Federal Register, Volume 62 Issue 105 (Monday, June 2, 1997)

[Federal Register Volume 62, Number 105 (Monday, June 2, 1997)]
[Rules and Regulations]
[Pages 30222-30228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14215]

[[Page 30221]]

_______________________________________________________________________

Part VI

Department of Housing and Urban Development

_______________________________________________________________________

24 CFR Part 200, et al.

Delegation of Insuring Authority to Direct Endorsement Mortgages;
Interim Rule

Federal Register / Vol. 62, No. 105 / Monday, June 2, 1997 / Rules
and Regulations

[[Page 30222]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200, 202, 203, and 206

[Docket No. FR-4169-I-01]
RIN 2502-AC87

Delegation of Insuring Authority to Direct Endorsement
Mortgagees; Interim Rule

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

ACTION: Interim rule.

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SUMMARY: This interim rule implements the Lender Insurance program,
under which the Secretary will delegate the authority to insure single
family mortgages to certain mortgagees that are approved under the
Direct Endorsement program. This interim rule provides that eligible
mortgagees that participate in the Lender Insurance program will be
responsible for conducting a pre-insurance review during the
origination of their single family mortgages, and they will be
responsible for insuring the mortgages. HUD intends that delegating
this insurance authority through the Lender Insurance program will be
consistent with HUD's efforts to reinvent the Federal Housing
Administration (FHA) by creating a more efficient and less burdensome
process for providing single family mortgage insurance.

DATES: Effective Date: July 2, 1997. The information collection
requirements in Sec. 203.255(f) of this interim rule, however, will not
be effective until the Office of Management and Budget (OMB) has
approved them under the Paperwork Reduction Act of 1995 and assigned
them a control number. Publication of the control numbers notifies the
public that OMB has approved these information collection requirements.
Deadline for comments on this interim rule: August 1, 1997.
Deadline for comments on the proposed information collection
requirements: August 1, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding
this interim rule to the Office of the General Counsel, Rules Docket
Clerk, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC 20410. Communications should refer
to the above docket number and title. A copy of each communication
submitted will be available for public inspection and copying during
regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above
address. HUD will not accept comments sent by facsimile (FAX).
HUD also invites interested persons to submit comments on the
proposed information collection requirements in Sec. 203.255(f) of this
interim rule. Comments should refer to the above docket number and
title, and should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Attention: Desk Officer for
HUD, Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT: John J. Coonts, Director, Office of
Insured Single Family Housing, Department of Housing and Urban
Development, Room 9162, 451 7th Street, SW., Washington, DC 20410;
telephone (202) 708-3046 (this number is not toll-free). Persons with
hearing or speech impairments may access this number via TTY by calling
the Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

Section 427 of the Departments of Veterans Affairs and Housing and
Urban Development, and Independent Agencies Appropriations Act, 1997
(Pub. L. 104-204, approved September 26, 1996; 110 Stat. 2874, 2928)
(the Appropriations Act) amended title II of the National Housing Act
(12 U.S.C. 1707 et seq.) to provide that the Secretary may delegate to
Direct Endorsement mortgagees the authority to insure mortgages on
single family properties. Section 427 provided that, in determining
whether to delegate this authority to a mortgagee, the Secretary must
consider the experience and performance of the mortgagee in order to
minimize the risk of loss to the insurance funds. Section 427 also
provided for enforcement of the insurance requirements by expressly
authorizing the Secretary to require indemnification from the mortgagee
under certain circumstances in the event of a claim.
Under the Federal Housing Administration's (FHA's) current
insurance endorsement process, a copy of FHA's Mortgage Insurance
Certificate (MIC) is evidence that FHA has actually insured a mortgage.
The Secretary issues an MIC, endorsing the mortgage for insurance,
after determining that a mortgage meets the eligibility requirements
for insurance. Although issuing MICs is a highly routine process, it is
also a very staff-intensive and time-consuming one, and one that
requires unnecessary paperwork for the mortgagee and HUD. Under section
427 of the Appropriations Act, the Secretary can now delegate the
insuring authority to certain Direct Endorsement mortgagees. This
interim rule will therefore implement a new Lender Insurance program
that will give mortgagees participating in the program the
responsibility of performing their own pre-insurance review, and of
insuring the mortgages they have underwritten.
Consistent with HUD's efforts to reduce the amount of paperwork
associated with FHA insured loans, mortgagees under this new Lender
Insurance program will be required to communicate with HUD in a purely
automated manner. HUD's new electronic system for the Lender Insurance
program is in its final stages of development and should be operational
in several months.
In addition, HUD is developing a system that will allow it to
communicate electronically with all mortgagees that participate in HUD
programs. This new system will eventually eliminate the necessity of
issuing MICs as evidence of insurance. Therefore, this interim rule, in
addition to implementing the Lender Insurance program, will amend the
regulations to allow for future electronic communication with all
mortgagees.

