Can a Lender Declare a Nonpayment Default Because of “Political Risk”?

If most business owners ever bothered to read the fine print in bank loan documents, they would be shocked. Unlike residential lending which has come under increased scrutiny since the 2008, commercial lending is still the Wild West of the banking world. And usually it is the bank that has far more guns. Readers of the blog know that we rail against nonpayment defaults (also called nonmonetary defaults). These clauses allow a bank to default a borrower even if the borrower has never missed or been late on a single payment.

Some of the loan documents that we have reviewed are so one sided that even judges must hold their noses. How about a provision that says the bank can declare a default whenever it perceives itself at risk? Or a nonpayment default provision for whenever the bank feels “uneasy”?

Add to this list of one sided horrors a new term of default, political risk!

Our “friends” at the Loan Market Association have come up with new language for banks to add to loan documents. Language that allows banks to declare a default in the case of political risk or unrest.

Some readers may be thinking, “Okay, I get I, the bank wants to be able to declare a default in the event of a revolution or some other extreme event.” That is not how the clauses are drafted, however. And once again, the bank gets to make that interpretation.

Presently there are two options a bank can choose when inserting a political risk clause. First, there is language that says a nonpayment default for political risk must be “material.” That means that the bank must first assess the risk against the borrower’s ability to pay.

The easier solution for the bank is the unqualified political risk clause. If the bank says there is a political risk then it must be so and no matter how remote, the bank retains the right to call the note and accelerate payments. These clauses are so ridiculous that one could argue there is political risk if either Donald Trump or Hillary Clinton are elected.

Borrowers, of course, hate these clauses. As do we. Why should a borrower be defaulted for events completely beyond its control?

Unfortunately, many commercial borrowers never read their loan documents until a problem occurs. Others simply trust their lender. While that practice may work for many, it is quite common for banks to change directions overnight, especially when loan officers leave, new leadership comes in or the bank is acquired.

The traditional – and legitimate – nonpayment defaults in most mortgages include:

  • failure to pay the property taxes (when the taxes are not paid into an escrow account)
  • failure to pay the property insurance (when insurance is not escrowed), and
  • transfers of ownership of the property without notice or the lender’s permission.

After those three, things can pretty dicey for the borrower. Lenders have too much power if they can declare a default simply because they feel insecure or don’t like the outcome of an election.

Presently we are litigating a claim against FCRE (Freedom Mortgage) involving an alleged default because the borrower allowed the property to become “run down.” What constitutes “run down?” They argue that term could mean something as miniscule as chipped paint on a sign.

Banks already have too much power. Many borrowers go into commercial loan transactions believing that banks owe them a fiduciary duty and a high standard of care. Unfortunately, that is often not true.

If you are the subject of a non-payment or non-monetary default, contact us immediately. We have succeeded in turning back the clock and returning real property back to the owners (instead of the bank). Time is of the essence, however.

Once a bank declares a default, fees and charges begin to quickly mount. Cross collateralization schemes put other loans and property at risk. Seemingly overnight, fees and penalties can eat up any equity one has in the property.

The best defense against an aggressive lender is often a good offense. Litigation isn’t the best way to handle most disputes but when your bank won’t listen to reason or appears intent on taking all your property, litigation may be the best and only option. Suing banks isn’t easy but those suits can be won. (Juries don’t like bank misconduct.)

Often the only thing a banker respects is a lender liability lawyer tougher than them.

The second your lender declares a nonpayment default, contact us immediately. Each day that goes by could mean more default interest, fees, penalties and the like. For more information, contact attorney Brian Mahany at [hidden email] or by telephone at (414) 704-6731*(direct). All inquiries are kept completely confidential.

Are you a lawyer handling an existing case and looking for lender liability counsel? We are happy to assist. 

*MahanyLaw and Judge, Lang & Katers are two national boutique law firms that work together on cases against banks. We are one of the few law firms not afraid to sue banks. Because we never represent banks, we rarely ever have conflicts of interest. Before you call, however, please understand that we can only take a small percentage of the cases sent to us. Those cases are typically cases on behalf of business clients and high net worth individuals. Our minimum case size is $5 million but if you are close, give us a call. Unfortunately, we are not able to take residential loan cases that do not meet the $5 million loss threshold. Visit our consumer page for ideas if you have a residential loan problem.

MahanyLaw and Judge, Lang & Katers. America’s Lender Liability lawyers – We Sue Banks