In conjunction with the May 5, 2020 update to and extension of their temporary origination and appraisal guidance, Fannie Mae and Freddie Mac updated their COVID-19 FAQs.
The agencies include new FAQs addressing their guidance that furloughed employees do not qualify under their guidelines for temporary leave income policy. In particular, Fannie Mae includes the following new FAQs:
Q5. If a VOE indicates the borrower is actively employed, but borrower discloses they are furloughed, what are the next steps?
The income may not be used for qualifying. A borrower who is furloughed or laid off is not considered to be actively employed. See Lender Letter LL-2020-03, Impact of COVID-19 on Originations for details.
Q10. If the borrower is furloughed but continues receiving income for a specified period of time, such as four weeks, can the income be used for qualifying?
No. This income is not stable, predictable, or likely to continue and therefore does not meet the requirements in Selling Guide B3-3.1-01, General Income Information; Continuity of Income.
Freddie Mac includes the following new FAQs:
Q3: The Borrower works for a company that has publicly stated employees will continue to be paid through a certain date (e.g., 3 weeks out); however, the employer’s physical place of business is temporarily closed. Is it acceptable to use the income to qualify the borrower?
No, the Guide requirements for Income Continuance are not met. As of this writing, the economic effect of COVID-19 to the ability of certain employers to re-open are unknown. This impacts a reasonable expectation of income continuance, regardless of the planned temporary closure status.
Q5: The 10-day PCV verifies the borrower’s employment status as employed; however, I have other information that indicates the Borrower may be furloughed or laid off. Is it acceptable to use the 10-day PCV as confirmation of the Borrower’s employment status?
No, the Seller’s knowledge that the Borrower may be furloughed or laid off contradicts a reasonable expectation of continuance and probability of consistent receipt of income. In this scenario, the Seller must resolve the discrepancy – which may require updated income documentation – before proceeding with using the income for qualifying. It is also recommended that, if possible, the Seller ask the employer during employment verification whether the borrower’s employment status or income level has changed within the last 60 days, as it is possible that a 10-day PCV employment status may still indicate “employed” after the borrower is furloughed or laid off.
Fannie Mae and Freddie Mac also address the situation in which a self-employed borrower has received a Paycheck Protection Program loan.
Fannie Mae includes the following new FAQs:
Q16. Does the lender need to consider a Paycheck Protection Program (PPP) loan when analyzing a self-employed borrower?
The PPP is a loan issued by Small Business Administration lenders under the CARES Act. These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. The existence of a PPP loan could be helpful information in analyzing the borrower's business. Lenders should apply due diligence and review the actions of the business and any impact the current situation has taken on the flow of income.
Q17. Does the lender need to consider a Paycheck Protection Program (PPP) loan in the borrower’s DTI?
Under the CARES Act, PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven. Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.
Q10. If the Borrower is self-employed and has disclosed that they are in the process of obtaining, or have obtained a new SBA Paycheck Protection Plan (PPP) loan under the CARES Act provisions, must a payment be considered?
If a self-employed Borrower has taken out an SBA PPP loan under the CARES Act, no payment – estimated or otherwise – need be included in the DTI or considered in the income calculation (e.g., as a deduction from income) at this time. This guidance may change as more information about the PPP loans becomes available, including the amount of loan forgiveness (e.g., full, reduced or none) which will be determined at a later date.
New FAQs from Fannie Mae also address changes in an applicant’s pay structure, temporary age of document requirements, the temporary suspension of employment validation through Desktop Underwriter® (DU®) and corresponding suspension of representation and warranty relief for employment verification within the Desktop Underwriter® (DU®) validation service, the use of third-party employment verification reports, the self-reporting of a loan in a COVID-19 forbearance, and other matters.
New FAQs from Freddie Mac also address temporary age of document requirements, the self-reporting of a mortgage in a COVID-19 forbearance, and other matters.
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