[Federal Register Volume 64, Number 105 (Wednesday, June 2, 1999)]
[Rules and Regulations]
[Pages 29758-29766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13917]



[[Page 29757]]

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Part III





Department of Housing and Urban Development





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24 CFR Part 203



Single Family Mortgage Insurance; Informed Consumer Choice Disclosure 
Notice; Final Rule

  Federal Register / Vol. 64, No. 105 / Wednesday, June 2, 1999 / Rules 
and Regulations  

[[Page 29758]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4411-F-02]
RIN 2502-AH30


Single Family Mortgage Insurance; Informed Consumer Choice 
Disclosure Notice

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

ACTION: Final rule.

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SUMMARY: This final rule implements a recent statutory amendment to 
HUD's Federal Housing Administration (FHA) Single Family Mortgage 
Insurance Program. The statutory amendment requires an original lender 
to provide certain information, in the form of a disclosure notice, to 
prospective borrowers who have applied for an FHA-insured home 
mortgage; and that HUD develop this disclosure notice. Specifically, 
through the disclosure notice, the lender must provide the prospective 
FHA borrower with an analysis comparing the mortgage costs of the FHA-
insured mortgage with the mortgage costs of other similar conventional 
mortgage products that the lender offers and that the borrower may 
qualify for. The disclosure notice must also provide information about 
when the requirement to pay FHA mortgage insurance premiums terminates. 
This final rule takes into consideration public comment received on the 
February 16, 1999 proposed rule.

DATES: Effective Date: July 2, 1999.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Home 
Mortgage Insurance Division, Office of Insured Single Family Housing, 
Room 9270, U.S. Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-8000; telephone (202) 708-2700 
(this is not a toll-free number). Hearing or speech-impaired 
individuals may access this number via TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background on the Informed Consumer Choice Disclosure 
Requirement

    HUD's February 16, 1999 proposed rule (64 FR 7726) advised the 
public of our proposal to amend the Federal Housing Administration 
(FHA) Single Family Mortgage Insurance Program regulations to require 
lenders to disclose, through a notice, certain consumer information to 
prospective FHA borrowers. Because a number of comments received on the 
proposed rule indicated some misunderstanding about the reasons for 
this rulemaking, we believe it may be helpful to repeat, in this final 
rule, the background of the new informed consumer choice disclosure 
requirement.

a. New Statutory Requirement--Lenders Must Disclose Certain Information 
to Borrowers in Form of a Notice and HUD Must Develop the Notice

    Section 225(a) of the Departments of Veterans Affairs and Housing 
and Urban Development, and Independent Agencies Appropriations Act, 
1999 (Pub. L. 105-276, 112 Stat. 2461)(FY 1999 HUD Appropriations Act) 
amended section 203(b)(2) of the National Housing Act (12 U.S.C. 
1709(b)(2))(NHA) by adding the following language at the end of the 
section:

    In conjunction with any loan insured under this section, an 
original lender shall provide to each prospective borrower a 
disclosure notice that provides a one page analysis of mortgage 
products offered by that lender and for which the borrower would 
qualify. This notice shall include: (i) A generic analysis comparing 
note rate (and associated interest payments), insurance premiums, 
and other costs and fees that would be due over the life of the loan 
for a loan insured by the Secretary under this subsection with note 
rates, insurance premiums (if applicable), and other costs and fees 
that would be expected to be due if the mortgagor obtained instead 
other mortgage products offered by the lender and for which the 
borrower would qualify with similar loan-to-value ratio in 
connection with a conventional mortgage . . . assuming prevailing 
interest rates; and (ii) a statement regarding when the mortgagor's 
requirement to pay mortgage insurance premiums for a mortgage 
insured under this section would terminate or a statement that the 
requirement will terminate only if the mortgage is refinanced, paid 
off, or otherwise terminated.
1. Statutory Obligations Imposed on Lenders
    This statutory amendment requires original lenders to provide 
prospective FHA-insured mortgage borrowers with:
    (1) A one page analysis comparing the mortgage costs of the FHA-
insured mortgage with the mortgage costs of other similar conventional 
mortgage products that the lender offers and that the borrower may 
qualify for; and
    (2) Information about when the requirement to pay FHA mortgage 
insurance premiums terminates.
2. Statutory Obligations Imposed on HUD
    Section 225(b) of the FY 1999 HUD Appropriations Act directs HUD 
to:
    (1) Develop the disclosure notice document, through which the 
lender must disclose this information; and
    (2) Develop this notice within 150 days of enactment of the FY 1999 
HUD Appropriations Act through notice and comment rulemaking.

