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12.3.7.4 VA Post-Forbearance Options

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The VA’s April 8, 2020 Circular required servicers to offer standard loss mitigation options to borrowers facing COVID-19 hardship.99 The VA provided a list of available options, and these included its disaster modification options. The Circular stated clearly that “[s]ervicers are not to require a borrower who receives a CARES Act forbearance to make a lump sum payment, equating to what would have been due if a forbearance was not in effect, after the forbearance period ends.”100 The VA recognized that a lump sum would be allowed if it is payable at the end of the loan term (essentially a deferment) or if the borrower opts to pay in a lump sum rather than use the listed loss mitigation options that permit more affordable means of repayment.

While the VA’s menu of options did not explicitly include a deferral program that places forborne payments at the end of the loan term, the agency recognized that servicers were offering this option for non-VA loans. A VA regulation prevents servicers from broadly offering deferral to VA borrowers because it severely limits the amount that can be deferred.101 In response, the VA has waived the regulation “only in the case of a servicer offering a deferment as a COVID-19 loss mitigation option to a borrower who requested a CARES Act forbearance.” In waiving the regulation, VA did not mandate offering deferral, but hopefully its waiver will facilitate the use of deferral as a streamlined loss mitigation option.

In December of 2020, VA proposed a partial claim option in which the agency would lend money to borrowers to bring their loans current after borrowers recover from COVID hardships.102 Borrowers would access the partial claim loans through their mortgage servicers who evaluate financial information that borrowers submit. These partial claim loans would be capped at fifteen percent of the primary mortgage balance, would accrue interest at one percent per annum, and would be secured by mortgages on the borrowers’ property. Borrowers would be required to repay the partial claim loan within ten years; however, payments would not be required for the first five years of the loan.

Consumer organization and mortgage industry organizations commented on the proposal with concerns regarding the payment shock borrowers would face if this program was implemented.103 It is the condensed, five-year repayment term that will cause the significant payment increases for borrowers.

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