[Federal Register Volume 75, Number 165 (Thursday, August 26, 2010)]
[Rules and Regulations]
[Pages 52429-52435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21261]



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 Rules and Regulations
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  Federal Register / Vol. 75, No. 165 / Thursday, August 26, 2010 / 
Rules and Regulations  

[[Page 52429]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service

7 CFR Part 1980

RIN 0575-AC85


Guaranteed Single Family Housing Loans

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Housing Service (RHS) is amending its regulations to 
add new servicing options to the Single Family Housing Guaranteed Loan 
Program (SFHGLP) that lenders may utilize while still maintaining the 
SFHGLP loan guarantee. The Agency will allow lenders to extend loans 
for a term of up to 40 years from the date of modification. The Agency 
also will allow lenders to advance funds on behalf of borrowers in 
amounts necessary to bring defaulted loans current, up to 30 percent of 
the unpaid principal balance of the loan. Upon request, RHS will 
reimburse the lender for eligible advances. The intended effect is to 
reduce mortgage foreclosures among SFHGLP borrowers and help stabilize 
the national housing market. This amendment is being issued as a final 
rule pursuant to section 101(c)(1) of the Helping Families Save Their 
Homes Act of 2009, which authorizes RHS to promulgate this rule without 
regard to the notice and comment provisions of 5 U.S.C. 553 or the 
Statement of Policy of the Secretary of Agriculture effective July 24, 
1971 (36 FR 13804) relating to notices of proposed rulemaking and 
public participation in rulemaking.

DATES: Effective Date: This rule is effective September 24th, 2010.

FOR FURTHER INFORMATION CONTACT: Stuart Walden, Senior Loan Specialist, 
Section 502 Guaranteed Loan Program--STOP 0784 (Room 2241), U.S. 
Department of Agriculture, Rural Housing Service, 1400 Independence 
Ave., SW., Washington, DC 20250-0784. Telephone: 202-690-4507; 202-720-
8795; E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be not significant and has 
not been reviewed by the Office of Management and Budget (OMB) under 
Executive Order 12866.

Executive Order 12988, Civil Justice Reform

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. In accordance with the Executive Order: (1) All State 
and local laws and regulations that are in conflict with this rule will 
be preempted; (2) No retroactive effect will be given to this rule; and 
(3) Administrative proceedings in accordance with the regulations of 
the National Appeals Division of USDA at 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule unless those regulations specifically allow bringing suit at 
an earlier time.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA (2 
U.S.C. 1532), RHS generally must prepare a written statement, including 
a cost benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of the UMRA generally requires RHS to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, more cost-effective, or least burdensome alternative that 
achieves the objectives of the rule. This rule contains no Federal 
mandates (under the regulatory provisions of Title II of the UMRA) for 
State, local, and tribal governments or the private sector. Therefore, 
this rule is not subject to the requirements of sections 202 and 205 of 
the UMRA.

Environmental Impact Statement

    This final rule has been reviewed in accordance with 7 CFR part 
1940, subpart G, ``Environmental Program.'' Rural Development has 
determined that an environmental Impact Statement is not required 
because the issuance of regulations and instructions, as well as 
amendments to them, describing administrative and financial procedures 
for processing, approving, and implementing the Agency's financial 
programs is categorically excluded in the Agency's National 
Environmental Policy Act of 1969 (NEPA) regulation found at 7 CFR 
1940.310(e)(3). Thus, in accordance with NEPA (42 U.S.C. 4321-4347), 
Rural Development has determined that this regulation does not 
constitute a major action significantly affecting the quality of the 
human environment.
    Furthermore, individual awards under this rule are hereby 
classified as categorical exclusions according to 7 CFR 1940.310(e)(2) 
(loan-closing and servicing activities, transfers, assumptions, 
subordinations, construction management activities and amendments and 
revisions to approved projects, including the provision of additional 
financial assistance that do not alter the purpose, operation, 
location, or design of the project as originally approved) and thus do 
not require any additional documentation.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on States, the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose a substantial direct compliance cost on State and local 
governments. Therefore, consultation with the States is not required.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.) the undersigned has determined and certified by signature of this 
document that this rule will not have a significant impact on a 
substantial number of small entities. Program requirements for the 
guaranteed single family housing program are the same for all approved

[[Page 52430]]

lenders regardless of their size. Borrowers are low to moderate income 
individual homebuyers, not entities.

Intergovernmental Consultation

    This program/activity is excluded from the provisions of Executive 
Order 12372, which require intergovernmental consultation with State 
and local officials.

Programs Affected

    The program affected is listed in the Catalog of Federal Domestic 
Assistance as 10.410, Very Low to Moderate Income Housing Loans.

Paperwork Reduction Act of 1995

    Section 101(c)(1)(C) of the Helping Families Save Their Homes Act 
of 2009 authorizes RHS to promulgate this rule without regard to the 
Paperwork Reduction Act.

E-Government Act Compliance

    RHS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to government information 
and services, and for other purposes.

Non-Discrimination Statement

    USDA prohibits discrimination in all its programs and activities on 
the basis of race, color, national origin, age, disability, and where 
applicable, sex, marital status, religion, sexual orientation, genetic 
information, political beliefs, reprisal, or because all or part of an 
individual's income is derived from any public assistance program. (Not 
all prohibited bases apply to all programs.) Persons with disabilities 
who require alternative means for communication of program information 
(Braille, large print, audiotape, etc.) should contact USDA's TARGET 
Center at (202) 720-2600 (voice and TDD). To file a complaint of 
discrimination, write to USDA, Director, Office of Civil Rights, 1400 
Independence Avenue, SW., Washington, DC 20250-9410, or call (800) 795-
3272 (voice), or (202) 720-6382 (TDD). ``USDA is an equal opportunity 
provider, employer, and lender.''

Background Information

    The Helping Families Save Their Homes Act of 2009 was signed into 
law on May 20, 2009. Section 101 of this law amended section 502(h) of 
the Housing Act of 1949 (42 U.S.C. 1472(h)), which authorizes the RHS 
Section 502 Guaranteed Loan Program. The amendments gave RHS the 
authority to approve the modification of guaranteed single family 
housing loans that are in default or facing imminent default with terms 
extended up to 40 years from the date of modification (section 
502(h)(14) of the Housing Act). The amendments also gave RHS the 
authority to establish a program for the payment of partial claims to 
mortgagees (approved guaranteed lenders) who agree to apply the claim 
amount to the payment of a loan in default or facing imminent default 
(section 502(h)(14) of the Housing Act). This rule adds 7 CFR 1980.373 
to allow lenders to modify mortgages by reducing the interest rate to a 
level at or below a maximum allowable interest rate and extending the 
term of the loan up to 40 years from the date of loan modification 
(``extended-term loan modification''). RHS also will reimburse lenders 
for certain advances made on behalf of borrowers in default or facing 
imminent default (``mortgage recovery advances'') (together with 
extended-term loan modification, ``special loan servicing''). Lenders 
must receive written approval from RHS prior to servicing a borrower's 
account with special loan servicing. As with other authorized servicing 
options, the Lender must submit a servicing plan to RHS pursuant to 7 
CFR 1980.374 when a borrower's account is 90 days delinquent and a 
method other than foreclosure is recommended to resolve the 
delinquency. Use of special loan servicing does not change the terms of 
the loan note guarantee. The Agency hopes that the additional servicing 
authorities will help to stabilize the current housing market. This 
rule also amends 7 CFR 1980.302, ``Definitions and Abbreviations,'' to 
include the terms introduced in 7 CFR 1980.373.
    Pursuant to section 1980.373(b), special loan servicing shall be 
used to bring the borrower's mortgage payment to income ratio as close 
as possible to, but not less than, 31 percent. The mortgage payment to 
income ratio is defined as the monthly mortgage payment (principal, 
interest, taxes, and insurance) for the modified mortgage divided by 
the borrower's gross monthly income. RHS chose to target 31 percent of 
a borrower's gross monthly income because 31 percent is consistent with 
the industry standard and is reasonable for determining a monthly 
mortgage payment that the borrower can afford. The U.S. Treasury 
Department's Home Affordable Modification Program (HAMP) requires 
servicers to reduce the borrower's monthly mortgage payment to 31 
percent of the borrower's total pre-tax monthly income. The Federal 
Housing Administration (FHA) and Department of Veterans Affairs (VA) 
also use a 31 percent target in their HAMP-related loan modification 
programs. The following Web sites provide additional information about 
HAMP: www.hmpadmin.com (for servicers) and http://makinghomeaffordable.gov/ (for borrowers). Please note that while HAMP 
is a temporary program (currently set to expire on December 31, 2012), 
the provisions of this final rule have no expiration date.
    Section 1980.373(b) also requires the Lender to verify the 
borrower's income prior to servicing the borrower's account with 
special loan servicing. For borrowers who are employed by a private or 
public organization, the Lender shall examine documents such as the 
borrower's current pay stub and most recent Internal Revenue Service 
Form W-2. For borrowers who are self-employed, the Lender shall examine 
documents such as the borrower's profit and loss statements (for the 
year to date and the previous year) and the borrower's signed tax 
return for the previous year. These verification measures are designed 
to ensure accuracy.
    Pursuant to section 1980.373(c), the Lender must consider 
traditional servicing options before considering special loan 
servicing. Specifically, the Lender must consider the borrower for a 
repayment agreement, special forbearance agreement, and loan 
modification plan with a term not to exceed 30 years from the date of 
the original loan. These traditional servicing options are detailed in 
the Loss Mitigation Guide that RHS distributes to all approved lenders 
servicing SFHGLP loans. If the targeted mortgage payment to income 
ratio cannot be achieved using traditional servicing options, then the 
Lender may consider an extended-term loan modification. If the targeted 
mortgage payment to income ratio cannot be achieved using an extended-
term loan modification, then the Lender may consider a mortgage 
recovery advance in addition to the extended-term loan modification. 
Before considering a mortgage recovery advance, the Lender must reduce 
the interest rate to the maximum allowable interest rate and extend the 
repayment term for 30 years from the date of loan modification. The 
Lender may reduce the interest rate further and/or extend the term of 
the loan for up to 40 years from the date of loan modification at the 
Lender's option, but the Lender shall not be required to do so before 
utilizing a mortgage recovery advance. This sequence gives lenders some 
flexibility while encouraging lenders to achieve

