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17.4 PROTECTIVE ADVANCES [7 CFR 3555.302]
Servicers may advance funds to pay for emergency expenses necessary to protect the security property and charge the cost against the borrower’s account. If the borrower is unable to repay the advance in a lump sum with the next scheduled payment, the servicer may schedule repayment consistent with the borrower’s ability to pay if the borrower can make regular payments and bring the mortgage account current within 18 months or less. In most cases, the servicer should be able to arrange with the borrower to bring the account current within 120 days.
A. Advances for Property Repairs
Servicers must ensure that borrowers immediately notify them of any loss or damage to insured property and collect the amount of the loss from the insurance company. Because protective advances are covered by the guarantee, servicers should advance funds only to pay for emergency repairs to protect the security value of the property. Protective advances for repairs should be considered only if the borrower informs the servicer that an additional loan or reimbursement from an insurer cannot be obtained in an appropriate timeframe, or if the borrower has abandoned the property.
Protective advances that are not reimbursed through insurance coverage may be covered by the guarantee with proper documentation as to why the advance was not covered by insurance if the advance was other than for taxes and insurance premiums.
Either the borrower or the servicer may identify the need for repairs of the security property. All repairs, replacements, and new construction must be planned, performed, and inspected in accordance with the standards specified in Chapter 12 of this Handbook. If the servicer is unsure whether the repairs would affect the security value of the
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property, the servicer should request that an inspector examine the property to assess whether repairs are necessary. Based on the value of the property, the servicer must determine whether the repairs are cost effective and document this assessment in the servicer’s file. Protective advances exceeding $2,000 require Agency concurrence.
B. Advances for Taxes and Insurance
The servicer is responsible for maintaining escrow funds in a reasonable and prudent manner assuring real estate taxes, insurance, and assessments are paid timely even if a shortage exists requiring the servicer to advance funds on behalf of the borrower. The servicer will notify the borrower in writing of any escrow shortages and document the decision in the servicer’s file. Servicers are encouraged to adopt accepted industry standards for hazard and flood insurance as noted in Chapter 16 of this Handbook. Servicers may also advance for unpaid association dues to protect the status of the lien when necessary.