.

HB-2-3550

3.1 INTRODUCTION

To protect the Agency’s interest in the security property, the Servicing and Asset 

Management Office (Servicing Office) must ensure that real estate taxes and any other local 

assessments are paid and that the property remains adequately insured. To ensure that funds are 

available for these purposes, the Agency requires most borrowers who receive new loans to 

deposit funds to an escrow account. Borrowers who are not required to establish an escrow 

account may do so voluntarily. If an escrow account has been established, payments for 

insurance, taxes, and other assessments are made by the Agency. If an escrow account has not 

been established, the borrower is responsible for making timely payments.

Section 1 of this chapter describes basic requirements for paying taxes and maintaining 

insurance coverage; Section 2 provides procedure for establishing and maintaining the escrow 

account; and Section 3 discusses procedures for addressing insured and uninsured losses to the 

security property.

SECTION 1: TAX AND INSURANCE REQUIREMENTS [7 CFR 3550.60

 and 3550.61]

3.2 TAXES AND OTHER LOCAL ASSESSMENTS

The Agency contracts with a tax service to secure tax information for all borrowers. The 

tax service obtains tax bills due for payment, determines the optimal time to pay the taxes in 

order to take advantage of any discounts, and provides delinquent tax status on the portfolio.

A. Tax Service Fee

All borrowers are charged a tax service fee. Borrowers who obtain a subsequent loan are 

not required to pay a second tax service fee. Refer to the tax service fee schedule shown in 

Attachment 3-B to determine the fee charged for new loans and new rates and terms 

assumptions.

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3-1

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

CHAPTER 3: ESCROW, TAXES, AND INSURANCE
HB-2-3550

Paragraph 3.2 Taxes and Other Local Assessments

B. Borrowers Failure to Pay Taxes

Borrowers not on escrow are responsible for paying their real estate taxes each year and 

submitting proof of payment to the Servicing Office. When the Agency is notified that a 

borrower has not paid real estate taxes on the property or other local assessments, the Servicing 

Office must notify the borrower that proof of payment must be submitted to the Servicing Office 

within 60 days. If the borrower fails to submit proof of payment, the Servicing Office taxes and 

any penalties and charge the cost as an advance to the borrower’s account. The Servicing Office

will not generally pay taxes and penalties in cases where there is another known lien holder, the 

security property also includes a farm, or net recovery is not anticipated unless it is determined to 

be in the best interest of the Agency. If the Agency advances funds to pay taxes or insurance, the 

borrower will be required to convert to escrow. When an escrow account is established, the 

advance will be repaid over the remaining term of the loan minus ten years. If the loan has less 

than 10 years remaining, the fee will be spread over 2 years or the remaining term, whichever is 

less.

C. Recapture Receivable Accounts

Delinquent tax notices/pending tax sale notices from taxing authorities on recapture receivable 

accounts should be forwarded to the Tax Unit at the Servicing Office for handling. The notices 

can be faxed to (314)457-4535. Upon receipt of a notice of pending tax sale, the Servicing Office

will review the recapture receivable account to determine if it is in the best interest of the 

Agency to pay the taxes to avoid the tax sale and protect the Government’s interest in the 

property. If the taxes are paid the Servicing Office will demand payment from the borrower. If 

payment is not made a foreclosure action will pursue. 

3.3 INSURANCE REQUIREMENTS

Borrowers are responsible for obtaining and continuously maintaining insurance on the 

security property until the loan is paid in full. Evidence of insurance coverage for the first year 

of a loan must be provided at closing. In subsequent years, borrowers not on escrow are required

to pay insurance premiums and send proof of premium payment to the Servicing Office

annually. For borrowers on escrow, the Servicing Office makes the premium payments.

_____________________________________________________________________________________

3-2

Insurance on Acquired Property 

Insurance will not be carried on properties that the Agency has acquired. After a foreclosure 

sale has been held or after a deed in lieu of foreclosure has been filed for record, insurance will not be 

canceled but will not be renewed. If the property becomes uninsured between the time when the 

borrower defaults on the loan and the time when the Agency obtains title, the Agency will force place 

insurance to protect its interests.
HB-2-3550

Paragraph 3.3 Insurance Requirements

A. Policy Requirements

Borrowers must purchase policies from approved insurance companies. Attachment 3-A 

provides the minimum standards insurance policies must meet. When a loan is made, Field Staff 

are responsible for reviewing the applicant’s proposed insurance coverage to determine whether 

it is adequate. The Servicing Office also reviews these policies for adequacy when closing 

documents are forwarded from the Field Office and approves any subsequent changes to 

borrower insurance policies. Borrowers may need to obtain three types of insurance.

1. Hazard Insurance

Most borrowers are required to maintain hazard insurance to protect the property 

against fire, wind, and weather-related damage. These policies may also be called “Fire 

and Extended Coverage,” “Homeowner’s,” “All Physical Loss,” or “Broad Form” 

policies.

Any borrower with a secured indebtedness in excess of $15,000 at the time of loan 

approval must furnish and continually maintain hazard insurance on the security property, 

with companies, in amounts, and on terms and conditions acceptable to RHS and include 

a “loss payable clause” payable to RHS to protect the Government’s interest.”.

For borrowers initially required to maintain hazard insurance, the Servicing Office may 

force place coverage for the benefit of the Agency and charge the cost to the borrower’s account.

2. Flood Insurance

Flood insurance is required for all properties located in a Special Flood 

Hazard Area (SFHA), as identified by the Federal Emergency Management 

Agency (FEMA) and described in RD Instruction 426.2, except for loans and 

grants with an original principal balance of $5,000 or less. 

FEMA’s Standard Flood Hazard Determination is used to document whether a 

property is in a SFHA and whether flood insurance is available under FEMA’s National 

Flood Insurance Program. If the property is in a SFHA, the borrower should be notified 

using Form RD 3550-6, Notice of Special Flood Hazards, Flood Insurance Purchase 

Requirements, and Availability of Federal Disaster Relief Assistance. The borrower must 

sign and return the form. If the borrower in a SFHA cannot secure flood insurance 

through FEMA’s National Flood Insurance Program, the property is not eligible for 

Federal financial assistance.

