17.2 REQUIRED SERVICING ACTIONS (01/27/17)

Owned by Kacey Olson
Last updated: Nov 18, 2018
6 min read

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook


In addition to collecting regularly scheduled payments, lenders are also responsible for a wide variety of servicing activities including, but not limited to, the following actions.

A.    Ensuring Payment of Loan

Lenders should have a system to record loans, monitor payment activity and the history of borrower accounts.  Lenders are responsible for monitoring activities completed by third party servicing providers.

B.    Handling Late Payments and Fees 

Lenders may assess late payment charges to a borrower’s account when appropriate; however, these charges will not be covered by the loan guarantee.  Late payment charges are subject to the following restrictions.

  • The late payment charge must not exceed a rate that is reasonable and customary for the area.  The actual percentage of the monthly payment that the mortgagee may collect may be governed by state law.  The maximum amount cannot exceed the percentage of the payment due as prescribed by HUD, or the percentage of payment as prescribed by Fannie Mae or Freddie Mac.
  • For borrowers receiving interest assistance, payment will be made by the Agency directly to the lender on or before the 15th day of each month regardless of the date a borrower’s loan payment is due. The lender must not charge a late fee if the only unpaid portion of the borrower’s scheduled payment is interest assistance owed by the Agency.  If the borrower’s payment is late, the lender may only charge a late payment fee against the borrower’s unpaid portion.

C.    Ensuring Payment of Taxes and Insurance

Lenders must have adequate internal control processes to ensure that real estate taxes, assessments, and flood and hazard insurance premiums are paid as required for all property that secures a guaranteed loan.  Escrow funds may be used only for the purpose for which they were collected.

  • Lenders with escrow capacity.  Lenders that have the capacity to escrow funds for the payment of taxes, assessments, and insurance must do so.  Escrow accounts for all guaranteed loans must be administered in accordance with the RESPA of 1974 and must be insured by the FDIC or the NCUA insurance fund.
  • Lenders without escrow capacity.  Lenders that do not have the capacity to escrow funds must follow their approved plan for ensuring that such obligations are paid on time.  Such a plan should have been submitted with the initial application for lender approval, as described in Chapter 3 of this Handbook.  Rural Development may revoke the acceptance of the lender’s plan if loan performance indicates that delinquency and loss rates are being affected by the lender’s inability to escrow for taxes, assessment, and insurance.  This alternative is not available to lenders who contract for servicing.  Rural Development will not include any taxes or insurance amounts that accrued prior to acceleration in any potential loss claim.  
    • Third party servicers must have the capacity to escrow funds.

D.    Nonpayment of Taxes and/or Insurance

If real estate taxes and hazard insurance premiums are not paid, lenders must perform the following functions:  

  • Lenders must notify the borrower upon discovery of nonpayment and request evidence of payment within 30 days of such notice.  
  • Lenders may advance funds and arrange with the borrower for repayment if the borrower does not provide proof of the payment within the specified time or indicates an inability to make payments.  The lender must then begin to collect funds for future tax assessments and hazard insurance premiums and hold them in escrow.

E.    Maintaining Hazard Insurance and when applicable, Flood Insurance

Until the loan is paid in full, lenders must ensure that borrowers continuously maintain hazard and, if applicable, flood insurance in an amount sufficient to protect the property securing the guaranteed loan.  Lenders are encouraged to adopt accepted industry standards for hazard and flood insurance as noted in Paragraph 16.10 C of Chapter 16 of this Handbook.

  • Lenders are responsible for reviewing the borrower’s proposed insurance coverage to determine whether it is adequate.  Lenders must assure that hazard insurance claims involving property damage are filed and settled expeditiously.  All payments for insured losses must be applied to the restoration of the security or to the loan balance.  
  • Insurance claims for structural damage may be paid directly to the homeowner to advance funds to contractors, provided all of the following conditions are met:    
  • The mortgage is current.
  • The borrower’s payment history does not show delinquencies of two payments or more.
  • The property is occupied by the borrower(s).
  • The released funds may not exceed $15,000.00.
  • The borrower(s) must execute an affidavit in which the borrower(s) expressly agree to apply the released funds promptly to repair or reconstruct the residence. 
  • For insurance claims in excess of $15,000 and does not meet the criteria required above, lenders must supervise the insurance funds if a loss to the insured property occurs.  All repairs and replacements using the insurance proceeds must be planned, performed and inspected in accordance with Agency construction requirements and procedures.  Chapter 12 of this Handbook describes policies for obtaining plans, specifications and completing construction inspections involving repairs.  See Paragraph 18.12 of Chapter 18 of this Handbook for additional information regarding insurance claims involving property damage.

