**CHAPTER 2. ROUTINE DEBT COLLECTIONS**

Debts assigned to the FOC are divided into two categories: Title I
claims and "generic" debts. Title I claims result from a default on a
HUD/FHA insured property improvement loan or a manufactured home loan.
Generic debts include all other types of debt assigned to the FOC.
Regardless of how a debt originates, the debt collection policies and
procedures are similar.

2-1 [NEW CASES.]{.underline}

A.  [DCAMS Input.]{.underline} (See Paragraph 6-3 for information about
    the Debt Collection Asset Management System (DCAMS).)

1\. [Title I claims.]{.underline} New cases are established
automatically in DCAMS by an interface with the Title I Insurance System
(TIIS/F72) upon payment of insurance claims by the Insurance Operations
Division, Claims Branch.

2\. [Generic debts.]{.underline} New cases are established via manual
input or by providing an appropriate data file to the DCAMS contractor.

B.  [Transmittal of Case File.]{.underline} When a Title I claim is
    paid, the Claims Branch will forward the entire claim file,
    including the original documents, to the Asset Recovery Division.
    The claim binder should include the items checked by the lender on
    the Title I Claim for Loss, Form HUD-637 (see Appendix 1). For
    generic debts, the case file will be created from documentation
    within the FOC and/or from documentation provided by the applicable
    HUD/FHA program area.

C.  [Assignment of New Cases.]{.underline} Every FOC debt is assigned to
    a particular DSR or LSS. These assignments are documented in DCAMS
    via a DSR/LSS identification number. For Title I claims, new cases
    are automatically assigned in DCAMS to a DSR based on the zip code
    of the debtor\'s last known address. For generic debts, new cases
    are assigned to a DSR/LSS in DCAMS via manual input based on the
    type of debt, and based on staff assignments within the FOC. A "New
    Accounts Report" is produced that identifies accounts opened and
    assigned in DCAMS, or transferred in DCAMS from one DSR/LSS to a
    different DSR/LSS.

D.  [Demand Letter.]{.underline} A demand letter is automatically
    generated when a new case is established in DCAMS for each eligible
    (i.e. non-bankrupt) debtor. As a standard practice, demand letters
    are mailed in envelopes that request that the U.S. Postal Service
    provide address correction information if the address used is
    incorrect. If a demand letter is returned as undeliverable, another
    demand letter should be generated via DCAMS if a new address is
    obtained for the debtor. A demand letter may also be generated via
    DCAMS at any time if warranted by the circumstances of the case.

> If the demand letter or other HUD correspondence is returned as
> undeliverable, skip-tracing action should be initiated. (See Paragraph
> 2-14.)

E.  [Credit Bureau Notification Letter.]{.underline} HUD is required to
    provide advance notice to a consumer debtor before reporting
    information about the debt to a credit bureau. Advance notice to a
    commercial debtor is optional. In order to comply with this
    requirement, a "Notice of Intent to Report to a Credit Bureau" (CB
    Letter) (see also Paragraph 1-8 and Appendix 2) is mailed
    automatically to each eligible (i.e. not bankrupt) consumer debtor
    at the same time as the demand letter. A CB Letter may also be
    generated via DCAMS at any time if warranted by the circumstances of
    the case. If a debtor responds to the CB Letter with a dispute of
    the debt or a request for an administrative review, the case must be
    coded to suspend credit bureau reporting until the review is
    completed. Additional information about credit bureau reporting via
    DCAMS may be obtained from the DCAMS User Manual.

F.  [Correlative Accounts.]{.underline} The DSR/LSS should ensure that
    two or more accounts involving the same debtor (for the same type of
    debt) are maintained together for consistent collection activities.
    If different types of debts share a common debtor, then the
    collection activities on all such debts should be closely
    coordinated. DCAMS provides information about correlative accounts
    on the debtor information screen and via a monthly Correlative
    Accounts Report that provides the case numbers, the borrower\'s name
    and TIN (i.e. Social Security Number) of those accounts having the
    same debtor (for the same type of debt). The report is used to
    monitor correlative accounts. An overpayment of one account should
    not be refunded if a delinquent unpaid correlative account exists.
    The overpayment should be credited to that correlative account
    unless special circumstances are present.

2-2 [INITIAL CASE REVIEW.]{.underline}

For Title I claims, the assigned staff shall review the claim binder,
verify the case status and documentation, and enter any additional data
from the claim binder onto the appropriate DCAMS screens so that DCAMS
data needed for servicing is complete and up to date. Specific items
that are added include: a) telephone number; b) co-debtor data including
address, SSN, and telephone number; c) lender address, contact person,
and phone number; d) address of improved property; and e) lien
information.

