[Federal Register Volume 68, Number 84 (Thursday, May 1, 2003)]
[Rules and Regulations]
[Pages 23370-23376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10778]



[[Page 23369]]

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Part II





Department of Housing and Urban Development





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24 CFR Part 203



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

  Federal Register / Vol. 68, No. 84 / Thursday, May 1, 2003 / Rules 
and Regulations  

[[Page 23370]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Doc. No. FR-4615-F-02]
RIN 2502-AH57


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

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

ACTION: Final rule.

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SUMMARY: This final rule addresses property ``flipping,'' the practice 
whereby a property recently acquired is resold for a considerable 
profit with an artificially inflated value, often abetted by a lender's 
collusion with the appraiser. Specifically, the final rule establishes 
certain new requirements regarding the eligibility of properties to be 
financed with Federal Housing Administration (FHA) mortgage insurance. 
The regulatory amendments will comply with Congressional mandates to 
maintain the FHA Insurance Fund in a sound actuarial manner. The new 
requirements will make flipped properties ineligible for FHA-insured 
mortgage financing, thus precluding FHA home purchasers from becoming 
victims of predatory flipping activity. The final rule follows 
publication of a September 5, 2001, proposed rule and takes into 
consideration the public comments received on the proposed rule.

DATES: Effective Date: June 2, 2003.

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 September 5, 2001, Proposed Rule

    On September 5, 2001 (66 FR 46502), HUD published a proposed rule 
for public comment to address property ``flipping,'' the predatory 
lending practice whereby a property recently acquired is resold for a 
considerable profit with an artificially inflated value, often abetted 
by a lender's collusion with the appraiser. Most property flipping 
occurs within a matter of days after acquisition, and usually with only 
minor cosmetic improvements, if any. In the September 5, 2001, proposed 
rule, HUD proposed to restrict flipping by establishing new eligibility 
requirements for properties whose purchase is being financed with FHA 
mortgage insurance.
    As noted, property flipping involves the rapid re-sale, often 
within days, of a recently acquired property. Accordingly, HUD proposed 
to prohibit FHA financing for any property being sold within six months 
after acquisition by the seller. The proposed six-month restriction 
would not have applied to re-sales by HUD of Real Estate-Owned (REO) 
properties under 24 CFR part 291 and single family assets in 
revitalization areas pursuant to section 204 of the National Housing 
Act (12 U.S.C. 1710). The proposed rule also provided for legitimate 
transactions involving the quick and profitable re-sale of a recently 
acquired property, by authorizing HUD to grant case-by-case exceptions 
to the six-month restriction where the lender demonstrates that the 
sales price of the property corresponds to its market value.
    HUD also proposed to establish a new owner of record requirement 
for properties financed with FHA mortgage insurance. Unscrupulous 
investors will often flip properties they have contracted to purchase 
(but have not yet acquired) by selling or assigning the rights to the 
sales contract, often for a significant profit. The September 5, 2001, 
proposed rule addressed this issue by providing that only those 
properties purchased from the owner of record would be eligible for 
mortgages insured by FHA.
    The preamble to the September 5, 2001, proposed rule provides more 
information regarding the proposed regulatory amendments to the FHA 
regulations.

