- Landscape for Balloon QMs has changed
- Corporations and LLCs – Part II
- SCRA amendment enacted
- Title 50 gets an “app-endectomy”
- Guarantors not “applicants” under ECOA
Landscape for Balloon Loan QMs has changed
By John Burnett
If you are a small creditor and you believed your options for making balloon payment loans that satisfied the ATR rule would be shrinking on April 1 when the temporary balloon payment QM authorization under .43(e)(6) sunsetted, new regulatory amendments provide a reason to celebrate.
Many small lenders will now be able to qualify to make Balloon Payments QMs under .43(f) (which doesn’t have any sunset date) under the CFPB’s new relaxed requirement for the rural/underserved test. Under the Bureau’s new relaxed test (which you can find in 1026.35), all you have to do is make one covered transaction secured by a first lien in a rural or underserved area during the previous calendar year. This change was effective March 31st and it should allow many lenders to continue to make balloon payments, particularly when coupled with the previous changes to the tests for “small creditor.” This change also affects one of the tests for escrow avoidance on first lien HPMLs under .35. Good news all around for small creditors!
Corporations and LLCs – Part II
By Pauli D. Loeffler
I wrote about corporations and LLCs in the January 2012 OBA Legal Briefs. The focus of that article was formation of the entities (i.e., how they come into existence), and documentation needed by the entity to open an account or make a loan. This article will look at what could potentially be the other end of an entity’s life — what happens when the sole shareholder of a corporation or sole member of an LLC dies or becomes incapacitated, and what the laws are regarding the dissolution of corporations and LLCs. All citations are to Title 18 of the Oklahoma Statutes.
Death or incapacity of the corporation’s sole shareholder. The death or incapacity of the natural person owning 100% of a corporation generally will not terminate the existence of the corporation. The least likely scenario is that the Certificate of Incorporation stated the duration of the corporation would be the life of the sole shareholder rather than the most common “Perpetual” or a term of years. I have never seen this, but in this extremely unlikely event, the corporation will still continue in existence during dissolution for “winding up” which will be discussed below.
Another possibility is that the sole shareholder may have denoted on the shares themselves “Transfer on Death” (“TOD”) to one or more persons or to an existing trust of the shareholder. It is also possible for this to be part of the bylaws (required to be adopted by the corporation under § 1012 and §1013). If the sole shareholder did not have the foresight to provide for TOD of the shares, then these will now belong to the shareholder’s estate. If the sole shareholder is incompetent, a guardian appointed by a court or an attorney-in-fact (“AIF”) under a durable power of attorney granted authority to vote shares will “step into the shoes” of shareholder.
If the sole shareholder has named an authorized signer on the account, his or her authority does NOT cease upon the death or incapacity of the shareholder. The authorized signer can continue to write checks and make deposits, until his authority is removed by a court appointed guardian, an AIF, the TOD shareholders or the personal representative of the estate . This would be true even in the exceptionally unlikely circumstance when the duration of the corporation is the sole shareholder’s life, but s/he would have no authority to enter into new contracts.
The TOD shareholders or the personal representative appointed by a court will have the authority to vote the shares, elect officers, appoint signers, etc. to continue business operations. The successor in interest to the deceased sole shareholder, the guardian appointed by a court or the AIF under a durable power of attorney has the power to amend the Certificate of Incorporation to extend the duration of the corporation even if the original Certificate stated the duration for a term of years or the life of the shareholder.
It is a bit different when the entity is a professional corporation (“PC”) or a professional limited liability corporation (“PLLC”) formed under the Oklahoma Professional Entity Act, §§ 801-819. PCs and PLLCs are authorized for lawyers, doctors, dentists, chiropractors, CPAs, engineers and a multitude of professions (§ 803). All managers and shareholders of these professional entities must be duly licensed in accordance with the Oklahoma licensing laws for the profession or related profession to provide the professional services or related professional services, the deceased sole shareholder can only use TOD to transfer ownership to another licensed professional (§ 810). Under § 811, all employees rendering services for the PC or PLLC are required to be licensed as well. However, “the term “employee”, as used herein, [shall not be interpreted to include] clerks, secretaries, bookkeepers, technicians and other assistants who are not usually and ordinarily considered by custom and practice to be rendering professional services to the public for which a license is required.” This means that the authorized signer can continue to pay bills, salaries, etc. and make deposits payable to the PC.