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3-3

(05-27-98) SPECIAL PN; 

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.3 Insurance Requirements

Dwellings located in the 100 year flood plain have additional requirements that must be met in regards to 

elevation levels, public utilities or on-site water supply and waste disposal systems requirements, and 

completion of the eight step decision making process for alternative consideration. (see RD Instruction 

1970-F, section 1970.256 for further requirements).

3. Builder’s Risk Policies

The borrower may elect to obtain a builder’s risk policy that meets the Agency’s 

requirements while the dwelling is under construction. An acceptable policy either: (1) 

names the borrower as the insured; or (2) contains a builder’s risk endorsement for a 

policy issued to the borrower. A policy issued only to a contractor is not an acceptable 

substitute for the property insurance a borrower is required to provide. 

The Servicing Office should ensure that the builder’s risk policy automatically 

converts to full coverage when the dwelling is completed. Otherwise, acceptable 

insurance must be obtained to coincide with the expiration of the builder’s risk provisions 

of the policy. 

B. Acceptable Evidence of Insurance

For loans secured by a first lien, the borrower must provide the original policy or declaration 

page. For loans secured by other than a first lien, a copy of the policy or declaration page, or 

other evidence of insurance, is acceptable. At loan closing the applicant may submit a written 

binder in lieu of the policy or declaration page, as long as the policy will be submitted to the 

Servicing Office within 60 days of closing.

C. Force Placed Insurance

Force placed insurance is insurance coverage the Agency obtains for a security 

property when the borrower is unable or unwilling to provide adequate and acceptable 

insurance coverage. If the Agency force places insurance, the Servicing Office will make 

an advance to pay for the coverage and will inform the borrower of the new insurance. 

Borrowers must submit acceptable evidence of other insurance before the force placed 

insurance can be removed.

3.4 SERVICING ACTIONS RELATED TO INSURANCE

A. Reviewing Policies for Acceptability 

After loan closing, Field Staff will send the borrower’s policy to the Servicing Office along 

with other closing documents. The Servicing Office should review the policy to ensure that it 

meets the Agency’s requirements as described in Attachment 3-A. If the policy is acceptable, the 

Servicing Office should image the policy and enter the policy information into LoanServ. If the 

borrower’s policy is not acceptable, the Servicing Office should notify the borrower, explain why 

the policy is unacceptable, and request that the borrower submit an acceptable policy.

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3-4
HB-2-3550

Paragraph 3.4 Servicing Actions Related to Insurance

B. Annual Payments

For borrowers on escrow, the Servicing Office will pay annual insurance premiums from 

the escrow account. The borrower’s insurance company must submit a renewal notice to the 

Servicing Office indicating the amount of the next year’s insurance premium. SO must pay the 

required premium before the expiration date in order to prevent any lapse in insurance. 

Borrowers not on escrow are responsible for paying insurance premiums and sending the 

Servicing Office evidence of payment and the declaration page. If the Servicing Office does not 

receive evidence of insurance coverage they will advise the borrower within 10 days after the 

policy’s expiration date that the Agency will force place insurance if they fail to provide the 

necessary documentation within 60 days after the date of notification (45 days for flood 

insurance). Cost of the insurance will be charged to the borrower’s account and the borrower 

will be required to escrow for taxes and insurance.

C. Reviewing Changes in Insurance Coverage

Borrowers who wish to change insurance policies must submit a replacement policy and 

evidence of payment to the Servicing Office at least 60 days before the current policy expires. If 

the replacement policy is received with less than 60 days notice and the Servicing Office has 

already disbursed a payment for the existing policy from the escrow account, the borrower is 

responsible for obtaining reimbursement of the paid premium.

The Servicing Office must review the replacement policy to ensure that it meets the 

Agency’s requirements outlined in Attachment 3-A and may contact the applicable State Office 

to verify whether the insurance carrier is authorized to conduct business in the State. If the 

borrower’s policy is not acceptable, the Servicing Office should inform the borrower of the 

reason (for example, there is not an adequate amount of coverage, it is not in the correct name, or 

the premium has not been paid) and request that the borrower submit an acceptable policy. If 

necessary, the Servicing Office will force place insurance.

D. Cancellation of Insurance

For borrowers on escrow, the borrower’s insurance company must send to the Servicing 

Office any notice of cancellation or nonrenewal. Within 3 days of receiving the notification, the 

Servicing Office must notify the borrower of the need to get new insurance coverage before the 

existing policy expires. 

____________________________________________________________________________________________

3-5

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.4 Servicing Actions Related to Insurance

The borrower must send an invoice to the Servicing Office for payment and should 

include a copy of the policy, if it is available. If the borrower does not submit a new hazard or 

flood policy and invoice within 10 days of the old policy’s cancellation the Servicing Office will 

initiate action to force place insurance coverage on the property. If the borrower does not submit 

a new hazard or flood insurance policy and invoice within 70 days of the previous policy’s 

expiration date (45 days for flood insurance), the Servicing Office will force place insurance.

If a borrower not on escrow receives a notice of cancellation or nonrenewal, the borrower 

must secure new insurance coverage before the current policy expires. The borrower must 

submit proof of insurance coverage and evidence of payment to the Servicing Office before the 

policy expires. Borrowers who cannot secure new insurance coverage should contact SO

immediately. the Servicing Office will then force place insurance for the security property.

E. Vacant or Leased Units

If the Agency becomes aware that a security property is vacant or leased, the Servicing 

Office should review the policy to determine if it permits such conditions. If it does not, the 

Servicing Office should immediately notify the insurance carrier in writing. If the insurance 

carrier requires an additional premium because of the vacancy, tenant occupancy, or other 

increased hazard, the Servicing Office will pay the additional premium from the borrower’s 

escrow account, if one exists. Borrowers not on escrow are responsible for paying the increased 

premiums. If the borrower is unable to pay the increased premium, the Agency may pay the 

additional premium and charge the cost to the borrower’s account.

F. Transfer of Property

1. Assumptions

In a transfer with assumption, insurance will be required in the same amount and 

according to the same provisions as for an initial loan of the same type. The new owner 

may obtain a new policy or have the current insurance company issue an endorsement to 

the current insurance policy, changing the name of the insured to that of the new owner.