II. Significant Differences Between This Final Rule and September 5, 
2001, Proposed Rule

    This final rule follows publication of the September 5, 2001, 
proposed rule, and takes into consideration the public comments 
received on the proposed rule. The most significant differences between 
this final rule and the September 5, 2001, proposed rule are summarized 
below. Additional information regarding these changes is provided in 
the discussion of the public comments in sections III through VI of 
this preamble.
    1. Revised time restrictions on re-sales. In response to 
significant public comment on this issue, this final rule revises the 
proposed time restrictions on re-sales. The final rule reduces the time 
restriction on FHA mortgage insurance to short-term re-sales occurring 
within 90 days following acquisition by the seller.
    The rule, however, provides additional measures that HUD may take 
after 90 days, depending upon the circumstances of the re-sale. If the 
re-sale is between 91 days and 180 days following acquisition by the 
seller, the final rule requires the lender to document the re-sale 
value if the re-sale price is a certain percentage, as established by 
HUD, over the purchase price. The percentage established by HUD will be 
between 50 to 150 percent over the purchase price. The final rule 
provides the lender a number of options to meet this requirement. 
Specifically, the lender may obtain a second appraisal that supports 
the increased value. As an alternative, the lender may document its 
file to establish that the increased value is the result of 
rehabilitation to the property. The requirement for additional 
documentation will be set at a level that, as determined by HUD, will 
deter unscrupulous purchasers from attempting to flip property while 
simultaneously ensuring that legitimate rehabilitation of properties 
continues. This final rule would establish the level that triggers the 
additional documentation requirement at 100 percent above the original 
purchase price. HUD may revise the level that triggers this 
documentation requirement by Federal Register notice.
    In addition to requiring documentation for re-sales within the 91 
to 180 day period, the final rule authorizes HUD to impose additional 
protections against ``flipping'' for re-sales up to 12 months following 
acquisition by the seller. To address specific circumstances or 
locations where HUD identifies property flipping as a problem, the 
final rule authorizes that HUD may require the lender, for re-sales 
occurring between 91 days and 12 months, to obtain additional 
documentation to support the re-sale value if the re-sale price is 5 
percent or greater than the lowest sales price of the property during 
the preceding 12 months (as evidenced by the contract of sale). Should 
HUD exercise this authority, it would supersede the higher threshold 
established for the 91 day to 180 day period. At HUD's discretion, this 
documentation must include, but is not limited to, an appraisal from 
another appraiser.
    HUD will announce its determination to require additional value 
documentation for re-sales up to 12

[[Page 23371]]

months following acquisition by the seller through Federal Register 
notice. The requirement for additional value documentation may be 
established either on a nationwide or regional basis. The Federal 
Register notice will specify the percentage increase in the re-sale 
price that will trigger the need for additional documentation, and will 
specify the acceptable types of documentation. The Federal Register 
notice may also exclude re-sales of less than a specific dollar amount 
from the additional value documentation requirements. In order to 
provide the public with sufficient time to adjust to the additional 
documentation procedures, any such Federal Register notice, and any 
subsequent revisions, will be issued at least thirty days before taking 
effect.
    If the additional documentation supports a value that is more than 
5 percent lower than the value supported by the first appraisal, the 
lower value will be used in calculating the maximum insured mortgage 
amount. Otherwise, the value supported by the first appraisal will be 
used to calculate the maximum mortgage amount.
    If the re-sale date is more than 12 months following the date of 
acquisition by the seller, the property is eligible for a mortgage 
insured by FHA.
    2. Clarification of relevant dates for time restrictions on re-
sales. The final rule clarifies that, for purposes of the time 
restrictions on re-sales, the seller's date of acquisition will be 
based upon the date of settlement. The re-sale date will be based on 
the date of execution of the sales contract that will result in FHA 
mortgage insurance.
    3. Elimination of case-by-case exceptions to time restrictions on 
re-sales. The final rule no longer provides for case-by-case exceptions 
to the time restrictions on re-sales.
    4. Inapplicability of time restrictions on re-sales. The final rule 
continues to provide that the time restrictions on re-sales do not 
apply to re-sales by HUD of REO properties under 24 CFR part 291 and 
single family assets in revitalization areas pursuant to section 204 of 
the National Housing Act. In addition, the final rule also provides 
that the time restrictions do not apply to the re-sale of properties 
acquired by an employer or relocation agency in connection with the 
relocation of an employee.
    5. Owner of record documentation requirements. The final rule 
adopts the owner of record requirements contained in the proposed rule, 
but clarifies that lenders will be required to verify compliance with 
the requirement. The final rule provides that the lender must submit 
documentation verifying that the seller is the owner of record as part 
of the application for mortgage insurance. This documentation may 
include, but is not limited to, a property sales history report, a copy 
of the recorded deed, or other documentation (such as a copy of a 
property tax bill, a title commitment, or binder) indicating the 
seller's ownership of the property.
    6. Sanctions and indemnification. The final rule clarifies that 
failure of a lender to comply with the regulatory anti-flipping 
requirements may result in HUD requesting indemnification of the 
mortgage loan and/or seeking other appropriate remedies.
    7. Conforming changes to Sec.  203.255. The final rule amends Sec.  
203.255 of the FHA regulations, which lists the items that must be 
included in a mortgage insurance application, to reflect the anti-
flipping documentation required by this rule.

