A clawback in the mortgage lending industry may sound a bit desperate… and, well, it sort of is. A clawback generally refers to the recovery of money that was previously paid or transferred. The term can arise in several contexts. For example, a mortgage lender or investor may require a mortgage broker, loan originator, or other party to repay compensation, premiums, or other amounts if a loan is paid off unusually quickly, defaults shortly after closing, or fails to satisfy contractual representations and warranties. The specific circumstances in which a clawback is permitted depend on the applicable contract and law.
The term clawback is also used in bankruptcy and insolvency proceedings. A bankruptcy trustee may be authorized to recover certain payments or transfers made by a debtor before filing bankruptcy, such as avoidable preferential transfers or fraudulent transfers, and return the recovered property or funds to the bankruptcy estate. In this context, a clawback is intended to prevent certain creditors or other parties from improperly benefiting from pre-bankruptcy transfers at the expense of the bankruptcy estate and other creditors. Thus, in mortgage lending, a clawback generally means taking back funds that were previously paid when a contractual or legal basis permits their recovery.
