Standards for Mortgagor's Investment in Mortgaged Property, 56002-56007 [07-4846]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 72, Number 189 (Monday, October 1, 2007)]
[Rules and Regulations]
[Pages 56002-56007]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-4846]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 203



Standards for Mortgagor's Investment in Mortgaged Property: Final Rule

Federal Register / Vol. 72, No. 189 / Monday, October 1, 2007 / Rules 
and Regulations

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-5087-F-02]
RIN 2502-AI52


Standards for Mortgagor's Investment in Mortgaged Property

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

ACTION: Final rule.

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SUMMARY: This final rule amends the Department's regulations governing 
the specific standards for a mortgagor's investment in property for 
which the mortgage is insured by the Federal Housing Administration 
(FHA). Specifically, this final rule codifies HUD's longstanding 
practice, authorized by statute, of allowing a mortgagor's investment 
to be derived from gifts by family members and certain organizations.
    The standards established by this final rule address a situation in 
which the mortgagor's investment is derived from a gift, loan, or other 
payment that is provided by any donor, including an individual or an 
organization, and also specify prohibited sources for a mortgagor's 
investment. The final rule establishes that a prohibited source of 
downpayment assistance is a payment that consists, in whole or in part, 
of funds provided by any of the following parties before, during, or 
after closing of the property sale: The seller, or any other person or 
entity that financially benefits from the transaction; or any third 
party or entity that is reimbursed directly or indirectly by the 
seller, or any other person or entity that financially benefits from 
the transaction.
    This final rule follows publication of a May 11, 2007, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. After considering all comments received, HUD is adopting 
the May 11, 2007, proposed rule with certain minor clarification 
changes.

DATES: Effective Date: October 31, 2007.

FOR FURTHER INFORMATION CONTACT: Margaret Burns, Director, Office of 
Single Family Program Development, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410; telephone 
number (202) 708-2121 (this is not a toll-free number). Persons with 
hearing or speech impairments may access this number through TTY by 
calling the toll-free Federal Information Relay Service at (800) 877-
8339.

SUPPLEMENTARY INFORMATION:

I. Background

    In order for a mortgage to be eligible for insurance by the Federal 
Housing Administration (FHA), section 203(b)(9) of the National Housing 
Act (12 U.S.C. 1709(b)(9)) requires the mortgagor (with narrow 
exceptions) to pay on account of the property at least 3 percent of the 
cost of acquisition. The statute and the implementing regulation at 24 
CFR 203.19 are silent about permissible or impermissible sources of the 
mortgagor's investment, except that some loans are permitted sources 
under the statute. For example, section 203(b)(9) of the National 
Housing Act permits family members to provide loans to other family 
members, and permits the mortgagor's downpayment to be paid by a 
corporation or person other than the mortgagor in certain 
circumstances, such as when the mortgagor is 60 years of age or older, 
or when the mortgage covers a housing unit in a homeownership program 
under the Homeownership and Opportunity Through HOPE Act (Title IV of 
Pub. L. 101-625, 104 Stat. 4148, approved November 28, 1990). HUD has 
long taken the position that downpayment funding from the seller of the 
home to be purchased by a borrower with an FHA-insured loan is not a 
permissible source of the mortgagor's investment in the property. FHA's 
experience is that loans made to borrowers who rely on these types of 
seller-funded assistance perform very poorly.
    Although FHA has attempted to preclude downpayment funding derived 
from contributions of the seller of the property, some so-called 
charitable organizations have been able to circumvent these 
restrictions in various ways, including the establishment of a fund 
that provides the so-called ``gift'' to the homebuyer. The situations 
that cause FHA concern are those in which a so-called charitable 
organization provides a so-called gift to a homebuyer from funds that 
it receives, directly or indirectly, from the seller. In these cases, 
there is a clear quid pro quo between the homebuyer's purchase of the 
property and the seller's ``contribution'' or payment to the charitable 
organization. This is also true if the contribution to the charitable 
organization comes from an entity, other than the seller, that has an 
expectation of being reimbursed by the seller. Often, these 
contributions function as an inducement to purchase the home. It is 
these concerns that prompted HUD's rulemaking in 1999, which did not 
result in final regulations, and now again, in 2007.

