In prior posts I have discussed what bit coin is, in terms of describing the technical aspects of the thing.  Bit coin is only one of numerous non-fiat currencies which currently exist, and seems to be the most common.  In this post I will not be focusing on the technical nature of non-fiat currencies, but rather consider what the character of a non-fiat currency is legally.  Stated more directly, is a bit coin legally a currency, security, instrument or something else.

The trick is to realize that there is no coin

Bear with me, because this is a long post.

To state the obvious, bit coin is not a currency in the sense it was issued by a sovereign.  However, non-fiat currency is not unheard of in the world.  You could argue with a straight face that the game tokens at Chucky Cheese are a form of non-fiat currency.  They can be exchanged for value (say a video game or perhaps a trinket) and there is a market to exchange them with others – if you happen to be 10 years old.  But to say that a game token is legally the same thing as a bit coin over simplifies that notion that something which represents value and can be exchanged in necessarily a currency.

In reality, anything can retain value and be exchanged for something else of value.  This is the basis for early barter system economies, such as the Mesopotamian culture.  However, currency has only one imperative, which is to be valuable.  Unlike bartering wheat for timber, a currency cannot be used to make bread or build a house.  Its only purpose is to retain value.

In the United States, this is enough for the criminal justice system to have determined that bit coin is money for the purpose of the various criminal statutes concerning money laundering, purchase of illegal items, and transferring money to conspirators.

On the civil side of the law, the Courts have yet to settle on a definition of its character.  The notion of a bit coin as a currency is, in my opinion, driven by the name itself.  If it was called bit-value, bit-stock, or bit-note the immediate perception might be different.

In fact, some forward thinking companies issue Initial Coin Offerings (an “ICO”) which is similar to an IPO, but instead of shares in the company in the traditional sense, the company will issue “coins” to investors which function more as token on ownership rather than as a fungible currency.  In using an ICO, the coins are tracked with the blockchain technology allowing for the quick and anonymous transfer of the coins instantaneously to anyone anywhere.

These ICO coins are certainly not currency because they act as ownership stakes in a company and, while they hold value and can be exchanges for value, the ICO coin is not fungible with another company’s ICO coin.

By the same token (pun intended), is a bit coin itself fungible?  While one bit coin will equal another bit coin on the exchanges, each bit coin is supremely unique because of its hashing and ownership on the ledger.

Perhaps the hashing is analogous to a dollar bills serial number, but the ownership function on the ledger has no analogous characteristic with currency.   Without the ledger there could not be a decentralized ability to transfer a bit coin from one person to another, and without that ability anything of “value” is really worthless.  It is therefore, I believe, a central element of bit coin that it requires a ledger, which likes the bit coin to the owner’s wallet.

Equally import is that fiat-currencies are backed by the sovereign while bit coin is backed by nothing but the common belief that it has value.

Both of these issues, I think, sets bit coin apart from a currency, which requires no ledger or mechanism to keep track of ownership and (for fiat currency) requires sovereign backing.  While the true owner of the bit coin may remain anonymous, the owner must like his/her wallet and public key to each of his/her bit coin.

What then, if not currency?

As mentioned above, some types of block chained “coins” are much closer to a security than a typical bit coin.  In fact, the SEC has recently ruled that these token type coins from an ICO are regulated.  However, the bit coin (and similar) are not shares of a going concern which will be run primarily by others from which you hope to capture a gain from such operations.

Rather, its value with only the purpose of being value.

If I may, I think that a bit coin is most like a letter of credit payable in a foreign currency.  The obligation of this “bit-letter of credit” would be the bit coin market place.  When a bit coin owner wants to cash out, he/she attempts to convert the bit coin into some sovereign currency, say US Dollars, by selling / assigning that “bit-letter of credit” to a person willing to accept the rights to the “bit-letter of credit”.

The letter of credit analogy is supported by the fact that actual letters of credit can be traded in exchange for value.  And, if you had a letter of credit payable in Yen, but needed US Dollars, you would be subject to the currency fluctuations among the two.

In fact, the Knights Templar, who pioneered the original letters of credit, allegedly used a cipher on the documents to ensure their validity and kept records on their ledgers.  Additionally, these letters of credit were traded as if currency because of the belief in the credit worthiness of the Knights Templar – who were not a sovereign and were specifically not subject to any sovereign by papal bull.

We are still $20 short. Who did not chip in for the tab.

Indeed, the a modern letter of credit can be assigned, and to do so requires notice to the Bank which is recorded on the bank’s ledger.  Additionally, a letter of credit is not backed by the sovereign.

For this reason, I think bit coins are most analogous to a letter of credit in terms of its legal character.

Please feel free to disagree or comment below.  This in an emerging issue and input is appreciated.

We are well out of the .com bubble, but tech companies still form and fail.  For the lenders brave enough to lend to the tech companies developing software, the collateral is often the source code which is the nuts and bolts of an application or “app”.  While the source code is actually a written text written in some development code, it exists in the abstract and it thus an intangible in that sense.  However, unlike most collateral intangibles, this type often requires the original developer to make the source code worth anything more than a line item on a security agreement.

leyser-soze

Consider for a moment the case of Aereo, Inc., which filed bankruptcy is late 2014.  It was a company which developed a web based app which allowed users to watch TV on mobile devices or over an internet connection at home.  Basically, Aereo, Inc. received the cable/TV signal from the normal sources, e.g., cable and antenna, and then converted the signal to be routed through the internet to the subscribers.

In the course of developing this technology, Aereo raised about $250 million in equity from inventors.  So, presumably someone believed in the product.  (Admittedly, there was no secured debt).  Additionally, Aereo listed its assets as worth $20 million when it filed bankruptcy in November 2014.

So why did Aereo end up in bankruptcy? Basically all the old guard TV networks sued Aereo for providing their content to Aereo subscribers.  Much could be written about the underlying litigation in which Aereo essentially claimed it did nothing wrong by re-broadcasting the network’s programming verbatim.  However, this post is to discuss the value of the underlying source code of the app.

Putting the lawsuit aside, the technology was worth $250 million to someone.  However, in a recent decision by the bankruptcy court hearing the case the bankruptcy court approved a sale of the source code for $125,000.00.

Obviously, the sale price of what was essentially the heart and soul of Aereo seems low when considering the equity investment.  One of the main reasons is the lawsuit by the networks.  However, I would also propose that the ultimate sale price was also driven by the fact that the value of the source code is also driven by the individual developer’s involvement.  If the programmers leave, then the value drops a precipitously. Why would that be?

The simple answer is that source code is not a straight forward fait accompli, but rather it is usually a patchwork of fixes, updates, modifications and short term solutions.  It’s basically as if you are selling the rights to the sewer system of Rome – its complex, it’s been modified as the generations have progressed, and the original guy who designed it is gone.

So, if you are the secured creditor, how do you monetize the source code collateral to recover on the debt?  The short answer is that you likely won’t.  Most lenders discount the various types of collateral based on their collectability after default.  In the case of source code, the recent Aereo sale should be of some indication of the value of source code without the developers.  Understanding that the Aereo lawsuits played an impact in the sale, a lender should not ignore the total loss in value because the source code did not come with its original developers.

The take home message is this – the true value of source code is often with the developers and not with the intangible code.

In re Aereo, Inc. case no. 14-13200-shl, pending in the United States Bankruptcy Court for the Southern District of New York, Manhattan Division.

A good piece of advice I once received when I was younger was: “Don’t write an email you wouldn’t want copied to the cover of the New York Times”.  In the past, it would take days of depositions in a lawsuit to get a handle on what someone said or thought to prove a legal point.  Now, emails (combined with searching techniques) can provide a first person narrative usually by people who have no inclination their email conversations will be exhibits in an unexpected and un-filed lawsuit.  Sometimes, and entire lawsuit comes down to one email.  That was the case in a recent 5th Circuit opinion.

 

Credit: Unknown
Credit: Unknown

The Lawsuit

The lawsuit itself is fairly interesting if you follow the litigation surrounding the WaMu collapse and takeover by JPMorgan Chase Bank.  The lawsuit concerns a developer who was contracted by WaMu (pre-takeover) to acquire land, build a WaMu location and then rent it to WaMu for 20 years.  Prior to acquiring the land but while the developer was under contract, WaMu was taken over by the FDIC.

There has been significant litigation concerning the WaMu leases since the takeover and assignment to Chase which I don’t intend on getting into here.  In fact, the lawsuit is worthy of its own blog post for those of you interested in this “obscure but heavily litigated” matter (as the 5th Circuit put it).  Among one of the more interesting holdings is that the FDIC can be held liable for negligent misrepresentation because “it is reasonable to rely [on the statement] when the federal agency which oversees the banking industry…tells you that your banking lease may be lawfully rejected”.

