60124 Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Parts 203 and 206

[Docket No. FR–4032–F–04]

RIN 2502–AG72

Single Family Mortgage Insurance—

Loss Mitigation Procedures

AGENCY: Office of the Assistant

Secretary for Housing—Federal Housing

Commissioner, HUD.

ACTION: Final rule.

SUMMARY: This rule implements as final

an interim rule that amends 24 CFR part

203 to eliminate the Mortgage

Assignment Program and to provide that

HUD may: Recompense mortgagees for

using mortgage foreclosure alternatives,

such as special forbearance, loan

modifications, and deeds in lieu of

foreclosure; pay the mortgagee a partial

claim which would be applied to the

arrearage of a defaulted mortgage; and

accept assignment of a mortgage which

the mortgagee has modified to cure the

default.

EFFECTIVE DATE: February 1, 1998.

FOR FURTHER INFORMATION CONTACT:

Joseph McCloskey, Director, Single

Family Servicing Division, Room 9178,

Department of Housing and Urban

Development, 451 7th Street, SW.,

Washington, DC 20410, (202) 708–1672,

or, TTY for hearing and speech

impaired, (202) 708–4594. (These are

not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

This rule’s information collection

requirements have been submitted for

approval to the Office of Management

and Budget under the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501–

3520). An OMB control number, when

assigned, will be published in the

Federal Register. An agency may not

conduct or sponsor, and a person is not

required to respond to, a collection of

information unless the collection

displays a valid control number.

II. Background

On July 3, 1996 (61 FR 35014) the

Department published an interim rule to

implement loss mitigation procedures

under section 407 of The Balanced

Budget Downpayment Act, I (Pub. L.

104–99, approved January 26, 1996)

(Downpayment Act). Public comments

on the interim rule were invited for a

period of 60 days, until September 3,

1996. Delayed implementation dates of

March 1, 1997, were included for

provisions in two sections of the interim

rule (24 CFR 203.355(a) and 203.402(f))

so that the Department would be able to

consider any public comments on these

provisions before making them effective

in a final rule. The March 1, 1997

implementation date for these sections

was suspended until the issuance of a

final rule by an amendment published

on March 5, 1997 (62 FR 9930). On

November 12, 1996, HUD issued

Mortgagee Letter 96–61. This letter

provides information regarding changes

to special forbearance, mortgage

modification, pre-foreclosure sales

procedures and deeds-in-lieu of

foreclosure, and introduces the use of

partial claims, measurement of lender

performance and provisions for

incentive payments and

reimbursements. Included as

attachments to the mortgagee letter are

a checklist of eligibility criteria for each

of the loss mitigation procedures and

instructions required to file a claim.

HUD also issued Mortgagee Letter 97–

17, May 1, 1997, regarding loss

mitigation clarification of procedures,

and Mortgagee Letter 97–21, May 16,

1997, regarding Performance Scores.

III. Changes in the Final Rule

A number of changes from the interim

rule are made in this final rule. They are

described briefly below in this section,

and more fully in section IV. of this

preamble, in the discussion of the

public comments received on the

interim rule.

—The final rule has added a new

§ 203.341 to explicitly state that

mortgage insurance remains in force

after payment of a partial claim.

—The titles of §§ 203.342 and 203.616

are changed from ‘‘Recasting of

mortgage’’ to ‘‘Mortgage

modifications.’’

—HUD has amended the final rule at

§ 203.355(a) to clarify that the loss

mitigation provisions may be used in

combination.

—HUD has rewritten § 203.355(g), (h)

and (i) to provide 90 days for the

lender to try another loss mitigation

tool or to proceed to foreclosure after

the failure of any loss mitigation tool.

—The effective dates of the foreclosure

timing and cost reimbursement

provisions in §§ 203.355 and 203.402,

respectively, are changed to February

1, 1998.

—To be consistent with the other

paragraphs under § 203.371(b), the

reference to ‘‘The mortgage’’ in

paragraph (b)(1) is changed to read

‘‘the mortgagor’’. The reference in

paragraph (b)(5) to ‘‘financially able’’

is clarified to ‘‘financially qualified’’

to reflect more accurately instances in

which a mortgagor may have the

funds but not the equity to support a

modification.

—The words ‘‘accumulated during the

forbearance period’’ are deleted from

§ 203.414(a) to more accurately reflect

the authorizing statute and avoid a

potential technical limit on the

amount recoverable under a partial

claim.

—Section 203.552 is also clarified to

provide that mortgagees may collect

fees from mortgagors to the extent not

reimbursed by HUD.

IV. Response to Public Comments

Thirteen comments were received in

response to the July 3, 1996 interim

rule. Four of the comments were from

mortgagees; four were from public

interest groups; two were from State

housing finance agencies; two were

from individuals; and one was from an

industry association. HUD has reviewed

the comments received in response to

the interim rule and decided that some

changes should be made in the final

rule. The following discussion

addresses the changes or additions to

the rule and the administrative

issuances, in response to the public

comments received on the Loss

Mitigation (‘‘LM’’) interim rule. The

discussion is organized by the section of

the interim rule that is being

commented on, with specific subject

headings under each rule section, as

warranted.

Section 203.342 Recasting of Mortgage

One comment observed the rule does

not define, here and in § 203.471,

‘‘circumstances beyond the control.’’

Response: Please note the response to

this comment in the discussion under

§ 203.471, below.

