Q: It has been quite a while since we have handled any Short Sales. I need a quick refresher because our clients want to buy a Property that is listed on the MLS as requiring “Short Sale Lender Approval.” My clients do not mind having an extended escrow period to secure that approval; however, we are worried about the Listing Agent’s insistence that there must be an Addendum to the Purchase Agreement which requires the Buyer to pay the Seller’s outstanding attorneys’ fees and costs (supposedly in connection with a matter unrelated to the sale). The Listing Agent claims that the Seller’s Lender will not object to the Buyers paying $20,000 to the Seller’s Attorney as long as it is handled outside of escrow.
Is there any law which prohibits the Buyer from paying someone else’s attorneys’ fees and costs? Do we or our Buyers face any liability exposure in complying with the Listing Agent’s demand?
A: Yes! There is definitely potential liability exposure for everyone involved in that transaction but it is not just because the Buyer is paying $20,000 to the Seller’s Attorney.
The real problem is that in Short Sales, the Seller’s Lender will require the Buyers and the Agents to sign a Lender’s Affidavit, under penalty of perjury, in which everyone will swear that the transaction meets all of the Lender’s various requirements for approving the sale. Typically, Lenders’ Affidavits specify that the sale is an “Arms-Length” transaction between two unrelated parties and that the purchase price represents the total consideration being paid by the Buyer to acquire the Property. These Lender Affidavits usually confirm that the Seller, Buyer and/or Brokers have not and will not receive “directly or indirectly” any form of compensation other than what is specified in the Closing Documents.
Payments made outside of escrow (which are frequently written up on an Addendum that is not provided to the Lender) that, in any way, benefit the Seller, Buyer or Brokers are prohibited in Short Sales. If the Buyers make the payment as demanded in the situation described above, then the Buyers will be acting in a manner that is inconsistent with the terms usually specified in the Lender’s Affidavit; you and the Buyers could then face significant liability exposure for committing perjury (lying on the Lender’s Affidavit, which is a criminal act under both state and federal law. Agents and their Brokers who are convicted of committing perjury can expect to lose their real estate licenses.
Keep in mind the purpose of a Short Sale: the Seller has insufficient equity in the home to pay off the existing liens and encumbrances and is not financially capable of making up the difference that is owed. In a Short Sale, the Seller is requesting that the Lender take less money than what the Lender is legally- entitled to receive. Since Lenders are not obligated to grant this type of request and are providing a benefit to Sellers by forgiving some of the indebtedness, Lenders can establish their own pre-conditions for approving the Short Sale to make certain that everyone is being completely honest about the sale. Another way to look at this situation is to ask why would the Lender agree to reduce the amount that they receive on the sale when there is an extra $20,000 being paid by the Buyer to take care of the Seller’s legal bills?
If a Buyer is willing to pay money to someone on behalf of the Seller so as to acquire the Property, then the purchase price does not really reflect the total amount of consideration that the Buyer is paying to acquire the Property. The Parties are effectively defrauding the Lender about the true facts of the transaction.
Although Lender Fraud is usually associated with providing false or misleading information to a Lender to obtain financing, Lender Fraud can also occur when providing false or misleading information to obtain Short Sale Lender Approval from an institutional lender. Anyone who participates in Lender Fraud is committing a federal crime and is subject to serious penalties including: (a) paying substantial civil fines; (b) paying treble damages (3 times the loss suffered by the Lender); and (c) up to two years in federal prison. Agents and their Brokers who are convicted of Lender Fraud can also expect to lose their real estate licenses.
- The “Actual Lender” is the entity that will fund the loan; mortgage brokers are not the Actual Lender. The fact that a mortgage broker indicates that it is “ok” to do anything that the Actual Lender may not know about is a “red flag” of Lender Fraud.
- Whenever Lender Approval is needed, either to grant the Buyer’s requested financing or to grant a Short Sale, all terms and conditions of the sale must be submitted to the Actual Lender in writing and all consideration paid must be made through Escrow.
- No effort should be made to conceal information from the Actual Lender by means of separate agreements or using an Addendum that is not provided to the Lender.
- Never sign a Lender’s Affidavit without first confirming that all of the conditions specified by the Lender in the Affidavit as pre-conditions to granting the Short Sale have been fully met.
- To be safe, the best practice in Short Sales is to follow the AAAAAAAH Rule:
Any payment by
Anyone to
Anyone for
Anything must be
Approved in writing by the
Authorized person at the
Actual Lender granting the Short Sale and all payments must be detailed in the
HUD Closing Documents.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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