Seek Legal Advice Before Signing Contracts

In today’s highly regulated lending industry environment, most loan originators probably have their legal counsel review lender contracts and other important documents before signing them.

However, a decade ago it is likely that originators were less cautious and often signed contracts without fully realizing the problems they might subsequently face.

Jim Loustalot is a good example of a mortgage broker who has learned an unfortunate, expensive lesson and would like to help others avoid dealing with a similar situation. In 1999, Loustalot, then with Loans123.com, Foster City, Calif., signed a standard agreement with a major lender stating that it had “absolute indemnity” should any problems arise with the loans he brokered. Because he is thorough in his customer due diligence procedures, Loustalot wasn’t overly concerned with what now seems to be rather “rigid” contract language.

In January (2012) an attorney’s paralegal representing the nationwide lender contacted Loustalot to advise that he owed $206,000 for a buyback, resulting from a foreclosure on a former customer’s property. Apparently, in 2005 the borrower had closed on a purchase loan a few days prior to filling out a 1003 with Loustalot for a different property, a fact she never disclosed and that wasn’t revealed through the credit report and the new loan application. The lender presumably did its own due diligence before approving the loan and later selling it to Fannie Mae, whose audit in 2011 determined that the borrower’s dual loans contributed to her defaulting on the mortgage Loustalot had brokered. FNMA subsequently sent the lender a repurchase demand, which in turn prompted the attorney’s letter to Loustalot. Because he had signed a contract indemnifying the lender against all losses, according to the attorney he was responsible for the buyback.

Of course, Loustalot was incredulous that he was asked to pay for the borrower’s fraudulent action, which hadn’t been detected throughout the original transaction. “I didn’t cause the loan to default,” he said. “We did the normal due diligence. It felt like I was being extorted for this payment.”

After initially emphasizing that he didn’t want to pay the $206,000, Loustalot had follow-up discussions with the attorney who said the lender was willing to lower the amount, first to $103,000, then to $41,500, $20,000 and finally to $15,000.  He also sought the advice of attorney Herman Thordsen, who frequently advises CAMP members. Thordsen said that he was aware of several other originators who had already faced similar circumstances and decided to pay rather than get involved in a legal battle with a major lender. Thordsen also emphasized the importance of seeking legal advice before signing new contracts.

After several frustrating phone conversations, e-mails and letters, Loustalot decided to pay the $15,000 rather than endure a lengthy and expensive legal contest. However, he is determined to not only warn other originators who could face a similar problem, but also realize a more long-term solution. “The basic issue is the legal enforceability of this type of contract, which seemingly makes the broker liable for the life of the loan even if he or she has done everything right,” he said. “We need to challenge these old agreements.”

He also agrees with Attorney Thordsen’s advice to obtain legal counsel before signing contracts as well as other important operational issues.

(For additional information regarding Jim Loustalot’s lender contract situation, contact him at jim@homesandloans123.com)

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