[Federal Register Volume 64, Number 177 (Tuesday, September 14, 1999)]
[Proposed Rules]
[Pages 49956-49958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23921]



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Part XII





Department of Housing and Urban Development





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24 CFR Part 203



Sources of Homeowner Downpayment; Proposed Rule

  Federal Register / Vol. 64, No. 177 / Tuesday, September 14, 1999 / 
Proposed Rules  

[[Page 49956]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4469-P-01]
RIN 2502-AH38


Sources of Homeowner Downpayment

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

ACTION: Proposed rule.

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SUMMARY: HUD proposes to establish specific standards regarding the 
mortgagor's investment in the mortgaged property when a gift is 
provided by a charitable or other nonprofit organization. A gift could 
not be used for the mortgagor's investment if the organization received 
funds for the gift--directly or indirectly--from the seller of the 
property. The proposed rule is intended to prevent a seller from 
providing funds to an organization as a quid pro quo for that 
organization's downpayment assistance for purchases of one or more 
homes from the seller. In addition, HUD proposes to redraft in a more 
readable, accurate and up-to-date form, without substantive change in 
policy, the current regulation on the mortgagor's investment in the 
property.

DATES: Comments Due Date: November 15, 1999.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500. Communications should 
refer to the above docket number and title. Facsimile (FAX) comments 
are not acceptable. A copy of each communication submitted will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Home Mortgage 
Insurance Division, Room 9266, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-8000, (202) 
708-2700 (this is not a toll-free number). For hearing- and speech-
impaired persons, this number may be accessed via TTY (text telephone) 
by calling the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

    This proposed rule would accomplish two purposes. Its primary 
purpose is to publish for public comment a proposal to establish 
specific standards regarding the use of gifts by charitable or other 
nonprofit organizations as a source of the mortgagor's investment in 
the mortgaged property. Gifts could not be made from funds that the 
organization received--directly or indirectly--from the seller of the 
property. In addition, we propose to take this opportunity to redraft 
in a more readable, accurate and up-to-date form, without substantive 
change in policy, current Sec. 203.19 on the mortgagor's investment in 
the property.
    Section 203(b)(9) of the National Housing Act requires mortgagors 
(with narrow exceptions) to pay on account of the property at least 3 
percent of the cost of acquisition in order for the mortgage to be 
eligible for insurance by FHA. The statute, and the implementing 
regulation at 24 CFR 203.19, are silent about permissible and/or 
impermissible sources of the mortgagor's investment, except that some 
loans are permitted sources under the statute and other sources (by 
implication) are not permitted sources. For example, legislation was 
enacted in 1996 to amend section 203(b)(9) of the National Housing Act 
to permit family members to provide gifts and loans to other family 
members.
    FHA has specified through its handbooks and mortgagee letters a 
broad range of other permissible sources of the mortgagor's investment 
beyond the homebuyer's own cash savings, none of which include the 
seller of the property. In addition to loans permitted by statute, 
permissible sources include gifts from family members, the borrower's 
employer or labor union, governmental agencies and public entities 
engaged in the provision of homeownership assistance, and charitable 
organizations. It is this last group that is of concern.

