When Banks Break the Law
the following article is from the web-site of Bruce Alan Block, Attorney at Law
In the late 1990's, banks began canceling, calling, and refusing to renew lines of credit. Small businesses suddenly found themselves in the unenviable position of being without operating capital or credit; most drastically culled their work force, many others simply closed their doors. Of course, unemployed workers do not purchase the same amount of products (or pay taxes) which led to more national debt, more closures, and a real estate market collapse. The bank actions set into motion a chilling, chain reaction that wreaked serious havoc on the economy, leading to the financial crisis of 2007 and thereafter. Today, the country is still trying to recover from the domino effect caused by the tightening and elimination of monies for small business.
According to the Small Business Administration, 95% percent of U.S. employer firms are small businesses. It is not hard to understand why cutting off the supply of money to this vital segment of the economy set off such a crippling reaction.
Banks exist to receive and lend money. They act as a conduit of money from the Federal Reserve into the local economy. Banks are required to invest in local businesses and communities. As noted,Gone are the days when a bank would stand by a troubled business and try to help it through hard times. Sadly, nowadays the bank is the first to cut and run. The "friendly" bank of the last 20+ years that routinely renewed the credit line will suddenly decide to call the note and hands the small business a 90-day Forbearance Agreement.
Unfortunately, most businesses think they have no choice but to to sign the forbearance agreement — this is wrong thinking. Usually, the bank's 90-day forbearance agreement is pitched as a way for you to "obtain credit elsewhere." However, this is illusory, as you will find that no other bank will lend you money. Think about it, if your bank of 15+ years refuses to give you credit, do you really think another bank will? The answer of course is "no." In our experience, the small business will be unable to convince another bank to lend it money. Signing a forbearance agreement is the first step down a fast track to business closure or bankruptcy.
We strongly encourage any person or business faced with this situation to NOT sign a forbearance agreement (or anything else the bank "graciously" offers) until you have first talked to a knowledgeable lawyer. Why? Its simple. Forbearance agreements are lopsided and completely one-sided in favor of the bank. They give you a miserly 90 days that you would have had anyway. You give up and waive all rights to challenge the bank’s actions of why they won't lend to you, including the right to sue the bank for bad faith and unfair dealings. In our experience, those who did not sign a forbearance agreement remained in business. Every time, no exceptions.
Lender Liability, Good Faith and Fair Dealings.
It's a little known secret that banks and lending institutions can be sued for failing to act in good faith, failing to fairly treat its loan customers, and for its misdeeds. It is not impossible to go up against a big bank. An old adage comes to mind: "the bigger they are – the harder they fall." Likely, the bank has violated one or more of the numerous federal and state banking laws and regulations. Banks are subject to the same contract rules and common law principles as any other business.
Common law and contractual rules require that all parties to a contract (i.e. a loan agreement) act in good faith and with fair dealings. This means that both sides MUST act in a commercially reasonable manner, act in good faith, and fairly deal or treat the other party. Too often the banks think these principles do not apply to them, and that they can act in any manner they please. This is wrong. If a bank fails to act in good faith, if it fails to treat you fairly, if it fails to act in a commercially reasonable manner, it can be sued under a legal theory known as lender liability.
Equal Credit Opportunity Act – Spousal Signatures.
In the 1970's Congress passed the Equal Credit Opportunity Act which mandated certain criteria banks can and cannot use when making loans. The Equal Credit Opportunity Act prohibits a bank from requiring a spouse co-sign for a business loan. The ECOA and Regulation B, forbids banks from asking or requiring a non-involved wife to sign a personal guaranty for a loan being made to her husband's business (and visa versa). A bank will say that it will not make the loan or extend credit unless the wife also signs a personal guaranty. This is against federal law. If the husband and business are credit worthy and the wife is not involved in the business, a bank cannot ask nor require that a spouse personally guaranty company debt.
This prohibition does not apply where the spouse is actively involved in the business or where the applicant spouse and business are not credit worthy. However, in our experience most spousal signatures are obtained in violation of the law.
Unfortunately, most business men and women are unaware of this federal prohibition. We continue to see cases where banks have ignored the prohibition and required that a non-involved spouse sign a personal guaranty. Banks do this for a simple reason: if there is a default, the bank can attach all of the couple's assets, including the family home – homestead which is normally out of reach of creditors. The personal guaranty from the spouse makesall family assets conveniently available for seizure.
We have seen family homes foreclosed and sold by calloused banks whose sole focus is the "almighty dollar." These banks are completely indifferent to the path of destruction caused. We have seen banks garnish wages of an innocent spouse who didn't borrow the money, didn't personally benefit, and had no involvement with the business. A violation of the ECOA can result in the Promissory Note being declared null and void, collection actions terminated, and the offending bank required to pay actual attorney fees, actual damages, and even punitive damages.
Ignorance of Federal Banking Laws.
Sadly few in the civil litigation arena truly understand the ECOA prohibition or know how to use it as a defense. We do. We have handled lender liability, ECOA, and spousal signature cases. We know how to force a bank to release the innocent spouse from its clutched talons. It's not easy — but it can be done.
There are many state and federal laws that regulate the extension of credit and the termination of a line of credit. Our civil litigation and business line of credit attorney is experienced in handling cases where a line of credit has been arbitrarily canceled or terminated. Banks cannot arbitrarily deny you access to credit.
