28 Apr How to Use the Law to Fight Bank Abuse
Financial institutions, including banks, lenders, and debt collectors, serve an important and powerful role in the modern economy. But if this power is abused, financial institutions can sometimes harm consumers and small and mid-sized companies. Additionally, many of these financial companies have lobbied federal and local governments to craft laws so that they are shielded from liability. Despite their efforts, creative use of several different types of claims can remediate harm from financial institutions and hold bad actors accountable. This rticle gives a brief overview of possible claims consumers can bring against financial titans, starting with a discussion of the claims available in North Carolina and then generally highlighting other claims that may be available in different states.
Claims Available in North Carolina
North Carolina is considered a major banking and lending hub, and, logically, its court system has a reputation for being bank-friendly to support this industry. Based on this general tendency to favor the banking industry, North Carolina has been more conservative in developing lender liability than some other states. However, consumers can still bring many claims against lenders, banks, and financial institutions, including improper acceleration, fraudulent or negligent misrepresentations, wrongful foreclosure, wrongful interference with management, predatory lending, and improper behavior from debt collectors. Furthermore, recent action from the North Carolina Business Court suggests North Carolina might be finally acknowledging a fiduciary duty to negotiate in good faith could exist between lenders and borrowers.
Lenders can be held liable for improperly accelerating on loans, either in breach of contractual provisions or in violation of the implied covenant of good faith and fair dealing found in every contract. Nearly all loans contain terms that empower lenders to accelerate on loans, or require the entire balance of the loan is paid at once. Acceleration on loans often occurs when the borrower fails to make payments or otherwise demonstrates that it will not be able to finish the remainder of the payment plan. The terms of a loan agreement will usually explicitly state when the lender can accelerate the loan. But, if a lender accelerates in violation of the acceleration terms outlined in the loan agreement, the lender can be held liable for improper acceleration and the borrower can bring a cause of action for breach of contract. For example, if the terms of the loan state the borrower is entitled to a six month grace period after a missed payment, the lender may be liable for improper acceleration if the lender accelerates the loan before the grace period has run. Furthermore, some courts have ruled that a lender can be held liable for breach of contract if it violates subsequent oral modification of acceleration terms. This could look like a bank representative promising a borrower the bank will not accelerate the loan and then proceeding to call the balance in.
Violation of certain acceleration terms could also give rise to a breach of contract claim rooted in the concept of the implied covenant of good faith and fair dealing. A standard provision in acceleration terms gives lenders the right to accelerate the loan if the lender “deems itself insecure.” However, the Uniform Commercial Code limits the lender’s discretion to only accelerate the loan if the lender “in good faith believes that the prospect of payment or performance is impaired.” This grants a borrower a breach of contract claim if a lender calls in a loan based on the discretionary acceleration power but under unreasonable circumstances. Generally, a court will look to see if the lender could have reasonably believed repayment of the loan was likely impaired, or if the lender accelerates the loan for an improper purpose. If the court finds the loan was accelerated under discretionary terms, but for an improper purpose, it could find the lender breached the loan agreement. Previous courts have granted compensatory and punitive (or punishing) damages for claims of improper acceleration.
Fraudulent conduct and fraudulent or negligent misrepresentation by financial institutions can also grant consumers grounds for private suits. Fraudulent conduct occurs when a lender engages in conduct that purposefully deceives or misleads the borrower. An clear case that demonstrates this legal concept is the recent Wells Fargo scandal. After an investigation, it was discovered that Wells Fargo deceptively and fraudulent sold unauthorized products and repeatedly deceived their consumers. The Wells Fargo case just recently settled with the state of North Carolina for 575 million dollars. Fraudulent claims can be brought under tort theories or under North Carolina’s Unfair and Deceptive Practices Act, which provides consumers a private right of action to sue businesses that harm them through unfair or deceptive practices. This statute has broad applicability and can be used for a wide variety of unfair, unethical, and deceptive conduct from lenders. Beyond granting individuals grounds to sue for unfair behavior, the Act also provides victorious plaintiffs with the opportunity to seek treble damages (or three times more than a plaintiff’s actual damages) and reasonable attorney’s fees.
