USDA Technical Handbook HB-1-3555 §18.17 — Debt Settlement Reporting

USDA HB-1-3555, Chapter 18, § 18.17 — Debt Settlement Reporting

Effective 2025-05-05 · USDA chapter revision · Procedure Notice 640

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. 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    ‹‰Ž‡ ƒ‹Ž›‘—•‹‰ —ƒ”ƒ–‡‡†‘ƒ ”‘‰”ƒ Effective: 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 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 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 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 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 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 preforeclosure 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 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. 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. 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. K. NON-BORROWER INCOME Income from a non-borrower who also occupies the property may be used to support payments under all loss mitigation options with the following restrictions: x Servicers should consult their legal counsel to determine if non-borrower income can be utilized for loss mitigation home retention options since the non-borrower is not on the original mortgage. x Occupancy of the non-borrower must be fully verified. x Servicer should conduct a financial review of the entire household income and obligations to determine if there is sufficient income to pay back the arrearages. x If the Servicer determines the non-borrower household member is required by state law to be included on the modified note, the non-borrower household member must sign all required loss mitigation documentation. L. DIVORCE / LEGAL SEPARATION In instances where borrowers are divorced or legally separated, a lender can exclude an obligated borrower when determining eligibility for all loss mitigation options, providing the court has deemed the excluded borrower not responsible for the mortgage. The remaining obligated borrower must provide the fully executed legal document (ex. Divorce Decree) that shows the court’s order, as well as an executed Quit Claim if necessary. If documented, the divorced/separated party does not need to sign any required documentation for the purposes of loss mitigation. Any borrower excluded from eligibility requirements is still obligated to the note and is not released from liability. M. INELIGIBLE BORROWER If the borrower is not eligible for any loss mitigation alternative based on information secured from the borrower in a telephone interview, the servicer should advise the borrower of the reason(s) and allow the borrower at least seven calendar days to submit additional information that might have an impact upon the servicer’s evaluation. The servicer will retain the financial analysis and supporting documentation and make it available for compliance reviews. Collection actions may continue. N. COMBINED OPTION Loss mitigation options may be used alone or in combination to resolve an existing default. For example: 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. x Pre-foreclosure sale may be combined with a deed-in-lieu provision in case the property does not sell within the time required. x A servicer may utilize a trial plan with a loan modification when there is any doubt about a borrower’s long-term income stability. To reduce the risk of a workout failure, the borrower can demonstrate the ability to support the debt by making at least three-monthly payments at the modified amount before executing a modification. O. FORECLOSURE The servicer must consider all feasible loss mitigation options before initiating foreclosure. The servicer must document all options considered and retain such information for Agency review. If the borrower abandons the property, loss mitigation home retention options need not be considered prior to initiating the foreclosure. P. TIME TO INITIATE ACTION A servicer must initiate a loss mitigation option or refer to foreclosure within six months of the date of default. This requirement is considered satisfied by any of the following actions. x The loan is brought current or paid off. x The borrower executes a special forbearance agreement. x The loan modification is approved. x The borrower executes a pre-foreclosure sale or deed in lieu agreement. x The servicer initiates the first legal action to begin foreclosure. Q. SERVICER REPORTING The servicer reports these actions in the month they occur, or if after the monthly cutoff date, in the next reporting cycle using the appropriate ESR status code. R. EXTENSION REQUESTS If the servicer initiates a special forbearance or loan modification, but is unable to complete it, the servicer may approve an extension to the timeframe to initiate foreclosure provided the loss mitigation option began prior to the timeframe that foreclosure was to be initiated. To qualify for the extension, the servicer must document evidence that it analyzed the borrower’s complete financial situation and evaluated the appropriate loss 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 options. In addition, the servicer reports the loss mitigation initiative using the appropriate ESR status code in the monthly default status report. The servicer may approve an extension for completing a deed-in-lieu of foreclosure. If the servicer attempts a repayment plan (not special forbearance), the servicer may approve an extension before the timeframe to initiate foreclosure expires and explains why an extension is necessary. S. OPTION FAILURE If loss mitigation options fail, the servicer may either resume or initiate foreclosure or initiate another loss mitigation option. Failure occurs under any of the following circumstances: x The borrower does not perform under the terms of a written special forbearance agreement for 60 days. x The borrower does not perform under the terms of a trial period used as a condition of loan modification. Servicers must continue to perform outreach efforts to borrowers for other workout alternatives. Borrowers’ financial capacity will dictate whether a retention or disposition workout alternative is feasible. x There is no signed contract of sale within 3 months of a pre-foreclosure sale agreement; or if there is a signed contract of sale, settlement has not occurred within 6 months of the agreement; or the borrower notifies the servicer of withdrawal from the agreement; or the servicer notifies the borrower in writing that it has terminated