[Federal Register Volume 74, Number 228 (Monday, November 30, 2009)]
[Proposed Rules]
[Pages 62521-62531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-28335]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 202

[Docket No. FR 5356-P-01]
RIN 2502-AI81


Federal Housing Administration (FHA): Continuation of FHA 
Reform--Strengthening Risk Management Through Responsible FHA-Approved 
Lenders

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

[[Page 62522]]


ACTION: Proposed rule.

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SUMMARY: Through this proposed rule, HUD continues its efforts to 
streamline, modernize, and strengthen the mortgage insurance functions 
and responsibilities of FHA, as authorized by provisions contained in 
the National Housing Act, as amended by the FHA Modernization Act of 
2008, and further supported by the Helping Families Save Their Homes 
Act of 2009. First, FHA proposes to no longer approve loan 
correspondents as approved participants in FHA programs. Mortgagees 
would be required to ensure that their loan correspondents meet 
applicable requirements. The FHA-approved mortgagee will, in turn, act 
as sponsor as it has in the past. However, in using a sponsor/
correspondent relationship, the sponsoring mortgagee must agree to 
assume responsibility for any loan correspondent that works with the 
mortgagee in the FHA insured loan, and assume liability for the FHA-
insured loan underwritten and closed in the name of the FHA-approved 
mortgagee. Second, this proposed rule would update the FHA regulations 
to incorporate criteria specified in the Helping Families Save Their 
Homes Act of 2009 that precludes certain lending entities from 
originating an FHA-insured loan, and are designed to ensure that only 
entities of integrity are involved in the origination of FHA-insured 
transactions. Third, and consistent with the objective to work with and 
rely upon responsible mortgagees, FHA proposes to increase the net 
worth requirement for FHA-approved mortgagees for the purpose of 
ensuring that approved mortgagees are sufficiently capitalized.

DATES: Comment Due Date: December 30, 2009.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 10276, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Information Relay Service at 800-877-8339. Copies of all 
comments submitted are available for inspection and downloading at 
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Office of Lender Activities and 
Program Compliance, Department of Housing and Urban Development, 451 
7th Street, SW., Washington, DC 20410-8000; telephone number 202-708-
1515 (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 FHA Modernization Act of 2008, Title I of Division B of the 
Housing and Economic Recovery Act of 2008 (Pub. L. 110-289, approved 
July 30, 2008), made or authorized HUD to make significant changes to 
the way in which FHA conducts several areas of its mortgage insurance 
operations. The FHA Modernization Act increased maximum mortgage 
limits, overhauled and streamlined FHA's Title I manufactured housing 
and condominium mortgage insurance programs, allowed a Home Equity 
Conversion Mortgage (HECM) to be used to purchase a home, and allowed 
for the insurance of cooperatives, to name a few of the significant 
changes made by this 2008 statute. A key theme of many of the changes 
made by the FHA Modernization Act centered on streamlining and 
modernizing existing FHA programs.
    The Helping Families Save Their Homes Act (HFSH Act), Division A of 
Public Law 111-22, strengthened HUD's enforcement authority to ensure 
the integrity and safety of FHA's mortgage insurance programs. The HFSH 
Act contains several provisions designed to ensure that predatory 
lending entities and individuals are not allowed to participate in FHA-
insured mortgage programs, and specifically requires FHA approval of 
all parties participating in the FHA single family mortgage origination 
process. The HFSH Act authorizes HUD to impose civil money penalties 
against loan originators who are not FHA-approved and yet participate 
in FHA loan originations. The HFSH Act strengthens HUD's enforcement 
authority by authorizing the imposition of civil money penalties not 
only for violation of statutory requirements, but for violation of any 
FHA implementing regulation, handbook, or mortgagee letter issued under 
title II of the National Housing Act. The HFSH Act directs FHA to 
strengthen the existing FHA lender approval process, including 
strengthening by ensuring that only lenders of integrity are approved 
by FHA as approved mortgagees.
    With the authority and direction presented by these two statutes, 
which support and enhance the existing authority of the National 
Housing Act, FHA proposes to both streamline and strengthen the FHA 
lender approval process. Except as modified by this proposed rule, all 
other components of the lender approval process would remain the same, 
including those provisions regarding the monitoring and enforcement of 
FHA requirements, the imposition of sanctions (enhanced by the HFSH 
Act), and the opportunity to appeal adverse determinations.

II. This Proposed Rule

A. Strengthening and Streamlining Lender Approval

    1. Limiting Approval to Mortgagees. Through this rule, FHA proposes 
changes to the eligibility criteria for FHA lender approval. Currently, 
through the FHA lender approval

[[Page 62523]]

