[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4331]
[[Page Unknown]]
[Federal Register: February 25, 1994]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Parts 201 and 202
[Docket No. R-94-1636; FR-3021-F-02]
RIN 2502-AF29
Tiered Pricing
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This rule implements section 203(t) of the National Housing
Act. That section prohibits tiered pricing involving a variation in
mortgage charge rates that exceeds two percentage points for FHA
insured mortgages made by a mortgagee in an area. The purpose of the
rule is to eliminate a mortgagee's discriminatory pricing of FHA
insured mortgages in a particular area that would either discourage
home purchases or place an unfair burden of costs on the borrower. The
rule also implements section 539(a)(2) of the National Housing Act by
providing a procedure for requests for determination of a mortgagee's
compliance with tiered pricing restrictions or compliance by a
mortgagee or Title I lender with related prohibitions on establishing
minimum loan amounts.
EFFECTIVE DATE: March 28, 1994.
FOR FURTHER INFORMATION CONTACT: William Heyman, Director, Office of
Lender Activities and Land Sales Registration, Department of Housing
and Urban Development, room 9156, 451 Seventh Street SW., Washington,
DC 20410, Telephone Number (202) 708-1824; TDD telephone number (202)
708-4594. (These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION:
I. Introduction
The information collection requirements contained in this rule have
been approved by the Office of Management and Budget, under section
3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520),
and assigned OMB control numbers 2502-0265 and 2502-0059.
Section 330(a) of the Cranston-Gonzalez National Affordable Housing
Act, entitled ``Limitation on Tiered Pricing Practices,'' amended
Section 203 of the National Housing Act to add subsection (t). The new
provision restricts ``tiered pricing'' of single family FHA-insured
mortgages. ``Tiered pricing'' occurs when a mortgagee varies its
charges for the same type of mortgage in the same area, usually based
on the principal amount of the loan.
Under section 203(t), no mortgagee may make or hold FHA insured
mortgages if the customary lending practices of the mortgagee, as
determined by HUD, provide for variations of more than two percentage
points in the mortgage charge rate based on interest rate, level of
discount points, loan origination fees, or any other amount charged to
a mortgagor by the mortgagee with respect to a mortgage made within a
designated area. The section is concerned with lending practices that
may unfairly impose costs and charges that are higher for smaller loans
than for larger loans.
HUD published a proposed rule on July 14, 1993, 58 FR 37885, with a
request for public comments. HUD received 37 public comments. More than
half were from State Bankers Associations; comments also were received
from the American Bankers Association, the Mortgage Bankers
Association, and mortgagees. The following section summarizes the
principal points of the public comments, explains how HUD has responded
to the public comments, and explains additional changes that HUD has
made in the final rule.
II. Public Comments and Provisions of Final Rule
General
Most of the commenters agreed that tiered pricing in the form of
excessive variation in mortgage charge rates should be discouraged, but
most commenters also argued that the proposed rule would drive
mortgagees away from the FHA programs. The principal reasons cited were
the failure of the proposed rule to recognize legitimate differences in
pricing based on the fact that lower balance loans cost more to
originate, and excessive recordkeeping requirements in the proposed
rule. HUD believes that the commenters have overstated the burdensome
effect of the proposed rule (as distinguished from the statutory
command). HUD has concluded, however, that the lending community will
benefit from additional information concerning the manner in which HUD
intends to apply the final rule. The following discussion should
provide additional information on HUD's intentions that may alleviate
some of the commenters' concerns.
Many commenters observed that the two percentage point limit on
variation in mortgage charge rates may force mortgagees to either
suffer losses on the smallest loans (which must still be offered due to
an earlier statutory provision) or overprice the largest loans. Either
effect could lead mortgagees to withdraw from FHA single family
programs. In this rule, HUD has attempted to interpret the statute in a
way that preserves the ability of mortgagees to participate profitably
in FHA single family programs while honoring the letter and spirit of
the statute.
Calculation and Comparison of Mortgage Charge Rate
A. General
Many commenters expressed confusion over how mortgage charge rates
would be calculated and how HUD would determine which variations in
charges were acceptable. Mortgages will be compared to determine excess
variations in mortgage charge rates only if: (1) They are of the same
mortgage type, (2) from the same area and (3) the amounts charged by
the mortgagee were determined on the same day or during some other
reasonably limited period. Items 1 and 2 will be discussed in more
detail later under separate headings. The purpose of the comparison is
to determine whether a mortgagee's customary lending practices include
either variations in mortgage charge rates (determined primarily by the
discount point spread for each interest rate offered) that exceed two
percentage points, or lesser variations that are unrelated to
variations in the mortgagee's actual costs in making loans.
B. Two Percentage Point Variation
As explained in the preamble to the proposed rule, HUD's
determination of whether the permissible two percentage point variation
is exceeded will primarily be based on a review of discount points
charged by the mortgagee. The rule prevents a mortgagee from offering
an interest rate only for certain size loans. For any given interest
rate offered in an area for a mortgage type during the time period
under review, mortgages should be available to all applicants without a
difference in discount points of greater than two percentage points.
Charges collected by the mortgagee for third party services would not
be considered for tiered pricing purposes. HUD's experience is that all
mortgagees typically will collect the maximum 1% origination fee so
that the fee will be disregarded in reviewing variations in charges.
HUD expects a mortgagee to charge a mortgagor only the origination
fee, discount points and interest to cover its costs (excluding
payments for third party services). HUD regulations do not permit
mortgagees to charge other fees such as document preparation fees or
closing fees for services provided by their own employees. (Some
mortgagees are permitted to use appraisers and/or inspectors on their
staffs. For purposes of this rule, the amounts collected by a mortgagee
for the services of its staff appraisers and/or inspectors are
considered analogous to third party services and are not included in
mortgagee charges.)
