[photopress:fired.jpg,full,alignright]Has Lender Fraud become the standard?
Very sad, but very true story. I received an email from a Rain City Guide reader yesterday. The reader happens to be a local agent who was fired, because of her efforts to both accommodate her Buyer Client, without committing Lender Fraud.
The buyer fired her for not wholeheartedly complying with their WANTS, and for even considering for a moment, the Lender fraud implications of their WANTS.
Reason given..ALL OF OUR FRIENDS HAVE AGENTS AND LENDERS DOING THIS, AND WE FEEL YOUR SERVICES ARE THEREFORE COMPARATIVELY INADEQUATE. YOU DIDN’T FIGHT HARD TO GET US WHAT WE WANTED…
Suffice it to say, what they WANTED was cash back at closing under the table.
Apparently this has become so commonplace, that it is now the standard to which she was held. Money “off the sheet”. I can name more examples of commonplace Lender Fraud…but that is not the question here.
Sadly many told her she was being “a goody two shoes” about it. Very sad indeed.
John…placate the buyer!! ARE YOU FREAKING KIDDING ME?!?!
Obviously closing costs were already maxed out BTW…hence the WANT of cash under table in addition to all allowable credits. That’s obvious.
Knock on wood, I have never been asked to do this…and of course, I never would. The only instances when borrowers have received cash back at closing with transactions that I have done, were cases of 100% financing with sellers paying closing costs and therefore, there may be some refund of the buyers earnest money at closing. Nothing under the table. It’s disgusting.
I’m sure many of us can empathize with this situation (agent had put a lot of work into a deal only to have the buyer or seller try to change the rules of the game at the last minute). I have, on occasion, “rebated” part of my selling agent commission at closing but its usually applied against prepaids, closing costs or a purchase price reduction. Am wondering if the buyer in this situation would have been placated with this solution.
I’ve seen a number of posts regarding the topic of Buyers Agency agreements. Hindsight is 20/20 and each situation is uniqu. My goal is 100% agreement (reality is more like 75%) in order to protect myself, and the buyer as well, from situations like this.
I went to John’s link…apparently his ethics are better than mine because he is “a Realtor”. Galen…stop watching the commercials…look at reality.
Realtor commercials? Me? I don’t have a TV. Are you thinking of Robbie’s post? Something I said months ago and totally forgot?
Ardell
I’m not aware that you’ve been a party to nor a client of mine such that you can comment on the level of service and value I provide my clients or how successful I am doing so. I run my business with flexibility to best serve my clients, uphold the highest ethical standards and earn a very fine living doing so. I’ve walked away from many clients and deals that required me to make compromises that I was not prepared to make. So I take it that your business is so black and white that you’re not open minded to situations in which some type of “give” is required on your part to get the deal done?
Note that I would never rebate money under the table as the buyer requested in this situation nor would I have agreed to continue doing business with any client who I felt was trying to “screw” me at the last minute (again I’ve walked away from clients like these).
What if the buyer, instead of asking for money under the table, had asked for 1/2 % towards closing costs since they found the home of their own, had been referred to the agent by a friend, and were either going to go with a Red Fin type service if the agent didn’t want to assist them? Fine if you don’t want to walk away from the business but don’t criticize those of us who are open minded to doing so.
Ardell
Not sure I get your reference to Buyer Agency Agreements…
Maybe you can elaborate in the context of John’s post.
Thx
Russ
Ardell, I had a “client” ask me to commit fraud once. I fired them. 🙂
Good Answer NORM!!!
I knew Iiked you…
Cheers! 😉
I have always done the same as well. Am confused as to what part of my original post implied that it was OK to do what the buyers were requesting? I only suggested that depending on ALL the facts (apologize if my super human real estate broker powers don’t include the ability to grok that “Obviousl closing costs were already maxed out BTW…hence the WANT of cash under table in addition ot all allowable credits. That’s obvious. “) and that some type of credit/rebate MIGHT be a solution depending on the circumstances and the agents own principles.
ARDELL, I’ve seen you reference your support for “full transparency” in the real estate process. How isn’t the Buyers Agency agreement included as part of this concept? Its the agents option to ask for it , the buyers option to sign/not sign not the agents option to do business with that client accordingly. Isn’t it best that all parties understand the rules, duties and obligations before the process begins then after the case as in this situation?
Ardell-
I am a little confused at what John wrote that made you so irate. I don’t know this John from any other, but I fail to see what has upset you. Please elaborate.
To make sure we’re all on the same page, my definition of “at” closing is all that is part of the escrow process itself. I would define “after” closing as being something possibly unethical and/or illegal which I have never done nor would ever do.
My use of the words “placate the buyer” was perhaps the wrong choice. Henceforth I command the concept be referenced as “the process by which the agent attempts to save the deal while keeping within the legal and ethical bounds as set forth by the NAR, NWMLS, SKCAR, yadda, yadda, yadds and the agents own principled moral compass.”
Ardell,
Perhaps the word “placate” rubbed you the wrong way, but I think your strong response was not proportionate to his comments.
Anyway, no one’s ever asked me for money “under the table” either, nor have I heard more than one or two instances of it elsewhere. Perhaps it happens, but I don’t think very often. Most of the larger brokers, WIndermere, JL Scott, Coldwell Banker Bain — they have such large and intense educational programs that agents know it’s wrong and wouldn’t want to risk their license so would decline, even if asked.
Yikes, like Geordie, I’m a bit confused as well with Ardell’s response. Please elaborate.
