Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

The Chapter 11 bankruptcy filings by Chrysler, LLC and General Motors are likely to create a ripple effect of defaults and lawsuits through all tiers of the automotive supply chain and will impact businesses connected to that supply chain. Although Chrysler has emerged from bankruptcy as Chrysler Group LLC and all signs suggest that General Motors will attempt to emerge from Chapter 11 proceedings very rapidly, the underlying bankruptcy cases may proceed for months, if not years. The ripple effect could cause primary or lower tier suppliers to stretch payables or seek their own bankruptcy protection. Taking steps now may help protect you against the effects of insolvent customers or suppliers and prepare your company for a possible waive of bankruptcy avoidance and preference actions.

The keys are simple: pay attention to Chrysler notices, GM news, and your customers and suppliers; use common sense business judgment when dealing with your customers and suppliers; preserve relevant records, identify knowledgeable personnel; and conduct a preference analysis. 

 1.         Pay Attention.

 In the Chrysler and General Motors Chapter 11 cases, certain suppliers were designated “critical vendors” and continued to be paid as if the bankruptcy case had not been filed. It is important to pay attention to those proceedings if your business is closely linked to the automotive supply chain. To begin, stay on top of all notices from the Chrysler and GM Bankruptcy Courts. Similarly, use common sense and closely scrutinize current relationships with your suppliers and customers. If you sell to Tier One suppliers, you may wish to consider exercising rights under the Uniform Commercial Code to obtain additional assurances of future performance from them. Such assurances will verify that the Tier One supplier will have the ability to pay for the product you deliver. Additionally, if your customers are insolvent, you have a right to stop goods in transit, return items yet to be delivered, and reclaim goods already delivered. Additionally, if your customer has become a “slow pay,” consider additional credit limitations, review margins, and adjust payment methods to C.O.D. or cash in advance.

 If your supplier appears to be insolvent or is likely to end up in a bankruptcy proceeding, develop alternative sources of supply and, as appropriate, consider termination of existing supply arrangements with the vendor before the bankruptcy proceeding.

 2.         Protect Yourself From Bankruptcy Preference Actions.   

 Bankrupt entities in automotive supply chain may pursue avoidance actions against suppliers and other creditors, so it is always helpful to prepare in advance for possible recovery actions when you have received payments from an entity that is now in a bankruptcy proceeding.

 Under the bankruptcy code, a debtor generally has two years to file suit to avoid and recover payments made to creditors during the 90-day preference period[1] before it sought bankruptcy protection. In general, a debtor may avoid payments made during the preference period if they were not made in the ordinary course of its business relationship with the creditor or otherwise were not made on terms customary within the industry and result in the creditor receiving more than it would have received had the debtor filed a Chapter 7 liquidation. Because a debtor can initiate a preference action months or years after the underlying transaction, taking the following steps now will help you maximize your potential defenses and minimize your exposure to a preference claim if it is filed: 

•  A complete set of business records can be the best defense to a preference action so, as soon as you learn that one of your customers is now a debtor in bankruptcy, organize and store your records, electronically or manually, of any transactions that resulted in a payment from the debtor within 90 days before the bankruptcy filing. Retain those records for at least 36 months or until advised otherwise by legal counsel. If the debtor files a preference action against you, you will save time and money by having the records on hand and available to your legal counsel.  
• Identify personnel, including staff in the sales and accounts receivable areas, with knowledge of the transactions and record their information. If key personnel leave the debtor, obtain up-to-date contact information. Their assistance and testimony may be important in successfully defending a preference action. In addition, identify what is ordinary cause in your business or industry. Determine if value was given by extending credit after each payment was made during the 90 days. 
•  After gathering your business records, conduct a preference analysis to determine the company’s potential exposure to a preference action. Legal counsel can help with this analysis. If the preference exposure is significant, budget for the potential repayment and for legal fees.      

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Earlier today the FTC announced it would delay enforcement of its Red Flags Rule until November 1, 2009.  Enforcement had been scheduled to begin August 1, 2009.  As previously discussed here, the Red Flags Rule is an FTC regulation that requires “creditors” and “financial institutions” with “covered accounts” to have a program in place to detect identity theft.  The term “creditor” is defined broadly to include any entity that regularly extends credit.  A “covered account” is essentially the extension of credit as part of a continuing relationship to purchase a product or service for personal, household, or business purposes.

