Navigating Compliance Agreement Mortgages: An Exhaustive Overview

What is a Mortgage Compliance Agreement?

A compliance agreement, in the context of mortgages, is a written agreement that affirms the various types of requirements and conditions that a borrower must meet during the mortgage process. It is generally a legally binding agreement that you sign at closing and is typically not less than 150 words.
This is generally only required when the lender of your mortgage is acquiring the loan and the underlying property from the previous lender, typically through a mortgage assignment.
From a lender’s perspective, this type of agreement provides security in the transaction. In the compliance agreement, you are required to make certain representations . In essence, you are affirming that the property you are purchasing is free of liens or any other type of defect that would be of concern during the purchase process; that there are no new liens or defects that have occurred after the original sale; that there are no restrictions or easements on the property that would prevent you from obtaining title insurance; and that the title insurance policy you are purchasing from the lender, through the lender’s agent or from the title company, is sufficient to cover the loan in the event of litigation.
In addition to reaffirming the representations you are making in the sales contract, a compliance agreement prevents you from filing suit or asserting a claim against the lender if anything does go awry with the property subsequent to closing. Essentially, you waive your right to sue and promise that the lender is not responsible for any such consequences.

The Essentials of a Mortgage Compliance Agreement

A mortgage compliance agreement typically contains several key components. Although the specific terms may vary depending on local laws and practices, most mortgage compliance agreements share a common structure:
Loan amount- The loan amount that will be disbursed by the lender
Owner(s) of the property- The existing owner(s) who will remain on record after the transaction
Purchaser(s) of the property- Includes all new owners who will assume title after the transaction
Lender- The lending entity or individual financing the mortgage
Remainder- All parties who hold an interest in the property after the execution of the mortgage compliance agreement
Location of the property- The physical address of the real estate
Collapsing of all loans- A statement that all loans affecting the property will be combined into a single loan under the mortgage compliance agreement
Reserves- The amount of any remaining reserves held by the lender that will be transferred over to the purchaser
Escrow- Any amounts held in escrow will be handled for the benefit of the purchaser
Collateralization- The agreement is collateralized against the property. It will specify the extent to which the property will be encumbered under the mortgage compliance agreement
Time period- The length of the mortgage compliance agreement. These agreements are usually for short periods of time, often up to a year
Cost of money- The cost of borrowing under the agreement. This is usually no more than 2 percent of the loan balance per month
The language used in a mortgage compliance agreement may have significant legal implications for both the purchaser and the lender. For example, a lender may use a mortgage compliance agreement to move any loans secured against the subject property into a single loan with a single lender. While the lender intends to consolidate its position in the property, the host of other failure to disclose or non-disclosure issues may arise. If there are multiple existing loans, a blanket lien covering the entire property may not provide the lender the level of security needed to protect its rights.
For the purchaser, the lender may not properly define the scope of any remaining interest and the remaining interest may not be clear. This creates the potential for competing claims from other parties retained in the mortgage compliance agreement.

How Loan Closing Process Involves the Use of a Compliance Agreement

When all conditions precedent to closing have been met, which may have been identified in the commitment or at the request of an underwriting approval, there might be a final compliance requirement to be addressed by the borrower prior to closing. This is often referred to as a compliance agreement and is a written acknowledgment by the borrower that (i) certain disclosures, like the HUD-1/1A and GFE, have been issued; (ii) that items have been or are required to be refunded to the borrower; (iii) the borrower will receive certain documents at or after closing; (iv) there are certain fees associated with the transaction and/or that such fees have been disclosed, if applicable; (v) that the borrower grants the lender the right to require the borrower to remedy any non-compliance with respect to the GFE/HUD-1/1A disclosure requirements of RESPA in the event such non-compliance is attributable to the borrower, and/or (vi) addressing other compliance-related issues that arise in the transaction. Although a compliance agreement often is based upon risk assessment, and reflects the application of practical reader experience, it probably should not simply be a form. In each transaction, consideration should be given to (i) whether the compliance agreement should specifically address the extent to which fees not designated as "zero tolerance" under RESPA are not being collected in connection with the transaction, (ii) if the closing date is after the end of the third business day after issuance of the initial GFE, whether the GFE is "reasonably consistent" with the HUD-1/1A, and/or (iii) whether there is failure to refund fees previously paid by the borrower for which a rebate is due following the disbursement of loan proceeds. Compliance agreements may be utilized after the closing to the extent permitted by state law and may or may not be recorded by the lender.

