Attachment 2 - Industry Day Slides FINAL06.30.26.pptx

Rural Housing Service - Servicing Office

Industry Day Event July 10, 2025

Scope and Background Scott Williams / Acting Director, Servicing Office Performance Objectives Scott Williams / Acting Director, Servicing Office Uniqueness of Portfolio Kenneth Elli / Acting Associate Director for Customer Loan Servicing Inherently Governmental Functions Richard Cohen / Acting Associate Director for Asset Management and Business Operations Proposed System Interfaces Michael Sutton / Acting Director Pre-Default Division Questions and Answers Scott Williams / Acting Director, Servicing Office

Agenda

Rural Development’s Servicing Office has issued a request for information (RFI) from qualified vendors to provide loan (servicing current, delinquent, terminated loans) and grant servicing: loss mitigation services; bankruptcy and foreclosures services; management and disposition of acquired properties; escrow processing; special servicing procedures; and provide accounting reports/data management for the Single- Family Housing (SFH) Direct Loan portfolio. The purpose of this RFI is to identify a capable mortgage loan servicer to assist and enhance our operations and create efficiencies in servicing this complex loan portfolio.

Potential contractor would provide day-to-day support for SFH Direct Loan servicing actions that are not inherently governmental.

The RFI specifically requests details information on the loan servicer's ability to perform complex task associated with this portfolio, IT system impacts and the proposed cost methodology analysis.

These tasks would include loan administration and servicing, portfolio monitoring and analysis, risk management, delinquency and default management, compliance and regulatory oversight (i.e. Handbook 3550-HB2), collateral and asset management and workout and restructuring as defined in RHS Direct Loan Servicing Regulation.

Scope

Reference regulations and handbook 3550-2

Rural Development’s Servicing Office (SO) performs loan servicing activities across all three lines of business; Utilities, Business and Housing. The SO is currently servicing over 1.3 million loans with an outstanding portfolio balance of $238 billion, of this amount SFH Direct loans and grants, total 185,000, active loans with an outstanding indebtedness of $14.5 billion. Below is a break down of these loans:

Servicing approximately 245,000 accounts from the following programs:

SFH Direct Loans (159,000 loans) SFH Direct Loans/Recapture Accounts (50,000 loans) Debt Settlements (2,500 loans) REO (675 properties) 504 Loan/Grant Program (12,000 loans and 15,000 loan/grant combos) 523/524 Loans (4,000 loans) 533 Grants (5,000 grants)

Background

What does this Program do?

The SFH Direct Loan Program offers mortgage financing to help eligible, low and very-low-income applicants buy, build, improve, or repair a rural home as their primary residence. The SFH Direct Loan Program provides payment assistance – a temporary subsidy – to help increase a borrower’s repayment ability, however, subsidy benefits require repayment at the end of the loan term.

What are the requirements to qualify for the Direct Home Loan Program:

Be without decent, safe housing.

Be unable to get a loan with reasonable terms and conditions from other resources.

Agree to live in the home as your primary residence.

Meet U.S. citizenship or noncitizen requirements.

Additionally, properties must:

Be considered modest for the area.

Not have a market value higher than the area loan limit.

How can funds be used?

Funds can be used to buy, build, repair, renovate, or relocate a home or to purchase and prepare home sales.

Other program terms Down payment not typically required.

The maximum loan amount depends on factors such as income, assets, debts and the amount of payment assistance an applicant is eligible for.

The typical loan payback period is 33 years (38 years for very-low-income applicants unable to afford a 33-year loan term).

With payment assistance, a monthly mortgage payment can be reduced to as low as a 1 percent interest rate.

A borrower must repay all or part of any payment assistance received over the life of the loan.

What governs this program?

The Housing Act of 1949, amended; 7 CFR Part 3550 The SFH Direct Loan Program Handbooks.

Performance Objectives Request for Information – The vendor will provide support and coordination necessary to perform ministerial tasks associated with the SFH Direct Loan program. All services performed by the vendor will be under the direct supervision of the Federal oversight staff.

SFH Direct Loan Program Escrow Support Payment Assistance Analysis and Processing Special Assistance Support Cash Management Support Business Process, Policies and Procedures Communications and Stakeholder Engagement Communication Management Customer Contact Customer Advocacy

Performance Objectives (Cont.)

