The Ox and the Ditch: FAQ - First Steps in a Loan Default? Types of Default? Alternatives to Calling a Default?
Guest Writer: Brenda Brown, Winstead PC
This is a special series of blog entries in which we provide some quick answers tolenders' frequently asked questions (FAQ). Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.
Without further ado:
FAQ #1 - The Borrower is how far behind – now what?
- Analyze the entire situation: the collateral, the loan documents, the file, any co-lender or intercreditor agreements, financials on the parties, the market - in other words, the entire picture. Act like you're about to own it.
- Consider restructuring – But send a "Discussion Letter" – to help avoid waiver of lender's rights under the loan documents
- Determine whether a default – as defined in the loan documents – has occurred. If so, consider sending Notice of Default and Notice of Acceleration.
- Generally Borrower has "terminal euphoria" and no reason to change unless it is in default.
FAQ #2 - What if the default was not a monetary default?
- "Default" vs. "Event of Default" – check defined terms in the loan documents.
- Look for Grace / Cure Periods to see if expired.
FAQ #3 - What can I do besides calling a default?
- Alternatives to calling a default include à Restructure (i.e., amend the loan documents so the borrower is no longer in default – if the borrower's financial deterioration is not too great)
- Simple Notice of Default à Just to create a written record that it exists and is continuing.
To read the entire Tough Times FAQ series, please click here.
Please post comments or questions below.
