This Bulletin reiterates Company policy regarding paying off a line of credit mortgage.
Line of credit mortgages are a source of claims for our industry. These mortgages may be labeled in a variety of ways, some of which include "Home Equity Loans", "Equity Secure Accounts", "Home Equity Lines of Credit", "Credit Line Mortgages" or "Revolving Credit Mortgages". These loans generally involve a revolving line of credit secured by a mortgage on real property. The terms of the loan typically permit funds to be borrowed, repaid in whole or in part, and then borrowed again. All draws enjoy the same priority as the initial draw.
Line of credit mortgages pose special risks for the Company because a "payoff" of the outstanding balance of the loan may not automatically terminate the line of credit. The payoff may merely create a zero balance on an otherwise active line of credit. Unless the existing line of credit is irrevocably terminated, the borrower can still obtain draws after the closing, and such subsequent advances may have the potential to obtain lien priority superior to the insured mortgage. Therefore, even if the outstanding balance is being paid off, it is insufficient to merely require the borrower to sign a letter at closing directing that the account be closed.
Line of credit loans often provide for alternative methods of obtaining advances, including checkbooks, electronic transfers, and debit cards. Therefore, it is insufficient to merely collect the line of credit checkbook or debit card associated with the account, or to require that they be returned to the existing lender.
Individual states may have specific laws relating to line of credit mortgages. Such laws may also prescribe a statutorily acceptable method for terminating and releasing these mortgages. Typically, a payoff of the outstanding balance of the loan is not sufficient to close and discharge these mortgages. Generally, a request by the borrower in writing to close the line of credit mortgage must be made to the existing lender.
The best protection against an advance being made after the closing is receipt of confirmation from the existing lender, prior to the closing, that the line of credit account is closed, together with an undertaking by the lender to deliver a satisfaction of mortgage upon payment of the outstanding balance.
In addition to compliance with any applicable state statutes and any specific directions from your local underwriter, the following minimum requirements must be complied with in connection with the payoff and satisfaction of a line of credit mortgage:
1. All outstanding mortgages must be examined for provisions permitting line of credit and/or revolving advances. If a line of credit mortgage is found, the commitment must specifically identify the mortgage as securing a line of credit.
2. A standard "payoff" of the outstanding balance may not terminate the line of credit. Therefore, it is insufficient for the commitment to merely call for the "repayment" of the mortgage. The commitment must also require that the line of credit be closed so that no further advances can be made. You must insert the following requirement in your commitment (subject to local variation):
"Mortgage from _____________ to _________ recorded ____________, securing a note in the original principal sum of $_____________, and other obligations described therein. This mortgage secures an equity line of credit and/or revolving loan. The Company requires a satisfactory written statement from the existing lender confirming: (a) the payoff amount, (b) that the line of credit has been closed, and no further draws/advances will be permitted and/or the right to future advances has been terminated, and (c) agreeing to deliver a full satisfaction/release upon payment of the outstanding balance."
3. Only the borrower can close the line of credit. If the mortgage specifies a procedure to cancel the advances, require compliance by the borrower. Otherwise, suggest that the borrower use the "STG Request to Cancel Revolving Credit Loan" (form referenced below) which includes a payoff request. If more than one person can draw on the loan, all borrowers must request cancellation of the line of credit. Arrangements for this letter should be made in advance of the closing. Please allow ample time for a response from the existing lender.
4. The lender will likely have a standard form by which it agrees to close the line of credit. If not, suggest use of "STG Pay-Off Quotation 1994" (form referenced below).
5. On the day of closing, reconfirm the payoff amount.
6. If possible, arrange for a same day payoff (e.g., by wire).
7. At closing, require execution of "STG Affidavit - Revolving Credit Loan and Personal Undertaking 1994" by the seller/borrower (form referenced below).
8. After closing, confirm that the satisfaction is received and that the mortgage/deed of trust is canceled of record.
If you have any questions regarding the above, please contact a Stewart underwriter.
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