6.1

OVERVIEW

In order to complete a Section 184 transaction, lenders are required to comply with all conditions of the firm commitment, close the loan before the expiration of key documents, and submit the loan information to the Program ONAP for endorsement.

This chapter outlines the process for Section 184 loan closing and endorsement. For projects involving rehabilitation or new construction, refer to Chapter 7 for more information about post-closing construction requirements.

back to top

6.2

TIMING

1. Closing. Lenders and borrowers may go to loan closing after the firm commitment has been received from HUD. A firm commitment is valid for 60 days or as specified on the firm commitment. Under normal circumstances, firm commitment extensions are not permitted. However, with the permission of the Program ONAP, the commitment may be extended.
2. Endorsement. Lenders must submit loan and settlement documents for endorsement within 60 days of loan closing and must include a certification that the construction escrow has been established (when undertaking construction or rehabilitation). After receipt of a complete loan endorsement file, the Program ONAP will send the lender the loan guarantee certificate.
3. Effect of the Guarantee. Absent fraud or misrepresentation in the origination or closing of the loan, the Section 184 guarantee becomes effective with the loan closing. In order to receive the loan guarantee certificate, lenders must submit the case binder to the Program ONAP for endorsement. The certificate will be issued within 10 days of receipt of the complete case binder.

back to top

6.3

LOAN CHANGES AFTER THE FIRM COMMITMENT

Loans must close in accordance with the terms and conditions of the firm commitment. In general, the loan amount and terms are fixed at firm commitment and HUD will not permit changes after this commitment has been issued. The Department may allow post-commitment changes to the loan amount under the following three conditions:

1. Changes in Borrower Status due to a significant negative event affecting the homebuyer’s income, liabilities, or credit status before the loan has closed. For example, if a member of the home buying family loses their job after commitment but prior to closing , the lender may resubmit key processing information and request a reduced mortgage. Lenders may request a greater loan than was initially anticipated in the firm commitment. This increase must be approved by the Program ONAP.
2. Interest Rate Changes. Interest rate increases of more than 1 percentage point must be approved by the Program ONAP on all commitments issued by HUD. If the interest rate increase after HUD’s firm commitment is 1 percentage point or less, HUD approval is only required when the debt-to-income ratio will exceed 41 percent.
3. Errors in loan processing, including miscalculations or inaccurate background information. Prior to closing, the firm commitment amounts may be reduced but not increased due to such errors.

If these inaccuracies were due to fraud or intentional misrepresentation, HUD will cancel the firm commitment and investigate as necessary and permitted under applicable statutes.

4. Unforeseeable Construction Costs that significantly affect the total cost of the home. As noted in Paragraph 7.3b, borrowers should build a modest contingency into the construction cost estimate. If unforeseeable events will increase costs and exceed the bounds of this contingency, the lender may apply to HUD to recast the mortgage. Unforeseeable events include such problems as weather-induced delays or supply shortages but do not include basic changes to the scope of work for aesthetic or convenience purposes.

   If the homebuyer’s income and credit will permit this change and HUD concurs that such changes meet the "unforeseen test," HUD will permit the mortgage to be recast. Lenders are cautioned that HUD will review these requests closely and are required to request HUD approval before beginning any work that will increase the overall mortgage amount. Amounts which exceed statutory LTV limits must be placed in a second mortgage or loan secured by other property.

back to top

6.4

LOAN CLOSING REQUIREMENTS

The lender is required to resolve all problems regarding title to the real estate, comply with all conditions of the commitment, close the loan before the expiration of the HUD-issued firm commitment and expiration of the credit documents, and submit the loan documents for endorsement within 60 days of loan closing.

1. Documents. The Section 184 loan is closed using standard HUD documentation with the addition of: a construction rider a construction loan agreement (if applicable); lease document (if applicable); and the Section 184 mortgage rider (specific to the type of land — see Appendix 4).
2. Signatures. All individuals appearing on the loan application must sign the mortgage note. Signatures of all individuals appearing on the loan application who are owners of the property must appear on the lien agreements (mortgage, deed of trust or security deed), leases, or other applicable agreements. However, some tribes and/or BIA offices restrict ownership or succession rights for non-Native Americans or other members of particular households. If the property is on tribal trust land and the tribe will not allow right of succession to one or more of the parties to the application, this information must be clearly stated within the lease and lien documents. If this information is so stated, tribes may sign leases and record liens with selected members of the applicant household, in accordance with tribal law. If a co-borrower is not a party to the lease agreement, the co-borrower must sign a statement acknowledging that he/she understands the inheritance laws of the tribe.
3. Power of Attorney may be used for closing documents. Any power of attorney, whether specific or general, must comply with state or tribal law and allow for the mortgage note to be legally enforced in that jurisdiction. It is the lender’s responsibility to assure that clear title can be conveyed in the event of foreclosure. Except for the conditions described below, the initial loan application may not be executed by using a power of attorney (i.e., it must be signed by all borrowers). Either the initial loan application or the final must contain the signatures of all borrowers.
1. Military personnel on overseas duty or on unaccompanied tour. The lender should obtain the service person’s signature on the application by mail or facsimile machine.
2. Incapacitated borrowers unable to sign the mortgage application. The lender must provide evidence the signer has authority to purchase the property and obligate the borrower. This would include a durable power of attorney designed to survive incapacity and avoid the need for court proceedings. The incapacitated individual must occupy the property to be insured.
4. Closing in Compliance with Firm Commitment. The loan must close in the same manner in which it was underwritten and approved. Additional signatures on the security instruments and/or mortgage note of individuals not reviewed during mortgage credit analysis may be grounds for withholding endorsement.
5. Guarantee Fee. A guarantee fee equal to one percent of the base mortgage amount (i.e. the loan amount excluding any financed guarantee fee) must be received at HUD’s lock box in Atlanta, Georgia within 15 days of closing and prior to the endorsement of any Section 184 loan. The fee is a one-time charge to the borrower and may be financed into the mortgage amount. This fee is transmitted via check to the address listed on the Loan Guarantee Transmittal Form, Form HUD-53038.

