[Federal Register Volume 68, Number 225 (Friday, November 21, 2003)]
[Rules and Regulations]
[Pages 65824-65827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29055]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 203



FHA TOTAL Mortgage Scorecard; Interim Rule

  Federal Register / Vol. 68, No. 225 / Friday, November 21, 2003 / 
Rules and Regulations  

[[Page 65824]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4835-I-01]
RIN 2502-AI00


FHA TOTAL Mortgage Scorecard

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

ACTION: Interim rule.

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SUMMARY: This interim rule would codify the procedures that mortgagees 
and automated underwriting system vendors must observe if they opt to 
use the ``Technology Open To Approved Lenders'' (TOTAL) mortgage 
scorecard offered by the Federal Housing Administration (FHA). This 
rule follows a December 6, 2000, Federal Register notice, which 
announced the Department's intention to deploy the TOTAL mortgage 
scorecard. The interim rule also clarifies that the underwriting 
requirements to which FHA mortgagees must adhere are not altered by 
this rule. This rule only provides the requirements and procedures for 
use of the TOTAL mortgage scorecard.

EFFECTIVE DATE: December 22, 2003.
    Comment Due Date: January 20, 2004.

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

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of 
Single Family Program Development, Room 9278, 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 persons may access this number by calling the toll-free 
Federal Information Relay Service number at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    On December 6, 2000, the Department published a notice in the 
Federal Register (65 FR 76273), announcing its intention to deploy the 
FHA TOTAL (originally an acronym for ``Technology Open To All 
Lenders,'' but now more accurately standing for ``Technology Open To 
Approved Lenders'') Mortgage Scorecard for mortgage industry use. The 
TOTAL Mortgage Scorecard (or Scorecard), developed by HUD, assesses the 
credit worthiness of FHA mortgagors by evaluating certain mortgage 
application and mortgagor credit information that has been 
statistically proven to accurately predict the likelihood of mortgagor 
default. The TOTAL Mortgage Scorecard is not an automated underwriting 
system (AUS); rather, it is a mathematical equation intended for use 
within an automated underwriting system.
    The December 6, 2000, notice (Notice) described the Department's 
purpose and objectives in deploying the TOTAL Mortgage Scorecard. The 
objectives for the use of the TOTAL Mortgage Scorecard, which were 
first stated in the Notice, are (1) to provide an improved credit 
evaluation system for FHA loans that has been statistically proven to 
accurately predict the likelihood of mortgagor default while providing 
a uniform system protective of borrowers; (2) to expand access to 
mortgage credit for low- and moderate-income mortgagors and discourage 
unlawful discrimination against mortgagors protected by the Fair 
Housing Act and the Equal Credit Opportunity Act; (3) to facilitate 
access to, and reduce the cost and time associated with, originating 
HUD/FHA-insured mortgages; and (4) to encourage a standardized, 
industry-wide capability for communication and exchange of information 
among members of the mortgage lending community.
    The Notice also advised that approval would be rescinded for the 
two individual privately developed mortgage scorecards used in the 
processing of FHA mortgage loans, and that after deployment of the 
TOTAL Mortgage Scorecard, HUD would require use of the Scorecard in any 
AUS. The Notice also indicated that users of the TOTAL Mortgage 
Scorecard would receive documentation relief and credit policy waivers 
provided by HUD. Further, the Notice advised that HUD also had 
developed a Use Agreement that established the requirements and 
responsibilities for implementation and use of the TOTAL Mortgage 
Scorecard by qualified mortgagees and others that purchase, sell, 
underwrite, or document HUD mortgage loans for mortgagees under HUD's 
Direct Endorsement program. Two organizations have been working with 
HUD to test the use of the TOTAL Mortgage Scorecard. While HUD, through 
individual approvals, could authorize other organizations to use the 
TOTAL Mortgage Scorecard, HUD has decided that a more efficient course 
of action is to promulgate regulations for the use of the Scorecard 
consistent with the purpose and objectives announced in the Notice 
instead of executing individual approvals that establish the 
requirements and responsibilities for use of the Scorecard.
    Current regulations at 24 CFR 203.255 describe the documentation 
requirements mortgagees must follow when underwriting mortgage loans to 
be insured by FHA, and state that for mortgage loans rated as 
acceptable risks by an approved AUS, a Direct Endorsement underwriter 
need not certify that he/she has personally reviewed the credit 
application. The regulations do not, however, describe the rules and 
procedures that mortgagees and automated underwriting system vendors 
must observe if they opt to use the TOTAL Mortgage Scorecard, and to 
receive the inherent benefits accompanying its use, including 
documentation relief and credit policy revisions.

