FHA Establishing Partial Payment Process for Section 232 Healthcare Program

The Federal Housing Administration is looking to establish a partial payment of claims (PPC) process for the Department of Housing and Urban development’s Section 232 program, thanks to success the process has had in heading off some full-scale defaults of FHA-insured loans in the agency’s multifamily portfolio and the benefits it is expected to produce for the healthcare loans program.

On July 9, FHA published a proposed rule in the Federal Register seeking comment on amending regulations governing the Section 232 program for the construction, substantial rehabilitation, purchase, and refinancing of nursing homes, intermediate care facilities, board and care homes, and assisted living facilities. The agency projects that allowing PPC will result in annual benefits of $4.455 million.

When borrowers default on their loans, lenders are encouraged to work with them to “cure” the default. But there are some cases where that’s not possible and that the situation is essentially hopeless, says Bernard Gawley, vice president of Ziegler and part of the financing firm’s FHA/HUD team. 


At that point, the case is generally assigned to the government, which reimburses the lender the amount they should have gotten since first giving notice of the default along with the principal amount of the loan. 

What the PPC can do is allow lenders to work with borrowers to avoid default by determining the amount of the loan the borrower is able to pay; in many cases the borrower is able to pay back (and keep up with payments for) a substantial amount of the loan, says Gawley.

Lenders can then restructure the loan to the amount the borrower can afford. For the remainder of the loan that the borrower can’t pay, the lender can make a partial claim to the government. The borrower will then execute a second note with the government for the amount they weren’t able to repay the original lender, which they must repay once they have the ability to do so.


Rather than 100% of the loan being reassigned to the government, which may then force the facility’s sale, the borrower is able to stay in possession of the facility and try to work out the loan situation. 

“Over time, there’s a pretty good probability they can work the situation off and pay the government back,” Gawley says. “But in the meantime, the borrower is in control of the facility.”

In these cases, the borrower can still provide services and get its management fee; the lender still has a loan on its books; and the federal government ends up paying loan insurance benefits to the lender at just a percentage of the full loan as opposed to the full amount.

“The partial payment of claims program is a process that allows everyone to win,” he says. “It’s a commonsense approach.”

FHA has done some of these claims “sporadically” already, and they’ve been successful enough that the agency is willing to do more whenever possible, Gawley continues. The healthcare loans program has very few defaults, though, he notes, as the government has a very thorough approach to underwriting financing deals. 

“HUD’s not going to be utilizing PPC an awful lot because we have so few defaults,” he says. “But for those cases where there is a default, HUD will probably utilize it because it’s beneficial to everybody involved.” 

FHA expects the benefits of allowing PPC in the healthcare loan program to total $891,000 per facility, which stem from avoided costs of moving the facility’s residents. 

“Transfers totaling $2.874 million occur from FHA and lenders that opt for PPC to FHA borrowers, as the avoided costs allow FHA premiums to not increase,” the rule says. “FHA expects approximately five PPCs annually in the section 232 program. Aggregating these effects produces annual benefits of $4.455 million and annual transfers of $14.369 million.”

For more information and requirements for utilizing the PPC process, view the proposed rule on the Federal Register. 

Written by Alyssa Gerace 

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