29 posts categorized "Secured Lending"

Is UCC Article 9 the Achilles Heel of Bitcoin?

posted by Bob Lawless

Bitcoin imageLast week, Professor Lynn LoPucki called me up and asked a good question. Why hasn’t Bitcoin fallen apart because of the operation of Article 9 of the Uniform Commercial Code (UCC)? It is a really good question. With Lynn’s permission, I am writing up a blog post about our conversation, but it was Lynn who first identified the issue.

As many readers will know, all 50 states have enacted the UCC with only minor variations. Article 9 governs security interests in personal property – that is, movable and intangible property as opposed to land and buildings. The bank that gave you a car loan has an Article 9 security interest in the automobile serving as collateral for the loan, and the bank providing operating capital for your corner bakery similarly may have an Article 9 security interest in the inventory, equipment, and accounts at the store. Article 9 is one of those laws that only specialists tend to know, but it plays an important role in the flow of commerce.

Continue reading "Is UCC Article 9 the Achilles Heel of Bitcoin?" »

CapitalOne Contract Not Just Creepy But Illegal?

posted by Dalié Jiménez

Shutterstock_144867838CapOne's taken a lot of flack today over its apparent desire to check what's in your wallet by visiting you at home and at work.  The LA Times story got even bigger when it made it to Twitter and  great (and lots of bad, see previous sentence) puns started rolling in.

The company answer seems to be that language from a security agreement for snowmobiles got "mixed in" with the credit card language (and no one over there is reading their 6-page contracts). They are now "considering creating two separate agreements given this language doesn’t apply to our general cardholder base."  

I wonder if that means that they'll also revisit the part of the credit card agreements that takes a security interest in anything you buy from Best Buy, Big Lots, Jordan's Furniture, Neiman Marcus/Bergdorf Goodman, or Saks?  (I should note, your clothes are only in danger if you have a Saks "retail" card; if your card is a Platinum or World card not only is your interest rate likely lower but it seems your stuff is also safe).

Continue reading "CapitalOne Contract Not Just Creepy But Illegal?" »

This, I Don't Believe

posted by Bob Lawless

My friend, Frank Venis, sent me a link to a Planet Money/NPR story that 42.1% of home purchases are now in cash. I have been meaning to write up a quick post on the story since the story appeared, but my day job kept interfering.

Continue reading "This, I Don't Believe" »

New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy

posted by Melissa Jacoby

RibbonHouse Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract:

We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.

Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.

Ribbon house image courtesy of Shutterstock.

Ice Cube Bonds: New Paper on 363 Sales and Chapter 11

posted by Melissa Jacoby

MatchesFAC UT ARDEAT, begins The Flamethrowers by Rachel Kushner. It means "made to burn," the narrator learns (from that "gasbag . . . Chesil Jones"). Whether your preferred hurry-up 363 sale metaphor involves flames, ice, or a wagon full of rotting salmon, Ted Janger and I have just posted a draft of an article reframing the problems with pre-plan going-concern sales, and reallocating the risk associated with such sales. The abstract:

Financially-distressed companies can melt like ice cubes. In Chrysler’s Chapter 11 bankruptcy, the finding that the debtor was losing $100,000,000 per day justified the hurry-up sale of the company to Fiat.  This assertion -- that the firm is a rapidly wasting asset -- is frequently offered, and accepted, in support of quick sales under section 363(b) of the Bankruptcy Code. This raises a policy question:  is this speed and streamlined process a “bug” or “feature?” Do these hurry-up going-concern sales create a speed premium and maximize value for the bankruptcy estate, or do they facilitate collusive deals between incumbent managers, senior creditors and potential purchasers? The answer is, “a little bit of both.” It is, therefore, crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock-in a favored deal. To accomplish this sorting and reduce transactional leverage, we seek to allocate the increased risks of foregone process to the beneficiaries of the sale. We propose that a reserve – the Ice Cube Bond – be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited section 363 sales as a useful way to quiet title in complex assets and preserve value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code.

Perhaps Ice Cube Bonds is the long weekend reading material you were hoping would come your way? We'd value your feedback.

Match image courtesy of Shutterstock.

