This is the title claim we title agents are trained to avoid. We take the extra step to freeze the line, if possible. We have the seller sign a statement requesting that the line be closed and satisfied of record. This is what we are supposed to do. Yet, when we recently processed a refinance title insurance application, we were shocked to uncover a situation in which a prior owner [TWO owners back] was using a line of credit attached to our consumer's house. How could this happen?
We started our investigation by contacting the bank and asking them to satisfy the mortgage. That's when we found out that the line had a balance and was still in use. WHAT? The bank refused to satisfy or assist us beyond a courtesy call to the borrowers asking that they call us.
We then made contact with the title agent who handled the sale that included the supposed payoff of the mortgage. This title agent is the one who SHREDDED her files and so we had no evidence to show the bank that they should have closed the line and satisfied the mortgage. [Two ex-employees of the SHREDDER did offer some help by somehow getting into the computer system and reprinting documents so we had a clue about the contents of the HUD-1 and the policy.]
Next we made contact with the title agency who handled the next sale, the one where our consumer was the purchaser. We asked if they had discovered the unsatisfied mortgage and they said yes, however, they did not pursue satisfaction. They requested and obtained an indemnification letter from the prior title company.
So, we had the first agency who may not have followed good standards and asked for satisfaction. Our clue that they may not have followed good standards is that they SHREDDED their files.
We have the next agency in line who also, in my opinion, didn't do such a good job. If they had contacted the bank they would have discovered that the line of credit was still in use. They also seemed to have insured over this unsatisfied mortgage without even disclosing its existence to their consumer.
We obtained a copy of our consumer's owner policy and then contacted BOTH title companies and had our consumer open a claim.
We got a great response from the claims department at First American. The attorney from the other title company was no help except that he wanted us to take an indemnification letter. We wanted more than that and First American sent demand letters to the prior owner and the bank. They offered and we accepted indemnification with PERFORMANCE language. Our consumer and lender were both on board and okay with this performance based indemnity as was my underwriter. We closed this transaction this week and the good news is that First American was able to get a release from the bank prior to our closing - much sooner than expected. ;)