April 2026 OBA Legal Briefs

April 2026 OBA Legal Briefs

By Scott Thompson

First in Time, First in Right? Lien Priority Disputes Between Lenders and M&M Lienholders

1. Introduction

For commercial lenders in Oklahoma, few words induce as much anxiety as “mechanic’s lien.” In the complex world of construction financing, the security of a bank’s mortgage is paramount. A lender generally assumes that by recording a mortgage before funds are disbursed, they have secured the “first position” on the collateral. However, under Oklahoma law, this assumption faces a potent challenger: the mechanic’s and materialman’s (M&M) lien.

Unlike a standard judgment lien that takes priority from the date it is recorded, an M&M lien has a unique “superpower”— the ability to “relate back” to an earlier date. If a contractor can prove their lien has priority over a bank’s mortgage, the bank’s collateral position can be wiped out in a foreclosure, leaving the lender unsecured. To avoid this, the lender might have to take extraordinary steps to protect its interests, including paying off the M&M lien itself or buying the property at the Sheriff’s Sale.

This article takes a look at the priority conflicts between mortgage lenders and M&M lienholders under Oklahoma law. It will examine the controlling statutes, the critical “American First” rule regarding commencement of work, the distinction between obligatory and optional advances, and practical strategies bankers must employ to protect their institution’s interests.

1. The Statutory Framework: 42 O.S. § 141

The foundation of lien priority in Oklahoma is found in Title 42, Section 141 of the Oklahoma Statutes. This statute grants a lien to any person who performs labor or furnishes material for the erection, alteration, or repair of any building, improvement, or structure under a contract with the owner.

The statute explicitly addresses priority:

“Such liens shall be preferred to all other liens or encumbrances which may attach to or upon such land, buildings or improvements or either of them subsequent to the commencement of such building, the furnishing or putting up of such fixtures or machinery…”

On its face, this statute establishes the “First in Time, First in Right” rule. If the mortgage is recorded before the M&M lien attaches, the mortgage should win. If the M&M lien attaches before the mortgage is recorded, the lien wins.

However, the complexity lies in determining exactly when an M&M lien “attaches.” Unlike a mortgage, which attaches when recorded at the county clerk’s office, an M&M lien attaches at the “commencement” of the work. This creates a “relation back” doctrine. Thus, a lien filed in March can legally “relate back” to take priority as of January, potentially leapfrogging a mortgage recorded in February.

III. The “American First” Rule: Individual vs. Project Commencement

For decades, Oklahoma law struggled with a critical question: Does a mechanic’s lien relate back to the start of the entire project or the start of that specific contractor’s work?

Imagine a scenario:

January 1: A surveyor clears brush on the land (Project Commencement).

February 1: The Bank records its construction mortgage.

March 1: An electrician starts wiring the building.

June 1: The electrician is unpaid and files a lien.

Under the “Project Commencement” theory (the old rule), the electrician’s lien would relate back to January 1 (the start of the project), jumping ahead of the Bank’s February mortgage. This was a nightmare for lenders, as any visible work on the site prior to closing could poison the priority of the entire loan against all future subcontractors.

The Controlling Precedent: American First Title & Trust Co. v. Ewing

In 1965, the Oklahoma Supreme Court clarified this issue in the landmark case American First Title & Trust Co. v. Ewing, 1965 OK 98, 403 P.2d 488. The Court overruled previous interpretations and established the “Individual Commencement” rule.

The Court held that the priority of a materialman’s lien relative to a mortgage is determined by the date the individual claimant commenced their specific labor or furnished their specific materials, not the date the overall building project began.

This is a massive legal advantage for lenders in Oklahoma compared to states like Missouri or Arkansas, where the “Project Commencement” rule often prevails. In Oklahoma, if you record your mortgage on February 1, you generally have priority over the electrician who starts on March 1, even if the surveyor started on January 1. The surveyor might have priority over you, but the electrician does not ride the coattails of the surveyor’s priority.

1. The Trap of “Optional Advances”: Liberty National Bank v. Kaibab.

While the American First rule protects lenders regarding the start of work, a second danger arises during the funding of the loan. This is the issue of Obligatory vs. Optional Advances.

