In a previous posting, I explained the process a bank goes through to make a loan. The most fundamental aspect within the loan is the covenant.
Within a loan agreement, there is a list of covenants. The most important covenant is that the borrower pay back the loan and interest in full. In essence, the borrower has satisfied the most fundamental requirement of the loan agreement. The lender will want to loan money to such a borrower again and again. This is how banks make money.
The following provides us with a perspective when such loan transactions are no longer reliable. Who better than a billionaire developer to state his position on such transactions (you can fast forward to the 7 minute mark if you wish):
Why would anyone in their right mind continue doing business where there is substantial risk to his or her future business?
A comment by a former banker:
I was a lender for 25 years. Never did we sue a loan applicant for misstating the value of an asset. If the value was important in the loan decision it fell upon the lender to confirm it through appraisal. Kevin is right. If we went after people for this half the country would be in jail.