Unavoidably Negligent Loan Servicing

Rossetta v CitiMortgage, Inc. (2017) 18 CA5th 628

After having been laid off from her job and discovering her breast cancer had come back, Borrower attempted to obtain a loan modification with her lender (through the mortgage servicer, as the lender’s agent) (Lender/Servicer) for over 2 years. Lender/Servicer told her she had to be in default before she could request a loan modification. During that process, Lender/Servicer forced Borrower to submit the same documents “over and over again,” lost or mishandled modification documents, kept her in limbo on various applications, and then denied multiple applications “for bogus reasons.” 18 CA5th at 643. After failing to achieve a permanent loan modification, Borrower filed for bankruptcy. Later, she sued Lender/Servicer, alleging multiple causes of action sounding in tort and unlawful business practices in violation of the Unfair Competition Law (UCL). The trial court sustained Lender/Servicer’s demurrer. Borrower appealed.

The court of appeal affirmed in part and reversed in part. The court concluded that the trial court erred in sustaining the demurrer to the causes of action for negligence and violations of the UCL.Once the parties begin negotiating a loan modification, they are in an established relationship. A lender/servicer in that relationship has greater bargaining power because the borrower cannot shop around. This was particularly true here because Lender/Servicer had insisted Borrower be in default.

Regarding the negligence action, Lender/Servicer’s immoral misconduct resulted in a foreseeable harm to Borrower. Lender/Servicer had a duty to handle the loan modification application in a timely and responsible manner—which arguably was not done here. Balancing the various negligence factors, the court of appeal found that Lender/Servicer owed Borrower a duty of care and held the negligence claim survived demurrer.

In contrast, the trial court properly sustained the demurrer to the causes of action for intentional misrepresentation and promissory estoppel, but Borrower should have been given an opportunity to state a viable cause of action based on an alleged oral promise to provide her with a Trial Period Plan (TPP) under the Home Affordable Mortgage Program (HAMP). The trial court also properly sustained the demurrer to the causes of action for negligent misrepresentation, breach of contract, intentional infliction of emotional distress, and conversion without leave to amend.

The Editor’s Take: One of the many conclusions reached in this decision is that CitiMortgage may be liable for negligently handling a borrower’s loan modification application. The (former?) general rule that a borrower is not owed any duty of care unless the involvement of the lender or servicer goes beyond the conventional role of merely lending money is not applicable when the borrower has made an application for a loan modification. The trial court had viewed that arrangement as one that “falls squarely within the scope of a lending institution’s conventional role as a lender of money” (citing Lueras v BAC Home Loans Servicing (2013) 221 CA4th 49, 67 (Fourth District)), but the majority of the Third District Court of Appeal treated this situation as distinctly different because such an applicant lacks the usual alternative of simply finding a different lender, an option available to a person seeking a new loan (and especially when the applicant has also been informed that she must already be in default to qualify for such a modification).

Taking the loan modification situation out of the general no-duty rule governing new lending meant putting it under the Biakanja six-factor analysis for deciding whether a lender (or servicer) has any duty of care when handling such a modification request. Biakanja v Irving (1958) 49 C2d 647. But I opined in a column last year that I did not know how anyone can predict where such a Biakanja analysis will lead. See Liability for Negligent Loan Modification, 39 CEB RPLR 89 (July 2016) (also on my website at RogerBernhardt.com).

This decision concludes that all six Biakanja factors—intent to affect plaintiff, foreseeability of harm, certainty of injury, close connection between conduct and injury, moral blameworthiness, and policy of harm prevention)—lead to imposition of a duty of care. But the peremptory way in which the majority treated those factors tempts one to conclude that this was an after-the-fact analysis, where the court decided (first) that a duty of care ought to be imposed, and then (second) brought in the six-factor analysis to justify that conclusion. How persuasive can it be that there was a close connection between CitiMortgage’s negligent conduct and Rosetta’s injuries, in light of the court’s conclusion that “[w]e do not know when Rossetta would have defaulted if left to her own devices, and ‘it is very likely that a borrower induced to default before it becomes absolutely necessary suffers associated injuries involving increased fees and an increased possibility of losing the home’”? 18 CA5th at 642. Or that CitiMortgage’s conduct was morally blameworthy because it probably held “all the cards”? 18 CA5th at 642. Observers can only wonder what the result would have been had the court found that the two factors of close connection and moral blame weighed in favor of a no-duty conclusion while the other four factors came out the other way. Is four to two close enough to reach the same result?

The concurring opinion of Justice Mauro generates even more wonderment. He appears to conclude that agreeing to review an application for a modification generates no duty of care because that amounts merely to conventional lending activity, and generated a duty of care in this case only because CitiMortgage refused to consider Rossetta’s application unless she was three months in default—a factor about which the majority said “[a]t a minimum, the alleged policy of making default a condition of being considered for a loan modification informs our application of the Biakanja factors.” 18 CA5th at 641.

It would probably be safer for attorneys to simply admonish lenders and servicers that they are always at risk of being held to owe a duty of care to borrowers—regardless of the reasons given—than it is to advise them that the answer depends on how six unpredictable and incoherent factors are purportedly balanced.  Roger Bernhardt

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41 Real Property Law Reporter 15 (Cal CEB Jan. 2018) © The Regents of the University of California, reprinted with permission of CEB