Debt finance

Lending

The amount of regulation a lender faces will depend on the type of product (consumer or commercial) and the type of collateral securing the product (real estate or non-real estate). Consumer loans are more heavily regulated than commercial loans, with consumer loans secured by real estate being the most heavily regulated on both the federal and state level and unsecured commercial loans being the least regulated. That being said, it is unlikely for any credit product offered in the US to be completely unregulated in all states and jurisdictions.

Below are some general restrictions on lending.

Prohibition on unsafe and unsound banking practices

The Federal Deposit Insurance Act (FDI Act) prohibits federally and state-chartered banks and thrift institutions from engaging in unsafe and unsound banking practices, including those relating to banks’ lending activities. Regulators can impose corrective measures, including cease-and-desist orders or termination of the bank’s deposit insurance coverage for a bank engaging in any unsafe or unsound banking practices.

Capping of interest rates

State usury laws, which may apply to both federally and state-chartered banks, impose limitations on the interest rates that banks may charge for consumer and commercial loans.

Limits on loans to one borrower

Federal law caps the amount of credit that national banks are permitted to extend to one borrower or to a group of related borrowers, subject to specific exceptions which are tailored to the nature and type of loan. Some states have comparable limitations.

Restrictions on lending to affiliates

Federal law restricts lending and other extensions of credit by a bank directly or indirectly to its affiliates by setting quantitative limitations on a bank’s transactions with any single affiliate, and with all affiliates combined, and by setting forth collateral requirements for certain bank transactions with affiliates, among other restrictions and limitations.

Restrictions on lending to insiders

Loan terms to insiders are closely regulated and some transactions can be prohibited entirely. Additional requirements for loans to executive officers and directors exist.

Anti-tying rules

The Bank Holding Company Act (BHC Act) prohibits banks from requiring their customers to obtain any product or service, including non-bank products or services, as a condition to the extension of credit. Certain safe harbors exist.

Prohibitions on discrimination

The Equal Credit Opportunity Act (ECOA) applies to all creditors and prohibits a lender from discriminating on the basis of a protected characteristic (race, color, religion, national origin, sex, marital status, age, the receipt of public assistance).

Below are some consumer-specific restrictions on lending.

Consumer lending disclosure obligations

Truth in Lending Act (TILA) and Regulation Z require certain disclosures to be made when providing consumer credit. The ECOA requires notification disclosures to be provided to denied applicants of consumer credit.

Prohibitions on unfair, deceptive, or abusive acts or practices (UDAAPs) in consumer lending

The Dodd-Frank Act prohibits UDAAPs. For generic examples of what may be considered a UDAAP please consider the Consumer Financial Protection Bureau bulletin dated 10 July 2013.

Additional prohibitions on discrimination

The Fair Housing Act prohibits discrimination on the basis of race, color, national origin, religion, sex, familial status, and handicap in all aspects of 'residential real estate related transactions, including but not limited to: (1) making loans to buy, build, repair, or improve a dwelling; (2) purchasing real estate loans; (3) selling, brokering or appraising residential real estate; or (4) selling or renting a dwelling.'

Residential mortgage requirements

Residential mortgage origination, selling/purchasing, and servicing is closely regulated on both a federal and state level. Numerous restrictions, standards, and disclosure requirements specific to residential mortgages exist in this highly regulated space.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Lending in the US can be structured in a number of different ways to include a variety of features depending on the commercial needs of
the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility), a club basis (a small group of multiple lenders each providing parts of the overall facility) or syndicated basis (a larger group of multiple lenders each providing parts of the overall facility).

Loans can be secured or unsecured. Assets of a debtor can have multiple security interests attached thereto and such security interests are usually allocated among secured parties in respect of priority and other similar rights pursuant to an intercreditor agreement. A first-lien/second-lien loan can be combined into one unitranche loan. In this structure, the lenders enter into an agreement among lenders outside of the credit agreement with the borrower.

Club and syndicated facilities by their nature involve more parties (such as agents which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, e.g. acquisition financing, dividend recapitalizations, working capital loans or letter of credit facilities.

Loan durations

The duration of a loan may include:

• a term loan, provided for an agreed period of time but with a short availability period;
• a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
• a swingline loan, provided on a short-term basis to solve short-term cash flow issues; or
• a bridge loan, provided for up to a year and intended to bridge the gap until another financing source is available.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security – common types.

Loan commitment

Lenders are obligated to provide the loan if certain conditions are fulfilled.

A credit agreement may also include an uncommitted incremental facility or an accordion, which allow the borrower to increase the commitments of the existing lenders or bring new lenders into the facility. The lenders do not commit upfront to providing additional loans.

Loan repayment

Typically, a term loan is repayable on an amortizing basis (in instalments over the life of the loan) or is repayable in full at maturity. Revolving loans may be reborrowed and repaid throughout the life of the facility.

Federal agencies, such as the US Consumer Financial Protection Bureau, regulate lending to consumers and in the context of residential real estate loans. Lenders in the context of commercial real estate loans should also consider zoning laws and environmental regulations.

For more information, see Lending and borrowing – restrictions.

Yes, both principles are recognized as a matter of US law.

For instance, it is common to appoint an agent in connection with a loan or a trustee in connection with a bond. The agent or trustee, as applicable, may act on behalf of the lenders or secured parties or hold rights and other assets on for such lenders or secured parties.

Generally

Federal and state laws prohibit lenders from charging an unreasonably high interest rate or other unreasonable fees. Lenders who violate usury laws may incur civil or criminal penalties.

Standard form documentation

Credit agreements in the US are typically based on the agent’s or lead lender’s standard form. This may incorporate language recommended by the Loan Syndications and Trading Association, but there is no standard form documentation.

There are no other notable risks or issues around borrowing to be raised further to those outlined in preceding sections.