What can Bankers do to mitigate risk
and potential losses…
1. Balanced performance (e.g. growth, profitability, and quality) is
out-of-balance.
 Excessive risk at the time of underwriting;
 Poor evaluation of repayment sources;
 Improper loan servicing; and
 Documentation deficiencies or errors.
What can Bankers do to mitigate risk
and potential losses…
2. Close the loan as approved (surprisingly).
 Include all conditions of co-approval in the loan documents,
and in particular covenants within the loan agreement
 Use appropriate Schedules as part of the loan agreement at the
time of closing;
 Do not make any amendments to promissory notes, deeds of
trust, security agreements, loan agreements, etc., and in
particular deletion of default language and remedies thereof,
without co-approval and advice from bank counsel.
3. Use bank counsel (not the borrower's lawyer!)
What can Bankers do to mitigate risk
and potential losses…
4. Know Thy Borrower (not only upon extension of new credit but
renewals as well!!)
 Read the articles of incorporation, LLC organizational documents,
operating agreements, partnership agreements, etc.;
 Fully understand the organizational structure and ownership
interest by principal/member. Particularly important as it relates
to guaranties;
 Be sure that the correct authorized officers/members of the borrower
are duly reflected and included on the borrowing resolution.
 How are shareholder/member capital calls handled per the above
documents?;
 Lending money to borrowers and/or prospects whose financial
affairs are too complex to understand and/or too unpredictable
should be avoided. Stated simply, if we don’t understand the
borrower, how can we understand how the bank will be repaid?
What can Bankers do to mitigate risk
and potential losses…
 What is the capital structure (e.g. equity, shareholder debt,
etc.) of the Borrowing entity? Generally shareholder debt
should always be subordinated to the bank. However, there
are varying degrees to any Subordination Agreements that
should be clearly spelled out as part of the co-approval and the
loan documents. To be considered “equity”, the
Subordination Agreement needs to fully subordinate
shareowner debt to bank and include a standstill provision
restricting any and all principal and interest payments;
 Is the borrower in good standing with the Secretary of State
office?
What can Bankers do to mitigate risk
and potential losses…
5. Know Thy Sources of Repayment!!
 How is the borrower going to pay the loan back? (e.g. primary source
of repayment);
 How is the borrower going to pay the loan back if the primary source
of repayment is insufficient? In other words, a secondary source of
repayment needs to be clearly identified during the underwriting
process;
 Fully understand borrower’s contingent debt (including any capital
call provisions) and global cash flow position. Analyze the borrower’s
financial condition including all related interests;
 Do those repayment answers make sense?
 Does the proposed covenants and loan structure make sense?
What Bankers do to mitigate risk and
potential losses…
6. Know Thy Collateral!
 Inspect as part of the underwriting process and prior to submitting
loan package for co-approval;
 Include digital pictures of the collateral as part of write-up package;
 Continue to systematically inspect the collateral as part of on-going
portfolio management and servicing thereafter.
What can Bankers do to mitigate risk
and potential losses…
7. At the time of renewals and modifications, lack of verification of the
bank’s lien position including any delinquent payroll and/or property
taxes as well as any subordinate debt, liens, judgments, etc. No
documentation due-diligence conducted as part of the
renewal/modification process :
 Updated borrowing resolution:
 Update to title (search);
 Title Policy endorsements;
 UCC extensions
 Amendment(s) to Deed of Trust/Mortgage, Security Agreement,
Loan Agreement, etc.;
 Guarantor notification; and
 No Bank counsel involvement.
What can Bankers do to mitigate risk
and potential losses…
8. Act!
 After documenting loan covenant compliance, deal with any
violations immediately with written notifications to clients;
 Don’t wait for year-end numbers or tax returns if you see alarming
trends. Discuss what you see with your client so you can answer the
“why’s” when you talk to your co-approver;
 TELL YOUR CLIENT WHEN YOU ARE CONCERNED. It is unfair
for a borrower to figure out the bank thinks they are a problem only
when they are transferred to Problem Loan Administration. Early
discussions might prevent them from ever getting to PLA;
 Act very fast particularly if it is ABL and CRE Construction Loans;
 Always be mindful of potential “Course of Dealing” issues.
What can Bankers do to mitigate risk
and potential losses…
9. Continue to service and monitor the loan after booking:
 Particularly important on construction related projects and ABL
lending;
 For CRE Construction projects always use AIA form documents , read
the inspection reports and act immediately if the project gets sideways
(e.g. cost over-runs, lack of equity, over-advancing funds compared to
the balance to finish, etc.)
 Utmost importance on residential A&D (e.g. avg. sales price, unit
absorption trends, release fees, principal curtailment, adherence to
approved pay-out ratio, etc.);
 Readily obtain current financial statements, tax returns, loan base
reports, etc. AND analyze them upon receipt (just don't send to file);
 Adhere to loan covenants compliance and document accordingly. If
not, it could potentially create a course of dealing issue for the bank;
and
 Bubble up any risk migration to your co-approver on an on-going
basis.
What can Bankers do to mitigate risk
and potential losses…
10. Maintain continuous and open dialogue, particularly in terms of financial
performance, between the bank and client:
 Be curious and ask questions. If the answers lead to other questions,
ask them too. Your co-approver will and you don’t want to go back
and forth with your client. You are ready when you can understand
it, it makes sense and you can explain it fully.
 Be Honest. PCE does not mean you dance around legitimate issues.
Clients may not like what they hear sometimes, but they will later and
gain respect for you (e.g. added value).