Cal. Court of Appeal Finds Finance Company Owed No Duty To Determine Borrower’s Ability to Repay

In Perlas v. GMAC Mort., L.C.C. – Cal.Rptr.3d –, 2010 WL 3155946 (2010), the California Court of Appeal held that a finance company owed no duty to the borrower to determne the borrower’s ability to repay. Though Perlas involved a home mortgage loan, the same principle may apply to auto finance as well. The Court of Appeal explained:

Neither the FAC nor appellants’ proposed amendments allege that GMAC expressly represented to appellants that they had the ability to make the loan payments specified in the loan documents. Appellants appear to conflate loan qualification and loan affordability. In effect, appellants argue that they were entitled to rely upon GMAC’s determination that they qualified for the loans in order to decide if they could afford the loans. Appellants cite no authority for this proposition, and it ignores the nature of the lender-borrower relationship. “[A]bsent special circumstances … a loan transaction is at arm’s length and there is no fiduciary relationship between the borrower and lender. [Citations.]” ( Oaks Management Corporation v. Superior Court (2006) 145 Cal.App.4th 453, 466.) A commercial lender pursues its own economic interests in lending money. ( Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.) A lender “owes no duty of care to the [borrowers] in approving their loan.” ( Wagner v. Benson (1980) 101 Cal.App.3d 27, 35.) A lender is under no duty “to determine the borrower’s ability to repay the loan…. The lender’s efforts to determine the creditworthiness and ability to repay by a borrower are for the lender’s protection, not the borrower’s.” ( Renteria v. U.S. (D.Ariz.2006) 452 F.Supp.2d 910, 922-923 [borrowers rely on their own judgment and risk assessment in deciding whether to accept the loan]; accord, Cross v. Downey Savings and Loan Association (C.D.Cal., Feb. 23, 2009, CV09-317 CAS(SSx)) 2009 WL 481482 [nonpub. opn.].) Thus, appellants fail to demonstrate they can sufficiently amend the FAC to state a cause of action for fraudulent misrepresentation.