Pay Attention to your Loan Terms – A Case Study

Several years ago we were approached by an individual who was having trouble with her bank.  She had paid her commercial mortgage debt each and every month for over 10 years.  However, her credit had deteriorated for personal reasons and she had allegedly violated certain loan covenants.  Essentially she was a good borrower who looked bad on paper.

The bank began foreclosure proceedings on the property (which had ample equity).  While foreclosure matters are often hopeless, we nevertheless reviewed the complaint with her as well as her payment history in an attempt to gain some leverage over the bank and the situation.  During that process we discovered two significant things: (1) the monthly mortgage payments (and bank invoices) that were dutifully paid by our client never varied over the term of the loan and (2) the loan papers she had signed provided that the interest rate was to reset every five years.  The bank obviously never made these resets, and given the falling rates prevalent in the first decade of this century, our client had been grievously overcharged.

Armed with this knowledge we included a counterclaim for the overpayment in our response to the foreclosure complaint.  This bought our client some time and forced the bank to recalculate her loan balance.  The result was that she was able to re-finance with another lender with a loan balance that was approximately 20% lower than the original demand made by the bank in the foreclosure complaint.  Ironically, the bank would have been better off never bringing the lawsuit; its mistake would likely never have been discovered.

There are probably a number of lessons here, but the most obvious ones are: know the terms of your obligations and monitor the payments you make over time.  Even honorable lenders make mistakes, and some lenders are, perhaps, more opportunistic than honorable.



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