Dangers of mortgage lending without up to the minute title search

Sometimes, a lender lends money secured by real estate without a current search of the public records to determine whether any lien might have priority over the lender’s mortgage. Loan documents are executed, funds are advanced and the mortgage is delivered to the Register for recording, sometimes contemporaneously with the disbursement of the loan, sometimes later.

A recent case in the Tennessee Court of Appeals underscored the danger of advancing funds prior to conducting a title search current to the recording of the mortgage. In that case, loan documents were executed and the loan proceeds were advanced by lender to borrower on December 1. Lender’s mortgage was sent overnight for recording on December 2 in the public records. Without lender’s knowledge, borrower had purchased the property securing the loan several months earlier from a seller who provided seller financing; however, seller’s mortgage was not recorded until December 1. Lender relied on borrower’s representation that the property was unencumbered, and lender advanced the loan to borrower without first conducting a title search to confirm that its mortgage had been recorded and was not subject to prior liens.

When lender challenged the priority of the Seller’s mortgage over lender’s mortgage, the Court confirmed long standing law in Tennessee that seller’s mortgage had priority over lender’s mortgage because it had been recorded first. Thus, lender had a second mortgage rather than a first to secure its loan. Had lender conducted a current search of the public records to determine whether any lien might have priority over the lender’s mortgage before advancing the loan, it could have avoided the unfortunate circumstance of having a second mortgage securing its loan had it.

To avoid this risk, lenders should either conduct a current search of the public records to determine whether any lien might have priority over the lender’s mortgage before advancing the loan or obtain title insurance insuring lender against such risk.