The Email

In any event, the purpose of this post is to illustrate that a lawsuit and its appeal can boil down to one single email.

The email in question was sent by an executive of the developer to Chase requesting that the lease be rejected quickly so that the developer could cut its losses and be done with it.  The developer, having relied on the FDIC’s representation that the lease could be rejected, believed that rejection was the only outcome.

As it turns out, the FDIC was wrong.  In fact, the agreement between WaMu and the developer was assumed by Chase. When the developer figured it out, he sued Chase for damages for breach of contract (as opposed to being stuck with nothing when the FDIC repudiates a lease).

In the 5th Circuit opinion, the Court of Appeals quotes the email directly five times in support of its holding that there was not mutual termination, which was one of the two issues on appeal.  (The developer won the appeal).  There is no other evidence directly cited by the 5th Circuit to support its holding.

In short, the entire case has now been determined based primarily on one email an executive sent out in the ordinary course of his day.  There is no legalese in the cited portions of the email.  In fact, the executive didn’t use the proper legal terms for what he was requesting from Chase and the FDIC.   I haven’t spoken with the executive, but I think it’s a safe bet that he did not write the email thinking the 5th circuit’s opinion would one day turn on a few quick sentences.

The take home lesson here is likely already known by everyone reading this.  You have no doubt heard this over and over again.  Don’t write an email you would not want to be public.  This post is to illustrate that even the most mundane of emails may win or lose a lawsuit you have no inclination will be filed.   In short, you never know when your last email will be the one pasted into a Federal Appeals Court opinion.

Central Southwest Texas Development, LLC v. JPMorgan Bank, NA, et al., case no. 12-51083, pending in the United States Appeals Court for the Fifth Circuit.  Opinion Entered March 2, 2015.

Bitcoin is one of several crypto-currencies which are exchanged generally outside of sovereign control and all electronically.  In early 2014, a Bitcoin exchange named Mt. Gox filed bankruptcy in Tokyo and subsequently sought additional protection in the US by filing a chapter 15 bankruptcy petition.  Just recently, the bankruptcy trustee in Tokyo has announced he will begin to pay back account holders in Bitcoin using a US based bitcoin exchange.

Dogecoin is another crypto-currency and is my personal favorite because of the mascot.
Dogecoin is another crypto-currency and is my personal favorite because of the mascot.

First, some background.  Skip this is you are familiar with Bitcoin

Bitcoin is not a “coin” at all in the traditional sense.  Rather, one bitcoin is essentially a complex mathematical code which is recorded on a public ledger as one bitcoin.  That bitcoin has a two security keys which permit the bitcoin to be owned by (and transferred) by a person.

  1. The public key allows the bitcoin to be utilized by the bitcoin exchanges.
  2. The private key is what is used by the bitcoin holder to transfer the bitcoin value to the recipient.

So, in a sense, your bitcoin “wallet” will not hold any coins (or currency), but rather your bitcoin private keys.  When you spend bitcoins from your wallet, you are using your private key to tell the online public ledger to reflect a transfer of bitcoin to a new owner.  That new owner gets a new private key and the bitcoin transaction is complete.

The mathematics and cryptography are significantly more complicated than that.  But, from a consumer standpoint, this is essentially what the transaction looks like.

Unlike sovereign issued (and backed) currency, Bitcoin has no government backing and very little government regulation.

  • There is no Federal Reserve or similar body for bitcoin.
  • There is no government producing bitcoin.
  • Regulations (or lack of regulation) vary significantly globally.
  • All bitcoins are produced by “mining” which is basically utilizing a very complex mathematical proof to create a one-of-a-kind number, which is the bitcoin.

The amount of computing power to mine bitcoins is not insignificant because of the complexity.  Thus, Bitcoin exchanges, such as Mt. Gox will commit resources to do so and will offer exchange services, payment services, wallets and other ancillary quasi-banking services to consumer account holders.

Second, what is going on in the Mt. Gox Case.

When Mt. Gox filed bankruptcy, one of the stated reasons for the bankruptcy was that it had lost 850,000 bitcoins.  At the time, the value of these was about $500,000.00 (USD).

After the bankruptcy was filed, the bankruptcy trustee found about 200,000 of the lost bitcoins.  However, much of the remaining unaccounted bitcoins belonged to account holders at Mt. Gox.  Although, Mt. Gox did hold bitcoin on its own account.  The loss was attributed to hackers and technical issues with the exchange site itself.

