The year 2020 brought unprecedented disruption to nearly every sector of the economy, but the judicial system continued to operate and issue rulings with lasting implications for the private lending industry. Several decisions handed down by federal and state courts during that period fundamentally reshaped how lenders assess risk, structure transactions, and evaluate their compliance obligations. These cases remain relevant today and offer important lessons for private lenders navigating an increasingly complex regulatory landscape.
Expanded Consumer Protection Reach for Trust-Based Lending
Gilliam v. Levine (9th Cir. 2020)
One of the most consequential rulings of 2020 for private lenders involved a loan made to a trust. In this case, a trustee obtained financing on behalf of a trust to fund repairs on a personal residence occupied by the trustee’s niece, who was also a trust beneficiary. The central legal question was whether this transaction qualified as a “consumer credit transaction” subject to federal disclosure requirements.
The Ninth Circuit Court of Appeals answered affirmatively, holding that a trust established by an individual for tax and estate planning purposes does not forfeit consumer disclosure protections simply because it is structured as a trust entity. The court determined that when a trust seeks financing for repairs to a personal residence occupied by a beneficiary, the transaction remains a “consumer credit transaction” within the meaning of the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), Federal Reserve Regulation Z, and California’s Rosenthal Fair Debt Collection Practices Act.
Why This Decision Still Matters
This ruling significantly expanded the universe of transactions that may trigger consumer lending compliance obligations. Private lenders who make loans to trusts cannot simply categorize every trust-based transaction as a commercial or business-purpose loan. The critical factor is the intended use of the loan proceeds, not the legal structure of the borrowing entity. When loan funds are directed toward a personal residence, particularly one occupied by a trust beneficiary, the full suite of consumer lending disclosures and protections may apply regardless of the trust wrapper.
Lenders should implement underwriting procedures that specifically investigate the end use of funds in trust-based transactions, documenting the business or commercial purpose thoroughly when that characterization is appropriate, and applying consumer lending protocols when the facts point toward personal, family, or household use.
Recalculation of Deficiency Judgments in Hawaii
HawaiiUSA Federal Credit Union v. Monalim (HI 2020)
The Hawaii Supreme Court issued a significant decision aligning the state with the majority approach to calculating deficiency judgments after foreclosure. Under the newly adopted framework, the deficiency amount equals the outstanding mortgage balance minus the greater of (a) the property’s fair market value at the time of foreclosure or (b) the actual sale price at auction.
Previously, Hawaii followed the minority rule, calculating the deficiency as the loan balance minus only the foreclosure sale price, without reference to fair market value. The prior approach could produce larger deficiency judgments when properties sold at auction for prices well below their appraised value, a common occurrence in distressed real estate markets.
Practical Implications for Lenders
This ruling reduced potential deficiency recovery for lenders operating in Hawaii, since the fair market value floor means the deficiency cannot exceed the difference between the debt and the property’s true market worth, even if the auction produces a lower price. For private lenders with exposure in Hawaii or similar jurisdictions, this decision underscores the importance of understanding state-specific deficiency judgment calculations when modeling potential loss scenarios and developing bidding strategies at foreclosure sales.
More broadly, the decision reflects a nationwide trend toward limiting deficiency judgments to protect borrowers from windfall recoveries by lenders who acquire properties at below-market auction prices. Lenders operating across multiple states should maintain current knowledge of each jurisdiction’s deficiency calculation methodology.
Evolving Servicer Duty of Care in California
Sheen v. Wells Fargo Bank, N.A. (CA 2019, review granted 2020)
The California Supreme Court granted review in this case to address a question with far-reaching implications: whether mortgage loan servicers owe borrowers a legal duty to exercise reasonable care when processing loan modification requests. The California Attorney General filed an amicus brief urging the court to recognize such a duty, which would expose servicers to negligence liability for errors, delays, and miscommunications during the modification process.
Significance for Private Lending Servicers
Although this case originated in the institutional lending context, the legal principles at stake apply equally to private lending servicers who handle borrower requests for forbearance, modification, or other workout arrangements. If California courts ultimately recognize a duty of care in this context, servicers who negligently mishandle modification requests, lose borrower documentation, provide inaccurate information about available options, or fail to respond within reasonable timeframes could face tort liability beyond traditional breach-of-contract claims.
Private lenders and servicers should proactively implement robust servicing protocols for handling borrower communications and workout requests, regardless of how this specific case is ultimately resolved. Maintaining detailed records of every borrower interaction, establishing defined response timelines, and training staff on proper handling of modification inquiries all serve to reduce liability exposure.
Purchaser Due Diligence Obligations at Foreclosure Auctions
Matson v. S.B.S. Trust Deed Network (CA 2020)
The California Court of Appeal (Fifth District) delivered a clear message about due diligence obligations for foreclosure auction bidders in this case. The plaintiff, Matson SDRE Group, purchased a deed of trust at a nonjudicial foreclosure sale after relying on a private software application called PropertyRadar to assess the lien position and market value of the property. The software data was incorrect: the plaintiff mistakenly believed the foreclosed lien was in first position and that the property’s market value was significantly lower than its actual worth.
After discovering the errors post-purchase, the plaintiff sought to rescind the sale based on unilateral mistake. The court denied rescission, noting that the plaintiff had obtained a 94-page title report but failed to review it thoroughly. The Fifth District held that a purchaser who relies entirely on a private software application without conducting an independent investigation of the property’s liens and encumbrances cannot rescind a foreclosure sale based on errors that diligent review would have uncovered.
Lessons for Private Lenders and Investors
This decision reinforces a fundamental principle of foreclosure auction participation: the burden of due diligence falls squarely on the buyer. Private lenders bidding at trustee sales, whether on their own collateral or on third-party properties, must conduct thorough, independent title investigations rather than relying solely on automated tools or software-generated reports.
Specifically, auction bidders should:
- Order and thoroughly review a current preliminary title report well in advance of the sale date
- Independently verify lien position, priority, and outstanding balances for all recorded encumbrances
- Cross-reference automated valuation data against independent appraisals or broker price opinions
- Consult with legal counsel regarding any title complexities or ambiguities before committing to bid
The court’s ruling provides no safety net for bidders who take shortcuts in their pre-auction analysis. The financial consequences of purchasing a property based on incomplete or inaccurate due diligence rest entirely with the purchaser.
Looking Forward: Enduring Themes from 2020 Case Law
The decisions cataloged here reflect several enduring themes that continue to shape the private lending landscape:
Substance over form. Courts are increasingly willing to look past the formal legal structure of a transaction (trust entity, business entity, etc.) to examine the actual purpose and use of loan proceeds. Private lenders must align their compliance obligations with the economic reality of each transaction, not merely its nominal structure.
Due diligence as a non-delegable responsibility. Whether evaluating a loan application, processing a workout request, or bidding at a foreclosure auction, the obligation to conduct thorough, independent analysis cannot be outsourced to software tools or informal processes.
Expanding lender and servicer accountability. The trend toward imposing affirmative duties of care on loan servicers reflects a broader judicial and regulatory movement toward holding financial institutions accountable for how they interact with borrowers, particularly distressed borrowers seeking loss mitigation assistance.
Private lenders who internalize these lessons and build their compliance, servicing, and acquisition processes accordingly will be best positioned to manage risk in an evolving legal environment.
For guidance on regulatory compliance, foreclosure strategy, loss mitigation, or any legal issue affecting your private lending business, contact Geraci LLP at (949) 403-3488 or visit our offices at 90 Discovery, Irvine, CA 92618.
