[Federal Register Volume 75, Number 195 (Friday, October 8, 2010)]
[Proposed Rules]
[Pages 62335-62342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25441]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-5156-P-01]
RIN 2502 AI58
Federal Housing Administration (FHA) Single Family Lender
Insurance Process: Eligibility, Indemnification, and Termination
AGENCY: Office of the Assistant Secretary of Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: Through this proposed rule, HUD continues its efforts to
improve and expand the risk management activities of the Federal
Housing Administration (FHA). The proposed regulatory changes will
update and enhance the Lender Insurance process through which the
majority of FHA-insured mortgages are endorsed for insurance. Most
significantly, the proposed rule would provide additional guidance on
HUD's regulations implementing the statutory requirements regarding
mortgagee indemnification to HUD of insurance claims in the case of
fraud, misrepresentation, or noncompliance with applicable loan
origination requirements. The proposed rule also provides that
mortgagees must continually maintain the acceptable claim and default
rate required for eligibility to initially be delegated Lender
Insurance authority, in order to retain such authority. In addition,
this proposed rule also provides that HUD will review Lender Insurance
mortgagee performance on a continual basis. HUD also proposes to revise
the methodology for determining acceptable claim and default rates, to
more accurately reflect mortgagee performance, and to streamline the
approval process for Lender Insurance mortgagees that have undergone a
corporate restructuring. The Department has also taken the opportunity
afforded by this proposed rule to make two technical corrections to the
regulations and to solicit public comment on whether FHA mortgagees
should be required to submit mortgage loan case binders to HUD
electronically.
DATES: Comment Due Date: December 7, 2010.
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 Seventh
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 Seventh 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
http://www.regulations.gov. HUD strongly encourages commenters to
submit comments electronically. Electronic submission of comments
allows the commenter maximum time to prepare and submit a comment,
ensures timely receipt by HUD, and enables HUD to make them immediately
available to the public. Comments submitted electronically through the
http://www.regulations.gov Web site can be viewed by other commenters
and interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments
must be submitted through one of the two methods specified above.
Again, all submissions must refer to the docket number and title of
the rule. No Facsimile Comments. Facsimile (FAX) comments are not
acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an 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
Information Relay Service at 800-877-8339. Copies of all comments
submitted are available for inspection and downloading at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Mark Ross, Acting Director, Office of
Single Family Program Development, Office of Housing, Department of
Housing and Urban Development, 451 Seventh 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 Information Relay
Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Housing Administration (FHA) was established by
Congress in 1934 to improve nationwide housing standards, to provide
employment and stimulate industry, to improve conditions with respect
to home mortgage financing, to prevent speculative excesses in new
mortgage investment, and to eliminate the necessity for costly second
mortgage financing. FHA-insured single family mortgages are originated
and underwritten through the Direct Endorsement process. A majority of
FHA-insured mortgages that are originated under the Direct Endorsement
process are endorsed for insurance by mortgage lenders through a second
process, the Lender Insurance process.
The Direct Endorsement and Lender Insurance processes are not
separate programs; rather, they are the mechanisms that enable FHA-
approved lenders to consider single family mortgage applications
without first submitting paperwork to HUD. The Lender Insurance process
is authorized under section 256 of the National Housing Act (12 U.S.C.
1715z-21). The HUD regulations that presently govern the Direct
Endorsement and Lender
[[Page 62336]]
Insurance processes are codified at 24 CFR part 203 (entitled Single
Family Mortgage Insurance).
The Direct Endorsement process is described in Sec. 203.5 and is
available to mortgagees who meet the requirements set forth in Sec.
203.3. Under Direct Endorsement, the mortgagee determines that the
proposed mortgage is eligible for insurance under applicable
regulations, and submits the required documents to FHA in accordance
with Sec. 203.255. The Direct Endorsement mortgagee's performance is
subject to pre-endorsement and post-endorsement review by the
Secretary.
Direct Endorsement mortgagees that meet the requirements of Sec.
203.4 may be approved for Lender Insurance, as described in Sec.
203.6. Under the Lender Insurance process, a mortgagee conducts its own
pre-insurance review and insures the mortgage without a pre-endorsement
review by HUD. In order to be eligible to participate in the FHA single
family programs as a Lender Insurance mortgagee, an FHA mortgage lender
must be an unconditionally approved Direct Endorsement mortgagee that
is high performing--i.e., for at least 2 years prior to its application
for Lender Insurance authority, the mortgagee must have had a claim and
default record acceptable to HUD.
II. This Proposed Rule
Through this proposed rule, HUD continues its efforts to improve
and expand the risk management activities of FHA. The proposed
regulatory changes will update and enhance the Lender Insurance
process. Most significantly, the proposed rule would revise HUD's
regulations implementing the statutory requirements regarding lender
indemnification to HUD of insurance claims in the case of fraud,
misrepresentation, or noncompliance with applicable loan origination
requirements. The proposed rule will also provide that mortgagees, in
order to retain their Lender Insurance authority, must continually
maintain the acceptable claim and default rate required of them when
they were initially delegated such authority. In addition, this
proposed rule provides that HUD will review Lender Insurance mortgagee
performance on a continual basis. HUD also proposes to revise the
methodology for determining acceptable claim and default rates to more
accurately reflect mortgagee performance, and to streamline the
approval process for Lender Insurance mortgagees that have undergone a
corporate restructuring. The Department has also taken the opportunity
afforded by this proposed rule to make two technical corrections to the
regulations.
