[Federal Register Volume 65, Number 62 (Thursday, March 30, 2000)]
[Proposed Rules]
[Pages 17120-17125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7771]



[[Page 17119]]

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Part V





Department of Housing and Urban Development





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24 CFR Parts 201 and 202



Strengthening the Title I Property Improvement and Manufactured Home 
Loan Insurance Programs and Title I Lender/Title II Mortgagee Approval 
Requirements; Proposed Rule

  Federal Register / Vol. 65, No. 62 / Thursday, March, 30, 2000 / 
Proposed Rules  

[[Page 17120]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201 and 202

[Docket No. FR-4246-P-01]
RIN: 2502-AG95


Strengthening the Title I Property Improvement and Manufactured 
Home Loan Insurance Programs and Title I Lender/Title II Mortgagee 
Approval Requirements

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

ACTION: Proposed rule.

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SUMMARY: This rule proposes to amend HUD's regulations for the Title I 
Property Improvement and Manufactured Housing Loan Insurance programs. 
The changes are designed to enhance program controls and strengthen the 
financial viability of the programs. Among other amendments, this 
proposed rule would require that lenders disburse the proceeds of a 
direct property improvement loan in excess of $7,500 using a draw 
system, similar to that used in construction lending; expand and 
strengthen the on-site inspection requirements applicable to dealer and 
direct property improvement loans; and require that a lien securing a 
property improvement loan in excess of $7,500 must occupy no less than 
a second lien position. The proposed rule would also require that a 
lender disburse Title I dealer property improvement loan proceeds 
either solely to the borrower, or jointly to the borrower and dealer or 
other parties to the transaction. HUD also proposes to increase the 
insurance charge for Title I property improvement and manufactured 
housing loan insurance. Additionally, the proposed rule would also 
conform the liquidity requirements applicable to the Title I program to 
those currently applicable to the Title II Single Family Mortgage 
Insurance program. Finally, the rule would increase the net worth 
requirements applicable to both the Title I and Title II programs.

DATES: Comments due date: May 30, 2000.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, 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 T. Morris, Director, Office of 
Single Family Program Development, Office of Insured Single Family 
Housing, Room 9266, 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

A. Title I Loan Insurance

    Section 2 of Title I of the National Housing Act (12 U.S.C. 1703) 
authorizes HUD to insure 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 Loan 
Insurance programs are located in 24 CFR part 201. Additionally, the 
HUD regulations at 24 CFR part 202 establish minimum standards and 
requirements for approval by the Secretary of HUD of lenders and 
mortgagees to participate in both the Title I programs and the Title II 
Single Family Mortgage Insurance program. The programs are administered 
by HUD's Office of Housing-Federal Housing Administration (FHA).

B. Property Improvement Loans

    The Title I property improvement loan program is often the most 
viable, cost-effective mechanism for individuals to finance property 
improvements. Under the program, HUD-FHA makes it easier for consumers 
to obtain affordable loans by insuring such loans made by private 
lenders to improve properties that meet certain requirements. Title I 
loans may be used to finance permanent property improvements that 
protect or improve the basic livability or utility of the property. 
Only lenders approved by HUD specifically for the program can make 
loans covered by Title I insurance. Eligible borrowers include the 
owner of the property to be improved, the person leasing the property 
(with a fixed lease term that expires not less than 6 calendar months 
after the final maturity of the loan), or someone purchasing the 
property under a land installment contract.

C. Manufactured Home Loans

    HUD has been insuring loans on manufactured homes under Title I 
since 1969. By protecting lenders against the risk of default, HUD's 
participation has encouraged them to finance manufactured homes, which 
had traditionally been financed as personal property through 
comparatively high-interest, short term consumer installment loans. The 
Title I manufactured home loan program, therefore, increases the 
availability of affordable financing for buyers of manufactured homes. 
All buyers who plan to purchase manufactured homes as their principal 
place of residence are eligible to participate in the program. Approved 
lending institutions are eligible for insurance on loans made under the 
program. Buyers of manufactured homes may obtain insured loans for 
insurance through HUD-approved lenders or through approved dealers.

