Today, borrowers are struggling under a heavier burden of debt, from credit cards and student loans to car loans and mortgages. Total household debt climbed to a staggering $18.39 trillion in the second quarter of 2025 and delinquency rates remain elevated, according to the Federal Reserve Bank of New York.
Whether proactively or reactively, some consumers are searching for financial breathing room so they can better manage their debt payments. Enter loan negotiations.
“We’ve always been very open to renegotiating, because we’re a community bank,” says John Buhrmaster, CEO of $700 million-asset 1st National Bank of Scotia in Scotia, New York. “We’re here to help people.”
Although the community bank has not seen a noticeable increase in requests for mortgage modifications, its lenders are busy modifying car loans due to the higher cost of vehicles. “Especially in this time, where inflation over a number of years has caught up to most everyone, we need to make sure that our community banks are using all their options,” adds Buhrmaster.
Modify vs. refinance
The preferred route in most cases is a loan modification versus a refinance. “The modification is a quicker, easier, cheaper process to help the customer and give them the lower rate,” says Peter Sulick, vice president and mortgage sales manager at PeoplesBank in Holyoke, Massachusetts, of the $6.6 billion-asset holding company PeoplesBancorp, MHC. “The advantage to the bank is we retain the customer.”
A community bank’s ability to do a loan modification depends on a variety of factors, such as where that loan is held, who is servicing it, the size of the bank and the rules governing a particular state. Banks that hold loans on their own balance sheet have the most flexibility in what they can or can’t do to help a borrower.
Making a difference for homeowners
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Modifications also take different forms and occur for a variety of reasons beyond financial stress. For example, a bank might offer a one-time close mortgage loan, where a short-term construction loan is modified to a permanent mortgage when construction is complete. Or a borrower might go to a lender in hopes of renegotiating a lower rate.
A modification allows the terms of the loan to be changed without having to refinance and go through the entire process of creating a new loan. However, one key component in a modification is that no new money is disbursed.
“The last thing the bank wants is to have to go through a foreclosure or repossession or something of that nature,” says Ron Haynie, senior vice president of mortgage finance policy for ICBA. “So, they work with the borrower to restructure the debt via a modification to get the loan back on track.”
Early intervention is key
Quick Stat
$18.39T
Total household debt nationwide, as of Q2 2025, an increase of $185B
Source: Federal Reserve Bank of New York
The general rule of thumb for community banks is to be proactive and start a modification before a borrower gets into a default situation. Most banks allow a grace period on late payments, but once a loan is 30 days late, it’s automatically reported to the credit bureau.
“Generally, when a borrower needs to start the modification process is before they get in trouble with a loan and before they start missing payments, because modifying and refinancing usually are done when the person is in good standing,” notes Sulick. At PeoplesBank, the loan needs to be current and not past due to be eligible for a modification.
Many community banks are helping consumers stay ahead of stress that may snowball into delinquency and bad credit.
For example, lenders at 1st National Bank of Scotia focus on early intervention. The first time someone is 10 days late on a payment, a banker will get on the phone and reach out to the customer. They have an honest conversation with the customer to learn about the issue that’s affecting their loan payments. Is the payment too much for them? Does the monthly payment date need to be adjusted? Is some other life event influencing their ability to pay?
“What we teach our officers is that the interview process is critical in determining whether they’re in a temporary situation or if this is going to be permanent,” says Buhrmaster. Is it an unexpected expense that can be managed, or is it something more serious, such as a loss of a job or a spouse who is leaving employment to stay home with children? Sometimes people just overestimated what they could afford or were expecting a big raise that never materialized, he adds.
Handling difficult conversations
There is no blanket approach for handling every payment problem, so the community banker must work to understand a customer’s specific situation. Helpful considerations include:
What is the customer trying to accomplish?
Are they trying to get to a lower payment?
Are they trying to shorten the term?
What’s in the customer’s best interest?
“You have the most success when you’re able to show empathy and you’re able to listen,” Buhrmaster says. “That allows you to formulate the right plan for the customer.” For example, perhaps the borrower can’t really afford payments on a $60,000 truck, and they need to sell it and buy a lower-cost vehicle.
A community bank might suggest modifying the car loan to interest-only payments for two to three months to give the borrower time to sell the car and buy something more affordable.
Modifications are a great tool, Haynie says, and community banks are uniquely positioned to help customers who might be struggling by modifying an existing loan.
PeoplesBank’s Sulick concurs: “As a community bank, we really do value our customers, so we’re going to try to get to the root of what the customer is trying to accomplish.”