b. How the February 16, 1999 Rule Proposed To Implement These Statutory 
Requirements

    HUD's February 16, 1999 proposed rule included, for comment, a 
model disclosure notice that provided the consumer information required 
to be disclosed by section 225(a) of the FY 1999 HUD Appropriations Act 
(or more accurately by amended section 203(b)(2) of the NHA). The 
proposed rule also included an amendment to HUD's regulations at 24 CFR 
part 203 that would add a new Sec. 203.10. New Sec. 203.10 would 
conform HUD's FHA Single Family Mortgage Insurance Program regulations 
to the statutory lender disclosure requirement.
    In the February 16, 1999 proposed rule, we specifically solicited 
comments and recommendations regarding the format of the proposed 
disclosure notice. As we stated in the proposed rule, HUD anticipates 
lenders will develop generic disclosure notices that compare a typical 
FHA mortgage in the marketplace with typical conventional mortgages 
offered by that lender using a $100,000 sales price (or another amount 
that may be typical within the lender's market). We noted in the rule 
that lenders will be expected to modify their disclosure notices 
accordingly as conventional mortgage offerings and pricing change over 
time.
    We also stated in the proposed rule that it was HUD's assessment 
that a generic disclosure notice (similar to those provided with ARMs) 
reflects the intent of Congress in passing this statutory requirement 
and does not place an unreasonable burden on lenders. Therefore, we are 
not requiring, through this rulemaking, a case-specific disclosure 
notice for each borrower who may qualify for both an FHA-insured 
mortgage and conventional financing. We reiterate the statement, made 
in the proposed rule, that to do otherwise would significantly increase 
mortgage origination costs and be counter to the intent of Congress in 
enacting the informed consumer choice requirement and the Paperwork 
Reduction Act of 1995.

II. Public Comments on the Proposed Rule

    In order to complete rulemaking by the deadline imposed by section 
225(b) of the FY 1999 HUD Appropriation Act,

[[Page 29759]]

we found it necessary to shorten the public comment period for the 
February 16, 1999 proposed rule to 30 days. By the close of the public 
comment period on March 18, 1999, we had received 27 comments on the 
proposed rule. The commenters primarily included mortgage lending 
institutions and associations representing lenders.
    This section of the preamble presents a summary of the significant 
issues raised by the commenters and HUD's responses to their comments.

a. Support for the Proposal--HUD's Proposal Strikes a Reasonable 
Balance

    The majority of the commenters were supportive of the proposed 
model disclosure notice and commended HUD's efforts to strike a balance 
between the borrower's need for information and minimizing the 
administrative burden placed on lenders. The following reflects a 
comment typical of these commenters:

    [We] applaud HUD's efforts to develop the Informed Consumer 
Choice Disclosure in a manner that provides consumers with 
meaningful, relevant information without adding to the 
administrative burden being borne by lenders. By not requiring case-
specific examples, the proposed disclosure format allows lenders to 
be flexible but consistent in the way which pertinent information is 
provided to borrowers thereby striking a reasonable balance between 
the borrower's need for information and the effort required for 
lenders to produce the disclosure.

b. Opposition to the Proposal--Do Not Mandate Disclosure; Do Not 
Mandate Use of HUD's Proposed Disclosure Notice

    Comments. Several commenters stated their opposition to the 
requirement that lenders provide a disclosure notice to prospective FHA 
borrowers. Other commenters in this group recognized that the 
disclosure requirement was statutory but objected to HUD's proposed 
model disclosure notice. These commenters stated that HUD's disclosure 
notice was too summary or brief in form and, therefore, was not very 
informative. These commenters stated that, because of its brevity, the 
disclosure notice might be misleading or confusing for the borrower.
    Other commenters stated that the consumer is buried with 
information that he or she has little interest in receiving, and even 
less ability to decipher, and that implementing the disclosure in any 
form will only heighten the confusion surrounding mortgage lending. 
Another commenter stated that responsible lenders already follow 
procedures that ensure applicants are properly informed of the various 
products available to them and of the costs associated with mortgage 
loans. The commenter stated that HUD should focus on the few lenders 
that do not inform applicants of the various products available to 
them, instead of mandating that the whole industry adopt another 
disclosure notice.
    HUD Response. As stated in the proposed rule, and reiterated in 
this final rule, section 225(a) of the FY 1999 HUD Appropriations Act 
(amended section 203(b)(2) of the NHA) imposes this disclosure 
requirement on lenders. We have no authority to waive this requirement. 
The statute specifies that the disclosure notice is to provide a one 
page analysis of mortgage products offered by the lender for which the 
prospective FHA borrower would qualify, and that this analysis is to 
offer comparison information. The statute imposes an obligation on HUD 
to develop the disclosure notice through notice and comment rulemaking. 
We have complied with this statutory obligation through this 
rulemaking.
    We recognize that a lender may want to provide a borrower with more 
comparison information than a one page disclosure notice makes 
possible. We also recognize, as some commenters pointed out, that many 
lenders already provide this type of information in booklets and 
brochures that are readily available to borrowers. Nevertheless, by 
creating this statutory disclosure requirement, the Congress appears to 
have sought specific assurances that lenders are advising prospective 
FHA borrowers of any comparable conventional mortgage products that 
they may qualify for. The implementation of this requirement through 
regulation does not prohibit a lender from providing a borrower with 
information the lender has already compiled in addition to the one-page 
disclosure notice.