D. Changes to the Title I Programs

    While HUD believes that Title I property improvement and 
manufactured home loans fill an important role otherwise unserved by 
either public or private lending products, HUD also believes that the 
program can be strengthened by implementing new financial and program 
controls. HUD recently conducted a comprehensive review of the Title I 
programs and concluded that several changes are necessary to strengthen 
the financial viability of the programs. Accordingly, HUD is issuing 
this proposed rule, which would make several changes to the Title I and 
lender approval program regulations at 24 CFR parts 201 and 202, 
respectively. HUD believes these amendments are needed to protect the 
financial interests of the FHA, taxpayers, and the vast majority of 
borrowers and lenders who comply fully with the requirements of the 
Title I programs. The proposed changes to the Title I program 
regulations are discussed in section II of this preamble.

E. Net Worth Requirements for the Title I and Title II Programs

    In addition to the changes described above (which would only apply 
to the Title I programs), this proposed rule would also revise 24 CFR 
part 202 to raise the current minimum net worth requirements applicable 
to loan correspondents under both the Title I and Title II programs. 
This proposed change is discussed in section III of this preamble.

[[Page 17121]]

II. Proposed Regulatory Changes to the Title I Program Regulations

    The changes that would be made by this proposed rule to HUD's Title 
I regulations are as follows. As noted, some of the changes would be 
applicable to both the property improvement and manufactured home loan 
programs. Other changes would apply solely to Title I property 
improvement loans.
    1. Two party disbursements of dealer property improvement loan 
proceeds (Secs. 201.2 and 201.26). The proposed rule would amend the 
definition of ``dealer loan'' in Sec. 201.2 to prohibit lenders from 
disbursing property improvement loan proceeds solely to a dealer. The 
proposed rule would require that a lender disburse the proceeds either 
solely to the borrower or jointly to the borrower and dealer or other 
parties to the transaction. The proposed rule would also make a 
conforming change to Sec. 201.26, which describes the conditions for 
disbursement of property improvement loan proceeds.
    This regulatory amendment will reduce the risk that property 
improvement loan proceeds might be released without the borrower's 
consent. Further, by requiring that the borrower agrees to the payment 
of funds to the contractor, the proposed amendment will ensure that all 
property improvement work is completed in an acceptable manner. The 
proposed requirement will also assure that any disagreements between 
the borrower and contractor are brought to the lender's attention as 
quickly as possible.
    2. Lien position for property improvement loans in excess of $7,500 
(Sec. 201.24). The proposed rule would amend Sec. 201.24 (which 
describes security requirements) to require that a lien securing a 
property improvement loan in excess of $7,500 must occupy no less than 
a second lien position. The current regulation does not specify the 
position that such a lien must occupy, other than to state that the 
Title I property improvement loan must have priority over any lien 
securing an uninsured loan made at the same time.
    3. Disbursement of direct property improvement loan proceeds in 
excess of $7,500 (Sec. 201.26). This proposed rule would amend 
Sec. 201.26 (which describes the conditions for loan disbursement) to 
modify the disbursement procedures for direct property improvement 
loans in excess of $7,500. The proposed rule would require that such 
disbursements be made using a ``draw'' system, similar to that used in 
construction lending. Lenders would be required to deposit all of the 
loan proceeds in an interest bearing escrow account until they are 
disbursed. The draws would be made in accordance with criteria 
established by the Secretary. The loan proceeds would be disbursed in 
three draws--an initial disbursement of 40 percent of the loan 
proceeds, a subsequent 40 percent disbursement, and a final 20 percent 
disbursement.
    This regulatory amendment will help to reduce opportunities for 
misuse of funds. However, HUD recognizes that the use of a draw system 
will impose some additional administrative and other costs on lenders. 
Accordingly, this proposed rule would only require the use of this 
disbursement procedure only for direct loans in excess of $7,500.
    The proposed draw system would not apply to dealer loans. As 
explained elsewhere in this preamble, HUD would establish other 
requirements to safeguard the proper use of dealer loan proceeds. These 
protections include the prohibition on the disbursement of Title I loan 
proceeds solely to a dealer (see the discussion of proposed change 
number 1 above). Further, the proposed rule would establish a telephone 
interview requirement for the disbursement of dealer loan proceeds (see 
the discussion of proposed change number 4 below).
    4. Telephone interviews for dealer property improvement loan 
disbursements (Sec. 201.26). The proposed rule would amend Sec. 201.26 
to require that the lender must conduct a telephone interview with the 
borrower before the disbursement of dealer property improvement loan 
proceeds. The lender, at a minimum, must obtain an oral affirmation 
from the borrower to release funds to the dealer. As with the proposed 
dual disbursement requirement discussed above (see proposed change 
number 1), it is expected that the telephone interview will help to 
ensure borrower satisfaction with the work being performed by the 
dealer/contractor. The lender shall document the borrower's oral 
affirmation.
    5. Liquidity requirement (Secs. 201.27, 202.6, 202.7, and 202.8). 
The proposed rule would amend the regulations at 24 CFR parts 201 and 
202 to conform the liquidity requirements applicable to the Title I 
program to those currently applicable to the Title II Single Family 
Mortgage Insurance program. The proposed liquidity requirement would 
apply to Title I supervised lenders (Sec. 202.6), Title I unsupervised 
lenders (Sec. 202.7), Title I loan correspondent lenders (Sec. 202.8), 
and Title I dealers (Sec. 201.27). Under the proposed rule, these Title 
I participants would be required to have liquid assets consisting of 
cash (or its equivalent acceptable to the Secretary) in the amount of 
20 percent of their net worth, up to a maximum liquidity requirement of 
$100,000. For purposes of this proposed rule, HUD will not consider 
lines of credit to be liquid assets, nor loans or mortgages held for 
resale by the mortgagee. Liquid assets include cash on hand, checking 
accounts, savings accounts, certificates of deposit, and marketable 
securities.
    HUD believes that the proposed liquidity requirement will protect 
the interests of the FHA and consumers by ensuring that only 
financially sound program participants are eligible to participate in 
the Title I programs. Further, the liquidity requirement would provide 
Title I lenders, dealers, and loan correspondents with a reserve of 
cash upon which to draw if unexpected expenditures arise. HUD believes 
the new requirement would reduce the temptation to misuse trust funds 
and escrow accounts. The proposed liquidity requirements would not 
become applicable until six months after the effective date of the 
final rule. This delayed effective date will provide Title I lenders, 
dealers and loan correspondents with adequate time to meet the new 
requirement.
    6. Reporting of loans for insurance (Sec. 201.30). The proposed 
rule would amend Sec. 201.30 to clarify that required loan reports must 
be submitted on the form prescribed by the Secretary, and must contain 
the data prescribed by HUD. This change will ensure that information 
vital to the proper monitoring of Title I loans (such as the address of 
the borrower and the applicable interest rate) is properly collected 
and transmitted to HUD.
    7. Increase in insurance charge for property improvement and 
manufactured home loans (Sec. 201.31). The proposed rule would revise 
Sec. 201.31(a) to increase the insurance charge for Title I property 
improvement and manufactured home loan insurance. Currently, Title I 
lenders are required to pay an insurance charge of 0.50 percent of the 
loan amount, multiplied by the number of years of the loan term. This 
proposed rule would increase the applicable percentage to 1.00 percent 
of the loan amount. The current charge amount has proven insufficient 
in covering the costs of insurance claims paid by HUD under the 
program. The proposed increase is necessary to strengthen the financial 
viability of the Title I program.
    Further, the proposed rule would amend Sec. 201.31(b) to conform 
the procedures governing the payment of the insurance charge for 
manufactured

