[Federal Register Volume 68, Number 62 (Tuesday, April 1, 2003)]
[Proposed Rules]
[Pages 15906-15910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7704]



[[Page 15905]]

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Part IV





Department of Housing and Urban Development





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24 CFR Part 202



Revisions to FHA Credit Watch Termination Initiative; Proposed Rule

  Federal Register / Vol. 68, No. 62 / Tuesday, April 1, 2003 / 
Proposed Rule  

[[Page 15906]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 202

[Docket No. FR-4625-P-01]
RIN 2502-AH60


Revisions to FHA Credit Watch Termination Initiative

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would make several amendments to the 
Federal Housing Administration (FHA) Credit Watch Termination 
Initiative. The proposed rule provides for a fully computerized Credit 
Watch status notification process through use of the FHA Neighborhood 
Watch Early Warning System. A mortgagee will be considered to be on 
Credit Watch status if, at any time, it has a default and claim rate of 
higher than 150 percent of the normal rate, and its origination 
approval agreement has not been terminated. The proposed rule would 
also prohibit a mortgagee that has received a notice of proposed 
termination of its origination approval agreement from establishing a 
new branch for the origination of FHA-insured mortgages in the lending 
area covered by the proposed termination. In addition, the proposed 
rule would establish that the default and claim thresholds underlying 
the Credit Watch Termination Initiative apply to both underwriting and 
originating mortgagees. The proposed rule would also codify the 
definition of ``underserved area'' that is currently used under the 
Credit Watch Termination Initiative. Finally, the proposed rule would 
provide that, for purposes of Credit Watch Termination evaluation, the 
date of mortgage origination will be considered to be the date the loan 
transaction commences amortization, rather than the date of endorsement 
for FHA mortgage insurance.

DATES: Comment Due Date: June 2, 2003.

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

FOR FURTHER INFORMATION CONTACT: Phillip Murray, Director, Office of 
Lender Activities and Program Compliance, Office of Housing, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Room B-133, 
Washington, DC 20410; telephone (202) 708-1515 (this is not a toll-free 
number). Persons with hearing or speech impairments may access this 
number via TTY by calling the toll-free Federal Information Relay 
Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--The FHA Credit Watch Termination Initiative

    Homeownership rates in the United States have reached a record 
level, and the efficient management of the FHA mortgage insurance fund 
remains a cornerstone of HUD's strategy to further expand housing 
opportunities. By originating and underwriting insured single family 
mortgages in accordance with program guidelines, FHA-approved 
mortgagees are valuable participants in achieving greater access to the 
housing credit market, particularly for individuals and in geographic 
areas that have traditionally been under-served.
    Approval of a mortgagee by HUD/FHA to participate in FHA mortgage 
insurance programs includes an origination approval agreement (the 
Agreement) between HUD and the mortgagee. Under the Agreement, the 
mortgagee is authorized to originate single family mortgage loans and 
submit them to FHA for insurance endorsement. Some mortgagees, however, 
have demonstrated high default and claim rates on their FHA-insured 
portfolios that, although not signifying violations of FHA 
requirements, are nonetheless unacceptable. As a result, HUD developed 
the Credit Watch Termination Initiative to identify mortgagees with 
unsatisfactory performance levels and take ameliorative action at an 
early stage. HUD's regulations for the Credit Watch Termination 
Initiative are found at 24 CFR 202.3.
    Under the FHA Credit Watch Termination Initiative, FHA 
systematically reviews mortgagees' early default and claim rates, that 
is, defaults and claims on mortgagees' loans during the initial 24 
months following endorsement. Mortgagees with excessive default and 
claim rates are considered to be on Credit Watch Status and, in cases 
of more severe performance deficiencies, HUD may terminate the 
mortgagee's loan origination approval authority. Credit Watch Status 
constitutes a warning to a mortgagee that its default and claim rates 
are in excess of permissible levels, and that failure to achieve 
improvement may lead to the termination of its Agreement. The 
Termination of a mortgagee's Agreement is separate and apart from any 
action taken by HUD's Mortgagee Review Board for violations of FHA 
requirements under 24 CFR part 25.
    In a May 17, 1999, Federal Register notice (64 FR 26769) HUD 
advised that it would publish a list of mortgagees that have had their 
Agreements terminated. HUD has periodically published such notices 
since May 1999.

