HB-3-3560

CHAPTER 13: OTHER SPECIAL CASES 

[7 CFR 3560.458 THROUGH 3560.459]

13.1 INTRODUCTION 

There are a number of special circumstances that necessitate additional servicing 

procedures beyond those presented in previous chapters. Most of these cases involve 

characteristics unique to either a particular property or to a particular borrower. Property and 

borrower issues include a number of relatively uncommon, but nevertheless important, situations 

that Loan Servicers need to know how to address. Property issues include abandonment, 

valueless liens, and other security issues. Borrower issues include death, divorce, 

bankruptcy/insolvency, and membership liability agreements. 

This chapter presents the requirements for these other special servicing cases and Agency 

procedures for addressing them. 

SECTION 1: PROPERTY ISSUES 

13.2 OVERVIEW OF PROPERTY ISSUES 

The Agency’s servicing goal is to protect the physical and financial asset that each 

project represents, and ensure that each project is operated in a way that meets program

objectives. Sometimes, a property becomes troubled due to mismanagement, deferred 

maintenance, or market changes. As a result, the property may lose a significant share of its 

value. Whether a borrower chooses to abandon the property or to continue with its management, 

the Agency needs to address the situation created by the property’s problems with appropriate 

servicing measures that protect the interest of the tenants and the Government. This section 

describes those measures. 

In general, Loan Servicers should obtain the advice of the Office of General Counsel 

(OGC) as needed for handling the special circumstances addressed in this section. These 

circumstances include: 

• Abandonment; 

• Valueless liens; 

• Other security issues; and 

• Taking additional security to protect Agency interests. 

Prior to any decision involving real property under the above-listed special 

circumstances, Loan Servicers will complete an environmental review under The National 

Environmental Policy Act (NEPA), and a due diligence report. Refer to RD Instruction 1940-G 

and Chapter 3, Section 3 of HB-1-3560 for further information. 

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13.3 ABANDONMENT 

When the Agency believes that a borrower has abandoned a project, it will make an 

immediate check to determine if the borrower has moved and, if so, whether a forwarding 

address can be determined so that further servicing actions can be taken. The Agency will take 

the steps necessary to protect the Government’s security interest in the property. In general, the 

steps taken following abandonment are similar to those taken following foreclosure, once 

abandonment has been confirmed. 

A. Indicators of Abandonment 

The Agency considers a property to be abandoned when any or all of the following 

conditions exist: 

• The borrower cannot be located after the Loan Servicer has made diligent efforts to 

contact the borrower. This condition also applies to instances where the general 

partner(s) of a limited partnership cannot be located and the limited partners are 

unknown or cannot be located. 

• The project remains unoccupied for an extended period of time, and the borrower 

makes no effort to maintain the security property, secure eligible occupants, and/or 

comply with the objectives of the loan within a reasonable period of time as specified 

by the Loan Servicer in a certified letter sent to the borrower requesting compliance. 

B. Contacting Prior Lien Holders

If the property is not being maintained and the Loan Servicer determines that the 

borrower has abandoned the project, the Loan Servicer will attempt to contact any prior 

lien holders with a request that they take control of the property and make any emergency 

repairs necessary. 

If no prior lien holder is involved or the prior lien holder cannot immediately be 

contacted or refuses to make the emergency repairs, the Loan Servicer will immediately 

notify the State Director and request permission to: 

• Take possession of the property pending liquidation; 

• Make health and safety repairs to prevent further deterioration of the security; and 

• Enter into a management or caretaker’s agreement on behalf of the owner. 

C. Making Emergency Health and Safety Repairs 

When making necessary health and safety repairs where an emergency exists, Loan 

Servicers should recognize that the repairs need to be completed as quickly and 

effectively as possible. Accordingly, a commonsense approach that balances the health 

and safety of tenants with the price, speed, and quality of the repairs should be employed. 

Bids for specific services may be obtained from several local contractors only if the bid 

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process does not adversely affect the health and safety of the tenants. Loan Servicers 

must document the circumstances leading to the emergency situation, as well as the 

reasonable steps taken to address health and safety concerns in the case file, to later back 

up any costs incurred. 

All costs incurred at the project during the interim period between abandonment and 

eventual disposition by the Agency—including repair costs—are the responsibility of the 

borrower. The Agency treats the costs of managing abandoned property as a recoverable 

cost item. 

D. Appointing a Caretaker or Management Agent 

A caretaker or management agent will normally be appointed when the borrower has 

abandoned the security property or has failed to maintain its operation and the State 

Director determines, with the advice of OGC, that the Agency should take possession of 

the property to best protect the interest of the government. Selection of a caretaker or 

management agent is subject to the following requirements: 

• Qualifications. Persons or firms chosen as caretakers or management agents should 

have experience in operating and managing similar properties or have business 

experience that qualifies them to provide the needed services. They must be located 

near the property to provide day-to-day supervision, or be able to appoint a qualified 

local person to meet this requirement. Caretakers will normally be selected for 

unoccupied projects or those not suitable for occupancy. Management agents will 

only be selected for projects that are occupied or suitable for occupancy. The 

selection process—which must comply with all applicable Federal Acquisition 

Regulation (FAR) requirements—must be adequately documented by Loan Servicers 

in the case file. 