Thus, for purposes of the two percentage point variation there will
ordinarily be no need to consider other fees or charges. Mortgagees
that establish other fees or charges should be certain that they are
acceptable to the local HUD Office as reasonable and customary.
Mortgagees are also on notice that HUD will consider them in
determining compliance with the two percentage point limitation on
variations even if the spread in discount points among mortgages is
less than two percent.
Several commenters noted that any flat fee will necessarily have a
greater impact on the mortgage charge rate for a small loan than for a
larger loan, making it more difficult to comply with the two percent
variation. It is probable that Congress did not expect significant flat
fees for services to be charged by the mortgagee because such services
are ordinarily to be compensated through the 1% origination fee.
However, the statutory definition of mortgage charge rate refers to
``any other amount charged to a mortgagor with respect to an insured
mortgage.'' The Department interprets this language as excluding flat
fees for mortgagee services distinct from the actual making of the loan
(justifying the treatment of staff appraisers and staff inspectors
described above) but the Department finds no blanket authority to
disregard any flat fees charged by the mortgagee for any part of its
role in the actual underwriting and closing process.
Two commenters addressed the proposed Sec. 202.20(d) which would
require that any interest rate offered for a mortgage type be available
for mortgages of any principal amount. HUD has responded to one comment
by clarifying in the final rule that this requirement applies only
within an area as defined by the rule. Another commenter argued that
the proposed rule conflicted with the tiered pricing statute because
the proposed rule would require a mortgagee to recover a variance in
costs in making different loans through variances in points rather than
interest rates, whereas the statute left to the mortgagee the
discretion to recover differences through either means or a combination
of them. The commenter is correct that the statute refers to variations
between mortgage charge rates instead of variations in discount points.
If HUD permitted certain interest rates to be reserved for certain size
loans, HUD would have needed to propose a rule that in all cases
required a mathematical calculation of a specific mortgage charge rate,
taking into account at least interest rates, discount points and
origination fees. Under such an approach a mortgagee could have
reserved certain interest rates for certain loans.
Such an approach may have been closer than the proposed rule to the
literal language of the statute. HUD determined that the statute
permitted a different and less complex approach. The compliance burden
on mortgagees as well as the monitoring burden on HUD is greatly
reduced if the primary comparison between mortgages is limited to
discount points only so that no calculation is required. A single
commenter objected to this approach, while nearly all commenters urged
a reduction in regulatory burden. HUD will use its simplified approach
of focussing on one component of the mortgage charge rate (discount
points) in lieu of a more complex and burdensome approach.
C. Variation in Costs
For a mortgagee which is in compliance with the two percentage
point limitation on variation in mortgage charge rates, the statute
also requires that HUD ensure that any variations in mortgage charge
rates ``are based only on actual variations in fees or costs to the
mortgagee to make the loan.'' This requirement was contained in the
proposed rule in Sec. 202.20(a). Many commenters expressed concern over
how HUD would determine the costs to make a loan. In effect, commenters
wanted to know whether HUD would look solely at a mortgagee's direct
expenditures and overhead in determining the cost of making a loan or
whether the origination fees and value of servicing rights generated in
making the loan would also be considered to arrive at a net cost. Loans
of different sizes might appear to have similar costs until origination
fees and servicing value are considered.
Origination fees necessarily vary because they are set at 1% of the
loan amount. Commenters also explained that servicing value might be
nonexistent for the smallest loans but could be a significant factor
that partially or completely offsets costs for a larger loan. If these
items were considered so that net costs were compared and points were
allowed to make up the difference in net costs between small and large
loans, mortgagees would have less difficulty in complying with the
rule.
HUD did not address this issue specifically in the proposed rule.
HUD agrees with commenters that the statute was not intended to prevent
consideration of the variations in origination fee income and servicing
values as factors offsetting other variations in costs. HUD has added
language to Sec. 202.20(a) of the final rule to clarify that net costs
will be considered. Section 202.20(a) has also been revised to improve
organization.
One commenter proposed that variation in mortgage charge rates up
to two percentage points be permitted whenever the mortgagee can
demonstrate that it is not recovering for any mortgage more than its
average cost to originate all mortgages. ``The lender should be
prohibited from creating classes of mortgages and allocating differing
costs to those classes,'' wrote the commenter. The Department agrees
that the mortgagee may allocate the same average basic cost for all
mortgages within a mortgage type, or for all mortgages, provided that
this approach is documented in the mortgagee's records. Information
submitted by commenters suggested that mortgagees do have information
on the average basic cost of originating an FHA-insured mortgage
(without considering the value of servicing) produced by allocating
general overhead among the mortgages originated. One commenter used an
estimate of $1,000 ``unit cost'' plus a commission that varied with
loan size, resulting in a cost range of $1,175-$1,700 for loans of
$25,000-$100,000. Another reported typical loan costs of $1500-$1800.
Another stated that all FHA-insured single family mortgages, regardless
of size, cost approximately the same to originate. An industry study by
the Mortgage Bankers Association of America based on 1991 data from 185
mortgagees (not limited to FHA-insured mortgages) indicated somewhat
higher expenses for producing a loan--an average of $2,332 for all
companies studied, $2,183 for companies that purchase less than 10% of
their loan production, and $1,884 for the ten companies in the study
with the highest profit. HUD will not question a mortgagee that
documents its costs by using an average basic production cost in these
ranges for all sizes of FHA-insured mortgages and any additional
documented costs varying directly due to loan size, such as for
commission. A mortgagee that wants to justify its costs variations by
using differing basic costs for particular mortgages within a mortgage
type will need to document any actual difference in costs but will not
be prohibited from attempting to do so.