After proceeding with the bankruptcy case, the bankruptcy trustee had suggested that the Mr. Gox bitcoins be converted to USD and then used to repay the account holders at Mt. Gox who had lost their bitcoins.  In an interesting turn of events, the creditors demanded to be repaid in bitcoin.  The reasons probably vary, but it is likely the creditors did not want the already volatile bitcoin market to tank when the bitcoins were exchanged for cash.

In order to go about that, the bankruptcy trustee has enlisted the help of another bitcoin exchange named Kraken, which is based in the US.

Finally, things to consider

From an overview perspective; the first thing to consider is that Bitcoin specifically, and perhaps the other crypto-currencies, are not going away despite high profile failures such as Mt. Gox.  Some domestic retailers are now accepting Bitcoin for day-to-day exchanges as they would cash.  Notwithstanding, the market remains very volatile.

At a more narrow level, a bankruptcy court (even in Japan) that pays the creditors in non-sovereign backed crypto-currency should raise a few eyebrows. In this case, it appears that the payment in bitcoin was at the request of the creditors.  However, it is not clear what would happen if account holders had demanded USD (or yen), but received bitcoin while non-account holder creditors were paid from liquidating traditional hard assets in cash.

Obviously there are significant other issues to consider which are not covered in this humble blog post.  Regardless, these issues and others are on the horizon.

In meetings with senior executives and their in-house counsel, I hear this consistent cry: due to ever-increasing regulations, costs associated with compliance are soaring at commercial banks and at financial institutions that own banks (such as life insurance companies).  As a result, “regulatory cost collaboration” is becoming a key strategy for financial institutions with their key vendors.  It is a strategy that overlooks a very familiar and expense vendor: lawyers.

 

Puzzle missing legal

This omission will not last for long.

The impact of compliance costs is well documented (look at this report by Thomson Reuters; and this survey of small banks by Hester Peirce, Ian Robinson and Thomas Stratmann at the Mercatus Center [George Mason University]).

It is a story that I hear 100% of the time from senior executives.  Here are two examples:

  • Regional Bank (top 70 in asset size): it spent over $35million last year in regulatory compliance costs, such as rent, new employees, software and hardware
  • National Bank  (top 20 in asset size): the compliance group has grown from 100 employees to over 700 employees in the last several years

In response to the growth in regulations, financial institutions are striving to streamline processes, both internally and with their vendors.

In the context of third-party vendors, I call this “regulatory cost collaboration.”

Financial institutions with innovative leadership use “regulatory cost collaboration” like this:

  • the financial institution associates specific information, furnished by a specific vendor, with information needed under (or impacted by) regulations or compliance rules; and then
  • the scope of work for the vendor expressly requires performance of the vendor’s service or product in a form or format that minimizes the associated regulatory costs to be incurred by the financial institution

Vendors who implement this approach (or better yet, for a vendor who independently identifies a way to do this) are recognized as a “value-add vender” by the financial institution.

Of course, regulatory cost collaboration does not include the lawyers.

No one is surprised.

Collaboration from Lawyers: The Elephant in the Room
Collaboration from Lawyers:
The Elephant in the Room

 

Lawyers are one of the few “industries” where little has changed since I started in 1981.  “What” lawyers do and the “product” that lawyers deliver remains astonishingly unchanged since 1981.  Sure, today we have computers (and no secretaries), email (and no life) and instant access to everything (the internet is magical); and instead of paper closing binders, we e-mail the closing documents in a PDF format.

None of these changes meets my definition of the phrase “regulatory cost collaboration.”   Indeed, the changes remain lawyer-centric – even the PDF.

Unless the financial institution has specific rules governing the use of PDFs, the use of PDFs actually might be “anti-collaborative” in that it creates MORE work for the financial institution –

  • the PDF still must be “searched” in order to locate specific terms and provisions (since lawyers will “drop” a key provision in any location and in any document);
  • the PDF might not be in a searchable format;
  • even if searchable, the provision might be difficult to locate because the reader may fail to use the “correct” search term or phrases;
  • the identifier or name of the PDF itself might be unrecognizable (since it was generated by the law firm document management system); thus forcing the recipient to “open” it and then rename it

Of course, Richard Susskind and others continue to predict some sort of disruptive change, where the legal industry will deliver the product (be it paper or expensive advice) in a manner that assists Companies in conducting business.  There were numerous conferences and meetings on the topic in the past year (Harvard Law; Suffolk University Law [Kennedy-Mighell podcast summary]); and various legal tech thought-leaders closely monitor the topic (the ABA Law Practice Magazine, July/August 2014 issue is wonderful; and the ABA Legal Rebels is interesting).