• Allowable fees. The amount of the management agent or caretaker fee must be set in 

accordance with Agency requirements for management fees. The requirements 

regarding management fees are established at 7 CFR 3560.102(i) and described in 

Chapter 3 of HB-2-3560. These fees will be paid as a project expense if project funds 

(e.g., reserve accounts) are available. If project funds are not available, fees will be 

paid with Government vouchers, considered a recoverable cost, and charged to the 

borrower’s account. The fees will be paid on a monthly basis.

• Rental rates. Rental rates at abandoned properties will normally remain the same for 

eligible occupants as when the project was under the control of the borrower, 

although revisions may be allowed under certain circumstances with the approval of 

the State Director. Such conditions include: 

◊ The lease agreement between the borrower and tenant permits changing the rates; 

◊ A change of rates is needed to provide income sufficient to pay operational and 

maintenance expenses, including the caretaker’s fee, and to repay the loan on 

schedule; or 

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◊ Any increase will not result in rental rates above the payment ability of eligible 

occupants, unless the State Director has given the authority to rent units to 

ineligible occupants. 

• OGC advice. The State Director should consult OGC for advice, including the 

possibility of having a receiver appointed, when the following conditions exist: 

◊ The project is occupied but rent is not paid or collected; 

◊ The eligibility of the occupants cannot be determined; and 

◊ The borrower has failed to comply with the objectives of the loan within a 

reasonable time frame as specified by the Loan Servicer in a certified letter to the 

borrower requesting compliance. 

E. Addressing the Agency’s Relationship with the Borrower 

To resolve the abandonment situation, the Agency must determine the cause of the 

abandonment. If a property is abandoned in accordance with Section 13.3 A of this 

chapter, Loan Servicers need to document that the Agency will proceed with one of three 

servicing options: foreclosure, acceptance of a deed in lieu of foreclosure, or debt 

settlement. The Agency normally will proceed with foreclosure unless one of the other 

two options is offered by the borrower. If the Agency determines after investigating the 

causes for the abandonment that the borrower entity is no longer viable, it will normally 

proceed to foreclosure or accept a deed in lieu of foreclosure, if debt settlement cannot be 

achieved. The Agency will consider negotiated debt settlement only in cases where a

default is evident and doing so is in the best interest of the Government. Properties in 

which debts are settled may be declared non-program properties. 

Upon foreclosure, the Agency has the authority to seize any project accounts on 

which the Agency has countersigned (e.g., reserve accounts). 

13.4 VALUELESS LIENS 

A valueless lien exists at a property where the recoverable value of the lien is less than 

the estimated cost of recovery. When the Agency determines that it has a valueless lien, it will 

prepare a written determination to that effect and release its lien. 

A. Declaring a Valueless Lien 

To declare a valueless lien, the Loan Servicer must provide the following submissions 

to the State Office: 

• Identification of property (legal description); 

• Description of the Agency’s lien position;

• Documentation of reasons that lien is determined to be without value; and 

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• Explanation of the reasons for releasing the lien and a description of the type of 

release sought (i.e., partial or full). 

B. Documenting Valueless Liens 

To document the reasons the lien on a project is determined to be valueless and to 

devise a strategy for releasing the lien, Loan Servicers should take the following steps: 

• Within the context of a problem case report, write up an assessment of the value of 

the project and forward it to the State Director for review and guidance on how to 

release the lien; and 

• Follow State Office instructions, as applicable. 

13.5 OTHER SECURITY 

The Agency also services other security instruments, such as collateral assignments, 

assignments of rents, Housing Assistance Payments (HAP) contracts, and notices of lien holder 

interest in a manner indicated by the agreements and according to acceptable practices in the 

respective states. When other security is taken, the Approval Official should develop a plan for 

servicing it at the outset.

• The State Director should develop any special servicing actions with the advice of 

OGC to protect the Agency’s interest.

• Loan Servicers should file evidence of the other security in the loan docket in the 

Field Office. 

• The Loan Servicer should make a notation on the management system card showing 

that the security has been retained. 

13.6 OBTAINING ADDITIONAL SECURITY TO PROTECT AGENCY INTERESTS 

The Agency generally does not need additional security to protect its interest. However, 

the Agency may negotiate with the borrower to obtain additional security in the form of real 

estate or other security when a decline in the value of the original security or other changes 

adversely affect the security available to the Agency in the event of a default. Examples of cases 

where the Agency may seek additional security include when the account is delinquent, the 

property has not been properly managed or maintained, or there is serious doubt that the 

borrower can carry out loan objectives. 

