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Keeping Current—Property Editor: Prof. James C. Smith, University of Georgia, Athens, GA 30602, email@example.com. Contributing editors: Prof. William G. Baker, Prof. Ronald Benton Brown, Prof. Matthew J. Festa, Prof. Shelby D. Green, and Prof. John A. Lovett.
Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
ADVERSE POSSESSION: Cotenant's sole possession of farm for over 40 years is not sufficient to acquire title by adverse possession. Dover Scott was one of six children. Each inherited a 1/6 interest in a farm. Subsequently, Dover bought some of his siblings' interests so that he owned a 5/12 interest. He moved into the house on the farm in 1953 and from that point on farmed part of the land, rented other parts, kept the rents, made improvements to the land, and paid all the expenses, including the property taxes. He never discussed the ownership of the farm with the co-owning relatives. At various times, Dover executed three mortgages on the farm, all of which described his title as a 5/12 interest. At Dover's death in 1999, his children inherited his interest. Dover's children commenced litigation, claiming to have acquired the entire title by adverse possession. They lost on the case's third visit to the Tennessee Court of Appeals. An adverse possessor has the burden of proving that his possession was under a claim of right and adverse (that is, hostile) to the true owner. The burden is especially hard to meet when a possessing cotenant seeks to quiet title against his fellow cotenants. The law requires proof of an "ouster" of those cotenants who chose not to assert their rights to possession. Here there was no evidence that Dover ever claimed the entire title or excluded his relatives from the farm. To the contrary, in the mortgages he acknowledged that he only owned a 5/12 interest. Moreover, Dover's buying interests from some relatives was inconsistent with his possession being under a claim of right adverse to the other relatives. Dover's children also relied on a statute providing that a person who pays the property taxes for more than 20 years "shall be presumed prima facie to be the legal owner of such land." Tenn. Code. Ann. § 28-2-109. The statute, however, only creates a presumption, which the relatives rebutted by demonstrating that Dover had not satisfied the requirements for acquisition of title by adverse possession. Scott v. Yarbro, No. W2008-00090-COA-R3-CV, 2008 WL 4613979 ( Tenn. Ct. App. Oct. 15, 2008).
BROKERS: Defaulting buyer not liable for brokerage commission in absence of written promise. The buyers defaulted on their contract to purchase a residence, and the buyers' broker sued them for the brokerage commission. The broker based its claim on a provision in the sales contract that a party who failed to perform would be obligated to pay the broker the full commission "pursuant to a separate agreement or agreements." The court found that this ran afoul of a requirement that the amount of the commission be in writing. Brokerage Relationships in Real Estate Transactions Act, Ga. Code Ann. § 10-6A-10(3). In the written buyer brokerage agreement, the buyers' agent struck a preprinted paragraph covering the commission, marking it with "N/A" rather than inserting an amount. The broker unsuccessfully attempted to provide that written proof by introducing the broker's "Instructions to Closing Attorney/Commission Confirmation Agreement." The court rejected it because it was not signed by the buyers. The broker also testified that the buyers were handed a copy of the listing on the property on which appeared "Selling Commission: 2.5" as written proof that the parties agreed to pay a 2.5% commission. The court also rejected that because the agent did not even discuss the commission with the buyers in conjunction with that copy of the listing. In the alternative, the broker claimed compensation as the procuring cause and based on quantum meruit. Although those remedies are available under Georgia law, they are only available when there is no contract. They were not available here because the broker had conceded that there was a written brokerage agreement. Moreover, the broker had never made a claim under either of those theories in the trial court. Pargar, LLC v. Jackson, 670 S.E.2d 547 (Ga. Ct. App. 2008).
