For the last several years, the City of Chicago has rapidly expanded the scope of regulations on lenders and mortgage servicers doing business in the City. If recent developments are any indication, the City Council’s transparent hostility to the mortgage industry does not appear to be abating.
The City of Chicago recently passed an amendment to Municipal Code section 13-12-126 concerning the obligations of mortgagees (and loan servicers) of loans secured by vacant buildings. The amendment, which became effective on October 19, 2016, significantly expands the scope of the vacant building provisions, shortens the registration timeline and increases the registration fees. All these changes work to the detriment of mortgagees and loan servicers.
The first significant change is that the vacant building provisions are no longer limited only to vacant residential buildings, but now apply to all vacant buildings securing loans that are in default. Mortgagees and servicers of loans secured by commercial properties thus should immediately conduct an evaluation of their default portfolio to determine whether there are any vacant commercial properties therein. Those properties should be registered immediately.
The second significant change relates to the registration timeline. A mortgagee or servicer must register a vacant property securing a defaulted loan within the later of (a) 30 days after the building becomes vacant or, (b) 10 days after the default. In other words, if a borrower is in default and then the property becomes vacant, a mortgagee or servicer has 30 days to register the property. If the property is vacant and then the borrower goes into default, a mortgagee or servicer only has 10 days to register. A borrower is in “default” when 60 days past due on the obligation to make a scheduled payment for buildings with four or fewer units, and when 90 days past due on the obligation to make a scheduled payment for buildings with five or more units. Prior to the amendment, the time to register was the later of 30 days after the property becomes vacant, or 60 days after a default, so the amendment significantly shortens the registration window.
It is general industry practice to order a property inspection 45 days after the borrower becomes delinquent, and then conduct regular inspections in 30-day intervals thereafter. The registration requirements mean that if the initial 45-day or the regular 30-day property inspection reveals that the property is vacant, the servicer is under an immediate obligation to register that building with the City. Timely and effective communication between the property inspector and the servicer will thus be critical to ensuring compliance with the amended ordinance.
The third significant change is the increase in registration fees. Previously the registration fee was $500. Now, if the mortgagee or servicer registers the property within 30 days of the vacancy, the cost is $700. If the mortgagee or servicer registers the property within 10 days of the default, the fee is $400. The motivation behind this change and the disparity in fees is not clear. Moreover, while the registration is now valid for 12 months rather than 6, there is a renewal charge of $700 where there was previously none. Even more significantly, the mortgagee is also now required to renew so long as the property remains vacant or the borrower is in default. In other words, once a vacant property is registered, the registration must be renewed if the borrower remains in default, even if the building subsequently becomes occupied.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.