[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]]

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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.

    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

[[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