[Federal Register Volume 69, Number 72 (Wednesday, April 14, 2004)]
[Proposed Rules]
[Pages 19906-19913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8340]



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Part II





Department of Housing and Urban Development





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24 CFR Parts 30 and 203



Treble Damages for Failure To Engage in Loss Mitigation; Proposed Rule

  Federal Register / Vol. 69, No. 72 / Wednesday, April 14, 2004 / 
Proposed Rules  

[[Page 19906]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 30 and 203

[Docket No. FR-4553-P-02]
RIN 2501-AC66


Treble Damages for Failure To Engage in Loss Mitigation

AGENCY: Office of Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule amends HUD's civil money penalty 
regulations to reflect HUD's authorization to impose treble damages on 
a mortgagee for any mortgage for which the mortgagee had a duty but 
failed to engage in appropriate loss mitigation actions. The proposed 
rule follows publication of an advanced notice of proposed rulemaking 
(ANPR) and takes into consideration public comments received on the 
ANPR.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Rules Docket Clerk, Regulations Division, Office of 
General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-0500. 
Communications should refer to the above docket number and title. 
Facsimile (FAX) comments are not acceptable. A copy of each 
communication submitted will be available for public inspection and 
copying between 8 a.m. and 5 p.m. weekdays at the above address.

DATES: Comment Due Date: June 14, 2004.

FOR FURTHER INFORMATION CONTACT: Michael Reyes, Office of the Deputy 
Assistant Secretary for Single Family Housing, Office of Housing, 
Department of Housing and Urban Development, 301 NW Sixth Street, 
Oklahoma City, OK 73102-2807, telephone (405) 609-8475 (this is not a 
toll-free number). Hearing-or speech-impaired individuals may access 
this number through TTY by calling the toll-free Federal Information 
Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Sections 601(f), (g), and (h) of the Departments of Veterans 
Affairs and Housing and Urban Development, and Independent Agencies 
Appropriations Act, 1999 (Pub. L. 105-276, approved October 21, 1998) 
amended sections 230, 536(a), and 536(b)(1) of the National Housing Act 
(NHA) (12 U.S.C. 1715u, 12 U.S.C. 1735f-14(a)(2), and 12 U.S.C. 1735f-
14(b)(1), respectively) to add a triple penalty to the existing civil 
money penalty system for failure to engage in appropriate loss 
mitigation. Section 230(a) of Title II of the NHA, as amended, makes it 
mandatory for the mortgagee, upon the default of a single family 
mortgage, to engage in loss mitigation actions (including, but not 
limited to, special forbearance, loan modification, and deeds in lieu 
of foreclosure) for the purpose of providing alternatives to 
foreclosure. Section 601(h) amends section 536(b) of the NHA to 
authorize but not require HUD to impose a civil money penalty on 
mortgagees that fail to engage in loss mitigation activities, as 
required in section 230(a) of the NHA. Section 601(g) amends section 
563(a) of the NHA to provide that the penalty shall be equal to three 
times the amount of any insurance benefits claimed by a mortgagee with 
respect to any mortgage for which the mortgagee had a duty to engage in 
loss mitigation and failed to do so.
    On December 6, 2000 (65 FR 76520), HUD published in the Federal 
Register an advance notice of proposed rulemaking (ANPR) that advised 
the public of HUD's plan to issue a proposed rule to amend HUD's civil 
money penalties regulations to assess treble damages for a mortgagee 
that had a duty to engage in loss mitigation and failed to do so. HUD's 
ANPR also solicited comments on the use of a tier ranking system (TRS) 
that analyzes a mortgagee's loss mitigation efforts on a portfolio-wide 
basis, and ranks the mortgagee on performance ratios of loss mitigation 
actions to real estate owned (REO). The TRS, proposed through this 
rule, is based on a system that HUD implemented through notice as a 
pilot.
    HUD's TRS consists of four tiers (Tiers 1, 2, 3 and 4) and is 
designed to measure a mortgagee's loss mitigation performance. While 
any mortgagee that has duty to engage in loss mitigation and fails to 
do so is subject to treble damages, this rule provides appropriate 
notification that HUD will focus on Tier 4 mortgagees. Information 
available to HUD indicates that Tier 4 mortgagees engage in little or 
no loss mitigation. The public will be apprised of any change to HUD's 
focus through Federal Register notice. In addition, for any mortgagee, 
regardless of ranking or absence of ranking, HUD is not prevented from 
pursuing HUD penalties or sanctions.
    Failure to engage in loss mitigation is defined as a servicing 
lender's failure to evaluate a loan for loss mitigation before four 
full monthly mortgage installments are due and unpaid to determine 
which, if any, loss mitigation techniques are appropriate (see 24 CFR 
203.605), or subsequent failure to take appropriate loss mitigation 
action(s). Offering plausible loss mitigation options (as defined in 24 
CFR 203.501) to qualified borrowers is engaging in loss mitigation. 
Mortgagees must be able to provide documentation of their loss 
mitigation evaluations and actions. Should a claim for mortgage 
insurance benefits later be filed, this documentation must be 
maintained in the claim review file in accordance with 24 CFR 
203.365(c). Failure to successfully engage in loss mitigation with a 
borrower that is uncooperative or otherwise ineligible is not 
considered ``failure to engage'' in loss mitigation for that mortgage.

