Q: My Buyer is in escrow on a deal that includes 95% financing. He is having difficulty getting his loan approved because the Lender does not like how little is currently in the Buyer’s bank account. The Mortgage Broker told my client that he needs to add $20,000 to his account; the Mortgage Broker suggested that the Buyer temporarily borrow that sum from someone to increase his bank account just until escrow closes.
The Buyer is asking me to make the loan. If I don’t do this, the deal will not close; I need this commission. I have access to $20,000 and could make the loan. What paperwork do I need to protect myself if I make this loan?
A. Sadly, you are asking the WRONG question. No documentation can protect you from your potential liability in this situation.
The Lender is looking for assurance that the Buyer has the financial resources to make his loan commitments. The Mortgage Broker’s suggestion is to artificially increase the Buyer’s bank account so that it would appear to the Lender that the Buyer has more financial reserves than the Buyer currently has; the Mortgage Broker’s suggestion is to lie to the Lender.
The federal government views this proposed activity as LENDER FRAUD. The Buyer would be falsely representing to the Lender that he has this money available, when in fact it is your money which will be promptly returned to you. The Buyer would be guilty of the federal crime of Lender Fraud. In addition, since you are knowingly aiding and abetting the Buyer in this fraudulent activity, you would not only be guilty of Lender Fraud but you and the Buyer would also be charged with a secondary crime: conspiracy to commit Lender Fraud.
It is not a defense that this scheme was suggested by the Mortgage Broker or the Bank Loan Officer – these individuals are not the people who are deciding to fund the loan. Therefore, the Mortgage Broker is just as guilty as you and the Buyer. However, it will be more difficult to prove the involvement of the Mortgage Broker because that person has undoubtedly not put the suggestion to get a temporary loan in writing and will deny making the suggestion if the Buyer defaults on the loan and the Lender finds out about the fraud. You and the Buyer will be left holding the bag because the only paper trail leads right to the two of you.
PRACTICE TIPS:
- Do NOT agree to participate in any scheme to falsify or conceal information provided to a Lender to secure a loan. You and your Broker could be heavily fined by the federal government and, if you are found guilty of Lender Fraud, you could possibly lose your real estate licenses.
- Do not lend money to your clients unless all of the following factors are true:
A. You want to be in the business of lending money but NOTE: if a real estate Broker makes more than 20 loans secured by real estate totaling more than $2,000,000 in any 12-month period, then the DRE must be notified once this threshold amount is met.
B. You are able to comply with all of the reporting and risk management requirements detailed in the DRE Mortgage Loan Broker Compliance Manual.
The DRE Manual can be accessed at: https://www.dre.ca.gov/files/pdf/re7.pdf
C. If you are affiliated with a Broker, your Broker needs to be advised in advance of making any loans to clients. Making any given loan should only be done with the express approval of your Broker and must be handled in a manner that is consistent with any requirements in the Broker’s Policy Manual.
D. If you are lending a Buyer money to acquire a property where the Buyer is securing an institutional first loan, your loan needs to be specified in the Purchase Agreement as a Second Deed of Trust. The loan needs to be disclosed, in writing, to the Lender of the First as early as possible but definitely before the First loan is approved.
E. You receive a note and deed of trust on the property at the Close of Escrow.
F. You are willing to lose the money that you have lent and/or you are willing to foreclose on your client if the loan payments are not made.
- Lenders (e.g., the actual entity that funds the loan and not the Mortgage Broker or Loan Officer) are legally entitled to know the truth about the terms of a real property transaction and the actual financial qualifications of the Buyer. Anyone who intentionally creates false information or conceals information from the Lender can be in violation of federal law which will result in severe consequences.
- No deal is worth your integrity or your license.
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