HB-2-3550

5.1 OVERVIEW OF SPECIAL SERVICING [7 CFR 3550.201]

The majority of Agency borrowers repay their loans without the need for special 

servicing. However, some borrowers will encounter financial or personal problems that make it 

difficult or impossible for them to meet the terms and conditions of the loan. Other borrowers 

may prove unwilling to do so. In either case, the Agency’s response begins with special 

servicing activities that are designed to help the borrower become current and succeed in 

repaying the loan. Exhibit 5-1 summarizes the special servicing tools that can be used to help a 

borrower succeed in repaying a loan. Each of these tools is discussed in detail in this chapter. If, 

even with the special servicing assistance the Agency can offer, the borrower is unable or 

unwilling to continue with the loan, the Agency must take action to liquidate the loan in the most 

cost-effective manner.

Upon receipt of a new loan, the Servicing and Asset ManagementOffice (Servicing 

Office) New Loan Unit will review the account to ensure it is properly identified as a 

leveraged/participation loan. A leveraged/participation loan classification will only be given to 

those loans where the Agency is in a junior lien position and participation loans that are 

amortized. However, no change will be made to the account that would result in granting a 

higher amount of payment assistance if the field office approved the loan without granting the 

EIR. The New Loan Unit will ensure the leveraged lender has been properly identified, 

including a Tax ID number and consistent spelling of the lender’s name and address along with 

other identifying information, as necessary.

A. Time Frame for Servicing Action [7 CFR 3550.202]

An account is considered past due if the scheduled payment has not been received by the 

due date. A late fee will be assessed if the scheduled payment is not received by the 15th day 

after the due date. Monthly-pay accounts may be liquidated without further servicing when:

• An amount equal to three scheduled payments is past due; or

• An amount equal to two scheduled payments has been past due for at least 3 

consecutive months. Exhibit 5-2 illustrates these time frames.

For annual-pay borrowers, the account may be accelerated without further servicing when 

at least three-twelfths of one scheduled payment has not been received by its due date.

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(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

CHAPTER 5: SPECIAL SERVICING
.

HB-2-3550

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

Exhibit 5-1

Special Servicing Tools

General Servicing

• Regular followup and counseling for delinquent accounts.

• Conversion of delinquent annual-pay borrowers to monthly payments.

Delinquency Workout Agreements

• Through delinquency workout agreements of up to 2 years, borrowers agree to make the 

required monthly payment plus an amount that will bring the account current.

Protective Advances

• Most commonly used to pay taxes and insurance and initial contributions to a newly 

established escrow account.

• May also be used to provide funds for repairs to the security property if the borrower 

cannot qualify for a subsequent loan.

• Advances are repaid through a lump sum, payment schedule consistent with the 

borrower’s ability to pay, or by reamortizing the loan.

Payment Assistance

• Payment assistance to reduce the borrower’s required payment may be made available to 

eligible borrowers living in eligible units.

• Borrowers with program loans made before August 1, 1968, and nonprogram borrowers 

may be able to refinance in order to receive payment assistance.

Moratoriums

• A moratorium “stops the clock” on payments for up to 2 years to enable the borrower to 

recover from losses of income or unexpected expenses.

• Amounts that accrue during the moratorium are repaid in a lump sum or by 

reamortizing the loan and including the amounts accrued in the outstanding balance.

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HB-2-3550

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

Exhibit 5-2

Illustration of Past Due Time Frames

Scheduled payment due is $400 (principal and interest portion equals $325; taxes and insurance portion 

equals $75.)

Example 1: An amount equal to 3 scheduled payments is past due.

 Account

Balance Due

April 1: No payment is received. $400

April 2: This account is past due.

April 16: A late fee will be assessed. $413

May 1: No payment is received. $813

May 16: A second late fee will be assessed. $826

June 1: No payment is received. $1,226

June 2: An amount equal to 3 scheduled payments is past due. $1,226

Example 2: An amount equal to 2 scheduled payments is past due for at least 3 consecutive months.

 Account

Balance Due

April 1: No payment is received. $400

April 2: This account is past due.

April 16: A late fee will be assessed. $413

May 1: Borrower pays $200. $613

May 16 A late fee will be assessed. $626

June 1: No payment is received. $1,026

June 2: An amount equal to 2 scheduled payments

is past due - first month.

