In-Depth: 10 Steps For Following Regulators’ COVID-19 Guidance

Supplement to 10 Steps For Following Regulators’ COVID-19 Guidance While Still Protecting Your Bank (Barack Ferrazzano Client Alert, March 2020)

• Duration. Loan modifications and forbearance agreements are meant to treat temporary conditions, not permanent ones. Accordingly, it is crucial that any agreement not turn what is meant to be temporary relief into permanent relief that is adverse to a bank’s safety and soundness. We recommend short-term relief, which can be extended as we gain visibility into the impact of COVID-19 (coronavirus).
• Access To Information. Loan agreements should have provisions that allow banks to visit a borrower’s and/or audit their financials to ensure they are in compliance with loan covenants. We recommend that banks demand this information in connection with loan modifications and forbearance, and consider requiring more frequent financial submissions.
• Cross-Default. A default under any loan document should be a default under either the loan modification or forbearance agreement and vice-versa. This provision is crucial to allow banks to stay ahead of any negative borrower financial developments.
• Enforcement. Where appropriate and permissible under applicable law, banks should require confession of judgment and consent to appoint receiver appointment provisions in any loan modification or forbearance agreements. These provisions allow banks more immediate action if a borrower’s condition further deteriorates and/or the value of the bank’s collateral declines precipitously.
• Reaffirmation. Borrowers, along with any guarantors or pledgors, should reaffirm their debt and other obligations under any guaranties, pledges, and/or loan documents. Reaffirmation provisions further buttress the borrower's, its guarantors', and pledgors' obligations to the bank. Also, if loans are not guaranteed by business owners, they should be required in connection with modifications and forbearance agreements.
• Waiver Of Defenses. Agreements should have waiver of defense provisions if a bank has to enforce the agreement. This is a key provision now that borrowers are raising force majeure and “impossibility” defenses given the current COVID-19 environment.
• Release In Favor Bank. Along with the waiver of defense provision, a general release by borrower — along with any of its guarantors or pledgors — helps prevent these parties from alleging lender liability causes of action.
• Choice Of Law, Choice of Venue & Jury Waivers. Documents should explicitly identify which state’s law applies and the state and county where any lawsuit must be filed, most likely the location of a bank's headquarters. Agreements also should have a jury waiver. Jury trials tend to be more expensive than bench trials and take longer to be decided. Moreover, many judges and juries will have little experience with banking law and practice, but educating one person knowledgeable in the law generally is easier than educating 6-12 people without that knowledge. Jury waiver provisions should always be prominent — it should be in all caps, at a minimum.
• Anti-Money Laundering. Often overlooked, an anti-money laundering provision can help protect banks from regulatory scrutiny in case borrowers are paying the down the loan as part of a loan modification or forbearance agreement from funds obtained from a party that is not a current customer of the bank.
• Litigation Strategy For Key Loans. The first nine steps will help in the event of litigation on any loan, but for larger, more critical loans, banks should consult with business litigation attorneys to establish a broader strategy to maximize the likelihood of recovery in the event of a lawsuit.