§ 1980.373 - Special loan servicing.

(a) General. As specified in this section, the Lender may reduce the interest rate to a level at or below the maximum allowable interest rate and extend the term of the loan up to 40 years from the date of loan modification (“extended-term loan modification”) and, if necessary, advance funds on behalf of a borrower to satisfy the borrower's arrearage, pay legal fees and foreclosure costs related to a cancelled foreclosure action, and reduce principal (“mortgage recovery advance”) (collectively, “special loan servicing”). Upon request, RHS will reimburse the Lender for eligible mortgage recovery advances under the partial loss claim procedures of this section. Lenders must receive written approval from RHS prior to servicing a borrower's account with special loan servicing. The Lender must submit a servicing plan to RHS pursuant to §1980.374 when a borrower's account is 90 days delinquent and a method other than foreclosure is recommended to resolve the delinquency. Use of special loan servicing does not change the terms of the loan note guarantee.

(b) Mortgage payment to income ratio. This ratio is defined as the monthly mortgage payment (principal, interest, taxes, and insurance (PITI)) for the modified mortgage divided by the borrower's gross monthly income. The servicing options in this section shall be used in the order established in paragraph (c) of this section to bring the borrower's mortgage payment to income ratio as close as possible to, but not less than, 31 percent. Prior to servicing a borrower's account with special loan servicing, the Lender must verify the borrower's income. For borrowers who are employed by a private or public organization, the Lender shall verify the borrower's income by examining documents such as the borrower's current pay stub and most recent Internal Revenue Service Form W-2. For borrowers who are self-employed, the Lender shall verify the borrower's income by examining documents such as the borrower's profit and loss statements (for the year to date and the previous year) and the borrower's signed tax return for the previous year.

(c) Special loan servicing steps. The Lender must consider loan servicing options in the order established by this paragraph (c).

(1) The Lender must consider the following traditional servicing options before considering special loan servicing.

(i) Repayment agreement. A repayment agreement is an informal forbearance plan lasting three months or less. An informal forbearance plan is the best means to ensure that a 30-or 60-day delinquency does not escalate beyond the borrower's ability to cure.

(ii) Special forbearance agreement. A special forbearance plan is structured so that it leads to a current loan, either by gradually increasing monthly payments in an amount sufficient to repay the arrearage over time, or (if the borrower is at least three months delinquent) through resumption of normal payments for a period (generally three or more months) followed by a loan modification. The maximum arrearage under a special forbearance plan must never exceed the equivalent of 12 months of PITI.

(iii) Loan modification plan with a term not to exceed 30 years from the date of the original loan. A loan modification is a permanent change in one or more of the terms of a loan that results in a payment the borrower can afford and allows the loan to be brought current. Loan modifications may include a reduction in the interest rate, even below the market rate if necessary; capitalization of all or a portion of the arrearage (PITI); and/or reamortization of the balance due. The term of the loan modification may not exceed 30 years from the date of the original loan. The terms of the SFHGLP loan note guarantee do not change. The loan note guarantee is in effect only for 30 years from the date of the original loan.

(2) If the targeted mortgage payment to income ratio cannot be achieved using traditional servicing options, then the Lender may consider an extended-term loan modification.

(3) If the targeted mortgage payment to income ratio cannot be achieved using an extended-term loan modification, then the Lender may consider a mortgage recovery advance in addition to the extended-term loan modification. Before considering a mortgage recovery advance, the Lender must reduce the interest rate to the maximum allowable interest rate and extend the repayment term for 30 years from the date of loan modification. The Lender may reduce the interest rate further and/or extend the term of the loan for up to 40 years from the date of loan modification at the Lender's option, but the Lender shall not be required to do so before utilizing a mortgage recovery advance.

(d) Eligibility. The following eligibility requirements apply to all special loan servicing.

(1) The borrower must be in default or facing imminent default. A borrower is “facing imminent default” if that borrower is current or less than 30 days past due on the mortgage obligation and is experiencing a significant reduction in income or some other hardship that will prevent him or her from making the next required payment on the mortgage during the month in which it is due. The borrower must be able to document the cause of the imminent default, which may include, but is not limited to, one or more of the following types of hardship:

(i) A reduction in or loss of income that was supporting the mortgage loan, e.g., unemployment, reduced job hours, reduced pay, or a decline in self-employed business earnings. A scheduled temporary shutdown of the employer (such as for a scheduled vacation) would not in and by itself be adequate to support an imminent default.

(ii) A change in household financial circumstances, e.g., death in family, serious or chronic illness, permanent or short-term disability.

(2) The borrower's total debt to income ratio following the special loan servicing must not exceed 55 percent. Total debt to income ratio is defined as the borrower's monthly mortgage payment plus all recurring monthly debt divided by the borrower's gross monthly income. Prior to servicing a borrower's account with special loan servicing, the Lender must verify the borrower's income and total debt. For borrowers who are employed by a private or public organization, the Lender shall verify the borrower's income by examining documents such as the borrower's current pay stub and most recent Internal Revenue Service Form W-2. For borrowers who are self-employed, the Lender shall verify the borrower's income by examining documents such as the borrower's profit and loss statements (for the year to date and the previous year) and the borrower's signed tax return for the previous year. The Lender shall verify the borrower's total debt by ordering and examining the borrower's credit report.