Fraudulent or Negligent Misrepresentation is also grounds for individuals to sue banks and other financial institutions. Both fraudulent and negligent misrepresentation between banks and consumers would occur when the lender communicates false information to a borrower and the borrower relies on this information to his detriment. The difference between fraudulent and negligent misrepresentation mainly centers around the defendant’s state of mind. If the lender purposefully deceived the borrower with his statements, then it is a fraudulent misrepresentation. However, if the lender simply fails to use reasonable care in ensuring the information stated was accurate, it could be liable for negligent misrepresentation. Financial institutions can be held liable for the fraudulent or negligent misrepresentations of any employee representatives or statements made in transactions with borrowers. Fraudulent or negligent misrepresentations claims can be brought as a tort claim or borrowers who have suffered harm from the fraudulent or negligent misrepresentations of financial institutions can also bring claims with the Unfair and Deceptive Trade Act described above.
Lenders initiating foreclosure proceedings open themselves up to liability if they fail to comply with the terms of the foreclosure process in the loan agreement or state foreclosure laws. Lenders are particularly at risk for liability if they are found to have willfully violated these provisions. Wrongful foreclosure is a recognized tort in North Carolina, usually available when a mortgagor has wrongfully foreclosed on a home in violation of the express terms of the loan agreement, such as notice requirements or grace periods. North Carolina has also held violating the fiduciary duty between the trustee for a deed of trust to “use diligence and fairness in conducting the sale and to receive and disburse the proceeds of the sale” in a fair manner can lead to a wrongful foreclosure claim.
Failing to follow all applicable state foreclosure laws throughout the transition of ownership can also lead to potential claims against the financial institutions involved in the foreclosure. State law and judicial processes recognize that foreclosing on a property is a significant legal process that has a huge impact on both the lender and the borrower. Due to the great impact on individual citizens, many states create foreclosure processes that are designed to ensure the transition of ownership is equitable. Companies involved in the foreclosure process must comply with a state’s foreclosure procedure and laws. In one of our cases, we filed this claim after a foreclosure company illegally destroyed the clients’ property during a foreclosure. The claim rested on a North Carolina foreclosure law that requires a foreclosure preservation company obtain a writ of possession before entering a property to remove the former homeowner’s belongings. The clients ultimately received 7 times the value of their lost property because the company purposefully failed to comply with all the foreclosure procedural requirements.
The North Carolina legislature developed the Predatory Lending Act to protect mortgage holders from unethical, illegal, and abusive lending practices of financial institutions. The provisions of the act explicitly prohibit prepayment penalties for mortgage loans of $150,000 or more, repeated refinancing of an existing home loan to accrue new up front-fees, financing of up-front, single premium insurance payments, financing of fees; balloon payments; and negative amortization; and lending without regard to a homeowner’s ability to repay on high-cost home loans. Additionally, this statute makes it illegal for financial institutions to engage in usury, or lending with unreasonably high fees and interest rates. Using the Unfair and Deceptive Practices Act described above, borrowers can bring a claim against any lending organization that engages in prohibited usury or predatory lending action, and could receive three times the borrower’s actual damages and reasonable attorney’s fees.
Claims Against Debt Collectors
North Carolina also has extensive protections against unfair practices for debt collection agencies. When a debt moves from the lending institution to a debt collection agency, certain protects are extended to the debtor. These protections prohibit the debt collection agency from harassing, abusing, threatening, or unreasonably publishing confidential information about the debtor. The statute also prevents debt collectors from collecting funds in a deceptive, fraudulent, or misleading manner. All of these provisions essentially require the debt collection agencies to perform their job of collections in a reasonable manner and forces them to seek settlements in good faith. If the debt collection agency violations these protections, it will be liable for the actual damages sustained by the debtor and the bank can also be punished by a court for up to $4,000 per violation.