The proposed regulatory changes are as follows:
1. Lender indemnification for insurance claims. Under section
256(c) of the National Housing Act (12 U.S.C. 1715z-21(c)), an FHA-
approved Lender Insurance mortgagee may be required to indemnify HUD
for the loss if the mortgage loan was ``not originated in compliance
with the requirements established by the Secretary, and the Secretary
pays an insurance claim * * * within a reasonable period specified by
the Secretary.'' HUD may also require indemnification at any time ``if
fraud or misrepresentation was involved in connection with
origination'' of the mortgage loan. FHA may impose indemnifications,
irrespective of whether the noncompliance, fraud, or misrepresentation
caused the mortgage default. Currently, the section 256 statutory
indemnification requirement is limited to mortgagees with Lender
Insurance authority. On January 20, 2010, the Department announced that
it would seek changes to section 256 of the National Housing Act, to
apply the indemnification provisions to all Direct Endorsement
lenders.\1\
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\1\ See HUD press release HUD No. 10-016, available at: http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016.
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The section 256 statutory indemnification requirements are
currently codified at Sec. 203.255(f)(4). HUD proposes to create a new
Sec. 203.255(g) that would provide additional guidance on the
statutory requirements of section 256.
As discussed, the section 256 indemnification requirements are
applicable to claims paid in connection to a mortgage that was not
``originated'' in accordance with FHA requirements. For purposes of
Sec. 203.255(f), this proposed rule would define the term
``origination'' as meaning ``the process of creating a mortgage,
starting with the taking of the initial application, continuing with
the processing and underwriting, and ending with the mortgagee
endorsing the mortgage note for FHA mortgage insurance.'' The proposed
definition of ``origination'' would apply only to indemnifications for
mortgages endorsed for FHA mortgage insurance under section 256 of the
National Housing Act by authorized Lender Insurance mortgagees, and is
not being proposed by HUD to apply in any other contexts related to the
FHA programs.
As noted, cases of fraud or misrepresentation may require
indemnification at any time. However, for cases not involving fraud or
misrepresentation, section 256(c) limits the Department's ability to
require indemnification to insurance claims paid within a ``reasonable
time period'' established by HUD. New Sec. 203.255(g) would implement
this timing requirement by codifying HUD's longstanding practice of
requiring indemnification for FHA insurance claims paid ``within five
years from the date of mortgage insurance endorsement.'' The date of
endorsement is a fixed date, and therefore has the benefit of being
known to both HUD and the Lender Insurance mortgagee. Moreover, 5 years
is a reasonable ``seasoning'' period for a particular mortgage loan to
either perform or go into default and for the Department to ascertain
whether errors in the origination of the mortgage loan were made, while
not being so long a time frame so as to burden mortgagees with the
possibility of indemnification for a long-ago endorsed mortgage loan.
Section 256(c) authorizes HUD to require indemnification where the
mortgage was not originated in compliance with the HUD-established
requirements. Proposed Sec. 203.255(g) identifies the origination
requirements for which HUD may seek indemnification if the Lender
Insurance mortgagee knew or should have known that the requirements
were not followed in the origination of the mortgage. HUD will seek
such remedy for violations of FHA origination requirements that HUD
deems serious and material; for example, in cases where the mortgage
should never have been endorsed by the mortgagee, because FHA would not
have insured the mortgage absent proper adherence to the Lender
Insurance process. Specifically, a mortgagee may be required to
indemnify HUD if it failed to, among other actions: (1) Verify and
analyze the creditworthiness, income, and/or employment of the
mortgagor in accordance with FHA requirements; (2) verify the source of
assets brought by the mortgagor for payment of the required down
payment and/or closing costs in accordance with FHA requirements; (3)
address property deficiencies identified in the appraisal affecting the
health and safety of the occupants or the structural integrity of the
property in accordance with FHA requirements; or (4) ensure, in
accordance with the requirements of Sec. 203.5(e), that the appraisal
of the property serving as security for the mortgage loan satisfies FHA
appraisal
[[Page 62337]]
requirements. HUD may seek indemnification irrespective of whether the
violation caused the mortgage default.
HUD deems violations of the origination requirements identified in
the proposed rule as serious and material, because they pertain to the
core analyses that must be performed for all properly underwritten
mortgage loans. The purpose of mortgage loan underwriting is to
evaluate the willingness and financial capability of the mortgagor to
pay the loan, and to assess the physical condition of the property that
is to serve as security for the mortgage loan, in order to determine
whether it constitutes adequate collateral. These basic underwriting
principles are enshrined in the so-called ``Four C's of Credit''
(credit, capacity, capital, and collateral) commonly referred to in the
mortgage lending industry. The origination requirements listed above
correspond to these fundamental underwriting functions. Accordingly,
HUD believes that indemnification may be an appropriate remedy where
the mortgagee knew or should have known that these requirements were
not followed in the origination of the mortgage loan.