the agreement for non-compliance. T. DOCUMENTATION For each loss claim, the servicer must maintain evidence in its servicing notes and collection history systems of its compliance with loss mitigation guidelines as well as supporting documentation including all communications with the Agency. The servicing notes and collection history systems also must retain evidence of compliance with counseling and other actions on loans that do not result in a loss claim. U. SERVICING PLAN The servicer must add a servicing plan in the “Add Loss Mitigation” screen in USDA LINC when a method other than foreclosure is approved to resolve the borrower’s delinquency. The servicing plan must be submitted prior to implementing any action with the borrower. For pre-foreclosure sales and deed-in-lieu of foreclosure alternatives, 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 servicer must retain a “Disposition (PFS/DIL) Cost Benefit Analysis” along with the servicing plan. If the servicer provides the borrower with an option that requires a trial payment, the servicer must enter the trial modification into USDA LINC at the time of approval. When the borrower completes the trial period and executes the final agreement, the servicer must enter the final modification terms into USDA LINC and finalize the modification. If the borrower fails to perform under the trial agreement, the servicer must cancel the trial modification in USDA LINC. 4. SPECIAL FORBEARANCE A special forbearance agreement is a written plan that may temporarily reduce or suspend payments and/or gradually increase monthly payments in an amount sufficient to repay the arrearage for a short period. A special forbearance agreement may also involve payments for several months followed by a loan modification. The agreement provides the borrower with relief not typically afforded under an informal repayment agreement. Examples of provisions in a special forbearance agreement include a repayment term of four or more months; suspending or reducing payments for one or more months to allow the borrower to recover from the cause of default; or an agreement to allow the borrower to resume making full monthly payments while delaying repayment of the arrearage. A special forbearance is a plan that involves one of the following: x Full repayment: Monthly payments in an amount sufficient to repay the arrearage over time, typically less than or equal to six months; or x Hardship or disaster forbearance: Reduced or suspended monthly payments while the borrower(s) resolves the hardship, such as unemployment, followed by an evaluation for other home preservation options if needed. The maximum arrearage under a special forbearance plan cannot exceed the equivalent of 12 months delinquency. A. LOAN ELIGIBILITY The loan is a minimum of 30 days delinquent, or at risk of imminent default, but not more than 12 payments delinquent and is not in foreclosure when a special forbearance agreement is executed. The servicer may suspend foreclosure, on advice of its legal counsel, subject to the borrower’s performance under the terms of the special forbearance agreement, if the suspension is stated in writing in the agreement. 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. B. PROPERTY ELIGIBILITY The servicer must conduct an inspection to verify that the property has no physical conditions that adversely affect either the borrower’s continued use or ability to support the debt. Normally a simple curbside inspection is sufficient; however, a borrower will not be able to support payments under a special forbearance plan if the property is in such a deteriorated condition that repairs will exhaust the borrower’s monthly resources. The servicer must use good business judgement to determine if an interior inspection should be utilized. The analysis of the borrower’s income should consider obvious property maintenance expenses. The use of good business judgment is imperative. If significant deferred maintenance is a contributing cause of the default, it may be appropriate to provide a period of mortgage forbearance during which specified repairs are completed at the borrower’s expense. If the property is in extremely poor physical condition, a special forbearance plan that allows a reduction or suspension of payments must contain a requirement to repair the property. C. BORROWER ELIGIBILITY Special forbearance may be offered to a borrower who has recently experienced a verified loss of income or an increase in living expenses. The borrower should be the owner-occupant of the property securing the SFHGLP loan and committed to occupying the property as a primary residence. D. FINANCIAL ANALYSIS The servicer’s responsibility is to validate and document the borrower’s capacity under the terms of the recommendation. The servicer determines that the borrower has the capacity to support the modified monthly payments and bring the loan current under the terms of a forbearance plan. The proposed repayment terms must be consistent with the borrower’s ability to pay. The following documentation must be obtained to determine financial capacity of the borrower: x Letter from borrower outlining their involuntary inability to pay/hardship x Income Documentation as stated in the overview section x Credit Report x Detailed budget 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. x Documentation of any other sources of income to be used in evaluation Excluding documentation from prior years, all financial information must be dated within 90 days from the date of receipt by the servicer. If the servicer’s financial analysis determines that the borrower either does not, or will not, have the ability to resume full monthly payments in the near future, special forbearance should not be used. The servicer should then consider other loss mitigation options. E. UNEMPLOYMENT When it has been determined that the reason for default is unemployment and the borrower does not have any immediate opportunities for re-employment, SFHGLP extends additional latitude to servicers to mitigate losses. Servicers have the authority to enter into a forbearance agreement with a borrower who is unemployed or significantly underemployed and seeking re-employment at the time the borrower’s financials are being analyzed by the servicer. The term of this forbearance shall be the lessor of 12 months or a term that would not cause the dollar amount of the borrower’s delinquency to exceed 12 months of scheduled monthly mortgage payment reduction