USDA New Loss Mitigation Retention Option (PSA) Published

The Rural Housing Service (RHS or the Agency), a Rural Development (RD) agency of the United States Department of Agriculture (USDA) issued a demonstration program that will establish a new loss mitigation retention option, referred to as the Payment Supplement Account (PSA).  Per RHS: “this demonstration program helps struggling borrowers that are delinquent on their mortgage payments are unable to obtain a payment reduction utilizing the currently available loss mitigation options.”

Effective Date:

• The effective date of this demonstration program is July 24, 2024.
• The duration of the demonstration program is anticipated to continue until July 24, 2026, at which time the RHS may extend the demonstration program or terminate it.”

Highlights of the Program:

• What is a Demonstration Program?  
  • A program to test new approaches to offering housing under statutory authority;
  • Need not be consistent with all regulatory provisions while active.
• Background behind testing this new approach:
  • “While the Agency’s loss mitigation options have continued to deliver assistance to borrowers in default, unprecedented higher interest rates in conjunction with the current economic conditions have impacted the ability and delayed the effectiveness of those relief measures to meaningfully assist borrowers”;
• How the Program works:
  • “The PSA shall be funded by a stand-alone Mortgage Recovery Advance (“MRA”). The PSA assists borrowers who have experienced a documented hardship that led to an involuntary inability to pay their mortgage obligation, require payment reduction to resume making a monthly payment, and currently have a below market interest rate.”
  • The PSA demonstration program shall require the servicer to use a portion of the MRA funds to cure the arrearage and segregate the remaining funds in a separate, non-interest-bearing custodial account to provide monthly payment relief to the borrower.
  • The PSA shall be funded by a stand-alone MRA, which shall be incrementally utilized to first, payoff the arrearages accumulated during a hardship to bring the loan current and second, to supplement the principal portion of the borrower’s payment in monthly increments and provide payment relief for three years.
  • The PSA shall remain with the servicer’s lien as a non-interest-bearing, recoverable servicing advance.
  • The MRA created under this demonstration program shall not be secured by a second lien in favor of RD, which eliminates the need for notary fees, recording costs, and additional legal fees.”
• Eligibility Requirements:
• To be eligible under this demonstration program, all the following parameters shall apply:
  • The borrower must occupy the home as their primary residence.
  • The borrower must have experienced a documented hardship and requires payment reduction to resume making a regular monthly payment. The hardship that caused the borrower’s involuntary inability to pay must have been cured. Lenders and servicers may refer to HB–1–3555 Attachment 18–A for guidance on this inquiry.
  • There is no reasonable ability for the borrower to cure the delinquency on their own within 12 months without assistance.
  • The MRA shall be utilized to cure the arrearage, bring the loan current, and fund a PSA that will be utilized to provide a targeted reduction to the borrower’s principal and interest (P&I) payment for three years. At the end of the three years, the borrower shall be responsible for resuming the full amount of their monthly contractual payment.
  • The servicer should target a 25 percent principal and interest reduction, not to exceed the principal portion of the principal and interest, for a maximum 3-year total period. If a 25 percent reduction cannot be achieved, offer the achievable reduction, not less than 5 percent, and not to exceed a maximum 3-year total period.
  • Three trial timely payments will be required. Guidance on trial payments is available at HB–1–3555 Attachment 18– A.
  • The borrower shall sign an agreement to repay the advance in full.
  • The servicer shall segregate the funds paid by USDA for the PSA in a separate, non-interest-bearing custodial account (the PSA) characterized by the following:
    • is deposited with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA);
    • does not limit the servicer’s access to funds for the payment supplement, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; and
    • clearly identifies the funds being held in that account as being derived from and held as part of the PSA Agreement executed by the borrower.
    • The servicer must ensure that the funds in the PSA are clearly delineated as funds held as a result of the PSA Agreement executed by the borrower, for use only as provided for in the PSA Agreement. Neither the servicer nor the borrower may exercise discretion in the use and application of the funds from the PSA; funds shall be used and applied only to reduce the principal balance.
      • The MRA utilized to fund the PSA will be limited to 30 percent of the borrower’s unpaid principal balance at the time of initial default. If the borrower has previously been provided an MRA they may still be considered for a PSA MRA provided that the combined amount of MRAs do not exceed the 30 percent maximum outlined above.
      • This option is the last option in the loss mitigation waterfall, and it must be determined by the servicer that the borrower is not eligible for any other retention solution prior to solicitation for participation in this pilot.
      • Servicers shall advance their own funds to bring the loan current prior to requesting the MRA to establish the PSA.
      • Servicers may file an MRA claim with RD to recoup the funds they advance on behalf of the borrower and utilized to fund the PSA, subject to the MRA claim filing requirements described in 7 CFR part 3555.
      • The amount of the non-interest-bearing receivable will remain part of the servicer’s first lien.
      • The servicer shall agree to repay the amount of the MRA to RD when the first lien matures, the borrower sells or refinances the home, or otherwise pays the loan in full.
      • The servicer shall draw from the PSA monthly, only when the borrower makes their portion of the monthly payment, to provide payment relief. As funds are advanced, the amount drawn will be added to the non-interest-bearing receivable.
      • If a borrower makes the full amount of their monthly contractual payment, the servicer shall still make the monthly draw from the PSA. Any additional funds paid by the borrower shall be applied to curtail the principal balance.
      • A borrower who re-defaults while receiving PSA funds can re-enter the RD loss mitigation waterfall and be evaluated for traditional options, if eligible. Any remaining PSA funds should be applied to the unpaid principal balance as part of that loss mitigation action.
      • If a servicing transfer occurs on the guaranteed loan, the servicer shall ensure that the funds in the PSA awaiting disbursement are transferred to the new servicer at the same time as the mortgage transfer. The new servicer shall assume any remaining obligations of the initial servicer in connection with the ongoing loss mitigation action consistent with the terms of the PSA Agreement.
      • If there is a loss due to a short sale, a deed-in-lieu of foreclosure, or a foreclosure, any remaining funds in the PSA shall be applied towards the principal balance and added to the non-interest-bearing receivable prior to a loss claim being filed.

The servicer may be required to submit additional information about the pilot program outside of the usual electronic reporting process. This enhanced report shall be provided as requested and should include at minimum the number of current and existing PSA MRAs provided under this pilot. Loan servicing and loss claim submissions will be conducted in accordance with the Housing Act of 1949, as amended, and 7 CFR part 3555.

To read the Single Family Housing Guaranteed Housing Payment Supplement Account Demonstration Program, click here. 
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This post was prepared by Marissa M. Yaker, Esq.