KEY TOPICS IN THIS CHAPTER 

 Pre-Liquidation Requirements 

 Decision to Liquidate 

 Property Liquidation 

 Agency Election of Assignment or Conveyance 

 Determination of the Claim Amount 

 Payment of the Final Claim 

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10.1 PURPOSE AND OVERVIEW 

This chapter addresses the property 

liquidation and claim processes. When all 

reasonable efforts to resolve deficiencies 

in loan performance have failed, the 

lender must liquidate the loan and dispose 

of the property in order to submit a final 

loss claim. An overview of the GRRHP 

liquidation and claim payment process is 

shown in Exhibit 10-1. 

EXHIBIT 10-1 

THE LIQUIDATION PROCESS FOR GRRHP

The lender submits a liquidation plan and supporting documentation to the Agency 

within 30 calendar days of the decision to liquidate. 

The Agency notifies the lender of its decision to approve or reject the plan 

within 20 calendar days of receipt of the plan. If the Agency fails to respond to the lender 

within 20 calendar days, the liquidation plan will be considered approved by default, 

and the 90-day period for interest accrual will commence. 

If the liquidation is expected to exceed 90 calendar days, the lender must 

submit with the liquidation plan Form RD 449-30, 

“Loan Note Guarantee Report of Loss”, for an estimated loss payment. 

Payment on the estimated loss claim is normally made within 

30 calendar days after the Agency’s approval of Form RD 449-30. 

The lender acquires and disposes of the property in 

accordance with the liquidation plan. 

The lender submits a final report of loss on Form RD 449-30 to the Agency. 

The final loss claim is normally paid within 60 calendar days 

of receipt of the final report of loss. 

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SECTION 1: PRE-LIQUIDATION REQUIREMENTS 

10.2 OVERVIEW 

Before a decision to liquidate can be considered, the lender must make all reasonable 

attempts to resolve the deficiencies with the property. Chapter 7 provides a variety of Agencyrecommended special servicing actions to help lenders restore a property’s physical and financial 

health. Implementation of a workout plan can often delay or eliminate the need to liquidate the 

account. As a part of the notification to the Agency of a decision to liquidate, the lender must 

certify that they have made all reasonable attempts to resolve the issues using special servicing 

methods. 

SECTION 2: DECISION TO LIQUIDATE 

10.3 OVERVIEW 

A decision to liquidate must be made by the lender when it determines that the default 

cannot be cured through special servicing, and it is in the best interest of the Agency and the 

lender to liquidate. 

In the event of a default involving a loan to an Indian tribe or tribal corporation, which is 

secured by an interest in land within such tribe's reservation (as determined by the Secretary of 

the Interior), including a community in Alaska incorporated by the Secretary of the Interior 

pursuant to the Indian Reorganization Act (25 U.S.C. 461 et seq.), the lender shall only pursue 

liquidation after offering to transfer the account to an eligible tribal member, the tribe, or the 

Indian housing authority serving the tribe. If the lender subsequently proceeds to liquidate the 

account, the lender shall not sell, transfer, or otherwise dispose of or alienate the property except 

to one of the entities described in the preceding sentence. 

Liquidation should be considered when any of the following circumstances exist: 

 A loan has been delinquent for 90 calendar days, and the lender and borrower have not 

been able to agree on the terms to cure the delinquency; 

 The borrower has failed to comply with the approved workout plan; or 

 Delaying liquidation will impair the recovery value of the collateral or jeopardize full 

recovery on the loan. 

If not already paid off under the guarantee, the holder may initiate by written demand to 

the lender and/or the Agency requesting commencement of foreclosure or repurchase of the 

unpaid guaranteed portion of the loan when the borrower is not less than 60 days in default or the 

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lender has failed to remit to the holder its pro rata share of any payment made by the borrower 

within 30 days of the lender’s receipt thereof [§3565.405(a) and (b)]. During the liquidation 

process, the lender must follow the procedures for repurchasing the loan from the holder 

regardless of when the holder formally requests that it be reimbursed under the guarantee 

[§3565.405(a) and (b)]. 

 Once a decision is made to liquidate a loan, the lender must meet the following 

deadlines in order to be eligible for payment under the guarantee: 

 Notify the borrower and the Agency within 7 calendar days from the date of the 

decision to liquidate (see Paragraph 10.4); 

 Submit a liquidation action plan for Agency approval within 30 calendar days of the 

notice to the Agency (see Paragraph 10.5); and 

 Submit Form RD 449-30 for an estimated loss payment if the liquidation is expected 

to exceed 90 calendar days (see Paragraph 10.7). 

When the lender decides to liquidate, they must report to the Agency on a monthly basis 

using Form RD 1980-41 until the account is satisfied or the guarantee is terminated. 

At the same time the lender has decided to pursue liquidation, the lender must notify the 

holder of the intent to liquidate, unless the holder has already been paid under the guarantee. 

10.4 NOTICE OF LIQUIDATION AND POTENTIAL CLAIM 

 Once the lender has made a decision to liquidate the account, they must notify 

the Agency and the borrower within 7 calendar days of the decision. This notification will 

inform the borrower that liquidation proceedings will commence and alert the Agency to expect 

a submission of the liquidation plan. The holder may request of the lender that it (the holder) be 

paid off prior to liquidation. If, under the guarantee, the lender does not repurchase the loan 

from the holder, the Agency will repurchase the loan from the holder in accordance with 

[§3565.405 (b)]. 

10.5 SUBMISSION OF A LIQUIDATION PLAN 

Within 30 calendar days after notifying the Agency of the decision to liquidate, the 

lender must submit to the Agency, in writing, the proposed liquidation plan. Upon approval by 

the Agency, the lender will commence liquidation. If, within 20 calendar days of the Agency’s 

receipt of the liquidation plan, the Agency fails to respond to the lender's proposal, the 

liquidation plan will be approved by default. 

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A liquidation plan must include, but is not limited to the following: 

 Documentation to establish the lender's and/or holder’s ownership of the guaranteed 

loan, promissory note, and related security instruments and a copy of the payment 

ledger or equivalent which reflects the current loan balance, accrued interest to date, 

and the method of computing the interest. 

 A full and complete list of all collateral, including any personal and corporate 

guarantees. 

 The recommended liquidation methods for making the maximum collection possible 

on the indebtedness and the justification for such methods, including recommended 

actions for: 

 Acquiring and disposing of all collateral; and 

 Collecting from guarantors. 

 An appraisal of the collateral and the due diligence report. In order to formulate a 

liquidation plan that maximizes recovery, collateral must be evaluated in accordance 

with the requirements contained in Chapter 11 for the release of hazardous substances, 

petroleum products, or other environmental hazards that may adversely impact the 

market value of the collateral. The appraiser must consider this information in 

developing an appraised value. 

 The proposed date of foreclosure. 

 The proposed date of liquidation. 

 Steps to be taken to preserve the collateral and protect the tenants. 

 Copies of the borrower's latest available financial statements. 

 Copies of the personal or corporate guarantor's latest available financial statements. 

 An itemized list of estimated liquidation expenses expected to be incurred along with 

justification for each expense. 

 A schedule to periodically report to the Agency on the progress of liquidation. 

 An estimate and justification of protective advances. 

 Proposed protective bid amounts on collateral to be sold at auction and a breakdown 

to show how the amounts were determined. 

 A determination of whether a deed-in-lieu of foreclosure will be considered. 

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 If a voluntary conveyance is considered, the proposed amount to be credited to the 

guaranteed debt. 

 Any relevant legal opinions, including, for example, opinions on environmental 

issues, title searches, and bankruptcy. 

10.6 APPROVAL OF LIQUIDATION PLAN 

The Agency will accept or reject the lender's liquidation plan within 20 calendar days

after receipt of the plan or request that the lender make revisions to the plan. If the Agency fails 

to meet this deadline, the plan will be approved by default. When the State Office receives the 

lender’s liquidation plan, the State Office immediately must notify the Director of the MultiFamily Housing Guarantee Loan Division. 

The State Office will review and assess the lender’s liquidation plan. The State Office 

will recommend acceptance or rejection of a liquidation plan and send it to the National Office 

for concurrence in a timely manner. The Director of the Multi-Family Housing Guarantee Loan 

Division will review the State Office recommendation and the liquidation plan. The National 

Office must concur with the State Office recommendation on all lender submitted liquidation 

plans. 

When a liquidation plan is approved by the Agency, the lender must proceed 

expeditiously with liquidation, in accordance with the terms of the plan. Agency approval of the 

lender’s liquidation plan is normally classified as a categorical exclusion under the Agency’s 

environmental review process, unless the proposed method of liquidation will result in an 

alteration of the purpose, operation, location, or design of the project as originally approved. 

The liquidation plan may be modified when conditions warrant. All modifications must be 

approved, in writing, by the Agency prior to implementation. 

