Best Practices: Why a Forbearance Agreement May be a Win-Win Solution for Dealing with a Struggling Borrower

When faced with a borrower who is a chronic late pay or who has approached the lender to discuss options because they have defaulted or are about to default on a loan, a lender may be quick to transfer the loan to their special assets department and let them sort it out. However, before declaring the loan in default and moving ahead to start litigation and liquidation against the borrower, a lender may want to consider the benefits of entering into a forbearance agreement with the borrower.

While forbearance agreements may not be appropriate in all situations, in cases where the borrower is cooperating with the lender and is seeking the lender’s assistance, it can be a valuable tool that can help both the borrower and the lender in the long run. Forbearance agreements are agreements that incorporate the terms of the underlying loan documents, acknowledge the present defaults of the borrower, and set forth terms under which the lender will forbear from taking legal action, provided that the borrower adheres to certain modified terms.

The real benefit in a forbearance agreement for a lender is that it provides the lender the opportunity to correct any issues in the underlying loan documents and loan file, and to add terms that give the lender additional protections and more control in certain situations. A well drafted forbearance agreement will also contain provisions requiring a borrower to acknowledge the present defaults under the loan documents, waive their defenses to defaults, acknowledge the present amounts due under the loan, set the jurisdiction where a lawsuit may be filed, waive a jury trial, waive any claims that the borrower may have against the lender, and reserve the lender’s rights back to the date of the original default, among other things.

In a situation where a lender has a loan that is secured by real estate and the borrower’s business is failing, a forbearance agreement can be used to set a time frame in which the real property needs to be sold before the lender will take legal action. In cases where the borrower wants to continue operating its business, a lender may be able to require that the borrower hire an independent turnaround professional that is approved by the lender to assist the company in its recovery efforts.

All of the provisions mentioned above can provide the lender with more control with respect to the borrower and help get the lender in the best position if and when the time comes to commence litigation and liquidation activities against the borrower. It also provides additional evidence the lender can point to if a borrower raises any defenses against the lender, including the enforceability of the loan documents, or what amounts are due and owing under the loan. Forbearance agreements can be a valuable tool for getting a loan back on track or further protect a lender in litigation.

For more information regarding forbearance agreements for lender’s SBA or conventional loans, please contact Lyndsay at 267-4701-1154 or at lrowland@starfieldsmith.com.