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Recoverer
The
Volume 3, Number 3
Cincinnati (513) 723-2200 • Cleveland (216) 685-1000 • Columbus (614) 228-7272 • Detroit (248) 362-6100 • Mount Holly, NJ (609) 914-0437 • Philadelphia (215) 599-1500 • Pittsburgh (412) 434-7955
Mortgage Lenders
1-2,
8 The Advantages
By: Heather Estes Bell, Esquire and Disadvantages
of Deeds in Lieu of
Foreclosure for
Advantages of Accepting Mortgage Lenders
Deeds in Lieu of Foreclosure
Speed of DLF process 3 The Nuts &
A DLF typically results in a quicker disposition of the property Bolts of the
than by the process of foreclosure. A foreclosure can be time- Estate Process
consuming due to delays resulting from perfecting service of
process, obtaining a judgment and order of sale, and obtaining
a sale date. Also, in the context of a bankruptcy, a DLF can be 4 An Update on
accepted during the pendency of the bankruptcy once an the Customer
order of abandonment has been obtained from the trustee. Identification
Program:
Protection from work stoppages in construction loans Final Rules
Governing the
A DLF can help to evade the risk of work stoppages for
USA Patriot Act
construction loans where construction is ongoing.
Heather Estes Bell is an attorney in the Less expensive process
Cincinnati office in the foreclosure/evictions 5-6 The Soldiers' and
A DLF is generally less expensive than foreclosure if you
department. She can be reached at Sailors' Civil Relief
consider the respective legal fees involved. Additionally, a DLF
(513) 723-2203 or hbell@weltman.com. Act Explained
can be less costly than a receivership should a receivership
become necessary.
Most mortgage lenders know that a deed in lieu of
Preventing risk of asset deterioration 7 The Importance
foreclosure (DLF) is a method of gaining possession
of real estate by the recordation of a deed from the of Good Credit
A DLF minimizes the risk of a deteriorating asset and prevents Education
property owners to the mortgage holder, making a waste of the asset, especially when the borrower could be
foreclosure suit unnecessary. Most mortgage lenders redirecting property rents and/or mismanaging the property.
also realize that the consideration of the transaction
is often that the lender will forego a deficiency balance Faster sale of property
against the borrowers and/or their co-signors in By gaining quicker control of the property, the lender can
return for the execution of the deed. However, a more expeditiously enter the market to effect a sale of
myriad of issues should be considered before deciding the property.
whether the DLF is the most advantageous course
of action available. In order to make this decision, it Less disruptive process
is essential to examine the advantages and A DLF is less disruptive to tenants and other third parties
disadvantages of accepting a DLF from the perspective that would be named in a foreclosure action.
of the mortgage lender.
Continued on page 2
w e l t m a n . c o m Recoverer 1
The
The Advantages and Disadvantages of Deeds
in Lieu of Foreclosure for Mortgage Lenders Continued from page 1
Disadvantages of Accepting
Deeds in Lieu of Foreclosure
Lack of liability for deficiency claims
The borrower or guarantors may be released from liability for any deficiency
claim.
Potential delays in foreclosure process
Debtors often try to use DLF negotiations as a means of delaying foreclosure.
In order to prevent delays, the lender and borrowers can enter into a pre-
workout agreement that includes a solid date for the conclusion of the
Greater borrower cooperation DLF. It is often advantageous to consider commencing a foreclosure action
The borrower is generally more cooperative, because a while negotiating the DLF to gain leverage.
DLF is an agreed-upon resolution. No judicial action is Paying subordinate liens
taken, and a DLF is not reported on the borrower’s credit
report. With the borrower's cooperation, the lender is The borrower may not have the authority to transfer the property. In a
able to undertake a more thorough due diligence DLF transfer, subordinate liens survive the transaction, whereas they would
investigation of the property. be terminated in a foreclosure. Therefore, the lender must decide whether
to pay the subordinate liens, if any exist, before entering into a DLF
More accurate accounting for personal property transaction.
The lender is better able to account for personal property Common law mergers
in the consensual atmosphere.
The mortgage interest can be extinguished by a theory known as common
Prevention of delays in the foreclosure process law merger. As applied to DLF transactions, a common law merger would
The lender can avoid the hazards of a borrower delaying operate to extinguish the lender's mortgage interest when it accepts a
the foreclosure process by filing a bankruptcy petition or DLF. This can become problematic if the debtor or a bankruptcy trustee
asserting lender liability claims and other defenses. later tries to set aside the conveyance of the deed. Many states have
abolished or at least limited the theory of common law merger, but the
Improving loan documentation issue should always be considered before deciding whether to enter into
A DLF provides a helpful vehicle to implement covenants a DLF. Often, to avoid common law merger, one only needs to preserve
and warranties that may be lacking in existing loan the mortgage by declaring that the intent for merger is not to occur within
documentation. the documentation.
The borrower does not have a right of redemption of Savvy debtors' attorneys may later try to argue that a DLF is an equitable
the property in a DLF transaction. mortgage. Additionally, they may argue that there exists a clogging of the
equity right of redemption unless you can show that the transfer was
Release from lender liability actions voluntary and not the product of coercion or fraud. It is essential to make
sure all documentation reflects that the transaction is voluntary and that
As a condition to the DLF workout, the debtor will have
the transaction is not actually an equitable mortgage. To avoid clogging
to release the lender from any lender liability actions.
the equity of redemption, do not require a deed unless the deed is
Favorable nature of other agreements voluntarily given for adequate consideration. Generally, lenders should
avoid provisions in the workout agreement or deed that provide for
Other workout agreements, such as forbearance
reconveyance, sharing in the proceeds of a subsequent sale, or rights of
agreements, sale-lease backs, short sales, loan modifications,
first refusal. Such provisions might suggest a continuing security device or
or rights to cure arrearages in bankruptcy may be more
equitable mortgage exists. However, if a retained possessory interest is
favorable to the debtor. The debtor may be allowed to
desirable for both the lender and the borrower, it can be achieved by
retain the real property and not provide the lender with
carefully structuring the transaction.
the full value of its collateral up front.
