[Federal Register Volume 75, Number 75 (Tuesday, April 20, 2010)]
[Rules and Regulations]
[Pages 20718-20735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-8837]



[[Page 20717]]

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Part III





Department of Housing and Urban Development





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24 CFR Part 202



Federal Housing Administration: Continuation of FHA Reform; 
Strengthening Risk Management Through Responsible FHA-Approved Lenders; 
Final Rule

  Federal Register / Vol. 75, No. 75 / Tuesday, April 20, 2010 / Rules 
and Regulations  

[[Page 20718]]


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Department of Housing AND Urban Development

24 CFR Part 202

[Docket No. FR 5356-F-02]
RIN 2502-AI81


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

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

ACTION: Final rule with request for comments.

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SUMMARY: This final rule adopts changes pertaining to the approval of 
mortgage lenders by the Federal Housing Administration (FHA) that are 
designed to strengthen FHA by improving its management of risk. This 
final rule increases the net worth requirement for FHA-approved 
mortgagees. The increase, the first since 1993, is adopted to ensure 
that FHA-approved mortgagees are sufficiently capitalized for the 
financial transactions occurring, and concomitant risks present, in 
today's economy. This final rule also provides for elimination of the 
FHA approval process for loan correspondents. Loan correspondents will 
no longer be approved participants in FHA programs. Loan 
correspondents, however, will continue to have the opportunity to 
participate in FHA programs as third-party originators (TPOs) through 
sponsorship by FHA-approved mortgagees, as is currently the case, or 
through application to be approved as an FHA-approved mortgagee. In 
eliminating FHA's approval of loan correspondents, FHA-approved 
mortgagees assume full responsibility to ensure that a sponsored loan 
correspondent adheres to FHA's loan origination and processing 
requirements. Finally, this final rule updates FHA's regulations to 
incorporate criteria specified in the Helping Families Save Their Homes 
Act of 2009 (HFSH Act) designed to ensure that only entities of 
integrity are involved in the origination of FHA-insured loans.
    HUD also takes the opportunity afforded by this final rule to 
solicit comment on whether to adopt additional net worth requirements 
for FHA-approved mortgagees that originate multifamily mortgages of $25 
million or more.

DATES: Effective Date: May 20, 2010.
    Comment Due Date: As provided in section V. of the preamble, HUD is 
soliciting comment on whether to adopt additional net worth 
requirements for FHA-approved mortgagees that originate multifamily 
mortgages of $25 million or more. Comments on this issue are due on or 
before May 20, 2010. This is the only issue for which HUD solicits 
comment.

ADDRESSES: Interested persons are invited to submit comments in 
response to issue identified in section V of the preamble 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 
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 
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 
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 Proposed Rule

    In September 2009, FHA announced plans to implement a set of policy 
changes designed to enhance FHA's risk management functions. The 
announcement preceded completion of an independent actuarial study to 
be submitted to Congress and which was expected to show FHA's capital 
reserve ratio dropping below the congressionally mandated threshold of 
2 percent.\1\ The changes announced in September 2009 were prompted by 
recognition of the need to put in place measures that would immediately 
commence strengthening FHA's reserves and, for the long term, better 
manage risk. The changes that FHA announced in September 2009 included 
the policy changes submitted for public comment in HUD's proposed rule 
published in the Federal Register on November 30, 2009 (74 FR 62521).
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    \1\ HUD released its independent actuarial study on November 13, 
2009. The study reported that FHA sustained significant losses from 
loans insured prior to 2009, and that FHA's capital reserve ratio 
had fallen below the congressionally mandated level of 2 percent. 
The capital reserve ratio generally reflects the reserves available 
(after paying expected claims and expenses) as a percentage of the 
current portfolio, to address unexpected losses. The report can be 
found at: http://www.hud.gov/offices/hsg/fhafy09annualmanagementreport.pdf.
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    HUD proposed the following policy changes in its November 30, 2009, 
proposed rule:
    1. Increasing the Net Worth Requirements for FHA-Approved 
Mortgagees. HUD proposed to increase the net worth requirements for 
current FHA-approved mortgagees, including investing mortgagees, and 
applicants seeking FHA approval as mortgagees from $250,000 to $2.5 
million over a period of 3 years. The proposed rule provided that 
within one year of the

[[Page 20719]]

effective date of the final rule, which would follow the November 30, 
2009, proposed rule, 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.\2\ 
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.
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    \2\ Supervised mortgagees are financial institutions that are 
members of the Federal Reserve System, and financial institutions 
whose accounts are insured by the Federal Deposit Insurance 
Corporation (FDIC) or the National Credit Union Administration 
(NCUA). Examples of supervised mortgagees are banks, savings 
associations, and credit unions. Nonsupervised mortgagees are non-
depository financial entities that have as their principal activity 
the lending or investment of funds in real estate mortgages. 
Investing mortgagees are organizations, including charitable or not-
for-profit institutions or pension funds, which are not approved as 
another type of institution and that invest funds under their own 
control. (See definitions of these terms at 24 CFR 202.6(a), 
202.7(a), and 202.9(a), respectively.)
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    In proposing to increase the net worth requirements of approved 
mortgagees, the November 30, 2009, proposed rule noted that the net 
worth requirements of FHA-approved mortgagees had not been increased 
since 1993. HUD advised that the increases were not only necessary 
adjustments for inflation, but would help ensure that FHA-approved 
mortgage lenders, including investing mortgagees, are sufficiently 
capitalized to meet the potential needs associated with the financial 
services they provide.
    2. Limiting Approval to Mortgagees. In the November 30, 2009, rule, 
HUD proposed to limit FHA's approval only to mortgagees that underwrite 
loans and can perform any origination and/or servicing function and can 
also own FHA-insured loans. Loan correspondents, in contrast to 
mortgagees, perform any origination function except underwriting, and 
cannot service or own FHA-insured mortgage loans. HUD did not propose 
to alter the approval process of investing mortgagees and governmental 
institutions, as addressed in 24 CFR 202.9 and 202.10.
    In proposing to limit FHA's approval to the mortgagee charged with 
underwriting, servicing, or owning a loan, HUD advised that it is the 
mortgage lender with the greatest control over the mortgage loan that 
should be subject to FHA's rigorous lender approval and oversight 
processes, and bear the greatest degree of responsibility and liability 
for the mortgage loan obtained by the mortgage borrower and insured by 
FHA. In the November 30, 2009, proposed rule, HUD advised that loan 
correspondents would continue to have the opportunity to participate in 
the origination of FHA mortgage loans as third-party originators (TPOs) 
through association with an FHA-approved mortgagee, as is currently the 
arrangement, but TPOs would no longer be subject to the FHA lender 
approval process. HUD also advised that since HUD would no longer be 
approving loan correspondents, and in acknowledgement and anticipation 
that loan correspondents would continue to be involved in the 
origination of FHA-insured mortgage loans through sponsorship, FHA-
approved mortgagees would assume full responsibility to ensure that 
their sponsored TPOs adhere to FHA origination and processing 
requirements.
    Responsibility for actions of TPOs is not a new responsibility for 
FHA-approved mortgagees. HUD's current regulations in 24 CFR 
202.8(b)(7) provide that: ``Each sponsor shall be responsible to the 
Secretary for the actions of its loan correspondent lenders or 
mortgagees in originating loans or mortgages, unless applicable law or 
regulation requires specific knowledge on the part of the party to be 
held responsible.'' The present regulations in 24 CFR 202.8(b)(6) 
provide that: ``Each sponsor must obtain approval of its loan 
correspondent lenders or mortgagees from the Secretary.'' It is the 
obligation to obtain approval of loan correspondents/TPOs from FHA 
that, under this final rule, mortgagees will no longer have to meet. 
However, in being relieved of the responsibility to obtain prior 
approval from FHA of the TPOs that it would like to sponsor, the 
mortgagee assumes responsibility that sponsored TPOs meet FHA's 
requirements regarding loan origination and processing as found in 
relevant statutes, regulations, HUD handbooks, and mortgagee letters. 
Failure of the TPO to comply with these requirements may result in FHA 
seeking sanctions against the sponsoring FHA-approved mortgagee.
    The proposed rule provided that, upon promulgation of the final 
rule, entities that are already approved by FHA as loan correspondents 
would not be permitted to renew their loan correspondent status or 
automatically convert their approval to mortgagee, and only FHA-
approved mortgagees would be allowed to request FHA case numbers. 
However, a loan correspondent would be eligible to apply to FHA to 
obtain approval as a mortgagee.
    3. Ineligibility to Participate in Origination of FHA-Insured 
Loans. The November 30, 2009, rule proposed to codify criteria 
specified in section 203 of the HFSH Act that precludes any lending 
entity not approved or authorized by the Secretary from participating 
in FHA programs, and also prohibits participation by an entity if the 
entity is currently: Suspended, debarred, or under limited denial of 
participation; 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; subject to unresolved findings of a HUD investigation, or 
engaged in business practices that do not conform to generally accepted 
practices of prudent mortgagees or that demonstrate irresponsibility; 
convicted of, or has pled guilty or nolo contendere to, a felony 
related to participation in the real estate or mortgage loan industry; 
in violation of the Secure and Fair Enforcement (SAFE) Mortgage 
Licensing Act (Title V of Division A of Public Law 110-289, approved 
July 30, 2008) (SAFE Act); or in violation of any other requirement 
established by the Secretary.
    Implementation of the criteria in section 203 of the HFSH Act did 
not require rulemaking, and the November 30, 2009, proposed rule noted 
that the statutory restrictions were in effect upon enactment of the 
HFSH Act.\3\
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    \3\ 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.
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    4. Use of HUD Registered Business Name and Business Changes. The 
November 30, 2009, rule also proposed to codify the statutory 
requirement presented in section 203 of the HFSH Act that 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, the November 30, 2009, rule also proposed 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. 
This Mortgagee Letter directed FHA-approved mortgagees to maintain 
copies

[[Page 20720]]

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.
    The November 30, 2009, rule also proposed 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, the 
November 30, 2009, rule noted that HUD was also 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.
    The amendments proposed by the November 30, 2009, proposed rule are 
discussed in more detail in the November 30, 2009, Federal Register at 
74 FR 62522 through 62528.

