Loan  Documentation  Michigan  Credit  Union  League  –  Lending  &  Marke5ng  Conference  February  11,  2015  

Introduction  

•  Mostly,  loan  documents  will  never  be  needed.  

•  Borrower  in  financial  crisis  may  lead  to:  •  A  line  of  creditors  wan5ng  to  be  paid  •  The  necessity  of  following  the  leKer  of  the  documents  

•  Collec5on  vs.  Charge  Off  •  Loans  documented  by  bank  personnel  may  be  tested  by  legal  counsel    who  aKempt  to  expose  deficiencies  and  challenge  the  lender’s  posi5on  

•  The  only  strength  the  lender  has  is  the  efficiency  and  effec(veness  of  its  documenta5on  

•  So,  appropriate  loan  documenta5on  is  cri5cal  to  our  success  as  lenders.  

Ronn

ie  L.  B

oling  -­‐  2

015  

2  

Balance Sheet

Ronnie  L.  Boling  -­‐    2011   3

A  Lending  Ins(tu(on  

Ronn

ie  L.  B

oling  -­‐  2

015  

3  

Income Statement

Ronnie  L.  Boling  -­‐    2011   4

Source  of  Income  -­‐  Lending  

Ronn

ie  L.  B

oling  -­‐  2

015  

4  

Lending  –  The  Big  E’s  

•  Effec(veness    •  Efficiency  

Ronn

ie  L.  B

oling  -­‐  2

015  

5  

The  Bo'om  Line    

Given  enhanced  compe55on,  shrinking  margins,  and  a  somewhat  erra5c  economy,  success  or  failure  of  the  financial  ins5tu5on  will  greatly  depend  on  its  documenta5on  of  the  loan  porVolio.  We  must  get  it  right!  

Ronn

ie  L.  B

oling  -­‐  2

015  

6  

Training  Is  Key  

•  Lending  Officers  •  Loan  Underwriters  •  Loan  Processors  •  Credit  Department  Personnel  •  Senior  Management    …..We  are  all  in  the  same  boat!    

Ronn

ie  L.  B

oling  -­‐  2

015  

7  

The  Uniform  Commercial  Code  &  Article  9  •  The  Uniform  Commercial  Code  (UCC)  is  the  result  of  an  effort  to  harmonize  the  law  of  sales  and  other  commercial  transac5ons  in  all  50  states  within  the  United  States  of  America.      

•  Has  been  in  effect  since  the  early  1960’s  •  Ar5cle  9  -­‐  Covers  security  interests  in  personal  property  and  fixtures  

•  Adopted  in  all  50  states  •  The  State  of  Michigan  has  adopted  all  major  amendments  

Ronn

ie  L.  B

oling  -­‐  2

015  

8  

 Security  Interest  

•  Must  be….  •  In  wri5ng  •  Authen5cated  by  the  debtor  (signed)  •  Grant  a  security  interest  •  Describe  the  debt  •  Describe  the  collateral  being  offered.  •  AKached  

•  The  Security  Agreement  must  be  valid  •  Secured  party  must  give  value  (i.e.  a  loan)  •  The  debtor  must  have  rights  to  the  collateral  

•  Perfected…  

Ronn

ie  L.  B

oling  -­‐  2

015  

9  

Ronn

ie  L.  B

oling  -­‐  2

015  

10  

Security  Interest  –  Perfection    •  Pledge  •  Automa5c  Perfec5on  •  Purchase  money  security  interest  •  Security  interest  in  proceeds  

•  Lien  Recording  –  Titled  Goods  •  Control  •  Filing  –  UCC-­‐1  Financing  Statement  

Ronn

ie  L.  B

oling  -­‐  2

015  

11  

CONTRACTS  USED  IN  COMMERCIAL  LENDING  

Ronn

ie  L.  B

oling  -­‐  2

015  

12  

Contracts  

•  A  promise  or  a  set  of  promises  for  breach  of  which  the  law  gives  a  remedy  or  the  performance  of  which  the  law  in  some  way  recognizes  a  duty.  

•  May  be  wriKen  or  oral….wriKen  is  easier  to  prove.  

•  Must  contain….  •  An  offer  and  an  acceptance  •  Considera5on  –  established  value  •  Must  be  legal   Ro

nnie  L.  B

oling  -­‐  2

015  

13  

Term  Sheet    

•  A  non-­‐binding  document  incorpora5ng  some  of  the  material  terms  of  the  loan  but  not  a  binding  document  to  lend  money.  

•  Used  to  nego5ate  in  the  early  stages  of  the  lending  process.  

Ronn

ie  L.  B

oling  -­‐  2

015  

14  

         This  Proposal  cons5tutes  only  a  general,  non-­‐binding  expression  of  interest  on  part  of  Bank.    THIS  PROPOSAL  IS  SUBJECT  TO  BANK’S  CREDIT,  LEGAL,  AND  INVESTMENT  APPROVAL  PROCESS  AND  IS  NOT  INTENDED  TO  AND  DOES  NOT  CREATE  A  LEGALLY  BINDING  COMMITMENT  OR  OBLIGATION  ON  PART  OF  BANK.      The  crea5on  of  such  a  legally  binding  commitment  or  obliga5on  is  subject  to,  among  other  things,  the  comple5on  by  Bank  of  an  in-­‐depth  inves5ga5on  of  the  proposed  investment,  the  results  of  which  are  deemed  sa5sfactory  by  Bank  and  the  nego5a5on,  execu5on  and  delivery  of  defini5ve  documents  which  are  mutually  agreed  upon  by  borrow  and  Bank  and  no  occurrence  of  a  material  adverse  change  in  business,  financial  condi5on,  or  prospect  of  borrower  or  any  guarantor.  This  proposal  is  provided  solely  for  your  benefit  and  shall  not  be  reproduced,  distributed,  quoted,  or  otherwise  made  reference  to  except  between  the  senior  management,  officers  and  legal  counsel  of  the  borrower.  Please  review  and  sign  and  send  back  to  Bank.    

Ronn

ie  L.  B

oling  -­‐  2

015  

15  

Commitment  Letter  

•  The  purpose  is  to  set  forth  the  basic  commitment  of  the  financial  ins5tu5on  to  lend  money  and  the  requirements  of  the  borrower  as  far  as  repayment  and  security.  

•  Components  •  The  par5es  •  Type  and  purpose  of  the  loan  •  Amount  of  the  lender’s  commitment  •  Interest  and  other  compensa5on  to  the  lender  •  Repayment  and  prepayment  provisions  •  Collateral  (if  any)  •  Condi5ons  precedent  to  lending  •  Representa5ons  and  warran5es  •  Affirma5ve  covenants  •  Nega5ve  covenants  •  Financial  covenants  

•  Every  element  of  the  loan  must  be  set  forth  

Ronn

ie  L.  B

oling  -­‐  2

015  

16  

Ronn

ie  L.  B

oling  -­‐  2

015  

17  

Authority  to  Borrow  

•  Establishes  who  is  authorized  to  borrow  on  behalf  of  the  business  en5ty.    

•  Components  •  Iden5fica5on  of  borrower  •  Name  of  person’s  authorized  to  execute  documents  

•  Signed  by  corporate  officers  •  General  or  specific  to  a  certain  transac5on  

Ronn

ie  L.  B

oling  -­‐  2

015  

18  

Corporate  Resolu(on  RESOLVED,  that  the    of  the  Corpora5on  is  authorized,  for  the  account  of  this  Corpora5on,  and  on  such  terms  and  condi5ons  as  he/she/they  may  deem  proper,  to  borrow  from    (Financial  Ins5tu5on)  sums  of  money;  and  to  sign,  execute,  and  endorse  all  such  documents  as  may  be  required  by  said  bank  to  evidence  such  indebtedness;  to  discount  or  rediscount  with  said  bank  any  of  the  bills  receivable  owned  by  this  Corpora5on;  to  apply  for  and  obtain  from  said  bank  leKers  of  credit,  and  to  execute  agreements  to  secure  said  bank  in  connec5on  therewith,  to  pledge  and/or  mortgage  any  moneys  on  deposit  or  any  moneys  otherwise  in  the  possession  of  said  band,  and/or  any  bonds,  stocks,  receivables,  or  other  property  of  this  Corpora5on,  to  secure  the  payment  of  any  indebtedness,  liability,  or  obliga5on  of  this  Corpora5on  to  said  bank  whether  now  due  or  to  become  due  and  whether  exis5ng  or  hereaper  incurred,  to  withdraw  and/or  subs5tute  any  property  held  at  any  5me  by  said  bank  as  collateral,  and  to  sign  and  execute  trust  receipts  for  the  withdrawal  of  same  when  required;  and  generally  to  do  and  perform  all  acts  and  sign  all  agreements,  obliga5ons,  pledges,  and/or  other  instruments  necessary  or  required  by  said  bank.  The  undersigned  hereby  cer5fies  that  he/she  is  the  duly  elected  and  qualified  Secretary  and  the  custodian  of  the  books  and  records  and  seal  of    ,a  corpora5on  duly  formed  pursuant  to  the  laws  of  the  state  of    and  that  the  foregoing  is  a  true  record  of  a  resolu5on  duly  adopted  at  a  mee5ng  of  the    and  that  said  mee5ng  was  held  in  accordance  with  state  law  and  the  Bylaws  of  the  above-­‐named  Corpora5on  on    ,and  that  said  resolu5on  is  now  in  full  force  and  effect  without  modifica5on  or  rescission.  IN  WITNESS  WHEREOF,  I  have  executed  my  name  as  Secretary  and  have  hereunto  affixed  the  corporate  seal  of  the  above-­‐named  Corpora5on  this  ____  ,    of    ___________________.,  2015      Secretary  ________________________________  