SFH Direct Loans Escrow Support-Processes escrow analysis statements for a nationwide portfolio of over 160,000 RD SFH-D customers.

Payment Assistance Analysis- Obtains and evaluates payment assistance and moratorium applications/renewals to determine eligibility for payment subsidy and moratoriums for SFH Direct customers.

Special Assistance Support -Provides technical loan support and assistance to Rural Development Agency for various SFH payment processing methods as it relates to special loan servicing activities.

Cash Management Support - plan, organize, direct, and coordinate loan servicing and management reporting activities related to the development, maintenance, and operation of the detail loan servicing and accounting system for direct loans and grants. The borrower detail record and related borrower transactions forms the basis for the accuracy of the Servicing Office financial reports.

Performance Objectives (Cont.)

Business Processes, Policies, and Procedures- Review of the Servicing Office’s administrative policies and documented procedures to maintain alignment with the mission. Incorporate new and updated policies and regulations into existing Standard Operating Procedures (SOPs), and shall, where necessary, create new SOPs Communication and Stakeholder Engagement Communication Management- Manages the development and coordination of Management Information Systems information to determine areas of risk, weaknesses, and process improvements.

Customer Contact - Provides first line service to approximately 185,000 mortgage loan and grant borrowers as well as third party callers as a customer advocate providing cost-effective service by applying applicable USDA regulations as well as various financial servicing tools.

Customer Advocacy- Receive, research, analyze and respond to complex inquiries from customers, internal and external entities in writing regarding RD loan and grant issues.

Uniqueness of Portfolio The SFH Direct Loan Program is designed to support the development of affordable housing stock in rural communities across rural America. This program was authorized in the Housing Act of 1949 and provides the authority to the Rural Housing Service to buy down a borrower's interest rate to as low as one percent, while also authorizing specialized servicing parameters that are both specific this borrowing category. Further, these specialized requirements have been the driving force in the customized design of IT systems used to manage and report on this program as well as deliver funding. Let’s talk about some of these unique characteristics:

Multiple Loan Set – The Agency sends 1 billing statement for all loans in the loan set. When a borrower with multiple loans for the same property makes less than the scheduled payment on all loans, the payment will be applied to the oldest loan and then in declining order of age. Future remittances will be applied beginning with the oldest unpaid installment and must be kept in paid to date order.

Protective Advances – Funds advance to the borrower for escrow shortages and other approved costs to protected the government’s interest. These fees are amortized for a minimum of one month but can be amortized up to the maturity date of the loan. Interest accrual is calculated based on note rate.

NEED TO HIGHLIGHT THAT ALL THIS NEEDS TO BE MAINTAINED BY LOAN SERVICER.

Uniqueness of Portfolio (Cont.)

Cash Posting/Fees – If a borrower makes less than the scheduled payment, the payment is held in suspense and is not applied to the borrower’s account. When subsequent payments are received in an amount sufficient to equal a scheduled (subsidized) payment(s), the amount will be applied by paid to date in the following order:

Hierarchy:

Recoverable costs (a.k.a. Protective advances or amortized fees) Accrued interest due Principal Due Escrow for taxes and insurance Other Fees (Late Charges and NSF) Note: Subsidy is applied as a credit to interest then principal to make the full P/I note payment.

Uniqueness of Portfolio (Cont.)

Cash Posting Foreclosures (Cash Sale) and Short Sales – Funds are applied in the following order:

Hierarchy:

Recoverable Costs (a.k.a. Protective advances or amortized fees) Foreclosure Costs Other Fees (e.g. Late Charges) Accrued Interest Principal Subsidy Recapture (if applicable)

Uniqueness of Portfolio (Cont.)

Re-amortization of loans- A process that creates a new repayment schedule for the remaining loan balance. The Agency cannot modify the interest rate, loan term or maturity date. Re-amortizations may be granted for the following reasons:

Repay unauthorized assistance due to inaccurate information.

Repay principal and interest accrued, and advances made during a moratorium.

Bring current an account under a delinquency workout agreement after the borrower has demonstrated the willingness and ability to meet the terms of the loan and delinquency workout agreement and the re-amortization is in the borrower’s and Government’s best interests Moratoriums-Borrowers are afforded the opportunity to be place on a moratorium of payment in certain situations. The moratorium can last between six months and two years. At the end of the moratorium period a Re-amortization of the loan typically takes place.

