New Predatory Lending Regulations - (17) Loans Not in the Borrower's Interest

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.


The new prohibited activity under item (17) makes it a "deceptive act or practice for a mortgage broker to process, make or arrange a loan that is not in the borrower's interest." It goes on to require the broker to disclose when the financial interest of the broker conflicts with the financial interest of the borrower. If the broker is going to get paid more if the borrower gets a loan with a higher interest rate, the broker needs to disclose the conflict and not help with the loan. The regulation further provides that the broker cannot disclaim a fiduciary duty to the borrower.


I surprised that the regulation requires the mortgage broker to have a fiduciary for the borrower. I think the mortgage broker is acting as an agent for their lenders, not as an agent of the borrower.


I think this regulation, if enacted, will leave mortgage brokers scratching their head as to how to operate. How can they determine if a loan is in a borrower's interest?

New Predatory Lending Regulations - (16) No Documentation Loans

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.


The proposed prohibited activity in (16) limits the mortgage lender's ability to make no-documentation or limited documentation loans. These types of loans were targeted at borrowers who had trouble documenting all of their income. Typically this type of borrower would be an independent contractor or small business owner. [CNN.Money background article]


On the dark side, I believe these borrowers were typically a contractor or business owner who did not do a good job tracking all of the cash they received and was hiding income from the taxman. I also think these loans were used for a borrower trying to get more of a mortgage than they would ordinarily be able to get using typical underwriting standards. The borrower would state that they had more income than they actually did. I never saw a good reason for this type of loan to exist other than to cheat the lender or the taxman.


The Washington Post does not paint a pretty picture on the use of these loans: The Lowdown on Low-Doc Loans.


Although the new regulation does not prohibit this type of loan, the regulation makes them very unappealing to lenders. The lender must deliver a statement with the borrower's income and a disclosure that the loan will be at a higher interest rate because of the "no-doc" option. Also, the lender needs to verify the employment and income when the stated income is "not reasonable for the occupation or experience of the borrower.. . ."


I do not know how a lender is supposed to determine what a reasonable income is for a person in a particular occupation with a particular level of experience. Effectively, a lender is leaving itself wide open for a claim under 93A if makes no-doc or limited doc loans in Massachusetts.

New Predatory Lending Regulations - (15) Lender Must Believe the Borrower Can Repay

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.


The new (15) provides in part: "It is an unfair or deceptive act or practice for a . . . lender to . . . make a mortgage loan unless the . . . lender . . . reasonably believes at the time the loan is expected to be made that the borrower will be able to repay the loan based upon a consideration of the borrower’s income, assets, obligations, employment status, credit history, and financial resources, not limited to the borrower’s equity in the dwelling which secures repayment of the loan. . . ."

The problem with this new prohibited activity is the lack of a benchmark for a lender to rely on. The challenge from the borrower under (15) will almost always come after the person has gone into default and is scrambling to prevent foreclosure. How can the lender prove that they reasonably believed the borrower could repay the loan when it turns out that the borrower could not.


How much of their income should a borrower reasonably be expected to expend on their mortgage and still be expected to be able to repay the loan? Certainly a loan with monthly payments in excess of 100% of a borrowers net monthly income would be a violation of this new provision. But I am not sure where the percentage hits the tipping point to become reasonably expected to be able to repay. 90%? 75%? 50%? 25%?

I think the borrower should be the party that determines if they will be able to repay the loan.

Summary of Proposed Predatory Lending Regulations

The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A).

The Attorney General summarized wants to enact the new regulations to:

· Prohibit mortgage brokers or lenders from making a loan if they do not have a
reasonable belief that the borrower is able to repay the loan.
· Restrict the abuse of no-documentation or “stated income” loans by requiring that the mortgage broker or lender disclose how the interest rates or other charges will increase under a “no-doc” loan, and obtain the borrower’s signed statement of income in order to process those types of loans.
· Prohibit mortgage brokers from arranging or processing loans that are not in the borrower’s interest, and prohibit brokers from brokering loans if their financial interests conflict with the borrower’s.
· Prohibit mortgage lenders from steering borrowers to loan products that are more costly than those that the borrower qualifies for, and prohibits lenders from discriminating between similarly qualified borrowers.

These new regulations are an update of regulations from 1992 when the last big mortgage crisis affected the Commonwealth. The regulations apply to all residential mortgages, except open end home equity lines of credit.


The update adds new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.

I have a lot of concern about knee-jerk reactions to mortgage crisis. One person's predatory lending is another person's provider of an opportunity to invest in real estate.

Predatory Lending Regulations and Hearing Schedule

The Massachusetts Attorney General is reacting to the current sub-prime mortgage lending situation by proposing several new regulations under M.G.L. 93A

A copy of the proposed regulations can be found here.