process, FHA approves two types of lenders. First, FHA approves 
mortgagees. Mortgagees can perform any lender origination and/or 
service function and can own FHA-insured loans. Second, FHA approves 
loan correspondents, but with limited functions. Loan correspondents 
are allowed to perform any origination function except underwriting and 
cannot service or own FHA-insured loans. This rule proposes to limit 
the FHA lender approval process to mortgagees. This rule does not 
propose to alter, however, the approval process of investing mortgagees 
and governmental institutions as addressed in 24 CFR 202.9 and 202.10. 
FHA will continue to approve investing mortgagees and government 
institutions.
    The limitation of the FHA approval process to mortgagees reflects 
recognition that the mortgagee, by underwriting, servicing, or owning a 
loan, is the most critical lending party to a mortgage transaction. 
Accordingly, the mortgagee should be the party that is subject to FHA's 
rigorous lender-approval and oversight processes, and bear the greatest 
degree of responsibility and liability for the loan obtained by the 
borrower and insured by FHA. Loan correspondents will continue to be 
authorized to participate in the origination of FHA loans through 
association with an FHA-approved mortgagee, but these entities no 
longer will be subject to the FHA lender-approval process.
    FHA-approved mortgagees would be required to ensure that their loan 
correspondents meet applicable requirements. The FHA-approved mortgagee 
acts as sponsor as it has in the past, but in using a sponsor/
correspondent relationship, the sponsoring mortgagee must agree to 
assume responsibility for any loan correspondent that works with the 
mortgagee in the FHA-insured loan for activities related to the loan 
origination, and assume liability for the FHA-insured loan underwritten 
and closed in the name of the FHA-approved mortgagee. Not only would 
FHA-approved mortgagees be required to ensure that sponsoring loan 
correspondents meet standards assuring their integrity and financial 
soundness, including those recently emphasized in the HFSH Act (see 
Section II.A.2 of this preamble), but to also ensure compliance by all 
parties to an FHA transaction with FHA's requirements regarding loan 
origination, processing, underwriting, and servicing and found in 
relevant statutes, regulations, HUD handbooks, and mortgagee letters. 
Although loan correspondents no longer would be subject to lender 
approval requirements, the FHA-approved mortgagee must ensure that any 
loan correspondent that the mortgagee sponsors complies with the 
requirements that make loans eligible for FHA insurance. Failure to 
comply with these requirements may result in FHA seeking sanctions 
against the FHA-approved mortgagee.
    FHA-approved mortgagees will be authorized to underwrite for and 
acquire FHA mortgage applications from loan correspondents and non-FHA-
approved lenders, such as mortgage brokers, provided that these 
parties: (1) Are in compliance with the requirements of the Secure and 
Fair Enforcement (SAFE) Mortgage Licensing Act (Title V of Division A 
of Pub. L. 110-289, approved July 30, 2008), when such requirements 
become applicable under the State or States in which these parties 
conduct business, and (2) are not suspended, debarred, or otherwise 
excluded from participating in the origination of an FHA loan. If the 
loan application is taken by an entity that is not the FHA-approved 
Direct Endorsement mortgagee that underwrote the loan, the entity must 
include the following in the FHA loan origination system for the 
subject loan: (1) The entity's FHA identification number (if the entity 
is FHA-approved) or (2) the entity's legal name and tax identification 
number (if the entity is not FHA-approved). The loan must be 
underwritten by and closed in the name of the FHA-approved mortgagee.
    As contemplated by this proposed rule, upon promulgation of the 
final rule that will follow this proposed rule, entities that are 
already approved by FHA as loan correspondents would not be permitted 
to renew their status, or convert their approval to mortgagee, and only 
FHA-approved mortgagees would be allowed to request FHA case numbers.
    The advantages of this limitation of FHA lender approval authority 
are twofold. First, this change focuses the administrative burden of 
the lender approval process to those entities (and HUD recognizes that 
a stringent approval process necessitates some administrative burden) 
that bear the greatest responsibility for the validity and eligibility 
of the loan for FHA insurance. It is the mortgagee that determines 
whether a borrower qualifies for the mortgage for which the borrower 
applied and, therefore, determines the risk of lending money to the 
borrower. This is the most critical determination of the mortgage 
process. Second, the change allows loan correspondents to continue to 
participate in the FHA loan origination process, but without having to 
undergo the lender approval process.
    2. Ineligibility To Participate in Origination of FHA-Insured 
Loans. In addition to limiting the FHA lender approval process to 
mortgagees, this proposed rule incorporates criteria specified in 
section 203 of the HFSH Act that precludes any lending entity not 
approved by the Secretary to participate in FHA programs or not in 
compliance with the following eligibility requirements from originating 
an FHA-insured loan. Section 203(b) of the HFSH Act adds a new 
subsection (d) to section 202 of the National Housing Act, provides as 
follows: ``LIMITATIONS ON PARTICIPATION IN ORIGINATION AND MORTGAGEE 
APPROVAL.--

 ``REQUIREMENT.--Any person or entity that is not approved 
by the Secretary to serve as a mortgagee, as such term is defined in 
subsection (c)(7), shall not participate in the origination of an 
FHA-insured loan except as authorized by the Secretary.
 ``ELIGIBILITY FOR APPROVAL.--In order to be eligible for 
approval by the Secretary, an applicant mortgagee shall not be, and 
shall not have any officer, partner, director, principal, manager, 
supervisor, loan processor, loan underwriter, or loan originator of 
the applicant mortgagee who is--
    [cir] ``currently suspended, debarred, under a limited denial of 
participation (LDP), or otherwise restricted under part 25 of title 
24 of the Code of Federal Regulations, 2 Code of Federal 
Regulations, part 180 as implemented by part 2424, or any successor 
regulations to such parts, or under similar provisions of any other 
Federal agency;
    [cir] ``under indictment for, or has been convicted of, an 
offense that reflects adversely upon the applicant's integrity, 
competence or fitness to meet the responsibilities of an approved 
mortgagee;
    [cir] ``subject to unresolved findings contained in a Department 
of Housing and Urban Development or other governmental audit, 
investigation, or review;
    [cir] ``engaged in business practices that do not conform to 
generally accepted practices of prudent mortgagees or that 
demonstrate irresponsibility;
    [cir] ``convicted of, or who has pled guilty or nolo contendre 
to, a felony related to participation in the real estate or mortgage 
loan industry--
    [cir] ``during the 7-year period preceding the date of the 
application for licensing and registration; or
    [cir] ``at any time preceding such date of application, if such 
felony involved an act of fraud, dishonesty, or a breach of trust, 
or money laundering;
    [cir] ``in violation of provisions of the S.A.F.E. Mortgage 
Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable 
provision of State law; or

[[Page 62524]]

    [cir] ``in violation of any other requirement as established by 
the Secretary.''

    Given the specificity of the statutory language, implementation of 
the criteria does not require rulemaking and the restrictions are, 
therefore, currently in effect. These criteria were announced by the 
Mortgagee Letter entitled ``Strengthening Counterparty Risk 
Management,'' issued September 18, 2009, and can be found as document 
number 09-31 at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm. This rule proposes to update HUD's regulations to 
conform to the statutory requirements. Although these are statutory 
criteria which the Department does not have the discretion to alter, 
HUD nevertheless welcomes comment on these criteria and on any other 
comparable requirements that HUD should add to preclude participation 
in the origination of FHA-insured loans, and welcomes comment on any of 
the criteria for which an affected party seeks elaboration or guidance.
    While this rule proposes to codify the new statutory ineligibility 
criteria, this rule does not propose to revise current procedures in 
place in FHA regulations and handbooks that are applicable to appeals 
of adverse determinations. Additionally, these new statutory criteria 
do not require HUD to propose enforcement mechanisms and procedures 
beyond those already in place for enforcement of FHA requirements. 
While the HFSH Act strengthens FHA's enforcement authority by expanding 
HUD's ability to impose civil money penalties and strengthening the 
authority of the Mortgagee Review Board, this increased authority does 
not require additional enforcement procedures. The procedures already 
in place by which FHA may take action against mortgagees in violation 
of FHA requirements continue to be sufficient.

