A Lender Owes No Duty to a Borrower to Disclose an Intent to Defraud the Borrower

Are a homeowner’s damages for the decline in the value of their home the fault of the lender? Numerous borrowers have tried to make this argument, though the Court of Appeal suggests that these claims have little merit, as the market is the true cause of the homeowner’s loss.

In the recent case of Bank of America Corp. v. Superior Court (Aug. 24, 2011) 198 Cal.App.4th 862, the plaintiffs made a creative claim against their mortgage lender, arguing that the lender had a separate duty to disclose to each of them the lender’s intent to defraud them on their loans.

The plaintiffs were 248 borrowers who obtained a residential mortgage loan from Countywide Home Loans. In their action, they alleged that Countrywide had used false and inflated property evaluations to induce borrowers to obtain large loans on risky terms, knowing that the loans were unsustainable and would result in a crash that would destroy the borrowers’ equity. The plaintiffs alleged that Countywide had a duty to disclose to each borrower that the mortgage being offered was part of a massive fraud.

Countywide challenged the claim by arguing that, with respect to the alleged failure to disclose their intent to defraud the borrowers, Countrywide owed no separate duty of disclosure and the plaintiffs had failed to tie the alleged nondisclosure to any of their damages.

While the trial court refused to dismiss the claim for the failure to disclose the intent to defraud, the Court of Appeal reversed and directed the trial court to find that the claim was not proper. In doing so, the Court of Appeal concluded that Countywide had no duty to warn borrowers of its intent to commit fraud. While Countrywide had a duty to refrain from committing fraud, it had no independent duty to disclose to its borrowers its alleged intent to defraud its investors by selling them mortgages with inflated values.

The Court in this case observed that they were aware of no authority supporting the imposition of additional liability on an intentional tortfeasor for failing to disclose his or her tortous intent before committing a tort. The Court also concluded that the plaintiffs failed to prove any causation. In that regard, due to the generalized decline in home values which affected all homeowners, there was no nexus between Countrywide’s alleged fraudulent concealment of it scheme to bilk investors and the diminution in value of plaintiffs’ properties.

The holding in Bank of America demonstrates that courts remain skeptical of the ever increasing number of claims brought against residential lenders relating to a decrease in property values. As noted by the Court, when such claims are closely scrutinized, it is most likely that any damages resulted from a falling real estate market, and not deceptive practices by the lender.