62 posts categorized "Secured Lending"

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?

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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).  

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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.

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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!

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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.

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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.  

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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.

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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.

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