2. Payment in Full

When a borrower pays off the Agency’s debt in full, the Agency releases its insurance 

interest in the security property. the Servicing Office should notify the insurance agency 

of record to remove the Agency’s interests from the mortgagee or loss payable clause.

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3-6
HB-2-3550

Paragraph 3.4 Servicing Actions Related to Insurance

3. Transfers Without Satisfying Agency Debt

If the Agency becomes aware that the borrower has transferred title to the property 

without satisfying the Agency’s debt, the Servicing Office should immediately notify the 

new owner that the mortgage requires the owner to provide and maintain adequate, 

acceptable insurance with the Agency listed as the mortgagee. In addition, the new 

owner should be informed that evidence of coverage and payment must be received by 

the Servicing Office within 30 days. If the evidence is not received in that time frame, 

the Servicing Office will force place insurance. The Agency will notify the borrower and 

new owner that acceptance of the new policy or endorsement will not constitute consent 

by the Government to the transfer.

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3-7

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

(This page was intentionally left blank)

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3-8
HB-2-3550

SECTION 2: ESCROW REQUIREMENTS

3.5 OVERVIEW OF ESCROW REQUIREMENTS

A. Requirement to escrow

The Agency requires most borrowers 

who receive new loans to escrow funds for taxes 

and insurance.

Borrowers are exempt from escrow 

requirements if they:

• Are current on an annual payment 

plan;

• Have a leveraged loan and the escrow is maintained by the primary lending 

institution;

• Have received only a Section 504 grant;

• Have Section 504 loans with a total outstanding balance of $15,000 or less, and the 

Agency determines there is no risk to the Government’s security interest in the 

property;

• Have a Section 504 loan and the Agency does not hold a mortgage interest in the 

property; or

• Assume a current loan (not past due) on same rates and terms; or

• Have security property which includes a farm and the property is not subdivided 

between farm and non-farm tract. In these cases, the Agency may still elect to require 

escrow where the housing represents the majority of the value of the security property 

or it is in the Agency’s best interest to require escrow.

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3-9

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Escrow Statutes

The Agency administers escrow 

accounts in accordance with the Real Estate 

Settlement and Procedures Act of 1974 

(RESPA) and section 501(e) of the Housing Act 

of 1949.
HB-2-3550

Paragraph 3.5 Overview of Escrow Requirements

Existing borrowers who do not have escrow accounts may voluntarily establish an escrow 

account. Existing borrowers who pay on a monthly basis and annual-pay borrowers with 

monthly income must establish escrow accounts if:

• The borrower obtains a subsequent loan;

• The borrower requests a Delinquency Workout Agreement;

• The borrower’s loan is reamortized as a servicing action; or

• Because of borrower failure to pay, the Agency must advance funds to pay for 

insurance, taxes, or other local assessments. The advance will be repaid over the 

remaining term of the loan minus ten years. If the loan has less than 10 years 

remaining, the fee will be spread over 2 years or the remaining term, whichever is 

less. 

B. Sources of Escrow Funding

At the time the escrow account is established an initial deposit to the account is required. 

Once the escrow account is established, a portion of the borrower’s monthly payment continues 

to fund the escrow account. Exhibit 3-1 illustrates the calculation of the initial deposit and 

monthly escrow payment. 

3.6 ESTABLISHING ESCROW ACCOUNTS FOR NEW LOANS

A. Field Office Responsibilities

No later than loan closing, the borrower must provide proof of insurance coverage. Field 

Staff will enter the borrower’s estimated taxes and insurance premiums into UniFi, which 

automatically calculates the initial deposit and the monthly payment. The Closing 

Agent/Attorney collects escrow funds at closing and, in most cases, provides the funds to the the 

Servicing Office along with the closing documents. If real estate taxes are due within 60 days of 

the date of closing, the Closing Agent/Attorney will pay the real estate taxes and submit the 

remaining amount to the Servicing Office.

Exhibit 3-2 lists the closing documents related to taxes and insurance and provides processing instructions 

for each.

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3-10
HB-2-3550

Paragraph 3.6 Establishing Escrow Accounts for New Loans

____________________________________________________________________________________________

3-11

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Exhibit 3-1

Escrow Account Funding

The initial escrow balance and the escrow payment amount are calculated in accordance with RESPA. UniFi 

prepares Form RD 3550-9, Initial Escrow Account Disclosure Statement described in Paragraph 3.6 B.2. The 

following example is intended to show how escrow accounts are funded each year.

Assumptions:

(1) The loan closing occurs on February 12, 1996 with the first payment due April 1, 1996.

(2) Taxes of $214.88 are paid in July and December.

(3) Hazard insurance of $319.00 is paid in January.

(4) The Agency requires a cushion equal to 2 months of payments.

Monthly Payment Calculation:

$214.88

$214.88

$319.00

$748.76 Total anticipated escrow disbursements divided by 12 equals

$ 62.39 per month escrow payment

Month Payments to Escrow Disbursements Balance

Loan Closing

April

May

June

July

August

September

October

November

December

January

February

March

$249.64

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 62.39

$ 0.00

$ 0.00

$ 0.00

$ 0.00

$214.88

$ 0.00

$ 0.00

$ 0.00

$ 0.00

$214.88

$319.00

$ 0.00

$ 0.00

$249.64

$312.03

$374.42

$436.81

$284.32

$346.71

$409.10

$471.49

$533.88

$381.39

$124.78

$187.17

$249.56

The borrower will be required to pay $62.39 per month and will also be required to fund the escrow account at 

closing in the amount of $249.64. Part of the tax payment component of the initial escrow deposit will be 

contributed by the seller for the period from January 1st to the closing on February 12th.

