Over the past year there has been a significant increase in the number of new loan sale advisory firms formed and appearing on the internet. This is not a surprise considering the vast number of potential loan sellers in the market due to the ongoing real estate devaluation nationwide.
What is a surprise though is that many of these new companies, as well as a few more established firms, are “advertising” specific loans for sale and making public explicit loan collateral descriptions identifying project names, locations and even addresses.
The loan sale industry has always been known by its strict confidentiality practices. The public advertising of loan sales much less the identification of specific loans has long been considered taboo in the loan sale industry for several reasons:
- Most lender/sellers do not want to be identified as offering loans at a discount;
- Borrower’s that become aware that their loan is being offered for sale as a result will likely expect a discounted payoff;
- The borrower’s financial information is confidential and must not be shared with third parties by the lender except on a “need to know” basis by potential purchasers of the financial documents (notes) and then only under a strict confidentiality agreement. These confidentiality agreements almost always include a provision strictly prohibiting borrower contact. There are a number of reasons for this but the primary reason is that the borrower is under no obligation to discuss their financial condition with anyone but the lender of record and most importantly it is prohibited under the Gramm Leach Bliley Act;
- The real estate that is the underlying collateral for the loans is “not” what’s for sale, only the financial note. By advertising the specific collateral information it could mislead the potential investor/buyer that the real property securing the note is “readily” available, which is seldom the case.
I have on several occasions in past articles attempted to respond to the possible ramifications advertising loan sales and specific collateral addresses. I recently took it a step further and polled twenty (20) of the top lender liability law firms in the nation and asked the following:
Hypothetical Situation: A property owner has his real property listed for sale; locates a potential buyer and enters into negotiation to purchase the property. During the negotiation the buyer becomes aware the property owner’s “loan” is being advertised for sale. The potential buyer then contacts the note seller (borrower’s lender) and negotiates a purchase of the “note” at a price far less than the property owner/seller is asking. The buyer then ceases negotiation with the owner/seller and buys the note from the lender/seller.
This note sale clearly impeded the owner/seller’s ability to sell his property and the ability to possibly recoup his equity and worked to the lender/seller’s favor by getting rid of a potential problem loan.
Question: Would this action by the lender/seller expose the lending institution to a potential lender liability claim?
Of the twenty (20) law firms polled fourteen (14) responded. None of the firms responding were aware of the practice of advertising loans for sale and none could state any known cases to refer to. However all of the firms felt that such an action “could” lead to a lender liability claim. The opinions only differed in “how” the potential buyer came to know about the loan being offered for sale. Some felt that a lender could mitigate a claim by having a loan buyer sign a statement that they have not been in direct negotiation to purchase the collateral from the borrower. But it was unanimous that by advertising a lender could not ensure the execution of a confidentiality agreement and therefore have “no” control over who did or did not speak to their borrower.
Oh, and they “all” had significant interest in just “where” to find these "advertisements" and announcements. Of course I was glad to help.
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