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COVID-19 AND THE LESSONS OF
THE GREAT RECESSION
"Those who cannot remember the past are doomed to repeat it"
- George Santayana
How's that for an imposing title?
Let's simply say that those of us who went through the trials of the 2008-9 recession had a few surprises and several instances where, much to our distress, we learned we were right about the risks of departing from "best practices." Unfortunately, we also learned that advice many lawyers offered as a matter of course was soundly ignored, sometimes with disastrous consequences.
Translating this information into items that may be relevant to the current economic retraction, and adding a few that seem like good ideas, here are what we hope will be boring-because-I-knew-that reminders and suggestions.
Now is the time to check your files.
Don't wait for the marginal credits to miss payments. Do a spring cleaning-like review of files. Are insurance certificates current? (and if you don't track insurance, it may be a good time to demand proof of insurance). Are property tax payments up to date and do you have proof of payment? Were there any irregularities in the acceptance process? Have you been notified of any equipment casualty or malfunction?
Spot check for fraud.
For many, the number one lesson of the GR was that they were financing nonexistent equipment, cheaper models, etc. or were otherwise the victims of lessee and/or vendor fraud. As you go through files, ask yourself how comfortable you are in this regard.
Inspect.
It may not be possible to do on-site visits, but you can demand the lessee send you evidence that the equipment is on location and properly running. A certificate signed by an officer, a photograph of the equipment, any proof that all is well may be helpful, and if the lessee refuses to comply, it may mean you have a problem that is best addressed immediately.
Purchase Orders.
With respect to new deals, are you issuing purchase orders? Do they clearly state that all conditions must be met to your satisfaction, and that any determination is to be made in your sole discretion? Do you have an "out" for adverse change in the lessee's business or financial condition? What about industry segment issues? We anticipate some pretty angry vendors grasping for any argument that someone should pay for the equipment that was ordered.
Commitment Letters.
While we are the unappetizing subject, what sort of approvals do you give customers? Originators and brokers? This is no time to commit to anything without enough qualifications to give you a back door the size of the gates of Rome. Can a prospective borrower/lessee claim it has third-party rights under the approval you sent the originator? Have you advertised rates and availability in a way that looks like an actual offer? Yes, lessors get sued on this basis. We saw one get burned very badly for an industry-wide fax!
Payment Deferrals.
Lots to say here:
1. Do you really want to agree to a deferral or is this really a forbearance situation: should the customer admit it is in default and you agree only to forbear exercising remedies if certain conditions are met?
2. If deferring rent or other payments, is it entirely clear when those payments are to be made? Is interest to accrue? Are you recalculating? If you are extending the term of a true lease, what about the residual assumption?
3. Who has the right to make the decision on deferrals, extensions of term and other modifications? If you are a vendor, is it worth buying back the deal to preserve the customer relationship (and if you do so, is it clear that it is not setting any kind of precedent or expectation for the future?). If you originated the deal, have you retained any rights with regard to these modifications? If you bought or funded a lease or loan, is it clear that you have the final say, and does your originator know that?
Double think all this if you did a blind assignment.
4. What internal procedures do you have to address requests for deferrals, amendments, etc? Can anyone in your shop pick up the phone and seem to promise to help the customer out? There have been cases in which promising consent and then withdrawing it was held to be "bad faith." Yes, your Lease or EFA says there can be no oral modifications. No, that is no more bulletproof than anything else in the document when the entire country is hurting and the bankruptcy judge is overworked.
5. If the customer files for bankruptcy/reorganization is the deferral still in effect? There are reasons why a court can hold a default based on a bankruptcy court filing unenforceable. You might be better off if the deferral itself says that any default restores the original payment schedule AND specifically that any bankruptcy-type action automatically reinstates the original payment plan.
Fraud, Yes, Fraud.
Are you prepared to be even more careful about fraud in the coming months? Stressed-out sales staff may be hungrier than ever and that "perfect" deal that comes in at 2:00 Friday and requires immediate action is even more likely to be coming from a hungry scammer or desperate customer who needs an unsecured loan on secured loan terms.
Need Info?
How are you feeling about your app-only portfolio? Do you need to request more information and do your documents permit it?
Employee Loyalty.
Confidentiality, client-stealing, participation in fraud...sorry to say, but these times require a re-appraisal of your staff. Whom do you trust? How much?
Even More Distasteful...
Consider your exposure to your funders and other business partners. Is there a deal you sold off that might not be what you thought it was and did you represent too much? If you are the buyer/funder, do you have the rights under your documentation you think you have, or did you add a "To Assignor's knowledge" or two because...the credit was stronger than it looks now. Be prepared for the bad phone call by re-reading your documents.
Default Procedures
. We hope each of you has been blessed with a write-off free portfolio. Even if you have merely done well in your credit analysis, you may be tested now. Do you have a policy in place for defaults? What letter goes out after 10 days? 30? 60? When do you involve a lawyer and do you know who to call? Do you know what you can and cannot do in a repossession/foreclosure?
Be Prepared...For Lots of Stuff.
Easy to say, right? The advice is to imagine the worst and ask yourself if you have policies in place to meet it. Can you respond to a need for immediate action against a customer, vendor or originator? Does your bank line have a performance standard? Do you need to rethink commitments to fund? to take on additional space, equipment or employees?
Of course, this is gloomy and 90% of it probably does not apply to you (at least we hope not), but while wishing you a safe and profitable summer, we must do our job and urge that you prepare for the Waterloos and Alamos we hope are not on your horizon. That is the way to be one of those who survives to look back on these days and be thankful you made it through.
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