[Federal Register Volume 62, Number 128 (Thursday, July 3, 1997)]
[Proposed Rules]
[Pages 36194-36197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17402]



[[Page 36193]]

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Part V





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 201 and 202



_______________________________________________________________________



Title I Property Improvement and Manufactured Home Loan Insurance 
Programs; Proposed Rule

  Federal Register / Vol. 62, No. 128 / Thursday, July 3, 1997 / 
Proposed Rules  

[[Page 36194]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201 and 202

[Docket No. FR-4242-P-01]
RIN 2502-AG94


Title I Property Improvement and Manufactured Home Loan Insurance 
Programs

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes to amend HUD's regulations for the Title I 
Property Improvement program. In this rule, HUD proposes to eliminate 
the portion of the program through which sellers, contractors, or 
suppliers of goods or services assist borrowers in preparing credit 
applications or otherwise obtaining Title I property improvement loans 
from HUD-insured lenders. Property improvement loans would still, 
however, be available directly from lenders. HUD anticipates that this 
proposed rule will end the abuses and excessive claims that HUD has 
experienced in the dealer loan portion of the Title I Property 
Improvement Loan program. HUD is also proposing technical and 
conforming amendments to various sections referring to ``dealers'' or 
``dealer loans'' to clarify that they apply only to the manufactured 
home loan program.

DATES: Comment Due Date: September 2, 1997.

ADDRESSES: HUD invites interested persons to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of the General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street, S.W., 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 at the above address. HUD will not accept 
comments sent by facsimile (FAX).

FOR FURTHER INFORMATION CONTACT: Mark W. Holman, Acting Director, Home 
Mortgage Insurance Division, Department of Housing and Urban 
Development, Room 9270, 451 Seventh Street, S.W., Washington, DC 20410; 
telephone (202) 708-2121. 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:

Background

    Under section 2 of title I of the National Housing Act (12 U.S.C. 
1703) (the Act), HUD insures approved lenders against losses sustained 
as a result of borrower defaults on property improvement loans and 
manufactured home loans. The regulations implementing the Title I 
programs are in 24 CFR part 201. The regulations currently provide for 
two methods of obtaining a Title I property improvement loan. The 
borrower may arrange for a loan directly with the lender (a direct 
loan), or through the intervention or assistance of a dealer (a dealer 
loan), such as a seller, a contractor, or a supplier of goods or 
services. In this proposed rule, HUD seeks to amend the regulations in 
part 201 to eliminate the dealer loan process for property improvement 
loans. This proposed rule would not, however, affect the availability 
of Title I property improvement loans through the direct loan process, 
nor would it affect the process through which borrowers can obtain 
Title I manufactured home loans.
    HUD's decision to omit dealers from the Title I Property 
Improvement Loan program stems from a long-standing concern regarding 
the effectiveness of, and abuses in, the Title I program. As early as 
1986, HUD's Office of Inspector General identified significant fraud 
and abuse in the program, specifically relating to dealer-originated 
loans. In particular, the Inspector General noted a high percentage of 
borrowers being taken advantage of by dealers/contractors, problems 
with approval and supervision of dealers by lenders, and unsatisfactory 
underwriting of dealer originated loans. In 1993 and 1994, monitoring 
reviews by HUD's Quality Assurance Division of major Title I lenders 
revealed extensive dealer fraud and noncompliance with HUD 
requirements. In 1994 the Inspector General recommended termination of 
the entire Title I program because of the higher risk these consumer 
loans represent.
    While HUD believes that the Title I property improvement loans fill 
a niche otherwise unserved by either public or private lending 
products, HUD is concerned with the need to minimize the financial 
liability of this program. In particular, HUD has repeatedly addressed 
the issue of dealer participation in the Title I Property Improvement 
Loan program. HUD instituted a series of reforms in 1985-1986 to 
provide for improved lender oversight of dealer participation. (See 50 
FR 43516, 43521; October 25, 1985). HUD again amended its regulations 
in 1991 to tighten dealer requirements and lender oversight further (56 
FR 52414; October 18, 1991).
    Earlier this year, HUD again reviewed dealer participation in the 
Title I Property Improvement program. HUD reviewed 245 complaints filed 
against dealers since December 1995. Those complaints reveal many of 
the same abuses identified by the Inspector General. These abuses have 
included deceptive advertising practices, fraudulent certification of 
work completed, failure to complete specified improvements, 
falsification of documents, overpricing, and kickbacks.
    In addition, a review of claim rates reveals a consistently higher 
claim rate, dating back to 1987, for dealer loans as compared to direct 
loans. HUD's analysis of the loans originated in 1987-1994 shows a 
claim rate for dealer loans of 6.0 percent, and only a 3.5 percent 
claim rate for direct loans. When analysis of loan performance is 
focused on those loans outside of California (where both types of loans 
have a very high 9.2 percent claim rate) dealer loans have a claim rate 
over 3 times higher than direct loans. The dealer loan claim rate is 
5.5 percent, compared to 1.6 percent for direct loans.
    HUD believes that the elimination of dealer loans from the Title I 
Property Improvement Loan program is an appropriate step to protect 
borrowers from unscrupulous business practices, to ensure greater 
accountability in the program, and to reduce program claim rates. HUD 
notes that this proposed rule would not prevent current property 
improvement dealers from continuing to provide goods and services to 
borrowers pursuant to the program, but it would require direct lender 
approval and supervision of the Title I loan that funds these goods and 
services.
    While HUD believes that the elimination of dealer loans from the 
Title I Property Improvement Loan program is an appropriate step to 
take to address the longstanding problems with the dealer loan 
component of the program, HUD invites comments on ways to address this 
problem other than through the elimination of dealer loans. HUD 
requests that commenters who submit proposals on alternative ways to 
resolve this problem specifically address how the proposed alternative 
would address the systemic flaws and inherent conflicts of interest 
that currently exist in the dealer loan component of the Title I 
Property Improvement Loan program.

