OCR Loan Documents: Notes, Guaranties and Security Papers

To OCR loan documents, inventory the scanned set, convert the promissory note first and proofread every figure in it against the image, then convert the loan agreement, the security documents and each guaranty as separate files. Finish with the amendments, and with any allonge or assignment that shows who holds the note today.

What is in a scanned loan document set?

A scanned loan document set holds the promise to pay, the agreement around it, the papers that give the lender collateral, and the promises of anyone else who stands behind the debt. The names vary by lender and by deal, so identify each document from its own title and opening paragraph.

The table gives the members as the terms are commonly used. Confirm each against the document in your own file.

The financing statement has minimum contents set by statute. Under section 9-502(a) of the Uniform Commercial Code, and subject to its subsection (b) on real-property-related filings, a financing statement is sufficient only if it "provides the name of the debtor", "provides the name of the secured party or a representative of the secured party" and "indicates the collateral covered by the financing statement". That is the uniform text. The version a state enacted may differ, so read the one that applies to your filing. For conversion it tells you which three fields on that form to proofread first.

A loan agreement may also require the borrower to carry insurance and deliver proof of it, so certificates and policies can turn up in the same box. Reading a policy as a contract is its own job, covered in the post on OCR for an insurance policy.

A mortgage or deed of trust may carry a notary acknowledgment, and what a scan keeps of a notary's seal is covered in the post on a scanned notarized document.

Why does a promissory note need closer proofreading than the loan agreement?

A promissory note packs the whole money obligation into a few pages: principal, interest rate, payment amount, payment dates and maturity. Almost every line holds a figure, and a single misread digit changes what is owed. In the long loan agreement, a misread letter tends to leave a non-word that a reader notices.

Compare the two on a fictional loan from Meridian Vale Bank to Ashgrove Millworks, Inc.:

Recognition has no way to know that "7.25%" should not be "7.75%". Both are valid. The reasons digits and decimal points go wrong are explained in the post on why OCR gets numbers wrong. For a note, the practical answer is a field-by-field read against the page:

• Principal in words and in figures. "ONE MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($1,250,000.00)". The two forms should agree in the image and in the text. If they disagree in the image itself, report that to the lawyer and do not correct it.
• Interest rate, including any index and margin, any floor, and the default rate.
• Day-count wording, such as a 360-day year. It sits in one short phrase.
• Payment amount and frequency.
• First payment date and maturity date.
• Late charge: the percentage and the number of days.
• Prepayment terms.
• The maker's exact name and the signer's title.
• The date of the note and the loan number in the header or footer.

Then test the figures against each other. If the note states a principal, a rate, a term and a level monthly payment, compute the payment in a spreadsheet. A result that differs from the stated payment by more than rounding means a figure was misread or the note has terms you have not found yet, such as a balloon payment. Go back to the image.

Schema Law does not mark a passage as uncertain, and you should assume the same of any converted file unless its maker says otherwise, so the read against the image is the control.

After you confirm the promissory note, open the security documents and read the collateral description on the page image. Note the borrower, the lender, and any loan covenant that states a financial test, with its page. If the security agreement speaks of perfection or a security interest, copy the filing data you can see. Check a letter of credit in the same set for its number, amount, and expiry.

Converting a loan file from the promissory note outward

Convert the note first, then the loan agreement, then the security documents and guaranties, then the amendments in date order. Every other document in the file refers back to the note by its date, amount and parties, so once the note's details are confirmed you have a key for checking everything else.

1. Inventory the set. One row per document: title, date, parties, pages, signed or not, recorded or not. Do this from the page images before any conversion.
2. Separate combined scans. A closing set scanned as one PDF should be split at document boundaries so each instrument is its own file. Keep an allonge with its note.
3. Convert the note and proofread it in full. Four pages can be read word for word. Record the confirmed principal, date, maker and lender.
4. Convert the loan agreement. Read the definitions of the loan, the note and the "Loan Documents" against the image. That last definition is a list, and it works as a second inventory: every document it names should be in your set.
5. Convert the security agreement and any mortgage or deed of trust. Check that each one describes the secured debt by the same principal, date and parties you recorded in step 3.
6. Convert each guaranty. Check the guarantor's name in the opening paragraph against the signature block, and whether the guaranty names the same note.
7. Convert the filings. Financing statements and recorded instruments carry file numbers and recording data in stamps and boxes. Read those from the image.
8. Convert amendments and modifications in date order. For each, note the section it changes. If a modification restates the rate or maturity, the note's original figures are now history, and your summary must say so.
9. Run cross-checks across the converted set.

The cross-checks for step 9:

If you use Schema Law, each document goes up as its own PDF, PNG or JPEG of up to 20 MB, and the page allowances for each plan are on the pricing page. Count pages from the inventory first; a 58-page credit agreement with schedules will not fit the Free plan's three pages per document.

Where the loan financed a purchase of property or a business, the purchase contract belongs in the same matter file. The post on a scanned purchase agreement covers that document.

Covenant and reporting deadlines inside a scanned credit agreement

Recurring obligations in a credit agreement sit in the covenant sections and are written as intervals: "within 45 days after the end of each fiscal quarter". Search the converted text for the interval words, list each obligation with its section number, and read the number of days against the image before it goes in a calendar.