III. Discussion of Public Comments Received on the September 5, 2001, 
Proposed Rule

    The public comment period on the September 5, 2001, proposed rule 
closed on November 5, 2001. HUD received 120 public comments on the 
proposed rule. Comments were received from national associations 
representing realtors, individual realtors, homebuilders and 
contractors, mortgage bankers, state and local housing and community 
development agencies, and other commenters. Many commenters submitted 
identical ``form'' letters. Sections IV, V, and VI of this preamble 
present a summary of the most significant issues raised by the public 
commenters, and HUD's responses to these issues. Section IV of the 
preamble discusses the public comments regarding the proposed six-month 
restriction on re-sales. Section V discusses the public comments on the 
provisions regarding case-by-case exceptions and the owner of record 
requirements. Section VI of the preamble discusses the other public 
comments received by HUD on the September 5, 2001, proposed rule.

IV. Comments Regarding Time Restriction on Re-Sales

    Under the September 5, 2001, proposed rule, any property sold 
within six months after acquisition by the seller would not be eligible 
for a mortgage insured by FHA. The proposed six-month restriction would 
not have applied to re-sales by HUD of REO properties under 24 CFR part 
291 and of single family assets in revitalization areas pursuant to 
section 204 of the National Housing Act. This provision of the proposed 
rule was of significant public interest, and the majority of comments 
on the September 5, 2001, proposed rule concerned the six-month 
restriction on re-sales. Several commenters supported the restriction, 
writing that the proposal would help to eliminate the most extreme 
cases of property flipping. Most of the commenters, however, expressed 
concerns about the six-month restriction and urged HUD to reconsider 
its proposal.
    Comment: The proposed time restriction will hurt HUD's interests 
and the interests of homebuyers. Several commenters wrote that a six-
month restriction would be too short, and fail to deter longer-term 
property flipping transactions. These commenters suggested lengthening 
the re-sale ban to nine months or one year. Many other commenters, 
however, wrote that the six-month restriction would be too long, and 
hurt HUD's interests and the best interest of the home buying public. 
The commenters wrote that by eliminating the ability of legitimate 
investors to resell homes using HUD financing, the six-month ban would 
reduce the incentive for investors to buy and rehabilitate these 
properties. The commenters wrote that this could mean that many 
undesirable properties remain unsold by the lender for years. Rather 
than providing a decent home, these properties would instead blight 
neighborhoods as decaying eyesores. The commenters wrote that the 
unintended consequence of the proposed rule would be to unwittingly 
close down the businesses of many residential real estate investors 
while attempting to outlaw the predatory practices of a few.
    HUD Response. In response to these concerns raised by the public 
commenters, HUD has substantially revised the proposed time 
restrictions on re-sales. HUD agrees with the commenters who wrote that 
there are many legitimate transactions that would be prohibited by a 
six-month restriction on FHA financing. Accordingly, HUD has revised 
the rule to accommodate such re-sales, while still implementing 
safeguards to assure that the value of the property is recognized in 
the marketplace and to reduce the possibility of appraisal fraud.
    The final rule reduces the time restriction on FHA mortgage 
insurance to short-term re-sales occurring within 90 days following 
acquisition by the seller. HUD will not grant case-by-case exceptions 
to the 90-day restriction. If the re-sale is between 91 and 180 days 
following acquisition by the seller, HUD will require that the lender 
document

[[Page 23372]]