back to top

6.5

ESCROW ACCOUNT POLICIES

At closing, lenders must establish escrow accounts and require that mortgagors make monthly payments to ensure that funds will be available to pay taxes (as applicable) and insurance premiums when they come due. This section highlights general escrow policies. Specific escrow items are detailed in the following section.

1. Escrow Authority. The authority to collect funds for escrow items must be included in the security instrument signed by the borrower at closing.
2. Escrow Obligations. Lenders must also escrow funds for any items which, if not paid, would create liens on the property positioned ahead of the Section 184 mortgage.
3. Common Escrow Payment Periods. Escrowed obligations are usually paid annually or semi-annually. However, HUD does not object to a lender using other accrual periods (i.e. quarterly) because of variations in due dates of the escrow items, especially where these accrual periods produce a savings for the borrower without causing undue hardship to him or her.
4. Escrow Deposits. All lenders must aggregate all escrow funds received from borrowers, including those funds escrowed at closing under an Assurance of Completion Agreement. A special custodial account must be established with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration.
5. Proper Use of Escrow Funds. Escrow funds may only be used for the purpose for which they were collected and are subject to audit and examination by HUD. The lender must comply with all current and future RESPA regulations.
6. Interest on Escrows. Lenders may determine whether to place the escrow in an interest bearing account. Where escrow funds are invested, the net income derived from this investment must be passed on to the mortgagor in the form of interest as follows:
1. In compliance with any state and/or regulatory agency requirements governing the handling and/or payment of interest earned on a mortgagor’s escrow account; and
2. The net earnings from the investment of the mortgagor’s funds after deducting the actual cost of administering the interest bearing account.

In no case, may the expenses charged the mortgagor for maintaining the interest bearing escrow account exceed the gross interest earned from investing the funds in that account.

back to top

6.6

ESCROW ACCOUNT ITEMS

1. Items to be Escrowed. As noted above, the mortgagee must establish an aggregate amount that is sufficient to cover all escrow obligations as they become due and before they become delinquent. These obligations may include:
1. Hazard Insurance.
2. Taxes (when applicable).
3. Special Assessments (when applicable).
4. Ground Rents Such as Lease Payments (when applicable).
5. Flood Insurance Premiums (when applicable). For more information about flood plain requirements, see Paragraph 4.12.

Once the required amount has been collected at closing and the account established, the lender must collect monthly an amount from the borrower that is sufficient to pay the bills as they become due. It is the mortgagee’s responsibility to make disbursements as bill become payable even if it requires the advancing of corporate funds where escrow deposits are inadequate to meet obligations. Escrow items are discussed in detail below.

2. Taxes. When the exact amount of the annual property tax bill is unknown, the lender should contact the government entity with tax authority over the property.
1. On tribal trust and allotted land, this will be the tribe. Some tribes do not charge property taxes. Lenders should check with individual tribes to obtain this information. The Program ONAP will have a list of tribal telephone numbers, addresses, and contact persons. The lender should ensure that borrowers on trust land are not erroneously charged county property taxes.
2. On fee land, the lender should contact the unit of government (tribe, county, or city) with jurisdiction over this property.

   In order to avoid a substantial surplus or shortage at the time of the first escrow analysis, be certain that the improved value of the property is used to estimate the amount needed at closing and on a monthly basis. For existing properties, lenders can use actual taxes paid last year.

3. Insurance. Initial insurance escrow requirements must be based on the one-year premium actually paid by the borrower for the policy unless the lender knows that the renewal premium will differ.