Search terms that surface recurring duties:

• "within" followed by a number, and "no later than";
• "each fiscal quarter", "each fiscal year", "monthly", "annually";
• "deliver", "furnish", "provide to Lender";
• "compliance certificate", "financial statements", "borrowing base";
• "maintain", "not permit", "not less than", "not greater than";
• "notice" near "default", "litigation" or "change".

Build the result as a table. A fictional extract from the Ashgrove credit agreement:

Three points need the image and not the text.

The number of days. 45 and 46, 90 and 30, 120 and 180 are all plausible. A covenant calendar built on a misread interval produces a late delivery.

Ratios. "1.25 to 1.00" depends on a decimal point. A ratio read as "125 to 1.00" is plainly wrong, but "1.15" for "1.25" is not.

Definitions behind the test. The covenant says "Debt Service Coverage Ratio"; the arithmetic is in the definitions section thirty pages away. Record the page of the definition beside the covenant.

Turning an interval into actual dates, with business-day and month-end rules, is owned by the post on which date terms in a scanned contract drive a deadline. And when an amendment changes a covenant level, update the table and keep the old row marked as superseded, with the amendment's date.

Allonges, endorsements and assignments attached to a scanned note

The pages after a note's signature can show who holds it now. As the terms are commonly used, an endorsement is a signature, with or without a named payee, on the note or on a sheet attached to it, and that attached sheet is an allonge. An assignment is a separate document transferring the note, the security or both.

The attached sheet matters because of how the commercial code treats it. Section 3-204(a) of the Uniform Commercial Code says: "For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument." Whether your state enacted that sentence unchanged, and whether a given sheet counts as affixed, are legal questions. The scanning question is simpler and comes first: does your file show the sheet at all, and in the right place?

What to capture and check:

1. Scan the back of every page of the note. An endorsement stamped on the reverse of the signature page is lost in a single-sided scan. If you did not make the scan, ask whoever holds the paper whether the backs are blank.
2. Keep the allonge with the note. Do not split it into its own file. Record its position: "page 5 of 5, following the signature page".
3. Note how it was attached, if you can see the paper: stapled, clipped or loose. A scan cannot show this, so write it in the inventory on the day the paper is in front of you.
4. Transcribe each endorsement by hand. They are short enough to type out, and typing forces you to look at every word under the signature.
5. List them in order.

A fictional chain for the Ashgrove note:

Endorsement stamps are a hard case for recognition: small type, ink of uneven density, a signature written through the words, and sometimes a second stamp over the first. The post on whether OCR can read stamps over text explains what goes wrong. Treat the converted text of a stamp as a draft and the image as the record.

A blank in an endorsement, as in the second row, is content. Transcribe it as a blank. Do not let a converted file close the gap or drop the line, and do not fill it.

Assignments are ordinary documents and convert like any other, but check three fields against the image: the assignor, the assignee, and the description of what is assigned, including any recording reference to the mortgage. Loan files that have reached foreclosure raise further questions about the chain, covered in the post on OCR for foreclosure documents.

Can a scan of a promissory note stand in for the original note?

Do not assume it can. For a note that is a negotiable instrument, the commercial code has a specific section on enforcing an instrument that is lost, destroyed or stolen, and it sets conditions. A scan can help prove what the note said. Whether that is enough is a question for the lawyer under your state's law.

The uniform text is section 3-309 of the Uniform Commercial Code. Subsection (a) lists when "a person not in possession of an instrument is entitled to enforce the instrument". One of its conditions, in (a)(3), is that:

the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

Subsection (b) then says what that person has to show:

A person seeking enforcement of an instrument under subsection (a) must prove the terms of the instrument and the person's right to enforce the instrument.

It adds that the court "may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument."

Three cautions before anyone relies on those words.

• This is the uniform text. The version your state enacted may differ. Read the statute of the state whose law governs the note.
• It applies to instruments. Whether a particular note is a negotiable instrument under the code is itself a legal question.
• Nothing here is legal advice. The section is quoted so you know why the paper matters and what a scan may be asked to prove.

What this means for the person handling the documents is concrete. "Prove the terms of the instrument" is a task a good scan supports and a poor one does not. So:

1. Find out where the original note is today and write it in the inventory: with the lender's custodian, in a vault, with counsel, unknown.
2. Never discard or mark the paper on the strength of having scanned it.
3. Make the scan a faithful picture. Every page, both sides, in color or grayscale so that ink, stamps and corrections are visible.
4. Keep the scan as made. The searchable copy and the Word export are working files derived from it.
5. Record who scanned it, when, and from what: the original, or a copy of a copy.

Other kinds of contract raise a milder version of the same question, and the general position is in the post on when someone still asks for the wet-ink original. A note is the document in a loan file where the answer is least safe to guess.

The converted text has its own use in the meantime. A searchable loan file lets you find every reference to the note's date, the guarantor's name or a covenant level in seconds. Schema Law's format list describes its searchable PDF export in these words: "Your original file with a hidden text layer, so search finds the page". The page it finds is still a picture of the note, and the paper is still the note.