On April 8, 2020, the Department of Veterans Affairs (“VA”) and the Department of Agriculture (“USDA”) each issued guidance implementing the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide relief measures for mortgage borrowers affected by the COVID-19 crisis. The VA’s Circular 26-20-12 and the USDA’s Stakeholder Announcement dated April 8, 2020 are part of the federal housing agencies’ ongoing efforts to provide financial relief to mortgage borrowers since President Trump issued the March 13, 2020 proclamation declaring a national emergency concerning the COVID-19 outbreak. While these recent announcements by the VA and USDA implementing Section 4022 of the CARES Act are largely similar, they also contain some important differences as well as additional detail that is not specified in Section 4022 of the CARES Act.
VA Circular 26-20-12
VA Circular 26-20-12 implements Section 4022 of the CARES Act by announcing a forbearance requirement for borrowers of VA-guaranteed or VA-held loans who are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency, regardless of delinquency status. In accordance with Section 4022 of the CARES Act, to qualify for forbearance relief under VA Circular 26-20-12, the borrower only needs to (1) submit the request to the servicer and (2) attest that the borrower is experiencing a financial hardship due to the COVID-19 emergency. Also consistent with the CARES Act, the term of the forbearance period announced in the VA Circular is initially up to 180 days, with an extension period that the borrower can request for up to another 180 days.
Circular 26-20-12 additionally mentions that the VA “expects the servicer to inform the borrower of the borrower’s forbearance rights,” and that the borrower, not the servicer, is entitled to determine the period of forbearance, subject to the statutory limit of up to 360 days. Section 4022 of the CARES Act does not mention any servicer requirements to disclose information to borrowers and does not clearly state which party, the servicer or the borrower, is to determine the term of the forbearance period, apart from the maximum 180-day initial and extension periods. Of the federal housing agencies and Fannie Mae and Freddie Mac (together, the “GSEs”) that have issued guidance implementing CARES Act forbearance to date, the VA’s requirement could arguably be the most borrower-friendly in this respect.
Circular 26-20-12 also states that servicers are prohibited from charging fees, penalties or interest beyond amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract, which parallels Section 4022 of the CARES Act. The Circular further requires that VA loan servicers comply with CARES Act credit reporting requirements, which means, among other requirements, that servicers cannot report an account as delinquent merely because of a forbearance provided in connection with a COVID-19-related hardship. At the end of the forbearance period, the VA requires servicers of VA-guaranteed loans to consider all loss mitigation options described in Chapter 5 of the VA Servicer Handbook M26-4, including: (1) repayment plans, (2) loan modifications, (3) streamline modifications, (4) VA affordable modifications, (5) VA disaster modifications, and (6) disaster extend modifications. The guidance expressly prohibits servicers from requiring borrowers to pay a lump sum payment at the end of the forbearance period if the amount would equate to what would have been due if the forbearance was not in effect, unless: (i) the lump sum payment is paid at the end of the loan term, or (ii) the borrower chooses to make a lump sum payment instead of the loss mitigation options referenced above. Servicers are also required to review loan files for all possible loss mitigation options no later than 30 days before the end of the forbearance period and document those reviews in their loan servicing systems. If no loss mitigation options are possible, servicers must refer the file to the relevant Regional Loan Center for VA’s consideration of a loan refunding if the borrower’s home has equity. When refunding is not possible, the Circular instructs servicers of VA-guaranteed loans to consider short sales and deeds in lieu of foreclosure.
Lastly, Circular 26-20-12 includes a 60-day moratorium, beginning on March 18, 2020, on any initiation of a foreclosure process, movement for a foreclosure judgment, or order of sale or execution of a foreclosure-related eviction or foreclosure sale, which moratorium excludes any vacant or abandoned property. This moratorium is consistent with the CARES Act and supersedes the VA’s prior Circular 26-20-7, which did not require a 60-day moratorium on foreclosures but only “strongly encourage[ed]” servicers to establish one, which we discussed in our Legal Update on March 23, 2020.
USDA Stakeholder Announcement Dated April 8, 2020
In its Stakeholder Announcement dated April 8, 2020,1 the USDA also implemented the forbearance requirement of the CARES Act with respect to mortgage loans under the USDA Guaranteed Loan Program. The USDA requires lenders to provide immediate forbearance to a borrower who attests to financial hardship directly or indirectly caused by COVID-19 for a period of up to 180 days, which period may be extended up to an additional 180 days at the borrower’s request. Consistent with the CARES Act, no accrual of fees, penalties or interest may be charged to the borrower beyond the amounts calculated as if the borrower had made all contractual payments in a timely fashion. The USDA Announcement differs from the aforementioned VA Circular in that the USDA Announcement does not (1) refer to an expectation or requirement that the borrower be informed of its forbearance rights, or (2) specifically state which party determines the length of the forbearance period.
Similar to the VA’s guidance and the guidance of other federal housing agencies and the GSEs in response to the COVID-19 crisis, USDA servicers are required to analyze loss mitigation options at the end of the forbearance period. According to the USDA’s Stakeholder Announcement, at the end of forbearance, the lender is required to communicate with the borrower to determine if the borrower is able to resume making monthly payments, and if so, the lender must offer the borrower a written re-payment plan or, at the borrower’s request, extend the loan term for a period that is at least the length of the forbearance period. If the borrower is unable to resume making monthly contractual payments at the end of the forbearance period, the servicer must evaluate the borrower for all available options presented in the Loss Mitigation Guide, which is found at Attachment 18-A in Chapter 18 of the USDA Technical Handbook.
Lastly, the USDA Announcement states that lenders may approve the initial 180-day forbearance period no later than October 30, 2020. This deadline for offering the initial forbearance period effectively means that all COVID-19-related forbearance periods for mortgage loans under the USDA Guaranteed Loan Program could end around late October 2021, assuming that the borrower requests the maximum 360 days. The October 30, 2020 deadline for providing the initial forbearance period is also the same deadline set by the FHA in its Mortgagee Letter 2020-06, as mentioned in our Legal Update dated April 9, 2020. As of now, the FHA and the USDA are the only two federal housing agencies or GSEs to specify particular dates with respect to Section 4022 of the CARES Act, which only references a “covered period” that is not defined in Section 4022.
Note also that the USDA Announcement does not make reference to a foreclosure moratorium in accordance with Section 4022 of the CARES Act, presumably because the USDA already announced a 60-day foreclosure moratorium for all USDA Single Family Housing Guaranteed Loan Program loans in its Stakeholder Announcement dated March 19, 2020.
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These announcements regarding relief measures for VA and USDA borrowers implementing Section 4022 of the CARES Act are part of the federal housing agencies’ ongoing response to the COVID-19 crisis, which we discussed in prior Legal Updates that can be found on our Financial Regulatory COVID-19 Portal. We will issue Legal Updates to keep you up-to-date on any significant future announcements.
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1 The USDA issued an update to this Stakeholder Announcement on April 15, 2020; however, the provisions of the Stakeholder Announcement implementing the CARES Act forbearance requirement remain unchanged.