Posting for

Wednesday, August 26, 1998

by: Bert Rush

brush@firstam.com

RELEASES "TO COME"/CREDIT LINES/ESCROW AND CLOSING

Looks like some of our favorite lenders are out to hurt themselves--like folks who speed up for a fog bank. When will they learn not to run with scissors?

Scott McGuire and Liz Corbett of our Orange County (CA) branch have just briefed me on three claims-in-waiting--each involving different players but similar facts. One of the lenders involved is a major bank, the other a local credit union.

In each case we've closed a refinancing with releases to come. Each payoff demand is in writing, on the lender's letterhead. Two of the payoff demands (from the same major bank) bear the statement "THIS ACCOUNT HAS BEEN FROZEN"--in boldface. The third (from the credit union) recites:

"We reserve the right to amend or withdraw this demand at any time, to refuse insufficient funds, and to refuse if additional charges are incurred after the preparation of this demand."

But all three promise the lender's release will be sent promptly after payoff.

In each case the paid-off loan was a "home equity" credit line--and the line remained open after closing. In Case No. 1 an additional $9,567 was advanced fourteen weeks after closing; in Case No. 2 an additional $10,000 was advanced four weeks after closing, followed by another $500 and another $10,000 after that; in Case No. 3 an additional $30,000 was advanced four months after closing.

In each case the lender has failed to provide a release. When contacted by phone they say, "We are not going to turn away our customers."

My guess is this is going on to an extent I don't even want to think about--all across the country. I'm also betting these lenders continue to show these loans as real estate-secured on their books.

I think I read recently that personal bankruptcies are at an all-time high--even as the economy seems healthy and unemployment is at all-time lows. When (not "if") we have a downturn...no, I can't look.

We've already preached the gospel of documenting payoffs of all loans with releases to come, including written evidence of paid-off lenders' obligations to freeze their accounts and provide releases. When we have this, we win every time.

But faced with major losses lenders may want to blame us, and we should expect 'em to fight us tooth and toenail over every smoldering ruin of a failed loan in their portfolio. It may be time to approach senior management with these lenders--let 'em know we're concerned.

But mainly, let's remember these issues and give them new emphasis in our ongoing training.

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Rick Garlick (Golden, CO) writes:

We have somewhere between 5 and 7 of these homequity line claims pending in Colorado. We have previously instructed the agents to be sure their payoff cover lettersmake it clear that the loan is to be paid off and the lien of the mortgage released and if possible to have the borrower sign the cover letter instructing the lender to terminate the credit line. These measures have only been moderately successful, so we are now thinking of having the following language added to the endorsement area on the back of the payoff check:

ENDORSER ACKNOWLEDGES BY ITS NEGOTIATION OF THIS ITEM THE PAYMENT IN FULL OF THE DEBT REFERENCED BY THE LOAN NUMBER SHOWN ON THE FACE OF THIS ITEM AND THE SATISFACTION FOR ALL PURPOSES OF ANY DEED OF TRUST OR OTHER SECURITY INSTRUMENT SECURING THE PAYMENT OF SUCH LOAN.

Any comments from the group?

Reply to Rick: Could help/couldn't hurt--so I like the idea. It also might be a good idea to send a cover letter with payoff checks which includes the recital:

"You are given this check to be held by you in trust pending our receipt of your written release, suitable for recording, of any mortgage or deed of trust securing repayment of the loan being paid off by this check."

This is similar to language I used when mailing settlement checks--while in private practice. It attempts to impose a trustor-trustee relationship, and a condition upon negotiation of the check. Naturally, I don't expect any lender to hold the check til after they mail the release--I don't even expect them to notice the recital --but it's another thing we might try to protect the interests of our insureds.

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Following up on Wednesday's posting, Frank Melchior (Iselin, NJ) writes:

With all of the exasperating experience we've had on this subject over the last umpteen years, how can anyone rely on an account being frozen? How long does the "ice age" last? Obviously anything short of a promise to terminate the account is playing with fire.

In a separate e-mail, following Rick Garlick's reply and my reply to Rick, Frank writes:

What about the Goldome case?

The language in your suggested transmittal letter is, I believe, worse than useless. It is dangerous. If they do not meet the condition of the trust, what defense do you have . . . and isn't interest accruing on the unpaid balance while the check remains unpaid???

Reply to Frank: The idea is that if the lender doesn't meet the condition (providing the release), but they negotiate the payoff check, you would have an action against the lender to compel the release or recover the amount of the payoff. You're right, this is no defense to a claim--just a possible way for us to handle the claim with minimal loss. And, yes, if a lender complies by holding the check whilst preparing and mailing a release, they'd probably want more interest--which First American would be asked to pay. I'm betting they wouldn't hold up depositing the check--but read on....

And which Goldome case are you referring to? I remember the name but not the issues.

Next, Sandi Cole (Maricopa County, AZ) writes:

My name is Sandi Cole. I am the Manager of the Reconveyance Tracking Department in Maricopa County, Arizona. I was forwarded your E-Mail regarding "To Come / Equity Lines of Credit.

I too have experienced some similar situations with Lines of Credit.

We would send out the Notice of Intent of Release, the lender would call me and tell me that they never received the Termination Letter signed by the customer to close the credit line. I now require the SIGNED Termination Letter to be included with the Recon Tracking order. If it is not included the order goes back to the branch. This seems to be working. This pratice has made the situation better.

Feel free to contact me if you have any questions!

