Loan Auditors

While it generally true that a holder in due course is not liable for claims made against the seller of a property, there are times when a holder in due course could be liable. If an assignee to a mortgage takes control over the loan when there is a clear violation of the contract under applicable law then that assignee could be liable. Here’s a situation that could lead to a rescission just as if the originator of the loan were still servicing the loan.

Mortgage Company A underwrites a loan for $250,000 to a borrower in January 2008. In August 2009, Mortgage Company A sells the loan to Mortgage Company B. In September 2009 the homeowner loses his job. Mortgage Company B attempts to collect payments for 90 days then begins the foreclosure process. In February 2009, the homeowner discovers a TILA violation after conducting a forensic loan audit. Mortgage Company A failed to provide the necessary disclosures to the homeowner. Is Mortgage Company B now liable and can the homeowner seek a loan modification based on this situation?

The answer, clearly, is “yes.”

We are not attempting to provide legal advice here, but the question is a matter of whether or not Mortgage Company B should have known about the violation prior to purchasing the loan. Since recognition missing required documents is something that a simple review would have uncovered, it can be argued that Mortgage Company B did not do its due diligence. As a holder in due course on the mortgage documents in question, Mortgage Company B could be liable and the homeowner may be able to request a loan modification.