Arizona Residential Mortgage Brokers: Potential Additional Liability Exposure on the Horizon
by Bob Henry
Arizona Senate Bill 1026, introduced by Senator Ableser, proposes some significant changes to the law governing Arizona’s residential mortgage brokers that could expand their potential liability arising out of their day-to-day business dealings.
The bill proposes amendments to A.R.S. § 6-909, which currently sets forth various “prohibited acts” for those who are engaged in the business of making or negotiating “mortgage loans” in the State of Arizona. If enacted, S.B. 1026 would impose upon mortgage brokers an independent duty to verify a loan applicant’s ability to repay a loan, which historically has been the obligation (from a business perspective) of the institution actually providing the loan to the borrower, and not a statutory obligation or duty of the person or institution helping a borrower secure the loan.
Specifically, the law would prohibit mortgage brokers from making, providing or arranging for residential mortgage loans “without verifying the borrower’s reasonable ability” to repay the loan, including payments related to that loan (e.g., real estate taxes, HOA fees, etc.). The mortgage broker’s verification of the borrower’s “ability” to satisfy the loan would require the mortgage broker to review various documents that mortgage brokers would typically or presumably be reviewing and considering in the ordinary course (e.g., a borrower’s tax returns, payroll receipts, etc.), but nevertheless to date has not been required expressly by statute by the “mortgage broker” involved in the transaction.
If enacted, this law could expand, at least impact, the potential liability of residential mortgage brokers in various ways. In litigation with borrowers arising out of residential loans gone awry, borrowers might contend that “their” mortgage broker did not sufficiently advise them of the risks associated with that loan and verify what was required from them; borrowers will then assert claims relating to their mortgage broker’s failure to do so as part of their claims or defenses in litigation that arises out of their failed loans. In litigation brought by those providing the loans, lenders might argue that the mortgage broker (not the defaulting borrower likely with little or no resources available to him, her or it) was indeed the party responsible for the defaulted loan, or lenders and mortgage brokers may end up asserting cross-claims against one another.
While claims, from just about any angle, would be contract-based in whole or in part, a statute imposing this affirmative duty on mortgage brokers by statute could impact, perhaps significantly, future litigation in many ways – some of which would obviously be problematic for the mortgage broker industry from a general liability perspective and, conversely, some of which could even be helpful (especially for those in the industry that comply with what the statute expects and requires, giving them the comfort and potential argument that “we complied with the applicable statute in every sense” as additional cover in future litigation).
S.B. 1026 is indeed just a “bill” – proposed legislation. No doubt the stakeholders on all fronts will weigh in with their comments about it during the legislative process.