Do CRE Borrowers Need Recourse?
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Patrick Rodgers has become somewhat of a hometown hero here in Philadelphia. He is a homeowner who “stuck it” to Wells Fargo (NYSE: WFC) by taking advantage of a federal law called the Real Estate Settlement Procedures Act (RESPA). You can read Patrick's story in this article published on Philly.com. Long story short, Wells Fargo, Patrick's home mortgage lender, required that he change his homeowner's insurance to a new and drastically more expensive coverage plan. Wells Fargo's demand was essentially a method of preserving the value of their collateral. In an attempt to find out why his lender was requiring a change in insurance, Patrick wrote Wells Fargo a formal letter asking for an explanation. Wells Fargo didn't respond to Patrick's question and as a result, Patrick was awarded a $1,000 fine levied against Wells Fargo under the RESPA law. After reading Patrick's story I began to wonder, “What if this happened with a loan secured by commercial real estate?”
In Patrick's case, RESPA provided some level of recourse against the lender for failing to answer his questions. But the collateral in that instance was not an income producing property. Let's step into the shoes of a commercial real estate owner instead. Suppose the owner's bank demands that he or she increase the insurance coverage on an office building because it has historical significance, and therefore a higher replacement cost. The owner could probably very easily call up his lender or servicer and demand an explanation. More than likely, the lender or servicer would provide a sufficient explanation and if the lender crafted their documentation correctly, the borrower would have to comply. But what if the lender or servicer fails to answer the CRE owner's questions about why he is being required to take out increased insurance coverage? Can the CRE owner take his lender to court the same way Patrick did?
Unfortunately RESPA does not apply to loans secured by commercial real estate. A commercial real estate owner essentially has no recourse against a lender that does not answer his or her questions or concerns (unless there is a law of which I am unaware). Unlike homeowners whose right to information is protected under federal law, CRE owners rely on the threat of taking future business elsewhere to have their questions answered. In a tough credit environment, that threat may not be enough. As we've heard a lot lately, in times of distress many CRE owners have had trouble opening a dialogue with their lenders and servicers. Is it time to consider some sort of legislation that penalizes CRE lenders for failing to address their borrowers' concerns?