I am looking for examples of borrowers who have (successfully) sued
banks for issuing them a highly risky loan. I'd appreciate any
pointers to U.S. legal precedence for action taken against a bank for
giving someone a risky loan. |
Request for Question Clarification by
pafalafa-ga
on
08 Jun 2005 17:51 PDT
sw88tbeth-ga,
It would be helpful to know two things:
1. Is there a particular state that you're most interested in? Much
of the case law on this topic is state law.
2. Is there a particular type of loan of interest? Housing loans are
treated differently than, say, loans to a small business.
Let us know what ever else you can about the situation, and perhaps we
can get you the information you need.
pafalafa-ga
|
Clarification of Question by
sw88tbeth-ga
on
08 Jun 2005 23:04 PDT
I am interested in any U.S. cases and am especially interested in California cases.
The loan type would be for home loans. Thank you.
|
Request for Question Clarification by
pafalafa-ga
on
09 Jun 2005 07:46 PDT
Do these sound like the types of case you're interested in...?
=====
...In Williams v. Gelt Financial Corp., the borrower's loan
application showed a 17.990% fixed interest rate, while the TILA
disclosure form listed the interest rate as 20.243%. The court,
observing that TILA is to be "'liberally construed in favor of
borrowers,'" held that the inconsistencies in the disclosures, as well
as the lender's failure to acknowledge the borrower's attempts to
rescind, constituted a violation of TILA. The court observed that
other courts found TILA violations, even without proof of actual
damages, when there was "'an obvious discrepancy between the
disclosures provided to the borrower and the security interest granted
in the mortgage instrument.'"
[Note from paf: TILA is the Truth in Lending Act]
...in Hemauer v. ITT Financial Services the lender prepared two
separate loan agreements, although the borrowers only requested one
loan. Although both agreements were signed on the same day and related
to the same transaction, the lender argued that the second loan was
actually a refinance of the first. However, the court held that the
lender, by splitting the true cost of the loan between the two
transactions, violated TILA's requirements that disclosures be clear
and conspicuous, and that all relevant disclosures be properly grouped
together...
...in Rodash v. AIB Mortgage Co., the lender gave the borrower two
disputed documents: (1) "a Notice of Right to Cancel," and (2) "an
Acknowledgment of Receipt of Notice of Right to Cancel and Election
Not to Cancel." The court held that although the lender properly
notified the borrower of her right to rescind, the lender's inclusion
of the acknowledgment and the waiver on the same page, with a single
signature line, constituted a TILA violation because the borrower was
not given a clear and conspicuous notice of her recission rights. The
court noted that a borrower may only "waive her right to rescind" in
cases where a "bona fide emergency necessitates an immediate extension
of credit."
=====
Let me know if these sound like the sort of cases involving "highly
risky loans" that you're interested in knowing more about.
pafalafa-ga
|
Clarification of Question by
sw88tbeth-ga
on
09 Jun 2005 09:56 PDT
Thanks 'pafalafa-ga' for your attention to this question.
These cases highlight where an error was made in the bank transaction,
but I am really trying to identify if there is any instance of a
borrower successfully suing a bank for issuing them a home loan that
was too risky given the borrower's profile (e.g. borrower actually had
few assets, little income, etc. but the bank gave them a big loan
anyway).
Thank you very much for your continued hunting.
|
Request for Question Clarification by
pafalafa-ga
on
09 Jun 2005 10:26 PDT
Thanks for getting back to me.
I'd like to ask for a bit more clarification.
Generally, lenders charge higher interest rates to loans that they
consider to be a higher-risk--this is the so-called sub-prime market
for loans.
This practice of high-risk, sub-prime lending is generally considered
acceptable (unless the lending becomes 'predatory' through abusive
practices). In other words, home loans are often issued to those with
little assets, bad credit, etc, and these customers pay much higher
rates than others who are considered less risky.
In the absence of clear-cut abuses in the loan process, I'm having
trouble imagining the basis of a suit for a loan being "too risky".
In what way was the recipient of the loan harmed by receiving a
high-risk loan?
Perhaps if I understand the circumstances a bit better, I can find the
relevant cases that you seek.
Thanks for whatever additional info you can provide.
paf
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Clarification of Question by
sw88tbeth-ga
on
09 Jun 2005 11:01 PDT
Specifically, the bank used a borrower's restricted stock as
collateral for a large loan. The borrower could not sell this stock
until a future lock-up period, had few assets and little income so
this is why I am calling the bank's loan to this individual 'highly
risky.'
Again, thanks for your persistence and I am hopeful you'll be able to
unearth something that pertains to this specific type of lawsuit.
|
Request for Question Clarification by
pafalafa-ga
on
09 Jun 2005 11:40 PDT
Thanks (and sorry to be so persnickety here) but I still need to
understand this key aspect of the issue:
"In what way was the recipient of the loan harmed by receiving a
high-risk loan?"
paf
|
Clarification of Question by
sw88tbeth-ga
on
09 Jun 2005 12:53 PDT
The collatoralized restricted stock tanked and became worthless almost
immediately after the bank extended the large loan. The borrower had
to sell the house at a loss shortly thereafter and to date, has paid
the bank more than $300,000 in interest alone.
I hope this clarification might truly identify if a case like this has
ever existed in the past. Thank you.
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Request for Question Clarification by
pafalafa-ga
on
09 Jun 2005 18:13 PDT
Thanks for the extra info...it helped.
Thus far, I have found reference to only one case that comes close:
http://alaskalegislature.com/stories/101102/murkowski.shtml
Democrats resurrect Murkowski bank suit
...Bering Strait Native Corp. oversaw the funds of the 17 village
corporations and invested the money in risky ventures, including a
concrete company, a trucking company, a tire manufacturer and several
other investments, Cole said.
He said the investments went against the recommendations of the
Fairbanks-based Alaska Bank of the North, which advised putting the
money in conservative stocks and bonds, Cole said.
Bering Strait Native Corp. went to the bank for loans to pay for the
acquisitions, using village corporation money as collateral, Cole
said. By 1977 the faulty investments caused the bank to foreclose on
the loans.
Sitnasauk sued the bank on the grounds that the institution should not
have approved the loans. In 1988, after a seven-year court battle,
Sitnasauk was awarded $10 million from the bank - the estimated amount
that would have been returned from that corporation's original $2.3
million investment.
----
Bottom line seems to be that the bank was, in fact, sued for making
overly-risky loans, and that they paid out $10 million to cover an the
losses from an initial $2.3 million investment.
I'm not sure I can find very much beyond that. Let me know if this helps at all.
pafalafa-ga
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