HB-1-3555

(03-09-16) SPECIAL PN 4-1 

Revised (01-05-24) PN 602

CHAPTER 4: LENDER RESPONSIBILITIES

[7 CFR 3555.51]

4.1 INTRODUCTION

Lenders must operate responsibly and comply with all Single Family Housing 

Guaranteed Loan Program (SFHGLP) requirements. The Agency will provide notice of 

all program changes; however, lenders are responsible for remaining informed of all 

program policies and procedures and ensuring that lender staff is adequately trained. The 

Agency encourages lenders to attend or participate in training provided by the Agency or 

other approved methods, as outlined in Chapter 3 of this Handbook. For Agency 

provided training, the Lender and Partner Activities Branch can arrange training for 

lenders and their staff members. New lenders who request participation in the SFHGLP 

by submitting Form RD 3555-16, Agreement for Participation in Single Family Housing 

Guaranteed/Insured Loan Programs of the United States Government, are required to 

take training prior to approval by the Agency. Lenders are encouraged to register for 

automatic email notification regarding loan origination and servicing updates. Lenders 

may register at: https://public.govdelivery.com/accounts/USDARD/subscriber/new. 

4.2 OPERATE RESPONSIBLY

The lender must:

• Operate in a prudent and businesslike manner. A lender that maintains approval 

from Fannie Mae, Freddie Mac, VA, or HUD (as outlined in Chapter 3 of this 

Handbook) is presumed to act responsibly if all elements of the Lender 

Agreement are maintained.

• Establish and maintain adequate written policies for loan origination, 

underwriting, servicing, and quality control. Refer to Chapter 3 for additional

guidance on quality control plans. It must be compliant for the organization on 

which approval is based and include a representative sampling of SFHGLP loans. 

The lender must provide copies of the quality control plan for Agency review.

• Avoid Conflicts of Interest. Employees that have an impact on the mortgage 

transaction (i.e. loan originators, processors, underwriters, appraisers, inspectors, 

etc.) are prohibited from having multiple roles or multiple sources of income, 

either directly or indirectly, in a single Rural Development transaction. Examples 

include, but are not limited to, compensation resulting from an ownership interest 

in another business that is party to the same Rural Development transaction or 

compensation earned by a spouse, domestic partner, or other family member that 

has a role in the same Rural Development transaction. Employees who are also 
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Paragraph 4.2 Operate Responsibly

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the applicant may not participate in any part of the loan origination, approval, or 

closing process on behalf of the lender.

4.3 MAINTAIN A WELL-TRAINED STAFF

A lender must ensure that its loan processors, underwriters, and servicers are fully 

trained to implement the SFHGLP properly and document this training was provided 

before originating SFHGLP loans.

• Maintain knowledgeable staff. The lender must ensure that new staff members 

are trained on relevant SFHGLP areas. Lenders will ensure that all staff utilizing 

the Guaranteed Underwriting System (GUS) and Lender Loan Closing (LLC)

system are up to date on mandatory trainings. On a periodic basis, lenders are 

encouraged to seek refresher training for staff to promote efficiency and 

consistency in delivering the SFHGLP.

• Performance improvement. If the Agency finds that a lender needs to improve 

its performance, the Agency will require training for the lender’s staff.

4.4 COLLECT LOAN PAYMENTS AND ENSURE PAYMENT OF TAXES AND 

INSURANCE

The servicing lender, or their representative, must collect the borrower’s monthly 

payment and apply the funds to the borrower’s account in accordance with the terms of 

the promissory note and mortgage. The servicing lender must maintain first lien position 

and ensure that real estate taxes and hazard insurance premiums are paid when they are 

due. If tax and insurance funds are collected from the borrower, they must be held in 

escrow in accordance with the Consumer Financial Protection Bureau (CFPB) 

regulations. A lender that is not able to hold funds in escrow must have a plan that 

ensures that taxes and insurance are paid, as described in Attachment 4-A.

