Fighting Back on the Buyback
Scrutinizing underwriting practices can offer a defense in cases that target brokers
By Laura Marquez-Garrett, attorney, Foster Pepper PLLC
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
Laura Marquez-Garrett
is an attorney with Foster Pepper PLLC (www.
foster.com) and works
on mortgage-industry
matters, including the
representation of mortgage lenders and brokers
in litigation and regulatory-compliance matters. She also is experienced in class-action
and white-collar defense. Marquez-Garrett
graduated from Harvard Law School in 2002.
E-mail her at marql@foster.com.
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
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Loans made or arranged pursuant to a California Finance Lender’s License.
Provided to mortgage professionals for information only and not intended or authorized for consumer or public distribution.
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,
of income. Accepting these loans contributed in part to increased foreclosure rates,
which in turn led to significant financial
losses for lenders and investors.
It’s becoming apparent that even
in cases where borrowers provided
“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.”
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.
Moreover, in situations where many lenders are demanding buybacks — or where one
lender is demanding buybacks for several
loans — retaining an experienced attorney
is critical because patterns of defaulted loans
could lead to criminal investigations.
Look into lender complacency
State and federal authorities have shifted
their attention and resources toward examining the causes of the current economic crisis. Among the various types of
mortgage and other fraud allegedly perpetrated by financial-industry professionals is an emphasis on lender complacency.
In fact, some have suggested that lenders
should be liable under theories of criminal
negligence for their failure to investigate
borrowers adequately before making subprime (aka, nonprime) mortgage loans.
Stated-income loans, for example,
didn’t require borrowers to provide proof
documentation, some lenders may have
cut corners with respect to underwriting
— even though borrowers were charged
fees for underwriting services. These
shortcomings range from a failure on the
lenders’ part to follow their own underwriting procedures to a failure to perform
any underwriting at all.
Where demands for buybacks and damages relate to subprime mortgages, brokers
should focus on lenders’ own practices as
a means of bolstering legal defenses and
counterclaims.
Investigate underwriting practices
Even when dealing with the most one-sided
broker agreements, it can be argued that
proper underwriting was an express and
implied duty imposed on lenders. The following are examples of provisions in broker agreements that attempt to shift all of
the risk onto brokers’ shoulders:
■ Broker-warranty provisions, whereby
a broker represents that none of the statements or information contained in a loan-application package will contain untrue
statements or omissions of material fact,
regardless of whether the broker knew or
had reason to suspect these misstatements
or omissions
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