On Friday, President Trump signed the Coronavirus Economic Stabilization Act of 2020 (CARES Act). The significant legislation directs more than $2 trillion into fighting the COVID-19 pandemic and stimulating America’s economy for the duration of the pandemic. This blog summarizes some of the provisions that are most relevant to financial institutions that make or service consumer loans.
The CARES Act amends the Fair Credit Reporting Act (FCRA) to include a section specifically addressing credit reporting during the COVID-19 pandemic. The amendment applies only where an accommodation is made. “Accommodation” is defined as an agreement to defer one or more payments, accept a partial payment, forbear delinquent amounts, modify a loan or contract, or provide any other assistance to a consumer who is affected by COVID-19 during the covered period. The “covered period” runs from January 31, 2020, and to 120 days following the enactment of the act or 120 days after the declaration of emergency related to the COVID-19 pandemic terminates, whichever comes later.
If an accommodation is made for one or more payments and the consumer either makes the payment or is not required to make the payment pursuant to the terms of the accommodation, the furnisher must report the account as current. If the account was delinquent prior to the accommodation, the account can continue to be reported as delinquent unless or until the account is brought current during the accommodation period, at which point the account must be reported as current. An account that has been charged-off is excluded from these requirements.
Forbearance and Foreclosure Moratorium for Federally Backed Loans
A borrower with a federally backed mortgage loan who is experiencing financial hardship that is either directly or indirectly due to COVID-19 may request forbearance for up to 360 days by submitting a request to the loan servicer. Borrowers must affirm that they are experiencing financial hardship due, either directly or indirectly, to the COVID-19 emergency. A federally backed mortgage loan is a loan that is secured by a lien (either a first lien or a subordinate lien) on residential real property designed for one to four families that is:
- Insured under section 255 of the National Housing Act;
- Guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992;
- Guaranteed or insured by the Department of Veterans Affairs;
- Made, guaranteed, or insured by the Department of Agriculture; or
- Owned or securitized by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
The initial forbearance request can be granted for a period of up to 180 days. The forbearance can then be continued for an additional 180 days at the borrower’s request. Either the initial or extended period may be shortened at the request of the borrower. During the forbearance, no fees, penalties, or interest – beyond those that were already scheduled or calculated as if the borrower had made all contractual payments on time and in full under the terms of the mortgage contract – may accrue.
In order to request forbearance, a borrower need only submit an attestation providing that COVID-19 has caused a financial hardship. While a drafting error omitted the definition of covered period, earlier drafts defined the “covered period” as the earlier of the termination of the COVID-19 national emergency or December 31, 2020.
In addition to the forbearance provisions discussed above, a servicer of a federally backed mortgage loan may not initiate, move for judgment or order of sale, execute a foreclosure-related eviction, or execute a foreclosure sale for the 60-day period starting on March 18, 2020. The moratorium does not apply if the property is vacant or abandoned.
Forbearance for Multifamily Federally Backed Loans
Multifamily borrowers with federally backed loans also have the option of requesting forbearance for up to 90 days. Fannie Mae and Freddie Mac have already issued guidance regarding the forbearance program.
In the multifamily context, a federally backed loan is any loan that is secured by a first or subordinate lien for real property designed for five or more families and:
- Made (in whole or in part), insured, guaranteed, supplemented, or assisted in any way by any office or agency of the federal government;
- Made under or in connection with a housing and urban development program or any other housing or related program administered by the Secretary of HUD; or
- Owned or securitized by Fannie Mae and Freddie Mac.
Temporary financing (e.g., construction loans) are excluded. The “covered period” for multifamily forbearance terminates when the COVID-19 national emergency is terminated or on December 31, 2020, whichever is earlier.
In response to either an oral or written request from a multifamily borrower, the servicer must (1) document the financial hardship; and (2) provide forbearance for up to 30 days. The forbearance can be extended for up to two additional 30-day periods at the borrower’s request, so long as the extension request is made during the covered period and at least 15 days prior to the end of the current forbearance period. The forbearance can also be terminated by the borrower at any time.
