At the end of this article, I will tell you about a $75,000 loss that a client took that could have been avoided had the client and his attorney taken some free advice. I’ll also give you two valuable bullet points that can help you avoid a loss like this.
But first, let me ask you a few basic questions.
- Do you know how to choose between a Modification and a Forbearance?
- Do you know when an NMLS licensed Loan Servicer is required to negotiate the workout agreement with your Borrower?
- Do you know what verbiage, when written into your loan documents, could save you time in exercising your rights to collect and allow for the compensation you may not ordinarily be entitled to?
- Did you know that a Modification will require you to cancel a pending foreclosure sale?
The answer to these questions are not that simple for the average investor and – believe it or not – even for many real estate attorneys.
The following information will address the basics of the two most common loss mitigation strategies and give some insight on what to consider when your borrower runs into hard times.
What is a Forbearance?
A forbearance agreement is a short-term agreement between borrower and lender whereby lender agrees to delay the enforcement of rights under the terms of the loan in exchange for borrower agreeing to cure a default within a specified period of time. Other than the temporary delay in proceeding with collection, the forbearance will not modify the terms of the loan. A few examples of when a forbearance can be effective are:
- Borrower’s loan has matured and cannot pay off the loan in full but has the desire and ability to pay off the loan vis a vie a sale or refinance.
- Borrower fell behind in payments, the amount to cure the default is not substantial and borrower has the ability to perform the original terms of the loan moving forward.
- Borrower will not be able to cure the default, but is selling the property and needs time to close the sale.
A forbearance fee may be charged. However, if you are not a licensed broker, one may need to be involved in the forbearance. If the interest charged for the loan, inclusive of interest which accrues under the terms of the note and any origination fee, loan fee or other consideration for the loan, exceeds ten percent (10%) at the time the loan was made or exceeds 10% when you calculate the forbearance fee into the interest charges for the loan, a licensed broker must be involved in order for the loan to continue to be exempt from usury.
If no forbearance fee is being charged for the forbearance of a loan that was made or arranged by a licensed broker, a broker is not required for the forbearance, even if the terms of the loan would be usurious if no licensed broker were involved.
In order to be effective, a forbearance must be properly memorialized in writing to be legal and avoid any misunderstanding concerning the terms of the forbearance.
What is a Modification
A loan modification is similar to a forbearance agreement; however, there are a few crucial differences. First, a modification changes the terms of the loan rather than temporarily delaying enforcement by lender. Second, a modification will result in the cure of the default, requiring lender to initiate a new foreclosure action in the event of borrower’s default after modification.
Extension/Modification Fee/Increase in Interest Rate
Similar to a forbearance, if the terms of the loan were usurious prior to the modification, unless the modification does not result in borrower paying any additional charges as consideration for the loan and the modification (i.e. extension fee, increased interest rate), a broker must be involved. In addition, a broker will be required if the additional interest charges paid by borrower for the modification makes the terms of the loan usurious, a licensed broker must broker the modification. You should note that if borrower agreed in writing to an extension fee as part of the terms of the original loan, a broker would not be required.
In general, the modification must be in writing. However, a borrower can enforce the terms of an oral or implied modification if the terms of such modification have been substantially performed by the parties. As with a forbearance agreement, best practice is to always have a written modification agreement with the borrower in order to ensure that the parties understand the agreed upon terms – in some cases, a modification will need to be recorded and title insurance secured.
Now, back to the $75,000 loss that I mentioned in the beginning of this article.
What if I told you the lender could have avoided this 5-figure hit by taking advantage of services we routinely provide, at no cost to him?
The story goes like this –
The lender opted to negotiate the terms of the modification and reinstatement solely through their very prominent Southern California Real Estate attorneys, dismissing our services as not needed on top of the legal help he was receiving.
After four months had passed, we received almost $850,000.00 in back payments and $75,000 penalties from the borrower. As we posted the payment, we realized that the law firm used the figures owed as of the day they took over the case – they did not calculate into the agreement the amounts that had accrued over the past four months – the penalties should have totaled $150,000.00.
Sadly, the lender was told that because the modification had been signed by all parties, the lender received all he was legally due under the poorly negotiated agreement. When the lender sought reimbursement from the law firm, he was told that while they “may have” included inaccurate figures in the modification agreement they drafted, their representation was centered on negotiating and recovering the money; the lender was responsible to verify the figures prior to signing.
Two valuable things to consider:
- Well written loan documents provide for recovery of all of the lender’s reasonable collection and enforcement expenses. In this case, our $250.00 flat fee for assisting the attorney with the file, would have been added to the amount due from the borrower to cure their default. More importantly, based on the skill level of our team and their experience in negotiating, preparing and collecting on over 1,000 loan modifications in the last 10 years, we could have delivered a better product and result, than the law firm who billed $24,000.00.
Borrower’s often react differently when they receive letters and calls from law firms. When we work with borrower’s we have people on the phone who are specially trained to understand the situation and be empathetic. They use experiences from their own life and other files to really help get to a reasonable solution.
- Sometimes you only need a screw driver – Sometimes you need a hammer and a screwdriver. In any situation, especially in cases of large investments, you need to use the right tools and resources at the right time. We know from experience that we can’t solve all loan problems in house. We have assisted with hundreds of formal complaints from borrowers so as we see red flags developing, we are working hard to document the lender’s willingness to be flexible and highlight their attempt to help the borrower. We are also showing that lenders are not rushing to the hammer to intimidate or threaten the borrower BUT that the solid efforts of the lender are not being reasonably considered by the borrower. When it’s time, we help you use the right hammer, the right way. We do work WITH the best law firms in the industry like The Geraci Law Firm, and we work really well together. These attorneys specialize in private money loans and are awesome at protecting your investment and delivering the best service and advice to avoid help you avoid unnecessary losses . . . especially $75,000 ones!
When we process loans and draft documents, we review the file in depth, for dozens of potential red flags and errors – and we often find them. This service, like our modification and collection services, is usually available to lenders and brokers at no cost to them. We know some lenders and brokers like to prepare loan docs either for the oversight or for the extra few hundred dollars they can add to the loan fees. If you are a broker, we encourage you to use that valuable time to secure another good deal for your lenders. If you are lenders, we encourage you to have an extra set of eyes and hands assisting with the process. This is our specialty and our references, brokers and borrowers, rave about our services.
If you would like to learn more about how Loan Management services from Del Toro can help you underwrite, process, doc and service your loans better, please contact us here or call our office at (877) 335-8676.