Financial institutions, lenders and service providers should note that the California Supreme Court upheld a Court of Appeals decision confirming that there is no obligation for a lender to “address, consider and respond carefully and completely” to a loan modification request submitted by a borrower. In doing so, California’s highest court resolved a division of authority at the appellate level. However, the Court specifically rejected consideration of negligent misrepresentations or claims of promissory estoppel, noting that nothing in the Notice “should be construed as categorically excluding such claims in the context of amending the ‘mortgage”.
In Sheen vs. Wells Fargo Bank, NA (March 7, 2022) The California Supreme Court affirmed the decision of the Court of Appeals, which affirmed the trial court’s decision upholding the defendant lender’s objection to the plaintiff borrower’s negligence claim in a case involving a junior lien and the alleged negligence of a lender in failing to respond in a timely manner to the borrower’s request to vary a second deed of trust.
The question of whether a duty to process, review, and respond to submitted loan modification applications exists in California has long divided California appellate courts. Typically, to defend themselves against such a claim, financial institutions, lenders and managers invoke Nymark v. Heart Fed. savings and credit association uphold the “general rule” that “a financial institution owes no duty of care to a borrower where the institution’s involvement in the lending transaction does not exceed the scope of its conventional role as a mere lender to money”. Although the general rule of Nymark does not apply, the factors listed by Biakanja v. Irving confirm that the courts should not recognize such an obligation.
In shine, the borrower defaulted on junior liens in 2008 or 2009. Subsequently, he contacted his lender, defendant Wells Fargo Bank, NA (“Wells Fargo”), regarding the possibility of reversing the foreclosure sale so that he could apply and be considered for modification and subsequently submitted applications for modification of his second and third position loans. Wells Fargo canceled the scheduled sale date, but has yet to respond to the borrower’s request and sell the loan. The property was finally seized about four years later. Subsequently, the borrower sued, asserting a claim of negligence against Wells Fargo on the basis that it “owed the plaintiff a duty of care to carefully and completely process, consider, and respond to requests to change loan submitted by the applicant”. The Court of Appeal upheld the trial court’s decision upholding Wells Fargo’s objection.
California Supreme Court decision
In upholding the Court of Appeals decision, the California Supreme Court recognized the division of powers between the appellate courts and held that the common law claim for borrower negligence fails in light of the rule of economic loss and cannot be justified by reference to the biakanja The factors. In a nutshell, the economic loss rule precludes recovery in tort for purely economic losses negligently inflicted out of respect for a contract between the disputing parties. Since the borrower’s claim arises out of the mortgage agreement and is not independent of it, the economic loss rule bars his claim for negligence. Moreover, the California Supreme Court explained that its rejection of the borrower’s arguments as inconsistent with the economic loss rule also accords with the well-established “general rule” of Nymark because processing a loan modification request falls under Wells Fargo’s role as lender. In addition, the California Supreme Court confirmed that the multifactorial approach formulated in biakanja Is do not apply in the context of the administration of mortgages, where the plaintiff and the defendant are in a contractual relationship.
In addition, the California Supreme Court addressed two important policy considerations. First, in response to the Borrower’s argument that if it were unable to sue for negligence, it would be essentially without recourse, the Court specifically noted that “there is causes of action other than a general claim of negligence,” coupled with a failure to properly process, review, and respond to a loan modification application, including negligent misrepresentation and promissory estoppel. Second, in response to the Borrower’s argument that allowing his tort action to proceed will prevent future harm, the Court noted that he did not explain how the Imposing an obligation “would encourage repairers to engage in the modification process rather than simply excluding”. Ultimately, the Court recognized that recognizing such an obligation would impose real costs and would likely involve reforms to the mortgage services industry, best left to the Legislative Assembly to tackle.
Finally, the Court expressly rejected cases weighing biakanja factors in determining whether a duty of care exists, including Weimer v. Nationstar Mortgage, LLC (the Borrower has sufficiently argued that the managers had a duty of care with respect to the processing of the loan modification request after the application of the biakanja The factors); Rossetta vs. CitiMortgage, Inc. (complaint sufficiently alleging a cause of action for negligence, including a duty of care, against a loan officer); Daniels v Select Portfolio Servicing, Inc. (the Borrower has sufficiently alleged that the Defendant breached its duty of care because four of the six biakanja factors militating in favor of finding an obligation); and Alvarez c. BAC Home Loans Servicing, LP (the plaintiffs have sufficiently alleged a breach of duty of care by alleging improper handling of their loan modification requests, given that the biakanja factors “weigh clearly” in favor of an obligation), all cases frequently cited by borrowers, insofar as they are inconsistent with the judgment of the Court.
Although the California Supreme Court has confirmed that financial institutions, lenders, and servicers have no separate obligation to borrowers to “carefully and completely process, consider, and respond to” a borrower’s request for a loan modification , she pointed out that she only considered this narrow question defined by the borrower.  So while financial institutions, lenders and managing agents may see a decline in general negligence claims against them after this ruling, they should expect to see an increase in other causes of action associated with any breach of exercise due diligence in processing, reviewing and responding to loan modification applications, as the Court has expressly declined to rule on negligent misrepresentations and promissory estoppel claims.