While the Agency has the authority to seek additional security in the circumstances listed 

above, it is generally a negotiated, nonforcible action. However, there may be instances where 

the Agency can use its leverage to obtain additional security (e.g., a case where loan funds are 

used to purchase land on which the borrower plans to build a parking lot). In such cases, the 

Agency might demand an interest in the parking lot as additional security for the entire project. 

Additional security is taken by executing a deed of trust with the borrower. 

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A. State Director Authorization 

In cases where taking additional security is warranted, the Loan Servicer must 

forward the borrower’s case file to the State Director for authorization, along with a 

memorandum providing the following information: 

• The facts that justify the taking of additional security; 

• A conservative estimate of the market value of any real estate to be mortgaged (Note: 

It is not necessary to obtain an appraisal of the property to be mortgaged unless 

required by the State Director.); 

• A brief description of any existing liens on the additional security, including the 

repayment terms and the unpaid balance; 

• The name of the title holder and how the title to the property is held (Note: Title 

evidence is not required.); 

• A plan for servicing the additional security to be taken; and 

• A description of other servicing alternatives available to ensure that the objectives of 

the loan will be met and to protect the Government from loss. 

The highest quality security available should be taken whenever additional security is 

considered. This means that if several security options are available, the option that has 

the least amount of risk associated with it (and would thus be easiest to liquidate if 

necessary) should be chosen. Security property with known environmental hazards or 

other risks generally should not be taken as additional security. Such risks will generally 

be identified when the Loan Servicer conducts due diligence, including an environmental 

review. When the Agency chooses not to acquire additional security property, whether in 

whole or in part due to the presence of or potential for release of hazardous substances or 

petroleum products, the Loan Servicer will notify the appropriate regulatory authority of 

the Agency’s findings and actions. 

B. OGC Advice 

Loan Servicers should obtain OGC advice and assistance whenever additional 

security is taken. Specifically, OGC can provide a title opinion, which will advise Loan 

Servicers as to what lien position is available to the Agency. 

13.7 SECURITY ISSUES INVOLVING PROJECTS WITH PARTICIPATION LOANS 

The Agency’s rule states that when other participation is involved, the Agency will 

service the account in accordance with appropriate Agency servicing regulations and the 

agreements made with the other participants at the time of loan origination. 

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SECTION 2: BORROWER ISSUES 

13.8 OVERVIEW OF BORROWER ISSUES 

Borrowers may occasionally experience special circumstances that affect their ability to 

operate the property and, thus, the Agency’s approach to servicing their accounts. Bankruptcy, 

death, and divorce are events that require special attention to ensure that the interests of the 

tenants and the Government are protected. Similarly, special agreements that borrowers may 

have with members of the organization may affect the Agency’s servicing approaches and 

decisions. This section addresses such special cases. 

13.9 REQUIREMENTS FOR ADDRESSING BORROWER ISSUES 

The Agency will address borrower accounts affected by special circumstances, such as 

death, bankruptcy, insolvency, and divorce, on a case-specific basis. The Agency will make 

servicing decisions in such cases that are in the best interest of the tenants and the Government. 

The Agency will bring legal action questioning the legal capacity of the borrower to administer 

the project if found necessary to protect the Government’s interest. The borrower or the 

borrower’s representative will provide to the Agency information concerning the:

• Evidence of legal action, due to a will or court actions that establish who is to become

the owner, on the part of the heirs or trustee following the borrower’s death; 

• Financial status of the borrower; 

• Status of the security property; and 

• Impact of the identified actions on the project’s operation. 

In general, Loan Servicers should obtain the advice of OGC as necessary to handle 

circumstances involving death, bankruptcy, insolvency, and divorce. 

A. Bankruptcy 

The handling of bankruptcy cases varies from state to state. Therefore, the State 

Director may issue State Supplements providing more specific guidance to expedite the 

handling of those cases. In general, however, Loan Servicers should obtain and follow 

the advice of OGC as necessary whenever general partners file for bankruptcy. 

B. Divorce 

When individual borrowers with loans are involved in a divorce action, the Loan 

Servicer will review the case after the final divorce decree has been granted to determine 

if any action is needed for the future servicing of the account. The Loan Servicer will 

submit the case file to the State Director for advice if the Loan Servicer is uncertain of 

the servicing actions needed to protect the Agency’s interest, or if continuation of the

loan with the remaining borrower is not authorized. The Agency will not make 

subsequent loans to pay equity as a result of a divorce action. 

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C. Membership Liability Agreements 

As a loan approval requirement, some borrowers may have special agreements with 

members of the organization for the purchase of shares of stock or for the payment of a 

pro rata share of the loan in the event of a default. Alternatively, they may have 

instruments commonly referred to as individual liability agreements, which are usually 

assigned to and held by the Agency as additional security for the loan. In other cases, the 

borrower’s note may be endorsed by individuals. The Agency will service these security 

and liability instruments in a manner indicated by the agreements to adequately protect 

the Agency’s interest. The State Director will develop servicing actions with the advice 

of OGC. 

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