Provisions in commercial mortgage loan documents,  where a particular state law is “selected” as the governing law, can drive a deal into a ditch, and take a good (or growing) lending relationship into the emergency room.  In many situations, this topic is a good example of over-thinking, and perhaps over-lawyering.

  • Simply stated, which of these two thinkers gets it right on using (or not using) choice of law provisions in a typical commercial mortgage loan?

  The choice of law topic is a very intellectually rich subject for lawyers.  Much is written about it.  Entire books.  It is a class topic for an entire semester in law schools.  It is a wonderful topic for lawyers.  It “invites” debate and discussion.  And confusion. However, lawyers who go to war over the “choice of law” provision (in commercial mortgage loan documents) are the poster child for those who argue for simplicity in contracts, and who view lawyers as deal inhibitors, and as creators of all things complicated. My perspective is that in the typical mortgage loan, there is no legitimate reason for this provision to be the subject of discussion.  There is no “choice” in choice of law.  The approach should be simple –

  • the mortgage loan documents should be governed by the law of the state where the project (the loan collateral) is located

Here are a few reasons supporting the two perspectives on this: Choice of Law Should NOT be the Law of the State Where the Project is Located

  • Quality Control: Mortgage lenders need to know that their loan portfolio has consistent terms (subject to the exception below).  Thus, all of the loans should apply the laws of a single state.
  • Easier to Manage: Using the laws of a single state makes it easier for loan servicing to make decisions.
  • Exceptions (creation & enforcement):  Of course, local state law must govern the creation of liens and the enforcement of remedies.  So, the choice of law must always have this exception.
  • He (She) Who Has the Gold Makes the Rules:  The loan is the lender’s money, and if a borrower wants to use it, then the borrower simply needs to do as told – accept this approach and close the loan.  The lender must be obeyed (if the borrower wants the money).
Choice of Law SHOULD be the Law of the State where the Project is Located
  • Quality Control:  In our age of technology, surely “quality” can be controlled by smarter uses of technology (for collaboration, reporting, etc).  Keep a list.  Share it.  Also, legal opinions on choice of law provisions (that select the law of another state) can be very expensive.  Let’s not lose track of this important point: the lender needs to lend money; and if the choice of law provision inhibits the deal, or increases legal fees or mucks up the closing process and experience, then the result could negatively impact the Lender’s ability to handle future loans from the borrower, or from others in the local market.
  • Easier to Manage:  Again, we’re well into the information age.  Access to laws of the 50 states is not difficult.  Collecting and sharing information about state law should not be a problem.  Again, let’s not get side tracked . . . the lender needs to lend money.
  • Exceptions: if and when the loan goes bad, taking the “exceptions” approach (where one state’s law governs some topics and another state’s law govern other topics) injects a level of complexity into an “already” bad situation.  Dealing with a troubled loan is difficult, and now it becomes even more challenging because the lender, the borrower and then the courts must become experts at implementing the choice of law provision.  Indeed, how is injecting this complexity a “good” thing?   Will a court handling the case correctly apply the law (as selected under the loan documents)?
  • He (She) Might Have the Gold But . . . No One Wants It:  Again . . . the lender needs to lend money.  Also the market understands that our system of governance allows States to have differing laws.  So, “why” should a lender try to “unify” them in a lending platform?  Does the market actually reward a lender for doing so?
Selecting the laws of the state (for all topics) where the project is located just makes sense.  And cents.
A simple thought.
Please share your thoughts below.

       

In many 19th hole country club gatherings across the nation, there is a lot of discussion on whether CMBS loans really are enforceable.

Unfortunately, the answer to that question is multi-faceted.  (It has two parts to it.)

As part  of his focus on risk management issues for financial service companies, Brian Vanderwoude has this follow up on his earlier report covering the ability of a CMBS servicer to enforce (on behalf of the CMBS trust) terms of a CMBS loan in Texas –

At least in Texas, the loan servicer is a proper party to enforce the loan terms in a situation where the language in the CMBS documents (i.e., the pooling and servicing agreement) expressly give the loan servicer the right or ability to do so.  Recently, a Texas appellate court revisited this topic and didn’t change its earlier ruling on it.