II. This Proposed Rule

A. Proposed Amendments

    Consistent with HUD's proposal as expressed in the ANPR, this 
proposed rule would add a triple penalty to the existing penalty system 
for failure to engage in loss mitigation. The proposed rule would also 
describe the process for assessing the treble damages when a mortgagee 
fails to engage in loss mitigation activities with cooperative and 
qualified mortgagors. The proposed rule would amend 24 CFR parts 30 and 
203 to set out the maximum penalty amounts for those servicing 
mortgagees who fail to engage in loss mitigation. Mortgagees who fail 
to engage in loss mitigation may be subject to penalties of three times 
the amount of any mortgage insurance benefits claimed by the mortgagee.
    In part 30, HUD proposes to revise Sec.  30.35 to set out the 
maximum penalty amounts for failing to engage in loss mitigation. 
Additionally, HUD proposes to amend the existing language and add 
paragraph (l) of Sec.  30.80 to establish that, with regard to treble 
damages, the factors listed in paragraphs (a) through (k) may only be 
considered in assessing the appropriateness of the sanction, because 
the statute provides no flexibility with regard to the amount of the 
penalty. Attention will be given to whether circumstances beyond the 
control of the mortgagee made loss mitigation impossible (e.g., natural 
disaster) or whether the mortgagee took affirmative steps prior to the 
Department's awareness of the violation to make HUD and the mortgagor 
whole for losses sustained due to the mortgagee's failure to engage in 
loss mitigation.
    In 24 CFR part 203, HUD proposes to revise and reorganize Sec.  
203.605, currently captioned ``Loss Mitigation Evaluation.'' The first 
sentence of

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Sec.  203.605 that begins, ``No later than when three full monthly 
mortgage payments due on the mortgage are unpaid'' is revised for 
clarity to read ``Before four full monthly installments due on the 
mortgage are unpaid * * *'' Section 203.605 is then reorganized into 
three paragraphs. The existing and sole paragraph in Sec.  203.605, 
which sets out a lender's duty to mitigate, becomes paragraph (a), 
``Duty to mitigate.'' New paragraph (b) describes how HUD will measure 
a mortgagee's loss mitigation performance and analyze its loss 
mitigation efforts portfolio-wide by using the current tier ranking 
system. New paragraph (c) provides the consequences for mortgagees that 
fail to perform the loss mitigation techniques as provided in paragraph 
(a) of this section and in Sec.  203.501.

B. The Tier Ranking System

    HUD's TRS is designed to measure loss mitigation performance by 
each mortgagee. Tier 1 reflects the highest or best ranking mortgagees 
and Tier 4 reflects the lowest or least satisfactory ranking 
mortgagees. HUD considers a Tier 4 ranking evidence that a mortgagee 
has failed to engage in loss mitigation to such an extent that it is 
highly probable that the mortgagee has systematically denied loss 
mitigation to cooperative and qualified borrowers. Therefore, as noted 
earlier in this preamble, while any mortgagee that fails to engage in 
loss mitigation may be subject to treble damages, HUD's present intent 
is to focus on Tier 4 mortgagees.
    The current formula for determining TRS ranking is: (Forbearances + 
Loss Mitigation Retention Claims + Pre Foreclosure Sale claims + Deed 
in Lieu Claims)/ (Forbearances + Loss Mitigation Retention Claims + Pre 
Foreclosure Sale Claims + Deed in Lieu Claims + Foreclosure Claims).
    Loss mitigation retention claims are special forbearance claims, 
loan modification claims, and partial claims. An account is counted 
only once for purposes of calculating the number of loss mitigation 
actions the mortgagee performed. Therefore, if within the same 
evaluation period, a mortgagee provides the mortgagor a forbearance 
agreement and also a loan modification, the loan would be counted as 
having received only one loss mitigation action. However, if the loan 
is terminated due to foreclosure during the same ranking period, the 
loan would be counted twice in the denominator--once for having 
received a loss mitigation claim, and once for the foreclosure.
    The current stratification for the tiers is as follows:
    Tier 1 is greater than or equal to 80 percent;
    Tier 2 is equal to or greater than 55 percent and less than 80 
percent;
