Archive for the ‘Bank Regulators’ Category

How the Commercial Loan Review Helps in Loan Modification

Sunday, April 11th, 2010

The commercial loan review has opposite meanings for the the borrower and the lender when they are preparing to negotiate for a  restructuring of the debt.  Loan restructuring is being pushed by bank regulators, such as the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC), because they know that this will lead to better results for both parties.

The bank regulators believe that the situations of many of the troubled commercial borrowers are only temporary and that they really want to continue with the payments but the circumstances are preventing them from doing it.  They also know that providing the borrowers with some room for recovery would be advantageous for the banks and the economy in the long run.  Of course, the regulators also clarified their support for loan workouts by pointing out that this does not mean that the lenders will approve all applications without applying standard methods for evaluating risks.  It would not benefit anyone if a commercial loan modification is provided to a business that has lost its viability and when the foreclosure is unavoidable.

In simple terms, what the financial regulators are proposing is that the lenders should be more creative when searching for possible ways to assist the businesses in avoiding foreclosure.  This is where the commercial loan review comes into play.  This is the method of appraising the capability of the property owner to come up with the modified mortgage payments.  Some of the factors that the lenders have to consider include the payment history, the flow of cash into the business, the availability of guarantors that can take over if the borrower fails to pay, and the condition of the market.  In simple terms, the commercial loan review that the lender will perform will play an important role in the approval of the workout.

Meanwhile, a different kind of commercial loan review is conducted for the borrower by a loss mitigation professional or consultant.  This process will concentrate on the original loan contract because it has been found that  four out of five agreements that were made during the booming years of commercial real estate had some flaws.  These flaws are transgressions against the laws and regulations that have been put in place to protect the borrowers from the abusive practices of some lenders.  Such violations have serious penalties, such as requiring the lender to return to the borrower all of the interests that have been paid since the start of the loan.  Even more serious is the fact that the lender would be forbidden to apply any of the provisions in the previous contract, such as foreclosure or repossession of the property.  Hence, the borrower would have a strong negotiating position if such violations are discovered in the loan documents.

If such violations are found, this will also assist the property owner even if the process of foreclosure has already been initiated.  The court will freeze the proceedings until such time that a decision has been made regarding these accusations.  The commercial loan review will indeed provide the borrower with a strong weapon when negotiating with the bank for a loan restructuring.

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