COVENANTS: Option to repurchase on death of buyers or decision to sell was extinguished by foreclosure and did not run with the land. A seller, a developer of homes for persons of low- and moderate-income, sold a home, extending financing by means of a low-interest second mortgage loan. The second mortgage granted the seller the right to repurchase the property in the event of the buyers' death or in the event the buyers elected to sell the property within 30 years. Four years later, the buyers refinanced the debt on the property, paying the total amount owed to the seller. The seller, however, only executed a certificate of "partial satisfaction" on account of the option to repurchase, which it maintained still burdened the property. The buyers later defaulted on the refinancing loan, and the lender initiated foreclosure. When the foreclosure purchaser was unable to obtain title insurance on account of the option to purchase, it sought a declaratory judgment that the foreclosure sale did not trigger the option and that the option was personal to the buyers and did not run with the land. The circuit court entered summary judgment for the seller, but the supreme court reversed. The court focused on one of the key elements for an enforceable real covenant: whether the covenanting parties intended the burden to run with the land. The option language in the mortgage operated on the occurrence of two definite events: the death of the buyers or their election to sell within 30 years. Inasmuch as the sale of the property in foreclosure was not an "election" by the buyers, neither of the described events occurred to trigger the option. Moreover, by their nature, these events were personal to the buyers and demonstrated that the parties did not intend for the option to run with the land. Although the court's narrow reading of the language was technically correct, it overlooked the seller's clear purpose in bargaining for the option to purchase—to ensure continued use of the property as affordable housing for persons of low- or moderate-income for a minimum term of 30 years. Beeren & Barry Investments, LLC v. AHC, Inc., 671 S.E.2d 147 ( Va. 2009).
DEEDS: Parish church holds real and personal property in trust for diocese, despite lack of trust language in deed. Prompted by serious theological disputes with one of its parishes, the All Saints Protestant Episcopal Church ("parish"), the Episcopal Diocese of Rochester ("Diocese") resolved to declare the parish "extinct." It also resolved that the parish should transfer all of its real and personal property to the trustees of the Diocese. The parish maintained that it held legal title to the property free of any claims by the Diocese. The Diocese brought suit, seeking a declaratory judgment that the parish's property was impressed with a trust in favor of the Diocese. In addition to its counterclaim to quiet title, the parish brought a special proceeding against the Diocese, seeking to annul the determination declaring it extinct on the basis that the Diocese abused its discretion and failed to follow its own rules and state law. In affirming the lower courts, the court of appeals followed the "neutral principles" approach, which resolves church property disputes by reference to the terms of deeds, the local church's charter, and the general church's constitution, interpreted "in purely secular terms" without reliance on religious precepts. The court found nothing in the deeds to the property that created an express trust in favor of the Diocese. Nonetheless, when the parish joined the Diocese, it agreed to be bound by the constitution of the Diocese and the "Dennis Canons," which among other things, required that "[a]ll real and personal property held by or for the benefit of any Parish, Mission or Congregation [be] held in trust for this Church [the National Episcopal Church] and the diocese thereof, in which the Parish . . . is located." The court found these provisions dispositive of the property rights. It declined to rule on the issue of the rightfulness of the expulsion of the parish, concluding that the matter was an ecclesiastical determination and not reviewable by a secular court. Episcopal Diocese of Rochester v. Harnish, 899 N.E.2d 920 (N.Y. 2008).
