The Four Seasons of loan documentation

RMA Journal, The, May, 2004 by Bruce Bates

The absence of critical documentation may not be the sole result of summer-cycle competition; it could come from a freak perfect storm: sometimes it just happens. All of the elements converge at the worst possible time, each amplifying the combined fury of the circumstances. In one recent relationship transferred for resolution, the documents were all prepared correctly at funding; for some unknown reason, however, after a year the Deed of Trust was released. Possibly a well-intended clerk or a sloppy employee released the critical document. The discovery of the release came only after the file was transfered to the workout group, at which time it was thoroughly scrubbed. There is no evidence in the file for the basis of the release, and the borrower fortunately did not know of the release. The dilemma became how to quickly correct the situation. We could have filed a document claiming that the release was a mistake, but that might provide litigation fodder. Fortunately, the company was requesting an increase in the line of credit, and that gave us the basis for redocumenting over the error. The company never became aware of the bank's faux pas and therefore was not able to use this mistake to extract additional concessions.

Sunrise, Sunset

As things change, they stay the same. Each season requires a different strategy and adaptation of documentation. Each season, problem loans position the resolution differently.

If you take just one thing away from this article, remember that anecdotal experience shows that more risk deals are done in the late summer and early autumn cycle. By trying to stay ahead of the herd, lenders have a far better chance of finding the best lending pastures ... and of not being trampled.

Contact Bruce Bates by e-mail at BBates@zionsbank.com.

Bruce Bates is a vice president with Zions Bancorporation, Salt Lake City, Utah.