June 16: A late fee is assessed. $1,039

July 1: Borrower pays $300. $1,139

July 2: An amount equal to 2 scheduled payments

is past due - second month.

July 16: A late fee is assessed. $1,152

August 1: Borrower pays $400. $1,152

August 2: An amount equal to 2 scheduled payments

is past due -- third month.

NOTE: These examples are presented to illustrate the time frame in which the Agency could initiate 

liquidation without further servicing. But in practice, the Agency should intervene with other servicing 

actions well before the date that liquidation is permitted.

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(05-27-98) SPECIAL PN

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

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

B. Identifying Special Servicing Accounts

Accounts that require special servicing should be identified well before either of these 

thresholds has been reached. In some instances, the borrower may notify the Servicing Office of 

a problem, such as the loss of employment, even before a single payment has been missed. In 

the case of a leveraged/participation loan the lender may contact the Agency when the borrower 

is past due on their account, before a single payment is missed on the Agency debt. In other 

cases, the Servicing Office will initiate regular followup and counseling with the borrower

because of past due amounts. Generally, any borrower with past due amounts equal to two 

scheduled payments should be referred to a counselor for special servicing.

C. Developing a Servicing Strategy

The circumstances of each borrower are 

unique, and the servicing strategy for each 

should be tailored to the individual 

circumstances. The special servicing tools in 

this chapter often may be used in combination.

For each special servicing 

account, the Servicing Office must 

work with the borrower to develop 

a reasonable servicing strategy 

with the borrower. Servicers must carefully 

document the strategy and each contact with 

the borrower.

It is important when servicing 

leveraged/participation loans that the Agency be aware of the account status of the other lender. 

The Servicing Office will attempt to contact the borrower to determine why they are 

having difficulty making payments to the Agency and the status of the 

leveraged/participation loan. The Servicing Office will review the borrower’s financial 

situation and determine the servicing action to take on the Agency debt that may include 

payment assistance and moratorium, Delinquency Workout Agreement, Promise to Pay, or 

protective advance. If the borrower is past due on the leveraged/participation loan, the Servicing 

Office must also consider servicing options available from the other lender to bring the account 

current when working with the borrower on the past due Agency debt.

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Example - Combining Special Servicing Tools

A borrower who loses employment may 

become delinquent before contacting the 

Servicing Office for assistance. Such a 

borrower may be eligible for new or increased 

payment subsidies or be eligible for a 

moratorium. Alternatively, the borrower may 

require a delinquency workout agreement to 

correct the past due amount.

A borrower may need a moratorium on 

payments in the case of a serious illness of a 

household member. The borrower may also 

need to reamortize the loan at the end of the 

moratorium period.
HB-2-3550

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

D. Borrowers Who Have Filed for Bankruptcy

All servicing actions connected with a borrower who has filed for bankruptcy protection under 

any Chapter of the Bankruptcy Code should be handled on a case-by-case basis, with advice 

from the Office of General Counsel (OGC). This paragraph summarizes the key concepts 

surrounding the types of bankruptcies that most 

frequently affect Agency servicing actions.

When a borrower files a petition under 

the Bankruptcy Code, the court initially 

prohibits further collection actions by creditors 

by entering a stay. If the Servicing Office receives the petition, it should be forwarded to OGC 

with any supporting materials. When a borrower has filed for bankruptcy protection, the 

Servicing Office should obtain a Notice of Commencement of Bankruptcy from the bankruptcy 

court to document the bankruptcy activity for the borrower’s file.

The Servicing Office should continue to 

send monthly statements to borrowers who have 

filed for bankruptcy unless notified by OGC to 

stop sending statements to borrowers in a 

particular jurisdiction. All other collection actions 

must be discontinued until approved by OGC. 

Payments made voluntarily by the borrower should 

be accepted.

The Agency does not need to attend bankruptcy proceedings unless OGC advises it. If an 

Agency presence is required, Field Staff should be asked to attend the proceedings.

1. Proof of Claim

Official Bankruptcy Form 10, Proof of Claim is used to itemize the Agency’s claims 

against the borrower for the bankruptcy court. It must be filed within 180 days after the 

date the bankruptcy was filed, unless the date is changed by the bankruptcy court. No 

Proof of Claim needs to be submitted for Chapter 7 no-asset cases or in cases where OGC 

determines that the Agency’s claim, exclusive of recapture, is fully secured.

2. Chapter 13 Cases

Under a Chapter 13 bankruptcy plan, the borrower will continue to make scheduled 

monthly payments during the life of the plan. If the borrower was in default on an 

Agency debt at the time the plan was developed, the plan should specify a schedule under 

which the borrower will repay the delinquent amount during the term of the plan. ____________________________________________________________________________________________

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(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Cease Collections

Servicing Office must not pursue collection 

activities for borrowers who have filed for 

bankruptcy.

SCRA OF 2003

Determine if borrower is protected by the 

Sevicemembers Civil Relief Act of 2003. Check 

CUS/CRE screen in LoanServ. Field name: 

SCRA.
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HB-2-3550

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

The Servicing Office may use special servicing actions, such as granting payment 

assistance or a moratorium, to help the borrower make scheduled monthly payments. If a 

borrower does not make scheduled payments according to the plan, the Servicing Office

should request OGC guidance in working with the bankruptcy court to resolve the 

problem. The Agency is not permitted to accelerate the account without the consent of 

the bankruptcy court, even if the borrower meets the Agency’s criteria for liquidation.

Normal servicing may be resumed when the stay is terminated and the trustee has 

released any interest in the Agency’s security. This will automatically occur when the 

bankruptcy case is dismissed and closed or the plan is complete and the case is closed.

3. Chapter 7 Cases

Under Chapter 7 bankruptcy, the borrower is given the option to liquidate property 

that he or she can no longer financially retain which may include the Agency’s security 

property. The Agency is not permitted to accelerate the account without the consent of 

the bankruptcy court, even if the borrower meets the Agency’s criteria for liquidation, 

until the property is no longer property of the bankruptcy estate. Property will cease to 

be part of the bankruptcy estate if the property is abandoned by the bankruptcy trustee 

and the borrower receives a discharge or, if the property has not been abandoned, on the 

earliest to occur of: (1) the date the case is closed; (2) the date the bankruptcy is 

dismissed; or (3) the date the debtor receives a discharge.

If the borrower will retain the security property, the Servicing Office should request 

that the borrower execute a “reaffirmation agreement.” Under this agreement, the 

borrower promises to resume payments to the Agency once the bankruptcy case is 

discharged and would again be personally liable for the debt. If the borrower does not 

execute a reaffirmation agreement before discharge, Handbook Letter 102(3550), 

Continuation with Unreaffirmed Debt After Discharge in Bankruptcy, must be sent to the 

borrower after discharge. The Servicing Officeshould resume normal servicing 

procedures for borrowers who have received discharges under Chapter 7, and who have 

executed a reaffirmation agreement or who have received Handbook Letter 102(3550). A 

borrower who is discharged under Chapter 7 of the Bankruptcy Code and has not signed 

a reaffirmation agreement is no longer personally liable for the debt.

E. Developing a Problem Case Report

When special servicing is required, the borrower’s case will typically be referred to a 

Servicer who specializes in counseling. In order to become familiar with the case, the Counselor 

should review the borrower’s information and begin a problem case report ____________________________________________________________________________________________

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HB-2-3550

Paragraph 5.1 Overview of Special Servicing [7 CFR 3550.201]

The problem case report is an automated screen that consolidates basic information about 

the loan and borrower. While some information may not be available when the problem case 

report is started, all information should be provided before a recommendation for liquidation is 

made. The problem case report:

• Summarizes the status of the loan and the servicing actions taken or considered; 

• Identifies delinquent taxes and other liens against the security, all borrowers and 

cosigners, and any others who may have an interest in the property;

• Provides information on borrower income and assets and the value of the security 

property;

• Makes recommendations regarding foreclosure and how other lien holders will be 

handled.

The problem case report is a living document. It should be updated at key points in the servicing 

process to summarize all servicing actions that are taken. In this way, the problem case report 

can serve as an organized reference to the status of the account -- making it easy for the 

Counselor to review the case and discuss it with supervisors. When the Counselor determines 

that the borrower cannot be successful or if the borrower fails to cooperate by refusing: (1) to 

provide information; (2) to agree to a reasonable repayment schedule for the deficiency; or (3) to 

meet the terms of the agreed upon delinquency workout agreement, the Counselor will complete 

the problem case report and make a recommendation for liquidation when it is in the best interest 

of the Government. The problem case report will be submitted to the Counselor’s supervisor for 

review and approval.

