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PNC Bank, N.A. v. Cosmany

F-12264-03 (N.J. Super. Ch. Div. 2005) (Unpublished)

MORTGAGES; HOME EQUITY—A credit line lender that has not been requested to close its line is entitled to retain its mortgage lien priority over a subsequent lender, even one that advanced funds to pay off a then existing balance.

A bank that closes a loan with a borrower with an existing home equity line of credit must take reasonable steps to insure that the credit line is closed and paid off at closing to avail itself of equitable subrogation. When a bank lends funds to pay off an older mortgage and the older mortgage is not discharged, the older mortgage is equitably subrogated to the extent of the new loan so long as the new lender lacks knowledge of the other encumbrance. Here, a bank agreed to lend money. The title insurance commitment provided that if there were an existing home equity line of credit, then the borrower was required to obtain a payoff letter and, at closing, send a letter instructing the old lender to close the credit line. At closing, the line was paid off but was not closed. The borrower never sent a letter closing the credit line. The borrower continued to borrow under the old credit line and eventually defaulted. The new lender claimed that, since it gave the borrower the funds to pay off the credit line, its mortgage should be deemed to have priority over the credit line. The lower court disagreed. The credit line mortgage had been recorded first and had priority. Unlike a conventional mortgage, a credit line mortgage operates much like a credit card and the borrower can continue to borrow while the line is open. The new lender, having noticed that the older mortgage was a credit line mortgage, was advised by the title company that in order for its mortgage to be an insured first mortgage, the old credit line needed to be closed. The new lender took no steps to insure that the credit line was closed prior to funding the loan and did not follow up after closing to verify that the loan had been closed and no further advances made. Therefore, the new mortgage was a junior lien, subject to the credit line. The credit line lender never received a request to close the account and had no reason to cease lending money or close the account. As between the two banks, the credit line lender was entitled to have its mortgage declared superior to the new mortgage.

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