For those brokers still in the loan modification business, this post is long overdue.  Loan modifications for primary residences have fairly strict guidelines in documentation to support the government backed loan modification.  For the rentals, lender standard are much less restrictive when it comes to documentation.  When are you liable for false or inaccurate documentation?

When are you liable?

A common question for many loan modification companies is at what point are they going to be liable for false representations by the borrower.  The general answer is that you are liable just as you would be in any other transaction.  As an authorized agent, you are an agent of the client, the principle,  representing their interests to the lender.  The principle is generally responsible for the acts of the agent, but agents can sometimes be held responsible for their own acts separately and jointly with the principle.

Let us take fraud for instance.  The principle makes a misrepresentation to the agent, which in turns represents to a third party.  If the agent knew it was a misrepresentation and made the representation to the third party knowings its falsity, the agent can easily be held independently liable with the principle.  If the agent had no idea that the representation was false, liability is likely limited to possibly negligent misrepresentation of the agent and fraud for the principle.  The scope of negligent misrepresentation is subtle and is determined through a number of factors including the standard of care.

In the loan modification context, repeating false reforestations to the lender which you know are false, could open you up to independent liability.  If you repeat the false representation without knowledge of its truth to the lender, your liability is limited (not non-existent).  Many brokers protect their liability by having the borrowers prepare the financial documentation themselves and independently.

Bottom line: In any transaction, whether agent or principle, you have a duty of honesty.  There is some wiggle room when it comes to documentation that should not be stretched so far, even if the lender asks you to do it.  For example, expenses are rarely documented, and often lenders are looking at budgeted future expenses.  This gives both client and you some leeway to get the modification qualified; however, abuse of this elasticity will raise red flags.