II. This Proposed Rule

    This proposed rule would make several amendments to HUD's 
regulations for the FHA Credit Watch Termination Initiative. The 
proposed changes would strengthen HUD's capacity to safeguard the FHA 
mortgage insurance fund. This section of the preamble describes the 
most significant amendments that would be made by the proposed rule.

A. Electronic Notification of Credit Watch Status

    Consistent with the goals of the Administration regarding the 
increased use of technology in government, the proposed rule would 
allow for electronic Credit Watch monitoring and notification. 
Specifically, the proposed rule provides that HUD will, on an ongoing 
basis, review the FHA mortgage claim and default rate of each mortgagee 
in the geographic region served by a HUD field office. HUD will use its 
electronic Neighborhood Watch Early Warning System for this purpose. 
The Neighborhood Watch Early Warning System is available to mortgagees 
via the FHA Connection at https://entp.hud.gov/clas/index.html. This 
proposed regulatory change would codify the policy first announced in 
FHA Mortgagee Letter 2001-23, issued on October 21, 2001.\1\ This 
Mortgagee Letter provides instructions for using the Neighborhood Watch 
Early Warning System for purposes of monitoring performance under the 
Credit Watch Termination Initiative. A copy of HUD

[[Page 15907]]

Mortgagee Letter 2001-23 may be obtained through HUD's Client 
Information and Policy Systems (HUDCLIPS) Internet Home page at http://www.hudclips.org.
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    \1\ The availability of the Neighborhood Watch Early Warning 
System was first announced in Mortgagee Letter 2000-20, issued on 
June 6, 2000. Mortagagee Letter 2002-15, issued on July 17, 2002, 
announces the list of enhancements that have been made to the 
Neighborhood Watch Early Warning System since issuance of Mortgagee 
Letter 2000-20. Copies of both these Mortgagee Letters may be 
obtained via the Internet at http://www.hudclips.org.
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    HUD will no longer provide mortgagees with written notification of 
placement on Credit Watch Status. Rather, each mortgagee will be 
responsible for using the Neighborhood Watch Early Warning System to 
monitor its performance. A mortgagee will be considered to be on Credit 
Watch Status if, at any time, it has a rate of defaults and claims on 
insured mortgages originated, underwritten or both in the geographic 
area served by a HUD field office which exceeds 150 percent of the 
normal rate, and its Agreement has not been terminated by HUD. Further, 
the Neighborhood Watch Early Warning System, which is updated monthly, 
will allow the ongoing tracking of mortgagee performance, allowing for 
the elimination of the current six-month tracking period for evaluating 
mortgagees placed on Credit Watch Status.

