Lenders have to protect themselves from financial exposure when issuing mortgages and other sizable loans. They typically integrate protective terms into their mortgage notes to protect the company in the event of defaults and other issues that may arise during the repayment period of the loan.
Lenders also need to acknowledge and address the possibility of organizational liability. Borrowers and third parties can sometimes pursue lawsuits against banks, mortgage companies and other financial businesses due to a variety of different types of liability. Lenders, therefore, need to be proactive about limiting their liability through proper contract inclusions and specific company practices.
How can lenders limit their liability and risk of facing lawsuits brought by borrowers or third parties?
Maintain fastidious financial records
Financial mistakes on the part of lenders can provide the basis for litigation in some cases or can protect borrowers from litigation in other cases. The failure to properly credit accounts for payments made could cause significant complications in the future. So could a failure to promptly return overpayments if the borrower has already repaid the principal balance and accrued interest in full. Texas courts have held a lender responsible for borrower bankruptcies in the past due. Keeping clear internal records that are also available to borrowers can help ensure that there are no miscommunications related to payments.
Document communication with borrowers
Typically, lenders are held to the terms included in written contracts. However, borrowers going through unusual circumstances may call seeking relief. They may later claim that the lender verbally agreed to certain modifications. Keeping clear records of all communications with borrowers, especially in scenarios where borrowers request concessions or have missed payments, can help protect lenders from liability.
Limit direct property ownership
Sometimes, lender liability relates to third-party claims. In scenarios where lenders must foreclose on properties, they could be vulnerable to premises liability lawsuits should people end up hurt when visiting the property. Securing abandoned or foreclosed properties to prevent unauthorized access and minimizing the company’s portfolio of foreclosed properties by selling them promptly can help limit the exposure that mortgage companies and similar lenders have when they must assume ownership of and control over individual residential real estate units.
Executives and other business leaders may need help exploring potential ways for the company to limit liability or respond to claims made by borrowers or outside parties. Reviewing contracts and company practices with a skilled legal team can help financial businesses limit their legal exposure.