As attorneys and their clients continue to grapple with the economic impact of the COVID-19 pandemic, every attorney should have a basic understanding of the relief available to consumers under the CARES Act. On June 5, 2020, the MSBA Consumer Bankruptcy section presented a discussion of the benefits and potential pitfalls of the provisions for mortgage forbearance and student loan deferment. Bud Stephen Tayman, Esquire, moderated the live discussion, and attorneys Kelly A. Grafton, William A. Grafton, Jeffrey Scholnick, and William
F. Steinwedel presented.
Section 4022(b) of the CARES Act focuses on mortgage forbearance. The Act requires lenders to offer forbearance of up to six month to borrowers who (1) have federally backed mortgages and (2) can demonstrate a COVID-19-related hardship. Practitioners should encourage clients to apply for forbearance even if they have a loan that is held by a private trust; although private lenders are not required to offer forbearance, many servicers will consider a request. Mr. Steinwedel noted that the CARES Act clearly states that a lender cannot deny forbearance if a loan was already delinquent, or a borrower has defaulted or is in bankruptcy. However, forbearance might rightfully be denied if a borrower’s financial hardship predated COVID-19. Mr. Steinwedel’s experience with the CARES Act is that the process is slow—up to two months—and that most borrowers are receiving forbearances of three months.
Once a borrower receives a forbearance under the CARES Act, there is a question of what will happen to the deferred portion of the balance. Mr. Grafton provided an overview of how Fannie Mae will address this issue, but noted that each agency has its own guidelines. He predicted that the most utilized process will be for a deferral agreement, allowing a buyer to pay the deferred portion at the end of the loan. Fannie Mae requires the following steps for a deferral agreement: a servicer offer a deferral; the borrower must accept the offer; the borrower must confirm their hardship is resolved and they are able to resume payments; the loan is a conventional first lien mortgage; the residence is occupied by the owner or a renter; the loan is not more than 360 days delinquent. Mr. Grafton encouraged practitioners to record a deferral agreement in land records, although it is unclear whether recordation is required.
Ms. Grafton addressed what will happen if a borrower cannot resume fully monthly payments after the forbearance period. Again using Fannie Mae as an example, Ms. Grafton noted that the loan servicer would be required to evaluate a borrower for a flex modification, which would extend the term of loan to up to 40 years from the date of modification. The same process would apply for a borrower who defaults on their mortgage before completing a COVID deferral. If a borrower is eligible, a loan servicer must send an offer for a Fannie Mae flex modification no later than 75th day of delinquency
Section 3513 of the CARES Act provides for student loan deferments. Mr. Scholnick noted that the statute places the burden on the government, collectors, and agents to notify borrowers that all student loan payments are suspended until September 30, 2020, with no accrual of interest or penalties. The law also stays any collection actions. Beginning in August 2020, borrowers must receive no less than six notices stating that their obligations will resume and that they have the option to enroll in an income-driven repayment plan. Although the CARES Act applies only to federal student loans, some state attorneys general have tried to create the same deferment format for private loans, and many private loan servicers are participating in the state programs. Mr. Scholnick noted that most people don’t know if their loans are private or federal, and discussed ways in which this information can be obtained.