D. Other Comments on Mortgage Charge Rates
A few commenters disagreed completely with HUD's approach to
determining mortgage charge rates. They argued that HUD should use the
annual percentage rate (APR) determined under the Truth in Lending Act
as the mortgage charge rate. HUD considered this approach when
developing the proposed rule but did not pursue the idea. The APR could
be useful in determining compliance with the two percentage point limit
on variation, but the simplicity of comparing two APRs does not seem to
be any great advantage over the simplicity of comparing discount points
under the proposed rule. Use of the APR could not help to determine
whether variations in fees and charges within the two percentage point
limitation were justified. In addition, the APR includes charges not
under the control of the mortgagee, such as charges for the appraisal,
credit report and other third party closing services, that would
distort the application of the two percent tolerance that Congress
intended to be applied only to mortgagee charges. It might be possible
to develop some other tolerance applied to APR variations that
approximated the effect of the two percent variation for mortgage
charge rates, but HUD has no clear authority to abandon the specific
terms of the statute. If Congress had intended that HUD attack the
tiered pricing problem through comparison of APRs, it could easily have
said so instead of developing the distinct concept of mortgage charge
rates.
Two commenters questioned the statement in the preamble to the
proposed rule that HUD would review any practices that pass closing
costs and charges to the seller, in addition to items paid by the
mortgagor. The commenters stated that HUD lacked statutory authority to
review fees charged to the seller. One stated that at a minimum the
rule should clarify that fees paid by the seller should be reviewed to
determine whether they were charged to circumvent the tiered pricing
rule and that there would be no other scrutiny.
The commenters' remarks regarding statutory authority presumably
refer to the statutory definition of ``mortgage charge rate'' as
including various items ``charged to a mortgagor with respect to an
insured mortgage.'' This could exclude some items that a mortgagee
would not charge to a mortgagor, such as a seller's share of a
settlement fee in a jurisdiction in which sellers share responsibility
for the mortgagee's cost of conducting a settlement. HUD does not agree
that the law precludes review of one or more items of closing costs
merely because actual payment may have been made by the seller in the
particular transaction. The law applies to the mortgagee's customary
lending practices, not to the terms negotiated between particular
sellers and buyers.
For example, assume that the parties to the sale are able to
negotiate the manner in which they will share the responsibility for
paying discount points to the mortgagee. If the mortgagee charges three
extra points for a small mortgage as compared to a large one at the
same interest rate, the mortgagee is not in compliance with the tiered
pricing restriction merely because the seller in the smaller
transaction has agreed to pay one or two points on behalf of the
mortgagor. That aspect of the seller-mortgagor negotiation does not
modify the mortgagee's customary lending practices, which are to charge
a mortgagor an impermissible amount of extra points for the smaller
loan.
Recordkeeping
Most commenters viewed as excessively burdensome the requirement in
Sec. 202.20(h) of the proposed rule that mortgagees retain for three
years records on pricing information ``satisfactory to the Secretary''.
The following comment represents a typical reaction: ``The creation of
a separate and distinct recordkeeping system for this particular
proposed rule is excessive.'' Another complained of ``the sheer volume
and extent of the loan documentation requirement.'' Another asserted
that the proposal ``requires banks to make extensive calculation of
variables.'' Commenters did not offer any suggestions as to how HUD
could monitor compliance with the statute if it had no access to
historical records on a mortgagee's pricing policies.
HUD deliberately proposed a rule that minimized a mortgagee's
recordkeeping burden and that did not require a separate and distinct
recordkeeping system. HUD might have pursued approaches that would have
placed substantial new recordkeeping and reporting burdens on a
mortgagee, such as requiring all pricing sheets to be submitted to a
local HUD office when they are adopted, or requiring a mortgagee to
calculate a mortgage charge rate for each FHA insured single family
mortgage or requiring a mortgagee to develop its own comparisons of its
mortgage charge rates. HUD chose instead not to specify new records
that a mortgagee must develop and maintain. Under current FHA policies
and under the regulations implementing the Equal Credit Opportunity
Act, 12 CFR part 202, mortgagees must retain loan files for both
rejected and closed loan applications for two years. The rule does not
add significantly to this burden.
Files for closed loans will ordinarily contain information showing
the date and terms when the mortgage charges were locked in. Loan files
for rejected loans should also contain sufficient information on the
pricing of the loan if processing progressed far enough for specific
loans terms to be considered. However, the rule does not require that
pricing information be retained on an individual loan basis. The focus
of the rule is on the ``customary lending practices'' of a mortgagee. A
mortgagee could choose to retain its pricing sheets for two years as
evidence of its general pricing policies and as a simple way to
demonstrate compliance with the regulation. The final rule does not
dictate whether a mortgagee keeps information on mortgage charges on an
individual loan basis, as a general record on its pricing policies, or
both. Similarly, a mortgagee that wishes to ensure consideration of
factors offsetting direct costs may include evidence of variations in
origination fees and the value of servicing rights either in the
individual loan files or in some other form that is available to HUD
monitors.
The comments suggest that the necessary information is routinely
available to a mortgagee with respect to each loan that is underwritten
since the information is a basis for pricing the particular loan. It is
a simple matter and not a substantial new burden to include the
information in the loan file, or otherwise maintain it elsewhere if the
mortgagee so chooses.