I’m confused as well how this relates to Buyer’s Agency Agreements. The one that I have written out spells out my duties as they are required in Washington State RCW – such as written notice of my compensation, duration of agency, duties to my clients, any guarantees that I provide (and I do), etc, etc. I’m stumped by Ardell’s remark and potentially flawed “if, then” scenario she’s created here. If a buyer wants/intends to commit fraud, then buyer’s agent must somehow be culpable via the agent agreement? Please do elaborate.
Like many of the others on this post I’ve walked away from clients that are unscrupulous and I don’t feel bad about it at all. Like others here, I’ve built my reputation as a business person for years and I don’t need one “moment of weakness” or a commission that badly to lose it forever. In this business reputation is everything and without it you are nothing. I understand John’s points from earlier in the thread and where he was trying to go with it. Sadly, blogging may provide “transparency” as Ardell loves to tout but it also breeds incohesive rants and confusion as well on occasion.
It seems to me that the main point of all this is to point out that having funds transfer to one or the other party after closing is typically defined as fraud -and usually felonious in nature. It should be avoided at all costs both by agents, other industry professionals, and the people with whom they handle transactions.
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Reba
RU using 41A (Buyers Agency Agreement), a ReMax version thereof or something you’re had created? I wouldn’t even think of asking for copy of later per your earlier blog regarding agents asking you to share your marketing plans with them 🙂
I actually a welcome an agreement that is even more specific then 41A regarding our obligations to the buyer.
The agent who had this problem emailed me that she is planning to post her thoughts, but is tied up at the moment. I advised her to do so anonymously under the pseudonym “Fired in Seattle” so that she can put this behind her, and not have people calling her or emailing her about it.
I think her personal thoughts will be of interest to all, rather than second hand through me. Hopefully that will be within the next 24 hours or so. She is going to try to do it tonight after her appointments.
Stay tuned.
Reba says: “I’m stumped by Ardell’s remark and potentially flawed “if, then
Just of out curiosity, who is liable for fraud if a deal like this is made?
– the buyer?
– the seller?
– any agents?
– the title company?
– anyone who knows about it?
Anyone who knows about it is complicit and culpable. Liable I think could depend on the evenutal damage to the lender, if any.
Perhaps one of the attorneys knows of a case and who was reprimanded, fined, lost their licenses or sued. I am aware of a builder who was sent to jail for silent seconds and Dustin did a story about an escrow company owner who went to jail that may have involved cash under the table deals. His name was Ed and he’s travelling at the moment, but I’ll ask him.
Ardell,
The man Dustin did a post on, Ed, was an owner of a title and escrow company. He was groomed by a owner of a real estate brokerage for many years and eventually the broker talked Ed in to letting him do the signings. Ed affixed his notary seal to the signatures without witnessing the signature and checking ID. All the homes eventually went into foreclosure; the were all closed at Ed’s company so the Fed’s came knocking. In his very long essay, Ed admits to creating two HUD1s and changing the Schedule A of a title policy.
http://www.raincityguide.com/2007/01/05/a-personal-take-on-the-ethics-of-a-title-professional/
Shameless plug: Our company does expert witness work for attorneys who need help spotting fraud on HUD I Settlement Statements. We see that once loans (usually it never stops with one loan) go into foreclosure, everyone involved with the transaction get called in to testify.
title
xo
appraiser
lender
mortgage broker
loan originator working for the broker
both agents
buyer
seller
Usually……one of those folks cuts a deal and testifies against everyone else.
Ardell, the most notorious case in WA state until lately was the Century Mortgage case over in Spokane. The real estate agent involved lost her license and did jail time. I kinda thought that case was so 2005, but if you want, I can find the link.
Ardell
Its interesting that you are so quick defend yourself against a perceived flame but don’t have the time to clarify your attempted character assassination of me earlier. I’ve attempted to clarify my original post and it sounds like I’m not alone it wanting to better understand your hair triggered response to my original post. Granted the string has gotten off topic but my comments on the use of Buyers Agency agreements was one suggestion/opinion on how to reduce the risk of this type of situation.
Am anxious to hear the subject agents summary of the situation. In hindsight I’m sure all/most of us would decide not to work with this type of client knowing how the situation turned out. Aside from that scenario wouldn’t most agents prefer to find a solution to allow them to fairly/ethically earn their commission and not fall into this trap in the first place? The Buyers Agency agreement is one tool an agent can use to “educate” their client, hopefully from the get go, on the how they and the MLS have agreed to run their businesses.
Hello John,
I wanted to be sure to give it my full time and attention and read all of your comments to this point. I get an email when a comment is posted, so scan them while I am working. I can flip into an easy response, but yours requires me to read the string of four or five comments, and so requires more time than answering a single comment. Am working on three client issues today and am almost finished.
I promise to give it my full time and attention shortly.
John,
I indicated that the TONE of your comment offended me. I will excerpt now from that comment, and subsequent comments, what offends me.
“…agent had put a lot of work into a deal only to have the buyer or seller try to change the rules of the game at the last minute)…wondering if the buyer in this situation would have been placated with this solution…My goal is 100% agreement (reality is more like 75%) in order to protect myself… to get the deal done…the process by which the agent attempts to save the deal…
but my comments on the use of Buyers Agency agreements was one suggestion/opinion on how to reduce the risk of this type of situation.wouldn’t most agents prefer to find a solution to allow them to fairly/ethically earn their commission and not fall into this trap?”
John, I repeat from my original comment “the tone of it offends me at the deepest level.” The “Almighty ‘DEAL’ of it”. All about the agent and the deal. Yes, agents here have wondered why I was offended…but I’ll bet you most consumers WOULD “get it”. They are not “a deal”. They are not to be placated. When they want to switch agents, an agreement to force them to do something they don’t want to do…continue to work with that agent…is not the answer to this issue.
