Locking out the Lockout Clause

So on a beautiful quiet day in pastoral Sonoma County, after almost 3 years my 61 year old client Diane finally received the final order from the Court. It was ordered that Bayview Financial/M & T Bank was to return the excessive PREPAYMENT/lockout fee that they had woven into the loan documents, unbeknownst to Diane at the time of origination.

The money ordered to be returned was money the bank collected when Diane went to sell her home/ income property and discovered a Lockout/ Yield Maintenance clause in addition to another CLEARLY stated prepayment penalty.

At the time my only experience with Lockout Clauses was with Large Commercial Investment Loans that had an experienced high net-worth borrower. In the case of Diane she owned a Small Multi-Unit Property that she had inherited from a close friend when he died. Here’s what happened to Diane.

She was in contract to sell her home/ 9 unit property for APPROXIMATELY $995,000 and had a (year and a half old) First Mortgage in the range of $450,000. When reviewing the Seller’s Escrow Closing Statement we noticed that there was not only a 5% prepayment penalty, but another lender demand for approximately $220,000. I am not making this up! As astounding as this story sounds it turned out to be true. The Cover Page/Abstract of the loan’s terms and conditions did mention the 5% Prepay Penalty. However, not listed was a Lockout Clause in the body of the contract.

Diane had to perform on the Sale or face a prospect of a 1031 inspired lawsuit from the buyer. She paid under duress and was able to convince two very gutsy and talented attorneys to take on the case to sue to get the money returned that was collected from Lockout /Yield Maintenance Penalty.

This was a tricky proposition for the attorneys because the law approaches Residential and Commercial loans in much different ways when it comes to Predatory Lending Practices. While residential loans have strict criteria for these kinds of lender “shenanigans”, commercial lenders function in lending practices based on something to the effect of ” Not Shocking the Conscious of the Community”.

In the case of my client, fortunately she won!! It took approximately 2 years to get a judgment in her favor and another year (or so) to wade through the appeals. While I am not privy the Court Costs and/or the attorney fees that accumulated over the 35 month process, I believe the fees must be triple what my client collected. ONLY HER OWN money was returned. That’s what it took to pry the money back from the lender.

Moral of the story – Understand your Loan Documents and all penalties associated with paying off your loan, and know the meaning of the Lockout Clause.