II. The May 11, 2007, Proposed Rule

    On May 11, 2007, HUD published a proposed rule (72 FR 27047) for 
public comment to codify standards regarding the use of gifts as a 
source of the mortgagor's investment in the mortgaged property, and to 
also specify prohibited sources for a mortgagor's investment. The 
proposed rule established that a prohibited source of downpayment 
assistance is a payment that consists, in whole or in part, of funds 
provided by any of the following parties before, during, or after 
closing of the property sale: (1) The seller, or any other person or 
entity that financially benefits from the transaction; or (2) any third 
party or entity (referred to as a ``donor'') that is reimbursed 
directly or indirectly by any of the parties listed in clause (1).
    As discussed in the proposed rule, FHA's primary concern with these 
transactions is that the sales price is often increased to ensure that 
the seller's net proceeds are not diminished, and such increase in 
sales price is often to the detriment of the borrower and FHA. A 
Government Accountability Office (GAO) report released in 2005 entitled 
``Mortgage Financing: Actions Needed to Help FHA Manage Risks from New 
Loan Products' (GAO Mortgage Financing Report) stated that Fannie Mae 
and Freddie Mac do not allow seller-related contributions to the 
downpayment, and that seller-related contributions could contribute to 
an overvaluation of the price of the property (GAO Mortgage Financing 
Report, at page 16).
    In May 2006, the Internal Revenue Service (IRS) addressed these 
same concerns by issuing Revenue Ruling 2006-27, which provides 
guidelines on organizations that may provide downpayment assistance to 
homebuyers and qualify as tax-exempt charitable or educational 
organizations under Internal Revenue Code (IRC) section 501(c)(3), and 
those that do not qualify for this tax-exempt status. The IRS, in its 
press announcement of the ruling, stated that funneling downpayment 
assistance from sellers to buyers through ``self-serving, circular-
financing arrangements'' is inconsistent with operation as a section 
501(c)(3) charitable organization. The IRS stated that, in a typical 
scheme, there is a direct correlation between the amount of the 
downpayment assistance provided to the buyer and the payment received 
from the seller, the seller pays the organization only if the sale 
closes, and the organization usually charges an

[[Page 56003]]

additional fee for its services. The IRS noted that so-called charities 
that manipulate the system do more than mislead honest homebuyers; 
these organizations ultimately cause an increase in the cost of the 
home and damage the image of honest, legitimate charities. (See IRS 
News Release of May 4, 2006, at https://www.irs.gov/newsroom/article/
0,id=156675,00.html.)
    As the IRS also noted in its press release, inflated sales prices 
are often found on properties purchased with downpayment assistance 
from seller-funded nonprofit programs. Unlike true gifts that reduce 
the amount of the purchase price financed by the homeowner, such seller 
contributions increase the sales price of the home and result in higher 
mortgage payments.
    Given that seller-funded gift programs thrive in stagnant or 
depreciating housing markets, the risk to FHA increases if FHA cannot 
recover the full amount owed when FHA acquires and resells a home that 
had been purchased by a participating borrower who had defaulted on the 
FHA-insured loan. While these situations represent a financial burden 
for FHA and taxpayers, of equal if not greater concern, is that they 
hurt the families who lose their homes and the neighborhoods in which 
those homes are located.

III. This Final Rule

    For the foregoing reasons, HUD is proceeding, through this final 
rule, to codify the regulations submitted for public comment in the May 
11, 2007, proposed rule. This final rule makes the following change to 
the May 11, 2007, proposed rule in response to public comment. This 
final rule clarifies in Sec.  203.19(f) that a tribal government or a 
tribally designated housing entity (TDHE), as defined at 25 U.S.C. 
4103(21), is a permissible source of downpayment assistance. 
Additionally, the final rule revises in Sec.  203.19(f) the description 
of tax-exempt organizations that are permissible sources of gifts to 
more closely align this description with the description used by IRS of 
such organizations.
    In addition, notwithstanding the effective date provided under the 
DATES caption of this rule, pursuant to an April 1998 settlement 
agreement resolving litigation between the Nehemiah Progressive Housing 
Development Corporation (Nehemiah) and HUD, the effective date shall be 
March 31, 2008 for the Nehemiah downpayment assistance program 
described in the settlement agreement between Nehemiah and HUD.
    While this rule prevents sellers from funding downpayments in their 
own home sales transactions, the rule is not intended to preclude 
sellers from contributing to charitable organizations that provide 
downpayment assistance that is unrelated in any manner to any 
properties sold by the seller. In addition, the rule is not intended to 
preclude reasonable assistance with closing costs not related to the 
minimum investment, which may be permitted under local practice. 
Nothing in this rule changes HUD's policy of allowing builders and 
other sellers to offer cash incentives to homebuyers, provided that any 
cash or cash equivalent given to a homebuyer before, at, or after 
closing results in a proportionate reduction to the mortgage; an amount 
which the homebuyer then would have to provide as additional funds at 
closing. The primary focus of this rule is to establish appropriate 
standards for downpayment assistance to a homebuyer that is categorized 
as a gift.

