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#2257581 - 08/03/21 05:21 PM Refinances-Lien Status when Unknown liens show up?
Help! Compliance Offline
100 Club
Joined: Oct 2012
Posts: 143
San Antonio, TX
We had a cash-out refinance application. We thought we were paying off a 1st lien, but the title search brought to light that there was a lien from 1991 that had no balance, but the applicant failed to have a Release of Lien recorded. We requested numerous times for the applicant to get this done, but they became unresponsive...so we denied them due to "Property ownership or other issue with title." The line of business wants to report the application as a 1st lien, but I am inclined to report it as a 2nd lien as that was the result of the known lien being paid off, and the application was specifically denied due to a lack of a recorded ROL for the unknown 1st lien. Note if this was not a refinance, and it was only the unknown lien in question, I might be inclined to accept reporting the application as a 1st lien.

Do you believe it is correct to report this application as a 2nd lien given the circumstances? Is it a gray area that has an allowance for either, and the institution just has to have a consistent approach? Thank you for all feedback...

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#2257584 - 08/03/21 06:00 PM Re: Refinances-Lien Status when Unknown liens show up? Help! Compliance
John_Burnett Offline
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John_Burnett
Joined: Feb 2013
Posts: 283
Cape Cod
The application was for a first-lien loan, and the bank anticipated it would be a first-lien loan. That's how you report it, even though you denied the application because of the title flaw.
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#2257608 - 08/03/21 07:37 PM Re: Refinances-Lien Status when Unknown liens show up? Help! Compliance
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
Official Interpretation
Paragraph 4(a)(14)
1. Determining lien status for applications and covered loans originated and purchased. i. Financial institutions are required to report lien status for covered loans they originateand purchase and applications that do not result in originations (preapproval requests that are approved but not accepted, preapproval requests that are denied, applications that are approved but not accepted, denied, withdrawn, or closed for incompleteness). For covered loans purchased by a financial institution, lien status is determined by reference to the best information readily available to the financial institution at the time of purchase. For covered loans that a financial institution originates and applications that do not result in originations, lien status is determined by reference to the best information readily available to the financial institution at the time final action is taken and to the financial institution's own procedures. Thus, financial institutions may rely on the title search they routinely perform as part of their underwriting procedures—for example, for home purchase loans. Regulation C does not require financial institutions to perform title searches solely to comply with HMDA reporting requirements. . . . . . . . .
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2257610 - 08/03/21 07:51 PM Re: Refinances-Lien Status when Unknown liens show up? Help! Compliance
John_Burnett Offline
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John_Burnett
Joined: Feb 2013
Posts: 283
Cape Cod
OK. Dan found the rule in the case when you have a title search and know the lien status.

That would suggest the you would report the application as one for a 2nd or junior lien loan.
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#2257630 - 08/03/21 08:57 PM Re: Refinances-Lien Status when Unknown liens show up? Dan Persfull
Help! Compliance Offline
100 Club
Joined: Oct 2012
Posts: 143
San Antonio, TX
Ok...so our underwriter just wanted me to confirm that whether or not this was a refinance transaction involving paying off an existing lien of which we were aware, because they became and were aware of the existing lien (with no balance) by the time final action was taken (and it wasn't released), the lien status would be 2nd lien regardless. Example: We and the applicant thought there was no lien at all, and the homeowner wanted a home improvement loan. We became aware of the existing lien, so we requested the applicant to obtain a Release of Lien and have it recorded. The applicant refused or became unresponsive, and they were subsequently denied for whatever reason. So it would still be most appropriate to report the application as a 2nd/subordinate lien, correct?

Thanks for your counsel and making things more clear...

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#2257649 - 08/04/21 01:45 PM Re: Refinances-Lien Status when Unknown liens show up? Help! Compliance
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 47,517
Bloomington, IN
Thus, financial institutions may rely on the title search they routinely perform as part of their underwriting procedures -

If you rely on the title work as part of your underwriting procedures then you would report the lien status based on the information known at the time the final action is taken.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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