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fredscott · Joined: 17 Feb 2008 Posts: 4 3.61 Dollars($)

During the construction loan process, bank inspectors monitoring the construction draws released funds to the general contractor for a significant amount of line items / work and that was never completed.

Independent inspectors that I hired noted that the amount of funds released to the builder is in the $200,000+ range for uncompleted work. Example : no installation in the attic but the builder got 100% of the installation draw (that is just one of many).

Plus, these inspectors were supposed to question any significant changes to the construction plans and report those back to the bank. The builder made several major unauthorized changes without my approval.

The builder defaulted on the construction contract and I’m dealing with him in another lawsuit.

Do I have a case against the bank?

Because I was paying for those draws during the construction process for that uncompleted work and the bank is looking to take the home in foreclosure because the construction loan period has expired. To make matters worse, because we couldn’t complete the home and didn’t have an 80% LTV the bank wouldn’t release any of the funds remaining on the note even if I wanted too.

The reason we could not have a 80% LTV is that they released funds for uncompleted work. This just doesn’t sound right.

This is a unique case. According to a couple local attorneys if they foreclose on me then I might can sue them for “contributory negligence” or at least protect myself if they come after me for a deficiency judgment if they decide to go that route.

Has anyone experienced this situation?

The bank even though I clearly proved their negligence isn’t willing to take the home back in a Deed-in-Lieu. We have 3 offers to purchase the home in its current state (2 of those offers are all cash deals).

The only problem is that they are way low than what I owe on the note but I hope the bank doesn’t want to take over a ½ completed home requiring a significant amount of upkeep. They are looking at these short sale offers now and the sheriff sale is set for later this month. (so I might have hope)

Any feedback on the above would be appreciated.

Posted: Wed Jul 08, 2009 4:38 am Post subject:

Hi

I think you can file a contributory negligence lawsuit against the bank. But whether it'll be useful to you, depends on what type of agreement you had with the bank. If the bank was supposed to inspect the work prior to disbursing the funds as per the agreement and you think they didn't do that, you have strong point in your favor to sue them for contributory negligence. The lenders are suffering a loss as you've not been able to complete the construction work. You're not being able to use the funds as the LTV is below 80%. But your lenders are the ones who should not have disbursed funds until the work was complete. So, in a way they are responsible for the loss they are suffering.

However, I don't think it will stop the foreclosure procedure. When you signed the agreement with the lender, it was agreed that the lender could foreclose on your property if their loan was not repaid on time. Now that the construction period is over and the loan amount has not been repaid, the lender has the right to foreclose on your property.

savior70 · Posted: Wed Jul 08, 2009 4:42 am Post subject:

Oops! It was me! I forgot to login! Smile

elnoralittle · Posted: Wed Jul 08, 2009 5:15 am Post subject:

savior is right.
Most lenders though, on construction to perm loans, must inspect the property each step of the way. Before more funds are released, they are to inspect the property to make sure that the last draw was utilized for what it was needed for and that those steps were completed prior to moving on to the next.
That is typical for any lender. I don't really think there is a program out there that doesn't inspect, especially in this market.
I think that you have a very good case and should get in touch with a lawyer now. A foreclosure may prohibit you from buying a home for the next 4 years.

catbrooks · Joined: 24 Jan 2010 Posts: 3 2.16 Dollars($)

I feel for you fredscott! I would be very interested in finding out the status of your complaint as we are in a similar situation, only much worse!

Our lender funded 95% of our construction loan and the house is only 60-65% complete. To make matters worse, some of the completed work was never paid for and we have liens against the property.

Walking away from this situation is not an option for us because on top of originally having almost a million dollars in equity when we began the project, we have spent about a million more during the process. All our money is sunk into this home and we have nothing left.

Our bank funded draws for incomplete work, deposits, fraudulent documents, etc., etc., etc. When they did do an inspection, (many draws were given without one), they always funded way over the complete amount. Our construction period was supposed to be 12 months with 10 draws. We are now 4 1/2 years later and there were 26 draws. When the builder realized all the money was gone, he walked. We never signed ANY change orders, but the bank overfunded almost every line item.

We notified the bank of our suspicions about the builder misappropriating the funds for over a year, but it turns out that the loan administrator we were informing was "friendly" with the builder. We have since found out that another customer of this same bank and builder had the same problem and they had a lawyer inform the bank the builder was a crook and they were firing him . This happened over a year before our money ran out and during the time I was complaining to the bank. The bank KNEW this was happening, but allowed it to continue!

The loan administrator has since been "let go", and the branch has been closed supposedly for "economic reasons".

My family has been devestated by this whole process. I am a mother of two young children and I cannot tell you the financial, emotional and physical damage this has done to my family.

Guest

catbrooks sounds almost like my situation except I am involved with a commercial loan and my partner was the "crook"... I too have spent almost two years trying to get the bank to listen and been to many attorneys and authorities and just keep getting told it is a very complicated situation and a lot of head scratching. If any of you have found actual ways to prosecute this type of problem I would appreciate knowing what it is.

Guest

The developer or builder who is borrowing the money is responsible to only pay for what has been built or delivered by the contractor. When the bank inspects the property it is doing so only to protect its collateral in case of foreclosure it is under no obligation to protect the borrower from the borrowers contractors. If the borrower cannot do this by himself he should not be in business. A more common situation is when borrower and contractor conspire to get the bank to release funds for items not yet built or delivered.

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Bank’s Negligence on a Construction Loan