Ronn

ie  L.  B

oling  -­‐  2

015  

19  

Promissory  Note  

•  The  primary  document  that  evidences  the  borrower’s  indebtedness  to  the  financial  ins5tu5on.  

•  Components  •  Iden5fica5on  of  borrower  •  Amount  of  the  loan  /  credit  line  •  Iden5fica5on  of  payee  •  Interest  rate  provisions  •  Repayment  agreement  •  Defini5on  of  events  of  default  and  remedies   Ro

nnie  L.  B

oling  -­‐  2

015  

20  

Loan  Agreement  

•  A  detailed  statement  of  the  borrower’s  obliga5on  to  repay  the  loan,  provide  security  for  repayment  and  to  perform  its  opera5ons  during  the  term  of  the  loan  in  specific  ways  as  requested  by  the  financial  ins5tu5on  and  agreed  to  by  the  borrower.    

•  Components  •  Amount  of  the  loan,  repayment  terms  and  interest  rate  

•  Collateral  •  Condi5ons  precedent  –  things  that  must  be  accomplished  before  the  loan  or  advanced  sre  made  

•  Borrower’s  representa5ons  and  warran5es  •  Environmental  covenants  •  Affirma5ve  and  nega5ve  covenants  •  Financial  covenants  •  Default  provisions  and  remedies  •  Jurisdic5on  provisions    

Ronn

ie  L.  B

oling  -­‐  2

015  

21  

Security  Agreement  

•  Gives  the  lender  a  security  interest  in  the  collateral  described  in  the  agreement.      

•  Components:  •  In  wri5ng  •  Authen5cated  by  the  debtor  •  Describe  the  collateral  •  Specifically  grants  a  security  interest  •  Describes  the  obliga5on  being  secured  •  Date  of  execu5on  •  Representa5ons  and  warran5es  •  Events  of  default  •  Remedies  of  the  lender  •  Loca5on  of  the  collateral  •  Insurance  requirements  •  Environmental  provisions  

Ronn

ie  L.  B

oling  -­‐  2

015  

22  

Guaranty  Agreement  

•  Creates  a  binding  contract  whereby  the  guarantor  is  obligated  to  repay  the  loan  in  the  event  the  debtor  defaults  on  the  obliga5on  

•  Components:  •  Descrip5on  of  the  debt  to  be  paid  •  Iden5fica5on  of  the  party  whose  debt  is  being  paid  

•  Iden5fies  the  party  receiving  payment  in  the  event  of  default   Ro

nnie  L.  B

oling  -­‐  2

015  

23  

Pledge  /  Security  Agreement  •  Creates  a  perfected  security  interest  in  collateral  possessed  by  the  financial  ins5tu5on  

•  Components:  •  Descrip5on  of  the  collateral  •  Iden5fica5on  of  party  holding  collateral  (financial  insitu5on)  

•  Financial  ins5tu5on’s  commitment  to  preserve  the  collateral  

•  Lender’s  right  to  sell  or  dispose  of  the  collateral  

Ronn

ie  L.  B

oling  -­‐  2

015  

24  

The  Financing  Statement  –  UCC1  •  Exists  as  a  means  of  perfec5ng  a  security  interest  in  collateral  

•  Must  contain:  •  Name  of  debtor  •  Name  of  secured  party  •  Descrip5on  of  collateral  •  Date  of  execu5on  

