4330.1 REV-5

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CHAPTER 5. PREPAYMENTS - TERMINATIONS - MIP REFUNDS

AND DISTRIBUTIVE SHARES

5-1 GENERAL.

A. Prepayments (24 CFR 203.22(b) and 203.558(a)). HUD regulations

24 CFR 203.22(b) provides for the prepayment of HUD-insured

mortgages either in part or in full without penalty. HUD

regulations 24 CFR 203.558 permit the mortgagee to accept

prepayment in any amount at any time, so long as interest is

calculated on the actual unpaid principal balance of the debt.

B. Voluntary Termination Of Mortgage Insurance (24 CFR 203.295).

Mortgage insurance may be voluntarily terminated at any time as

long as both the mortgagor and the mortgagee agree to the

termination. However, mortgagors are to be made fully aware that

by electing to terminate the mortgage insurance, they are also

electing to forego all future HUD assistance and relief measures

to which they were previously entitled.

C. Disclosure Statements (24 CFR 203.9 and 203.558(f)). Section 329

of the Cranston-Gonzalez National Affordable Housing Act requires

that effective August 22, 1991, mortgagees shall provide to

mortgagors at closing, as well as annually, a written Disclosure

Statement of the amount outstanding on the loan and describe the

requirements that the mortgagor must fulfill upon prepayment of

the mortgage to prevent accrual of any interest on the mortgage

after the date of prepayment.

The annual Disclosure Statement provided by the mortgagee must

contain the amount outstanding under the mortgage which includes

the total of principal, interest, penalties and late charges and

advances, information which is generally available in automated

systems. Also, any other charges related to the loan and

foreclosure or bankruptcy expenses incurred to date under the

mortgage must be included in the amount provided on the

disclosure statement. Because this amount could change after the

date of the statement, the disclosure is supplemented by a

statement which indicates that the amount provided is subject to

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5-19/94

4330.1 REV-5

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further accounting adjustments along with the note that any

payments received or advances made to the account before the

stated expiration date will change the amount provided.

The Disclosure Statements must be used in the formats shown in

Appendices 8 (A and B). The basic disclosure language is

necessary because it pertains to the mortgagee\'s rights under the

mortgage. The mortgagee must insert the appropriate mortgagee

option language and the appropriate date for mortgages insured

before and after August 2, 1985.

Mortgagees may use a checklist arrangement for the inserts and

options on each form. But, mortgagees must be certain to check

the appropriate boxes to avoid any confusion on the part of the

mortgagor.

NOTE: Mortgagees which will accept a prepayment with or

without advance notice and/or accept payment on other

than the installment due date and not charge any

additional interest, may supplement the language, as

appropriate, to inform mortgagors of its practice and

its legal rights as reflected in the mortgage

instrument. None of the HUD-required language should

be deleted.

The mortgagee may provide the annual disclosure

statement along with the end of year statement (24 CFR

203.508(c)), subject to any IRS prohibitions. It is

not required that the mortgagee provide the annual

disclosure at that specific time. The disclosure

statement can be inserted in the same envelope with the

end of year statement, but it must be a separate

\* document. A perforated attachment to the annual 1098

Statement which highlights and delineates clearly the

prepayment disclosure form from the 1098 would also be

acceptable. \*

5-2 PREPAYMENT IN FULL (24 CFR 203.558).

A.Mortgages Insured Prior To August 2, 1985 (24 CFR 203.558(b)).

The security instrument provides that the mortgagor may prepay

the mortgage in full on the first day of any month in the term of

the mortgage (i.e., on an installment due date) without penalty

provided the mortgagee receives 30-day prior written notice of

intent to prepay.

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9/945-2

4330.1 REV-5

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1.Mortgagee\'s Options. If a prepayment is offered on other

than an installment due date, the mortgagee has the option

of:

a.refusing to accept the prepayment until the first day

of the month following expiration of the 30-day notice

period as provided in the mortgage; or

b.requiring the payment of interest to that date, but

only if the mortgagee so advises the mortgagor in a

form approved by HUD (an acceptable format is shown in

Appendix 8(C)) in response to the mortgagor\'s inquiry

or request for payoff figures, or upon receipt of the

prepayment amount from the mortgagor.

NOTE:The decision to require a 30-day prepayment notice

is up to the mortgagee. HUD regulations (24 CFR

203.558(a)) permit the mortgagee to accept a

prepayment any time in any amount as long as

interest on the debt is calculated on the actual

unpaid principal balance of the mortgage.

2.Interest Calculations (24 CFR 203.558(a)). HUD regulations

require that interest on the debt be calculated on the

actual unpaid principal balance of the mortgage.

Examples are given below as to how to determine the date to

which a mortgagee is entitled to collect interest in

connection with a prepayment.

a\. EXAMPLE #1: Notice and Prepayment Required According

To The Terms Of The Mortgage.

(1)Written notice of intent to prepay is received by

the mortgagee on October 20;

(2)Mortgagee immediately furnishes mortgage balance

data and notice of its payoff policy to the

mortgagor (and his/her agent);

(3)30 days advance notice runs from October 20 to

November 17; (See Paragraph 5-2D, below for

calculations)

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5-39/94

4330.1 REV-5

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(4)Next installment due date (after 30-day notice

period expires) is December 1;

(5)Payoff is received on November 10;

(6)Mortgagee has the privilege of:

(a)refusing to accept the prepayment until

December 1; or

(b)accepting the payment and charging interest

to December 1.

b\. EXAMPLE #2: Written Notice Given Less Than 30 Days

Before Prepayment AND Mortgagee Fails To

Respond To Mortgagor With Prepayment

Policy.

(1)Written notice of intent to prepay was received by

the mortgagee on January 15;

(2)Mortgagee failed to (or chose not to) advise

mortgagor and his or her agent of its prepayment

policy and the procedures which must be followed;

(3)Payoff was received on February 1;

(4)Mortgagee must accept the prepayment on February 1

as the required disclosure was not sent to the

mortgagor. (Interest may only be charged to

February 1).

c\. EXAMPLE #3: No Written Notice Given To Indicate

Mortgagor\'s Intention To Prepay.

(1)April 15 mortgagor tendered payment in

full\--without giving the mortgagee prior written

notice of intent to prepay;

(2)April 15 would be considered the date written

notice of intent to prepay was received;

(3)Mortgagee would have the option of:

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9/945-4

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(a)responding to the mortgagor\'s action (i.e.,

the tender of the payment in full) with a

written statement advising of its prepayment

policy\--this would enable the mortgagee to

either:

(i)defer the acceptance of the prepayment

until June 1; or

(ii)accept the payment and charge interest

through June 1;

(b)accept the prepayment on April 15 (the date

the payoff was tendered by the

mortgagor)\--this would limit the collection

of interest to April 15.

3.Non-disclosure Penalty. Any mortgagee that fails to meet

the disclosure requirements shown in Paragraph 5-2C below

must forfeit the interest collected for any period after the

date the prepayment is received.

B.Mortgages Insured On Or After August 2, 1985 (24 CFR 203.558(c)).

Mortgages insured on or after August 2, 1985, shall not require

30 days advance notice of prepayment even though the mortgage

security instrument states otherwise.

Mortgagors may, without penalty, prepay the mortgage in full on

the first of any month in the mortgage term without giving the

mortgagee any notice (oral or written) of intent, regardless of

what the mortgage security instrument may state.

1.Mortgagee\'s Options. If the prepayment is offered on other

than an installment due date, the mortgagee has the option

of:

a.refusing to accept the prepayment until the next

installment due date (i.e., the first of the next

month); or

b.requiring the payment of interest to the next

installment due date but only if the mortgagee so

advises the mortgagor in a form approved by HUD (See

Appendix 8(C) for an acceptable sample) in response to

the mortgagor\'s, (or

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5-59/94

4330.1 REV-5

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his/her agent\'s) inquiry or request for payoff figures,

or upon receipt of the prepayment amount from the

mortgagor.

2.Non-disclosure Penalty. Any mortgagee that fails to meet

the disclosure requirements shown in Paragraph 5-2C below

must forfeit the interest collected after the date the

prepayment is received.

C.Disclosure. When a mortgagee receives information indicating

that a mortgagor intends to prepay the insured mortgage in full

on a specific date in the future, the mortgagee must disclose the

procedures that must be followed with respect to the payoff and

must explain how the amount of the prepayment has been

determined. Otherwise, the mortgagee must forfeit any interest

collected after the date of prepayment.

This disclosure must include, but need not be limited to, an

explanation pointing out that:

1.unlike principal (which is paid in the current month\'s

mortgage payment), interest earned by the mortgagee the

previous month must be paid in the next month\'s mortgage

payment since the interest must be earned by the mortgagee

before it is owed by the mortgagor; and

2.the interest being charged to the next installment due date

with regard to prepayments is in fact interest that was

earned the previous month and has yet to be paid by the

mortgagor.

NOTE:A copy of the payoff statement and the disclosure

notice must be provided to the mortgagor directly even

though the mortgagee is dealing with an agent of the

mortgagor (such as a real estate agent, attorney,

broker, seller, title company, escrow agent, etc.).

D.Effective Dates Of The Notice Of Intent And The Prepayment

Amount.

The effective date of the \"Notice of Intent\" to prepay is

considered to be the date the mortgagee\'s records indicate the

\"Notice\" was received by the mortgage company (regardless of what

office in that company

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9/945-6

4330.1 REV-5

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actually received it) unless the mortgagor can produce

documentation evidencing the \"Notice\" was received earlier. The

30-day advance notice period begins on the date of delivery to

the mortgage company through the next 29 consecutive calendar

days.

E.When \"Installment Due Date\" Falls On A Non-Work Day (24 CFR

203.558(d)). When the installment due date (i.e., the first day

of the month) falls on a non-work day, the mortgagor\'s Notice of

Intent to prepay and the receipt of the prepayment amount shall

be considered timely if received on the next working day.

F.Expiration Of Notice Of Intent. Once received, a mortgagor\'s

Notice of Intent to prepay shall be considered as having met the

mortgagee\'s 30-day advance notice requirement for a minimum of 90

calendar days after receipt.

G.Escrow Balance Returned To Mortgagor. When the mortgage

insurance is terminated without payment of a claim for insurance

benefits (i.e., payment in full) the remaining funds held in

escrow for the payment of taxes and hazard insurance shall be

\* released to the mortgagor promptly (i.e., no later than 30

calendar days after the payoff). \*

EXCEPTION:An analysis must be performed in accordance with

Paragraph 10-20D3 on all Section 235 prepayments

in full prior to refunding any escrow money to the

mortgagors.

H.Section 235 Mortgages. In addition to the other requirements

cited under Paragraph 5-2, for all Section 235 mortgages that are

prepaid in full, the following requirements apply:

1.mortgagees must perform an analysis in accordance with

Paragraph 10-20D3 prior to refunding any escrow money to the

mortgagor as stated in the \"Exception\" cited in the

preceding paragraph; and

2.mortgagees must determine in accordance with the

instructions outlined in Chapter 11 if the mortgage is

insured pursuant to a firm commitment issued after May 27,

1981 as to whether;

a.the prepayment has triggered the recapture provision in

connection with HUD\'s Section 235 mortgage on the

property; and

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5-79/94

4330.1 REV-5

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b.the appropriate action has been taken as required by

Chapter 11.

5-3PARTIAL PREPAYMENT (24 CFR 203.558). The language cited in Paragraphs

5-1 and 5-2 apply to partial prepayments as well as prepayments in

full. However, the application of partial prepayments varies from

that of applying prepayments in full.

A.Acceptable Methods Of Applying Partial Prepayments. Partial

prepayments may be applied in any of the following ways, based on

the method agreed upon by the mortgagee and the mortgagor. The

advantage of each method is also given below.

1.Making Advance Full Monthly Payments. The mortgagor may

make one or more full monthly payments before they come due.

The advantage to the mortgagor applying a partial prepayment

in this manner is that should he/she encounter financial

difficulty in the future, this would allow him/her to miss

an equal number of installments without creating a mortgage

default or incurring a late charge.

2.Applying Additional Payments Toward Reducing Principal and

Future Monthly Payments. By applying additional payments to

reduce the unpaid principal balance, the new balance may be

reamortized over the remaining term of the mortgage and the

mortgagor\'s future payments will be reduced accordingly. A

modification agreement may be necessary to accomplish this,

and the mortgagor must receive formal notification of the

mortgagee\'s willingness to accept the reduced payments.

EXCEPTION:This method of application cannot be used

with mortgages insured under Section 235

unless the assistance payments are recomputed

as described in Paragraph 10-12. This method

of application will benefit the mortgagor in

the future as it would result in the

following:

a.the mortgagor making smaller mortgage payments;

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9/945-8

4330.1 REV-5

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b.the acceleration of the maturity of the mortgage;

c.the reduction in the amount of interest paid over the

term of the mortgage;

d.affecting the manner in which mortgage payments are

applied;

e.interest would be recomputed on the actual unpaid

principal balance, making the principal portion larger

and the interest portion smaller; and

f.as the original amortization schedule would no longer

apply, a new amortization schedule would be required.

B.Effects On Mortgage Insurance Premiums (24 CFR 203.261).

Regardless of any partial prepayments, delinquent payments,

agreements to postpone payments or agreements to recast the

mortgage, the MIP collected must follow the original payment

schedule of the mortgage established at the time it was insured.

5-4TERMINATIONS. When insurance is terminated without a claim for

mortgage insurance benefits, the mortgagee must submit Form

HUD-27050-A, Mortgage Insurance Termination (Appendix 9) or its tape

equivalent to report the termination (24 CFR 203.318).

A.Submit Form HUD-27050-A or its tape equivalent within 15 calendar

days whenever:

1.the mortgage is paid-in-full, either at or before maturity;

(24 CFR 203.316)

2.the mortgagee and mortgagor mutually agree to voluntary

termination of the mortgage insurance (24 CFR 203.317); or

3.the mortgagee has acquired title to the property but decides

not to convey title to HUD and submit a claim (24 CFR

203.315).

B.Magnetic Tape Submission. If a mortgagee typically terminated 50

or more mortgages a month, HUD encourages

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5-99/94

4330.1 REV-5

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submitting the data from Form HUD-27050-A on magnetic tape.

1.The data must be complete for each mortgage and must conform

to HUD data input formats. Tapes should be sent to:

Department of HUD

Computer Management Division

Room 4135

451 7th Street, SW

Washington, DC 20410

2.HUD accepts no responsibility for errors or the correction

of errors. HUD will return to the mortgagee a report of

unreconcilable errors.

3.Mortgagees may obtain additional information about tape

submissions from:

Department of HUD

Insurance Operations Division

Systems Management Branch

Room 2234

451 Seventh Street, SW

Washington, DC 20410

\* C. HUD\'s Reliance On Termination Data. It is very important that

the mortgagee use the correct case number and the current

mortgagor name and current mailing address when submitting the

termination of mortgage. HUD relies directly on this data to

locate and pay MIP premium refunds and/or distributive shares.

D.Compute the pro rated MIP due if a \"periodic\" premium was paid.

(24 CFR 203.319) The additional premium, if any, should be

included in the next monthly premium remittance. \*

5-5 MIP REFUNDS (24 CFR 203.283).

HUD will refund any portion of the \"Up-front\" premium that it did not

earn when the mortgage insurance is terminated without a claim for

mortgage insurance benefits. (See Appendix 10, Homeowner\'s Fact Sheet

and Appendix 11, Application for Premium Refund or Distributive Share)

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9/945-10

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\* A. The FHA Commissioner reviews the annual audit of FHA\'s Mutual

Mortgage Insurance Fund and determines how much premium to charge

for new loans and how much to refund (the rate at which the

\"up-front\" premiums is earned) when loans are terminated.

B.To compute the Premium Refund, obtain information on the MIP that

should have been paid and the first payment date from the

borrower\'s closing documents, the mortgage instrument, the

servicing mortgagee or from corrected Statement of Accounts that

were received that reflect adjustments to under and over

payments. Use this information to complete the following steps:

1\. List the \"up-front\" MIP amount: \$\_\_\_\_\_\_\_\_\_

2.Determines the period of insurance

in months: \_\_\_\_\_\_\_\_\_

3.Select the premium factor

(See Appendix 10A) by using the

period of insurance in Step 2. \_\_\_\_\_\_\_\_\_

4.Compute the premium refund amount by

multiplying line 1 times line 3. \$========= \*

NOTE:The period of insurance begins when the mortgage starts

to amortize, i.e., 1 month prior to the first payment

due date of the mortgage, and ends at the end of the

month in which the mortgage is paid-in-full, assumed,

or refinanced. For example, a mortgage with a first

payment due of April 1, 1991, that was paid-off on

January 15, 1993, has a period of insurance of 23

months (March 1991 - January 1993).

No premium refund remains for mortgagors with a period

of insurance equal to or greater than 84 months.

\* C. Notification To Mortgagors. Whenever a mortgage that is an

obligation of the Mutual Mortgage Insurance Fund is originated or

terminated without a claim for mortgage insurance benefits, the

mortgage must notify the mortgagor of the possibility of

eligibility for a premium refund. (Appendix 10 is FHA

Homeowners\' Fact Sheet that may be used for this purpose.)

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5-119/94

4330.1 REV-5

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the mortgagor of the possibility of eligibility for a premium

refund. (Appendix 10 is FHA Homeowners\' Fact Sheet that may be

used for this purpose.)

D.Assumptions. When a mortgage is assumed, the insurance continues

in force; there is no refund of unearned premium. If an

\"up-front\" MIP was financed as part of the original transaction,

the MIP remains a part of the unpaid balance of the assumed

mortgage. If the \"up-front\" MIP was paid in full at closing by

the original mortgagor, the assumptor gains the benefit of that

payment unless negotiated otherwise by the seller and the

purchaser. HUD will not be a party to this

negotiation. \*

5-6DISTRIBUTIVE SHARES. HUD may also pay Distributive Shares under

certain conditions when mortgage insurance is terminated either at or

before maturity (24 CFR 203.423) on mortgages that are obligations of

the Mutual Mortgage Insurance Fund (i.e., most mortgages insured under

Section 203 and some mortgages insured under other sections.)

When insurance of one of these mortgages is terminated without a claim

for mortgage insurance benefits, the owner of the property at time of

termination may be eligible for a distribution from the Fund. If so,

HUD will send a Form HUD-27050-B Notification of Premium Refund or

Distributive Share (Appendix 11) to the mortgagor at the address on

its records or to the address entered on the Form HUD-27050-A or its

tape equivalent. The amount of the distributive share is determined

by HUD and is indicated on the Form HUD-27050-B.

\*Mortgages that terminated prior to November 5, 1990, may be eligible

for a distributive share if the mortgage insurance was in force for at

least seven years. Eligibility is based on the characteristics of the

mortgages in their group.

Mortgages that terminated on or after November 5, 1990, are not

currently eligible for a distributive share because of an amendment to

the National Housing Act (12 U.S.C. 1711) that prohibits the issuance

of distributive shares in any year that the operational goals of the

Mutual Mortgage Insurance Fund are not met. \*

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9/945-12

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the mortgagor of the possibility of eligibility for a

distributive share. (Appendix 10 is FHA Homeowners\' Fact Sheet

that may be used for this purpose.)

B.Assumptions. When a mortgage is assumed, the insurance continues

in force and no eligibility for distributive shares is

determined. The owner(s) of the property at the time the

mortgage insurance is terminated are eligible for the

distributive share, if any.

\* C. Statute Of Limitations On Distributive Shares. Because of the

amendment to Section 205(c) of the National Housing Act (12

U.S.C. 1711(C)), effective October 28, 1993, HUD is no longer

liable for unpaid distributive shares that remain unclaimed 6

years from the date notification was first sent to the last known

address. \*

5-7RECORD KEEPING. Mortgagees must maintain precise records related to

MIP for each mortgage serviced, including data on all MIP payments

since September 1, 1982, when monthly collection of MIP began. These

records, covering mortgages in the portfolio, payments made, mortgages

acquired, sold and paid in full, voluntarily terminated, and subject

to claims, must be retained for at least three years after the

mortgage is removed from the portfolio.

At the end of each year, the mortgagee\'s Independent Public Accountant

(IPA) must include in its statement related to its audit of the

mortgagee a certification that the mortgagee\'s procedures are adequate

to ensure compliance with HUD rules and regulations pertinent to the

payment of MIP.

A.Portfolio Reconciliations. HUD may, from time to time, require

mortgagees to provide information adequate to permit

reconciliation of mortgagee records with HUD\'s. This information

may include:

1.identification of the mortgage;

2.the amount of MIP due and paid to HUD for each mortgage for

each time period;

3.the date insurance was terminated or servicing transferred,

if applicable; and

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5-139/94

4330.1 REV-5

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4.for mortgages acquired after September 1, 1982, the date

servicing was acquired.

NOTE:This information may be required for a specific

amortization anniversary month or for all mortgages in

the servicer\'s portfolio at the end of a specific

calendar month.

B.Payment Of MIP (24 CFR 203.259). Any MIP due HUD may be paid

either in cash or in debentures.

C.Mortgagee Responsibility. A servicer acquiring servicing of an

insured mortgage becomes responsible to HUD for all MIP required

to be paid from origination of the mortgage. It is the acquiring

mortgagee\'s responsibility to assure that any obligation to HUD

arising before the acquisition of servicing was discharged by the

former mortgagee. HUD will not deal with originating mortgagees

or former servicers on issues related to the payment of MIP.

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9/945-14