[Federal Register Volume 69, Number 246 (Thursday, December 23, 2004)]
[Rules and Regulations]
[Pages 77114-77116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28050]



[[Page 77113]]

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Part IV





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; Additional Exceptions to Time Restriction on Sales; 
Interim Rule

  Federal Register / Vol. 69, No. 246 / Thursday, December 23, 2004 / 
Rules and Regulations  

[[Page 77114]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Doc. No. FR-4911-I-01; HUD-2004-0017]
RIN 2502-AI18


Prohibition of Property Flipping in HUD's Single Family Mortgage 
Insurance Programs; Additional Exceptions to Time Restriction on Sales

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

ACTION: Interim rule.

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SUMMARY: HUD's regulations addressing the predatory practice of 
property ``flipping'' establish certain time restrictions regarding the 
sale of properties whose purchase is being financed with Federal 
Housing Administration (FHA) mortgage insurance. The regulations 
include an exception from the time restrictions for properties acquired 
and subsequently sold by FHA. This interim rule broadens the exception 
to include all other federal agencies that acquire properties as a 
result of a function of their programs and quickly market and sell 
these acquired properties. The interim rule also clarifies that the 
time restrictions on sales do not apply to properties that are acquired 
by inheritance.

DATES: Effective Date: January 24, 2005.
    Comment Due Date: February 22, 2005.

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. Electronic comments may be submitted 
through either:
     The Federal eRulemaking Portal: at http://www.regulations.gov; or
     The HUD electronic Web site at: http://www.epa.gov/feddocket. Follow the link entitled ``View Open HUD Dockets.'' 
Commenters should follow the instructions provided on that site to 
submit comments electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available for public inspection 
and copying between 8 a.m. and 5 p.m. weekdays at the above address. 
Copies are also available for inspection and downloading at http://www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Vance C. Morris, Director, Office of 
Single Family Program Development, Office of Insured Single Family 
Housing, Room 9266, 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 through TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    On May 1, 2003 (68 FR 23370), HUD published a final rule to address 
property ``flipping,'' a predatory lending practice whereby a property 
that was acquired is quickly resold for a considerable profit with an 
artificially inflated value, often abetted by a mortgagee's collusion 
with the property appraiser and others involved in the mortgage loan 
transaction. Most property flipping occurs within a matter of days 
after the initial acquisition. Minor cosmetic improvements, if any, may 
be made to the property to make it appeal to an unwary homeowner. The 
final rule, which became effective on June 2, 2003, restricts flipping 
by establishing new eligibility requirements for properties whose 
purchase is being financed with FHA mortgage insurance. These 
eligibility requirements are contained in a new Sec.  203.37a of HUD's 
single family mortgage insurance regulations at 24 CFR part 203.
    Among other requirements, Sec.  203.37a makes properties that have 
recently been resold ineligible as security for FHA-insured mortgage 
financing. Specifically, Sec.  203.37a prohibits FHA insured mortgage 
financing for any property being sold within three months after 
acquisition by the seller. Properties that are sold between 91 and 180 
days after acquisition by the sellers to homebuyers seeking FHA-insured 
financing are subject to additional documentation requirements to 
ensure that any increases in the values of the properties are 
supportable. The regulation provides that the time restrictions on 
sales do not apply to sales by HUD of its Real Estate-Owned (REO) 
properties pursuant to 24 CFR part 291, as well as single family assets 
in revitalization zones that HUD acquires and sells under the 
provisions of section 204 of the National Housing Act (12 U.S.C. 1710). 
The time restrictions are also inapplicable to the sale of properties 
acquired by an employer or relocation agency in connection with the 
relocation of an employee who needs to sell his/her home in order to 
relocate.

