{"id":483,"date":"2011-03-05T01:48:28","date_gmt":"2011-03-05T01:48:28","guid":{"rendered":"http:\/\/fresnolawyerblog.com\/?p=483"},"modified":"2011-03-05T06:11:51","modified_gmt":"2011-03-05T06:11:51","slug":"smith-v-home-loan-funding-an-excessive-remedy-against-mortgage-broker","status":"publish","type":"post","link":"https:\/\/fresnolawyerblog.com\/?p=483","title":{"rendered":"Smith v. Home Loan Funding – An Excessive Remedy Against Mortgage Broker"},"content":{"rendered":"

The decision in Smith v. Home Loan Funding, Inc<\/strong>. (Feb. 25, 2011) 2011 DJDAR 2968 may have satisfied a \u201cfeel good\u201d impulse at the Court of Appeal.\u00a0 However, it seems that Justice Gilbert<\/a> jumped the rails when he affirmed the award of damages.\u00a0 Even more, he awarded attorney\u2019s fees when there was no contract between the parties providing for such recovery.\u00a0 The result is intellectually disappointing.<\/p>\n

The case involved a loan that was placed by Home Loan Funding (HLF).\u00a0 According to the opinion, \u201cAnthony Baden worked for HLF as a loan officer.\u00a0 He had no real estate or mortgage broker license.\u00a0 In March 2006, Tonya Smith contacted Baden in response to an advertisement she received from HLF.\u00a0 She sought a $40,000 home equity line of credit.\u00a0 Her home had existing first and second mortgages.\u201d<\/p>\n

Here comes the fact that gave rise to a finding of liability<\/strong>.\u00a0 \u201c[Anthony] told [Tonya] he could \u2018shop the loan.\u2019\u00a0 When asked whether Baden ever told her that he was a mortgage broker Smith replied, “I believe so, yes.”\u00a0 Smith testified that she trusted Baden completely, and believed he would provide her with the best loan.\u201d<\/p>\n

In fact, \u201cBaden provided Smith with a $700,000 first trust deed.\u00a0 The loan had a term of 30 years with a variable interest rate. The loan contained a 3.85 margin over the indexed interest rate.\u201d<\/p>\n

In addition, \u201cSmith did not want a prepayment penalty on the new loan. Baden represented to her that the new loan would have none.\u00a0 Baden reassured Smith and her husband throughout escrow that there would be no prepayment penalty and sent an email to assure them.\u201d\u00a0 But when it came time to close, \u201ca prepayment penalty was reinserted into the transaction by means of a rider.\u201d<\/p>\n

The loan was favorable to the broker.\u00a0 \u201cSmith’s expert, Luis Araya, testified that the commission available to HLF for the sale of the loan on the secondary market was greatly enhanced by the inclusion of both a prepayment penalty and a heavily marked-up margin.\u00a0 Araya also testified that a 3.85 margin is \u2018astronomical.\u2019”<\/p>\n

Now we start to wonder about the bona fides of the transaction, and whether they support the award of damages.\u00a0 \u201cAraya testified that Smith cannot refinance her loan in today’s market. She cannot provide sufficient documentation of her income.\u00a0 There are no longer loans available without documentation of income.\u201d<\/p>\n

Duh.\u00a0 Those days are gone.\u00a0 But this statement suggests that the borrower (Tonya) obtained what is sometimes referred to as a \u201cliar loan<\/a>,\u201d with no evidence of income or ability to repay the loan.\u00a0 Meaning we can expect this loan to tilt into foreclosure.<\/p>\n

The court noted that \u201ca mortgage broker has a fiduciary duty toward the borrower.\u201d\u00a0 HLF argued that since it placed the loan in-house, it acted as the lender, not as a mortgage broker.\u00a0 The court rejected this argument: \u201cBut that HLF ultimately persuaded Smith to accept one of its loans, hardly negates that HLF undertook to act as Smith’s broker.\u00a0 Instead, it is evidence of HLF’s and Baden’s self-dealing at the expense of Smith.\u201d<\/p>\n

\"Mercat<\/a><\/p>\n

Now the thorny issue of damages<\/strong>.\u00a0 On appeal, \u201cHLF contends the trial court erred in awarding damages for the full life of the 30-year loan.\u00a0 It claims there is no evidence Smith would hold the loan or the property for 30 years . . . In Stratton v. Tejani<\/em> (1982) 139 Cal.App.3d 204 . . . The court stated that residential real property typically is held for only seven to ten years.\u201d<\/p>\n

That\u2019s an accurate statement regarding property ownership.\u00a0 Even more, what if the house goes to foreclosure (perhaps likely, given that the loan was made without proof of income)?\u00a0 It seems that if the court were to award damages on a 30-year basis, it would provide a windfall to the customer.<\/p>\n

But that argument went nowhere on appeal.\u00a0 Stated Justice Gilbert, \u201cWe think Stratton is not applicable here. That the mortgage has a term of 30 years is sufficient to support the trial court’s calculation . . . The evidence is that Smith does not qualify to refinance.\u00a0 She is more likely than anyone to be saddled with a 30-year mortgage.\u201d<\/p>\n

To rub salt in the wound, the court of appeal affirmed an award of attorney\u2019s fees to the borrower based on a clause in \u201cthe note secured by the deed of trust.\u2019”<\/p>\n

Common sense tells me that the promissory note is separate from the claim against the mortgage broker, which claim was based on breach of fiduciary duties.\u00a0 Remember when the court said, \u201cYou shopped the loan, you\u2019re a mortgage broker.\u201d\u00a0 On appeal \u201cHLF points out that under section 1717 a prevailing party cannot recover fees for actions based on tort including breach of fiduciary duty and misrepresentation.\u201d<\/p>\n

But when it came to attorney\u2019s fees, the court lumped it all together, even though no claim was stated under the promissory note or the deed of trust.<\/p>\n

Here comes the train wreck<\/a><\/strong>.\u00a0 \u201cHere, not only did HLF have a fiduciary obligation, but Baden made an express oral promise to Smith that he would shop the best loan for her.\u00a0 [T]he trial court treated the oral brokerage agreement and the loan documents as a single agreement<\/strong>. This was justified because they were all part of the same transaction.\u00a0 The award of attorney fees was proper.\u201d<\/p>\n

That seems like piling on.\u00a0 The defendant was held liable as a fiduciary because of shopped the loan.\u00a0 Then the court mashed all of the documents together and said, \u201cHey, we found an attorney\u2019s fees clause in one of the contracts.\u201d\u00a0 That is not a logical outcome.\u00a0 But, because the California Supreme Court almost never takes up business cases for review, the decision will be binding.<\/p>\n

Smith v. Home Loan Funding, Inc<\/strong>.<\/a> (Feb. 25, 2011) 2011 DJDAR 2968<\/p>\n","protected":false},"excerpt":{"rendered":"

The decision in Smith v. Home Loan Funding, Inc. (Feb. 25, 2011) 2011 DJDAR 2968 may have satisfied a \u201cfeel good\u201d impulse at the Court of Appeal.\u00a0 However, it seems that Justice Gilbert jumped the rails when he affirmed the award of damages.\u00a0 Even more, he awarded attorney\u2019s fees when there was no contract between […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,8],"tags":[],"class_list":["post-483","post","type-post","status-publish","format-standard","hentry","category-case-law","category-real-property"],"_links":{"self":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/483"}],"collection":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=483"}],"version-history":[{"count":4,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/483\/revisions"}],"predecessor-version":[{"id":488,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/483\/revisions\/488"}],"wp:attachment":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=483"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=483"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=483"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}