Of course, nothing addresses the practical, real time (right now) need for regulatory cost collaboration by lawyers.

Yet.  Stay tuned.

If you see this differently or have something to add, please comment below.

I’m back. Back to blogging. Home here at L360.

The Return of the Prodigal Son Painting by Bartholome Esteban Murillo National Gallery of Art (Washington, D.C.)
The Return of the Prodigal Son
Painting by Bartholome Esteban Murillo
National Gallery of Art (Washington, D.C.)

Several years ago, Kevin O’Keefe or Tom Mighell (one of them) commented that the majority of legal blogs last less than a year. Clearly, I’m one of them on quiting. It just took me longer to quit.

I stopped regularly blogging after 4 years (from September, 2008 until October 2012), and after over 420 blog entries. Always focusing on commercial finance, I started blogging on distressed debt topics (under the “ToughTimesForLenders” blog name).  As the economy (kind of) recovered, the blog became “Lenders360blog” in order to cover “positive” finance topics. Finally, technology was added since it is an operational pillar for all commercial lenders.

This threefold transformation reflected my personal journey. After all, blogging is personal. (Blogging tip #1: make your blog personal. Ditch the academic mumbo-dumbo. Mix meaningful content with your personality.)

THE QUESTION: Why come back to blogging?

I’m going to pretend you noticed that I quit, or even care that I’m back. (In another posting, I’ll cover the sibling, and for some the more interesting, question: “why did you stop blogging?”) (Blogging tip #2: leave a teaser early . . . .)

QUICK ANSWER: Blogging been berry, berry good to me. (Baseball, not so good for my Texas Rangers – good or bad, I slip them into this blog.)

Simply stated, blogging jump-started my current professional focus. (Blogging tip #3: . . . and tease often.)

NOT TO BLOG:

This is NOT a blogger
This is NOT a blogger

At first glance (and maybe every glance), blogging appears to be just another selfish, fruitless mound of babbling by lawyers striving, in a quick (and for me, quirky) 90 minute breather, to escape the following (mark your favorite ones – you’re lying if you only mark one):

◊  Keyboard Pounding

◊  Email Grenades (they lob it into my email inbox and run)

◊  Phone call wrestling

◊  Compensation Complaining

◊  Hourly Rate Creeping

◊  Legal Fee Complaining

◊  34/7  workstyle (not a typo)

◊  Teach oung Lawyers; Then they leave; Repeat

◊  What I’d give to not share a Secretary with 3 other lawyers

◊  Billing games (firm policy v. client reality)

◊  Wine’n Dine; Work & Bill; Client Whine; Then Repeat

◊  What I’d give to afford a Paralegal

(Blogging tip #4:  audience participation and engagement; they ARE in the room with you right now.)

Ultimately, however, the evaluation of a blogs is reflected in the frequency of the blog. Infrequent blogging is an “admission against interest” by the blogger. Why should anyone notice or even care, when the blogger doesn’t care enough to regularly blog?

This point is painted best in a story told on The Ticket years ago.  (Blogging tip #5: make it a story; even adults cuddle up to stories.)  The Father-Coach of a YMCA football team (tackle football, of course) was ranting on his 10 year old son for sloppy play. The son looked up (way, way up) to Father-Coach and said:

“Dad, I cain’t hear what yu saying, cuz yu acting so loud (sic).

(So, who is sick in this story?) (Repeat Blogging tip #5: make it a story; even adults cuddle up to stories)

Blogging: love it or leave. Don’t be half-hearted at it.

Your clients recognize a half-hearted effort. Do you ever want to be half-way on anything touching your reputation and your means of income?

TO BLOG

“It’s not just what you know — it’s who knows what you know.” Cordell Parvin
“It’s not just what you know — it’s who knows what you know.” Cordell Parvin

Here are some of the reasons “why” I enjoy and benefit from blogging (no priority order):

  • People: They Want Information

People working at financial services companies want information.  They want it “when” they need it; they need information on demand.  So, make basic information available to them. Be helpful; and in return, they will seek you for help. Over the years, I jump start this by handing out or sending lists of popular blog entries.

