(03-09-16) SPECIAL PN

Renumbered (04-30-20) PN 536

APPENDIX 8

PENALTIES
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(03-09-16) SPECIAL PN

Renumbered (04-30-20) PN 536

APPENDIX 8

PENALTIES

1. Claim for Unallowable Expenses

The servicer’s loss claim request should reflect only allowable expenses. If the 

Agency’s review of the servicer’s claim shows that unallowable expenses have 

been claimed, the loss claim amount will be reduced by the amount of unallowable 

expenses to reflect only allowable costs. The Agency will document any costs it 

disallows and the reasons for its determination. The following are some of the 

costs the Agency will disallow:

• Additional interest accrued beyond 60 days of acquisition;

• Interest accrued after allowable foreclosure time frame;

• Late fees;

• In-house servicer expenses such as employee salaries, in-house legal fees, 

travel, or REO management fees; and

• Liquidation or disposition costs that is not reasonable and customary for the 

area or fees that exceed fees as noted in Attachment 18-C of Chapter 18.

2. Failure to Adhere to Required Collection Procedures

The servicer is responsible for ensuring that all required collection actions are 

taken within the prescribed time frames and carefully documented. The Agency 

will reduce or deny a servicer’s claim if the servicer fails to document that all 

required collection actions were taken at the appropriate times as noted in Chapter 

18. The following are the penalties for failure to fulfill required collection 

obligations. Penalties take into consideration grace periods offered by the Agency 

outlined Chapter 18 of this Handbook.

• If the servicer fails to attempt to make any contact with the borrower within 

65 days past due, the claim may be denied.

• If the servicer fails to provide timely and accurate Electronic Status 

Reporting (ESR) including when the account is in default, the claim may be 

reduced or denied.
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• If the servicer does not initiate contact with the borrower within 25 days 

past due but makes contact within 65 days past due, accrued interest may be 

reduced by 50 percent.

• If the servicer fails to inspect the property within 65 days past due, but no 

loss results, the accrued interest may be reduced by 10 percent.

• If the servicer fails to inspect and secure an abandoned property, the loss 

claim will be reduced by 10 percent and the dollar value of the loss 

attributable to the servicer’s failure to secure property, as documented in an 

appraisal. If a loss has not been documented by an appraisal, the claim may

be denied.

3. Failure to Adhere to Required Foreclosure Time Frames

The servicer is responsible for foreclosing on the property within the time 

frames detailed in Attachment 18-B of Chapter 18. If the servicer fails to do so, the 

Agency may reduce the claim by the amount of any interest accrued beyond the 

allowable foreclosure time line. 

4. Failure to Adhere to Servicing Guidelines

Although the Agency does not service loans, there are servicing requirements 

that lenders must follow. If the Agency determines that the loan was not serviced

in accordance with Agency requirements, the Agency may take any action up to

and including reduction or denial of claim, terminating the loan note guarantee, or 

the requiring the servicing lender to indemnify the Agency if a loss claim is paid.

5. Failure to File a Loss Claim Accurately and Within Required Timelines 

The servicer is responsible for filing a timely and accurate loss claim. If the 

servicer fails to meet agency required timelines when filing claims, the Agency 

may reduce any additional interest paid from the allowable days to zero. 

6. Failure to Ensure That All Applicable Property Standards Were Met

If a loss claim is filed that indicates that some or all of the loss may be 

attributable to problems with the property itself, the Agency will investigate the 

cause of the problem and determine if the originating lender is subject to 

indemnification in accordance with 7 CFR §3555.108(d). 
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7. Failure to Maintain the Property

Servicers are responsible for ensuring that properties securing guaranteed loans 

are adequately maintained throughout the life of the loan. Servicers are responsible 

for making protective advances to protect the security property at any point 

necessary during the life of the loan determining occupancy status, and securing the 

property. If the Agency determines that failure to maintain the property has 

resulted in a loss, the Agency will determine the dollar value of the loss attributable 

to the servicer’s failure to act and may deduct that amount from the loss claim.

