[Federal Register Volume 76, Number 62 (Thursday, March 31, 2011)]
[Notices]
[Pages 17936-17951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7551]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-5450-N-03]
RIN 2502-ZA09
Federal Housing Administration (FHA): Notice of FHA PowerSaver
Home Energy Retrofit Loan Pilot Program
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
[[Page 17937]]
ACTION: Notice.
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SUMMARY: This notice announces HUD's FHA Home Energy Retrofit Loan
Pilot Program (Retrofit Pilot Program or Pilot Program) known as FHA
PowerSaver. The Consolidated Appropriations Act, 2010 directs HUD to
conduct an Energy Efficient Mortgage Innovation pilot program targeted
to the single family housing market. The Retrofit Pilot Program meets
this statutory directive and provides funding to support that effort.
The announcement of this pilot program follows a November 10, 2010,
Federal Register notice in which HUD submitted for public comment its
proposal to conduct the Retrofit Pilot Program. This announcement of
the final structure of the Pilot Program takes into consideration the
public comments received in response to the November 10, 2010, notice.
DATES: Effective Date: May 2, 2011May 2, 2011
FOR FURTHER INFORMATION CONTACT: Patricia McBarron, Office of Single
Family Housing Development, Office of Housing, Department of Housing
and Urban Development, 451 7th Street, SW., Washington, DC 20410-8000;
telephone number 202-708-2121 (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
On November 10, 2010 (75 FR 69112), HUD published in the Federal
Register a notice that announced its proposal to conduct the Retrofit
Pilot Program. The Consolidated Appropriations Act, 2010 (Pub. L. 111-
117, approved December 16, 2009, 123 Stat. 3034) (2010 Appropriations
Act), which appropriated Fiscal Year (FY) 2010 funds for HUD, among
other agencies, appropriated $50 million for an Energy Innovation Fund
to enable HUD to catalyze innovations in the residential energy
efficiency sector that have the promise of replicability and help
create a standardized home energy efficient retrofit market. Of the $50
million appropriated for the Energy Innovation Fund, the 2010
Appropriations Act stated that ``$25,000,000 shall be for the Energy
Efficient Mortgage Innovation pilot program directed at the single
family housing market.'' (See Pub. L. 111-117, at 123 Stat. 3089.)
As discussed in detail in the November 10, 2010, notice, in
considering how to structure the pilot program directed by the 2010
Appropriations Act, HUD looked to the findings of the Administration's
Recovery Through Retrofit Report,\1\ which specifically addressed
retrofitting homes for energy efficiency, and the suitability of
building the pilot program by supplementing FHA's Title I Property
Improvement Loan Insurance program (Title I program). HUD determined
that both the Administration's Recovery through Retrofit Report and
FHA's Title I program provided the appropriate foundation for
structuring the Retrofit Pilot Program. (See 75 FR 69113-69114.) With
respect to the Title I program, HUD determined that utilizing the
existing FHA Title I program, with additional grant funds and new
requirements, is the most efficient and effective opportunity it could
deploy to deliver federally insured financing to homeowners in markets
that are ready and able to utilize it.
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\1\ On October 19, 2009, the Administration released the
Recovery Through Retrofit Report (RTR Report), which builds on the
foundation laid out in the American Recovery and Reinvestment Act
(Pub. L. 111-5, approved February 17, 2009) to expand green job
opportunities in the United States and boost energy savings for
middle class Americans by retrofitting homes for energy efficiency.
The White House Council on Environmental Quality, along with 12
federal departments and agencies (including HUD) and 6 White House
offices, developed the report through an interagency process. The
RTR Report recognizes that the funding of residential retrofit
projects will help create jobs for retrofit workers, while also
helping homeowners save money by lowering their utility bills. The
report can be found at http://www.whitehouse.gov/assets/documents/Recovery_Through_Retrofit_Final_Report.pdf.
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FHA's Title I program is authorized by section 2 of Title I of the
National Housing Act (12 U.S.C. 1703), and its regulations are codified
in 24 CFR part 201.
II. The November 10, 2010, Proposal
As provided in the November 10, 2010, notice, FHA's goals for the
Retrofit Pilot Program are: (1) To facilitate the testing and scaling
of a mainstream mortgage product for home energy retrofit loans that
includes liquidity options for lenders, resulting in more affordable
and widely available loans than are currently available for home energy
retrofits; and (2) to establish a robust set of data on home energy
efficiency improvements and their impact--on energy savings, borrower
income, property value, and other metrics--for the purpose of driving
development and expansion of mainstream mortgage products to support
home energy efficiency retrofits. After determining the viability of
the Title I program to achieve these goals, FHA also determined that
several changes to the program are necessary for the purposes of the
Retrofit Pilot Program. These changes are described in detail in
Section II.F. of the November 10, 2010, notice. (See 75 FR 69115).)
Broadly, the modifications to the Title I regulations are intended to
protect consumers, provide low-cost financing, and generate lender and
secondary market participation in home energy retrofit loans.
In the November 10, 2010, notice, HUD solicited public comment on
the proposed structure of the Retrofit Pilot Program, and also invited
interested lenders to advise HUD of their interest, as described in
Appendix A of the notice, so that HUD may contact them and explore
their interest and the possibility of their participation in the pilot
program.
At the close of the public comment period on December 27, 2010, HUD
received 49 public comments. HUD reviewed the comments, which are
addressed in section IV of this notice, and made some changes to the
Retrofit Pilot Program in response to public comment and further
consideration of issues by HUD. The changes made to the Retrofit Pilot
Program are addressed in Section III, which immediately follows.
III. Changes to the Proposed Retrofit Pilot Program
HUD has made the following changes to the November 10, 2010,
notice:
1. Lender grant funds. The final notice specifies all of the
purposes for which lenders may use grant funds. They are: (1)
Supporting costs associated with creating or enhancing staffing and/or
systems necessary to deliver or report on PowerSaver-insured loans; (2)
Funding costs of loan marketing, origination, and/or underwriting; (3)
Offsetting costs associated with appraisals and other approved methods
of property valuation; and (4) For lenders that will also service their
own loans, reducing servicing costs.
In addition, this notice clarifies that HUD grant funds may not be
used to directly subsidize or otherwise ``write-down'' the interest
rate on PowerSaver loans. Non-Federal grant funds may be used for this
purpose.
2. Eligible properties (definition of ``single family property
improvement loans''). This notice broadens the definition of eligible
properties to include both attached and semidetached single unit,
owner-occupied principal residences, in addition to detached properties
of that type. Further, HUD has clarified that condominium units that
otherwise meet the criteria of an eligible single family property are
also
[[Page 17938]]
eligible properties under the pilot program.
3. New eligible improvements. This notice adds replacement windows
that meet the most recent Energy Star specifications to the list of
eligible improvements that may be funded with a PowerSaver loan.
4. Revisions to eligible improvements listed in the November 10,
2010, notice. This notice makes the following revisions with respect to
eligible improvements listed in the November 10, 2010, notice:
a. Ground source heat pump systems (instead of ``geothermal heat
pumps'' as in the November 10, 2010, notice) must be installed in
accordance with ANSI/ACCA Standard 5 QJ-2010; and
b. Wind turbines must:
(i) Have a nameplate capacity of not more than 100 kilowatts;
(ii) Have performance and safety certification to:
The International Electromechanical Commission (IEC)
standards from an accredited product certification body, or
Certification to the American Wind Energy Association
(AWEA) standards from the Small Wind Certification Council (SWCC) or a
nationally recognized testing laboratory; and
(iii) Be installed by an installer with North American Board of
Certified Energy Practitioners Small Wind Installer Certification or
small wind turbine installation training from an accredited training
organization.