  •  People: They Know Me Before I Know Them

Many loan officers know me before I even meet them.  Blogging accelerates relationships – it does NOT replace them.  But, it sure is nice to meet a stranger to me who knows me.

  • People: Earn a Reputation and Meet the Right People

With hundreds of blog posts on a wide range on good lending, bad lending and technology topics, my expertise is “out there” for all to read.  The blog fed my reputation through (i) conversations with reporters, (ii) publishing pieces in industry magazines (including the technology column in the bi-monthly ABA RPTE Section’s eReport), (iii) speaking engagements at law schools, State Bar seminars, industry organizations and financial services companies, and (iv) memberships in important organizations, such the American College of Mortgage Attorneys and the remarkable Association of Life Insurance Counsel (where I co-chair the Communications Committee with the gifted Gretchen Cepek of Allianz Life Insurance Company of North America).

  • Teaching & Constant Learning

I use the blog as a resource in presentations with clients, and within the law firm as a tool to mentor younger lawyers.  Importantly, it keeps me engaged with industry trends and challenges, and positions me with friends and clients as a constant source for new and valuable information.

  • Change: the Conversation

Bloggging changes conversations.  For example, I use listings of the most popular blog entries as conversation starters, giving others the opportunity to share their experiences or perspectives with me.  They tell me what is important to them.

  • Change: It is Personal

Blogging changed me.  I progressed from telling my story, to hearing the client’s needs and then to understanding both the client’s business and the value and uses (current and potential) of our legal work product.  Importantly, I learned that my legal work product was the beginning, not the end.

  • Change: Our Friend

Change.  We often complain of change. As I return to blogging, I return appreciative of the friends who connected with me because of the little blog called Lenders360blog (and it’s predecessor, ToughTimesForLenders). And also I return with many thanks to the attorneys and talented friends at Winstead PC who shared ideas with me; and with special thanks to the gifted Allen Fuqua and Rachel Guy.

  • Change: My New Venture

However, I’m back in a very different role and with a radical focus.  Blogging, listening and learning pointed me to a new venture.  I now manage legal workflow and create tools that lift legal content out of the traditional, manual legal process into a self-service process – a transformed process with rich collaboration, communication and information gathering.  Companies save money.  Companies harvest new value.  Blogging contributed to the insight behind my new venture.

(Blogging tip #6: keep blogs short (400-500 words).  This one is over 1,100 words. Wow. Horrible.)

Please add your thoughts or experiences about blogging by commenting below.

Over the last few weeks, I’ve commented on the new version of the OCC’s Commercial Real Estate Lending Handbook (I give it a gentlemen’s C); and I listed a few legal topics that deserve some guidance from the OCC. “Guidance” could even merely be a list of important topics (ending with a warning that the list is NOT an all-inclusive list). I expect legal issues to be identified and put on the “check the box” list by the OCC  – with the banks expect to check the box. The "Blank" List   Unfortunately, instead of leading the class by at least listing legal issues associated with risks in commercial real estate lending, the OCC implicitly affirms those banks that under value and under utilize legal counsel.  (Let’s resist the temptation to comment on “why” this takes place.) Fortunately, some banks are very good at identifying and monitoring legal issues. Several of them do this by a simple two step process:

  1. List key legal provisions in loan documents
  2. Instruct legal counsel to report, in writing AND PRIOR to closing, if these provisions are altered

Here is a sample list (it is NOT an exhaustive or all-inclusive list):  legal counsel must report (in writing) any changes, from the bank’s standard form, in loan document provisions that cover the following –

  • grace period, late charges and default interest
  • prepayment, lockout and yield maintenance
  • transfer restrictions (due on sale) provisions
  • subordinate financing (due on encumbrance provisions)
  • material deviations in, or deletions of, the remedies provisions (unless required under the governing law of the state in which the collateral is located)
  • recourse provisions
  • environmental provisions
  • taxes and insurance premiums escrows
  • any reserves or other escrows
  • granting clauses or form description of collateral contained in such granting clauses (unless required under the governing law of the state in which the collateral is located)
  • casualty or condemnation provisions
  • addition of a provision allowing a release of collateral (unless expressly provided for in the credit approval)
  • lender approval process relating to amendments, renewals or termination of major leases (or new leases)
  • cooperation provisions, including use of any future technology required by lender (such as on-line reporting and delivery of required materials and information)
  • WARNING: __________ [this list is not “all-inclusive” and you should revise it as needed]

My suggestion is that every bank (or other lender) take this approach.  Surely at some point, the OCC will view this simple approach as a key to safe and sound banking practices. Please share you comments below.                

