[Federal Register Volume 71, Number 62 (Friday, March 31, 2006)]
[Rules and Regulations]
[Pages 16231-16235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3083]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4916-F-02]
RIN 2502-AI20


Change in Default Reporting Period

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

ACTION: Final rule.

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SUMMARY: This final rule revises the regulations under the single-
family mortgage insurance program that require mortgagees to report the 
status of all single-family mortgages insured by HUD that are 90 or 
more days delinquent. The rule requires mortgagees to report to HUD 
mortgages that are 30 or more days delinquent on the last day of the 
month. The Department believes that the rule would, among other things, 
provide HUD with more recent delinquency information. The receipt of 
more up-to-date information will enable HUD to better monitor its loss 
mitigation program and strengthen the soundness of the Federal Housing 
Administration (FHA) mortgage insurance funds. This final rule follows 
publication of a January 21, 2005, proposed rule, and takes into 
consideration the seven public comments received on the proposed rule. 
After careful consideration of the comments, HUD has decided to adopt 
the proposed rule without substantive change.

DATES: Effective Date: May 1, 2006.

FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Office of 
the Deputy Assistant Secretary for Single Family Housing, Office of 
Housing, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Room 9172, Washington, DC 20410-8000; telephone (202) 708-
1672 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--The January 21, 2005, Proposed Rule

    On January 21, 2005 (70 FR 3266), HUD published a proposed rule to 
revise the regulations under part 203 that require mortgagees to report 
the status of all single-family mortgages insured by HUD that are 90 or 
more days delinquent. The proposed rule indicated that the revision to 
the regulations would require mortgagees to report to HUD mortgages 
that are 30 or more days delinquent on the last day of the month.
    The January 21, 2005, proposed rule contained a detailed rationale 
for the proposed revision. HUD stated in the proposed rule that the 
revisions to the regulations would bring FHA's requirements closer to 
Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and industry 
standards for delinquency reporting requirements. As such, FHA would be 
in a better position to integrate itself, should it choose to do so, 
into a single platform for industry-wide default data reporting. 
Additionally, mortgagees should better understand references to 
payments due and unpaid rather than being required to count days from 
the due date.
    The proposed rule further stated that HUD also believes the 
revisions would contribute to FHA's efforts in protecting the financial 
integrity of the FHA Mutual Mortgage Insurance Fund. The effect of the 
revisions is that the Department would receive more recent and timely 
delinquency and default information, thereby increasing FHA's ability 
to forecast default volume, future defaults, and potential insurance 
losses. More timely information, the proposed rule concluded, would 
also enable FHA to monitor better its loss mitigation program. 
Monitoring of the loss mitigation program is important to FHA because 
FHA insures 100 percent of a mortgage loan as compared to private 
mortgage insurers, which generally insure only 10 to 20 percent of a 
loan.

II. This Final Rule

    This final rule follows publication of the January 21, 2005, 
proposed rule, and takes into consideration the seven public comments 
received in response. The public comment period on the rule closed on 
February 22, 2005. Comments were received from a state housing finance 
agency, a state housing authority, a trade association, and mortgage 
companies. After careful consideration of the public comments, HUD has 
decided to adopt the January 21, 2005, proposed rule with one minor 
change. For clarification purposes, the clause ``or that were reported 
as delinquent the previous month'' is being added to each section. This 
makes it clear that mortgages previously reported as delinquent or in 
default the previous month must be reported again in the latest 
reporting month. Except for that clarification, the proposed rule and 
this final rule are substantively identical.

III. Discussion of Public Comments Received on the January 21, 2005, 
Proposed Rule

    Comment: Expanded default reporting would provide minimal benefit. 
The commenter wrote that the proposal would significantly increase the 
number of reportable events each month. The majority of delinquent 
loans never get to 90-day delinquent status, thus additional data will 
provide minimal benefit to HUD in terms of determining potential 
insurance losses.
    HUD Response. HUD acknowledges that requiring mortgagees to report 
30- and 60-day delinquencies will result in an increase in the total 
volume of reportable events. However, most mortgage servicing computer 
systems are capable of providing this additional data and are in fact 
currently providing similar data on 30-day plus delinquencies to trade 
associations, such as the Mortgage Bankers Association, to various 
private investors and insurers, and to the housing-related Government 
Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.
    HUD has expanded and updated the capacity of its own system to 
accommodate the anticipated increase in overall data volume as well as 
status and default code changes. These changes were implemented to 
bring the data requested by HUD in line with what Fannie Mae and 
Freddie Mac currently require. One of the previous industry complaints 
was that HUD's

