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Treble Damages for Failure To Engage in Loss Mitigation
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[Federal Register: April 26, 2005 (Volume 70, Number 79)]
[Rules and Regulations]
[Page 21571-21578]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ap05-11]
[[Page 21572]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 30 and 203
[Docket No. FR-4553-F-03]
RIN 2501-AC66
Treble Damages for Failure To Engage in Loss Mitigation
AGENCY: Office of Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This final rule amends HUD's civil money penalty regulations
to reflect HUD's authorization to impose treble damages on a mortgagee
for any mortgage for which the mortgagee had a duty but failed to
engage in appropriate loss mitigation actions. The final rule follows
publication of a proposed rule, takes into consideration the public
comments received on the proposed rule, but makes no changes at this
final rule stage.
DATES: Effective Date: May 26, 2005.
FOR FURTHER INFORMATION CONTACT: Michael Reyes, Office of the Deputy
Assistant Secretary for Single Family Housing, Office of Housing,
Department of Housing and Urban Development, 301 NW. Sixth Street,
Oklahoma City, OK 73102-2807, telephone (405) 609-8475 (this is not a
toll-free number). Persons with hearing or speech impairments may
access this number via TTY by calling the toll-free Federal Information
Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
On April 14, 2004 (69 FR 19906), HUD published a proposed rule that
would amend HUD's civil money penalty regulations at 24 CFR part 30 and
HUD's single family mortgage insurance regulations at 24 CFR part 203
to reflect HUD's authorization to impose treble damages on a mortgagee
for any mortgage for which the mortgagee had a duty but failed to
engage in appropriate loss mitigation actions.
Sections 601(f), (g), and (h) of the Departments of Veterans
Affairs and Housing and Urban Development, and Independent Agencies
Appropriations Act, 1999 (Pub. L. 105-276, approved October 21, 1998),
amended sections 230, 536(a), and 536(b)(1) of the National Housing Act
(NHA) (12 U.S.C. 1715u, 12 U.S.C. 1735f-14(a)(2), and 12 U.S.C. 1735f-
14(b)(1), respectively) to add a triple penalty to the existing civil
money penalty system for failure to engage in appropriate loss
mitigation. Section 230(a) of title II of the NHA, as amended, makes it
mandatory for the mortgagee, upon the default of a single family
mortgage, to engage in loss mitigation actions (including, but not
limited to, special forbearance, loan modification, and deeds in lieu
of foreclosure) for the purpose of providing alternatives to
foreclosure. Section 601(h) amended section 536(b) of title V of the
NHA to authorize but not require HUD to impose a civil money penalty on
mortgagees that fail to engage in loss mitigation activities as
required in section 230(a) of the NHA. Section 601(g) amended section
536(a) of title V of the NHA to provide that the penalty shall be equal
to three times the amount of any insurance benefits claimed by a
mortgagee with respect to any mortgage for which the mortgagee had a
duty to engage in loss mitigation and failed to do so.
On December 6, 2000 (65 FR 76520), HUD published in the Federal
Register an advance notice of proposed rulemaking (ANPR) that advised
the public of HUD's plan to issue a proposed rule to amend HUD's civil
money penalties regulations to assess treble damages for a mortgagee
that had a duty to engage in loss mitigation and failed to do so. HUD's
ANPR also solicited comments on the use of a tier ranking system (TRS)
that analyzes a mortgagee's loss mitigation efforts on a portfolio-wide
basis, and ranks the mortgagee on performance ratios of loss mitigation
actions to conveyance claims. The TRS is based on a system that HUD
implemented through notice as a pilot.
HUD's TRS consists of four tiers (Tiers 1, 2, 3, and 4) and is
designed to measure a mortgagee's loss mitigation performance. While
any mortgagee that has a duty to engage in loss mitigation and fails to
do so is subject to treble damages, this rule provides appropriate
notification that HUD will focus on Tier 4 mortgagees. Information
available to HUD indicates that Tier 4 mortgagees engage in little or
no loss mitigation. The public will be apprised of any change to HUD's
focus through Federal Register notice. In addition, for any mortgagee,
regardless of ranking or absence of ranking, HUD is not prevented from
pursuing HUD penalties or sanctions.
Failure to engage in loss mitigation is defined as a mortgagee's
failure to evaluate a loan for loss mitigation before four full monthly
mortgage installments are due and unpaid to determine which, if any,
loss mitigation techniques are appropriate (see 24 CFR 203.605), or
subsequent failure to take appropriate loss mitigation action(s).
Offering plausible loss mitigation options (as defined in 24 CFR
203.501) to qualified borrowers is engaging in loss mitigation.
Mortgagees must be able to provide documentation of their loss
mitigation evaluations and actions. Should a claim for mortgage
insurance benefits later be filed, this documentation must be
maintained in the claim review file in accordance with 24 CFR
203.365(c). Failure to successfully engage in loss mitigation with a
borrower that is uncooperative or otherwise ineligible is not
considered ``failure to engage'' in loss mitigation for that mortgage.