Uniqueness of Portfolio (Cont.)

Assumptions:

Same Rates and Terms-A USDA loan assumption with the "same rates and terms" means the buyer takes over the seller's existing mortgage, including the interest rate and remaining loan term, without modification. This is typically allowed in specific situations, such as family transfers of property, but not always available.

New Rates and Terms-The purchaser assumes the outstanding debt (principal and any recapture amounts). The debt is re-amortized with new rates and terms. If both the buyer and the property meet the Section 502 program requirements (the program through which USDA loans are offered), the loan can be assumed on program terms. New purchasers meeting the requirements may also be eligible for subsequent loans to cover the difference between the assumed debt and the purchase price.

Uniqueness of Portfolio (Cont.)

Delinquency Workout - Borrowers with past due accounts are often offered the opportunity to avoid liquidation by entering into a delinquency workout agreement that specifies a plan for bringing the account current. To receive a delinquency workout agreement, the following requirements apply:

A borrower who is unable to pay the past-due amount in a single payment must pay monthly all scheduled payments plus an agreed upon additional amount that brings the account current within 2 years or the remaining term of the loan, whichever is shorter.

If a borrower becomes more than 30 days past due under the terms of a delinquency workout agreement, RHS will cancel the agreement.

Uniqueness of Portfolio (Cont.)

Treasury Offset Program (TOP)- TOP is a debt collection program administered by the Bureau of the Fiscal Services within the Department of the Treasury. It is designed to collect delinquent debts owed to federal and state agencies by offsetting certain federal and state payments. (Tax return refunds, % of social security). Must be collected by a Federal Agency and collections need to be monitored, tracked and in some cases refunded. Once a loan is through the 60-day certification process (120 days past due) the account is then certified for collections for the life of the loan. Once certified, federal funds can be intercepted if the borrower is 1 day delinquent. (There is no grace period) Cross Servicing-(Post liquidation) - Refers to the process of collecting delinquent debts owed to the USDA or other federal agencies. This involves the U.S. Treasury's Bureau of the Fiscal Service's Disbursing and Debt Management (DDM) area taking on the responsibility of collecting these debts on behalf of the USDA. The Debt Collection Improvement Act of 1996 (DCIA) and the Federal Claims Collection Standards (FCCS) mandate the use of various collection tools, including cross-servicing.

Real Estate Owned (REO) - Systemically when a property becomes an REO, a new account is created on the system crediting the original loan the amount of the bid amount.

Uniqueness of Portfolio (Cont.)

Subsidy -The USDA Section 502 Direct Loan Program offers a subsidy component to help low- and very-low-income families afford homeownership in rural areas.

Subsidy – RHS administers three types of payment subsidies: interest credit, payment assistance method 1 and payment assistance method 2. Payment subsidies are subject to recapture when the borrower transfers title or ceases to occupy the property.

Income-Based: The subsidy is based on the borrower’s projected future household income.

The amount of subsidy granted is the lesser of the difference between:

(i) The annualized promissory note installments for the combined RHS loan and eligible leveraged loans plus the cost of taxes and insurance less method defined percent of the borrower’s adjusted income, or

(ii) The annualized promissory note installments for the RHS loan less the amount the borrower would pay if the loan were amortized at an interest rate of 1 percent.

Income Re-certification: The USDA re-verifies household income annually, as income changes affect the subsidy amount.

Uniqueness of Portfolio (Cont.)

Subsidy Recapture-USDA subsidy recapture refers to the requirement for borrowers of certain USDA loans, specifically Section 502 Direct Loans, to repay a portion of the subsidy they received when they sell, transfer title, or cease to occupy the property. This recapture policy ensures that the government's investment in affordable housing is partially recovered when the borrower's financial situation improves or when they no longer need the subsidy. The amount of subsidy to be repaid is based on the increase in the property’s value since the loan origination. Recapture is due at the time of sale or transfer of title. Borrowers have the opportunity to defer recapture payments if they continue to occupy the property. The recapture is recorded as a lien against the property.

Graduation-Borrowers are required to "graduate" to other credit options at reasonable rates and terms when they become financially able to do so. This means that as a borrower's financial situation improves, they should seek to refinance their USDA loan into a conventional loan. Borrowers are required to provide documentation within a specific timeframe to demonstrate their ability or inability to graduate.

