The Financing Contingency: Does it disfavor mortgage brokers?

As always, this is not legal advice. For legal advice, consult a lawyer, not a blog.

First and foremost, let me admit my own ignorance up front as to exactly how a buyer works with a mortgage broker. Hopefully, someone with such knowledge and experience will clarify any errors below that result from my ignorance. Indeed, this post is for my own education as much as anything else.

In its current iteration, the financing contingency (NWMLS Form 22A) specifically defines “lender” as “the party funding the loan.” Thus, by its very terms, the term lender does not include a mortgage broker, since a mortgage broker simply brokers the loan (i.e., matches up a lender with a borrower) and does not actually lend any money.

So what’s the issue? Its two-fold. First, in paragraph 1 Form 22A states: “If Buyer changes the lender without Seller’s prior written consent after the agreed upon time to apply for financing expires, then the Financing Contingency shall be deemed waived.” [Only relevant portions of sentence included in quote.] If the buyer is using a mortgage broker, it is possible that the buyer will not have decided on a specific “lender” before expiration of the application period (by default 5 days but often shortened). In that case, the buyer may be deemed to have waived the contingency, or at a minimum the buyer may need to get the seller’s written consent for a lender selected after expiration. If seller refuses to give such consent, then the buyer may have waived the contingency. Note use of the word “may” as the form is ambiguous and open to some interpretation on this issue.

One the second issue, however, the risk is clear. If buyer’s financing fails, then per paragraph 4 the buyer must present “written confirmation from buyer’s lender” of the date of application, that buyer had the funds to close (i.e. the down payment), and why the loan was denied. I think its safe to say that a declining letter from a mortgage broker would not satisfy this requirement given the specific definition of “lender” in the form. So don’t rely on a letter from your mortgage broker (as many buyers do).

The upshot? If you’re using a mortgage broker rather than dealing directly with a lender, discuss this issue with your broker to confirm that you will still get the protections of the contingency. Make sure the broker will have “applied” for a loan on your behalf with a specific lender prior to expiration of the application period. And if the application is denied, make sure you get a letter so indicating from the LENDER, not just your broker.

20 thoughts on “The Financing Contingency: Does it disfavor mortgage brokers?

  1. Hi Craig,

    There was a case out of Kittitas County, WA where a seller sued a buyer and won. Buyer was to have made application to a LENDER within X number of days.

    Buyer made application with a broker and the broker did not forward on the application to a lender within the required time frame. Seller won the case.

    When i first started using this case in the classroom, the majority of mortgage broker loan originators were outraged and horrified, however, that was back in 06/07.

    Today we have a small but core group of weather beaten broker/LOs who are aware of HUD’s and this state’s definition of a lender: The entity with the money to fund the loan.

    Many of the 06/07 LOs only did refinances, never met a Realtor they liked, nor did they have any intention of ever dealing with realtors (said with a small “r” and a measure of disgust in their voice)

    Realtors are demanding, you see. So many LOs prefered easy squeezy stated income refis for the quick bucks. The majority of those cowboys are gone.

    I am confident that the majority of LOs (who work at a broker) today know this. Well, LOL, at least my students know of this case study. I had several thousand LOs go through that course.

    Now. Where might the problems lie?

    What about LOs who are licensed under a consumer loan company? These folks are just now, in 2010, going through their mandatory education and taking the new national exam.

    LOs who work at a CL company can also decide to broker a loan. When brokering, the loan originator is subject to the entire Mortgage Broker Practices Act for that loan and if these folks don’t submit the loan to the lender within the required time frame, their buyer is out of compliance with their purchase and sales agreement.

    • Jillayne, many of us who work for a CLA were under the MBPA when DFI decided to create the CLA designation. DFI was going after a few with the CLA designation/requirements and created a real pain for those of us who were abiding by MBPA.

  2. Craig, actually, I’m not a mortgage broker, I work for a correspondent lender (aka CLA in WA State) we fund probably 90% or more of our loans from our credit line… I’ve brokered one loan in the last 3 years. ๐Ÿ™‚ But thanks for the mention–but can you correct it since I DON’T WORK FOR A BROKER.

  3. Hi Rhonda,

    CLA is not a designation. I know you know that.

    Just wanted the readers to understand that at this moment in time, loan originators in WA who work for a firm that is licensed under the Consumer Loan Act (CLA) do not have to be licensed….today. But they all will be by June 30, 2010.

    Even though an LO is working for a consumer loan lender, they still must also know the Mortgage Broker PRactices Act because when an LO does broker that one loan every now and again, the LO will need to follow the MBPA.

    “I don’t work for a broker” doesn’t mean an LO gets excused from following the MBPA.

    Again, I know Rhonda knows this. Other LOs and consumers might not.

    It’s a detailed but important point regarding Craig’s topic at hand!

  4. AAAAACK! I’m sorry to have mischaracterized your position, Rhonda. That was of course not my intention and I apologize for having gotten that wrong. I certainly want my posts to be accurate as well!! You’ll see its now been edited and — at least on that issue — is no longer incorrect.

    As for the regulatory/legal issues raised by you and Jillayne, I have to defer to you entirely. I really know very little about the operation of brokers, loan originators, consumer lenders, etc. My post concerns the obligations imposed by the CONTRACT only, not those imposed by the state, DFI, etc.

    • No worries, Craig– I know you had good intentions ๐Ÿ™‚ it’s important for consumers and all parties involved with a real estate transaction to understand the difference between a correspondent lender (where we process, underwrite, draw loan docs and actually fund the loan) vs a mortgage broker (originate the loan). In years past, there haven’t been that many correspondent lenders because of the great net worth it requires and the liability associated…it’s a much larger commitment on many levels than a mortgage broker. This is part of the reason why we’re now seeing many mortgage broker’s trying to join correspondent lenders.

  5. Jillayne,

    In your example where the seller sued the buyer in Kittitas, I would think the broker has some degree of responsibility. Yet apparently, the buyer took the liability.

    Craig – do you think there would be some type of recourse to the broker?

    Typically, the buyer checks “forfeiture of earnest money” in the event of default of the PSA. So in this case, I assume the PSA indicated remedies by the seller which could entail a lawsuit?

  6. James:

    Yes, you’re right, there may be a claim against the broker, particularly if the broker had notice of the deadline for applying to a “lender” (in other words, if the broker had a copy of the contract). Even absent a contract, it may be that the broker had done enough other deals to be held responsible. In any event, though, probably not a slam dunk.

    As for the suit itself, I bet it was over the earnest money. Seller claimed to be entitled to it based on the failure to apply to a “lender,” while buyer argued otherwise.

  7. Craig – thanks for reply. Typically, when mortgage/loan docs are filled out there are tons of disclosures and disclaimers. I’m sure there’s something that discusses this point in case the broker did not even submit an application.

    Real estate – a highly litigious environment that makes your lawyer your best (and most expensive) friend. ๐Ÿ™‚

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