So what happens when the sole shareholder of a PC/PLLC dies without providing for transfer of his/her shares to another licensed professional? § 815 provides:
If there is only one shareholder of a professional corporation, and the shareholder dies or becomes incapacitated, the executor or administrator or other personal representative of the shareholder shall have the authority to sell the shares of capital stock owned by the shareholder to a qualified purchaser, or to cause a dissolution of the professional corporation as provided by law. The vesting of ownership of shares of stock in a professional corporation in the executor or administrator or other personal representative shall be solely for the purposes set forth above and shall not be deemed to contravene any other provisions of this act.
Death or incapacity of the LLC’s sole member. Just like the sole shareholder of a corporation, the member might provide for transfer of his membership interest on death on membership shares, by a separate document or in the Operating Agreement. Note that unlike bylaws for a corporation, an operating agreement is not required under the Oklahoma statutes. If this is not the case, or if the sole member is incapacitated rather than deceased, then § 2036 applies:
C. If the sole member of a limited liability company dies or dissolves, or a court of competent jurisdiction adjudges the member to be incompetent or otherwise lacking legal capacity, the member’s personal representative accedes to the membership interest and possesses all rights, powers and duties associated with the interest for the benefit of the incompetent member or the deceased member’s estate.
An authorized signer appointed by the deceased or incapacitated sole member could continue to make deposits and pay bills, etc. until removed by the successor in interest (guardian, AIF, personal representative of the estate or TOD member/s) who will be able to run the business. However, see the provisions regarding dissolution for time limitations when the sole member dies.
Dissolution of a corporation. § 1096 provides for dissolution of corporations which would include PCs and PLLCs. It states:
A. If it should be deemed advisable in the judgment of the board of directors of any corporation that it should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each shareholder entitled to vote thereon of the adoption of the resolution and of a meeting of shareholders to take action upon the resolution.
B. At the meeting a vote shall be taken upon the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon shall vote for the proposed dissolution, a certificate of dissolution shall be filed with the Secretary of State pursuant to subsection D of this section.
C. Dissolution of a corporation may also be authorized without action of the directors if all the shareholders entitled to vote thereon shall consent in writing and a certificate of dissolution shall be filed with the Secretary of State pursuant to subsection D of this section.
D. If dissolution is authorized in accordance with this section, a certificate of dissolution shall be executed, acknowledged and filed, and shall become effective, in accordance with Section 1007 of this title. Such certificate of dissolution shall set forth:
1. the name of the corporation;
2. the date dissolution was authorized;
3. that the dissolution has been authorized by the board of directors and shareholders of the corporation, in accordance with subsections A and B of this section, or that the dissolution has been authorized by all of the shareholders of the corporation entitled to vote on a dissolution, in accordance with subsection C of this section; and
4. the names and addresses of the directors and officers of the corporation.
E. The resolution authorizing a proposed dissolution may provide that notwithstanding authorization or consent to the proposed dissolution by the shareholders, or the members of a nonstock corporation pursuant to Section 1097 of this title, the board of directors or governing body may abandon such proposed dissolution without further action by the shareholders or members.
F. Upon a certificate of dissolution becoming effective in accordance with Section 1007 of this title, the corporation shall be dissolved.
Note that § 1099 provides that whether a corporation’s existence expires by statement of duration in the Certificate of Incorporation is otherwise dissolved, there is a period for “winding up” the business. For three after expiration or dissolution or for such longer period as a district court shall direct, the corporation continues for the purpose of prosecuting and defending suits by or against them and to of enable them gradually to settle and close their business, dispose of and convey their property, discharge their liabilities, and to distribute to their shareholders any remaining assets, but not to continue the business. Any action, suit, or proceeding begun by or against the corporation either prior to or within three (3) years after the date of its expiration or dissolution, will continue without until any judgments, orders or decrees are fully executed, without the necessity for any special direction to that effect by the district court. This means that the just because the corporation has filed a Certificate of dissolution, it is not necessary to close the account.
