Loan Documentation 101 - Part 1 The Basics · 2016-02-10 · Your State Association Presents....
Transcript of Loan Documentation 101 - Part 1 The Basics · 2016-02-10 · Your State Association Presents....
Your State Association Presents
Lenders LearnTM Chapter 3Loan Documentation 101 - Part 1
The Basics
Program Materials
Use this document to follow along with the webinar.
Please test your system before the broadcast. Be sure to
print enough copies for all listeners. Chapter 3 of the Lenders LearnTM secured lending guide is provided as a
separate handout.
Wednesday, February 10, 2016 Presenter: Robin Russell
Technical Support (for faster service please submit inquiries via email or online): (Registration & Tech Support): Email- [email protected], Phone- (877)988-7526 FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs
About Lenders LearnTM
Lenders LearnTM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin’s new 2016 Multistate Secured Lending Guide.
Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates.
1: Basic Business Entities (1/21)2: The UCC for Lenders (2/3)3: Loan Doc 101: The Basics (2/10)4: Loan Doc 101: Business Collateral (2/23)5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3)9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18)11: Commercial Loan Documentation (5/3 & 5/4)12: Letters of Credit (5/17)13: Lending to Municipalities (8/24)14, 15, 16: Basic Bankruptcy for Bankers (11/2)17: Loan Participations (11/15)
Also Recommended: • Top Loan Documentation Mistakes (TBD),• Advanced Commercial Loan Documentation (6/1)• Understanding Commercial Loan Documents (9/20)• Understanding Real Estate Loan Documents (9/22)• Commercial Real Estate Loan Documentation (12/7)
All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders LearnTM curriculum and missed the webinar, please visit the on-demand catalog to register.
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Loan Documentation 101: Part OneThe Basic Loan Document Package
Robin RussellAndrews Kurth LLP
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Robin Russell
ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience inbankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidatingtrustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors andbidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyanceand preference claims in bankruptcy and district court. She has also represented banks, institutional lenders andcorporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of ThomsonReuters’ Texas Practice Guides for both Creditors’ Rights and Financial Transactions and the Texas BankersAssociation’s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and TexasAccount Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring relatedtopics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received herLL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of theBaylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the TexasSupreme Court.
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Notice
This presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that neither the presenter nor your State Bankers Association is engaged in rendering legal, accounting or other professional advice or service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought — from a Declaration of Principles Adopted by the American Bar Association and a committee of Publishers and Associations.
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Basic Secured Loan Documentation
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Basic Loan Documents for a Lien on Personal Property
• Loan Application
• Financial Statements
• Promissory Note
• Security Agreement
• Step of Perfection (i.e., UCC-1, Possession, Control)
• Lien Search
• Title Verification Document
• Authorization Documentation
• Insurance
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Other Common Documents
• Guaranty
• Subordination or Inter Creditor Agreement
• Appraisal/Valuation
• State and federal disclosure documents
• Arbitration Agreement
• Legal Opinion
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The Loan Application
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Consumer Loans: Reg B• The Equal Credit Opportunity Act Reg. B [12 CFR 202] requires that certain
notices be given to persons who apply for consumer and business credit. Specifically, a creditor must notify an applicant of action taken within
- 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application;
- 30 days after taking adverse action on an incomplete application;
- 30 days after taking adverse action on an existing account; or
- 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.
• A written loan/credit application provides a date from which a Bank may calculate these deadlines.
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The Financial Statement
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Covenant Testing• Debt Equity Ratio
• Debt Service or Debt Coverage Ratio
• Interest Coverage Ratio
• Minimum Net Worth
• Minimum Working Capital
• Current Ratio
• Fixed Charge Coverage Ratio
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Fraud on a Financial Institution
“This information and the information provided on all accompanying financial statements and schedules is provided for the purpose of obtaining credit for the Applicant(s) or for the purpose of Applicant(s) guaranteeing credit for others. Applicant(s) acknowledge that representations made in this statement will be relied on by Creditor in its decision to grant such credit. This Statement is true and correct in every detail and accurately represents the financial condition of the Applicant(s) on the date given below. Creditor is authorized to make all inquiries it deems necessary to verify the accuracy of the information contained herein and to determine the creditworthiness of the Applicant(s). Applicant(s) will promptly notify Creditor of any subsequent changes which would affect the accuracy of this Statement. Creditor is further authorized to answer any questions about Creditor’s credit experience with Applicant(s). aware that any knowing or willful false statements regarding the value of the above property for purposes of influencing the actions of Creditor can be a violation of federal law. 18 U.S.C. & 1014, and may result in a fine or imprisonment or both.”
