In one sentence
The ongoing confirmation that a borrower is meeting the loan's promises, tested periodically from the borrower's financial reporting.
The longer version
Loan agreements carry covenants: minimum DSCR, reporting deadlines, restrictions on transfers and additional debt. Compliance is tested each period, usually from statements the borrower must deliver on schedule.
Testing only works if the reporting arrives and the file is current. Covenant tracking is a steady servicing cadence, and a common examination focus.
Common questions
- What is covenant compliance?
- Ongoing confirmation that the borrower meets the loan's promises, tested from reported financials, certifications and inspections on the schedule the loan agreement sets.
- What happens when a borrower breaches a covenant?
- Depending on the loan, it can trigger cash management, require a paydown or reserve, or become an event of default. Many loans allow a cure period.
- Why is covenant tracking hard?
- Because it depends on borrower reporting arriving on time and in the right form. Late statements mean untested covenants, which is itself an exception.
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