Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

I know that the subject of flood insurance has little "glitz" and that the narrow focus here is on co-lender deals (my other postings on this topic), but if -

• you're in a multi-lender loan (participation, syndication, etc.)
• with federally regulated lending institutions
• where any portion of the real estate collateral is in (or even near) a flood plain

. . . then this announcement by the Loan Sale Trading Ass'n (LSTA) should interest you.

Recently, the LSTA has published the final version of the “Market Standards for Flood Insurance Processes in Syndicated Lending”. 

The federal laws and regulations regarding flood insurance come into play when any of the co-lenders is a federally regulated institution.  Briefly, the regulations mandate that lenders obtain certain flood documents and impose a requirement and a time frame for force placement.

The LSTA guidelines establish procedures for the administrative agent (or lead lender) covering the following topics:

• obtaining documents which evidence compliance with such laws and regulations
• adequate monitoring by lenders in the syndicate of such compliance.

So, if your distressed loan is in (or even near) a flood plain, and if you're a federally regulated lender (or if any other lender in the co-lender group is federally regulated; or if you might be selling the paper or the collateral after the co-lender group takes ownership), then these standards are important to you.

Note also: to what extent will these standards "influence" the broader servicing community and standard of care?

You can bet that these standards will be used "against" the lead or agent bank by other co-lenders in the deal.  Ignoring these standards could be a breach of the servicing obligations or standard of care.

If you have an example of this, or a similar situation, please comment below.

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This is the second of a two-part series (PART ONE) covering initial due diligence topics for workouts involving co-lender structures, with a focus solely on the participated or syndicated co-lender structure. The series is not a comprehensive listing of possible issues on this topic, but merely a basis template to assist you as you review the co-lender and other relevant loan documents.

Typical Servicing issues:

• how are on all decisions made within the co-lender group on these subjects?
  • waivers and consents
  • default\enforcement (special servicing issues)
  • after enforcement (expenses to protect\preserve, to sell, to complete; title of the property [name of servicer; tenant in common; nominee entity jointly owned]
  • advances, expenses and losses
  • excess recovery
  • is there a buy\sell provision if co-lenders are not able to resolve disagreement?
• what decisions may servicer make without input from co-lenders
• duties of servicer: what must it do (reporting, inspections, etc.)?
• standard of care of servicer
• what if servicer has an equity position?
• rights of co-lenders to examine and copy
• notification rights (when must servicer notify a co-lender)
• fees (primary servicing; special servicing; asset management and disposition)
• future property inspections and reporting (review reports only; or more active role, such as accompany servicer during on-site inspections)

Does the loan seller or originator have any liability?

• contractual duties and warranties
• fiduciary duties

Transfers

• buy\sell for disagreements
• transfers to affiliates
• transfers to third parties (right of first offer?)
• is sub participations\syndication prohibited?

Sharing of payments: on sums paid by the borrower, are payments applied -

• proportionately to all co-lender?
• non-proportionately to co-lenders?

If you have any comments, suggestions or additions to the foregoing, please post a comment.

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