THE BLOG

Beware the Loan Application

04/23/2015 12:20 pm ET | Updated Jun 22, 2015

You refinance your house or purchase a new one. You buy a piece of investment property and you apply for a loan. The mortgage broker sends you an application. You give it a glance and you sign it. The mortgage broker tells you it is "just a formality, the lender is going to run a credit check anyway". In the fine print on the last page of the application there is a paragraph that warns you that pursuant to Title 18, United States Code Section 1001 there are penalties for putting false information on the loan application. You don't notice this, or if you do, you ask the broker about it. The broker tells you "it's nothing". The application is submitted and the loan is approved. You forget about it.

Sometime down the road you find yourself in divorce court, or in family court with a dispute over child support, spousal support, or some financial issue. If your adversary has done due diligence they have subpoenaed that loan application. While you are in court arguing that your income is $25,000 per month, your adversary presents the loan application to the court and it says your income is $35,000 per month. While you claim that you owe money to other creditors, the loan application does not reflect that. And when you contend that your net worth is "X", the loan application states it is "Y". All of a sudden "just a formality" is anything but. Now you have to try to explain that the application is inaccurate, that the loan broker filled it out and told you to sign it. That you didn't look it over very carefully, in fact, you didn't look it over at all. Your credibility has just left the courtroom.

This tactic is used in a family law proceeding fairly often with very damaging results. A judge, duty-bound to uphold the law, isn't going to just gloss over the fact that you signed this form with a warning on it of the effects of making a misrepresentation or an actual false statement. If you say you were unaware of the consequences, your credibility is now called into question. If you say that the loan broker completed the application for you and you did not check it, same result. The more significant issue, however, is that the court can now make orders based upon what is in the application whether that information is accurate or not.

While most people don't expect that these applications often see the light of day, the truth is that they do. You cannot rely on the broker or anyone else who tells you not to worry about what the application states. In many situations, including divorce court, that application can end up costing you plenty.