During these unprecedented times, Americans are increasingly feeling the impact of the COVID-19 pandemic, both on their everyday lives and their financial well-being. For many individuals, financial relief is being provided in the form of payment deferral programs which require a modification to the terms of existing loan agreements. Such efforts will ease pressures on troubled borrowers, improve the borrower’s ability to pay back the debt and strengthen a lender’s ability to collect on its loans going forward after the pandemic is over.
While federal regulatory agencies have issued joint policy statements providing additional regulatory flexibility to allow servicers to work with struggling borrowers, such efforts must still be accomplished in a manner that is consistent with safe and sound banking practices and in compliance with applicable laws and regulations. The Temenos Compliance Advisory Team has answered the top questions from our first LIVE Q&A webinar held on April 15th, 2020.
1. What documents do we use to defer payments for a loan?
This answer will depend first on whether the loan is considered a “federally backed mortgage” under the CARES Act. A federally backed mortgages under the CARES Act, are mortgages purchased by Fannie Mae and Freddie Mac, insured or guaranteed by HUD, VA, or USDA, or made directly by the USDA. For those types of mortgages, COVID-19 affected borrowers have the right to request a forbearance under the CARES Act. It is not necessary the borrower sign any sort of modification agreement, as the deferral process is outlined in the Act itself and is an automatic right. For questions on a forbearance under the CARES Act, you will need to consult your legal counsel or possibly one of the loan providers, such as Fannie or Freddie, as it does not fall under the federal compliance regulations on which we advise.
Now, for loans outside of federally backed mortgages under the CARES Act, you will need to treat them differently depending on whether they are closed end or open end credit.
For closed-end credit, you will need to do a loan modification that clearly outlines the terms of the payments. A modification does not trigger any new disclosures or requirements under Reg. Z, such as an LE/CD, ATR/QM, HOEPA, or HPML.
But, with a payment deferral offer like this, you must make sure that the customer understands that you are not offering to forgive the monthly payment, but only allowing them to defer or postpone payments and the borrowers still owe those amounts. In other words, you are simply extending the term of the loan by three months or three payments, or adding a balloon to the end, or however you’ve decided to structure the repayment of the deferred amounts.
If this is open-end credit, and you have not disclosed this feature in the original credit disclosure, then you will need to do a change in terms, which could be as simple as a note on the periodic statement telling the customer which months of payments they may skip, or it could be a change in terms form. The key is that you must give notice about when payments will resume. So, you can either use a change in terms form which outlines when the payments will resume. Or, you can simply include note on the periodic statement that says they may skip specific monthly payments, such as that the borrower may defer their May, June, and July payments. That indicates to the borrower that payments will resume again in August.
For any loan deferment, you’ll need to clearly explain if and how interest will continue to accrue and the effects of the deferral, such as that it will extend the maturity date, or there will be a balloon. In addition, some states have laws restricting this type of arrangement, so you will need to also contact your bank’s legal counsel or possibly your state banking agency to determine if your state has any additional requirements or restrictions.
2. Would deferring the payments be considered a MIRE event that triggers flood?
If you are extending the maturity date on the loan with the deferment, this would be a MIRE event. That means the lender will either need to pull a new flood certification or rely on an existing flood certification that meets the criteria for doing so under the flood rules. If the property is in a flood zone, then a flood notification letter should be sent.
Also, keep in mind that modifying a loan that was not subject to flood escrow due to the origination date being prior to Jan. 1, 2016 will cause the loan to be subject to flood escrow if the maturity date is extended, and the lender does not qualify for the small services exemption or some other transaction exemption to escrow.
3. If we deny a borrower a deferral, do we have to send an adverse action notice?
Generally an adverse action notice is not required. According to Federal Reserve guidance previously issued, there is a four-step process to determine whether an adverse action notice is needed. You will need to ask these four questions:
- Would there be an extension of credit? “Credit” includes the right to defer payment and a modification usually will include deferring payment of a debt by actions such as reducing the interest rate or extending the loan term.
- Was there an application? In general, if a borrower has submitted enough information for the lender to evaluate the modification request, there will have been an application.
- Was there an adverse action on the application? An “adverse action” is a refusal to grant credit in substantially the amount requested or on substantially the terms requested in an application. A denial of a modification request likely would be an adverse action.
