Lender Liability: Where Are The Risks?

Banker Resource
April 12, 2013 — 1,544 views  
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When you lend money to someone, the lender must ensure that the borrower is treated fairly. Usually, a written agreement is drafted with the terms and conditions of the loan. This agreement is signed by both the lender and the borrower, and a third party witness in some cases as well. Since both the parties involved in this deal are human, there might be cases where you might act in breach of the initial agreement, intentionally or unintentionally. This is called lender liability. If the borrower files a lawsuit, you might have to pay damages to the borrower. Here are some of the top risks associated with lender liability.

Making Sudden Moves

You might get miffed by the behavior of the borrower in returning the borrowed sum, and you may act suddenly without thinking. This is the most vulnerable area in lender liability. Always notify the borrower in advance, whatever it might be for.

Violating the Terms of the Agreement

Whatever you do, do not violate the terms of the agreement, like asking the borrower to pay up before the due date. You can do that only if the borrower has violated his/her part of the terms and conditions. Nevertheless, even in the case of a violation by the borrower, make sure you take legal counsel before acting.

Involve Yourself in Helping the Borrower Settle the Claim

In order to help the borrower settle your loan, you might help him in a direct or indirect way. However, this is risky as the borrower might term this as duress if he/she files litigation against you. Keep away from the borrowers’ business at all costs.

Advising the Borrower

Do not provide any sort of advice to the borrower, related or unrelated to the loan. The relationship will be termed fiduciary and the borrower might claim that your advice led to the subsequent problems.

Keep Track of Communication

Be professional in all your communications to the borrower and also keep a record of everything. Phone calls, emails, posts, etc. should all be filed. You never know when you might need to use those records.

Be Honest in All Credit-related Communications

If the borrower asks you about any information related to the loan, make sure that you remain truthful and accurate. In case you make any mistake, the borrower might term it as using false information to influence the borrower. This will come back to hurt you in case of a lawsuit filed against you.

Giving Due Consideration before Suing the Borrower

If you plan to sue the borrower, make sure you think about it properly before filing the lawsuit officially. The general consensus about this is that the borrower is the one who is feeling the heat. So, the sympathies will be towards the borrower and you, as the lender, will be considered the villain. In case there is a single point where you are found to breach the contract, your case can be torn apart by the defense. The aforementioned are only a few main risks associated with lender liability.

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