[Federal Register Volume 67, Number 154 (Friday, August 9, 2002)]
[Rules and Regulations]
[Pages 52378-52381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20240]



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Part IX





Department of Housing and Urban Development





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24 CFR Parts 200 and 203



Single Family Mortgage Insurance; Section 203(k) Consultant Placement 
and Removal Procedures; Final Rule

  Federal Register / Vol. 67 , No. 154 / Friday, August 9, 2002 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200 and 203

[Docket No. FR-4592-F-02]
RIN 2502-AH51


Single Family Mortgage Insurance; Section 203(k) Consultant 
Placement and Removal Procedures

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

ACTION: Final rule.

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SUMMARY: This final rule establishes placement and removal procedures 
for HUD's list of qualified consultants under the Section 203(k) 
Rehabilitation Loan Insurance Program. A 203(k) lender may select a 
qualified independent consultant, who is an expert in the field of home 
inspection, cost estimating, and construction, to perform various tasks 
required for the rehabilitation of the property. The establishment of 
these placement and removal procedures will better protect 203(k) 
borrowers and lenders, and safeguard Federal Housing Administration 
(FHA) insurance funds. This final rule follows publication of an 
October 24, 2001 proposed rule.

DATES: Effective Date: September 9, 2002.
    Comment Due Date: October 8, 2002.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Rules Docket Clerk, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410. Communications should refer to the above 
docket number and title. Facsimile (FAX) comments are not acceptable. A 
copy of each communication 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, 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--The October 24, 2001 Proposed Rule

    On October 24, 2001 (66 FR 53930), HUD published a proposed rule 
for public comment to establish placement and removal procedures for 
HUD's list of qualified consultants under the Section 203(k) 
Rehabilitation Loan Insurance Program. The 203(k) Program is the 
primary Federal Housing Administration (FHA) program for the 
rehabilitation and repair of single family properties. Section 203(k) 
loan insurance enables homebuyers and homeowners to finance both the 
purchase (or refinance) of a house and the cost of its rehabilitation 
through a single mortgage.
    One of the most time consuming and difficult parts of the 203(k) 
loan process is for the borrower to properly prepare the required cost 
estimate, work write-up, and architectural exhibits. A borrower using 
the 203(k) Program may choose to have a qualified independent 
consultant, who is an expert in the field of home inspection, cost 
estimating, and construction, perform these tasks. The lender will then 
select a consultant and determine the scope of the work to be 
performed. The use of a consultant by the borrower is not required. 
However, many borrowers choose to use consultants to expedite 
processing of their 203(k) loans.
    HUD, through its four Homeownership Centers (HOCs), maintains lists 
of qualified consultants on the applicable internet website. A lender 
may only select a consultant included on a HOC's list. Presently, there 
are no regulatory procedures for placing a consultant on, nor for 
removing a poorly performing consultant from the list. HUD published 
the October 24, 2001 proposed rule to establish such policies and 
procedures. The establishment of these placement and removal procedures 
will better protect 203(k) borrowers and lenders, and safeguard the FHA 
insurance fund. The October 24, 2001 proposed rule provides additional 
details regarding the 203(k) consultant placement and removal 
procedures.

II. This Final Rule

    This final rule follows publication of the October 24, 2001 
proposed rule. The public comment period on the proposed rule closed on 
December 24, 2001. HUD did not receive any public comments on the 
proposed rule; however, it has made three changes to the policies and 
procedures contained in the October 24, 2001 proposed rule.
    First, the final rule no longer provides that a 203(k) consultant 
may be removed from HUD's list for having served as the consultant on 
properties in foreclosure, default, or claim status. HUD has determined 
that further consideration is required regarding this provision of the 
proposed rule, and the preamble of this rule, in Section IV, requests 
comment on specific issues related to establishing such a provision. 
After considering any comments that are received, should HUD at a 
future date decide to provide for the removal of 203(k) consultants 
based on excessive claim and default rates, it will do so through 
issuance of a new proposed rule.
    Secondly, this final rule clarifies that a consultant may be 
removed from the 203(k) Consultant Roster for failure to retain 
standing as a state licensed home inspector, if the consultant is 
located in a state the requires such licensing. This final rule (as did 
the preceding October 24, 2001 proposed rule) provides that such 
licensing is required for placement on the Roster, but the proposed 
rule failed to specify that failure to maintain the licensing 
constituted grounds for removal. The final rule provides the necessary 
clarification.
    Finally, Sec. 203.50(l) of this final rule clarifies that, once a 
203(k) borrower chooses to use the services of a consultant, the lender 
must select a consultant that has been placed on the 203(k) Consultant 
Roster. The proposed regulatory language would only have provided that 
a lender ``may'' select a consultant placed on the Roster. This 
language might have caused some 203(k) lenders to incorrectly assume 
that consultants not included on the Roster were eligible for 
selection.

