Federal Housing Administration (FHA): Continuation of FHA Reform-Strengthening Risk Management Through Responsible FHA-Approved Lenders, 62521-62531 [E9-28335]
Download as PDF
<![CDATA[
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
Authority: 23 U.S.C. 141(c) and 315; 49
CFR 1.48(b).
Executive Order 12372
(Intergovernmental Review)
Catalog of Federal Domestic
Assistance Program Number 20.205,
Highway Research, Planning, and
Construction. The regulations
implementing Executive Order 12372
regarding intergovernmental
consultation on Federal programs and
activities apply to this program.
Accordingly, the FHWA solicits
comments on this issue.
2. Revise § 669.7 to read as follows:
§ 669.7
Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3501, et. seq.),
Federal agencies must obtain approval
from the Office of Management and
Budget (OMB) for each collection of
information they conduct, sponsor, or
require through regulations. The FHWA
has determined that this proposal does
contain collection of information
requirements for the purposes of the
PRA. The FHWA believes that the
information collected under this action
is contained in the existing information
collection under OMB Control Number
2125–0541 granted by OMB on February
1, 2008.
National Environmental Policy Act
The agency has analyzed this
proposed action for the purpose of the
National Environmental Policy Act of
1969 (42 U.S.C. 4321) and has
determined that this proposed action
would not have any effect on the quality
of the environment.
Regulation Identification Number
A regulation identification number
(RIN) is assigned to each regulatory
action listed in the Unified Agenda of
Federal Regulations. The Regulatory
Information Service Center publishes
the Unified Agenda in April and
October of each year. The RIN contained
in the heading of this document can be
used to cross reference this action with
the Unified Agenda.
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
List of Subjects in 23 CFR Part 669
Grants programs—transportation,
Highways and roads, Taxes, Motor
vehicles.
Issued on: October 28, 2009.
Victor M. Mendez,
Administrator.
In consideration of the foregoing, the
FHWA proposes to amend title 23, Code
of Federal Regulations part 669 as
follows:
PART 669—ENFORCEMENT OF
HEAVY VEHICLE USE TAX
1. The authority citation for part 669
is revised to read as follows:
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
Certification requirement.
The Governor of each State, or his or
her designee, shall certify to the FHWA
before January 1 of each year that it is
obtaining proof of payment of the heavy
vehicle use tax as a condition of
registration in accordance with 23
U.S.C. 141(c). The certification shall
cover the 12-month period ending
September 30.
§ 669.9
[Amended]
3. Amend § 669.9 by amending
paragraphs (b) and (c) by removing the
words ‘‘23 U.S.C. 141(d)’’ and adding in
its place the words ‘‘23 U.S.C. 141(c)’’
each place it appears.
§ 669.11
[Amended]
4. Amend § 669.11 by removing the
word ‘‘July’’ and adding in its place the
word ‘‘January’’.
5. Revise § 669.13 to read as follows:
§ 669.13 Effect of failure to certify or to
adequately obtain proof of payment.
If a State fails to certify as required by
this regulation or if the Secretary of
Transportation determines that a State is
not adequately obtaining proof of
payment of the heavy vehicle use tax as
a condition of registration
notwithstanding the State’s certification,
Federal-aid highway funds apportioned
to the State under 23 U.S.C. 104(b)(4) for
the next fiscal year shall be reduced in
an amount up to 25 percent as
determined by the Secretary.
6. Revise § 669.15 to read as follows:
§ 669.15
funds.
Procedure for the reduction of
(a) Each fiscal year, each State
determined to be in nonconformity with
the requirements of this part will be
advised of the funds expected to be
withheld from apportionment in
accordance with § 669.13 and 23 U.S.C.
141(c), as part of the advance notice of
apportionments required under 23
U.S.C. 104(e), normally not later than 90
days prior to final apportionment.
(b) A State that received a notice in
accordance with paragraph (a) of this
section may within 30 days of its receipt
of the advance notice of
apportionments, submit documentation
showing why it is in conformity with
this Part. Documentation shall be
submitted to the Federal Highway
Administration, 1200 New Jersey
Avenue, SE., Washington, DC 20590.
(c) Each fiscal year, each State
determined to be in nonconformity with
the requirements of this part and 23
U.S.C. 141(c), based on FHWA’s final
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
62521
determination, will receive notice of the
funds being withheld from
apportionment pursuant to § 669.3 and
23 U.S.C. 141(c), as part of the
certification of apportionments required
under 23 U.S.C. 104(e), which normally
occurs on October 1 of each fiscal year.
§ 669.19
[Amended]
7. Amend § 669.19 as follows:
a. Amend paragraphs (a) and (b) by
removing the words ‘‘23 U.S.C.