[[Page 52431]]

the targeted mortgage payment to income ratio using the servicing 
option(s) that will be least expensive for the government. Use of the 
mortgage recovery advance is limited because the mortgage recovery 
advance will be most expensive for the government. By imposing these 
restrictions, RHS will promote the reduction of mortgage foreclosures 
in a cost-effective manner.
    Section 1980.373(d) describes eligibility requirements that apply 
to all special loan servicing.
    First, in order for a borrower to be eligible, the borrower must be 
in default or facing imminent default. A borrower is ``facing imminent 
default'' if that borrower is current or less than 30 days past due on 
the mortgage obligation and is experiencing a significant reduction in 
income or some other hardship that will prevent him or her from making 
the next required payment on the mortgage during the month in which it 
is due. Section 502(h)(14) of the Housing Act of 1949 authorizes RHS to 
allow loan modifications and payment of partial claims with respect to 
mortgages that are in default or facing imminent default. RHS believes 
that establishing early contact with borrowers having difficulty making 
their mortgage payments increases the likelihood that such borrowers 
will be able to retain homeownership.
    Second, in order for a borrower to be eligible, the borrower's 
total debt to income ratio following special loan servicing must not 
exceed 55 percent. Total debt to income ratio is defined as the 
borrower's monthly mortgage payment plus all recurring monthly debt 
divided by the borrower's gross monthly income. This requirement exists 
to control costs for the government. Repayment ability is substantially 
impaired when a borrower's total debt to income ratio exceeds 55 
percent. FHA uses the same eligibility standard in its HAMP-related 
loan modification program. In connection with this requirement, section 
1980.373(d) requires the Lender to verify the borrower's income and 
total debt prior to servicing the borrower's account with special loan 
servicing. For borrowers who are employed by a private or public 
organization, the Lender shall verify the borrower's income by 
examining documents such as the borrower's current pay stub and most 
recent Internal Revenue Service Form W-2. For borrowers who are self-
employed, the Lender shall verify the borrower's income by examining 
documents such as the borrower's profit and loss statements (for the 
year to date and the previous year) and the borrower's signed tax 
return for the previous year. The Lender shall verify the borrower's 
total debt by ordering and examining the borrower's credit report. 
These verification measures are designed to ensure accuracy.
    Third, in order for a borrower to be eligible, the borrower must 
successfully complete a trial payment plan to demonstrate that the 
borrower will be able to make regularly scheduled payments as modified 
by the special loan servicing. For borrowers who are in default when 
special loan servicing is initiated, the trial payment plan shall be 
three months in length. For borrowers facing imminent default when 
special loan servicing is initiated, the trial payment plan shall be 
four months in length. The borrower's monthly payment during the trial 
payment plan shall equal the monthly payment that would be owed by the 
borrower following the special loan servicing. A three-month trial 
period is the industry standard and a key element of HAMP. The trial 
period allows the government to verify that the proposed servicing plan 
will succeed in helping the borrower afford their home. Three months is 
sufficient time for a borrower to demonstrate that the new payment can 
be maintained. Borrowers facing imminent default must complete a four-
month trial period. FHA also requires a four-month trial period for 
borrowers facing imminent default in its HAMP-related loan modification 
program. During this trial period, the Lender shall service the 
mortgage in the same manner as it would service a mortgage under a 
special forbearance agreement, i.e., the Lender shall review the status 
of the plan each month and take appropriate action if the borrower is 
not complying with the terms of the plan. If the borrower does not 
successfully complete the trial payment plan by making each of the 
monthly payments on time, the borrower is not eligible for special loan 
servicing. If the borrower begins but does not successfully complete a 
trial payment plan, the Lender should consider the borrower for 
voluntary liquidation and deed in lieu of foreclosure before proceeding 
to foreclosure. This provision is included to minimize loss to the 
government.
    Finally, in order for a borrower to be eligible for special loan 
servicing, the borrower must occupy the property as the borrower's 
primary residence at the time of the special loan servicing and intend 
to continue occupying the property as such. This requirement is 
consistent with existing SFHGLP regulations. It is also consistent with 
the purpose of the program--to assist eligible households in having 
adequate but modest, decent, safe, and sanitary dwellings for their own 
use.
    Section 1980.373(e) states that in an extended-term loan 
modification, the Lender shall reduce the interest rate to a level at 
or below the maximum allowable interest rate and extend the repayment 
term up to 40 years from the date of loan modification. Pursuant to 
section 1980.373(e), the interest rate must be fixed. Using a fixed 
interest rate makes the loan terms easy for the borrower to understand 
and reduces the administrative burden on the government. RHS may 
establish the maximum allowable interest rate by publishing a notice in 
the Federal Register describing how to calculate the rate. This will 
allow RHS to adapt to industry standards and market conditions. If the 
maximum allowable interest rate has not been established by notice in 
the Federal Register, the maximum allowable interest rate shall be 50 
basis points greater than the most recent Freddie Mac Weekly Primary 
Mortgage Market Survey (PMMS) rate for 30-year fixed-rate mortgages 
(U.S. average), rounded to the nearest one-eighth of one percent 
(0.125%), as of the date the loan modification is executed. Weekly PMMS 
rates are published on the Freddie Mac Web site, and the Federal 
Reserve Board includes the average 30-year PMMS rate in the list of 
Selected Interest Rates that it publishes weekly in its Statistical 
Release H.15. This default maximum allowable interest rate is 
determined using the same formula used by FHA in its HAMP-related loan 
modification program. Section 1980.373(e) also requires that the term 
of the loan be extended only as long as is necessary to achieve the 
targeted mortgage payment to income ratio (but no longer than 40 years) 
after the interest rate has been fixed at a level at or below the 
maximum allowable rate. This requirement ensures that the program goals 
are met in a cost-effective manner. As required by section 502(h)(14) 
of the Housing Act of 1949, expenses related to special loan servicing 
shall not be charged to the borrower. Such expenses include title 
search fees and recording fees, but not legal fees and costs related to 
a cancelled foreclosure initiated prior to special loan servicing. 
Legal fees and costs related to a cancelled foreclosure may be 
capitalized into the modified principal balance provided that such 
foreclosure costs reflect work actually completed prior to the date of 
the foreclosure cancellation. Late fees should not be capitalized into 
the modified loan.
    Pursuant to section 1980.373(f), the maximum mortgage recovery 
advance

