During the past year I have been asked many questions from clients concerning commercial lending, ranging from loan production issues to bankruptcy concerns and loan enforcement matters. In this blog I have tried to address many of these issues.

One question from a client last year really stuck with me. I was asked, assuming that the commercial loan market in California declines in 2017, how will future commercial loan defaults be different than past commercial loan defaults and what can we do now to minimize the risk of future defaults?

I have read many articles projecting when the economy may worsen and commercial loan defaults may increase. Several articles have predicted that the economy will worsen before 2017 due, in large part, to projected interest rate increases, especially as more commercial loans mature in the next two years. Other articles have predicted that the economy will remain strong beyond 2017 based on the current strength of the economy. Predicting future economic trends can be tricky and is clearly not an exact science. However, the exact date of when the number of commercial loan defaults may increase is not nearly as important for answering the question of minimizing the risk of future commercial loan defaults, as assessing how these future commercial loan defaults may be different than previous commercial loan defaults.

I believe that future commercial loan defaults will be different than previous loan defaults in at least the following three respects:

1. Less trust in lending institutions. It is obvious from reading media coverage of current events that the general public has a much lower level of trust in lenders. In fact, lenders have been assessed much of the blame for the last recession. This lack of trust has spilled over to the courts. When I am in court, it is painfully obvious from judges’ comments and attitudes that the credibility of lenders with the courts has dipped to dangerously low levels. This is also well illustrated by the California Supreme Court decision of Riverisland Cold Storage v. Fresno-Madera Production Credit Ass’n, which eviscerated the parol evidence rule to allow admission into evidence of alleged prior oral statements directly contradicting the terms of written contracts. In short, the law is evolving to be much more borrower friendly and lender adverse. Although this trend should not discourage lenders from enforcing their loan documents when appropriate, I have worked with many lender clients during the past year to change their approaches in dealing with borrowers on defaulted loans as well as modifying their communications with their borrowers. I have also helped our lender clients in altering not just the terms of their commercial loan documents but even the format of their loan documents to meet these new challenges.
2. Failure of commercial lenders to follow established procedures. Commercial lending is competitive. In order to gain new customers and enter new markets, many lenders have been forced to “bend”, or in some instances completely ignore, existing policies to attract more customers and more business. This situation has been made worse as many lenders have reduced their staffs to minimize costs. Over the past year, I have worked with our lender clients to train their loan staff on such matters as handling the difficult borrower, properly creating “paper trails“ and document retention, all of which may be critical should the loans being worked on now later go into default.
3. Increased use of technology. Lenders are creating and using new technologies and services that are ahead of the present state of the law. As a result, the legal landscape continues to change, not just regarding borrower/lender disputes but also disputes between lenders. At ECJ, we are combining different practice areas to tackle these new and challenging issues from many different angles. I have found that looking to the future to anticipate future issues and concerns has greatly helped us find creative solutions to existing problems. In addition, especially as technology continues to advance at such a rapid rate, our responsiveness to our clients’ concerns and close communication with our clients allows us to stay ahead of the changes in the law and our competition. We hope to carry this on throughout 2015 to better represent our clients.