Fiduciary Duty to Borrowers in California

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Mortgage brokers owe a fidciary duty to borrowers in California, but lending institutions do not. This raises interesting questions about the role of yield spread premiums and whether they are an improper payment.

California courts have held since 1979 that a mortgage broker owes a fiduciary duty to a borrower.  But lenders do not.  The mortgage transaction between the borrower and lender is at "arms length" much like buying a used car from a car lot salesman.  The law expects the buyer not to trust the lender and to understand that the lender's interests are counter to the borrowers: the worse the loan is for the borrower, the more money the bank makes.  This assumption is supported by the statistics: about 60 percent of "subprime" borrowers qualified for prime loans, but were talked into subprime loans with exploding interest rates because mortgage brokers were paid higher commissions for selling those loans.

In 2007, California passed a law imposing a fiduciary duty on mortgage brokers that notes:

A mortgage broker providing mortgage brokerage services to a borrower is the fiduciary of the borrower, and any violation of the broker's fiduciary duties shall be a violation of the mortgage broker's license law. This fiduciary duty includes a requirement that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest.

AB 1830 was introduced in the 2007-08 legislative session by Assembly Members Lieu, Bass Nava and Wolk.

The California Supreme Court held in 1979 that a mortgage loan broker acts in a fiduciary capacity that "not only imposes upon him the duty of acting in the highest good faith toward his principal but precludes the agent from obtaining any advantage over the principal in any transaction had by virtue of his agency."  Wyatt v. Union Mortgage Co., 24 Cal.3d 773, 782 (1979).

Lending institutions, on the other hand, have no fiduciary duty to borrowers Nymark v. Heart Federal Savings & Loan Assn., 231 Cal.App.3d 1089, 1093, fn. 1 (1991):

The relationship between a lending institution and its borrower-client is not fiduciary in nature.  A commercial lender is entitled to pursue its own economic interests in a loan transaction.  This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another.

Civil Claims for Negligence Against Brokers

Establishing a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence.  Beauchamp v. Los Gatos Golf Course, 273 Cal. App.2d 20, 32 (1969).  Claims for negligence include, of course, negligence, but also negligent infliction of emotional distress,

Damages Issues in Mortgage Litigation Cases

A successful plaintiff may recover special damages, which include the actual value of losses in money that the defendant's negligent act caused.  Special damages include things like lost wages, cost of repair, medical bills, amounts paid over what would have been paid absent the negligence.  Special damages present problems in many mortgage litigation cases, because the plaintiff usually bought a house that fell in value and so foreclosure does not actually cost the borrower real losses that can be quantified mathematically.  Consider, for example, a case where the borrower purchased a house for $800,000 in 2005 and faced foreclosure proved to have resulted from a "pick-a-payment" loan that a broker negligently selected.  If the fair market value of the house is now $500,000, losing the house to a non-judicial foreclosure doesn't cause the borrower measurable special damages.  In this case, the damages are negative $300,000.  That is, from a purely mathematical perspective, the borrower benefits by $300,000 from a non-judicial foreclosure by being able to escape from a debt that exceeds the value of the property securing it by $300,000.

Because many borrowers are not mathematical (which is how we got into this mess), many will explain that they would rather have the $800,000 debt on a $500,000 house and that losing the house is a real financial loss.

General damages may include compensation for physical pain and suffering, psychological suffering, loss of consortium (meaning the enjoyment of a relationship with family members), and other injuries that are not easy to quantify in money terms.  Where there is a fiduciary duty, it is sometimes possible to recover damages for negligent infliction of emotional distress.

Punitive damages are for the purpose of punishing a defendant and are therefore not available in a claim for negligence.  If a plaintiff can prove intentional, reckless or malicious wrongdoing including fraud, the plaintiff may recover punitive damages.

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