When Forbearances Aren’t the Best Option For Your Members

Within hours of New York State’s promulgation of emergency regulations, two grizzled veterans of loss mitigation gave me a call to vent. To set the stage, both of these individuals work with credit unions and understand that most credit unions are committed to going the extra mile when it comes to helping out troubled borrowers. Still, they made a very convincing argument that New York’s forbearance regulations and the national glorification of the forbearance option may actually do more harm than good for many homeowners. Here’s why.

Most importantly, a forbearance is not a loan modification. New York’s regulation does not provide a definition of forbearance. It is a term of art referring to a lender’s agreement to withhold enforcing repayment obligations for a specified period. Under New York’s regulation, that period is 90 days and under both Fannie and Freddie guidelines, the forbearances can go much longer. The key point to keep in mind and explain to the anxious borrowers who are calling both banks and credit unions by the thousands every day is that at the end of the forbearance period, the member owes the same amount he or she would have owed had they simply continued to make payments in the first place. In other words, your financially troubled borrower now immediately owes three months of payments. Do they understand this? Clearly, many of your members will end up having to formally modify their loans to remain in good standing.

This is what is getting my grizzled veterans so frustrated and concerned. Under New York’s regulation, it is now an unsafe and unsound practice to deny a forbearance to a qualified individual, although you can take the individual’s financial resources into account. In other words, there will be many instances in which it makes sense for a family to continue to make payments even if one of the spouses has been laid off. Hopefully, New York State regulators will understand that financial determinations are ultimately as unique as the individuals making the request. This may not be the intent of New York’s regulations, but I hope people like my grizzled veterans are not penalized for encouraging individuals to forgo forbearances that they may technically be eligible for when doing so is not in a member’s medium or long term interest.

This raises one obvious compliance point. Document, document, document. Document what was explained to the member. Document the criteria you use in making forbearance determinations. Also, make it crystal clear to the member that they are still responsible for the payments they skip during the forbearance period.