[Federal Register Volume 66, Number 216 (Wednesday, November 7, 2001)]
[Rules and Regulations]
[Pages 56410-56420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27900]



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Part IV





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; Final Rule

  Federal Register / Vol. 66, No. 216 / Wednesday, November 7, 2001 / 
Rules and Regulations  

[[Page 56410]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201 and 202

[Docket No. FR-4246-F-02]
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: Final rule.

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SUMMARY: This final rule amends HUD's regulations for the Title I 
Property Improvement and Manufactured Housing Loan Insurance programs. 
The final rule also increases the net worth requirements applicable to 
both the Title I and Title II Single Family Mortgage Insurance 
programs. The changes are designed to enhance program controls and 
strengthen the financial viability of the programs. This final rule 
follows publication of a March 30, 2000 proposed rule, and takes into 
consideration the public comments received on the proposed rule.

DATES: Effective Date: The amendments to Secs. 201.27 and 202.8 are 
effective on May 7, 2002. All other provisions of this final rule are 
effective on December 7, 2001.

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--HUD's March 30, 2000 Proposed Rule

    On March 30, 2000 (65 FR 17120), HUD published for public comment a 
proposed rule to amend HUD's regulations for the Title I Property 
Improvement and Manufactured Housing Loan Insurance program. 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 has determined that the program can be 
strengthened by implementing new financial and program controls. 
Accordingly, HUD issued the March 30, 2000 proposed rule, which 
proposed to make several changes to the Title I and lender approval 
program regulations at 24 CFR parts 201 and 202, respectively. The 
proposed amendments were designed to protect the financial interests of 
the Federal Housing Administration (FHA), taxpayers, and the vast 
majority of borrowers and lenders who comply fully with the 
requirements of the Title I program.
    Among other proposed amendments, the March 30, 2000 proposed rule 
would:
    1. 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;
    2. Require that a lien securing a property improvement loan in 
excess of $7,500 must occupy no less than a second lien position;
    3. 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;
    4. Require that the lender conduct a telephone interview with the 
borrower before the disbursement of dealer property improvement loan 
proceeds;
    5. Conform the liquidity requirements applicable to the Title I 
program to those currently applicable to the Title II Single Family 
Mortgage Insurance program;
    6. Clarify that required loan reports must be submitted on the form 
prescribed by the Secretary, and must contain the data prescribed by 
HUD;
    7. Increase the insurance charge for Title I property improvement 
and manufactured housing loan insurance; and
    8. Expand and strengthen the on-site inspection requirements 
applicable to dealer and direct property improvement loans.
    HUD also proposed to increase the net worth requirements for both 
Title I and Title II loan correspondents. Specifically, the March 30, 
2000 proposed rule would 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 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 preamble to the March 30, 2000 proposed rule provides 
additional details regarding the proposed amendments to 24 CFR parts 
201 and 202.

II. Significant Differences Between the March 30, 2000 Proposed 
Rule and This Final Rule

    This rule follows publication of the March 30, 2000 proposed rule, 
and takes into consideration the public comments received on the 
proposed rule. The most significant differences between this final rule 
and the March 30, 2000 proposed rule are as follows. These changes are 
discussed in greater detail in Section III of this preamble, which 
presents a summary of the significant issues raised by the public 
commenters and HUD's responses to these issues.
    1. Exemptions to Lien Position Requirements. This final rule 
provides that the lien position requirements do not apply where: (1) 
the first and second mortgage were made at the same time (as usually 
occurs to accommodate a 20 percent downpayment on a conventional 
purchase mortgage); or (2) the second mortgage was provided by a state 
or local government agency in conjunction with a downpayment assistance 
program.
    2. Use of ``draw'' system not required. The final rule no longer 
provides for the use of a draw system in the disbursement of direct 
property improvement loan proceeds in excess of $7,500.
    3. Effective date for two-party disbursement requirements. This 
final rule clarifies that the two-party disbursement requirements are 
applicable only to dealer loans made on or after the effective date of 
this final rule.
    4. Title I Program liquidity requirements not revised. This final 
rule does not adopt the proposed changes to the liquidity requirements 
for the Title I program.
    5. No new inspection requirements. The final rule does not adopt 
the proposed revisions to the inspection requirements for dealer and 
direct property improvement loans.
    6. Revised Net Worth Requirements. HUD has revised the proposed 
rule to more closely link the net worth adjustments to increases in 
inflation. Specifically, this final rule establishes an increased net 
worth requirement computed by adjusting the current requirements for 
inflation since 1991 using the Consumer Price Index published by the 
U.S. Bureau of Labor Statistics. The increased net worth requirements 
are based on Consumer Price Index adjustments commencing in 1991, since 
the Title I net worth requirements were last increased by HUD in that 
year.

[[Page 56411]]

    7. Exemption of dealers from branch office requirements. The final 
rule no longer requires Title I dealers to maintain additional net 
worth for each branch office.

III. Discussion of the Public Comments Received on the March 30, 
2000 Proposed Rule

    The public comment period for the proposed rule closed on May 30, 
2000. HUD received 502 public comments on the March 30, 2000 proposed 
rule. Several of the commenters submitted multiple comments. Numerous 
commenters submitted ``form letters,'' identical in substance to one 
another. The majority of comments were submitted by lenders 
participating in the Title I and II programs. Comments were also 
submitted by national and state organizations representing mortgage 
brokers, home improvement lenders, and mortgage bankers; state and 
local housing agencies; a state employees credit union; a state 
manufactured housing association; private individuals; and other 
commenters.
    This section of the preamble presents a summary of the significant 
issues raised by the public commenters and HUD's responses to these 
comments.

