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February 27, 2016

The Compliance Agreement

The Compliance Agreement
This document is often part of a loan package. While not notarized, “The undersigned hereby agrees to cooperate”. This cooperation includes working with both the lender and the Escrow or “Closing Agent” to facilitate “reasonable requests”. This cooperation is subsequent to the closing, on an “if necessary” basis. Said cooperation includes providing any and all documentation “deemed necessary or desirable”. It is very open ended with an enforcement clause, to be discussed later in this installment.

The affiants to this agreement, often both the buyer and the seller, are obligated to assist, as “necessary”, to complete the transaction. This completion can include verbiage to include the marketability of the loan and/or securing title insurance. They may be requested (really required) to re-execute documents or sign additional documents. They may also be asked to provide previously “not relevant or considered” documents, to facilitate the closing.

Score one for stating the obvious. While researching this blog, one of the compliance agreement documents specifically stated: The sellers are not required to perform duties and responsibilities of the buyer, and the reverse is also understood. As mentioned the responsibilities of the affiants is a bit open ended. They are both required to not only facilitate requests “deemed necessary” but also those “desirable”. An up to date appraisal would certainly be desirable, but it’s not clearly spelled out who would be required to pay if this was requested. Similarly, it’s not clear who would be responsible for expenses to make the loan “insurable”.

While this document is usually a single page; the issues are rather complex. There are four parties involved: The Lender, the Title Co., the Borrower, and the Seller. It’s easy to visualize conflicts developing. The “enforcement arm” is frequently in the last paragraph. This section includes for recovery of all expenses, and lawyer fees, by the winning party if it is adjudicated.

Thus failure to comply with an “it’s desirable” request (demand?) from Title, might result in Title obtaining the item and billing the, for example; seller. Additionally the seller would, if they contest the cost, and lose; have to pay the attorney fees of the Title Company. Quite a lot of responsibility is included on that one little page. Few bother to read it. It’s generally explained (not by the Notary!) as agreeing to resign a lost document; but it really comprises much more.

I often wondered why such a “strong” document is rarely if ever notarized. Perhaps the public perception of notarized documents being “binding” and others “contestable” is in play. Whatever the reason, all affiants should be aware of the broad scope of the Compliance Agreement. It’s more than just allowing clerical errors to be corrected, much more. I have heard it explained away as only allowing for the correction of typographical errors. “If we put the comma in the wrong place and say you only pay fifty cents a month, not five hundred a month; we are allowed to correct that typo”. Yes, it’s that; but also much more.

How does this apply to the notary? From my prospective the issues are so broad, vague and potentially of great economic effect – I would not attempt to “explain” it; not a bit. If asked a question related to the Compliance Agreement, for me it’s an immediate call to the Loan Officer.

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  1. HI Jeremy,

    The only comment I have is that in most (>90%) of my signings (76.2% this year are refinance) the Compliance Agreement is notarized. If such is the case there is also a Limited Power of Attorney to allow them to make corrections of a clerical or typographical nature. The LPOA specifically states that the LPOA cannot be used to make any changes to the loan itself )rate, payment, amount, etc)

    Comment by Miguel Buchwald — March 4, 2016 @ 8:12 pm

  2. It seems that you are referring to the Correction and Compliance Agreement. A separate Compliance Agreement usually refers just to the fact that the signer will comply within 30 days of a request to either provide more documentation or sign additional documents in order to fund the loan.

    The Correction Agreement part is for clerical, etc., errors.

    Comment by Sooz — March 5, 2016 @ 3:42 am

  3. FYI – for nearly every signing I do in the LA area, this document is notarized. Perhaps is varies by country and/or state. I’ve seen variations where the Compliance agreement is merged with an E&O Agreement. Most of the language only pertains to ensuring marketability of the loan and to protect the lender in case they failed to deliver a necessary document to the buyer of the loan (usually an agency such as FNMA).

    Have there been any cases where borrowers and/or sellers have been ‘abused’ (required to submit substantial additional funds after closing)? I’m not sure if the issues in this document are ‘…broad, vague, and potentially of great economic effect’, but it can’t hurt to play it safe as with any other document when asked to explain potential legal consequences – refer to a lawyer and/or your loan officer.

    Comment by BobH — March 11, 2016 @ 2:30 am

  4. Glad you helped differentiate the two; compliance and correction, huge differences. Always helping to make us sharper and better at our chosen profession. Thank you Jeremy.

    Comment by David R Collins — July 10, 2018 @ 8:54 pm

  5. Errors and Omissions /Compliance Agreement in a Refi has a sections for the Notary to sign. Does it need to be stamped? there is not notary wording.

    Comment by Jennifer Randall — July 7, 2020 @ 4:57 pm

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