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38 DePaul L. Rev. 43 (1988-1989)
Mortgage Lender Liability - Construction Loans

handle is hein.journals/deplr38 and id is 53 raw text is: MORTGAGE LENDER LIABILITY-CONSTRUCTION
Robert Kratovil*
For centuries the question of lender liability in mortgage law has slumbered
while other areas of the mortgage field were being vigorously explored. Now
this area of the field has come to life. Plainly, in the near future many
decisions will explore lender liability. This commentary will be confined to
a very narrow issue in lender liability law, namely, the question of lender
liability in a construction loan' where the lender elects to disburse the funds
and mechanics' liens2 arise. The question here explored is the extent of the
lender's liability to the landowner for negligent disbursement of construction
funds, especially where this results in the attachment of mechanics' liens to
the mortgaged land.
To illustrate, an example: the construction lender disburses funds to the
contractor who is building the borrower's house. But the bank has been
inattentive and has paid bills for other projects out of the borrower's funds.
Thus, the construction funds will be exhausted before the house is finished.
There will be outstanding contractor's bills. The contractor will file a me-
chanic's lien against a property that is already burdened with the construction
mortgage. As should be obvious, the combined liens will far exceed the value
of the finished construction, and the risk of foreclosure will become very
great unless the borrower is ready to step in with extra funds of his own.
Until recently in many jurisdictions the aggrieved borrower had no cause
of action against the negligent lender. Courts seeking to create a remedy for
* Distinguished Professor of Law, The John Marshall Law School, Chicago, Illinois;
formerly General Counsel for the Chicago Title Insurance Company; formerly instructor of
real property law at DePaul University College of Law and at the American Savings and Loan
Institute; J.D., DePaul University College of Law.
1. A construction mortgage has been defined as one obtained for the purpose of financing
construction under which the mortgage is empowered and obligated to disburse the funds to
the builder or contractor as the construction progresses. Annotation, Mortgage-Lender's
Duty, In Disbursing Funds, To Protect Mortgager Against Outstanding Or Potential Mechanics'
Liens Against The Mortgaged Property, 30 A.L.R. 4th 134 (1984). A landowner enters into a
construction loan because he needs the money to build a building. This means that the loan
proceeds will be paid out in the course of construction since neither the general contractor nor
the many trades involved will wait for their money until the building has been completed.
2. A mechanic's lien is a claim created by law for the purpose of securing priority
of payment of the price or value of work performed and materials furnished in
erecting or repairing a building or other structure, and as such attaches to the land
as well as buildings and improvements erected thereon.
BLAcK's LAW DICTIONARY (4th ed. 1968).

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