II. This Final Rule
This final rule follows publication of the April 14, 2004, proposed
rule and takes into consideration the public comments received on the
proposed rule. After careful consideration of the public comments, HUD
has decided to adopt the April 14, 2004, proposed rule without change.
III. Discussion of Public Comments
The public comment period on the April 14, 2004, proposed rule
closed on June 14, 2004. HUD received nine public comments on the
proposed rule. Comments were received from a housing counseling agency,
state housing and finance authorities, trade associations representing
mortgage bankers and brokers, and a community development organization.
This section of the preamble presents a summary of the significant issues
raised by the public commenters and HUD's responses to these issues.
Comment: The treble damages penalty is unfair and excessively high.
Two commenters stated that the treble damages penalty is unfair because
it is not based on damages actually sustained by HUD. The commenters
wrote that the penalties proposed are not treble damages but are
actually numbers that are ten times HUD's actual losses on
foreclosures. The commenters stated that the average losses incurred by
HUD per foreclosure in 2003 were approximately $26,000, whereas an
average penalty incurred per treble damages violation would be three
times the average insurance claim, or approximately $276,000. One
commenter explained the imposition of treble damages penalty is
excessive in that the servicer ``risks losing'' three times the amount
of the entire claim. Another commenter stated that treble damages should
be limited to the amount of the borrower's current principal balance.
HUD Response. The statutory language that added this triple penalty
to the existing civil money penalty
[[Page 21573]]
system states that the penalty shall be in the amount of three times
the amount of any insurance benefits claimed for which the mortgagee
failed to engage in loss mitigation. HUD, in determining the treble
damages penalty amount, must abide by the statutory directive.
Furthermore, the penalty is a punitive damage that would be assessed
based on the lender's failure to follow HUD's policies and regulations.
It is designed to remind mortgagees of the importance of complying with
existing regulations and policies that require lenders to engage in
loss mitigation, which minimizes the risk that borrowers unnecessarily
lose their homes.
Comment: The TRS has no bright-line test. One commenter is
concerned there is no ``bright-line test'' to determine a lender or
mortgagee's placement in the TRS.
HUD Response. Lenders have had sufficient notice through 17 rounds
of the Tier Ranking System to have a familiarity with the system. HUD
published, by notice, with opportunity for comment, the benchmarks used
in the Tier Ranking System.
Comment: Loss mitigation efforts are highly subjective. One
commenter asked, ``How far is a lender expected to go to reach an
uncooperative borrower [?]''
HUD Response. This final rule does not impose new servicing
requirements on lenders, so the level of effort required to make
contact and to attempt to gather and evaluate the borrower's financial
situation remains unchanged. As stated in the proposed rule, if,
despite documented attempts to evaluate or provide loss mitigation,
implementation could not occur due to the borrower's refusal or failure
to cooperate with the mortgagee, then generally, the mortgagee would be
considered in compliance and not subject to treble damages for the
particular loan.
An evaluation of the number of foreclosures by the 22 lenders
earning a Tier 4 score in Round 17 shows that the median number of
foreclosures was 32, the average was 63, the minimum was 11, and the
maximum was 456. A comparison of these numbers to the corresponding
level of loss mitigation used to calculate the TRS score supports HUD's
contention that a Tier 4 ranking is evidence that a mortgagee has
failed to engage in loss mitigation to such an extent that it is highly
probable that the mortgagee has systematically denied loss mitigation
to cooperative and qualified borrowers.
Lenders have had sufficient notice through 17 rounds of the Tier
Ranking System. HUD's post-claim reviews can go back three years to
establish a pattern of non-compliance with HUD policy. Treble damages
will not be assessed on any claim where the date of default occurred
before the final rule's effective date.
Comment: It is unclear what claims are subject to the treble
damages audit and penalty. One commenter stated that HUD should provide
a clearer statement of what claims, past and future, will be part of
any treble damages audit and resulting penalty.
HUD Response. HUD will not pursue treble damages for failure to
engage in loss mitigation where the date of default occurred before the
final rule's effective date. Aside from that restriction, HUD may
pursue treble damages as allowed by the operative statute of limitations.
Comment: Tier 4 mortgagees should have a different standard of
treble damages penalty than Tiers 1-3 mortgagees. One commenter wrote
that HUD must be very cautious in assessing the penalty and should only
assess the penalty for Tier 4 mortgagees. Another commenter stated,
``HUD's apparent willingness to penalize any mortgagee for failure to
engage properly in loss mitigation, `regardless of [TRS] ranking or
absence of ranking,' or historical context of excellent loss mitigation
efforts, is disingenuous.'' One commenter wrote that it believes Tier
1-3 servicers should not have unlimited contingent liability for
failure to engage in loss mitigation because minor infractions or other
consumer complaints could trigger increased sampling and possible
imposition of treble damages looking back to the previous servicing
audit; thus, HUD should limit treble damages to only those servicers
who fall into the Tier 4 category.
HUD Response. In the proposed rule, HUD stated that while any
mortgagee that has a duty to engage in loss mitigation and fails to do
so is subject to treble damages, this rule provides appropriate
notification that HUD will focus on Tier 4 mortgagees for review
purposes. Information available to HUD indicates that Tier 4 mortgagees
engage in little or no loss mitigation. HUD continues to agree with
this assessment.