I was offended by your intitial comment and your subsequent comments, as they are all about the agent, the agent getting paid, the deal getting done, the agreement protecting the agent…more about the agent protecting themselves against not getting paid.
I am offended for me and I am offended for the agent who never ONCE complained about not getting paid nor did she blame her clients for feeling the way they did. If all their friends got the money that way, how could she blame them? Why would she blame them? How would they know it was illegal if all their friends “showed them the money”?
She did not feel screwed over by the client. She felt screwed over by all of the agents who allow these things to happen “off the sheet” leading her nice clients to believe it was OK. She was concerned she hadn’t done enough for them and maybe they were right as “everyone else was doing it”.
The issue at hand is that all of the buyer’s friends have gotten cash this way when purchasing homes. The buyer’s expectations were set by the ability of their friends to do this. An agreement might help the agent force the buyer to pay her angrily, though they did not buy that house and did not see other houses with her as she was fired as a result of not getting that house with cash back.
John, I was offended by the tone because it was all about the agent’s work and the agent’s payment and the bad buyers screwing the poor agent.
I wanted you and others to be offended by a marketplace that has so much lender fraud that a good and honest buyer client is led to believe that is normal. They have no idea it is illegal, and don’t believe it is illegal when the agent tells them, “because everyone is doing it”.
Your outrage is for the agent and the consumer screwing the agent.
The agent this happened to’s outrage and my outrage is: that these poor buyers…very nice people…have been led to believe that getting cash back “off the sheet” is a normal practice of home purchase, because everyone is doing it. Not that an agent didn’t get paid.
The outrage is about the prevalence of lender fraud…not about the agent at all.
The issue at hand is that the buyer felt the request must be doable and OK as all of their friends were getting money this way. The issue at hand was the agent felt very badly that she may have done her clients a disservice by not affording them the same opportunity as their friends.
My comments stand…I am offended by the agent-centric tone of it.
John “What if the buyer, instead of asking for money under the table, had asked for 1/2 % towards closing costs since they found the home of their own, had been referred to the agent by a friend, and were either going to go with a Red Fin type service if the agent didn’t want to assist them? Fine if you don’t want to walk away from the business but don’t criticize those of us who are open minded to doing so.”
Marlow,
The Agent who “was fired” does work for one of the companies you mentioned. Her broker did defend her position.
“Man on the Street” said agent in the way…everyone’s doing it…stop being such a goody two shoes”.
Thanks Jillayne,
I’ve “met” Ed over at Active Rain. It’s a good example of how far things can go when everyone starts pushing the envelope to the point of it seeming OK. I’m hoping to meet him in person. Told him he’s my “if you could have lunch with anyone…who would it be” guy.
Another major “done a lot but NOT OK” is investor’s doing loans as owner occupieds. Pretending they are buying as principal residence so they don’t have to put the downpayment of an investor vs. an owner occupied loan. “Everyone’s doing it…what’s your problem?”
Why won’t escrow do “hold backs” here like on the East Coast?
A lot of lender fraud is created because “the lenders don’t want to hear about repairs”, leaving the buyer and seller in the mess of how to pay for repairs if the lender doesn’t want “to see it”.
Lots of addendums the lender “can’t see”.
Maybe the lenders are the culprits here moreso than anyone. What if the buyer wants a roof or paint the house credit? What if the seller can’t pay it until he gets the money from the sale of the house?
On the East Coast the lender is protected by escrow taking the $7,500 for the new roof from seller proceeds. Holding it and paying it to the roofer direct after the roof is on.
Here…they have to figure out a way to get the money for the new roof from the seller to the buyer because “the lender doesn’t want to see it” and escrow won’t take a hold back for it.
The problem is created by lender and escrow as far as I can tell.
Ardell paraphrased the issue pretty accurately and concisely, but for the rest of you that didn’t get to hear all the details about the situation here it goes:
It was very disheartening to lose a client because I lost their trust by telling them something different than what 3 of their friends experienced in their recent real estate transactions. It was even more disheartening to have both my husband and my father indicate that I was being too self-righteous about the issue and was imposing my values on my clients.
After reaching mutual acceptance on a home in our area, in which the purchase price was around $400K and the agreement included a seller contribution to closing costs and pre-paid items of $10K (already a figure in excess of the Buyer costs thus utilizing the overage of the contribution to buy down the interest rate) an issue arose during the inspection: the exterior of the home needed to be painted in order to protect the siding from damage. Given that it was December and that we have been having such wonderful weather, we could not arrange for the home to be painted prior to closing. My clients were not willing to take on this added expense, but would move forward with the transaction if the seller would pay for the painting. Given that the home could not be painted now, my clients asked point blank could they get cash back from the seller at closing to pay for the painting down the road. The first time they asked this question; I responded by stating that lending guidelines do not permit cash back from the seller outside of the already almost maxed, disclosed and lender approved seller contributions to buyer’s closing costs and prepaid items already agreed upon. Furthermore I knew that my clients did not want any additional contribution to their closing cost but rather a means with which to pay a painter 4 months from now. I did let them know that while we could not get them cash at closing, that we might be able to find some other legal way to offset the cost of the painting. They accepted that answer and we continued to move forward negotiating their transaction. Then while we were waiting for the seller’s response to the inspection request, my clients brought up the cash back from the seller issue again, this time referencing their 3 friends’ experiences. I had been suggesting all sorts of creative but legal solutions. I thought about an escrow holdback, but it is like pulling teeth to get an escrow company to do a holdback, so I suggested to the lender if the seller could legally include a washer/dryer and/or refrigerator (currently not included in the transaction) so that the Buyers would not have to purchase those items, thus saving themselves that cash so that they could now put it toward the painting. The lender responded by telling me that I could do a number of things, but that she just “couldn’t know about it
Thank you “Fired in Seattle”
I appreciate you giving the detail, I did not feel free to do that, given it was not my transaction.
