Iowa Banking Law Blog

Top Five Ways Lenders Make Their Collection Actions More Dificult (and pay more attorney's fees): #2

This is the second installment of the five ways lenders make their collection actions more difficult.

RULE #2:      STICK YOUR CUSTOMER’S UNCONDITIONAL AND UNLIMITED  GUARANTY IN THE FILE AND DON’T WORRY ABOUT IT AGAIN UNTIL IT’S TIME TO SUE

The Iowa Supreme Court complicated the lives of Iowa lenders in 2003 when it declared that it was the “custom and practice” of the banking industry to provide a guarantor with written notice of the terms of any new loan that the lender considers to be covered by a prior guaranty.   Beal Bank v. Siems, 670 N.W.2d 119 (Iowa 2003).  In that case, the Supreme Court found that a lender had “abandoned” a written guaranty due in part to its failure to give such written notice to the guarantor.  Any lender who fails to give such notice to its guarantors now has the pleasure of explaining to a judge (or jury) why it is not following industry custom and practice.

The Beal Bank case also illustrates the importance of Rule #1.  In Beal, the Bank’s form of guaranty did not include the notice language of 535.17.  There was some language in the guaranty which generally provided that “no alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the [parties].”  However, because that language was not in boldface ten-point type, the Court found it was not sufficiently conspicuous to make 535.17 applicable. 

For more information contact Jon P. Sullivan of Dickinson Mackaman Tyler & Hagen, P.C.

Changes to SBA Community Express Program

The Small Business Administration (SBA) is restructuring its Community Express program, effective October 1, to increase the number of eligible borrowers and funnel more lending to low-income areas.  The restructuring extends this 9 year old “pilot program with a deadline” to December 31, 2009.  The SBA Community Express loan program is designed for small businesses in disadvantaged communities to help them succeed.

            Some important changes to the Community Express program include:

• After October 1^st, anyone is eligible for the loan, while before that date only minorities, women, veterans, and those in low income areas are eligible.
• Small businesses with a principal office in a low-income HUBzone, or an area covered by the Community Reinvestment Act, will be eligible for the loans, as will any small firm seeking a loan of $25,000 or less.
• The SBA reduced the maximum interest rate lenders may charge for Community Express loans, bringing it in line with the SBA’s 7(a) program.  The new maximum rate will be prime plus 2.25% for loans with maturities of less than 7 years.  For loans with maturities of 7 years or more, the maximum rate will be prime plus 2.75%. 
• Lenders are allowed to charge an additional 2 percentage points for loans under $25,000, and an additional 1 percentage point for loans between $25,000 and $50,000.
• Lenders using the Community Express program, who are required to arrange technical assistance for borrowers, will be able to use the SBA’s online Small Business Training Network to satisfy this requirement.
• The SBA guarantees 75% – 85% of Community Express loans, and up to $250,000 can be borrowed through the Community Express Program.

Federal Reserve Bank of Chicago Economics Blog

Wade Rousse and Cindy Ivanac-Lillig at the Federal Reserve Bank of Chicago have started an economics blog entitled "Marginal Thoughts."  So far, the blog has defined and discussed various economic terms and concepts that are being bandied about these days.  Marginal Thoughts has very short, engaging posts; its informative, but not dense, you should be able to read it and understand it even before you have your morning coffee.  It hasn't been up long, here's to hoping they continue it.

I suggest you subscribe to Marginal Thoughts.  It appears that there is a post about once a week, so your inbox won't be inundated. 

Jeff Andersen

Top Five Ways Lenders Make Their Collection Actions More Dificult (and pay more attorney's fees): #1

The following is one lawyer’s attempt to briefly identify some of those mistakes made by lenders which, in his recent experience collecting loans, tend to cost lenders the most in terms of lost time and money.   These are lessons which are much better learned in the abstract than “first hand.”  The following rules will not tell a lender what mistakes to avoid in underwriting a loan.  They do, however, suggest some common mistakes to avoid in the manner in which a lender structures, documents and administers loans, so as to minimize the lender’s risk and expense when it becomes necessary to enforce the lender’s legal remedies against the borrower and/or the bank’s collateral.

This will be posted in five installments.