II. The Lender Insurance Program

Mortgagee Participation

Each mortgagee choosing to participate in the Lender Insurance
program will be required to use the Lender Insurance process to insure
all of the loans it originates or underwrites. Only Direct Endorsement
mortgagees with a minimum 2-year acceptable claim and default record
under the Direct Endorsement program will be considered for
participation in the Lender Insurance program. Two years provides HUD
with a sufficient amount of claim and default data on which to examine
the mortgagee's experience and performance. At the time of the lender's
request to participate in this program, HUD will determine the lender's
claim performance based upon the cumulative claim and default rate of
the lender's FHA originated mortgages for the prior two years, as of
the most recent quarter available to HUD.
HUD will compare the mortgagee's claim and default record with that
for all insured mortgages. For the purposes of fairly determining a
mortgagee's performance, HUD will place the mortgagee in one of two
categories: (1) Mortgagees that operate in a single State (Single State
mortgagees), and (2) Mortgagees that operate in more than one State
(Multi-State mortgagees).

[[Page 30223]]

Single State and Multi-State mortgagees that are at or below 150
percent of the national average for claims and defaults will be
eligible for this new authority. In addition, this interim rule will
provide for an exception process for Single State mortgagees that do
not meet the national claim and default average. Under this exception
process, a Single State mortgagee will have the option of having its
claim and default rate compared with the average in the State in which
it operates. Therefore, Single State mortgagees using the exception
process will also be eligible for this new authority if they are at or
below 150 percent of the State average for claims and defaults.
Net worth requirements will be the same as those for Direct
Endorsement mortgagees. HUD does not see the value in establishing
separate net worth requirements for this new program at this time.
A mortgagee's ability to participate in this program will be
reviewed on a yearly basis. Furthermore, HUD will monitor the quality
of the mortgagee's performance in the pre-insurance review process. If
HUD determines that a mortgagee has not performed in accordance with
prudent review techniques and/or HUD's requirements, HUD will take
appropriate action, including the immediate withdrawal of the
mortgagee's authority to participate in the Lender Insurance program.

Pre-Insurance Review

Under the Direct Endorsement program, a mortgagee submits to the
Secretary the documents listed in Sec. 203.255(b), which includes a
property appraisal, an application for insurance, a copy of the
mortgage, and underwriter and mortgagee certifications. The Secretary
reviews the documents for such purposes as to ensure that the mortgage
is properly executed and that it is within the maximum mortgage amount
(Sec. 203.255(c)). After this review, if the Secretary determines that
the mortgage is eligible, the Secretary endorses the mortgage for
insurance by issuing an MIC.
Under the Lender Insurance program implemented through this interim
rule, the program requirements will remain the same as those under the
Direct Endorsement program. Under the Lender Insurance program,
however, HUD is transferring the pre-insurance review function to
participating mortgagees. HUD will directly inform participating
mortgagees of the items that HUD would review prior to endorsement if
it were insuring the mortgage, and the mortgagee's staff that is
insuring the mortgage will review the appropriate items. The
mortgagee's staff reviewing and subsequently insuring the loan must not
be the same staff that originated the loan and/or underwrote the loan
for insurance.

Insurance of the Mortgage

Under the Lender Insurance program, the mortgagee will
electronically transmit the proper amount of mortgage insurance premium
(MIP) and data in a standardized format. HUD's electronic systems will
check to ensure that the proper amount of MIP was paid and determine
that complete mortgage insurance data was provided. Once HUD's systems
acknowledges the mortgagee's information, the mortgage is insured.