For generic debts, similar data should be input to DCAMS as part of the
manual input process, or after DCAMS loading if the loading was via a
data file.

In addition, data pertinent to collection efforts shall be entered on
the Case Remarks Screen (see [DCAMS User Manual]{.underline}).

2-3 [ROUTINE CASE INFORMATION MAINTENANCE.]{.underline}

Good case information maintenance is essential for effective debt
collection activity including: establishing the legal debt, choosing
appropriate collection actions (e.g. automatic referral to Treasury),
proving the debt in a legal or administrative proceeding, evaluating
payment agreements or settlement offers, resolving disputes, overcoming
objections or defenses, resolving problems, and in determining if
collection action should be suspended or terminated. Good case
information maintenance is also essential for portfolio management,
management information reporting, and internal controls. Besides
documenting significant collection activity, good case information
maintenance includes making prompt, accurate updates to the data in
DCAMS.

A.  [Debt Collection Asset Management System (DCAMS).]{.underline} Much
    of the collection process is automated. DCAMS is designed to send
    collection letters, report delinquent debts to credit bureaus and
    CAIVRS, assess penalties and administrative costs, and refer
    eligible debts to TOP and Cross-Servicing based on predefined
    criteria and the status of the case as reflected in DCAMS data
    fields. Keeping the data in DCAMS current will prevent incorrect
    transactions and inappropriate referrals (e.g., if a debtor has
    filed bankruptcy). DCAMS must be updated to prevent improper
    referral for TOP offset. For a complete listing of codes and how to
    update DCAMS, refer to the DCAMS User Manual.

> Data fields in DCAMS must be updated when new information is received.
> All telephone and personal contacts with the debtor or with other
> people about the debt should be summarized on the DCAMS Case Remarks
> Screen. Correspondence or other printed material should be noted via a
> DCAMS Case Remark entry if the item is significant to the collection
> history of the case. A Case Remark should always be entered when a
> refund is processed and for congressional (or similar) inquiries and
> responses.

B.  [Claim File.]{.underline} Correspondence and other printed material
    regarding the case must be retained in the case file unless it is
    clearly duplicative or otherwise of no value. Financial statements,
    credit reports, or other documents that were used as a basis for a
    collection action (e.g. payment agreement, compromise, suspension,
    or termination) plus any related analysis, justification, or
    approval documents shall be included in the case file. For a
    complete list of items required to be included in the case file,
    refer to Paragraph 6-1.

2-4 [CONTACT WITH THE DEBTOR.]{.underline}

After a new case is appropriately added to DCAMS, the system issues a
demand letter (see sample letter in Appendix 3) to each eligible (i.e.
not bankrupt, etc.) debtor. The demand letter provides the name and
telephone number of the DSR or LSS that the debtor may contact for
further information or to discuss repayment. Since HUD's collection
policy is to refer delinquent debts to the Department of the Treasury at
the earliest possible date, it is not necessary to initiate telephone
contact with a debtor who does not respond to the demand letter, however
this option is available when the circumstances warrant. The telephone
number may be obtained from the case file, directory assistance,
employers, relatives, or other sources.

Contacts with a debtor should be guided by the following:

A.  [Collect the debt.]{.underline} HUD's objective is to collect the
    debt in full as soon as possible. The DSR/LSS should answer the
    debtor's questions and attempt to overcome any objections of the
    debtor or other obstacles to obtaining payment. The DSR/LSS should
    confirm that the debtor is aware of the basis for the debt, the
    amount due, and that additional interest, penalties, and
    administrative costs may be added to the debt if it is not paid in
    full immediately. The option to accept a monthly payment plan or a
    compromise settlement should be discussed only after it has been
    determined that immediate payment in full is not feasible.

> The DSR/LSS is authorized to accept a repayment agreement without
> management approval or concurrence so long as it is within the
> parameters outlined in Paragraph 2-6. Only the FOC Director, or FOC
> Division Director(s) that have been officially delegated authority to
> act on debts assigned to the FOC, may accept or reject compromise
> offers or other repayment terms. (See also Paragraphs 1-7 and 2-8, D.)

B.  [Confirm the caller's identity.]{.underline} The DSR/LSS should
    confirm that he/she is speaking with the debtor or an authorized
    representative of the debtor. The debtor's privacy rights must be
    respected, particularly when handling a consumer debt. If the call
    is with a relative of the debtor or other representative, details
    regarding the debt must not be discussed until consent from the
    debtor is obtained and documented. (See also Paragraph 1-5.)

