The Technological Transformation of Real Estate Finance

 

Brook Boyd
Counsel
Meister Seelig & Fein LLP
Author, Real Estate Financing

Retail Bank Branches Are Vanishing & Online Banking Is Growing 

The number of U.S. bank branches dropped 8% (from 97,000 to 89,300) over the last 10 years, and is expected to drop even more steeply by 20% (to 71,500) over the next 10 years. Similarly, the typical bank branch is expected to decrease from 5,000 square feet to 3,000 square feet or smaller over the next decade. 

This is not because of any inherent weakness in the banking industry, since, for example, bank deposits increased, from 2007 to 2016, by about 70%, to $11.3 trillion. Instead, technological innovations have radically improved the efficiency of banking transactions. For example, although it generally costs a bank about $8 for a customer to make a deposit with a teller at a bank branch, it costs only 80 cents for a customer to make a deposit at an ATM, and only 8 cents when a customer makes a deposit using a mobile phone, as more and more consumers do.  From the customer’s point of view, this does have some downsides, such as the downgrading, and even disappearance in some rural areas, of the local community banker.

Impact of AI on Credit Underwriting

What further banking innovations are possible? MyBucks uses artificial intelligence (“AI”) to help calculate credit scores and make loan decisions, and it offers 15-minute, AI-based loans through WhatsApp and Facebook Messenger. When a potential borrower downloads the MyBucks’ Haraka app, the app then checks the borrower’s phone for data, such as texts, call logs and location data. MyBucks also compares the borrower’s social media feed against the information in the borrower’s mobile wallet. MyBucks made around 200,000 Haraka loans in 2017.

BankMobile, a U.S. bank, will use Upstart’s online lending software, which uses AI to assess the creditworthiness of millennials and other consumers with little to no credit history. Upstart has received a no-action letter from the CFPB for such software, which uses education data. Critics have argued that a lender’s reliance on education data may discriminate against disadvantaged borrowers that lack a college education or high school diploma. 

When Will Closings Finally Be Paperless?

Consumer borrowers who participated in an eClosing pilot conducted by the CFPB “generally reported higher measures of understanding the process, increased efficiency, and a higher perception of being ‘in control’ of their closing experience, compared to borrowers who closed on their home loan just using paper disclosures.” However, lenders have found the use of eNotes and other electronic documents, and eNotarizations, to be more complicated and burdensome than the traditional use of paper documents. Therefore, there are still relatively few eClosings. In addition, the sale of eNotes and other electronic documents is difficult, even with respect to loans purchased by Fannie Mae and Freddie Mac, which have been pioneers in this area. In the case of commercial loans, paper documents are still used for most loans.

According to the CFPB, “A commonly stated obstacle to wider adoption of eClosing had been that many counties in the U.S. did not allow electronic recording (eRecording) of mortgage documents . . . . Encouragingly, almost 80 percent of the American population now lives in counties that allow eRecording.”

In 2017, Fannie Mae agreed that if any loans are secured by mortgages that have been recorded electronically and that comply with all applicable requirements under the E-SIGN and UETA laws, then any sellers and servicers – if approved by Fannie Mae to deliver such loans – may retain the mortgages and notes relating to such loans solely in electronic format, and are not required to retain paper counterparts thereof. The servicer must use an electronic note (eNote) vault that meets certain requirements. In 2017, Fannie Mae also clarified that if the electronic notarization is a remote notarization, additional requirements must be met. Freddie Mac has also authorized the use of electronic mortgage loan documents and has removed the requirement for storage of paper counterparts.

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eDiscovery - In The News

   

The Texas Supreme Court sets a framework for requesting access to Electronically Stored Information (ESI) such as tracked changes and comments in Microsoft Word documents, notes in PowerPoint, and other dynamic information.

By Robert K. Wise & Kennon L. Wooten, authors of Texas Discovery: A Guide to Taking and Resisting Discovery Under the Texas Rules of Civil Procedure, a comprehensive guide to the Texas discovery practice.