F.    Assessing Eligibility for Interest Assistance 

Lenders must annually review the income of borrowers who are receiving interest assistance to ensure that they are receiving the appropriate amount. Appendix 6 of this Handbook includes the Agency’s policies for annual reviews of a household’s income and for providing interest assistance during the course of the loan.

G.   Approving Borrower Actions 

During the term of the guaranteed loan, the borrower may ask the lender for permission to undertake actions that could affect the value of the security property. Section 2 of this chapter provides the policies that lenders should follow in determining whether to approve actions such as a partial release of security.  In cases of a transfer with an assumption of the outstanding debt, lenders must obtain approval from the Agency before consenting to the transaction.

H.   Addressing Unauthorized Assistance or Overpayment of Interest Assistance

The lender is responsible for notifying the borrower of the Agency’s determination of unauthorized assistance or overpayment of interest assistance.  If the Agency determines that the borrower received unauthorized assistance or an overpayment, the lender must surrender the guarantee, in the case of unauthorized assistance, or collect the excess assistance, in the case of an overpayment.  Appendix 6 of this Handbook outlines the policies for Agency determinations of unauthorized assistance and the actions the lender may be required to take.

I.      Obtaining Final Payments and Recapture of Shared Equity 

The lender must not satisfy a borrower’s account and release the security instruments until full payment of all amounts owed; including unpaid principal and interest, protective advances, overpayment of interest assistance, and shared equity has been received and verified.  For those borrowers who have received interest assistance, even if the borrower repays the full outstanding account balance, the account is not considered paid in full until shared equity is paid, as described in Appendix 6 of this Handbook.

Upon full satisfaction of the borrower’s account, the lender will return the Loan Note Guarantee to the Agency approving office marked “cancelled.”  If the Loan Note Guarantee is not available, the lender must advise the Agency in writing that the loan has been satisfied by payment in full.

J.     Handling Borrowers in Bankruptcy 

The lender is responsible for taking appropriate action during bankruptcy proceedings to protect the borrower and the government’s interest.  When notice is received that a borrower has filed a bankruptcy petition, the lender must:

  • Obtain a copy of the bankruptcy petition;
  • Complete and file a proof of claim within the time set by the bankruptcy court;
  • Maintain copies of all documents associated with the bankruptcy;
  • Review the proposed repayment plan;
  • Comply with all applicable laws and regulations;
  • Monitor the bankruptcy proceedings;
  • Monitor receipt of post- and pre-petition payments; and
  • Determine that tax and insurance payments are current or determine if additional funds are necessary to maintain an escrow account.

The lender must refer the account to an attorney when the account becomes 30 days or more delinquent.  Refer to Chapter 18 for more detailed information on delinquent accounts in bankruptcy.

K.   Complying with the Servicemembers Civil Relief Act (SSCRA)

The Servicemembers Civil Relief Act requires that the interest rate charged a borrower who enters full-time active military duty after a loan is closed not exceed six percent if the borrower’s military obligations are affecting their ability to pay.  The borrower should supply the lender with documentation of their active duty status.  Active military duty does not include participation in a military reserve or the National Guard unless the borrower is called to active duty.  

1.         Change of Active Military Status

The lender will cancel the six percent interest rate and resume the promissory note interest rate when notified by the borrower that he or she is no longer on active military duty.  The lender may process a new payment assistance agreement if the borrower is eligible according to Appendix 6 of this Handbook. 

2.        Amount of Assistance

If a borrower qualifies for payment assistance see Appendix 6 of this Handbook, after reduction of the interest rate to six percent, the amount of payment assistance received during the period of active military duty will be the difference between the amount due at the subsidized rate for principal and interest and the amount due at the six percent interest rate.  The six percent interest rate will be effective with the first payment due after the lender confirms active military status of the borrower.

The Agency will not include interest on a loss claim filed in excess of six percent for the period the veteran was eligible, nor for any period of time the lender failed to establish the note rate after notification by the borrower of non-active military service.