A corporation may also be “involuntarily” dissolved or terminated by a court under §§ 1104-1105. When this happens, the decree or judgment shall be immediately filed by the clerk in the court as well as in the Office of the Secretary of State, and a note shall be made by the Secretary of State on the corporation’s charter or certificate of incorporation and on the index.
Dissolution of an LLC. Dissolution of an LLC does not require any filing with the Oklahoma Secretary of State and is set out in § 2037. A limited liability company is dissolved upon the earlier of the duration set out in the articles of organization (which is why the bank needs a copy of these), an event specified in the operating agreement (if one exists), the written consent of the members, at any time there are no members unless: within ninety (90) days or such other period as is provided for in the operating agreement after the occurrence of the event that terminated the continued membership of the last remaining member, the personal representative of the last remaining member (e.g., guardian, AIF or personal representative of the deceased member’s estate) agrees in writing to continue the limited liability company and to the admission of the personal representative of the member or its nominee or designee to the limited liability company as a member, effective as of the occurrence of the death or incapacity of the member), entry of a decree by a court.
The LLC continues to exist after dissolution whether or not articles of dissolution are filed but may only carry on activities to wind up the business and liquidate its assets. An LLC account can therefore remain open to permit this.
SCRA amendment enacted
By John S. Burnett and Mary Beth Guard
Sometimes procrastination pays off. “Better late than never” may be what you’re thinking right now, and you’d be right. President Obama signed the “Foreclosure Relief and Extension of Servicemembers Act of 2015” into law on March 31, 2016. This short piece of legislation amended the dates in Section 710(d) of the “Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 (Public Law 112-154) to extend the sunset in that act of the temporary substitution of “one year” for “90 days” in sections 303(b) and (c) of the Servicemembers Civil Relief Act (50 U.S.C. 3953). The new sunset date is December 31, 2017.
What does all that mean? Two important servicemember protections are at issue, as detailed below:
By way of background, 50 USC 3953(b) has traditionally provided an avenue through which a stay of proceedings to enforce an obligation can be granted by a court (either on the court’s own motion, or at the request of a servicemember) , so long as three conditions apply:
1. The proceedings involve an obligation on real or personal property owned by a servicemember that originated before the period of military service and for which the servicemember is still obligated; and
2. The obligation is secured by a mortgage, trust deed, or other security in the nature of a mortgage; and
3. The action to enforce the obligation is filed during the servicemember’s period of military service or a certain period of time thereafter.
It is the “certain period of time after military service” part of the statute that has been tinkered with repeatedly over the last few years to give a greater window of opportunity for a servicemember to avail himself or herself of a stay of proceedings or adjustment of the obligation. Originally, it only applied to an action filed during the period of military service or within 90 days after, but there have been five different amendments to that time period, beginning in 2008. Each time while the period has been elongated, it’s been on a short leash, with sunset provisions requiring its reversion to 90 days. As described above, the previous sun did indeed set and the action to extend it came three months later than it should have – but it finally got enacted 3/31/2016, making the period of protection apply to actions filed during the period of military service or within one year after (at least until it sunsets again 12/31/17).
Interestingly, under this same section of the SCRA and within these same timeframes, the court has the power to not only stay the proceedings for a period of time as justice and equity require, but also to adjust the obligation to preserve the interests of all parties. Loan modifications at the courthouse!
The second amendment affected 3953(c) on the same types of obligations detailed above (i.e., an obligation on real or personal property owned by a servicemember that originated before the period of military service and for which the servicemember is still obligated that is secured by a mortgage, trust deed, or other security in the nature of a mortgage.) It says that a sale, foreclosure, or seizure of property for a breach the obligation shall not be valid if made either during, or within one year after, the period of the servicemember’s military service unless there is a specific court order given to allow it or there is an agreement under Section 3918. It, too, used to say “during the period of military service or within 90 days after” and it went through numerous changes and sunsets. The “one year after” part will be with us through the end of 2017 at least.
