Overview of the clawback provision
The idea that lenders can recoup mortgage broker fees is commonly understood. However, many mortgage brokers are unaware that clawback clauses can be triggered in a variety of ways, sometimes with relative ease.
The table below summarises the various categories of clawback clauses typically found in contracts between mortgage brokers and lenders.
Understand the nuances
We now take a closer look at the nuances of these clawback clauses to see their overall impact.
Buyback clause
Many mortgage brokers believe that a repurchase obligation only arises in cases of fraud or gross negligence, which can be difficult to prove.
However, the burden of proof on the lender to assert a repurchase claim is usually much lower.
The repurchase obligation can be triggered simply by showing that the broker has breached any of the representations or warranties in the mortgage brokerage agreement. The list of representations and warranties is often so long and extensive that even the most compliant brokers have difficulty complying with them completely. For example, brokers must represent that they comply with all federal, state, and local laws, thereby incorporating into their agreement all the requirements of federal laws such as RESPA and state laws such as Chapter 494 of the Florida Statutes.
As noted in the diagram, the repurchase obligation arises automatically when the lender receives a repurchase demand from the investor. Importantly, the lender only needs to receive the demand notice; it is not necessary for the lender to have already repurchased the loan.
Furthermore, it usually doesn't matter if there is a foreclosure or not: the mortgage broker's responsibilities shift from buying down the loan to purchasing the related property.
The most common reasons a lender will ask a broker to buy back a loan are:
misstatement of income, employment, and/or debt-to-income, valuation misstatement, occupancy misstatement, asset misstatement, undisclosed liabilities, bad debts
In an ideal world, lenders and mortgage brokers should be equally responsible for soundly underwriting the transaction, but in the real world, these buyback clauses essentially shift 100% of the underwriting burden onto the mortgage broker.
Early default and early repayment provisions
While the risk of receiving a repurchase demand can last for several years (subject to a statute of limitations defense), early payment default clauses and early repayment clauses have a much shorter lifespan.
Still, there are some important points to remember.
For early repayment defaults, the scope is usually limited to only the borrower's first payment, but in some cases extends to the first six payments. Mortgage brokers typically have no contact with the borrower when the first payment is due (two months after signing) and no contact for the next five payments. For early repayment clauses, the look-back period is usually 180 days. Again, the broker is usually not in contact at that time and has limited control when the borrower attempts to refinance or terminate the loan early.
Therefore, it is a good idea for mortgage brokers to maintain communication with their customers even after the loan has closed, such as by helping them enroll in automatic payments for their loan payments. Also, if a borrower wants to pay off their loan early within 180 days by refinancing, the broker can help minimize the damage if the new loan is returned to the same lender.
Strategies to mitigate risk and liability
Read the fine print. Be sure to familiarize yourself with your current mortgage broker contract, as clawback clause language can vary widely. You can try to negotiate more favorable language before signing with a new lender. Have strong internal controls in place. Hire a compliance expert or lawyer to set up internal policies to eliminate fraudulent borrower applications as much as possible. Also, have an automated system in place to notify borrowers to make their first payment on time after signing. Have strong E&O insurance. If that “rainy day” comes and the lender invokes a clawback clause against you, make sure your no-fault insurance covers these situations and file a claim immediately. However, be aware that some E&O insurance policies specifically exclude cases where the insured refuses or fails to buy back the loan. Be prepared to contest the lender's demands. Most lenders will work with your mortgage broker to resolve the issue through some sort of settlement. After all, lenders don't want to lose your business. However, if a settlement can't be reached, you may need to hire an attorney and take the case to court or arbitration, depending on the dispute resolution clause. In the meantime, you may not be entitled to fees on other loans pending in that lender's pipeline because of the lender's right of offset.
Source link