What Loan Sellers Need to Know Before Signing a Residential Mortgage Loan Purchase Agreement

Mortgage loan purchase agreements govern the sale of residential loans from originators to purchasers in the secondary market. The parties seeking to purchase loans typically are the drafters of these agreements, and thus the wording of these agreements tends to be overwhelmingly in the purchaser’s favor. Nevertheless, in their zeal to sell loans to purchasers (often referred to by sellers as “investors”), many sellers sign the proposed agreements with little negotiation, often under time constraints. The result can be open-ended financial exposure and litigation risk that far exceeds the small profit generated by selling a loan.

Here are a few examples of types of provisions we regularly flag for clients, and what can be done about them:

1. Fraud Representations Without a Knowledge Qualifier

Many proposed agreements would require the seller to represent and warrant that no fraud occurred in the loan’s origination. Any such assurance, in order to better protect a loan seller, should contain a knowledge qualifier, meaning that the representation and warranty only covers issues or problems of which the seller was aware (or clearly should have been aware) at the time of the sale. Without limiting the scope of the representation and warranty in this way, the seller can potentially be deemed liable even for fraud by borrowers, appraisers, or settlement agents that was not known or easily identifiable by the seller at the time of origination and sale. Wherever possible, insist on a “to the best of Seller’s knowledge” qualifier for third-party acts. This is a standard, commercially reasonable request.

2. Early Payment Default (“EPD”) Repurchase Obligations

EPD provisions require the seller to repurchase any loan that becomes delinquent within a specified window — usually 90 days — after closing. But early defaults are by no means necessarily the seller’s fault. A borrower’s first, second or third payment may be missed or incorrectly allocated due to the purchaser’s servicing errors, such as failing to send a necessary notice or credit a payment. Negotiate express exceptions for purchaser or servicer-caused delinquencies and extend cure periods to at least 10–15 business days.

3. Deemed Materiality Provisions

Some agreements designate certain breach categories as automatically having a “material adverse effect,” arguably bypassing any requirement for the purchaser to show actual harm. This can turn even a minor or technical issue into an automatic repurchase trigger. However, the purchaser should have to demonstrate that the breach actually did materially and adversely affect the loan’s value or enforceability.

4. Unlimited Survival Periods and Statute of Limitations Waivers

We have seen agreements where repurchase and indemnification obligations survive indefinitely and the seller expressly waives all statutes of limitation. The result is perpetual exposure — claims brought five, ten, or twenty years after the sale. Negotiate a defined survival period and never agree to waive the statute of limitations.

These four provisions are just the tip of the iceberg. Mortgage loan purchase agreements typically contain dozens of additional clauses that warrant careful scrutiny, including indemnification obligations, set-off rights, powers of attorney, amendment provisions, cure periods, termination rights, and more. Each one can carry significant financial consequences if left unexamined.

Disclaimer: This blog post is provided for informational and educational purposes only and does not constitute legal advice. The information presented is based on our general experience reviewing mortgage loan purchase agreements and should not be relied upon as a substitute for consultation with qualified legal counsel regarding your specific circumstances.