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home loans with the insurance charge payment procedures for property 
improvement loans. The current regulations establish an accelerated 
payment schedule for manufactured home loans with a maturity in excess 
of 25 months. Given the proposed increase in the insurance charge, HUD 
also proposes to eliminate this ``front loading'' system for 
manufactured home loans. Under the proposed rule, the payment schedule 
for manufactured homes loans with a maturity in excess of 25 months 
would be identical to that applicable to comparable property 
improvement loans. Specifically, insurance charge payments for both 
types of loans would be made in annual installments of 1.00 percent of 
the loan amount until the insurance charge is paid.
    8. Inspection requirements for all dealer and direct property 
improvement loans (Sec. 201.40). HUD proposes to expand the current on-
site inspection requirements for dealer and direct property improvement 
loans at Sec. 201.40. Specifically, the proposed rule would require 
that on-site inspections be conducted for all dealer and direct 
property improvement loans (not just for loans where the principal 
obligation is $7,500 or more, or where the borrower fails to submit a 
completion certificate). In the case of dealer and direct property 
improvement loans of $7,500 or less, the lender would be required to 
conduct two inspections--a pre-construction inspection and a post-
construction inspection. For dealer and direct loans in excess of 
$7,500 the lender would also be required to conduct a third inspection. 
Additionally, the proposed rule would also require that photographs of 
the site be taken as part of all required inspections. The pre-
construction inspection and photograph requirements do not apply where 
emergency action is needed to repair damage resulting from a disaster, 
as described in Sec. 201.20(b)(3)(ii). The proposed rule would also 
authorize HUD to grant exceptions to the pre-construction inspection 
and photograph requirements.
    The expanded inspection requirements will protect the interests of 
borrowers and the FHA by helping to verify that all property 
improvement work has been completed in a satisfactory manner. In 
addition, the proposed regulatory amendments will help to ensure that 
no funding is extended for improvements that were completed prior to 
obtaining the Title I loan.

