Bank president Spencer had approved significant loan amounts to Bob for the purpose of developing a shopping center.Spencer was satisfied that the land collateralizing the shopping center loan was sufficient,and Spencer was not particularly concerned about that loan.Bob,however,requested an additional loan for the purpose of starting a temporary employee agency.Bob offered to collateralize that loan with his office equipment,but Spencer was uneasy that such collateral was insufficient.If Spencer decides to go forward with the loan involving the temporary employee agency,which of the following is true regarding his options?

Question

Quizplus · Accepted Answer

A cross-default provision would allow Spencer to declare a default on the temporary employee agency loan if Bob defaults on any of his other loans with the bank. A cross-collateralization provision would allow Spencer to use the collateral securing the shopping center loan to secure the temporary employee agency loan. While Article 9 does restrict the enforceability of some cross-collateralization provisions, it still allows them under certain circumstances, such as when the collateral securing the original loan secures the new loan as well. Therefore, Spencer should request both a cross-default provision and a cross-collateralization provision to protect the bank's interests. Alternatively, Spencer could also request a guarantee from a solvent person or entity to further secure the loan.

Bank President Spencer Had Approved Significant Loan Amounts to Bob