All lending institutions face the risk of lawsuits from disgruntled or unsatisfied customers. Lenders liability is an exposure to legal action that might be taken against a lending officer, a financial institution, his or her officers and directors for any direct involvement in the lending function.
To avoid claims, all banks should always give proper notice to clients in writing of any changes taking place in bank policy or any other areas. Instruct employees to always be truthful in answering credit inquiries, especially where it concerns borrowers whose credit is not in good order.
Honor all financial commitments given to customers, especially if such commitments are evidenced in writing. Avoid any involvement in the management of the borrower’s business and be sure that all written memos to the loan file are objective, unemotional and accurate.
All loan documents should be carefully drafted and the procedures outlined therein followed carefully. Give loan officers specific training regarding lender liability issues. Make sure that environmental loss control procedures are properly dealt with. A bankers professional liability, or BPL insurance policy, addresses these types of issues.
3 main types of lender liability
There are three types of lender liability issues that should be addressed: Pure, Managerial, and Ownership. Pure lender liability results from the lending process itself, and the bank need to be aware of the implied warranties of the lending function, possible fiduciary responsibilities, the doctrine of tortuous interference, implied contract, and discrimination.
Managerial liability results in the real or alleged partial or total management of a borrower’s company. There is concern due to the actual involvement of the bank in the borrower’s affairs. If, for example, the managerial relationship was formed under duress, or wrongful control, or failed to catch an environmental problem, there may be some serious liability issues to contend with.
Ownership lender liability occurs when the bank actually takes control of a business and runs the operation prior to reselling it. With Ownership lending liability, the bank takes on all the liability of an operator of the business it decides to run. Without proper forethought, this action could wind up being disastrous and run the risk of litigation.
Don’t face these common exposures without proper coverage on hand. Speak to your agent about a BPL insurance policy that protects your lending institution against risks and exposures faced on a daily basis.