Asked and AnsweredI'm selling my co-op next month and my attorney aked me to "freeze" the line of credit I have with my bank. What exactly do I have to do?
First, Some Background
In addition to the primary loan which a purchaser may obtain to acquire the apartment, sometimes an owner may also obtain a home equity line of credit (known as a “HELOC” in the trade). The bank will file another UCC lien to give notice of the loan and the borrower will enter into a credit agreement with the bank that allows the borrower to “drawn down” against the loan when needed and pay it back when possible. It is a revolving credit loan in which the borrower can keep borrowing against the line, to the extent the entire line of credit is not used or the amount of the line is not reduced or the line terminated.
When there is an outstanding line of credit, there is one more step that the seller has to undertake in order satisfy the obligation to deliver title free of all liens and encumbrances.
Freezing the Line
Besides delivering pay-off letters and payments in full of the seller’s loans, with an outstanding line of credit, the seller must request that the bank “freeze” the line of credit so that the seller is not permitted to take any further advances against the line. To freeze the account, the seller is usually required to put the freeze request to the bank in writing in advance of the closing. Once the bank gets the request, the bank will issue a letter indicating that the line has been frozen. If the seller fails to obtain a “freeze letter” from the bank, the closing may have to be adjourned until the freeze letter is obtained. The purchaser’s attorney and the purchaser’s title company (with a condo purchase), should not go forward with the closing if the seller has not terminated his or her right to take advances against the line of credit. Although it is unlikely that a seller will continue to draw down on a line of credit after the apartment has been sold and the line paid off, without written verification from the seller’s bank that the line of credit has been frozen, the closing may not be completed.
Residential Reality: Freezing the Line of Credit is a Detail, but an Important One
In most cases, the seller’s attorney nudges the seller sufficiently and the seller’s line is frozen and a freeze letter is delivered at closing. In order to insure a closing with lots of smiling faces, the lawyers need to make sure that this technical detail is handled.
For more on freezing your line of credit and pay-offs in general, see "Hey Seller, Freeze!"