C.  [Verify and record data about the debtor.]{.underline} The debtor\'s
    address, telephone numbers and social security (or tax ID) number,
    etc., should be verified with the debtor when contact is made.

D.  [Explain the debt.]{.underline} A debtor may seek information on the
    origin of the debt and/or details regarding the calculation of the
    balance due. A debtor may also present objections or defenses to
    HUD's effort to collect the debt. The DSR/LSS should provide an
    explanation of the debt and a breakdown of the calculation of the
    amount due as required. This information may be communicated either
    orally or in writing as requested by the debtor. The DSR/LSS should
    listen carefully to any objections or defenses presented, and
    respond as appropriate.

E.  [Determine debtor\'s willingness to pay.]{.underline} The DSR/LSS
    should also assess the debtor\'s willingness to reduce or eliminate
    the debt.

F.  [Facilitate Voluntary Repayment.]{.underline} See policies and
    procedures for a "responsive" debtor in Paragraph 2-5.

G.  [Follow-up.]{.underline} The DSR/LSS must follow-up as necessary to
    fulfill any commitments made to the debtor. DCAMS and the case file
    should be documented as appropriate. (See also Paragraph 2-3.)

    5.  [RESPONSIVE DEBTOR.]{.underline}

> In addition to responding to any questions, concerns, or requests of
> the debtor, the DSR/LSS shall request payment of the debt. If the
> debtor is willing to pay, but not able to send immediate payment in
> full, the DSR/LSS shall obtain information about the debtor's
> financial situation in order to determine the most effective means of
> liquidating the debt. Voluntary payment options include:

-   [Payment in Full.]{.underline} The debtor makes a one-time, lump sum
    payment to pay off the debt.

-   [Repayment Plan.]{.underline} An agreement to make monthly
    installment payments to pay off the debt in a specified period of
    time.

-   [Compromise.]{.underline} The acceptance of less than the full
    amount owed in satisfaction of the entire debt with the remaining
    portion forgiven. Compromises are usually paid in a lump sum.

-   [Partial Settlement.]{.underline} The payment of a portion of the
    outstanding balance by one or more debtor(s) and the continuation of
    efforts to collect the remaining balance from the other debtor(s). A
    partial settlement may also involve a release of lien, subordination
    of lien, or a partial release of security without payment in full or
    compromise of the debt.

-   [Pre-authorized Debits (PAD).]{.underline} The automatic monthly
    withdrawal of the repayment amount from a debtor\'s bank account.

> If any payment terms other than immediate payment in full are received
> from the debtor, the following steps shall take place:

A.  [Obtain financial information.]{.underline} Information about the
    debtor's current financial condition shall be requested. Relevant
    financial information includes current data on the debtor's income,
    expenses, assets, and liabilities. For consumer debtors, form
    HUD-56142, Debt Resolution Program Financial Statement (see
    Appendix 4) may be used. This form may be sent to the debtor for
    completion, or completed by HUD staff via a telephone interview as
    the circumstances warrant. Commercial debtors are to provide
    financial statements prepared by an accountant.

B.  [Validate financial statement data.]{.underline} The information
    obtained shall be validated to the extent warranted by the
    circumstances. Means of validating financial information include:
    credit reports, pay stubs, contact with the employer, contact with
    other creditors, from tax returns, from real estate assessment data,
    and via state employment information. The debtor must provide an
    appropriate release to document the debtor's permission for any
    validation method that requires the release of personal or financial
    information to or from a third party. The release of information by
    third parties may be governed by separate state privacy law
    requirements.

C.  [Analyze financial information.]{.underline} The DSR/LSS shall
    analyze the debtor\'s financial information to assess the debtor's
    ability to pay the debt and to determine the appropriate collection
    strategy. The financial statement documentation shall be filed in
    the case binder.

    5.  [ESTABLISHING PAYMENT PLANS.]{.underline} \[Ref.: 24 CFR
        17.72 (d) & 31 CFR 901.8\]

If payment in full is not feasible, the DSR/LSS may solicit an agreement
to pay the debt in regular installments. The DSR/LSS is authorized to
accept a repayment agreement so long as it is within the parameters
outlined below.