A. Comments Regarding Two-Party Disbursements of Dealer Property 
Improvement Loan Proceeds

    The March 30, 2000 rule proposed to amend the definition of 
``dealer loan'' in Sec. 201.2 to prohibit lenders from disbursing 
property improvement loan proceeds solely to a dealer. HUD proposed to 
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 March 30, 2000 rule also proposed to make a conforming 
change to Sec. 201.26, which describes the conditions for disbursement 
of property improvement loan proceeds.
    Comment: Two-party disbursements will leave dealers vulnerable to 
unscrupulous borrowers. Several commenters were concerned that the 
proposed two-party disbursement requirement would leave contractors 
without guarantee of payment upon completion of their work. The 
commenters wrote that lenders would have no way to prevent an 
unscrupulous borrower from cashing the check and retaining the funds.
    HUD Response. The proposed dual disbursement requirements will not 
deprive contractors of their right to payment. Contractors have various 
options to secure payment upon completion of their work. For example, 
the contractor might request a three-party closing or escrow whereby 
the contractor would assign the contract to the lender only upon the 
borrower's simultaneous endorsement of the lender's check to the 
contractor. Accordingly, HUD does not believe that a change to the 
proposed rule is necessary.
    Comment: Rather than two-party disbursements, the final rule should 
require pre-disbursement inspections for dealer loans. One commenter 
suggested that, as an alternative to dual disbursements, HUD should 
require pre-disbursement inspections for dealer loans. According to the 
commenter, such inspections would assure that all work has been 
properly performed before payment of the dealer, while protecting the 
dealer against unscrupulous borrowers. The commenter suggested that the 
pre-disbursement inspection should include photographs. The commenter 
also recommended that, following the inspection, the homeowner should 
sign a completion certificate and release form authorizing payment of 
the dealer.s
    HUD Response. HUD has not adopted the change suggested by the 
commenter. HUD agrees that inspections play an important role in 
ensuring the satisfactory completion of the property improvement work. 
However, HUD also believes that two-party disbursements are required to 
protect the financial integrity of the Title I program. The dual 
disbursement requirement will provide additional protections not 
afforded by inspections. The two-party disbursement requirement will 
ensure that loan proceeds are not released against the wishes of the 
borrower. Further, two-party disbursements will help to alert the 
lender to disputes between the borrower and the dealer.
    The commenter emphasizes the role of the completion certificate 
signed by the homeowner upon the completion of the property improvement 
work. HUD agrees that such certificates are useful in preventing the 
misuse of loan funds. However, HUD has occasionally experienced 
problems regarding the improper signing of completion certificates 
prior to completion of the work. Accordingly, HUD does not believe that 
reliance on a completion certificate is a viable alternative to the 
two-part disbursement procedures established by this final rule.
    Comment: Two-party disbursements may conflict with state law. 
Several commenters wrote that Title I dealer loans are retail sales 
installment transactions governed by state law. The commenters wrote 
that, under a retail sales installment contract, the dealer assigns all 
of its right, title and interest in the contract to the lender, and the 
lender pays the dealer for the assignment when the conditions of the 
contract have been satisfied. The commenters questioned HUD's legal 
authority to require that the seller of the retail installment contract 
(the dealer) be bypassed and the money be handed over to the borrower 
(who is not a party to the retail installment transaction).
    HUD Response. HUD is not aware of any specific conflict between the 
proposed rule and any state or local law. However, HUD is cognizant 
that such conflicts may potentially arise in the future. Should such an 
issue arise, HUD will determine how best to resolve the conflict.
    Comment: Two-party disbursements are unnecessary. Several 
commenters wrote that two-party disbursements are unnecessary. 
According to the commenters, other regulatory requirements ensure that 
all required work has been performed properly before payment of the 
dealer--such as the requirement that lenders not release funds to pay 
the dealer until the homeowner signs a completion certificate, the 
post-completion inspection requirement, and the proposed requirement 
for a telephone conversation with the borrower before the release of 
funds.
    HUD Response. HUD does not agree that other regulatory requirements 
make the two-party disbursement procedures unnecessary. HUD believes 
that the two-party disbursement procedures will provide additional 
protections not afforded by these other requirements. For example, two-
party disbursements will ensure that loan proceeds are not released 
against the borrower's wishes, and will help to promptly alert the 
lender to disagreements between the borrower and the dealer. 
Accordingly, HUD has decided to adopt the proposed dual disbursement 
requirements without change.
    Comment: Support for two-party disbursements. Two commenters 
supported the proposed dual disbursement requirements. The commenters 
wrote that the proposal was reasonable and should prevent the disbursal 
of loan proceeds against the borrower's wishes. The commenters also 
wrote that two-party disbursements would help to ensure that property 
improvement work is completed satisfactorily, and that disagreements 
between the borrower and the dealer are brought to the lender's 
attention.
    HUD Response. HUD agrees with the commenters. As noted, this rule 
makes

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final the proposed dual disbursement requirements without change.

B. Comments Regarding Lien Position for Property Improvement Loans in 
Excess of $7,500

    The March 30, 2000 rule proposed to 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.
    Comment: Proposed lien position requirement will prevent many 
homeowners from participating in the Title I program. Several 
commenters wrote that the proposed lien position requirement would 
prevent homeowners who already have home equity loans, lines of credit, 
or received downpayment assistance, from participating in the Title I 
program. The commenters wrote that many home loans originated today are 
made in the form of a first and second lien transaction, in order to 
secure lower private mortgage insurance costs. Also, many state and 
local government agencies use second mortgages (``soft seconds'') to 
secure loans under their downpayment assistance programs. According to 
one of the commenters, the lien requirements would also be unworkable 
when borrowers use city, county, or state bond loan programs, which 
often prevent the consolidation of additional borrowing with the 
initial loan received under the bond program.
    HUD Response. HUD agrees that the proposed lien position 
requirements may interfere with the ability of certain homeowners to 
obtain Title I financing. Accordingly, HUD has revised the proposed 
rule to accommodate the concerns raised by the commenters. This final 
rule provides that the lien position requirements do not apply where: 
(1) The first and second mortgage were made at the same time (as 
usually occurs to accommodate a 20 percent downpayment on a 
conventional purchase mortgage); or (2) the second mortgage was 
provided by a state or local government agency in conjunction with a 
downpayment assistance program.
    Comment: Rather than prohibiting Title I loans from holding a third 
lien position, the final rule should require that a Title I loan take 
precedence over other liens issued at the same time. Several of the 
commenters recommended an alternative to the proposed lien position 
requirements. Specifically, these commenters recommended that rather 
than prohibiting Title I loans from holding a third lien position, HUD 
should require that a Title I loan take precedence over other liens 
issued at the same time. The commenters wrote that the final rule 
should prohibit a lender from processing a Title I application on a 
property for which the same lender has made a conventional subordinate-
lien loan within the last 60 days. One of the commenters suggested a 
90-day period, rather than the 60-days recommended by the other 
commenters. Another commenter suggested that the prohibition should 
apply whether the uninsured loan was made by the same lender or a 
different lender.
    HUD Response. HUD agrees that the flexibility requested by the 
commenters is necessary to accommodate certain types of frequently used 
real estate financing. As noted above, HUD has revised the proposed 
rule to provide that the lien position requirement does not apply where 
the first and second mortgage were made at the same time.
    Comment: Proposed lien position requirement will force many Title I 
lenders out of business. Two commenters wrote that many Title I loans 
occupy a third lien position. Therefore, the proposed requirements 
would prevent lenders from offering Title I loans, and drive the 
lenders out of business.
    HUD Response. The requirement is necessary to assure the financial 
integrity and continuing viability of the program. As discussed above, 
HUD has revised the lien position requirements to accommodate certain 
types of real estate financing. HUD believes that the revised 
requirements strike the appropriate balance between the need for 
flexibility, and ensuring that the program operates in a sound fiscal 
manner.

