[Federal Register Volume 70, Number 79 (Tuesday, April 26, 2005)]
[Rules and Regulations]
[Pages 21572-21578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-8334]



[[Page 21571]]

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Part IV





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; Final Rule

  Federal Register / Vol. 70 , No. 79 / Tuesday, April 26, 2005 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 30 and 203

[Docket No. FR-4553-F-03]
RIN 2501-AC66


Treble Damages for Failure To Engage in Loss Mitigation

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

ACTION: Final rule.

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SUMMARY: This final 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 final rule follows 
publication of a proposed rule, takes into consideration the public 
comments received on the proposed rule, but makes no changes at this 
final rule stage.

DATES: Effective Date: May 26, 2005.

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). Persons with hearing or speech impairments may 
access this number via TTY by calling the toll-free Federal Information 
Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:


I. Background

    On April 14, 2004 (69 FR 19906), HUD published a proposed rule that 
would amend HUD's civil money penalty regulations at 24 CFR part 30 and 
HUD's single family mortgage insurance regulations at 24 CFR part 203 
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.
    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) amended section 536(b) of title V 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) amended section 
536(a) of title V 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 conveyance claims. The TRS 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 a 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 mortgagee'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 Final Rule

    This final rule follows publication of the April 14, 2004, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. After careful consideration of the public comments, HUD 
has decided to adopt the April 14, 2004, proposed rule without change.

III. Discussion of Public Comments

    The public comment period on the April 14, 2004, proposed rule 
closed on June 14, 2004. HUD received nine public comments on the 
proposed rule. Comments were received from a housing counseling agency, 
state housing and finance authorities, trade associations representing 
mortgage bankers and brokers, and a community development organization. 
This section of the preamble presents a summary of the significant 
issues raised by the public commenters and HUD's responses to these 
issues.
    Comment: The treble damages penalty is unfair and excessively high. 
Two commenters stated that the treble damages penalty is unfair because 
it is not based on damages actually sustained by HUD. The commenters 
wrote that the penalties proposed are not treble damages but are 
actually numbers that are ten times HUD's actual losses on 
foreclosures. The commenters stated that the average losses incurred by 
HUD per foreclosure in 2003 were approximately $26,000, whereas an 
average penalty incurred per treble damages violation would be three 
times the average insurance claim, or approximately $276,000. One 
commenter explained the imposition of treble damages penalty is 
excessive in that the servicer ``risks losing'' three times the amount 
of the entire claim. Another commenter stated that treble damages 
should be limited to the amount of the borrower's current principal 
balance.
    HUD Response. The statutory language that added this triple penalty 
to the existing civil money penalty

[[Page 21573]]