In a construction loan, funds are not typically disbursed all at once; they are drawn down over time. If a bank disburses funds after an M&M lien has been filed or work has started, does that new disbursement maintain the priority of the original mortgage recording?

The controlling case is Liberty National Bank & Trust Co. v. Kaibab Industries, 1978 OK 162, 591 P.2d 692. The Oklahoma Supreme Court adopted a rule that differentiates between advances the lender must make and those it chooses to make.

Obligatory Advances: If the lender is legally contractually bound to advance the funds (provided conditions are met), the priority of the advance relates back to the original date of the mortgage recording. These advances remain superior to intervening M&M liens.

Optional Advances: If the lender has discretion to stop funding (e.g., the borrower is in default, or the loan agreement says the bank “may” advance funds), any advance made after an M&M lien attaches loses its priority to that lien.

Most bank loan documents are drafted to give the bank maximum power, often stating that the bank “may” advance funds or can stop advances if the borrower defaults. Ironically, this protective language can convert an advance from “obligatory” to “optional.” If a banker knows (or should know) that a lien has been filed, and they choose to fund a draw anyway to keep the project moving, that specific draw may become junior to the M&M lien.

1. Priority Risks in Practice

Despite the favorable American First ruling, Oklahoma bankers still face significant risks.

1. The “Visible Commencement” Ambiguity

While the law focuses on the individual contractor, “commencement” is a factual question. If a general contractor (GC) performs work before the mortgage is recorded, and that GC holds the contract for the entire project, their lien (and potentially the claims of subs flowing through them) could have priority over the mortgage. If the GC started “visible” work like grading or staking before recording, the entire construction contract amount could theoretically leapfrog the mortgage.

2. Professional Services (Architects and Engineers)

Oklahoma law (42 O.S. § 143.3 and case law) allows architects and engineers to file liens. These professionals often complete their work (drawings, site plans) months before the bank closes the loan. While their work is often “invisible” on the land, if it results in an improvement, they have lien rights. However, for priority purposes, the physical “commencement” on the land is usually the trigger. Bankers must be wary of unpaid design fees that could result in a lien filed early in the project.

3. Title Company Exceptions

Title insurance policies act as the primary shield for these risks. However, a standard loan policy will contain a “standard exception” for M&M liens “not shown by the public records.” This leaves the bank exposed to the “relation back” risk. Lenders must require specific endorsements and the removal of this exception to be covered.

1. Recommendations for Bankers to Manage Priority

To protect lien priority and avoid the “unsecured” nightmare, Oklahoma bankers should consider the a five-point risk management strategy.

1. The Pre-Closing Site Inspection (The “Date Down”)

Before recording the mortgage, the bank (or the title company) should verify that absolutely no work has commenced on the property.

Actionable Step: Require a physical inspection and photograph of the property on the morning of closing, immediately prior to recording the mortgage.

What to look for: Look for survey stakes, clearing of brush, delivery of port-a-potties, or deposited lumber.

If work is found: If any work is visible, you have a “broken priority” situation. You must obtain lien waivers from whoever performed that work and, critically, you must disclose this to the title company. The title company may require an indemnity or specific subordination agreements to insure the loan.

1. Strategic Drafting of Loan Documents (Obligatory Advances)

Review your construction loan agreements with legal counsel to ensure they align with the Kaibab standard for obligatory advances.

Actionable Step: Ensure your loan agreement defines the conditions under which you must lend. While you need default provisions, the structure should support the argument that as long as the borrower is in compliance, the bank is obligated to fund. This helps protect the priority of future draws against intervening M&M liens.

1. Mastering Lien Waivers (No Statutory Form)

Oklahoma does not have a mandatory statutory form for lien waivers. The bank should not rely on potentially weak waivers provided by contractors, but rather should demand a robust waiver form prepared by the bank be used.

Actionable Step: Create a strict “Lien Waiver and Release” template for your institution. Your loan document system may already have this, but make sure it contains the following requirements.

Requirements:

Conditional Waiver: For the current draw (valid only upon payment).

