Lawyers Can Seal the Deal
Fearful of a lawyer killing your deals? Most likely yes. Need that be the case? No. Can lawyers be better utilized in credit union lending? Absolutely yes.
I am often asked to speak to non-lawyers who work for lenders about the loan documentation process. Never about underwriting or loan commitments. But application-to-underwriting-to-commitment-to-loan documentation-to-closing is closely linked. And it is more than simply one, long hyphenated series of words. It's making the deal.
Occasionally loan originators will contact me with legal issues relating to a loan before they issue a loan application. The smart among them want to ferret out what could become an underwriting issue, and they want to have some level of confidence that an issue that might be a problem is not deal killer. Issues, not lawyers, are deal killers. And should be.
Identifying and failure to identify deal-killing issues are a large problem facing credit unions, especially for loans intending to be participations.
While originators sometimes fearing their own underwriters may call legal counsel in advance, too often there are no communications between underwriters and lender's counsel. Our best engagements and best loan closings involve underwriter-lawyer communications. It is bottom- line efficiency for any loan closing. Moreover, it is the bottom line to better portfolios or participations.
Too often in credit union lending the problem is that underwriters and others do not know what they do not know. "Doc orders" become short hand for taking the basic deal points and inputting them into form documentation that spits out from a document system or document service. In other sectors of the lending industry, loan documentation is inextricably related to underwriting.
Some clients provide me underwriting memoranda. I may gain insight from what is in the underwriting memorandum. Sometimes the provision of a commitment is further amplified by what is in the underwriting memorandum – and this will drive provisions of the loan documents, of preparation of special documents.
Read more: Communicating with underwriters ...
It is particularly important for lawyers to be involved in communicating with underwriters prior to commitment on certain issues. Some of these issues include:
- — "Wait a Minute Issues!" – Does the lawyer have any insight as to a legal hurdle that may preclude the loan from closing?
- — Special escrows – Are there special issues, and if so, how should they be handled?
- — Parcel releases
- — Properties unleased
- — Letter of credit issues
- — Ground lease transactions
- — Single-tenant properties
Good outside counsel may frequently provide input how underwriting problems can be resolved, so that lenders may help make the loan. In some instances, I may be drawn into pre-commitment review of matters (e.g., special title matters, ground lease matters, etc.) In these instances, I am able to make specific recommendations that make it possible for a particular loan to be approved or documented correctly.
The hyphenated loan closing stanza at the start of this article linked the words “commitment” and “loan documentation.” The commitment will define loan documents. Sometimes no one understands why battles arise post-commitment, but usually it’s because certain problems and solutions were not clearly covered at the commitment stage.
There is a ying/yang moment commitment stage. Originators want to sign up deals. But this is the ultimate "Wait-A-Minute." Does the borrower understand everything in the commitment? Probably not. Should borrower's counsel get involved at the commitment stage? Yes. But does he/she most of the time? No.
Going back to the premise that your lawyer can be a deal maker rather than a deal killer requires a closer look at a commitment from a borrower's point of view. If not negotiated carefully, the borrower will lose right to negotiate certain issues in loan documents. The commitment fee has been paid. The borrower cannot negotiate, and later claim that it did not understand matters. Borrowers will live and die by the commitment.
Smart borrowers have lawyers. This requires smart lenders to have lawyers. Certainly a lawyer reviewing the commitment slows the process. Sometimes they negotiate. This may cause aches and pains to lender because if deal is not signed, the question becomes who pays for the lender's lawyer? But how issues are covered in the commitment will be how loan documents are framed.
Even when borrowers do not have legal counsel, lenders may consider use of outside legal counsel at the commitment stage. Based upon the way certain issues are framed in the commitment, we might tighten some of the issues, and better protect lender.
The following are a few of the instances when I am called upon to assist with commitments:
- — Special reserves
- — Letters of credit
- — Guaranties, particularly springing guaranties
- — Impounds (special impounds)
- — Unusual issues relating to additional collateral
Too often in the absence of legal counsel those taking "doc orders" or responsible for simply inputting data into a system fail to capture special obligations or special documents required for a transaction. Can a lawyer do it better? No doubt. Does the benefit outweigh the cost and will loan participants have higher levels of comfort? Always.