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Offering Homeowners a Loan is Not A Representation that the Homeowners can Afford the Loan- a California court reminds Borrowers that Lenders Usually Do Not Owe Borrowers a Duty of Care.

Homeowners in Discovery Bay, California, sought in 2007 to refinance their mortgage through GMAC. They provided the loan officer will accurate income information. It turned out, however, that the loan application prepared for them had a fabricated, inflated income. They were not given the application to review. They could not afford payments on the new loan, and lost the house through foreclosure. The homeowners sued GMAC and other defendants.

In the published opinion, the court dealt only with their claim of fraudulent misrepresentation. The homeowners’ attorney creatively argued that, in giving them the loan, GMAC falsely misrepresented that the homeowners could afford the loan based on their true income-the income information they provided to the loan officer. The homeowners claimed this told them that GMAC thought they could afford the loan.

The court said no; GMAC’s position that they qualified for the loan is not a representation that they could afford the loan. The lender’s efforts to determine the ability of the borrower to repay a loan is for the lender’s protection, not the borrower.

Not clear from the opinion was why the homeowners did not concern themselves with the loan officer who falsified their income information. (I assume that the homeowners could afford their original loan, because otherwise they would have a problem proving damages.) May be that, like a lot of such people in the boon times, the individual and his office have since disappeared.

Perlas v. GMAC Mortgage LLC (2010) First District Court of Appeal No. A125212.