Mortgage Contingency Clause Continues to Confuse
by James L. Goldsmith, Esq.
No provision of the new Standard Agreement for the Sale of Real Estate (AS-R) has spawned more controversy than the mortgage contingency clause. The source of that controversy? Identifying the mortgage lender(s) to whom the buyer is obligated to apply for the mortgage loan.
While the form has withstood the scrutiny of PAR’s Standards Forms Committee, questions remain about how the form is used: specifically, how the mortgage lender identification option is handled. In introducing the form, PAR staff and instructors said that the purpose of identifying a mortgage lender was not to direct buyers to lenders owned or affiliated with listing brokers or to wrest control of the selection from the buyer. The principal purpose of identifying the mortgage lender is to enable buyers to demonstrate their intent to make a mortgage application to the lending institution that provides pre-qualification.
Incidents reported to PAR legal counsel suggest that not every licensee is exercising caution when using the optional lender identification line. In one case, a lender is threatening to file a defamation lawsuit against a listing brokerage because the agent allegedly defamed the lender identified in the buyer’s offer. The listing agent asserts that he met with the seller and expressed his opinion as to the quality of service provided by the identified lender. He claims that he made sure that the seller understood that he was only offering his opinion and that his opinion was based on a limited number of bad experiences.
The lender, of course, sees things much differently. He claims that the listing agent made disparaging and slanderous statements – that the lender was difficult to work with, was non-responsive and did not perform in a timely manner – and that the opinions were presented as fact.
How can REALTORS® avoid these kinds of situations?
Be positive. Don’t advise a buyer or seller to avoid a specific mortgage lender. Instead, propose that the buyer make a mortgage application to a specific lender in addition to any others that she may choose to select. Say something positive about the company and the strength it adds to the offer by naming that company in the mortgage contingency clause.
Follow all of the disclosure and referral rules to ensure RESPA compliance if you are recommending use of an affiliated lender or mortgage broker. There is nothing to be gained by not allowing the buyer to make application to his or her chosen lender.
Watch what you say. Be circumspect in your discussion with the seller when reviewing a buyer’s proposed lender. Make sure your facts are accurate and opinions are clearly identified as opinions.
Avoid exaggerations. Using expressions such as “they’re the worst” will bring nothing but trouble. Consider recommending a lender that you can vouch for rather than eliminating one.
Keep discussions private. There is nothing to be gained by telling a buyer agent or buyer that he has selected a bad lender. Any licensee can be accused by another agent or party who remembers a conversation differently.
Next month’s article will deal with restraint of trade and anti-competitive practices that can arise when brokerages act in a manner that systematically deters buyers from using certain mortgage lenders and/or brokers.
James L. Goldsmith is a member of the law firm of Caldwell & Kearns in Harrisburg and one of the attorneys staffing the PAR Legal Hotline. He represents brokers and salespersons in various legal matters across the state.