Borrowers Should Know If They Can Afford to Make Loan Payments

We never hesitate to complain of a court decision that doesn't square with our notions of fairness and/or common sense. We ought, then, to give credit when it is due and to acknowledge decisions that might be seen as striking a blow for common sense in a world gone overboard with self-proclaimed victims who persistently seek to blame others for the consequences of their own bad judgment.

A toast, then, to California's First Appellate District Court of Appeal and the decision rendered in the case of Perlas v. GMAC Mtg. The facts are as follows:

In the fall of 2007, Perlas and Villacorta (Borrowers) sought to refinance property they owned in Discovery Bay. When they applied for the loan, they told the GMAC loan consultant that their gross income was $50,000 a year. Within a few days, they were told they qualified for the loan. Subsequently, they obtained a $417,000, 30-year, fixed-rate loan at 6.375% from GMAC. The monthly payments were to be $2,601.54.

At the closing, one of the documents they were required to sign was a loan application which they had neither prepared nor reviewed. The application stated that their "total income" was $9,466 per month. The Borrowers were not requested to confirm the accuracy of the information in the application, nor did they read it. They did sign the document.

At the time of the loan closing, the Borrowers also executed documents prepared by GMAC for a $114,000 home equity line of credit. The entire amount of the credit line was advanced as part of the refinance. The credit line application was also neither prepared nor reviewed by the borrowers.

Not surprisingly, the Borrowers were unable to make the payments. In June of 2008 a notice of default was filed, and a notice of trustee sale was filed in September of that year. In October, the Borrowers filed suit against GMAC. Among the causes of action alleged were fraud (misrepresentation), fraud (concealment), and breach of fiduciary duty. GMAC filed motions to demur (essentially, to object) and the trial court agreed, holding that the Borrowers had not stated facts sufficient to give a cause of action. The Borrowers appealed.

The Court of Appeal upheld the trial court ruling in favor of GMAC. Its reasoning is instructive.

The Borrowers argued that GMAC had represented to them that they qualified for the loan(s) based on their "true income", and that GMAC knew that this was false. Hence, "they (the Borrowers) relied on the misrepresentation and obtained the loans believing that GMAC's approval of the Loan indicated that GMAC thought [they] 'could afford' the loans." But the Court rejected this. "Appellants [i.e. the Borrowers] appear to conflate loan qualification and loan affordability. In effect [they] argue that they were entitled to rely upon GMAC's determination that they qualified for the loans in order to decide if they could afford the loans." But this, the Court said, "ignores the nature of the lender-borrower relationship." It then went on to cite from a number of cases. Among the points noted: "…there is no fiduciary relationship between the borrower and lender." "A lender 'owes no duty of care to the [borrowers] in approving their loan.'" "The lender's efforts to determine the creditworthiness and ability to repay by a borrower are for the lender's protection, not the borrower's."

Attorney/Author Harold Justman makes this comment: "This case will help put an end to many of the pending lawsuits where homeowners were pulling out all of their equity with new loans and now want to blame someone else for their bad financial decision. As an expert witness, I have read numerous depositions of borrowers who are trying to blame someone for getting them into a loan which they couldn't afford. None of them has been able to tell a convincing story that they didn't know that they couldn't afford the loan."