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The Role Of The Commercial Loan Review In Restructuring Agreements

The commercial loan review has two contrasting meanings for the lender and the borrower when they are attempting to reach an agreement on loan modification. 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.

Author: Michael Bartonolis
Date: Dec 9, 2009 - 7:09:54 PM

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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.  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 becomes important.  This is the method of appraising the capability of the property owner to come up with the modified mortgage payments.  The issues that have to be taken into account by the banks include the cash flow of the business or individual, the payment record, the market situation, and the presence of potential guarantors for the property owner.  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 activity will focus on the original loan agreement because experts have discovered that 80 percent of the loans that were released for commercial properties during the prosperous years in real estate contained 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.  Moreover, the bank would not be able to apply any of the provisions contained in the original agreement and this includes repossession or foreclosure 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 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.

View all articles by Michael Bartonolis

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