[Federal Register Volume 59, Number 104 (Wednesday, June 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13224]


[[Page Unknown]]

[Federal Register: June 1, 1994]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 207, 213, 220, 221, 232, 241, 242, and 244

[Docket No. R-94-1662; FR-3224-F-02]
RIN 2502-AF64

 

Effect of Acquisition of Title by Mortgagee or the Secretary on a 
Title Insurance Policy

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Final rule; confirmation of interim rule.

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SUMMARY: This rule adopts as final an interim rule published on June 
24, 1993 that removed a provision in current HUD regulations requiring 
that any title insurance policy obtained in connection with the 
insurance of multifamily mortgages must provide that, upon acquisition 
of title by the mortgagee or the Secretary, ``it will become an owner's 
policy running to the mortgagee or the Secretary, as the case may be'' 
and substitute the provision ``it will continue to provide the same 
coverage as the original policy, and will run to the mortgagee or the 
Secretary, as the case may be''. The purpose of this rulemaking was to 
remove a regulatory restriction and to adopt in its place a more 
efficient procedure.

EFFECTIVE DATE: July 1, 1994.

FOR FURTHER INFORMATION CONTACT: Gaines E. Hopkins, Managing Attorney, 
Multifamily Mortgage Division, Office of General Counsel, Room 9228, 
451 Seventh Street, S.W., Washington, D.C. 20410, telephone (202) 708-
4090, TDD (202) 708-3259. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Background

    Section 207.36 of Title 24 of the Code of Federal Regulations 
requires a mortgagee to furnish a survey and a policy of title 
insurance or its equivalent as a prerequisite to the closing of an 
insured multifamily housing loan. Where a title policy is to be 
furnished, the regulation requires that the policy name the mortgagee 
and HUD as the insured and also provide that, upon acquisition of title 
by either the mortgagee or HUD, the policy will become an owner's 
policy running to either the mortgagee or HUD.
    If a mortgage default occurs and a mortgagee elects to exercise its 
right to assign the mortgage to HUD, it must comply with 24 CFR 
207.258(b)(4)(ii). This provision requires that all policies of title 
insurance or evidences of title submitted to HUD have the original 
title coverage extended to include the date of the assignment of the 
mortgage. If the mortgagee elects to foreclose on the mortgage itself, 
or if it accepts a deed-in-lieu of foreclosure from the mortgagor, the 
requirements set out in Secs. 207.258(c)(8) and 207.258a apply. These 
sections provide that if title insurance was utilized at the time of 
endorsement, the mortgagee will be required to submit an owner's title 
policy in favor of HUD that is effective on the date that the project 
is conveyed to the Secretary. If, however, an abstract and attorney's 
opinion were originally accepted at the time of endorsement, they are 
again acceptable. It should be noted that the aforementioned 
regulations either are incorporated into, or have a counterpart in, all 
parts of Title 24 of the Code of Federal Regulations that are 
applicable to multifamily and health care mortgage insurance programs.
    There are two basic title insurance policy formats, one for owners/
mortgagors and a second for lenders/mortgagees. Each is used in both 
commercial and residential transactions. The standard title policies 
have been written and promulgated by the industry trade organization, 
American Land Title Association (ALTA), and are used in most 
jurisdictions. In jurisdictions that mandate a particular format, HUD 
has deferred to state law and accepted the state-mandated format. For 
the last two decades, HUD has accepted the 1970 ALTA format, and no 
other ALTA format under the aforesaid regulatory requirements, in those 
jurisdictions that do not otherwise require the use of a particular 
title policy.
    Periodically, ALTA has revised its approved standard title policy 
to provide for what it perceives as changing legal and market 
conditions. At the request of ALTA, HUD has reviewed each new policy 
format to assess its positive or negative impact upon the specific 
title insurance needs of the Department. In 1987, ALTA published a new 
title policy that was reviewed and subsequently approved by HUD, but 
only upon the condition that, in multifamily and health care cases, 
title companies add an endorsement to the lender's policy providing 
that it will automatically ``convert'' to an owner's policy if HUD 
becomes the owner of the FHA-insured project as a result of 
foreclosure. The HUD Office of General Counsel expressed the opinion 
that a ``conversion'' endorsement is necessary to comply with the 
requirement in Sec. 207.36(a)(1) ``that upon acquisition of title by 
the mortgagee or the Secretary, [the title policy] will become an 
owner's policy * * *.'' This endorsement condition has been strongly 
resisted by ALTA and some of its individual corporate members, 
resulting in situations where it was only with considerable difficulty 
that title insurance was obtainable.

