Friday, November 7, 2014, 3:45 PM

Fraud Claim Against Lender Dismissed

"Courts have held that there is no duty on a lender to ensure that a loan is suitable for a borrower," wrote Judge Jones in a recent case dismissing a fraud and misrepresentation claim brought by a home owner against the lender.  In this case, the plaintiffs alleged that the loan officer told them that their income qualified them for the loans they were seeking, when in fact plaintiffs' income was not high enough to meet debt to income ratio utilized by mortgage lenders.  The Court found that these allegations were not sufficiently specific to meet the heightened pleading standards of Rule 9.  "Without more, plaintiffs' allegations essentially amount to an assertion that the lender convinced them to take out a loan they couldn't afford," which is not a basis for fraud.

The Court cited several cases stating that lenders do not act on behalf of borrowers, do not have a duty to determine a borrower's ability to repay a loan, and that borrowers have to "rely on their own judgment and risk assessment to determine whether or not to accept the loan."  Alternatively, the Court found that the claims were barred by the statute of limitations.  The case, Muncy v. Centex Home Equity Company, LLC, was pending in the Abingdon division of the Western District of Virginia.

This case is another example of the steady stream of cases brought by borrowers against lenders related to lending or foreclosure practices.  Most of the cases, like this one, are dismissed in the preliminary stages of litigation.  However, there is still a significant cost to lenders in having to defend all cases brought against them, even the most frivolous.

Click here for more information on Womble Carlyle's Financial Services Litigation team.

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