If you have knowledge of ever assisted a client in a brief sale or loan modification then you can be aware that lenders frequently request that your clients make financial disclosure. This financial disclosure is usually a condition precedent to the lender modifying the client's loan or it's created a condition precedent to the lender releasing their lien on the property incident to a brief sale. Have you ever thought about whether or not your client should be creating financial disclosure?. What is financial disclosure?. Typically, financial disclosure involves our clients turning over personal financial details to their lender in anticipation of receiving a concession by the lender.
This concession returns within the shape of a loan modification or the lender releasing its lien on the client's property to facilitate a brief sale. The details includes: i bank statements; ii pay stubs; iv profit and loss statements; v tax returns and the like. Why do lenders request financial disclosure?. Before I address this question I should spot out the obvious. The debtor creditor relationship is one regarding the highest many adversarial relationships that exist in our society.
On any provided day, whether we are in a good economy or an evil economy, you can walk into your regional courthouse and you can locate a huge many lawsuits that have been filed by lenders against borrowers for nonpayment on their loans. With this in mind it is appropriate to pose the question: Howcome do lenders request financial disclosure?. If someone owed you money on a loan and they were not creating payments to you then what paperwork should you locate useful in helping you collect your money? Bank statements? Pay stubs? Tax returns? Profit and loss statements? Balance sheets? One reason lenders ask for financial disclosure is that they need to identify personal and real property belonging to the borrower that shall be liquidated to pay below the debt. Another reason lenders ask for financial disclosure is to identify sources of income they can intercept in an effort to pay below their debt. Whenever a borrower fails to pay on a loan that borrower shall be confronted by the lender and the relationship between that borrower and that lender shall grow to very contentious.
Are borrowers obligated to make financial disclosure?. Generally a borrower has no legal obligation to make financial disclosure. Likewise, lenders have no legal obligation to make a concession to their borrowers i. , loan modification or lien release in a brief sale. Loan modifications and brief sales essentially involve an unique bargaining process.
Financial disclosure is component of this bargaining process. The lender has the right to location like a condition precedent to even negotiating with the borrower that the borrower make financial disclosure. Likewise, the borrower is within his or her right to refuse to comply with this condition precedent financial disclosure. However, when a borrower refuses to make financial disclosure then the bargaining stops and the borrower is left possessing to make the payments on his original loan or face foreclosure. Many regarding the borrowers that are now receiving note of for a loan modification or to brief sell their building are in stated income loans.
Many loan brokers and borrowers alike treated these stated income loans as invitations to lie related to the borrowers' income and assets. This is bank fraud and it is not without consequence. Under federal law, bank fraud within the United States is defined, and created illegal, primarily by the Bank Fraud Statute in Title 18 regarding the USA Code. 1344 Bank Fraud Statute states:. Whoever knowingly executes, or attempts to execute, a scheme or artifice.
two to defraud a financial institution; or 3 to obtain any regarding the moneys, funds, credits, assets, securities, or other property owned by, or below the custody or manage of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not higher than $1,000,000 or imprisoned not higher than 30 years, or both. There are civil implications associated with bank fraud as well. Fraud is non-dischargeable in bankruptcy. So the question becomes: How does bank fraud relate to financial disclosure?. If a borrower creates financial disclosure to their lender and the financial details conflicts with the details the borrower provided the lender in his or her loan application then the borrower shall have inadvertently exposed the fraud that he had committed at the time he or she obtained the loan.
Whether consciously or subconsciously borrowers trust they have bankruptcy like a fall return position if they really lose manage over their financial obligations. But where there is bank fraud then the bankruptcy choice shall not exist. A lender can file a lawsuit inside regarding the bankruptcy court called an adversary proceeding. In an adversary proceeding the lender asks the court that the lender's debt be determined to have been the product of a fraud and that the borrower's obligation to repay this debt grow to non-dischargeable within the bankruptcy. Stated differently, in an adversary proceeding the lender seeks to have the borrower's obligation to pay on the loan survive the bankruptcy.
Normally it is difficult for a lender to prove that a borrower committed bank fraud. However, with the advent of brief sales and loan modifications it has grow to easier for lenders to return up with persuasive evidence regarding the fraud. When a borrower creates financial disclosure they shall inadvertently give the lender with very credible evidence exposing the fraud. In that we are talking about real estate secured loans we are frequently talking about loans measured in hundreds of thousands of dollars and sometimes millions of dollars. In a below real estate market a borrower should be receiving note of at liability emanating from his loan s with no problems measured in hundreds of thousands of dollars.
Imagine an obligation of this magnitude being non-dischargeable in bankruptcy. It is a sobering thought. What should an unique estate agent or broker do?. A real estate agent or broker has a duty to disclose facts that should likely affect their client's willingness to enter into or done a transaction. With this in mind, an unique estate agent or broker should disclose any suspicions they shall have concerning likely bank fraud and suggest that the client talk to a lawyer.
This disclosure should be in writing and signed by the client acknowledging receipt regarding the disclosure. A real estate agent or broker does not need to make sure that that the client actually consult with a lawyer. Merely encouraging the client to do so in writing should suffice so long as it is accompanied by the actual disclosure. But if the borrower does not disclose then they shall not receive a loan modification or the lender shall not approve the brief sale. The lender usually has the legal right to refuse to modify the loan or release their lien on the property in a brief sale unless the borrower creates financial disclosure.
For the borrower experiencing mortgage distress he or she is confronted with a difficult choice. Assume the risk associated with financial disclosure in hopes of saving the building or facilitating a brief sale or play it safe and lose the building to foreclosure. I shall be first one to admit that these are not attractive choices. But, more times than not, these are the choices the borrower has to decide from. The lender usually has the legal right to refuse to modify the loan or release their lien on the property in a brief sale unless the borrower creates financial disclosure.
For the borrower experiencing mortgage distress he or she is confronted with a difficult choice. Assume the risk associated with financial disclosure in hopes of saving the building or facilitating a brief sale or play it safe and lose the building to foreclosure. I shall be first one to admit that these are not attractive choices. But, more times than not, these are the choices the borrower has to decide from. I hope you located this story helpful and I wish you all the greatest of luck in your real estate endeavors.
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