Continued on page 8
w e l t m a n . c o m Recoverer 2
The
The Nuts & Bolts of the Estate Process
By: Scott S. Weltman, Esquire
Recoverer 3
The
An Update on the Customer
Identification Program:
Final Rules Governing the USA Patriot Act
The final rules governing the USA Patriot Act (USAPA) have been published, and the compliance
deadline has been set as October 1, 2003. Section 326 of the USAPA requires the secretary
of the treasury to prescribe regulations setting forth the minimum standards for financial Robert Rutkowski is a partner in
institutions that relate to the identification and verification of any person who applies to the Brooklyn Heights operations
open an account. These standards are referred to as the customer identification program center. His practice areas include
(CIP). regulatory compliance and
contract law. He can be
Fortunately, the final rules governing Section 326 do not contain any dramatic changes and reached at (216) 739-5004
they have largely positive implications. Some of the changes include: or rrutkowski@weltman.com.
Definitions: Several definitions have changed, including “account” and “customer.”
The information required in the CIP is
• Account: Infrequent transactions such as money order purchases or wire transfers are essentially the same as detailed under the
not included in this definition. initial statute. The CIP must include risk-
based procedures for verifying the identity
• Customer: The term refers to someone opening an account but not someone merely
of each customer as is reasonable and
asking about an account. The term does not contemplate cosigners; it only considers
practicable. Procedures need to enable the
account holders.
financial institution to form a reasonable belief
The final rules are not retroactive. As long as the financial institution can show that that it knows the true identity of each
it has a reasonable belief that it knows the true identity of the existing account holder, the customer. As a risk-based procedure, the CIP
existing account holder need not go through the CIP process. This is a very welcome change! needs to contemplate the:
All USAPA programs must be part of the financial institution's Bank Secrecy Act Program. Types of accounts maintained at the
The bank has flexibility in choosing what types of identification it will accept. While a driver’s financial institution
license is a typical choice, the bank is not limited to accepting that form of identification. It
Methods of opening accounts
must merely be able to verify the legitimacy of the identification requested. For example, if
you allow a Nigerian passport to be used as identification, the bank needs to know how to Types of identifying information
identify a legitimate Nigerian passport. available
In the final rules, there is no longer a requirement that a photocopy of the identification Financial institution's size, location
needs to be kept as part of the CIP. Additionally, notice of the CIP can be given to customers and customer base
by posting a note in the lobby, giving notice with the account opening documents, or posting
it on Internet applications. Any form of written or oral notice will suffice. In short, if your management team has already
developed a CIP, the program probably will
Ironically, the USAPA requirement of checking customer names against a government list only need minor tweaking to be in compliance
is currently a moot point, because presently, there is no list. However, this may change at with the final rules governing the USAPA.
any time and it is highly recommended that financial institutions periodically check the U.S.
Department of Treasury Web site for updates (www.treasury.gov).
The USAPA will no doubt affect day-to-day practices in ways that are unpredictable. For
example, financial institutions conducting indirect lending programs will need to look at their
programs to see who, if anyone, needs to conduct a customer identification check. If an
indirect lending program involves a car dealer originating the loan on its own paper and then
assigning it to the financial institution, then the car dealer, if anyone, would need to run the
borrower through its CIP. However, if the financial institution uses its own paper in the
transaction and the car dealer is merely steering the potential borrower to the financial
institution, then the financial institution would have to run the borrower through its CIP.
Continued on page 6
Recoverer 5
The
The Soldiers' and Sailors' Civil Relief Act Explained
Continued from page 5
w e l t m a n . c o m Recoverer 6
The
The Importance
of Good Credit
Education
By: Megan Ashley Graves
A person’s credit history is the same as their financial reputation; it stays with them forever. Any company who has legitimate
reasons can review credit history. It can be used to determine eligibility for employment, an apartment rental, insurance,
and many other things! Therefore, it is imperative for a person to maintain good credit. Though many people view teenagers
as young and irresponsible, they can be taught good money management skills. High school is the time when teenagers
begin to have financial responsibilities; part-time jobs, credit cards, and checking accounts begin to become available as
graduation draws closer. Without a thorough understanding of budgeting and the credit system, many fall into debt or
financial trouble. Teenagers must learn how to handle their money and maintain good credit before the time comes when
they will really need those skills.
Good money habits must be formed when children are young. Even something as simple as an allowance can be a powerful
teaching tool in understanding how to budget and plan. Teens must know where their money is going and learn how to
spend wisely. Teenagers must also learn how to handle credit cards correctly, so that they do not overspend and fall into
debt. A person’s credit reputation is something easy to tarnish, but much harder to repair.
By receiving credit education while they are still young, teenagers will have the ability to develop good habits in dealing
with their money. And good habits formed at youth, as Aristotle said, make all the difference- especially when dealing with
financial planning.
Recoverer 7
The
WELTMAN, WEINBERG & REIS CO., L.P.A.
Recoverer
The
The Recoverer is provided as a free service by Weltman, Weinberg & Reis Co., L.P.A., representing clients on creditors’ rights issues. The data contained
in this newsletter is a summary of legal information and is not intended to constitute legal advice on specific matters. Direct editorial comments to
Recoverer 8
The
Tanya Tybur at 323 W. Lakeside Avenue, Suite 200, Cleveland, Ohio 44113. Phone 216 685-1098. Fax 216 363-4121. E-mail ttybur@weltman.com. Web site weltman.com.