III.A.1.e. Payment Administration (03/14/16)

Owned by Kacey Olson
Last updated: Nov 25, 2018
5 min read

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Receipt of Payments

ii. Application of Payments

iii. Return of Partial Payments for Less than the Amount Due

iv. Application of Partial Prepayments

v. Prepayment

i. Receipt of Payments

The Mortgagee must either use a Trust Clearing Account or special custodial account to hold all payments on the insured Mortgage.

The Mortgagee’s Trust Clearing Account may be used for collections received on all types of Mortgages. If a Trust Clearing Account is not used, the Mortgagee must immediately transfer payments into a special custodial account.

ii. Application of Payments

Mortgagees using special custodial accounts must withdraw an amount equal to the principal, interest, and service charges within 30 Days after deposit and post to the Borrower’s records accordingly.

The Mortgagee must apply Borrower payments in the following order:

  • to MIPs due, if any;
  • to other escrow items;
  • to interest on the Mortgage;
  • to amortization of the principal on the Mortgage; and
  • to Late Charges, provided, however, that any amounts owed for Late Charges must be handled consistent with TILA regulations.

The Mortgagee may only apply funds for payments of optional insurance coverage premiums after the application of funds to all other elements of the monthly Mortgage Payment.

iii. Return of Partial Payments for Less than the Amount Due

(A) Definition A Partial Payment is a payment of any amount less than the full amount due under the Mortgage at the time the payment is tendered, including Late Charges and amounts advanced by the Mortgagee on behalf of the Borrower.

(B) Standard For performing Mortgages, the Mortgagee may return any Partial Payment to the Borrower with a letter of explanation.

(C) Required Documentation The Mortgagee must note in its servicing file any Partial Payments received and, if applicable, documentation on the date the payment was returned with a letter of explanation.

iv. Application of Partial Prepayments

(A) Definition A Partial Prepayment is a payment of part of the principal amount before the date on which the principal is due. An Advance Full Monthly Payment is the payment of an amount larger than the full monthly payment, equaling an additional full monthly payment.

(B) Standard The Mortgagee must apply Partial Prepayments as requested by the Borrower as either:

  • advance full monthly payments; or
  • additional payments toward reducing principal and future monthly payments.

In the event that the Borrower does not specify how the Partial Prepayment should be applied, the Mortgagee should communicate with the Borrower to determine the method of application or apply the payment in a manner previously communicated to the Borrower.

If the Borrower elects to have Partial Prepayments equal to a full monthly payment applied as an advance full monthly payment, the Mortgagee must allow the Borrower to skip an equal number of installments in the future without creating a mortgage Default or incurring a Late Charge.

v. Prepayment

(A) Definitions A Partial Prepayment is a payment of part of the principal amount before the date on which the principal is due. A Payoff or Prepayment in Full is the payment in whole of the principal amount of the mortgage Note in advance of expiration of the term of the mortgage Note. The Installment Due Date is the first Day of the month, as provided for in the security instrument.

(B) Standard The Mortgagee must accept a prepayment of a Mortgage in whole or in part on any Installment Due Date without penalty to the Borrower.

(C) Prepayment Procedures

(1) Mortgages Closed On or After January 21, 2015The Mortgagee must accept a prepayment on a Mortgage closed on or after January 21, 2015, at any time and in any amount. The Mortgagee must calculate the interest as of the date the prepayment is received, not as of the next Installment Due Date.

(2) Mortgages Closed Before January 21, 2015

(a) Mortgages Insured On or After August 2, 1985The Mortgagee must accept a prepayment on a Mortgage insured on or after August 2, 1985 and closed before January 21, 2015, if the Borrower prepays the Mortgage in full on the first Day of any month in the term of the Mortgage. If prepayment is offered on a day other than the Installment Due Date, the Mortgagee may:

  • refuse to accept the prepayment until the first Day of the next month; or
  • accept the prepayment and require the payment of interest to the first Day of the next month. For Prepayment in Full, this option may only be used if the Mortgagee has provided the Payoff Disclosure to the Borrower.

(b) Mortgages Insured Prior to August 2, 1985

(i) Definitions Notice of Intent to Prepay refers to the advance notice that Borrowers on Mortgages insured before August 2, 1985 must provide in order to prepay their FHA-insured Mortgages in full without penalty. The 30-Day Advance Prepayment Notice Period refers to the time requirement for the Borrower to provide advance notice to the Mortgagee for prepayment of an FHA-insured Mortgage insured prior to August 2, 1985.

(ii) Standard The Mortgagee must accept prepayment on a Mortgage insured prior to August 2, 1985, if the Borrower:

  • submits to the Mortgagee a Notice of Intent to Prepay at least 30 Days prior to the prepayment; and
  • prepays the Mortgage in full on the first Day of any month in the term of the Mortgage.

If a prepayment is offered on a day other than the Installment Due Date, the Mortgagee may:

  • refuse to accept the prepayment until the first Day of the month following the expiration of the 30-Day Advance Prepayment Notice Period; or
  • accept prepayment and require the payment of interest to the first Day of the month following the expiration of the 30-Day Advance Prepayment Notice Period. For Prepayment in Full, this option may only be used if the Mortgagee has provided the Payoff Disclosure to the Borrower.

(iii) Borrower’s Notice of Intent to Prepay For Mortgages insured prior to August 2, 1985, the Borrower must send and the Mortgagee must receive the Borrower’s Notice of Intent to Prepay at least 30 Days prior to prepayment. If the Borrower submits a prepayment without previously sending a Borrower’s Notice of Intent to Prepay, the Mortgagee may consider receipt of the prepayment as the Borrower’s Notice of Intent to Prepay. The Mortgagee may choose to:

  • provide a Payoff Disclosure, enabling the Mortgagee to:
    • defer acceptance of prepayment until the first Day of the month following the date prepayment is tendered; or
    • accept the prepayment and require the payment of interest to the first Day of the month following the date prepayment is tendered; or
  • accept the prepayment on the date tendered, which limits the Mortgagee’s collection of interest to that prepayment date.

(iv) Effective Dates for Notice of Intent to Prepay The effective date of the Notice of Intent to Prepay is the date that the Notice was received by the Mortgagee, unless the Borrower can produce documentation showing that the Notice was received earlier. The 30-Day Advance Prepayment Notice Period required for Mortgages insured prior to August 2, 1985, begins on this date of receipt.

(c) Installment Due Date Falls on a Non-Business Day When the Installment Due Date falls on a non-business day, the Mortgagee must consider a Borrower’s Notice of Intent to Prepay or the receipt of the prepayment amount for a Mortgage closed before January 21, 2015 timely if received on the next business day.

(3) Payoff Disclosure Requirements When notified of the Borrower’s intent to prepay, the Mortgagee must send the Payoff Disclosure and copy of the payoff statement directly to the Borrower, even if the Mortgagee is dealing with an Authorized Third Party. The Mortgagee will forfeit any interest collected after the date of prepayment if these disclosure requirements are not met.

(D) Trustee’s Fee for Satisfactions If specifically provided for in the security instrument, the Mortgagee may charge the Borrower the amount of the trustee’s fee, plus any reasonable and customary fee for payment, or for the execution of a satisfaction, release or trustee's deed when the debt is paid in full.

(E) Recording Fees for Satisfactions The Mortgagee may charge the Borrower a reasonable and customary fee for recording satisfactions in states where recordation is not the responsibility of the Mortgagee.