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Lenders at risk: 3 tips to reduce borrower counterclaims: the rise in counterclaim lawsuits filed by borrowers against community banks, credit unions and other financial institutions can be an opportunity for agents.

The housing crash caused a record number of foreclosures, putting lenders at greater risk of counterclaims by borrowers. Although some counterclaim suits are simply attempts by the borrower to stall the foreclosure process, many times that is not the case, which means lenders typically have to mount a costly defense until the merits are further determined.

The number of counterclaims being filed, the liability banks face, and the need for a strong defense all underscore the need for appropriate insurance coverage.

Current conditions provide an opportunity for agents and brokers to work with carriers to offer expertise and advice to help their clients at community banks, credit unions and other financial institutions address counterclaim exposures and solutions.

Borrowers who file lender liability counterclaims typically assert fault on the part of the lender at various points in the mortgage process: during the initial extension of the credit, during the servicing of the loan, or in the foreclosure process. Common causes of action include breach of contract, breach of fiduciary duty, failure to disclose loan terms, misrepresentation, fraud, negligence, failure to supervise a loan, breach of duty of good faith and fair dealing, invasion of privacy and violation of the Truth in Lending Act.

The borrower may seek monetary damages or other types of relief that can include prejudgment interest, treble damages, punitive damages and attorneys' fees. Additional retribution for nonmonetary relief can also be sought out by the borrower, such as rescission or reformation of the loan agreement, or a declaration that the loan is void.

Specialized agents and brokers with knowledge of financial institutions can leverage the current market conditions as an opportunity to demonstrate their expertise and help their clients under stand the various types of claims a borrower may file. These include:

* Misrepresentation of the profitability of a company or investment, interest rate, maturity date or other terms of the loan

* Loan extended to the borrower despite a poor credit history

* Misconduct during the servicing of the loan or violation of loan agreement terms

* Borrower loss of profits due to a reneging on a commitment to extend the loan or release additional funds

* Wrongdoing during the foreclosure process and faulty execution of the loan acceleration process.

For the lender, a counterclaim can either mark the start of a lengthy litigation process or a brief headache. Small banks are not alone when it comes to lender liabilities and the threat of counterclaim litigation. To help reduce the risk of potential damages, leading agents and brokers are providing risk mitigation suggestions.

For example, they are underscoring for clients that their loan processes must be consistent and follow strict guidelines. From the first meeting with the borrower, lenders should be mindful that the borrower may rely on their advice when accepting the terms of the loan. Lenders also should document the terms of the loan, any modifications to those terms and all communications with the borrower and other involved parties throughout the process. By creating a detailed loan file, lenders strengthen their defense against any potential counterclaims.

To help prevent unnecessary foreclosure complications or counterclaims, agents and brokers can help their lender clients by providing the following best practice tips:

1 Due diligence: Lenders should carefully review the file to assess any potential disputes that could be raised by the borrower. The lender also may benefit from researching the borrower's legal history to assess whether he or she has a history of litigation.

2 Communication: Before moving forward with a foreclosure, agents and brokers should advise their lender clients to communicate clearly with the borrower. By discussing alternative solutions, such as forbearance or deed in lieu of foreclosure, the lender may be able to avoid a legal issue. Lenders who maintain amicable relations with borrowers are less likely to see a counterclaim arise from a foreclosure. Even if the borrower does file a counterclaim, evidence that the lender considered alternate payment options with the borrower can be beneficial to the defense.

3 Legal counsel: Before lenders choose a lawyer, agents and brokers should advise their clients to ensure that the lawyer they work with has experience in lender liability claim defense. The attorney handling the foreclosure is not necessarily the best person to defend against the counterclaim.

Specialized agents and brokers understand that lender liability counterclaims cannot always be avoided. Sharing risk management tactics with lenders can help them avoid problems and build a defense if a counterclaim occurs. Because litigation can be costly, agents and brokers are working closely with carriers that offer expertise and insight in financial institutions to ensure that their clients have the proper combination of insurance coverage to help meet defense costs and protect lenders' bottom lines.

More on the Web:

The Financial Meltdown:

> 5 Years Later

> High Risk, High Reward

> Bad Banking Puts Insurance on the Radar

Read these related articles at

Mark C. Horton manages and oversees Travelers' community bank business throughout the U.S.
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Title Annotation:FINANCIAL
Author:Horton, Mark C.
Publication:American Agent & Broker
Date:Nov 1, 2013
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