Is it just me, or do loan orginators routinely encourage bank fraud? First, the background: There are a variety of federal and state laws that make it a VERY serious crime to mislead a lender for purposes of getting a mortgage. At the federal level, 18 USC sec 1014 makes it a crime to “knowingly make any false statement or report . . . for the purpose of influencing in any way the action of” a commercial lender. (Emphasis added). The penalty? A cool million dollar fine and/or 30 years in federal prison. Yup, not a misprint: 30 years in Club Fed. On the state level, RCW 19.44.080 makes it a crime to “knowingly make any misstatement, misrepresentation, or omission during the mortgage lending process knowing that it may be relied on by a mortgage lender.” (Emphasis added). The penalty? Its a class B felony, so 10 years in the joint and/or $20 grand.
As indicated by these laws, as a society we cherish honesty to lenders and believe very strongly that anyone who is dishonest AT ALL in order to secure a loan has committed a very serious crime. The problem, of course, appears to be that nobody in the RE industry agrees. Rather, it appears that the RE industry treats this type of bank fraud (misleading a lender in order to facilitate getting a loan) to be something akin to taking a second serving of dessert: bad form, sure, but if nobody knows…
You may be thinking: “What on earth is Craig talking about? Everyone I know is honest and abides by the law!” Well, think further, and in particular think about a buyer’s inspection contingency response. The NWMLS provides a Form 35R specifically for resolution of the inspection contingency. By its terms, the 35R and any other notices or addenda relating to any modifications or repairs becomes a part of the contract, and of course the lender has the right to receive (and buyer has the obligation to provide to the lender) the entire contract.
How many agents out there have used the Form 35R to request repairs and/or price reductions? And have you gotten any feedback from the loan originator once he or she receives a copy of the signed form? I have. The 35R had the fourth box checked (buyer proposes modifications) and the text below, “Sale price reduced to $440k.” About as simple as can be — but apparently still likely to arouse the suspicions of the underwriters, thus complicating the process. The loan originator’s request? “Toss” the 35R and instead use a Form 34 for a simple price reduction.
The problem? That clearly violates the state law above, and probably the federal law too (at least it will when the buyer signs at escrow a statement indicating that he has provided the lender with all requested information, including a complete copy of the PSA). In other words, even LENDERS encourage violation of the laws designed entirely to protect lenders.
And one wonders how we inflated the housing bubble…..
LOs often times have to balance the ability to get a deal done and also not intentionally committing fraud. Unfortunately, there is a HUGE disconnect between underwriting mortgages and the process of buying and selling homes. Often times things that are simple fixes between buyers and sellers can cause significant issues with underwriting. A good LO learns what is an issue versus what is not an issue. Often times, LOs also have to know when there is too much information versus when something needs to be disclosed. In my experience, it isn’t as black and white as you make it out to be.
For instance, if the roof is falling down on a property, most LOs are going to say it needs to be disclosed and it is a problem. However, if there is a small leak with a toilet that the seller has agreed to repair or give a credit, most LOs are probably going to say it isn’t worth the can of worms it could potentially open if disclosed. Generally, U/Ws have no CONTEXT, so seemingly small things can wind up being blown out of proportion if not moderated appropriately and that is what LOs often try to do to keep the deal moving along.
It is kind of like when judging if something is obscene. I can’t define it, but I know it when I see it.
Russ:
You note above, in regards to a leaky toilet: “Most LOs are probably going to say it isn’t worth the can of worms it could potentially open if disclosed [to the underwriters].” Yes, you’re right, LO’s make the determination that some facts should be concealed from the underwriters because the underwriters will make a big deal out of nothing. The LOs then get the buyers/borrowers’ cooperation, and their agent as well ususally, in concealing these facts. All absolutely true.
But, of course, this is bank fraud. All you are doing is justifying bank fraud. That’s fine, but recognize that both Congress and the WA Legislature have examined this issue and decided that what you advocate is a serious crime.
According to our state and local governments, LOs should not interject themselves in the decisions of the underwriters. Underwriters are entitled to ALL information about the property that is available to the parties. Underwriters then make decisions based on that information. NOBODY should substitute their judgment for that of the underwriters and decide that some information need not be shared. At least that’s what the law says. And I agree with it.
Craig, again it isn’t black and white. No one is advocating fraud or intentionally hiding something from an underwriter. The issue is that when some things are disclosed it opens another can of worms that can sink the transaction. LOs have to use judgment to determine if it is something that is going to potentially be an issue and figure out the best way to proceed.