A.  [General Policies.]{.underline} Repayment agreements shall be in
    writing and signed by the debtor. In addition to the debtor's
    financial circumstances, the size of the debt should be considered
    in determining the payment amount and the length of the repayment
    plan. The goal is to have payments sufficient in size and frequency
    to pay off the debt within 3 years, if possible. At a minimum, the
    payment should be sufficient in size to pay accruing interest and
    reduce principal. If the repayment agreement extends beyond 3 years,
    there should be periodic reviews to determine if the debtor\'s
    financial circumstances have changed significantly. If significant
    changes have taken place, agreements shall be adjusted to reflect
    the debtor\'s current financial condition. Note: additional
    information on payment plans for generic debts may be found in
    Paragraph 8-6.

B.  [Repayment Agreements.]{.underline} Form HUD-56146 shall be used
    (see Appendix 5). The signed agreement must be filed in the claim
    file.

C.  [Billing Statements.]{.underline} Every debtor under a repayment
    plan is sent a DCAMS-generated monthly billing statement. This
    monthly statement shows the amount and date of the last payment, the
    total amount due on the debt, interest accruals, penalties and other
    charges assessed, past due amounts, and the amount and due date of
    the next installment. A return envelope and payment stub are
    included to facilitate payment directly to the appropriate payment
    lockbox. See the DCAMS User Manual for procedures to be followed to
    establish billing and a sample billing statement.

D.  [Due Dates for Installment Payments.]{.underline} The available due
    dates for bills issued via DCAMS are the following dates each month:
    10, 15, 20, 25, and 30. The debtor may select one of these dates;
    otherwise the DSR/LSS will determine the billing date.

E.  [Irregular or Slow Payments.]{.underline} The DSR/LSS may use the
    DCAMS Aging Report to monitor debtor adherence to the repayment
    agreement. Where warranted, he/she may contact the debtor to discuss
    the reason for nonpayment and to advise the debtor of the
    consequences of defaulting on the agreement. DCAMS automatically
    stops sending billing statements and initiates the process to refer
    the debt to Treasury if payments are not remitted as billed. The
    criteria for curtailing billing is based on several factors, but
    DCAMS will always curtail billing if no payment is received for a
    period of 120 days.

Many reasons are given for slow payments such as illness, divorce, and
temporary unemployment or other reduction in income. If such problems
are confirmed, such cases may warrant temporary reductions in the amount
of payment, suspension of billing, or negotiating a new agreement. The
DSR/LSS should consider the impact of such changes on the potential for
future TOP offsets or other collection remedies.

F.  [Review of Accounts.]{.underline} The DSR/LSS should review the
    monthly Aging Schedule for debts that are delinquent under a payment
    agreement and consider the following actions:

    -   Telephone calls

    -   Collection letter to stimulate slow paying debtors

    -   Removing the debtor from billing status to enable referral to
        Treasury (TOP and Cross-Servicing)

    -   Enforced debt collection, i.e., referral for litigation,
        foreclosure, referral to Mortgagee Review Board, etc. See
        Paragraph 2-12 regarding handling unresponsive debtors.

2-7 [PROCESSING PAYMENTS.]{.underline} (See also Paragraph 7-1.) Debtors
shall be instructed to write the HUD assigned claim number on their
check, money order, or other form of payment and to send payments
directly to the designated Lockbox Depository, and not to the FOC. The
funds for payments received by the lockbox bank are wired to the
Department of Treasury. The lockbox bank transmits a data file with the
payment details to the DCAMS contractor for overnight entry to the
debtor\'s account. Payments are applied to the components of the debt in
the following order: Treasury fees, penalties, administrative costs,
interest and lastly to principal.

> Payments received by the FOC must be handled in accordance with HUD
> Handbook 1911.1 REV-4, "Handling and Protecting Cash and Other
> Negotiable Instruments," and subsequent revisions. Debtors shall be
> encouraged to make lump sum settlements or payoffs by certified or
> cashier\'s check, or money order. If a personal check is accepted for
> full payment or approved settlement, no release of liability shall be
> executed until 90 days have passed. See additional details regarding
> the "90-Day Rule" for payment confirmation in Paragraph 5-3. A debtor
> who demands an immediate release should be asked to submit a copy of
> the front and back of the cancelled check to verify that HUD received
> the money.

8.  [SETTLEMENT BY COMPROMISE.]{.underline} \[References: 24 CFR 17.65
    and 31 CFR Part 902\]

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A.  [General Policy.]{.underline} A compromise settlement is where there
    is an agreement between a debtor and HUD in which HUD agrees to
    accept less than the full amount owed by the debtor in exchange for
    a full release of all debtors and any security. The basis for a
    compromise must be carefully documented. A compromise settlement
    results in the closing of the account; and may require HUD to report
    the cancelled, uncollected debt to the IRS via form 1099-C. (See
    Paragraph 2-15.)