Here are the details: on March 14, 2011, the Dallas Court of Appeals vacated its judgment in ECF North Ridge Assocs., L.P. v. ORIX Capital Markets, L.L.C., No. 05-09-00066-CV, 2010 WL 5141806 (Tex. App.-Dallas Dec. 20, 2010), and issued an amended opinion. The new opinion can be found at ECF North Ridge Assocs., L.P. v. ORIX Capital Markets, L.L.C., No. 05-09-00066-CV, 2011 WL 856902 (Tex. App.–Dallas March 14, 2011, no pet. h.). In the amended opinion, the Court altered its prior opinion regarding terrorism insurance and default interest, but did not make any substantive change to its opinion regarding standing (i.e., the ability of the loan servicer to enforce the CMBS loan terms). Thus, the Court again confirmed that the loan servicer had the authority to sue either in its own name or as loan servicer based on the language of the CMBS pooling and servicing agreement.

I suspect that courts in other states will take this same approach on the "procedural" question of "who" can assert rights or enforce loan terms.

However, this topic is very different from "what" a lender (or servicer) must prove in the enforcement action.  In other words, the question or proof for "standing" to sue is different from the elements of proof or steps required to properly foreclosure on a deed of trust, or to prove the actual default or breach of the loan terms.

This is the key distinction that needs to be understood in the 19th hole: "who" can sue is different from "what" decides the case.

If you have any comments or a perspective on this, please post a comment below.

 

In some (but not all) states, home owners (whose loans have been securitized) are successfully overturning or stopping judicial foreclosures (of their defaulted loan) by questioning the authority of the loan servicer (such as MERS) to foreclosure.  An example of this is the Ibanez case.  While the facts of these cases center around lost notes or missing documents, the legal concept centers around "standing" – which means "who" has the ability to assert certain rights or claims. 

The issue of "who" has standing to assert claims on behalf of a lender will be the focus of many courts over the next few months (or even years).

In a recent Texas appellate case handled by several lawyers at Winstead (including Talmage Boston and David Johnson, as co-counsel with in-house counsel and another Dallas law firm), this issue was addressed in the context of a securitized commercial real estate loan and the borrower’s failure to obtain terrorism insurance.  In the case, the loan servicer called a default and then sued the borrower due to this failure.  The borrower then argued that the loan servicer didn’t have the authority (or "standing") to bring the law suit.

After reviewing the pooling and servicing agreement (the "PSA"), the court held that the loan servicer had the authority to sue either in its own name or as loan servicer.  (More details on the case are below.)

Clearly, unless and until we get a federal solution to these questions involving securitized loans, this will be a 50 state slugfest on the basic question of "who" can assert the lender’s rights in a securitized loan.  And as this case illustrates, the answer could vary – depending upon the facts of each case.

If you see if differently, or have your own story, please post a comment below.

And "thanks" to Brian Vanderwoude for bringing this important Texas case to my attention, and in furnishing the summary below –

Continue Reading Can A Servicer Sue On A Defaulted CMBS Loan? TX Court Says “Yes”

After hearing about the Ibanez case (link to search on TT4L), every lender or loan servicer who holds an assigned note and real property lien is now tasking staff to evaluate their own risk on the key issue in the case: locating documents that prove ownership of both the note (a UCC question) AND the lien (a chain-of-title question).  Let’s focus on the 2nd question and the Ibanez case:

  • Is there proof or evidence of chain-of-title as to the real property lien?

Evaluating and mitigating risk are tasks that John Kincade and Brian Vanderwoude use every day for lenders and servicers.  So, they jump in here with some tips, and then (for those who don’t enjoy reading legal opinions) give us a quick summary of the Ibanez case.

