On August 31, 2020, pursuant to the option granted in HB 4204 (the “Act”) to extend the emergency period via executive order, Oregon Governor Kate Brown issued Executive Order No. 20-37 extending the emergency period covered by the foreclosure moratorium to December 31, 2020. In Executive Order No. 20-37, Governor Brown also reserved the right to further extend the moratorium. However, it is not clear whether Governor Brown has the right to extend the emergency period a second time because the Act as written only grants the right to the Governor to extend the emergency period “not later than 30 days before September 30, 2020.”
Thus, as extended, the Act prohibits lenders from commencing a new judicial foreclosure action or obtaining a judgment on a pending judicial foreclosure action until January 1, 2021. In addition, all time periods for notices issued in a nonjudicial foreclosure action commenced prior to the effective date of the Act are tolled until the end of the emergency period and any nonjudicial foreclosure sale that takes place during the emergency period is invalid. The extension also gives borrowers the right to give notice any time up to December 31, 2020, that they are unable to make installment payments as a result of the COVID-19 pandemic. Thereafter, the lender is precluded from requiring additional monthly payments during the emergency period or invoking many default remedies that may otherwise be available under the loan. Such remedies include acceleration, imposition of default interest, late fees, penalties and attorneys’ fees, new lockbox or cash management procedures, denying foreclosure avoidance remedies as a result of the default, taking control of operating revenue from secured real property, or seeking a new appraisal or inspection if the lender is not permitted to do so absent a default. Any missed payments are deferred to maturity unless the borrower and lender otherwise agree.
The Act was extended despite the request of various industry groups, such as the American Bankers Association, Commercial Real Estate Finance Council and Mortgage Bankers Association, in an August 13, 2020 letter to Governor Brown, urging the Governor to allow the Act to expire on September 30, 2020. The letter cited concerns regarding conflict with the federal CARES Act, that its imprecision creates uncertainty with regard to lender obligations and available remedies, and that it will increase costs to lenders and servicers, which will ultimately be passed onto borrowers.
Among the uncertainties presented by the extension of the Act is whether Section 9 of the Act, which requires all lenders to give notice to their borrowers no later than August 29 of their right to seek relief under the Act, applies to new loans. Before the extension, the notice requirement would have been moot as to most new loans closed after the effective date of the Act, as the first payment would likely not have been due until after the expiration of the emergency period. Now, however, those lenders could arguably be in violation of the Act for failing to give notice since borrowers can now seek relief for payments up to December 31, 2020. Second, while it is clear that a nonjudicial foreclosure sale cannot be held during the emergency period and that time periods for pending nonjudicial foreclosures are tolled during the emergency period, the law is silent on whether a new nonjudicial foreclosure could be commenced during the emergency period for reasons other than a payment default or where the borrower has not sought relief under the statute. Although it is far from certain due to the imprecise language of the Act, arguably, in such instances notices of default could be recorded, starting the time running for a nonjudicial sale to take place after the expiration of the emergency period.
As extended, the Act would be repealed 90 days after the expiration of the emergency period or on April 1, 2021, giving aggrieved parties until then to file any claims for damages for alleged violations of the Act.
The Act’s ultimate impact, however, remains uncertain as on August 13, 2020, the Oregon Bankers Association and three Oregon-chartered banks filed suit against the State of Oregon, among others, in federal court for the District of Oregon, seeking to strike Sections 3 and 9 of the Act on constitutional grounds. Section 3 prevents lenders from exercising many default remedies based upon payment or covenant defaults, once the borrower has given notice that the default is based upon decline in income due to the COVID-19 pandemic, and Section 9 requires lenders to send notice to borrowers of their right to seek relief under the Act. The Plaintiffs argue that sections 3 and 9 of the Act violate the U.S. Constitution because they conflict with the CARES Act and seek to supplant its purpose in protecting borrowers impacted by COVID-19, unlawfully alter the terms of bargained-for loan contracts and impair the ability of lenders to enforce loans, harming, in particular, small community banks whose liquidity could be jeopardized if sufficient numbers of borrowers cease making payments, which must be deferred under the Act until maturity.
The constitutional challenges are as follows: first, that the Act is preempted by federal law, including the CARES Act and the National Bank Act; second, that the Act unlawfully restricts the right of banks to make and enforce contracts, violating the Contracts Clause of the Constitution; and third, that it wrongfully imposes liability retroactively for past conduct, violating due process and constituting an unlawful taking of property without just compensation. It is important to note that the pending litigation does not challenge the foreclosure moratorium, but only those sections that prevent lenders from imposing fees and charges and other default remedies upon nonpayment, and that require lenders to send notices to borrowers. The litigation has not proceeded beyond the complaint stage, but now that the emergency period has been extended to December 31, 2020, it is much more likely that the litigation will proceed.