Reengage the deal team
The workout banker should reengage the deal team, especially the relationship manager who was working with the customer or member. Obtaining access to all of the loan documents and credit file is of paramount importance and the relationship manager can provide context and share any important email, correspondence, and servicing notes with the customer or member. At this point, the workout officer will conduct a full and comprehensive review of the loan documents (which are essentially the Bible governing the loan), including email correspondence, letters, or other documentation that may provide a “smoking gun” indicating lender liability or a commitment made about the loan (either directly or inadvertently). If there are weaknesses in the loan documentation or if any lender liability is discovered, the workout officer should engage legal partners and craft a strategy on how best to resolve it, first and foremost. The financial institution may also want to engage a lawyer to formally review the loan documents and title to verify there are no gaps or insecurities.
Meet with the borrower
A meeting should occur with the borrower to introduce the loan officer and workout officer (warm handoff – if possible) – hopefully at or near the collateral property. Note: I am a firm believer that a commercial property inspection must be conducted by the credit union or bank or its officer if possible. The on-site inspection can illuminate any issues with the neighborhood or the property itself (e.g., unreported vacancies, visible deferred maintenance, and busyness of the property).
Some best practices for this initial meeting with the borrower, which can be contentious if the customer or member has never been sent to workout, are to:
- Have two bank or credit union representatives at the meeting.
- Take good notes and minutes.
- Email those minutes to all attendees to recap the discussion.
Often, workout meetings can be difficult discussions, and if emotions run high or the borrower makes accusations, it is best to have a record of what was discussed. It is important to note that the introductory meeting will not resolve the issues but is more for explaining the role of the financial institution, the rules of the road for communication going forward, the issues that predicated the transfer, and to make requests for additional information needed (financial and otherwise) that will be necessary to work on a solution. Again, follow up in writing with the formal request for information, and be sure to include any and all parties to the loan (including co-borrowers and guarantors).
Re-underwrite the CRE credit
The loan workout team will essentially want to re-underwrite the commercial real estate credit, especially if the borrower is open and transparent in providing updated financial information (both current and projections). It is also at this point that the bank or credit union should obtain an updated third-party appraisal of the collateral, especially if the last appraisal on the real estate or other collateral is stale (older than 12 months old) or if there have been substantial changes to the property or surrounding market. Additionally, if the loan documents allow or if the loan has an actual declared default, the institution should obtain updated financial information from all guarantors (corporate and personal).
Revisit the loan grade
Once all of this information has been obtained on the primary, secondary and tertiary sources of repayment, the bank or credit union can revisit the current grade on the distressed CRE loan and strategize on the best course to resolve the asset. The financial institution should make the distinction of whether the credit is a “retain” or “exit” customer or member. The former indicates a strategy of rehabilitation and return to line of business. The latter indicates a collection posture that seeks to get repaid via the strategy that provides the best resolution on a net present value basis.
Engage CRE credit partners
Engage the workout team
Consult on potential treatment