IV. Discussion of Key Issues Raised by Public Commenters on Proposed 
Rule

    The public comment period for the May 11, 2007, proposed rule was 
initially set to close on July 10, 2007, but HUD extended the comment 
period to August 10, 2007. HUD received approximately 15,000 public 
comments on the proposed rule. The overwhelming majority of these 
comments consisted of brief statements opposing HUD's rule, with the 
majority also submitting their comments in a standard similar format 
and wording, and urging HUD not to eliminate downpayment assistance in 
connection with FHA-insured mortgages. However, a number of comments 
supported the rule, and approved of FHA's efforts to harmonize its 
regulations regarding downpayment assistance with recent rulings of the 
IRS. These commenters shared HUD's concerns about home price inflation 
and the associated risks for increased delinquency and foreclosure. 
They stated that inflated home prices affect a community's housing 
market, and can magnify existing housing affordability problems.
    The following provides a summary of the major themes and issues 
raised during the public comment period on the proposed rule.
    Comment: HUD should not eliminate downpayment assistance, but 
regulate such assistance, or establish standards for downpayment 
supported loans, including taking action to improve appraisals and 
require stricter underwriting and a higher insurance premium for such 
loans.
    HUD response: Many commenters, through their statements urging HUD 
not to eliminate downpayment assistance, indicated that they believed 
the May 11, 2007, proposed rule would eliminate all downpayment 
assistance. HUD's May 11, 2007, rule did not propose to eliminate 
downpayment assistance, but rather proposed to regulate such assistance 
as the commenters requested. Additionally, HUD is not eliminating all 
privately funded downpayment assistance. Such assistance is permitted, 
for example, from family members, the borrower's employer, state or 
local governments, charitable organizations that do not rely upon a 
party with a financial interest in the transaction for downpayment 
assistance, or labor organizations. The proposed rule, however, did 
propose to preclude as acceptable downpayment assistance, assistance 
that, in whole or in part, is funded by the seller or any other person 
or entity that financially benefits from the transaction or any third 
party or entity that is reimbursed, directly or indirectly, by the 
seller or any other party that financially benefits from the 
transaction.
    Comment: Although downpayment assistance presents risks, HUD should 
address what an acceptable level of risk is, and determine how the risk 
can be maintained at or below that level.
    HUD response: Based on HUD's analysis of its loan portfolio going 
back to 1998, HUD has assessed that risk and has determined that there 
is 2 to 3 times greater risk of default and claim with purchase loans 
that receive downpayment assistance from the seller or other persons or 
entities that financially benefit from the sale of a home to the 
borrower than from all other loans with downpayment assistance from all 
other sources.
    For example, for loans endorsed for insurance in Fiscal Year (FY) 
2001, the cumulative claim rate as of July 2007 was 7.1 percent for 
loans with downpayment assistance from relatives, public agencies, and 
employers, but 15.8 percent for loans with downpayment assistance from 
nonprofit entities that received reimbursements from sellers. A 
cumulative claim rate is calculated by dividing the number of claims 
that have occurred to date by the number of loans endorsed in a 
particular fiscal year. In conjunction with the FY 2006 Actuarial 
Review of the Mutual Mortgage Insurance Fund, FHA's independent 
actuaries estimated that the ultimate claim rate for 30-year fixed-rate 
purchase loans endorsed in FY 2008 would be 11.04 percent if they did 
not have seller-funded downpayment assistance, but 23.06 percent if 
they did. An ultimate claim rate is defined as the total number of

