Forensic Loan Audits – Debunked and Demystified

What can an Audit do for you?

When researching loan modification companies or attorneys, one will often see a reference to the firm doing a “Forensic Loan Audit” of your documents. It is claimed that the audit will “discover violations of TILA/RESPA, find fraudulent misrepresentation, and identify the terms of your loan, fees and other “pertinent” information. Then, you should take the audit to an attorney who can use it to achieve a loan modification, or file a lawsuit.

What does this mean? Is it valid? What is the real story behind audits? This article will try and clear up the subject for better understanding.

A Forensic Loan Audit is a process that involves the examination of all of your loan documents. The purpose of the audit is to find violations within your loan documents that can be used to your advantage under the Truth In Lending Act or the Real Estate Settlement Procedures Act. These pieces of Federal legislation are the guidelines for lending and the disclosure of costs related to any loan. Remedies for violations are damages for up to one year, and a Three Year Extended Rescission for specific violations of required “material disclosures”.

There are variations of Audits, but essentially there are only two true types of audits:

Low Level or TILA/RESPA Audit
This audit is the “typical” audit that most companies perform. It is software based, and it looks primarily for Truth In Lending and RESPA violations. The purpose of this audit is to attempt to achieve “rescission” of the loan. Rescission means that you are entitled to cancel the loan. However, cancelling the loan does not mean that you get the home free and clear, as some people would lead you to believe.The problem with rescission of a loan is that to cancel the loan, the borrower must be able to “tender an offer” of all money borrowed from the lender, minus all costs of the loan and all payments. The outcome is to “restore” all parties to a state of being prior to the loan being taken out. In California (as in most other “bubble locales”), most homeowners, for various reasons, have no ability to tender this offer. Most often, the lack of ability to tender the offer is that the homeowner cannot find the financing to replace the loan. Therefore, rescission is ineffective, and lenders know this. (See more in my earlier IamFacingForeclosure article, TILA and RESPA Ineffective In Real-World Foreclosure Defense).There is an “Enhanced” version of the TILA/RESPA audit. This audit purports to look for evidence of fraud, fraudulent misrepresentation, breach of contract and other issues with the loan. The problem with “Enhanced” audits is that the firms who are attempting to look for such only do so upon a superficially. They look at the loan from a myopic level and never dwell deeper in what has occurred.

To determine if you are dealing with a firm using either of these approaches, just ask if they use software for the audit and Truth In Lending Disclosure results. If so, you know that they are likely a “Low-Level Audit Firm”. To further determine the firm’s audit ability, just ask them to explain the Securitization Process in detail, and watch them stutter. Or ask them about the technical aspects of the Foreclosure Process and have them explain it in detail. Or ask them about MERS. These firms do not understand these topics and will typically not be able to offer explanations of such subjects nor can they explain the underlying issues regarding these topics.

Finally, just look at their website. If information is very general in detail, it is likely that you are speaking with someone who is only doing the low-level audit. Additionally, if the website quotes a court case and or a specific law, but offers no analysis of the underlying decision, you can certainly bet that the firm is a Low-Level Audit firm.

Most attorneys have major issues with these type of audits. In each category, they simply announce whether the applicable test was “passed or failed”. No other explanations are given. The attorney is then left to come up with the reason for the failure.

If litigation is involved, then the attorney is at a great disadvantage. To receive a Temporary Restraining Order or a Preliminary Injunction, the complaint must be argued with “specificity”. This means that the allegations must be described in detail, explaining what has occurred, and often how it occurred. With the TILA/RESPA audit, even if violations are found, the violations are not described for a “specificity” argument. Often, LFI has been contacted by attorneys using these audits for assistance in what the actual findings meant, and then for instructions on how to argue specificity. Once we have explained and given them guidance, they seek to use LFI.

By the way, it should be mentioned that the reason for most Temporary Restraining Orders to be denied is specificity of the arguments.

The second audit that you may find would be the Predatory Lending Audit. It is rare to find a firm that is competent in conducting this audit. That is because it is performed by hand, requires people who not only understand the lending process, but is well versed in not just TILA and RESPA, but is also very familiar with many other Statutes at the State and Federal level. A competent firm doing this type of audit will know Securitization inside and out, be able to obtain Pooling and Servicing Agreements, 10-K filings, FWP documents, Mortgage Loan Purchase Agreements, and then know the Foreclosure Process in detail for their state.

Predatory Lending Audit
This audit is the “High Level” audit. The purpose of the audit is to determine everything that happened regarding the loan. It identifies not just TILA/RESPA violations, but also numerous other violations designed to allow attorneys to file lawsuits to stop foreclosures and to win damages. There are very few companies who can do a “quality” Predatory Lending audit. This is because to do such an audit, one has to be familiar with court processes and the thinking of lenders and their defensive posturing. The LFI [Ed. Note: - LFI is the author's company] audit is a Predatory Lending Audit, designed to assist attorneys in the lawsuit. It is a “Living Audit”, constantly being revised due to the increasing case law and also due to LFI developing new tactics and legal challenges for attorneys.

To effectively perform a Predatory Lending audit, the audit must be done by a professional familiar with the loan process, forms, regulations, lender practices and broker practices. To be equally effective, the auditor must also understand the laws pertaining to not just disclosure requirements, but often contract law, tort law, civil law, foreclosure law, and other pertinent statute.

Most important is that an auditor must be part detective and part mind-reader. That is because the auditor is dealing with only a portion of the loan file, the portion that has been provided to the borrower by the broker and the closing documents by the title company and lender. Missing will be all the loan documents that the lender has generated for approving the loan. This includes underwriting approval, doc order forms, rate lock requests, rates sheets, and other various documents related to the approval. Usually, the Appraisal is absent as well. As a result, the auditor must use industry knowledge, common sense and intuition to fill in the gaps as to what happened with the loan.

To develop a competent “Predatory Lending Auditor”, it takes my company 4-6 months to train an auditor to a level where he is considered competent and capable of performing audits on his own with no supervision.

Once a Predatory Lending audit is completed by the auditor, it should not be sent out to the client. Instead, it should be reviewed by the head auditor for final sign-off for accuracy.

( LFI uses a “two part review” whereby after the initial review is completed, I do a final review on each and every audit to determine that the audit is completely accurate, and that nothing has been missed. Usually, I will still find violations, mostly as a result that I have done audits for so long, I pick up on violations that may occur once every 500 audits or less. Such violations cannot be taught, instead they can only be learned through experience.)...

To read the original article click here

Other articles of interest...
Foreclosure suit hits X/O condo site
Next Bank of America CEO must rebuild firm's image
After Ken Lewis' departure, next Bank of America CEO must make Merrill deal pay off
I.M.F. Calls for Overhaul of Financial System
The International Monetary Fund said Wednesday that “the global economy has turned a corner”
Mortgage Broker Firms to Fall 72 Percent from Peak
The number of mortgage broker firms nationwide is expected to fall a staggering 72 percent from its peak back in 2005,