5.2 DELINQUENCY WORKOUT AGREEMENTS [7 CFR 3550.205]

Delinquency workout agreements permit borrowers to stop liquidation action by agreeing 

to pay, in addition to the scheduled payment, an extra amount that will bring the account current 

within 2 years or the remaining term of the loan, whichever is shorter. 

A. Eligibility

Delinquent borrowers with either program or nonprogram loans may be eligible for a 

delinquency workout agreement. However, a Servicer cannot approve more than one agreement 

with a particular borrower within a 2-year period without approval from a supervisor. As a 

condition for approval of a delinquency workout agreement, monthly pay borrowers must be on ___________________________________________________________________________________________

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(05-27-98) SPECIAL PN

Revised (03-09-22) SPECIAL PN
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HB-2-3550

Paragraph 5.2 Delinquency Workout Agreements [7 CFR 3550.205]

escrow and annual-pay borrowers with monthly income must convert to a monthly payment 

schedule and be on escrow.

B. Related Servicing Actions

Before proceeding with a delinquency 

workout agreement, it is important to understand 

the reasons for the delinquency. If the borrower 

has had difficulty making regular payments 

because the borrower lost income or had 

unexpected expenses, a delinquency workout 

agreement alone will not solve the problem. In 

such cases a moratorium, rather than a 

delinquency workout agreement, may be the 

appropriate servicing strategy. For eligible borrowers, new or additional payment subsidy also 

may be needed.

C. Processing Delinquency Workout Agreements

1. Determining a Reasonable Payment

Any time a borrower requires over 60 days to repay a delinquency, the Servicing 

Office conducts an analysis of the borrower’s financial circumstances based upon 

necessary and essential family expenses to determine a reasonable monthly payment 

amount and repayment term (not to exceed 24 months). The borrower should provide to 

the Servicing Office the necessary information for the analysis. To determine an amount 

for the delinquency workout agreement, a ratio of 41 percent of annual income will be 

used. After determining 41 percent of the borrower’s annual income, subtract the annual 

amount for principal, interest, real estate taxes, and insurance, child support payments, 

and installments on consumer and medical debts which will require longer than 6 months 

to repay. The amount remaining will be used to establish a delinquency workout 

agreement. In situations where the balance will not pay off the delinquency within 24 

months, or there is a negative balance, a delinquency workout agreement will not be 

established, unless the borrower firmly asserts that they can repay the delinquency within

24 months

2. Confirming the Agreement

For borrowers who agree to pay delinquent amounts within 30 days, the 

reaffirmation agreement must be documented. At least 30 days before the 

moratorium is scheduled to expire, the borrower must provide financial 

information needed to process the re-amortization of the loan(s).Borrowers 

5-8

Realistic Promises to Pay

An important aspect of a Servicer’s 

counseling role is to help borrowers avoid 

entering into unrealistic delinquency workout 

agreements. Delinquency workout agreements 

should not be used unless available information 

supports the borrower’s promise to pay.
HB-2-3550

Paragraph 5.2 Delinquency Workout Agreements [7 CFR 3550.205]

who need more than 30 days to repay a delinquency must be sent a letter confirming the 

repayment agreement. Borrowers who require a formal delinquency workout agreement 

(any agreement that exceeds 60 days) will receive an adjusted billing statement that 

itemizes the additional amount to be paid.

3. Late Fees on Delinquency Workout Agreements

Late fees accrued during the term of the agreement will be waived for months in 

which the borrower pays according to the agreement.

4. Borrower Failure to Pay

If a borrower who’s required to make payments under a delinquency workout 

agreement is more than 30 days past due, the agreement is automatically canceled. If the 

borrower’s failure to comply with the terms of the agreement is the result of additional 

financial problems, additional servicing options may be considered. If the borrower is 

unwilling to comply with the agreement or if, even with all available servicing options,

the account cannot be brought current, the loan should be liquidated.

5. Bringing the Account Current Through Reamortization

Borrowers who have been successfully paying the amounts due under a delinquency 

workout agreement may be offered the opportunity to have the outstanding balance

reamortized over the remaining term of the loan. To be eligible for reamortization: (1) 

the remaining term of the delinquency workout agreement must be at least 12 months; 

and (2) the borrower must have been making full payments without incurring any late 

fees for at least 6 months.

