Brokers Should Scrutinize Lender Contracts

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.

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 MortgageDaily.com 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: burdenlisa@yahoo.com