Comment: A ``safe harbor'' should be established where mortgagees
demonstrating overall compliance will not be subjected to treble damage
penalties. One commenter wrote that a safe harbor should be provided to
those who demonstrate a ``systematic overall compliance'' with the loss
mitigation rules. The commenter explained that due to the ``extreme
nature of the penalty,'' treble damages should not be imposed where a
servicer is materially complying with the loss mitigation regulations
and only ``isolated incidents'' of non-compliance have occurred.
Another commenter stated that servicers that have generally good loss
mitigation records may be subjected to treble damages for ``relatively
isolated compliance failures.'' This commenter stated that a safe
harbor should be included for those mortgagees with ``good rankings''
and that treble damages should be reserved for only those who have
``repeatedly failed to comply'' with loss mitigation requirements;
otherwise, the ``inability to avoid treble damages'' may make ``GNMA
servicing less attractive.'' Another commenter wrote that HUD should
reconsider a treble damages penalty exemption for servicers who have
demonstrated overall compliance with HUD's loss mitigation rules
through the Tier rankings.
HUD Response. As stated previously, the civil money penalty statute
does not allow HUD to exempt any group of lenders; therefore, HUD is
prohibited from exempting Tier 1-3 lenders from potential treble
damages. Also, as stated previously, this rule provides appropriate
notification that HUD will focus on Tier 4 mortgagees for review
purposes. Finally, while there is a case-by-case liability stemming
from failure to evaluate a loan for loss mitigation and/or failure to
then take the appropriate action, treble damage penalties are more
likely where there is a pattern of non-compliance as opposed to an
isolated servicing mistake. Thus, HUD continues to emphasize that HUD
will primarily concentrate on those mortgagees that engage in little or
no loss mitigation.
Comment: Mortgagees should be allowed flexibility to challenge its
findings of non-compliance. One commenter wrote that the appeals
process must be more broad in allowing servicers to refute substantive
findings of ``failure to engage in loss mitigation'' regardless of the
Tier ranking. The commenter explained that overly aggressive auditors
who have misapplied Federal Housing Administration (FHA) requirements
in the past will have the final decision on which companies will appear
before the Mortgagee Review Board (MRB) for possible treble penalties;
thus, servicers deserve an opportunity to refute an auditor's findings
with HUD staff that are knowledgeable about loss mitigation policies
before reaching the MRB. Another commenter stated that an appeals
process is critical to ensure that the imposition of the treble damages
penalty is justified.
HUD Response. HUD believes the commenters' concerns are misplaced,
[[Page 21574]]
and characterization of some Quality Assurance Division (QAD) monitors
as ``overly aggressive'' is incorrect. HUD takes its duties to protect
the public very seriously, and will continue current vigorous efforts
to ensure the stability and viability of Departmental programs.
Mortgagees have opportunities throughout the monitoring and Mortgagee
Review Board process to contest proposed findings, and ultimately, to
appeal any findings actually made. Generally, mortgagees have the
ability to discuss potential findings with monitors on-site at the end
of a review. If a mortgagee is referred to the Mortgagee Review Board
and a Notice of Violation is issued, the mortgagee has an opportunity
to submit a comprehensive response to the Notice. The mortgagee's
response is considered by the Mortgagee Review Board in determining
whether an administrative action or civil money penalty is appropriate.
Upon being notified of the Board's determination to impose a sanction,
a mortgagee has appeal rights as provided by statute and regulations.
Comment: Servicers should have sufficient lead times before tier
scoring standards are changed and implemented. One commenter wrote that
because HUD reserves the right to change the tier scoring benchmarks
via Federal Register notice, any changes to the tier scoring system
should allow the servicer necessary time (12 months) to make necessary
revisions to their processes to meet new performance standards set out
by HUD. Another commenter wrote that HUD should provide an advance
warning system to allow servicers to improve their scores before
enforcement actions can be taken. The commenter stated that servicers,
like borrowers seeking loss mitigation, should be given a chance to
cure. Moreover, although HUD has claimed it will adjust thresholds
based on negative market conditions, an early warning system is still
needed. Another commenter suggested that servicers be provided 12
months' advance warning of an increase in TRS thresholds or a change in
TRS calculation so that servicers can publicly comment; also, 12 months
allows for an evaluation of the change on a morgagee's tier ranking and
an opportunity to adjust business models to raise scores. This alone
may require hiring additional staff, a change of business plans, etc.
This same commenter wrote that 12 months is consistent with other HUD
timelines when other mortgagee policies have been changed. The
commenter used the Round 14 Tier 4 threshold change from ``less than
15%'' to ``less than 40%'' as an example of how a more advanced warning
could result in affected companies taking steps to avoid the new category.
HUD Response. A lender's business model should not be based on
HUD's Tier Ranking System or its benchmarks; rather, it should be based
on meeting the requirements that lenders evaluate all defaulted loans
for loss mitigation and then take the appropriate action. As stated in
the proposed rule, HUD may from time to time propose changes to the
benchmarks. The changes will be proposed by a Federal Register notice,
and offer the opportunity for comment before the changes take effect.