c. Specific Comments on the Model Disclosure Notice and New Sec. 203.10

    Comment--Additional Information Should Be Included in the Notice, 
and Certain Terms Should be Changed. Several commenters suggested 
various changes to the proposed model disclosure notice. Some of these 
suggestions consisted of stylistic or editorial changes. Other 
suggestions included substantive changes to the model notice. These 
changes included:

--Adding a line to compare the annual percentage rate (APR) of the 
mortgage products;
--Adding a ``total payment'' line to include the monthly mortgage 
insurance premium in line 6;
--Adding a third column to show the dollar differences between the 
first two columns;
--Changing the title of line 4 to ``Downpayment and Closing Costs'';
--Changing the title of line 4 to ``Required Equity Investment'';
--Changing the title of line 4 ``Cash Needed at Closing'';
--Clarifying that closing costs do not include points;
--Providing more explanation on how mortgage insurance payments change;
--Defining the percentage of private mortgage insurance coverage 
required;
--Identifying conditions under which mortgage insurance may not be 
dropped under a conventional mortgage; and
--Identifying any conditions that attach to the conventional loan that 
may require the continuation of mortgage insurance.

    This list does not include all suggestions made by the commenters, 
but provides an overview of the various types of changes suggested by 
the commenters.
    HUD Response--Model Notice Adheres to Statutory Requirements; 
Lenders Have Flexibility to Add Information They Believe Relevant. HUD 
appreciates all the suggestions that commenters offered on how the 
proposed model notice could be improved. As the model notice included 
in this final rule reflects, we adopted some, but clearly not all, of 
the changes recommended by the commenters. Consistent with President 
Clinton's memorandum on plain language (entitled ``Plain Language in 
Government'', 63 FR 31885, June 10, 1998), we revised some language in 
an effort to make the model notice conform with the President's 
directive. Of the suggested changes that we did not adopt in the final 
model notice, we note that many of the suggested changes would require 
more detailed information than a one-page analysis can reasonably 
include. More importantly, many of the suggested changes would require 
more information than the statute requires be included in the 
disclosure notice.
    In developing the disclosure notice, we were cognizant of both the 
considerable information already provided to borrowers by many lenders 
and the degree of information we believe that Congress intended lenders 
to provide to borrowers in a one page analysis. We believe that 
Congress, in imposing this requirement on lenders, sought assurances 
that FHA borrowers would be made aware of any non-FHA mortgage products 
that they may qualify for, and determined that a one page

[[Page 29760]]

