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Financial Services Law Insights and Observations

Court Rules Lender, Acting as Mortgage Broker, Breached Fiduciary Duty to Borrower

State Issues

On February 24, a California court of appeals affirmed a trial court’s decision to award damages against a mortgage lender for breach of fiduciary duty and misrepresentation, where the loan officer for the lender acted as a mortgage broker. Smith v. Home Loan Funding, Inc., 2d Civ. No. B219372 (Super. Ct. No. 56-2007-00306-CU-BT-SIM) (Ventura County) (Cal. 2d Dist. Ct. App. February 24, 2011). Home Loan Funding, Inc. (HLF) provided residential mortgage loans, funding most directly, but also brokering some loans to other lenders. The plaintiff, Tonya Smith, contacted Anthony Baden, a loan officer for HLF, requesting a home equity line of credit. Baden indicated to her that he was a mortgage broker. Baden contacted Smith later and told her he "shopped the loan" with other lenders but could not obtain one for her because of her low credit scores. Baden then suggested that Smith refinance her existing loan and told her "he would shop the best loan" for her. Smith agreed but told Baden she did not want a loan with a prepayment penalty. Baden assured her via email that there would be no prepayment penalty on the new loan. At the time Smith signed the loan documents, she was unaware that the new loan, which was made by HLF as direct lender, had a prepayment penalty rider and an interest rate margin that was 1.2% higher than the margin Smith could have qualified for. The trial court had ruled that Baden and HLF acted as loan brokers and breached their fiduciary duty to Smith. The court awarded Smith $21,908 in damages for the prepayment penalty and $72,187.17, which is the present value of the difference in the margins over the 30-year life of the loan. The court also awarded Smith $26,342.50 in attorney fees against HLF. Upon review, the Court of Appeal found award of damages on the prepayment penalty to be inconsistent with damages on a 30-year loan that is not likely to be refinanced and struck those damages. The court affirmed the lower court judgment and damage award in all other respects.

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