[[Page 36195]]

Proposed Amendments to Parts 201 and 202

    This rule proposes to amend the definitions of ``Dealer'' and 
``Dealer loan'' in Sec. 201.2 to eliminate the references to property 
improvement loans, thereby limiting dealers and dealer loans to the 
manufactured home portion of the Title I program. This rule would also 
remove references to property improvement dealer loans in Sec. 201.26 
regarding conditions for loan disbursement, in Sec. 201.27 regarding 
requirements for dealer loans, and in Sec. 201.40 regarding 
postdisbursement loan requirements (such as completion certificates).
    In order to strengthen and clarify the prohibition against property 
improvement dealer loans, however, this proposed rule would do more 
than simply remove references to such loans from the regulations. This 
proposed rule would add a sentence to Sec. 201.29 regarding ineligible 
participants to provide that property improvement dealers (including 
contractors or their affiliates) cannot assist borrowers in obtaining a 
property improvement loan. This proposed rule would similarly add a new 
paragraph to Sec. 201.26 regarding conditions for loan disbursement to 
provide that the lender must ensure that any contractor used to perform 
property improvement work must not have had any role in assisting the 
borrower in obtaining the loan. To supplement these new provisions, 
this proposed rule would add definitions for the terms ``Affiliate,'' 
``Contractor,'' and ``Property improvement dealer.''
    This rule also proposes to amend 24 CFR part 202 regarding the 
approval of lending institutions. Part 202 establishes minimum 
standards and requirements for the Secretary's approval of lenders to 
participate in the Title I program. The regulations in part 202 were 
recently revised as part of HUD's regulatory reinvention efforts (62 FR 
20080; April 24, 1997). Today's rule proposes to amend the new 
Secs. 202.6 and 202.7 regarding supervised lenders and nonsupervised 
lenders (respectively), to provide that HUD-insured lenders cannot make 
Title I property improvement loans through the dealer loan process.

Findings and Certifications

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866, Regulatory Planning and Review, 
issued by the President on September 30, 1993. Any changes made in this 
proposed rule subsequent to its submission to OMB are identified in the 
docket file, which is available for public inspection during regular 
business hours in the Office of the Rules Docket Clerk, Office of the 
General Counsel, Department of Housing and Urban Development, Room 
10276, 451 Seventh Street, S.W., Washington, DC 20410.

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 
during regular business hours in the Office of the Rules Docket Clerk, 
Office of General Counsel, Department of Housing and Urban Development, 
Room 10276, 451 Seventh Street, S.W., Washington, DC 20410.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
doing certifies that it will not have a significant economic impact on 
a substantial number of small entities. The provisions of this proposed 
rule would prevent dealers from assisting borrowers in preparing credit 
applications or otherwise obtaining Title I property improvement loans. 
(The provisions would not prevent dealers from providing information 
about lenders that participate in the Title I property improvement 
program.) This proposed rule would not, however, prevent dealers from 
continuing to provide goods and other services to borrowers with Title 
I property improvement loans. Additionally, the majority of the Title I 
property improvement dealer loans involve dealers and dealer lenders 
that are not small entities and, therefore, HUD does not anticipate 
that this proposed rule would, if implemented, have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act. HUD recognizes, however, 
that the uniform application of requirements on entities of differing 
sizes often places a disproportionate burden on small entities. 
Therefore, HUD specifically solicits comments as to whether this 
proposed rule would significantly impact a substantial number of small 
entities, and as to any less burdensome alternatives.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this proposed 
rule will not have substantial direct effects on States or their 
political subdivisions, on the relationship between the Federal 
Government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Specifically, 
the requirements of this proposed rule are directed to lenders and 
borrowers, and will not impinge upon the relationship between the 
Federal Government and State and local governments. As a result, this 
proposed rule is not subject to review under the Order.