II. This Interim Rule

    This interim rule broadens the exception to the property flipping 
time restrictions to include all Federal agencies that acquire 
properties as a result of a function of their programs and quickly 
market and sell these acquired properties. This interim rule also 
clarifies that the time restrictions on sales do not apply to 
properties that have been acquired by inheritance.
    HUD is aware that there are other Federal Government agencies that 
handle quick sales of acquired single family properties where the 
purchasers of such properties may want to avail themselves of the 
ability to obtain FHA-insured mortgage financing. These agencies 
include, but are not limited to, the Rural Housing Service of the 
Department of Agriculture, the Department of Veterans Affairs, and the 
Federal Deposit Insurance Corporation. The Federal Government does not 
engage in the predatory lending practice of inflating sales prices for 
the sale of acquired properties under its various programs, and thus, 
Federal agencies should not be subject to the time restrictions 
contained in Sec.  203.37a.
    In addition to the broadened exception for Federal agencies, this 
interim rule also clarifies that the time restrictions do not apply to 
sales of inherited properties. As discussed above, the purpose of the 
time restrictions is to curb fraudulent property ``flips'' whereby a 
property is deliberately acquired through a sale for the purpose of a 
quick sale at an artificially inflated value. Although an individual 
who has inherited a property may turn the property over quickly and at 
a profit, the property was not acquired through a sale. Accordingly, 
the sales of inherited properties fall outside the intended scope of 
the regulatory restrictions established by HUD's May 1, 2003, final 
rule. Since publication of the final rule, HUD has received questions 
regarding the applicability of the time restrictions on inherited 
properties. HUD has taken the opportunity afforded by this interim rule 
to clarify its regulations by specifying that the sale of an inherited 
property is not subject to the property flipping time restrictions.
    HUD has also received questions as to whether the exception could 
be extended to situations involving bank foreclosures and incidents 
where a builder has a program to purchase the

[[Page 77115]]

old home of an individual buying one of the builder's new homes. HUD 
understands that lenders and builders have the incentive to turn over 
these properties quickly. There is more risk, however, that in some of 
these sales, predatory lending activities could occur. HUD believes 
that extending the exception to cover these situations would 
substantially weaken the regulatory safeguards against property 
flipping. Accordingly, the scope of this interim rule is limited to 
Federal Government agencies and inherited properties. The broadened 
exception does not include sales of such properties by the government 
sponsored enterprises (Fannie Mae and Freddie Mac) nor by private 
entities.
    Although the scope of this interim rule is limited to the two 
additional exceptions described above (for Federal agencies and 
inherited properties), HUD recognizes that there may be other 
circumstances or categories of sales where an exception to the time 
restrictions may be appropriate and consistent with the goals of the 
property flipping restrictions. Accordingly, HUD is issuing these 
regulatory amendments on an interim basis and is providing the public 
with a 60-day comment period. HUD welcomes comments on the regulatory 
amendments made by this interim rule and on whether the regulations 
should provide for additional exceptions to the time restrictions on 
sales. The public comments will be addressed in the final rule.

