Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (608) 640-4050 or email.
Q. Currently, we are sending out a notice to the first lien holder (if applicable) on our closed-end real estate transactions. The notice just notifies them that we are taking second lien position. Are we required to send this?
A. The notice is not legally required, and other credit unions have told us that it is becoming less common to send it. Nevertheless, we continue to recommend the practice, which can protect the junior lien holder if the senior lien holder makes a certain type of future advance on its loan.
The League’s ii Release No. B048 discusses the competing lien priority rules for lenders who make advances under a mortgage loan. The ii Release includes a sample notice form.
The issue is that in Wisconsin, as in most other states, an optional future advance on a senior mortgage has priority over an intervening lien unless the senior mortgage holder has actual knowledge of such lien at the time it makes the advance. That sample notice simply informs the holder of the first mortgage that the credit union has a second mortgage in place – so that if the first mortgage holder makes any “optional” advances to its borrower, they will not be ahead of the junior lien holder’s interests. If the senior mortgage holder makes an advance that it is obligated to make under the terms of its loan agreement (an “obligatory” advance), or if it makes an advance to protect its interest (a “protective” advance), such as to pay insurance premiums or delinquent taxes, then the notice won’t help the second mortgage lender.
The ii release goes into detail to explain what optional, obligatory, and protective advances are.
We advise “junior” lienholders this way in the release:
Junior Mortgage Holder Strategy
As a result of the above priority rule, a junior mortgage holder credit union should always send a notice of its lien to any superior mortgage holder. Proof of this notice should cut off the priority of any later optional advances by the senior lienholder. A sample notice is provided in Exhibit A at the end of this release. This notice will not give the credit union priority over later protective advances by the senior lienholder.
As discussed below, a junior lienholder will still lose priority to obligatory advances by the senior lienholder. When underwriting a junior mortgage loan, the credit union should calculate available equity based on the credit limit of an obligatory advance or open-end mortgage, rather than merely the current balance.