analysis would provide the appropriate ``notification'' of these non-
FHA mortgage products. We believe that this ``notification of possible 
mortgage options'' was the main objective of this statutory 
requirement. For more complete information, the FHA borrower, once 
notified by the disclosure notice, can then follow-up with the lender 
and obtain more information on any conventional mortgages that the 
borrower may qualify for. We believe that the statutory language is 
clear that Congress was not mandating a detailed comparison of FHA 
versus conventional mortgage products, nor was it mandating a notice 
that would explain all applicable mortgage terms.
    In developing the model disclosure notice, HUD's intent was to 
adhere to the statutorily required components of the notice and not to 
go beyond these requirements. Therefore, we structured the model notice 
to provide only the information statutorily required, which is to say, 
only the information sufficient to put the prospective FHA borrower on 
notice of conventional mortgage products that the borrower may qualify 
for, and to provide this information in a manner and format that would 
not impose an undue administrative burden on lenders.
    As discussed in the proposed rule and later in this preamble, 
lenders may want to make additions to their disclosure notices. The 
model notice included in the final rule merely represents the format 
prescribed by the Commissioner. The model notice contains the minimum 
elements of an informed consumer choice disclosure notice. These 
elements must be included in a lender's notice. The lender may want to 
include additional lines, columns, or mortgage features that better 
reflect their mortgage products, or define terms lenders believe should 
be explained.
    Comment--The Title of the Second Column of the FHA mortgage 
insurance Premium Information Tables is Unclear. Two commenters wrote 
that the titles of the second columns of the FHA mortgage insurance 
premium tables (entitled ``You will make payments for:'') were unclear. 
Both commenters were concerned that consumers might not realize that 
``payments'' means insurance premium payments, rather than mortgage 
payments. One commenter suggested that the titles should be changed to 
``You will make premium payments for:''. The other commenter suggested 
that the titles should be changed to read: ``You will make mortgage 
insurance payments for:''.
    HUD Response--Clarification Is Made in Final Version of Model 
Notice. We agree that the title of the second column of the FHA 
mortgage insurance premium information tables in the February 16, 1999 
proposed model notice was unclear. In order to be as clear as possible, 
in the model notice included in this final rule, we changed the title 
to reflect both commenters' suggestions. The title of the second column 
is now ``You will make mortgage insurance premium payments:''.
    Comment--Does ``Associated Costs'' Include the Interest Rate? One 
commenter asked whether the phrase ``associated costs'' in the first 
paragraph of the proposed model notice included the interest rate. The 
commenter was concerned that requiring exact interest rate quotes on 
the disclosure notice would significantly increase the paperwork burden 
of the lender. The commenter suggested that the final model notice 
should clarify whether the phrase ``associated costs'' includes the 
interest rate.
    HUD Response--Interest Rate Not Included in Associated Costs. The 
phrase ``associated costs'' does not include the interest rate. The 
disclosure notice does not require an interest rate quote.
    Comment--Reference to ``Upfront Mortgage Insurance Premium'' 
Requires Revision. Three commenters made suggestions about line 10 of 
the model notice, entitled ``Upfront Mortgage Insurance Premium.'' Two 
commenters suggested that line 10 should use the upfront mortgage 
insurance premium (UFMIP) for non-first-time homebuyers. One of these 
commenters pointed out that the model notice uses the UFMIP for first-
time homebuyers who obtain housing counseling, which implies that 
lenders should use this number. The other commenter suggested that line 
10 should state the UFMIP as a percentage of the loan amount (either 
1.75% or 2.25%), in addition to the dollar amount.
    HUD Response--Lender Should Choose Appropriate UFMIP. The 
directions in the proposed rule for line 10 of the model notice 
provided that the lender should ``[s]how any upfront mortgage insurance 
premium charged. . .'' This instruction means that a lender should 
choose an appropriate UFMIP. In order to be clear, however, the final 
model notice includes a footnote that indicates which UFMIP was used in 
the table. Lenders must include a similar footnote.
    Comment--The FHA Column Numbers Appear to be Incorrect. One 
commenter suggested that some of the numbers in the FHA column are 
incorrect. The commenter wrote that, assuming the base mortgage amount 
of $97,750 (line 2), the upfront mortgage insurance premium (line 10) 
would be $2,199.38, and the adjusted mortgage amount would be $99,949 
(line 2 in parentheses). The commenter also suggested that the monthly 
mortgage insurance premium (line 8) would be $40.54.
    HUD Response--Model Notice Based on First-Time Homebuyer UFMIP. The 
numbers in the FHA column in the model notice are based on a first-time 
home buyer UFMIP. The numbers suggested by the commenter are based on a 
non-first-time homebuyer UFMIP. As mentioned in the response to the 
previous comment, the final model notice has been revised to include a 
footnote that indicates which UFMIP was used in the table. In the case 
of the final model notice, the footnote indicates that the table uses a 
first-time homebuyer UFMIP.
    Please note, the number listed for the monthly mortgage insurance 
premium (line 8) has been revised from $41.44 to $40.73 in the final 
model notice. This is a correction. The number listed in the proposed 
model notice was based on the mortgage amount including the UFMIP (line 
2 in parentheses). It should have been based on the mortgage amount not 
including the UFMIP. The number listed on line 8 of the final model 
notice is now correct.
    Comment--Remove the Phrase ``Lender's Judgment'' from Model Notice. 
The proposed model disclosure notice includes a sentence that states 
``[I]n your lender's judgment, you may have the credit standing to 
qualify for more than one mortgage product.'' A few commenters 
requested that the phrase ``in your lender's judgment'' be removed from 
the model disclosure notice. These commenters stated that the phrase 
tends to indicate that the lender controls the borrower's eligibility 
for each mortgage product listed on the disclosure notice and that the 
lender has the authority to offer a borrower other mortgage products 
when, in some cases, the lender has no such authority.
    HUD Response--Phrase Removed but Statute Requires Lenders to 
Exercise Judgment. Although we removed this phrase from the final model 
notice, we have included this language in the text of the final 
regulation. The statute expects lenders to exercise their judgment in 
determining whether a prospective FHA borrower may be eligible for a 
conventional mortgage product. The statute provides that ``in 
conjunction with any loan insured under this section (section 203(b)(2) 
of

