Why does a title company ask for a “freeze letter” or hold additional funds when paying off a Home Equity Line of Credit Loan (HELOC)? Paying off a HELOC can present unique problems if certain precautions are not taken.
Let’s say that a homeowner takes out a HELOC loan of $50,000, secured by a Deed of Trust on their home. Generally with equity lines of credit or lines of credit loans, $50,000 is the total amount available to the borrower. The borrower receives a checkbook allowing them to borrow the amount needed, up to $50,000, when they need it, up to the total amount of the line of credit, which in this case is $50,000. They then must repay the amount they’ve borrowed, pursuant to the terms of their loan agreement.
Now, it’s time to pay off that Line of Credit Deed of Trust. This is where the title company must be cautious. The title company will want to know that when they receive a demand for payment from the lender the lender has frozen the account so that no additional checks written by the borrower will be honored after the freeze date. The “freeze letter” is a form that is completed by the borrower, requesting the lender to freeze the account.
As soon as the escrow receives this letter from the borrower, they must get it to the lender immediately. Otherwise, the account will not be frozen. Sending the letter to the title company, rather than the lender, does not freeze the account, and may delay the closing of the current transaction.
As an additional safeguard, title companies will quite often hold money after the payoff has been made, just in case the lender processed a check from the borrower after the loan was supposedly frozen. This is especially true in cases where the freeze letter was sent to the title company instead of the lender. The amount to be held can vary, but in the above example, if the amount of the demand was $25,000, the title company would hold the difference between the amount of the demand and the amount of the original Line of Credit Deed of Trust until the title company can confirm with the lender that the payoff was accepted, that the account is frozen, and that there is no other money due on the account.
The length of time the title company would hold this money would depend upon how long it might take to confirm the payoff with the lender. If additional money were owed on the account, the title company would pay it from the money that they hold. Once the title company can confirm that the account is closed and paid in full, any money they are holding will be returned to the escrow that handled the transaction.
Source: Lawyers Title, MDC
Comments