B. Strengthening the Capacity of FHA-Approved Mortgagees

    FHA proposes to increase the net worth requirement for approved 
mortgagees and those applicants seeking approval as mortgagees from 
$250,000 to $2.5 million. In addition, FHA proposes to require 
investing mortgagees to comply with the new net worth requirements. In 
order to provide mortgagees with time to adjust to the new 
requirements, the proposed rule would phase in the net worth increases 
over a 3-year period.
    Within one year of the effective date of the final rule resulting 
from this rulemaking process, supervised and nonsupervised mortgagees 
and investing mortgagees would be required to have a minimum net worth 
of $1 million, of which at least 20 percent must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary. 
Mortgagees would be required to comply with the minimum net worth 
requirement of $2.5 million within 3 years of the effective date of the 
final rule, with at least 20 percent of such net worth consisting of 
liquid assets.
    The net worth requirements have not been updated since 1993. HUD's 
proposal to increase the net worth requirements for FHA-approved 
mortgagees is consistent with recent increases in net worth 
requirements by the government sponsored enterprises. In September 
2008, both Fannie Mae and Ginnie Mae increased the net worth 
requirements for their business partners. Ginnie Mae now requires a net 
worth of $1 million and Fannie Mae requires a net worth of $1.65 
million. As of December 31, 2009, Fannie Mae's net worth requirements 
will be increased further to $2.5 million plus a dollar amount that 
represents one-quarter of one percent (.25 percent) of the outstanding 
principal balance of the lender's total portfolio of mortgages serviced 
for Fannie Mae. As is evidenced by the actions of Ginnie Mae and Fannie 
Mae, the increases in required net worth proposed by FHA are consistent 
with industry norms for counterparty risk management.
    The net worth increases proposed in this rule reflect not only 
necessary adjustments for inflation, but also the lessons learned as a 
result of the housing market crisis. The changes will help to ensure 
that FHA-approved lenders, including investing mortgagees, are 
sufficiently capitalized to meet the potential needs associated with 
the financial services they provide.
    The proposed rule would also simplify the net worth requirements by 
establishing uniform requirements for Title I and Title II mortgagees. 
Under the current regulations at 24 CFR 202.5(n), Title II supervised 
and unsupervised mortgagees (except multifamily mortgagees) are 
required to maintain additional net worth in excess of the existing 
requirements of not less than one percent of the mortgage volume 
exceeding $25 million, but total net worth is not required to exceed $1 
million. This proposed rule would eliminate the additional net worth 
requirements for title II mortgagees.

C. Use of HUD Registered Business Name and Business Changes

    In addition to the two significant proposed changes presented in 
Sections II.A. and II.B. of this preamble, HUD proposes to codify the 
statutory requirement presented in section 203 of the HFSH Act, which 
directs FHA-approved mortgagees to use their HUD-registered business 
names in all advertisements and promotional materials related to FHA 
programs. HUD-registered business names include any alias or ``doing 
business as'' (DBA) on file with FHA. In addition to codifying this 
statutory requirement, this rule also proposes to codify the 
requirements specified in FHA's Strengthening Counterparty Risk 
Management Mortgagee Letter, issued September 18, 2009, and found at 
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm, 
which directs FHA-approved mortgagees to maintain copies of all 
advertisements and promotional materials for a period of 2 years from 
the date that the materials are circulated or used for advertisement 
purposes.
    Through this rule, HUD also proposes to codify the requirement in 
section 203 of the HFSH Act that requires mortgagees to notify FHA if 
individual employees of the lender are subject to any sanction or other 
administrative action. In incorporating this requirement, HUD also is 
proposing to codify its existing requirements pertaining to 
notification to FHA of business changes, such as changes in legal 
structure, which are currently found in HUD Handbook 4060.1, REV-2, 
Chapters 2 and 6.

D. The General Approval Standards for Mortgagees (24 CFR 202.5)

    Section 202.5 of HUD's FHA regulations sets forth the general 
approval standards for FHA-approved mortgagees. Because this section 
sets forth the approval standards, this is the principal regulation 
that is proposed to be amended by this rule. However, with the 
exception of adding new provisions in Sec.  202.5(b) to address the use 
of business name, and non-FHA approved entities, all other changes 
proposed by this rule are changes to existing provisions. For example, 
paragraph (f) concerning business changes, and paragraph (j), which 
pertains to ineligibility, are expanded to include the statutory 
requirements of the HFSH Act. Section 202.5(g), which addresses 
financial statements, is proposed to be amended to include reference to 
the requirement to submit an audited financial statement within 90 days 
of the end of a mortgagee's fiscal year. The requirement to submit an 
audited financial statement was initiated in FHA's Strengthening 
Counterparty Risk Management Mortgagee Letter, issued September 18, 
2009. (See http://

[[Page 62525]]

www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm.)

III. Justification for Shortened Public Comment Period

    It is the general practice of the Department to provide a 60-day 
public comment period on all proposed rules. The Department, however, 
is reducing its usual 60-day public comment period to 30 days for this 
proposed rule. As discussed in the preamble, although this rule 
proposes to no longer approve loan correspondents as approved 
participants in FHA programs, and to limit approval to mortgagees, this 
does not mean that loan correspondents may no longer participate in the 
FHA-insured loan origination process. Loan correspondents would 
continue to be authorized to participate in the origination of FHA 
loans through association with an FHA-approved mortgagee, but they 
would no longer be subject to the rigorous FHA lender-approval process, 
which is more appropriate for those entities that underwrite the loans. 
The FHA-approved mortgagee will, in turn, act as sponsor as it has in 
the past, and the sponsoring mortgagee will assume responsibility for 
any loan correspondent that works with the mortgagee in the FHA-insured 
loan, and assume liability for the FHA-insured loan underwritten and 
closed in the name of the FHA-approved mortgagee. Therefore, this 
change should not result in any loss of business by any currently FHA-
approved lending entity.
    Additionally, although the proposed rule would raise the net worth 
requirement for FHA-approved mortgagees, which have not been increased 
in more than 15 years, the net worth requirements proposed are at a 
level comparable to industry standard, as already discussed in the 
preamble and as further discussed in Section IV of this preamble. 
Additionally, to provide FHA-approved mortgagees with sufficient time 
to meet the new requirements, HUD would phase in the net worth 
increases over a 3-year period from the effective date of the final 
rule resulting from this rulemaking. Within one year from the effective 
date of the final rule, FHA-approved mortgagees would be required to 
have a net worth of $1 million. At present, 60 percent of approved 
mortgagees have a net worth of $1 million or more. Those that do not 
currently meet the $1 million net worth requirement may choose to 
increase their net worth to meet the new requirements or may 
participate by partnering with an approved FHA mortgagee, as is the 
case for loan correspondents. Within 3 years from the effective date of 
the final rule, mortgagees would be required to have a net worth of 
$2.5 million, a figure that is consistent with industry practice. It is 
HUD's view, therefore, that this change, given the proposed net worth 
requirement and the time to meet such requirement, as well as the other 
avenues of participation in FHA programs available to those mortgagees 
not able to meet the new net worth requirements, would not 
significantly restrict any currently FHA-approved mortgagees from the 
opportunity to participate in FHA programs.
    The proposed rule would also update HUD's regulations to 
incorporate criteria specified in the HFSH Act that precludes any 
lending entity not approved by the Secretary to participate in FHA 
programs or not in compliance with applicable eligibility requirements 
from originating an FHA-insured loan. These are statutory restrictions, 
which HUD does not have the authority to modify in response to comment. 
The statutory provisions are currently in effect and the proposed 
regulatory changes merely update HUD's regulations to conform to the 
language of the HFSH Act.
    Given that the changes proposed by this rule bring FHA up to date 
with current industry standards and conform to explicit statutory 
language, and would not result in significant changes to current FHA 
participation, FHA believes a 30-day public comment period presents a 
sufficient period for comment. Although HUD has determined that a 
reduced comment period is merited in this case, the Department 
continues to value public input in the rulemaking process. As noted, 
the proposed rule solicits public comment for a period of 30 days, and 
all comments received will be considered in the development of the 
final rule.

