This is the fourth installment of the five ways lenders make their collection actions more difficult.
RULE #4: GIVE NO THOUGHT TO POTENTIAL SERVICING-RELATED ISSUES, INCLUDING POTENTIAL CONFLICTS OF INTEREST, WHEN SELLING AND PURCHASING LOAN PARTICIPATIONS
Although the purchase and sale of participations in loans is a useful tool for managing risk, such transactions can greatly complicate (i.e., add expense and delay to) the servicing of troubled loans. Some degree of complication is unavoidable when a participated loan goes into default, because the lead lender will oftentimes wish to waive or modify one or more provisions of the original loan agreement as part of its collection strategy, and participants usually reserve the right to approve or disapprove such waivers or modifications. A well-drafted participation agreement, however, will at least provide clear guidance as to when participants’ consent to a proposed action by the lead lender is required, what level of support is necessary in order for the lead lender to act and a mechanism for resolving stalemates. Careful thought should also be given, by both the originating and participant banks, as to whether the lead lender is permitted to make additional loans to the same borrower and, if so, under what circumstances. The potential conflicts of interest faced by a lead lender which services loans with the same borrower both for its own account and for the account of others can make it difficult even for a “well-intentioned” lead bank to be effective in its servicing of both loans.
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