[Link to GHM-0004 (Index
3.400)](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0004LOPS.doc)

[Link to GHM-0007 (Index
3.400)](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0007LOPS.doc)

Insurance Claim\--Mortgagee Noncompliance with Regs.

Legal Opinion: GHM-0053

Index: 3.400, 3.410

Subject: Insurance Claim\--Mortgagee Noncompliance with Regs.

December 21, 1992

MEMORANDUM FOR: Stephen Reynolds, Staff

Title X Asset Management, HSI

FROM: Donald A. Franck, Chief Attorney, Loan Management

and Property Disposition Section, GHM

SUBJECT: Port Arthur Title X Projects

Project Nos. 114-46026/114-46027

(L-1361)

This is in response to a computer mail message from Victor

Vacanti of the Office of Multifamily Insurance Accounting and

Servicing and your November 9, 1992 telephone call in which you

requested our advice concerning whether the Department would be

required to pay insurance claims on the captioned project

mortgages.

It is our understanding that the two Title X projects, Lake

Arthur Manor and Park Central NITI, have been in default since

1986 and, in May, 1992, both mortgages were foreclosed by the

U.S. Department of Commerce (\"Commerce\"). Since that time,

Commerce has not made an election to convey the properties to

HUD. We have also been informed that mortgage insurance premiums

for both projects are delinquent, the maturity dates of each loan

have passed and Commerce is not an FHA-approved mortgagee. You

question whether under these circumstances the Department would

be obligated to pay a claim for insurance benefits if Commerce

made an election to convey the property.

Section 207(g) of the National Housing Act (\"NHA\"), which,

pursuant to Section 1009 of the NHA, is applicable to Title X

mortgages, states that if the mortgagor fails to make any payment

due under the terms of a mortgage insured under this section and

\"if such default continues for a period of thirty days, the

mortgagee shall be entitled to receive the benefits of the

insurance as hereinafter provided, upon assignment, transfer, and

delivery to the Secretary, within a period and in accordance with

rules and regulations to be prescribed by the Secretary\" of all

rights and interests arising under the mortgage. Title 24 CFR

207.255, adds the additional requirement that the mortgage

default must continue for a period of 30 days before the

mortgagee shall be entitled to receive insurance benefits.

However, 207.251(g) of the regulations defines \"mortgagee\" as

\"the original lender under a mortgage its successors and such of

its assigns as are approved by the Commissioner \....\" Therefore,

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since Commerce is not an FHA-approved mortgagee, it would not be

eligible to receive insurance benefits.

Even if Commerce were to become an FHA-approved mortgagee or

transferred its mortgagee rights to an FHA-approved lender, we

are of the opinion that it would have forfeited its rights to

insurance benefits by the fact that it has foreclosed and has not

provided notice to HUD of its actions or intentions.

Section 207(n) of the NHA provides the Secretary with

authority for the Secretary to unilaterally terminate the

insurance contract. Section 207(n) provides that in the event a

mortgage becomes in default through failure of the mortgagor to

make any payment due, the mortgage continues in default for 30

days, but the mortgagee does not foreclose on or otherwise

acquire the property, and the Secretary is given written notice

thereof, all rights of the mortgagee and the mortgagor the

insurance contract shall terminate as of the date of the

mortgagee\'s notice. While Section 207(n) makes it clear that the

mortgagee\'s failure to take action regarding the loan or the

property, combined with notice to the Secretary of such inaction,

terminates the mortgagee\'s rights under the contract of

insurance, it does not address the converse situation, i.e., when

the mortgagee has foreclosed but has not notified the Secretary

of its intentions. Section 207.253a of the regulations also

addresses cases in which the Commissioner may terminate the

contract of insurance, but the precondition is that the mortgagee

must have elected to convey the property to the Commissioner.

Hence, we have looked to common law for guidance.

It is a general principle of insurance law that once there

is a loss under the terms of a policy, notice of loss should be

given with as little delay as the circumstances will permit or

within a reasonable period of time after discovering the loss.

There are, however, exceptions to this general rule. For

example, a failure to give notice of a loss would not forfeit the

right of the insured to recover under the insurance policy unless

an express condition of forfeiture were contained in the policy.

Also, late notice generally will not bar recovery under the

policy unless the insurer has been harmed in some way. However,

if a definite time limit is fixed by the policy for notice,

failure to comply therewith could bar recovery under the

policy.1

Several cases also support the contention that Commerce has

forfeited its rights under the insurance policy. In RTE

Corporation v. Maryland Casualty Company, a case concerning a

loss under a contract for property insurance, the Supreme Court

1 John Allen Appleman and Jean Appleman, Insurance Law and

Practice 3501 (1970).

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of Wisconsin held that the insured has a duty to provide prompt

notice to the insurer of a loss, i.e., destruction or damage to

property, and, under the circumstances of this case, nine months

was too long a period. 74 Wis.2d 614, 247 N.W.2d 171 (1976).

Other cases have held similarly.2 In all of the cases examined,

the courts looked to the time period specified in the contract to

determine whether notice was given in a timely fashion, and if no

notice was specified, the courts looked to a time period which

would be reasonable under the circumstances of the case.

Section 207.256(a) of the regulations states that if the

default is not cured within the 30 days grace period, \"the

mortgage e shall within 30 days thereafter notify the

Commissioner in writing of such default.\" This provision gives

clear notice to mortgagees that whenever there is a monetary

default (as defined in 207.255(a)), the mortgagee shall provide

notice of the default to the Commissioner. Hence, under the

general principles of insurance law and case law, Commerce would

be barred from asserting an insurance claim due to its failure to

timely notify the Commissioner of the defaults.

In light of our conclusion that Commerce would not be

entitled to insurance benefits if it were to file a claim, you

may wish to notify Commerce that the Department is terminating

its insurance contract on the basis of its material non-

compliance with the notification requirements of the regulations

and also request MIAS to terminate the insurance on its records.

If you have any questions, please call Monica Jordan at

708-4107.

2 See, Atlantic Joint Stock Land Bank of Raleigh v. Foster,

2117 N.C. 415, 8 S.E.2d 235 (1940) and Patrick v. Auto-Owners

Insurance Company, 5 Ohio App.3d 118, 449 N.E.2d 790 (1982).