[[Page 16232]]

status and default reason codes were different from those required by 
Fannie Mae and Freddie Mac. This effort will bring additional 
uniformity to the information reported by mortgagees.
    The Department believes that the benefits of early delinquency 
reporting are similar to the benefits derived by early delinquency 
intervention for the mortgagor. The earlier in the delinquency that 
intervention is provided, the higher the success percentage. HUD 
believes that this improved information will enable HUD to better 
monitor its loss mitigation program, perform more accurate trend 
analysis, and better secure the soundness of the FHA Mortgage Insurance 
Fund.
    Comment: The proposed change would not bring HUD requirements 
closer to industry standards. The commenter wrote that the proposed 
change actually would be more burdensome than the reporting 
requirements imposed by Fannie Mae and Freddie Mac.
    HUD Response. As mentioned earlier, the Department has upgraded and 
improved its computer systems. Included in these system improvements 
are the system changes to support the new requirement to begin 
reporting delinquencies at 30 days. In addition, the Department has 
implemented changes to simplify the mortgagee's reporting process. The 
Department also has implemented changes to ensure, to the extent 
possible, that the delinquency reporting required by HUD is as uniform 
as possible with the reporting required by both Fannie Mae and Freddie 
Mac. The Department will provide adequate lead-time for all industry 
participants to incorporate the new requirements into their computer 
system.
    Comment: HUD grossly underestimates the additional burden in cost 
and man-hours involved in reporting the additional information. The 
commenter estimates that the rule would add approximately 387,808 new 
reportable 30- and 60-day events each month. Thus, the real reporting 
burden will be four times higher than HUD estimates. The true costs 
will only be known when the housing industry has more complete 
information identifying the exact elements that will be required to be 
reported.
    HUD Response. HUD is unable to determine how the commenter arrived 
at the conclusion that the rule would result in 387,808 new reportable 
events and that the reporting burden would be four times higher than 
the burden estimated by HUD. HUD is aware that the volume of reportable 
events will increase to at least three times the current volume. 
However, the Department has been careful to maintain, for the most 
part, the existing reporting structure. Most of the system changes 
relate to the addition of some status codes and default reason codes 
that are all defined within the Electronic Data Interchange (EDI) 
standard Transaction Set 264, Version 4010 and 4040, which most of the 
housing industry currently uses. The key system logic change will have 
the various industry systems test for a different level of delinquency. 
As a result, servicers will be required to do a one-time reprogramming 
of their systems to identify accounts that have become 30 days 
delinquent on the last day of the month to begin reporting, rather than 
selecting accounts that have become 90 days delinquent on the last day 
of the month. Thereafter, the information will be automatically 
generated by the updated system without requiring the investment of 
additional time of the servicers' employees. The computer systems in 
use today are very efficient and are already selecting accounts for 
reporting for various purposes that are 30- and 60-days delinquent.
    Comment: The rule would require costly systems upgrades.
    HUD Response. HUD disagrees to the extent that it was careful to 
keep new data fields to a minimum and maintain for the most part the 
existing reporting requirements. The test for when to begin reporting 
an account will change. At the housing industry's request, many of the 
status and default reason codes currently in use by Fannie Mae and 
Freddie Mac will be integrated into HUD's to provide an updated listing 
that is as uniform as possible. HUD also has removed five status codes 
that are no longer needed or that the industry found confusing. HUD 
believes that implementing the changes will result in only a negligible 
cost to the mortgagee and that the ongoing monthly reporting will 
generate only a small increase over what is currently incurred.
    Comment: The proposed change would increase reporting burdens and 
increase the opportunity for error to occur. Because the Single Family 
Default Monitoring System (SFDMS) is currently unable to accept more 
than one default event per month, the potential for errors to occur and 
for earlier reportable events to be lost will be greater. Manually 
inputting the information is both risky and expensive. The commenter 
recommends that SFDMS allow for complete reporting without supplemental 
reporting through the FHA Internet Connection when multiple events 
occur in the same month.
    HUD Response. As mentioned earlier, HUD has updated its computer 
systems not only to incorporate the new requirement but also to accept 
more than one status code during the month. This will be particularly 
helpful for those accounts where first legal action to initiate 
foreclosure was taken and before the last day of the month the 
mortgagor filed bankruptcy. HUD will be able to accept both codes, and 
both will be a part of HUD's delinquency history for the account. 
Mortgagees will need to ensure that they update their systems so that 
they do not erroneously block one or the other code from being 
correctly reported.
    Comment: The limitations of SFDMS puts servicers at greater risk of 
delaying, losing, or missing a ``first legal'' action. This delay may 
result in a loss of debenture interest amounting to several thousands 
of dollars per case. The commenter requests that, in connection with 
30- and 60-day delinquencies, HUD waive any curtailment of debenture 
interest penalties until the SFDMS is enhanced to accept multiple 
default events.
    HUD Response. As stated previously, HUD anticipated a need for 
accepting multiple codes for each month, and has updated its system to 
accommodate this need. HUD will provide sufficient advance notification 
for all industry participants to complete the required system changes 
before requiring the new information to be reported.
    Comment: The mortgage industry has technology constraints limiting 
its quick compliance with the rule. According to a number of 
commenters, most servicers use platforms and software provided by third 
parties. These providers need time to update and redesign the systems/
programs to allow for expanded reporting. A commenter asked whether a 
lender or mortgagee that develops its own automated client system would 
be required to submit it to HUD for approval.
    HUD Response: As previously mentioned, HUD will provide sufficient 
notification and time for all industry participants to upgrade and test 
their systems. For those mortgagees that use EDI, the Department will 
support some form of beta testing of the revised reporting 
requirements.
    Comment: The use of data fields for reporting the delinquencies. 
HUD should not utilize the same set of data fields on the 90-day 
delinquencies to report the 30-day delinquencies because items such as 
occupancy status and reason for default are often not known at that 
time. The commenter requested that HUD avoid creating new default codes 
for 30- and 60-day delinquencies.

