It can be frustrating when a loan is prolonged, but there are good reasons, and potential benefits for investors. In this blog, we’ll take a look at why Estateguru prolongs some loans, and what it means for our investors.
Reasons for Prolonging
Sometimes our borrowers can’t repay their loans in accordance with the agreed timeline. This can happen for many different reasons. There may be unavoidable delays with the project, with the sale of the collateral or the product/s, with obtaining permits or with refinancing. If the borrower has proved cooperative and has paid all interest and fees on time, Estateguru can, in select cases and when we feel it is in alignment with our investors’ best interests, offer to extend the loan period.
What are the criteria for loan prolongation?
Loan prolongations are only granted under specific circumstances. To qualify, the borrower must meet several conditions:
- The borrower needs to provide an updated and confirmed exit plan.
- Our team must reevaluate the collateral’s current value.
- The use of the funds must align with the loan’s intended purpose.
- Prior to extending the loan, the borrower must settle all outstanding debts to our investors. We can prolong ONLY if the loan is not in “late” status – which means that all fees, interest, and indemnities are paid on time or have to be paid before prolonging.
- The following documentation and records, relating to the borrower, security provider and/or guarantor, need to be updated and saved onto Estateguru’s administrative system:
- Credit bureau data.
- Background checks, such as criminal reports or records, public announcements, court decisions and Fraud Prevention checks.
- Business registry check of annual reports.
- Business registry check of representation rights.
- If required by the credit committee, a new market valuation report will be ordered.
- The relevant loan manager will review and update the borrower’s account on the Estateguru platform, which includes checking the validity of IDs and other supporting documents.
- The real estate registry extract of the collateral will be reviewed to account for any new developments following the establishment of the original mortgage by Estateguru’s security agent.
- The existing mortgage agreement will be assessed to establish if there are any special terms in regard to extensions or amendments.
- In the event of any changes to the suretyship and/or guarantors, then confirmation will be sought out immediately, in written and signed form, to mitigate for any legal risk.
When loans meet the criteria described above, and the results of our underwriting process are satisfactory, then we will consider prolongation as a means of bringing about an exit from the project without any decrease in investor returns. We allow for the revision of the loan terms in these select cases, as enforcement procedures typically lead to an auction, which may not yield as much profit for our investors.
In cases where we feel it would allow our borrowers to repay the funds in an orderly manner, we believe this option is more advantageous for our investors. However,in cases where we do not receive a satisfactory response or any positive outcomes, we initiate the enforcement process. Ultimately, the credit committee will decide whether or not a borrower’s application for a loan extension is granted.
Prolongment period
For loans issued after the acquisition of our European Crowdfunding Licence, the maximum prolongment period is six months. Loans issued prior to that could be prolonged for as long as 24 months. The borrower will need to find a solution, whether it be selling the property or securing additional refunding elsewhere, in that time.
What prolongation means for our Investors
Of course, when a loan is prolonged, it means that investors will not receive their principal back at the agreed upon time. However, collaboration with the borrower typically results in a more favourable recovery outcome for the lender than engaging in a protracted enforcement process. Additionally, the interest rate goes up 1 percentage point every three months.
As mentioned above, before a prolongment is approved, we will conduct a reevaluation of the exit plan and reassess the borrower and security documentation to ensure that their credit strength hasn’t been compromised during the loan maturity.