When a Billion Dollars has Eight Digits; Taking Authorization Seriously

posted by Melissa Jacoby

CloudytitleMove over, two ships Peerless. Even in legal regimes that prioritize substance over form, errors in the execution of formalities can produce significant consequences and the risk of transactional failure. And even chapter 11 cases featuring quick asset sales can generate litigation over such formalities for years to come. A recent example illustrates both points.  

On March 1, 2013, the United States Bankruptcy Court for the Southern District of New York issued and certified a judgment for direct appeal to the United States Court of Appeals for the Second Circuit. The decision grants summary judgment in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. et al, adversary proceeding 09-00504, in the GM bankruptcy. The decision already has received in-depth summaries, at least in some law firm bulletins. If the Second Circuit accepts a direct appeal, I aspire to watch the oral arguments, but hope it will be easier to find a seat in the courtroom than in NML v. Argentina.   

Continue reading "When a Billion Dollars has Eight Digits; Taking Authorization Seriously" »

Stripping Down Bankruptcy Jargon

posted by Melissa Jacoby

StrongarmA Credit Slips commenter recently asked that blog posts explain (or at least spell out) acronyms and specialist terminology. This inspired me to report back on a corporate bankruptcy terminology set that University of North Carolina Law students collaboratively produced last year (technically, a wiki) in business bankruptcy, an advanced transition-to-the-profession seminar. In both comments and emailsCredit Slips readers helped me expand the list of terms (and also offered great ideas for practical writing projects). So thanks again for your contributions, and thanks also to the Spring 2012 seminar alumni - some of whom are practicing bankruptcy law or clerking for bankruptcy courts right now, or headed there soon - who tackled the collaborative vocabulary project, and the entire seminar and its experimental elements, with such great spirit and a 100% perfect attendance record! So, some observations. 

Continue reading "Stripping Down Bankruptcy Jargon" »

Except as Provided in the Syllabus, Students Shall Read the Statutory Section (i) Before Coming to Class or (ii) In Class Unless Provided Otherwise

posted by Bob Lawless

VisilawThe legal side of what we do requires comprehending dense statutory texts. Law students, however, arrive in our courses after a first year of law school heavily devoted to case law. When I was teaching corporate law, a student once came up after class with a question about  preparing for the final exam. She earnestly explained that she understood "the law" -- it was just the statute she could not understand. Could I recommend a book that explained the statute? The law apparently was what was in the cases in the textbook, with the statute being some sort of aid to understanding the law. No wonder they put those statutes in books called statutory supplements!

In reaction to what I see as an overemphasis on court decisions in many other law school courses, my courses unashamedly emphasize the statutes we cover. For example, is a spouse is an "insider" under the Bankruptcy Code? Here is a hint for my students this upcoming semester -- the answer does not depend on your gut instinct: "relative" is a defined term. Thus, I was initially appalled on Friday when I got an advertisement from Aspen, a law textbook publisher (including of my own textbook on empirical methods in law), asking if I felt guilty about the amount of statutory material I assigned. If so, the new LoPucki and Warren statutory supplement for Bankruptcy Law and Article 9 (of the Uniform Commercial Code) was now available as a VisiLaw marked version that would make "inaccessible statutes accessible." No, I did not feel guilty about assigning too much statutory material -- if anything I wanted to assign more. This new development just seemed like another sign of the pending zombie apocalypse.

My initial reaction, however, was more "ready, fire, aim" than considered judgment. As I learned more about the product, I've decided it is worth a try. At the least, I wanted to write something here to get reactions from practitioners.

Continue reading "Except as Provided in the Syllabus, Students Shall Read the Statutory Section (i) Before Coming to Class or (ii) In Class Unless Provided Otherwise" »

Article 9 and Bankruptcy Judges

posted by Melissa Jacoby

prior post addressed a proposed amendment to Article 9's official comments stating that the date of an Article 9 filing relates back to the initial filing date even if the debtor did NOT authorize the filing at that time. This post returns to that topic for two reasons. First, although it is risky to generalize, I sense that bankruptcy judges may still be unaware of this proposed amendment. This is relevant because bankruptcy judges often are on the "front lines" of Article 9 interpretation. Second, I have heard, indirectly, that at least some people want this amendment to lend approval to some lenders' current practice to routinely file without authorization during the loan application process. In other words, the loan is likely to be given within a few days, so no harm no foul. Maybe I misheard or misunderstood?  