If you mention these timeframes in your bank’s procedures, make sure you have them correct.
Those of you who put off updating your HUD SCRA delinquency notice in the hope that Congress would act made the right choice. It’s just unfortunate that the legislation wasn’t enacted until three months after the language had legally reverted to “90 days.” If you did update your notices, you must now change the “90 days” back to “one year.”
Those of us who remember something similar – the “now you have it, now you don’t” HUD requirement for homeownership counseling notices to delinquent borrowers back in the 90s feel a deep sense of déjà vu.
Title 50 gets an “app-endectomy”
By Mary Beth Guard
No, you have not switched to the medical channel, and you can blame Pauli for the clever title. What I’m talking about is the fact that for decades the Servicemembers Civil Relief Act, and the Soldiers’ and Sailors’ Civil Relief Act before it, were found in an Appendix to Title 50 of the United States Code. We always found it a bit bizarre, but that is the way it was and we accepted it. Now, it has changed.
The SCRA has been moved to a new Chapter 50 of Title 50 of the U.S.C. and the sections are numbered from 3901 through 4043. So, you have the sections of the Act itself (1 through 803); you have the section numbers that were used when the SCRA was stuck away in the Appendix (501 through 597b) and you have the new, improved section numbers as the law now exists within Title 50 (3901 through 4043).
If any of your policies, procedures, forms, workpapers, or anything else refer to an outdated citation, get it fixed. To aid in that endeavor, John Burnett created an indispensable SCRA Sections Cross-Reference Table. https://www.bankersonline.com/regulations/scra-xref
Guarantors not “applicants” under ECOA
By Andy Zavoina
The Supreme Court of the United States recently ruled on a case addressing the rights of applicants on a loan, and guarantors, under the Equal Credit Opportunity Act (ECOA). The ruling was the first since the passing of Justice Scalia where the Court’s vote was split four and four. When this is the case, the decision of the appellate court is considered to be affirmed by an equally divided court. In the case of Hawkins v. Community Bank of Raymore it was the Eighth Circuit’s ruling which was the deciding factor. At the end of the day this ruling was favorable to banks. The ruling is that a spouse who guarantees a loan is not an “applicant” under the ECOA, and therefore is not covered by the marital status discrimination provisions that apply to applicants under the ECOA. Here is what happened and why it is important.
Part of the stated purpose of Reg B, which implements ECOA, “is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age…” Reg B and ECOA apply to both consumer and commercial loans. Before ECOA was enacted, it was common for a woman to apply for credit and be approved contingent upon a guaranty by her husband. That was one of many discriminatory practices ECOA made unlawful.
ECOA is focused on making credit available, not restricting it. That is important in this decision.
Valerie Hawkins and Janice Patterson are wives of two men who owned a business which was approved for a residential development loan by the Community Bank of Raymore. The men’s business was granted a loan of $2 million, contingent upon their personal guarantees and guarantees from their spouses. As is common in lending practices, a lender will review the financial statements of applicants and want to see solvency. As an example, in many cases assets may be owned by more than one person but debts on the assets are joint and several so the applicant gets credit for half an asset, but all the debt. The home mortgage is often the key here. In other cases, lenders simply request the business sign on the debt and the owners and spouses of the owners guarantee the debt. In my opinion these are “iffy” based on the general rule we learn about Reg B – you can request signatures of other owners of property on collateral/security documents, but you can’t require they be on the debt. This is an area this court case and other similar cases have explored. ECOA is a law often relied upon by a spouse to try to escape the debt and even collect damages from a lender. That is what Hawkins and Patterson tried to do in this case as well.
Here, four residential development loans were in default. The Community Bank of Raymore accelerated and demanded the loans in full. The spouses who guaranteed the loans were not owners in the business. They sued the bank because the only reason they were asked to guaranty the debt was because they were married to the owners of the borrowing business. This, they contended, was marital discrimination and Reg B prohibits discrimination on the basis of marital status.