EASEMENTS: Merger terminates easement when cotenants acquire both parcels despite differences in forms of ownership. A 1981 conveyance included the grant of an easement appurtenant for light and view across the grantors' retained adjoining lot. In 1992, the grantees conveyed their lot with the easement to Sommer and Dunham as joint tenants. In 1994, the grantors conveyed their retained lot to Sommer and Dunham as tenants in common. In that conveyance, Dunham took title to his share as a trustee for his own revocable trust. When Sommer and Dunham later contracted to sell the burdened lot to McGrath, the question was whether McGrath would take title free of the easement because of merger during the period when Sommer and Dunham owned both lots. Merger terminates an easement when one person owns both the dominant and servient estates. Sommer and Dunham were obviously not one person. Could merger occur if the same two people owned both interests? The court answered in the affirmative based on a statute providing "the singular number includes the plural." Cal. Civ. Code § 14. Would the fact that Sommer and Dunham took title to the benefited lot as joint tenants while they took title to the burdened lot as tenants in common prevent the merger? The court found it to be no impediment. The same persons owned both lots with identical undivided interests, except for the right of survivorship that either party could terminate. More troublesome was the fact that Dunham took title to the benefited lot as an individual and took title to the burdened lot as a trustee. Dunham, however, was also the beneficiary under this revocable trust, which the court characterized as a "probate avoidance device" that would not prevent his creditors from reaching the corpus. Focusing on substance rather than form, the court concluded that Dunham was the owner for purposes of applying the merger doctrine. The court also rejected the claim that the subsequent conveyance of the previously burdened lot to a third party revived the easement. Once extinguished, an easement must be created anew. Express creation failed because the deed did not refer to any easement, and implied creation failed because there was no ongoing obvious use. The court also refused to enforce the easement based on equitable considerations because the current owner of the previously benefited lot had notice before buying that the easement might not benefit the land because of merger, and the price was discounted to reflect that risk. Zanelli v. McGrath, 82 Cal. Rptr. 3d 835 (Ct. App. 2008).
LANDLORD-TENANT: Landlord not liable for attack by tenant's dogs absent a "no pet" rule or control of the facility. A tenant who operated a tattoo parlor kept pit bulls in a fenced pen outside the building. The dogs were very aggressive and routinely leapt against the fence and barked ferociously when neighbors passed by. The landlord knew of the dogs' aggressive tendencies but did not ask the tenant to remove them. One day, the tenant hired a 13-year-old boy with severe auditory and oral impairments to clean up the dogs' waste and took him inside the pen with the dogs. Even though the tenant told the boy that the dogs did not bite, when the door to the pen accidentally slammed shut with the boy inside, the dogs attacked him, causing severe injuries, including a ripped-off ear. The boy's parents won a million dollar judgment against the tenant, which appeared largely uncollectible given the tenant's impecunious position. They then sought recovery against the landlord. In finding the landlord not liable, the court recited the general principle that a landlord has a duty to exercise reasonable care to cure a dangerous condition if he has actual or constructive notice of the condition and he has the right to exercise control over the condition. Here, the lease did not contain a "no pet" rule, which meant that the landlord had no right to terminate the lease based on the dogs' presence. Nor was the landlord liable as an "owner or harborer" of a dangerous animal under the city's dangerous dog act, D.C. Code §§ 8-1902 to 8-1908. First, the court pointed to cases from other jurisdictions interpreting similar "owner or harborer" language, which consistently held that a landlord does not harbor his tenant's dogs "simply by virtue of being a landlord." Second, even if the landlord harbored the pit bulls, there would be no statutory liability because there had been no administrative determination that the dogs were dangerous. Because the legislature had already spoken on the matter, the court declined to adopt a rule, "on public policy grounds, that pit bulls (and other aggressive dogs) are dangerous instrumentalities and to hold that every lease contains implied authority for the landlord to evict tenants who own or harbor these animals." The court heavily emphasized the absence of a "no pet" provision in the lease. But could the landlord have invoked a "no nuisance" provision, found in most leases, to require the tenant to remove the dogs? If so, wouldn't the landlord then have a duty to abate the nuisance? Campbell v. Noble, 962 A.2d 264 (D.C. 2008).
