“We might be able to arrange arrangements for your repayment. Can you bring at least one payment by Friday?” In a two-sentence discussion with the borrower, the employee serving your loan may have just planted the borrower’s litigation seed.
“They said they would work with me.” If you institutionalize the foreclosure action later, the borrower can state that they are “in negotiations” with your company to prepare a payment plan. Such claims can lead to other arguments in muddy areas that seize collateral.
From the borrower’s point of view, when does the loan officer’s actions cross the line between normal daily communication and the actual agreement to modify the loan agreement or delay the collection action? The answer to this question can be very subjective.
What is the solution?
Enter – Pre-Exercise Agreement.
With the Pre-Training Agreement, the borrower and lender agree that there is no training agreement, there is no postponement of billing actions by the lender / service provider, and there is no modification of the terms of the loan agreement or lenders’ rights, unless the agreement is made in writing and implemented by all parties.
Actually, the term “Protocol Agreement” should be used, rather than “Pre-Training Agreement.” It might be wise to avoid using the term exercise altogether. Their use, either orally or in writing, can enable borrowers to claim that they rely on representation that some arrangements or modifications will be made.
WHEN and HOW to use the “protocol” agreement:
Strengths of Procedure:
Where the borrower has entered into a protocol agreement, you have a clear protection element. But what about bad borrowers who haven’t, or won’t, implement a protocol agreement?
In this complex field, which is clearly stated, written procedures and protocol letters can help avoid misunderstandings and reduce responsibility.
Written policies and procedures for loan service staff, (or anyone who interacts with your borrower) can prove to be helpful when defending against borrower claims. In making the procedure, you might want to consider dividing all loan officer / borrower conversations into two different categories:
Basic conversation, pure information:
“Where do I send payment?” “When will you send us your April 1 payment?” Strangely, there is little that can be said by borrowers without stepping into the field of negotiations and agreements. Decisions must be made about the extent to which the conversation can proceed without the steps outlined below.
Arrangement or negotiation conversation:
If the borrower shows that they will bring the April 1 payment and May 1 payment on May 9, they have just proposed a loan exercise. When the person serving your loan recognizes this arrangement, you have just signed an unwritten loan training agreement. Even though this is an extreme example, it shows how easily you can step into negotiations and modifications. It may be necessary to empower your staff to make certain limited payment arrangements. With written procedures, you have the opportunity to explain clearly what, if there is a variation of the payment that is required by contract can be agreed with or without a protocol agreement that is fully implemented.
When a borrower’s request or statement triggers the need, under your policy, for a protocol agreement, or when a decision is made to enter into a protocol agreement, a standard letter must come out to the borrower, which contains:
1) A restatement of the fact that there is no agreement to change loan terms or extend billing actions on the part of the service provider, unless a written protocol agreement is executed by all parties.
2) Instructions to the borrower to contact the relevant service provider by executing the protocol agreement, or requesting that they implement the agreement, if someone has been attached to the protocol letter.
NOTE: Depending on the foreclosure law or other delinquency related to your loan, you may want to consult with a legal advisor about combining protocol letters with other notices that you have sent to delinquent borrowers.
Written procedures for communicating with delinquent borrowers, protocol letters, and protocol agreements not only reduce liability when dealing with troubled borrowers, but can also avoid misunderstandings and provide “road maps” to borrowers to overcome their delinquency.