2012-03-09, 14:27

Fannie Mae New Loan Documents - Issues Checklist

By: Pamela V. Rothenberg, Esq.
After a meaningful hiatus (one that essentially paralleled the same time period in the multifamily marketplace where there was little to no transactional activity), we are back in the multifamily blogging business. Our first topic, one we are confident is near and dear to almost every multifamily real estate owner, is Fannie Mae, and more particularly the new set of form multifamily loan documents introduced by Fannie Mae in 2011. These new documents reflect a major overhaul of the previous Fannie Mae loan documents in both form and substance and they include several additional provisions that materially expand the risks of recourse exposure to borrowers and loan guarantors. We have developed a list of 10 key issues that borrowers should focus on as they evaluate the new Fannie Mae loan documents. Here are the first 2 items from our checklist:

1. Full Personal Liability for Failure to Comply with Single Asset Entity Requirements. Under the new Loan Agreement, the borrower and any guarantor are personally liable to the Lender for repayment of the entire indebtedness if the borrower fails to comply with the single asset requirements of the Loan. This is broader than the previous non-recourse carve out that was limited to loss or damage suffered by Fannie Mae, but is fairly customary for a non-recourse loan. What is unusual, however, is the lack of clarity about exactly what comprises these single asset entity requirements. The recourse provision does not reference a particular section of the Loan Agreement or any other loan document, so the borrower is left guessing about what failure might trigger this major liability. Also, there is no apparent notice or cure period before full personal liability is triggered, so the borrower is not even afforded the opportunity to fix a loan document violation it may not even clearly understand it has engaged in.

2. Full Personal Liability for Non-Willful Material Misrepresentation. Under the Loan Agreement, the borrower and any guarantor are personally liable to the Lender for repayment of the entire indebtedness if the borrower, any guarantor, any key principal, or any officer, director, or owner of those parties commits fraud or material misrepresentation in connection with the original underwriting of the loan or in complying with the loan’s on-going
reporting requirements. In the old Fannie Mae loan documents, the borrower and any guarantor were only liable for the loss or damage suffered by the lender due to fraud or material misrepresentation; these infractions did not trigger full personal liability for the indebtedness. Again, this new provision is broader than a traditional a non-recourse loan.

Stay tuned for the remaining items from our list and please weigh in if you have identified other areas of concern in the new Fannie Mae Loan Documents.

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