I’ve been involved in politics and government for over 40 years and I can say definitively that I have not seen legislation that offers as much direct and immediate relief to distressed consumers, borrowers, small business owners and tenants as the Covid-19 stimulus package, known as the CARES Act that Congress passed on Friday, March 27. You can read an analysis of the bill here. You can read the legislation in its entirety here.
While I’m generally pleased with the CARES Act, I do have two concerns:
First, I believe government, mortgage loan servicers and banks may make significant mistakes and cause undue delays as they implement the legislation, and, second, I worry that many mortgage, consumer, and student loan borrowers may not receive the assistance they will need to weather the Covid-19 emergency.
Here’s the bad news…
The Acts’ protections only apply to federally-backed mortgage loans.
If you are among the more than 50% of homeowners whose mortgage is “federally related” i.e. owned by Fannie Mae, Freddie Mac or insured by the FHA, VA and the Department of Agriculture help, which I’ll describe later, is on the way. But many borrowers, including those who have recently been in default in recent years, are not eligible for relief because their loans are not owned by the listed entities. That means it’s very important to find out who owns your loan. We can help you find out or you can send a “Request for Information to your servicer. Many loans that were formerly owned by Fannie Mae and Freddie Mac or insured by the FHA have been resold. In many cases hedge funds that are not obligated to offer the forbearance of payments included in the bill now hold own the loans.
The Act does not address Private Student Loans.
If your loan is not owned by the U.S. Department of Education then you are not eligible for the 6-month, consequence-free payment holiday included in the Act. While some courts in some counties have placed stays on some collection activity, lawsuits and other collection actions involving private student loans may proceed.
The Act’s eviction protections for renters apply to a very small category of landlords
Landlords who have loans from Fannie Mae or Freddie Mac and who seek mortgage assistance are prohibited from evicting tenants. Unfortunately, the vast majority of landlords do not fall into this category.
It is important to note that the members of Congress did not carve out these exceptions because they don’t care about the people they impact. The exceptions exist because the federal government generally lacks the power to control the private creditors involved.
Now for the good news—and there’s lots of it…
Mortgages:
Mortgage Servicers for Federally Backed Mortgages must provide a 60-day suspension of payment obligations to borrowers who claim they are unable to apy because they have been impacted they Covid-19 crisis.
Mortgage Servicers for Federally Backed Mortgages are required to agree to forbearance of up to 12 months or longer without adding additional fees, penalties or interest other than that contemplated by the original note. It is important to note, however, that the Act does not prohibit negative credit reporting during the forbearance period.
Servicers of Federally Backed Mortgages are prohibited from moving forward to foreclose or evicting anyone from now until May 17, 2020.
Student Loans:
All Payments on Federal student loans will be suspended for six months. More significantly, no interest, penalties, or fees will accrue during this time period. The non-payments will be treated as payments for the purpose of forgiveness, loan rehabilitation or public service loan forgiveness programs. In addition, the Act contains a very consumer-friendly provision that requires lenders to report the borrower as paying currently to credit reporting agencies. Remember these provision DO NOT apply to Private Student Loans.
Unemployment Compensation:
The Act adds $600 per week in federal unemployment benefits to the amount paid by each state. For many workers this means unemployment checks will nearly equal their normal wage. You must still apply through your state’s unemployment system.
Small Business Owners:
Small business owners can apply to banks or other SBS-approved lenders for loans to cover eight to ten weeks of expenses including payroll, rent, health insurance, sick pay and other day to day costs. The loan is forgivable if the business keeps its employees on the payroll during the period. Banks will originate and service the loans and the Government will subsidize them through the SBA. While $355 billion has been appropriated, based on my discussions with clients, the money may run out so we suggest that small business owners apply right away.
Bankruptcy Changes:
The following changes to the Bankruptcy Code will be in effect for the next 12 months:
The stimulus checks Americans receive will not be considered income for purposes of filing a Bankruptcy.
For those already in a confirmed Chapter 13 Plan, the Bankruptcy Code has been amended to allow for Debtor(s) to file a Motion to Modify their Chapter 13 based on financial issues caused by COVID to extend the term of their plan for up to 84 months/seven years.
The definition of Debtor for purposes of filing Subchapter V of Chapter 11 also known as the Small Business Reorganization Act has been expanded to include all debtors, not just those defined as a small business:
The following change to the Bankruptcy Code is permanent:
The debt limit for cases eligible to file under the new Small Business Reorganization Act under Chapter 11 (a.k.a. SBRA or Subchapter V) has been increased to $7,500.000.00
See Previous updates on this crisis and its impact on consumers here
For more information contact [email protected] or call 877-475-8100
Marc Dann