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The HB-1-3555 Handbook directs servicers to ensure that hazard insurance claims are filed and settled in an expeditious manner. It states:

Servicers are responsible for taking prompt action to protect the interests of the borrower and Agency when a hazard or flood occurs. This involves working closely with the insurance carrier, the borrower, and repair contractors. The servicer will complete a thorough analysis concerning the decision to repair the security property and document the decision. The decision should support the best level of return to the servicer and minimize loss to the Agency. Insurance proceeds will be issued jointly to the servicer and the borrower. If the decision is to use the proceeds to repair the property, the servicer must ensure a licensed contractor is used to complete the repairs. Unless the homeowner qualifies for direct payment of insurance proceeds in accordance with of Chapter 17 of this Handbook, the servicer will release the proceeds in draws based on periodic inspections. The final draw will be paid after verification that all repairs were satisfactorily completed. The servicer is responsible for obtaining all lien waivers for work performed. If the premises have been totally destroyed, the servicer should compare the unpaid principal balance with the insurance proceeds and any other circumstances affecting the case, such as local laws barring reconstruction of the destroyed property. Insurance loss payments, condemnation awards, or similar proceeds will be applied on debts in HB-1-3555 18-17 (03-09-16) SPECIAL PN Revised (04-30-20) PN 536 accordance with lien priorities, on which the guarantee was based, or to rebuild or otherwise acquire needed replacement collateral.254

The referenced regulation provides:

Insurance claim settlements. Prior to release of hazard insurance proceeds because of damage caused by a natural disaster, servicers must complete a cost and benefit analysis on a case-by-case basis to determine if the property can be repaired or rebuilt. The servicer’s actions must be based on the status of the mortgage, the amount of insurance proceeds, and the length of time required repairing or reconstructing the property, and the market conditions in the area. If the property will not be repaired or rebuilt, the insurance proceeds must be applied to the unpaid principal loan balance.255


  • 254 U.S. Dep’t of Agriculture, Rural Development, SFH Guaranteed Loan Program Technical Handbook HB-1-3555, § 18.16, Property Damage and Insurance Claims [7 C.F.R. § 3555.307(d)].

  • 255 7 C.F.R. § 3555.307.