17.8 TRANSFER AND ASSUMPTION (01/27/17)

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

Servicers must obtain written concurrence from the Agency before consenting to a transfer of a property securing a guaranteed loan with an assumption of the outstanding debt to a program eligible applicant. Transfers between family members do not require Agency concurrence since the transferee is not required to assume the debt.

If the borrower transfers the security property and the transferee does not assume the debt, the servicer need not seek Agency approval but must simply notify the Agency. In general, the Agency will withdraw the guarantee if a security property is transferred without assumption of the debt. In the following limited cases, which generally involve transfers of title between family members, the Agency will continue to honor the guarantee regardless of whether the transferee assumes the outstanding debt. The due on- sale clause will not be triggered in the following cases as defined by the Garn-St. Germain Depository Institutions Act of 1982:

• A transfer from the borrower to a spouse or children not resulting from the death of the borrower;
• A transfer to a relative, joint tenant, or tenant by the entirety resulting from the death of the borrower;
• A transfer to a spouse or an ex-spouse resulting from a divorce decree, legal separation agreement, or property settlement agreement;
• A transfer to a person other than a deceased borrower’s spouse who wishes to assume the loan for the benefit of persons who were dependent on the deceased borrower at the time of death, if the dwelling will be occupied by one or more persons who were dependent on the borrower at the time of death, and there is a reasonable prospect of repayment;
• A transfer into an inter vivos trust in which the borrower does not transfer rights of occupancy in the property;

When a transferee obtains a property with a guaranteed loan through a transfer of title as noted above, the following actions will occur:

• The servicer will notify Rural Development of the transfer;
• Rural Development will continue with the guarantee, whether or not the transferee assumes the guaranteed loan;
• The transferee may assume the guarantee loan on the rates and terms contained in the promissory note. If the account is past due at the time an assumption agreement is executed, the loan may be modified to bring the account current in accordance as described in Chapter 18, Attachment A, “Loss Mitigation Guide”;
• The transferee may assume the guaranteed loan under new rates and terms if the transferee applies and is eligible. Any new rates and terms must not exceed the rates and terms allowed for new loans and the interest rate must not exceed the inter rate on the initial loan as described in Chapter 7 of this Handbook;
• Any subsequent transfer of title, except upon the death of the inheritor or between inheritors to consolidate title, will trigger the due-on-sale clause.

1. Unauthorized Sale or Transfer For transfers falling under the Garn-St. Germain rule, the transferee is not required to assume the debt. In all other cases, the Agency will withdraw the guarantee if the security property is transferred without an assumption of the debt. If a servicer becomes aware that a borrower has transferred title to a property without the servicer’s knowledge and the transfer does not fall under the Garn-St. Germain rule, the servicer must take one of the following actions:

• Obtain Agency approval for the transfer with assumption if the applicant is eligible to assume the loan;
• Liquidate the guaranteed loan and submit a claim for any loss; or
• Notify the Agency of the transfer, and continue with the loan without the guarantee.

1. Transfer with Agency Approval In General, Servicers must obtain approval from the Agency before consenting to a transfer with an assumption of the outstanding debt. The Agency will review the application as it does any other request for a loan guarantee and will issue a conditional commitment if it approves the transfer. To request a transfer and assumption, the servicer must submit the following to the approving state office.

• A written request for a transfer and assumption, which will distinguish the package from an application for a new loan. The request must state the applicant’s credit worthiness, income eligibility, and include an executed underwriter’s analysis;
• A fully documented application for guaranteed loan assistance for the prospective purchaser, as described in Chapter 15 of this Handbook. The use of the Agency's automated underwriting system, GUS, is prohibited on a transfer with an assumption of an outstanding debt.

1. Requirements for an Assumption The Agency may approve a transfer with an assumption of the outstanding debt if all of the following conditions are met.