II. This Interim Rule

    This interim rule would revise HUD's regulation at 24 CFR 203.251 
to add a definition for ``TOTAL,'' and Sec.  203.255(b)(5) would be 
revised to remove the reference to ``an automated underwriting system 
approved by the Secretary or Commissioner'' and substitute ``TOTAL 
Mortgage Scorecard.'' The requirements governing the use of the TOTAL 
Mortgage Scorecard would also be added to Sec.  203.255(b)(5). Any AUS 
vendor that ``calls'' the TOTAL Mortgage Scorecard, and any FHA-
approved mortgagee that obtains a risk assessment from the Scorecard, 
must abide by the requirements set forth in this regulation. Only AUSs 
developed, operated, owned, or used by FHA-approved Direct Endorsement 
mortgages, Fannie Mae, or Freddie Mac will be able to access the 
scorecard, and only FHA-approved mortgagees will be able to obtain risk 
assessments using the TOTAL Mortgage Scorecard. The rule affirms that 
Direct Endorsement mortgagees remain solely responsible for the 
underwriting decision. Implementation of this regulation will rescind 
Mortgagee Letters 96-34, 98-14, and 99-26, which address FHA's review 
of individual automated underwriting procedures. This rule does not 
alter the underwriting requirements to which FHA mortgagees must 
currently adhere. This rule only addresses the use of the TOTAL 
Mortgage Scorecard and the

[[Page 65825]]

requirements and procedures to which FHA mortgagees must adhere if they 
opt to use the Scorecard. Specifically, this regulation establishes the 
conditions for use of the Scorecard.
    The TOTAL Mortgage Scorecard is only a tool to assist the mortgagee 
in managing its workflow and expediting the endorsement process and is 
not a substitute for the mortgagee's reasonable consideration of risk 
and credit worthiness. The Department believes that the TOTAL Mortgage 
Scorecard is a valuable tool, but that value depends upon proper use of 
the Scorecard in accordance with HUD requirements and procedures. To 
help assure the TOTAL Mortgage Scorecard is not misused, the rule would 
require mortgagees to provide full manual underwriting for mortgage 
applicants when the scorecard returns a ``refer'' risk score. The 
Scorecard results must not be used as the basis for rejecting any 
mortgage applicant.
    In addition, the rule would provide that both mortgagees and 
vendors must:

--use the scorecard to process FHA and other loan products specified by 
the FHA Commissioner only, and for no other purpose;
--implement quality control procedures for scorecard usage and provide, 
at FHA's request, reports and loan samples that enable FHA to evaluate 
program operation;
--not use the TOTAL Mortgage Scorecard to direct mortgagors into other 
non-FHA product offerings (this requirement does not relieve a 
mortgagee from its obligations under Sec.  203.10 concerning informed 
consumer choice for prospective FHA mortgagors);
--not disassemble, decompile, reverse engineer, derive or otherwise 
reproduce any part of the source code or algorithm in the TOTAL 
Mortgage Scorecard;
--not provide feedback messages that conflict with the Equal Credit 
Opportunity Act; and
--comply with any additional HUD/FHA requirements or procedures, that 
are applicable to the TOTAL Mortgage Scorecard and may be issued 
through handbooks, mortgagee letters, TOTAL User Guides, or TOTAL 
Developers Guide following appropriate advance notification, where 
applicable.

    Automated underwriting system vendors and mortgagees found to 
violate these conditions may have their access to the Scorecard 
terminated with appropriate notice. HUD will provide a vendor or 
mortgagee with a 30-day notice of a violation and loss of privilege. 
The notice will state the nature of the violation, the effective date 
of the loss of privilege, and the duration of the loss of privilege. A 
party receiving such a notice may appeal to the Deputy Assistant 
Secretary for Single Family Housing (DAS-SFH), or the Deputy Assistant 
Secretary's designee, before the effective date by providing evidence 
to refute the violation. The loss of privilege is stayed until the DAS-
SFH notifies the party that the loss of privilege has been affirmed, 
rescinded, or modified. As an additional measure to ensure compliance 
with these requirements, access to the TOTAL Mortgage Scorecard by a 
FHA mortgagee will be conditioned upon the mortgagee's certification to 
comply with the requirements as provided in this rule.

