By Thomas Abbott and Kristine Kruger
On March 27, 2020, the president signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, in response to the national emergency arising from the COVID-19 pandemic. Four key provisions of the CARES Act are likely to affect mortgage loan servicers: (1) credit protection; (2) a moratorium on foreclosures; (3) forbearance on mortgage payments; and (4) a moratorium on eviction filings. Compliance with the CARES Act may be straightforward for moratoriums but more challenging for credit reporting and regulatory compliance. This post provides an updated summary of salient portions of the CARES Act and identifies potential regulatory compliance pitfalls.
Summary of the CARES Act
- Amendment to the Fair Credit Reporting Act
The CARES Act amends the Fair Credit Reporting Act (FCRA) to require furnishers of credit information who make an accommodation that the consumer satisfies to report the credit obligation or account as current unless the account was delinquent before the accommodation. See 15 U.S.C. § 1681s-2(a)(1)(F)(ii)(I)-(II). The amendment is potentially retroactive, defining the covered period from January 31, 2020, to the later of July 25, 2020, or 120 days after the termination of the national emergency. See 15 U.S.C. § 1681s-2(a)(1)(F)(i)(II). Accommodations are defined broadly to include forbearances under the CARES Act in addition to a loan servicer’s deferment of payments, loan modifications, or other assistance or relief granted to a consumer affected by the COVID-19 pandemic during the covered period. See 15 U.S.C. § 1681s-2(a)(1)(F)(i)(I).
- Foreclosure Moratorium
The CARES Act imposes a moratorium on foreclosures of federally backed mortgage loans secured by real property consisting of 1-4 units. Federally backed mortgage loans include loans owned or securitized by the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae) and loans owned, insured, or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA). See 15 U.S.C. § 9056(a)(2). The CARES Act prohibits a servicer of a federally backed mortgage loan from initiating any judicial or nonjudicial foreclosure process, moving for a foreclosure judgment, ordering a sale, or executing a foreclosure-related eviction or foreclosure sale. See id § 9056(c)(2). Foreclosure of vacant or abandoned property is not included in the moratorium. Id. The moratorium period is 60 days, from March 18, 2020, to May 17, 2020. See id. The moratorium applies to all foreclosures, not just foreclosures arising from delinquencies caused by COVID-19. See id.
- Temporary Moratorium on Eviction Filings
The CARES Act imposes a moratorium on evictions filings for a covered dwelling, which is defined as a dwelling on or in a covered property that is occupied by a tenant (1) pursuant to a residential lease or (2) without a lease or with a lease terminable under state law. See 15 U.S.C. § 9058(a)(1). A covered property includes any property that has a federally backed mortgage loan or federally backed multifamily mortgage loan. Id. § 9058(2)(B). Federally backed mortgage loans are defined to include any loan that is secured by a first or subordinate lien on residential property designed principally for the occupancy of from 1 to 4 families and is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the federal government or in connection with a housing or urban development program administered by the Department of Housing and Urban Development (HUD) or that is purchased or securitized by Fannie Mae or Freddie Mac. See id. § 9058(a)(4). Loans secured by properties designed for occupancy of 5 or more families are defined as federally backed multifamily mortgage loans under a similar definition. See id. § 9058(a)(5). The moratorium period is 120 days, beginning on March 27, 2020—i.e., through at least July 25, 2020. During this period, the lessor of a covered dwelling may not initiate a legal action to recover possession of the dwelling from a tenant for nonpayment of rent or impose fees, penalties, or other charges related to such nonpayment of rent. See id. § 9058(b). Further, the lessor of a covered dwelling must provide at least 30 days’ notice to vacate and may not issue such notice until after the expiration of the covered period. See id. § 9058(c). Thus, the lessor of a covered dwelling may not require a tenant to vacate the premises until, at the earliest, August 26, 2020.
- Payment Forbearance—1-4 Units
Borrowers with a federally backed mortgage loan who are affected by the COVID-19 emergency may request and obtain a forbearance from loan payments for an initial period of up to 180 days. See 15 U.S.C. § 9056(b)(1). To obtain the forbearance, the borrower must submit a request to the servicer and affirm that he or she is experiencing a financial hardship during the COVID-19 emergency. See id. The statute does not specify whether a written request is required. The duration of an initial forbearance is up to 180 days. See § 9056(b)(2). The borrower may request an additional forbearance of up to 180 days, provided that the request is made during the initial forbearance period. Id.; see also § 9056(c)(1). The servicer shall require no additional documentation from the borrower other than his or her attestation to a financial hardship caused by the COVID-19 emergency and may not charge fees, penalties, or interest in connection with the forbearance. See § 9056(c)(1). During a period of forbearance, no fees, penalties, or interest beyond the amount scheduled or calculated as if the borrower made all contractual payments on time and in full shall accrue on the account. See § 9056(b)(3).
- Payment Forbearance—5+ Units
The CARES Act also provides forbearance relief for federally backed mortgage loans secured by real property consisting of 5 or more units. The statute requires the request to be in writing. Federally backed mortgage loans include any loan that is secured by a first or subordinate lien on residential real property designed for occupancy by 5 or more families and is owned or securitized by Freddie Mac or Fannie Mae and any loan owned, insured, or guaranteed by the FHA, the VA, or the USDA. See 15 U.S.C. § 9057(f)(2). The forbearance period is up to 30 days and may be extended for up to 2 additional 30-day periods upon request of the borrower, provided that the request for an extension is made at least 15 days prior to the end of the forbearance period in effect. See § 9057(c)(1). Requests for forbearance require that the borrower have been current on loan payments as of February 1, 2020. See § 9057(b).
Potential Pitfalls for Servicing of Federally Backed Mortgage Loans
The CARES Act omits definitions for several key terms. For example, the term “covered period” is used but not defined in the provision for foreclosure moratoriums and payment forbearances. See 15 U.S.C. § 9056. “Forbearance” is not defined either, and based on this term’s use within the CARES Act and the Consumer Financial Protection Bureau (CFPB) guidance, consumers may misinterpret the relief as a deferment. This may cause significant confusion for consumers upon the termination of the covered periods under the CARES Act and could spur litigation. Under a traditional forbearance, the borrower is required to make up all payments that were not made during the forbearance period. In contrast, a deferment would put such missed payments at the end of the loan. Consumers recovering from financial hardship caused by COVID-19 are likely to assume that the CARES Act provides for deferment rather than forbearance. Servicers will have to navigate this issue with clear communication and should expect an increase in litigation based on consumer protection statutes such as the Fair Debt Collection Practices Act (FDCPA) and state law equivalents.