and, will be contingent upon the servicer’s financial analysis of the borrower. As a condition of the forbearance agreement, the borrower must pursue employment during the term of the forbearance agreement. Additionally, the borrower must contact the servicer if their employment status changes. The servicer is required to verify the borrower’s employment status monthly and restructure the forbearance agreement or evaluate the borrower for another option, such as a loan modification, when the borrower’s employment status changes. As with SFHGLP’s standard forbearance agreement, all of the requirements apply to these special provisions. F. DOCUMENTATION The servicer should provide the borrower a written agreement to be signed and returned with the first payment, that clearly defines the term, frequency of payments, and amounts due under the special forbearance plan. The agreement acknowledges previously missed mortgage payments and states that failure to comply with its terms can result in foreclosure. In the absence of a signed agreement, the servicer may accept the borrower’s modified payment as acknowledgment of the terms of the forbearance. If the 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. borrower fails to provide the servicer with the signed agreement prior to the end of the forbearance, the servicer should document their continued efforts to collect the agreement. There is no maximum length for a special forbearance agreement, and the servicer may allow as much time as is reasonable based on the borrower’s repayment ability. An acceptable agreement should: x Provide the borrower with relief not available under an informal payment plan. x Not at any time allow the total arrearage amount to exceed the equivalent of 12 months delinquency. x Not allow late fees to be charged while the borrower is performing under the terms of a special forbearance agreement. x Permit allowable foreclosure costs and late fees accrued before the special forbearance agreement is executed to be included as part of the repayment schedule. However, such costs and late fees are collected only after payment of all principal, interest, and escrow advances. The loan is never considered delinquent only because the borrower has not paid late fees or other foreclosure costs. G. REVIEW AND RENEGOTIATION The servicer reviews the status of a special forbearance plan each month and takes appropriate action if the borrower is not complying with the terms of the plan. A plan may be renegotiated if the borrower’s financial circumstances change; however, under a renegotiated plan, the loan cannot accrue more than 12 months delinquency. 5. LOAN MODIFICATION 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 change in the interest rate, even below the market rate if necessary and should focus on payment reduction as the primary goal. Loan modifications may include capitalization of the arrearage. Capitalization may also include foreclosure fees and costs that are associated with the current foreclosure action, deficits in tax and insurance accounts, past due annual fees imposed by the servicer, but not late charges or servicers fees. A modification may be appropriate for a borrower who has experienced a permanent or long-term reduction in income or an increase in expenses, or who has recovered from the 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. cause of the default but does not have sufficient income to repay the arrearage through a repayment plan. To qualify for a modification, the borrower has a documented ability to support the monthly mortgage debt after the terms of the loan are modified. A. LOAN ELIGIBILITY To modify the loan under loss mitigation: x The loan must be in default or at risk of imminent default. x The loan is not in foreclosure at the time the modification is executed; however, a loan removed from foreclosure status may be modified. x The default is due to a verified loss of income or increase in expenses. B. PROPERTY ELIGIBILITY While the modification option does not have a loan-to-value restriction, and an appraisal is not required, the servicer must conduct an inspection to verify that the property has no physical conditions that adversely impact the borrower’s continued use or ability to support the debt. Normally a simple curbside inspection is sufficient; however, a borrower will not be able to support payments under a loan modification plan if the property is in such a deteriorated condition that repairs will exhaust the borrower’s monthly resources. The servicer must use good business judgement to determine if an interior inspection should be utilized, and if necessary, analysis of the borrower’s finances should consider anticipated property maintenance expenses. If the property is in extremely poor physical condition, a modification may not offer a resolution of the default. Costs to complete needed repairs may not be capitalized as part of a modification agreement, and the borrower may not receive any cash from the modification. C. BORROWER ELIGIBILITY The current borrower(s) on the existing Rural Development (RD) guaranteed singlefamily mortgage must be identical to the borrower(s) on the modified mortgage. The borrower(s) must be facing imminent default or be in default. The Servicer should not require the borrower to contribute cash to pay down arrearages prior to a loan modification. 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 borrower must be the owner-occupant who is committed to occupying the property as a primary residence. A modification must not be used to bring a loan current before a sale or assumption. D. FINANCIAL ANALYSIS To be considered for a loan modification, the borrower must provide detailed financial information to the Servicer. Servicers may collect financial information from the borrower either in writing or during a telephone interview. Regardless of how the borrower’s financial information was secured, the Servicer must independently verify the financial information. The following documentation must be obtained to determine financial capacity of the borrower: x Documentation from borrower outlining their involuntary inability to pay/hardship. x Income documentation as stated in the overview section. x The borrower’s credit report. The credit report should only be used to validate monthly installment debt, revolving debt, and secondary mortgage debt. A borrower’s credit score obtained from any credit repository will not be considered in determining whether a borrower is eligible for loss mitigation. Questions relating to documentation requirements should be directed to the Servicing Office via email to [email protected]. 