Continue reading "Article 9 and Bankruptcy Judges" »

Storage Wars and the Credit Practices Rule

posted by Bob Lawless

A few times I have caught Storage Wars, a television show on A&E. When storage units customers do not pay their fees, the contents are auctioned off by the storage unit company. The show follows professional treasure hunters who bid at these auctions. The catch is that the treasure hunters are purchasing the unit without full knowledge of the unit's contents. With all the drama of finding out what was behind door number three on Let's Make a Deal, viewers get to watch these treasure hunters paw through the storage unit's contents and try to profit by finding items of real value. Every now and then, an item of tremendous value might be uncovered. A few days ago, I started wondering how this was legal.

Continue reading "Storage Wars and the Credit Practices Rule" »

Recommended reading: Broome on Article 9 Financing Statements

posted by Melissa Jacoby

A few weeks ago I wrote about the importance of giving priority to an Article 9 financing statement only from the date on which the debtor  actually authorizes the filing, and a proposed official comment contrary to this position. My colleague Lissa Broome has just posted on SSRN an article she has written about another dimension of the issue: when secured parties file financing statements with an indication of collateral that is far broader than what the debtor authorized in the security agreement. She discusses recent cases that do not deter this activity as well as potential implications, including the chilling effect on future lending transactions.

When the debtor's signature was eliminated as a requirement for a valid financing statement in Revised Article 9, the drafters justified the change by technology: medium neutrality and facilitating paperless filing. Functionally, though, the implications go far beyond technology when you combine this change with the opportunity to file all-asset financing statements AND the broadest possible reading of the first to file or perfect rule discussed a few weeks ago.

Promoting Integrity in the UCC Article 9 Recording System

posted by Melissa Jacoby

On January 1, 2011, Larry files a UCC-1 financing statement against David indicating David's equipment as collateral. At this point, David doesn't even know Larry, has not given him a security interest, and has not authorized this filing. On February 1, 2012, David meets and borrows money from Larry and signs a security agreement listing equipment as collateral (which, under UCC 9-509, automatically authorizes the filing of a financing statement against equipment). What is the relevant date for determining Larry's priority? The language of Article 9 itself strongly implies that February 1, 2012 is the relevant date. UCC 9-509 makes clear that financing statements are not valid unless authorized by the debtor - a pretty minimal burden to cloud the debtor's title. But a little-discussed 2010 amendment to the official comments of Article 9 says otherwise: to the drafters, if the filing is later authorized, Larry gets the benefit of the 1/1/2011 filing date for purposes of the "first-to-file-or-perfect" rule and other priority rules or competitions. 

The most relevant portion of the new paragraph (an addition to comment 4 to 9-322) reads as follows:

Continue reading "Promoting Integrity in the UCC Article 9 Recording System " »

Should the Government or the Market Set Mortgage Down Payments? A New Study

posted by Melissa Jacoby

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

Your Favorite Business Bankruptcy/Restructuring Lingo: A Word of Thanks

posted by Melissa Jacoby

Just a word of gratitude to readers for providing great responses to the prior call for corporate bankruptcy lingo. Thanks to your help, UNC Law's advanced business bankruptcy students are collaboratively examining such terms through a wiki and this will help them make an even smoother transition into the professional world. If any new lingo comes to mind, don't hesitate to pass it along! 

Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy

posted by Melissa Jacoby

At the end of a lively session yesterday at Duke Law School featuring Professor Stephen Ware of University of Kansas Law School, there was a brief discussion of whether shorter foreclosure timelines and clearer rules would promote more workouts of delinquent mortgages. The aforementioned paper about bankrupt homeowners suggests that the opposite might actually be the case: among homeowners in bankruptcy, longer foreclosure timelines in their home states were associated with a lower probability of foreclosure initiation while shorter timelines were associated with a higher probability of foreclosure initiation.