104(b)(5)’’ and adding in its place the
words ‘‘23 U.S.C. 104(b)(4)’’ in each
place it appears; and
b. Amend paragraph (c) by removing
the word ‘‘Secretary’s’’.
8. Revise § 669.21 to read as follows:
§ 669.21 Procedure for evaluating State
compliance.
The FHWA shall periodically review
the State’s procedures for complying
with 23 U.S.C. 141(c), including an
inspection of supporting documentation
and records. In those States where a
branch office of the State, a local
jurisdiction, or a private entity is
providing services to register motor
vehicles including vehicles subject to
HVUT, the State shall be responsible for
ensuring that these entities comply with
the requirements of this part concerning
the collection and retention of evidence
of payment of the HVUT as a condition
of registration for vehicles subject to
such tax and develop adequate
procedures to maintain such
compliance. The State or other
responsible entity shall retain a copy of
the receipted IRS Schedule 1 (Form
2290), or an acceptable substitute
prescribed by 26 CFR 41.6001–2 for a
period of 1 year for purposes of
evaluating State compliance with 23
U.S.C. 141(c) by the FHWA. The State
may develop a software system to
maintain copies or images of this proof
of payment.
[FR Doc. E9–27939 Filed 11–27–09; 8:45 am]
BILLING CODE P
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 202
[Docket No. FR 5356–P–01]
RIN 2502–AI81
Federal Housing Administration (FHA):
Continuation of FHA Reform—
Strengthening Risk Management
Through Responsible FHA-Approved
Lenders
AGENCY: Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner, HUD.
E:\FR\FM\30NOP1.SGM
30NOP1
62522
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
ACTION:
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
Proposed rule.
SUMMARY: Through this proposed rule,
HUD continues its efforts to streamline,
modernize, and strengthen the mortgage
insurance functions and responsibilities
of FHA, as authorized by provisions
contained in the National Housing Act,
as amended by the FHA Modernization
Act of 2008, and further supported by
the Helping Families Save Their Homes
Act of 2009. First, FHA proposes to no
longer approve loan correspondents as
approved participants in FHA programs.
Mortgagees would be required to ensure
that their loan correspondents meet
applicable requirements. The FHAapproved mortgagee will, in turn, act as
sponsor as it has in the past. However,
in using a sponsor/correspondent
relationship, the sponsoring mortgagee
must agree to assume responsibility for
any loan correspondent that works with
the mortgagee in the FHA insured loan,
and assume liability for the FHAinsured loan underwritten and closed in
the name of the FHA-approved
mortgagee. Second, this proposed rule
would update the FHA regulations to
incorporate criteria specified in the
Helping Families Save Their Homes Act
of 2009 that precludes certain lending
entities from originating an FHAinsured loan, and are designed to ensure
that only entities of integrity are
involved in the origination of FHAinsured transactions. Third, and
consistent with the objective to work
with and rely upon responsible
mortgagees, FHA proposes to increase
the net worth requirement for FHAapproved mortgagees for the purpose of
ensuring that approved mortgagees are
sufficiently capitalized.
DATES: Comment Due Date: December
30, 2009.
ADDRESSES: Interested persons are
invited to submit comments regarding
this proposed rule to the Regulations
Division, Office of General Counsel,
Department of Housing and Urban
Development, 451 7th Street, SW.,
Room 10276, Washington, DC 20410–
0500. Communications must refer to the
above docket number and title. There
are two methods for submitting public
comments. All submissions must refer
to the above docket number and title.
1. Submission of Comments by Mail.
Comments may be submitted by mail to
the Regulations Division, Office of
General Counsel, Department of
Housing and Urban Development, 451
7th Street, SW., Room 10276,
Washington, DC 20410–0500.
2. Electronic Submission of
Comments. Interested persons may
submit comments electronically through
the Federal eRulemaking Portal at
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
https://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
https://www.regulations.gov Web site can
be viewed by other commenters and
interested members of the public.
Commenters should follow the
instructions provided on that site to
submit comments electronically.
Note: To receive consideration as public
comments, comments must be submitted
through one of the two methods specified
above. Again, all submissions must refer to
the docket number and title of the rule.
No Facsimile Comments. Facsimile
(FAX) comments are not acceptable.
Public Inspection of Public
Comments. All properly submitted
comments and communications
submitted to HUD will be available for
public inspection and copying between
8 a.m. and 5 p.m. weekdays at the above
address. Due to security measures at the
HUD Headquarters building, an
appointment to review the public
comments must be scheduled in
advance by calling the Regulations
Division at 202–708–3055 (this is not a
toll-free number). Individuals with
speech or hearing impairments may
access this number via TTY by calling
the Federal Information Relay Service at
800–877–8339. Copies of all comments
submitted are available for inspection
and downloading at https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Office of Lender Activities and Program
Compliance, Department of Housing
and Urban Development, 451 7th Street,
SW., Washington, DC 20410–8000;
telephone number 202–708–1515 (this
is not a toll-free number). Persons with
hearing or speech impairments may
access this number through TTY by
calling the toll-free Federal Information
Relay Service at 800–877–8339.
