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Do Not Overstep Your Bounds – Court Holds Mortgage Lender to the Higher Standard of Mortgage Broker

Debt Collection and Mortgage & Lending Law by Simon Offord, Esq.

In the 2011 case of Smith v. Home Loan Funding, Inc., the Second District Court of Appeals held that a mortgage lender, who represented that they would comparison shop for the best loan, stepped into the role of a mortgage broker, and thus owed the borrower a fiduciary duty.

Mortgage lenders generally do not owe a fiduciary duty to a borrower.  However, in considering the facts and evidence presented in the Smith case, the Court held that the lender undertook a fiduciary duty to the borrower and was eventually held liable for damages.

The case involved a loan that was placed by Home Loan Funding (HLF).  According to the Court’s opinion, “Anthony Baden worked for HLF as a loan officer.  He had no real estate or mortgage broker license.  In March 2006, Tonya Smith contacted Baden in response to an advertisement she received from HLF.  She sought a $40,000 home equity line of credit.”

The most significant factor in the Court’s decision was that the lender told the borrower he could “shop the loan.”  When asked whether the lender ever told the borrower that he was a mortgage broker, the lender replied, “I believe so, yes.”  The borrower testified that she trusted the lender completely and believed he would provide her with the best loan.

The Court determined that the lender, by making such representations to the borrower, acted as a mortgage broker and had, therefore, assumed fiduciary duties to Smith, which HLF breached.  The Court of Appeal affirmed the trial court’s decision, determining there was sufficient evidence to find that the lender’s actions were significant enough to elevate its duties to that of a broker.

Somewhat surprisingly, the Court also awarded plaintiffs their attorney fees.  The Court of Appeal affirmed an award of attorney’s fees to the borrower based on a clause in the promissory note secured by the deed of trust.  This was despite that the lawsuit dealt with the alleged tortious conduct of the lender (breach of fiduciary duty and misrepresentation), not breach of contract.  This part of the decision has raised eyebrows and sparked controversy as it seems to contradict common logic and appears to be more of a punishment to the lender than a sound legal decision.   It will be interesting to see what comes of this ruling in the future.

If you have questions about your responsibilities as a mortgage broker or lender, or if you have any other questions about real estate legal issues, contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at

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