Review the loan file to avoid problems later
When a loan becomes distressed, it is essential that the secured lender conduct a review of the file to determine if there are any deficiencies that need to be corrected. If the deficiencies are not corrected, the lender’s collateral position could be jeopardized and the lender may well encounter obstacles in enforcing the loan.
One of the first steps in reviewing a loan file is to order a UCC search of all borrowers, guarantors, and principal of borrowers, as well as a title search of all mortgaged real estate. This research will help find out if the lender has a priority lien on the collateral securing the loan. They will also provide an overview of a debtor’s other creditors and any issues a debtor might have.
For loans secured by real estate, the lender must determine if a mortgage has been signed by the beneficial owner, contains an accurate legal description, and has been registered in the correct county. Examine the mortgage to determine the secured debt and determine if a notice of default is required and what remedies are available. An updated title search will reveal if there are any lien priority issues, including unpaid property taxes that initiate the mortgage lien. Depending on the length of the property tax default, the mortgage could be canceled by a tax foreclosure sale. Finally, the lender must confirm that there is insurance with appropriate coverage amounts describing the lender as the mortgagee and the beneficiary of the loss.
For loans secured by personal property, the beneficial owner of the property must sign the collateral agreement. The description of the asset in the guarantee contract must match the description in the financing statement. UCC lien search, using the exact legal name of the borrower, will reveal if the lender’s funding statement is properly indexed and is still in effect. UCC-1 filings are only valid for five years, unless continued. A UCC privilege search will also reveal if there are any privilege priority issues. For example, a federal tax lien will take precedence over the lender’s security on advances made after 45 days immediately after the filing of the federal tax lien and only with respect to claims arising during that same period. In addition, UCC searches of major guarantors or principals may reveal information such as the borrower using assets outside the scope of the collateral block, as well as additional debt from parties related to the borrower. Finally, the lender should obtain proof of personal property insurance in appropriate coverage amounts, describing the lender as the lender receiving the loss.
In addition, loan resolutions should be reviewed to confirm that the appropriate people have signed the loan documents.
Undertaking privilege searches is imperative. Time and time again, research has shown us that a mortgage has not been filed in the correct jurisdiction or has been released involuntarily. On several occasions, we were able to renew the UCC-1 funding statements in due time. We also found UCC-1 deposits that had expired or were never deposited.
A final consideration is who should undertake the file review. Although the loan officer can do this, the work product of this review may be discovered in legal proceedings. (see Drive pointer n ° 5). One way to protect this work product from discovery is to have a lawyer, either in-house or outside counsel, undertake the review of the case. When this happens, the written review note will be protected by solicitor-client privilege.
© 2021 Miller, Canfield, Paddock and Stone PLC Review of national legislation, volume X, number 304