5. Use of loan proceeds to fund other improvements. Section
V.F.4(b) of the notice also specifies that homeowners may use up to 25
percent of PowerSaver loan proceeds to fund, with certain specified
exceptions, property improvements identified in Title I Letter 470 as
eligible improvements under the Title I program. A copy of Title I
Letter 470 may be downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm.
6. Property valuation. This notice specifies that lenders may use a
Fannie Mae and Freddie Mac Form 2055 Exterior-Only Inspection
Residential Appraisal Report (most recent version) to determine
property value for the purposes of establishing property valuation. The
notice also specifies that lenders may be able to use Automated
Valuation Models (AVMs) to establish property value for certain
borrowers, subject to FHA approval on a case-by case basis. HUD will
discuss this issue further with lenders in the review of their
Expression of Interest. HUD notes, however, that potential purchasers
of PowerSaver loans from originating lenders may have additional or
more restrictive criteria regarding the use of AVMs, which lenders
seeking to sell loans to such entities may be required to meet.
7. Charges to borrower to obtain a loan. This notice specifies the
list of charges and fees that may be charged in connection with a
PowerSaver loan and which may be financed as part of a PowerSaver loan.
8. Criteria for dealer loans. This notice generally affirms that
``dealer loans'' are not allowed as part of the PowerSaver pilot.
However, home improvement contractors may provide information to
homeowners as to how they may obtain a PowerSaver loan, including the
identity of lenders who are participating in the program.
9. Insurance claim procedure. This notice continues to provide that
the holder of the note will be accountable to HUD for origination/
underwriting errors, and that the servicer will be accountable to HUD
for servicing errors, as long as the servicer is a HUD-approved lender.
However, based on further internal HUD consideration on how best to
effectuate this requirement, this notice clarifies that the insured
lender must enter into an agreement with its servicer, under which the
servicer agrees to be liable to HUD for such errors, and which
identifies HUD as a third-party beneficiary of such agreement.
IV. Discussion of Public Comments on the Proposed Retrofit Pilot
Program
Comments were submitted by lenders and representatives of the
lending industry; home performance contractors and representatives of
the home performance/contracting industry (including one pension fund);
local officials and representatives of state energy agencies;
environmental and public health organizations; providers of energy
services and technologies; community development financial
institutions; and members of the general public. This section presents
a summary of the significant issues raised by the commenters on the
November 10, 2010, notice and HUD's responses to these issues.
A. Comments on Geographic Scope
In listing the locations that received funding under the Department
of Energy (DOE) Better Buildings program, all of which are
automatically eligible locations for lenders to serve in the pilot
program, the Proposed Notice inadvertently excluded Nashville,
Tennessee, from the list. This notice corrects this error; Nashville is
an automatically eligible location for a lender to serve under the
pilot program. In addition, in December 2010, DOE announced that the
following State Energy Programs were integrated into BetterBuildings:
Alabama, Maine, Massachusetts, Michigan, Nevada, Washington, and
Virginia. As a result, these states are automatically eligible
locations for lenders to serve under the pilot program.
Finally, this notice provides that areas where the Home Performance
with Energy Star program is available are automatically eligible
locations for lenders to serve under the pilot program.
Several commenters suggested that certain communities that are not
covered under DOE's Better Buildings Program should be eligible markets
for lenders to serve in the pilot program. As noted in the November 10,
2010, notice, HUD strongly encourages lenders to serve such markets,
provided lenders can demonstrate, through their Expressions of Interest
in participating, that such locations are viable markets for the
deployment of PowerSaver-insured loans. On December 16, 2010, HUD
posted additional guidance on its Web site to assist lenders in this
area: http://www.hud.gov/offices/hsg/sfh/title/additionalsaverinformation.pdf.
B. Comments on Lender Eligibility
Several commenters recommended that HUD allow institutions that may
not be FHA-approved lenders, such as community development financial
institutions and state energy agencies, to be eligible lenders under
the pilot program. HUD hopes and expects that a wide range of entities
will express interest in participating in the pilot program, including
entities that have not participated in FHA programs in the past.
However, as required by the National Housing Act, any entity that
wishes to make loans insured by FHA under the pilot program must hold a
valid Title I contract of insurance and be approved by the Secretary.
HUD notes that approved Title II lenders may obtain Title I eligibility
under an expedited process.
C. Comments on Lender Grant Funds
Several commenters suggested uses of the incentive grant funds
available to lenders under the pilot program in addition to the uses
specified in the November 10, 2010, notice. Some commenters recommended
allowing grant funds to be used to support a lender's costs associated
with creating or enhancing systems necessary to deliver PowerSaver
loans.
HUD agrees with this suggestion and this notice specifies that such
use is allowed with grant funds under the
[[Page 17939]]
pilot program. In addition, this notice specifies that lenders may use
grant funds to offset costs associated with appraisals.
Several commenters suggested that HUD grant funds be available to
lenders to set up loan loss reserves. Due to the current insurance
structure, HUD does not view this as a viable or optimal use of HUD
grant funds for the purposes of the pilot program and declines to make
this change. HUD notes that many communities have access to other funds
through DOE and other sources that may be available for such purposes.
HUD is encouraging lenders to work in partnership with other entities
through the pilot program and will evaluate lender Expressions of
Interest to participate in part on the extent to which lenders propose
to do so. HUD's intention is to provide lenders the flexibility to use
funds so long as any use delivers demonstrable benefit to borrowers,
such as by making loans more affordable or available. One commenter
recommended that HUD ensure that lenders who propose to use grant funds
to lower the interest rate on PowerSaver loans they originate do not
``over subsidize'' loans. HUD will work closely with each lender to
size and scope the lender's grant payments so that the payments have
the most beneficial impact in the market. As stated in the November 10,
2010, notice, the amount of payment to each lender and the eligible
uses of funds by each lender will be determined by HUD based on the
lender's Expression of Interest. A significant factor in determining
payment amounts to each lender will be the number of loans the lender
anticipates making during the 2-year period of the pilot program.
Lenders were required to report to HUD on their use of incentive
payments funds.
D. Comments on Selection of Lenders
One commenter recommended that HUD require lenders to secure the
approval of their Expressions of Interest from ``existing energy
efficiency program officials'' before submitting them to HUD and
suggested HUD share Expressions of Interest with ``state energy
offices'' in states that each lender proposes to serve. HUD declines to
make this change, as lender Expressions of Interest are nonbinding, and
so may change as lenders finalize the details of their participation in
discussions with HUD, and may contain proprietary information. The same
commenter encouraged HUD to ensure participating lenders collaborate
closely with state energy efforts and other initiatives that are
currently supporting home energy improvements in markets the lender
proposes. HUD does in fact intend to do this, as suggested in the
November 10, 2010, notice (with reference to the importance of
partnerships with public sector agencies), and will evaluate lender
Expressions of Interest in part on this basis.
E. Comments on Eligible Properties (Definition of ``Single Family
Property Improvement Loans'')
Several commenters recommended broadening the definition of
eligible properties under the pilot program. The following property
types were recommended: attached and semidetached single unit, owner-
occupied principal residences; manufactured homes; and multifamily
properties. HUD agrees with the suggestion to allow attached and
semidetached single unit, owner-occupied principal residences, in
addition to detached properties of that type. Such properties are fully
within any common definition of ``single family housing'' and represent
an important segment of the housing stock in many communities. This
notice reflects this change. Further, HUD has clarified that
condominium units that otherwise meet the criteria of an eligible
single family property are also eligible properties under the pilot
program.
HUD declines to make further changes to eligible property types.