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claims expected to occur over the 30-year life of a book of business 
divided by the total number of loans endorsed in a particular fiscal 
year. The difference between these rates represents the difference 
between acceptable and unacceptable levels of risk to the FHA insurance 
fund.
    In addition, HUD has determined that loans with downpayment 
assistance from sellers or other parties with a financial interest in 
the transaction are also associated with a higher loss rate than other 
single family loans insured by FHA. In other words, homeowners with 
this type of downpayment assistance have a two to three times higher 
possibility of losing their home. This rule, therefore, is HUD's effort 
to mitigate an unacceptable level of risk.
    Comment: HUD can mitigate the risk from downpayment assistance by 
requiring full disclosure of the amount of downpayment assistance for 
underwriting and to appraisers.
    HUD response: FHA requirements currently require disclosure of the 
full amount of downpayment assistance.
    Comment: Rather than eliminate downpayment assistance, HUD can 
further mitigate risk by requiring a complete home inspection, to avoid 
potentially huge repair costs to the homeowner. HUD could also require 
the owner to obtain a homeowner's warranty for a specified period of 
time, to avoid high repair cost as a potential source of default and 
foreclosure. Alternatively, HUD could require downpayment assistance 
companies to offer mandatory risk mitigation tools or offer insurance 
to the buyer.
    HUD response: HUD reiterates that downpayment assistance is not 
being eliminated by this rule. The commenters' recommendations are 
noted, but the suggested actions are outside the scope of the present 
rule. In addition, the recommendations pertaining to warranty or 
insurance does not deal directly with sales price inflation, which is a 
separate issue from repair costs a homeowner may face after purchasing 
a home.
    Comment: Price inflation does not arise from downpayment 
assistance, but from the appraisal process. The appraisal process 
should be reformed, for example, by establishing a blind pool appraiser 
selection process for loans with downpayment assistance.
    HUD response: Downpayment assistance can be an independent source 
of price inflation separate from, or in conjunction with, any price 
inflation that may arise from the appraisal process, which, while noted 
by HUD, is an issue beyond the scope of the present rule. HUD has 
already taken steps to address the appraisal issue. HUD's Appraiser 
Roster, for which the regulations can be found in 24 CFR part 200, 
subpart G, is intended to ensure fairness and accuracy in the appraisal 
process for FHA-insured mortgages.
    Comment: HUD should make rules to deal with predatory lenders and 
lenders who charge outrageous rates. Such lenders are the real problem, 
rather than downpayment assistance. It is a lender's responsibility to 
ensure that people cannot buy more than they can afford, and 
downpayment assistance should not be affected because of bad lender 
decisions.
    HUD response: HUD acknowledges that problems may arise at each 
stage of, and with each party to, a complex transaction such as 
purchasing a home. In addition, problems change over time, and the way 
any given problem is addressed also changes. This rule addresses an 
aspect, other than predatory lending, of the home purchase transaction 
that has been identified as a problem. HUD notes the recommendation is 
outside the scope of this rule. Although HUD does not regulate non-FHA 
lending practices, HUD has taken steps, such as issuing rules on 
