Principal balance discrepancy on mortgage

[bmwhongus]

Hi. Thanks for all the insight on this website. It is really a helpful tool for common folks to learn more about our financial situations and how dire they might be.

My bank is trying to foreclose on my commercial real estate property. Back in 2009, the bank had already put the mortgage under non-accrual (subsequent payments on the loan would be credited to the principal balance). Throughout the years, I've been paying whatever I could every month, even though it's not the original amount on the note ($4k instead of $6k). The bank never objected, and they never modified my loan. They just stopped caring about my loan. I even got a demand letter from the bank saying I owed $439k on principal back in 2010, which matched all the principal balances I had paid to it. Fast forward a couple years and the bank merged with another superbank. When superbank took over, it appeared that they took the back interest from the loan and added it up to the principal that I had been chipping away at. Can the superbank do this? My loan had been in nonaccrual for the past 4 years, with each payment chipping away at the principal. Isn't there some government regulation requiring banks to designate non-accrual loans and keep them in non-accrual unless they show either 1) They paid off the loan in full or 2) They show that they have the ability to do so within a reasonable time frame?

So now superbank is trying to foreclose on me because I stopped monthly payments due to the discrepancy in the principal balance. Could they foreclose if the principal balance that I have is far different than the one they have? (since nonaccrual in 2009, my principal balance is $385,000. The bank now has my principal balance at $486,000). I have all the paperwork that shows my payment records and even when the bank put my loan on nonaccrual. Do any of this help at all?

Thanks for any insight you guys can offer!

[justbroke]

I don't think you have any recourse. Without a formal modification, the "balance" has increased due to accrual of interest on the principal. If they are saying that your "principal balance" has changed, that's an entirely different story. If they are saying that your "principal" is still $XXX and your balance is $YYY (where YYY = XXX + Interest), then they are likely correctly accounting for your payment history.

If there is any recourse, you could try to hire a foreclosure attorney or you could use this all this documentation as a defense to foreclosure. I can't tell you that you have a good chance of sustaining anything. Unless there is a writing that modified your promissory note or some rider changing it to an non-interest loan, then the bank will hide behind the original promissory note and claim that it was a "bank" error.

[bmwhongus]

Thank you so much for your response!

What would be reason for recourse in foreclosure defense? In my case in particular, there seems to be some predatory lending questions. First off, my parents do not know English. When the loan was made by the bank to my parents, they misled them to believe that 1) the personal property of the guarantors would not be touched or affected in any way and 2) The borrowers (my parents) didn't need legal representation and thus, didn't have a lawyer looking out for them. In the aftermath of all this, my parents obviously signed for the loan due to having already spent $10k before the loan closing to set up companies, commitment fee of $5000 for the bank, etc. If they didn't sign the loan, the $10k they already spent would have been for nothing. Also, the negotiated rate of interest jumped significantly after the note was made (change in terms of the note) from 4.91% variable to 6.8% variable before finally settling on 7.25% fixed. None of that reflected the promised rate by the loan officer (around "5.5-6%...no more than 6" he said). Keep in mind that this was back in 2004-2005 when predatory lending was rampant. At the time, we lived in the #1 predatory lending state in the US.

I know that it seems like crying over something that went sour and didn't go in our favor, but the truth is if all these things were disclosed to us, we would have never gotten the loan in the first place. Yes, nobody pointed a gun to our head to sign for the loan, but looking back at it, it seems like we were picking out a body part to shoot ourselves. It would have been peachy if the loan didn't have any problems and we had the ability to pay it, but now that it has problems, these things need to be brought back up. Its not like we didn't try to fix the problem and offer more and more lump sum cash in order to lower the monthly payment and we tried and tried to pay all we could.

Thank you once again for any insight you could offer.

[justbroke]

Unfortunately, anything that is not in the Promissory Note is not a contract. Many brokers and loan officers will give you the low percentage offering, but the deal is not final until all the terms are reviewed. Then and only then is a rate fixed, and then you sign for that rate or you walk away. You would have no recourse and you would have, essentially, no defense to foreclosure for non-payment.

Additionally, consumer protection laws don't apply in business transactions. This appears to be a business transaction for a business loan. Typically, you don't need legal representation when signing a mortgage, even if it is a commercial mortgage/loan.

Unless you have, in a writing that modified the original promissory note to a "non-interest" note, it "could" be difficult to fight this. What may have happened is that you were offered a forbearance of the accrual of interest for some period to allow you (the guarantor) the chance to catch up. A forbearance is not a forgiveness. It's no different than the furniture credit accounts that promise no payments for 18 months only to accumulate interest over that period of time (or no interest over that period with a minimum payment).

I can only suggest going to a foreclosure defense attorney that may have some commercial loan experience. I have limited commercial loan experience as I have had such loans in the past for real property. I don't believe that TILA (Truth In Lending) and RESPA apply in commercial mortgages, but I could be entirely wrong. You must seek out a professional.

