U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 4, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER TI-411 MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Clarification of Requirements for Payment of Title I Loan Insurance Charges The Department has found that the requirements for the payment of Title I loan insurance charges are often subject to misinterpretation. This letter is to provide all lenders with the necessary clarification of those requirements. Responsibility for Payment of Insurance Charges Section 2(f) of the National Housing Act requires that the Secretary of HUD establish a loan insurance charge for the insurance coverage being provided, and states that the charge is payable in advance for the term of the loan and shall be paid in such time and such manner as may be prescribed by the Secretary. Section 229 of the National Housing Act explicitly precludes Title I insurance coverage from being terminated at the option of the lender. In implementing these statutory provisions, §201.31 of the Title I regulations provides that, for any loan with a term longer than 25 months, insurance charges will be billed and collected in annual installments until maturity, or until the loan is prepaid in full or the lender has filed an insurance claim. The Comptroller General of the United States has issued several opinions which have concluded that lenders are legally obligated to pay Title I loan insurance charges for the term of each loan, and they cannot unilaterally terminate their insurance coverage simply by refusing to remit the charges when due. In the only litigation concerning a unilateral termination of insurance, the lender claimed that it should no longer be required to pay insurance charges because its insurance coverage reserve account was exhausted. However, the court held that the plain language of the statute required that the lender pay insurance charges for the term of each loan. See Ponce Federal Bank v. Secretary of Housing and Urban Development, 690 F. Supp. 1145 (D. Puerto Rico, 1988). _____________________________________________________________________ 2 Therefore, Title I lenders are obligated to pay the loan insurance charges on any insured loan until it matures, or until the loan is prepaid in full or an insurance claim is filed. This obligation continues even if the lender has exhausted its insurance coverage reserve account, and even if the lender decides to terminate its Title I contract of insurance. The only effect of contract termination is that the Department will not provide insurance coverage on loans originated after the termination date. It does not affect the lender's obligation to pay insurance charges and perform its other obligations under the contract of insurance, and it does not relieve the Department of its responsibility to pay valid insurance claims on loans originated before the termination. Failure to pay loan insurance charges as required by 201.31 is a violation of § 30.320(l) of the Department's regulations and could result in the imposition of civil money penalties (see Title I letter TI-409 dated August 23, 1991). Transfer of Loans to Another Lender The Department has seen an increased incidence of Title I loans being sold or transferred to lenders not holding valid contracts of insurance. Such actions may have been taken on the assumption that these loans would be removed from insurance coverage and the transferor lender would be relieved from any further obligation to pay insurance charges. All lenders are cautioned that § 201.32(c) of the Title I regulations prohibits Title I lenders from selling, assigning or otherwise transferring insured loans to lenders not holding valid contracts of insurance. If the transferee lender does not obtain a contract of insurance and arrange for proper transfer of the insurance coverage within a reasonable time, the transferor lender will be held liable for the insurance charges on these loans. Lenders should also be aware that the transfer of Title I loans to lenders not holding valid contracts of insurance is a violation of §30.321(b) of the Department's regulations and could result in the imposition of civil money penalties. Proper Billing for Insurance Charges Section 201.31(c) of the Title I regulations authorizes the Secretary to assess a penalty charge and daily interest for any loan insurance charges not received within 25 days after the billing date. However, no penalty charge or interest will be assessed if the Secretary fails to acknowledge receipt of the lender's loan report or fails to issue a proper billing to the lender for the insurance charges. Some lenders have asked what is meant by the term "proper billing." _____________________________________________________________________ 3 The Department regards a billing to be "proper" if the monthly billing statement is mailed to the lender's last known address of record. If a lender moves, it is responsible for notifying the Department of its new address. The Department will consider waiving the penalty charge and interest on a late payment if the lender provides a reasonable explanation for the delay in sending the payment and has previously shown a history of prompt payments. For Further Information If you have any questions about this letter, please write to Robert J. Coyle, Director, Title I Insurance Division, Room 9158, 451 Seventh Street, S.W., Washington, D.C. 20410, or call the Department toll-free at 1-800-733-HOME (1-800-733-4663). Sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner