The Federal Reserve’s senior loan officer survey is due to be released tomorrow but already the news has leaked. For the fourth straight quarter, banks have toughened their underwriting criteria. That means it is getting harder to get or renew a loan. For those fortune to receive financing, the cost of that credit will be higher or the banks will want more collateral or both.
Until recently, commercial loan standards have been loosening up. In fact, America’s commercial borrowers enjoyed 20 quarters of improving conditions.
It is not just new borrowers and those seeking to renew or refinance loans that have to worry. As underwriting standards tighten, we have seen some unscrupulous lenders declare non payment defaults on existing loans.
Payment vs. Non Payment Defaults
Most everyone accepts that if you miss a loan payment, lenders have the right to declare a default and demand immediate repayment of their loan. Buried in most commercial loan documents are clauses that give banks far more reasons to declare defaults and call loans.
Found in most commercial notes are provisions regarding non payment defaults (sometimes called non monetary defaults). These clauses allow the lender to declare a borrower to be in default and declare the entire note immediately due even if the borrower has never missed or been late on a payment!
An economist at Moody’s says that only borrowers in the energy sector need to worry about the current credit tightening. Not true! After a brief lift in oil prices, the energy market is again at near record lows. While we agree that oil and gas companies are at particular risk of having their loans being declared in default, we see a much broader problem affecting all commercial borrowers.
Because banks fear a slowing of the economy, many banks are moving to conserve cash. For some banks, that means defaulting borrowers who have never missed a loan payment.
Commercial loan documents for all but the biggest and most powerful borrowers are typically drafted heavily in favor of the banks. Some loan documents allow the lender to declare a default if collateral falls below a certain value. These clauses often refer to minimum loan to value ratios. Of course, the value of the collateral is almost always in the eyes of the beholder.
With a loan to value or “LTV ratio” clause, at there is at least some clarity as to when a bank can default, accelerate and foreclose. Some loan documents, however, are so onerous that they simply allow the lender to declare a default when the lender thinks the loan is at risk.
Are these clauses enforceable?
Sometimes. Courts usually back the bank in the case of a payment default but are less likely to allow a bank to declare a non payment default unless the alleged breach is material and evidence supporting that breach is substantial.
What this means is that borrowers should be very wary of their lenders. Even with borrowers who have never missed a payment, we have seen many banks declare a default and attempt to foreclose. That means making sure all required financial statements are filed and all other terms of the loan are in compliance. If the loan is backed by real estate, make sure all taxes and assessments are paid and all maintenance is up-to-date. (A favorite non-payment default scam used by some banks is to declare that the property is “run down” and deteriorating.)
What to Do if A Bank Declares Your Loan in Default
Sometimes despite all your best efforts, your lender may still declare its loan in default. If that happens, call us immediately. Once a loan is in default, most loan agreements allow the lender to collect default interest, accelerate the note, charge late fees, force you to pay their legal fees and reallocate your payments. In just a few short months of default, you may find yourself so underwater that it becomes almost impossible to see a way out.
Everyday we hear from business owners who ask about suing banks. Yes, you can sue your bank and win but its best to not waste any time. Even if a lender promises to work with you, be wary. The default interest clock ticks everyday. While a bank makes promises and forces you to spin your wheels, the late fees continue to mount. Before long, any equity you enjoyed may be wiped out.
Need more information or help?
We have more general information regarding non payment defaults here. You can also give us a call. Attorney Chris Katers can be reached at [hidden email] or by phone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at [hidden email]
About MahanyLaw and Judge, Lang & Katers. We are two national boutique law firms that have joined forces to take on banks, lenders, special servicers and others in the financial services industry. Most lender liability lawyers defend banks. Not us. Our single goal is to sue banks on behalf of our clients. Because we are boutiques and focus on predatory banking schemes, our fees are reasonable and it doesn’t take long for us to get up to speed.
Our industry knowledge and experience has given us the clout to represent all sizes companies from small to billion enterprises. Unfortunately, we can’t take personal foreclosure cases, consumer cases or cases where the true losses are less than $5 million.
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