According to RESPA, the lending institution at some time during the year must achieve an escrow balance that 

serves as a cushion but does not exceed 2 monthly escrow payments. In this example, the balance equal to 2 

monthly payments ($124.78), occurs in January after the payment for hazard insurance.

the Servicing Office is required to perform an escrow analysis within 12 months of the first payment and every 

year thereafter. The actual running escrow balance from the prior year will become the basis for projecting the 

necessary escrow payment for the next year. The low point achieved will be compared to the projected minimum of 

$124.78. If the low point is below $124.78, the loan will be deemed to have a shortage. If the low point is greater 

than $50.00, the loan will have a surplus, which will be refunded to the borrower, if the surplus is less than $50.00, it 

will be or credited to the next year’s escrow.
HB-2-3550

Paragraph 3.6 Establishing Escrow Accounts for New Loans

B. The Servicing Office Responsibilities

After reviewing the information sent by the Field Staff, the Servicing Office deposits the 

escrow funds and verifies the information on Form RD 3550-15.

1. Notification to Tax Service

Within 30 days of establishing the escrow account, the Servicing Office should send 

the completed tax worksheet to the tax service, along with the loan identification number, 

the parcel number, a legal description of the borrower’s property, and the tax service fee. 

The tax service will set up the borrower’s information in its system and generate a unique 

tax service contract number. The tax service will then send the borrower’s contract 

number to the Servicing Office. This number will be entered into LoanServ to help 

identify the borrower’s account.

2. Initial Escrow Account Disclosure Statement

The field office is responsible for completing the Form RD 3550-9 “Initial Escrow 

Account Disclosure Statement”. The statement will be initialed by the borrower at closing and 

the borrower will be provided a copy of the statement. The signed statement will be forwarded to 

the Servicing Office with the closing documents.

____________________________________________________________________________________________

3-12

Exhibit 3-2

Closing Documents Related to Tax and Insurance

• Form RD 3550-19, Initial Escrow Account Disclosure Statement, shows the 

amount of the initial escrow deposit.

• Closing Disclosure. The Servicing Office must verify that the real estate 

taxes have been properly pro rated between the buyer and seller by reviewing

the Closing Disclosure.

• Tax information. The Servicing Office must enter into LoanServ the 

information on taxing authorities, parcel number, due dates, and tax 

information from Form RD 3550-15 Tax Information.

• Title insurance policy. The Servicing Office must verify that the legal 

description of the property is consistent with the closing documents.

• Insurance documentation. The Servicing Office must review the insurance 

documentation (either a policy, declaration page, or binder) and enter into 

LoanServ information such as the cost, coverage period, coverage amount, 

company, and beneficiaries.
HB-2-3550

Paragraph 3.6 Establishing Escrow Accounts for New Loans

The initial disclosure statement should include the amount of the borrower’s monthly 

mortgage payment and the portion of the payment going into the escrow account. It 

should itemize the estimated taxes and insurance premiums to be paid from the account

during the upcoming year. It also should show the cushion and a trial running balance for 

the account. (A trial running balance is a projected escrow balance for each month 

during the computation year.)

3. Construction Loans

When a borrower receives a construction loan, an escrow account is not established 

until after construction is complete. In addition, since loan payments are deferred during 

the construction period, monthly escrow payments are not paid. Two options are 

provided to loan applicants to handle taxes and insurance. One option is to include in the 

loan amount, subject to loan underwriting requirements, taxes which come due during 

construction and the amount to fund the initial escrow deposit. The other option is for the 

borrower to use personal funds to pay taxes when due and for the initial escrow deposit to 

be paid by the borrower in a lump sum when the construction loan is converted to a 

permanent loan. If the borrower does not pay tax bills or insurance bills which become 

due during construction or there are insufficient funds to establish the escrow account 

when the loan is converted, the Field Office will cue the Servicing Office and provide the 

estimated amount of the shortage, and the facts in the case. The Servicing Office will 

generally increase the monthly payment scheduled for the remainder of the escrow cycle 

to compensate for the shortage. The Servicing Office may also elect to charge the 

borrower’s account for any shortage and reamortize the loan.

Borrowers must be counseled that they are ultimately responsible for payment of

insurance premiums and while the costs may be included in the loan, the borrower is

responsible to cover any shortage which may occur. 

If construction is completed as planned, the course of construction (Builder’s Risk) 

policy should remain in effect without an additional premium due during construction. 

However, if a second premium is due during construction, the borrower is responsible for

this payment. Within 30 days of the anticipated construction completion date, the

borrower will provide the Field Office with a copy of the binder for a hazard insurance

policy and a receipt showing it has been paid in full for one year, OR a request for a 

draw from the construction loan to pay one year’s hazard insurance premium in full, as

applicable. 

____________________________________________________________________________________________

3-13

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.7 Establishing Escrow Accounts for Existing Loans

3.7 ESTABLISHING ESCROW ACCOUNTS FOR EXISTING LOANS

A. Determining the Escrow Amount

To establish an escrow account for a borrower with an existing loan, the Servicing Office must 

gather the information discussed in the following paragraphs.

1. Insurance Information

Current information on insurance coverage should be available in the Servicing Office

records. If current information is not available, the Servicing Office should contact the 

borrower at least 30 days prior to establishing an escrow account, notifying them that they must 

provide proof of insurance coverage.

When the policy information is received, the Servicing Office must review it to ensure that 

it meets the Agency’s requirements, as described in Attachment 3-A, and enter information about 

the insurance into LoanServ. If the borrower cannot or will not obtain insurance coverage, the 

Servicing Office will force place insurance.

2. Tax Information

The Servicing Office will confirm with the borrower the taxing authorities to which taxes 

are due, the amount of taxes paid by the borrower last year, and the due dates. the Servicing 

Office will verify this information, enter it into LoanServ, and establish an escrow account.

Once the necessary information is entered into LoanServ, the escrow analysis unit will 

calculate the escrow amount (both the initial deposit and the monthly amount). The Servicing 

Office should change the tax service code in LoanServ to reflect that the borrower is now on 

escrow and within 30 days of setting up the escrow account, inform the tax service that the 

borrower has been converted to escrow. The tax service will then be changed to escrow.

B. Obtain Funds for the Escrow Account

Once the escrow account is set up, the Servicing Office must deposit the specified escrow 

funds into the borrower’s escrow account. If the escrow account contains insufficient funds to 

pay the insurance and taxes when due, the Servicing Office will advance an amount equal to the 

difference between the amount due and the escrow balance. At the time of the annual escrow 

analysis, any negative balances or shortage will be spread over 12 months and collected with the 

escrow portion of the borrower’s mortgage payments.