• The transferee must:
  • Assume the entire outstanding debt and acquire all of the property securing the guaranteed loan balance;
  • Be an eligible applicant.
• The transferor must:
  • Remain liable for the debt;
  • Acknowledge continued liability for the debt in writing.
• The property must meet the site; dwelling and environmental requirements described in Chapter 12, or are brought to those standards. Guaranteed loans secured by properties located in areas that are no longer considered rural may still be transferred and assumed;
• The priority of the lender’s existing lien securing the guaranteed loan must be maintained or improved;
• If the account is delinquent at the time of transfer, the servicer my review the transferee for loss mitigation and if eligible may execute a modification agreement concurrently with the assumption;
• Any new rates and terms must not exceed the rates and terms allowed for new loans under Chapter 7 of this Handbook, and the interest rate must not exceed the interest rate on the initial loan;
• The transferor must pay any recapture owed at the time of the transfer and assumption, if applicable;
• If additional financing is required to complete the transfer and assumption or to make needed repairs, the Agency may approve a supplemental guaranteed loan as long as the total outstanding principal balance does not exceed the market value of the property;
• The market value of the security being acquired by the transferee must be at least equal to the secured indebtedness against the property;
• A new guarantee fee must be paid to the Agency. The fee is calculated based on the remaining principal balance, plus any supplemental loan.

1. Closing a Transfer with an Assumption of the Outstanding Debt Once the servicer obtains Agency approval, the servicer may proceed with closing the transaction as it would for any other guaranteed loan. Along with all other required loan closing documents, the servicer must provide the Agency with a conformed copy of the executed assumption agreement. The servicer must process the assumption on a form approved by Fannie Mae, Freddie Mac, HUD, VA or FCS (for FCS lenders only).The existing Form RD 3555-17, “Loan Note Guarantee”will remain in effect. The servicer should note the date, amount assumed, and name(s) of the assuming party on the original Form RD 3555-17 and provide a copy to the Agency’s approving office. When the Agency processes the guarantee fee, Agency staff must submit Form RD 1980-7, “Notification of Transfer and Assumption of a Guaranteed Loan,” to the Office of the Deputy Chief Financial Officer.
2. Modification to Promissory Note and Security Instruments If the repayment schedule or interest rate changes as a result of the transfer and assumption, the transferor will remain liable for the debt and, therefore, must approve any changes. The rates and terms must not exceed the rates and terms allowed for new guaranteed loans and must not exceed the interest rate on the initial loan.

• The debt must not exceed the remaining amount due on the original loan;
• The term of the loan must not exceed thirty years from the date of the transfer and assumption.

The Servicer must request and obtain prior approval for the transfer, and the servicer must submit an explanation of the reasons for the proposed change in rates and terms.

1. Transfer Without Agency Approval If the borrower transfers the property and the transferee does not assume the debt, the servicer need not seek Agency approval but must simply notify the Agency and the agency will withdraw the guarantee. The only exception is for the Garn-St. Germain transfers listed in section 17.8. In these cases the Agency will continue to honor the guarantee and will not require the transferee to assume the guaranteed loan. Although not required, if the transferee wishes to assume the loan the servicer must seek agency approval except in the following limited situations:

• The property is transferred to a relative, joint tenant, or tenant by the entirety resulting from the death of the borrower and the transferee occupies the property as its primary residence;
• A transfer to a person other than a deceased borrower’s relative who wishes to assume the loan for the benefit of persons who were dependent on the deceased borrower at the time of death, if the dwelling will be occupied by one or more persons who were dependent on the borrower at the time of death, and there is a reasonable prospect of repayment;
• A transfer into an inter vivos trust in which the borrower does not transfer rights of occupancy in the property and remains an obligor to the outstanding debt.

Transferees noted above need not be program-eligible in order to assume the loan. If the account is past due at the time of transfer, the service my review the transferee for loss mitigation and if found eligible, may execute a modification agreement concurrently with the assumption. Any subsequent transfer of title, except upon the death of the inheritor or between inheritors to consolidate title, will be treated as a sale.