Servicers granting forbearance should ensure the borrower understands that a forbearance plan does not
any mortgage payments. Rather, it merely delays them to be paid when the borrower comes out of financial trouble. After the forbearance period, the borrower must pay both the regular monthly mortgage payments and additional payments either monthly or a balloon at a designated time to cover the payments accrued during the forbearance period. If the borrower doesn’t budget accordingly, the borrower may fall back into financial difficulties.
At least once during the forbearance period servicers should inform the borrower (in writing) of the following:
Borrowers’ requests for other types of solutions, such as short sales or deeds in lieu, often include requests for full or partial loan forgiveness. If granted, upon completion of the transaction the servicer will issue a 1099C form to report the full or partial loan forgiveness, to the Internal Revenue Service. The IRS generally deems as taxable income the cancellation of debt for which the borrower is liable, with certain exceptions such as provided in IRS Code Section 108 (a)(1)(a)
if the cancelled debt has been discharged in bankruptcy, or in Section 108(a)(1)(B)
if the borrower qualifies as insolvent.
Although servicers should never make representations to borrowers regarding tax consequences, servicers should advise the borrower to consult the borrower’s own tax professional.
In addition, full or partial forgiveness of debt may have a negative impact on the borrower’s credit record.
Therefore, if the servicer agrees to full or partial loan forgiveness, the servicer should inform the borrower and include in their loss mitigation agreement, express provisions that the servicer will report the debt forgiveness to the IRS on Form 1099C, and that the servicer will follow standard industry practice in reporting to the major credit reporting agencies.
Doing so can help ensure that the borrower will make a fully-informed decision, and help reduce the probability of a borrower claiming wrongdoing by the servicer.