What are the Final Loan Documentation Requirements?

When working with clients, loan officers have two major responsibilities:

1) They evaluate an applicant's financial and credit histories against loan amounts requested and based upon such findings render a decision as to whether or not to grant a loan.

2) In scenarios where an applicant's loan request is successfully granted, loan officers produce a series of official loan documents.
We will focus on those official loan documents both to understand the three main documents that are required and the processes that loan officers go through in order to produce such official forms.
Loan Agreement (LA)

By definition, a Loan Agreement (LA) is a contract entered into by and between a lender and a borrower. Stipulating the terms of a loan, outlined within the LA are provisions, specifically referred to as "representations and warranties", which serve as assurances that both parties have complied with the required conditions of the loan.

The loan agreement contains the "representations and warranties" of the borrower. These are your promises to the bank that you've complied with certain conditions.

Typically, loan agreements are characterized in one of two ways, either by the type of lender or by the type of facility.

When categorizing loan agreements by the type of lender, there tends to be two subdivisions:

· Bilateral loans.

· Syndicated loans.

When categorizing loan agreements by the type of facility, there also tends to be two categories:

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· Term loans.

· Revolving loans.

Essentially, term loans are structured in such a way that they are repaid within set number of installments paid out over the course of the loan.

Note: Some lenders apply a charge for early settlement (also known as an early redemption penalty) should the borrower repay the loan in full prior to the agreed upon end date. Potentially, this penalty can add an additional month or two of interest.

In contrast, revolving loans (aka overdrafts), enable the borrower to take out a maximum amount at any time. The associated interest, calculated based upon the amount drawn out, is expected to be paid on a monthly basis.
Loan Subdivisions

Within the two types of loan categories (term and revolving) various subdivisions exist, for instance, interest only loans and balloon payment loans. Furthermore, the loan can also be subcategorized based upon whether it qualifies as a secured loan or as an unsecured loan and whether the rate of interest is fixed or floating (based on an adjustable rate).

Because there is no mandated loan agreement form, they tend to vary dramatically based upon the country of origin. Yet, despite the wide ranging differences, loan agreements generally tend to encompass the following components:

  1. References to contact, their phone numbers and addresses.
  2. Definitions and interpretations of provisions.
  3. Facility and purpose.
  4. Required conditions of the loan.
  5. Repayment provisions.
  6. Prepayment and cancellation provisions.
  7. Interest amounts and interest earning periods.
  8. Payment provisions.
  9. Representations on the part of the borrower.
  10. Covenants of the borrower.
  11. In the event of default, what will occur and what can be done.
  12. Provisions for penalties and liquidated damages
  13. Calculation Formulas
  14. Provisions for lenders' fees
  15. Provisions for lenders' expenses.
  16. Security provisions.
  17. Amendments and waiver provisions.
  18. Covenants relating to changes in party ownership.
  19. Set-off clause (seizure of assets).
  20. Appointment of a process agent.

Note: At this point of the loan finalization process, the lender should already have all of an applicant's financial documents. However, should additional materials, such as investment filings, be required, it is the responsibility of the loan officer to impress upon the applicant the need to submit those in a timely manner.

Furthermore, though already reviewed, all financial data associated in the loan application will need to be fully verified prior to the actual activation of the loan.
Promissory Note

We probably have seen promissory notes at some point in our lives.

The promissory note details the principal and interest amounts owed, when payments are due, and it outlines the events that would allow the bank to declare your loan in default. This is shown in the following example.

On this date of [DATE], in return for valuable consideration received, the undersigned borrower[s] jointly and severally promise to pay to [LENDER'S NAME], the "Lender", the sum of $[DOLLARS] Dollars, together with interest thereon at the rate of [RATE] percent ([RATE] %) per annum.

In the loan package, the all important promissory note is used to specify the terms of repayment, including principal and interest, the length of the loan, late fees, and whether a prepayment penalty needs to be assessed. In addition, it also describes the circumstances under which the borrower may wind up in default, and what happens in the event of such a default.

In the promissory note contained in the loan package the following elements may be found: terms of repayment, late fees, method of payment (automatic debit/credit card, etc.), modification options, note transfers, and penalties in cases of default.
Guarantee and Surety Agreement

In the case of small business loans, the guarantee or surety agreement is the borrower's promise to the bank that, if the borrower's business entity is unable to repay the money, they will personally repay it from their personal holdings.

Since most startup businesses have not amassed impressive assets or racked up sufficient operating histories, lenders frequently require the loan be backed up with personal assets because it presents too great a risk without such .

In essence, the borrower makes a personal guarantee that should the business fail, they will pay back the loan out of their own personal holdings. For example, the bank may ask that the principals secure the loan with the equity in their homes.
Truth-in-Lending (TIL): "In a Form the Consumer May Keep"

Truth-in-Lending (TIL), a broad based term used in a variety of instances requiring public acknowledgements be made to consumers, also has a place within formalized lending practices. The Truth-in-Lending Act requires "clear and conspicuous" disclosure of the key provisions to borrowers relating to their loans.

Within the lending arena, truth in lending applies to a range of disclosures including: APR whereby it must be listed more prominently than other disclosures and ARMs. Also TIL covers credit cards and those additional revelations that need to be publicly revealed within a specified time period.

Take the Truth in Lending concept one step further; disclosures need to be provided "in a form the consumer can keep." Specifically, this means that the disclosures need to be put down in writing and be able to be retained by the consumer. This is to ensure that lenders do not say one thing and then enforce another.
Also regulated, the timing requirement stipulates that the disclosures be presented to the consumer "before consummation," that is before accepting the loan.