HUD OIG Report: HUD Did Not Correctly Service all Due and Payable Partial Claims

On June 25, 2026, the Office of Inspector General for the United States Department of Housing and Urban Development published a Report entitled, “HUD Did Not Correctly Service all Due and Payable Partial Claims”. Highlights below from the Report were directly and copied and pasted:

Summary from HUD OIG:

HUD’s NSC did not service all due and payable partial claims in accordance with HUD rules, regulations, policies, and procedures. Specifically, we identified that 74 of 81 statistically sampled FHA loan files involved servicing or collection discrepancies including missing loan documents, demand letters not being sent, and untimely delivery and upload of loan documents. These conditions occurred because of an increased volume of partial claims and inadequate oversight of the Loan Servicing Contractor (LSC), including a lack of well-defined partial claims tracking and collection performance requirements in the LSC contract. Further, the NSC relied on manual processes to handle the execution, servicing, and termination of partial claims. As a result, there is an increased risk that FHA will not collect the debts, ultimately impacting the FHA insurance fund.

Overview of the Partial Claim Program per the Report:

The FHA partial claim is a loss mitigation tool that helps borrowers keep their homes by HUD advancing funds on behalf of the borrowers to reinstate delinquent FHA-insured mortgages. The borrowers execute promissory notes and mortgages payable to HUD when they accept the advances. A partial claim note does not accrue interest and is not due and payable until the related first mortgage has been paid off, has matured, or has been refinanced with a non-FHA-insured mortgage or the borrower sells the property. HUD paid more than 1.8 million partial claims since the program began in 1997.

During the last 5 years, the number of terminated FHA-insured mortgages with associated partial claims has increased. Between fiscal years 2021 and 2024, 343,801 partial claims valued at more than $7.7 million were associated with terminated FHA mortgages. In some cases, a lender or title company remits a portion of the proceeds from the sale or refinance of the property to the LSC to pay off the partial claim.

In other cases, the LSC transfers the unpaid partial claim debt to HUD’s Financial Operations Center (FOC) to take collection action against the borrower. This action includes referring the delinquent debts to the U.S. Department of the Treasury. HUD’s FOC is responsible for servicing and collecting a variety of debts and receivables that are transferred from other organizations within HUD. 31 CFR 901.1 requires Federal agencies to aggressively collect all debts arising from activities of that agency. This requirement mandates that debt collection actions be taken promptly once it is determined that a debt is owed.

Demand Letter:

HUD policy requires loan documents be delivered within 60 days for the promissory note and 6 months for the subordinate mortgage unless otherwise stated in policy. If the lender does not deliver the loan documents within the allotted time frame, the NSC is required to send a demand letter for the loan document(s) and seek reimbursement of the incentive fees and the full amount of the partial claim if the documents are still not provided. The NSC’s procedure requires that 61-day and 91-day demand letters are sent to the lender for missing promissory notes as notification that they are required to reimburse the partial claim payment and incentive fee (if applicable) for the subject loan if the documents are not.

If the servicer fails to submit the missing documents by expiration of the deadline date, a referral to HUD’s Office of Program Enforcement is required for resolution.

Proof of Claim Filing

In cases of bankruptcy, HUD procedures requires that the LSC prepare and file Proof of Claim not later than 5 business days from notification of the bankruptcy filing. The Proof of Claim shall be imaged upon receipt of proof of filing. We observed that 3 of the 81 sample loan files reviewed (3.7 percent) included discrepancies related to missing notices of bankruptcy filing which resulted in the LSC not filing the Proof of Claim.

Link to Report:

HUD Did Not Correctly Service all Due and Payable Partial Claims