Applicant(s) are
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Not All Debts Are Dischargeable
• Alimony and child support
• Certain taxes. (Most taxes can NOT be discharged)
• Debts for certain education benefit (Student Loans)
• Loans made or guaranteed by a governmental unit
• Debts for willful and malicious injury by the debtor to another entity
• Or to the property of another entity
• Debts for death or personal injury caused by the debtor’s operation of a motor
vehicle while the debtor was intoxicated from alcohol or other substances
• Debts for certain criminal restitution orders
• Debts for money or property obtained by false pretenses -- this includes any
debt that the court finds was obtained fraudulently or illegally
• Debts for fraud or defalcation while acting in a fiduciary capacity
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Loan Committee Memos and Presentations
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Overview
• The information for the Loan Committee Memo comes from the borrower and the Bank’s due diligence on the borrower.
• If a loan ultimately goes into default and is fully or partially uncollectible, the loan committee memo will be heavily scrutinized by Bank regulators in order to determine if there were flaws in the underwriting process.
• The Loan Committee Memo should identify all known risks.
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“Seven C’s of Loan Review”• Credit
• Capacity
• Capital
• Collateral
• Character
• Conditions
• Commitment
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Description of Borrower’s Business
• The type of business entity to which the loan will be made
• A description of the borrower’s capital structure(i.e. subsidiaries/owners)
• A history of the business
• The current status of the business such as its business location(s), major purchasers/suppliers, etc.
• Future plans including marketing strategy
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Financial Information
• The following financial information should be provided by the borrower to the Bank:
- tax returns
- balance sheet
- income statement/profit loss statement
- cash flow projections with clearly articulated assumptions on which the projections are based
- operating cycle
• For project financing a detailed operating budget and sources and uses of funds.
• Key financial information should be summarized and financial data should be attached.
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Purpose of Loan
• Working capital
• Equipment & machinery
• Furniture & fixtures
• Leasehold improvements
• Acquisition of real estate
• Debt consolidation/refinancing/restructuring
• Acquisition of a business or business line
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Management
• Identify board members of a corporation, managers of a limited liability company, general partners of a partnership, etc.
• Identify key employees of the business including their roles, responsibilities and experience.
• Profiles of Top Management may be attached to the memo and key person life insurance (discussed below) should be considered.
• Outside business professionals, including attorneys and auditors may be included.
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Loan Proposal
• Type
• Amount
• Collateral and its value
• Guarantors
• Repayment plan
• Other key terms
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Location & Market Dynamics
• The Loan Committee Memo should reflect an assessment by the Bank of the strength of the market for the borrower’s goods or services.
• For projects involving real estate development or new businesses a Market Study is often warranted.
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The Promissory Note
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• Principal Amount
• Single/Multiple Advance
• Interest Rate - fixed
- floating
• Accrual Method
• Default Rate
• Payment Schedule
• Maturity Date
• Security/Collateral
• Applicable Law
• Defaults
• Remedies
• Signature of Borrower
Basic Promissory Note
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How Do I Become A Secured Creditor?
