Pennsylvania Confession of Judgement

8 Replies

Hey Guys,

I was closing on my first multi-family in PA the other day and the lender had me sign a confession of judgement tied to the loan. It was the first I ever heard of it and after closing I researched it. After researching it, I am a bit concerned and wish I knew about this requirement before choosing a lender.

My questions: 

Are these required on every commercial loan product in PA?  

Do you guys also sign as Guarantors on your commercial loans with this clause?

Seriously considering early loan payoff. I'm not a fan of debt, but I figured leveraging for multis was a responsible use of debt.  That being said, signing as guarantor and the confession of judgement thing has me reevaluating my approach.

Thanks in Advance for any feedback!

Hi @Amad Osman , yes, I've seen both clauses on commercial loans in PA, but they are not required. A lot of lenders will want some form of recourse in their commercial loans, depending on the LTV and financials. In the eastern PA market, I usually won't see non-recourse unless you're lower than 60-65% LTV.

Before you pay off early, be sure you don't have any pre-payment penalties.  For example, a lot of lenders like to put in a 'step-down' prepayment penalty, where the penalty starts high, but lowers each year through the life of the loan. 

Thx @Andrew Beauchemin

75% LTV and there is a 1% early payoff penalty, but I'm willing to eat it.

So if I offered to put down another 10-15% I could have avoided it?

@Amad Osman , it's a possibility, it certainly would have given you more leverage to negotiate with.  No two loans are the same, which is why I would always suggest shopping around lenders, or get yourself a broker.  (full disclosure, i'm a commercial mortgage broker and am obviously bias here!)

I'm a fan of always keeping leverage on multi's, have you explored refinancing options, rather than completely paying off the debt?

These are common in the commercial lending world in PA. But why are you afraid of it if you are prepared to pay the obligation? That only kicks in when the borrower defaults on payment - make your payments in full and on time, and you can then act as if it is not there ...

Originally posted by @Steve Babiak :

These are common in the commercial lending world in PA. But why are you afraid of it if you are prepared to pay the obligation? That only kicks in when the borrower defaults on payment - make your payments in full and on time, and you can then act as if it is not there ...

 If only it was that simple. There are 10 additional events of default beside failure to pay. I also felt blindsided by this, but that’s my fault. Lastly, I just don’t trust banks I guess. I’m going to consult an attorney and make sure I understand all possible outcomes.

@Amad Osman

Most traditional lenders in Pennsylvania will ask you to sign a confession of judgment. Now if you are a very desirable borrower, you can negotiate it out. But most of us won't fall into that category. 

Note that confession of judgment is not "magic." Getting a confessed judgment to stick takes about the same amount of efforts as bringing a foreclosure action or suing under a guaranty. Having helped banks sue thousands of debtors, I can tell you that there is nothing inherently easier about confessing judgment versus any other lawsuit the bank can bring. 

Also, note that banks do not call defaults for fun. In many banks, loan officers get penalized for making too many loans that default. Likewise, calling a default requires the loan officers to file a lot of busy paperwork instead of selling loans. Long story short, banks generally won't call a default unless: (1) you fail to pay for a while; or (2) the bank deems you a total nightmare of a customer to work with. For most banks, the "10 additional events of default" you found in your loan documents are generally reserved for the second scenario.  

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.

Originally posted by @Amad Osman :
Originally posted by @Steve Babiak:

These are common in the commercial lending world in PA. But why are you afraid of it if you are prepared to pay the obligation? That only kicks in when the borrower defaults on payment - make your payments in full and on time, and you can then act as if it is not there ...

 If only it was that simple. There are 10 additional events of default beside failure to pay. I also felt blindsided by this, but that’s my fault. Lastly, I just don’t trust banks I guess. I’m going to consult an attorney and make sure I understand all possible outcomes.

My bet is the other events of default all relate to non-payment or habitual late-payment on this debt or some other debt to the bank, transferring ownership of the asset (or the borrower) without bank permission, or negatively affecting the value of the asset in some way. 

Nothing to be concerned with unless and until you don't honor your obligations to this creditor.

Thanks guys, appreciate you all taking the time to respond. 

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