FAQs
Question: Can you tell me where in the Iowa Code it states that state-chartered banks are required to obtain a written title opinion by an attorney for purchase money (and refinance of purchase money) loans?
Answer: The final title opinion requirement is found in the Iowa Administrative Code – section 9.2(4):
9.2(4) Evidence of title. The state bank shall obtain, when lending for the purpose of acquisition or for the purpose of refinance of acquisition when a new mortgage, deed of trust, or similar instrument is filed, one of the following:
- A written legal opinion by an attorney admitted to practice in the state in which the real estate is located showing marketable title in the mortgagor and describing any existing liens and stating that the state bank’s mortgage, deed of trust, or similar instrument is a lien on the real estate. An Iowa title guaranty certificate issued by the Iowa title guaranty division of the Iowa finance authority satisfies this requirement.
- Title insurance written by an insurance company licensed to do business in the state in which the real property is located describing any existing liens and insuring the title to the real property and the validity and enforceability of the mortgage, deed of trust, or similar instrument as a lien on the real property.
This Iowa Administrative Code provision is applicable to consumer-, business-, and agricultural-purpose loans made to either consumers or business entities. Notice, it requires a state-chartered bank to obtain either a written legal opinion by an attorney licensed in the state where the real property is located OR title insurance written by a company licensed in the state where the real property is located. However, the state of Iowa does NOT license title insurance companies, so there are NO title agents that meet this standard in Iowa. If the bank is securing a loan with a property located outside of Iowa, it can obtain title insurance on that property from an insurer licensed in that state and comply with this code section.
It is also important to understand a written title opinion is only required when the loan purpose is to acquire property (or refinance the acquisition) AND when taking a new mortgage or similar collateral interest in the property. So, a loan for another purpose other than acquisition (or refi) – such as home improvement or for operating expenses – would NOT trigger the requirement even though it is secured by real property.
The Administrative Code does however include a provision providing some flexibility, often referred to as the “basket provision” in section 9.2(6):
9.2(6) Exempted transactions. In addition to the exemptions set forth in subrule 9.2(5), it may be appropriate, in light of all relevant credit considerations, including community reinvestment factors, for state banks, in certain instances, to originate or purchase real estate loans that do not meet the requirements of this rule. State banks shall be allowed to make such loans; however, the aggregate amount of all real estate loans that fall into this category shall not exceed aggregate capital as reflected on the state bank’s most recent consolidated report of condition, unless prior approval to exceed this limitation has been obtained from the superintendent. These exempted loans must be identified by the board of directors by name and outstanding balance and must be reviewed by the board no less frequently than annually. Examiners, during the course of their examinations, will determine whether these exempted loans are adequately documented and appropriate in light of overall safety and soundness considerations. No real estate loans to directors, officers, or principal shareholders or their related interests shall be allowed in the exempted category of this subrule.
As a result, a state-charted bank could obtain title insurance on properties located in Iowa instead of a written title opinion, however the aggregate total of these loans cannot exceed the bank’s capital, and the loans must be reported and reviewed by your board at least annually. Loans made to directors, officers and shareholders are not eligible for the basket provision. Also keep in mind the bank’s loan policy would have to permit use of the basket provision.
Question: What is the required cure period under Iowa law for a commercial loan?
Answer: Iowa law does not require commercial loans to be cured unless the loan is secured by:
- A borrower’s homestead, in which case a 30-day cure period is required by Iowa code chapter 654.2D or
- Ag land, in which case a 45-day cure period is required by Iowa Code chapter 654.2A
If the loan is secured by other collateral such as inventory, equipment or commercial real estate, a cure notice and cure period are not required; instead, collection efforts will be determined per the bank’s contract with the borrower. Creditors questioning cure periods or default procedures should consult with their legal counsel.
On a related topic, loans subject to the Iowa Consumer Credit Code are subject to a 20-day cure period when in default. See Iowa code chapter 537.5110(4)(a).
Question: We are considering implementing prepayment penalties on commercial and agricultural loans. Are there any limitations we should be aware of?
Answer: Iowa law prohibits prepayment penalties on loans secured by real estate when the purpose of the loan is for purchase or refinance of a single-family or two-family dwelling occupied or to be occupied by the borrower. The code also prohibits prepayment on loans for the purpose of purchasing agricultural land if the loan term is for a period of five years or less. (See Iowa Code section 535.9.) If the loan is for purposes other than as described at Iowa Code 535.9, a prepayment penalty is allowed provided it is agreed between the lender and the borrower and contained in the contractual terms of the loan documents.
NOTE: In addition to these statutory provisions regarding prepayment penalties on loans secured by real estate, the Iowa Consumer Credit Code a 537.2509 also provides that in consumer loan transactions, a consumer has an absolute right to prepay the loan at any time.
Question: Does the change in the UCC, effective July 1, 2013 to use an individual debtor’s name as it appears on their state-issued driver’s license on UCC filings mean we are also required to use their driver’s license name on our notes and security agreements? Do we have to modify existing notes and security agreements when we amend or renew UCC filings?
Answer: No. There is no requirement to change the names on the notes or security agreements to match driver’s license name. This new requirement is only applicable to the financing statement. The UCC filing acts as a “notice to the world” of the bank’s security interest and generally should not negatively impact the legality of the bank’s note/security agreement when minor variations exist. If the bank has any legal concerns, it could have the borrower sign a name affidavit affirming that he/she is one and the same person as shown on the various documents.