Perhaps people will see that a Buyer Agency Agreement had absolutely nothing to do with this issue and the issue is the commonplace nature of fraud.
Thx for the detail “Fired in Seattle”. Totally agree you made the right call.
Ardell, am not going to try to convince you otherwise regarding the use of Buyers Agency agreement given your long history on the topic. I respect your decision to run your biz the way you want as I would expect others to do the same for those of us who have a different opinion. Let the market decide.
My term “keeping the deal together” was a guideline if this is what the clients truely wanted but needed some education regarding was is legal and ethical vs vise versa. None of us would be the successes we are without putting the clients first. In a scenario in which the buyer’d decision to “fire” their agent might have cost them the home they really wanted, it don’t see how working on creative solution that got them the home ethically is the wrong approach.
Am still confused about how your comments regarding “below average and lowest common denominator agent” has anything to do with the tone or context of my comments vs. being a personal attack but I’m thick skinned and will let other readers draw their own conclusions.
“Fired” — I agree you made absolutely the right call. Good work maintaining your integrity even as those close to you apparently counseled otherwise. And shame on the lender — the “do what you want but don’t tell me” attitude is quite simply reprehensible. As an attorney, I often will inform a client that the proposed conduct is illegal and therefore I cannot asist them with it. I can however explain the risks associated with the conduct and alternatives that are within the law and perhaps still address the underlying concern.
Speaking of legal work-arounds, I’ve had success in holding back funds in my own trust account pursuant to the terms of an addendum to address a condition of the property to be corrected after closing. The lender may still have an issue with the now-disclosed and identified defect, which could in turn jeopardize the loan (if the defect is significant enough to jeopardize the value of the lender’s collateral). However, that is one of the potential issues that can arise that must be dealt with one way or another — sometimes not in a manner preferred by the parties. It’s unavoidable if the parties and their professionals abide by their legal obligations.
Finally, perhaps this conduct by agents and mortgage brokers is fostered, in part, by the commission structure. When the professionals won’t get paid for their efforts unless and until closing, they may be more willing to break rules to insure that the transaction closes.
John. I am truly on a mission to stop agents from saying “the deal” ever. We represent people, we do not sell houses, is my mantra. So coming from the AGENT point of view on this article vs problem, the public in general problem, or the buyer’s problem, is “the tone” of offense to me.
I have no problem with Buyer Agency Agreements, as long as NO part of the agent’s purpose in having one, is to tie a buyer to an agent or to protect the agent. As I’ve said, I have had some instances when I need a Buyer Agency Agreement to protect the consumer, and I do use them at those times.
But let’s go here, John, because “where did this come from” in this thread?
Why are agents SO VERY MUCH OK with paying each other 25% referral fees day and night
and NOT OK with buyer getting that same money??
Why the double standard?? Agent ends up with same money, so why the “tude”? Money doesn’t stay “in the family”? And they wonder why I use Mafia references…
John says to Ardell from out in left field: “What if the buyer, instead of asking for money under the table, had asked for 1/2 % towards closing costs since they found the home of their own, had been referred to the agent by a friend, and were either going to go with a Red Fin type service if the agent didn’t want to assist them? Fine if you don’t want to walk away from the business but don’t criticize those of us who are open minded to doing so.
Craig,
The lender saying “write a separate addendum with that and I won’t put it in the file to the underlying lender” is the norm. Sad to say, but because lenders do not want to see the word “repair” or any reference to “credit for repair”, this is where we are on a national scale. “Hear no repair, speak no repair, see no word repair.” is the lender’s mantra. Not practical where real estate is concerned.
That is what puts everyone in a bad place…lender doesn’t want to know. No loan if lender knows.
Gimme her name. I want to send her a dozen roses for being the “Miss Goody-Two Shoes” on this one.
Her name should be lauded across the net (if she permits it) and her former clients’ name should be broadcasted likewise.
Too many originators and Realtors sacrifice their ethics for the commission. This story SHOULD lead every local news channel.
Brian,
I will send her your email address. 🙂
But Brian, you are missing the point that the buyers were very nice people. How do they know who is right in this? All their friends whom they know better, or this agent they knew for only two weeks when they made the offer?
The buyers are not “the bad guys“…that everyone is doing it is the problem…not this agent’s buyers. The house needed painting…can’t paint paint in the rain…no credit allowed…no one will hold the money from seller proceeds until the house can be painted in nice weather…
The system is at fault here…not the buyers.
We have a type of siding here that makes painting it NOT a cosmetic issue…so Mr. Lenderman…tell us…how do we get money from the seller to paint that siding when it stops raining after closing?? AND tell the TRUTH that it is for painting a “wood product siding”.
This Fired Agent wants to know why she can’t have a credit for a repair?? And tell the truth that is IS for a REPAIR? You make us lie…lenders make us lie and say “toward closing costs”. Please stop making us lie lender industry…PLEASE!!
Ardell, you raise some excellent points and from my perspective one can see that there is a serious problem which needs to be addressed. However, with all respect, I think you’re too quick to let this buyer off the hook and I think “Fired
Brian,
Thanks for the nice comment. Just the thought of someone thinking enough of my efforts to want to send flowers makes my day. I would love to share my name, but I put in too much detail about the transaction, that I want to protect and maintain my former clients privacy.
Ardell – it is fine to pass along my email in limited fashion.
I would love it if this issue came to light across the country because I do think as agents we are forced by the lending industry to keep things shrouded in secrecy. But I don’t think my former clients are the bad guys either. In their eyes, as in the eyes of my father and husband – a contract is a contract. If two consenting parties agree, why is a side agreement illegal??? Truth be told – I am hard pressed to have a good answer as to why a side agreement is illegal other than trusting the articles I have read written by lawyers on the subject stating that in regards to lending, side agreements are federal offenses. If my clients close friends have recieved cash back, it is hard for them to trust someone they have only know a couple of weeks who is telling them differently. Human nature is that we want to believe those we love and care about and don’t want to think that they would do something wrong.
I would also like to clarify that my father and husband both indicated that if my clients wanted to participate in a side agreement after I educated them to its legality, that I should just step aside and let them do as they like, but not to actively participate in or even help facilitate the side agreement.
Unfortunately, fraud is becoming more common. Just recently, one of the lenders where I send quite a few loans to increased their requirements that ALL appraisals have interior photos of the kitchen, bathroom and living room. When I asked the rep for the lender about this new guideline, I was told it was due to increased fraud nationally (not just our fine State).
Norm,
The industry is too quick to put the buyer “on the hook” instead of “looking in the mirror” at how the industry itself really creates the consumer behavior.
With all due respect Norm, the consumer “gets it”, only the agents think it is the consumer causing it. If they are causing it…then look for the reason “why”, as therein lies the problem. The root cause…not the person who is doing it.
I have not ever in 16 years met a consumer who did not have good reason for their actions. It is my job to help them through their objective to the correct way to meet their need, as I did with Fired in Seattle on the phone. Came up with several options…albeit after the firing.
The consumer was clearly not incorect in this instance. Craig might have been called in to escrow the paint funds and just be a bill paid by seller at closing, for example. Many options. The buyer is not wrong…they simply are NOT the PROFESSIONAL.
That is why I get so angry and freak out when agents BLAME the consumer…it is the professional’s job to get to the root cause of the behavior, and give the the better way to meet their needs.
If an agent is trying “to placate the consumer” and “close the deal” they are approaching the issue from the wrong mindset. Whether that is you or John or any agent.
Getting angry at the consumer is NEVER an option…I fired an agent for that because her anger clouded her judment and she could only see her side of the situation. In her angered state she could not assist the client and became a dangerous card on the table for the Company. I gave her 3 hours of chat about it and overnight to cool off and then…no progress…mad at client…fired here.
That is why the money part, the agent getting paid or not part, must be put in the closet until the day after closing.
Most loans are sold on the secondary market and therefore typically run through a checklist of items that help them meet securities requirements, a major reason why money paid to any party outside of closing is considered fraud. There is a lot more to it but that is the short story. Information on this subject is readily available if you look for it.
Also, I have heard of firms (and have had a client use) that will do the hold back for repairs but there is a fee associated typically for the service rendered. I’m asking the former escrow office on that transaction for the info that I may be able to pass on to those reading this post. I do know that some escrow firms will do it. Per Julee Pratt of The Escrow Source “We will do holdbacks for one year on a transaction as long as the lender approves of it.” If you need someone to do disbursements throughout the hold period that may be another resource which is what I refer to above. Again, I’ll forward what I find – each agent can ask within the context of their own transaction and circumstances if what they offer is universal or specific to any terms or conditions.
In follow up to Reba: or, alternatively, you can ask your friendly, hard-working attorney what he will charge for holding the funds in his trust account.
Personally,
I’ve always used my attorney unless escrow did it for free. 🙂
The problem has been that the mortgage broker, who is placing the loan with the underlying lender,often is the one saying “put for closing costs”.
Craig? Would seem to me this leaves the seller uncovered if the buyer comes back to sue them if the siding rots because it wasn’t painted. “He said she said” the money was for paint, when paperwork doesn’t protect the seller. Dangerous in my opinion. Buyer could always say that money wasn’t for painting the house.
I’m coming to the party late and seems everything would have been said by now. But, I have never had any problems with getting a hold-back done at closing.
That would make for making a clear case of making sure the language in the inspection addendum, 35R, is clear for all parties. Also, most escrow and legal firms will require specific information before accepting the funds in trust. In the case of needing to be very specific with what the money is for, even if used toward closing costs, the buyer’s agent (and the seller’s agent if the buyer’s agent won’t or doesn’t do it) should make a reference to what the closing cost credit is for. Paraphrased example (but not the exact language I’d use in a response situation): Buyer responds in 35R with a request for a new roof; seller won’t pay directly for the roof but they’ll provide $10,000 so the seller’s agent might respond in the 2nd section of 35R that seller rejects buyer’s request and instead offers the following remedy – credit of $10,000 toward allowable closing costs as consideration toward a new roof. If buyer accepts then you have some documentation showing that the buyer took the $10k credit as payment toward the new roof. Usually we’ll include our attorney in the response for something like this to make sure we write an addendum that covers our client’s interests – on either the buyer or the seller side depending on our client relationship for that transaction.
Ardell, I didn’t say that consumers are the cause of mortgage fraud. I merely pointed out as you did in post 22, “Anyone who knows about it is complicit and culpable.”