Although the benchmarks are not part of the codified regulations, HUD
nevertheless recognizes that changes to the benchmarks should undergo
the opportunity for comment before becoming final and taking effect.
Changes to evaluation thresholds are done periodically within the
industry as performance changes. Under the TRS, Tier 4 will always be
the lowest ranking possible. While the benchmarks were adjusted in
Round 14, this was the only benchmark change since the workout ratio
was adopted in Round 6. Advance notice, with opportunity to comment,
will be given should HUD decide to change the TRS formula.
Comment: Only claims from the last quarter should be considered in
HUD's TRS analysis. One commenter wrote that if HUD is willing to
impose treble damages for failure to engage in loss mitigation on one
loan, regardless of a mortgagee's loss mitigation performance, then HUD
is being ``capricious and excessive.'' Both commenters stated that only
claims filed during the last quarter comprising the ranking should be
subject to treble damages and that claims in following quarters should
not be subject to treble damages if the score improves to a higher
ranking. The two commenters wrote that a preferred policy would be to
subject servicers to the treble damage penalty only after servicers
have been ranked Tier 4 for four consecutive quarters because this
provides a reasonable opportunity to correct deficiencies or adjust
business plans. In other words, this would allow sufficient time for an
opportunity to cure. One of the commenters wrote that it previously
supported quarterly rankings, but if the scope of servicers' liability
is not limited to one quarter, then it is critical to reduce the
frequency with which companies are evaluated for treble damages.
HUD Response. As stated above, lenders have had sufficient notice
through 17 rounds of the Tier Ranking System to evaluate and improve
their rankings. The statute does not permit HUD to exempt lenders from
possible penalty based upon the approach proposed by the commenter, but
treble damages will not be assessed on any loan where the date of
default occurred before the effective date of this final rule.
As stated previously, this rule provides appropriate notification
that HUD will focus on Tier 4 mortgagees for review purposes. HUD
believes that looking at four quarters of data in TRS is in the
lender's best interest, as it provides a better indication of
performance. HUD will continue to provide quarterly feedback via the
TRS. Given HUD's limited resources, HUD will focus on as many Tier 4
lenders as HUD can; however, the TRS is only one of several tools used
by HUD for targeting lenders for review.
Comment: Tiers 1-3 liability should only extend for one quarter.
Two commenters wrote that the window for Tiers 1-3 liability should
extend for only one quarter. One commenter suggested providing
quarterly reports for the servicers' benefit (``early warning system'')
but that only one ``compliance'' ranking issued per year would trigger
any enforcement action. The other commenter wrote that servicers ranked
Tier 4 should only be subject to treble damages for those claims made
during the last quarter comprising the ranking.
HUD Response. There is no ``tier liability.'' A mortgagee is not
determined liable or not liable simply due to what Tier ranking a
mortgagee occupies. As stated previously, HUD is focusing on Tier 4
mortgagees for review purposes. Also, as stated above, all Lenders have
had sufficient notice through 17 rounds of the Tier Ranking System.
HUD's post claim reviews can go back three years to establish a pattern
of non-compliance with HUD policy. Treble damages will not be assessed
on any loan where the date of default occurred before the final rule's
effective date.
Comment: Only certain loan origination issue dates and Round dates
should be used in determining TRS rankings. One commenter stated that
it assumes HUD will not use dates from Round 14 through Round 17 in
future scores if the data causes a servicer to be ranked Tier 4. The
commenter explained that it assumes also that any findings of failure
to engage in loss mitigation from October 1, 2002 through June 30, 2004
will not be subject to treble damages, because servicers did not have
an advance warning of the increase in the threshold. Also, a
[[Page 21575]]
commenter stated that any application of the treble damages penalty
should only apply to loans originated on or after the issue date of the
final treble damages rule.
HUD Response. HUD believes there is no reason to delay application
of TRS beyond issuance of the final rule. All tier rankings are based
on one year's data, so mortgagees have sufficient information and
notice of their performance to gauge their compliance. As a part of the
pilot testing of TRS, 17 Rounds of TRS scores have been issued since
December 2000. HUD's observation is that changes from Round to Round
have been minimal based on the data's rolling 12 months. Treble damages
will not be assessed on any loan where the date of default occurred
before this final rule's effective date.
Comment: Implementation of the treble damages hurts FHA. One
commenter stated ``We are concerned that the inability to completely
avoid treble damages may make FHA servicing less attractive.''
HUD Response. HUD partially agrees with this comment. The inability
to completely avoid treble damages may make FHA servicing less
attractive to those lenders who systematically fail to engage in loss
mitigation, which is a violation of existing regulations. However, this
final rule adds no new servicing requirements; rather, it increases the
penalty to those lenders who do not follow these requirements. When
lenders do not service FHA loans in accordance with FHA regulations,
this failure to perform loss mitigation results in greater losses to
HUD. Lenders who do not service FHA loans in accordance with FHA
regulations also harm the insurance fund by precluding ways by which a
homeowner could recover financially and make mortgage payments.
