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Tonya Smith v. Home Loan Funding

February 24, 2011

TONYA SMITH, PLAINTIFF AND RESPONDENT,
v.
HOME LOAN FUNDING, INC., ET AL., DEFENDANTS AND APPELLANTS.



Super. Ct. No. 56-2007- 00306806-CU-BT-SIM Ventura County

The opinion of the court was delivered by: Gilbert, P.J.

CERTIFIED FOR PUBLICATION

The mortgage lender who also acts as a mortgage broker must keep in mind the differences between the two when speaking to a prospective client. A mortgage broker has a fiduciary duty to a borrower. A mortgage lender does not. This case teaches that a mortgage lender should take care not to convey to a prospective client that it is acting as a broker when in fact it is acting as a lender.

A mortgage broker appeals a judgment awarding damages against it for breach of fiduciary duty and misrepresentation. The broker contends there is no substantial evidence it acted as a broker, the amount of damages awarded is excessive, and there is no basis for an award of attorney fees. We modify the damage award by eliminating damages awarded for a prepayment penalty. Such damages are inconsistent with an award of damages based on an interest differential over the 30-year term of the loan. In all other respects, we affirm.

FACTS

Home Loan Funding, Inc., (HLF) was a California corporation that provided lending services for residential mortgages. It funded most of its loans directly to borrowers, and brokered some of its loans to third party lenders, Washington Mutual and World Savings Bank.

Anthony Baden worked for HLF as a loan officer. He had no real estate or mortgage broker license. In March 2006, Tonya Smith contacted Baden in response to an advertisement she received from HLF. She sought a $40,000 home equity line of credit (HELOC). Her home had existing first and second mortgages.

Baden told Smith he could "shop the loan." When asked whether Baden ever told her that he was a mortgage broker Smith replied, "I believe so, yes." Smith testified that she trusted Baden completely, and believed he would provide her with the best loan.

Smith signed a loan application. Thereafter, Baden told her she did not qualify for a HELOC because her credit scores were too low. He said he "shopped it" with other lenders. When asked how many other lenders he inquired about the HELOC, he testified, "Well, I don't recall the exact number. It was more than one." He said, "[W]e looked at every lender that offered a home equity line of credit that we were able to process." Baden admitted that when he worked for HLF he placed loans with other lenders.

Baden suggested that Smith refinance with a new first deed of trust. Smith expressed reluctance because her existing first trust deed had a prepayment penalty. Baden told her to check with a tax professional to see if the prepayment penalty would be tax deductible. Smith learned that it was and decided to refinance.

Smith contacted Baden who told her, "he would shop the best loan for me." She trusted Baden and did not contact another lender. Baden provided Smith with a $700,000 first trust deed. The loan had a term of 30 years with a variable interest rate. The loan contained a 3.85 margin over the indexed interest rate.

Smith did not want a prepayment penalty on the new loan. Baden represented to her that the new loan would have none. Baden reassured Smith and her husband throughout escrow that there would be no prepayment penalty and sent an email to assure them.

Although the promissory note provided there was no prepayment penalty, a prepayment penalty was reinserted into the transaction by means of a rider. Smith did not notice the prepayment penalty when she signed the stack of loan documents. She had no reason to believe that Baden and HLF would mislead her. HLF was the direct lender for the loan.

Smith's expert, Luis Araya, testified that the commission available to HLF for the sale of the loan on the secondary market was greatly enhanced by the inclusion of both a prepayment penalty and a heavily marked-up margin. Araya also testified that a 3.85 margin is "[a]stronomical." He said Smith would have qualified for a loan with a 2.2 percent margin without a prepayment penalty. He would have been compensated through a loan origination fee. The maximum loan origination fee he ever charged is one percent. Araya testified that Smith cannot refinance her loan in ...


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