•  UCC11  •  Search  for  exis5ng  liens  

•  UCC3  •  Con5nua5on  •  Amendment  •  Release  

Ronn

ie  L.  B

oling  -­‐  2

015  

25  

Ronn

ie  L.  B

oling  -­‐  2

015  

26  

Ronn

ie  L.  B

oling  -­‐  2

015  

27  

Ronn

ie  L.  B

oling  -­‐  2

015  

28  

Deed  of  Trust  /  Mortgage  •  Secure  a  lien  on  real  estate    •  Components:  •  Mortgagor  •  Mortgagee  •  Grant  of  security  interest  in  trust  •  Descrip5on  of  real  estate  •  Descrip5on  of  debt  •  Representa5ons  and  warran5es  •  Events  of  default  and  remedies  of  mortgagee  •  Environmental  covenants    

Ronn

ie  L.  B

oling  -­‐  2

015  

29  

Assignment  of  Life  Insurance  •  Assigns  proceeds  from  life  insurance  as  collateral  to  secure  a  debt  

•  Lender  holds  policy  and  has  assignment  acknowledged  by  life  insurance  company.  

Ronn

ie  L.  B

oling  -­‐  2

015  

30  

Trust  Receipt    

•  Lender  agrees  to  release  collateral  “in  trust”  to  the  borrower  for  some  specific  purpose  and  the  borrower  agrees  to  return  it  by  a  specified  period  of  5me.    

Ronn

ie  L.  B

oling  -­‐  2

015  

31  

Ronn

ie  L.  B

oling  -­‐  2

015  

32  

Delivery  Agreement  

•  Borrower  agrees  to  deliver  collateral  to  lender  at  a  specified  5me.    

Ronn

ie  L.  B

oling  -­‐  2

015  

33  

REGULATIONS  

Ronn

ie  L.  B

oling  -­‐  2

015  

34  

The  Fences:  Regulations  •  The Equal Credit Opportunity Act (ECOA) is a United States law (codified

at 15 U.S.C. § 1691 et seq.), enacted in 1974, that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract);[1] to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The law applies to any person who, in the ordinary course of business, regularly participates in a credit decision, including banks, retailers, bankcard companies, finance companies, and credit unions.

•  Failure to comply with the Equal Credit Opportunity Act's Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.[2]

•  The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed. [1]

•  TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires uniform or standardized disclosure of costs and charges so that consumers can shop. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and certain higher-cost mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.

Ronn

ie  L.  B

oling  -­‐  2

015  

35  

Regulations  (cont’d.)  •  The Fair Credit Reporting Act (FCRA) is a United States federal law

(codified at 15 U.S.C. § 1681 et seq.) that regulates the collection, dissemination, and use of consumer information, including consumer credit information.[1] (Full Statute (PDF).) Along with the Fair Debt Collection Practices Act (FDCPA), it forms the base of consumer credit rights in the United States. It was originally passed in 1970,[2] and is enforced by the US Federal Trade Commission and private litigants.

•  he Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5]

•  The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.)[6]

•  The Real Estate Settlement Procedures Act (RESPA) was created because various companies associated with the buying and selling of real estate, such as lenders, real estate agents, construction companies and title insurance companies were often engaging in providing undisclosed kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics. It requires lenders to provide a good faith estimate (GFE) for all the approximate costs of a particular loan and finally a HUD-1 (for purchase real estate loans) or a HUD-1A (for refinances of real estate loans) at the closing of the real estate loan. The final HUD-1 or HUD-1A allows the borrower to know specifically the costs of the loan and to whom the fees are being allotted.  

Ronn

ie  L.  B

oling  -­‐  2

015  

36  

Regulations  (cont’d.)  •  The United States Home Mortgage Disclosure Act (or HMDA, pronounced

HUM-duh) was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster.[1]

•  HMDA was designed by the Federal Reserve Board in order to:

•  Help public officials to distribute public-sector investments•  Discover if financial institutions are serving housing needs of communities•  Identify where there are discriminatory lending practices•  Home Ownership Equity Protection Act: n July 14, 2008 the Board of

Governors of the Federal Reserve (Fed) released new rules under the Truth in Lending Act (TILA) - Regulation Z. The rule seeks to protect consumers from unfair and deceptive acts and practices.

