Commercial lenders continue to dig themselves out of the credit crisis that began in 2008. In doing so, many lenders are trying to shore up their balance sheets by writing down the loans that, in hindsight, they regret making. However, the law requires that a lender have a legitimate basis to call in a loan or otherwise declare a default.
In general, a loan agreement is like any other contract — there are rights and obligations that run both ways. A lender can breach a loan agreement just as easily as a borrower can default. Thus, lenders must treat their borrowers fairly and as required under the loan agreement and applicable laws. If they don’t, they are subject to litigation.
“Lender liability claims have not gained this much attention since the last banking crises in the late 1980s and early 1990s,” says Monte Mann, a partner with the business litigation specialty firm Novack and Macey LLP. “These claims have returned to prominence since the credit crisis began in 2008 because banks have been trying to improve the overall health of their commercial loan portfolios by, among other things, declaring borrower defaults.”
Smart Business spoke with Mann about lender liability claims and how — as a commercial borrower — you can maintain better balance of power in the relationship with your lender.
What is lender liability?
Lender liability is a general term used to describe a variety of claims that borrowers assert against lenders. These may include claims for breach of: (i) a loan commitment or loan agreement; (ii) the duty of good faith and fair dealing that the lender owes the borrower; (iii) fiduciary duty; or (iv) any other legal obligation the lender owes the borrower.
For example, since 2008, there has been a dramatic increase in the number of lawsuits in which builders and real estate developers have sued lenders, alleging that lenders have improperly refused to honor written commitments to fund construction loans. Moreover, although it may seem counterintuitive, borrowers may have claims against lenders even in instances in which the borrower concedes that it has failed to make payments required under a loan. In particular, borrowers have increasingly sued lenders for selling loan collateral for less than fair market value.
The relationship between lender and borrower is typically harmonious at the beginning, but when it goes bad, it does so quickly. Commercial borrowers must know that they have rights and understand them in order to protect themselves.
Cynics contend that in the current lending environment, unscrupulous lenders are contriving defaults in order to call in loans. In other words, skeptics argue that lenders are actively searching for technical deficiencies to exploit circumstances that they never would have acted on during better economic times. Commercial borrowers must be aware, prepared and protected.