II. This Final Rule--Policies Adopted

    In consideration of issues raised by the commenters and HUD's own 
further consideration of issues related to this final rule, HUD is 
making the following changes at the final rule stage:

Net Worth Requirements for Applicants for Approval To Participate in 
FHA Single Family or Multifamily Programs and for FHA-Approved 
Mortgagees: 2010 to 2011

    The following net worth requirements are effective on May 20, 2010, 
for new applicants for FHA approval to participate in FHA single-family 
or multifamily programs, and effective on May 20, 2011, for all 
approved supervised and nonsupervised lenders and mortgagees, and all 
approved investing lenders and mortgagees with FHA approval as of May 
20, 2010:
     Applicants for FHA Approval and Existing Non-Small 
Business Approved Lenders and Mortgagees. An applicant for FHA approval 
or an approved lender or mortgagee that exceeds the size standards for 
its industry classification as established by the Small Business 
Administration (SBA) at 13 CFR 121.201, Sector 52 (Finance and 
Insurance), Subsector 522 (Credit Intermediation and Related 
Activities) 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.
     Existing Small Business Approved Lenders and Mortgagees. 
An approved lender or mortgagee that meets the SBA size standards for 
its industry classification shall have a net worth of not less than 
$500,000, of which no less than 20 percent must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary. The 
net worth requirements for small business lenders and mortgagees remain 
applicable as long as the mortgagee continues to meet the SBA size 
standard for a small business. If, based on the audited financial 
statement prepared at the end of its fiscal year and provided to HUD at 
the commencement of the new fiscal year, a small business lender or 
mortgagee no longer meets the SBA size standard of a small business, 
the mortgagee shall meet the net worth requirements for a non-small 
business mortgagee by the last day of the fiscal year in which the 
audited financial statements were submitted.

Net Worth Requirements for Applicants for Approval To Participate in 
FHA Single Family or Multifamily Programs and FHA-Approved Mortgagees: 
2013 and After

    The following net worth requirements are effective on May 20, 2013, 
for new applicants for FHA approval to participate in FHA single-family 
or multifamily programs, for all approved supervised and nonsupervised 
lenders and mortgagees, and for all FHA-approved investing lenders and 
mortgagees:
     Single Family Mortgagees. Irrespective of size, all FHA-
approved mortgagees and applicants for approval to participate in FHA 
single family programs shall have a net worth of $1 million, plus an 
additional net worth of one percent of the total volume in excess of 
$25 million of FHA single family insured mortgages originated, 
underwritten, purchased, or serviced during the prior fiscal year, up 
to a maximum required net worth of $2.5 million. No less than 20 
percent of the mortgagee's required net worth must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary.
     Multifamily Mortgagees. Irrespective of size, all existing 
FHA-approved mortgagees and applicants for approval to participate in 
FHA multifamily programs shall have a minimum net worth of $1 million. 
For those multifamily mortgagees that also engage in multifamily 
mortgage servicing, an additional net worth of one percent of the total 
volume in excess of $25 million of FHA multifamily mortgages 
originated, purchased, or serviced during the prior fiscal year, up to 
a maximum required net worth of $2.5 million, is required. For 
multifamily mortgagees that do not perform multifamily mortgage 
servicing, an additional net worth of one half of one percent of the 
total volume in excess of $25 million of FHA multifamily mortgages 
originated during the prior fiscal year, up to a maximum required net 
worth of $2.5 million, is required. No less than 20 percent of the 
mortgagee's required net worth must be liquid assets consisting of cash 
or its equivalent acceptable to the Secretary.
     Single Family and Multifamily Mortgagees. Irrespective of 
size, all existing FHA-approved mortgagees and applicants for approval 
to participate in both FHA single family and multifamily programs must 
meet the net worth requirements for a single family mortgagee. 
Therefore, if a mortgagee is a participant in both the multifamily and 
single family programs, it is required to meet the greater net worth 
requirements for single family mortgagees.

Elimination of FHA Approval of Loan Correspondents

    The final rule limits the FHA approval process to mortgagees, but 
provides that all loan correspondents approved as of the date of the 
effective date of this final rule will maintain their approval through 
December 31, 2010. Commencing 30 days following publication of this 
rule, FHA will no longer approve new applicants for approval as loan 
correspondents.

Processing and Closing a Loan

    The final rule clarifies that, as a result of HUD's elimination of 
the FHA approval process for loan correspondents, the requirements 
regarding Principal-Authorized Agent relationships will also change. 
Mortgage loans originated through Principal-Authorized Agent 
relationships will be permitted to close in either party's name. 
However, to participate in such relationships, both the Principal and 
Authorized Agent must be approved as Direct Endorsement lenders under 
24 CFR 203.3. Further, for mortgage loans originated under the 
relationship, the Principal must originate and the Authorized Agent 
must underwrite, and their actions must be recorded as such in FHA 
Connection (FHA's Computer Home Underwriting Mortgage System).

Nonsubstantive Technical Changes

    In addition, HUD has taken the opportunity afforded by this final 
rule to make several nonsubstantive changes to the proposed rule for 
purposes of clarity. For example, HUD has removed paragraph (c) of the 
definition of ``Lender or title I lender'' at Sec.  202.2 to remove a 
reference to loan correspondents.

[[Page 20721]]

III. Two Issues Under Consideration

    As discussed in more detail later in this preamble, HUD is 
reviewing two issues for further consideration, and taking public 
comment on one of the issues.
    First, HUD will further consider the prohibition on a TPO closing a 
loan in its own name. This final rule provides, as did the proposed 
rule, that a TPO may not close a loan in its name, and HUD is not 
considering withdrawing this prohibition in this final rule. However, 
HUD will further examine this issue. Until and unless HUD announces a 
change to this prohibition, the prohibition for currently FHA-approved 
loan correspondents (that subsequently will become TPOs) closing any 
FHA-insured mortgages in their own names will be applicable commencing 
January 1, 2011. Currently FHA-approved loan correspondents may 
continue to close FHA-insured mortgages in their own name through 
December 31, 2010.
    Second, HUD is considering requiring FHA-approved mortgagees that 
originate multifamily mortgages of $25 million or more to retain as 
additional net worth 50 basis points (0.5%) of the fee income resulting 
from such loans, in addition to their required net worth as set forth 
in this rule, up to a maximum of $5 million. This provision is intended 
to ensure sufficient mortgagee capitalization to compensate for the 
increased risk posed by such high cost projects. HUD is specifically 
taking public comment on this issue for a period of 30 days, and asks 
commenters to follow the public comment instructions in the ADDRESSES 
section of this preamble, above. This is the only issue for which HUD 
solicits comment.

IV. Discussion of Public Comments

    By the close of the public comment period on the November 30, 2009, 
proposed rule, on December 30, 2009, HUD had received 207 public 
comments. Comments were received from a variety of industry 
participants, including large direct endorsement FHA lenders, FHA loan 
correspondents, trade associations representing participants in the 
mortgage industry, and other interested parties such as law firms, 
certified public accountants, and individuals. In addition, the Office 
of Advocacy, of SBA, commented on the discussion of its impact on small 
businesses. All public comments can be found in the preamble to the 
rule, at http://www.regulations.gov.

A. The Comments, Generally

    The majority of the comments supported the goals of the November 
30, 2009, rule, but differed with or opposed HUD's proposed methods of 
implementation of the rule. For instance, many commenters supported the 
elimination of loan correspondent approval but expressed concerns about 
the proposed means of implementing this provision and its possible 
impact on loan origination activities, including concerns that 
borrowers would be affected by the absence of FHA approval and 
oversight of loan correspondents. Similarly, commenters generally 
supported FHA's intention to increase net worth requirements for 
mortgagees, but were not in agreement with the level to which HUD 
proposed to increase these requirements, or the timing of the increase. 
Other commenters sought postponement of any changes to lender/loan 
correspondent requirements until the housing market recovered. They 
stated this was not the time for HUD to make such ``sweeping'' changes 
to its relationships with the industry. Other commenters requested 
changes to policies that were not proposed in the November 30, 2009, 
proposed rule, such as changes to down payment requirements, yield 
spread premiums, and the Home Valuation Code of Conduct. These changes 
were not addressed in the November 30, 2009, proposed rule and are 
therefore outside the scope of this rulemaking.

B. Specific Issues Raised by Commenters

    The following presents the key issues raised by the public comments 
and HUD's response to these issues.
Timing of FHA's Policy Changes
    Comment: Commenters stated that this rule, combined with the new 
Real Estate Settlement Procedures Act (RESPA) disclosures, will result 
in the demise of the mortgage lending industry, other than big banks, 
and, by favoring large financial institutions, will limit the recovery 
of the housing market through the growth engine of small business. 
Commenters stated that changes to the current FHA system will further 
burden the weak housing market by adding more people to the ranks of 
the unemployed and risking foreclosure of their homes. Commenters 
stated that the current market is becoming stable and such sweeping 
action is unnecessary.
    HUD Response: HUD recognizes that the housing market remains in 
stress and that the FHA programs are a key element in sustaining 
economic recovery. However, the downturn in the housing market has not 
been without consequences to FHA. Consistent with its proactive role in 
previous economic crises, FHA once again positioned itself in this 
current crisis to quickly respond to the needs of homeowners in 
distress and qualified homebuyers without access to credit. As a 
result, the volume of FHA insurance increased as private sources of 
mortgage finance retreated from the market. The pace of growth in FHA's 
portfolio over such a short period of time, combined with continued 
housing price declines, defaults by homeowners, and home foreclosures 
has had an adverse impact on FHA, as evidenced by the reduction in 
FHA's capital reserve ratio reported in the independent actuarial study 
recently submitted to Congress.\4\ FHA cannot continue to be a 
stabilizing force in the mortgage market if FHA's own condition is not 
stable and strong. Although the timing of implementation of these 
measures may not be ideal, they cannot and should not be delayed. 
Replenishing FHA's capital reserves as quickly as possible is essential 
to ensuring that FHA remains available to respond to needs in the 
housing market. Additionally, as discussed below in HUD's response to 
specific comments raised about net worth requirements and the 
elimination of loan correspondents, the changes adopted by this final 
rule are not as sweeping as some commenters declare.
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    \4\ See footnote 1.
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FHA's Role in the Housing Market
    Comment: Commenters stated that the changes proposed to be 
implemented represent a major redefinition of the way FHA monitors and 
sources its business. Commenters stated that the policy changes would 
reduce the competency and selectivity of FHA originators precisely at 
such a time when it is necessary to improve the quality of loan 
originators. Commenters stated that FHA's proposals are at odds with 
other of the Administration's proposals pertaining to the financial/
housing markets, which would increase, not decrease, regulatory 
oversight. Commenters stated that a reduction of regulatory oversight 
will make FHA-insured loans vulnerable to involvement by entities that 
do not have the experience and competency that is traditionally found 
in FHA-insured mortgage loan participants, experience and competency 
required by FHA regulations, which will create more problems for FHA 
and borrowers of FHA-insured loans. Commenters stated that by favoring 
the larger mortgage lenders, FHA's changes in policies will result in 
less competition, less choice, and harm to consumers.

