My blog entry of February, 2013 addressed using a pre-negotiation agreement before starting loan modification or workout discussions with a defaulting borrower. My central point was that pre-negotiation agreements are useful in two ways: (1) to cut off any claims of waiver and to clear the conversation of any shadow of lender liability; and (2) to focus the borrower’s mind on the need to solve the problem.
After that posting, one of my clients asked about the timing of sending the default letter and presenting the pre-negotiation agreement: When is the best time to present the pre-negotiation agreement? This is a very good question. Usually, I get a troubled loan file from the client after the default letter has already gone out. I review the loan documents, check to identify the collateral and make sure the lender is perfected, then call the work-out officer and ask how they would like to proceed. Sometimes it’s apparent that the banker on the other end of the phone has given this question no thought whatsoever.
That’s backwards. The time for the lender to plan what they want from the borrower and how they are going to get it is before the NOD is sent.
The notice of default is a line-in-the-sand, pistols-at-dawn invitation to a fight. The last thing that you, as a lender, want to do is to arouse your miscreant-borrower from his deadbeat torpor and get him to his lawyer before you have decided what you are going to do. Once the excitement starts, the lender is no longer in control of how things play out, but will have to respond to whatever the borrower does. If, as is usually the case for a lender, you get to make the first move, you want your initial action to advance your overall strategy, and perhaps automatically sending off a default letter is not as effective as, say, setting off a deposit account; suing for a pre-judgment writ of garnishment or attachment; or appointing a receiver for income-producing collateral.
Before you start pushing over the dominoes with a default letter, know where you want to go.
This post was written by attorney Rick L. Knuth