Section 203.350 Assignment of

Mortgage

Assignment Program Grace Period.

Two comments stated a grace period

needs to be implemented between the

termination of the Assignment Program

on April 26, 1996, and the

implementation of alternative

procedures.

Response: The statute established

April 26, 1996 as the ending date for the

Assignment Program and provided for

processing of applications submitted

before that date. HUD continues to

process all assignment applications

received prior to April 26, 1996.

Assignment of modified mortgage.

One comment stated HUD should

positively commit to accepting

assignment of a mortgage upon

fulfillment of the requirements of

§ 203.350.
Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations 60125

Response: The statement that HUD

‘‘may’’ accept an assignment in

paragraph (a) of this section repeats the

statutory language, which establishes

the circumstances under which HUD is

permitted to accept the assignment of a

mortgage. Since HUD has worked with

GNMA to change the repooling

requirements (see Mortgagee Letter 96–

32, June 28, 1996) HUD foresees no

occasion when a mortgage will not be

able to be repooled or when assignment

to HUD will be necessary. Nevertheless,

the authority to accept assignments in

rare and unforeseen circumstances

remains available.

Section 203.355 Acquisition of Property

Lender’s Final Determination and

Needs of Mortgagors. One comment

stated that the over-arching flaw of these

alternatives is that their use is left

entirely to the discretion of lenders.

Another comment argued that lenders

who hold HUD-insured mortgages have

no significant incentives to work with

homeowners to avoid foreclosure, and

they do not do so. This comment went

on to say the regulations fall short in

designing a reasonable response to the

needs of low-income homeowners for

foreclosure prevention and relief.

Response: Under the Loss Mitigation

program the lender will have the final

determination on the use of LM

measures and will have incentives to try

to use them where appropriate. Unlike

the Assignment Program, none of these

LM measures is an entitlement, and thus

the lender has more discretion with

regard to administering these measures.

Lenders must use their judgement in

deciding which LM measure is

appropriate for a particular mortgagor.

The language that the interim rule adds

to § 203.501 and Mortgagee Letter 96–61

provides a process through which a

borrower’s eligibility for loss mitigation

is determined. The statute provides that

the lender will be given the discretion

to decide which LM measures will be

used in a particular case.

FHA programs are meant to be selfsustaining, and an essential element of

these loss mitigation measures is that

they must decrease the insurance funds’

prospective losses (or at least not

increase the funds’ prospective losses).

Thus, HUD must balance the needs of

mortgagors with the need to mitigate

losses to the mortgage insurance funds.

These measures are designed for

mortgagors who prospectively can

recover from their financial difficulties.

If the mortgagor has not recovered

financially within 18 months, HUD

analysis and experience indicate that

the prospects for recovery are poor. Two

reasons for a cap on the term of

forbearance are to limit the level of

losses to the insurance fund and to

prevent borrowers from getting too

deeply into arrears.

Training Lenders and Housing

Counseling Agencies in LM Program.

One comment noted that without better

training programs, manuals, and

instructions, coupled with meaningful

FHA oversight, the benefits of these

alternatives will not be realized by

either HUD or homeowners. Another

comment strongly recommended that,

with HUD implementing these changes,

more training be provided to Housing

Counselors across the country.

Response: HUD will promote

mortgagee participation in LM, and

provide training to lenders and monitor

their performance. HUD has already

provided Loss Mitigation training to

some lenders and housing counseling

agencies and will provide additional

training in the near future.

Shorter Foreclosure Initiation Period.

Three comments supported the

reduction of the foreclosure initiation

period from nine to six months as

realistic and consistent with

conventional loan servicing procedures.

One of these comments was pleased that

the implementation of the reduced

period was delayed in the interim rule.

Three other comments opposed

reducing the time frame of foreclosure

to six months as too short to allow

mortgagors to work out plans with

mortgagees and resolve circumstances.

One comment argued the requirement

in § 203.355(h) to initiate foreclosure

within 90 days of a borrower’s failure to

meet the terms of a special forbearance

agreement is not a sufficient time

period, given that mortgagees may not

proceed with foreclosure until a

borrower’s failure has continued for 60

days. Sixty days from the 60-day failure,

a total of 120 days, would be more

workable. Another comment on this

section recommended § 203.355(h)

should clarify that foreclosure must be

initiated within the time period of

paragraph (a)—nine or six months from

the date of default—or within 90 (or

120) after the borrower’s failure to meet

the special forbearance requirements,

whichever is later.

Response: HUD considers the sixmonth period for initiating foreclosure

to be adequate. The industry standard is

four months. If HUD continues to use a

nine-month period, the Department will

incur additional expense. Also, the

longer foreclosure is delayed, the less

likely it is that a mortgage will be cured.

The final rule is being amended by

adding a new paragraph (i) at § 203.355

to clarify that if a lender enters into a

loss mitigation relief measure and it

fails, the six-month requirement is

extended by an additional ninety days

to allow the lender to try another loss

mitigation tool or go to foreclosure. It is

also to be expected that if after six

months no loss mitigation measure is

workable, then foreclosure is inevitable.

HUD believes that the ‘‘window’’ for

initiating foreclosure provides the

lender with adequate time in special

forbearance cases. The lender

determines when LM fails or no other

LM tool is applicable. In each instance,

the lender must initiate foreclosure

within 90 days. There is no need to

expand this 90-day deadline in the rule,

since the lender is able, in any case

where additional time would facilitate

mitigating loss, to request an extension

from HUD.

Simultaneously Considering LM and

Pursuing Foreclosure. The preamble to

the interim rule states that HUD will

‘‘generally’’ permit mortgagees

simultaneously to consider loss

mitigation actions and to proceed with

foreclosure to meet the new six-month

time period. One comment requested

HUD to clarify its use of the term

‘‘generally,’’ because mortgagees need to

understand the specific circumstances

under which HUD would find it

appropriate and acceptable to stop or

delay foreclosure for mortgagors who

are actively negotiating or paying under

a loss mitigation plan.

Response: The final rule at § 203.355

has clarified that lenders may use loss

mitigation tools and take foreclosure

action in combination. The prospect of

foreclosure is an effective incentive to

borrowers in negotiating workouts and

the rule is intended to allow flexibility

in this interrelationship. As stated in the

preamble to the interim rule (at 61 FR

35015, column 2 and 3), HUD believes

that early intervention—before six

months of delinquent payments—is

necessary for effective LM, and the

lender may make timely preparations

for initiation of foreclosure while

pursuing LM actions. In addition, on a

case-by-case basis, the lender may

request an extension to the 6-month

deadline from the field office.

HUD has rewritten § 203.355(g) and

(h) to provide 90 days to try another loss

mitigation tool or to proceed to

foreclosure after the failure of any loss

mitigation tool.

Using LM tools in combination. One

comment requested that the regulation

be explicit in informing lenders and

homeowners that the loss mitigation

tools may be used singly or in

combination. Although the preamble

explains that the servicing actions or

strategies may be used in combination,

§ 203.355(a) implies just the opposite by
60126 Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations

saying that ‘‘the mortgagee shall take

one of the following actions within

[nine or] six months of the date of

default . . .’’

Response: The LM provisions may be

used in combination and HUD has

amended the final rule at § 203.355(a)

accordingly. This is discussed on page

2 of Mortgagee Letter 96–61, where HUD

says that the LM strategies ‘‘may be used

singly or in combination, as required on

a case-by-case basis.’’ In accordance

with the explicit legislative intent, HUD

will defer to the discretion of the lender

in applying loss mitigation measures.

Section 203.371 Partial claim

Partial Claim and Special

Forbearance. One comment asked if the

forbearance agreement at § 203.371(a)

must meet the requirements of a

‘‘special’’ forbearance agreement.

Response: The forbearance discussed

in § 203.371(a) need not be ‘‘special

forbearance’’ under § 203.471 to qualify

for a partial claim.

Special Forbearance Period of 18

Months. One comment argued the

planned 18 month limit on special

forbearance is an arbitrary period of

time and is too short. HUD has put all

authority to provide assistance in the

hands of the mortgagee. Only if the

mortgagee decides to provide special

forbearance (which HUD intends to

limit to 18 months), and the homeowner

is then able to make full mortgage

payments, will HUD provide a partial

claim to the mortgagee at the end of the

special forbearance period.

Response: HUD has determined that

an 18-month period for special

forbearance is sufficient to allow the

mortgagor to recover financially. In

addition, this limit is reasonable in view

of the statutory limit (amended § 230(a)

of the National Housing Act, 12 U.S.C.

1715u(a)) that partial claims may not

exceed 12 monthly mortgage payments

(PITI) and any costs related to default

that are approved by HUD.

Partial Claim Filing. A comment

asked if the mortgagee may choose

when to file a partial claim under

§ 203.371(b)(1) after the mandated

default period has passed.

Response: Mortgagee Letter 96–61, in

the claims instructions for partial

claims, specifies the window of time for

filing the claim, namely, between the

time the subordinate lien to HUD has

been executed and 60 days after it has

been recorded.

Repooling Modified Loans. One

comment stated the rule does not

indicate whether GNMA or non-GNMA

investors have approved or considered

the requirement that to file a partial

claim, the mortgagor must not be able to

support monthly mortgage payments for

a modified loan in which the total

arrearage is included. If investors

prohibit loan modification under

circumstances in which the rule

requires such activity, servicers could

be caught in the middle. HUD should

establish underwriting criteria for

eligibility of mortgagors for the

proposed loan modification program.

Another comment asked if HUD will

provide definitive guidelines for making

determinations of a borrower’s financial

capacity under § 203.371(b) (4) and (5)

to refinance or support a modified

mortgage.

Response: HUD has worked out an

understanding with GNMA for revised

pooling requirements to assure

repooling and minimize this problem.

HUD expects that in almost all cases,

mortgage modifications can be effected

in such a way as to be repoolable, that

is, at an interest rate and with a new

term (e.g., 360 months) that will meet

GNMA pooling requirements.

Nevertheless, in the limited

circumstances where a modified

mortgage cannot be repooled, HUD will

establish criteria for accepting a

modified mortgage for assignment, and

provide guidance in a future Mortgagee

Letter.

Servicing the HUD-held Second

Mortgage. Three comments

recommended the rule should state that

a mortgagee is entitled to a fee for

servicing when HUD accepts assignment

and requires a mortgagee to continue

servicing the loan under § 203.371(d).

One of these comments argued that

given the low balances, a percentage

based servicing fee would not be

sufficient. Another comment stated the

vast majority of mortgagees are not

experienced in servicing ‘‘soft seconds,’’

the subordinate lien arising from

payment of a partial claim, and most

computer systems are not programmed

to handle such unique debt instruments.

This comment recommended that HUD

solicit a limited number of servicers to

service the subordinate liens on behalf

of HUD. On a related issue, one

comment recommended that the

guidelines should make clear that the

subordinate mortgage may call for

repayment of the partial claim amount

at a future date or at the time of transfer

of property or payoff of the insured

mortgage. HUD should also specify that

subordinate mortgages will be at zero

percent interest.

Response: HUD intends to continue to

reserve the right to require lenders to

service second mortgages executed in

connection with partial claims.

However, as noted in Mortgagee Letter

96–61, since the subordinate mortgage

carries no interest or monthly payments

and is due only when the first mortgage

is paid in full, foreclosed, or when the

borrower no longer occupies the

property, HUD has decided to hold and

service these mortgages at this time.

Mortgagee Advances—

Reimbursement in the settlement of the

Partial Claim. One comment asked if a

partial claim payment will include

mortgagee advances on behalf of the

borrower.

Response: Mortgagees will be

reimbursed, in accordance with

Mortgagee Letter 96–61 instructions for

Item 107 in the claims instructions for

a Partial Claim. Item 107 provides for

reimbursement of the total arrearage that

accumulated during the forbearance

period, including PITI and necessary

advances for assessments, but excluding

late fees and foreclosure costs.

Loan Insurance After a Partial Claim.

One comment stated the rule should

clarify that if a default occurs after

payment of a partial claim, the full

amount of remaining principal,

advances and accrued debenture

interest with applicable costs is payable

in a subsequent foreclosure and

conveyance claim.

Response: After a partial claim, the

remaining loan remains insured. The

final rule has added a new § 203.341 to

explicitly state that mortgage insurance

remains in force after payment of a

partial claim, as is already done in

existing LM actions such as special

forbearance and loan modification.

Using the Partial Claim Procedure to

Erase Excess of Debt Over Current

Market Value. One comment suggested

HUD might consider using the partial

claim process to pay out insurance

coverage on any gap between the loan

balance and the market value. This

would pay down the debt to a market

value, make the lender whole, and allow

the mortgage payments to be reduced to

a lower amount on the net balance of

the remaining rate and term.

Response: FHA mortgages, even when

LM is to be considered, are not meant

to be ‘‘shared-depreciation mortgages.’’

While the Pre-Foreclosure Sale

procedure accomplishes something

similar to this (although the mortgagor

necessarily loses the property), the

negative equity position is not an

appropriate reason for using the Partial

Claims procedure. The mortgagor

remains liable for the full amount of the

debt even if there is negative equity, just

as the mortgagor would benefit if the

property were to appreciate in value.
Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations 60127

Section 203.402 Items Included in

Payment

Tying Reimbursement to LM Success

Rates. A number of comments stated

they were opposed to the change that

would permit HUD to vary the

percentage of foreclosure and

acquisition expenses through an

administrative issuance rather than

through the rulemaking process. Setting

the reimbursement levels for these costs

is important enough to be addressed

through a notice and comment

rulemaking process rather than

administrative issuance. One comment

suggested that the rule should specify a

level of reimbursement (e.g., up to 100

percent and not less than 50 percent) for

foreclosure costs or costs of acquiring

the property, rather than state that the

percentage reimbursed will be

determined by HUD. Another comment

argued HUD should not tie the

reimbursement of foreclosure fees and

costs to loss mitigation performance,

because loss mitigation success is

influenced by a number of factors, such

as the age of the portfolio, geography,

and whether the loan was acquired, that

are independent of mortgagee efforts.

The level of reimbursement should take

into consideration the percentage of loss

mitigation cures versus the percentage

of foreclosures, reinstatements,

servicing acquisitions and peer

performance. HUD should work with

the mortgage industry to develop a fair

and equitable performance model.

Another comment also questioned the

ability to develop a fair and equitable

calculation methodology that would

accurately measure mortgagee

performance without incorporating

factors over which mortgagees have

little or no control. The comment

concluded that even the best of loss

mitigators cannot overcome origination

and underwriting deficiencies.

Response: In the interim rule, HUD

specifically requested public comment

and provided for a delayed

implementation date to allow for

consideration of comments received for

both the foreclosure timing and cost

reimbursement provisions in §§ 203.355

and 203.402, respectively. With the

March 5, 1997 publication of the

suspension of these provisions, they

will not take effect until a minimum of

sixty days after publication of this final

rule in the Federal Register. The rule

satisfies the concerns expressed in

relation to reimbursement reductions,

since the lowered rate of reimbursement

for foreclosure costs at § 203.402(f), will

apply only to mortgages endorsed on or

after February 1, 1998. Lenders have

had an opportunity to comment on this

point, and these provisions are not

going into effect without the

opportunity for prior notice and

comment. The other changes to

§ 203.402 do not constitute reductions.

HUD has undertaken an effort to

streamline its rules, and that policy is

being followed in this rule. Minimizing

the detail put into the rule will give

HUD the flexibility to make appropriate

amendments in a timely manner in

response to the experience of lenders

and HUD with LM procedures, and to

vary the reimbursement for LM

measures according to lender

performance. HUD will address the

reimbursement of foreclosure costs in

future mortgagee letters.

HUD’s ranking model was announced

in Mortgagee Letter 97–21, May 16,

1997. In developing this model, HUD

considered these comments, met with

industry representatives, and adopted

some of the comments. As a result, HUD

believes the model provides a fair basis

for ranking lenders.

HUD contends that LM has a

significant impact upon losses to FHA

insurance funds based on foreclosure

avoidance. HUD has and will continue

to work with industry to provide

equitable performance measurements.

HUD is creating an incentive for lenders

to intervene early in the default cycle to

address delinquencies.

Tying the foreclosure cost

reimbursement to lender performance is

part of the LM incentive structure. Not

only do lenders receive cash incentives

for performing LM, but lenders must

accept some risk, in the form of

absorbing foreclosure costs, for their LM

decisions or failure to use LM tools.

Mortgagee Letter 97–21, on page 2,

provides that lenders in the top 25% of

each of the performance groups (high,

medium and low volume) will receive

75% reimbursement of foreclosure

costs.

HUD believes that LM is a win-winwin proposition for borrowers, lenders

and HUD. Borrowers get an opportunity

to retain home ownership; lenders can

better manage their inventory losses

through early default intervention; and

HUD can better protect the insurance

funds to continue providing affordable

housing opportunities.

How Reimbursement for LM Will be

Made. One comment stated the rule

needs to clarify if HUD will reimburse

for loss mitigation efforts in the event a

mortgage insurance claim is filed or

whether a separate transaction driven

claim process is envisioned.

Response: Mortgagee Letter 96–61 and

the claims instructions attachments

explain how the reimbursement is

accomplished. Generally, lenders may

submit a claim for each LM tool when

it is put in place. Should the loan go to

foreclosure despite the lender’s LM

efforts, the lender may file a claim for

the insurance benefits.

Mortgagee Monitoring by HUD. One

comment recommended that in

reimbursing mortgagees for foreclosure

and acquisition costs, and in the

payment of partial claims, HUD should

closely monitor mortgagees to make sure

they are making good faith efforts to

bring accounts current before initiating

foreclosure on mortgagors.

Response: HUD realizes that

mortgagees will need to be monitored

on their implementation of LM, and

HUD has allocated staff and modified

automated procedures to accomplish

this. HUD is monitoring lenders’

performance and will take necessary

enforcement actions to assure

compliance with servicing

requirements.

Section 203.412 Payment for

Foreclosure Alternative Actions

Lender Incentives. One comment

stated payment of insurance benefits for

loss mitigation activities, if adequate,

will provide a near-term benefit that

could balance the cost of employing loss

mitigation techniques. If HUD wishes to

avoid the costs associated with default

and foreclosures, it must be willing to

pay a reasonable amount to the lender

and the borrower.

Response: HUD believes that lenders

will have sufficient incentive to employ

LM measures. While the

reimbursements and incentives

provided by HUD may not by

themselves be decisive, lenders and

servicers are in business to make money

holding and servicing loans that

perform. To the extent that LM actions

result in mortgagors’ retention of their

homes, mortgagees retain their business.

In addition, when a lender conveys a

property to HUD, the lender, under the

final rule, has to absorb one third or

more of the foreclosure costs and forego

substantial interest revenue. Thus, if the

lender refuses to consider loss

mitigation, the lender will certainly

lose. Mortgage insurance continues after

the LM is undertaken, whether

successfully or not. The authorizing

statute is explicit in directing HUD to

give the mortgagees latitude to exercise

their discretion in deciding upon using

Loss Mitigation measures. The rule

requires mortgagees to review each case

monthly and determine which LM tool

to utilize.

Fees (including attorney fees)

Incurred in LM Actions. One comment

suggested that in addition to

reimbursement for any title examination
60128 Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations

and/or title insurance policy

endorsement, mortgagees should be

reimbursed for their legal costs incurred

in connection with a mortgage

modification or recasting.

Response: The claims instructions

issued in Mortgagee Letter 96–61

provide for payments to partially offset

‘‘administrative fees’’ (Item 129 on the

claim) for special forbearance, loan

modification, deed in lieu and partial

claim to offset the lender’s costs and

thereby provide an incentive to

undertake LM measures. The

Department considers these fees

adequate. In addition, HUD provides a

payment for consideration to mortgagors

in pre-foreclosure sale and deed-in-lieu

cases.

Section 203.414 Amount of Payment—

Partial Claims

Arrearage. Two comments

recommended the rule should clarify

that arrearage includes principal,

interest, late charges, taxes, and other

fees (inspection fees, attorney’s fees,

bankruptcy and foreclosure fees,

insufficient check fees, late charges)

necessary to bring the loan current.

Response: Mortgagee Letter 96–61

clarified ‘‘mortgage payment’’ to consist

of PITI. The arrearage includes only

PITI; no other costs are eligible for

reimbursement under a partial claim,

although the lender will also receive a

flat administrative fee and will be

reimbursed recordation costs.

Section 203.471 Special Forbearance

Circumstances Beyond the

Mortgagor’s Control. One comment

observed HUD has not defined, here and

in § 203.342, ‘‘circumstances beyond the

control.’’ This leaves servicers open to

being second-guessed.

Response: HUD does not intend to

second-guess lenders who reasonably

provide for the use of LM tools. HUD

defined ‘‘circumstances’’ in an objective

manner in Mortgagee Letter 96–61 to

address a broad audience of

homeowners. The Letter indicates that

‘‘Homeowners may be considered for

special forbearance provided they have

recently experienced (1) an involuntary

reduction in income or an increase in

living expenses and (2) the lender

determines the borrower has a

reasonable ability to pay under the

terms of the forbearance plan to

eliminate the arrearage.’’

Non-hardship Forbearance. One

comment claimed the concept of

penalizing the lender by not

reimbursing those forbearance

delinquencies which are not caused by

hardship will stifle the incentive of the

lenders to forbear.

Response: HUD’s loss mitigation

program does not have a ‘‘hardship’’

test. As noted immediately above, FHA

has broadened the basis for when

special forbearance and mortgage

modification may be considered as

available loss mitigation tools. The

lender must now confirm that the

homeowner has experienced a loss of

income or an increase of expenses to

qualify for special forbearance.

Section 203.552 Fees and Charges

after Endorsement

Elimination of Regulatory Control of

Post-endorsement Fees and Charges.

One comment stated HUD needs to be

moving towards eliminating regulatory

control over post endorsement fees and

charges.

Response: The setting of post

endorsement fees and charges by the

Department provides consistency where

needed and allows regional differences

where HUD deems appropriate.

Releasing or withdrawing any oversight

in setting those fees would lead to far

more disparate treatment of mortgagors

than is done currently.

Section 203.605 Loss Mitigation

Evaluation

When the Mortgagor Does Not Qualify

or is Uncooperative. One comment

recommended no further evaluations

should be necessary once a

determination is made that the

mortgagor does not qualify or is

uncooperative. Another comment

requested that to help assure that

lenders are not at risk for allegations of

fair lending violations, HUD should

establish specific standards for actions

that mortgagees should take to

determine a defaulted borrower’s

eligibility for loss mitigation measures.

Such standards would address the issue

of borrowers whose circumstances

would qualify them for loss mitigation,

but who do not seek out the mortgagee

for such assistance.

Response: Mortgagee Letter 96–61 and

the checklists in Attachment A to the

Letter describe the qualifications for LM

and also state that LM should be used

where ‘‘appropriate.’’ After review and

consideration of all LM tools and all the

facts of the case, the lender can decide

to decline to grant LM to an

uncooperative mortgagor in accordance

with this general principle of

appropriateness.

Under the pre-foreclosure sale (PFS)

procedure, the mortgagor’s good-faith

efforts are required and monitored.

Besides PFS, the cooperativeness of the

mortgagor would be relevant to special

forbearance, partial claim and loan

modification. Mortgagee Letter 96–61

requires that, in these cases, the

mortgagor should have ‘‘a commitment

to remain in’’ the home (see checklists

in Attachment A). The cooperative

participation of the borrower is implicit

in this criterion.

Loss mitigation does not add new

requirements related to Fair Housing.

HUD expects lenders will comply fully

with existing fair lending laws and will

continue to ensure compliance with

those laws. The object of LM is to avoid

foreclosure, and lenders must justify use

or non-use of all LM tools and

reevaluate monthly. In this respect,

lenders are directed to HUD’s Mortgagee

Letter 96–61, page 3, and § 203.605 of

this final rule.

Section 203.606 Pre-Foreclosure

Review

Notice to the Mortgagor of the

Consequences of Default. One comment

stated that although the rule states the

required notification to the mortgagor of

default and the mortgagee’s intent to

foreclose will be in ‘‘a format prescribed

by the Secretary,’’ the industry would

welcome the opportunity to comment

on the content of the notice. The notice

should be firm in explaining the

consequences of inaction, while also

being informative and consumerfriendly to encourage communication

with the mortgagee.

Response: HUD will seek comments

relative to possible modifications of

mortgagor notification required by

§ 203.606.

Use of HUD-approved Housing

Counseling Agencies. One comment

suggested that the use of Housing

Counseling Agencies should be a part of

all mortgagee letters to mortgagors when

requesting payments and/or

information. Another comment stated

that HUD should strongly recommend

that mortgagees provide donations to

counseling agencies in their

communities.

Response: Regarding the use of

housing counseling agencies, HUD’s

current practice, in accordance with the

requirements of § 203.602, is that the

lender must send the mortgagor a

delinquency notice (currently in the

form of the ‘‘Avoiding foreclosure’’

pamphlet) during the second month of

delinquency (see Handbook 4330.1

REV–5, Par. 7–7G and Appendix 19).

This notice includes a recommendation

to contact a HUD-approved housing

counseling agency.

Some lenders already sponsor or form

partnerships with counseling agencies.

However, it would be inappropriate for

HUD to recommend that mortgagees

make donations to counseling agencies.
Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations 60129

Section 203.616 Recasting of Mortgage

Time for lenders to implement the

recasting requirement. One comment

noted that mortgagees generally do not

have established procedures and

documents for modifications and

recasting of insured loans. Mortgagees

will have to establish such procedures

after reviewing detailed underwriting

standards yet to be set by HUD. March

1, 1997, is too soon to implement the

recasting requirement.

Response: HUD believes that with the

issuance of Mortgagee Letter 96–61,

November 12, 1996, and Mortgagee

Letter 97–17, May 1, 1997, the lenders

have sufficient time to gear up for this

procedure.

Scope of recasting. One comment

noted the regulation is currently written

as if recasting the unpaid amount due

over the remaining term of the mortgage

is the only option available. Language

should be added to allow specifically

for modification such as an interest rate

reduction, or conversion from an ARM

to a fixed rate mortgage. In addition, the

comment recommended the heading for

this section should read: Modifying/

Recasting of mortgage.

