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Mitigate or Else

HUD increases fines for FHA servicers that don't mitigate

April 19, 2004

By MortgageDaily.com staff

A proposed rule could triple the fines the government can seek against FHA servicers that fail to engage in loss mitigation techniques to assist troubled borrowers.

The Department of Housing and Urban Development said it published Thursday a proposed rule that would triple the amount of damages it can impose on FHA servicing lenders that fail to offer defaulted homeowners loss mitigation options as these can prevent many from losing their home.

"We are working to ensure that every qualifying FHA borrower is afforded the opportunity to explore all options to keep their homes," HUD Secretary Alphonso Jackson said in a statement. "Our lenders must engage in loss mitigation efforts to help people stay in their homes, help to stabilize neighborhoods and prevent losses to FHA's Insurance Fund."

The national housing agency said it has worked to ensure that lenders assist defaulted FHA-insured borrowers in how they may qualify for one of HUD's loss mitigation options and that in the last two fiscal years, about half of such homeowners have been able to avoid foreclosure. The proposed rule would build upon these efforts, specify how HUD will be empowered to penalize lenders who fail to successfully engage in loss mitigation techniques and define the criteria used to evaluate a lender's performance, HUD said.

The treble damages penalty would be in addition to the current fine of $6,500 that lenders receive for each violation, and is not subject to the current limit of $1.25 million for all violations committed during any one-year period, the agency said.

HUD defines failure to engage in loss mitigation as a "servicing lender's failure to: evaluate a loan for loss mitigation before four full monthly mortgage installments are due and unpaid; determine which, if any, loss mitigation techniques are appropriate and take appropriate loss mitigation actions."

Lender's loss mitigation efforts will be measured on a portfolio-wide basis with HUD's Tier Ranking System, which will rank the lender based on the ratio of loss mitigation actions to foreclosure actions. HUD says it intends to focus its efforts on lenders that rank in the lowest tier.

Loss mitigation techniques lenders can offer to borrowers who meet certain qualifications, based on their circumstances, include the following:

  • Special Forbearance, in which, based on the borrower's financial situation, a repayment plan is arranged and possibly a temporary reduction or suspension of payments;

  • Mortgage Modification, in which the monthly payment is reduced and/or the term of the mortgage is extended;

  • Partial Claim, in which a one-time payment from the FHA insurance fund can be obtained to bring the mortgage current;

  • Pre-Foreclosure Sale, in which the borrower sells the property for less than the amount necessary to satisfy the mortgage and avoid foreclosure, and

  • Deed-in-Lieu of Foreclosure, in which the borrower loses the home by giving back the property to the lender to avoid damaging their credit rating as much as a foreclosure would.

The comment period for the proposed rule ends June 14, according to the Federal Register notice.

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