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Overview of lender liability

On Behalf of | Mar 23, 2020 | Business Litigation |

As is the case with other areas of law, the term lender liability actually covers a number of different types of legal claims that borrowers can make against banks and other institutions which loan money.

Litigation based on theory of lender liability has gained traction over the last generation. In former days, it usually was only banks that sued borrowers when the borrowers fell behind in payments, but now borrowers are more and more prone to asserting their own rights against their lenders.

For instance, a loan, like any other contract, is a two-sided agreement, with both the lender and the borrower having rights and responsibilities. If the bank breaks this agreement, it may be liable to pay damages to the borrower, such as the cost of the borrower’s having to go and find another loan and, in some cases, the borrower’s lost profits.

Sometimes, a lender’s breach of contract can be a means for an honest borrower who is behind to get some leverage against the bank. After all, a bank cannot enforce its note if it turns out the note is unlawful. Moreover, even if the bank does have good grounds to declare a default, it must seize and sell its collateral according to the terms of its agreement.

For example, if the bank fails to make efforts to get the best price for the collateral, the bank may forfeit its right to collect some or all of the remaining balance on the loan.

Related to breach of contract cases, other lender liability litigation can include cases alleging fraud. In some situations, such as when the lender acts as if were a borrower’s financial adviser, it may be possible to accuse the lender of breaching a fiduciary duty.

Finally, it is also important to remember that lenders are subject to a number of laws and regulations which they must follow no matter what their loan agreement say. While some of these laws are only enforced through government agencies, in many other cases, they can form the basis of a borrower’s case against its lender. These individual laws and regulations can be complicated.


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