Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
The third exception regards the after-acquired property
clause that protects the value of the collateral in which the
creditor has a perfected security interest. The
after-acquired property clause ordinarily gives the original
creditor senior priority over creditors with later perfected
interests. However, it is waived as regards the creditor
who supplies replacements or additions to the collateral or
the artisan who supplies materials and services that
enhance the value of the collateral as long as a perfected
security interest in the replacement or additions, or
collateral is held.
Borrowing Authorization
Borrowing authorizations in essence permit one party to
incur liability for another. In the context of lending, this
usually concerns corporations. A corporation may enter
into contracts within the scope of the powers authorized by
its charter. In order to make binding contracts on behalf of
the corporation, the officers must be authorized to do so
either by the board of directors or by expressed or implied
general powers. Usually a special resolution expressly
gives certain officers the right to obligate the corporate
entity, pledge assets as collateral, agree to other terms of
the indebtedness and sign all necessary documentation on
behalf of the corporate entity.
Although a general resolution is perhaps satisfactory for
the short-term, unsecured borrowings of a corporation, a
specific resolution of the corporation's board of directors is
generally advisable to authorize such transactions as term
loans, loans secured by security interests in the
corporation's personal property, or mortgages on real
estate. Further, mortgaging or pledging substantially all of
the corporation's assets without prior approval of the
shareholders of the corporation is often prohibited,
therefore, a bank may need to seek advice of counsel to
determine if shareholder consent is required for certain
contemplated transactions.
Loans to corporations should indicate on their face that the
corporation is the borrower. The corporate name should
appear followed by the name, title and signature of the
appropriate officer. If the writing is a negotiable
instrument, the UCC states the party signing is personally
liable as a general rule. To enforce payment against a
corporation, the note or other writing should clearly show
that the debtor is a corporation.
Bond and Stock Powers
As mentioned previously, a bank generally obtains a
security interest in stocks and bonds by possession. The
documents which allow the bank to sell the securities if the
borrower defaults are called stock powers and bond
powers. The examiner should ensure the bank has, for
each borrower who has pledged stocks or bonds, one
signed stock power for all stock certificates of a single
issuer, and a separate signed bond power for each bond
instrument. The signature must agree with the name on the
actual stock certificate or bond instrument. Refer to
Federal Reserve Board Regulations Part 221 (Reg U) for
further information on loans secured by investment
securities.
Comaker
Two or more persons who are parties to a contract or
promise to pay are known as comakers. They are a unit to
the performance of one act and are considered primarily
liable. In the case of default on an unsecured loan, a
judgment would be obtained against all. A release against
one is a release against all because there is but one
obligation and if that obligation is released as to one
obligor, it is released as to all others.
Loan Guarantee
Since banks often condition credit advances upon the
backup support provided by third party guarantees,
examiners should understand the legal fundamentals
governing guarantees. A guarantee may be a guarantee of
payment or of collection. "Payment guaranteed" or
equivalent words added to a signature means that if the
instrument is not paid when due, the guarantor will pay it
according to its terms without resort by the holder to any
other party. "Collection guaranteed" or equivalent words
added to a signature means that if the instrument is not paid
when due, the guarantor will pay it, but only after the
holder has reduced to judgment a claim against the maker
and execution has been returned unsatisfied, or after the
maker has become insolvent or it is otherwise useless to
proceed against such a party.
Contracts of guarantee are further divided into a limited
guarantee which relates to a specific note (often referred to
as an "endorsement") or for a fixed period of time, or a
continuing guarantee which, in contrast, is represented by a
separate instrument and enforceable for future (duration
depends upon State law) transactions between the bank and
the borrower or until revoked. A well drawn continuing
guarantee contains language substantially similar to the
following: "This is an absolute and unconditional
guarantee of payment, is unconditionally delivered, and is
not subject to the procurement of a guarantee from any
person other than the undersigned, or to the performance or
happening of any other condition." The aforementioned
Loans (12-04) 3.2-56 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation