USDA Technical Handbook HB-1-3555 §18.17 — Debt Settlement Reporting
USDA HB-1-3555 §18.17 (Debt Settlement Reporting). Gap-fill (verbatim).
Verbatim regulatory text
Verbatim provisions from USDA Technical Handbook HB-1-3555 §18.17 — Debt Settlement Reporting — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
USDA HB-1-3555 18.17 — Debt Settlement Reporting
BT SETTLEMENT REPORTING Servicers will be responsible for reporting to IRS and all national credit reporting repositories any discharge of indebtedness or any debt settled through liquidation in accordance with Internal Revenue Code.
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. ATTACHMENT 18-A THE LOSS MITIGATION GUIDE Effective:
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. THE LOSS MITIGATION GUIDE SINGLE FAMILY HOUSING GUARANTEED LOAN PROGRAM 1. SERVICING EARLY DELINQUENCY LOANS (LESS THAN 90 DAYS PAST DUE) The purpose of all collection efforts is to bring a delinquent mortgage current in the shortest time possible. Single Family Housing Guaranteed Loan Program (SFHGLP) policy as stated in 7 CFR § 3555 describes minimum servicing requirements to accomplish this objective. The majority of one or two payment delinquencies will be addressed by either voluntary reinstatement by borrowers, or through traditional collection methods outlined in 7 CFR § 3555. While a loss mitigation program is designed to address serious defaults, any reasonable servicer efforts to cure loans that are past due for 30 days or more contribute to the goal of helping residents in rural areas retain homeownership and reduce the Agency’s losses. Thus, effective loss mitigation begins in the early stages of servicing defaulted loans. It is the servicer’s responsibility to validate and document the borrower’s capacity under the terms of the loss mitigation workout recommendation. A. EARLY INTERVENTION To facilitate a successful loss mitigation intervention, the servicer must attempt to make verbal or written contact with the borrower or an authorized representative if the payment is not received by the 20th day after it is due. Before an account becomes 60 days past due and if there is no contact or payment arrangement in place, the servicer must send a certified letter to the borrower requesting an interview in an effort to resolve the past due account. The earlier the servicer contacts the delinquent borrower and identifies the cause of the default, the more likely it is that the default will be cured, and the borrower will be able to keep the home. It is critical that the servicer make all decisions in a manner consistent with fair housing and lending principles. Servicers are strongly encouraged to recommend borrowers contact state and/or local agencies for financial assistance. B. CAUSE OF DEFAULT The servicer should identify the underlying cause of the delinquency at the earliest stage of borrower contact and determine if the problem is permanent or temporary. A borrower whose ability to support the mortgage debt has been permanently reduced
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. through death, divorce, or permanent disability is unlikely to cure the default through a repayment plan. Such a borrower should be evaluated for either a loan modification, which may result in a reduction of the mortgage payment, or a pre-foreclosure sale, which allows a transition to more affordable housing. A borrower who needs credit, legal, or employment assistance to resolve temporary financial problems should be referred to housing counseling, such as HUD housing counseling at 1-800-569-4287 or HUD’s approved housing counseling website, https://apps.hud.gov/offices/hsg/sfh/hcc/hcs.cfm as soon as possible. C. DEFAULT COUNSELING A borrower who receives early counseling is much more likely to bring the loan current. Servicers are strongly encouraged to recommend financial counseling to borrowers and establish working relationships with counseling agencies. The servicer should provide HUD’s publication 2008-5-FHA, Save your Home: Tips to Avoid Foreclosure, rev April 2012 to the borrower, before the account becomes 60 days past due. This may not be feasible, however, if the borrower has filed a bankruptcy petition and, in the opinion of the servicer’s legal counsel, providing a copy of the pamphlet would be a violation of the bankruptcy stay. In such cases, the servicer should keep documentation of this fact in the servicing file. D. INFORMAL REPAYMENT PLANS An informal repayment plan is a verbal agreement lasting for 3 months or less. Such a plan is the first and best means to ensure that a one- or two-month delinquency does not escalate beyond the borrower’s ability to cure. In such a plan, the servicer should carefully review the borrower’s financial situation and arrange payment terms that the borrower can realistically keep, and the delinquency can be cured. Informal repayment plans should be documented and retained in the servicing permanent file. If it becomes apparent that an informal repayment plan will not be sufficient to resolve the delinquency, the servicer should refer to section 3, “General” of this guide, to evaluate whether one of the more formal loss mitigation strategies should occur. E. SALE OF THE PROPERTY A borrower who does not have the ability to cure the delinquent loan, but who has sufficient equity in the property to satisfy the outstanding debt from a sale proceeds, should be assisted in selling the property. This assistance may include a written agreement that provides a short-term reduction or suspension of payments pending the
