Lender Liability Law – Causes Of Action & Related Theories

Lender Liability litigation has seen radical increase in the recent years.  Though lender liability as a law was formulated to safeguard the interests of the borrowers and to support them in cases where they are subject to unfair trade and mortgage practices, there are few cases wherein this law has also back-fired.

Some use this law even to defend genuine and routine collection claims by filling lawsuits against lenders.

The most common cases for which borrowers file a lawsuit against the lenders under the following common-law theories of Liability:

  • Breach of Contract

  • Breach of Fiduciary duty

  • Breach of Good faith

  • Frauds

  • Duress

  • Interference

  • Negligence

  • Statutory claims under bankruptcy laws

  • Federal Security Laws

  • Tax laws

  • Environmental Laws

  • RICO Act (Racketeer Influenced and Corrupt Organizations)

Causes of Actions:

Lender Liability claims usually fall under these three major categories and causes:

  • Claims seeking recovery of damages

This is generally filed in case a loan or funding is not approved to the borrower or to-be borrower due to a suspected action or negligence by the lender.

  • Counterclaims to illegal collection or foreclosure actions
  • “First Strike” lawsuits in anticipation of collection or foreclosure actions.

The second and third type of claims is rather of a defensive pattern, which will arise due to the unlawful activities of the lender such as collection or foreclosure.

The Common Theories related to Lender Liability:

  1. Compulsory Counterclaims:

Most of the claims are demanded by the borrower in a lawsuit taken up by the lender for recovery of payments under the contract abiding by the loan documents. This counterclaim becomes a compulsory impulsive action against the lawsuit filed by the lender.

  1. Contract Theories:

A contract is a mutually consented agreement entered into by two parties. The documents, which constitute and govern the contract, include all the documents submitted right from the beginning of the mortgage process starting from the application form, financial statements, guaranties, promissory notes and line of credit notes. Find more about Herskovitslaw.com. So while preparing such documents care should be taken to make all the facts and figures crystal clear, using an unconditional language.

  1. UCC & Good faith Theories:

slide_gavelThe Uniform Commercial Code is the governing body of the theories of lender liability. The Theory of Good faith is nothing but the basic trust factor that forms the essence of any contract. When a contract is entered in to by two parties, it if firmly believed that both the parties will be true to their self and will disclose any and all information that may be deemed necessary and would affect the decision making ability of the parties.

In case of the lender, it is his obvious duty to disclose all the rules and regulations and the consequences of the loan that is going to be taken by the borrower. Coming to the borrower, it is the borrowers duty to disclose his financial situations, his repayment capacity and his commitments and all other information that the lender might need to know before granting him a loan.

If these disclosures are done, then the good faith concept is upheld and future inconveniences and misinterpretations would be avoided. Just in case if this is not done in a proper way. The affected party can very well file a lender liability suit against the lawbreaker.

There are circumstances where the lender liability law is taken up against the lenders for no fault of theirs. In few instances the borrowers allegedly file a lawsuit against lenders for a collection that is more of a routine type and also use this law purported to defend the borrowers as an offensive tool against the lenders.

The theories and the laws not only require the lender to be true and act legal, but the same holds true for the borrower as well. It is the duty and the responsibility of the borrower to repay his debts on time as per his commitment. In cases of defaults, the lender has all the right to take legal action against the borrower. Just in order to get out of legal actions, some of the borrowers take the tool of lender liability in an offensive manner to corner lenders.

The theories, causes and consequences of lender liability are clearly put on black and white. It is the duty and responsibility of the borrower as well as the lender to understand the lender liability law and act vigilantly and in a more honest and legal manner. So it is necessary that both the parties beware of the implications and consequences of the Lender Liability Law.