In the current economic times, it should not be surprising to discover you may have one or more borrowers in financial trouble. The following is a list of ideas for every loan officer to consider when this situation initially arises:
- Don’t hide the problem. Acknowledge and deal with the problem from the onset. It will open up more options and provide the opportunity for a more favorable resolution rather than waiting until the problem is in dire straits. Talk to others at the bank early and often. They may have good ideas for how to solve the problem and they are likely to appreciate your candor.
- Find the file/loan documents. Finding the complete file may be more challenging than you might think. Work hard at finding the entire file. Having a complete file with all loan documents (including all modifications) is very important to ensure that the bank has a clear picture of where it stands and the options available to it.
- Safeguard original loan documents. Maintain a safe place for all original loan documents, especially the original note and any guarantees. Make sure you know where these documents are maintained and that you have access to them. Having the originals may significantly simplify any legal action, particularly if you have a cognovit note and guaranty.
- Find significant “other” documents. Finding all significant correspondence (including e-mails) should also be a top priority. A determination must be made if there were any verbal or implied agreements with a borrower that could be construed to constitute a course of dealing or a loan modification and which could affect the outcome and your strategy.
- Chronology of events. Create a timeline or chronology of events leading up to a borrower default. It can be a very effective tool and may help you develop an effective strategy to deal with the situation.
- Understand your borrower’s perspective. The situation should be thought through from your borrower’s perspective. If you know your borrower’s attitudes and needs, these can potentially be used to the bank’s advantage. Any potential lender liability claims should also be examined.
- Defective loan documents. Review all loan documents carefully for any defects. You may be able to fix these defects as part of your workout strategy.
- Notices. All notices to the borrower and any guarantors must comply with the terms of the loan documents. Notices may also have to be provided to additional collateral providers, subordinate lenders, tenants or other parties that are part of, or affected by, your loan.
- Title update. Order a title update to determine the status of any other liens or claims on the property securing your loan. Particular attention should be paid if the title agency is affiliated with the borrower, in which case, going through a different title agency might be in order if you want to preserve confidentiality or if you are worried that the title agent may try to hide a problem.
- UCC filings. Conduct a UCC search should be conducted to confirm the priority of your filing, the continued validity of the bank’s filing and to see what other security interests have been granted by your borrower.
- Status of borrowing entity. Conduct a review of the Secretary of State’s website to determine if your borrower is still in good standing with the Secretary of State’s office.
- Insurance. Review current insurance coverage to make sure the coverage and policies have not lapsed.
- Property due diligence. Determine the current condition of the property including any deferred maintenance along with an inventory of personal property and accounts receivable. An updated appraisal may need to be ordered to determine the current property value. Particular attention should be paid to any existing sales contracts or leases.
- Financial due diligence. Conduct a review of current financial statements and tax returns of the borrower and any guarantors. Additionally, if applicable, you will need to take into account the costs to complete the construction of the project and the amount available to be disbursed under the loan. You should also review cash available and any other loans or obligations of the borrower and any guarantors.
- Strategy. Once you have done your due diligence and understand the borrower’s perspective, you can develop and implement your strategy for dealing with the problem.
- Cautions. In any situation you should always proceed with caution and be aware of any lender liability issues. As circumstances change, you must adhere to the required notice provisions and be careful of various preference and bankruptcy issues. When required, due diligence should be updated and at all times you should avoid any verbal agreements and waivers.
Again, each situation will be different, but if the foregoing is adhered to, it is more likely that you will get off to a good start in protecting the bank and in determining and implementing an effective strategy.