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. sale of the property. The servicer has full responsibility in assisting the borrower in such a case. 2. LOSS MITIGATION OVERVIEW SFHGLP servicers have the authority and the responsibility to use effective actions and strategies to assist borrowers to retain their homes, and thus reduce losses to the Agency and the servicer. Because of its ongoing relationship with the borrower, the servicer is in the best position to determine which, if any, loss mitigation strategies are appropriate in each circumstance. A. SERVICERS LOSS MITIGATION ACTIONS The servicer must: x Report a complete and accurate loan-servicing plan to the agency that clearly outlines the approved action via USDA Lender Interactive Network Connection (USDA LINC). x Consider all reasonable means to address the delinquency at the earliest possible time. x Use payment or credit scoring tools, if available, to identify high risk borrowers that may need more attention, rather than wait until standard contact dates. x Inform the borrower(s) of available loss mitigation options and the availability of housing counseling before the end of the second month (60th day) of delinquency. (Ensuring that the borrower receives the HUD publication https://www.hud.gov/sites/dfiles/Housing/documents/RevUpdHmownSuc121518f nl.pdf titled Homeowners Guide to Success, is acceptable, as well as documentation in the servicing and collection notes of conversations with the borrower concerning mitigation options). x Evaluate each delinquent loan once they become greater than 30 days past due but no later than the 90th day of delinquency to determine which loss mitigation option is appropriate. x Use loss mitigation whenever feasible to avoid foreclosure. x Reevaluate each delinquent loan monthly until delinquency is cured or the foreclosure action is complete. x Report loss mitigation actions through monthly default status reporting using ESR status of mortgage code values. x Initiate foreclosure within six months (180 days) of default unless a loss
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. mitigation option is being pursued and ensure that all actions taken are documented. x Initiate foreclosure timely on vacant and abandoned properties. x Retain a complete audit trail showing all loss mitigation actions. 3. GENERAL This section describes the general policies, recommended procedures, and minimum actions that constitute effective loss mitigation techniques. A. DEFAULT STATUS OF THE LOAN Loss mitigation options are intended to provide relief for a borrower who is delinquent or facing imminent default. A default is defined as any loan that has failed to perform under any covenant of the mortgage or deed of trust for 30 days or more 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 the borrower from making the next required payment on the mortgage during the month in which it is due. Any attempt to deliberately manufacture or misrepresent pertinent facts about a borrower’s financial or other qualifying status may disqualify the borrower from participating in loss mitigation options and result in civil or criminal penalties. If perpetrated by a servicer, such actions may lead to administrative and/or judicial penalties against the servicer. B. OWNER OCCUPANCY The borrower must occupy the property as their principal residence to be eligible for loss mitigation retention options. However, loss mitigation disposition options may be considered if the property has been recently vacated due to one of the following, but not limited to, special circumstances: x Employment transfer x Natural disaster x Medical condition A servicer may make an exception for a non-occupant borrower who is seeking relief through a pre-foreclosure sale (PFS) or DIL when the reason for vacancy was involuntary
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. in nature. The servicer maintains the documents justifying such an exception in the servicing file. C. OTHER ELIGIBILITY FACTORS The following eligibility restrictions apply in all cases: x A borrower who has a pending/active bankruptcy may be considered for loss mitigation options; however, the servicer must fully document the borrowers pending plan with items such as, but not limited to, a copy of the proposed/confirmed trustee plan. The servicer must obtain trustee approval prior to loss mitigation plan execution. x If a servicing agreement, investor guidelines, or applicable law restricts or prohibits compliance with any steps outlined in this guide, the servicer must maintain evidence in the loan file documenting the nature of any deviation from the provided guidance. D. 90 DAY REVIEW The servicer evaluates each delinquent SFHGLP loan that it services when monthly installments are due and unpaid for 91 days, and considers all loss mitigation techniques to determine which, if any, are appropriate. To meet this evaluation requirement, the servicer’s early involvement in the delinquency is demonstrated by contact with the borrower to gather sufficient information about the borrower’s circumstances, intentions, and financial condition. While the servicer cannot be responsible if a borrower fails to respond to repeated contacts, the servicer must clearly document aggressive efforts to reach the borrower within 90 days of the default. E. CURABLE DEFAULT When the hardship no longer exists and the borrower is committed to remaining in the home, the servicer should consider reinstatement options in this order: x Special forbearance x Loan modification
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. F. NON-CURABLE DEFAULT When the hardships continue to exist, the delinquency is not curable, and the borrower is not committed to remaining in the home, the servicer should consider disposition options in this order: x Pre-foreclosure sale (PFS) x Deed-in-lieu of foreclosure (DIL) G. OPTION PRIORITY The following waterfall of loss mitigation workout options must be adhered to: 1. Informal Repayment Plan 2. Special Forbearance 3. Loan Modification 4. Pre-Foreclosure Sale 5. Deed-In-Lieu Whenever possible, the servicer should review the borrower for all loss mitigation options concurrently and if eligible, provide a decision based on the highest available option in the waterfall. In all cases, if a borrower is eligible for both a retention and a pre-foreclosure option, the retention option must be prioritized. If the borrower accepts and then fails a retention option within the first 12 months, they can be offered a pre- foreclosure option based on this evaluation with no further need to document ability/ inability to pay. In some cases, the waterfall of loss mitigation options may warrant utilizing a disposition workout in-lieu of a retention workout based on the borrower’s involuntary inability to pay. H. MONTHLY EVALUATION Each month the account remains delinquent, the servicer must reevaluate the status of each loan following the 90-day review and maintains documentation of the evaluations in its servicing or collection system. The evaluation may be as simple as notes in the collection system that the borrower’s payments under special forbearance are made as
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. agreed. Reports generated by servicing systems that track repayment plans are adequate for documentation purposes. I. EVALUATING THE BORROWERS FINANCIAL CONDITION For any loss mitigation option, the servicer must obtain detailed financial information from the borrower. The servicer may ask the borrower to give this information on a form of its choice that collects all the data elements required for loss mitigation. If the borrower is cooperative, the information may be taken during a telephone interview if it is a complete picture of the borrower’s financial information. Regardless of how the financial information is initially obtained, the servicer should request the borrower provide evidence to support the income with current paystubs and/or a profit and loss statement if the borrower is self-employed. The servicer should obtain a credit report to verify debts, and any other forms of verification the servicer deems appropriate. Once a servicer has the borrower’s complete financial information, they should analyze the borrower’s current and future ability to meet the monthly mortgage obligation by determining the borrower’s repayment ability as follows: x Determine the borrower’s current monthly gross income making necessary adjustments for income fluctuations. x Calculate the borrower’s normal monthly financial obligations including debt service on the mortgage and other credit obligations. Adjust for obligations due over the term of the proposed special forbearance agreement, or in the case of all other options, for a minimum of three months. x Any child support or alimony obligations should be documented with a court order to determine the monthly obligation. x Determine the borrowers current Housing to Income (HTI) ratio as well as their total debt (TD) ratio. All detailed financial information used to determine the borrower’s financial capacity must be dated within 90 days from the date of receipt by the servicer. The servicer must communicate a decision to the borrower within 30 days of receiving a complete loss mitigation package. The servicer must use good business judgment to ensure that the workout option selected reasonably reflects the borrower’s ability to pay. A borrower with sufficient income should be asked to cure the debt through a retention option.
USDA HB-1-3555 18.17 — Debt Settlement Reporting
04-14-25) PN 637 Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts. J. INCOME VERIFICATION Servicers shall document their process in determining each borrower’s income scenario. When verifying income of a borrower, servicers should use good business judgment consistent with how they evaluate borrowers when modifying loans held in their own portfolio but at a minimum collect the following: x Wage or Salary income: o Paystub(s) not more than 90 days old at time of submission to servicer, that covers at least 4 weeks of earned income. o Borrowers most recent W-2 or executed tax returns (can be waived if paystubs document at least 6 months YTD income). x Self-Employment Income: o Most recent quarterly or YTD profit and loss statement along with a copy of the most recent executed tax return. Audited financial statements are not required. x Other/ Benefit Income: o Bonus, commission, tips, overtime, etc. income must be documented with reliable third-party evidence that such income is consistent and likely to continue. o Benefit income including but not limited to social security, disability, public assistance, and Supplemental Nutrition Assistance Program (SNAP) benefits can be considered income for the purpose of loss mitigation. Benefit income must be documented through award letter, exhibits, or benefits statements from the provider or evidence of receipt to the borrower. x Non- Taxable Income: o The servicer, at its discretion, may “gross up” income not subject to federal taxes. When grossing up any income, the servicer must document and support the amount of grossed up income and should use the same effective tax rate, not to exceed 25%, for grossing up that the borrower used to calculate the borrower’s federal income tax return from the previous year. o Excluding documentation from prior years, all financial information must be dated within 90 days from the date of receipt by the servicer.