Unconditional Waiver: For all past draws (acknowledging money was received).

Scope: Ensure the waiver covers “all labor, services, and materials furnished through [Date],” not just “invoices attached.”

Indemnity: Include a clause where the contractor agrees to indemnify the bank if any of their subcontractors file a lien.

1. Title Insurance: The ALTA 32/33 Strategy

You should not rely on a standard title policy alone for construction loans. You should manage the “gap” between the initial recording and the final completion.

Actionable Step: Utilize the ALTA 32 and ALTA 33 endorsement series.

ALTA 32 (Construction Loan – Loss of Priority): This endorsement provides coverage against liens that claim priority over the mortgage, generally tied to specific disbursements.

ALTA 33 (Disbursement Endorsement): This is a “date down” endorsement issued with each draw. It updates the date of coverage and confirms that no new liens have appeared on the record.

Process: Do not fund a draw until the title company is prepared to issue the ALTA 33 endorsement for that draw. This forces the title company to check the records and collect the necessary lien waivers before you release cash.

1. Vendor Management and Joint Checks

If a general contractor is showing signs of financial distress (e.g., asking for early draws, rumors of slow payment to subs), the bank must intervene to protect its priority. Make certain that your loan documents specifically allow you to take the following action steps.

Actionable Step: Utilize Joint Checks. If you suspect the GC is not paying the electrician, cut the draw check payable to “General Contractor AND Electrician.” Both must endorse it, ensuring the sub gets paid and cannot validly file a lien later.

Actionable Step: Request a “Job Cost Breakdown” or “Schedule of Values” at the start and track it relentlessly. If the line item for “Concrete” is 100% drawn but the foundation isn’t finished, you have a diversion of funds problem that will lead to liens.

VII. Conclusion

In Oklahoma, the law leans slightly in favor of the diligent lender thanks to the American First “individual commencement” rule. However, this advantage is easily lost through sloppy draw administration or failure to inspect the site before closing. By treating the “commencement of work” as a strict “red line” at closing, managing the “obligatory” nature of future advances, and utilizing the ALTA 32/33 endorsement framework, bankers can effectively insulate their collateral from the threat of mechanics’ liens.

The Banker’s Checklist for Lien Priority

Phase	Critical Action	Why?
Pre-Closing	Site Inspection	Ensure no work has started. If work exists, priority is already broken.
Pre-Closing	Recording	Record the mortgage before any work is begun.
Documentation	“Obligatory” Language	Draft loan docs to ensure future advances maintain priority under Kaibab.
Draw Process	Lien Waivers	Specific, lender-prepared waivers should be used.
Draw Process	Title Updates	Require ALTA 33 endorsement with every draw.
Risk Mgmt	Joint Checks	Use if the General Contractor’s liquidity is in doubt.

 

Banker Q&As

By Pauli Loeffler

DBAs

1. Q. Do DBA’s or sole proprietorships need to be registered with the state or require any type of official registration before we open accounts?
2. There is no requirement that a non-entity sole proprietor register with the Oklahoma Secretary of State. However, banks do need to perform due diligence before opening an account for these businesses. On the OBA’s Legal Links web page under Templates, Forms, and Charts you will find Affidavits that you may use to help establish that these are Bonafide business. For that purpose, you will find the Affidavit of Sole Proprietorship (Individual), the Affidavit of Sole Proprietorship (Married Persons) as allowed under Banking Code Section 907:

A deposit made in any bank or credit union by a husband and wife which is primarily for a business purpose may be treated, at the option of the depositors, as a sole proprietorship account, rather than a partnership account unless a formal partnership has been formed.

There is also an Affidavit of Sole Member LLC.  I will add that sole proprietorships that are not legal entities may file for a Tradename with the Oklahoma Secretary of State.

Oklahoma Loan Origination Fees

1. I have been attempting to research any loan origination fee limits on a bridge/swing loan (typically a second mortgage on a residential 1-4 family dwelling) in Oklahoma.

