The Banking Expert Witness: Referrals for Plaintiff and Defense Attorneys


banking expert witnessCo-authored with Lauren Solari

Given the technical language used in finance, and the inherently complex policies that led to the current adverse economic conditions, the subject matter expertise of a banking expert witness is useful – if not critical – in cases relaed to financial matters and lending transactions.

banking expert witness called to testify can succinctly explain industry-specific terms to the trier of fact. Thus helping to provide authority and sway to a legal argument.

WHO IS A BANKING EXPERT WITNESS?

A banking expert witness may be a former banker, director, account, regulator, compliance officer, or policy analyst. Some banking expert witnesses specialize in forensic accounting. Forensic accountants are generally veteran auditors, accountants, and investigators of legal and financial documents. They often probe and prevent fraudulent practices within a bank or company.

A banking expert witness has broad knowledge of accounting standards and procedures. They also have up-to-the-minute data on exchange rates and monetary units used in foreign banking. Plaintiffs and defendants equally benefit from working with a banking expert witness. Whether that litigant is a small business owner who has been denied a loan, or a major banking institution disputing a banking regulation there are still benefits.

Banking expert witnesses are called to consult and testify on a variety of issues, such as:

  • Bank operations
  • Bankruptcy
  • Commercial banking
  • Compliance
  • Consumer loans
  • Lending policies
  • Lending regulations
  • Loan defaults
  • Loan review
  • Management policies
  • Loan restructures/workouts
  • Real estate lending
  • Wire transfers

A banking expert witness works with attorneys, financial institutions, insurance companies, regulatory agencies, real-estate entities, and financial services companies. The American banking industry is becoming increasingly regulated and complex at both the state and federal level. Consequently, there is a growing need for the subject matter expertise and insight of an experienced banking expert witness. From specific lending regulations, to filing for bankruptcy, to the standards of care owed by a banking official, a banking expert witness can provide invaluable analysis and testimony—and winning results.

EXAMPLES OF ISSUES THAT A BANKING EXPERT WITNESS MAY BE ASKED TO OPINE ON

Standards of Care for Bank Officials and Lenders

A banking expert witnesses is qualified to explain aspects of the banking industry as well as established standards of care. Generally, such standards of care are based on financial fiduciary law. This is the idea that there is an implied relationship of trust and good will between professional financiers and the clients that trust their money to them.

A banking expert witness can discuss how bank officials are given a high degree of discretion in drafting loan agreements. This often leaves borrowers at the mercy of the bank’s terms. Such discretion includes determining whether to extend a line of credit to a client, the due date for loan and interest payments, and the terms for terminating financing. However, the common law imposes a limited check on the lender’s course of conduct. This prompts bank officials to act in “good faith” and within the parameters of commercial reasonableness in their dealings with borrowers and other third parties. A banking expert witness may testify that such boundaries, while not not spelled out in lending agreements, are considered “implied.”

The Uniform Commerical Code (UCC) currently defines good faith as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”. Calling a banking expert witness to testify on the complicated UCC provisions listed will help the jury under the concept of “good faith” and how it actually operates in everyday practice. A banking expert witness is especially instructive in decisive banking litigation cases. Such as whether the bank engaged in predatory lending, or whether the bank’s decision to terminate a line of credit was commercially reasonable.

Related: Refinancing Agreement Triggers Lawsuit”

Underwriting Policies

Banking expert witnesses have been in high-demand ever since the 2008 economic crash revealed the alarming underwriting policies employed by financial institutions. With millions of Americans combating foreclosure proceedings in an attempt to keep their homes, homeowners and governments are seeking legal recourse.

According to the American Enterprise Institute , “[s]ince 2006, housing prices have fallen 30 to 40 percent in most areas; millions now owe more on their mortgages than their houses are worth, and millions more have only slivers of equity. The average homeowner today has 7 percent equity in his or her home, versus 45 percent as recently as 1990.” 

Banking giants as Bank of America, Citigroup, and Wells Fargo are accused of utilizing discriminatory mortgage lending practices in violation of the Federal Fair Housing Act. Both plaintiff and defense attorneys are calling on banking expert witnesses in lawsuits. They are seeking to hold banks responsible for the “pattern and practice” of issuing loans for low-income minorities and middle-class borrowers under fundamentally unfair and unaffordable terms and conditions. The testimony of a banking expert witness will be instrumental. Influencing the trier of fact’s determination of whether financial institutions provided lending terms that were impossible to repay and whether such questionable and exotic loans contained were structured to fail.