HUD fully agrees with the statements by commenters that many
manufactured homes and multifamily properties and their residents would
benefit from energy improvements. However, as noted in the November 10,
2010, notice, the PowerSaver pilot program is being implemented under
the statutory directive from Congress to create a pilot program
directed at the single family housing market.\2\ HUD also notes that
other HUD programs are designed to support manufactured and multifamily
housing.
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\2\ The Consolidated Appropriations Act, 2010 (Pub. L. 111-117,
approved December 16, 2009, 123 Stat. 3034). Specifically, see
Public Law 111-117, at 123 Stat. 3089.
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F. Comments on Eligible Use of Loan Proceeds
Several commenters addressed the subject of eligible uses of loan
proceeds. Some commenters recommended that the list of eligible
improvements directly related to home energy performance be revised and
expanded. Others recommended that HUD allow borrowers flexibility to
use loan proceeds to fund costs associated with improvements that are
not on the list. With respect to the first set of comments, HUD has
made a revision to the list of eligible improvements. Specifically,
this notice adds replacement windows that meet the most recent Energy
Star specifications to the list of eligible improvements that may be
funded under the PowerSaver program.
In addition, this notice makes the following revisions with respect
to eligible improvements on the list provided in the November 10, 2010,
notice:
1. Ground source heat pump systems (instead of ``geothermal heat
pumps'' as in the November 10, 2010, notice) must be installed in
accordance with ANSI/ACCA Standard 5 QJ-2010; and
2. Wind turbines must:
(a) Have a nameplate capacity of no more than 100 kilowatts;
(b) Have performance and safety certification to:
The IEC standards from an accredited product certification
body, or
Certification to the AWEA standard from the SWCC or a
nationally recognized testing laboratory; and
(c) Be installed by an installer with North American Board of
Certified Energy Practitioners Small Wind Installer Certification or
small wind turbine installation training from an accredited training
organization.
Other commenters recommended that the list of eligible improvements
include ``home energy management systems'' and ``home lighting
systems.'' HUD declines to make these changes. While HUD agrees that
improvements consistent with these terms can improve home energy
performance, Title I Letter 470 provides that property improvement for
the purposes of the program must ``[i]n general * * * be permanent,
hard wired or hard plumbed to the property.'' Another commenter
recommended stronger and more prescriptive requirements with respect to
insulation, sealing, skylights, and air conditioning systems. HUD
declines to make these changes. HUD believes that these recommendations
generally represent a more aggressive set of requirements than is
reasonable and necessary to apply across the board to a national pilot
program. HUD recognizes that in every area of energy-related home
improvements, technology and practice is continually improving. At this
early stage in the development of a market for energy efficient home
improvements, HUD believes the list of eligible improvements as revised
in this notice strikes the right balance between improving home energy
performance and ensuring a sufficiently broad range of homeowners and
communities can benefit from the pilot program.
[[Page 17940]]
One commenter recommended that power purchase agreements (PPAs) or
contracts with third-party owners to use electricity generated by on-
site photovoltaic systems, be allowed as eligible improvements, subject
to certain conditions. HUD is supportive of innovative efforts to
expand the deployment of clean energy in the residential sector,
specifically including through PPAs, subject to certain borrower
disclosures and protections. The recommendation represents a broader
interpretation than generally has been made of the term ``property
improvement.'' (The Title I program on which the pilot program is based
is authorized to support property improvements.) HUD believes that this
proposed recommendation is worthy of further consideration and is
interested in better understanding the underwriting and operational
issues, whether the recommendation is an eligible activity under the
Title I program, and the risks and protections for homeowners as well
as FHA. While HUD declines to make the recommended change at this time,
it may reconsider this decision in the future based on additional
analysis.
With respect to recommendations regarding more flexible use of loan
proceeds, HUD agrees with commenters that flexibility is appropriate
and likely necessary to encourage and enable many homeowners to fund
home energy improvements, which many will likely do as part of a
broader remodeling or renovation of their home. HUD also agrees with
one commenter that suggested it would be important to ensure homeowners
can make basic health and safety-related improvements at the time of a
home energy improvement job. At a nascent stage of consumer awareness
and interest in home energy improvements, HUD believes it is important
to make financing products as appealing and marketable as possible,
while maintaining the focus on the policy goal of more energy efficient
homes. HUD notes that leading state and local home energy improvement
loan programs, as well as the Fannie Mae Energy Loan product, allow
significant flexibility in the use of loan proceeds on this basis.
Section V.F.4(b) of this notice specifies that homeowners may use
up to 25 percent of PowerSaver loan proceeds to fund certain property
improvements identified in Title I Letter 470 as eligible improvements
under the Title I program. A copy of Title I Letter 470 may be
downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm.
HUD recognizes that such flexibility may add some complexity to
aspects of the evaluation of the pilot program. However, HUD believes
the reporting requirements of the program, which will generate data on
the specific energy improvement measures funded with each loan, will be
sufficient to meet the evaluation goals in this area.
Also with respect to eligible uses of loan proceeds, several
commenters recommended that HUD require that homeowners avail
themselves of a home energy audit or rating to be eligible for a
PowerSaver loan. HUD declines to require audits/ratings in connection
with PowerSaver loans at this time. Audit/rating approaches, protocols,
technologies, and data appear to vary substantially. HUD is concerned
that there is not an industry consensus or uniform standard for energy
audits/ratings. (HUD notes that one commenter suggested such standards
are in development by one industry group and may be available in early
2011; HUD will be interested in following this development.) DOE is
currently piloting the new Home Energy Score program, which includes an
energy audit component. Once the Home Energy Score pilot program is
complete, HUD may revisit the required use of an energy audit. In
addition, it is HUD's understanding that comprehensive audits/ratings
can cost as much as $500, adding a significant additional expense; one
commenter suggested allowing the cost of audits to be financed as part
of the PowerSaver loan. For these reasons, a required audit or rating,
as recommended, may disadvantage certain homeowners and communities.
HUD generally agrees with these commenters that audits/ratings can
enable homeowners to better understand the most cost effective energy
savings improvements for their particular home. For these reasons, the
November 10, 2010, notice strongly encouraged the use of audits; this
notice affirms this encouragement. Furthermore, as suggested in the
November 10, 2010, notice, HUD will consider the extent to which audits
will be required or encouraged by lenders in lender Expressions of
Interest to participate in the pilot program. In addition, this notice
allows the cost of an energy audit/rating to be financed as part of the
PowerSaver loan.
G. Comments on Property Valuation
Several commenters addressed the property valuation requirement,
which is necessary to ensure homeowners do not have total mortgage debt
(including the PowerSaver loan) in excess of the current value of their
home at the time of PowerSaver loan origination. One commenter
recommended that HUD allow lenders to use a Fannie Mae and Freddie Mac
Form 2055 Exterior-Only Inspection Residential Appraisal Report, on
which the November 10, 2010, notice specifically solicited comment.
This notice adopts this recommendation. Some commenters also
recommended that Automated Valuation Models (AVMs) be allowed for use
in establishing property valuation. HUD recognizes that AVMs can be an
effective tool in certain markets and may be appropriate to use with
respect to borrowers who have built some equity in their homes. The
notice specifies that lenders may use AVMs to establish property value
for certain borrowers, subject to FHA approval, on a case-by-case
basis. HUD will discuss this issue further with lenders in the review
of their Expression of Interest.
Some commenters raised the concern that appraisals would add
inordinate cost to a PowerSaver loan and to the time to close a loan.
HUD is sensitive to this concern and agrees that the cost and time
associated with appraisals may pose a challenge to the marketability of
PowerSaver loans. The availability of various options for determining
property valuation, as noted above, addresses this concern. A sound
basis for determining property value is essential for determining a
borrower's combined-loan-to-value ratio and for establishing PowerSaver
loans as viable for capital markets investment and liquidity, which is
a stated goal of the pilot program. As noted above, lenders may propose
to use incentive grant funds to offset costs associated with appraisals
and other approved methods of property valuation. In addition, this
notice specifies that appraisal costs may be financed as part of the
PowerSaver loan.