[[Page 29761]]

the NHA) an original lender shall provide to each prospective borrower 
a disclosure notice that provides a one page analysis of mortgage 
products offered by that lender and for which the borrower would 
qualify'' (emphasis added). We believe that this language requires the 
lender to determine, based on the information the lender has about the 
prospective FHA borrower, whether the borrower may qualify for a 
conventional mortgage product. If the lender determines that the 
prospective FHA borrower may qualify for a conventional mortgage 
product, the lender must provide the disclosure notice to the borrower.
    The final rule does not require, however, that this determination 
be a formal determination in any way. The final rule only requires the 
lender to make a determination based on the lender's initial assessment 
of the prospective FHA borrower's eligibility for a conventional 
mortgage product. We believe that the Congress intended the disclosure 
notice to pose as minimal a burden on lenders as possible. We also 
believe that Congress intended that, to be most useful, the disclosure 
be provided to borrowers as early as possible in the process. Requiring 
that the determination be based only on an initial assessment satisfies 
both these requirements because a lender need only make a quick initial 
determination, perhaps within a few minutes of meeting with a borrower, 
before deciding whether to hand out the notice.
    The final rule emphasizes that the nature of determination is 
informal by using the language ``may qualify'' (Sec. 203.10(a)) in 
place of the statutory language ``would qualify''. The word ``may'' 
indicates a less certain determination than the word ``would'' 
requires. The use of the word ``may'' in the final rule indicates that 
the lender's determination need only be an informal, initial 
determination. Because we also believe that Congress intended the 
notice to be distributed as widely as possible, the final rule states 
that if a lender is unsure about a borrower's eligibility the lender 
should distribute the disclosure notice.
    Comment--Providing the Disclosure Notice Will Mislead Borrowers 
That They Are Eligible for Non-FHA Products. A few commenters requested 
clarification regarding to whom the lender must provide the informed 
consumer choice disclosure notice. One commenter stated that providing 
the disclosure will lead the average applicant to believe that he or 
she will be equally likely to qualify for either FHA or conventional 
financing. This commenter stated that in most cases the average FHA 
applicant will not qualify for conventional financing. Other commenters 
asked whether a lender is to provide the disclosure only to applicants 
who will likely qualify for conventional financing.
    HUD Response--The Statute Requires the Lender to Provide the 
Disclosure to a Prospective FHA Borrower Who ``Would Qualify'' for a 
Non-FHA Mortgage Product Offered by the Lender. The statute does not 
require a lender to provide every prospective borrower or every 
prospective FHA borrower with an informed consumer choice disclosure 
notice. As mentioned in the response to the previous comment regarding 
the phrase ``lender's judgment'', a lender is required to determine, 
based on the lender's initial assessment, whether a prospective FHA 
borrower may be eligible for a conventional mortgage product. If the 
lender determines that the borrower may be eligible, then the lender 
must provide a disclosure notice to the borrower.
    Again, in imposing this requirement on lenders, we believe that 
there was concern on the part of the Congress that there are 
individuals who qualify for both an FHA-insured mortgage and a 
conventional mortgage, and Congress wanted assurances that these 
borrowers would be made aware of their choice of financing. In order to 
ensure that all prospective FHA borrowers that must receive a 
disclosure notice do, in fact, receive a disclosure notice, the lender 
should err on the side of providing a disclosure notice to a 
prospective FHA borrower. The final rule emphasizes this by stating 
that if a lender is unsure about a prospective FHA borrower's 
eligibility, the lender should provide a disclosure notice to the 
borrower.
    One commenter suggested that a lender should be able to include in 
the disclosure notice a comparison of key underwriting requirements 
between conventional and FHA loan products, and this information would 
assist the consumer in understanding why conventional financing would 
not be a viable alternative. The statute, however, does not mandate 
this action on the part of the lender.
    Comment--Clarify the Type of Comparison of FHA/Conventional 
Mortgage Products That Is Required. One commenter stated that it was 
the intent of the Congress that the disclosure notice should provide 
consumers with a broader comparison of conventional loan products and 
not just a single conventional loan product. Other commenters requested 
that the final rule make clear that the disclosure notice assumes 
hypothetical loan terms; that the notice is for illustration purposes 
only (that actual customer rate and loan terms may be different); or 
that where a lender serves more than one market, the lender can develop 
a generic notice suitable for all markets. Other commenters stated that 
the notice should require lenders to provide only a comparison of the 
most commonly required FHA mortgages and most commonly available 
conventional mortgage products, and requested that the final rule 
clarify that the lender may select a typical, conventional loan for 
comparison. Another commenter stated that HUD should stipulate to 
lenders that conventional loans used for comparison should include 
consideration of all conventional products offered by the lender that 
the borrower may qualify for with the best alternative used for 
comparison with the comparable FHA loan parameters. One commenter 
suggested that HUD's model notice include the following language for 
clarity purposes: ``As such, your lender has prepared a comparison of 
typical FHA and alternative conventional mortgage products for your 
review. The information below reflects terms and conditions that we 
have used recently for our FHA and conventional loans. The loan amount, 
costs, interest rate, premiums, and other information in the comparison 
will vary from your own loan transaction.''
    HUD Response--The Lender Need Only Provide A Generic Comparison. We 
believe that the proposed rule was clear about the type of comparison 
that is required by the statute, that is a generic comparison. We 
stated in the February 16, 1999 proposed rule that HUD would not 
require a case-specific notice for each prospective FHA borrower who 
may qualify for both an FHA-insured mortgage and conventional 
financing. We stated that the disclosure notice should compare a 
typical FHA mortgage in the marketplace with a typical conventional 
mortgage offered by the lender. We understand, however, the concerns of 
lenders about the type of comparison that must be made, and have 
included additional language in the final rule and in the model notice 
that we believe eliminates ambiguity about the type of comparison 
required.
    Comment--HUD's Proposal For the Time At Which the Lender Must 
Provide the Disclosure Should Be Changed. Two commenters stated that 
borrowers want and need to see the information provided in the 
disclosure notice before they begin their application process. Other 
commenters stated that the timing of the disclosure notice should 
conform to the timing of disclosure established

