Cross-Default Language
By: Stephen Rountree
In several client banks, we have noted a relatively recent change in various platform generated loan documents, particularly notes and security agreements, that appears to limit cross collateralization:
The cross-collateralization clause on any existing or future loan, but not including this Loan, is void and ineffective as to this Loan, including any extension or refinancing…
It appears the language is a result of various consumer compliance regulations. However, it would appear the language is appearing in both consumer and commercial loan documentation. We are encouraging banks to review their loan documentation. If the platform system has defaulted to the apparently limiting language, the bank should seek legal & compliance staff counsel before making changes. It would, however, appear the language is not needed (and is potentially detrimental) for commercial loans.
The cross-collateralization clause on any existing or future loan, but not including this Loan, is void and ineffective as to this Loan, including any extension or refinancing…
It appears the language is a result of various consumer compliance regulations. However, it would appear the language is appearing in both consumer and commercial loan documentation. We are encouraging banks to review their loan documentation. If the platform system has defaulted to the apparently limiting language, the bank should seek legal & compliance staff counsel before making changes. It would, however, appear the language is not needed (and is potentially detrimental) for commercial loans.