The proposed rule would also specify that the demand for
indemnification will be made by either the Secretary or the Mortgagee
Review Board. Under an indemnification agreement, the originating
mortgage lender agrees to either abstain from filing an insurance
claim, or to reimburse FHA if a subsequent holder of the mortgage files
an insurance claim and FHA suffers a financial loss.
2. Acceptable claim and default rate for Lender Insurance
mortgagees. Section 256(b) of the National Housing Act requires that
the Secretary of HUD, in deciding whether to grant a mortgagee's
application for Lender Insurance approval, consider ``the experience
and performance of the mortgagee compared to the default rate of all
insured mortgagees in comparable markets.'' HUD has implemented this
statutory requirement at Sec. 203.4(b), which requires that ``a
mortgagee must have had an acceptable claim and default record for at
least 2 years prior to its application for'' Lender Insurance
authority. The present regulation defines an acceptable claim and
default as at or below 150 percent of either: (1) The national average
rate for all insured mortgages; or (2) if the mortgagee operates in a
single state, the average rate for insured mortgages in the state.
The current regulation may make it easier for a single state
mortgagee to meet the acceptable standard if the mortgagee operates in
a state that has a high default rate. In contrast, a mortgagee would be
disadvantaged by having its claim and default rate compared to the
national average if the mortgagee operates in two states that have high
default rates, even if the mortgagee is in full compliance with FHA
requirements and otherwise eligible for Lender Insurance approval. To
address these potential concerns, HUD proposes to revise the
methodology for computing the acceptable claim and default rate for
Lender Insurance approval. The proposed rule would revise Sec.
203.4(b) by providing that a mortgagee is eligible for the Lender
Insurance program if its claim and default rate is at or below 150
percent of the average rate in the state(s) where the mortgagee
operates. The proposed methodology will more accurately reflect
mortgagee performance by evaluating each mortgagee based on its actual
area of operations.
3. Need to maintain acceptable claim and default rate. As noted,
Sec. 203.4(b) requires that mortgagees have an acceptable claim and
default rate as an eligibility criterion for initial Lender Insurance
approval; however, the regulation does not specify what constitutes an
acceptable claim and default rate for purposes of maintaining Lender
Insurance approval. This proposed rule emphasizes that a Lender
Insurance mortgagee must continually maintain the acceptable claim and
default rate required of them when they were initially granted Lender
Insurance authority. HUD will review Lender Insurance mortgagee
performance on a continual basis, and mortgagees that fail to maintain
the required claim and default rate will be subject to termination of
their Lender Insurance authority.
4. Lender Insurance approval in the case of merger, acquisition, or
restructuring. Section 256 of the National Housing Act requires that
HUD consider ``the experience and performance of the mortgagee'' in
determining the appropriateness of delegating the Secretary's authority
to endorse mortgages for FHA insurance. HUD's implementing regulations
at Sec. 203.4(b) elaborate on the statutory requirement by providing
that ``a mortgagee must have had an acceptable claim and default record
for at least 2 years prior to its application for'' Lender Insurance
authority. As discussed above in this preamble, the Lender Insurance
process is reserved for high-performing mortgagees. The performance
history requirement helps to ensure that only those mortgagees with a
proven track record are eligible for Lender Insurance authority.
Newly formed business entities that do not have a performance
record are, therefore, ineligible for Lender Insurance approval. This
is true even if the newly formed lending institution was created by a
merger, acquisition, or reorganization where one or more of the
participating entities had Lender Insurance approval, and the new
resulting lending institution retains the structure, staff, and
operational protocols that would--absent the 2-year historical
performance requirement--make the new entity eligible for Lender
Insurance authority under section 256 of the National Housing Act.
Deferral of Lender Insurance eligibility is merited for new corporate
entities that have not had the time to establish an acceptable
performance track history. However, in the case of new entities created
by a merger, acquisition, or reorganization, it is possible to forecast
future performance with a high degree of certainty based on the
performance history of the predecessor entities. To deny Lender
Insurance eligibility to such mortgagees simply for purposes of
``running out the clock'' is contrary to the rationale of the
performance history requirement and the Lender Insurance process.
In the past, the Department has addressed this issue through the
granting of case-by-case regulatory waivers, a process that has the
potential to be lengthy and, on occasion, administratively burdensome.
This proposed rule would eliminate the need for regulatory waivers by
codifying the conditions under which the Secretary may grant Lender
Insurance authority to a mortgagee with less than the required
historical performance record. The proposed criteria would permit HUD
to evaluate the performance of the new mortgagee based on the
performance history of the predecessor corporate entities, while also
safeguarding against the possibility that a mortgagee with a poor track
record might attempt to circumvent the purposes of section 256 by
acquiring or merging with a high-performing lending institution.
First, the mortgagee must be an entity created by a merger,
acquisition, or reorganization completed less than 2 years prior to the
date of the mortgagee's application for Lender Insurance approval.