C. Comments Regarding Disbursement of Direct Property Improvement Loan 
Proceeds in Excess of $7,500

    The March 30, 2000 rule proposed to 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. HUD proposed to require that such disbursements be made 
using a ``draw'' system, similar to that used in construction lending. 
Lenders would have been required to deposit all of the loan proceeds in 
an interest bearing escrow account until they are disbursed. The draws 
would have been made in accordance with criteria established by the 
Secretary. The loan proceeds would have been 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.
    Comment: Objections to proposed draw system. Several commenters 
wrote in opposition to the proposed draw system. The objections raised 
by the commenters varied, but all agreed that the final rule should not 
require the use of draw disbursement procedures. For example, several 
commenters wrote that the proposed draw system would be costly and 
difficult to administer for those Title I loans used to conduct simple 
home improvements that are completed in a few days or weeks (such as 
the replacement of siding or roofing, the installation of new windows, 
or the insulation of the home). Other commenters wrote that the maximum 
$25,000 Title I loan is a relatively small loan by banking industry 
standards. These commenters were concerned that the imposition of the 
additional draw requirements would make these small loans even less 
attractive to lenders. One commenter wrote that the proposed draw 
system would create a significant risk of litigation for lenders and/or 
housing authorities acting as the lender's rehabilitation agent. 
Several commenters wrote that the use of draws is unnecessary because 
required inspections will suffice to address HUD's stated goal of 
preventing opportunities for the misuse of funds. One commenter 
questioned whether the proposed draws system might conflict with State 
requirements governing the use of draw disbursements in the 
construction industry.
    HUD Response. Upon reconsideration, HUD has decided not to require 
the use of a draw disbursement system for direct property improvement 
loans in excess of $7,500. HUD agrees with the commenters that the use 
of such a system might present administrative difficulties for lenders 
and may hinder participation in the Title I Program. HUD has concluded 
that the implementation of a draw system requires further review, 
including whether less burdensome alternatives exist to protect against 
the misuse of funds. Should HUD decide at a later date to implement a 
draw disbursement system, it will do so through a proposed rule and 
provide the public with an additional opportunity to comment.
    Comment: Suggested revisions or alternatives to proposed draw 
system. To address some of the concerns summarized above, several 
commenters suggested modifications or alternatives to the proposed draw 
system. For

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example, some commenters wrote that draws should only apply to ``larger 
projects'' involving direct loans in excess of $15,000 (or some other 
specified amount). Other commenters advocated that HUD revise the 
proposed rule to provide lenders and borrowers with greater flexibility 
in determining the appropriateness of using a draw system, and in 
establishing the number of required draws. Two commenters wrote that, 
instead of multiple draws, the final rule should require an initial 
``holdback'' of 10 percent of the loan amount. One commenter wrote that 
the issuance of three joint checks would achieve the same results as 
the proposed draw system, with far less costs to the homeowner.
    HUD Response. As noted above, HUD has decided not to adopt the 
proposed draw system requirements at this final rule stage. HUD will 
consider the suggestions made by the commenters should it decide to 
implement a draw system for Title I loans at a future date.
    Comment: Concerns about escrow account requirements. Several 
commenters expressed concerns about the escrow account requirements of 
the proposed draw system. For example, some commenters wrote that 
lenders would most likely pass the costs of establishing the interest-
bearing escrow account to borrowers.
    One commenter suggested that, rather than requiring the 
establishment of an escrow account, the final rule should permit the 
lender to charge interest at the note rate on any fees included in the 
loan amount and on those loan proceeds actually disbursed to the 
borrower, beginning with the initial draw.
    HUD Response. As discussed above, this final rule does not adopt 
the draw disbursement requirements of the March 30, 2000 proposed rule. 
HUD will take the concerns expressed by the commenters into 
consideration should it decide, at a later time, to implement a draw 
system for the Title I Program.

D. Comments Regarding Telephone Interviews for Dealer Property 
Improvement Loan Disbursements

    The March 30, 2000 rule proposed to 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, would be required to obtain an oral 
affirmation from the borrower to release funds to the dealer.
    Comment: Support for telephone interview requirement. Several 
public commenters wrote in support of the proposed telephone interview 
requirement. Many of these commenters noted that this practice is 
already followed by most reputable lenders in the Title I dealer loan 
program.
    HUD Response. HUD agrees that the telephone interview requirements 
will help to ensure the continued effectiveness of the Title I program. 
This final rule adopts the proposed requirement without change.
    Comment: Telephone interview requirement is duplicative and will 
slow down the dealer loan process. Two commenters opposed the proposed 
telephone interview requirement as unnecessary. According to the 
commenters, the proposed dual disbursement requirement, and the current 
certificate of completion requirement, will ensure that all work is 
properly performed before the disbursement of the dealer loan proceeds. 
The commenters also wrote that, in today's increasingly automated 
lending environment, the proposed requirement would be costly to 
administer and unnecessarily delay dealer loan transactions.
    HUD Response. Telephone interviews are a well established industry 
procedure already practiced by the majority of Title I lenders. 
Further, the majority of commenters submitting comments on this 
proposal recognized the effectiveness of telephone interviews and 
supported the requirement. Accordingly, requiring the use of telephone 
interviews will not pose an unfamiliar or unduly burdensome 
administrative requirement.

