Banks: Does A Lender Owe A Borrower A Duty to Process a Loan or Loan Modification Without Error?

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Banks:  Does A Lender Owe A Borrower A Duty to Process a Loan or Loan Modification Without Error?

The Supreme Court recently ruled in Sheen v Wells Fargo Bank that a borrower could not pursue a negligence claim of bank error, holding that the lender did not owe the borrower a tort duty sounding in general negligence principles to process and respond carefully to a borrower’s loan modification application such that, upon a breach of this duty, the lender may be liable for the borrower’s pecuniary losses unaccompanied by property damage or personal injury.  Borrower’s assertion of a “special relationship” between himself and Wells Fargo did not provide a compelling basis to recognize such a duty.  What?

Borrower’s lawsuit alleges that Wells breached its duty by (1) failing to respond to borrower’s loan applications, (2) sending two letters suggesting loans had been modified and his house would not be sold, (3) phoning his wife to say there would be no foreclosure sale of his home, (4) confirming borrower’s interpretation of these letters with a further letter that read like it was sent in connection with an unsecured debt rather than a secured mortgage loan, and (5) assigning the loan to someone without notifying the assignor that borrower’s modification application was pending.  Wells foreclosed on borrower’s and his wife’s home.  Borrower sued, not based on breach of contract, but on negligence.

The trial court considered borrower’s claims and rejected them, granting Wells motion to dismiss.  The court of appeals affirmed, holding that “a lender does not owe a borrower a tort duty of care during a loan modification negotiation.”  Noting that the “economic loss rule” bars negligence claims against a counter contracting party, even if there is a ‘special relationship.’

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