> September 24, 2001

## MORTGAGEE LETTER 2001-22

**TO: ALL APPROVED MORTGAGEES**

**ATTENTION: Servicing Managers**

**Subject: The Effect of the Soldiers' and Sailors' Civil Relief Act**

## of 1940 on FHA-insured Mortgages

This mortgagee letter provides updated guidance to mortgagees on the
provisions of the Soldiers' and Sailors' Civil Relief Act of 1940
(hereafter the 1940 Act) as it affects FHA-insured mortgages. This
guidance supersedes Mortgagee Letter 91-6, dated January 30, 1991.

The 1940 Act provides additional relief, but does not amend the National
Housing Act. The Department is not in a position to interpret all the
various provisions of the 1940 Act as they may affect rights between
mortgagees and mortgagors. Such interpretations should be obtained from
the Department of Defense, the mortgagee's attorney, or be determined by
the courts.

The 1940 Act provides certain relief measures to persons in military
service. Section 511 of the 1940 Act defines "person in military
service" as all members of the Army, Navy, Marine Corps, Air Force and
Coast Guard, as well as Public Health Officers detailed for duty with
either the Army or Navy. According to Section 526 of the 1940 Act, all
debts incurred by a member of the military service **prior to** entry
into active duty shall be charged a maximum interest rate of six percent
for the period of active military service. Also, Section 532 provides
protections during foreclosure when a person in the military service
entered into a contract obligation before that person's entry into the
service.

The Department's regulations at 24 CFR 203.345, 203.346, and 203.610
also provide special relief provisions for persons in the military
service. These relief measures cover several areas of servicing of
affected FHA-insured mortgages, including: postponement of principal
payments and protection during foreclosure.

# Reduction of Monthly Payments 

The 1940 Act requires that lenders charge not more than a six percent
interest rate during the period of active military service on all debts
incurred by a member of the military service prior to entry into active
duty service, unless in the opinion of the court, the ability to pay is
not materially affected by reason of such service. This interest rate
limitation includes FHA-insured mortgages. According to the 1940 Act,
interest is defined to include service charges, fees, or any other
charges (except bona fide insurance).

Since the 1940 Act only requires that the interest be reduced to six
percent for the period of active duty, lenders may calculate the
interest for the first and last months of active duty on a per diem
basis, or choose to permit the lower interest rate for the whole month.

If notified that a mortgagor is on active military duty, the lender must
advise the mortgagor or representative of the adjusted amount due,
provide adjusted coupons or billings, and ensure that the reduced
payments are not returned as insufficient.

If the lender was not notified that the mortgagor is on active military
duty, but receives a reduced payment which approximates an interest
reduction to six percent, the lender is expected to contact the
mortgagor or a representative to determine whether the mortgagor is on
active military duty. If no appropriate explanation is provided, the
lender may return the insufficient payment if in compliance with 24
CFR 203.556.

The few remaining Section 235 mortgages still receiving assistance may
be affected by the interest rate reduction. Any income recertification
requests received from mortgagors must be processed expeditiously. On
all accounts receiving assistance where the note rate of interest
exceeds six percent, the assistance must be reanalyzed. Since the 1940
Act reduces the interest rate to six percent for the period of active
duty, the subsidy must be calculated using the full mortgage payment at
that rate when determining the assistance. For some accounts, the
interest rate reduction will cause the suspension of assistance for the
term of active military duty. Whenever an interest rate reduction is
performed for retroactive effect and the Section 235 assistance is
reduced, any over billed subsidy must be returned to the Department by
refund or adjustment to the next Section 235 monthly billing. When
active duty terminates and the Note rate resumes, the assistance must be
recalculated and assistance restored in accordance with the usual
procedures.

# Protection During Foreclosure

According to Section 532 of the 1940 Act, court permission is necessary
to foreclose a loan that falls under its provisions. Foreclosure sales
(or manufactured-housing repossessions) during the period of military
service or within three months thereafter are invalid unless the courts
permit them or they take place pursuant to a written agreement, entered
into after the commencement of active duty, between the parties
involved, as provided in Section 517 of the 1940 Act. Violations of
Section 532 can result in a prison term of up to one year or a fine or
both.

# Loss Mitigation

Since Mortgagee Letter 91-6 was issued the assignment program has been
terminated. However, lenders must consider all applicable loss
mitigation options for active duty military persons. These options
include special forbearance, loan modification, partial claim,
pre-foreclosure sale and deed-in-lieu of foreclosure. For guidance,
lenders should refer to Mortgagee Letter 00-05, Loss Mitigation
Program-Comprehensive Clarification of Policy and Notice of Procedural
Changes.

**[Postponement of Principal Payments]{.underline}**

In addition to the normal loss mitigation options, lenders may, by
written agreement with the mortgagor, postpone any part of the mortgage
payment that represents principal. Such arrangements must include a
provision for resuming monthly payments, once the period of active duty
plus three months has ended, in amounts that would completely amortize
the mortgage debt within the maturity as provided in the original
mortgage.

**[Claims for Insurance Benefits]{.underline}**

On conveyance claims, the Department will pay the applicable debenture
interest rate from the date of default to the date the claim is paid
unless interest is curtailed pursuant to 24 CFR 203.402 (k). Delays in
foreclosure caused by the 1940 Act will not cause a debenture interest
curtailment.

Please direct any questions regarding this guidance to the Department's
National Servicing Center in Oklahoma City, at (888) 297-8685 (this is a
toll-free number).

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Mel Martinez