Loan agreements and stipulations for commercial documents

The following will highlight important stipulations of different commercial documents mentioned. These stipulations will give the reader an overview on how financing institutions (such as banks) shape our developing economy by providing loan accommodation to applicants in need of financial assistance.

I. Promissory Note:

1. Principal amount of the loan. However, except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to a corporation shall at no time exceed twenty percent (20%) of the net worth of such bank.

2. Amount of interest. The amount of the interest that will be charged will be based on the transfer pool rate after considering the cost of money and interest expenses, giving both the lender and the borrower a win-win situation. Based on the current banking practice, the amount of interest would range from 9% to 13% depending on the inflation rates, transfer pool rates and cost of money as determined by the Treasury Department.

3. Authority given to the bank (lender) to set-off from the borrower’s account any existing deposits which he may have in the bank (lender), in order to pay the principal loan in case of default.

4. Amount of attorney’s fees and penalty charges in case the borrower defaults in payment of the principal obligation. This stipulation is intended to protect the interest of the bank (lender) against defaulting corporations.

II. Credit Line Agreement:


1. A voluntary undertaking that the borrower is desirous to obtain credit accommodation from the lender, freely accepting the terms and conditions set forth in the agreement; and that the lender is willing to extend such credit accommodation.

2. Principal amount of the credit line agreement;

3. The kind of credit line that would fit the needs of the borrower. Under the LC/TR Line (Letter of Credit/Trust Receipt) Line, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as security of the loan. A trust receipt is a “security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. This is a requirement in case the need of the borrower involves importation of goods. However, this credit line may also be utilized in the export of goods. Of course, the bank gets minimal commission for opening a credit line from the bank and additional commission on the remittances (in case the credit line involves importation of goods). A trust receipt is a requirement in the importation of goods. In the export of goods, the bank may agree on a simple loan agreement with a letter of credit.

4. Collaterals, which may involve bank deposits, chattels or real property;

5. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;

6. The term of the credit line and the interest to be charged for opening a credit line;

7. An authority in favor of the bank to sell properties which were utilized as collaterals, to apply the proceeds thereof to the due and demandable principal loan amount, interest and charges;

8. List of subsidiaries and affiliates of the client which will benefit from the credit line, with an additional stipulation that all the subsidiaries and affiliates will also be solidarily liable with the client;

9. Effectivity of service of correspondences to the client/borrower;

10. A stipulation that the books of the bank concerning the principal amount and computation of the interest shall be conclusive;

11. Attorney’s fees, penalty charges and costs of the suit, in case the bank is compelled to hire the services of counsel to litigate the collection of the principal amount; and

12. Venue in case of litigation.

III. Real Estate Mortgage:

1. The parties in the real estate mortgage;

2. Principal amount of the credit accommodation;

3. Description and list of the real properties subject of the mortgage;

4. A stipulation that the mortgage will also bind the successors in interest of the mortgagor/borrower;

5. A voluntary undertaking that the real property would stand as a security to pay the principal amount of the loan;

6. Payment of expenses in connection with the mortgage, such as the documentary stamp tax, cancellation of the mortgage, notarial fee and taxes assessed on the real property;

7. While the property is in the possession of the mortgagor, an undertaking that all expenses in the repair of the improvements shall be borne by the mortgagor;

8. In case of insolvency by the mortgagor/borrower, an automatic appointment of the bank as receiver to take charge of the property subject of the mortgage;

9. In case of breach of any of the conditions of the mortgage, an automatic appointment of the bank as Attorney-in-Fact to do acts of administration and acts of strict dominion over the mortgaged property;

10. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;

11. Penalty interests, attorney’s fees, and other expenses relative to the foreclosure of the real property;

12. A prohibition that the mortgaged property will not be encumbered, leased and mortgaged without the written consent of the mortgagor;

13. Possibility of changes in the interest rates and bank charges with advance notice to the mortgagor/borrower;

14. A stipulation of the mortgagor’s waiver under Article 13 of Rule 39 of the Rules of Court;

15. A stipulation that the mortgaged property is clean from all prior liens and encumbrances;

16. Signature of the parties and their respective witnesses to the mortgaged contract;

17. The mortgage must be notarized and annotated in the Registry where the real property is located.

III. Chattel Mortgage:

1. Same Stipulations as in the real estate mortgage

2. Affidavit of Good faith - It is an oath wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is just and valid obligation and one not entered into for the purpose of fraud.”

IV. Surety Agreement:
It is customary in the banking institution that at least 51% of the stockholders acquiring a controlling interest in the corporation must sign the surety agreement. In the surety agreement, the signatories will be solidarily liable with the corporation with respect to the credit line granted in favor of the corporation. It is a common banking practice to require the JSS (“Joint and Solidary Signature”) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this: (1) In case of default, the creditor’s recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety; (2) Such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

Some banks will grant a continuing suretyship agreement with Corporations whom the bank considers as a valued client. The criteria for the grant of the continuing suretyship agreement will be based on the following:
1. Number of years in the business
2. Status in the industry
3. Satisfactory credit.

The continuing surety agreement credit line program will allow corporations to avail of the credit line even before the 6-month waiting period.

V. Trust Receipt:

1. The description of the merchandise with reference to the bill of lading

2. The term of the trust receipt

3. An undertaking of the entrustee that he merely holds the merchandise subject of the trust receipt in trust from the entrustor (bank) and that the entrustee is authorized to sell the goods and apply the proceeds for the full payment of his liability with the bank.

VI. Letter of Credit:

1. A notice that the bank has granted a credit line in favor of the corporation/borrower.

2. Percentage commission for opening a credit line plus commission for the remittances, if any. In the banking sector, this is called the compensating business with the client.