Continue reading "Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy" »

What is the Relationship Between Credit Cards and Mortgage Delinquency?

posted by Melissa Jacoby

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

Continue reading "What is the Relationship Between Credit Cards and Mortgage Delinquency? " »

In or Out of Mortgage Trouble? A Study of Bankrupt Homeowners

posted by Melissa Jacoby

This is a newly published paper  in the American Bankruptcy Law Journal that I was lucky to work on with Daniel McCue and Eric Belsky at the Joint Center for Housing Studies at Harvard University. Using previously unexamined data in the 2007 Consumer Bankruptcy Project, we study what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. Although much can be said about the econometric analysis, for now I wanted to mention quickly that the paper includes descriptive details about bankrupt homeowners (debtor-reported) such as numbers of missed mortgage payments, use of adjustable rate mortgages, mortgage broker use, mobile homes, and refinancing or home equity lines of credit. So please check it out!   

The Value(s) of Foreclosure Law Reform?

posted by Melissa Jacoby

As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?

Continue reading "The Value(s) of Foreclosure Law Reform?" »

First to File--Patent Thoughts

posted by Adam Levitin

Congress just passed a bill overhauling the US patent system.  The most significant change appears to be shift from a first-to-invent to a first-to-file system.  Now, I am not a patent scholar and am wading into unfamiliar waters by opinining in any way on this shift, but it's rather fascinating to consider from a comparative perspective with security interests in personalty and realty, where first-to-file is generally the rule (with important exceptions like relation back for purchase money security interests and priority by possession or control).  

So, as I understand it, a key problem with first-to-invent was that it was rather time-consuming to determine who actually invented something first. Administratively, that seems like a cumbersome system, even if it does help protect original thinking. 

At first glance, first-to-file seems like a much easier system administratively, which will speed up the patent process and create more certainty in property rights--and certainty is the major goal of any property title system. It should eliminate litigation over priority of invention.  (Put differently, we're going to a pure race system, not even race-notice.) But I suspect that first-to-file will just put more weight on the question of whether A's filing covers the same property as B's filing. If A and B have filed for patents on separate ideas, then there's no competition in rights and no problem. The danger, it would seem, is that first-to-file might encourage prophylactic filings. I'm not sure how easy that is to do, but encouraging a race could undercut the efficiency gains by not having to adjudicate who was first to invent.  

Homeowners Insurance Claims and the Foreclosure Crisis

posted by Daniel Schwarcz

Prompted by several comments to one of my earlier posts, I've been thinking about situations where a homeowner files an insurance claim for property damage to her home while she is in default on her mortgage.  The general practice, as I understand it, is for insurers to write claim settlement checks out to the mortgagee, rather than the policyholder, in such situations.   This practice is based on a clause in most homeowners policies that "If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear." 

All of this makes sense.  But, it seems to me that the mortgagee ought to have an obligation to promptly use any insurance proceeds it receives in this manner to fix the underlying property damage.  Failing to do so, and holding on to the insurance proceeds as cash collateral, seems to me to potentially constitute a violation of the mortgagee's obligation of good faith.  Yet according to the commentators referenced above, this is apparently a common practice (though I would be curious about other readers' experiences).  

Continue reading "Homeowners Insurance Claims and the Foreclosure Crisis " »

Transmission Channels

posted by Sarah Woo

The BIS folks have just released a literature review about the transmission channels between the financial and real sectors of the economy. This is a pretty comprehensive literature review (which also means that it is a tad dry), but there are interesting bits in their identification of gaps in the literature.

One of the observations in the paper led me to consider a question: is cash-flow based lending or collateral-based lending more susceptible to systemic risk? Which of them serves as a stronger transmission channel for risk between the financial and real sectors? The answer might point the way to better regulation of the financial industry.

Continue reading "Transmission Channels " »

Clash of the Titans: RMBS Edition

posted by Adam Levitin

And so it begins. We're about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers). 

There have already been some opening skirmishes. The monoline bond insurers (MBIA, Syncora, FGIC, Ambac (and here), CIFG (and here), and--I haven't found any litigation with them on this, but there's gotta be some--ACA) have been litigating against some of the banks whose securitizations they insured for various fraud, negligent misrepresentation, and breach of warranty claims. Many of the Federal Home Loan Banks (Chicago, Indianapolis, Pittsburgh, San Francisco, Seattle, maybe others that I don't recall of the top of my head), which slurped up RMBS during the bubble, only to find them toxic, have brought (separate) suits mainly on securities fraud charges, but also on common law fraud and negligent misrepresentation claims. (See here for a totally dated, August 2010 estimation of the liabilities in these suits.)