[[Page 20722]]

    HUD Response: Through the policy changes adopted in this final 
rule, FHA is not abandoning its traditional role in the housing market. 
The changes adopted are designed to ensure that FHA remains financially 
stable and strong, and that, as a result of the availability of FHA 
insurance, mortgage lenders are able to offer more affordable mortgage 
loan terms as they always have through FHA mortgage insurance programs.
    FHA is not retreating from regulatory oversight. As further 
discussed below, the focus of FHA-approval on mortgage lenders that 
underwrite and own mortgage loans reflects recognition that these are 
the entities that control the decision to extend a mortgage loan to a 
borrower, including the assessment of the mortgage borrower's ability 
to repay the mortgage loan, and therefore, should be the entities 
subject to FHA's regulatory oversight and requirements for sufficient 
capitalization. It is HUD's position that the policy changes 
implemented by this rule promote better regulatory oversight by 
focusing FHA's resources on oversight of the entities with the greatest 
degree of control over an FHA-insured mortgage loan. Furthermore, the 
SAFE Act and other recent initiatives have provided a uniform and 
reliable method of tracking loan originator licensing and compliance. 
As noted earlier in this preamble and further discussed below, FHA-
approved mortgagees now have, and have always had, responsibility and 
liability for the performance of sponsored loan correspondents. The 
final rule merely shifts to a sponsoring mortgagee the threshold 
assessment of a loan correspondent's qualifications to participate in 
FHA-insured loan transactions as a component part of the eligibility of 
the mortgage loan for FHA insurance.
Increase in Net Worth Requirements
    Comment: The majority of those commenting on the proposed net worth 
increase expressed the view that $1 million was an acceptable level of 
required net worth for lenders, although some commenters requested a 
delay in the effective date of the increase beyond the one-year period 
proposed by HUD and until such time as it could be said that the 
economy had sufficiently recovered. Among those commenters supporting 
the increase to $1 million, the majority of them, however, stated that 
the total increase in required net worth, to a level of $2.5 million, 
was excessive. Commenters stated that a net worth of $2.5 million would 
favor only the largest financial institutions, and eliminate the 
possibility of smaller mortgage lenders being able to obtain approval 
as FHA-approved mortgagees. Commenters stated that the increase in net 
worth would only be passed on to the borrowers by mortgage lenders 
charging higher fees.
    Some commenters suggested that net worth requirements be increased 
by different amounts, ranging from $500,000 to tiered requirements 
based on origination or lending volume, or by a Consumer Price Index 
(CPI) indicator. Other commenters suggested that the proposed timeframe 
of 3 years in which to comply with this new requirement was 
unrealistic. Other commenters stated that there should be no need to 
align FHA with Fannie Mae and Freddie Mac, particularly given the 
serious financial problems of those government-sponsored enterprises. A 
few commenters noted that the net worth requirements imposed by Ginnie 
Mae have not been raised for some time, and that Ginnie Mae was 
allegedly in better financial condition than either Fannie Mae or 
Freddie Mac.
    Some commenters submitted that an increase in the net worth was not 
the appropriate solution to enhance mortgage lender responsibility and 
performance. Commenters stated that no correlation had been shown 
between higher net worth and mortgage lender performance. Other 
commenters advised that net worth for FHA-approved mortgagees is 
actually higher than the $250,000 cited by HUD, because HUD also 
requires lenders to maintain net worth of one percent of funded loans. 
Other commenters suggested alternatives to increasing net worth such as 
establishing borrower FICO[supreg] requirements (a credit scoring 
system developed by the Fair Isaac Corporation), instituting required 
mortgagee internal controls, assessing a lender's track record before 
raising net worth, increasing FHA educational requirements, stepping up 
enforcement, and increased prosecution of fraud cases. Commenters also 
expressed the view that mortgagees engaged solely in multifamily and 
Home Equity Conversion Mortgage (``HECM'' or reverse mortgage) lending 
should not be held to the same requirements as single family mortgagees 
due to the differences in business models and products. One commenter 
recommended grandfathering existing mortgagee's/servicer's multifamily 
portfolios and making the net worth increase prospective for new 
insurance commitments applied for after the effective date of the rule.
    A few commenters stated that credit unions face unique problems in 
meeting increased capital requirements, because credit unions do not 
have access to capital markets and can increase their net worth only by 
cutting expenses or increasing their net income.
    HUD Response: In proposing an increase in net worth requirements of 
FHA-approved mortgagees, HUD strives to balance two components of FHA's 
mission: (1) To operate with a high degree of public and fiscal 
accountability, and (2) to stabilize housing credit markets in times of 
economic disruption. HUD recognizes that raising net worth requirements 
in the midst of current economic conditions may present some challenges 
for businesses in this sector. While the Nation's economy, and the 
mortgage and real estate industries in particular, currently face 
difficulties, it is just these difficulties, and the potential risks 
that accompany them, that necessitate FHA taking prudent action to 
protect its insurance funds. An increase in net worth is essential to 
ensure the stability of FHA mortgagees, especially given how low the 
current net worth requirements are; net worth requirements that were 
established in 1993 and not raised since that date.
    Additionally, the increase in net worth requirements does not 
ignore the fact that small mortgage lenders with lower capital reserves 
can and do originate quality loans. The fact remains, however, that the 
net worth level required by FHA prior to this final rule was 
established almost 20 years ago, and that passage of time is 
significant. Ensuring appropriate capitalization of firms engaged in 
lending activities is a fundamental principle of sound business 
regulation. Although many of FHA's program participants engage in 
responsible and diligent lending practices, effective underwriting and 
quality control procedures alone do not guarantee the continued 
financial viability of a lending entity. Therefore, requiring 
appropriate capitalization of FHA program participants is an essential 
baseline by which FHA can measure the soundness of its program 
participants.
    With respect to commenters' statements about Ginnie Mae not having 
raised net worth requirements, Ginnie Mae raised its net worth 
requirements for new applicant single family issuers in 2008. 
Additionally, the higher net worth requirements imposed by Fannie Mae 
and Freddie Mac were not the business practices that were reported to 
contribute to their financial difficulties.
    While HUD's position remains that an increase in net worth 
requirements is essential, it has revised the proposed rule to mitigate 
the potential economic burden on current participants in the

[[Page 20723]]

FHA single family and multifamily mortgage insurance programs and avoid 
disrupting their continued ability to provide FHA mortgage insurance. 
Although new applicants for FHA approval that do not currently 
participate in the single family or multifamily programs would be 
required to comply with the new net worth requirements commencing on 
the effective date of this final rule, currently approved program 
participants would have one year from the effective date of the rule to 
comply with the net worth increase.
    As already noted in Section II of this preamble, in response to 
commenters' concerns and as a result of further consideration of the 
net worth proposal by HUD, this final rule provides FHA-approved 
mortgagees that meet SBA's standards for classification as a small 
business an even more gradual transition period to meet the new net 
worth requirements. While HUD believes that a net worth of $1 million 
is prudent and appropriate for mortgagees, the Department very much 
values its existing relationships with FHA-approved small business 
mortgagees and realizes that the one year time frame for compliance 
with the increase in required net worth may have proven prohibitive for 
some of these firms. In recognition of this reality, FHA has determined 
that a more gradual increase in the required net worth for small 
business mortgagees is appropriate. Unlike new applicants for FHA 
approval, these mortgagees already possess unique knowledge and 
competency with regard to FHA products and have demonstrated their 
responsibility and reliability in the exercise of FHA activities. 
Therefore, due to the mutually beneficial relationships that exist 
between FHA and these small business mortgagees, HUD believes it is 
appropriate to take measures to permit their continued participation in 
FHA programs, while simultaneously taking steps to appropriately manage 
FHA's counterparty risks.
    Additionally, as described in Section II of this preamble, this 
final rule recognizes the key distinctions between the single family 
and multifamily business models, and this final rule provides net worth 
requirements that HUD determined are appropriate for single family and 
multifamily mortgagees. As noted in Section III of this preamble, HUD 
is considering requiring FHA-approved mortgagees that process 
multifamily mortgages of $25 million or more to retain a portion of 
their fee income from such transactions as additional net worth, and to 
increase the maximum required net worth for these mortgage lenders. 
These mortgages present higher risk to the multifamily mortgagees, and 
consequently to FHA, and the higher net worth better protects both the 
mortgagees and FHA against such increased potential liability. HUD will 
take comments on this single issue for the next 30 days, as provided in 
Section V of this preamble.
    With respect to credit unions, HUD believes that the changes made 
at this final rule stage alleviate the concerns expressed by credit 
union commenters. Following the initial increase in required net worth 
within one year following the effective date of this final rule, 
mortgagees will be granted an additional 2 years (after the first-year 
increase) in which to accumulate the required incremental net worth 
based on volume in excess of $25 million of FHA single family insured 
mortgages originated, underwritten, purchased, and/or serviced during 
the prior fiscal year.
Elimination of FHA Approval of Loan Correspondents
    Comment: Some commenters opposed FHA elimination of loan 
correspondent approval. Commenters suggested that FHA continue to 
approve, set requirements for, and monitor loan correspondents. 
Commenters suggested that in addition to continuing loan correspondent 
approval, FHA should increase its approval requirements for loan 
correspondents as an alternate means of strengthening its risk 
management. Commenters raised concerns about administrative 
difficulties that would arise through elimination of loan correspondent 
approval and that such difficulties would hinder effective program 
operations. Commenters stated that mortgagees will incur significant 
costs in employing and training new staff to process and close 
additional loans from correspondents, because mortgagees would not be 
able to handle correspondent functions on their own.
    Other commenters stated that elimination of loan correspondent 
approval would cause undue stress for mortgage lenders as they struggle 
to maintain compliance by their sponsored TPOs. Further, commenters 
expressed concern that mortgage lenders will inconsistently enforce 
standards, and this will ultimately be more costly than compliance with 
existing FHA requirements. In addition, a commenter noted that 
eliminating loan correspondent approval and certification increases 
risk to the insurance fund by opening the door to many new 
correspondents and the inherent conflict of interest sponsors will have 
between monitoring compliance and closing loans.
    HUD Response: HUD appreciates and carefully considered the issues 
raised by commenters, but HUD maintains its position that the 
elimination of FHA approval of loan correspondents is prudent for FHA 
and efficient for both FHA and mortgage lenders. Limiting approval to 
mortgagees reflects the recognition that the mortgagee, by 
underwriting, servicing, or owning a loan, is the most critical lending 
party to a mortgage transaction. 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. Accordingly, it is appropriate that FHA's approval process and 
oversight be focused on mortgagees, the parties to the loan transaction 
that pose the greatest risk to HUD.
    As noted earlier in this preamble, FHA-approved mortgagees 
currently have, and have always had, significant responsibility and 
liability for actions of sponsored loan correspondents. HUD's 
regulations have long provided that each sponsoring mortgagee shall be 
responsible for the actions of its loan correspondent lenders or 
mortgagees in originating loans or mortgages, unless applicable law or 
regulation requires specific knowledge on the part of the party to be 
held responsible (see 24 CFR 202.8(b)(7)).
    HUD further defined the quality control requirements of a 
sponsoring mortgagee in its Mortgagee Approval Handbook (HB 4060.1 REV2 
Ch. 7), by requiring sponsoring mortgagees to provide for a review of 
mortgage loans originated and sold to it by each of its loan 
correspondents. As part of this review, sponsors determine the 
appropriate percentage of mortgage loans to review based on volume, 
past experience, and other factors. Sponsors are required to document 
their methodologies and the results of these reviews. In addition, all 
mortgagees/sponsors must identify patterns of early defaults by 
location, program, loan characteristic, loan correspondent, etc. 
Mortgagees/sponsors may use HUD's Neighborhood Watch Early Warning 
System to identify patterns. Mortgagees/sponsors must identify 
commonalities among participants in the mortgage origination process to 
learn the extent of their involvement in problem cases. Mortgages and 
loans involving appraisers, loan officers, processors, underwriters, 
etc., who have been