E. Comments Regarding Liquidity Requirements

    The March 30, 2000 rule proposed to amend the regulations at 24 CFR 
parts 201 and 202 to make the liquidity requirements applicable to the 
Title I and Title II programs consistent with one another. The proposed 
liquidity requirement would have applied 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 have been 
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 the proposed rule, HUD would not have considered lines of credit to 
be liquid assets, nor loans or mortgages held for resale by the 
mortgagee.
    Comment: Concerns regarding the proposed liquidity requirements. 
Two commenters supported the proposed liquidity requirements, writing 
that many Title I lenders and loan correspondents are also approved as 
Title II mortgagees and therefore already satisfy the proposed 
liquidity increases. However, other commenters wrote that the proposed 
liquidity requirements would impose an economic hardship on Title I 
participants. For example, several commenters wrote that most Title I 
dealers are two or three person operations whose business assets are 
limited and, therefore, would find it very difficult to meet the 
proposed liquidity requirements.
    Several commenters wrote that HUD, by proposing to conform the 
Title and Title II liquidity requirements, but disregarding other 
program differences, would place Title I lenders at a marketplace 
disadvantage. The commenters wrote that Title II mortgagees are not 
subject to the Title I ``bricks and mortar'' and minimum staffing 
requirements for HUD branch office approval. The commenters recommended 
that, should HUD decide to finalize the proposed liquidity 
requirements, it should also conform these other Title I and Title II 
program requirements.
    One commenter wrote that the liquidity requirements would not 
necessarily assure dealer integrity or reliability. Some commenters 
noted that the misuse of restricted funds is not a significant concern 
for Title I loan correspondents, since they do not service HUD loans 
and never hold insurance or escrow monies. These commenters suggested 
that the required liquidity for loan correspondents be capped at 20 
percent of the minimum net worth.
    HUD Response. Upon reconsideration, HUD has decided not to proceed 
with the proposed changes to the Title I liquidity requirements. HUD 
agrees with the commenters that the proposed liquidity increases might 
pose an economic hardship for some Title I lenders, correspondents and 
dealers. Accordingly, HUD has decided to defer any changes to the Title 
I liquidity requirements in order to further consider the impacts of 
such increases. Should HUD decide to increase the liquidity 
requirements at a future date, it will implement these changes through 
proposed rulemaking and provide the public with an additional 
opportunity to comment.

F. Comments Regarding the Reporting of Loans for Insurance

    The March 30, 2000 rule proposed to amend Sec. 201.30 to clarify 
that required loan reports must be submitted on the form prescribed by 
the Secretary, and

[[Page 56414]]

must contain the data prescribed by HUD.
    Comment: Support for proposed reporting requirements. Several 
commenters supported this proposed requirement. The commenters wrote 
that the proposal would allow HUD to better monitor and track 
participant performance.
    HUD Response. HUD agrees that the reporting requirements will 
facilitate its review of Title I participant performance.
    Comment: The reporting requirements should be ``phased-in''. One 
commenter, while supporting the proposed reporting requirements, noted 
that ``requirements of this sort often involve the modification of 
automated systems, which are sometimes maintained by others.'' The 
commenter suggested that the new reporting requirements be ``phased-
in,'' in order to provide participants adequate time to make needed 
adjustments.
    HUD Response. HUD agrees that lenders may require time to modify 
existing procedures in order to comply with any new HUD reporting 
requirements. HUD notes that the final rule does not establish new or 
revised reporting requirements at this time. Rather, the language of 
the proposed and final rules clarifies that the required reports must 
be submitted in the format, and contain the data, prescribed by HUD. In 
evaluating lender compliance with any new reporting requirements, HUD 
will take into consideration the need of lenders to update their 
current systems and procedures.

G. Comments Regarding Increased Insurance Charge for Property 
Improvement and Manufactured Home Loans

    The March 30, 2000 rule proposed to revise Sec. 201.31(a) to 
increase the insurance charge for Title I property improvement and 
manufactured home loan insurance. Currently, Title I property 
improvement 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. HUD proposed to increase the applicable percentage to 1.00 
percent of the loan amount. HUD also proposed to amend Sec. 201.31(b) 
to conform the procedures governing the payment of the insurance charge 
for manufactured 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. 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.
1. General Comments Regarding the Increased Insurance Charge
    Comment: Support for increased insurance charge. Several commenters 
supported the proposed increase. The commenters wrote that the proposal 
was necessary for the Title I program to be self-supporting.
    HUD Response. HUD agrees with these commenters. The final rule 
adopts the proposed revisions without change.
    Comment: Cost of increased insurance charge will be passed on to 
the borrower. Several commenters wrote that the costs of the increased 
insurance charge would be passed on to the borrower. Some of the 
commenters wrote that lenders sometimes absorb the cost of the 
insurance premium as a ``goodwill'' gesture. However, the commenters 
wrote that if HUD proceeds with the proposed increase, lenders may be 
forced to pass the cost to the borrower. According to the commenters, 
this will mean charging substantial up-front fees that most borrowers 
cannot afford.
    HUD Response. HUD does not agree with these commenters. Market 
costs will determine whether the increased insurance charge will be 
passed on to borrowers, or absorbed by lenders as a necessary expense 
of maintaining their competitiveness in the market.
    Comment: The proposed increase is excessive. Two commenters, 
although supporting an increase to the insurance charge, wrote that the 
proposed increase was excessive. One of the commenters suggested that 
HUD should reduce the proposed increase to 0.75 percent of the loan 
amount. The second commenter wrote that an 0.88 percent insurance 
charge would be sufficient.
    HUD Response. HUD has not adopted the changes requested by these 
commenters. The increase to the insurance charge is based upon the 
conclusions reached by a comprehensive HUD analysis of the Title I 
program. This analysis evaluated various premium models, and concluded 
that the increase is necessary to cover the costs of insurance claims 
paid by HUD under the program. In addition, to simplify the product for 
the industry, both the Title I property improvement and manufactured 
home programs will use the same method of premium collection.
    Comment: There is no basis for modifying the front-loaded 
collection system for manufactured home loans. One commenter wrote that 
``[i]n spite of a declining loan volume beginning in the early 1990's, 
the manufactured home loan program has shown positive cash flow in each 
year since 1989, and has generated a surplus of $120 million over this 
eleven year period'' (emphasis in original). Therefore, according to 
the commenter, there is no basis for changing the total loan insurance 
charge or the ``front-loaded'' collection system for manufactured home 
loans.
    HUD Response. HUD has not revised the proposed rule in response to 
this comment. The Title I Manufactured Home Program has not generated a 
positive cash flow in recent years.
2. Suggested Revisions to Increased Insurance Charge
    Comment: Insurance charge should be based upon a performance based 
standard. Several commenters suggested that HUD develop performance 
standards for use in establishing the insurance charge for each lender. 
The commenters wrote that participating financial institutions should 
not be forced to bear the costs of program losses attributable to a 
minority of poor-performing lenders. According to the commenters, the 
use of a performance-based insurance charge would reward lenders with 
strong underwriting standards, while maintaining the financial 
stability of the program.
    HUD Response. HUD has not adopted the suggestions made by these 
commenters. Title I property improvement loans fill an important role 
otherwise unserved by either public or private lending products. 
Accordingly, HUD believes it is appropriate to use a single premium 
rate applicable to all lenders. A performance-based premium standard 
might make Title I loans unaffordable in certain communities.
    Comment: Title I loans that are financed by municipal housing bonds 
should be exempt from the proposed insurance charge increase. Two 
commenters were concerned that the proposed increase to the insurance 
charge might jeopardize the ability of state and local housing agencies 
to provide low-interest Title I loans to low-income households. The 
commenters wrote that bond-financed Title I loans have a lower rate of 
default than other Title I loans and provide lower interest rates on 
home improvement loans for low-income households. Accordingly, the 
commenters recommended that HUD exempt bond-financed Title I loans from 
any increases to the insurance charge.
    HUD Response. HUD has not adopted the change suggested by the