the increased value of the property if the re-sale price exceeds an 
established value between 50 and 150 percent of the purchase price. As 
a further safeguard against flipping for re-sales up to 12 months 
following acquisition by the seller, the final rule authorizes HUD to 
require that the lender obtain additional verification of the value of 
the property if the re-sale price is 5 percent or greater than the 
lowest sales price of the property during the preceding 12 months (as 
evidenced by the contract of sale).
    HUD believes that short re-sales executed within 90 days imply pre-
arranged transactions that often prove to be among the most egregious 
examples of predatory lending practices and, thus, will not insure 
mortgages on these ``flipped'' properties. Ninety days is also not an 
unreasonable waiting period if actual rehabilitation and repairs of a 
property occur before the property is re-sold. HUD agrees that the 
previously proposed six-month ban on re-sales would have been 
disruptive to the industry and would have provided a disincentive to 
legitimate contractors who improve houses--thus increasing the stock of 
affordable housing. It was never HUD's intention to eliminate the 
ability of investors and contractors to profit from their actions, but 
rather to assure that homebuyers are not purchasing overvalued houses 
and becoming the unwitting victims of predatory practices. To this end, 
HUD believes that the final rule accomplishes this goal. While the most 
egregious examples of property flipping consist of nearly immediate re-
sales or ``flips,'' HUD also agrees with the commenters who wrote that 
the six-month restriction was too short to deter longer-term predatory 
flipping transactions. While an outright ban on FHA mortgage insurance 
is not warranted for re-sales occurring beyond 90 days, HUD agrees that 
additional safeguards may be required to ensure that the value of the 
property has not been fraudulently inflated. Recognizing this, the 
final rule requires that lenders document the increased value of the 
property if the re-sale price exceeds an established value for re-sales 
occurring between 91 and 180 days following acquisition of the 
property. As an additional protection against flipping, the final rule 
provides that HUD may require lenders to obtain additional 
documentation that supports the re-sale price for re-sales within 12 
months of the acquisition date if the re-sale price is 5 percent or 
greater than the purchase price if HUD identifies specific 
circumstances or locations where property flipping is a problem. Should 
HUD exercise this authority, this authority would supersede the higher 
threshold established for the 91 day to 180 day period. At HUD's 
discretion, this additional documentation must include, but is not 
limited to, an appraisal from another appraiser. As an alternative, the 
lender may document its file to establish that the increased value is 
the result of rehabilitation to the property.
    For re-sales between 91 and 180 days, HUD will establish the level 
that triggers this documentation requirement at 100 percent above the 
original purchase price. HUD believes that setting the level at 100 
percent above the original purchase price will deter unscrupulous 
purchasers from attempting to flip property while simultaneously 
ensuring that legitimate rehabilitation of properties continues. The 
final rule provides HUD the authority to revise the level. Should HUD 
determine that the level is not effectively deterring property 
flipping, HUD may lower the trigger. Similarly, HUD may increase the 
level if HUD determines that legitimate rehabilitation of properties is 
adversely affected by the documentation requirement, and that adverse 
effect is not justified by a significant deterrent effect on property 
flipping. HUD may revise the trigger level by Federal Register notice. 
In order to provide the public with sufficient time to adjust to the 
additional documentation procedures, revisions to the standard will be 
issued at least thirty days before taking effect.
    If HUD identifies specific circumstances or locations where 
property flipping is a problem, HUD may require the lender, for re-
sales up to 12 months following acquisition of the property, to provide 
additional documentation if the re-sale price is 5 percent or greater 
than the purchase price. Should HUD exercise this authority, this 
authority would supersede the higher threshold established for the 91 
day to 180 day period. HUD will announce its determination to require 
additional value documentation through issuance of a Federal Register 
notice. The requirement for additional value documentation may be 
established on a nationwide or regional basis. Further, the Federal 
Register notice will specify the percentage increase in the re-sale 
price that will trigger the need for additional documentation, and will 
specify the acceptable types of documentation. The Federal Register 
notice may also exclude re-sales of less than a specific dollar amount 
from the additional value documentation requirements. In order to 
provide the public with sufficient time to adjust to the additional 
documentation procedures, any such Federal Register notice, and any 
subsequent revisions, will be issued at least thirty days before taking 
effect.
    If the additional documentation supports a value that is more than 
5 percent lower than the value supported by the first appraisal, the 
lower value will be used in calculating the maximum insured mortgage 
amount. Otherwise, the original value supported by the first appraisal 
will be used to calculate the maximum mortgage amount.
    Comment: Re-sales involving only a modest increase over the 
previous sales price should be exempt from the time restrictions. 
Several commenters wrote that when the sale price increases only a 
small amount between the previous sale and the new sale to be financed 
with an FHA-insured mortgage, HUD's concern with property flipping is 
drastically diminished.
    HUD Response. HUD agrees that its concerns with property flipping 
are reduced when the sales price increases only a small amount between 
the previous sale and the new sale to be financed with an FHA-insured 
mortgage. As described in more detail in the preceding response, HUD 
may exclude re-sales of less than a specific dollar amount from any 
additional valuation requirements.
    Comment: The proposed rule could have significant negative 
consequences on government and corporate employees relocated yearly by 
their employers. Several commenters wrote that the six-month 
restriction would have a negative impact on the thousands of government 
and private sector employees that are relocated each year. The 
commenters wrote that, from an employer's standpoint, any house 
purchased from a relocating employee would essentially be unsaleable 
through the FHA programs because the six-month waiting period would 
result in unacceptably large carrying costs. Several of the commenters 
advocated that the final rule exempt properties acquired by an employer 
in connection with an employee's relocation from the restriction on re-
sales.
    HUD Response. HUD agrees with the commenters and has revised the 
proposed rule at the final rule stage accordingly. The final rule 
exempts properties acquired by an employer or relocation agency in 
connection with the relocation of an employee from the time restriction 
on re-sales.
    Comment: The final rule should provide clarification regarding the 
relevant dates for calculating the time

[[Page 23373]]

restriction on re-sales. Several commenters recommended that the final 
rule define the date of acquisition of the property by the seller and 
the re-sale date used to calculate the time restriction on re-sales.
    HUD Response. HUD agrees with the commenters. The final rule 
clarifies that, for purposes of the time restrictions on re-sales, the 
seller's date of acquisition will be based upon the date of settlement. 
The re-sale date will be based on the date of execution of the sales 
contract that will result in FHA mortgage insurance.

