Like many others our client recently lost his job in the Fall. Realizing that he was not going to quickly replace it in the industry he was trained in, he decided to look into buying a business. He did his research and identified a business he wanted. The business involved a license so he retained a lawyer to assist him securing the license. The acquisition was going to require financing so he searched for lenders who were willing to finance the business. All of these elements were coming together in a sensible way. As his divorce counsel, he asked us to prepare a letter to his lender specifying the likely outcome of his divorce from a financial viewpoint.
This should have been the tip-off. Three weeks after writing that letter on his behalf, he received a letter from the broker for the potential lender breezily noting that any financing would be contingent upon the lender’s receipt of a written property settlement agreement. Now, in this instance, the client reports that he has kept the deal alive but there is a moral to the story. Lenders are going back to their old ways in the wake of the financial crisis of September, 2008.
In olden days (meaning about a decade ago), once a bank or lender discovered that a person was involved in a divorce, the financing process stopped cold until a property settlement agreement was produced. For many people, this occurred weeks or months after they had formed an agreement of sale to acquire a property or business. Typically, it occurred in real estate transaction. A couple would agree to separate and one spouse would strike out to look for a new home. Once spouse found the home of his dreams, he would submit an agreement of sale. He would put down the earnest money deposit and spend days compiling all the financial data for the mortgage underwriter. No one told the fool that when the mortgage application got to the “underwriting” department, folks with arm bands and green eyeshades would issue their standard letter asking for documents x,y,z and a written property settlement agreement.
Anyone familiar with divorce knows that a written property settlement agreement does not spring from the ground. It can take months to negotiate usually because one party is not inclined to complete the process. So here is the new home buyer, emotionally and financially committed to acquire a new home, stymied by the absence of this written agreement. Usually, buyers can get out of the transaction because most home or business sales are contingent upon financing. But much time and energy was wasted before the underwriter became the undertaker to the deal.
About ten years ago, this started to change as underwriting principles loosened. As we all know, by 2006-2007, many banks were loaning to borrowers who had little more than an agreement of sale and a measurable pulse. Not so today. The old, unfriendly underwriters are back and they are watching. So if you are in the process of divorce, ask your realtor, banker or business broker early on whether your status is going to prevent you from getting a significant loan until a settlement with your spouse is reached.