[[Page 16233]]

The commenter also requested that HUD clarify what information is 
needed and when it would be needed in light of the expanded reporting 
requirements. The commenter supports efforts to revise the ``usage 
definition'' of code 42.
    HUD Response. As stated before, HUD has updated its computer 
systems not only to incorporate the new 30-day delinquency requirement 
but also to accept more than one status code for the monthly reporting 
cycle. HUD recognizes that the level of detail secured from the 
mortgagor by the time the account has become 90 or more days delinquent 
will exceed the level of detail known about an account that has just 
become 30 days delinquent. Therefore, it will be acceptable to advise 
the Department that the reason for the default is unknown and/or that 
the mortgagor had not yet been contacted to determine the reason for 
the delinquency when reporting on 30-or 60-day delinquent accounts. 
There will not be new codes established for reporting 30- and 60-day 
accounts. Where the loan is in default but there is no other reportable 
status (such as a payment plan, etc.), the servicer will report the 
default using status code 42. HUD will calculate the number of months 
the loan is delinquent based on the date of the oldest unpaid 
installment, as reported by the servicer. HUD intends, immediately 
following the publication of this final rule, to issue administrative 
guidelines with respect to codes and data elements that it will require 
in light of the reporting requirements established by this rule.
    Comment: Clarify whether HUD will be adjusting the current deadline 
for reporting. The commenter requests that the current ``reporting 
cycles'' not be shortened at this time.
    HUD Response. The reporting cycles will remain the same. Reporting 
will be required once a month and mortgagees will be allowed the first 
five business days of each month to complete the reporting for the 
prior month. With the exception of the first five business days of the 
month, which are set aside to allow servicers to report the status of 
loans as of the last day of the previous month, mortgagees are free to 
report specific events as soon as they happen. For example, if the 
first legal action to initiate foreclosure occurs on July 18, 2005, the 
mortgagee may submit status code 68 advising HUD that the first legal 
action to initiate foreclosure occurred. The mortgagee need not wait 
until the last day of the month.

