The Best of the Legal Hotline: Working with Lenders


 Debbi Conrad & Tracy Rucka  |    May 09, 2005
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We recently received the following Hotline questions concerning transactions involving mortgage brokers, lenders and financial institutions.

Is it against the law in the state of Wisconsin to have a prepayment penalty on a single-family residential mortgage?

Prepayment penalties are not illegal per se. Depending on the type of loan program, prepayment penalties may be permitted. For example, Wis. Stat. ¬ß 138.052(2)(a)2 provides that with respect to residential mortgage loans, ‚Äú...the parties may agree that if a prepayment is made within 5 years of the date of the loan, then the lender shall receive an amount not exceeding 60 days‚Äô interest at the contract rate on the amount by which the aggregate principal prepayments for a 12 month period exceeds 20% of the original amount of the loan.‚ÄĚ For more information regarding mortgage issues, contact the Department of Financial Institutions online at www.wdfi.org. Sellers with specific questions may contact the lender or their attorney.

Can a financial institution request that the seller revise the real estate condition report (RECR)? The seller’s RECR indicates that there is a slight bulge in the left side of the basement caused by a tree that was removed, and that the seller has not experienced any leakage. The lender wants the seller to prepare a new RECR without mentioning these facts. Is this legal?

Unless the condition of the basement has been rectified, there is no reason for the seller to amend or redo the RECR. If the basement remains in the same condition and the seller were to sign a new RECR not noting the observed problems, the seller would be lying, committing fraud, and assisting the lender to commit fraud upon the secondary market. The listing broker or the seller may wish to consider filing a complaint with the Department of Financial Institutions regarding the behavior of this lender. This may be done online by visiting www.wdfi.org/contact_us/ComplaintDefault.htm.

A mortgage broker is offering $300 for each deal that closes to the real estate licensee who sent them the lead. Is this legal?

The Real Estate Settlement Procedure Act (RESPA) forbids paying fees or giving gifts for the referral of business to settlement service providers. For instance, it is illegal for a mortgage brokerage firm to pay $300 per loan to real estate agents who steer homebuyers in its direction.

Under RESPA, no person may give or receive fees or kickbacks for the referral of settlement services, or give or receive a split or percentage of settlement charges other than for services actually provided. Paying or receiving a fee or a ‚Äúthing of value‚ÄĚ for the referral of business related to a mortgage loan settlement without rendering a service is illegal under RESPA. A charge by a person for which no or nominal services were performed or for which duplicative fees are charged is an unearned fee and is also a RESPA violation.

‚ÄúSettlement services‚ÄĚ are defined under RESPA to include any services related to (1) the origination, processing or funding of a federally-related mortgage loan; (2) mortgage broker services such as counseling, taking applications, obtaining verifications and appraisals, lender-borrower communications, etc.; (3) title company services; (4) an attorney‚Äôs legal services; (5) closing document preparation; (6) credit reports and appraisals; (7) property inspections; (8) conducting the settlement; (9) mortgage insurance; (10) hazard, flood or casualty insurance and homeowner warranties; (11) mortgage life, disability or similar insurance; (12) real property taxes and assessments; (13) and real estate brokers and agents.

An agreement or understanding that a ‚Äúthing of value‚ÄĚ will be given in exchange for a settlement service referral need not be written or even verbalized. Such an agreement can be established by a practice, pattern or course of conduct.

For more information about RESPA, go to www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm.

The buyer delivered a loan commitment to the seller that was subject to an appraisal. The appraised value was less than the purchase price. Does the buyer have a way out of the contract?

Not unless there was a separate appraisal contingency in the offer. The buyer may request an appraisal contingency in a transaction to assure the subject property will appraise at a certain value. If the buyer uses a separate appraisal contingency and receives a loan commitment subject to an appraisal, the separate appraisal contingency is not waived by submitting the loan commitment. If there is no separate appraisal contingency and the buyer submits a loan commitment that is subject to an appraisal, the buyer is assuming the risk that the property will appraise at required value. If the property does not appraise at that value, a buyer without a separate appraisal contingency is in breach of contract if he or she does not close. If an independent appraisal contingency was used, the buyer is protected and is not in breach if the property did not appraise at the required value, even if a loan commitment subject to an appraisal had previously been submitted to the seller.

A mortgage company has asked the listing agent to winterize the listed foreclosure property, keep the sidewalks shoveled, change the locks and contact the power company. Is this part of the listing?

Property management services are not part of the standard listing contract. If company policy does not prohibit such services, the agent could agree to assist the seller with these items. A ‚ÄúModel Release from Liability‚ÄĚ form, as well as information about avoiding liability when ordering services for parties is found in Legal Update 04.05, ‚ÄúAvoiding Liability When Signing and Making Referrals,‚ÄĚ www.wra.org/LU0405.

The seller has deeded the listed home back to the lender in lieu of foreclosure. The listing broker had listing protection for a buyer. Does it apply now to the lender?

In cases where the seller provides the lender with a deed in lieu of foreclosure, the lender becomes the new seller. The listing protection between the listing broker and the owner is terminated. The listing broker would need to enter into either a listing with the lender or a buyer agency with the buyer to provide real estate brokerage services for a transaction between the interested buyer and the lender. Legal Update 99.05, ‚ÄúMortgage Foreclosures‚ÄĚ (www.wra.org/LU9905), contains additional information about foreclosures and the effect on real estate transactions.

The sellers owe $175,000 to the first mortgagee and $64,000 to the second mortgagee. The sellers are not making their payments and may go into bankruptcy. There is an offer for $230,000. The second lender may take a short sale, but wants 30 days to make a decision. The seller does not want the listing broker to let the buyer know that it will be subject to a short sale. What should the listing broker do?

Whether the possibility of a short sale, foreclosure or bankruptcy needs to be disclosed by the broker as an adverse material fact is a judgment that only the broker can make after considering all of the facts and circumstances in the transaction. For example, the fact of the short sale itself may not require disclosure if the transaction is going to come together and close. On the other hand, a short sale may need to be disclosed if it appears that the seller will not be able to complete the transaction. A foreclosure may not need to be disclosed if the buyer can close before judicial confirmation of the sheriff’s sale. A bankruptcy may cause the property to come under the control of the bankruptcy trustee. Although disclosure may not need to be made initially based on the information available at the commencement of the transaction, facts and circumstances may change resulting in the obligation of the broker to make timely written disclosures.

If the listing broker knows that the seller is not able to or does not intend to meet his or her obligations under the contract, then the short sale constitutes an adverse fact that must be promptly disclosed to the parties in writing. Alternatively, § RL 24.07(3) states that a broker will be practicing competently if the broker promptly discloses the information suggesting the possibility of a short sale, in writing, to all parties, recommends that the parties obtain expert assistance to investigate or evaluate the situation and, if directed by the parties, drafts appropriate contingencies.

The fact that the lender is demanding 30 days to review the transaction will dictate the terms and conditions under which the seller may accept an offer and may result in a contingency provision. The seller may be referred to legal counsel for advice on the most appropriate way to respond to the offer.

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