The Dangerous Allure of Form Loan Documents

Jerome A. Grossman

Mr. Grossman is Senior Counsel with Gresham Savage Nolan & Tilden, PC, working out of San Diego. His practice concentrates on commercial and real estate financings of all types, including real estate loans, secured and unsecured credit facilities, and asset-based financings and secured transactions. Among other professional activities, he is a Fellow of the American College of Commercial Finance Lawyers, has been a member of the Editorial Board of the Business Law News since October, 2013, and is currently serving as Editor-in-Chief.

Many smaller banks—and even some larger banks, when documenting smaller loans—use preprinted form documents. In some cases, the documents really are preprinted; in other cases, the documents are generated by a document production program that takes an information sheet containing pertinent facts about the loan parties and the terms of the loan and generates a completed set of loan documents. In either case, making changes to the documents can be a challenge. One purpose of the documents, of course, is to allow someone without a law degree, or even an informed understanding of the provisions of the documents themselves, nevertheless to generate a serviceable set of loan documents.

In an effort to provide a one-size-fits-all solution (and to reduce transaction costs by avoiding the involvement of lawyers), however, form documents often fail to adequately address real-life concerns. Even though the forms may be offered in a manner that does not contemplate negotiation, it is imperative that a prospective borrower read them before signing, and read all of them, not only those most tailored to the transaction in question, such as the loan agreement. In the author’s experience, form documents often include a boilerplate provision to the effect that "in the event of any conflict within the provisions of this document or between this document and any Related Document, and notwithstanding any other provision to the contrary in any of the foregoing, the provisions most favorable to Lender shall control."¹ A borrower might prefer to ferret out, and eliminate, any conflicts between documents.