Attorney David Lutz on Proactively Managing Risk in Commercial Lending

Commercial lenders operate in a landscape where documentation quality, collateral clarity, and compliance with the Uniform Commercial Code (UCC) directly affect enforceability. When loan files contain inconsistencies or when collateral is not perfected properly, lenders may face unexpected exposure—often surfacing only when a borrower defaults. With over 25 years representing financial institutions, David A. Lutz, J.D., MBA, emphasizes disciplined drafting and strategic planning as the cornerstones of effective risk reduction.

1. Prioritize Clear and Consistent Documentation

Strong loan relationships begin with meticulously drafted documents. To reduce ambiguity and strengthen enforceability, lenders should ensure every loan package includes:

• A detailed loan agreement outlining repayment terms, covenants, reporting duties, and default remedies.

• A security agreement that clearly identifies collateral and sets forth the borrower’s obligations.

• Precise collateral descriptions, especially when referencing UCC Article 9 collateral categories such as accounts, equipment, inventory, or general intangibles.

Lutz notes that many conflicts arise not from borrower intent, but from preventable drafting oversights. Investing time upfront often prevents costly disputes down the road.

2. Perfect Security Interests Using the Correct UCC Method

A lender’s rights are only as strong as its perfection steps. Under UCC Article 9:

• Filing a financing statement perfects most security interests.

• Possession is required for items like instruments, money, and tangible chattel paper.

• Control is mandatory for deposit accounts, investment property, and electronic chattel paper.

Priority battles frequently hinge on these distinctions. In Lutz’s experience, lenders often lose priority not because they lack a valid lien, but because their method of perfection did not match what Article 9 requires for that particular collateral.

3. Protect Cash Collateral with Deposit Account Control Agreements

Cash is a critical component of many collateral packages, and a Deposit Account Control Agreement (DACA) is essential when a borrower’s deposit accounts are significant. A DACA gives the secured lender “control,” meaning:

• Priority over competing security interests

• The right to instruct the bank after default

• Stronger protection in insolvency or receivership situations

Without a DACA, the lender may find itself subordinated to another creditor—or even to the depository bank itself.

4. Use Financial Covenants to Identify Trouble Early

Covenants serve as early-warning indicators and allow lenders to monitor borrower health before circumstances deteriorate. Common protective covenants include:

• Minimum liquidity or financial ratio requirements

• Debt-service coverage thresholds

• Restrictions on new borrowing

• Limits on asset transfers

• Regular reporting of financial statements or tax returns

These provisions give lenders timely visibility into a borrower’s operations, reducing the chances of sudden collateral impairment.

5. Plan Enforcement Strategies Before Default Occurs

Well-drafted loan documents should not only define rights but also outline enforcement options clearly. Lenders should be prepared to use:

• Repossession and disposition of personal property collateral

• Foreclosure remedies for real estate

• Appointment of a receiver to stabilize assets

• Setoff rights when accounts are held at the same institution

• Litigation or confession of judgment remedies (where permissible)

In Lutz’s view, lenders who understand their enforcement pathways early are better positioned to act decisively and preserve collateral value.

Conclusion

Managing commercial lending risk requires more than standardized forms. It takes proactive planning, technical precision, and a clear understanding of secured transactions. With decades of experience in banking law and UCC matters, Attorney David Lutz helps lenders structure transactions that safeguard their interests and strengthen enforceability across the entire credit relationship.