MECHANIC'S LIENS: Subcontractor's supplier cannot file mechanic's lien against commercial leasehold after failing to give statutory pre-lien notice. A tenant leased 4,375 square feet of floor space in a mall and hired a general contractor to build out that space for its store. The general contractor hired a subcontractor to put in drywall, and the subcontractor contracted to buy the drywall materials from a supplier. After completion of construction, the tenant paid the general contractor, the general contractor paid the subcontractor, but the subcontractor failed to pay its supplier. The supplier asserted a mechanic's lien against the tenant and its landlord, which the defendants disputed because the supplier had not given a pre-lien notice within 45 days after supplying materials generally required by the Minnesota mechanic's lien statute. Minn. Stat. § 514.011(2). An exception applies if the improved property has more than 5,000 square feet of usable floor space. Id. § 514.011(4c). The mall had over 5,000 square feet of space, but the tenant's store did not. The defendants prevailed on summary judgment. Because the language of the statute was not ambiguous, the plain language controlled. The appellate court refused to "weigh the equities" to determine if the pre-lien notice was required because the legislature had based the exception solely on the size of the property. The supplier also unsuccessfully argued that the mall size provided the relevant number because the mechanic's lien would attach to the entire mall and could not attach to only the tenant's leased premises. It concluded that expanding the exception as the supplier urged would deprive many tenants of the protection that the legislature had clearly intended to provide them. Wallboard, Inc. v. St. Cloud Mall, LLC, 758 N.W.2d 356 (Minn. Ct. App. 2008).
PREMISES LIABILITY: Landowner not responsible for attack of wild bees on neighbor, despite landowner's knowledge that bees nested on his land. A neighbor was attacked by wild bees that nested on a landowner's land. The neighbor sued the landowner alleging breach of a duty to use ordinary, reasonable, and due care to protect the neighbor and that the landowner's allowing wild bees on the premises constituted a private nuisance. The nuisance claim was rejected based on the "established common law rule . . . that a land owner is under no affirmative duty to remedy conditions of purely natural origin upon his land even though they are dangerous or inconvenient to his neighbors." The landowner did not contribute to the existence of the bees or their nest on the property. The well-established doctrine, ferae naturae, under which wild animals are presumed to be owned by no one specifically but by the people generally, precluded liability on the negligence claim. Liability follows only when a landowner reduces wild animals to possession or control or introduces a non-indigenous animal into the area. Whether the same rule of immunity should apply when a plaintiff alleges negligence was not so clear. In making that determination, the court balanced the social importance of protecting the injured party against the importance of avoiding the imposition of extensive liability. In this case, that balance favored the landowner; to require an owner to abate all harm potentially posed to his neighbors by indigenous animals, plants, and insects naturally located on his property would impose an enormous and unwarranted burden. In this regard, the court disputed the neighbor's characterization of the need for imposing liability for wild animals, that is, because of the close proximity of neighbors in modern times. Instead, it found that the original justification for the ferae naturae doctrine (the unpredictability and uncontrollability of wild animals) continued to have validity. Finally, the court rejected the neighbor's assertion of liability based on an undertaking by the landowner to remove the trees and bees that he failed to carry out. "A mere promise to render a service coupled with neither performance nor reliance imposes no tort obligation upon the promisor." The landowner's refusal to perform was only a "refusal to become an instrument of good." Belhumeur v. Zilm, 949 A.2d 162 (N.H. 2008).
PUBLIC LANDS: Congressional resolution did not strip state of sovereign authority to alienate lands ceded by United States to state. The Office of Hawaiian Affairs (OHA) and native Hawaiians sued the state Housing and Community Development Corporation of Hawaii (HCDCH) to enjoin the alienation of property from a public lands trust. The trust contains former public, government, and crown (Hawaiian monarchy) lands ceded to the United States when it annexed the Territory of Hawaii. Congress granted these lands back to the state government in public trust in the 1959 act admitting Hawaii to statehood. The OHA is a state agency that manages the funds from the trust for the benefit of native Hawaiians. The HCDCH planned to remove a parcel from the trust for development as affordable housing, with compensation to be paid to OHA as required by state law. In the lawsuit OHA argued that Congress stripped the state of its authority to alienate the trust lands when it passed a 1993 joint resolution apologizing for the United States' role in overthrowing the Hawaiian monarchy in 1893. The resolution's substantive section acknowledged the historical significance of the event, apologized to native Hawaiians, and expressed a "commitment to acknowledge the ramifications" of the overthrow; it also disclaimed any settlement of claims against the United States. Pub. L. No. 103-150, 107 Stat. 1510, 1513 (1993). The Supreme Court of Hawaii, finding that the apology resolution recognized unrelinquished native Hawaiian property claims, permanently enjoined the state from alienating lands from the trust. The U.S. Supreme Court reversed. Justice Alito's opinion for a unanimous Court held that the apology resolution's substantive provisions used only conciliatory or precatory verbs that did not confer substantive rights on native Hawaiians. The resolution did not strip the state of its sovereign authority over state-owned land, which includes the right to alienate. The Court also suggested that it would be unconstitutional for Congress in the apology resolution to take away the substantive property rights that it had granted to Hawaii in admitting it to statehood. Hawaii v. Office of Hawaiian Affairs, 129 S. Ct. 1436 (2009).
SALES CONTRACTS: Sellers are not entitled to reformation on ground that they would have sought higher price for their farm had they known buyer was coal company. The sellers listed their farm for sale with a real estate agent, asking $640,000. A real estate agent ("Broker") acting for a coal company ("Buyer") made an offer, and the parties eventually agreed on $525,000. Along with the offer to purchase, the Broker submitted a form prepared by the West Virginia Real Estate Commission stating that the Broker had a duty "to both the buyer and the seller [to] disclose all facts known to the agent materially affecting the value or desirability of the property." The deal closed, with the sellers leasing back the farm from the Buyer on a short-term basis. Several months later the sellers learned the identity of the Buyer and sought additional payment—"what [the] land is worth." Thereafter, they ceased paying rent under the lease. When the Buyer sued for back rent and possession, the sellers counterclaimed, seeking to reform the contract based on the failure to disclose the Buyer's identity and intended purpose (to build a coal preparation plant on the farm). The sellers asserted that they would have set a higher purchase price had they known these facts. The Buyer prevailed on summary judgment, the court pointing out that it was not proper to "reform a contract for the sale of land, which is clear and unambiguous in its terms." An established exception, however, exists when one party is mistaken about a material fact and the other party has engaged in fraud or other inequitable conduct. The court concluded that there was no mistake on the sellers' part because they never inquired about the identity of the Buyer or its intended purpose. Nor did the Buyer fraudulently induce the sellers to enter into the agreement. Indeed, the facts showed that the sellers relied on the advice of their own broker on the Buyer's identity and a proper price. The court declined to rule on whether the language in the broker disclosure form required disclosure by the Broker to the sellers of all known facts materially affecting the value or desirability of the property but did point out that nothing in the state statutes required such disclosure. Terra Firma Co. v. Morgan, 674 S.E.2d 190 (W. Va. 2008).
This issue's current developments in property literature focuses on recent articles that have proposed short- and long-term solutions to the subprime mortgage crisis and the larger crisis in financial markets plaguing the entire real estate industry.
In Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, 93 Minn. L. Rev. 373 (2008), Prof. Stephen L. Schwarcz, one of the nation's leading experts on securitization, argues that the legal system's response to the financial crisis triggered by the subprime mortgage meltdown should not focus overly on banks but should address the fundamental structure of our financial markets. Much of his article reviews why disclosure, securitization, market discipline, and rating agencies failed to prevent the crisis we are now experiencing. Among the root causes Schwarcz identifies are (1) investors' failure to take a sufficiently long-term view of risk, (2) investors' over-reliance on third parties (the sellers and arrangers of securitized assets and of course the rating agencies), (3) investors' failure to pay close enough attention to what they were buying because of bubble mania and their own bounded rationality, (4) the complexity of securitized transactions themselves, (5) conflicts of interest among market participants, and (6) systemic risk features. In addition, he notes the tendency of financial markets to produce a "tragedy of the commons" in which the benefits of exploiting capital resources accrue to individual market participants seeking to maximize short-term gain. The risks of exploitation, however, are distributed among a wide class of individual participants, each having little incentive to invest in identifying, disclosing, or reducing those risks. With these explanations in place, Schwarcz offers four principal policy recommendations for the future. First, he contends we should not entirely eliminate securitization because it is critical to the underlying funding liquidity of banks and many corporations. Second, we should require or encourage mortgage originators to take some risk of loss—in the form of a "prior or pari passu (equal and ratable) risk of loss"—on the loans they originate. Interestingly, Schwarcz notes that this risk sharing already occurs in many nonmortgage securitization transactions and was beginning to occur even in mortgage securitizations just before the subprime meltdown broke through the use of "early default payment protection." Third, Schwarcz recommends that the interests of individual investment bankers should be better aligned with the long-term interests of the institutions for which they work. Finally, he urges more conservative (that is, tighter) regulation of loan underwriting standards through the imposition, for example, of minimum real estate value to loan over-collateralization on all mortgages secured by real estate. In sum, Schwarcz's remedies focus on the supply side of the equation. His tone is cautious. He espouses the hope that this latest financial market instability will serve as a warning, relieving markets of a "liquidity glut" and serving as a "critical safety valve" so that the next crisis "won't spread and turn into the Big One, which undermines the whole financial system."