The Texas Supreme Court’s May 26, 2017 opinion in In Re State Farm Lloyds, Nos. 15-0903 and 15-0905, is the Court’s second foray into the rules regarding electronic discovery. In re Weekly Homes, L.P., 295 S.W. 309 (Tex. 2009) (orig. proceeding), was its first and delineated the parameters for assessing a request for direct access to electronically-stored information (ESI).

Is Access to Metadata Required?

In State Farm Lloyds, State Farm Lloyds was sued by its insured homeowners for underpaying hail-damage claims. The homeowners sought, and the trial court ordered, ESI to be produced in its native or “near-native” form rather than in static-image forms (e.g., PDF, TIFF, and JPEG) into which State Farm converted claims-related ESI in the ordinary course of business. The homeowners argued that production of ESI in the requested form was needed to obtain metadata that tracked changes and comments in Microsoft- Word documents, speaker notes in presentations, and animations or other dynamic information that was unavailable in static-image forms.

State Farm Lloyds objected to producing ESI in the requested form because (1) its ordinary business practice was to upload claims information in static, read-only forms, which stripped metadata from the uploaded files, and (2) native or “near-native” production would require development of a new process involving the review of the upstream data sources to determine whether native files exist and, if so, engineering an extraction process. After the trial court overruled State Farm Lloyds’ objection and ordered it to produce ESI in the requested form, State Farms Lloyds sought mandamus relief. The intermediate appellate court denied mandamus relief. So did the Texas Supreme Court, but without prejudice, to allow the trial court to reconsider its decision in light of the Court’s opinion and guidance.


“Neither Party May Dictate the Form of Electric Discovery”


State Farm Lloyds contains three core holdings. Initially, it holds that, under the Texas discovery rules, “neither party may dictate the form of electric discovery.”

Next, the case holds that, if the producing party objects to the requested form for ESI’s production because unreasonable efforts are required to produce it in that form and a “reasonably usable” form is readily available, the trial court must conduct a case-specific proportionality analysis balancing the following factors: (1) the likely benefit of producing the ESI in the requested form, including the “cumulative effects” of the trial court’s order; (2) the case’s specific needs; (3) the amount in controversy; (4) the parties’ financial and technological resources; (5) the importance of the issues at stake in the litigation; (6) the importance of the proposed discovery in resolving the litigation; and (7) any other articulable factor bearing on proportionality.
Finally, the case holds that metadata’s relevance in litigation “must be obvious or at least linked, more or less concretely, to a claim or defense[,]” noting that “metadata may be necessary to the litigation when the who, what, where, when and why ESI was generated is an actual issue in the case, not merely a helpful or theoretical issue.”

The decision also is important for at least two other reasons. First, it aligns electric-discovery practice under the Texas discovery rules with those under the federal discovery rules. Second, the Court, quoting Weekly Homes, noted that the Texas discovery rules in general “are not inconsistent with the federal rules or the case law interpreting them” even though they may not “mirror the federal language.” Accordingly, in e-discovery disputes in Texas state courts, practitioners can, and should, rely on cases interpreting the pertinent federal rules as guidance.

Robert K. Wise & Kennon L. Wooten are authors of Texas Discovery: A Guide to Taking and Resisting Discovery Under the Texas Rules of Civil Procedure, a comprehensive guide to the Texas discovery practice. Robert K. Wise is a founding member of Lillard Wise Szygenda PLLC in Dallas. Kennon Wooton is a partner at Scott Douglass & McConnico LLP in Austin.

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Drafting Commercial Leases in 2017: Growing Complexity

 

Negotiating and Drafting Office Leases - In the News

“Learning concepts and dangers from the litigation of such transactional documents and from real malpractice cases is professionally essential...”

Drafting Commercial Leases in 2017: Growing Complexity
By John Busey Wood

The fundamental and critical building blocks of value for most commercial real estate are the property commercial leases. Rarely are investment properties or owner developed and operated properties valued for transfer, investment or financing on their brick and mortar components. So it is not a surprise that designing lease forms, negotiating and implementing leasing programs, and maintaining vigilant compliance monitoring are all essential for investors in real estate. It follows that such foundational concepts are equally essential and critical for those businesses occupying leased commercial space. Just as income from leases is sophisticated and multidimensional, so too is the understanding of the full and complete occupancy costs and risks that are attendant to a tenant's lease agreement.