SUPPLEMENTARY INFORMATION:
I. Background
The FHA Modernization Act of 2008,
Title I of Division B of the Housing and
Economic Recovery Act of 2008 (Pub. L.
110–289, approved July 30, 2008), made
or authorized HUD to make significant
changes to the way in which FHA
conducts several areas of its mortgage
insurance operations. The FHA
Modernization Act increased maximum
mortgage limits, overhauled and
streamlined FHA’s Title I manufactured
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
housing and condominium mortgage
insurance programs, allowed a Home
Equity Conversion Mortgage (HECM) to
be used to purchase a home, and
allowed for the insurance of
cooperatives, to name a few of the
significant changes made by this 2008
statute. A key theme of many of the
changes made by the FHA
Modernization Act centered on
streamlining and modernizing existing
FHA programs.
The Helping Families Save Their
Homes Act (HFSH Act), Division A of
Public Law 111–22, strengthened HUD’s
enforcement authority to ensure the
integrity and safety of FHA’s mortgage
insurance programs. The HFSH Act
contains several provisions designed to
ensure that predatory lending entities
and individuals are not allowed to
participate in FHA-insured mortgage
programs, and specifically requires FHA
approval of all parties participating in
the FHA single family mortgage
origination process. The HFSH Act
authorizes HUD to impose civil money
penalties against loan originators who
are not FHA-approved and yet
participate in FHA loan originations.
The HFSH Act strengthens HUD’s
enforcement authority by authorizing
the imposition of civil money penalties
not only for violation of statutory
requirements, but for violation of any
FHA implementing regulation,
handbook, or mortgagee letter issued
under title II of the National Housing
Act. The HFSH Act directs FHA to
strengthen the existing FHA lender
approval process, including
strengthening by ensuring that only
lenders of integrity are approved by
FHA as approved mortgagees.
With the authority and direction
presented by these two statutes, which
support and enhance the existing
authority of the National Housing Act,
FHA proposes to both streamline and
strengthen the FHA lender approval
process. Except as modified by this
proposed rule, all other components of
the lender approval process would
remain the same, including those
provisions regarding the monitoring and
enforcement of FHA requirements, the
imposition of sanctions (enhanced by
the HFSH Act), and the opportunity to
appeal adverse determinations.
II. This Proposed Rule
A. Strengthening and Streamlining
Lender Approval
1. Limiting Approval to Mortgagees.
Through this rule, FHA proposes
changes to the eligibility criteria for
FHA lender approval. Currently,
through the FHA lender approval
E:\FR\FM\30NOP1.SGM
30NOP1
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
process, FHA approves two types of
lenders. First, FHA approves
mortgagees. Mortgagees can perform any
lender origination and/or service
function and can own FHA-insured
loans. Second, FHA approves loan
correspondents, but with limited
functions. Loan correspondents are
allowed to perform any origination
function except underwriting and
cannot service or own FHA-insured
loans. This rule proposes to limit the
FHA lender approval process to
mortgagees. This rule does not propose
to alter, however, the approval process
of investing mortgagees and
governmental institutions as addressed
in 24 CFR 202.9 and 202.10. FHA will
continue to approve investing
mortgagees and government institutions.
The limitation of the FHA approval
process to mortgagees reflects
recognition that the mortgagee, by
underwriting, servicing, or owning a
loan, is the most critical lending party
to a mortgage transaction. Accordingly,
the mortgagee should be the party that
is subject to FHA’s rigorous lenderapproval and oversight processes, and
bear the greatest degree of responsibility
and liability for the loan obtained by the
borrower and insured by FHA. Loan
correspondents will continue to be
authorized to participate in the
origination of FHA loans through
association with an FHA-approved
mortgagee, but these entities no longer
will be subject to the FHA lenderapproval process.
FHA-approved mortgagees would be
required to ensure that their loan
correspondents meet applicable
requirements. The FHA-approved
mortgagee acts as sponsor as it has in
the past, but in using a sponsor/
correspondent relationship, the
sponsoring mortgagee must agree to
assume responsibility for any loan
correspondent that works with the
mortgagee in the FHA-insured loan for
activities related to the loan origination,
and assume liability for the FHAinsured loan underwritten and closed in
the name of the FHA-approved
mortgagee. Not only would FHAapproved mortgagees be required to
ensure that sponsoring loan
correspondents meet standards assuring
their integrity and financial soundness,
including those recently emphasized in
the HFSH Act (see Section II.A.2 of this
preamble), but to also ensure
compliance by all parties to an FHA
transaction with FHA’s requirements
regarding loan origination, processing,
underwriting, and servicing and found
in relevant statutes, regulations, HUD
handbooks, and mortgagee letters.