The sections that I could locate to research included:

 

1. Title 6 – Banks & Trust Companies:  I didn’t see anything pertaining to loans
2. Title 160 – Department of Consumer Credit:  Chapter 25 – Uniform Consumer Credit Code (UCCC) Rules and Chapter 45 – Truth in Lending Rules.

 

Are there other laws/statutes that I need to review to ensure that we are in compliance with Oklahoma state regulations?  I would appreciate any guidance you might be able to provide.

 

1. Almost all real estate secured loans are exempt from the OK Uniform Consumer Credit Code (U3C):

Real estate loans excluded from certain U3C provisions. The first real estate exclusion is in Section 1-202(5), and depends on the loan’s purpose.  This provision generally exempts from the U3C’s coverage loans “made to enable the debtor to build or purchase a residence or to refinance such loan.”  The U3C provisions with respect to (1) disclosures, (2) remedies, and (3) the 45% usury rate on non-consumer loans continue to apply. Note that disclosures made in compliance with Reg Z satisfy the disclosure requirements of Oklahoma’s U3C.

The second exclusion is in Section 3-105, and eliminates from the definition of “consumer loan” any loan that is “primarily secured by an interest in land,” if the value of the land is substantial in relation to the amount of the loan, and the loan has an initial interest rate not exceeding 13%. Most banks have not been made few if any consumer-purpose real estate loans at an initial rate exceeding 13% (either fixed or variable rate) since the ‘80s.  Again, most “restrictions on practices” contained in the U3C will not apply because they are neither disclosures (Section 3-301) nor remedies (Section 5-201).

Marital Trust

 

1. Q. We have a spouse that is wanting to open an account in the name of a Marital Trust, now that his wife has passed.  We have the Trust documents in the name of her Revocable Trust that talk about the Marital Trust once she passes but don’t we need a separate Trust Agreement for the Marital Trust?  He has gotten an EIN for the Marital Trust.  I have attached the documents for reference.
2. What you have is called an “A-B” Trust. The “A” part is Marital Trust or Marital Deduction Trust which benefits the surviving spouse while the “B” part is the Residuary Trust which deals with the rest of the assets that aren’t part of the Marital Deduction Trust. You already have the Trust document that covers both the A and B trust, and no additional documents are need.

Altered check claim

1. Do we send a copy of the front and back of our customer’s check, and the written affidavit of alteration/forgery when we send a Breach of Warranty Claim or a Check Indemnification Agreement to the depositary bank on an altered check? If so, do we need to get an authorization from our customer to send a copy of their altered check, and their written signed affidavit of alteration/forgery?
2. Yes, provide a copy of the front and back of the check. The signed affidavit that the check has been altered is the customer’s authorization.

Closing loan on holiday, Right of Rescission

1. Q. Monday 16^th is a Federal Holiday.  We are open for business on the 16^th , so can we fund the loan on Monday, 16^th or do we need to wait until Tues the 17^th? We have funded them on a federal holidays in the past.
2. For purposes of rescission, “business day” means all calendar days except Sundays and the federal legal holidays listed in 5 U.S.C. 6103(a) which are the following:

New Year’s day, January 1st.

Martin Luther King, Jr.’s Birthday, third Monday in January.

Washington’s Birthday, third Monday in February.

Memorial Day, last Monday in May.

Juneteenth, June 19th.

Independence Day, July 4th.

Labor Day, first Monday in September.

Columbus Day, second Monday in October.

Veterans Day, November 11th.

Thanksgiving Day, fourth Thursday in November.

Christmas Day, December 25th.

 

Only the date specified in the statute is considered a legal holiday for purposes of rescission. Five federal legal holidays are identified in 5 U.S.C. 6103(a) by a specific date: New Year’s Day, January 1; Juneteenth, June 19th; Independence Day, July 4; Veteran’s Day, November 11; and Christmas Day, December 25. When one of these holidays falls on a Saturday, July 4 for example, federal offices and other entities may observe the holiday on the preceding Friday, July 3. The observed holiday, July 3, is a business day for purposes of rescission or the delivery of disclosures for certain high-cost mortgages covered by Reg. Z § 1026.32.

