In the largest multistate agreement since the tobacco settlement of 1998, the Obama administration, along with 49 state attorney generals, announced a $25 billion settlement with five of the nation's largest banks. In addition to instances of wrongful foreclosure and fraud, the government's investigations found that banks routinely violated the law through improper practices, signing foreclosure documents without a notary or without knowledge that the documents were factual.
What implications does this landmark case have for credit unions? It's true this settlement involved large banks and not credit unions. However, the conditions precipitating these events have yet to improve.
According to the NCUA, foreclosure and repossessions at NCUA-insured credit unions, which peaked in 2011, remain at elevated levels. It's reasonable to assume that this activity will continue to put credit unions at increased risk for claims relating to their lending practices when loans go bad. Further, headlines generated by big cases like the one above are likely to grab the attention of troubled borrowers, who may feel empowered to investigate and file claims against their own financial institutions.
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In accordance with this trend, CUNA Mutual Group, which insures nearly 90% of U.S. credit unions with its fidelity bond and management and professional liability coverages, has seen an increase in both frequency and loss amounts from credit unions involved in lender liability lawsuits. Claims under its liability coverage increased 18%, while payments increased 30% from 2010 to 2011.
Common lender liability scenarios credit unions will continue to face in 2012 and beyond include member suits for wrongful auto repossession, wrongful foreclosure on the member's home, claims the credit union acted unfairly and harassed the member when collecting a delinquent loan, or selling a borrower's collateral for less than its fair market value.
Specifically, CUNA Mutual Group has seen a significant increase in claims, including wrongful repossession, wrongful foreclosure and violation of U.S Bankruptcy Code, with a record number of claims filed in 2010 and 2011 resulting from the issuance of Uniform Commercial Code post-repossession documents that didn't comply with the notice of intent to sell.
The UCC governs repossession documents and requires specific language, disclosures and properly executed documents. In some cases, for example, collection staff failed to complete these documents properly and send them to members after secured collateral was repossessed but prior to the sale of the collateral as required by law. Unintentional violation of any steps involved in the UCC provisions, which can vary state by state, can lead to potential class action lawsuits against the credit union by its borrowers and guarantors.
Credit unions that have recently foreclosed on property, are involved in member business lending or have seen their delinquencies rise over the last 12 to 18 months are at greater exposure, and the financial penalties can be significant. Even if a defendant can avoid an award or settlement, in CUNA Mutual Group's experience, the defense of these claims commonly surpasses five figures, while larger, more complicated cases can cost much more.
While the increased foreclosure and repossession activity related to the economic downturn have increased risk, it is also important to note other actions that can trigger a lender liability lawsuit against a credit union. Examples include wrongfully failing to fund a loan, wrongfully refusing to renew a loan and negligently processing or administering a loan.
Best practices to avoid lender liability claims include:
- Ensure your member-facing repossession documents have been reviewed and approved by your legal counsel and comply with all applicable UCC provisions.
- Do not attempt to collect a debt from a member that has been discharged through bankruptcy, as it could violate the U.S. Bankruptcy Code.
- Provide sufficient advance notice to commercial borrowers in the event your credit union decides to utilize a demand note feature.
- Make sure your credit union's foreclosure policy is reviewed at least annually and includes, at a minimum, the following components:
- Ensure all applicable laws are followed during the foreclosure process.
- Obtain an appraisal at the time of foreclosure to determine proper book value.
- Maintain records on foreclosures.
- Repair authorization procedures.
- Prohibit preferential treatment during disposition.
- Require records to be maintained on all sales.
When considering lender liability insurance protection, it's important to review your coverage levels at least annually to ensure they're adequate.
John Wallace is vice president and product leader for CUNA Mutual Group's commercial products.
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