The rule has garnered significant attention lately from lawyers following the FTC’s announcement in April that the FTC interprets the Red Flags Rule to apply to law firms because law firms bill for services already rendered.  The ABA disagrees and has threatened to sue should the FTC continue to assert that the Rule applies to lawyers.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Greenspan v. Third Fed. S. & L. Assn., Slip Opinion No. 2009-Ohio-3508, the Supreme Court of Ohio held that the private right of action for damages resulting from the unauthorized practice of law could only be invoked after the Supreme Court had already made such a finding. 

The plaintiff in Greenspan alleged that a $300 document preparation fee charged by Third Federal in connection with a 2002 mortgage loan constituted the unauthorized practice of law because  the bank's nonattorney personnel prepared and completed mortgage loan documents. 

The Supreme Court of Ohio rejected that claim, holding that the Court has exclusive jurisdiction over the practice of law in Ohio, including the unauthorized practice of law.  Therefore any determination that a defendant engaged in such unauthorized practice could only come from the Supreme Court, which established a Board on the Unauthorized Practice of Law for precisely this purpose.  The private right of action authorized by the legislature, therefore, could only permit recovery against persons already found to have engaged in the unauthorized practice of law by the Supreme Court, and the statute authorizing such recovery provided for exactly that.  Creative attempts to circumvent the Court's exclusive jurisdiction by framing the matter as common-law "unjust enrichment" failed. 

Although the Court rejected the argument that a plaintiff could bring a private action under these circumstances, it did not reach the issue of whether preparing the documents in question itself constituted the unauthorized practice of law.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Promulgated under Sections 114 and 315 of the Fair and Accurate Credit Transactions Act (“FACTA”), the rules on Identity Theft Red Flags and Address Discrepancies have caused widespread confusion as to their coverage, application, and compliance requirements. In a coordinated response to this confusion, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision (each, a “Federal Banking Agency”), and the Federal Trade Commission (“FTC”) recently developed a set of frequently asked questions (“FAQs") to assist those that extend credit on covered accounts. 

The FAQs, 37 of them in all, cover the following range of topics:

• Red Flags Rule Scope
• Definitions
• Establishment of an Identity Theft Prevention Program (“Program”)
• Program Elements
• Program Administration
• Red Flags Examples
• Change of Address Validation
• Address Discrepancies Rule Scope
• Establishing a Reasonable Belief
• Furnishing Information to a Consumer Reporting Agency

For financial institutions regulated by a federal banking agency, the Identity Theft Red Flags and Address Discrepancies under FACTA went into effect on November 1, 2008. For all other consumer creditors, the FTC has delayed the effective date, first to May 1, 2009 and now to August 1, 2009. Please see the FTC’s Red Flags website for further information on the rules and for information and guidance for low-risk businesses on the development and implementation of a complying Program.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a response to public outcry in the midst of a recession, on April 21, 2009 the Board of Governors of the Federal Reserve System (“Board”), together with the Office of Thrift Supervision and the National Credit Union Administration, recently issued new rule clarifications under Regulation AA of the Federal Trade Commission Act in an effort to prevent unfair trade practices related to consumer credit cards. That same day, the Board also released clarifications under Regulation Z of the Truth in Lending Act in order to further regulate disclosures and solicitations related to consumer credit cards. The clarified rules take effect on July 1, 2010.

Taking this step toward tighter consumer credit card regulation and turning it into a giant leap, lawmakers passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”), amending the Truth in Lending Act so as to ban certain credit card provider practices and augment required disclosures. President Obama signed the CARD Act into law on May 22, 2009. With the exception of two provisions that take effect on August 20, 2009, the CARD Act takes effect in February of 2010. With such short implementation timeframes for both the clarified rules and the CARD Act, consumer credit card providers must move quickly to revise policies and procedures to achieve timely compliance. 

Agency Rules 

As stated by Board Chairman Ben S. Bernanke at the adoption of the rules in December of last year, these “protections will allow consumers to access credit on terms that are fair and more easily understood.” These “protections” alter Regulations AA, Z, and DD as follows:

Regulation AA:

• Existing Balance Rate Increases: The proposed rules prohibit increasing the rate on existing balances unless the rate is tied to an index, a promotional rate expires, or the minimum due is not received within 30 days following the due date.
• Payment Times: Under the proposed rules, credit card payments may not be considered “late” unless the provider gives reasonable time to make payments (including a safe harbor provision for providers that send statements at least 21 days before the payment due date).
• Payment Allocation: Payments above the minimum due, made when multiple rates apply to multiple balances, would require allocation by one of three methods. Applying the entire payment to the lowest rate will no longer be permitted. Further, all payments above the minimum due must be allocated first to non-discounted-rate balances.
• Two-Cycle Billing: The proposed rules prohibit calculating finance charges in relation to days in billing cycles preceding the current billing cycle.
• Firm Offers of Credit: Financial institutions advertising offers of credit with multiple rates would be required to disclose the factors assessed to determine if the consumer qualifies for the lowest rate.
• Credit Card Holds: The proposed rules prohibit imposing fees when the credit limit is exceeded because of a hold on available credit.
• Subprime Credit Cards: The proposed rules prohibit financing security deposits and credit availability fees, if such charges over the first year would exceed 50 percent of the initial credit limit. Also, financed security deposits and credit availability fees exceeding 25 percent of the initial credit limit must be spread across the first year.
• Opt Out Rights: The new rules prohibit assessing overdraft fees, unless the consumer was given a chance to opt out of overdraft payment services and declined. Also, the financial institution must offer a partial opt out for ATM and point-of-sale.
• Debit Holds: No fees may be imposed when the account is overdrawn because of a hold on available funds.

Regulation Z:

• Payment Timeliness: Mailed credit card payments received by 5:00 p.m. be considered timely. Further, in cases when the due date falls on a weekend or holiday, payments received by mail the next business day must be considered timely.

Regulation DD – Account Disclosures:

• Overdraft Disclosures: Disclose month-to-date and year-to-date totals for overdraft and returned-item fees on periodic statements; and
• Availability Disclosures: Disclose available funds irrespective of funds to cover overdrafts, when using an automated information system.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The FDIC has updated its regulatory advice concerning changes for insurance coverage of sweep accounts. Bankers, corporate treasurers and CFO’s should carefully consider the impact on sweep accounts of recent changes in the FDIC’s deposit insurance of these accounts. 

On July 6, the FDIC issued a Financial Institution Letter (FIL-39-2009) consisting of frequently asked questions to update the rule change that was final in January 2009 and published here. The new Letter, intended to answer common questions from bankers, covers:

• The types of sweep accounts covered by the disclosure requirements,
• The disclosures required by the rule.
• The frequency of required disclosures.
• The principles used to determine how swept funds will be treated in the event of failure.
• The requirements for a properly structured repo sweep.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Given that merger and acquisition activity is at a five-year low, it has been difficult to determine the impact of a now nearly two-year old rule that places additional restrictions on fairness opinions issued by deal advisors. The Financial Industry Regulatory Authority (“FINRA”) Rule 2290 requires disclosure of potential conflicts of interest between firms that render fairness opinions and the parties to the corporate transactions that are the subject of the fairness opinions.

The rule is designed to alert shareholders that a fairness opinion regarding a potential transaction is not necessarily rendered by a completely independent third party. FINRA is concerned that shareholders may not be aware that the firm issuing a fairness opinion is often an advisor to a party to the transaction whose compensation may be contingent upon the success of the deal.

The rule addresses this concern by requiring specific disclosures if a member firm issuing a fairness opinion knows or has reason to know that the fairness opinion will be provided or described to the company’s public shareholders. Even if an opinion is prepared only for use by the board of directors of a client, shareholders of the client will now be made aware of potential conflicts of interest – including contingent compensation arrangements – because fairness opinions are usually included in materials provided to public shareholders.

The following disclosures are required by Rule 2290:

• whether the member firm has acted as a financial advisor to any party to the transaction;
• whether compensation for the opinion is contingent upon the success of the transaction;
• material relationships during the past two years between the member firm and any party to the transaction;
• whether the member firm independently verified any of the information that formed a substantial basis for the fairness opinion and was supplied to the member by the company requesting the opinion;
• whether the fairness opinion was approved or issued by a fairness committee; and
• whether the fairness opinion addresses the fairness of the amount or nature of the compensation from the transaction to certain insiders relative to the compensation to shareholders.

Member firms must also ensure that they meet the rule’s procedural requirements for issuing fairness opinions. Member firms that issue fairness opinions must have written procedures regarding the approval of all fairness opinions, not just those that will be provided to shareholders. Additionally, the written procedures must describe when the member firm will use a fairness committee to issue a fairness opinion and the process by which the valuation analyses used in the fairness opinion will be evaluated.

The rule is already in effect and has been approved by the Securities and Exchange Commission. Member firms should review their templates for fairness opinions and the procedures by which fairness opinions are rendered to ensure compliance with the rule.

