U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 July 14, 1988 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 88-25 TO: ALL APPROVED MORTGAGEES SUBJECT: Administration of the Section 235 Program: Common Servicing Errors, Clarification of Policies and Procedures and Recent Legislative Changes Although a revision to Chapter 10, HUD Handbook 4330.1 was issued in April 1987, many program participants remain in non-compliance with HUD requirements and lenders are being required to refund monies to the Department. The purpose of this Mortgagee Letter is to bring attention to several of the most common areas of non-compliance, provide clarification of existing policies and procedures, and highlight certain recent legislative changes which affect the servicing of all Section 235 mortgages. Appropriate changes to HUD Handbook 4330.1 will be made in the near future. Most Common Findings of Non-Compliance and Clarification of the Department's Policies and Procedures (1) Failure to make retroactive adjustments for overpaid subsidy from prior recertifications Many mortgagees have not adjusted subsidy in situations where they become aware (usually at the time of annual recertification) that homeowners received an increase of $50.00 or more in gross monthly income for mortgages insured after January 5, 1976. For further guidance review HUD Handbook 4330.1 Rev., Chapter 10, CHG-3, dated April 7, 1987, paragraph 10-29(F)(2)(a). Significant amounts of overpaid assistance have been paid by the Department due to the failure of mortgagors to properly report increases in income and by the inaction of mortgagees to correct the assistance payments when they receive evidence of these increases. Lenders must review any account insured on or after January 5, 1976, where there is an annual increase in income of $600.00 or more to establish the respective dates and amounts of all increases since the prior recertification. Appropriate adjustments to the assistance payments must then be made. All interim increases of $50.00 per month must be treated as separate required recertifications. For example, Mr. Jones (January anniversary) receives a $75.00 per month raise in April and another raise of $95.00 per month in July. Both raises will require retroactive adjustments in his assistance payments. All adjustments in payments must be made in accordance with HUD Handbook 4330.1 Rev., paragraph 10-15. Where an adjustment results in the suspension of assistance payments, handling charges must also be reimbursed to HUD. Generally, adjustments for overpaid subsidy must be included in the next monthly billing (Form HUD-931O2). Should you have any questions regarding submission of Section 235 billings or refunds, you may contact Mr. Inder Varma, Chief, Accounts Payable Branch, at (202) 755-6706. Recovery of overpaid assistance from mortgagors may be obtained by either a lump sum payment or a repayment schedule. Care should be exercised not to create undue hardship on mortgagors which could potentially result in a default. (2) Use of incorrect income for determination of assistance payments To calculate assistance payments, use the mortgagor's verified current income or the reported expected income, whichever is higher. The mortgagor's option to recertify is his protection when there is a loss of income. Refer to HUD Handbook 4330.1 Rev., Chapter 10, paragraph 10-10(C) and instructions to Form HUD-93101 for guidance on this requirement. In cases where the mortgagor states on Form HUD-931O1, that he expects to earn more than his employer verified, this would not be a case of establishing assistance based upon the unsupported word of the mortgagor, but rather a case where a judgment must be made as to which is the best information available. It is HUD's intent to require verification of all income to protect both the lender and HUD from the intentional understatement of income by mortgagors. Our experience has shown that many employers are reluctant to acknowledge that overtime is certain or guaranteed to continue. Too often, mortgagors receive income from other sources or routinely work overtime for several years, establishing an identifiable trend, and even indicate on Form HUD-931O1 that they expect to receive this increased income. When lenders fail to use the highest income reported, overpaid assistance may result and the mortgagor cannot understand why he owes overpaid assistance. In addition, use of the highest reported income will often avoid the retroactive calculations required when $50.00 or more monthly increases income are noted on annual recertifications. Therefore, for all recertifications, use the highest reported income for determination of subsidy. (3) Incorrect Computation of Formula II assistance The Formula II computation sets the ceiling on the maximum subsidy to be paid by HUD. Formula II subsidy is based on the mortgage interest rate and the interest rate to which the mortgage can be subsidized. The factor