RESPONSIBILITY FOR ANSWERING LENDER QUESTIONNAIRES
Question: An owner in our community has reached an agreement with a buyer who wants to purchase the owner’s unit. The lender providing the buyer’s mortgage has submitted a questionnaire seeking extensive information about the community’s finances, its structural condition and pending litigation among other things. Is the board required to respond?
Answer: The short answer is no, but a longer answer will probably be more helpful. Mortgage lenders have been asking questions and association boards and their managers have been answering them for a long time.
Lenders say these information requests are part of the due diligence they must undertake to identify financial, structural or management problems in the community that might affect the ability of the borrower to repay the mortgage the lender is approving.
Associations, for their part, have acknowledged, sometimes reluctantly, that they should provide at least some of the information lenders request, so prospective buyers can purchase units in the community and existing owners can sell them. But boards and managers have also recognized the risks they may incur if they provide information that turns out to be erroneous or is deemed to be misleading.
Those risks were underscored, in bold, by a 2003 Massachusetts Appellate Court decision (Eisenberg vs. Phoenix Association Management, Inc.), in which a manager filling out a lender questionnaire responded ‘no’ to question about whether there were any special assessments pending at the community. Although that was true at the time, the board subsequently approved an assessment to finance a capital repair. The buyer sued, alleging that the answer was misleading, and the court agreed, requiring the association to pay damages and legal fees totaling more than $25,000.
In light of that decision, association attorneys have been advising their clients to approach lender questionnaires cautiously, answering only unambiguous questions requiring straightforward answers and involving information of which they are certain – the number of units in the community, for example, or the age of the buildings.
They should not answer questions requiring expert opinions they aren’t qualified to offer. “Does the association face any potential legal liabilities,” and “Does it comply with local zoning requirements,” are just a few examples of questions boards and managers should avoid.
The consistent if occasionally uneasy balance between what lenders wanted to know and the information managers were willing to provide was shaken three years ago following the collapse of a Florida condominium building (Surfside Towers), when lenders began asking more extensive and more detailed questions about the structural integrity of association buildings. But the advice we had been giving condominium clients remained the same: Don’t respond to questions you aren’t qualified to answer. Give lenders a recent engineering study, if you have one, but don’t try to summarize what it says. Leave it to lenders to read the study, interpret it and assess its implications for themselves.
More recently—some lenders have begun tweaking questions to solicit more specific and more expansive answers than managers want to provide – in effect, encouraging them to color outside the narrow lines they have drawn around the information they can comfortably provide.
One recent example: “Have you received any complaints from unit owners addressing the safety, structural stability or habitability of the project?” Our recommended answer: “We haven’t received any written reports within the last year stating that the buildings are not structurally sound.”
Back to that problematic question about current or anticipated special assessments, which continues to pop up from time to time, we suggest a qualified answer, something like: “The board has been discussing projects that may require a special assessment but has not made a final decision on the amount or on whether or when an assessment might be levied.”
If you aren’t sure how to answer a question or aren’t sure how to interpret it (the wording isn’t always clear), you should consult the association’s attorney. The best practice is probably to have your attorney review questionnaires before you complete them, to make sure they don’t contain any potential legal landmines you should avoid.
What if lenders won’t accept a qualified answer or no answer at all to their questions? This doesn’t happen often, but when it does, we remind clients that there is no law requiring associations to complete lender questionnaires; their compliance is strictly voluntary – a courtesy to owners, but nothing more. Associations have absolutely no relationship with the prospective buyer or the lender, and no obligation, legal or otherwise, to either of them.
Of course, associations do have a relationship with owners and a desire to maintain good relations with them.
But they also have a fiduciary obligation to protect the interests of the community by avoiding the liability risks that responses to some lender questions might create. If a lender is adamant and refuses to approve the buyer’s loan, we suggest that the buyer may want to seek a loan with a lender that holds loans in its portfolio rather than selling them, and so may have more flexible underwriting policies and less demanding questionnaires.
Contact Justin Magsarili for questions regarding how to respond to lender requests.