Memorandum of Decision Re: Lender Liability

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re RICHARD and CAROL PEEPLES,                                       No. 1-86-01685      Debtors. ___________________________/ RICHARD and CAROL PEEPLES,      Plaintiffs,    v.                                                                                          A.P. No. 1-87-0004 JOHN M. WAHLUND, et al.,      Defendants. _____________________________/
     In January, 1985, defendant Great Western Savings made the debtors a purchase-money loan, enabling the debtors to purchase a home. Two years later, after obtaining modification of the automatic stay from this court, Great Western completed its foreclosure of the home. In this action the debtors are suing Great Western for making the loan. The debtors argue that they did not qualify for the loan, that Great Western knew they did not qualify, and that because Great Western made the loan anyway they have been damaged by loss of their home, inability to get financing for another home, and emotional distress.      The only real issue between the debtors and Great Western is whether a lending institution owes a duty to a borrower not to honor the borrower's request for a loan if the borrower appears unable to repay it. Concluding that there is no such duty, the court grants Great Western's motion for summary judgment.      While the court takes judicial notice of the recent increase in litigation brought by borrowers against lending institutions, these cases are based upon breach of the lender's fiduciary duty as to actions taken after the loan has been made. The court can find no basis in California law for imposing liability for merely making a loan which the borrower may not be able to pay.      While the making of a loan to a non-qualified borrower may violate statutory lending restrictions, the purpose of such statutes is to protect the lending institution's depositors against injudicious loan practices. Rossman Mill & Lumber Co. v. Fullerton Savings & Loan Assn. (1963) 221 Cal.App.2d 705, 711. Accordingly, they cannot be the basis for a complaint by the borrower. 4 Witkin, Summary of California Law (8th ed), Torts, sec. 7.      Strong policy considerations militate against making lenders liable in circumstances such as those now before the court. Many borderline borrowers might be denied the chance to own a home if the lending institution fears a lawsuit if the borrowers are unable to make their mortgage payments.      For the above reasons, Great Western's motion for summary judgment is granted. Great Western will recover its costs of suit, but not sanctions. Counsel for Great Western shall submit an appropriate form of judgment.
Dated: December 7, 1987                                                                              _______________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY