Sue the Bank for Negligence?

20 Replies

Has anyone here ever sued a bank for incompetence? A local bank here epically messed up a deal for me but I was able to salvage it (had to come up with an extra $10-15k in a day) and still closed, but their negligence did almost cost me a great deal...I was pissed but let it slide - just won’t use them again. Fast forward to yesterday, I’m talking to a dear friend who is buying her first investment property with her husband and the deal fell through epically. The bank messed up royally. She is now out her earnest money, inspection $, etc and has lost a great deal. We are shocked to discover it is the same bank and broker who almost ruined my deal! She is appealing to the seller to get her earnest $ back since it was definitely a bank error, but I doubt she will. Is there any way to sue the bank in a situation where their negligence is the reason for the failed deal?

@Ericka Grant I cannot speak on the legality of any of this as I am not an attorney. But given that I am a lender, maybe I can help decipher whether something went wrong on the lenders end. 

In IL, we have attorneys involved on every deal. People complain about it adding yet another cost but the attorney is there to ensure that contingency dates within your contract do not get blown. So 99% of the time, an attorney watching for contingency dates would not allow a contingency to be blown, putting your earnest money at stake (ideally). 

What exactly did the lender do to screw up? How did their mortgage contingency get cleared? If it was cleared by the mortgage company but truly wasn't clear to close, that is a pretty big issue. 

Jeff Dulla, Lender in IL (#031.0024775), CO (#100055471), FL (#LO24291), IN (#19621), MI (#207322), MN (#MN-MLO-207322), and WI (#600802)
(708) 531-8322

Nope, nada. Some lenders just suck but they’re not liable for your expenses. Usually, when someone loses their EM due to “bank incompetence” it’s because they didn’t have loan approval by their deadline, but went ahead instead of canceling while they had the right to, due to promises on the lender’s part.

Betcha a steak dinner you/they signed some kind of arbitration clause. Plus, banks are chock full of attorneys. Two groups I try hard not to get riled up are highly paid attorneys and city code inspectors. 

Can't hurt to call/write a letter to some sort of ombudsman, regulator or the bank's customer service..  And leave reviews of the bank's problems. There is a very large highly regarded bank/insurance company that is apparently AWFUL at closing loans.  Even though I bank with them, I will never use them for loans because I've heard how bad they are at it. 

Thanks @Jeff Dulla @Nicky Reader and @Wayne Brooks for your input. I agree it is a long shot but it sucks that this loan officer is costing people deals.

In my friend’s case they were buying a condo to airbnb. HOA is fine with investors and she did a ton of up front research and shared the %of renters/% of owners with loan officer from DAY 1.

The day they are scheduled to close, the loan officer says “sorry, loan is denied because the % of renters is too high by 1%”. Loan officer then suggested they switch to owner-occupier and find someone to sign a bogus lease on their current home (mortgage fraud). Deal falls through, earnest $ lost - they are totally jaded now and her hubby doesn’t want to invest anymore.

In my case, the same loan officer assured me that I could buy a triplex investment property for 20% down. I checked and double checked (and asked her to check with her boss) because that was lower than any other bank I spoke with. She assured me no problem since they are a community bank. 1-2 days before closing she casually informs me that she misspoke and I now need 25% to close...so I have to come up with another $9,000+ to close. Luckily we had it and were still able to close on time, otherwise we definitely would have lost our earnest money AND the deal as there were 4 other buyers waiting in case it fell through.

I’m not pursuing anything for myself since the deal closed, but it would be great if there was a way for my friend to get her earnest $ back

Originally posted by @Ericka Grant :

Thanks Jeff Dulla Nicky Reader and Wayne Brooks for your input. I agree it is a long shot but it sucks that this loan officer is costing people deals.

In my friend's case they were buying a condo to airbnb. HOA is fine with investors and she did a ton of up front research and shared the %of renters/% of owners with loan officer from DAY 1.

The day they are scheduled to close, the loan officer says “sorry, loan is denied because the % of renters is too high by 1%”. Loan officer then suggested they switch to owner-occupier and find someone to sign a bogus lease on their current home (mortgage fraud). Deal falls through, earnest $ lost - they are totally jaded now and her hubby doesn’t want to invest anymore.

In my case, the same loan officer assured me that I could buy a triplex investment property for 20% down. I checked and double checked (and asked her to check with her boss) because that was lower than any other bank I spoke with. She assured me no problem since they are a community bank. 1-2 days before closing she casually informs me that she misspoke and I now need 25% to close...so I have to come up with another $9,000+ to close. Luckily we had it and were still able to close on time, otherwise we definitely would have lost our earnest money AND the deal as there were 4 other buyers waiting in case it fell through.

I’m not pursuing anything for myself since the deal closed, but it would be great if there was a way for my friend to get her earnest $ back

 In both cases those are vanilla FNMA guidelines. 

When I say "yes" to someone after multiple other lenders say "no," I'm usually willing to share the relevant guideline that I'm citing with underwriting once appraisal is ordered and we're collecting the final paperwork needed for underwriting. That might be how you can protect yourself in the future. To wit: It's black and white with 100% certainty that 80% LTV investment triplex was never going to happen, period, end of story, not up for debate. Sorry you wasted your time chasing that unicorn. :\

You will always know if it's ACTUALLY a portfolio loan because it'll be an ARM with super high interest rate / points. If it looks like gov't subsidized terms/conditions, it probably is, meaning Fannie and Freddie guidelines will apply. The reality is that if it's an un-subsidized portfolio mortgage, the rate/points needs to beat the ROI of a Wall Street index fund or generic REIT, or it would never make sense for a lender to do the loan, since they could park the $400k with Wall Street or a REIT and make more than they'd make by lending you money.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Ericka Grant That is just bad consultation for sure. Misinformation or just ignorance. Also another reason why I would recommend a mortgage banker - so that you have a bevy of options. It may not have helped you because 25% is the lowest I have seen for conforming mortgages on a three/four unit. But it probably would have helped your friend. A mortgage banker would likely have some non-warrantable options at their disposal. 

I am sorry to hear about everything. It does sound like the lender messed up. No idea if you really have any recourse or not. 

Jeff Dulla, Lender in IL (#031.0024775), CO (#100055471), FL (#LO24291), IN (#19621), MI (#207322), MN (#MN-MLO-207322), and WI (#600802)
(708) 531-8322

@Chris Mason good to know. I will make sure that I know the FNMA guidelines by heart before the next deal...had no idea 20% was a unicorn. I guess the real bummer here is that this is a community bank that markets itself on serving marginal communities and helping non-traditional/first time buyers and they SUCK and are giving people bad info and bad outcomes. I wish there was a way to regulate that better.

@Jeff Dulla thanks for the input - when you say “non-warrantable” options, can you share examples of what those would be?

This is why it is important to use a good lender.  Everyone is out there shopping for the lowest rates and lowest fees and gives no thought to the quality of the lender.  I cant tell you how many times my clients use a lender of their choosing because they have a lower rate than the lenders I recommend....then their lender does something to screw up and we need to switch to the lender I recommended in the first place to save the transaction.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

@Ericka Grant When you go through a residential mortgage lender - bank, broker, whatever, what you are typically trying to acquire is a Fannie, Freddie, FHA, VA, jumbo loan. Specifically for what you are talking about, your friend was probably trying to get a Fannie/Freddie loan for the condo. Fannie/Freddie posts guidelines on the make up of a condo building - how many units are investors, percentage owned by one entity, commercial space percentage, etc. If you violate one of those guidelines, the loan is considered non-warrantable - meaning Fannie/Freddie won't do the loan.

Buying an investment property in a building that has an investor concentration of higher than 30% of the units is a major no-no. For that you would need to go through a non-warrantable option. Typically these have high down payment requirements, higher rates, maybe points. 

Lenders/banks are notoriously unorganized. My guess would be that they didnt get the condo questionnaire back from the management company/association until very late in the process. That is why they didn't find out until the very last minute. A solid mortgage lender would do everything they could to get that form back asap in order to review it and protect your interest in the property. 

Jeff Dulla, Lender in IL (#031.0024775), CO (#100055471), FL (#LO24291), IN (#19621), MI (#207322), MN (#MN-MLO-207322), and WI (#600802)
(708) 531-8322
Originally posted by @Ericka Grant :

Chris Mason good to know. I will make sure that I know the FNMA guidelines by heart before the next deal...had no idea 20% was a unicorn. I guess the real bummer here is that this is a community bank that markets itself on serving marginal communities and helping non-traditional/first time buyers and they SUCK and are giving people bad info and bad outcomes. I wish there was a way to regulate that better.

