The Undisclosed Second Mortgage
Dana is a licensed MLO taking an application for a $290,000 purchase. The borrower, Priya, lists a $40,000 'personal loan' on the application but says it was used to help her brother buy a car and she is not responsible for repayment. During document review, Dana sees the loan's closing disclosure; the collateral is listed as 'real property located at 118 Kodiak Court' - which is the same address Priya is purchasing. The purchase contract shows the seller is an LLC whose registered agent is Priya's cousin. Priya's down payment is 10%, and her debt-to-income ratio is already at 47% without counting the $40,000 loan. Priya asks Dana not to include the loan 'because it's not really mine.'
1. What must Dana do about the $40,000 loan and the seller relationship?
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Dana must treat the $40,000 as debt secured by the subject property - it is a second lien, not a personal loan, and it must be disclosed on the application and counted in the DTI. A borrower's verbal characterization does not override the closing disclosure. Dana should correct the application, include the obligation, and re-underwrite: at 47% DTI before the second lien, adding it will likely push the file out of eligibility, which is a legitimate outcome, not a problem to hide.
The seller/cousin relationship is a potential undisclosed interested-party transaction and possible occupancy or fraud red flag. Dana must document it, notify underwriting, and not proceed on the borrower's assurance. Dana should not accept a request to omit a known debt; that is a misrepresentation on the application.
2. Priya asks Dana to leave the loan off. How should Dana respond, and what are the consequences of complying?
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Dana must decline clearly and explain why: the application must be accurate and complete to the best of the MLO's knowledge, and knowingly omitting a debt is a misstatement. Complying would expose Dana to licensing discipline, potential fraud liability, and repurchase risk for the lender, and would harm Priya if the omission surfaced later.
The professional response is to correct the file, tell Priya the loan will be included, and let underwriting determine eligibility. If Priya refuses to proceed accurately, Dana should document the conversation and decline the transaction. Dana should also escalate the seller relationship to compliance rather than resolving it informally.