RD Instruction 1980-D, Section 1980.374, covers a lender's responsibilities in pursuing the liquidation of a guaranteed loan account when there is an incurable default. Lenders must exercise due diligence in completing the liquidation process. This due diligence should include an estimate of the total debt, whether the security value is sufficient to cover that debt and whether there is any recovery potential for any deficiency. The estimate of the total debt includes the unpaid principal, protective advances, interest accrual through the liquidation process, and other potential costs, such as the expense of the liquidation action and, if applicable, the cost of Real Estate Owned (REO) management and disposition.

The determination of the security value should be based on the current market value of the property. The recovery potential should be based on the borrower's assets and/or ability to pay the deficiency, as well as other potential sources of recovery, such as proceeds of insurance claims or pending litigation that might result in collection of the deficiency.

When foreclosure is the proposed method of liquidation, the determination of the amount to bid at the sale will have a significant effect on the net loss to the lender and to the Government. In determining the amount and the strategy of the foreclosure bid, the lender must consider State statutory requirements as well as the following considerations. If the bid at the sale covers the total debt, it is satisfied in the eyes of the law and the lender has no basis for further collection from the borrower. The lender's position of first mortgagee is extinguished and therefore, there is no right to collect any proceeds from insurance or litigation. In addition, when the bid is equivalent to or exceeds the market value of the property, potential buyers are less interested in bidding and it is more likely the lender will acquire the property as well as the costs of managing and disposing of it.

The Agency is frequently asked to provide or concur in a lender's bid at a foreclosure sale; however, RD Instruction 1980-D does not specifically address foreclosure sale bidding, therefore, Rural Development has issued this Administrative Notice which provides the needed guidance.

To view the Administrative Notice in its entirety,  please click here