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William B. Blanchard reminds home buyers that “A Clear to Close Letter Doesn’t Mean You Are Clear to Close.” Thus, buyers are advised to manage their credit wisely
Experienced real estate attorney William B. Blanchard is publishing comments on issues related to the closing process, advising home buyers to pay particular attention to their credit during the loan process. His comments arose from a recent experience where Mr. Blanchard received notice from a lender that their customer’s loan was “clear to close” (CTC) and asked him, as the Seller’s attorney, to schedule a closing. The CTC is notice that all conditions required to fund the loan were completed, approved by the underwriter and the loan was ready to close. It appeared the loan was ready for funding.
On the morning of the scheduled closing, Buyer’s attorney called and said that his client’s loan was being sent back to the underwriters because of a credit issue that appeared on their last credit inquiry. The borrowers were not aware that their loan required a minimum credit score. On the morning of our closing the lender ran a quick credit check and found the couple had 2 late payments on other credit obligations since making their loan application. The damage was a major drop in their FICO score and a cancelled closing. Now the buyers, who have movers scheduled, have no place to live or store furniture are facing the likelihood that the damage to their credit will take several weeks or months to fix.
Mr. Blanchard thus comments: “Lenders, attorneys, and real estate agents should warn their buyer clients of the consequences of using, not just abusing, credit during their loan application process. Equifax, a major credit reporting agency says that on-time payments and credit history, make up 35% of a credit score. Clients need to know that missing a payment is often fatal while an application is pending even if they’re pre-approved for a loan, have a loan commitment or are clear to close. Loan approval is always subject to last minute credit review.”
Mr. Blanchard explains that having a credit account sent to collections will certainly have a major impact on credit review as will credit utilization rate. This rate is the amount of outstanding debt relative to the total of all credit lines. Equifax suggests that anything over 30% credit utilization will damage a score significantly. Caution clients not to get anxious to buy new furniture for the new home or make any other major credit purchase. Seven percent of a FICO score is impacted by opening new credit lines. Advise clients to wait until they have the keys in hand before going on a shopping spree. Finally, a score can go down if you transfer balances or even pay off a card. Home buyers need to know not to do anything that has the potential to lower their credit score until their loan is closed and they own their new home.
Mr. Blanchard’s advice is that real estate attorneys make credit management warnings a visible part of your client’s home purchase counselling. If nothing more, provide your buyers with a copy of this article or your own warning as part of your engagement agreement. The following caution has a prominent position in my client engagement agreement. I don’t want to hear, “you never told me” if the loan is rejected.
Mr. Blanchard suggests a written caution along the lines of:
“Congratulations on your contract to purchase a new home and your pre-qualification for a loan. A word of caution regarding managing credit during your loan process. Lenders use your FICO and credit reports for approving your loan and setting your interest rate. Your lender most likely reviewed both before providing your pre-approval letter. Be careful with your use of credit while your loan is being processed because your loan can be rejected for damaging changes to your score and report. This can happen up to the time you’ve completed your closing and have the keys to the new home.
The following are credit situations to avoid during your application process:
· Do not use credit cards excessively. Keep balances below 30% of your credit limit and don’t make any major purchases;
· Do not let current accounts fall behind. Missing one payment during the loan process can lead to a substantial reduction to your score and loan rejection;
· Do not co-sign for anyone on a new account or loan.
· Do not give permission to anyone to run your credit (by applying for new credit accounts). The furniture for the new home can wait until you are holding the keys. New credit inquiries will reduce your score and can lead to denial of your credit application.”
The complete commentary on “Managing Credit During the Loan Process” by William B. Blanchard is available on his blog at https://williamblanchardblog.blogspot.com/
William B. Blanchard, Esq. cautions agents to avoid forwarding emails that contain wire transfer instructions for real estate transactions
In light of the frequent scams involving wire transfers of funds for real estate transactions, real estate lawyer William “Bill” Blanchard alerts buyers and real estate businesses to this recurrent problem. The basic model of the scam is that scammers intercept and replace wire transfer instructions sent via email between the various parties to a real estate transaction. The buyer then wires the funds for the scheduled transaction, only to find that the funds were sent to the scammers’ accounts where they quickly disappeared.
