These days, many institutional lenders are selling non-performing loans to financial and strategic buyers. The concept is usually sound because the selling institution can recover at least the amount at which the loan is carried on its books, often together with out-of-pocket fees and costs. The idea is simple: Get the loan off the books of the Bank and move on to other matters that are profitable.
In our experience, we have found that many lenders unwittingly create contingent obligations by entering into poorly drafted loan purchase and sale agreements. In their hurry to close the deal and get the loan off the Bank’s books, sellers often neglect to nit pick the covenants of the loan purchase and sale agreement. Those covenants can create future liabilities if not carefully drafted.
One rule of thumb is to make certain that no representations or warranties made by the selling Bank survive the closing of the loan sale transaction. Loans should be sold on an “as is” basis, without recourse to the selling institution. To be fair to the buyer, a period of due diligence will be required, but frequently these days, we are finding buyers to be strategically connected or interested in the property or business that serves as collateral for the loan. It is important to include a representation from the buyer in the agreement that the buyer has had the opportunity to conduct its own due diligence, to consult with counsel of its choice, to consult with experts of its own choice, such as appraisers and environmental inspectors, and that the buyer understands that it is acquiring the asset without recourse to the selling lender.
This is the time to make certain that any “warts” are disclosed so that there will be no doubt that the buyer purchased the loan with eyes wide open. If the borrower is in bankruptcy or default, that status should be recited in the agreement. If there are known issues with respect to underlying collateral, they should be noted. As in most disclosure documents, the loan purchase and sale agreement should provide substantial comfort to the selling lender and should act to discourage a buyer of a troubled loan from attempting to seek recourse against the seller where the transaction was not as imagined in the eyes of the beholder.
Often, loan buyers attempt to insert into loan purchase and sale agreements numerous representations by the selling Bank. These representations should be rejected outright. There should be very few representations made by the selling Bank beyond that the Bank is in good standing, owns the asset being sold and is authorized to sell it. Well-drafted loan purchase and sale agreements should contain explicit disclaimers making it clear that the selling Bank is not warranting any sort of credit performance by the borrower and that they determination of the enforceability and the ability to collect the loan must be made independently by the buyer.
The JMBM Special Assets Team™ has sold numerous loans for clients and continues to do so frequently. Please call if you are contemplating the sale of a loan and have any concerns about whether the transaction will truly take all of the risk related to the loan off the books of the Bank.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.