Scrutinizing underwriting practices can offer a defense in cases that target brokers

Laura Marquez-Garrett, attorney, Foster Pepper PLLC

As published in Scotsman Guide's Residential Edition, July 2009.

Mortgage brokers frequently find themselves in litigious tugs of war, with lenders demanding loan repurchases on one side and borrowers claiming ignorance of their agreements on the other. Thoroughly investigating lenders' underwriting guidelines and practices can help settle, or even obtain dismissal, of such disputes. Implementing a step-by-step process for responding to and fighting lenders' buyback demands can keep brokers from absorbing punishment they may not necessarily deserve.

Lender-initiated lawsuits often begin with the demand that brokers repurchase defaulted loans or pay damages. One-sided broker agreements frequently support such demands. In some cases, lenders seek strict liability for borrower misstatements or omissions. But brokers shouldn't always be held strictly liable, particularly because many of these cases involve questionable underwriting.

As lenders continue to respond to increasing default and foreclosure rates by attempting to cash in buyback and damage provisions contained in broker agreements, brokers must be prepared. By knowing which steps to take and understanding good underwriting from bad, brokers can position themselves to fight legal demands that might otherwise jeopardize their careers. Brokers who prepare to defend themselves not only increase their chances of winning in court, but they also increase their chances of keeping calm when and if the threat of legal demands becomes reality.

Respond to initial demands

Buyback demands, if unanswered or inadequately answered, will likely lead to litigation. There are a few ways brokers can respond to initial buyback demands, which almost always come in the form of a letter from the lender or the lender's attorney.

Brokers who don't have the resources to hire an attorney should address such demands directly with the lender. If brokers can substantiate their inability to pay, some lenders will drop the demand. For lenders, it makes little sense to waste resources on litigation with no potential for future recovery.

In cases where a broker has some resources, initial contact can pave the way for settlement at a substantially reduced amount. In cases where brokers have greater resources, it is best to have an attorney deal with lender demands.

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