Notice Requirements for Closing a Home Equity Line of Credit:

Lessons From Mellon Bank v. Countrywide Home Loans, Inc.

Mellon Bank, N.A. v. Countrywide Home Loans, Inc., (October of 2003).  The Court of Common Pleas of Allegheny County held that where a home equity line of credit agreement requires notice from the mortgagor to close the line and satisfy the mortgage, notice by a third party who pays off the line of credit is ineffective.  The result:  the third party is left with rights that are junior to the mortgagee and subject to the whim of a mortgagor to redraw on the line of credit.  

SUMMARY AND FACTUAL BACKGROUND

 In 1995, Countrywide Home Loans (“Countrywide”) disbursed a home equity line of credit secured by a mortgage on the borrower’s property.   In 1996, Mellon Bank, N.A. (“Mellon”) disbursed an installment loan to the borrower that paid off the Countrywide loan and was secured by a mortgage on the same property.  At the closing, Mellon issued a check to Countrywide that contained a stamped notation on the back stating:   

“By endorsing this check, payee acknowledges receipt of the payment in full satisfaction of the … lien … and further warrants that payee shall forthwith satisfy said lien of record.”     

Countrywide never satisfied the mortgage and the borrower continued to draw on the line.  In 2001, the borrower defaulted on both loans and Countrywide and Mellon each instituted foreclosure actions.  Mellon obtained the sheriff’s deed and brought an action in equity to compel Countrywide to satisfy its mortgage of record. 

DISCUSSION

Mellon advanced several arguments for compelling Countrywide to satisfy its mortgage and the Court rejected each one.

Mellon first argued that Countrywide should be compelled to satisfy its mortgage on legal grounds.  Mellon claimed that 21 Pa.C.S.A. Section 681 required Countrywide to satisfy its mortgage upon its receipt of payment in full.  However, the Court noted that the clear language of this statute requires the mortgagor to request satisfaction.   In this case, there was no evidence that the mortgagor ever requested Countrywide to satisfy its mortgage. 

Mellon then argued that the stamped endorsement on the check to Countrywide met the requirements of 42 Pa.C.S.A. Section 8143,  which outlines the notice required to establish priority of an open-end mortgage.  The Court responded that the stamped endorsement failed to contain sufficient information regarding the amount and nature of the loan and did not comply with the service requirements of 42 Pa.C.S.A. Section 8143.

Mellon also argued that equitable principals required Countrywide to satisfy its mortgage.  However, the Court disagreed.  The Court found no communication between Countrywide and Mellon that suggested Countrywide induced Mellon to pay off the loan by promising to satisfy the mortgage.   Additionally, the Court found no evidence of any agreement to satisfy the mortgage between the two lenders.  Accordingly, equity did not compel satisfaction.

The Court concluded that without proper notice from the mortgagor to Countrywide to terminate the home equity loan and satisfy the mortgage; or alternatively, without an express agreement between the lenders regarding lien priority, Countrywide cannot be compelled to satisfy the mortgage under Pennsylvania law.

PRACTICAL ADVICE

A lender can protect its interests in this situation in a number of ways.   The most practical solution is to prepare a written statement for the mortgagor to sign at the closing of the loan that directs the mortgagee to terminate the line of credit and satisfy the mortgage.  Additional solutions include obtaining a written statement from the mortgagee that acknowledges its obligation to terminate the line and satisfy the mortgage as a condition to its receipt of payment in full of the balance owed on the line.  In light of this recent decision, it is recommended that the lender, at the very least, obtain the express acknowledgement from the mortgagee to terminate the line and satisfy the mortgage.

If you have any questions or concerns about this case or the procedure to ensure the right to terminate a home equity line of credit and satisfy the corresponding mortgage, please contact an attorney in the Insolvency and Creditors Rights’ Department of Tucker Arensberg, P.C.

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