Mortgage Daily Logo
mortgage news from industry experts

Brokers Should Scrutinize Lender Contracts

Brokers Should Scrutinize Lender ContractsNAMB session looks at broker contracts

July 6, 2006

WASHINGTON correspondent for

PHILADELPHIA — Mortgage brokers should review, investigate and analyze contracts with wholesale lenders at the outset of the business relationship so they don’t have to defend themselves in court down the road.

Gordon Schlicke, an industry columnist and consultant, recently offered the tips at the National Association of Mortgage Broker’s annual conference.

“Be defensive, be a little negative, be cautious, be careful and even though you might have a contract in existence with a lender, don’t let personal relationships color your decision to go back and read it yet again,” the consultant told conference attendees.

Schlicke noted that during the first six months of this year in the Northwest region, the number of lawsuits involving lenders exercising buybacks has almost doubled from eight this time last year to 14 through June of this year. Noting that there is no standard lender-broker contract, Schlicke said both lenders and brokers need a clear understanding of their duties and responsibilities and those duties and responsibilities need to be negotiated upfront.

photo of Gordon Schlicke
Gordon Schlicke at NAMB conference

What can you do to protect yourself? What can you negotiate? It’s called defensive brokerage, he said. Request that the lender indemnify the broker from damages resulting from its own acts of omissions and breach of duty under the contract. The clause should say that the broker is not liable for damages resulting from the lender’s actions. Brokers are limited agents under most laws but not so under many of the contracts Schlicke has studied. A broker should limit their liability under the contract.Scan the agreement for things that need definition. What is an acceptable appraisal? Is the broker warranting the appraisal? Does it mean the appraisal must be done by a licensed appraiser? If a lender makes a loan and it goes bad, the lender will look at the contract with the broker and ask the broker why it was not provided with a proper appraisal if the parameters of an appraisal are not defined in the contract. Schlicke said this issue arises quite often.

Brokers should examine how loan underwriting is treated, he said. Schlicke said a clause explaining that a lender would have the right but not the obligation to underwrite any loans submitted for purchase appeared in a contract but what that it actually meant that the lender was saying that its approval and purchase of the loan did not mean that it was responsible for underwriting the loan even though the lender approved and purchased the loan from the broker.

Find out if the lender agrees to return the original loan documents if the loan fails to close, Schlicke asked. If there is a lawsuit, the broker will need the original documents not copies. The lender, in the event of a court action, is under no obligation to return the documents. Negotiate this in the beginning, he said.

Does the repurchase clause contain the phrase that the “broker shall repurchase any loan sold to the lender within 20 business days on receipt of written notice that the buyer is 90 days or more delinquent with regard to loan payments.” There is no limitation on the total amount of time, he pointed out. A broker could find that 10 years down the road, the lender has decided to exercise this unlimited buyback clause.

Schlicke told the audience to pay particular attention to representations and warranties. He read contract language stating the warranty was deemed to have been relied upon regardless of whether the lender had the opportunity to investigate the information submitted by the broker. He asked, “How can you warrant a stated income loan?” Under this language, he pointed out, that’s exactly what mortgage brokers were doing. If the stated income loan is incorrect, the broker has 100 percent liability. A warranty means no problems, he said.

Brokers should ask for the same level of legal protection given to in-house originators. If the legal issue involves an omission or act committed by the lender, will the lender assume the broker’s defense or must the broker provide counsel and request dismissal on summary judgment. He said brokers should not rely upon the relationship with a lender, even one of several years duration, to protect the broker in case of a lawsuit.

Finally, if the lender’s policies and procedures do not comport with current laws and regulations, refuse to cooperate. Schlicke said some subprime lenders can be rather “nasty.” For an example of the penalties in such a situation, Schlicke suggested that the audience read the Office of the Comptroller of the Currency’s Agreement 2005-142 for a list of penalties.

Lisa D. Burden is a legal analyst for and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at:

Popular posts

How Long Does It Take to Refinance a Mortgage
How Long Does It Take to Refinance a Mortgage

So, you’re interested in refinancing your mortgage. Maybe you want some extra capital to do that home project you’ve always dreamed of, interest rates are nearing record lows, or you want to start consolidating debt. Regardless of the motivation behind the refinance,...

How Does Refinancing a Mortgage Work
How Does Refinancing a Mortgage Work

A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that....

What Does It Mean to Refinance Your Home
What Does It Mean to Refinance Your Home

You can think of refinancing your mortgage as a debt redo. Essentially, you’ll swap out the existing loan for a new one - ideally with better terms and conditions. Only this time it could help you save money on high mortgage payments, rather than just borrow it....

Setting up the Utilities in My New House
Setting up the Utilities in My New House

All the tedious, time-consuming home closing documents have been signed, sealed, and delivered. Your belongings are packed into what seems like a million boxes and you have a solid plan to haul all your existing furniture to the new place. Just as your boxes and...

When Is My First Mortgage Payment Due?
When Is My First Mortgage Payment Due?

Navigating your way through a brand new mortgage loan can be a difficult task, especially for first time homeowners. After handing over a large sum of money for the down payment and closing costs, it’s important to pay attention to the timing of your first mortgage...


Don’t worry, we don’t spam

calculate your monthly mortgage payment

Related Topics

Helpful Links

Daily mortgage rate trends

Best mortgage lenders

First-time homebuyers programs by state

Loan limits by state

Types of mortgages

APR vs interest rate

Understanding PMI

Related Posts