1. UNDERWRITING GROSS MONTHLY INCOME Gross monthly income includes the following, with respect to the borrower and any co- borrower(s): x The gross amount, before any payroll deductions, of wages and salaries, overtime pay, commissions, fees, tips, bonuses, and other compensation for personal services. x For self-employed borrowers, the net income from operation of a farm, business, or profession. x Interest, dividends, and net income of any kind from real or personal 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. property (for example, investment income and rental income). x Benefit income, including the full amount of periodic payments received from Social Security (may be grossed up to a maximum of 125% of nontaxable income) (including Social Security received by adults on behalf of minors or by minors intended for their own support), annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts. x Alimony and/or child support may be used to qualify; however, it is voluntary and if the income renders the borrower ineligible the servicer is allowed to remove and re-evaluate the borrower. x Income received by the borrower that is reasonably likely to continue. 2. UNDERWRITING BACK-END TOTAL DEBT RATIO The Back-End ratio (total debt ratio) is the ratio of the borrower’s total recurring monthly debts (such as the borrower’s monthly mortgage payment (PITI), payments on all installment debts, monthly payments on all junior liens, alimony, child support, car lease payments, aggregate negative net rental income from all investment properties owned, and monthly mortgage payments for second homes) to the borrower’s gross monthly income. The servicer must validate all monthly installment debt, revolving debt, and secondary mortgage debt. This can be accomplished by pulling a credit report for each borrower or a joint report for married co-borrowers. The servicer must also consider any information obtained from the borrower orally or in writing concerning monthly obligations not reported on the credit file and document such obligations accordingly. E. FORECLOSURE If the foreclosure process has already begun, the Servicer should not proceed with the foreclosure action until the borrower has been evaluated for all loss mitigation options and, if eligible, an offer to participate in the modification has been made. F. MODIFICATION PURPOSE The purpose of a loan modification should be to provide payment relief to the borrower in the form of a reduced payment. When no other payment relief options are available, the Servicer may find it necessary to offer the borrower a modification for which the payment is increased. In cases where an increased payment is necessary, the 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. borrower must demonstrate affordability by making at least 3 trial payments prior to execution of the modification. G. LIEN PRIORITY The servicer must ensure the first-lien status of the modified mortgage in compliance with any applicable state or Federal laws and regulations. H. ESCROWS Servicers are required to escrow for borrowers’ real estate taxes and mortgage-related insurance payments. I. MODIFICATION OPTIONS The following apply to loan modifications: x The modification results in a fixed-rate fully amortizing loan. x The modified interest rate may be increased over the original note but may not exceed the current market interest rate at the time of approval. x The modification brings the loan current. The servicer shall calculate the target payment as close as possible to 31% of the verified gross monthly income. Loan Modification options shall be used in the following order to bring the borrowers mortgage payment (PITI) to as close as possible to the target payment. 1. Capitalize all delinquency. Capitalization may include foreclosure fees and costs that are associated with a current foreclosure action, deficits in tax and insurance accounts and past due annual fees imposed by the servicer. Past due homeowner’s association dues should be capitalized, if necessary, to protect the first lien position. Servicer late charges and fees cannot be capitalized. 2. Modify interest rate to a level at or below the maximum allowable rate as defined by the Agency. If the maximum allowable interest rate has not been established by the Agency, the servicer should use the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) rate for 30-year fixed rate mortgages plus 50 basis points rounded to the nearest one –eighth of one percent (0.125%). 3. If the target payment is unable to be achieved with rate modification alone, the servicer shall extend the term in one-month increments, up to a maximum of 480 months until one of the following is achieved. a. The mortgage payment is at or below the target and the payment has 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. been reduced a minimum of ten percent; or b. The mortgage payment is at or below the target and the term has been extended to the cap of 480 months. 4. Rate and/or Term extension thresholds outline above should be considered maximum allowable modifications. The servicer may establish lower rate and/or term allowable costs based on contractual restrictions. 5. If the targeted monthly mortgage payment still cannot be achieved, the servicer may consider a Mortgage Recovery Advance (MRA) as outlined below in Section 5(J), to reduce the borrowers interest bearing principal, in addition to the rate/term modification to achieve the monthly target payment. 6. If the servicer has exhausted all steps of the waterfall and the target payment is not achieved, however, the borrower’s payment (PITI) has been reduced by a minimum of ten percent, the servicer should offer the modification to the borrower(s). 