N.C. Ct. of App.: Fazzari v. Infinity Partners- No Negligent Underwriting Cause of Action for Purchase of Real Estate

Summary: Plaintiffs brought suit against, among other, lenders that had financed mortgage loans for the development of investment properties, alleging that the appraisals conducted, which unanimously and uniformly valued real property lots, regardless of specific qualities or locations, for $500,000, the exact minimum to support the mortgage lender’s underwriting requirements, constituted both negligent underwriting and also an unfair trade practice. Following shortly after the Dallaire opinion from the North Carolina Supreme Court (see: http://ncbankruptcyexpert.com/?p=4791 ) the Court of Appeals recited that only in exceptional circumstances would a fiduciary duty arise between a lender and borrower and even then the “borrower cannot establish a claim for negligent misrepresentation based on a loan officer’s statements . . . if the borrower fails to make reasonable inquiry into the validity of those statements.” Id. at __, __ S.E.2d at __. In this case, the court held that “appraisals and underwriting are an integral parts of the commercial lending process.” Further, appraisals and underwriting are for the benefit of the lender only and “[simply put, in North Carolina, there is no cause of action for negligent underwriting of loans for the purchase of real estate.” Commentary: While reciting that Dallaire held that “[g]enerally, the home loan process is regarded as an arm’s length transaction between parties of equal bargaining power and, absent exceptional circumstances, will not give rise to a fiduciary duty” and also finding that appraisals and underwriting are “appraisals and underwriting are an integral parts of the commercial lending process” (Emphasis added to both quotations), it is unfortunate that the Court of Appeals did not limit its categorical rejection of negligent underwriting to “commercial lending”, where the parties more clearly have “equal bargaining power”. In residential home loans, an understanding of appraisals and underwriting is much less likely for the consumer borrower and the bargaining power can be far less equal. For a copy of the opinion, please see: Fazzari v. Infinity Partners- No Negligent Underwriting Cause of Action for Purchase of Real Estate