Vero Beach, Florida – When this homeowner refinanced her line of credit First American insured a new second mortgage for $72,174. The insured lender performed its own closing. Upon request the prior lender provided a written payoff demand of $61,829 "good through" July 25. No per diem figure was given. Actual closing took place June 28th, at which time the new lender calculated payoff for the prior mortgage should be $61,014. A check was mailed and the new mortgage was recorded.

A Line of Credit: Harder to kill than crabgrass?

About one week later the prior lender wrote the borrower claiming an additional $440 due on the old credit line. Instead of paying up the borrower made new draws on the old account.

It turned out the prior lender failed to close its credit line because it never considered itself fully paid. By the time this was discovered the borrower had drawn $70,000 against the old account.

First American hired attorneys to sue for judicial foreclosure and priority, but the judge ruled for the prior lender.

The Company paid $72,175 to clear the offending mortgage, plus legal expenses of $53,118.

Claims involving paid but unreleased mortgages are seen frequently, and credit lines in particular have been a problem. Attorneys and closing agents will not be made liable for this risk, nor for any risk in connection with closing, unless their own misconduct or negligence could be shown. Once again, other forms of title assurance offer no protection here.

Title insurance covers this risk even where the lender does its own closing, unless the lender knowingly allows the prior mortgage to remain.