[[Page 52432]]

consists of the sum of arrearages not to exceed 12 months of principal, 
interest, taxes, and insurance; legal fees and foreclosure costs 
related to a cancelled foreclosure action; and principal reduction. The 
maximum mortgage recovery advance is 30 percent of the unpaid principal 
balance as of the date of default. Section 502(h)(14) of the Housing 
Act of 1949 limits the amount of the partial claim to no more than 30 
percent of the unpaid principal balance of the mortgage plus any costs 
that are approved by the Secretary. RHS has decided not to take any 
costs into account in order to streamline the calculation of the 
maximum mortgage recovery advance. The principal deferment on the 
modified mortgage is determined by multiplying the unpaid principal 
balance by 30 percent and then reducing that amount by arrearages 
advanced to cure the default and any foreclosure costs incurred to that 
point. The principal deferment amount for a specific case shall be 
limited to the amount that will bring the borrower's total monthly 
mortgage payment to 31 percent of gross monthly income. Limiting the 
amount of deferred principal in this way ensures that the program goals 
are met in a cost-effective manner. As required by section 502(h)(14) 
of the Housing Act of 1949, expenses related to special loan servicing 
shall not be charged to the borrower. Such expenses include title 
search fees and recording fees, but not legal fees and costs related to 
a cancelled foreclosure initiated prior to special loan servicing. 
Legal fees and foreclosure costs related to a cancelled foreclosure 
action may be included in the mortgage recovery advance provided that 
such foreclosure costs reflect work actually completed prior to the 
date of the foreclosure cancellation. Late fees should not be included 
in a mortgage recovery advance.
    Section 1980.373(f) also addresses other issues relating to 
mortgage recovery advances. Pursuant to section 1980.373(f)(1), the 
Lender must have the borrower execute a promissory note payable to RHS 
and a mortgage or deed-of-trust in recordable form perfecting a lien 
naming RHS as the secured party for the amount of the mortgage recovery 
advance. The Lender shall properly record the mortgage or deed-of-trust 
in the appropriate local real estate records and provide the original 
promissory note to RHS. The Lender may file a claim pursuant to 7 CFR 
1980.376 for reimbursement of up to $250 for a title search and/or 
recording fees in connection with this promissory note and mortgage or 
deed-of-trust. RHS used similar procedures successfully in its Mortgage 
Recovery Advance Program for SFHGLP borrowers in default on their 
housing loans due to damage caused by certain hurricanes in 2005. 
Pursuant to section 1980.373(f)(2), prior to making a mortgage recovery 
advance, the Lender must perform an escrow analysis to ensure that the 
payment made on behalf of the borrower accurately reflects the escrow 
amount required for taxes and insurance.
    Section 1980.373(f)(3) discusses repayment of mortgage recovery 
advances. First, the mortgage recovery advance note and subordinate 
mortgage or deed-of-trust shall be interest-free. Second, borrowers are 
not required to make any monthly or periodic payments on the mortgage 
recovery advance note; however, borrowers may voluntarily submit 
partial payments without incurring any prepayment penalty. Third, the 
due date for the mortgage recovery advance note shall be the due date 
of the guaranteed note held by the Lender, as modified by the special 
loan servicing. Prior to the due date on the mortgage recovery advance 
