The question arises: If a consumer is seeking to obtain a real estate mortgage loan, does his mortgage broker have a fiduciary duty to look out for his interests? In California, the answer is ‘yes'. Not all states are the same.
That California mortgage brokers have such a fiduciary duty has been a matter of case law for some time. In 1979 the California Supreme Court considered a particularly egregious case (Wyatt v. Union Mortgage Co.) wherein the broker not only mislead the applicants as to the loan's interest rate and the amount of balloon payment, but also he did not point out the onerous significance of the loan terms regarding late charges and a so-called "grace period" relative to late payments.
Among other points, the court also made the analogy with insurance policies:
"In the context of insurance policies, this court has recognized that a fiduciary's duty may extend beyond bare written disclosure of the terms of a transaction to duties of oral disclosure and counseling…The insured usually confides implicitly in the agent securing the insurance, and it is only just and equitable that the company should be required to call specifically to the attention of the policy-holder such provisions as the one before us."
"The reasoning of these cases applies to transactions with mortgage loan brokers as well… the broker's failure to disclose orally the true rate of interest, the penalty for late payments or the swollen size of the balloon payment clearly constituted breach of the broker's fiduciary obligations. It is noteworthy also that the provisions regarding interest rate, late charges and balloon payment were highly unfavorable to the borrower and yet the broker made no attempt to draw his clients' attention to these matters."
It should be noted that we are here only talking about brokers. The courts have not ascribed the same duties to lenders and their direct representatives. In the case of Nymark v. Heart Federal Savings and Loan (Third District Court of Appeals, June 27, 1991) the court considered a plaintiff's charge that a lender failed in its duty of care in the making of an appraisal. Here, the court wrote, "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… Thus, for example, a lender has no duty to disclose its knowledge that the borrower's intended use of the loan proceeds represents an unsafe investment."
In a concurring opinion, two of the justices wrote, "The relationship between a lending institution and its borrower-client is not fiduciary in nature…A commercial lender is entitled to pursue its own economic interest in a loan transaction... This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another."
Not only does California case law support the assertion that a mortgage broker has fiduciary duties to the borrower/applicant, but also those duties were codified as a result of Assembly Bill 260 (Lieu), which was approved by the Governor on October 11, 2009 and became effective January 1, 2010.
AB 260 was one of a slew of lending-related bills that were part of the fall-out of the Great Mortgage Debacle a couple of years earlier. Curiously, AB 260 was exactly the same bill, but with dates changed, as one the Governor had vetoed (as AB 1830) in 2008. At that time, his veto message said, "…further legislation is unnecessary until we can evaluate the effect of the reforms that have already been enacted."
As a result of AB 260, California Civil Code § 2923.1 (a) now reads:
"A mortgage broker providing mortgage brokerage services to a borrower is the fiduciary of the borrower, and any violation of the broker's fiduciary duties shall be a violation of the mortgage broker's license law. This fiduciary duty includes a requirement that the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest. A mortgage broker who provides mortgage brokerage services to the borrower owes this fiduciary duty to the borrower regardless of whether the mortgage broker is acting as an agent for any other party in connection with the residential mortgage loan transaction." [my emphasis]
Not much wiggle room there.
For varying reasons, AB 260 was opposed by the Department of Real Estate, Department of Corporations, Department of Finance, California Mortgage Association, California Association of Mortgage Brokers, and the California Association of REALTORS®.