CARES Act Forbearance: What You Need to Know

By Compliance Alliance Staff

What’s this all about?
As offices, restaurants, gig services, and other businesses across the country shut down and the unemployment rate skyrockets due to the Coronavirus pandemic, federal regulatory agencies have taken action to bring relief to homeowners who can’t make their mortgage payments. Specifically, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law on March 27th, 2020, borrowers with federally backed mortgage loans experiencing financial hardship due directly or indirectly to the COVID-19 emergency may request a forbearance by making a request to their mortgage servicer and affirming that they are experiencing financial hardship during this emergency. The regulatory agencies have stated that a forbearance under the CARES Act qualifies as a short-term payment forbearance program under Regulation X, or RESPA.

In the agencies’ April 3rd joint statement, they stated their flexible supervisory and enforcement approach regarding certain consumer communications required by the mortgage servicing rules during this emergency.

A little context, please?
Just to make sure we’re all on the same page here, forbearance is when a mortgage servicer – that’s the company that sends the mortgage statement and manages the loan, or lender – allows a borrower to pause or reduce mortgage payments for a limited period of time. Importantly, it does not erase what the borrower owes, and the borrower will have to repay any missed or reduced payments in the future. So, if your borrower is able to continue making payments, they should keep doing so.

What kind of relief are we talking about?
So the types of forbearance available vary by loan type. If the mortgage is backed by the federal government, which includes FHA, VA, USDA, Fannie Mae, and Freddie Mac loans, the provisions of the recently passed CARES Act explicitly allow borrowers to temporarily suspend payments if they are experimenting financial difficulty due to the impact of the COVID-19 emergency on their finances, regardless of whether they are delinquent.

For non-government backed or private loans, these loan servicers may also have forbearance or deferment options, but the exact options available may differ.

For the federally backed mortgages under the CARES Act, if a borrower is experiencing financial hardship due to the Coronavirus pandemic, they may request a forbearance for up to 180 days, and servicers must provide the forbearance. The borrower also has a right to request an extension for an additional 180 days, and the servicer must extend this forbearance. While there won’t be any additional penalties, fees, or interest added to your account, your regular interest will accrue.

Other than the borrower informing the servicer that they have a pandemic-related hardship, they cannot be required to submit additional documentation to qualify for this forbearance.

What should you make your borrowers aware of?
Regardless of the type of mortgage a borrower has, the regulators have instructed borrowers to communicate with their loan servicer regarding relief options, so here are some things to consider.

First, if a borrower can’t make their mortgage payments or needs to reduce or suspend their payments, you can expect your borrowers coming to you for guidance and relief, and the agencies have made it clear that you must provide relief in the form of forbearance options.

Second, when providing these options to your borrowers, you need to make sure the following concerns are clearly addressed:

1. Will you owe the entire unpaid amount in a lump sum once the pause period has ended or at the end of the loan term?
2. Can the loan term be extended so missed payments are added to the end of the mortgage?
3. Will subsequent monthly payments be higher for a period of time to make up for the higher for a period of time to make up for the deferred amount?

What’s the conclusion, here?
Ultimately, your Bank needs to be prepared to provide forbearance and payment suspension options to your borrowers. We know this is a highly fluid and confusing time for everyone, but rest assured that the Compliance Alliance Team is here to answer all of your questions and concerns. For additional guidance, check-out our Pandemic Planning for Banks page full of resources on this topic here: https://compliancealliance.com/about-us/pandemic-planning-for-banks. Additionally, you can review the April Joint Statement here: https://www.fdic.gov/news/news/press/2020/pr20047a.pdf