How banks and mortgage companies, as well as borrowers can benefit from “Pre-Workout Agreements,” which are agreements entered into between lender and borrower, before discussing a special payment plan, arrangement to make up back payments. Article describes why agreements are necessary, how they should be used, and problems when they are not used.
“We may be able to work out an arrangement regarding your back payments. Can you bring in at least one payment by Friday?” In a two sentence discussion with the borrower, your loan servicing employee may have just planted the seeds of borrower litigation.
“They said they would work with me.” If you institute a foreclosure action at a later date, the borrower may allege that they were “in negotiations” with your company to work out a payment plan. Such a claim could raise another argument in the muddy area of foreclosing on the collateral.
From a borrower’s perspective, when do the loan servicer’s actions cross the line between normal, everyday communication and an actual agreement to modify the loan agreement or postpone collection actions? The answers to this question can be quite subjective.
What’s the solution?
Enter – The Pre-Workout Agreement.
With a Pre-Workout Agreement, the borrower and lender agree that there is no workout agreement, no postponement of any collection action by the lender/ servicer, and no modification of any of the terms of the loan agreement(s) or lender’s rights, unless that agreement is in writing and executed by all parties.
Actually, the term “Protocol Agreement” should be used, rather than “Pre-Workout Agreement.” It may be wise to avoid the use of the term workout altogether. Its use, whether orally or in writing, may allow a borrower to claim that they relied on a representation that some arrangement or modification would be made.
WHEN and HOW to use the “protocol” agreement:
The Power of Procedures: Where borrowers have executed protocol agreements, you have an obvious element of protection. But what about borrowers who are delinquent and haven’t yet, or won’t execute a protocol agreement?
In this delicate area, clearly stated, written procedures and a protocol letter may assist in avoiding misunderstandings and reducing liability.
Procedures: Written policies and procedures for loan servicing staff, (or anyone who interacts with your borrowers) may prove helpful when defending against borrower claims. In creating procedures, you may want to consider dividing up all loan servicer/borrower conversations into two distinct categories:
Basic, purely informational conversations: “What address do I send the payment to?” “When will you be sending us your April 1 payment?” Surprisingly little can be said to a borrower without stepping into the area of negotiations and agreements. Decisions have to be made as to how far conversations can go without the steps outlined below.
Arrangement or negotiation conversations: If the borrower indicates that they will bring in both their April 1 payment and their May 1 payment on May 9, they’ve just proposed a loan workout. When your loan servicing person acknowledges this arrangement, you’ve just entered into an unwritten loan workout agreement. Although this is an extreme example, it demonstrates how easily you can step into negotiation and modification. It may be necessary to empower your staff to make certain limited payment arrangements. With written procedures, you have the opportunity to clearly spell out what, if any variations from the contractually required payments can be agreed to with or without a fully executed protocol agreement.
The “Protocol” letter: When a borrower’s requests or statements trigger the need, under your policies, for a protocol agreement, or when a decision is made to enter into into a protocol agreement, a standard letter should go out to the borrower, containing:
1) A re-statement of the fact that there is no agreement to modify the loan terms or extend any collection action on the part of the servicer, unless a written protocol agreement is executed by all parties.
2) An instruction to the borrower to either contact the servicer regarding executing a protocol agreement, or requesting that they execute the agreement, if one has already been enclosed with the protocol letter.
NOTE: Depending on which other foreclosure or delinquency related laws your loan falls under, you may wish to consult with counsel regarding combining the protocol letter with other notices you’re already sending to a delinquent borrower.
Written procedures for communicating with delinquent borrowers, protocol letters, and protocol agreements may not only reduce liability when dealing with delinquent borrowers, but may also avoid misunderstandings and provide borrowers with a
“roadmap” for working through their delinquency.
A Loan on Half A House?
Informs reader and describes how a loan can be made to an owner of a partial interest, say, a 50% owner of a property, WITHOUT the signature of the other owners. Reader will learn that a loan can be made to the owner of a partial interest, when this might be useful and what the limitations and pitfalls are.
Title Insurance Checklist
Describes important considerations for lenders with respect to their title insurance coverage. Provides lenders with best practices for ordering title insurance coverage, but more important, for MAINTAINING the coverage during the life of the loan. Gives specific mistakes for lenders to avoid and steps lenders can take to prevent denial of coverage by title insurer.
Avoiding the $475,000 Mistake – Entering the Credit Bid
Article is for lenders, performing the foreclosure function in collecting on a loan. Article explains procedures for entering lender’s minimum “credit bid” or required minimum bid at the trustee’s sale. Article instructs reader on how to avoid the common mistake of entering a full credit bid, resulting in loss of certain type of insurance coverage, or loss of ability to pursue debtor.