4.5 MAINTAIN FIDELITY BONDING

The lender must maintain fidelity insurance covering its employees’ errors and 

omissions at a level of coverage deemed prudent based on the size of the lender’s 

operation. The fidelity bond or errors and omission insurance that is generally acceptable 

to the secondary market agencies (Ginnie Mae, Fannie Mae, and Freddie Mac) will meet 

Rural Development requirements.
HB-1-3555

(03-09-16) SPECIAL PN 4-3

Revised (01-05-24) PN 602

4.6 SELL LOANS ONLY TO APPROVED LENDERS [7 CFR 3555.54]

A. Procedure

A SFHGLP loan may be sold only to an Agency-approved lender, Fannie Mae or 

Freddie Mac. The selling lender must report any guaranteed loan sale to the Agency by 

using Form RD 3555-11, Lender Record Change. The notification of transfer of the 

loan(s) should be emailed to the Rural Development Servicing Office at

RD.SO.HSB@usda.gov. If the loan is sold to a party not approved to participate in the 

SFHGLP, the Loan Note Guarantee will be considered invalid. Should a lender be unable 

to complete the sale of a loan due to the loss of the original Loan Note Guarantee, the 

lender may request a copy from the Agency. The Agency will provide a copy marked 

“Reissued Loan Note Guarantee.” If the loan was closed in the Agency’s Lender Loan 

Closing System, the lender can access a duplicate copy within the system.

B. Purchaser Risks and Responsibilities

The purchaser of a SFHGLP loan acquires all the rights of a loan holder under the 

guarantee. This means that, should there ever be a loss, the purchaser is entitled to file a 

loss claim with the Agency. However, the purchaser must ensure that it properly fulfills 

all servicing obligations and must provide the Agency any requested assistance for its 

program monitoring. Negligent servicing actions from the lender may invalidate the

Loan Note Guarantee.

Negligent servicing is defined as servicing that is inconsistent with §3555.252 and 

includes the failure to perform those services which a reasonably prudent lender would 

perform in servicing its own loan portfolio of loans that are not guaranteed. Examples 

include, but are not limited to, violation of usury laws, civil rights laws, servicing 

requirements, failure to obtain the required security, and use of loan funds for 

unauthorized purposes. The Agency maintains the authority to enforce this policy 

regardless of the timeframe in which Rural Development is made aware of such action.

Negligent servicing includes not only the concept of a failure to act, but also not acting in 

a timely manner or acting contrary to the way a reasonably prudent lender would act up 

to the time of loan maturity or until a final loss is paid.

4.7 REPORT SIGNIFICANT CHANGES

The lender must immediately inform the Agency, in writing, of significant changes in 

its structure or status. Failure to keep the Agency informed of changes in accordance 

with Form RD 3555-16 could lead to withdrawal of approval. Significant changes 

include instances where the lender:

• Changes its name, location, address, tax identification number, or corporate 

structure;

• Changes its fidelity bonding or errors and omissions insurance coverage;
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Paragraph 4.7 Report Significant Changes

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• Becomes insolvent;

• Files for any type of bankruptcy protection, is forced into involuntary bankruptcy, 

or requests an assignment for the benefit of creditors;

• Takes any actions to cease operations, or discontinue servicing its SFHGLP

portfolio;

• Becomes delinquent on any Federal debt, or is debarred, suspended, or sanctioned 

in connection with participation in any Federal program;

• Is debarred, suspended, or sanctioned in accordance with any applicable State 

licensing or certification requirement or regulation; or

• Voluntarily withdraws from participation in the SFHGLP.

4.8 ADHERE TO SFHGLP GUIDELINES

The lender must follow all SFHGLP guidelines. Failure to comply could result in 

reduction or denial of a loss claim or revocation of approval to participate in the program. 

These program guidelines include:

• Approved Forms. The lender must use forms approved by the FHA, Fannie 

Mae, Freddie Mac, or FCS lenders when forms are not provided by the Agency.

• Eligibility Requirements. The lender is responsible for ensuring that the loan 

applicant and property meet all SFHGLP eligibility requirements.

