Mortgage lenders beware: The “CARES” Act has features that make enforcement of federally-backed mortgage loans almost impossible during the “covered period” that runs from January 31, 2020, through the later of 120 days after the enactment of the bill or 120 days after the corona virus national emergency terminates, and which could also greatly diminish the value of loan assets held on the lenders’ books. The CARES Act became law on March 27, 2020, as Public Law No. 116-136.

Forbearance Granted with No Documentation and Foreclosures Prohibited

The act, by amending the Fair Credit Reporting Act, gives delinquent borrowers as much as a one-year forbearance period (an initial 180-day period that can be extended for another 180 days on the mere request of the borrower) on their loans while also precluding lenders from foreclosing and evicting those who are delinquent.  The eligibility for these legislative benefits is triggered by the borrower’s simply submitting to the loan servicer a request for the benefits based on the borrower’s affirmance that he or she has suffered a “financial hardship during the COVID-19 emergency.”

No documentation or description of the hardship is required.  Section 4022(c) of the act states that the servicer must grant the forbearance with “no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID-19 emergency.”  Based on the plain language of the statute, there is no requirement that the financial hardship have anything to do with the corona virus or actions taken to ameliorate it.  The financial hardship need only have occurred during the time of the nationally-declared emergency.

During the forbearance, no interest, fees or penalties may accrue on the account.

Section 4022(c)(2) precludes any foreclosure of any federally-backed mortgage for 60 days beginning on March 18, 2020, independent of the “hardship-based” demand for forbearance.

Given the lack of definition of what constitutes a “financial hardship” under the act, and the prohibition on the servicer’s request for any information to back up the borrower’s assertion that a “financial hardship” has been suffered, and the lack of any requirement that the hardship be in any way related to the corona virus epidemic, this law essentially bars enforcement of all federally-backed mortgage loans upon request of the borrower during the covered period.  In other words, the loan is, for all intents and purposes, simply unsecured during the covered period and potentially for a year after the covered period if the borrower makes a request for forbearance within the covered period.

Section 4023 of the act gives essentially the same rights to borrowers with federally-backed mortgage loans on multi-family property; i.e., apartment landlords.  If such a borrower elects to demand the forbearance, however, the borrower/landlord cannot evict any tenant or charge any late fees for non-payment of rent.

Section 4024 of the act precludes all landlords who have federally-backed mortgage loans or who participate in certain other specialty programs such as those created by the Violence Against Women Act and the Rural Housing Voucher Program from evicting any tenant for non-payment during the 120-day period following the enactment of the CARES Act.

This is a significant legislative alteration of existing contract rights of lenders with a potentially tremendous impact on the asset value of loans as held on the books of the lenders.  Banks and other mortgage lenders covered by these provisions will face enormous challenges regarding enforcement of the loans, and may have to make significant write-downs of the values of their loan portfolios, which could in turn greatly affect their soundness in the view of regulators.