Some commenters recommended that an energy audit suffice for
establishing the property value. HUD declines to makes this change, as
energy audits are not currently recognized by the housing finance
industry as a viable tool for determining home value. HUD is interested
in working with stakeholders and exploring the extent to which energy
audits may be able to provide reliable information to inform
determinations of home value and borrower ability to afford and repay
mortgage loans. Finally, one commenter suggested that an audit should
eliminate an appraisal requirement for an unsecured PowerSaver loan.
The notice clarifies that, as under the Title I Property Improvement
program, PowerSaver loans of less than $7,500 are
[[Page 17941]]
not required to be secured and appraisal is not required for such
loans.
H. Credit Requirements for Borrowers
Some commenters recommended modest tightening or relaxing of the
minimum credit score and maximum total debt-to-income for borrowers
receiving PowerSaver loans. HUD declines to make any changes to these
features of the program at this time. Homeowners' response and loan
performance, among other factors, during the pilot program may warrant
adjustments to credit requirements in the future.
I. Requirements for Dealer Loans
Several commenters suggested that HUD allow ``dealer loans,'' as
defined by the FHA Title I Property Improvement Home Loan program, be
allowed under the PowerSaver pilot program. The Title I Property
Improvement Home Loan program regulations at Sec. 201.2 define a
``dealer loan'' as ``a loan where a dealer, having a direct or indirect
financial interest in the transaction between the borrower and the
lender, assists the borrower in preparing the credit application or
otherwise assists the borrower in obtaining the loan from the lender.''
HUD agrees with these commenters that responsible home improvement
contractors can be effective in educating homeowners about home energy
loan financing options, which is typically important to maintaining
homeowner interest in a financing option.
While HUD declines to make this change, home improvement
contractors may provide information to homeowners as to how they may
obtain a PowerSaver loan, including the identity of lenders who are
participating in the program.
J. Evaluating the Success of the Retrofit Pilot Program
Several commenters made recommendations regarding HUD's planned
evaluation of the PowerSaver pilot program. Some suggested that HUD
require homeowners to sign a disclosure in connection with a PowerSaver
loan to allow access to pre- and post-installation utility bill
information. HUD recognizes the importance of accessing utility bill
information and is exploring options for accessing it in a manner that
ensures homeowner privacy. This notice does not require homeowners to
provide utility bill information; HUD will discuss this issue
individually with participating lenders in the review of lender
Expressions of Interest.
One commenter suggested that HUD participate in efforts by DOE, the
Environmental Protection Agency, and industry groups to develop metrics
and standards for data collection and program evaluation and to
coordinate to the extent feasible with DOE's Home Energy Score Pilot
Program. HUD appreciates and agrees with this recommendation and has
already been in discussions along these lines with DOE and others.
K. Other Comments
Several commenters recommended increasing the maximum loan amounts
overall or with respect to unsecured loans. HUD declines to make
changes to the loan limits. HUD believes that the $25,000 loan limit is
sufficient to cover all or most of the cost of a comprehensive retrofit
or the cost of a renewable energy system--and in the latter case a
variety of subsidies and incentives are available to fund costs that
the loan cannot. With respect to unsecured loans, the primary purpose
of the PowerSaver pilot program is to establish the viability of a
mainstream mortgage product for home energy improvement loans;
unsecured loan products and credit card options of various types are
already available in the market. Because the current Title I Property
Improvement Home Loan program does not require loans under $7,500 to be
secured, primarily because it would add infeasible cost to such small
loans, HUD is retaining that feature, with no change, and no additional
incentives to originate (as one commenter recommended) in the
PowerSaver pilot program.
Some commenters broadly suggested that HUD require contractors who
perform home energy improvements funded by PowerSaver loans to be
certified on some basis or that broader ``quality assurance''
procedures be required. HUD is sympathetic to the concerns expressed by
the commenters and generally agrees that high quality assurance
procedures can enhance the prospects that a home improvement job will
be performed properly and professionally. HUD understands that a number
of communities implementing comprehensive home energy improvement
programs are imposing or incentivizing such requirements.
HUD will ask lenders that submit Expressions of Interest in
participating in the program to describe the extent to which contractor
certification and overall quality assurance is reflected in programs
serving the lender's proposed target market(s) and will evaluate
Expressions of Interest in part on this basis. In addition, HUD will
encourage lenders to adopt sound practices in this area. Such practices
include:
(1) Verification that contractors have demonstrated business
experience as home improvement contractors;
(2) Documentation on file of basic information such as trade name,
places of business, type of ownership, type of business, and names and
employment histories of the owners and staff;
(3) Provision of current financial statement prepared by someone
who is independent of the contractor and is qualified by education and
experience to prepare such statements, and a commercial credit report
on the contractor;
(4) Procedures for supervising and monitoring contractors'
activities with respect to loans insured under the Pilot Program; and
(5) Evidence of homeowner satisfaction with work performed by the
contractor under the Pilot Program.
HUD declines to make these or other quality assurance requirements
mandatory, however. HUD believes that such a requirement would add
unnecessary administrative burden on lenders in the Pilot Program. In
addition, HUD expects that it will be able to work closely with
lenders, as well as local communities, to monitor and help ensure
quality assurance under the Pilot Program given that only a limited
number of lenders will participate. In addition, HUD may revisit the
issue of quality assurance during its evaluation of the pilot program
to determine whether changes should be made to the Pilot Program along
the lines suggested by the commenters.
Several commenters encouraged HUD to implement a ``streamlined
application procedure'' for PowerSaver loans. HUD recognizes the
importance of ensuring homeowners can close on PowerSaver loans in a
timely manner. HUD will utilize the Title I Property Improvement Home
Loan program platform and system for the PowerSaver pilot program. This
system, while different from the system used for FHA Title II loan
products, should enable lenders to make a timely turnaround of loan
applications. In addition, HUD will consider lenders' expected loan
procedures and expected turnaround time in evaluating their Expressions
of Interest to participate in the pilot program.
One commenter suggested that HUD allow PowerSaver loans to be in
third lien position in cases where the borrower has a home mortgage
loan in first position, a home equity loan in second position, and
sufficient home equity to take on a PowerSaver loan
[[Page 17942]]
without exceeding 100 percent combined loan to value. HUD declines to
make this change; the Title I regulations at 24 CFR 201.24(a)(1)(iii)
specify that, in general, liens securing Title-insured loans ``need not
be a first lien on the property; however the lien securing the Title I
loan must hold no less than the second lien position.'' The regulations
authorize a Title I loan to hold a third lien position in specified
limited circumstances: (1) Where the first and second mortgage were
made at the same time; or (2) the second mortgage was provided by a
state or local agency in conjunction with a downpayment assistance
program.
V. The Home Energy Retrofit Loan Pilot Program (FHA PowerSaver)
A. Authority
The Retrofit Pilot Program is authorized by the Energy Innovation
Fund of the 2010 Appropriations Act, which directs HUD to conduct an
Energy Efficient Mortgage Innovation pilot program targeted to the
single family housing market (Pub. L. 111-117, at 123 Stat. 3089). The
Pilot Program is based on the requirements of Title I, section 2 of the
National Housing Act (12 U.S.C. 1703). Under section 2(a) of the
National Housing Act, HUD is authorized to provide loan insurance in
order to help homeowners finance alterations, repairs, and improvements
in connection with existing structures or manufactured homes. HUD's
implementing regulations are codified at 24 CFR part 201.