Secondly, one or more of the entities participating in the merger,
acquisition, or reorganization must have had Lender Insurance approval
at the time of the corporate restructuring. Third, all of the lending
institutions participating in the corporate
[[Page 62338]]
restructuring must have had an acceptable claim and default record for
the 2-years preceding the mortgagee's application for Lender Insurance
approval. Fourth, and last, the extrapolated claim and default record
of the mortgagee derived by aggregating the claims and defaults of the
entities participating in the merger, acquisition, or reorganization,
for the 2-year period prior to the mortgagee's application for Lender
Insurance approval, constitutes an acceptable rate of claims and
defaults.
The proposed new process would permit, but not compel, HUD to grant
Lender Insurance authority to those mortgagees meeting the criteria
outlined above. While a rebuttable presumption in favor of granting
approval would be established by a mortgagee that meets all four of the
required criterions, HUD may consider other available evidence or data
indicative of performance, and may deny the application for Lender
Insurance authority and require the mortgagee to wait until it
establishes an acceptable performance track record. The proposed
regulatory provision is consistent with HUD's responsibility to
evaluate mortgagee experience and ensure that Lender Insurance
authority is provided only to high-performing lenders that comply with
FHA requirements, while also facilitating the provision of FHA-
insurance by new lending institutions created by a corporate
restructuring.
5. HUD reviews. Consistent with its duty to protect the FHA
insurance fund, HUD monitors mortgagee performance on an ongoing basis
(see, for example, the present regulation at 24 CFR 202.3 providing for
such HUD reviews). However, the current Lender Insurance regulation at
Sec. 203.4(c) only refers to an annual performance review. This
proposed rule would clarify that HUD will monitor a mortgagee's
eligibility to participate in the Lender Insurance program on a
continual basis.
6. Termination of Lender Insurance authority. This proposed rule
would revise Sec. 203.4(d), which governs terminations of Lender
Insurance authority, for purposes of clarity and readability. The
proposed rule would provide additional specificity on the grounds for
termination. Revised Sec. 203.4(d) provides that HUD may immediately
terminate the mortgagee's approval to participate in the Lender
Insurance program, if the mortgagee violates any of the requirements
and procedures established by the Secretary for mortgagees approved to
participate in the Lender Insurance program, the Direct Endorsement
program, or the Title II Single Family mortgage insurance program, or
if HUD determines that other good cause exists. In addition, the
proposed rule clarifies that terminations of Lender Insurance approval
are effective upon receipt of HUD's notice of such termination. The
proposed rule would also revise Sec. 203.4(d) to clarify that pursuant
to section 256(d) of the National Housing Act (12 U.S.C. 1715z-21(d)),
HUD termination decisions are not subject to judicial review and that
terminations instituted under Sec. 203.4(d) are distinct from
withdrawal of mortgagee approval by the Mortgagee Review Board under 24
CFR part 25.
7. Lender insurance pre-insurance review. The present regulations
at Sec. 203.255(f)(1) require that mortgagees conduct a pre-insurance
review of mortgages insured under the Lender Insurance process. The
regulations provide that the pre-insurance review must meet HUD
requirements, but does not specify the requirements for applicable
reviews, instead providing that ``HUD will directly inform
participating mortgagees of its minimum requirements for pre-insurance
review.'' This proposed rule would codify existing Lender Insurance
practice concerning the pre-insurance review provisions, by specifying
that Lender Insurance mortgagees are responsible for conducting the
pre-insurance review that would otherwise be performed by HUD under the
Direct Endorsement process.
8. Technical correction. In addition to the proposed regulatory
changes discussed above in this preamble, HUD has taken the opportunity
afforded by this proposed rule to make a nonsubstantive change to the
existing regulations. The proposed rule would make a technical
correction to Sec. 203.4(a), which incorrectly cross-references to
Sec. 203.5 as containing the requirements for Direct Endorsement
approval. These approval procedures are codified at Sec. 203.3.
III. Issue Under Consideration: Mandatory Electronic Submission of Case
Binders
In addition to soliciting public comment on the proposed regulatory
changes described above in this preamble, the Department solicits
comment on a possible change to current recordkeeping and submission
requirements that the Department is considering. The present Direct
Endorsement regulations at 24 CFR 203.255(b) require mortgagees to
submit to HUD specified documentation within 60 days after the date of
closing of a mortgage loan (collectively, these documents and
certifications are referred to as the mortgage loan ``case binder'').
The Lender Insurance regulations at 24 CFR 203.255(f)(2) provide that
mortgagees must maintain records, including origination files, in a
manner and for a time frame prescribed by HUD, and must make these
mortgage loan ``case binders'' available to HUD staff upon request.
Customarily, case binders are maintained and submitted to HUD in
hard-copy paper format. Given changes in technology that facilitate the
electronic submission and storing of mortgage loan records, HUD is now
considering requiring by June 2012 that all case binders be submitted
electronically regardless of the insurance process used by a mortgagee.