• Underwriting Requirements. The Agency approved lender is responsible for 

underwriting the loan even if an agent originates the loan.

• Servicing Requirements. The lender must comply with the loan servicing 

requirements in this Handbook. The approved lender is responsible for proper 

servicing even if it has sub-contracted the servicing.

• Counterparty Management and Third-party Providers. Lenders are 

responsible for managing all counterparty and third-party providers that may 

assist to the processing, underwriting, and servicing of SFHGLP loans.

• Monitoring Requirements. The lender must submit all required reports and 

cooperate with all Agency monitoring efforts and information requests.
HB-1-3555

(03-09-16) SPECIAL PN 4-5

Revised (01-05-24) PN 602

4.9 INDEMNIFICATION

If the Agency determines that the originating lender did not originate a loan in 

accordance with the requirements of 7 CFR 3555 and this Handbook, the Loan Note 

Guarantee will remain in effect for any holder of the loan who acquired it from an 

originating lender. The Agency may use available legal remedies against the originating 

lender, which may include revoking the originating lender’s eligibility status in 

accordance with §3555.52 and Chapter 3 of this Handbook. The Agency may also require 

the originating lender to: 

1. Indemnify the Agency for the loss, if the loan default under the guarantee 

occurred within 60 months of loan closing, when one or more of the following 

conditions is present:

• The originating lender utilized unsupported data or omitted material 

information when submitting the request for a Conditional Commitment to 

the Agency.

• The Agency determined that the originating lender did not originate a loan in 

accordance with the applicable statutory requirements or the regulatory 

requirements of 7 CFR Part 3555.

• The originating lender failed to properly verify and analyze the applicant’s 

income, assets, and employment history in accordance with Agency 

guidelines. 

• The originating lender failed to properly verify and analyze debt and 

obligations in accordance with Agency guidelines.

• The originating lender failed to address appraisal discrepancies or 

deficiencies impacting the value of the property.

• The originating lender failed to address property deficiencies identified in the

appraisal or inspection report that affect the health and safety of the 

occupants or the structural integrity of the property.

• The originating lender used an appraiser that was not properly licensed or 

certified to make residential real estate appraisals in accordance with 

§3555.107(d).

2. Indemnify the Agency for the loss, regardless of how long ago the loan closed or 

the default occurred, if the Agency determines that fraud or misrepresentation was 

involved in the origination of the loan. 
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Paragraph 4.9 Indemnification

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If it is determined the loan is subject to indemnification, the payout of a loss claim

shall be determined based on the following scenarios:

• If the originating lender sold the loan and transferred the Loan Note Guarantee to 

a servicing lender, the loss claim may be paid to the lender that acquired the loan 

and indemnification will be pursued against the originating lender.

• If the originating lender assigned servicing rights to a servicing lender but 

continues to hold the Loan Note Guarantee, the loss claim will not be paid.

• If the originating lender is also the servicing lender, and no transfers have 

occurred, the loss claim will not be paid.

Adverse decisions involving loss claims shall be resolved in accordance with 

guidance provided in Appendix 3 of this Handbook.

4.10 PREVENT MORTGAGE FRAUD

Lenders are accountable for the contents of a loan file, including:

• The sources of and authenticity of all qualifying documentation; and

• Representation made on the loan application, such as occupancy, employment 

income, assets, equity contribution, etc.

Lenders must ensure they have adequate quality control procedures in place to help 

detect and effectively prevent mortgage fraud. Sound pre-funding quality control 

practices and rigorous post-funding quality control programs are examples to safeguard 

against fraud. The quality control procedures should address updating company policies 

and procedures when fraud is discovered.