IV. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). A determination, as provided below, was made that this 
proposed 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).
    The changes to the lender-approval process do not prevent 
participation by entities that have to date been involved in FHA 
programs, but rather limits the actual approval process to those 
entities that underwrite, service, or own FHA-insured mortgages. 
Therefore, loan correspondents and other non-FHA approved lenders can 
continue to be involved in FHA loan origination by working with FHA-
approved mortgagees. Loan correspondents and other third-party 
originators would be exempt, however, from completing the FHA lender 
approval process.
    The increase in net worth requirements, while seemingly a 
significant increase from the current net worth requirements 
established in 1993, is not significant when one considers the 
following: the net worth requirement for FHA-approved lending entities 
has not been increased in more than 15 years; the net worth increase 
would not apply to loan correspondents; and, as previously discussed in 
this preamble, the proposed net worth requirements are consistent with 
those currently required by other Federal financial institutions with 
which FHA-approved mortgagees conduct business and whose requirements 
they must meet. The following provides further analysis of the 
estimated impact of the increase in net requirements that supports 
HUD's determination that this rule is not an economically significant 
rule as defined by Executive Order 12866.
    FHA does not presently collect audited financial statements from 
supervised institutions. As a result, it is not possible to determine 
if any of these entities that are currently FHA-approved would be 
unable to meet the proposed increased net worth requirements. 
Therefore, for the purposes of the following analysis, only data from 
approved non-supervised mortgagees is considered. However, based upon 
the fact that supervised institutions must meet much higher capital 
standards established by Federal banking regulators (and to comply with 
international Basel II standards), it is very unlikely that any 
supervised institutions would fail to meet the proposed net worth 
requirements. As a proxy, FHA analyzed Ginnie Mae net worth data for 
its supervised lender issuers and discovered that none of these lenders 
had a net worth below FHA's proposed requirement. In fact, the average 
net worth of this cohort was $2.4 billion.
    The enactment of the proposed rule would present two options to 
mortgagees that currently possess a net worth below the proposed 
$2,500,000 requirement:
    1. Increase their net worth, within the 3 years of enactment of the 
final rule, from the current $250,000 to $2.5

[[Page 62526]]

million, 20 percent of which must be held in liquid assets; or
    2. Relinquish their status as an FHA-approved mortgagee and 
continue conducting FHA business as a loan correspondent by initiating 
a relationship with an approved mortgagee.
    The actual economic impact of the proposed rule is the opportunity 
cost of option 1 and the lost revenue and additional costs associated 
with option 2. For mortgagees that choose option 1, it is anticipated 
that the increase in net worth would be met largely by changing the 
title of existing assets from the individual holdings of a mortgagees' 
owners to those of the institutions. Returns on the assets would be 
earned by the same individuals, whether they were held in the names of 
the individuals or by the mortgagees that they owned. Thus, increasing 
the minimum net worth requirement affects only the rate of return of 
the capital invested, which is the true measure of the economic impact 
of option 1. The impacts associated with this option are further 
discussed below.
    For mortgagees that choose option 2, the functional impact of the 
option is that they no longer would be able to underwrite and process 
the loans they originate. The economic impact that would result from 
those limitations would be the loss of income from those aspects of the 
FHA mortgage lending process they no longer would be permitted to 
perform and the added costs they would be required to pay to their 
sponsor for processing and underwriting. An analysis of the impacts for 
mortgagees in choosing this option also is provided below.
    If all mortgagees selected option 1 and transferred title from 
existing assets, the actual impact of such an action is the opportunity 
cost of holding those assets as net worth rather than investing them in 
other potentially higher-yielding investments. The true measure of 
economic impact is found by drilling down even farther to consider only 
the opportunity cost associated with those assets that must be 
converted to liquid form. Because assets held for net worth may still 
be invested elsewhere, it is only the 20 percent liquid asset portion 
of a mortgagee's capital that is affected by the increased net worth 
requirement. However, the analysis below depicts both the opportunity 
cost of the total capital transfer required to meet the higher net 
worth standard, and the opportunity cost of the liquid assets necessary 
to meet the requirement.
    Table 1 below calculates the opportunity cost for mortgagees in 
meeting the proposed net worth requirements based upon total net worth 
needed. Table 2 calculates the opportunity cost in terms of required 
liquid assets. Based on data from FHA's Lender Assessment SubSystem 
(LASS), 24 mortgagees have a net worth equal to $250,000, 465 
mortgagees have a net worth between $250,000 and $1 million, 350 
mortgagees have a net worth between $1 million and $2.5 million, and 
369 mortgagees have a net worth of greater than $2.5 million.
    In Table 1 below, Column A lists the number of lenders in the 
aforementioned categories. Column B lists the average net worth of the 
mortgagees in each category. Column C subtracts the average net worth 
from the new requirement of $2.5 million per mortgagee. Column D then 
calculates the average opportunity cost per lender for each stratum.
    The aggregate cost of this provision totals the opportunity cost of 
holding the amount shown in Column C in net worth rather than investing 
it in other potentially higher-yielding investments. The opportunity 
cost in Column D therefore is calculated as the difference between the 
average market rate of return and the risk-free interest rate. The 
average market rate is represented by the real annualized return of the 
S&P 500 between 1990 and 2008, which equals 4.5 percent. The risk-free 
interest is the average 10-year Treasury rate between 1990 and 2008, 
which equals 2.7 percent. The difference between these two rates equals 
1.8 percent. Finally, the average opportunity cost of the increase in 
the net worth requirement per mortgagee, shown in Column D, was 
multiplied times Column A, the number of mortgagees in each category, 
to calculate the total cost of the net worth requirement imposed by 
this regulation, shown in Column E. As shown in Table 1, the total 
opportunity cost for all mortgagees of holding the additional funds in 
net worth totals $23.4 million.

