Published January 24, 2012 | By Jeanne
I got a call from a client this morning asking if a mortgage we showed on a title search was open-ended. It is an important question. When we do a search, we report what we find. If the mortgage is open-ended we write “Open-Ended Mortgage.” If it is not, we simply write “Mortgage.” But, this reminded me of an email I received a few months ago. It seems that an abstractor did not indicate whether the mortgage was open-ended or not. As it turned out, it was open-ended and there was a claim on the title policy because of the discrepancy. The question in the email I received was simply “who is responsible for the claim?”
Why does it matter whether the mortgage is open-ended or not? An open-ended mortgage allows for future advances. Most commonly, these are home equity lines of credit where the homeowner can write checks to draw additional funds on their mortgage. When there is a sale, it is very important for a close-out letter to accompany the payoff. Otherwise, the balance is paid off, but the account remains open and the borrower can continue to write checks, running the balance back up, which is still secured by the mortgage. This can be important in a refinance, too, because those future advances may have priority over the new mortgage. Although in a refinance, it may be possible to argue equitable subrogation saves the new mortgage’s priority over the equity line.
This becomes a title insurance claim when the borrower on the equity line, who has now sold the property, defaults on the line of credit secured by the open-ended mortgage, which was paid off but never released. The lender files a foreclosure on its open-ended mortgage and discovers the property has sold; they then serve the new owner with the summons and complaint. The new owner now has a title claim.
The facts as presented in the email were essentially as described above – the open-ended mortgage was shown on the title search as a “mortgage” and it was paid off. But, because the title agent did not realize it was open-ended, no close out letter was provided to instruct the lender to close the account. The borrower then continued to borrow on the account and subsequently defaulted. When faced with a claim on the policy it issued, the agent blamed the abstractor for not noting on the search that it was an open-ended mortgage. The abstractor’s E&O carrier was notified that there was a potential claim.
There is certainly a valid claim on the title policy. But is this the responsibility of the abstractor? In the abstractor’s view, he showed the mortgage. But was that enough? Was he still negligent for failing to inform his client that it was open-ended?
Maybe. It is the responsibility for the abstractor to accurately show what he finds – given the importance of the fact that this was an open-ended mortgage, the client has a good argument that the abstractor was negligent. However, there are additional facts that would become relevant in determining if that negligence was the proximate cause of the claim and whether the abstractor is liable. Perhaps the client was also negligent.
Often times, a payoff letter from the lender will indicate if a close-out letter is required to close the account. This would be sufficient to put the agent on notice that it was an open-ended mortgage. And, if this was a second mortgage, perhaps the client should have inquired further to find out if this mortgage was open-ended. I would also like to know how long ago the closing was in relation to the default on the line of credit. The title agent should have followed up to get a release – if the mortgage went unreleased for a long period of time, it should have caught the mistake before a large balance was incurred and the borrower defaulted. This could have minimized the risk and exposure of the title agent.
There is most likely enough blame to go around in this scenario. The problem could have been easily avoided if the abstractor had properly noted on the search that the mortgage was open-ended. It is important for an abstractor to understand the significance of the documents he reviews so that they can be accurately reported to the client. Not all mortgages are created equal.
On the other hand, the agent here could have done more to prevent this claim, too. So is it really fair to place the blame on the abstractor? In my opinion, this is a claim that the title company should just cover… that is what title insurance is for. But, since it is arguably a claim related to searching error, there are two E&O policies from which the underwriter can recoup its losses – the agent’s and the abstractor’s. Regardless of which bears the greater responsibility, there is an E&O claim and the cost of doing business (for all of us) will go up.
What do you think? Who should be responsible for the claim?