Six Ways to Lay an Egg with Easy Loan Oversights

By Eric Sherburne | Banking & Finance

Small businesses and their lenders devote plenty of energy and resources to the loan application and negotiation process, but sometimes they pay less than adequate attention to important details of documentation and administration.

Here are six examples of ways to “lay an egg” with easy oversights.

Failure to sufficiently identify obligors/grantors and establish authority

It seems like an obvious point, but it is critical to properly identify the parties to a loan and to memorialize that each has the authority to do whatever it is doing. Review of entity organizational and governance documents is one part. Clear resolutions, certificates, or similar evidence of authority is another part.

Failure to identify collateral adequately

Identifying collateral inaccurately or incompletely in a mortgage or security agreement can lead to a security interest that is not enforceable as the parties to the loan agreed. A mortgage with a legal description that is invalid may create no enforceable lien at all, and a legal description that describes less than all of the property or that describes the wrong property limits the value of the lien, perhaps making it effectively worthless. Likewise with a collateral description in a security agreement.

Failure to prefect a security interest

Making a security interest enforceable against “the rest of the world” requires a perfection step: recording a mortgage or filing a UCC financing statement, for example. Neglecting to complete the perfection step at all is an obvious error, but there are more subtle oversights. Recording the mortgage or filing the financing statement in the wrong office or with fewer than all of the relevant offices is one potential oversight. Another is using the wrong perfection method; remember, an interest in collateral like letter-of-credit rights, deposit accounts, and life insurance is not perfected by filing a financing statement.

Failure to appreciate a landlord’s potential interest in assets

Borrowers who are tenants in leased space may have subjected some or all of their assets to a security interest in favor of lessors. All parties – borrower, lender, and landlord – should understand their respective rights in the assets. Sometimes a Lessor’s Agreement is the answer. Other times, thorough, memorialized communication is sufficient.

Waiver of covenants, defaults, or undertakings

If the loan documents require particular conduct, all parties to the loan should comply and should acknowledge when they have failed to do so. A lender’s neglect to monitor for compliance or failure to respond when noncompliance is discovered can lead to a deemed waiver of the covenant or undertaking, making it difficult or impossible to enforce. Similarly, a borrower’s lack of candor regarding noncompliance can exacerbate an otherwise manageable issue.

Attempting to reuse documents with limited effectiveness

A common example of “penny wise, pound foolish” is the attempt to reuse loan documents to save recording fees, mortgage tax, etc. or to “speed up” a closing by having fewer documents to sign. Some documents, properly prepared and executed in the first instance, are “reusable;” unlimited, continuing guaranties could be an example. However, many documents, even properly prepared and executed in the first instance, are not reusable; unsatisfied mortgages that at any time did not secure an outstanding debt are an example.


QUESTIONS ABOUT THIS TOPIC?

If you have any questions about the content of this article or need help obtaining a business loan please contact attorney Eric Sherburne at 715-808-8832, or email at esherburne@eckberglammers.com.


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