Borrowers are permitted to select their own insurance carrier. Borrowers may elect to take a higher level of coverage. The following types of coverage may be purchased:

1. Dwelling insurance (hazard) insurance in an amount necessary to protect the investment must be obtained. If the borrower fails to obtain coverage, the lender may force coverage and require the mortgagor to pay the premium. If the lender places the coverage, it must be obtained at a reasonable rate.
2. Flood insurance (when applicable and available). See Paragraph 4.12 of this guidance for more information about flood plain requirements.
3. Homeowner’s policies (at the discretion of the borrower and with the cooperation of the mortgagee).
4. Life or disability insurance or optional coverage are at the borrower’s discretion. The mortgagee may not make this an obligation of the mortgage or make failure to pay such premiums as condition of default. These payments may not be deposited in the bank account with other escrow payments.
4. Additional Collections. Lenders may maintain a "cushion" in the borrower’s escrow account as permitted by RESPA.

back to top

6.7

SUBMISSION OF THE CASE BINDER FOR ENDORSEMENT

1. Overview. The case binder must meet the requirements specified herein. The lender must complete the front of the binder and write the case number on the side and bottom tabs of the binder. The lender may use the remaining space on the side tab for its own use. The processing and closing documents must be placed in the case binder in the order specified in the following paragraphs.
2. Timing. Case binders must be submitted within 60 days after closing. For construction/ permanent mortgages, the lender must include in the case binder verification that the escrow account has been established.
3. Late Endorsement Procedures. If the loan is submitted for endorsement more than 60 days after loan closing, the lender’s endorsement submission must include the following:
• An explanation and justification for the delay.
• A copy of the payment ledger (history) showing the date each payment was received by the lender including if the case is submitted after the 15th of the month, the payment due for the month in which the case is submitted for endorsement. For example. If the case closed February 3rd and the case is submitted for endorsement April 16th (postmarked), the payment ledger must reflect receipt of the April payment even though the payment is not considered delinquent until May 1st.
• Payments under the mortgage must not be delinquent when the loan is submitted for endorsement.
• Each payment must have been made in the calendar month due. If a payment is made outside the calendar month due, the lender cannot submit the case for endorsement until six consecutive payments have been made within the calendar month due.
• A certification by the lender that the lender did not provide the funds to bring the loan current or to affect the appearance of an acceptable payment history.
4. Submission Items (see checklist in Appendix 3). The following items must be submitted for endorsement on all Section 184 loans:
• Request for endorsement (HUD Form 54111).
• Late request for endorsement (see paragraph 6.7c, if applicable).
• Payment of Guarantee Fee (Program ONAP will verify receipt at lockbox).
• Firm Commitment.
• Final Mortgage Credit Analysis Worksheet.
• Final Maximum Mortgage Worksheet (single close only)
• Final signed Good Faith Estimate
• Final signed Uniform Residential Loan Application and all executed pages of Addendum A
• Certified true copy of Note.
• Certified true copy of Mortgage Instrument
• Certified true copy of Section 184 Rider to the mortgage instrument. Riders for fee simple, individual allotted and leasehold are in Appendix 4.
• HUD-1 Settlement Statement (form HUD-1) with signatures of buyer, seller (if applicable) and closing agent.
• Addendum Certifications to HUD-1 with signatures of buyer, seller (if applicable) and closing agent (standard FHA certifications).
• Flood Certificate.
• Warranty of Substantial Completion, HUD-92544 (when new construction completed prior to closing)
• Proof of completion of any additional conditions on the firm commitment.

For single close new construction or rehabilitation loans, the following must also be submitted:

• Certified true copy of Section 184 Applicant Acknowledgement.
• Certified true copy of Construction Loan Agreement.
• Certified true copy of Construction Loan Rider to the mortgage instrument
• Evidence of Establishment of Construction/Rehab Escrow account (copy of deposit slip or bank statement)

For properties located on fee simple land, the following must also be submitted:

• Title policy (title commitment will be accepted for guarantee but copy of the title policy must follow).

For properties located on tribal trust land:

• Final signed TSR (after closing) from the BIA with recorded and BIA approved Mortgage Instrument/Riders and Lease
• Certified true copy of Lease.
• BIA Certificate of Leasehold Mortgage Approval.

For properties located on individual allotted trust land (no lease):

• Final signed TSR (after closing) with recorded and BIA approved Mortgage Instrument/Riders
• BIA Certificate of Mortgage approval (generally an attachment to the Mortgage)
• If fractionated land ownership (multiple owners other than our borrower), all individuals must approve Mortgage Instrument either on a BIA consent form or signature on the mortgage instrument (as required by BIA).

For properties located on individual allotted trust land (with lease):

• Final signed TSR (after closing) with recorded and approved Mortgage Instrument/Riders and Lease.
• Certified true copy of lease.
• BIA Certificate of Leasehold Mortgage Approval.

back to top

6.8

POST ENDORSEMENT SUBMISSION (Single Close)

At the completion of single close new construction or rehabilitation, the following items are submitted to Program ONAP:

• Final Release Notice (prepared for HUD approval).
• Mortgagee’s Assurance of Completion, where escrow was established for minor incomplete work.
• Compliance Inspection Report(s) (Form HUD-92051) (one for each draw including final).
• Final pictures of completed property.
• HUD Approved Request for Change to Plans and Specifications (Form HUD-92577) (if applicable), including a set of as-built drawings.
• Specific Condition(s) clearance documentation (e.g., local health authority approvals, termite inspection report or soil treatment certification, certificate of occupancy).
• Warranty of Substantial Completion (HUD form 92544).
• Draw Request(s) (all draws including final).
• Mortgagor’s letter of completion.
• Approved Contingency Release Letter (if applicable).

For more information about the construction process, see Chapter 7.