C. Notify the Borrower

Once the escrow account has been established, the Servicing Office must send written 

notification to the borrower which includes an explanation of the establishment and function of 

the escrow account and Form RD 3550-9. See Paragraph 3.6 B.2 for a description of this 

document. The disclosure statement must be sent within 45 days after creating the escrow 

account.

____________________________________________________________________________________

3-14
HB-2-3550

3.8 ESCROW PAYMENTS

The Servicing Office will disburse funds 

as necessary to pay tax and insurance bills, as 

well as other appropriate expenses. The 

Servicing Office will be responsible for ensuring 

that all escrow payments are made at the optimal time to take advantage of any discounts and 

avoid penalties.

3.9 ANNUAL ESCROW ANALYSIS

RESPA requires the Servicing Office to conduct an annual escrow account analysis for 

each borrower that has an escrow account. RESPA also requires the Servicing Office to provide 

borrowers with an Annual Escrow Disclosure Statement that shows the account history and 

projects activity for the coming year. A borrower’s monthly payment to the escrow account may 

increase or decrease as a result of the analysis. The Servicing Office must mail the disclosure 

statement at least 30 days prior to the new payment effective date.

A. Surpluses

Surpluses arise when the account balance does not reach the expected low point of two 

monthly escrow payments during the year. When a surplus for an escrow account is greater than 

or equal to $50 and the borrower is current on the loan, the Servicing Office will generate a 

check and return the surplus to the borrower with the Annual Escrow Disclosure Statement.

B. Shortages

Shortages arise when the escrow balance is less than the expected low point during the 

year. Generally, the Servicing Office can recover shortages by adjusting the monthly payment to 

the escrow account and spreading the amount equally over the next 12-month period. If the 

borrower cannot make the resulting required payment, the Servicing Office may spread it out 

over a longer period. If a risk analysis reveals that the borrower is unlikely to be able to repay 

the amount, the Servicing Office may require payment within 30 days. the Servicing Office

should consider special servicing options if the borrower is unable to repay the amount within 30 

days.

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3-15

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Termination of Escrow Payments

Escrow disbursements will stop 

immediately upon debt settlement or release of 

security.
HB-2-3550

Paragraph 3.9 Annual Escrow Analysis

C. Account History

In general, the account history should 

include a description of the borrower’s monthly 

mortgage payment and the portion going into the 

escrow account, the total amounts paid into and 

disbursed from the account, an explanation of 

how any surpluses or shortages will be handled, and the balance of the escrow account at the end 

of the year. Any differences in actual disbursements from amounts previously projected should 

be marked with an asterisk.

D. Projection

The Servicing Office should base its projection on last year’s disbursement amount 

unless last year’s statement includes items that are not paid annually such as flood insurance that 

is due every 3 years or quarterly tax assessments.

A projection statement should cover 12 months unless the loan will mature within the 

next 12 months. In this case, the projection need only cover the months through the maturity 

date.

3.10 DISCLOSURE STATEMENTS FOR PROPERTY TRANSFERS AND PAYOFFS

A. Loan Assumptions

Loan assumptions require the preparation of a statement for both the buyer and the seller.

1. Disclosure to the New Borrower

For assumptions on the same rates and terms, the Servicing Office should provide the 

new borrower with Form RD 3550-9 within 45 days of completing the name change on 

LoanServ. The disclosure for new purchasers who assume a loan on new rates and terms 

is handled the same as for any new loan as described in Paragraph 3.6 B.2.

2. Disclosure to the Previous Owner

For either kind of assumption, a disclosure statement covering the period from the last 

disclosure until property transfer must be sent to the prior borrower within 60 days of 

completing the assumption.

B. Loans Paid in Full

A disclosure statement that shows the account history from the date of the last disclosure 

to the date of payoff must be sent to a borrower who pays a loan in full.

___________________________________________________________________________________________

3-16

Accelerated Accounts

If a borrower’s account is currently 

accelerated, the Servicing Office does not 

provide a disclosure statement.
HB-2-3550

SECTION 3: LOSSES [7 CFR 3550.61(d)]

3.11 OVERVIEW 

When the Servicing Office learns of a loss to a security property, the actions to be taken 

depend upon whether the property is insured, whether the Agency is named as the mortgagee in 

the insurance policy, and the lien position of the Agency’s loan. This section provides servicing 

instructions for dealing with both insured and uninsured losses.

A. Reporting the Loss

The borrower is responsible for immediately notifying the Servicing Office of any loss or 

damage to the security property and for collecting covered losses from the insurance company. 

The Servicing Office may ask the Field Office to inspect the property to verify that the borrower 

has taken the necessary steps to protect the property against further damage. If the borrower is 

unable to arrange for adequate protection, the Field Staff may recommend to the Servicing 

Office that a protective advance be used to arrange for emergency protection.

B. Losses on Properties with Accelerated Loans

Losses on properties in the process of foreclosure or deed in lieu of foreclosure will be 

handled in accordance with advice from the Office of the General Counsel (OGC). All loss 

payments should be applied to the borrower’s real estate indebtedness before title to the property 

is taken by the Government, unless absolute assignment has been made by the borrower to the 

Government of all loss funds due from the insurance company. 

If a borrower has improperly disposed of loss proceeds, the Servicing Office’s escrow 

branch should consult with its risk management branch and OGC to determine what further 

action should be taken.

C. Agency Subrogation of Its Rights

Whenever a borrower willfully destroys a security property, the insurance company is not 

liable to the borrower but is still liable to the Agency (as the mortgagee). In such circumstances, 

the insurance company may ask the Agency to subrogate and assign some of its legal rights in 

the property to the insurance company. The Servicing Office will consult with OGC to 

determine whether subrogation is appropriate. 

____________________________________________________________________________________________

3-17

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.13 Filing The Insurance Claim

3.12 FILING THE INSURANCE CLAIM

The borrower is responsible for submitting a claim to the insurance company. The 

insurance company will send an adjuster to evaluate the borrower’s loss, establish the work to be 

completed, and develop an estimated cost to complete the work (by individual work item). To 

document the information, the adjuster will complete an adjuster’s worksheet. 

