11/15/2010

If You Got a Home Loan From the Bank, Are You Its Client?

No. You're the borrower. And as the borrower, you voluntarily took the loan from the bank, and according to the usual circumstances of an arms-length loan transaction, there is no fiduciary relationship.

However, Bank of America's investors, for example, include Pimco of Newport Beach, TCW Corp. of Los Angeles, BlackRock, Inc. of New York, and Federal Reserve Bank of New York. Bank of America has about 500 investors, all of whom it may owe a fiduciary obligation because of their investment/purchase of funds. Banks in these cases are the servicers for these investors, with whom they have agreements or contracts. Those contracts are known as PSA's, Pooling and Servicing Agreements, which guide the specific demands made on loan modifications or short sales requested by the borrower. It may not be easy to find out the exact terms  in those agreements, and in fact, it's often difficult to find out what investor holds the note due to the use of MERS in the last few years. But those servicing agreements spell out the relationship of the Bank to the investor, and ultimately, the course of your short sale or loan modification request. The servicer may actually have leeway in negotiating for the investor, but if the investor is able to accuse the servicer it did not act in the investor's best interest, the servicing bank could have a lawsuit on its hands. So you might be told the "investor" is making demands, but is that really the full story?

The banks/servicers frequently require the use of their bank addendums to be added to Realtor contracts--adding another layer to interpret in the transaction.  Here is another use of the term "fiduciary"--On a recently published Purchase Contract Addendum by Wells Fargo in July/August of this year, the following language definitely confuses the issue: "It is the Brokers’ fiduciary responsibility to present the highest and best offer to the servicer." To be very clear, 1) the seller's broker has a fiduciary duty to the seller, not to the seller's bank, and 2) offers are presented to the seller, not to the bank. The "highest and best offer" (and the best offer may not necessarily be the highest price) is presented to the seller, who ideally accepts an offer when it then becomes a contract, which is than submitted to the bank for its approval to accept less than the outstanding loan amount. Naturally, the bank is interested in recouping as much money as possible, but the issue of fiduciary relationship--the person to whom you owe the greatest care--is clearly laid out for brokers in agency law, and that person is your seller if you are the listing broker, not the bank. The broker cannot be the servant of both because the broker already has a contract (the listing agreement) with the seller who owns the property, not with the bank--or investor--which owns the note.

Sellers would like a clear, black-and-white outlook for their property, and it's rarely easy, and full of complications. It's very important for the seller to read the letter issued by the bank when a short sale has been approved--the seller should not assume the bank is issuing language that is completely in the seller's interest without taking the time to examine it, or have it looked at by a tax or legal advisor!

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