While the case (and these tips) are directed at loans transferred into a CMBS pool, the concepts apply equally to any assigned or conveyed note and real property lien.

Your Collateral File Should Contain (guidelines of ownership chain-of-title given by the Ibanez court):

  1. An assignment of the note AND the lien that is –
    • Recorded – although in Ibanez, an assignment did not need to be in recordable form at the time of notice or foreclosure sale (under Massachusetts law), "recording is likely the better practice." 
    • Made by a party that itself held the mortgage
  2. The assignment (or other document containing the transfer) should contain conveyance language of a present assignment ("does hereby assign" and "does hereby deliver") –  rather than conveyance language of an intent to assign in the future.
  3. A transfer document containing an assignment of multiple notes AND liens (into a securitized trust, if a CMBS pool) should clearly and specifically identify each mortgage being assigned.
  4. This identification may be evidenced by attaching to the pooling & servicing agreement (or other assignment instrument) a schedule or listing of the assigned loans and mortgages.
    • A sufficient description would include a complete property address; the loan number, assuming it is referenced in the mortgage or deed of trust; filing record of the mortgage; or other similar proof which would allow tracing if any question were raised.
    • On the other hand, a mere description of the mortgage by property zip code and payment history is insufficient proof.

Before You Make Demand andOr Foreclose (some risk management suggestions)

  1. The solution to the problems the Massachusetts court raised in Ibanez may be as simple as making sure the last recorded assignee grants a new assignment to the foreclosing entity before the foreclosure process begins – or better yet, before a demand letter is sent.
  2. Note that many commercial securitization documents typically discuss the completion of mortgage loan assignments by a servicer.  Locate this provision, and complete the assignments (and record them) as step one in your process.
  3. If documents are missing, you’ll need to assess these types of exposures:
    –  Breach of the servicing standard of care: the failure of a loan servicer to obtain the necessary assignments may constitute a breach of the servicer’s standard of care.
    – Liability of prior note holder:  The failure to properly assign the loan could be a breach by the lender that closed the loan or last assigned the note and lien.
    – Liability to real property purchasers: If the real property has been foreclosed upon and then sold, then the buyers probably have recourse against their seller – because the seller did not properly obtain title of the mortgage and thus improperly foreclosed – so that it did NOT have title to convey to the buyers.
    – Liability to investors:  There may be some additional exposure when the security offering documents (or the loan participation agreement) represented to investors that the mortgages had been validly assigned (or owned by the lead lender).
  4. Consider a Judicial Foreclosure: CalculatedRisk notes that even in states where non-judicial foreclosure is allowed, judicial foreclosure may still make sense if there are questionable assignments in the chain of title. 
  5. Title Insurance: If practical, consider obtaining an endorsement to the existing loan title policy.
  6. _________ ?????? (Please add your suggestions in the comment box below)

The Ibanez case: Background

To paraphrase the prison warden’s famous line from Cool Hand Luke (Warner Bros. 1967), "What we’ve got here is a failure [of proof]." A failure of proof indeed. As has been widely publicized, inU.S. Bank, N.A. v. Ibanez, the Massachusetts Supreme Court last Friday (January 7, 2011) voided foreclosures by trustees on behalf of mortgage-backed securitization trusts because the trustee banks could not prove that they actually owned the mortgages at issue at the time of foreclosure.

Following origination, the residential mortgages had been assigned to various entities and eventually pooled with others and converted into mortgage-backed securities. After the borrowers fell behind on payments, the trustees foreclosed and purchased the properties. They then filed declaratory judgment actions to clear title to the properties, which of course required them to establish the validity of the foreclosure upon which their respective claims to title rested.

But in each case, the trustee could not prove its trust held an assignment of the mortgage at the time of foreclosure notice or sale. In fact, the actual assignments from the mortgage holders occurred eight months (La Race) and over one year (Ibanez) following the foreclosure. So whereas the state foreclosure law (in this case Massachusetts) required proof that the trustees held the respective mortgages before foreclosing on them, neither bank could satisfy this standard burden.