                               Table 1--Calculation of Opportunity Cost to FHA-Approved Mortgagees for Full Capitalization
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       (A)               (B)               (C)         (D) = (C)*1.8%     (E) = (A)*(D)
                                                               -----------------------------------------------------------------------------------------
                           Net worth                                                                Average required
                                                                    Number of        Average net     increase in net       Average          Aggregate
                                                                   mortgagees           worth             worth       opportunity cost  opportunity cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K.........................................................                24          $250,000        $2,250,000           $40,500          $972,000
$250K.........................................................               465           539,345         1,960,655            35,292        16,410,780
$1M-$2.5M.....................................................               350         1,537,509           962,491            17,325         6,063,750
>$2.5M........................................................               369       164,252,737
                                                               -----------------------------------------------------------------------------------------
    Total.....................................................             1,208  ................  ................  ................        23,446,530
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 2 below further extrapolates this data to assess the 
opportunity cost associated with only that portion of net worth held in 
liquid assets. The actual cost of this provision totals the opportunity 
cost of holding 20 percent of total net worth as liquid assets rather 
than investing it in other potentially higher-yielding investments. The 
opportunity cost therefore is calculated in essentially the same 
fashion as for Table 1. However, Column D of Table 2 lists the average 
increase in required liquid assets for lenders in each category. The 
opportunity cost is then calculated in the same fashion as described 
for Table 1, by multiplying the amount shown in Column D times 1.8 
percent. This figure is shown in Column E. The total cost of the 
provision was then determined by multiplying the amount in Column E 
times the number of lenders in each stratum listed in Column A. As 
shown in Table 2, the opportunity cost of holding the additional 
required liquid assets in net worth totals $4.7 million.\1\
---------------------------------------------------------------------------

    \1\ Even if the percentage of required net worth held in liquid 
assets were to yield no return whatsoever, utilizing the 4.5 percent 
average market rate of return mentioned previously, the total 
opportunity cost of the uninvested liquid assets would total just 
$11,723,184.

[[Page 62527]]



                                 Table 2--Calculation of Opportunity Cost to FHA-Approved Mortgagees for Liquid Holdings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     (A)               (B)               (C)          (D) = (C)*20%    (E) = (D)*1.8%     (F) = (A)*(E)
                                             -----------------------------------------------------------------------------------------------------------
                  Net worth                                                       Average required
                                                  Number of        Average net     increase in net  Average increase      Aggregate         Aggregate
                                                 mortgagees           worth             worth       in liquid assets  opportunity cost  opportunity cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K.......................................                24          $250,000        $2,250,000          $450,000            $8,100          $194,400
$250K.......................................               465           539,345         1,960,655           392,131             7,058         3,282,137
$1M-$2.5M...................................               350         1,537,509           962,491           192,498             3,465         1,212,738
>$2.5M......................................               369       164,252,737
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................             1,208  ................  ................  ................  ................         4,689,275
--------------------------------------------------------------------------------------------------------------------------------------------------------

    If all mortgagees selected option 2, the economic impact again 
would issue from lost revenue derived from those aspects of the FHA 
mortgage lending process they no longer would be permitted to perform 
and the added costs they would be required to pay to their sponsor for 
processing and underwriting. There are four primary ways in which a 
lender can receive income from the mortgage business: (1) Origination 
fees, (2) servicing release premiums, (3) servicing fees, and (4) 
income derived from securitization. The potential income derived from 
these revenue streams is as follows:
    (1) FHA origination fees are capped at 1 percent of the loan 
amount.
    (2) The industry standard for servicing release premiums is between 
75 to 100 basis points of a loan's unpaid principal balance at the time 
of sale.
    (3) The average annual servicing fee of an FHA loan is 30 basis 
points on the unpaid principal balance.
    (4) Income derived from securitization will not be considered 
because a mortgagee must meet the higher net worth already required by 
Ginnie Mae, Fannie Mae, and Freddie Mac in order to participate in the 
respective securitization programs.
    FHA analyzed the origination patterns of the mortgagees that would 
be affected over a 2-year period from August 31, 2007 to September 30, 
2009. It should be noted that the vast majority of lenders reviewed do 
not service a mortgage portfolio but rather sell their mortgages to 
aggregators.
    As is seen in Table 3 below, of the 489 lenders with a net worth 
less than the proposed $1 million, 355 have originated at least one 
loan in the 2-year sample period. Of the 350 lenders above the proposed 
$1 million net worth but below the proposed $2.5 million, 299 have 
originated at least one loan during the 2-year sample period. Since the 
affected mortgagees still would be permitted to originate FHA loans for 
a fee and would be entitled to income streams derived from servicing 
release premiums, the only economic impact would be from the costs 
these lenders pay to FHA-approved lenders for the processing and 
underwriting of the mortgages sold. Table 3 provides information 
regarding the economic impact if all lenders opted to relinquish their 
FHA approval and operate via a relationship with an FHA-approved 
mortgagee. Column A lists the number of lenders in each net worth 
category. Column B lists only the number of lenders in each category 
that originated at least one loan in the 2-year period from August 31, 
2007, to September 30, 2009. Column C provides the average yearly 
originations performed by each stratum for the 2-year period. Column D 
calculates the average number of originations performed per lender by 
dividing Column C by column B. Column E calculates the average total 
processing and underwriting fees paid by loan correspondents for loans 
they originated by multiplying the amount in Column D times $200, the 
average fee required by a mortgagee for these services. Column F 
calculates the total cost of these fees for loan correspondents by 
multiplying Column E by Column B. As is seen from Table 3, the economic 
impact of this option is $45.1 million.