B. Default and Claim Rates for Placement on Credit Watch Status

    Under the current regulation, a mortgagee may be placed on Credit 
Watch Status if it has a rate of defaults and claims on insured 
mortgages which exceeds ``150 percent but not 200 percent of the normal 
rate.'' The regulation, therefore, establishes a ``cap'' on the default 
and claim rates for placing a mortgagee on Credit Watch Status. The 
existing regulation also authorizes HUD to terminate a mortgagee's 
Agreement if the mortgagee's default and claim rate exceeds 200 percent 
of the normal rate.
    In the past, HUD has used its administrative discretion to focus 
its resources on those mortgagees with default and claim rates higher 
than the 200 percent threshold. This has had the potential to create a 
gap in HUD's Credit Watch monitoring and enforcement efforts, since 
mortgagees with default and claim rates falling between 200 percent of 
the normal rate and the higher threshold being used for terminations 
would neither be placed on Credit Watch Status nor have their 
Agreements terminated. HUD addressed this potential concern by issuing 
a series of regulatory waivers of the Credit Watch cap to authorize 
placement of such mortgagees on Credit Watch Status. This proposed rule 
would eliminate the need for these regulatory waivers by removing the 
cap, and providing that a mortgagee will be considered to be on Credit 
Watch Status if, at any time, it has a rate of defaults and claims on 
insured mortgages that exceeds 150 percent of the normal rate and its 
Agreement has not been terminated.
    The proposed change would not restrict HUD's ability to terminate a 
mortgagee whose claim and default rate exceeds 200 percent of the 
normal rate, but merely provides that such mortgagees will be 
considered to be on Credit Watch Status unless HUD determines that 
termination may be appropriate.

C. Limitation on the Establishment of New Branches

    In reviewing the Credit Watch Termination process, HUD learned that 
some mortgagees were establishing new branches for the origination of 
FHA-insured mortgages subsequent to receiving proposed termination 
notices for existing branches. The mortgagees would establish the new 
branches to replace the authority which was lost, or which might be 
lost, as a result of the proposed termination of the existing branches. 
The result was that these mortgagees were able to evade the intended 
effects of the Credit Watch Termination Initiative. HUD's interest is 
in the mortgagee determining the reasons for its high default and claim 
rate in a lending area and correcting the underlying causes that led to 
the termination before the mortgagee is allowed to establish a new 
branch for the origination of FHA-insured mortgages.
    In order for FHA to effectively address this evasion of the 
intended effect of Credit Watch Termination, this proposed rule would 
prohibit a mortgagee that receives a notice of proposed termination of 
its Agreement from establishing a new branch for the origination of 
FHA-insured mortgages in the lending area covered by the proposed 
termination notice. Upon the effective date of this regulation at the 
final rule stage, a mortgagee that is in receipt of a notice of 
proposed termination may not establish any new branch in the 
location(s) cited in the proposed termination notice until either: (1) 
The proposed termination notice is rescinded; or (2) the Agreement for 
the affected branch or branches has been terminated for at least six 
months and the Secretary has determined that the underlying causes for 
termination have been remedied.

D. Inclusion of Underwriting Mortgagees

    Under the current Credit Watch Termination regulation, HUD 
evaluates the performance of a mortgagee based solely on the loans it 
originates. HUD's Credit Watch Termination evaluation, therefore, 
excludes underwriting which is an important part of the mortgage loan 
process. While the mortgagee that originates a loan may also be the 
mortgagee that underwrites the loan, often there are two different 
entities involved. Specifically, an FHA approved loan correspondent 
only originates loans and does not underwrite. Rather, the loan 
correspondent has ``sponsor mortgagees'' that perform the underwriting 
function.
    HUD's emphasis on accountability extends beyond the origination of 
loans to include the mortgagee that underwrites the loan. For example, 
HUD's regulations provide for the termination of a mortgagee's ability 
to underwrite FHA loans when the Agreement is terminated pursuant to 
the Credit Watch Termination Initiative (see 24 CFR 203.3(d)(2)(iv)). 
HUD has determined that to minimize the risk associated with the FHA 
single family mortgage insurance programs, HUD should also periodically 
evaluate the performance of underwriting mortgagees. Accordingly, this 
proposed rule would include underwriting mortgagees within the scope of 
the Credit Watch Termination Initiative. The proposed amendment would 
emphasize HUD's authority to terminate the ability of a mortgagee to 
originate or underwrite FHA-insured single family mortgages where the 
mortgagee has demonstrated an unacceptably high default and claim rate. 
HUD will analyze data for mortgagees that underwrite their own loans, 
and for mortgagees that underwrite loans for their loan correspondents 
as well as for mortgagees that underwrite both their own loans and 
loans for their loan correspondents.