The borrower must negotiate the adjustment of the loss with the insurance company. The 

borrower may consult with the Agency, but the Agency will not enter into the negotiations with 

the insurance adjusters, make commitments, or sign any forms in connection with the 

adjustment. The Agency will not waive any rights that it may have against the company, except 

when the borrower’s claim has been settled.

If, after the borrower has settled the claim, the Servicing Office determines that the 

adjustment agreed to by the borrower is significantly less than the amount to which the borrower 

is entitled under the terms of the policy, the Agency may consider reopening negotiations with 

the insurance company.

3.13 ADMINISTERING INSURANCE PROCEEDS

The mortgagee or loss payable clause of borrower insurance policies ensures that the 

Agency’s interest is protected. Checks for insurance proceeds (also called “loss drafts”) are 

made payable jointly to the borrower and the Agency. Other lien holders also may be parties to 

the loss draft.

Borrowers with insurance claims must contact the Servicing Office to establish a plan to 

repair or rehabilitate the security property. If the insurance claim proceeds will not be used to 

redevelop the security property, the amount received must be applied to the account. Depending 

upon the amount of the loss, the Agency may require that the expenditure of insurance payments 

be supervised by a local Field Office. It is important that the Servicing Office and the Field 

Office work together to assure that any repairs are completed to protect the government’s 

interest. The amount of Field Office involvement is dependent upon the amount of the insurance 

claim and the risk to the government.

A. Loans Secured by a First Lien

Once insurance proceeds are received, the borrower should endorse the loss draft and 

send it, along with the adjuster’s worksheet, to the Servicing Office. The Servicing Office 

generally places the funds into a managed escrow account. However, when the amount of the 

loss claim is $7,500 or less and the borrower’s account is current, Field Offices are authorized to 

endorse the insurance claim check without recourse provided the borrower submits the adjuster’s 

worksheet along with 

____________________________________________________________________________________________

3-18
HB-2-3550

Paragraph 3.13 Administering Insurance Proceeds

documentation that the repairs will be made or have been completed. Note: Field offices should 

first review the adjuster’s worksheet to ensure that the check is the total claim disbursement. If it 

is a partial disbursement, the check should be forwarded to the Servicing Office and not endorsed 

in the field. 

For significant rehabilitation (having a total cost of more than $30,000) all development 

will be completed under the supervision of the local Field Office. The insurance proceeds may 

be provided to the Field Office to establish a supervised bank account or retained for 

disbursement at the Servicing Office. Development will be managed by the Field Office in a like 

manner as development funded by loan proceeds. This could include Form RD 1924-2, 

Description of Materials, and Form RD 1924-25, Plan Certification or a building permit issued 

by the local jurisdiction. As noted in Paragraph 3.14, all repairs and replacements will be 

planned, performed, inspected, and paid for in accordance with RD Instruction 1924-A. 

Payment schedules will be established in the individual repair plan.

Written contracts, using Form RD 1924-6, Construction Contract are strongly 

recommended for all rehabilitation-related construction, and are required if there is construction 

involved that would affect the dwelling’s structural integrity. Otherwise, a Form RD-1924-1, 

Development Plan or similar form, with cost estimates and specifications may be used. Unless 

the borrower method is used, funds will not be advanced for materials or other purposes until 

work is completed.

In summary, there are three different ways development with insurance claim proceeds 

is managed by the Servicing Office and Field Staff, depending on the amount and risk involved. 

Exhibit 3-3 presents a matrix summarizing these procedures.

• Total claim of $7,500 or less and the borrower’s account is current: Field Staff 

endorses the check to the borrower after reviewing the adjuster’s worksheet;

• Total claim exceeding $7,500 but less than $30,000, or claims of $7,500 or less and 

the borrower’s account is not current: Field Staff forwards insurance proceeds to the 

Servicing Office’s insurance escrow, and inspects the work as requested by the Servicing 

Office;

• Total claim of more than $30,000: Field Staff establishes a supervised bank account or 

forwards insurance proceeds to the Servicing Office’s escrow, and manages all steps of 

construction planning and performance in a like manner as development funded by loan 

proceeds. 

____________________________________________________________________________________________

3-19

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

For construction contracts exceeding $10,000, Department of Labor requirements also 

apply. Refer to RD Instruction 1924-A.

____________________________________________________________________________________________

3-20

Exhibit 3-3

Administration of Insurance Proceeds

when Redevelopment Work is to be Performed

Total Claims Account Status Rehab Components Insurance Claims

Administration 

Procedure

$7,500 or less Current Not considered Field Staff endorses check 

to borrower after 

reviewing the adjuster’s 

worksheet.

$7,500 or less Not current Not considered Field Staff forwards

insurance proceeds to

the Servicing Office ’s 

insurance escrow, and 

inspects the work as 

requested by the 

Servicing Office .

More than $7,500 but less 

than $30,000

All accounts regardless of

status

Single component

More than $7,500 but

less than $30,000

All accounts

regardless of

status

More than one

component

Field Staff establishes a 

supervised bank account 

or forwards insurance 

proceeds to the 

Servicing Office ’s 

escrow, and manages all 

steps of construction 

planning and 

performance in a like 

manner as development

funded by loan 

proceeds. Work is 

inspected work prior to 

any disbursements.

More than $30,000 All accounts

regardless of

status

All rehab work
HB-2-3550

Paragraph 3.13 Administering Insurance Proceeds

B. Loans Secured by Other Than a First Lien

If the loss draft does not include the interest of the prior mortgagee or if all other payees 

have endorsed the draft, the Servicing Office administers the claim as described above for loans 

secured by a first lien.

When the loss draft includes the interest of the prior mortgagee, oversight of repairs of 

any supervised account may be conducted by the prior mortgagee.

1. When Proceeds Will Be Used to Repair or Replace the Property

The Servicing Office should endorse the loss draft without recourse once the prior 

mortgagee has agreed to the use of the loss funds to repair or replace the damaged 

property and the borrower has provided satisfactory proof that the repairs have been 

made or satisfactory assurance that the work will be performed. Satisfactory assurance 

includes a signed construction contract, a final inspection report, or a contractor’s release 

of liens.