The hearing schedule for the proposed regulations is as follows:

Monday, September, 17, 2007, 11:00 a.m.
Worcester Regional Chamber of Commerce
339 Main Street
Worcester, MA 01608

Tuesday, September 18, 2007, 11:00 a.m.
Brockton District Court, Rotunda Hearing Room
215 Main Street
Brockton, MA 02301


Wednesday, September 19, 2007, 10:00 a.m.
Office of the Attorney General
1350 Main Street, 3rd Floor Conference Room
Springfield, MA 01103


Thursday, September 20, 2007, 10:00 a.m.
The State House - Gardner Auditorium
Boston, MA 02108

Relocation Of An Easement

I must have missed this case when it came out in 2004, but Massachusetts has changed the law on the ability to relocate an easement that burdens your property. Now the property owner has an ability to relocate an easement on their property.

In the case of M.P.M. Builders, LLC v. Dwyer, 442 Mass. 87 (2004), the Massachusetts Supreme Judicial Court adopted the American Law Institute's "modern rule" on the relocation of easements in the Restatement (Third) of Property (Servitudes) Section 4.8(3) (2000). The owner of property subject to an easement can relocate the location of the easement without the consent of the easement holder, subject to certain conditions.

The law Massachusetts is the minority position. The majority of states require mutual consent to change the location of an easement.

Section 4.8(3) provides that:

Unless expressly denied by the terms of an easement, the owner of the servient
estate is entitled to make reasonable changes to the location or dimension of an
easement, at the servient owner's expense, to permit normal use or development
of the servient estate, but only if the changes do not (a) significantly lessen
the utility of the easement, (b) increase the burden on the owner of the
easement in its use and enjoyment, or (c) frustrate the purpose for which the
easement was created.

If you are getting the benefit of a new easement in Massachusetts, you should make sure that the easement may only be relocated with mutual consent of the parties. This will allow you to control the relocation and frustrate the relocation if necessary. If you are getting the benefit of the easement, you probably do not want to have that language, so you some possibility of relocated the easement for future development of your property.

The Land Court case of Moses et al v. Cohen et al. (Mass. Land Ct. Jan. 12, 2007) highlighted the ability of the easement holder to block relocation by inserting language into the easement that requires the holder's consent for relocation. It also pointed out that you should clarify the purposes of the easement so that those purposes can be considered in deciding of the relocation is appropriate. For example, if the easement is not just for access, but to preserve a view or prevent erosion.

There is a great article on the topic in the Massachusetts Bar Association Section Review publication by E. Christopher Kehoe and Timothy C. Twardowski of Robinson & Cole LLP

1031 Exchange Do's and Don'ts

Rochelle Stone, of Starker Services Inc., wrote this article in the National Real Estate Investor: 1031 Exchange Do's and Don'ts.

She points out the importance of the 1031 qualified intermediary, especially one that won't commingle your funds. She point out the theft of client's funds by Southwest Exchange. $83 million went missing earlier this year, presumably into the pockets of the McGhan family.

Safeguards for the Paperless Registry of Deeds

Dick Howe of the Middlesex North Registry of Deeds in Lowell wrote about the safeguards being put in place as the real estate records are transitioning to from book-based to paperless: Paperless Safeguards.

His objective is to make "every single documents of any relevance in the possession of the registry to be fully available electronically." In the current market of cheap electronic storage and hard drives, he could "easily load the entire electronic contents of the registry into [a] backpack and still have room for a notebook computer."

It sounds like he is getting some pushback from examiners about the conversion. Rightfully, their first concern should be about the sanctity of the public record. People and businesses invest billions of dollars into real estate and rely on the registry to confirm who owns the real estate and any limitation on the rights to the real estate.

My guess is that examiners are also concerned about the jobs. By making records more accessible and easier to search, it becomes less important to have a good examiner working in the registry.

"If some of the energy now being expended on trying to retain a 19th century, paper based way of doing things was diverted to developing imaginative ways of using our electronic records, the business of title examination would become both more efficient and more precise, but that’s just my opinion."

Galactic Suite Hotel

Get ready to make your reservations. The Galactic Suite Space Resort is planning its first accommodations by 2012. [Company News] They expect to start selling tickets in 2008.

For 3 million Euros you get 18 weeks of preparation on a Caribbean island, the flight into space and three nights in the orbital hotel. During the stay you get to participate in space experiments. (Its not clear whether you are the subject of the experiments.)

As far-fetched as this may sound, the company reportedly received $3 billion in backing from a space enthusiast to build the hotel. That backer must be one of the 40,000 people in the world who could afford to stay at the hotel.