Although loan correspondents no longer
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
would be subject to lender approval
requirements, the FHA-approved
mortgagee must ensure that any loan
correspondent that the mortgagee
sponsors complies with the
requirements that make loans eligible
for FHA insurance. Failure to comply
with these requirements may result in
FHA seeking sanctions against the FHAapproved mortgagee.
FHA-approved mortgagees will be
authorized to underwrite for and
acquire FHA mortgage applications from
loan correspondents and non-FHAapproved lenders, such as mortgage
brokers, provided that these parties: (1)
Are in compliance with the
requirements of the Secure and Fair
Enforcement (SAFE) Mortgage Licensing
Act (Title V of Division A of Pub. L.
110–289, approved July 30, 2008), when
such requirements become applicable
under the State or States in which these
parties conduct business, and (2) are not
suspended, debarred, or otherwise
excluded from participating in the
origination of an FHA loan. If the loan
application is taken by an entity that is
not the FHA-approved Direct
Endorsement mortgagee that underwrote
the loan, the entity must include the
following in the FHA loan origination
system for the subject loan: (1) The
entity’s FHA identification number (if
the entity is FHA-approved) or (2) the
entity’s legal name and tax
identification number (if the entity is
not FHA-approved). The loan must be
underwritten by and closed in the name
of the FHA-approved mortgagee.
As contemplated by this proposed
rule, upon promulgation of the final rule
that will follow this proposed rule,
entities that are already approved by
FHA as loan correspondents would not
be permitted to renew their status, or
convert their approval to mortgagee, and
only FHA-approved mortgagees would
be allowed to request FHA case
numbers.
The advantages of this limitation of
FHA lender approval authority are
twofold. First, this change focuses the
administrative burden of the lender
approval process to those entities (and
HUD recognizes that a stringent
approval process necessitates some
administrative burden) that bear the
greatest responsibility for the validity
and eligibility of the loan for FHA
insurance. It is the mortgagee that
determines whether a borrower qualifies
for the mortgage for which the borrower
applied and, therefore, determines the
risk of lending money to the borrower.
This is the most critical determination
of the mortgage process. Second, the
change allows loan correspondents to
continue to participate in the FHA loan
PO 00000
Frm 00008
Fmt 4702
Sfmt 4702
62523
origination process, but without having
to undergo the lender approval process.
2. Ineligibility To Participate in
Origination of FHA–Insured Loans. In
addition to limiting the FHA lender
approval process to mortgagees, this
proposed rule incorporates criteria
specified in section 203 of the HFSH
Act that precludes any lending entity
not approved by the Secretary to
participate in FHA programs or not in
compliance with the following
eligibility requirements from originating
an FHA-insured loan. Section 203(b) of
the HFSH Act adds a new subsection (d)
to section 202 of the National Housing
Act, provides as follows:
‘‘LIMITATIONS ON PARTICIPATION
IN ORIGINATION AND MORTGAGEE
APPROVAL.—
• ‘‘REQUIREMENT.—Any person or entity
that is not approved by the Secretary to
serve as a mortgagee, as such term is
defined in subsection (c)(7), shall not
participate in the origination of an FHAinsured loan except as authorized by the
Secretary.
• ‘‘ELIGIBILITY FOR APPROVAL.—In order
to be eligible for approval by the Secretary,
an applicant mortgagee shall not be, and
shall not have any officer, partner, director,
principal, manager, supervisor, loan
processor, loan underwriter, or loan
originator of the applicant mortgagee who
is—
Æ ‘‘currently suspended, debarred, under a
limited denial of participation (LDP), or
otherwise restricted under part 25 of title
24 of the Code of Federal Regulations, 2
Code of Federal Regulations, part 180 as
implemented by part 2424, or any
successor regulations to such parts, or
under similar provisions of any other
Federal agency;
Æ ‘‘under indictment for, or has been
convicted of, an offense that reflects
adversely upon the applicant’s integrity,
competence or fitness to meet the
responsibilities of an approved
mortgagee;
Æ ‘‘subject to unresolved findings
contained in a Department of Housing
and Urban Development or other
governmental audit, investigation, or
review;
Æ ‘‘engaged in business practices that do
not conform to generally accepted
practices of prudent mortgagees or that
demonstrate irresponsibility;
Æ ‘‘convicted of, or who has pled guilty or
nolo contendre to, a felony related to
participation in the real estate or
mortgage loan industry—
Æ ‘‘during the 7-year period preceding the
date of the application for licensing and
registration; or
Æ ‘‘at any time preceding such date of
application, if such felony involved an
act of fraud, dishonesty, or a breach of
trust, or money laundering;
Æ ‘‘in violation of provisions of the
S.A.F.E. Mortgage Licensing Act of 2008
(12 U.S.C. 5101 et seq.) or any applicable
provision of State law; or
E:\FR\FM\30NOP1.SGM
30NOP1
62524
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
Æ ‘‘in violation of any other requirement as
established by the Secretary.’’
