The following actions should be the priority of the team or individual that will be managing this new problem loan.
1) Obtain all legal documents, including but not limited to:
- Note
- Mortgage/deed of trust
- Security agreement
- Loan/credit agreement
- All guarantees
- Any and all modification/extension/renewal documentation
- Title insurance and policy
- Any formal correspondence (formal notices, default/reservation of rights letters, term sheets, commitment letters, etc.)
- Relevant email correspondence (anything that discusses the loan between the bank or credit union and the borrower).
Read and review every document in full. Be particularly on guard if a loan has already been extended informally. It is not uncommon for borrowers to later that argue there was a promise of future extensions.
2) Obtain all credit file information, including:
- Most recent annual review
- Origination credit package for the operative loan
- Most recent financials – both borrower(s) and all guarantor(s)
- If applicable, most recent appraisal, most recent environmental report, property condition reports, field exams or other third-party documentation.
3) Review all the loan documentation and compare operative legal documents with what was approved in the credit package or any amendments. Be sure to check the institution’s loan servicing system to make sure terms match as well. Outline any missing documentation or financials as required by the loan documents. Review:
- Are there any defaults under the loan documents? Can you identify any smoking guns with respect to servicing, invoicing, documentation, or imperfections with collateral?
- If anything is identified in the loan documents, engage with management and internal counsel to discuss how to document and strategize.
4) Meet with the customer and notify them of the handoff/change in classification (not of the loan grade, but of the fact that the loan is in “workout”). If transferring to a new group, make sure the customer or member knows that the new group/banker is the only point of contact for the loan/relationship. You don’t want multiple different voices from the bank, and communication should be centralized.
Ideally, meet with the customer in person and at the primary collateral (to see with your own eyes). If you anticipate the conversation will be difficult, bring a second person from the financial institution to the meeting. Take notes or minutes. A best practice is to avoid a "he said/she said" scenario if the conversation is challenging or gets heated. Be sure to LISTEN and request all missing information.
5) Follow up with an email to all attendees, including the minutes and the points of discussion. Reiterate the need for any missing or needed financial information. List the items needed in writing (current financials, aging schedules, rent rolls, interim statements, missing tax returns, guarantor personal financial statements/tax returns).
6) If items are required under the loan documents and are not provided, present a written letter and identify relevant sections of the loan document. If the items are still not provided, then issue a default letter. Notify the customer if you must obtain a new appraisal or environmental. Request a 13-week cash budget and/or a go-forward budget from the borrower.