Additionally, lenders who do not service FHA loans in accordance with
FHA regulations also deprive servicers of servicing income. The MRB has
assessed and will continue to assess substantial fines to those lenders
who demonstrate a pattern of non-compliance with HUD regulations.
Comment: Ranking servicers by legal identity is a positive step.
One commenter expressed support that the proposed rule provides that
servicers will be ranked by legal entity rather than separate mortgagee
identification numbers. The commenter stated that servicers that have
acquired other servicers will not be disadvantaged with regard to
treble damages merely because they possess multiple mortgagee
identification numbers and transact different activities under those
numbers.
HUD Response. HUD has been providing a single, aggregate score only
to those lenders with multiple HUD identification numbers who have
legally become a single entity, and who have provided this notification
to and met other requirements of HUD's Lender Approval and
Recertification Division.
Comment: Question regarding proposed damages cap. One commenter
asked whether the maximum money penalty, currently $1,250,000, applies
to the treble damages penalty. The commenter would like HUD to make an
express statement explaining the cap to treble damages.
HUD Response. HUD does not believe the annual limitation to the
amount of civil money penalties applies to treble damages imposed for
failure to engage in loss mitigation. The original enactment of a civil
money penalty in 1988 was capped at the per violation level and the per
violation cap was further modified by an annual cap. The 1998
legislation enacting a civil money penalty for failure to engage in
loss mitigation provided for a penalty that substantially exceeds the
original per violation maximum enacted by the initial 1988 civil money
penalty legislation, and makes no mention of an annual cap on loss
mitigation penalties. Indeed, a loss mitigation penalty for a single
loss mitigation failure will likely be assessed at hundreds of
thousands of dollars as the average claim to HUD is roughly $98,500.
The legislative history for the 1998 enactment emphasizes Congress'
intent that the loss mitigation program be ``aggressive and
effective.'' Finally, as codified, the annual cap only modifies
penalties previously capped on a per violation basis. Given the
foregoing, HUD believes that an annual maximum civil money penalty
amount does not apply to loss mitigation penalties.
Comment: HUD should make loan-level information more easily
available to servicers. One commenter requested that HUD make available
information used to calculate Tier Rankings in a downloadable batch
format through FHA Connection. The commenter states that often the HUD
data and the servicers' data do not match; also, a servicer must cut
and paste tens of thousands of fields of information in order to
perform reconciliation, which is very time-consuming. Servicers must be
able to validate and reconcile their internal records to ensure all
parties are operating off the same records.
HUD Response. In HUD's experience, the primary reason for failure
to reconcile data stems from failure of the lender to accurately report
to HUD's Single Family Default Monitoring System (SFDMS). The lender
provides data to HUD, so the lender should be able to recreate in their
own systems the data sent to HUD's SFDMS and data regarding paid loss
mitigation and foreclosure claims. HUD has always responded to
individual inquiries requesting loan level information. HUD is studying
providing loan level data through a system accessible to lenders, but
at this time does not have adequate funding for necessary system
enhancements.
Comment: HUD should provide timely TRS reports when used to trigger
liability or incentives. One commenter stated that because not all
servicers can accurately monitor their Tier Rankings internally due to
the difficulty in reconciliation and verification, HUD should provide
timely TRS reports to ensure that the servicers have enough time to
correct deficiencies before the next Tier Rankings are released.
HUD Response. There has always been at least a one-quarter lag from
the end of the ranking period until the scores are released. This
allows adequate time to ensure data integrity within the HUD systems
from which the TRS counts are obtained. The TRS scoring methodology was
designed so that lenders could calculate their own scores for self-
monitoring, at any interval desired, using data from their own internal
systems.
Comment: Round 6's calculation change negatively affects rankings.
One commenter stated that the change in TRS calculation in Round 6,
which requires servicers to back out multiple loss mitigation actions
reported, makes the internal calculation of the score more difficult
and less reliable. This results in discrepancies between servicer-
generated rankings and the official Tier rankings.
HUD Response. The TRS calculation, including the maximum of one
credit for multiple cases, was developed by HUD using widely available
database software. The TRS scoring methodology was designed so that
lenders could calculate their own scores for self-monitoring, at any
interval desired, using data from their own internal systems.
Comment: Question regarding sampling to determine Tier 4 reviews.
One commenter asked if HUD plans to conduct a 100 percent review of
Tier 4 servicers or if HUD will limit the review to a smaller
percentage or random sample.
HUD Response. Since 2001, soon after the first TRS scores were
released, HUD incorporated TRS scores into the methodology used to
target servicing lenders for review. This methodology
[[Page 21576]]
takes into account variables which include, but are not limited to, TRS
scores, servicing portfolio size, length of time since last HUD review,
default rates, default reporting, foreclosure claims, and previous
findings. This methodology ensures that servicing lenders are reviewed
with appropriate frequency, and effectively ensures that all Tier 4
servicing lenders will be reviewed at some time based on the variables
in the targeting methodology. Furthermore, HUD may review any claim at
any time for compliance with HUD's regulations regardless of tier ranking.