[[Page 29762]]

for statements required by the Real Estate Settlement Procedures Act 
(RESPA) and the Truth in Lending Act (TILA). Another commenter 
suggested that the trigger event should not be the signing of the loan, 
but when the application is received or prepared by the lender. These 
same commenters stated that, at a minimum, the final rule must clarify 
that when the proposed rule stated ``three days,'' HUD meant three 
business days.
    HUD Response--Disclosure Notice Must Be Provided No Later Than 
Three Days After the Lender's Receipt of the Application. We appreciate 
these comments and recognize the need for clarification with respect to 
the time at which the lender must provide the disclosure notice. The 
final rule provides that the disclosure notice must be provided to a 
prospective FHA borrower no later than three business days after the 
lender's receipt of the application.
    Comment--Rule Should Clarify If Mortgage Brokers Are Responsible 
for Providing the Disclosure Notice. A few commenters asked whether a 
mortgage broker is responsible for delivering the disclosure notice if 
the application is taken by a mortgage broker. One commenter noted that 
in the situation in which a broker takes the application, the broker 
might not deliver the application to the lender until well after the 
three-day period has expired.
    HUD Response--A Mortgage Broker Is Not An Original Lender; Lender 
Is Responsible for Providing Disclosure Notice. The statute provides 
that the ``original lender'' must provide the informed consumer choice 
disclosure. Therefore, a mortgage broker providing the disclosure 
notice to the borrower will not fulfill the lender's obligation under 
the statute. As noted in the previous response, the final rule 
clarifies that the timing of the disclosure notice is no later than 3 
business days after the lender's receipt of the application.
    Comment--The Disclosure Notice Should Be Updated Only Once 
Annually. Several commenters were concerned about the frequency with 
which they would be required to update the disclosure notice. These 
commenters stated that since pricing of mortgage products can change as 
frequently as daily or weekly, it would appear that the expectation is 
that the lenders would be required to update the disclosure notices 
with the same frequency. The commenters stated that to update the 
disclosure notices for pricing changes as frequently as they occur 
defeats the intent of Congress in mandating a generic comparison. These 
lenders requested that the final rule provide that lenders need only 
update the disclosure notice once every 12 months.
    HUD Response--The Final Rule Provides that the Disclosure Notice 
Need Only Be Updated Once Annually. We agree with the commenters that 
market conditions could technically require frequent revisions to the 
disclosure notice that would result in an undue administrative burden 
on lenders. HUD encourages lenders to update their disclosure notices 
periodically so that the notice remains meaningful to their borrowers, 
but the final rule only requires lenders to update their disclosure 
notices once annually.
    Comment--Delay the Effective Date of its Rule Requiring Informed 
Consumer Choice Disclosure. A few commenters requested that HUD delay 
implementation of the informed consumer choice disclosure notice until 
after the Homeownership Protection Act (Pub. L. 105-216, 12 U.S.C. 4901 
et seq.) (HPA) becomes effective on July 29, 1999. These commenters 
noted that this statute will change the maximum number of years that 
mortgage insurance will be required. The HPA requires automatic 
termination of private mortgage insurance (PMI), generally when the 
loan-to-value (LTV) is scheduled to reach 78 percent of its original 
level. The commenters stated that in addition to the HPA, the Federal 
