Advice

10 Rules to Remember When Borrowing From Your Bank


1. Don’t rely on what your banker tells you; get it in writing.

A legal doctrine known as the “parol evidence rule” enables lenders to keep any evidence out of court about prior or contemporaneous oral agreements they made with their borrowers if the oral agreement conflicts with the written loan documents.

2. If you get a loan commitment, be sure it is in writing and includes all the terms of the loan.

In many states, special laws known as “statutes of fraud” require loan commitments to be in writing. As a result, it is imperative that, when your lender commits to making a loan, that the commitment be reduced to writing.

3. Get all important statements by your loan officer confirmed in writing.

Lenders are using the doctrine of “reasonable reliance” to convince courts that a borrower should have known that what a banker promised was so unreasonable the borrower should not be able to recover any damages against the lender for making those statements. The doctrine has unfortunately been stretched to ludicrous lengths.

4. Read every document before signing; if you have any questions, ask.

In the past, courts were lenient about enforcing the strict terms of loan agreements. They understood that not everyone reads, let alone understands, every single word buried in the small print on the back of deeds of trust and mortgages.

5. If you have any questions about your loan documents or your rights under them, contact a lawyer.

One of the few groups of people more distressing to deal with than bankers are lawyers. Lawyers aren’t cheap, especially good ones, and they often seem to create more problems than they solve.

6. Never give a lender a security interest in something you can’t live without.

Lenders often demand far more security than they need. While this may be a prudent, cautious lending strategy for them, it can prove disastrous for a borrower or guarantor who pledges that security…

7. If your banker tells you something that sounds unusual, check it out.

In years past, the public generally trusted bankers and held them in a certain esteem. Deals were done on a handshake and mutual trust between the lender and borrower was more the rule than the exception…

8. Be aware of what you’re giving up if you sign a jury trial waiver, an arbitration clause or a release.

Lenders today are including jury trial waiver and arbitration clauses in their loan agreements with alarming frequency. A jury trial waiver prevents you from having disputes with your lender decided by a jury, while an arbitration clause prevents you from having your disputes decided by a court.

9. If you suspect your lender has done something improper, do something about it.

A doctrine known as “waiver of the fraud” is being used by lenders to prevent borrowers from prosecuting their claims. Under the doctrine, a borrower who suspects fraud by the lender but who nevertheless continues to accept substantial benefits from the lender (i.e., funding under a line of credit) waives or loses the ability to pursue a fraud claim.

10. Don’t ever forget that your banker’s allegiance is to the bank and not to you.

Many people like to develop strong personal relationships with the people they do business with. They may foster close friendships with a loan officer or banker, especially in a small town where the branch manager knows everyone and there’s only one bank in town.

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