I have lost count of the times an underwriter or a funder has said don’t put the “repair credit” on the hud. Just make it a closing cost credit and call it a day, especially if it is a small amount. Any good underwriter will also point out the judgment factor in how things are to be disclosed.
The issue is that underwriting is about selling loans and not assessing credit risk. As a result, when things are disclosed, no matter how minor, it may create additional paperwork or headache even when the underwriter knows it isn’t a big issue. however, the mere fact it is disclosed creates the need to document. Good underwriters often try to avoid these situations just as much as an LO and will often instruct how to handle the situation to prevent the issue from escalating.
It is black and white. Disclosure is the law. If a buyer and seller want to address a leaky toilet outside of the Real Estate transaction, fine, do that, resolve the issue. If the issue is indeed large enough to create paper work about then be aware, that needs to be disclosed to everybody.
The Purchase and Sale Agreement is a Purchase and Sale Agreement for a property. Once you use the paper work for buying a new toilet with borrowed funds it’s up to the lender.
This is actually playing into Craig’s pet peave of the Trouble with Sales People.
The real irony, David, is that even if the issue is resolved outside of escrow, that resolution would also run afould of the law. After all, both buyer and seller are concealing this information from the lender specifically because the lender might rely on it, which in turn would delay or kill the loan (and thus the deal entirely). That sure appears to fall squarely within the state law as an “omission.”
Both of you are completely missing my point and maybe it is because neither of you are on the financing side. Let me use a real world example of a loan that just closed.
The appraiser noted in the appraisal that a toilet upstairs was leaking and caused a water stain on a basement ceiling. This leaky toilet was something that could have been fixed with a $5 gasket from Home Depot. Regardless, the mere fact that it was noted as deferred maintenance in the appraisal required the underwriter to request it be corrected and fixed by a certified plumber prior to close. Not really a big deal since we had plenty of time to make the arrangements.
Had this same issue come up say at the closing table, everyone would have simply said just issue a $500 closing cost credit. No attorney, realtor, lo, or title company that wants to stay in business is going to say stop the closing, send the documentation to the bank about a $5 gasket on a leaky toilet, and potentially hold up the transaction over this. In fact, if you even attempted to do this, I would bet a steak dinner the underwriter would be like WTF? Give a closing cost credit and be done with it. I know this because I have discussed it with u/w on countless occasions when these things do occur.
Why the distinction? Because in the first example it is in the appraisal and needs to be documented a certain way for loan salability for the simple fact it is in the appraisal and nothing more. However, in the second example, the underwriter would have simple said put a closing cost credit because otherwise it requires more documentation than is warranted for the situation. It has NOTHING to do with keeping information from the lenders. It has to do with how loans are bought and sold on the secondary market. Yes, you can call it out, stop the closing, and potentially put a ton more paperwork in play but it simply isn’t necessary in most cases.
It simply is not as black and white as you are suggesting. If the roof caved in, then yes that is a different issue and this is where judgment comes into play. If you look at any lenders guidelines they specifically call out when credits can be given and usually they are very ambiguous about when it is needed as it is not black and white.
Yes, like I said, a lender can ask for any repairs they require. Yours is a perfect example about a stain in the basement ceiling.
One of my concerns is when an agent tells a seller to paint the ceiling without ever addressing the cause of the stain. More specifically to this discussion is when inspection reports become a point of renegotiation of a Purchase and Sale Agreement.
If the inspector notes the stain on the inspection report and the buyer and seller decide to come to a financial agreement then that needs to be disclosed. If on the other hand the toilet comes up, the problem is addressed in a professional manner, and there is clear agreement that the issue is resolved then that is a side negotiation. Craig is right, it may be an omission, but in my opinion it is only an omission if it is material to the value of the property.
Then you brought up the saleability of the Note. This is another of my favorite topics because the actual structure has very little to do with the value. A loan can be made on a shell, in most cases it is. The buyer is the added value with the down payment, or ability to pay.
Notes priced far above value is the reason we have a problem today.
Craig, I’m not sure if this is who you’re working with as a LO or one time circumstance… as Russ mentions, it depends on what’s going on. Depending on what the issue is, our company (it’s not up to the LO) might be okay with it–if it’s small; or we might need to do an escrow hold back. Some issues might be so significant that an escrow holdback may not work.
And in that case, due to laws as you reference and underwriting guidelines, the type of financing the borrower is seeking may not work. Perhaps the borrower (actually property) will require a construction loan or FHA 203k.
Could agents or home buyers or sellers be impacted by the laws you’re referencing? Or is only the mortgage originator the one committing fraud?
