Lender Liability is a term used to describe the obligation a lender has to treat a borrower fairly. Borrowers often initiate a lender liability claim if they believe they have been damaged by a lender’s actions, or as a negotiating tactic to improve the chances of the lender accepting a reduced payoff. In almost all cases, a lender liability claim is used to weaken the negotiating position of the lender with the borrower. Borrowers that have financial trouble also use lender liability claims to counteract anticipated foreclosures or collections. Usually a borrower will base their lender liability claim on some perceived negligent action taken by the lender that harmed them or their business in some way. A breach of contract, not dealing in good faith, and a failure in fiduciary duties are also used.
Lender Liability Claims
A common area in which lender liability claims are made is lender interference in, or attempted control of, a borrower’s business. When these claims are made, a Coachella Valley litigation attorney can expect to see claims of the lender asserting approval authority over financial expenditures of the company or even locating a third party on the business premises to monitor business practices. Lenders should carefully consider any action they take towards the borrower in the context of the contract between them to determine if the action can be viewed as a breach of contract.
Can Oral Communications Be Used as Proof?
Oral communications between the borrower and lender should also not be relied upon as proof that a loan has been modified or extended. The claim that oral communications provided the basis for changing a loan’s terms is also common. All loan contracts should explicitly state that oral modifications are not allowed and provide an agreed upon procedure to modify or extend the loan.
There are some things you can do if a borrower is likely to make a lender liability claim against you. Coachella Valley mediation attorneys can help you to try and prevent one before it occurs. If it is suspected a lender liability claim is possible, here are some guidelines to pursue with your attorney.
- Don’t just hope for the best, develop a plan with your attorney to deal with any claims that may arise.
- Don’t provide business advice or direction, in any form, to the borrower.
- Borrowers that are experiencing financial difficulty may view any action you take as a prelude to foreclosure or collection. Communicate with the borrower clearly and do not do anything that will surprise them.
- Fulfill all of your contractual obligations all of the time. Treat all of your borrowers fairly and honestly.
- Finally, if a claim is filed, know who will be handling the legal claim. As with all negotiations, understanding the goals of the other side will help to make sure everyone can move towards an acceptable agreement.