Response: HUD acknowledges the

potential ambiguity of the rule language

pointed out by this comment and has

clarified the rule to indicate that

adjustments to both term and interest

rate are permitted. There is no

prohibition of reduction of interest rate

or conversion from ARM to fixed. In

addition, HUD is changing the titles of

§§ 203.342 and 203.616 to ‘‘Mortgage

Modifications.’’

Recasting Current Loans and Fairlending Complaints. HUD should

reconsider whether to provide for

recasting of a current loan, because of

the small population of loans that

would be served by this provision,

which may, nonetheless, give rise to

complaints based on fair housing or

other grounds.

Response: The LM tools represent a

spectrum of foreclosure-avoidance

techniques, not all of which can be

applied to particular buyers, but which

as a whole represent substantial

opportunities for FHA borrowers to

maintain home ownership. As stated in

the response under § 203.605, above,

loss mitigation does not add new

requirements related to Fair Housing;

HUD expects lenders will comply fully

with existing fair lending laws and will

continue to ensure compliance with

those laws.

V. Findings and Certifications

Environmental Impact

At the time of publication of the

interim rule, a Finding of No Significant

Impact with respect to the environment

was made in accordance with HUD

regulations in 24 CFR part 50 that

implement section 102(2)(C) of the

National Environmental Policy Act of

1969 (42 U.S.C. 4332). The interim rule

is adopted by this final rule without

significant change. Accordingly, the

initial Finding of No Significant Impact

remains applicable, and is available for

public inspection between 7:30 a.m. and

5:30 p.m. weekdays in the office of the

Rules Docket Clerk at the above address.

Congressional Review of Major Final

Rules

This rule is a ‘‘major rule’’ as defined

in the Administrative Procedure Act (5

U.S.C. 804(2)), and will be submitted to

the Congress for review in accordance

with the statutory procedure.

Regulatory Flexibility Act

The Secretary, in accordance with

provisions of the Regulatory Flexibility

Act (5 U.S.C. 605(b)), has reviewed this

rule before publication and by

approving it certifies that it will not

have a significant economic impact on

a substantial number of small entities.

Most of the economic impact of the rule

will affect the Department, which stands

to benefit from the successful

implementation of the loss mitigation

techniques addressed by the rule.

Executive Order 12612, Federalism

HUD has determined, in accordance

with Executive Order 12612,

Federalism, that this rule will not have

a substantial, direct effect on the States

or on the relationship between the

Federal government and the States, or

on the distribution of power or

responsibilities among the various

levels of government, since the rule

involves primarily relationships

between the Department and private

entities.

Executive Order 13045, Protection of

Children from Environmental Health

Risks and Safety Risks

This rule will not pose an

environmental health risk or safety risk

on children.

The Catalog of Federal Domestic

Assistance Number for Single Family

HOME Insurance is 14.117.

List of Subjects

24 CFR Part 203

Hawaiian Natives, Home

improvement, Indians—lands, Loan

programs—housing and community

development, Mortgage insurance,

Reporting and recordkeeping

requirements, Solar energy.

24 CFR Part 206

Aged, Condominiums, Loan

programs—housing and community

development, Mortgage insurance,

Reporting and recordkeeping

requirements.

Accordingly, for the reasons stated in

the preamble, parts 203 and 206 of title

24 of the Code of Federal Regulations

are amended by adopting the interim

rule published in the Federal Register

on July 3, 1996 (61 FR 35014) as final

with the following changes:

PART 203—SINGLE FAMILY

MORTGAGE INSURANCE

1. The authority citation for part 203

continues to read as follows:

Authority: 12 U.S.C. 1709, 1710, 1715b,

and 1715u; 42 U.S.C. 3535(d).

2. A new § 203.341 is added to read

as follows:

§ 203.341 Partial claim.

If the conditions of § 203.371 are met

and a partial claim is paid pursuant to

that section, the contract of insurance

shall continue in force, except as

otherwise provided in this subpart.

3. Section 203.342 is revised to read

as follows:

§ 203.342 Mortgage modification.

If a mortgage is recast pursuant to

§ 203.616, the principal amount of the

mortgage, as modified, shall be

considered to be the ‘‘original principal

balance of the mortgage’’ as that term is

used in § 203.401.

4. In § 203.355, paragraphs (a), (c), (g)

introductory text, and (h) are revised

and a new paragraph (i) is added to read

as follows:

§ 203.355 Acquisition of property.

(a) In general. Upon default of a

mortgage, except as provided in

paragraphs (b) through (i) of this

section, the mortgagee shall take one of

the following actions within nine

months from the date of default, or

within any additional time approved by

the Secretary or authorized by

§§ 203.345 or 203.346. For mortgages

where the date of default is on or after

February 1, 1998, the mortgagee shall

take one or a combination of the

following actions within six months of

the date of default or within such

additional time approved by HUD or

authorized by §§ 203.345 or 203.346:

(1) Obtain a deed-in-lieu of

foreclosure (see §§ 203.357, 203.389 and
60130 Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / Rules and Regulations

203.402(f) of this part) with title being

taken in the name of the mortgagee or

the Secretary;

(2) Commence foreclosure;

(3) Enter into a special forbearance

agreement under § 203.614;

(4) Complete a modification of the

mortgage under § 203.616;

(5) Complete a refinance of the

mortgage under § 203.43(c);

(6) Complete an assumption under

§ 203.512;

(7) File a partial claim under

§ 203.371; or

(8) Initiate a pre-foreclosure sale

under § 203.370.

