My boss has told me a few times at conferences, “no one has figured out how to make money in litigation.” I’m assuming he meant no one other than me. Point taken. So, how can you avoid litigation, or ‘lawsuit proof’ your loan files? Let’s have a look.
The time to start is at underwriting. Fraud is WAY up since 2017, so ensure you know who your borrower is, that the collateral exists and is owned by your borrower, and that you’ve purchased the right amount of Title Insurance (we recommend 125%) of the loan amount. Fraud is a bigger topic and will be the subject of a forthcoming article (teaser!).
Presuming you find yourself with a defaulted loan, a way (not recommended) is to just let it go. You can make a forbearance agreement with your customer. That means you and the borrower agree that you won’t enforce your rights now, and that the borrower promises (pinky swear this time) that he’ll cure the default over a period of time. This essentially waives your collection remedies (for a time) in hopes the loan will one day begin performing again. You want to ensure this doesn’t extend too long, or you may find yourself unable to collect at some point (owing to the Statute of Limitations).
You can also modify the loan terms. This variety of ‘work out’ generally involves moving defaulted payments to the end of the loan, waiving fees/costs/interest, changing the interest rate, changing the monthly payment, or extending the duration of the loan. If you do this, IT IS ESSENTIAL that you notify all guarantors. They don’t have to agree, or like it, but they must be notified (otherwise you’ll forever waive your right to collect from them).
Perhaps your borrower is in a substantially worse position and can’t make any modification work. He just wants to walk away and toss the keys to you. This is a deed in lieu of foreclosure circumstance. This will get you title to the property (your collateral) and will avoid the costs and time of conducting a foreclosure. It also waives your right to collect any deficiency against your customer (not so against your guarantor – but again, remember to notify him beforehand).
Failing any of those pre-litigation remedies, there is the time-honored practice of “saber rattling.” Ensure your contract has an attorney’s fee provision. So long as it does, and so long as you are convinced your position is correct, this strategy can work. “It sure would be unfortunate (for you) if I had to sue and enforce this contract pal, because you’ll have to pay my lawyer (and yours).” You see, all the fees and costs of litigation get added to the balance owed, so litigation becomes rather expensive for borrowers in default. This might intimidate them into consenting to one of the remedies listed above.
If litigation seems inevitable, have a careful look at your file. Do you have a signed contract? Is the guaranty signed? Is the Deed of Trust signed, and does it encumber the correct property? Is your account payment history sufficiently detailed that you could explain it to a golden retriever? If so, make a final attempt at “saber rattling”, and give the borrower one last chance; or have your attorney do it. A last-gasp effort might resolve this for you.
If you have to march down to the courthouse, consider at the outset your strategy; it may save you a tremendous amount. Bearing in mind the fees provision in your contract – which really means your borrower is paying for all this – combining remedies into one case will make the procedure cheaper. If you sue for judicial foreclosure and add breach of guaranty causes of action in it, by the end of the case you will have title to the property, a deficiency judgment against your borrower, and a deficiency judgment against all your guarantors. You’ll also insulate yourself from many of the borrower claims against you and protect from the anti-deficiency rules. You can also ‘double track’ these cases with non-judicial foreclosures.
Once you get finished winning, there are cost effective remedies (and others not so much) which will find their way to uniting you with your money. Record abstracts – those will immediately cause your deficiency balance to attach to all real estate your borrower/guarantors own (and they cost less than $40). Bank levies can really ruin your borrower’s day (and get them to come negotiate payments with you). Same for wage garnishments.
Saving all that, you can use complicated methods (the extraordinary relief – also the subject of a forthcoming article – teaser2). These involve receivership, judgment debtor examinations, keepers (the till tapper), and other exotic remedies.
We are always available to you and excited to help strategize your plan. Doing so is the only responsible way to manage your asset. If you don’t know where you are trying to go, any road will take you there. All the best.
Do you have questions about how to approach a delinquent borrower? Geraci’s litigation team is here to help. Contact us today.