Rural Development/Rural Housing Service

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1 RHS/RD Single Family Home Loan Programs: Foreclosure Defenses Gideon Anders Senior Attorney National Housing Law Project ganders@nhlp.

1 1 RHS/RD Single Family Home Loan Programs: Foreclosure Defenses Gideon Anders Senior Attorney National Housing Law Project National Consumer Law Center: 2013 Consumer Rights Litigation Conference Rural Development/Rural Housing Service USDA Housing Programs Legally vested in the Rural Housing Service (RHS). Formerly Farmers Home Administration (FmHA). 2 Administered by and under the Rural Development mission area of USDA. State Offices in all but three states (those states administer programs for multiple states and territories). Area or field offices in all states. Number reduced substantially due to funding cuts. Centralized Servicing Center, St. Louis MO 1

2 Major RD Housing Programs Single Family Direct and Guaranteed loans ( 502). Direct loans are made and serviced by RD. Directed at very low- and low-income households. Typically subsidized. Payment Assistance I & II or Interest Credit. Servicing carried out by Finance Office, located in St. Louis, MO, via mail and phone. Used primarily for purchase of modest existing homes. Can be used for new construction and major rehabilitation. Guaranteed Loans are made and serviced by private lenders. Directed at moderate income and some low-income households. Primarily used for purchase of existing homes. 3 Primary Issues Single Family Direct Loan Program RD Loan servicing prior to foreclosure. Debt collection after default and foreclosure. Single Family Guaranteed Loan Program Lender s and RD s loan servicing obligations. Post foreclosure RD debt collection practices. 4 2

3 Direct Loan Program: Loan Servicing Prior to Foreclosure Failure to properly service loan is a defense to foreclosure. Is agency following the law? Are regulations consistent with authorizing statutes? Are regulations arbitrary and capricious? Is servicing official following agency regulations? Did official apply regulations properly to factual situation that official is aware of or should have been aware of? 5 Direct Loan Program: Authorities 6 Statutes: 42 U.S.C p-2 Regulations: 7 C.F.R Handbook: HB-1 DLOS Field Office Handbook HB-2 DLOS Centralized Servicing Center Administrative Notices: Unnumbered Letters: 3

4 Payment Subsidy 7 C.F.R Payment Assistance/Interest Credit subsidy: Check whether client got assistance to which she was entitled. 33 year loans are made at RHS market rate interest rate. Subsidized by interest subsidy that may lower payment to effective 1% loan: Pre-1995 loans: Interest Credit loans: Payment Assistance I : Payment Assistance II. Annual Review and Bi-annual recertification. If household income decreases to a point that would cause principal and interest payments to change by at least 10%, borrower is eligible for recertification. Borrower is obligated to request additional assistance unless RD is aware of income loss. Subsidy is subject to recapture. 7 C.F.R Moratorium Relief 7 C.F.R Up to 2 years of no principal or interest payments; continued eligibility reviewed every 6 months. Borrower protected against deficiency judgment. Borrower eligible when s/he is temporarily unable to make scheduled payments due to circumstances beyond borrower s control. Borrower s income must have dropped at least 20% in last 12 months; or Borrower had to pay unexpected & unreimbursed expenses related to illness or death of borrower or member of family; or 4

5 Moratorium Relief (Cont.) 9 Home was damaged without adequate hazard insurance and Borrower account must not be currently accelerated. 7 C.F.R (a)(3). RD must notify borrower of availability of moratorium relief when borrower defaults on loan or agency becomes aware of circumstances that would qualify the borrower for relief. Factual Issues: Did RD notify borrower of availability of relief? Did RD official properly consider eligibility? Legal Issues Moratorium Relief (Cont.) 10 Requirement that borrower must have lost 20% of income. Limitation to borrower is arbitrary: RD looks at household income when determining interest subsidies. Requirement that income must drop 20% within 12 months is also arbitrary: 20% requirement is inconsistent with requirement for paying unexpected & unreimbursed expenses which has no threshold. Limitation that loan must not have been accelerated inconsistent with statutory provision which states that moratorium is available at any time that the loan is outstanding. U.S. v. Shields, 733 F.Supp. 776 (D. Vt. 1989); U.S. v. Brewer, 1996 WL (D. Vt. 1996); U.S. v. Rodriguez, 453 F.Supp. 21 (E.D. Wash. 1978). 5

6 Moratorium Relief (Cont.) Post Moratorium: Ability to continue making payments. 11 Additional Payment Agreement. Reamortization. Cancellation of interest accrued during the moratorium. Foreclosure: if borrower unable to continue making payments. Arbitrary determination: it assumes that borrower will only pay certain percentage of income for shelter. All options require borrower to make higher payments than before moratorium. Alternatives: refinancing or extending loan term: not offered; but see United States v. Garner, 767 F.2d 104 (5 th Cir. 1985). Other Direct Loan Servicing Options Delinquency Workout Agreement. 7 C.F.R Available when borrower is not eligible for moratorium. Short term remedy that increases payments substantially. 12 Reamortization -- 7 C.F.R Usually only available after moratorium (if in the government s best interest). Available when National Appeals Division reverses RD decision. 6