As a condition of reamortization, annual-pay borrowers with monthly income must 

convert to a monthly payment schedule, and the borrower must agree to the establishment 

of an escrow account for taxes, insurance, and related costs. Annual-pay borrowers 

without monthly income will be encouraged to convert to a monthly payment schedule, 

but are not required to convert to a monthly schedule or establish an escrow.

5.3 USING PAYMENT ASSISTANCE AS A SPECIAL SERVICING ACTION

[7 CFR 3550.204]

Payment assistance is offered as part of a special servicing strategy to help prevent future 

delinquent payments by adjusting the monthly payment to an amount the borrower can afford. ____________________________________________________________________________________________

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(05-27-98) SPECIAL PN

Revised (03-09-22) SPECIAL PN
.

HB-2-3550

Paragraph 5.3 Using Payment Assistance as a Special Servicing Action [7 CFR 3550.204]

However, providing payment assistance alone will not cure a delinquency. Therefore, payment 

assistance must be used in conjunction with either a delinquency workout agreement or a 

moratorium. Detailed instructions for processing payment assistance are provided in Chapter 4.

A. Refinancing Loans to Permit Payment Assistance

Payment assistance cannot be provided in conjunction with loans made before August 1, 

1968, or with loans made on above-moderate or nonprogram terms. However, borrowers who 

are in danger of losing their homes due to circumstances beyond their control may be permitted 

to refinance their loans to enable them to obtain payment assistance. Before proposing that a 

loan be refinanced, the Servicer should consider whether other servicing actions can solve the 

problem without payment assistance. If not, the Servicer must consider whether the payment 

assistance that will be provided, plus any other available servicing actions, will be sufficient to 

remedy the delinquency and place the borrower in a position to remain current on the new loan. 

To do so, the Servicer should:

• Confirm that the borrower would be income-eligible for payment assistance following 

the procedures in Chapter 4; and

• Use LoanServ to estimate the borrower’s monthly payments if the loan were 

refinanced.

If refinancing the loan appears feasible, the Servicing Office should request that the 

appropriate Field Office originate the new loan. No additional servicing actions are taken on the 

account until the Field Office makes a determination about refinancing the loan.

B. Servicing Actions While the Request for Payment Subsidies Is Processed

During the time that it takes to receive and verify income data and determine that the 

family is eligible for payment assistance, the account continues to accrue late fees.

5.4 PROTECTIVE ADVANCES [7 CFR 3550.206]

The Agency may advance funds to pay for fees and services that are needed to protect the 

Government’s interest in either program or nonprogram property. Protective advances are 

generally only considered when the Agency cannot provide a subsequent loan for such purpose 

to the borrower. This could occur because the borrower does not meet current eligibility 

requirements, a lack of funds, or an unwillingness of the borrower to cooperate. When the 

Servicing Office

becomes aware that a borrower may need a subsequent loan or protective advance, they will refer 

the case to the Field Office, and cue the Field Office accordingly. The Agency recovers the

___________________________________________________________________________________________

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HB-2-3550

Paragraph 5.4 Protective Advances [7 CFR 3550.206]

amounts advanced by charging the borrower’s account. Amounts advanced are due with the next

scheduled payment. If the borrower is unable to repay the advance in a lump sum, the Field 

Office may request that the Servicing Office schedule repayment consistent with the borrower’s 

ability to pay or reamortize the loan.

A. Advances for Property Repairs

Protective advances for property repairs are made only to protect the Government’s 

interest in the security property and should be considered only if the repairs cannot be financed 

through a subsequent loan. Advances will bear interest at the promissory note rate of the loan 

against which they are charged. Advances for borrowers with multiple loans secured by the 

same property should be charged against the largest loan.

1. Determining the Need for Repairs

The need for repairs may be identified by either the borrower, Field Office, or the 

Servicing Office. Field Offices are responsible for completing an inspection of the 

property, an environmental review, developing a description of the work required,

preparing a cost estimate, and approving the protective advance.

2. Alternative Sources of Funding

Before processing the advance, the Field Office must first determine whether it 

appears that the borrower qualifies for a subsequent loan. If a subsequent loan appears 

feasible, the Field Office will process a loan application immediately. If the need for a 

protective advance is so urgent or if it is clearly apparent that the borrower would not 

qualify for a loan, is uncooperative, or that a protective advance is more appropriate, the 

Field Office must document why alternatives were not feasible and why the repairs are 

needed to protective the Government’s interest when processing an advance. Protective 

advances will be reported to the IRS as income to the vendor and IRS Form 1099 will be 

generated. In no case will the borrower or a RD employee be listed as the vendor.