Recordkeeping Requirements

This interim rule provides that Lender Insurance mortgagees must
maintain records, including origination files, in a manner and for a
time period to be prescribed by the Assistant Secretary for Housing--
Federal Housing Commissioner, and must make them available to
authorized HUD staff upon request.

Post-Insurance Technical Review

Under the Direct Endorsement program, the Secretary may review the
mortgage documentation after the mortgage is insured to ensure that the
mortgage satisfies the Secretary's requirements. Under the Lender
Insurance program, mortgagees will not be expected to submit case
binders on mortgages that they insure themselves, unless they are
chosen by HUD's electronic system for post-insurance technical review.
HUD's electronic system will notify mortgagees that a loan has been
selected for post-insurance technical review when it reviews the
mortgage insurance data transmitted by the mortgagee. Prudent quality
control measures require that HUD perform an underwriting review on a
sample of loans relatively soon after they are insured.

Indemnification

Section 427 of the Appropriations Act provides for a mortgagee to
indemnify the Secretary for losses incurred if fraud or
misrepresentation was involved in the origination of the loan,
regardless of when the claim is paid. Section 427 also provides that
the Secretary may require indemnification for those loans involving
violations of the Secretary's requirements.
A requirement of indemnification in a case of fraud or
misrepresentation may arise when HUD reviews the origination package in
the case of a claim. HUD may, however, notify mortgagees of the
possibility of indemnification prior to a claim--as the result of a
post-insurance technical review or a mortgagee monitoring audit. This
right of indemnification under the Lender Insurance program in the case
of fraud or misrepresentation will not affect HUD's rights to otherwise
seek indemnification, or to refer matters to the Mortgagee Review
Board.
When considering this right of indemnification in cases other than
when fraud or misrepresentation are present, HUD does not intend to
require indemnification on the basis of errors related to those items
that the mortgagee is responsible for reviewing prior to insuring the
mortgage under the Lender Insurance program. HUD will, however, retain
the authority to take enforcement steps, including the immediate
withdrawal of the mortgagee's authority to participate in the Lender
Insurance program, Mortgagee Review Board action, or proposed
indemnifications on select cases.

Claims

Mortgagees participating in the Lender Insurance program will
follow the current claim procedures in subpart B of part 203.

Conforming Changes; Correction

This interim rule makes several amendments to HUD's single family
regulations in parts 200, 202, 203, and 206 to include references to
the Lender Insurance program.
This interim rule also makes a correction to Sec. 203.415(b) that
is unrelated to the Lender Insurance program. That paragraph was
revised on December 9, 1992 to include a reference to the Direct
Endorsement program (57 FR 58326). The December 9, 1992 final rule,
however, inadvertently changed the date described in Sec. 203.415(b) to
September 2, 1984, rather than September 2, 1964. This interim rule
will correct that date to read September 2, 1964.

III. Justification for Interim Rulemaking

HUD generally publishes a rule for public comment before issuing a
rule for effect, in accordance with its own regulations on rulemaking
in 24 CFR part 10. However, part 10 provides that prior public
procedure will be omitted if HUD determines that it is ``impracticable,
unnecessary, or contrary to the public interest'' (24 CFR 10.1). HUD
finds that prior public procedure is unnecessary.
Delegating the insuring authority to mortgagees through the Lender

[[Page 30224]]

Insurance program is consistent with HUD's efforts to reinvent the
Federal Housing Administration (FHA). The Lender Insurance process will
be a more efficient and less burdensome process for providing single
family mortgage insurance. While this interim rule makes the Lender
Insurance process available, it does not require mortgagees to
participate, nor does it withdraw any procedures that are otherwise
available to mortgagees. However, HUD is allowing for a full 60-day
public comment period on the provisions of this interim rule, and HUD
will consider the relevant issues raised by the commenters in its
development of a final rule for the Lender Insurance program.

IV. Findings and Certifications

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review, issued by the
President on September 30, 1993. OMB determined that this rule is a
``significant regulatory action,'' as defined in section 3(f) of the
Order (although not economically significant, as provided in section
3(f)(1) of the Order). Any changes made in this rule subsequent to its
submission to OMB are identified in the docket file, which is available
for public inspection between 7:30 a.m. and 5:30 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.

Paperwork Reduction Act

The information collection requirement contained in Sec. 203.255(f)
of this interim rule have been submitted to the Office of Management
and Budget (OMB) for review in accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501-3520). An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the collection displays a valid control number. The
OMB control number, when assigned, will be announced by separate notice
in the Federal Register.
As required under 5 CFR 1320.8(d)(1), HUD and OMB are seeking
comments from members of the public and affected agencies concerning
the proposed collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses. Interested persons are
invited to submit comments according to the instructions in the DATES
and ADDRESSES sections in the preamble of this interim rule.
This document also provides the following information:
Title of Proposal: Request for Insurance Endorsement under the
Direct Endorsement Program.
OMB Control Number: OMB has previously approved the information
collection requirements for the Direct Endorsement Program under
control number 2502-0365. HUD is seeking to reinstate that previously
approved collection, incorporating the information collection
requirement contained in Sec. 203.255(f) of this rule.
Description of the Need for the Information and Proposed Use:
Lenders must submit certain information regarding the mortgages to HUD
so that HUD can, as generally required by statute, produce statistics
and reports, and track repair escrows, certain types of mortgages, and
warranties. This information is also necessary for HUD to monitor
lender calculations of qualifying ratios.
Form Numbers: HUD-54111; however, lenders are free to tailor this
format to their individual procedures and needs.
Members of Affected Public: Business or other for-profit.
Estimation of the Total Number of Hours Needed to Prepare the
Information Collection including Number of Respondents, Frequency of
Response, and Hours of Response:

----------------------------------------------------------------------------------------------------------------
Est. avg.
Number of respondents Total annual response time Est. annual
responses (hours) burden (hrs.)
----------------------------------------------------------------------------------------------------------------
4,800........................................................ 600,000 .0833 50,040
----------------------------------------------------------------------------------------------------------------

HUD estimates that 95 percent of the responses will be collected
electronically; therefore, since the requested information is already
in lenders' files and computers, the reporting burden is minimal.

Environmental Impact

A Finding of No Significant Impact with respect to the environment
was 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. 4223). The Finding is available for public inspection
between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules
Docket Clerk, Office of General Counsel, Room 10276, Department of
Housing and Urban Development, 451 7th Street, SW, Washington, DC
20410.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this interim rule before publication and
by approving it certifies that this rule would not have a significant
economic impact on a substantial number of small entities. This interim
rule does not require mortgagees to participate, nor does it otherwise
withdraw any procedures that are otherwise available to mortgagees.
Small entities are specifically invited, however, to comment on whether
this rule will significantly affect them, and to provide any
alternatives for less burdensome compliance.

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 interim rule would 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.
As a result, the rule is not subject to review under the Order.

[[Page 30225]]

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this interim rule would
not have potential for significant impact on family formation,
maintenance, and general well-being, and thus, is not subject to review
under the Order. No significant change in existing HUD policies or
programs will result from promulgation of this rule, as those policies
and programs relate to family concerns.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal
agencies to assess the effects of their regulatory actions on State,
local, and tribal governments, and the private sector. This rule does
not impose any Federal mandates on any State, local, or tribal
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 200

Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Home improvement, Housing standards,
Incorporation by reference, Lead poisoning, Loan programs--housing and
community development, Minimum property standards, Mortgage insurance,
Organization and functions (Government agencies), Penalties, Reporting
and recordkeeping requirements, Social security, Unemployment
compensation, Wages.

24 CFR Part 202

Administrative practice and procedure, Home improvement,
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements.

24 CFR Part 203

Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.

24 CFR Part 206

Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.

Accordingly, for the reasons stated in the preamble, parts 200,
202, 203, and 206 of title 24 of the Code of Federal Regulations, are
amended as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

1. The authority citation for 24 CFR part 200 continues to read as
follows:

Authority: 12 U.S.C. 1701-1715z-18; 42 U.S.C. 3535(d).

2. In Sec. 200.926, paragraph (a)(2)(i) is revised to read as
follows:

Sec. 200.926 Minimum property standards for one and two family
dwellings.