[[Page 20724]]

associated with problems must be included in the review sample. 
Accordingly, HUD's existing regulations reflect the responsibilities to 
be fulfilled by FHA-approved mortgagees, which are responsibilities 
that should be assumed by any lender, given the discretion and control 
that lenders have over the loans they underwrite.
    The additional responsibility that HUD will require of sponsoring 
FHA-approved mortgagees through this final rule is minimal. Since 
mortgagees are already responsible for ensuring that FHA requirements 
are met for mortgage loans originated by loan correspondents, HUD 
believes it is appropriate for mortgagees to continue doing so for 
TPOs. A mortgagee will be subject to sanctions (e.g., civil money 
penalties) should it fail in its responsibility to ensure that mortgage 
loans presented to FHA for endorsement, or those that the mortgagee 
endorses for insurance under the FHA Lender Insurance process, comply 
with processing and origination requirements. HUD's position is that, 
given the existing sponsor relationships between mortgagees and loan 
correspondents, mortgagees will continue to be able to undertake a 
threshold determination of a TPO's qualifications. Moreover, making 
sponsors responsible for this oversight actually relieves loan 
correspondents from the administrative burden of FHA's lender approval 
and recertification processes.
    Commenters raised concerns that elimination of approval of loan 
correspondents will result in mortgagees incurring significant costs in 
employing and training new staff to process and close mortgage loans. 
It is HUD's view, after careful consideration, that approved mortgagees 
will continue to rely upon loan correspondents with whom they have 
worked for years and who have demonstrated to sponsoring mortgagees 
their competency, compliance with applicable requirements, and 
integrity in their participation in the origination of FHA-insured 
mortgage loans. HUD believes that it would be contrary to current and 
financially sound business practices for approved mortgagees to sever 
ties with experienced loan correspondents with whom they have had a 
positive relationship for years, and have to hire and train new staff 
to perform correspondent functions.
    With respect to concerns that were raised about the integrity of 
TPOs without FHA approval, and the possibility of borrowers being 
exposed to unscrupulous loan originators, HUD believes that recent 
changes to mortgage lending licensing and regulatory requirements 
provide additional safeguards that did not exist when FHA established 
its lender-approval requirements. Specifically, the SAFE Act and the 
Nationwide Mortgage Licensing System have created standards that govern 
mortgage lending activities for loan officers and loan origination 
entities, and systems for tracking compliance with applicable mortgage 
lending laws. Further, recent changes in regulations for RESPA and the 
Good Faith Estimate have strengthened requirements to combat fraud and 
have improved disclosure of information to borrowers. These new or 
improved mechanisms to protect the public from inappropriate lender 
practices are in addition to state and local regulations and 
requirements governing mortgage lending practices. It should also be 
noted that the HFSH Act expanded HUD's authority to impose civil money 
penalties upon entities and individuals to include non-FHA-approved 
entities and their employees or representatives. HUD will judiciously 
use this new authority in conjunction with the changes enacted under 
this final rule.
    While this final rule proceeds to adopt the proposal to eliminate 
approval of loan correspondents, as provided in Section II of this 
preamble, HUD emphasizes that currently approved loan correspondents as 
of the effective date of this final rule may continue to act as FHA-
approved loan correspondents through December 31, 2010, and loan 
correspondents are eligible to apply for approval as an FHA-approved 
mortgagee.
FHA Approval of HECM Loan Correspondents Is Required by Law
    Comment: Commenters stated that HUD's November 30, 2009, proposed 
rule overlooked changes in statutory language made to section 255 of 
the National Housing Act (NHA), by the Housing and Economic Recovery 
Act of 2008 (HERA) (Pub. L. 110-289, approved July 30, 2008), which 
provide that only FHA-approved entities may participate in the home 
equity conversion mortgage (HECM) program. The commenters state that 
section 2122 of the HERA provides that ``All parties that participate 
in the origination of a mortgage to be insured under this section shall 
be approved by the Secretary.'' The commenters state that section 203 
of the HFSH Act provides: ``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) of the NHA shall not participate in the origination 
of an FHA-insured loan except as authorized by the Secretary.'' The 
commenters state that the language amending section 255 of the National 
Housing Act does not contain the phrase ``except as authorized by the 
Secretary'' that is included in section 203 of the HFSH Act. The 
commenters state that to comply with the HERA language, HUD must 
continue to approve and monitor loan correspondents engaged in HECM 
originations.
    HUD Response: The commenters identify a perceived contradiction 
between section 203(b) of the HFSH Act and section 2122(a)(9) of HERA, 
both pertaining to approval by the Secretary of HUD of parties engaged 
in the origination of FHA-insured mortgages. HUD appreciates the 
question posed by the commenters but, for the following reasons, 
disagrees with their analysis of the two statutory provisions in 
question.
    As noted by the commenters, the HERA amendments to section 255 of 
the National Housing Act require that mortgage lenders participating in 
the origination of HECM mortgages must be ``approved by the 
Secretary.'' Subsequent to enactment of HERA in July 2008, the HFSH Act 
was enacted on May 20, 2009. While the HERA changes to section 255 were 
limited to the origination of HECM mortgages, the HSFH amendments to 
section 202 of the National Housing Act more broadly encompass the 
origination of all single family mortgages insured by FHA, including 
those insured under the HECM program. Section 203(b) of HFSH also 
requires HUD approval of mortgage lenders participating in the 
origination of FHA-insured mortgages, ``except as authorized by the 
Secretary.'' This statutory exception to the approval requirement 
signifies that Congress intended to provide FHA with the authority to 
permit some limited participation by TPOs, which otherwise will not be 
FHA-approved mortgagees in the FHA mortgage insurance programs 
(including the HECM program), as provided for under this final rule.
    Rather than putting forth contradictory instructions from Congress, 
as the commenters assert, HUD views the statutory mortgagee approval 
requirements of sections 203 and 255 of the National Housing Act as 
being reconcilable. The statutory change to section 255 recognizes that 
the beneficiaries of the HECM program--elderly homeowners--are 
vulnerable to unscrupulous players in the lending market that target 
the elderly with overpriced or unneeded financial products. By 
specifying that mortgage lenders must be ``approved by the Secretary,'' 
Congress did not restrict the Secretary's ability to ``authorize'' TPO

[[Page 20725]]

