www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 January 7, 1992 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 92-2 TO: ALL APPROVED MORTGAGEES ATTENTION: Single Family Servicing Managers SUBJECT: Debenture Interest on Single Family Insurance Claims (Part B) as Calculated on Parts C and D, and Debenture Interest on Part A when Reasonable Diligence in Completing Foreclosure is not Exercised. Effective March 1, 1992, the Department of Housing and Urban Development is correcting its instructions to mortgagees for calculating debenture interest on Part B of Single Family Insurance Claims for all claim types except assignments, automatic assignments and co-insurance claims. Mortgagees must carefully examine and follow the procedures as outlined in this mortgagee letter for all Part B claims filed after the effective date of this mortgagee letter. Additionally, the last section of this mortgagee letter provides instructions on claim processing when the reasonable diligence time frames identified in Mortgagee Letter 90-30 are missed. PART I CALCULATION OF INTEREST ON EXPENSES Current instructions in Mortgagee Letter 85-19 (Paragraph 14, dated September 10, 1985) only instruct mortgagees to curtail the calculation of debenture interest on expenses when they do not meet the allowable time frames for the submission of title evidence or fiscal data. However, HUD Regulation 203.402(k)(l) provides that when any time requirement is missed, interest on a claim is to be computed only to the date on which a particular action (as required by 203.355, 203.356, 203.359, 203.360 and 203.365) should have been taken or to which it was extended. Therefore, HUD is requiring mortgagees to curtail debenture interest on expenses when the mortgagee has missed any regulatory time requirement. This mortgagee letter provides instructions to mortgagees on how to calculate the interest on the claim. _____________________________________________________________________ 2 Effective March 1, 1992, interest claimed on Parts C and D of Form HUD-27011 should be calculated only to the earliest of any time requirement not met as identified in 203.402(k). For example, if the mortgagee fails to commence foreclosure within the time required by 203.355 and also fails to submit title evidence within the time required by 203.365, the debenture interest on all parts of the claim will be computed only to the date foreclosure should have been instituted (the earlier of the two missed time frames). The automated claims system is being modified to calculate debenture interest based on Part A as well as Part B time frames. This will affect all Part B claims processed after modification is made regardless of when they were filed. The system will check the interest claimed for each line item, using the earliest interest curtailment date. If the interest claimed exceeds the allowable amount, all interest for that item will be deleted. Mortgagees are instructed to utilize the following procedures: PART B, FORM HUD-27011 In preparing the Part B claim form, use the following procedures in completing item 104. o Item 104 - Date Form Prepared Enter the date Part B is prepared and submitted to HUD. This revises the instructions regarding item 104 in Mortgagee Letter 85-19, page 6, #14(a) and (b), as well as changes made to the instructions for completing Form HUD-27011, Single Family Application for Insurance Benefits, which were provided with Mortgagee Letter 87-20 dated June 23, 1987. Therefore, always enter in item 104 the date the Part B is prepared and submitted. However, only use this date to calculate interest on reimbursable expenditures, when no time requirements have been missed. PARTS C AND D, FORM HUD-27011 o Debenture Interest. The amount of interest to be claimed for an expenditure is to be calculated as follows: 1. Multiply the daily interest rate factor by the amount paid. 2. Multiply this result by the number of days from the date paid (or default date, if later) for each line item to the earlier of: (i) date in item 104 (submission date for Part B), or (ii) the date of the earliest time requirement missed. _____________________________________________________________________ 3 o Expenditures Prior to the Date of Default. It is possible that expenditures or advances will be made by the mortgagee prior to the date of default. The regulations do not permit the payment of debenture interest on expenses prior to the date of default (24 CFR 203.410 (c)). If an expenditure or advancement is made prior to the date of default, debenture interest is computed from default date. When completing Parts C and D of Form HUD-27011, enter the date of default in the "Date Paid" column. In addition, place the actual date paid in parentheses following the description. o Interest Computations. Daily Interest Rate Factor tables are provided in Appendix IV of the instructions for Form HUD-27011, Single Family Application for Insurance Benefits, to assist in converting the debenture interest rates to factors. In addition, Julian date calendars are provided in Appendix V to assist in determining the number of days from the date the expenditure was paid (or default date, if later) to the date the claim was prepared, item 104 (or the curtailment date if earlier). The following three examples are provided to illustrate how debenture interest must be calculated on reimbursable expenses. In the first example, all time requirements were met; in the second example, the requirement to institute foreclosure within one year of default was missed; and in the third example, the property was not conveyed to HUD within 30 days of possession and marketable title. In all of the examples a debenture interest rate of 8.5 percent is used with a daily interest rate factor of .0002328767. Alternatively, the annual interest rate may be divided by 365. (For a leap year, divide by 366.) Example 1: All Required Time Requirements Met. In this example, all time requirements have been met. The default date was January 1, 1990. Interest on expenditures is calculated from the date of the expenditure (or default date if later) to the date the Part B claim form was prepared. See the Julian Date Calendar (Appendix V) to calculate the number of days. The following expenditures were itemized on Parts C and D and included in the amounts claimed on Part B of Form HUD-27011 (items 110 and 111) submitted September 15, 1990. o December 10, 1989 $100 paid for Hazard Insurance Premium (Escrow had been fully depleted) o July 22, 1990 $25 paid for lawn mowing _____________________________________________________________________ 4 August 9, 1990 $156 paid for debris removal Amount of Interest to Amount Daily Interest Days be Claimed Paid Rate Factor Covered on Part C $100 x .0002328767 x 257 (1/01/90 - 9/15/90 = 5.98 25 x .0002328767 x 55 (7/22/90 - 9/15/90) = .32 156 x .0002328767 x 37 (8/09/90 - 9/15/90) = 1.34 In this example, the mortgagee is entitled to interest on the expenses from the date they were paid (or default date if later) up to the date the claim is settled. The mortgagee calculates the interest up to the date the claim form was prepared and submitted, and HUD calculates the interest up to the settlement date. Example 2: Mortgagee Failed to Institute Foreclosure Within One Year from the Date of Default. In Example 2, the mortgagee failed to initiate foreclosure within one year of the date of default and no extension was requested or granted. As a result, interest does not accrue on any part of the claim beyond the date foreclosure should have been instituted. Interest must be calculated from the date of the expenditure to the date by which foreclosure should have been instituted. The date of default was January 1, 1990, however foreclosure was not instituted until March 15, 1991. In order for the mortgagee to have met the time requirement, foreclosure should have been instituted by January 1, 1991. Interest on reimbursable expenses may only be claimed and paid to January 1, 1991. The following expenditures were itemized on Part C and included in Part B (item 110), Form HUD-27011, submitted September 15, 1991. Since these expenditures were incurred after January 1, 1991, interest is not payable on these amounts. July 22, 1991 $25 paid for lawn mowing August 9, 1991 $156 paid for debris removal Amount Daily Interest Days Paid Rate Factor Covered Interest $25 x .0002328767 x 0 (7/22/91 - 1/1/91) = 0.00 156 x .0002328767 x 0 (8/09/91 - 1/1/91) = 0.00 _____________________________________________________________________ 5 In this case the mortgagee must asterisk the date in item 104 (September 15, 1991*) and place a notation on the form as follows: * Failure to institute foreclosure within one year of the date of default (January 1, 1990). Interest calculated to January 1, 1991. Example 3: Mortgagee Failed to Convey the Property to BUD Within 30 Days of Possession and Marketable Title. In Example 3, the mortgagee met the time requirements to institute and to complete foreclosure, but did not convey the property to HUD within 30 days of possession and marketable title. In this example, the mortgagee had possession of and marketable title to the property on July 2, 1990. The time limit to convey ended August 1, 1990. However, the property was not conveyed, and Part A of the claim was not filed until August 15, 1990. Therefore, interest is calculated from the date of the expenditure (date paid) to the date the time allowed for conveyance expired (August 1). The following expenditures were itemized on Part C and included in the amount claimed in item 110 of Part B, Form HUD-27011 submitted September 15, 1990. July 22, 1990 $25 paid for lawn mowing. August 9, 1990 $156 paid for debris removal. Amount Daily Interest Days Paid Rate Factor Covered Interest $25 x .0002328767 x 10 (7/22/90 - 8/1/90) = .06 156 x .0002328767 x 0 (8/09/90 - 8/1/90) = .00 In this case the mortgagee should asterisk the date in item 104 (September 15, 1990*) and place a notation on the form as follows: * Failure to convey within 30 days of the date in item 9 (July 2, 1990). Interest calculated to August 1, 1990 (item 9 plus 30 days). In addition to these examples, a table is attached (Table 1 - Conveyances: Earliest Time Requirement Missed) which may be used to help determine the appropriate beginning and ending dates for the calculation of debenture interest to be claimed. Mortgagees should review their copy of the Part A claim form as well as the Advice of Payment letter (if available) to assist them in determining whether a time frame was missed. _____________________________________________________________________ 6 PART II DEBENTURE INTEREST ON PART A WHEN REASONABLE DILIGENCE IS NOT EXERCISED IN THE COMPLETION OF FORECLOSURE Mortgagee Letter 90-30 prescribes time frames within which mortgagees should complete foreclosure actions under normal circumstances. Currently, HUD's automated system does not curtail debenture interest on a claim in the event this time requirement is not met. If the reasonable diligence time requirement is exceeded without a valid reason, the amount of excess debenture interest received in the Part A claim payment should be calculated by the mortgagee and remitted using the supplemental claim procedure upon receipt of the Part A payment. In cases where the property was directly conveyed to HUD, when calculating the date to which interest should have been paid, allow one additional month to the existing state foreclosure time frame. (NOTE: When filing a supplemental claim to remit funds, it is not necessary to wait for Part B payment as is the case when filing a supplemental claim for additional reimbursement. A check must be attached to the face of the supplemental claim.) A copy of the supplemental claim and canceled check must be retained in the claim file. If the mortgagee does not correct overpayments resulting from exceeding the reasonable diligence time frame by filing a supplemental claim, these errors, when identified on a single family claims review, will be extrapolated over the mortgagee's settled claims universe and included in assessment of overpayments. Example A mortgagee filed the Part A of a claim for insurance benefits on a property located in Texas. The mortgagee instituted foreclosure on January 1, 1991, but did not complete foreclosure (record the Trustee's Deed) until May 15, 1991. The claim was filed on June 1, 1991 and settled on June 12, 1991. The mortgagee was paid debenture interest from the date of default (August 1, 1990) until June 12, 1991 (the claim settlement date). The mortgagee did not have a valid reason for exceeding the time requirement for completing foreclosure (3 months in Texas), and therefore is only entitled to interest up to April 1, 1991 1/. In this case the mortgagee was overpaid for 72 days of interest. To calculate the interest overpaid, multiply the daily interest rate factor by 72 days, and multiply the result by the net amount (UPB less any insurance adjustment) on which interest was calculated on the payment of the Part A claim. _____________________________ 1/ This will be the date to which interest is calculated on the Part B claim (unless an earlier time requirement is missed). _____________________________________________________________________ 7 Assuming in this example that the Part A was paid based on a UPB of $50,000 (with no insurance adjustments), and the debenture interest rate was 10%. The Part A payment was $50,000, plus debenture interest of $4,315.07 (315 days daily interest factor of .0002739726 ). Since 72 days were overpaid, the amount of interest overpaid is $986.30. This amount should be remitted to HUD via supplemental claim. The check must be attached to the face of the supplemental claim. HUD will monitor compliance with these requirements through the single family on-site claims review process. Mortgagees will be required to reimburse the Department for any excessive debenture interest which has been claimed and paid. If you have any questions about these procedures, please contact the Single Family Claims Phone Center at (703) 235-9102. Very sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner Attachment _____________________________________________________________________ Table 1 CONVEYANCES EARLIEST TIME REQUIREMENT MISSED __________________________________________________________________________ ******************************************************************** * * * * * * * * * * * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * * * * * * * * * * * ******************************************************************** __________________________________________________________________________