V. Comments Regarding Case-by-Case Exceptions and Owner of Record 
Requirements

A. Comments Regarding Case-by-Case Exceptions to Time Restrictions on 
Re-Sales

    The September 5, 2001, proposed rule would have provided HUD with 
the authority to grant exceptions to the six-month restriction on re-
sales, on a case-by-case basis, if the mortgagee provided written 
documentation demonstrating that the sales price of the property 
accurately corresponded to its market value. The proposed rule provided 
that such documentation could include, but would not be limited to, 
evidence that: (1) The sales price reflected a rapidly appreciating 
real estate market; (2) the seller had made improvements that resulted 
in a corresponding increase in the value of the property; or (3) the 
property was being sold at below market value due to a distress sale or 
at a tax sale.
    Comment: Objections and Requested Clarifications to Proposed 
Exceptions Procedure. Several commenters submitted comments regarding 
the proposed exceptions procedure contained in the proposed rule. Some 
of the commenters focused on the process HUD would use to process 
exception requests. These commenters asked HUD to provide additional 
details regarding this process (such as identifying the entity within 
HUD that would be responsible for examining exception requests.) Some 
of these commenters also wrote that HUD does not have sufficient 
resources to responsibly handle this task and that the ``wheels of 
bureaucracy'' could drag the review process beyond the six-month 
restriction period. The commenters requested that the final rule 
establish specific deadlines for speedily processing and granting 
exception requests (for example a 30-day period).
    Other commenters objected to the factors that the proposed rule 
stated HUD would consider in determining whether to grant an exception. 
The commenters wrote that these factors were all biased toward market 
abnormalities and had little relevance to the amount of time the owner 
holds a property. The commenters advocated that HUD expand the list of 
factors to address this perceived deficiency. For example, some 
commenters suggested that the final rule specify that HUD will permit 
exceptions as a result of death, job loss, unemployment/military 
transfer, and other reasonable circumstances beyond the owner's 
control. Other commenters suggested that the list of factors should be 
modified to recognize specific actions by lenders to justify exceptions 
to the six-month restriction, such as obtaining a home inspection.
    HUD Response. HUD has eliminated the need for case-by-case 
exceptions by reducing the time restriction on FHA mortgage insurance 
to short-term re-sales that occur within 90 days following acquisition 
of the property by the seller. HUD believes that the short-term 
restriction on re-sales is reasonable, addresses concerns raised by the 
public commenters on the proposed rule, and will prohibit the most 
egregious examples of predatory lending involving flipped properties. 
HUD will not grant case-by-case exceptions to the revised 90-day 
restriction.

B. Comments Regarding Owner of Record Requirement

    The September 5, 2001, proposed rule provided that only those 
properties purchased from the owner of record would be eligible for a 
mortgage insured by FHA.
    Comment: The owner of record requirements require clarification. 
One commenter suggested that the owner of record requirements be 
expanded and clarified to ensure that unscrupulous parties do not avoid 
the intent of the rule. The commenter recommended that the language of 
the proposed rule be revised to specify that the property must be 
purchased ``solely and completely'' from the owner of record to be 
eligible for a mortgage insured by FHA. The commenter also suggested 
that the proposed rule be revised to clarify that the sale may not 
involve any transfer or assignment of any sales agreement or any 
interest therein. Further, the commenter wrote that the final rule 
should clearly prohibit any person intervening in the sales transaction 
on behalf of the owner of record, including those who transfer 
ownership to the buyer and collect the sale proceeds.
    HUD Response. HUD agrees and has modified the proposed rule to 
clarify what constitutes an ``owner of record'' and the manner in which 
compliance with this requirement must be verified. The final rule 
clarifies that lenders will be required to verify compliance with the 
requirement. The final rule provides that the lender must submit 
documentation verifying that the seller is the owner of record as part 
of the application for mortgage insurance. This documentation may 
include, but is not limited to, a property sales history report, a copy 
of the recorded deed, or other documentation (such as a copy of a 
property tax bill, a title commitment, or binder) indicating the 
seller's ownership of the property.