    Tier 3 is equal to or greater than 15 percent and less than 55 
percent; and
    Tier 4 is less than 15 percent.
    Neither the current TRS nor the current stratification will be 
codified in regulation. The TRS formula and stratification will be 
issued through Federal Register notice. Changes to the TRS formula and 
stratification will be announced through Federal Register notice and 
provide the opportunity for public comment before taking effect.
    HUD sets the cut-off between tiers based on break points identified 
by application of the formula to the mortgagees. The Tier 4 cut-off is 
currently at 15 percent. HUD's information indicates that mortgagees 
below 15 percent are performing little or no loss mitigation. Three 
mortgagees scored in Tier 4 for the most recent round of scoring, with 
scores issued on April 28, 2003.
    Under the TRS, a mortgagee will have notice of its tier ranking 
through (1) HUD's quarterly ``Tier Ranking Letters'' and (2) the 
mortgagee's ability to calculate its own score at any interval desired 
for self-monitoring. The documents will advise the mortgagee that it 
has the opportunity to appeal its ranking. The scoring methodology is 
such that mortgagees can calculate their own score at any interval 
desired for self-monitoring. The quarterly Tier Ranking Letters cover a 
rolling 12-month period, so the ranking assigned to a mortgagee always 
covers 12 months of performance with a one-quarter lag from the ending 
calculation date.
    A mortgagee that disagrees with its Tier 4 ranking may appeal to 
the Deputy Assistant Secretary for Single Family or the Deputy 
Assistant Secretary's designee and request an informal conference on 
the ranking. The only basis, however, for appeal of a Tier 4 ranking is 
the mortgagee's belief that the ranking was based on incorrect or 
incomplete data. For example, the tiering formula relies in part on the 
lender's accurate reporting of informal forbearance (where no loss 
mitigation claim has been filed). This is accomplished by the 
mortgagee's reporting of servicing actions to HUD's Single Family 
Default Monitoring System (SFDMS), which also requires the mortgagee to 
report other loss mitigation actions (including loan modification) 
whether or not a claim for a loss mitigation incentive may also be 
submitted. If the lender produces appropriate documentation of informal 
forbearance agreements, delinquent refinances, or other valid loss 
mitigation actions, which were not reported to HUD or were not included 
in the tier ranking calculation, HUD will revise that servicer's tier 
ranking score.
    In order for treble damages to be imposed relative to an individual 
loan, HUD will first look to see if the servicing mortgagee took any 
loss mitigation action. As stated in Mortgagee Letter 00-05, ``HUD 
believes that the mortgagee is in the best position to determine which, 
if any, loss mitigation strategies are appropriate in a given 
circumstance.'' Without HUD approval, mortgagees may, in their sole 
discretion, utilize any of the loss mitigation options within the 
guidelines provided in Mortgagee Letter 00-05 and any subsequent 
mortgagee letter regarding loss mitigation.
    Generally, a mortgagee would be considered in compliance and not 
subject to treble damages for a particular loan if (1) a proper 
evaluation indicated that the mortgagor was not eligible for any loss 
mitigation tools or (2) despite documented attempts to evaluate or 
provide loss mitigation, implementation could not occur due to the 
borrower's refusal or failure to cooperate with the mortgagee.
    A mortgagee is subject to treble damages when the mortgagee has 
failed to properly evaluate whether a mortgagor was eligible for any 
loss mitigation tool and, if the mortgagor was eligible and 
cooperative, the mortgagee has failed to undertake loss mitigation for 
the eligible mortgagor. However, in determining whether to proceed with 
a violation, HUD will consider whether the mortgagee's failure to 
engage in loss mitigation is excused by circumstances beyond the 
mortgagee's control (e.g. natural disasters), or whether the mortgagee 
has taken affirmative steps, prior to HUD's awareness of the violation, 
to make HUD and the mortgagor whole for losses sustained as a result of 
the mortgagee's failure to engage in loss mitigation. If HUD determines 
to proceed on a violation, the due process procedures provided in 24 
CFR part 30 apply.

