[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Proposed Rules]
[Pages 8448-8456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02668]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 200 and 203
[Docket No. FR-5457-P-01]
RIN 2502-AJ03
Streamlining Inspection and Warranty Requirements for Federal
Housing Administration (FHA) Single-Family Mortgage Insurance: Removal
of the FHA Inspector Roster and of the Ten-Year Protection Plan
Requirements for High Loan-to-Value Ratio Mortgages
AGENCY: Office of the Assistant Secretary of Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would streamline the inspection and home
warranty requirements for FHA single-family mortgage insurance. First,
HUD proposes to remove the regulations for the FHA Inspector Roster
(Roster). The Roster is a list of inspectors approved by FHA as
eligible to determine if the construction quality of a one- to four-
unit property is acceptable as security for an FHA-insured loan. HUD's
regulations currently require the use of an inspector from the Roster
as a condition for FHA mortgage insurance where the local jurisdiction
does not perform necessary inspections. HUD's proposal to remove the
Roster regulations is based on the recognition of the sufficiency and
quality of inspections carried out by certified inspectors and other
qualified individuals. Second, this proposed rule would also remove the
regulations
[[Page 8449]]
requiring 10-year protection plans in order to qualify for high loan-
to-value (LTV), FHA-insured mortgages as a condition of closing for
newly constructed single-family homes. The Housing and Economic
Recovery Act of 2008 (HERA) removed the statutory requirement for a
warranty plan and other special requirements for high LTV mortgages.
HUD, however, is retaining the requirement that the Warranty of
Completion of Construction (form HUD-92544) be executed by the builder
and the buyer of a new construction home, as a condition for FHA
mortgage insurance.
DATES: Comment due date: April 8, 2013.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Department of Housing and Urban Development, 451 7th Street
SW., Room 10276, Washington, DC 20410-0500. Communications must refer
to the above docket number and title. There are two methods for
submitting public comments. All submissions must refer to the above
docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street SW., Room 10276,
Washington, DC 20410-0001.
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 advance appointment to review the public comments must be
scheduled 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 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: Karin Hill, Director, Office of Single
Family Program Development, Office of Housing, Department of Housing
and Urban Development, 451 7th Street SW., Room 9278, 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 via TTY by calling the Federal Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
Through FHA, HUD insures mortgages made by qualified lenders to
people purchasing or refinancing a primary residence. The National
Housing Act (12 U.S.C. 1709 et seq.) authorizes HUD to provide mortgage
insurance so that qualified borrowers may use the insured mortgage to
finance the purchase of new or existing one-to-four unit (single-
family) housing. FHA's single family mortgage insurance is an important
tool through which the Federal Government expands homeownership
opportunities for first-time homebuyers and other borrowers who would
not otherwise qualify for conventional mortgages on affordable terms,
as well as for those who live in underserved areas where mortgages may
be harder to get.
Under its statutory authority, HUD has issued various regulations
that govern the inspection and warranty requirements of these FHA-
insured mortgages. Since the promulgation of these regulations, the
quality of housing and building technology has improved significantly.
In addition, local jurisdictions have adopted more uniform building
codes, while more vigorously enforcing their building codes. As a
result, HUD recognizes that some of its former requirements for
mortgage insurance are no longer necessary to protect lenders against
the risk of default. With this rule, HUD proposes to remove those
requirements it no longer believes to be necessary, thereby reducing
some of the administrative burden on both homeowners and HUD, while
also producing dollar savings for homeowners who obtain FHA-insured
mortgages.
First, HUD proposes to eliminate its national Inspector Roster
(Roster). The Roster is a list of inspectors, approved by HUD, to
perform inspections in the limited circumstances when either: (1) A
local jurisdiction did not already perform its own inspections for new
construction, and issue building permits and certificates of occupancy;
or (2) when the inspection of a repair or renovation was not performed
by a licensed professional as specified by regulation. See 24 CFR
200.170(b). HUD originally created the Roster to standardize the
inspection process for properties with FHA-insured mortgages. Before
the Roster, cities and states developed their own building codes, which
had little uniformity or consistency with each other. Now, however, the
International Residential Code (IRC) is in use or adopted in 49 states,
the District of Columbia, and the U.S. Virgin Islands. The
International Code Council (ICC), which developed the IRC, also
certifies Residential Combination Inspectors (RCIs). To be certified by
the ICC, RCIs must pass a rigorous set of examinations, which includes
testing their knowledge of the IRC.\1\ As a result, there is no longer
a need for HUD to maintain and administer its own standardization
process for inspectors.
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\1\ See http://www.iccsafe.org/Accreditation/Documents/ComboCertificate.pdf.
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Second, HUD proposes to eliminate its requirement that borrowers
purchase a 10-year protection plan for all high loan-to-value (LTV)
mortgages in order to qualify for FHA mortgage insurance. In 1979, when
Congress authorized HUD to insure mortgages with a high LTV ratio (in
excess of 90 percent of the appraised property value), Congress also
required that, to qualify for FHA insurance for such mortgages,
borrowers would have to purchase a consumer protection plan or warranty
plan acceptable to HUD. (Pub. L. 96-153, 93 Stat. 1101, approved
December 21, 1979.) But in 2008, Congress eliminated the requirement of
purchasing a consumer protection plan or warranty plan. (Pub. L. 110-
289, 122 Stat. 2654, approved July 30, 2008). While HUD may still keep
the requirements in place, HUD is no longer statutorily mandated to do
so. Upon evaluation, HUD believes that the significant improvements in
building technology and the quality of housing, as well as
[[Page 8450]]
the adoption of uniform building codes and local jurisdictions' more
stringent enforcement of building codes, mitigate HUD's previous
concerns about needing to protect property owners from defects in
workmanship and materials.