Question: Collateral Descriptions for Financing Statements – Are there standard collateral descriptions that should be used on security agreements and UCC filings as a result of the Article 9 revisions?
Answer: The following are suggested collateral description language for various types of collateral for use on both the security agreement and financing statement. These descriptions are taken from the seminar workbook, “Practical, Effective Loan Documentation Under Revised Article 9 of the UCC” written and presented by Robert Ullom for Iowa Bankers Association, April 2001.
The Revised Article 9 allows a super-generic description of collateral (“All assets of the debtor, now owned or hereafter acquired.”) only on the UCC-1. Such generic descriptions are not permitted for the security agreement. As a practical matter, it would always be sound practice/policy to continue the traditional practice of having collateral description language be identical on both the security agreement and the UCC-1. (See more information regarding use of “All Assets” at the end of this answer.)
- Consumer Goods: specifically describe the particular items involved, including serial number, when available.
- Inventory: “All inventory, raw materials, work in progress or materials used or consumed in debtor’s business, whether now owned or hereafter acquired, together with all proceeds including accounts receivable and notes.”
- Equipment: If blanket/floating lien: “All of debtor’s equipment whether now owned or hereafter acquired, together with substitutes and replacements thereof, all accessions and accessories added to or used in connection with such equipment.” If specific piece(s) of equipment: “Equipment consisting of the following: (give description of types of equipment, e.g. desks, computer, fork lift, trucks, etc. and specific identification including make, model and serial number).”
- Farm Products: “All farm products, whether now owned or hereafter acquired, including but not limited to all livestock and their products and offspring, feed additives and all crops, seed, fertilizers, chemicals and supplies. In addition, all documents, warehouse receipts or any other writing evidencing the right to take possession or otherwise order the disposition of harvested crops.” (NOTE: Mr. Ullom also suggests if the collateral is crops, under the revised UCC, the security agreement does not require a description of the real estate where crops are growing or to be grown or a location description for livestock. Instead, use “all other crops/livestock wherever grown/located.” If a real estate description already exists on a prior filing, Mr. Ullom suggests amending the filing to include “all other crops/livestock wherever grown/located.”)
- Accounts (generally accounts receivable): Any and all accounts and accounts receivable whether now owned or hereafter acquired arising out of the business of the debtor.
- Investment Property (certificated or un-certificated securities): No UCC filing – possession or gaining control is required to perfect the security interest. On security agreement, give name of issuer, number of shares (or dollar amount if bond is being pledged) and certificate/bond number(s).
- Deposit Accounts: No UCC filing – a security interest in a deposit account may be perfected only by control (take possession of the CD). On security agreement, describe as: “ABC Bank Certificate of Deposit Number 12345, in the original amount of $50,000, and any renewals and extensions thereof.”
- Fixtures: “All of debtor’s fixtures now existing or hereafter acquired. These goods are to become fixtures on the following described real estate: (provide legal description). The name of the record owner of the real estate is (provide name of owner of record).” For fixture filings, UCC-1 is to be filed in the real estate records in the office of the County Recorder in the county where the real estate is located to which the fixtures are becoming attached.
- “All Assets”: Describing collateral on the new financing statement is sufficient if the description 1) is adequate for the purposes of the security agreement or 2) if it indicates that it covers either “all assets” or “all personal property.” Remember that this generic description of collateral is insufficient for the purposes of the security agreement, and can only be used for the financing statement.
However, there is also a UCC section addressing the basic rule that a financing statement must be authorized by the debtor in an authenticated record. Iowa Code § 554.9509. The financing statement itself need not be signed, in order to facilitate electronic filing. A creditor’s existing security agreements under Iowa Code § 554.9509(2) will act as this authenticated record and will authorize all subsequent filings of an initial financing statement and amendments covering collateral described in the security agreement and an amendment covering proceeds of the collateral. IBA takes the view that if banks use the security agreement as the authorizing document for filing initial financing statements and amendments adding collateral or adding debtors, this will not authorize the filing of a financing statement or amendment containing the above “all assets” or “all personal property” description. (Financing statements should describe the same collateral classifications as your security agreements – as required under the old article
9.) Banks wanting to take advantage of the new generic classifications on the financing statement or amendment should do so by obtaining debtor authorization in a separate authenticated record. Although there is no specific guidance for this “separate authenticated record,” the following language may be used:
Debtor Authorization to File Financing Statement
I, (debtor), hereby authorize (creditor) to file pursuant to Iowa Code Section 554.9509(1) an initial financing statement, amendment that adds collateral covered by a financing statement, or amendment that adds a debtor to a financing statement. This authorizes (creditor) to describe collateral on the financing statement as permitted in Iowa Code Section 554.9504.
This authorization is valid for any current or future security interest obtained or to be obtained by the above creditor and continues until specifically terminated in writing by either party.
Signature of Debtor(s)
Signature of Creditor/Secured Party
Date
Before using this language, consult with bank counsel, as there could be “consideration” issues that may be addressed by current security agreements, allowing banks to require debtors to sign any and all documents protecting your security interest.