“2nd section of 35R that seller rejects buyer’s request and instead offers the following remedy – credit of $10,000 toward allowable closing costs as consideration toward a new roof”
I like that method, but I haven’t seen a lender fund with “new roof” anywhere in their paperwork. Usually we have to have the roof completed prior to closing. Sometimes the roofer agrees to get paid at closing, and many agents try to have a roofer contact that is willing to put the roof on without getting paid until closing.
Rhonda and Brian? What is your experience if “new roof” is noted anywhere in the lender’s paperwork? Will they fund, if the roof isn’t done before closing, once they see “new roof” in the paperwork?
Hi Norm,
Actually I have met many people at parties etc who talk about buying four homes zero down in a short period of time, I’ve had agents from other companies ask me “how to get $10,000 to the buyer” off the sheet.
Honestly Norm, They do not know it is Lender Fraud. Hopefully this article will help educate some of those people. No they do not believe it to be fraud and I get the same “goody two shoes” look at times that “Fired in Seattle” got.
I ask “what is the $10,000 for”? If it is for a property upgrade, I can usually find a way, as the lender’s collateral is enhanced by the funds. But if they say “A trip to Hawaii”, I say why should the lender finance a trip to Hawaii…where’s his collateral for that?
They usually get it after I say, if the home forecloses the trip to Hawaii can’t be recalled by the lender so he can resell it, to get his money back. The lightbulb usually goes on, if I give the trip to Hawaii example. But they do wish they could have continued on, in their previous uninformed state 🙂
Fired in Seattle,
Even it the buyers do end up going down the fraud path, which escrow company is going to agree to close that transaction? Perhaps the next step would have been to deceive escrow also, with two separate purchase and sales agreements. You are in a far better place walking away from this one.
Ardell,
I was tempted to say, “I’ll answer your question in a blog and send you a link!
PS. I will run this by our underwriter tomorrow morning…I’ll let you know if I hear anything different.
Rhonda,
LOL, I got a TON of mileage onTHAT comment 🙂 I didn’t think underwriting would generally allow that. BTW…my sister is an underwriter…so I have an inside track on this stuff.
And I don’t blame the lender there, as a roof will go from bad to worse. Not good if they have to foreclose to have to sell a bank owned property that needs a new roof. And Lord knows they don’t want to mess with putting a new one on to sell it.
I totally agree that roof could not be done. I also think hiding the fact that it needs a roof and putting $10,000 for closing costs when it needs a roof is lender fraud.
I think Lender Fraud is committed every day by people who just don’t “get it”. The reason for the rules…not just the letter of the law.
I think not painting because it is not the right time of year to paint, is a whole lot different than trying to pass off a roof that needs to be replaced as “closing costs” credit.
Jillayne,
Light bulb went on!! I wanted to close with the seller and buyer back to back at Transnation a few year’s back so we could all go to lunch together. They said their policy was that the buyer and seller were not alowed in the building at the same time.
I was floored…pretty ticked actually 🙂
MAKES SENSE NOW – If the buyer and seller are not in the building, then they can’t pass personal checks to each other under their roof.
What a great policy to prevent any complicity in “under the table” – “off the sheet” exchanges between the buyer and the seller.
That’s how some would protect themselves. Very smart.
I’m the man “Ed” that Jillayne mentioned earlier and was featured in Dustins post. For the record: I was not accussed of falsifying schedule “A” of title commitments or preparing two settlements sheets as Jillayne stated. I never once did either during a 20 year professional career. My essay does not say that I did. I went to prison because I failed to turn in a realtor who was committing fraud. I did not participate in the fraud, but I didn’t investigate thoroughly enough either and I didn’t report the activity that I was aware of. Make no mistake about this: I was never accussed of committing fraud. The case is public record for anyone who cares to read it.
I tossed and turned last night thinking about this post. This situation is not always “lender” fraud. I’ve had transactions where once the appraisal comes in commenting on the condition of the roof, the agent comments something to the effect, “We were hoping the appraiser wouldn’t catch this.”
Ardell, in your scenario of NOO trying to buy as owner occupied, I did have an investor pull this on me once. It was one of my first loans–I was so upset. He changed his address with the lender after closing and the lender called his note due! Buyer fraud.
Rhonda,
“Lender Fraud means fraud AGAINST the Lender, the Lender being the VICTIM, not the perpetrator. Stop tossing and turning and get some sleep 🙂 Hiding a bad roof situation is Fraud AGAINST the lender who will be the one that suffers if the asset they are funding is not worth what the lender is putting up for it.
So it is always the lender who is the victim.
Whew! Thanks, Ardell.
Jillayne,
Thank you for concuring with my decision to not facillitate a side agreement. As for escrow closing the deal, my understanding is that they would have never known about the side agreement because if they did the money would have to show up on the HUD – which is what I wanted in the first place. So escrow would have been frauded too. Not what I want to do.
Overall, everyones comments have made me feel a lot better about losing a client. I haven’t lost very many in my 8 years, so it stings when I do, but the wound is healing quickly! 🙂
Thanks to everyone for your support. Here is to upholding our profession and making each one of us a better fiduciary to our clients.
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Hi Ed,
Thanks for stopping by. I read the following in your essay. If my assumptions were incorrect, thank you for the correction:
[I was instructed to misrepresent ownership in Schedule “A
Well everyone, I’m teaching a Realtor class tomorrow in Bellevue on Mortgage Fraud, 4 clock hours. I promise to report back on any interesting stories shared by those present. I am especially curious to hear if the real estate agents present believe we have a big problem here locally in regards to cash at closing changing hands outside of the HUD.
I’ll post an update here tomorrow afternoon.
