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 14 A fight over “what the bank knew and when did it know it” as to trustee powers is never good and is always expensive. It is fact driven, and it is hard to prove a negative. “Yes, we had a copy of the trust but we never read it” sounds suspect. Some banks, as a matter of policy, prohibit having or reviewing the trust document when relying on a certification. At a minimum, you should know why you would ask for a copy of the entire trust document (or the portion listing trustee powers), when the bank intends to rely on a certification of trust. “Knowledge” of an inconsistent certification could be raised as a challenge to the trustee’s borrowing actions. This can be a great- er concern where the trust is guaranteeing a loan to an entity not owned by the trust, or is pledging collateral to secure a loan to a borrower not owned by the trust. A challenge by a successor, trustee on behalf of deceased trustee’s minor children beneficia - ries, arguing the loan/collateral pledge/guaranty did not benefit the trust and was not allowed by the trust, is unpleasant and ex- pensive. Better to avoid the potential problem and request only what is actually needed to verify the existence of the trust. 2. When Negotiating, Document Commitments And Non-Commitments Most banks use some formof commitment letter for large or com- plex proposed loans. Interest letters or terms sheet are also com- mon. What is needed but is often not included in interest letters, is language which clearly states the content is for negotiation and discussion only, is not a promise or commitment tomake or renew a loan, and such a commitment if actually made will be contained in a later document signed by both parties. A single sentence is rarely sufficient to contain all these qualifications. Confirmation by the customer of the non-commitment is goodprotection, avoids misunderstandings, and is also often overlooked. Both commit- ments and interest letters should include language that the writing supersedes prior written and oral communications. In the case of a “terms sheet” include a clear disclaimer that all terms, rates and other requirements are subject to change and the above concept that any actual commitment by the bank for the proposed credit will be in a separate written commitment. Get your customer to confirm the interest letter is not a commitment. There are a number of important components to a formal commit- ment. Most banks to a clear job of stating the loan amount, rate, payment terms and collateral. Equally important are the “docu- mentation” and “out” provisions which require closing and fund- ing only with documentation and collateral verification required by the bank, and the conditions under which the bank can refuse to close and fund (i.e inability to provide required collateral values, material adverse change, etc.) Often overlooked in a commitment is the requirement that borrower pay costs incurred by the bank (appraisals, title binder, surveys, collateral valuations, etc.) If the loan does not close, the commitment can still require the borrower to reimburse the bank for those expenses. One way to ensure pay- ment is to collect a prepaid commitment fee to cover the expected costs. 3. All Agreements Are In The Loan Documents Any banker who has been involved in a loan workout understands that while the loan documents may not often be looked at for a performing loan, when problems occur, the bank will look to the loan documents to protect its rights and remedies. The borrower or its attorney will also look at, and likely challenge, any bank ac- tion contrary to the documents. In a competitive banking world with the emphasis on marketing and “getting the deal done”, it is simply wrong to tell a borrower the loan documents are just “forms”, just “paperwork required by the back room”, or “these papers don’t really matter as long as I am your banker”. It is a more serious issue to make statements such as “don’t worry, we really don’t enforce this stuff” or “the bank would never do the stuff in here”. Bank loan documents (if well done) are designed to cover a broad range of potential problems and protect the bank. The worst risk (to the bank and to a lending career) is for a lend- er to tell the borrower that the lender will actually apply different loan terms or standards (invariably more lenient) than the writ- ten loan documents. The classic example is the claim there was a “side” promise to grant a renewal at maturity. The loan documents should reflect all terms, conditions, and re - quirements imposed by the bank to grant the loan. Failing to in- clude all conditions means the bank will have difficulty enforcing compliance with the omitted conditions against a borrower who becomes uncooperative. I have over the years had lenders question why a loan agreement for a large or complex credit was “so long” and ask me to make it “shorter”. I usually ask the banker to identify which protections and provisions the bank will never need to enforce, so I can re- move the un-needed provisions. That answer usually resolves the question. 4. Make Sure All Loan Documents Are Com- plete And Executed The loan is ready to close and the borrower is anxious to get fund- ed. Larger banks have documentation review systems and staff to help; in a smaller bank it may be just you (and perhaps an assis- tant.) In addition to ensuring the signing entity, require appro- priate resolutions and authorizations to prove who has authority to sign. Make sure that resolutions conform to the actual entity documents. Mortgages and other collateral documents often describe real es- tate or personal property by an attached exhibit. Loan agreements and other loan documents may use schedules, exhibits or other attachments. It is surprising in a loanworkout how often the bank or its counsel discovers that some document was not signed, was not notarized (where required), or an exhibit was not attached. If the exhibit does not contain a heading describing the document to which it belongs, it can be difficult tomatch the document with the correct exhibit. Even if attached, documents can get detached and re-arranged prior to scanning, so use an identifying heading. Fill in all blanks. I have seem notes, loan agreements and mortgages with a blank date. As with most issues, prevention is easier and cheaper than resolving a later problem. 5. Enforce Covenants (Or Document Waivers) Contested loan workouts are more difficult (and expensive) when the borrower claims covenants or remedies are not enforceable or were waived by the bank’s failure to enforce them. Enforcing some but not all covenants without documentation, or informally “waiving” requirements, can create the opportunity for a borrower to argue waiver or unfair action by the bank. The bankmay not realize there is a covenant non-compliance. Re- lying on a requirement for the borrower to self-report non-compli- ance is not a recipe for success in the view of most. “File it and for- get it” is not a satisfactory use of loan covenants. Some covenants n Ten Things Your Attorney Would Like Commercial Lenders to Remember  continued from page 13