How the Commercial Loan Review Helps in Loan Modification
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.
It is the contention of the financial regulators that many of the commercial property owners are only experiencing a temporary setback in their finances and that they are actually willing to go on paying for the mortgage if this is made possible. They also realize that offering the borrowers a chance to recover would benefit the banks and the economy in the end. Naturally, the regulators also pointed out that even if they have expressed their support for restructuring the loans, this does not mean that the lenders will disregard the basic rules for assessing risks and approve all applications. Offering a commercial loan modification to a business that has very little chance of surviving does not make sense because foreclosure is inevitable.
Basically, what the bank regulators are suggesting that banks should do is to expand their creativity when trying to look for ways to help the businesses that still have a chance of surviving the crisis. This is where the commercial loan review comes into play. This is the procedure for assessing the capacity of the borrower to repay the loan if the terms were adjusted. 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. Thus, the commercial loan review will have a vital role in the decision making of the bank for or against the loan workout.
However, for the borrower, the commercial loan review is something that is usually done by a loss mitigation expert 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 errors are violations of some of the rules and regulations that have been established to protect borrowers from abusive 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 is therefore a very potent weapon for the property owner in convincing the lender to grant a loan workout.
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