Using LaserPro in conjunction with legal counsel to manage high value loans
Commercial lending is an important element of many financial institutions’ businesses, but the process of drawing up loan documents, especially for high value loans, can be complex. Every loan is different and must meet regulatory requirements and reflect the terms of the deal. Truly effective loan documents mitigate various relationship risks while still helping a customer achieve their own business objectives for taking out the loan.
In general, banks and credit unions want to reduce loan documentation costs while maintaining regulatory compliance, and also create enforceable contractual agreements between themselves and the borrower. They want to achieve this as efficiently and cost effectively as possible, which means not having every loan documented from scratch by third parties, notably outside counsel.
The way to achieve all those seemingly conflicting objectives is to use software systems, such as Finastra’s Fusion LaserPro, which are designed to build effective loan contracts at a more reasonable cost through the standardization of reusable blocks of language, terms and templates.
It’s important to state that such systems are not supposed to remove the valuable role of legal counsel in high value loans, but rather to focus costly legal professionals’ contribution on high level advice, not on documenting individual loans.
1. Review your lending policy
Before moving forward with a software platform, financial institutions are advised to check the status of their lending policy. Required by regulation, a lending policy outlines an institution’s appetite for risk in terms of how much it will lend, when certain collateral items or lending to particular parties might require outside counsel intervention, and when it will only use outside counsel-created documents.
The policy helps the banks and credit unions anticipate which third-party documents will need to be included in high value loans and the sources of those documents, the range of loan terms that will be used, and the type of final loan documents that will be provided to the client. It might also be time to update your lending policy to integrate use of software systems into the policy.
The idea is to create a set of capabilities to build into LaserPro that will help a financial institution increase its lending parameters without risk or unnecessary cost. Once set up, the system provides ways to decrease reliance on outside counsel for low-level work, while still reducing the risk of something going wrong with larger or more complex loans.
2. Collaborate with counsel
Once the lending policy is defined and agreed, it is important for banks and credit unions to educate themselves (and their counsel) on how a software system such as Fusion LaserPro provides legal “command and control” to reduce risk and increase compliance.
Fusion LaserPro operates on a set of policies, administrative settings, and standard product templates that are set up and configured by a financial institution. Each institution makes its own decisions and inside/outside counsel should be part of helping set those policies, as well as making the choices within the software that have legally-important implications.
Lenders need to think about how these LaserPro controls help them meet their goals of risk reduction and compliance, and how they might allow them to extend their use of LaserPro.
Some legally important choices institutions must make include selecting and prioritising applicable lending statutes, choice of law issues, and a myriad of other important choices. Lenders can also use LaserPro to create standard product templates, with various pre-sets governing command and control, which means that every time a loan is done, it's completed within the same basic parameters. A strategic investment in counsel at this stage results in loan documents that better adheres to your internal policies and procedures and meet the needs of your institution and customers.
One important example of making such choices is interstate lending and how it relates to the choice of law concept. Each state enacts legislation to govern and protect the citizens residing in or traveling through that state. Generally, these laws apply to events or transactions occurring in a particular state. However, sometimes events, parties or property involved in a loan are located in more than one state, and laws governing loans often differ from state to state.
For example, assume a borrower in state A wishes to obtain a loan from the lender in state B. Whose law will a court apply if the borrower or the lender goes to court? Can the lender and the borrower agree as to which state's law applies to the loan?
Resolving these matters can be complicated and depends on the type of transaction and the state laws involved. Generally, a provision in the loan contract that provides for a particular state's law to govern the transaction will be honored unless the chosen state has no substantial relationship to the parties or the transaction; or applying the chosen state's law would be contrary to a fundamental policy of a state that has a materially greater interest.
Effectively making that choice requires planning up front, while knowing that the decision can be implemented through LaserPro function.
3. Include and review counsel language
LaserPro has the ability to incorporate an institution's own language into the loan document package through a variety of functions. Having counsel help create the right language, or documents, for a loan product requires an investment in time up-front, then ongoing monitoring for potential changes and improvements.
LaserPro text fields allow for free-form text insertion; many times, the appropriate text can be created by counsel and pre-set in the standard product template. LaserPro additional provisions allow for sentences of paragraphs to be strategically inserted into documents. These can be created by counsel and stored in a library of additional provisions and reused loan after loan (and, again, pre-set in the standard product template). LaserPro exhibits and Custom Document Management function allows entire documents to be added to a LaserPro transaction and populated with deal specific data from the LaserPro transaction. LawyerPro is a module of LaserPro that allows financial institutions to get a document in an editable format that's compatible with word processing systems like Word, making it easy to collaborate with third parties.
All these capabilities allow use of counsel-created language and documents in a standard and system enforced fashion.
4. Use counsel time wisely
In many cases, lending policies will simply state that if the dollar amount exceeds a certain amount, counsel will be involved. The goal is to drive that number up in value by using a software system, yet still reduce risk by involving counsel in various touch points during set-up, as well as investing in reusable language and templates.
Customer Document Management (CDM) is another example of a LaserPro capability that allows a financial institution to incorporate attorney-prepared documents into a standard LaserPro transaction. These may be deal-specific documents, or could be add-on documents used in every contract for the loan product.
CDM is particularly useful when creating and completing fillable Microsoft Word or PDF documents outside of LaserPro, but then delivers these documents along with the rest of the LaserPro loan document set. Its advantages include reducing errors caused by duplicate data entry, and avoiding the need to print additional non-LaserPro documents to include in the LaserPro document package.
With CDM, users can import Word or PDF documents or create unique data fields. These documents become part of the loan package. There is no need to source custom documents from a folder and copy and paste or deliver them separately, they can just be added to the LaserPro pack.
Since it’s then possible to have counsel review, instead of counsel creation, the lending policy can change so that it reaches a higher dollar value. There would be an option for review only, unless there are a set of circumstances that require full counsel creation.
5. Understand the benefits of the compliance warranty
LaserPro has a compliance warranty, which means banks and credit unions are always covered in terms of changes to the regulatory compliance regimes that govern lending. It provides a standard $1 million warranty with the option to increase the warranty cap up to $5 million.
One of the questions that clients often ask is what happens if they add additional provisions to a LaserPro document or modify or delete language in a LaserPro document. In general, the compliance warranty covers standard language produced by the software. Adding language or modifying or deleting standard language does not, by itself, represent an exception to coverage under the compliance warranty.
However, if the language your financial institution adds to the document or transaction, or the changes it makes to the standard language, affects the compliance of other standard language in the document in question, the compliance warranty would not provide coverage.
Compliant documentation is at the center of the loan process for financial institutions. The strength and efficiency of LaserPro compliance are key to everyone at the institution – from the CEO to the loan officers, and from back office to compliance. They're looking to increase efficiency, decrease compliance risk and provide complete documentation for all types of loans.
LaserPro enables institution-defined workflows that enforce pre-set LaserPro policies and implement your institution’s lending policy. At the same time, LaserPro offers the ability to add counsel created language and document to system-generated loan packages.
However, while the same emphasis on speed, efficiency and accuracy applies across the board in lending, there’s an additional consideration within commercial lending. By removing complexity and expanding the use of libraries of approved wording and templates, incorporating outside documents seamlessly, clients can use their valuable counsels’ time for loan product review and setup and strategic loan contract review, rather than full origination.
In turn, this means lenders can extend their loan book upwards into higher value transactions that were previously precluded by the cost of involving legal counsel throughout the process. The net gain is that they can increase the volume and complexity of loans they are in a position to make, without increasing their exposure to unnecessary risk.
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