Chuck Woods (Albuquerque) writes:

We have experienced situations where subsequent to a payoff on a "line of credit" mortgage, the borrowers have drawn additional funds. After the first experience (which cost us) we instituted a procedure that included in the payoff are instructions to the lender to immediately close the line of credit account secured by said mortgage and issue a release of the mortgage and forward the executed Release of Mortgage to us. Also included on the payoff letter is an acknowledgement and acceptance by Borrower that reads "We request that our line of credit account be closed and the mortgage be released in full. We understand that closing the line of credit account could mean that any checks drawn on the account may be returned unprocessed." Since that time we did have a situation where the lender failed to close the account and advanced additional funds, we persuaded the lender to issue a release after they reviewed our payoff letter containing this verbiage. I imagine most of our offices are (or should be) using some variation of this form for credit line payoffs.

Jim Dondero (Grand Rapids, MI) writes:

Both the check endorsement and "trust" cover letter are excellent ideas, but even stronger might be the BORROWER(S)' unequivocal written instruction to the lender to terminate the account and record a discharge of the mortgage.

While equity-line payoffs are MOST problematic, consider the case where a large national first-lien lender (repeatedly) rejects what they claim to be an insufficient tender because its payoff department in one state is unaware that its foreclosure department in another state had incurred legal expenses in connection with the commencement of foreclosure proceedings, which it now insists be added to the payoff amount. In fact the lender, always sensitive to the plight of settlement agents, would not agree to adjourn the foreclosure sale! I opted to let the sale occur and then redeemed the Sheriff's Deed, because the STATUTORY fees and costs allowed on redemption were considerably less than the ACTUAL attorney fees that the lender was demanding.

When all is said and done, the only way to be CERTAIN that a release will be forthcoming is to require it be delivered in escrow to the settlement agent in advance. Ha! -- Those days are LONG gone with the wind!

Debbie Asero (Fairfax, VA) writes:

This is without a doubt a national problem. In the Mid Atlantic region we experience numerous claims from unreleased equity line accounts. Sometimes it's agent negligence, sometimes pure fraud on the part of the owner/borrower/seller; most times, it's the greed of the lender who wants to "keep its client". This has been an topic in our Regional Newsletter and at every seminar the Mid Atlantic region has sponsored in the past four years. Continuing to educate our staff and agents/attorneys is a necessity. Getting to the root of the problem, the lender, is also a necessity. How is that done tactfully and without losing our larger lender clients? One solution: preach the necessity of an actual "affidavit" to close the account and forward the release to the named settlement/closing entity. From personal experience, it has worked fairly well, but, nothing is fool proof.

And, David Dickson (Memphis) writes:

Re: Ricks endorsement-we've seen checks returned as the loan continues to accrue interest with instructions to issue without endorsement. Though it wouldn't work with a credit line loan we have seen transmittal letters that state that if the check is for an amount other than the exact amount required to retire the debt the amount forwarded should be used to apply to then unpaid balance with any balance owing being billed to the closer. This should avoid the return of the check for some silly difference in the amount tendered and the amount due-one day's interest for example-seen all the time.

Reply by Bert: So there may be a Catch-22 involved. If we add endorsement language (as suggested by Rick) or trust language (as suggested by me) the result may be that lenders will return checks and/or hold checks pending preparation and mailing of the release--either way causing additional interest to be incurred (as suggested by Frank)--which we'll be asked to pay. If we balk at paying, the line remains open and we run the risk of the borrower drawing upon the line again (for that story see Claims Chronicles VI--the Vero Beach, FL claim).

The consensus seems to be that we're probably doing all we can by maintaining the discipline of carefully documented files, and having borrowers sign instructions to their lender directing that accounts be frozen and closed upon payoff. For now, 'nuff said.

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Following up on last Wednesday's closing, Carol Brooks (Bedford, NH) writes:

The comments haven't mentioned surrender of checks/cards on the equity line. Our guideline to our NH Agents is to read the recorded equity mortgage carefully for the contract terms for termination of the account; request the Borrower comply with the termination terms, i.e. execute a notice to terminate; that the Borrower surrender all equity line checks or cards; that the Agent request a Statement from the Lender as to returned checks and confirm that all outstanding checks cards have been surrendered and accounted for. NH had one claim where the Agent relied on a verbal demand to freeze--not a written demand by the Borrower, didn't require surrender of checks, didn't examine the recorded document for termination terms. The Borrower had one check left after closing....and used it the week after closing to draw down the account in full!

Reply to Carol: Good suggestions. But come tax time or Christmas a lot of these lenders mail fresh checks--reminding us all to spend. Last Christmas the bank on our First American cards did this--had John Buehler running all over the building to retrieve checks.

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Following Wednesday's posting several of your reported that the text about Park Kennedy's comments "wrapped" or extended beyond the right margin, so it's hard to read and/or can't be printed. Duly noted--we'll see if we can figure out what's happening.

Meanwhile, what Park said was that this problem is serious enough that we should go to senior management of lenders involved and tell them we're concerned. This may make some loan officers, and others, mad, but in the long run it's probably the best thing to do.

We are going to start with the major bank involved in two of our refusals to release, by trying to contact the person in charge of their home equity loan operations. Stay tuned.

And, David Dickson (Memphis) writes:

Rhonda Bundy, our Memphis/WTN Branch attorney has been working with me on these equity line of credit claims in Cristina's absence (maternity leave). We were reviewing your most recent postings and response to my Wilson Bank claim. She recently sold her house which had a first and HELOC (home equity line of credit) mortgage. She followed up in our title plant and has confirmed that the HELOC was released, but yesterday she received a small packet of new checks!! I told her-jokingly-well now you have an unsecured line of credit. It wasn't FTB but was one of the largest banks in the state.