Pros and Cons of Compliance Agreements for Borrowers

The potential benefits of compliance agreements for borrowers include: (1) obtaining conforming status on an otherwise ineligible loan; (2) being able to obtain a loan based on our determination after verification that the borrower has met all obligations under the compliance agreement; and (3) the progress towards lending guidelines is such that the borrower will be able to have a loan approved obtained without defaulting on loan terms after the borrower has lived with the property for a certain number of months, and the borrower is interested in obtaining a loan sooner than would require waiting for the necessary months to pass. As a result, the borrower might be interested in applying or reapplying while the borrower waits for the time period to end.
However, from the borrower’s perspective, there can be both advantages and disadvantages to entering into a compliance agreement. When the borrower goes into default before entering into a compliance agreement, the foreclosure process is underway. Signing the compliance agreement will halt the foreclosure process. If the borrower is successful in making the payments under the compliance agreement, then the representation in the compliance agreement is deemed met. However, if the borrower cannot adhere to the compliance agreement terms, then the lender or servicer can move forward with the Foreclosure.
In addition, the borrower can only move forward with obtaining a loan if the penalty period has passed. If a little incentive is offered for the borrower complying and meeting the time requirements before applying for a loan, then it can benefit both parties.

Common Problems & Solutions Related to Compliance Agreements

The existence of compliance agreements often give rise to disputes. Some of the more common involve claims by a borrower (or debtor) that the agreement is no longer enforceable because it is expired or otherwise outlived its effectiveness according to its terms. A common scenario involves a construction foreclosure action where the proceeds of the sale of the encumbered realty are required to satisfy a compliance agreement. This can implicate the convoluted marshaling of liens provisions in New Jersey law, or the limitations in the Uniform Commercial Code on the variation of a security interest base rate. Each state has its own body of law on the enforcement of compliance agreements. In New Jersey, key decisions on this topic include LG Chem America v. Au New House, Inc., 362 N.J. Super. 62 (App. Div. 2003) (the allocation of the proceeds under a compliance agreement did not violate the doctrine of marshaling of liens); and First Commodities Corp. v. Lafferty, 254 N.J. Super. 151 (App. Div. 1992) (a waiver of the maturity date of a note endorsed by a borrower was not violative of the New Jersey Uniform Commercial Code, and hence, an extension of a rate provided in the compliance agreement was enforceable).
Another circumstance in which a compliance agreement dispute may arise is where a party to the agreement executes a subsequent, conflicting agreement. This circumstance can be examined under the rules of contract novation, as explained in Holes Indus. v. Massaro , 64 N.J. Super. 247 (Ch. Div. 1960). These agreements are often executed in the setting of a resolution of foreclosure litigation. As recited in Holes, the requirements for a novation are; (1) a previous obligation; (2) a new contract between the same parties, but with different terms; (3) that both parties intent to extinguish the old obligation; and (4) that a new contract be entered into.
This leads into a discussion of conditions precedent and the extent to which they may be satisfied. In accordance with the basic elements of an enforceable contract, there are certain conditions which must be met before performance is due. These conditions may lead to litigation when one party contends the conditions have not been met, while another party proceeds to performance. Courts look to the relative obligations of the parties under the contract to determine whether the conditions have been met. For instance, in Central Jersey Bank & Trust Co. v. Vadino, 159 N.J. Super. 305 (Ch. Div. 1978), the court held that a debtor must make a proper presentation of funds prior to maturity in order to obtain the benefit of a grace period under the Uniform Commercial Code. By contrast, in Phillips v. Jupiter Candies, Inc., 163 N.J. Super. 474 (Ch. Div. 1978), the court held a condition precedent inapplicable on the ground that it was lacking in materiality. Generally, courts will workout such differences in accordance with the principles of honesty and fair dealing so that the parties do not suffer from a material breach.