Vintage Wine Trust

I just ran across this real estate company: Vintage Wine Trust. They are the only Real Estate Investment Trust to focus solely on the wine grape industry. They work with vineyard and winery owners to structure sale-leaseback financing of their real estate.

Interesting to see a sale leaseback company focused on a specific industry.

New Uniform Act on Limited Liability Companies

The ABA approved the new Uniform Act on Limited Liability Companies [Press Release] updating the 1996 Act. Limited Liability Companies still dominate the ownership structures of real estate assets.

Here are the highlights:

1. In the 2006 Act, the operating agreement determines whether a company is manager-managed or member-managed. In the 1996 Act the kind of management is determined in the certificate of organization. If the agreement is silent, the company is a member-managed company by default. Leaving this decision to the agreement allows the company to determine and re-determine its management structure more flexibly. A third-party creditor may seek affirmation of a manager’s or a member’s authority before doing business with the company and practice indicates does so without checking the official record for the certificate. In addition, certificates of authority may be filed to provide notice that only certain members or managers in a company are entitled to do business on behalf of the company.

2. There is no requirement that a company’s operating agreement be in writing in either the 1996 or 2006 Act. However, the definitions “record” and “signature” establish that any statute of frauds requirement within the 2006 Act may be satisfied with electronic records and signatures. The 1996 Act does not recognize electronic records or signatures.

3. A member may not transfer his or her membership in a company, unless the operating agreement makes it possible. The only interest that may be transferred is called the “distributional interest” in the 1996 Act and the “transferable interest” in the 2006 Act. In the 2006 Act, a “transferable interest” is generally any right to distributions that a member has under the operating agreement. The operating agreement may impose restrictions on a right to transfer. However, the certificate of organization may provide that a “transferable interest” is freely transferable under the 2006 Act. If it does, the transferable interest may be certificated in the same manner any investment security is, and is likely to be a security under Article 8 of the Uniform Commercial Code.

4. In both the 1996 and the 2006 Acts, members owe a duty of care to each other. The duty in the 1996 Act is to refrain from conduct that is grossly negligent or reckless conduct, intentional misconduct or knowing violation of law. In the 2006 Act, the standard is ordinary care (care that a person in a like position would reasonably exercise) subject to the business judgment rule.

5. Under both the 1996 and 2006 Acts, the operating agreement governs the relationships between members and members and managers (if any). The 1996 Act, however, provides that the duty of loyalty and the duty of care may not be eliminated in the operating agreement. But the operating agreement may specify those acts and transactions that do not violate the duty of loyalty, so long as not manifestly unreasonable. In the 2006 Act, the operating agreement may eliminate the duty of loyalty or duty of care, provided that eliminating them is not “manifestly unreasonable.” The agreement may not authorize intentional misconduct or knowing violations of law, as well.

6. The 1996 Act does not expressly address the issue of indemnification of members or managers, but the 2006 Act does. It provides for indemnification as a statutory matter. But the operating agreement may alter the right to indemnification, and may limit damages to the company and members for any breach except for breach of the duty of loyalty or for a financial benefit received to which the member or manager is not entitled.

7. The 1996 Act makes no provision for companies that are initially organized without members. There must be at least one member upon filing the certificate of organization. In the 2006 Act, a member does not necessarily need to be named at least 90 days from the day the certificate is filed. There is a limited ability, therefore, to create what are called “shelf” companies.

8. One issue that especially vexes limited liability company law is the rights creditors of members have in the assets of the company. The 1996 Act restricts creditors’ interests to a member’s distributional interest and provides a judgment creditor with a “charging order” as the only method of executing against that interest. The resultant lien may be foreclosed and sold in a judicial foreclosure sale. The 2006 Act further requires a finding: that payment may not be made within a reasonable time, before a court orders foreclosure of the lien. This finding is not required in the 1996 Act. In addition, the 2006 Act makes it absolutely clear that a purchase in a foreclosure sale does not make the purchaser a member.

9. In the 1996 Act dissociation (resigning from membership) of a member by express will triggers an obligation to buy the interest of that member in an at-will or term company. Failure to buy may subject the company to a judicial dissolution and winding up of the business. The 2006 Act provides no obligation to buy out a dissociating member, nor a ground based upon failure of a buyout for judicial dissolution. The company has greater stability under the 2006 Act, notwithstanding any dissociation of a member.

10. The 1996 Act provides members with the right to file a derivative action on behalf of a company alleging certain kinds of misfeasance on the part of the company by its management. Under the 2006 Act, the company may form a “litigation committee” to investigate claims asserted in a derivative action. This stays the litigation while the committee does its investigation. The objective of the investigation is to determine if the litigation is for the good of the company. The litigation committee ultimately reports to the court with a recommendation to continue with the plaintiff or the committee as plaintiff, or to settle, or to dismiss.

