Posts Tagged ‘claims avoidance’

illustration of a woman holding HELOC paper in front of a house

A Claims Tale: All Mortgages Are Not Created Equal – HELOC Mortgage Payoff

Dealing with mortgages and deeds of trusts in a transaction seems fairly easy to address at a closing, you would think. On occasion, we see a security instrument known as the Home Equity Line of Credit (HELOC) Mortgage or Deed of Trust – a revolving credit line secured by the home’s equity – that is not treated the same way as a traditional mortgage. HELOC instruments may require additional steps to shut down and release the lien from the property.

Let’s consider a scenario:

Mr. and Mrs. Smith are the previous owners of property located at 123 Main Street, Anywhere, USA.  The owner has two loans secured by the property: a $150,000 traditional mortgage and a $300,000 HELOC mortgage. Mr. and Mrs. Smith sell the property to the buyer, Tim Jones, for $475,000. As part of the closing process, the title company sends the payments to the lenders by wire transfer.

Two years later, Tim Jones receives a notice of foreclosure from the home equity line of credit lender. The lender asserts that Mr. and Mrs. Smith’s HELOC loan has a balance and was never closed. The HELOC loan once again has a balance of $300,000, and the loan is now in default. Tim Jones submits a claim.

The Lesson:

A HELOC loan typically includes a clause that gives the borrower the ability to “borrow, repay, and reborrow” from time to time, up to a maximum credit available, through a maturity date.  

In our scenario, the lender may have applied the payment on the HELOC loan as a “pay down” on the loan and did not close down the account and cancel the loan two years earlier. 

For a HELOC loan, the lender may require additional steps be taken to close out the loan and have the lien released from the property. In certain cases, the lender requires that the borrower execute a “Close out / Close Down” letter. Not only does the borrower(s) have to sign the letter authorizing the account to be closed, but the signed letter has to be delivered to the lender instructing the lender to do so. In some cases, a lender may even have a specific form to be used to effectuate the closing of the account.

Practice Points:

If you are planning to mail or wire payoff funds to a HELOC lender, as a best practice, if you see that the loan is a HELOC –

  • carefully review the lender’s instructions to close out the account; 
  • ask questions to ensure all requirements are met;
  • deliver the borrower’s signed close down the account letter concurrently with the payment; and
  • keep a copy of the letter along with evidence on how and when you sent the “close out / close down” letter to the lender. 

Even if there is a zero-dollar ($0) balance on the borrower’s account on the day of closing, you still want to ensure that the account is properly closed, and the lien released. 

When you come across a HELOC mortgage, be aware that only requesting a loan payoff statement from a lender may not be enough to obtain a cancellation and release of the HELOC mortgage. By recognizing that there is a difference between a traditional mortgage versus a HELOC mortgage when it is time to pay off the loan, you will be well on your way to having the lien properly cancelled from the property.

blank check

Obtaining Payoff Statements Directly from the Lender

Looking to avoid title claims related to unpaid mortgages and deeds of trust? We offer 4 tips

Our Claims Team has received various claims related to unpaid mortgages and deeds of trust. Here are two scenarios we have seen arise in the context of a claim:

Scenario One

The agent receives a payoff statement from the seller. The seller sends an email requesting the payoff from the lender and copies the agent on the email.

The agent relies on the email and the payoff statement to wire funds to the lender.

Later, it is discovered that the email address for the lender is fake, and the bank account receiving the payment was held by the seller, not the lender.

Scenario Two

The agent reaches out to the lender for a payoff statement. However, the closing date is approaching, and the lender has not responded.

The seller provides the agent with a printout showing a zero-balance owed on the account. The agent contacts the lender once again for a payoff statement.

The lender confirms over the phone that a zero balance is owed. The agent closes the transaction based on these representations.

Later, it is determined the original lender confirmed a zero-balance due because the loan had been sold to another lender.

An assignment of the mortgage had been recorded, and the current holder of the notes filed to foreclose.

Here are 4 tips to help you avoid these types of claims:

  1. Always obtain a payoff statement directly from the lender. Do not rely on payoff statements provided by other parties. Your request for a payoff should include a letter of authorization from the borrower, the loan number, the property address, the borrower’s name and your fax number or email address.
  2. Only rely on a payoff statement sent by the current holder of the note. Check the MERS system, (if the mortgage is a MERS loan), and the public records for the last assignee.
  3. Be mindful of working with hard money lenders – hard money lenders may assign their interests off the record. (See Bulletin 2017-02 and Claims Title Tip dated September 18, 2017 discussing hard money lenders .)
  4. Obtain separate payoff statements directly from each lender with an interest in the property being sold or refinanced. Do not rely on representations from the borrower or other institutions regarding the balance of a loan.
heloc computer

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.

Hot Topics in Claims Avoidance: Avoiding POA Claims in Florida

In the title industry, a power of attorney (“POA”) is used when one of the parties to the transaction cannot be physically present at the closing. Transactions involving a power of attorney are ripe for fraud and errors.

The following checklist can be used to determine whether or not to proceed with insuring a real property transaction involving a POA:

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