D6 - 74_91.pdf

DIMENSION 6 - 74 NOTES: AUTHORIZATION You need to obtain a limited liability company resolution. This is the document by which the members of the company grant authority for persons to make agreements and sign documents on behalf of the company. The resolution indicates who can borrow, give guarante...

DIMENSION 6 - 74 NOTES: AUTHORIZATION You need to obtain a limited liability company resolution. This is the document by which the members of the company grant authority for persons to make agreements and sign documents on behalf of the company. The resolution indicates who can borrow, give guarantees, or grant collateral interests in company assets on behalf of the company. SIGNATORY REQUIREMENT The company name, as it appears on the Articles of Organization or the Certificate of Good Standing should be typed above the signature line. Each signature appears after the word “By” and above the typed or printed name of the individual(s) authorized to sign for the borrower followed by a comma and the individual’s title. Example: Friendship, L.L.C. By: ______________________________ Sara Gray, Managing Member COMMENTS Consider obtaining a legal opinion on the adequacy of the documents delivered to you. Identify any legal issues, as opposed to business issues, and use legal counsel to resolve them. You should not attempt to resolve legal issues on your own even if you have a law degree. Your primary focus is customer service. CRC US Body of Knowledge In non-community property states, the Equal Credit Opportunity Act (ECOA) prohibits requests for a guarantee from a spouse. A lender may request “more creditworthy co-guarantors” and may accept spouses’ guarantees if the guarantors volunteer them. Federal Reserve Board’s Regulation O prohibits making loans to insiders or their related interests unless the loans are made on substantially the same terms as those prevailing at the time for comparable transactions with other persons. The loans also must not involve more than normal risk of nonpayment. There are also individual and aggregate lending limits and periodic reporting requirements. DIMENSION 6 - 75 A nonprofit corporation is a public or quasi-public entity established for administration of public affairs or for charitable, religious, or benevolent purposes. It usually has a board of directors who manage the corporation and elect officers and a staff, answerable to the board, who run the day-to-day operations of the association. The corporation is responsible for its debts. The directors, officers, and staff are not liable for unpaid debts of the corporation unless they have guaranteed the debts. Your state may have different statutory requirements for charitable, religious, and benevolent corporate entities. Review the laws in your state to determine which of the following provisions apply. IDENTIFICATION NEEDED Charter of Association. In order to establish a nonprofit corporation, its organizers must file a charter of association with an appropriate state agency. The articles include the name of the corporation, how long it will exist, its business purpose, the names of its organizers and original directors and other such information required by the law of the state in which it is organized. You should obtain a filed copy either from the customer or from the appropriate state agency. Bylaws and any amendments. Each corporation also establishes bylaws. The corporation’s bylaws provide the rules under which the company will function. The bylaws establish the number of directors; number, title, and duties of officers; frequency and timing of directors’ meetings; and other matters necessary to the operations of the business. You should obtain a copy from the customer. Association Certificate of Good Standing from the state. A certificate of good standing is issued by the appropriate state agency if the nonprofit corporation is in current compliance with all reporting and fee requirements set by the state. Obtain periodically to ensure compliance. At a minimum, obtain a certificate each time a new or renewed loan is documented or every two years. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. NONPROFIT CORPORATION DIMENSION 6 - 76 NOTES: AUTHORIZATION You must obtain a copy of the board of directors’ resolution certified by the corporation secretary. This is the document evidencing the action by which the directors of the corporation granted authority to officers to make agreements and sign documents on behalf of the corporation. The resolution indicates who can borrow, give guarantees, or grant collateral interests in corporate assets on behalf of the corporation. Obtain an Incumbency Certificate signed by the corporation secretary when there is a change in officers after a resolution has been delivered to you. If the secretary is authorized to borrow on his or her signature alone, the certificate should also be signed by an officer other than the secretary (unless your state permits one-person nonprofit corporations and this is one such corporation). SIGNATORY REQUIREMENT The association name, as it appears on the Articles of Incorporation or the Certificate of Good Standing, should be typed above the signature line. Each signature appears after the word “By” and above the typed or printed name of the individual authorized to sign for the borrower followed by a comma and the individual’s title. Example: Friendship Association By: ______________________ Sara Gray, Secretary CRC US Body of Knowledge COMMENTS Consider obtaining a legal opinion on the adequacy of the documents delivered to you. Identify any legal issues, as opposed to business issues, and use legal counsel to resolve them. You should not attempt to resolve legal issues on your own even if you have a law degree. Your primary focus is customer service. You may also