As deal activity increases, boards of directors of acquiring companies are apt to look more closely at the fairness opinions they are relying on and the implications of relying on an opinion that notes significant conflicts of interest.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In a case decided at the end of this most recent term, the U.S. Supreme Court ruled that New York State prosecutors are permitted to investigate national banks for lending discrimination. The case opinion  in Cuomo v. Clearing House Association is contrary to what was the Office of the Comptroller of the Currency’s interpretation of federal banking regulations. The OCC had blocked an investigation by New York into lending practices of national banks, but the Court held that states have the power to enforce their banking-related laws against national banks.

At issue was an OCC regulation that expansively interpreted the National Bank Act’s preemption of a state’s visitorial powers to preclude states from enforcing national banks’ compliance with state and federal discrimination-in-lending laws. In a 5-4 opinion, the Court ruled that the OCC’s regulation preempting state law enforcement is not a reasonable interpretation of the NBA.

The case is potentially an affront to the OCC’s long-standing position in favor of preemption. As the bureau of the Department of Treasury charged with regulating national banks, the OCC has long argued for preemption of state banking law in what some have called an effort to make the national bank charter more attractive. The United States Supreme Court had previously endorsed the OCC’s position on preemption in the 2007 case of Watters v. Wachovia Bank, N.A.

In that opinion, the Court held that Wachovia Mortgage Corporation, a real estate lending business and wholly owned operating subsidiary of Wachovia, was subject to the superintendence of the OCC and not to the regulatory regimes of the several states in which the subsidiary operated.

The OCC’s victory in Watters was the culmination of years of opinion letters by the agency on the subject of preemption, each letter offering guidance on why various state laws are subject to preemption by federal law. The specific question of whether the OCC has the authority to preempt state law had, until Watters, remained unanswered by the Supreme Court, despite dissention on the issue among the circuit courts. The decision in the Watters case, which can be characterized as a clash between federal agency power and states’ rights, concludes that Congress has consistently supported the national banks’ right to avoid registration, inspection, and enforcement in every state in which they do business.

The decision indicates that the OCC, without authorization from Congress, does have the power to conclude that state banking law interferes with federal law and is therefore preempted. Surprisingly, a supreme court that has remained committed to states’ rights in other contexts supported the power of federal agencies in the context of banking law in the Watters decision.

Some commentators had thought the Watters decision, as the dissent states, “threatens the vitality of most state laws as applied to national banks.” In the realm of consumer protection laws, however, it seems the Watters decision has been significantly limited by the Cuomo decision.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Private equity investment in banks remains stalled despite a 10-month-old Federal Reserve rule change that allows minority stakeholders in banks and bank holding companies to increase their investments without being subject to regulation under the Bank Holding Company Act of 1956 (the “BHC Act”).  The new rules are intended to encourage private equity funds to invest in banking organizations at a time when many banks require additional capital. Some news outlets report regulators will relax additional rules to encourage private buyouts, including the FDIC, which will soon issue “policy guidelines” regarding private equity investments.

The BHC Act applies to any company that controls a bank or bank holding company. Minority investors in banking organizations commonly structure their investments to ensure that they do not obtain “control” of the banking organization, a status that triggers regulation under the BHC Act. “Control” is defined by the BHC Act to include the exercise of a controlling influence over the management or policies of the bank. The Federal Reserve’s latest policy statement on this subject offers further guidance on what constitutes a “controlling influence.”

The Federal Reserve policy statement institutes the following changes to allow a minority investor to avoid having a controlling influence:

• A minority investor is permitted to have a representative on a banking organization’s board of directors and may have two representatives if there are at least eight board members. There are limitations on the investor’s representative serving as board chairman or on specific committees. Previously, an investor with 10 percent or more of the voting stock of a bank was not permitted to have representation on the board of directors unless it owned less than 15 percent of the voting stock and another investor owned a larger block.

• An investor does not have a controlling influence if it owns less than one-third of the total equity of the bank and less than 15 percent of any class of voting stock. Previously, equity investments could not exceed 25 percent of the total equity of the bank and the investor was required to own less than 10 percent of the voting stock.

• A minority investor may now advocate a variety of positions, including changes in the bank’s policies and operations, strategies for raising capital, new business lines, sales of subsidiaries and other assets, mergers, and changes in management, as long as the decision to act on such discussions remains with the shareholders as a group or the board of directors, as appropriate. Communications by minority shareholders should not contain threats to sell shares or to solicit proxies as a way of influencing management.

• Under the new policy statement, business relationships between minority investors and the bank may be allowed depending on the ownership percentage of the investor, and whether the business relationship is non-exclusive, on market terms, and terminable without penalty to the bank.

• The Federal Reserve continues to look unfavorably on contractual restrictions that inhibit a banking organization’s ability to make decisions on hiring, firing, executive compensation, operations, raising capital, sales and acquisitions of major assets, and mergers and acquisitions. However, investment agreements that restrict issuing senior securities, borrowing on a senior basis, modifying the investor’s security, or liquidating the bank are no longer discouraged.

At a time when banking organizations are seeking capital from all available sources, these changes have not necessarily encouraged much-needed investment by private equity funds.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In Wilborn v. Bank One Corporation (Slip Opinion No. 2009-Ohio-306), the Supreme Court of Ohio upheld a provision in a residential mortgage contract that required a defaulting borrower to pay a lender's reasonable attorney fees as a condition for reinstating a defaulted loan and terminating foreclosure proceedings.  Although this decision merely upholds a common practice among lenders, there should be little doubt now that Ohio lenders may require the payment of attorney fees to reinstate a mortgage in foreclosure, particularly if the mortgage was a standardized Fannie Mae or Freddie Mac document. 

The crux of the Wilbon matter centered on the apparent conflict between the mortgage document (which required payment of attorney fees as a condition of loan reinstatement after default) and Ohio public policy and common law dating back to 1893 (prohibiting the recovery of attorney fees resulting from a default upon a consumer or residential debt obligation). 

The Court walked a twisting and very narrow path to arrive at its conclusion, first finding that the current statutory scheme under R.C. 1301.21 authorizing the payment of attorney fees was merely illustrative and did not prohibit recovery in all other circumstances.  Next, the Court distinguished between the borrower's contractual right to reinstatement of the loan from its legal right to redeem the property.  Holding that while attorney fees may not be recovered as a condition to redemption, the payment of such fees was a reasonable bargin for the lender to agree to terminate foreclosure proceedings and voluntarily re-enter the loan arrangement with the consumer.  Finally, the Court found that the Fannie Mae/Freddie Mac documents were not contracts of adhesion because industry groups and consumer advocate groups were heavily involved in the negotiation and implementation of these form documents.  So while the individual borrower may have little power to alter the terms and conditions of the mortgage, the process by which the template for these forms came about was sufficient to protect the borrower's interests in this regard.

The takeaway from this case is that borrowers can likely be required to pay their lenders' attorney fees as a condition to loan reinstatement, and lenders can erase any doubt as to the enforcibility of these provisions by using Fannie/Freddie standardized loan documents rather than their own customized loan documents. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On November 12, 2008, the U.S. Department of Housing and Urban Development ("HUD") issued a long-anticipated Final Rule amending the regulatory framework of the Real Estate Settlement Procedures Act ("RESPA").  In conjunction with the Final Rule, HUD also issued a standardized Good Faith Estimate form and a revised HUD-1 Settlement Statement form.  Compliance with the Final Rule and use of these standardized forms will become mandatory on January 1, 2010.

Industry groups maintain that the Final Rule is deficient in many respects, arguing that because it may overlap with regulations issued by the Fed under the Truth in Lending Act, it creates the possibility of conflicting and ambiguous requirements for lenders and brokers.  Consumer advocates also maintain the Final Rule is deficient, arguing that it falls short of stopping certain incentives, such as yield-spread premiums, that contributed heavily to the current problems in the mortgage market, and fails in a broader sense in that it does not help consumers answer the basic question:  Can I afford this loan?

Key to these regulations is the requirement that lenders or brokers issue a Good Faith Estimate at the outset of the loan process.  Lenders must prepare the estimate with a minimum of information from the borrower, such as the borrower's name, Social Security number, gross monthly income, address and value of the property, and the amount of the proposed mortgage loan.  Lenders can request additional information, but cannot expect the borrower to go into the detail otherwise reserved for the formal loan application process. 

Once the lender has the necessary information, it must provide the borrower with a Good Faith Estimate (at no charge to the borrower) within three days.  The Good Faith Estimate will contain information needed to help consumers shop for the lowest-cost loan, such as the interest rate, timing and cost of the interest rate lock, estimated cost of all settlement charges (including title insurance and recording fees), and the general terms of the loan, such as the amount, term, origination fees, estimated monthly payment, and the fixed or variable nature of the interest rate. 

Because the purpose of this estimate is to help consumers make informed decisions, loan originators have an express obligation to provide accurate information up front.  As a result, the final cost and terms of the loan and closing process must reflect the original Good Faith Estimate, except under certain specific circumstances. 

This Final Rule represents a substantial changes in the regulatory environment surrounding residential mortgage loans and the settlement process.  In addition to the significant changes that lenders and brokers will need to make to their loan application process in order to ensure full compliance with the Good Faith Estimate requirements, there will be many practical business arrangements that will have to be made to ensure that disclosed costs (such as a title company's settlement costs) are accurate. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

House Bill 138, effective September 11, 2008, makes sweeping and widespread changes to the substantive and procedural aspects of foreclosures in Ohio.  Although the actual implementation of these new standards may vary and each county's procedures must be verified for all current and future foreclosure cases, those currently in progress as of September 11, 2008 should be subject to the former statutes as to substantive matters but will be subject to the procedural changes in the new legislation.  Highlights are as follows:

• The court may require mediation of any foreclosure at any point during the proceeding and may require the personal attendance of both the mortgagor and mortgagee.
• The lis pendens date is changed from the date service is perfected on the principal defendant(s) to the date the complaint is actually filed.  Although this change doesn't eliminate the requirement that service be obtained on the defendant at some point in the case, it does create some certainty about the point at which subsequent liens are barred.
• In residential foreclosures a Preliminary Judicial Report (PJR) obtained from a title company must be filed within 14 days of the complaint and updated by a Final Judicial Report prior to the court issuing an order of sale.  Commercial foreclosures have the option of using a PJR or a standard title commitment. 
• The officer making the sale is required to collect certain purchaser information, such as contact information, the name of the purchaser and the name to which title should be conveyed, and other information.  This requirement applies to the foreclosing lender as well, should that lender be the successful bidder at the sale. 
• An obligation is placed on the parties to have the sale confirmed within thirty days of the sale, and the purchaser must pay the balance due within that time.  Failure to do so may be treated as a contempt of court and may result in forfeiture of the deposit.  The court is also granted broad authority to stay confirmation to give the defaulting borrower time to redeem the property or "for any other reason the court deems appropriate."
• The deed must now be prepared by the lender's attorney and submitted to the sheriff, who now handles recording.  Because taxes, conveyance fees and other charges must be paid prior to recording, lenders are being asked to submit a certain amount of money (varying by county) to cover these costs. 

Some of the foregoing changes, such as the revised lis pendens date, will speed the foreclosure process along and make title examination much easier.  Other changes will benefit consumers and title agents, such as the residential PJR requirements.  Lenders should note, however, that there are a number of pitfalls in this legislation that have the potential to extent foreclosure proceedings.  First, the possibility of mediation could result in delay, particularly when the borrower gives at least the appearance of being able to bring the loan current.  In addition, the court now has the discretion to stay a sale confirmation to give the defaulting borrower additional time to redeem the property or for any other reason the court deems appropriate.  How courts will use this apparently unfettered discretion remains to be seen.  In all events lenders will be saddled with additional costs and delays in what is already a time-consuming process. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Board of Governors of the Federal Reserve recently approved a final rule amending Regulation Z (Truth in Lending) and the Home Ownership Equity Protection Act (HOEPA).   The purpose of the new rule, according to Federal Reserve Chairman Ben Bernanke, is to "protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting home ownership."  The highlights of the new rule are as follows:

The final rule imposes certain restrictions on lenders in relation to "higher priced mortgages."  This term is broadly defined to capture virtually all loans in the subprime market while at the same time excluding loans in the prime market.  Lenders are prohibited from making a loan without verifying the borrowers' ability to repay the loan from income and assets other than the mortgaged property.  Targeted directly at the practice of offering adjustable rate mortgages (ARMs) with low initial payments, compliance with this regulation requires lenders to assess repayment ability based on the highest scheduled payments in the first seven years of the loan.  In a similar vein, prepayment penalties are prohibited when payments may change within the initial four years of the loan.  More importantly, lenders may incur liability for violating these standards on a case-by-case basis, as borrowers will not have to demonstrate that any violations are part of a larger pattern or practice. 

Advertising for all mortgage loans, regardless of type, priority or the nature of the collateral, must contain additional information about rates, monthly payments and other loan features, such as the effect of discounted rates, the existence of a balloon payment, deductibility of certain kinds of interest for tax purposes, and the extent of promotional or introductory rates.  Certain specific advertising practices thought to be misleading or deceptive are also banned. 

Compliance with this final rule becomes mandatory on October 1, 2009.

• Email This
• Print
• Comments
• Trackbacks
• Share Link