Duty to Negotiate in Good Faith
The North Carolina Business Court recently found a fiduciary duty for a lender to negotiate in good faith with its borrower. Though North Carolina has previously held the lender-borrower relationship does not create a fiduciary duty, a recent case has opened the door for plaintiffs to bring a claim against a lender for failing to negotiate the terms of a loan in good faith. The recent case held that once a lender and a borrower have engaged in enough negotiations to create a “binding preliminary agreement” there, then, is a duty to continue the negotiations in good faith to finalize all the remaining terms of the contract. Though the bankruptcy court does not create binding law, this case opens the door for the possibility that failing to continue loan negotiations in good faith could lead to a tort claim against lenders.
Breach of Fiduciary Duties Between Borrowers and Lenders
Violation of fiduciary duties between borrowers and lenders can lead to private claims that hold financial institutions accountable for bad behavior. Generally, no fiduciary duty exists in the lender-borrower relationship. However, some states recognize a fiduciary duty can exist between borrowers and lenders “if the lender asserts substantial control over the borrower’s business affairs.” Substantial control from the lender could occur if the lender acts as a financial advisor, the lender drafts legal documents for the borrower, the lender helps the borrowing company make decisions about vendors, or if the lender controls any type of decision making process for the borrower. If the lender begins to take control over the borrower’s business, the lender then has a fiduciary duty to act in the best interest of the borrower and maintain a duty of confidentiality. Under this theory, consumers will have a claim against lenders that act in a self-interested manner or breach confidentiality.
General Principles of Lender Liability
Other states have created more avenues for lending and financial institutions to be held liable by private consumers. The laws of other states may apply to your interactions with financial institutions, depending on where the institution is located or possible because of the the terms of your lending agreement. Consumer claims against financial institutions that may be available in other states include a tortious claim for technical foreclosures, wrongful interference with management, and breach of fiduciary duties.
Some consumers may be able to bring a claim against banks that have instituted a foreclosure based on a technical, or immaterial, default rather than a missed payment. Many loan agreements are extremely long and contain complex legal terms. Unfortunately, some lenders negotiate favorable terms that create an opportunity for “technical defaults” to be grounds for foreclosing on a property in order to take the property for its own portfolio. Technical defaults occur when a borrower fails to comply with a technical requirement in the loan agreement. This is directly contrasted with payment defaults where the borrower fails to make a payment on the loan. Courts readily distinguish between technical defaults and payment defaults. Improperly foreclosing on property can establish a claim against the lender under theories of breach of contract of good faith and fair dealing. The Oregon Supreme Court put this concept best when it held “[e]quity will not allow a mortgagee to foreclose a mortgage for a mere technical default.” Lenders who foreclose based on technical defaults in order to add the property to their portfolio can be held liable for this unethical conduct in certain states.
Wrongful interference with Management
Wrongful interference with management claims against lender organizations occur when the lender oversteps its role in the lender-borrower relationship and begins to interfere with the borrower’s business. This may occur if it appears uncertain that the borrower will be able to repay loans or debts. The heart of this claim rests on a bank-defendant interfering with the contracts and day-to-day activities of a borrower. This interference may look different depending on the relationship between the parties. One of the most notable cases on the theory held a bank liable under wrongful interference with management when the bank threatened to send a company into bankruptcy, pursuant to a “change in management clause,” if the company did not keep the bank-appointed CEO. Another court found a bank liable for wrongful interference with management when funding for a construction project was contingent on inspection of the progress of the construction. Under this theory, many states prevent lenders from overstepping their official role and provide harmed borrowers with a private claim against lenders who engage in this conduct. If a bank is currently using a loan agreement to interfere with the management of your company, you may have grounds to bring a viable wrongful interference claim.
This post was co-written with Mallory Miller, JD.