Foreclosures and lending issues abound in the press, courtrooms, neighborhood gossip, and, for the considerably less fortunate, bank accounts.
In California, lenders recently secured a significant appellate victory in Perlas v. GMAC Mortgage, LLC.
Let's start with the facts. Appellants Mercedes Perlas and Len Villacorta applied for a $417,000.00 loan from GMAC, a mortgage lender. At the closing of the Loan, a Loan Application was tendered, which Appellants apparently neither reviewed nor prepared. The Application stated a "total income" well in excess of (1) what Appellants actually earned and (2) what Appellants originally stated to GMAC in inducing the loan. The material change in this information was not disclosed to Appellants nor were Appellants requested to confirm the accuracy, including the inflated "total income" information, of the Loan Application. According to Appellants, they signed the preprinted (by GMAC) Loan Application and other documents "without an opportunity to read or review them." Well, that might be the first mistake.
GMAC approved Appellants as being, and this is important to the borrower world, "qualified" for the loan. Sure enough, Appellants could not make the payments called for in the Loan Documents. Doubly sure enough, the Trustee "recorded a notice of default and election to sell under the deed of trust." The property was then sold in foreclosure.
On the second day of Christmas, a lawsuit was filed. Appellant filed a bevvy of claims against GMAC (and other defendants), the point of our discussion being claims for fraudulent misrepresentation and fraudulent concealment against lender GMAC. Essentially, Appellants argued that GMAC "knew or should have known, at the time the documents were prepared and tendered by GMAC to appellants for the Loan and Credit Line, that it was not possible for appellants to make the payments called for in the Loan and Credit Line based upon the income information actually provided to GMAC." And, therefore, "[b]y preparing and tendering the documents to appellants, the Lender Defendants represented to appellants that appellants could, in fact, make the payments called for in the loans and failed to disclose to appellants that they could not possibly afford the payments called for in the loans."
The trial court sustained demurrers to the fraud claims against GMAC, and Appellants, well, they appealed.
California's appellate court affirmed that Appellant's fraud claims failed to state a cause of action against lender GMAC, holding: "Appellants appear to conflate loan qualification and loan affordability. In effect, appellants argue that they were entitled to rely upon GMAC‟s determination that they qualified for the loans in order to decide if they could afford the loans. Appellants cite no authority for this proposition, and it ignores the nature of the lender-borrower relationship.... [A]bsent special circumstances ... a loan transaction is at arm's length and there is no fiduciary relationship between the borrower and lender. A commercial lender pursues its own economic interests in lending money. A lender is under no duty to determine the borrower's ability to repay the loan.... The lender's efforts to determine the creditworthiness and ability to repay by a borrower are for the lender‟s protection, not the borrower's."
Safe harbor for lenders in California's common law. According to some outlets, however, legislation has been introduced in the United States Congress that would have required “mortgage originators” to “make reasonable efforts to secure a home mortgage loan that is appropriately advantageous to the borrower ….” (S.2452) and provided that “no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan ….” (H.R.3915).
Neither piece from 2007 became law, but lenders can probably see where the wind may be blowing.
Mike Thelen is a lawyer in Womble Carlyle's Real Estate Litigation practice group. He regularly represents a wide variety of clients in land use and land development issues, from local governments to businesses, in both state and federal venues throughout North Carolina.