TPA Tricks of the Trade: A Lawyer’s PerspectiveApril 17, 2023 – Articles
Borrowers who go through the process of obtaining an FHA-insured multifamily loan generally come to the same conclusion: the juice is worth the squeeze. At the end of the day, they get to enjoy a unique blend of benefits (35 or 40-year mortgage term, below market interest rate, etc.) that simply can’t be replicated with a conventional loan.
One FHA benefit that’s been getting a lot of attention lately is loan assumption. Entities purchasing multifamily properties can assume HUD-insured debt on those properties. In 2023, when interest rates on new loans are the highest they’ve been in years, multifamily property purchasers are naturally drawn to properties where they can assume an existing HUD-insured loan with an interest rate around 2 or 3 percent (e.g. a loan that closed in 2021).
In HUD parlance, a loan assumption is referred to as a full transfer of physical assets, or full TPA. Just like a HUD-insured loan closing, the TPA process is not without its challenges. Having served as counsel to HUD, lenders and borrowers on TPAs, I can offer a few suggestions that may reduce friction when assuming an FHA-insured loan:
Make sure the Purchaser’s Letter tells a clear and complete story
Purchasers, sellers, lenders and their attorneys often spend months discussing a loan assumption before presenting paperwork to HUD. They’ve lived with the transaction for so long that when it comes time to draft the Purchaser’s Letter (the document that describes the proposed TPA for HUD), they sometimes omit critical details that they take for granted.
When I was HUD counsel, it wasn’t unusual for me to read a Purchaser’s Letter two or three times and still not be fully clear on the game plan for transferring the property and assuming the loan. The Letter needs to tell the story of the TPA in a way that uninitiated staff at HUD can easily follow. It must operate as a clear road map, a tool that HUD staff can use to understand the existing structure and the proposed post-TPA structure.
Bear in mind that HUD staff will typically focus on three key aspects of a project when reviewing the Letter: physical (capital) needs, financial needs and management needs. The Purchaser’s Letter needs to squarely address each of those aspects and, if necessary, present a plan for making improvements. For example, if a section of the project needs new siding, the Letter needs to describe a timeline for replacement and a source of funding.
Title Report = ALTA 11-06 Mortgage Modification Endorsement
HUD’s TPA checklist calls simply for a “Title Report,” but what is actually needed for the initial submission to HUD is a draft ALTA 11-06 Mortgage Modification Endorsement to the existing loan title policy. An ALTA-11-06 endorsement will reflect the Release, Assumption and Modification Agreement (the document under which the purchaser assumes the mortgage) and bring the effective date of the policy up to the date of the acquisition/loan assumption.
It is advantageous for purchasers to engage the same title office that issued the original loan policy when obtaining ALTA 11-06 endorsements. A different title company would likely need to issue a brand new loan policy, which may in turn require the new title company to review the ALTA Survey that has already been accepted by HUD. In my experience, lenders and HUD offices strongly prefer ALTA 11-06 endorsements and will push back against introducing a new title company and a new policy.
Be prepared to address “new” encumbrances
In addition to changing the effective date of the policy, date-down endorsements will show the lender and HUD what encumbrances have been recorded against the property since the loan closing (e.g., utility easements). If the existing owner/seller did not obtain HUD’s prior written consent to such encumbrances per the HUD Regulatory Agreement, the purchaser should 1) acknowledge the non-compliance, 2) describe the encumbrance, 3) explain why the encumbrance is acceptable (or how the risk will be mitigated) and 4) assure HUD that, going forward, the purchaser will abide by the Regulatory Agreement and seek HUD’s prior approval for future encumbrances. All of this can be done in the Purchaser’s Letter.
Getting out in front of these title matters, rather than waiting for HUD to comment on them, will add velocity to the TPA and make a good impression on the Department.
HUD’s Request for Endorsement, which is one of the loan documents that purchasers assume as part of a TPA, contains the following provision:
“Lender shall maintain a perfected lien position in the UCC Collateral for the life of the Loan.”
To maintain a perfected lien position in a project’s UCC Collateral (certain non-real estate assets and property), lenders generally must have valid UCC-1 financing statements filed in the applicable county office where the project is located and in the applicable state office where the borrower is organized. A financing statement isn’t valid unless it correctly identifies the borrower. Accordingly, when a borrower changes through a TPA, the lender must file UCC-3 form amendments corresponding to the existing UCC in order to identify the new owner/debtor and comply with the Request for Endorsement. Just because the official TPA checklist (form HUD-92266) doesn’t call for UCC-3’s doesn’t mean that they aren’t required.
Designate a “chief ambassador” to HUD
While processing times vary greatly from HUD Office to HUD Office, draft TPA documents generally have a tendency to languish once they’ve hit HUD’s inbox for review. To maintain momentum on a TPA, the lender and purchaser should designate a single individual who will 1) serve as the chief ambassador to HUD (preferably someone well-versed with TPA requirements) and 2) diplomatically nudge the Department for updates at appropriate times and efficiently respond to any HUD inquiries. Lender employees or their attorneys typically fill this role, in a manner consistent with HUD-insured loan closings, although I’ve seen borrower team members serve as chief ambassador as well.
How often you check in with HUD prior to TPA approval will depend on a few factors, including the timelines set by the purchase and sale agreement and the timing of the HUD review process. When I am the designated ambassador, I generally give HUD at least two weeks after the initial submission before asking for an update. After sending revised documents in response to the agency’s comments, I have found it effective practice to check in with HUD weekly.
Just like HUD-insured loan closings, getting the TPA “juice” (final TPA approval) requires a fair amount of “squeeze” (process and documentation). Effective collaboration between lenders, borrowers, HUD and their respective counsel can take some of the strain out of the squeeze, setting borrowers up to enjoy the benefits of HUD-insured financing.