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 economically 
significant, as provided in 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 at the 
Department of Housing and Urban Development, Office of General Counsel, 
Regulations Division, 451 Seventh Street, SW., Room 10276, Washington, 
DC 20410-0500. Due to security measures at the HUD Headquarters 
building, please schedule an appointment to review the docket file by 
calling the Regulations Division at (202) 708-3055 (this is not a toll-
free number).

Paperwork Reduction Act

    The information collection requirements contained in this 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 2502-0060. 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.
    The burden of the information collections in this final rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                     Number of     average time      Estimated
           Section reference                Number of parties      responses per        for        annual burden
                                                                    respondent      requirement     (in hours)
                                                                                    (in hours)
----------------------------------------------------------------------------------------------------------------
24 CFR 203.330, 24 CFR 203.331, 24 CFR  Via EDI =120 lenders....              12             1.5           2,160
 203.439.
24 CFR 203.466, 24 CFR 203.467........  Via FHAC =120 lenders...              12             3.5           5,040
                                                                 -----------------------------------------------
    Total.............................  ........................  ..............  ..............           7,200
----------------------------------------------------------------------------------------------------------------

    The number of lenders that is currently servicing single-family 
FHA-insured mortgages has decreased greatly due to many mergers, 
acquisitions, and consolidations within the mortgage industry. The top 
10 lenders (by volume serviced) now service approximately 90 percent of 
the active FHA-insured mortgages. The larger lenders utilize Electronic 
Data Interchange (EDI) to submit their delinquency data to HUD. This 
process means that those lenders must submit only one electronic report 
to HUD each month to comply with the reporting requirement. In October 
and November 2005, approximately 120 lenders reported delinquency data 
to HUD via EDI. There should be very little additional time required 
for those lenders submitting via EDI as the process will continue to 
require submission of a single electronic report to HUD, even with an 
increase of accounts within the report. HUD increased the average 
burden to 1.5 hours for reporting via EDI to ensure that adequate time 
is provided.
    The remaining lenders utilize an Internet-based application, the 
FHA Connection (FHAC) to report. Again, with respect to October and 
November 2005 reporting, approximately 120 lenders submitted 
delinquency data to HUD via the FHAC with more than 80 of those lenders 
submitting fewer than 10 accounts per month. Reporting delinquent loans 
to HUD that previously required approximately an hour on average to 
report now may require 2 or more hours to complete. As several 
commenters indicated that the burden may triple, HUD has increased the 
estimated time for reporting via FHAC to 3.5 hours. The total estimated 
hours remains at 7,200 hours per year.

Environmental Impact

    This rule is categorically excluded from environmental review under 
the National Environmental Policy Act (42 U.S.C. 4321 et seq.). In 
keeping with the

[[Page 16234]]

exclusion provided for in 24 CFR 50.19(c)(1), this rule does not 
direct, provide for assistance or loan and mortgage insurance for, or 
otherwise govern or regulate, real property acquisition, disposition, 
leasing, rehabilitation, alteration, demolition, or new construction, 
or establish, revise or provide for standards for construction or 
construction materials, manufactured housing, or occupancy. 
Accordingly, under 24 CFR 50.19(c)(2), this rule is categorically 
excluded because it amends an existing document where the existing 
document as a whole would not fall within the exclusion in 24 CFR 
50.19(c)(1) but the amendment by itself would do so.

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 
on the private sector. This rule does not impose a federal mandate on 
any state, local, or tribal government, nor on the private sector, 
within the meaning of the Unfunded Mandates Reform Act of 1995.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (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 final rule will 
not materially affect many small businesses participating in the FHA 
single-family mortgage insurance programs. More than 90 percent of the 
servicing of FHA single-family mortgage loans is done by a few large 
entities. There are a very few small lenders that retain the servicing 
function in-house; most small lenders contract out the function. 
Consequently, the rule will not impact a substantial number of small 
entities. Although the rule will require timelier reporting by 
servicers of delinquent mortgages, the information that the servicers 
will report is already in their possession. As a result, any new 
expense to small entities caused by this rule will be negligible. 
Further, there are no anti-competitive discriminatory aspects of the 
rule with regard to small entities. Accordingly, the undersigned 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities.

