Good Banker or Lender Liability?
Steven I. Fried, Principal Capital Finance 45605 Navajo
Drive Indian Wells, California 92210-8872 Email:
Steven.Fried@Banking ExpertWitness.com Web:
http://www.BankingExpertWitness.com Telephone: (760) 776-5749
Facsimile: (760) 776-9179
No matter how experienced you are as a lender or how much of
your customer's best interests motivated your actions; when a
banking relationship runs into trouble the next two words you
could easily hear are lender liability. Good Banker or Lender
Liability- A Banking Conundrum?
I was prompted to write this article because of the reflections
I had on my own training and career in banking contrasted with
my experience as an expert witness in finance related cases. I
was also thrilled to legitimately sneak in the word conundrum as
the new buzz word in economic circles. Years from now, people
will be able to date this article for using that word much like
the buzz word of several years ago - gravitas. Nevertheless, I
am concerned about the conundrum that exists between my training
as a lender and my recent experience testifying as an expert
witness in financial litigation. I spent more than 30 years as a
lender in commercial banks including over 20 years as a senior
policy-making officer and turnaround specialist for troubled
banks. In all the training I received and in the experiences I
had, good judgment was a most valued ability. I have always
worked in a decentralized lending environment where authority,
analysis, judgment and responsibility were left to line lenders.
After a long period of supervision and assessment of your
skills, you were given authority to evaluate lending
circumstances and make the decision on every type of loan
situation; aggressive new loans, borderline customers and
workouts. In fact, the loan administrations in which I worked
insisted that the originating officer handle the workout if that
circumstance should arise, in order to "learn from your
mistakes." A bank, like any of its customers, is organized to
make a profit. It, therefore, requires sales which are usually
generated, in large part, by the very same officers responsible
for granting loans. Banking is the only industry where the
Salesman and the Credit Manager are one and the same person. One
of my old bosses told me that being a loan officer was like "a
barrel tapped at both ends." The tap on one end is that you must
provide intelligent loan decisions to establish and maintain the
bank's loan relationships while the tap at the other end
represents your duty to protect the bank's capital. Between
those two tapped ends lies the conundrum. There isn't a business
in the world that hasn't run into difficulties at some point in
its history. Sometimes difficulties arise from good things
happening such as when sales growth outstrips working capital or
problems can occur from not so good things like an unexpected
supply shortage, rise or fall in market prices, etc. Sometimes
the difficulties are just a "bump in the road" and sometimes
they aren't. It's at these times that even the most experienced
loan officer gets to really earn their pay; "Do I make the next
advance or not?". Interestingly enough, whether you decide to
support your customer or "pull the plug," you need to keep in
mind two words - Lender Liability. Regardless of which way you
decide to go, if things don't work out well, you may be hearing
them all too soon. As I said at the outset, what prompted me to
write this article was the apparent conflict between my training
(and I think I had great training) and the rising volume and
sophistication of lender liability claims. Judging by the
inquiries I get and recent cases I have been involved with,
lender liability claims are skyrocketing in number and size.
Banks, bank counsel and other interested parties have tried
mightily to limit this expansion. Many states have passed laws
to limit lender liability claims. Loan documents frequently
contain mandatory arbitration clauses and a waiver of jury trial
and courts have tried to narrow lender/borrower disputes to
within the "four corners" of the loan documentation. All to no
avail. In the "old days" a borrower might say "you should have
never lent me that much money because you knew I couldn't handle
it." Now the claims involve Fraud, RICO, at least five kinds of
negligence along with the milder old favorites of Breach of
Contract and the Covenant of Good Faith and Fair Dealing. Having
watched the process frequently and at very close range over the
past few years yet firmly believing in the tremendous economic
benefits for all concerned of a well-trained, intelligent loan
officer; what is a banker to do? (Conundrum - A paradoxical,
insoluble, or difficult problem; a dilemma) There are three
things to do: Hopefully, you have been doing this all along; but
certainly when a borrower hits that first bump in the road and
you are called upon to make difficult decisions; DOCUMENT,
DOCUMENT, DOCUMENT. Assuming there are no blatant facts to
undermine your actions to this point, the first place an
experienced opposing counsel will look is to the bank's policies
and procedures searching for deviations between policy/procedure
and actions. There are many other places they will look based
upon the individual circumstances which are precluded here by
space limitations. The key ingredient is that it's okay to
deviate from policy so long as you follow proper procedures and
DOCUMENT the valid business reasons for your actions. Second, I
strongly suggest you read an article entitled "THE TEN
COMMANDMENTS FOR AVOIDING LENDER LIABILITY" By Helen Davis
Chaitman. Paraphrasing Commandment Number 1 (and I don't believe
it is a coincidence that this is the first commandment); "Thou
Shall Take No Precipitous Action". I have seen an awful lot of
situations where the bank could have eliminated litigation,
perhaps resurrected the relationship and saved tremendous
amounts of money by only living up to this commandment. By
following the other 9 commandments as well, you stand a good
chance of avoiding further, very substantial liability and
litigation. Thirdly, should you find yourself in a potential
lender liability situation, call us (a shameless
self-promotion). Seriously, an experienced, credible and totally
independent third party to vouch for the bank's faithfulness to
industry standards and practices can make the difference between
recovery and loss. (About the author: Mr. Fried is a principal
in Capital Finance, a litigation consulting and support firm
specializing in complex banking and commercial finance matters.
He can be reached at (760) 776-5749 or
Steven.Fried@BankingExpertWitness.com)