VI. Other Comments on the Proposed Rule

A. General Objections to Proposed Rule

    Comment: HUD should focus its efforts on fraudulent appraisals. 
Several commenters wrote that rather than establishing additional 
regulatory requirements, HUD should focus its enforcement efforts on 
the root of most property flipping--poor and fraudulent appraisals. 
Several of the commenters wrote that HUD should conduct independent 
appraisals of all properties being purchased with FHA financing. Other 
commenters suggested that HUD strengthen its requirements concerning 
the education and experience of appraisers conducting FHA appraisals. 
Still other commenters recommended that HUD take more aggressive steps 
to identify and sanction unscrupulous appraisers engaged in property 
flipping.
    HUD Response. HUD agrees that fraudulent and inflated appraised 
values are the source of most predatory practices involving property 
flipping, and the final rule requires additional appraised value 
safeguards. HUD does not agree that FHA should be the entity to perform 
the appraisals. Staffing realities and HUD's commitment to the Direct 
Endorsement (DE) program compel it to rely on qualified appraisers and 
DE lenders to deliver mortgage financing to the consumer as efficiently 
and inexpensively as possible. HUD also notes that it has implemented 
several policies to help ensure the accuracy and completeness of 
appraisals on properties securing FHA-insured mortgages. For example, 
HUD has established the FHA Appraiser Roster, which lists those 
appraisers who are eligible to perform FHA single family appraisals. 
HUD is also developing several other initiatives to strengthen the 
quality of FHA appraisals, and to impose stricter FHA Appraiser Roster 
qualifications. In addition, where those involved in property flipping 
schemes

[[Page 23374]]

have been identified, HUD will pursue those entities and individuals to 
impose sanctions available to HUD, and HUD will enlist the assistance 
of applicable federal and local authorities in prosecuting those 
individuals.
    Comment: HUD should target known property flippers. Several 
commenters wrote that, rather than imposing new restrictions, HUD 
should focus its regulatory efforts on individuals who are known to 
have engaged in property flipping. The commenters suggested that HUD 
should review its claim and default records to identify those persons 
currently engaged in predatory lending practices. The commenters 
suggested that those persons should be barred from participating in the 
FHA programs for a specified period (such as 1-3 years). The commenters 
wrote that in this way HUD could reduce predatory lending activity 
without punishing the innocent subsequent buyer.
    HUD Response: HUD believes it is better to preclude predatory 
practices proactively and eliminate opportunities for unscrupulous 
actors, than to retroactively attempt to find the perpetrators after 
the damage to the homebuyers has been done. As noted, however, in the 
response to the preceding comment, where unscrupulous actors have been 
identified in property flipping schemes, HUD will take action against 
those individuals and entities.
    Comment: HUD already has the enforcement tools necessary to 
prohibit property flipping. Several commenters wrote that HUD should 
make better use of its existing sanction and penalty methods to deter 
property flipping, rather than subject the FHA programs to increased 
regulation.
    HUD Response. HUD agrees in principle that existing procedures 
exist to protect its interests as well as those of the homebuyers. 
However, unlike existing enforcement tools, the additional safeguards 
implemented by this final rule are directly targeted at the problems 
associated with property flipping. The final rule proactively deals 
with both the pre-arranged transaction that often results in predatory 
practices against unwitting homebuyers as well as appraisals that 
cannot support the value claimed.

B. Suggested Changes to Proposed Rule

    Comment: HUD should establish additional safeguards for victims of 
property flipping. One commenter made this suggestion. The commenter 
wrote that such procedures should include timely and thorough re-
appraisals of properties where flipping is alleged, assistance for all 
homeowners victimized by a fraudulent appraisal or other mortgage 
fraud, and remediation to victimized homeowners.
    HUD Response. HUD does not agree that the expansive remedies 
proposed by the commenter are necessary, since this final rule should 
preclude the most egregious examples of fraudulent property flips 
before they occur.
    Comment: HUD should expand the scope of the rule to include 
mortgages insured by other governmental entities. One commenter made 
this suggestion.
    HUD Response. HUD has not revised the proposed rule in response to 
this comment. HUD has no jurisdiction over mortgages guaranteed or made 
by other government agencies, such as the Department of Veterans 
Affairs, and the Rural Housing Service of the Department of 
Agriculture.
    Comment: The final rule should prohibit gifts to potential 
borrowers that will enable them to pay off debts that would otherwise 
render them ineligible for FHA mortgage insurance. The commenters wrote 
that ``gifts'' made to potential borrowers in order to enable them to 
pay off debts, including judgments and liens, are often a principal 
tool of those engaged in property flipping and should be prohibited in 
the final rule.
    HUD Response. HUD does not believe that a change to the rule is 
required. Mortgagee Letter 2002-02 (issued on January 16, 2002) already 
addresses gifts for the purpose of paying off obligations and 
judgments. A copy of this Mortgagee Letter may be downloaded from the 
HUD Client Information and Policy System (HUDCLIPS) Internet Web site 
at http://www.hudclips.org.