Then last fall the financial world was shaken by the New York Fed, BlackRock, and PIMCO's demand letter to Bank of New York Mellon and Countrywide. That showed that A-list financial institutions were taking the range of problems with RMBS, from representation and warranty breaches to servicer malfeasance, seriously. (You can see the NY Fed, acting for the Maiden Lane LLCs, as really another representing AIG, essentially the mother of all monolines for these purposes.) But that wasn't litigation proper, just an angry growl, with a threat of litigation if things weren't resolved. (When you see the letterhead for the response, you'll see that BoA/CW is taking this mighty seriously. Despite the typo in that snippy letter, it didn't come cheap. These guys are lawyering up.)   

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title--the mortgage-backed securities are actually non-mortgage backed securities!

Continue reading "Clash of the Titans: RMBS Edition" »

Auto Title Lending Data

posted by Adam Levitin

Todd Zywicki has written several articles (here and  in a fuller version here) on auto title pledge lending that cite default rates on auto title loans are 14-17%, while repossessions occur only in 4%-8% of cases and in 20% of those cases the borrower redeems the car. These numbers are cobbled together from several disparate sources, so they might not all fit together, but from this (and borrower characteristics) Todd concludes there's no basis to claims that auto title lending is predatory.

These numbers long seemed too good to be true to me—they would imply either huge profit margins (which Todd disputes) or huge overhead costs (Todd's explanation). They also seemed highly skewed by the fact they were counting loans rather than borrowers. Title loans are 30-day loans that can be rolled over, but a roll-over counts as a new roll, which effectively inflates the denominator for default rates. 

I came across a rather obscure Tennessee Department of Financial Institutions study (actually cited by Todd) that has some numbers from examinations of title lenders, and it seems to tell a somewhat less rosy story about title lending.

Continue reading "Auto Title Lending Data" »

The CFPB Auto Dealer Exemption--A Reminder of the Why We Should be Worried

posted by Adam Levitin

It looks like auto dealers are going to get their carve out from the CFPB.  I can't think of a policy argument for exempting auto dealers; maybe someone will provide one in the comments.  The used car dealer has long been the poster child for sharp dealing.  But it's worth reviewing the consumer protection problems with auto dealers, so that we realize what practices are being exempted from potential future regulatory oversight.  

Continue reading "The CFPB Auto Dealer Exemption--A Reminder of the Why We Should be Worried" »

Repo Madness

posted by Katie Porter

A few months ago on Credit Slips Bob Lawless described a situation in which a car repo agent in California took a car with a toddler inside. Bob thought it wasn't breach of the peace, but I think Bob was wrong and he should stick to prognosticating about the bankruptcy filing rate, where he's been dead on. The National Consumer Law Center has issued a new report, Repo Madness, that describes many more harrowing incidents in repossession. The report describes how two repo agents and four auto owners have been killed in the past three years during repossessions, and includes a map showing geographically how many and where particularly troubling incidents have occurred. The report makes an interesting analogy to laws that limited landlords' rights to evict tenants, suggesting that mandating a summary process for repossession (such as replevin) may be a social and economic good. The report is a reminder of the dark side of self-help repossession, which students (and maybe their teachers) tend to find the most fun and entertaining day of Article 9 Secured Transactions classes.  

Life Imitates Art (or at Least My Final Exam)

posted by Bob Lawless

From the San Jose Mercury News, the headline says it all: "Repo man takes San Jose mom's car with 2-year old in back seat" (courtesy of The Consumerist). Now, a short essay from my Secured Credit final exam:

Cletus and Brandine Spuckler are in your law office and tell you the following tale of woe. They had borrowed money from the Burns Finance Company to pay for their 2007 Ford Expedition but have recently fell behind on their payments. Burns Finance Company has a valid, perfected security interest in the 2007 Ford Expedition. One morning, Brandine found that Cletus’s tractor was blocking the driveway when she needed to take two of their kids to preschool. Consequently, Brandine loaded the two kids in the Expedition, got the tractor keys from Cletus, backed the tractor out, then backed out the Expedition, and then returned the tractor to its place on their driveway. She left the Expedition running in the street, with the keys in the ignition and the kids in the backseat. While Brandine went back inside to return the keys to Cletus, an employee of Burns Finance repossessed the automobile, driving off in it with the kids in the back seat. The employee got about three blocks when he saw the kids, and he promptly returned the Expedition to Brandine, who was emotionally distraught having seen a stranger drive off with her kids. Since that time, both Brandine and the two children have been unable to sleep and are emotionally upset. Putting aside the question of any tort claims, do you think the Spucklers have any valid claims under the Uniform Commercial Code?

I based the question on Chapa v. Traciers & Associates, 267 S.W.3d 386 (Tex. App. 2008). Still, I thought I was making this up. Who knew?

Continue reading "Life Imitates Art (or at Least My Final Exam)" »

Proposals for Haircuts at the FDIC

posted by Bob Lawless

FDIC-sponsored haircuts have become a hot item in the blogosphere. My wife used to work for the FDIC, and I smile every time I hear the term as I think about the building on F Street with a big barber pole in front of it. Here, the term is not being used in its hirsuted sense but as part of the colorful vernacular that surrounds insolvency work. A "haircut" describes a situation where a creditor is paid less than that to which they are entitled.

The FDIC proposal comes from Representatives Brad Miller and Dennis Moore and would limit the recovery of secured creditors to 80% of the value of their collateral in FDIC takeovers of failed banks. (I can't seem to locate the original text of the proposal on the Internet, but it has been widely reported.) Academic types will remember a similar proposal from Professor Elizabeth Warren back in the 1990s that would have limited recovery to 80% of the collateral's value. While Warren's proposal would have applied to many types of secured lending (at that covered by Article 9 of the Uniform Commercial Code, the current proposal is limited to failed financial institutions taken over by the FDIC.

The usual criticism has arisen in the usual places, namely that the latest proposal will discourage capital formation in banks. In turn, it is said that banks will lend less. Growth will be deterred. And we'll see even more gruesome scenarios involving the cross-breeding of dogs and cats. All of that might be true--well the dogs-and-cats part is less likely--but these criticisms miss the point. The question is not whether we like capital formation and economic growth but whether the costs are worth the benefits. The costs here come from the moral hazard that is created by asset partitioning.

Continue reading "Proposals for Haircuts at the FDIC" »

How to Fail My Secured Credit Exam Two Different Ways

posted by Bob Lawless

By way of Underbelly comes this story from the Seattle Times chronicling the many failures at the now defunct WaMu. Among the stories was that a WaMu banker gave O.J. Simpson a second mortgage on his Florida home despite the existence of a huge judgment lien against Simpson arising out of his civil trial for killing his wife and her friend. Why did WaMu think it could collect the second mortgage? According to the news story, Simpson had put a note in the file saying he did not do it, and therefore the judgment was "no good." OK, that's pretty dumb and, for my students who read the blog, would not be a passing answer in my secured credit class.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?

Help Me Decide -- Is a "Replacement" New Collateral

posted by Bob Lawless

This semester, I have been teaching secured credit from Lynn LoPucki and Elizabeth Warren's wonderful textbook. One of the problems from the book was, I believe, inspired by my former colleague at UNLV and current bankruptcy judge, Bruce Markell, who requires his students to draft a security agreement taking a security interest in an object he brought to class. A student's agreement has presented an interpretive issue with the problem, and I told him I would get the input of our readership on Credit Slips. One thing the assignment allowed me to do is to talk about boilerplate. There is nothing necessarily wrong with boilerplate, but we should understand what it is doing when we use it.

The object I brought to class was a baseball signed by the great Lou Brock, a Hall of Fame outfielder for the St. Louis Cardinals. The instructions specifically state that the students are to draft a security agreement taking a security interest in this object--the baseball--and nothing else. If the students comply with the instructions, they get a pass on the assignment, and if not, they get a fail. As Markell always said to me--in the real world there is no such thing as a security agreement that is almost valid.

Continue reading "Help Me Decide -- Is a "Replacement" New Collateral" »

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