Client Alert: From the Scheer Law Group: Servicer Claims for Mishandling Loan Modifications are Held to be the Obligations of the Lender

To All SLG Clients and Affiliates.
From: Spencer Scheer
Date: July 7, 2016
Subject:  Client Alert: From the Scheer Law Group

Court are upholding Negligence Claims against Servicers for Mishandling Loan Modification Applications and holding that the Lender/Investor can be liable under agency Principles.

A California appellate court has held that borrowers can assert claims for both misrepresentation and negligent loan administration against a loan servicer and against an indenture trustee (lender/investor), as the servicer’s principal, resulting from allegedly mishandling a loan modification application  (See Daniels v. Select Portfolio Servicing, Inc., 246 Cal. App. 4th 1150, 201 Cal. Rptr. 3d 390 (2016)).

There is currently a split of authority under California law on whether there is a duty of care imposed by law on a servicer handling a loan modification application. The trend as evidenced by the Daniels case appears to be in favor of finding a duty of care under the law and  permitting the borrower to assert a negligence claim against the loan servicer for mishandling the modification process (Note: There is contrary authority). What should concern all lender/investors is that the Court in this case allowed claims against the lender/investor for acts of the servicer, for both the negligence and intentional misrepresentation claims, based on agency theories.

Note: This  holding expands liability on two fronts: First, it confirms the duty  imposed on a servicer to act promptly and fairly in the loan modification process.  Second, while not directly finding that the lender has such a duty (as opposed to a separate servicer) the result is that there is a defacto duty imposed on the lender via agency principles.

Note: this case also highlights the need of lender/investors and their servicers to properly apportion risk when establishing the lender/servicer relationship via indemnity and hold harmless agreements.

Please call me if you would like to discuss

Spencer Scheer