Lien a/k/a Attachment + Perfection = Secured Status
Security Agreement + UCC-1
Deed of Trust + Recording in County
Ship Mortgage + Coast Guard Filing
Aircraft Security Agreement + FAA Filing
Investment Property + Account Control Agreement Security Agreement
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The Lien Document
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Attachment
• Bank gives value
• Debtor has rights in collateral
• Debtor has signed written agreement granting lien
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Requirements Of A Lien Document
Mandatory• Identify parties• Identify what obligation is being secured• Identify collateral• Contain “words of grant” granting lien on collateral• In writing• Signed by owner of collateral
Optional• Representations/Warranties• Covenants• Events of Default• Remedies• Applicable Law
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Collateral Descriptions for Personal Property
By item or type (i.e., UCC classification)UCC TYPE: “All inventory now owned or
hereafter acquired and all proceeds therefrom”
ITEM: “That certain film processor VIN 43298746”
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Real Property Legal Descriptions
• Metes & Bounds
• Map or Plat
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Metes and BoundsA metes and bounds description is the most common type of description used for a large and/or unimproved piece of property:
A tract which embraces Lot R-2 and portions of Lots Q-2 and S-2, as one, in Block “C” of WESTOVER HILLS, an Addition near Fort Worth, Tarrant County, Texas, according to plat recorded in Volume 1365, Page 51, Deed Records of Tarrant County, Texas, more particularly described as follows:
BEGINNING at a stake in the South line of said Lot Q-2 and 106 feet from its Southeast corner and being the Southwest corner of the tract conveyed to R.E. Harding by deed recorded in Volume 1930, Page 75, Deed Records of Tarrant County, Texas;
THENCE along the line of said Harding tract North 17 degrees 43 minutes East 282 feet to a pip and North 26 degrees 47 minutes East 187 feet to a pipe at the Northwest corner of said tract in the Northerly line of said Lot Q-2;
THENCE along the Northerly line of Lots Q-2, R-2 and S-2, North 44-1/4 degrees West 70-9/10 feet to an axle at the Eastern angle point in the North line of Lot R-2, and South 66 degrees West 100 feet to a car axle at a re-entrant corner of said Lot R-2 and North 66-1/2 degrees West 100 feet to a car axle at the Westerly angle point in the North line of said Lot R-2 and West 85-9/10 feet to an iron which is 50-9/10 feet West from the Northeast corner of said Lot S-2;
THENCE south 6 degrees 28 minutes West 418 feet to an iron in the South line of said Lot S-2 and 10 feet from its Southeast corner;
THENCE Southeasterly along the Southerly lines of said Lots S-2, R-2, and Q-2, a distance of 204 feet to the PLACE OF BEGINNING.
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Map or Plat
A map or plat description is the most commontype of description used for urban residentialproperty:
Lot Fifty-Six (56) in Block Five (5), Plat ofBayou Woods, Section (8), Harris County,Texas, according to the map thereof recordedin Volume 224, Page 15, of the Map Records ofHarris County, Texas.
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What Types of Collateral AreCovered by the UCC?
The UCC covers five types of tangible personal property:
• Inventory
• Equipment
• Fixtures
• Farm Products
• Consumer Goods
Intangible personal property is divided into the following classifications under the UCC:
• Accounts
• Chattel Paper
• General Intangibles
• Instruments
• Deposit Accounts (Commercial)
• Letter of Credit Rights
If accounts represent amounts due from the U.S. government, they may be subject to special rules, see Government Contracts.
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What Types of Collateral are Not Covered by the UCC?
Tangible personal property includes the following types of collateral not exclusively covered by the UCC:
• Motor Vehicles
• Manufactured Homes
• Boats and Vessels
• Aircraft
• Rolling Stock
Intangible personal property also includes the following types of collateral not subject to the UCC:
• Life Insurance
• Deposit Accounts (Consumer)
• Tort Claims
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What are UCC Proceeds?
• “Proceeds” include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds of collateral.
• Insurance payable due to loss or damage to collateral is proceeds if the debtor is the beneficiary.
• Money, checks, deposit accounts and the like are “cash proceeds.”
• All other proceeds of collateral are “noncash proceeds.”