(a) * * *
(2) * * *
(i) Approved for insurance or other benefits prior to the start of
construction, including approval under the Direct Endorsement process
described in Sec. 203.5 of this chapter, or under the Lender Insurance
process described in Sec. 203.6 of this chapter;
* * * * *
3. In Sec. 200.926d, paragraph (c)(4)(vii) is revised to read as
follows:

Sec. 200.926d Construction requirements.

* * * * *
(c) * * *
(4) * * *
(vii) In all cases in which a Direct Endorsement (DE) mortgagee or
a Lender Insurance (LI) mortgagee seeks to insure a mortgage on a newly
constructed one- to four-family dwelling (including a newly erected
manufactured home) which was processed by the DE or LI mortgagee, the
DE or LI mortgagee shall determine whether the property is located in a
100-year floodplain as designated on maps of the Federal Emergency
Management Agency and, if so, shall obtain a final Letter of Map
Amendment (LOMA) or final Letter of Map Revision (LOMR) before the DE
mortgagee submits the application for insurance to HUD, or before the
LI mortgagee submits all the required data regarding the mortgage to
HUD, as applicable. Under the DE program, such mortgages shall not be
eligible for insurance unless the DE mortgagee submits the LOMA or LOMR
to HUD with the mortgagee's request for endorsement.
* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

4. The authority citation for 24 CFR part 202 continues to read as
follows:

Authority: 12 U.S.C. 1703, 1709, and 1715b; 42 U.S.C. 3535(d).

5. In Sec. 202.3, paragraph (c)(2)(v)(A) is revised to read as
follows:

Sec. 202.3 Approval status for lenders and mortgagees.

* * * * *
(c) * * *
(2) * * *
(v) * * *
(A) The eligibility of the mortgage for insurance, absent fraud or
misrepresentation, if the mortgagor and all terms and conditions of the
mortgage had been approved before the termination by the Direct
Endorsement or Lender Insurance mortgagee or were covered by a firm
commitment issued by the Secretary; however, no other mortgages
originated by the mortgagee shall be insured unless a new originated
approval agreement is accepted by the Secretary;
* * * * *
6. In Sec. 202.8, paragraph (b)(9) is revised to read as follows:

Sec. 202.8 Loan correspondent lenders and mortgagees.

* * * * *
(b) * * *
(9) For mortgages processed through Direct Endorsement under
Secs. 203.5 and 203.255(b) of this chapter, or through Lender Insurance
under Secs. 203.6 and 203.255(f) of this chapter, underwriting shall be
the responsibility of the Direct Endorsement sponsor or Lender
Insurance sponsor (respectively), and the mortgage shall be closed in
the loan correspondent mortgagee's own name or the name of the sponsor
that will purchase the loan. For mortgages not processed through Direct
Endorsement or through Lender Insurance, the mortgage must be both
underwritten and closed in the loan correspondent's own name.
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

7. The authority citation for 24 CFR part 203 continues to read as
follows:

Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C.
3535(d). Subpart C also is issued under 12 U.S.C. 1715u.

Subpart A--Eligibility Requirements and Underwriting Procedures

8. In subpart A of part 203, the undesignated center heading
between the subpart heading and Sec. 203.1 is revised to read as
follows: ``DIRECT ENDORSEMENT, LENDER INSURANCE, AND COMMITMENTS''.
9. Section 203.1 is revised to read as follows:

Sec. 203.1 Underwriting procedures.

The three underwriting procedures for single family mortgages are:

[[Page 30226]]

(a) Direct Endorsement. This procedure, which is described in
Sec. 203.5, is available for mortgagees that are eligible under
Sec. 203.3.
(b) Lender insurance. This procedure, which is described in
Sec. 203.6, is available for mortgagees that are eligible for the
Direct Endorsement program under Sec. 203.5, and that are also approved
according to Sec. 203.4.
(c) Issuing of commitments through HUD offices. Processing through
HUD offices as described in Sec. 203.7, with issuance of commitments,
is available only for mortgages that are not eligible for Direct
Endorsement processing under Sec. 203.5(b) or to the extent required in
Sec. 203.3(b)(4), Sec. 203.3(d)(1), or as determined by the Secretary.
10. In subpart A, a new Sec. 203.4 is added, to read as follows:

Sec. 203.4 Approval of mortgagees for Lender Insurance.

Each mortgagee that chooses to participate in the Lender Insurance
program must use the Lender Insurance process to insure all of the
mortgages that it underwrites, unless the mortgages are ineligible for
the Direct Endorsement program as provided in Sec. 203.5(b), or unless
HUD determines that the mortgages are ineligible for the Lender
Insurance program.
(a) Direct Endorsement approval. To be approved for the Lender
Insurance program described in Sec. 203.6, a mortgagee must be
unconditionally approved for the Direct Endorsement program as provided
in Sec. 203.5.
(b) Performance: Claim and default rates. In addition to being
unconditionally approved for the Direct Endorsement program, a
mortgagee must have had an acceptable claim and default record for at
least 2 years prior to its application for participation in the Lender
Insurance program. HUD determines acceptable claim and default record
as follows:
(1) A mortgagee is eligible for the Lender Insurance program if its
claim and default rate is at or below 150 percent of the national
average rate for all insured mortgages.
(2) A mortgagee that operates in a single State (Single State
mortgagee) may choose to have its claim and default rate compared with
the average rate in the State in which it operates, in which case the
Single State mortgagee is eligible for the Lender Insurance program if
its claim and default rate is at or below 150 percent of the State
average rate for insured mortgages.
(c) Annual review. HUD will monitor a mortgagee's eligibility to
participate in the Lender Insurance program on a yearly basis.
(d) Termination of approval. If a mortgagee that has been approved
by HUD for the Lender Insurance program violates the requirements and
procedures established by the Secretary for such program, or if HUD
determines that other good cause exists (including, but not limited to,
HUD's determination that the mortgagee is not using prudent review
techniques), HUD may immediately terminate the mortgagee's approval to
participate in the Lender Insurance program, in accordance with section
256(d) of the National Housing Act (12 U.S.C. 1715z-21(d)). Within 30
days after receiving HUD's notice of termination, a mortgagee may
request an informal conference with the Deputy Assistant Secretary for
Single Family Housing. The conference will be conducted within 30 days
after HUD receives a timely request for the conference. After the
conference, the Deputy Assistant Secretary may decide to affirm the
termination action or to reinstate the mortgagee's Lender Insurance
program approval. The decision will be communicated to the mortgagee in
writing and will be deemed a final agency action.
11. In Sec. 203.5, paragraph (b) is revised to read as follows:

Sec. 203.5 Direct Endorsement process.

* * * * *
(b) Eligible programs. (1) All single family mortgages authorized
for insurance under the National Housing Act must be originated through
the Direct Endorsement program, except the following:
(i) Mortgages underwritten for insurance by mortgagees that have
applied for participation in, and have been approved for, the Lender
Insurance program;
(ii) Mortgages authorized under sections 203(n), 203(p), 213(d),
221(h), 221(i), 225, 233, 237, 809, or 810 of the National Housing Act,
or any other insurance programs announced by Federal Register notice;
or
(iii) As provided in Sec. 203.1.
(2) The provision contained in Sec. 221.55 of this chapter
regarding deferred sales to displaced families is not available in the
Direct Endorsement program.
* * * * *
12. A new Sec. 203.6 is added to read as follows:

Sec. 203.6 Lender Insurance process.

Under the Lender Insurance program, a mortgagee approved for the
program conducts its own pre-insurance review, insures the mortgage,
and agrees to indemnify HUD in accordance with Sec. 203.255(f).
13. The introductory text of Sec. 203.7 is revised to read as
follows:

Sec. 203.7 Commitment process.

For single family mortgage programs that are not eligible for
Direct Endorsement processing under Sec. 203.5, or for Lender Insurance
processing under Sec. 203.6, the mortgagee must submit an application
for mortgage insurance in a form prescribed by the Secretary prior to
making the mortgage loan. If:
* * * * *
14. In Sec. 203.43i, the introductory text of paragraph (d) is
revised, the introductory text of paragraph (g) is revised, and
paragraph (g)(2) is revised; to read as follows:

Sec. 203.43i Eligibility of mortgages on Hawaiian Home Lands insured
pursuant to section 247 of the National Housing Act.

