This is the reaction of the Commonwealth Development Authority to Senate Bill 17-60 which proposes to disallow CDA, the Commonwealth Ports Authority and the Department of Public Lands from waiving interest on loans.
Manuel A. Sablan, CDA executive director, said debt relief is an important vehicle for the agency that gives incentive to borrowers to come forward and make the payments.
“The idea here is not to forgive but to work with the borrower. But in a situation where the borrower does not have anything, then it will cost CDA more to go after that account with legal fees and administrative costs. There’s no possibility of obtaining any collections from that account.”
In its Feb. 27 meeting, the CDA board opined, “Foreclosing hurts a lot of people. It’s a long drawn-out process. As much as possible, we try to find a way to work it out.”
Sablan told Variety that CDA, as a lender, when trying to work out a loan — a troubled loan — should have all the flexibility to restructure that loan.
“If the borrower simply does not have the income nor the assets to pay the loan, then the option should be there to waive the accrued interest,” Sablan said.
He explained that when the borrower becomes delinquent and loan becomes default, there are a number of actions that CDA can take: move to foreclose the account; work out with the borrower and offer options to settle the loan.
CDA, through its board of directors, can defer payment of accrued interest until some future date then amortize the principal for a longer period of time at reduced interest rate. “So the monthly payment will be much lower.”
Sablan said as long as the borrower does not move in this direction, indebtedness continues to increase. “Should we continue to move in collecting the accrued interest despite the fact that the borrower neither has the ability to pay nor the assets that we could foreclose to fully satisfy the debt?
Then consideration to waive the accrued interest should be there.”
To explain further the program, Sablan cited an example. “Borrower A is substantially, seriously delinquent. Now, in our records, from the accounting side, any loan that is 120 days delinquent is basically reflecting in our books as non-collectible. But legally it is collectible because the borrower is still obligated to pay for the entire debt. So we will go to the borrower to say, we will file a complaint for the debts that you owe. Let us assume he borrows $100,000 on the date we filed the complaint. His loan is $100,000 principal and $50,000 accrued interest. Technically he owes us [CDA] $150,000. Complaint will be $150,000 if that account will go to court for foreclosure.”
Sablan further explained that before the agency moves in that direction, CDA will work out an arrangement with the borrower.
“Now you have a $150,000 loan, $50,000 accrued interest, we are prepared to defer payment of accrued interest, provided you are able to resume payment on your loan by restructuring the loan so that the $100,000 principal owed will be amortized over 30 years at a reduced interest rate of 2 percent.”
Sablan said without the debt relief arrangement, the agency goes to court to pursue foreclosure and the court will issue a $150,000 judgment saddled with 9 percent interest, judicial interest rate. From the time the judgment is rendered, the $150,000 will continue to accrue at 9 percent that will further place the borrower in a precarious situation.
“Debt relief is the vehicle to avoid foreclosure,” he said.
However, Sablan said, if the borrower fails to live up to his commitment with CDA under the debt relief program by substantially falling behind in payments, then the deal is off and the agency moves to pursue foreclosure of the property.
Under the debt relief program, monthly payment has been reduced considerably over a 30-year term. “If we see that you are religiously making payments, CDA may reevaluate the financial position and offer to waive a certain percentage of the interest.
During the board meeting, CDA discussed that borrowers were having a hard time remitting payments. “Some of these portfolios have been revised 12 times.”
It was also discussed that the net portfolio should have grown considerably.
Merced “Marcie” Tomokane, chairwoman of CDA’s Development Corporation Division, said the net portfolio didn’t grow as expected because loans have been revised “like 15 times.”
“There’s no single penny payment to the principal. The revolving fund was running empty and the corpus of the fund wasn’t revolving,” she said.
With the debt relief program, CDA managed to be collecting now.
Asked if there’s change after the debt relief program, Sablan said, “Definitely, borrowers are coming forward to make payments and settle their loans.”
As of 2010, CDA declared debt relief program as a success.
Of the 33 clients, only four failed to make the monthly payments within the last three years.
CDA reported, “There is roughly $8 million in the portfolio bringing $30,000 in monthly payments and yielding over $12 thousand monthly in interest income for CDA.”
CDA is looking at restructuring DCD loans to the debt relief program and expects to transfer more than $7 million within the next year or two.
To date, 20 borrowers are actively seeking debt relief in addition to 33 clients already in the program. Seven accounts are now moving to the foreclosure process.