Hi Jillayene
For the sake of fairness, I would like to share the remainder of the paragraph shown above and the following paragraph in the essay as well:
I was instructed to misrepresent ownership in Schedule “A
Hi Ed,
I empathize. When we’re in a dilemma, It is really hard to reflect on all the possible consequences of our actions before we make a choice.
Unfortunately, most all folks who are caught up in fraud cases plead just that: “I didn’t mean to. It was just a mistake” when facts of their case show that they really did have intentions to deceive. Sounds like the judge sided with you in your case.
Just like predatory lenders bring down the reputation of ethical, honorable lenders, predatory convicted felons will bring down the reputation of ethical, honorable, convicted felons.
[said with sarcasm and humor; not meant to hurt feelings.]
Thanks for sharing. I recommend reading Ed’s entire essay. Ed makes a strong point about Controlled Business Arrangements (or AfBAs, affiliated business arrrangements as they are sometimes called) and how CBAs, though legal if done properly, are often not in the best interest of the consumer or the local real estate community and have the potential to set up an ethical business owner for a losing endgame.
I wish you well. Please keep us up to date if you decide to submit your essay to the American Land Title Assoc.
Ed’s comments verify the widespread abuse on the “can’t be too bad if everyone’s doing it” basis. Someone else closed it.
Before writing this article, I advised “Fired in Seattle” that I would have found a way to have the house painted, because that was protecting the lender. Not painting it would create a $20,000 problem out of a $2,500 paint job…siding replacement.
To me, it would have been in the lender’s best interest to find some way to guarantee that wood product siding was painted. We need to understand the underlying concepts involved. Protecting the lender doesn’t stop at “cash issues”. The lender is giving a lot of money to fund the purchase, they deserve our consideration of their potential risk.
As I mentioned earlier, lenders will agree to holdbacks, but escrow won’t go there unless all parties agree to the holdback.
Often this requires re-submitting the loan, possibly re-drawing documents, re-signing, an extension…..It is hard work staying in compliance as a mortgage broker and escrow officer.
There were enough ways to solve Fired’s dilemma. It is too bad that the mortgage broker and buyer wanted to change the rules of the game to serve themselves….and then set up Fired to take the fall.
Jillayne,
Fired’s situation was somewhat the buyer’s “fault” as they maximized the 3% allowable credit at time of offer without really needing the funds to close. Backed themselves into the corner from the getgo. They could have taken the $2,500 off purchase price, as they had monies…then they why now friends do it kicked in…
Jillayne and Ardell
I want to part with a couple of comments. The interaction on this site is possibly the best educational tool that I’ve seen to date. I like the way you illustrate real examples and then sort of go at it from every possible angle. To my knowledge, a similar forum does’nt exist in Baltimore or any city near enough to mimic customs and laws. It’s a shame because I find the whole thing to be valuable and interesting.
Jillayne,
I’m very interested to hear who your class goes. I did a 1 CE class for the Eastside Regional Escrow Association on Loan Originator Licensing. They (the attending LPOs) can’t wait for this legislation to pass in hopes of weeding out bad brokers, or “evil doers” 😉 as GW would say!
Thank you so much Ed. I get a lot of heat for raising topics no one wants to really talk about or wants exposed. Your comment warms my heart this morning.
“You make us lie…lenders make us lie and say “toward closing costs
Well Brian…as they say, better late than never 🙂
BTW…we don’t get “points” for comments here 🙂 so they are all “legit”.
Hi All,
I taught a real estate CE class today in Bellevue on Mortgage Fraud. Two interesting insights:
1) The majority of students were male. That is…..unusual. From a teaching standpoint, it also means that verbal dialogue will get agressive. Indeed, at one point, I found myself having to stand between two men (seated at opposite ends of the room) to intervene and redirect their energy. I pointed this out to everyone and we all had a laugh.
2) The majority of agents were concerned with learning how to avoid accidentally become involved in mortgage fraud. Over a third but less than half had been asked or knew of a fellow colleague who had been asked, to arrange seller incentive$ trading hands outside of the HUD 1 Settlement Statement.
Okay. My flippant comment might have been misinterpreted. I was just checking in to “get my points” (private joke for Active Rainers).
Lenders don’t make anyone lie. Lenders allow a percentage of the sales price for NRCC, not repairs. Most 100% programs allow up to 3% seller credit. Lenders don’t want to “finance” more than the value of the home.
If the home is in disrepair, it should be fixed or a credit can be given, It will, however, NOT affect the buyer’s downpayment. If the seller want s to credit $10,000 for the painting, the lender won’t finance that amount and reduce the loan amount.
Don’t lie to lenders. Don’t take the advice of a lender’s rep or mortgage broker to lie. If, closing costs are paid by the seller, as a concession for cosmetic repairs, and it fits into the lender’s guidelines, write it up.
Let me give you an example. I sold a home in Phoenix. The seller asked for certain cosmetic repair items; I offered a washer and dryer as a concession. I could have easily offered a concession of $2,000 to be applied as the buyer saw fit. If it was under the limit for seller concessions set by the lender’s guidelines, I would be fine.
Brian,
Can’t tell you how many times a mortgage broker has said, don’t put THAT, just say it is toward buyer’s closing costs.
…over 1000 times, Ardell (last month).
Maybe the answer is to be intentionally vague. Just offer it as a seller’s concession.
Brian,
Here’s the problem with that. You tell a consumer to put “toward closing costs” when it is to replace a bathroom faucet, for example. So you have told them to call something different, than what it really is. Why? So the loan will go through and fund.