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
Given the specificity of the statutory
language, implementation of the criteria
does not require rulemaking and the
restrictions are, therefore, currently in
effect. These criteria were announced by
the Mortgagee Letter entitled
‘‘Strengthening Counterparty Risk
Management,’’ issued September 18,
2009, and can be found as document
number 09–31 at https://www.hud.gov/
offices/adm/hudclips/letters/mortgagee/
index.cfm. This rule proposes to update
HUD’s regulations to conform to the
statutory requirements. Although these
are statutory criteria which the
Department does not have the discretion
to alter, HUD nevertheless welcomes
comment on these criteria and on any
other comparable requirements that
HUD should add to preclude
participation in the origination of FHAinsured loans, and welcomes comment
on any of the criteria for which an
affected party seeks elaboration or
guidance.
While this rule proposes to codify the
new statutory ineligibility criteria, this
rule does not propose to revise current
procedures in place in FHA regulations
and handbooks that are applicable to
appeals of adverse determinations.
Additionally, these new statutory
criteria do not require HUD to propose
enforcement mechanisms and
procedures beyond those already in
place for enforcement of FHA
requirements. While the HFSH Act
strengthens FHA’s enforcement
authority by expanding HUD’s ability to
impose civil money penalties and
strengthening the authority of the
Mortgagee Review Board, this increased
authority does not require additional
enforcement procedures. The
procedures already in place by which
FHA may take action against mortgagees
in violation of FHA requirements
continue to be sufficient.
B. Strengthening the Capacity of FHAApproved Mortgagees
FHA proposes to increase the net
worth requirement for approved
mortgagees and those applicants seeking
approval as mortgagees from $250,000
to $2.5 million. In addition, FHA
proposes to require investing
mortgagees to comply with the new net
worth requirements. In order to provide
mortgagees with time to adjust to the
new requirements, the proposed rule
would phase in the net worth increases
over a 3-year period.
Within one year of the effective date
of the final rule resulting from this
rulemaking process, supervised and
nonsupervised mortgagees and investing
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
mortgagees would be required to have a
minimum net worth of $1 million, of
which at least 20 percent must be liquid
assets consisting of cash or its
equivalent acceptable to the Secretary.
Mortgagees would be required to
comply with the minimum net worth
requirement of $2.5 million within 3
years of the effective date of the final
rule, with at least 20 percent of such net
worth consisting of liquid assets.
The net worth requirements have not
been updated since 1993. HUD’s
proposal to increase the net worth
requirements for FHA-approved
mortgagees is consistent with recent
increases in net worth requirements by
the government sponsored enterprises.
In September 2008, both Fannie Mae
and Ginnie Mae increased the net worth
requirements for their business partners.
Ginnie Mae now requires a net worth of
$1 million and Fannie Mae requires a
net worth of $1.65 million. As of
December 31, 2009, Fannie Mae’s net
worth requirements will be increased
further to $2.5 million plus a dollar
amount that represents one-quarter of
one percent (.25 percent) of the
outstanding principal balance of the
lender’s total portfolio of mortgages
serviced for Fannie Mae. As is
evidenced by the actions of Ginnie Mae
and Fannie Mae, the increases in
required net worth proposed by FHA are
consistent with industry norms for
counterparty risk management.
The net worth increases proposed in
this rule reflect not only necessary
adjustments for inflation, but also the
lessons learned as a result of the
housing market crisis. The changes will
help to ensure that FHA-approved
lenders, including investing mortgagees,
are sufficiently capitalized to meet the
potential needs associated with the
financial services they provide.
The proposed rule would also
simplify the net worth requirements by
establishing uniform requirements for
Title I and Title II mortgagees. Under
the current regulations at 24 CFR
202.5(n), Title II supervised and
unsupervised mortgagees (except
multifamily mortgagees) are required to
maintain additional net worth in excess
of the existing requirements of not less
than one percent of the mortgage
volume exceeding $25 million, but total
net worth is not required to exceed $1
million. This proposed rule would
eliminate the additional net worth
requirements for title II mortgagees.
