Q & A: best loan practices

Northwestern Financial Review, Dec 15-Dec 31, 2004 by Ball, Jane C

1. Is the Bank perfected as to pledged stock if it has the Borrower sign a pledge agreement and files a UCC Financing Statement?

The Bank may have a perfected security interest, but another lender who later takes "control" of the stock may have priority. In general, to protect the Bank, the Bank should take possession of the stock certificates. If the stock is held in an investment account, the prudent approach is to have the entity holding the stock sign an agreement recognizing the Bank's interest and permitting the Bank to make trades without the Borrower's consent. The agreement may also restrict the Borrower's ability to make trades.

2. If the Borrower's factory and all of its collateral is located in Minnesota, where should the Bank do lien searches?

If the Borrower is a Minnesota registered entity (e.g., a corporation or limited liability company), the Bank should search at the Minnesota secretary of State. However, if the Borrower is organized in another state, that state's law determines where to search. Additionally, until the transition to Revised Article 9 is complete, the Bank should also search in Minnesota because that is where the collateral is located.

3. Does the Bank need to do anything other than file a UCC Financing Statement to perfect its security interest in deposit accounts?

If the Borrower has a deposit account at another financial institution, filing a UCC Financing Statement will not give the Bank priority over the other institution. Accordingly, the Bank should require the other financial institution to sign a control agreement whereby it recognizes the Bank's prior security interest and permits the Bank to make withdrawals without the Borrower's permission. The control agreement may also restrict the Borrower's ability to make withdrawals without the Bank's consent.

4. Are there differences between an attorney's opinion and a lender's title insurance policy?

A title insurance policy provides coverage through the time the lender's mortgage is recorded. An attorney's opinion, however, only provides assurance through the date in which the abstracts were certified to the attorney. Accordingly, an attorney's opinion leaves the lender vulnerable to intervening encumbrances.

5. Should the Bank read the lender's title insurance policy?

It is important to read, understand and negotiate a lender's policy. The policy is only as good as its substance. Review the survey to make certain the policy's legal description covers the Borrower's property. Ask the title company to delete any standard exception that the Bank does not want to exclude. Additionally, request endorsements to the policy for any added coverages you desire.

6. Should the Bank require the guarantor to attend a sit-down closing?

There is a lot of pressure these days to close transactions electronically. However, sit-down closings help to insure that the guarantor signs the guaranty. If the Borrower delivers an executed guaranty, a phone call to the guarantor confirming he or she signed the guaranty can provide assurance to the Bank.

7. Does the Bank's existing mortgage need to be modified when it makes an additional loan to the Borrower?

Generally, in Minnesota, the Bank may only enforce a commercial mortgage up to the amount of debt upon which mortgage registration tax (MRT) has been paid. If the Bank has increased the Borrower's line of credit or has made a separate term loan to the Borrower, it should file a mortgage modification and require the Borrower to pay MRT on the increased amount. The mortgage modification should, among other things, also specify any change in the term of the loan.