enter into transactions with unincorporated associations and/or nonprofit associations. You must obtain a copy of such association’s organizational papers to determine who is authorized to grant signature authority. Signatory requirements are the same as for nonprofit corporations. DIMENSION 6 - 77 A trust is an entity that has an obligation of special trust to another entity. A business or common-law trust is a formal business organization whereby personal and/or real property is held and managed for the benefit of persons who are holders of transferable certificates issued by the trustees. Trusts are also set up by individuals as estate planning devices for the benefit of other individuals and charities. The trustee is not liable for the unpaid debts of the trust unless the trustee has guaranteed the debts. IDENTIFICATION NEEDED You need to obtain a certified copy of the Trust Agreement. Obtain the copy from the customer. You should also personally know the trustee’s identity or verify the trustee’s identity by other means, such as a driver’s license AUTHORIZATION Same as for identification SIGNATORY REQUIREMENT The legal names of all designated trustees or one or more of the trustees as designated in the trust agreement are required. Each signature appears after the word “By” and above the typed or printed name followed by a comma and the words “Trustee under Trust Agreement (date of trust agreement) for the benefit of (Name of beneficiary)” Example: By: _____________________________ David Hart, Trustee under Trust Agreement dated 6/10/99 for the benefit of the Workers Union NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. TRUST DIMENSION 6 - 78 NOTES: COMMENTS Obtain a legal opinion on the authority of the trustee to borrow funds for the trust and to grant a security interest in the trust’s assets. Federal Reserve Board’s Regulation O applies to any executive officer, director, and 10% or greater shareholder of the bank and the related interests of each such person. It covers similarly situated insiders of a bank’s parent holding company and the other subsidiaries of that holding company, such as other banks and nonbank subsidiaries. ESTATE AND GUARDIANSHIP Estates and guardianships have an obligation of special trust to other persons. They come into existence when a person dies or is subject to guardianship proceedings leading to appointment of a guardian for the person. The person appointed as administrator/executor/personal representation/guardian is not personally liable for unpaid debts of the estate or guardianship unless he or she has guaranteed the debts. IDENTIFICATION NEEDED You need to obtain a certified copy of court order appointing administrator/executor/ personal representative/guardian. Obtain from the court with which the estate or guardianship is established. You should also personally know the identity of the administrator, executor, personal representative, or guardian or verify the identity from another source, such as, a driver’s license. AUTHORIZATION CRC US Body of Knowledge Certified copy of court order appointing administrator/executor/ personal representative/ guardian. The court order will indicate the extent of the person’s authority. DIMENSION 6 - 79 The legal name of estate or guardianship as designated in the court order is required. The signature appears after the word “By” and above the typed or printed name followed by a comma and the words identifying the individual’s relationship to the borrowing entity. Example: By: ______________________________ John R. Brown, Executor for the Estate of Mary Brown Example: By: ______________________________ John R. Brown, Guardian for Mary A. Brown COMMENTS If not clearly stated in the court order, obtain a legal opinion on the authority of the administrator/executor/personal representative/ guardian to borrow funds and grant a security interest in the assets of the estate or guardianship. Federal Reserve Board’s Regulation O applies to any executive officer, director and 10% or greater shareholder of the bank and the related interests of each such person. It covers similarly situated insiders of a bank’s parent holding company and the other subsidiaries of that holding company, such as other banks and nonbank subsidiaries. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. SIGNATORY REQUIREMENT DIMENSION 6 - 80 ENTITIES CHART The following chart summarizes the characteristics of the entities we have discussed. CRC US Body of Knowledge ORGANIZATIONAL STRUCTURE LEGAL LIABILITY Sole proprietor A one-person business entity. No formal organization required. Some states require a trade name filing. The sole proprietor is always personally liable for all debts incurred by the sole proprietorship. General partnership A business entity in which two or more persons are engaged. May have, but is not required to have, a written partnership agreement. Some states require a trade name filing. Each general partner is personally liable for unpaid debts of the partnership. Limited liability partnership A general partnership that has registered with the state to become a limited liability partnership. Some states require a trade name filing. General partners are not liable for any new debt of the partnership. Limited partnership A business entity involving two or more persons, at least one as a general partner, and at least one as a limited partner. A written partnership agreement is usually required as well as a filing with the appropriate state office. The general partner or general partners manage the business. Each general partner is personally liable for unpaid debts of the partnership. The limited partners are not personally liable for such debts. Limited liability limited partnership A limited partnership that has registered with the state to become a limited