Montana Bill Aims to Protect Bankers in Borrower Disputes

A court decision in Montana has left banks in the state vulnerable in disputes with borrowers.

The state's Supreme Court ruled last year that presumed oral agreements are sufficient for borrowers to mount legal challenges in lending disputes. The case — Morrow v. Bank of America — centered on a borrowers' claim that a bank employee advised the homeowners, Abraham and Betty Jean Morrow, to skip a payment in order to qualify for a loan modification. B of A argued that its staff would have never given such advice.

Bankers, concerned that the decision takes the concept behind a handshake deal too far, are backing a bill recently introduced in Montana's legislature that would require written contract amendments, signed by the lender, for most loans. After the bill faced opposition, the Montana Bankers Association backed an exemption for owner-occupied homes to preserve protections for other loan categories.

Bankers have been worried that the court's decision, though it involved a mortgage dispute, could be applied to all types of loans, Steve Turkiewicz, the state association's president and chief executive, said in an interview Tuesday.

The bill "addresses concerns raised by the homeowners and we feel it also addresses concerns bankers have," Turkiewicz said.

It is unclear whether other states have a similar legal view.

Bankers in Montana began fretting after Chief Justice Mike McGrath wrote in an opinion last May that conversations between Bank of America employees and the Morrows had gone beyond "the usual arms-length debtor-creditor relationship."

The Morrows claimed that B of A employees advised them to skip a loan payment to qualify for the federal government's Home Affordable Modification Program. (The mortgage in question was for a home in Montana.)

Bank of America argued that its employees would never provide such advice, adding that it had legitimate reasons to reject the Morrows' request for a modification. The Morrows had moved to Montana from South Carolina, where they retained business interests, leading B of A to question the validity of their Montana residency.

The Morrows filed their lawsuit in May 2011 in the District Court of Lewis and Clark County.

Despite the absence of any written agreement modifying the mortgage, McGrath sided with the Morrows, believing that they were, in fact, instructed to skip a payment to qualify. As a result, he wrote in the court's opinion that Bank of America "owed a duty to manage the modification process in a manner that would not cause the Morrows to suffer loss or injury by reason of" the bank's negligence.

Bank of America had a duty to follow federal guidelines once its employees told the Morrows that their application would be processed under HAMP, McGrath wrote, adding that the bank failed to follow through.

McGrath's decision remanded the case to the district court; the Morrows reached a confidential settlement with B of A in November.

A Bank of America spokesman declined to comment. John Heenan, one of the Morrows' lawyers, did not return calls seeking comment.

Montana bankers are concerned that the outcome could encourage borrowers upset by a lender's adverse decision to employ a similar challenge in court. As a result, "bankers might be more circumspect in trying to resolve problem or troubled loans," Turkiewicz said.

In its original form, the Montana bill stated that "no action in contract or tort may be brought against a regulated lender based on a negotiation, promise or commitment that is not in writing signed by the lender." It passed the Senate without difficulty, but the House initially tabled it after trial lawyers and homeowner advocates objected, said Sen. Eric Moore, a Republican who introduced the bill.

The bill recently cleared a House committee; a full vote is expected on April 8.

Moore, who co-owns a growing cattle-feeding business in Miles City, Mont., joked in an interview that he has "sat on the wrong side of the desk" from bankers discussing loans on several occasions. He said those experiences taught him that "timely and candid conversation between lenders and borrowers is critical," adding that the process of negotiating deals will become more difficult and costly "if everyone has their lawyers present."

The legislator, in commentary written for local media last month, argued that allowing conversations between lenders and borrowers to qualify as grounds for legal action defied common sense. "I know Montanans like to do business on a handshake, but the reality is that when you get a mortgage, car loan, or operating loan, you get it in writing," he wrote.

The bill is expected to reach the desk of Gov. Steve Bullock, pending House passage and a reconciliation process. A spokesman for Bullock did not return a call seeking comment.

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