Each day we study new Court filings against lenders for trends to report to our lender contacts and clients.  One trend has been a huge increase over the last several quarters in claims by borrowers that their banks misled them into believing that they could afford the mortgage payments.  Dozens of these cases have been filed by seasoned plaintiffs’ lawyers who should know what they are doing and, given the potential bias against lenders which we have noticed in picking juries recently, this seemed quite troublesome.  However, just this month a California Appellate Court has turned the tide by rejecting significant elements of such claims, and this is good news for lenders everywhere.

More specifically, in Perlas v. GMAC Mortgage, LLC, the First Appellate District upheld the trial court’s dismissal of a contention that lenders have an obligation to their borrowers to assess creditworthiness.  (Case No. A125212, Cal. Ct. App. August 11, 2010)  When plaintiffs in that case applied for a purchase money loan, GMAC Mortgage’s processing official mistakenly overstated the borrowers’ annual income, the borrowers thus qualified, and the loan then closed.  Later, after foreclosure loomed, plaintiffs sued GMAC on a theory that the lender should have advised the borrowers that they could not afford the loan based upon the true annual income statements which had been supplied by the plaintiffs.  The Court of Appeal rejected that theory, holding that the lender did not have a fiduciary relationship to the borrower and thus did not have a duty to determine for the borrower’s benefit an ability to repay.  Unless and until the plaintiffs can specifically allege that the lender directly told them that they had ability to make the loan payments, no cause of action can be stated. 

Though this represents a very positive development for lenders, exposure still exists for claims of actual fraudulent misrepresentation.  So, while there is no duty to evaluate financial strength in order to qualify the borrower, there is still a duty to refrain from representing untrue facts.

For any further questions or follow up inquiries, please contact Bill Norman at 415-765-6236 or WNorman@cwclaw.com.

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