Freddie Mac Issues Guidance for Managing Escrow During COVID-19 Related Hardship

12/8/2020

As credit unions continue to work with members who have been financially affected by the COVID-19 pandemic, the credit unions are wondering how to deal with escrow accounts that are in either CARES Act forbearance or forbearance under the provisions of Oregon’s H. 4204.

Freddie Mac has released guidance for managing escrow during a COVID-19 related hardship, whether under a CARES Act Forbearance Plan or Freddie Mac COVID-19 Payment Deferral plan.

Under the Real Estate Settlement Procedures Act (RESPA), and escrow deficiency occurs when a borrower’s current escrow balance falls short of the target balance of funds anticipated as sufficient to pay real estate taxes, insurance premiums (including flood insurance), and other charges at the time of escrow analysis. If the deficiency is greater than or equal to one month’s escrow payment, the servicer has the option of requiring the borrower to repay the deficiency in two or more equal monthly payments.

The Freddie Mac guidance instructs servicers to make escrow advances, which represent additional funds paid on behalf of the borrower by the servicer when there are insufficient funds in the escrow account to satisfy the entire payment of an escrow account item that has come due. The instructions stipulate that the advance funds should be put into the escrow custodial account prior to remitting the amount due. A repayment plan should be set up with the borrower to recoup the escrow shortage. At the time of escrow analysis, the servicer can either collect the shortage amount in a lump sum from the borrower along with their next scheduled mortgage payment or spread the escrow shortage repayment amount over a period not to exceed 60 months.

Similarly, H. 4204 provides that after an escrow analysis and in accordance with RESPA, a lender may adjust the amount of any escrow impound payment the borrower has an obligation to make under the financing agreement and may take into account any shortage or deficiency that results from deferring payments under the Act.

According to Appendix B to Part 741, credit unions may advance funds to cover third party fees such as force-placed insurance or property taxes when it comes to loan workouts.

For borrowers who do not have escrow accounts, per the CFPB, they continue to be responsible for paying property taxes and insurance payments. The borrower is also responsible for making any HOA and condo fees during forbearance.

Question of the Week

Q. What does the credit union need to know about mailing 1099-INT Forms to our members?

A. If a member qualifies for a 1099-INT, the credit union must use the official IRS Form 1099-INT or an acceptable substitute. Additionally, the statement may also contain the following information:

  • Form W-2, W-8, W-9, or other Forms 1098, 1099, and 5498 statements;
  • A check from the account being reported;
  • A letter explaining why no check is enclosed;
  • A statement of the person’s account that is shown on the 1099-INT; and
  • A letter explaining the tax consequences of the information shown on the statement.

No additional enclosures, such as advertising, promotional material, or a quarterly or annual report, are permitted. Even a sentence or two on the year-end statement describing new services offered by the payer is not permitted. Logos are permitted on the envelope and on any nontax enclosures.

A recipient statement may be perforated to a check or to a statement of the recipient’s specific account. The check or account statement to which the recipient statement is perforated must contain, in bold and conspicuous type, the legend “Important Tax Return Document Attached.”

The legend “Important Tax Return Document Enclosed” must appear in a bold and conspicuous manner on the outside of the envelope and on each letter explaining why no check is enclosed, or on each check or account statement that is not perforated to the recipient statement. The legend is not required on any tax form, tax statement, or permitted letter of tax consequences included in a statement mailing. Further, you need not pluralize the word “document” in the legend simply because more than one recipient statement is enclosed.

Related Links

IRS General Instructions for Certain Information Returns

Legal Briefs

National Credit Union Administration

NCUA Releases Q3 2020 Credit Union System Performance Data
The NCUA released data on the performance of federally insured credit unions for the quarter ending Sept. 30.

Consumer Financial Protection Bureau

CFPB Finalizes Advisory Opinions Policy and Announces Two New Advisory Opinions
The CFPB issued its final Advisory Opinions Policy and issued advisory opinions on earned wage access products and when certain education loan products refinance or consolidate a consumer’s pre-existing federal or private student loans.

Office of Foreign Assets Control

OFAC has updated the SDN list as of Dec. 3. The last update prior to this was Nov. 30.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.

Posted in Compliance, Compliance News.