participation in the origination of HECM mortgages under section 202 of 
the NHA. Instead, HUD has determined that Congress emphasized the need 
of FHA to take steps to protect elderly borrowers, who may lack the 
sophistication of the mortgage marketplace. FHA has addressed this need 
by allowing only mortgage lenders with professional and financial 
competency and integrity to participate in the origination of HECM 
mortgages. The provisions of this final rule regarding the relationship 
of sponsoring mortgagees and TPOs are consistent with the congressional 
intent of safeguarding HECM borrowers underlying the HERA statutory 
language. As discussed previously in this preamble, FHA-approved 
mortgagees have had, prior to this rulemaking, significant 
responsibility for actions of sponsored TPOs. As a result of this 
ongoing relationship between the sponsoring mortgagee and TPO, the 
sponsoring mortgagee is in a better position than FHA to immediately 
detect deficiencies with TPO performance and to remedy those 
deficiencies. Accordingly, HUD will look to FHA-approved sponsoring 
mortgagees to ensure that HECM mortgage loans are properly originated, 
and each sponsor shall be responsible to FHA for the actions of its 
loan correspondent lenders or mortgagees in originating HECM loans or 
mortgages.
Additional Guidance Requested Concerning Mortgagee Oversight of TPOs
    Comment: Commenters requested additional guidance regarding 
requirements of FHA-approved mortgagees for the approval, monitoring, 
and liability for actions of the TPOs they sponsor. Some commenters 
requested that FHA establish minimum approval guidelines for TPO 
approval by a sponsoring mortgagee. Others asked for clarification 
about the extent of monitoring required by mortgagees for the TPOs they 
sponsor, and of the specific TPO actions or violations for which 
mortgagees will be liable. Other commenters noted that lenders would be 
unable to perform the regulatory function that HUD performs in 
monitoring TPOs. Commenters stated that FHA should continue to monitor 
``mini-eagles'' and others directly. Other commenters expressed concern 
about the elimination of audits of loan correspondents, which serve an 
important function.
    HUD Response: HUD will not establish FHA requirements related to 
sponsor approval of TPOs. To do so defeats the aforementioned 
efficiency and improved risk management that HUD is striving to 
achieve. By focusing approval solely on lenders that underwrite loans, 
HUD's approval process should yield improved results in ensuring that 
only responsible lenders of integrity and competence are FHA-approved 
lenders. Such lenders will ensure that their employees and the TPOs 
that they sponsor are individuals and entities of integrity and 
competence. While, as noted in the response to a preceding comment, 
FHA-approved mortgagees will now make the initial determination of TPO 
qualifications, and not FHA, this assessment should not differ 
significantly from the manner in which FHA-approved mortgagees hire 
loan officers and appoint officials in their organizations. Moreover, 
sponsoring mortgagees have the authority to establish oversight 
requirements to monitor the ongoing performance and financial capacity 
of their TPOs, as the mortgagees may determine appropriate, including 
the submission of audited financial statements from sponsored TPOs.
    To the extent that mortgagees seek guidance from HUD on how best to 
determine if TPOs adhere to FHA's processing and origination 
requirements and are eligible to participate in the origination of FHA-
insured mortgage loans, HUD recommends that mortgagees develop and 
implement measures such as the following: (1) Procedures to verify TPO 
compliance with all federal, state, and local requirements that govern 
their activities; (2) procedures to verify TPO compliance with the 
requirements of the SAFE Act; (3) procedures to ensure that TPOs are 
not suspended, debarred, or under a limited denial of participation 
(LDP), in HUD's Credit Alert Interactive Voice Response System, or on 
the Federal Government's Excluded Parties list; (4) institutional 
guidelines and systems for establishing and maintaining relationships 
with TPOs; (5) procedures that govern the performance of due diligence; 
(6) systems for monitoring loan quality and performance for each 
sponsored TPO; (7) procedures for addressing potential problems with 
TPO operations, business practices, or customer service, and clearly 
articulated remedial processes for instances when such problems occur; 
(8) enhanced quality control plans and procedures that ensure 
appropriate evaluation of TPO originations; (9) ongoing renewal 
processes to ensure that TPOs continue to meet the mortgagee's approval 
standards; and (10) procedures for evaluating the financial capacity of 
TPOs. These are only recommendations on HUD's part, and no doubt many 
mortgagees already have such procedures, protocols, and systems in 
place.
    Although not a change from existing requirements, it is 
nevertheless important to reiterate that mortgagees may not knowingly 
or willingly conduct business with TPOs that are not in compliance with 
all laws and regulations that govern their practices. If a mortgagee 
becomes aware of TPO noncompliance with any provision of law or 
regulation, FHA requires that the mortgagee cease sponsoring FHA loans 
on behalf of the TPO in question and proceed accordingly with regard to 
notifying HUD of such occurrences. Mortgagees that continue to engage 
with such entities will be held responsible for such activities by HUD. 
Moreover, HUD will hold mortgagees accountable for FHA loan origination 
and processing violations committed by TPOs.
Processing a Loan in Name of FHA-Approved Mortgagee
    Comment: Some commenters requested that HUD permit non-FHA-approved 
TPOs to process a loan and close it in the entity's own name, and not 
that of the FHA-approved mortgagee. The commenters stated that the 
removal of this authority would yield a number of adverse impacts for 
TPOs, including impacts on state licensing and regulatory matters and 
TPO funding arrangements. Some commenters expressed concern that the 
elimination of processing authority would limit TPO revenues, and would 
present a significant administrative burden for mortgagees.
    HUD Response: HUD has not revised the rule in response to these 
comments, but as noted earlier in this preamble and discussed at the 
end of this response, HUD is further considering this issue. Section 
203(b)(1) of the National Housing Act (12 U.S.C. 1709(b)(1)) requires 
that a mortgage ``[h]ave been made to, and be held by, a mortgagee 
approved by the Secretary'' in order to be eligible for FHA mortgage 
insurance. Accordingly, only FHA-approved mortgagees may close mortgage 
loans in their names (that is, using the statutory terminology, have 
the mortgage ``made to'' the FHA-approved mortgagee). Since FHA will no 
longer be approving loan correspondents, TPOs will be statutorily 
prohibited from closing FHA-insured mortgage loans in their own names; 
however, TPOs may continue to close such mortgages in the name of their 
sponsoring FHA-approved mortgagees. Further, only the sponsoring FHA-

[[Page 20726]]

approved mortgagee may submit the loan to FHA for insurance 
endorsement.
    HUD emphasizes that currently approved TPOs (loan correspondents) 
as of the effective date of this final rule may continue to act as FHA-
approved TPOs and close FHA-insured mortgages in their name through 
December 31, 2010. Loan correspondents are also eligible to apply for 
approval as an FHA-approved mortgagee.
    As noted earlier in this preamble, HUD will further consider this 
issue, but unless such change is made, currently FHA-approved loan 
correspondents (that subsequently will become TPOs), commencing on 
January 1, 2011, may no longer close FHA-insured mortgages in their own 
names, although they may continue to do so through December 31, 2010.
Third-Party Originators Should Be Permitted To Access and Utilize FHA 
Connection
    Comment: Commenters expressed concern about the inability of TPOs 
to access and utilize the FHA Connection system for loans they 
originate. These commenters advised that the data input and other tasks 
performed by TPOs in FHA Connection were an important part of the 
services they provide to mortgagees.
    HUD Response: HUD information technology security requirements do 
not permit non-FHA-approved entities to access or utilize FHA 
Connection. Therefore, only FHA-approved mortgagees will be authorized 
to utilize this system to carry out necessary processes associated with 
a loan transaction. However, as explained in Mortgagee Letter 2004-31, 
which remains applicable, FHA Connection's Business-to-Government (FHAC 
B2G) Specification ``allows lenders to transmit data directly from 
their own internal loan processing systems to FHA without re-keying 
data into the FHA Connection or functional equivalent.'' This 
functionality allows TPOs to input data into a sponsoring mortgagee's 
loan origination system, as may be permitted by the sponsoring 
mortgagee, which will then carry out FHA Connection tasks via an 
automated process. Such practices will enable TPOs to continue to 
provide important loan processing services to mortgagees. Additional 
information regarding FHAC B2G can be found in the ``FHA Connection 
Business to Government User's Guide'' at http://www.hud.gov/offices/hsg/sfh/f17c/b2g.pdf.
Tracking TPO Performance Through Single Family Neighborhood Watch
    Comment: Commenters suggested that HUD continue to track TPO 
performance through the Single Family Neighborhood Watch (Neighborhood 
Watch) system. The commenters were concerned that with the removal of 
loan correspondent approval, the ability to analyze performance data 
for sponsored TPOs would be eliminated. These commenters requested that 
TPO tracking in Neighborhood Watch continue.
    HUD Response: FHA will make available to sponsoring mortgagees 
aggregate comparison TPO performance data at a national level. HUD 
anticipates that mortgagees will use this data in carrying out their 
responsibilities under this final rule to monitor the performance of 
their TPOs on an ongoing basis. The information will be available to 
FHA-approved mortgagees by accessing Neighborhood Watch through their 
FHA Connection account.
Geographic Limitations on Originations
    Comment: Commenters requested clarification regarding the impact of 
this rule on FHA's ``Areas Approved for Business.'' The commenters 
expressed concern that the rule would result in geographic limitations 
on originations.
    HUD Response: When conducting retail and direct lending 
originations, FHA-approved mortgagees must continue to comply with the 
existing Single Family Origination Lending Areas (Areas Approved for 
Business or AAFB), as outlined in HUD Handbook 4155.2, Section12.E.2. 
FHA-approved mortgagees must also continue to be licensed to perform 
loan origination in each state in which they desire to originate FHA 
loans. For purposes of wholesale origination, FHA-approved mortgagees 
may underwrite loans originated in any state in which they are 
permitted by the state to do so, and in which the originating TPO is 
permitted to conduct mortgage origination activities. Hence, a 
mortgagee's wholesale AAFB consists of all states in which it sponsors 
a TPO that meets the applicable requirements for loan origination of 
that state and in which the mortgagee is permitted by the state to 
underwrite mortgage loans and sponsor TPOs.
Principal-Authorized Agent Relationship
    Comment: Commenters requested clarification of possible impacts, or 
lack thereof, of this rule on Principal-Authorized Agent relationships.
    HUD Response: For FHA-insured loans, the Principal-Authorized Agent 
Relationship provides FHA-mortgagees with flexibility in the 
origination of FHA-insured single family loans in situations where the 
FHA-approved mortgagee seeks to collaborate with another FHA-approved 
mortgagee. Through this flexibility, FHA-approved mortgagees may offer 
diversified loan products or programs because of the ability to team 
with firms that may have more expertise in specialized areas.
    As a result of HUD's elimination of the FHA approval process for 
loan correspondents, the requirements regarding Principal-Authorized 
Agent relationships will also change. Loans originated through 
Principal-Authorized Agent relationships will be permitted to close in 
either party's name. However, to participate in this relationship, both 
the Principal and Authorized Agent must be approved as Direct 
Endorsement lenders under 24 CFR 203.3. Further, for loans insured 
under the relationship, the Principal must originate and the Authorized 
Agent must underwrite, and the relationship must be recorded as such in 
FHA Connection (FHA's Computer Home Underwriting Mortgage System).
Rulemaking Issues
Abbreviated Comment Period
    Comment: Several commenters objected to the reduced comment period 
for the proposed rule. One of the commenters objected on the grounds 
that the regulatory amendments constitute major changes to FHA's 
regulatory structure that may affect the taxpayer. Another commenter 
wrote that the reduced comment period gave the impression that HUD 
wanted to ``push through'' the changes. One commenter suggested that 
HUD issue a revised proposed rule for additional public comment.
    HUD Response. As more fully discussed in the preamble to the 
November 30, 2009, proposed rule, the regulatory changes proposed in 
November would largely conform to HUD's regulations to recent statutory 
requirements and update FHA business practices to current industry 
standards. Although HUD acknowledges that streamlining FHA's approval 
process to mortgagees is not an insignificant change, as discussed in 
the November 30, 2009, proposed rule and the preamble to this final 
rule, the elimination of approval of loan correspondents does not mean 
that these entities are barred from participation in FHA programs. The 
expectation is that they will continue to participate as they always 
have, through sponsorship by FHA-approved