tables used for computing the Formula II assistance are included as Appendix 19 to HUD Handbook 4330.1. In many cases, we found the mortgagee used the wrong factor or interest rate to calculate the Formula II assistance. Mortgagees may review HUD Handbook 4330.1 Rev., Chapter 10, Chg. 3, paragraph 10-12(D) or Appendix 19 for assistance. There are two typographical errors in Appendix 19. Page 36 is incorrectly labeled Appendix 16 and the approximate closing dates for factors on page 58 should be reflected as "prior to 3/9/81." Please make note of these corrections as indicated. Also, a copy of the mortgage note and the approved Form HUD-93100 should be maintained on file for reference and HUD review purposes. Recent Legislative Changes (1) Several legislative changes, including tho Older Americans Act Amendments of 1987, will impact on the administration of the Section 235 Program by statutorily excluding several types of income from Section 235 assistance calculations. Currently, HUD Regulations, 24 CFR 235.5(d), which define "gross annual income" for purposes of Section 235 income computations, do not delineate income which should be excluded by statute. HUD Handbook 4330.1 Chapter 10, paragraph 10-10 does indicate many examples of income to be excluded. Appropriate changes to 24 CFR 235.5 and HUD Handbook 4330.1, Revised will be made in the near future. Until these changes are completed, please note the following additional examples of income which mortgagees must exclude from Section 235 income calculations. (A) Relocation payments made pursuant to Title II of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 (42 U.S.C. 4636); (B) The value of the allotment provided to an eligible household for coupons under the Food Stamp Act of 1977 (7 U.S.C. 2017(b)); (C) Payments to volunteers under the domestic Volunteer Service Act of 1973 (42 U.S.C. 5O44(g), 5058); (D) Payments received under the Alaska Native Claims Settlement Act (43 U.S.C. 1626(a)); (E) Income derived from certain submarginal land of the United States that is held in trust for certain Indian tribes (25 U.S.C. 459(e)); (F) Payments or allowances made under the Department of Health and Human Services Low-Income Home Energy Assistance Program (42 U.S.C. 8624(f)); (G) Payments received under programs funded in whole or in part under the Job Training Partnership Act (29 U.S.C. 1552(b)); (H) Income derived from the disposition of funds of the Grand River Band of Ottawa Indians (Pub L. 94-540, 90 Stat. 2503-2504); (I) The first $2000 of per capita shares received from judgment funds awarded by the Indian Claims Commission or the court of Claims (25 U.S.C. 1407-1408) or from funds held in trust for an Indian tribe by the Secretary of the Interior (25 U.S.C. 117); and (J) Amounts of scholarships funded under Title IV of the Higher Education Act of 1965 that are used to cover the cost of attendance at an educational institution (See 24 CFR 215.1(c)(6), 236.3(c)(6), 813.106(c)(6), and 913.106(c)(6). (K) Payments received from programs funded under Title V of the Older Americans Act of 1965 (42 U.S.C. 3056(f)). This list is not all inclusive, for determination of any other source of income which may fall into this category, please contact the local HUD Office where the property is located. (2) Section 235 Alien Eligibility Provisions. The Housing and Community Development Act of 1987 sets forth certain restrictions on the use of assisted housing by ineligible aliens. As a result, changes will be required in HUD Handbook 4330.1, Rev., Paragraph 10- 40 and in HUD Regulations 24 CFR. 235.13. Until these changes are issued, please contact the Single Family Servicing Division, Insured Servicing Branch at (202) 755-7330 if you have questions concerning this matter. Other Required time frame for notifying mortgagors of Changes in Assistance Payments (4330.1, page 10-22, paragraph 10-16(B)). With the issuance of the April 1987 revision of HUD Handbook 4330.1, the minimum number of days required between the mailing of the notice to mortgagors and the effective date of payment change was increased from ten to fifteen days. This change has prompted confusion, therefore, effective with the date of this mortgagee letter, we are changing the requirement for the mailing of the notice from fifteen days back to ten days. Lender Compliance The Department is committed to reduce abuses of the Section 235 program including all overpayments of assistance. Our review of lender compliance shall include: on-site reviews, periodic requests of Section 235 cases for review, and compulsory reviews of all recapture cases before Satisfactions are completed. Lenders will be required to correct findings and refund any overpaid assistance to the Department. If you have any questions concerning this letter, please contact the Single Family Loan Management Branch in the local HUD Office which has jurisdiction over the property. Sincerely yours, Thomas T. Demery Assistant Secretary