Comment: Small mortgagees will be negatively affected by a treble
damages penalty. One commenter states it is concerned that HUD has
retained the possibility to assess treble damages on any mortgagee HUD
determines has failed to engage in loss mitigation. This commenter
writes that such action would be very damaging to small mortgagees and
that a good way to encourage mortgagees to engage in loss mitigation
would be to use a tiered level of fines and penalties based on the size
of the mortgagee. The commenter states that if a small mortgagee
determines that it may be subject to an FHA penalty due to a failure to
engage in required loss mitigation actions, it can simply push for
foreclosure rather than offer loss mitigation to the mortgagor,
purchase the property at foreclosure sale and make no claim (i.e., do
not convey the property to the FHA).
HUD Response. The civil money penalty statute does not allow HUD to
assess the penalty on any factor other than three times the amount of
any insurance benefits claimed by the mortgagee with respect to any
mortgage for which the mortgagee failed to engage in such loss
mitigation actions. As stated in the proposed rule, all mortgagees have
an obligation to ensure that all borrowers are afforded the opportunity
for loss mitigation where loss mitigation is appropriate, and HUD has
an obligation to enforce the loss mitigation requirements, regardless
of the mortgagee's portfolio size.
HUD notes that pushing for a foreclosure without attempting loss
mitigation as identified in the comment violates HUD's servicing
regulations even in the absence of a filed claim. Implementation of a
rush to foreclosure policy could subject the mortgagee and individuals
involved in the violation to monetary penalties and program exclusions.
A mortgagee that realizes that it has not done loss mitigation, and is
fearful of a treble damages penalty, should, rather than push for
foreclosure, stop or stay the foreclosure, perform the loss mitigation
evaluation and then take the appropriate action, and potentially avoid
a treble damages penalty altogether.
Comment: Small mortgagees are unable to handle the financial and
organizational costs associated with additional regulations. A
commenter wrote that small mortgagees such as state housing agencies
are on the verge of suffering because of a variety of FHA policies and
servicing FHA-insured loans is becoming almost as costly as servicing
sub-prime loans. The potential fines and treble damages that the new
mortgagee may encounter after taking on the service of new portfolios
must be considered. The commenter stated that the ``myriad of rules,
regulations, complexities, penalties and fines that are part of the
current FHA insurance environment are detrimental to the achievement of
the mission of state housing agencies and in turn detrimental to the
achievement of HUD's stated mission and strategic goals.'' The
commenter offered suggestions to lessen what the commenter states is a
significant economic impact on small entities. The commenter suggests
that: (1) A new definition of ``small'' be implemented; (2) more
penalty categories be created where the penalties and fees are lower
for smaller organizations; and (3) classifications are based on
portfolio size and not the number of claims.
HUD Response. As stated previously, Section 230(a) of the NHA
requires lenders to engage in loss mitigation actions. Again, this
final rule adds no new servicing requirements; rather, it provides for
imposition of a penalty on mortgagees that do not follow loss
mitigation requirements. The intent of treble damages is to encourage
mortgagees to comply with existing HUD policies, regulations, and statutes.
Comment: HUD should address the unique needs of specialty
servicers, especially small-to mid-sized servicers and subservicers,
which have unique business models. The commenter wrote that when
subservicers are contractually required to finalize any foreclosure
actions and process claims on behalf of the primary servicer, the
subservicer must identify itself as the ``mortgagee of record'' and
that foreclosure claim payment will be assigned to the subservicer for
Tier Ranking purposes, thus negatively affecting the subservicer's TRS
ranking. Also, buyers that acquire servicing for severely delinquent
loans will have limited opportunity to perform loss mitigation. The
commenter wrote that HUD should expressly state that a servicer's
business model and/or the practical inability to perform certain loss
mitigation functions will be considered a compensating factor for a
Tier 4 ranking and HUD's imposition of treble damages. HUD should
review servicers and the impact those servicers' different business
models have on a case-by-case basis. Another commenter stated that
``mistakes happen.'' The commenter noted that one mistake on a loan
file, thus resulting in a treble damages penalty, could put a small
mortgagee out of business.
HUD Response. As stated previously, section 230(a) of the NHA
requires mortgagees to engage in loss mitigation actions. Again, this
final rule adds no new servicing requirements; rather, it provides for
imposition of a penalty on mortgagees that do not follow loss
mitigation requirements. The intent of treble damages is to encourage
mortgagees to comply with existing HUD policies, regulations, and
statutes. HUD is not a party to contractual agreements between
servicers and subservicers. Servicers and subservicers are cautioned,
however, to ensure that the parties to the contract have followed HUD
regulations regarding approved servicers, mortgage record changes and
servicing requirements, including loss mitigation evaluation and the
management decision to foreclose.
HUD disagrees with the comment that a servicer's business model
and/or the practical inability to perform certain loss mitigation
functions should be considered a compensating factor for a Tier 4
ranking and HUD's imposition of treble damages. To allow such a
compensating factor undermines the effectiveness of the regulatory
scheme as neither the buyer nor the seller would accept responsibility
for appropriate servicing, including the loss mitigation evaluation.