[bmwhongus]

Every attorney that I've spoken to so far has been in a state of shock when I bring up the fact that we didn't have an attorney represent us in this commercial mortgage. This was solely due to the fact that the bank misled us. The rates on the mortgage had been changed in writing, from an initial 4.91% to 6.8% and then another change in terms was added to make it 7.25%. All of these were attached to the original note. 7.25% fixed back in the day was in the high range. When my parents signed these changes, the bank just sent a secretary over to the house and she was the one who gave them the papers to sign with no question. Since the final change was made after construction on the property was finished, there wasn't a choice but to sign for the 7.25% fixed. Also, the bank used outdated personal financial information when my parents applied for the loan. Parents had NO SOURCE OF INCOME for 3 years prior before applying for the loan, and yet the bank still used the last tax return that showed they had income. This was not willfully done by my parents, who fully disclosed that they had no income, yet the bank still used the tax returns from 3 years before that showed they had income. All in all, everything just didn't seem right. To make a million dollar loan without a veritable source of income would seem foolish on the bank's part.

Once again, thanks for your helpful advice and tips! It is really really comforting knowing that there are people out there that have been through/helped others through dark times like these.

[LadyInTheRed]

Every attorney that I've spoken to so far has been in a state of shock when I bring up the fact that we didn't have an attorney represent us in this commercial mortgage.

And what did those attorneys advise?

[bmwhongus]

Well, one in particular was like "well, there's not much we can do about that now since you signed everything..." But the fact is that my parents were stripped of their rights to protection by law when the bank misled them and said that an attorney would be provided by the SBA due to this being an SBA loan. All my parents knew was that since they were paying all the attorney fees, then the attorney must be representing them. The case stinks to high heaven and all signs point to predatory lending, but there doesn't seem to be much we can do about it now. Yes, I know that just because you don't have a lawyer, it doesn't automatically mean predatory lending, but doesn't a red flag pop up at least? All of my parents' other real estate transactions had lawyers represent them, yet for this loan they did not? Why? Why wouldn't they have a lawyer---or why wouldn't the bank make sure they had a lawyer (if anything else, just to make sure all their bases are covered in the transaction)? Simple answer is because my parents were misled. I've done some reading on the internets and usually in a commercial mortgage case, it is automatically assumed that there is a lawyer representing the borrowers due to commercial loans being a bit more intricate than a home mortgage loan. Also, the borrower for a commercial loan is assumed to be more savvy and knowledgeable and therefore wouldn't make the mistakes a normal average home mortgage borrower would make. Arguments like not understanding English and not understanding what you signed for doesn't hold water because the commercial borrower is usually sophisticated enough to get legal representation. But what if the commercial borrower is someone like my parents who really didn't know what they signed for? Hell, it wasn't until the day of closing that they were hoodwinked into the personal guarantee on the loan. By then, they had already spent around $10k with the commitment letter, setting up corporations, etc. There was no choice but to sign the dotted line, it seemed. If there was legal representation, my parents could have at least asked what the consequences were if they didn't sign.

If it was one particular thing that happened, then there could have been benefit of the doubt, but this is a list of shady things that occured.

---loan was approved with old, outdated tax returns from 3 years prior showing income even though parents had been retired and had no income for 3 years at the time of origination.
---loan was promised to be at 5.5-6%, but jumped to 7.25% after construction was done (with at least 2 changes to original note)
---loan was made after being misled about personal guarantees (parents would have never made the loan if their other assets would be jeopardized...bank had assured that it wouldn't have touched them).
---loan was made without legal representation for borrowers and the bank lied by saying the closing attorneys from the SBA was the borrowers' representation because they had paid the fees.
---changes on the note were given to my parents to sign by a secretary who secretly came to the house and had my parents sign it without anyone present.

I'm sorry for sounding like a whiny baby or anything, but it's just a really really stressful time and by letting my story be known is really therapeutic. All these complaints are only at the origination of the loan. Throughout the loan, there had been many problems as well...problems that we tried to solve, but the bank would not respond (who turns away lump sum $25k to bring loan current and then another $50k to principal to try and modify/reduce monthly payments?). My parents and I work day and night for the past 10 years only to have the bank come by and say, sorry, we're foreclosing. I think that's the hardest part of it all...something you poured your blood, sweat, and tears in for the past ten years all of a sudden getting snatched away. I know I'm not the only one that this kinda thing happens to, and I know I'm probably luckier than some people because even if they do foreclose, (hopefully) the property has sufficient value to cover all debt owed on the loan *knock on wood*. Still, it doesn't get much worse than wasting 10 prime years of your life. So once again, thank you all for your time, patience, and guidance. Really really appreciated!