III. Small Business Concerns Related to the Removal of Consultants

    With respect to removing a 203(k) consultant from the list, or 
taking other appropriate enforcement action against a consultant, HUD 
is cognizant that section 222 of the Small Business Regulatory 
Enforcement Fairness Act of 1996 (Public Law 104-121) (referred to as 
``SBREFA'') requires the Small Business and Agriculture Regulatory 
Enforcement Ombudsman to ``work with each agency with regulatory 
authority over small businesses to ensure that small business concerns 
that receive or are subject to an audit, on-site inspection, compliance 
assistance effort or other enforcement related communication or contact 
by agency personnel are provided with a means to comment on the 
enforcement activity conducted by this personnel.'' To implement this 
statutory provision, the Small Business Administration has

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requested that agencies include the following language on agency 
publications and notices that are provided to small businesses concerns 
at the time the enforcement action is undertaken. The language is as 
follows:

Your Comments Are Important

    The Small Business and Agriculture Regulatory Enforcement 
Ombudsman and 10 Regional Fairness Boards were established to 
receive comments from small businesses about federal agency 
enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to 
small business. If you wish to comment on the enforcement actions of 
[insert agency name], call 1-888-REG-FAIR (1-888-734-3247).

    As HUD stated in its notice describing HUD's actions on the 
implementation of SBREFA, which was published on May 21, 1998 (63 FR 
28214), HUD intends to work with the Small Business Administration to 
provide small entities with information on the Fairness Boards and 
National Ombudsman program, at the time enforcement actions are taken, 
to ensure that small entities have the full means to comment on the 
enforcement activity conducted by HUD.

IV. Request for Public Comment

    HUD seeks to establish clear, consistent and familiar standards and 
procedures for a consultant to maintain status on, or be removed from, 
the 203(k) Consultant Roster. HUD is therefore seeking comment on 
whether, and if so, in what manner, it should establish ``serving, or 
having served, as the rehabilitation consultant for properties securing 
203(k) mortgages of which a significant percentage are in foreclosure, 
default or claim status'' as a basis for removal from the Roster. In 
particular, HUD requests comments on the following issues:
    1. Whether HUD should establish a minimum number of consultations 
as a threshold for any action, and if so, what number would be 
appropriate.
    2. Whether HUD should specify the age of 203(k) mortgages that 
would be considered under a standard, and what age would be appropriate 
(e.g., consultations on properties securing 203(k) mortgages not more 
than one, two or three years old.
    3. What percentage of foreclosure, default or claims should be 
considered.
    4. What period of time over which consultations are conducted 
should be used for evaluation purposes (e.g., consultations over 12 
months, or 18 months, or 24 months)?
    5. What factors in addition to the percent of loan defaults, 
foreclosures and claims should HUD consider in evaluating consultant 
performance?
    6. Should the severity of loss be considered as a factor in 
evaluating a consultant's performance?
    7. If included as a factor, how should severity of loss be 
considered in evaluating performance?
    8. What kinds of factors should be considered as mitigating for a 
consultant with higher than normal default, foreclosure and claim 
rates?
    9. What are appropriate procedures and factors to consider for 
removal?
    10. What is an appropriate period of removal from the Roster before 
a reinstatement is permitted?
    11. What are appropriate procedures and factors to consider for 
reinstatement?

V. Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in this final 
rule have 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 2502-0527. 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.

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

    This final rule establishes placement and removal procedures for 
HUD's list of qualified 203(k) rehabilitation loan consultants. The 
final rule does not direct, provide for assistance or loan and mortgage 
insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this 
final rule is categorically excluded from environmental review under 
the National Environmental Policy Act (42 U.S.C. 4321 et seq.).