> The Department of Justice (DOJ) must approve a compromise settlement
> for any generic debt (other than a Title II claim or a debt owed by a
> Title I lender) with a current principal balance greater than
> \$100,000, or in which there is an indication of fraud, false claim,
> or misrepresentation. (See Paragraph 1-7.) In addition, DOJ must
> approve a compromise settlement for any debt that HUD has referred to
> DOJ for litigation, although DOJ usually seeks HUD's concurrence.
>
> HUD has the option to delegate authority to Treasury FMS to compromise
> debts that have been referred to Cross-Servicing. For debts where FMS
> has not been delegated this authority, the DSR/LSS promptly evaluates
> compromise proposals submitted by FMS following the standards in this
> section and advises FMS of HUD's final decision.

B.  [Procedure for Offering or Requesting a Compromise.]{.underline} As
    indicated in Paragraph 2-5, a compromise settlement is a voluntary
    payment option. The demand letter (see Appendix 3) instructs the
    debtor to provide a Financial Statement (HUD Form 56142; Appendix 4)
    if the debtor is unable to pay in full immediately. The debtor may
    propose a compromise settlement when he/she responds to the demand
    letter. A debtor may also offer a compromise settlement on his/her
    own initiative at any point during the lifespan of the debt.

> The DSR/LSS may suggest that the debtor consider a compromise
> settlement if his/her review of the debtor's Financial Statement
> indicates that the case meets a criterion for compromise acceptance
> (see below).
>
> The debtor's compromise proposal shall be submitted in writing via HUD
> Form 56141 (Debt Resolution Program Settlement Offer) (See Appendix
> 6). The debtor must also complete and provide a Financial Statement
> (Form HUD 56142 - Debt Resolution Program Financial Statement) (See
> Appendix 4). Other supporting documents that may be required are
> listed in sub-paragraph D below.

C.  [Criteria for Acceptance.]{.underline} An account may be compromised
    if any of the following criteria apply:

    1.  The debtor is unable to pay the full amount in a reasonable
        time, as verified through credit reports or other financial
        information. Factors to consider regarding the debtor's ability
        to pay include the age and health of the debtor, present and
        potential income, and the availability of assets or income that
        may be realized by enforced collection action. The DSR's or
        LSS's evaluation should include an analysis of HUD\'s
        security/lien position, if any, and the prospects for
        collections via offset or administrative wage garnishment.

    2.  HUD is unable to collect the debt in full within a reasonable
        time by enforced collection proceedings. Factors to consider
        include any exemptions available to the debtor under state or
        federal law and the uncertainty as to the value received for
        collateral via a forced sale. If the debtor is a lender who is
        actively participating in HUD/FHA programs, then the possibility
        of administrative sanctions via the Office of Lender Activities
        is another factor to consider.

    3.  There is significant doubt as to the Government\'s ability to
        prove its case in court. Factors to consider include the legal
        issues involved and whether there is a bona fide dispute as to
        the facts. (See Paragraph 4-6, C. for information regarding the
        documentation required for the Government to prove its case in
        court.)

    4.  The cost of collecting the debt does not justify the enforced
        collection of the full amount. Factors to consider include the
        probable amount of court costs and attorney's fees. As a
        consideration for going to court to collect a debt, DOJ will
        retain 3% of payments from the judgment or settlement. While HUD
        will receive only 97%, DOJ will credit the full amount of the
        payment(s) they collect and HUD must adjust its balance to DOJ's
        (See Paragraph 5-8). Thus, the 3% retained by DOJ is a cost to
        HUD.

> NOTE: When two or more debtors are jointly and severally liable, a
> settlement with only one debtor should be handled as a partial
> settlement, not as a compromise. (See Paragraph 2-9.)

D.  [Review and Evaluation of Compromise Offer]{.underline}. The DSR/LSS
    is responsible for reviewing, analyzing, and recommending approval
    or disapproval of all compromise offers for assigned accounts. Each
    recommendation is based on a thorough analysis of the supporting
    documentation relative to the amount of the compromise offer. The
    relevant facts, analysis, justification, recommendations and
    approval must be documented. A Settlement Offer Record (see
    Appendix 7) or equivalent shall be used. The analysis includes a
    review of the following as appropriate:

    1.  Debt Resolution Program Settlement Offer (Form HUD 56141) (See
        Appendix 6)

    2.  Financial Statement (e.g. Form HUD - 56142)(see Appendix 4)

    3.  Copy of Income Tax Return(s)

    4.  Credit Report

    5.  Supporting documents (e.g. pay stubs, evidence of unemployment,
        disability, etc.)

    6.  An explanation of the source and conditions (if any) attached to
        offered funds

    7.  If funds are to be derived from the sale or refinance of
        property, an itemized listing of the proposed distribution of
        proceeds, in order of seniority.

    8.  The disposition of title to any and all real property in which
        debtor currently has an interest.

    9.  An appraisal report or other information source used to verify
        the value of property.

E.  [Disclosure of Tax Implications.]{.underline} The debtor should be
    advised during the compromise negotiations and in any final
    acceptance letter that HUD's acceptance of the compromise offer may
    result in HUD reporting the cancelled, uncollected amount of the
    debt to the IRS on Form 1099-C (see Paragraph 2-15and Appendix 8).

F.  [Decision on Compromise Offer.]{.underline} Only the FOC Director or
    FOC Division Director(s) that have been delegated compromise
    authority shall accept or reject compromise offers. The DSR/LSS
    shall submit the recommendation, with justification and supporting
    analysis, to the appropriate Director for decision. The Director may
    require a review and recommendation by intermediate supervisory
    staff.

> The DSR/LSS shall notify the debtor (or the debtor's authorized agent)
> regarding the decision in writing. If the offer is accepted and
> payment was not submitted with the offer, the acceptance letter should
> include a firm deadline for receipt of the funds. This deadline
> (normally 30-60 days) must agree with the deadline documented on the
> Settlement Offer Record. If the funds are not remitted within the
> required time frame, the acceptance is void, unless the approving
> official grants an extension.

G.  [Payment of Compromise Offer.]{.underline} The DSR/LSS should direct
    the debtor to note the HUD assigned claim number on his/her check or
    money order and to send payment to the appropriate lockbox address.
    (See also Paragraph 2-7.) The debtor should be encouraged to remit
    payment by certified check, cashier\'s check, money order, or
    equivalent in order to expedite the issuance of releases.
    Remittances obtained in connection with compromise proposals may be
    held (i.e. not sent to lockbox), until a decision is made to accept
    or reject the offer.

> Compromises payable in installments are generally not accepted. If
> payment of a compromise in installments is necessary, the installment
> period should not exceed 3 months unless special circumstances are
> present. When a compromise offer payable in installments is approved,
> the DSR/LSS should obtain a written compromise agreement signed by the
> debtor that provides for full payment of the compromised amount in a
> period not to exceed the term specified in the final approval. This
> agreement must specify that default in the payment of any installment
> voids the agreement and that HUD will retain all payments already
> received.

H.  [Releasing Liability.]{.underline} After the compromise payment or
    final installment is received and posted to the account, the
    promissory note or contract, if any, should be stamped
    \"Paid-in-Full by Compromise\" and be returned to the debtor. If the
    debt is secured, a release of lien should also be issued (see
    Paragraph 5-4). If the payment was by personal check, wait 90 days
    before releasing any document to ensure that the check was not
    returned for insufficient funds. (See also Paragraph 5-3 regarding
    the "90-Day Rule" For Payment Confirmation.)

I.  [Documentation.]{.underline} The basis for acceptance or rejection
    of a compromise offer and the official decision must be documented
    in detail on a Settlement Offer Record. (See Appendix 7.). The
    Settlement Offer Record with other supporting documents must be
    retained in the claim file.

    8.  [PARTIAL SETTLEMENT OFFER.]{.underline} A partial settlement may
        be offered by one or more debtors, but not all debtors on an
        account where there are two or more parties jointly and
        severally liable. If the offer is accepted, collection efforts
        shall continue with the remaining debtor(s). The account shall
        not be closed. (See also Paragraph 1-11 regarding Joint and
        Several Liability.)

A partial settlement may also involve a release or subordination of
HUD's lien without a full release of liability of all debtors. The
debtor may seek a subordination of HUD's lien if the debtor is
attempting to refinance the property and the amount of the proposed new
loan is less than the sum all existing liens plus the closing costs
associated with the transaction. For example, HUD may hold a second lien
securing a Title I property improvement loan claim, and the debtor may
attempt to obtain a loan to refinance the existing first mortgage in
order to obtain a better interest rate. Since the lender making the new
loan will usually insist that its loan be secured by a first lien on the
property, the debtor must obtain either a release or a subordination of
HUD's lien for the deal to proceed.

