WHAT IS LENDER LIABILITY?
Lender liability refers to consumer protection laws that protect those who borrow money. Banks, mortgage companies, and other lenders are governed by certain laws to ensure they don’t take advantage of borrowers.
Lenders generally need to treat their borrowers fairly; if they don’t, they may be subject to lender liability, meaning a borrower can file legal action against them. There are several ways that a lender can violate lenders laws, including breach of contract, breach of fiduciary relationship, and inappropriate collateral sales.
There are also specific laws that regulate lenders, including;
- Real Estate Settlement Procedures Act (RESPA)
- Truth in Lending Act (TILA)
- Regulation X
- Regulation Y
Many of these laws were developed and enhanced after the financial crisis in the early 2000s. In addition to holding lenders to a higher standard, these laws also provide statutory fines and compensatory damages for victims of lender wrong-doing.
If you have fallen behind on your mortgage or are considering Chapter 13 Bankruptcy, you should know that Regulation X of the Real Estate Settlement Procedures Act (RESPA) and Regulation Z of the Truth in Lending Act (TILA) may protect you.
Learn about the ways that lenders can violate lenders laws and how you can protect yourself.
BREACH OF CONTRACT
Generally, lenders need to ensure that that the borrower has been notified of the terms of the agreement, including collateral, and under what circumstances the lender can take action to repossess or claim that collateral.
The foreclosure crisis of the Great Recession in 2008 highlighted the unfair tactics many mortgage companies used to claim homes from people who had trouble paying their mortgage.
Contracts are used to govern the agreements between lenders and borrowers. If a lender doesn’t follow the terms agreed upon in the contract, a borrower can claim that they are in breach of contract and take legal action to recover any losses they suffered as a result.
Borrowers may also accuse lenders of fraud if the borrower did not agree to the terms of a contract that the lender is trying to enforce. Fraud also occurs if a lender changes the terms of a contract and does not communicate those changes properly to the borrower.
After the recession, the federal government enacted laws to further protect borrowers entering into contracts with lenders after borrowers accused lenders of deceptive behavior, particularly on the part of mortgage companies and banks.
Borrowers accused lenders of improperly applying mortgage payments to fees and late charges, rather than to principal and interest payments. Additionally, lenders were accused of improperly processing loss mitigation applications, loan modifications, short-sale requests, and deed-in-lieu of foreclosure requests. Tough federal laws, including RESPA and TILA, now protect borrowers and subject lenders to steep fines and penalties for violations.
FIDUCIARY RELATIONSHIPS
Under lender liability law, lenders owe a duty to treat their borrowers fairly. Lender liability laws say that a fiduciary duty exists for the lender when borrowers have faith in the lender to uphold their end of the deal, when borrowers are in a position of inequality or dependence on the lender, and when the lender controls the borrowers’ affairs.
Banks, mortgage companies, and other commercial lenders generally have a fiduciary duty to their borrowers. Borrowers may be able to take legal action if their lender was not acting in their best interest with regard to the loan—for example, by misleading them or failing to provide information about their loans.
Financial advisors also have a fiduciary duty to their clients and if a bank mixes financial advice with a loan, they owe an additional duty to work in the best interests of their customers for both the investment and the loan.
Federal laws, like TILA and RESPA, set higher standards for lenders as well. These laws require lenders to provide information to borrowers within specified time frames and process actions efficiently.
COLLATERAL
Lender liability claims may also concern the improper handling of collateral. Collateral is secured by a lender to help ensure the loan; however, specific laws, as well as terms in the contract dictate when the lender can claim the collateral.
Lenders must follow the rules regarding collateral, even if a borrower defaults on a loan. Borrowers can hold lenders liable if there is an improper repossession or inappropriate sale of the collateral. For example, if the lender uses a low-ball appraisal to set the value of the collateral or doesn’t properly advertise the collateral, the borrower can take legal action claiming that the lender handled the collateral improperly.
Borrowers should know that lender liability law protects their interest. New federal regulations also provide borrowers who have been victimized by lenders to recover damages, legal fee,s and even statutory fines of $1,000 to $4,000 depending on the situation.