property flipping, appraisal reform, and lender accountability, to 
address predatory lending, and continues to monitor this problem and 
develop new ways of addressing it. FHA has also taken steps to mitigate 
mortgage insurance losses with the development and implementation of 
Credit Watch, Neighborhood Watch, and Appraiser Watch. FHA also 
strengthened its education efforts by doubling housing counseling grant 
funds, creating anti-predatory lending brochures, featuring anti-
predatory lending messages in advertising, and increasing training 
opportunities for FHA's program participants.
    Comment: HUD should require homebuyer education instead of 
eliminating downpayment assistance.
    HUD response: HUD notes that it is not eliminating downpayment 
assistance but, as requested by many commenters, is establishing 
standards for the use of downpayment assistance in FHA-insured 
mortgages. HUD encourages and supports homebuyer education, and for 
some programs requires homebuyer counseling, but addressing that 
subject is beyond the scope of the current rule.
    Comment: HUD should permit sellers to directly contribute 
downpayment assistance to buyers without a middleman.
    HUD response: HUD has determined that contributions to downpayment 
assistance from sellers and other parties with a financial interest in 
the transaction, whether direct or indirect, present an unacceptable 
level of risk for FHA-insured mortgages.
    Comment: Rather than doing away with downpayment assistance, HUD 
should increase FHA loan limits.
    HUD response: It is unclear how increasing loan limits would 
mitigate the risk that HUD has experienced with seller-funded 
downpayment assistance.
    Comment: Rather than doing away with downpayment assistance, HUD 
should enforce Mortgagee Letter 02-02.
    HUD response: While noting again that HUD is not ending downpayment 
assistance, HUD also notes that Mortgagee Letter 02-02 addresses a 
different issue than that addressed by this rule. Mortgagee Letter 02-
02 addresses a situation where a seller or a nonprofit entity has paid 
a homebuyer's consumer debt, which then makes it easier for the buyer 
to meet debt to income ratios. Further, HUD does enforce Mortgagee 
Letter 02-02. The focus of this rule is downpayment assistance provided 
by a party with a financial interest in the transaction.
    Comment: Rather than doing away with downpayment assistance, HUD 
should limit the seller contribution to 3 percent.
    HUD response: HUD reiterates that it is seeking to establish 
reasonable and prudent standards for the use of downpayment assistance, 
and that downpayment assistance from a seller or other party with a 
financial interest in the transaction presents an unacceptable risk to 
FHA.
    Comment: Downpayment assistance should be permitted in the 6 
percent seller concession for closing costs that FHA allows.
    HUD response: The downpayment differs from closing costs in that 
the downpayment creates equity in the property for the buyer and 
closing costs do not. As such, the downpayment cannot be included in 
the mortgage, whereas certain closing costs are permitted to be 
included in the mortgage. For this reason, downpayment assistance 
cannot be treated as closing costs.
    Comment: Downpayment assistance helps first-time, low-credit, and 
low-income homebuyers, who are often minority or single-parent 
households. HUD should not eliminate or limit such assistance.
    HUD response: As noted, HUD is not eliminating downpayment 
assistance but is establishing reasonable and prudent standards for the 
use of downpayment assistance. All homebuyers will benefit if the debt

