19.3.5.2 Workouts

A. The RC Director has broad discretion under this Guide (e.g., Chapter 12 and its appendices), and Handbook 4435.1, to approve the terms of an interim workout during the construction period to resolve serious construction problems that pose a risk of foreclosure and other hardship regardless of the cause. If negotiations are successful, there may be workout, disbursement, or settlement agreements to evidence the agreed upon resolution of the serious construction problem(s) (e.g., contractor default and abandonment). The RC Director and HUD Closing Attorney will review takeover agreements, settlement agreements, etc., that affect the documents from Initial Closing, including the Construction Contract. The RC Director, in consultation with the HUD Closing Attorney, will approve the terms of the workout, the takeover agreement, if applicable, and any changes to existing agreements from Initial Closing.

1. Checklist . The Interim Closing/Workout Checklist (see Section 19.4.1.4) functions as a guide for the RC Director and HUD Closing Attorney as to what documents may be required for a workout. The documents listed on the checklist are not mandatory by default, and each workout is case specific. The RC Director and HUD Closing Attorney determine what documents, if any, are necessary for HUD to approve a structured workout during construction. Some documents in the checklist may be appropriate for collection as part of the workout, even if they do not require amendment.

2. Other Administrative Guidance . Applicable Guidance elsewhere in this Chapter, in the remainder of this Guide, and in Handbook 4435.1, provide guidance in HUD’s review of the terms of construction period workouts and interim closings, when appropriate.

3. Mortgage Increase . If the RC Director approves a mortgage increase in connection with the workout, HUD’s requirements for Final Closing loan modification apply. See Section 19.5.9.4. Lender’s Counsel must provide a written certification from all relevant program participants, including the Surety when the bond(s) have been called, acknowledging the applicability of these Final Closing requirements, and compliance therewith as a condition of HUD’s approval of the structured workout and/or interim closing. (a certification is acceptable).

4. Contractor Default and Project Abandonment . In cases of General Contractor default and abandonment, Lender’s Counsel must coordinate with Lender, Borrower, HUD, and Surety to initiate the Surety’s takeover of the Construction Contract under the performance bond. The workout may also require a call on the payment bond. HUD, Lender, Borrower, and Surety, as applicable, will negotiate the terms for completion of the project. This often results in extensive negotiation between the HUD Closing Attorney and Surety’s counsel over the terms of the surety’s takeover agreement, and a disbursement agreement between Lender, Borrower, and Surety. There may be additional costs and significant alterations to the Project, especially if the Project is less than 75% complete. Compliance

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with this Chapter must be stipulated in the body of any takeover agreement. See also Section 19.4.12, Final Closing when Contractor and Borrower are in Dispute.

5. Litigation. If litigation related to construction of the Project has been filed or is threatened, Lender and Borrower must disclose the litigation to the RC Director and the HUD Closing Attorney.

   • The HUD Closing Attorney will confer with their Regional Counsel and Associate Regional Counsel for Litigation to determine whether a litigation hold is necessary prior to HUD granting approval for any workout or interim closing.

• The RC Director and the HUD Closing Attorney will also evaluate disclosed litigation and determine whether any risk mitigants related to the litigation should be included as terms of the workout. See Section 19.3.4, Final Closings in Dispute, for further guidance on considerations and risk mitigants related to construction litigation.