(3) The borrower must successfully complete a trial payment plan to demonstrate that the borrower will be able to make regularly scheduled payments as modified by the special loan servicing. For borrowers who are in default when special loan servicing is initiated, the trial payment plan shall be three months in length. For borrowers facing imminent default when special loan servicing is initiated, the trial payment plan shall be four months in length. The borrower's monthly payment during the trial payment plan shall equal the monthly payment that would be owed by the borrower following the special loan servicing. During this trial period, the Lender shall service the mortgage in the same manner as it would service a mortgage under a special forbearance agreement (i.e., the Lender shall review the status of the plan each month and take appropriate action if the borrower is not complying with the terms of the plan). If the borrower does not successfully complete the trial payment plan by making each of the monthly payments on time, the borrower is not eligible for special loan servicing. If the borrower begins but does not successfully complete a trial payment plan, the Lender should consider the borrower for voluntary liquidation and deed in lieu of foreclosure before proceeding to foreclosure.

(4) At the time of the special loan servicing, the borrower must occupy the property as the borrower's primary residence and intend to continue occupying the property as such.

(e) Extended-term loan modification. The Lender may modify the loan by reducing the interest rate to a level at or below the maximum allowable interest rate and extending the repayment term up to a maximum of 40 years from the date of loan modification. The interest rate must be fixed. RHS may establish the maximum allowable interest rate by publishing a notice in the Federal Register describing how to calculate the rate. If the maximum allowable interest rate has not been established by notice in the Federal Register, the maximum allowable interest rate shall be 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) rate for 30-year fixed-rate mortgages (U.S. average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the loan modification is executed. Weekly PMMS rates are published on the Freddie Mac Web site, and the Federal Reserve Board includes the average 30-year PMMS rate in the list of Selected Interest Rates that it publishes weekly in its Statistical Release H.15. The term shall be extended only as long as is necessary to achieve the targeted mortgage payment to income ratio after the interest rate has been fixed at a level at or below the maximum allowable rate. Expenses related to special loan servicing shall not be charged to the borrower. Such expenses include title search fees and recording fees, but not legal fees and costs related to a cancelled foreclosure initiated prior to special loan servicing. Legal fees and costs related to a cancelled foreclosure may be capitalized into the modified principal balance provided that such foreclosure costs reflect work actually completed prior to the date of the foreclosure cancellation. Late fees should not be capitalized into the modified loan.

(f) Mortgage recovery advance. The maximum mortgage recovery advance consists of the sum of arrearages not to exceed 12 months of PITI; legal fees and foreclosure costs related to a cancelled foreclosure action; and principal reduction. The maximum mortgage recovery advance is 30 percent of the unpaid principal balance as of the date of default. The principal deferment on the modified mortgage is determined by multiplying the unpaid principal balance by 30 percent and then reducing that amount by arrearages advanced to cure the default and any foreclosure costs incurred to that point. The principal deferment amount for a specific case shall be limited to the amount that will bring the borrower's total monthly mortgage payment to 31 percent of gross monthly income. Expenses related to special loan servicing shall not be charged to the borrower. Such expenses include title search fees and recording fees, but not legal fees and costs related to a cancelled foreclosure initiated prior to special loan servicing. Legal fees and foreclosure costs related to a cancelled foreclosure action may be included in the mortgage recovery advance provided that such foreclosure costs reflect work actually completed prior to the date of the foreclosure cancellation. Late fees should not be included in a mortgage recovery advance.

(1) The Lender must have the borrower execute a promissory note payable to RHS and a mortgage or deed-of-trust in recordable form perfecting a lien naming RHS as the secured party for the amount of the mortgage recovery advance. The Lender shall properly record the mortgage or deed-of-trust in the appropriate local real estate records and provide the original promissory note to RHS. The Lender may file a claim pursuant to §1980.376 of this subpart for reimbursement of up to $250 for a title search and/or recording fees in connection with this promissory note and mortgage or deed-of-trust.

(2) Prior to making a mortgage recovery advance, the Lender must perform an escrow analysis to ensure that the payment made on behalf of the borrower accurately reflects the escrow amount required for taxes and insurance.

(3) The following terms apply to the repayment of mortgage recovery advances:

(i) The mortgage recovery advance note and subordinate mortgage or deed-of-trust shall be interest-free.

(ii) Borrowers are not required to make any monthly or periodic payments on the mortgage recovery advance note; however, borrowers may voluntarily submit partial payments without incurring any prepayment penalty.

(iii) The due date for the mortgage recovery advance note shall be the due date of the guaranteed note held by the Lender, as modified by the special loan servicing. Prior to the due date on the mortgage recovery advance note, payment in full under the note is due at the earlier of the following:

(A) When the first lien mortgage and the guaranteed note are paid off; or

(B) When the borrower transfers title to the property by voluntary or involuntary means.

(iv) Repayment of all or part of the mortgage recovery advance must be remitted directly to RHS by the borrower.

(v) RHS will collect this Federal debt from the borrower by any available means if the mortgage recovery advance is not repaid based on the terms outlined in the promissory note and mortgage or deed-of-trust.

(4) The following provisions apply when a Lender files a claim with RHS for reimbursement of a mortgage recovery advance:

(i) A claim for reimbursement in a form acceptable to RHS must be submitted to RHS within 60 days of the advance being executed by the borrower through his or her signature on the promissory note.

(ii) When filing the claim for reimbursement with RHS, the Lender must:

(A) Submit the original promissory note and a copy of the filed mortgage or deed-of-trust;

(B) Include a summary of the amount of the funds advanced, including the monthly PITI and principal deferment (if applicable), and other account information indicating the borrower's arrearage before the advance, as well as the present status of the account as of the date of the advance;

(C) Provide the name, address, and tax ID number for the Lender; and

(D) Provide the name, address, and phone number of a contact person for the Lender who can answer questions about the reimbursement request.

(5) If a borrower defaults on his or her loan after receiving a mortgage recovery advance and a loss claim is filed by the Lender due to the default, any Agency reimbursement issued for the mortgage recovery advance to the Lender on behalf of the borrower will be credited toward the maximum loan guarantee amount payable by the Agency under the guarantee.

[75 FR 52433, Aug. 26, 2010]