In short, all that the final rule requires is that a mortgagee be
able to provide records to HUD during routine HUD mortgagee monitoring
(or otherwise pursuant to a general inquiry as discussed below in
Section III), in a form determined by the mortgagee and consistent with
existing legal requirements for recordkeeping, that will enable HUD to
obtain answers to a few basic questions: What charges has a mortgagee
imposed on mortgagors for its mortgages, of a particular mortgage type
in a particular area, during a specified time period? If the charges
vary between mortgages of the same interest rate, mortgage type and
area, what is the specific reason for the amount of variance? If the
mortgagee has information available to answer these questions (and HUD
expects that mortgagees already have such information without the
requirements of this rule), then the mortgagee has records
``satisfactory to the Secretary.'' HUD will inform mortgagees if the
records ordinarily retained by mortgagees are found to be insufficient
in the course of applying the rule and more specific requirements are
needed.
A few commenters questioned the reference in Sec. 202.20(h) of the
proposed rule to data required under regulations implementing the Home
Mortgage Disclosure Act (HMDA). The rule does not affect existing HMDA
requirements, either by adding to information that must be reported for
HMDA purposes or by relieving mortgagees of any reporting requirements.
The final rule has been corrected to acknowledge that not all FHA-
approved mortgagees are required to report under HMDA. Mortgagees that
are not covered by HMDA are subject to similar requirements with
respect to applications and closed loans involving FHA-insured
mortgages pursuant to HUD's responsibilities under the Fair Housing
Act, Mortgagee Letter 90-25 and other mortgagee letters, and Handbook
4155.1 REV-4, paragraph 3-14G.1.
Responsibility of Sponsors/Wholesalers/Investors
Ten commenters disagreed with the Department's position in the
preamble to the proposed rule regarding responsibility of sponsors/
wholesalers/investors. The Department proposed to hold responsible for
an originator's tiered pricing violations the sponsor mortgagee (if the
originator was approved by HUD as a loan correspondent) or any
wholesaler/investor mortgagee that had arranged prior to closing to
fund and purchase the mortgage (i.e., through table funding). This
would involve interpreting the statutory phrase ``customary loan
practices'' as applicable to the wholesale purchases of mortgages from
the originator and including the purchased loans.
Commenters stated that the mortgagees/investors at the wholesale
level lacked the ability to dictate the amounts charged to a mortgagor
by the originating mortgagee and therefore should not be held
responsible. Some commenters also stated that a sponsor has no
knowledge of the various prices charged by its loan correspondents and
no way to monitor them. Many commenters also pointed out that an
originating loan correspondent could have many sponsors, and that HUD
should not hold a single sponsor responsible for the loan practices of
the loan correspondent including loans originated for other sponsors.
The Department stated in the proposed rule preamble that its intent
was to ``most effectively regulate those directly responsible for
tiered pricing.'' Responsibility can be the result of action or
inaction by the sponsor or wholesale purchaser. The Department's
experience in examining possible tiered pricing violations has been
that loan originators attribute any violations to the requirements of
mortgagees at the wholesale level. The Department agrees that this is
not always the case. The Department does not view as dispositive,
however, the fact that the tiered pricing practices at the retail level
may not have been expressly dictated by the wholesale mortgagee. The
Department believes that there are other ways in which the wholesaler's
requirements and practices may lead to tiered pricing that is not in
compliance with the statute.
The commenters generally appeared to accept the Department's
position that the practices of wholesale lenders in setting terms for
the mortgages that they fund or purchase can come within the scope of
the statutory term ``customary lending practices'' if they have the
effect of leading to discriminatory pricing by the originating
mortgagees in violation of the tiered pricing restrictions. The
disagreement is over whether, in fact, that effect follows from typical
arrangements.
Current regulations, at 24 CFR 202.15(c)(6), provide that each
sponsor of a loan correspondent shall be responsible to the Secretary
for the actions of its loan correspondent in originating mortgages,
unless applicable law or regulation requires specific knowledge on the
part of the party to be held responsible. This principle applies to the
tiered pricing area. It is limited to those mortgages with which the
particular sponsor mortgagee is involved, not mortgages originated for
sale to other mortgagees. The sponsor is required to underwrite the FHA
insured loans that it will purchase from the loan correspondent, 24 CFR
202.15(c)(1). The sponsor is not ignorant of the lending practices of
its correspondent with respect to such loans. The Department will
provide a sponsor the opportunity to explain why it should not be
regarded as responsible for a particular tiered pricing violation of
its loan correspondent with respect to loans that it underwrites, but
the Department does not agree that sponsors generally cannot be
regarded as responsible for the pricing of loans by loan
correspondents.
In the proposed rule HUD stated its intention to treat wholesale
purchasers providing table funding for a mortgagee in the same manner
as HUD-approved sponsors. At least one commenter specifically objected
to any application of the rule to a table funding situation. The
commenter cited a 1992 ruling of the Emerging Issues Task Force of the
Financial Accounting Standards Board (FASB), the governing body of the
accounting profession, that a table funding arrangement should be
accounted for as a purchase if the loan is legally structured as an
origination by the correspondent and if the correspondent is
independent of the mortgage banking enterprise. HUD does not agree that
this accounting ruling should govern the distinct issue of
responsibility for tiered pricing practices. Even if the mortgagee/
investor providing table funding is not an approved sponsor purchasing
from a loan correspondent, HUD will regard the mortgagee/investor as
responsible for tiered pricing violations if the requirements of the
funding mortgagee have the effect of leading to a tiered pricing
violation by the loan originator. HUD has revised Sec. 202.20(a) to
state this principle in the final rule. HUD continues to distinguish
approved sponsors from other mortgagees providing table funding because
other mortgagees do not have the general responsibility for the
correspondent/originator stated in Sec. 202.15(c)(6).
