Agencies Respond to Borrowers in Latest Loan Document Updates

24 July, 2012
by Marsha Baumgarner, Executive Vice President & Chief Legal Officer

Over the last year, Fannie Mae and Freddie Mac overhauled their form loan documents.  Fannie Mae started the ball rolling in early 2011 when it published a new set of loan documents, retiring form loan documents that had been in existence since the late 1990s.  In late 2011, Freddie Mac also published a new set of loan documents. They did so to provide the updates necessary to respond to the maturity of their program but also to incorporate changes necessary to optimize their CME securitization execution while still addressing the needs of borrowers.  

Since publication of the new documents, borrowers and their counsel have expressed multiple concerns about many of the changes as well as the impact of the ensuing negotiations on timely execution.  Beech Street, along with others, advocated strongly for change and the agencies listened. 

Freddie Mac responded by providing documentation flexibility, but that may impact pricing given that such changes may affect Freddie Mac’s CME securitization execution.  Fannie Mae took another approach.

Fannie Mae’s Revised Loan Documents

  • ‚ÄčLate Charges:  Clarifies that the late charge is not due if the maturity date is missed.
  • Personal Liability:  Clarifies that no party other than the borrower and guarantor are personally liable for the loan.

  • Non-Recourse Carve-outs:  Specifies certain non-recourse carve-outs.  For example:

    • Failure to apply security deposits pursuant to a lease is now only a loss event if such failure occurs after an event of default.
    • Failure to maintain all insurance policies is still a loss event, but if lender is collecting impounds then a failure to pay the premium is not a loss event.
    • Unintentional misrepresentation that is reckless and material is now only a loss event, not a full recourse event as it was previously, but intentional written material misrepresentation or omission is still a full recourse event.
  • Personal Liability for Indemnity Obligations:  Now expressly provides that the indemnity does not cover gross misconduct of lender.

  • Principals:  Eliminates references to principals from all loan documents.  The provisions now only run to the borrower, guarantor, or key principal, as applicable.

  • ERISA:  Substantially simplifies the ERISA representation and provides a newly published ERISA modification where the borrower has an ERISA plan in existence.

  • Single Asset Status:  Acknowledges that a borrower’s financial statements may be consolidated with an affiliate so long as such consolidation is in accordance with generally accepted accounting principles.

  • Payment of Fees, Costs, and Expenses of Lender:  Deletes fees that may be incurred by lender in connection with any securitization, including fees to rating agencies, attorneys, and accountants.

  • Waste:  Now allows for ordinary wear and tear as an exception to waste.

  • Audited Financials:  Clarifies that audited financials will be required only if borrower fails to provide the required financial statement in a timely manner, if the financial statements are not materially complete or accurate, or if there is a continuing event of default.

  • Events of Default:  Now provides that whenever there is an event of default and certain rights of the borrower are curtailed, e.g., the right to collect rents, that such right is curtailed only while the event of default is continuing and not for the remainder of the loan term.

The Environmental Indemnity was one of the few things Fannie Mae tightened, redefining the definition of mold and expanding indemnity to adjacent properties owned by the borrower or borrower affiliates among other provisions.  That said, portions of the Environmental Indemnity were made better.  Changes included:

  • Adding knowledge qualifiers to some provisions
  • Allowing a continued prohibited condition so long as an O&M program is in place
  • Permitting use of “commercially reasonable” efforts to comply with O&M programs
  • Affirming that the indemnity obligations do not continue after the loan is paid in full unless there is an existing suit or the payoff is deemed void or voidable by a bankruptcy court

Focus on Requests That Matter Most

We recognize that the changes will not cover every circumstance, but they should go a long way to reducing the number of requests borrowers have to make.  At the same time, the fact that Fannie Mae left a number of provisions unchanged indicates that the agency feels strongly about them—and will waive them only in special circumstances.  As a result, borrowers should focus on making requests that are essential to their business.

At Beech Street we can draw on our long history with Fannie Mae and Freddie Mac and our experienced legal team of agency veterans to help borrowers understand the latest changes in the loan documents.  We will work with the agencies to make the best possible case for those requests that are most important to borrowers.   

Rates


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