Sharpening a conflict in the California state courts, the Sacramento-based Third District Court of Appeal has held that a lender owes a tort duty of due care to a borrower during mortgage modification negotiations if the lender’s involvement in the negotiations exceeds the scope of a normal financial institution and creates a “special relationship” with the borrower. In Robert Weimer, Jr. v. Nationstar Mortgage, LLC (April 2, 2020), the Third District Court of Appeal rejected a recent decision by the Los Angeles-based Second District Court of Appeal, which had held that “a lender does not owe a borrower a common law duty to offer, consider, or approve a loan modification.” (Sheen v. Wells Fargo Bank, N.A. (2019) 38 Cal.App.5th 346, review granted by the Supreme Court.)
In Weimer v. Nationstar Mortgage, the Third District Court of Appeal disagreed on policy grounds. The Sacramento-based appellate court found that, while a lender does not have a duty to consider a loan modification application, a duty of due care is created because of a “special relationship” where a loan modification is processed by the lender and is intended to affect the borrower, there is foreseeability of harm to the borrower if the loan servicer negligently processes the plaintiff’s loan modification application, there is a degree of certainty that the lender’s negligence will cause the borrower to suffer injury (e.g., to the borrower’s credit, increased interest and arrears, and/or forgoing opportunities to pursue other default-relief remedies), the lender makes representations to the borrower reassuring the borrower of “ultimate success with the process, thus going beyond the mere consideration of his loan modification applications,” and the lender is blameworthy for its negligent conduct in processing the loan modification application. In Weimer, the court found the following factors relevant to creating a lender’s duty of due care in a loan modification negotiation: “here, the alleged representations by [lender] that plaintiff would be approved for the modification could be viewed as a guarantee and constitutes involvement exceeding the scope of the conventional money lending role. Also beyond the scope of the role of conventional lender is the alleged misrepresentation by [lender] that plaintiff was eligible to apply for and receive a HAMP modification when he clearly was not.” The Weimer court found these allegations support a strong public policy to “require lenders to deal reasonably with borrowers in default to try to effectuate a workable loan modification” and a “strong preference for fostering more cooperative relations between lenders and borrowers who are at risk of foreclosure.”
It is anticipated that the California Supreme Court will resolve the split among the California courts of appeal in its review of Sheen v. Wells Fargo Bank.
The Weimer case followed another court of appeal decision that provides a cautionary lesson to lenders who modify a real property-secured loan agreement rather than employ a forbearance agreement to assist a borrower in default. In Taniguchi v. Restoration Homes, LLC (Dec. 16, 2019) 43 Cal.App.5th 478, following the borrowers’ default on a home mortgage loan, the lender permitted a “modification” agreement that deferred approximately $120,000 in missed principal and interest payments and late charges until maturity, in exchange for the borrower agreeing to a 10-year maturity date and a requirement to refinance the loan or make a balloon payment of about $531,000 at maturity. The modification agreement also provided that the failure to make the modified payments would be an event of default, and that a default would make the modification agreement null and void at the lender’s option, and the lender would have the right to enforce the loan according to the original terms. After modification of the home mortgage agreement, the borrower missed four more monthly payments. The borrowers argued they had the right to reinstate by tendering the four missed payments, but the lender insisted it had the right to demand the four missed payments and all earlier missed principal and interest payments and late charges that had been deferred under the modification agreement.
In a case of first impression, the First District Court of Appeal found in favor of the borrowers in holding that a loan “modification” agreement forbids a lender from requiring the borrower to cure the pre-modification arrearages in order to reinstate the loan and avoid foreclosure following a default under the modification agreement. The Taniguchi court held that loan modification agreements are subject to an anti-waiver statute, codified as Civil Code section 2953, which forbids lenders from forcing borrowers to waive the borrower’s right of reinstatement of a loan “in connection with the making of or renewing of any loan secured by a deed of trust, mortgage or other instrument creating a lien on real property,” as provided by Civil Code section 2924c, which provides that a borrower need only pay all amounts due to reinstate the loan, and not the balance of the loan. The Taniguchi court of appeal held that a loan “modification” following a default was the making or renewing of a new loan, such that the lender could not force the borrowers to pay all arrearages that were in default under the original loan, as a condition of reinstatement of the loan and avoid a foreclosure. Thus, the court of appeal held that the lender could require the borrowers to tender only the amount in default under the “modification,” e.g., four missed payments, but not the deferred amounts (e.g., $120,000). The lender, Restoration Homes, asked the California Supreme Court to exercise its discretionary authority to review the Taniguchi decision. The Supreme Court declined to accept an appeal, refusing to reverse or limit the decision.
To avoid this result, and to require reinstatement of all amounts in default, including arrearages due under the original loan, lenders are encouraged to enter into a forbearance agreement that extend the date for payments of the arrearages.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorneys from our office, or the attorney with whom you typically consult.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502