Best Practices: Managing Borrower Communications in the Age of AI: Risk Considerations for Defaulted Loans

As artificial intelligence tools become increasingly accessible, lenders are facing a new and evolving risk landscape when communicating with borrowers following a loan default. Borrowers now have the ability to record, transcribe, analyze, and strategically generate communications using AI-driven platforms. Routine conversations that once carried minimal perceived risk may now become evidence in lender liability claims or enforcement disputes.  For banks and commercial lenders, thoughtful communication protocols after default are more important than ever.

One of the most common, and avoidable, mistakes lenders make after a loan enters default is allowing multiple employees to communicate with the borrower. Relationship managers, branch personnel, loan officers, workout staff, and collections representatives may each attempt to preserve goodwill or advance negotiations, unintentionally creating inconsistent messaging.

Lenders should clearly designate specific individuals or departments authorized to communicate with defaulted borrowers, typically within special assets, loan workout, or legal teams. Once default occurs, all borrower communications should be routed through these designated representatives.

Modern borrowers may record phone calls, preserve text messages, or use AI tools to summarize conversations and identify perceived inconsistencies or admissions. Even informal communications, such as text messages or unscripted phone discussions, may later appear in demand letters, regulatory complaints, or lender liability lawsuits.  Lender representatives should therefore operate under a practical assumption that every communication may become an exhibit in future litigation.

As determining the best strategy for a loan workout, lender should consider the following when communicating with a borrower: limiting substantive discussions via text messaging; avoiding speculative or informal statements regarding collateral value or repayment expectations; refraining from statements that could be interpreted as promises, extensions, or forbearance agreements; and confirming material discussions through carefully reviewed written correspondence when appropriate.

Borrowers increasingly request lender-generated documents during workout discussions, including appraisals, valuations, inspections, or internal credit analyses. While cooperation may sometimes facilitate resolution, lenders should carefully evaluate whether disclosure is necessary or advisable.

Documents such as property appraisals or internal valuations are frequently repurposed by borrowers attempting to assert claims alleging negligent lending, bad faith negotiations, or improper loan servicing.

Before providing internal materials lenders should consider: whether disclosure is required; whether the document reflects preliminary or internal analysis; potential privilege or work-product protections; how the document may be characterized in future litigation; and whether lender should require a borrower to sign a release letter if providing documents prepared for the lender to a borrower.  Early coordination with legal counsel can help lenders balance workout objectives against potential litigation exposure.

The increasing sophistication of borrower technology means that traditional informal workout practices may expose lenders to unintended liability. Proactive lenders should be or have already established internal default-management procedures to ensure communications remain controlled, consistent, and defensible.

Counsel experienced in creditors’ rights and loan enforcement matters can play a valuable role at the early stages of default by helping lenders structure communication protocols, evaluate document requests, and minimize lender liability risks while enforcement strategies are being developed.   If you need assistance with communications with a default borrower, or are considering policies to deal with the same, contact Lyndsay Rowland at lrowland@starfieldsmith.com or 267-470-1154.