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 will 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 establishes the procedure by which a consultant, who 
has violated FHA single family mortgage insurance program requirements, 
may be removed from HUD's list of qualified 203(k) consultants. 
Accordingly, to the extent that this final rule impacts small entities 
it will be as a result of actions taken by small entities themselves--
that is, violation of single family program regulations and 
requirements.
    Further, the final rule provides several procedural safeguards 
designed to minimize any potential impact on small entities. For 
example, the rule grants consultants, selected for removal from the 
list, the opportunity to provide a written response and to request a 
conference regarding a proposed removal. The rule also specifies that 
the official designated by HUD to review an appeal may not be the same 
HUD official involved in the initial removal decision. In addition, the 
examination requirements will be ``phased-in'' for consultants on the 
list, and will not take effect until six months after the effective 
date of promulgation. This delayed effective date will provide 
consultants on the list with additional time to meet the new 
requirements.

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 will not have 
federalism implications and will not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive Order.

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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 will 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 Number for the Section 
203(k) Rehabilitation Loan Insurance program is 14.108.

List of Subjects

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Home improvement, Housing standards, 
Incorporation by reference, Lead poisoning, Loan programs--housing and 
community development, Minimum property standards, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

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 amends 
24 CFR parts 200 and 203 as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

    1. The authority citation for 24 CFR part 200 is revised to read as 
follows:

    Authority: 12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).

    2. In subpart F, add Secs. 200.190-200.193, under a new 
undesignated center heading reading ``Section 203(k) Rehabilitation 
Loan Consultants,'' to read as follows:

Subpart F--Placement and Removal Procedures for Participation in 
FHA Programs

    Section 203(k) Rehabilitation Loan Consultants


Sec. 200.190  HUD list of qualified 203(k) consultants.

    (a) Qualified consultant list. HUD maintains a list of qualified 
consultants for use in the rehabilitation loan insurance program 
authorized by section 203(k) of the National Housing Act (12 U.S.C. 
1709(k)) (referred to as the ``203(k) Program'').
    (b) Consultant functions. Only a consultant included on the list 
may be selected by the lender to conduct any consultant function under 
the 203(k) Program (see Sec. 203.50(l) of this title).
    (c) Disclaimer. The inclusion of a consultant on the list means 
only that the consultant has met the qualifications and conditions 
prescribed by the Secretary for placement on the list of consultants 
qualified for the 203(k) Program. The inclusion of a consultant on the 
list does not create or imply a warranty or endorsement by HUD of the 
consultant, nor does it represent a warranty of any work performed by 
the consultant.


Sec. 200.191  Placement of 203(k) consultant.

    (a) Application. To be considered for placement on the list, a 
consultant must apply to HUD using an application (or materials) in a 
form prescribed by HUD.
    (b) Eligibility. To be eligible for placement on the list:
    (1) The consultant must demonstrate to HUD that it either:
    (i) Has at least three years' experience as a remodeling 
contractor, general contractor or home inspector; or
    (ii) Is a state-licensed architect or state-licensed engineer;
    (2) If located in a state that requires the licensing of home 
inspectors, the consultant must submit proof of such licensing;
    (3) The consultant must submit a narrative description of the 
consultant's ability to perform home inspections, prepare architectural 
drawings, use proper methods of cost estimating and complete draw 
inspections.
    (4) The consultant must certify that it has read and fully 
understands the requirements of the HUD handbook on the 203(k) Program 
(4240.4) and all HUD Mortgagee Letters and other instructions relating 
to the 203(k) Program.
    (5) The consultant must not be listed on:
    (i) The General Services Administration's Suspension and Debarment 
List;
    (ii) HUD's Limited Denial of Participation List; or
    (iii) HUD's Credit Alert Interactive Voice Response System.
    (6) The consultant must have passed a comprehensive examination on 
the 203(k) Program, if HUD has developed such an exam.
    (c) Delayed effective date of examination requirement for 
consultants currently on the list. Consultants who are included on the 
list on the date when the requirement for the examination described in 
paragraph (b)(6) of this section becomes effective have until 6 months 
following this date to pass the comprehensive exam. Failure to pass the 
examination by the deadline date constitutes cause for removal under 
Sec. 200.192.


Sec. 200.192  Removal of 203(k) consultant.

