www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 January 30, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 91-6 TO: ALL APPROVED MORTGAGEES ATTENTION: SERVICING MANAGERS (SINGLE FAMILY) SUBJECT: Effect of Soldiers' and Sailors' Civil Relief Act of 1940 on FHA-insured Mortgages This Mortgagee Letter informs you of provisions of the above Act which affect FHA-insured mortgages. The Soldiers' and Sailors' Civil Relief Act did not amend the National Housing Act, and, as you know, we have always taken the view that the Department is not in a position to interpret all the various provisions of the Relief Act as they may affect rights between mortgagees and mortgagors. Such interpretations should be obtained from the Department of Defense, or your own attorney, or are a matter for determination by the courts. The Persian Gulf situation and the call-up of reservists to active military duty raise numerous questions about the effect of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the Act), and its effect on FHA-insured mortgages. The Act provides certain relief measures to persons in military service. Section 511 of the Act defines "person in the military service" as all members of the Army, Navy, Marine Corps, Air Force and Coast Guard, and Public Health Officers detailed to the Army or Navy on active duty. According to Section 526 of the Act all debts incurred by a member of the military service PRIOR TO entry into the active duty shall be charged a maximum interest rate of six percent for the period of active military service. Further, Sections 532 and 590 provide protections during foreclosure when a reservist or National Guard member who has an existing contract obligation is subsequently ordered to active duty or when a civilian enlists subsequent to having the contract obligation. The Department's regulations at 24 CFR 203.345 and 346 provide special relief provisions for persons called to active military service. HUD Handbook 4330.1, Chapter 8, Paragraph 124 explains the Act further. These relief measures cover several areas of servicing affected FHA-insured mortgages, including: reduction of monthly payments due to a reduction of interest rate; protection during foreclosure; default servicing and assignment requirements; and optional relief from payment of principal. They also affect claims for insurance benefits. _____________________________________________________________________ 1. Reduction of Monthly Payments The law requires creditors to charge not more than six percent interest rate for the period of active military service on all debts incurred by a member of the military service prior to entry into active duty service, unless in the opinion of the court, the ability to pay is not materially affected by reason of such service. Interest is defined to include service charges, fees, or any other charges (except bona fide insurance). Section 235 assistance may be affected by the interest rate reduction. You may receive income recertification requests from mortgagors who are affected by the Act. They must be processed expeditiously. On all accounts receiving assistance where the Note rate of interest exceeds six percent, the assistance must be reanalyzed. Since the Relief Act reduces the interest rate to six percent for the period of active duty, the subsidy must be calculated using the full mortgage payment at that rate when determining the assistance. For some accounts the interest rate reduction will cause the suspension of assistance for the term of active military duty. Whenever an interest rate reduction is performed for retroactive effect and the Section 235 assistance is reduced, any overbilled subsidy must be returned to the Department by refund or adjustment to the next Section 235 monthly billing. When active duty terminates and the Note rate resumes, the assistance must be recalculated and assistance restored in accordance with the usual procedures. Since mortgagees are only required to reduce the interest rate to six percent for the period of active duty, you may calculate the beginning and ending months at six percent on a per diem basis for the dates of actual service with the remainder of those months calculated at the Note rate of interest. You may also choose to permit the lower interest rate for the whole month at the beginning and end of active duty. If you are notified of a call to active military duty by the mortgagor or a representative, you must: Respond to inquiries as to the amount of the monthly installment payment which would be required at the six percent rate as defined in the Act; Provide revised payment cards or coupon books when appropriate; Ensure that payments in the amount allowable under the Act are not inappropriately returned to borrowers as insufficient. _____________________________________________________________________ When the mortgagor did not notify your office, and you receive a reduced payment which indicates a possible effort at an interest reduction to six percent, you are expected to: Contact the mortgagor or a representative of the mortgagor to determine whether the reduced payment was sent because the debtor was called to active military service; If no appropriate explanation is provided, the mortgagee may return the insufficient payment if the action is in compliance with the partial payment regulations (24 CFR 203.556); 2. Protection During Foreclosure According to Section 532 of the Act, court permission is necessary to foreclose a loan that falls under the Act's provisions. Foreclosure sales (or manufactured-housing repossessions) during the period of military service or within three months thereafter are invalid unless the courts permit them or they take place pursuant to a written agreement, entered into after the commencement of active duty, between the parties involved, as provided in Section 517 of the Act. Violations of section 532 can result in a prison term up to one year or a fine of up to $1000, or both. The regulation (24 CFR 203.346) provides that the period of active duty service will be excluded in computing the one year period from default within which the mortgagee is required to commence foreclosure proceedings. It permits the mortgagee who does commence foreclosure proceedings during the period of military service to voluntarily postpone completion of such proceedings while the mortgagor is on active duty regardless of whether application has been made to a court for a stay of foreclosure. Mortgagees may voluntarily withhold foreclosure, with or without applying partial payments which advance the date of default. 3. Default Servicing and the Assignment Program Requirements Whenever an affected mortgage is in default and the courts permission is needed to either initiate or complete foreclosure you must obtain such permission prior to sending the assignment letter 2 or 3. (This is to assure that you have the ability to foreclose.) If the court will permit the initiation and completion of foreclosure, you must suspend the foreclosure until the assignment notices are sent. If the mortgagor requests assignment, you must wait until the Field Office issues a final decision before continuing with foreclosure. _____________________________________________________________________ Only if the account remains in default after six months from the completion of active duty and the mortgagor has not been approved for a "stay of foreclosure" to extend a repayment plan under Section 590 of the Act, may you send the required assignment letters without seeking prior approval of the court to initiate or complete foreclosure. You are encouraged to enter into written forbearance agreements with mortgagors who are in military service in accordance with HUD Handbook 4330.1, Chapter 8, paragraph 124. As an alternative to the limited extension of mortgage term provided under special forbearance, 24 CFR 203.614, which requires resumption of regular payments after the forbearance period not to exceed eighteen months, Section 590 of the Relief Act offers a longer term extension to eligible mortgagors. If mortgagors obtain such relief through the court, assignment letters may not be sent unless the mortgagor fails to keep the terms of the court approved repayment plan. 4. Optional Relief from Payment of Principal With the approval of the local Field Office, you may enter into a written forbearance agreement in accordance with Handbook 4330.1 paragraph 124(c)(1) to postpone (for the period of active duty plus three months) any part of the monthly mortgage payment which represents amortization of principal. If you do so, the agreement must also provide for the resumption of monthly payments after that period in amounts sufficient to fully amortize the mortgage within the maturity as provided in the original mortgage. 5. Claims for Insurance benefits On conveyance claims, the Department will pay the applicable debenture interest rate from the date of default to the date the claim is paid unless interest is curtailed pursuant to 24 CFR 203.402(k). Delays in foreclosure caused by the Relief Act will not cause a debenture interest curtailment. For assignment claims, the Note rate interest will be paid for the period of default not within the period of active duty. Pursuant to Section 203.353(b), when the note rate has been reduced to six percent in accord with the Relief Act, the claim for insurance benefits must be reduced to reflect interest accruals at the lower rate for the period of active duty. _____________________________________________________________________ Direct any questions pertaining to this directive to the Loan Management Branch of the local HUD Office which has jurisdiction over the mortgage. Sincerely yours, Arthur J. Hill Acting Assistant Secretary for Housing-Federal Housing Commissioner