system states that the penalty shall be in the amount of three times 
the amount of any insurance benefits claimed for which the mortgagee 
failed to engage in loss mitigation. HUD, in determining the treble 
damages penalty amount, must abide by the statutory directive. 
Furthermore, the penalty is a punitive damage that would be assessed 
based on the lender's failure to follow HUD's policies and regulations. 
It is designed to remind mortgagees of the importance of complying with 
existing regulations and policies that require lenders to engage in 
loss mitigation, which minimizes the risk that borrowers unnecessarily 
lose their homes.
    Comment: The TRS has no bright-line test. One commenter is 
concerned there is no ``bright-line test'' to determine a lender or 
mortgagee's placement in the TRS.
    HUD Response. Lenders have had sufficient notice through 17 rounds 
of the Tier Ranking System to have a familiarity with the system. HUD 
published, by notice, with opportunity for comment, the benchmarks used 
in the Tier Ranking System.
    Comment: Loss mitigation efforts are highly subjective. One 
commenter asked, ``How far is a lender expected to go to reach an 
uncooperative borrower [?]''
    HUD Response. This final rule does not impose new servicing 
requirements on lenders, so the level of effort required to make 
contact and to attempt to gather and evaluate the borrower's financial 
situation remains unchanged. As stated in the proposed rule, if, 
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, then generally, the mortgagee would be 
considered in compliance and not subject to treble damages for the 
particular loan.
    An evaluation of the number of foreclosures by the 22 lenders 
earning a Tier 4 score in Round 17 shows that the median number of 
foreclosures was 32, the average was 63, the minimum was 11, and the 
maximum was 456. A comparison of these numbers to the corresponding 
level of loss mitigation used to calculate the TRS score supports HUD's 
contention that a Tier 4 ranking is 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.
    Lenders have had sufficient notice through 17 rounds of the Tier 
Ranking System. HUD's post-claim reviews can go back three years to 
establish a pattern of non-compliance with HUD policy. Treble damages 
will not be assessed on any claim where the date of default occurred 
before the final rule's effective date.
    Comment: It is unclear what claims are subject to the treble 
damages audit and penalty. One commenter stated that HUD should provide 
a clearer statement of what claims, past and future, will be part of 
any treble damages audit and resulting penalty.
    HUD Response. HUD will not pursue treble damages for failure to 
engage in loss mitigation where the date of default occurred before the 
final rule's effective date. Aside from that restriction, HUD may 
pursue treble damages as allowed by the operative statute of 
limitations.
    Comment: Tier 4 mortgagees should have a different standard of 
treble damages penalty than Tiers 1-3 mortgagees. One commenter wrote 
that HUD must be very cautious in assessing the penalty and should only 
assess the penalty for Tier 4 mortgagees. Another commenter stated, 
``HUD's apparent willingness to penalize any mortgagee for failure to 
engage properly in loss mitigation, `regardless of [TRS] ranking or 
absence of ranking,' or historical context of excellent loss mitigation 
efforts, is disingenuous.'' One commenter wrote that it believes Tier 
1-3 servicers should not have unlimited contingent liability for 
failure to engage in loss mitigation because minor infractions or other 
consumer complaints could trigger increased sampling and possible 
imposition of treble damages looking back to the previous servicing 
audit; thus, HUD should limit treble damages to only those servicers 
who fall into the Tier 4 category.
    HUD Response. In the proposed rule, HUD stated that while any 
mortgagee that has a 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 for review 
purposes. Information available to HUD indicates that Tier 4 mortgagees 
engage in little or no loss mitigation. HUD continues to agree with 
this assessment.
    Comment: A ``safe harbor'' should be established where mortgagees 
demonstrating overall compliance will not be subjected to treble damage 
penalties. One commenter wrote that a safe harbor should be provided to 
those who demonstrate a ``systematic overall compliance'' with the loss 
mitigation rules. The commenter explained that due to the ``extreme 
nature of the penalty,'' treble damages should not be imposed where a 
servicer is materially complying with the loss mitigation regulations 
and only ``isolated incidents'' of non-compliance have occurred. 
Another commenter stated that servicers that have generally good loss 
mitigation records may be subjected to treble damages for ``relatively 
isolated compliance failures.'' This commenter stated that a safe 
harbor should be included for those mortgagees with ``good rankings'' 
and that treble damages should be reserved for only those who have 
``repeatedly failed to comply'' with loss mitigation requirements; 
otherwise, the ``inability to avoid treble damages'' may make ``GNMA 
servicing less attractive.'' Another commenter wrote that HUD should 
reconsider a treble damages penalty exemption for servicers who have 
demonstrated overall compliance with HUD's loss mitigation rules 
through the Tier rankings.
    HUD Response. As stated previously, the civil money penalty statute 
does not allow HUD to exempt any group of lenders; therefore, HUD is 
prohibited from exempting Tier 1-3 lenders from potential treble 
damages. Also, as stated previously, this rule provides appropriate 
notification that HUD will focus on Tier 4 mortgagees for review 
purposes. Finally, while there is a case-by-case liability stemming 
from failure to evaluate a loan for loss mitigation and/or failure to 
then take the appropriate action, treble damage penalties are more 
likely where there is a pattern of non-compliance as opposed to an 
isolated servicing mistake. Thus, HUD continues to emphasize that HUD 
will primarily concentrate on those mortgagees that engage in little or 
no loss mitigation.
    Comment: Mortgagees should be allowed flexibility to challenge its 
findings of non-compliance. One commenter wrote that the appeals 
process must be more broad in allowing servicers to refute substantive 
findings of ``failure to engage in loss mitigation'' regardless of the 
Tier ranking. The commenter explained that overly aggressive auditors 
who have misapplied Federal Housing Administration (FHA) requirements 
in the past will have the final decision on which companies will appear 
before the Mortgagee Review Board (MRB) for possible treble penalties; 
thus, servicers deserve an opportunity to refute an auditor's findings 
with HUD staff that are knowledgeable about loss mitigation policies 
before reaching the MRB. Another commenter stated that an appeals 
process is critical to ensure that the imposition of the treble damages 
penalty is justified.
    HUD Response. HUD believes the commenters' concerns are misplaced,

