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Issues Posed by Home Equity Lines of Credit (HELOC)

By Carleton Burch Anderson
McPharlin & Conners LLP Lawyers

Protecting against the stale HELOC and mitigating losses.

Home equity lines of credit (“HELOC”) secured by Deeds of Trusts are a fixture of modern consumer finance. According to an article appearing in the Washington Post, an estimated 10 million homeowners will open a HELOC between 2018 and 2022.

For the title insurer, the revolving nature of the HELOC, coupled with the fact there is no universally accepted procedure for closing a HELOC and reconveying the Deed of Trust in connection with a subsequent transaction, creates a unique problem.

With property values on the rise, there appears to be an uptick in foreclosures of HELOC loans.

Thus, downstream owners and lenders are faced with issues relating to not only the validity, but the amount and priority of the HELOC.

This article discusses ways to protect against the stale HELOC and how to mitigate losses.

From the underwriting perspective, never assume that an earlier refinance, sale or conveyance resulted in the release of the HELOC Deed of Trust unless there is a Full release of record.

More often than not, it happens that a HELOC was paid down through a refinance, but the HELOC was not closed and the borrower continued to draw down.

Where a subsequent lender intended its loan to pay the HELOC and be secured as a first priority Deed of Trust but there is no release (or subordination agreement), a lien priority dispute may arise.

To protect against such a situation, as part of the closing there should be express instruction signed by the borrower to close the HELOC and there should be a full release Deed of Trust or subordination agreement executed by the holder of the HELOC Deed of Trust.

Recent case law confirms the need for caution. The California Court of Appeals decision Bank of New York Mellon v. Citibank, N.A. 8 Cal.App.5th 935 ( 2017) in which the court found that the HELOC was not automatically extinguished as a result of the loan being “paid off” or “paid down” absent express instructions to the lender to close the line of credit and reconvey the security.

The court held that a subsequent owner took subject to the lien of the prior HELOC.

To avoid the unique issues that come with an outstanding HELOC claim, be mindful of any open HELOC Deeds of Trust. Be sure to provide express written instructions to the lender, signed by the borrower, instructing the lender to close loan and reconvey the property.

If you have any questions when working to close out a HELOC Deed of Trust please contact Alliant National’s underwriting department.

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IRS Warns of Tax Transcript Email Scam

ALTA TitleNews Online Archive
November 29, 2018

The Internal Revenue Service and Security Summit partners recently issued a warning about the surge of fraudulent emails impersonating the IRS and using tax transcripts as bait to entice users to open documents containing malware.

The scam is especially problematic for businesses whose employees might open the malware because the software can spread throughout the network and potentially take months to successfully remove.

Known as Emotet, this malware generally poses as specific banks and financial institutions in its effort to trick people into opening infected documents.

In the past few weeks, the scam masqueraded as the IRS, pretending to be from “IRS Online.” The scam email carries an attachment labeled “Tax Account Transcript” or something similar, and the subject line uses some variation of the phrase “tax transcript.”

These clues can change with each version of the malware. Scores of these malicious Emotet emails were forwarded to phishing@irs.gov.
recently.

The IRS reminds taxpayers it does not send unsolicited emails to the public, nor would it email a sensitive document such as a tax transcript, which is a summary of a tax return. The IRS urges taxpayers not to open the email or the attachment.

If using a personal computer, delete or forward the scam email to phishing@irs.gov.

If you see these using an employer’s computer, notify the company’s technology professionals.

Reprinted with permission from the American Land Title Association.

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Alliant National Successfully Completes SSAE 18 Type II Exam for Fifth Consecutive Year

Successful SSAE 18 Type II examination validates Alliant National’s processes for approving, monitoring and reviewing its agents

LONGMONT, Colo. – Alliant National Title Insurance Company, a unique title insurance underwriter that partners with Independent Agents to improve their competitive position in the marketplace, announces the successful completion of the Service Organization Control (SOC 1) SSAE 18 Type II examination for the fifth consecutive year.

The examination results in an AICPA endorsed report stating that Alliant National Title Insurance Company has maintained effective controls over its Agent Quality Management System. A-Lign Certified Public Accountants of Tampa, Fla., performed the engagement and certification.

The successful SSAE 18 Type II examination validates Alliant National’s processes for approving, monitoring, and reviewing its agents, which results in its agents being designated as Authorized Service Providers or Certified Service Providers of Alliant National. Under this framework, Alliant National’s Independent Agents are reviewed annually against rigorous quality standards.

Lenders relying upon Alliant National’s oversight of its agents and Authorized and Certified Service Provider programs receive additional assurance that processes and controls are designed and function properly and accurately.

Alliant National was certified to the SSAE 16 Type I standard on Dec. 1, 2013 and received compliant status to the more rigorous SSAE 16 Type II standard effective Aug. 31, 2014 and each year through December 31, 2018. That makes 2018 the fifth consecutive year of continued compliance to SSAE Type II standards. The unqualified report was issued without exceptions.

“Alliant National was the first title insurance underwriter in the nation to obtain an SSAE16 Type II compliant status and is the only title insurance underwriter to achieve compliant status for five consecutive years. This certification provides strong independent assurance of our agent oversight systems to lenders and all stakeholders,” Alliant National President and CEO, Bob Grubb said. “Our goal is to provide unequivocal evidence of the quality of our agents through an independently audited system.”