* * * * *
(d) Conditions for insurance. Mortgages will be eligible for
insurance under this section, according to the procedures in
Secs. 203.5, 203.6, or 203.7 (as applicable), only where the Department
of Hawaiian Home Lands:
* * * * *
(g) Construction advances. Advances made by the mortgagee during
construction are eligible for insurance, according to the procedures in
Secs. 203.5, 203.6, or 203.7 (as applicable), if the Secretary
determines that no feasible financing alternative is available and if:
* * * * *
(2) The advances are made only as provided in the commitment or the
approval by the Direct Endorsement or Lender Insurance underwriter;
* * * * *
15. In Sec. 203.50, paragraph (h) is revised to read as follows:

Sec. 203.50 Eligibility of rehabilitation loans.

* * * * *
(h) Insurance may be available for advances made during
rehabilitation or upon completion of rehabilitation, according to the
procedures in Secs. 203.5, 203.6, or 203.7 (as applicable).
* * * * *
16. Section 203.249 is revised to read as follows:

Sec. 203.249 Effect of amendments.

[[Page 30227]]

either the Direct Endorsement or Lender Insurance mortgagee has
approved the mortgagor and all terms and conditions of the mortgage or
loan, or the Secretary has issued a firm commitment. In addition, such
amendment will not adversely affect the eligibility of specific
property if such property is covered by a conditional commitment issued
by the Secretary, a certificate of reasonable value issued by the
Secretary of Veterans Affairs, or an appraisal report approved by a
Direct Endorsement or Lender Insurance underwriter.
17. In Sec. 203.255, paragraph (a) is revised, and a new paragraph
(f) is added; to read as follows:

Sec. 203.255 Insurance of mortgage.

(a) Mortgages with firm commitments. For applications for insurance
involving mortgages not eligible to be originated under the Direct
Endorsement program under Sec. 203.5, or under the Lender Insurance
program under Sec. 203.6, the Secretary will either endorse the
mortgage for insurance by issuing a Mortgage Insurance Certificate,
provided that the mortgagee is in compliance with the firm commitment,
or will electronically acknowledge that the mortgage has been insured.
* * * * *
(f) Lender Insurance. (1) Pre-insurance review. For applications
for insurance involving mortgages originated under the Lender Insurance
program under Sec. 203.6, the mortgagee is responsible for performing a
pre-insurance review that meets HUD's requirements. HUD will directly
inform participating mortgagees of its minimum requirements for pre-
insurance review. The mortgagee's staff that performs the pre-insurance
review must not be the same staff that originated the mortgage or
underwrote the mortgage for insurance.
(2) Recordkeeping. Mortgagees must maintain records, including
origination files, in a manner and for a time period to be prescribed
by the Assistant Secretary for Housing--Federal Housing Commissioner,
and must make them available to authorized HUD staff upon request.
(3) Insuring the mortgage. If, following this review, the mortgage
is determined to be eligible, the mortgagee will electronically submit
all required data to HUD regarding the mortgage. HUD's electronic
system will acknowledge that the mortgage has been insured. HUD's
electronic system may also issue a notice to the mortgagee that the
mortgage has been selected for post-insurance technical review, and
that the HUD case binder must be sent to the identified HUD office.
(4) Indemnification. By insuring the mortgage, the mortgagee agrees
to indemnify HUD under the conditions of section 256(c) of the National
Housing Act (12 U.S.C. 1717z-21(c)).
18. Section 203.257 is revised to read as follows:

Sec. 203.257 Creation of the contract.

The mortgage shall be an insured mortgage from the date of the
issuance of a Mortgage Insurance Certificate, from the date of the
endorsement of the credit instrument, or from the date of HUD's
electronic acknowledgement to the mortgagee that the mortgage is
insured, as applicable. The Commissioner and the mortgagee are
thereafter bound by the regulations in this subpart with the same force
and to the same extent as if a separate contract had been executed
relating to the insured mortgage, including the provisions of the
regulations in this subpart and of the Act.
19. In Sec. 203.415, paragraph (b) is revised to read as follows:

Sec. 203.415 Delivery of certificate of claim.

