Within a day of signing the proposal-commitment letter and obtaining the deposit, bank counsel should advise borrower's counsel of the initial information and documentation required from third parties to close the transaction.
Examples include searches, title reports, environmental reports, landlord's waivers and consents, and assignments of life insurance policies.
In addition, borrower's counsel should be given a closing agenda and Uniform Commercial Code financing statements. An initial draft of the loan documents should be swiftly prepared and delivered to the borrower and borrower's counsel within a few days.
Traditionally, the function of loan documents was simply to memorialize the transaction by setting forth the terms of the relationship between the bank and the borrower. Currently, however, loan documents are also used as a marketing tool.
Banks should continually review the types of documents being used and, where appropriate, revise them to keep in step with trends and geographical distinctions.
Loan documents can be "kinder and gentler" in appearance without sacrificing provisions essential to protect the bank. Lenders should avoid the use of forms except in the simplest of transactions, as it is usually quicker and cheaper to draft documents from scratch.
Regardless of the loan's size, provisions critical to the bank's ability to recover in the event of a default should not be omitted.
Powers of attorney should be required in certain cases, such as asset- based transactions, where it is critical for the bank to be able to endorse the borrower's name on negotiable instruments and receive mail.
If the transaction is being syndicated or if other lenders are involved, that should be disclosed in the documents. This is particularly important where the participant or co-lender is requiring specific rights to deal directly with the borrower or the borrower's assets upon default.
The bank officer and counsel should work as a team. The bank officer should make final decisions with respect to credit issues; bank counsel, with the officer's participation, should make final decisions with respect to crucial legal issues.
Before commencing negotiations, the bank officer should understand which provisions of the loan documents are negotiable and which are not.
Negotiable provisions include those related to the ability of the borrower to do business, including entering mergers, declaring dividends, or creating subsidiaries. These usually lie in the covenant section of the loan agreement; credit policies will dictate how far they may be negotiated.
However, negotiations with respect to default and the rights and remedies of the bank upon default should be strictly limited.
The forum for negotiations should be planned. Telephone negotiating, in general, is time-consuming unless all decision makers are on the line. Holding a meeting to resolve outstanding issues is more effective. In fact, at such a meeting, the borrower is usually more inclined to control its attorney and move things along.