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

Insurance Claim\--Excess Mortgage Proceeds

Legal Opinion: GHM-0079

Index: 3.400, 3.405

Subject: Insurance Claim\--Excess Mortgage Proceeds

April 14, 1993

Michael D. Saad, Esq.

Squire, Sanders & Dempsey

Huntington Center

41 South High Street

Columbus, OH 43215

Re: Skylake Ranch

FHA Project No. 101-46015

(L-1356)

Dear Mr. Saad:

This responds to your November 5, 1992 letter to Sam Rothman

of the Office of General Counsel, Office of Program Enforcement,

in which you asked HUD to respond to several matters regarding the

insurance claim payment for the captioned project.

First, you maintained that there should not have been a

reduction in the insurance benefits paid to the mortgagee as the

result of a reduction of the maximum insurable mortgage amount.

You stated that, once HUD insures advances of mortgage proceeds,

the mortgagee is protected by the insurance contract against loan

loss. To demonstrate the protections the mortgagee enjoys, you

referred to section 207.25(a)(3) of the regulations and paragraph

3 of the Agreement and Certification (Form No. 3306). Section

207.25(a)(3) provides that the mortgagor shall agree to apply in

reduction of the outstanding balance of mortgage principal any

excess of mortgage proceeds over statutory limitations based on

actual costs. The Agreement and Certification provides that the

mortgagor will pay any excess mortgage proceeds to the mortgagee

and the mortgagee agrees that the contract of insurance is reduced

by the amount of the excess.

It is our opinion that while the regulations and the Agreement

and Certification establish that the mortgagee must use excess

proceeds to pay down the mortgage balance, there is a condition

precedent to reduction of the mortgage amount, namely, that the

mortgagor must first pay the excess proceeds to the mortgagee

before the mortgagee is able to apply such proceeds to the mortgage

balance. In August, 1991, we advised HUD\'s Office of Mortgage

Insurance Accounting and Servicing (\"MIAS\") that the principal

amount of the mortgage should be the amount determined after cost

certification because the approval of advances is not considered

to be a final approval. Rather, final approval of amounts advanced

comes during the cost certification stage, which may result in a

reevaluation of the legality of the amounts advanced. However, in

arriving at this conclusion, it was assumed that the mortgagor was

able to remit the excess mortgage proceeds to the mortgagee. But

if the mortgagor does not repay the excess mortgage proceeds to the

mortgagee, the mortgagee is not obligated to pay down the mortgage

balance. We have requested MIAS to make the appropriate

adjustments to the insurance payment.

Second, you agreed with the Office of Inspector General

(\"OIG\") report that the mortgagee officially notified HUD of the

default on November 20, 1987. It is our understanding that you

also agree that interest appropriately was curtailed from March 1

to November 20, 1987, but you question HUD\'s failure to pay

interest for the period after November 20, 1987. HUD regulations,

at 24 C.F.R. section 207.259(b)(1)(iii), state that interest will

be paid on the claim -

\"except that when the mortgagee fails to meet any one of the

applicable requirements of §§ 207.256 and 207.258 within the

specified time and in a manner satisfactory to the

Commissioner, the interest allowance in such cash payment

shall be computed only to the date on which the particular

required actions should have been taken or to which it was

extended.\"

This office has interpreted this provision to mean that if a

requirement was not met by the established deadline, interest will

be curtailed on the claim on the deadline and will not begin to

accrue again. In the instant case, the date of default was January

1, 1987. Section 207.256(a) of the regulations provides that if

the default is not cured within 30 days of the date the payment is

due, the mortgagee shall, within 30 days thereafter, notify the

Commissioner in writing of such default. Therefore, under the

regulations, the mortgagee should have notified HUD of the default

no later than March 1, 1987. Because notification of the default

was not sent to HUD until November 20, 1987, interest appropriately

was curtailed after March 1, 1987. Also, you have asserted that

the OIG report concluded \"that interest accruing between March 1

and November 20, 1987 should be disallowed, but not interest

accruing thereafter.\" However, we wish to clarify that the OIG

report did not draw any conclusion with regard to the payment of

interest after November 20, 1987.

If you have additional questions, please call Monica Jordan

on (202) 708-4107.

Very sincerely yours,

Donald A. Franck

Chief Attorney, Loan Management and

Property Disposition Section