[Federal Register Volume 62, Number 215 (Thursday, November 6, 1997)]
[Rules and Regulations]
[Pages 60124-60130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29374]



[[Page 60123]]

_______________________________________________________________________

Part II





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 203 and 206



Single Family Mortgage Insurance--Loss Mitigation Procedures; Final 
Rule

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

[[Page 60124]]



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 Sec. 203.341 to explicitly state that 
mortgage insurance remains in force after payment of a partial claim.
--The titles of Secs. 203.342 and 203.616 are changed from ``Recasting 
of mortgage'' to ``Mortgage modifications.''
--HUD has amended the final rule at Sec. 203.355(a) to clarify that the 
loss mitigation provisions may be used in combination.
--HUD has rewritten Sec. 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 Secs. 203.355 and 203.402, respectively, are changed to 
February 1, 1998.
--To be consistent with the other paragraphs under Sec. 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 Sec. 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 
Sec. 203.471, ``circumstances beyond the control.''
    Response: Please note the response to this comment in the 
discussion under Sec. 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 Sec. 203.350.

[[Page 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 Sec. 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 self-sustaining, 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 Sec. 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 Sec. 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 six-month 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 Sec. 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 Sec. 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 Sec. 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, Sec. 203.355(a) implies just the opposite by

[[Page 60126]]

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 Sec. 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 Sec. 203.371(a) must meet the requirements of 
a ``special'' forbearance agreement.
    Response: The forbearance discussed in Sec. 203.371(a) need not be 
``special forbearance'' under Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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.

[[Page 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 Secs. 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 Sec. 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 
Sec. 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-win-win 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

[[Page 60128]]

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 Sec. 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 
Sec. 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 consumer-friendly to encourage communication with 
the mortgagee.
    Response: HUD will seek comments relative to possible modifications 
of mortgagor notification required by Sec. 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 Sec. 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.

[[Page 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 
Secs. 203.342 and 203.616 to ``Mortgage Modifications.''
    Recasting Current Loans and Fair-lending 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 Sec. 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 Sec. 203.341 is added to read as follows:


Sec. 203.341  Partial claim.

    If the conditions of Sec. 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:


Sec. 203.342  Mortgage modification.

    If a mortgage is recast pursuant to Sec. 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 
Sec. 203.401.
    4. In Sec. 203.355, paragraphs (a), (c), (g) introductory text, and 
(h) are revised and a new paragraph (i) is added to read as follows:


Sec. 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 Secs. 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 Secs. 203.345 or 203.346:
    (1) Obtain a deed-in-lieu of foreclosure (see Secs. 203.357, 
203.389 and

[[Page 60130]]

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 Sec. 203.614;
    (4) Complete a modification of the mortgage under Sec. 203.616;
    (5) Complete a refinance of the mortgage under Sec. 203.43(c);
    (6) Complete an assumption under Sec. 203.512;
    (7) File a partial claim under Sec. 203.371; or
    (8) Initiate a pre-foreclosure sale under Sec. 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 pre-foreclosure 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 Sec. 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 Sec. 203.614 and the 
failure continues for 60 days, the mortgagee must undertake one of the 
actions listed at Sec. 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 Sec. 203.616, refinance under 
Sec. 203.43(c), or assumption under Sec. 203.512. Provided that the 
mortgagee has established the mortgagor's eligibility within the time 
frame provided in Sec. 203.355(a), if a mortgagee enters into a loss 
mitigation relief measure (i.e., modification under Sec. 203.616, 
refinance under Sec. 203.43(c), or assumption under Sec. 203.512) and 
it fails, the six-month period provided in Sec. 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 Sec. 203.371, paragraphs (b)(1) and (b)(5) are revised to 
read as follows:


Sec. 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 Sec. 203.402, paragraph (f) is revised to read as follows:


Sec. 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 Sec. 203.414, paragraph (a) is revised to read as follows:


Sec. 203.414  Amount of payment--partial claims.

    (a) Claim Amount. Where a claim for partial insurance benefits is 
filed in accordance with Sec. 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 Sec. 203.552, paragraph (a) introductory text is revised to 
read as follows:


Sec. 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:


Sec. 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