Deferrals and Disclosures: What Financial Service Providers Must Know When Offering Short-Term Payment Assistance to Customers Impacted by COVID-19

As the coronavirus pandemic continues to threaten employment for countless workers across the country, Americans are increasingly facing a loss of income related to business closures, loss of hours and wages, layoffs, the need to miss work to care for home-bound school aged children, shelter-in-place orders, and out-of-pocket medical costs related to COVID-19, among others.    

Federal and state-specific measures are being taken to offer financial relief.  The Department of Housing and Urban Development (HUD), for example, is suspending evictions and foreclosures for 60 days for homeowners with certain mortgages on single-family properties insured by the Federal Housing Administration (FHA), effective March 18, 2020.  The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, is also suspending foreclosures and evictions for at least 60 days and expanded eligibility for payment forbearance to borrowers impacted by COVID-19 for up to 12 months, regardless of whether the property is owner-occupied, a second home, or an investment property.  Borrowers with federal student debt may also receive administrative forbearance relief as of March 20, 2020.

Numerous state agencies have also announced temporary reprieves to borrowers impacted by the coronavirus, including New York Governor Cuomo’s March 19, 2020, announcement that mortgage payments would be waived for 90-days.  Across the country, various city and county officials have issued moratoriums preventing residents from being evicted due to a loss of income caused by the COVID-19 pandemic.

In addition to government efforts, numerous financial institutions and other financial service providers are offering payment assistance to customers impacted by coronavirus, as a surge of borrowers request temporary relief options related to their mortgage, credit card, auto, student, and personal loan obligations.  One such option is allowing customers who were otherwise current before being impacted by the coronavirus the option to defer or skip payments for a certain period of time without incurring any late fees or finance charges and without any negative reporting to the credit bureaus.    

In fact, the FDIC recently issued a series of FAQs on March 19, 2020, encouraging financial institutions to provide borrowers affected by the COVID-19 outbreak with payment accommodations to facilitate the ability to work through the immediate impact of the virus.  The FDIC specifically noted that financial institutions may consider offering borrowers facing short-term setbacks the ability to defer or skip payments and either extend the original maturity date of the loan or make the deferred payments due in a balloon payment at the maturity date of the loan.

When offering deferred or skipped payment options, it is critical that financial institutions and financial service providers alike provide borrowers with accurate disclosures that are consistent with federal and state consumer protection laws to help customers avoid any misunderstandings regarding any changes in the terms.  Importantly, all customer notices and disclosures must clearly describe how a deferred payment or extension process will work.

In structuring the deferred or skipped payment options, financial institutions and financial service providers should consider the following: 

• Carefully structure the option as a modification, not a refinance. A refinance is considered a new transaction that requires new Truth in Lending Act (“TILA”) disclosures.  12 C.F.R. § 1026.20(a).  In contrast, a mere change in the payment schedule without an increase in APR or additional credit advanced beyond amounts already accrued plus insurance premiums, is considered a modification that does not require new TILA disclosures.    
• Explain how interest will be treated during the deferral period. While full-blown TILA disclosures are not required for modifications, the customer should still receive sufficient information that accurately and clearly describes whether interest will accrue on the loans during the deferral period in which customers are allowed to skip payments. 
• Explain how the deferred payments will be repaid. Customers should also be clearly informed as to whether a deferral or extension period will create a balloon payment at the maturity of the loan, or whether the period will impact or extend the original maturity date of the loan.    
• Explain how the deferred payment impacts the cost of the loan. Customers should receive sufficient information to understand whether any deferral or extension period will increase or otherwise change the total costs over the life of the loan, including the amount of interest paid or any changes to the terms that could increase costs.
• Explain the impact on escrow accounts. For loans with escrow accounts, additional information should be provided to inform the customer of the impact a deferral or extension period could have on escrow payments and balances, including notice that any shortfall in the customer’s escrow account balance must be covered in the future.  Institutions should proactively consider the options under the Real Estate Settlement Procedures Act (“RESPA”) for recovering any shortage or deficiency in connection with escrow accounts and the time period that will be provided to the customer to replenish those amounts. 
• Carefully adjust credit reporting processes. Institutions should ensure that all customers who receive payment accommodations as a result of the effects of COVID-19 are not reported to the credit bureaus as past due, or, consider the suspension of all negative reporting during the pandemic altogether.

In order for these payment accommodation programs to be effective, financial institutions and financial service providers should immediately begin informing customers impacted by the coronavirus how they can request payment assistance, including the timeframe to avoid any late payment penalties.  In providing these services, institutions must be mindful of their fair lending obligations and ensure that these assistance programs are offered equally to all eligible customers and provided in a fair and non-discriminatory manner.

Regulators are actively encouraging institutions to look for ways to assist their customers during these difficult times.  It is critical, however, that customers receive sufficient information to make informed decisions in selecting these programs and that all services are provided in compliance with fair lending and consumer protection laws. 

In this rapidly evolving environment, we remain available to field questions related to payment assistance and other consumer finance inquiries in the midst of COVID-19, and we have been preparing numerous deferral agreements, modifications, and notices for our financial services clients.  Please contact us if we can assist you.   

Abigail Lyle is a partner in the financial services litigation and compliance practice group in the Dallas office of Hunton Andrews Kurth. Abigail’s practice focuses on regulatory compliance and defending financial institutions in enforcement actions and litigation related to consumer protection laws. 

Rachael Craven is an associate in the financial services litigation and compliance practice group in the Dallas office of Hunton Andrews Kurth. Rachael counsels financial institutions and financial service providers in compliance and regulatory matters.