Pub. 13 2016 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S Issue 3 • 2016 13 1. Know The Borrower This mantra as old as lending is still a key to good credit approval and loan administration. It is also necessary for proper loan documentation. You already know that a comprehensive understand- ing of the customer and its business is needed for proper credit structure. Matching the type of cred- it to the collateral and repayment source(s) and putting the right financial covenants and report - ing in place is a well-developed process in most banks these days. Understanding which entity owns which assets and whether the assets can be pledged as collateral is also needed to create effec - tive loan documents. Know the Borrower also means understanding the legal entity(ies) which are borrowing, grant- ing collateral liens and guaranteeing the credit. Requiring complete entity documents early in the underwriting process helps understand what ac- tions are allowed or require special approval (by shareholders, partners, members, trustees, etc.) A title or position does not automatically equal authority – you must read the entity documents. Know who is authorized to sign loan documents and ensure that person signs the documents. Re- member that regardless of the number of layers of entity ownerships, at the end of the day only a human being can sign on behalf of an entity. You must drill down through the entity layers until you reach a natural person. A note on Certifications of Trust. Under The New Mexico Uniform Trust Code, the bank is entitled to rely on a certification of trust and enforce the transaction against the trust, only if the bank does not have knowledge that representations in the certification are incorrect. If the certification allows actions which are not actually allowed (or are prohibited) by the trust document, the certi- fication is not enforceable if the bank knows the certification is in conflict with the trust document. The Code provides: “A recipient of a certification of trust may require the trustee to furnish copies of those excerpts from the original trust instrument and later amendments that designate the trustee and confer upon the trustee the power to act in the pending transaction.” (NMSA § 46A-10-1013(E). No problem if the bank requires the trustee to provide only the portion of the trust designating the trustee. However, if the bank also requires excerpts from the trust document showing the trustee’s powers, and those described powers are not consistent with the certification, the bank may have created a questions as to whether it had knowledge of the inconsistency. Ten Things Your Attorney Would Like Commercial Lenders to Remember T here is an old adage that good loans don’t need documents and bad loans can’t have enough. Any banker with a few grey hairs has seen that borrowers can act in very different ways when their financial situation becomes difficult. Some are candid and cooperative, some ignore or don’t agree there is a problem. The worst borrowers start looking for ways to shift the loss to the bank while hiding assets and/or blame the bank for making the loan. The “character” factor is alive andwell in the age of credit scoring. One of the smartest bankers I ever worked with once described why he would not bank certain prospective customer with a colorful borrowing past. He explained that the borrower can spend full time trying to avoid paying the loan once made, while the banker has only a limited time available to spend getting repaid. Below are a few suggestions for avoiding problems: FEATURE There is an old adage that good loans don’t need documents and bad loans can’t have enough. Any banker with a few grey hairs has seen that borrowers can act in very different ways when their financial situation becomes difficult. GORDON LITTLE MILLER STRAVERT LAW OFFICES n Ten Things Your Attorney Would Like Commercial Lenders to Remember  continued on page 14