On April 13, 2020, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2020-26 (the “Revenue Procedure”) providing guidance to lenders and loan servicers offering relief to borrowers with federally-backed residential and multifamily mortgage loans, including relief mandated under the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (the “CARES Act”), as well as similar state programs. The Revenue Procedure also applies to non-federally backed mortgage loans, provided that the borrower is suffering financial hardship as a result of COVID-19 and the relief is sought between March 27, 2020, and December 31, 2020.
Under the Revenue Procedure, investment trusts and real estate mortgage investment conduits (“REMICs”) are permitted to grant loan modification and forbearance relief to borrowers experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency without suffering adverse tax consequences, including the possibility of income and loss recognition and failed compliance for such vehicles under Sections 860A through 860G of the Internal Revenue Code of 1986, as amended (the “Code”) and the Treasury Regulations promulgated thereunder (the “Regulations”).
The Revenue Procedure provides that for a mortgage loan held by REMICs, forbearance and related loan modifications as described above will not:
- Cause such loan to be treated as a newly-issued mortgage loan, notwithstanding the fact that the forbearance or loan modification may result in a significant modification of the loan under Code Section 1001 and Regulation §1.1001–3;
- Result in a prohibited mortgage loan disposition transaction, which would otherwise result in tax on the REMIC equal to 100 percent of the tax derived from such transaction; or
- Result in a deemed prohibited reissuance of REMIC regular interests in exchange for a newly-issued mortgage loan.
In addition to the above guidance, the Revenue Procedure also clarifies that the forbearance and related loan modifications resulting in payment delays will be treated as disregarded payment contingencies under Regulation §1.860G-1(b)(3)(ii). Accordingly, an interest in a REMIC will not fail to be classified as a regular interest as a result of the forbearance.
The Revenue Procedure also provides that mortgage loans that are subject to forbearance and loan modification as described here may be acquired by a REMIC without the acquiring REMIC being treated as having improper knowledge of an anticipated default under Regulation §1.856-6(b)(3).
Finally, with respect to mortgage loans owned by an investment trust, forbearances and related loan modifications as described here will not result in the trust having a prohibited power to vary the investment of the trust, which may otherwise jeopardize the trust’s classification as a “grantor trust.”