E. Mortgage Origination Date

    Under the current regulations for the Credit Watch Termination 
Initiative, a mortgage is considered to be originated in the same 
federal fiscal year in which HUD endorses it for FHA mortgage 
insurance. Although HUD requires that the mortgagee submit a mortgage 
for endorsement within 60 days after closing (see Sec.  203.255(b)), 
there may be delays in the submission of the endorsement packages. 
Consequently, the endorsement dates for loans originated during the 
same period can vary greatly. Given these discrepancies in the timing 
of endorsement, linking the date of origination to the endorsement date 
does not allow for the most accurate comparison of loan performance.
    This proposed rule would provide that, for purposes of the Credit 
Watch

[[Page 15908]]

Termination evaluation, the date of mortgage origination will be 
considered to be the date the loan transaction commences amortization, 
rather than the date of endorsement for FHA mortgage insurance. Unlike 
the date of endorsement, the beginning amortization date is not 
dependent on the filing of timely paperwork with HUD. Further, Credit 
Watch analysis is based on default and claim rates. The due date for 
mortgage payments is established pursuant to the closing date, and 
mortgage defaults are reported based on these payment due dates. 
Accordingly, HUD believes that focusing on the amortization date will 
provide for a more uniform starting date for Credit Watch evaluations 
and increase the effectiveness of the Credit Watch Termination 
Initiative.

F. Definition of Underserved Area

    HUD's regulation provides that before notification of proposed 
termination is sent to a mortgagee, the Secretary will review the 
Census tract area concentrations of the default and claims. This 
provision of the existing regulations would not be modified by this 
proposed rule. If the Secretary determines that the excessive rate is 
the result of mortgage lending in underserved areas, the Secretary may 
determine not to terminate the origination approval agreement. HUD is 
aware, however, that predatory lending abuses may occur in underserved 
areas, and that the excessive rates may be the result of predatory 
lending. The Secretary will consider this factor, where appropriate, in 
making a determination.
    HUD has announced in Mortgagee Letter 99-15 that, for purposes of 
the Credit Watch Termination Initiative, the term ``underserved area'' 
will have the same meaning as that provided in HUD's regulations for 
the Government Sponsored Enterprises at 24 CFR part 81. Specifically, 
Sec.  81.2 of those regulations defines the term ``underserved area'', 
in part, to mean:

    [A] Census tract, a federal or state American Indian reservation 
or tribal or individual trust land, or the balance of a census tract 
excluding the area within any federal or state American Indian 
reservation or tribal or individual trust land, having:
    (i) A median income at or below 120 percent of the median income 
of the metropolitan area and a minority population of 30 percent or 
greater; or
    (ii) A median income at or below 90 percent of median income of 
the metropolitan area.
    This proposed rule would codify the interpretation of ``underserved 
area'' provided in the Mortgagee Letter. Specifically, the proposed 
rule would amend Sec.  202.3(c)(2) to specify that the term 
``underserved area'' will have the same meaning as that provided in 24 
CFR 81.2.

G. Informal Conference Prior to Termination

    The regulations provide that prior to termination the mortgagee may 
request an informal conference with HUD. However, the regulations do 
not currently specify the timeframes for submission of such a request, 
nor for the holding of the informal conference. This proposed rule 
would specify that HUD must receive the written request for the 
informal conference no later than 30 calendar days after the date of 
the proposed termination notice. Unless HUD grants an extension, the 
informal conference must be held no later than 60 calendar days after 
the date of the proposed termination notice.

H. Reinstatement of Terminated Origination Approval Agreements

    The proposed rule would also add a new Sec.  202.3(e) describing 
the procedures a terminated mortgagee must follow to have its 
origination approval agreement reinstated. A mortgagee whose 
origination approval agreement has been terminated may apply for 
reinstatement if the origination approval agreement has been terminated 
for the affected branch or branches for at least six months and the 
mortgagee continues to be an approved mortgagee meeting the general 
standards of Sec.  202.5 and the specific requirements of Sec. Sec.  
202.6, 202.7, 202.8 or 202.10, and 202.12.
    The mortgagee's application for reinstatement must be accompanied 
by an independent analysis of the terminated office's operations and 
identifying the underlying cause of the mortgagee's unacceptable 
default and claim rate. The independent analysis must be prepared by an 
independent Certified Public Accountant (CPA) qualified to perform 
audits under the government auditing standards issued by the General 
Accounting Office. The application must also contain a corrective 
action plan addressing each of the issues identified in the CPA 
analysis and include evidence demonstrating that the mortgagee has 
implemented the corrective action plan. The Secretary will grant the 
mortgagee's application for reinstatement if the mortgagee's 
application is complete and the Secretary determines that the 
underlying causes for the termination have been satisfactorily 
remedied.

III. Small Business Concerns Related to Credit Watch Termination 
Initiative

    With respect to termination of the mortgagee's Agreement, or taking 
other appropriate enforcement action against a mortgagee, HUD is 
cognizant that section 222 of the Small Business Regulatory Enforcement 
Fairness Act of 1996 (Pub. L. 104-121) (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 requested that agencies include the 
following language on agency publications and notices that are provided 
to small business 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], you will find the necessary comment forms at 
http://www.sba.gov.ombudsman or call 1-888-REG-FAIR (1-888-734-
3247).

    In accordance with its notice describing HUD's actions on the 
implementation of SBREFA, which was published on May 21, 1998 (63 FR 
28214), HUD will 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. Findings and Certifications

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 proposed 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

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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.

Regulatory Flexibility Act

    The Secretary has reviewed this proposed rule before publication, 
and by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The reasons for HUD's determination are as follows.
    This proposed rule would make several amendments to HUD's 
regulations for the FHA Credit Watch Termination Initiative. First, 
consistent with the goals of the Administration regarding the increased 
use of technology in government, the proposed rule would allow for a 
fully computerized Credit Watch notification process through use of the 
FHA Neighborhood Watch Early Warning System. This proposed change would 
provide for a streamlined and more effective method of monitoring 
mortgagee performance and for notifying poor performing mortgagees that 
are in danger of having their Agreements terminated by HUD. The change 
would not impose an undue burden on small entities, since it merely 
codifies existing HUD policy previously announced through a Mortgagee 
Letter. Further, the majority of mortgagees (small and large) 
participating in the FHA mortgage insurance programs currently have 
access to the FHA Internet Connection that is used to provide such 
notification.
    The proposed rule would also remove the regulatory cap on the 
Credit Watch default and claim rates, and providing that a mortgagee 
will be considered to be on Credit Watch Status if it has a default and 
claim rate on insured mortgages that exceeds 150 percent of the normal 
rate and its Agreement has not been terminated. This revision would not 
impose a significant economic impact on small entities, since the 
entities that would be affected by this change are poor performing 
mortgagees that are already subject to termination of their Agreements.
    The proposed rule also would prohibit a mortgagee that has received 
a notice of proposed termination of its Agreement from establishing a 
new branch for the origination of FHA-insured mortgages in the lending 
area covered by the proposed termination. The mortgagees to which this 
change would be applicable are those that already have been notified by 
HUD that their default and claim rates exceed an acceptable standard in 
specified geographic areas and they are at risk of having their FHA 
mortgage origination approvals terminated. The appropriate logical 
response to a notice of proposed termination is not to have this same 
mortgagee open a new branch in the same lending area before risks have 
been mitigated and problems corrected. The intent of this rulemaking is 
to close a loophole used by mortgagees to evade HUD's existing 
procedure for reviewing losses to the insurance funds.
    The proposed rule would also establish that the default and claim 
thresholds underlying the Credit Watch Termination Initiative apply to 
both underwriting and originating mortgagees. This amendment will 
ensure that the performance of all mortgagees involved in FHA-insured 
mortgage transactions is evaluated. To the extent that the proposed 
change would have an economic impact on small underwriting mortgagees 
who are presently not covered by Credit Watch Termination, it will be 
as a result of actions taken by the mortgagees themselves--that is, 
failure to undertake the sound business practices necessary to maintain 
default and claim rates at an acceptable level.
    The proposed rule would also provide that, for purposes of the 
Credit Watch Termination evaluation, the date of mortgage origination 
would be considered to be the date the loan transaction commences 
amortization, rather than the date of endorsement for FHA mortgage 
insurance as provided in the current regulation. This proposed change 
would not impose any economic burden on small mortgagees. Rather, the 
change would improve the accuracy of Credit Watch Termination 
evaluations by conforming HUD's definition of the mortgage origination 
date to the beginning amortization date used to report defaults. 
Finally, the proposed rule would codify existing definition of the term 
``underserved area'' for purposes of Credit Watch Termination 
determinations. This proposed amendment would merely codify existing 
policy and would, therefore, not impose any new economic burden on 
mortgagees.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Environmental Impact

