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.
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