Commercial leases have grown over the last four decades from small demising contracts to over 300 pages of owner cost, maintenance, compliance, and risk transfer and have become the obligations of the tenant occupant. Not all of these transfers of costs and obligations are apparent, but when they are understood, they can be cost/price analyzed to evaluate the true long term occupancy costs of space. These costs, obligations, and risk analytics become apparent when viewed from working knowledge and transactional experience. Such knowledge and transactional experience can be obtained over time by practicing in the area, as well as by reading and obtaining commentary and analytics on real transactional documents and forms that have been drafted and tested by experts in the commercial real estate field. Gaining access to such transactions and forms as well as creator tips and commentary is a rare gift. However, learning concepts and dangers from the litigation of such transactional documents and from real malpractice cases is professionally essential.

The Killer Lease: Theft by Lease
Long term commercial leases are replete with costly and risky surprises within the text, as well as important items omitted from the text. Commercial leases have evolved in the United States and principally in New York City for over 400 years, beginning in the Dutch Colony days, and have been nurtured in a legal and business environment of caveat emptor—they have been completely unregulated or refereed. The result has involved some of the most creative stripping of profits known to man, as a result of the language used. Layers of definitions and mixed professional disciplines, together with a mismatch of standards of cash flows, tax treatments, and accounting terminology to make lease language sound nice and feel good, actually rip the financial heart out of tenants. It is truly the extreme sport of multi-dimensional theft by lease.

Lease forms over the last forty years have not gotten shorter or fairer in the slightest bit. Value, costs, and risk can be found in the small print and it is truly the case that one of the hardest things for the human brain to identify is "what is missing in the text or formulae.” However, this work will result in the savings of multiples of its cost, as it will guide you through the process of the evaluation and accommodation of the difficult task of living with commercial leases.

For almost twenty-five years, Negotiating and Drafting Office Leases, authored by John Busey Wood and Alan M. Di Sciullo, has provided the investment, operating, legal, accounting, and brokerage communities in depth research, form analytics and transactional evaluations, as well as current topics and malpractice awareness. In 1994, author James Busey Wood was named "the father of the modern Killer Form of Lease" by the Wall Street Journal.

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Whistleblower Law - In the News

 

Lisa J. Banks
Partner
Katz, Marshall & Banks, LLP
Co-Author, Whistleblower Law: A Practitioner's Guide

The Defend Trade Secrets Act (DTSA), signed into law by President Obama in May 2016, is one of the most significant developments in whistleblower law in some time. Among other provisions, the DTSA provides immunity from liability for disclosing trade secrets to a government official or attorney for the purpose of reporting or investigating suspected illegal activity, as well as disclosures made in legal proceedings, so long as the disclosure is under seal. This protection extends to retaliation lawsuits.

In many ways, the Act’s whistleblower protections are modest. For instance, the DTSA immunizes a whistleblower who uses trade secret information “in the court proceeding” after the whistleblower “files a lawsuit [under seal] for retaliation.” But most federal whistleblower statutes require a whistleblower to first file an administrative complaint with the Department of Labor, and it is unclear whether disclosures made in such complaints would be immunized or even could be sealed. The Act may also encourage whistleblowers to file under seal more often than necessary out of concern that a court might determine that some piece of evidence underlying the complaint constituted a trade secret. Despite its potentially narrow scope, the DTSA undoubtedly provides significant protections not previously available for whistleblowers.

The DTSA is part of a broader trend in whistleblower law to deter companies from stifling employees’ ability to alert appropriate authorities on potentially unlawful activity. This trend was reflected in the SEC’s recent spate of enforcement actions – seven since August 2016 – against companies that used employment agreements to stifle current and former employees’ ability to report wrongdoing to the government. Similarly, OSHA announced in August 2016 that it would not approve of settlement agreements between whistleblowers and their employers that included confidentiality provisions that prohibited the whistleblower from providing information to the government. Elsewhere, the Department of Defense, NASA, and the General Services Administration issued a final rule in January 2017 prohibiting federal contractors from using agreements that restrict “the lawful reporting of waste, fraud, or abuse to a designated government representative authorized to receive such a report.”

