Mortgage brokers constantly solicit new loan opportunities. That is the nature of their business. They can spend most of their working day and week following up on prospects. The purpose is to locate a lead, obtain the material information, then convert the proposed transaction into a successfully closed file, along with a reasonable paycheck. That has been the strategy since I can remember and 100 years before.
Some brokers have more success than others. Some pursue with a vengeance while others dance around the periphery. All spend a significant amount of time with borrowers whose strategy is to deliver a delicately doctored up application package. The purpose is to avoid disclosure of material facts that would negatively affect the creditworthiness of the overall borrower and collateral property.
What is less clear is whether the borrower’s mortgage broker realizes the avoidance scheme or takes part in the construction effort. The borrowers’ broker has a fiduciary duty of reasonable inquiry, to collect and verify all the material facts, and to submit a truthful package to a funding lender.
Below are examples that demonstrate the problem.
- Borrower submitted a loan request to a mortgage broker for a new refinance first commercial loan of $2,500,000. The property had a fully operational ongoing concern business with expected cash flow to pay expenses and debt service.
- The loan application was submitted, not on a commercial loan application, but rather a 1003 residential 1-4 loan application. Business purpose loans should be not be accompanied with 1003 that was designed for an owner-occupied residential property that is intended to be funded by Fanny Mae Government loan.
- Business purpose loans should be submitted using a Business Purpose/Commercial Loan Application.
- The borrowing entity was a California Limited Liability Company.
- The borrower had retirement and disability income but relied primarily on the security property for income.
- His current first lien was privately refinanced with no reporting to any credit reporting company.
- According to the prospective borrower, the property had been purchased as an REO from a foreclosing lender of the prior owner.
- Upon in-depth inquiry, there were interesting discoveries. While the borrower had in fact purchased the property as an REO from the lender, the borrower had initially gained control of the property by acquiring all the shares of the bankrupt entity which previously held the title.
- The borrower was able to obtain new financing from a group of private lenders and exit bankruptcy, at which point the borrower almost immediately defaulted on the loan.
- Subsequently, a new lender was brought in to recapitalize the property. Under this new financing, the group of private lenders agreed to a partial pay-down of their outstanding principal balance in exchange for subordinating the balance of their loan to the new lender.
- Shortly after completing this refinancing the Borrower again defaulted on the new lender who then successfully foreclosed on the property. Now holding a highly specialized ROE asset in a tertiary market, the Lender agreed to sell the asset back to the Borrower at a price below their note balance with 100% seller carry-back financing.
- The borrowers again struggled to service the reduced debt and missed the maturity date on the seller carry back financing. Then the problematic borrower sought out a new lender. This is where a new prospective lender entered the picture. |
- It was discovered that the borrowers had other litigation ongoing relating to claims on another unrelated property for false appraisals, which included intentional misrepresentation, concealment (fraud), conspiracy to defraud, and other claims. Apparently, the borrower used a family member to complete an appraisal that turned out to be false.
- The borrowers were secretive about not wanting the prospective new lender to communicate with the past lender and wanted to make sure that the new appraisal was not disclosed to the old lender because the borrower was requesting a substantial discount on the payoff.
- The scheme unraveled over time as the prospective new lender processing and underwriting staff kept discovering more and more red flags.
The prospective new lender’s staff should be complimented as to their in-depth inquiry and making the decision to decline the loan that would surely become a servicing nightmare.
Business and Private Money Finance Consultant
Cell (949) 533-8315
I intend this article for educational purposes only and is not a solicitation.