10.7 FILING AN ESTIMATED LOSS CLAIM 

Upon approval of the liquidation plan, all interest credit payments, if applicable, from the 

Agency will cease. If the liquidation plan is expected to exceed 90 calendar days the lender will 

submit an estimated loss payment with the liquidation plan. Any estimated loss payment must 

be applied to the outstanding principal and interest of the guaranteed debt. Estimates must be 

prepared and submitted by the lender on Form RD 449-30 using the basic loss formula as 

provided on the report. The estimated loss claim will be promptly processed. Payment of the 

estimated loss amount will normally be made to the lender within 30 calendar days after the loss 

estimate has been approved by the Agency. 

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10.8 WITHDRAWAL OF A CLAIM 

At the request of the lender, if the borrower cures the default prior to the earliest payment 

of the estimated loss claim or foreclosure, the guarantee will continue as if the default had not 

occurred. The lender must notify the State Office, the Agency Finance Office and the holder that 

the default has been cured. 

SECTION 3: PROPERTY LIQUIDATION 

10.9 PROPERTY ACQUISITION 

The first step in the liquidation process is to acquire the property. The liquidation plan 

must inform the Agency of the proposed method of acquisition, including: 

 Judicial foreclosure; 

 Non-judicial foreclosure; or 

 Deed-in-lieu of foreclosure. 

The lender must estimate the time frame when the acquisition should occur. 

In most cases, acquisition should be completed within 120 calendar days from approval of the 

liquidation plan. If the lender foresees a longer acquisition period, the reasons for the delay must 

be explained in the liquidation plan. Examples of appropriate reasons for a delay include: 

 A State law declaration of bankruptcy by the borrower; 

 Time to provide written notice to tenants or similar tenant protection measures; 

 Constraints imposed by other liens or financing on the property; and 

 Court backlog. 

Unless otherwise approved by the Agency, the amount bid by the lender at foreclosure 

sale must equal the lesser of the sum of the outstanding principal and interest, liquidation 

expense, and approved protective advances or the appraised value of the property. 

Once the collateral has been purchased by a third party through foreclosure, the borrower has 

conveyed title to the lender, or an estimated loss payment is made by the Agency to the lender, 

no further transfer of physical assets can be made. Once the lender has title to the property, 

interested purchasers of the real estate owned (REO) property may negotiate with the lender, at 

the lender’s discretion. 

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10.10 LENDER LIQUIDATION 

 If a property is acquired by the lender through foreclosure or other method of 

conveyance, the lender must dispose of the property in accordance with the 

liquidation plan. If complications in the liquidation process lead to unforeseen delays, the lender 

must immediately notify the Agency of the reason for the delay and submit a revised date for 

expected liquidation. Failure to inform the Agency of the unforeseen circumstance could result 

in the denial of payments to the lender under the guarantee. 

While the Agency expects the lender to dispose of the property in a manner 

that will yield the highest possible market value, marketing and liquidation actions 

must ensure that protections afforded to tenants in [7 CFR part 3560, subpart D] are 

provided. 

10.11 FAILURE TO COMPLY WITH THE LIQUIDATION PLAN 

The purpose of the liquidation plan is to ensure timely liquidation of property at the 

lowest cost to the Agency. If the lender fails to comply with the liquidation plan that has been 

approved by the Agency, it may result in the denial of benefits to the lender under the guarantee. 

If the lender becomes aware of any situation that would change any part of the 

liquidation plan, it must immediately inform the Agency of the reasons for such change and 

submit an amendment to the liquidation plan for approval by the Agency. 

SECTION 4: AGENCY ELECTION OF 

ASSIGNMENT OR CONVEYANCE 

10.12 OVERVIEW 

While liquidation by the lender will occur in almost every case, the Agency reserves the 

right to require the lender to assign the loan or convey the property to the government prior to 

liquidation if it determines that assignment or conveyance of title is in the best interest of the 

government. In these cases, the lender may submit a claim in accordance with the provisions of 

Section 5 of this chapter. If a holder remains in possession of a certificate of guarantee of the 

loan during this process, it must also be notified of such action by the lender. 

Examples of reasons the Agency may require loan assignment or conveyance of title 

include: 

 It would be less costly to the government for the Agency to dispose of the property; 

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 Tenant protection issues are of such a complicated nature that disposal or retention of 

the property by the Agency is necessary; and 

 The lender has been grossly negligent in servicing the loan. 

After a review of the proposed liquidation plan, the Agency will inform the lender if it 

will require an assignment or conveyance of title. 

