The pitfalls of a defective loan application
Just as defective closing documents can negatively impact a Lender’s ability to securitize loans, similarly, a defective loan application can also negatively impact a Lender’s ability to securitize the resulting loan. This is because information provided on a loan application, including borrowers’ incomes and employment history, is vital information that helps determine a borrower’s creditworthiness. If the loan application is defective due to a Lender’s negligent failure to verify the information submitted, it could lead to a defective loan entirely.
A case that illustrates this is CitiMortgage, Inc. v. Just Mortgage, Inc., No. 4:2009cv01909 - Document 242 (E.D. Mo. 2013).
On November 20, 2009, plaintiff CitiMortgage, Inc. filed a breach of contract lawsuit against defendant Just Mortgage, Inc. CitiMortgage alleged that Just Mortgage delivered twenty-seven loans that failed to conform to the terms of the contract and that Just Mortgage subsequently refused to cure or repurchase these loans, thereby breaching the contract. CitiMortgage cited amongst other defects, defective loan application packages that rendered loans defective. CitiMortgage is in the business of purchasing and reselling loans, and the defective loan applications made the loans unsalable. CitiMortgage moved for summary judgment.
CitiMortgage was granted summary judgment due to the defective loan applications in the loan packages. CitiMortgage was granted damages, costs, attorney's fees, pre-judgment interest, post-judgment interest, and an order compelling Just Mortgage to perform its obligations under the contract, namely, repurchasing the twenty-seven loans at issue.
Below are a few examples of loans rendered defective due to defective loan applications:
“After purchasing the Beevers Loan from Just Mortgage, CitiMortgage discovered that the Beevers Loan application package misrepresented the borrower's income. After inputting the correct income, the debt-to-income ratio for the Beevers Loan exceeded the applicable underwriting guidelines.”
“After purchasing the Collins Loan from Just Mortgage, CitiMortgage discovered that there was alleged identity fraud11 in connection with the Collins Loan application package.”
“After purchasing the Mollah Loan from Just Mortgage, CitiMortgage discovered that the Mollah Loan application package failed to disclose two other borrower mortgages. After inputting the correct debt, the debt-to-income ratio for the Mollah Loan exceeded the applicable underwriting guidelines.”
It is often easy for lenders and loan originators to ignore the accuracy of information collected on a loan application because it is the preliminary step to a loan that may not close. But as shown above, the information collected on a loan application can have far reaching implications, including rendering the entire loan defective.