In The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 Cornell L. Rev. ___ (2009), Prof. Oren Bar-Gill, a leading proponent of applying the field of behavioral economics to the study of law, attempts to explain why the subprime mortgage market in general—and the subprime mortgage contract in particular—is geared to exploit subprime borrowers. His primary focus is on the cognitive or psychological limits of most subprime borrowers and the ways in which subprime lenders design contracts to fill the demand created by subprime borrowers' bounded rationality. In short, he presents a study in radical market failure. At the heart of most subprime mortgage contracts, Bar-Gill claims, are two especially dangerous features. The first is "cost-deferral": high loan to value ratios, low interest rates followed by higher ones once introductory teaser periods end, and zero or negative amortization. The second is "complexity": multiple interest rates defined by complex formulas, numerous fees applicable at different times and often contingent on exogenous events or borrower behavior, and, most of all, prepayment options and penalties, which introduce tricky calculations that even the most sophisticated economists often cannot fully evaluate. Although rational choice economic models can explain some of these features, Bar-Gill maintains that only an understanding of the imperfect rationality of borrowers (their myopia and their tendency to be overly optimistic about their future incomes, housing prices, credit scores, or interest rates) can fully explain the surge in subprime mortgage lending witnessed in the last decade. This approach leads him to reject overly moralistic accounts of the dynamics that led to the crisis, accounts that blame either "unscrupulous lenders" or "irresponsible borrowers." Instead, Bar-Gill offers primarily a "demand-side market failure account," although he also observes a "supply side market failure" that led lenders to cater willingly to borrowers' imperfectly rational demand, even when the demanded product designs increased lenders' own default risk. Bar-Gill's proposed solutions follow from his explanation of the crisis. To counter borrowers' tendency toward myopia and excessive optimism and to overcome the trend toward complexity in mortgage products, Bar-Gill recommends a more robust form of annual percentage rate (APR) disclosure (a normalized measure of the total cost of credit) in the period leading up to the closing of a residential mortgage loan. APR disclosure was the cornerstone of the consumer protection mechanisms implemented by the Truth in Lending Act of 1968 (TILA), 15 U.S.C. §§ 1601–67. But Bar-Gill explains that APR disclosure has up until now generally failed to live up to its promise (especially in the subprime and Alt-A markets) for several reasons. First, lenders often give the disclosure statement to borrowers too late to make a difference, and even when made earlier in the borrowing process, it does not bind the lender. Second, the disclosure does not include numerous and crucial price dimensions. Third, it fails to account for the crucial effect of the prepayment option and prepayment penalties. Bar-Gill's proposed solutions include requiring lenders to disclose a binding APR disclosure fairly early in the loan application process, amending TILA to impose tougher and automatic civil liability penalties for noncompliance, making the disclosure more inclusive by incorporating more fees and price dimensions, and finally trying to make the disclosure address the all important effect of prepayment options and penalties by using the sophisticated algorithms already employed by the mortgage industry.