III. Justification for Interim Rulemaking

    HUD generally publishes a rule for public comment before issuing a 
rule for effect, in accordance with its own regulations on rulemaking 
in 24 CFR part 10. However, part 10 provides for exceptions to the 
general rule if the agency finds good cause to omit advanced notice and 
public participation. The good cause requirement is satisfied when 
prior public procedure is ``impractical, unnecessary, or contrary to 
the public interest'' (see 24 CFR 10.1).
    This interim rule broadens the exception to the property flipping 
time restrictions to include all Federal agencies that acquire 
properties as a result of a function of their programs and quickly 
market and sell these acquired properties. Since the effective date of 
HUD's final rule on property flipping, HUD has become aware of 
instances where individuals wishing to purchase an REO home from 
another Federal agency have been unable to obtain FHA financing due to 
the regulatory time restriction on sales. As noted above in this 
preamble, the Federal Government does not engage in the predatory 
lending practice of inflating sales prices for the sale of acquired 
properties under its various programs. Delaying the effectiveness of 
this rule to solicit public comment, therefore, would unnecessarily 
continue to deny FHA mortgage financing to otherwise eligible 
homebuyers wishing to purchase an REO home from another Federal agency. 
Accordingly, HUD has determined that it is in the public interest to 
issue these amendments as an interim rule.
    In addition to the broadened exception for Federal agencies, this 
interim rule also clarifies that the time restrictions do not apply to 
sales of inherited properties. As explained above in this preamble, 
transactions involving the sale of inherited properties fall outside 
the intended scope of the regulatory time restrictions. Since 
publication of the May 1, 2003, final rule, HUD has received questions 
regarding the applicability of the time restrictions on inherited 
properties. HUD has taken the opportunity afforded by this final rule 
to clarify its regulations by specifying that sales of inherited 
properties are not subject to the property flipping time restrictions. 
This amendment does not impose new, nor modify existing, regulatory 
requirements. Rather, the new regulatory language is designed to 
clarify the scope of the existing requirements and to assist homebuyers 
and lenders comply with the HUD requirements. Accordingly, HUD has 
determined that it is unnecessary to delay the effectiveness of this 
amendment to solicit prior public comment.
    Although HUD believes that good cause exists to publish this rule 
for effect without prior public comment, HUD recognizes the value of 
public comment in the development of its regulations. HUD, therefore, 
is issuing these regulations on an interim basis and is providing the 
public with a 60-day comment period. HUD welcomes comments on the 
regulatory amendments made by this interim rule. The public comments 
will be addressed in the final rule.

IV. Findings and Certifications

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 an economically 
significant regulatory action, as provided under section 3(f)(1) of the 
order). Any changes made to the rule subsequent to its submission to 
OMB are identified in the docket file, which is available for public 
inspection in the Regulations Division, Room 10276, Office of General 
Counsel, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410-0500.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made for the May 1, 2003, final rule 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. 4332 et seq.). 
That Finding remains applicable to this interim rule and is available 
for public inspection between the hours of 8 a.m. and 5 p.m. weekdays 
in the Regulations Division, Room 10276, Office of General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This interim rule does not impose any new or revised obligations of any 
kind on mall entities participating in the FHA single family mortgage 
insurance programs. Rather, the interim rule is exclusively concerned 
with alleviating a current burden imposed on Federal agencies that 
operate REO property disposition programs, and clarifying the scope of 
current regulatory requirements. Specifically, the interim rule 
broadens the exception to the property flipping time restrictions to 
include all Federal agencies that acquire properties as a result of a 
function of their programs and quickly market and sell these acquired 
properties. In addition, the interim rule clarifies that the time 
restrictions do not apply to the sale of inherited properties. To the 
extent the interim rule has any impact on small entities, it will be to 
benefit those small entities that assist in the sale of federal REO 
properties and inherited properties by facilitating the sale of 
additional properties that otherwise would be

[[Page 77116]]

deemed ineligible for FHA insured mortgage financing. Accordingly, the 
undersigned certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic impact on a substantial number of small entities, 
HUD specifically invites comments regarding 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 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 order. This interim 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 order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) 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 interim rule will 
not impose any Federal mandates on any State, local, or tribal 
government, or on the private sector, within the meaning of UMRA.

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 for 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 as follows:

PART 203--SINGLE FAMILY HOUSING 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. 
3535d.

0
2. Section 203.37a is amended by revising paragraph (c) to read as 
follows:


Sec.  203.37a  Sale of property.

* * * * *
    (c) Exceptions to the time restrictions on sales. The time 
restrictions on sales described in paragraph (b) of this section do not 
apply to:
    (1) 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);
    (2) Sales by another agency of the United States Government of REO 
single family properties pursuant to programs operated by these 
agencies (this does not include the Government Sponsored Enterprises);
    (3) Sales of property that were acquired by the sellers by 
inheritance; and
    (4) Sales of properties purchased by an employer or relocation 
agency in connection with the relocation of an employee.
* * * * *

    Dated: November 22, 2004.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 04-28050 Filed 12-22-04; 8:45 am]
BILLING CODE 4210-27-P