Reserve Board plans to revise the Official Staff Commentary on 
Regulation Z to explain the interaction between the HPA and TILA.
    HUD Response--Statute Provides No Authority for Delaying 
Implementation. We understand the concerns of the commenters, but 
believe that the FY 1999 HUD Appropriations Act does not provide HUD 
with the authority to delay implementation. In requiring HUD to develop 
the disclosure notice 150 days after enactment of the HUD FY 1999 
Appropriations Act and to develop the disclosure notice through notice 
and comment rulemaking, we interpret this to mean that the only delay 
in implementation of this statutory requirement is to be HUD's 
development of the notice. To ensure prompt development, the Congress 
imposed a statutory deadline on HUD for development of the notice.
    Comment--HUD Needs to Provide Additional Guidance on How 
Calculations Are to Be Made in the Comparison Chart and More Detailed 
Instructions on Preparing the Notice. A few commenters asked technical 
questions about how precisely calculations were to be done in the 
disclosure notice to provide a meaningful comparison to consumers.
    HUD Response--HUD Will Provide Lenders More Detailed Instructions 
Through Mortgagee Letter. It is our intent that the disclosure notice 
impose as minimal an administrative burden on FHA approved mortgagees 
as possible. This rule is not the appropriate place to provide detailed 
processing instructions and additional guidance on calculations to 
lenders. We will be issuing a Mortgagee Letter and will provide 
specific guidance to lenders about the disclosure notice.

III. The Informed Consumer Choice Disclosure Notice--HUD's Model 
Notice

    The following provides HUD's model informed consumer choice 
disclosure notice. To complete the generic disclosure format shown 
below, lenders should use the following instructions. At the lender's 
discretion, a lender may revise the disclosure notice to include 
additional line items or columns, further define terms, or explain 
additional features that better reflect the lender's FHA and 
conventional mortgage products so as to make a meaningful comparison.

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IV. Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520) and assigned OMB control number 2502-0537. 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.

Environmental Impact

    In accordance with 24 CFR 50.19(c)(1) of HUD's regulations, this 
rule does not direct, provide for assistance or loan and mortgage 
insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Therefore, this rule is categorically excluded 
from the requirements of the National Environmental Policy Act of 1969 
(Pub. L. 91-190, 83 Stat. 852, codified as amended at 42 U.S.C. 4321-
4347).

Regulatory Flexibility Act

    The Secretary has reviewed this final rule before publication and 
by approving it certifies, in accordance with section 3(a) of the 
Regulatory Flexibility Act (5 U.S.C. 605(b)), that this rule would not 
have a significant economic impact on a substantial number of small 
entities. The rule implements a statutory disclosure requirement 
imposed on lenders and provides lenders with a model format for that 
disclosure so that the lenders may comply with the statutory 
requirements.

Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612 (entitled ``Federalism''), has determined that 
the policies contained in this rule would 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. 
Accordingly, review under the order is not required.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (5 U.S.C. 
1531-1538)(UMRA) requires Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and on 
the private sector. This final rule does not impose, within the meaning 
of the UMRA, any Federal mandates on any State, local, or tribal 
governments or on the private sector.