10.13 ASSIGNMENT OF THE LOAN 

An assignment of the guaranteed loan to the Agency must be in written and recordable 

form and must be completed within 90 calendar days of the Agency notice to the lender. The 

assignment documents will be forwarded to the OGC’s Regional Attorney for review. The 

assignment will be considered complete once the following transactions are completed to the 

Agency’s satisfaction. 

 Conveyance to the Agency of all rights and interests arising under the loan. 

 Assignment to the Agency of all claims against the borrower or others arising out of 

the loan transaction, including: 

 All collateral agreements affecting financing, construction, use, or operation 

of the property; and 

 All claims under policies of title, or other insurance, surety bonds, or other 

guarantees. 

 A due diligence report which evaluates the effect of potential contamination from 

hazardous wastes and from the release of hazardous substances and petroleum 

products on the security value of real property and an appraisal which takes the 

findings of the due diligence report into consideration. 

If the Agency requires an assignment, the lender must stop any liquidation actions that 

are in process. 

10.14 CONVEYANCE OF TITLE TO THE AGENCY 

When the Agency requires a conveyance of title to the property, the lender must inform 

the Agency of the method and time frame for obtaining title to the property. The lender must 

obtain a deed in lieu of foreclosure from the borrower or implement the approved liquidation 

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plan. Once the foreclosure action is completed and the lender has obtained title to the property, 

the lender must transfer the title to the Agency. The Agency will accept the conveyance of title 

upon acceptance of the documents listed below and receipt of a satisfactory warranty deed. 

 A release of all claims of the lender or other holder of the guarantee against the 

property. 

 A due diligence report which evaluates the effect of potential contamination from 

hazardous wastes and from the release of hazardous substances and petroleum 

products on the security value of real property and an appraisal which takes the 

findings of the due diligence report into consideration. 

 An assignment of the lender’s rights to any operating funds and any reserves or 

escrow account established for such purposes as: 

 The maintenance of the property, including any replacement reserve or capital 

improvement reserves; or 

 The payment of property taxes and insurance. 

Prior to acceptance of conveyance of property, the Agency will conduct an inspection to 

determine the physical condition, security, and need for rehabilitation and repair. This 

inspection will encompass site conditions, building exteriors, common elements, and interiors of 

all units. 

SECTION 5: DETERMINATION OF THE CLAIM AMOUNT 

10.15 INTRODUCTION 

The determination of the claim amount actually begins during the development of the 

liquidation plan. Factors such as the date of the decision to liquidate, estimated liquidation value 

of the security property, estimated date of foreclosure and estimated date of liquidation will all 

affect the amount the Agency will be required to pay to the lender. The Agency will review the 

liquidation plan to be sure that the costs and time frames of acquisition and liquidation minimize 

losses to the government. Calculating the amount payable under the guarantee is a multi-step 

process detailed below. 

If there is a loss claim due to contamination from a release of hazardous substances, 

hazardous wastes, or petroleum products, the Agency shall not finalize loss claims until the 

guaranteed lender has sold the property or the Agency has accepted assignment or conveyance of 

title to the property. 

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10.16 DETERMINATION OF THE DATE OF LOSS 

A. Lender Liquidation 

The date of loss is the date the loan is terminated due to foreclosure or other 

means of conveyance. This date will be the earliest of: 

 The date on which the property is acquired; or 

 The proposed date of acquisition in the liquidation plan or any approved 

modifications to the liquidation plan. 

If the date of acquisition is later than the date approved by the Agency, the date of 

loss for the purpose of calculation of the claim will be the Agency’s approved date. 

B. Assignment or Conveyance of Title to the Agency 

Where the Agency requires an assignment of the loan or conveyance of title, the 

date of loss will be the date on which the Agency accepts assignment of the loan or 

conveyance of title. 

In submitting the liquidation plan to the Agency, the lender must specify the 

estimated date of assignment or conveyance of title. Unless the delay in assignment or 

conveyance is due to Agency action or inaction, the date of loss may be no later than the 

date approved in the liquidation plan or any amendment. 

10.17 CALCULATION OF LOSS 

In order to receive payment under the guarantee, the lender must calculate and submit for 

Agency approval Form RD 449-30. The information contained in the report will be used to 

estimate the loss to the Agency on an individual loan. The aggregate amounts reported by all 

lenders will be used to forecast the amount the Agency will need to disburse in claim payments 

in a fiscal year. When completing the report of loss, the lender should use the following as a 

guide. 