HUD expects the elimination of these two requirements to have an
anticipated total savings of $29,569,957. By eliminating the Roster,
HUD expects to save approximately $42,770 in administrative costs. In
addition, lenders will have a greater number of inspectors to choose
from, thereby increasing competition among qualified inspectors and
potentially driving down the fees that inspectors charge lenders.
Inspectors remain subject to other certification requirements,
therefore minimizing any potential risk of unnoticed structural defects
in properties secured by FHA-insured mortgages. Because this risk is
very small, and because the universe of loans subject to the inspector
roster requirement is also very small, HUD believes the costs of
removing this requirement to be minimal.
By eliminating the 10-year warranty requirement, HUD anticipates
saving $10,601 in administrative costs. Homeowners are expected save
approximately $29.4 million from no longer being required to purchase a
10-year warranty plan in order to secure an FHA-insured mortgage.
Providers of warranty plans are also expected to save $132,066 from the
reduced paperwork burden of submitting required protection plans to HUD
for approval. For those homeowners who still choose to purchase a
warranty plan, they can choose from the entire market of warranty
providers and not just those approved by HUD. Allowing homeowners to
choose any provider they wish should increase competition and,
possibly, drive down the prices of the protection plans. The costs of
eliminating the warranty requirement are expected to be minimal. The
increased quality of construction materials and the standardization of
building codes have greatly mitigated concerns of defective
construction that might result from eliminating the warranty
requirement. Moreover, the number of potential homes affected by the
elimination of the warranty requirement is very limited.
Summary of savings resulting from proposed regulatory changes:
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FHA Inspection Roster
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Administrative Costs Savings:
Revised Administrative Costs Savings............ $42,770
Elimination of the review of applications... 11,250
Elimination of the fielding with inspectors 11,520
and data input into FHA Connection.........
Elimination of the maintenance of the Roster 5,000
database...................................
Elimination of the application HUD-925631 15,000
(Appication for Fee or Roster Personnel
Designation) and associated burden hours...
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10-Year Warranty Plan
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Elimination of the warranty plan (Saving to 29,352,615
Homeowners)........................................
Administrative Costs Savings:
Revised Administrative Cost Savings............. 142,667
Lender's (Lender's Review).................. 132,066
HUD......................................... 10,601
--HUD Review............................ 6,601
--Elimination of the 10-year warranty 320
webpage................................
--Elimination of the review of Plan 1,920
Renewals...............................
--Elimination of the review of single 1,280
state renewals.........................
--Elimination of burden hours on 480
Warranty Providers for Plan Submittal..
Estimated Total Financial Savings:
Revised Estimated Total Financial Savings....... 29,538,052
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II. Background
FHA Inspection Requirements and the Inspector Roster
Compliance inspectors, both from the private sector as well as HUD
staff, have always played a vital role in FHA's mission to provide
affordable homeownership by providing a means of assessing the
durability and structural soundness of a home (whether newly
constructed or under repair or renovation), as well as protecting the
health and safety of the occupants. This role was particularly crucial
in the 1930s and the following decades due to the lack of generally
accepted building codes and code enforcement. Beginning in the early
1900s, model codes were developed by three separate regional model code
groups. In addition, by the first part of the 20th century, all major
cities had developed and adopted their own individual building codes
with little uniformity or consistency among the various codes.
In 1990, the three major model code groups combined efforts and
formed the ICC to develop uniform codes with no regional limitations.
Since the promulgation of the initial ICC codes, most state and local
governments that have adopted building codes to regulate and
standardize the construction of residential and commercial buildings
have chosen the model codes developed by the ICC. While there is no
official national building code, since the publication of the most
recent version of the ICC residential building code in 2009, the IRC is
in use or adopted in 49 states, the District of Columbia, and the U.S.
Virgin Islands. (See http://www.iccsafe.org/gr/Pages/adoptions.aspx.)
The number of adoptions continues to increase. In addition to adopting
the ICC codes, jurisdictions have developed protocols and standards for
inspections to ensure compliance with the adopted code.
Because of the historic lack of uniformity among building codes,
FHA utilized various methods to standardize the inspection process for
properties with FHA-insured mortgages. Before 1996, FHA's 81 field
offices each maintained a panel of fee inspectors who were assigned on
a rotating basis to perform inspections. From 1996 to 2004, mortgagees
selected inspectors from a panel of inspectors listed on the Internet.
This ``Internet panel'' was a compilation of inspectors from the local
panels established by FHA's field offices. In 2002, FHA issued a
proposed rule to establish the Roster to take the place of the Internet
panel of inspectors.
[[Page 8451]]
The final rule, published on March 10, 2004 (69 FR 11494) and codified
at 24 CFR 200.170-172, implementing the Roster that is in place today
provides eligibility standards, procedures, and requirements for
placement on the Roster. In addition to demonstrating professional
experience and familiarity with HUD requirements, an applicant for the
Roster is required to provide verification of passing HUD's
comprehensive examination for Roster inspectors and possession of an
inspector's license or certification if the state or local jurisdiction
where the inspector operates requires such licensing or certification.