The ruling left open the door for the bank trustees to fix the chain-of-title issues and, at the end of the day, the trustees might be able to foreclose on the two properties at issue. They will need to get their paperwork in order, however, before beginning the foreclosure process again.

Thank you to John and Brian for this; and if you have suggestions, please post them below.

Enough of MERS and technology – but, how about technology but from a different angle?

The amount of commercial real estate debt in distress is huge:

  • delinquent unpaid balances on CMBS loans exceeding $62 billion (October 2010), and heading toward $70-$80 billion by year end ’10 (per Realpoint)
  • delinquency ratio of 8.04% (September, 2010) (per Realpoint)
  • Fitch predicts special servicing volume of @ $110 billion of CMBS loans by the end of 2010 
  • @ 3,000 banks and savings institutions have more than 300% of their risk based capital in commercial real estate loans (per JLL)

Late in the good economy, "green buildings" became a new distinctive for the newest construction.

This is the "technology-smart" building – designed, built and operated to be environmentally friendly for all of us, and resource efficient and healthier for the occupants.  And the rent is a little higher.  A good thing.  Unless the tenant moves out or goes bankrupt.

Combining the large number of distressed investments with the green building concept:

  • What does a "green building" mean for real estate lenders dealing with distressed debt? How much extra trouble is a green building?

A green building is an operational and legal disaster in the making for a foreclosing lender.

I brought this concern and my questions to Bill Weinberg, a friend and partner at my law firm.  As you’ll read in his answers to my questions, it depends on the nature of the collateral, where it is located, and what the lender intends to do with it.  But since Bill is the expert . . . . 

Keith: "first, Bill, thanks for that tip about adding this topic to my ‘watch list’ on distressed debt, and for alerting me on changes in local building codes that come into play on a construction loan – I actually blogged on it . . . over a year ago."

Bill Weinberg: "yeah, but you forgot to mention me in that blog . . . should I say ‘thanks?’"

Keith: "well the bet at the firm was that I wouldn’t still be blogging. . . so here’s your opportunity to see your name a bunch of times out there in the vastness of the internet . . . "

Bill Weinberg: "you need my help . . .  remember, your distressed debt decision tree list after ACMA did NOT even mention this topic"

Keith: "guilty . . .  bad oversight . . . this is a topic begging for trouble. . . Question #1: What is the first question, or step that needs to be taken?"

Bill Weinberg: "let me make this simple for you . . . and I know that you like bullet points –

  • What is the nature of the collateral?
  • Is it raw land, an occupied building, or something else like a half-finished building?
  • If the collateral is raw land, it is fairly safe to say that there is no green building issue. 
    • First of all, there is no building. 
    • Secondly, the lender will probably be long gone before anyone lifts a shovel to start work on a building.
    • BUT: you still need to get that environmental study BEFORE you take possession or take title 
  • If the collateral is improved . . . 
    • and an occupied building, the lender may have to maintain it appropriately
    • or is a half-fished building, the lender may have to build it appropriately
    • either way, you’ll still need to get that environmental study BEFORE you take possession or take title

Keith: " love how you talk in bullets . . . let’s just assume that you’ve taken possession or obtained title  . . . . foreclosure or a deed in lieu . . . . Question #2: what’s next on the list?

Bill Weinberg: "you’re the dog that just caught the car – so:

  • Do you know how to operate and maintain the green building features?
  • A green building may contain some high-tech features with which the typical maintenance or janitorial crew may not be familiar.
    • Do you know how to operate the solar panels or the rain water re-use system?
    • How about the geothermal heating and cooling system?
    • Does the janitorial staff know how to clean a waterless urinal?
  • Do you have the warranties for the specialized fixtures and equipment?
  • Don’t lose the value of the innovative features by neglecting to seek expert assistance.

