Lines of Credit and Title Company Protocol

By admin

Several bankers, realtors and consumers continue to wonder why it is vital that the title insurance company is insistent on making sure a line of credit mortgages is closed prior to closing.  The fact is Home Equity Lines of Credit (HELOC) are a large source of claims in the title insurance industry. A equity line is essentially a revolving line of credit secured by a mortgage on the borrowers property. Most of these loans allow funds to be borrowed, repaid in whole or in part, and then borrowed again. All proceeds however continue to be protected by the security document (mortgage) against the property.  These vehicles became popular in the early part of the last decade as a resource to conduct home repairs or simply have access to additional equity in one’s home.

Title companies have to be diligent because paying off the outstanding balance of such a loan usually does not terminate the line of credit. All that is occurring is that the line of credit “balance” is back to zero, however the borrower still in most cases has full access to the line. When insuring a refinance the title company will require the line of credit to be irrevocably terminated. Otherwise the borrower can refinance the mortgage and then tap the line of credit thereafter before the bank closes access to it.  The line would still have priority over the new loan that was used to pay off the balance, this would inevitably create a claim. Although most title companies used to accept the borrowers signed letter at closing directing that the account be closed, such is now insufficient due to the industry’s increase in problems in this area.

Generally, a request by the borrower in writing to close the line of credit mortgage must be made to the existing lender. The best protection for a Title Company against an advance being made after the closing is receipt of confirmation from the existing lender, prior to the closing, that the line of credit account is closed.  Although many times this is not obtainable, usually the title company can confirm with the bank that they have received the “close out” letter from the borrower.

So when closing off a line of credit at closing, be sure to have your closed out letter submitted to the bank prior to the settlement.  This will assure no issues with funding the file and the title company will be clear to disburse with out delay.