[[Page 21574]]

and characterization of some Quality Assurance Division (QAD) monitors 
as ``overly aggressive'' is incorrect. HUD takes its duties to protect 
the public very seriously, and will continue current vigorous efforts 
to ensure the stability and viability of Departmental programs. 
Mortgagees have opportunities throughout the monitoring and Mortgagee 
Review Board process to contest proposed findings, and ultimately, to 
appeal any findings actually made. Generally, mortgagees have the 
ability to discuss potential findings with monitors on-site at the end 
of a review. If a mortgagee is referred to the Mortgagee Review Board 
and a Notice of Violation is issued, the mortgagee has an opportunity 
to submit a comprehensive response to the Notice. The mortgagee's 
response is considered by the Mortgagee Review Board in determining 
whether an administrative action or civil money penalty is appropriate. 
Upon being notified of the Board's determination to impose a sanction, 
a mortgagee has appeal rights as provided by statute and regulations.
    Comment: Servicers should have sufficient lead times before tier 
scoring standards are changed and implemented. One commenter wrote that 
because HUD reserves the right to change the tier scoring benchmarks 
via Federal Register notice, any changes to the tier scoring system 
should allow the servicer necessary time (12 months) to make necessary 
revisions to their processes to meet new performance standards set out 
by HUD. Another commenter wrote that HUD should provide an advance 
warning system to allow servicers to improve their scores before 
enforcement actions can be taken. The commenter stated that servicers, 
like borrowers seeking loss mitigation, should be given a chance to 
cure. Moreover, although HUD has claimed it will adjust thresholds 
based on negative market conditions, an early warning system is still 
needed. Another commenter suggested that servicers be provided 12 
months' advance warning of an increase in TRS thresholds or a change in 
TRS calculation so that servicers can publicly comment; also, 12 months 
allows for an evaluation of the change on a morgagee's tier ranking and 
an opportunity to adjust business models to raise scores. This alone 
may require hiring additional staff, a change of business plans, etc. 
This same commenter wrote that 12 months is consistent with other HUD 
timelines when other mortgagee policies have been changed. The 
commenter used the Round 14 Tier 4 threshold change from ``less than 
15%'' to ``less than 40%'' as an example of how a more advanced warning 
could result in affected companies taking steps to avoid the new 
category.
    HUD Response. A lender's business model should not be based on 
HUD's Tier Ranking System or its benchmarks; rather, it should be based 
on meeting the requirements that lenders evaluate all defaulted loans 
for loss mitigation and then take the appropriate action. As stated in 
the proposed rule, HUD may from time to time propose changes to the 
benchmarks. The changes will be proposed by a Federal Register notice, 
and offer the opportunity for comment before the changes take effect. 
Although the benchmarks are not part of the codified regulations, HUD 
nevertheless recognizes that changes to the benchmarks should undergo 
the opportunity for comment before becoming final and taking effect. 
Changes to evaluation thresholds are done periodically within the 
industry as performance changes. Under the TRS, Tier 4 will always be 
the lowest ranking possible. While the benchmarks were adjusted in 
Round 14, this was the only benchmark change since the workout ratio 
was adopted in Round 6. Advance notice, with opportunity to comment, 
will be given should HUD decide to change the TRS formula.