 

HMDA

1. We made a loan to purchase (then sale) an investment 1 unit dwelling.  On that same loan we had additional collateral on a 1 unit dwelling that was also being sold.  The borrower tore down the purchased dwelling and is now wanting a loan to reconstruct the property, from ground up.  We will be rolling in the originally loans balance into the new construction loan (which is the majority of the loan amount).  Both properties will be on the loan.  Is this loan exempt from HMDA because of the new loan purpose? Or is it a HMDA refinance because the original loan was secured by that second property, which is still on this new loan.

A shorter way of describing loan above is:

 

If we refinance a loan that was originally secured by a dwelling, and adding money for initial construction of another dwelling, is the new loan a HMDA refinance or is it exempt as a construction loan? The same dwelling is on both loans.

 

1. refinance typically takes precedence over a construction purpose if a new, permanent loan satisfies and replaces an existing dwelling-secured loan. Construction-only loans are generally considered temporary financing and are excluded from HMDA reporting, while a “refinance” is defined as a loan that satisfies and replaces an existing obligation. If the loan is meant to replace an existing loan, it is generally considered a refinance under HMDA.

Key details regarding construction and refinance under HMDA:

The Hierarchy: HMDA reporting prioritizes purpose in a specific order: 1. Purchase, 2. Refinance/Cash-out Refinance, 3. Home Improvement, 4. Other.

Temporary Exemption: Construction-only loans (short-term loans to build a home) are often excluded from HMDA, as they are considered temporary, provided they are not automatically converted into permanent financing.

Refinance Definition: If a loan “satisfies and replaces” an existing dwelling-secured loan, it is a refinance.

Construction-to-Permanent: If a loan is specifically for the initial construction of a new dwelling and is replaced by permanent financing, the initial construction loan is not reportable, whereas the permanent financing (if it qualifies as a refinance) might be.

TRID vs. HMDA: It is crucial to distinguish that TRID (TILA-RESPA Integrated Disclosure) has a different hierarchy than HMDA; in TRID, a purchase typically trumps all, but in HMDA, a refinance has specific reporting requirements.

Appraisal requirements

1. If we have a Real Estate loan that is for commercial purpose and is being secured by multiple rental homes (1-4 family), what appraisal requirement should we be based off of? The loan amount is over $650,000.
2. Appraisal Threshold For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.40 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

 

So first you need to determine which properties are part of the tract develop, and the estimated value of each property to determine whether a property requires an evaluation or an appraisal.

 

CD rates for employees

 

1. My question is, are their regulations that prohibit rate exceptions for employees?

     

215. Reg O 215.4 (a)(1) allows banks to make loans to employees on terms comparable as those offered persons who are not employees. However, Reg O applies to loans rather than deposit accounts.

 

UTMA disbursement before age 18

16. We have 2 UTMA accounts. One belongs to an 18 year old and the other minor is 16. They were set up as UTMA accounts after their father died, and an older sibling was the executor of the estate. An older half-sibling is the custodian of the funds. At this point, the custodian is receiving threats that she will be sued if she does not distribute the money to the 18 year old and 16 year old. She would like to just let them have the money in the accounts and be done with them. Their harassment is making her life difficult.  My questions:
17. As I read the statute it refers to a minor as someone who is not 21. Does that mean the kids can’t have any of the money until they are 21?

Generally, court ordered UTMAs restrict disbursement of funds until the minor attains the age of 18. The custodian can request the court to allow a disbursement before the minor reaches age 18 to pay for a car or take a vacation.

2. Can the custodian somehow give them the money and just be done with it? Not without risking being found in contempt by the court.
3. What are our responsibilities at the bank in this situation? Once the minor attains the age of 18, the funds can be paid to the aged out minor.
4. Did you receive a copy of the order of the probate court naming the half sibling as custodian on the two accounts. While minors are considered adults upon attaining the age of 18, UTMAs may denote the age for disbursement no later than age 21. Rarely have I seen a court ordered UTMA that sets the age of disbursement as 21. If the minor gets married or joins the armed forces with parental consent at age 17, s/he is relieved of the disability of minority and the funds may be disbursed at that time.