If you have any comments, questions or war stories, please comment below.

More from Bill Weinberg shortly . . . .

Article Co-Author:  Courtney D. Bristow, Winstead PC

It’s Monday morning and you’re getting ready for work with the news on the TV in the background. By now, you’re practically immune to the daily dose of doom and gloom that has become business news, particularly with regard to real estate and mortgage-backed securities. So you’re not overly concerned when you hear the anchor say, “Vital signs are dangerously low in the commercial mortgage-backed securities market. We’re suffering from a trifecta of decimated bond prices, weakening mortgage performance and drastically reduced loan originations. The threefold combination has pummeled portfolio values and deprived borrowers of a primary source of commercial real estate financing.”1 As you turn off the television and head out the door, you find solace in the fact that you work for a public healthcare company and not a financial services firm.

Your phone is ringing as you walk into your office. It’s your CFO explaining that a $5 million loan on one of your office buildings in Michigan is maturing in three months. He asks you to help the company’s internal business unit that is desperately searching for new financing while, at the same time, communicating with the commercial mortgage-backed securities (CMBS) loan servicer who manages the loan. Did he just say CMBS? Loan servicer?  Find financing upon maturity?  What do you need to know about the CMBS industry and its participants to navigate through this mortgage mess that just fell into your lap? Click here to read the entire article.

Article published in the September issue of American Corporate Counsel (ACC) Docket, the award-winning journal of the Association of Corporate Counsel.
 

(More from our "Watch for Change" series . . . .)

As you know, the "new" economy is prompting a wide range of new laws and ordinances, all of which present opportunities for the unwary to trip up and mess up in the collection process.

This posting will interest you if any of your collateral involves residential real property.

While this posting is written from a Texas perspective, the concept applies to all statesbecause the new Federal law applies to all states.

Thanks to Vince Marino of Winstead PC for this information, which was published in the Houston Business Journal on July 17, 2009.

If you have any questions or comments, please post them.

New Federal Foreclosure Law Gives Residential Tenants 90 Days to Vacate

In May 2009, President Barack Obama signed a new law called the “Protecting Tenants at Foreclosure Act of 2009,” the provisions of which were part of a much longer 72-page law known as the, “Helping Families Save Their Homes Act of 2009.”
 
One part of this new federal law causes an important change in Texas local law on foreclosures and the rights of a tenant after a foreclosure.
 
Effective immediately (i.e. for foreclosures occurring after May 20, 2009) and relating to certain “federally related mortgage loans” and any loans on dwelling or residential real property, the purchaser at a foreclosure sale is required to provide a bona fide tenant at least 90 days’ notice before the tenant has to vacate. The new law is national in scope so tenants, no matter what state they live in, now have time to adjust their lives.
 
As a general rule, the new law requires any immediate successor-in-interest in property foreclosed upon to assume the property subject to the rights of a bona fide tenant under a bona fide lease until the end of the remaining term of the lease. There are exceptions to this general rule — such as the lease must be in existence as of the date of the notice of foreclosure, for example.
 
If a tenant is in possession of the property foreclosed upon without a lease or with a lease that is “terminable at will,” the purchaser at foreclosure merely has to give the occupant 90 days’ notice to vacate.
 
In all of the above instances, the foreclosing party can still evict a tenant who is not paying rent or is otherwise in default under his lease.
 
In Texas, if a mortgage was executed before the lease was executed, or if the lease was executed before the mortgage, and the lease contained a subordination provision making the lease subordinate and the mortgage superior in right, Texas law recognized that, after a foreclosure, such a tenant under such a lease would be a “tenant at will.”
 
Even with the new federal legislation, it would arguably appear that, under such circumstances, and based on the tenant being a tenant at will, a successful bidder at a Texas foreclosure would not have to honor the lease for the duration of its remaining term, but could instead terminate it with a 90-day notice to vacate.
 
