FHA Mortgage Guide

Fiduciary relationships require the highest duty of care. According to Black’s Law Dictionary, fiduciary relationships usually arise in one of four situations: (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.

But, what about the lender? Does the relationship between lender and borrower qualify as a “fiduciary relationship?”

Generally speaking, for national lenders and their mortgage subsidiaries it is argued that the answer is no. Absent special circumstances, the relationship between a lender and a borrower is merely that of a creditor-debtor, not that of a fiduciary. However, in certain situations, courts have implicitly recognized imposing fiduciary duties on lenders based on policy grounds. For instance, a lender may be considered a fiduciary when it “takes control” of the borrower, or when “moral, social, personal, or domestic” relationships are shown to exist between the parties. (Cases cited in American Bar Association – Business Tort Litigation (2d Ed.)) Further, when the lender undertakes to perform a task on behalf of the borrower, then it is likely that the lender has made itself a fiduciary for the borrower, based on the law of agency. (Id.)

Should the fiduciary duties extend more liberally to the lender-borrower relationship? The answer should be a resounding YES. Often times, when a loan officer or mortgage broker is helping to arrange a loan for a borrower, that loan officer/mortgage broker is, in reality, acting as the agent for both the lender and borrower. For instance, certain loan officers/mortgage brokers will work predominantly with a few lenders. Instead of acting solely in the borrower’s best interests, these loan officers/mortgage brokers simply act as an intermediary between lender and borrower. Therefore, in the foregoing situation, the lender should be considered a fiduciary via the law of agency.

More importantly, however, is the fact that procuring a home loan is likely the biggest monetary obligation a person will have in his/her lifetime. Consequently, any missteps in the loan transaction process can lead to dire consequences for the borrower. It is for this reason that the law should impose more liberally a fiduciary relationship between borrower and lender, especially in the residential home loan marketplace where the average borrower is not as sophisticated as the lender. If fiduciary relationships were more liberally imposed, we would likely see lenders implementing more safeguards before underwriting a loan. If this were the case, the mortgage meltdown might not have been as catastrophic to our national economy.

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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.

Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.

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