For Administrative Use Only Missouri RD AN No. 1388 (HB-1-3550)

February 7, 2002

TO: All Local and Area Offices

Missouri

FROM: Gregory C. Branum

State Director, Rural Development

SUBJECT: Calculating Recapture on Direct Single Family Housing

Loans with Early Payoffs

[PURPOSE/INTENDED OUTCOME]{.underline}: To provide guidance on
determining appraised value and calculating subsidy recapture in cases
where subsidized borrowers have unknowingly paid off their direct Single
Family Housing (SFH) loans early and are being notified of recapture
due. As a result of the way payments were applied in the past, many
borrowers with older accounts will pay off their loans earlier than the
maturity date.

[COMPARISON WITH PREVIOUS AN]{.underline}:

No previous AN has been issued on this subject.

[IMPLEMENTATION RESPONSIBILITIES]{.underline}:

Until January 1990, subsidized payments were applied based on the
reduced interest rate as calculated by the Interest Credit Agreement.
Applying the monthly installment at a reduced interest rate was equal to
having a substantial curtailment credited each month. Additional
reductions of principal were compounded until 1990 when the subsidized
payment was changed so that interest accrued based on the note rate.

An example of the impact this earlier policy is having is that in the
early 1980's many borrowers obtained loans with high interest rates of
13 and 13.5 percent and received subsidy at a 1 percent interest rate.
With payments being applied at the lower interest rate, the principal
balance was reduced several years earlier than the actual maturity date
of the loan. The longer a loan received the benefit of a 1 percent
accrual, and the higher the corresponding note rate, the greater the
reduction in loan term. At this time, many of these borrowers are
unknowingly making the final installment with payment of their regularly
scheduled mortgage payment.

These early payoffs are creating issues in field offices when a borrower
unexpectedly pays off their loan early and is informed that they owe an
enormous amount of recapture. When a loan is paid in full, borrowers are
automatically notified by letter (by CSC) that they have 60 days to
submit an appraisal for calculation of recapture. The letter also
informs the borrower that they

will receive a 25 percent discount if they elect to pay the recapture
owed within 60 days. The following guidance will hopefully provide a
more efficient method of handling these unusual cases.

[PROPERTY VALUATION]{.underline}

The initial version of the Subsidy Repayment Agreement (1979) indicates
the amount of subsidy to be repaid the Government will be based on the
appraised value determined by the Agency. An appraisal or assessed value
may be used if you believe that would adequately reflect market value.
However, if an assessed value is used, a statement from the field office
indicating that the assessed value accurately reflects the market value
should be included. In Missouri, the CDM will first inspect the property
and then contact the County Assessor's office and determine if the
assessed value adequately reflects (within 5%) the market value of the
property. If it does, then you will use the assessed value. If the
assessed value does not accurately reflect the market value, then an
appraisal must be obtained. This will be completed by our in-house
appraisers, if possible, or an outside appraiser. Either process is
acceptable.

If an outside appraisal is needed, the Agency will incur the cost and
the borrower will not be charged. [THIS ONLY APPLIES TO THE LOANS WITH
UNEXPECTED EARLY PAYOFFS AND THE ESTABLISHMENT OF A RECAPTURE
RECEIVABLE.]{.underline} Costs associated with obtaining an appraisal in
these instances will be paid from recoverable Program Loan Cost Funds
using the "Direct Loan Financing Account" (R funds) and coded "S1B1".
The borrower's name and account number should [not]{.underline} be
included on the AD-838 form. We do, however, recommend including the
property address as well as a statement indicating the charge is for an
appraisal. Field office staff will review the appraisals and the
Centralized Servicing Center (CSC) will accept their value
determinations.

## CUSTOMER NOTIFICATION -- CSC AND FIELD OFFICE INTERFACE

Revised notification letters were developed to clarify the explanation
of why recapture is due; and to inform borrowers of the process they
should follow relative to payment of subsidy recapture. An explanation
of how the borrower may receive consideration for capital improvements
is also addressed in the revised letter. The time allotted for these
borrowers to pay recapture owed is extended to 120 days; otherwise, the
recapture will be deferred and set up as a receivable account. Copies of
these letters are attached for your information.

When CSC becomes aware that an account has paid off **in this fashion**
(not a refinance or sale), they will task the field using Task #590 *P &
I PIF/Recap Receivable Established. DO NOT RELEASE THE SECURITY
INSTRUMENTS.* The expiration timeframe will be 60 days. At the

same time, Task #589 *Early Payoff Notification* will be sent to the
State Office queue. The expiration timeframe will be 45 days to allow
for follow-up before the 60 days expire. This will

be an indication that Letter #1, the "Congratulations" letter, has been
sent from CSC and that the field should begin the process to have the
market value established. An appraisal/valuation should not be completed
until the borrower has indicated whether they are seeking credit for
capital improvements. Local offices will establish a 10-day (from date
of the #590 queue) follow-up for the capital improvement form. If the
form is not received, the local office will contact the borrower
directly for this information and at the same time arrange for an
appraisal/valuation. You will have a total of 60 days to provide the
market valuation to CSC. Once market value is determined, a request for
calculation of recapture should be faxed to the Payoff Section at
314-206-2113. The packet should contain a cover letter stating the
purpose of the request, a contact person, fax number and a copy of all
supporting documentation.

CSC will send Letter #2 giving the borrower 120 days to either pay the
calculated recapture amount owed, or defer payment. CSC will also fax a
copy of the letter to the local office. The case file should be marked
as a recapture receivable account. Settlement values used by CSC can be
viewed on the RHCD Recap Calc screen. If the borrower pays the
recapture, the field will get the standard queue to prepare the release.

## WORKING WITH PREVIOUSLY AFFECTED BORROWERS

This payment application method has impacted many existing accounts over
the past couple of years. Evidence indicates many borrowers may not have
understood the situation. As a result, these borrowers have recapture
receivable accounts established for the full amount of subsidy received.
An updated list of recapture receivables should have been received in
your office the week of February 4, 2002. We are requesting that local
offices with accounts on this list review the system notes and determine
if a maximum recapture receivable account was established for a borrower
who **unknowingly** paid their loan off early due to subsidy.

In these situations you are authorized to start the process to have CSC
calculate the subsidy recapture based upon the current market value
using the aforementioned guidance and the sample letters attached. In
those cases, **[the field office will send Letter #1, the
"Congratulations" letter to the borrower, appropriately modified to
change references to "your local field office"]{.underline}**, and
noting the FASTeller system. Thereafter, the above referenced guidance
will be followed from the point of determining market value and faxing a
request to the Payoff Section. CSC is authorized to correct the
recapture receivable amount in these cases.

Attachments

Letter #1 Congratulations Letter with Capital Improvements explanation

Letter #2