Careful Who You Trust. A Lender Can Be Liable For The Negligence And Misrepresentations Of Its Loan Servicers, Even Absent Any Contractual Privity Between The Borrower And The Lender

Ervin Cohen & Jessup LLP
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In the recent case of Daniels v. Select Portfolio Serving, Inc., the California Court of Appeal has held that a lender may be liable for the negligence and misrepresentations of the lender’s servicer, without any contractual privity between the lender and the borrower and even though the lender’s involvement did not exceed its “conventional role.”

In the Daniels case, the lender denied the borrower’s application for a modification of a residential loan for failure of the borrower to provide all of the documentation required for the loan modification, despite the fact that loan servicer had allegedly told the borrower that it received all documentation needed for the modification of the loan. The loan servicer then allegedly advised the borrower to stop making payments under the loan. After the borrower complied with the advice of the loan servicer, the lender then proceeded with foreclosure. The borrowers filed a lawsuit to stop the foreclosure and the lender and loan servicer filed a demurrer challenging the complaint.

Although sustained at the trial court level, the Daniels court overruled the trial court’s ruling on the demurrer. The Daniels court noted the existence of California case law that a lender owes no duty of care to a borrower absent privity of contract when the lender’s involvement in the loan transaction did not exceed its conventional role as a lender of money. However, the Daniels court rejected this case law and, instead, turned to general rules of tort law to broaden the potential liability of the lender and its duty owed to the borrower. Further, even though the lender acquired the loan by assignment, the Daniels court ruled that the lender may be liable for the misrepresentations of the loan servicer following the assignment of the loan.

The Daniels case seems to be extending the trend of California courts to expand the liability of lenders under California law. Obviously, a lender cannot be too careful in its dealing with its borrower prior to entering a loan (or loan modification in the case of the Daniels decision) and also in its selection of the loan servicer. I also believe that the Daniels case can be applied to mortgage bankers and other agents retained by the lender in connection with the production and enforcement of residential and commercial loans.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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