Similar to identity theft, this type of fraud happens when an unauthorized individual gain access through online banking applications, capturing the account information to create and write bad checks.
An adverse action notice is a document sent to a loan applicant stating a bank’s rationale for denying a loan. It may also contain a counteroffer, such as a lesser amount or a request for an approved co-borrower.
The term “aging exceptions” refers to a group of critical exceptions that have not been resolved within a reasonable amount of time.
Altered check fraud occurs when a fraudster changes the amounts and Payee from a stolen check.
Audit and exam prep is a process that financial institutions go through in order to adequately prepare for upcoming audits and exams.
An authorized signer form is a document that allows an account holder to grant a range of clearance levels to individuals to perform certain functions within a bank account.

Debt covenants, also known as financial covenants or banking covenants, are conditions written into commercial loan agreements that bind both the bank or credit union, and borrower, to the terms. These constraints vary by industry and collateral type.

Why Are Debt Covenants Important?

Debt covenants are designed to shield the lending institution against risk and, simultaneously, to help protect the borrower from loan default. They may outline both what a customer or member must do (known as a positive debt covenant) as well as actions that a borrower cannot make (negative debt covenants). As such, a company should take these specifications into account when formulating plans to remain compliant with its loan agreement.

Debt Covenant Examples

Examples of positive debt covenants include:

  • Allowing a bank or credit union to take inventory of stock/assets on hand: In the case of a cattle loan, the borrower may be asked to permit the lending bank or credit union to count cattle and evaluate current cash value. Similarly, a financial institution may require car dealerships to submit to monthly inventory inspections. An institution may also mandate that a dealer pay the loan amount on a car sold within a set number of days. (Otherwise, the dealership may use the proceeds instead to purchase more cars, which may elevate the lender’s risk of being repaid if the auto market takes a downturn.)
  • Providing financials: Lenders might require a business to provide annual accounts receivables reports or submit yearly tax returns.

Examples of negative debt covenants include:

  • Prohibiting additional borrowing: A loan agreement may stipulate that the borrower cannot take out subsequent loans until the total debt has been repaid.
  • Not exceeding loan to income ratios: To alleviate undue exposure to default, a financial institution may include a debt covenant stating that the loan amount will not comprise more than a certain percentage of a company’s accounts receivables. For example, let’s assume that a bank has agreed to a line of credit up to 80 percent of a business’s accounts receivables. However, a financial statement submitted by the company shows that the loan is at 85 percent of the organization’s accounts receivables. At that point, the bank is permitted to require the borrower to pay down a specific amount, bringing the loan back into compliance.

Debt Covenant Resources

For more commercial lending best practices and tools, be sure to check out our extensive resource library with free spreadsheets, whitepapers, and eBooks.

Searching for more banking definitions? Check out our banking definitions page.

Explore more resources

Remote Deposit Capture (RDC) eBook

Remote deposit capture (RDC) ranks as a significant feature of modern banking. In fact, a San Global Research industry report projects the RDC market to grow at a compounded rate of 5.8% through 2032. As the banking industry continues its digital...
Read More »

AccuAccount: Solution Overview Brochure

Track and manage every loan document in one system and streamline loan management from application through servicing with our core-integrated software platform. From loan application automation, to drag-and-drop document imaging, to document tracking, and five...
Read More »

Related articles

Wednesday 17 April 2024

Why Should Credit Analysts Use AccuAccount?

Credit analysts need reliable access to credit documentation in order to do their jobs well, including account holder financial health data. Although it is frequently…

Learn More »

Tuesday 9 April 2024

Advocating for Streamlined Document Management at Your Financial Institution

Implementing a system like AccuAccount can enable numerous efficiencies for commercial lending teams. Expedited access to loan documents, reduced paper, enhanced exception management and reporting…

Learn More »

Monday 1 April 2024

[Playbook] Loan Management: Efficiently Manage Notices

Although notices serve as an essential form of communication with account holders, managing notices can involve considerable administrative work for loan assistants, insurance clerks, and…

Learn More »

Tuesday 26 March 2024

Check Fraud: Common Examples and How to Stay Ahead of the Fraudsters

Check fraud is the most prevalent type of fraud at financial institutions, costing billions of dollars in losses annually, while impacting millions of account holders…

Learn More »

Wednesday 20 March 2024

Accelerating Efficiency by Leveraging Alogent’s Full Suite of Process Automation Solutions

Why should your bank or credit union consider implementing FASTdocs alongside AccuAccount? For financial institutions looking to retire legacy systems, consolidate vendors, and reduce paper-based…

Learn More »

Thursday 14 March 2024

Show Me the Money: Best Practices to Accelerate Funds Availability through Check Deposits

The Financial Brand recently published an article highlighting how faster access to funds could reshape the battle for deposits. Would you implement new processes if…

Learn More »

Tuesday 12 March 2024

With Delinquencies on the Rise, It’s Time to Rethink Collateral Perfection & Risk Management

Delinquent loans seem to be on the rise at financial institutions across the United States. Such trends may indicate macroeconomic difficulties, but they also pose…

Learn More »

Tuesday 5 March 2024

3 Loan Management Workflows to Help You Save Time & Drive Efficiency

Automating a single task may not seem like a big savings in the grand scheme of things. But, what if that task occurred multiple times…

Learn More »