* * * * *

(c) Prohibition of foreclosure within

time limits. If the laws of the State in

which the mortgaged property is

located, or Federal bankruptcy law:

(1) Do not permit the commencement

of foreclosure within the time limits

described in paragraphs (a), (b), (g), (h)

and (i) of this section, the mortgagee

must commence foreclosure within 90

days after the expiration of the time

during which foreclosure is prohibited;

or

(2) Require the prosecution of a

foreclosure to be discontinued, the

mortgagee must recommence the

foreclosure within 90 days after the

expiration of the time during which

foreclosure is prohibited.

* * * * *

(g) Pre-foreclosure sale procedure.

Within 90 days of the end of a

mortgagor’s participation in the preforeclosure sale procedure, or within the

time limit described in paragraph (a) of

this section, whichever is later, if no

closing of an approved pre-foreclosure

sale has occurred, the mortgagee must

obtain a deed in lieu of foreclosure, with

title being taken in the name of the

mortgagee or the Secretary, or undertake

one of the actions listed at § 203.355(a).

The end-of-participation date is defined

as:

* * * * *

(h) Special forbearance. If the

mortgagor fails to meet the requirements

of a special forbearance under § 203.614

and the failure continues for 60 days,

the mortgagee must undertake one of the

actions listed at § 203.355(a) within the

time limit described in paragraph (a) of

this section or 90 days after the

mortgagor’s failure to meet the special

forbearance requirements, whichever is

later.

(i) Modification under § 203.616,

refinance under § 203.43(c), or

assumption under § 203.512. Provided

that the mortgagee has established the

mortgagor’s eligibility within the time

frame provided in § 203.355(a), if a

mortgagee enters into a loss mitigation

relief measure (i.e., modification under

§ 203.616, refinance under § 203.43(c),

or assumption under § 203.512) and it

fails, the six-month period provided in

§ 203.355(a) is extended by an

additional 90 days to allow the

mortgagee to try another loss mitigation

tool or go to foreclosure.

5. In § 203.371, paragraphs (b)(1) and

(b)(5) are revised to read as follows:

§ 203.371 Partial claim.

* * * * *

(b) * * *

(1) The mortgagor has been

delinquent for at least 4 months or such

other time prescribed by HUD;

* * * * *

(5) The mortgagor is not financially

qualified to support monthly mortgage

payments on a modified mortgage or on

a refinanced mortgage in which the total

arrearage is included.

* * * * *

6. In § 203.402, paragraph (f) is

revised to read as follows:

§ 203.402 Items included in payment—

conveyed and non-conveyed properties.

* * * * *

(f) Foreclosure costs or costs of

acquiring the property otherwise

(including costs of acquiring the

property by the mortgagee and of

conveying and evidencing title to the

property to HUD, but not including any

costs borne by the mortgagee to correct

title defects) actually paid by the

mortgagee and approved by HUD, in an

amount not in excess of two-thirds of

such costs or $75, whichever is the

greater. For mortgages insured on or

after February 1, 1998, the Secretary

will reimburse a percentage of

foreclosure costs or costs of acquiring

the property, which percentage shall be

determined in accordance with such

conditions as the Secretary shall

prescribe. Where the foreclosure

involves a mortgage sold by the

Secretary on or after August 1, 1969, or

a mortgage executed in connection with

the sale of property by the Secretary on

or after such date, the mortgagee shall

be reimbursed (in addition to the

amount determined under the foregoing)

for any extra costs incurred in the

foreclosure as a result of a defect in the

mortgage instrument, or a defect in the

mortgage transaction or a defect in title

which existed at or prior to the time the

mortgage (or its assignment by the

Secretary) was filed for record, if the

mortgagee establishes to the satisfaction

of the Commissioner that such extra

costs are over and above those

customarily incurred in the area.

* * * * *

7. In § 203.414, paragraph (a) is

revised to read as follows:

§ 203.414 Amount of payment—partial

claims.

(a) Claim Amount. Where a claim for

partial insurance benefits is filed in

accordance with § 203.371, the amount

of the insurance benefits shall consist of

the arrearage not to exceed an amount

equivalent to 12 monthly mortgage

payments, and any costs prescribed by

HUD related to the default.

* * * * *

8. In § 203.552, paragraph (a)

introductory text is revised to read as

follows:

§ 203.552 Fees and charges after

endorsement.

(a) The mortgagee may collect

reasonable and customary fees and

charges from the mortgagor after

insurance endorsement only as

provided below. The mortgagee may

collect these fees or charges from the

mortgagor only to the extent that the

mortgagee is not reimbursed for such

fees by HUD.

* * * * *

9. Section 203.616 is revised to read

as follows:

§ 203.616 Mortgage modification.

The mortgagee may modify a

mortgage for the purpose of changing

the amortization provisions by recasting

the total unpaid amount due for a term

not exceeding 360 months. The

mortgagee must notify HUD of such

modification in a format prescribed by

HUD within 30 days of the execution of

the modification agreement.

Dated: September 16, 1997.

Stephanie A. Smith,

General Deputy Assistant Secretary for

Housing, Federal Housing Commissioner.

[FR Doc. 97–29374 Filed 11–5–97; 8:45 am]

BILLING CODE 4210–27–P