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California Mortgage Lender Acts Like a Mortgage Broker, Creating Fiduciary Duties and Owing Damages to the Borrower. Does It Pay to Say You Will “Shop the Loan”?

A California mortgage lender does not owe fiduciary duty to a borrower; a mortgage broker does. The difference is substantial, and a loan officer in Ventura County learned the hard way. A fiduciary duty is a duty of both loyalty and good faith.

Borrower Tonya contacted loan officer Anthony in response to an advertisement. She had existing first & second loans, and wanted a home equity loan (HELOC). Anthony told her could shop the loan. However, he later said she did not qualify for a HELOC because her credit scores were too low. He said he had ‘shopped’ it with more then one lender, and that they looked at every lender that offered a HELOC that they were able to process. (Here’s a key to the story- this was to be a NO DOCS loan). He recommended refinancing into a new $700,000 first, with an interest margin of 3.85 over the indexed rate, which she did. It was agreed that there would not be a prepayment penalty, but one got slipped in on a rider, a surprise every experienced Sacramento Real Estate Attorney has seen in their practice before.

istockphoto_11975157-approved-loan-application-on-a-desktop.jpgEventually Tonya got wise and sued. Her expert testified that the interest she paid was astronomical, and she could have obtained a loan with a much lower rate, the present value of the difference being $72,187.17. Plus there would be no repayment penalty. Now she cannot refinance because she cannot provide documentation of income- she needs a no docs loan, but no one does that anymore!

The Court of Appeals in Smith v. Home Loan Funding ruled that the lender acted as a broker, thus invoking a duty to obtain the best loan. Anthony said he would shop the loan, and did look at every lender “that we were able to process.” But that was only the lenders they were affiliated with in-house. On appeal the lender argued that it was error to calculate the damages over the full 30 year term of the loan, as there was not evidence that she would hold the loan for the full 30 years. There are decisions that allow for a reduced term, because the average home is held for only 7-10 years. But here, the court refused to speculate on what Tonya might do; as she is unlikely to qualify to refinance, “she is more likely than anyone to be saddled with a 30-year mortgage.”

The trial court also awarded attorney fees based on provisions the Promissory Note and Deed of Trust, which the lender disputed as the claims were for torts- breach of fiduciary duty and misrepresentation. However, there was also a finding of breach of the implied covenant of good faith and fair dealing, which is implied in every contract. Such a breach can support an attorney fee award under Civil Code 1717, and here the trial court treated the oral agreement (to shop the loan) and the written loan documents as a single agreement. Thus, the court threw the book at the Lender, awarding attorney fees to Tonya.

One way to look at this case is to say the loan officer was trying to be helpful, and no good deed goes unpunished. However, we all (including judges) now have some insight into loan practices that occurred in the last few years. If he was really ‘shopping’ the loan, trying to get her the best deal, he didn’t need to take on the huge interest margin. How helpful was he really? I submit that the margin markup was high, rather than increasing the points, was because borrowers did not understand what was going on, but they did understand points.