RULE #1:       DON’T BOTHER TO INCORPORATE THE SAFE-HARBOR LANGUAGE OF IOWA CODE SECTION 535.17 IN EVERY CREDIT DOCUMENT IN YOUR FILE

             

Iowa Code Section 535.17 is unquestionably the strongest weapon that the Iowa Legislature has provided to lenders to assist them in avoiding frivolous and costly litigation over credit agreements of any kind.  The key to obtaining the full protection afforded by Iowa Code Section 535.17 is to include certain statutorily-prescribed language in the credit agreement.  That language should be very familiar to any Iowa lender:

            IMPORTANT:  READ BEFORE SIGNING.  THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE.  NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.  YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

When this language appears in the credit document, it means that the credit document must be enforced the way it is written.  With extremely few exceptions, it prevents the borrower from arguing that the credit document is unenforceable due to events, actions or circumstances that would otherwise be fertile ground for litigation.  It cuts off such common law “equitable” defenses as fraud, promissory estoppel, undue influence and economic duress.  In short, it is the best possible thing the lender has going for it when the borrower starts looking for ways to prevent or slow the enforcement of the lender’s legal rights through the use of judicial process.

In light of its obvious benefits, it is puzzling how often lenders do not incorporate the language in their credit agreements that is necessary in order to make Code Section 535.17 fully applicable to the agreement.  There are no doubt a number of reasons this language does not find its way into every credit agreement written in the State of Iowa.  For example, some lenders use pre-printed forms that, due to the fact they are out-dated or were prepared by out-of-state venders unfamiliar with Iowa law, do not include the required language.  Some lenders (or their attorneys) may not appreciate the broad variety of documents that qualify as “written credit documents” that should routinely include this language. 

Some things to keep in mind regarding 535.17:

(a)        The “safe harbor” language must appear in boldface type at least ten points in size;

(b)        As an alternative to including this language in every credit document, it can be included in a separate form given to the borrower;

(c)        If the notice language was overlooked at a closing, the statute even permits the notice to be given after the closing (“[t]his notification can be included among the terms of a credit agreement, can be included on a separate form . . . with other disclosures that are provided when the agreement is made, or can be given wholly apart from the agreement and at any time after the agreement has been made.”);

(d)        “Credit Agreement” is defined very broadly to include any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose (e.g., would include a guaranty or a modification or forbearance agreement);

(e)        Transactions to which 535.17 does not apply include consumer loans (for $20,000 or less, made primarily for personal family or household purpose), credit card debt or home equity line of credit. 

Stay tuned for Rule #2. 

If you have any questions contact Jon P. Sullivan of Dickinson, Mackaman, Tyler & Hagen,

P.C.

Evidence of Authority and Operating Agreements

This is from Ward on Iowa Limited Liability Company Law.

Granting an LLC manager the power to "execute" instruments (for example, a promissory note) does not mean the manager has discretionary authority to borrow money on behalf of the LLC, so says the Kansas Court of Appeals in Sunflower Bank v. Airport Red Coach Inn of Wichita LLC, 175 P 3d 883 (Kan. App. 2008).

The court also concluded that the bank had "knowledge" of the fact that the operating agreement did not grant the manager such authority because it had a copy of the operating agreement in its possession.

The bank bungled this one in two ways.  It didn't require the manager to provide evidence of his authority (by resolution or written consent) and apparently didn't read the operating agreement or at least the loan officer did not understand what he or she read.

-Marc Ward

Deposit Insurance and Your Payroll Deposits: Avoid Being IndyMac'd

Reports in the wake of last week's failure of IndyMac indicated that some 10,000 customers had deposits in excess of the $100,000 FDIC insurance limits.  The FDIC, in an act of restrained benevolence, has indicated that it will voluntarily pay depositors an "advance dividend" of 50% of uninsured amounts they may have had on deposit at IndyMac.  But, it is important to keep in mind, the offer really is a strictly voluntary one, because the FDIC has no obligation to pay customers anything above the insured amount.

Followers of FDIC receivership actions have undoubtedly noted the careful language the FDIC has used in all of its statements arising out of recent failures.  With a great degree of precision, the FDIC has boasted that no insured deposits have been lost.  In other words, provided a depositor had less than $100,000 (or $250,000 for certain other types of funds held by the failed entity like an IRA), the depositor was paid for 100% of the depositor's claim.  But other than in the case of IndyMac, the deposit limit has been the limit in recent failures.