Proposed Substantive Change

    Although FHA has attempted to preclude downpayment funding derived 
from the seller of the property, either directly or indirectly, some 
charitable organizations have been able to circumvent these 
restrictions in various ways, including the establishment of a fund 
that provides the ``gift'' to the homebuyer. However, the fund is 
immediately replenished by the seller providing a ``charitable 
donation'' or paying a ``service fee'' to the nonprofit from the 
proceeds of the sale of the house and does so only if the homebuyer is 
using the charitable organization's downpayment assistance program. 
There is a clear quid pro quo between the homebuyer's purchase of the 
property and the seller's ``contribution'' or payment to the nonprofit 
organization.
    FHA has several concerns with these programs. First, borrowers with 
limited cash investments into the sale transactions represent 
significantly greater risk to the insurance fund. In many cases, 
homebuyers using these downpayment assistance programs need only one 
percent of their own money for the downpayment. In some programs, they 
are not required to invest any cash at all. While many States and 
public entities may have similar programs regarding the homebuyer's 
cash investment requirements, those programs generally carry with them 
substantive underwriting criteria above and beyond FHA's minimum 
standards as well as program eligibility requirements (usually 
restrictions on the borrower's maximum income so that the program 
benefits low- and moderate-income clients); these are generally missing 
in the programs of the nonprofits recently reviewed by FHA. FHA's 
second concern is that the sales price is often increased so that the 
seller's net proceeds are not diminished. This increases FHA's risk 
that it will not recover the full amount owed if forced to acquire and 
resell a home purchased by a participating borrower who then defaults 
on the loan.
    The proposed rule generally permits a mortgagor's minimum 
investment to come from gifts from charitable organizations and other 
non-profit organizations, if HUD has approved the organizations as 
sources of gifts. Despite HUD's approval, an organization's gift may 
not be used for the mortgagor's minimum investment if the organization 
receives from the seller of the property at any time, directly or 
indirectly, either the gift funds, or other consideration or 
reimbursement for making the gift, including service fees. This 
prohibition would apply to sales of existing homes by private sellers 
as well as sales by builders, developers, etc., involved in new 
construction, or any party with an identity of interest with them. HUD 
would not allow any form of downpayment assistance in any of its 
programs if those funds are derived, partially or in whole, in any 
manner from sellers of the property being purchased with the 
assistance.
    The proposed rule is intended to prevent a seller from providing 
funds to an organization as a quid pro quo for that organization's 
downpayment assistance for purchases of one or more homes from the 
seller. The proposed rule is not intended to preclude sellers such as 
builders from contributing to charitable and other nonprofit

[[Page 49957]]

organizations that provide downpayment assistance unrelated to 
properties sold by the seller or that otherwise further affordable 
housing.

