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Claims Corner

Mortgages

Mortgage Payoff Claims - Their Causes and Solutions

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 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 ATG Form 4137: Payoff Letter Request. 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 website versions are interactive pdf or “DOC” files for your use. To access the website version, visit www.atgf.com and login as a member; from the member section, click the Transaction Forms/Tools tab, then Transaction Forms, and Miscellaneous and select the form by its title. 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, [email protected], 217.403.0020, or 312.752.1990, with questions on this or any ATG form.