Oregon Law Limits Lender Enforcement Actions Against Borrowers

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Oregon’s House Bill 4204 (the “Statute”) was signed into law on July 7, 2020, by Governor Kate Brown. The Statute imposes certain limitations on a lender’s right to undertake enforcement action against a borrower on loans secured by commercial or residential property. The Statute will remain in effect for the duration of an “Emergency Period”, which is currently set to expire on September 30, 2020 and is retroactive to March 8, 2020. The Emergency Period may be extended by executive order issued no later than September 1, 2020.

During the Emergency Period, if a borrower provides notice to its lender stating that it cannot make periodic installments or other payments due to the lender under a loan, then the lender is prohibited by the Statute from treating such failure to pay as a default of the loan.

If the mortgaged property is a residential property with four or fewer dwelling units, the borrower’s notice must state that its failure to pay is due to a loss of income as result of the COVID‑19 pandemic. For commercial property, or residential properties consisting of more than four dwelling units, the borrower’s notice must also include financial statements or other evidence showing a loss of income related to the COVID-19 pandemic and must disclose whether the borrower has received funds from the SBA’s Paycheck Protection Program or other state or federal relief programs. The borrower does not need to provide such notice to the lender of its inability to pay more than once.

If the borrower has sent notice of its inability to pay and subsequently does not make its payments, then, unless the borrower and the lender otherwise agree to modify, defer or otherwise work out the loan, the lender must (1) defer from collecting the payments for the duration of the Emergency Period and (2) permit the borrower to pay all such deferred amounts at maturity of the loan.

The Statute further requires each lender authorized to do business in Oregon to provide written notice on or prior to August 29, 2020 (the “Notice Date”) to all of that “lender’s borrowers” of a borrower’s rights for accommodation under the Statute (the “Lender Notice”). (We note that the Notice Date is a Saturday.) Many questions remain as to how lenders will determine which borrowers should be classified as “lender’s borrowers” in Oregon, particularly as they relate to multi-state loan pools.

Additionally, with respect to a loan subject to the limitations above, the Statute provides that lenders may not:

  • Impose or collect a default rate of interest, fees, penalties, attorneys’ fees or other fees in connection with the borrower’s failure to make a payment during the Emergency Period;
  • Treat the borrower’s failure to pay during the Emergency Period as an ineligibility for a foreclosure avoidance measure;
  • Require or charge for an inspection, appraisal or broker opinion of value, not otherwise permitted in the absence of a default;
  • Initiate cash management not already in existence prior to June 30, 2020;
  • Implement lockbox procedures not already in existence prior to June 30, 2020;
  • Take control of the operating revenue from the mortgaged property, unless such control was established prior to June 30, 2020; or
  • Declare a default based on the borrower’s failure to meet a financial covenant as result of inadequate operating revenue resulting from the COVID-19 pandemic.

If a lender takes any such prohibited action, the Statute provides a cause of action for the borrower and allows for recovery of actual damages, court costs, and attorney fees.

The Statute notably does not apply to foreclosure judgments that (i) were issued prior to the Emergency Period, (ii) occur in connection with a tax foreclosure proceeding, or (iii) occur after a person has recorded a notice of intent to abandon real property or a judicial order that authorizes an abandonment of real property.

We recommend that lenders consult with counsel in determining (i) which borrowers are entitled to a Lender Notice, (ii) the content of the Lender Notice and (iii) the precise timing for delivery of the Lender Notice.

This Statute has generated tremendous discussion in the national real estate lending community given the scope of the limitations imposed on lenders and the possibility that other states may adopt legislation of this kind. It remains to be seen whether these types of laws will in the long run prove beneficial to borrowers or instead chill lending in affected states for the terms of such laws.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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