The regulations also provide procedures for removing an inspector from
the Roster for cause, generally for actions detrimental to HUD or its
programs.
The regulations also set forth the circumstances under which FHA-
approved mortgagees are required to use a Roster inspector. For new
construction, a Roster inspector is needed only where the local
jurisdiction in which the property is located does not perform
inspections and does not issue building permits prior to construction
and certificates of occupancy or equivalent documents upon satisfactory
completion of construction. See 24 CFR 200.170(b)(1). For repairs or
renovations to existing construction, a Roster inspector is needed only
where structural repairs have been made requiring an inspection and
this inspection is not performed by one of the licensed professionals
as specified by regulation. See 24 CFR 200.170(b)(2). The licensed
professional may be a licensed, bonded, and registered engineer; a
licensed home inspector; or other person specifically registered or
licensed to conduct such inspections, such as a building inspector in a
jurisdiction that has adopted a building code and that requires the
issuance of building permits and subsequent inspections for repairs and
renovations of existing construction, structural or otherwise.
Insured 10-Year Protection Plan for High LTV Mortgages
Section 310 of the Housing and Community Development Amendments of
1979 (Pub. L. 96-153, approved December 21, 1979) (1979 Amendments),
amended section 203(b)(2) of the National Housing Act (12 U.S.C.
1709(b)(2)) to permit FHA to insure a mortgage with a high LTV ratio
(in excess of 90 percent of the appraised property value) for single-
family homes less than one year old if the dwelling was approved for
mortgage insurance prior to construction or if ``the dwelling is
covered by a consumer protection plan or warranty plan acceptable to
the Secretary and satisfies all requirements which would have been
applicable if such dwelling had been approved for mortgage insurance
prior to the beginning of construction.''
Following issuance of a notice of solicitation of public comments
(49 FR 45075, November 14, 1984) and a proposed rule (52 FR 21961, June
10, 1987), HUD published a final rule on October 5, 1990 (55 FR 41016),
that set forth the requirements for a consumer protection plan
``acceptable to the Secretary,'' in accordance with the 1979
Amendments. This final rule is codified at 24 CFR 203.18(a)(3) and
203.200-209. Section 203.18(a)(3) requires high LTV mortgages to be
accompanied by a 10-year consumer protection plan in order to be
eligible for FHA mortgage insurance. Sections 203.200 through 203.209
set forth the criteria that such plans must meet in order to be
acceptable to HUD, including certain underwriting standards and
baseline warranty coverage that insures against structural defects. HUD
currently maintains a database with 17 approved 10-year warranty plan
providers, which is available on the HUD Web site.\2\ Plan issuers
apply to have their warranty plans accepted by HUD by submitting the
plans to HUD for review. HUD then examines the submitted plans for
compliance with the regulations. In order to maintain acceptance by
HUD, the plans must be resubmitted for review every 2 years or the
acceptance will be automatically terminated.
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\2\ The list of approved 10-year protection plans may be
downloaded from http://www.hud.gov/offices/hsg/sfh/ins/hoctenyr.pdf.
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The HERA (Pub. L. 110-289, approved July 30, 2008) eliminated the
language in section 203(b)(2) that imposed special requirements on high
LTV mortgages, including the requirement for a consumer protection plan
or warranty plan deemed acceptable by HUD. Removal of such language
does not prohibit HUD from retaining these requirements, but HUD is no
longer statutorily mandated to maintain these requirements for high LTV
mortgages.
III. This Proposed Rule
Removal of FHA Inspection Requirements and the Inspector Roster
Along with the increasing prevalence of uniform residential
building codes promulgated by ICC, there is an increasing number of
RCIs who are certified by the ICC. RCIs certified by the ICC must pass
a set of rigorous examinations and must be familiar with the IRC; the
most widely adopted residential code in the country. Because of this
and the fact that FHA accepts a local jurisdiction's building permits
and certificates of occupancy in lieu of an inspection by a Roster
inspector, FHA has determined that it is no longer necessary to
maintain an Inspector Roster. For new and proposed construction, as
well as for repairs and renovations of existing properties, in areas
where local jurisdictions provide building code enforcement and the
requisite documentation (issuance of building permits and certificates
of occupancy or satisfactory inspection notices for work completed, or
their equivalents), FHA will continue to accept such documentation as
satisfactory evidence of the completion of work. For the diminishing
number of jurisdictions that do not provide building code enforcement
and requisite documentation, FHA proposes to accept inspections by an
RCI certified by the ICC and who is also licensed or certified as a
home inspector in accordance with the applicable State and local
requirements governing the licensing or certification of such
inspectors in the respective jurisdiction.
The ICC is a membership association dedicated to building safety
and fire prevention and develops the great majority of building codes
and standards used to construct residential and commercial buildings in
the United States. An RCI is certified by the ICC after successful
passage of the following standardized examinations, developed and
administered by the ICC: Residential Building Inspector, Residential
Electrical Inspector, Residential Mechanical Inspector, and Residential
Plumbing Inspector. An ICC certification is valid for 3 years and
renewal is achieved by participating in continuing education and
professional development activities.
