Lender Liability Often Starts With Good Intentions

Most bankers understand lender liability in concept. The harder part is recognizing how easily it can develop in an ordinary borrower relationship. 

In a recent ProSight article, Jason Alpert and Martin Knaust describe lender liability with a simple formula: (Loan + Duty) x Breach = Damages. Duties may come from loan documents, common law expectations such as good faith and fair dealing, or statutes and regulations. A breach can be something the bank does—or fails to do—that harms the borrower. 

The risk often grows when a credit deteriorates, communication increases, and the banker wants to help. In a distressed relationship, a borrower may later argue that the bank’s suggestions were really directives about how to run the business. 

A few safeguards matter: 

Keep advice from becoming direction. Recommendations should be framed as recommendations, not requirements. The bank should avoid tying a borrower action to a renewal, draw, payment modification, or other accommodation in a way that could look like a quid pro quo. In a Texas bankruptcy case, a lender accused of excessive operational control was held liable for almost $17 million, mostly in lost enterprise value. 

Watch the course of dealing. If a bank repeatedly waives covenants, delays enforcement, or provides informal assurances, the borrower may argue that the bank effectively changed the relationship. Best practice is to notify the borrower of the current default and make clear that any waiver or accommodation is a one-time event. 

Use releases carefully. When the bank grants something of value—a waiver, forbearance, modification, or more time—it may be reasonable to request a release of claims. But the release should be written, supported by consideration, bargained for, and joined by any guarantors. 

Protect boundaries. Get written borrower consent on who may receive information and what may be shared. If requiring a turnaround professional, provide at least three acceptable firms and let the borrower choose. When recommending any professional, offer several qualified names, disclose business relationships, avoid referral compensation, and document that the borrower made the selection. 

The takeaway: Lender liability control starts with disciplined communication—what bankers say, what they write, when they escalate, and how they preserve the borrower’s decision-making role. The simplest standard, according to the authors, is this: Write every email as though it will be published on the front page of The Wall Street Journal.