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 15 are mandatory (usually financial ratios and financial statements), others may be “if required by the bank”. Make certain to distin- guish elective requirements in the loan documents to prevent a compliance exception. The loan agreement should clearly state whether a covenant or reporting requirement is (always) required, or is only required if requested by the bank. Another threshold issue in drafting for covenant compliance is whether the loan documents make covenant non-compliance an automatic “default” or merely an “event of default” for which the bank can elect to declare a “default”. The two are vastly different for good reason. Giving the bank to option, at its sole election, to declare a default, is far more flexible for the bank in administering the loan. If loan documents make non-compliance an automat- ic default, written documentation of waiver is critical to avoid the argument that because the bank took no action then, no action is allowed later. When non-compliance with a covenant is discovered, obviously the bank needs to understand the consequences. A late finan - cial statement is not the same as a suit by another creditor to ap- point a receiver and liquidate the business. As soon as the bank determines what action (or inaction) to take, notice of both the non-compliance and the consequence should be made in writing. If the bank requires correction, be clear what is required, by when, and the consequences if correction does not occur. If the bank waives the non-compliance, written notice of the waiver should explain whether the waiver is a one-time waiver or the covenant is no longer required. In either case, the notice should report that the waiver does not apply to any other non-compliance, known or unknown. Written acknowledgement from the borrower of the problem and the promised corrections is a great tool often over- looked. Some banks require a fee as part of a non-compliance waiver. 6. Document The File (And Be NICE) I have on rare occasion dealt with a banker who never wanted to put anything in writing under the theory it could never be used against the bank (or more probably the lender). My view is, this is neither realistic, nor helpful to the bank. Under the adage that “no documents are needed for a performing loan” and “all documents are needed for a problem loan” – the better approach is to docu- ment every loan as though it will become a workout. “Documents” includes emails and all other forms of written communication as well as file notes and phone call records. Operate under the assumption that every document in the loan file could end up being read by a judge in a law suit. Showing what the bank did, when, and why at each step demonstrates the business reason for actions (or inactions) by the bank. If a borrower re- quest is declined, the request, the reasons for the decline and how the response was made to the customer are all important. Docu- menting declined requests is as important as documenting grant- ed requests, provided the business reasons are clearly included. Particularly in the case of credit weakness or continuing renewals, documenting the concerns and reasons for the bank’s actions will be needed by the workout officer or attorney. Most banks with a formal credit underwriting and approval systemdo this well. Doc- umenting interimcommunications, including phone calls with the borrower are important to this process. Be Nice! Under the theory “a judge may look at the whole file”, a professional and courteous content and tone helps prove the bank acted in a fair and businesslike manner at all times. Avoid slang, insulting terms, and generally inappropriate comments. Current news stories containing excerpts of “hacked” emails are an excel- lent example of how not to speak and write. 7. Recognize And Address Loan Problems And Weaknesses Every lender has (or will) experience the joy of a good loan cus- tomer experiencing financial problems. Obviously, the severity of the problem will govern the bank’s response. Continuing our theme of documenting what actions the bank takes and why, it is not helpful to hide a problem or concern. Recognizing and docu- menting the issue allows the bank to document what actions the borrower promised to correct the problem. Most experienced workout officers and attorneys favor written notice to the borrow - er: 1) of the specific problem, 2) that required cure or action be made by the borrower, 3) that the borrower report how it will fix the problem (if there are multiple options), 4) the time require- ment or deadline for both starting and completing the correction, and 5) possible actions or at least a full reservation of right of the bank in the event the borrower does not resolve the problem or the problem get worse. A simple message confirming “this is the problem we discussed and this is what you agreed you would do” goes a long way to proving the bank’s proper loan actions. If more serious problems are identified when possible, get a writ - ten confirmation from the borrower: 1) agreeing the problem(s) exist, and 2) detailing the corrective action the borrower offers or agrees it will take. If the relationship deteriorates, the bank has written proof that the borrower agreed the problem existed and how the borrower promised to fix the problems. Proving the bor - rower admitted the problem, was given the chance to cure, and was unable to cure goes a long way in front of a judge to show n Ten Things Your Attorney Would Like Commercial Lenders to Remember  continued on page 16