    Comment: Only claims from the last quarter should be considered in 
HUD's TRS analysis. One commenter wrote that if HUD is willing to 
impose treble damages for failure to engage in loss mitigation on one 
loan, regardless of a mortgagee's loss mitigation performance, then HUD 
is being ``capricious and excessive.'' Both commenters stated that only 
claims filed during the last quarter comprising the ranking should be 
subject to treble damages and that claims in following quarters should 
not be subject to treble damages if the score improves to a higher 
ranking. The two commenters wrote that a preferred policy would be to 
subject servicers to the treble damage penalty only after servicers 
have been ranked Tier 4 for four consecutive quarters because this 
provides a reasonable opportunity to correct deficiencies or adjust 
business plans. In other words, this would allow sufficient time for an 
opportunity to cure. One of the commenters wrote that it previously 
supported quarterly rankings, but if the scope of servicers' liability 
is not limited to one quarter, then it is critical to reduce the 
frequency with which companies are evaluated for treble damages.
    HUD Response. As stated above, lenders have had sufficient notice 
through 17 rounds of the Tier Ranking System to evaluate and improve 
their rankings. The statute does not permit HUD to exempt lenders from 
possible penalty based upon the approach proposed by the commenter, but 
treble damages will not be assessed on any loan where the date of 
default occurred before the effective date of this final rule.
    As stated previously, this rule provides appropriate notification 
that HUD will focus on Tier 4 mortgagees for review purposes. HUD 
believes that looking at four quarters of data in TRS is in the 
lender's best interest, as it provides a better indication of 
performance. HUD will continue to provide quarterly feedback via the 
TRS. Given HUD's limited resources, HUD will focus on as many Tier 4 
lenders as HUD can; however, the TRS is only one of several tools used 
by HUD for targeting lenders for review.
    Comment: Tiers 1-3 liability should only extend for one quarter. 
Two commenters wrote that the window for Tiers 1-3 liability should 
extend for only one quarter. One commenter suggested providing 
quarterly reports for the servicers' benefit (``early warning system'') 
but that only one ``compliance'' ranking issued per year would trigger 
any enforcement action. The other commenter wrote that servicers ranked 
Tier 4 should only be subject to treble damages for those claims made 
during the last quarter comprising the ranking.
    HUD Response. There is no ``tier liability.'' A mortgagee is not 
determined liable or not liable simply due to what Tier ranking a 
mortgagee occupies. As stated previously, HUD is focusing on Tier 4 
mortgagees for review purposes. Also, as stated above, all Lenders have 
had sufficient notice through 17 rounds of the Tier Ranking System. 
HUD's post claim reviews can go back three years to establish a pattern 
of non-compliance with HUD policy. Treble damages will not be assessed 
on any loan where the date of default occurred before the final rule's 
effective date.
    Comment: Only certain loan origination issue dates and Round dates 
should be used in determining TRS rankings. One commenter stated that 
it assumes HUD will not use dates from Round 14 through Round 17 in 
future scores if the data causes a servicer to be ranked Tier 4. The 
commenter explained that it assumes also that any findings of failure 
to engage in loss mitigation from October 1, 2002 through June 30, 2004 
will not be subject to treble damages, because servicers did not have 
an advance warning of the increase in the threshold. Also, a

