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“Bank” – The New Four Letter Word: Tips to Avoid Lender Liability Claims

Being a lender or an investor has its perks: you have money, you control it, decide where it goes and how it is used. But being a lender or investor certainly has its drawbacks, especially in a progressively litigious world. Most people have little sympathy for the seemingly impersonal financial monolith – the bank. Despite the reality that the majority of individuals and companies could never achieve their personal or business goals without the assistance of banks and other lenders, they are often viewed as unsympathetic gatekeepers. So it is not surprising that when individuals and businesses fall on hard times, they are increasingly challenging their financial institutions in court.

Lender liability claims are on the rise across the nation, and South Carolina is no exception.  Borrowers, generally in response to a foreclosure or collection action initiated by a lender, are striking back, alleging any number of claims which fall under the generic term “lender liability.”  These claims (usually made in the form of counterclaims) include negligence, breach of fiduciary duty, unfair trade practices, and civil conspiracy. Most importantly with these claims, a borrower will include that one sentence that brings fear to the heart of every lender: “defendant demands a jury trial.” Once a jury demand is made and assuming the borrower can survive a motion to dismiss on at least one of the claims asserted, the entire case morphs. What began as a standard foreclosure or collection action becomes a full-blown jury trial, to be decided by twelve likely unsympathetic jurors, most of whom feel slighted in some way by their own bank or lender. Banks and lenders know this, so regardless of the strength or viability of the borrower’s claims, most prudent banks and lenders attempt to reach some type of settlement before trial.  

It is critical that lenders and banks periodically review their lending procedures and look for ways to reduce the risk of perspective claims, from loan origination through the initiation of collection actions. The following tips are aimed at helping lenders and banks avoid lender liability claims:

1.  Carefully draft (with your attorney) loan documents with an eye toward the potential for later lender liability claims.

  • Clearly Articulate Your Rights and Obligations in the Loan Documents: South Carolina courts have consistently held that a lender cannot be liable for an alleged breach of an implied duty of good faith and fair dealing where the lender merely exercised the rights allowed under the terms of the loan documents.
  • Include an Enforceable, Broadly-Worded Waiver of Jury Trial Provision:  The most powerful tool a borrower has is the right to demand a jury trial on compulsory, legal counterclaims, and the last thing lenders and banks want is to have a jury of twelve individuals deciding the merits of the claims asserted. To avoid this potentially devastating possibility, lenders should include enforceable, broadly-worded jury trial waivers in their loan documents. Under South Carolina law, the right to a jury trial is a substantial right, and any waiver thereof is strictly construed by the courts. The language of the waiver should reference modifications, amendments or renewals of the initial loan agreement and any other documents executed as a part of the loan process and should not be buried in the boilerplate language of a complex loan agreement.

2.  Define and maintain a consistent “lender-only” relationship with your borrower.

  • Fraud and misrepresentation claims are often asserted by borrowers. However, under South Carolina law, these claims are difficult to establish absent some evidence that the lender undertook additional duties, such as the provision of financial or business advice or in some way became involved in the business of the borrower. Quite simply, lenders and banks should avoid any perceived role in the borrower’s business except the administration of the borrower’s loan.
  • Additionally, to state a viable misrepresentation claim, the borrower must prove that there was reasonable reliance on the lender’s representations. Defining and maintaining a “lender-only” relationship with the borrower reduces the likelihood that a representation (other than those made in the normal course of loan administration) will be made or that the borrower will be able to establish a right to rely on any representation made by the lender. 

3.  Involve licensed attorneys in the loan closing process.

  • Most banks and lenders doing business in the state of South Carolina realize the importance of having licensed attorneys involved in the closing process, including drafting the closing documents and supervising the actual closing.  Failure to use an attorney in the closing process in the state of South Carolina is considered the unauthorized practice of law and will result in the lender being barred from enforcing the loan documents.
  • The final point is an important one. As new consumer protections are enacted and as the Federal Consumer Financial Protection Board (CFPB) expands its policies and presence, lenders should keep their legal counsel in the loop of their transactions to ensure legal and regulatory compliance. CFPB and similar initiatives will embolden disgruntled borrowers and enterprising litigators, and lenders and banks should be prepared.

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