Although Lender Insurance mortgagees are not currently required to
submit case binders (except upon HUD's request for a post-endorsement
technical review), under HUD's proposal they would be required to
submit these mortgage loan records electronically within a specified
time frame following insurance of the mortgage. The final rule may
contain regulatory text requiring the electronic submission of case
binders, and HUD invites public comment on such a possible change,
including the appropriateness of a June 2012 implementation date, the
costs and benefits that would be associated with the electronic
submission of case binders, and what the required time frames should be
for submission of electronic case binders following insurance of the
mortgage. For more information about the costs and benefits of this
provision, please see the regulatory planning and review section of
this preamble.
IV. Findings and Certification
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled ``Regulatory Planning and Review'').
OMB determined that this rule is a ``significant regulatory action,''
as defined in section 3(f) of the Order (although not an economically
significant regulatory action, as provided under section 3(f)(1) of the
Order).
This proposed rule would modify three existing areas affecting FHA-
approved lenders. First, this rule would impose indemnification
provisions to all approved mortgagees with Lender Insurance authority.
Second, this rule would amend the methodology and requirements for
determining an acceptable claim and default rate. Lastly, this rule
would amend the 2-year
[[Page 62339]]
historical performance requirement for mortgagees resulting from
merger, acquisition, or reorganization. Other provisions of this rule
describe clarifying or technical changes which would not produce an
economic impact. The proposed rule also solicits comments on a possible
change to current recordkeeping and submission requirements that the
Department is considering. To the extent that these amendments have any
economic impact, it would be to reduce the compliance costs currently
borne by lenders, by clarifying and providing additional instructions
that supplement existing FHA requirements and procedures. This rule, as
proposed, would not have an economic effect of greater than $100
million and thus does not require a regulatory impact analysis. The
reasons for HUD's determination are as follows:
Indemnification Requirements. With regard to the proposed
indemnification provisions, this proposed rule codifies much of
existing HUD practice, and this rule alone should not result in a
dramatic change in underwriting practices and the quality of FHA loans,
assuming that all of FHA's Direct Endorsement lenders currently conduct
due diligence in extending FHA-insured loans. A marginal change will be
encountered by those lenders with ineffective risk management practices
and/or those lenders who have refused to execute an indemnification
agreement. HUD expects there to be some reduction in claims paid by
FHA, but not a noticeable reduction in the claims rate attributed to
this change by itself. FHA's average loss rate on claims for first
quarter Fiscal Year (FY) 2010 (October 1, 2009 to February 28, 2010)
properties conveyed to HUD and subsequently sold was approximately 60
percent. For every claim averted, there would be a transfer (loss
avoidance) of approximately $73,000 to FHA.
The primary change is that all Direct Endorsement lenders with
Lender Insurance authority will be subject to indemnification
procedures and will not be able to negotiate the settlement, as is the
current practice. This facet of the rule could lead to an efficiency:
the initial process by a lender of deciding whether to indemnify FHA
will be eliminated, and would be accompanied by reductions in the
length and cost of negotiations. Time and effort may be saved because
the costs of a lengthy preparation for both FHA and the lender in
coming before the Mortgage Review Board are reduced by this proposed
rule. The number of signed indemnifications for the last seven fiscal
years (FY 2004 through the end of FY 2010) has averaged 1,282
indemnification agreements annually. If the average negotiation costs
are one percent of the loan amount for both FHA and the lender
(approximately $140,000 is currently the average FHA-insured mortgage
amount), then the transaction costs to avoid or delay the
indemnification would be $1,400 per loan. Over an average of 1,300
indemnifications, the aggregate transaction costs saved by this rule
would be $1.7 million.
Acceptable Claim and Default Rate. The proposed rule would make two
changes regarding acceptable claim and default rates for Lender
Insurance mortgagees. First, HUD proposes to more accurately evaluate a
mortgagee's performance record by basing the claim and default rate
comparison on the mortgagee's actual area of operations. The proposed
rule also clarifies that, in order to retain their Lender Insurance
authority, mortgagees must continually maintain the acceptable claim
and default rate required of them when they were initially delegated
such authority.
To simulate the impact of the proposed changes, HUD used data on
active Direct Endorsement lenders. By moving to a consistent
methodology, regional lenders are compared not to a national standard,
but to their peers operating in the same area. Using as a base the
total number of 1,945 currently active Direct Endorsement lenders, an
additional 18 lenders would have the claim and default rate necessary
for Lender Insurance authority under this proposed rule. However, the
proposed requirement that Lender Insurance mortgagees maintain the
acceptable default and claim rate initially required for Lender
Insurance eligibility appears to result in a minimal reduction in the
number of Direct Endorsement lenders that would be deemed to eligible
for Lender Insurance authority. Specifically, 113 out of the 1,945
currently active Direct Endorsement mortgagees would no longer have the
necessary claim and default rate to maintain Lender Insurance
authority; however, these mortgagees would retain their Direct
Endorsement authority and could continue to participate in FHA
programs.
The combined effect of the two proposed changes would be to reduce
the number of Direct Endorsement mortgagees eligible for Lender
Insurance authority (a reduction of 54). In the short run, this effect
can be thought of as a transfer between lenders of different regions.
In the longer run, HUD expects the impact of this rule to be
geographically neutral. Lenders will not be permanently reduced as a
result of this rule; rather, HUD expects that lenders who can meet the
eligibility criteria will eventually assume the business of those
lenders who could not meet the new eligibility criteria.
