need a dre defense attorney to handle charges of breach of fiduciary duty and lawsuit

CALIFORNIA REAL ESTATE BROKERS MUST UNDERSTAND THE FIDUCIARY DUTY TO THE LOAN BORROWER.

We recently had a client come to our office for legal advice in regard to suing her real estate broker for a breach of the broker fiduciary duty. As we all learned early on in our real estate broker training, the fiduciary duty is a duty of “TRUST” and the highest duty known to law. As I tell people, it means you better treat your clients the same as you would your own mom, dad, brother or sister (assuming you care about them of course). The fiduciary duty means a duty of care, loyalty, dilligence, disclosure of relevant facts in a transaction, etc.

Yet when it comes to balloon loans (loans where all the borrower is normally doing is paying interest on the loan and there is a big balloon payment due in 5 or 10 years, this is a tricky subject. The mortgage broker must answer honestly questions posed by the borrower in regard to these types of loans and what they mean. When the real estate broker withholds information, or fraudulently conceals certain information or fails to accurately explain the true nature of the balloon feature, this can lead to legal liability. I would argue the same applies to explaining the “option arm loan, pick-a-pay and negative amortization loans.

One of the key cases addressing the real estate broker fiduciary duty in regard to balloon loans is Wyatt v. Union Mortgage Company, 598 P.2d 45 (1979) out of the Supreme Court of California. In this case the Court discussed the brokers duty.

The Court first discussed the role of the Loan Broker in California:

A mortgage loan broker is customarily retained by a borrower to act as the Borrower’s agent in negotiating an acceptable loan. All persons engaged in this business in California are required to obtain real estate licenses. (Bus. & Prof.Code, ss 10130 and 10131, subd. (d).) Thus, general principles of agency (Civ.Code, ss 2228 and 2322, subd. 3) combine with statutory duties created by the Real Estate Law (see Bus. & Prof.Code, s 10176, subds. (a), (i)) to impose upon mortgage loan brokers an obligation to make a full and accurate disclosure of the terms of a loan to borrowers and to act always in the utmost good faith toward their principals. “The law imposes on a real estate agent ‘the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his beneficiary.’ (Citations.) This relationship not only imposes upon him the duty of acting in the highest good faith toward his principal but precludes the agent from obtaining any advantage over the principal in any transaction had by virtue of his agency. (Citation.)” (Batson v. Sterehlow (1968) 68 Cal.2d 662, 674-765, 68 Cal.Rptr. 589, 597-598, 441 P.2d 101, 109- 110) A real estate licensee is “charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision. (Citations.)” (Rattray v. Scudder (1946) 28 Cal.2d 214, 223, 169 P.2d 371, 376; see also Realty Projects, Inc. v. Smith, (1973) 32 Cal.App.3d 204, 210, 108 Cal.Rptr. 71; Smith v. Zak (1971) 20 Cal.App.3d 785, 792-793, 98 Cal.Rptr. 242.).

The Court then discussed the loan at issue in the Case:

In the present case, respondents testified they did not read the stack of written loan documents before signing them in 1966. However, respondents did ask the broker about the rate of interest, late payments, and the size of the balloon payment due at the end of the loan period. In response to their questions, respondents received the materially misleading and incomplete information already described in this opinion. Given this evidence, the jury justifiably concluded that Stockton did not satisfy its fiduciary obligations of disclosure and good faith toward its principal in regard to the 1966 loan.

The Court laid out the general legal principle in regard to the fiduciary duty of the loan broker in California to their borrower client:

Principles of agency combined with statutory duties created by real estate law to impose upon mortgage loan brokers an obligation to make a full and accurate disclosure of terms of a loan to borrowers and act always in utmost good faith toward their principals. In addition, A real estate licensee is charged with duty of fullest disclosure of all material facts concerning transaction that might affect principal’s decision.

The Court then analogized to insurance disclosures:

“ ‘It is a matter almost of common knowledge that a very small percentage of policyholders are actually cognizant of the provisions of their policies . . . The policies are prepared by the experts of the companies, they are highly technical in their phraseology, they are complicated and voluminous. . . . The insured usually confides implicitly in the agent securing the insurance, And it is only just and equitable that the company should be required to call specifically to the attention of the policyholder such provisions as the one before us.’ ” (Motor T. Co. v. Great American Indem. Co. (1936) 6 Cal.2d 439, 444, 58 P.2d 374; Glickman v. New York Life Ins. Co., supra, 16 Cal.2d at pp. 631-632, 107 P.2d 252.). The reasoning of these cases applies to transactions with mortgage loan brokers as well. Here, the record discloses that respondents were persons of modest means and limited experience in financial affairs, whose equity in their home was their principal asset. They retained a mortgage loan broker to negotiate for them highly complex loan terms and they may be assumed to have justifiably relied on the latter’s expertise. Against such a backdrop, the broker’s failure to disclose orally the true rate of interest, the penalty for late payments or the swollen size of the balloon payment clearly constituted breach of the broker’s fiduciary obligations. It is noteworthy also that the provisions regarding interest rate, late charges and balloon payment were highly unfavorable to the borrower and yet the broker made no attempt to draw his clients’ attention to these matters.

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AS THIS CASE POINTS OUT, A CALIFORNIA REAL ESTATE BROKER OUGHT TO FULLY DISCLOSE THE TRUE NATURE OF THE LOAN TO THE BORROWER, INCLUDING SPECIFICALLY EXPLAINING THE BALLOON, OR NEGAM FEATURE TO THE BORROWER. WOULD BE WISE TO PUT THIS IN WRITING AND GET A SIGNATURE ON IT. FAILURE TO COUNSEL AND FULLY DISCLOSE COULD LEAD TO HUGE LIABILITY AS IT DID IN THIS CASE. THE COURT FOUND FOR THE BORROWER AND AWARDED $200,000 IN PUNITIVE DAMAGES.