[[Page 20727]]

mortgagees, and can avail themselves of that benefit without the 
necessity or burden of having to go through the FHA lender approval 
process. Additionally, as noted already in this preamble, loan 
correspondents may apply for approval as FHA-approved mortgagees. In 
the case of the changes to conform HUD's regulations to the explicit 
statutory restrictions on loan origination contained in the HFSH Act, 
HUD does not have authority to modify these requirements in response to 
comment.
    Given the narrow scope of the changes proposed in HUD's November 
30, 2009, final rule, HUD remains of the position that 30 days was a 
sufficient period for public comment--a determination that is supported 
by more than 200 public comments received, the thoughtfulness of the 
comments, and the support provided in suggesting alternatives.
Unfunded Mandate
    Comment: One commenter wrote that this rule imposes unreimbursed 
costs on the private sector and may be an unfunded mandate. The 
commenter stated that according to the numbers provided in the proposed 
rule itself, 68 percent of the 13,831 FHA-approved lending entities are 
approved correspondents, i.e., approximately 9,405. HUD's rule shifts 
the oversight of these 9,405 loan correspondents to FHA's approved 
mortgage lenders. This commenter stated that if HUD's proposal meets 
the definition of an unfunded mandate, HUD may be required to have the 
Congressional Budget Office identify and estimate its costs, which the 
commenter states has not been done.
    HUD Response. The commenter is incorrect in asserting that this 
rule imposes an unfamiliar and economically burdensome mandate on FHA-
approved mortgagees. While it is correct that the rule would make FHA-
approved mortgagees responsible for ensuring that their TPOs adhere to 
FHA loan origination and processing requirements, the rule does not 
mandate that sponsors adopt any specific new oversight protocols or 
bear new economic costs. The responsibility to ensure that TPOs that 
originate mortgage loans under a sponsorship relationship with 
mortgagees are responsible, knowledgeable, competent, and have 
integrity is, or should be, common and prudent business practice. In 
this regard, loan correspondents already provide their sponsoring 
mortgagees with data regarding their performance, and sponsoring 
mortgagees currently review the operations and performance of their 
loan correspondents as a good business practice.
    Continued participation in the FHA-insurance programs as approved 
mortgagees by present participants is voluntary. Section 101 of the 
Unfunded Mandates Reform Act (2 U.S.C. 1531-1538) (UMRA) specifically 
excludes conditions for receipt of federal assistance and duties 
arising from participation in a voluntary federal program from the 
definition of ``federal private sector mandate'' subject to the 
requirements of UMRA. Accordingly, the commenter is also incorrect, as 
a matter of law, that the rule imposes an unfunded mandate.
Legal Authority for Rule
    Comment: Some commenters questioned HUD's statutory authority to 
terminate approval and to delegate to lenders this governmental 
authority to approve and oversee loan correspondents. One commenter 
wrote that the rule ignores the HFSH Act, which requires all loan 
originators and loan origination companies to register and become 
licensed. Several commenters wrote that the rule appears to contradict 
the statutory requirements for HUD's Home Equity Conversion Mortgage 
(HECM) program in 12 U.S.C. 1715z-20(n)(2), which, according to the 
commenters, requires all parties that participate in the origination of 
a HECM mortgage to be approved by the Secretary. Other commenters wrote 
that under the rule private companies must be empowered to conduct not 
only the normal quality-control audits, but also site audits and 
reviews, as well as financial audits and reviews, including auditing 
whether each person who originates a mortgage is an employee of the 
mortgagee or correspondent and has payroll taxes properly deducted. The 
commenter questioned whether such authority can be granted to a private 
company.
    HUD Response. The concerns expressed by these commenters, such as 
the HECM issue, and the perceived abdication of regulatory oversight, 
have already been addressed in this preamble. However, HUD emphasizes 
that it is not delegating its rulemaking authority and regulatory 
functions to nongovernmental entities. Rather, through this rulemaking, 
FHA is limiting the type of entity that will be an FHA-approved 
mortgagee. This limitation is consistent with FHA's authority under the 
National Housing Act. Additionally, HUD is not asking FHA-approved 
mortgagees to perform a regulatory function, but rather to undertake 
the type of due diligence, vetting, and oversight of any party that the 
lender employs or relies upon for functions related to its FHA lending 
activities. As stated in the proposed rule, such responsibility rests 
more appropriately with the FHA-approved mortgagee rather than with 
FHA.
    The final rule is also consistent with the HFSH Act, the rulemaking 
authority provided to the Secretary to carry out the FHA programs under 
section 211 of the National Housing Act (12 U.S.C. 1715b), as well as 
the general rulemaking authority conferred to the Secretary of HUD 
under section 7(o) of the Department of Housing and Urban Development 
Act (42 U.S.C. 3535(d)).
Economic Impact of Rule
    Comment: Commenters raised questions and concerns regarding the 
economic impacts of the regulatory changes and, in particular, the 
potential impact on small lending institutions. Several of the 
commenters wrote the economic impacts of the rule would exceed $100 
million and, therefore, that the rule should be classified as an 
``economically significant'' regulatory action under Executive Order 
12866 regarding ``Regulatory Planning and Review.'' Other commenters 
focused on the costs that would be borne by lenders to comply with the 
new requirements, such as the updating of systems and compliance with 
state licensing requirements. Commenters stated that HUD underestimated 
the significance of these costs. Other commenters stated that HUD 
ignored the negative impact that the loss of simply being able to post 
``FHA approval'' will have on the business of loan correspondents.
    HUD Response. HUD recognizes that the changes being implemented by 
this final rule will not be without costs, but as fully addressed in 
the analysis provided in HUD's November 30, 2009, proposed rule, HUD 
maintains that such changes will not result in an annual impact on the 
economy of $100 million or more. HUD recognizes that the increase in 
net worth requirements must be addressed by lenders, but as provided in 
the economic analysis in the proposed rule, the majority of FHA-
approved lenders already meet the $1 million net worth requirement, and 
HUD is allowing sufficient time for those FHA-approved lenders that 
currently do not meet this requirement to be able to achieve this 
level. As noted earlier in this preamble, the final rule not only 
maintains the proposed rule's timetable of one calendar year to achieve 
the initial $1 million net worth requirement and 2 additional calendar 
years beyond the first year to achieve the additional volume-based net 
worth requirements, but allows even more

[[Page 20728]]

time for mortgagees that meet SBA's definition of a small business, and 
recognizes the key distinctions between single family and multifamily 
mortgagees.
    With respect to the elimination of approval of loan correspondents, 
loan correspondents will be relieved of the costs associated with the 
formal process of FHA approval, and will retain their loan 
correspondent approval through December 31, 2010. This extension of 
their current FHA approval provides loan correspondents with additional 
time to seek FHA approval as an approved mortgagee or confirm the 
continuation of existing relationships with sponsoring mortgagees. As 
has been stated in this preamble, it is HUD's expectation that trusting 
and profitable relationships between sponsoring mortgagees and 
sponsored loan correspondents will continue.
    While TPOs will no longer be permitted to advertise that they are 
``FHA Approved,'' they will be allowed to state that they are 
authorized to originate FHA products. HUD believes that the ability of 
TPOs to advertise the availability of FHA products will mitigate any 
adverse impacts of the removal of the specific ``FHA Approved'' 
verbiage from TPO advertising.

V. Public Comment Solicitation on Additional Net Worth Requirements for 
Originators of Multifamily Mortgages of $25 Million or More

    HUD is soliciting comment on a proposal to require FHA-approved 
mortgagees that originate multifamily mortgages of $25 million or more 
to retain as additional net worth 50 basis points (0.5%) of the fee 
income resulting from such loans in addition to their required net 
worth as set forth in this rule, up to a maximum of $5 million. This is 
the only issue for which HUD solicits comment, and HUD will not 
consider comments submitted on other aspects of this final rule. 
Comments on this issue must be submitted in accordance with the 
ADDRESSES section of this preamble, above.

VI. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this final rule 
under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). This final rule, as was the case with the proposed rule, has 
been determined to be a ``significant regulatory action,'' as defined 
in section 3(f) of the Order, but not economically significant, as 
provided in section 3(f)(1) of the Order. The analysis of this 
rulemaking provided in HUD's November 30, 2009, proposed rule (74 FR 
62525-62527) continues to support that this rule is not economically 
significant. Additionally, HUD's decision to modify the requirements 
for increased net worth to accommodate small business concerns and the 
distinctions between single family and multifamily mortgagees, combined 
with the removal of potential barriers to TPO revenue generation, 
further confirms HUD's assessment that this rule will not have an 
annual impact on the economy of $100 million or more. The reasons for 
HUD's determination are as follows:
A. Increased Net Worth Requirements
    1. Current Mortgagee Net Worth. Because loan correspondent approval 
will be eliminated via this rule, an analysis of the impact of 
increased net worth requirements is limited to a review of data for 
approved mortgagees. Further, 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 will be unable to 
meet the increased net worth requirements. Based upon the fact that 
supervised institutions must meet much higher capital standards 
established by federal banking regulators, it is very unlikely that any 
supervised firms will fail to meet the higher net worth threshold. As a 
proxy, FHA analyzed Ginnie Mae net worth data for its supervised 
lenders and discovered that none of these lenders had a net worth below 
FHA's increased requirement. In fact, the average net worth of this 
cohort was $2.4 billion.
    As of November 30, 2009, the number of the most recent accepted 
audit submission by nonsupervised mortgagees for renewal of FHA lender 
approval totals 1,297. A clear majority of these approved nonsupervised 
mortgagees (754, or 58 percent of the total) currently already have a 
net worth greater than $1 million. It should also be noted that of 
presently approved loan correspondents, 137 have a current net worth 
greater than $1 million.
    2. Cost of Increased Net Worth Requirement for Mortgagees. The 
enactment of the proposed rule would present two options to mortgagees 
that currently possess a net worth below the proposed $1 million 
requirement: (1) Increase their net worth from the current $250,000 to 
between $1 million and $2.5 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 third-party 
originator by initiating a sponsorship 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 the first option, this final rule will 
require them to increase their net worth from the current $250,000 to 
between $1 million and $2.5 million, 20 percent of which must be held 
in liquid assets. Thus, each approved mortgagee will be required to 
increase its liquid asset holdings from $50,000 to between $200,000 and 
$500,000. The calculated cost of this provision equals the opportunity 
cost \5\ of the money held in liquid assets; i.e., the amount they 
could have earned in otherwise nonliquid accounts.
---------------------------------------------------------------------------

    \5\ Opportunity cost is the value of the next best alternative. 
In this case, if mortgagees were not required to hold additional 
funds as liquid assets, the next best alternative would be a higher 
yielding nonliquid asset.
---------------------------------------------------------------------------

    This method of calculating the opportunity cost of the rule assumes 
that moneys distributed as shareholder income will be invested by 
owners in other yield-bearing investments. Such a supposition may or 
may not be accurate, but provides a ``best case scenario'' for owner 
decision making, and therefore, the highest potential opportunity cost 
resulting from the rule. At the very least, if owners do not invest 
distributed income in yield-bearing investments, this rule is expected 
to result in a loss of personal income through an increase in the 
firm's retained earnings.
    Table 1 below calculates the opportunity cost of this increase to 
existing FHA-approved mortgagees. Based on data from FHA's Lender 
Assessment Sub-System (LASS),\6\ 36 single family mortgagees have a net 
worth equal to $250,000, 233 mortgagees have a net worth between 
$250,000 and $500,000, 274 mortgagees have a net worth between $500,000 
and $1 million, 363 mortgagees have a net worth between $1 million and 
$2.5 million, and 391 mortgagees have a net worth of greater than $2.5 
million. Column B lists the average net worth of the mortgagees in each 
category. Column C subtracts the average net worth from the new 
requirement, which was calculated based on each mortgagee's total 
annual single family volume. Column D then calculates the average 
increase in liquid assets per

