HUD’s nursing facility loan program is built on a foundation of trust: trust that lenders will underwrite responsibly, and that borrowers will operate facilities with care and fiscal discipline. But when defaults occur—and particularly when the same operators keep reappearing in deals that later fail—trust alone isn’t enough.
If HUD wants to reduce risk to its insurance fund and improve long-term outcomes for residents and taxpayers alike, it must start holding HUD-approved lenders and underwriters accountable for repeated failures. Here are five ways HUD can do that.
1. Implement a Tiered Servicing Fee Structure
HUD-approved lenders currently receive a standard annual servicing fee, regardless of portfolio performance. This flat structure fails to account for risk—or reward quality.
Solution: Tie the annual servicing fee to performance metrics such as:
- Default rates
- Average CMS quality rating of borrower facilities
- Debt service coverage ratios across the lender’s portfolio
Example: A lender with a strong-performing book of business might retain the full 0.25% annual fee. A lender with repeated early defaults or multiple 1-star operators could see their fee reduced to 0.15% or less.
2. Track Underwriter Performance with a Scorecard
HUD can and should track the underwriting history of approved lenders. A simple internal scorecard could flag:
- Repeat business with defaulting operators
- Percentage of underwritten deals that default within 3 years
- Number of projects that dip below 3 stars or DSCR 1.0 within 24 months of closing
This data gives HUD the power to identify systemic patterns—and to step in when lenders are ignoring red flags.
3. Require Enhanced Underwriting for Repeat Offenders
If a lender continues to submit loans for operators who previously defaulted, HUD should demand a higher level of diligence. For example:
- A senior officer attestation explaining the rationale for the loan
- A third-party financial or compliance review
- Stronger reserve and guarantee structures baked into the deal
This raises the bar for high-risk deals without banning them outright.
4. Impose a Penalty Period for Poor Performance
Just as defaulting operators may be restricted from future deals, lenders with repeated underwriting failures should face temporary consequences.
During the penalty period, HUD could:
- Bar the lender from submitting streamlined assumptions or refinancings
- Require them to fund a risk mitigation escrow on new deals
- Limit the number of projects they can underwrite annually
This gives lenders a chance to course-correct—while still protecting the program.
5. Publish a Lender Performance Scorecard
Transparency changes behavior. By publishing a HUD-endorsed “Lender Performance Scorecard” annually, stakeholders (including borrowers, investors, and HUD itself) could better assess lender practices and incentives.
Key metrics might include:
- Default rates over time
- Number of facilities per lender with CMS 1- or 2-star ratings
- Frequency of early assumptions or operator changes
This would spotlight responsible lenders—and expose those enabling churn.
Why Now?
The HUD nursing facility portfolio is under pressure—from changing ownership patterns, higher acuity populations, and strained state budgets. Ensuring that only stable, quality-driven providers and lenders participate is critical to long-term sustainability.
These reforms wouldn’t restrict good lenders—they’d empower them. They’d also send a clear message: underwriting isn’t just about closing a deal. It’s about getting the right operator in the door—and keeping them there.
Related Content
👉 From Default to Recovery: Rethinking HUD’s Nursing Facility Oversight
👉 Don’t Wait for a Default: HUD Needs an Early Intervention Playbook