> If there is insufficient equity in the property to permit a new loan
> in an amount sufficient to pay off HUD, then a reduced payment to HUD
> in exchange for a subordination of lien may be considered. From HUD's
> perspective, a subordination of lien is better than a release of lien
> because the prospects for the payment in full of HUD's debt in the
> future are improved if HUD's debt continues to be secured by the
> property.
>
> The compromise settlement standards in Paragraph 2-8 apply to partial
> settlement offers except that the debtor is issued a Release of
> Liability document rather than the cancelled note. A release of lien
> or subordination of lien may also be issued if part of the approved
> settlement. If the offer is for a release or subordination of
> security, the following information should be obtained:

-   Explanation as to why the new loan cannot include pay-off of the
    current obligation.

-   Exact amount and terms of the new mortgage to which HUD is
    subordinating.

-   Itemized statement of the distribution of funds advanced in the
    refinancing.

-   The name of the mortgagee and the mortgagor as it will appear in the
    new mortgage.

> DCAMS must be updated at the conclusion of a partial settlement to
> prevent future collection actions against the debtor(s) who were
> released. Since collection actions continue after a partial settlement
> and there is no cancellation of the debt, the debtor(s) released via a
> partial settlement is not subject to IRS 1099-C reporting.

2-10 [RELEASE OF LIEN REQUEST -- NON-FEDERAL.]{.underline} HUD may
receive a request to release its security for a debt. For example,
another lien holder may request a release of lien in connection with a
foreclosure action. There must be no automatic release of lien. As the
Department\'s policy is that a gratuitous release of lien (i.e. for no
monetary consideration) may be given only to another federal agency (see
Paragraph 2-11), the DSR/LSS should review the circumstances and
negotiate the best settlement possible. This may be by full payment,
partial payment, or a fee to cover expenses incurred. For anything less
than full payment, the request should be processed as a partial
settlement offer.

2-11 [RELEASE OF LIEN REQUEST FROM FEDERAL AGENCY.]{.underline} It is
HUD's policy to provide a release of lien to another federal agency that
holds a lien senior to HUD's lien if it is determined that HUD's lien is
valueless. "Valueless" means that the amount(s) outstanding on the
senior lien(s) exceeds the current value of the secured property. When a
request for a release of lien is received from another federal agency,
the DSR/LSS evaluates the request to determine if the request qualifies
under this policy. The evaluation and decision shall be processed and
documented similar to a partial settlement offer. If approved, the
DSR/LSS prepares a lien release for transmittal to the first lien
holder, which will be responsible for recording the release.

If HUD's claim is partially secured (i.e. the lien is not valueless but
there is insufficient equity value to secure the full amount of the
debt) and another federal agency commences foreclosure of a senior lien,
then HUD will not provide a release of lien to the other federal agency.
Instead, HUD will agree to be named as a party in the foreclosure action
(either co-plaintiff or creditor defendant as deemed appropriate by HUD
Counsel and/or the Department of Justice), allowing the proceeds to be
distributed by lien priority. If the other federal agency opts to accept
a deed-in-lieu of foreclosure and requests a release of lien from HUD,
the DSR/LSS should attempt to negotiate a settlement amount with the
other federal agency. The DSR/LSS should seek legal advice from the
local HUD Office Chief Counsel, as appropriate, in responding to these
scenarios.

2-12 [UNRESPONSIVE DEBTOR.]{.underline}

A.  [Debt Collection Strategy.]{.underline} For each debt, the DSR/LSS
    should employ an appropriate collection strategy that takes into
    account all relevant factors. Such factors include the amount of the
    debt, the severity of the delinquency, the debtor's individual
    circumstances, the debtor's past history in realizing and resolving
    HUD-held debts, and the Debt Collection Improvement Act requirement
    that agencies should refer all eligible delinquent debts to Treasury
    (for Cross-Servicing and TOP) by the time a debt is 180 days
    delinquent. Since DCAMS automatically refers eligible debts to
    Treasury prior to 180 days after the initial demand letter, HUD's
    effort to collect a debt via voluntary payment agreement is normally
    limited to this time period. After referral, Treasury's Financial
    Management Service (FMS) and its private collection agencies are
    responsible for contacting the debtor to press for payment of the
    debt, and for using the available collection tools to enforce
    involuntary recovery.

