Seyfarth Synopsis: In response to inquiries from interested parties, on May 4, 2020, the Commissioner (the “Commissioner”) of the DC Department of Insurance, Securities, and Banking (the “DISB”) published additional guidance (the “Supplemental Guidance”) on the mortgage deferral program for residential and commercial mortgages (the “Program”) introduced on April 7, 2020 as part of the COVID-19 Response Supplemental Emergency Amendment Act of 2020, as amended (the “Supplemental Act”). The Supplemental Guidance provides clarity with respect to certain aspects of the Program, as discussed in more detail below.
Scope of the Program
Section 1 of the Supplemental Guidance addresses some initial confusion as to the scope of the Program. The original text of the Supplemental Act provided that the requirements of the Program applies to any “mortgage servicer”. The DC City Council subsequently enacted certain additional resolutions and amendments to the Supplemental Act, which broadened the scope of the Program to apply to “mortgage lenders” which includes entities such as mortgage loan originators and servicers, but specifically excludes banks, trust companies, and similar institutions that accept deposits.1 As such, various industry groups have inquired as to the intended scope of the Program.
The Supplemental Guidance confirms that requirements of the Program apply to any entity that makes or services a residential or commercial mortgage loan for real property located in the District of Columbia. The Supplemental Guidance notes Section 202(h) of the Supplemental Act waived the aforementioned exceptions to the term “mortgage lender” for the duration of the COVID-19 public health emergency. As such, the definition of a mortgage lender in the context of the Program includes financial institutions such as banks, trust companies, savings banks, savings and loan associations, and credit unions. It is important to note, however, that the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association are explicitly excluded from participation in the Program, as separate federal-level forbearance rules apply to such entities.
Parties should now be aware that any entity that has made, or is servicing, a mortgage loan for real property located in Washington, DC is subject to the Program’s requirements and such entities should begin implementing mortgage deferral programs for applicable borrowers.
General Mechanics of the Program
As discussed above, the Program requires that all mortgage lenders under the jurisdiction of the DISB offer borrowers who satisfy the criteria discussed below a deferral of their mortgage payments. Such deferral requirements are applicable during the period for which the Mayor has declared a Public Health Emergency and for sixty (60) days thereafter (the “Deferral Period”). A mortgage lender’s deferral program must:
Grant at least a 90-day deferral for the monthly payments of principal and interest on the mortgage loan;
Waive all fees (including late fees and processing fees) for the duration of the COVID-19 public health emergency; and
Forbid the mortgage lender from reporting any delinquency or derogatory information to a credit bureau that occurs as a result of the deferral.
The Program dictates that mortgage lenders must approve each application in which a borrower (1) demonstrates evidence of a financial hardship resulting from the COVID-19 public health emergency (including an existing delinquency or a future inability to make mortgage payments) and (2) agrees in writing to pay the deferred payments within a reasonable time (as agreed to by the mortgage lender and borrower), or five (5) years from the end of the Deferral Period, or the end of the original term of the mortgage loan, whichever is earlier.
Mortgage lenders should note that there are exceptions to the Program for certain borrowers who were already in distress before DC Mayor Muriel Bowser instituted the COVID-19 public health emergency. The Program does not apply to a property for which a mortgage servicer had already initiated foreclosure proceedings or exercised its right to accelerate the loan as of March 11, 2020.
Record-Keeping and Notice Obligations for Mortgage Lenders
Mortgage lenders are also subject to certain record-keeping and reporting requirements under the Program, including:
A requirement to retain all applications for mortgage deferral, whether approved or denied, for at least three (3) years after final payment is made on the mortgage or the mortgage is sold, whichever occurs first. Additionally, if requested, a mortgage lender must make a copy of its mortgage deferral application available to the Commissioner of the DISB.
A requirement to provide the Commissioner of the DISB with a notice summary of all approved applications as of May 8, 2020, such notice including the percentage of mortgage deferrals approved for and accepted by each borrower (a “Mortgage Deferral Status Report”). After the initial submission, mortgage lenders must provide updates to the Mortgage Deferral Status Report in fifteen (15) day intervals during the Deferral Period.
Mortgage lenders should pay particular attention to Section 3 of the Supplemental Guidance, which details the preparation and submission of the Mortgage Deferral Status Reports noted above. In addition to providing the number of mortgage deferral applications that have been approved, a Mortgage Deferral Status Report must include the name of the borrower, the property address, the type of mortgage the borrower holds (residential or commercial), the period of deferral, and the amount of the approved deferral. The Mortgage Deferral Status Report should also include the same information for any pending or denied applications (and for such denied applications, the mortgage lender must provide a detailed basis for denying the deferral).
In the event that a borrower’s application for mortgage deferral is denied, the applicant may file a written complaint with the Commissioner of the DISB for formal investigation.
A borrower receiving a mortgage deferral under the Program should be aware of certain notice and rent reduction requirements with respect to any qualified tenants2 occupying its property. Specifically, any borrower receiving a mortgage deferral must:
Notify its tenants in writing of such deferral. Borrowers should follow the process set forth in Section 7 of the Supplemental Guidance, which requires the posting of notice of the deferral approval in a common area of the property that is visible to all tenants. This posting requirement is in addition to any other written notice a borrower intends to provide its tenants.
Reduce the rent charged to any qualified tenant in the same proportion that the mortgage payment was reduced for the period during Deferral Period. The borrower may require a qualified tenant to repay the amount of such reduced rent without interest or fees by the earlier of the end of the lease term or eighteen (18) months after the Deferral Period.
The aforementioned rules are designed to pass along the benefits of the mortgage deferral to the residential or commercial tenants that evidence a need for economic relief. Eligible borrowers should keep in mind that their tenants may proactively inquire as to whether an application for mortgage relief under the Program has been submitted and may even consider working proactively with tenants on this issue.
As noted above, both residential and commercial tenants occupying eligible properties are entitled to a proportional share of the relief granted under the Program and as such, should consider contacting their landlords to discuss the status, or request the submission, of an application to the applicable mortgage lender.
In the event a landlord does not qualify for relief under the Program (e.g., a situation where a landlord owns property free and clear of any financing), a tenant might consider relief under the Rental Payment Plan Program introduced through the Coronavirus Omnibus Emergency Amendment Act of 2020 (Bill 23-750), which was signed into law on May 13, 2020, the details of which Seyfarth has analyzed for interested parties in a separate article.
1 A defined in Title 26 of the District of Columbia Code, a mortgage lender is any person who either makes a mortgage loan, engages in the business of servicing mortgage loans for others, or collects or otherwise receives mortgage loan payments directly from borrowers for distribution to any other person, but does not include banks, trust companies, and similar institutions that accept deposits and are regulated under Title 26 of the District of Columbia Official Code. 2 Under the Program, a “qualified tenant” means a tenant of a property owned or controlled by a person or entity receiving a mortgage deferral under the Program that has notified the landlord of an inability to pay all or a portion of the rent due as a result of the COVID-19 public health emergency.