Agreed-Upon Credits Not Paid to Buyers

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

Agreed-Upon Credits Not Paid to Buyers

Q: We represented the Seller and another Broker represented the Buyer. As part of the contingency removal process, the Seller agreed to give the Buyer a $3,000 credit towards closing costs. That credit was put on an Addendum which the Buyer’s agent did not give to the Lender and she forgot to put it into Escrow. After Escrow closed, the Buyer’s Agent discovered that the credit was not listed in the Closing Documents. The Seller is still willing to provide the Buyer with the money but I believe that it could be Lender Fraud if the Seller gives the Buyer a check outside of escrow. What are the options at this point?

A: As you have properly surmised, any effort to give the Buyer money outside of escrow in this scenario will create the potential for a claim of Lender Fraud. This is a serious federal crime which is extremely dangerous for everyone involved and the penalties for Lender Fraud include a fine of $10,000 and two years in federal prison.

All credits to the Buyer must appear on the Closing Documents when there is a federally- insured loan. No credits can be paid outside of Escrow.

Although the Purchase Contract Addendum specifies that the Seller agreed to pay the credit, the C.A.R. Residential Purchase Agreement form clearly states in Paragraph 3J (5):

“Any credit to Buyer, from any source, … that is agreed to by the Parties (“Contractual Credit”) … shall be disclosed to Buyer’s lender. If the total credit allowed by Buyer’s lender is less than the Contractual Credit, then (i) the Contractual Credit shall be reduced to the Lender Allowable Credit . . .”

A comparable provision exists in the SFAR Purchase Agreement (Paragraph 3). Even though a comparable provision is not in the current PRDS Purchase Contract, it would still constitute Lender Fraud to pay the Buyer a credit outside of Escrow.

Under the terms of the CAR Purchase Agreement, the Buyer did not meet the conditions precedent for securing the credit, i.e., the sum was not disclosed to the Lender and thus there is no proof that the Buyer’s Lender would have allowed any or all of that credit In this particular situation, the reason that the credit was not paid was because the Selling Agent failed to protect the Buyer’s interests by not providing the Addendum to either the Lender or the Escrow Officer. As such, the Buyer then has a potential claim of Breach of Fiduciary Duty against the Selling Agent.

There are three options at this point:

1. The Selling Agent could enter into a formal written Settlement Agreement with the Buyer to resolve the potential Breach of Fiduciary Duty Claim. The Selling Agent could then settle the Buyer’s claim for $3,000. The Release would necessarily need to state that there is no admission of liability. This is really the best option for the Seller and the Listing Agent.

2. Depending upon who all the Parties are, they could arguably enter into a global settlement with the Seller, the Listing Agent and the Selling Agent all contributing towards a Settlement of $3,000 with a release of all Buyer’s claims against the Seller and everyone else. Again, the Release would necessarily need to state that there is no admission of liability.

3. Do nothing. Wait for the Buyer to take this matter to Small Claims Court (preferably with all of the Parties named as Defendants) which is the proper forum for this claim. Mediation and Arbitration Provisions in all 3 Residential Purchase Agreement forms specifically exclude matters that are within the jurisdictional limit of Small Claims Court; unless the Buyer has filed multiple actions in that forum, they can seek the full $3,000. If the Court issues an Order that the Seller and/or anyone else owes the Buyer any money, then payment pursuant to a Court Order would arguably not constitute Lender Fraud.

Best Practice Tips:

1. Regardless of who represents whom, Listing and Selling agents should make sure that the Buyer’s Lender is aware of all credits. The Buyer cannot receive a credit through escrow from any source unless the Lender approves of the credit; thus, any documentation regarding credits should be submitted to the Lender and approved by the Lender in writing. Selling Agents should make sure that this step is done and Listing Agents should request proof that it was taken care of in a timely fashion.

2. Selling Agents should emphasize that regardless of which Purchase Agreement form is used, any and all credits to the Buyer are limited to the Lender’s approval limit as a matter of federal law. If the Buyer is not securing a federally-insured loan, then the Buyer is free to negotiate any credit.

3. When negotiating a credit, Selling Agents should make sure that Buyer’s expectations are managed so that Buyer understands those credits may be reduced by their Lender. If the Buyer’s purchase is dependent upon securing that credit, then the Buyer should be advised not to remove the financing contingency until the Lender has, in fact, approved that credit in writing.

4. Be certain that Buyer fully understands the importance of Lender limitations on credits and that real estate professionals legally cannot make up the difference by a payment that does not appear on the Closing Documents – commission “rebates” are considered to be credits under federal mortgage guidelines.

5. Do not engage in any plan or scheme to make up the difference in the credit to Buyer that has been disallowed by the Lender. Even if a mortgage broker (as opposed to the actual Lender/Underwriter) has advised you (or the Buyer) that it is okay to pay the credit outside of escrow and that it is “done all of the time,” do not listen to that advice. A mortgage broker is NOT the Lender and their advice cannot be relied upon – they are merely acting in the conspiracy to commit Lender Fraud. Unless the UNDERWRITER for the actual Lender approves a credit, that credit cannot be paid to the Buyer.

6. If anyone is attempting to convince you to make a payment to or for the benefit of a Buyer outside of escrow, immediately discuss this situation with your manager or risk management attorney. Remember the formula: Lender + Payments Outside of Escrow = Fraud.

7. For more general information about negotiating credits, see our 2016 Weekly Tip on Credits.

WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is 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.