A loan negotiation generally follows the lines of each party setting out its “want” list and then using whatever leverage it brings to the table to accomplish its goals. The lender typical wants to get paid back in a reasonable time frame and at a market rate while possibly generating other business income from things such as selling cash management services while the borrower wants to obtain favorable repayment terms that leave it with as much discretion to run their business as possible. The size of the loan, documentation costs, regulatory pressures and possible past dealings are all issues that affect the negotiation.
Sometimes the lender’s “want list” includes things such as the borrower providing guarantees or additional collateral or even retaining a consultant to advise the borrower on developing a better business plan. In preparing its request for such items, lenders must work within the strictures set out in the anti-tying provisions of the Bank Holding Company Act. The Act, with some exceptions, generally prohibits a lender from conditioning an extension of credit other services on the requirement that the borrower purchase some other credit, property or services from the lender. (See generally, Blanchard, Lender Liability: Law., Practice and Prevention, Chapter 16, Anti-Tying Provisions.)
The typical loan covenants that lenders ask for such as financial reporting and financial ratios do not violate the anti-tying provisions. The requirements are fairly traditional and both generally understood by both the lender and borrower. Lenders get into trouble, however, when they begin asking for things from a borrower that don’t seem to have anything to do with maintaining the soundness of the borrower’s loan.
A recent example of this is found in the case of Halifax Center, LLC, et al. v. PBI Bank, a decision from the Western District of Kentucky. In this case an investor named David Chandler wanted to purchase a note and mortgage from HUD involving a 165 unit apartment complex in Chicago. The total purchase price was $9,145,020.06. The investor sought financing for $6 million of the purchase price from PBI Bank. In his lawsuit against PBI the investor alleged that PBI indicated that they were willing to extend the requested loan but only on the condition that he purchase some unrelated property located in Owensboro, Kentucky on which the Bank currently held a mortgage (the “Halifax Property”). The underlying loan was in default. The investor did not know the owner of the property and knew nothing about the property but agreed to purchase the property in order to obtain the sought after financing.