8. Failure to Dispose of the Property for an Appropriate Amount

The servicer is responsible for ensuring that when property is liquidated, either 

voluntarily or through foreclosure, it is sold for an amount supported by an 

appraisal and is acceptable to the Agency. Chapter 18 outlines the minimum 

requirements for meeting the Agency’s price expectations in various disposition 

scenarios. If the servicer fails to dispose of a property at an appropriate price, the 

Agency may reduce the loss claim by the difference between the sale price and the 

price that should have been obtained.

9. Failure to Obtain Required Security

The servicer is responsible for obtaining the needed security for the loan. If the 

borrower becomes delinquent on the loan and it is shown that the servicer failed to 

obtain all required security, the loss claim will be denied in accordance with 7 CFR

§3555.108(c).

10. Failure to Maintain the Required Security

If the servicer fails to make a needed protective advance in accordance with 7 

CFR §3555.302(b), the claim will be reduced by the cost of repairing damage 

caused by failure to act.

If the servicer fails to contact the borrower within 65 days past due to determine 

whether the property has been abandoned and/or fails to secure an abandoned 

property by 95 days past due and no damage attributable to the servicer’s failure 

can be documented, the claim must be reduced by 10 percent. 

If damage attributable to the servicer’s failure can be documented, the claim 

must be reduced by 10 percent plus the cost of repairing damage caused by the 

failure to act.
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11. Provision of Unauthorized Assistance

The Agency cannot make a loss claim payment in the case of unauthorized 

assistance. If, at the time the loan note guarantee was approved, a borrower did 

not qualify for the SFHGLP or evidence is present that the property did not meet 

all property requirements, the Agency must deny the loss claim.

In very unusual circumstances, it is possible that a borrower might use some 

portion of the loan funds for an unauthorized purpose without the servicer’s 

knowledge (i.e. – cash returned at closing that did not represent cash from 

personal funds contributed by or on behalf (gift funds) of the borrower) or 

purchase of furniture. In such a case, the Agency would honor the loss claim, but 

reduce the loss claim payment by the amount of the funds that were used for the 

unauthorized purpose. 

12. Commission of, or Failure to, Report Knowledge of Fraud

If a lender or servicer commits fraud or fails to report fraud about which the

lender or servicer knew, or should have known, the Agency will deny the loss 

claim.

13. Failure to Carry Out Established Monitoring Guidelines for Real Estate tax 

and Hazard Insurance Premium

If the servicer fails to carry out established monitoring guidelines for real 

estate tax and hazard insurance premium, the Agency may revoke servicer

approval.

14. Sale of Loan to Non-Approved Servicer or Other Party

If the loan is sold to a party not approved to participate in the SFHGLP, the 

loan note guarantee will be considered invalid for the non-approved lender.

15. Failure to Adhere to Underwriting Guidelines

Although the Agency does not underwrite loans, there are underwriting

requirements that lenders must follow. If the Agency determines that the loan 

was not underwritten in accordance with Agency requirements, the Agency may 

terminate the loan note guarantee, or the originating lender may be required to 

indemnify the Agency if a loss claim is paid.
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Renumbered (04-30-20) PN 536

16. Incomplete Closing Documentation

If the Agency determines that closing documentation is incomplete, or that 

there were minor, correctable errors in the documents, the lender may be granted 

up to 30 days to correct the situation. If the complete package is not resubmitted 

within 30 days, and the account is in default, the Conditional Commitment will 

not be honored.

17. Unauthorized Sale or Transfer

The Agency will withdraw the guarantee if the security property is transferred 

without an assumption of the debt, unless transferred under the Garn-St. 

Germaine rule. 

18. Failure to Adhere to Agency Standards for Handling Bankruptcy

The Agency may reduce or deny any loss claim by 10 percent resulting from 

an account in bankruptcy that is subsequently foreclosed when accurate and 

timely actions were not initiated. 

19. Property with Environmental Issues at Time of Liquidation

If the property’s value at the time of liquidation is affected by environmental 

issues, the servicer must document how the hazard developed and became known. 

If the servicer failed to conduct appropriate due diligence at loan origination, the 

loss claim will be denied or reduced by the decrease in market value attributable 

to the environmental hazard.