[[Page 56005]]

burdens of homeownership are set more realistically and if price 
inflation at the time of purchase is mitigated. Further, mortgage 
insurance premiums would likely have to be increased without these 
standards, which would negatively impact all homebuyers. In addition, 
an analysis of HUD Real Estate Owned (REO) sales since 2004 shows that 
sales proceeds from this type of downpayment assistance is 3 to 6 
percent less than other REO sales. This suggests that the sales prices 
of such properties may have been inflated.
    Comment: This rule will negatively impact the market devastated by 
Hurricane Katrina by reducing the number of families willing to rebuild 
or buy in that market.
    HUD response: A number of special incentives and forms of 
assistance, such as disaster relief loans and grants and lower buyer 
investment requirements, are available in disaster zones such as that 
created by Hurricane Katrina. FHA, for example, offers eligible 
disaster victims section 203(h)-insured mortgages, which require no 
downpayment. Such assistance and requirements appropriately leave 
homebuyers in a much more favorable position to reestablish 
homeownership. The reasonable and prudent standards established by this 
rule will help to ensure that the benefits provided to disaster victims 
are not undercut by burdensome price and debt inflation.
    Comment: The rule will have a negative impact on FHA's business, 
because of the substantial percentage of loans supported by downpayment 
assistance. The rule would immediately cause a huge contraction in 
FHA's business.
    HUD response: HUD does not intend to maintain or expand the volume 
of FHA business at the expense of sound and sustainable purchases by 
homebuyers. Such a result would be contrary to the public purposes 
underlying FHA's business.
    Comment: The rule is not supported by data. The analysis of the 
Government Accountability Office (GAO) found that downpayment-assisted 
loans had higher default and claim rates than other FHA loans, but did 
not segregate the effects of downpayment assistance from those of low 
downpayments and low credit ratings. HUD should conduct additional 
research because the data presented does not appear to be conclusive.
    HUD response: HUD has collected and analyzed additional data 
through its portfolio analysis. This analysis provides additional 
verification of the higher level of risk associated with downpayments 
funded by a seller or other financially interested party compared to 
downpayments funded from other sources, which HUD continues to permit. 
HUD's analysis has also established that loans with downpayment 
assistance from sellers or other parties with a financial interest in 
the transaction have a higher loss rate associated with them and 
currently represent 30 percent of FHA's REO portfolio.
    Comment: Prohibition of downpayment assistance would harm otherwise 
qualified borrowers, who will have to delay or forego homeownership or 
turn to the subprime market.
    HUD response: HUD notes again that the current rule does not 
prohibit or eliminate downpayment assistance, but only establishes 
reasonable and prudent standards for its use that will benefit, and not 
harm, homebuyers. The purpose of the rule is to mitigate the harm 
caused by downpayment assistance from sources with a financial interest 
in the transaction, and help assure continued homeownership. As 
previously stated, downpayment assistance from parties with a financial 
interest in the transaction have higher default and claim rates and 
higher loss rates.
    Comment: Downpayment assistance should not be prohibited because it 
provides borrowers instant equity when they purchase a home.
    HUD response: HUD agrees, and the rule does not prohibit all 
downpayment assistance.
    Comment: The rule will have a negative impact on the housing market 
and on the economy.
    HUD response: To the contrary, HUD expects that the reasonable and 
prudent approach taken by this rule will have a positive impact on the 
housing market and on the economy by reducing the number of mortgages 
that would otherwise default and go into foreclosure, driving down 
property values and negatively impacting a community's tax base and 
economic viability.
    Comment: HUD should partner with downpayment assistance programs to 
promote homeownership. A zero downpayment program or downpayment 
assistance is needed to address the subprime crisis, because there is 
little or no equity in a substantial number of troubled properties. HUD 
should postpone action on downpayment assistance until 100 percent 
financing is permitted.
    HUD response: HUD does sponsor downpayment assistance programs 
through such programs as the American Dream Downpayment Initiative, and 
others in which the assistance is not linked to the financial interest 
of parties other than the homebuyer. HUD currently does not have the 
authority for a zero downpayment program; however, a zero downpayment 
program would not address this issue of the financial interest of the 
providers of downpayment assistance. Reasonable standards would still 
be necessary for downpayment assistance, even if there is no 
requirement for a minimum investment by the homebuyer.
    Comment: HUD is replacing a private sector program that works and 
is forcing people to rely on government bureaucracy. In addition, 
government-sponsored downpayment assistance has eligibility 
requirements such as income limits. Private downpayment assistance is 
available to anyone. The rule will vastly increase the size and cost of 
government.
    HUD response: Many of the comments recognized the value of, and the 
need for, reasonable standards, and the eligibility requirements noted 
here provide such standards. The cost of government is controlled by 
prioritizing the availability of benefits to those who need them most. 
Private downpayment assistance that does not rely upon a party with a 
financial interest in the transaction is not affected by this rule, 
which establishes reasonable and prudent standards for the use of 
downpayment assistance. This rule addresses certain forms of 
downpayment assistance that increase the cost of government because 
they increase FHA mortgage insurance payments for losses attributable 
to loan defaults and lower REO sales proceeds.
    Comment: A developer should be able to offer buyers incentives to 
purchase properties.
    HUD response: A developer's ability to offer incentives, such as a 
reduced purchase price or a lower interest rate, is not affected by 
this rule. These incentives are distinguishable from downpayment 
assistance, and only the provision of downpayment assistance by a 
seller or a party with a financial interest in the transaction is 
prohibited by this rule.
    Comment: Real estate agents should be permitted to use their 
commission to fund the downpayment where the real estate agent is the 
buyer/mortgagor, because the commission is earned, and not a seller 
contribution or gift.
    HUD response: The circumstance described by this comment are not 
affected by this rule, because a borrower's earned income, such as a 
real estate agent's commission, is a permissible source of downpayment.
    Comment: The rule should not exclude Indian tribes or tribally 
designated housing entities (TDHEs)

