WE ARE STILL SEEING PROBLEMS IN THE USE OF COMMERCIAL PLATFORM BANKING FORMS
Have you actually read your forms?
(Part 1 of a 2-part series)
The use of computer-based software to prepare routine banking forms has greatly reduced the cost of document preparation and offers the promise of better quality control. Unfortunately, our experience is still showing that too few resources and too little attention are being devoted to the formation of reasonable loan documentation policies and procedures, and to the training of personnel. These problems are not limited to just one or two lenders in this market. They are widespread. The assumption seems to be that just because the lender has a system that can be adequate, it is always being used in a manner that will correctly document loans and secured positions. External loan reviews by bank examiners and accounting firms are not designed to spot the systemic weaknesses in the use of these forms.
Here are a few of the common problems we are seeing:
Loan covenants that prohibit any dividends or distributions being used where the borrower is a pass-through taxpayer such as a subchapter S corporation.
Using standard security agreements on collateral such as aircraft or large vessels that have special procedures for perfecting security interests.
Similar misuse of security agreements to attempt to take a security interest in brokerage accounts, limited liability company membership interests, bank accounts, patents, copyrights and trademarks.
Using equipment security agreements for motor vehicles that are being held for sale or lease. (These are inventory and are not equipment under the Uniform Commercial Code.)
Lack of understanding about the different requirements in the tri-state market for guaranties, mortgages and amendments, and interest rate calculation methods.
Misdescription of the debt that is secured by a mortgage, particularly in mortgages given by someone other than the borrower.
Financial covenants that do not fit the borrower's business cycle or accounting practices.
Provisions prohibiting the sale of collateral—even where the collateral is inventory.
Lack of environmental covenants and other protections in mortgage documentation.
Statutory references to laws that have been amended or repealed.
Jury waivers that are done in a manner that are unenforceable.
As you consider how your institution is using these forms, ask yourself if there is an annual reevaluation of how and when these forms are being used. This should also include a review of the options for completion of the forms that exist within the software. Feature rich software may multiply the opportunity to make choices that are not always in your institution’s best interests.