Bulletin: NJ000006

Dear Associates:

Summary

This bulletin is intended to confirm and reinforce the company underwriting practices relative to "Line of Credit" mortgages. Before removing such a mortgage as an objection to title, not only must the account be paid in full but proof must be obtained, in writing, from the mortgagee that the account has been closed prior to the closing of title.

Underwriting Practice

Where a search discloses a "Line of Credit" mortgage, as defined in N.J.S.A. 46:9-8.1 the following requirement must be set forth in Schedule B, Section I of the commitment to insure and the mortgage may not be removed as an exception to title unless the requirement is met, notwithstanding that proof is provided that the balance of the account secured by the mortgage has been paid in full.

"Mortgage made by _______ to _______, dated ________, recorded on ________, in Mortgage Book _____ page _____, appears to be a Line of Credit mortgage securing a maximum amount of $_______. The account secured by said mortgage must be closed prior to closing so that no further advances may be made on the account. Proof in writing from the mortgagee must be submitted to the company prior to the closing verifying that the account is closed and the sum necessary to satisfy the outstanding balance."

Background

The company has experienced a sharp rise in claims caused by the failure to properly pay off "Line of Credit" mortgages. In a typical situation the closing agent "pays off" the balance due under the mortgage in the same manner as a non-line of credit mortgage. The borrower/mortgagor then requests a further advance on the line of credit after the closing resulting in a loss of priority as to the insured owner/lender. The problem usually is that either the closing agent failed to realize the mortgage secured a line of credit or mistakenly believed he/she could close the account by requesting the account be closed in the cover letter making the pay off.

As you will recall prior to 1985 there was a great deal of uncertainty as to the priority of advances made under Line of Credit or revolving credit types of mortgages. As the "home equity line" mortgage became more popular the legislature responded by enacting whet is now N.J.S.A. 46:9-8.1 et.seq.. The statute made it clear that where a mortgage secures a specific amount of credit and provides for advances from time to time, that all advances under that mortgage would have priority over liens recorded or filed after the recording of such mortgage. These types of mortgages became very popular and continue to be very common on both residential and commercial properties.

While the statute answered most of the questions as to the lien priority of advances under line of credit mortgages, it also created problems when these mortgages are "paid off". The creation and popularity of these mortgages has become a major new source of potential losses for the industry.

Detailed Underwriting Practice:

The following is the correct underwriting practice with regard to Line of Credit mortgages:

1. During the search phase of the title examination, all mortgages must be examined for provisions permitting advances from time to time.
   
   
2. If a Line of Credit mortgage is found to affect the title, the commitment to insure must specifically identify the mortgage as securing a line of credit.
   
   
3. It is not sufficient to merely call for the satisfaction or pay off of the mortgage in the commitment to insure. The commitment must require that the line of credit secured by the mortgage be closed so that no further advances can be made under the line. Caution must be taken to confirm that the line is closed by the borrower. A third party such as the closing agent may not have the authority to direct the lender to close the loan. Remember the line of credit agreement is between the lender and the borrower. A third party can not usually cancel an agreement when the third party is not a party to the agreement. Remember also that a letter paying off the balance and demanding that the account be closed may not be effective for the same reason. In addition, it may be unrealistic to suppose that an employee at that lender who is processing hundreds of payments per week will even take note of such a request.
   
   
4. Collecting the "checkbook" and having the borrower sign a letter at closing directing that the account be closed is not sufficient to protect the company. Many of these types of accounts provide for alternative methods of securing advances, some even permit the use of automatic teller machines.
   
   
5. The only way to adequately protect against an advance being taken after the closing is to make sure the account is closed before the closing. The best evidence that the account is closed is a letter from the lender confirming same and stating the balance due on the account and that upon payment of the balance a discharge of the mortgage will be issued. (See the suggested Schedule B., Section I language above.) See Home Office underwriting bulletin number 93-15-ALL for suggested forms to request the closing of the account. Remember it has to be the borrower(s) who must request that the account be closed.
   
   
6. The balance on the account should be confirmed at the closing and paid with "good funds" received at the closing.
   
   
7. Require the standard seller's or mortgagor's affidavit of title be executed at closing.
   
   
8. After closing a follow up should be done to make sure the discharge is received and the mortgage is canceled of record.

If you have any questions with regard to the above, as usual, please do not hesitate to contact the company.