Single Family Housing Guaranteed Loan Program Changes Related to Special Servicing Options

<RULE> DEPARTMENT OF AGRICULTURE <SUBAGY>Rural Housing Service</SUBAGY> <CFR>7 CFR Part 3555</CFR> <DEPDOC>[Docket No. RHS-24-SFH-0001]</DEPDOC> <RIN>RIN 0575-AD28</RIN> <SUBJECT>Single Family Housing Guaranteed Loan Program Changes Related to Special Servicing Options</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Rural Housing Service, U.S. Department of Agriculture (USDA). <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Rural Housing Service (RHS or Agency), a Rural Development (RD) agency of the United States Department of Agriculture (USDA), is implementing changes to the Single-Family Housing Guaranteed Loan Program (SFHGLP) to amend the current regulations regarding Special Servicing Options and adjust the Mortgage Recovery Advance (MRA) process. This final rule is intended to benefit borrowers and lenders by providing lenders more flexibility in their servicing options, offering a less expensive and less cumbersome MRA process, and reduce program risk of the guaranteed loan portfolio. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective February 11, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Ticia Weare, Finance and Loan Analyst, Single Family Housing Guaranteed Loan Division, Rural Development, U.S. Department of Agriculture, STOP 0784, South Agriculture Building, 1400 Independence Avenue SW, Washington, DC 20250-0784. Telephone: (314) 679-6919; or email: <E T="03">ticia.weare@usda.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> The USDA RHS offers a variety of programs to build or improve housing and essential community facilities in rural areas. RHS offers loans, grants, and loan guarantees for single- and multi-family housing, childcare centers, fire and police stations, hospitals, libraries, nursing homes, schools, first responder vehicles and equipment, housing for farm laborers and much more. RHS also provides technical assistance loans and grants in partnership with non-profit organizations, Indian tribes, State and Federal Government agencies, and local communities. Under the authority of the Housing Act of 1949 (42 U.S.C. 1471 <E T="03">et seq.</E> ), as amended, the SFHGLP makes loan guarantees to provide low- and moderate-income persons in rural areas an opportunity to own decent, safe, and sanitary dwellings and related facilities. The RHS administers the SFHGLP that provides a 90% Loan Note Guarantee to approved lenders to reduce the lender's risk of extending loans to low- and moderate-income households in rural areas. Approved lenders make the initial eligibility determinations, and the Agency reviews those determinations to make a final eligibility decision. This program helps lenders work with low- and moderate-income households living in rural areas to make homeownership a reality. Providing affordable homeownership opportunities promotes prosperity, which in turn creates thriving communities and improves the quality of life in rural areas. The RHS published a proposed rule on January 27, 2023 (88 FR 5275) to amend the current regulation for the SFHGLP found in 7 CFR part 3555. This final rule will amend 7 CFR part 3555 to implement changes related to the use of Special Servicing Options for Non-Performing Loans. The changes to the current regulation will benefit borrowers by offering a less cumbersome option to eliminate documentation and eligibility challenges for borrowers who do not require payment reduction, while providing lenders more flexibility in their servicing options and reducing program risk of the guaranteed loan portfolio. The SFHGLP is authorized by section 502(h) of the Housing Act of 1949, (42 U.S.C. 1472(h)), as amended. 7 CFR part 3555 sets forth the regulatory requirements of the SFHGLP which includes policies regarding originating, servicing, holding, and liquidating SFHGLP loans. SFHGLP approved lenders make the initial eligibility determinations, and the Agency reviews those determinations to make a final eligibility decision. In § 3555.303, lenders are provided several traditional servicing options for Non-Performing Loans. The use of special servicing options in § 3555.304 is provided if the traditional servicing options provided in § 3555.303 have been exhausted or the lender has determined that the use of such servicing options would not resolve the delinquency. RHS is issuing a final rule to amend §§ 3555.303 and .304 to incorporate the MRA as a part of the regular servicing options in § 3555.303 and allow for streamline servicing options in § 3555.304. This final rule also adjusts the MRA process to make it less cumbersome and eliminates documentation and eligibility challenges for borrowers who do not require payment reduction. <HD SOURCE="HD1">II. Discussion of Public Comments Received on March 28, 2023, Proposed Rule</HD> The Agency received comments from 12 respondents, including mortgage lenders, associations, and