BK Court: Lender Can't Rely on Liar Loan App

A California couple with income of about $65,000 recently lost their home to foreclosure after having refinanced their mortgage debt up to about $680,000. How did they manage to borrow that much? Stated income (no-doc) mortgages, of course. After they lost their home, the lender took the rather aggressive tack of objecting to the couple's Chapter 7 discharge of the deficiency (the $250,000 alleged difference between the foreclosure proceeds and the mortgage debt.) The bank claimed that the couple had procured their mortgages by fraud, namely by lying about their income, and therefore were barred from discharging the debt under Section 523 of the Bankruptcy Code.

The couple claimed that they knew nothing of the false statements in their application, but the Bankruptcy Court's decision (Download) did not find their testimony credible on this point. However, the judge went on to find that the inflated income was so obviously implausible, given the borrowers' occupations, that the bank could not reasonably have relied on their stated income. The result was a finding against the bank, and a discharge of the unpaid debt.

HT to April Charney.