[[Page 56006]]

from the governments considered in the rule. In taking this significant 
action, HUD did not follow its own policy on tribal consultation and 
the rule should be withdrawn until HUD follows the consultation 
procedure.
    HUD response: The rule did not intend to exclude Indian tribes or 
TDHEs from the governments considered in the rule. This final rule 
specifically clarifies the treatment of downpayment assistance from 
Indian tribes and TDHEs. As with other rules that are generally 
applicable and, thus, also incidentally apply to Indian tribes, HUD did 
not undertake tribal consultation. HUD's tribal consultation policy 
states, ``Tribal Coordination, Collaboration and Consultation applies 
when any proposed policies, programs or actions are identified by HUD 
as having a substantial direct effect on an Indian tribe.'' (66 FR 
49785). Since the effect of the rule on tribes is only incidental and 
since the rule applies to all FHA-insured single family mortgages, the 
tribal consultation policy is not applicable. All providers of 
downpayment assistance are subject to the general standard of this rule 
and their downpayment assistance cannot be funded by sellers or other 
parties with a financial interest in the transaction. HUD follows, and 
will continue to follow, its tribal consultation policy when identified 
by HUD as applicable.
    Comment: HUD should clarify whether downpayment assistance provided 
by grantees under government programs is permitted.
    HUD response: Grant funds made available to assist homebuyers may 
be used for downpayment assistance because such funds are not linked to 
the sources addressed by this standard, namely, the seller or other 
parties with a financial interest in the transaction. Grantees act with 
a public purpose, using government-provided funds, rather than acting 
with a private financial interest in the transaction or using funds 
from parties with a financial interest in the transaction.
    Comment: HUD should provide a definition of ``family members.''
    HUD response: The term ``family member'' is defined at section 
201(e) of the National Housing Act (12 U.S.C. 1707(e)) and governs 
regulations issued for FHA programs under section 203 of the National 
Housing Act, such as the current rule.
    Comment: HUD should permit loans for downpayment assistance and 
second mortgages, including loans from the seller and from governments.
    HUD response: The rule continues to permit loans authorized by 
statute as a source for the minimum investment. Loans from sellers are 
not authorized by statute.
    Comment: HUD should clarify that this rule does not prohibit 
assistance from nonprofit developers.
    HUD response: HUD permits downpayment assistance from charitable 
organizations. Downpayment assistance from nonprofit developers is 
permitted as long as it complies with this general standard and their 
downpayment assistance cannot be funded by sellers or other parties 
with a financial interest in the transaction.

V. Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed the rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that the rule is a ``significant regulatory action,'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). The docket file was available for 
public inspection in the Regulations Division, Office of General 
Counsel, Room 10276, 451 Seventh Street, SW., Washington, DC 20410-
0500.

Environmental Review

    A Finding of No Significant Impact was not required for the 
proposed rule. Under 24 CFR 50.19(b)(6), the rule is categorically 
excluded from the requirements of the National Environmental Policy Act 
(42 U.S.C. 4332 et seq.) and that categorical exclusion continues to 
apply.

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 purpose of this rule, as noted in the preamble, is to establish 
standards regarding the use of gifts by borrowers with an FHA-insured 
mortgage--primarily standards that would address gifts by charitable 
organizations--as a source of an FHA mortgagor's investment in the 
mortgaged property. To date, HUD's practice has been to limit 
permissible sources of gifts to family members, governmental agencies, 
employer of the mortgagor, labor union of the mortgagor, or charitable 
organizations. HUD is not narrowing the sources of gifts through this 
rulemaking, but rather is striving to ensure that gifts are gifts and 
that, especially in the situation of gifts from charitable 
organizations, the gift is not a quid pro quo between the homebuyer's 
purchase of the property and the seller's ``contribution'' or payment 
to the charitable organization.
    The prohibited sources of downpayment assistance, as structured in 
the final rule, are narrow and should not encompass a substantial 
number of small entities that are engaged in downpayment assistance to 
homebuyers, which, to date, have primarily been charitable 
organizations with tax-exempt status. Charitable organizations, large 
or small, remain eligible to provide downpayment assistance to FHA 
mortgagors, subject to meeting the requirements of Sec.  203.19, as 
revised by this final rule.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities.

