Pub. 8 2020 Issue 3

www.uba.org 18 W hen a borrower defaults on its loan, its lender is faced with a major decision — will it exercise its remedies under the loan documents, including fore- closing on the collateral? Or will it work with the borrower to possibly waive the default, enter into a forbearance agreement or otherwise modify the loan and loan documents? Before getting to this crucial decision, however, there are other preliminary issues to consider. Among these issues is the follow- ing question: how should it respond to the borrower’s commu- nications regarding the default and requests to discuss possible loan modifications? Should it send a reservation of rights letter? And should any other step be taken before entering into workout discussions with the borrower? The purpose of this article is to advise lenders on these key preliminary issues. COMMUNICATIONS WITH BORROWER It isn’t always easy to know what to say to a borrower when it reaches out to discuss a default. There are customer relation- ship issues to consider. However, there’s also the concern that something you communicate to the borrower may come back and be used against you during a potential workout. Thus, as a general rule, a lender should always be careful when discussing any default and potential forbearance or other loan modification with the borrower. This need for care means all communica- tions should include appropriate disclaimers. However, being careful doesn’t necessarily mean one must take an adversarial or overly formal tone in responding to the borrower. This qualification is especially true with verbal communications, which are generally not binding on either the borrower or the lender due to the language in the loan docu- ments providing that the loan documents cannot be modified except by a written agreement. Nevertheless, in almost all cases, after a verbal communication with the borrower, it makes sense to send a simple, informal email. Use the email to memorialize the verbal communication and to avoid misinterpretation by the borrower. Below is a simple example: Thanks for today’s call to discuss [describe loan/issue]. As you know, and as discussed, the bank can’t agree to any MY BORROWER IS IN DEFAULT: A FEW PRELIMINARY ISSUES TO CONSIDER By Landon A. Hardcastle, Jones Waldo