III. Justification for Interim Rulemaking

    In general, HUD publishes a rule for public comment before issuing 
a rule for effect, in accordance with HUD's own regulations on 
rulemaking at 24 CFR part 10. Part 10, however, does provide for 
exceptions for that general rule where HUD finds good cause to omit 
advance notice and public participation. The good cause requirement is 
satisfied when prior public procedure is determined ``impracticable, 
unnecessary, or contrary to the public interest.''
    HUD finds that good cause exists to publish this interim rule for 
effect without first soliciting public comment in that prior public 
procedure would be contrary to the public interest. Currently, loan 
originators underwrite FHA loans manually or through Fannie Mae and 
Freddie Mac's proprietary automated systems that employ scorecards that 
were built using data on FHA borrowers but with algorithms known only 
to the developers and not to FHA. Over the last four years, HUD has 
developed its own FHA TOTAL Scorecard and through validation determined 
that it provides an improved credit evaluation system for FHA loans 
that has been statistically proven to accurately predict the likelihood 
of mortgagor default while providing a uniform system protective of 
borrowers. Indeed, the TOTAL Scorecard, among other attributes, better 
predicts delinquencies that may occur under FHA loans than any other 
underwriting means currently available.
    The release of the TOTAL Scorecard and its implementation without 
delay through the issuance of this rule will allow FHA to benefit 
immediately from this more refined, uniform instrument that will better 
measure the credit worthiness of potential borrowers and better protect 
the Government from financial losses. This is especially true in an 
environment of relatively low interest rates, increased demand for FHA 
insurance products, and historically high FHA delinquency rates. 
Additionally, because the scorecard is government property and HUD is 
prepared to accept data on TOTAL Scorecard performance, immediate 
deployment will allow HUD to efficiently track the performance of FHA 
loans and FHA lenders and quickly fix and refine the scorecard further.
    For borrowers, immediate deployment of the TOTAL Scorecard will 
result in the institution of a single system nationwide that will offer 
uniform processing.
    The interim rule enables, but does not require, FHA mortgage 
lenders to use this new automated means of assessing the credit 
worthiness of FHA mortgagors. Although use of the TOTAL Scorecard is 
not required, the Department believes that this rule makes use of the 
TOTAL Scorecard possible for a greater number of mortgagees, and for 
the benefit of a greater number of mortgagors, at an earlier point in 
time and in a more efficient manner than would execution of individual 
approvals to use the TOTAL Scorecard issued in accordance with 
outstanding mortgagee letter instructions. For FHA mortgagees that opt 
to use the TOTAL Scorecard, use of the TOTAL Scorecard is subject to 
several conditions to protect borrowers including that borrowers who 
are classified ``refer'' will be processed through manual underwriting. 
For the TOTAL Scorecard to provide the intended benefits of accurate 
assessment, FHA mortgagees must abide by the terms and conditions for 
use. Also, FHA mortgagees may not disassemble, decompile, reverse 
engineer, derive or otherwise reproduce any part of the source code or 
algorithm in the TOTAL Scorecard. Such tampering may render the TOTAL 
Scorecard inaccurate and unusable.

IV. Findings and Certifications

Paperwork Reduction Act

    The proposed new information collection requirements contained in 
Sec.  203.255(b)(5) have been submitted to the Office of Management and 
Budget (OMB) for review under the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501-3520). Under this Act, an agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection displays a valid control number.

[[Page 65826]]

    The public reporting burden for this new collection of information 
is estimated to include the time for reviewing the instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Information on the estimated public reporting burden is provided in the 
following table:

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                                                                        Number of      Responses per     Total annual      Hours per
                       Information collection                          respondents       respondent       responses         response       Total hours
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                                                                              6,000                1            6,000                1            6,000
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    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
proposed collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Comments must be 
received by January 20, 2004. Comments must refer to the proposal by 
name and docket number (FR-4835-I-01) and must be sent to:

Lauren Wittenberg, HUD Desk Officer, Office of Management and Budget, 
New Executive Office Building, Washington, DC 20503-0009, [email protected], and
Gloria Diggs, Reports Liaison Officer, Office of the Assistant 
Secretary for Housing-Federal Housing Commissioner, Room 9116, U.S. 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-8000.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
for this rule has been made in accordance with HUD regulations at 24 
CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969. The Finding of No Significant Impact 
is available for public inspection between 7:30 a.m. and 5:30 p.m. 
weekdays in the office of the Rules Docket Clerk, Office of the General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street, SW., Washington, DC 20410-0500.

Unfunded Mandates Reform Act

    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 
the private sector. This interim rule does not impose a federal mandate 
that will result in expenditure by state, local, or tribal governments, 
within the meaning of the Unfunded Mandates Reform Act of 1995.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule would not have a significant 
economic impact on a substantial number of small entities. The rule 
governs access to, and use of, an automated, electronic tool to assist 
mortgagees in managing workflow and expediting the endorsement process. 
There are no anti-competitive discriminatory aspects of the rule with 
regard to small entities, and there are not any unusual procedures that 
would need to be complied with by small entities. Although HUD has 
determined that this interim rule would not have a significant economic 
impact on a substantial number of small entities, HUD welcomes comments 
regarding any less burdensome alternatives to this rule that will meet 
HUD's objectives as described in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (1) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (2) the rule 
preempts state law, unless the agency meets the consultation and 
funding requirements of section 6 of the Executive Order. This interim 
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.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``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 economically 
significant, as provided in section 3(f)(1) of the Order). Any changes 
made to the interim rule subsequent to its submission to OMB are 
identified in the docket file, which is available for public inspection 
in the Regulations Division, Office of the General Counsel, Room 10276, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-0500.

