PAYOFF LETTERS FOR REVOLVING CREDIT MORTGAGES


When the commitment shows a revolving credit mortgage, also known as a home equity loan or a line of credit on Schedule B, you must obtain a payoff letter to be able to pay it off at closing. However, revolving credit mortgages are different from other types of mortgages. Revolving credit mortgages allow a borrower to write checks from the account until the amount due reaches a pre-determined maximum, which is stated in the mortgage document. If the borrower pays down the debt, then the borrower may write more checks up to the maximum amount again. Therefore, unless the account is closed or frozen, a borrower/seller could continue to write checks after the date of the payoff letter, rendering the letter inaccurate. When this happens, the payoff check from closing is not enough to pay off the mortgage and the lender refuses to release the mortgage. ATG has experienced many claims with this fact situation.


You should be sure to review copies of all open mortgages in the chain of title to find out whether the seller has any revolving credit mortgages when you have the search results for the commitment. Many sellers do not understand what a revolving credit mortgage is and will make draws on it before closing, often to pay for closing or moving expenses. You should have a conversation with the seller to explain what a revolving credit mortgage is and that the seller should not make any further draws on the line of credit before the closing to ensure that your payoff letter, when received, will be accurate.


Therefore, when preparing for a closing where the seller has a revolving credit mortgage, you must take extra steps to ensure that the payoff goes smoothly. When you call the lender to request a payoff letter, you must also ask the lender to close the account. Most times, the seller must make a follow-up call, as lenders typically take instructions regarding accounts only from account holders. Some lenders will tell you the account cannot be closed until after it is paid off. If this is the case, the lender should freeze the account so no more checks from the account will be honored. Then, you must obtain a payoff letter that post-dates the closing or freezing of the account, confirms that the account is closed or frozen, and states that upon receipt of the amount indicated, the lender will release its mortgage.


If you do not succeed in having the account closed or frozen, or if your payoff letter pre-dates the closing or freezing of the account, you may not waive the exception for the revolving credit mortgage.


Because of the higher risk associated with revolving credit mortgages, be sure to obtain copies of all open mortgages in the chain of title at the time of your initial search. Review each to determine whether they are conventional or revolving credit mortgages before you write any commitment, and when you find a revolving credit mortgage, note that fact in the commitment's exception language so that you, or the closer, will remember to take the extra steps necessary to get a reliable payoff letter.


If you have any difficulty obtaining an accurate payoff for a revolving credit mortgage, or have other questions or concerns about revolving credit mortgages, please call the Underwriting Department at 800.252.0402, 312.372.8361, or legal@atgf.com

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