[Federal Register Volume 75, Number 165 (Thursday, August 26, 2010)]
[Rules and Regulations]
[Pages 52429-52435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21261]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 75, No. 165 / Thursday, August 26, 2010 /
Rules and Regulations
[[Page 52429]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
7 CFR Part 1980
RIN 0575-AC85
Guaranteed Single Family Housing Loans
AGENCY: Rural Housing Service, USDA.
ACTION: Final rule.
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SUMMARY: The Rural Housing Service (RHS) is amending its regulations to
add new servicing options to the Single Family Housing Guaranteed Loan
Program (SFHGLP) that lenders may utilize while still maintaining the
SFHGLP loan guarantee. The Agency will allow lenders to extend loans
for a term of up to 40 years from the date of modification. The Agency
also will allow lenders to advance funds on behalf of borrowers in
amounts necessary to bring defaulted loans current, up to 30 percent of
the unpaid principal balance of the loan. Upon request, RHS will
reimburse the lender for eligible advances. The intended effect is to
reduce mortgage foreclosures among SFHGLP borrowers and help stabilize
the national housing market. This amendment is being issued as a final
rule pursuant to section 101(c)(1) of the Helping Families Save Their
Homes Act of 2009, which authorizes RHS to promulgate this rule without
regard to the notice and comment provisions of 5 U.S.C. 553 or the
Statement of Policy of the Secretary of Agriculture effective July 24,
1971 (36 FR 13804) relating to notices of proposed rulemaking and
public participation in rulemaking.
DATES: Effective Date: This rule is effective September 24th, 2010.
FOR FURTHER INFORMATION CONTACT: Stuart Walden, Senior Loan Specialist,
Section 502 Guaranteed Loan Program--STOP 0784 (Room 2241), U.S.
Department of Agriculture, Rural Housing Service, 1400 Independence
Ave., SW., Washington, DC 20250-0784. Telephone: 202-690-4507; 202-720-
8795; E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
Classification
This final rule has been determined to be not significant and has
not been reviewed by the Office of Management and Budget (OMB) under
Executive Order 12866.
Executive Order 12988, Civil Justice Reform
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. In accordance with the Executive Order: (1) All State
and local laws and regulations that are in conflict with this rule will
be preempted; (2) No retroactive effect will be given to this rule; and
(3) Administrative proceedings in accordance with the regulations of
the National Appeals Division of USDA at 7 CFR part 11 must be
exhausted before bringing suit in court challenging action taken under
this rule unless those regulations specifically allow bringing suit at
an earlier time.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. Under section 202 of the UMRA (2
U.S.C. 1532), RHS generally must prepare a written statement, including
a cost benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to State, local, or tribal
governments, in the aggregate, or to the private sector, of $100
million or more in any one year. When such a statement is needed for a
rule, section 205 of the UMRA generally requires RHS to identify and
consider a reasonable number of regulatory alternatives and adopt the
least costly, more cost-effective, or least burdensome alternative that
achieves the objectives of the rule. This rule contains no Federal
mandates (under the regulatory provisions of Title II of the UMRA) for
State, local, and tribal governments or the private sector. Therefore,
this rule is not subject to the requirements of sections 202 and 205 of
the UMRA.
Environmental Impact Statement
This final rule has been reviewed in accordance with 7 CFR part
1940, subpart G, ``Environmental Program.'' Rural Development has
determined that an environmental Impact Statement is not required
because the issuance of regulations and instructions, as well as
amendments to them, describing administrative and financial procedures
for processing, approving, and implementing the Agency's financial
programs is categorically excluded in the Agency's National
Environmental Policy Act of 1969 (NEPA) regulation found at 7 CFR
1940.310(e)(3). Thus, in accordance with NEPA (42 U.S.C. 4321-4347),
Rural Development has determined that this regulation does not
constitute a major action significantly affecting the quality of the
human environment.
Furthermore, individual awards under this rule are hereby
classified as categorical exclusions according to 7 CFR 1940.310(e)(2)
(loan-closing and servicing activities, transfers, assumptions,
subordinations, construction management activities and amendments and
revisions to approved projects, including the provision of additional
financial assistance that do not alter the purpose, operation,
location, or design of the project as originally approved) and thus do
not require any additional documentation.
Executive Order 13132, Federalism
The policies contained in this rule do not have any substantial
direct effect on States, the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
rule impose a substantial direct compliance cost on State and local
governments. Therefore, consultation with the States is not required.
