Before the recession, credit unions sometimes skimped onrequiring business borrowers to provide legal opinions fortransaction fundamentals, attorney Dustin DeVore told aneducational session audience during a Feb. 11 Metropolitan AreaCredit 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 experiencedmember business lending losses, and as they do more business lending, the use of legal opinions will emerge asa trend. Large credit unions that are active in business lendingprobably have a legal opinion policy in place, requiring such aspart of MBL due diligence for loans of $1 million or more, headded.

Opinions are gathered from the borrower's attorney and includeconfirmation of the enforceability of loan documents, theeffectiveness of the deed of trust, due authorization of thetransaction, the entity's good standing as a limited liabilitycorporation or corporation, a lack of usury law violations, and theeffectiveness of the security agreement.

“Most borrowers' attorneys won't give you an opinion on thefirst lien, which is why you get title insurance,” DeVoresaid. 

The credit union's counsel must also review the opinions, andoftentimes, they are heavily negotiated with both sides loading thedocument with legalese and loopholes that protect theirclients.

“Lawyers don't like legal opinions because they're fact,” DeVoresaid. “If the information turns out to not be true, the lender cancome after the borrower in court.”

NAFCU General Counsel Carrie Hunt said legal opinions arenothing new in the credit union lending arena, but she agreed withDeVore that the institutions are probably using them more due thesedays because there is more scrutiny on lending transactions ingeneral.

Because MBLs could be potentially participated out to othercredit unions, legal opinions allow both the lead and participatingcredit unions the ability to say they've done their due diligence.“It's not as if (legal opinions) provide ultimate protection, butit's another level of due diligence,” Hunt said.

Credit unions are also increasingly turning to attorneys whenentering the loan participation market, which DeVore said he thinksis another industry legal trend. Due to delinquencies, loanparticipation due diligence will be on the NCUA's watch list,prompting credit unions to get their supporting documents inorder. 

Because loan participations are often split six months or moreafter the loan is funded, DeVore suggested participating creditunions confirm for themselves that no new liens are on the title.Adequate insurance, a comparison of the lead lender's policies andprocedures against the participating credit unions and a check ofenvironmental issues are also part of good due diligence, hesuggested. 

When possible, credit unions should also conduct a site visitbefore going in on a loan. “People are often surprised when I saythis,” DeVore said. “Nothing beats seeing the building. It mightlook good in the photo, but when you arrive you discover it's in abad neighborhood, or there are several for lease signs nearby.”

Confessed judgments, when the borrower agrees up front to adefault judgment, is another legal trend found among credit unions,DeVore said. In fact, he said they may become an NCUA requirementfor MBLs as credit unions increase this type of lendingactivity.

“This is a new topic for credit unions, but banks do itfrequently,” DeVore said. “If the loan defaults, you can walk intocourt without notifying the borrower and get an immediatelyjudgment. It can be a bit Draconian, but you can do it.”

However, confessed judgments involve certain requirements andrestrictions, including minimum font sizes, position of thedocument in the loan agreement and a requirement that it benotarized if included as part of a personal guaranty, according tosome legal experts.