If there's anything we've learned from this Great Recession, it's that better loans make better asset-backed securities. While lots of attention has been focused on loan quality in terms of underwriting, not much has been said about how the quality of loan documents themselves affect collectability and, by extension, value to the pool. But when the time comes to enforce a loan or guaranty, the devil is in the drafting—not just of the negotiated terms, but of those standard provisions often copied from one transaction to another. Over the next few weeks, we'll look at several standard "boilerplate" provisions found in loan documents, and discuss why it just might be time to give your forms a second look.
The litigator's silver bullet: summary judgment
But before we get into specific provisions . . . a little context. Whether securitized or unsecuritized, backed by a guaranty or limited recourse, loan transactions are, at the core, contractual arrangements. MBS servicers and investors believe that enforcing their loans should be a quick and easy proceeding—after all, the borrower signed a contract. You just file suit, show the judge the contract, and come home with an enforceable judgment. In my business, that's called "summary judgment," where the moving party demonstrates that there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. But defense lawyers with a little skill and savvy can capitalize on inartfully drafted loan documents to avoid summary judgment, generate fact issues for trial, and generally increase the expense of enforcement.
Time, as they say, is money. Even if a loan or guaranty is ultimately enforced after trial, lost time and energy are real costs that can turn even the most miraculous trial victory into a business loss. A little work on the front-end reviewing long-ignored standard provisions, however, can remove an arrow from the borrower's quiver and increase the chance of quick, efficient loan enforcement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