[[Page 56415]]

commenters. As noted, the premium increase is based on recent credit 
subsidy estimates used for budget purposes. HUD's credit subsidy 
analysis evaluated the performance of the entire Title I portfolio, and 
did not exclude Title I loans financed by municipal housing bonds. 
Accordingly, the conclusions reached by HUD regarding the need for an 
increased insurance charge are equally applicable to these types of 
Title I loans.
    Comment: Increased insurance charge should only apply to loans made 
after the effective date of the final rule. One commenter, while 
supporting an increase to the insurance charge, wrote that the increase 
should only apply to loans made after the effective date of the final 
rule.
    HUD Response. The increased insurance charge applies only to Title 
I loans made on or after the effective date of this final rule.
    Comment: HUD should consider ``sunsetting'' the increased insurance 
charge. One commenter wrote that, if the increased insurance charge is 
necessary to cover past program losses, HUD should provide a ``sunset 
provision'' for the premium increase. Once the past losses have been 
recovered in a few years, the insurance charge would be reduced to its 
current level.
    HUD Response. HUD has not adopted the change suggested by the 
commenter. The increase to the insurance charge is necessary not only 
to recoup past losses in the Title I program, but also to cover the 
projected costs of future insurance claims paid by HUD under the 
program.
    Comment: Final rule should establish ``front loaded'' collection 
system for property improvement loans. One commenter wrote that a level 
annual premium penalizes those lenders who make good Title I loans and 
hold them in their portfolio for servicing. According to the commenter, 
many of these lenders do not pass the premium cost to borrowers, and 
must, therefore, pay the annual premium from the ever-declining 
interest payments they receive. ``Increasing the annual premium from 
0.50 percent to 1.00 percent will exacerbate this problem* * *'' The 
commenter suggested that HUD adopt a ``front-loaded collection system 
similar to the one that has been successful for the manufactured home 
loan program.'' According to the commenter, such a system would conform 
to the recommendations made by HUD staff in 1995, and subsequently 
``confirmed by Price Waterhouse in its 1997 study of the program, and 
reaffirmed by KPMG Peat Marwick in its 1998 front-end risk assessment 
on the program.''
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. The current premium structure was developed by HUD based on 
data provided from several sources, including various financial 
contractors. Based on this information, HUD has determined that the 
current structure meets the financial needs of FHA and participants in 
the Title I program. Moreover, the regulatory change suggested by the 
commenter could not appropriately be implemented at the final rule 
stage, but would require additional notice and opportunity for public 
comment.

H. Comments Regarding Inspection Requirements for Dealer and Direct 
Property Improvement Loans

    The March 30, 2000 rule proposed to expand the current on-site 
inspection requirements for dealer and direct property improvement 
loans at Sec. 201.40. Specifically, HUD proposed to 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 have been 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 have been required to conduct a third inspection. 
Additionally, HUD proposed to require that photographs of the site be 
taken as part of all required inspections.
    Comment: Concerns regarding proposed inspections. Several 
commenters expressed concern about the proposed inspection 
requirements. For example, various commenters wrote that the proposed 
increase in the number of required inspections would be 
administratively burdensome, costly and impracticable. The commenters 
wrote that it would serve no worthwhile purpose to require multiple 
inspections within the few days it takes to complete most Title I 
projects. Several commenters requested that HUD raise the current 
inspection fees, or otherwise provide additional funding to cover the 
costs of conducting the additional inspection. Other commenters 
objected to the time periods for conducting the proposed inspections. 
One of these commenters suggested extending the 60-day deadline for 
completing the required inspections to 90-days. Two commenters 
recommended shortening the existing period for completion of direct 
loan improvements from six months to 90 days (with a one-time 90-day 
extension).
    HUD Response. This final rule does not adopt the proposed changes 
to the Title I inspection requirements. HUD has decided to defer any 
changes to the inspection procedures to allow for further review of the 
potential impacts of such revisions. Should HUD decide to revise the 
Title I inspection requirements at a future date, it will implement 
these changes through proposed rulemaking and provide the public with 
an additional opportunity to comment.

I. Comments Regarding Net Worth Requirements for Title I and Title II 
Programs

    The March 30, 2000 rule proposed to increase the net worth 
requirements for both Title I and Title II loan correspondents. 
Specifically, HUD proposed to 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. HUD also proposed 
to amend Sec. 201.27 to raise the current minimum net worth 
requirements for Title I property improvement loan dealers and 
manufactured home dealers from $25,000 and $50,000, respectively, to 
$75,000.
1. Support for Proposed Net Worth Requirements
    Comment: Support for increased net worth requirements.
    A minority of commenters supported the proposed net worth 
requirements. The commenters wrote that fraudulently originated loans 
and loans to unqualified borrowers are more likely to occur if the 
lender is thinly capitalized and desperate to close and sell more loans 
to stay solvent. Accordingly, the higher worth requirements should 
ensure greater integrity and accountability.
    Response. HUD agrees that increased net worth requirements are 
necessary to help ensure greater accountability in the Title I and 
Title II programs.
    Comment: Net worth requirements should be increased further. Three 
commenters wrote that the proposed net worth increases are not 
sufficient. The commenters suggested that the net worth requirements 
should be increased even further--to $100,000 or some other amount.
    HUD Response. As discussed in greater detail below, HUD has revised 
the proposed rule to more closely link the net worth adjustments to 
increases

[[Page 56416]]

in inflation. HUD believes that increasing the net worth requirements 
to reflect inflationary pressures is equitable and will not pose an 
undue financial burden on program participants.
2. Objections to Proposed Net Worth Requirements
    Comment: Increased net worth requirements will eliminate 
competition and make borrowers vulnerable to abusive lending practices. 
Many commenters wrote that lenders would find it extremely costly to 
maintain the required cash reserves. The commenters wrote that the 
proposed net worth requirements would drive many of these lenders out 
of business, or force them to cease offering Title I loans. 
Accordingly, the proposed net worth requirements would decrease 
competition and allow mortgage lenders to charge higher fees and offer 
services that are inferior and more profitable. The commenters wrote 
that the increased net worth requirements would ultimately result in 
borrowers either being directed to sub-prime products at much higher 
interest rates or being required to pay the higher bank prices.
    Many of these commenters questioned why HUD would propose to 
increase the net worth requirements at a time when it has specifically 
requested the National Association of Mortgage Brokers (NAMB) to assist 
in expanding the use of FHA programs by mortgage brokers. According to 
the commenters, the increased net worth requirements would have the 
opposite effect by preventing many lenders from participating in the 
Title I programs.
    HUD Response. HUD does not agree that the increased net worth 
requirements will decrease market competition and hurt consumers. HUD 
last increased the Title I net worth requirements in 1991. Fiscal Year 
1999 set an all time high for new approved lenders with Fiscal Year 
2000 being the second highest. The rate of new lender approvals has 
continued at these historic high levels through the first half of 
Fiscal Year 2001. Moreover, 82 percent of new lenders approved thus far 
in Fiscal Year 2001 have been loan correspondents. If anything, market 
competition in the Title I program is increasing and not decreasing.
    Comment: Increased net worth requirements will limit availability 
of Title I loans to underserved communities. Many commenters wrote that 
small lenders are often more willing to provide necessary services to 
minority and rural communities. According to these commenters, these 
lenders will often provide educational seminars in English, Spanish, 
and a variety of other languages, or visit families to explain home 
loan financing and take a loan application. The increased net worth 
requirements would prevent these lenders from participating in the 
Title I programs, and, therefore, limit the availability of Title I 
loans to underserved minority and rural communities.
    HUD Response. As discussed above, HUD does not agree that the new 
net worth requirements will decrease the number of participating 
lenders. Rather, HUD believes that the financial reforms implemented by 
this final rule will make participation in the Title I program an even 
more attractive option for lenders. Moreover, the final rule will 
strengthen the financial soundness of participating lenders. 
Accordingly, rather than restrict the availability of Title I loans, 
the final rule will make the program available to many new borrowers--
including those located in traditionally underserved rural and minority 
communities.
    Comment: Increased net worth requirements unfairly penalize loan 
correspondents, who are not responsible for servicing Title I loans. 
Many commenters wrote that the majority of loan correspondents are 
small businesses, who immediately deliver FHA loan packages to a lender 
(sponsor). The servicing lenders are the entities in complete control 
of the restricted funds for all customer insurance premiums and 
escrows. The commenters objected to the establishment of increased net 
worth requirements for loan correspondents, since the correspondents do 
not underwrite, approve, fund and/or service FHA loans. The commenters 
wrote that the increased net worth requirements would force loan 
correspondents to tie up excessive business capital in cash reserves, 
that might be more productively used to run the company's operations. 
Several of the commenters suggested that HUD make the sponsoring lender 
accountable for the actions of the correspondent. The commenters wrote 
that such a practice would conform to the existing procedures used by 
Fannie Mae, Freddie Mac, and the Department of Veterans Affairs.
    HUD Response. HUD has not revised the proposed rule in response to 
these public comments. While loan correspondents are not authorized to 
service FHA insured loans, they do collect some up-front fees and/or 
premiums from borrowers as part of the origination process. Loan 
correspondents are also required to fund the Title I loans they 
originate. With respect to the commenters suggesting that HUD make 
sponsors responsible for the actions of loan correspondents in lieu of 
increasing the net worth requirement, HUD notes that the FHA lender 
approval regulations already provide for such accountability (see 24 
CFR 202.8(b)(7)).
    Comment: There is no correlation between net worth and default 
ratios. Many commenters wrote that the net worth of lenders has no 
bearing on default ratios. The commenters wrote that some of the most 
well-capitalized lenders have been suspended from FHA participation due 
to high default rates and fraud.
    HUD Response. HUD has not revised the proposed rule in response to 
these comments. While it is true that some well-capitalized lenders 
have been suspended from FHA participation because of high claim rates 
or fraud, it is also true that some under-capitalized lenders have also 
been subjected to similar sanctions. In HUD's experience, there is less 
stress on well capitalized lenders to misuse restricted funds such as 
insurance premiums or escrows for operating expenses. The net worth 
increases will help to ensure that only well-capitalized and 
financially strong lenders are eligible to participate in the Title I 
and Title II programs.
    Comment: Increased net worth requirements are unnecessary; existing 
requirements are sufficient to protect against misuse of FHA funds. 
Several commenters wrote that existing HUD regulations adequately 
protect the public and FHA against fraud and the misuse of funds. The 
commenters recommended that HUD should educate lenders on existing 
program procedures and enforce compliance with these requirements, 
rather than increasing the net worth requirements. One of the 
commenters wrote that ``HUD now has the tools, like the Credit Watch 
program, to accurately assess the performance of any lender.'' The 
commenter questioned the need to raise the net worth levels, given that 
objective measures of real performance are now in place.
    HUD Response. HUD agrees that lender education and compliance 
enforcement are important tools in protecting against the misuse of FHA 
loan funds. However, enforcement actions occur only after the violation 
of FHA requirements. Further, the performance measures mentioned by the 
commenters (such as the Credit Watch Program) come into play after HUD 
has assumed the risk of insuring the loans originated by participating 
lenders. Therefore, HUD believes that preventative risk management 
measures are necessary to help reduce the risk to

[[Page 56417]]

FHA insurance funds. HUD's goal in issuing this final rule is to help 
to reduce the number of necessary FHA enforcement actions, as well as 
the incidence of poor performance ratings under Credit Watch and other 
similar measurement systems.
3. Comments Regarding HUD's Justification for Proposed Net Worth 
Increases
    Comment: Loss rates do not justify proposed net worth requirements. 
Several commenters questioned HUD's explanation that the proposed net 
worth increase is necessary due to increases in the loss rates for the 
Title I and Title II programs (see 65 FR 17122, middle column). The 
commenters noted that, based on the figures provided in the preamble, 
the average loss has more than doubled for the Title I program ($13,783 
to date versus $6,318 in FY 1991), while the increase for the Title II 
program has been just under one-third ($31,800 today versus $24,140 for 
FY 1991). According to the commenters, the proposed net worth increase 
would be greater than the increase in losses for the Title II program, 
but insufficient to cover Title I program losses.
    As one of the commenters wrote:

    [B]ased on the proposed increase, a Title I correspondent would 
go from being able to indemnify 7.9 average losses in 1991 to being 
able to indemnify 5.4 average losses today. At the same time, a 
Title II correspondent would go from a capability of indemnifying 
2.1 average losses in 1991 to 2.4 today. Thus, while the ability to 
indemnify would increase slightly for Title II correspondents under 
the Proposal (12%), the ability to indemnify for Title I 
correspondents would decrease substantially (46%). The Proposal 
would increase net worth requirements to much for Title II and too 
little for Title I, based on the trends in average losses for the 
two programs. * * * We see no reason why Title II participants 
should cross-subsidize the Title I program.

    HUD Response. HUD does not agree with the commenter. HUD's goal in 
establishing minimum net worth requirements is not to ensure that 
lenders will have the capability to indemnify HUD against losses 
resulting from improper or fraudulent loans. Rather, the objective is 
to ensure that lenders have the financial capacity to operate their 
companies in a sound and professional manner, thereby reducing the risk 
to FHA insurance funds. The data provided in the proposed rule was 
designed to highlight the fact that HUD's losses per claim have 
increased significantly, while the net worth requirement has remained 
the same. Further, there can be no cross-subsidization of the two 
programs since FHA insurance under the Title I and Title II programs is 
provided through separate appropriations.
    Comment: Inflation does not justify proposed net worth increases. 
Several commenters disagreed with HUD's explanation that the net worth 
requirements need adjustment due to inflation (see 65 FR 17123, middle 
column). The commenters wrote that the past seven years have seen 
uncommonly low levels of inflation. According to the commenters, 
inflation has not approached the level of 50% over the past seven years 
since the last increase in net worth requirements. Accordingly, the 
commenters believe that the proposed increase ``vastly overreaches the 
degree of increase in net worth that inflation alone can justify.''
    HUD Response. HUD agrees that the increases to the net worth 
requirements should be more closely linked to actual increases in 
inflation. Accordingly, this final rule establishes an increased net 
worth requirement computed by adjusting the current requirements for 
inflation from 1991 to 2000 using the Consumer Price Index published by 
the U.S. Bureau of Labor Statistics. The increased net worth 
requirements are based on Consumer Price Index adjustments commencing 
in 1991, since the Title I net worth requirements were last increased 
by HUD in that year. The numbers are rounded to the nearest $1,000. 
Specifically, the final rule raises the net worth requirements for 
Title II loan correspondent mortgagees and Title I loan correspondent 
lenders from $50,000 to $63,000. The final rule also amends Sec. 201.27 
to raise the current minimum net worth requirements for Title I 
property improvement loan dealers and manufactured home dealers from 
$25,000 and $50,000 to $32,000 and $63,000, respectively.
4. Suggested Revisions to Proposed Net Worth Requirements
    Comment: The final rule should provide lenders with additional time 
to meet the net worth requirements. Several commenters wrote that six 
months would not be sufficient time for lenders to meet the new net 
worth requirements. Two of the commenters suggested that one year would 
be a more equitable time period.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. This rule continues to grant lenders six months from the 
effective date of the final rule (seven months following the date of 
publication) to comply with the new requirements. HUD believes the 
final rule provides sufficient time for lenders to take any actions 
necessary to comply with the increased net worth requirements.
    Comment: Bonding requirement is a more appropriate alternative to 
increasing the net worth requirements. Several commenters suggested 
that, in lieu of increasing the net worth, HUD should impose a surety 
bond requirement. This might involve the bonding of the loan broker/
correspondent, as well as the individual bonding of originators 
employed by the correspondent. According to the commenters, a surety 
bond requirement would be less costly for lenders to meet, while 
securing financial responsibility and providing a recourse for all 
parties involved. The commenters wrote that a surety bond requirement 
would also benefit HUD by affording relief from the burden of reviewing 
annual audited financial statements.
    HUD Response. HUD has not adopted the recommendations made by the 
commenter. In 1999, HUD conducted extensive research into the 
possibility of accepting surety bonds and concluded that it would 
increase the risk to HUD and impair its ability to monitor and sanction 
Title I lenders. Although underwriting standards may vary among bonding 
companies, most financial guaranty bonds provide for full recourse to 
the principals of a company in the form of a personal guarantee. Most 
small Title I lenders would not be able (or willing) to provide such a 
guarantee in order to obtain a surety bond.
    Comment: Increased net worth requirements should not apply to 
currently approved loan correspondents. Two commenters suggested that 
HUD exempt currently approved loan correspondents from the increased 
net worth requirements.
    HUD Response. HUD has not revised the proposed rule in response to 
these comments. In the interests of fairness, the final rule 
establishes a uniform net worth requirement applicable to all loan 
correspondents, regardless of when they were approved by FHA. The 
commenter's suggestion would put newly approved Title I correspondents 
at a distinct market disadvantage.
    Comment: Increased net worth requirements should apply to loan 
correspondents, but not to Title I dealers. Several commenters 
supported increased net worth requirements for loan correspondents. 
According to the commenters, correspondents should be required to have 
sufficient net worth to indemnify HUD for more than a few loans. The 
commenters, however, unanimously advocated that loan dealers be 
exempted from the net worth increases. The commenters wrote that most 
Title I loan dealers are small businesses who would be unable to meet 
the proposed increases. Further,

[[Page 56418]]

the commenters wrote that loan dealers do not underwrite Title I loans, 
but merely originate the loans.
    HUD Response. As noted, HUD has revised the proposed rule to more 
closely link the net worth adjustments to increases in inflation. HUD 
believes that increasing the net worth requirements to reflect 
inflationary pressures is equitable and will not pose an undue 
financial burden on program participants. In addition, as stated 
elsewhere in this preamble, HUD has exempted Title I dealers from the 
new branch office requirements.

J. Comments Regarding Performance Based Standards

    The preamble to the March 30, 2000 proposed rule explained that 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. The preamble advised 
that while HUD was still developing data collection and measurement 
systems for this purpose and was not proposing any requirements in this 
area under this proposed rule, it was interested in the public's views 
on using this tool. (See 65 FR 17122, middle and third columns.)
    Comment: Support for performance based standards. Several 
commenters supported the development of performance based standards for 
the Title I program. The commenters wrote that such standards have been 
used effectively in a number of mortgage purchase and participation 
programs, and can be used effectively to assure loan quality and 
compliance with Title I program requirements. The commenters also urged 
that any such standards be objective and equitable. The commenters 
offered to work with HUD in the development of the performance based 
standards.
    HUD Response. At this time, HUD has decided not to implement 
performance based standards for the Title I program. HUD continues to 
believe that such standards can be an effective risk management tool, 
and may develop performance standards in the future. HUD thanks the 
commenters for their suggestions, and appreciates their offer to work 
with HUD on the development of such standards. HUD will take the 
comments under consideration should it determine to develop performance 
based standards for use in the Title I program.