HUD cannot allow ``sale of a mortgage'' to be an acceptable reason to
not evaluate a loan for loss mitigation. While it may be true that
servicing mortgagees who acquire servicing of severely delinquent loans
could have limited opportunity to perform loss mitigation, the solution
lies in the servicing mortgagees's due diligence prior to acquiring
loans. Due diligence provides the servicing mortgagee the opportunity
to measure the risks inherent in the portfolio, including, but not
limited to, inadequate servicing or other factors that may ultimately
lead to findings, civil money penalties, or indemnification of HUD
(Please see Mortgagee Letter 2002-21, dated September 26, 2002, Due
Diligence in Acquiring Loans, and HUD Handbook 4330.1, Rev-5, Chapter
6, for more guidance).
[[Page 21577]]
Finally, while there is a case-by-case liability stemming from
failure to evaluate a loan for loss mitigation and/or failure to then
take the appropriate action, treble damage penalties are more likely
where there is a pattern of non-compliance as opposed to an isolated
servicing mistake.
IV. Small Business Concerns Related to Treble Damages
With respect to imposing treble damages on a mortgagee for failure
to engage in loss mitigation, or taking other appropriate enforcement
action against a mortgagee, HUD is cognizant that section 222 of the
Small Business Regulatory Enforcement Fairness Act of 1996 (Public Law
104-121) (SBREFA) requires the Small Business and Agriculture
Regulatory Enforcement Ombudsman to ``work with each agency with
regulatory authority over small businesses to ensure that small
business concerns that receive or are subject to an audit, on-site
inspection, compliance assistance effort, or other enforcement related
communication or contact by agency personnel are provided with a means
to comment on the enforcement activity conducted by this personnel.''
To implement this statutory provision, the Small Business
Administration has requested that agencies include the following
language on agency publications and notices that are provided to small
business concerns at the time the enforcement action is undertaken. The
language is as follows:
Your Comments Are Important
The Small Business and Agriculture Regulatory Enforcement
Ombudsman and 10 Regional Fairness Boards were established to
receive comments from small businesses about Federal agency
enforcement actions. The Ombudsman will annually evaluate the
enforcement activities and rate each agency's responsiveness to
small business. If you wish to comment on the enforcement actions of
[insert agency name], you will find the necessary comment forms at
http://www.sba.gov/ombudsman 
or call 1-888-REG-FAIR
(1-888-734-3247).
In accordance with its notice describing HUD's actions on the
implementation of SBREFA, which was published on May 21, 1998 (63 FR
28214), HUD will work with the Small Business Administration to provide
small entities with information on the Fairness Boards and National
Ombudsman program, at the time enforcement actions are taken, to ensure
that small entities have the full means to comment on the enforcement
activity conducted by HUD.
V. Findings and Certifications
Public Reporting Burden
The information collection requirements contained in this rule have
been approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. chapter
35) and assigned OMB control number 2502-0523. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays
a valid control number.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.), generally
requires an agency to conduct a regulatory flexibility analysis of any
rule subject to notice and comment rulemaking requirements unless the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities. All entities, small
or large, will be subject to the same penalties for failure to engage
in loss mitigation as established by statute and implemented by this
rule. The statute does not provide an exemption for small entities. To
the extent that the treble damages penalty would impose a significant
economic impact on small entities, an impact will only occur due to a
mortgagee's own inaction--since the only entities that will be affected
will be poorly performing mortgagees that fail to engage in loss
mitigation. Therefore, the undersigned certifies that this final rule
will not have a significant economic impact on a substantial number of
small entities.
Environmental Impact
In accordance with 24 CFR 50.19(c)(6) of HUD's regulations, this
rule involves establishment of treble damages for lenders who fail to
perform the loss mitigation evaluation and actions under 24 CFR
203.605. In accordance with 24 CFR 50.19(c)(1) of HUD's regulations,
this final rule does not direct, provide for assistance or loan and
mortgage insurance for, or otherwise govern or regulate, real property
acquisition, disposition, leasing, rehabilitation, alteration,
demolition, or new construction, or establish, revise, or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. Therefore, this rule is categorically excluded
from the requirements of the National Environmental Policy Act (42
U.S.C. 4321 et seq.).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of Section 6 of the Executive Order are met. This rule
affects only mortgagees and does not have federalism implications and
does not impose substantial direct compliance costs on state and local
governments or preempt state law within the meaning of the Executive
Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2
U.S.C. 1531-1538) establishes requirements for Federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments and the private sector. This final rule does not
impose any Federal mandates on any state, local, or tribal government
or the private sector within the meaning of UMRA.
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action'' as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the office of the Regulations
Division, Office of General Counsel, Room 10276, 451 Seventh Street,
SW., Washington, DC 20410-5000.
Catalog of Federal Domestic Assistance Number
The Catalog of Federal Domestic Assistance number applicable to the
program affected by this rule is 14.117.
List of Subjects
24 CFR Part 30
Administrative practice and procedure, Grant programs--housing and
community development, Loan programs--housing and community
development, Mortgages, Penalties.
