beware of dangers lurking in the lending process

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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BEWARE OF DANGERS LURKING IN

THE LENDING PROCESS

Adapted from the RMA New England Chapter

Event: Defensive Banking 101.

Moderator: Howard M. Brown, Hackett Feinberg P.C.

Speakers: John Hackett, Hackett Feinberg P.C.

Richard E. Gentilli, Hackett Feinberg P.C.

James M. Liston, Hackett Feinberg P.C.


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CONTRACTUAL PROMISES

Did you know that your bank

can be sued over the

perception of a broken

promise?


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CONTRACTUAL PROMISES (CONT.)

Contracts are not only

written documents,

but also verbal.

• You don’t need a formal document; if

someone says you promised X, that

can be enforceable.

• Be mindful of spoken words that can

be construed as a promise.


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CONTRACTUAL PROMISES (CONT.)

Be mindful of what you put in

written correspondence,

especially email—it could be

binding even if your bank did

not intend it to be.


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EXAMPLES OF DOCUMENTS WHERE

DISCLAIMERS SHOULD BE USED

Use broad disclaimers

for:

• Email.

• Term sheets.

• Initial proposal letters.

• Workout and litigation.


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EXAMPLES OF PHRASES TO USE

Use phrases such as:

• Terms and proposals are subject to change.

• Formal approval is required by lender before a commitment may issue.


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EXAMPLES OF TERMS TO AVOID

Avoid terms

such as:

• Commit

• Offer

• Extend

• Reasonable


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EXAMPLES OF TERMS TO AVOID (CONT.)

Using the term reasonable in

contracts leaves too much

room for interpretation and

opens the door to litigation.


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SAMPLE DISCLAIMER

FOR A PROPOSAL LETTER

The financing proposal set forth below has be prepared on

the basis of certain information and material provided by

you to the lender and at a time when the lender has not

had an opportunity to compete its due diligence

investigations. The terms and conditions set forth below

are the terms and conditions that the undersigned will

present for approval to the appropriate approval authorities

within the lender. This proposal is not a commitment by the

lender to make a loan or loans on the terms set forth

herein. In addition, the terms contained in this proposal

may be subject to change or additional terms and

conditions required in connection with any final

commitment may be made by the lender.


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DUE DILIGENCE

Conduct due diligence up

front on all parties,

including guarantors.


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DUE DILIGENCE (CONT.)

Even if everything comes back

clean, other issues, such as

secret liens, could arise.

– John Hackett, Hackett Feinberg P.C.


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EXAMPLES OF SECRET LIENS

Progress payments are payments the

Department of Defense makes to defense

contractors before goods are delivered.

Progress payments

• If the goods don’t get delivered, those payments are

secured by the goods, even in front of a perfected UCC

filing.

• Ask borrowing manufacturers up front:

• Do you work the DOD?

• Do you receive progress payments?


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EXAMPLES OF SECRET LIENS (CONT.)

Other examples include:

• Landlord liens.

• Distraint rights.

• An excise tax lien on assets

acquired by a borrower for a

corporation.

• Warehouseman liens.

• Subrogation right of insurance

companies.


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WHAT TO DO

As you exchange emails/phone

calls with the borrower, it’s best

to have a point person;

the more voices the

greater the chance of

misunderstandings… and

lawsuits.


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WHAT NOT TO DO

Don’t

• Destroy documents.

• Sanitize a file in any way.

• Include items now that will be embarrassing later.

• Talk to third parties (including other banks) about borrowers.

• Fall for requests to talk “off the record.”


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WHAT NOT TO DO

Don’t

• Give a new lender a copy of your appraisal.

• Discuss potential future sales with a potential bidder pre-foreclosure.

• Exercise too much control over the borrower.

• Portray yourself as the borrowers fiduciary.

• Grant grace or cure periods following a default, particularly with revolving loans. You want to be able to respond quickly.


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TIPS TO LIMIT DAMAGE WHEN THE

BORROWER GOES INTO BANKRUPTCY

You may prefer to have collateral sold by a

bankruptcy trustee to avoid disputes about the

price of the sale.

Bankruptcy may help when the lender does

not want to take possession of problem

collateral, e.g., contaminated real estate.


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DEFENSIVE BANKING 101 FINAL MESSAGES

Be proactive. Head off problems

before they can develop.

• Scrutinize loan documents and

filings as soon as workout begins,

because trustees or other

creditors will be looking for

problems.

• Any necessary changes must be

made to the documents 90 or

more days before a bankruptcy

filing.


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beware of dangers lurking in the lending process

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