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.
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.
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.