Forbearance Rights Under CARES Act
by: Greggory B. Oberg, Esq.
If not already apparent to you, Servicing issues have emerged as the dark horse for Compliance Challenge of the Year 2020. Since the Mortgage Servicing Rules (MSR-good blog on the topic Here) were enacted in ~2016, servicing has been trending higher risk and complexity on the regulatory side. The overlapping requirements for consumer protection imposed by investors, insurers, and federal or state authorities almost require the inclusion of one or more attorneys in the development of sound procedure across jurisdictions.
Well now it's more confusing. And opposed to having a 2-5 year runway as we did with certain aspects of the MSRs, it's a seemingly 2-5 hour runway some days. I'll grant that things have slowed down…fewer executive orders like the MA Smoke and CO2 issue; fewer 'new' state legislation being introduced and debated, and a majority of the entities we'd like to hear from have at least made an obligatory appearance.
Over at SCA, we've been more or less triage issues as they arise with clients--we're all in the same boat here, it's a crazy world and you gotta do your best with limited info.
But, for me--as one of those people who like to read the statutes themselves--this relative "slowdown" has given me the opportunity to stop treating and start preventing, to take an analogy from current events. While I'd love to talk for hours on the topic--even generally--it's important to reset the table here and focus on one issue at time in our understanding of the complex overlays created by new state, federal, and investor requirements.
Coronavirus Aid, Relief, and Economic Security Act - CARES ACT
Many sources have published pretty decent overviews of the bill at large, but I want to focus (ok-still somewhat in triage mode apparently) on those aspects that relate specifically to immediate actions in regard to our interaction with consumers. Specifically, our borrowers in servicing.
As you might know, the CARES act creates a "right" to forbearance of "up to 180 days" minimally. What you probably are less familiar with is how this might actually apply to your portfolio. So let's break down the statute, specifically looking at § 4022: Foreclosure Moratorium and Consumer Right to Request Forbearance
Three subsections, pretty typical structure. As an overview:
Subsection (a) addresses Definitions--key to applicability question on loan-level.
Subsection (b) addresses the Forbearance specifics
Subsection (c) addresses Foreclosure Moratorium and Servicer Obligations (lightly)
Below I've got a screenshot of the major subsections, each followed by my quick analysis as pertinent to the average community lender (depository or otherwise) servicing loans. Any State law implications/references I may make are generally keyed to MA law, although I'm closely monitoring a dozen or so states our clients frequently work in.
(1) While the definition of the emergency may seem unimportant, there is a small nugget here. In many of these "temporary" or "emergency" bills--both state and federal level--sunset clauses tie to X days after certain triggering events. The start of the emergency is one, specifically applicable to issues like determining the delinquency or performance status of a mortgage for eligibility for relief. The start of the emergency, in many cases, is the moment in time the payment status pre-emergency is generally relevant. In MA, for example, that date is March 10, 2020. It may be earlier in states like California.
Not real sure how that varying date may impact things for multi-state servicers, but it's an inflection point I'm watching for.
(2) Here's the big one. Although we haven't been told so yet, you can deduce that "Federally backed mortgage loan" will be a jurisdictional trigger by which the CARES Act mandates forbearance assistance to certain borrowers. For purposes of understanding the floor of actions we must take, this is important to understand. The Federal Government doesn't have--or chose not to use in this case--the authority to mandate all servicers stop collecting payments. But they can effectively hit most of them.
And the areas they do not, state laws very likely will fill in. So while in practice this Forbearance "right" may end up setting the standard for all loans, without regard to owner/assignee, we do need to understand the margins.
All loans purchased or securitized by Fannie or Freddie. Any loan insured or guaranteed by FHA, or the Dep't of [anything really] should be assumed covered.
Subsection (b) has some really useful items, some that clients have overlooked.
First, we learn that the forbearance period is "up to 180" days...but then may include up to ANOTHER 180 days. It can be shortened, but only on the borrower's election.
Second, we see no interest or other fees can be charged on the account. We must treat the borrower as if they had made the payments on time, despite forbearance.
Finally, subsection (c) ties it all together and provides the requirements banks and non-bank servicers must abide by. Again, not the clearest language on earth, but certainly provides us with the minimum.
Borrower requests for forbearance will not require additional documentation to verify hardship beyond the borrower's attestation.
Borrowers have a right to no less than 180 days forbearance, and no more than 360 days (for now).
Only the borrower may elect to shorten this time period.
No new fees or interest can be charged or accrue during this period, generally.