7. If it is determined the borrower cannot be provided with a payment reduction and no other options are available a modification can still be offered, including a limited increase in payment, if the following conditions are met: a. The borrowers post modified payment is no greater than 36% of their monthly income. b. The borrowers post modified payment has increased no more than 10%. c. The modified principal balance may exceed the loan’s original principal balance. d. The modified principal balance may exceed 100% loan-to-value. e. The use of a trial payment to support the borrower’s willingness and ability to pay is encouraged for a modification, however, it is not required unless an MRA is utilized as part of the modification. If the servicer should determine a trial payment is the best course of action, they should follow the trial period guidance provided below. J. MORTGAGE RECOVERY ADVANCE All new MRAs will not be secured with a note/mortgage in favor of the Agency. Prior MRAs will be referred to as “Legacy MRAs”. The maximum amount of the MRA is 30% of the unpaid principal balance at the time of the initial default and shall include 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. any principal reduction needed to achieve the target monthly mortgage payment. If the borrower has previously been provided an MRA of any type, they may be considered for an additional MRA providing that the combined amount of MRAs does not exceed the 30% maximum outlined above. In order to set-up the MRA, the servicer should advance the funds to the borrower’s account by creating a non-interest-bearing recoverable servicing advance as a receivable on the borrower's behalf. This amount should be stated on the monthly mortgage statement along with the principal balance. To file a claim for reimbursement of a MRA, the servicer must submit a claim to RD within 60 days of the advance being executed by the borrower through his or her signature on the MRA Agreement. When filing the claim for reimbursement with RD, the servicer must upload a copy of the MRA Agreement signed by the borrower(s) using the USDA LINC website. The servicer must also upload a summary of the amount of the funds advanced, including the monthly PITIA and principal curtailment (if applicable), and other account information indicating the borrower's arrearage before the advance. In addition, the servicer should supply the present status of the account as of the date of the advance including evidence the loan has been reinstated; the name, address, and tax ID number for the servicer; and the name, address, and phone number of a contact person for the servicer who can answer questions about the reimbursement request. The complete claim, including all supporting documents referred to above, must be submitted within 60 days of the execution of the mortgage recovery advance. All required documentation must be uploaded via USDA LINC for reimbursement. 1. MRA GUIDELINES No interest will accrue on the MRA. The payment of the MRA is not due until the earliest of (i) the maturity of the modified mortgage, (ii) the borrower transfers title to the property (by sale or by other voluntary or involuntary means), or (iii) a pay-off of the mortgage. Borrowers are not required to make any monthly or periodic payments on the MRA. However, borrower(s) may voluntarily submit partial payments without incurring any prepayment penalties. Any repayment by the borrower of 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 MRA, whether partial or incomplete, must be remitted back to the agency from the servicer prior to release of the lien. If the servicer releases the lien without collecting the advance from the borrower, the servicer must reimburse the Agency from their own funds except in cases where the guarantee is terminated due to a loss event such as a Short Sale, Deed in Lieu, or Foreclosure. For legacy MRAs, the borrower must send payment directly to RD. The applicable payment mailing address information can be found on the Loan Servicing page of the LINC Training and Resource Library, located at https://www.rd.usda.gov/resources/usda-linc-training-resource-library. K. STAND ALONE MRA If the servicer determines the borrower is able to make their current contractual payment, the servicer can offer the borrower a stand-alone MRA to cure the delinquency if the following criteria are met: x The hardship that caused the borrowers involuntary inability to pay has been cured. x There is no reasonable ability for the borrower to cure the delinquency on their own within 12 months. If the above conditions are met, the servicer may utilize a MRA to settle the borrower delinquency and return the borrower to a current status. The MRA is limited to an amount no greater than what is necessary to resolve any delinquency and unreimbursed servicer advances made during the delinquency and must meet all other requirements as explained in section 5.K above. L. TRIAL PAYMENT REQUIREMENTS Prior to modifying a loan using any type of MRA or a modification in which the borrower’s payment increases, the servicer must have the borrower complete a trial period during which the borrower makes the monthly mortgage payment they would make under the modified mortgage. For borrowers who are in default when a trial payment is initiated, the trial period must be three months in length. The servicer cannot modify the loan unless the 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. borrower makes all three modified trial payments in the month in which they are due. For borrowers facing imminent default when a trial payment is initiated, the trial period must be four months in length. The servicer cannot modify the loan unless the borrower makes all four reduced trial payments in the month in which they are due. M. STEPS TO ACHIEVE AFFORDABILITY IN ORDER OF PRIORITY Order Options Trial Required 1 Modify Rate 2 Extend Term 3 MRA w/ Mod Y 4 Affordability Check Payment Increase <=10% & HTI <=36% Y * Stand Alone MRA (can be offered at any time if the servicer determines the borrower does not need, or is not eligible for payment reduction) Y N. DOCUMENTATION The servicer ensures that the modification documentation preserves the first lien status of the SFHGLP-guaranteed loan. The servicer will decide in accordance with state law as to whether it is necessary to record the modification agreement in order to maintain the first lien. O. DISCLOSURES The servicer complies with any disclosure or notice requirements applicable under 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. state or federal law. P. FAILURE If the loan becomes delinquent following modification, it shall be treated as a new default and serviced accordingly. Since the servicer maintains the first lien status of the loan subsequent to modification, any amount that is not in the first lien position is not guaranteed by SFHGLP and is not subject to a claim. If the servicer submits a claim, the Agency reserves the right to request documentation (legal or otherwise) establishing the loan’s first lien status. Q. SUBSEQUENT USE If a loan has been modified within the previous two years, re-default