What is a Loan Document Audit?

A loan documents audit is the analysis of original loan documents by an attorney or attorney run software. The main objective for this analysis is to identify predatory lending violations, including but not limited to RESPA and TILA. If there are violations found, the audit should include the severity of the violations. Egregious violations can harbor huge consequences for the lender that owns the note if identified and litigated.

Reasons to Conduct a Loan Documents Audit

Obtaining a Loan Document Audit is essential in every Loan Restructuring, Short sale, and Deed in Lieu resolution. The findings of an audit can significantly improve your or your client’s chances for a positive resolution.

• General Loan Documentation Errors
• Reverse Engineering
• Real Estate Settlement Procedures Act (RESPA) Violations
• Truth in Lending Act (TILA) Violations
• Home Owner Equity Protection Act Violations
• Good Faith Estimate Compliance
• Misleading Disclosures
• Overstated Home Values
• Overstated Income in the Loan Application
• Lender and/or Broker Misrepresentations
• Usury Violations
• Excessive ARM Adjustments
• Loan Servicing Violations
• Excessive Points and Fees
• Predatory Lending
• Forgery
• Loan Flipping
• Fair Debt Reporting Act Violations
• Fair Debt Collection Practices Act Violations
• Fraud

Why is a loan documents audit important?

Loan Documents audits are important to gaining the attention of the loss mitigation departments of the major lenders and servicers. It demonstrates to the lender and servicer that the borrower is being represented by a competent professional, that negotiations should proceed promptly and that it is in all parties' interests to reach a win-win resolution.

Loan Documents audits are a critical part of the actual loan modification process because it gives the borrower's representative leverage when negotiating with the lender and servicer. Violations of federal and state consumer protection laws relating to mortgage lending may enable the borrower to rescind (effectively cancel) the loan, serve to block a foreclosure, or may entitle the borrower to refunds or monetary damages. Moreover, in cases where the borrower cannot show hardship, has no equity in the home, or does not have sufficient income to support a modified loan, the forensic loan audit is the only means of blocking foreclosure proceedings or compelling the lender to agree to new loan terms.

What is the likelihood that a loan documents audit will reveal a regulatory violation?

There is a very reasonable possibility that a given mortgage transaction materially violates one or more consumer protection laws. The mortgage industry's struggle to comply with consumer protection laws is nothing short of staggering. A remarkable report published by the inspector general for the FDIC reveals that 83% of federally supervised banks that made loans at the peak of the mortgage boom were cited for patterns of "significant compliance violations." The FDIC regulates banks that generally did not engage in subprime lending and that are required to have minimum regulatory controls in place. The percentage of lenders failing to comply with regulatory requirements is even higher for state-licensed, non-bank lenders—such as Ameriquest, New Century and Option One—who were responsible for originating 52% of subprime mortgages and are subject to a much broader patchwork of state regulation.

What Happens if There are Violations?

Hire an attorney who is skilled in consumer advocacy, predatory lending and real estate law.

An attorney will determine the proper course of action. This may include an attempt to settle the Loan Issue/Documented Dispute with the Lender prior to filing complaint(s) with any agency and inform the Lender of the Issues found in the "Loan Document Audit".

If a loan was funded unlawfully, the borrower may be entitled to compensation, a refund of all interest paid to date, legal fees, or renegotiation of the terms of the loan.

A creditor who violates the disclosure requirements may be sued for twice the amount of the total finance charge on the loan. In the case of a home mortgage, this can be a very significant amount, amounting to thousands of dollars. Costs and attorneys fees may also be awarded to the consumer.

What loan documents are required for a loan documents audit and how can I acquire them if the borrower does not have copies?

The documents required are standard to mortgage loan transactions. FRAS will provide you a loan document inventory checklist. If the borrower does not have one or more of the documents, FRAS will provide you with a Qualified Written Request ("QWR") that you may complete and send to the servicer. A QWR is letter written pursuant to Section 6 of the federal Real Estate Settlement Procedures Act ("RESPA") seeking information and actions from the servicer. Under federal law, servicers have to acknowledge the letter within 20 working days and respond in 60.

How long does it take for Financial Relief Attorney Services to perform a loan audit?

Normally one week, but could be longer depend on the complexity of the mortgage transaction and completeness of the loan file.

What is a Short Sale?

Also known as a real estate short pay-off or a pre-foreclosure workout, a short sale is an agreement with a lender to accept less than the amount owed by a borrower via a sale of the property to a third party.

A homeowner falls behind on his or her mortgage payments, usually due to a job loss, rising debt payments, or both. Facing a situation in which the home value has fallen and cannot be sold for the amount of the mortgage owed, FRAS works out a deal with the lender to sell the home for whatever the market will bear. If the amount of the sale is for less than the amount owed on the mortgage, the lender gets the proceeds and discharges the remaining debt.

What are the Advantages of a Short Sale in comparison to a Foreclosure?

While in both cases, short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short sellers avoid having a "debt discharged due to foreclosure" on their credit reports. Mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will reduce your credit score by over 250 points. You could also have to wait up to several years to qualify for a mortgage at a reasonable rate.

Short sales show up on a credit report as a "pre-foreclosure in redemption" status and can result in a credit score reduction of 100 points or less. After the sale, the mortgage may show up as "discharged." People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 18 months. So, if buying a home is a future goal, then a short sale is the better option for many families.