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Partners in Wire-Fraud Protection: The Escrow Account Holder and the Bank

Wire fraud is a HUGE problem that only keeps getting bigger and bigger.

In fact, U.S. Representative Randy Hultgren (R-III) wrote a letter to Fed Chairman Jerome Powell on June 29th urging the Fed to be more proactive in regard to wire fraud and real estate transactions. The letter referenced the United Kingdom’s system of matching payees’ names as a possible solution to the problem of wire fraud.

However, we don’t have to wait until a federal law is passed that orders banks to match the payee name on the wire transfer payment to name on the payee’s destination bank account (“Beneficiary Bank”).

As title and escrow agents, we can be proactive and in partnership with the banks with which we do business.

So, what can we do right now?

First, we can know what our Agreement with our Escrow Account Bank says.

Does your Bank Agreement say that your bank will check the payee’s name with the name on the destination account when a wire fund transfer is initiated?

Or, does it say your bank need only rely upon the account number it was provided in the wiring instructions order? The answers to these questions might lead to an opportunity to have a discussion with your partnering Receiving Bank.

We can also send the wire instructions on the payment order, with explicit directions that acceptance be restricted to match the designated payee’s name on the Beneficiary Bank account. If it doesn’t match, then do not send the funds.

Lastly, if something does go wrong despite our best efforts and precautions, then notify both the Beneficiary Bank and the Receiving Bank as soon as possible. Typically, banks require notification of an unauthorized transfer or error within a defined time period such as, for example, thirty or sixty days.

Aside from any contractual or legal requirement for early notification, the sooner the problem is communicated, the greater the odds of the bank being able to halt or pull back the wire funds transfer.

For a great explanation of how a wire fund transfer works behind the scenes, view “Funds Transfer Law and Unauthorized Payment Liability.”

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Watch Out for These 3 Tax Scams

According to the IRS, thousands of people have lost millions of dollars and their personal information to tax scams.

These days, when we consider fraud schemes targeting title agents, we usually think about email scams where criminals attempt to interject themselves into specific transactions for the purpose of diverting a wire.

Such scams can be devastating for agents and consumers, and we must guard against this type of email fraud.

However, scams involving real estate transactions are just one small piece of the larger fraud puzzle; and with tax season upon us, it’s important to remember that our industry is not immune to the types of email and other schemes that are common to other businesses.

According to the IRS, thousands of people have lost millions of dollars and their personal information to tax scams.

Scammers use the regular mail, telephone, or email to set up individuals, businesses, payroll and tax professionals.

The agency recently released a flurry of alerts warning of various schemes. You can find a full summary on the IRS webpage, but here are just a few highlights.

W-2 scam

The IRS warned that fraudsters are increasingly targeting payroll and human resource departments in an attempt to obtain their Forms W-2, which the criminals then use to file fraudulent tax returns.

To work the scam, the fraudster writes emails that look like they’re from an organization executive. The emails are directed to an internal employee with access to wage and tax information, and they often begin with an innocent greeting, such as: “hi, are you working today.”

Soon, the fraudster asks for all Form W-2 information.

The W-2 phishing scam has victimized hundreds of organizations and thousands of employees in recent years, the IRS said. Employers of all sizes have been affected including public schools, universities, hospitals, tribal governments and charities.

The IRS has established a process allowing businesses and payroll service providers to quickly report any data losses related to the W-2 scam.

Learn more about the process here.

Phone scam

In a recent blog post,”Think Email Fraud is the Only Hack Tactic? Think Again.” , we noted that scammers are increasingly using phone calls to attempt to trick title agents into wiring money to fraudulent accounts.

Some simple technologies even allow fraudsters to spoof phone numbers. So, a criminal could call you, but make it look like the call was coming from someone legitimately involved in the transaction.

As it turns out, tax fraudsters are using this same technology.

The IRS warned that criminals claiming to be IRS employees — using fake names and bogus IRS identification badge numbers — are trying to bully victims into sending them money.

Sometimes the fraudsters claim that the victim has a tax refund coming, and the money can be deposited if the victim provides his or her banking information.

The tax phone scam seems to be targeted toward individuals as opposed to businesses, but it underscores at least two important points: 1.) treat threats and high pressure language as a red flag; and 2.) the telephone isn’t always a “safe” method of communication.

Malware

Malware scams certainly aren’t new. Basically, the fraudster sends an email that looks like it’s from a trusted source, such as a business contact, a reputable company or a government agency.

The email directs the receiver to click a hyperlink or open an attachment.

When clicked, malicious software loads onto the victim’s computer, and the scammer uses that software to gain access to sensitive systems and information.

Fraudsters often attempt to trick title agents and others involved in real estate transactions into clicking malicious links by sending emails purporting to contain “important closing documents.”

By now many agents have seen the “closing documents” scheme, and they know how to avoid it. However, companies need to remain vigilant for other types of malware emails.

In recent weeks, the IRS has seen a surge in malware emails targeting the employees of all types of businesses. The emails, which appear to come from the IRS, carry malicious attachments labeled “Tax Account Transcript” or something similar. The words “tax transcript” often appear in the subject line.

The IRS reminded taxpayers that it does not send unsolicited emails to the public and would never email a sensitive document such as a tax transcript, which is a summary of a tax return.

If using a personal computer, such emails should be deleted or forwarded to phishing@irs.gov, the agency said. Those who receive such emails at work should notify their company’s technology team.

This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

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