Economic cycles, market disruptions, and individual circumstances periodically challenge borrowers’ ability to meet loan obligations. When borrowers request payment deferrals or other accommodations, lenders must evaluate each situation and—when appropriate—document forbearance arrangements properly.
A well-crafted forbearance agreement protects lender interests while providing borrowers the time needed to resolve temporary difficulties.
When Forbearance Makes Sense
Forbearance represents a strategic decision, not an automatic accommodation. Lenders should evaluate:
Formalizing Forbearance Requests
Standardized Request Procedures
Lenders benefit from established forbearance request processes:
- Current loan identification
- Specific accommodation requested
- Reason for the request
- Supporting documentation
- Proposed resolution timeline
Standardization enables efficient processing when multiple requests arrive simultaneously.
Documentation Requirements
Even informal borrower requests require formal lender responses. Oral agreements create substantial risk:
- Misunderstandings about terms
- Disputes about what was agreed
- Potential claims of oral modification
- Evidentiary challenges in enforcement proceedings
All forbearance communications should be memorialized in writing, sent to the borrower’s notice address specified in the loan documents.
Structuring the Forbearance Agreement
Preliminary Matters
- Current amounts due under the loan
- Acknowledgment of default status
- Statement that forbearance is a voluntary lender accommodation
- Affirmation of the loan’s business purpose
- Principal balance
- Accrued interest
- Default interest (if applicable)
- Late fees
- Protective advances
- Attorneys’ fees
Core Forbearance Terms
- Recording Notice of Default
- Initiating foreclosure proceedings
- Charging late fees
- Accruing default interest
- Exercising other remedies
- Specific start and end dates
- Conditions for extension (if any)
- Events triggering early termination
- Amount and timing of payments
- Application of payments received
- Consequences of missed payments
Protective Provisions
- Legal fees incurred to date
- Title insurance updates
- Property insurance and taxes
- Other protective advances
- Known claims
- Unknown claims (to the extent permitted)
- Related party claims
This prevents subsequent disputes about pre-forbearance matters.
- Signature authority issues
- Entity authorization gaps
- Recording deficiencies
- Other technical problems
Default Definitions
Clearly define events that terminate forbearance and restore enforcement rights:
Additional Protections
- No new liens recorded
- Taxes remain current
- No other title defects
- Updated entity certificates
- Resolutions authorizing forbearance
- Good standing certificates
Practical Considerations
Timing and Process
Authority Verification
Ensure proper execution authority on both sides:
- Loan servicing agreements may restrict servicer authority
- Review any participation or syndication arrangements
- Confirm fund operating agreements permit forbearance
- Current entity documentation
- Appropriate resolutions
- Guarantor consent where applicable
Exit Strategy Importance
Forbearance provides time, not permanent solution. Both parties should understand the expected exit:
Clear expectations from the outset reduce disputes if forbearance fails.
Conclusion
Forbearance agreements serve both lender and borrower interests when properly structured. They provide borrowers time to resolve temporary difficulties while protecting lenders through formal documentation, clear default definitions, and preserved enforcement rights.
The relatively modest cost of proper forbearance documentation compares favorably to the risks of informal arrangements or the expense of immediate enforcement.
For lenders navigating borrower default situations, consulting with legal counsel experienced in workout transactions ensures properly structured agreements that protect lender interests while offering borrowers meaningful opportunities for resolution.