•  The rule provides protections by establishing a new category of "higher-priced mortgage loans" defined as closed-end consumer credit transactions secured by the consumer's principal dwelling where the Annual Percentage Rate (APR) on the loan exceeds the rate on a Treasury security with a comparable maturity by 3%. This would include purchase loans, refinancings of such loans, and home equity loans, but would exclude loans for vacation properties, open-end home-equity plans, reverse mortgages, or construction-only loans.

•  Additionally, the rule requires earlier consumer disclosures for closed end mortgages secured by a principal dwelling and prohibits: certain acts of or practices for "higher priced" or subprime mortgage loans and loans that meet HOEPA's cost triggers; other acts or practices for all closed-end credit transactions secured by a consumer's principal dwelling; and certain misleading or deceptive advertising practices in connection with closed-end mortgages.  

Ronn

ie  L.  B

oling  -­‐  2

015  

37  

Regulations  (cont’d.)  •  The United States Home Mortgage Disclosure Act (or HMDA, pronounced

HUM-duh) was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster.[1]

•  HMDA was designed by the Federal Reserve Board in order to:

•  Help public officials to distribute public-sector investments•  Discover if financial institutions are serving housing needs of communities•  Identify where there are discriminatory lending practices•  Home Ownership Equity Protection Act: n July 14, 2008 the Board of

Governors of the Federal Reserve (Fed) released new rules under the Truth in Lending Act (TILA) - Regulation Z. The rule seeks to protect consumers from unfair and deceptive acts and practices.

•  The rule provides protections by establishing a new category of "higher-priced mortgage loans" defined as closed-end consumer credit transactions secured by the consumer's principal dwelling where the Annual Percentage Rate (APR) on the loan exceeds the rate on a Treasury security with a comparable maturity by 3%. This would include purchase loans, refinancings of such loans, and home equity loans, but would exclude loans for vacation properties, open-end home-equity plans, reverse mortgages, or construction-only loans.

•  Additionally, the rule requires earlier consumer disclosures for closed end mortgages secured by a principal dwelling and prohibits: certain acts of or practices for "higher priced" or subprime mortgage loans and loans that meet HOEPA's cost triggers; other acts or practices for all closed-end credit transactions secured by a consumer's principal dwelling; and certain misleading or deceptive advertising practices in connection with closed-end mortgages.  

Ronn

ie  L.  B

oling  -­‐  2

015  

38  

Consumer  Loans  

•  Personal    •  Automobile  •  Home  equity  line  of  credit  •  Boat  •  Equipment  •  Securi5es  porVolio  •  Mortgage  

Ronn

ie  L.  B

oling  -­‐  2

015  

39  

Documentation    

•  Note,  Disclosure  and  Security  Agreement  •  Perfec5on  of  Lien  •  Personal  Unsecured  •  Automobile  •  Home  equity  line  of  credit  •  Boat  •  Equipment  •  Securi5es  porVolio  •  Mortgage  

Ronn

ie  L.  B

oling  -­‐  2

015  

40  

Ronn

ie  L.  B

oling  -­‐  2

015  

41  

Automobile  Loan  

Ronn

ie  L.  B

oling  -­‐  2

015  

42  

Home  Equity  Line  of  Credit  –  Deed  of  Trust  

Ronn

ie  L.  B

oling  -­‐  2

015  

43  

Boat  Loan  

•  Greater  than  25’  is  considered  a  yacht  •  Lien  recorded  using  a  Ships  Mortgage  via  the  United  States  Coast  Guard  

•  Boat  and  trailer  are  5tled  vehicles  •  Motor  –  file  UCC1  

Ronn

ie  L.  B

oling  -­‐  2

015  

44  

Ronn

ie  L.  B

oling  -­‐  2

015  

45  

Equipment  Loan    

•  Lien  perfected  by  filing  a  UCC1  •  File  with  Secretary  of  State  •  File  with  County  Recorder  •  File  in  debtors  first  name,  last  name,  DBA  name,  etc.    

Ronn

ie  L.  B

oling  -­‐  2

015  

46  

Securities  /  Portfolio  

Ronn

ie  L.  B

oling  -­‐  2

015  

47  

Real  Estate  

•  Deed  of  Trust  •  Open  End  vs.  Closed  End  •  Title  Search  to  guarantee  clear  5tle  

Ronn

ie  L.  B

oling  -­‐  2

015  

48  

Loan  Checklist    

Ronn

ie  L.  B

oling  -­‐  2

015  

49  

Be  prepared  for  the  worst….leave  no  room  for  error!  

Ronn

ie  L.  B

oling  -­‐  2

015  

50