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Security AgreementRepresentations and Warranties
• Valid existence as entity
• Authorization to execute and perform
• Past, present and future name
• Location/address of debtor
• Ownership of collateral
• PMSI
• Use of property (personal, business, agricultural)
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Security Agreement CovenantsDuties Toward Property
• possession• good repair• payment of taxes• access to inspect collateral• notification of loss• access to books and records• nondisposition (unless ordinary course)• recordation of security interest on chattel paper• proper collection and settlement of accounts• no commingling of proceeds• direct payment of accounts receivable• insurance
Other Duties• authorization of secured party to file financing statement• authorization of secured party to protect collateral• advance notice of changes (name, location, form of organization)
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Security Agreement Defaults
• Failure to pay principal and/or interest
• Breach of covenant
• Rep or warranty untrue
• Bankruptcy/insolvency
• Deemed insecure
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Security Agreement Remedies
• Charge default interest
• Turn over collateral
• Enter and take possession of collateral
• Foreclose
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Methods Of Perfection
• File UCC-1
• Possession
• Control
• Notation on Title
• Non-UCC Filings- Real Estate Records
- FAA
- Coast Guard
- Patent & Trademark Office
- Copyright Office
- State Agencies
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Illustration of Perfection Requirements for Proceeds Under UCC
• If the Bank has a security interest in medical equipment which it has perfected by the filing of a financing statement describing medical equipment and the borrower exchanges some of the medical equipment for office equipment, the Bank will have a continuously perfected security interest in the office equipment.
• On the other hand, if the borrower sells the medical equipment and uses the cash to buy a car, the Bank’s perfected security interest in the car will lapse at the end of the 20 days, because there will be no notation on the certificate of title to indicate that the Bank has a security interest in the office equipment.
• The Bank has a lien on inventory, accounts and equipment.
• If the borrower sells an x-ray machine for cash and then uses the cash to buy vaccine, the Bank will have a continuously perfected security interest in the vaccine because it is inventory as described in the financing statement.
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UCC Requirements for Continued Perfection of a Security Interest in
Proceeds
• The Bank’s security interest continues in collateral, notwithstanding the sale, exchange or other disposition thereof by the borrower unless the disposition was authorized by the Bank in the security agreement or otherwise.
• Bank’s security interest continues described below, in any identifiable proceeds of the collateral, including collections received by the borrower.
• The Bank’s security interest in proceeds becomes unperfected on the 21st day after the borrower receives the proceeds unless:
– A UCC-1 covers the original collateral and the proceeds are collateral in which a security interest may be perfected by filing a UCC-1 in the same office in which the original UCC-1 was filed.
– The proceeds are identifiable cash proceeds; or
– A security interest in the proceeds is perfected before the expiration of the 20-day period.
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UCC-1 Financing Statements
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At What Point in Time Do I File a UCC-1?
• May file before security agreement signed
• Should file before funds advanced
• A deed of trust or mortgage may only be filed after it is signed. It is both the lien and perfection document.
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How Long Does Perfection Last?
• A Form UCC-1 Financing Statement is effective for five (5) years and may be extended for additional five year periods during the six-month “window” prior to expiration of the previous five-year period.
• A UCC-1 filed in connection with a public-finance transaction is effective for 30 years.
• A UCC-1 on fixtures filed in the County Real Property Records is effective for five years.
• A deed of trust/mortgage or fixture financing statement contained within a mortgage or deed of trust it is effective for the term stated in the mortgage or deed of trust.
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Financing Statement Requirements
To be effective, a Financing Statement must:
• give the name of the debtor(s),
• give the name of the secured party,
• give a description of the collateral,
• provide a mailing address for the debtor and the Secured Party of record,
• indicate whether the debtor is an individual or an organization, or,
• if the debtor is an organization, provide the type of organization and the jurisdiction of organization of the debtor,
• signature of debtor not required.
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Debtor Name
• The most important element when preparing a financing statement is the debtor’s name.
• The debtor’s name should be nothing more and nothing less than the exact, full legal name of the debtor.
• Do not abbreviate words in the debtor’s name unless the legal name of the debtor contains abbreviations.
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Collateral Description
• A collateral description in the UCC-1 (but not the security agreement) on commercial collateral may simply state “all assets” or “all property”. The one exception is a “Commercial tort claim” which must be specifically described.
• A UCC-1 on consumer goods requires a description of the specific consumer good.
• A security interest in a consumer’s investment property requires specific identification of the account.
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Name of Record Owner
• If the name of the record owner is required in the UCC-1, it should be obtained through an abstract or title company or from a recent real estate tax bill or some similar document.
• A mailing or street address is not sufficient as a description.
• The following is an example of a legal description of real property:
Lot Fifty-Six (56), in Block Five (5), Plat of Bayou Woods, Section (8), in Harris County, Texas, according to the map thereof recorded in Volume 224, Page 15, of the Map Records of Harris County, Texas.