Proposed Non-Substantive Redrafting of Sec. 203.19

    The current Sec. 203.19, entitled ``Mortgagor's minimum 
investment'', is a combination of section 203(b)(9) of the National 
Housing Act (as it existed before the 1996 amendment) and additional 
regulatory policy in two areas. First, Sec. 203.19(a) includes a $200 
minimum investment in two cases where section 203(b)(9) does not apply, 
due either to an express exclusion (for veterans) or an implicit 
exclusion (for disaster victims receiving a 100 percent mortgage under 
section 203(h) of the National Housing Act and Sec. 203.18(e) of the 
regulations). Second, Sec. 203.19(b) provides detailed guidance 
regarding the type of loan for cases (other than family member loans) 
where section 203(b)(9) expressly permits loans for the mortgagor's 
minimum investment. Regarding loans, Sec. 203.19 does not currently 
recognize either family member loans or loans under State or local 
housing assistance programs (impliedly permitted by section 528 of the 
National Housing Act) although both forms of loans are recognized in 
FHA's mortgage credit handbook. There is nothing regarding downpayment 
assistance in the form of gifts in the current Sec. 203.19. Therefore, 
we have considered it preferable to redraft and update Sec. 203.19, in 
a non-substantive manner, instead of simply adding a new substantive 
discussion of restrictions for a particular type of gift.
    As redrafted, Sec. 203.19 has the following organization. Paragraph 
(a) requires a mortgagor to have the funds needed to complete the 
transaction (payment of purchase price and settlement costs) in 
addition to the funds provided by the insured mortgage itself. This 
basic policy was previously stated only in a handbook rather than a 
regulation, but it is a basic requirement of mortgage lending and does 
not represents a new substantive policy.
    Paragraph (b) corresponds to the current Sec. 203.19(a)(1) and the 
first part of section 203(b)(9) of the National Housing Act by stating 
the basic rule for a 3 percent mortgagor cash investment. The statute 
and the current regulation give HUD the discretion to require more than 
3 percent, but it is no longer necessary to reserve this discretion in 
regulations. In practice, HUD has not demanded more than 3 percent 
except as needed to satisfy the basic requirement for cash sufficient 
to close the transaction (as stated in proposed new paragraph (a)). 
Both the statute and the current regulation except from the 3 percent 
requirement for veterans (who can qualify for 100 percent mortgage 
financing for a $ 25,000 loan under section 203(b)(2) of the Act) and 
disaster victims (who can qualify for 100 percent mortgage financing 
under section 203(h) of the National Housing Act). However, the current 
Sec. 203.19(a)(2) imposes a $200 minimum cash investment requirement 
for those mortgagors. That $ 200 requirement is no longer meaningful in 
relation to vast increases in home values and mortgage amounts since 
the $200 requirement was adopted, and HUD proposes to delete it from 
the regulations in the interests of simplifying mortgage processing.
    Paragraph (c) of the proposed rule would state what has long been a 
basic HUD policy: the mortgagor's required funds should not come from 
the seller of the property. This is necessary to achieve meaningful 
application of statutory loan-to-value requirements. Otherwise, there 
could be a tendency for sellers to advance funds for closing costs 
while inflating the purchase price to recoup the costs, with a higher 
mortgage amount being based on the inflated price. Using the lesser of 
appraised price or purchase price to determine mortgage amount can 
control this tendency to a degree, but additional measures are prudent. 
On the other hand, HUD has recognized local market practices in which 
sellers customarily agree to pay some of the buyer's closing costs. 
Beginning in the mid-1980's, HUD's administrative policies reflected in 
Mortgagee Letters and handbooks have permitted some seller 
contributions, consistent with local market practices that would be 
reflected in local appraisal practices, but never more that 6 percent 
of the purchase price. Proposed paragraph (c) would permit HUD to 
continue this administrative policy and make any needed adjustment 
without rulemaking, as long as the seller does not ever provide the 
statutory 3 percent mortgagor's cash investment. Funds from the seller 
would be broadly defined as any funds derived directly or indirectly 
from any gift or loan made by the seller or any party with an identity 
of interest with the seller.
    Paragraph (d) states the general policy that funds from loans or 
gifts may not be used for any part of the mortgagor's minimum 
investment, unless otherwise provided in the rule. Paragraph (e), like 
current Sec. 203.19(b), is intended to identify certain loan sources 
authorized by statute. The paragraph states clearly HUD's historical 
understanding of the Congressional intent behind section 203(b)(9) of 
the National Housing Act: loans are a forbidden source of the 3 percent 
minimum investment unless a statute provides otherwise, explicitly or 
implicitly. Paragraph (e) includes certain statutory authorizations 
that HUD relies on but which are currently not stated or referenced in 
regulations (family loans and government loan programs). It also 
handles by general reference, instead of the more specific language in 
current Sec. 203.19(b), certain little-used or unused loan sources 
authorized by section 203(b)(9) of the National Housing Act (e.g., HOPE 
3).
    Although paragraph (e) only restricts the use of loans for the 3 
percent minimum cash investment and does not apply to the rest of the 
required investment, readers should note that Sec. 203.32 contains 
restrictions on secondary financing that is unsecured or secured by the 
home. Paragraph (e) would not supersede anything in Sec. 203.32. 
Paragraph (e) omits the detail regarding the acceptable form of loan 
that currently appears in Sec. 203.19(b), because these are matters 
more suitable for a handbook.
    Finally, paragraph (f) contains the new substantive policy proposal 
regarding gifts discussed above, while also setting forth other 
acceptable gift sources permitted by current policy.

Findings and Certifications

Environmental Review

    A Finding of No Significant Impact is not required for this 
proposed rule because it is covered by the exclusion in 24 CFR 
50.19(b)(6).

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this proposed rule before publication and 
by approving it certifies that this proposed rule is not anticipated to 
have a significant economic impact on a substantial number of small 
entities. The primary purpose of this rule, as noted in the preamble, 
is to establish standards regarding the use of gifts by charitable or 
other nonprofit organizations as a source of an FHA's mortgagor's 
investment in the mortgaged property. Specifically, the standards would 
provide that gifts could not be made from funds that the organization 
received, directly or indirectly, from the seller of the property. 
While HUD recognizes that many nonprofit or charitable organizations 
may be small entities, HUD does not believe that this rule would have a 
significant economic impact on a substantial number of small entities. 
HUD's proposed rule does not

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preclude gifts from charitable or other nonprofit organizations. This 
proposed rule only precludes these gifts if these organizations receive 
from the seller of the property at any time, directly or indirectly, 
either the gift funds, or other consideration or reimbursement for 
making the gift, including service fees. The purpose of this 
restriction is to prevent a seller from providing funds to an 
organization as a quid pro quo for that organization's downpayment 
assistance for purchase of one or more homes of the seller.
    While this restriction is an important one to place on the use of 
gifts as a source of downpayment, HUD believes that few entities, large 
or small, would be affected by this restriction. Nevertheless, HUD is 
sensitive to the fact that uniform application of requirements on 
entities of differing sizes often places a disproportionate burden on 
small entities. Therefore, small entities are specifically invited to 
comment on whether this proposed rule will significantly affect them, 
and to make any recommendations on alternatives for compliance the 
requirements of this rule. Comments should be submitted in accordance 
with the instructions in the DATES and ADDRESSES sections in the 
preamble of this proposed rule.

