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Just what is a "loan approval"? part 2
Dear John,
Thanks for your reply of April 29.
I've had more than one purpose in reducing thoughts on loan approval to writing. If it were just you and I trying to develop each others' thinking, we could have covered this ground in a short phone call. However, I've wanted to define the troubled ground: first because the Denver Metro area is still a small community in which to do business, and we are colliding with your language every 10 days or so; and second because we have duties to borrowers related to their sales contracts even though we are not parties to those contracts.
1. Your letter's statement of the issue is excellent: is there a standard meaning for "loan approval" which is neutral between the contract parties, and reasonably specific?
Try this one: "'Loan approval' in the standard of practice of residential permanent mortgage lending means that a credit package including appraisal has been approved by an underwriter employed by the firm which intends to fund the loan, or employed by the firm which has issued a purchase approval or purchase commitment to the funding firm."
While always containing conditions expressed and implied, nearly all loans approved this way will close. Some will be delayed (the percentage determined largely by the skill of the originator), but they'll close. The vast bulk of files with potentially deal-killing conditions are "suspended," in the parlance of our trade.
Sellers and buyers could reasonably rely on such approvals. The definition is designed to separate authentic approvals from "credit approvals" (same as the definition above, but without an appraisal; useful if there is some reason to suspect the buyer's qualification or credit); "pre-approvals" (often used as borderline marketing scams); and cowboy approvals issued by people and firms unable or unprepared to fund.
The definition offered is not only fair to sellers, but buyers can easily ask lenders to comply with or certify compliance with such language.
It's also easy to tack on a buyer's offer or seller's requirement to disclose expressed conditions. I agree wholeheartedly that a disclosure of conditions doesn't necessarily give the seller any remedy, but it would save a whole lot of pain. Nothing is more painful to participants than a last-minute lender delay or cancellation without prior warning, and nobody is angrier than a seller who has been kept in the dark by a buyer who has been struggling to waive conditions, and failed. Condition disclosure would minimize controversy (fewer dueling moving vansÉ.), and encourage negotiations to modify existing contracts.
2. I hadn't forgotten your articles; they are required reading for our staff. The only element in them and in the language you've drafted with which I have serious disagreement is your use of "unconditional" loan approval.
I sent copies of your language to a few dozen lenders, attorneys, and real estate brokers. I asked all if they had ever seen an authentic "unconditional approval." None had.
I believe there is no such thing. (If I'm wrong, please let me know, and we'll push Boulder West into the 20th century.) You might as well insert language requiring the buyer to hold his breath between loan approval and closing. I'm not guardhouse lawyer enough to know how the courts feel about a contract demand for an item which cannot be obtained and does not exist, but I am certain that such a demand is bad business.
It is painful when we tell inexperienced agents and buyers that our firm cannot comply with the terms of their contracts, sometimes days after acceptance. They soon discover that no other lender can, either.
Your paragraph (the tough, unambiguous one) appeared in our office last Friday in a seller counter. The buyer, a real estate attorney relocating from out of state, assumed the seller was so litigious that it wasn't safe to try to buy his house. He knew already that no lender could comply with the language, and grudgingly countered with the language stricken.
I can't imagine that you intend for your language to be used to trigger antagonistic exchanges, or to force uninformed buyers into agreeing to an impossible provision.
There are times when sellers should demand non-refundable earnest money upon loan approval, and times when sellers and buyers should grill lenders about the extent of the loan approval granted. However, if you want the buyer to take all the loan approval risk after the condition is waived, say so; but don't demand that the buyer obtain an imaginary status.
3. I have not formally approached the Commission, but a couple of people brought copies of your language and my letter of the 9th to the Inter-Professional Committee of the Real Estate Commission, and I gather that there was a discussion of the loan approval subject at its April meeting (I'm copying Harry Reagan on this correspondence as he says he missed that meeting). There are Bar Association representatives at each meeting whom I expect would share the minutes with you.
Best regards,
Louis S. Barnes, II
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