Forensic Mortgage Audits are of Limited Utility

A forensic mortgage audit is an analysis of the loan from the application, to the closing and through the default. The primary goal is determine whether there are violations of the Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA). A secondary goal is to determine whether loan payments were properly applied and all loan charges are consistent with the loan documents. Forensic auditors maintain that this information can give a borrower leverage in mortgage modification negotiations. I’m not so sure.

TILA and RESPA violations, or improper payment applications and loan charges, are claims that the borrower must prove in court. Merely presenting a forensic mortgage audit report that concludes the bank engaged in wrongdoing does not mean that the bank engaged in wrongdoing. The bank is entitled to have the borrower’s claims follow the normal litigation process. This means pleadings, documents discovery, depositions, experts, dispositive motions and possibly a trial. The bank can subject the audit report, and the person that prepared it, to close scrutiny. The bank will have its own competing audit report. This is all time consuming and expensive for the borrower. The banks, of course, know this. They also know that a borrower in mortgage default is not likely to have the financial resources to pay a lawyer to fight the fight. It’s true that this type of litigation is also expensive for the bank, but the bank may just want to see how far into the litigation the borrower’s resources will take him. Think of it like a game of litigation chicken. The bank is in a better position to win that game.