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commenter stated that any application of the treble damages penalty 
should only apply to loans originated on or after the issue date of the 
final treble damages rule.
    HUD Response. 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 a part of the 
pilot testing of TRS, 17 Rounds of TRS scores have been issued since 
December 2000. HUD's observation is that changes from Round to Round 
have been minimal based on the data's rolling 12 months. Treble damages 
will not be assessed on any loan where the date of default occurred 
before this final rule's effective date.
    Comment: Implementation of the treble damages hurts FHA. One 
commenter stated ``We are concerned that the inability to completely 
avoid treble damages may make FHA servicing less attractive.''
    HUD Response. HUD partially agrees with this comment. The inability 
to completely avoid treble damages may make FHA servicing less 
attractive to those lenders who systematically fail to engage in loss 
mitigation, which is a violation of existing regulations. However, this 
final rule adds no new servicing requirements; rather, it increases the 
penalty to those lenders who do not follow these requirements. When 
lenders do not service FHA loans in accordance with FHA regulations, 
this failure to perform loss mitigation results in greater losses to 
HUD. Lenders who do not service FHA loans in accordance with FHA 
regulations also harm the insurance fund by precluding ways by which a 
homeowner could recover financially and make mortgage payments. 
Additionally, lenders who do not service FHA loans in accordance with 
FHA regulations also deprive servicers of servicing income. The MRB has 
assessed and will continue to assess substantial fines to those lenders 
who demonstrate a pattern of non-compliance with HUD regulations.
    Comment: Ranking servicers by legal identity is a positive step. 
One commenter expressed support that the proposed rule provides that 
servicers will be ranked by legal entity rather than separate mortgagee 
identification numbers. The commenter stated that servicers that have 
acquired other servicers will not be disadvantaged with regard to 
treble damages merely because they possess multiple mortgagee 
identification numbers and transact different activities under those 
numbers.
    HUD Response. HUD has been providing a single, aggregate score only 
to those lenders 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: Question regarding proposed damages cap. One commenter 
asked whether the maximum money penalty, currently $1,250,000, applies 
to the treble damages penalty. The commenter would like HUD to make an 
express statement explaining the cap to treble damages.
    HUD Response. HUD does not believe the annual limitation to the 
amount of civil money penalties applies to treble damages imposed for 
failure to engage in loss mitigation. The original enactment of a civil 
money penalty in 1988 was capped at the per violation level and the per 
violation cap was further modified by an annual cap. The 1998 
legislation enacting a civil money penalty for failure to engage in 
loss mitigation provided for a penalty that substantially exceeds the 
original per violation maximum enacted by the initial 1988 civil money 
penalty legislation, and makes no mention of an annual cap on loss 
mitigation penalties. Indeed, a loss mitigation penalty for a single 
loss mitigation failure will likely be assessed at hundreds of 
thousands of dollars as the average claim to HUD is roughly $98,500. 
The legislative history for the 1998 enactment emphasizes Congress' 
intent that the loss mitigation program be ``aggressive and 
effective.'' Finally, as codified, the annual cap only modifies 
penalties previously capped on a per violation basis. Given the 
foregoing, HUD believes that an annual maximum civil money penalty 
amount does not apply to loss mitigation penalties.
    Comment: HUD should make loan-level information more easily 
available to servicers. One commenter requested that HUD make available 
information used to calculate Tier Rankings in a downloadable batch 
format through FHA Connection. The commenter states that often the HUD 
data and the servicers' data do not match; also, a servicer must cut 
and paste tens of thousands of fields of information in order to 
perform reconciliation, which is very time-consuming. Servicers must be 
able to validate and reconcile their internal records to ensure all 
parties are operating off the same records.
    HUD Response. In HUD's experience, the primary reason for failure 
to reconcile data stems from failure of the lender to accurately report 
to HUD's Single Family Default Monitoring System (SFDMS). The lender 
provides data to HUD, so the lender should be able to recreate in their 
own systems the data sent to HUD's SFDMS and data regarding paid loss 
mitigation and foreclosure claims. HUD has always responded to 
individual inquiries requesting loan level information. HUD is studying 
providing loan level data through a system accessible to lenders, but 
at this time does not have adequate funding for necessary system 
enhancements.
    Comment: HUD should provide timely TRS reports when used to trigger 
liability or incentives. One commenter stated that because not all 
servicers can accurately monitor their Tier Rankings internally due to 
the difficulty in reconciliation and verification, HUD should provide 
timely TRS reports to ensure that the servicers have enough time to 
correct deficiencies before the next Tier Rankings are released.
    HUD Response. There has always been at least a one-quarter lag from 
the end of the ranking period until the scores are released. This 
allows adequate time to ensure data integrity within the HUD systems 
from which the TRS counts are obtained. The TRS scoring methodology was 
designed so that lenders could calculate their own scores for self-
monitoring, at any interval desired, using data from their own internal 
systems.
    Comment: Round 6's calculation change negatively affects rankings. 
One commenter stated that the change in TRS calculation in Round 6, 
which requires servicers to back out multiple loss mitigation actions 
reported, makes the internal calculation of the score more difficult 
and less reliable. This results in discrepancies between servicer-
generated rankings and the official Tier rankings.
    HUD Response. The TRS calculation, including the maximum of one 
credit for multiple cases, was developed by HUD using widely available 
database software. The TRS scoring methodology was designed so that 
lenders could calculate their own scores for self-monitoring, at any 
interval desired, using data from their own internal systems.
    Comment: Question regarding sampling to determine Tier 4 reviews. 
One commenter asked if HUD plans to conduct a 100 percent review of 
Tier 4 servicers or if HUD will limit the review to a smaller 
percentage or random sample.
    HUD Response. Since 2001, soon after the first TRS scores were 
released, HUD incorporated TRS scores into the methodology used to 
target servicing lenders for review. This methodology