Executive Order 12612, Federalism

    Executive Order 12612, (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This final 
rule does not impose substantial direct compliance costs on state and 
local governments or preempt state law within the meaning of the 
Executive Order. This final rule solely addresses requirements under 
HUD's FHA mortgage insurance programs.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4, approved March 22, 1995) established requirements for federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and the private sector. This final rule 
does not impose any federal mandates on any state, local, or tribal 
governments or the private sector within the meaning of the Unfunded 
Mandates Reform Act of 1995.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for the principal 
FHA single family mortgage insurance program is 14.117. This final rule 
also applies through cross-referencing to FHA mortgage insurance for 
condominium units (14.133), and other smaller single family programs.

[[Page 56007]]

List of Subjects in 24 CFR Part 203

    Loan programs--housing and community development, Mortgage 
insurance, Reporting and recordkeeping requirements.

0
Accordingly, the Department amends 24 CFR part 203, as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. 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).

0
2. Section 203.19 is revised to read as follows:


Sec.  203.19  Mortgagor's investment in the property.

    (a) Required funds. The mortgagor must have available funds equal 
to the difference between:
    (1) The cost of acquisition, which is the sum of the purchase price 
of the home and settlement costs acceptable to the Secretary; and
    (2) The amount of the insured mortgage.
    (b) Mortgagor's minimum cash investment. The required funds under 
paragraph (a) of this section must include an investment in the 
property by the mortgagor, in cash or cash equivalent, equal to at 
least 3 percent of the cost of acquisition, as determined by the 
Secretary, unless the mortgagor is:
    (1) A veteran meeting the requirements of Sec.  203.18(b); or
    (2) A disaster victim meeting the requirements of Sec.  203.18(e).
    (c) Restrictions on seller funding. Notwithstanding paragraphs (e) 
and (f) of this section, the funds required by paragraph (a) of this 
section shall not consist, in whole or in part, of funds provided by 
any of the following parties before, during, or after closing of the 
property sale:
    (1) The seller or any other person or entity that financially 
benefits from the transaction; or
    (2) Any third party or entity that is reimbursed, directly or 
indirectly, by any of the parties described in paragraph (c)(1) of this 
section.
    (d) Gifts and loans usually prohibited for minimum cash investment. 
A mortgagor may not use funds for any part of the minimum cash 
investment under paragraph (b) of this section if the funds were 
obtained through a loan or a gift from any person, except as provided 
in paragraphs (e) and (f) of this section, respectively.
    (e) Permissible sources of loans.
    (1) Statutory authorization needed. A statute must authorize a loan 
as a source of the mortgagor's minimum cash investment under paragraph 
(b) of this section.
    (2) Examples. The following loans are authorized by statute as a 
source for the minimum investment:
    (i) A loan from a family member, a loan to a mortgagor who is at 
least 60 years old when the mortgage is accepted for insurance, or a 
loan that is otherwise expressly authorized by section 203(b)(9) of the 
National Housing Act;
    (ii) A loan made or held by, or insured by, a federal, state, or 
local government agency or instrumentality under terms and conditions 
approved by the Secretary;
    (iii) A loan made or held by, or insured by, a tribal government or 
an agency or instrumentality thereof, including a tribally designated 
housing entity as defined at 25 U.S.C. 4103(21), which is treated as a 
state or local government under applicable state or local law, under 
terms and conditions approved by the Secretary; and
    (iv) A federal disaster relief loan.
    (f) Permissible sources of gifts. The following are permissible 
sources of gifts or grants used for the mortgagor's minimum investment 
under paragraph (b) of this section:
    (1) Family members and governmental agencies and instrumentalities 
eligible under paragraphs (e)(2)(i) and (ii) of this section;
    (2) A tribal government or an agency or instrumentality thereof, 
including a tribally designated housing entity, as defined at 25 U.S.C. 
4103(21);
    (3) An employer or labor union of the mortgagor;
    (4) Organizations described in section 501(c)(3) and exempt from 
taxation under section 501(a) of the Internal Revenue Code;
    (5) Disaster relief grants; and
    (6) Other sources as may be approved by the Secretary on a case-by-
case basis.

    Dated: September 26, 2007.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 07-4846 Filed 9-28-07; 8:45 am]
BILLING CODE 4210-67-P