note, payment in full under the note is due at the earlier of the 
following: When the first lien mortgage and the guaranteed note are 
paid off, or when the borrower transfers title to the property by 
voluntary or involuntary means. These provisions reflect industry 
practice under HAMP, which mandates that interest not accrue on 
deferred principal and that deferred principal is not due until the 
borrower pays off the loan, refinances, or sells the house. Fourth, 
repayment of all or part of the mortgage recovery advance must be 
remitted directly to RHS by the borrower. Finally, RHS will collect 
this Federal debt from the borrower by any available means if the 
mortgage recovery advance is not repaid based on the terms outlined in 
the promissory note and mortgage or deed-of-trust.
    Section 1980.373(f)(4) discusses how a Lender files a claim with 
RHS for reimbursement of a mortgage recovery advance. First, a claim 
for reimbursement must be submitted to RHS within 60 days of the 
advance being executed by the borrower through his or her signature on 
the promissory note. Second, when filing the claim for reimbursement 
with RHS, the Lender must: Submit the original promissory note and a 
copy of the filed mortgage or deed-of-trust; include a summary of the 
amount of the funds advanced, including the monthly principal, 
interest, taxes, insurance, and principal deferment (if applicable), 
and other account information indicating the borrower's arrearage 
before the advance, as well as the present status of the account as of 
the date of the advance; provide the name, address, and tax ID number 
for the Lender; and provide the name, address, and phone number of a 
contact person for the Lender who can answer questions about the 
reimbursement request. These requirements allow RHS to exercise 
oversight and verify proper use of government funds for this servicing 
option.
    Pursuant to section 1980.373(f)(5), if a borrower defaults on his 
or her loan after receiving a mortgage recovery advance and a loss 
claim is filed by the Lender due to the default, any Agency 
reimbursement issued for the mortgage recovery advance to the Lender on 
behalf of the borrower will be credited toward the maximum loan 
guarantee amount payable by the Agency under the guarantee. RHS 
followed this policy successfully in its mortgage recovery advance 
Program for SFHGLP borrowers in default on their housing loans due to 
damage caused by certain hurricanes in 2005. This credit or reduction 
in the ultimate loss claim payment is necessary since the mortgage 
recovery advance is a partial claim under the guarantee.

List of Subjects in 7 CFR Part 1980

    Home improvement, Loan programs--Housing and community development, 
Mortgage insurance, Mortgages, Rural areas.

0
For the reasons stated in the preamble, chapter XVIII, title 7 of the 
Code of Federal Regulations, is amended as follows:

PART 1980--GENERAL

0
1. The authority citation for part 1980 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.

Subpart D--Rural Housing Loans

0
2. Section 1980.302(a) is amended by adding in alphabetical order the 
definitions for ``Extended-term loan modification,'' ``Maximum 
allowable interest rate,'' ``Mortgage payment to income ratio,'' 
``Mortgage recovery advance,'' and ``Total debt to income ratio,'' to 
read as follows:


Sec.  1980.302  Definitions and abbreviations.

    (a) * * *
    Extended-term loan modification. A loan modification in which the 
Lender reduces the interest rate to a level at or below the maximum 
allowable interest rate and then extends the repayment term up to a 
maximum of 40 years from the date of loan modification, but only

[[Page 52433]]

as long as is necessary to achieve the targeted mortgage payment to 
income ratio.
* * * * *
    Maximum allowable interest rate. RHS may establish the maximum 
allowable interest rate in an extended-term loan modification by 
publishing a notice in the Federal Register describing how to calculate 
the maximum allowable interest rate. If the maximum allowable interest 
rate has not been established by notice in the Federal Register, the 
maximum allowable interest rate shall be 50 basis points greater than 
the most recent Freddie Mac Weekly Primary Mortgage Market Survey 
(PMMS) rate for 30-year fixed-rate mortgages (U.S. average), rounded to 
the nearest one-eighth of one percent (0.125%), as of the date the loan 
modification is executed. Weekly PMMS rates are published on the 
Freddie Mac Web site, and the Federal Reserve Board includes the 
average 30-year PMMS rate in the list of Selected Interest Rates that 
it publishes weekly in its Statistical Release H.15.
* * * * *
    Mortgage payment to income ratio. This ratio is defined as the 
monthly mortgage payment (principal, interest, taxes, and insurance) 
divided by the borrower's gross monthly income.
* * * * *
    Mortgage recovery advance. A mortgage recovery advance is funds 
advanced by the Lender on behalf of a borrower to satisfy the 
borrower's arrearage, pay legal fees and foreclosure costs related to a 
cancelled foreclosure action, and reduce principal. Upon request, RHS 
will reimburse the Lender for eligible mortgage recovery advances. The 
maximum mortgage recovery advance consists of the sum of:
    (i) Arrearages not to exceed 12 months of principal, interest, 
taxes, and insurance;
    (ii) legal fees and foreclosure costs related to a cancelled 
foreclosure action; and
    (iii) principal reduction.


The maximum mortgage recovery advance is 30 percent of the unpaid 
principal balance as of the date of default.
* * * * *
    Total debt to income ratio. Total debt to income ratio is defined 
as the borrower's monthly mortgage payment plus all recurring monthly 
debt divided by the borrower's gross monthly income.
* * * * *

0
3. Section 1980.373 is added to read as follows:


Sec.  1980.373  Special loan servicing.

    (a) General. As specified in this section, the Lender may reduce 
the interest rate to a level at or below the maximum allowable interest 
rate and extend the term of the loan up to 40 years from the date of 
loan modification (``extended-term loan modification'') and, if 
necessary, advance funds on behalf of a borrower to satisfy the 
borrower's arrearage, pay legal fees and foreclosure costs related to a 
cancelled foreclosure action, and reduce principal (``mortgage recovery 
advance'') (collectively, ``special loan servicing''). Upon request, 
RHS will reimburse the Lender for eligible mortgage recovery advances 
under the partial loss claim procedures of this section. Lenders must 
receive written approval from RHS prior to servicing a borrower's 
account with special loan servicing. The Lender must submit a servicing 
plan to RHS pursuant to Sec.  1980.374 when a borrower's account is 90 
days delinquent and a method other than foreclosure is recommended to 
resolve the delinquency. Use of special loan servicing does not change 
the terms of the loan note guarantee.
    (b) Mortgage payment to income ratio. This ratio is defined as the 
monthly mortgage payment (principal, interest, taxes, and insurance 
(PITI)) for the modified mortgage divided by the borrower's gross 
monthly income. The servicing options in this section shall be used in 
the order established in paragraph (c) of this section to bring the 
borrower's mortgage payment to income ratio as close as possible to, 
but not less than, 31 percent. Prior to servicing a borrower's account 
with special loan servicing, the Lender must verify the borrower's 
income. For borrowers who are employed by a private or public 
organization, the Lender shall verify the borrower's income by 
examining documents such as the borrower's current pay stub and most 
recent Internal Revenue Service Form W-2. For borrowers who are self-
employed, the Lender shall verify the borrower's income by examining 
documents such as the borrower's profit and loss statements (for the 
year to date and the previous year) and the borrower's signed tax 
return for the previous year.
    (c) Special loan servicing steps. The Lender must consider loan 
servicing options in the order established by this paragraph (c).
    (1) The Lender must consider the following traditional servicing 
options before considering special loan servicing.
    (i) Repayment agreement. A repayment agreement is an informal 
forbearance plan lasting three months or less. An informal forbearance 
plan is the best means to ensure that a 30-or 60-day delinquency does 
not escalate beyond the borrower's ability to cure.
    (ii) Special forbearance agreement. A special forbearance plan is 
structured so that it leads to a current loan, either by gradually 
increasing monthly payments in an amount sufficient to repay the 
arrearage over time, or (if the borrower is at least three months 
delinquent) through resumption of normal payments for a period 
(generally three or more months) followed by a loan modification. The 
maximum arrearage under a special forbearance plan must never exceed 
the equivalent of 12 months of PITI.
    (iii) Loan modification plan with a term not to exceed 30 years 
from the date of the original loan. A loan modification is a permanent 
change in one or more of the terms of a loan that results in a payment 
the borrower can afford and allows the loan to be brought current. Loan 
modifications may include a reduction in the interest rate, even below 
the market rate if necessary; capitalization of all or a portion of the 
arrearage (PITI); and/or reamortization of the balance due. The term of 
the loan modification may not exceed 30 years from the date of the 
original loan. The terms of the SFHGLP loan note guarantee do not 
change. The loan note guarantee is in effect only for 30 years from the 
date of the original loan.
    (2) If the targeted mortgage payment to income ratio cannot be 
achieved using traditional servicing options, then the Lender may 
consider an extended-term loan modification.
    (3) If the targeted mortgage payment to income ratio cannot be 
achieved using an extended-term loan modification, then the Lender may 
consider a mortgage recovery advance in addition to the extended-term 
loan modification. Before considering a mortgage recovery advance, the 
Lender must reduce the interest rate to the maximum allowable interest 
rate and extend the repayment term for 30 years from the date of loan 
modification. The Lender may reduce the interest rate further and/or 
extend the term of the loan for up to 40 years from the date of loan 
modification at the Lender's option, but the Lender shall not be 
required to do so before utilizing a mortgage recovery advance.
    (d) Eligibility. The following eligibility requirements apply to 
all special loan servicing.
    (1) The borrower must be in default or facing imminent default. A 
borrower is ``facing imminent default'' if that borrower is current or 
less than 30 days past due on the mortgage obligation and

[[Page 52434]]

is experiencing a significant reduction in income or some other 
hardship that will prevent him or her from making the next required 
payment on the mortgage during the month in which it is due. The 
borrower must be able to document the cause of the imminent default, 
which may include, but is not limited to, one or more of the following 
types of hardship:
    (i) A reduction in or loss of income that was supporting the 
mortgage loan, e.g., unemployment, reduced job hours, reduced pay, or a 
decline in self-employed business earnings. A scheduled temporary 
shutdown of the employer (such as for a scheduled vacation) would not 
in and by itself be adequate to support an imminent default.
    (ii) A change in household financial circumstances, e.g., death in 
family, serious or chronic illness, permanent or short-term disability.
    (2) The borrower's total debt to income ratio following the special 
loan servicing must not exceed 55 percent. Total debt to income ratio 
is defined as the borrower's monthly mortgage payment plus all 
recurring monthly debt divided by the borrower's gross monthly income. 
Prior to servicing a borrower's account with special loan servicing, 
the Lender must verify the borrower's income and total debt. For 
borrowers who are employed by a private or public organization, the 
Lender shall verify the borrower's income by examining documents such 
as the borrower's current pay stub and most recent Internal Revenue 
Service Form W-2. For borrowers who are self-employed, the Lender shall 
verify the borrower's income by examining documents such as the 
borrower's profit and loss statements (for the year to date and the 
previous year) and the borrower's signed tax return for the previous 
year. The Lender shall verify the borrower's total debt by ordering and 
examining the borrower's credit report.
    (3) The borrower must successfully complete a trial payment plan to 
demonstrate that the borrower will be able to make regularly scheduled 
payments as modified by the special loan servicing. For borrowers who 
are in default when special loan servicing is initiated, the trial 
payment plan shall be three months in length. For borrowers facing 
imminent default when special loan servicing is initiated, the trial 
payment plan shall be four months in length. The borrower's monthly 
payment during the trial payment plan shall equal the monthly payment 
that would be owed by the borrower following the special loan 
servicing. During this trial period, the Lender shall service the 
mortgage in the same manner as it would service a mortgage under a 
special forbearance agreement (i.e., the Lender shall review the status 
of the plan each month and take appropriate action if the borrower is 
not complying with the terms of the plan). If the borrower does not 
successfully complete the trial payment plan by making each of the 
monthly payments on time, the borrower is not eligible for special loan 
servicing. If the borrower begins but does not successfully complete a 
trial payment plan, the Lender should consider the borrower for 
voluntary liquidation and deed in lieu of foreclosure before proceeding 
to foreclosure.
    (4) At the time of the special loan servicing, the borrower must 
occupy the property as the borrower's primary residence and intend to 
continue occupying the property as such.
    (e) Extended-term loan modification. The Lender may modify the loan 
by reducing the interest rate to a level at or below the maximum 
allowable interest rate and extending the repayment term up to a 
maximum of 40 years from the date of loan modification. The interest 
rate must be fixed. RHS may establish the maximum allowable interest 
rate by publishing a notice in the Federal Register describing how to 
calculate the rate. If the maximum allowable interest rate has not been 
established by notice in the Federal Register, the maximum allowable 
interest rate shall be 50 basis points greater than the most recent 
Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) rate for 30-
year fixed-rate mortgages (U.S. average), rounded to the nearest one-
eighth of one percent (0.125%), as of the date the loan modification is 
executed. Weekly PMMS rates are published on the Freddie Mac Web site, 
and the Federal Reserve Board includes the average 30-year PMMS rate in 
the list of Selected Interest Rates that it publishes weekly in its 
Statistical Release H.15. The term shall be extended only as long as is 
necessary to achieve the targeted mortgage payment to income ratio 
after the interest rate has been fixed at a level at or below the 
maximum allowable rate. Expenses related to special loan servicing 
shall not be charged to the borrower. Such expenses include title 
search fees and recording fees, but not legal fees and costs related to 
a cancelled foreclosure initiated prior to special loan servicing. 
Legal fees and costs related to a cancelled foreclosure may be 
capitalized into the modified principal balance provided that such 
foreclosure costs reflect work actually completed prior to the date of 
the foreclosure cancellation. Late fees should not be capitalized into 
the modified loan.
    (f) Mortgage recovery advance. The maximum mortgage recovery 
advance consists of the sum of arrearages not to exceed 12 months of 
PITI; legal fees and foreclosure costs related to a cancelled 
foreclosure action; and principal reduction. The maximum mortgage 
recovery advance is 30 percent of the unpaid principal balance as of 
the date of default. The principal deferment on the modified mortgage 
is determined by multiplying the unpaid principal balance by 30 percent 
and then reducing that amount by arrearages advanced to cure the 
default and any foreclosure costs incurred to that point. The principal 
deferment amount for a specific case shall be limited to the amount 
that will bring the borrower's total monthly mortgage payment to 31 
percent of gross monthly income. Expenses related to special loan 
servicing shall not be charged to the borrower. Such expenses include 
title search fees and recording fees, but not legal fees and costs 
related to a cancelled foreclosure initiated prior to special loan 
servicing. Legal fees and foreclosure costs related to a cancelled 
foreclosure action may be included in the mortgage recovery advance 
provided that such foreclosure costs reflect work actually completed 
prior to the date of the foreclosure cancellation. Late fees should not 
be included in a mortgage recovery advance.
    (1) The Lender must have the borrower execute a promissory note 
payable to RHS and a mortgage or deed-of-trust in recordable form 
perfecting a lien naming RHS as the secured party for the amount of the 
mortgage recovery advance. The Lender shall properly record the 
mortgage or deed-of-trust in the appropriate local real estate records 
and provide the original promissory note to RHS. The Lender may file a 
claim pursuant to Sec.  1980.376 of this subpart for reimbursement of 
up to $250 for a title search and/or recording fees in connection with 
this promissory note and mortgage or deed-of-trust.
    (2) Prior to making a mortgage recovery advance, the Lender must 
perform an escrow analysis to ensure that the payment made on behalf of 
the borrower accurately reflects the escrow amount required for taxes 
and insurance.
    (3) The following terms apply to the repayment of mortgage recovery 
advances:
    (i) The mortgage recovery advance note and subordinate mortgage or 
deed-of-trust shall be interest-free.
    (ii) Borrowers are not required to make any monthly or periodic 
payments

[[Page 52435]]

on the mortgage recovery advance note; however, borrowers may 
voluntarily submit partial payments without incurring any prepayment 
penalty.
    (iii) The due date for the mortgage recovery advance note shall be 
the due date of the guaranteed note held by the Lender, as modified by 
the special loan servicing. Prior to the due date on the mortgage 
recovery advance note, payment in full under the note is due at the 
earlier of the following:
    (A) When the first lien mortgage and the guaranteed note are paid 
off; or
    (B) When the borrower transfers title to the property by voluntary 
or involuntary means.
    (iv) Repayment of all or part of the mortgage recovery advance must 
be remitted directly to RHS by the borrower.
    (v) RHS will collect this Federal debt from the borrower by any 
available means if the mortgage recovery advance is not repaid based on 
the terms outlined in the promissory note and mortgage or deed-of-
trust.
    (4) The following provisions apply when a Lender files a claim with 
RHS for reimbursement of a mortgage recovery advance:
    (i) A claim for reimbursement in a form acceptable to RHS must be 
submitted to RHS within 60 days of the advance being executed by the 
borrower through his or her signature on the promissory note.
    (ii) When filing the claim for reimbursement with RHS, the Lender 
must:
    (A) Submit the original promissory note and a copy of the filed 
mortgage or deed-of-trust;
    (B) Include a summary of the amount of the funds advanced, 
including the monthly PITI and principal deferment (if applicable), and 
other account information indicating the borrower's arrearage before 
the advance, as well as the present status of the account as of the 
date of the advance;
    (C) Provide the name, address, and tax ID number for the Lender; 
and
    (D) Provide the name, address, and phone number of a contact person 
for the Lender who can answer questions about the reimbursement 
request.
    (5) If a borrower defaults on his or her loan after receiving a 
mortgage recovery advance and a loss claim is filed by the Lender due 
to the default, any Agency reimbursement issued for the mortgage 
recovery advance to the Lender on behalf of the borrower will be 
credited toward the maximum loan guarantee amount payable by the Agency 
under the guarantee.

    Dated: August 18, 2010.
Tammye Trevi[ntilde]o,
Administrator Rural Housing Service.
[FR Doc. 2010-21261 Filed 8-25-10; 8:45 am]
BILLING CODE 3410-XV-P