At industry conferences, I often hear, “No one has figured out how to make money in litigation.” The truth is, lending litigation is not about profit, but about protecting your investments when borrowers default. For real estate lenders, the best strategy is to minimize risks before disputes arise and to be prepared with effective remedies when they do. Below are seven essential lending litigation strategies that can help you safeguard loan files, enforce rights, and maximize recovery.
1. Start Strong at Underwriting
The time to prepare for lending litigation is at the very beginning, underwriting. Fraud is WAY up since 2017, so ensure you know who your borrower is, that the collateral exists and is owned by your borrower, and that you have purchased the right amount of Title Insurance (we recommend 125 percent) of the loan amount. Fraud prevention is a bigger topic and will be the subject of a forthcoming article (teaser!).
By verifying details upfront, you not only reduce the likelihood of fraud but also strengthen your position if a dispute arises later. Strong underwriting is your first line of defense against costly litigation.
2. Weigh the Use of Forbearance Agreements
Presuming you find yourself with a defaulted loan, one option (not recommended long-term) is to let it go temporarily with a forbearance agreement. This means you and the borrower agree that you will not enforce your rights now, and the borrower promises (pinky swear this time) that they will cure the default over a period of time.
However, this essentially waives your collection remedies for a period. You want to ensure this does not extend too long, or you may find yourself unable to collect at some point due to the Statute of Limitations. Forbearance agreements can buy time, but lenders must manage them carefully to avoid weakening their legal position.
3. Explore Loan Modifications
Another path is modifying loan terms. This variety of “workout” generally involves moving defaulted payments to the end of the loan, waiving fees, changing the interest rate, lowering monthly payments, or extending the duration of the loan.
If you pursue this route, it is essential that you notify all guarantors. They do not have to agree or like it, but they must be notified. Failing to notify guarantors can permanently waive your right to collect from them, so do not overlook this critical step.
4. Consider a Deed in Lieu of Foreclosure
Perhaps your borrower is in a substantially worse position and cannot make any modification work. They may just want to walk away and hand you the keys. This is where a deed in lieu of foreclosure comes in.
This solution transfers title to the property (your collateral) back to you and avoids the costs and time of conducting a foreclosure. However, it does waive your right to collect any deficiency against your borrower. It does not waive your rights against guarantors, but again, you must notify them beforehand.
5. Use Saber Rattling as a Pre-Litigation Tool
Failing those pre-litigation remedies, there is the time-honored practice of “saber rattling.” Ensure your contract has an attorney’s fee provision. So long as it does, and so long as you are convinced your position is correct, this strategy can work.
“It sure would be unfortunate (for you) if I had to sue and enforce this contract pal, because you will have to pay my lawyer (and yours).” You see, all the fees and costs of litigation get added to the balance owed, so litigation becomes rather expensive for borrowers in default. This might intimidate them into consenting to one of the remedies listed above.
6. Preparing for Lending Litigation
If litigation seems inevitable, carefully examine your file. Do you have a signed contract? Is the guaranty signed? Is the Deed of Trust signed, and does it encumber the correct property? Is your account payment history sufficiently detailed that you could explain it to a golden retriever?
If so, make a final attempt at “saber rattling,” and give the borrower one last chance, or have your attorney do it. Sometimes, a last-gasp effort is enough to resolve the dispute without court.
7. Combine Remedies for Maximum Recovery
If you must march down to the courthouse, consider your lending litigation strategy at the outset; it may save you a tremendous amount. Bearing in mind the fees provision in your contract, which really means your borrower is paying for all this, combining remedies into one case will make the procedure cheaper.
For example, if you sue for judicial foreclosure and add breach of guaranty causes of action in the same case, by the end you will have title to the property, a deficiency judgment against your borrower, and a deficiency judgment against all guarantors. You will also insulate yourself from many of the borrower’s claims against you and protect yourself from the anti-deficiency rules. You can even “double track” these cases with non-judicial foreclosures for efficiency.
Post-Judgment Collection Tools
Once the lending litigation process is complete, there are cost-effective remedies (and others not so much) that can reunite you with your money. Recording abstracts immediately attaches your deficiency balance to all real estate your borrower or guarantors own (and they cost less than $40).
Bank levies can ruin a borrower’s day and bring them to the negotiating table. Wage garnishments work similarly. Saving all that, you can use more complicated methods, the extraordinary relief that will be the subject of a forthcoming article. These include receivership, judgment debtor examinations, keepers (the till tapper), and other exotic remedies.
Final Thoughts
Lending litigation does not have to be overwhelming if you approach it with the right strategy. At Fortra Law, our Litigation & Bankruptcy team works with private lenders across the real estate industry to enforce rights, recover assets, and protect loan files before, during, and after disputes. If you have questions about how to approach a delinquent borrower or want to explore options for lawsuit-proofing your loans, contact Fortra Law today.
