Q. Is lender liability still a problem today? It seems like all I read about in the papers about banks is how much money they are making.
A. Well, banks are making a lot of money right now. At the same time, however, lender liability has not gone away. For example, the largest lender liability claim actually upheld on appeal ($70 million plus post judgment interest of $18 million) was recently paid by a lender. See Anuhco, Inc. v. Westinghouse Credit Corp., 883 S.W.2d 910 (Mo App 1994). As far as the actual number of cases being filed today it pretty well follows the economy. When the economy goes into a recession the number of cases shoot up as lenders try and work their way out of bad loans.
Q. So we're at a low point in the cycle for new cases right now?
A. That's right. the economy has been doing resaonably well for the last two years. You can track this by examining the number of "non-performing" loans held on the books of banks and other lenders. Today we are seeing very low percentages of non-performing loans..
Q. But are there any cases being filed today?
A. Absolutely. You have to remember that banks always have a certain minimum level of problem loans regardless of what the overall economy is doing. For example, a well run bank might always have around 1% of its outstanding loans falling into the non-performing category. This percentage could double or triple in an economic downturn.
Q. Anything else affecting the volume of cases?
A. Interestingly enough, one of the things affecting the number of cases is the fact that lenders are expanding into related financial products areas.
Q. Like derivatives?
A. Right. Derivatives, mutual funds, financial advisory services, etc. What tends to happen is that as lenders move into these new products they are assuming even more risk than they have traditionally done with basic lending.
Q. Won't they make more money off of these products?
A. That is the plan. You should be able to generate a higher return on your investment to offset the increase in risk. They will have to get used to the fact that these new products subject them to old lender liability claims arising under securities laws, negligence and fraudulent misrepresentation.
Q. What about today's lending environment?
A. Interestingly, as the economy improves lenders come under more and more pressure to grow loan volume. What this means is that loans start being made which the loan oficers would not have touched when the economic recovery was just begining. As competition for these loans heats up the type of due diligence they would normally do gets relaxed. The Comptroller of the currency has recently commented on this phenomenon. Documentation mistakes and lax documentation become more common.
Q. And when the economy turns south?
A. Those are the very loans which the loan officers will want to move out of the bank before the state or federal regulators write them up for having them on the books. Unfortunately, in their hurry to move those loans out of the bank the loan officers will make mistakes and generate lender liability claims.
Q. How does this affect lawyers?
A. In several ways. First, today is when they should be practicing preventive law. Some, but not all, of tomorrow's lender liability cases can be headed off by paying attention to proper loan documentation and by being sensitive to the types of claims which a borrower might bring down the road. Second, lawyers who participate in putting on bad loans which generate significant lender liability claims that could have been prevented may find themselves subject to civil money penalty actions by federal regulatory agencies. It pays to be careful today.
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