III. Discussion of Public Comments on ANPR

    The public comment period for the ANPR closed on February 5, 2001. 
HUD received seven comments in response to the ANPR. The following 
discussion provides a summary of the issues and comments raised by the 
commenters and HUD's responses to these comments. Specifically, HUD 
sought comments on the proposed tier system and any other factor that 
commenters believe should be included. HUD has

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taken these comments into consideration in developing the proposed 
rule.
    Comment: Two commenters wrote that four components of treble 
damages should be: (1) Definition of ``failure to engage in loss 
mitigation'', (2) assessment of penalty, (3) standards for compliance, 
and (4) standards to measure performance.
    HUD Response: HUD agrees, and all four components are part of the 
regulation in this proposed rule.
    Comment: Two commenters wrote that good overall performers, such as 
those in Tiers 1 through 3 should be excluded from treble damages even 
if a small number of loans are found to be in noncompliance. The 
commenters suggested that this exemption is fair, because HUD has the 
ability to impose other sanctions, including ordinary civil money 
penalties.
    HUD Response: As discussed in Section II of this preamble, while no 
mortgagee that fails to engage in loss mitigation is exempt from 
possible imposition of treble damages, the proposed rule provides 
notification that HUD's focus is Tier 4 mortgagees. As also discussed 
earlier in this preamble, HUD retains the authority to impose other 
sanctions, including civil money penalties, on all mortgagees.
    Comment: Two commenters wrote that, rather than subjecting a Tier 4 
servicer to treble damages automatically, HUD should develop a process 
that provides (1) a standard for liability, (2) an opportunity to 
mitigate or bring up compensating factors, (3) sufficient warning 
before penalties are assessed, and (4) an appeals process.
    HUD Response: The proposed rule provides for the components 
suggested by the commenter, as noted earlier in this preamble. A Tier 4 
servicing mortgagee is not automatically subject to treble damages. The 
rule provides a standard for liability, and the Tier 4 servicing 
mortgagee has sufficient warning of its ranking and the opportunity to 
appeal the ranking based on a mortgagee's disagreement with the data 
used in the calculation. As also noted earlier in this preamble, 
mortgagees are able to calculate their TRS score at any time on their 
own, and therefore have sufficient advance notice of where they will 
fall in the ranking process.
    Comment: Two commenters requested that ``failure to engage in loss 
mitigation'' be defined to identify the types of violations that would 
give rise to treble penalties on a loan-level basis, and that minor 
violations should clearly not give rise to treble damages. The 
commenter describes minor violations as (1) failure to document when 
letters were mailed or that the monthly evaluation took place, or (2) 
repayment plans that are subjectively judged ``unrealistic'' by 
auditors.
    HUD Response: Earlier in this preamble, HUD described how failure 
to engage in loss mitigation would be defined. Additionally, the 
preamble noted that a servicing mortgagee would be considered in 
compliance and not subject to treble damages if (1) a proper evaluation 
indicated that the borrower was not eligible for any loss mitigation 
tools and (2) despite documented attempts to evaluate or provide loss 
mitigation, implementation could not occur due to the borrower's 
refusal or failure to cooperate with the mortgagee's mitigation 
activities.
    Comment: Two commenters wrote that HUD should exclude a loan from 
the treble penalty if certain ``compensating factors'' were present. 
The commenters suggested that these factors would include that the 
violation did not result in financial damage to HUD; the borrower was 
not eligible for loss mitigation in any case; the reason for the 
failure of loss mitigation was the borrower's failure to cooperate; the 
borrower was in bankruptcy; the borrower was incarcerated or otherwise 
unable to manage his or her affairs; the property was abandoned or the 
property was seized by the government; loss mitigation was attempted 
but there was partial non-compliance; the infraction was isolated and 
the mortgagee took steps to ensure that the situation would not 
continue; the borrower was offered a remedy despite technical 
noncompliance; HUD had internal delays, such as delays in the payment 
of claims; and loss mitigation alternatives would create a loss to the 
servicer, i.e., modification.
    HUD Response: The response to the preceding comment addresses 
generally when a servicing lender would be considered in compliance and 
not subject to treble damages. Additionally, HUD may exclude a loan 
from treble damages if factors beyond the mortgagee's control made loss 
mitigation impossible (e.g., natural disasters) or the mortgagee took 
affirmative steps prior to the Department's awareness of the violation 
to make HUD and the mortgagor whole for the mortgagee's failure to 
engage in loss mitigation.
    HUD would not exclude the imposition of treble damages because the 
failure to engage in loss mitigation was isolated and the lender had 
taken steps to ensure that the situation would not continue. 
Additionally, the borrower's being in bankruptcy by itself does not 
always prohibit the ``Partial Claim'' or ``Pre-Foreclosure Sale'' 
options.
    Comment: One commenter, a state housing agency, stated that, 
because of the unique characteristics of its borrowers, opportunities 
for loss mitigation were limited and that this should be taken into 
account when assessing treble penalties. The commenter stated that 
these included the fact that a large percentage of the borrowers were 
rural, first time homebuyers with low interest loans. In order to be 
fairly evaluated, this commenter suggested that lower tier ratios or 
other compensating factors needed to be implemented. Additionally, a 
mortgage company commenter wrote that its low average rate of interest 
limited its loss mitigation options. Furthermore, this commenter wrote 
that it uses the ``informal equivalent'' of recognized loss mitigation 
options, but a formal claims procedure was not worthwhile because of 
the low incentive payment.
    HUD Response: HUD has evaluated the special circumstances 
surrounding the unique characteristics of state housing agencies. 
During 2001, HUD had several discussions with representatives of state 
housing agencies and the National Council of State Housing Agencies 
(NCSHA). The NCSHA provided HUD with the results of its survey of 
members' loss mitigation actions. The survey cited reasons that some 
members could not utilize loan modifications, and these reasons 
included limitations due to bond financing requirements.
    HUD does not find a need to establish any special requirements for 
state housing agencies. As HUD's records indicate from the October 17, 
2001, TRS test scoring (Round 5), the only state housing agency to 
receive a Tier 4 ranking was so rated due to its failure to report 
accurately to the ``Single Family Default Monitoring System'' (SFDMS). 
The ranking had nothing to do with its status as a quasi-government 
entity. Further, of the four state housing agencies ranked in Tier 1, 
none utilized ``Mortgage Modification,'' three did not utilize 
``Partial Claims,'' and one agency only used ``Special and Formal 
Forbearances.'' The result is that no impact to state housing agencies 
was found, other than failure to report accurately to HUD's SFDMS. As 
of Round 11, no state housing agencies were ranked in Tier 4. State 
housing agencies may appeal their Tier 4 ranking or penalty assessment 
or both in the same manner as other mortgagees.
    A mortgagee has the right to utilize the ``informal equivalent'' of 
special

