By: Lance T. Denha, Esq.
ALERT: Because of the current uncertainties in the financial markets, lenders are actively and routinely performing periodic comprehensive legal reviews and audits of their existing loans and credit portfolios. Why? The Lender needs to determine whether (1) the loan documents are accurate, complete and in compliance with applicable credit approvals, (2) the lender has been receiving and evaluating financial statements and compliance certificates on a regularly scheduled basis, (3) the borrower is in compliance with all financial and other covenants and (4) the lender has perfected its security interest in the collateral.
Basic Loan Document Review
Each file includes a complete review and basic analysis of all applicable loan documents. This process confirms that the lender has in its possession all original signed loan agreements, security agreements, notes, amendments, assignments, guarantees, UCC financing statements, mortgages, etc. This is done to ensure the loan documents are sufficient, accurate and complete.
Inventory and Audit
Each review also will incorporate a complete inventory and identification of all collateral and related documents, including, to the extent applicable, equipment, fixtures, pledged accounts, intellectual property rights, appraisals, environmental assessments and inspections, stock certificates, title certificates, franchise and license agreements, title insurance policies, ALTA surveys, UCC insurance policies and other insurance policies.
The lender may also conduct a valuation of the collateral for purposes of determining the current value. These updated valuations may include anything from 3rd party appraisals to an informal evaluation. This is usually dependent upon the type of collateral involved and the size of the transaction. This step allows the lender to determine the appropriate amount to bid at a UCC or foreclosure sale and may assist the lender in recognizing what its expected position and the potential recovery will be in a bankruptcy proceeding.
Legal Review and Analysis
All legal opinions of borrower’s counsel may be reviewed to ensure that such counsel provided its opinion on all of the legal matters required by lenders credit approval department. This may include, but not be limited to, the borrower continuing to make payment and remain current with the loan, the loan documents remaining valid and binding, and whether legal obstacles and hurdles remain regarding lender’s interest in order to ensure lender protection of the collateral.
In addition, where lenders are concerned that the borrower may be contemplating bankruptcy or other insolvency proceedings, an attorney’s audit of the file should include reviewing and analyzing bankruptcy laws as well as specific bankruptcy code provisions which may impact attempts between lender and borrower to successively achieve a loan workout.
To summarize, borrowers need to understand that there is no better way for lenders to identify loan documentation issues than by performing comprehensive reviews and audits of the loan documents and collateral files. By doing so lenders will be able to address any deficiencies by changing its credit compliance portfolio management and other document retention systems.