Bank of America was forced to pay the, “largest residential fair lending settlement in history” in 2011. Settling with the Department of Justice on charges that, “its Countrywide Financial unit steered hundreds of thousands of minority borrowers into predatory mortgages.”. Most recently, the city of Los Angles and Miami filed separate lawsuits, “over questionable home loans they made to low-income borrowers.”.

In cases where an individual’s loan application is denied, they may call upon a banking expert witness. They can strengthen the claim against the financial institution for discrimination. Generally, such lawsuits allege that the offered loan is unconscionable and seek damages and rescission for predatory lending practices. A banking expert witness provides important testimony in such litigation matters. They apply their industry expertise to analyze and opine on the consumer credit industry and loan application review processes.

A banking expert witness offers important authority on subject matter that is critical in the judge or jury’s ultimate case holding. Underwriting policies are highly subjective. A banking expert witness may opine on how the financial insitutition performed the loan candidate’s consumer credit analysis. They can also testify to whether they adequately assessed the candidate’s capacity to pay off the loan. Such analysis traditionally focuses on the candidate’s employment history, salary, credit history, and financial needs.

In cases where a financial instituion chooses to process a “stated income loan” instead of a “fully documented loan, a banking expert witness can provide valuable insight.  A stated income loan is different from a full documented loan in that it requires little verification. A state income loan is usually based on the borrowers’ credit score and asserted income, rather than income tax returns or pay stubs. 

Case Example: Drakopoulos v. U.S. Bank Nat. Ass’n (991 N.E.2d 1086)

In Drakopoulos, a banking expert witness submitted an affidavit noting that “stated income loans ‘are considered appropriate only for borrowers whose income is not reasonably susceptible to normal verification procedures.” In situations where the borrower is employed and their “income is verifiable from his W–2, wage stubs and income tax returns, the only purposes served by processing a mortgage on a ‘stated income’ basis are to inflate the [b]orrower’s income to enable approval of an objectively unaffordable loan and to increase the interest rate on that loan.”

banking expert witnessWire Fraud

Wire fraud pertains to financial fraud that is committed through telecommunications or electronic communications. To prove wire fraud, four elements must be established: (1) that the defendant voluntarily and intentionally devised or participated in a scheme to defraud another out of money; (2) that the defendant did so with the intent to defraud; (3) that it was reasonably foreseeable that interstate wire communications would be used; and (4) that interstate wire communications were in fact used.

Fraud is becoming more sophisticated as new types of malware are deployed. Due to the highly technical and industry-specific nature of wire fraud, testimony by a banking expert witness is often the decisive factor in the complicated task of proving wire fraud crime. Banking expert witnesses analyze a company’s bank statements and credit statements. Then they testify as to the legality of the processes. Additionally, a banking expert witness may also testify about the procedures involved with negotiating a letter of credit. A banking expert witness can determine whether there was anything out of the ordinary. If the wire transfer instructions greatly varied from the norm or if a transaction laced the presence of an advising bank, such actions may be indicative of a fraudulent credit transaction.

One banking expert witness helped a small business owner prove that his bank failed to follow commercially reasonably security procedures in the landmark case of Patco Const. Co., Inc. v. People’s United Bank (684 F.3d 197). The signs of fraud were apparent and highly uncharacteristic for the business. “They were initiated on consecutive days, from different computers and a different IP address, and in amounts substantially greater than Patco’s typical transactions, and involved payees to whom Patco had never before sent funds from its account at the Bank.”. The Bank’s security system flagged the transactions as potentially fraudulent. However, the Bank never actually monitored or acted on the data. The case decision states that testimony by Patco’s banking expert witness showed that:

“keylogging malware was a persistent problem throughout the financial industry. It was foreseeable, against this background, that triggering the use of the same challenge questions for high-risk transactions as were used for ordinary transactions, was ineffective as a stand-alone backstop to password/ID entry. Indeed, it was well known that setting challenge questions to be asked on every transaction greatly increases the risk that a fraudster equipped with a keylogger would be able to access the answers to a customer’s challenge questions. This is because it increases the frequency with which such information is entered through a user’s keyboard.”

