Legal Opinion: GPC-0003

Index: 8.900

Subject: Compromise of Claims Against Mortgagees and Servicers

March 5, 1992

MEMORANDUM FOR: Bruce Albright, Assistant General Counsel, Home

Mortgage Division, GHH

ATTN: June Auerbach, Senior Attorney

FROM: Sam Rothman, Senior Attorney, GPC

SUBJECT: Compromise of claims against mortgagees and servicers

This replies to your January 22, 1992 memorandum in which

you posed several questions regarding the referenced subject. We

respond to your questions in the order presented.

1\. (a) Does HUD have the authority to compromise claims of

\$20,000 (to be changed to \$100,000) or more against a mortgagee

or servicer or must they be done by the Department of Justice?

HUD has the authority to compromise any claim that does not

exceed \$100,000, exclusive of interest, at the time the claim is

determined to be valid and past due. (Although HUD regulations,

at 24 CFR 17.74(a), specify a \$20,000 maximum, that amount is

based on 31 U.S.C. 3711(a)(2), which was amended on November 15,

1990 to raise the \$20,000 ceiling to \$100,000. Pub. L. 101-552.

We are drafting appropriate amendments to Part 17. Pending the

regulatory amendment, it is my view that the statutory change is

self-executing and supersedes 17.74(a).) Generally, compromise

of a claim in excess of \$100,000 must be referred to the Justice

Department for approval. Keep in mind, however, that the

compromise authority of the Debt Collection Act of 1982 and the

Federal Claims Collection Standards, 4 CFR Parts 101-105, are

intended to cumulate rather than supersede existing authority.

Therefore, should HUD have compromise authority under a program

statute, then DOJ approval would not be required.

An example of arguably other compromise authority may be

found at section 207(l) of the National Housing Act, 12 U.S.C.

1713(l). That paragraph includes the following language:

notwithstanding any other provision of law, the

Secretary shall also have power to pursue to final

collection by way of compromise or otherwise all

claims assigned and transferred to him in connection

with the assignment, transfer, and delivery provided

for in this section, and \...to foreclose on any

property\....

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Thus, in the case of a claim against a multifamily mortgagor, it

may be argued that the Secretary may compromise that claim

without regard to DOJ. Also, the Department\'s debt management

policy is such that the claims collection process does not extend

to debts secured by mortgages. See Handbook 1900.25 REV 3, 1-2

b\.

However, the claims you mention are for overpayment of

mortgage insurance claims and clearly are not secured by

mortgages. In fact, these claims arise after the completion of

the entire mortgage insurance claim procedure and, in any event,

are not \"claims assigned or transferred\" to the Secretary.

Therefore, absent other compromise authority, the compromise of

those claims, if more than \$100,000, would require DOJ approval.

1\. (b) Please outline the procedure of how such claims

should be handled.

The first step is to evaluate and quantify the claim. In

the case of an audit it is important to scrutinize the audit

report because we must be able to prove the debt. Toward that

end it is helpful if the audit findings are based on \"disallowed

costs\" rather than \"questioned costs.\"

Assuming the \$100,000 threshold is satisfied, an appropriate

program official, e.g., a Division Director or Office Director,

should prepare a compromise recommendation for the Departmental

Claims Officer (DCO). Unless the DCO has questions, he will

prepare a recommendation to DOJ relying heavily on the program

official\'s justification. Background material must accompany the

recommendation.

The criteria for compromise are set forth in 24 CFR 17.73

and Handbook 1900.25 REV 3 at 4-7, and include cost-

effectiveness and the debtor\'s ability to pay.

Depending on the facts of a given case, the DCO might ask

the Program Compliance Division \--this office\-- to clear his

recommendation to DOJ. After its review DOJ will notify the DCO.

Absent DOJ objection, the DCO will authorize the compromise and

the write-off of the balance to OFA, MIAS or the applicable RAD.

As part of this procedure the DCO would send copies of relevant

memos to the program official who initiated the compromise.

2\. (a) Does anyone in SFH or MIAS have the authority to

attempt to collect a claim, regardless of amount, against a

mortgagee or servicer? 24 CFR 17.63 seems to indicate that only

claims collection officers can attempt to collect claims. Who

are the claims collection officers designated by the Assistant

Secretary for Housing?

The current situation as to claims collection officers is

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uncertain. The list of claims collection officers that I have is

woefully outdated. Under Notice 91-0006 ADM (copy attached),

which was issued on July 22, 1991 there is no longer a need for

claims collection officers because their responsibilities will be

performed by outside collection agencies. The rationale for the

CCO scheme, as I understand it, was to provide for someone with

specialized collection experience to take over a matter after a

program official had tried but failed to collect. As it

developed, that process was extremely time-consuming for a number

of reasons. I assume that the inefficiency of that process

accounts for the policy change eliminating the need for CCO\'s.

It seems to me that there still is a role for HUD personnel

to play, and I do not see 17.63 as an impediment. The authority

who designated a claims collection officer does not lose his

authority because the designee is removed. Thus, as a practical

matter, any responsible program official may initiate a

collection case. By \"collection case\" I mean an enforcement

action in an administrative or litigation forum, not the type of

activity a collection agency would perform as described in Notice

91-0006 ADM.