III. Increased Net Worth Requirements

    In addition to the regulatory changes described in Section II of 
this preamble (which would only apply to the Title I property 
improvement and manufactured home programs), this proposed rule would 
also increase the net worth requirements for both Title I and Title II 
loan correspondents. Specifically, the rule would amend Sec. 202.8 to 
raise the minimum net worth requirement for Title II loan correspondent 
mortgagees and Title I loan correspondent lenders from $50,000 to 
$75,000. The proposed rule would also amend Sec. 201.27 to raise the 
current minimum net worth requirements for Title I property improvement 
loan and manufactured home dealers from $25,000 and $50,000, 
respectively, to $75,000.
    The net worth reforms proposed by this rule are directed toward 
this goal of ensuring that only responsible and adequately capitalized 
entities are program participants. In HUD's experience there is less 
stress on well capitalized companies to misuse restricted funds such as 
insurance premiums or escrows for operating expenses. The net worth 
requirements were last raised in 1992 and HUD believes they need to be 
raised again to take into account inflation as well as increased losses 
per claim. Since fiscal year 1991, the average Title I claim has 
increased from $7,020 to $15,314 while the average loss has increased 
from $6,318 to $13,783. The average Title II claim has increased from 
$54,905 to $82,226, and the average loss has increased from $24,140 to 
$31,800. Even with this modest increase in required net worth, a lender 
would only be able cover indemnification for five Title I loans or two 
Title II mortgages.
    The proposed net worth requirements would not become applicable 
until six months after the effective date of the final rule. This 
delayed effective date will provide dealers and loan correspondents 
with adequate time to meet the new requirements.

IV. Performance-Based Standards for the Title I Program

    HUD is planning to develop performance-based standards for 
determining the continued eligibility of lenders, correspondents and 
dealers in the Title I program. These would identify objective criteria 
for loan performance and would ensure management quality. While HUD is 
still developing data collection and measurement systems for this 
purpose and is not proposing any requirements in this area under this 
proposed rule, it is interested in the public's views on using this 
tool.

V. Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in 
Sec. 201.26(a)(7) (the new telephone interview requirement for dealer 
property loan disbursements) has been submitted to the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3520). This is the only new information collection 
requirement that would be established by this proposed rule. In 
accordance with the Paperwork Reduction Act, HUD may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection displays a currently valid OMB 
control number.
    The average number of dealer transactions per year is 22,000. A 
single response to the information collection requirement would be 
required per dealer transaction. HUD estimates that the average time 
per response would be no more than five minutes. Accordingly, the 
estimated annual burden that would be imposed by the proposed 
information collection requirement is 1,833 hours.
    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
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 regarding the 
information collection requirements in this proposal. Comments must be 
received within sixty (60) days from the date of this proposal. 
Comments must refer to the proposal by name and docket number (FR-4246) 
and must be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and 
Budget,

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New Executive Office Building, Washington, DC 20503;

and

Ethelene Washington, Reports Liaison Officer, Office of the Assistant 
Secretary for Housing-Federal Housing Commissioner, Department of 
Housing and Urban Development, 451--7th Street, SW, Room 9114, 
Washington, DC 20410

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Department's Rules 
Docket Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-
0500.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4223). The Finding of No Significant Impact is 
available for public inspection between the hours of 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 Seventh Street, SW, Washington, DC.

