Real Estate LawBusiness LawUnderstanding California Loan Modification Agreements

August 6, 2021by admin

Understanding California Loan Modification Agreements

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A loan modification agreement is an agreement that facilitates the change to the original terms of a loan. A loan modification agreement can modify any aspect of an original loan, including a change in the interest rate, extension of the maturity date or amount of debt. In addition, a California loan modification agreement can serve to obtain additional security or additional guarantors for repayment of the underlying loan. 

If the loan modifications are material or significant, the lender will be concerned about potential adverse effects on the lender’s lien property; and therefore, it will be important to record a memorandum of modifications and obtain a mortgage modification endorsement from the title insurance company. 

Another important consideration is that the lender must also consider the impact of loan modifications on the liabilities of guarantors and others that are secondarily liable to the lender on the loan.  Since guarantors are absolved in the event of any material modification of the principal obligation without consent, the lender must take steps to ensure that any third-party guarantors of the secured debt will be bound by the loan modification. As such, for any loan modification, the lender should obtain the reaffirmation of the guarantor’s obligations under its guaranty and consent to the proposed modification as a condition of agreeing to a loan modification agreement.

A significant loan modification may have tax consequences for the lender and the borrower.  For example, if the modified debt is less than the amount of the outstanding debt under the original instrument, the result will be income to the borrower because of the cancellation of indebtedness, more commonly known as cancellation of debt income (CODI). See IRC §§61(a)(12), 108(e)(10). Borrowers need to contact tax advisors to determine applicability of IRC exceptions in deferring or eliminating CODI and resulting consequences.

How Can a Loan Modification Be Facilitated? What Are the Requirements?

Pursuant to Business and Professions Code Section 10131(d) a person must have a real estate broker license to solicit borrowers or lenders for or negotiate loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.  

Since a note or deed of trust is a contract in writing, due to the statute of frauds any loan modification cannot be an executory oral agreement. Civil Code Section 1968(a). 

A loan modification agreement negotiated by a borrower or a borrower’s real estate broker can be documented by an attorney. 

Simantob Law Group is a law firm of business attorneys and real estate lawyers. We have represented the business and real estate legal needs of individuals and companies, from start-ups to regional and national US corporations for over 20 years. Please contact us at 310.281.0041 or complete our online contact form to discuss your California Loan Modification documentation/guidance needs.

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