[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:
---------------------------------------------------------------------------

    \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 
---------------------------------------------------------------------------
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