Application of Rule to All Single Family Programs
Numerous commenters objected to applying the rule to all FHA single
family programs rather than limiting the rule to the section 203
programs mentioned in the legislation. The commenters viewed this as a
major extension of the scope of tiered pricing restrictions, and beyond
HUD's legal authority. One commenter supported HUD's approach.
Section 203(t) can be read as only requiring HUD to consider
section 203 mortgages when determining whether the customary lending
practices of a mortgagee violate the tiered pricing restrictions. Most
Section 203 mortgages are insured under the basic Section 203(b)
program; insurance is also available in specific circumstances under
Sections 203 (h), (i), (n) or (k). HUD does not agree that it lacks
authority to consider practices under other FHA single family programs
and concludes that there is good reason to look beyond section 203 to
other single family programs as well.
For FY 1993, approximately 84.5 percent of single family mortgage
loans receiving FHA insurance were insured under section 203 programs
so that single family mortgagees will not be subject to significant
extra burdens by including other programs in this rule. The principal
non-section 203 mortgage insurance program is the section 234(c)
program for insurance of condominium unit mortgages with approximately
7.7 percent of insured mortgages in FY 1993. There is no policy reason
why the practice of tiered pricing should be viewed differently for
section 234(c) mortgages as for section 203(b) mortgages. It should be
restricted in both programs. In addition, the Department anticipates
that additional significant single family programs may be added to the
National Housing Act outside of section 203 with the same potential for
discriminatory treatment through tiered pricing. The law should not be
interpreted to require specific amendment of section 203(t) as a
prerequisite to addressing tiered pricing concerns in new programs; the
better reading is that the law permits HUD to attack any tiered pricing
concerns for each new program without the need for express new
authority.
The general rulemaking authority in section 211 of the National
Housing Act permits HUD to adopt rules and regulations that it regards
as necessary to carry out Title II of the National Housing Act; that
authority permits HUD to adopt and apply its mortgagee approval
requirements generally to all programs and the tiered pricing
restrictions are being adopted in the regulations as an additional
section of the mortgagee approval requirements. In section 539 of the
National Housing Act, which will be discussed in a later section,
Congress acknowledged the relationship of the tiered pricing
restrictions of section 203(t) with the prohibition of a minimum loan
amount in section 535 of the National Housing Act. Congress required
the Secretary to assess the compliance of a mortgagee with both
requirements in connection with any HUD examination of a mortgagee, and
required a single procedure for a private individual to require
determination of a mortgagee's compliance with both requirements.
Section 535 has already been implemented by regulation for all single
family programs and it is reasonable to keep the same broad approach
for the related provision. The Department is sympathetic to the
commenters' concern that extension of the tiered pricing restrictions
to many minor programs could be burdensome. The Department will respond
to this concern by focusing its review of tiered pricing compliance on
a limited number of mortgage types involving major programs as
discussed below.
Mortgage Type
The proposed rule provides for comparison only of mortgages of the
same mortgage type. Instead of describing each mortgage type, the
proposed rule provided that a mortgage type would include those groups
of mortgages that are closely parallel in important risk
characteristics. The proposed rule would have authorized the Secretary
to develop standards and definitions regarding risk characteristics.
The preamble to the proposed rule suggested that mortgage types could
be based both on approaches to interest rate (fixed rate, ARM, GPM) and
insurance program (sections 203(b) and 234(c) separated from section
203(k)). The Department indicated particular interest in receiving
industry comment.
The commenters provided many suggestions for developing mortgage
types. There was no consensus regarding appropriate typing. The
following were cited by one or more commenters as characteristics that
should place mortgages in separate categories: purchase vs. refinance,
attached/condominium vs. detached (203(b)), high vs. low loan-to-value
ratio, adjustable rate vs. fixed rate level payment vs. fixed rate
graduated payment, new vs. existing construction, no- or low-closing
cost loans (refinances or others) with premium interest rate vs. market
rate, and different FHA mortgage insurance funds.
One commenter stated that mortgage types should be based on cost of
origination instead of risk. The proposed rule reference to risk was
taken from the pertinent discussion in the Conference Committee report
on the statute1, but that report also mentioned expenses. The
report states:
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\1\H.R. Rep. 101-922, p. 393.
This section is intended to apply to Sec. 203 of the National
Housing Act by loan type. For example, mortgages insured under the
section 203(k) program may be priced differently from mortgages
insured under the 203(b) program. The Committee recognizes that
different types of mortgages involve differing levels of risk,
processing expenses or other factors that differentiate them and
---------------------------------------------------------------------------
necessitate pricing variation.
The basic objective is to avoid comparing mortgages where one would
ordinarily expect to find interest rate and/or discount point
differences due to the nature of the mortgage even given identical
borrowers, property and loan amount. HUD agrees that the proposed
rule's reference only to ``risk characteristics'' may be too limiting
and additional language has been added to Sec. 202.20(g) that
paraphrases the Conference Committee report.
The Department does not consider it advisable to place a fixed
delineation of mortgage types in the rule because of lack of experience
and potential new mortgage programs and pricing practices. Instead the
Department has retained general language providing for the Secretary to
provide standards and definitions. Based on this authority, HUD's
monitoring for tiered pricing compliance will initially be based on a
mortgage type definition that will divide mortgages only into two types
based on program: section 203(b)/section 234(c) mortgages as one type,
with section 203(k) rehabilitation loans as a separate type. The rule
extends to all single family programs as discussed above, but at this
time HUD intends to restrict routine monitoring to these major
programs.