- Was the borrower delinquent or in default? This tends to be the question that relieves a lender from sending an adverse action on a modification request. Under Reg. B, a lender is not required to give an adverse action notice to a borrower whose account is delinquent or in default. Most borrowers seeking modifications are delinquent on payments. However, I the borrower is not yet delinquent, an adverse action notice is required. You can find the guidance issued by the Federal Reserve regarding the 4 questions in the following link provided by the Fed using a secure website – Mortgage Loan Modifications and Regulation B’s Adverse Action Requirements.
#4. Are short term deferral requests considered a loss mitigation application under RESPA, triggering loss mitigation notice requirements?
Short-term forbearance plans are excluded from some of the otherwise applicable loss mitigation procedural requirements. While RESPA generally prohibits a lender from offering loss mitigation option based upon evaluation of information in connection with an incomplete application, there is an exception in the rule for short-term options
RESPA permits servicers to offer-short term forbearance plans based on an evaluation of an incomplete application, including offering this option to borrowers who have not submitted an application at all. A short-term forbearance option is one that does not exceed payment deferment for longer than six months, regardless of how long the repayment period is. This is true even if the servicer offers multiple successive short-term payment forbearance, such as what you find in the CARES Act forbearance program. However, there are still certain notice requirements that must be met.
A servicer must still provide the acknowledgement notice that is normally required within five days of receipt of an incomplete application. The agencies recognize that this notice may be confusing to a borrower who is applying for a forbearance, so they have said they do not intend to take enforcement action against servicers for failing to provide the notice within five days, so long as the servicer provides the notice before the end of the forbearance period. The borrower must also send a written notice stating, among other things, the specific payment terms and duration of the program. A servicer must also contact borrower near the end of any short-term forbearance period if the borrower remains delinquent. However, this second notice may be verbal. There is also flexibility in the rules around how servicers can adjust the content of these notices in an effort to avoid some confusion since they are specifically related to COVID-19 issues.
Now, if you are a small servicer, you will remain exempt from these notice requirements since the majority of the loss mitigation sections do not apply to small servicers.
#5. Do we have to worry about fair lending?
Yes. Even though these are not new extensions of credit, a lender should still make sure they are offering and granting extensions to borrowers on a fair and equitable basis. Now, regulators have said that modifications should be based on the facts and circumstances of each borrower and loan. But you still don’t want to raise any red flags with Fair Lending by creating a disparate impact situation or by offering the modification to certain consumer groups and not to others based on arbitrary decisioning criteria.
#6. Are we still required to send periodic statements for open-end credit for the months the payments are deferred?
Yes, a periodic statement is still required to be sent during the months the payments are deferred. Reg. Z requires a periodic statement for each billing cycle at the end of which an account has a debit or credit balance of more than $1 or on which a finance charge has been imposed. While the borrower may not owe a payment for a specific month, the borrower still has a balance owed on the debt.
#7. Are we required to comply with E-sign for payment deferrals?
Yes. For open end plans, including HELOC’s, if the lender has not disclosed the skip feature in the original account opening disclosures, a lender is required to provide a change in terms prior to resuming the original payment schedule. As we’ve previously addressed, this can be done either using a change in terms form or can be as simple as a note on the periodic statement indicating which monthly payments may be skipped. E- sign covers any information required by statute or regulation, or other applicable law to be provided to a consumer in writing. Because a change in terms notice notifying a customer that the periodic payment is resuming or the periodic statement itself are both required to be in writing, a lender must comply with E-sign for these documents.
A modification agreement is essentially an amendment to the promissory note. State laws will determine whether this document is required to be in writing. If your state law requires a modification to be in writing, then it must comply with E-sign as well.
#8. Should we continue to send late notices and report them as late to the credit bureau?
The CARES Act mandates that lenders report loan modifications that result from the COVID-19 pandemic as current to the extent the borrower was current at the time the payment accommodations were made. If the borrower was delinquent when the payment accommodations were made, the creditor may continue to report the account as delinquent, unless the borrower brings the account current during that time. This applies to all types of lending.
As far as late notices, so far the only prohibition against further collection relates to student loans. According to the CARES Act, a lender must suspend all collection activities related to student loans for the period of payment suspension outlined in the Act.
As of today, there has been no further guidance issued that would prevent a lender from sending late notices for any other types of loans that were delinquent prior to the borrower becoming affected by this crisis.
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