Lender Insurance Approval in the Case of Corporate Restructuring.
The proposed rule would facilitate the compliance of new lending
institutions resulting from a merger, acquisition, or reorganization
with the statutory requirements for Lender Insurance approval. The
proposed rule would thus make changes designed to provide additional
regulatory flexibility and better reflect existing market conditions.
The regulatory 2-year performance history requirement may impose a
burden on lenders whose compliance with FHA requirements was not
affected by the business reorganization. Although HUD has in the past
granted regulatory waivers to address this problem, the proposed rule
will codify a solution that is less administratively burdensome than
the regulatory waiver process.
Mandatory Electronic Submission of Case Binders. The present Direct
Endorsement regulations require mortgagees to submit case binders to
HUD within 60 days after the date of closing of a mortgage loan.
Customarily, case binders are maintained and submitted to HUD in hard-
copy paper format. Given changes in technology that facilitate the
electronic submission and storing of mortgage loan records, the
proposed rule solicits comments on whether HUD should require that all
case binders be submitted electronically. Although Lender Insurance
mortgagees are not currently required to submit case binders (except
upon HUD's request), under HUD's proposal they would be required to
submit these mortgage loan records electronically within a specified
time frame following insurance of the mortgage.
The minimum cost of this change to mortgagee would be zero. Most
companies already possess the technology to process electronic
documents for their investors. In addition, there are currently seven
lenders that submit a total of 250,000 electronic case binders
annually. These firms would not incur additional costs for submitting
electronic binders to FHA. Although most companies already subscribe to
a service that transmits electronic documents, sending them to FHA
would impose an additional cost. A reasonable estimate of the
additional cost per loan is a transaction fee in the range of $9 to $17
per case binder, with an upfront cost of $5,000 to $15,000 per firm.
With 4,000 firms, the aggregate
[[Page 62340]]
fixed cost of this portion of the rule would range from $20 million to
$60 million. If FHA has an average of 1.5 million loans, then 1.25
million loans would be affected (1.5 million minus 250,000). The
aggregate variable cost of this requirement would constitute from $11
million to $21 million ($9 to $17 multiplied by 1.25 million).
The low-cost-scenario is defined as the case where the fixed and
variable costs are lowest and the high-cost scenario where the costs
are highest. The annualized cost over 10 years at a 3 percent discount
rate would be $14 million in the low-cost scenario and $29 million
annually in the high-cost scenario. At a 7 percent discount rate, the
annualized cost over 10 years would be $15 million annually for the
low-cost scenario and $31 million for the high-cost scenario.
The net cost, however, of moving to mandatory electronic submission
should not be lesser the gross cost described above, since there will
be some substitution from more expensive postal to electronic
submission. These benefits are expected to last for the next 10 years
until a new investment is required. Consider, for example, if the case
binders of one-half of all loans were mailed to FHA at a cost of $30
per binder, then the annual savings of postal costs would be $18.7
million. This provision generates net benefits for the low-cost of
transmission scenario (a total of $44 million at a 3 percent discount
rate over 10 years) but not for the high-cost of transmission of
scenario (a net cost of $81 million at the 3 percent discount rate).
The annualized net benefit in the low-cost scenario is $5.4 million and
the annualized net cost in the high-cost scenario is $9.6 annually.
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 toll-free Federal Information Relay Service at
800-877-8339.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The proposed rule would not add any new regulatory burdens on FHA-
approved mortgage lenders. Rather, as noted above in this preamble (see
the section captioned ``Regulatory Planning and Review''), the proposed
rule would codify much of existing practice regarding indemnification.
Specifically, the proposed rule would codify a definition of the term
``origination'' for purposes of indemnification, specify time limits on
HUD's ability to demand indemnification in cases not involving fraud or
misrepresentation, and identify specific defects in mortgage loan
origination that may prompt HUD to seek indemnification. The primary
change is that all Lender Insurance mortgagees will be subject to
indemnification and will not be able to negotiate a settlement in lieu
of indemnification. As noted in the ``Regulatory Planning and Review''
section of this preamble, this change may have a marginal impact on
those lenders with ineffective risk management practices and who have
refused to execute an indemnification agreement. Accordingly, to the
extent that indemnification provisions of this proposed rule have any
economic impact, it will be as a result of the lender's own actions--
i.e., its inability or unwillingness to comply with prudent risk
management practices--and not as a result of HUD regulatory action.
HUD also proposes to revise the methodology for determining
acceptable claim and default rates. The regulatory change will more
accurately evaluate a mortgagee's performance record by basing the
claim and default rate comparison on the mortgagee's actual area of
operations, rather than on the national average. This change would have
an overall beneficial economic impact on small business lenders.\2\ HUD
data indicates that an additional ten small business lenders would be
deemed to have an acceptable claim and default rate for purposes of
Lender Insurance authority as a result of this change. (There are
currently 602 active small business Direct Endorsement mortgagees
participating in FHA programs.)