Regulatory Flexibility Act

    The Secretary has reviewed this proposed rule before publication, 
and by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The reasons for HUD's determination are as follows.
    With one exception (the increased net worth requirements for loan 
correspondents), the amendments made by this proposed rule exclusively 
relate to the Title I program. The majority of financial institutions 
participating in the Title I program are large depositary institutions 
and thus the proposed changes pose only minimum burdens for smaller 
entities seeking to conduct Title I loan transactions. Some of these 
proposed requirements (such as two-party disbursements for dealer loan 
proceeds, and ensuring at least a second lien position for certain 
loans) would impose minimal, or no, economic costs.
    Where the proposed rule would impose an economic burden (such as 
the increased net worth and liquidity requirements), HUD has attempted 
to minimize the costs to lenders. For example, the proposed increased 
net worth and liquidity requirements would be ``phased-in,'' and not 
take effect until six months after the effective date of the other new 
regulatory requirements. This delayed effective date will provide 
lenders with additional time to meet the new requirements.
    The proposed rule would also increase the net worth requirements 
for all Title I and Title II loan correspondents from $50,000 to 
$75,000. HUD is proposing to make this modest increase for a variety of 
reasons, including the need to make adjustments for inflation since the 
net worth requirements were last updated--in 1991 for the Title I 
program (October 18, 1991; 56 FR 52414); and 1992 for the Title II 
program (December 9, 1992; 57 FR 58326).
    Although the primary purpose of setting minimum net worth standards 
is not to ensure that a lender can absorb the costs of fines or 
indemnifications, HUD notes that the proposed net worth requirement 
will cover only three Title I loans, assuming a maximum loan value of 
$25,000. The proposed net worth requirement would cover only five 
average Title I loans (assuming a $13,000 average loss). The proposed 
net worth requirement will cover less than one Title II loan, assuming 
a maximum loan value of $219,849. The proposed net worth requirement 
would cover two average Title II loans (assuming a $31,000 average 
loss). Therefore, the proposed net worth value is not significant in 
comparison to the typical size of a Title I and Title II loan.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This proposed rule would not have 
federalism implications and would not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) 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 Unfunded Mandates 
Reform Act of 1995.

Catalog of Federal Domestic Assistance Numbers

    The Catalog of Federal Domestic Assistance program numbers 
applicable to the 24 CFR parts 201 and 202 are:
    14.110  Manufactured Home Loan Insurance-- Financing Purchase of 
Manufactured Homes as Principal Residences of Borrowers;
    14.142  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, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR parts 201 and 202 to read as follows:

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

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

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

    2. In Sec. 201.2, revise the definition of ``Dealer loan'' to read 
as follows:


Sec. 201.2  Definitions.

* * * * *

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    Dealer loan means a loan where 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. 
In the case of a property improvement loan, the lender may disburse the 
loan proceeds solely to the borrower, or jointly to the borrower and 
the dealer or other parties to the transaction. In the case of a 
manufactured home loan, 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.
* * * * *
    3. Revise Sec. 201.24(a) to read as follows:


Sec. 201.24  Security requirements.

    (a) Property improvement loans. (1) Property improvement loans in 
excess of $7,500. (i) Any property improvement loan in excess of $7,500 
shall be secured by a recorded lien on the improved property. The lien 
shall be evidenced by a mortgage or deed of trust, executed by the 
borrower and all other owners in fee simple.
    (ii) If the borrower is a lessee, the borrower and all owners in 
fee simple must execute the mortgage or deed of trust. If the borrower 
is purchasing the property under a land installment contract, the 
borrower, all owners in fee simple, and all intervening contract 
sellers must execute the mortgage or deed of trust.
    (iii) The lien need not be a first lien on the property; however, 
the lien securing the Title I loan must hold no less than the second 
lien position.
    (2) Property improvement loans of $7,500 or less. Any property 
improvement loan for $7,500 or less (other than a manufactured home 
improvement loan) shall be similarly secured if, including such loan, 
the total amount of all Title I loans on the improved property is more 
than $7,500.
    (3) Manufactured home improvement loans. Manufactured home 
improvement loans need not be secured.
* * * * *
    4. Amend Sec. 201.26 as follows:
    a. Redesignate paragraphs (a) and (b) as paragraphs (b) and (c), 
respectively;
    b. Add new paragraph (a);
    c. Redesignate newly designated paragraphs (b)(6) and (b)(7) as 
paragraphs (b)(8) and (b)(9), respectively; and
    d. Add new paragraphs (b)(6) and (b)(7).