Note that even under Texas law before this new federal legislation, if a home was purchased at a foreclosure sale under a lien superior to the tenant’s lease and the tenant paid rent on time and is not otherwise in default under the tenant’s lease after foreclosure, the purchaser was required to give the tenant at least 30 days written notice to vacate if the purchaser chose not to continue the lease. So, in this instance, the new federal law imposes a longer notice period in Texas.
 
Following a foreclosure, the new law says that if the tenant has no lease, he has to vacate within 90 days after receipt of a notice to vacate (which notice might be able to be given even before the foreclosure), or if there is a lease, a bona fide tenant can stay in possession for the remainder of the term pursuant to such tenant’s lease. But if the lease is “terminable at will” under state law, or if a purchaser from the successful bidder at foreclosure will occupy the property as his primary residence, the tenant must nevertheless vacate — but such tenant is entitled to receive a 90-day notice to vacate.
 
There is a provision in the statute that says nothing in the statute shall affect the requirements for termination of any federal or state-subsidized tenancy or of any state or local law that provides longer time periods or other additional protections for tenants.
 
The new foreclosure provisions only affect tenant-occupied properties that are being foreclosed upon and has no effect on mortgagor-occupied properties.
 
The new legislation represents a big change to the law in Texas. Where we previously had scattered state laws, now we have one national statute. The law sunsets on December 31, 2012.

Guest Writer – Christopher T. Nixon, Winstead PC

In part 1I covered the relationship between the loan servicer and the B-note holder, and the role of the B-note holder in making decisions about the loan.  This posting addresses a situation where that the B-note holder no longer can participate in decisions, and the replacement of the special servicer.

Is there any circumstance in which the B-note holder no longer has consultation and consent rights?
Yes, in the event of a Control Appraisal Event, the B-note holder typically loses its consultation and consent rights under the co-lender agreement.  A Control Appraisal Event is typically defined as a reduction in the principal balance of the B-note by appraisal deductions or realized losses to below a certain level (typically 25%; although we have seen percentage levels as high as 50%) of its original principal balance.  In this event, the consultation and consent rights are transferred to the A-note holder under a typical co-lender agreement.

Under the co-lender agreement, may the B-note holder replace the master servicer?
Absent a breach by the master servicer under the co-lender agreement, the B-note holder has no right to replace the master servicer.

Under the co-lender agreement, may the B-note holder replace the special servicer?
The B-note holder may replace the special servicer without cause at any time, subject to certain conditions being met with respect to the replacement special servicer.  However, it is important to note that the B-note holder is responsible for certain costs and expenses incurred in connection with such replacement, and such replacement may cause significant delays and disruption in the servicing of the A/B loan.  Under most co-lender agreements, the B-note holder loses the right to replace the special servicer upon the occurrence of a Control Appraisal Event.

Conclusion:
Because the terms and conditions of co-lender agreements are typically heavily negotiated between the A-note holder and the B-note holder, it is essential for a CMBS loan servicer to review and understand the terms and conditions of the co-lender agreement for the particular A/B loan being serviced.  A failure by the loan servicer to comply with the terms and conditions of the co-lender agreement for the particular A/B loan being serviced may expose the loan servicer to liability to the B-note holder in connection with the servicing of the A/B loan.

If you have any questions, commentary or stories to share, please post a comment
 

Guest Writer – Christopher T. Nixon, Winstead PC

CMBS loan servicers have duties to a myriad of parties in the servicing of a CMBS loan, including the REMIC trust, the bondholders, and the borrower.  With respect to an A/B loan, a CMBS loan servicer also has certain duties to the B-note holder pursuant to the terms of the co-lender agreement between the A-note holder and the B-note holder.  Because co-lender agreements are typically heavily negotiated during the origination of an A/B loan, CMBS loan servicers should carefully review the co-lender agreement for the particular A/B loan being serviced to fully understand its duties thereunder to the B-note holder in connection with servicing the A/B loan.

