Tag: loans

Are Loans Securities?

We have been following a case that has been winding its way through New York federal courts for some time that players in the syndicated loan market have described as everything from “a potential game changer” to an “existential threat” to the syndicated loan market.

The case in question is Kirschner v. JPMorgan Chase Bank, N.A., which is before the United States Court of Appeals for the Second Circuit. In this case, the Court will consider an appeal of a 2020 decision by the United States District Court for the Southern District of New York which held that the syndicated term loan in question was not a security. Significantly, this ruling indicated that because syndicated term loans are not securities, they are therefore not subject to securities laws and regulations.

The consequence of a determination that syndicated loans are securities would be significant. It would mean, among other things, that the syndicated loan market would have to comply with various state and federal securities laws. This would significantly change the cost of these transactions as well as the means by which syndication and loan trading take place. The Loan Syndications and Trading Association (LSTA) filed an amicus brief in this case in May of this year, which we covered here. The LSTA argued in its brief, among other things, that beyond the increased cost, regulating syndicated loans as securities would fundamentally change other aspects of the syndicated loan market. Specifically, the LSTA pointed to the importance of a borrower’s ability to have veto rights and other control in determining which entities will hold its debt. The LSTA also noted the importance of quick access to funding on flexible terms specific to the borrower in question – something we know is at the heart of so many fund finance transactions – which would be greatly compromised within a securities regulatory regime. The LSTA brief also discusses potential negative impacts on the CLO market.

Those in favor of a change in regulation point to features such as nonbank lender participation in the market, the fact that the test to determine whether a loan is a security may be outdated, and the overall size of the syndicated loan market – at $1.4 trillion – which could be a risk to the larger global financial system potentially warranting more stringent regulation.

Most experts believe that the Second Circuit will not overturn the decision issued in the lower court, but the issue in question is significant enough that market players should keep an eye on this one. Oral arguments will take place early next year. We will continue to watch as this case develops and update you here.

Article By Leah Edelboim of Cadwalader, Wickersham & Taft LLP

For more securities and SEC legal news, click here to visit the National Law Review.

© Copyright 2022 Cadwalader, Wickersham & Taft LLP

CFPB Plans to Increase Regulation over “Buy Now, Pay Later” Lenders

The Consumer Financial Protect Bureau (CFPB) issued a release on September 15, 2022, announcing its intent to issue additional interpretive guidance or rules to ensure “Buy Now, Pay Later” (BNPL) lenders comply with the same or similar regulations already established for credit cards following a study on the industry.

In its press release, the CFPB Director Rohit Chopra noted the rapidly growing use of “Buy Now, Pay Later is a rapidly growing type of loan that serves as a close substitute for credit cards.” While credit cards include interest charges, BNPL loans do not, making them more attractive to consumers. Instead, these loans allow consumers to purchase a product and repay the purchase price through several installment payments. As a result, BNPL loans have become prominent over the past several years, particularly during the COVID-19 pandemic. These previously niche loans, typically used for apparel and beauty purchases, are now used in almost all consumer-facing industries.

The CFPB noted several highlights of BNPL loans found through the study, which include:

  • Increased loan approval rates year over year;
  • Increased occurrences of late fee charges;
  • Increased product returns by consumers; and
  • Shrinking profit margins by BNPL lenders.

As a result of the study, the CFPB outlined the following concerns with the BNPL industry, mainly because the marketing of these loans leads consumers to believe the loans are a “zero-risk credit option.”

  • Limited Consumer Protections: While BNPL loans are used as an alternative to credit cards, they lack the standard credit disclosures, dispute resolution rights, etc., that similar consumer credit transactions often require.
  • Data Harvesting: Lower profit margins associated with BNPL loans have pushed the industry to monetize consumer data, potentially impacting consumer privacy.
  • Debt Accumulation: According to the CFPB, BNPL loans encourage consumers to purchase more products and borrow more, resulting in consumers becoming overleveraged. While the CFPB notes that the lenders in this space do not furnish credit data to credit reporting companies, the CFPB is concerned about this industry extending credit to consumers who may not be able to repay the debt.

