How Lender Liability Losses Turn Into Class Action Lawsuits

With lender liability litigation on the rise throughout the financial services industry, you may be at risk of a class action lawsuit over a systemic flaw or even an individual employee’s negligence over time. Three common flaws are:

  • Non-compliant forms.
  • Employees not following lending and collections policies, often because of inadequate training or oversight.
  • Collections tactics, either in-house or through third-party collectors.

Non-compliant Forms

The surge in lawsuits related to wrongful repossession of collateral is a good case study in the type of activity that can breed class action litigation.

For example, a number of credit unions were sued over defective notices of intent to sell (NOI) and notices of deficiency forms that didn’t comply with state and federal requirements. Specifically, credit unions have been sued for failing include all of the details required by state law.

A non-compliant form is a perfect target for class action. As credit unions take legal action to collect deficient balances, borrowers are retaining attorneys who then discover problems in the credit union’s forms.

Non-compliant Lending Procedures and/or Poor Training

Another reason credit unions have been sued over defective NOI’s is that members didn’t receive it in the required amount of time before the collateral was sold. States differ on this requirement, and some credit unions didn’t include the time parameters in their lending procedures—or didn’t properly train employees to adhere to the correct timeline.

At the center of most lender liability lawsuits is the loan policy itself. But even if the policy and procedures comply with laws and regulations, an established pattern of employees ignoring the procedure can also increase your risk to this type of litigation. This highlights the importance of lending oversight by management and the board of directors.

Collections Tactics, In-house and Through Third-party Collectors

In some cases, credit unions have been sued for attempting to collect debts that have been discharged through bankruptcy. As with foreclosures, bankruptcies generate a public record that litigators can use to assemble a class of plaintiffs.

Another collections tactic that has generated class action lawsuits is “robo-calling” cell phones. The Telephone Consumer Protection Act (TCPA disallows “robo-calling” cell phones without the owner’s consent, although collections calls are permitted under certain circumstances.

If members sign loan forms in which they’ve provided a cell phone number, credit unions must be sure that these forms constitute permission to call the cell phone. If your credit union uses a third-party collection service, be sure you know the tactics they use to contact your members.

This summary is not a contract and no coverage is provided by this publication, nor does it replace any provisions of any insurance policy or bond. Please read the actual policy for specific coverage, terms, conditions, and exclusions.

Review Lending Policies, Training and Forms

Work with legal counsel to review your credit union’s written lending policies and forms to be sure they comply with state and federal regulations. Just as important: Train your staff on these procedures and audit the loan files carefully to be sure the training is effective.

It’s also a good idea to review your credit union’s lender liability coverage, which applies to far more areas of lending than the common class action risks covered above. Mortgage and business lending may increase your credit unions risk of lender liability losses.

This is not intended as legal advice. For more information about lender liability risks, visit CUNA Mutual Group’s Credit Union Protection Resource Center at www.cunamutual.com.

 

Strategic Link is the NWCUA’s wholly-owned service corporation, using the power of aggregation to provide the Association’s member credit unions with exclusive high-quality, competitively-priced products and discounted services. Contact Director of Strategic Partnerships Craig Reed today to find out how Strategic Link can help your credit union save money while meeting its goals in 2013 and beyond: 206.340.4789, creed@nwcua.org.

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