other interested parties. Specific public comments are addressed below: <E T="03">Public Comment:</E> One respondent suggested that the Agency combine both § 3555.303 (traditional servicing options) with § 3555.304 to maintain the COVID-19 loss mitigation waterfall and provide specific guidance in HB-1-3555. Further, the respondent suggested the Agency maintain the standalone MRA as the first option in the waterfall for borrowers who do not require payment reduction; eliminate financial reviews for seriously delinquent borrowers; retain a target payment reduction of 20 percent for borrowers who cannot resume an affordable new payment; and allow the MRA to be combined with a 30 or 40 year loan modification, allowing borrowers to defer additional principal if MRA funds are available. <E T="03">Agency's Response:</E> The Agency appreciates the commenter's response. The Agency agrees changes to § 3555.303 in addition to changes in § 3555.304 may assist in loss mitigation and amends the proposed rule accordingly. The final rule incorporates the MRA into § 3555.303, maintaining the MRA as either a standalone option or combined with a loan modification. The Agency agrees additional flexibility in servicing options may assist in preventing unnecessary foreclosures. The final rule amends § 3555.304 to provide streamline servicing options to provide the borrower with at least a 10 percent reduction to their principal and interest payment with no consideration of the borrower's financials. The Agency agrees with the respondent that the option to extend the loan term as suggested may assist in loss mitigation, therefore, the final rule provides the ability to extend the loan term after reamortization up to 40 years when necessary to demonstrate repayment ability. Additionally, the Agency will amend § 3555.303 to add section (b)(3)(vi) indicating the order in which that traditional servicing options will be established. <E T="03">Public Comment:</E> Four respondents replied that they were in favor of the proposed rule, some indicating that eliminating the subordinate lien is a worthy regulatory reform priority for post-pandemic mortgage servicing. However, they have expressed their opinion that this may place an undue burden on the lender and the borrower for collection of a balloon payment of the non-interest-bearing promissory note at the maturity of the interest-bearing loan. These respondents recommend that the Agency allow servicers to assign the servicing advance MRA to USDA at maturity of the interest-bearing original note, stating that the Agency has greater flexibility to help such homeowners avoid foreclosure. <E T="03">Agency's Response:</E> The Agency appreciates the support, as well as the suggested revision. It is anticipated that only a small percentage of loans will reach maturity. The Agency has not amended the final rule as recommended; however, the Agency is amending § 3555.303 to allow an MRA to be combined with up to a 40-year loan modification term, allowing borrowers to defer the additional principal if MRA funds are available. The opportunity to defer the additional principal will ensure borrowers are able to achieve the target payment. Additionally, the Agency is not opposed to allowing the servicer additional collection time if the lien is not released prior to the loan, including the MRA, being paid in full. The Agency will continue to work with the industry to provide alternative solutions. <E T="03">Public Comment:</E> Four respondents requested that clarification be provided in the rule to allow lenders to provide multiple MRAs throughout the life of the loan. <E T="03">Agency's Response:</E> The Agency appreciates the commenters' responses, as well as the suggested revision. The Agency has amended the rule to allow multiple MRAs and to clarify what conditions must be present to allow additional MRAs. <E T="03">Public Comment:</E> One respondent suggested that the Agency exempt small servicers from the provisions of the new rule, explaining that requiring servicers to collect the unsecured debt the homeowner owes to USDA puts them in the position of becoming third party debt collectors and creates a different relationship than what a Housing Finance Agency servicer agreed to when their agency agreed to offer and service SFHGLP loans as part of their single-family program offerings. <E T="03">Agency's Response:</E> The Agency appreciates the commenter's response. It is anticipated that only a small percentage of loans will reach maturity. The Agency has not amended the rule as recommended; however, the Agency is amending the CFR to allow an MRA to be combined with up to a 40-year loan modification term, allowing borrowers to defer the additional principal if MRA funds are available. The opportunity to defer the additional principal will ensure borrower ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 41k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━