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\2\ The Small Business Administration size standard regulations
at 13 CFR 121.201 define small business lenders and mortgagees as
having less than $7 million in annual revenues for nondepository
firms and assets under $175 million for depository firms.
---------------------------------------------------------------------------
The proposed rule also specifies that mortgagees must maintain the
acceptable claim and default rate required of them when they were
initially granted Lender Insurance authority, in order to retain such
authority, and that HUD will monitor mortgagee performance on an
ongoing basis. As noted in the ``Regulatory Planning and Review''
section of this preamble, this provision of the proposed rule would
result in a minimal reduction in the number of Direct Endorsement
lenders that would be deemed eligible for Lender Insurance authority
(113 out of a total of 1,945 currently active Direct Endorsement
mortgagees). However, the economic impacts of this change should be
minimal, as these lenders will continue to be able to participate in
FHA programs as Direct Endorsement mortgagees. Moreover HUD reiterates
that Lender Insurance authority is reserved for high-performing
mortgagees that have a proven track record of risk management and sound
underwriting practices. The regulatory change would merely require that
Lender Insurance mortgagees maintain the same performance record that
first made them eligible for Lender Insurance authority. To the extent
that the proposed amendment has any impact, it will be as a consequence
of the lender's inability to maintain acceptable risk management
practices, and not as a result a HUD regulatory mandate.
The proposed rule also would make several changes designed to
provide additional regulatory flexibility and better reflect existing
market conditions. For example, the proposed rule would facilitate the
compliance of new lending institutions created by a merger,
acquisition, or reorganization with the statutory requirements for
Lender Insurance approval. Under HUD's regulations implementing section
256 of the National Housing Act, mortgagees must comply with a 2-year
performance history requirement in order to qualify for Lender
Insurance approval. As a new business entity, the lending institution
created by a merger, acquisition, or reorganization would not be able
to comply with the performance 2-year history requirements, and thus
would be ineligible for Lender Insurance authority. The regulatory 2-
year performance history requirement may impose a burden on lenders
whose compliance with FHA requirements is not affected by the business
reorganization. Although HUD has in the past granted regulatory waivers
to address this problem, the proposed rule will codify a solution that
is less administratively burdensome than the regulatory waiver process.
[[Page 62341]]
The proposed rule also solicits comment on a possible change to
current recordkeeping and submission requirements. In light of changes
in technology that facilitate the electronic submission and storing of
mortgage loan records, HUD is considering requiring that case binders
be submitted electronically regardless of the insurance process used by
a mortgagee. As discussed in detail in the ``Regulatory Planning and
Review'' section of this preamble, the proposed change likely would
reduce the economic burden imposed on mortgagees by no longer requiring
that they incur the cost of maintaining paper records (except in the
worst high-cost scenario). Moreover, these benefits are expected to
last for the next 10 years until a new technology investment is
required.
Accordingly, for the above reasons, the undersigned certifies that
this rule will not have a significant economic impact on a substantial
number of small entities. Notwithstanding HUD's determination that this
rule will not have a significant effect on a substantial number of
small entities, HUD specifically invites comments regarding any less
burdensome alternatives to this rule that will meet HUD's objectives,
as described in this preamble.
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 proposed rule does
not impose any federal mandates on any state, local, or tribal
governments, or on the private sector, within the meaning of UMRA.
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. Accordingly, under 24 CFR 50.19(c)(1), this rule
is categorically excluded from environmental review under the National
Environmental Policy Act of 1969 (42 U.S.C. 4321).
Paperwork Reduction Act
The information collection requirements for this proposed rule have
been approved by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB
control number 2502-0059. In accordance with the Paperwork Reduction
Act, 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.
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 in 24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
Accordingly, for the reasons discussed in the preamble, HUD
proposes to amend 24 CFR part 203 to read as follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
1. The authority citation for part 203 is revised to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and
1717z-21; 42 U.S.C. 3535(d).
2. In Sec. 203.4, amend paragraph (a) by revising the reference
``Sec. 203.5'' to read ``Sec. 203.3'' and revise paragraphs (b), (c),
and (d), to read as follows:
Sec. 203.4 Approval of mortgagees for Lender Insurance.
* * * * *
(b) Performance: Claim and default rate. (1) In addition to being
unconditionally approved for the Direct Endorsement program, a
mortgagee must have had an acceptable claim and default rate (as
described in paragraph (b)(3) of this section) for at least 2 years
prior to its application for participation in the Lender Insurance
program, and must maintain such a claim and default rate in order to
retain Lender Insurance approval.
(2) HUD may approve a mortgagee that is otherwise eligible for
Lender Insurance approval, but has an acceptable claim and default
record of less than 2 years, if:
(i) The mortgagee is a an entity created by a merger, acquisition,
or reorganization completed less than 2 years prior to the date of the
mortgagee's application for Lender Insurance approval;
(ii) One or more of the entities participating in the merger,
acquisition, or reorganization had Lender Insurance approval at the
time of the merger, acquisition, or reorganization;
(iii) All of the lending institutions participating in the merger,
acquisition, or reorganization had an acceptable claim and default
record for the 2 years preceding the mortgagee's application for Lender
Insurance approval; and
(iv) The extrapolated claim and default record of the mortgagee
derived by aggregating the claims and defaults of the entities
participating in the merger, acquisition, or reorganization, for the 2-
year period prior to the mortgagee's application for Lender Insurance
approval, constitutes an acceptable rate of claims and defaults, as
defined by this section.