B. Advances for Other Purposes

In order to protect the Government’s interest, protective advances also may be used for 

other purposes. These types of advances will be processed and approved by Field Offices or the 

Servicing Office, as appropriate. Field Staff will coordinate efforts with the Servicing Office for 

any loan that is still under the jurisdiction of the Servicing Office. Protective advances for other 

purposes include such items as:

• Paying off a prior lien holder who intends to foreclose in cases where the Agency is a 

junior lien holder. ____________________________________________________________________________________________

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(05-27-98) SPECIAL PN

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

Paragraph 5.5 Moratoriums [7 CFR 3550.207]

• Paying taxes or insurance premiums; or 

• Paying for local assessments.

5.5 MORATORIUMS [7 CFR 3550.207]

A moratorium is an agreement between the Agency and a program borrower to suspend 

the requirement for the borrower to make payments for up to a 2-year period. A moratorium is 

intended to help a borrower who is experiencing temporary financial difficulties avoid 

foreclosure. Before considering a moratorium, a borrower must first be considered for payment 

subsidy, or if currently receiving a payment subsidy, an increase in such assistance. A 

nonprogram borrower is not eligible for a moratorium.

When a borrower with a leveraged/participation loan is approved for a moratorium they 

should be informed that it is their responsibility to continue making payments on the 

leveraged/participation loan. If the borrower’s loss or decrease in income prohibits them from 

paying the other mortgage payment consideration can be given to paying off the 

leveraged/participation lender.

A. Eligibility

For a borrower to be eligible for a 

moratorium, all of the following conditions must 

be met:

• Due to circumstances beyond the 

borrower’s control, the borrower is 

temporarily unable to continue to 

make scheduled payments because:

◊ The borrowers repayment income fell by at least 20 percent within the past 12 

months. The change in repayment income is based only on the income of 

parties to the note who are living in the household, or

◊ The borrower must pay unexpected and unreimbursed expenses resulting from 

the illness, injury, or death of the borrower or a family member, or

◊ The borrower must pay unexpected and unreimbursed expenses resulting from 

damage to the security property in cases where adequate hazard insurance was 

not available or was prohibitively expensive.

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5-12

Multiple Moratoriums

A borrower may be eligible for more 

than 1 moratorium over the life of the loan. No 

waiting period between moratoriums is required 

if new circumstances qualify the borrower for a 

new moratorium at the end of a moratorium.
HB-2-3550

Paragraph 5.5 Moratoriums [7 CFR 3550.207]

• The borrower occupies the dwelling, unless RHS determines that it is uninhabitable 

or the borrower may be temporarily absent, and

• The borrower’s account is not currently accelerated, and

• The loan was written on program terms.

B. Initiating the Request for a Moratorium

Although some borrowers may be knowledgeable enough to request a moratorium, more 

typically the Servicing Office will recognize that a borrower is a candidate for a moratorium and 

propose it to the borrower. Regardless of which party initiates the discussion, the 

borrower must request the moratorium and provide financial information to enable the 

Servicing Office to determine whether the borrower’s new financial circumstances 

support the request for a moratorium. The Servicer should carefully document the 

request. Moratoriums are not available to nonprogram borrowers.

C. Evaluating and Acting on the Request

A moratorium is not an appropriate 

servicing tool for borrowers whose 

circumstances have changed in such a way that it 

is unrealistic to anticipate recovery within the 

maximum moratorium period. Both the 

borrower’s plans and the Servicer’s judgment 

enter into this decision. To evaluate the 

situation, the Servicer must:

• Determine whether the borrower may 

be eligible for payment assistance or, 

if already on a payment subsidy, for 

an increase in such assistance.

• If it is determined that the borrower cannot make the scheduled payments, determine 

whether the cause is due to reasons beyond the borrower’s control;

Conduct a financial analysis to determine whether, given the new circumstances, the 

borrower is unable to make the scheduled payment;

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(05-27-98) SPECIAL PN

Revised (03-31-21) SPECIAL PN

Four Key Steps In Evaluating

a Moratorium Request

• Confirm the facts of the case.

• Determine whether a moratorium is the 

appropriate remedy.

