U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                               WASHINGTON, D.C. 20410-8000
                                  March 20, 1987


OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
                                                                     TI-387
      MEMORANDUM FOR:   ALL TITLE I LENDING INSTITUTIONS
                        Attn:  Installment Loan Department
      SUBJECT:  Unilateral Reduction of Interest Rates for Loans that are
                not Delinquent or in Default
 
           A number of lenders have questioned the necessity of obtaining
      the borrower's written concurrence in order to lower the interest
      rate and reduce the monthly payment for the balance of the loan
      term on an existing Title I loan.  Lenders have found that
      borrowers often ignore offers to reduce the interest rate and
      monthly payments, even though these actions are of obvious benefit
      to them.
 
          FHA has determined that a unilateral reduction of the interest
      rate and the monthly payment for the balance of the loan term is
      permissible, provided that the following conditions are met:
 
          1.   Payments on the loan must be current;
 
          2.   The borrower must be provided with written notice of the
               changes being made and their effective date; and
 
          3.   The loan file must be documented as to the changes being
               made and their effective date.
 
          When changes in the other terms and conditions of the loan are
      involved, or when the loan is in a delinquent or defaulted status,
      the modification agreement or repayment plan procedures in section
      201.18 of the Title I regulations must be followed, or the loan
      must be refinanced.
 
          While FHA has no objection to the unilateral reduction of
      interest rates under the conditions outlined above, lenders should
      be certain that State and local law permits this procedure without
      adversely affecting the validity and enforceability of the note and
      any security instrument.  In addition, GNMA advises that
      manufactured home loans that are repurchased from GNMA pools in
      order to reduce the interest rate can be repooled only if the
      borrower's written concurrence in the interest rate reduction is
      obtained.
 

     If you have any questions concerning FHA's position on this
matter, please write to Robert J. Coyle, Director, Title I
Insurance Division, 451 Seventh Street, S.W., Room 9160,
Washington, D.C., 20410, or call the Division on (202) 755-6880.
Questions on GNMA repooling requirements should be directed to
Paul A. Yates, Director, Financial Management Division, GNMA,
Washington, D.C., telephone (202) 755-7141.
 
                                Sincerely yours,
 
                                Thomas T. Demery
                                Assistant Secretary