The following is an analysis of the CARES Act, courtesy of Ian Rambarran, Shareholder with Klinedinst PC. Rambarran currently serves as California MBA Legal Issues Committee Chair.
President Trump signed into law the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act a little over a week ago. Today, lenders and servicers are quickly instituting processes to assist borrowers and tenants with COVID-19 related relief. The CARES Act aims to streamline relief for all those affected by COVID-19, if the loans are federally backed. This means that the CARES Act applies to all FHA, HUD, VA, Department of Agriculture Loans, Fannie Mae and Freddie Mac loans.
A complete copy of the CARES Act can be found at: congress.gov/bill/116th-congress/house-bill/748/text#toc-H4D5728D599DE43C1B10376E596A41BCE.
Unlike the typical loss mitigation scenario, the Act creates an automatic 180-day forbearance if:
- A borrower is suffering financial hardship due directly or indirectly to COVID-19 and,
- A borrower affirms he or she is experiencing the hardship during the COVID-19 emergency (National Emergency declared by the President).
The forbearance option applies without regard to prior delinquency and the forbearance period may be extended an additional 180 days. During the forbearance period, no fees, penalties, or interest beyond the amounts scheduled may be charged. Effectively, lenders and servicers should calculate them as if the borrower had made all of his or her payments on time and in full. Additionally, following a request for forbearance, a servicer may not initiate foreclosure or execute a foreclosure-related eviction for at least 60 days.
The CARES Act states the only documentation required from the borrower is an attestation that their financial hardship is caused by COVID-19. It is not yet clear how attenuated the hardship may be to COVID-19, but the COVID-19 pandemic will affect all aspects of commerce because close to 90% of the country has been ordered to shelter in place. Nearly any hardship could therefore be connected to COVID-19 based on circuitous logic.
Forbearance For Multifamily Properties
The CARES Act also applies to covered Multifamily Properties. A multifamily borrower (borrower of a property of five or more dwellings) experiencing financial hardship either directly or indirectly because of COVID-19 may request forbearance either orally or by written request. For this type of investment-based property, a servicer must document the hardship, provide forbearance for up to 30 days, and extend the forbearance for up to two additional 30 day periods, so long as a borrower makes the request at least 15 days prior to the end of a provided forbearance period.
The CARES Act also expects the benefits afforded to multifamily property owners be passed down to the tenants. For example, a borrower/landlord cannot evict a tenant nor can the borrower/landlord charge late fees or penalties against the tenant during the forbearance period. Indeed, the borrower cannot serve notices to vacate until after the expiration of the forbearance period and must provide at least 30 days to vacate.
The CARES Act implements a 120 days moratorium on all covered properties. This means that the borrower may not: initiate an action (file a complaint) to recover the property based on nonpayment of rent or charge a tenant penalty for nonpayment of rent. Furthermore, a tenant must also receive at least 30 days’ notice to vacate and the notice may not be served until after the expiration of the 120-day period. Following a foreclosure, the property owner steps into the shoes of the prior borrower/lessor. Therefore, this enactment will limit the ability of lenders to proceed with actions such as unlawful detainers.
Finally, the CARES Act makes clears that a servicer “may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.” The only exception to the foregoing is the property is vacant or abandoned.
The servicing landscape is quickly changing in light of the COVID-19 pandemic. The CARES Act provides extensive new protections for borrowers and occupants of covered properties. In order to ensure compliance with the CARES Act, lenders and servicers should exercise an abundance of caution before moving to foreclosure or eviction. In fact, it would be prudent to communicate with the borrowers to ensure retention options are offered (not just received). Similar efforts should be provided to tenants as well. By following a cautious approach, the lending and servicing industry will be ahead of any new regulatory concerns and support the policy goals of the CARES Act, which amongst other things, stabilizes the economy and secure public health.
About the Authors
Ian A. Rambarran works with the firm’s corporate clients, focusing primarily on business, financial services, employment, intellectual property, real estate, transportation, and construction issues. A graduate of the University of the Pacific, McGeorge School of Law, Mr. Rambarran currently serves as Chairman of the California MBA Legal Issues Committee. He frequently counsels and represents clients in business and commercial disputes, and represents lenders and financial institutions in disputes throughout California. Mr. Rambarran can be reached at firstname.lastname@example.org.
This article is intended to be for informational purposes only. This information does not constitute legal advice. The law is constantly changing and the information may not be complete or correct depending on the date of the article and your particular legal problem. The use of information from this article does not create any type of attorney-client relationship.
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