Summary:

Obtaining a loan without informing a spouse can have significant personal and legal trust-related implications. In a real-life example, a husband intentionally deceived his wife, who was unaware of his plan to obtain a loan and encumber their owner-occupied family home. The couple jointly held the property title as tenants-in-common, which raised legal questions about the husband's actions and could lead to severe legal consequences, including the potential loss of the family home, a devastating outcome that no one would want to face. This potential loss underscores the importance of spousal consent in financial decisions and the potential breakdown of trust in the marriage. Many challenging days and lonely nights were forthcoming! By keeping his wife in the dark about his loan plans, the husband may find himself in a lonely and isolating situation.

The borrower's mortgage broker said

The borrower's mortgage broker said, My client wants to borrow a second trust deed on the family single-family owner-occupied home to start an iron fabrication business for custom homes. He fabricates entries, gates, decorative railing, and handrails. He also does custom orders. He has owned his owner-occupied property for a long time and has plenty of equity. However, the wife was never mentioned in these discussions about a potential loan.

The borrower's mortgage broker requested the application documents, including the loan application, credit authorization, and disclosures, for his borrower to fill out. Upon receiving the application back from the borrower, the broker noticed that the wife had not signed it. When questioning the borrower, it was apparent that the husband intentionally failed to disclose to his wife his intention to encumber the property of a scoundrel. She was unaware of the pending loan and her husband's desire to use the property as collateral.

The competent lender responded.

Since the husband and wife are both on title to the property, they are both principals of the transaction. Both must understand and agree to the terms and conditions of any proposed loan. They are required to approve and sign all related documents. In this case, when the wife was informed about her husband's intention to borrow money using their home as collateral, she objected to the process. Her emotional outburst, a clear sign of the strain on their relationship, was warranted. This situation highlights the importance of seeking legal advice and being fully aware of all financial decisions within a marriage. Professional guidance can help navigate such complex situations and prevent legal and personal consequences.

In this case, the procuring mortgage broker should have obtained a title profile and noticed that the husband and wife owned the property. The broker did not adequately inquire about the borrower's intentions, a crucial step in ensuring the legality and transparency of the loan process. A procuring mortgage broker's role is to act in the client's best interest (a fiduciary obligation), ensuring that they understand the terms and conditions of the loan and that the parties are informed and involved. This includes ensuring both spouses are aware of and agree to the loan terms, as well as understanding the potential legal implications of proceeding without spousal consent.

In California, a spouse cannot sell, convey, or encumber a property without the other spouse's consent. This legal requirement, known as the spousal consent law, is designed to protect the rights of both parties in a marriage. If such a transaction occurs without permission, the non-consenting spouse can petition the court to void it. This could lead to the lender losing its lien position on the property, meaning it would no longer have the right to foreclose in the event of default and become an unsecured creditor, a riskier position with less chance of full repayment. The lender's role is not just to provide the loan but also to ensure that all legal requirements, including spousal consent, are met to protect their investment and the borrower's interests.

Reference material:

https://schorr-law.com/community-real-property-spouse-or-domestic-partner-joint-ownership/

I have not addressed the subject of consumer purpose vs. business purpose lending and whether it was appropriate to encumber this couple's single-family owner-occupied property to start a metal fabrication business. Could you email me if you want an article on the subject?