Regulatory Flexibility Act
In compliance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.) the undersigned has determined and certified by signature of this
document that this rule will not have a significant impact on a
substantial number of small entities. Program requirements for the
guaranteed single family housing program are the same for all approved
[[Page 52430]]
lenders regardless of their size. Borrowers are low to moderate income
individual homebuyers, not entities.
Intergovernmental Consultation
This program/activity is excluded from the provisions of Executive
Order 12372, which require intergovernmental consultation with State
and local officials.
Programs Affected
The program affected is listed in the Catalog of Federal Domestic
Assistance as 10.410, Very Low to Moderate Income Housing Loans.
Paperwork Reduction Act of 1995
Section 101(c)(1)(C) of the Helping Families Save Their Homes Act
of 2009 authorizes RHS to promulgate this rule without regard to the
Paperwork Reduction Act.
E-Government Act Compliance
RHS is committed to complying with the E-Government Act, to promote
the use of the Internet and other information technologies to provide
increased opportunities for citizen access to government information
and services, and for other purposes.
Non-Discrimination Statement
USDA prohibits discrimination in all its programs and activities on
the basis of race, color, national origin, age, disability, and where
applicable, sex, marital status, religion, sexual orientation, genetic
information, political beliefs, reprisal, or because all or part of an
individual's income is derived from any public assistance program. (Not
all prohibited bases apply to all programs.) Persons with disabilities
who require alternative means for communication of program information
(Braille, large print, audiotape, etc.) should contact USDA's TARGET
Center at (202) 720-2600 (voice and TDD). To file a complaint of
discrimination, write to USDA, Director, Office of Civil Rights, 1400
Independence Avenue, SW., Washington, DC 20250-9410, or call (800) 795-
3272 (voice), or (202) 720-6382 (TDD). ``USDA is an equal opportunity
provider, employer, and lender.''
Background Information
The Helping Families Save Their Homes Act of 2009 was signed into
law on May 20, 2009. Section 101 of this law amended section 502(h) of
the Housing Act of 1949 (42 U.S.C. 1472(h)), which authorizes the RHS
Section 502 Guaranteed Loan Program. The amendments gave RHS the
authority to approve the modification of guaranteed single family
housing loans that are in default or facing imminent default with terms
extended up to 40 years from the date of modification (section
502(h)(14) of the Housing Act). The amendments also gave RHS the
authority to establish a program for the payment of partial claims to
mortgagees (approved guaranteed lenders) who agree to apply the claim
amount to the payment of a loan in default or facing imminent default
(section 502(h)(14) of the Housing Act). This rule adds 7 CFR 1980.373
to allow lenders to modify mortgages by reducing the interest rate to a
level at or below a maximum allowable interest rate and extending the
term of the loan up to 40 years from the date of loan modification
(``extended-term loan modification''). RHS also will reimburse lenders
for certain advances made on behalf of borrowers in default or facing
imminent default (``mortgage recovery advances'') (together with
extended-term loan modification, ``special loan servicing''). Lenders
must receive written approval from RHS prior to servicing a borrower's
account with special loan servicing. As with other authorized servicing
options, the Lender must submit a servicing plan to RHS pursuant to 7
CFR 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. The Agency hopes that the additional servicing
authorities will help to stabilize the current housing market. This
rule also amends 7 CFR 1980.302, ``Definitions and Abbreviations,'' to
include the terms introduced in 7 CFR 1980.373.
Pursuant to section 1980.373(b), special loan servicing shall be
used to bring the borrower's mortgage payment to income ratio as close
as possible to, but not less than, 31 percent. The mortgage payment to
income ratio is defined as the monthly mortgage payment (principal,
interest, taxes, and insurance) for the modified mortgage divided by
the borrower's gross monthly income. RHS chose to target 31 percent of
a borrower's gross monthly income because 31 percent is consistent with
the industry standard and is reasonable for determining a monthly
mortgage payment that the borrower can afford. The U.S. Treasury
Department's Home Affordable Modification Program (HAMP) requires
servicers to reduce the borrower's monthly mortgage payment to 31
percent of the borrower's total pre-tax monthly income. The Federal
Housing Administration (FHA) and Department of Veterans Affairs (VA)
also use a 31 percent target in their HAMP-related loan modification
programs. The following Web sites provide additional information about
HAMP: www.hmpadmin.com (for servicers) and http://makinghomeaffordable.gov/ (for borrowers). Please note that while HAMP
is a temporary program (currently set to expire on December 31, 2012),
the provisions of this final rule have no expiration date.