These statutory and administrative efforts to preserve the ability of whistleblowers to report wrongdoing to the government, regardless of contractual provisions to the contrary, represent an important development in whistleblower law. While attorneys specializing in this area of law will be watching carefully to see whether these efforts continue under the new administration, protecting whistleblowers has long been a bipartisan issue. Powerful senators ranging from Charles Grassley (R-IA) to Patrick Leahy (D-VT), among many others, having expended considerable effort over the years to protect those who speak truth to power. The hope among whistleblower advocates is that this issue will continue to enjoy support from both sides of the aisle in the years to come.

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Employment Litigation
Federal False Claims Act and Qui Tam Litigation
Corporate Criminal Liability and Prevention
Corporate Governance: Avoiding and Responding to Misconduct
Federal Corporate Sentencing: Compliance and Mitigation
Business Separation Transactions: Spin-Offs, Subsidiary IPOs and Tracking Stock
White Collar Crime: Business and Regulatory Offenses
Health Care Fraud: Enforcement and Compliance
Education Law

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Law Libraries and Cybersecurity

    •   

Caroline Young
Associate Director for Public Services,
The Center for Law and Justice Library
Rutgers Law School
Author, Legal Research and Law Library Management

On the heels of the recent indictment of three Chinese nationals for hacking into two U.S. law firms to obtain insider information, Legal Research and Law Library Management introduces a new chapter on cybersecurity. This chapter includes an analysis of best practices for law libraries, an outline of the role of law librarians in bolstering cybersecurity, and a cybersecurity preparedness checklist.

For years, the Federal Bureau of Investigation has been cautioning law firms that they are specifically subject to attack because they have sensitive data that if released could be devastating to clients that the firms represent.  The specific risk to law firms draws from their size. They have much larger bank accounts than individual consumers yet they are much smaller than most large companies and do not spend the money or do not have the infrastructure to put all of the right security measures into place. However, there is no doubt that breaches at law firms happen, and they occur much more than generally appreciated, although they are often not reported. In fact, one study found that 25% of law firms with more than 100 attorneys have had a security breach. Shockingly, the bulk of attorneys say that their firm has no data-breach response plan.

Understanding why cyberattacks attacks occur begins with understanding what hackers are looking for. The most common scenario is that hackers are not trying to find any specific piece of information. Rather, they randomly retrieve an enormous amount of data and then examine it to see what information is potentially valuable.

Since law firms, law libraries, and other organizations depend on their capacity to collect, access, and process huge amounts of electronic data (aggregated data) for operational efficacy, law firms and other organizations have taken on significant risks and responsibilities. For example, most law firms electronically store large amounts of extremely sensitive client information, employee records, and sensitive financial information about the firm, which makes them particularly vulnerable to hackers, causing serious financial, legal, and operational costs to the firm. 

With the dangers associated with holding huge amounts of electronic information come novel opportunities and security solutions. There are numerous potential roles for law librarians and legal information professionals in their institution’s cybersecurity plans that will allow them to partner with IT staff and other stakeholders. Some of the areas where law librarians and legal information professionals may be especially helpful are working with third-party vendors, educating and training other employees, and researching security options (e.g., software solutions, cybersecurity insurance, and the like).

Law librarians and legal information professionals are particularly well suited to aiding in the battle against cybersecurity threats in the following ways:
    • Upholding third-party vendor compliance with
       cybersecurity policies
    • Educating users about multiple devices and data access
    • Pinpointing the data that is most likely to be
       targeted or damaging if it is breached
    • Educating users about data encryption
    • Supporting and protecting password practices
       (research and software support)
    • Fine-tuning employee behavior policies
    • Training on cybersecurity rules
    • Researching cybersecurity liability insurance (research)
    • New threats: ransomware (ongoing research)

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