Throughout the past year, the economic landscape has been hit particularly hard by the COVID-19 pandemic, which has put borrowers and lenders in riskier positions in terms of taking on more debt/extending credit as well as potentially seeking other changes to their loan term whether it is by seeking forbearance, loan modifications, or other changes. Pursuing these avenues, even if they are included in the contractual loan arrangement, may open the door for potential lender liability claims.
Lender liability is an area of law that deals with the fair treatment of borrowers by lenders. When lenders fail to uphold their contractual obligations or mistreat borrowers in regards to loans and loan agreements, its grounds for borrowers to take legal action. Lenders that are found liable for losses sustained by a borrower may be left paying for the damages or face other consequences.
If a borrower or third-party directly or indirectly experiences losses in connection with a loan they’ve taken out, they may pursue legal action under one or more of the following lender liability theories or causes of action, including but not limited to:
- Breach of Contract – The relationship between a lender and borrower is contractual, and failing to uphold the oral, implied, and written contracts leaves the lender liable. Examples of breach of contract claims may include if the lender fails to advance funds, extend a loan, honor a loan modification or forbear after agreeing to do so contractually. A Breach of Federal Regulations may also sometimes be triggered.
- Breach of the Implied Covenant of Good Faith and Fair Dealing – The lender is required to be honest and not purposefully attempt to gain benefit out of the contract. An example may include manipulating an appraisal of the borrower’s property to cause a loan default.
- Economic Duress – If a borrower is coerced into accepting loan terms and has little to no choice but to comply with the lender’s demands, there may be a suit filed for economic duress.
- Fraud or Misrepresentation – This includes lenders making any kind of fraudulent claim, misrepresenting material, or any other violation of state or federal laws.
- Negligence and Breach of Fiduciary Duties – If the borrower and lender are in a relationship such that the lender exercises control or influence over the borrower’s business affairs and the borrower is in an unequal position with the lender, then a fiduciary relationship may exist and the lender must act in the best interest of the borrower.
- Instrumentality Theory – A lender becomes liable for the debts of the borrower when it becomes so involved in and exerts such a degree of control over the borrower that the borrower simply becomes a means to an end for the lender – the borrower essentially becomes a business conduit for the lender.
- Tortious Interference with a Contract – This may occur when a lender intentionally induces a breach of the borrower’s contract with a third party.
Banks, financial institutions, and other lenders take on risk when they lend to borrowers, but it is their duty and responsibility to treat their customers fairly and in good faith. When they don’t, lender liability claims may be brought against them.
For help understanding the complex area of lender liability or if you have any other commercial law questions, get in touch with us at Silverberg|Brito, PLLC.