Mortgage Fraud from a False WDI Report

Every prospective homebuyer in Maryland should obtain a Wood Destroying Insect (“WDI”) Report prior to going to closing.  The contract of sale should provide the Buyer with the right to terminate the contract if termite infestation or damage is found, or, if Buyer agrees, to allow Seller, at Seller’s cost, to treat the infestation and arrange for repairs by licensed contractors.

When a false WDI Inspection Report is used to obtain a mortgage, buyers may be able to claim mortgage fraud against the seller and other responsible parties.

If you have a potential claim involving mortgage fraud, contact Whitney, LLP for a consultation at 410 583 8000, or use our Quick Contact Form.

Read Whitney, LLP’s blog on mortgage fraud involving condominiums here and read our blog on other types of cases we handle here.

Whitney, LLP represents home buyers in a variety of real estate cases across Maryland, including but not limited to concealed latent defects, misrepresentations by sellers and agents and mortgage fraud.

A Deliberately False WDI Inspection Report Can Constitute Mortgage Fraud

Critical Required Document

Some mortgage lenders require WDI Inspections in order to approve a loan.  For VA loans it is mandatory.  The WDI Inspection Report is sometimes referred to as the “termite certificate.”  A “clean cert,” meaning a negative WDI inspection that finds no infestation or damage, is required by those mortgage lenders, and is regarded as a Critical Required Document to obtain a loan.  Stated otherwise, the loan will be denied if the termite infestation is not treated, or if the termite damage is not repaired.

“Box B” on MD-1 Form

Homebuyers should be aware that if visible evidence of termites is detected by the WDI Inspection, “Box B” on the mandatory MD-1 Form must be checked; and if so, Buyer or other interested party should arrange for a qualified structural professional to evaluate the extent of damage and the need for repairs.  Because additional termite damage is often hidden, an evaluation requires opening walls, removing insulation and other necessary destructive exploration.

As set forth in the state-mandated MD-1 Form that must be used for WDI Inspections for the purpose of real estate transactions, COMAR 15.05.01.14 B. (2), if the inspector finds evidence of the presence of termites, additional investigation is recommended to detect hidden damage. This recommendation is set forth as follows in the MD-1 report form:

NOTE: This is not a structural damage report. If box B above is checked, it should be understood that some degree of damage, including hidden damage, may be present. If any questions arise regarding damage indicated by this report, it is recommended that the buyer or any interested parties contact a qualified professional to determine the extent of damage and the need for repairs.

See MD-1 form. Honest pest control companies uniformly recognize that if visible evidence of either an active or previous infestation or damage is noted by an inspector, it should be evaluated by a licensed contractor, because hidden damage is highly probable.

Concealment of Evidence of Termites

In residential real estate transactions, pest control companies depend on realtors for referral business, and are mindful that sellers and realtors are highly motivated to get to closing without deal breakers surfacing such as a positive WDI inspection for termites and/or termite damage.  Dishonest pest control companies and dishonest sellers therefore will fail to report evidence of termites.

Seller Must Disclose Known Termite Infestation and Termite Damage

Under Maryland law, Seller must provide a prospective homebuyer with either a Disclosure Statement or Disclaimer Statement.

Introduction of the Maryland Residential Disclosure Statement

Disclosure Statement

When Seller elects to provide a prospective buyer with a (“Disclosure Statement”), Buyer is furnished the Disclosure Statement “disclosing defects or other information about the condition of the real property actually known by the seller.” (emphasis added).

The Disclosure Statement contains the following notice to sellers, which states in pertinent part:

NOTICE TO SELLERS: Complete and sign this statement only if you elect to disclose defects including latent defects or other information about the condition of the property actually known by you; otherwise, sign the Residential Property Disclaimer Statement. (emphasis added).

Buyer is correspondingly informed:

NOTICE TO PURCHASERS: The information provided is the representation of the Sellers and is based upon the actual knowledge of Sellers as of the date noted. (emphasis added).

Sellers should be mindful not to answer “Yes” or “No” if in fact they do not know of any termite infestation or damage.  Answering “No” could constitute a reckless indifference to the truth that would be reasonable to charge Seller with knowledge of falsity.