Advice and Considerations Regarding the Law and Compliance Agreements

A common misconception is that a compliance agreement is a mere formality and that its provisions are soft-edged; that is, they may or may not be enforced, depending upon the circumstances. The rules governing compliance agreements, however, are not loosey-goosey, as many think. Compliance agreements are full-fledged contracts, and they are enforceable as contracts, like any other contract. As a result, Defendants should be aware of several important legal considerations.
First, the law requires that a compliance agreement contain an effective date, and it must state the basis for the effective date; however, many will not list an effective date in the "WHEREAS" clauses. Instead, they will say that the date listed in the signature block is the effective date. Second, the law requires that a compliance agreement include a specific statement at the end of the first introductory sentence in subpart (a) of 21 C.F.R. § 7.3(b)(3). See 77 Fed. Reg. at 26519. Third, the law requires that the compliance agreement will become effective only after the Agency promptly completes its review of all the documentation it has requested. Id.
Relatedly, compliance agreements are legally enforceable after entry of the Consent Decree, and so long as the consent decree is effective, the compliance agreement remains in full effect. Contrarily, if a consent decree becomes void for any reason, then the compliance agreement also becomes void.
It bears repeating that compliance agreements are, first and foremost, contracts. As a result, any breach of the compliance agreement may provide the Government legal grounds to impose penalties outside of the terms of the compliance agreement itself. It may be difficult, as a practical matter, to understand exactly what has been agreed to on the client’s behalf by the President or other senior executive(s). For that reason, as with the consent decree, it is critical that clients understand the compliance agreement, review it carefully with experienced FDA counsel, and be sure they know what has been agreed to before it is signed.

Changing Trends, New Developments, and Fast Facts about Mortgage Compliance Agreements

In recent years, mortgage compliance agreements have seen their share of movement in terms of how they are viewed in light of changing regulations. From the Dodd-Frank Act to new Qualified Mortgage criteria, the Federal Housing Finance Agency is keeping close watch over the direction of the mortgage industry. However, that doesn’t necessarily mean that new trends have been fully realized in the market place yet. Because the mortgage compliance industry is highly-regulated, it has arguably seen the most changes in the past few years, with revisions and clarifications on many parts of the Home Ownership Equity and Protection Act (HOEPA) and other relevant acts. The Consumer Financial Protection Bureau (CFPB) continues to meet fairly often with stakeholders and constituents to probe for ways to reduce complexity in complying with federal laws and regulations. The CFPB is an important player because it has authority over the development of rules designed to improve compliance for mortgage loans, while also protecting consumers from predatory lending . For instance, the CFPB has updated the definitions of a small creditor as well as a rural county, in order to give these financial institutions more access to the secondary market. This new rule aims to increase the availability of credit to small borrowers, and thus, places compliance agreement mortgages directly in their sights. Another recent example is when the Federal Housing Finance Agency published a notice of proposed rulemaking to revise the requirements for single-family seller/servicers to align with the recently adopted Ability-to-Repay Rule, or the Truth in Lending Act (Housing Goals). While mortgage compliance agreements aren’t directly in this rule making, it’s clear that lenders should be aware of the changing landscape and shape their policies and practices accordingly for compliance purposes. With the above developments in mind, it’s also worth noting that lenders have seen a shift in their customers seeking out designations such as small creditor and rural-lender, in order to provide a better position in the secondary market. While there are different timelines for utilizing the new rules, it’s becoming a popular trend to capitalize on the newly revised rules.