B. Duration and Geographic Scope
1. Duration. The Retrofit Pilot Program will be conducted for loans
originated during a period of 2 years commencing on May 2, 2011. HUD,
however, may extend the duration of the Pilot Program, after its
commencement, beyond the 2-year period to accurately assess the Pilot's
effectiveness. In making such determination, HUD will look closely at
the results of its evaluation of the program as described in Section VI
of this notice. HUD will announce any such extension through Federal
Register notice.
2. Geographic scope. The success of the Retrofit Pilot Program and
its potential to inform further efforts to expand financing for energy
efficient home retrofits will be advanced by focusing on properties
located in communities that have already taken affirmative steps to
address energy efficiency retrofits. HUD is aware that a number of
communities have already developed the programmatic infrastructure to
help ensure that the critical nonfinancial components of a holistic
retrofit initiative are in place. In selecting communities in which to
conduct the Pilot Program, HUD will target communities that have
already developed a robust home energy efficiency retrofit
infrastructure.
DOE's Energy Efficiency and Conservation Block Grants (EECBG)
program is authorized under Title V, Subtitle E of the Energy
Independence and Security Act (EISA), signed into law on December 19,
2007. Through formula and competitive grants administered by DOE, this
program empowers local communities to make strategic investments to
meet the Nation's long-term goals for energy independence and
leadership on climate change.
With funding for the EECBG program provided by the American
Recovery and Reinvestment Act, DOE initiated the Retrofit Ramp-up
Program, now known as the Better Buildings program, a demonstration
program directed to stimulating activities and investments that can:
(1) Deliver verified energy savings from a variety of projects in the
local jurisdiction of the applicant, with a particular emphasis on
efficiency improvements in residential, commercial, industrial, and
public buildings; (2) achieve broader market participation and greater
efficiency savings from building retrofits; (3) highly leverage grant
funding in order to significantly enhance the resources available for
supporting the program; (4) sustain themselves beyond the grant monies
and the grant period by designing a viable strategy for program
sustainability; (5) serve as pilot building-retrofit programs that
demonstrate the benefits of gaining economy of scale; and (6) serve as
examples of comprehensive community-scale energy-efficiency approaches
that could be replicated in other communities across the country.
Under the Better Buildings Program, approximately $485 million was
allocated by DOE through competitive grants to initiatives in the
following locations: Austin, TX; Berlin, Cambridge, Chestertown,
Cumberland, Denton, Easton, Elkton, Frostburg, Oakland, Princess Anne,
Dundalk, Westminster, Havre de Grace, Salisbury, Takoma Park, and
University Park, MD; Fayette County, PA; Bedford, NY; Berlin, Nashua,
and Plymouth, NH; Boulder County, City and County of Denver, Garfield
County, and Eagle County, CO; Camden, NJ; Chicago region, IL;
Cincinnati, Ohio, and northeast Kentucky; a consortium of 14
Connecticut Towns: Bethany, Cheshire, East Haddam, East Hampton,
Glastonbury, Lebanon, Mansfield, Portland, Ridgefield, Weston,
Westport, Wethersfield, Wilton, and Windom; Detroit, Grand Rapids, and
southeast MI; Greensboro, NC; Indianapolis and Lafayette, IN; Kansas
City, MO; Los Angeles, San Francisco Bay Area, Sacramento, San Diego,
and Santa Barbara County, CA; Lowell, MA; Madison, Milwaukee, and
Racine, WI; Maine statewide; Missouri statewide; Nashville, TN; New
York statewide; Omaha and Lincoln, NE; Oregon statewide; Philadelphia,
PA; Phoenix, AZ; Riley County, KS; San Antonio, TX; Seattle, and
Bainbridge Island, WA; select Southeastern cities: Atlanta, GA;
Carrboro, Chapel Hill, and Charlotte, NC; Charleston SC;
Charlottesville, VA; Decatur, GA; Hampton Roads/Virginia Beach, VA;
Huntsville, AL; Jacksonville, FL; New Orleans, LA; Toledo, OH; and the
U.S. Virgin Islands. In addition, in December 2010, DOE announced that
the following State Energy Programs were integrated into
BetterBuildings: Alabama, Maine, Massachusetts, Michigan, Nevada,
Washington, and Virginia.
The locations listed above are all eligible markets for lenders to
serve in the Pilot. In addition, this notice provides that areas where
the Home Performance with Energy Star program is available are
automatically eligible locations for lenders to serve under the pilot
program. Those areas are listed here: http://www.energystar.gov/index.cfm?c=home_improvement.hm_improvement_hpwes_partners.
FHA will consider lenders' interest in other communities, subject
to an assessment of such communities' infrastructure for implementing
residential retrofit programs. As noted in the November 10, 2010,
notice, HUD strongly encourages lenders to serve such markets, provided
lenders can demonstrate, through their Expressions of Interest in
participating, that such locations are viable markets for the
deployment of PowerSaver-insured loans. On December 16, 2010, HUD
posted additional guidance on its Web site to assist lenders in this
area: http://www.hud.gov/offices/hsg/sfh/title/additionalsaverinformation.pdf. HUD expects to consult with DOE in such
cases.
HUD considered targeting the pilot to a smaller number of markets,
which may have increased the likelihood of lender competition within
some markets, potentially benefitting consumers. HUD determined that
such an approach could limit the number and diversity of lenders that
could participate in the program overall, however. HUD determined it
was important for the Pilot to be open to a
[[Page 17943]]
reasonably wide range of lenders--by size and type, as well as service
area--especially given the challenging conditions facing lenders in the
current environment, which may create barriers to participation for
some, even if interested. In selecting lenders to participate, HUD will
evaluate the extent to which lenders intend to provide loans at the
most favorable rate to consumers, thus directly addressing a major
benefit that lender competition would potentially foster.
C. Lender Eligibility
Lender participation in the Retrofit Pilot Program is voluntary. Of
the pool of interested lenders that meet the criteria described in
Section II of the November 10, 2010, notice and reiterated below, HUD
intends to select a limited number of lenders to participate in the
Retrofit Pilot Program. HUD is currently undertaking efforts to
identify FHA-approved lenders that may be suitable candidates for
participation in the Retrofit Pilot Program. HUD reserves the right to
terminate a lender's participation in the Retrofit Pilot Program for
unacceptable performance. Examples of unacceptable lender performance
could include violating the program's underwriting and credit criteria,
failing to meet HUD reporting requirements, and high defaults among
originated loans under the program. To be eligible, lenders must
satisfy the following criteria:
1. Approval as an FHA Title I or Title II program lender. Lenders
must hold valid Title I contracts of insurance and be approved pursuant
to the requirements of 24 CFR part 202 to originate, purchase, hold,
service, or sell loans insured under the Title I program regulations at
24 CFR part 201. However, approved Title II lenders may obtain Title I
eligibility under an expedited process by contacting HUD and submitting
the Title I approval package described at http://www.hud.gov/offices/hsg/sfh/lender/title1ap.cfm.
2. Experience with similar lending initiatives. Lenders must be
able to demonstrate experience with the type of lending initiative
being undertaken in the Retrofit Pilot Program. In particular, HUD will
consider the extent to which lenders have experience in successfully
originating and/or servicing small loans, home equity loans, second
liens, FHA section 203(k) rehabilitation loans, and Title I Property
Improvement Loans. Lenders that do not have experience in such lending
may still be able to participate in the Pilot Program to the extent
they can demonstrate how their other experience is relevant to
determining their ability to participate in the pilot, and provided
they agree to meet the Title I requirements before participation in the
pilot program.
3. Computer system capabilities. Lenders must have the technical
capability to interface with FHA through FHA Connection. In addition,
lenders must have the technical capability to interface with any other
computer systems utilized by FHA or its contractors pertaining to the
Retrofit Pilot Program.
