A.12.5.4 Remedies to Cure Defaults

• A. Call on the Bonding Company to perform, where applicable.

1. Request field counsel to communicate with surety where it fails to perform to terms of the bond.

2. Where the Surety refuses to honor its obligations after communications by field counsel, request the Department of Treasury to initiate procedures for removal of the surety from the Treasury Circular 570.

3. List the surety, contractor, and project; describe the particulars, including nature of the problem, length of delays and actions taken by Borrower, mortgagee and HUD to secure surety's performance; and attach a copy of the bond(s).

4. Mail to:

U.S. Department of Treasury Surety Bond Branch Financial Management Service Washington, D.C. 20227

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5. Distribute copies of the letter to the Washington Docket, Field Office Docket and the Regional or Satellite Office Director.

B. MAP Lender or Title Company control payments through issuance of two- or three-party checks to assure that disbursed mortgage proceeds are applied for the intended purpose and not diverted to other uses.

1. All money drawn for construction must be paid to subcontractors, suppliers, and workers on the job.

2. Money drawn for specified purposes, e.g., Architect's fees, insurance premiums, taxes, etc., must not be diverted to other uses.

C. Transfer construction funds to soft cost expenses, i.e., keep the mortgage in balance. The liquidated damages clause in the construction contract provides a source of funds for overruns in interest, taxes, MIP and insurance (soft costs) that are due to construction delays that are the General Contractor's fault.

1. Authorize the transfer of funds from the construction contract for payment of soft cost overruns, where it becomes apparent that the scheduled date for completion cannot be met due to the fault of the contractor. The amount of transferred funds must be reflected on subsequent form HUD-92448, as a decrease to item 7, Sum of Cost Breakdown Items Plus Inventories of Materials.

   • The transfer of funds will get the attention of the contractor, Surety (if any), Borrower and mortgagee, as well as address any financial necessity.

• Notify the contractor, Surety (if any), Borrower and mortgagee by certified mail of the amount and the reason for the transfer.

Require written acknowledgement of the notification from the mortgagee and Surety, if any.

2. When the amount originally allocated to interest on form HUD-92451, Financial Record of Mortgage Loan Transaction (or similar format in an Excel worksheet) is exhausted or near exhaustion, request the Architect and HUD representative to estimate the earliest date of construction completion. Use this date to:

Set an assumed completion date.

• Compute the minimum liquidated damages for the period between the completion date specified in the construction contract, as adjusted by approved change orders, and the assumed completion date.

• Transfer the computed amount from Column J, Construction, to Column G, Carrying Charges and Financing, on form HUD-92451 (or similar format in an Excel worksheet).

• 1. Allocate full amount to interest, initially.
• 2. Only use funds for MIP, taxes and insurance after funds for these line items, and the working capital escrow have been exhausted.

D. Use contractor's holdback, subject to provisions of Appendix 12, Section A.12.5.4.B above.

E. Release assurance of completion cash escrow where used in place of a performance and completion bond for the construction contract.

1. The Regional or Satellite Office Director may authorize such release, where:

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The project is nearly complete,

• Project completion and final closing may not be attainable with the remaining mortgage proceeds alone or in combination with the Borrower other available assets, and

• Release of the funds will offer an excellent chance for project completion and final closing with clear title.

2. The entire escrow may be released under such circumstances except for 2-1/2 percent of the contract, which amount is needed to fund the latent defects escrow, subject to:

   • The MAP Lender must take steps to assure that all required payments by the contractor have been made or will be met to preclude uncovered liens, and

   • Disbursement of such funds and Borrower’s additional contributions must be under strict control of the mortgagee or a title company.

3. Distribute the Regional or Satellite Office Director's written authorization for release of the funds as follows: original to the Washington Docket with copies to the Field Office Docket, Closing Attorney, and Mortgage Credit Control File.

F. Infusion of new money. See Appendix 12, Section A.12.5.3.H.1 above.

G. Deferment of principal payments where the project is complete and ready for occupancy but cannot go to final closing.

H. Mortgage increase may be provided as discussed in MAP Guide Chapter 13, Section 13.23, where economically feasible. Where the contractor is changed because the original contractor becomes bankrupt, abandons the job, or the contract is terminated due to inadequate contractor performance, any mortgage increase must also be processed in accordance with the following:

1. Reprocess the project.

   • Use rents, expenses, and occupancy ratios current as of the date of reprocessing.

   • Consider the new builder's cost to complete, amounts expended to date, and any increase in carrying charges, financing, etc., due to increased mortgage amount and/or extra construction time over the original estimate.

2. Mortgage increase conditions.

The Borrower provides any required front money.

• 1. Any recovery from the original contractor or surety must be applied first to reduction of the mortgage on a mandatory basis.
• 2. The balance of the net recovery after legal expense, if any, may be used to indemnify the Borrower, MAP Lender, and others.
• 3. A legal document providing for Appendix 12, Section A.12.5.4.A and Section A.12.5.4.B above must be included as a rider to the Regulatory Agreement and Lender’s Certificate at final closing, where such recovery has not been made before and considered in the cost certification.

I. Reanalyze the Cost Certification for inclusion of all allowable costs where final closing has not occurred.

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• J. Working capital deposit balance.