IRS Releases Revenue Procedure Providing Safe Harbors to Investment Trusts and REMICs Participating in COVID-19 Forbearance Programs | Practical Law

IRS Releases Revenue Procedure Providing Safe Harbors to Investment Trusts and REMICs Participating in COVID-19 Forbearance Programs | Practical Law

The IRS released Revenue Procedure 2020-26, which provides safe harbors to existing and future securitization vehicles in transactions in which one or more borrowers have asked to participate or has previously participated in a COVID-19 forbearance program.

IRS Releases Revenue Procedure Providing Safe Harbors to Investment Trusts and REMICs Participating in COVID-19 Forbearance Programs

by Practical Law Finance
Published on 23 Apr 2020 • USA (National/Federal)
The IRS released Revenue Procedure 2020-26, which provides safe harbors to existing and future securitization vehicles in transactions in which one or more borrowers have asked to participate or has previously participated in a COVID-19 forbearance program.
On April 13, 2020, the IRS released Revenue Procedure 2020-26, which provides safe harbors to existing and future securitization vehicles in transactions in which one or more borrowers have asked to participate or has previously participated in a COVID-19 forbearance program.
The CARES Act, passed by the US Congress on March 27, 2020, provides, among other things, that during the covered period, borrowers and multifamily borrowers with federally backed mortgage loans experiencing financial hardship due to COVID-19 may request and obtain forbearance on their loans (see Legal Update, COVID-19: Federal CARES Act Stimulus Provides Relief for Federally Backed Residential and Multifamily Mortgage Loans).
However, many of these federally backed mortgage and multifamily mortgage loans are held by securitization vehicles such as investment trusts and real estate mortgage investment conduits (REMICs). The IRS therefore sought to provide a safe harbor for qualifying REMICs and investment trusts from having their federal tax characterization affected as a result of participation in a forbearance program.
Section 5 of the revenue procedure states that it applies to the following transactions:
  • 5.01. Forbearances of any federally backed mortgage or multifamily mortgage loans held by a REMIC or investment trust that has been provided under section 4022 or 4023 of the CARES Act, as well as forbearances not described that are provided by a holder or servicer that are agreed to by the borrower of any federally backed or non-federally backed mortgage loan and that are made under forbearance programs for borrowers experiencing a financial hardship due to COVID-19.
  • 5.02. The direct or indirect acquisition by a REMIC on or after March 27, 2020 of any federally backed mortgage loans or multifamily mortgage loans with respect to which the borrower received a forbearance under section 4022 or 4023 of the CARES Act, as well as any mortgage loans not described for which the borrower requested or agreed to a forbearance between March 27, 2020 and December 31, 2020 that was granted as a result of financial hardship due to COVID-19.
The revenue procedure states that for mortgage loans held by REMICs, forbearances described in section 5.01 of the revenue procedure:
  • Will not be treated as resulting in a newly issued mortgage loan for purposes of § 1.860G-2(b)(1) of the Internal Revenue Code (IRC).
  • Will not be treated as a prohibited transaction under § 860F(a)(2) of the IRC.
  • Will not result in a deemed reissuance of the REMIC's regular interests.
The revenue procedure also states that for mortgage loans held by investment trusts, forbearance cannot vary the investment of the certificateholders if the forbearance:
  • Is described in section 5.01 of the revenue procedure.
  • Is offered voluntarily or through state-mandated forbearance programs by holders or servicers for a period of three to six months, relief was requested or agreed to between March 27, 2020 and December 31, 2020, and relief was granted as a result of financial hardship due to COVID-19.
The revenue procedure also states that if a forbearance loan described in section 5.02 of the revenue procedure is acquired by a REMIC, that prior forbearance will not be:
  • Treated as evidence that the REMIC had improper knowledge of an anticipated default under § 1.856-6(b)(3) of the IRC.
  • Taken into account in determining the origination date of the mortgage loan for purposes of § 1.860G-2(a)(1) of the IRC.
Lastly, the revenue procedure states that for mortgage loans held by REMICs, delays and shortfalls in payments associated with or caused by forbearances described in section 5.01 of the revenue procedure are contingencies under § 1.860G-1(b)(3)(ii) of the IRC that can be disregarded.
For a continuously updated collection of resources addressing COVID-19, see Practical Law's Global Coronavirus Toolkit.