Section 13 of the Disclosure Form

The Disclosure Statement Must Disclose Termite Infestation and Damage

In response to specific questions set forth in the Disclosure Statement Seller must disclose the following information:

Please indicate your actual knowledge with respect to the following:

13. Wood destroying insects: Any infestation and or prior damage?

      [   ] Yes  [  ] No  [   ] Unknown

    Comments:                                                                 

Any treatments or repairs?     [   ] Yes  [  ] No  [   ] Unknown

Any warranties?          [   ] Yes  [  ] No  [   ] Unknown

Comments: (For example: Termite company comes out 1 x/year, no termites.)

*                      *                      *

19. Are there any other material defects, including latent defects, affecting the physical condition of the property?

     [   ] Yes  [  ] No  [   ] Unknown

Directly beneath these representations is the following verification:

The Seller(s) acknowledge having carefully examined this statement, including any comments, and verify that it is complete and accurate as of the date signed. The Seller(s) further acknowledge that they have been informed of their rights and obligations under § 10-702 of the Maryland Real Property Article. (emphasis added).

Disclaimer Statement

Alternatively, Seller may elect to provide Buyer with a Property Disclaimer Statement.

This requires the Seller to notify Buyer of any latent defects or conditions actually known by Seller, which would include a termite infestation or termite damage.

Seller’s Liability for Mortgage Fraud

Seller owes a duty to Buyer to disclose known termite infestation and damage and to accurately, carefully and honestly sign the WDI Inspection Report.  (“Seller acknowledges that all information regarding W.D.I. infestation, damage, repair and treatment history have been disclosed to the buyer.”)

Seller’s false statement or omission on the MD-1 Form, Property Disclosure Statement and/or Disclaimer Statement, supports a cause of action based on violation of Maryland’s Mortgage Fraud Protection Act (“MFPA”).  In pertinent part, the MFPA defines “Mortgage fraud” as follows:

(d) “Mortgage fraud” means any action by a person made with the intent to defraud that involves:

(1) Knowingly making any deliberate misstatement, misrepresentation, or omission during the mortgage lending process with the intent that the misstatement, misrepresentation or omission be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process;

Md. Code Ann., Real Prop. § 7-401(d)(1).

Treble Damages And  Attorney’s Fees Are Available

Section 7-406 of the MFPA provides that a person may bring an action for damages incurred as the result of a violation of the Act, and may seek, and the court may award, reasonable attorney’s fees and damages equal to three times the amount of actual damages.

Pest Control Company’s Liability for Mortgage Fraud

Maryland-licensed pest control companies know that WDI Inspections are specialized inspections “made in connection with a property transfer or for the purpose of securing a real estate loan.”  See COMAR 15.05.01.14 B.  When a WDI Inspection is requested by a realtor, and the MD-1 Report is emailed by the inspector to a realtor, there is no plausible basis for the inspector to claim, in an effort to evade liability, that he “didn’t know it was for a real estate transaction.”

If the inspector finds visible evidence of the presence of termites, and falsely checks “Box A,” indicating no evidence of wood destroying insects, such false statement is a basis for establishing mortgage fraud under § 7-401 (d) (1) and (d) (2) by knowingly creating a false document for use during the mortgage lending process.  If Seller and/or a realtor are involved in a scheme with the inspector to secure a “clean cert,” liability under the MFPA may exist pursuant to § 7-401 (d) (5), which prohibits conspiracies to commit mortgage fraud.

The Consequences of Concealment

It is devastating to discover, after closing, a termite infestation and massive termite damage.  The home may not be safe to live in, and very costly repairs are required.

Sellers, termite inspectors and realtors who know of termite infestation or termite damage are obligated to disclose such information.  In addition to legal remedies based on theories of negligent misrepresentation, and common law fraud, wronged Buyers may seek treble damages and recovery of reasonable attorney’s fees through a cause of action based on mortgage fraud.

Fortunately, home buyers have many legal rights and can take legal action upon discovering deceit.

Daniel Whitney, Jr. and Daniel Whitney of Whitney, LLP

Lawyers for False WDI Mortgage Fraud – Whitney, LLP

If you purchased a home and discovered that a false WDI inspection report was used to obtain the mortgage, you have legal rights and can fight back.

Whitney, LLP represents clients in Maryland in mortgage fraud claims, and provides representation across Maryland, including Baltimore, Columbia, Annapolis, Ocean City, Rockville, Bethesda, Ellicott City, Frederick, Silver Spring and Dorcester.