If funds remain after the repairs are complete and the prior lien holder has agreed in 

writing that it will apply the funds as a payment on the borrower’s prior lien 

indebtedness, the loss draft should be endorsed without recourse.

2. When Proceeds Will be Used to Reduce Debt on the Property

When the amount of the loss draft is less than the amount of the indebtedness secured 

by the prior lien and the holder of the prior lien has agreed in writing that it will apply 

such funds as a payment on the borrower’s prior lien indebtedness, the Servicing Office

may endorse the loss draft without recourse.

When the amount of the loss draft exceeds the amount of the indebtedness secured by the 

prior lien and the borrower has agreed in writing to pay such indebtedness from the loss 

funds, the loss draft should be endorsed without recourse only after all parties named as 

payees in the draft have signed an agreement to deliver the draft “in escrow” to a bank 

acceptable to the named parties. The agreement will specify the manner in which the 

funds will be disbursed by the escrow agent to the mortgagees named in the draft.

C. If the Agency is Not Listed as a Mortgagee

The Agency must always be listed in the mortgagee or loss payable clause. However, if 

through some oversight the Agency is not listed as mortgagee, the Servicing Office must contact 

the borrower to

____________________________________________________________________________________________

3-21

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.13 Administering Insurance Proceeds

determine if loss proceeds have been received. If the borrower has not yet received the funds, 

the Servicing Office should contact the insurance carrier to request that the loss proceeds be 

made payable jointly to the Agency and the borrower.

If the borrower already has received the proceeds but has not yet paid for repairs, the

Servicing Office should notify the borrower that the loss proceeds must be used for repairs or 

other uses as required by the Agency. If the borrower fails to make required repairs, the account 

should be accelerated as soon as practical if the Government’s security interest is threatened.

D. When the Agency has No Claim on Insurance Proceeds

If the indebtedness secured by the insured property has been paid in full, or the draft is in 

payment for a loss of property on which the Agency has no claim, any loss draft which includes 

the Agency as a payee may be endorsed and released without recourse and delivered to the 

borrower.

3.14 INSPECTING REPAIRS AND AUTHORIZING PAYMENTS

All repairs and replacements will be planned, performed, inspected, and paid 

for in accordance with RD Instruction 1924-A. Payment schedules will be established 

in the individual repair plan and the construction contract.

A. Progress Inspections and Payments

When the loss claim is under the purview of the Servicing Office, Servicing Office

should request that the Field Office inspect the repair work and complete Form RD 1924-12, 

Inspection Report. Before each inspection related to a progress payment, Field Staff should 

request a check from the Servicing Office. The check should be made payable to the borrower 

and the contractor. If work has been satisfactorily completed, Field Staff will instruct the 

borrower to endorse the check and give it to the contractor. If the inspection reveals that the 

work was not completed satisfactorily, Field Staff will void the check and return it to the 

Servicing Office. After each periodic inspection, Field Staff will send the inspection report to 

the Servicing Office and maintain a copy in the borrower’s case file. Field Staff will follow up 

on the adjustment of all losses until satisfactory settlement has been made.

B. Final Payment

When all work has been satisfactorily completed, Field Staff will release the final check 

to the borrower and submit to the Servicing Office all documents completed as required in RD 

Instruction 1924-A, including: a final Form RD 1924-12, Inspection Report; Form RD 1924-9, 

Certificate of Contractor’s Release; Form RD 1924-10, Release By Claimants; and Form RD 

1924-19, Builder’s Warranty. ____________________________________________________________________________________________

3-22
HB-2-3550

Paragraph 3.15 Post Repair Activities

3.15 POST REPAIR ACTIVITIES

A. If Insurance Funds Remain

If insurance funds remain after all repairs, replacements, or other authorized corrections 

have been made, the funds will be applied in the following order of priority:

• Prior liens, including delinquent property taxes;

• Any delinquency on the account; and

• Advances for recoverable cost items.

If funds still remain after being applied in the above order and the Agency’s debt is 

adequately secured, the Servicing Office should release the funds to the borrower.

B. Reinstatement After Loss

In cases where insurance in the amount of the loss is not reinstated automatically under 

the provisions of the policy, the Agency should ensure that the borrower reinstates the full 

amount of the coverage required by the Agency.

3.16 PRESIDENTIAL DECLARED DISASTERS

After a presidential declared major disaster, borrowers may need quick access to all or a 

portion of the insurance proceeds. 

A. Repairs That Will Be Completed Within 30 Days

If the insurance proceeds are $10,000 or less and the repairs can be completed within 30 

days, the Agency may endorse the entire check and the proceeds can be released to the borrower 

for repairs to the property. Before this is done, the borrower must provide a copy of the 

contractor’s estimate of the repair costs.

If the insurance proceeds are more than $10,000 and the repairs can be completed within 

30 days, the Agency may release $20,000 to the borrower for the repairs. The borrower must 

provide a copy of the contractor’s estimate of the cost of repairs. The Agency will retain the 

balance of the proceeds for disbursement according to the borrower’s individual plan.

____________________________________________________________________________________________

3-23

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Paragraph 3.16 Presidential Declared Disasters

B. Repairs That Require More than 30 Days to Complete

If the repairs cannot be completed within 30 days and the insurance proceeds exceed the 

outstanding debt against the property, the Servicing Office may release to the borrower an 

amount equal to the difference between the amount of the insurance proceeds and the debt 

against the property. The Agency will retain the balance of the proceeds for disbursement 

according to the borrower’s individual plan.

3.17 LOSSES NOT COVERED BY INSURANCE

If a loss occurs while insurance is not in force, the Servicing Office should notify the 

borrower that failure to maintain insurance is a violation of the security agreement and instruct 

the borrower to make the needed repairs or replacements.

If the borrower is unable or unwilling to make needed repairs or replacements, the 

Servicer will prepare a problem case report and make recommendations on the following items:

• The advisability and possibility of making a subsequent loan to pay for needed 

repairs;

• Subordination of the Agency’s real estate lien to permit the borrower to obtain funds 

from another source for needed repairs;

• The possibility of the borrower obtaining funds secured by a junior lien from another 

lender; and 

• Whether a protective advance is necessary to protect the Government’s interest.