[[Page 21576]]

takes into account variables which include, but are not limited to, TRS 
scores, servicing portfolio size, length of time since last HUD review, 
default rates, default reporting, foreclosure claims, and previous 
findings. This methodology ensures that servicing lenders are reviewed 
with appropriate frequency, and effectively ensures that all Tier 4 
servicing lenders will be reviewed at some time based on the variables 
in the targeting methodology. Furthermore, HUD may review any claim at 
any time for compliance with HUD's regulations regardless of tier 
ranking.
    Comment: Small mortgagees will be negatively affected by a treble 
damages penalty. One commenter states it is concerned that HUD has 
retained the possibility to assess treble damages on any mortgagee HUD 
determines has failed to engage in loss mitigation. This commenter 
writes that such action would be very damaging to small mortgagees and 
that a good way to encourage mortgagees to engage in loss mitigation 
would be to use a tiered level of fines and penalties based on the size 
of the mortgagee. The commenter states that if a small mortgagee 
determines that it may be subject to an FHA penalty due to a failure to 
engage in required loss mitigation actions, it can simply push for 
foreclosure rather than offer loss mitigation to the mortgagor, 
purchase the property at foreclosure sale and make no claim (i.e., do 
not convey the property to the FHA).
    HUD Response. The civil money penalty statute does not allow HUD to 
assess the penalty on any factor other than three times the amount of 
any insurance benefits claimed by the mortgagee with respect to any 
mortgage for which the mortgagee failed to engage in such loss 
mitigation actions. As stated in the proposed rule, all mortgagees have 
an obligation to ensure that all borrowers are afforded the opportunity 
for loss mitigation where loss mitigation is appropriate, and HUD has 
an obligation to enforce the loss mitigation requirements, regardless 
of the mortgagee's portfolio size.
    HUD notes that pushing for a foreclosure without attempting loss 
mitigation as identified in the comment violates HUD's servicing 
regulations even in the absence of a filed claim. Implementation of a 
rush to foreclosure policy could subject the mortgagee and individuals 
involved in the violation to monetary penalties and program exclusions. 
A mortgagee that realizes that it has not done loss mitigation, and is 
fearful of a treble damages penalty, should, rather than push for 
foreclosure, stop or stay the foreclosure, perform the loss mitigation 
evaluation and then take the appropriate action, and potentially avoid 
a treble damages penalty altogether.
    Comment: Small mortgagees are unable to handle the financial and 
organizational costs associated with additional regulations. A 
commenter wrote that small mortgagees such as state housing agencies 
are on the verge of suffering because of a variety of FHA policies and 
servicing FHA-insured loans is becoming almost as costly as servicing 
sub-prime loans. The potential fines and treble damages that the new 
mortgagee may encounter after taking on the service of new portfolios 
must be considered. The commenter stated that the ``myriad of rules, 
regulations, complexities, penalties and fines that are part of the 
current FHA insurance environment are detrimental to the achievement of 
the mission of state housing agencies and in turn detrimental to the 
achievement of HUD's stated mission and strategic goals.'' The 
commenter offered suggestions to lessen what the commenter states is a 
significant economic impact on small entities. The commenter suggests 
that: (1) A new definition of ``small'' be implemented; (2) more 
penalty categories be created where the penalties and fees are lower 