risk is presumed to increase following a subsequent modification. Before granting a modification in this circumstance, the servicer must validate the borrower has experienced a change in circumstances that led to a separate default or imminent default unrelated to the first. Any such decision must be documented and placed in the servicing file. A subsequent modification should be an unusual occurrence, and the cause of the second default should not be related to the original reason for default. R. LOAN NOTE GUARANTEE The terms of the SFHGLP Loan Note Guarantee (LNG) may change. The LNG may be extended to coincide with the terms of a loan modification that meets the eligibility criteria as noted in 7 CFR § 3555.303. Any loss on the modified loan is limited to the lessor of either 90% of the original loan amount, or the sum of the first 35% of the loss and 85% of the balance of the loss. S. SERVICER NOTIFICATION REQUIREMENTS (MODIFICATIONS) The servicer will upload a copy of the executed loan modification to the borrower file within 30 days of execution and no later than 60 days via USDA LINC. Additionally, the servicer must upload notification that if the modification was not executed by the borrower via USDA LINC. The agreement should contain the following key data elements: x Borrower and co-borrower name(s) and ID number(s) x Effective modification date 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. x Modified unpaid principal balance x Eligible interest and costs capitalized x Sum of modified principal and capitalized interest and costs x Interest rate x Maturity date T. AGENCY ACTION The Agency staff processes the loan modification by means of the Guaranteed Loan System (GLS). 6. PRE-FORECLOSURE SALE/DEED-IN-LIEU The pre-foreclosure sale (PFS) option allows a borrower in default to sell his or her home and use the sale proceeds to satisfy the mortgage debt even if the proceeds are less than the amount owed. This option is appropriate for a borrower whose financial situation requires the sale of the home, but who is unable to do so because the value of the property has declined to less than the amount owed on the mortgage. A borrower wishing to use the PFS option submits a request to the servicer along with any financial information the servicer requires. The servicer obtains a recent market value appraisal and preliminary title report to determine the feasibility of the PFS. The servicer notifies the borrower whether the request is approved. The borrower makes a commitment to actively market the property for a period of at least three months, during which time the servicer delays foreclosure action. If the property does not sell, the servicer is encouraged to work with the borrower to determine the eligibility for a deed-in-lieu of foreclosure. Deed-in-lieu of foreclosure (DIL) is a disposition option in which a borrower voluntarily deeds the collateral property to the servicer in exchange for a release from all obligations under the mortgage. A DIL is usually preferable to foreclosure because it avoids the time and expense of a legal foreclosure action, and the property is generally in better physical condition at acquisition due to the cooperative nature of the transaction. The servicer may only review a borrower for a DIL prior to a PFS in cases of death, borrower incapacitation or other extreme circumstances. The servicer must use good business judgement when making this determination and retain all appropriate documentation in the servicing file. 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. A. LOAN ELIGIBILITY The loan is in default (delinquent more than 30 days) at the time the pre-foreclosure sale is closed. A servicer may exercise discretion to accept an application from a borrower who is facing imminent default, and if the loan will be in default by the time the pre-foreclosure sale is completed. The servicer documents this decision in the servicing file. Under no circumstances shall PFS be available to borrowers who have voluntarily stopped paying their mortgage despite their continued ability to pay. B. BORROWER ELIGIBILITY The PFS option may be extended to a borrower who meets all of the following: x Is in default or facing imminent default due to a verified increase in living expenses or decrease in income. x Occupies the property as a primary residence (servicer must document occupancy status). x Is not eligible for any available retention options. In addition, borrowers who have failed to perform on an accepted loan modification using USDA guidance may be evaluated for a PFS option. A non-occupant borrower may be reviewed for a PFS option if it is determined the vacancy was involuntary in nature, such as job loss, mandatory transfer, divorce, death, etc. C. BORROWERS APPLICATION/DOCUMENTATION A defaulted borrower or a borrower facing imminent default who expresses interest in a pre-foreclosure sale should be sent a copy of the servicer’s PFS criteria. Additionally, the servicer is encouraged to proactively solicit participation by a borrower who is in default or facing imminent default on an SFHGLP first mortgage and who is unable to cure the default. By signing and returning the application with the required financial information, the borrower should acknowledge receipt of housing counseling, and agree to: x List the property with a licensed real estate broker unrelated to the borrower (The listing agreement should include a specific cancellation clause in the event the terms of a sale are not acceptable). 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. x Make a good faith effort to aggressively market the property. x Perform all normal property maintenance and repairs until closing of the preforeclosure sale. D. PROPERTY VALUE The servicer obtains a standard market value appraisal from an appraiser who does not share any interest with the borrower or borrower’s agent. The appraisal contains both “As Is” and “As Repaired” values for the property and should be valid for six months. A copy of the appraisal is shared with the homeowner or sales agent, if requested. Appraisals or opinions of value provided by the borrower, or borrower’s real estate agent are not acceptable. The servicer reviews the appraisal and satisfies itself that the opinion represents the fair market value of the subject property. The list price of the property must reflect its fair market value. The cost of the appraisal is reimbursable in the loss claim. E. PROPERTY CONDITION Properties that have sustained