[Federal Register Volume 66, Number 172 (Wednesday, September 5, 2001)]
[Proposed Rules]
[Pages 46502-46504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22170]



[[Page 46501]]

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

Part II





Department of Housing and Urban Development





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



24 CFR Part 203



Prohibition of Property Flipping in HUD's Single Family Mortgage 
Insurance Programs; Proposed Rule

  Federal Register / Vol. 66, No. 172 / Wednesday, September 5, 2001 / 
Proposed Rules  

[[Page 46502]]


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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Doc. No. FR-4615-P-01]
RIN 2502-AH57


Prohibition of Property Flipping in HUD's Single Family Mortgage 
Insurance Programs

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would address property ``flipping,'' the 
practice whereby a property recently acquired is resold for a 
considerable profit with an artificially inflated value, often abetted 
by a lender's collusion with the appraiser. Specifically, the proposed 
rule would establish certain new requirements regarding the eligibility 
of properties for FHA mortgage insurance. The proposed regulatory 
amendments would protect FHA borrowers from becoming unwitting victims 
of property flipping. Further, the proposed changes comply with 
Congressional mandates to maintain the FHA Insurance Fund in a sound 
actuarial manner.

DATES: Comments Due Date: November 5, 2001.

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-
2121 (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

    Predatory lending--whether undertaken by creditors, brokers or even 
home improvement contractors--involves engaging in deception or fraud, 
manipulating the borrower through aggressive sales tactics, or taking 
unfair advantage of a borrower's lack of understanding about loan 
terms. These practices are combined with loan terms that, alone or in 
combination, are abusive or make the borrower more vulnerable to 
abusive practices. Predatory lending often occurs in the subprime 
mortgage market which, in general, serves an important role by 
providing loans to borrowers who do not meet the credit standards for 
the prime mortgage market.
    While no one set of abusive lending practices or terms 
characterizes a predatory mortgage loan, a loan can be predatory when 
lenders or brokers undertake one or more of the following practices: 
Charge borrowers excessive, often hidden fees; successively refinance 
loans at no benefit to the borrower; make loans without regard to a 
borrower's ability to repay; and engage in high-pressure sales tactics 
or outright fraud and deception. Vulnerable populations, including 
elderly and low-income individuals, and low-income or minority 
neighborhoods may be targeted by these unscrupulous lenders.
    A major example of predatory lending is property ``flipping,'' the 
practice whereby a recently acquired property is resold for a 
considerable profit with an artificially inflated value, often abetted 
by a lender's collusion with the appraiser. Most property flipping 
occurs within a matter of days after acquisition, and usually with only 
minor cosmetic improvements, if any.

II. This Proposed Rule

    This proposed rule is one of several actions HUD is taking to 
address property flipping. This proposed rule would amend HUD's FHA 
single family mortgage insurance regulations at 24 CFR part 203 by 
establishing a new Sec. 203.37a. This section would prescribe certain 
new requirements regarding the eligibility of properties for FHA 
mortgage insurance. The proposed regulatory amendments would protect 
FHA borrowers from becoming unwitting victims of property flipping. 
Further, the proposed changes comply with Congressional mandates to 
maintain the FHA Insurance Fund in a sound actuarial manner. Victims of 
predatory lending often default, causing losses to the Insurance Fund 
as a result of claims. Addressing predatory lending practices will 
assist in reducing such claims.
    1. Six-month restriction on sales. Proposed Sec. 203.37a would 
provide that any property being sold within six months after 
acquisition by the seller is not eligible for FHA financing. The 6 
month restriction would not apply to the disposition of HUD-acquired 
properties under 24 CFR part 291 or to the disposition of single family 
assets in revitalization areas pursuant to section 204 of the National 
Housing Act (12 U.S.C. 1710).
    As noted, property flipping involves the rapid resale, often within 
days, of a recently acquired property. A quick resale minimizes the 
ownership expenses incurred by the investor, and increases the 
profitability of the transaction. This is especially true when the 
``flip'' is a pre-arranged transaction that would otherwise not have 
occurred without an interim owner aware of the final buyer's 
willingness to pay the excessive sales price. HUD believes that the 
proposed 6 month restriction on resales is of sufficient duration to 
preclude such short-term property flipping. HUD specifically invites 
public comment on the appropriateness of the 6 month period, and on 
whether a shorter or longer period would better accomplish HUD's goal 
of protecting FHA borrowers from becoming targets of this abusive sales 
practice.
    2. Owner of record. Unscrupulous investors will also flip 
properties they have contracted to purchase (but have not yet acquired) 
by selling or assigning the rights to the sales contract, often for a 
significant profit. To prevent such property flipping scenarios, new 
Sec. 203.37a would provide that only those properties purchased from 
the owner of record are eligible for FHA mortgage insurance.
    3. Exceptions to property flipping restrictions. While HUD wishes 
to assist FHA borrowers in avoiding predatory sales practices, HUD is 
also aware that justifiable circumstances may sometimes exist for the 
quick and profitable resale of a recently acquired property. HUD does 
not wish to prevent the ability to use FHA-insured mortgage financing 
for the purchase of properties acquired through such legitimate 
transactions. Accordingly, new Sec. 203.37a would authorize HUD to 
grant exceptions, on a case-by-case basis, to the proposed property 
flipping restrictions where the mortgagee demonstrates that the sales 
price of the property corresponds to its market value. Such 
documentation may include, but is not limited to, evidence that the 
sale price reflects a rapidly appreciating real estate market, that the

