Much has been written in the past year or so regarding a new body of “legal science” known as “Forensic Loan Auditing”, borrowing the term from accountant’s “forensic auditing”. In many ways, the term “Forensic Loan Auditing” is as it implies — a forensic (detailed) review of the loan documents. The question is: what are these attorney (crime scene) investigators looking for?
At the height of the real estate market, which, as hard to believe, was only a few years ago, most attorneys, including myself, had at least one to two closings per day. The attorneys representing the lenders (such as Chase, WAMU, Bank of America, CitiMortgage, Wells Fargo, etc…) were so busy that, at times, they could not even find enough per-diem attorneys to fill in for them at the closings and, as a result, the closings had to go “quick and smooth.” If the closing did not finish within two hours, the Borrower was charged additional fees – and no one likes to pay additional fees.
The enormous amount of closings, coupled with the time pressure constraints imposed on the purchaser/borrower by the attorneys representing the lenders and free-flowing loans where not only did the buyer not have to put any money down to purchase a house (that many times the buyer could not really afford based on the information provided, but often times not sufficiently or properly reviewed by the loan originators and underwriters) but where the buyers actually walked away from the closing table with money from the bank and a bottle of champagne from the lender’s attorney, led to a situation where the buyer/borrower was told by his or her attorney to “sign here, here and there.” Truth be told, most buyers, for the reasons mentioned above, did not care and did just that – signed here, here and there. I myself have been guilty of instructing my clients to sign here, here and there (albeit I did explain to them the documents) where the client just told me clearly: “I don’t care what it is, just tell me where to sign.”
The questions thus begs, what is it that the buyer/borrower signed at the closing and what effect do the documents signed and the manner in which they were signed have as part of the borrower who is now facing foreclosure or is in the midst of the foreclosure process. Since various lenders have different loan documents and riders, I will elaborate in this column on the most common documents and in next week’s column will further discuss the documents’ relevance and impact in foreclosure defense.
The basic loan package documents include the Promissory Note, Mortgage Agreement, Assignment of Leases and Rents. But the package does not stop there and also includes a variety of Disclosure forms, copies of Appraisal Reports, loan commitments, good faith estimates and copies of the borrower’s loan application (and it is these last documents that are one of the main “crime scene” documents that are reviewed by the Forensic Loan Auditors, including by my law firm).
As the name implies, a Promissory Note (usually referred to just as the “Note”) is just that – the Borrower’s Promise to repay the loan to the lender. The Note contains the basic loan information, including the amount borrowed, interest rate, lender’s name and payment address and late payment penalties. In the State of New York (as in most if not all of the United States), the Note is not recorded in the Registrar’s records and, therefore, is not available for the public viewing.
Similar to the Note, the Mortgage Agreement is the agreement that actually allows the lender to place a lien and “encumber” the property. Much like the Note, the Mortgage Agreement states the amount borrowed, interest rate and payment terms, but also states various sections of what the lender’s rights are in the event of default by borrower. To put it simply, the Mortgage Agreement states: If you don’t pay, we’ll take your home away.
The Mortgage Agreement, unlike the Note, is recorded in the Registrar’s records and is available for the public to see. Due to the fact that most of the terms listed in the Note are also listed in the Mortgage, the much hyped defense of “show me the Original Note” is not all it’s hyped out to be. In most cases, the Courts in the State of New York will not simply cancel a mortgage due to lender’s inability to furnish the original Note, since the terms are restated in the Mortgage and, most often, the Borrower has been making payments for some time before he or she defaulted on the loan and went into foreclosure, in effect making the borrower “estopped” from claiming that the Borrower did not agree to repay the loan as evidenced by the Mortgage. Additionally, in the case where the lender is unable to produce the Original Note, the Lender produces a “Lost Note Affidavit”. Of course, each case and each mortgage is different and different factors are involved and must be reviewed by an attorney competent in the Foreclosure Defense arena.
Aside from the Note and Mortgage, the Borrower signs at the closing various disclosure statements as mandated by RESPA. The purpose of most of the disclosures is to protect the lenders from actions done by mortgage brokers, appraisers and loan originators. In effect, the lenders want to pass the liability to the ‘little guys.’ However, what the banks do not want to admit is that the little guys are agents of the bank and, based on the laws of agency, the banks can be held accountable for the ‘Little guys’ actions. In the next column we will further discuss the various disclosure and side agreements that the banks had the buyer/borrower sign and what impact it may have on the borrower’s foreclosure defense strategy.
Alexander Gofer is the managing partner of the Gofer Law Group and can be reached at 212-480-3400 ext 101 or via e-mail: [email protected]
The Gofer Law Group is a full service Law Firm with location is Long Island, Manhattan and Williamsburg, focusing Foreclosure Defense, Private Lending, Residential and Commercial Real Estate Transactions and Joint Venture Agreements.