Without question, handling a closing involves checking off lots of boxes to make sure you have everything you need at the closing table. In order for things to go smoothly during the moment of truth, any number of items have to be handled in advance. One important item on the checklist for the buyer’s attorney, is insuring that the Seller’s line of credit has been “frozen” in advance of the closing.
How a Line Works
With most lines of credit, the borrower can “take down” all or a portion of the advances allowable until the line is “maxed” out. As the seller pays down the outstanding principal balance of the line, additional advances are again possible. So if a line is open at the time of a closing, even if the balance of the line (evidenced by a pay off letter from the lender) is paid in full, at least in theory, the seller can continue to draw down the line, even after the closing. Although this potential problem is less of an issue with a co-op closing, since the lien terminations are delivered at closing, it can be disastrous for condo purchases where the mortgage satisfactions are delivered to the title company after the closing.
Disagreeable Banks and Dishonorable Sellers
Although obtaining a pay off statement from a bank for a primary loan takes only a phone call to the pay off department, banks can be quite finicky about terminating lines of credit. Several banks will require the borrower (not the borrower’s attorney) to request the closing of a line of credit in writing. Several weeks after the request is made the bank will forward a letter confirming that the line has been “frozen” and that no further advances will be permitted on the line. That document, together with a line cancellation request and a pay off letter, showing the balance of the loan, with accrued interest through the closing date, will be sufficient to insure that the seller won’t be able to use the line after the closing is completed. If the line is not frozen and if the seller continues to draw down on the line, the bank will not terminate its mortgage lien and the buyer will be stuck with the seller’s mortgage lien for the open line of credit. Not a good result. A great deal of effort will then be needed to track down the seller and force the payment of the outstanding balance on the line that was created on or after the date of closing.
Preparing for Closing
To insure that problems are not encountered at closing, attorneys for each party need to check the lien search or title report, as the case may be, to determine if there is a lien that relates to a line of credit. Once it’s determined that a line of credit is open, the buyer’s attorney must request that the line be frozen in advance of the closing. In many cases, the seller’s attorney will undertake to have the line frozen without the request of the buyer’s attorney. Unfortunately, not every seller’s attorney is aware that the line must be frozen. If the buyer’s attorney does not make the request, there is no assurance that the task will be done. Although I have seen a line frozen at the closing table, after begging and pleading by both the seller and the seller’s attorney, in most cases the bank will not be able to send a freeze letter immediately and the closing will have to be adjourned. Particularly if the seller is not at the closing (and has given a power of attorney to his or her attorney), the bank will not issue the freeze letter, without a written request from the seller at the closing table. It’s a vertigo moment for the seller’s attorney, with potentially serious consequences, if the buyer has a rate lock that’s about to expire.
Residential Reality: Get it done, the sooner the better…
Once it’s determined that a line of credit is outstanding, make sure the seller’s attorney is on the case and gets this troublesome item resolved. Unless the freeze letter is on hand at the time of the closing, there will be many unhappy faces at the closing table.