[[Page 20729]]

mortgagee, equal to 20 percent of the increase in net worth.
---------------------------------------------------------------------------

    \6\ This data is comprised of accepted audits received in the 
LASS system in support of the applications by currently approved 
nonsupervised mortgagees for renewal of FHA approval.
---------------------------------------------------------------------------

    For multifamily mortgagees that do not also originate FHA single 
family mortgages, four mortgagees have a net worth equal to $250,000, 
10 mortgagees have a net worth between $250,000 and $500,000, 12 
mortgagees have a net worth between $500,000 and $1 million, 12 
mortgagees have a net worth between $1 million and $2.5 million, and 22 
mortgagees have a net worth of greater than $2.5 million.
    The cost of this provision totals the opportunity cost of holding 
the amount shown in Column D in liquid assets, rather than investing it 
in other potentially higher-yielding investments. The opportunity cost 
is therefore 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 rate is 
the average 10-year U.S. 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 E, was multiplied 
by the number of mortgagees in each category to calculate the total 
cost of the net worth requirement imposed by this regulation. As shown 
in Table 1, the opportunity cost of holding the additional funds in 
liquid assets totals $1,668,627.
    Costs to mortgagees of meeting the higher minimum net worth 
requirements beyond those associated with the opportunity cost of 
liquid assets are not included in Table 1 because it is anticipated 
that the nonliquid increase in net worth would be met largely by 
changing the title of existing assets held by mortgagees' owners from 
individual holdings to holdings of the firm. Thus, increasing the 
minimum net worth requirement does not itself create an economic 
effect. FHA does acknowledge, however, that for transfers of non-cash 
assets there may be transaction costs associated with such transfers. 
Nevertheless, it is not possible to quantify these costs because it is 
impossible to know the types of assets that may be transferred and the 
number of mortgagees that would choose this method of asset 
reassignment to achieve a higher required net worth.

                                           Table 1--Calculation of Opportunity Cost to FHA-Approved Mortgagees
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Average
                                                             Number of      Average net      required         Average         Average        Aggregate
                        Net worth                           mortgagees         worth        increase in     increase in     opportunity     opportunity
                                                                                             net worth     liquid assets       cost            cost
                                                                     (A)             (B)             (C)   (D) = (C)*20%  (E) = (D)*1.8%   (F) = (A)*(E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             A: Calcuation of Opportunity Cost to SF FHA-Approved Mortgagees
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K...................................................              36        $250,000        $821,580        $164,316          $2,958        $106,477
$250K-$500K.............................................             233         344,237         717,824         143,565           2,584         602,111
$500K-$1M...............................................             274         706,911         493,486          98,697           1,777         486,775
$1M-$2.5M...............................................             363       1,535,246         252,322          50,464             908         329,734
>$2.5M..................................................             391     164,007,911  ..............  ..............  ..............  ..............
                                                         -----------------------------------------------------------------------------------------------
    Total SF............................................           1,297  ..............  ..............  ..............  ..............       1,525,097
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          B: Calculation of Opportunity Cost to MF-Only FHA-Approved Mortgagees
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K...................................................               4         250,000         864,938         172,988           3,114          12,455
$250K-$500K.............................................              10         355,183         937,407         187,481           3,375          33,747
$500K-$1M...............................................              12         660,627         552,090         110,418           1,988          23,850
$1M-$2.5M...............................................              12       1,585,506          39,655           7,931             143           1,713
>$2.5M..................................................              22      40,374,682  ..............  ..............  ..............          71,765
                                                         -----------------------------------------------------------------------------------------------
    Total MF-Only.......................................              60  ..............  ..............  ..............  ..............         143,530
                                                         -----------------------------------------------------------------------------------------------
        Total Costs.....................................  ..............  ..............  ..............  ..............  ..............       1,668,627
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For mortgagees that choose option 2, the functional impact of the 
option would be the loss of income from those aspects of the FHA 
mortgage lending process they would no longer be permitted to perform 
and the added costs they would be required to pay to their sponsor for 
processing \7\ and underwriting.
---------------------------------------------------------------------------

    \7\ Sponsoring mortgagees may choose whether or not to permit 
their sponsored TPOs to perform processing functions. Therefore, 
some TPOs may still receive processing income. The calculations of 
lost revenue used in this analysis assume the loss of all processing 
revenues for mortgagees that relinquish their FHA approval and 
become TPOs.
---------------------------------------------------------------------------

    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. Origination fees are largely determined by the 
marketplace and are not currently regulated by FHA. The FHA industry 
average for servicing release premiums is between 75 to 100 basis 
points of a loan's unpaid principal balance at the time of sale. 
Average annual servicing fee of an FHA loan is 30 basis points on the 
unpaid principal balance. 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 
recent 2-year period. HUD notes 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 2 below, of the 543 lenders with a net worth 
less than the proposed $1 million, 355 have originated at least one 
loan in the 2-year sample period. Since the affected mortgagees still 
would be permitted to

[[Page 20730]]

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 2 calculates 
the economic impact if all lenders opted to relinquish their FHA 
approval and operate via a relationship with an FHA-approved mortgagee.

                                 Table 2--Calculation of Opportunity Cost to FHA-Approved Mortgagees for Liquid Holdings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Lenders w/      Avg number of                    Avg Loan *
                                                        Total number    originations in      yearly       Avg number of  processing fee/  Aggregate loan
                                                         of lenders       2-yr period     originations     orig/lender       lender       processing fee
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$250K <$1M..........................................             543               355          87,455             246         $49,270      $17,491,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
* FHA estimates a $200 charge per loan for processing fees.

B. Elimination of FHA Approval of Loan Correspondents
    1. Loan correspondents. Loan correspondents currently face two 
costs as FHA-approved lenders. First, they are required to submit 
audited financial statements and pay a renewal fee annually. In 
addition, they must also meet a net worth requirement of up to 
$250,000,\8\ of which 20 percent must be held in liquid assets. As a 
result, loan correspondents that choose to continue participating in 
FHA programs as TPOs may presumably be able to utilize the capital 
retained in net worth for other purposes, and may not have to submit 
audited financial statements for approval by a sponsoring mortgagee.\9\ 
If no sponsoring mortgagees required a minimum net worth for their 
sponsored TPOs, this could release $574,938,000 \10\ of capital 
currently retained by loan correspondents as net worth for uses in 
other ways. If no sponsoring mortgagees require the submission of 
audited financial statements by TPOs, this could yield a savings to 
loan correspondents of approximately $68,445,000.\11\
---------------------------------------------------------------------------

    \8\ The current net worth requirement for loan correspondents is 
$63,000 plus an additional $25,000 for each registered branch up to 
a maximum of $250,000.
    \9\ Because sponsoring mortgagees are permitted to establish 
their own standards for approval of sponsored TPOs, it is impossible 
to definitively calculate a savings resulting from the elimination 
of FHA requirements for loan correspondents.
    \10\ Based upon FHA's current minimum required net worth for 
loan correspondents of $63,000, multiplied by the total number of 
approved loan correspondents, 9,126.
    \11\ Based upon an average cost to loan correspondents of $7,500 
for the compilation of audited financial statements, multiplied by 
the total number of approved loan correspondents, 9,126.
---------------------------------------------------------------------------

    These savings are offset by the fact that 44 states plus the 
District of Columbia impose bonding or net worth requirements that will 
continue to apply to brokers, and that the minimum requirements of 12 
states exceed those of FHA. It should be noted that the shift from the 
loan correspondent business model to the TPO model may require some 
TPOs to acquire a different type of state licensing, which would yield 
additional costs to these lenders. Because the requirements governing 
lenders vary across states, as do the licensing fees and associated 
costs, it is not possible to derive an actual or estimated cost for 
changes to TPO licensing, but it is a factor that must be taken into 
consideration when evaluating the impact of this rule on loan 
correspondents.
    2. FHA-approved mortgagees. The majority of FHA-approved mortgagees 
engage in wholesale lending whereby they underwrite and endorse loans 
originated by outside FHA-approved loan correspondents. It is 
reasonable to expect that such relationships will continue. FHA 
mortgagees with wholesale loan operations are already required to 
monitor the performance of loans which are acquired from mortgage 
brokers and loan correspondents. They are currently held responsible 
for the underwriting and credit decisions made on loans acquired from 
brokers. Lenders use a variety of methods to track and monitor the 
performance of loans purchased from brokers and correspondents, 
including broker scorecards. Thus, requiring mortgagees to perform 
oversight of the non-FHA approved TPOs with which they partner should 
in essence be a codification of practices that are already the norm for 
prudent mortgagees. Although the costs of oversight may increase 
slightly, given the current practices of mortgagees to monitor the 
performance of loan correspondents with which they partner, the 
increase in these costs to lenders from the implementation of this 
regulation is expected to be minimal.
    In addition to the costs associated with the ongoing monitoring and 
oversight of sponsored TPOs, it may also be assumed that some 
mortgagees will establish their own minimum criteria with which to vet 
potential TPOs seeking sponsorship. There will obviously be a cost to 
the mortgagee to evaluate potential candidates for sponsorship. 
However, because it is impossible to know how many mortgagees will 
employ such processes, the extensiveness of the requirements and 
evaluations used by mortgagees to analyze candidates, and the actual 
cost to a mortgagee for such activities, it is not possible for HUD to 
quantify the total costs to mortgagees of vetting potential TPOs. 
Nevertheless, HUD does acknowledge that costs will be incurred for 
these processes.
    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.

