Over the last few weeks, I’ve commented on the new version of the OCC’s Commercial Real Estate Lending Handbook (I give it a gentlemen’s C); and I listed a few legal topics that deserve some guidance from the OCC.
“Guidance” could even merely be a list of important topics (ending with a warning that the list is NOT an all-inclusive list).
I expect legal issues to be identified and put on the “check the box” list by the OCC - with the banks expect to check the box.
Unfortunately, instead of leading the class by at least listing legal issues associated with risks in commercial real estate lending, the OCC implicitly affirms those banks that under value and under utilize legal counsel. (Let’s resist the temptation to comment on “why” this takes place.)
Fortunately, some banks are very good at identifying and monitoring legal issues. Several of them do this by a simple two step process:
- List key legal provisions in loan documents
- Instruct legal counsel to report, in writing AND PRIOR to closing, if these provisions are altered
Here is a sample list (it is NOT an exhaustive or all-inclusive list): legal counsel must report (in writing) any changes, from the bank’s standard form, in loan document provisions that cover the following -
- grace period, late charges and default interest
- prepayment, lockout and yield maintenance
- transfer restrictions (due on sale) provisions
- subordinate financing (due on encumbrance provisions)
- material deviations in, or deletions of, the remedies provisions (unless required under the governing law of the state in which the collateral is located)
- recourse provisions
- environmental provisions
- taxes and insurance premiums escrows
- any reserves or other escrows
- granting clauses or form description of collateral contained in such granting clauses (unless required under the governing law of the state in which the collateral is located)
- casualty or condemnation provisions
- addition of a provision allowing a release of collateral (unless expressly provided for in the credit approval)
- lender approval process relating to amendments, renewals or termination of major leases (or new leases)
- cooperation provisions, including use of any future technology required by lender (such as on-line reporting and delivery of required materials and information)
- WARNING: __________ [this list is not "all-inclusive" and you should revise it as needed]
My suggestion is that every bank (or other lender) take this approach. Surely at some point, the OCC will view this simple approach as a key to safe and sound banking practices.
Please share you comments below.