Title Industry Position

    The title industry argues that a lender's policy cannot be 
``converted'' to an owner's policy as HUD has requested and raises 
arguments relating to (1) distinctions between the two formats that 
bear directly upon the ``value'' of the coverage; (2) cost schedules 
that are on file with state insurance commissioners; (3) the 
unavailability of coverage to other mortgagees or private mortgage 
insurers; (4) the prior practice of FHA; (5) a different interpretation 
of the regulation; and (6) the opinion that either HUD or the lender 
should pay the entire cost of a new owner's policy. Inasmuch as HUD, by 
this rule, is removing the regulatory restriction, it is not necessary 
to set forth the relative merits and demerits of this industry 
position.

Current HUD Procedure

    At present, HUD acquires title to a project pursuant to one of 
several procedures. The most common procedure is for the mortgagee to 
assign the mortgage to HUD when there is a default. As part of the 
assignment process, the mortgagee is required, at its own expense, to 
extend the coverage of the original mortgagee policy to include the 
time period between the dates of original endorsement for insurance and 
the assignment. This is usually accomplished by a limited title search 
and a ``date-down'' endorsement of the existing title policy, but may 
also be done through the purchase of an entirely new lender's policy. 
After assignment of a mortgage, if the default continues, it is HUD's 
policy to employ an attorney who practices in the jurisdiction where 
the project is located to act as a commissioner or trustee in the 
foreclosure. It is the responsibility of the foreclosure commissioner 
to perform a limited title search covering the time period between the 
assignment of the mortgage to HUD and the institution of proceedings 
under the Federal Foreclosure Act. Even though no title policy is 
obtained by HUD as a result of the foreclosure commissioner's findings 
and report, HUD would have the power to bring a malpractice action 
against the licensed attorney who acted as the foreclosure commissioner 
if the work product were flawed.
    A lender also may elect not to assign, but to institute foreclosure 
proceedings on its own or to take title from the mortgagor by a deed-
in-lieu of foreclosure and to convey title directly to HUD. After the 
lender obtains title to the project by means of foreclosure or a deed-
in-lieu, it is entitled to transfer title directly to HUD. If the 
lender chooses to proceed in this manner, Sec. 207.258a requires that 
it purchase, at its own expense, an owner's title policy ``effective on 
or after the date of the recording of the conveyance to the 
Commissioner.''
    It should also be noted that Section 207(k) of the National Housing 
Act and the implementing regulations also give HUD the option of either 
proceeding to foreclosure or taking a deed-in-lieu of foreclosure 
directly from the mortgagor, following the assignment of the project 
mortgage to the Secretary.

HUD Response

    Title insurance is necessary in virtually all primary and secondary 
mortgage market transactions. Although individual title companies may 
still be willing to issue the 1970 ALTA lender's title policy on a 
case-by-case basis in those states where they are not forbidden by 
state regulation from doing so, the 1992 ALTA lender's policy format 
now represents the only title policy format that has the official 
approval of the title industry's trade association for use by title 
companies nationwide. The Department has determined that it is 
necessary to change its regulations so that the 1992 ALTA title policy 
format can be accepted by HUD for use in FHA-insured multifamily 
mortgage transactions.
    Consequently, the Department's regulations are revised to remove 
the requirement that the Secretary, in every case, be issued an owner's 
title policy. HUD would retain the flexibility, however, to make such a 
determination on a case-by-case basis. Accordingly, in this rule HUD is 
revising 24 CFR 207.36(a)(1) and conforming other relevant sections by 
removing the phrase ``it will become an owner's policy running to the 
mortgagee or the Secretary as the case may be,'' and substituting ``it 
will continue to provide the same coverage as the original policy, and 
will run to the mortgagee or the Secretary, as the case may be''.
    As a consequence of having removed the regulatory requirement in 
Sec. 207.36 requiring the purchase of an owner's policy, HUD could 
either purchase an owner's title policy after acquisition of title, or 
HUD could choose to self-insure after acquisition of title. After this 
rule takes effect HUD will decide on a case-by-case basis either to 
purchase an owner's policy at its own expense, or to self-insure for 
the time period after acquisition of title.

