Lying On Loan Application Not A Bar To Mortgage Debt Discharge Where Negligent Bank Fails To Follow Its Own Lending Guidelines, Says Bankruptcy Judge

In Oakland, California, The Wall Street Journal reports:

• In a ruling that backs borrowers even when they have lied on loan applications, a federal bankruptcy judge held that borrowers who inflated their income to get a loan don't have to pay back a bank because the lender should have noticed a "red flag" about the deceit. The case, which the Oakland, Calif., judge called "a poster child for some of the practices that have led to the current crisis in our housing market," places responsibility on the lender for vetting information in loan applications.

With respect to the falsely inflated income figures contained in the borrowers' loan application:

• [T]he judge said that the income figures "would alert the reasonably prudent lender of the possibility that the information was inaccurate" and that the bank didn't follow its own guidelines, which required that it "evaluate the reasonableness of the stated income based on job type, tenure, and geographical location among other things."

For more, see Are Borrowers Free to Lie? (Lender Held Responsible for Vetting Data on Home Loan); (If the link doesn't go to the full story, then go here - then click link for the full story; you may also have to click the "Refresh" button on the web page to get to the story).

For the judge's written decision, see National City Bank v. Hill (in re Hill), Case No. 07-41137; A.P. No. 07-4106 AT (May 23, 2008).