In the current COVID-19 environment, many borrowers are asking whether the government will grant borrowers any relief from payment obligations under their commercial loans. There is a general reluctance of governmental authorities to interfere with private contracts, which would include most loan documents. Accordingly, loan payments are contractual obligations for which borrowers will generally remain responsible. At present, there does not appear to be any government-mandated relief from the requirement to pay principal and interest due on commercial loans.
Financial agencies, including the Board of Governors of the Federal Reserve System, Conference of State Bank Supervisors, Consumer Financial Protection Bureau, National Credit Union Administration, and the Office of the Comptroller of the Currency are encouraging lenders to work constructively with borrowers affected by COVID-19 to (i) improve loan performance and reduce defaults and (ii) provide additional information regarding loan modifications. Such agencies have also relaxed the classification of troubled debt restructuring in the current circumstances. Many banks are working with regulators for a relief package regarding the payment of principal and interest during the crisis.
In the multifamily sector, Fannie Mae and Freddie Mac are granting borrowers payment forbearance of 90 days, so long as borrowers (i) demonstrate hardship due to the COVID-19 crisis and (ii) do not evict tenants based solely on non-payment of rent during that time frame. It may be possible that other sectors and lenders will provide similar incentives. Borrowers can check the Forbes list of banks offering relief or the American Bankers Association list to see which lenders are providing such relief. Many lenders have suggested that businesses apply for small business loan assistance under the Paycheck Protection Program (“PPP”) (under the CARES Act) or Economic Injury Disaster Loans (“EIDL”). Banks have been flooded with applications for PPP loans, as has been widely publicized. It is generally recommended that borrowers communicate early and often with their lender regarding requests for payment deferrals. A common solution currently being implemented involves lenders agreeing to defer loan payments for 90 to 120 days, with the understanding that deferred payments will be paid back to lenders within six months to one year after such deferral.
Borrowers can generally expect lenders to require certain concessions in connection with the forbearance of loan payments. Credit enhancements can be expected, which may include that additional guarantors execute guaranties or supplemental collateral be provided. If the loan is non-recourse in nature, banks may insist that such loans convert to being fully recourse, in addition to making a substantial payment of (i) principal and/or (ii) a review deposit. At a minimum, lenders will require that the borrowers sign pre-negotiation letters prior to any loan workout discussions to manage expectations of borrowers and protect lenders.
While many lenders are being accommodating to borrowers during this unusual time, lenders that are struggling, due to an underperforming portfolio, may be less willing to make concessions. For example, lenders who have a portfolio that may be heavily secured by hospitality assets may be less willing to negotiate with borrowers. Prior to engagement in any loan workout discussions, parties should first confer with their attorney to determine their respective rights, obligations, and alternatives.