Equity Line of Credit: Failure to Properly Cancel

Do you remember the movie, Goundhog Day? In the movie, a TV weatherman, Phil Connors, (played by Bill Murray) wakes up in Punxsutawney, PA to find himself repeating Groundhog Day over and over again.

 Will Graebe, our Vice President of Claims, finds himself in a similar situation. No matter how much we talk about this particular potential claim, lawyers continue to report their failure to properly close an equity line of credit.

 For the past few years, real property errors have resulted in the largest number of malpractice claims reported to Lawyers Mutual. The most common preventable real estate error we see? A failure to properly cancel an equity line of credit after a house has been sold. In many cases the buyer purchases a home that is subject to an equity line of credit in connection with a sale or refinance. The closing attorney presents a pay-off check to the lender with oral instructions to cancel the equity line of credit and the deed of trust. In some cases the lender fails to cancel the deed of trust per the attorney’s instructions, and the seller continues to use the line of credit attached to the home he sold. The innocent buyer and his lender, who thought they had a first lien mortgage, are eventually threatened with foreclosure proceedings when the seller fails to make the payments on the equity loan.

 Lawyers Mutual and various title insurance companies started talking about this issue in 1995 when the Raintree case was decided. Raintree Realty and Constr., Inc. v. Kasey, 116 N.C. App. 340, 447 S.E.2d 823 (1994), aff’d, 341 N.C. 195, 459 S.E.2d 273 (1995). This case holds that the equity line lender is not required to cancel the deed of trust securing the line of credit unless (1) the balance of all outstanding amounts secured by the mortgage or deed of trust is zero, and (2) the borrower has made a request that the lender cancel the deed of trust by means of “written entry upon the security instrument showing payment and satisfaction.” Id. at 342, 447 S.E.2d at 825.  In the absence of written notice from the seller to the seller’s lender, there is no tangible evidence that such a request was ever made.

 Recently, we have seen situations in which attorneys hand-deliver pay-off checks to the local branch of the lender (usually to a bank teller rather than the loan department) without providing a cancellation letter. A cancellation letter should be presented to the lender along with the check.  In addition, because a cancellation letter can disappear from the lender’s file, we suggest taking two copies of the letter to the lender and asking the party receiving the check to sign one copy for the attorney’s file.

 Keep in mind, it is the responsibility of the closing attorney to obtain a letter from the seller requesting that all deeds of trust be cancelled at the time of closing.

 If you find yourself with an equity line problem, don’t worry about Will experiencing déjà vu, call us to report the claim as soon as you are aware of the problem.