A couple years ago, Clark County was first named a Judicial Hellhole. The state of Nevada could be on its way to being the nation’s first Lending Hellhole.
The pendulum swings all the way to one side, then all the way to the other, never stopping in the middle. So it is with Nevada’s overreaction to the loosey-goosey days of easy money.
The Silver State is creating taxpayer-backed business loan programs because “banks aren’t lending,” while at the same time making it more difficult for lenders to survive in the state.
Banks are currently fashionable targets for contempt and derision but the fact is that financing is vital to a modern economy. Not many of us have enough idle cash laying around to pay for a home, even at today’s depressed prices.
The ability to finance automobile purchases allows the average person to buy a car more advanced than the Fred Flintstone Mobile. Commercial lending facilitates business growth and permits companies to make capital investments while freeing up cash for operations.
While politicians complain about banks not lending money, government regulators are looking over the banks’ shoulders scrutinizing every transaction and forcing lenders to tighten their requirements. The Silver State has gone even further in overreacting to the excesses of the mortgage bubble by enacting legislation that could make it extremely difficult for lenders to operate profitably in the state and, therefore, more difficult for the state’s consumers and businesses.
If lenders can’t make money by lending it out, they won’t lend. Nevada Banking Association President Bill Uffelman says, “Nevada is rightfully gaining a reputation as a lousy place to loan or buy debt.”
Two pieces of legislation that became law this past spring have contributed to that reputation. AB284 creates additional hoops for lenders jump through to foreclosure on property owners who have defaulted on their loans. As a result of this law the number of Notices of Default (NOD), a filing required to start the foreclosure process against delinquent borrowers, has plummeted.
AB273, among other things, reduces the amount some lenders can recover from a secured loan. This could severely hamper banks’ ability to sell loans to secondary buyers, which provides additional capital to make more loans. It could also more difficult for solvent banks to purchase failed banks that have been taken over by the FDIC.
AB284 has virtually stopped NOD filings in Nevada, at least for the time being. Some of those familiar with the legislation believe that the requirements of AB284 don’t present an impossible burden for lenders wishing to foreclose on delinquent borrowers but it is making lenders more hesitant.
Mark Connot, a real estate attorney with Fox Rothschild, stated that the “personal knowledge” requirement in an affidavit filed with a NOD could be satisfied by an individual familiarizing himself with the documents and electronic records of prior transactions. “Someone can be educated on the personal knowledge,” according to Connot. He believes other requirements, such as the need to demonstrate “actual or constructive possession,” meaning the “power and intent to control the note”, could be more troublesome.
However, even if lenders believe these issues can be overcome, NOD filings are unlikely to return to their prior pace any time soon. No lender wants to be the first one to jump into that pool.
A person making a false statement on the affidavit, including a claim of “personal knowledge”, is subject to fines and can be prosecuted for perjury. In addition, there are a slew of attorneys, many flushed with past successes suing mortgage companies, chomping at the bit to sue over AB284. Lenders could be liable for civil awards to homeowners who have not made mortgage payments in many months, simply for filing improper affidavits.
While lenders may eventually discover a way to comply with the requirements of AB284, everyone is waiting for someone else to take the plunge first. As Uffelman puts it, “Who’s going to be the test dummy?”
While the consequences of AB284 may be more immediate, the impact of AB273 is more far-reaching.
AB273 mandates that a lender who buys a mortgage from another lender can only collect what it paid for the note, regardless of the face value. In other words, the law removes the profit potential from the purchase of promissory notes on secured loans and, thus, the willingness of lenders to buy promissory notes.
Banks often sell these to acquire more capital, allowing them to make more loans. In addition, these secondary sales allow banks to salvage something from loans in default by selling them to buyers who then have incentive to collect the remaining balance, especially in the case of business loans secured by personal guarantees. If buyers can’t collect more than they paid, “nobody is going to purchase those notes,” Connot says.
According to Uffelman the law could also have an effect the ability of solvent banks to purchase the loans of banks taken over by the FDIC. These are almost always purchased at a steep discount.
AB273 would prevent the purchasing bank from collecting more than the discounted amount it paid for them. This would remove any incentive for banks to purchase these loans. If the FDIC is unable to sell the loans of failed banks it could possibly have an impact on FDIC insurance.
Currently the Nevada Supreme Court is hearing cases regarding AB273 and whether it is retroactive. Borrowers have argued the law should apply to any loan not foreclosed upon before it took effect. Lenders dispute this, claiming it should only apply to loans issued after the effective date of the law. Lenders can factor the additional costs and risks into new loans but not to those with contracts already in force.
The ability to secure financing is vital for a modern economy. It increases the capacity of consumers to make major purchases and is essential for business growth. The state of Nevada has taken several steps that have made an already-difficult climate even worse for the state’s lenders, which could seriously hamper the state’s recovery and economic growth.
Facebook
Twitter
Pinterest
RSS