4. Audit capabilities. Lenders must have a demonstrated capacity to
provide timely reports to FHA on origination and performance of
retrofit loans. FHA envisions requiring monthly reports on loan and
portfolio performance. In addition, a lender must be able to provide an
electronic loan package to HUD for a random sample of loans chosen for
quality reviews.
5. Collaborative capacity. Lenders must have demonstrated capacity
to work with public sector agencies, nonprofit organizations, and
utilities or home improvement contractors.
D. Lender Grant Funds
HUD recognizes that even with federal mortgage insurance such as
would be available under the Pilot Program, small loans for home energy
retrofits may have relatively high transaction costs for lenders,
discouraging some from offering such loans and forcing others that do
offer them to increase costs to borrowers. HUD will utilize the
appropriated funds provided under the 2010 Appropriations Act to
provide lender incentive payments to support activities that lower
costs to borrowers. Eligible uses of such payments are: (1) Supporting
costs associated with creating or enhancing staffing and/or systems
necessary to deliver or report on PowerSaver insured loans; (2) Funding
costs of loan marketing, origination, or underwriting; (3) Offsetting
costs associated with appraisals and other approved methods of property
valuation; and (4) For lenders that will also service their own loans,
reducing servicing costs.
HUD will also consider other proposed uses of such funds. Any use
of funds must show, to HUD's satisfaction, bona fide benefit to
borrowers. The amount of payment to each lender and the eligible uses
of funds by each lender will be determined by HUD based on the lender's
Expression of Interest. A significant factor in determining payment
amounts to each lender will be the number of loans the lender
anticipates making during the 2-year period of the Pilot Program.
Lenders will be required to report to HUD on their use of incentive
payment funds. HUD anticipates that the amount of grant funds will not
exceed $5 million per lender.
In addition, this notice clarifies that HUD grant funds may not be
used to directly subsidize or otherwise ``write down'' the interest
rate on PowerSaver loans. Non-Federal grant funds may be used for this
purpose.
Grant funds may be available to lenders who request them, but are
not required for participation. Lenders who do not seek funds may still
participate in the Pilot Program.
E. Selection of Lenders
As noted above, lenders interested in potentially participating in
the Retrofit Pilot Program were required to submit an Expression of
Interest using the template in Appendix A and by following the
instructions provided in the November 10, 2010, notice.
In evaluating Expressions of Interest and selecting lenders to
participate, HUD will first review each Expression of Interest to
verify that the lender is eligible to participate in the program. HUD
will then evaluate the Expressions of Interest from all eligible
lenders primarily by weighing the following factors in the Expression
of Interest: (1) The lender's anticipated loan volume and target
markets; (2) the lender's business model for participating in the
pilot; (3) the lender's capacity (experience and/or potential) to work
in public-private partnerships; and (4) the extent to which the lender
intends to deliver the most favorable loan product to consumers. HUD
anticipates that these primary weighting factors will have generally
equal weighting significance. In addition, HUD may consider the
following factors in selecting lenders to participate: (1) Diversity of
lender type and target market; and (2) impact on low-income households
and communities.
F. Differences Between Retrofit Pilot Program and Existing Title I
Program
With the exceptions discussed below, the Retrofit Pilot Program
will be governed by the Title I program regulations at 24 CFR part 201.
This notice does not make any changes to the current Title I Property
Improvement Program. The differences specified in this notice are only
applicable to lenders selected to participate in the Pilot Program.
Lenders selected to participate in the Retrofit Pilot Program must
enter into a Retrofit Pilot Program Agreement by which they commit to
adhere to the Title I program regulations, except as
[[Page 17944]]
modified in this notice and in subsequent refinements, such
modifications being applicable only to loans insured under the Retrofit
Pilot Program. There will also be other requirements applicable to the
Retrofit Pilot Program; for example, insuring Retrofit Pilot Program
loans only in communities selected for the Pilot Program.
In summary, the changes described below, in combination with the
appropriated funds, have the effect of creating an innovative pilot
program that accords with Congress' direction in the Act. These changes
fall into the following categories: (1) Changes designed to enhance
underwriting of program loans; (2) changes related to FHA
administration of the program, specifically in the areas of loan
servicing, claim procedures, and reporting; (3) changes to target the
pilot program specifically for its purpose of improving home energy
performance; and (4) changes to provide additional benefits to
borrowers. Finally, as noted, FHA will augment these changes with grant
funds for lenders, using funding appropriated under the 2010
Appropriations Act. In summary, these changes adjust the current
flexible framework for the Title I program to enable it to encourage
and directly support home improvements that improve energy performance,
while reducing barriers to making financing under the program more
widely available and more affordable.
1. Definition 24 CFR 201.2. For purposes of the Retrofit Pilot
Program, the following terms have the following meanings.
a. Single family property improvement loans. Only ``single family
property improvement loans'' as that term is defined in 24 CFR 201.2
are eligible for FHA insurance and the Retrofit Pilot Program.
Properties must also be principal residences as defined in 24 CFR
201.2. For purposes of the Retrofit Pilot Program, the term includes
detached, semidetached, and attached single family properties.
Condominium units that otherwise meet the criteria of an eligible
single family property are also eligible properties under the pilot
program.
Loans used to finance the property improvements for manufactured
homes and multifamily properties \3\ are not eligible for the Retrofit
Pilot Program, but remain eligible for Title I program insurance under
24 CFR part 201.
---------------------------------------------------------------------------
\3\ Manufactured home improvement loan and multifamily property
improvement loan are terms defined in Sec. 201.2.
---------------------------------------------------------------------------
2. Loan maturities (24 CFR 201.11). Under the Title I program
regulations at 24 CFR 201.11 an insured loan may have a term as long as
20 years. Under the Retrofit Pilot Program, loan terms generally will
be limited to 15 years to better align the term of financing with the
useful life of, and benefits from, most energy retrofit improvements.
Under the Pilot Program, loan terms that are for 20 years can be used
only for certain specified improvements: renewable energy measures,
ground source heat pump systems, and other improvements as approved by
HUD. See ``Eligible use of loan proceeds'' in Section V.D.4(b) below.
3. Interest and discount points (24 CFR 201.13). Under the Title I
program regulations at 24 CFR 201.13, the lender may not require or
allow any party, other than the borrower, to pay discount points or
other financing charges in connection with the loan transaction. This
restriction, while helping to assure that borrowers have a personal
stake in the repayment of the loan, also has the effect of hindering
state and local efforts to support home energy retrofits by lowering
the cost of capital to consumers, such as through interest rate write-
downs. The Retrofit Pilot Program expressly contemplates that third
parties (including state and local governments, private organizations,
and nonprofit organizations) may pay discount points or other financing
charges in connection with the Title I loan transaction and encourages
third parties to work with participating lenders on this basis. In
addition, as noted, lenders may utilize HUD incentive payments for this
purpose under the Pilot Program.
The interest shall be calculated on a traditional mortgage interest
basis.
4. Property improvement loan eligibility (24 CFR 201.20).
a. Borrower eligibility (24 CFR 201.20(a)). As under Title I loans,
Retrofit Pilot Program borrowers shall have at least a one-half
interest in one of the following:
(i) Fee simple title of the property; or
(ii) A properly recorded land installment contract.
Unlike the Title I program, lessees of the property will not be
eligible to participate in the Pilot Program. The limitation of
eligibility to owner-occupied properties is designed to reduce the
variables in the Pilot Program for purposes of evaluation, as well as
to help ensure compliance with the minimum property loan-to-value
ratios described in section V.F.5. below.
b. Eligible use of the loan proceeds (24 CFR 201.20(b)). Similar to
the Title I program, loan proceeds shall be used only for the purposes
disclosed in the loan application. Under the standard Title I loan,
proceeds shall be used only to finance property improvements that
substantially protect or improve the basic livability or utility of the
property. Further, HUD has established a list of items and activities
that may not be financed with the proceeds of any property improvement
loan.
