When customers run into financial difficulty, they may request a modification to loan terms. This may be advantageous to the organization. It can save writing off the delinquent loan and causing a full loss to the organization. Use the following as a base to create your own Loan Modification Policy.
STATEMENT OF POLICY
Loan Modifications will be considered in cases of documented hardship due to long term or permanent loss of income, significant increase in household expenses, and when the organization’s interest will be protected or enhanced by preventing a loan loss.
The Organization recognizes that unforeseen events such as prolonged illness, disability, death, work stoppage due to strike, layoff or hours reduction, or permanent pay cut or job loss may present financial hardship, making it impossible for the borrower to meet the agreed upon terms of their loan contract. It is in the best interest of the borrower and their credit standing to secure a more permanent solution for the difficulties presented by these events. It is also in the best interest of the organization to use appropriate tools to control and reduce loan defaults and the corresponding detrimental impact on earnings.
- A loan modification is defined as a mutual agreement between the borrower(s) and the organization to change the original terms of the loan contract by adjusting the length of the repayment term (extension), adjusting the interest rate or consolidating multiple contracts into one, in order to reduce the loan payment amount.
- In order to accomplish this modification, the instrument creating the original obligation will be replaced with a new one containing the modified terms. In most cases all makers of the original loan, including co-applicants, guarantors and co-owners of pledged collateral must agree to the new terms and indicate so by signing the new instrument.
- In structuring the modification, every effort will be made to preserve the earnings stream of the account in question. Additionally, the terms of the new agreement should not be unduly extended nor may never extend beyond the maximum limits established by NCUA for the loan type. Primarily however, consideration will be given to how best to recover the organization’s principal.
- Modification requests will be reviewed by the Director of Lending. The Modification request must be accompanied by a letter of Financial Hardship. The referring loan representative will submit an updated financial status, re-evaluation of any collateral securing the loan along with substantiation that the borrower will be able to comply with the recommended change in terms, thereby avoiding return to a delinquent status (i.e. Paystubs, employment contract). In addition, the referring rep should attempt to secure additional collateral or signers to help offset the borrower’s unstable financial condition.
- When necessary we may require a fresh appraisal on the property by an approved appraiser.
- Mortgage Loan Modifications will be restricted to loans secured by the borrower’s primary residence.
- In cases where a significant segment of the client are impacted simultaneously (i.e. strike, layoffs or shutdown of a SEG) and delinquency/ modification requests are expected to increase, the board may temporarily implement, through board action, the following authorities in order to provide the flexibility necessary to help mitigate the negative impact to the organization:
- The Director of Lending may approve modifications for borrowers up to 90 days delinquent.
- Terms may be extended up to eighteen (18) months beyond the current product policy maximum before board approval is required.
- Original contract rates may be assigned to the modified contract regardless of current credit score and corresponding risk rate for the product.
- Board approval is required for all requests containing terms outside of these parameters.
- Modifications may ONLY occur once every two years.
- The modification will NOT allow any CASH OUT.
INTEREST RATE REDUCTION OR FORBEARANCE
- Any client who requests an interest rate reduction or Principal Forbearance must meet with and be approved by the Loan Review Committee (CEO, Director of Lending and One member of the Board of Directors.)
- In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.” Loan borrowers sometimes have problems making payments. This may cause the lender to start the foreclosure process. To avoid foreclosure, the lender and the borrower can make an agreement called "forbearance". According to this agreement, the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule in a certain time. This period and the payment plan depend on the details of the agreement that are accepted by both parties.