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. 
At the proposed rule stage, HUD certified that this rule, if issued in 
final, would not have a significant economic impact on a substantial 
number of small entities, within the meaning of the Regulatory 
Flexibility Act. HUD continues to stand by its findings on this issue. 
(See 74 FR 62528.)
    The Office of Advocacy of the Small Business Administration (SBA-
OA) expressed concern that the rule as proposed would adversely affect 
a large number of small businesses and encouraged HUD to conduct an 
Initial Regulatory Flexibility Analysis to further explore the impact 
of the rule upon such entities. SBA-OA was concerned specifically with 
the

[[Page 20731]]

proposed increase to FHA's net worth requirements and the operational 
limitations that may be experienced by TPOs resulting from the 
elimination of loan correspondent approval. Of the 1,297 approved 
nonsupervised mortgagees that renewed their FHA approval during the 
sample period of December 1, 2008, to November 20, 2009, 888 
mortgagees, or 68.5 percent, met the SBA specifications for 
classification as a small business. Of these 888 mortgagees, 379 (42.7 
percent of the total) already have a net worth in excess of $1 million 
and 629 (70.8 percent of the total) already have a net worth in excess 
of at least $500,000. Accordingly, a significant majority of currently 
approved small business nonsupervised mortgagees either already have a 
net worth of $1 million or greater, or are well on their way to 
complying with the new requirement. The remaining 259 small business 
nonsupervised mortgagees with a net worth of less than $500,000 
constitute a small minority of 7.8 percent of the total number of 
approved mortgagees. While HUD determined that the proposed rule, if 
implemented without change at the final rule stage, would not have a 
significant economic impact on a substantial number of small entities, 
HUD nevertheless appreciated the small entity impact concerns expressed 
by commenters, and, as already discussed several times in the preamble 
to this final rule, this final rule provides for a more gradual 
transition to new net worth requirements for lenders that meet SBA's 
definition of a small business.
    SBA-OA also expressed concern that small lender correspondents (to 
which HUD refers to in this preamble as TPOs) may lose income as a 
result of the loss of FHA approval. However, as HUD noted in the 
preamble to the proposed rule and in this preamble to the final rule, 
the changes to the lender approval process do not prevent participation 
by entities that have been involved in FHA programs. Rather, the rule 
limits the actual approval process to those entities that underwrite, 
service, or own FHA-insured mortgages. Loan correspondents and other 
TPOs may continue to be involved in FHA loan origination by working 
with FHA-approved mortgagees.
    While HUD information technology security requirements do not 
permit non-FHA approved entities to access the FHA Connection, HUD's 
Business to Government Specification permits TPOs to utilize their 
sponsoring mortgagees' loan origination systems to perform many loan 
origination processes conducted in the FHA Connection. Further, all 
TPOs will continue to have access to all FHA training and information 
resources. Therefore, with these additional changes made at the final 
rule stage, TPOs will continue to have access to the tools and 
resources necessary to participate in the origination of FHA-insured 
loans, and any remaining impacts upon TPO revenues will be extremely 
minimal.
    In developing this final rule, HUD gave careful consideration to 
the concerns expressed by small entity commenters, and by SBA-OA on the 
behalf of small entities, and has made changes to address these 
concerns while maintaining the important policy changes needed to 
responsibly manage risk to FHA.

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 final 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 final 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.

0
Accordingly, for the reasons stated in the preamble above, HUD amends 
24 CFR part 202 as follows:

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

0
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).


0
2. In Sec.  202.2, revise the definitions of ``Lender or Title I 
lender'', and ``Mortgagee or Title II mortgagee,'' to read as follows:


Sec.  202.2  Definitions.

* * * * *
    Lender or Title I lender means a financial institution that:
    (a) Holds a valid Title I Contract of Insurance and is approved by 
the Secretary under this part as a supervised lender under Sec.  202.6, 
a nonsupervised lender under Sec.  202.7, an investing lender under 
Sec.  202.9, or a governmental or similar institution under Sec.  
202.10; or
    (b) Is under suspension or held a Title I contract that has been 
terminated but remains responsible for servicing or selling Title I 
loans that it holds and is authorized to file insurance claims on such 
loans.
* * * * *
    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 202.10.
* * * * *

0
3. In Sec.  202.3, revised paragraphs (a) introductory text, (a)(1), 
and (a)(3) 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.

[[Page 20732]]

    (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.
* * * * *
    (3) Authorized agents. A mortgagee approved under Sec. Sec.  202.6, 
202.7, or 202.10 as a nonsupervised mortgagee, supervised mortgagee, or 
governmental or similar institution approved as a Direct Endorsement 
mortgagee under 24 CFR 203.3 may, with the approval of the Secretary, 
designate a nonsupervised or supervised mortgagee with Direct 
Endorsement approval under 24 CFR 203.3 as authorized agent for the 
purpose of underwriting loans. The application for mortgage insurance 
may be submitted in the name of the FHA-approved mortgagee or its 
designated authorized agent under this paragraph.
* * * * *

0
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 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 from a non-FHA-approved entity must confirm 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 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, 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

[[Page 20733]]

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, or loan originator 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 mortgagees or that demonstrate 
irresponsibility;
    (5) Be convicted of, or have pled guilty or nolo contendere 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) Be 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) Be 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 or Title II 
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. 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.
    (m) Reports. Each lender and mortgagee must submit an annual 
certification 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) Applicability. The requirements of this section 
apply to approved supervised and nonsupervised lenders and mortgagees 
under Sec.  202.6 and Sec.  202.7, and approved investing lenders and 
mortgagees under Sec.  202.9. For ease of reference, these institutions 
are referred to as ``approved lenders and mortgagees'' for purposes of 
this section. The requirements of this section also apply to applicants 
for FHA approval under Sec. Sec.  202.6, 202.7, and 202.9. For ease of 
reference, these entities are referred to as ``applicants'' for 
purposes of this section.
    (2) Phased-in net worth requirements for 2010 and 2011--(i) 
Applicants. Effective on June 21, 2010, applicants shall comply with 
the net worth requirements set forth in paragraphs (n)(2)(iii) of this 
section.
    (ii) Approved mortgagees. Effective on May 20, 2011, each approved 
lender or mortgagee with FHA approval as of May 20, 2010 shall comply 
with the net worth requirements set forth in paragraphs (n)(2)(iii) or 
(n)(2)(iv) of this section, as applicable.
    (iii) Net worth requirements for non-small businesses. Each 
approved lender or mortgagee that exceeds the size standard for its 
industry classification established by the Small Business 
Administration at 13 CFR 121.201 Sector 52 (Finance and Insurance), 
Subsector 522 (Credit Intermediation and Related Activities) 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.
    (iv) Net worth requirements for small businesses. Each approved 
lender or mortgagee that meets the size standard for its industry 
classification established by the Small Business Administration at 13 
CFR 121.201 Sector 52 (Finance and Insurance), Subsector 522 (Credit 
Intermediation and Related Activities) shall have a net worth of not 
less than $500,000, of which no less than 20 percent must be liquid 
assets consisting of cash or its equivalent acceptable to the 
Secretary. If, based on the audited financial statement prepared at the 
end of its fiscal year and provided to HUD at the commencement of the 
new fiscal year, an approved lender or mortgagee no longer meets the 
Small Business Administration size standard for its industry 
classification, the approved lender or mortgagee shall meet the net 
worth requirement set forth in paragraph (n)(2)(iii) of this section 
for a non-small business approved lender or mortgagee by the last day 
of the fiscal year in which the audited financial statements were 
submitted.
    (3) Net worth requirements for 2013 and subsequent years. Effective 
May 20, 2013:
    (i) Irrespective of size, each applicant and each approved lender 
or mortgagee, for participation solely under the FHA single family 
programs, shall have a net worth of not less than $1 million, plus an 
additional net worth of one percent of the total volume in excess of 
$25 million of FHA single family insured mortgages originated, 
underwritten,

[[Page 20734]]

purchased, or serviced during the prior fiscal year, up to a maximum 
required net worth of $2.5 million. No less than 20 percent of the 
applicant's or approved lender or mortgagee's required net worth must 
be liquid assets consisting of cash or its equivalent acceptable to the 
Secretary.
    (ii) Multifamily net worth requirements. Irrespective of size, each 
applicant for approval and each approved lender or mortgagee for 
participation solely under the FHA multifamily programs shall have a 
minimum net worth of not less than $1 million. For those multifamily 
approved lenders or mortgagees that also engage in mortgage servicing, 
an additional net worth of one percent of the total volume in excess of 
$25 million of FHA multifamily mortgages originated, purchased, or 
serviced during the prior fiscal year, up to a maximum required net 
worth of $2.5 million, is required. For multifamily approved lenders or 
mortgagees that do not perform mortgage servicing, an additional net 
worth of one half of one percent of the total volume in excess of $25 
million of FHA multifamily mortgages originated during the prior fiscal 
year, up to a maximum required net worth of $2.5 million, is required. 
No less than 20 percent of the applicant's or approved lender's or 
mortgagee's required net worth must be liquid assets consisting of cash 
or its equivalent acceptable to the Secretary.
    (iii) Dual participation net worth requirements. Irrespective of 
size, each applicant for approval and each approved lender or mortgagee 
that is a participant in both FHA single-family and multifamily 
programs must meet the net worth requirements as set forth in paragraph 
(n)(3)(i) of this section.


0
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 insured 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.


0
6. Revise Sec.  202.8 to read as follows:


Sec.  202.8  Sponsored third-party originators; Continued approval of 
loan correspondents through December 31, 2010.

    (a) Definitions--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.
    (3) Each sponsor shall be responsible to the Secretary for the 
actions of its sponsored third-party originators or mortgagees in 
originating loans or mortgages, unless applicable law or regulation 
requires specific knowledge on the part of the party to be held 
responsible. If specific knowledge is required, the Secretary will 
presume that a sponsor has knowledge of the actions of its sponsored 
third-party originators or mortgagees in originating loans or mortgages 
and the sponsor is responsible for those actions unless it can rebut 
the presumption with affirmative evidence.
    Sponsored third-party originator. A third-party originator does not 
hold a Title I Contract of Insurance or Title II Origination Approval 
Agreement and may not purchase or hold loans but is authorized to 
originate Title I direct loans or Title II mortgage loans for sale or 
transfer to a sponsor or sponsors, as defined in this section, which 
holds a valid Title I Contract of Insurance or Title II Origination 
Approval Agreement and is not under suspension, subject to the sponsor 
determining that the third-party originator has met the eligibility 
criteria of paragraph (b) of this section.
    (b) Eligibility to originate loans to be insured by FHA. A non-
approved third-party originator may originate loans to be insured by 
FHA, provided:
    (1) The third-party originator is working with and through an FHA-
approved lender or mortgagee; and
    (2) The third-party originator or an officer, partner, director, 
principal, manager, supervisor, loan processor, or loan originator of 
the third-party originator has not been subject to the sanctions or 
administrative actions listed in Sec.  202.5(j), as determined and 
verified by the FHA-approved lender or mortgagee.
    (c) Continued approval of loan correspondents through December 31, 
2010. A loan correspondent (as that term was defined under the version 
of this section in effect immediately before May 20, 2010) with FHA 
approval as of May 20, 2010 will maintain its FHA approval through 
December 31, 2010.


Sec.  202.9  [Amended]

0
7. In Sec.  202.9, remove the last sentence of paragraph (a).


0
8. 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;
    (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.


0
9. 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 exceed 2 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

[[Page 20735]]

mortgagee include all single family insured mortgages originated by the 
mortgagee, including those funded by the mortgagee or purchased from 
the originator, if the requirements of the mortgagee have the effect of 
leading to a 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: April 9, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-8837 Filed 4-19-10; 8:45 am]
BILLING CODE 4210-67-P