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community
[[Page 21578]]
development, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
? For the reasons discussed in the preamble, HUD amends 24 CFR parts 30
and 203 to read as follows:
PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT
? 1. The authority citation for 24 CFR part 30 continues to read as
follows:
Authority: 12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, 1735f-15;
15 U.S.C. 1717a; 28 U.S.C. 2641 note; 42 U.S.C. 3535(d).
Subpart B--Violations
? 2. In Sec. 30.35, add a new paragraph (a)(15) and revise paragraph (c)
to read as follows:
Sec. 30.35 Mortgagees and lenders.
* * * * *
(a) * * *
(15) Fails to engage in loss mitigation as provided in Sec.
203.605 of this title. * * *
(c) Amount of penalty. (1) Maximum penalty. Except as provided in
paragraph (c)(2) of this section, the maximum penalty is $6,500 for
each violation, up to a limit of $1,250,000 for all violations
committed during any one-year period. Each violation shall constitute a
separate violation as to each mortgage or loan application.
(2) Maximum penalty for failing to engage in loss mitigation. The
penalty for a violation of paragraph (a)(15) of this section shall be
three times the amount of the total mortgage insurance benefits claimed
by the mortgagee with respect to any mortgage for which the mortgagee
failed to engage in such loss mitigation actions.
Subpart C--Procedures
? 3. Add Sec. 30.80 (l) to read as follows:
Sec. 30.80 Factors in determining the appropriateness and amount of
civil money penalty.
* * * * *
(l) HUD may consider the factors listed in paragraphs (a) through
(k) of this section to determine the appropriateness of imposing a
penalty under Sec. 30.35(c)(2); however, HUD cannot change the amount
of the penalty under Sec. 30.35(c)(2).
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
? 4. The authority citation for 24 CFR part 203 continues to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 3535(d).
Subpart C--Servicing Responsibilities
? 5. Revise Sec. 203.500 to read as follows:
Sec. 203.500 Mortgage servicing generally.
This subpart identifies servicing practices of lending institutions
that HUD considers acceptable for mortgages insured by HUD. Failure to
comply with this subpart shall not be a basis for denial of insurance
benefits, but failure to comply will be cause for imposition of a civil
money penalty, including a penalty under Sec. 30.35(c)(2), or
withdrawal of HUD's approval of a mortgagee. It is the intent of the
Department that no mortgagee shall commence foreclosure or acquire
title to a property until the requirements of this subpart have been
followed.
? 6. Revise Sec. 203.605 to read as follows:
Sec. 203.605 Loss mitigation performance.
(a) Duty to mitigate. Before four full monthly installments due on
the mortgage have become unpaid, the mortgagee shall evaluate on a
monthly basis all of the loss mitigation techniques provided at Sec.
203.501 to determine which is appropriate. Based upon such evaluations,
the mortgagee shall take the appropriate loss mitigation action.
Documentation must be maintained for the initial and all subsequent
evaluations and resulting loss mitigation actions. Should a claim for
mortgage insurance benefits later be filed, the mortgagee shall
maintain this documentation in the claim review file under the
requirements of Sec. 203.365(c).
(b) Assessment of mortgagee's loss mitigation performance. (1) HUD
will measure and advise mortgagees of their loss mitigation performance
through the Tier Ranking System (TRS). Under the TRS, HUD will analyze
each mortgagee's loss mitigation efforts portfolio-wide on a quarterly
basis, based on 12 months of performance, by computing ratios involving
loss mitigation attempts, defaults, and claims. Based on the ratios,
HUD will group mortgagees in four tiers (Tiers 1, 2, 3, and 4), with
Tier 1 representing the highest or best ranking mortgagees and Tier 4
representing the lowest or least satisfactory ranking mortgagees. The
precise methodology for calculating the TRS ratios and for determining
the tier stratification (or cutoff points) will be provided through
Federal Register notice. Notice of future TRS methodology or
stratification changes will be published in the Federal Register and
will provide a 30-day public comment period.
(2) Before HUD issues each quarterly TRS notice, HUD will review
the number of claims paid to the mortgagee. If HUD determines that the
lender's low TRS score is the result of a small number of defaults or a
small number of foreclosure claims, or both, as defined by notice, HUD
may determine not to designate the mortgagee as Tier 3 or Tier 4, and
the mortgagee will remain unranked.
(3) Within 30 calendar days after the date of the TRS notice, a
mortgagee that scored in Tier 4 may appeal its ranking to the Deputy
Assistant Secretary for Single Family or the Deputy Assistant
Secretary's designee and request an informal HUD conference. The only
basis for appeal by the Tier 4 mortgagee is disagreement with the data
used by HUD to calculate the mortgagee's ranking. If HUD determines
that the mortgagee's Tier 4 ranking was based on incorrect or
incomplete data, the mortgagee's performance will be recalculated and
the mortgagee will receive a corrected tier ranking score.
(c) Assessment of civil money penalty. A mortgagee that is found to
have failed to engage in loss mitigation as required under paragraph
(a) of this section shall be liable for a civil money penalty as
provided in Sec. 30.35(c) of this title.
Dated: April 15, 2005.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 05-8334 Filed 4-25-05; 8:45 am]
BILLING CODE 4210-27-P