Recently, the Federal Housing Administration (FHA) withdrew part of a proposed rule that sought to establish a maximum time period within which an FHA approved mortgagee must file a claim with FHA for insurance benefits. The decision came in response to public comments expressing concern over the proposed rule’s implementation, which many agreed would ultimately have a chilling effect on FHA participation. The decision represents a win for FHA lenders/servicers seeking reimbursement on defaulted loan portfolios.
The Proposed Rule
The prosed rule, published in the Federal Register on July 6, 2015, sought to establish, for the first time, a deadline by which a claim for insurance benefits must be filed with FHA. In general, the rule would prohibit the filling of a claim for insurance benefits after a specified amount of time following certain events relating to the submission of a claim. Additionally, the rule would prohibit the filling of any claim more than 12 months after the expiration of a period of time from the date of default that is equal to the amount of time provided in the reasonable diligence timeframe established under 24 CFR § 203.356(b).
The proposed rule also imposed specific deadlines based on claim type. For properties acquired by foreclosure, claims must be filed no later than three months from the occurrence of one of the following events, whichever is later:
- the date of the foreclosure sale;
- the date of expiration of the redemption period (the period allowed to the mortgagor to redeem and regain ownership of the property);
- the date that the mortgagee acquires possession of the property (i.e. the property is vacant); or
- such further time as the Secretary or the Secretary’s designee may approve in writing. Properties that are conveyed through a pre-foreclosure sale or Deed-in-Lieu option would also be subject to a three-month claim period beginning on the date of closing and date of conveyance, respectively.
Finally, the proposed rule provided that the contract of insurance would be terminated, without notice, if the mortgagee failed to file a claim within the deadline.
Public Comments / Concern
Public concern over the proposed rule can generally be bucketed into three categories:
- failure to recognize the practical impediments to timely conveyance;
- potential legal and due process issues;
- negative effect on FHA participation and thus access to credit for borrowers.
For the first category, commenters noted that the proposed rule failed to recognize that FHA requirements and policies, as well as other federal and state imposed responsibilities, played a significant role in the need for mortgagees to take additional time to submit a claim. Commenters explained, for example, that responsibilities imposed on servicers by the FHA to resolve outstanding tax, HOA and utility issues directly contribute to delays, and, in many cases, would result in the inability to file a claim.
For the second category, commenters largely focused on the authority to unilaterally cancel FHA insurance contracts on the basis of delayed claims. As several commenters correctly observed, the National Housing Act (NHA) does not provide express authority on this point, and whether that authority can be implied is up for debate. Commenters also pointed out that the method of calculating the claim filing deadline is open to legal debate and interpretation.
Finally, commenters noted that losing the insurance guarantee in cases where the servicer exercises reasonable diligence to meet state and FHA requirements would have a chilling effect on FHA participation. Commenters explained that the insurance function is crucial for the extension of credit to lower/middle class Americans and first time home buyers who, in many cases, find it difficult to find an alternative means of purchasing a home.
What It Means / Next Steps
As a practical matter, the decision to withdraw the proposed rule represents a win for FHA lenders/servicers as they maintain an avenue for recovery on defaulted loan portfolios. More generally, the FHA’s decision maintains confidence in the relatability of the FHA guarantee and shifts the risk of default away from the lender back to the FHA. The FHA did not completely shut the door on establishing maximum time period for claim filing, however, specifically noting that any revised proposed deadline would be published in the Federal Register with an opportunity for comment.