                                 Table 3--Calculation of Lost Revenue for Mortgagees That Relinquish Their FHA Approval
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     (A)               (B)               (C)          (D) = (C)/(B)    (E) = (D)*$200     (F) = (E)*(B)
                                             -----------------------------------------------------------------------------------------------------------
                                                                   Lenders w/      Avg. number of                         Avg. loan
                                               Total number of   originations in       yearly        Avg. number of    processing fee/   Aggregate loan
                                                   lenders        2-year period     originations       orig/lender         lender        processing fee
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$250K < $1M................................               489               355            87,455               246           $49,200       $17,466,000
$1M-$2.5M...................................               350               299           138,289               463            92,600        27,687,400
    Total...................................  ................  ................  ................  ................  ................        45,153,400
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As is evidenced above, under either option a mortgagee adopts to 
accommodate the proposed increase in net worth requirements, the total 
economic impact is below $100 million. FHA believes that the method of 
assessment outlined here is the most true and accurate accounting of 
the economic impacts of this proposed rule.
    As part of the public comments that HUD is soliciting on this rule, 
HUD also solicits public comment on its analysis and welcomes feedback 
on potential effects that commenters believe this rule will have on 
competition in financial and housing markets, with particular emphasis 
on the ability of mortgagees to transfer assets in order to increase 
their net worth.
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th 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 202-402-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the Federal Information Relay Service at 800-877-
8339.

[[Page 62528]]

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.
    Currently, there are 13,831 FHA-approved lending entities. Of these 
approved entities, 28 percent are approved mortgagees, 68 percent are 
approved correspondents, and the remaining 4 percent constitute 
government mortgagees or investing mortgagees. Of FHA-approved 
mortgagees, only 60 percent currently have a net worth of $1 million or 
more. An additional 20 percent of approved mortgagees have a net worth 
greater than $500,000. Thus, a significant portion of these mortgagees 
could be expected to achieve a net worth of $1 million within the one 
year period prior to the net worth requirement taking effect. Those 
that are unable to meet the new net worth requirement in that time 
would still be able to participate in FHA programs by partnering with 
an approved mortgagee.
    The small entities that participate in the FHA loan origination 
have, to date, largely been loan correspondents. As discussed in this 
preamble, the proposed rule would not deny loan correspondents the 
ability to continue to participate in the origination of FHA-insured 
loans. Rather, the proposed regulatory changes would alleviate the 
administrative burden imposed on loan correspondents by no longer 
requiring them to apply separately for FHA approval. The changes 
proposed by this rule allow smaller entities to continue to be involved 
in the origination of FHA-insured loans without having to come under 
the FHA approval process and meet net worth requirements.
    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 effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in the preamble to this rule.

Environmental Impact

    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. This rule is limited to the eligibility of those 
entities that may be approved as FHA-approved lenders. Accordingly, 
under 24 CFR 50.19(c)(1), this rule is categorically excluded from 
environmental review under the National Environmental Policy Act of 
1969 (42 U.S.C. 4321).

Executive Order 13132, Federalism

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

Unfunded Mandates Reform Act

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance (CFDA) Program number is 
14.183.

List of Subjects in 24 CFR Part 202

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

    Accordingly, for the reasons stated above, HUD proposes to amend 24 
CFR part 202 as follows:

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

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

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

    2. In Sec.  202.2, the definition mortgagee or Title II mortgagee 
is revised to read as follows:


Sec.  202.2  Definitions.

* * * * *
    Mortgagee or Title II mortgagee means a mortgage lender that is 
approved to participate in the Title II programs as a supervised 
mortgagee under Sec.  202.6, a nonsupervised mortgagee under Sec.  
202.7, an investing mortgagee under Sec.  202.9, or a governmental or 
similar institution under Sec.  202.10.
* * * * *
    3. In Sec.  202.3, revise paragraphs (a) introductory text and 
(a)(1) to read as follows:


Sec.  202.3  Approval status for lenders and mortgagees.

    (a) Initial approval. A lender or mortgagee may be approved for 
participation in the Title I or Title II programs upon filing a request 
for approval on a form prescribed by the Secretary and signed by the 
applicant. The approval form shall be accompanied by such documentation 
as may be prescribed by the Secretary.
    (1) Approval is signified by:
    (i) The Secretary's agreement that the lender or mortgagee is 
considered approved under the Title I or Title II programs, except as 
otherwise ordered by the Mortgagee Review Board or an officer or 
subdivision of the Department to which the Mortgagee Review Board has 
delegated its power, unless the lender or mortgagee voluntarily 
relinquishes its approval;
    (ii) Consent by the lender or mortgagee to comply at all times with 
the general approval requirements of Sec.  202.5, and with additional 
requirements governing the particular class of lender or mortgagee for 
which it was approved as described under subpart B at Sec. Sec.  202.6 
through 202.10; and
    (iii) Under the Title I program, the issuance of a Contract of 
Insurance constitutes an agreement between the Secretary and the lender 
and which governs participation in the Title I program.
* * * * *
    4. Revise Sec.  202.5 to read as follows:


Sec.  202.5  General approval standards.

    To be approved for participation in the Title I or Title II 
programs, and to maintain approval, a lender or mortgagee shall meet 
and continue to meet the general requirements of paragraphs (a) through 
(n) of this section (except as provided in Sec.  202.10(b)) and the 
requirements for one of the eligible

[[Page 62529]]

