Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date: August 27, 2019

To: All Scheer Law Group Clients and Affiliates

From: Spencer Scheer

Subject: NO DUTY OF CARE OWED BY LENDER IN LOAN MOD NEGOTIATIONS. SPLIT IN CALIFORNIA AUTHORITY

There is a split in the holdings by California appellate courts on whether a lender owes a borrower a duty of care in tort (negligence claim) arising out of loan modification negotiations.

The duty is usually alleged to be that the Lender or servicer is required to process a loan modification request in a timely, fair, and reasonable manner, and is used as a springboard to assert that the failure to grant a loan modification was arbitrary, unfair or inequitable.

California Appellate courts in the First and Sixth districts have found such a duty See e.g. Alverez v BAC Home Loans Servicing, LP(2014), 228 Cal. App. 4th 941, and Daniels v Select Portfolio Servicing, Inc. (2016) 246 Cal. App. 4th 1150. Now the California Second Appellate District has held that there is no such duty. See Sheen v. Wells Fargo Bank, N.A. (2019) 38 Cal.App.5th 346. The decision in this case relied primarily on the holding that economic losses resulting from financial transactions are primarily governed by contract and fraud remedies instead of negligence concepts and that the greater weight of authority in the U.S. is to reject imposing a duty on a lender for negligent review and processing.

The imputation of a duty of care for negligence under the loan modification process is a slippery slope drastically changing the arm’s length relationship generally associated with the lender borrower relationship. The trend to find such a duty occurred largely in response to the “mortgage meltdown” in 2012, in order to find ways to keep borrowers in their homes and to slow down foreclosures. The decision in the Sheen case restores some perspective and is more reflective of current economic conditions. It will be up the California Supreme Court to resolve the issue once and for all, or until legislation is passed on the issue. In the meantime, lenders and servicers can cite the holding in Sheen to refute claims of a duty and attendant tort or statutory claims based on the claimed duty.

Please call or email if you have questions about this case.

Spencer Scheer