[[Page 46503]]

seller has made improvements that result in a corresponding increase to 
the value of the property, or that the property is being sold at below 
market value due to a distress sale or at a tax sale.
    HUD invites comment as to whether these exceptions are sufficient 
to avoid preventing or delaying legitimate business transactions. Such 
transactions might include certain resales within 6 months at less than 
the previous purchase price or certain resales at more than the 
previous purchase price but less than market value.

III. Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). 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 burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                   Estimated
                                                 Number of        Number of       average time      Estimated
              Section reference                   parties       responses per   for requirement   Annual Burden
                                                                  respondent       (in hours)       (in hours)
----------------------------------------------------------------------------------------------------------------
Sec.  203.37a(c)............................             500                1              0.5              250
----------------------------------------------------------------------------------------------------------------

    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. Under the 
provisions of 5 CFR part 1320, OMB is required to make a decision 
concerning this collection of information between 30 and 60 days after 
today's publication date. Therefore, a comment on the information 
collection requirements is best assured of having its full effect if 
OMB receives the comment within 30 days of today's publication. This 
time frame does not affect the deadline for comments to the agency on 
the proposed rule, however. Comments must refer to the proposal by name 
and docket number (FR-4615) and must be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and 
Budget, 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. The 
proposed regulatory amendments are exclusively concerned with curbing 
the predatory lending practice of property flipping. The vast majority 
of lenders participating in the FHA single family mortgage insurance 
programs fully comply with all program requirements and conduct 
themselves in an ethical manner. The proposed rule would only impact 
the small minority of unscrupulous lenders who participate in the FHA 
programs and engage in this predatory practice.
    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.

[[Page 46504]]

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

    The Catalog of Federal Domestic Assistance Numbers for 24 CFR part 
203 are 14.117 and 14.133.

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.
    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR part 203 to read 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. 203.37a to read as follows:


Sec. 203.37a  Sale of property.

    (a) Sale by owner of record. To be eligible for mortgage insurance, 
the property must be purchased from the owner of record and may not be 
sold through the sale or assignment of the sales contract.
    (b) No re-sale within previous 6 months. (1) Any property being 
sold within six months after acquisition by the seller is not eligible 
for mortgage insurance.
    (2) This six month restriction does not apply to the disposition 
of:
    (i) HUD-acquired properties under 24 CFR part 291; or
    (ii) Single family assets in revitalization areas pursuant to 
section 204 of the National Housing Act (12 U.S.C. 1710).
    (c) Case-by-case exceptions. HUD may grant exceptions to the 
provisions of this section, on a case-by-case basis, upon written 
demonstration by the mortgagee that the sales price of the property 
accurately corresponds to its market value. Such documentation may 
include, but is not limited to, evidence that:
    (1) The sales price reflects a rapidly appreciating real estate 
market;
    (2) The seller has made improvements that have resulted in a 
corresponding increase to the value to the property; or
    (3) The property is being sold at below market value due to a 
distress sale or at a tax sale.

    Dated: July 12, 2001.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 01-22170 Filed 9-4-01; 8:45 am]
BILLING CODE 4210-27-P