By Jason Bushby and Greg Pipes
In a previous issue of ABA Bank Compliance, we discussed the COVID-19 forbearance landscape and related compliance challenges for mortgage servicers. In this article, we unpack the post-forbearance world, focusing on the transition out of forbearance and into other forms of loss mitigation assistance, including, but not limited to, payment deferrals, repayment plans, loan modifications, etc. This article also examines the interplay between investor/insurer requirements, federal law, and select state laws.
Under the Coronavirus Aid, Relief, and Economic Security Act, servicers of federally-backed single family mortgages are required to provide forbearances to borrowers impacted, directly or indirectly, by COVID-19. Borrowers that meet this criteria and request assistance during the covered period are entitled to an initial forbearance period of up to 180 days and a one-time extension of 180 days (or less if the borrower chooses). Some state and local jurisdictions have also enacted forbearance requirements that are similar to, or expand upon the CARES Act provisions.
With a few exceptions—covered later in this article—federal and state forbearance requirements do not dictate how servicers should handle forborne amounts after the forbearance period ends. In keeping with industry standard, most lenders and servicers require the borrower either to repay the forborne amounts as a lump sum at the end of the forbearance period or enter into some additional form of loss mitigation. Servicers transitioning into this post-forbearance landscape must evaluate a patchwork of federal, state and investor/insurer requirements to determine which options to offer and how to offer them legally and efficiently. With increasing numbers of COVID-19 forbearances set to expire each month, these issues are relevant now more than ever.
Common post-forbearance scenarios
Borrowers exiting COVID-19 forbearances in the current environment will likely have a mix of post-forbearance options that include traditional loss mitigation options and unique COVID-19 programs developed by the investor/insurer. A list of common post-forbearance options/pathways and a brief description of each is included below. Of course, the types of options and specific terms available to any one borrower will depend on loan type, local laws and investor/insurer requirements.
Reinstatement. The borrower pays back all payments that were missed under the forbearance plan. After the reinstatement, the borrower continues to pay his or her contractual payment under the original terms of the loan.
Repayment plan. Tthe borrower resumes making his or her regular monthly payments, plus an additional portion of the missed amount…