There are many instances in a commercial transaction where lenders can avoid triggering the applicability of consumer protection laws. The documentation of the commercial loan is an important step in this process. This is especially true when the borrower or a guarantor on the loan is an individual, and even more so when collateral for the commercial loan includes assets unrelated to the business, such as a personal residence.

Following are some simple steps a lender can take to ensure its loan documentation clearly reflects that the loan is a commercial loan:

1. When the borrower or guarantor is an individual, the loan documents that borrower or guarantor executes should, wherever possible, expressly indicate that the loan being provided is for business purposes and not for household or family use;
2. In any loan documents in which an individual is pledging collateral, there should be a clear explanation at the beginning of the document that the loan being secured by the collateral is for business purposes;
3. Guarantees executed by individuals should clearly state that the individual is guarantying a commercial loan and identify the commercial borrower. Furthermore, all collateral documentation securing a personal guarantee should contain a clear explanation of the consideration given for the grant of the collateral, which is the commercial loan to the business borrower; and
4. Finally, for every commercial loan, lenders should prepare a transaction-specific "statement of business purpose" to be included and executed as part of the loan document package. While the statement does not have to be as detailed as a settlement/closing statement, it should at least summarize all of the authorized business uses of the loan proceeds.   Additionally, this statement should be executed by all parties obligated under the loan (Borrowers, Co-Borrowers and Guarantors), so that all parties to the loan will be estopped from claiming that the loan was anything other than a business loan.

By following the steps set forth above in documenting commercial loans, lenders will make it much more clear to any court or any regulator who may be reviewing the loan file that the loan was made solely for business purposes, and not for any personal, household or consumer purpose, thus will minimizing the chance that the lender will be faulted by regulators or that debtors will be able to hamper enforcement activates by the lender by relying upon consumer protection laws.  

For more information on keeping consumer protection laws out of your commercial loan transactions, contact Janet at 215-542-7070, or jdery@starfieldsmith.com.