for smaller organizations; and (3) classifications are based on 
portfolio size and not the number of claims.
    HUD Response. As stated previously, Section 230(a) of the NHA 
requires lenders to engage in loss mitigation actions. Again, this 
final rule adds no new servicing requirements; rather, it provides for 
imposition of a penalty on mortgagees that do not follow loss 
mitigation requirements. The intent of treble damages is to encourage 
mortgagees to comply with existing HUD policies, regulations, and 
statutes.
    Comment: HUD should address the unique needs of specialty 
servicers, especially small-to mid-sized servicers and subservicers, 
which have unique business models. The commenter wrote that when 
subservicers are contractually required to finalize any foreclosure 
actions and process claims on behalf of the primary servicer, the 
subservicer must identify itself as the ``mortgagee of record'' and 
that foreclosure claim payment will be assigned to the subservicer for 
Tier Ranking purposes, thus negatively affecting the subservicer's TRS 
ranking. Also, buyers that acquire servicing for severely delinquent 
loans will have limited opportunity to perform loss mitigation. The 
commenter wrote that HUD should expressly state that a servicer's 
business model and/or the practical inability to perform certain loss 
mitigation functions will be considered a compensating factor for a 
Tier 4 ranking and HUD's imposition of treble damages. HUD should 
review servicers and the impact those servicers' different business 
models have on a case-by-case basis. Another commenter stated that 
``mistakes happen.'' The commenter noted that one mistake on a loan 
file, thus resulting in a treble damages penalty, could put a small 
mortgagee out of business.
    HUD Response. As stated previously, section 230(a) of the NHA 
requires mortgagees to engage in loss mitigation actions. Again, this 
final rule adds no new servicing requirements; rather, it provides for 
imposition of a penalty on mortgagees that do not follow loss 
mitigation requirements. The intent of treble damages is to encourage 
mortgagees to comply with existing HUD policies, regulations, and 
statutes. HUD is not a party to contractual agreements between 
servicers and subservicers. Servicers and subservicers are cautioned, 
however, to ensure that the parties to the contract have followed HUD 
regulations regarding approved servicers, mortgage record changes and 
servicing requirements, including loss mitigation evaluation and the 
management decision to foreclose.
    HUD disagrees with the comment that a servicer's business model 
and/or the practical inability to perform certain loss mitigation 
functions should be considered a compensating factor for a Tier 4 
ranking and HUD's imposition of treble damages. To allow such a 
compensating factor undermines the effectiveness of the regulatory 
scheme as neither the buyer nor the seller would accept responsibility 
for appropriate servicing, including the loss mitigation evaluation. 
HUD cannot allow ``sale of a mortgage'' to be an acceptable reason to 
not evaluate a loan for loss mitigation. While it may be true that 
servicing mortgagees who acquire servicing of severely delinquent loans 
could have limited opportunity to perform loss mitigation, the solution 
lies in the servicing mortgagees's due diligence prior to acquiring 
loans. Due diligence provides the servicing mortgagee the opportunity 
to measure the risks inherent in the portfolio, including, but not 
limited to, inadequate servicing or other factors that may ultimately 
lead to findings, civil money penalties, or indemnification of HUD 
(Please see Mortgagee Letter 2002-21, dated September 26, 2002, Due 
Diligence in Acquiring Loans, and HUD Handbook 4330.1, Rev-5, Chapter 
6, for more guidance).