When preparing the report, the Servicing Office Servicer should consider such factors as 

the borrower’s previous repayment history, the amount of the loss, the nature of the repairs, and 

the threat to the Agency’s security interest.

Recommendations to accelerate the loan should be processed in accordance with

Chapter 6.

____________________________________________________________________________________________

3-24
HB-2-3550

Attachment 3-A

Page 1 of 3

ATTACHMENT 3-A

INSURANCE POLICY REQUIREMENTS

A. Authorized Insurance Providers

Borrowers must purchase their policies from approved insurance companies licensed to 

do business in the State where the property is located. If the required insurance is not available 

at comparable rates from a State-licensed insurance company, insurance from another company 

may be accepted if:

• The Office of the General Counsel (OGC) confirms that policies issued by the 

company are enforceable despite the fact that the company is not licensed to conduct 

business in the State, and the company is a legal entity that may be sued in the State 

where the property is located; and

• The State Director determines that the company is reputable and financially sound 

based on the company’s financial statements, industry rating standards, or 

information available from the State insurance authority or other lending institutions.

The Servicing Office Servicers may contact the applicable State Office to verify whether 

the insurance carrier is authorized to do business in the state.

B. Loss or Damage Covered

Hazard insurance policies must insure buildings against loss or damage by fire, lightning, 

windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke. The flood 

insurance, if applicable, must cover any damage due to water or flooding conditions.

C. Amount

The borrower is required to insure the dwelling and any other essential buildings in an amount equal to 

the insurable values of the dwelling and other essential buildings. However, in cases where the borrower’s 

outstanding secured indebtedness is less than the insurable value of the dwelling and other essential 

buildings, the borrower may elect a lower coverage provided it is not less than the outstanding secured 

indebtedness. If the borrower fails, or is unable to insure the secured property, RHS will force place 

insurance. The amount of the lender-placed coverage will generally be the last known insured value. 

____________________________________________________________________________________________

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN
HB-2-3550

Attachment 3-A

Page 2 of 3

The policy must state whether or not the building is on a leasehold. State Supplements 

provide guidance on specific State insurance requirements pertaining to leasehold interests. The 

Servicing Office Servicers may contact the applicable State Office for further guidance.

D. Borrower’s Deductible

The borrower’s deductible must not exceed the generally accepted minimum based on the 

current industry standards and local market conditions. For flood insurance these deductibles 

apply unless the insurance carrier requires a higher amount.

E. Term

The policy must have a term of at least 1 year, with evidence that 1 year’s premium has 

been paid.

F. Effective Date

If there are insurable buildings on the property (as opposed to vacant land to be built upon), 

the policy must be in force at the time the loan is closed. When a dwelling is to be constructed, 

the insurance coverage must be effective as of the date the materials are delivered to the 

property. No payments from loan funds for labor or materials can be made unless insurance 

coverage is in place.

G. Construction Specifications and Use Conditions

If the insurance policy specifies certain standards of construction or prescribes certain uses 

of the property, the policy will be acceptable only if the property meets the specifications or 

conditions.

H. Names and Location

The policy must include the legal names of all parties being insured. It also must contain a 

description of the property’s location, although a legal metes and bounds description is not 

required.

I. Mortgagee Clause

A mortgagee clause ensures that the Agency will be reimbursed in the event of a loss by 

identifying the Agency as the secured party on the lien (the “mortgagee”). The standard 

mortgagee clause adopted by the State must be attached to or printed in the policy. It also must 

identify the Agency as the mortgagee. Specifically, the Agency must be identified as the 

“United 

____________________________________________________________________________________________
HB-2-3550

Attachment 3-A

Page 3 of 3

States of America, acting through the Rural Housing Service or its successor agency.” The Agency, and 

all other mortgagees whose interests are insured under the policy, must be shown in either the 

mortgagee clause or on the declaration page in the order of priority of their mortgages. The 

address should be:

USDA, Rural Development

Servicing Office Attn: Insurance Department

P.O. Box 66876

St. Louis, Missouri 63166

Whenever a new mortgagee clause is issued after the policy has been in force, the new 

mortgagee clause must be signed by an authorized agent or officer of the company that issued the 

policy.

When an approved mortgagee clause is not printed in the policy, a “loss payable clause” 

which lists all the parties that would receive payment in case of a loss is acceptable, provided the 

Agency will receive payment in case of loss, even in circumstances in which the company would 

not be liable to the borrower. The closing agent must verify that an authorized official of the 

insurance company has sent a signed letter to the State Director stating that all insurance policies 

issued by the company in the State incorporate all the provisions of the standard mortgagee 

clause and that the Agency is named in the loss payable clause (a State Supplement will be 

issued offering guidance on the requirements of this letter).

____________________________________________________________________________________________

(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Master Policies

A master policy is one containing substantially the same standard 

provisions adopted or recommended by legislative action or by order of 

the State’s insurance authority. A master policy is required, unless State 

statutes exempt the company from the regulations requiring its use.

If a State has adopted a master policy, the State Director will submit a 

copy to the Servicing Office. The Servicing Office will compare 

individual policies to the master policy to determine whether they are 

sufficient to protect the Agency’s interest.
HB-2-3550

Attachment 3-B

Page 1 of 1

ATTACHMENT 3-B

TAX SERVICE FEE SCHEDULE 

The tax service fee will be charged according to the timetable listed below:

Tax Service Fee: New Rates and Terms Assumptions * $10

New Loans Approved July 17, 2022 - July 16, 2023 $91

 July 17, 2022 to September 29, 2023 $91

September 30, 2023 to September 29, 2024 $80

(This fee remains in effect until further notice)

* The charge for Tax Service on a New Rates & Terms assumption will remain $10 unless 

otherwise notified.

Note: July 17, 2023 to September 29, 2023 was an interim tax fee service extension.

____________________________________________________________________________________________

(05-27-98) SPECIAL PN

Revised (11-22-23) PN 598