By Glen C. Hansen

In Perlas v. GMAC Mortgage, LLC (August 11, 2010) 187 Cal.App.4th 429, the California Court of Appeal for the First Appellate District held that home loan borrowers could not state a cause of action for fraudulent misrepresentation or concealment against a lender, because a borrower is not entitled to rely upon a lender’s knowingly false determination that the borrower is qualified for a loan in order to decide if the borrower could afford the loan.

In Perlas, borrowers applied for a loan from GMAC, a commercial mortgage lender. One of the documents tendered at closing was a “purported” application for the loan, which borrowers had neither prepared nor reviewed. The application stated borrowers’ total income was $ 9,466.00 per month, which was substantially greater than the actual income information borrowers provided to GMAC. At closing, borrowers signed the preprinted application and other documents without being given an opportunity to read or review them, or to confirm the accuracy of the information in the application. In actuality, at no time did borrowers’ income permit them to make the payments called for in the loan documents. Following borrowers’ failure to make the required loan payments, the underlying security was foreclosed upon. Borrowers filed an action against GMAC, among others. The trial court sustained demurrers to the borrowers’ causes of action against GMAC. The Court of Appeal affirmed.

In the published portions of its decision, the Court of Appeal rejected the borrowers’ claim that they could rely upon GMAC’s knowingly false determination that borrowers qualified for the loans as a representation by GMAC to borrowers that they could afford the loans. Borrowers alleged that GMAC knew the loan approval was based on a “fabricated, inflated income,” and that GMAC knew that it was not possible for borrowers to make the payments called for in the loans. However, the court held that such allegations failed to state a cause of action because the borrowers did not allege that GMAC expressly represented to them that they had the ability to make the loan payments specified in the loan documents. Borrowers’ apparent argument that they were entitled to rely upon GMAC’s determination that they qualified for the loans in order to decide if they could afford the loans “ignores the nature of the lender-borrower relationship.” The court held that “absent special circumstances … a loan transaction is at arm’s length and there is no fiduciary relationship between the borrower and lender.” The court added that a lender is under no duty to determine the borrower’s ability to repay the loan.

The holding in Perlas is similar to that of the United States District Court in Ruiz v. Decision One Mortgage Co., LLC, No. C06-02530 (slip opinion), 2006 U.S. Dist. LEXIS 54571 at *7, 2006 WL 2067072 (N.D.Cal. July 25, 2006), which stated: “In California, generally, there is no duty of care owed to a borrower by a lender.” (Citing Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.)

Before borrowers give up all hope of establishing a duty of care owed by commercial lenders to residential borrowers regarding loan affordability, borrowers should review the status of relevant state and federal statutes that address that issue.[1]

Although yet to be enacted, Congress has considered imposing additional duties on lenders. For example, in 2007, legislation was introduced in Congress that would have required “mortgage originators” to “make reasonable efforts to secure a home mortgage loan that is appropriately advantageous to the borrower ….” (S.2452 (110th Cong.), §301.) Another bill passed out of the House of Representatives that same year provided that “no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan ….” (H.R.3915 (110th Cong.), §201.) If codified, legislation such as this could potentially be used to establish a statutory duty of care owed by lenders to borrowers relating to loan affordability, even where cases such as Perlas and Ruiz have foreclosed a common law basis for such a duty. For now however, Perlas and Ruiz provide a safe harbor for many lenders.

Glen C. Hansen is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues. 

[1] In an unreported portion of the Perlas decision, the Court of Appeal rejected the borrowers’ allegation that GMAC owed them a fiduciary duty under California Financial Code section 4979.5, even though borrowers had alleged that GMAC was licensed by the California Department of Real Estate, and that borrowers “went directly to GMAC to obtain their loans.” The court noted that borrowers failed to allege that GMAC acted as a broker at any time in its dealings with borrowers.