Legal Question in Civil Litigation in California

I realize that under TILA, a Lender has "No Duty" to look at ANY issue in the Title, that was the cause of a "Bad Loan" being done, that the Title Insurance Company has THAT duty.

But I've NEVER read anywhere as to WHAT happens when they voluntarily DO look at a specific title defect or other irregularity in which a loan was done,when they don't have to, then admit it;What kind a legal can-of-worms are they opening up for themselves, if or when THIS happens?

There MUST be an element of "Liability" that's triggered and comes into play when or if, THIS EVER happens, as I don't think that a rep for the lender would be so STRONGLY opposed to looking at a "Title Defect" on a property that was used for the loan, simply because that by "Law", they don't have to, it seems as though they're actually AFRAID to do it, as it would cost them BIG.

And from ALL of the "I Don't Knows" I've gotten from various and many Legal sources, something like THIS happening is obviously a VERY rare occurrence.

So MY question is: EXACTLY HOW DOES A LENDER BECOME "LIABLE" WHEN THEY ACKNOWLEDGE LOOKING AT SOMETHING "OUTSIDE" OF WHAT THEY HAVE A DUTY TO LOOK AT (UNDER TILA), THAT IS SPECIFIC EVIDENCE OF AN OVERLOOKED "DEFECT" OR "IRREGULARITY", WHICH PROVES THAT THE LOAN NEVER SHOULD HAVE BEEN DONE???


Asked on 12/03/11, 3:57 pm

1 Answer from Attorneys

No commercial lender ever looks at title beyond the title report. They don't have a title plant. They don't go down to the county recorder and do a title search. Why would they? Even in the hypothetical situation you present, in which a lender is actually specifically informed of an alleged defect in title, it is not up to the lender to sort out the disputed title. Liability requires a duty and a breach of that duty. A lender has no duty to anyone other than to the borrower to comply with the terms of the loan agreement, TILA, RESPA, etc. There is no way a lender can be liable to anyone for ignoring a defect in title. The penalty to a lender who disregards information that there is or may be a defect in title is that their security interest in the property will be invalid. If the borrower does not have valid title, then the mortgage/deed of trust is unenforceable. That is the penalty to a lender who knows of a defect in title and makes the loan anyway. In your implausible scenario, the title company did not catch the defect either, in which case there would be coverage, but if the lender in fact knew of the defect, then the title company would have a defense.

You really have to realize, though, that the scenario of a lender receiving actual knowledge of a defect in title, and the title company not knowing of it and warning the lender, and the lender making the loan anyway, is basically unimaginable except in a private loan transaction in which something else is going on between the lender and borrower other than an arms length loan transaction.

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Answered on 12/03/11, 4:30 pm


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