HUD Raises Fines For Lenders Who Fail To Assist Troubled Borrowers
April 27, 2005
WASHINGTON -The Department of Housing and Urban Development today published a final rule that dramatically increases the amount of damages HUD can seek against FHA lenders that fail to engage in loss mitigation techniques. Loss mitigation options enable many homeowners who are in default on their FHA mortgage to avoid foreclosure and remain in their homes.
"We are working to ensure that every FHA borrower is afforded the opportunity to explore all options to keep their homes," said HUD Secretary Alphonso Jackson. "Our lenders must make every effort to help people stay in their homes, help to stabilize neighborhoods and prevent losses to FHA's Insurance Fund."
Currently, the maximum penalty that can be imposed on lenders is $6,500 for each violation, up to a limit of $1.25 million for all violations committed during any one-year period. This new penalty provides for additional damages of three times the amount of any FHA mortgage insurance benefit claimed by a lender and is not subject to the current limitations.
In recent years, HUD has strived to ensure that lenders work with FHA-insured homeowners in default to see how they may qualify for one of HUD's loss mitigation options. In the past three fiscal years, almost 230,000 defaulted FHA borrowers benefited from loss mitigation, more than lost their homes through foreclosure. This new rule will build upon those efforts by specifically addressing how HUD will be empowered to penalize lenders who fail to successfully engage in loss mitigation techniques and by specifically defining the criteria used to evaluate a lender's performance.
Failure to engage in loss mitigation is defined as a servicing lender's failure to: evaluate a loan for loss mitigation before four full monthly mortgage installments are due and unpaid; determine which, if any, loss mitigation techniques are appropriate and take appropriate loss mitigation actions. HUD will use its Tier Ranking System (TRS) to measure a lender's loss mitigation efforts on a portfolio-wide basis, and rank the lender based on the ratio of loss mitigation actions to foreclosure actions. HUD intends to focus its efforts on lenders ranked in the lowest tier.
Loss mitigation techniques include the following:
- Special Forbearance, in which the lender arranges a repayment plan based on the borrower's financial situation and possibly provide for a temporary reduction or suspension of payments;
- Mortgage Modification, in which the lender capitalizes the mortgage delinquency, usually reducing the monthly payment and/or extending the term of the mortgage;
- Partial Claim, in which the lender obtains a one-time payment from the FHA insurance fund to bring the mortgage current;
- Pre-Foreclosure Sale, in which the borrower avoids foreclosure by selling the property for its appraised value, and these proceeds are less than the amount necessary to pay off the mortgage, and
- Deed-in-Lieu of Foreclosure, in which the borrower gives back the property to the lender. The borrowers lose their house, but do not damage their credit rating as much as a foreclosure would.
For each of these options, the borrower must meet certain qualifications, based on their circumstances. HUD's site, "Help for Homeowner's Facing the Loss of Their Home," provides a step by step plan and offers more details on HUD's loss mitigation programs.