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Court Comes Down Hard On Bank That Didn’t Satisfy Open-Ended Mortgage in 90 Days

The South Carolina Supreme Court recently sent a clear message to banks: all mortgages – including those with a home equity line of credit (HELOC) – must be satisfied within 90 days of receiving a payoff. Banks that don't have a procedure for timely execution of payoffs where there is a line of credit should implement one immediately or risk certain liability.

While this has long been the law in South Carolina, banks, as a matter of practice, have often treated mortgages attached to an equity line of credit differently. Additionally, banks have asked for a kill letter from the borrower signifying that the line of credit should be closed before satisfying such mortgages.

Bank ignored check notation: "payoff of first mortgage"

The decision came in Regions Bank v. Strawn where the buyer's closing attorney delivered a check to the bank paying down the seller's mortgage to zero. The check had the typed notation: "payoff of first mortgage." The bank applied the money to the mortgage and to the balance of more than $32,000 on the attached line of credit, but did not satisfy the mortgage. Instead, Regions issued new checks for the line of credit to Richard Strawn, who had not owned the property for more than two years after deeding it to his former wife, the seller in this case. Strawn proceeded to run up new debt of more than $72,000, and when he defaulted, the bank foreclosed on the new owners of the home.

The new owners counterclaimed and moved for summary judgment on the foreclosure. They asked for damages under section 29-3-320 of the South Carolina Code, which says that banks that don't satisfy a mortgage within 90 days are subject to damages of the lesser of $25,000 or one-half of the secured debt, plus attorneys’ fees, costs and actual damages. 

Regions argued that mortgages with revolving lines of credit are treated differently than unencumbered traditional mortgages, and that it could not satisfy the mortgage without a kill letter from Strawn.

The trial court sided with the new owner, as did the South Carolina Court of Appeals.

Before the South Carolina Supreme Court, Regions asked the court to decide if open-ended mortgages were an exception to the statute requiring satisfaction of a mortgage within 90 days of payoff, and if the original grantor – the equity line of credit holder – must request that the mortgage be satisfied. Regions argued that it was neither authorized nor required to satisfy the mortgage without request from the original grantor.

Court decision came down squarely on side of consumers

The court left no wiggle room in its decision, saying: "open-ended mortgages are satisfied in the same manner as other mortgages." In other words, if a bank receives a check from a closing attorney that says "payoff of mortgage," that's enough.

The decision is part of a trend in the South Carolina judiciary to penalize lenders for doing things that the courts view as unfair.

Banks should make sure they have procedures in place to proactively contact equity line holders and close those accounts when they receive mortgage payoffs.

Kristen N. Nichols is of counsel in the Charleston, S.C., office of Turner Padget. She serves clients in the areas of bankruptcy, commercial law and litigation, foreclosure, debtor / creditor law, landlord / tenant law and creditors’ rights. She represents local and regional banks, lenders, investors and small businesses on matters involving loan resolution, asset recovery, contract modification and renegotiation, and bankruptcy. She may be reached at (843) 576-2836 or knichols@turnerpadget.com.

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