Rhonda — actually, I think the buyer and the agent are more likely to be liable under these statutes, at least where the originator is employed by the lender. Under those circumstances, I see a substantial risk to the agent and buyer if they cooperate in the “scheme” (Russ, I’m using quotes for a reason) to conceal information from the underwriters. The originator, though, as an employee may not be subject to the same liability, I don’t know.
Craig,
If they really wanted to know, they would require an inspection of all financed homes and a complete copy of the inspection. That’s a change that would actually help a lot of homebuyers. BUT they would also have to allow for escrowed funds from closing for repairs or some flexibility to make other arrangements.
In areas I have worked, local governments have often required Certificates of Occupancy for resale homes and required certain repairs to close. Fire Safety issues, walkway settlement safety issues.
If more repairs were required by lenders and local governments when properties changed hands…well, the world would be a better place. Neighborhoods would get less run down. Fire safety would be less of a concern.
But I guess supporting that thinking makes me a socialist 🙂
Wait a minute, this is my favorite topic! The renegotiation of the Purchase and Sale Agreement after an inspection should be illegal. There is no question about that, and it most assuredly should be enforced.
The fact that some yahoo inspector comes out to a property and does a cursory look see on a property is no bargaining chip. If there are defects, great, start over. Nickle and diming a transaction, on the other hand is no more than extortion.
The fact that Real Estate agents are completely clueless about the product of property is no excuse for this tawdry attempt to justify a commission. “Oh, I just saved you X amount of money by negotiating an inspection report,” is just baloney.
It just occurred to me that I’m agreeing with Craig. Uh Oh, I’ve said too much.
David,
The lender participating in the property condition at closing, and asking for improvements, helps insure a more solid basis for the collateral on the loan. FHA and VA have been doing that for many, many years. Clearly not “illegal” and a good practice.
Rhonda and Craig,
I have seen a couple of bank-owned properties REQUIRE a pre-approval for a re-hab loan be submitted with all offers.
Lender requirements are much different from what’s being discussed. The lender, any lender, can require property improvements, like a new roof, based on photos of the property.
In my opinion what’s being discussed is that modifications to a Purchase and Sale Agreement, based on information obtained by inspection, should be, or must be disclosed to the lender.
Improvements to the property may be a good thing for a lender, but asking for cash in lieu of should be a part of the loan process. Hold backs are one way to deal with it.
A second part is that by doing work to a property you never know what you will find. The seller might replace the roof on a sold property, and dry rot might be discovered. The lender can refuse to fund because of the wrangling of the agents. The house could be held off the market until all repairs can be completed.
The dry rot might lead to the bath room, which could lead to the tile, which then leads to the sub floor, and ultimately to a small little brown spot on the ceiling of the basement which some eager beaver painted over while preparing the property for sale.
Lenders can do what they want. Real Estate agents, on the other hand make all sorts of decisions which may, or may not be, in the best interest of the clients involved.
It is best to start over, some times, and inspection negotiations may be one of those times.
Forgive me, everyone! I posted only to be away from my computer for the entire next day — what poor form!! 🙁 Anyway I am back now and will reply in a timely fashion, beginning with comments above in reply to specific comments.
Russ:
I get your point: On a day-to-day, practical level, where everyone gets paid only when the transaction closes, there is a powerful incentive to exercise a degree of judgment as to what is revealed to a loan underwriter and what is not. In your first example, the underwriter was formally informed of the defect. As a result, the underwriter had to deal with it formally. In your second example, exact same defect, but the underwriter knew nothing of it. In that instance, in the real world, the LO and others involved do — and should, in your opinion — simply omit this information from any documentation that will otherwise land in the file.
I get it, that’s how the world works. Here’s my issue: the law (and in particular the state law, which is more stringent) is clear. If you knowingly conceal or refrain from revealing any information during the loan process, knowing that it MAY be relied upon by the lender, you’ve commited a Class B felony. In your second example, the professionals involved decided to omit documentation of the toilet credit (the PSA was revised, probably by addendum at closing, to reflect the credit) from the loan file, because if that fact was included it would have delayed closing.
Russ, please explain how this does NOT violate the statute. My point is that it does violate the statute, even though it may arguably be the “right” thing to do.
If this is the law, then I think we should abide by it. Perhaps the law needs changing. Perhaps the law is OK, but the underwriting process is too cumbersome and needs to be changed to reflect real world realities. I don’t think its OK to say, “Underwriting is too cumbersome, so lets break the law to keep everything moving smoothly.”
One other point: I don’t understand you when you say this is all about selling loans in the secondary market. It seems to me this is all about getting the loan funded by closing. Its all about giving the underwriters only the information they need to fund the loan, and keeping from them the “minor” stuff that everyone knows is irrelevant but which is treated as a a big deal given inflexible underwriting guidelines. Please explain this point further.
