National Housing Law Project Housing Law Bulletin

In 1996, in an effort to save staff time and money and to improve loan servicing, the Rural Housing Service (RHS) transferred responsibility for single-family loan servicing from the Department of Agriculture's local Rural Development offices to a newly established Centralized Servicing Center (CSC) located in the agency's Finance Office in St. Louis. As a result, the personal loan servicing, which had been heralded for nearly 50 years as the hallmark of the Farmers Home Administration's (RHS's predecessor) success in making loans to low- and very low-income persons, was replaced by a centralized and mostly automated servicing center. CSC now relies on computers to monitor loan payments, generate servicing letters and invite borrowers to call the Center's automated phone system for various forms of assistance. Since the transfer, the delinquency rate in the RHS single-family housing programs has risen dramatically. In February of 1998, the delinquency rate among borrowers who were making monthly payments to the agency was 21.1 percent. While the rate has dropped slightly to 19 percent as of the end of April, the delinquency rate is comparatively still very high. Moreover, the foreclosure case load is also very high, with over 10,500 RHS borrowers facing foreclosure action as of the end of April.

The delinquency rate is so high that agency staff as well as outside advocates are trying to understand and remedy its causes. While no definite answers have been developed, it appears that the increased delinquency rate is caused by a variety of factors, including computer errors and impersonal and inadequate servicing.

Increasing number of default notices/defaults for minor infractions. A number of housing advocates report that a significant number of borrowers who do not believe they are in default are getting default notices and are repeatedly threatened with foreclosure. While RHS is at a loss to explain all of these cases, its staff suggests that many of these default notices are being generated by relatively small delinquencies in payments that would have been overlooked by its field staff when it was servicing loans. Other defaults are caused by the fact that borrowers who are receiving subsidies are not returning their annual recertification forms promptly, if at all, causing temporary or permanent increases in their payment obligations which, if not cured, cause the borrowers' loans to be considered in default. To address some of these issues, RHS has developed an action plan that, among other things, will again involve Rural Development field staff in servicing loans by following up on borrowers who have not responded to requests for recertifications and other agency notices.

Servicing tools not being utilized. Another reason for the increased defaults appears to be the agency's failure to use the full panoply of servicing tools that are available to it. In a recent Georgia case, a borrower who had fallen behind in her mortgage payments due to a relatively short-lived decline in income, and who was not eligible for either moratorium relief or loan reamortization, was not considered for a Delinquency Workout Agreement (DWA), one of the servicing tools set out in the RHS regulations.¹ Upon inquiry by the borrower's attorney about the agency's failure to consider a DWA, the attorney was advised that the agency's computer software was not programmed to deal with DWAs. Potentially, this is a significant problem that is denying many borrowers foreclosure relief to which they are entitled.

Advocates who are representing borrowers in foreclosure actions should review whether their clients were potentially eligible for a DWA and whether they were offered relief prior to foreclosure. If not, consider using this as an issue in any pending appeal or as a defense to a foreclosure.

The administration of moratorium relief appears to be another problem causing high delinquency rates. In the early 1990s, the number of moratoriums in effect at any one time typically exceeded 12,000 cases. As of April 30, 1998, the number of outstanding moratoriums was 4,778. It is not known why the number of moratoriums has dropped so significantly, but undoubtedly the fact that the availability of a moratorium is not explained to borrowers in person is a factor. Another contributing factor arises from the fact that borrowers are required to compile and present information, often in writing, supporting their eligibility for moratorium relief. Without fully understanding the criteria for eligibility and without assistance from local staff in completing the necessary forms, many borrowers either do not submit any information to support a claim for relief or submit inadequate information. This is particularly true for a significant numbers of RHS borrowers who do not have basic reading and writing skills.

Improper application of the regulations. Yet another reason for the high default rate may be the RHS's improper application of other regulations resulting in borrowers making excessive mortgage payments. In another recent Georgia case, RHS attributed to an individual's gross income benefit dollars provided by her employer under a cafeteria plan that were used by the employee to purchase medical insurance for her family. RHS contended that these benefits had to be included in the borrower's income for purposes of calculating her interest credit subsidy, thus substantially increasing her monthly mortgage payments. Upon appeal, the hearing officer from USDA's National Appeals Division found in the borrower's favor. RHS appealed the decision to the Director of the National Appeals Division, whose office upheld the hearing officer's decision. The National Director's Office concluded that RHS regulations exclude from annual income "amounts that are granted specifically for, or in reimbursement of, the cost of medical expenses," and that the "Agency erred when it included nontaxable benefit dollars provided by the Appellant's employer for the payment of medical expenses as annual income for the calculation of interest credit assistance."²

RHS's concern and willingness to address the delinquency rate is heartening. However, until it publicly releases its action plan, remedies past wrongs, and integrates its field staff into the servicing of single-family loans, advocates and borrowers are urged to carefully review the agency's claims and loan servicing actions and to challenge practices that are not in keeping with its statutory and regulatory obligations.

¹  See 7 C.F.R. § 3350.205.
²  Director's Review Determination, Case No. 98000161 S (Mar. 31, 1998).

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