    This proposed rule would 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), this 
proposed rule is categorically excluded from the requirements of the 
National Environmental Policy Act (42 U.S.C. 4332 et seq.).

Executive Order 13132, Federalism

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) establishes requirements for federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments, and on the private sector. This proposed rule would not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the Unfunded Mandates 
Reform Act of 1995.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Program number 
applicable to 24 CFR part 202 is 14.20.

List of Subjects in 24 CFR Part 202

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

    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR part 202 as follows:

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

    1. The authority citation for 24 CFR part 202 continues to read as 
follows:


[[Page 15910]]


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

    2. Amend Sec.  202.3 by revising paragraph (c)(2) and adding 
paragraph (e) to read as follows:


Sec.  202.3  Approval status for lenders and mortgagees.

* * * * *
    (c) * * *
    (2) Termination of the origination approval agreement. (i) Scope 
and frequency of review. The Secretary will review, on an ongoing 
basis, the number of defaults and claims on mortgages originated, 
underwritten, or both, by each mortgagee in the geographic area served 
by a HUD field office. HUD will make this rate information available to 
mortgagees and the public through electronic means and will issue 
instructions for accessing this information through a Mortgagee Letter. 
For this purpose, and for all purposes under paragraph (c) of this 
section, a mortgage is considered to be originated in the same federal 
fiscal year in which its amortization commences. The Secretary may also 
review the insured mortgage performance of a mortgagee's branch offices 
individually and may terminate the authority of the branch or the 
authority of the mortgagee's overall operation.
    (ii) Credit Watch Status. Mortgagees are responsible for monitoring 
their default and claim rate performance. A mortgagee is considered to 
be on Credit Watch Status if, at any time, the mortgagee has a rate of 
defaults and claims on insured mortgages originated, underwritten, or 
both, in an area which exceeds 150 percent of the normal rate and its 
origination approval agreement has not been terminated. A poor 
performing mortgagee on Credit Watch Status is in danger of having its 
origination approval agreement terminated by HUD.
    (iii) Effect of default and claim rate determination. (A) The 
Secretary may notify a mortgagee that its origination approval 
agreement will terminate 60 days after notice is given, if the 
mortgagee had a rate of defaults and claims on insured mortgages 
originated, underwritten, or both, in an area which exceeded 200 
percent of the normal rate and exceeded the national default and claim 
rate for insured mortgages. The termination notice may be given without 
prior action by the Mortgagee Review Board.
    (B) Before the Secretary sends the termination notice, the 
Secretary shall review the Census tract concentrations of the defaults 
and claims. If the Secretary determines that the excessive rate is the 
result of mortgage lending in underserved areas, as defined in 24 CFR 
81.2, the Secretary may determine not to terminate the origination 
approval agreement.
    (C) Prior to termination the mortgagee may submit a written request 
for an informal conference with the Deputy Assistant Secretary for 
Single Family Housing or that official's designee. HUD must receive the 
written request no later than 30 calendar days after the date of the 
proposed termination notice. Unless HUD grants an extension, the 
informal conference must be held no later than 60 calendar days after 
the date of the proposed termination notice. After considering relevant 
reasons and factors beyond the mortgagee's control that contributed to 