serious damage (from fire, flood, earthquake, tornado, etc.) should not be considered for PFS if the cost of repair exceeds ten percent of the “As Repaired” appraised value until all insurance claims have been resolved. The servicer may exercise discretion to accept or reject a damaged property when the repair costs are less than the ten percent threshold and should document the decision in the servicing file. Prior to servicing plan submission, servicers must ensure that hazard insurance claims involving property damage are filed and settled expeditiously. All repairs and replacements using the insurance proceeds must be planned, performed, and inspected in accordance with Agency construction requirements and procedures. (7 CFR 3555.252) F. CONDITION OF TITLE The property has marketable title. The servicer obtains a title search or preliminary title report to verify that the title is not impaired either with unresolvable title problems or with junior liens that cannot be discharged. If the servicer determines that junior liens and other title issues can be resolved, the borrower’s PFS application may be approved, and resolution of the title issues can be pursued concurrent with the marketing effort. When reviewing for a DIL, all junior liens or issues with title must be resolved PRIOR to approval. 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. G. FINANCIAL / PROPERTY ANALYSIS The servicer determines the borrower’s present and anticipated financial condition. The servicer projects the borrower’s monthly income and uses good business judgment to determine that the borrower is unable to support the mortgage debt. The servicer may continue with Pre-Foreclosure options, even if the debt is affordable, provided the reason for default requires the borrower to relocate. The following documentation must be obtained and/or completed in order to determine financial capacity of the borrower: x Letter from borrower outlining their involuntary inability to pay/hardship. x Income documentation as stated in the overview section. x Credit Report; and, x Detailed budget. If the borrower has been offered a loss mitigation solution based on full documentation in the last 12 months, the servicer can determine the borrower’s ability/inability to support the debt based on the previous evaluation without obtaining new documentation. All of the following documentation pertaining to the subject property must be obtained: x Appraisal x Listing Agreement x Sales Contract (if applicable) x Closing Disclosure x Title Report; and x All PFS workouts must be accompanied by the “Disposition (PFS/DIL) Cost Benefit Analysis” (Attachment 18-B). Attachment 18-B is an example of the analysis that must be completed for a PFS workout to be considered. Servicers may generate their own version of Attachment 18-B in-lieu of utilizing the example provided. 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. H. TIMING OF PFS ACTIONS The servicer should review for a PFS, commences foreclosure, or initiates another loss mitigation option within six months of the date of default, unless the default is cured earlier. If the PFS follows a failed special forbearance agreement, the PFS, foreclosure or other option should be initiated within 90 days of the failure. I. DURATION OF THE PFS PERIOD The PFS period should be 90 days from the date of approval. The servicer should review the marketing efforts with the borrower each month. After 90 days have passed without a scheduled closing, the servicer should discuss the likelihood of a sale with the real estate broker and decide if a 30-day extension to the PFS is appropriate. Documentation of this decision is retained in the servicing notes. If the property is under contract at the end of the marketing period, the servicer may extend the PFS period for 60 days, not to exceed a total of six months. The pre-foreclosure option may also be extended to a borrower that has not received prior approval to participate in the PFS program. A sales contract offer must be validated by an appraisal that is conducted by an appraiser not party to the transaction. The appraisal must support the “as is” property value independent of the current offer. If a closing of an approved PFS has not occurred within 90 days of the expiration of the PFS period (or six months of the date of default, whichever is later), the servicer should automatically evaluate the borrower for a deed-in-lieu, and if not eligible, commence foreclosure. If the borrower’s financial condition has improved significantly to the point that a cure of the delinquency is a viable option, the servicer may undertake a special forbearance agreement or a loan modification. However, the servicer should fully justify this decision in the claim review file and approve the action within the 90day period. J. OTHER SERVICER ACTIONS The servicer is responsible for inspection, protection, and preservation of the property between the 45th day of default and the date it approves the borrower’s PFS request. Funds spent for preservation and protection may be reimbursed. 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 servicer must provide any documents deemed pertinent to describe all servicing actions taken. K. EARLY TERMINATION The borrower’s participation in the PFS option may be terminated at the servicer’s discretion, for any of the following reasons: x Unresolvable title problems; x Determination that the borrower is not acting in good faith to market the property; or, x Voluntary withdrawal by the borrower. L. BORROWER CONSIDERATION A borrower who successfully sells the property securing the loan using the PFS option is relieved of the mortgage obligation. The borrower shall not be pursued for deficiency judgments by either the servicer or the Agency. M. NET SALES PROCEEDS The servicer may approve a sales contract or listing price in which the net sales proceeds are at least 84% of the home’s “As-Is” appraised value. “Net Sales Proceeds” is defined as the contract/ listing price less: x Sales commission of six percent or less. x Local/State transfer tax stamps and other customary closing costs including the seller’s costs for a title search and title insurance. x Up to $2,500 may be used from sales proceeds for discharge of liens or encumbrances; and, x Allowable seller concessions must not exceed three percent of the sales price. In cases where Rural Development is guaranteeing a new loan, the seller concessions will be limited to one percent of the purchaser’s new mortgage loan