How do I qualified for a Short sale?

In order to be eligible for a short sale we must be able to prove to the lender that you are a victim of a “hardship” and therefore unable to continue making payments on your mortgage. A hardship situation is one that is the result of some extenuating circumstance that forces the borrower into a position where they can no longer afford their mortgage payments. While every situation is different, some frequent examples of hardship include:

• Decrease in the value of the home
• Unemployment or reduction in income 
• Illness
• Medical expenses
• Employment relocation
• Failed business
• Bankruptcy
• Death of spouse or Family Member 
• Divorce or separation
• Incarceration

What is a Deed-in-lieu of Foreclosure? 

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principle advantage to the borrower is that it immediately releases him from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he would in a formal foreclosure.

If you have been unable to make your monthly mortgage payments and have also been unsuccessful trying to sell your home at the market value, this form of foreclosure may be what is necessary to get you back on track. This procedure allows you to transfer your property voluntarily to your lender or Mortgage Company and your debt or deficiency is often forgiven. This will not save your home, but it will help you with your chances of getting another mortgage loan in the future and it will help you avoid the lengthy legal process of foreclosure. Although it is a negative strike on your credit rating, it is less harmful than a mortgage foreclosure.

Typically your Mortgage Company will require that your home has been listed with a Real Estate Agent for at least 30 days and there are no other liens on the property for them to approve you. Some Companies may also require that the property be vacant, an interior appraisal of the property and a minimum of 60 days prior to a Foreclosure sale.

A true deed in lieu of foreclosure is a situation in which the indebtedness is secured by the real estate being voluntarily relinquished. Both sides enter into the transaction voluntarily and in good faith. The deed in lieu of foreclosure agreement must reference and contain contract language releasing the borrower from any further personal liability, otherwise it is generally not advantageous for the borrower to sign. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair market value of the property, but this has become less of an obstacle as property values have declined recently. Usually, lenders will agree since they will end up with exactly what they would have gotten at a foreclosure sale, without going to the expense of actually conducing the foreclosure sale process.

Lenders will not act upon a deed in lieu of foreclosure unless they receive a formal written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily, this is typically done through a deed in lieu of foreclosure attorney. So long as the arrangement is voluntary, and the lender did not exert undue pressure on the borrower, the deed in lieu of foreclosure process is lawful. However, neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a all contract terms are negotiated and final resolution is reached.

What is the difference between a Foreclosure and a Deed-in-lieu of Foreclosure?

A (typical) foreclosure refers either to a trustee's sale foreclosure (non-judicial proceeding) or to a judicial foreclosure (a judicial proceeding). California is a "non-judicial" foreclosure state, so the Court need not be involved in foreclosure proceedings. A deed in lieu of foreclosure refers to a method of avoiding that formal foreclosure process and entering into an agreement with the lender to accept title to the property voluntarily. This usually saves everyone time and money in the long run. A deed in lieu of foreclosure is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property (including any potential personal deficiency). In this way the lender can avoid the foreclosure process to regain title to the property fast and efficiently, and all they are walking away from is a speculative (at best) claim against a likely insolvent borrower that will never be collectable anyway.

Can I just Quit-claim the property to the lender and record the transfer?

A borrower cannot simply transfer title to the lender without the lender's formal permission, such as just recording a quitclaim deed. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, creative homeowners have simply quitclaimed the property to the lender anyway, and recorded the instrument without the lender's permission or prior knowledge. Good idea, but generally not a viable option.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender in such a manner. The lender would simply record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code 1058.5.)

Why would a lender ever refuse a Deed-in-lieu of Foreclosure? 

Lenders often refuse a deed in lieu of foreclosure due to the better quality and more certain title they receive at a trustee's sale, called the "Trustee's Deed Upon Sale". A trustee's deed upon sale serves to eliminate and wipe out any junior liens such as Home Equity Lines of Credit, 2nd Mortgages, judgment liens, etc. If those issues exist, it may be more challenging to convince a lender to accept a deed in lieu of foreclosure, nothing is impossible though.

Do I have to have the property listed for Short Sale to do a Deed-in-lieu of Foreclosure?

Yes. Lenders do require that the property is listed for sale, even though it ultimately is not going to sell in today's market.

Do I have to be late on my mortgage payments to submit a Deed-in-lieu of Foreclosure request?

Yes, but we cannot can not advise you to stop making payments if you have the ability to do so. It is sometimes possible to complete a deed in lieu of foreclosure or short sale when the borrower is current, but it is difficult and may take much longer.

Does my financial affects my chance for a Deed-in-lieu of Foreclosure?

A deed in lieu of foreclosure or short sale is designed for a borrower who simply can not afford their property. It is not designed for a borrower who simply does not wish to keep their property despite an ability to pay for it. However, we have not seen any significant correlation between the assets and income a borrower has and the lenders willingness to consider a deed in lieu of foreclosure or short sale request. Simply, the lender is making the decision between taking the property at a foreclosure sale or agreeing to take it back voluntarily. Of course if they were offered the option of a borrower continuing to make payments and comply with all terms and conditions of the mortgage contract, that would be their choice.