Single Business Enterprise
(SBE) is a legal remedy sought by creditors in order to receive pecuniary rewards from a borrower's affiliated entities. In recent years, this legal doctrine
has been used by commercial mortgage-backed security
servicers and trustees to counter traditionally legal asset protection arrangements between closely related business entities. What was originally sold as a "great feature" of SPE loans, i.e., "Non_recourse" for high-equity borrowers for the sole purpose of equity stripping
of borrowers and investors with a built-in tax evasion
Bankruptcy Protection of Creditors.
This practice is in violation of PSA and Mortgage Servicing Standards because,
1) All Securitizations require SPE (Single Purpose Entity) borrower and SBE litigation acknowledges the non-REMIC compliance of the loans which they claim to be a servicer of and are bound to protect as REMIC investors,
2) this legal remedy is only available to the holder of note and mortgage (the injured party) and not the Fee Servicers whose only intention is equity stripping disguised as mortgage fee collection,
3) Servicers are not supposed to have loan origination documents (only source of SBE information). However, REMIC trustees routinely pass the loan origination documents to loan Servicers in violation of Banking Privacy laws and regulations.
4) most states do not recognize SBE as a "Cause of Action
". So these other parties could not have been sued by lenders in state courts. However, the Servicers and REMIC Trustees hire and pay Bankruptcy Trustees (buying Sword & Shield of Trustees in Bankruptcy courts
) using a Joint Funding Agreement
or DIP financing to strip targeted borrowers' affiliates equity with the court injunctions and freezing of the assets options available to these bankruptcy trustees, using the trust funds. These legal fees were routinely charged to senior Certificateholders plus interest so the Special Servicers and B-Piece investors always had plenty of incentives to take these equity stripping routes in bankruptcy courts.
Should the actual lender want to sue on the note, he should include the SBE parties as original defendants in mortgage default and foreclosure proceedings (state courts) and not as judgment debtors after garnering a judgment against the borrowers and their affiliates in Federal Bankruptcy Courts (See Pre-empting Workouts). That is why all Mortgage Backed Securities (MBS including RMBS and CMBS) mortgage loan
purchase agreements have a "repurchase" provision to send the loans back to its originators.
Today, it appears that all the bad loan originators are getting away with their fraudulent acts of placing bad loans for the sole purpose of securitization (i.e. selling them to public), Because U.S. Government has agreed to buy all the bad securities (Toxic Assets) at taxpayers expense and the originators and securitization firms (Lehman Brothers, Bear Stearns, Merrill Lynch
, Wachovia (First Union), Washington Mutual
, etc.) have gone out of business. This has eliminated the "Repurchase" option for most "Sub-Prime" loans as only a few have survived the consolidation and have reorganized themselves and act as other players in MBS markets.
It is common that the REMIC Servicers and REMIC Trustees walk away with borrowers and investors assets in the bankruptcy courts as "Judgment Creditors" while they are neither Creditors nor should they have received any judgments against Borrowers, since they were never a "Holder of the Note and Mortgage", the Certificateholders of the Toxic bonds were the actual holders of the Note (loan). The investors, called the bondholders or certificafeholders who are the real injured party never have nor ever will received any compensation!