Equity Line Payoffs - Problem Requiring Great Care
Chris Burti, Vice President and Senior Legal Counsel

North Carolina's title industry is experiencing a rash of claims arising from situations where a Homeowner's Equity Line of Credit ("HELOC") is "paid off" at closing, only to later find that the HELOC borrower has continued to make draws on the credit line after the closing. The problem results when the HELOC is not properly terminated and canceled of record. Preventing the problem can be difficult because our North Carolina HELOC statute offers little clear cut guidance on how to accomplish this, thus allowing lenders to adopt inconsistent requirements. This article is a discussion of the proper procedure for terminating a HELOC loan and cancelling the deed of trust under North Carolina law.

The HELOC deed of trust should first be read carefully to determine if there are any specific requirements included in the instrument by the lender for the termination of the loan, for the calculation of the final payoff, and for satisfaction of record of the deed of trust. Obviously, any and all such requirements must be met. N.C.G.S. Section 45-81(c) provides what limited statutory procedure that we have. It states: "At any time when the balance of all outstanding sums secured by a mortgage or deed of trust pursuant to the provisions of this Article is zero, the lender shall, upon the request of the borrower, make written entry upon the security instrument showing payment and satisfaction of the instrument; provided, however, that such security instrument shall remain in full force and effect for the term set forth therein absent the borrower's request for such written entry. No prepayment penalty may be charged with respect to an equity line of credit loan." This statute requires the outstanding debt be reduced to zero and a specific request by the borrowers. Most lenders have interpreted this to mean that they can (and do) require a written request signed by the borrowers. In light of Gramm, Leach Bliley, this might not be construed as altogether unreasonable no matter how inconvenient at times.

Whenever possible, the account should be "blocked" or "frozen" when requesting the payoff letter prior to closing. Sample language is attached (with borrowers' signatures required). If the account cannot be frozen prior to closing, then the payoff must be accompanied by a termination request executed by the borrowers. The closing attorney should verify that all checks have cleared and should require that all extra checks and any cards be delivered by the borrower and preferably destroyed in the attorney's presence. The payoff transmittal letter must clearly require the lender to terminate the HELOC and cancel the deed of trust of record. Again, if the account has not been frozen prior to closing, then the payoff must be accompanied by a request executed by the borrowers as in the sample language below. Finally, it is critical that the closing attorney follow up after closing to assure that the lender complies with the payoff letter requirements and that the deed of trust is actually canceled of record.

Two suggested payoff letter forms and a "Freeze" request provided by practitioners and insurers follow for use in preparing a form for your office:

Re: Loan Number:
      Obligor:
      Property Address:

Dear Sir or Madam:

Pursuant to North Carolina General Statute 45-81(c), I/We, Owner(s) of the above referenced property securing the stated equity line loan, request that you IMMEDIATELY UPON RECEIPT OF PAYMENT TENDERED BELOW, close this account and honor no further advances. I/We have not written checks/drafts from the equity line account which have not cleared, and will not write any more checks and agree to indemnify and hold harmless the Closing Attorney, the new lender, the Buyer and the title insurance company from any loss as a result of this equity line account being used subsequent to the date of this notice and/or for checks/drafts being honored subsequent to the date upon which I/we state the account was last used by me/us.

______________________________      _____________________________

Obligor/Owner                                                          Obligor/Owner

********************

Enclosed please find our check in the amount of $________ representing payment in full of this equity line account as stated by prior written notice from you. THIS PAYMENT IS NOT TO BE CONSTRUED AS A PAYDOWN OF THIS ACCOUNT. THE ACCOUNT IS TO BE CLOSED. No more checks or drafts should be honored. Please IMMEDIATELY acknowledge receipt of payment and your acceptance as satisfaction in full, subject to clearance of funds, by returning the enclosed copy of this letter in the envelope provided for your convenience.

In the event, for whatever reason, the amount tendered is insufficient for payment in full, please accept the enclosed as partial payment and advise IMMEDIATELY of the deficiency. This will avoid interest accruing on the full balance until the deficiency can be sent to you.

Please enter satisfaction on the original (copies not acceptable) note and deed of trust, and forward to me. DO NOT SEND TO THE OBLIGOR. I will be responsible for cancellation and forwarding to the obligor. If you are unable to send the original note and deed of trust, any other documentation necessary to clear this lien and additional recording costs will be your responsibility.

Sincerely yours,

(FIRM NAME)

(Closing Attorney Name)

RECEIPT ACKNOWLEDGE: Received this ______ day of ________________, 20___.

BY:

_________________________________________________________________________________

Re: Loan Number:
      Obligor: 
      Property Address:

Dear Sir or Madam:

In the event this loan is secured by a Mortgage [Deed of Trust] allowing for advances of a credit line, please be advised that this letter authorizes and directs you to freeze the referenced credit line upon issuance of your payoff [demand]. If you require further authorization, please contact the undersigned attorney immediately. Payment pursuant to your payoff (demand) will eliminate any security interest you have in the property in question. In order to avoid unsecured additional advances the account must be frozen upon issuance of your payoff [demand]. If you make any additional advances they will not be secured by the subject property. We will be completing an escrow/closing transaction involving a new owner or lender in reliance on the release of your security interest in the property. Upon payment you will be obligated to issue a release of the Deed of Trust securing the line of credit.

