Verifying the Collateral Base on a Revolver
by John Burnett and Dan Persfull, BOL Gurus Guru BIOS
Question: I would like help in locating any published guidelines regarding due diligence a bank should exercise with respect to periodic verification of the collateral base pledged for a revolving commercial loan.
Answer by Dan Persfull: I cannot find anything to support the periodic review of collateral. I may have just been using the wrong search terms on the FDIC web site.
However, from a Safety and Soundness standpoint it would seem logical that you periodically evaluate your collateral.
As an example, if your policy is X% of receivables, stock certificates, etc., and you do not periodically evaluate the value, you could very easily go over the allowable LTV. Your Safety and Soundness examiners are not going to like this. Especially if there is no discussion in the file addressing the exception to the LTV.
It should be a standard practice for any lender to periodically evaluate collateral that can fluctuate in value to insure that they are staying within the approved LTV.
Answer by John Burnett: If the borrowing base is heavily slanted toward accounts receivable and the business is seasonably cyclical, you might require a borrowing base certification quarterly. This could require a review of the accounts receivable by the borrower's CPA firm or an independent third party.
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