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 proposes to 
amend 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. Amend Sec.  203.251 by adding paragraph (t) to read as follows:


Sec.  203.251  Definitions.

* * * * *

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    (t) TOTAL is an acronym that stands for ``Technology Open To 
Approved Lenders.'' TOTAL is a mortgage scorecard based on a 
mathematical equation that is to be used within an automated 
underwriting system (AUS). TOTAL is a tool to assist the mortgagee in 
managing its workflow and expediting the endorsement process, and is 
not a substitute for the mortgagee's reasonable consideration of risk 
and credit worthiness. Direct Endorsement mortgagees using TOTAL remain 
solely responsible for the underwriting decision.

0
3. Amend Sec.  203.255 by revising paragraph (b)(5) to read as follows:


Sec.  203.255  Insurance of mortgage.

* * * * *
    (b) * * *
    (5) An underwriter certification, on a form prescribed by the 
Secretary, stating that the underwriter has personally reviewed the 
appraisal report and credit application (including the analysis 
performed on the worksheets) and that the proposed mortgage complies 
with HUD underwriting requirements, and incorporates each of the 
underwriter certification items that apply to the mortgage submitted 
for endorsement, as set forth in the applicable handbook or similar 
publication that is distributed to all Direct Endorsement mortgagees, 
except that where the TOTAL Mortgage Scorecard is used by the 
mortgagee, and the TOTAL Mortgage Scorecard has determined that the 
application represents an acceptable risk under terms and conditions 
agreed to by the FHA, a Direct Endorsement underwriter shall not be 
required to certify that the underwriter has personally reviewed the 
credit application (including the analysis performed on any 
worksheets). The following requirements are also applicable to the use 
of the TOTAL Mortgage Scorecard:
    (i) Mortgagees and vendors must certify to compliance with these 
requirements:
    (A) Permissible users. Only FHA-approved automatic underwriting 
systems (AUSs) developed, operated, owned, or used by FHA-approved 
Direct Endorsement mortgages, Fannie Mae, or Freddie Mac, may access 
TOTAL, and only FHA-approved mortgagees will be able to obtain risk-
assessments using TOTAL;
    (B) Limitation on use. Results from TOTAL must not be used as the 
basis for rejecting any mortgage applicant. Mortgagees must provide 
full manual underwriting for mortgage applicants when TOTAL returns a 
``refer'' risk score.
    (C) Vendor and mortgagee requirements. Both mortgagees and vendors 
must:
    (1) Use TOTAL to process FHA and other loan products specified by 
the FHA Commissioner only and for no other purpose;
    (2) Implement quality control procedures for TOTAL usage and 
provide, at FHA's request, reports and loan samples that enable FHA to 
evaluate program operation;
    (3) Not use TOTAL to direct mortgagors into other non-FHA product 
offerings (this requirement does not relieve a mortgagee from its 
obligations under Sec.  203.10 concerning informed consumer choice for 
prospective FHA mortgagors);
    (4) Not disassemble, decompile, reverse engineer, derive or 
otherwise reproduce any part of the source code or algorithm in TOTAL;
    (5) Not provide feedback messages that conflict with the Equal 
Credit Opportunity Act; and
    (6) Comply with any additional HUD/FHA requirements or procedures 
that are applicable to the Scorecard and may be issued through 
handbooks, mortgagee letters, TOTAL User Guides, or TOTAL Developers 
Guide following appropriate advance notification, where applicable.
    (ii) Loss of privilege to use TOTAL. Mortgagees and AUS vendors 
found to violate the requirements applicable to the use of TOTAL may 
have their access to TOTAL and all associated privileges terminated 
upon appropriate notice in accordance with the following procedure:
    (A) Notice. HUD will provide a mortgagee or vendor with a 30-day 
notice of a violation and loss of privilege. The notice will state the 
nature of the violation, the effective date of the loss of the 
privilege, and the duration of the loss of the privilege. The notice 
will become effective on the date provided in the notice, unless the 
mortgagee or vendor appeals the violation and loss of privilege in 
accordance with paragraph (b)(5)(ii)(B) of this section.
    (B) Appeal. A party receiving a notice of violation may appeal to 
the Deputy Assistant Secretary for Single Family Housing (DAS-SFH), or 
his or her designee, before the effective date of the notice by 
providing evidence to refute the violation. The loss of privilege is 
stayed until the DAS-SFH, or designee, notifies the party that the loss 
of privilege has been affirmed, rescinded, or modified.
* * * * *

    Dated: October 29, 2003.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 03-29055 Filed 11-20-03; 8:45 am]
BILLING CODE 4210-27-P