The California Court of Appeal, Second District, recently held that a mortgage lender that brokered loans to other lenders, and that had represented to a prospective borrower that it would "shop the best loan" for her, acted as a mortgage broker and thus had a fiduciary duty to the borrower.
A copy of the opinion is available online at: http://www.courtinfo.ca.gov/opinions/documents/B219372.PDF
Defendant Home Loan Funding ("HLF") primarily originated and occasionally brokered loans to residential borrowers. The plaintiff consumer contacted HLF to apply for a HELOC, but HLF's loan officer was unable to qualify the plaintiff, despite making multiple inquiries with other lenders. The loan officer then suggested refinancing with a new first deed of trust and assured the plaintiff that he would "shop the best loan" for her, and would obtain a loan without a pre-payment penalty. HLF then directly extended an adjustable rate loan to plaintiff that included a pre-payment penalty, and an interest rate margin higher than the lowest for which the plaintiff likely could have qualified.
The borrower sued, and the trial court concluded that HLF and its loan officer acted as mortgage loan brokers, breached their fiduciary duty to plaintiff, and misrepresented the terms and advisability of the loan. The trial court awarded damages for the pre-payment penalty, the difference between the actual interest rate margin and that of a loan for which the borrower could have qualified, and attorney fees. HLF appealed.
The appellate court examined Section 10131 of the California Business and Professions Code, noting that a "broker" is defined as a person who "[s]olicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property…." The Court also noted that the "mortgage broker acts as the borrower's agent."
The appellate court also examined Section 50003(m) of the California Financial Code, which defines a mortgage "lender" as "a person [who] . . . directly makes residential mortgage loans, and . . . makes the credit decision in the loan transactions." Unlike the broker relationship, "[t]he relationship between a lending institution and a borrower is not fiduciary in nature."
The Court then analyzed the trial record, and concluded that HLF's loan officer had "shopped" plaintiff's HELOC application among multiple lenders, and that he had represented to the plaintiff that he was a mortgage broker and would "shop the best loan" for the refinance. The appellate court held that the record also established that HLF had previously placed loans with other lenders. According to the appellate court, these facts provided "more than ample evidence to support the trial court's finding that HLF and [its loan officer] acted as a mortgage broker and owed [plaintiff] fiduciary duties," the Court noted. The Court was not persuaded by HFL's argument that the loan documents identified HLF only as a lender, noting that it was HLF that "ultimately persuaded [the borrower] to accept one of its loans."
The Court then evaluated the calculation of damages, in light of HLF's argument that the borrower would likely not pay the loan for its full 30 year term, by examining two conflicting California appellate decisions. In Hutton v. Glicksberg (1982) 128 Cal.App.3d 240, 251-252, a damages calculation "based on the difference in interest calculated over the entire 30-year term of the loan" was upheld. However, the appellate court in Stratton v. Tejani (1982) 139 Cal.App.3d 204, 214, reached a different conclusion, ruling that "calculating the interest differential over the entire 30-year term lacks a factual basis," particularly given that "residential real property typically is held for only seven to ten years."
Considering these precedents, the Court concluded that "Stratton is not applicable here," as "[t]he actual term of the mortgage provides a more solid foundation for the calculation of damages than speculation based on what the typical homeowner may or may not do, particularly in today's uncertain housing market." Further, the Court noted, "[t]he evidence is that [plaintiff] does not qualify to refinance" and that "she is more likely than anyone to be saddled with a 30-year mortgage."
However, the Court agreed with HLF in that "it is inconsistent for the trial court to award damages based on both the 30-year term of the mortgage and the prepayment penalty" and therefore ordered the prepayment penalty damages stricken.
The Court also considered the award of attorney fees, observing that the borrower's note specifically provided for an award of fees and that Section 1717(a) of the California Civil Code provides that a prevailing party may receive fees "[w]here a contract provides for attorney's fees."
The Court disagreed with HLF's argument that, although the borrower was a prevailing party, she prevailed on an "action[] based on tort," rather than an "action on a contract," as is required by Section 1717. The Court noted that, "[i]n addition to breach of fiduciary duty and misrepresentation… HLF breached the implied covenant of good faith and fair dealing." Because "the implied covenant is contract-based," and because the appellate court believed that the trial court appropriately considered "the oral brokerage agreement and the loan documents as a single agreement," the appellate court ruled that the "award of attorney fees was proper."
Ralph T. Wutscher
Kahrl Wutscher LLP
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RWutscher@kw-llp.com
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