A. Request for Estimated Loss Claim 

Form RD 449-30 must be completed following the guidance in Paragraph 10.7. 

Unpaid principal and interest figures inserted in lines 11 and 12 must be calculated as of 

the date of submission of the form. 

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B. Final Report of Loss (when an estimated loss claim payment has not been made)

The unpaid principal and interest figure on Form RD 449-30 must be calculated 

based on the date of loss as explained in Paragraph 10.16 A. For interest calculation 

purposes, the Agency will pay interest that accrues no more than 90 calendar days from 

the date the liquidation plan is approved by the Agency. 

10.18 PROTECTIVE ADVANCES 

The calculation of the loss amount may include any amounts approved by the Agency for 

protective advances not paid from the project’s cash flow. In general, protective advances are 

funds necessary to protect the value of the asset and ensure the security, health, and safety of the 

tenants. The lender must obtain the Agency’s written approval for any protective advance above 

$5,000. Such amounts may include:

 Property taxes; 

 Water and sewer charges and other special assessments that are liens prior to the 

guaranteed loan; and 

 Property insurance. 

The lender may include an estimated amount of protective advances as part of the 

liquidation plan (see Paragraph 10.5). Once the plan is approved by the Agency, this amount 

must be included by the lender in the calculation for the report of final loss on Form RD 449-30,

unless a different amount is approved by the Agency. 

10.19 LIQUIDATION EXPENSES 

The calculation of the loss amount will include any amounts approved by the Agency for 

liquidation expenses. In general, liquidation expenses are defined as those expenses necessary to 

market and dispose of the property. Such amounts may include: 

 Loan guarantee fees paid after the borrower default;

 Reasonable third-party expenses to maintain and liquidate the property; and

 Independent appraiser’s fees, including the cost of the due diligence report.

10.20 LEGAL EXPENSES DURING BANKRUPTCY PROCEEDINGS

The lender is responsible for protecting the guaranteed loan and all collateral securing the 

loan in bankruptcy proceedings. The State Office will immediately notify the National Office of 

all bankruptcy and pending bankruptcy proceedings and shall submit status reports to the 

National Office on a monthly basis. 

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When a bankruptcy proceeding results in the liquidation of the borrower entity legal 

expenses will be handled as directed by the court. All reasonable and customary legal expenses 

to protect the collateral may be shared based on the guaranteed percentage, usually a 90/10 split 

between the Agency and the lender. Chapter 11 of the Bankruptcy Code pertains to a 

reorganization of a business, where legal protection is afforded to the business. Expenses 

incurred by the lender in a Chapter 11 reorganization can never be liquidation expenses unless 

the proceeding becomes a Chapter 11 liquidation. 

10.21 MAXIMUM GUARANTEE PAYMENT 

The maximum guarantee payment will not exceed the product of 90 percent, or such 

lesser guarantee percentage as set forth in the Loan Note Guarantee Agreement, times the 

allowable loss amount, as determined in Form RD 449-30. The maximum guarantee payment 

must be approved by the Agency in accordance with Section 6 of this chapter.

SECTION 6: PAYMENT OF THE FINAL CLAIM 

10.22 OVERVIEW 

Within 60 calendar days of liquidation of the property, the lender must submit a report of 

final loss to the Agency using Form RD 449-30. 

The lender must certify that all possibilities of collection have been exhausted as a 

condition for payment of the final claim. Upon payment, in whole or in part, the note or 

judgement evidencing the debt shall be assigned to the United States, and the lender shall have 

no further claim against the borrower or the United States. 

10.23 SUBMISSION OF A REPORT OF FINAL LOSS 

If the final loss is less than the estimated loss payment, the lender will reimburse the 

Agency for the overpayment, using Form RD 1980-43, “Lender’s Guaranteed Loan Payment to 

USDA”. 

In those instances where the lender has made authorized protective advances not included 

in the estimated loss payment, it may claim recovery for the guaranteed portion of approved 

amounts advanced, and interest resulting from such advances, not to exceed 90 calendar days 

from the Agency’s approval of the liquidation plan. Such payment will be made by the Agency 

when the final report of loss is approved. 

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10.24 THE APPROVED CLAIM AMOUNT 

If the State Office reviewing the lender’s claim is satisfied with the lender’s calculation 

of the final claim amount, then the State Office will forward the claim payment request to the 

USDA Finance Office for processing. The Finance Office will process the claim normally 

within 60 calendar days of receipt of the claim request from the State Office. 

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