In Making Credit Safer, 157 U. Penn. L. Rev. 1 (2008), Prof. Bar-Gill teams up with Prof. Elizabeth Warren of Harvard Law School to make another interesting and highly publicized proposal to minimize the risk of future financial crises recurring. In this article, Bar-Gill and Warren address the reasons why markets for all kinds of consumer credit, not just mortgage loans but also credit cards and payday lending, fail. Just as in Bar-Gill's other article, the authors draw on the learning of behavioral economics and on numerous empirical studies of consumer credit cards. Their key assertion is that unlike the markets for tangible consumer products—toasters, lawnmowers, infant car seats, food, and drugs—where safety regulation is ubiquitous and generally effective in eliminating or at least greatly reducing the risk of direct harm to consumers and indirect harm to society at large, markets for consumer financial products are under-regulated or poorly regulated. The reasons for this regulatory failure are numerous according to the authors. First, sellers of credit have learned to exploit consumers' lack of information and their cognitive limitations (imperfect rationality once again). Second, consumer financial products have become much more complex, and this complexity masks the ability of sellers to change terms and keep consumers in vulnerable positions. Third, ex post judicial solutions—the common law of contracts (primarily the unconscionability doctrine) and the fallback protection of bankruptcy—have failed to curb abuse by sellers of consumer credit. Here, the authors point to institutional competence problems and procedural barriers that prevent courts from serving as effective regulators as much as doctrinal limitations in contract or bankruptcy law. Fourth, a competing patchwork of state consumer regulation is either preempted by weak federal law, or, if not preempted, simply unable to provide effective national protection because financial institutions can export the weakest state laws (those with the highest usury rates, for example) to consumer financial transactions in other states. Here Bar-Gill and Warren illustrate a classic regulatory race to the bottom enhanced by banks' opportunistic regulatory arbitrage. Fifth, existing federal regulatory efforts are inefficiently scattered among a variety of agencies that lack either (1) enough authority to regulate key actors in the financial product industry (for example, the inability of banking regulators to reach nondepository institutions like mortgage finance companies that originated so many subprime mortgage loans or the inability of the Federal Trade Commission (FTC) to reach banks or thrifts) or (2) the motivation to be effective because their primary focus is protecting the soundness of financial institutions or because too often their funding is tied to the very institutions they regulate. Bar-Gill and Warren's solution is to create a new federal body, modeled on the Consumer Product Safety Commission. This Financial Product Safety Commission, or a new consumer credit division within an existing agency such as the FTC, could develop the expertise to keep up with the fast pace of innovation in the financial industry. It could use its rulemaking authority to quickly promulgate nuanced regulations that account for product innovation. And presumably it would be independently and adequately funded so that it could monitor and enforce these new regulations effectively.
In Unsafe at Any Price?, 157 U. Pa. L. Rev. PENNumbra 167 (2009), Prof. Ronald J. Mann offers a short but insightful response to Bar-Gill and Warren's Making Credit Safer. Mann questions whether a federal agency given a broad mandate to regulate or eliminate "unsafe" financial products will, in the long run, effectively advance the interests of consumers. At the outset, he notes that a vague statutory mandate to make consumer financial products "safe" could lead to regulatory errors and open the door wide to the specter of regulatory capture that public choice theorists have long warned us against. As an example of this phenomenon, Mann cites the long, and for many years unsuccessful, experience of the Federal Reserve's attempt to implement the disclosure requirements in TILA. Second, he raises doubts about how easy it will be to decide which consumer financial safety products are unsafe. In other words, he questions Bar-Gill and Warren's appealing analogy between toasters and lawnmowers on one hand and credit cards and subprime mortgages on the other. In the case of tangible consumer products, he observes, it is relatively easy to agree on the optimal number of accidents caused by defects that society should tolerate (probably close to zero) and that the social losses from banning these types of products is slight. But it will be much harder for regulators to determine which consumer financial products are so risky that they should be eliminated because even the riskiest products can have "positive spillover effects" and some consumers can understand and beneficially use such products (credit cards and mortgage loans with low introductory "teaser rates," for example). Finally, he suggests that by making certain financial products appear "safe," we may unfortunately increase the unhappy secondary effects stemming from excessive household borrowing. For Mann, the most important social problem related to many consumer financial products—credit cards, home equity loans, or high-risk refinancing—is the likelihood that they "facilitate unreflexive spending and subsequent financial distress." Thus, in the end, Mann worries that a focus on safety may well lead in the wrong direction. It may be more important, he contends, "to focus on reforms that will respond to the culture of unreflective borrowing and consumption," as unpalatable as such reforms may be in the midst of a severe economic recession.
