Insights

North Carolina has enacted a bill that is designed to provide lenders and title companies greater certainty in connection with payoff and short-pay transactions. Under Senate Bill 679, effective October 1, 2011, if an authorized person delivers certain notices in connection with a new loan, the borrower will not be able to receive additional advances on an existing loan after the new lender sends a payoff request, a HELOC will terminate after the payoff, and any additional advances made on the old loan after the payoff will be unsecured. The procedure to suspend the accountholder’s access to the line before the payoff occurs is curious. Creditors are subject to strict rules about when they can suspend access to a HELOC under Section 226.5b of Regulation Z. Regulation Z does not permit a creditor to suspend access simply because it receives notice from another creditor that may or may not eventually enter into a new loan with the accountholder.

Procedure to Block New Advances Before Payoff

If an applicant applies for a mortgage loan from a depository institution, and the loan proceeds will be used to pay off an existing mortgage loan secured by the real property that will secure the new loan, the new lender may send a directive to the current lienholder instructing it to suspend any further advances on the existing loan until the payoff date. The new lender must also send notice to the borrower.

The statute calls the directive to the current lienholder a credit suspension directive. The new lender must send the directive to the current lienholder when the new lender sends a payoff request or short-pay statement. It must send the directive no more than 30 days before the anticipated payoff date. The directive must include the following information:

• The name and authority of the person giving the directive;
• Sufficient information to enable the creditor to identify the secured obligation, the identity of the borrower, and the real property encumbered by the security interest;
• The specified payoff date, which may not be more than 30 days after the notification is given; and
• A clear and unambiguous directive to the secured creditor to suspend through and including the payoff date the borrower’s right and ability to obtain any additional credit advances which, if made, would be secured by the security instrument.

The statute does not provide a sample form for the directive. The new lender must send a separate notice and a copy of the directive to the borrower at the same time. The statute provides a sample form for the notice to the borrower. The new lender must cancel the directive if it cancels the new loan or if the applicant asks it to cancel the directive. There is no sample form or content requirements for the notice of cancellation.

The current lienholder may continue to advance sums secured by its security instrument for certain purposes, such as for insurance, taxes, or assessments or to protect the current noteholder’s interest, or sums that were initiated or approved before receipt of the directive.

Request to Terminate an Equity Line of Credit

An authorized person (a title company issuing a title policy on a new loan or an attorney or depository institution responsible for disbursing funds on a new loan) can terminate an existing home equity line of credit account that is paid by the new loan. The authorized person must send a termination request to the current lienholder along with the payoff funds. The person must also send a copy of the termination request and a notice explaining the request to the borrower on the line of credit that was terminated. The statute includes sample forms for the request to terminate and two forms of the notice to the borrower.

Notice Regarding Future Advances

A new lender, a title insurance company, an owner of the property who is not the borrower, or a qualified lienholder may notify the current lienholder that any future advances on the prior HELOC will not be secured by the old security instrument if the advances occur after the lender pays off the prior loan. The statute includes a sample form for the notice to the current lienholder and the related notice to the borrower.

Timothy P. Meredith is a partner in the Maryland office of Hudson Cook, LLP. Tim can be reached at 410-865-5404 or by email at tmeredith@hudco.com.