American Fisheries Act – Implications for Lenders

American Fisheries Act – Implications for Lenders

Background

The American Fisheries Act of 1998 (“AFA”) is a federal law designed to protect and increase participation by United States citizens in the United States fisheries trade. The enactment of the AFA increased the required level of United States citizen ownership and control of United States flag fishing vessels. In addition to requiring that at least 75% of each tier of ownership of United States flag fishing vessels be by United States citizens, the AFA imposes United States citizen ownership and control requirements relating to the transfer, operation, manning, and mortgaging of United States flag fishing vessels. The AFA restricts the ability of foreign persons and entities, including lenders, from exercising impermissible ownership or control of certain United States flag fishing vessels. Of particular importance for lenders, the AFA restricts the types of entities allowed to hold mortgages on United States flag fishing vessels with a registered length of 100 or more feet.

Who can be a mortgagee?

AFor United States flag fishing vessels with a registered length of 100 or more feet, a mortgagee must be a citizen of the United States, a state or federal chartered financial institution insured by the FDIC, a farm credit lender, a commercial fishing and agriculture bank, a domestic commercial lender eligible to own a vessel, or a mortgage trustee.

What is a mortgage trustee?

A lender who does not otherwise qualify to act as a mortgagee under the AFA must use a mortgage trustee to hold the mortgage and the related debt instruments in trust for the lender. A mortgage trustee must meet the following requirements:

• Be eligible to be a preferred mortgagee as a citizen of the United States, a state or federal chartered financial institution insured by the FDIC, a farm credit lender, a commercial fishing and agriculture bank, or a domestic commercial lender eligible to own a vessel;
• Be organized as a corporation and doing business under the laws of the United States or of a State;
• Be authorized under those laws to exercise corporate trust powers;
• Be subject to supervision or examination by an official of the United States Government or a State;
• Have a combined capital and surplus (as stated in its most recent report of condition) of at least $3 million; andAny other requirements prescribed by the United States Maritime Administration (“MarAd”).

A mortgage trustee must submit an application and various certifications to MarAd in order to be approved as a qualified mortgage trustee.

Commercial Lender Status

If a lender is using a mortgage trustee and is not a commercial lender, a lender syndicate or eligible to be a preferred mortgagee, MarAd must determine that the issuance, assignment, transfer or trust arrangement does not result in an impermissible transfer of control to a person not eligible to own a vessel with a fishery endorsement.

To qualify as a commercial lender, an entity must (i) be primarily engaged in the business of lending and other financing transactions, and (ii) have a loan portfolio in excess of $100 million, of which not more than 50% in dollar amount consists of loans to borrowers in the commercial fishing industry, as certified to MarAd by such lender

Why is this important to the Lender?

A properly executed preferred mortgage grants the mortgagee recourse upon the mortgagor’s default, and is necessary for the lender to provide a secured loan. If the mortgagor defaults, the mortgagee has the right to enforce the preferred mortgage lien in a civil action for a vessel, to enforce a claim for the outstanding indebtedness secured by the mortgaged vessel, and to make a claim against the mortgagor for the amount of the outstanding indebtedness.

Additionally, for many United States flag fishing vessels, much of the market value of the vessel, and therefore much of the value of the collateral in these types of secured loans, depends on the vessel maintaining a fisheries endorsement. Maintaining a fisheries endorsement requires that ownership and control be held by United States citizens. Therefore, it is important to lenders that the mortgage and related debt instruments, and, if necessary, the enforcement actions taken thereon, not cause the vessel to lose its fisheries endorsement.