The COVID-19 pandemic
has brought forbearance agreement requests
to the top of the creditor's agenda. While forbearance agreements, repayment plans, and loan modifications are some of the tools in the creditor’s loss mitigation tool chest, most borrowers in sudden financial distress due to the COVID-19 situation are likely to request a forbearance agreement, even if their payments are current. How does a forbearance agreement differ from a loan modification or a repayment plan? What are the best practices for creditors?
What is a Forbearance Agreement?
A forbearance agreement is generally an agreement to postpone, reduce, or suspend payments due on a loan for a limited and specific time while the borrower is experiencing relatively short-term financial difficulties, due to reduced income or unexpected expenses such as medical bills. Interest accruing during the forbearance period remains the borrower's responsibility; however, in these unprecedented times, creditors may consider waiving additional interest during a forbearance period. Otherwise, the unpaid interest will be added (i.e. capitalized) to the balance of the loan. Hence, while the forbearance agreement can provide temporary relief for the borrower, the borrower may end up paying more over the life of the loan, if additional interest accumulates.
A forbearance agreement can be entered into when payments are already delinquent, or when the borrower whose payments are current will not be able to make upcoming payments when due. Typically, the creditor agrees to waive late charges and not to accelerate payments due on the loan, or foreclose on the mortgaged property, during the forbearance period.
How Does a Forbearance Agreement Differ from a Repayment Plan or a Loan Modification?
A repayment plan is used when the borrower has fallen behind in payments. The plan requires the borrower to make regular payments to cover the current months plus an additional amount to catch up gradually.
A loan modification is a change in the loan terms, such as reducing the interest rate to reduce the monthly payment amount, or reducing the monthly payment amount and extending the term of the loan.
What are the Best Practices for Creditors Receiving Forbearance Requests?
At the time of the original loan application, the creditor required the borrower to submit certain personal and financial information. Creditors require this as part of their due diligence, for the following reasons:
(1) To determine whether the borrower qualifies for the loan under the creditor’s parameters
(2) To have information that may facilitate the creditor’s recovery of the loan in the event of a default. The borrower’s residence address, marital status, phone number, employment, and asset information, are all valuable to you and your collection attorney in this regard.
Processing a forbearance request is similar in many respects to processing an original loan application.
Similar to Item 1, above, creditors should establish requirements for documentation in addition to the borrower’s signed hardship statement. The creditor should verify whether the borrower qualifies for relief, based on the creditor’s parameters.
Similar to Item 2, above, creditors should require the borrower to provide updated personal and financial information. Although the creditor and the borrower both hope or even expect the borrower to fulfill the terms of the loan agreement after the forbearance period ends, a percentage of borrowers, unfortunately, will default. Since the original loan application, the borrower may have had changes in residence, marital status, employment, and assets. Obtaining updated information at the time of the forbearance agreement can significantly improve the debt recovery and its timeline, in the event of a default.
What are the Best Practices for the Forbearance Agreement?
By agreeing to forbear, the creditor is granting the borrower an accommodation (although not required to do so). In exchange, the borrower should be willing to acknowledge certain facts and waive certain rights. For example, the borrower should agree to waive any defenses or counterclaims that the borrower may have against the creditor.
The forbearance agreement should include recitals of facts to preclude the borrower from disputing them in future litigation, including:
• An acknowledgment that the parties executed the loan documents, and any renewals, extensions, modifications, or amendments; and a reaffirmation of the documents.
• An acknowledgment of the balance due, including unpaid principal and interest, late charges, other charges, and any negative escrow amount.
• (If applicable) An admission of any existing default, each of which constitutes an event of default under the loan documents and that the creditor is entitled to immediately pursue all remedies available to it, without defense, setoff, or counterclaim.
• (If applicable) An acknowledgment that the creditor provided a demand letter (notice of default) in accordance with the loan documents.
• An acknowledgment that the borrower has had the opportunity to consult with an attorney.
• An acknowledgment that the agreement is binding upon the parties and their respective successors, assigns, heirs and personal representatives.
The agreement should also set forth all terms of the agreement, including:
• The forbearance period, and whether the borrower is relieved from paying, or must pay reduced payments during the time period.
• (If desired) A requirement that the creditor’s costs and expenses related to the preparation, negotiation, and delivery of the agreement and all documents related, be added to the loan balance.
• (If desired) Requirements for the borrower to provide periodic financial updates during the forbearance period.
• A release of liability for any causes of action the borrower may have against the creditor.
• Requiring the borrower to provide further documents and instruments and take all such further action as may be reasonably necessary or appropriate to confirm or carry out the provisions and intent of the agreement.
• Allowing the creditor to immediately terminate the agreement upon expiration of the forbearance period or a default by the borrower, whichever occurs first.
As in other loss mitigation agreements, the creditor should do the following:
• Explain the terms of the agreement to the borrower to ensure that the borrower understands all of its terms.
• Ensure that the agreement is signed by each borrower.
• Monitor the borrower’s fulfillment of any reduced payment requirements during the forbearance period
• Keep track of the forbearance expiration dates. Communicate with the borrower as those dates approach, to ensure that the borrower is aware of the next required payment date and will be ready to resume the regular payments.
To learn more about forbearance agreements, register for Larry's upcoming webinar, COVID-19 Forbearance Requests,
on Monday, March 30th from 10:00 - 11:00 a.m. A recording is available here
If we can be of assistance in handling your forbearance agreements or other loss mitigation efforts, please contact our office
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.