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Misrepresentations in the Sale of a Loan

Banks and other financial institutions sometimes engage in the purchase of loans from other financial institutions.  These purchase and sale transactions typically involve some representations made by the seller of the loan to the buyer of the loan upon which the loan buyer relies.  

In a case recently decided, a financial institution bought loans from another financial institution.  The buyer later turned around and sold some of the loans to a third party.  However, under the terms of the purchase agreement, the third party rejected certain of the loans and the buyer had to repurchase them.  Realizing that there was a problem with the loans, the buyer sued the original seller for misrepresentation.

The original seller asked the court to dismiss the case on the basis that the buyer had waited too long after the sale date to sue on the misrepresentation.  The buyer argued that, since it wasn’t aware of the misrepresentation until several years later, then its lawsuit was still within the time for filing.  The court decided that the claim arose at the time the original sale was completed, not at the time the misrepresentation was discovered.  Thus, the buyer was out of luck.

Banks that engage in these types of loan purchases should make sure to investigate any representations made by a seller prior to closing the deal.  If it becomes clear after closing that a misrepresentation was made, the bank should make prompt demand against the seller.  If the seller doesn’t respond, the purchasing bank must act quickly in filing any lawsuits.