liability limited partnership. This type of entity is not available in all states. Limited partners are not personally liable for any debts of the partnership. General partners are not personally liable for any new debt of the partnership. DIMENSION 6 - 81 LEGAL LIABILITY Joint venture Two or more business entities joined The separate entities involved in the by contract for a joint business venture. joint venture are probably individually The existence and organizational setup liable for debts of the joint venture. of each participant in the joint venture must be determined. Corporation An artificial entity created by statute. It Directors, officers, and shareholders are has directors, officers and shareholders. not personally liable for debts of the corporation. Each state requires that Articles of Incorporation be filed to establish the entity. By-laws of the corporation describe the relationship among directors, officers, and shareholders. Limited liability company An artificial entity created by statute. It has members, including a managing member. Each state requires that Articles of Organization be filed to establish the entity. The Operating Agreement of the limited liability company describes the relationship among the members. Members are not individually liable for debts of the limited liability company. Nonprofit corporation An artificial entity created by statute. Each state requires that organizational documents be filed to establish the entity. Directors, officers, and managers are not liable for debts of the nonprofit corporation. Trust An entity created by executing a trust agreement. The trust agreement names a trustee or trustees and discloses the powers granted to the trustee or trustees. The trustee is not personally liable for debts of the trust. Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. ORGANIZATIONAL STRUCTURE DIMENSION 6 - 82 ORGANIZATIONAL STRUCTURE Estate or guardianship An entity created by order of a state court that has jurisdiction to do so within the state where created. The powers of the personal representative are limited to those provided in the court order. LEGAL LIABILITY The personal representative, executor, administrator is not personally liable for debts of the estate or the person for whom the guardianship is established. FUNDAMENTAL LEGAL DOCUMENTATION Documentation errors are a major cause for lender loss on commercial loans. If needed documents are not obtained and accurately completed, collection of a loan may be legally impossible. In this section, we will discuss the requirements of these legal documents: Proposal letter/term sheet. Commitment letter. Promissory notes. Loan agreements. Security agreement, deeds of trust, mortgages. Lines of credit: committed and uncommitted. CRC US Body of Knowledge Participation agreements. DIMENSION 6 - 83 In order to get negotiations started you may provide a potential borrower with a written proposal letter or term sheet. You should include the following in the proposal letter or term sheet: A clear listing of all information you will require the potential borrower to deliver to you before further considering a possible loan transaction. A summary of the significant terms you would require in any extension of credit to the potential borrower, such as reporting requirements, collateral requirements, guaranty requirements, etc. A significant term is any term that would influence the potential borrower to accept or reject any credit offer you make. A statement that the terms included are not the only terms that you may require. For example: “Terms other than those in this proposal letter/term sheet may be agreed to between the Lender and the Borrower.” A statement that you will require additional documentation to close the loan. For example: “If an extension of credit is approved, additional documentation will be required and may include, but not be limited to, a loan agreement, guaranty, and collateral documents.” A clear statement that you are not making a commitment to lend. For example: “This proposal is not a commitment to lend, but is an outline of the principal terms on which the Lender may be willing to lend. Any final commitment of the Lender to lend, if any is made, will be contingent upon all approvals required by the Lender, including, but not limited to, credit approval and signing of loan documents satisfactory to the Lender.” An expiration date for the proposal. For example: “Contact us by July 4, 2001, or we will assume that you have no interest in pursuing the financing discussed in this proposal.” NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. PROPOSAL LETTER/TERM SHEET DIMENSION 6 - 84 NOTES: COMMITMENT LETTER You may follow up your proposal letter or term sheet with a commitment letter, provided the credit has been approved within your financial institution. Your proposal letter or term sheet outlined the general terms of a possible transaction with the customer. Your commitment letter will go much further. It will obligate you to go forward with the transaction. It should serve as the basis for the credit relationship between you and your customer. Commitment letters are used more frequently in real estate transactions than in other loan transactions. You should include the following in the commitment letter: A clear listing of all information you will require the potential borrower to deliver to you before the loan closing. A summary of the significant terms you will require. A significant term is any term that would influence the potential borrower to accept or reject the credit offer you make. A statement that the terms included are not the only terms that you may require. For example: “Terms not included in this letter will also apply, including those set out in any other documents signed in connection with the loan or