September 25, 2018
DFS ADVISES STATE-CHARTERED BANKS OF THEIR RESPONSIBILITIES IN LENDING TO LANDLORDS OF RENT-STABILIZED OR RENT-REGULATED MULTI-FAMILY RESIDENTIAL BUILDINGS
Department Issues Guidance on Permissible Lending Practices to Combat Inappropriate Practices, Including Tenant Harassment and Unsafe Living Conditions
Financial Services Superintendent Maria T. Vullo today announced that the Department of Financial Services (DFS) has issued guidance to assist regulated banking institutions in their lending activities involving New York rent-stabilized or rent-regulated multifamily residential buildings. DFS has received complaints that certain owners of rent-stabilized multifamily residential buildings who have engaged in inappropriate practices including tenant harassment and unsafe living conditions may have obtained loans, directly or indirectly, from banking institutions for the purchase or renovation of buildings, and DFS expects enhanced due diligence of such landlords.
“Our banking institutions play an important role in providing critical financing for improving and increasing the affordability of housing and access to reasonably priced housing in New York,” said Superintendent Vullo. “DFS expects New York State-chartered institutions to apply best practices and conduct proper due diligence of these landlords. There can be no excuse for misconduct by a landlord. We expect our lenders to diligently review their matters and follow up on red flags suggesting potential misconduct.”
It has come to the Department’s attention that certain landlords of rent-stabilized buildings routinely have been deferring necessary and required maintenance and property costs needed to operate the multifamily residential buildings they own, thus violating tenant leases and disturbing their right to quiet enjoyment of their homes; that certain landlords have forced eviction or buy-out of tenants from their apartments, including those protected by New York’s affordable rent regulations; and that certain landlords have used the proceeds from their bank loans to renovate such apartments in order to lease them out to new tenants at higher rents as quickly as possible in order to remove the apartments from rent stabilization.
The Department has issued this guidance to ensure that New York state-chartered institutions are following best practices in lending to owners of rent-stabilized buildings so that state-chartered banking institutions do not knowingly or unknowingly facilitate landlords’ schemes to harass tenants and violate New York rent regulations.
For example, the terms of a loan may not require a landlord of a rent-stabilized building to embark on a hyper-aggressive plan to drive up rents in order to pay off the loan within a relatively short period of time, which the lender should have known could not be executed without disregarding tenant rights and landlord obligations to pay taxes, utilities and other costs that are standard for a New York City landlord. In addition, lending institutions should consider whether a landlord default is likely based on the real rent rolls of the building, resulting in mismanagement of the building and other violations.
The DFS guidance issued today includes the following best practices:
Pre-Loan Due Diligence
- Lenders should conduct appropriate due diligence on property owners, including when the bank’s role is providing indirect financing to the property owner through a third-party vehicle, as if the end user is the bank’s customer. For example, lenders should conduct background checks and lien searches, evaluate experience and reputation of the owner, review tenant complaints and search for the existence of any tenant lawsuits, and review media coverage concerning the owner or problems at the properties or allegations by tenants, and use the resulting information as a determining factor in their loan decisions.
- Lenders should conduct due diligence on properties, including due diligence regarding outstanding housing code and building violations with New York City’s Department of Housing Preservation and Development or other applicable housing authority. This shall include enhanced diligence when a property has a relatively high number of violations.
- Lenders should ensure realistic and sound underwriting terms for any loan involving a multifamily residential building, including:
- Hiring reputable, independent appraisers to provide accurate property appraisals;
- Paying particular attention to actual cash flow projections based on in-place rents and vacant apartments to make sure they do not unreasonably exceed current rent payment streams, and;
- Establishing a debt service coverage ratio that is based on the specific facts of each loan and is based on realistic assumptions and consistent with safe and sound underwriting standards and practices and subject to documentation.
- Lenders should establish covenants or procedures to ensure that emergency and hazard repairs, including current and prior year violations of class “C”, “B” and applicable “I” violations, are corrected within six months of the loan closing.
- Lenders should take into consideration the level of responsiveness and willingness of a property owner in addressing concerns about building code violations, as a factor for future loans to the property owner.
A copy of the guidance can be found here.