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Basic UCC-1 Filing Location Rules
• A debtor who is an individual is located in the state of the individual’s principal residence.
• A registered organization that is organized under the law of a state is located in that state.
• A debtor that is a nonregistered organization (i.e. a general partnership) and has only one place of business is located in the state of its place of business.
• A debtor that is a nonregistered organization and has more than one place of business is located in the state of its chief executive office.
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Additional Filing Locations• A registered organization that is organized under the law of the United States
and a branch or agency of a bank that is not organized under the law of the United States or a state are located:– in the state that the law of the United States designates, if the law
designates a state of location;– in the state that the registered organization, branch, or agency
designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location; or
– in the District of Columbia, if neither of the above applies.• A branch or agency of a bank that is not organized under the law of the
United States or a state is located in the state in which the branch or agency is licensed, if all branches and agencies of the bank are licensed in only one state.
• The United States is located in the District of Columbia.• A foreign air carrier is located at the designated office of the agent upon
which service of process may be made on behalf of the carrier.
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Special Filing Location Issues
• A registered organization continues to be located in the jurisdiction notwithstanding:
– the suspension, revocation, forfeiture, or lapse of the registered organization’s status as such in its jurisdiction of organization; or
– the dissolution, winding up, or cancellation of the existence of the registered organization.
• A debtor who ceases to exist, have a residence or have a place of business continues to be located in the jurisdiction where it last existed, resided or did business.
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Lien Searches
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Types of Lien Searches
• UCC – Secretary of State or other Central Filing Office
• County Real Estate Records
• Review of Certificate of Title
• Possession in hands of debtor (where perfection by possession)
• Special Filing Office
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Where Do I Conduct a UCC Lien Search?
• Lien searches are done in the locations for UCC-1 Financing Statements in the state where the debtor is located.
• When farm products are taken as collateral the Bank should also conduct a lien search in each state in which farm products are located to look for agricultural liens.
• A lien search is done on the legal name(s) of the Debtor.
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What Names Do I Search?
• An incomplete debtor name may result in a failure to disclose all the desired information.
Example #1: Real Name: Autoworld, Inc. Name Searched: Autoworld, Corp Result: Filings against Autoworld Inc. will be shown because Inc. and Corp. are currently considered ancillary information by most central filing offices.
Example #2: Real Name: Autoworld of Texas, Inc. Name Searched: Autoworld of California; Result: Filings against Autoworld of Texas not shown.
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Liens Not Disclosed by UCC Lien Search
• Liens filed at the county level such as state tax liens and liens on fixtures.
• Liens perfected by possession, such as liens on chattel paper and certificated securities.
• Liens on special classes of collateral such as ships, aircraft, rolling stock, motor vehicles and manufactured homes.
• UCC-1 filings on the debtor in states not searched.• Nonownership of the collateral by the debtor.• A lien against the prior owner of the collateral.
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Future Liens Which Can “Prime” The Bank
Certain liens which arise after the Bank perfects its lien can “prime” the Bank:
• A purchase money security interest (PMSI).
• A possessory lien created by state law such as an automotive repair shop’s lien on an automobile in its possession.
• A landlord’s lien created by state law.
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The Authorization Documentation
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Importance
• Type of entity which effect liability of individuals and applicable taxation
• Exact full legal name of debtor
• Jurisdiction of organization (i.e., state formation) for filing
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Individual
= John Lee Doe
= J.L. Doe
= Bubba Doe
Exact full legal name
Goes By
Nickname
Debtor for UCC-1 = John Lee Doe
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Signatures for Individuals
• A person’s signature is whatever they have adopted as such
• The written signature need not exactly match the typed name
For example: John Lee Doe may sign “J. L. Doe”
mark
John
his
Doe
X marks the spot
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Business Borrowers
• Sole Proprietorships• General Partnerships• Limited Partnerships (LP)• Limited Liability Partnerships (LLP)• C Corporations• S Corporations• Limited Liability Companies (LLC)• Real Estate Investment Trusts• Cooperative Associations• Professional Corporations• Professional Associations
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Sole Proprietorship
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Sole Proprietorship
• An individual doing business under an assumed name d/b/a
John Lee Doe
d/b/aJohn’s Auto
d/b/aAutoworld
d/b/aJohn’s Flowers
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What if my loan officer wants to put the d/b/a in the loan
documents?
