A default or “Event of Default” normally triggers the Bank’s right to begin foreclosure on its collateral and, if the loan is a revolving line of credit, stop the borrower’s ability to draw down additional funds. The Bank must look to the loan agreement or deed of trust in order to determine if a default or “Event of Default” has occurred. There are two types of defaults–monetary defaults and non-monetary defaults. Failure to pay as agreed is a monetary default. What else may constitute a default is a matter of agreement between the parties.
The Bank officer(s) monitoring the loan should become familiar with the covenants under the Bank’s loan agreement or deed of trust in order to effectively monitor the loan and avoid waving its rights. In non-standard loan documents the covenants are negotiated. When a loan is originated the Bank should study the Borrower’s business in order to determine what custom tailored covenants should be drafted into the loan agreement.
Careful attention should be given to determining whether a default has actually occurred and whether the Bank has by its actions or inaction waived any of its rights to proceed. The Bank’s counsel should be advised of all the facts and consulted as soon as possible after it is believed that a default has occurred.