This rule proposes to amend 24 CFR 200.145, entitled ``Property and
mortgage assessment,'' to include the fact that property inspections
are still required despite the removal of the Roster regulations. The
removal of the Roster regulations does not mean an absence of any
inspection requirement for a property to be eligible for an FHA-insured
mortgage. This rule will continue to permit inspections performed by
local jurisdictions as satisfactory evidence of work completed, as
discussed above. Where such inspections are not performed by the local
jurisdiction (e.g., where jurisdictions do not provide for building
code enforcement or do not provide documentation such as building
permits and certificates of occupancy), this rule
[[Page 8452]]
would require that the inspections be performed by an RCI who is also
licensed or certified as a home inspector in jurisdictions that license
or certify such inspectors. The number of required inspections would be
unchanged from current regulatory requirements--three inspections in
the case of new construction (see Sec. 200.170(b)(1)) and a single
inspection for existing construction (see Sec. 200.170(b)(2)).
In those rare instances involving property located in areas where
there is an absence of such RCIs, the lender shall obtain an inspection
performed by a third party who is a registered architect, a
professional engineer, or a tradesman or contractor and has met the
licensing and bonding requirements of the State in which the property
is located. Registered architects and professional engineers generally
must have a minimum of 10 years of documented residential construction
experience as related to new construction or repairs of a structural
nature, ranging from building techniques to the installation of
mechanical, electrical, and plumbing systems.\3\ In cases where
inspections are performed by RCIs or other qualified third parties in
areas where there is an absence of RCIs, the inspection must ensure
that construction was in accordance with any applicable building codes
in jurisdictions that have building codes in place but either do not
provide for building code enforcement or do not provide documentation
such as building permits and certificates of occupancy.
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\3\ Each State establishes the licensing requirements for
professional engineers and architects, which generally include
education requirements and require passing certain examinations. As
provided, in the following Web site, for example, becoming a
licensed professional engineer generally requires at least 12 years
of education and experience. See http://www.heimer.com/pe/index.html.
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Specific requests for comment. HUD has been unable to determine the
number of jurisdictions for which there may be an absence of RCIs, and
specifically requests information that would help HUD determine the
number of jurisdictions or geographical areas in which RCIs are not
available to perform inspections. Additionally, HUD is considering and
seeks comment on whether, for jurisdictions for which RCIs are not
available, whether HUD should require the lender, in selecting a non-
RCI, albeit an individual licensed and bonded under State law, to
select a registered architect, engineer, tradesman, or contractor with
a minimum of 5 years experience.
By continuing to accept inspections performed by local
jurisdictions rather than requiring an inspection by an FHA Roster
inspector, FHA is recognizing that the local jurisdiction is in a
better position to determine how best to conduct inspections to ensure
compliance with local building codes. By continuing its practice of
deferring to the local jurisdiction, FHA would also be mirroring the
broader residential mortgage lending industry, which has no national
roster of inspectors and relies upon local jurisdictions to ensure that
new construction or renovation or repairs to existing construction is
both durable and safe. By accepting inspections performed by RCIs, HUD
is conforming its standards to rigorous and well-established nationwide
criteria for home inspections.
The number of properties insured by FHA that would require an
inspection by an RCI (or other qualified individual where an RCI is
unavailable) is statistically insignificant. Of the 1,946,639 loans
endorsed by FHA in Fiscal Year (FY) 2009, only 2,975 (0.15 percent) of
these loans required the use of a Roster inspector. Of the 1,746,367
loans endorsed by FHA in FY 2010, only 2,155 (0.1 percent) of these
loans required the use of a Roster inspector. For FY 2011, only 685 out
of 1,182,512 (0.06 percent) endorsed loans required the use of a Roster
inspector. This statistical trend, along with the high standards
required to become an RCI (or the professional qualifications and
length of experience that would be required for other qualified
individuals in the absence of an RCI), indicate that the elimination of
the Inspector Roster will have an insignificant impact on the risk to
FHA's Insurance Fund. In other words, because so few homes even require
an inspection by a Roster inspector anymore, and RCIs have such high
qualifications, it is highly unlikely that eliminating the Inspector
Roster poses any increased risk of foreclosure because of inadequate
inspections.
Removal of Requirement for Insured 10-Year Protection Plan for High-LTV
Mortgages
The new inspection requirements proposed by this rule will apply to
all single-family dwellings insured by FHA, for both new and existing
construction, including high LTV FHA-insured mortgages. In this regard,
HUD proposes to remove the regulations governing 10-year protection
plans for high LTV mortgages, found at 24 CFR 203.18(a)(3) and 200-209.
As discussed above in the Background section of this preamble, HERA
eliminated any special requirements for high LTV mortgages, therefore
HUD proposes to amend its regulations to follow suit. In proposing to
remove in regulation the requirement for a 10-year protection plan, it
is HUD's position that in the more than 20 years since the promulgation
of the 10-year protection plan regulations, the necessity of requiring
consumer protection plans appears to have lessened. The quality of
housing and building technology has improved significantly, as has the
proliferation of more uniform building codes and building code
enforcement.
Requiring protection plans increases, in most cases, the cost of
buying a home, as well as the regulatory burden on lenders and
homebuyers. Builders will frequently factor in the cost of a 10-year
protection plan and this increase in cost adds to the cost of the home.
