17.7 PARTIAL RELEASE OF SECURITY (01/27/17)

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

If a servicer consents to a transaction affecting a security property, such as selling or exchanging security property, or granting a right-of-way across the security property, the servicer must ensure that certain conditions are met and that the mortgage file is carefully documented.

1. Conditions for Partial Release
2. Adequate Compensation The borrower must receive adequate compensation.

• The sale of any part of the security property must result in a payment equal to the value of the security being released or rights granted;
• The exchange of security property must result in another parcel of property acquired that has value equal to or greater than that being released;
• The granting of an easement or right-of-way must result in benefits that are equal to or greater than the value of the security property being released.

1. Net Proceeds The net cash proceeds must be used to reduce the principal balance of the outstanding debt or be used to improve the property. Unless the outstanding debt is paid in full the borrower should receive no cash from the transaction. All net proceeds should be applied in the following order:

• To pay customary and reasonable cost related to the transaction owed by the borrower;
• To be applied on a prior lien debt, if any;
• To be applied to the outstanding balance or used for improvements to the security property. If the funds are to be used for property improvements, the servicer should release the funds as the improvements are completed. The servicer must ensure that the proceeds are used as planned. Any funds remaining after the improvements are completed must be applied as a principal curtailment.

1. Program Standards The security property, after the transaction is completed, must meet program standards.
2. Ability to Repay the Loan The borrower's ability to repay the guaranteed debt must not be jeopardized. The guaranteed loan should be current and in good standing.
3. Servicer Delegation USDA approval is not required for the voluntary or involuntary release of the security provided that all of the following conditions are met:

• The portion of the property being conveyed does not exceed 10%of the area of the mortgaged property;
• There is no damage to existing structures or other improvements;
• There is no unrepaired damage to sewer, water, or paving;
• All of the payment received as compensation for the taking of the property is applied to reduce the unpaid principal balance of the mortgage, and;
• The conveyance occurs after the mortgage loan was guaranteed.

1. Processing a Partial Release - Servicer To process a partial release under the delegation authority described above, the servicer must complete and/or document the following actions. If the servicer eventually files a loss claim, the claim must be accompanied by the servicer’s certification that all requirements have been met.

• The borrower’s reason for requesting the servicer to make the release, including information regarding the contemplated use of land to be released;
• The monetary consideration, if any, to be received by the borrower;
• Confirm the mortgage loan is in good standing, the amount of principal balance owed and the due date of unpaid installment. If delinquent, confirm the number of delinquent payments;
• Determine the value of the property if a release is processed, taking into consideration any improvements being completed. An appraisal of the security property will be conducted if the most current appraisal is more than 1 year old or if it does not reflect current market value. The appraisals must reflect the value of the property prior to the release of partial security and the value of the remaining property once the release of partial security occurs;
• Complete any forms required by state law;
• A list of unpaid special assessments, if any, and the total amount payable;
• Update the legal descriptions of the property, as necessary;
• Report any restrictions to be imposed on the land to be released;
• Provide a survey or sketch of the property showing dimensions of the portion to be released, the location of the existing and proposed improvements, and the relation of the property to surrounding properties;
• Plans and specifications, including cost estimates, of any alterations proposed for the remaining property after release;
• For an exchange of all or a portion of the security property, obtain title clearance for the new security before the release of the existing security. Security instruments must be obtained for the new property;
• For a sale of all or a portion of the security property, deliver the release when full payment is received; and
• Notify the Agency of any reduction in the outstanding principal balance through monthly default or quarterly status reporting.

1. Processing a Partial Release - Agency If Agency approval is required and the servicer is nationally approved, the request will be sent to the National Office as listed in Appendix 4. State approved servicers will send requests to the state contact in which the property is located. In such cases the servicer should send evidence of all completed actions to the agency for review. National and state contact information may be found in Appendix 4 of this Handbook. The approval official will analyze the servicer’s request for partial release and consider the following

• Estimate of value prior to the proposed release;
• Estimate of value after the proposed release;
• Loss in value attributed to the proposed release;
• The use or purpose(s) to which the released property would be put to;
• The estimated cost of proposed improvements to the remaining property;
• The estimated value of the remaining property after any proposed improvements are completed;
• Consideration if the remaining mortgage security is less marketable as a result of the release.

A decision on a case-by-case basis will be made if a reduction to the principal mortgage balance is required as a condition to approval of the partial release request.

Notification of approval/denial will be communicated to the servicer. Any denial must state the reason(s) for denial in detail.