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Does a mortgage broker meet its duty to prevent fraudulent loans by arranging for title insurance? The Court found evidence of obtaining insurance relevant to the broker’s duty, not barred by the collateral source rule.

Mortgage loan brokers have a duty to mitigate the risk of possible loan fraud in California. The extent that title insurance would do this is a topic for another day, but brokers routinely arrange for title insurance for their lenders. Another protection against fraud is to have signatures notarized; at least the person signing has proven their identity. In a perfect storm for one mortgage Broker, it was the notary committing the fraud, and the trial court judge would not let them submit evidence that they got title insurance to help protect the lender against such acts. The judge claimed that the collateral source rule required the evidence be kept out. With this evidence barred, the Lender hammered the jury with claims that the Broker was negligent and breached its fiduciary duty, and the jury agreed. The appellate court did not.

El dorado real estate lawyer.jpg In Bryan Chanda V. Federal Home Loans Corporation, Chanda was a money lender and Federal was a private mortgage broker. Barker was the office manager for the owner of a commercial building in El Centro. Barker was also a Notary Public. Barker contacted Federal requesting an equity loan of $165,000 on behalf of the owners of the building. Federal’s loan officer wanted to arrange to meet with the owners so that they could sign the note and deed of trust, but Barker said one of the owners was not available. But, she would be happy to take the documents and get their notarized signatures. Barker then forged the signatures, and notarized them. Sacramento real estate trial attorneys rarely see fraudulent notarizations, but when they do, the notary is usually long gone.

Six months later, Barker asked for a larger replacement loan of $480,000. She again forged and notarized the signatures. The property owners learned about the fraud (no indication whether or not Barker had skipped town yet), and sued everyone. A forged deed of trust is not effective (though they can win out over unclean hands). The lender cross-complained against everyone, including Federal for negligence and breach of fiduciary duty. All parties and claims settled, except the lender’s claims against the Broker.

At trial the Broker wanted to admit evidence that it had obtained a title insurance policy, relevant to defendant against the breach of fiduciary duty claim. The judge first prohibited the evidence under the collateral source rule, then said it could be mentioned that ti was acquired as per the escrow instructions, but finally refused to allow the evidence because it had the potential to prejudice the jury, knowing that there might be insurance coverage..

In determining tort damages, the collateral source rule provides “that if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor. [i]f an injured plaintiff gets some compensation for the injury from a collateral source such as insurance, that payment is, under the collateral source doctrine, not deducted from the damages that the plaintiff can collect from the tortfeasor
-The Test: As a rule of evidence, it precludes the introduction of evidence of the plaintiff being compensated by a collateral source unless there is a ‘persuasive showing’ that such evidence is of ‘substantial probative value’ for purposes other than reducing damages. The trial court must then determine, pursuant to Evidence Code section 352, whether the probative value of the other evidence outweighs the prejudicial effect of the mention of insurance.

sacramento forgery attorney.jpgHere, the Broker wanted to show that industry standards required it to obtain title insurance covering fraud and forgery for the loan transaction. The Broker’s expert stated that a broker has a duty to mitigate the risks of possible loan fraud. However, he was prevented by the judge from testifying about the role of title insurance against fraud and forgery applicable to such mitigation. The court of appeals found that keeping out this evidence was prejudicial to the Broker. The Lender tried the case on the theory that the Broker did nothing to mitigate against the risk of fraud or forgery. At the beginning of trial, counsel told the jury that the evidence would show that the Broker had no policies, procedures or practice manuals to cover “how their clients or investors might be protected.”

The court found that the value of the evidence outweighed its prejudicial effect because it could have prevented the prejudice by instructing the jury:
(1) to only consider the evidence for purposes of deciding whether the Broker was negligent or had breached its fiduciary duties, and
(2) to not consider any potential recovery under the title insurance policy in assessing damages as this is a matter for the court to address after the jury renders its verdict.

It was interesting that, at the time of trial, the claim against the title insurance policy had not been resolved. So the only prejudice would have been that the Lender MIGHT have insurance coverage to compensate him for the loss.