classes of lenders or mortgagees in Sec. Sec.  202.6 through 202.10.
    (a) Business form. (1) The lender or mortgagee shall be a 
corporation or other chartered institution, a permanent organization 
having succession, or a partnership. A partnership must meet the 
requirements of paragraphs (a)(1)(i) through (iv) of this section.
    (i) Each general partner must be a corporation or other chartered 
institution consisting of two or more persons.
    (ii) One general partner must be designated as the managing general 
partner. The managing general partner shall comply with the 
requirements of paragraphs (b), (c), and (f) of this section. The 
managing general partner must have as its principal activity the 
management of one or more partnerships, all of which are mortgage 
lenders or property improvement or manufactured home lenders, and must 
have exclusive authority to deal directly with the Secretary on behalf 
of each partnership. Newly admitted partners must agree to the 
management of the partnership by the designated managing general 
partner. If the managing general partner withdraws or is removed from 
the partnership for any reason, a new managing general partner shall be 
substituted, and the Secretary shall be immediately notified of the 
substitution.
    (iii) The partnership agreement shall specify that the partnership 
shall exist for the minimum term of years required by the Secretary. 
All insured mortgages and Title I loans held by the partnership shall 
be transferred to a lender or mortgagee approved under this part prior 
to the termination of the partnership. The partnership shall be 
specifically authorized to continue its existence if a partner 
withdraws.
    (iv) The Secretary must be notified immediately of any amendments 
to the partnership agreement that would affect the partnership's 
actions under the Title I or Title II programs.
    (2) Use of business name. The lender or mortgagee must use its HUD-
registered business name in all advertisements and promotional 
materials related to FHA programs. HUD-registered business names 
include any alias or ``doing business as'' (DBA) on file with FHA. The 
lender or mortgagee must keep copies of all print and electronic 
advertisements and promotional materials for a period of 2 years from 
the date that the materials are circulated or used to advertise.
    (3) Non-FHA-approved entities. A lender or mortgagee that accepts a 
loan application by a non-FHA-approved entity must determine that the 
non-FHA-approved entity is not subject to the sanctions or 
administrative actions listed in paragraph (j) of this section, and 
that the entity's legal name and Tax ID number are included in the FHA 
loan origination system record for the subject loan. The loan to be 
insured by FHA must be underwritten by and closed in the name of the 
FHA-approved lender or mortgagee.
    (b) Employees. The lender or mortgagee shall employ competent 
personnel trained to perform their assigned responsibilities in 
consumer or mortgage lending, including origination, servicing, and 
collection activities, and shall maintain adequate staff and facilities 
to originate and service mortgages or Title I loans, in accordance with 
applicable regulations, to the extent the mortgagee or lender engages 
in such activities.
    (c) Officers. All employees who will sign applications for mortgage 
insurance on behalf of the mortgagee or report loans for insurance 
shall be corporate officers or shall otherwise be authorized to bind 
the lender or mortgagee in the origination transaction. The lender or 
mortgagee shall ensure that an authorized person reports all 
originations, purchases, and sales of Title I loans or Title II 
mortgages to the Secretary for the purpose of obtaining or transferring 
insurance coverage.
    (d) Escrows. The lender or mortgagee shall not use escrow funds for 
any purpose other than that for which they were received. It shall 
segregate escrow commitment deposits, work completion deposits, and all 
periodic payments received under loans or insured mortgages on account 
of ground rents, taxes, assessments, and insurance charges or premiums, 
and shall deposit such funds with one or more financial institutions in 
a special account or accounts that are fully insured by the Federal 
Deposit Insurance Corporation or the National Credit Union 
Administration, except as otherwise provided in writing by the 
Secretary.
    (e) Servicing. A lender shall service or arrange for servicing of 
the loan in accordance with the requirements of 24 CFR part 201. A 
mortgagee shall service or arrange for servicing of the mortgage in 
accordance with the servicing responsibilities contained in subpart C 
of 24 CFR part 203 and in 24 CFR part 207, with all other applicable 
regulations contained in this title, and with such additional 
conditions and requirements as the Secretary may impose.
    (f) Business changes. The lender or mortgagee shall provide prompt 
notification to the Secretary, in such form as prescribed by the 
Secretary, of:
    (1) All changes in its legal structure, including, but not limited 
to, mergers, terminations, name, location, control of ownership, and 
character of business; and
    (2) Any officer, partner, director, principal, manager, supervisor, 
loan processor, loan underwriter, loan originator, or employee of the 
lender or mortgagee, or the lender or mortgagee itself, that is subject 
to one or more of the sanctions in paragraph (j) of this section.
    (g) Financial statements. The lender or mortgagee shall furnish to 
the Secretary a copy of its annual audited financial statement within 
90 days of its fiscal year end, furnish such other information as the 
Secretary may request, and submit to an examination of that portion of 
its records that relates to its Title I and/or Title II program 
activities.
    (h) Quality control plan. The lender or mortgagee shall implement a 
written quality control plan, acceptable to the Secretary, that assures 
compliance with the regulations and other issuances of the Secretary 
regarding loan or mortgage origination and servicing.
    (i) Fees. The lender or mortgagee, unless approved under Sec.  
202.10, shall pay an application fee and annual fees, including 
additional fees for each branch office authorized to originate Title I 
loans or submit applications for mortgage insurance, at such times and 
in such amounts as the Secretary may require. The Secretary may 
identify additional classes or groups of lenders or mortgagees that may 
be exempt from one or more of these fees.
    (j) Ineligibility. For a lender or mortgagee to be eligible for FHA 
approval, neither the lender or mortgagee, nor any officer, partner, 
director, principal, manager, supervisor, loan processor, loan 
underwriter, loan originator, or employee of the lender or mortgagee 
shall:
    (1) Be suspended, debarred, under a limited denial of participation 
(LDP), or otherwise restricted under 2 CFR part 2424 or 24 CFR part 25, 
or under similar procedures of any other Federal agency;
    (2) Be indicted for, or have been convicted of, an offense that 
reflects adversely upon the integrity, competency, or fitness to meet 
the responsibilities of the lender or mortgagee to participate in the 
Title I or Title II programs;
    (3) Be subject to unresolved findings as a result of HUD or other 
governmental audit, investigation, or review;
    (4) Be engaged in business practices that do not conform to 
generally accepted practices of prudent

[[Page 62530]]

