We recently got a question from one of our firm's community bank clients that does a lot of small business lending. The bank sometimes makes commercial loans that are guaranteed by the borrower’s principal. The principal, in turn, secures his/her obligations under the guaranty with a mortgage on his/her primary residence. The question was:
if the bank decides to foreclose on the mortgage in order to pay itself down under the guaranty of the commercial loan, do the pre-suit notice and settlement conference provisions of Ind. Code 32-30-10.5 apply?
The client believed that the answer was “no” because the subject loans were not made “primarily for personal, family or household purposes,” which in part defines the loans governed by the statute. See I.C. 32-30-10.5-5(a)(2).
After consulting with my partner Tom Dinwiddie, who was involved in the creation of the 2009 legislation, we concluded that the client's understanding was correct. (Click here for my 2009 post regarding the legislation.) The process was never intended to apply to commercial loans. The key is that the bank is foreclosing on property securing a business loan, not a consumer loan. Even though the bank is targeting residential real estate, the protections afforded by the statute do not apply.
Our conclusions with regard to the inapplicablity of Indiana's pre-suit notice and settlement conference statute - entitled "Foreclosure Prevention Agreements for Residential Mortgages" - are supported by case law interpreting the Fair Debt Collections Practices Act, which uses the identicle terminology "primarily for personal, family or household purposes...." As noted by by 12/18/09 and 11/16/06 posts, the regulations of the FDCPA generally do not apply to commercial foreclosures or the collection of business debts.