    (a) Cause for removal. HUD may remove a consultant from the list 
for any cause that HUD determines to be detrimental to HUD or its 
programs. Cause for removal includes, but is not limited to:
    (1) Poor performance on a HUD quality control field review;
    (2) Failure to comply with applicable regulations or other written 
instructions or standards issued by HUD;
    (3) Failure to comply with applicable Civil Rights requirements;
    (4) Being debarred or suspended, or subject to a limited denial of 
participation;
    (5) Misrepresentation or fraudulent statements;
    (6) Failure to retain standing as a state licensed architect or 
state-licensed engineer (unless the consultant can demonstrate the 
required three years experience as a home inspector or remodeling 
contractor);
    (7) Failure to retain standing as a state licensed home inspector, 
if the consultant is located in a sate that requires such licensing; or
    (8) Failure to respond within a reasonable time to HUD inquiries or 
requests for documentation.
    (b) Procedure for removal. A consultant that is debarred or 
suspended, or subject to a limited denial of participation will be 
automatically removed from the list. In all other cases, the following 
procedure for removal will be followed:
    (1) HUD will give the consultant written notice of the proposed 
removal. The notice will state the reasons for, and the duration of, 
the proposed removal.
    (2) The consultant will have 20 days from the date of the notice 
(or longer, if provided in the notice) to submit a written response 
appealing the proposed removal and to request a conference. A request 
for a conference must be in writing and must be submitted along with 
the written response.
    (3) A HUD official will review the appeal and send a response 
either

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affirming, modifying, or canceling the removal. The HUD official will 
not be someone who was involved in HUD's initial removal decision. HUD 
will respond with a decision within 30 days of receiving the appeal or, 
if the consultant has requested a conference, within 30 days after the 
completion of the conference. HUD may extend the 30-day period by 
providing written notice to the consultant.
    (4) If the consultant does not submit a timely written response, 
the removal will be effective 20 days after the date of HUD's initial 
removal notice (or after a longer period provided in the notice). If a 
written response is submitted, and the removal decision is affirmed or 
modified, the removal will be effective on the date of HUD's notice 
affirming or modifying the initial removal decision.
    (c) Placement on the list after removal. A consultant that has been 
removed from the list may apply for placement on the list (in 
accordance with Sec. 200.191) after the period of the consultant's 
removal from the list has expired. An application will be rejected if 
the period for the consultant's removal from the list has not expired.
    (d) Other action. Nothing in this section prohibits HUD from taking 
such other action against a consultant, as provided in 24 CFR part 24, 
or from seeking any other remedy against a consultant available to HUD 
by statute or otherwise.


Sec. 200.193  Responsibilities of 203(k) consultants on the list.

    All consultants included on the list are responsible for:
    (a) Obtaining and reading the HUD handbook on the 203(k) Program 
(4240.4) and any updates to the handbook.
    (b) Complying with the HUD handbook on the 203(k) Program (4240.4), 
and any updates to the handbook, when performing any consultant 
function under the 203(k) Program.
    (c) Obtaining and reading all Mortgagee Letters and other 
instructions issued by HUD relating to the 203(k) Program.
    (d) Complying with all Mortgagee Letters and other instructions 
issued by HUD relating to the 203(k) Program, when undertaking any 
consultant function under the 203(k) Program.
    (e) Complying with HUD's request for documentation relating to any 
203(k) project on which the consultant has worked.
    (f) Complying with HUD's monitoring requirements relating to the 
203(k) Program.

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    3. 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).


    4. Add Sec. 203.50(l) to read as follows:


Sec. 203.50  Eligibility of rehabilitation loans.

* * * * *
    (l) Rehabilitation loan consultants. HUD maintains a list of 
qualified consultants, in accordance with Secs. 200.190 through 200.193 
of this title. When the borrower elects to use the services of a 
consultant, the lender must select a consultant on the list to perform 
one or more of the following tasks:
    (1) Conduct a preliminary feasibility analysis before or after the 
submission of a sales contract;
    (2) Prepare the cost estimate, work write-up, and architectural 
exhibits required for the rehabilitation of the property;
    (3) Conduct a plan review; and
    (4) Conduct the draw inspections for the release of funds during 
the construction phase of the project.

    Dated: July 8, 2002.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 02-20240 Filed 8-8-02; 8:45 am]
BILLING CODE 4210-27-P