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Rising Defaults: Lenders Beware of Pitfalls When Working with Customers!

Date: May 21, 2020 @ 07:00 AM
Filed Under: Legal

Defaults will increase due to the impact of COVID-19 on our economy. The equipment lease and finance industry has enjoyed historically low defaults for over a decade. Today, you, your employees and your need to revisit skills and protocols that have been “dusty” or dormant since the credit crisis of 2008.

Modifying payment terms, providing accommodations and interacting with your customers requires careful attention. Here is a refresher focusing on three key pitfalls when seeking to protect your business interests. With collections, workouts and special accommodations on the rise, the first goal is clear: Collect your payments! Additionally, where possible, provide your customers with reasonable accommodations that enable their business to continue operating so they will continue to make payments in the future.

Take the following “Smart Actions” to proactively create advantages for your company.

Smart Action 1: Review the Underlying Transaction Documents

A company’s failure to review the underlying documents supporting the transaction before making accommodations is the most overlooked pitfall and common mistake in a high-default economy. Often times, the documents are not reviewed until the matter is sent to legal for enforcement of the lender’s rights. This oversight will often come back to haunt you. We strongly recommend reviewing the file before any accommodation is provided to the customer.
The reason is simple; it is an opportunity to correct any deficiencies and ambiguities concerning the transaction before, and in conjunction with, any accommodations being offered to your customers. Examples include changes in equipment, payment dates, payment terms, serial numbers and other missing or incomplete items. This is a “golden opportunity” for lenders to rectify any potential issues that may surface and hurt them down the road.

Fact: Smart lenders utilize customer accommodations as a strategy tool primarily to correct deficiencies in the underlying documentation. Paying attention to this detail synchronizes your business with your documentation. Be the empowered lender, better prepared to service your customers while protecting your interests.

Smart Action 2: Document & Have Customers Sign All Accommodations (Electronically or by Ink)

A. Modification Agreements
All accommodations provided to the customer must be documented. A proactive lender will have a standard form to memorialize any changes agreed to by the customer. These forms are of highest value when adaptable to address any deficiencies in the underlying transactions or simply to confirm certain information, such as: payments remaining, end-of-term date and acceptance of equipment.

B. Forbearance Agreements
Forbearance agreements differ from amendments or modifications in that forbearance agreements generally provide for representations and agreements from the customer in exchange for the lender’s agreement not to enforce its rights for a set period of time. They also often include acknowledgment by the customer of sums due, amounts remaining, admission of default, waivers of claims and a release from the customer confirming that the lender has fulfilled its obligations under the underlying finance agreements. Forbearance agreements are generally viewed as a more formal document which may be reviewed by legal counsel for both the lender and the customer.

The justification for entering into well-drafted modifications and/or forbearance agreements is to provide the accommodation and reduce the risk of “problems” arising from the lender’s enforcement of its rights in the underlying transaction documents. In most jurisdictions, these enforcement actions are commenced in state or federal court. The goal for the lender is to start the lawsuit and, if the case is not quickly resolved, move for summary judgment. The summary judgement motion is designed to provide the lender with the leverage to strike either an acceptable settlement or obtain summary judgment against the customer and guarantor.

C. Electronic Signature Protocols
Electronic signature protocols should be in place to facilitate obtaining the customer’s agreement to any modification or forbearance agreement. Electronic signatures are preferred (when set up properly) because they provide a level of authentication (i.e. how do you know who actually signed your document?) If electronic signatures are not possible, at the very least, obtain an ink signature and a driver’s license. Another common pitfall to avoid is having accommodations accepted by an exchange of emails. Unfortunately, an exchange of emails is frequently susceptible to more than one meaning, giving rise to potential problems. Use standard forms and have them properly signed.

Smart Action 3: Utilize & Review Confessions of Judgement

In certain circumstances, lenders may consider using a Confession of Judgment to secure the obligations being restructured. Do not fall prey to this article’s last pitfall. Review the applicable Confession of Judgment laws with legal counsel. These laws differ from state to state and dictate when and how Confessions of Judgment can be entered against the borrower and guarantor. Confessions of Judgment usually have a limited term of use.

For example, in New York, a Confession of Judgment is only valid for three years from the date it is executed. To the extent your Confessions of Judgment must remain in place for a longer period of time, particularly if you are extending the term, properly drafted agreements can address and resolve this issue. In addition, New York passed a law in August 2019 mandating that Confessions of Judgment may only be filed in New York against residents of the State of the New York. Shockingly, this new law also applies retroactively to any Confessions of Judgment executed in the past. This creates potential problems for lenders with preexisting Confessions of Judgment. Therefore, if you have a Confession of Judgment in New York that may be unenforceable and this customer is seeking an accommodation, your business now has a perfect opportunity to address and resolve that problem.


In the upcoming months, courts will be inundated with litigations resulting from the economic downturn. This increase, combined with the fact that many courts have closed for traditional commercial disputes, strongly indicates that there will be delays in the court system. As a result, striking agreements that are well-documented and secured by the entry of judgment are not only cost effective, they are also an efficient way in which to address accounts in default.

This article represents a small list of the topics that lenders must consider when working through a high-default economy. Keep these pitfalls and advantages in the forefront of your collection strategies so that you can both maximize your opportunities for recovery and minimize the risks of known and unknown problems by:

  1. Reviewing the underlying documents to identify and resolve any unexpected issues;
  2. Documenting accommodations and having them properly executed; avoiding email acceptance; and
  3. Using Confessions of Judgement with awareness when appropriate and possible.

Educate your team on these issues and set corporate policies and procedures for handling these now common and sometimes tricky scenarios. The quality of your documentation and your overall strategy will directly improve and facilitate your collections. Seek proper legal counsel as your “safety net” to empower and guide you and your company to success.

Robert S. Cohen, Esq.
Partner | Moritt Hock & Hamroff LLP
Bob Cohen is a partner of Moritt Hock & Hamroff LLP where he Co-Chairs the firm's Litigation practice group and serves as Chair of its Equipment Leasing and Transportation Finance group. With over 30 years of experience in all facets of the equipment leasing and asset-based lending industries, Cohen devotes his practice to commercial litigation, creditors' rights, corporate transactions, bankruptcy and cybersecurity related matters. He has particular experience in the documentation of financial transactions, electronic signatures, enforcement of equipment leases and secured loans, as well as the negotiation of workouts and resolutions.

As a recognized leader in his field, Cohen serves as a frequent speaker and author on various topics relating to equipment leasing and finance, electronic signatures and cybersecurity, including actively serving as a regular speaker and moderator at annual and bi-annual conferences for the Equipment and Leasing Finance Association (ELFA) and National Equipment Finance Association (NEFA).

Cohen is a member of ELFA where he serves on its Women's Council Committee and previously served on its Credit and Collections Management Committee and Legal Committee. He is also a member of NEFA where he serves on its Legal Committee and previously served on its Education Committee. In addition to his professional endeavors, he also dedicates his time to the Special Olympics of New York, where he serves on its Board of Directors and Executive Committee and serves as a Chair of its Annual Gold Coast Tour for Champions Golf Outing. Cohen has also worked with high school students through the Herricks Chapter of DECA (Distributive Education Clubs of America), as well as with students from the Island Trees School District where he served as a mentor on career and college choices.
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