What is Lender Liability
Lender liability first became a mainstream legal practice area during the 1980s. This body of law requires lenders to treat their borrowers fairly and when they don’t, the borrowers can bring forth litigation against the lenders under a variety of legal claims. Based on the current state of mortgage lending, lender liability most commonly occurs from breach of contract, breach of fiduciary duty, and inappropriate collateral sales.
The Lender-Borrower Relationship
The lender-borrower relationship, while straightforward, can quickly become complex. At an everyday level, the lender provides loans and prepared and signed loan documents—with the borrower subject to the terms and conditions of these documents. Additionally, the lender provides no advice, consulting, or participation in the management of the funds to the borrower. Because the lenders are trained to not act in an advisory role, the fiduciary relationship between a lender and borrower is limited. The lenders instead owe a fiduciary duty to their employer. This duty requires a lender to act in the best interest of the company through keeping current on the borrower’s financial condition to ensure that the loans can be repaid in a prudent manner.
Good Faith and Fair Dealing in the Lender-Borrower Relationship
In lending, there is a long-standing principle that the lender has to act in good faith and fair dealing with the borrower. Because this principle has been around in the banking community for so long, commercial lenders are familiar with this concept and are expected to strictly adhere to it. This principle requires that lenders make sure their actions are consistent with policies, procedures, regulatory requirements, and that the lender does not guarantee a false sense of security either by action or conversation to the borrower.
Breach of Contract
For most of modern lending history, lenders were the ones suing borrowers for breach of contract. However, after lender liability became available to borrowers, borrowers are just as likely to sue lenders for breach of contract.
The same contractual rules and requirements also apply to loan agreements. Thus, if the contract was signed fraudulently or without mutual consent, the agreement is unenforceable. Additionally, if the lender is the one breaching the contract, the lender can be sued. The most common remedy borrowers seek when suing a lender is a financial recovery of damages. These damages can include the difference between the loan amount and cost to get a new loan, the costs associated with obtaining this loan, and any lost opportunity or lost profit.
One common defense lenders utilize is the “parol of evidence rule” that prevents borrowers from recovering damages based on oral promises or statements that the lenders may have made to the borrower. This specific rule prevents admissions of oral evidence in court that would or did contradict a written and signed agreement. Courts consider this rule because written evidence is more accurate than human memory. While written agreements are safer than oral agreements, this rule opens the door to lender misconduct. For example, a lender could make an oral agreement that they know they can never fulfill. Further, the contract signed does not include each and every provision discussed in the oral agreement. However, there are several exceptions to this rule that borrowers can use to pursue recovery.
Breach of Fiduciary Duty
Fiduciary duty is a relationship in which the fiduciary owes a special duty to the other person in the relationship. Further, the fiduciary must look out for that other person’s interest with a special level of care. When lender liability cases first came to the public, borrower’s lawyers tried to establish that lenders had a fiduciary duty. However, over time, lenders have limited the ability for borrowers to state that their relationship is fiduciary in nature.
If a lender-borrower relationship is at arm’s length, the relationship is not fiduciary. However, there are certain cases where the courts have designated a lender-borrower relationship as fiduciary. The main reason lender-borrower relationships would be considered fiduciary is if a lender takes the role of a financial advisor.
Inappropriate Collateral Sales
Another situation where lending litigation may come up is when a lender wrongly sells collateral after a loan default. Further, the Uniform Commercial Code requires that the method, manner, time, place, and terms of the sale be “commercially reasonable.”
Commercially reasonable refers to when a lender relies on an appropriate appraisal and provides sufficient publicity for the sale to generate multiple bids. When a lender fails to meet the commercially reasonable standard, the lender may lose the right to collect a deficiency, forfeit its security interest, or be liable for damages.
With over 20 years of experience, Antonoplos & Associates real estate attorneys have the knowledge and experience required to assist clients with real estate litigation in DC, Maryland, and Virginia. Furthermore, our attorneys have a strong background in real estate, construction law, and business law. Because of this experience, we are can assist clients with most aspects of real estate litigation. Finally, we are able to help you before, during, and after your real estate litigation. This is true whether you need assistance with personal or commercial legal issues.
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