A list of eligible measures is attached as an appendix to this
notice. Homeowners may use up to 25 percent of the PowerSaver loan
proceeds to fund, with the following exceptions, any property
improvement that is identified in Title I Letter 470 as an eligible
improvement under the Title I program. The following property
improvements, although listed in Title I Letter 470 as eligible
improvements under the Title I program, are not eligible for funding
with PowerSaver loan proceeds:
Barns
Boathouses
Boatslips
Bookcases (built-in)
Cabinets (unless the improvement would result in health
benefits)
Choir lofts
Decks, Gazebos
Docks
Door chimes
Driveways
Lattice work
Piers
Porches
Safes/vaults
A copy of Title I Letter 470 may be downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm. If a lender
has any doubt as to the eligibility of any item or activity, the lender
must request a determination from FHA before making a loan. HUD
strongly encourages the use of home energy audits and other tools to
enable consumers to determine the most beneficial improvements they
should seek to undertake.
5. Property valuation (24 CFR 201.20). The combined loan-to-value
ratio of any previously existing mortgage and PowerSaver loan cannot
exceed 100 percent. As under the Title I Property Improvement program,
this requirement does not apply in cases involving PowerSaver loans of
less than $7,500 and not secured by the property. Lenders may either
use a Fannie Mae and Freddie Mac Form 2055 Exterior-Only Inspection
Residential Appraisal Report (most current version) or an Automated
Valuation Model (AVM) to establish property value. Any use of AVMs by
any lender participating in the pilot program must be approved by FHA
on a case-by-case basis. HUD will
[[Page 17945]]
discuss this issue further with lenders in the review of their
Expression of Interest. HUD notes, however, that potential purchasers
of PowerSaver loans from originating lenders may have additional or
more restrictive criteria regarding the use of AVMs, which lenders
seeking to sell loans to such entities may be required to meet.
6. Credit requirements for borrowers (24 CFR 201.22). In addition
to the requirements under the Title I program, all borrowers
participating in the Retrofit Pilot Program must have a decision credit
score of 660 or higher. The decision credit score used by FHA is based
on methodologies developed by the FICO Corporation. FICO scores, which
range from a low of 300 to a high of 850, are calculated by each of the
three National Credit Bureaus and are based upon credit-related
information reported by creditors, specific to each applicant. Lower
credit scores indicate greater risk of default on any new credit
extended to the applicant. The decision credit score is based on the
middle of three National Credit Bureau scores or the lower of two
scores when all three are not available, for the lowest scoring
applicant.
The borrower's total debt-to-income ratio cannot exceed 45 percent,
as under the Title I program. HUD recognizes that requiring a minimum
credit score for participation in the pilot program will mean that some
homeowners cannot participate. However, given that this is a pilot
program, HUD has determined to limit the Retrofit Pilot Program to
borrowers with these credit scores in order to make an initial
assessment of the interaction of credit ratings and repayment in
connection with home energy retrofit loans.
7. Charges to borrower to obtain loan (24 CFR 201.25). The
regulations provide for a HUD-established list of fees and charges that
may be included in a property improvement loan. A slightly different
list of fees and charges is established for the Retrofit Pilot Program
in an appendix to this notice. The list indicates which of those fees
and charges may be financed as part of a PowerSaver loan.
8. Conditions for loan disbursement (24 CFR 201.26). In addition to
current Title I requirements pertaining to disbursement of loan
proceeds, the Retrofit Pilot Program funds shall be disbursed to the
borrower(s) in two increments: (1) 50 percent of the proceeds shall be
disbursed at loan funding/closing; and (2) the remaining 50 percent of
the proceeds shall be disbursed after the energy retrofit improvements
have been completed as evidenced by an executed Completion Certificate
for Property Improvements (form HUD-56002) by the borrower(s), and a
lender-required inspection.
9. Dealer loans (24 CFR 201.27). Under the Title I program, a
dealer loan (defined at 24 CFR 201.2) ``means a loan where a dealer,
having a direct or indirect financial interest in the transaction
between the borrower and the lender, assists the borrower in preparing
the credit application or otherwise assists the borrower in obtaining
the loan from the lender.''
Dealer loans will not be permitted in the Retrofit Pilot Program.
The reason for this limitation is that dealer loans have been
disproportionately correlated with poor loan performance under Title I
and other home improvement loan programs in the past. While HUD
recognizes that there are many responsible dealers who can and would
provide financing through dealer loans in a responsible manner, it is
limiting the Retrofit Pilot Program to ``direct loans.'' ``Direct
loans'' is defined under the Title I program (at 24 CFR 201.2) as ``a
loan for which a borrower makes application directly to a lender
without any assistance from a dealer.'' HUD believes that home
improvement contractors and others whose activity may be described
under the definition of ``dealer'' for the Title I program will play an
important role in ensuring the pilot's success by performing the actual
work related to the retrofits.
However, home improvement contractors may provide information to
homeowners as to how they may obtain a PowerSaver loan, including the
identity of lenders who are participating in the program.
10. Loan servicing (24 CFR 201.41). Under the Title I program,
lenders remain responsible for proper collection efforts, even though
actual loan servicing and collection may be performed by an agent of
the lender. In addition to these requirements, the servicer of a
Retrofit Pilot Program loan, whether the servicer is the original
lender or a subsequent servicer, as under FHA's major single family
program (commonly referred to as the Title II program), is fully
responsible for the required servicing responsibilities. As under the
Title II program, ``the mortgagee shall remain fully responsible for
proper servicing, and the actions of its servicer shall be considered
to be the actions of the mortgagee.'' HUD emphasizes that the servicer
shall also be fully responsible for its actions as a servicer. HUD
intends to seek recovery from servicers if FHA losses are attributable
to servicing errors.
In addition, as noted, lenders that also service loans they
originate under the pilot program may utilize HUD incentive payments
under the program to reduce servicing costs that deliver bona fide
benefits to borrowers.
11. Insurance claim procedure (24 CFR 201.54). Under the Title I
program, HUD requires that insurance claims be fully documented.
Under the Pilot Program, the holder of the note will be accountable
to HUD for origination/underwriting errors, and the servicer will be
accountable to HUD for servicing errors, as long as the servicer is a
HUD-approved lender. To effectuate this, the insured lender must enter
into an agreement with its servicer, under which the servicer agrees to
be liable to HUD for such errors, and which identifies HUD as a third-
party beneficiary of such agreement.
VI. Evaluating the Success of the Retrofit Pilot Program
As stated in the November 10, 2010, notice, HUD's goals for the
Pilot Program are: (1) To facilitate the testing and scaling of a
mainstream mortgage product for home energy retrofit loans that
includes liquidity options for lenders, resulting in more affordable
and widely available loans than are currently available for home energy
retrofits; and (2) to establish a robust set of data on home energy
efficiency improvements and their impact--on energy savings, borrower
income, property value, and other metrics--for the purpose of driving
development and expansion of mainstream mortgage products to support
home energy retrofits.
HUD's evaluation of PowerSaver will be focused on the extent to
which the pilot program achieves those goals. To address the first
goal, HUD, through its internal staff and systems, will closely assess
lender performance and experience in marketing, originating, servicing
and selling PowerSaver loans. As a pilot program in which a small
number of lenders will participate, PowerSaver will afford HUD an
unusual ability to learn from lenders as they deploy PowerSaver loans.
