Preventing Omission of Important Terms in Loan Documentation Forms

Preventing Omission of Important Terms in Loan Documentation Forms

by Robert S. Fisher

Every lawyer worries about omitting a critical provision from a document being drafted or reviewed. The practitioner structuring a loan transaction should be particularly cognizant when making use of a standardized loan document, which may or may not contain all the needed elements. Potential pitfalls are discussed in this article.

Excerpt:

Every lawyer worries about omitting a critical provision from a document being drafted or reviewed. Sometimes the lawyer might have caused the omission by not realizing the need for the provision or by using a pre-drafted form and overlooking the fact that the needed provision had not been required in the transaction for which the earlier form had been drafted. At other times, financial restraints imposed by the client might limit the time available to review all the special conditions of the transaction.

In the arena of the plain vanilla ("one size fits all") forms in which printers and over-assertive regulators delight, such errors can also occur, with unfortunate results, unless the uniformity carries with it protection for the drafting lawyer. The uniform form often sounds safe because the common understanding is that everyone uses it. A major unforeseen problem can arise when a lender imposes the use of the form on independent loan originators, creating paper to sell to the lender who may be accustomed to having the eliminated clause in their documents and in related documents that their assignee does not create for them.

The Uniformity Inducement - A Million Dollar Bond

One inducement to lenders and others using a given form to rely on the legal work done by the printer's legal staff often appears in the form of a million dollar bond. Many lenders conclude that this is enough protection for them. However, there is a problem with reliance on such bonds: they often may require that the form be used in only one state and if it is used elsewhere, the bond does not apply. If a lender does business in 50 states, this may mean ordering and using as many as 50 different versions of the form. Highly experienced lenders will ask that a form be drafted so that all states where it may be used are listed in a footnote on the form. This, if course, leads to a complex annual review to make sure all of the listed states still accept all terms of the uniform form or allow suitable hedging language. If state specific forms are used, there could be a need for 50 individual reviews each year. As we have seen from the recent rash of consumer and shareholder class actions and government prosecutions, some errors can cost much more than million dollars per state.

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Robert S. Fisher has practiced extensively in the area of consumer financing of motor vehicles, recreational vehicles, recreational yachts, general aviation aircraft, and general commercial equipment leasing. He has represented banks, finance, general leasing, and yacht chartering companies in setting up leasing programs and in the purchase, sale, and securitization of vehicles and equipment.

He has lectured on recreational vessel matters before the Maritime Subcommittee of the American Bar Association, where he is chair of the Boat Working Group of the National Title Task Force, and at the Association of the Bar of the City of New York, where he was a member for two terms of the Admiralty Committee. He has also lectured for the Conference on Consumer Finance Law of Oklahoma City University School of Law and written for the Consumer Financial Quarterly and the Rutgers Law Review. Mr. Fisher writes frequently on maritime legal topics for Yachting Magazine.