Forbearance

Introduction to Forbearance

Forbearance is an agreement between a borrower and their credit provider to delay payments, pause fees and interest, or otherwise offer temporary relief to the borrower. Forbearance is sometimes required by law (such as military consumer protections or bankruptcy settlements) but might also be part of the creditor’s loan management strategy, where they aim to keep borrowers engaged and promote repayment over the long term. In these cases, they are sometimes referred to as hardship or relief programs.

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Forbearance and hardship programs offer several benefits to both the consumer and the creditor.

• Borrowers get immediate relief from their debt obligations. With payments lowered or paused, they can focus their attention on their most immediate financial difficulties, like housing or medical emergencies. This gives them time to restabilize their cash flow and expenses, helping them avoid major financial consequences like bankruptcy or eviction.
• Credit providers can use the forbearance program to keep in steady contact with borrowers. Rather than letting them slip away into deep delinquency and risk an eventual default, the borrower can keep them engaged, raising the chances of repayment. Relief programs also significantly improve the customer experience.

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Borrowers often need to demonstrate a need for forbearance, such as financial difficulties or major life events, especially when the forbearance program is legally mandated.

Forbearance processes and qualifications

The forbearance process works differently depending on the type of credit product, the specific lender, and any legal requirements that may require specific forbearance options.

Types of forbearance offered by lenders

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Credit providers generally offer forbearance or hardship programs under similar circumstances.

• Legal requirement. Laws like the Servicemember Civil Relief Act (SCRA) and Military Lending Act (MLA) guarantee lowered interest rates for members of the armed forces. Similar state laws may require forbearance in other circumstances. Similarly, federal student loans have a standardized forbearance procedure that pauses payments (but not interest).
• Loss of income. If a borrower’s financial situation has significantly changed since the account was first opened, they may no longer be able to repay their debt according to the original agreement. In these cases, many lenders have forbearance programs or refinancing products available to keep borrowers repaying at a sustainable rate.
• Short-term difficulties. Borrowers may also face financial hardships that disrupt their immediate cash flow, but don’t impact their ability to repay over the long-term. In these cases, many creditors are willing to enroll borrowers in a forbearance program, pausing or lowering their payments, late fees, or interest rates until they can resume normal payments.

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In each case, different credit providers will have different eligibility requirements for forbearance. Some lenders only offer forbearance when legally required, so borrowers can’t assume that it’s an available option without reading their contract or asking their creditor directly.

Forbearance eligibility

Depending on the type of forbearance program, borrowers may face different eligibility requirements. Enrollment in a forbearance plan might be granted to avoid major financial hardship, like a foreclosure, bankruptcy, or eviction, or in response to financial difficulties like job loss or sudden illness. Credit providers might also offer forbearance programs when they notice a borrower has missed several payments, allowing them to repay in smaller amounts or giving them time to catch up.

Borrowers hoping to enroll in a forbearance program should first contact their credit servicer. In many cases, this will be the same organization that initially offered them credit, but loans can also be resold or managed by third-party servicing companies. In any case, they should contact the servicer and request information about forbearance or hardship programs. If the credit provider does not currently offer a forbearance program, they might also inquire about refinancing, debt consolidation, or debt rescheduling.

Managing Forbearance and Its Implications

Whether due to legal requirements or in an effort to keep struggling borrowers engaged, credit providers who offer forbearance programs need a system in place to manage individual cases and workflows.

In terms of the account’s financial mechanics, forbearance may have several effects. Paused or lowered payments, reduced interest rates, and fee waivers can all be part of a forbearance plan, but many legacy credit management programs lack streamlined tools to customize existing accounts, meaning those updates will require manual work or even back-end coding (if it’s even possible in the first place). Monitoring and managing active forbearance cases may also require reporting tools, data analytics, and clear process workflows.

Similarly, forbearance requires clear communication with the accountholder. When they first request forbearance, borrowers may be under the impression that it’s automatically approved, or that the plan is more generous than what’s actually offered. Once enrolled, they might lose contact and never restart their payments. Clear communication before and during the forbearance process can alleviate the confusion, but again, many legacy systems’ communication tools are lacking.

Modern lending and credit platforms streamline both account management and borrower communication. Automations and guided workflows can turn the many steps of a forbearance plan into a one-click process. Communications can be personalized with account and borrower information, and sent through whatever medium is most convenient and effective for the individual borrower—direct mail, email, or even SMS.

Keep borrowers engaged with your own forbearance program

Amid a turbulent economy with delinquency rates on the rise, credit providers need a better system for keeping borrowers engaged and repaying throughout financial difficulties. Legacy platforms may struggle to implement a successful forbearance program, but LoanPro’s modern configuration and automation tools make these kinds of program updates a smooth, streamlined process.

Take Best Egg for example. When the COVID-19 pandemic broke out, they were able to launch two complementary forbearance programs in just 60 days, helping borrowers ride out the sudden loss of income without defaulting on their debts. Defaults and delinquencies stayed low, and Best Egg subsequently won two consecutive top-10 spots in the J.D. Power Award for customer satisfaction among consumer lenders.

If you want to deliver that same award-winning experience to your borrowers, reach out to us. We’d love to discuss how forbearance and hardship plans fit into your overall collections strategies, and show you where LoanPro might enhance your process.