Minimizing Lender Liability

 Posted on January 13, 2025 in Creditor's Rights

For lenders, a troubling development that has recurred in recent years is lender liability. Lender liability refers to the legal claims that lenders can face alleging that they did not act according to the law during a lending transaction, usually after a default.

A lender liability claim can come from a borrower, guarantor, or third party arguing that the lender owes them damages. Lender liability can make a lender’s job more difficult and expose lenders to monetary losses. For this reason, it is a good idea to consult with an experienced Chicago, IL creditor’s rights attorney on how best to minimize lender liability. 

Common Lender Liability Claims

Breach of Contract

A breach of a loan document is a breach of contract. Lenders should be aware of potential areas of liability, such as improperly crediting payments or not fulfilling notice requirements. 

Wrongful Foreclosure 

If the lender has made a procedural mistake when foreclosing on a property, the debtor can bring a wrongful foreclosure action. These types of errors can include things like failing to correctly apply mortgage payments to honor a forbearance agreement or making incorrect adjustments to interest rates. 

Modification and Waiver Issues

Loan agreements usually specify that any modifications or waivers need to be in writing. Yet sometimes lenders will inadvertently deviate from this standard and orally promise to modify or waive an obligation. Borrowers can then claim that they relied on the lender’s conduct. 

Limiting the Risk of Lender Liability

There are protections lenders can put in place to reduce the risk of being exposed to lender liability claims, including: 

Draft Protections Into Loan Documents

By drafting in terms that anticipate potential claims, lenders can limit liability. For example, lenders should include terms that specifically prohibit oral loan modifications and integration sections that state that the written agreement is the entire agreement between the parties. 

Communicate With the Borrower

Communicate with the borrower early and often, and do so respectfully and professionally. This can minimize claims that the lender did not act in good faith. 

Consult With Your Attorney

Before acting on a borrower default, have an attorney review the contract and provide advice on whether to move forward before freezing a line of credit. If there are questions at any point about whether a loan servicer is acting within the servicer’s legal rights, stay on the safe side and speak with an attorney before taking potentially illegal actions. 

Contact Our Chicago, IL Creditor’s Rights Attorney

Whether you are negotiating a loan modification with a customer or concerned about exposure to liability after default, our experienced Chicago, IL creditor’s rights attorneys can help you minimize your potential lender liability.  At Dimand Walinski Law Offices, P.C., we advise lenders and defend creditor rights. Contact our offices for a consultation at 312-704-0771 today.