January 2019: Lender's Edge Newsletter
Payoff Letter Pitfalls for Commercial Lenders
A borrower’s request for a payoff letter on a secured commercial loan is typically a completely noncontroversial matter: an honest borrower has located a buyer for its property, or found another lender to refinance the borrower’s debt, and needs a statement of the amount required to pay the debt and discharge the existing lien. In such cases, the lender prepares a payoff letter stating the amounts due on the loan, provides the letter to a title company or other closing agent, and the lender’s loan is paid without incident.
How should the existing lender handle a payoff request in more unusual circumstances? For example, what is a lender to do when faced with a borrower who repeatedly demands payoff letters on a secured loan, but never provides the lender with any details regarding any proposed refinancing or sale? And what if that same borrower is in default on the secured debt, and the lender reasonably believes the borrower intends to sell the collateral to an insider for less than reasonably equivalent value? What if, in the midst of demanding payoff letters from the lender, the borrower fails to respond to the lender’s questions regarding the location of the collateral? What if the borrower disputes the amount required to discharge the lender’s mortgage or deed of trust, and threatens to sue the lender if the lender proceeds with foreclosure? In the face of such circumstances, is the lender required to provide a payoff letter at all and, if so, what information must the lender include? A lender recently faced these questions and ultimately won before the Missouri Court of Appeals in the case of Theresa Grisham, et al v. The Mission Bank.
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