March 2, 2016

California Supreme Court Reaffirms Broad Protections for Borrowers Using Purchase Money Loans

Last week, the California Supreme Court reaffirmed broad protections for borrowers using purchase money loans. In Coker v. JPMorgan Chase Bank, N.A., the Court explained that the state limits “a lender’s recovery on a standard purchase money loan to the value of the security, no matter how the security has been exhausted….” In other words, the borrower in most cases cannot be liable for a deficient security (home value that is less than the balance of the note secured by lender’s deed of trust). The court insisted that it will look to the “substance rather than the form” of the transaction to determine the breadth of protection. In the case of standard purchase money loans, the court held these protections are “automatically” in place. For more exotic lending arrangements, courts will protect borrowers against deficiencies from lenders overvaluing property or general economic stresses in the market.