K. Comments Regarding Small Business Impacts

    Two commenters questioned HUD's preamble certification that the 
proposed rule would not have a significant economic impact on a 
substantial number of small entities (see 65 FR 17123, first column).
    Comment: The proposed rule inadequately addressed small business 
concerns. Two commenters disagreed with the preamble statement 
indicating that ``[t]he majority of financial institutions 
participating in the Title I program are large depository 
institutions.'' One of the commenters wrote that its ``experience is 
quite the opposite.'' The second commenter noted that the regulations 
defining what constitutes a small business are issued by the Small 
Business Administration (SBA). According to the commenter, under the 
SBA regulations at 13 CFR 121.201, many of the lending institutions and 
loan dealers participating in the Title I program are small business 
entities.
    Two commenters wrote that the proposed rule inadequately addressed 
the adverse economic impacts of the proposed rule on small entities. 
According to the commenters, if the proposed net worth and liquidity 
requirements were to be implemented, many property improvement and 
manufactured home dealers could not afford to participate in the Title 
I program. The commenters reminded HUD of its obligation, under the 
Regulatory Flexibility Act (5 U.S.C. 605(b)) to consider alternatives 
that would accomplish HUD's goals without severe economic losses to 
small businesses.
    HUD Response. HUD does not agree with these commenters. Small 
business concerns were carefully considered by HUD in the development 
of the proposed and final rules. Where this final rule imposes an 
economic burden, HUD has attempted to minimize the costs to small 
lenders and other small entities participating in the Title I and Title 
II programs. The commenters are also incorrect in writing that HUD has 
not considered less costly alternatives to the regulatory changes. The 
preamble to the proposed rule specifically invited comments from the 
public (including small businesses) on possible less burdensome 
alternatives to the proposed regulatory amendments (see 65 FR 17123, 
third column). HUD received over 500 public comments on the March 30, 
2000 proposed rule, many of them suggesting changes to the proposed 
regulatory language. HUD carefully reviewed each of these comments and, 
where it determined appropriate, revised the proposed rule to adopt the 
recommended changes.
    In response to public comment, HUD has decided not to adopt several 
provisions of the proposed rule that had the potential to impose 
economic hardship on small participants in the Title I Program. As 
discussed above in this preamble, the final rule no longer increases 
the liquidity requirements, requires the use of a draw system for 
disbursement of direct loans in excess of $7,500, or establishes new 
inspection requirements. In addition, Title I dealers will not be 
required to maintain additional net worth for each branch office. The 
final rule also ``phases-in'' the increases to the net worth 
requirements. Also in response to public comment, HUD has revised the 
proposed rule to more closely link the net worth adjustments to 
increases in inflation.
    As noted elsewhere in this preamble, HUD also disagrees with the 
commenters that the net worth increases will decrease the number of 
participating lenders. HUD last increased the net worth requirements 
for the Title I program in 1991. Lender participation in the Title I 
program has significantly increased each year since 1991. In Fiscal 
Years 1999 and 2000, FHA approved a record number of new lenders for 
participation in the program. In addition, an analysis of a sampling of 
four years worth of the annual recertification audits submitted by loan 
correspondents in the Title I program indicates that the impact of the 
increase of the net worth is minimal as 74% of the lenders already meet 
the new standard.
    For the above reasons, HUD has determined that the final rule will 
not have a significant economic impact on a substantial number of small 
entities, in accordance with the requirements of the Regulatory 
Flexibility Act.

IV. 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 approved by the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3520) and assigned OMB Control Number 2502-0328. 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.

[[Page 56419]]

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 
was made at the proposed rule stage 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). That Finding remains 
applicable to this final rule, and 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 final rule before publication, and 
by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this final 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 final rule makes several amendments to HUD's Title I program 
regulations. The final rule also increases the net worth requirements 
applicable to both the Title I and Title II Single Family Mortgage 
Insurance programs. The changes are designed to enhance program 
controls and strengthen the financial viability of the programs. This 
final rule follows publication of a March 30, 2000 proposed rule, and 
takes into consideration the public comments received on the proposed 
rule. The preamble to the March 30, 2000 proposed rule specifically 
solicited comment from the public (including small businesses) on 
possible less burdensome alternatives to the proposed regulatory 
amendments (see 65 FR 17123, third column).
    Many of the new requirements (such as two-party disbursements for 
dealer loan proceeds, and ensuring at least a second lien position for 
certain loans) will pose minimal, or no, economic costs. Where the 
final rule imposes an economic burden (such as the increased net 
worth), HUD has attempted to minimize the costs to small lenders and 
other small entities participating in the Title I and Title II 
programs. In addition, HUD has adopted several changes suggested by the 
commenters to alleviate economic burden on small entities.
    Among other provisions designed to address small business concerns, 
the final rule no longer increases the liquidity requirements for 
participation in the Title I Program. In addition, Title I dealers will 
not be required to maintain additional net worth for each branch 
office. The final rule also ``phases-in'' the increases to the net 
worth. HUD has also revised the proposed rule to more closely link the 
net worth adjustments to increases in inflation. HUD has revised the 
proposed lien position requirements to accommodate certain types of 
frequently used real estate financing. In addition, the final rule no 
longer requires the use of a draw system for disbursement of direct 
loan proceeds in excess of $7,500, nor mandates new inspection 
procedures for Title I loans.

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 final 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 final 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  Property Improvement Loan Insurance for Improving All 
Existing Structures and Building of New Nonresidential Structures; and
    14.162  Mortgage Insurance--Combination and Manufactured Home Lot 
Loans.

List of Subjects

24 CFR Part 201

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

24 CFR Part 202

    Administrative practice and procedure, Home improvement, 
Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements.


    Accordingly, for the reasons described in the preamble, HUD amends 
24 CFR parts 201 and 201 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.

* * * * *
    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.
* * * * *

[[Page 56420]]


    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. This requirement shall not apply where the first and 
second mortgages were made at the same time or the second mortgage was 
provided by a state or local government agency in conjunction with a 
downpayment assistance program.
    (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 any such 
additional loans, 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)(6) and (a)(7) as paragraphs (a)(8) 
and (a)(9), respectively; and
    b. Add new paragraphs (a)(6) and (a)(7).


Sec. 201.26  Conditions for loan disbursement.

    (a) * * *
    (6) In the case of a dealer loan made on or after December 7, 2001, 
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 $32,000 
and $63,000, respectively. The required net worth must be maintained in 
assets acceptable to the Secretary.
    (ii) 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 transfer of loan 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 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.
* * * * *

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. 202.8(b)(1) 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 $63,000 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.
* * * * *

    Dated: August 27, 2001.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 01-27900 Filed 11-6-01; 8:45 am]
BILLING CODE 4210-27-P