VA Allows Deferments as Loss Mitigation Options for Borrowers with COVID-19 Forbearances

Ballard Spahr LLP

Ballard Spahr LLP

In Loan Guaranty Circular 26-20-33, the U.S. Department of Veterans Affairs temporarily authorized the use of deferments as a loss mitigation option for borrowers with a COVID-19 forbearance.

A deferment may be used only with a borrower who can resume making the regularly scheduled loan payments. Pursuant to a deferment, the servicer would defer payment of the total amount of forborne payments (including principal, interest, taxes, and insurance) to the loan maturity date, or until the borrower refinances the loan, transfers the property, or otherwise pays off the loan, whichever occurs first. There may not be any added cost, fees, or interest to the borrower, nor any penalty for early payment of the deferred amount. 

VA advises that servicers should not enter into a modification agreement that alters the terms of the existing loan for the purpose of applying a deferment. To ensure compliance with servicing laws, the VA also advises servicers to seek specific advice from their legal counsel. Additionally, the VA cautions that the servicer must ensure that a deferment will not adversely affect the government’s interest in the VA loan and/or impair the vested rights of any other person.

Deferments may not be used for borrowers who are unable to resume making the regularly scheduled payments. Servicers must assess the suitability of other loss mitigation options for such borrowers. 

The VA notes that a deferment under this temporary authority is not a loss mitigation option for which the VA has authorized an incentive payment.

As previously reported, in Loan Guaranty Circular 26-20-25 the VA addressed the eligibility for VA loans of borrowers with a CARES Act forbearance or some other type of COVID-19 credit relief. Among other guidance, the VA advises in the Circular that any periods of forbearance do not count toward the loan seasoning requirement for an Interest Rate Reduction Refinance Loan, often referred to as an IRRRL. In Change 1 to the Circular, the VA advises that any periods of forbearance also do not count toward the loan seasoning requirement for a cash-out refinance loan.

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