amount. Examples of settlement costs which may not be included in the net sales proceeds calculation are: x Tax service fees and other property transfer costs normally paid by the buyer 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. x Home warranty fees x Repairs not stipulated in the appraisal x Survey costs x Lawyer’s fees for representing the seller (apart from conducting the settlement or review of documents) x Purchaser’s down payment, escrow impounds and interim interest x Purchaser’s upfront/monthly mortgage insurance premiums x Servicer’s Title Insurance fee There can be no hidden terms or special understandings between any of the parties involved in the transaction, i.e., the buyer, seller, appraiser, sales agent, closing agent, and servicer. The servicer should review the signed Contract for Sale (if available) within five business days of receipt. If no contract is available, the servicer should approve the listing price of the property with the understanding that if an offer is made that meets the terms listed above, the transaction shall be pre-approved with little additional review required. The transaction is an outright sale of the premises. No sale by assumption may be considered, regardless of provisions for release of liability. N. CLOSING AND POST CLOSING RESPONSIBILITIES Before the transaction closes, the servicer will provide the closing agent with a list of all amounts payable out of the sale proceeds. Before giving final approval for a closing, the servicer reviews the settlement statement to ensure that it complies with earlier closing cost estimates. A PFS is reported to national credit bureaus as a “short sale.” The servicer is responsible for filing any applicable forms with the IRS and reporting any discharge of indebtedness after a PFS or DIL, in accordance with the Internal Revenue Code. O. DEED-IN-LIEU To be considered for a DIL the borrower must fully execute a written DIL agreement that contains all the conditions under which the deed will be accepted including: x Specific transfer date 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. x Notification that there may be income tax consequences because of the DIL x Acknowledgment that borrowers who comply with all the requirements of the agreement shall not be pursued for deficiency judgments x A statement describing the general physical condition in which the property will be conveyed demonstrating clean and marketable condition x Agreement that the borrower will convey the property vacant and free of personal property unless the servicer has approved occupied conveyance x Itemization of the keys, built-in fixtures, and equipment to be delivered to the servicer on or before the transfer date x Borrower’s agreement to provide evidence that certain utilities, assessments, and homeowner’s association dues are paid in full to the transfer date unless otherwise agreed to by the parties All DIL of foreclosure workouts must be accompanied by the “Disposition (PFS/DIL) Cost Benefit Analysis” (Attachment 18-B). Attachment 18-B is an example of the analysis that must be completed in order for a DIL workout to be considered. Servicers may generate their own version of Attachment 18-B in-lieu of utilizing the example provided. P. FILING A CLAIM The loss claim under the loan note guarantee is submitted to the Agency within 45 days after the date of the PFS or DIL closing. The Agency will reimburse the servicer for reasonable and customary costs of the appraisal, title search (if not included in the settlement statement), the allowable percentage of legal fees for a foreclosure postponed pending completion of PFS or DIL, if applicable, and reasonable costs of preservation and protection. Disbursements for taxes, assessments, hazard insurance, and other allowable items payable before the date of the PFS or DIL closing are also reimbursable. The Agency will not pay costs related to the property incurred after the closing date. The Agency will pay a loss mitigation incentive of $1000 for successfully closing a PFS or $250 for a DIL if all the documentation requirements outlined above are met. 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-B Disposition (PFS/DIL) Cost Benefit Analysis (Example) This worksheet is being provided to demonstrate cost savings to the Government, as described under 7 CFR 3555.305. Voluntary liquidation methods must demonstrate the expected cost to the Government to be the same as or less than the cost of foreclosure. Other methods of liquidation must demonstrate how the proposal will result in savings to the Government. These options are appropriate for borrowers who have experienced a verified, involuntary inability to meet their mortgage obligation. Borrowers that have abandoned their mortgage obligation or strategically defaulted may not be eligible. For further eligibility clarification, please refer to the "The Loss Mitigation Guide." Failure to comply with Agency Regulation, Policies and Guidance may result in a reduction or denial of any future Loss Claim. If you need further assistance, please contact the Servicing Office via email at [email protected]. Voluntary/Other Liquidation Method Foreclosure Method Current Market Value $180,000.00 Current Market Value $180,000.00 ¹ Gross Sales Price $172,500.00 ¹Estimated Liquidation Value $151,200.00 ² Net Sales Proceeds $157,482.63 ³ Actual Net Sales Price % 91.294% Unpaid Principal Balance $203,325.62 Unpaid Principal Balance $203,325.62 Interest to Settlement Date $5,622.79 Interest to FC Sale Date $6,401.16 Escrow Shortage $900.00 Escrow Shortage $1,100.00 FC Cost $1,513.25 FC Cost $2,731.55 Other Cost $129.13 Other Cost $129.13 Total Debt $211,490.79 ²Estimated REO Marketing Cost $24,116.00 Less Net Sales Proceeds $157,482.63 Total Debt $236,291.86 Total Estimated Loss Claim $54,008.16 Less Estimated Liquidation Value $151,200.00 Total Estimated Loss Claim $85,091.86 ¹ If no offer is available enter Market Value in lieu of Gross Sales Price. ² If no offer is available reduce Market Value by Management Acquisition Factor (14.95%) and enter in lieu of Net Sales Proceeds. ³ The result of the Net Sale Price divided by the Current Market Value ¹Equal to 84% of the Current Market Value ²Multiply Estimated Liquidation Value by Management Acquisition Factor (15.95%) Cost Savings to the Government: $31,083.70 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.

Source: USDA HB-1-3555, Chapter 18, § 18.17 — Debt Settlement Reporting · source URL · snapshot 0466acd1ea2d17a4