As the PowerSaver program launches and lenders establish marketing
plans, loan interest rates, and strategies for holding and/or selling
loans, HUD will be in position to assess market impacts as they
develop. HUD, working with its lender partners in the pilot program,
will get a sense of the factors that contribute to (or impede) consumer
demand for home energy efficiency improvement financing. In addition,
as noted, lenders will be reporting regularly to HUD on loan
performance and the uses of loan proceeds for various improvements.
Thus, HUD will
[[Page 17946]]
have a sense of performance and preference within specific lender
programs and markets, as well as potential trends across the portfolio
of lenders. HUD will not attempt to rush to conclusions, and will
expect possible changes in trends as the pilot program matures and
expands.
As a pilot program, one of the principal purposes of the Pilot is
to generate data on key questions that can help make the case for
additional mainstream mortgage products to support home energy
retrofits, including first mortgage options. HUD is therefore committed
to a robust evaluation program in connection with the Pilot. (The
evaluation will also enable HUD to assess the success of possible
modifications to the existing Title I program before initiating,
through rulemaking, any changes to the Title I regulations.)
To address the second goal, HUD will focus on three overarching
questions: (1) Did homes reduce their energy consumption after
retrofits were completed? (2) Did homeowners realize lower energy bills
as a result of the retrofits? and (3) Were home values affected as a
result of the retrofits? Data from the PowerSaver Pilot Program
suggesting answers to these questions will help fill a major void and
start to establish a basis for analyzing other financing.
This component of the evaluation will be conducted by a third party
with which HUD will contract. That entity will be under contract as the
pilot program launches and lenders begin to make loans. HUD anticipates
that a critical component of this part of the evaluation will be the
third party's ability to access pre- and post-retrofit utility data
from at least a sample of PowerSaver homeowners. HUD is aware of
effective practices for third parties to access this information, on a
confidential basis, and will encourage the evaluation contractor to
utilize such practices, including those developed and implemented by
DOE.
HUD acknowledges that the issues identified can be challenging
impacts to evaluate, for reasons ranging from ``rebound effects'' to
consumer concerns about access to utility billing data. HUD believes
that it must attempt to do so, however, and believes that additional,
useful information at a meaningful scale can be obtained through the
PowerSaver program. HUD believes that continued progress on mainstream
mortgage financing options for home energy retrofits requires attention
to these issues.
HUD recognizes that an evaluation of PowerSaver could also consider
other important questions. HUD will explore, internally and with its
contractor, the feasibility of adding to the core evaluation scope,
potentially including: (1) Lender costs for originating and servicing;
(2) impact of interest rates on consumer participation; (3) relative
effectiveness of nonfinancial programmatic elements (consumer
education, product marketing, auditing tools, and workforce quality
assurance); and (4) the extent to which specific home energy
improvements are chosen and the results from specific measures.
The results of the evaluation program will heavily inform HUD's
determination of whether to make the PowerSaver pilot program a
permanent FHA program, subject to any desired changes and pursuant to
any appropriate rulemaking process that HUD may determine is necessary.
A successful pilot program, and a sound basis for making PowerSaver a
permanent program would be reflected in an evaluation that HUD believes
demonstrates that: (1) Lenders demonstrate that there is a market for
PowerSaver loans in their communities that they can serve on a viable
continuing basis, facilitated to the extent necessary by an ability to
sell or securitize PowerSaver loans; (2) the best available data
suggests that PowerSaver loans are resulting in more home energy
retrofits (and related jobs and economic benefits), lower energy use,
and lower energy bills; and (3) FHA systems and staff indicate that FHA
can continue and potentially expand the program in a safe and sound
manner.
VII. Findings and Certifications
Paperwork Reduction Act
The information collection requirements in this notice have been
approved by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) and
assigned OMB Control Number 2502-0596. In accordance with the PRA, an
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information, unless it displays a currently
valid OMB control number.
Executive Order 12866, Regulatory Planning and Review
OMB reviewed this notice rule under Executive Order 12866 (entitled
``Regulatory Planning and Review''). As was the case with the November
10, 2010, notice, this notice has been determined to be an
``economically significant regulatory action,'' as defined in section
3(f)(1) of the Order. The revised impact analysis for this notice is
available at http://www.hud.gov/offices/adm/hudclips/ia/. The following
provides a brief summary of the finding relating to the aggregate
costs, benefits, and transfers of the pilot program contained in the
analysis:
Introduction. As discussed more fully in the accompanying impact
analysis, HUD envisions that the pilot program will provide insurance
for up to 24,000 loans over the 2-year period of the pilot program,
with an expected average loan size of $12,500. The program is therefore
expected to result in the extension of up to $300 million in FHA-
insured energy efficiency property improvement loans over the 2-year
period and a resulting energy-saving valued at as much as $630 million
(in present discounted value).
Benefits. The aggregate net benefits are obtained by multiplying
the individual net benefits by the expected number of loans and adding
the expected social benefits of reduced energy consumption. As a base
case, HUD assumes a consumer household with annual savings of $1,000, a
0 percent price growth, and a 7 percent discount rate. The present
value of a technical retrofit for this base case scenario is $11,400.
Assuming a rebound effect of 30 percent yields a comfort benefit of
$3,400 and energy savings of $8,000 per participant.\4\ As noted,
approximately 24,000 loans are expected over 2 years. For the base case
scenario, this would equal $41 million in comfort benefits and $96
million in energy savings for each year of the program. The benefits of
the FHA program may not equal the sum of the benefits of all retrofits
financed through the program, but only reflect the benefits of the
retrofits that would not have occurred without the program; however,
the existence of significant market imperfections and the lack of
affordable financing make it reasonable to assume that a large
proportion, if not all of the loans, will generate benefits.
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\4\ The ``rebound effect'' refers to the fact that the reaction
of the consumer to the energy-saving technology will not necessarily
reduce energy consumption by what is technically possible. By
increasing energy efficiency, the retrofit reduces the expense of
physical comfort and will thus increase the demand for comfort. In
fact, the retrofit may have been driven for a demand for more
heating in the winter or cooling in the summer. The size of the
rebound effect will depend on the income of the household and the
path of energy prices.
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Costs. The cost of receiving the energy-savings is the upfront
investment plus the costs of financing the investment. The cost per
investment is thus equal to the size of the loan, or $14,880 on
average.
Transfers to Consumers. The transfer to consumers is equal to the
difference
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between the FHA interest rate and the interest rates on other loans
available for the same purpose. As discussed, alternative means of
financing are limited and come with higher interest costs. However, if
the next best interest rate for the consumer were fairly low at 10
percent, then this loan would represent a transfer of approximately
$5,000 per household. Aggregated over 12,000 participants, the
aggregate annual consumer transfer through lower interest costs would
be $62 million.
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.
Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment was prepared in accordance with HUD regulations at 24 CFR
part 50, which implement section 102(2)(C) of the National
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). Individual
mortgage insurance actions taken under the pilot program are
categorically excluded under HUD's regulations at 24 CFR 50.19(b)(17)
and not subject to the federal laws and authorities cited in 24 CFR
50.4, other than 24 CFR 50.4(b)(1) and (c)(1), and 24 CFR 51.303(a)(3).
The FONSI is available for public inspection between the hours of 8
a.m. and 5 p.m. weekdays in the Regulations Division, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
7th Street, SW., Washington, DC 20410. Due to security measures at the
HUD Headquarters building, please schedule an appointment to review the
FONSI 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 toll-free Federal Information
Relay Service at 800-877-8339.
Dated: March 24, 2011.
Joseph F. Smith,
General Deputy Assistant Secretary for Housing--Federal Housing
Commissioner.
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[FR Doc. 2011-7551 Filed 3-30-11; 8:45 am]
BILLING CODE 4210-67-C