Takeaways

The CFPB has yet again reinforced its commitment to regulate lenders that extend consumer credit. The CFPB’s decision to either enforce existing consumer laws (i.e., the Truth in Lending Act disclosures already required for credit cards and other consumer loans) or create new rules on the growing BNPL industry is not unexpected. However, the CFPB’s release shows a renewed focus on protecting consumers’ privacy rights and ensuring that consumers can afford to repay their credit lines before offers of credit are extended, and demonstrates once more that the Bureau will seek to regulate emerging forms of consumer credit.

Article By David T. Long Jr. and Andrew J. Narod of Bradley Arant Boult Cummings LLP

For more financial institutions and banking legal news, click here to visit the National Law Review.

© 2022 Bradley Arant Boult Cummings LLP

Appellate Court Tells CitiMortgage It Can’t Force “Repurchase” Of What No Longer Exists

A recent decision by the United States Court of Appeals for the Eighth Circuit offers some vindication for mortgage companies still facing “repurchase” demands made by the banks to which they sold residential mortgages in the years leading up to the financial crisis that began in 2007 and accelerated in 2008.  In CitiMortgage, Inc. v. Equity Bank, N.A., No. 18-1312 (8th Cir. 2019), the Eighth Circuit (which has appellate jurisdiction over the federal district courts of Arkansas, Iowa, Minnesota, Missouri, Nebraska, and the Dakotas) reached the common-sense conclusion that a plaintiff cannot require a defendant loan originator/seller to “repurchase” a loan extinguished by foreclosure.  In such a circumstance, the court reasoned, there simply is nothing left to repurchase.  In so holding, the Eighth Circuit affirmed the judgment of the United States District Court for the Eastern District of Missouri  — a court that, despite being CitiMortgage’s consistently chosen forum for repurchase and contractual indemnification claims against loan sellers, had granted summary judgment to the defendant, Equity Bank, on this issue.

The relevant factual background is as follows. CitiMortgage filed suit against Equity, demanding that Equity repurchase 12 residential mortgage loans. CitiMortgage had notified Equity that it needed to take action under the cure-or-purchase provision in the parties’ Agreement.  The Eighth Circuit affirmed the district court’s holding that Equity’s duty to repurchase was limited to the six loans that had not gone through foreclosure. For the loans that had not gone through foreclosure, the court affirmed the district court’s holding that Equity breached the Agreement. The court rejected Equity’s claims that CitiMortgage’s letters lacked the necessary detail to trigger its duty to perform, and that CitiMortgage waited too long to exercise its rights. But, as to the six loans that had gone through foreclosure, the court affirmed the district court’s holding that Equity owed nothing to CitiMortgage.

As part of its analysis detailing the reasons that Equity could not be required to repurchase loans already foreclosed upon, the Eighth Circuit faulted CitiMortgage for never explaining what, exactly, Equity was supposed to repurchase. We have regularly made that argument when defending clients against repurchase claims and likewise, have never gotten a satisfactory response as to what our client could repurchase.   Typically, in tacit acknowledgment of the merit of that argument, plaintiffs make sure to do something that the appellate court intimated CitiMortgage should have done in this case.  That is to seek instead what is usually an alternative contractual remedy, indemnification.   Perhaps because it considered the repurchase provision in its contract with Equity more likely to generate a significant damages award (this contract’s repurchase provision established a “repurchase price formula” favorable to CitiMortgage), CitiMortgage opted in this case to seek only the remedy of “repurchase.”

To be sure, a plaintiff’s decision to seek an “indemnification” remedy also creates obstacles to recovery in most cases of this type.  Among those obstacles are many of the same statute of limitations problems that parties asking for repurchase face, as well as substantial questions about the circumstances under which the party seeking indemnification incurred the liability for which it is seeking payment.  Relatedly, whether a particular alleged loan defect can fairly be said to have caused the plaintiff’s monetary loss is typically very much in question when a plaintiff aggregator seeks indemnification from a defendant loan seller. Many battles over such issues remain to be fought, but, in the meantime, the Eighth Circuit’s recognition that a party cannot repurchase what no longer exists is a welcome development for residential mortgage loan originators.

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP