Importance of the Commercial Loan Review 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.  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.

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 know that providing the borrowers with some room for recovery would be advantageous for the banks and the economy in the long run.  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.  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 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.  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.  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 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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