In Sheen v. Wells Fargo Bank, the California Supreme Court has settled a split of authority over the application of a general negligence duty of care to loan modification applications.

In Sheen, the Second Appellate District Court of Appeal affirmed the trial court’s dismissal of claims against Wells Fargo on demurrer. Among other theories, Sheen alleged that the loan servicer breached a negligence duty of care in responding to loan modification applications and in related communications. The Court of Appeal affirmed the trial court’s decision that a negligence duty of care does not apply to a loan modification review, leaving potential remedies to other bodies of law, including contract, promissory estoppel, fraud, and statutory duties. 

On March 7, 2022, the California Supreme Court affirmed the lower court’s dismissal of claims against Wells Fargo, holding that a general negligence duty of care does not apply to a loan modification review.

Why is this important? There are three reasons why this case is impactful.

REASON 1:  SHEEN RESOLVES A LONG-STANDING SPLIT IN THE CALIFORNIA COURTS OF APPEAL

The Supreme Court in Sheen declined to recognize a general negligence duty of care because “the handling of a loan modification application is within the scope of Wells Fargo’s role as a lender.”  In so holding, the Court expressly rejected the rule urged by the borrower’s counsel for a duty “‘to process, review and respond carefully and completely to [his] loan modification applications’ so as to avoid causing plaintiff pure monetary loss through a lack of care in handling his applications.”

REASON 2: OTHER COMMON LAW DUTIES SURVIVE SHEEN

Even though the Supreme Court rejected a general negligence duty, other common law theories may still apply to loan modifications and loan servicing.

Claims such as negligent misrepresentation and promissory estoppel, among others, remain available after Sheen and will continue to apply to loan modification reviews.  Loan servicers should review and revise any form letters and templates used during the loan modification process to ensure compliance with statutory and common law duties.  Any perceived written or oral miscommunication during the loan modification process can increase the chances of litigation exposure.

REASON 3:  SERVICERS SHOULD BUTTON UP LOAN MODIFICATION PROCEDURES TO AVOID POTENTIAL CLAIMS

Lenders and loan servicers should review the Supreme Court’s decision with outside counsel and consider what, if any, improvements can be made to loan servicing policies and procedures under the guidance of Sheen.  In an environment where many borrowers may still need financial assistance following COVID forbearance plans, loan modification applications should be handled properly to minimize the risk of borrower claims.

CONCLUSION

Loan servicers can avoid litigation risks by adopting policies and procedures to ensure clear and unambiguous communications in loan servicing and loan modification reviews. 

Our team can advise on implementing best practices, and we regularly represent clients in defending loan servicing and loan modification claims that arise. 

If you have any questions regarding these matters, give us a call. We would love to help!