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 would not have ``federalism implications'' because it does not 
have substantial direct effects on the States (including their 
political subdivisions), or on the distribution of power and 
responsibilities among the various levels of government. This proposed 
rule solely addresses requirements under HUD's FHA mortgage insurance 
programs.

Unfunded Mandates Reform Act

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for the principal 
FHA single family mortgage insurance is 14.117. This proposed rule 
would also apply through cross-referencing to FHA mortgage insurance 
for condominium units (14.133), and other smaller single family 
programs.

List of Subjects in 24 CFR Part 203

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

    Accordingly, the Department proposes to amend 24 CFR part 203 as 
follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 continues to read:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715u; 42 U.S.C. 
3535(d).

    2. Section 203.19 is revised to read as follows:


Sec. 203.19  Mortgagor's investment in the property.

    (a) Required funds. The mortgagor must have available funds equal 
to the difference between:
    (1) The sum of the purchase price of the home and settlement costs 
acceptable to the Secretary; and
    (2) The amount of the insured mortgage.
    (b) Minimum cash investment. The required funds under paragraph (a) 
of this section must include an investment in the property by the 
mortgagor, in cash or cash equivalent, equal to at least 3 percent of 
the cost of acquisition as determined by the Secretary, unless the 
mortgagor is:
    (1) A veteran meeting the requirements of Sec. 203.18(a)(3); or
    (2) A disaster victim meeting the requirements of Sec. 203.18(e).
    (c) Restrictions on seller funding. None of the required funds 
under paragraph (a) of this section may be provided by the seller, 
except as approved by the Secretary, notwithstanding paragraphs (e) and 
(f) of this section. For purposes of this paragraph and paragraph (f), 
funds are provided by the seller if they are derived directly or 
indirectly from any gift, loan or other payment, including a service 
charge, made by the seller or by any party with an identity of interest 
with the seller.
    (d) Gifts and loans usually prohibited for minimum cash investment. 
A mortgagor may not use funds for any part of the minimum cash 
investment under paragraph (b) of this section if the funds were 
obtained through a gift or a loan from any person, except as provided 
in paragraphs (e) and (f) of this section.
    (e) Permissible sources of loans. (1) Statutory authorization 
needed. A statute must authorize a loan as a source of the mortgagor's 
minimum cash investment under paragraph (b) of this section. The 
authority may be explicit or implicit.
    (2) Examples. The following loans are authorized (explicitly or 
implicitly) by statute as a source for the minimum investment:
    (i) A loan from a family member, a loan to a mortgagor who is at 
least 60 years old when the mortgage is accepted for insurance, or a 
loan that is otherwise expressly authorized by section 203(b)(9) of the 
National Housing Act;
    (ii) A loan made by, or insured by, a State or local government 
agency or instrumentality under terms and conditions approved by the 
Secretary; and
    (iii) A Federal disaster relief loan.
    (f) Permissible sources of gifts. (1) General. The following are 
permissible sources of gifts or grants used for the mortgagor's minimum 
cash investment under paragraph (b) of this section:
    (i) Family members and governmental agencies and instrumentalities 
that may make loans under paragraphs (e)(2)(i) and (ii) of this 
section;
    (ii) An employer or labor union of the mortgagor;
    (iii) Charitable organizations or other nonprofit organizations 
approved by the Secretary as a source of gifts, subject to paragraph 
(2) of this section;
    (iv) Disaster relief grants; and
    (v) Other sources approved by the Secretary.
    (2) Charitable organization and other nonprofit organization. A 
gift from a charitable organization or other nonprofit organization may 
not be used for the minimum investment if the organization receives 
from the seller at any time, directly or indirectly, either the gift 
funds, or other consideration or reimbursement for making the gift, 
including service fees.

    Dated: August 23, 1999.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 99-23921 Filed 9-13-99; 8:45 am]
BILLING CODE 4210-27-P