Section 1980.373(b) also requires the Lender to verify the
borrower's income prior to servicing the borrower's account with
special loan servicing. For borrowers who are employed by a private or
public organization, the Lender shall examine 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 examine
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. These verification measures are designed
to ensure accuracy.
Pursuant to section 1980.373(c), the Lender must consider
traditional servicing options before considering special loan
servicing. Specifically, the Lender must consider the borrower for a
repayment agreement, special forbearance agreement, and loan
modification plan with a term not to exceed 30 years from the date of
the original loan. These traditional servicing options are detailed in
the Loss Mitigation Guide that RHS distributes to all approved lenders
servicing SFHGLP loans. 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. 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. This sequence gives lenders some
flexibility while encouraging lenders to achieve
[[Page 52431]]
the targeted mortgage payment to income ratio using the servicing
option(s) that will be least expensive for the government. Use of the
mortgage recovery advance is limited because the mortgage recovery
advance will be most expensive for the government. By imposing these
restrictions, RHS will promote the reduction of mortgage foreclosures
in a cost-effective manner.
Section 1980.373(d) describes eligibility requirements that apply
to all special loan servicing.
First, in order for a borrower to be eligible, 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. Section 502(h)(14) of the Housing Act of 1949 authorizes RHS to
allow loan modifications and payment of partial claims with respect to
mortgages that are in default or facing imminent default. RHS believes
that establishing early contact with borrowers having difficulty making
their mortgage payments increases the likelihood that such borrowers
will be able to retain homeownership.
Second, in order for a borrower to be eligible, the borrower's
total debt to income ratio following 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. This requirement exists
to control costs for the government. Repayment ability is substantially
impaired when a borrower's total debt to income ratio exceeds 55
percent. FHA uses the same eligibility standard in its HAMP-related
loan modification program. In connection with this requirement, section
1980.373(d) requires the Lender to verify the borrower's income and
total debt prior to servicing the borrower's account with special loan
servicing. 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.
These verification measures are designed to ensure accuracy.
Third, in order for a borrower to be eligible, 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. A three-month trial
period is the industry standard and a key element of HAMP. The trial
period allows the government to verify that the proposed servicing plan
will succeed in helping the borrower afford their home. Three months is
sufficient time for a borrower to demonstrate that the new payment can
be maintained. Borrowers facing imminent default must complete a four-
month trial period. FHA also requires a four-month trial period for
borrowers facing imminent default in its HAMP-related loan modification
program. 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. This provision is included to minimize loss to the
government.
Finally, in order for a borrower to be eligible for special loan
servicing, the borrower must occupy the property as the borrower's
primary residence at the time of the special loan servicing and intend
to continue occupying the property as such. This requirement is
consistent with existing SFHGLP regulations. It is also consistent with
the purpose of the program--to assist eligible households in having
adequate but modest, decent, safe, and sanitary dwellings for their own
use.
Section 1980.373(e) states that in an extended-term loan
modification, the Lender shall reduce the interest rate to a level at
or below the maximum allowable interest rate and extend the repayment
term up to 40 years from the date of loan modification. Pursuant to
section 1980.373(e), the interest rate must be fixed. Using a fixed
interest rate makes the loan terms easy for the borrower to understand
and reduces the administrative burden on the government. RHS may
establish the maximum allowable interest rate by publishing a notice in
the Federal Register describing how to calculate the rate. This will
allow RHS to adapt to industry standards and market conditions. 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. This default maximum allowable interest rate is
determined using the same formula used by FHA in its HAMP-related loan
modification program. Section 1980.373(e) also requires that the term
of the loan be extended only as long as is necessary to achieve the
targeted mortgage payment to income ratio (but no longer than 40 years)
after the interest rate has been fixed at a level at or below the
maximum allowable rate. This requirement ensures that the program goals
are met in a cost-effective manner. As required by section 502(h)(14)
of the Housing Act of 1949, 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.
Pursuant to section 1980.373(f), the maximum mortgage recovery
advance
[[Page 52432]]
consists of the sum of arrearages not to exceed 12 months of principal,
interest, taxes, and insurance; 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. Section 502(h)(14) of the Housing
Act of 1949 limits the amount of the partial claim to no more than 30
percent of the unpaid principal balance of the mortgage plus any costs
that are approved by the Secretary. RHS has decided not to take any
costs into account in order to streamline the calculation of the
maximum mortgage recovery advance. 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. Limiting the
amount of deferred principal in this way ensures that the program goals
are met in a cost-effective manner. As required by section 502(h)(14)
of the Housing Act of 1949, 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.