Then they want to do basically the same thing, say it is owner occupied when it isn’t, to get a better rate and terms, you say “Oh no, that is lender fraud!” (you meaning the lending industry, not Brian personally).
How does a consumer know the difference and lie when you say so but not when you don’t. The answer can’t be “to be intentionally vague” as that would make the answer to the question, “Are you going to live in the house?”: Possibly, maybe, I could.
Intentionally vague transcends from where WE want them to be intentioanally vague to our purposes, into their being intentionally vague to suit their purpose. Not fair to say yes to the former and no to the latter.
I agree in principle but exist in a pragmatic world. You are correct. I wish we could change things to make them more precise.
I agree with Brian… I wish I could make the underwriting rules…however….
The lender is not lying when they inform a buyer and/or selling agent that their underwriting guidelines will not accept $10k credit towards a faulty roof or faucet or whatever the repair is…however, guidelines will allow x$ towards closing costs…or the price can be reduced $10k or the work can be completed prior to closing. The lender is providing what ever possible options are available within the loan parameters for that transaction.
The buyer is commiting fraud (lying) when they say they’re going to reside in the property, but they don’t and never intended to.
How “pragmatic” is it for a lender of resale homes to expect that there are no credits for repairs?
Some things should be fixed, yes. But here’s the problem. The buyer is the one who has to live in it, not the seller. The buyer may want a top of the notch roof that costs $10,000, but the seller doesn’t have to provide that. Should the buyer live with the $7,500 job, when he is more than willing to pay the difference and get the better job after closing? He wants the seller to give him (or the roofer direct) $7,500 toward the new roof and pay the difference and get the roof he wants on his house.
Given these and many other issues, credits often are the best answer for the buyer. It isn’t “pragmatic” for lenders to pretend every house is perfect, by never wanting to see the word “repair” on an addendum.
Once the only acceptable answer is to lie to the lender…where do you draw the line on “lying to the lender”? You told me to lie to the lender over here and then get mad when I lie to the lender over there. I can see how many consumers can be confused about “the rules”.
First off, I’m not mad. I don’t think it’s acceptable to lie to the lender and yes, it is confusing for consumers.
What happens if the buyer receives the $10k for the roof to be repaired after closing and once the they begin the work, the roof cost is actually $15k and not $7,500? They don’t have the money, they have to borrow and increase their monthly debts. And begins to slide down a slippery slope.
The lender does not want to own a house they had to foreclose on and if they do own it, they don’t want to deal with a bad roof, too.
Rhonda,
Based on experience, the buyer who is tight on money is more than happy to have a new roof prior to closing. It is more often the buyer that isn’t tight on money that want’s to control the work product and take the seller credit against a more costly job.
Real Examples: Dishwasher breaks. Warranty company will replace with “like kind”. New owner wants top of the line stainless steel. Warranty company gives homeowner a cash amount of $340 which they apply to the new dishwasher that costs $500.
Roof: Buyer not able to pay anything and wants roof on before closing. Seller’s agent advises that new black roof going on this week. Buyer freaks out and hates black roof. Able to get some options as to color, but not as many as buyer would have if they hired the roofer. A lot of scrambling to keep that black roof from getting on to that house.
When we negotiate inspections, we walk a fine line of what should be fixed prior to close, and what should be a credit. Credits are for items that have the potential for the buyer to be unhappy with the fix. Seller only has to replace with “like kind” and buyer may want to upgrade. We can’t have the buyer paying the seller for the upgrade prior to close.
While your example of “lender needing to foreclose” is sometimes relevant, it is less relevant than real life real estate where the lender doesn’t need to foreclose.
My rule is seller fixes prior to close if there is any hazard involved:
1) Hot water tank could blow any minute – replace ASAP prior to close
2) Wall heater is a dangerous recalled model – replace ASAP prior to close
3) Electrical Panel is insufficient amperage and full of cockamamie after market add ons beyond panel capability – fix and upgrade prior to close
As opposed to:
Roof has 3 year’s left, seller gives partial credit for new roof that is not needed today. This way buyer gets to pick color and type of flashing and hire a roofer of their choice.
Even if the roof has two to three year’s, we can’t say “toward roof” on the addendum.
Portion of fence is rotted: Buyer wants a new fence in six months or so. Wants a credit toward new fence and not the current one fixed. Fixing the fence would be a waste of money as that fence is going to the dump in six months.
I can see where the lender would not allow some repair credits and would want to have something fixed prior to closing. But the current advice to NEVER use the word repair on an addendum, is not practical for a real estate transaction.
There is no getting around the fact that all repairs cannot be made prior to closing on every financed property sold in this Country, and some need to have repair credits. That’s the real world.
As to your “not (being) mad”, This is an issue that effects all home buyers across the Country. It is not personal to any of us.
It is an industrywide issue that buyers are expected to hide the truth in some instances, and then chastised from hiding the truth in others. Sending mixed messages to the consumer about hiding the true facts from the lender, opens the door to hiding more truths than those the industry “asks” them to hide. It’s like saying “Only hide the truth when we say so, and not when we don’t say so.” Not fair and really doesn’t work.
Hi Ardell,
I have read your blog today for the first time and feel so heartened that there are such great honest people out there like yourself. I would love to connect with you and see if we can help each other. I work for a wonderful retirement community in Redmond called Fairwinds that is a place for independent seniors that are tired of living in their homes and want to be free to travel and enjoy life without the responsibilities of a home. If you have any seniors in the Redmond area or that want to move to the Redmond area after selling their home, please contact me. I too would feel comfortable referring prospects that are needing to sell before they come to us. Its a wonderful thing to find a person whose ethics are intact. What a joy!