Get to know the pitfalls of lending before it's too late
John Arno, broker, Park Hill Lending
As published in Scotsman Guide's Commercial Edition, August 2008.
Considerable liability can arise from obvious or obscure sources. Years after a transaction, you can find yourself spending valuable time and money on a lawsuit for a deal in which you conducted yourself impeccably. It's an unfortunate truth to this business.
That said, you can take steps to minimize your risk and to keep more of what you earn in the long term. Here are 11 ways to do so.
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1. Follow your state laws: When in doubt about these rules as they pertain to commercial real estate or lending, ask. Don't assume anything. If you don't have a real estate lawyer, put one on retainer, if you can afford it. Members of the National Association of Realtors may receive free legal advice in their state. In addition, your state department of real estate (or its equivalent) may offer free legal information related to general real estate questions.
2. Avoid misrepresentation: This can take many forms but often occurs when a mortgage broker makes misleading statements about possible loan amounts, rates or terms. It also can happen when brokers fail to provide an accurate disclosure document or use the correct disclosure form. Borrowers make important investment decisions based on proposed loan terms. Brokers must represent the most-accurate terms they have available and keep borrowers informed of changes. Overdisclosure is always preferred to the alternative. If you learn of a rate or term change, you would be well-advised to issue another disclosure document, even if not required by law. Always ensure that clients sign that they have read, understand and acknowledge receipt of the disclosure, as of its date.
3. Complete documents accurately: This is critical. Every word or number put into writing can come back to haunt you if borrowers relied on this information and incurred a loss by following it. Regulatory agencies can impose fines and take disciplinary action against a broker for failing to complete necessary forms completely. Take time to review every document for accuracy. If you are unclear about how to complete a document correctly, consult with the regulatory agency requiring its completion or with an attorney.
4. Disclose all material facts: Whether or not the borrower discloses them to you, always disclose material facts to the lender and to the borrower whenever you discover them. Don't expect an appraiser, engineer or another representative of the lender to have seen what you have seen. If you're not sure if what you have observed is a potential issue, note its existence in your write-up to the bank and recommend an examination. Put all disclosures in a dated missive that notes how you learned these facts. By documenting every disclosure to your borrower and lender, you reduce your risk of not filing a required disclosure in a timely fashion.
5. Stay truthful in your advertising: The forerunner to contemporary claims of false or misleading advertising is the 1911 "Printer's Ink Statute," adopted with variations in a number of states. It essentially made it a misdemeanor to advertise a representation that is untrue, deceptive or misleading. Advertising a loan program offering a loan-to-value ratio, interest rates or other material terms that you cannot provide often is against the law -- and a considerable risk. Penalties vary from state to state. Make sure that all advertising is true and that it is not worded in a way that can be construed to have multiple meanings.
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