For some add'l context (this is also for the lurkers that'll come across this thread in the future), the last time a wholesale rep (a person who courts mortgage brokers for brokered mortgage business, representing a wholesale lender which can be a bank that also lends to consumers directly, a REIT, a CU, etc) called me all excited about their 80% LTV 2-4 unit investment program, their rates were north of 6% and ARMs. And this was before the recent rate hike, they might be north of 7 now. The property is going to go for a price that makes sense to someone with financing much better than that. Your offer that makes sense to you with that rate can never be the highest, assuming you are doing the same prudent cashflow analysis that your competition is doing to come up with how much you can offer on the property and still turn a profit.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

How much earnest money are we talking about? It would be a waste of time to try to sue anybody, but I'm just curious how much money was lost in the deal. There might be some very low-cost options to look at (small claims court, for example). Most earnest money is $1000 or less unless you're talking some real expensive real estate, which doesn't sound like the case for a community bank serving underprivileged areas. 

I thought it was "standard" ( the prudent thing to do) to have a mortgage contingency when you are using financing? 

@JD Martin you are right, my guess is they are only out a couple of thousand dollars between EMD and other fees, but for newbies who are just dipping in, the loss is a burn. Her hubby is super frugal and risk averse so even that “small” loss hits hard.

@Jay Hinrichs agree that the realtor is also at fault here. I pointed that out, but the realtor is her husband’s aunt; they won’t use her again but also don’t want to go after her for her mistakes

I guess this will just count as a newbie lesson...

@Victor N. Good point. I’m sure they had a standard mortgage financing contingency...maybe the contingency period had expired?

Originally posted by @Ericka Grant :

JD Martin you are right, my guess is they are only out a couple of thousand dollars between EMD and other fees, but for newbies who are just dipping in, the loss is a burn. Her hubby is super frugal and risk averse so even that "small" loss hits hard.

Jay Hinrichs agree that the realtor is also at fault here. I pointed that out, but the realtor is her husband’s aunt; they won’t use her again but also don’t want to go after her for her mistakes

I guess this will just count as a newbie lesson...

 First thing anyone should know when they sign a contract and put down some money is what are their escape clauses, what are they locking into no matter what, and what are the deadlines for the above. A lot of realtors are laissez-faire about the clauses - "Oh, don't worry that it's only 7 days on the inspection, you'll have the guy out there tomorrow" and then things happen out of your control - "Inspector was stuck in Boston because of the Nor'easter, won't be back in town for another week - sorry!". I tell my realtor what I want in the contract, not the other way around, and if he puts something in there I don't like - a short closing date on a rough property; etc - I make him change it before I sign it. I don't take anyone's word for anything that "Oh, we'll just work around that". Nope. The contract is the contract. I know of plenty of sellers who have held buyers to terms that were probably unreasonable, but the buyer signed the contract. 

@Ericka Grant Nothing like a lawsuit to get everyone's attention.

If you think your friends have a case they should go for it! I'd go after the Seller, Broker and Bank jointly and severally. Folks have a lot more rights as idiots (Consumers in an Owner occupied deal) than Investors or anyone with a license (professional license not a drivers license;-)

@Mike Hurney LOL. Lawsuit culture in this country is out of control. Just curious why you think they should consider going after the seller? That was their initial approach - to petition the seller for a return of their EMD, but I felt that wasn’t fair as the seller didn’t do anything wrong - the bank and their realtor were at fault.

I may not have mentioned this but the HOA provided all needed documentation of renter/owner ratio before the offer was submitted - bank had that paperwork from day 1 but didn’t decline based on it until the day closing was scheduled to occur.

@Ericka Grant Your "dear friends" (really you?) should go after everyone involved for this "fell through epically" problem. My table stakes in this would be, if your dear friends aren't interested in going after everyone involved, then why should you be?

By now they should have consulted a Real Estate Attorney with experience and a track record in this field, start with a Title Insurance company for their recommendations.

Again, you shouldn't be interested in helping someone more than they are interested in helping themselves!!!

wanna guess how I know this;-)

Next, what properties have you looked at in the past week?

In our "farm", we just reviewed a dozen Open Houses to help with our "comps" and 15 upcoming foreclosures to see if we can get the notes. Also grinding through Quick Books to update for our 2017 taxes:-( 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.