Question

Explain the importance of ensuring all loan documents are correct and include all necessary

provisions. What risks might a bank face if documentation is not executed or written properly?

Answer 1

It is highly essential for any bank/lending institution to ensure that all the loan documents are prepared in accordance with terms and conditions agreed upon with the buyer and applicable lending rules/regulations as provided by the relevant governing authority (which may be the central bank of the country or and any other financial authority regulated by the government). The loan documents should contain all the details of the borrower, mortgage (if any provided), period of loan, interest rate, nature of interest rate (fixed/flexible), loan covenants, repayment mode, installment amount, penalty for late/early payment, guarantor details and so on. It should be as specific as possible. The grammer of the document should be correct and there should be no spelling mistakes. Correctness of loan documents would help the lender in taking appropriate course of action if the borrower defaults in making the payments as and when they become due.

A loan document is the basis on which the courts/government bodies will grant decision in the favor of the bank/financial institution. In case, the loan documents are not correct, the bank faces the risk of default in the repayment of loan. The borrower might try to take advantage of mistakes/loopholes (in the loan documents) as such documents will not stand valid in the court of law. The lender might lose all of its money if the documentation is not proper. The bank might not even be able to claim any right on the property/mortgage on the basis of which the loan was granted in case the client files for bankruptcy.