Businesses that deposit large payroll account sums should be aware that those deposits, notwithstanding that they may be designated as a separate account, will be combined with other accounts of the business at any one bank.  Thus, if a business had $50,000 on deposit in an operating account, $40,000 on deposit in a marketing account, and then just before payday made a $40,000 deposit to a payroll account and the bank failed, the business stands to lose $30,000, which represents the portion on deposit at the failed bank over and above the $100,000 limit.

"Pass through coverage", which is available for accounts held for others who are specifically identified, would not apply to a payroll deposit because the deposit is not owned by the employees.

One possible solution to avoid possible loss of deposited payroll funds?  Bearing in mind that the preferred day of the week for shutting down banks is Friday, move paydays to any day other than Friday.

More Consumer Protection: Fed Toughens Reg Z

The Federal Reserve Board today approved a final rule relating to home mortgage lending that is aimed at promoting more responsible lending and protecting consumers.  The new rule becomes effective October 1, 2009 except for a provision imposing a new escrow requirement, which is to be phased in during 2010.  In addition to prohibiting unfair, abusive or deceptive home mortgage lending practices and restricting certain other practices, the rule establishes some new advertising standards and imposes additional disclosure requirements that must be made at earlier points in the process than has heretofore been the case.

The new provisions reach all mortgage lenders, not just those supervised by the Federal Reserve.  The Fed hopes that, in making the provisions more far reaching, the playing field for lenders will be leveled, and there will be more competition in the mortgage lending arena.

Four key protections for "higher-priced mortgage loans" (a new category) are established.  These include:

1.  Prohibiting loans from being made without regard to borrowers ability to reapy from income and assets other than the home's value.  Repayment ability must be based on the highest scheduled payment in the first 7 years of the loan.

2.  Income and assets relied upon to extend credit must be verified.

3.  No prepayment penalites if the payment can change in the first four years (two year limit for prepayment penalties for other loans).

4.  Mandatory escrow accounts for property taxes and insurance for first lien mortgage loans.

For all other loans secured by a principal dwelling of the borrower, the rule prohibits creditors and mortgage brokers from coercing appraisers to misstate values; prohibits servicers from engaging in certain practices like pyramiding late fees and requires payments to be credited as of the date of receipt; requires creditors to provide good faith cost estimates within 3 days of a loan application (currently, only required for home purchase loans; now required for home improvements or refi's).

New advertising rules require more information about rates, payments and other loan features and prohibits using the term "fixed" rate when the rate can later change.

The final rule exemplifies the continuing regulatory concern over the problems associated with the subprime lending sector's abusive practices in recent years and the Fed's determination to crack down on rogue lenders and shady practices.  Virtually all loans in the subprime sector will be affected by the new rules. 

NEW IDENTITY THEFT RULES TAKE EFFECT

On January 1, 2008, the final rules propounded by the OCC, Board of Governors, FDIC, OTS, NCUA and FTC requiring financial institutions and creditors to develop an Identity Theft Prevention Program finally became effective. 

Under these guidelines, an Identity Theft Prevention Program must identify those accounts where identity theft is most likely to occur.  Only financial institutions and creditors that offer or maintain “covered accounts” must develop such a program.  A “covered account” is an account used for personal, family, or household purposes involving multiple payments or transactions or any other account for which there is a reasonably foreseeable risk of identity theft to customers or to the safety and soundness of the institution.  The program must also be designed to detect, prevent, and mitigate identity theft and should be tailored to the size, complexity and nature of each financial institution.

Under the rules, the four basic elements that must be included in the program include:  1) identifying red flags for covered accounts and incorporating those red flags into the program; 2) detecting those red flags; 3) responding to the red flags; and 4) ensuring the program is updated periodically to reflect any changes in the risks to the customer or to the institution.

There are also certain steps that must be taken to administer the program including obtaining approval of the written program by the board of directors or committee of the board, ensuring oversight of the program, training staff, and overseeing service provider relationships.

Financial institutions and creditors should take note – the mandatory compliance date for these rules is November 1, 2008.