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Enforceable Rate-Lock Agreements

Practice Tips:  Trying to Prevent a Borrower from Shopping

Partnering with Title Mark, LLCcan provide a critical tool in avoiding exposure to a multitude of pitfalls ranging from poorly serviced customers to costly litigation.  Our topic today is timely as competition challenges even the most successful of our mortgage and lending clients.

To set the background leading up to a recent case, rate lock agreements were historically a problem, particularly in the 1990's.  Loan officers often suffered losses by shopping customers who disregarded the legal significance of such agreements.  In addition, consumers, reputable lenders, as well as the entire lending industry, suffered when unscrupulous lenders failed to live up to their end of the lock in agreement.  In 1994, the legislature responded by passing a law intended to give meat to the enforceability of the rate lock agreement.  However, it was not until April, 2004 that we receive clarification from the courts as to what makes this an agreement enforceable.  Click here for River City Mtg v. Gary J. Baldus, et al Court Case.

A court case to take note of is River City Mortgage Corporation dba River City Mortgage & Financial vs. Gary J. Baldus, et al (Minn. App. 2004)  This case is significant to the lending industry because the holding clarifies what is required in order for a rate-lock agreement to be enforceable.  After reviewing this case, we can see several pitfalls that could happen to any lender.  Without an enforceable rate-lock agreement, the borrower is free to shop around and select another lender.  You might also lose a client because of closing delays that are outside of your control yet the language in the rate-lock agreement may not be sufficient to address this issue.

Under Minn. Stat. §47.206 (2004), an enforceable rate-lock agreement cannot be ambiguous. It must have either:

(1)  A definite expiration date; or

(2)  A term of the agreement (the term must be a FIXED period of time). 

Under the facts of this case, River City Mortgage Corporation (hereafter "River City");

(1)  Entered into a rate-lock agreement with the borrower to provide an interest rate of 6.25% if a closing occurred on or before November 24, 2002.

(2)  Due to builder delays, the closing did not occur on time. 

(3)  The borrower secured other financing and closed with another lender on January 6, 2003.

(4)  River City sued for breach of contract and tortious interference with contract. 

River City's rate-lock agreement provided that if the loan did not close by the specified date it would "be re-priced and closed at the greater of (a) the Interest Rate and Discount which RCMF is then willing to make the Loan in view of prevailing market conditions, or (b) the terms shown above" (i.e. the originally locked rate of 6.25%).

The court found the agreement did not have a "definite expiration date" because the contract contained language that bound the borrower to a potentially higher rate once November 24, 2002 had passed and there was no indication in the contract of how long the borrower was bound to borrow from River City.  The court held that this was not a valid contract so there could be no breach of contract.  The agreement was void from the beginning as if there never was an agreement at all.  In other wards, he was free to shop from lender to lender to lender. This was certainly not the intent of the parties but it was the result of a poorly drafted rate-lock agreement.

In light of this case, here are some practice tips to avoid the problems in the River City case.

Rate-Lock Agreements:  Preventing a borrower from shopping around and insuring that terms of the agreement are binding:

In light of this case our practice tips to comply with Minn. Stat. SS 47.206 are as follows:

1:  The Lender AND borrower must sign a written rate-lock agreement that complies with §47.206 (2004).

2:  The rate-lock agreement must be signed at the TIME AN OFFER IS MADE

3:  Include either;

     (A)   An Expiration Date.  I.e. "This Rate / Lock Agreement expires on July 1, 2005", OR

     (B)   A Term of Agreement - which may not be less than the reasonable anticipated closing date OR time required to process, approve, and close the loan. (The Term MUST be a FIXED period of time).

4:  The agreement must express consideration and set forth the relevant terms and conditions. 

5:  A "Clearly implied " (i.e. the eventual closing date) is NOT good enough.  The court will not give it flexible interpretation.  The agreement must state a date (i.e.) November 24, 2005 or 120 days from the date of the Rate / Lock Agreement. 

NOTE; Perhaps you can use a date 120 days in the future. Your pricing will be fixed by agreement of the parties for the first 60 days.  It can than be tied (binding both parties) to a third party index (competitor's posted rate +/- 10 year T-bill or other published rate).

6:  Minnesota Statutes expressly prohibit open-ended language found in rate-lock agreements. Therefore, the agreement will be found void if you use language such as "The rate ABC lender is then willing to make based on prevailing market conditions or 6.25%, whichever is greater."

Please feel free to contact Brad Solheim at bsolheim@titlemark.com or 952-442-7766 with any questions you may have involving rate-lock agreements.

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