Any multifamily borrower who receives forbearance may not evict or initiate eviction proceedings against a tenant in the property financed by the loan for which forbearance was sought solely for nonpayment of rent or other fees and charges or charge the tenant any late fees, penalties, or other charges for late payment of rent. Multifamily borrowers are similarly barred from issuing notices to vacate to the tenant during a forbearance period. A notice to vacate may be served after the expiration of the forbearance period, but only if the vacate date is at least 30 days out and does not violate the 120-day eviction ban set forth below. Finally, multifamily borrowers may not charge any late fees, penalties, or other charges to tenants due to the nonpayment of rent.
Moratorium on Evictions
Irrespective of whether forbearance is requested, the lessor of a property that participates in a covered housing program of the Violence Against Women Act of 1994 or the rural housing voucher program under section 542 of the Housing Act of 1949, or has a federally backed mortgage loan or multifamily loan as described above may not initiate eviction proceedings for nonpayment of rent or charge fees, penalties, or other charges for nonpayment of rent for a 120-day period beginning on the date the act is enacted. Lessors likewise cannot require a tenant to vacate during this 120-day period. For all vacate notices served after 120 days, tenants must be provided at least 30 days to vacate.
Student loan borrowers who have federally owned loans will receive a six-month deferral of principal and interest payments (through September 30, 2020). Additionally, employers can provide up to $5,250 annually toward an employee’s student loan or other education expenses on a tax-free basis for payments made before January 1, 2021. Finally, students who have left school due to COVID-19 will have that school term excluded from counting toward lifetime subsidized loan eligibility and Pell Grant eligibility. Relatedly, students who have left school as a result of COVID-19 do not have to return the Pell Grants or federal student loans.
$454 Billion Liquidity Facility
The Federal Reserve may use up to $454 billion to establish programs or facilities for the purpose of providing liquidity to the financial system and eligible businesses, states, or municipalities by (1) directly purchasing obligations or other interests, (2) purchasing obligations or other interests in the secondary market, or (3) making loans. The Secretary of the Treasury is responsible for establishing the terms, conditions, and rates of any loans made under this program. Any program or facility that provides direct loans is subject to the following requirements:
- The borrower, with limited exceptions, may not repurchase stocks or purchase stock in a parent company until 12 months after the loan is repaid;
- The borrower may not pay dividends or make other capital distributions with respect to the business’ common stock until 12 months after the loan is repaid; and
- The borrower must comply with certain limits on executive compensation that impact employees or officers who made more than $425,000 in the 2019 calendar year.
Additionally, the requirements of section 13(3) of the Federal Reserve Act apply to any programs or facilities established using the $454 billion and are only available to businesses that are created and organized in the United States or that have significant operations (including a majority of its employees) based in the United States.
In addition to the program discussed above, the Secretary of the Treasury must attempt to establish a program or facility that provides financing to lenders that make direct loans to eligible businesses, including nonprofit organizations, with between 500 and 10,000 employees. The loans would generally have a 2% interest rate and would not require principal and interest payments for the first six months of the loan. Borrowers using this program or facility would have to make a good-faith certification that:
- The loan is necessary, as a result of the uncertainty of economic conditions, to support the ongoing operations of the recipient;
- The loan will be used to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020;
- The borrower intends to restore at least 90% of the workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workforce within four months of the termination of the public health crisis;
- The borrower is domiciled in the United States, created or organized in the United States, and has significant operations, including a majority of its employees located in the United States;
- The borrower is not a debtor in a bankruptcy proceeding;
- The borrower, with limited exceptions, will not pay dividends with respect to common stock or repurchase stocks or the stocks of any parent company while the loan is outstanding;
- The borrower may not outsource or offshore jobs during the term of the loan and for two years after the loan is repaid;
- The borrower will not abrogate existing collective bargaining agreements for the term of the loan and two years after the loan is repaid; and
- The borrow must remain neutral in any union organizing effort for the term of the loan.
Congress and the administration are already working on at least one additional stimulus package, Stimulus Four, and it is expected to include corrections and clarifications to the CARES Act and previous stimulus efforts, as well as additional relief/stimulus efforts. Bradley’s Banking and Financial Services Practice Group and Governmental Affairs Practice Group are actively monitoring and engaging with Congress and the administration on these issues.