Mortgage Payoff Pitfalls: 7 Ways to Fight Fraud
By Steven Presley, Esq.
In the title insurance and settlement industry, many agents are targeted by fraudsters who attempt to divert proceeds intended to satisfy open mortgages when a payoff letter is requested. In addition to preventing fraud, agents must also remember several nuances when it comes to satisfying mortgages involving noninstitutional lenders, foreclosures, equity lines of credit and reverse mortgages. These seven tips will help agents requesting electronic payoff letters minimize exposure to fraud, while satisfying specific types of mortgages.
1. Ordering the Payoff Letter: Do It Yourself
When ordering a payoff letter on a mortgage, agents should never let the borrower request the letters themselves. The borrower may not have the necessary safeguards in their home or office networks to prevent email correspondence from being intercepted by a fraudster. Fraudsters may have easier access to a borrower’s e–mail and can potentially alter a payoff letter’s wiring instructions. It is always best to have the borrower sign an authorization letter permitting agents to request the payoff letters directly from the lender.
Further, if you receive a revised payoff letter that you did not request, we recommend that agents immediately contact the lender directly to verify the contents. As standard practice, agents should always request an updated payoff letter directly from the lender on the day of closing to avoid any miscalculation.
2. Verify the Sender’s Information
It is not uncommon for fraudsters to create email accounts that look like the lender’s email accounts. Most lenders will typically use an encrypted form of email. However, if an agent receives a payoff letter in an attachment to a non-encrypted email, agents should be cautious prior to opening the email by placing their computer’s mouse over the sender’s email address, then comparing the email server address and domain with the lender’s actual server address and domain.
Fraudsters can intercept an email from a bank or borrower and then alter the document’s contents, including (and often) the wiring instructions. Agents should always independently confirm the wiring instructions by calling the lender directly if a wire is going to be used to pay off the mortgage.
3. Formatting Issues: A Fraudster Red Flag
Fraudsters may not always be careful when altering a document. In addition to grammatical and spelling errors, agents should look for different-sized letters or the use of multiple fonts, as this may be a sign that the document was modified. If you have received a payoff letter in PDF format, agents should also look for text boxes that are layered over the correct account information, or conceal information such as a mailing address.
4. Non-Institutional Mortgages: Special Attention Required
When requesting a payoff from a private, non-institutional lender, agents should take extra precautions to verify that the lender did not assign the mortgage or pledge the note as collateral. Agents should request that the lender provide documentation that they are in fact in possession of the promissory note by requesting it. This will confirm that the correct lender is being paid, and that the lender did not assign the note to another lender or pledge the note as collateral in another transaction.
5. Equity Lines of Credit
Equity lines of credit present a unique set of obstacles when ordering a payoff letter and satisfying the mortgage of record. Claims may arise in situations where a mortgage is not fully satisfied because of a last-minute draw on the account by the borrower to pay for moving expenses or new furniture for a new house. Last-minute draws will change the amounts needed to satisfy the loan, and the lender’s payoff letter will no longer be valid.
When requesting a payoff letter on an equity line of credit, agents should include in their payoff request a letter signed by the borrower requesting that the lender freeze the credit line, and to direct the lender to close the account upon receipt of the full payoff amount. However, it is important to note that lenders will often have their own set of forms that the borrower will need to sign to freeze and close the account. Agents will want to reach out to the lender as far in advance as possible to obtain the correct forms for the borrower to sign at closing.
It is also strongly suggested that the borrower surrender to the agent at closing any credit cards or checks tied to the equity line so they are not inadvertently used after closing. It is also required that agents update the payoff letter on the day of closing to confirm that no additional amounts have been withdrawn on the loan prior to closing.
Doma agents, for additional information on satisfactions and equity lines of credit, please see National Title Bulletin 2022-05, which you can access on Agent Connect.
6. Mortgages in Foreclosure
If the lender holding the mortgage has already initiated foreclosure proceedings, agents should directly request all payoff letters from the attorney representing the lender in the foreclosure action. Agents who do not request the payoff letter from the attorney run the risk of requesting a payoff that will not include the fees and costs the lender paid to initiate the foreclosure proceedings. Without such fees and costs being paid, the mortgage will not be satisfied of record.
7. Reverse Mortgages
Home Equity Conversion Mortgages are one of the most common forms of reverse mortgages. Agents who encounter these types of mortgages will see requirements on their commitment regarding the satisfaction of two mortgages. The first mortgage to be satisfied is in favor of the lender, and the second mortgage is in favor of the Department of Housing and Urban Development (HUD). Questions often arise when determining whether a payoff letter should be ordered from HUD. Since typically there are no payments made to HUD, payoff letters are normally not required. However, agents should be aware that a payoff from HUD may be required if HUD has paid out funds to avoid a default under the mortgage. All agents should contact the servicer for the HUD loans and request a certificate to verify that HUD has not paid any funds out.
Doma agents are welcome to contact Doma Underwriting Counsel at [email protected] for questions regarding different mortgage types and the prevention of fraud.
Steven Presley is Doma’s Regional Underwriting Counsel in Florida.