List of Subjects in 24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.
    For the reasons discussed in the preamble, HUD amends 24 CFR part 
203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. 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).
    2. Add Sec. 203.10 to read as follows:


Sec. 203.10  Informed consumer choice for prospective FHA mortgagors.

    (a) Mortgagee to provide disclosure notice. A mortgagee must 
provide a prospective FHA mortgagor with an informed consumer choice 
disclosure notice if, in the mortgagees's judgment, the prospective FHA 
mortgagor may qualify for similar conventional mortgage products 
offered by the mortgagee. The mortgagee should base this judgment on 
the mortgagee's initial assessment of the prospective FHA mortgagor's 
eligibility for a conventional mortgage product. If a mortgagee is 
unsure about a prospective FHA mortgagor's eligibility for a 
conventional mortgage product, the mortgagee should provide the 
prospective FHA mortgagor with an informed consumer choice disclosure 
notice.
    (b) Informed consumer choice disclosure notice. (1) Contents of 
notice. The informed consumer choice disclosure notice must:
    (i) Provide a one page generic analysis comparing the mortgage 
costs of an FHA-insured mortgage with the mortgage costs of similar 
conventional mortgage products offered by the mortgagee that the 
prospective FHA mortgagor may qualify for;
    (ii) Provide information about when the requirement to pay FHA 
mortgage insurance premiums terminates; and
    (iii) Meet the requirements of section 203(b)(2) of the National 
Housing Act (12 U.S.C. 1709(b)(2)).
    (2) Format of disclosure notice. The informed consumer choice 
disclosure notice must be provided in a format prescribed by the 
Commissioner. HUD has prepared a model informed consumer choice 
disclosure notice that represents this format and that meets the 
requirements of section 203(b)(2) of the National Housing Act (12 
U.S.C. 1709(b)(2)). The model informed consumer choice disclosure 
notice contains the minimum elements of an informed consumer choice 
disclosure notice. These elements must be included in a mortgagee's 
informed consumer choice disclosure notice. A mortgagee, however, may 
include additional elements in an informed consumer choice disclosure 
notice to better reflect the mortgagee's products or to provide 
information that the mortgagee believes is meaningful and helpful to 
the mortgagee's customers.
    (3) Availability of model disclosure notice. HUD's model informed 
consumer choice disclosure notice is made available to FHA-approved 
mortgagees through Mortgagee Letter and is available to the public 
through the internet at HUD's web site at http://www.hud.gov or by 
contacting: Home Mortgage Insurance Division, Office of Insured Single 
Family Housing, U.S. Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-8000; telephone (202) 708-2700 
(this is not a toll-free number), or the nearest HUD Homeownership 
Center (Atlanta, GA (888) 696-4687; Denver, CO (800) 543-9378; 
Philadelphia, PA (800) 440-8647; or Santa Ana, CA (888) 827-5605). 
Hearing- or speech-impaired individuals may access these numbers via 
TTY by calling the toll-free Federal Information Relay Service at (800) 
877-8339.
    (c) Timing. When required under paragraph (a) of this section, a 
mortgagee must provide an informed consumer choice disclosure notice to 
a prospective FHA mortgagor not later than three business days after 
the mortgagee receives the prospective FHA mortgagor's application.
    (d) Revision of notice. A mortgagee should revise its informed 
consumer choice disclosure notice periodically to reflect prevailing 
market conditions. To ensure that the informed consumer choice 
disclosure notice reflects prevailing market conditions, a mortgagee 
must revise its informed consumer choice disclosure notice at least 
once annually.
    (e) Applicability. This section applies to any application for 
mortgage insurance authorized under section 203(b) of the National 
Housing Act (12 U.S.C. 1709) that the mortgagee receives on or after 
July 2, 1999.
    (f) Definitions. As used in this section:

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    Application means the submission of financial information in 
anticipation of a credit decision.
    Conventional mortgage means conventional mortgage as used in 
section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1454(a)(2)) or section 302(b)(2) of the Federal National 
Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), as applicable.
    Mortgagee means mortgagee as defined in Sec. 202.2 of this chapter.
    Prospective FHA mortgagor means a person who submits an application 
to a mortgagee to obtain mortgage insurance authorized under section 
203(b) of the National Housing Act (12 U.S.C. 1709).

    Dated: May 12, 1999.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 99-13917 Filed 6-1-99; 8:45 am]
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