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August 2nd, 2019

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Early Sullivan Prevails for Client Sun West in Bench Trial Over Defective Loan

Following a bench trial before the Honorable Dennis J. Landin, a statement of decision was issued in favor of Early Sullivan client Sun West regarding a defective loan it was sold by First Alliance Home Mortgage LLC (“First Alliance”). First Alliance entered into a correspondent agreement with Sun West through which First Alliance would sell loans to Sun West that Sun West would then sell on the secondary market to certain governmental entities, including Fannie Mae and Ginnie Mae. Sun West was required to repurchase the loan in question from Fannie Mae because it did not meet certain regulations relating to borrower reserves. When Sun West demanded that First Alliance repurchase this loan from Sun West, First Alliance refused to do so claiming that Sun West should have caught the borrower reserve problem before purchasing the loan because Sun West had underwritten the loan.

At the trial, First Alliance again argued Sun West was the underwriter, but the evidence at trial showed that First Alliance was the final underwriter of the loan and that Sun West only performed a more limited underwriting review. Further, the evidence established that even if Sun West personnel were engaged in duties similar to those of an underwriter, they were not given the information about the borrower’s insufficient cash reserves until after the time of closing and, thus, could not have caught the issue. Therefore, the judge ruled that First Alliance was obligated under the parties’ contract to repurchase the loan.

First Alliance further argued that Sun West did not sufficiently attempt to mitigate the damages. The court found this unpersuasive as Sun West was not obliged to sell the loan on the open market, and it made efforts to convince Fannie Mae to keep the loan and sought further documentation from First Alliance to rectify the deficiency, which was never produced. Additionally, Sun West proposed a “lender credit” to Fannie Mae to reduce the risk. Due to the reasons listed above the court ruled in Sun West’s favor stating it “did all it was required to do under the law.”

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