the excessive default and claim rates, the Deputy Assistant Secretary 
for Single Family Housing or designee may withdraw the termination 
notice.
    (D) Upon receipt of a proposed termination notice, the mortgagee 
shall not establish a new branch or new branches for the origination of 
FHA-insured mortgages in the area or areas that are covered by the 
proposed termination notice. As of [effective date of final rule to be 
inserted at final rule stage] a mortgagee that is in receipt of a 
notice of proposed termination may not establish any new branch in the 
location or locations cited in the proposed termination notice until 
either:
    (1) The proposed termination notice is rescinded; or
    (2) The Secretary reinstates the mortgagee's origination approval 
agreement, in accordance with paragraph (e) of this section.
    (iv) Rights and obligations in the event of termination. If a 
mortgagee's origination approval agreement is terminated, it may not 
originate or underwrite single family insured mortgages unless the 
origination approval agreement is reinstated by the Secretary in 
accordance with paragraph (e) of this section, notwithstanding any 
other provision of this part except Sec.  202.3(c)(2)(iv)(A). 
Termination of the origination approval agreement shall not affect:
    (A) The eligibility of the mortgage for insurance, absent fraud or 
misrepresentation, if the mortgagor and all terms and conditions of the 
mortgage had been approved before the termination by the Direct 
Endorsement or Lender Insurance mortgagee or were covered by a firm 
commitment issued by the Secretary; however, no other mortgages 
originated by the mortgagee shall be insured unless a new origination 
approval agreement is accepted by the Secretary;
    (B) A mortgagee's obligation to continue to pay insurance premiums 
and meet all other obligations, including servicing, associated with 
insured mortgages;
    (C) A mortgagee's right to apply for reinstatement of the 
origination approval agreement in accordance with paragraph (e) of this 
section; or
    (D) A mortgagee's right to purchase insured mortgages or to service 
its own portfolio or the portfolios of other mortgagees with which it 
has a servicing contract.
* * * * *
    (e) Reinstatement of terminated origination approval agreement. (1) 
Reinstatement. A mortgagee whose origination approval agreement has 
been terminated under paragraph (c) of this section may apply for 
reinstatement if:
    (i) The origination approval agreement for the affected branch or 
branches has been terminated for at least six months; and
    (ii) The mortgagee continues to be an approved mortgagee meeting 
the general standards of Sec.  202.5 and the specific requirements of 
Sec. Sec.  202.6, 202.7, 202.8 or 202.10, and 202.12.
    (2) Application for reinstatement. The mortgagee's application for 
reinstatement must:
    (i) Be in a format prescribed by the Secretary and signed by the 
mortgagee;
    (ii) Be accompanied by an independent analysis of the terminated 
office's operations and identifying the underlying cause of the 
mortgagee's unacceptable default and claim rate. The independent 
analysis must be prepared by an independent Certified Public Accountant 
(CPA) qualified to perform audits under the government auditing 
standards issued by the General Accounting Office; and
    (iii) Be accompanied by a corrective action plan addressing each of 
the issues identified in the independent analysis described in 
paragraph (e)(2)(ii) of this section, along with evidence demonstrating 
that the mortgagee has implemented the corrective action plan.
    (3) HUD action on reinstatement application. The Secretary will 
grant the mortgagee's application for reinstatement if the mortgagee's 
application is complete and the Secretary determines that the 
underlying causes for the termination have been satisfactorily 
remedied.

    Dated: March 2, 2003.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 03-7704 Filed 3-31-03; 8:45 am]
BILLING CODE 4210-27-P