HUD considered whether each mortgage type based on program should
be further subdivided based on other characteristics of the mortgage
such as those cited by the commenters. HUD has concluded that it does
not have sufficient information and experience to determine additional
appropriate subtypes at this time, given the lack of any consensus
among the commenters who addressed this question. An excessive number
of overly specific mortgage types would result if each of the suggested
methods of grouping mortgages were adopted by HUD. The final rule
permits HUD to further define mortgage types if its monitoring
experience demonstrates that this is necessary to avoid inappropriate
comparisons of mortgages when determining compliance with the rule.
Definition of ``Area''
The statute applies the two percentage point limitation on mortgage
charge rate variation to mortgages on dwellings in an ``area''. The
statute states that ``area'' shall have the meaning given the term
under section 203(b)(2) of the National Housing Act. The pertinent
sentence in section 203(b)(2) states that ``area'' means a county or a
metropolitan statistical area (MSA) as established by the Office of
Management and Budget, whichever results in the higher dollar amount.
This definition is ordinarily used when implementing HUD's authority to
designate ``high-cost'' areas where--due to high median area house
prices--the FHA maximum mortgage limit can exceed the $67,500 amount
that would otherwise apply for a 1-family residence. There is some
ambiguity in applying this definition of ``area'' to the tiered pricing
context.
The proposed rule regarded the statutory reference to the section
203(b)(2) definition as an indication that the areas for tiered pricing
purposes should be the high-cost areas already designated by HUD to
determine maximum mortgage amounts. These areas currently cover most of
the population of the country and include most MSAs as well as some
counties that are not part of any MSA. Under the reading of the statute
adopted in the proposed rule, there is no specific statutory guidance
regarding how other parts of the country should be divided into areas
for purposes of tiered pricing comparisons. The proposed rule would
have divided the rest of the country (i.e, excluding the designated
high-cost areas) by using the jurisdictional lines of HUD Field
Offices.
HUD received 5 comments--all negative--on its proposed approach to
defining areas. Several commenters indicated that the proposed rule was
difficult to understand. Three commenters made specific suggestions for
different approaches. One asserted that the statutory reference to the
section 203(b)(2) definition of area simply means that loans made in
metropolitan statistical areas are compared with other loans made in
the same metropolitan statistical area, and loans made outside of
metropolitan statistical areas are compared on a county by county
basis. This commenter also recommended use of counties because HMDA
data is compiled by counties. HMDA data is not compiled for loans
outside MSAs, however, so that HMDA precedent is not pertinent
regarding defining rural land into ``areas'' for tiered pricing
purposes. Another commenter accepted HUD's use of designated high-cost
areas as areas for purposes of the rule, but also suggested that the
remainder of the country be compared on a county-by-county basis
instead of using HUD Field Office jurisdictions. A third commenter also
objected to use of HUD Field Office jurisdictions and suggested the use
of areas served by the lender's own offices as they might change from
time to time. Another commenter noted that different counties or states
may require different pricing levels even though they are both in the
same HUD Office jurisdiction, without offering any alternative
approach. None of the commenters submitted any information regarding
how lenders typically vary pricing levels geographically. No evidence
was submitted indicating that pricing typically varies on a county-by-
county basis.
After reviewing the comments, HUD continues to conclude that the
most likely intent of the statutory reference to the section 203(b)(2)
definition of area was to require use of the same high-cost areas that
are used for designating mortgage limits under section 203(b)(2). It is
unlikely that the statute demands use of county-by-county comparisons
outside of MSAs, as one commenter suggested, because of the lack of
evidence that mortgages are priced on a county basis and because of the
very large number of separate rural areas that would result--with very
few mortgages made by any one mortgagee in most of the areas. County
comparisons are unlikely to reveal any excessive tiered pricing that
may be occurring over broader areas outside of MSAs.
It is possible that the statute does not mandate any tiered pricing
comparisons outside of high-cost areas. If so, HUD still would possess
authority to extend the rule's coverage through its general rulemaking
authority and HUD believes that it is not appropriate to exclude parts
of the country from coverage of the final rule. There is no reason to
conclude that excessive tiered pricing, to the extent that it exists,
is limited to high-cost areas.
Any dividing of the rural and non-high-cost MSAs will be somewhat
arbitrary and will not match exactly any mortgagee's perception of
different mortgage markets. Use of political jurisdictional lines could
result in too many areas (counties) or too few and too large areas
(states). HUD has concluded that use of HUD Office jurisdictional lines
is an appropriate compromise. In large sparsely populated states which
are unlikely to be divided into well-defined separate mortgage pricing
areas, there is typically a single HUD Office. In the more populous
state there are likely to be several HUD offices, as well as high-cost
areas, so that the state will be divided into a number of different
areas for tiered pricing comparisons. HUD has previously decided to use
HUD Office jurisdictions as a means of dividing up mortgage markets for
monitoring purposes. For example, 24 CFR 202.11(d)(i) defines the
``normal rate'' of claims and defaults in an area on the basis of HUD
Office jurisdictions.
Therefore, HUD has not made any substantive changes in the
definition of area in the final rule. A technical change has been made
in the reference to the regulation on high-cost areas to reflect
revisions made by a final rule that implemented a revision of section
203(b)(2) in the Housing and Community Development Act of 1992 (58 FR
40996, July 30, 1993.)
Variations From Customary Lending Practices
The commenters raised a number of questions involving cases where
the actual charges for the mortgage might differ in special cases from
the prevailing policy of the mortgagee. Commenters asked about reduced
rates for certain loans as a promotion or to gain market share in an
area or on a ``random basis,'' about par-plus pricing, about negotiated
interest rates or points needed to attract a particular mortgagor from
a competitor lender, and about loan officer overages. Rather than
discuss each of these situations in detail, the Department will point
out that the statute is directed at a mortgagee's ``customary lending
practices''. It is permissible for a mortgagee to have a lending policy
that permits occasional deviations from the standard terms it is
generally offering to customers in its lending area, even if beyond a
two percent variation, provided that those deviations are not applied
in a discriminatory fashion and are available to purchasers on lower as
well as higher priced homes on an individual case basis. The loan file
should document why special pricing was applied. The two percent
variation limitation is permitted by law not to recognize the
occasional exceptions to a pricing policy, but to permit the
mortgagee's pricing policy itself to contain some variations among
loans, principally to ensure that a mortgagee can afford to make loans
of all sizes.
One commenter objected to the lack of a good faith exception
process for what it characterized as ``good faith noncompliance based
on circumstances which do not violate the spirit of a regulation * * *
There should be the ability to show that in good faith, tiered pricing
was not based on loan amounts or other discriminatory factors.'' HUD
does not interpret the statute as authorizing a formal good faith
exception although, as stated above, the statute is concerned with
customary practices instead of the actual terms of each individual
mortgage. Monitoring and enforcement in this area, as in other areas,
can take into account actual circumstances when determining appropriate
responses to a mortgagee's noncompliance. The mere lack of intent to
engage in forbidden discrimination is not a defense. The statute
prohibits customary lending practices with variation in mortgage charge
rates on greater than two percentage points regardless of any
legitimate business motive for the excess variation. The statute
requires HUD to determine that lesser variations in mortgage charge
rates are based on actual variations in fees or costs to the mortgagee.
The mere lack of an illegitimate discriminatory motive for variations
is not enough.
III. Implementation of Section 539(a) of the National Housing Act
Section 330(b) of the Cranston-Gonzalez National Affordable Housing
Act added a new section 539(a) to the National Housing Act (NHA). The
new section requires, among other things, that the Secretary establish
a procedure whereby any person may file a request for a determination
on whether a mortgagee is in compliance with: (1) The new section
203(t) on tiered pricing, and (2) certain other provisions of the
National Housing Act that prohibit minimum loan amounts for insured
mortgages and Title I loans. The Secretary must also establish a
procedure to inform each requestor of the disposition of its request
for determination and to publish in the Federal Register the
disposition of any case referred to the Mortgagee Review Board for
action.
HUD published a notice setting forth the procedure for filing a
request for determination of compliance with section 203(t) and the
minimum loan amount prohibitions (56 FR 33455, July 22, 1991.) Section
330(b) requires that this notice be followed by a final rule. The
substance of the notice is included in this rule as a new subsection
(i) to Sec. 202.20. The Department has also amended Sec. 201.10(g) to
refer to new Sec. 202.20(i) because the procedure also applies to Title
I Lenders.
Many commenters, primarily State Banking Associations, objected to
this provision as a ``private right of action'' that would cause HUD to
conduct ``fishing expeditions'' at great expense to mortgagees. HUD
believes that the commenters misunderstood the intent of the provision.
HUD has done no more than follow the requirements of section 539(a)(2)
of the National Housing Act. Those requirements must be read together
with section 539(a)(1), which directs the Secretary to assess the
performance of a mortgagee in meeting the tiered pricing and minimum
loan amount prohibitions ``[i]n connection with any examination of a
mortgagee by the Secretary pursuant to this [National Housing] Act.''
In other words, a tiered pricing review generally would be conducted as
part of the regular mortgagee monitoring conducted by HUD.
Section 539(b)(2) ensures that HUD can receive evidence of
violations outside of its regular mortgagee monitoring so that special
investigations can be made if appropriate. The law and the rule do not
compel HUD to conduct an investigation at the demand of any person. A
person may ``request'' a HUD determination of compliance, and HUD must
inform the person of the disposition of the request, which could be a
decision that no investigation was warranted. One commenter suggested
that requests be published. They will be available to the public upon
request under the Freedom of Information Act (except to the extent that
withholding is determined to be necessary under the ``investigatory
records'' exception to disclosure) but HUD does not plan a formal
publication system.
An investigation might not be warranted if the requestor provides
no reason to suspect a tiered pricing violation by the mortgagee or if
the request appears to have been solely for harassment purposes. HUD
has limited investigative and monitoring resources and will not waste
those resources in pursuing all requests no matter how unsupported or
frivolous. HUD will respond vigorously when it receives reason to
suspect a tiered pricing violation even though a violation may not have
been identified through the regular mortgagee monitoring process.
IV. Procedural Requirements
Assistance Numbers
The Catalog of Federal Domestic Assistance program numbers are:
14.108, 14.110, 14.117, 14.119, 14.120, 14.121, 14.122, 14.123, 14.133,
14.142 and 14.162.
Regulatory Flexibility Act
Under 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the
Undersigned hereby certifies that this rule does not have a significant
economic impact on a substantial number of small entities. The rule
carries out a statutory mandate designed to ensure that FHA mortgagees
will not discriminate against FHA mortgagors with low principal loans.
The Department believes that the rule does this in a manner which
interferes to the minimum extent feasible with ordinary business
operations of small entities.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this rule do not have ``federalism implications'' within
the meaning of the Order. The rule does not alter existing
relationships between the Department, state and local governments and
the private sector.
Executive Order 12606, the Family
The General Counsel, as the Designated Official for Executive Order
12606, the Family, has determined that the provisions of this rule do
not have the potential significant impact on family formation,
maintenance, and general well-being within the meaning of the Order.
The tiered pricing rule serves primarily as a tool for prohibiting
discrimination against mortgagors who apply for low-principal loans.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969. (42 U.S.C. 4332) The Finding of No Significant Impact is
available for public inspection and copying through Friday, 7:30 a.m.
until 6:00 p.m. in the Office of the Rules Docket Clerk, Office of
General Counsel, room 10276, Department of Housing and Urban
Development, 451 Seventh Street SW., Washington, DC 20410.
Regulatory Agenda
This rule was listed as sequence number 1528 in the Department's
Semiannual Agenda of Regulations published on October 25, 1993 (58 FR
56402, 56428) pursuant to Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects
24 CFR Part 201
Health facilities, Historic preservation, Home improvement, Loan
programs--housing and community development, Manufactured homes,
Mortgage insurance, Reporting and recordkeeping requirements.
24 CFR Part 202
Administrative practice and procedure, Home improvement,
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, 24 CFR parts 201 and 202 are amended to read as
follows:
PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS
1. The authority citation for 24 CFR part 201 is revised to read as
follows:
Authority: 12 U.S.C. 1703; 42 U.S.C. 3535(d).
2. In Sec. 201.10, paragraph (g) is amended by adding to the end of
the paragraph a new sentence to read as follows:
Sec. 201.10 Loan amounts.
* * * * *
(g) * * * A person may request the Secretary to determine
compliance of a lender with this section as provided in Sec. 202.20(i)
of this chapter.
PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES
3. The authority citation for 24 CFR part 202 continues to read as
follows:
Authority: 12 U.S.C. 1703, 1709, and 1715(b); 42 U.S.C. 3535(d).
Subpart B--Approval of Mortgages
4. Part 202, subpart B, is amended by adding a new Sec. 202.20 to
read as follows:
Sec. 202.20 Tiered Pricing.
(a) Customary lending practices. (1) The customary lending
practices of a mortgagee for its FHA insured single family mortgages
shall not provide for a variation in mortgage charge rates that exceeds
two percentage points. A variation is determined as provided in
paragraph (f) of this section.
(2) The customary lending practices of a mortgagee include all FHA
insured single family mortgages originated by the mortgagee. They also
include FHA insured single family mortgages funded by the mortgagee or
purchased from the originator if requirements of the mortgagee have the
effect of leading to violation of this section by the originator. The
responsibility of sponsors of loan correspondents is also governed by
Sec. 202.15(c)(6).
(3) Any variations in the mortgage charge rate up to two percentage
points under the mortgagee's customary lending practices must be based
on actual variations in fees or cost to the mortgagee to make the loan,
which shall be determined after accounting for the value of servicing
rights generated by making the loan and other income to the mortgagee
related to the loan. Fees or costs must be fully documented for each
specific loan.
(b) Area. For purposes of this section, an area is:
(1) An area used by HUD for purposes of Sec. 203.18(a) of this
chapter to determine the median 1-family house price for an area; or
(2) The area served by a HUD field office but excluding any area
included in paragraph (b)(1) of this section.
(c) Mortgage charges. Mortgage charges include any charges under
the control of the mortgagee and not collected for the benefit of third
parties, including, but not limited to interest discount points and
loan origination fees.
(d) Interest rate. Whenever a mortgagee offers a particular
interest rate for a mortgage type in an area, it may not restrict the
availability of the rate in the area on the basis of the principal
amount of the mortgage. A mortgagee may not direct mortgage applicants
to any specific interest rate category on the basis of loan size.
(e) Mortgage charge rate. The mortgage charge rate is defined as
the amount of mortgage charges for an FHA insured mortgage expressed as
a percentage of the initial principal amount of the mortgage.
(f) Determining excess variations. Variation in mortgage charge
rates for a mortgage type is determined by comparing all mortgage
charge rates offered by the mortgagee within an area for the mortgage
type for a designated day or other time period, including mortgage
charge rates for all actual mortgage applications.
(g) Mortgage type. A mortgage type for purposes of paragraph (f) of
this section will include those mortgages that are closely parallel in
important characteristics affecting pricing and charges, such as level
of risk or processing expenses. The Secretary may develop standards and
definitions regarding mortgage types.
(h) Recordkeeping. Mortgagees are required to maintain records on
pricing information, satisfactory to the Secretary, that would allow
for reasonable inspection by HUD for a period of at least two years.
Additionally, many mortgagees are required to maintain racial, ethnic,
and gender data under the regulations implementing the Home Mortgage
Disclosure Act (12 U.S.C. 2801-2810).
(i) Request for determination of compliance. Pursuant to section
539(a) of the Cranston-Gonzalez National Affordable Housing Act, any
person may file a request that the Secretary determine whether a
mortgagee or Title I lender is in compliance with this section or with
sections implementing sections 223(a)(7) and 535 of the National
Housing Act such as Secs. 201.10(g), 203.18d and 203.43(c)(5) of this
chapter.2 The request for determination shall be made to the
following address: Department of Housing and Urban Development, Office
of Lender Activities and Land Sales Registration, 451 Seventh Street
SW., Room 9146, Washington, DC 20410. Each request shall include the
requestor's name and address and the name and address of the mortgagee
or Title I lender involved. A complete explanation of the circumstances
and the mortgagee's or Title I lender's practices, to the extent known,
must be delineated. Any documented evidence that the requestor may
have, including copies of advertisements, HUD-1 Settlement Statements,
sales contracts, or other relevant documents would greatly expedite the
Department's review and the resultant determination. The Secretary
shall inform the requestor of the disposition of the request. The
Secretary shall publish in the Federal Register the disposition of any
case referred by the Secretary to the Mortgagee Review Board.
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\2\Only section 535 applies to Title I lenders.
(Approved by the Office of Management and Budget under control
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numbers 2502-0265 and 2502-0059)
Dated: February 15, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-4331 Filed 2-24-94; 8:45 am]
BILLING CODE 4210-27-P