The court’s decision further states that, “failure to implement additional procedures was especially unreasonable in light of the bank’s knowledge of ongoing fraud.”

Related: Cyber Thieves Penetrate Bank’s Intern Security System

Shareholder Derivative Actions

Directors and officers of companies owe a fiduciary duty to shareholders. If shareholders believe that a company’s directors and officers breached such a duty, they may file a derivative suit on behalf of the corporation. In such cases, banking expert witness are incredibly helpful.  They will review the actions of the directors and officers. Additionally, they can provide a report analyzing how their performance measures up in relation to the duty of care typically owed shareholders.

Such reports are not in and of themselves conclusory. However, they oftentimes strongly indicate that the officers breached their fiduciary responsibilities. For example, if a company’s shareholders are seeking to prove that an officer of that company is engaging in fraud, it is beneficial to call upon a banking expert in the derivative suit. He can testify that certain discrepancies on a bank statement would likely be fraudulent given the type of transactions that such a company regularly engages in.

Regulatory Compliance

Following the financial crisis of the 2008, the government enacted legislation to prevent future financial disaster. While the industry used to boast that it was simply “too big to fail,” it is now becoming heavily regulated. As a result, financial institutes must now institute and comply with regulations established by governmental agencies such as the U.S. Securities and Exchange Commission (“SEC”), Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve System, National Credit Union Administration, Officer of the Comptroller of the Currency and the Office of Thrift Supervision.

A banking expert in regulatory compliance can highlight the tax benefits to which companies are entitled, based on their compliance with established SEC regulations. For example, in the 2008 case of Fifth Third Bank v. U.S. (518 F.3d 1368), the court was confronted with a large bank that claimed to be financially injured by the government’s compliance policies. The court ultimately affirmed the value of actual banking experience over the theories of academics, noting that:

“[Defendant’s experts] are intelligent men and skilled economists. However, their argument is mired in economic theory. Inevitably the court must weight their theoretical testimony against the practical experience of [Plaintiff’s expert]. Who, though he possesses no doctorate in economics, has specialized in thrift appraisals and conversions, with clients both from the private sector and the Government.”

This opinion demonstrates the great weight courts afford experts with practical, real-world experience. Even above those who have merely studied banking and compliance.

Related: Derivatives Expert Opines on Banking Violations

Practice in Geographic Regions

In the way that all politics are local, it is often critical to have a banking expert witness familiar with the specific practices in a given geographical region. A banking expert witness is relied upon to explain the standards used in processing transactions in a given locale. In Prestridge v. Bank of Jena (924 So. 2d 1266), a banking expert witness was disqualified from testifying because they were unfamiliar with the practices and standards of the region in which the litigation arose. By his own admission, the bank expert witness did not understand the, “internal practices of other local banks, or what information would be available to tellers making a transaction.”. As the expert would not reliably testify regarding the requirements of current banking standards for the area, the court disqualified him. They held that a more localized expert opinion regarding the local banking standards was necessary.

In Lofti-Fard v. First Fed. of Lakewood (2006 WL 2036466), a banking expert witness was disqualified from testifying because he had never worked in a U.S. bank and was unfamiliar with domestic banking practices. As he, “lacked sufficient qualifications to testify as to banking industry standards in the United States, the banking expert witness was precluded from opining on banking industry standards involving a commercial loan between U.S. citizens and a federal chartered U.S. bank.”. Such cases highlight the importance of a hiring a qualified banking expert. It also explains why The Expert Institute custom recruits expert witnesses. They base their choice on the facts of the case and the requirements of the hiring attorney.

Regulatory Compliance

Money laundering prohibits the use of the proceeds of criminal activities for various purposes. This includes engaging in and conspiring to engage in transactions intended to promote the carrying on of unlawful activity. Such lawsuits require banking expert witnesses to explain the methods employed in money laundering schemes. For example, a banking expert witness in financial investigations and money laundering could offer testimony about currency transactional reports (CTR’s) filed with the Internal Revenue Service. A banking expert witness might further opine on specifics . This could include the nature of the CTR, “structuring,” and disclosure requirements for currency transactions.

About The Author

Inna Kraner, J.D., is a Senior Business Proposals Specialist and writer with experience litigating corporate, industrial, financial, regulatory, and controversy matters.