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In the current economic climate, lenders continue to face the Hobson’s Choice of how to respond to once-reliable borrowers who are now showing signs of distress. For example, when a borrower fails to make a monthly interest payment, or fails to adhere to other requirements under a loan agreement, a lender has the option of noticing a default, which, if uncured, allows the lender either to accelerate the loan at issue or foreclose on the underlying collateral (e.g., typically, the property in a real estate lending context). However, if, as is often the case, the loan is non-recourse (except for “bad act” carveouts), or if the property has significantly diminished in value since the execution of the loan documents, a lender might opt to accommodate a delinquent borrower rather than pursuing foreclosure. Lenders who pursue this strategy, however, must be cautious.

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