www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 February 27, 1990 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSNG-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 90-7 TO: ALL APPROVED MORTGAGEES ATTENTION: SERVICING MANAGERS (SINGLE FAMILY) SUBJECT: SINGLE FAMILY APPLICATION FOR INSURANCE BENEFITS FORM HUD-27O11 - CLAIMS ISSUES EFFECTIVE DATE: April 1, 1990 An integral part of the Department's claim procedure is our post review function. As a result of recent claim reviews conducted by Irving Burton Associates, Inc. (IBA) , the Department identified several common issues relating to HUD's claim instructions and procedures which many mortgagees apparently misinterpreted resulting in claim errors. It became clear from the results of these reviews that additional clarification was needed relating to both HUD's claim instructions and claim review procedures. In response to many of these issues, the Department elected to modify some of our claim review procedures and to consider alternate documentation for the purpose of establishing mortgagee compliance. These procedural changes will apply retroactively to all claim reviews previously performed by IBA and to all claims filed prior to the effective date of this Mortgagee Letter. However, many of the allowances made for compliance determination will not be applicable after the effective date of this Mortgagee Letter and are not to be interpreted as changes in our written instructions. We caution mortgagees to review this issuance very carefully. Some of the allowances made for review purposes will no longer be applicable after the effective date of this Mortgagee Letter. This Mortgagee Letter is divided into three sections. In Section I we review the claim review procedures which we have elected to modify for the initial review period. Unless stated otherwise, these modifications will apply to all reviews previously performed by IBA and to all claims filed prior to the effective date of this Mortgagee Letter. In Section II we clarify existing instructions and in Section III we discuss changes to Handbook 4330.1 and Form HUD-27011 Claims Instructions. _____________________________________________________________________ 2 SECTION I With respect to previous single family claim review procedures, and to all claims filed prior tO the effective date of this mortgagee letter, the following modifications will be made. (1) Statistical Projections for Monetary Assessment. Where the Department elects not to perform a 100-percent review Of all claims in the audit universe and statistical sampling is performed, HUD will accept (in lieu of the midpoint projection) the lower limit of the statistical projection at the 90-percent confidence interval for monetary errors owed to HUD, unless actual monetary errors found exceed the lower limit. (2) Additional Information. There appears to exist an impression that HUD did not allow mortgagees an opportunity to refute our preliminary findings. HUD has never precluded a mortgagee from furnishing additional documentation to dispute our findings. To clarify this position, however, a minor change will he made in the content of our preliminary report. Where previously the preliminary report of review findings was perceived as HUD's final billing, the preliminary report will now advise mortgagees of their potential liability and will give the mortgagees forty-five (45) days to respond and provide documentation. Upon review of the documentation submitted, a revised assessment (a bill for the overpayment) will then be issued. (3) Underpayments. The review is intended to identify errors made on the claim for insurance benefits. As a courtesy those errors discovered by IBA during the course of the review which may result in an underpayment will be brought to the attention of the mortgagee. Each mortgagee may then review the sampled claims to identify actual underpayments. This does not constitute a change in our policy. Under existing policy, mortgagees have the opportunity to recover underpayments by submission of a supplemental claim on a case-by-case basis if the supplemental claim is filed within one year from the date of the final payment. We have added two additional options for mortgagees to recover underpayments for all reviews performed prior to the effective date of this Mortgagee Letter. At the time the mortgagee responds to the preliminary review report (or the revised report for these mortgages previously billed at the midpoint), the mortgagee must inform HUD in writing of its decision to either: (a) Offset the overpayment assessment by underpayments identified by the mortgagee in the review sample. Mortgagees may review the sample claims to identify actual underpayments. Once _____________________________________________________________________ 3 verified by HUD, these underpayments would be extrapolated to the universe of paid claims - using the same methodology as was used to determine the overpayments (i.e., based on the lower limit of a 90 percent confidence interval). A mortgagee will not be allowed to extrapolate a type of underpayment if supplemental claims regarding that type of underpayment have been filed and there is a reasonable concern by HUD that the extrapolation will result in a double payment to the mortgagee. In order to have underpayments extrapolated, a mortgagee will have to certify, at the time of election, whether or not supplemental claims