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 on the private sector. This proposed 
rule would not impose any Federal mandates on any State, local, or 
tribal governments, or on the private sector, within the meaning of the 
UMRA.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance program numbers are:

14.110  Manufactured Home Loan Insurance--Financing Purchase of 
Manufactured Homes as Principal Residences of Borrowers;
14.142  Property Improvement Loan Insurance for Improving All Existing 
Structures and Building of New Nonresidential Structures; and
14.162  Mortgage Insurance--Combination and Manufactured Home Lot 
Loans.

List of Subjects

24 CFR Part 201

    Health facilities, Historic preservation, Home improvement, Loan 
programs--housing and community development, Manufactured homes, 
Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 202

    Administrative practice and procedure, Home improvement, 
Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements.
    Accordingly, in chapter II of title 24 of the Code of Federal 
Regulations, parts 201 and 202 are proposed to be amended as follows:

[[Page 36196]]

PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS

    1. The authority citation for 24 CFR part 201 is revised to read as 
follows:

    Authority: 12 U.S.C. 1703; 42 U.S.C. 3535(d).

    2. Section 201.2 is amended by adding new definitions of 
``Affiliate'', ``Contractor'', and ``Property improvement dealer'', in 
alphabetical order; and by revising the definitions of ``Dealer'' and 
``Dealer loan''; to read as follows:


Sec. 201.2  Definitions.

* * * * *
    Affiliate. Persons are affiliates of each other if, directly or 
indirectly, either one controls or has the power to control the other, 
or a third person controls or has the power to control both. Indicia of 
control include, but are not limited to: interlocking management or 
ownership, identity of interests among family members, shared 
facilities and equipment, common use of employees, or a business entity 
organized following the suspension or debarment of a person or entity 
that has the same or similar management, ownership, or principal 
employees as the suspended, debarred, ineligible, or voluntarily 
excluded person.
* * * * *
    Contractor means any individual or other legal entity that submits 
offers for, or is awarded, or reasonably may be expected to submit 
offers for or be awarded, a contract to perform improvement work 
pursuant to a property improvement loan insured in accordance with this 
part. As used in this part, the term ``contractor'' includes any 
affiliate of the contractor.
    Dealer means any individual or other legal entity that engages in 
the business of manufactured home retail sales. All references to the 
term ``dealer'' in this part apply only in the case of manufactured 
home loans, unless otherwise specified (see definition for ``Property 
improvement dealer'' in this section).
    Dealer loan means a manufactured home loan in which a dealer, 
having a direct or indirect financial interest in the transaction 
between the borrower and the lender, assists the borrower in preparing 
the credit application or otherwise assists the borrower in obtaining 
the loan from the lender. The lender may disburse the loan proceeds 
solely to the dealer or the borrower, or jointly to the borrower and 
the dealer or other parties to the transaction.
* * * * *
    Property improvement dealer means a seller, contractor, or supplier 
of goods or services for property improvement.
* * * * *
    3. Section 201.20 is amended by revising paragraph (b)(1) to read 
as follows:


Sec. 201.20  Property improvement loan eligibility.

* * * * *
    (b) Eligible use of the loan proceeds. (1) The loan proceeds shall 
be used only for the purposes disclosed in the loan application. If the 
borrower plans to use a contractor to carry out the improvement work, 
the lender shall obtain a copy of a proposal or contract that describes 
in detail the work to be performed and the estimated or actual cost. If 
the borrower plans to carry out the improvement work without the 
services of a contractor, the borrower shall be required to furnish a 
detailed written description of the work to be performed, the materials 
to be furnished, and their estimated cost.
* * * * *
    4. Section 201.26 is amended by adding a new paragraph (a)(1)(iv); 
by removing paragraph (a)(5); by redesignating paragraphs (a)(6) and 
(a)(7) as paragraphs (a)(5) and (a)(6), respectively; and by revising 
newly redesignated paragraph (a)(5)(iii), to read as follows:


Sec. 201.26  Conditions for loan disbursement.