11. The 1996 Act allows no right of direct action against the company on behalf of a member as a plaintiff. The 2006 Act provides for direct action.

This link will take you to a copy of the Act.
This link is to a copy of the Act in Word.

Teaching the Rule Against Perpetuities?

Professor Ilya Somin, George Mason University School of Law, is thinking of not teaching the Rule Against Perpetuities: Should We Teach Law Students the Rule Against Perpetuities?

"In legal circles, the RAP is virtually a byword for abstruse complexity,
and is traditionally one of the most hated parts of the law school curriculum.
Forcing law students to learn it is almost a form of hazing, much like making
them learn the Blue Book."

Rotating Skyscraper

Not content with having the tallest building, now Dubai wants a building that spins.

Plans are underway for a 68- story combination hotel, apartment and office tower. Each floor can turn separately, so the building will be changing shape.


It looks great in this video, with the shape undulating. It looks like crap in the picture on Dubaicity.com. Each floor would take 90 minutes to rotate.

This is actually the second spinning building planned for Dubai. The first is a mere 30 story 200 unit condominium tower that rotates once per week.

Construction is scheduled to begin in June, 2008.

Turning a Debt into A Personal Guaranty

In the case of Orix Financial Services, Inc. v. Leclair (S.D.N.Y. Feb 26, 2007) the court found that under Rhode Island law, an individual who assumes to be acting for a corporation without authority to do so is liable for all debts arising from the action.

Mr. Leclair defaulted under his obligation under a note. The maker of the note was "Brian Leclair DBA T and D Excavating Co." Unfortunately for Mr. Leclair, the charter for T and D had beeen revoked two year prior to the execution of the note.

Under R.I. Gen. laws Section 7-1.2-1801: "All individuals who assume to act as a corporation without authority so to do are jointly and severally liable for all debts and liabilities incurred or arising as a result of that action."

Debt Market Update - LIBOR Upswing

I got this update from Chatham Financial this morning:

As many of you may have already heard, 1M LIBOR opened up 19bps this morning. This is, of course, a very sudden change particularly after a very stable year of LIBOR trading in the low 5.30's. This market movement demonstrates the reaction of many dealer banks after BNP Paribas halted withdraws from 3 funds that hold US subprime mortgage investments and NIBC (a Dutch bank) announced US$189mm in actual losses. This is the first significant news of US subprime markets impacting European banks. The European Central Bank, responding to an urgent demand for cash from banks affected by the subprime mortgage collapse in the U.S., loaned $130.2 billion (EUR 94.8bn) to assuage a credit crunch. For your reference, below is a current chart of some of the numbers that you may be interested in. As always, please feel free to call Chatham to discuss further.

Chatham Financial
235 Whitehorse Lane
Kennett Square, PA 19348
T: 610.925.3120
F: 610.925.3125
http://www.chathamfinancial.com/

Debt Markets Continue to Implode

Real Estate Finance and Investment is reporting that five securitizations worth at least $4.8 billion have been pulled from the market in the last week.

So far this does not seem to have much impact on pricing of commercial real estate. Surely, less debt is available and the pricing is less favorable, but there is still gobs of capital dedicated to real estate that are looking for investments. Highly leveraged deals and buyers relying on lots of debt are running into trouble. WSJ.com is reporting that the parties have extended the closing for the Tischman Speyer / Lehman acquisition of Archstone-Smith.

The debt markets are continuing to crush the residential real estate market. American Home Mortgage Investment has gone belly-up, National City has stopped offering some products through brokers and now jumbo loans are running into trouble: Mortgage Fears Drive Up Rates on Jumbo Loans (WSJ.com $$).

The problem with the jumbo loans is that they cannot be purchased and guarantied by Fannie Mae or Freddie Mac. That limts the resale value of the debt and the securitizations of the loans.

Building the Tallest Building

Younan Properties seems to think it can build the tallest building in the world: Younan Vows To Build Tallest Building. Of course they have not selected a city or a site to build on yet. Nor does it appear that they have the financing to build it.

It was a good way to get your name in the paper.

Meanwhile, my gas money has allowed Emaar Properties of Dubai to build the Burj Dubai Tower.



It is still under construction, but on July 24 the had steel up to 512.1 meters making it the world's tallest building. But they are still going and expect to reach a height of 700 meters. The tower is scheduled to open late next year.

According to the website for the tower, the goal "is not simply to be the world's highest building. It's to embody the world's highest aspirations."

Prior to the Burj Dubai, the world's tallest building was Taiwan's Taipei 101. It is a mere 508 meters tall.