C. Use of HUD Registered Business
Name and Business Changes
In addition to the two significant
proposed changes presented in Sections
II.A. and II.B. of this preamble, HUD
PO 00000
Frm 00009
Fmt 4702
Sfmt 4702
proposes to codify the statutory
requirement presented in section 203 of
the HFSH Act, which directs FHAapproved mortgagees to use their HUDregistered business names in all
advertisements and promotional
materials related to FHA programs.
HUD-registered business names include
any alias or ‘‘doing business as’’ (DBA)
on file with FHA. In addition to
codifying this statutory requirement,
this rule also proposes to codify the
requirements specified in FHA’s
Strengthening Counterparty Risk
Management Mortgagee Letter, issued
September 18, 2009, and found at
https://www.hud.gov/offices/adm/
hudclips/letters/mortgagee/index.cfm,
which directs FHA-approved
mortgagees to maintain copies of all
advertisements and promotional
materials for a period of 2 years from the
date that the materials are circulated or
used for advertisement purposes.
Through this rule, HUD also proposes
to codify the requirement in section 203
of the HFSH Act that requires
mortgagees to notify FHA if individual
employees of the lender are subject to
any sanction or other administrative
action. In incorporating this
requirement, HUD also is proposing to
codify its existing requirements
pertaining to notification to FHA of
business changes, such as changes in
legal structure, which are currently
found in HUD Handbook 4060.1, REV–
2, Chapters 2 and 6.
D. The General Approval Standards for
Mortgagees (24 CFR 202.5)
Section 202.5 of HUD’s FHA
regulations sets forth the general
approval standards for FHA-approved
mortgagees. Because this section sets
forth the approval standards, this is the
principal regulation that is proposed to
be amended by this rule. However, with
the exception of adding new provisions
in § 202.5(b) to address the use of
business name, and non-FHA approved
entities, all other changes proposed by
this rule are changes to existing
provisions. For example, paragraph (f)
concerning business changes, and
paragraph (j), which pertains to
ineligibility, are expanded to include
the statutory requirements of the HFSH
Act. Section 202.5(g), which addresses
financial statements, is proposed to be
amended to include reference to the
requirement to submit an audited
financial statement within 90 days of
the end of a mortgagee’s fiscal year. The
requirement to submit an audited
financial statement was initiated in
FHA’s Strengthening Counterparty Risk
Management Mortgagee Letter, issued
September 18, 2009. (See https://
E:\FR\FM\30NOP1.SGM
30NOP1
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
www.hud.gov/offices/adm/hudclips/
letters/mortgagee/index.cfm.)
III. Justification for Shortened Public
Comment Period
It is the general practice of the
Department to provide a 60-day public
comment period on all proposed rules.
The Department, however, is reducing
its usual 60-day public comment period
to 30 days for this proposed rule. As
discussed in the preamble, although this
rule proposes to no longer approve loan
correspondents as approved participants
in FHA programs, and to limit approval
to mortgagees, this does not mean that
loan correspondents may no longer
participate in the FHA-insured loan
origination process. Loan
correspondents would continue to be
authorized to participate in the
origination of FHA loans through
association with an FHA-approved
mortgagee, but they would no longer be
subject to the rigorous FHA lenderapproval process, which is more
appropriate for those entities that
underwrite the loans. The FHAapproved mortgagee will, in turn, act as
sponsor as it has in the past, and the
sponsoring mortgagee will assume
responsibility for any loan
correspondent that works with the
mortgagee in the FHA-insured loan, and
assume liability for the FHA-insured
loan underwritten and closed in the
name of the FHA-approved mortgagee.
Therefore, this change should not result
in any loss of business by any currently
FHA-approved lending entity.
Additionally, although the proposed
rule would raise the net worth
requirement for FHA-approved
mortgagees, which have not been
increased in more than 15 years, the net
worth requirements proposed are at a
level comparable to industry standard,
as already discussed in the preamble
and as further discussed in Section IV
of this preamble. Additionally, to
provide FHA-approved mortgagees with
sufficient time to meet the new
requirements, HUD would phase in the
net worth increases over a 3-year period
from the effective date of the final rule
resulting from this rulemaking. Within
one year from the effective date of the
final rule, FHA-approved mortgagees
would be required to have a net worth
of $1 million. At present, 60 percent of
approved mortgagees have a net worth
of $1 million or more. Those that do not
currently meet the $1 million net worth
requirement may choose to increase
their net worth to meet the new
requirements or may participate by
partnering with an approved FHA
mortgagee, as is the case for loan
correspondents. Within 3 years from the
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
effective date of the final rule,
mortgagees would be required to have a
net worth of $2.5 million, a figure that
is consistent with industry practice. It is
HUD’s view, therefore, that this change,
given the proposed net worth
requirement and the time to meet such
requirement, as well as the other
avenues of participation in FHA
programs available to those mortgagees
not able to meet the new net worth
requirements, would not significantly
restrict any currently FHA-approved
mortgagees from the opportunity to
participate in FHA programs.
