Lenders Learn TM Chapter 3

Transcription

1 Your State Association Presents Lenders Learn TM Chapter 3 Loan Documentation 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 Learn TM 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 or online): (Registration & Tech Support): - support@conferenceedge.com, Phone- (877) FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs

2 About Lenders Learn TM Lenders Learn TM 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 Learn TM curriculum and missed the webinar, please visit the on-demand catalog to register.

3 Loan Documentation 101: Part One The Basic Loan Document Package Robin Russell Andrews Kurth LLP 1 Robin Russell ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience in bankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidating trustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors and bidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyance and preference claims in bankruptcy and district court. She has also represented banks, institutional lenders and corporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of Thomson Reuters Texas Practice Guides for both Creditors Rights and Financial Transactions and the Texas Bankers Association s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas Account Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring related topics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received her LL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of the Baylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the Texas Supreme Court. 2 1

4 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. 3 Basic Secured Loan Documentation 4 2

5 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 5 Other Common Documents Guaranty Subordination or Inter Creditor Agreement Appraisal/Valuation State and federal disclosure documents Arbitration Agreement Legal Opinion 6 3

6 The Loan Application 7 8 4

7 9 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. 10 5

8 The Financial Statement 11 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 12 6

9

10 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). Applicant(s) are 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. 15 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 16 8

11 Loan Committee Memos and Presentations 17 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. 18 9

12 Seven C s of Loan Review Credit Capacity Capital Collateral Character Conditions Commitment 19 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 20 10

13 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. 21 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 22 11

14 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. 23 Loan Proposal Type Amount Collateral and its value Guarantors Repayment plan Other key terms 24 12

15 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. 25 The Promissory Note 26 13

16 Basic Promissory Note 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

17

18 How Do I Become A Secured Creditor? Lien a/k/a Attachment Security Agreement Deed of Trust Ship Mortgage Aircraft Security Agreement Investment Property Security Agreement + Perfection = Secured Status + UCC-1 + Recording in County + Coast Guard Filing + FAA Filing + Account Control Agreement 31 The Lien Document 32 16

19 33 Attachment Bank gives value Debtor has rights in collateral Debtor has signed written agreement granting lien 34 17

20 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

21

22 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 Real Property Legal Descriptions Metes & Bounds Map or Plat 40 20

23 Metes and Bounds A 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. 41 Map or Plat A map or plat description is the most common type of description used for urban residential property: Lot Fifty-Six (56) in Block Five (5), Plat of Bayou Woods, Section (8), Harris County, Texas, according to the map thereof recorded in Volume 224, Page 15, of the Map Records of Harris County, Texas

24 What Types of Collateral Are Covered 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. 43 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 44 22

25 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. 45 Security Agreement Representations 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) 46 23

26 Security Agreement Covenants Duties 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) 47 Security Agreement Defaults Failure to pay principal and/or interest Breach of covenant Rep or warranty untrue Bankruptcy/insolvency Deemed insecure 48 24

27 Security Agreement Remedies Charge default interest Turn over collateral Enter and take possession of collateral Foreclose 49 File UCC-1 Possession Control Notation on Title Non-UCC Filings Methods Of Perfection - Real Estate Records - FAA - Coast Guard - Patent & Trademark Office - Copyright Office - State Agencies 50 25

28 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. 51 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 21 st 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

29 UCC-1 Financing Statements 53 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

30 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. 55 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

31 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. 57 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

32 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. 59 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

33 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. 61 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

34 Lien Searches 63 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 64 32

35 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. 65 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

36

37 69 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

38 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. 71 The Authorization Documentation 72 36

39 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 73 Individual Exact full legal name Goes By Nickname = John Lee Doe = J.L. Doe = Bubba Doe Debtor for UCC-1 = John Lee Doe 74 37

40 75 Signatures for Individuals A person s signature is whatever they have adopted as such X marks the spot his John Doe mark The written signature need not exactly match the typed name For example: John Lee Doe may sign J. L. Doe 76 38

41 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 77 Sole Proprietorship 78 39

42 Sole Proprietorship An individual doing business under an assumed name d/b/a John Lee Doe d/b/a John s Auto d/b/a Autoworld d/b/a John s Flowers 79 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 80 40

43 UCC Filing Location State of Residence of Sole Proprietor (i.e., individual) 81 Authorization Documents Required for Sole Proprietorship Most states require Assumed Name Certificate Sole Proprietorship Resolution of Authority 82 41

44 General Partnership 83 personally liable for partnership debts John Doe Robert Brown John s Auto 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

45 UCC Filing Location Filed in the state of the general partnership s principal place of business 85 Authorization Documents Required for General Partnership/Joint Venture Partnership Agreement Partnership Resolution of Authority Assumed Name Certificate required in most states 86 43

46 Entities formed at State Level 87 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

47 Authorization Documents Required for 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 89 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

48

49 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 a POA cannot survive the death of the principal personal acting under POA should verify still good 93 Trust/Custodial Relationships Trustee legal title Custodian Trust Property UTMA Property Beneficiary income stream (general intangible) beneficial owner Minor John Doe, Trustee The Doe Family Trust Diana Doe as Custodian under UTMA for Sterling Doe 94 47

50 Title Verification Document 95 Examples of Title Verification Documentation Bill of Sale Invoice Title Deed Stock Certificate Patent Registration General Ledger 96 48

51 Subordination Agreements and the Rules of Priority 97 The Covered Dish Supper Rules of Priority PMSI Secured Unsecured Equity 98 49

52 General Rules of Priority first to file > possession wins possession v. filing > wins pre-existing security interest > wins purchase money security interest (PMSI) > wins as to specific collateral secured v. unsecured > secured wins perfected v. unperfected > perfected wins 99 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

53 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 101 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 #1 on all assets John s Auto, Inc. 12/8/09 UCC-1 filed by Bank #2 PMSI on specific office equipment John s Auto, Inc. 6/10/13 ABC Repair Company takes possession of office equipment for repair

54 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 103 Personal Property Lien Subordination

55

56 Business Purpose Affidavit or Statement Consider when: Loan under $50,000 Borrower is individual

57 Truth-in-Lending Disclosure Statement and Amount Financed Itemization

58 111 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

59 State Specific Disclosures 113 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

60 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 115 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

61 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 117 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

62 Guaranty 119 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

63 Typical Guaranty Relationships Parent Individual Owner Parent Subsidiary Business Entity Child 121 Requirements of Guaranty Mandatory - In writing - Supported by consideration - Executed prior to funding - Authority/Capacity to execute Optional - Waivers - Collateral - Subordination

64 Liability of Co-Guarantors Unlimited (i.e., joint and several) Limited: specified dollar amount pro rata share 123 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)

65 Arbitration Agreement

66

67 129 Legal Opinion HOU: