Using outside counsel to assist with loan closings may or may not be standard practice for SBA Lenders depending on a variety of factors such as: where a Lender is located in the country, the size of the loan transaction, the anticipated use of loan funds, or if the loan is out of a Lender’s lending footprint. Regardless of the reasons why a Lender decides to engage outside counsel, below are a few recommendations to make the engagement beneficial for the Lender:
Define the scope of engagement. Lenders should have a general engagement letter with each of its outside counsel’s firms. The engagement letter covers general responsibilities of counsel, the structure of billing and fees and any disclaimers or carve outs from representations. Outside counsel may be engaged for full scope representation, including due diligence review, loan documentation, closing and funding. More limited scope representation may be to review purchase documents for compliance with SBA’s change of ownership requirements or to review Lender prepared loan documents for consistency with its credit.
Organize and plan. Whether prepared by the Lender or its counsel, a preliminary closing conditions checklist is key to staying organized throughout the closing process. Determine who is responsible for updating the checklist and set reasonable expectations for sending out updated checklists. Remember marking items off the checklist is not enough, counsel will need a few days to review and analyze due diligence before approving or providing comments, and sending out an updated checklist.
Keep open communication. Scheduling a kickoff call with all parties to go over the checklist is a valuable time investment. Often the borrower has been working with the Lender for weeks or months to get to loan approval and believe they have provided most of the due diligence. A conference call to determine what due diligence still needs to be provided and why is very helpful for setting expectations. It also allows counsel to have a better understanding on the status of the underlying transaction (i.e. status of business purchase negotiations, or constructions plans development). It is critical for the Lender to promptly share with its counsel any information which may impact closing, such as third party report issues, or changes to the loan structure. If a Lender delays in providing counsel with updates to the loan transaction, it may delay closing as counsel needs to revise loan documents or request additional due diligence.
Define Roles and Responsibilities. When a Lender does not use outside counsel on a regular basis, or is working with a new counsel unfamiliar with their process, it’s important to take time to set roles and responsibilities to maximize the cost benefit of using outside counsel. Outside counsel only represents and works for and on behalf of the Lender. As a result, Lender’s counsel cannot draft transactional, real property or corporate documents on behalf of the borrower or seller. If the borrower is represented, the Lender’s counsel cannot speak directly to the borrower without the borrower’s counsel’s consent. Someone from Lender’s closing team should be designated as the main point of contact for the borrower.
Having clearly defined roles and responsibilities makes for a smoother closing process for all. Counsel should be consulted before setting any closing date to make sure they have adequate time to complete their work in advance of closing. Determining who (Lender or their counsel) coordinates closing logistics and oversees closing, are also critical decisions that should be established well in advance of the actual closing date. Finally, answering the questions who receives the original loan document package and who is responsible for post-closing will ensure that the loan remains compliant through post-closing and into servicing.
For more questions regarding structuring your loan closing process, please contact Kim Rayer at firstname.lastname@example.org.