In addition, although HUD is no longer mandated by statute to
require a consumer protection plan or warranty plan, HUD is retaining
the requirement that the Warranty of Completion of Construction (form
HUD-92544) be executed by the builder and the buyer of a newly
constructed home, as a condition for FHA mortgage insurance. This
warranty provides assurance to FHA that the home was built according to
plan, and protects the buyer against defects in equipment, material, or
workmanship supplied or performed by the builder, subcontractor, or
supplier. The warrantor agrees to fix and pay for the defect and
restore any component of the home damaged in fulfilling the terms and
conditions of the warranty. The one-year warranty commences on the date
that title is conveyed to the buyer, the date that construction is
complete, or upon occupancy, whichever date occurs first.
The regulations regarding 10-year protection plans were promulgated
more than 20 years ago, and because of the increase in the quality of
construction and the stringent requirements for building inspections
proposed by this rule, HUD has determined that 10-year protection plans
are no longer necessary to safeguard FHA's Insurance Fund. Reliance on
inspections performed by local jurisdictions, RCIs, or other qualified
individuals, as proposed by this rule, adequately protects the
Insurance Fund and streamlines FHA's processing requirements. In fact,
in HUD's final 1990 rule that followed the 1987 proposed rule and
established the 10-year protection plan regulations, HUD, at the final
rule stage, eliminated proposed criteria for acceptability of a plan on
the basis that the criteria removed were satisfactorily addressed by
state insurers and HUD did not need
[[Page 8453]]
to impose these requirements, adding to the burden of entities seeking
HUD's approval of warranty plans.\4\ Therefore, from the outset of
establishing the warranty plan regulations, it was never HUD's
intention to duplicate requirements that were satisfactorily being
addressed at the State or local level. HUD, however, is retaining the
requirement that the Warranty of Completion of Construction (form HUD-
92544) be executed by the builder and the buyer of the home, as a
condition for FHA mortgage insurance. The warranty of completion, as
the title indicates, addresses homes for which construction has not
been completed. Before committing to insure a loan on a home that has
not yet been completed, FHA requires a signed warranty of completion.
The 10-year warranty plan, as has been discussed in this preamble, is
designed to protect against construction defects. Again, however, it is
HUD's position that the quality of construction and more stringent
building code requirements and inspections makes the 10-year warranty
plan no longer necessary.
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\4\ In the preamble to the October 5, 1990, final rule, HUD
stated as follows: ``The Department has reconsidered its position
[on certain plan acceptability criteria] in light of these and
similar comments and has determined to continue the existing system
of accepting Plans that have State approval. This means that Plans
will not, as a separate matter, have to satisfy the independent
criteria formerly proposed in the sections referenced above. State
approval serves the purpose of those now abandoned sections--
ensuring that Plans have adequate financial and insurance backing.
Removal of these sections also has the incidental benefit of
eliminating a potential administrative burden on both HUD and Plan
issuers. This action means that Plan issuers will not have to
furnish the information that would have been required under these
now-removed sections and, consequently, HUD will not have to
evaluate each submission to ensure compliance with the regulatory
criteria. HUD, along with homeowners, is still assured of the
financial soundness of a Plan, since Plans backed by insurance
companies must demonstrate their acceptance in each State in which
they are doing business.'' (See 55 FR at 41017)
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Further, removal of these regulations is consistent with the
President's Executive Order 13563, entitled ``Improving Regulation and
Regulatory Review,'' signed by the President on January 18, 2011, and
published on January 21, 2011, at 76 FR 3821. This Executive Order
requires executive agencies to analyze regulations that are ``outmoded,
ineffective, insufficient, or excessively burdensome, and to modify,
streamline, expand, or repeal them in accordance with what has been
learned.'' For the reasons discussed in this preamble, HUD has
determined that the requirement of a 10-year protection plan for high
LTV mortgages is outmoded and may be unnecessarily costly to homebuyers
and, therefore, proposes to remove the regulations.
Conforming Change
This rule would also amend Sec. 203.50 to reflect the statutory
change made by HERA and the removal of Sec. Sec. 203.18(a)(3) and 200-
209 of the regulations. Section 203.50(f) (``Eligibility of
rehabilitation loans'') cross-references Sec. 203.18(a)(3), and
because Sec. 203.18(a)(3) is being removed, this rule will amend Sec.
203.50(f) accordingly.
IV. Findings and Certifications
Regulatory Review--Executive Orders 12866 and 13563
Under Executive Order 12866 (Regulatory Planning and Review), a
determination must be made whether a regulatory action is significant
and, therefore, subject to review by the Office of Management and
Budget (OMB) in accordance with the requirements of the order.
Executive Order 13563 (Improving Regulation and Regulatory Review)
directs executive agencies to analyze regulations that are ``outmoded,
ineffective, insufficient, or excessively burdensome, and to modify,
streamline, expand, or repeal them in accordance with what has been
learned.'' Executive Order 13563 also directs that where relevant,
feasible, and consistent with regulatory objectives, and to the extent
permitted by law, agencies are to identify and consider regulatory
approaches that reduce burdens and maintain flexibility and freedom of
choice for the public. This rule was determined to be a ``significant
regulatory action'' as defined in section 3(f) of Executive Order 12866
(although not an economically significant regulatory action, as
provided under section 3(f)(1) of the Executive Order).