The July 2013 issue of the “Mortgage Banking” magazine focuses on the Consumer Financial Protection Bureau (or “CFPB”).  The coverline  is this: “CFPB – A Powerful New Overseer.” Why my interest in this issue and coverline? In the past, commercial lenders (and their lawyers) blissfully ignored anything involving consumer lending.  We quickly distanced ourselves from any meeting involving discussions of consumer loan documentation, compliance audits, data collection (and access), and the byzantine consumer lending regulations. Residential lending was . . . but not really . . . but really . . . the “other side” of the lending family. This is changing. The residential obsession (on rules, lending policies, data collection and compliance inquiries) will radically change commercial lending.  It is more than a shadow on the wall. In every industry meeting attended by me in the past year, anticipating the impact of the CFPB upon commercial lending is a top-tier topic.  Although not a formal agenda item, the discussions are not “if” this will occur – the discussions are “when?” Leaders (on the commercial lending side) are anticipating the need to adopt some of, if not mirror, the CFPB requirements.  This will require new lending rules and lending policies, with requirements for expansive loan level data, rich data  mining and new compliance policies and procedures – with the ability to alter procedures and generate “new” reports upon demand (or at least quickly). Here are some of the drivers behind extending CFPB principals to commercial lending:

  • Other governmental authorities and industry regulators will perceive value in the CFPB approach (“since they’re digging into this on the consumer side, why aren’t we doing the same on the commercial side?”)
  • Investors will demand similar treatment (“why can’t the commercial side have the same focus on policies, rules, loan level transparency, and all that stuff – which we’re paying for”)
  • Supporting technology tools already are available (“what’s so hard about modifying these new tech tools for commercial investments?”)

No one questions whether the shadow is real. The focus is “when” will the shadow push the residential table into the same room as the commercial table. (Or maybe it’ll be the other way around.) No more distancing ourselves from Cousin Eddy – we’re going to eat a lot of meals together. Please post your comments below.  

Most commercial real estate loan documents give meaning to the phrase “real estate is old as dirt.”  Why? Because just as dirt doesn’t change, commercial mortgage loan documents largely ignore the impact of technology on the physical attributes, use and operations of the property.   Take another look at your mortgage loan forms with these questions in mind, and ask yourself if the forms are “as old as dirt.” My bet is that you won’t like the answers to the question.  (Yes, it’s even embarrassing.) Do your mortgage loan documents cover:

  • third party (or “cloud”) documents storage?
  • require lender consent to any use of electronic (eSign) documents with tenants and vendors?
  • address use or surrender of internet or social media tools (such as websites, Facebook, etc.) upon a loan default?
  • turnover of hardware and data used in the operation of the property?
  • due diligence (check list items) on technology contracts used in the operations, marketing or leasing of the property?
  • continuation of these contracts following foreclosure (or deed in lieu)?
  • what kind of new defaults and remedies are needed?
  • annual listing of technology contracts and third-party services?
  • using e-mail as a permitted method of giving “notice?”
  • require a borrower to cooperate if and when lender implements new technology tools (such as online reporting)?

Of course, this is not an exhaustive list.  My list seems to grow every few weeks. I recently spoke on this topic at the Texas Bar Advanced Real Estate Drafting Course, and later this summer, I plan to do a webinar series on this topic. If you have questions to “add,” please comment on them below.

As I look around the business landscape, much of the focus of company growth seems to center on leveraging the internet for greater connections (with their trading partners) and for more information (“big data”). It’s a party. My perspective is that lawyers soon will be invited to participate in the party. But right now – despite all of the hype of lawyers as being “important business partner and advisers” –  lawyers are sitting out the dance. Left behind at the curb. Think about all of the investment and energy on this topic, yet so little of it is directed at using technology (what seems to now be a fundamental tool) to achieve greater connection and more information from company lawyers (whether in-house counsel or outside law firms). In the last month, I”ve talked with two significant companies about ways to include lawyers in this fundamental topic. Here is a screen shot of my “mindmap” overview. Questions for you:

  • are you seeing this, too?
  • where is this going?

My perspective is that lawyers soon will be joining the party, and will no longer be left behind at the curb. Please give share your comments below.