Developments in the Commercial Real Estate Sector

The residential mortgage crisis is currently the primary focus of the media and the bulk of America. However, there is a looming crisis that has the potential to make the residential melt down seem like a picnic. The commercial sector is poised to collapse in a similar fashion as the residential sector. Commercial lenders must act now before the collapse comes to perform commercial loan modifications in order to prevent a major financial disaster.

Recently, 20 major commercial lending banks failed and were taken over by the regulators, but there has been no uproar. The FDIC and the IRS have both issued statements to commercial lenders attempting to prevent a financial collapse similar to that seen in the residential sector.

The FDIC released a Policy Statement on Prudent Commercial Real Estate Loan Workouts in October. This policy statement outlined the possible issues that are expected to arise in the coming months pertaining to commercial real estate and how lenders can act to minimize these risk issues.

The main way in which the Policy Statement suggested that commercial lenders deal with these future issues is to be proactive now in finding a workout solution with the borrower to modify the loan. The FDIC is basically telling these commercial lenders to modify commercial loans or there will be a catastrophe similar to that in residential.

The IRS issued a similar statement in October that encouraged commercial lenders to modify loans by specifically laying out how the IRS would look at the workouts from a taxation point of view. The IRS states that they will give certain tax benefits to commercial lender who perform workouts as well as treat the assets differently if they are in a workout.

What we see here are two large institutions foreseeing a problem on the horizon and attempting to take proactive steps to address the problem. The issue is that the FDIC and the IRS are only making recommendations on how to stave off collapse. There is nothing forcing the commercial lenders to negotiate workouts. Lenders had proven that their greed knows no bounds and they will just look for a bailout from the government if they start to fail.

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Source: National Loan Auditors, Inc.
http://www.NLAudit.com

Senate Bill 94 – FAQS from the CSB

The California State Bar recently issued a FAQ on how to interpret SB 94 and what practices will be allowed under the new law. However, the FAQ is only 3 questions long and addresses only a few of the issues raised by SB 94. Nonetheless, it is helpful and gives attorneys insight on how the California State Bar and other institutions will read the statute.

CLICK HERE TO READ THE CALIFORNIA STATE BAR’S FAQS ON SB 94

The most interesting point in the FAQ is the State Bar’s interpretation of the word “receive”. One of the most confusing points of SB 94 was whether an attorney could collect money into their trust account until the end of the process. This protected the attorney because they had insurance that if they performed their services they would be paid. The client was still protected because the trust account is strictly regulated by the State Bar and any funds that are not earned must be returned to the client.

The State Bar FAQ makes it very clear that accepting funds into a trust fund is a violation of SB94. They also go on to discuss their reading of the term “received”. The State Bar looks at the plain meaning of the word received and determines that “the term is broad enough to encompass a lawyer’s receipt of advance fees into a trust account.”

The State Bar has basically refused to define what received means, but has clearly determines that accepting money into a trust account is receiving money, even though the attorney cannot actually use those funds. Following this logic, if any money is taken from client for any reason and held in anyway this will be considered “received”.

This is not the best news for attorneys doing loan modifications, but it is better to have a clear rule than an ambiguous one.

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Source: National Loan Auditors, Inc.
http://www.NLAudit.com

Senate Bill 94 – The law has changed, now what?

On October 11, 2009, Governor Schwarzenegger signed into law Senate Bill 94. This law addresses how third parties can accept fees for loan modifications. The bill covers not only loan modification companies, but also attorneys who are hired by homeowners to represent them in negotiations with the lender to modify their loan.

I have discussed the ramifications of this bill in previous posts so I will not belabor the point. But for those new readers I will provide a brief overview.

SB 94 makes it criminal for anyone to accept up front fees for performing a loan modification. This includes attorneys, loan modification companies, and brokers. This essentially means that in order to do a loan modification a company or law firms must first perform all their work and hope to get paid at the end. This creates a tremendous amount of liability for anyone performing loan modifications. SB 94 has basically sent every lawyer and loan modification company, legitimate or not, running away from homeowners who need help for fear of violating the laws.

The law is clearly reactive to the few bad apples who were taking advantage of homeowners. Furthermore, the banks totally supported the law because it would insure that the unsophisticated homeowners were at the mercy of the banks when requesting a loan modification. A homeowner will now have to take it on faith that the lender was actually helping them to modify their loan.

So this is where we are today. SB 94 is law and effective immediately. No upfront fees can be collected until all work has been completed. But what does this really mean?

Does this mean that an attorney cannot accept money and hold it in a trust account until services have been performed? Does this mean that as long as the services contracted for are performed that you can collect that money? Can an attorney charge a client for incidental administrative costs (copying fees, filing fees) during the process? What about a consultation fee, if an attorney has a standard practice of charging $100 for a consultation to determine if they will take a case can the attorney no longer charge this fee for loan modification clients? SB 94 Fails to answer these and a multitude of other questions.

Basically SB 94 is not very clear on what it means by advance fee or what constitutes a completion of services. This has left those lawyers who wish to continue helping clients with loan modifications hanging in the wind trying to determine what will be compliant with the new law. The state bar has not made a statement pertaining to SB 94 since its passing.

Many lawyers have attempted to contact the state bar ethics hotline in order to clarify what is acceptable under the new law. However, the state bar ethics hotline is being flooded with phone calls and offers no answers to these questions.

The state bar stood strongly behind SB 94 but now when people have questions they leave them to figure it out on their own and potentially be the first test case as to what is and is not acceptable. No attorney wants to be the first case to determine what is acceptable under SB 94, especially with possible criminal punishments.

Right now the law has passed and is in full effect. Trying to go back and get rid of the law is a waste of time and resources. What is needed is clarification of what is allowed and what is not allowed so that companies who wish to continue helping homeowners can act knowing they are not going to be brought up on criminal charges.

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Source: National Loan Auditors, Inc.
http://www.NLAudit.com