As already discussed in this preamble, this rule would remove
conditions on closing an FHA-insured mortgage that HUD believes are no
longer necessary and that add to the closing process unnecessary costs
for the buyer. As discussed, HUD's proposal to remove the Inspector
Roster is based on the recognition of the sufficiency and quality of
inspections carried out by certified inspectors and other qualified
individuals. In proposing to remove the requirement for a 10-year
protection plan, HUD submits that in the more than 20 years since the
promulgation of the 10-year protection plan regulations, the necessity
of requiring consumer protection plans has lessened. The quality of
housing and building technology has improved significantly, as has the
proliferation of more uniform building codes and building code
enforcement.
HUD expects both the elimination of the national Inspector Roster
and the elimination of the 10-year warranty plan to have economic
benefits and costs. However, neither the economic costs nor the
benefits of the elimination of the two requirements are greater than
the $100 million threshold that determines economic significance under
Executive Orders 12866 and 13563. By eliminating the national Inspector
Roster, HUD anticipates benefits of approximately $27,770 in savings.
By eliminating the 10-year warranty requirement, HUD anticipates
benefits in the form of approximately $29.5 million in savings.
Benefits and Costs of Eliminating the Inspector Roster
By eliminating the Roster, HUD believes that this rule would expand
the number of inspectors from which lenders may choose for the
inspection of a home where the mortgage is to be insured by FHA. The
Roster has a total of 3,029 inspectors (in FY 2011, HUD added 90
inspectors and 29 have been added in FY 2012). HUD is also in the
process of removing ineligible inspectors from the Roster and
anticipates a significant reduction in inspectors upon completion of
this ``sweep.'' The ICC is an international organization, with 49
states, the District of Columbia, and the U.S. Virgin Islands having
adopted the IRC published by ICC. By adopting the IRC, the
jurisdictions have all agreed that, to perform the inspection of such
codes, the inspectors must be certified by the ICC as RCIs. It is not
known how many inspectors currently listed on the Roster have ICC
designation, or how many Roster inspectors without ICC designation
would earn the designation in order to perform FHA work. Although those
Roster inspectors who already have ICC designation would lose the
marketing benefits associated with being listed on the Roster, they
would continue to be eligible to perform FHA inspections. HUD believes
that the overall effect of removing Roster inspectors will be to
increase the number of competent inspectors, since inspectors currently
on the Roster would no longer have an advantage of the exclusive market
power of inspecting FHA-insured homes, conveyed by the current Roster
requirements. A possible benefit of the increased choice of inspectors
for the lender is that the cost, which is currently averaged to be
approximately $1,000, may be driven down by the increased competition,
and those
[[Page 8454]]
savings may be passed on to the homeowners.
In addition, HUD anticipates savings of approximately $42,770 in
administrative costs from ceasing to maintain the Roster. To
successfully administer the program, HUD must, among other
administrative duties, bear the costs and workload associated with: (1)
The review and verification of applicant qualifications for placement
on the Roster; (2) the maintenance of records pertaining to
application, placement, and removal from the Roster; (3) the monitoring
of inspector performance; and (4) administrative proceedings to remove
poor performing inspectors from the Roster. These costs will no longer
accrue once this rule becomes effective.
As a matter of costs, the elimination of the Roster would affect a
very limited number of loans. FHA data shows that the number of FHA-
insured properties that would require an inspection by an RCI or other
qualified individual where an RCI is unavailable is statistically
insignificant. These are the properties that would normally go to
inspectors from the Roster. Of the 1,946,639 loans endorsed by FHA in
FY 2009, only 2,975 (0.15 percent) of these loans required the use of a
Roster inspector. Of the 1,746,367 loans endorsed by FHA in FY 2010,
only 2,155 (0.1 percent) of these loans required the use of a Roster
inspector. For FY 2011, only 685 out of 1,182,512 (0.06 percent)
endorsed loans required the use of a Roster inspector.
Moreover, the increased risk of inadequate inspections because of
the elimination of the Roster is de minimis, if any. To become an RCI,
applicants must undergo a rigorous examination and certification
process that is more robust than the Inspector Roster qualification
process. In the limited circumstances where an RCI is unavailable in a
particular jurisdiction, the professional qualifications and length of
experience that would be required for other qualified individuals are
sufficiently high thresholds to mitigate the concern of inadequate
inspections.
Given that the costs of eliminating the Inspector Roster are
minimal because so few loans would be affected and that the concern of
inadequate inspections is mitigated by the now available alternatives
to Roster inspectors, as compared to the benefits of increased consumer
choice, administrative savings, and burden reduction, HUD believes the
benefits of this rule outweigh the minimal costs.
Benefits and Costs of Eliminating the 10-Year Warranty Requirement
By eliminating the 10-year warranty requirement, homeowners will no
longer be required to pay warranty premiums. There currently are 16
FHA-approved warranty issuers. In 2010 and 2011, an average of 57,415
warranties were issued, with an average warranty rate ranging from
$2.75 to $3.75 per $1,000 of coverage.\5\ Assuming an average coverage
of $170,412 (2010 average) and an average of $3.00 per $1,000 of
coverage,\6\ the total savings for homeowners because of the
elimination of the warranty requirement is projected to approximate
$29.4 million.
---------------------------------------------------------------------------
\5\ This information derives from HUD's survey of its current
warranty providers. A search on the Internet for home warranty
insurers and their rates revealed that rates range from $1.50 to
$7.50 per thousand, annual premium, depending upon the value/amount
of the property. See, for example, http://www.firstweber.com/consumer-notices/.
