Lender Liability and Self "Mirandizing"

Anybody who has ever watched a TV police drama or movie has heard a Miranda warning—“You have the right to remain silent, anything you say can and will be held against you in a court of law, you have the right to talk to an attorney,” et. cetera.

In criminal law, Miranda warnings are recited when the accused is subject to a custodial interrogation. Thankfully, albeit some extreme examples, lenders do not often have to encounter these warnings. However, if you are a lender, routinely reminding yourself that “anything you say CAN and WILL be held against you in a court of law” is not a bad habit.

Specifically, what lenders should be aware of is a certain subset of lender liability lawsuits generally alleging that the lender breached its oral contract/commitment or modification of the loan documents. Whether you are the originating loan officer or a special asset loan officer, what you say and your actions toward the borrower may be of great consequence and may cost your lending institution a significant amount of money either in legal fees and/or in damages.

For example, special asset officer Carla has been working with borrower Dan for the past year. The bank has encumbered all of Dan’s business assets and it holds a first priority deed of trust on the warehouse that Dan uses to operate his business. The bank and Dan have entered into numerous forbearance agreements, but Dan has not kept up with the payments. During the conversation where Carla explains that the bank intends to foreclose on the land and seize Dan’s personalty, Carla states rather offhandedly, “Dan, the bank sees foreclosure and repossession of personalty as our last option. We do not want to own your land nor your personal property, but we need you to make the payments. We want this loan to succeed and we want you to stay in business.” Dan, desperate, hears what he wants to hear, and in his mind, Carla has committed to not foreclosing until all other options are exhausted.

Carla may have opened the bank up to a serious lender liability lawsuit, and at the very least, may have created grounds for Dan to file a lawsuit attempting to cease the foreclosure and repossession. Why? Because Carla stated to Dan that the bank deems foreclosure and repossession as the last option and Dan can argue that other options were available.

Dan now may file a lender liability lawsuit alleging that Carla committed the bank to not foreclosing. Despite the parol evidence rule, the statute of frauds, and any merger clause or “no-modification” clause contained in loan documents, some courts have demonstrated an inclination to allow these oral statements to become oral modifications of the loan documents or view them to be separate oral commitments or contracts.

Everyone can agree that when a lender has to foreclose or repossess a borrower’s property, it creates a very uncomfortable situation for all the parties involved. Although the temptation is great for any loan officer to offer words of comfort, the lender should avoid this temptation. Often desperate, the borrower will remember these statements as the borrower heard them and may try to use the loan officer’s statements against the lender if a lawsuit ensues.

Therefore—and continuing with the police drama theme—the best advice for any loan officer is to follow Sgt. Joe Friday’s advice: “Stick to the facts.” Tell your borrower that he/she is in default and the bank is exercising its remedies under the loan documents. Do not make statements or promises that have not already been approved by your lending institution. And if compelled, express regret that the situation has come to this, but do not suggest that the lender in any way is waiving or relinquishing any rights.