Correct > John Lee Doe*
* individually and doing business under any assumed name including, without limitation, John’s Auto
Wrong > John Lee Doe d/b/a John’s Auto
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UCC Filing Location
State of Residence of Sole Proprietor (i.e., individual)
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Authorization Documents Requiredfor Sole Proprietorship
• Most states require Assumed Name Certificate
• Sole Proprietorship Resolution of Authority
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General Partnership
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• If all partner’s surnames are not in partnership name (i.e., Doe & Brown Auto) then in some states the partnership name (i.e.,John’s Auto) is considered an assumed name and an assumed name certificate should be filed.
personally liable for partnership
debts
John’s Auto
John Doe Robert Brown
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UCC Filing Location
Filed in the state of the general partnership’s
principal place of business
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Authorization Documents Required forGeneral Partnership/Joint Venture
• Partnership Agreement
• Partnership Resolution of Authority
• Assumed Name Certificate required in most states
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Entities “formed” at State Level
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Resolutions
• A meeting was held on a certain date
• The entity made a decision to request a loan from the lender
• The loan will benefit the entity
• Certain officers designated by name and title are authorized to execute loan documents on behalf of the entity
• Pledging of entity assets as collateral is authorized
*Funding of any loan should not occur prior to receipt of a properly executed borrowing resolution. Otherwise, the borrowing could be challenged as unauthorized.
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Authorization Documents Requiredfor Most Entities
• Certificate of Formation
• Bylaws/Company Agreement
• Certificate of Entity Status
• Certificate of State Tax Status
• Resolutions of the Board/Managers/General Partners/Principals
• Certificate of Authority to Transaction Business in all states outside its state of formation in which it does business
• Assumed Name Certificate, if appropriate
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Best Practices Checklist
Has the Bank satisfied itself prior to funding that:
The borrowing under consideration is permitted
Officers who are signing have been properly authorized
Entity does not have a maximum indebtedness clause which will be violated (from another credit arrangement or board action)
All conditions precedent to borrowing have been met
Exact name on loan documents matches with documents on file related to the entity,
Liens and security interests in collateral are proper and within the powers of the entity as granted by its Board/Managers/General Partners/Principals.
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• a POA cannot survive the death of the principal
Agent Acting under Power of Attorney
• durable v. nondurable powers of attorney
• broad powers v. limited powers
• effective now v. effective later
and later even if the principal becomes incompetent or incapacitated
when the principal becomes incompetent or incapacitated
• personal acting under POA should verify still good
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Trust/Custodial Relationships
Trustee Custodian
Trust Property UTMA Property
Beneficiary Minor
income stream (general intangible)
John Doe, TrusteeThe Doe Family Trust
Diana Doe as Custodian under UTMA for Sterling Doe
legaltitle
beneficialowner
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Title Verification Document
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Examples of Title Verification Documentation
• Bill of Sale
• Invoice
• Title
• Deed
• Stock Certificate
• Patent Registration
• General Ledger
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Subordination Agreements and the Rules of Priority
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The “Covered Dish Supper” Rules of Priority
EquityUnsecuredSecuredPMSI
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General Rules of Priority
• first to file > possession wins
• possession v. filing > wins
• pre-existing security interest > wins
• purchase money security > wins as to interest (PMSI) specific collateral
• secured v. unsecured > secured wins
• perfected v. unperfected > perfected wins
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First-to-File(Subordination)
John’s Auto, Inc. ← 9/8/03 UCC-1 filed by John Doe, Sr.
John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1
Subordination
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Purchase Money Security Interest
Equipment and Fixtures• file UCC-1 within 20 days of possession
Inventory
• file UCC-1 before debtor takes possession (i.e.,pre-filing)
• notification to other lien holders within last five years
Farm Products
• pre-filing• notification to other lien holders within last six months
Consumer Goods
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Purchase Money Security Interest
John’s Auto, Inc. ← 9/8/03 UCC-1 John Doe, Sr.
