Your borrower, “OrcWorks,” has been nothing but trouble from the get-go. Payments are always late and the line of credit is often overdrawn. The customer then complains about late charges and wonders why you and Gondor National Bank will not honor checks written against uncollected funds.
Even worse are the intimations that Gondor National Bank (and you in particular) are biased against OrcWorks and have been treating them unfairly. You are dreading the call you will have to make to the borrower about the always overdue financials, especially as you suspect that the financial statements will reveal covenant defaults and necessitate a further string of unpleasant calls and claims of unfair treatment.
As you are reaching for the Tums on your desk, your phone rings. It is Joe Hobbit, an old friend from your early days in banking, who is now a lender at Mordor Bank. Joe is considering refinancing the OrcWorks’ loans and wanted to give you a call for some “insights” into the borrower. Joe tells you the new loan is ready to be approved, but that he has some misgivings about the borrower and would like some information about the company and its owners. You can barely contain your excitement as you prepare to answer. This could mean getting rid of a major perpetual headache and make your portfolio so much easier.
This situation could go one of three ways…choose wisely.
Scenario No. 1. Even though you would love to get rid of OrcWorks as a customer, you have known Joe for a long time and feel that you owe him an honest answer. You therefore tell him about how difficult OrcWorks has been as a borrower and their possibly precarious financial outlook.
About a month later you receive a call from your boss and the Bank’s in-house counsel. They tell you the Bank just received a demand letter from a lawyer for OrcWorks accusing Gondor National Bank (and you in particular) of interfering with OrcWorks’ contractual and advantageous relations with Mordor Bank thus causing their loan applications to be denied. The borrower asserts breach of privacy laws and claims of slander against your bank. After that call, you reach for the Tums in your desk…
Scenario No. 2. Although you like Joe, he is a competitor and has taken a few good accounts away from you and “what goes around comes around.” So, you figure, let OrcWorks be his headache rather than mine. You tell Joe that the owners of OrcWorks are the salt of the earth, that OrcWorks is a fine borrower and that you will be sorry to see them go. Joe thanks you for the favorable reference. You hang up and lean back with a sense of satisfaction.
About four months later, you receive a call from your boss and the Bank’s in-house counsel who inform you that OrcWorks crashed and burned shortly after your glowing reference to Mordor Bank. Apparently, senior management at your bank was playing golf with his counterpart at Mordor Bank and they discussed the OrcWorks fiasco. Mordor Bank’s senior credit officer inquired whether misrepresenting a borrower’s financial situation was Bank of Gondor’s standard operating procedure. There was a discussion about a lender liability suit between OrcWorks and Mordor Bank and how Bank of Gondor may be dragged into it. You hang up and immediately grab two Tums to chew on…
Scenario No. 3. When Joe asks you about OrcWorks as a borrower, you respond: “I’m sorry. We have a very strict policy at Bank of Gondor in regard to customer/borrower privacy. If I disclose anything about this borrower, whether positive or negative, I will likely be in serious trouble. I could even be fired.” Joe reminds you that you’ve been friends a long time and asks you for your input “off the record.” You know this is a trap and that nothing is ever off the record. So, you again tell him, “Sorry, I really can’t comment on our customers”. Joe says something sarcastic like “thanks for nothing” and hangs up somewhat miffed. You start to reach for the Tums, but realize you really don’t need one this time…
Customer privacy is very important. Disregarding it can not only can result in you and your bank being sued, embarrassed or in trouble as outlined above, but also can result in regulatory consequences. When asked to discuss a current borrower, providing any information is a no-win situation. The requirement of discretion also goes for your opinion concerning your collateral or its value. Related to this, it is not advisable to share appraisals or environmental reports or the like with another lender. If you do so, you may be inadvertently vouching for their accuracy.
When asked for information about a borrower, it is best to refuse to respond on grounds of privacy- that is the only way to avoid potential pitfalls. If it is a former customer of the Bank, you may have a little more leeway but discretion is still the better approach. As difficult as it may be not to answer when another banker you have known for years asks you about a borrower, that is the safest course. Just say “No Comment”!
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.
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