II. Public Comment on Earlier Interim Rule

    On June 24, 1993 (58 FR 34213), the Department published in the 
Federal Register, an interim rule. A request was made for comment by 
the public on this interim rule. One comment has been received. The 
commenter, a private individual, quotes the following paragraph from 
the Preamble to the interim rule and asks the following question:
    ``As a consequence of having removed the regulatory requirement in 
Sec. 207.36 requiring the purchase of an owner's policy, HUD could 
either purchase an owner's title policy after acquisition of title, or 
HUD could choose to self-insure after acquisition of title. After this 
rule takes effect HUD will decide on a case-by-case basis either to 
purchase an owner's policy at its own expense, or to self-insure for 
the time period after acquisition of title.''
    ``My question is where does HUD have the authority to purchase a 
title insurance policy from its own funds for its own protection? The 
long standing policy of the Federal Government, as enunciated 
frequently by the General Accounting Office, is that the Government is 
a self-insurer and will not purchase commercial insurance against loss 
or damage to its own property (presumably HUD inventory property is 
considered as Government property.) Does HUD have approval from the 
Comptroller to use Government funds to purchase title insurance to 
protect its ownership interest?''
    HUD Response: It is true that the government is essentially a self-
insurer in certain specific areas, primarily loss or damage to 
government property and the liability of government employees. But 
there are many situations in which the government buys or pays for 
insurance. Among the more well known examples are the Employee's Health 
Benefits Program and the Federal Group Life Insurance. Moreover, even 
the self-insurance requirement for loss to government property does not 
apply in all situations. For example, the rule does not apply to a 
wholly-owned government corporation (the Federal Housing Administration 
(FHA) is treated as a corportion for this purpose, even though it is 
not chartered as one, 53 Comp Gen 337 (1973)). Furthermore, the 
Comptroller General has indicated that property acquired by FHA in 
exchange for the payment of insurance benefits occupies a different 
status from government owned property and does not fall within the 
meaning of the policy of not carrying hazard insurance on property it 
owns. Finally, the Comptroller General has never even defined title 
insurance as insuring property loss and thus prohibited from purchase.

III. Findings and Certifications

Regulatory Agenda

    This rule was listed as item 1598 in the Department's Semiannual 
Agenda of Regulations published on April 25, 1994 (59 FR 20424, 20450) 
under Office of Housing, in accordance with Executive Order 12866 and 
the Regulatory Flexibility Act.

Impact on Small Entities.

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before its publication and, by 
approving it, certifies that this rule does not have a significant 
economic impact on a substantial number of small entities. The rule 
effectively liberalizes title insurance requirements which must be met 
if a mortgage insurance claim is being made against HUD. Its impact on 
small entities will be minimal and any such impact will be beneficial.

Federalism Impact

    The General Counsel, as the Designated Official under section 6(a) 
of Executive order 12612, Federalism, has determined that the policies 
contained in this notice will not have substantial direct effects on 
states or their political subdivisions, or the relationship between the 
federal government and the states, or on the distribution of power and 
responsibilities among the various levels of government. The rule does 
not significantly change existing roles and relationships between 
federal, state and local governments in any of the programs to which it 
applies.

Impact on the Family

    The General Counsel, as the Designated Official under Executive 
order 12606, The Family, has determined that this notice does not have 
potential for significant impact on family formation, maintenance, and 
general well-being.

Environment

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.20(k) of the HUD regulations, 
the policies and procedures contained in this rule relate only to 
internal administrative procedures whose content does not constitute a 
development decision nor affect the physical condition of project areas 
or building sites and, therefore, are categorically excluded from the 
requirements of the National Environmental Policy Act.

List of Subjects

24 CFR Part 207

    Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements, Solar energy.

24 CFR Part 213

    Cooperatives, Mortgage insurance, Reporting and record-keeping 
requirements.

24 CFR Part 220

    Home improvement, Loan programs--housing and community development, 
Mortgage insurance, Reporting and recordkeeping requirements, Urban 
renewal.

24 CFR Part 221

    Low and moderate income housing, Mortgage insurance, Reporting and 
recordkeeping requirements.

24 CFR Part 232

    Fire prevention, Health facilities, Loan programs--health, Loan 
programs--housing and community development, Mortgage insurance, 
Nursing homes, Reporting and recordkeeping requirements.

24 CFR Part 241

    Energy conservation, Home improvement, Loan programs--Housing and 
Community Development, Mortgage insurance, Reporting and recordkeeping 
requirements, Solar energy.

24 CFR Part 242

    Hospitals, Mortgage insurance, Reporting and recordkeeping 
requirements.

24 CFR Part 244

    Health facilities, Mortgage insurance, Reporting and record- 
keeping requirements.

    The Catalog of Federal Domestic Assistance Numbers are: 14.112, 
14.126, 14.128, 14.129, 14.134, 14.135, 14.138, 14.139 and 14.155.

    Accordingly, the Department adopts as final and without change, the 
interim rule published on June 24, 1993 (58 FR 34213) that amended 24 
CFR parts 207, 213, 220, 221, 232, 241, 242 and 244.

    Dated: May 23, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 94-13224 Filed 5-31-94; 8:45 am]
BILLING CODE 4210-27-P