Can Banks be Liable for Processing or Underwriting a Loan that a Borrower Cannot Afford?
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Oftentimes, individuals or businesses borrow money from a bank or lender, and unfortunately, are unable to pay the loan payments. In this event, the borrower may try to shift the blame of their inability to pay on the bank or lender, by filing a claim for negligent loan processing or underwriting, and/or breach of fiduciary duty. Based on this, it is important for banks and lenders to know if they can be liable for processing or underwriting a loan, which the borrower ends up not being able to afford.
Occasionally a borrower’s counsel or counsel for an institution that has served as a lending partner in some capacity will get crafty in trying to shift the blame for bad business transactions to the originating and lead lending institution by asserting claims against the original lender for not performing like a reasonable and prudent bank can be expected to perform in the administration of a loan. The claims come in many forms, but they are all predicated on the same fundamental premise: if the bank had performed a better/reasonable underwriting or processing of the original loan, then the losses that ultimately occurred would have been prevented. Fortunately for banks, these types of claims are unsustainable in Florida law. There is no tort duty for banks to process loans competently. See Silver v. Countrywide Home Loans, Inc., 760 F. Supp. 2d 1330, 1339 (S.D. Fla. 2011).
Can a Bank be Liable for Negligent Loan Processing or Underwriting?
Under Florida law, in order for a borrower to prevail on a claim for negligence against a bank or lender, the borrower must establish that: (1) the bank/lender owed a legal duty to protect the borrower from a particular injury or damage; (2) the bank/lender breached this duty; (3) there is a reasonably close casual connection between the bank/lender’s conduct and the resulting injury to the borrower; and (4) the borrower suffered actual loss or damage. See Clay Elec. Co-op., Inc. v. Johnson, 873 So. 2d 1182, 1185 (Fla. 2003); Silver v. Countrywide Home Loans, Inc., 760 F. Supp. 2d 1330, 1339 (S.D. Fla. 2011).
Do Banks Have a Legal Duty to Perform Reasonable Loan Processing or Underwriting?
No! Fortunately for banks and lenders, no Florida court has held that a lender has a legal duty to use reasonable care in the processing or underwriting of a loan application. See Brenmar Holdings, LLC v. Regions Bank, N.A., No. 15-CV-23755, 2016 WL 4270206, at *4 (S.D. Fla. Aug. 15, 2016) (holding that banks have no duty to “process, convert, administer, or service” the borrower’s loan); Grave v. Wells Fargo Bank, N.A., No. 14-60975-CV, 2014 WL 11776961, at *9 (S.D. Fla. July 11, 2014) (holding “[p]laintiffs’ count for negligent processing of a loan fails as a matter of law, and “[p]laintiffs cannot allege that Wells Fargo had any loan processing duty giving rise to a claim for negligence”); Brake v. Wells Fargo Fin. Sys. Fla., Inc., No. 8:10-CV-338-T-33TGW, 2011 WL 6719215, at *11 (M.D. Fla. Dec. 5, 2011) (holding “Florida courts have rejected the contention that banks owe a legal duty to prospective borrowers to process, and consider, loan applications with reasonable care”); Silver, 760 F. Supp. 2d at 1339 (holding “[t]here is no tort duty to process loans competently”).
In analyzing the issue of whether banks have a reasonable duty of care in underwriting loan applications (either to their borrower or others who may rely on the existence of the loan), I was unable to find any law that provided extra-contractual tort liability to a bank who did not make representations to a borrower or other third party that induced reliance and created a fiduciary duty. To the contrary, at least four federal courts have concluded there is no such common law duty of competent loan underwriting or processing in Florida. See Brake v. Wells Fargo Fin. Sys. Fla., Inc., No. 8:10–cv338, 2011 WL 6719215, at *10–11 (M.D. Fla. Dec. 5, 2011) (noting “federal courts applying Florida law have held that there is no legal duty to process loans competently.”); Silver v. Countrywide Home Loans, Inc., 760 F. Supp. 2d 1330, 1342–43 (S.D. Fla. 2011) (same); Azar v. Nat’l City Bank, No. 6:09–cv–400, 2009 WL 3668460, at *3 (M.D. Fla. Oct. 26, 2009) (dismissing negligence claim because the defendant bank had no duty under Florida law to process plaintiff’s loan application properly); Matthys v. Mortg. Elec. Registration Sys., Inc., No. 6:09–cv–1150, 2009 WL 3762632, at *2 (M.D. Fla. Nov. 10, 2009) (dismissing negligence claims as there is no duty under Florida law to use reasonable care in the evaluation of loan applications).
