Default Featured image

False Information on the URLA Really Matters

Creditor-Side Bankruptcy and Real Estate Law by Peter N. Brewer, Esq.

In the days before the financial crisis, it was common that borrowers or their loan brokers would intentionally falsify information on the Uniform Residential Loan Application (URLA) to qualify for a loan.  This was especially true with so many lenders offering Stated Income and Stated Asset (SISA) loans.  While few borrowers or their brokers have suffered drastic legal consequences from this practice (besides borrowers receiving loans they could not afford and facing foreclosure) a bankruptcy court recently denied a discharge for a borrower who was not truthful on her URLA.

Facts of the Case

In In re: Trimble, the borrower, Trimble, was a real estate professional who purchased a home.  As part of the purchase, Trimble completed a URLA where she stated that her monthly income was approximately 250% higher than it actually was.  In addition, she stated that she was planning on renting out another property she owned, which never happened.  Soon after receiving the loan Trimble defaulted.  The lender proceeded with the foreclosure and received a deficiency judgment against Trimble personally.  Trimble filed for bankruptcy protection in hopes of receiving a discharge, which would absolve her from any personal liability on her debt.

Holding

The court found that Trimble was not entitled to a discharge of the deficiency judgment because she had intentionally misstated her financial condition.  Under the bankruptcy statutes, while most debt is dischargeable, a debt can become nondischargeable if it was incurred through a fraudulent written statement about the debtor’s financial condition.  Here, there was no dispute that the URLA was a written statement about the borrower’s financial condition.  Further, the evidence demonstrated that the monthly income was false.  Finally, the Court found that the lender actually relied on the URLA to approve the loan and the reliance was reasonable because SISA loans were standard industry practice at the time.  Accordingly, since the lender was able to prove fraud, the deficiency judgment was deemed not dischargeable.

Takeaway

This decision was made by the Bankruptcy Court for the Northern District of Mississippi.  Accordingly, it has no binding effect on California courts.  The key issue was a determination by the court that the lender’s reliance was reasonable.  The court found that because many lenders granted SISA loans, blind reliance on the URLA alone was reasonable.  However, it seems that other courts may find that SISA loans were, on their face, unreasonable or that the extremely high incomes reported by borrowers should have triggered a duty to investigate.  If either of these proves to be true, then a lender would likely not be able to prevent the discharge of the debt.

If you are a creditor dealing with a matter similar to the contents of this article and believe you need real estate legal representation, please contact Brewer Offord & Pedersen LLP at (650) 327-2900, or visit our website at www.BrewerFirm.com.

Latest Posts

Real Estate Contracts & Transactions

Out of Contract? Not So Fast…

by Adam Pedersen, Esq. on August 28, 2018

In the highly-competitive real estate market in California, agents are being more aggressive in enforcing contract terms. So before you tell your client that you are “out of contract”, you might want to be sure the contract is actually cancelled! [Read More]

Landlord & Tenant Law

What a Three-Day Notice to Pay Rent or Quit Really Means

by Brewer Firm Team on September 20, 2018

It is after Labor Day weekend and that means school supplies, summer vacation credit card bills, and preparing for the holidays. With all these added costs, the tenant may not have enough money to pay rent and the landlord serves [Read More]

Real Estate Contracts & Transactions

Can A Buyer Back Out of a Non-Contingent Offer?

by Simon Offord, Esq. on October 2, 2018

In my last article, we discussed liquidated damages in the context of a residential real estate purchase contract.  This article will examine whether a buyer may have a right to back out of a contract and receive their full deposit [Read More]