The proposed rule would also update
HUD’s regulations to incorporate criteria
specified in the HFSH Act that
precludes any lending entity not
approved by the Secretary to participate
in FHA programs or not in compliance
with applicable eligibility requirements
from originating an FHA-insured loan.
These are statutory restrictions, which
HUD does not have the authority to
modify in response to comment. The
statutory provisions are currently in
effect and the proposed regulatory
changes merely update HUD’s
regulations to conform to the language
of the HFSH Act.
Given that the changes proposed by
this rule bring FHA up to date with
current industry standards and conform
to explicit statutory language, and
would not result in significant changes
to current FHA participation, FHA
believes a 30-day public comment
period presents a sufficient period for
comment. Although HUD has
determined that a reduced comment
period is merited in this case, the
Department continues to value public
input in the rulemaking process. As
noted, the proposed rule solicits public
comment for a period of 30 days, and all
comments received will be considered
in the development of the final rule.
IV. Findings and Certifications
Executive Order 12866, Regulatory
Planning and Review
The Office of Management and Budget
(OMB) reviewed this proposed rule
under Executive Order 12866 (entitled
‘‘Regulatory Planning and Review’’). A
determination, as provided below, was
made that this proposed rule is a
‘‘significant regulatory action,’’ as
defined in section 3(f) of the Order
(although not economically significant,
as provided in section 3(f)(1) of the
Order).
The changes to the lender-approval
process do not prevent participation by
entities that have to date been involved
in FHA programs, but rather limits the
actual approval process to those entities
PO 00000
Frm 00010
Fmt 4702
Sfmt 4702
62525
that underwrite, service, or own FHAinsured mortgages. Therefore, loan
correspondents and other non-FHA
approved lenders can continue to be
involved in FHA loan origination by
working with FHA-approved
mortgagees. Loan correspondents and
other third-party originators would be
exempt, however, from completing the
FHA lender approval process.
The increase in net worth
requirements, while seemingly a
significant increase from the current net
worth requirements established in 1993,
is not significant when one considers
the following: the net worth
requirement for FHA-approved lending
entities has not been increased in more
than 15 years; the net worth increase
would not apply to loan correspondents;
and, as previously discussed in this
preamble, the proposed net worth
requirements are consistent with those
currently required by other Federal
financial institutions with which FHAapproved mortgagees conduct business
and whose requirements they must
meet. The following provides further
analysis of the estimated impact of the
increase in net requirements that
supports HUD’s determination that this
rule is not an economically significant
rule as defined by Executive Order
12866.
FHA does not presently collect
audited financial statements from
supervised institutions. As a result, it is
not possible to determine if any of these
entities that are currently FHAapproved would be unable to meet the
proposed increased net worth
requirements. Therefore, for the
purposes of the following analysis, only
data from approved non-supervised
mortgagees is considered. However,
based upon the fact that supervised
institutions must meet much higher
capital standards established by Federal
banking regulators (and to comply with
international Basel II standards), it is
very unlikely that any supervised
institutions would fail to meet the
proposed net worth requirements. As a
proxy, FHA analyzed Ginnie Mae net
worth data for its supervised lender
issuers and discovered that none of
these lenders had a net worth below
FHA’s proposed requirement. In fact,
the average net worth of this cohort was
$2.4 billion.
The enactment of the proposed rule
would present two options to
mortgagees that currently possess a net
worth below the proposed $2,500,000
requirement:
1. Increase their net worth, within the
3 years of enactment of the final rule,
from the current $250,000 to $2.5
E:\FR\FM\30NOP1.SGM
30NOP1
62526
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
million, 20 percent of which must be
held in liquid assets; or
2. Relinquish their status as an FHAapproved mortgagee and continue
conducting FHA business as a loan
correspondent by initiating a
relationship with an approved
mortgagee.
The actual economic impact of the
proposed rule is the opportunity cost of
option 1 and the lost revenue and
additional costs associated with option
2. For mortgagees that choose option 1,
it is anticipated that the increase in net
worth would be met largely by changing
the title of existing assets from the
individual holdings of a mortgagees’
owners to those of the institutions.
Returns on the assets would be earned
by the same individuals, whether they
were held in the names of the
individuals or by the mortgagees that
they owned. Thus, increasing the
minimum net worth requirement affects
only the rate of return of the capital
invested, which is the true measure of
the economic impact of option 1. The
impacts associated with this option are
further discussed below.
For mortgagees that choose option 2,
the functional impact of the option is
that they no longer would be able to
underwrite and process the loans they
originate. The economic impact that
would result from those limitations
would be the loss of income from those
aspects of the FHA mortgage lending
process they no longer would be
permitted to perform and the added
costs they would be required to pay to
their sponsor for processing and
underwriting. An analysis of the
impacts for mortgagees in choosing this
option also is provided below.