C. Miscellaneous Comments

    Comment: HUD should consider modifying the FHA connection appraisal 
assignment screen to include a field for capturing the seller's name. 
The commenter wrote that this would allow HUD to more easily determine 
whether a seller had previously sold a home to an FHA applicant, and if 
so, whether the history of a prior sale is indicative of possible 
property flipping.
    HUD Response. HUD is considering the change to the FHA connection 
system suggested by the commenter, and may implement this modification 
at a later date.
    Comment: HUD should create a public database of property sales 
within neighborhoods and the pricing history of individual homes. 
Several commenters made this recommendation. The commenters wrote that 
the names of the lenders, brokers, real estate agents, and appraisers 
should also be included in the database. The commenters wrote that the 
database would allow potential buyers to research the market values of 
homes in their areas. Additionally, the commenters wrote that because 
many victims of property flipping may not have access to computers, 
these services must be advertised and made available, possibly at 
community home counseling offices. The commenters also recommended that 
HUD make available to the public lists of lenders and appraisers 
involved in a high volume of foreclosures.
    HUD Response. HUD does not have the capacity to develop such a 
database for other than FHA-insured mortgages, and does not believe it 
should compete with private-sector service providers that already have 
developed property sales history reporting systems. HUD already 
provides public access to information regarding lenders with high rates 
of mortgage defaults through its Neighborhood Watch system.
    Comment: HUD should focus on educating homebuyers. One commenter 
wrote that HUD should help ensure that low-income buyers are better 
educated regarding the risks and responsibilities of purchasing a home, 
including predatory lending abuses.
    HUD Response. HUD has long advocated homeownership counseling and 
funds many agencies that provide such services.

VII. 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 2502-0547. 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, Office of General Counsel, Room 10276, 451

[[Page 23375]]

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 Department's Rules Docket Clerk, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500.

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 is 
exclusively concerned with curbing the predatory lending practice of 
property flipping. The vast majority of lenders participating in the 
FHA single family mortgage insurance programs fully comply with all 
program requirements and conduct themselves in an ethical manner. The 
final rule will only impact the small minority of unscrupulous lenders 
who participate in the FHA programs and engage in this predatory 
practice.

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 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 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

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

List of Subjects in 24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.


0
Accordingly, for the reasons described in the preamble, HUD amends 24 
CFR part 203 to read as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for 24 CFR part 203 continues to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
3535(d).


0
2. Add Sec.  203.37a to read as follows:


Sec.  203.37a  Sale of property.