Recently a court had to address such issue. A federal district court in Kansas upheld a jury verdict in this regard in the case of BAIN v. PLATINUM REALTY, LLC. There, a jury found a real estate licensee 85% responsible for the buyer’s losses, which occurred when the buyer transferred purchase money to fake account after licensee allegedly forwarded email containing fake wiring instructions to the buyer. In this case, a real estate buyer (“Buyer”) purportedly received an email from the listing broker (“Broker”) that provided new wiring instructions for the upcoming closing on a property. The Buyer used the false instructions to wire the purchase money to the fraudulent account and lost $196,622. The criminal had infiltrated the email exchanges between the parties to the transaction and created fake email accounts that were very similar to the email accounts used by the parties. The criminal had used these accounts to transmit the false wire instructions that were eventually sent to the Buyer.
The Buyer brought a lawsuit against a number of parties, including the Broker. The Broker claimed that she had never sent the email with the false wiring instructions. She had initially forwarded an email with the false wire instructions but she had sent it to one of the fake accounts set up by the criminal. She claimed that she had not sent the later email that the Buyer did receive and used to send the purchase money to the fraudulent account.
The case went to trial, and the jury found that the Broker was 85% responsible for the loss and the court entered judgment against the Broker for $167,129. The Broker filed a post-trial motion seeking a determination in her favor. Defendants argue that the evidence was insufficient to support the jury's finding in favor of plaintiff on his claim of negligent misrepresentation.
The Court instructed the jury concerning the elements of that claim as follows:
One who, in the course of his or her business, supplies false information for the guidance of another person in such other person's business transactions, is liable for damages suffered by such other person caused by reasonable reliance upon the false information if:
1. The person supplying the false information failed to exercise reasonable care or competence in obtaining or communicating the false information; and,
2. The person who relies upon the information is the person for whose benefit and guidance the information is supplied; and,
3. The damages are suffered in a transaction that the person supplying the information intends to influence.
The district court affirmed the jury verdict. The court rejected the Broker’s argument that she did not send the email to the Buyer that was used to send the wire, finding this was an issue of fact for the jury to resolve as there was some evidence that the Broker had sent the later email. The jury determined that the Broker had sent the email, and so the court affirmed the jury verdict in favor of the Buyer.
William Blanchard notes that “theft of closing funds or sale proceeds is nationwide problem. The internet is everywhere, and it has become rather easy for a scammer to hack into email accounts and/or create fake identities to divert the funds for a real estate transaction. In some states, including Illinois, there are laws requiring a ‘Closing Protection Letter (CPL)’. This is a form of insurance issued by title insurance companies, insuring the actions of a particular attorney, agent, and/or closer in conducting a closing. To bolster lender confidence in agency closings, major title companies and underwriters issued CPLs indemnifying lenders and buyers from losses occurring during the closing process.”
“Courts in many states without CPL legislation are struggling to justify decisions finding title companies and individual agency or agent’s errors and omission insurers responsible to the parties to real estate transactions that fail due to loss of funds or to sellers whose proceeds end up somewhere other than intended. Even though millions of dollars are being hijacked by unscrupulous closing agents, attorneys and hackers, there are no appellate or supreme court cases on the issue of title insurance company responsibility for loss due to fake wire transfer instructions involving CPLs,” concludes Mr. Blanchard.
The underlying case is JERRY BAIN, Plaintiff, v. PLATINUM REALTY, LLC and KATHRYN SYLVIA COLEMAN, Defendants, Case No. 16-2326-JWL United States District Court, D. Kansas (June 25, 2018). The Court’s memorandum and order upholding the jury verdict is at https://www.gpo.gov/fdsys/pkg/USCOURTS-ksd-2_16-cv-02326/pdf/USCOURTS-ksd-2_16-cv-02326-3.pdf