Pub. 10 2020 Issue 3

16 www.azbankers.org Enforcing Loan Documents Amid the Pandemic and Related Economic Downturn RICHARD HEROLD, JACOB SPARKS and W. BRIAN MEMORY Spencer Fane LLP T HE COVID-19 PANDEMIC NECESSARILY EXPANDS THE LIST OF factors any lender must consider when enforcing the terms and conditions of its loan documents. There is a vast distinction between a corporate borrower who has looted the company and diverted corporate assets for personal gain and a corporate borrower whose business has been explicitly shut down by a gubernatorial pandemic order or forced into bankruptcy by a reduction or elimination or revenue. In short, a tailored approach to each borrower is always essential, but even more so now. As borrowers struggle with reduced cash flows, depreciated collateral values, supply chain disruptions, changes in consum- er shopping behavior, and new health and safety practices that constrain capacity and productivity, lenders will likely continue to receive a higher volume of borrower requests for forbearanc- es, loan modifications, or other accommodations. When dealing with distressed borrowers, financial institutions must pursue proactive measures to assist their borrowers in finding stability and financial success, to protect the interests of the institution, and to preserve the value of the institution’s loan portfolio. Reviewing the Loan Documents for Potential Deficiencies Financial institutions should begin by collecting and reviewing all documents, including correspondence, relating to the loan. Documents should be preserved, well-organized and made easi- ly accessible. Lenders should confirm they have all required documentation and necessary signatures, and that the documents are otherwise free of errors or other deficiencies that could impact the financial institution’s position. Workout situations provide an invaluable opportunity for the lender to resurrect missing documents, to cure document deficiencies and to address drafting errors. Lien Perfection and Priority A lien perfection and priority analysis is a critical part of any loan file review. This is a great time for the lender to confirm it has a properly perfected lien on collateral and its perfected lien is first in priority among any other existing creditors by reviewing the UCC financing statements to ensure the debtor’s name is correct, the UCC-1 was filed in the proper jurisdiction and the collateral has been correctly described. When dealing with distressed borrowers, financial institutions must pursue proactive measures to assist their borrowers in finding stability and financial success, to protect the interests of the institution, and to preserve the value of the institution’s loan portfolio.