If you search Reg B for “applicant” you will see applicants and applicants have various rights and protections against certain types of discrimination, including marital status discrimination. This case addresses the issue of whether or not the women are “applicants” entitled to receive the protections Reg B provides. Prior to the Consumer Financial Protection Bureau assuming rule writing authority over Reg B, the Federal Reserve had that task. The rules and definitions of Reg B were not always as we read them now. And the Hawkins case caused the court to look beyond what Reg B said and to dissect ECOA.
ECOA itself defines “applicant” this way: “The term “applicant” means any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” (The emphasis in the definition is mine for clarity.)
When The Federal Reserve had rule writing authority over Reg B it defined “applicant as “any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of §1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties.” (Again, the emphasis in the definition is mine.) Note that it says “for the purposes of §1002.7(d)” which is the regulatory section pertaining to spousal signatures. That section, in part says “a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.”
Reg B didn’t always allow a guarantor to have the rights it allows today. Based on the ECOA definition the rights were granted to those who applied for a loan. A guarantor is requested during evaluation of the already submitted application. Guarantors are requested after the request is made for the loan. It was after an amendment to Reg B in 1985 by the Federal Reserve that the definition of an applicant was considered to include a guarantor as well. In fact, a proposed version of the amendment would have defined guarantors as “applicants” under the ECOA without any limitations. Guarantors and applicants would have been equal. But via the rule writing process industry-submitted comment letters expressed concern over the proposed definition. As a result, the final version of the Federal Reserve’s rule limited the new definition of “applicant” to parties seeking remedies under the spouse-signature rule.
The Eighth Circuit reviewed the plain language of the ECOA and affirmed the district court’s judgment in favor of the Community Bank of Raymore with a conclusion that the ECOA did not provide a cause of action to the plaintiffs because they were guarantors, not applicants, and a guarantor is not protected from marital status discrimination under the ECOA. The Eighth Circuit found no ambiguity in the definitions of the ECOA and saw no need to look at Reg B’s definitions, which would have included a guarantor.
This is not the first time this issue has been tested in the courts. Just two months before this Hawkins case, the Sixth Circuit heard a case (RL BB Acquisition LLC v. Bridgemill Commons Development Group LLC) and found that the definition of “applicant” in Reg B was a reasonable interpretation of what the ECOA called for. Similarly, the First Circuit Court ruled (in Mayes v. Chrysler Credit Corp.) that the Reg B expanded definition was applicable as did the Third Circuit (in Silverman v. Eastrich Multiple Investor Fund LP) as it concluded a spouse who is a guarantor was not precluded from actions under the ECOA.
Why did the Eighth Circuit reach a different opinion than three other courts at the same level? It applied a two-step process from the Supreme Court’s 1984 decision, Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc. In this case the Supreme Court looked for an agency interpretation of a statute and asks “whether Congress has directly spoken to the precise question at issue.” If it is determined that Congress did not directly address the question, the court asks “whether the agency’s answer is based on a permissible construction of the statute.”
The Eighth Circuit used Webster’s Dictionary to define “apply.” The court concluded that the “ECOA unmistakably provides that a person is an applicant only if she requests credit.” This excludes the spouse who is a guarantor under the ECOA definition. The court also looked at the stated purpose of ECOA and paid attention to the fact that it was intended in part “to curtail the practice of creditors who refused to grant a wife’s credit application without a guaranty from her husband.” The court acknowledged that neither Hawkins nor Patterson claimed to have been excluded from the loan process. Their claim was the opposite, that they were included by being required to guarantee the loan.
Because the 8th Circuit’s decision was affirmed by an evenly split court, legal experts opine that it will not have precedential effect in any other circuit and will only be a binding precedent in the Eighth Circuit states — Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Decisions that differed in other appellate courts will still apply in their own jurisdictions.
Had the decision gone in favor of Hawkins and Patterson and been by a majority of the Supreme Court, the floodgates could have opened to a large number of cases being argued against banks and the consequences could have been significant. Lenders must still not require cosigners or guarantors when an applicant qualifies for a loan on its own. A blanket policy of requiring spousal guarantors is never advisable. Have a well-defined policy and involve counsel if necessary, to ensure you steer clear of ECOA problems.