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Commercial Lending Update

Corporate Lawyers, Real Estate

Posted in on March 13, 2014

The Federal Reserve recently surveyed senior loan officers from 60 large domestic banking institutions and the U.S. agencies of 24 foreign banks. The results: In the fourth quarter of 2008, 87 percent of loan officers said they have tightened their lending standards for commercial real estate loans. Banks are pointing to uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for their more-restrictive lending policies. Some Banks have reported that their current or expected capital or liquidity positions contribute to the tightening of lending standards.

What that means for clients contemplating applying for commercial loans is more homework than they have had in the past. Common areas to be aware of include:

  • The minimum commercial loan for many banks has been rising.
  • Banks are starting to charge up-front commitment fees.
  • A severely limited amount of cash a business borrower can get when refinancing commercial mortgage loans.
  • The banks will require business plans for commercial loans for transactions for which business plans were not required in the past.
  • Complete, current tax returns for commercial mortgage loans will be required.
  • Most banks will require greater cross collateralization of real or personal property for commercial mortgage loans and operating loans.
  • Banks require balloon payments or the loan will be subject to recall after periods as short as 3-5 years for commercial loans.
  • Legal issues need to be in order and properly documented.

In short, in today’s uncertain market, underwriting has been tightened and lenders have become much more diligent in reviewing and analyzing applications for commercial loans and the underlying financial records that support the borrower’s income stream.