Lately I’ve been filing chapter 11 petitions to save real property only to confront the lender’s demand for payment of the prepayment penalty. The prepayment penalties are literally the total interest to be earned by the lender over the life of the loan less one month. One lender told me “its not a prepayment penalty, its a “Yield Maintenance Guarantee.” “And no, we won’t waive it for payment in full right now.”
One case I have proposes to pay the loan according to its original terms other than certain non-monetary defaults which we cannot cure (so the loan is still impaired in the Plan). The lender, represented by a large well-known firm, insists that it still has the right to the prepayment penalty even though the loan is not going to be prepaid. The prepayment penalty is roughly 20% of the entire debt and 15% of the value of the property. In the “Yield Maintenance” case (above), the penalty is $1 million on a property worth $6 million! That is basically all the equity.
The bigger problem with these cases though is the practical problem. The lender, by forcing a sale or a foreclosure, gets a windfall and therefore has no motivation to work out a deal, i.e., a consensual plan. I appreciate the idea that the lender’s view is that it will get the money back and reloan it at lower rates but that can be fixed especially where the original loan, the “Yield” being preserved, is low (although not as low as other loans today). My gripe, to make it short, is that suddenly these lenders (or at least the law firms they hire who are printing money as long as there is equity for them) are suddenly intransigent because of the windfall they are looking at.
I am filing the first objection to the proof of claim and we’ll see where this goes. The basis for the objection primarily is that under California law it is an unconscionable penalty.
