FHA Servicers Now Face Threat of Treble Damages from HUD.(Federal Housing Administration )

Washington -- Federal Housing Administration servicers are facing the threat of severe penalties if they don't do everything possible to help delinquent borrowers avoid foreclosure.

Under a final rule that goes into effect May 26, the Department of Housing and Urban Development can impose treble damages on FHA servicers who fail to comply with the agency's loss mitigation rules.

The long-dreaded rule means that HUD could impose a $300,000 fine if a $100,000 loan goes into foreclosure.

Lenders and servicers have warned HUD that treble damages, mandated by Congress in 1998, are unfair and excessive. And the threat of such penalties will make FHA servicing less attractive.

HUD never asked for such penalties. In fact, the department is quite proud of the loss mitigation program, which helped 78,000 delinquent FHA borrowers in fiscal year 2004 remain in their homes.

To HUD's credit, it stalled implementation of the rule for seven years while it developed a tiered system for ranking servicers by loss mitigation performance.

"HUD helped us out by creating a tiered system," said Vicky Vidal, senior director for the Mortgage Bankers Association. She stressed, however, that HUD got stuck with the "bad law" that it had to implement.