It starts when you are really busy or really trying to find a home for a loan. You might have missed a guideline or a lien and are now trying to stretch the boundaries. You do searches and find a lender that will do the file. You go over everything with the underwriter, send them the important information and finally are confident that they can close your loan. Sometime in this process, you now need to get approved by that investor.
Or, maybe you meet a rep at a lenders fair and he bugs you to get signed up or one of your LOs wants to get signed up and maybe you are really busy and just give the broker agreement a brief cursory review. Maybe it is a lender whose pricing is so good you have to get approved to be competitive in your market and choose to sign the agreement anyway. The rep says, “We have never asked a broker to buy back a loan … it’s just a formality required to sell our loans to the secondary market.”
Whatever the reason in the beginning you now have received a registered letter asking you to buy back a loan. You have usually 30 days or they will pursue legal actions. The letter states, “Please note in your broker agreement you have agreed to buy back a loan if it is unsellable for any reason—or we have been asked to repurchase the loan.” Even though the investor underwrote the loan, it is now unsellable and becomes your responsibility. Your borrower committed fraud unbeknownst to you, but you have agreed to indemnify the lender in any case which means buying the loan back, plus attorney’s fees and accrued interest.
There are several cases out there now where wholesalers are asking brokers to repurchase loans for these reasons. My first experience was in the early 1990s with a regional lender who approved and funded a 90 percent refinance with financed MI. The loan was unsellable because the LTV now exceeded 90 percent. I argued that they approved it and should have known upfront, but their answer was, “Please review your broker agreement.” Luckily, I was able to refinance with another lender doing the loan at no cost to the borrower to salvage our relationship. It only cost me extra time, stress and aggravation for my borrower.
There are several brokers who were not as lucky. One had a $47,000 manufactured loan that contained fraud by the borrower. The lender asked the broker to buy back the loan and the broker said, “No, we had no knowledge of the fraud.” They went to court and the broker won the fraud case, but was ordered to pay the lender $187,000 for losses and attorney’s fees under the broker agreement that said broker would indemnify the lender for whatever reason the loan went bad. The legal fees the lender the lender incurred were far greater than the loan amount. The broker had to pay his own legal fees in addition to the $187,000.
Many other brokers are being asked to buy back loans that were returned by Fannie Mae and Freddie Mac because their agreement states they will. Missing documentation, unsigned letters or disclosures can all cause buybacks.
Most brokers have no solution but to declare bankruptcy or shut their businesses that they have been operating for numerous years. Trying to reopen a new business usually doesn’t work as the judgment will follow. Business bankruptcy will not work if your agreement includes personal liability. Most of us have either incorporated or organized as an LLC to protect our personal assets, but then sign away that protection in a broker agreement. Several broker agreements require personal liability for employees, vendors and borrower fraud or even just if the loan is returned by the final investor. With this personal liability pledge, you have now given your savings and assets as collateral for your ability to fund close and fund loans through your investor.
If you have received this buyback request, it is already too late.
So what can we do now to protect ourselves? First, you must read your agreements and not sign ones that require any reason buybacks and definitely do not sign personal liability. If enough brokers refuse to sign, hopefully they will change their agreements. These agreements really do not make sense, as most brokers do not have the ability to buy back loans anyway and it usually results in bankruptcy or a closing of the business which does not help the wholesaler. So why have it in there to begin with? Now fraud is a different story and that will always remain and you will be personally responsible for any fraud you have knowledge of.
Do not think Errors & Omissions (E&O) coverage will protect you from one-sided broker agreements. If there are no errors and the lender simply wants you to buy back the loan, it is unlikely E&O will help you. Even if the lender made the error, many agreements still require you to buy back the loan and pay all the expenses of the lender. Most E&O policies will not cover fraud.
If you are operating as a mini-correspondent, you have already accepted this higher liability through the use of a warehouse line that you have probably provided with personal guarantees. The broker agreement is likely stricter as you are now in the Big Leagues.
So, starting now, let us read our agreements and refuse to sign those that are unfair. Strike out clauses that make you liable. There are many lenders out there with fair agreements and those are the ones you need to do business with. NAMB—The Association of Mortgage Professionals is going to try to get a standard agreement to use with all our lenders, but it will only work if we refuse to sign onerous agreements and ask them to use the NAMB standard agreement.
Rocke Andrews, CMC, CRMS of Lending Arizona LLC in Tucson, Ariz. is vice president of NAMB—The Association of Mortgage Professionals. He may be reached by phone at (520) 886-7283 or e-mail [email protected]