Fiduciary duties are requirements under the law of how a person or entity is allowed to conduct itself.
In California, such person has a duty of loyalty that they must always act in the best interests of the borrower, and a duty of care that they must act reasonably and responsibly.
Many people are surprised to learn that mortgage lenders, whether a private financier or an institution such as a bank or credit union, do NOT have a fiduciary relationship with borrowers under California law.
Why don’t mortgage lenders have fiduciary duties to borrowers in California?
In California, the law and the courts have traditionally viewed the relationship between mortgage lenders and borrowers as almost adversarial in nature.
That is, the interests of the lender (i.e. profiting off of the mortgage payment though interest payments) are often directly contradictory to the interests of the borrower (i.e. to have as little debt as possible and get out of debt quickly).
For this reason, it would be impractical to expect a mortgage lender to have a duty of loyalty to a borrower.
In the 1991 case Nymark v. Heart Federal Savings & Loan (231 Cal.App.3d 1089), a California homeowner sought to refinance his mortgage with the lender.
As part of its loan approval process, the lender conducted an appraisal of the property to determine whether it would be adequate collateral for the loan in question.
The appraisal stated that the property was in decent condition, and the homeowner subsequently signed the loan agreement. However, after the loan was paid out the homeowner learned that the appraisal failed to observe several construction defects and building code violations, and that the property was ultimately “red-tagged” (deemed unsafe for inhabitation) as a result.
The homeowner sued, alleging that the mortgage lender breached its fiduciary duty by conducting a negligent appraisal of the property.
The California Supreme Court, ruling in favor of the mortgage lender, made two significant observations concerning the relationship between a mortgage lender and a borrower:
Citing Wagner v. Benson (101 Cal.App.3d 27 (1980)), the Court held that, as a general rule, “a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” In other words, no fiduciary duty exists so long as the lender is providing money (in the form of a loan or mortgage) and nothing else.
Citing Connor v. Great Western Savings & Loan Assn. (69 Cal.2d 85, (1968)), the Court did note that an exception to the general rule would come about “only when the lender ‘actively participates’ in the financed enterprise ‘beyond the domain of the usual money lender.’”
Although the Court did not elaborate on this exception, it stated that the defendant’s appraisal was not an exception because the appraisal was done for the lender’s benefit, not for the borrower’s, and as part of the lender’s standard process for approving loans.
Because the lender was merely loaning money and had no further involvement with the property, the Court ruled that no duty of care was owed to the homeowner.
As the Court noted, “A contrary conclusion would produce the incongruous result that a lender which conducts an appraisal for its own benefit could become responsible for guaranteeing to the borrower the adequacy and soundness of the collateral the borrower has pledged as security for the loan.
Such a nonsensical result is not compelled by the law.” Nymark v. Heart Federal Savings & Loan, 231 Cal.App.3d 1089 at 1100.