Loan restructuring is basically a procedure which enables a public or private organization or a sovereign state facing economic hardship and cash flow issues to restructure its outstanding debts in order to either reduce or increase its available cash so it can carry on its normal operations. A loan restructuring is only possible if the creditors agree to it. The creditor agrees to it when he sees that there is no chance of the debt being repaid. He also agrees to the terms, since he wants to receive some part of his money instead of losing it.
In order for the creditor to be convinced and agree to a loan restructuring scheme, he has to be made to believe that the debtor will not be able to pay off the debts as planned unless the payment is increased or the reduced interest rate is applied to the principal amount borrowed. In the absence of such an assurance, the lender will not be prepared to go for a loan restructuring. The failure of the debtor to comply with this condition may lead to rejection of the proposal by the lenders. The lender may resort to the option of taking recourse to bankruptcy to compel compliance.
The method adopted by the lenders for evaluating the risk involved in approving the application of a loan restructuring plan is by looking at the income and other financial details of the borrowers. This evaluation is based on the provision made by the borrowers for meeting their current needs. For instance, a mortgage lender may look at the credit record of the borrower. If this record shows a history of missed payments, foreclosures, charge offs, bankruptcy or default, then chances are high that the borrower may default on repayments again. The lender will need to take this into consideration before offering a loan restructuring to the borrower. Similarly, lenders will want to know about the regular source of income that the borrower is drawing.
The borrowers who get approval for loan restructuring through one-time restructuring schemes have to pay lower installment amounts over a period of time as compared to the installments that they would have to pay under the fresh repayment terms. In most cases, this involves the extension of the term of the loans. This makes it easier for the borrowers to repay the loans in time and avoid foreclosure.
The lenders have to be careful while offering loan restructuring schemes to the borrowers. They have to be careful that the scheme offered does not create a situation of further financial difficulties for the affected borrowers. It is also important to understand the requirements of the borrowers and make them understand the implications of the plan offered. The lenders should also remember that the plan can be affected by the courts or by the Federal Reserve Board if the plan is found to be contradictory to the law. This is something that the lenders must keep in mind.
There are two types of restructuring options available to the lenders. One is the direct restructuring plan, which is applicable to individual borrowers, limited to debt that is unsecured. Another is the indirect restructuring option, which is applicable to the whole network of lenders or to all the lenders in the system. The lender involved in this transaction will decide the nature of payment after assessing the current schedule of payment by considering the present position of each borrower in the entire scheme.
In order to facilitate the process of restructuring loans for mortgage servicing companies, the Federal Housing Administration (FHA) allows the lenders to extend the term of the loan up to thirty days. The thirty days of extension only applies to non-performing assets that are owned by the FHA directly. These include sub-prime mortgages that are owned by the FHA or are held by a third-party organization that is insured by the FHA. Non-performing assets do not include assets like properties or real estate owned by the borrower. Instead, it refers to any asset that is held by the FHA, but is not managed by him. Loan restructuring for non-performing assets helps the borrowers in getting lower interest rates, payment mortification, deferment of payment, and payment holiday for the remaining amount of the loan.
Mortgage restructuring and loan emis are basically meant for restructuring loan accounts that are already delinquent. Mortgage restructuring enables the borrowers to benefit from the current schedule of payments for their loan account if they can show that there is no prospect of recovery in the near future. For this purpose, the borrower should provide supporting documents such as income and expenses statements, income tax returns, financial statements, and so on. Loan restructuring is to enable the lenders to waive penalties, fees, and charges. In addition, the lenders also agree to reduce the interest rate, prepayment penalties, and late penalty charges on the account.