BORROWER'S REQUEST FOR CANCELLATION OF DEED OF TRUST:

Pursuant to Section 45-81(c) of the North Carolina General Statutes, we the undersigned Owner(s) of the property described in the deed of trust securing the equity line loan above referenced, hereby request that, IMMEDIATELY UPON RECEIPT OF PAYMENT TENDERED BELOW, YOU SHOULD CLOSE THIS ACCOUNT AND HONOR NO FURTHER ADVANCES. We have not written further checks, drafts or draws from the equity line account and will not do so in the future. We hereby agree to indemnify and hold harmless your bank, the undersigned closing attorney, any new purchaser of the property, any new lender accepting the property as security for their loan and any title insurer providing coverage on the basis of this payoff and intended cancellation of said lien, including but not limited to any loss as a result of this equity line account being used subsequent to the date of this notice and/or for checks/drafts being honored subsequent to the date upon which I/we state the account was last used by me/us.
(Obligor / Owner of Property)
(Obligor / Owner of Property)

ATTORNEY'S SPECIFIC REQUEST REGARDING EQUITY LINE:

THIS PAYMENT IS NOT INTENDED AS ONLY A PAYDOWN OF THIS ACCOUNT. THE ACCOUNT IS TO BE CLOSED. No more checks or drafts should be honored. HOWEVER, IF THIS PAYMENT IS INSUFFICIENT TO PAYOFF THE ACCOUNT, THIS SHOULD BE APPLIED IMMEDIATELY AND THE UNDERSIGNED NOTIFIED OF ANY SHORTAGE. Please IMMEDIATELY acknowledge receipt of payment and either your acceptance as satisfaction in full or notice of amount of any shortage, as the case may be, by returning the enclosed copy of this letter in the envelope provided for your convenience, subject to the above check being honored and clearing our firm's trust account.

Sincerely yours,

(FIRM NAME)

(Closing Attorney Name)

 

"Freeze" Request for use prior to closing:

        Re: Loan Number:
              Obligor:
              Social Security Number:
              Property address:

        I/we, the owner(s) of the property described in the deed of trust securing the above debt, direct you to, IMMEDIATELY FREEZE THIS ACCOUNT AND HONOR NO FURTHER ADVANCES. I/we have written no checks, drafts nor draws from this account since ____________ and will not do so in the future.

_____________________________         __________________________________

Owner of Property                                       Owner of Property

Dirt Tales From the Deed Vault - Episode 36
John Dillard, Vice President and Legal Counsel

In the last installment of Dirt Tales we left you with the true story of Angie Ambler (not her real name), who was sitting in a jail cell for violating an injunction not to use a road she had no deeded right of way to. Angie's closing attorney had tacked onto a prior title policy in which access had been insured.

After being denied the right to drive on the only road that led to her house Angie's attorney, Lester Dolittle, had decided to go back and look for a grant of access in her chain of title. What the attorney discovered was that the land of the neighbor who was denying her right to use the road ran only to the centerline of the road. Dolittle came up with a plan. He would approach the other neighbor and try to get an easement for their half of the road. The road was wide enough, in his opinion, for Angie to drive only on that half of the road.

Query, would this be sufficient to solve Angie's dilemma? How would she or the complaining neighbor know that at all times she was driving solely on the granting neighbor's part of the road? Driving on one side of the road would work just fine in one direction, but going the opposite way Angie would be driving on the wrong side of the road. Attorney Doolittle assured Angie that wouldn't be such a big problem as there was hardly any traffic on the road.

If Angie wanted or needed to drive on the entire road what would her options be to achieve that? Her best option, according to her attorney, would be to file an action in court based on an Implied Easement theory. Doolittle found a case that set out the elements that would be needed.

In the case of Tedder v. Alford, 493 S.E.2d 487( N.C.App. 1997) Doolittle said that Angie would need to prove the following elements:

(1) there was common ownership of the dominant and servient parcels and a transfer which separated that ownership;

(2) that before the transfer, the owner used part of the tract for the benefit of the other part, and this use was apparent, continuous and permanent; and

(3) the claimed easement is 'necessary' to the use and enjoyment of the claimants land.

As the court in Tedder stated, "Once these elements are established, [a]n 'easement from prior use' may be implied to 'protect the probable expectations of the grantor and grantee that an existing use of part of the land would continue after the transfer.'"

Doolittle concluded that his effort to save time by tacking onto the existing title policy had not paid off at all and he was going to have to do an extensive title examination to try and prove common ownership of Angie's land and that of the complaining neighbor.