March 28, 2016
Stoops, Denious, Wilson & Murray, PLC
Many mortgage brokers do not think about investor repurchase demands and “make-wholes” claims. However, these demands continue to nag most mortgage brokers. The most common alleged bases for these claims are stated-income misrepresentations, appraisal misrepresentations, occupancy misrepresentations and undisclosed debts. Anytime there is a non-performing loan, ultimate default and an investor is asked to make-whole for it, the originating mortgage banker is eventually contacted in the form of a repurchase demand.
Many mortgage brokers are not aware of the provisions in their contracts with lenders regarding repurchase. To begin with, broker agreements contain representations and warranties that the mortgage broker is providing. A key representation and warranty is that the loan documents are in every respect valid and genuine and all information submitted with the loan documents is true and accurate. The mortgage loan documents are usually defined to mean the closing package and any, all documents creating, evidencing or securing the mortgage which are required or prepared by the mortgage broker in connection with the origination of the loan. Most mortgage brokers do not realize this includes the appraisal and that many repurchase demands do relate to appraisal misrepresentations. Representations and warranties are usually numerous and include additional matters such as the loan has complied with all applicable laws, meets the requirements and specifications established by the Federal National Mortgage (“Fannie Mae”) or Federal Home Loan Mortgage (“Freddie Mac”) and that the mortgage loans are in full compliance with all requirements of Fannie Mae or Freddie Mac, Government National Mortgage Association (“Ginnie Mae”), Federal Housing Administration (“FHA”) and Veterans Administration (“VA”).
The broker agreement will also contain a repurchase section which will set forth when the mortgage broker is required to repurchase a mortgage loan. There are several reasons why this provision would be applicable and include items such as: if there is evidence of fraud in the origination or closing of the loan; the lender determines the loan is not eligible; the mortgage broker fails to observe, perform or breaches in any material respect; any of the representations or warranties in the agreement. In addition, most broker agreements will contain a provision that requires a repurchase if the lender is required to repurchase the mortgage loan from Fannie Mae, Freddie Mac or other third party investor for any reason relating to the origination or closing of a mortgage loan. Most mortgage brokers are not aware of these provisions and requirements to repurchase which is essentially a no fault provision requiring a repurchase if the lender is required to repurchase.
Mortgage brokers may not want to think about repurchase demands, but ignoring the problem will not make it go away. The next step is what happens if you do get a repurchase demand? To begin, it is important to look at the governing law that would be set forth in the broker agreement. Often the broker agreement states that the governing law and where a lawsuit would be brought are where the lender is located and not the mortgage broker. Again, this is a provision that most mortgage brokers probably are not aware of and do not realize that even though they might be here in Arizona, if they have a broker agreement with a lender that is in another state they may be forced to litigate this matter in another state. Additionally, that would mean the choice of law likely would not be Arizona, but the state the lender is in, which makes a difference as to statute of limitations for when claims can be brought.
Mortgage brokers that do receive purchase demands are often surprised at how old the loans are and wonder how a repurchase demand could still be brought up now. When a lender receives a repurchase demand, for example from Fannie Mae that is when the statute of limitations begins to run on when the lender could bring a claim against the mortgage broker. Therefore, if a loan is performing for three or four years and then defaults, that may be when Fannie Mae issues a repurchase demand to the lender – the lender would then have a claim back against the mortgage broker.
Most mortgage brokers respond in argument that they did nothing wrong. They followed the guidelines of the loan and/or the company is no longer in existence; therefore, they should not be liable. However, those arguments usually do not prevail. If a company is no longer in existence, the lender has claims against the principals of the company. There could be an alter ego argument which would allow a lender to proceed against the principals of the company directly. In addition, as a managing agent of the brokerage who would be responsible for the management and supervision of the loan process, the president, owner or other officer of the company may have personal liability. The issue is what the principal as the managing agent of the company did to supervise the origination of the loan in order to assure that the information provided by the borrower or appraiser was true and accurate. In addition, there are cases where principals have been found to have breached a fiduciary duty to the lender.
Even if a mortgage broker does not feel responsible, it is important not to ignore a repurchase demand. With everything that has occurred over the last several years in the industry, many lenders have already started questioning whether a mortgage broker has unresolved repurchase demands. Thus, not dealing with repurchase demands may impact your business. In addition, not addressing it could lead to litigation. If the company is still in operation, the lender may cease doing business with the mortgage broker.
Most lenders will work with a mortgage broker to resolve the matter through some sort of settlement. Certainly, mortgage brokers should ask for all documentation and conduct their own research regarding the reason that has been alleged for the repurchase. Often a settlement is possible and the result can be less costly and time consuming than litigation. Regardless of the decision of whether to try to reach a settlement or to litigate, a repurchase demand should be addressed. Finally, mortgage brokers should make sure they are familiar with the provisions in the broker agreement regarding the representations and warranties as well as the repurchase provisions. With this information in mind, a mortgage broker should have a better understanding of repurchase demands – the fact that they are out there, will continue in the foreseeable future and what steps to take if you receive one.