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forbearance, since the mortgagee could receive credit for forbearances 
reported to HUD's default system. The mortgagee also has the right not 
to file incentive claims in the belief that to do so is not worthwhile. 
However, HUD will not alter the TRS formula to accommodate mortgagees 
who, while eligible, choose not to file loss mitigation incentive 
claims.
    Comment: Three commenters wrote that mortgage servicers should have 
an opportunity to appeal their rankings to HUD staff knowledgeable 
about loss mitigation policies. Two of the commenters specifically 
objected to the fact that currently servicers are required to refute 
findings with the auditors.
    HUD Response: Mortgagees may contact the Deputy Assistant Secretary 
or the Deputy Assistant Secretary's designee if they wish to appeal 
their Tier 4 rankings based on the TRS formula. Mortgagees may only 
appeal their Tier 4 ranking on grounds that the data on which the 
ranking was based are incomplete or incorrect.
    Comment: Six commenters objected to aspects of the tiered scoring 
system outlined in the ANPR, based on their understanding of the tiered 
scoring system. The commenters stated that the scoring system would 
involve a ratio (Special Forbearances + Modifications + Partial Claims 
+ Deeds in Lieu + Pre-Foreclosure Sales)/(Foreclosures + Deeds in Lieu 
+ Pre-Foreclosure Sales) of loss mitigation claims that did not result 
in foreclosure divided by the number of non-retention loss mitigation 
claims and foreclosures, such that servicers would be graded on their 
loss mitigation success rate.
    HUD Response: The commenters are referring to the ranking system 
that was being tested when the ANPR was published. However, subsequent 
to that time and effective with the Round 6 and Round 7 TRS 
calculations released August 20, 2002, as part of HUD's testing of this 
system, HUD modified the scoring system to calculate loss mitigation 
over loss mitigation plus foreclosures (see Section II.B. of this 
preamble for a more precise formula). The benchmarks assign to Tier 1 
(the most favorable tier) a ratio greater than or equal to 80 percent; 
to Tier 2, a ratio from 55 percent to less than 80 percent; to Tier 3, 
a ratio from 15 percent to less than 55 percent; and to Tier 4, a ratio 
of less than 15 percent. However, HUD reserves the right to change the 
benchmarks in the future by Federal Register notice that provides the 
opportunity for comment before the change takes effect.
    Comment: Four commenters wrote that the proposed TRS and benchmarks 
would result in the vast majority of mortgagees (as many as 84 percent 
based on calendar year 1999 figures) being in Tier 3 or Tier 4. The 
commenters noted further that this result does not make logical sense. 
Additionally, one commenter wrote that some servicers that would be 
ranked in Tiers 3 and 4 (as it understands HUD's proposal) would be 
ranked in the top tier in Freddie Mac's default performance measurement 
tool.
    HUD Response: For the calendar year 1999 calculation, 46 percent of 
the mortgagees were ranked Tier 3, and 38 percent of mortgagees were 
ranked in Tier 4, for a total of 84 percent. For the eleventh round of 
TRS scores, released April 28, 2003, 14.23 percent of mortgagees were 
ranked in Tier 3, and 1.26 percent of mortgagees were ranked in Tier 4, 
for a total of 15.49 percent. What is significant is that only three 
mortgagees (1.26 percent of Tiered mortgagees) achieved a ratio of less 
than 15 percent, thus, receiving a Tier 4 ranking. A comparison to 
Freddie Mac's default measurement tool would not be an appropriate 
comparison due to the different methods of program delivery.
    Comment: Some of the commenters proposed lowering all the tier 
rankings. One commenter wrote that the tier rankings should include 
mortgagees with ratios as follows: Tier 1, greater than 50 percent; 
Tier 2, 26-50 percent; Tier 3, 6-25 percent, and Tier 4, less than 5 
percent. Additionally, commenters wrote that these ratios would be 
comparable to Freddie Mac's scoring system. Another commenter wrote 
that HUD's benchmarks should always be below the conventional loan 
workout efficiency ratio, citing as support the fact that 85 percent of 
the servicers on the initial Tier Ranking Report fell into a Tier 3 or 
lower ranking.
    HUD Response: HUD has carefully examined the issue of tier ranking 
benchmarks. In the eleventh round of TRS scores, released April 28, 
2003, there were 113 Tier 1 mortgagees (47.28 percent of tiered 
mortgagees), 89 Tier 2 mortgagees (37.24 percent of tiered mortgagees), 
and 34 Tier 3 mortgagees (14.23 percent of tiered mortgagees). Only 
three mortgagees (1.26 percent of tiered mortgagees) achieved a ratio 
of less than 15 percent, therefore, receiving a Tier 4 ranking and 
possible imposition of treble damages. There were a total of 37 
mortgagees (15.49 percent of tiered mortgagees) in the 11th round that 
received a Tier 3 or lower ranking.
    Effective with the Round 6 scores, released concurrently with the 
Round 7 scores, HUD began using the TRS ratio. HUD may choose to adjust 
the benchmarks in consideration of prevailing economic conditions 
during a ranking period. It is necessary for HUD to have the 
flexibility to balance the goals of advancing loss mitigation efforts 
with the mortgagee's need to exercise sound business judgments. HUD 
will issue changes through a Federal Register notice with the 
opportunity to comment before the changes take effect.
    Comment: Three commenters wrote that the scoring system should take 
account of situations where servicers have purchased a large number of 
already-delinquent loans, for which some loss mitigation options may be 
too late and which thus have a negative impact on the servicer's score. 
Two of the commenters noted that such accounts, by their nature, 
represent a higher degree of risk and that the proposed tier scoring 
formula does not take this risk into account. Additionally, the 
commenters noted that the loss mitigation options that are available 
(pre-foreclosure sales and deeds in lieu) carry less weight in the 
formula, adversely affecting servicers who purchase such loans.
    HUD Response: There are FHA mortgagees who routinely acquire 
delinquent loans yet are ranked in Tier 1. Therefore, HUD believes the 
issue of acquisition of delinquent loans affecting the tier ranking of 
mortgagees should be addressed through the purchasing lender's due 
diligence efforts.
    Comment: Two commenters wrote that HUD should provide a single, 
aggregate score for mortgagees with multiple HUD identification 
numbers. The commenters noted further that such mortgagees have 
received excessively low scores on one mortgage number and overly high 
scores on another.
    HUD Response: HUD provides a single, aggregate score only for those 
mortgagees with multiple HUD identification numbers who have legally 
become a single entity, and who have provided this notification to and 
met other requirements of HUD's Lender Approval and Recertification 
Division.
    Comment: Two commenters requested that HUD take steps to eliminate 
backlogs in payment of loss mitigation claims, on which the ratio is 
based, to keep the scoring current. The commenter noted further that if 
claims data is used as a basis for scoring, backlogs must not occur. 
Another commenter wrote that HUD should delay implementation of the 
treble damages rule pending development of systems that will eliminate 
backlogs.
    HUD Response: Effective with Mortgagee Letter 2001-02, dated 
January 16, 2001, mortgagees may file

