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High-Profile Lawsuits Make Lenders a Bigger Target, CUNA Mutual Says
Friday, February 21, 2014 7:00 AM

Lender liability lawsuits are filed by borrowers who accuse lenders of failing to act in good faith and deal fairly. Lenders have been held liable for damages—even when adhering to the letter of the contract—when courts have agreed that the lender’s oral commitment breached the written contracts or waived preconditions. According to the CUNA Mutual Group, high-profile lawsuits are making lenders a bigger target. 

Three main types of lender liability generally apply to credit unions:

  1. Pure lender liability: The incorrect execution of the lending function, and the obligation to deal fairly with members who borrow money.
  2. Managerial lender liability: The lender assumes managerial control of a borrower’s business.
  3. Lender liability as an owner of a property: The lender assumes liability for property it has obtained through foreclosure.

Although you can’t avoid all lender liability lawsuits, particularly those filed as a reaction or a preventive strike against a foreclosure or repossession, the CUNA Mutual Group says there are some precautions that can minimize your risk of a legitimate lender liability lawsuit:

  • Document lending procedures and make sure every lending employee is trained in these procedures. Audit files regularly; the results can guide additional training as needed.
  • Review all of your credit union’s repossession documents with legal counsel, to ensure they comply with UCC provisions.
  • Insist on clean, well-documented loan files. Even scribbles in the margins of a document can be evidence in a trial. Files should document phone conversations to guard against claims of oral commitments.
  • Don’t allow an employee who has too much of a personal stake in the outcome of a loan to decide its fate. An executive committee or another qualified loan officer should step in to make key decisions when loans go bad.
  • Be wary of getting too involved in business decisions of members who have business loans.
  • Communicate early and often with members who have business loans regarding collections issues or forthcoming decisions about extending additional credit. No surprises.
  • Don’t try to collect a debt that’s been discharged through bankruptcy. This may violate the U.S. Bankruptcy Code.
  • Appraise repossessed collateral to determine its proper value before selling it.
  • Document all repairs and sales procedures on repossessed collateral. Don’t allow preferential treatment for buyers of collateral.

If your credit union hasn’t recently reviewed its lending policies and procedures with an eye toward minimizing exposure to lender liability lawsuits, the CUNA Mutual Group says credit unions should consider doing it now.