An amended federal law allows loan servicers to offer a payment deferral option to homeowners who finish a coronavirus-related forbearance—without requiring a complete loss mitigation application. If you accept the servicer's offer, you pay the skipped payments at the end of the loan (rather than, say, paying the overdue amounts in an immediate lump sum or through a repayment plan). In return, the servicer gets out of having to comply with some federal mortgage servicing requirements.
The law also provides you with other rights if the servicer decides to offer a deferral option.
Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, homeowners with a federally backed mortgage loan, regardless of delinquency status, experiencing a financial hardship due directly or indirectly to COVID-19, can get a forbearance of up to a year. A "federally backed mortgage loan" is a loan that's guaranteed or made by a federal agency, like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), or owned or securitized by Fannie Mae or Freddie Mac.
Also, even if your loan isn't federally backed, most servicers have forbearance programs to help borrowers during the coronavirus national emergency. In addition, your state might provide special protections or programs for mortgage borrowers. Arizona, California, Connecticut, Massachusetts, New York, Rhode Island, and the District of Columbia, for example, provide borrowers who’re having trouble making payments due to coronavirus the opportunity to get a forbearance. Contact your loan servicer, talk to a lawyer, or speak to a HUD-approved housing counselor to find out what options you have. You can also check your state government’s website to find out about available mortgage assistance.
But a forbearance isn't the same as loan forgiveness; you'll still owe the skipped payments after a forbearance period ends. Borrowers with Fannie Mae, Freddie Mac, and FHA-insured loans, for example, can pay these amounts through a payment deferral program or similar alternative in which the borrower defers (postpones) repayment until the end of the loan. But borrowers with other types of loans might have to pay the missed payments in a lump sum or through a repayment plan.
Under Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), most servicers must take certain steps and provide protections to borrowers facing foreclosure. For instance, if homeowners seek loss mitigation, the servicer has to try to get a complete application from them; it has to exercise reasonable diligence in obtaining documents and information to finish the application. The servicer then has to review the application for any loss mitigation option that the borrowers requested, like a loan modification, and all other available possibilities. (12 C.F.R. § 1024.41(b),(c)).
A Consumer Financial Protection Bureau (CFPB) interim final rule allows servicers to get out of complying with some mortgage servicing requirements if they offer payment deferrals to borrowers who finish their coronavirus-related forbearances. (12 C.F.R. § 1024.41).
Specifically, the law says that a servicer may provide borrowers with a payment deferral based upon an evaluation of an incomplete application. If the servicer offers a deferral, it doesn’t have to try to get additional information from the borrowers to complete their application or evaluate the borrowers for any other loss mitigation possibilities. It also doesn't have to provide an incomplete acknowledgment notice.
A “payment deferral” allows borrowers to resume making their regular mortgage payments when a forbearance ends. The missed payments are added to the end of the loan term. So, the borrowers don’t have to pay the skipped amounts in a lump sum, in a repayment plan, or through a loan modification immediately after the forbearance is over.
Under the amended law, borrowers who complete a coronavirus-related forbearance plan and accept the payment deferral option don’t have to come up with the missed payments until:
Also, the deferred amount can’t accrue interest, and the servicer can’t charge you a fee for picking this option. The servicer must waive all existing late charges, penalties, stop payment fees, and other similar charges once the borrower accepts the deferral option, too. (12 C.F.R. § 1024.41(c)(2)(v)(A)(2)). However, the law doesn’t say how you have to pay the deferred amount when it’s due. You might have to pay a lump sum or make additional installments at that time.
This law is effective as of July 1, 2020. But as of early October 2020, servicers are just starting to offer deferrals as borrowers complete their initial coronavirus forbearances.
The new rule applies to all principal and interest payments forborne under a COVID-19 forbearance program. (12 C.F.R. § 1024.41(c)(2)(v)). So, this kind of payment deferral plan isn’t limited to just CARES Act forbearances. All borrowers with coronavirus-related forbearances, even those who don’t have federally backed mortgage loans, are potentially covered.
It also covers all principal and interest payments that are due and unpaid by a borrower experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. (12 C.F.R. § 1024.41(c)(2)(v)). Accordingly, the law might apply even if the borrower didn't get a forbearance, but just owes mortgage payments incurred while experiencing a financial hardship due, directly or indirectly, to the coronavirus crisis.
The law covers forborne principal and interest payments, but not skipped escrow amounts, like for property taxes and homeowners’ insurance. So, the servicer can demand a lump sum (or additional installment payments) to repay escrow advances it made during the forbearance period or to cover an escrow shortage after the forbearance ends.
But borrowers with FHA-insured mortgages don’t have to worry about unpaid escrow amounts that accrued during a forbearance. That's because a COVID-19 National Emergency Standalone Partial Claim includes the full amount of forborne payments, including escrow amounts. Fannie Mae and Freddie Mac also require the servicer to include any escrow advances when offering their COVID-19 payment deferral program to borrowers following a CARES Act forbearance.
The amended law also gives homeowners new rights when a coronavirus forbearance is over, like ending the delinquency (that is, bringing the loan current) upon acceptance of the payment deferral option.
Under federal law, the servicer may start a foreclosure when the loan obligation is more than 120 days delinquent. So, generally, borrowers who are in a forbearance plan for more than 120 days, and complete the plan without bringing the loan current, could potentially face a foreclosure. But the amended law says that any pre-existing delinquency ends when the borrower accepts an offer for the deferral option. If you later fall delinquent on your mortgage payments after agreeing to this deferral option, the 120-day period starts again.
If your servicer doesn’t comply with this law, you can file a lawsuit under RESPA to recover attorneys’ fees, actual damages, plus up to $2,000 in statutory damages if a pattern or practice of servicer noncompliance exists. Consider talking to a lawyer if you think your servicer is treating you unfairly.
Also, if you can’t resume making your regular payments at the end of your forbearance, the deferral option won’t work for you. You might consider applying for a loan modification or looking into other alternatives. If you need information about ways to avoid foreclosure, consider talking to a lawyer. A HUD-approved housing counselor can also provide information about loss mitigation options (at no cost).