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Standard Procedures Manuals (SPM)
 

Commercial Lending March 2024


Our Commercial Lending Manual discusses the issues facing California lenders in making commercial loans secured by personal property, including due diligence requirements, structuring issues, and documentation requirements. It covers both secured and unsecured commercial loans, with an emphasis on the methods of creating and perfecting a security interest in a broad range of collateral types under Division 9 of the California Uniform Commercial Code. In addition, the Manual includes a discussion of the California Secretary of State’s online UCC Connect service and a detailed discussion of loan participations.

Note that this entire Manual was updated in June 2023. In October 2023, only Sections XVII and XVIII of Part Two were updated. In this latest update, Part Six dealing with buying and selling commercial loans, and Part Seven which addresses the legal and regulatory requirements for loan participations, have been updated.

SPM #3 is organized into seven parts, each focusing on different aspects of commercial lending. These parts are as follows.

  • Part One addresses a lender’s due diligence obligations when originating a commercial loan, including general due diligence requirements, an introduction to CIP, the beneficial ownership rule and customer due diligence, verifying borrowers and guarantors, evaluating personal property collateral and hidden liens.
  • Part Two covers regulatory issues affecting commercial loans, including safety and soundness standards; the Current Expected Credit Losses (CECL) methodology; CIP requirements; lending limits; credit union member business loan requirements; ECOA and HMDA for the commercial lender; appraisal regulations; the applicability of federal and state UDAP/UDAAP laws to commercial loans; and many other regulatory topics. In October 2023, Section XVII of Part Two was updated to provide a comprehensive discussion of the CFPB’s new Small Business Lending Rule (also commonly referred to as the “Section 1071 Rule”), which requires covered financial institutions to collect, maintain, and report certain data to the CFPB regarding their loans to minority-owned, women-owned, and small businesses. Moreover, new Section XVIII was added to Part Two to address fair lending issues in connection with commercial loans.
  • Part Three, titled Structuring and Loan Documentation, lays out structuring considerations for commercial lenders; loan documentation requirements (including detailed discussions of promissory notes, loan agreements, financing statements, intercreditor agreements and more); managing risks in an electronic environment; lending to nontraditional borrowers such as municipalities and local government units, native American tribes, and homeowners associations; and financing special types of collateral including accounts receivable, manufactured homes, government contracts, inventory, crypto-related assets, equipment, taking an assignment of a franchise agreement as collateral, and financing the acquisition of a business, among others.
  • Part Four focuses on several miscellaneous commercial lending issues, such as guaranties; using letters of credit as credit enhancements; lender liability; federal and state forfeiture laws; and insurance matters.
  • Part Five addresses the SBA’s 7(a) Loan Guaranty Program and its 504 Certified Development Company Loan Program. Additionally, Part Five discusses in detail SBA’s CARES Act-related loan programs, such as SBA’s Paycheck Protection Program (with an extensive discussion of the requirements and procedures governing the PPP loan forgiveness process), its Debt Relief Program Program, and the SBA’s Economic Injury Disaster Loan (EIDL) Program.
  • Part Six provides discussions of the legal and regulatory requirements governing banks and credit unions when purchasing and selling commercial loans.
  • Part Seven focuses primarily on loan participations to provide bankers with an understanding of the developing law of loan participations, with particular emphasis on the proper documentation of a loan participation to protect the rights and clearly define the duties and responsibilities of the originating lender/seller, the lead lender (who may also be the originating lender), and the participant/purchaser. Topics covered include due diligence issues specific to loan participations; regulatory issues affecting loan participations; structuring loan participations; recommended provisions for loan participation agreements; and insolvency and bankruptcy risks. Part Seven also includes a brief discussion that distinguishes loan participations and loan syndications.

The text of the Manual is 981 pages, plus 22 pages of appendixes.

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* Janet Bonnefin is retired from the practice of law with the firm.
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