[[Page 19910]]

loss mitigation retention claims through the FHA Connection instead of 
on paper. Since making the FHA Connection available for the filing of 
loss mitigation retention claims, there has been no backlog of unpaid 
claims. Should a backlog occur due to unforeseen circumstances, HUD 
will provide notification to industry of the backlog. HUD would then 
take the individual impact of the backlog into consideration before 
providing the next round of tiering.
    Comment: Two commenters wrote that the drawback of HUD's proposal 
is that the rule does not take into account assumptions, refinances of 
delinquent loans or forbearance plans that do not meet the technical 
requirements of HUD rules. The commenter noted further that this could 
be accomplished by giving servicers credit for these actions directly 
or by lowering all the benchmarks to reflect the ``incomplete'' nature 
of the data.
    HUD Response: HUD has begun to give mortgagees credit for formal 
and informal forbearance agreements, provided the mortgagee has 
reported these agreements in accordance with reporting requirements of 
the SFDMS. Where a mortgagee has been identified as having a tier four 
ranking and wishes to appeal the ranking, the Department will accept 
appropriate documentation of informal forbearance agreements, 
delinquent refinances, and other valid loss mitigation actions that 
were not reported to HUD or were not included in the tier ranking 
calculation. Where adequate documentation is provided, HUD will revise 
that tier ranking score.
    Comment: Several commenters wrote that the incentive payment system 
should be revised. Commenters stated that loss mitigation costs exceed 
incentive payments. Another commenter wrote that relying on incentive 
claims is flawed because it overlooks what a mortgagee may have done 
prior to getting to that stage. Other commenters wrote that incentives 
should compensate mortgage servicers for their expenses in promoting 
and implementing loss mitigation programs.
    HUD Response: Although HUD understands that mortgagees and 
servicers would prefer not to pay any loss mitigation expenses, payment 
of all such expenses by HUD would prove financially burdensome to HUD. 
Since successful loss mitigation benefits both HUD and mortgagees, 
certain costs of doing business should be borne by mortgagees and 
servicers themselves. The revised TRS formula does give mortgagees 
credit for formal and informal forbearance actions as well as loss 
mitigation actions.
    Comment: One commenter proposed incentives in the range of $100 
(for Tier 4) to $300 (for Tier 1) for special forbearances, $500 to 
$750 for loan modification, $250 to $500 for partial claims, $1,000 to 
$1,500 for foreclosure sales, and $250 to $375 for deeds in lieu of 
foreclosure.
    HUD Response: HUD is reviewing incentive levels as part of its 
ongoing analysis of the effectiveness of its loss mitigation program. 
Any changes to loss mitigation program provisions or incentives will be 
announced in future notices or rules, as appropriate, with opportunity 
for comment as applicable.
    Comment: Three commenters wrote that HUD should give greater 
incentives as rewards to Tier 1 and Tier 2 servicers. According to two 
of these commenters, Tier 1 servicers should receive a 50 percent 
increase in incentive payment as well as a two-month extension of pre-
foreclosure sale time frames and automatic reimbursement of 75 percent 
of foreclosure costs on Part B claims.
    HUD Response: While there has been some industry discussion of 
replacing the existing annual Mortgagee Performance Scores with the 
proposed TRS as the basis for increased incentives to the best scoring 
lenders, HUD has determined that the Mortgagee Performance Scores 
should continue to be applied. However, HUD continues to evaluate the 
TRS as a potential replacement of the existing scoring system as the 
basis for loss mitigation incentives.
    Comment: One commenter stated that the tier calculation should be 
based on recent data. Another commenter sought a more detailed 
explanation of the calculation, including ``timeframes'' of the data 
HUD uses. This commenter asked whether the relevant time is when the 
servicer files Part A or Part B claims, when HUD approved the claim for 
payment, or the date that HUD processes the first claim check or the 
second claim check. This commenter also wanted to know how the formula 
is affected by claims that HUD suspends.
    HUD Response: Most Tier Ranking letters have been issued with a 
one-quarter lag from the ending calculation date. For example, the 
Tiering Ranking letter issued during the third quarter of FY 2003 
(April 28, 2003) covered the second quarter of FY 2002 through the 
first quarter of FY 2003, allowing the second quarter of FY 2003 to be 
used to ensure that all claims have been processed for the period under 
review. The tiering calculation always covers a 12-month period. The 
formula counts paid loss mitigation retention claims as of the date the 
claim was paid. It counts Pre-Foreclosure, Deed-In-lieu of Foreclosures 
and Foreclosures as of the insurance termination date, which is the 
date the deed was filed, as reported by the lender on the Pre-
Foreclosure, Deed-In-Lieu of Foreclosure, or Foreclosure insurance 
claim form HUD 27011.
    Comment: One commenter stated that HUD's formula for measuring loss 
mitigation is misleading because it relies on the number of incentive 
claims a mortgagee files and does not consider other factors, such as 
loss mitigation efforts undertaken without filing claims.
    HUD Response: With the inclusion of formal and informal 
forbearances into the TRS calculation, HUD is able to give mortgagee 
credit for payment plans that do not result in a loss mitigation claim 
filing. HUD will consider whether other factors should be calculated, 
and welcomes additional comment on this issue.
    Comment: One commenter stated that the tier ranking system should 
treat smaller servicers differently because the rankings could be 
extremely volatile using the same scoring system as for larger 
servicers. This commenter recommended HUD adopt a system similar to 
Freddie Mac's, which assigns servicers with fewer than 25 loans that 
are 90 days or more delinquent a ranking that generally allows these 
servicers to service all types of loans, unless Freddie Mac becomes 
dissatisfied with the servicer's delinquency ratio. In this case, the 
servicer may become ineligible for certain high-risk loans.
    The commenter noted further that servicers with fewer than 10 
conveyance claims in the prior 12-month period should be unranked. 
Those with 10-40 conveyance claims should be designated ``small 
servicers.'' Under the commenter's proposal, the unranked servicers 
would be excluded from the tiered ranking system and from treble 
damages. Small servicers who rank in Tiers 2 through 4 would all be 
considered Tier 2 servicers. This is equitable, the commenter 
suggested, because (1) HUD's ranking system is not precise as the 
system fails to recognize certain loss mitigation techniques; (2) the 
severity of the penalty in relation to a small servicer's net worth is 
excessive; (3) HUD does not have significant risk exposure because 
these are small portfolios; and (4) borrowers with FHA-insured 
financing generally have higher loan to value ratios and less 
disposable income than conventional borrowers, so fewer of them qualify 
for loss mitigation options.
    HUD Response: All mortgagees have an obligation to ensure that all 
borrowers are afforded the opportunity

[[Page 19911]]

for loss mitigation where loss mitigation is appropriate, and HUD has 
an obligation to enforce the loss mitigation requirements, regardless 
of the servicing lender's portfolio size. HUD recognizes, however, that 
the rankings for smaller servicers can be extremely volatile using the 
same scoring system applied to larger servicers. That is why HUD has 
provided consideration for smaller servicers in its calculation. 
Servicers with fewer than 11 foreclosure claims in the 12-month 
evaluation period are unranked, unless the tier calculation would place 
them in Tier 1 or Tier 2.
    Comment: Two commenters wrote that there should be a periodic 
review of the tier benchmarks to ensure that they reflect economic and 
market conditions. Another commenter wrote that changing market 
conditions could cause a lender's ranking to vary widely. For example, 
in a market where loan originations decline, the ratio of mitigation 
plans generated to foreclosures completed would drop considerably. 
Because the majority of loss mitigation plans are generated early in 
the default stage, fewer new loans would produce fewer defaults (hence 
fewer opportunities for mitigation plans), while prior foreclosures 
would continue to move forward. The ratio of plans to foreclosures 
would appear to decline, giving the false impression that servicers are 
doing a poor job of loss mitigation.
    HUD Response: HUD is cognizant of the fact that changing market 
conditions can substantially impact, positively and negatively, the 
successful implementation of loss mitigation techniques. Periodic 
reviews of market conditions will be conducted and if an adjustment to 
the scoring system is determined appropriate, HUD will provide advance 
notice of the scoring changes through Federal Register notice as 
discussed in this preamble.
    Comment: One commenter urged HUD and Congress to work to rescind 
the treble damages law. The commenter stated that the penalty was 
unnecessary because of increased loss mitigation workouts in recent 
years; assuming a ``5 percent error rate, or a 95 percent compliance 
rate,'' the provision could erase the majority of profits of the 
mortgage servicing industry, with a potential $1 billion annual cost to 
the industry; the value of servicing rights would be negatively 
impacted; and the penalty was not related to HUD's actual damages or 
loss. As a consequence, this commenter wrote, mortgagees could decide 
to stop originating and servicing FHA-insured loans.
    HUD Response: HUD supports this legislation passed by Congress as 
an additional means to protect the FHA Insurance Fund from abuse and to 
promote homeownership retention.
    Comment: Three commenters wrote that the rule should only have 
prospective effect. One commenter stated that any application of the 
treble damages penalty should relate only to loans originated after the 
publication date of the final rule. Two commenters asked that HUD give 
mortgagees a one year transition period under the TRS before applying 
any treble damages.
    HUD Response: Section 230(a) of the National Housing Act states 
that a mortgagee shall engage in loss mitigation actions ``upon default 
of any mortgage insured under [Title II] * * * as provided in 
regulations by the Secretary.'' HUD believes there is no reason to 
delay application of TRS beyond issuance of the final rule. All tier 
rankings are based on one year's data, so mortgagees have sufficient 
information and notice of their performance to gauge their compliance. 
As part of the pilot testing of TRS, 11 rounds of TRS scores have been 
issued since December 2000, when HUD initiated the TRS pilot.
    Comment: One commenter wrote in support of the $1,100,000 per year 
cap on civil money penalties per mortgagee, which is statutorily 
required. Another commenter wrote that HUD should ``confirm that treble 
damages assessed to a servicer fall within this $1,100,000 limit.''
    HUD Response: HUD cannot exceed the statutory limitation per 
mortgagee on civil money penalties. The civil money penalty amounts 
that may be imposed were raised by statute and implemented in a HUD 
final rule published on March 17, 2003 (68 FR 12785), and which became 
effective April 16, 2003.
    Comment: One commenter wrote that HUD should ``communicate its FHA 
guidelines'' to the offending company and conduct any needed 
investigation.
    HUD Response: Through this rulemaking and future notices or 
mortgagee letters, HUD will continue to communicate the guidelines of 
the loss mitigation program. Instances of a lender's failure to engage 
in loss mitigation are and will continue to be investigated by HUD's 
Quality Assurance Division and HUD's National Servicing Center (NSC). 
Mortgagees, regardless of tier ranking, that do not comply with HUD's 
loss mitigation requirements will be required to affect corrective 
action in all instances and will be afforded the opportunity for 
additional training by NSC.

Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 
35) and assigned OMB control number 2502-0523. 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.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), reviewed this rule before publication and by approving 
it certifies that this rule would not have a significant economic 
impact on a substantial number of small entities. All entities, small 
or large, will be subject to the same penalties for failure to engage 
in loss mitigation as established by statute and proposed to be 
implemented by this rule. The statute does not provide an exemption for 
small entities. Nevertheless, the Department is sensitive to the fact 
that the uniform application of requirements on entities of differing 
sizes often places a disproportionate burden on non-profits/small 
entities businesses. That is why HUD has built a factor for smaller 
servicers into its scoring calculation. As noted in this preamble, HUD 
provides that servicers with fewer than 11 foreclosure claims in the 
12-month evaluation period remain unranked, unless the tier calculation 
would place them in Tier 1 or Tier 2. Although HUD has determined that 
this proposed rule would not have a significant economic impact on a 
substantial number of small entities, HUD welcomes comments regarding 
any less burdensome alternatives to this rule that will meet HUD's 
objectives as described in this preamble.

Environmental Impact

    In accordance with 24 CFR 50.19(c)(6) of HUD's regulations, this 
rule involves establishment of treble damages for lender's who fail to 
perform the loss mitigation evaluation and actions under 24 CFR 
203.605. In accordance with 24 CFR 50.19(c)(1) of HUD's regulations, 
this proposed rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or

[[Page 19912]]

construction materials, manufactured housing, or occupancy. Therefore, 
this proposed rule is categorically excluded from the requirements of 
the National Environmental Policy Act (42 U.S.C. 4321 et seq.).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This rule 
affects only mortgagees and does not have federalism implications and 
does not impose substantial direct compliance costs on state and local 
governments or preempt state law within the meaning of the Executive 
Order.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Regulations 
Division, Office of General Counsel, Room 10276, 451 Seventh Street, 
SW., Washington, DC 20410-0500.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and on the private sector. This proposed 
rule does not impose any federal mandate on any state, local, or tribal 
government, or on the private sector, within the meaning of UMRA.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number applicable to the 
program affected by this rule is 14.117.

