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.
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 realize that offering the borrowers a chance to recover would benefit the banks and the economy in the end. 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.
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.
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 will indeed provide the borrower with a strong weapon when negotiating with the bank for a loan restructuring.
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