Skip a Pay Part II: Closed-End Loans
As credit unions continue to find ways to help their members through these challenging times, skip a pay remains a hot topic in NAFCU’s compliance inbox. I addressed the rules for open-end credit in a previous blog and today’s post will cover the considerations for closed-end consumer credit.
Unlike open-end credit, Regulation Z does not specifically address skip a pay for closed-end loans. Section 1026.20 provides rules for refinances but the original obligation is not generally paid off and replaced in a skip a pay program, so the disclosure requirements for refinancings will likely not apply. The rule explains that the requirements for modifications are governed by state law. Credit unions interested in offering skip a pay options for closed-end loans may want to review any applicable state laws and the loan agreement before proceeding.
Skip a pay for closed-end loans can be done a few different ways and it will generally be up to the credit union and its member to determine the best course of action. One way could be to advance the maturity of the loan each time a payment is skipped. Another way could be to add a balloon payment at the end of the loan. However the credit union decides to proceed, it may want to ensure the terms of the skip and any new repayment terms are clearly disclosed to the member in the skip a pay agreement.
Another question that comes up for closed-end skips is NCUA’s maturity limit rules in section 701.21(c)(4). An NCUA legal opinion letter explains modifications that extend the maturity of a loan beyond the maximum maturity may be permissible “as long as there is no intention to violate the … maturity restriction.” If a skip a pay agreement extends the maturity limit of a loan, credit unions may want to consider documenting the reason for the modification in an effort to demonstrate no intention to violate the applicable maturity limit.
Credit unions have also been asking whether skip a pay agreements are considered troubled debt restructurings (TDR) and how to report them to the credit reporting agencies. Recent interagency guidance suggests short-term modifications made in response to the current pandemic are not TDRs when made to borrowers who were current prior to any relief. Borrowers would also not need to be reported as late on a payment if the credit union has agreed to a skip a pay agreement. For more on this guidance, check out this NAFCU Compliance Blog post. Borrowers who are delinquent prior to any agreement may be subject to NCUA’s TDR rules and negative credit reporting.
Additional considerations for real estate loans
Both state and federal agencies have issued information regarding deferring mortgage payments. As mortgage loans are covered by complex state and federal laws, there are more issues to consider when executing skip a pay agreements for these types of loans. Considerations such as recording requirements for mortgage modification agreements and signature requirements may be addressed by state law so credit unions may want to work with local counsel to ensure these considerations are addressed.
Flood insurance requirements could also be implicated with skip a pay agreement for a mortgage loan. The flood insurance rules in Part 760 apply when any designated loan is made, increased, extended or renewed. If the agreement results in any of these actions, the rules require a flood determination at the time of the increase, extension or renewal and the flood insurance and escrow requirements may kick in.
The mortgage servicing rules in Regulation X may also require additional actions. For example, if payments are not being made, this may result in an escrow deficiency. This NAFCU Compliance Blog post discusses a credit union’s option in handling deficiencies. If the credit union is allowing the member to skip multiple payments, then the loss mitigation rules may apply. This NAFCU Compliance Blog post provides more information on these requirements.
As closed-end skip a pay arrangements are often more complex than open-end skip a pay arrangements, credit unions may want to work with local counsel to draft an appropriate modification agreement that meets all state and federal requirements. For more NAFCU resources on the current pandemic, check out this webpage and, as always, NAFCU members can reach out to the team at compliance@nafcu.org.