(3) A mortgagee has an acceptable claim and default rate if its
rate of claims and defaults is at or below 150 percent of the average
rate for insured mortgages in the state(s) in which the mortgagee
operates.
(c) Reviews. HUD will monitor a mortgagee's eligibility to
participate in the Lender Insurance program on a continual basis.
(d) Termination of approval. (1) HUD may immediately terminate the
mortgagee's approval to participate in the Lender Insurance program, in
accordance with section 256(d) of the National Housing Act (12 U.S.C.
1715z-21(d)), if the mortgagee:
(i) Violates any of the requirements and procedures established by
the Secretary for mortgagees approved to participate in HUD's Lender
Insurance program, Direct Endorsement program, or the Title II Single
Family mortgage insurance program; or
(ii) If HUD determines that other good cause exists.
(2) Such termination will be effective upon receipt of HUD's notice
advising of the termination. Within 30 days after receiving HUD's
notice of termination, a
[[Page 62342]]
mortgagee may request an informal conference with the Deputy Assistant
Secretary for Single Family Housing or designee. The conference will be
conducted within 30 days after HUD receives a timely request for the
conference. After the conference, the Deputy Assistant Secretary (or
designee) may decide to affirm the termination action or to reinstate
the mortgagee's Lender Insurance program approval. The decision will be
communicated to the mortgagee in writing, will be deemed a final agency
action, and, pursuant to section 256(d) of the National Housing Act (12
U.S.C. 1715z-21(d)), is not subject to judicial review.
(3) Termination of an origination approval agreement under part 202
of this chapter or termination of Direct Endorsement approval under
Sec. 203.3(d)(2) for a mortgagee or one or more branch offices
automatically terminates Lender Insurance approval for the mortgagee or
the branch office or offices, without imposing any further requirement
on the mortgagee or such offices to comply with this paragraph.
(4) Any termination instituted under this section is distinct from
withdrawal of mortgagee approval by the Mortgagee Review Board under 24
CFR part 25.
3. In Sec. 203.255, revise paragraph (f)(1), remove paragraph
(f)(4), and add paragraph (g) to read as follows:
Sec. 203.255 Insurance of mortgage.
* * * * *
(f) Lender Insurance. (1) Pre-insurance review. For applications
for insurance involving mortgages originated under the Lender Insurance
program under Sec. 203.6, the mortgagee is responsible for performing
a pre-insurance review that would otherwise be performed by HUD under
Sec. 203.255(c) on the documents that would otherwise be submitted to
HUD under Sec. 203.255(b). The mortgagee's staff that performs the
pre-insurance review must not be the same staff that originated the
mortgage or underwrote the mortgage for insurance.
* * * * *
(g) Indemnification. (1) General. By insuring the mortgage, a
Lender Insurance mortgagee agrees to indemnify HUD, in accordance with
this paragraph.
(2) Definition of origination. For purposes of indemnification
under this paragraph, the term ``origination'' means the process of
creating a mortgage, starting with the taking of the initial
application, continuing with the processing and underwriting, and
ending with the mortgagee endorsing the mortgage note for FHA
insurance.
(3) Serious and material violation. The mortgagee shall indemnify
HUD for an FHA insurance claim paid within 5 years of mortgage
insurance endorsement, if the mortgagee knew or should have known of a
serious and material violation of FHA origination requirements, such
that the mortgage loan should not have been approved and endorsed by
the mortgagee and irrespective of whether the violation caused the
mortgage default. Such a serious and material violation of FHA
requirements in the origination of the mortgage may occur if the
mortgagee failed to, among other actions:
(i) Verify the creditworthiness, income, and/or employment of the
mortgagor in accordance with FHA requirements;
(ii) Verify the assets brought by the mortgagor for payment of the
required down payment and/or closing costs in accordance with FHA
requirements; or
(iii) Address property deficiencies identified in the appraisal
affecting the health and safety of the occupants or the structural
integrity of the property in accordance with FHA requirements, or
(iv) Ensure that the appraisal of the property serving as security
for the mortgage loan satisfies FHA appraisal requirements, in
accordance with Sec. 203.5(e).
(4) Fraud or misrepresentation. The mortgagee shall indemnify HUD
for an insurance claim if fraud or misrepresentation was involved in
connection with the origination of the mortgage, regardless of when the
mortgage was endorsed for insurance and irrespective of whether the
fraud or misrepresentation caused the mortgage default.
(5) Demand for indemnification. The demand for indemnification will
be made by either the Secretary or the Mortgagee Review Board. Under an
indemnification agreement, the Lender Insurance mortgagee agrees to
either abstain from filing an insurance claim, or reimburse FHA if a
subsequent holder of the mortgage files an insurance claim and FHA
suffers a financial loss.
Dated: September 16, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-25441 Filed 10-7-10; 8:45 am]
BILLING CODE 4210-67-P