Predatory Lending: Refinancing & Personal Guarantees

by 13 Aug 2012

(TheNicheReport) -- After the mortgage meltdown in late 2007 and 2008, many small community banks suddenly found their commercial loan portfolio was under-collateralized. The better banks gave borrowers plenty of notice that they would be requiring additional collateral – often in the form of personal guarantees and mortgages on the borrower’s residence.

Some small lenders, however, literally gave no warning and just shoved paperwork under the borrower’s nose at closing. Borrowers in those situations are often left with just two options – pledge their personal assets, or have the note called then and there.

Commercial loans are not subject to the strict regulatory enforcement structure surrounding residential loans. Home loans, on the other hand, must comply with a whole alphabet soup of federal regulations, including RESPA, TILA and others. We believe that when a lender suddenly forces a commercial borrower to sign personal guarantees and pledge personal assets, the lender must comply with these state and federal laws.

There doesn’t appear to be much case law on this novel approach to predatory lending, but we feel with the right case, a good argument can be made.

Presently we are litigating a case against a small Wisconsin bank in which we claim that the bank forced a 90-year-old woman to co-sign and guarantee her daughter’s business loans, knowing that the business was already in default. Of course, the mother was never told this nor did anyone explain the documents she was being asked to sign. Shortly after signing, the bank called the daughter’s note and is currently attempting to take the mother’s property.

In another case we are following, a small savings bank told a business borrower on the day his note was due that he needed to sign a personal guaranty. Having no choice and not understanding the paperwork presented, he signed. Even though he never missed a payment, the bank called the note shortly after securing the additional collateral and is now foreclosing on his home.

Of course, the banks in these cases deny wrongdoing.

The Wisconsin case involves the mother’s farm and not a residence, but in both cases, the banks sought to secure commercial debt with personal property and did so with no advance warning.

Congress passed RESPA – the Real Estate Settlement Procedures Act – which requires lenders to give homebuyers a number of disclosures well before the closing. The intent of the law is to avoid nasty surprises and confusion. Not showing papers or making disclosures until the day of closing to borrowers results in undue pressure.

Similar to RESPA, Congress also passed the Truth in Lending Act in order to prevent nasty surprises on the day of closing. Although these laws do not apply to commercial transactions, we believe that once a bank or mortgage broker requires a borrower to pledge his or her home and personal assets, then TILA and RESPA should apply.

In addition to federal violations, there are state-specific remedies available in many states, as well as common-law fraud and breach of fiduciary duty claims that can be brought.

We are presently looking for customers of small and medium-sized banks who forced commercial borrowers to sign guarantees without warning and on the day of closing.

To us, that is predatory lending.

 

By Brian Mahany; comments and questions are welcome. The fraud lawyers at Mahany & Ertl help many victims of bank fraud, predatory lending and predatory foreclosure practices. If you think you may have a claim, give us a call. All inquiries are kept in strict confidence. For more information, contact attorney Anthony Dietz at adietz@mahanyertl.com. If you have an immediate concern, please contact the author, attorney Brian Mahany, at brian@mahanyertl.com or (414) 704-6731 (direct).  Mahany & Ertl - America’s Fraud Lawyers. Offices throughout the United States.

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