As much as we wanted to tie in Thanksgiving to this post (think puns on words like “gobble”, “pilgrim” or “stuffing”), we thought that you might want to know more about loan issues this week. The economy is still not in full recovery mode, and as such, we are still dealing with some bank work-outs. Therefore, as you work with banks, carefully consider these three areas to help keep you out of trouble.
The Loan Application
Despite great forethought like hiring a lawyer, reviewing loan documents with care, and being clear with your lender, that initial loan application may still come back to bite you. These days, loans take a long time to close. Sometimes, many months can go by before funds are actually available, and in that time, many things can change. These changes require you to continually update your application and to keep your lender in the loop. If something was true when you made the application but it later becomes false before you close, that can be considered bank fraud if the error is material. Bank fraud, even if it was unintentional, comes with harsh repercussions and should be avoided at all costs. Accordingly, keep that application in mind as you review your loan documents.
Representations and Warranties
Similar to the loan application, issues with representations and warranties can also lead to fraud claims. Therefore, if you review nothing else in all of the many loan documents required by your lender, carefully review the representations and warranties section of those documents and make sure that they are absolutely and unequivocally true. Even a seemingly small issue can be a monumental problem if it relates to a false representation or warranty or an omission of a material fact to or with your lender.
Events of Default
The default section of your loan documents is of prime importance as well. This section outlines what the lender considers a violation of the loan, and it generally shows you what the lender’s rights are if the loan documents are violated. Additionally, some events of default can be considered representations, and as shown by the last section, that can lead to fraud claims even if the loan documents make no mention of it. Therefore, this section is as important as the representation and warranty section.
Do you see the trend in these issues? Obviously, fraud is the biggest “gotcha” when it comes to loan documents, and the points above demonstrate this. As such, here are the key take-away points to be considered:
- Always keep your loan application in mind as you proceed through the loan process;
- Carefully review the representations and warranties section of the loan documents; and
- Be aware of what the lender believes is an “Event of Default” and the lender’s rights if an event of default occurs.
Have you had issues with your loan documents? What are your biggest concerns? Please let us know!
About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.