    (a) * * *
    (1) * * *
    (iv) A property improvement dealer (as that term is defined in 
Sec. 201.2) must not have had any role in procuring, directing, or 
influencing the origination of the loan to the borrower. This 
prohibition does not, however, restrict a property improvement dealer 
from providing information to borrowers about lenders that participate 
in the Title I Property Improvement Loan program.
* * * * *
    (5) * * *
    (iii) Constitutes an acknowledgement of the borrower's 
postdisbursement obligation to furnish a completion certificate and to 
permit an on-site inspection by the lender or its agent in accordance 
with Secs. 201.40 (b) and (c).
* * * * *
    5. Section 201.27 is amended by revising paragraphs (a)(1) and 
(a)(7) to read as follows:


Sec. 201.27  Requirements for dealer loans.

    (a) Dealer approval and supervision. (1) The lender may approve 
only those dealers that, on the basis of experience and information, 
the lender considers to be reliable, financially responsible, and 
qualified to perform their contractual obligations to borrowers 
satisfactorily and to comply with the requirements of this part. In no 
case, however, may the lender approve a dealer unless the dealer has 
and maintains a net worth of not less than $50,000 in assets acceptable 
to the Secretary, and has demonstrated business experience in 
manufactured home retail sales.
* * * * *
    (7) As a condition of dealer approval (or reapproval), the lender 
may require a dealer to execute a written agreement that, if requested 
by the lender, the dealer will resell any manufactured home repossessed 
by the lender under a Title I insured manufactured home purchase loan 
approved by the lender as a dealer loan involving that dealer.
* * * * *
    6. Section 201.29 is amended by adding a sentence to the end, to 
read as follows:


Sec. 201.29  Ineligible participants.

    * * * No property improvement dealer (as that term is defined in 
Sec. 201.2) is eligible or permitted to procure, direct, or influence 
the origination of any loan by a lender under this part.
    7. Section 201.40 is amended by revising the introductory text of 
paragraph (b)(1), by revising (b)(1)(iii), and by revising paragraph 
(c), to read as follows:


Sec. 201.40  Postdisbursement loan requirements.

* * * * *
    (b) Requirements for property improvement loans. (1) After 
receiving the proceeds of a property improvement loan, and after the 
work is completed to the borrower's satisfaction, the borrower must 
submit a completion certificate to the lender, on a HUD-approved form 
and signed by the borrower under applicable criminal and civil 
penalties for fraud and misrepresentation, certifying that:
* * * * *
    (iii) The borrower has not obtained the benefit of and will not 
receive any cash payment, rebate, cash bonus, sales commission, or 
anything of more than nominal value from any property improvement 
dealer as an inducement for the consummation of the loan transaction.
* * * * *
    (c) Inspection requirement on property improvement loans. The 
lender or its agent must conduct an on-site inspection on any property

[[Page 36197]]

improvement loan for which the principal obligation is $7,500 or more, 
and on any property improvement loan for which the borrower fails to 
submit a completion certificate as required under paragraph (b) of this 
section. The inspection must be completed within 60 days after receipt 
of the completion certificate, or as soon as the lender determines that 
the borrower is unwilling to cooperate in submitting the completion 
certificate. The purpose of the inspection is to verify the eligibility 
of the improvements and whether the work has been completed. If the 
borrower will not cooperate in permitting an on-site inspection, the 
lender must report this fact to the Secretary.
* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

    8. 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).

    9. Section 202.6 is amended by revising paragraph (a) to read as 
follows:


Sec. 202.6  Supervised lenders and mortgagees.

    (a) Definition. A supervised lender or mortgagee is a financial 
institution that is a member of the Federal Reserve System or an 
institution whose accounts are insured by the Federal Deposit Insurance 
Corporation or the National Credit Union Administration. A supervised 
mortgagee may submit applications for mortgage insurance. A supervised 
lender or mortgagee may originate, purchase, hold, service, or sell 
loans or insured mortgages, respectively. Supervised lenders may not, 
however, originate a Title I property improvement loan if the 
origination was procured, directed, or influenced by a property 
improvement dealer (as that term is defined in 24 CFR 201.2).
* * * * *
    10. Section 202.7 is amended by revising paragraph (a) to read as 
follows:


Sec. 202.7  Nonsupervised lenders and mortgagees.

    (a) Definition. A nonsupervised lender or mortgagee is a lending 
institution that has as its principal activity the lending or investing 
of funds in real estate mortgages, consumer installment notes, or 
similar advances of credit, or the purchase of consumer installment 
contracts, and that is not approved under any other section of this 
part. A nonsupervised mortgagee may submit applications for mortgage 
insurance. A nonsupervised lender or mortgagee may originate, purchase, 
hold, service, or sell insured mortgages, respectively. Nonsupervised 
lenders may not, however, originate a Title I property improvement loan 
if the origination was procured, directed, or influenced by a property 
improvement dealer (as that term is defined in 24 CFR 201.2).
* * * * *
    Dated: May 30, 1997.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 97-17402 Filed 7-2-97; 8:45 am]
BILLING CODE 4210-27-P