loans made by the Lender.” A statement that you will require additional documentation to close the loan. For example: “At closing, additional documentation will be required as described in this commitment letter.” CRC US Body of Knowledge A clear statement that the commitment is a nonassignable offer made solely to borrower. An expiration date for the commitment. For example: “This commitment must be accepted by delivery to the Lender, on or before 5:00 P.M., local time on July 5, 2XXX, of a signed copy of this letter accepted by Borrower together with the commitment fee. Time is of the essence of this offer. If acceptance and payment of the commitment fee are not made by the date and time stated above, this commitment shall automatically expire without further notice.” DIMENSION 6 - 85 Lender commitment letters include a statement of required fees, the payment schedule, collateral requirements, and any conditions precedent to the transaction, including required appraisals and financial covenants. Most commitments also require that the borrower execute loan documents in a form acceptable to you or your legal counsel. Do not send commitment letters in situations where you do not intend to be committed to lend. Include as many of the material terms of the loan documentation as possible in the commitment letter. If the commitment letter was not drafted by legal counsel, have it reviewed by legal counsel before sending. Some lenders use commitment letters as the basic loan agreement with their borrowers. In such cases, the commitment letter includes an acceptance block where the borrower signs to show agreement with the terms in the letter. When that is done, the commitment letter becomes the loan agreement. PROMISSORY NOTES A promissory note is a written promise by one person to pay money to another. The person making the promise is called the maker of the note. The person to whom payment is made is called the payee. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. COMMENTS DIMENSION 6 - 86 NOTES: CONTENT The promissory note must contain language that will avoid interpretations that could lead to legal action. If your institution uses preprinted forms, you should not modify them in any respect other than selecting optional provisions. If a borrower insists on changes, you should consult legal counsel. The entity to which a negotiable promissory note is transferred becomes a holder in due course if certain conditions are met. First, the note must be negotiable. The potential holder in due course must receive the note in exchange for value given, usually money, by that person to the payee (the original party entitled to payment on the note). The maker (the original obligor on the note) might have a legal defense against the payee that would legally permit the maker to withhold payment. If the holder in due course is unaware of that defense at the time of transfer, the maker cannot use that defense to withhold payment from the holder in due course. In order for a promissory note to be negotiable, it must: Be signed by the maker (the original obligor on the note). Contain an unconditional promise to pay a fixed amount of money. Be payable to the order of an individual or entity or to the bearer (holder) of the note. Be payable at a set time or on demand. In addition, your promissory note must specify: The interest rate. CRC US Body of Knowledge An acceleration clause that gives you the right to declare the remaining balance due and payable upon an event of default regardless of the original payment schedule. DIMENSION 6 - 87 (Note: The repayment terms in the promissory note must match the loan type.) Demand: A demand loan is payable by the borrower whenever you make demand for payment. A promissory note may be made payable upon “the earlier of demand or” a specified date or by a specified installment schedule. Time loan: In a time loan transaction, the payee extends credit to the maker for a period of time until the payment is due. It may be payable in a single payment or in installment payments. Once any part of the loan is repaid, the amount cannot be re-borrowed. If the time is longer than one year, the loan is a term loan. Revolving credit: In a revolving credit transaction, the borrower is permitted to borrow all or part of the principal amount, repay it all at once or in part, and re-borrow it up to the committed amount. The note may have a demand feature making it payable in full on demand or at a specific date. Nonrevolving multiple advance loan: In a nonrevolving multiple advance loan transaction, the borrower is permitted to borrow all or part of the principal amount. Amounts borrowed and repaid cannot be borrowed again. LOAN AGREEMENTS A loan agreement is a written contract that describes the lending arrangement. It specifies your rights and duties and those of the borrower. It states the conditions under which the loan was granted and criteria the borrower must continue to meet. Some lenders use commitment letters as the basic loan agreement with their borrowers. In such cases, the commitment letter includes an acceptance block where the borrower signs to show agreement with the terms in the letter. When that is done, the commitment letter becomes the loan agreement. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. TYPES OF LOAN DIMENSION 6 - 88 NOTES: PURPOSE You may wish to establish certain conditions for making the loan, set restrictions to safeguard sources of repayment, or limit the future activities of the borrower. You cannot enforce any terms unless they are in writing and the borrower has agreed to them. The conditions, covenants, and restrictions of a loan agreement can give you an early warning of deterioration in the financial condition of the borrower. TYPE OF LOAN AGREEMENTS A letter agreement that has been accepted and agreed to by the borrower is sufficient for most revolving credit lines with a term of less than one year. Where a longer term is involved or the transaction is complex or the risk high, a formal credit agreement is more effective. Term loans and multi-year commitments generally involve added risk because of the reliance on the borrower’s ability to maintain earning power over time. The loan agreement helps you monitor the creditworthiness and debt service capacity of the borrower during the life of the loan. CONTENT OF LOAN AGREEMENTS Your legal counsel should draft loan agreements so that they are tailored to the particular loans. They should include the following: TERMS AND CONDITIONS Description of the loan by type, size, date, repayment, and security. CRC US Body of Knowledge Roles of parties to the transaction, such as, lender, borrower, guarantors, etc. DIMENSION 6 - 89 The borrower makes representations and warranties to affirm the facts and data you are relying upon. For example, the borrower represents itself as a certain legal entity, legally organized and able to enter into the loan transaction. It is often advisable to require an attorney’s opinion letter to ensure that the borrower correctly understands the representations and warranties and that these are indeed true. An opinion letter is provided by the borrower’s counsel and expresses an opinion that the loan documents have been duly executed and that they constitute the legal, valid, and binding obligation of the company. Requiring an opinion letter is a means of double checking the representations. A borrower may believe they are true and accurate, but on a technicality there may be an error in the document that only an opinion letter will discover and disclose. Affirmative and negative covenants (see Loan Covenants elsewhere in Dimension 6) that spell out promises by the borrower to: Provide full disclosure of information. Protect net worth. Protect cash flow. Protect asset quality. Control growth. Maintain key management. Assure legitimacy and the company as a going concern. Maintain profitability for the lender. CONDITIONS OF LENDING Conditions of lending describe events that must occur before loans will be made. Delivery of required financial statements. Delivery of certificates of good standing, borrowing resolutions, guaranties, etc. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. REPRESENTATIONS AND WARRANTIES DIMENSION 6 - 90 NOTES: EVENTS OF DEFAULT Events of default specify events that entitle you to remedies, such as: Breach of covenants. Insolvency. Failure to pay. Misrepresentations. Liens/seizure of property by creditors. Material adverse change. A material adverse change would be a change in the customer’s condition, financial or otherwise, that you would consider adverse to the customer and potentially damaging to the customer’s ability to carry out the terms of the loan transaction. You must consult with your lawyer before using this type of default to call a loan, as it may create lender liability risks. REMEDIES Remedies specify what the lender can do (in addition to its normal rights as a creditor under applicable state law) when default occurs, such as: Call the loan or loans. Grant waivers (temporary or permanent). Renegotiate the deal. CRC US Body of Knowledge Foreclose on collateral or require additional collateral. Doing nothing is not an option. If a default occurs, your inaction could be considered a waiver. The waiver could be used to establish a course of dealing between you and your customer and challenge the entire agreement. DIMENSION 6 - 91 Notices: when required, to whom, and mailing addresses of the parties. Who pays expenses. Governing law: the state law that will be used to settle disputes. Procedure for waivers and consents. SECURITY AGREEMENT A security agreement is an agreement that creates or provides for a security interest in assets of the borrower or some third party to secure repayment of a loan(s). It is an agreement between two parties, the grantor of the security interest (the Debtor) and the lender (the Secured Party). It is taken when you are not willing to make a loan based solely on the cash flow prospects of your customer. You want collateral to serve as a secondary source of repayment. A security interest cannot attach unless there is an agreement. Note also that a security agreement attaches your collateral only. To have legally enforceable access to your collateral, you must also perfect your security interest through additional means, such as filing a UCC-1 financing statement. Requirements in the Uniform Commercial Code (The UCC) (Also see Lien Perfection elsewhere in Dimension 6) Written. Unless you are in possession of the collateral, the security agreement must be in writing. When you are in possession of the collateral, the security agreement does not have to be in writing. Nonetheless, it is a good policy to always require a written security agreement. Signature. The debtor’s signature must appear on the security agreement. The signature does not have to be acknowledged or witnessed. Description of the collateral. The UCC requires that the description reasonably identify the collateral. You should clearly identify exactly what collateral you are taking. This can help to avoid collateral disputes with the borrower or other lenders. This can be accomplished by the inclusion of a broad statement with attached lists covering specific collateral. Simply describing the collateral as “all of the debtor’s assets” or “all of the debtor’s personal property” without more is legally insufficient. The security agreement will not be enforceable, and the lender will have no collateral. NOTES: Dimension 6 // Identify Repayment Sources and Appropriately Structure and Document Credit Exposures for.. MISCELLANEOUS