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Mortgage Forbearance – Will it hurt?

The Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law on March 27, 2020 is a wide-ranging piece of legislation aimed at providing financial aid to individuals and businesses impacted by the COVID-19 pandemic.

For example, consumers with a Federally backed mortgage loan may obtain a forbearance from their mortgage servicer upon request and with the borrower’s attestation of a financial hardship stemming from COVID-19. And even if accommodations are not required under the CARES Act or other applicable law, the Consumer Financial Protection Bureau along with many Federal and State agencies have encouraged financial institutions to work constructively with borrowers who are unable to meet their financial obligations due to the effects of the current pandemic. But how does this impact the borrower’s consumer credit rating?

Without question, credit scores and related information are critical to consumers and have an enormous reach as evidenced by the over 200 million American consumers who have credit files and trade lines. This information often determines who obtains credit, insurance, housing, and at what price, and even in some instances who obtains employment. However, the COVID-19 pandemic is posing financial challenges to consumers, leaving them with questions about their credit when working with lenders and creditors to obtain various forms of payment flexibility and forbearance.

The COVID-19 pandemic is posing financial challenges to consumers, leaving them with questions about their credit when working with lenders and creditors to obtain various forms of payment flexibility and forbearance.

Included in the CARES Act is a section that amends the Fair Credit Reporting Act (FCRA), a law enacted to promote the accuracy, fairness and privacy of consumer information contained in the possession of consumer reporting agencies. On June 16, 2020, the Consumer Financial Protection Bureau issued guidance specifically addressing consumer credit reporting related to the CARES Act and COVID-19 pandemic, including answers to commonly asked questions.

Perhaps the first question borrowers ask when entering into a forbearance agreement is how the agreement will impact their credit score. Consumers should therefore be pleased to learn that if their credit obligation or account was current before the accommodation[1], during the accommodation the creditor must continue to report the borrower’s credit obligation/account as current even if payments are not being made. If the credit obligation or account was delinquent before the accommodation, during the accommodation the creditor cannot advance the delinquent status. So if at the time of the forbearance the borrower’s account was 30 days past due, during the accommodation the creditor cannot report the account as 60 days past due, 90 days past due, etc.

Of equal importance is the fact that the consumer reporting protections afforded by the CARES Act continue to apply to the time period that was covered by the accommodation even after the accommodation ends. If payments were not required during the accommodation period, a creditor cannot report a consumer as delinquent at the end of the accommodation period, provided that the consumer was current before the accommodation began. Similarly, a creditor cannot advance the delinquency of a consumer based on the time period covered by the accommodation even after the accommodation period has concluded.

Fortunately, the Consumer Financial Protection Bureau has recognized the serious impact COVID-19 is having on the financial well-being of many consumers. As a result, the Bureau has taken prudent measures to encourage creditors to offer various forms of payment flexibility. It has also enacted laws to ensure that such accommodations do not unfairly punish borrowers who face circumstances that require them to take advantage of approved payment relief measures.

[1] An “accommodation” includes any payment assistance or relief granted to a consumer who is affected by the COVID-19 pandemic during the period from January 31, 2020, until 120 days after the termination of the COVID-19 national emergency declared by the President on March 13, 2020 under the National Emergencies Act.

This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Scott Drucker | AAR Online https://www.aaronline.com/2020/06/17/will-mortgage-forbearance-ruin-my-credit
A licensed Arizona attorney, Scott is General Counsel & Assistant CEO for the Arizona REALTORS® serving as the primary legal advisor to the association.