Before the recession, credit unions sometimes skimped on requiring business borrowers to provide legal opinions for transaction fundamentals, attorney Dustin DeVore told an educational session audience during a Feb. 11 Metropolitan Area Credit Union Management Association meeting in Rosslyn, Va.
DeVore, a partner with the Hampton Roads, Va.-based firm Kaufman & Canoles, said now that credit unions have experienced member business lending losses, and as they do more business lending, the use of legal opinions will emerge as a trend. Large credit unions that are active in business lending probably have a legal opinion policy in place, requiring such as part of MBL due diligence for loans of $1 million or more, he added.
Opinions are gathered from the borrower’s attorney and include confirmation of the enforceability of loan documents, the effectiveness of the deed of trust, due authorization of the transaction, the entity’s good standing as a limited liability corporation or corporation, a lack of usury law violations, and the effectiveness of the security agreement.
“Most borrowers’ attorneys won’t give you an opinion on the first lien, which is why you get title insurance,” DeVore said.
The credit union’s counsel must also review the opinions, and oftentimes, they are heavily negotiated with both sides loading the document with legalese and loopholes that protect their clients.
“Lawyers don’t like legal opinions because they’re fact,” DeVore said. “If the information turns out to not be true, the lender can come after the borrower in court.”
NAFCU General Counsel Carrie Hunt said legal opinions are nothing new in the credit union lending arena, but she agreed with DeVore that the institutions are probably using them more due these days because there is more scrutiny on lending transactions in general.
Because MBLs could be potentially participated out to other credit unions, legal opinions allow both the lead and participating credit unions the ability to say they’ve done their due diligence. “It’s not as if (legal opinions) provide ultimate protection, but it’s another level of due diligence,” Hunt said.
Credit unions are also increasingly turning to attorneys when entering the loan participation market, which DeVore said he thinks is another industry legal trend. Due to delinquencies, loan participation due diligence will be on the NCUA’s watch list, prompting credit unions to get their supporting documents in order.
Because loan participations are often split six months or more after the loan is funded, DeVore suggested participating credit unions confirm for themselves that no new liens are on the title. Adequate insurance, a comparison of the lead lender’s policies and procedures against the participating credit unions and a check of environmental issues are also part of good due diligence, he suggested.
When possible, credit unions should also conduct a site visit before going in on a loan. “People are often surprised when I say this,” DeVore said. “Nothing beats seeing the building. It might look good in the photo, but when you arrive you discover it’s in a bad neighborhood, or there are several for lease signs nearby.”
Confessed judgments, when the borrower agrees up front to a default judgment, is another legal trend found among credit unions, DeVore said. In fact, he said they may become an NCUA requirement for MBLs as credit unions increase this type of lending activity.
“This is a new topic for credit unions, but banks do it frequently,” DeVore said. “If the loan defaults, you can walk into court without notifying the borrower and get an immediately judgment. It can be a bit Draconian, but you can do it.”
However, confessed judgments involve certain requirements and restrictions, including minimum font sizes, position of the document in the loan agreement and a requirement that it be notarized if included as part of a personal guaranty, according to some legal experts.