As the FDIC continues to investigate the failures of banks like IndyMac and WaMu mortgage brokers are coming under more scrutiny for the loans they originated for those wholesalers.
The Federal Deposit Insurance Corp. is focused on brokers that delivered loans to the banks that resulted in heavy losses such as stated-income and no-documentation loans where the incomes of many borrowers were inflated.
The mortgage brokers feel this is unfair because they were making these "liar" loans at the direction of banks.
In many cases, the banks didn't want the brokers to verify borrower income or check tax returns.
Mortgage broker Marc Savitt noted the loans are generally four or five years old and it was the bank's responsibility to check borrower income.
If the FDIC contacts a broker, "my advice is don't give them anything until you talk with a lawyer," Savitt said.
Savitt is president of the National Association of Independent Housing Professionals, which has retained a California law firm to advise its members.
The NAIHP president recently met with FDIC attorneys about the lawsuits.
"They are only pursuing cases that are cost effective," Savitt said.
The cases mostly involve active brokers with financial resources or error and omission insurance.
First, the FDIC sends the broker a notice and step two is a subpoena for financial information.
"They want a settlement. This is all about the money," Savitt said in an interview.
The FDIC is not targeting brokers or any other group, according to FDIC deputy general counsel Rick Osterman.
"We are reviewing bank failures to determine whether people were responsible and culpable for the failure. Where we have meritorious and cost-effective claims we have an obligation to bring those claims," he said.
The FDIC currently has 172 pending mortgage malpractice and fraud lawsuits against mortgage brokers, appraisers, attorneys, closing agents and title companies.
After notifying individuals that they might be sued, FDIC attorneys "generally talk with them upfront to tell them what we found and hear their explanation," Osterman said. "It is possible we don't have all the facts. We are open to discussing that and getting all the information before making a decision to go forward."
One source with knowledge of four FDIC settlements with brokers said they ranged from $10,000 to $15,000. But the FDIC attorney indicated there are larger settlements with brokers.
Most of the broker lawsuits involve Bank United, IndyMac Bank, AmTrust, Washington Mutual and a handful of other banks that were major wholesale lenders before being closed by regulators and the bad assets were handed over to FDIC.
Wholesaler lenders require brokers to sign contracts with indemnification clauses, according to attorney Herman Thordsen, who represents several brokers facing FDIC lawsuits.
These indemnification clauses essentially say if anything goes wrong with the loan, for any reason whatsoever, the broker must cover any losses incurred by the wholesaler.
So the mortgage broker is really on the hook if the loan goes bad, according to Thordsen.
But he noted that the contracts used by the failed Pasadena, Calif., IndyMac Bank refer to brokers who "sell" loans.
However, brokers can't sell loans because they don't fund loans.
"We have always taken the position that the contract is not valid. And it cannot be enforced against the broker because they never sold them a loan," Thordsen said in an interview. His law firm is based in Santa Ana, Calif.
Meanwhile, some brokers claim that the lenders could have protected themselves from borrowers who inflated their incomes on stated-income loans by pulling their tax returns.
They point out that lenders didn't want the brokers to verify the borrower's income.
In fact, lenders instructed brokers to send them the IRS 4506 forms that are signed by the borrowers but not dated.
The IRS requires the taxpayer/borrower to sign and date the form.
Once dated, the lender must send the form to the IRS within 120 days to gain access to the borrower's tax filings. After 120 days, the IRS will reject the request.
If the form isn't dated, lenders can exercise that right anytime they want by inserting the date. This is why in Thordsen's opinion lenders requested an undated form.
So instead of using the 4506 to verify the borrower's income during the origination process, some lenders wait to pull the borrower's tax records after the loan goes bad.
"They use the 4506 to prove its bad and go after the broker," Thordsen said.
"There is no penalty for not dating the IRS form. So there is no downside for violating the law."
