Mortgage Brokerage Firm Fails To Disclose Franchise Bankruptcy

This case involves a young couple from Hawaii who were advised by their attorney to invest in commercial property. They bought a commercial property in California via the defendant mortgage brokerage firm based in Oregon. At the time of purchase, the couple had an understanding that a dry cleaner would be operational on the property. The brokerage firm had been informed by an appraiser that there would be no dry cleaner, but that information was not passed on to the buyers or their real estate agent. The franchise ultimately went bankrupt and the dry cleaner was never opened. As a result of this transaction, the couple lost a substantial portion of their savings. An expert in commercial mortgages was sought to determine if the actions of the brokerage were within the standard of care for such transactions.

Question(s) For Expert Witness

1. What responsibilities do mortgage brokerages have to accurately represent the properties they handle?

Expert Witness Response E-135908

A mortgage broker is obligated to thoroughly vet each transaction to make certain, to the best of their ability, that the details regarding the transaction are accurate. One could argue that the transmittal of facts regarding the purchase of a property such as tenant/franchisee ownership and financial details, lease term, rent schedule, construction timing, etc. is the primary responsibility of the investment sales broker who is involved in selling the property, not the mortgage banker/broker who is responsible for arranging financing. As a mortgage banker, I can attest that we often rely on transaction information at face value from the sales broker to use in our underwriting.

I have noticed on several occasions that sales brokers, particularly for single-tenant properties, are often inexperienced and have a difficult time accurately conveying crucial deal information correctly. For example, for this particular transaction, the buyer may have been led to believe that the tenant on the lease was a corporate operator (owned directly by or via a subsidiary of the parent company) when in actuality it may have been an inexperienced and poorly-capitalized franchisee. In the single-tenant property arena, there is a significant difference in value between a franchisee-owned store and a corporate owned store for this very reason. The corporate owned stores have the wherewithal to ensure that a project reaches completion. That being said, a mortgage banker has the responsibility and opportunity to verify the information presented when performing the underwriting for a loan. This due diligence includes reviewing the lease, confirming the tenant information, checking to see if corporate or franchisee, inspecting the property in person, and requesting additional information from the buyer/seller to make sure that all questions are answered and no uncertainty remains.

It concerns me that this mortgage banker is not local to either the property or the borrower, and leads me to believe that there is a high likelihood that the mortgage banker did not perform thorough due diligence on this transaction. The conventional compensation structure for mortgage bankers is commission based and therefore the mortgage banker is incentivized to get a transaction closed, despite any issues that may exist. It's possible that for this reason, the mortgage broker involved may not have disclosed to the borrower certain pertinent information that may have otherwise convinced them from proceeding with the transaction.