Arkansas codifies a procedure for the eviction of tenants engaged in prostitution, gambling, and alcohol violations. Although there is common law support for evicting a tenant who engages in nuisance activities, statutory procedures simplify the process. Under the Act, both the landlord and the county attorney are given authority to evict tenants who engage or allow others to engage in illegal prostitution, gambling, or alcohol violations on the leased premises. This statute will allow cities to clean up neighborhoods with such problems. It will also eliminate a typical governmental excuse for not dealing with such problems—lack of authority. 2009 Ark. Acts 464.
Arkansas adopts the Appraisal Management Company Registration Act. Under this Act, an appraisal management company, defined as a person who administers appraisers to fulfill requests for appraisal services, must register with the state appraiser licensing board, file a bond, and otherwise comply with the board's rules. The Act imposes stringent requirements on appraisal management companies to reduce fraud in the appraisal process. 2009 Ark. Acts 628.
Arkansas enacts the Uniform Prudent Management of Institutional Funds Act. The Act creates explicit standards that are consistent with modern portfolio theory for making diversified investments. It allows institutions, subject to using reasonable care in selecting the agent, to delegate the management and investment of charitable funds to outside companies. The Act also authorizes the courts to modify restrictions or the purpose of a fund. The institution, with the permission of the donor, can release or modify a restriction contained in a gift instrument. For small funds, institutions are allowed to modify restrictions on notice to the Attorney General without court action. The Act also changes the rules on the expenditure of endowment funds. The Act eliminates the historic dollar value limitation (the charity may not expend principal if it would reduce the fund below its original value) and the 7% limitation (expenditure of more than 7% of the value of an endowment fund in any year is presumed to be imprudent), permitting a charity to spend the amount the charity deems prudent for the purposes and duration of a given endowment fund. At least six jurisdictions have now enacted this uniform law. 2009 Ark. Acts 262.
California imposes a temporary 90-day moratorium on mortgage foreclosures. The California Foreclosure Prevention Act prohibits a mortgagee or trustee from giving a notice of sale for an additional 90 days after expiration of the normal three-month period if the loan is a first mortgage or deed of trust on the borrower's principal residence. Mortgage servicers who have adopted a comprehensive loan modification plan in accordance with the Act are exempt. The stated purpose is to provide additional time for borrowers to work out loan modifications while providing an exemption for mortgage loan servicers that have implemented a comprehensive loan modification program. 2009 Cal. Stat. 10.
Colorado mandates carbon monoxide detectors in residential properties. The Act applies to the sale or rental of a residential property (one-to-four-family dwelling). Owners and agents who comply with the Act and who install the carbon monoxide detectors in accordance with manufacturer's directions are relieved from liability resulting from the operation, maintenance, or effectiveness of a carbon monoxide alarm. 2009 Colo. Sess. Laws 51.
Utah adopts the Appraisal Management Company Registration and Regulation Act. Under this Act, appraisal management companies, defined as a person who administers appraisers to fulfill requests for appraisal services, must register with the state appraiser licensing board, file a bond, and otherwise comply with the board's rules. The Act imposes stringent requirements on appraisal management companies to reduce fraud in the appraisal process. 2009 Utah Laws 269.Return to Probate & Property Magazine