What is a loan workout and which strategy is commonly used to mitigate losses when a borrower misses terms?

• A. A loan workout is a routine annual review that terminates on time; lenders do nothing.
• B. A loan workout means lender increases loan size automatically.
• C. A loan workout refers to refinancing with identical terms regardless of performance.
• D. A loan workout occurs when a borrower fails to meet terms; lenders modify, restructure, or foreclose; use forbearance and workouts or property sale.

Answer: (D)

When a borrower misses terms, a loan workout is the lender’s approach to getting the loan back on track and reducing potential losses. It involves actions like modifying or restructuring the loan (adjusting the term, rate, or payment schedule), and using forbearance or other workouts to give the borrower time or relief. If recovery through modification isn’t possible, foreclosing or selling the collateral may be pursued to recover value. The goal is to preserve value and minimize losses rather than sticking with the original terms regardless of performance.

This is why the described strategies are best: they explicitly center on adjusting expectations and taking active steps to maintain repayment or recover value, rather than routine reviews, increasing the loan size, or refinancing with identical terms that don’t reflect the borrower's performance.