What Can a Loan Purchaser Do to You Under an MLPA Besides Demand Repurchase?

Besides demanding repurchase, a loan purchaser under an MLPA can, where the agreement grants it, set off its losses against your money before any breach has been proved. In our view, that is the remedy to worry about, because it takes the money and leaves you to sue for it.

One bank-owned correspondent purchaser publishes its correspondent purchase agreement on its own website. Under that form, the purchaser may, “at [the purchaser’s] discretion,” have losses “offset against Correspondent’s/Brokers funds on deposit at [the purchaser] or any affiliate of [the purchaser] and/or from and against future net funding of [the purchaser’s] loans.” The recovery runs against deposits held anywhere in the purchaser’s corporate family and against future fundings.

In our view, the provisions that let a purchaser collect without making a demand cost at least as much as repurchase when they fire, and they get a fraction of the attention.

Why does this gap exist?

This gap exists, in our view, because repurchase is the provision with a price on it, so it is where negotiating time goes. In our experience, early payment default triggers, knowledge qualifiers, deemed materiality, and survival periods take that time, and they deserve it. The provisions that move money without a proceeding, or that govern termination and what it leaves in force where the agreement has no survival clause, get less attention than their cost warrants.

This article works through those provisions, and the terms that sit beside them, in two published forms. The first is the bank-owned purchaser’s correspondent form. The second is a securitization-side mortgage loan purchase agreement between a seller and the depositor for its securitization, filed with the SEC in 2005. It faces a trust rather than a correspondent market, so we use it for contrast, not as a benchmark.

Where does set-off actually bite?

Set-off actually bites at your next funding or against your deposits, before any demand is made.

A repurchase demand is a claim, which you can contest before any money moves. A set-off right converts the same economics into self-help, because the purchaser simply nets its asserted loss out of the next wire. You are now the plaintiff, arguing about money you have already lost the use of. Under the correspondent form that suit carries a further risk, because the prevailing party in an action “to enforce any part of this Agreement, or for a declaration of rights hereunder” recovers its costs, including “reasonable attorney’s fees.”

The correspondent form’s set-off runs against deposits at affiliates and against future fundings. It reaches Losses, which the form counts as any “claims, demands, actions, suits” that “may arise or be made against or incurred by” the purchaser “as a result of” the correspondent’s nonperformance, breach of warranty, or misstated certification in connection with the agreement, and the offset reaches “Losses heretofore or hereafter incurred.” The decision to offset is left to the purchaser’s “discretion.” The securitization agreement grants no set-off at all.

What about a power of attorney?

Neither form reviewed here grants a power of attorney, which tells you nothing about yours.

The correspondent form grants none. The closest it comes is a recital, which says the correspondent desires, “where appropriate, to authorize [the purchaser] to act on its behalf in processing residential mortgage loans qualifying for sale to the secondary market.” A recital states a purpose; it grants nothing. The securitization agreement grants none either; it mentions powers of attorney only in each party’s representation about governmental consents, as an exception for recording.

Whether your own agreement, or anything signed at onboarding, grants one is a fact of those documents.

Can the purchaser change the deal without asking?

In both forms reviewed here, the purchaser cannot change the agreement itself without asking. The securitization agreement may be amended only “by written agreement signed by the Seller and the Purchaser.” The correspondent form makes no amendment effective “unless such amendment is in writing and signed by the duly authorized representatives of all parties.”

The comfort is narrower than it appears. The correspondent form incorporates no seller guide, but it ties eligibility to loans salable to Fannie Mae, Freddie Mac, “or a third party residential mortgage loan investor selected by [the purchaser].” It also lets the purchaser terminate for “Deviation of Loan origination and/or processing under Fannie Mae, Freddie Mac, or third-party investor guidelines.” The purchaser picks that investor, and neither the agencies’ guidelines nor the investor’s need the correspondent’s signature to change.

Where an agreement does incorporate a seller guide, the guide is the document that moves. We have written separately on what an aggregator can change in a seller guide without your consent.

How long do you have to fix a breach?

How long you have to fix a breach ranges, in the two forms reviewed here, from 90 days to none.

The securitization agreement gives the seller 90 days for both of its classes of breach. For one class the clock starts on discovery or notice; for the other it starts “from the date that the Seller was notified or otherwise obtained knowledge of such breach.” In each case the seller must, within that window, either fix the breach in every material respect or take the loan out of the trust. Removal is by repurchase at a defined price or by substitution, on conditions that differ by class. For one class, removal is available only where it cures the breach. Each class carries its own materiality threshold. The correspondent form specifies no cure period; an audit finding lets the purchaser require repurchase at its discretion and terminate at once.

In our view, the clock’s start matters as much as its length, and no cure period at all means the first notice you receive is already a demand.

What happens when the relationship ends?

When the relationship ends, termination is easy. Getting free of the obligations is not.

The correspondent form lets either party terminate on 90 days’ written notice, but notice “will not terminate outstanding obligations to process or deliver Loans in progress, or to service Loans closed hereunder, or to pay outstanding fees or expenses due.” That carve-out runs both ways. The asymmetry is elsewhere. The purchaser may also terminate “for specifically, but not limited to,” nine listed reasons, among them “Higher than average Loan delinquency ratios or performance characteristics,” and an audit that turns up a problem leaves the agreement “subject to immediate termination by [the purchaser].” The securitization agreement ends the parties’ obligations “upon the termination of the Trust.”

The correspondent form does not say how long repurchase and indemnity exposure survives termination; it has no survival clause for those obligations. Its termination clause lists what notice leaves alive and does not list repurchase or indemnity. In our view, the exposure then runs until the limitations period governing the claim expires. We have written separately on how long the representations behind a repurchase claim survive.

What does the indemnity actually reach?

The correspondent’s indemnity in the correspondent form reaches any loss from the correspondent’s nonperformance, breach of warranty, or misstated certification in connection with the agreement, and it is broader than the repurchase obligation beside it.

It runs to “any and all claims, demands, actions, suits, damages, costs, and expenses” that flow from those three triggers. A reciprocal indemnity runs the other way for the purchaser’s own failure to perform, which is the one indemnity in the form that runs in the seller’s favor.

An indemnity phrased that way reaches whatever its three triggers cause, and nothing in the sections read here narrows it below that. It is a separate obligation from repurchase, and, in our view, it can let a purchaser recover on a loan it never had the right to put back. We have written separately on the indemnification cap. The securitization agreement grants no freestanding indemnity for the loan representations. For a breach of those representations, cure, repurchase, or substitution, plus a payment for two specified representations, is the purchaser’s “sole and exclusive remedy under this Agreement or otherwise respecting a breach of representations or warranties hereunder with respect to the Mortgage Loans.” That payment, owed only where the breach triggers a repurchase or substitution, covers liability, penalty, or expense the trust actually incurred and paid, itself or through others acting for it, as a direct result.

The facts the answer turns on

In our view, the thing to worry about is the provision that moves money without a proceeding. A demand can be contested; a set-off has already happened by the time you read the wire. In the correspondent form that provision sits beside the indemnity and the termination clause read above; in the securitization agreement none of the three exists in that shape. Where your own agreement sits on each depends on four things: whose form you signed, whether a guide rides with it, what was signed at onboarding, and what your volume is worth to the purchaser. Those are questions of the paper and of the relationship, and that is the work.

Early payoff and early payment default provisions are a separate subject. We take them up in EPO premium recapture in correspondent lending.