ConstructionPro Week, Volume: Construction Advisor Today - Issue: 44 - 02/26/2010

Questionable Practices By Construction Lenders

A reader recently called our attention to an interesting problem. He is an HVAC contractor. He provides price quotations to property owners for the replacement and installation of complete systems. The property owner intends to finance this major improvement and approaches a lending institution. The loan officer informs the owner that at least two bids are required before a loan can be approved. The loan officer provides the property owner with the name and contact information of another HVAC contractor.


The reader reports that almost without fail, the competing HVAC contractor undercuts his bid slightly and is awarded the contract. The reader strongly suspects that the loan officer is providing the favored contractor with the original price quotation. The reader wonders if he has any legal recourse.

Our initial response was that the loan officer’s conduct was certainly unethical and possibly legally actionable. There is civil tort liability for interfering with a contractual relationship. And if the loan officer has been receiving reciprocal favors from his favored HVAC contractor, the conduct may be criminal. A lender’s requirement for more than one bid is reasonable, but there are ways to accomplish that without engaging in collusive business practices.


I'd like to hear if you have encountered similar problems. If so, what has been your response?  Please feel free to comment below.



I have dealt with this internally, not externally. Facilities will hand pick their desired contractor to do the work and they wait until after we have submitted for bids from companies. I think for one, the owner getting the financing has a right to declare that he will find his own vendor to request a bid from. The loan officer shouldn't be the subject matter expert on contractors. As long as the owner is meeting the required two bid option, the loan officer should not care who as long as he is licensed and bonded, etc. I think that would be a legitimate expectation. If the loan officer insists on having the owner use his specified contractor, I think it becomes a conflict of interest for the loan officer. He can't remain neutral if he's shoving contractors at people and saying you give them this chance, I'll give you the loan. Granted though, the owner does benefit from a lower price overall for the project but it's still considered shady and the recourse would be to have the owner then go to the loan officer's supervisor if there was no budging on the loan officer's specific request to use a particular contractor.

Unless the Loan Officer is "requiring" that the second bid be from the contractor he supplied then I don't see anything actionable, especially by the Contractor. If all's he's doing is providing a name to the Property Owner then the PO can get a second bid from anyone he wants. And even if there is something unethical going on between the LO and his Cont., the PO would most likely be the party entitled to damages, not the HVAC contractor.
The HVAC Cont has no claim until a contract is signed, the extended argument of that being, what if there were Cont. being undercut? Do they both get to file claims even though neither has a contract contracts?


His recourse is to stop bidding on jobs that involve this particular Loan Officer and/or take up the issue with the Contractor Licensing Board. He's engaging in unethical and illegal practices as well.

I don't think the bank has a right to request another bid. Either give the client a loan, or turn him down.


Why would the loan officer provide the name? That seems to be outside his scope of work and expertise. 
If the owner is required to obtain two bidders that is his responsibility I find it highly inappropriate for a loan officer to provide this service. 
Why would he determine the winning bidder would not prices go to the owner who then shows he got two bids and has selected a winner? Who can say if the owner is not sharing information?
For a person in a postion to approve a loan to be involved in recomending any contractor is a conflict of interest and I doubt his superiors are aware of it.


The loan officer may or may not have the prerogative to request two bidders. The owner has the right to use the suggested contractor or find one of his own. It is certainly in the owner's best interest to have more than one bid. I agreee that the contractor needs to be licensed, bonded, etc. for reasons of collateral. However, a private owner still retains the right to hire who he wants regardless of price. The loan should be offered based solely on the credit rating of the borrower.


More than likely, the property owner is providing the new contractor with the bid from the original contractor. It's much easier to give someone a breakdown of the project that has already been laid out rather than rehash all the discussion they likely had with the original contractor. They could also be fishing for a lower price. Unless the HVAC contractor has real evidence that the loan officer is providing that information, he better watch who he is accusing of unethical practices.


Hello Mr. Jarvis. Yes I have had a lender under cut my bid. It happens to be a major lender (Wells Fargo). My company was selected by the home owners to do the work and the lender sent over the contract document for us to sign, after I sent the signed contract back to the lender, the lender called and said that we were not qualified to do any work for any of their clients due our personal credit issues. I did not take legal action because I could not afford it. Any feed back would be greatly appreciated. Thank you.


This is a common practice these days, owners and lenders use the budget by contractor, to show to others to find lower prices. Once a contractor prepare a bid there is a lot of cost involve. Today there are no ethics in business.


I have hire many subs in my day, and don't always go with the lowest bid. There are times when my experience and relationship with a second lowest bid was such that I was willing to pay slightly more because i knew that extras, and other unforeseeable would be reasonable. That is always a gamble with an unknown sub, or vendor. Of course I'm not will to pay a huge premium for the privilege of knowing whom I'm dealing with (when it's my bid list, I only invite subs that I know I can work with. This idea of "Lowest bid - period!" can be a can of worms.


It is the property owners choice who to hire regardless of what a lender states, that is of course unless the property owner has a poor credit rating and has to oblige the lender to get a loan. On the other hand we all know you, (contractor) must bid multiple projects to get one especially in this economic downturn. Again property owners have a perferred list of contractors which they will utilize and use additonal pricing to be sure the preferred vendors are being fair. It is not always what you know but who you know...


In response to the question from Mr. Alves, it may be that you have no recourse in that situation. The loan agreement between the lender and the owner probably gives the lender the right to approve the contractor.


I believe the lender's conduct was unethical. I agree that there may be tort liability for interference with an advantageous contractual relationship. I agree that if the loan officer received a kickback, both the loan officer and the contractor providing the kickback should be prosecuted. The owner should go to the construction lender with approved plans and specifications. The owner then finds out the construction lender's requirements. If two bids are needed, the contractor then chooses the two best bids he receives for each part of the work. Unless each person and company involved in a construction project from start to finish uses good faith and fair dealing, whether required by contract, law or regulation, the construction process will collapse under the weight of all the protective documents which will be recommended by the lawyers to provide a solid cause of action for breach. Nothing will be built except new courthouses to handle all the litigation.


If lender's are going to require a bid review for private owner's (much as is required for a commercial construction loan set-up in escrow) then new policies need to be established within the industry. Similar controls have had to been placed on the insurance industry in the claims area. The practice of "steering" or advising policy owners which vendor or contractor to hire with bias for repairs has been made illegal within insurance regulation policies. At the most lenders should be only permitted to offer lists of approved contractors that have had to apply for that status without preference. This policy would also open up opportunities for contractors by making the playing field more even for all players. It is time for contractors to become more active in how new changes are affecting their business. Simply, start actively working to change policy and regulation rather than just complaining about it. Get active!





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