Loan servicer liable for negligent handling of loan modification negotiations

A California court has found a mortgage loan servicer to be liable for negligence in its handling of an application for a loan modification. Weimer v. Nationstar Mortgage, LLC, 260 Cal. Rptr.3d 712 (Ct. App. 2020. The court found loan servicers to be in a "special relationship" with the borrower and thus within an exception to the general rule of no tort duty for economic losses.


After defaulting on a mortgage, the mortgagor entered into a loan modification process with Bank of America, and was told that he had been approved for a loan modification. Because of that approval, he made a downpayment of $50,000 to obtain the loan modification. The bank had promised him that once it received the downpayment, it would halt foreclosure proceedings. The bank transferred the loan servicing rights and obligations to Specialized Loan Servicing (SLS) which initially refused to honor the terms of the loan modification agreement with Bank of America despite the $50,000 payment. Negotiations to modify the loan continued when the loan servicing rights were transferred again from SLS to Nationstar, which informed the borrower that he would have to restart loan modifications anew and that Nationstar would not honor Bank of America's loan modification agreement. The borrower further alleged that correspondence and documents related to loan modification negotiations were lost or misplaced.


The borrower argued that Nationstar had involved him in loan modification negotiations for a long time in order to keep earning fees from servicing his loan, that it made false statements to him, and that it had committed negligence in its management of the loan modification process.


The court held that he had the right to present evidence on these claims and that the rule that tort damages ordinarily cannot be obtained for breach of contract did not apply since the loan servicer had a special relationship with the borrower and a legal duty to act reasonably in the loan modification process. This was an exception to the general rule that a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.