What is the relationship between the CMBS servicer and the B-note holder?
A CMBS loan servicer’s relationship with the B-note holder derives from the co-lender agreement between the A-note holder and the B-note holder. The co-lender agreement governs the relationship, and sets forth the duties, liabilities and rights of the A-note holder and the B-note holder with respect to the A/B loan.  A typical co-lender agreement provides that the A-note holder will service the A/B loan on behalf of both the A-note holder and the B-note holder.  When the A-note holder places the A/B loan into a CMBS loan pool pursuant to a typical pooling and servicing agreement, the CMBS loan servicer assumes the A-note holder’s obligation to service the A/B loan.

What rights does the co-lender agreement provide to the B-note holder in connection with the servicing of the A/B loan?
The co-lender agreement provides to the B-note holder consultation and consent rights with respect to certain major servicing decisions related to the A/B loan.  The B-note holder’s consultation right requires the loan servicer to obtain and consider the advice and suggestions of the B-note holder before taking certain actions related to the A/B loan.  The B-note holder’s consent right requires the loan servicer to obtain the consent of the B-note holder before taking certain actions related to the A/B loan.

What major decisions require the servicer to consult with the B-note holder?
The provision of the co-lender agreement defining the B-note holder’s consultation rights is typically heavily negotiated between the A-note holder and the B-note holder.  Thus, a loan servicer should pay particular attention to this provision of the co-lender agreement to fully understand the scope of the B-note holder’s consultation rights.  Some loan servicing decisions typically requiring B-note holder consultation are:

  • Proposals to workout the A/B loan upon a borrower default
  • Releases of A/B loan escrow funds
  • Lease renewals requiring lender consent
  • Mortgaged property alterations requiring lender consent

What major decisions require the servicer to obtain the consent of the B-note holder?
Like the provision defining the B-note holder’s consultation rights, the provision of the co-lender agreement defining the B-note holder’s consent rights is typically heavily negotiated between the A-note holder and the B-note holder.  A loan servicer should carefully review this provision of the co-lender agreement given that there is no standard list of major decisions to which the B-note holder is entitled to consent.  Some loan servicing decisions typically requiring B-note holder consent are:

  • Foreclosure of the mortgaged property
  • Acceleration of the A/B loan upon a borrower default
  • Releases of collateral from the A/B loan
  • Assumptions of the A/B loan by a third party borrower
  • Extensions of the scheduled amortization payments or final maturity date of the A/B loan

If you have any questions, commentary or stories to share, please post a comment.

 

Guest Writer: Brenda Brown, Winstead PC

More from ourTough Times FAQs series:

FAQ #4 –  Do I need to reduce the commitment amount after sending a Notice of Default?

  • Typically, no – once the loan is declared to be in default, or once the maturity of the loan is accelerated, the lender has no on-going funding obligation – but confirm this in the documents.
  • The lender typically is not required to fund current loan allocations or grant new loan allocations.
  • Communicate clearly in writing to the Borrower that the lender has no further obligation to the fund and negotiations, inspections, administrations and even making future draws during a draw period (whether under a construction loan or a partial disbursed loan) do not amount to waivers of pre-existing defaults or can be considered obligations for future fundings.

FAQ #5 –  After a Default Notice, should I send statements showing Regular Monthly Interest or statements showing interest at the Default Rate?

  • Statements to the borrower should reflect the Default Rate of interest (rather than the prior regular interest rate), late fees, and any other fees due the lender (such as legal fees) – all of which usually do not appear in the "standard" statement.
  • So, typically it is best to STOP sending the regular monthly statements.

FAQ #6 –  What else should I put in writing?

  • Agreements Regarding Interim or Protective Advances
  • Forbearance Agreement

All of these first six questions underscore the fact that the status of the property and the loan must be looked at with current and fresh eyes so that the opportunities for solutions are enhanced, and the risks of encountering questions of waiver are avoided.

To read the entire Tough Times FAQ series, please click here.

Please post comments or questions below.