EDITOR'S NOTE: This article originally appeared under Claims Corner in the October 2008 issue of the ATG Casenotes and Underwriters’ Bulletin.

The two most common mortgage payoff claims that ATG experiences are where revolving lines of credit are not closed and where the payoff made is not for the correct mortgage. There are steps that you can take to help prevent these claims.

Revolving Lines of Credit

Claims with equity lines of credit occur when the seller draws money on the line of credit after the payoff letter has been obtained. As a result, the payoff letter that is used at closing is not accurate and the line of credit will not be released. If the seller does not make payments on the line of credit, a foreclosure action could be started against the insured property.

When preparing a commitment, the commitment should reflect that the mortgage is an equity line of credit. That way everyone involved in the transaction will be reminded that additional steps need to be taken in order to waive the mortgage.

In order to prevent these claims, the account should be frozen or closed when the payoff letter is requested. Ideally, the account would be closed prior to the closing. However, most lenders will not close the account until the account is paid in full. A frozen account will prevent the seller from drawing any additional sums from the line of credit. You most also review the payoff letter carefully. The seller should instruct the lender to close the account. Typically, this is handwritten on the payoff letter and is signed by the seller.

Incorrect Payoff Letters

Sometimes a lender sends an incorrect payoff letter even though the correct payoff letter was ordered by the member. It is important to check and double check to make sure that the correct payoff letter was requested and that the correct payoff letter was received. ATG has experienced numerous claims that have arisen because the wrong loan was paid off at closing. ATG has paid off car loans instead of mortgages, mortgages on different properties owned by the mortgagor, and even mortgages on property owned by people with similar names to the mortgagor. In most of the claims, the problem could have been avoided if the member had compared the loan number on the payoff letter to the loan number on the payoff request letter or checked the address of the property on the payoff letter. It has been ATG's experience that obtaining reimbursement from the seller is often difficult or impossible due to the financial condition of the seller.

To prevent claims that stem from errors made by lenders issuing payoff letters, ATG created  the Payoff Letter Request, ATG Form 4137. The form is available in ATG REsource and on our website. The REsource version is interactive and will prompt you to enter the necessary information, which includes the loan number, the last four digits of the borrower's social security number, and the document number of the recorded mortgage. The Forms page of the website offers both a fillable PDF version (linked above) and a Word version you can use. The form notes that the first page of the mortgage and a copy of the legal description are attached. By formalizing our request via this new form, we hope lenders will be more likely to provide the correct information.

Contact the ATG Underwriting Department with any questions about this procedure.