* * * * *
(b) If the mortgage was accepted for insurance pursuant to a
commitment issued on or after September 2, 1964, or under the Direct
Endorsement, Lender Insurance, or Coinsurance programs, no certificate
of claim will be issued.
20. Section 203.499 is revised to read as follows:

Sec. 203.499 Effect of amendments.

The regulations in this subpart may be amended by the Secretary at
any time and from time to time, in whole or in part, but such amendment
will not adversely affect the interests of a mortgagee under the
contract of insurance on any mortgage or loan already insured, and will
not adversely affect the interest of a mortgagee on any mortgage or
loan to be insured for which either the Direct Endorsement or Lender
Insurance mortgagee has approved the mortgagor and all terms and
conditions of the mortgage or loan, or the Secretary has issued a firm
commitment. In addition, such amendment will not adversely affect the
eligibility of specific property if such property is covered by a
conditional commitment issued by the Secretary, a certificate of
reasonable value issued by the Secretary of Veterans Affairs, or an
appraisal report approved by a Direct Endorsement or Lender Insurance
underwriter.

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

21. The authority citation for 24 CFR part 206 continues to read as
follows:

Authority: 12 U.S.C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).

22. In Sec. 206.3, the definition of ``Maximum claim amount'' is
revised to read as follows:

Sec. 206.3 Definitions.

* * * * *
Maximum claim amount means the lesser of the appraised value of the
property or maximum dollar amount for an area established by the
Secretary for a one-family residence under section 203(b)(2) of the
National Housing Act (as adjusted where applicable under section 214 of
the National Housing Act). Both the appraised value and the maximum
dollar amount for the area must be as of the date the Direct
Endorsement or Lender Insurance underwriter receives the appraisal
report. Closing costs must not be taken into account in determining
appraised value.
* * * * *
23. Section 206.7 is revised to read as follows:

Sec. 206.7 Effect of amendments.

The regulations in this part may be amended by the Secretary at any
time and from time to time, in whole or in part, but amendments to
subparts B and C of this part will not adversely affect the interests
of a mortgagee on any mortgage to be insured for which either the
Direct Endorsement mortgagee or Lender Insurance mortgagee has approved
the mortgagor and all terms and conditions of the mortgage, or the
Secretary has made a commitment to insure. Such amendments will not
adversely affect the interests of a mortgagor in the case of a default
by a mortgagee where the Secretary makes payments to the mortgagor.
24. Section 206.15 is revised to read as follows:

Sec. 206.15 Insurance.

Mortgages originated under this part must be endorsed through the
Direct Endorsement program under Sec. 203.5 of this chapter, or insured
through the Lender Insurance program under Sec. 203.6 of this chapter,
except as provided in Secs. 203.1 or 203.4 of this chapter. The
mortgagee must submit the information as described in Sec. 203.255 (b)
or (f) of this chapter, as applicable; the certificate of housing
counselling as described in Sec. 206.41; a copy of the title insurance
commitment satisfactory to the

[[Page 30228]]

Secretary (or other acceptable title evidence if the Secretary has
determined not to require title insurance under Sec. 206.45(a)); the
mortgagee's election of either the assignment or shared premium option
under Sec. 206.17; and any other documentation required by the
Secretary. Section 203.255 (c), (d), (e), and (f) of this chapter,
pertaining to the processes for Direct Endorsement and Lender
Insurance, apply to mortgages under this part. If the mortgagee has
complied with the requirements of Secs. 203.3, 203.4, 203.5, 203.6, and
203.255 of this chapter (as applicable), and the requirements of this
part, and the mortgage is determined to be eligible, the Secretary will
either endorse the mortgage for insurance by issuing a Mortgage
Insurance Certificate or will electronically acknowledge that the
mortgage has been insured. The mortgagee under the Lender Insurance
program shall execute for the Secretary the loan agreement included in
the term ``mortgage'' as defined in Sec. 206.3.

Dated: April 23, 1997.
Stephanie A. Smith,
General Deputy Assistant Secretary for Housing--Federal Housing
Commissioner.
[FR Doc. 97-14215 Filed 5-30-97; 8:45 am]
BILLING CODE 4210-27-P