\6\ Another source on home warranty pricing advises that the
average cost is about $3 per thousand of the selling price of the
home. See http://www.tcaor.com/Decoding_the_RE_Market/Home_Warranties.pdf. This rate is closer to that being charged by the
home warranty providers currently participating in FHA's program.
---------------------------------------------------------------------------
In addition, where homeowners with FHA-insured mortgages choose to
purchase a protection plan, the FHA-approved warranty issuers would
have to compete with other warranty issuers for such business. The
current regulations limit the choices available to homebuyers to those
warranty plan providers approved by HUD as meeting the regulatory
requirements. Homebuyers would reap the benefits of heightened market
competition, as warranty providers vie for their business through
competitive pricing and expanded warranty coverage.
As noted earlier in this preamble, requiring protection plans
increases, in most cases, the cost of buying a home. Builders
frequently will factor in the cost of a 10-year protection plan and
this increase in cost adds to the cost of the home. The changes
proposed by this rule would eliminate, for lenders and homeowners, the
costs associated with this regulatory burden.
In addition, the elimination of the warranty requirement also
eliminates the associated paperwork burden formerly associated with the
requirement. Assuming again the 2010-2011 average figure of 57,415
warranties, with 0.10 burden hours for each application, the
elimination of the warranty requirement saves the public an additional
$132,066 in burden hours. And finally, HUD has to review warranty plans
submitted for approval and renewal to ensure compliance with the
regulatory requirements of Sec. Sec. 203.200-203.209, while also
maintaining the online list of qualified warranty providers. The cost
to HUD of providing this administrative service is approximately
$10,601. In sum, the elimination of the warranty requirement represents
a total cost savings to the public of $29,352,615 in warranty cost +
$132,066 in paperwork burden + $10,601 in administrative costs to HUD.
The cost of eliminating the warranty requirement is that consumers may
be less protected from construction defects. However, as discussed
earlier, the increased quality of construction materials, and the
standardization of building codes and building code enforcement,
protect consumers much better now than when the warranty requirement
regulation was first promulgated. Assuming an average coverage of
$170,412 and computed total cost savings of $29,522,572, 174 of the
homes impacted by the elimination of this requirement would have to be
foreclosed upon, due to the financial impact associated with
construction problems, for the cost savings to be outweighed by the
costs of the elimination of the warranty requirement. HUD believes that
this is very unlikely. Thus, HUD believes that the benefit in cost
savings exceeds the potential cost of eliminating the 10-year warranty
requirement.
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
Regulation 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 toll-free Federal Relay Service at 800-877-8339.
Paperwork Reduction Act
As noted, although HUD proposes to remove the regulations requiring
10-year protection plans for high LTV FHA-insured mortgages, it is
retaining the requirement that the Warranty of Completion of
Construction (form HUD-92544) be executed by the builder and the buyer
of the home, as a condition for FHA mortgage insurance. The information
collections contained in form HUD-92544 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
2502-0598. The annual reporting burden of this information
[[Page 8455]]
collection is estimated at 478,758 hours and no burden dollars, and
this proposed rulemaking would not change the estimated burden hours
for continued use of form HUD-92544.
The information collection requirements contained in proposed Sec.
200.145(c), which would codify existing requirements pertaining to
compliance inspection reports (form HUD-92051) and the mortgagee's
assurance of completion (form HUD-92300), have been approved by OMB
under the PRA and assigned OMB Control Number 2502-0189. The annual
reporting burden of this information collection is estimated at 1,984
hours and no burden dollars, and this proposed rulemaking would not
change the estimated burden hours for continued use of these forms. HUD
would still expect the same number of inspections, just provided by a
different set of respondents (i.e., RCIs and qualified individuals, as
opposed to Roster inspectors).
The chart below represents the savings in paperwork burdens
proposed in this rule. By eliminating the Inspector Roster, inspectors
will no longer submit applications for HUD's review and approval. By
eliminating the warranty requirement, warranty providers will no longer
need to submit applications for HUD's review and approval.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Frequency of Responses per Burden hour Annual burden
Information collection respondents response annum per response hours Hourly cost Annual cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inspector Applications/HUD[dash]92563I 1,000 1 1,000 .50 500 $30 $15,000
(and copy of state certification)......
Warranty providers Sec. 203.202....... 16 *1 8 2.00 16 30 480
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Every 2 years.
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 the collection displays a currently valid OMB
control number.
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.
As noted above in this preamble, this proposed rule is a deregulatory
action taken by HUD that will alleviate the economic costs borne by
participants in the FHA single family mortgage insurance programs. As
an initial matter, HUD notes that the RFA, under its own terms, applies
to entities and not to individuals. The procedures and requirements for
placement on the Roster apply to individual inspectors, not to
entities. Accordingly, the RFA does not apply to the Roster component
of this proposed rule. In addition to removing the Roster regulations,
HUD also proposes to remove the regulations regarding the 10-year
protection plans required in order to qualify for high LTV FHA-insured
mortgages as a condition of closing for newly constructed single-family
homes. As discussed in this preamble, removal of the requirement for a
10-year protection plan would ease burdens on lenders and homebuilders
and does not preclude borrowers from purchasing such plans. HUD is
removing these regulations because it has deemed they are no longer
necessary. The proposed regulatory changes recognize the sufficiency
and quality of inspections carried out by local jurisdictions as a
result of the building permit and certification of occupancy processes.
