www.hudclips.org 


U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

July 22, 1991
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
MORTGAGEE LETTER 91-31
    SUBJECT:  Delinquent Federal Debt
 
         In lieu of the requirements promulgated by the Office of
    Management and Budget many lenders appear to be treating
    delinquent Federal debt the same as delinquent private debt in
    determining a loan applicant's credit worthiness.
    Private sector lenders have been submitting applications for
    mortgage insurance, after making a determination that the size of
    debt delinquency does not warrant rejection, without making any
    distinction as to whether or not the debt is owed to the Federal
    Government.
 
         HUD's grant, direct, insured and guaranteed loan programs
    must comply with the provisions of the Office of Management and
    Budget (OMB) Circular A-129, "MANAGING FEDERAL CREDIT PROGRAMS,"
    issued November 25, 1988.  This Circular prescribes policies and
    procedures for managing Federal credit programs and for
    collecting loans and other receivables.  It states in part that
    we shall:
 
         Suspend processing applications for Federal direct loans or
         require a private lender to suspend processing of loan
         guarantee applications when an applicant is found to be
         delinquent on a Federal debt.  The applicant must provide
         evidence that the delinquency has been resolved.  Otherwise,
         the credit granting agency must request validation from the
         Federal agency owed the debt that the debt is no longer
         delinquent.
 
         Therefore, HUD will not process applications for mortgage
    insurance if an applicant (Borrower, sponsor, mortgagor, general
    contractor, including all principals of the entities listed) has
    delinquent Federal debts.  Examples of Federal debts are direct
    loans, HUD-insured loans, student loans, Small Business
    Administration loans, or judgment liens against property for a
    debt owed the Federal Government, etc.
 
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     The Department expects a lender to prescreen proposed
applications by verifying the information presented in an
application against information contained in the applicant's
credit report(s).  The lender must closely review credit reports,
financial statements and make reasonable inquiries to determine
if an applicant is in default on any Federal debt.  This
procedure applies to both individuals and commercial
organizations.  Any applicant with a prior Federal default or
claim must submit to the lender an explanation of the extenuating
circumstances surrounding the delinquent Federal debt.
 
     The lender must include as part of the required application
exhibits submitted to HUD:
 
     A.  The applicant's detailed explanation of how it incurred
         the delinquent Federal debt.
 
     B.  A letterhead advice from the affected agency, signed by
         an officer, stating that the delinquent debt is current
         or satisfactory arrangements for repayment have been
         made.
 
     C.  The lender's reason(s) for recommendation of the
         applicant, which may be included in the work sheets and
         remarks sections of the processing documents or a
         covering letter with the submission.
 
     HUD will review the submission to assure that only
applicants who have resolved or made satisfactory arrangements to
repay their Federal debt are considered for additional awards or
guarantees while applicants who have unresolved delinquent
Federal debt will not be accepted for processing.
 
                          Very sincerely yours,
 
                          Arthur J. Hill
                          Assistant Secretary
                            Housing-Federal Housing Commissioner