Section 1980.373(f) also addresses other issues relating to
mortgage recovery advances. Pursuant to section 1980.373(f)(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 7 CFR
1980.376 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. RHS used similar procedures successfully in its Mortgage
Recovery Advance Program for SFHGLP borrowers in default on their
housing loans due to damage caused by certain hurricanes in 2005.
Pursuant to section 1980.373(f)(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.
Section 1980.373(f)(3) discusses repayment of mortgage recovery
advances. First, the mortgage recovery advance note and subordinate
mortgage or deed-of-trust shall be interest-free. Second, 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. Third, 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: When the first lien mortgage and the guaranteed note are
paid off, or when the borrower transfers title to the property by
voluntary or involuntary means. These provisions reflect industry
practice under HAMP, which mandates that interest not accrue on
deferred principal and that deferred principal is not due until the
borrower pays off the loan, refinances, or sells the house. Fourth,
repayment of all or part of the mortgage recovery advance must be
remitted directly to RHS by the borrower. Finally, 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.
Section 1980.373(f)(4) discusses how a Lender files a claim with
RHS for reimbursement of a mortgage recovery advance. First, a claim
for reimbursement 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. Second, when filing the claim for reimbursement
with RHS, the Lender must: Submit the original promissory note and a
copy of the filed mortgage or deed-of-trust; include a summary of the
amount of the funds advanced, including the monthly principal,
interest, taxes, insurance, 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; provide the name, address, and tax ID number
for the Lender; and provide the name, address, and phone number of a
contact person for the Lender who can answer questions about the
reimbursement request. These requirements allow RHS to exercise
oversight and verify proper use of government funds for this servicing
option.
Pursuant to section 1980.373(f)(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. RHS
followed this policy successfully in its mortgage recovery advance
Program for SFHGLP borrowers in default on their housing loans due to
damage caused by certain hurricanes in 2005. This credit or reduction
in the ultimate loss claim payment is necessary since the mortgage
recovery advance is a partial claim under the guarantee.
List of Subjects in 7 CFR Part 1980
Home improvement, Loan programs--Housing and community development,
Mortgage insurance, Mortgages, Rural areas.
0
For the reasons stated in the preamble, chapter XVIII, title 7 of the
Code of Federal Regulations, is amended as follows:
PART 1980--GENERAL
0
1. The authority citation for part 1980 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart D--Rural Housing Loans
0
2. Section 1980.302(a) is amended by adding in alphabetical order the
definitions for ``Extended-term loan modification,'' ``Maximum
allowable interest rate,'' ``Mortgage payment to income ratio,''
``Mortgage recovery advance,'' and ``Total debt to income ratio,'' to
read as follows:
Sec. 1980.302 Definitions and abbreviations.
(a) * * *
Extended-term loan modification. A loan modification in which the
Lender reduces the interest rate to a level at or below the maximum
allowable interest rate and then extends the repayment term up to a
maximum of 40 years from the date of loan modification, but only
[[Page 52433]]
as long as is necessary to achieve the targeted mortgage payment to
income ratio.
* * * * *
Maximum allowable interest rate. RHS may establish the maximum
allowable interest rate in an extended-term loan modification by
publishing a notice in the Federal Register describing how to calculate
the maximum allowable interest 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.
* * * * *
Mortgage payment to income ratio. This ratio is defined as the
monthly mortgage payment (principal, interest, taxes, and insurance)
divided by the borrower's gross monthly income.
* * * * *
Mortgage recovery advance. A mortgage recovery advance is funds
advanced by the Lender 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. Upon request, RHS
will reimburse the Lender for eligible mortgage recovery advances. The
maximum mortgage recovery advance consists of the sum of:
(i) Arrearages not to exceed 12 months of principal, interest,
taxes, and insurance;
(ii) legal fees and foreclosure costs related to a cancelled
foreclosure action; and
(iii) principal reduction.
The maximum mortgage recovery advance is 30 percent of the unpaid
principal balance as of the date of default.
* * * * *
Total debt to income ratio. 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.
* * * * *
0
3. Section 1980.373 is added to read as follows:
Sec. 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 Sec. 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
[[Page 52434]]
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 Sec. 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
[[Page 52435]]
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.
Dated: August 18, 2010.
Tammye Trevi[ntilde]o,
Administrator Rural Housing Service.
[FR Doc. 2010-21261 Filed 8-25-10; 8:45 am]
BILLING CODE 3410-XV-P