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COVID-19 and Mortgage Lenders and Services, MAC Clauses in Loan Agreements, Fair Credit Reporting Act Changes, and Employee Benefit Considerations

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  Community banks across the country are feeling the impact, both as small business themselves, and as providers of credit to so many other small businesses. The impacts of COVID-19 and the legislative responses to COVID-19 are increasingly broad, and affecting almost every aspect of American life. The lawyers of Bryan Cave Leighton Paisner (BCLP) are working to address those issues for companies of all sizes and industries, throughout the word.

As we collectively respond to the developing COVID-19 outbreak, the well-being of our clients and colleagues remains our paramount concern. We continue to closely monitor governmental, CDC, and WHO guidelines on travel, exposure and preventative measures and our firm has instituted a number of internal measures to ensure that BCLP is able to continue to consistently serve our clients’ business needs.  You can read more about the steps we have taken here.

In addition, BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, which is the first of many, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

COVID-19: The New Frontier for Mortgage Lenders and Servicers in the U.S.

Most mortgage lenders and servicers already have business continuity plans in place, but those plans may not fully address the dynamics of the COVID-19 crisis.  Typical contingency plans ensure operational effectiveness following events like natural disasters, cyberattacks, and the like.  They do not, in many respects, account for widespread quarantines, extended business closures, and mass job borrower job loss and income disruption, among other things.  Beyond business continuity, lenders and servicers must grapple with evolving regulatory requirements, the risk of downstream regulatory and litigation scrutiny for actions taken today, and management of reputational risk.  This alert details the key regulatory developments, issues and risk mitigation strategies lenders and servicers should consider.

Enforcement of MAC Clauses in Loan Agreements in Light Of COVID-19 and Related Business Disruption

Material adverse change clauses in loan agreements present important issues that borrowers and lenders alike need to consider carefully in this environment.  There are very few published decisions on enforcement of MAC clauses in the lending context and no published cases addressing a pandemic-type situation like the one we are currently facing. A lender that invokes a MAC clause may seek to declare a default under the loan as a prelude to an enforcement action or to avoid funding, or further funding, its loan to the borrower.  Lenders are often confronted with extreme time pressure when a funding request is involved, which makes these situations even more challenging. This alert addresses whether COVID-19 and the resulting business disruption may be reasonably considered a MAC in a typical commercial loan. 

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Loan Documentation Lessons Learned From the Recession

One of the first things we do as lawyers when handling a problem loan is to review the loan documents.  We do this because we will sometimes find defects in the loan documents that may alter the strategy the bank was going to take in its collection process.  Instead of moving to foreclose, for example, a lender might be more inclined to enter into a forbearance agreement with an opportunity to clean up documentation defects.  The following are some of the issues we typically ran across while handling problem loans originated during the Recession.

1. Term Sheets and Commitment Letters.  The use of Term Sheets and Loan Commitments varied dramatically between banks and even within the banks themselves.  For example, we found that if a bank did tend to use Term Sheets, the forms oftentimes were ones simply adopted by a particular loan officer, and not used uniformly across the bank.

Why care one way or the other?  The problem arises in the use of internal loan approval forms that are inconsistent with the Term Sheet sent to the customer.  In many cases, outside counsel attempted to document a loan based on the Term Sheet only to later discover discrepancies between the Term Sheet and the loan approval form.  Such discrepancies often resulted in the lender believing that it had certain collateral or certain rights only to find out later on when the loan went into default that it had neither.

The inconsistencies were also fertile ground for borrowers and guarantors to generate defenses and counterclaims based on the documentation not accurately setting forth the deal.  The original loan officer may or may not be available (or interested) to answer questions about exactly what occurred when the loan was being negotiated and later documented.

2. SignaturesGetting loan documents signed correctly is such an important foundation for enforcing a loan that it was always surprising when we reviewed a package and realized that documents had been signed incorrectly.  Signature deficiencies are particularly troublesome when dealing with real estate collateral.  For example, a Deed to Secure Debt might state on the front page that the Grantor is ABC, Inc. but when you get to the signature page it is signed by XYZ, Inc.  Trying to foreclose on the real property in that situation is, shall we say, somewhat problematic, and can involve, among other things, a suit to “reform” the documents.  Not exactly what a special assets officer wants to hear when he or she is expecting a simple, straightforward foreclosure action.

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