7 Other Direct Loan Servicing Options (Cont.) 13 Payment of Real Estate Taxes and Insurance -- 7 C.F.R Generally due with next scheduled payment; may use workout agreement or reamortize loan. Refinancing: not available. Administrative Due Process 14 Administrative Appeals -- 7 C.F.R. Part 11. Impartial Hearing Officer National Appeals Division (NAD). In person or phone hearing. Decisions reviewable by NAD Director. Redacted decisions are accessible and searchable at EAJA Applies. (attorneys fees). Exhaustion required in non-judicial foreclosure states. 7

8 Direct Loan Acceleration & Foreclosure Loan Acceleration Borrower must be at least 3 payments delinquent or 2 scheduled payments behind for 3 consecutive months. 7 C.F.R RD must follow state procedural foreclosure law to the extent that it is more favorable to the borrower. 42 U.S.C. 1475(b). RD limited to procedural rather than substantive rights. United States v. Larson 2003 WL (8th Cir. 2003) (unpublished). United States v. Kimbell Foods, 440 U.S. 715 (1979) may require otherwise. Non-judicial foreclosure states (Trustee or Title Co.) 15 Homeowner must enjoin state foreclosure proceedings in Federal Court. State courts do not have jurisdiction under APA. 5 U.S.C Direct Loan Foreclosure Judicial Foreclosure States. RD will initiate foreclosure frequently in state court. 16 Contract with private attorney. Agency must affirmatively allege proper loan servicing. Deficiency Judgment--RD will pursue unless borrower had a moratorium. Not barred by state anti-deficiency statutes. Federal law applies to contract; mortgage typically waives state substantive rights. See U.S. v. Mott, 12 F.3d 206 (4 th Cir. 1993)(table). But see U.S. v. Ellis, 714 F2d. 953 (9 th Cir. 1983). RD may now forgo because it can go after borrower administratively under Federal Debt Collection Improvement Act of 1996 (Pub. L ). 8

9 DEBT COLLECTION: PRE- and Post- FORECLOSURE Administrative Wage Garnishment & Federal Benefits/IRS Offsets. (Federal Debt Collection Improvement Act of 1996) 17 RD will pursue before foreclosure (when borrower is 180 days in default) and may do so after foreclosure. RD will pursue even if borrower received moratorium or RD approved short sale. As of Feb. 2013, RD may forgo collection if the borrower does not have the capacity to repay outstanding debt. Appeal is available from RHS before referral to Dept. of Treasury and at at any time at Department of Treasury. Bankruptcy ALTERNATIVES TO AVOIDING FORECLOSURE Stay foreclosure. Can raise substantive and procedural issues in bankruptcy proceeding. Relieve debt obligation. 18 RD-HAMP Not applicable to direct loans. 9

10 RD GUARANTEED HOME LOANS Private lenders make the loan to low- or moderateincome borrowers for qualified properties in rural areas. RD guarantees lender for up to 90% of loan loss. RD collects a guarantee fee, that is paid by borrower, from lender and mortgage insurance premium. Guaranteed loans are 30 year loans at fixed interest rate. Typically market rate for area. Authorized by 42 U.S.C. 1472(h). Regulations governing: 7 C.F.R Subpart D. 19 How to Determine if Loan is Guaranteed by RD? Primary Loan documents do not disclose that loan guaranteed by RD. Nothing in promissory note or deed of trust. Look at Closing Documents Settlement Statement (HUD-1). 20 Request for loan guarantee. RD Form (2 pages). Notification of Applicant on Use of Financial Information from Financial Institution. RD Form Call Lender/Servicer. 10

11 LENDER S OBLIGATIONS 21 When borrower does not perform any covenant in mortgage or deed of trust for 30 days lender must make reasonable attempt to: contact borrower if payment not received by 20 th day after due date. Interview borrower to resolve matter before loan is 60 days delinquent. When the loan becomes 3 payments delinquent, the lender must report to credit bureaus and decide whether to liquidate the account. The lender may liquidate unless there are extenuating circumstances. RD HAMP 22 RD has not implemented a HAMP program. Treasury Department considers program adopted by RD on Aug. 26, 2010 as RD-HAMP. 7 C.F.R encourages loan modifications and provides incentives but is completely discretionary. only 10 banks have modified their agreements with the Treasury to qualify for HAMP incentives. there are more than 500 lenders participating in the RD guaranteed loan program. Less than 50 loans have been actually modified under Treasury rules. 11

12 LIQUIDATION/FORECLOSURE 23 Permitted after at least one default if the lender determines borrower cannot or will not cure default. Lender must give borrower reasonable opportunity to bring account current before initiating foreclosure. (7 C.F.R ). Foreclosure must be initiated within 90 days of liquidation decision, OR 60 days after it is possible to do so (if there is a legal delay). Lender must notify RD of decision. STATUTORY FORECLOSURE AVOIDANCE AUTHORITIES Housing Act of 1949 Moratorium: 42 US.C Refinancing with RD direct Loans: 42 U.S.C. 1471(a)(4). 24 Best alternative since subsidies and moratorium are available under direct loan program. Helping Families Save Their Homes From Foreclosure Act of 2009 (Codified in 42 U.S.C. 1472(h)): Refinancing 42 U.S.C. 1472(h)(9) and 1472(h)(17). Assignment of Loan to RD 42 U.S.C. 1472(h)(15). Payment of Partial Claims 42 U.S.C. 1472(h)(14). Mortgage Modification 42 U.S.C. 1472(h)(14). 12

13 HELPING FAMILIES SAVE THEIR HOMES ACT OF 2009 (P.L ) 25 Most provisions have not been implemented. All that have been, give lenders discretion to use or decline to use avoidance mechanisms. 7 C.F.R Exception: Two-year Refinancing Pilot Program (Operating in about half the states; RD AN No (1980-D)(Feb. 12, 2012). -- available to borrowers who are current on payments for the past 12 months and who will save at least 1% on interest rate (questionable saving). --Upfront 1.5% refinance guarantee fee. --Annual.3% mortgage insurance premium. --Closing costs and 1% origination fee. RD FAILURE TO OFFER FORECLOSURE AVOIDANCE ASSISTANCE 26 All foreclosure avoidance mechanisms in original 1949 Housing Act are not applicable to Guaranteed Loans. RD claims that all of the Provisions of Helping Families Save Their Homes Act of 2009 are discretionary. RD has authorized, but not required, lenders to extend certain foreclosure avoidance mechanisms to guaranteed borrowers. Loan modifications. Payment 0f partial claims. Refinancing high interest rate loans to lower interest loans. 13

14 RD Non-Compliance (Cont.) It has not addressed any other provisions. Loan Assignment. Refinancing with direct loans. Due Process 27 Challenges to RD Position 28 Sheldon v. Vilsack, No (Sixth Circuit, Aug. 28, 2013) Fed. Appx., 2013 WL (Unpublished) affirming 2012 WL (E.D. Mich., March 29, 2012) (Unpublished)(Dismissing plaintiff s complaint on procedural grounds) consolidated with Tone v. Vilsack, No affirming CA 1:10-CV (S.D. Ohio, April 12, 2012)(Dismissing plaintiffs complaint). Unroe v. Vilsack, CA No. 2:11-cv-592 (S.D. Ohio, Filed Sept. 2011). Homkes v. Vilsack, CA No. 1:11-cv-321 (W.D. Mich., April 5, 2011)(TRO Order). 14

15 Guaranteed Loans: Borrower s Indemnification of RD 29 Prior to February 2013: second page of request for a loan guarantee (part of loan closing package), included a borrower certification and acknowledgment: * * * * I (We) certify and acknowledge that if the Agency pays a Loss claim on the requested loan to the lender, I (We) will reimburse the Agency for that amount. If I (we) do not, the Agency will use all remedies available to it, including those under the Debt Collection Improvement Act, to recover on the Federal debt directly from me (us). The Agency's right to collect is independent of the lender's right to collect under the guaranteed note and will not be affected by any release by the lender of my (our) obligation to repay the loan. Any Agency collection under this paragraph will not be shared with the lender. Form RD Deleted as of Feb RD/Treasury Administrative Wage Garnishment &Federal Benefits/IRS Offsets Acknowledgment never explained. Borrower never informed that guarantee is approved. Debt Collection Improvement Act allows federal agencies to collect federal debts administratively. Notice and Right to a hearing pre-garnishment if filed timely. If not timely, garnishment/offset begins but still have right to a hearing before ALJ. Right to collect supersedes state anti-deficiency laws. See Carter v. Derwinski, 987 F.2d. 611 (9 th Cir. 1993) (VA loan; authorized by statute). Agency can add up to 28% collection fee. Hearing decisions:

Possible Defenses to AWG/Offset No statutory or regulatory authority for agreement. Borrower may not have signed certification or agreement. RD obligation to mitigate damages.

16 Possible Defenses to AWG/Offset No statutory or regulatory authority for agreement. Borrower may not have signed certification or agreement. RD obligation to mitigate damages. Implement foreclosure avoidance mechanisms. Borrower paid for guarantee insurance at closing. Lender was not entitled to loss payment. Need to show chain of title. Was note holder approved RD guaranteed lender. Who bid at foreclosure sale? Hardship (2 year suspension of collection). 31 Gideon Anders National Housing Law Project 703 Market Street San Francisco, CA Ext RESOURCES 32 16

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