In any event, the authority to collect is rarely the issue;

it is the authority to collect less than the amount owed that is

the issue.

2\. (b) Assuming that SFH or MIAS has the authority to

attempt to collect claims in general, does anyone in SFH or MIAS

have the authority to compromise claims under \$20,000 (to be

changed to \$100,000) against a mortgagee or servicer? Has there

been some delegation of authority from the Assistant Secretary of

Administration to SFH or MIAS to compromise?

As indicated in our response to 2.(a), SFH or MIAS may

initiate a collection case for any amount. The compromise

authority of those offices is limited to \$100,000 and then only

as to Title I loans and tenant rents in HUD-owned properties.

(Debts secured by mortgages are excluded from these requirements,

and SFH or MIAS may compromise claims against mortgagors through

\$100,000. Whether HUD has the authority to compromise secured

claims in excess of \$100,000 is arguable but is not in issue

here.) Proposed compromises for all other claims must be cleared

by the DCO. There has been no other delegation of compromise

authority of which I am aware.

Thus, the compromise of any claim against a mortgagee or a

servicer as you described would require the DCO\'s approval.

2\. (c) Assuming again that SFH or MIAS has the authority to

attempt to collect claims, please outline the procedure of how

compromise offers should be handled. Specifically, once the

amount of a claim has been determined by SFH or MIAS, what

procedure should be followed when they receive a compromise

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offer? Does a representative from SHF or MIAS act as an

intermediary between the debtor and the Assistant Secretary of

Administration (for not-small claims) or a claims collection

officer (for small claims)?

As mentioned above, the authority to collect and the

authority to compromise are not co-extensive. SFH or MIAS would

serve as the negotiator; when it reached a position, it would

prepare a recommendation and forward it to the DCO with complete

background materials. As a practical matter, it might expedite

the DCO\'s handling if communication were made prior to or during

negotiations, particularly if the compromise would result in a

small recovery of a large claim. Since the DCO\'s staff would be

the contacts for SFH or MIAS, the size of the claims would be

irrelevant.

While negotiating, it is imperative that SFH or MIAS inform

the debtor that any agreement is subject to DOJ approval. Aside

from informing the other party that time for approval will be

needed and from preventing embarrassment to HUD should DOJ

object, the DOJ approval requirement allows legitimate \"wiggle\"

room should HUD fail to recognize some aspect of the deal during

negotiations that it wishes to correct before binding itself to

an obligation.

2\. (d) What amount has been set by the Assistant Secretary

for Administration for small claims under 24 CFR 17.65(a)? Who

are the claims collection officers referred to in that section?

Are they the same ones referred to in 17.63?

CCO\'s were authorized to compromise claims that did not

exceed \$2,500 (Handbook 1900.25 REV 3, 3-10). However, that

information, as well as the answers to the others posed in 2. (d)

is not longer relevant in light of the policy announced in Notice

91-0006 ADM (See response to question 2. (a)).

2\. (e) Does the Department have a Department Claims Officer

in accordance with 17.66? If so, would such officer have a role

in collecting or compromising claims such as those described

here?

The Department has a Department Claims Officer in accordance

with 17.66. He is Albert M. Miller, the Deputy Director of the

Office of Finance and Accounting. Yes, he would have a role in

compromising the type of claims you describe. That role is

described in our response to question 1. (b).

3\. Is it correct to say that the Debt Collection Act does

not apply to the \"determination\" of the amount owed, but once the

amount is determined the Act does apply to any offer to pay a

lower amount?

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Yes. However, both the HUD regulations ( 17.62 and 17.100)

and the Federal Claims Collection Standards (4 CFR 101.6 and

102.3) prohibit the subdividing of claims to avoid the \$100,000

ceiling for compromise and require that a claim be an amount

certain if it is to be collected by administrative offset.

4\. Under what authority does SFH or MIAS have, if any, to

perform administrative offsets under 24 CFR 17.72(b) and

17.100, et seq?

Section 17.100(b) directs the Secretary to use

administrative offset in all cases in which offset is legal and

feasible. \"Secretary\" is defined in 17.60(b) to include the

Secretary\'s designee. I do not know whether there are written

designations for offset or other collection authority other than

those in Part 17, subpart C. However, it seems to me that the

tenor of the regulations, including for example the DAS

responsibility at 17.109, is such that the authority of a given

program office is clearly implied to the extent that it is not

expressed.

The authority to collect, while theoretically implemented

through the CCO\'s, does not preclude the persons who had

delegated that authority in the first place from exercising it,

regardless of the existence of a CCO system. Also, remember that

the Debt Collection Act and its implementing regulations, are

supplements to whatever collection and compromise authority

existed when the Act became effective. The agencies\' view is

that a common law remedy of offset has always existed; the major

impact of the Debt Collection Act was to impose certain due

process requirements on the use of offset as a remedy.

Attachment