B.  [Due Process.]{.underline} If the debtor does not respond to the
    demand letter by establishing a repayment arrangement that is
    approved by HUD, a Notice of Intent to Collect by Treasury Offset
    (TOP NOI) (See Appendix 9) is sent automatically via DCAMS, unless
    the debtor is coded in DCAMS as bankrupt or otherwise ineligible for
    offset. This notice informs the debtor that the debt will be
    referred to Treasury for offset of Federal payments if payment in
    full or a reasonable payment plan is not established. The notice
    also informs the debtors of his/her due process rights including the
    right to an administrative review of the debt. (See Paragraph 3-7
    for information on appeals processing.)

C.  [Exceptions to Treasury Referral.]{.underline} If the debtor does
    not respond to the TOP NOI by establishing a repayment arrangement
    that is approved by HUD, then the debt is automatically referred to
    Treasury unless ineligible based on the DCAMS coding for the case.
    Debts in bankruptcy or that are subject to a pending TOP appeal are
    not eligible for Treasury referral. (See additional information in
    Chapter 3.) Debts where HUD has initiated enforced collection of the
    debt are also not referred to Treasury. (See additional information
    in Chapter 4.)

2-13 [CORRESPONDENCE.]{.underline} The DSR/LSS prepares collection
letters to debtors and/or their agents, attorneys, employers, etc. The
Center Director determines the signature authority for all
correspondence. These letters must be businesslike and courteous but may
become increasingly firm. As a standard practice, envelopes marked
\"Address Correction Requested\" shall be used for correspondence to
debtors in order to obtain information from the Postal Service if the
debtor has moved.

> Correspondence must be sent to the debtor unless the DSR/LSS has
> received written notification that an attorney or agent is
> representing the debtor. In such case, correspondence may be sent to
> the debtor\'s attorney or agent. Relevant information concerning the
> representative should be noted on the DCAMS Case Remarks Screen and
> the written notification should be retained in the case file.

2-14 [SKIP-TRACING.]{.underline} If correspondence to the debtor is
returned undeliverable, or if the FOC is otherwise informed that a
debtor's address is incorrect, skip-tracing action should be initiated
using available, cost-effective resources. Though it is acceptable to
send the required collection letters (demand letter, CB letter and NOI)
to the "last known address", FOC staff must take reasonable steps to
obtain the correct address in order to make a good faith effort to
provide actual notification to debtors. Notices must be resent when a
correct address is obtained. Skip-tracing resources that may be used
include the US Postal Service, credit bureaus, Treasury, as well as
direct contact with leads obtained from the case documentation.

15. [INTERNAL REVENUE SERVICE REPORTING REQUIREMENTS.]{.underline}

> As IRS reporting requirements may change, the process used each year
> must be based on the published instructions from IRS for the
> applicable tax year. At the time of issuing this handbook, the IRS
> required reporting of the following:

A.  [Mortgage Interest]{.underline}. Mortgage interest payments by the
    debtor that total \$600.00 or more during a calendar year are
    reported to the IRS. Only interest paid on debts that are secured by
    a lien on real property is reported. The following events occur each
    year in January:

1\. A Mortgage Interest Statement (Substitute Form 1098; see Appendix
10) is automatically sent via DCAMS to each eligible debtor. This
Statement documents the amount of qualified interest that was paid
during the preceding year.

2\. DCAMS simultaneously furnishes IRS with an appropriate data file.

3\. DCAMS provides the FOC with a report that lists all eligible debtors
who were issued a Substitute Form 1098.

B.  [Cancelled Debt]{.underline}. \[Ref.: 31 CFR 903.57\] When a debt is
    compromised, or when all collection action is terminated and a debt
    is closed out, HUD is required to comply with the IRS instructions
    for reporting the cancelled debt to the IRS, and to advise the
    debtor of this reporting via Form 1099-C. (See appendix 8.) To
    insure timely Form 1099-C reporting, FOC staff should complete
    appropriate processing in DCAMS by December 31^st^ for all
    compromise and closeout transactions that were completed during the
    year. In January of each year, the following events occur:

1\. Form 1099-C is automatically sent by DCAMS to eligible debtors based
on financial transactions that occurred during the preceding year.

2\. DCAMS simultaneously furnishes a data file to IRS.

3\. DCAMS provides a report that lists all eligible debtors who were
issued a Form 1099-C and the amount reported to IRS.

IRS requires that HUD issue a Form 1099-C even though the debtor may not
be subject to tax on the cancelled debt. That is, HUD is not required to
determine whether the debtor qualifies for any available exclusion under
the IRS Code. Debtors making inquiries regarding the tax consequences of
1099-C reporting should be advised to consult an IRS official,
accountant, lawyer or other tax expert.