Therefore, the undersigned certifies that this rule will not have a
significant impact on a substantial number of small entities.
Notwithstanding HUD's view that this rule will not have a
significant effect on a substantial number of small entities, HUD
specifically invites comments regarding any less burdensome
alternatives to this rule.
Environmental Impact
This proposed 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. In addition, part of this rule changes a
statutorily required and/or discretionary establishment and review of
loan limits. Accordingly, under 24 CFR 50.19(c)(1) and (c)(6), 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 rule will not have federalism
implications and would not impose substantial direct compliance costs
on State and local governments or preempt State law within the meaning
of the 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 rule does not
impose any federal mandates on any State, local, or tribal governments,
or on the private sector, within the meaning of UMRA.
Catalogue of Federal Domestic Assistance
The Catalogue of Federal Domestic Assistance Number for the
principal FHA single-family mortgage insurance program is 14.117.
List of Subjects
24 CFR Part 200
Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Housing standards, Lead poisoning, Loan
programs-housing and community development, Mortgage insurance,
Organization and functions (Government agencies), Penalties, Reporting
and recordkeeping requirements, Social Security, Unemployment
compensation, Wages.
[[Page 8456]]
24 CFR Part 203
Hawaiian natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
Accordingly, for the reasons discussed in the preamble, HUD
proposes to amend 24 CFR parts 200 and 203 to read as follows:
PART 200--INTRODUCTION TO FHA PROGRAMS
0
1. The authority citation for part 200 continues to read as follows:
Authority: 12 U.S.C. 1702-1715-z-21; 42 U.S.C. 3535(d).
0
2. In Sec. 200.145, add paragraph (c) to read as follows:
Sec. 200.145 Property and mortgage assessment.
* * * * *
(c) For all new construction as well as structural repairs and/or
renovations of existing properties, to the extent that an inspection is
required to determine if construction quality of a one- to four-unit
property is acceptable as security for an FHA-insured loan, the
following requirements apply:
(1)(i) In areas where local jurisdictions provide building code
enforcement and the requisite documentation, the lender shall provide a
copy of:
(A) The building permit, or its equivalent, and a copy of the
certificate of occupancy, or its equivalent; or
(B) A satisfactory inspection notice for work completed, or its
equivalent.
(ii) The documentation provided under paragraph (c)(1)(i) of this
section shall be considered satisfactory evidence of completion of the
work.
(2) In jurisdictions that do not provide building code enforcement
and requisite documentation, three inspections are required for new
construction. For existing construction, only one inspection and
certification of work completed for repairs and renovations is
required. For both new and existing construction, the lender shall, in
order to ensure compliance with FHA requirements:
(i) Select a Residential Combination Inspector (or its successor
designation) certified by the International Code Council (or its
successor organization) who is licensed or certified as a home
inspector in accordance with the applicable State and local
requirements governing the licensing or certification of those
jurisdictions that license or certify such inspectors in the respective
jurisdiction. The lender shall provide a certification from such
inspector that the new construction and/or structural repair or
renovation work is completed satisfactorily and in compliance with any
applicable building code.
(ii) In the absence of such Residential Combination Inspector, the
lender shall obtain an inspection performed by a third party, who is a
registered architect, a professional engineer, or a tradesman or
contractor, and who has met the licensing and bonding requirements of
the State in which the property is located. The lender shall provide a
certification from such inspector that the inspector is licensed and
bonded under applicable State law, and that the new construction and/or
structural repair or renovation work is completed satisfactorily and in
compliance with any applicable building code.
0
3. Remove the undesignated center heading ``FHA Inspector Roster'' and
Sec. Sec. 200.170-172.
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
4. The authority citation for part 203 continues to read as follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42
U.S.C. 3535(d).
Sec. 203.18 [Amended]
0
5. In Sec. 203.18, remove paragraph (a)(3) and redesignate paragraph
(a)(4) as paragraph (a)(3).
0
6. In Sec. 203.50, revise paragraph (f)(1) to read as follows:
Sec. 203.50 Eligibility of rehabilitation loans.
* * * * *
(f) * * *
(1)(i) The limits prescribed in Sec. 203.18(a)(1) (in the case of
a dwelling to be occupied as a principal residence, as defined in Sec.
203.18(f)(1));
(ii) The limits prescribed in Sec. 203.18(a)(1) and (3) (in the
case of a dwelling to be occupied as a secondary residence, as defined
in Sec. 203.18(f)(2));
(iii) 85 percent of the limits prescribed in Sec. 203.18(c), or
such higher limit, not to exceed the limits set forth in Sec.
203.18(a)(1), as Commissioner may prescribe (in the case of an eligible
nonoccupant mortgagor as defined in Sec. 203.18(f)(3));
(iv) The limits prescribed in Sec. 203.18a, based upon the sum of
the estimated cost of rehabilitation and the Commissioner's estimate of
the value of the property before rehabilitation; or
* * * * *
Sec. Sec. 203.200 through 203.209 [Removed]
0
7. Remove the undesignated center heading ``Insured Ten-Year Protection
Plans (Plan)'' and Sec. Sec. 203.200 through 203.209.
Dated: January 8, 2013.
Carol J. Galante
Assistant Secretary for Housing- Federal Housing Commissioner.
[FR Doc. 2013-02668 Filed 2-5-13; 8:45 am]
BILLING CODE 4210-67-P