Sec. 201.26  Conditions for loan disbursement.

    (a) Disbursement of direct property improvement loans in excess of 
$7,500. (1) Escrow account. For all direct property improvement loans 
in excess of $7,500, the lender must deposit all of the loan proceeds 
in an interest-bearing escrow account until they are disbursed in 
accordance with the requirements of this section.
    (2) Disbursement schedule. Disbursement of the loan proceeds will 
be made in a series of ``draws,'' in accordance with criteria 
established by the Secretary. Disbursement of the loan proceeds will be 
made using the following schedule:
    (i) The lender will disburse 40% of the loan proceeds upon the 
completion of the pre-construction inspection required under 
Sec. 201.40(c)(3)(i).
    (ii) Subsequent to the initial 40% draw (but before the final draw 
of the loan proceeds) the borrower may draw up to an additional 40% of 
the property improvement loan proceeds.
    (iii) The lender will disburse the balance of the loan proceeds 
upon the completion of the inspection required under 
Sec. 201.40(c)(3)(ii).
    (b) * * *
    (6) In the case of a dealer loan, the lender may disburse the loan 
proceeds solely to the borrower, or jointly to the borrower and the 
dealer or other parties to the transaction.
    (7) In the case of a dealer loan, the lender must conduct a 
telephone interview with the borrower before the disbursement of the 
loan proceeds. The lender, at minimum, must obtain an oral affirmation 
from the borrower to release funds to the dealer. The lender shall 
document the borrower's oral affirmation.
* * * * *
    5. Revise Sec. 201.27(a)(1) to read as follows:


Sec. 201.27  Requirements for dealer loans.

    (a) Dealer approval and supervision. (1) The lender shall approve 
only those dealers which, on the basis of experience and information, 
the lender considers to be reliable, financially responsible, and 
qualified to satisfactorily perform their contractual obligations to 
borrowers and to comply with the requirements of this part. However, in 
no case shall the lender approve a dealer that is unable to meet the 
following minimum qualifications:
    (i) Net worth. All property improvement and manufactured home 
dealers shall have and maintain a net worth of not less than $75,000, 
plus an additional $25,000 for each branch office, in assets acceptable 
to the Secretary, up to a maximum required net worth of $250,000.
    (ii) Liquid assets. A dealer shall have liquid assets consisting of 
cash or its equivalent acceptable to the Secretary in the amount of 20 
percent of its net worth, up to a maximum liquidity requirement of 
$100,000.
    (iii) Business experience. All property improvement loan and 
manufactured home dealers must have demonstrated business experience as 
a property improvement contractor or supplier, or in manufactured home 
retail sales, as applicable.
* * * * *
    6. Revise Sec. 201.30(a) to read as follows:


Sec. 201.30  Reporting of loans for insurance.

    (a) Date of reports. The lender shall transmit a loan report on 
each loan reported for insurance within 31 days from the date of the 
loan's origination or purchase from a dealer or another lender. The 
loan report must be submitted on the form prescribed by the Secretary, 
and must contain the data prescribed by HUD. Any loan refinanced under 
this part shall similarly be reported on the prescribed form within 31 
days from the date of refinancing. When a loan insured under this part 
is transferred to another lender without recourse, guaranty, guarantee, 
or repurchase agreement, a report on the prescribed form shall be 
transmitted to the Secretary within 31 days from the date of the 
transfer. No report is required when a loan insured under this part is 
transferred with recourse or under a guaranty, guarantee, or repurchase 
agreement.
* * * * *
    7. Amend Sec. 201.31 as follows:
    a. Revise the first sentence of paragraph (a); and
    b. Revise paragraph (b)(2).


Sec. 201.31  Insurance charge.

    (a) Insurance charge. For each eligible property improvement loan 
and manufactured home loan reported and acknowledged for insurance, the 
lender shall pay to the Secretary an insurance charge equal to 1.00 
percent of the loan amount, multiplied by the number of years of the 
loan term.
* * * * *
    (b) * * *
    (2)(i) For any loan having a maturity in excess of 25 months, 
payment of the insurance charge shall be made in annual installments, 
with the first installment due on the 25th calendar day after the date 
the Secretary acknowledges the loan report, and the second and 
successive installments due

[[Page 17125]]

on the 25th calendar day after the date of billing by the Secretary.
    (ii) For any loan having a maturity in excess of 25 months, payment 
shall be made in annual installments of 1.00 percent of the loan amount 
until the insurance charge is paid.
* * * * *
    8. In Sec. 201.40, revise the section heading and paragraph (c) to 
read as follows:


Sec. 201.40  Pre- and Post-disbursement loan requirements.

