Economic disruptions — whether driven by market downturns, rising unemployment, or sector-specific shocks — routinely place borrowers under financial pressure they did not anticipate. When a borrower reaches out asking for payment relief, the lender faces a judgment call: how much flexibility is appropriate, and how should that flexibility be properly documented?
A forbearance agreement is one of the most effective tools a private lender can deploy in this situation. When structured correctly, it protects the lender’s legal rights while giving the borrower a defined window to recover. When structured poorly — or handled informally — it creates the exact disputes and litigation risks it was meant to prevent.
This article explains how forbearance agreements work, what they should contain, and what lenders must consider before entering into one.
Evaluating Whether Forbearance Makes Sense
Not every borrower who requests payment relief has a genuine hardship that warrants a forbearance. Lenders must assess each situation individually.
A landlord whose rental income has been disrupted because tenants themselves are facing income loss represents a legitimate hardship case — the borrower’s ability to repay is directly tied to conditions outside their control. A borrower who has been a chronic late payer long before any market disruption, or whose financial challenges appear unrelated to broader conditions, may simply be using the moment opportunistically.
The evaluation requires looking at the actual loan file. What is the payment history? Is the borrower’s income tied to conditions that have genuinely changed? Are there other signs of distress, such as missed property taxes or liens recorded against the collateral? Lenders should take the time to work through each request rather than applying a blanket policy in either direction.
Why Formality Is Non-Negotiable
One of the most dangerous patterns from past periods of loan distress was lenders and borrowers reaching informal agreements about payment relief — handshake deals, verbal commitments, or casual email chains that were never formalized. When disputes arose later, those informal arrangements became the basis for borrower lawsuits alleging that the lender had waived its default rights.
The lesson is clear: any agreement to modify, delay, or forgive loan obligations must be in writing. This is true even when the borrower’s request comes in informally. The lender’s response, regardless of how the borrower framed the request, should be formal and documented.
Best practices include:
- Confirming all phone conversations in writing, via email or letter
- Sending correspondence to the notice address specified in the loan documents, not just to the borrower’s email
- Requiring the borrower to execute a formal Forbearance Agreement before any payment obligations are actually deferred
Oral misrepresentations were among the leading causes of lender litigation during the Great Recession. A formal agreement eliminates any ambiguity about what the lender agreed to — and what the lender did not agree to.
Streamlining Inbound Requests
When a significant number of borrowers are requesting payment relief within a short period, the administrative burden on the lender can be substantial. One way to manage volume is to place a standardized forbearance request form on the lender’s website. This form should capture:
- Identifying information about the loan
- The borrower’s stated reason for requesting relief
- Supporting documentation demonstrating the nature and scope of the hardship
A consistent intake process makes it easier to evaluate requests efficiently and ensures that every borrower has provided the same minimum information before any relief is granted.
Core Terms of a Well-Drafted Forbearance Agreement
What the Lender Is Forbearing From
The agreement must be explicit about which lender rights are being held in abeyance. Common examples include the right to record a Notice of Default, the right to charge late fees, and the right to accrue default interest. The agreement should also specify the duration of the forbearance period — whether that is a fixed number of days or a defined event-driven trigger.
Payment Terms During and After Forbearance
Typical forbearance terms for short-term bridge loans allow the borrower to defer one or more monthly payments, with those deferred amounts added to the balloon balance due at maturity rather than reinstated as immediate obligations. Lenders can build in a discretionary extension mechanism that allows the forbearance period to be extended at the lender’s sole option if conditions warrant — this gives the lender flexibility without obligating it to continue the forbearance indefinitely.
Best practices for forbearance terms include:
- A defined forbearance period, typically 60 to 90 days for borrowers with genuine demonstrated need
- No late charges on deferred payments during the forbearance window
- No accrual of default interest on amounts deferred during the forbearance period
- A clear statement that all other provisions of the original loan documents remain in full force and effect
Recitals and Reaffirmation
The recitals section of the forbearance agreement should explicitly state that the lender is granting the forbearance as a good-faith accommodation to the borrower — not as an acknowledgment of any obligation to do so, and not as a waiver of any rights beyond those specifically described. The agreement should reaffirm the full amounts outstanding under the loan, including principal, accrued interest, and any fees, and should confirm the business purpose of the loan.
Release of Claims
The agreement should include a comprehensive mutual release, with the borrower releasing the lender from any claims, known or unknown, arising up to the date of the agreement. This protects the lender from claims that might arise based on conduct during the servicing of the loan — including claims the borrower might not have yet discovered or identified at the time of signing.
Additional Protections to Build Into the Agreement
Loan File Review
A forbearance negotiation is a good opportunity to audit the underlying loan file for any deficiencies that could create problems later. Was signatory authority properly established in the original loan documents? If there is any question about whether the borrower’s representative was authorized to sign, the forbearance agreement can include representations and warranties addressing that issue and an entity certificate signed by all members or managing parties.
Definition of Future Defaults
The agreement must specify what will constitute a new default that terminates the forbearance. This should not be left to inference. Specifically define that the following events, among others, cancel the forbearance immediately:
- Any other default under the loan documents not addressed by the forbearance (for example, a transfer of the property without lender consent)
- Adverse action taken by other creditors of the borrower
- Seizure, repossession, or other adverse action against the secured property
- Any fraud or material misrepresentation by the borrower
Title Policy Date-Down Endorsement
When establishing a forbearance agreement, the lender should require the borrower to obtain a date-down endorsement to the lender’s existing title insurance policy. This confirms that no additional liens have been recorded against the property since the original policy was issued and that property taxes remain current. Surprises in the title chain discovered at enforcement time can significantly complicate the lender’s options.
Signature Authority Verification
Before the forbearance becomes effective, confirm that the person signing on behalf of the borrower has authority to do so. Some loan servicing agreements prohibit servicers from signing on behalf of lenders. Review any servicing agreements in place before relying on a servicer to execute the forbearance.
Conclusion
Regardless of market conditions, there will always be borrowers under economic pressure who need short-term accommodation. A well-documented forbearance agreement, structured with appropriate safeguards, allows a lender to work constructively with a borrower in genuine need — while fully preserving the lender’s legal position if the forbearance does not result in the loan being brought current.
The goal is to give both parties the best possible chance of a successful loan exit, without sacrificing the legal protections that define the lender-borrower relationship.
For assistance drafting a forbearance agreement or evaluating a borrower’s request for payment relief, contact Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