When a lender becomes aware of mortgage fraud, they must report the findings 

surrounding the discovery to the Quality Assurance and Lender Oversight Division at

SFHGLD.Compliance@usda.gov. The following information should be included: 

• Provide the name, email address, and telephone number of the company point of 

contact of the case reported;

• Indicate if the fraud involves origination or servicing of the loan;

• Indicate the originating lender (underwriting lender) and/or servicing lender, as 

applicable. Include the lender’s federal tax identification number and the lender 

loan number;
HB-1-3555

Paragraph 4.10 Prevent Mortgage Fraud

(03-09-16) SPECIAL PN 4-7

Revised (01-05-24) PN 602

• Agency borrower identification;

• Property street, city, state, and zip code;

• A detailed description of findings; and

• Identify the mortgage broker, loan officer, appraiser, closing agent, real estate 

agents, etc., as applicable.

Refer to Chapter 1 of this Handbook for more information regarding falsely submitted 

information, fraud, and unauthorized assistance.

4.11 WITHDRAWAL OF APPROVAL

A lender’s approval to participate in the SFHGLP does not expire if the lender is an 

active program participant who is complying with Agency guidelines, continues to meet 

the criteria of Form RD 3555-16, Agreement for Participation in Single Family Housing 

Guaranteed/Insured Loan Programs of the United States Government, and remains an 

eligible lender with Fannie Mae, Freddie Mac, HUD, VA, or other lender approval 

criteria explained at Section 3.2 of Chapter 3 of this Handbook. The Agency will

perform a review on a two year basis to recertify the lender’s on-going eligibility. When 

the Agency withdraws approval, the Agency retains the right to pursue debarment and 

other legal actions, as appropriate.

A. Criteria to Withdraw Approval

A lender’s approval may be withdrawn when the lender is neither servicing loans 

guaranteed under the program, does not hold SFHGLP loans, nor has originated a 

SFHGLP loan in the previous 24 months. Updated training to ensure a lender’s 

continued knowledge of the program may be required when lenders originated a small 

number of loans in the previous 24 months.

The Agency will withdraw a lender’s approval if the lender experiences uncorrected 

performance problems. The Agency will notify the lender in writing of the reasons for 

the termination and of its appeal rights as described in Appendix 3 of this Handbook. If a 

lender chooses to stop participating in the SFHGLP, the lender should notify the Agency 

in writing.

B. Sale of Loans upon Termination

Upon the Agency’s termination of a lender’s approval, any SFHGLP loans held by 

the lender must be sold within six months to an Agency-approved lender. Failure to sell 

the loans can result in the Agency withdrawing its guarantee from the loans. If poor loan 

quality prevents the sale, the lender may continue to hold the SFHGLP loans in its 
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Paragraph 4.11 Withdrawal of Approval

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portfolio; however, it must contract with an Agency-approved lender to conduct all 

servicing activities and give proper notifications to the Agency.

4.12 ADDITIONAL LENDER RESPONSIBILITIES UPON APPROVAL 

• Guaranteed Underwriting System (GUS). An automated underwriting system 

is available to approved participating lenders. Lenders will utilize GUS and must

enter into a User Agreement. Information on obtaining access to GUS is provided 

in Chapter 5 of this Handbook and at https://www.rd.usda.gov/programsservices/lenders/usda-linc-training-resource-library.

• Electronic Lender Loan Closing System. Lenders must submit closed loans 

electronically upon execution of a User Agreement. Access to the system 

provides the benefit of paying guarantee and technology fees electronically in lieu 

of paper checks. Additionally, the lender will have access to the Loan Note 

Guarantee electronically. Additional information is provided in Chapter 16 of this 

Handbook. An online user guide is available at 

http://www.rd.usda.gov/resources/usda-linc-training-resource-library/loanclosing. 

• Payment of Annual Fees. Lenders will pay annual fees electronically. 

Lender/servicers will enter into a User Agreement to receive automatic 

notification and electronically pay annual fees due. Additional information is 

provided Chapter 16 of this Handbook. 

• Electronic Status Reporting. Servicers must submit monthly default reports and 

portfolio reports indicating the status of loans they are servicing via Electronic 

Status Reporting (ESR) to the Servicing Office. The link 

https://www.rd.usda.gov/programs-services/lenders/usda-linc-training-resourcelibrary provides information on completing a Trading Partner Agreement and 

utilizing the Electronic Status Reporting (ESR) system. Questions or requests for 

assistance may be emailed to RD.SO.HSB@usda.gov. Refer to Chapter 17 and 

Appendix 8 of this Handbook for additional information regarding electronic 

reporting.

