[CIM-0104](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0104LOPS.doc)

Methods of Disposition for Coinsured Lenders

Legal Opinion: GHM-0077

Index: 3.500, 3.600

Subject: Methods of Disposition for Coinsured Lenders

April 9, 1993

Maribeth Stahl

Assistant Vice President

Integrated Funding, Inc.

The CRI Building

11200 Rockville Pike

Rockville, Maryland 20852

Dear Ms. Stahl:

This letter is in response to your February 22, 1993 letter

asking whether a coinsuring lender, after acquiring marketable

title to a project, may sell the project back to the borrower who

defaulted on the loan for the higher of the two appraised values.

After review by our office in conjunction with the Office of

Housing, we have concluded that it would be violative of

Departmental policy and public policy for a coinsuring lender who

has acquired titled to a project to sell the project back to the

defaulted borrower.

The facts as I understand them from our telephone

conversations are that the borrower defaulted on a mortgage

coinsured by Integrated Funding, Inc. (\"Integrated\") and HUD.

Integrated is attempting to foreclose and the borrower threatened

to file bankruptcy if Integrated proceeded with foreclosure. The

borrower then offered to give Integrated a deed-in-lieu of

foreclosure on the condition that Integrated sell the project back

to the borrower at the higher of the two appraised values.

Handbook 4566.2, \"Management, Servicing and Disposition

Requirements for Projects with 223(f) Coinsured Loans,\" lists the

methods of disposition a lender may use after acquiring title to

the property. The lender may dispose of the property through

either a competitive bid procedure or a negotiated sale.

These two methods of disposition are also the only methods

identified in the coinsurance regulations. (See 24 CFR

251.822(f)(1) and (2); 255.822(f)(1) and (2).) The borrower\'s

proposal does not fit into either category. It is obviously not

a competitive bid procedure. It is also not a negotiated sale

because a negotiated sale assumes that the sale is an arms length

transaction. An arms length transaction refers to the bargaining

position of two parties that are unrelated and whose mutual

dealings are influenced only by the independent interest of each.

It assumes that each party is dealing in good faith in the ordinary

course of business. The borrower\'s deal is a one-sided threat,

that is not made in good faith. Integrated\'s decision to foreclose

should not be dependent upon whether the borrower files bankruptcy.

The proposal by the borrower is violative of public policy

because it encourages a borrower to contrive a default and

consequently trigger a coinsurance claim. As a result, the

proposal would allow the borrower to avoid its obligations under

the regulatory agreement and mortgage, and would enable the

borrower to acquire the property for less than the redemption

value, which the borrower would have to pay at foreclosure to

acquire the property. A lender\'s acceptance of less than the

amount required to redeem the property would also raise a serious

question of whether the lender was engaging in a practice that was

not a prudent lending practice. Section 25.9(p) (24 CFR § 25.9(p)

(1992)) of the regulations requires lenders to participate in

business practices that conform to generally accepted practices of

prudent lenders.

Therefore, it would be against Departmental policy and public

policy for a coinsuring lender who has acquired title to a project

to sell the project back to a defaulted borrower.

Sincerely,

Donald A. Franck

Chief Attorney

Loan Management and Property

Disposition Section