On June 30, 2020, the State of Oregon enacted House Bill 4204 (the “Bill”) establishing a temporary commercial and residential foreclosure moratorium and other lender restrictions during an “emergency period” extending from March 8, 2020 until September 30, 2020. On August 31, 2020, Oregon Governor Kate Brown issued Executive Order No. 20-37 extending this emergency period for the Bill until December 31, 2020. The Bill obligates lenders to defer mortgage payments under certain circumstances and limits lenders’ default remedies on obligations secured by commercial and residential mortgages, trust deeds, land sale contracts, or other instruments relating to real property located in Oregon and personal property that is used as a residence in Oregon (e.g., manufactured or floating homes).
Lender Restrictions. If a borrower notifies a lender at any time during the emergency period that the borrower will not be able to make the periodic installment payment (or any other amount due) because of COVID-19, the lender may not treat as a default a borrower’s failure to pay during the emergency period. Upon such notice, the lender must (unless the lender and borrower otherwise agree to modify, defer, or otherwise mitigate a loan, including by agreeing to a foreclosure avoidance measure):
- Defer from collecting payments during the emergency period; and
- Permit the borrower to pay the deferred amounts on the loan’s maturity date. (This would effectively result in a balloon payment at the end of the loan term. After an escrow analysis under the Real Estate Settlement Procedures Act, a lender may adjust the amount of any escrow impound and may consider any shortage that results from the deferred payments.)
A lender may not with respect to a loan agreement during the emergency period:
- Impose fees, charges, penalties, default interest rates, attorney fees, or other amounts as a result of the deferred payments (but a lender may still be able to exercise its remedies due to non-monetary defaults);
- Treat the borrower’s failure to pay as an ineligibility for a foreclosure avoidance measure;
- Require an inspection or appraisal (unless permitted in the absence of a default);
- Initiate cash management, implement lockbox procedures, or take control of the operating revenue from real property (unless already in existence before June 30, 2020); and
- Declare a default based on the borrower’s failure to meet financial covenants due to inadequate operating revenue resulting from the COVID-19 pandemic.
Lenders should make sure they comply with these prohibitions because a borrower that suffers an ascertainable loss of money or property may sue a lender to recover actual damages and attorney fees and costs. Notably, this Bill does not relieve a borrower of the duty to repay the full amount of the loan that is subject to a waiver, deferral, modification, or forbearance under the Bill.
The accommodations provided under the Bill are repealed 90 days after the expiration of the emergency period.
Borrower’s Notice. To take advantage of the payment deferral, the borrower must provide a notice to lender once during the emergency period. The notice form depends on the property type:
- If the property is a residence with one to four units, the notice must attest that the borrower’s failure to pay is a result of a loss of income related to the COVID-19 pandemic. (A verbal or written notice may be sufficient for this category.)
- If the property is commercial property or residential property with more than four units, the notice must include financial statements or other evidence that demonstrates a loss of income related to the COVID-19 pandemic and must disclose any funds the borrower received from the Small Business Administration under the Paycheck Protection Program or other state or federal relief programs.
Lender’s Notice. By August 29, 2020, lenders that are authorized to do business in Oregon were required to provide written notice by mail to their borrowers of their rights under this Bill. If a lender has not provided such notice by this deadline or has originated new loans after this deadline, it would be prudent to do so as soon as possible. The Oregon Division of Financial Regulation released its guidance for loans secured by residential one to four units, which includes a sample notice form for such loans and provides that if the payments are deferred, the borrower’s credit report may show that the loan is in forbearance or in a deferred payment plan.
Foreclosure Moratorium. With limited exemptions, a lender may not during the emergency period (regardless of whether the borrower notifies a lender that the borrower cannot pay):
- Foreclose a trust deed by advertisement and sale;
- Sue to foreclose a mortgage or trust deed or to enforce an obligation under a retail installment contract for property;
- Enforce a forfeiture remedy; or
- Sue to foreclose a lien or other security interest on, or petition for an order of foreclosure by advertisement and sale of, property.
During the emergency period, a trustee’s and execution sales are prohibited, and a court may not enter a judgment of foreclosure and sale or issue a writ of execution and must dismiss without prejudice any suit filed to foreclose a lien. Any trustee’s or execution sales during the emergency period are void.
Legal Challenge. On August 13, 2020, the Oregon Bankers Association and three community banks (Lewis & Clark Bank, Bank of Eastern Oregon, and People’s Bank of Commerce) sued the State of Oregon in the U.S. District Court to challenge the Bill. Without directly challenging the foreclosure moratorium, the lawsuit contests other lender restrictions and lender’s notice requirement based on the Supremacy Clause and federal preemption; the Contracts Clause; and the Due Process and Takings Clauses (contesting the retroactive application of the Bill between March 8 and June 30). The lawsuit asserts that the lender restrictions (e.g. to change the payment schedule and due date of loans, prohibit lenders from imposing negotiated interest rates and fees) and lender’s notice requirement are not mandated by the federal law and conflict with Congress’ intent in addressing COVID-19 by passing the CARES Act. It also claims that the Bill does not include any provisions permitting lenders to act in response to property damage, or to require borrowers to maintain sufficient escrow funds, thus removing lenders’ ability to preserve the collateral value.