Loan Renegotiation is "New Phase" in Lending Relationship, May be Considered in whether Lender Breached Duty of Care

Back in March, a California Bankruptcy Court ruled “Franz Kafka lives [and] he works at Bank of America,” describing the bank as “heartless” in improperly foreclosing on houses, and summarized the homeowners’ ordeal with the bank as a “Kafkaesque nightmare.”

Now, closing out the year, a California Appeals Court has gotten in on the lender liability action. (Rossetta v. CitiMortgage Inc. (Dec. 18, 2017.)) This time the bank is CitiMortgage, and instead of improper foreclosures, the case involves an over two-year-long home loan modification application process. Essentially, the bank told the homeowner “nothing could be done” to modify the home loan until they were at least three months in default, dragged the process out over two years, and finally denied the modification because there was “an excessive” amount owed in arrears. The homeowner sued the bank for mishandling the modification process.

The general rule in California is that lenders do not owe a duty of care to a borrower unless their involvement exceeds their “conventional role as a mere lender of money." (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal. App.3d 1089, 1096.)  Certainly, there is no duty to offer or approve a loan modification. But once the parties enter into a renegotiation process? Here, the Court of Appeals in Rossetta made two noteworthy rulings, the first of which is more of an observation.

1. The Court stated that where a borrower and lender “voluntarily undertake to renegotiate a loan”, although still traditional lending, this is a "new phase" that "vastly differs" from the parties' relationship when they entered into the loan: the parties are now in an established relationship, the transaction is no longer arm’s length, and the lender has the greater bargaining power.

2. The Court ruled that, by making default a condition of being considered for a loan modification, CitiMortgage “arguably directed [the borrower’s] behavior in a way that potentially exceeds the role of a conventional lender.” 

The Court of Appeals ruled the borrower should proceed with its complaint that CitiMortgage “acted unreasonably by dragging [the borrower] through a seemingly endless application process.”  

Query how this would turn out if, instead of a homeowner, the facts involved a business loan in a workout. Fun fact to wrap this up: CitiMortgage is exiting the mortgage servicing business this coming year (2018).