Date post: | 06-Aug-2015 |
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Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
1
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
2
JOIN. ENGAGE. LEAD.
CONTRACTUAL PROMISES
Did you know that your bank
can be sued over the
perception of a broken
promise?
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
3
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
4
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
5
JOIN. ENGAGE. LEAD.
EXAMPLES OF DOCUMENTS WHERE
DISCLAIMERS SHOULD BE USED
Use broad disclaimers
for:
• Email.
• Term sheets.
• Initial proposal letters.
• Workout and litigation.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
6
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
7
JOIN. ENGAGE. LEAD.
EXAMPLES OF TERMS TO AVOID
Avoid terms
such as:
• Commit
• Offer
• Extend
• Reasonable
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
8
JOIN. ENGAGE. LEAD.
EXAMPLES OF TERMS TO AVOID (CONT.)
Using the term reasonable in
contracts leaves too much
room for interpretation and
opens the door to litigation.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
9
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
10
JOIN. ENGAGE. LEAD.
DUE DILIGENCE
Conduct due diligence up
front on all parties,
including guarantors.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
11
JOIN. ENGAGE. LEAD.
DUE DILIGENCE (CONT.)
Even if everything comes back
clean, other issues, such as
secret liens, could arise.
– John Hackett, Hackett Feinberg P.C.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
12
JOIN. ENGAGE. LEAD.
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?
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
13
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
14
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
15
JOIN. ENGAGE. LEAD.
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.”
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
16
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
17
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
18
JOIN. ENGAGE. LEAD.
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.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
19
JOIN. ENGAGE. LEAD.
SHARE THIS PRESENTATION
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