(Source: J. Scott Trubey The Atlanta Journal-Constitution (MCT) — In the frenzied final days of the General Assembly, a bill that would essentially absolve certain individuals of promises to repay bad loans is winding through the state House of Representatives.
Proponents say Senate Bill 448 would protect small businesses and put Georgians back to work.
But critics say it would really only help a few powerful developers and other business borrowers to get out of payment promises known as personal guaranties. Those guaranties are a safety net ensuring repayment in case loans went bad. Passing that buck could increase the cost of bank failures to federal authorities, and indirectly to bank customers and taxpayers, critics say.
A broader version of SB 448 passed the Senate on a 45-0 vote.
A scaled-down version in the House would prevent investors that buy loans from the Federal Deposit Insurance Corp. from going after guarantors. These investor groups, which act like debt collectors, could go after only what they paid for the loan, which is often far less than what’s owed, plus interest.
The House Rules Committee could assign SB 448 on Tuesday for a floor vote. The bill also could be attached to other legislation.
The FDIC, which declined comment, routinely sells bad loans to investors to help pay for the process of managing a failed bank’s affairs.
Making such guaranties worthless would mean the FDIC couldn’t collect as much from selling bad loans, increasing the cost of failed banks, said Tony Plath, banking professor at the University of North Carolina at Charlotte.
The bill as currently written could apply to any type of loan, but loans bought by investor groups that originated from failed Georgia banks tend to be for stalled subdivisions and other struggling residential or commercial developments.
Proponents of SB 448 say investors buy the loans for pennies on the dollar and try to reap outrageous profits instead of working with borrowers. They also say these investors are suing in default cases before foreclosure and then not giving debtors credit for the value of property later sold, an argument which lawyers for creditors dispute.
Opponents of the bill such as Kevin Ward, an Atlanta attorney who often works with creditors, said SB 448 would protect debtors whose defaults wounded failed banks in the first place.
Scott Leventhal, president and CEO of Atlanta-based Tivoli Properties, said the bill could help “a pretty wide demographic” of borrowers and boost the recovery by persuading bank regulators to be more creative in working out loans. He rejected claims the bill is a bailout for developers.
Leventhal declined to say when asked whether he might use the bill, if it passes, as a defense in a lawsuit again him and two of his companies seeking more than $4 million in principal and interest for a stalled development in Cherokee County.
But Ward says some defendants in defaulted loan cases are already looking to use SB 448.
Rialto Capital Management, the investor group behind an entity suing Leventhal, and a subsidiary of Lennar Homes, bought into a joint venture with the FDIC to work out a portfolio of loans from failed banks.
Leventhal, who testified in favor of the bill last week before the House banking committee, said Rialto — unlike other similar groups — is ruining local developers instead of helping them restart struggling projects, to put people to work and recoup loan proceeds.
Ward, whose clients include Rialto, said Georgia is overloaded with stalled developments, and many of the projects in default aren’t functioning and won’t even if creditors gave borrowers more time.
“What it does is it tries to take focus away from the bad actors who are seeking a bailout and 1/8put it3/8 onto the federal government,” Ward said of arguments for the bill.
Rialto and other investors are permitted to sue first under loan terms the lender and borrower agreed to, Ward said. They do so often because of diminished values for assets such as partially finished subdivisions given the region’s glut of abandoned developments.
Ward said investors do give borrowers credit for the value of properties sold in foreclosure.
Georgia has seen more bank failures than any other state since mid-2008. The FDIC’s Deposit Insurance Fund is paid by banks, but ultimately customers pay through bank fees, and taxpayers essentially underwrite the fund, which protects depositors.
Leventhal isn’t the only prominent metro Atlanta developer facing legal action from an investor group.
Wayne Mason, a prominent Gwinnett County developer is being sued as a guarantor by an investor group over a nearly $16 million loan on a failed DeKalb County development. It was not immediately clear if Mason supports the bill. Mason did not immediately return a message seeking comment.
Lobbying on both sides of the bill has been fierce. Capitol veterans say a nonprofit entity, Citizens for a Better Georgia Inc., formed in early March, is among the interests pushing SB 448. It is not clear who backs this organization, but four lobbyists have been working for the group, according to the state ethics commission website.
Messages left at phone numbers listed for Citizens for a Better Georgia were not immediately returned.
Rialto also appears to have mobilized at least seven lobbyists on its behalf.
State Sen. Don Balfour, R-Snellville, a co-sponsor of SB 448, said last week an earlier version would have helped community banks and Georgia’s economy by encouraging banks and borrowers to work together, thus preserving property values. On Monday, he rejected calling the bill a bailout.
The original version of SB 448 also would have applied to personal guaranties on loans sold by banks to other banks as well as investors, but bankers and others objected. The bill was narrowed in the House to apply only to the FDIC and investor groups.
House banking committee members feared a constitutional challenge on the basis the bill could rewrite existing legal contracts — the loans.
State Rep. Greg Morris, R-Vidalia, chairman of the banking committee, said the revised bill is not retroactive.
But the bill currently does not include any language in relation to time.
The bill also might face a challenge by the FDIC, Ward said, because SB 448 could pre-empt the agency in managing the affairs of failed banks.
Staff writer Christopher Quinn contributed to this article.
©2012 The Atlanta Journal-Constitution (Atlanta, Ga.)
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