The Problem
Every lender will inevitably face the scenario where a loan does not close according to the expected timeline, but loan documents are already prepared. If the closing is pushed to later that same month, there are typically little to no issues with the loan documents. But, sometimes closing gets pushed to the next month or later. This is where problems can arise.
The main focus when looking at this scenario is to correct the amount of interest that is being charged to the borrower. In general, lenders cannot charge a borrower interest for the days between the expected closing date and the actual closing date. Since loan documents are drafted based on the expected closing date, they describe the interest as if the loan had closed on time. Thus, if the closing date is pushed, changes must be made to the loan documents to accommodate this.
Another issue with these delays is that loan documents use the date of the documents to determine other vital dates – first payment date, maturity date, interest rate change dates, and more. In general, our loan documents are dated to allow for closing at any time within the same month of the document date without causing problems. If closing is pushed to a new month however, then almost every date within a document set will also need to adjust for the change. Pushing closing without pushing the maturity date reduces the loan term, which requires borrower repayment sooner. But this prevents the lender from collecting the full return they were expecting by reducing the number of interest payments received. One less month of interest can be the difference of thousands of dollars solely because closing was pushed, but the documents were not adjusted accordingly. Fortunately, there are multiple solutions available to resolve issues that may arise.
The Solutions
Each solution discussed below allows for different priorities to be made, depending on what is most important to each individual lender. Most commonly, we recommend having the borrower execute a per diem addendum. This is an addendum to the loan documents that simply revises the interest being charged by reducing the first month’s payment by the per diem or short interest amount paid by the borrower at closing. This is an easy and simple solution but does not change anything within the loan documents. This option is ideal for short delays, or for lenders who are comfortable with the loan term being slightly shorter. This is also helpful when loan documents have already been executed to avoid requiring the borrower to re-sign the entire loan document set with a notary.
Another option is to just fund and close the deal on the first day of the following month. This does not require any changes as the per diem interest being charged would simply be $0 and the rest of the loan terms can remain the same. This could be difficult to time perfectly, but in the event of a one- or two-day delay, it is a very simple solution that does not require any changes to be made to the loan documents, additional documentation to be drafted, nor having the borrower re-execute the documents.
A third option is for the lender to overfund the closing by the per diem interest amount. This allows for all dates to remain the same and for the lender to collect full interest payments as described in the loan documents. However, this requires the lender to wire in additional funds to essentially allow for a credit to the borrower for the interest that was not actually accrued but was or will be paid by the borrower as part of the normal monthly payment. This is a simple solution that many lenders choose, but some lenders do not want to wire in additional funds, especially if they have wired funds into escrow already for the closing.
Lenders may also choose to have the loan documents fully redated. This is the cleanest way to solve this problem since this does not require extra documents to be added to the package. This is ideal though when the loan documents have not yet been executed by the borrower. The lender can then hold the loan documents as normal with everything reflecting correctly, and not have to be concerned about keeping track of additional documents. This further allows the maturity date and other dates to be adjusted so the lender can collect full interest payments for the entire loan term, maximizing the lender’s return on investment. This can also benefit the borrower by providing the full length of the loan term before maturity and repayment, providing as much time as possible for the borrower to be prepared when repayment comes.
Overall, we see closing of loans being pushed frequently, but as discussed above, there are multiple solutions available to resolve the associated issues. As a lender, you should consider what is most important to you if this issue arises for one of your deals. Additionally, you should consult counsel with any questions or concerns you may have.
Contact the Banking and Finance Team at Geraci to answer any and all of your closing questions.
