when good deals go bad illinois community bankers association september 25, 2009 stephen h. malato
TRANSCRIPT
When Good Deals Go Bad
Illinois Community Bankers AssociationSeptember 25, 2009
Stephen H. Malato
Separating the Good, the Bad and the Ugly
Staffing loan monitoring adequate staffing
Triaging loans problem loans – review:
performing, borrowers honest and trustworthy (the good)
performing or not, borrowers dishonest and untrustworthy (the bad)
not performing due to market conditions, borrowers honest and trustworthy (the ugly)
Loss Mitigation v. Loss Resolution
At the outset, a lender cannot predict losses with certainty
The “measured view”Loan resolution and true lossesTension!
Dealing with Loans with Bad People
There is no amount of legal documentation that can protect you from a borrower who is not honest or trustworthy.
For bad loans, your most senior people are needed. The goal of dealing with a loan with bad people is to put
as much distance between those people and the bank by whatever means possible.
“Loss mitigation” takes a backseat to “loss resolution.” You cannot work with a dishonest borrower in the hopes of minimizing a loss.
Dealing with Problematic Loans with Good People
If you have been able to conclude that you are dealing with an honest person who is in difficult times, treat them differently than you treat bad people: avoid “one size fits all” in your approach to problem loans. do not make the borrower feel like a criminal because the
economy is a mess. Do not make irrevocable decisions regarding whether
they must leave the bank. “Loss mitigation” is a reasonable expectation and should
take precedence over “loss resolution.”
Steps to be Taken with all Problem Loans
Review the loan documents Understand your legal rightsDevelop a loan-specific strategy
Material Adverse Changes and Lender Insecurity Clauses
Standard provisions: adverse change insecurity
Practical impediments to use and why they are not enforced more frequently
When to Use a Material Adverse Change or an Insecurity Provision
Most appropriately used when there is a change of circumstances that is specific to the borrower rather than a decline in the economy which generally affects all borrowers.
May be a good tool to use with dishonest borrowers (the Bad).
Force Majeure Clauses and Commercial Impossibility
I would like to make my loan payment, but I am prevented from doing so.
Will Donald Trump win?
Impediments to Refinancing
Getting a borrower to go “somewhere else.” Not working so well in the downturn.
In past economies there was not the current level of deflation
Choices are often reduced to: live with the borrower take a haircut take a second mortgage or lien. liquidate the borrower
Talking to the Borrower
Illinois Credit AgreementPrudence still dictates careful conduct
Forebearance Agreements
To forebear or to modify . . . What’s in it for the lender?
improvement of grounds for enforcement change in loan terms
Is it worth it? If you have a dishonest borrower, the object of a
modification agreement or a forbearance agreement is to improve the availability of your remedies.
If you have an honest borrower facing an ugly economy, the object is to help the borrower in a manner that will minimize the ultimate loss that the bank will suffer.
Loan Participation Agreement
These present special issues loan participation agreements often do not
address enforcement in detail who gets to decide on accommodation or
enforcement? participant not in a position to require a specific
alternatives
Other Lender Issues
Deeds in lieu of foreclosureDisposition of collateral
