Page 11 - John Hundley 2014

Banking Law Roundup

Sharp Thinking

No. 112 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. April 2014

“Predatory” Lending May Prevent Foreclosure

Predatory lending may give rise to a defense preventing foreclosure on a mortgage loan, the Supreme
Court of Arkansas held recently.

Finding the mortgagee’s conduct “unconscionable,” Gulfco of La., Inc. v. Brantley, __ S.W.3d __, 2013
Ark. 367, 2013 WL 5497308 (Ark. 2013), said courts in making such an inquiry were to examine “the
totality of the circumstances surrounding the negotiation and execution of the contract.” However, it
identified three factors which it regarded as particularly important: (1) “whether there [was] a gross
inequality of bargaining power between the parties”; (2) “whether the aggrieved party was made aware of
and comprehended the provision in question”; and (3) whether there was “a belief by the stronger party
that there [was] no reasonable probability that the weaker party [would] fully perform the contract.”

In Gulfco, the debtors were unemployed, had first obtained a modest unsecured loan to pay household
bills, and had evidenced incapability to make the $92-a-month payments on that loan. Subsequent loans
were made to pay off previous notes or to bring their payments current. The creditor proposed and the
debtors took a $20,000 loan secured by their home.

“Despite the Brantley’s [sic] demonstrated inability to pay, Gulfco continued to loan them money,” the
court said. “Each loan, that included built-in fees and high interest rates, placed the Brantleys in a
position of ever-increasing debt, such that it was all but inevitable that they would end up in default. While
the Brantleys’ debt situation became more dire with each loan, Gulfco’s risk was minimal, because with
the mortgage, it was assured of receiving full payment on the loan. . . . [T]he evidence revealed an
intolerable pattern of reprehensible and unconscionable conduct on the party of Gulfco. . . . We hold that
the [trial] court did not err in refusing to enforce the mortgage”.

Appeals Court Holds 765 ILCS 5/11 Permissive

Section 11 of the Conveyances Act (765 ILCS 5/11) always has been a “safe harbor” provision stating
what a recorded mortgage may contain in order to be effective, the Seventh U.S. Circuit Court of Appeals
has ruled.

Deciding an issue argued but left open in Peoples Nat’l Bank v. Banterra Bank, 719 F.3d 608 (7th Cir.
2013) (see Sharp Thinking No. 91 (May 2013)), the court said that the form set forth in § 11 was merely
permissive, that the mortgages before it (which did not state the maturity date or interest rate on the
underlying notes) “supplied the indispensable elements of a mortgage under Illinois common law,” and
that the mortgages “were effective to give constructive record notice” to potential claimants. In re Crane,
742 F.3d 702 (7th Cir. 2013).

Construing the statute’s provision that “[m]ortgages of lands may be substantially in the following
form,” the court noted it “simply does not say that a recorded mortgage must set forth every element listed
for the recording to be effective against third parties. Strict compliance with the suggested form is not
required to ensure a valid mortgage enforceable against subsequent lenders and purchasers” (court’s
emphasis).

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
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