List of Subjects

24 CFR Part 30

    Administrative practice and procedure, Grant programs--housing and 
community development, Loan programs-housing and community development, 
Mortgages, Penalties.

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

    For the reasons stated in the preamble, HUD proposes to amend 24 
CFR parts 30 and 203 as follows:

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

    1. The authority citation for 24 CFR part 30 continues to read as 
follows:

    Authority: 12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, 1735f-15; 
15 U.S.C. 1717a; 28 U.S.C 2641 note; 42 U.S.C. 3535(d).

Subpart B--Violations

    2. In Sec.  30.35, add a new paragraph (a)(15) and revise paragraph 
(c) to read as follows:


Sec.  30.35  Mortgagees and lenders.

* * * * *
    (a)(15) Fails to engage in loss mitigation as provided in Sec.  
203.605 of this title.
    * * *
    (c) Amount of penalty. (1) Maximum penalty. Except as provided in 
paragraph (c)(2) of this section, the maximum penalty is $6,500 for 
each violation, up to a limit of $1,250,000 for all violations 
committed during any one-year period. Each violation shall constitute a 
separate violation as to each mortgage or loan application.
    (2) Maximum penalty for failing to engage in loss mitigation. The 
penalty for a violation of paragraph (a)(15) of this section shall be 
three times the amount of the total mortgage insurance benefits claimed 
by the mortgagee with respect to any mortgage for which the mortgagee 
failed to engage in such loss mitigation actions.

Subpart C--Procedures

    3. In Sec.  30.80 add a new paragraph (l) to read as follows:


Sec.  30.80  Factors in determining the appropriateness and amount of 
civil money penalty.

* * * * *
    (l) HUD may consider factors listed in paragraphs (a) through (k) 
of this section to determine the appropriateness of a penalty under 
Sec.  30.35(c)(2); however, HUD cannot change the amount of the penalty 
under Sec.  30.35(c)(2).

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    4. The authority citation for 24 CFR part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
3535(d).

Subpart C--Servicing Responsibilities

    5. Revise Sec.  203.500 to read as follows:


Sec.  203.500  Mortgage servicing generally.

    This subpart identifies servicing practices of lending institutions 
that HUD considers acceptable for mortgages insured by HUD. Failure to 
comply with this subpart shall not be a basis for denial of insurance 
benefits, but failure to comply will be cause for imposition of a civil 
money penalty, including a penalty under Sec.  30.35(c)(2), or 
withdrawal of HUD's approval of a mortgagee. It is the intent of the 
Department that no mortgagee shall commence foreclosure or acquire 
title to a property until the requirements of this subpart have been 
followed.
    6. Section 203.605, including its heading, is revised to read as 
follows:


Sec.  203.605  Loss mitigation performance.

    (a) Duty to mitigate. Before four full monthly installments due on 
the mortgage have become unpaid, the mortgagee shall evaluate on a 
monthly basis all of the loss mitigation techniques provided at Sec.  
203.501 to determine which is appropriate. Based upon such evaluations, 
the mortgagee shall take the appropriate loss mitigation action. 
Documentation must be maintained for the initial and all subsequent 
evaluations and resulting loss mitigation actions. Should a claim for 
mortgage insurance benefits later be filed, the mortgagee shall 
maintain this documentation in the claim review file under the 
requirements of Sec.  203.365(c).
    (b) Assessment of mortgagee's loss mitigation performance. (1) HUD 
will measure and advise mortgagees of their loss mitigation performance 
through the Tier Ranking System (TRS). Under the TRS, HUD will analyze 
each mortgagee's loss mitigation efforts portfolio-wide on a quarterly 
basis, based on 12 months of performance, by computing ratios involving 
loss mitigation attempts, defaults, and claims. Based on the ratios, 
HUD will group mortgagees in four tiers (Tiers 1, 2, 3 and 4), with 
Tier 1 representing the highest or best ranking mortgagees and Tier 4 
representing the lowest or least satisfactory ranking mortgagees. The 
precise methodology for calculating the TRS ratios and for determining 
the tier stratification (or cutoff points) will be provided through 
Federal Register

[[Page 19913]]

notice. Notice of future TRS methodology or stratification changes will 
be published in the Federal Register and will provide a 30-day public 
comment period.
    (2) Before HUD issues each quarterly TRS notice, HUD will review 
the number of claims paid to the mortgagee. If HUD determines that the 
lender's low TRS score is the result of a small number of defaults or a 
small number of foreclosure claims, or both, as defined by notice, HUD 
may determine not to designate the mortgagee as Tier 3 or Tier 4, and 
the mortgagee will remain unranked.
    (3) Within 30 calendar days after the date of the TRS notice, a 
mortgagee that scored in Tier 4 may appeal its ranking to the Deputy 
Assistant Secretary for Single Family or the Deputy Assistant's 
designee and request an informal HUD conference. The only basis for 
appeal by the Tier 4 mortgagee is disagreement with the data used by 
HUD to calculate the mortgagee's ranking. If HUD determines that the 
mortgagee's Tier 4 ranking was based on incorrect or incomplete data, 
the mortgagee's performance will be recalculated and the mortgagee will 
receive a corrected tier ranking score.
    (c) Assessment of civil money penalty. A mortgagee that is found to 
have failed to engage in loss mitigation as required under paragraph 
(a) of this section shall be liable for a civil money penalty as 
provided in Sec.  30.35(c) of this title.

    Dated: March 22, 2004.
Sean Cassidy,
General Deputy, Assistant Secretary for Housing.
[FR Doc. 04-8340 Filed 4-13-04; 8:45 am]
BILLING CODE 4210-27-P