The CARES ACT: Moratoriums, Forbearances and Modifications


The CARES Act, Consumer Bankruptcy, and Mortgage Servicing: What to Know and Potential Pitfalls

Enacted March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) places short-term obligations and restrictions on lenders and servicers of federally backed loans. As part of these limitations due to Coronavirus Disease 2019 (COVID-19), lenders and servicers are temporarily subject to moratoriums on foreclosures, mandatory forbearance obligations, and revised credit reporting obligations.

there are two overarching considerations relevant to borrowers and the Bankruptcy Code.1 First, the CARES Act makes three significant revisions to the Bankruptcy Code:

  • Increasing the cap for small business debtors seeking relief pursuant to the Small Business Reorganization Act under Subchapter 5 of the Bankruptcy Code from approximately $2.7 million to $7.5 million.
  • Removing COVID-19-related relief payments from calculations of (a) a debtor’s income for determining eligibility for Chapter 7 and Chapter 13 relief and (b) a debtor’s disposable income for a Chapter 13 Plan.
  • Permitting a Chapter 13 debtor with a confirmed Plan to modify the Plan based on “material financial hardship” resulting “directly or indirectly” from the COVID-19 pandemic, including extending payments under the Plan up to seven years after the debtor’s initial Plan payment was due.

lenders and servicers dealing with consumer borrowers subject to the Bankruptcy Code, in addition to the automatic stay applicable under section 362 of the Bankruptcy Code during pending bankruptcy proceedings, should be aware of the following provisions of the CARES Act: (i) the moratorium on foreclosures and foreclosure-related evictions for federally-backed mortgages; (ii) the mandate for short-term forbearance accommodations for federally-backed mortgages; (iii) the suspension of GAAP requirements to permit loan modifications without designating a loan as a “troubled debt restructuring”; and (iv) revisions to Fair Credit Reporting Act (FCRA) obligations

For borrowers that have already received a discharge of their personal liability but retained real property subject to a security interest, lenders and servicers should recognize that the CARES Act extends to payment obligations generally, not just those that constitute personal liabilities. Post-discharge borrowers may, therefore, still request an accommodation, and lenders and servicers should follow the same protocol in granting accommodations and forbearances, as they would for borrowers still obligated under a promissory note.

 lenders and servicers should be careful before filing any pleadings suggesting a default under a confirmed Plan or sending any pre-foreclosure notices until the expiration of the current foreclosure moratorium. Making any such filings or sending any such notices during the pendency of the moratorium period could be construed by a Bankruptcy Court as “initiating a foreclosure process,” which, in turn, could subject the lender or servicer to the risk of potential sanctions to the extent the Bankruptcy Court retains jurisdiction over any dispute. Further, for any property believed to be abandoned or vacant, lenders and servicers should confirm that status before proceeding with any foreclosure activity.


7 Responses

  1. Paper — THAT is incredible — Thanks.

  2. Here’s another great article from David Dayen:

    …”Stealing the Checks Update

    Today I have a new scoop in the ongoing banks-stealing-the-emergency-coronavirus-checks story. After being given the green light by the Treasury, banks are dutifully using the $1,200 CARES Act payments to offset existing debts. USAA Bank, one of the nation’s 30 largest, took $3,400 in CARES Act payments from a disabled veteran, his wife, and two kids. The account hadn’t been used by the family for over a year, but it was what the IRS had on file for their refunds. The family had debts and what they called a fraud charge on the account, but USAA said it wasn’t fraud, and they owed $8,000. So USAA took this emergency payment from a charged-off account, depriving a family that needed the money to make rent and buy medicine.

    The New York Times spoke to the same family and a couple others having their CARES Act payments taken (they did credit the Prospect for breaking the story, as did the Times editorial board). I have since heard from more people having this happen to them. I did not go into this crisis with a good impression of banks, but this really infuriates me. This money is not just a stimulus infusion, but for many folks, an absolute lifeline. And banks are just taking them? From accounts that are charged off, effectively closed for accounting purposes? The true mark of the industry’s insidiousness can be seen with the Bank Policy Institute, a trade group, demanding that the government exempt CARES Act payments from court-ordered garnishments by private debt collectors, not mentioning that the banks themselves can, and do, take the money.

    This is a full-spectrum failure. Congress should have protected these payments, they way they do Social Security and disability and veterans benefits, explicitly in the law. Congress didn’t. Then Treasury had the authority to write rules that protect the payments. Treasury didn’t. Then banks could do the right thing and not take peoples’ emergency money in a crisis. The banks, well, didn’t.”

  3. Excellent article from Wall Street on as usual:

    . . .”We have previously called Wall Street an institutionalized wealth transfer system from the 99 percent to the 1 percent. The CARES Act puts the wealth transfer system on steroids by letting the fat cats on Wall Street keep their decade-long obscene compensation which was made by hiding their risks off their balance sheets (privatizing the profits) and now forces taxpayers to pick up the tab for the losses on the toxic debt (socializing the losses). Treasury Secretary Steve Mnuchin has said this is nothing like the 2008 financial crisis – and yet, it is everything like the 2008 financial crisis except that it’s an even more brazen money grab.”

  4. Yes Ian and to Poppy.

    Interesting as to Ocwen — Ocwen sells MSR to NewRez. NewRez hires PHH to sub-servicer. Now, NewRez has terminated subservicing with PHH as to agency loans only. NewRez will be Master Servicer and do all servicing for itself. Non-agency loans will likely follow.

    Ocwen and PHH will become what?

    Has all this been in place while the Courts still live in la-la land?

  5. Maybe it’s time everyone peppered all the servicers with QWRs, to add to their angst

  6. We are in an economy that is propped up by debt, our debt. It’s fake, the fissures are showing…the virus is just showing the the reality of things, as they are. No one has liquidity. Banks-Insurers only required to hold 10% in reserve…they have little risk, liars the lot. Most have no savings, the inability to carry their debt 90 days or more. All by design, but people go for it.

    If we give them bums a bailout “AGAIN”…it is only for guaranteed investors profits…hasn’t anyone told these idiots investing is risky?

    We need to loosen our own dependence on stuff and cheating corporations, we are our at elasticity point and beyond…if they go, we go. They shouldn’t have this power over us. Just saying…

    I could go on and on…matters not, just an opinion. The virus is just the catalyst, not the real problem. I will do my best to protect myself and others, it’s all I can do, but I call bullsh*t on the rest of it.

  7. Each loan is being handled individually. Must fill out a form. Forbearance usually requires full payment in 90 days. Up to servicer and or lender (whoever the heck that is) to see whether borrower qualifies for an extension – or to tack onto terms of loan. At servicer/lender mercy. And even worse for non-bank servicers.

    As you know, I am not in foreclosure. Just paying an obscene rate (although internally it is recorded – I am 100% sure – as in default from day one – I have proof).

    I cannot speak with my servicer. Attorney pushing for forbearance. Really? I don’t trust as far as I can throw (and that is not far at all).

    Have to be ready to oppose a bailout.

    Unless there is a brilliant scientist out there (don’t see one yet) – this pandemic is not going away anytime soon. Moreover, people are going to remain scared even if we open up anytime soon. In an economy that is 70% consumption – people will be afraid to consume. They will try to save whatever they have. So – we are headed for a very different world – no matter what.

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