Importance of the Commercial Loan Review in Loan Modification

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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.  The loan workout is supported by financial regulators, such as the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, because they realize that this kind of deal will be beneficial 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.  Offering a commercial loan modification to a business that has very little chance of surviving does not make sense because foreclosure is inevitable.

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 becomes important.  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.  In simple terms, the commercial loan review that the lender will perform will play an important role in the approval of the 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.  The point is that the corresponding penalties for these flaws are usually severe, such as requiring the lender to return to the property owner all interests that have been paid since the beginning of the mortgage.  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.  Thus, this could be a powerful tool for the borrower in the event that such violations are actually found in the documents.

The presence of such violations will also be helpful for the borrower if the foreclosure proceedings have already started.  The proceedings will be stopped by the court while it has not yet decided if the bank had indeed made those violations.  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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