have been filed on claims paid during the review period for the types of underpayments the mortgagee proposes to have extrapolated. If mortgagees select this option, they will forfeit the opportunity to file any supplemental claims for cases which fall within the review period. If the results of this statistical projection, which would include underpayments, are negative (both limits of the projected range are a negative amount), the mortgagee's liability is reduced to zero. Under no conditions will the mortgagee be entitled to actual monetary reimbursement for any estimated underpayments. In the event the range of projected errors includes zero (negative lower limit/positive upper limit) the sample results will be deemed inconclusive and the amount due HUD will be the net of the actual errors found. If the net of the actual errors found results in a net underpayment, the mortgagee's liability is reduced to zero. OR (b) File supplemental claims for all underpayments during the review period identified by the mortgagee on a case-by-case basis. If this alternative is chosen, the mortgagee would have one year from the date of the claims review report to present such claims. The amount owed as shown in the final claim review report must be paid within 14 days of electing this option. The Insurance Claims Division will provide lenders with specific instruction on how these claims are to be filed. HUD reserves the right to perform a full review of any and all claims filed by mortgagees to determine if additional monies are owed the Department. These options will only be applicable for all claim reviews performed by IBA prior to the effective date of this Mortgagee Letter (not to claims which were filed before the effective date _____________________________________________________________________ 4 but were not included in the claim review). Effective with that date, mortgagees will no longer retain the option of requesting an offset of overpayments due HUD by underpayments due to mortgagee error, but wiIl retain the right to submit supplemental claims for all underpayments which they identify within one year from the date of final payment. However, if during its review, IBA determines that there have been underpayments due to errors made by HUD, such underpayments will be considered when establishing net payments due the Department. (4) Hazard Insurance Premium (HIP) Refunds. For the initial review period and for all claims filed prior to the effective date of this Mortgagee Letter, HUD will not consider a mortgagee in noncompliance (monetary assessment) for its failure to estimate the HIP refund and to include this refund in Block 109 where the mortgagee can demonstrate that: (a) The refund was remitted to the mortgagor, or (b) Payment to the Mortgagee in a particular case was specifically rejected by the insurer or, (c) An interpretation of a state's insurance code apparently required that HIP refunds be sent directly to the mortgagor (such as had been the case in Texas), or (d) The insurer has issued a written policy that refunds will be sent directly to the mortgagor. After the effective date of this Mortgagee Letter, specific written documentation on a case-by-case basis of the mortgagee's inability to obtain HIP refunds due to one of the reasons enumerated above shall be required and this documentation shall be included in each claim review file. NOTE: For the purpose of establishing mortgagee compliance, effective September 1, 1989, the fact that a property is in the state of Texas will not serve as sufficient documentation for not estimating premium refunds. HUD considers it a requirement of every mortgagee, as a prudent servicer, to attempt to minimize the number of cases in which HIP refunds cannot be obtained by the mortgagee. Such prudent servicing would include, but not be limited to, not accepting hazard insurance policies written by insurers that are known to refuse to return HIP refunds to mortgagees Of course, mortgagors, to the extent possible, should be given the opportunity to contract with the insurer of their choice if that insurer provides satisfactory coverage (including the returning of HIP refunds to the mortgagee). _____________________________________________________________________ 5 (5) Late Expenses. Property taxes should not be paid by the mortgagee after the deed to HUD has been recorded. For the initial review period and all claims filed prior to the effective date of this Mortgagee Letter, mortgagees who are cited for this error may have the monetary assessment removed if they can provide written evidence from the taxing authority that the taxes were not also paid by HUD for the same period or if they can provide written evidence that the HUD Field Office requested such payment after transfer. No expenses should be incurred (requests made for work to be done) or services performed on the property after the date the deed is filed for record (or the date the Commissioner is notified of the acquisition) unless the local office requests the lender in writing to take the specific action which cannot be completed before conveyance. After the effective date of this Mortgagee Letter, mortgagees are required to secure and pay all available tax bills prior to conveyance, whether the taxes are due before or after the property has been conveyed to HUD. However, mortgagees should not pay tax bills received after the date the property has been conveyed to HUD, unless expressly authorized by HUD in writing on a case-by-case basis. Also, after the effective date of this Mortgagee Letter, HUD will not reimburse lenders for services performed after the date of conveyance, unless the mortgagee has written approval from the local HUD Office. Payment may be made after the date the deed is filed for record. However, no expenses can be incurred (requests made for work to be done) after the date the deed is filed for record, unless the local office requests the lender in writing to take the specific action which cannot be completed before the date the deed to HUD is filed for record. (6) Extension Requests and Cost Limitations. In resolving audit findings relating to failure to obtain prior written HUD approval to exceed a particular time frame and for exceeding cost limits established by HUD, for all claims reviews performed during the initial review period and all claims filed prior to the effective date of this Mortgagee Letter, HUD will consider alternative documentation (to a written HUD approval) on a case-by-case basis. There should be sufficient evidence to indicate that the mortgagee had both a valid reason for the extension request, or the request to exceed published cost limits, and had requested the approval prior to the expiration of the time period for which the extension was requested or the time that the cost was incurred. An example of such acceptable documentation would be contemporaneous notes in the mortgagee's file indicating the date _____________________________________________________________________ 6 the extension was originally requested, the date of the verbal approval, and the name of the HUD employee who authorized the extension. After the effective date of this Mortgagee Letter, contemporaneous notes or documents, or after the fact affidavits, in the mortgagee's file will not be accepted. After the effective date of this Mortgagee Letter, all requests and approvals for extensions of time or permission to exceed published cost limitations must be in writing and copies of approvals must be maintained as part of the claim review file. Local HUD Offices have been instructed to promptly respond in writing to mortgagee requests. SECTION II The following are clarifications of existing instructions. (1) Form HUD-27O11, Block 9, Date of Possession and Acquisition of Marketable Title. The date that should be entered in Block 9 of Form HUD-27O11 is the later of the following dates: (a) Date of possession or; (b) Date of the acquisition of marketable title. Mortgagees may find it useful in determining the date to use for Block 9 to first establish if possession is an issue. Possession will not be an issue if the case meets one of the following: (a) the property is vacant prior to the foreclosure sale or end of the redemption period, (b) eviction takes place simultaneously as a part of the foreclosure action, or (c) permission to convey the property occupied has been granted. For such cases, the date placed in Block 9 will be the date of acquisition of good and marketable title. Possession will only be an issue if the property remained occupied after the mortgagee foreclosed and took title in its name. The date of possession will be considered the date the property was first discovered to be vacant by the mortgagee or its agent, or should have been discovered if the mortgagee was making regularly scheduled inspections (constructive notice). This date should not be confused with the date the inspection/securing was, ordered, the date the locks were changed, the date the mortgagee's agent secured the property, the date the grass was last mowed, or the date the mortgagee received written notification. (2) Damaged Properties. HUD Regulations covering damaged properties are as follows: (a) 24 CFR 203.377 concerning preservation and protection of properties; (b) 24 CFR 203.378 concerning property condition; and, (c) 24 CFR 203.379 concerning adjustment for damage or neglect. _____________________________________________________________________ 7 Where the mortgagee finds the property damaged prior to conveyance due to causes listed in the regulations, HUD expects the property to be repaired prior to conveyance. Permission may be requested from the local HUD Office to convey the property without repair. If permission to convey the property without repair is granted, the local HUD Office will provide you guidance as to how to adjust your claim. Local HUD Offices are discovering that many damaged properties are being conveyed without prior permission and without indication on the claim that the property is damaged nor any explanation of the circumstances. We caution mortgagees to take proper action to prevent damage to properties in default and to properly document their claims when properties are conveyed damaged. This will avoid future assessments or reconveyance problems. A separate Mortgagee Letter will be issued in the near future which will provide more detail on this issue. (3) Underpayments. As stated previously, after the effective date of this Mortgagee Letter, mortgageeS will no longer retain the option of requesting an offset of overpayments due HUD by underpayments caused by mortgagee errors but will retain the right to submit supplemental claims for all underpayments which they identify within one year from the date of final payment. HUD will continue to consider, however, underpayments caused by HUD