John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1on all assets
John’s Auto, Inc. ← 12/8/09 UCC-1 filed by Bank #2PMSI on specific office equipment
John’s Auto, Inc. ← 6/10/13 ABC Repair Company takes possession of office equipment for repair
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Subordination
A well drafted guaranty should:
• subordinate to the prior payment of the guaranteed loan, all indebtedness (present and future) owing to the guarantor by the borrower
• subordinate any lien or security interest that the guarantor may have or acquire on or in any collateral securing the loan
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Personal Property Lien Subordination
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Business Purpose Affidavit or Statement
Consider when:
• Loan under $50,000
• Borrower is individual
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Truth-in-Lending Disclosure Statement and Amount Financed Itemization
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Evidence of Insurance
• All tangible collateral should be covered with Bank as co-loss payee
• General liability coverage
• Business interruption
• Key person
• Flood, if applicable
• Crop, if applicable
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State Specific Disclosures
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Basic Real Estate Loan Documents – – – Pre Closing
• Loan Application
• Financial Statement
• Loan Commitment
• Earnest Money Contract
• Appraisal or Evaluation
• Survey
• Title Commitment
• UCC Lien Search
• Flood Hazard Determination & Notice to Borrower
• Environmental Assessment
• Escrow Instructions
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Basic Real Estate Loan Documents – – – Closing
• Settlement Statement
• Copy of Deed
• Promissory Note
• Deed of Trust or Mortgage
• Assignments of Rents & Leases
• Title Policy [and Real Estate Lien Subordination Agreement]
• Tax Certificate
• Evidence of Insurance
• Entire Agreement Statement
• Business Purpose Affidavit
• Truth in Lending Disclosure Statement
• Waiver of Consumer Rights
• Authorization Documentation
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Mortgage/Deed of Trust Basics• Names of real property owners exactly as they appear in the Deed• Name of Bank• Description of the debt and maturity date• A statement of consideration• Legal description of the real estate• Date• Grant of property with power of sale to the Trustee• Notarized and acknowledged signatures of the parties granting the lien• Assignment of Rents and Leases• Representations and Warranties• Due on Sale Clause• Covenants• Events of Default• Remedies
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Deed of Trust Representatives and Warranties
• Unencumbered Title
• Due organization and authorization
• No Hazardous Substances on Property
• No knowledge of pending or threatened litigation related to or violation of Environmental Law
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Deed of Trust Covenants• Pay debt
• Pay all taxes, assessments, liens, encumbrances, rents, utilities, etc.
• Defend Title
• Not encumber
• Maintain insurance
• Comply with all laws and regulations including environmental
• Not convey property (fee, easement, license, restrictive covenant, etc.)
• Keep property in good repair
• Regularly inspect for environmental compliance
• Allow inspections by Bank and its professionals
• Not substantially change use/nature of occupancy
• Provide financial information, copies of leases, etc.
• Escrow taxes and insurance if required by Bank
• Authorize UCC filing, if applicable
• Provide notice to Bank of any claim, proceeding, loss or damage
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Guaranty
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Guaranty Concepts
• Typically required when borrowing entity is privately owned.
• Required in scenarios where borrower credit strength is adequate.
• Considered an “unsafe and unsound practice” to make a loan to an individual without a guaranty that you would not make without the guarantor’s support
• Guaranty is a very one-sided document—in the bank’s favor.
• Guaranty should be a guaranty of payment not collection.
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Typical Guaranty Relationships
Subsidiary Child
Parent ParentIndividual
Owner
Business Entity
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Requirements of Guaranty
• Mandatory
- In writing
- Supported by consideration
- Executed prior to funding
- Authority/Capacity to execute
• Optional
- Waivers
- Collateral
- Subordination
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Liability of Co-Guarantors
• Unlimited (i.e., joint and several)
• Limited:
• specified dollar amount
• pro rata share
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Third Party Pledge of Collateral
• Liability limited to value of collateral
• Party who gives consent to pledge has no obligations with respect to collateral (i.e., affirmative covenants)
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Arbitration Agreement
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Legal Opinion
HOU:3631455.1