Banking Law Bulletin
As the seasons change (is rainy a season?) so too do banking laws and regulations continue to change and evolve. What follows are some important Winter/Spring developments:May Day! May Day! – Foreclosure Rules Kick In
On February 22, 2013, the Illinois Supreme Court announced new mortgage foreclosure rules designed to help those who face loss of their homes via foreclosure. These rules went into effect on May 1, 2013 and are now in play. There are three (3) new Supreme Court rules, as follows:
Rule 113 – APPLIES ONLY TO CASES FILED AFTER MAY 1.
Rule 114 – APPLIES TO ALL CASES PENDING ON OR FILED AFTER MAY 1 IF A FORECLOSURE JUDGMENT WAS NOT YET ENTERED BY MAY 1.
BOTTOM LINE: Accurate, understandable and producible records of mortgage payments and knowledge of, and compliance with, applicable loss mitigation programs are a must under these new rules.Student Loans – Is Water Starting to Leak Through The Non-Dischargeability Dam?
The bankruptcy code provides that student loans are exempt from discharge (are not excused) unless the continued obligation would “impose an undue hardship on the debtor and the debtor’s dependents”. In such case, the debt is discharged. What constitutes “undue hardship” then becomes crucial in determining whether or not a student loan is discharged or remains an enforceable obligation. In general, “undue hardship” is shown if three (3) conditions are met: (1) debtor cannot maintain, based on current income and expenses, a minimal standard of living if required to repay the loan; (2) the debtor’s state of affairs is likely to persist for a significant period of time; and (3) the debtor made good faith efforts to repay the loans. The last factor is key and often times cases come down to whether or not the inability to pay was due to factors within or beyond the debtor’s control. In other words, if, through no fault of the debtor, he was not able, or did not have the ability, to pay, i.e. due say to disability, infirmity or medical conditions, the good faith test was met. Normally, a student loan is not discharged if the person is healthy, able bodied and able to work. This may be changing.
The issue of whether or not the good faith test was met was the heart of the case in Krieger vs. Educational Credit Management Corporation decided by the United States Court of Appeals for the Seventh Circuit on April 10, 2013. Here, Susan Krieger incurred student loans to obtain training as a paralegal. She lived with her mother in a rural community where few jobs were available; received only a few hundred dollars every month from government programs; and was too poor to move to, or search for, better employment prospects elsewhere. She also had an old car that needed repairs and lacked internet access which hampered her search for work. The case came down to whether or not Krieger made a good faith effort to repay the loan. The bankruptcy court concluded that she had made a thorough (good faith) effort evidenced by her sending out over 200 applications for jobs over 10 years. The district court disagreed finding that Krieger could have searched harder for work and could have looked for employment in a field other than her stated profession, i.e. as a paralegal. On appeal, the Seventh Circuit concluded that Krieger, then age 53, and unemployed since 1986, had made a reasonable good faith effort to pay the student loan and that, therefore, the student loan was dischargeable.
The concern raised by the case is that the court discharged a student loan for a woman who was middle age (53), was in good health and had a solid education, i.e. paralegal training, for reasons that appear to be within her control, namely moving to an area where there were more job opportunities and/or taking a job outside her chosen profession. What is troubling is that Ms. Krieger’s situation is not unique. The Chicago Tribune recently reported that banks wrote off three million dollars of student loans in the first two (2) months of 2013 up six percent (6%) from 2012. Moreover, with over a trillion dollars of student loans outstanding and many young adults with college degrees struggling to find jobs in their chosen field, the implications of this case are profound. Will this case offer an excuse to avoid student loan obligations simply because one cannot find a job in his major/chosen profession within a small town where the young adult grew up or now lives? Is applying for 20 jobs a year good faith or borderline lazy? If a person gets a college degree, sits at home, makes some effort to get a job (2 job applications filed a month as Ms. Krieger did) and cannot find a job in his or her major (or chosen profession), can his student loan be excused and discharged? This case suggests that that is a possibility. Will the bankruptcy code’s protection against student loans being non-dischargeable start to break down as Krieger like cases trickle through the system? Time will tell.MORTGAGE LENDER vs. CONTRACTOR – WHO GETS THE FUNDS?
The issue is this: how are the proceeds of a foreclosure sale to be distributed between a construction lender/mortgagee and mechanic’s lien claimant when the mortgage predates the mechanic’s lien but the proceeds from a foreclosure sale are insufficient to fully pay all parties. In short, who wins if there is a shortfall of funds? In LaSalle Bank NA vs Cypress Creek, the Illinois Supreme Court held that the lender’s share of the foreclosure sale proceeds should be determined by adding together the value of the underlying unimproved land and the value of project improvements paid for by the loan proceeds. In other words, Cypress Creek held that the lender’s lien was superior to that of the mechanic’s lien holder on the improvements for which the construction loan proceeds were used to pay the contractors. As such, the lender stands in the shoes of mechanic’s lien claimants who have already been paid from the construction loan. This case was good news for lenders!
Unfortunately, Public Act 097-1165, effective February 13, 2013 overturns this decision. Under the new law, when the proceeds of a foreclosure sale are insufficient to satisfy the claims of both the lender and the mechanic’s lien claimants, the proceeds of the sale are to be distributed as follows:
This is bad news for lenders as it reverses the lien priorities on improvements made using the loan proceeds and thereby limits a bank’s ability to recoup on its loans when a project falls into trouble and a foreclosure ensues. To compensate for this increased risk, lenders have several options, including:
The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters. For more information regarding any of the foregoing items, please contact any member of our banking practice group: Dennis W. Gorman (email@example.com), William G. Keller, Jr. (firstname.lastname@example.org), James A. Rapp (email@example.com), William M. McCleery, Jr. (firstname.lastname@example.org), Ted M. Niemann (email@example.com), Michael A. Bickhaus (firstname.lastname@example.org) or Andrew K. Cashman (email@example.com), at (217) 223-3030 or visit us on the web at www.srnm.com. We invite and welcome all questions and comments.
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