Exploring Forbearance Agreements: A Complete Guide

What’s a Forbearance Agreement?

A forbearance agreement is a written contract between a debtor and creditor (such as a mortgage servicer) in which the creditor agrees to postpone (forbear) some or all of the debtors payments for a limited period of time. Forbearance agreements are primarily used by creditors to allow borrowers time to recover from financial problems (such as an unexpected illness or injury to a wage earner) that might otherwise prevent them from being able to stay current on their loan payments. Most creditors would prefer to enter into a forbearance agreement and receive some (even late) payments from a borrower , rather than proceed with foreclosure. So long as all the parties can remain flexible about things like loan amounts and the interest rate, creditors may find that they are able to resolve even relatively large delinquencies with forbearance agreements.
We see forbearance agreements in a number of different contexts, including the following:
These are just a few of the ways to approach the use of a forbearance agreement. In the right circumstances they can provide much needed time for both parties so that they can work out a repayment plan that works for both petitioner and respondent.

The Elements of a Forbearance Agreement

While there is no statutory definition of a forbearance agreement, it is understood to be an agreement between a lender/debtor, or even more simply a loan workout agreement. There is no standard form for these agreements; each forbearance agreement is unique. That said, it typically consists of:

A statement about the non-compliance of the borrower with the underlying loan agreement.
A declaration that the lender is temporarily refraining from exercising contractual or statutory rights or remedies as a result of the borrower’s failure to comply with the terms of the note and mortgage.
An outline of the process that will be used to determine whether the forbearance period is successful.
A requirement that the borrower make all payments as they become due.
A statement regarding what should happen in the event the borrower is unable to make a balloon, or final, payment.
A description of what steps will be taken if the borrower has not achieved compliance at the successful completion of the forbearance period.
An explanation that the lender has the discretion to determine the sufficiency of the borrower’s ability to meet each parameter outlined in the agreement.
A statement about the length of time that payments may be deferred.
A statement about how the interest rate will be applied, e.g., at the original interest rate, subject to any adjustments which are permitted under the agreement.
Any late charges or default charges contained in the underlying loan.
The due date of the deferred interest and/or principal.
A description of any modification to the loan agreement that will occur after the forbearance period is completed.

Pros and Cons

For the Lender
For a lender, the primary advantage of a forbearance agreement is the avoidance of a default and the costly expenses of litigation and foreclosure. The forbearance agreement provides not just the promise of payment (or partial payment) of the past due amounts, but also for a resumption of the regular monthly payments. Likewise, a common benefit is the extension of the maturity date of the underlying note and mortgages, allowing the borrower additional time to cure the default. Forbearance during temporary setbacks has proved beneficial to many lenders over the years. Banks and financial institutions routinely enter into forbearance agreements with responsible borrowers who have temporarily fallen behind for economic or personal reasons.
These positive attributes are not without their pitfalls; however. For a bank, the downside of extending forbearance is that it may open the flood gates to repeat default and the requirement of further forbearance. The longer a borrower has to cure a default, the more likely a second or third default occurs. Additionally, the desire to extend the maturity date of the note and mortgage may inhibit a bank from calling the loan earlier than it might prefer.
For the Borrower
The principal advantage for a borrower is that the agreement enables the borrower to delay enforcement action, such as foreclosure, and the sometimes drastic consequences that follow. It may not be easy to determine where the borrower will be on the back end of the loan. Economic impacts from one month to the next can be significant. A sick child, a broken-down car or a lost job are just a few of the reasons borrowers fall behind. Forbearance agreements have provided a testing ground for a borrower’s future and whether he or she has the ability to make regular monthly payments in the future. If the borrower’s problems are truly temporary, then a forbearance agreement may ultimately prove to be mutually beneficial for both the lender and the borrower.
The main drawback for a borrower is that, if the borrower is in a period of difficulty, the new payment schedule may be overly aggressive. A lender may require a borrower to commence paying the full amount of the past due payments or the new monthly payments, thereby forcing the borrower to join the ranks of a growing number of debtors fully aware that they cannot cure the default, and instead are simply delaying the inevitable.

How Forbearance Affects Your Credit

For borrowers who are having financial difficulties and are considering forbearance, but are worried about how this step effects their credit score, credit reporting requirements in mortgage servicing rules may provide a path to success without harming a borrower’s credit rating.
In cases where a lender and borrower enter into a loan modification or forbearance plan to avoid foreclosure, lenders must report the loan as "in forbearance" rather than "30 days past due" or worse. Installment accounts reported as "in forbearance" do not negatively impact credit scores, according to mortgage servicing requirements set forth in the Consumer Financial Protection Bureau’s Loan Servicing Rule (Regulation X).
The Loan Servicing Rule also says information about a forbearance plan must be reported to the consumer reporting agency (CRA) within 90 days after the date determined by the Rule and, if the consumer is later removed from a plan, then the consumer’s account must remain marked as "in forbearance" until a further payment is missed.
"FLP loans" – federally related mortgage loans that are not in default, on which the mortgage servicer offers a temporary reduction in monthly mortgage loan payments without an extension of the loan term – must not have a negative impact on the borrower’s credit report if the loan is reported as "in forbearance . "
The Mortgage Disclosure Improvement Act (MDIA), effective March 31, 2009, requires lenders to send out a copy of the HUD-1 settlement statement to any borrower who applies to refinance his or her mortgage or refinance another mortgage loan within three business days of the borrower making a loan application. One or more copies of the settlement statement must be delivered to the borrower no later than the day before any settlement. Lenders must comply with the regulation even if the loan does not close.
Lenders are permitted to treat a loan as made pursuant to a residential mortgage transaction if it complies with MDIA. Although MDIA does not extend to HELOCs (home equity line of credit) or ARMs (adjustable rate mortgages), lenders must make the necessary changes to their systems in order to accommodate the differing amounts of time to provide the settlement statement.
The CFPB found significant variations in the policies and practices commonly used by mortgage servicers to pay vendors who perform services for the borrower’s account and decided to issue a rule to implement the policies and practices established in the Mortgage Assistance Loan Modification Program (MALMP).

The Process of Getting a Forbearance Agreement

The borrower must request a Forbearance Agreement from the servicer of the mortgage. Upon making such a request, the servicer will provide guidelines on what must be done to complete the loan modification process. Most lenders require that the borrower submit a financial worksheet which contains income and expense information. The final approval of the temporary suspension will be based on the information provided in the income and expense statement.
The borrower initially contacts the servicer by telephone when requesting the conditions of the Forbearance Agreement. A borrower can also write a letter inquiring with the servicer along with an explanation of the factual basis for the recommended Forbearance Agreement. This letter should also include the following:
Once the appropriate information is received by the servicer, the servicer will have someone contact the borrower within two weeks. The settlement offer may be through telephone contact or in writing. If the lender does not respond to the request within a reasonable amount of time, it is recommended that the borrower contact them again. If failed communication occurs after the second inquiry the borrower may wish to consider making payments based on the original or due date terms of the mortgage contract, rather than attempt any form of debt negotiation or restructuring with a servicer, and then seek the assistance of a real estate attorney.
It is critical that the borrower act quickly once the servicer agrees to process the request. The lender may make an existing temporary suspension of payments un-enforceable if the borrower does not take prompt affirmative action. A borrower can refuse an offer of a forbearance agreement and remain current on the mortgage.

Options Other Than Forbearance Agreements

Before taking this important step a debtor should consider whether there are other options available. A good credit rating is important in times of economic hardship but so is the ability to stop foreclosure. Sometimes debtors are eligible for a loan modification. A loan modification has many of the benefits and provisions of a forbearance agreement, if you are in good standing. With a loan modification, the loan servicer may extend the loan term or adjust the interest rate. There are no additional costs associated with a loan modification to you, as long as your mortgage is owned by Fannie Mae or Freddie Mac. Other mortgage owners have different rules about granting loan modifications. Forbearance agreements differ because there is the potential for a significant up front cost in the form of extra fees or a balloon payment at the end . In some circumstances modifying your loan may stop foreclosure.
A refinancing may also be an option for borrowers struggling with their existing mortgage payments. A refi may lower your monthly payments and perhaps reduce the interest rate for your mortgage. A new lender may also purchase your existing mortgage. A lower interest rate on a low balance mortgage may stretch out the repayment of your mortgage and lower the payments.
A deferment may also be a workable option if it is in your best interest to stay with your current lender, particularly if it is Fannie Mae or Freddie Mac. A deferment may add the missed payments to the end of the loan. Generally, a deferment is a simple option when the mortgage is serviced by a GSE such as Fannie Mae or Freddie Mac.