What Happens to Your Commercial Loan if the Lending Bank Fails

Your commercial loan will still be active if your lending bank fails, but you may have a delay in the time you can use the loan. This is only true if your loan is distributed by a credit card or other current means; loans distributed prior to the time bank failure, will not be called back. Even though there is a slight delay in accessing current funds, your loan will return to its normal standing as soon as a buyer is arranged for the loan.

Lending Bank Fails

When a bank fails, it is essentially declaring bankruptcy. The debts it has to other lenders are not longer able to be paid from the cash flow it has coming in. This typically occurs in one of two scenarios: one, the bank was irresponsible with the debt it took on; two, a large number of the bank's borrowers default in a very short window. Both scenarios are most likely to occur in a recession. When a bank fails, the Federal Depository Insurance Company assumes the role of a bankruptcy court. The FDIC sells the bank’s assets in order to pay outstanding debts. Your loan is included as an asset to be purchased.

Assets are Purchased

Other lending institutions are the groups most likely to purchase your loan. They will see the potential revenue stream down the line, and they will often even have the chance to buy the loan. The purchaser will be buying the loans as is, and their name will simply go onto the contract.

Grace Period Ensues

While the FDIC is handling the process of dividing up assets, your loan will be stalled. Again, if you received all your funds previously, this is not as much of an inconvenience. Borrowers with commercial loans distributed monthly or on a credit card will be the most inconvenienced by this.

At the same time your loan is delayed, there will likely be a grace period on your payments. While payments still come due, you will not have to pay them until a new lender fully assumes the loan. You should keep the funds set aside for payment because they are still due.

Payments Resume

Once the sale is handled, the new lender will contact you regarding your new payment schedule and address. Again, since the lender bought the loan as is, the terms of the loan cannot change. Variable rate loans may see a rise in interest rates with the new lender, but all other loans should remain constant. You will simply be putting a new name in the "Pay to the Order of" section of your checks. If the lender would like to renegotiate your loan, there is a good chance you will have the opportunity to refinance and get a better loan than the one you previously held without penalty.