Why Lenders Will Never Negotiate Loan Forgiveness

Why won’t lenders negotiate loan forgiveness? The answer is simple and understandable. Despite the logic supporting such a strategy there is one inherent flaw: If a borrower goes into default and is offered an opportunity for debt forgiveness by the bank, the fear is that every other stressed borrower will immediately go into default and wait for their loan to be partially forgiven as well.

The belief is that such an action will destroy the credibility of the banking system and bring the banks to their knees, forcing them to provide debt forgiveness to any borrower who defaults. This would have disastrous effects on the bank and the entire banking system. Clearly, such an action by a bank could result in massive default.

Real or not, this is one of the major barriers preventing forgiveness from being a viable option in the banker’s playbook. We are unlikely to see such action for this reason.