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 rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments nor preempt state law within the meaning of 
the executive order.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number is 14.117.

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.
    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 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. Revise Sec.  203.330 to read as follows:


Sec.  203.330  Definition of delinquency and requirement for notice of 
delinquency to HUD.

    (a) A mortgage account is delinquent any time a payment is due and 
not paid.
    (b) Once each month on a day prescribed by HUD, the mortgagee shall 
report to HUD all mortgages insured under this part that were 
delinquent on the last day of the month, or that were reported as 
delinquent the previous month. The report shall be made in a manner 
prescribed by HUD.

0
3. Revise Sec.  203.331 to read as follows:


Sec.  203.331  Definition of default, date of default, and requirement 
of notice of default to HUD.

    (a) Default. If the mortgagor fails to make any payment or to 
perform any other obligation under the mortgage, and such failure 
continues for a period of 30 days, the mortgage shall be considered in 
default for the purposes of this subpart.
    (b) Date of default. For the purposes of this subpart, the date of 
default shall be considered as 30 days after:
    (1) The first uncorrected failure to perform any obligation under 
the mortgage; or
    (2) The first failure to make a monthly payment that subsequent 
payments by the mortgagor are insufficient to cover when applied to the 
overdue monthly payments in the order in which they became due.
    (c) Notice of default. Once each month, on a day prescribed by HUD, 
the mortgagee shall report to HUD all mortgages that were in default on 
the last day of the month, or that were reported as in default the 
previous month. The report shall be made in a manner prescribed by HUD.
    (d) Number of days in month. For the purposes of this section, each 
month shall be considered to have 30 days.


Sec.  203.332  [Removed and reserved]

0
4. Remove and reserve Sec.  203.332.

0
5. Amend Sec.  203.439 by revising paragraph (c) to read as follows:


Sec.  203.439  Mortgages on Hawaiian home lands insured pursuant to 
section 247 of the National Housing Act.

* * * * *
    (c) Notice of delinquency. Once each month on a day prescribed by 
HUD, the mortgagee shall notify the Department of Hawaiian Home Lands 
of all mortgages insured pursuant to section 247 of the National 
Housing Act on leaseholds of Hawaiian home lands that are delinquent on 
the last day of the month, or that were reported as delinquent the 
previous month. The notice is in addition to the requirement in 
Sec. Sec.  203.330 and 203.331.

0
6. Revise Sec.  203.466 to read as follows:


Sec.  203.466  Definition of delinquency and requirement for notice of 
delinquency to HUD.

    (a) A mortgage account is delinquent any time a payment is due and 
not paid.
    (b) Once each month on a day prescribed by HUD, the mortgagee shall 
report to HUD all mortgages insured under this part that were 
delinquent on the last day of the month, or that were reported as 
delinquent the previous month. The report shall be made in a manner 
prescribed by HUD.

0
7. Revise Sec.  203.467 to read as follows:


Sec.  203.467  Definition of default, date of default, and requirement 
of notice of default to HUD.

    (a) Default. If the mortgagor fails to make any payment or to 
perform any other obligation under the mortgage, and such failure 
continues for a period of 30 days, the mortgage shall be considered in 
default for the purposes of this subpart.

[[Page 16235]]

    (b) Date of default. For the purposes of this subpart, the date of 
default shall be considered as 30 days after:
    (1) The first uncorrected failure to perform any obligation under 
the mortgage; or
    (2) The first failure to make a monthly payment that subsequent 
payments by the borrower are insufficient to cover when applied to the 
overdue monthly payments in the order in which they became due.
    (c) Notice of default. Once each month, on a day prescribed by HUD, 
the mortgagee shall report to HUD all mortgages that were in default on 
the last day of the month, or that were reported as in default the 
previous month. The report shall be made on a form prescribed by HUD.
    (d) Number of days in month. For the purposes of this section, each 
month shall be considered to have 30 days.


Sec.  203.468  [Removed and reserved]

0
8. Remove and reserve Sec.  203.468.

    Dated: March 24, 2006.
Brian D. Montgomery,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 06-3083 Filed 3-30-06; 8:45 am]
BILLING CODE 4210-67-P