Pub. 9 2019-2020 Issue 6

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S May • June 2020 17 Lenders should ensure their loan files are current, well-organized and easily accessible — especially for the problem and risky loans. Any verbal understandings with borrowers should be promptly documented. Any incomplete or unsigned agreements should be promptly completed and signed. Examine Collateral The COVID-19 outbreak’s fallout will require almost all lenders to recover collateral by satisfying defaulted loans. So, lenders should carefully examine their collateral position, including: • Verifying that collateral is perfected correctly, including proper property descriptions and up-to-date recording and filing; • Inspecting (to the extent possible) collateral and obtaining timely appraisals and borrower reports, including financial statements and borrowing base reports; • Identifying subordinated collateral and assessing the likelihood and extent of the senior holder’s recovery; and • Verifying that insurance covering the collateral is intact. Consider Modified Agreements Borrowers will likely seek modified loan terms, legal requirements may mandate them, and lenders may be prudent to propose them for some borrowers proactively. Such agreements often come in the form of change in terms of agreements modifying payment, interest or default terms. In the event of an existing default, lenders may consider deeds in lieu of foreclosure or forbearance agreements. The combination and terms of these modified agreements will vary by each borrower’s circumstances. Failed negotiations for these modified agreements often lead to lender liability litigation. So, lenders should document negotiations wherever possible, inform borrowers (inwriting) thatnomodifications will be in effect until a written agreement is signed, and carefully document modified terms in writing. To the extent possible, borrower issues or disputes should be resolved with modified agreements. For instance, wherever possible, modified loan agreements should include (1) an acknowledgment of the debt owed, (2) an acknowledgment of the borrower’s default, and (3) a release by the borrower of any claims against the lender. The COVID-19 outbreak’s ripple effects will almost certainly touch all lenders and, in the short term, will significantly heighten lender risk. Loan documents, collateral, and modified terms all provide legal protections to mitigate that risk. Lenders should make sure to preserve those protections to the greatest extent possible. n