• Determine if borrower is protected by the 

SCRA Act of 2003

• Determine an appropriate monitoring 

schedule.
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HB-2-3550

Paragraph 5.5 Moratoriums [7 CFR 3550.207]

• Determine whether there is reason to believe that the borrower’s financial problems 

are temporary -- that is, can be sufficiently resolved within 2 years to enable the 

borrower to resume making scheduled payments; and

• If the borrower’s request is approved, notify the borrower in writing; or

• If the borrower’s request is rejected, notify the borrower and provide information 

about the appeal process described in Paragraph 1.9.

• If a leveraged/participation loan is involved, determine if the borrower can continue 

to make the other lieholders loan payments;

• If the borrower cannot make the leveraged/participation loan payments determine if 

the loan should be paid off with a protective advance prior to granting a moratorium.

D. Monitoring Borrower Accounts During the Moratorium

Moratoriums are permitted only for as long as the borrower’s circumstances prevent 

repayment of the loan. Borrowers are required to report changes in the circumstances on which 

the moratorium is based. For example, if a moratorium is granted because a borrower loses a 

job, the Agency must be notified when the borrower finds employment

Borrower eligibility for a continuation of the moratorium should be reviewed at least 

once every 6 months. The precise schedule should be worked out based on the borrower’s 

individual situation. For borrowers who receive payment subsidy, one of the semiannual reviews 

should be conducted simultaneously with the annual income re-examination.

When the moratorium is linked to unexpected expenses, the borrower periodically must 

submit evidence to document that those debts are being paid. Acceptable forms of 

documentation include certifications from the payee, copies of paid receipts, or canceled checks 

or money orders. If a borrower will continue to make payments on a leveraged/participation 

loan, the Servicing Office must verify with the other lender that the payments are being made 

each month

E. Cancellation of a Moratorium

The Servicing Office should cancel the moratorium if:

• The borrower does not respond to a request for financial information;

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HB-2-3550

Paragraph 5.5 Moratoriums [7 CFR 3550.207]

• The Agency receives information indicating that the moratorium is no longer 

required; or

• The moratorium was granted due to unexpected and unreimbursed expenses, and the 

borrower cannot show that an amount at least equal to the deferred payments has been 

applied toward the expenses.

If a cancellation is required, the Servicing Office must notify the borrower. If a borrower 

provides the information necessary to justify continuance of the moratorium within 30 days of 

the notification, the Servicing Officeshould continue the moratorium.

F. Resumption of Payments

At least 60 days before the moratorium is scheduled to expire, the Servicing Office

should review the borrower’s account to determine whether the borrower is able to resume 

making scheduled monthly payments. Unless current income data is available, the borrower 

must provide updated financial information.

1. Reamortization

When the moratorium expires 

or is cancelled, the loan will be 

re-amortized to include the 

amount deferred during the 

moratorium and the borrower will 

be required to escrow.

2. Forgiving Interest

If the new monthly payment, after consideration of the maximum amount of payment 

subsidy available to the borrower, exceeds the borrower’s repayment ability, all or part of 

the interest that has accrued during the moratorium may be forgiven so that the new 

monthly payment optimizes both affordability to the borrower as well as the best interest 

of the Government.

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(05-27-98) SPECIAL PN

Revised (03-09-22) SPECIAL PN

SCRA OF 2003

Original mortgage interest rate must be 

restored prior to reamortization for borrowers 

protected by the Act. Reduce mortgage interest 

rate to 6% upon completion of the 

reamortization if borrower is on active duty.
.

HB-2-3550

Paragraph 5.5 Moratoriums [7 CFR 3550.207]

3. Borrowers Unable to Resume Payments

If after the approved moratorium period, the borrower is unable to resume payments, 

the account must be liquidated, as described in Chapter 6.

5.6 THE LIQUIDATION RECOMMENDATION

At any point during the special servicing process, it may become clear that the borrower 

will be unable to succeed and that liquidation is appropriate. The Servicer should discuss this 

issue openly with the borrower and encourage the borrower to consider voluntary liquidation.

After discussing the situation with the borrower, the Servicer should use the problem case report 

to recommend liquidation and submit it to a supervisor for approval. Chapter 6 describes the 

various methods of liquidation that are available. The problem case report should document that 

the Counselor has pursued all appropriate servicing actions and summarize the reasons for the 

liquidation recommendation.

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