* * * * *
    (c) Inspection requirement on dealer and direct property 
improvement loans. (1) General. The lender or its agent shall conduct 
on-site inspections on all dealer and direct property improvement 
loans.
    (2) Inspections for dealer and direct property improvement loans of 
$7,500 or less. For dealer and direct property improvement loans of 
$7,500 or less, the lender or its agent shall conduct:
    (i) A pre-construction inspection within 30 days before the start 
of construction; and
    (ii) A post-construction inspection within 60 days after the 
receipt of the completion certificate, or as soon as the lender 
determines that the borrower is unwilling to cooperate in submitting a 
completion certificate, as required under paragraph (b) of this 
section.
    (3) Inspections for dealer and direct property improvement loans in 
excess of $7,500. For dealer and direct property improvement loans in 
excess of $7,500, the lender or its agent shall conduct:
    (i) A pre-construction inspection within 30 days before the start 
of construction;
    (ii) An inspection within 60 days before the disbursement of the 
loan proceeds (in the case of a dealer loan), or within 60 days before 
the final draw of the loan proceeds (in the case of a direct loan--see 
Sec. 200.26(a)(2)(iii)); and
    (iii) A post-construction inspection within 60 days after the 
receipt of the completion certificate, or as soon as the lender 
determines that the borrower is unwilling to cooperate in submitting a 
completion certificate, as required under paragraph (b) of this 
section.
    (4) Purpose of inspections. The purpose of the inspections is to 
verify the eligibility of the improvements and whether the work has 
been completed. Photographs of the site must be taken as part of all 
inspections. If the borrower will not cooperate in permitting an on-
site inspection, the lender shall report this fact to the Secretary.
    (5) Exceptions. The pre-construction inspection and photograph 
requirements do not apply where emergency action is needed to repair 
damage resulting from a disaster, as described in 
Sec. 201.20(b)(3)(ii). Exceptions to the pre-construction inspection 
and photograph requirements can be granted in other circumstances if 
the prior approval of the Secretary is obtained.
* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

    8. The authority citation for part 202 continues to read as 
follows:

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

    9. Revise Sec. 202.6(b)(2) to read as follows:


Sec. 202.6  Supervised lenders and mortgagees.

* * * * *
    (b) * * *
    (2) Liquid assets. The lender or mortgagee shall have liquid assets 
consisting of cash or its equivalent acceptable to the Secretary in the 
amount of 20 percent of its net worth, up to a maximum liquidity 
requirement of $100,000.
* * * * *
    10. Revise Sec. 202.7(b)(2) to read as follows:


Sec. 202.7  Nonsupervised lenders and mortgagees.

* * * * *
    (b) Liquid assets. The lender or mortgagee shall have liquid assets 
consisting of cash or its equivalent acceptable to the Secretary in the 
amount of 20 percent of its net worth, up to a maximum liquidity 
requirement of $100,000.
* * * * *
    11. Amend Sec. 202.8 by revising paragraphs (b)(1) and (b)(4) to 
read as follows:


Sec. 202.8  Loan correspondent lenders and mortgagees.

* * * * *
    (b) * * *
    (1) Net worth. A loan correspondent lender or mortgagee shall have 
a net worth of not less than $75,000 in assets acceptable to the 
Secretary, plus an additional $25,000 for each branch office authorized 
by the Secretary, up to a maximum requirement of $250,000, except that 
a multifamily mortgagee shall have a net worth of not less than 
$250,000 in assets acceptable to the Secretary.
* * * * *
    (4) Liquid assets. A loan correspondent lender or mortgagee shall 
have liquid assets consisting of cash or its equivalent acceptable to 
the Secretary in the amount of 20 percent of its net worth, up to a 
maximum liquidity requirement of $100,000.
* * * * *

    Dated: March 7, 2000.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 00-7771 Filed 3-29-00; 8:45 am]
BILLING CODE 4210-27-P