By way of illustration, in the Brake case, the borrowers brought a claim for negligence against Wells Fargo Bank. In this regard, the borrowers alleged that Wells Fargo owed them a duty of care to process the loan application in accordance with standard underwriting criteria, service the loan in accordance with industry standards, and otherwise deal in good faith, and that the bank breached this duty by “failing to collect, examine and evaluate, pertinent information” regarding the borrowers’ financial position. The borrowers further alleged that, had Wells Fargo comported its loan underwriting with best practices, it would have known that they could not afford the mortgage. Wells Fargo argued that the borrowers’ claim is not actionable because there is no duty to process the loan application in any particular manner. The United States District Court agreed with Wells Fargo, and stated that the negligence claim was “illogical,” because Wells Fargo simply granted the borrowers a loan pursuant to their own request. The court held that “Florida would not hold that a lender has a duty to use care in processing a loan application,” and recommended that the borrowers’ claim should be dismissed with prejudice. Brake, 2011 WL 6719215, at *10-11.
As such, it appears that banks and lenders cannot be held liable for negligent loan processing or underwriting because they do not have a legal duty to use reasonable care in the processing or underwriting of a loan application.
Beyond Underwriting: What About a Breach of Fiduciary Duty?
It depends… Under Florida law, in order for a borrower to prevail on a claim for breach of fiduciary duty, the borrower must establish that: (1) a fiduciary duty exists; (2) the bank or lender breached that duty; and (3) the borrower suffered damages that were proximately caused by the breach. Brenmar Holdings, LLC, 2016 WL 4270206, at *4; Silver, 760 F. Supp. 2d at 1338 (citing Gracey v. Eaker, 837 So. 2d 348 (Fla. 2002)).
Although the claims would be predicated on the sales and not the underwriting or processing activities, some borrowers may allege in a complaint that the bank or lender breached a fiduciary duty owed to them by convincing them to obtain a loan that they could not afford. The general rule in Florida is that banks and lenders do not owe borrowers a fiduciary duty. See Grave, 2014 WL 11776961, at *4 (noting “[g]enerally, there is no presumed fiduciary relationship between a lender and a borrower under the common law”); Silver, 760 F. Supp. 2d at 1338 (citing McCulloch v. PNC Bank Inc., 298 F.3d 1217, 1226 (11th Cir. 2002) (holding “there is no presumed fiduciary relationship between a lender and a borrower”) (applying Florida law)). However, Florida courts have found implied fiduciary relationships, in the bank context, based on specific factual circumstances surrounding the transaction and the relationship of the parties, and when confidence is reposed by one party and trust accepted by the other. Grave, 2014 WL 11776961, at *4 (citing First Nat’l Bank & Trust Co. v. Pack, 789 So. 2d 411, 414-15 (Fla. 4th DCA 2001)). A fiduciary relationship may arise, for example, “where the lender (1) takes on extra services for a customer, (2) receives any greater economic benefit than from a typical transaction, or (3) exercises extensive control.” Id. Cases that extend duties of this nature to banks typically involve egregious facts and circumstances.
The following cases demonstrate how challenging that barrier may be in practice. For example, in the Brake case, the borrowers brought a claim for breach of fiduciary duty against Wells Fargo Bank. In this regard, the borrowers alleged that a fiduciary relationship arose when the bank tendered financial advice to them, and it was breached when the bank used “high-pressure sales tactics” to convince them to obtain a loan they could not afford. Wells Fargo argued that, absent a special pre-existing relationship, the bank owed no fiduciary duty. The borrowers argued that a fiduciary duty did exist when the lender exceeded its role as an ordinary lender by offering financial advice, and the borrowers placed their trust in the bank. The United States District Court held that the complaint did not allege facts to plausibly show the special relationship between the borrowers and the bank that is required to establish that the bank was acting as a fiduciary. However, the court held that the borrowers could amend their complaint to add factual detail sufficient to state a cognizable claim. Brake, 2011 WL 6719215, at *5-6.
In the Silver case, the borrower brought a claim for breach of fiduciary duty against her mortgage lender. In this regard, the borrower stated that she established a relationship of trust and confidence with the lender because she negotiated the mortgage through thirty (30) to forty (40) telephone conversations with the lender’s agent. The borrower also claimed that she placed her trust and confidence in the lender, and believed that the lender would provide her with a loan that was in her best interests. The borrower further argued that the lender steered her into a risky and financially complex loan that was “unsuitable for her needs.” The United States District Court disagreed with the borrower and held that, “one may not unilaterally impose a fiduciary responsibility on another simply by reposing trust.” Absent some conscious acceptance of such fiduciary duty by the lender, no fiduciary relationship was created. Silver, 760 F. Supp. 2d at 1338-39. (S.D. Fla. 2011).
Therefore, depending on the factual circumstances, banks and lenders may be liable for a breach of fiduciary duty, but it such cases require factually anomalous scenarios and will warrant consequential scrutiny from courts at the pleadings and summary judgment phases of a case.
Banks and lenders should be relieved to know that they do not have a duty to perform reasonable loan processing or underwriting, and cannot be held liable for negligently processing or underwriting a loan. However, in some circumstances, a bank or lender may be liable for a breach of a fiduciary duty. If you’re a bank or lender, and the borrower has filed a claim against you for inadequate loan processing or underwriting, the experienced attorneys at Jimerson Birr can help.