As a result of the current economic situation caused by COVID-19, the federal government is encouraging lenders to enter into forbearance agreements with their borrowers. Many lenders and other creditors are expressing their willingness to do so.
A forbearance agreement is one made between a borrower and a lender. In these arrangements, the lender will agree to refrain temporarily from enforcing its rights against the borrower (such as, in most cases, a lawsuit for breach of the underlying loan agreement or promissory note) in exchange for certain promises or assurances from the borrower.
During the current crisis, lenders should consider contacting borrowers who default or are likely to default. A forbearance agreement may present an effective solution for both lender and borrower.
- For one, we are all hopeful that the economic fallout from the pandemic is temporary and that the recovery will be swift. The borrower will usually negotiate an amended repayment schedule, which will provide it more time to recover from the cause of the default and pay off the loan.
This is much more cost-effective for the lender than a lawsuit. Lawsuits are expensive and, even after securing a judgment, the lender may find that the borrower has no assets to collect. By allowing the borrower to extend the payment schedule, it may be more likely that the lender is made whole.
- Second, the lender can use the forbearance agreement to introduce new commercial terms. For instance, the lender may be able to secure the loan with additional collateral, obtain better financial covenants, or even support the loan with a personal guaranty. Thus, a lender can actually become more secure in its lending than when the loan originated.
There are a number of important legal considerations that borrowers and lenders must take into account and all forbearance arrangements should be documented in a legally binding agreement. If you would like assistance negotiating or drafting a forbearance agreement, please contact Andrew R. Silverman, [email protected].