error when doing mortgagee reviews. (4) Date of Foreclosure Proceedings (a) Instituted or (b) Date of Deed in Lieu of Foreclosure (Block 11, Form HUD-27011). The date which must be entered here is the date of the first legal action to foreclose required by local law (i .e. , the filing of a complaint, the publication of notice of sale, etc.). Because of the differences in state laws, this date will vary from state to state. NOTE: The referral of a foreclosure request to an attorney is not sufficient. In the case of a deed-in-lieu, the date to be entered in Block 11 is the date the deed is executed (signed). (5) Timely Initiation of Foreclosure. Where the mortgagee has established that a property has been vacant or abandoned, HUD expects lenders to immediately take steps to initiate foreclosure. In addition, where the property has been vacant or abandoned for more than 60 days, mortgages are not required to follow the Assignment Program requirement and should initiate foreclosure immediately. Listed below are the key issuances which have been released on filing Claims for Insurance Benefits. _____________________________________________________________________ 8 (1) Form HUD-27011 and Instructions (2) Mortgagee Letter 85-19, New Single Family Claims Payment System - Form HUD-27011, Single Family Application for Insurance Benefits - Title II Mortgages (3) MIAS FISCAL LETTER 87-1, Single Family Mortgage Insurance Instructions (4) MIAS FISCAL LETTER 87-8, Single Family Mortgage Insurance Instructions (5) Mortgagee Letter 87-20, Claims Without Conveyance of Title (CWC0T) ; Bidding Requirements for Foreclosure Sales (6) Mortgagee Letter 88-12, Occupied Conveyance of 0ne-to four Family Properties: Final Rule SECTION III The Department is in the process of issuing a complete revision to the claim instructions which will include all outstanding Mortgagee Letters. Claims instructions will be issued at a later date as a separate HUD Handbook, 4330.4. In the interim, we have attached a list of changes to be made to the present Claims Instructions (Addendum A). It is imperative that lenders refer to the claims instructions and the above issuances for guidance when preparing their claims. In addition, mortgagee's claim review files must be complete and have documentation which fully supports the information submitted on the claim form. If there are any questions, please contact the Insured Servicing Branch at (202) 755-6672. Sincerely yours, C. Austin Fitts Assistant Secretary for Housing Federal Housing Commissioner _____________________________________________________________________ Addendum A The claim instructions (Instructions For Single Family Application for Insurance Benefits, Form HUD-270ll, 12/84, and Mortgagee Letters 85-19, and 87-20) are hereby amended as follows and becomes effective on January I, 1990: I. Page 2 of the Claim Instructions - Add the following sub-sections before the sub-section titled "Audit File and Retention of Records". General - Fiscal Expenses Mortgagees are required to inspect, preserve and protect properties which are collateral for HUD-insured mortgages. The requirements to perform these services are set forth in HUD's regulations and Handbook 4330.1, Administration of Insured Home Mortgages. Mortgagees may apply for reimbursement of the fiscal expense associated with these requirements by submitting Form HUD 27011, Part B. Reimbursement for these fiscal expenses is limited to those amounts set out by HUD Handbook 4330.1, Paragraph 145 (c) and (d) and cost limitations published by HUD Field Offices. Mortgagees will not be reimbursed for those fiscal expenses which exceed the reimbursement criteria of Paragraph 145 (c) and (d) and the cost limits published by HUD or where the costs were incurred after the transfer of the property to HUD where the mortgagee did not have written approval from HUD Field Office prior to incurring the expense. General - Extension for Time Allowance These instructions set forth time requirements by claim type (Conveyed Home Properties, Assigned Home Mortgages, etc). These time requirements may be extended or amended on a case-by-case basis by the local HUD Field Office if a written request for approval for such extension is received by the local office at least 15 working days prior to the stated time requirement deadline. Local HUD Field Offices are not authorized to grant retroactive extensions of time unless the delay granting the extension was the fault of the Field Office. Approval of a time extension or notification of the rejection of the request and the reason for the rejection will be given by the Field Office in writing and must be placed in the lender's file. _____________________________________________________________________ 2 II. Page 58 - of the Claims Instructions Section V, Supplemental Insurance Claims Add the following paragraph at the end of Section V: Mortgagees who did not estimate a HIP refund on Part B, for any reason but receive a refund after filing the Form HUD-270ll, must remit the proceeds to HUD within 10 working days of receipt. Mortgagees who did estimate a HIP refund on Part B and subsequently were denied the refund should submit a supplemental claim for reimbursement. The mortgagee must state the amount of the reimbursement and indicate the justification for the reimbursement in the "Mortgagees Comment" section. _____________________________________________________________________