Servicer will need to monitor borrower after loan is paid in full. Once borrower leaves property or sell home they will need to paid in full otherwise servicer can start foreclosure process. If borrower dies in property, the subsidy is forgiven. Ensure to go over recapture calculation and discuss the need of an appraisal.

Uniqueness of Portfolio (Cont.)

Debt Settlement-refers to the process where the USDA offers options for borrowers to resolve outstanding debt on their loans, potentially through compromise, adjustment, or cancellation. This can involve a reduction in the amount owed or a change in repayment terms and is often pursued when voluntary liquidation or other collection efforts have not fully resolved the debt. (post liquidation in most cases) Unauthorized Assistance – Investigation and recover of funds disbursed or granted for loans, grants, and payment subsidy for which the borrower was not eligible to receive. Agency’s regulations requires to collect unauthorized assistance, whether the assistance was received as a result of error or deception, unless applicable Statute of Limitations has expired. Even if the error was made by Agency staff, the borrower is responsible for repaying the unauthorized amount.

The Agency utilizes its servicing system to obligate and disburse loan funds for all loan types.

Inherently Governmental Functions An "inherently governmental function" is a task or function that must be performed by a Government official. It is defined by Office of Federal Procurement Policy (OFFP) and is used when referring to activities that require either the exercise of discretion in applying Government authority or making of value judgments in making decisions for the Government. Functions that federal law and policy require to be performed by government personnel, not contractor employees, are known as "inherently governmental functions"

Acceleration of loans into foreclosure National Appeals Division (NAD) appeals determinations and mediations Agency to Agency transmission of data files

TOP

Cross Servicing Death Master File Annual HUD Median Income Table Do Not Pay (DNP) Credit Alert Verification Reporting System (CAIVRS)

THESE TASK WILL BE PERFORMED BY FEDERAL STAFF

Inherently Governmental Functions (Cont.)

Treasury Reporting of Delinquent Direct Single Family Housing Loans (TOP & Cross Servicing) Provide/review/approve/monitor/submit/provide technical advice:

TOP certification Cross Servicing debt referrals TOP & Cross Servicing balance reconciliation TOP & Cross Servicing weekly collections Administrative wage garnishment Treasury proof of debt requests Treasury debt RTA (return to Agency) Treasury DNP portal Retention and Management of funds held in the Corporate Escrow Account Collection of all funds processed for the prior business day Obligations of Government Funds Assumption – New Rates & Terms

Inherently Governmental Functions (Cont.)

Debt Settlement Decisions Certification/Final Approval Subsidy approvals and cancellations Moratorium approvals and cancellations Re-amortization involving the waiving of interest Unauthorized Assistance Decisions Short Sales Deed-in-Lieu Decision to Pay Taxes and/or Insurance on the following accounts Recapture Debt Settlement

Inherently Governmental Functions (Cont.)

Responses to Audit Reports from the OIG, GAO, or other federal agencies Some Examples:

Congressional Responses Hot Line Complaints Program Civil Rights Complaints Improper Payment Auditing/Reporting CAIVRS/Do Not Pay Reporting and Inquires

System Interfaces PLAS (General Ledger)-Servies as the financial hub for loan and grant programs for Rural Development.

ECF-Electronic filing and retrieval of loan documents.

IDMS Database-Cash Management & Disbursements.

PFCS-Program Funds Control System is used to allocate, obligate and disburse funds. All programs use this to check funding for obligations and disbursements.

ECMS-Enterprise Cash Management System is the web view of the ECMS database which holds all loan level accounting data (Fiscal Year's appropriation codes, type assistance codes, cohorts, Treasury Account Symbols (TAS) etc.) These are all necessary to derive the component TAS and Business Event Type Code (BETC) required by Treasury.

Unifi – Loan Origination System (interface with LoanServ) Data Act Files-Files to be posted to Government site for public consumption.

CRDS-Credit Reform Reporting-Borrower level transactional data by program and obligation year.

Sagent-LoanServ - LoanServ is a mainframe commercial product (COTS). LoanServ is the SFHD loan and grant servicing systems for recording and managing obligations, disbursements, collections, escrow, default management and all other servicing functions. It is the Agency's, system of record for servicing.

RD Answers to submitted questions.

New questions?

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