• Loss Mitigation and Loss Claim Administration. An automated method of 

processing loss mitigation requests pre-liquidation and loss claim administration 

post-liquidation is available to participating lender/servicers. Lenders will enter 

into a User Agreement. Servicers will utilize USDA LINC (Lender Interactive 

Network Connection) to submit loss mitigation plans and loss claims, which can 

be accessed at http://usdalinc.sc.egov.usda.gov/RHShome.do
HB-1-3555

Paragraph 4.12 Additional Lender Responsibilities Upon Approval

(03-09-16) SPECIAL PN 4-9

Revised (01-05-24) PN 602

• Post-Closing Lender Self Report. Once a loan closes and the Loan Note 

Guarantee has been issued, the Agency will not release the loan in GUS/GLS for

corrections. If the lender determines that information was not accurately reported 

during the underwriting process or changes occurred between issuance of the 

Conditional Commitment and the Loan Note Guarantee, the lender will submit a 

self-report to the Agency with a detailed description of the issue along with 

supporting documentation. The Loan Note Guarantee will not be revoked. The 

Agency will review the lender’s documentation and provide the lender with a 

written response. The Agency’s correspondence should be sufficient to satisfy 

most investor’s concerns regarding lender oversights. Additional information on 

submitting a self-report can be found in Attachment 16-B of Chapter 16 of this 

Handbook.
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Attachment 4-A

Page 1 of 1

ATTACHMENT 4-A

CONDITIONS FOR LENDERS NOT HOLDING FUNDS IN ESCROW

A lender who does not hold borrower funds in escrow for taxes and insurance should 

consider the following:

• The Agency’s loan guarantee covers a maximum of twelve months’ past-due real 

estate taxes and hazard insurance.

• Loan losses attributable to the borrower’s failure to maintain appropriate hazard 

insurance will not be covered by the Agency’s loan guarantee.

• Loan losses attributable to the borrower’s failure to pay real estate taxes when due 

will not be covered by the Agency’s loan guarantee.

• The lender will report annually to the Agency the number of borrowers who failed 

to pay real estate taxes and/or hazard insurance premiums which resulted in the 

lender advancing funds on the borrowers’ behalf.

Lenders who do not hold borrower funds in escrow should consider doing the 

following to minimize the risk of taxes and insurance not being paid:

• Prior to loan closing, the lender must extensively counsel applicants about the 

need for prompt payment of real estate taxes and hazard insurance premiums. 

Applicants must sign a statement indicating that they fully understand the 

significance of these obligations.

• The lender must include the estimated monthly tax and insurance expenses in the 

ratio calculations when determining the borrower’s loan eligibility.

• The lender should encourage applicants to set money aside for taxes and 

insurance through payroll deductions or bank accounts with direct deposit.

• The lender must ensure that taxes and insurance are paid by monitoring insurance 

policy expiration, contacting the taxing authority annually, and reviewing local 

newspapers for tax delinquencies.
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Attachment 4-B

Page 1 of 1

(03-09-16) SPECIAL PN

Revised (01-05-24) PN 602

ATTACHMENT 4-B

SAMPLE FOR ACKNOWLEDGMENT OF REAL ESTATE TAX

AND HAZARD INSURANCE REQUIREMENTS

(Date) 

I (We), ____________________________________________, hereby acknowledge that 

________________________________________(lender), has explained the requirements for 

monthly deposits, or set-asides for payment of annual real estate taxes and hazard insurance 

premiums. I (We), the undersigned, do state that I (We) understand and agree to set-aside 

_______ dollars each month ($ monthly amount) to pay real estate taxes and hazard insurance 

premiums when they are due.

____________________________________(Borrower Signature)

____________________________________(Borrower Signature)

____________________________________(Lender)