[[Page 21577]]

    Finally, while there is a case-by-case liability stemming from 
failure to evaluate a loan for loss mitigation and/or failure to then 
take the appropriate action, treble damage penalties are more likely 
where there is a pattern of non-compliance as opposed to an isolated 
servicing mistake.

IV. Small Business Concerns Related to Treble Damages

    With respect to imposing treble damages on a mortgagee for failure 
to engage in loss mitigation, or taking other appropriate enforcement 
action against a mortgagee, HUD is cognizant that section 222 of the 
Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law 
104-121) (SBREFA) requires the Small Business and Agriculture 
Regulatory Enforcement Ombudsman to ``work with each agency with 
regulatory authority over small businesses to ensure that small 
business concerns that receive or are subject to an audit, on-site 
inspection, compliance assistance effort, or other enforcement related 
communication or contact by agency personnel are provided with a means 
to comment on the enforcement activity conducted by this personnel.'' 
To implement this statutory provision, the Small Business 
Administration has requested that agencies include the following 
language on agency publications and notices that are provided to small 
business concerns at the time the enforcement action is undertaken. The 
language is as follows:

Your Comments Are Important

    The Small Business and Agriculture Regulatory Enforcement 
Ombudsman and 10 Regional Fairness Boards were established to 
receive comments from small businesses about Federal agency 
enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to 
small business. If you wish to comment on the enforcement actions of 
[insert agency name], you will find the necessary comment forms at 
http://www.sba.gov.ombudsman or call 1-888-REG-FAIR (1-888-734-
3247).

    In accordance with its notice describing HUD's actions on the 
implementation of SBREFA, which was published on May 21, 1998 (63 FR 
28214), HUD will work with the Small Business Administration to provide 
small entities with information on the Fairness Boards and National 
Ombudsman program, at the time enforcement actions are taken, to ensure 
that small entities have the full means to comment on the enforcement 
activity conducted by HUD.

V. 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 of information displays 
a valid control number.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.), generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements unless the 
agency certifies that the rule will 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 implemented by this 
rule. The statute does not provide an exemption for small entities. To 
the extent that the treble damages penalty would impose a significant 
economic impact on small entities, an impact will only occur due to a 
mortgagee's own inaction--since the only entities that will be affected 
will be poorly performing mortgagees that fail to engage in loss 
mitigation. Therefore, the undersigned certifies that this final rule 
will not have a significant economic impact on a substantial number of 
small entities.

Environmental Impact

    In accordance with 24 CFR 50.19(c)(6) of HUD's regulations, this 
rule involves establishment of treble damages for lenders 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 final 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 construction materials, manufactured 
housing, or occupancy. Therefore, this 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.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531-1538) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments and the private sector. This final rule does not 
impose any Federal mandates on any state, local, or tribal government 
or the private sector within the meaning of UMRA.

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 20410-5000.

Catalog of Federal Domestic Assistance Number

    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

[[Page 21578]]

development, Mortgage insurance, Reporting and recordkeeping 
requirements, Solar energy.


0
For the reasons discussed in the preamble, HUD amends 24 CFR parts 30 
and 203 to read as follows:

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

0
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

0
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

0
3. Add Sec.  30.80 (l) to read as follows:


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

* * * * *
    (l) HUD may consider the factors listed in paragraphs (a) through 
(k) of this section to determine the appropriateness of imposing 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

0
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

0
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.

0
6. Revise Sec.  203.605 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 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 
Secretary'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: April 15, 2005.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 05-8334 Filed 4-25-05; 8:45 am]
BILLING CODE 4210-27-P