Iowa Banking Law Blog

Five Ways Lenders Make Their Collection Actions More Difficult (and pay more attorney's fees): #5

This is the fifth and final installment of the five ways lenders make their collection actions more difficult.

RULE #5:       DON’T BOTHER TO VISUALLY INSPECT THE CONSTRUCTION SITE IMMEDIATELY BEFORE AND AFTER FILING YOUR CONSTRUCTION MORTGAGE

            Although the mortgage of a construction lender is generally entitled to priority over any mechanics lien claimant who starts its work after the mortgage is filed, a construction mortgage will be inferior to the claim of any mechanics lien claimant who starts work prior to the recording of the construction mortgage.  Consequently, the construction lender must take two steps to protect the priority of its mortgage.  First, it must inspect the property to confirm that no work has commenced at the site prior to the recording of the construction mortgage.  Second, in the event the inspection reveals that any work has begun at the site, subordinations must be obtained from every contractor who has provided such labor or materials. 

Five Ways Lenders Make Their Collection Actions More Difficult (and pay more attorney's fees): #4

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

RULE #4:       GIVE NO THOUGHT TO POTENTIAL SERVICING-RELATED ISSUES, INCLUDING POTENTIAL CONFLICTS OF INTEREST, WHEN SELLING AND PURCHASING LOAN PARTICIPATIONS

            Although the purchase and sale of participations in loans is a useful tool for managing risk, such transactions can greatly complicate (i.e., add expense and delay to) the servicing of troubled loans.  Some degree of complication is unavoidable when a participated loan goes into default, because the lead lender will oftentimes wish to waive or modify one or more provisions of the original loan agreement as part of its collection strategy, and participants usually reserve the right to approve or disapprove such waivers or modifications.  A well-drafted participation agreement, however, will at least provide clear guidance as to when participants’ consent to a proposed action by the lead lender is required, what level of support is necessary in order for the lead lender to act and a mechanism for resolving stalemates.  Careful thought should also be given, by both the originating and participant banks, as to whether the lead lender is permitted to make additional loans to the same borrower and, if so, under what circumstances.  The potential conflicts of interest faced by a lead lender which services loans with the same borrower both for its own account and for the account of others can make it difficult even for a “well-intentioned” lead bank to be effective in its servicing of both loans. 

Five Ways Lenders Make Their Collection Actions More Difficult (and pay more attorney's fees): #3

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

RULE #3:       MAKE SHORT-CUTS IN LOAN DOCUMENTATION TO ACCOMMODATE  YOUR BEST OR MOST SOUGHT-AFTER CUSTOMERS

            Although the temptation is great when times are good for a lender to accommodate its best customers by not insisting on quite the same level of detail and formality when documenting their loans, lenders should never forget that large credits are in many cases no more immune from a bad economy than are the smaller ones.  In the event of bankruptcy by the borrower, the lender with a duly perfected lien in collateral is always in far better shape than the holder of an unsecured claim, regardless of how good the borrower’s balance sheet looked at one time.  If an appraisal, a formal title opinion and lawyer-reviewed or prepared documentation are desirable in the case of a routine loan, the same is no less true in the case of a loan to a favored customer of the bank.  In that regard, a “title report” or “lien search” is no substitute for a final title opinion or title policy.  A “preliminary” title opinion is what the name implies – only a final title opinion can confirm the perfection and priority of the mortgage lien.

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.

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.