Craig:
It is really simple. Everything does not have to be disclosed from the banks perspective. The bank is concerned about salability of the loan. Salabilty is merely ensuring that things are done a certain way to meet secondary investor requirements. If you do it one way, it requires X. If you do it another, it requires Y. It all about figuring out which is the correct way for the particular transaction.
Again, it has nothing to do with trying to hide something from the lender. Using judgment is figuring out which is the path of least resistance which is why in my example had the toilet issue not been in the appraisal, the very first thing that the u/w would say is use a closing cost credit because that is all that is needed for a solid approval and requiring a certified plumber to fix it wouldn’t even be necessary. No one wants to create extra work if it isn’t needed.
The loan salability issue is why underwriting seemingly makes piss poor judgments about credit risk both from lending money to people who clearly shouldn’t qualify and also denying loans to millionaires.
I agree that no one should be hiding anything from the lender, but what you are not getting is that everything does not have to be disclosed and by not disclosing it you are not necessarily committing fraud. It is not black and white.
Russ, I note you have yet to once refer back to the requirements of the law. Instead, you continue to refer only to currrent practices. My whole point is that current practices, while perhaps justifiable and reasonable to some extent, are inconsistent with the law.
Is it your position that the conduct you describe is consistent with the state law? If so, please explain.
If not — and I think that is the case — then our point of disagreement turns on whether or not everyone should abide by this law. As an attorney, I cannot ethically help somebody circumvent the law or engage in fraudulent or illegal conduct. So I am inclined to argue that, even though the law may be overly strict and may complicate the lending process (thus delaying or killing deals), the solution is not to break the law but to either change the law and/or reform underwriting and loan selling protocols to make them more realistic. But as you note, its not a black/white issue, there are times when breaking the law is appropriate, and we may disagree on the issue.
My mortgage broker was Paramount Equity Mortgage, and we’ve gone all over what they did… I would like to comment that I have often felt rather an outsider because I am NOT suing my LENDER. I am interested in suing Paramount Equity Mortgage. WHY? Simple. I HAVE the loan that the documents reflect that I signed at closing. Never mind that I never LAID EYES on that loan (absolutely NO predisclosures, no signed loan application, no GFE’s NOTHING). The lender made the assumption that I DID have those things when they offered the loan. My MORTGAGE BROKER knew that I would never have agreed to the loan I signed at closing so he verbally sold me another one.
My point is: BOTH my lender AND myself are victims here. To prove my point, I send a Qualified Written Request for one of the loans I closed with them to send me ALL of the loan origination and pre-disclosure documents. The actual closed loan was a 2nd in the amount of $86K. The GFE docs that were sent to me by the lender in the QWR were for a JUMBO first loan for $430!! Uh…. I think that’s a problem.
There are numerous discreps on my Hud1 statements (yes, there are more than one) all that give a much rosier picture of our profile than what was reality. I could go on and on. Point is: HOW do you punish these guys? I can’t find an attorney to help me because there are so FEW in Washington State that even UNDERSTAND all of these games that these brokers played, let alone be able strategize a suit.
I have the POSTMARKED envelopes with the predisclosure docs in them that arrived AFTER we closed the loan!
If you know of one, I have a peach of a case here. By the way, I rescinded BOTH of the loans that I originated with PEM in 2006. The fun is about to begin…I understand the penalty for wrongful foreclosure is in the neighborhood of $100K. I hope that’s true. I should be in foreclosure soon. I’ll either be very happy, or homeless.
Did you sign closing documents? Did you sign a Note? Did you get a loan? Did you take possesion of the property? Did you make even one payment?
As long as you are on a public forum, let’s discuss.
SA — give me a call at your earliest convenience. I am happy to speak with you about your situation (there may be some important deadlines of which you need to be aware) and I can also refer you to a couple of attorneys who have made practices out of predatory lending (that is, if I’m not interested in your case, and I might be). 206-357-4222
So how did that go? That’s a little cold water on the discussion.
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hi all,
this is very useful.I have seen a couple of bank-owned properties REQUIRE a pre-approval for a re-hab loan be submitted with all offers.but this very useful to all people.
jessicap
D’oh! I forgot to include this link in the original post (Sea Times RE article). My favorite quote?
Whaddya’ think, Russ? Does a “separate payment to buyers” outside of escrow for a repair item, assuming its for a leaky toilet, pass muster from your perspective? Even if it does, its clearly — and I do not use that term lightly — bank fraud.