W11 - Loan Documentation and Disbursement

Documentation

establishes the relationship between the lender and the borrower and forms the  basis for any legal action on a court of law.

It is an essential part of the credit process and is required for each phase of the credit cycle, including credit application, credit analysis, credit approval, credit monitoring, collateral evaluation, impairment recognition, foreclosure of impaired loan and realization of security.

Purpose

• To set into a written form of the agreement between the lender and the borrower

• To clearly define the respective rights and obligations of the parties

• To provide the lender a clear course of action in the event of default

• To serve as evidence in the event of litigation

Importance

Legal Protection

Risk Assessment

Transparency

Compliance

Basic Principles

There is no binding contract unless the parties have the legal capacity to enter the contract and have given their consent to be bound under the terms and conditions of the contract

Credit Documentation, Availments and Disbursement

• All necessary legal documents prior to the initial release/restructuring or availment should be secured

• Account officers should serve as witness to the signing of all legal documents and should verify the signatures of borrowers to ascertain authenticity. Names of all signatories should be printed.

• Specimen signatures of all signatories should be maintained and updated

• Standard loan and collateral documents should be used as evidences of indebtedness or to provide support to credit extensions

Credit Documentation

• Principal Credit/Lending Documents

• Availment Documents

• Collateral/Security Documents

Principal Credit/Lending Documents

1. Loan/Line Agreement

2. Receivables Financing/Discounting Line/Agreement

3. Restructuring Agreement

Loan/Line Agreement

Contract between the lender and the client covering the grant of loan by the former to the latter under certain terms and conditions. Generally, it stipulates the loan type and purpose, amount, interest rate, penalties and charges, manner of repayment, availment, events of default, representations, warranties, covenants, and other stipulations or provisions not generally covered by the Promissory Note or collateral document securing the obligation.

Receivables Financing/Discounting Line/Agreement

Core document covering the terms and conditions whereby the proceeds of the credit facility are to be used for financing receivables.

Restructuring Agreement

This is used to document new terms and conditions affecting loan transactions in instances where borrower fails to meet his maturing obligations and/or by way of payment arrangement.

Availment Documents

1. Promissory Note

2. Disclosure Statement

Promissory Note

An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. It is a principal evidence of indebtedness and is to be considered along with the loan/line agreement.

Disclosure Statement

A document disclosing to the client the details of the loans to be released.

Collateral/Security Documents

1. Real Estate Mortgage (REM)

2. Mortgage Trust Indenture (MTI)

3. Chattel Mortgage (CM)

4. Assignment of Receivables

5. Joint and Several Signatures (JSS)/Comprehensive Surety Agreement

Real Estate Mortgage (REM)

A contract by which a client or third-party mortgagor secures in favor of the lender the fulfillment of principal obligation subjecting as security immovable (real) properties or real rights over them in the event the principal obligation is not fulfilled at the time stipulated.

Mortgage Trust Indenture (MTI)

A type of mortgage given to a trustee for the purpose of securing numerous creditors

Chattel Mortgage (CM)

Similar to REM except that the subject is chattel or personal property

Assignment of Receivables

A bilateral contract whereby one person transmits to another his rights, title, interests and actions against a third person either by way of payment or as a security.

Joint and Several Signatures (JSS)/Comprehensive Surety Agreement

Binds the key officers and management solidarily or severally with the principal borrower making them liable in case of default/non-payment due to misappropriation, fraud, mismanagement, etc.

Manner of Availment

• Release or availment should be in accordance with the approved terms and conditions and subject to completion of all necessary and appropriate legal documents

• Prior to the release or availment, the following conditions should be met:

- All pre-release requirements and conditions have been complied with and proper legal documentation has been completed including the registration of mortgage documents with appropriate registrars.

- The credit line has not expired or has not been exceeded

- Borrower has no past due availment

- Amount to be released will not exceed the approved credit limit or in accordance with the approved schedule of releases

- All availment documents have been signed by the borrower, and signed by the account officer as witness and other documents duly authenticated

- All PNs with Deed of Assignment should be accomplished and execute by the borrower and signed by the account officer as witness

• Releases should pass through different authorized signatories. No one person or division can singularly approve or effect a release

• Releases may be made in the following manner:

- One-time/lump sum release

- Partial release

Receipt and Maintenance of Credit Documents

• All original documents related to each availment should be reviewed and maintained.

• Exceptions, deviations or deferrals from standard terms and conditions should be subject to approval

Release of Collaterals and Preparation of Documents related thereto

• Cancellation of mortgages and release of collateral are allowed upon full payment of the loan, including other attendant obligation such as insurance, real estate taxes, etc.

• Release of mortgages, guarantees, and other documents after the full payment of the loan should be consistent with the provisions

Credit files

refer to all the documents that are related to the account. These shall include, but not limited to records of past experience with the client, the financial statement furnished by the borrower, the credit proposal, financial projections, business background information, CIR, appraisal report, inspection report, business registration and other permits, real estate tax receipts.

Credit File Maintenance

• The format of credit files must be standardized, and files neatly maintained with an appropriate system of cross indexing to facilitate review and follow up
• A separate credit file should be maintained for each customer and if a subsidiary file is created, it should be properly cross-indexed to the main credit file

• All photocopied documents submitted by the client should be stamped “certified true copy” upon presentation of the original copy and authenticated by the account officer

• Photocopied documents including the amendments thereto sourced from the government agency/s or office/s must be authenticated by the authorized officer from the source government agency/s or office/s

• The credit file provides credit officers a convenient reference about the basic information on the subject, and a history of the credit relationship with the borrower

• Credit folders must be treated as confidential and only authorized personnel may have access to these files

• The documents in the credit folders must be reviewed and maintained in good order