mortgagees or that demonstrate irresponsibility;
    (5) Be convicted of, or have pled guilty or nolo contendre to, a 
felony related to participation in the real estate or mortgage loan 
industry:
    (i) During the 7-year period preceding the date of the application 
for licensing and registration; or
    (ii) At any time preceding such date of application, if such felony 
involved an act of fraud, dishonesty, or a breach of trust or money 
laundering;
    (6) In violation of provisions of the Secure and Fair Enforcement 
(SAFE) Mortgage Licensing Act of 2008 (12.U.S.C. 5101 et seq.) or any 
applicable provision of State law; or
    (7) In violation of any other requirement established by the 
Secretary.
    (k) Branch offices. A lender may, upon approval by the Secretary, 
maintain branch offices for the origination of Title I loans. A branch 
office of a mortgagee must be registered with the Department in order 
to originate mortgages or submit applications for mortgage insurance. 
The lender or mortgagee shall remain fully responsible to the Secretary 
for the actions of its branch offices.
    (l) Conflict of interest and responsibility. (1) A mortgagee may 
not pay anything of value, directly or indirectly, in connection with 
any insured mortgage transaction or transactions to any person or 
entity if such person or entity has received any other consideration 
from the mortgagor, seller, builder, or any other person for services 
related to such transactions or related to the purchase or sale of the 
mortgaged property, except that consideration, approved by the 
Secretary, may be paid for services actually performed. The mortgagee 
shall not pay a referral fee to any person or organization.
    (2) Responsibility. FHA-approved lenders and mortgagees assume 
responsibility for ensuring that the lending entities with which they 
do business (e.g., loan correspondents, mortgage brokers) are not 
ineligible (as provided in paragraph (j) of this section) to 
participate in the origination of FHA-insured loans.
    (m) Reports. Each lender and mortgagee must submit a yearly 
verification report on a form prescribed by the Secretary. Upon 
application for approval and with each annual recertification, each 
lender and mortgagee must submit a certification that it has not been 
refused a license and has not been sanctioned by any State or States in 
which it will originate insured mortgages or Title I loans. In 
addition, each mortgagee shall file the following:
    (1) An audited or unaudited financial statement, within 30 days of 
the end of each fiscal quarter in which the mortgagee experiences an 
operating loss of 20 percent of its net worth, and until the mortgagee 
demonstrates an operating profit for 2 consecutive quarters or until 
the next recertification, whichever is the longer period; and
    (2) A statement of net worth within 30 days of the commencement of 
voluntary or involuntary bankruptcy, conservatorship, receivership, or 
any transfer of control to a Federal or State supervisory agency.
    (n) Net worth. (1) Effective on [date 1 year after the effective 
date of final rule], each supervised or nonsupervised lender or 
mortgagee approved under Sec.  202.6 and Sec.  202.7 and each investing 
lender and mortgagee approved under Sec.  202.9 shall have a net worth 
of not less than $1,000,000, of which no less than 20 percent must be 
liquid assets consisting of cash or its equivalent acceptable to the 
Secretary.
    (2) Effective on [date 3 years after the effective date of final 
rule], each supervised or nonsupervised lender or mortgagee approved 
under Sec.  202.6 and Sec.  202.7 and each investing lender and 
mortgagee approved under Sec.  202.9 shall have a net worth of not less 
than $2,500,000, of which no less than 20 percent must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary.
    5. Revise Sec.  202.6 to read as follows:


Sec.  202.6  Supervised lenders and mortgagees.

    (a) Definition. A supervised lender or mortgagee is a financial 
institution that is a member of the Federal Reserve System or an 
institution whose accounts are insured by the Federal Deposit Insurance 
Corporation or the National Credit Union Administration. A supervised 
mortgagee may submit applications for mortgage insurance. A supervised 
lender or mortgagee may originate, purchase, hold, service or sell 
loans or insure mortgages, respectively.
    (b) Additional requirements. In addition to the general approval 
requirements in Sec.  202.5, a supervised lender or mortgagee shall 
meet the following requirements:
    (1) Net worth. The net worth requirements appear in Sec.  202.5(n).
    (2) Notification. A lender or mortgagee shall promptly notify the 
Secretary in the event of termination of its supervision by its 
supervising agency.
    (3) Fidelity bond. A Title II mortgagee shall have fidelity bond 
coverage and errors and omissions insurance acceptable to the Secretary 
and in an amount required by the Secretary, or have alternative 
insurance coverage, approved by the Secretary, that assures the 
faithful performance of the responsibilities of the mortgagee.
    6. Revise Sec.  202.8 to read as follows:


Sec.  202.8  Loan correspondents.

    (a) Definitions.
    Loan correspondent. A loan correspondent lender does not hold a 
Title I Contract of Insurance and may not purchase or hold loans but 
may be approved to originate Title I direct loans for sale or transfer 
to a sponsor or sponsors, as defined in this section, which holds a 
valid Title I Contract of Insurance and is not under suspension, 
subject to the sponsor determining that the loan correspondent has met 
the eligibility criteria of paragraph (b) this section.
    Sponsor. (1) With respect to Title I programs, a sponsor is a 
lender that holds a valid Title I Contract of Insurance and meets the 
net worth requirement for the class of lender to which it belongs.
    (2) With respect to Title II programs, a sponsor is a mortgagee 
that holds a valid origination approval agreement, is approved to 
participate in the Direct Endorsement program, and meets the net worth 
requirement for the class of mortgagee to which it belongs.
    (b) Eligibility to originate FHA insured loans. A loan 
correspondent may originate FHA insured loans provided:
    (1) The loan correspondent is working with and through an FHA-
approved lender or mortgagee; and
    (2) The loan correspondent or an officer, partner, director, 
principal, manager, supervisor, loan processor, or employee of the loan 
correspondent has not been subject to the sanctions or administrative 
actions listed in Sec.  202.5, as determined and verified by the FHA-
approved lender or mortgagee.
    7. Revise Sec.  202.11 to read as follows:


Sec.  202.11  Title I.

    (a) Types of administrative action. In addition to termination of 
the Contract of Insurance, certain sanctions may be imposed under the 
Title I program. The administrative actions that may be applied are set 
forth in 24 CFR part 25. Civil money penalties may be imposed against 
Title I lenders and mortgagees pursuant to 24 CFR part 30.
    (b) Grounds for action. Administrative actions shall be based upon 
both the grounds set forth in 24 CFR part 25 and as follows:
    (1) Failure to properly supervise and monitor dealers under the 
provisions of part 201 of this title;

[[Page 62531]]

    (2) Exhaustion of the general insurance reserve established under 
part 201 of this title;
    (3) Maintenance of a Title I claims/loan ratio representing an 
unacceptable risk to the Department; or
    (4) Transfer of a Title I loan to a party that does not have a 
valid Title I Contract of Insurance.
    8. Revise Sec.  202.12(a)(1) to read as follows:


Sec.  202.12  Title II.

    (a) Tiered pricing. (1) General requirements. (i) Prohibition 
against excess variation. The customary lending practices of a 
mortgagee for its single family insured mortgages shall not provide for 
a variation in mortgage charge rates that exceeds two percentage 
points. A variation is determined as provided in paragraph (a)(6) of 
this section.
    (ii) Customary lending practices. The customary lending practices 
of a mortgagee include all single family insured mortgages originated 
by the mortgagee, including those funded by the mortgagee or purchased 
from the originator if requirements of the mortgagee have the effect of 
leading to violation of this section by the originator.
    (iii) Basis for permissible variations. Any variations in the 
mortgage charge rate up to two percentage points under the mortgagee's 
customary lending practices must be based on actual variations in fees 
or cost to the mortgagee to make the mortgage loan, which shall be 
determined after accounting for the value of servicing rights generated 
by making the loan and other income to the mortgagee related to the 
loan. Fees or costs must be fully documented for each specific loan.
* * * * *

    Dated: November 12, 2009.
David H. Stevens,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. E9-28335 Filed 11-27-09; 8:45 am]
BILLING CODE 4210-67-P