    (a) Sale by owner of record. (1) Owner of record requirement. To be 
eligible for a mortgage insured by FHA, the property must be purchased 
from the owner of record and the transaction may not involve any sale 
or assignment of the sales contract.
    (2) Supporting documentation. The mortgagee shall obtain 
documentation verifying that the seller is the owner of record and must 
submit this documentation to HUD as part of the application for 
mortgage insurance, in accordance with Sec.  203.255(b)(12). This 
documentation may include, but is not limited to, a property sales 
history report, a copy of the recorded deed from the seller, or other 
documentation (such as a copy of a property tax bill, title commitment, 
or binder) demonstrating the seller's ownership.
    (b) Time restrictions on re-sales. (1) General. The eligibility of 
a property for a mortgage insured by FHA is dependent on the time that 
has elapsed between the date the seller acquired the property (based 
upon the date of settlement) and the date of execution of the sales 
contract that will result in the FHA mortgage insurance (the re-sale 
date). The mortgagee shall obtain documentation verifying compliance 
with the time restrictions described in this paragraph and must submit 
this documentation to HUD as part of the application for mortgage 
insurance, in accordance with Sec.  203.255(b).
    (2) Re-sales occurring 90 days or less following acquisition. If 
the re-sale date is 90 days or less following the date of acquisition 
by the seller, the property is not eligible for a mortgage to be 
insured by FHA.
    (3) Re-sales occurring between 91 days and 180 days following 
acquisition. (i) If the re-sale date is between 91 days and 180 days 
following acquisition by the seller, the property is generally eligible 
for a mortgage insured by FHA.
    (ii) However, HUD will require that the mortgagee obtain additional 
documentation if the re-sale price is 100 percent over the purchase 
price. Such documentation must include an appraisal from another 
appraiser. The mortgagee may also document its loan file to support the 
increased value by establishing that the increased value results from 
the rehabilitation of the property.
    (iii) HUD may revise the level at which additional documentation is 
required under Sec.  203.37a(b)(3) at 50 to 150 percent over the 
original purchase price. HUD will revise this level by Federal Register 
notice with a 30 day delayed effective date.
    (4) Authority to address property flipping for re-sales occurring 
between 91 days and 12 months following acquisition.
    (i) If the re-sale date is more than 90 days after the date of 
acquisition by the seller, but before the end of the twelfth month 
after the date of acquisition, the property is eligible for a mortgage 
to be insured by FHA.
    (ii) However, HUD may require that the lender provide additional 
documentation to support the re-sale value of the property if the re-
sale price is 5 percent or greater than the lowest sales price of the 
property during the preceding 12 months (as evidenced by the contract 
of sale). At HUD's discretion, such documentation must include, but is 
not limited to, an appraisal from another appraiser. HUD may exclude 
re-sales of less than a specific dollar amount from the additional 
value documentation requirements.
    (iii) If the additional value documentation supports a value of the 
property that is more than 5 percent lower than the value supported by 
the first appraisal, the lower value will be used to calculate the 
maximum mortgage amount under Sec.  203.18. Otherwise, the value 
supported by the first appraisal will be used to calculate the maximum 
mortgage amount.

[[Page 23376]]

    (iv) HUD will announce its determination to require additional 
value documentation through issuance of a Federal Register notice. The 
requirement for additional value documentation may be established 
either on a nationwide or regional basis. Further, the Federal Register 
notice will specify the percentage increase in the re-sale price that 
will trigger the need for additional documentation, and will specify 
the acceptable types of documentation. The Federal Register notice may 
also exclude re-sales of less than a specific dollar amount from the 
additional value documentation requirements. Any such Federal Register 
notice, and any subsequent revisions, will be issued at least thirty 
days before taking effect.
    (v) The level at which additional documentation is required under 
Sec.  203.37a(b)(4) shall supersede that under Sec.  203.37a(b)(3).
    (5) Re-sales occurring more than 12 months following acquisition. 
If the re-sale date is more than 12 months following the date of 
acquisition by the seller, the property is eligible for a mortgage 
insured by FHA.
    (c) Exceptions to time restrictions on re-sales. The time 
restrictions on re-sales described in paragraph (b) of this section do 
not apply to:
    (1) Re-sales by HUD of Real Estate-Owned (REO) properties under 24 
CFR part 291 and of single family assets in revitalization areas 
pursuant to section 204 of the National Housing Act (12 U.S.C. 1710); 
and
    (2) Re-sales of properties purchased by an employer or relocation 
agency in connection with the relocation of an employee.
    (d) Sanctions and indemnification. Failure of a mortgagee to comply 
with the requirements of this section may result in HUD requesting 
indemnification of the mortgage loan, or seeking other appropriate 
remedies under 24 CFR part 25.

0
3. Amend Sec.  203.255 as follows:
0
a. Revise paragraph (b)(1);
0
b. Redesignate paragraph (b)(13) as (b)(14); and
0
c. Add a new paragraph (b)(13) to read as follows:


Sec.  203.255  Insurance of mortgage.

* * * * *
    (b) * * *
    (1) Property appraisal upon a form meeting the requirements of the 
Secretary (including, if required, any additional documentation 
supporting the appraised value of the property under Sec.  203.37a), or 
a HUD conditional commitment (for proposed construction only), or a 
Department of Veterans Affairs certificate of reasonable value, and all 
accompanying documents required by the Secretary;
* * * * *
    (13) The documentation required under Sec.  203.37a providing that:
    (i) The seller is the owner of record; and
    (ii) That more than 90 days elapsed between the date the seller 
acquired the property (based upon the date of settlement) and the date 
of execution of the sales contract that will result in the FHA mortgage 
insurance.
* * * * *

    Dated: February 7, 2003.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 03-10778 Filed 4-30-03; 8:45 am]
BILLING CODE 4210-27-P