What is Lender Liability?
Lender liability refers to the legal obligations and potential liabilities that lenders (such as banks or financial institutions) may face if they engage in misconduct or unfair practices when dealing with borrowers. It arises when a lender's actions harm a borrower, leading to legal claims based on breach of contract, fraud, negligence, or bad faith lending practices.
Common Causes of Lender Liability Claims:
Breach of Contract – Failing to uphold loan agreements or altering terms unfairly.
Fraud and Misrepresentation – Providing false or misleading information about loan terms.
Breach of Fiduciary Duty – If a lender assumes a fiduciary role but acts against the borrower’s interest.
Improper Loan Administration – Mishandling loan disbursements, misapplying payments, or failing to follow regulatory guidelines.
Wrongful Foreclosure – Foreclosing on a property without following proper procedures or when the borrower was not in default.
Tortious Interference – Unlawfully interfering with a borrower’s business operations, leading to financial harm.
Economic Duress – Using undue pressure or unfair tactics to force unfavorable loan modifications.
Lack of Good Faith – A Lender may act within the four corners of a loan agreement however courts have held certain acts lack good faith and fair dealing when a lender selectively enforces terms or fails to allow the borrower to mitigate damages.
Legal Consequences for Lenders:
Monetary damages to compensate borrowers.
Rescission of unfair loan agreements.
Regulatory penalties and fines.
Court-imposed injunctions prevent certain actions.
To mitigate lender liability, financial institutions must operate transparently, adhere to fair lending practices, and comply with the standards of good faith and fair dealing when enforcing a loan agreement.
Tom Donnelly has acted as an expert witness for both borrowers and lenders. He also teaches lenders on how to avoid lender liability.