If all mortgagees selected option 1 and
transferred title from existing assets, the
actual impact of such an action is the
opportunity cost of holding those assets
as net worth rather than investing them
in other potentially higher-yielding
investments. The true measure of
economic impact is found by drilling
down even farther to consider only the
opportunity cost associated with those
assets that must be converted to liquid
form. Because assets held for net worth
may still be invested elsewhere, it is
only the 20 percent liquid asset portion
of a mortgagee’s capital that is affected
by the increased net worth requirement.
However, the analysis below depicts
both the opportunity cost of the total
capital transfer required to meet the
higher net worth standard, and the
opportunity cost of the liquid assets
necessary to meet the requirement.
Table 1 below calculates the
opportunity cost for mortgagees in
meeting the proposed net worth
requirements based upon total net worth
needed. Table 2 calculates the
opportunity cost in terms of required
liquid assets. Based on data from FHA’s
Lender Assessment SubSystem (LASS),
24 mortgagees have a net worth equal to
$250,000, 465 mortgagees have a net
worth between $250,000 and $1 million,
350 mortgagees have a net worth
between $1 million and $2.5 million,
and 369 mortgagees have a net worth of
greater than $2.5 million.
In Table 1 below, Column A lists the
number of lenders in the
aforementioned categories. Column B
lists the average net worth of the
mortgagees in each category. Column C
subtracts the average net worth from the
new requirement of $2.5 million per
mortgagee. Column D then calculates
the average opportunity cost per lender
for each stratum.
The aggregate cost of this provision
totals the opportunity cost of holding
the amount shown in Column C in net
worth rather than investing it in other
potentially higher-yielding investments.
The opportunity cost in Column D
therefore is calculated as the difference
between the average market rate of
return and the risk-free interest rate. The
average market rate is represented by
the real annualized return of the S&P
500 between 1990 and 2008, which
equals 4.5 percent. The risk-free interest
is the average 10-year Treasury rate
between 1990 and 2008, which equals
2.7 percent. The difference between
these two rates equals 1.8 percent.
Finally, the average opportunity cost of
the increase in the net worth
requirement per mortgagee, shown in
Column D, was multiplied times
Column A, the number of mortgagees in
each category, to calculate the total cost
of the net worth requirement imposed
by this regulation, shown in Column E.
As shown in Table 1, the total
opportunity cost for all mortgagees of
holding the additional funds in net
worth totals $23.4 million.
TABLE 1—CALCULATION OF OPPORTUNITY COST TO FHA-APPROVED MORTGAGEES FOR FULL CAPITALIZATION
(A)
(C)
(D) = (C)*1.8%
(E) = (A)*(D)
Number of
mortgagees
Net worth
(B)
Average net
worth
Average required
increase in net
worth
Average opportunity cost
Aggregate opportunity cost
24
465
350
369
$250,000
539,345
1,537,509
164,252,737
$2,250,000
1,960,655
962,491
$40,500
35,292
17,325
$972,000
16,410,780
6,063,750
Total ..........................................................
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
$250K ...............................................................
$250K ...............................................................
$1M–$2.5M ......................................................
>$2.5M .............................................................
1,208
............................
............................
............................
23,446,530
Table 2 below further extrapolates
this data to assess the opportunity cost
associated with only that portion of net
worth held in liquid assets. The actual
cost of this provision totals the
opportunity cost of holding 20 percent
of total net worth as liquid assets rather
than investing it in other potentially
higher-yielding investments. The
opportunity cost therefore is calculated
in essentially the same fashion as for
Table 1. However, Column D of Table 2
lists the average increase in required
liquid assets for lenders in each
category. The opportunity cost is then
calculated in the same fashion as
described for Table 1, by multiplying
the amount shown in Column D times
1.8 percent. This figure is shown in
Column E. The total cost of the
provision was then determined by
multiplying the amount in Column E
times the number of lenders in each
stratum listed in Column A. As shown
in Table 2, the opportunity cost of
holding the additional required liquid
assets in net worth totals $4.7 million.1
1 Even if the percentage of required net worth
held in liquid assets were to yield no return
whatsoever, utilizing the 4.5 percent average market
rate of return mentioned previously, the total
opportunity cost of the uninvested liquid assets
would total just $11,723,184.
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
PO 00000
Frm 00011
Fmt 4702
Sfmt 4702
E:\FR\FM\30NOP1.SGM
30NOP1
62527
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
TABLE 2—CALCULATION OF OPPORTUNITY COST TO FHA-APPROVED MORTGAGEES FOR LIQUID HOLDINGS
(A)
(C)
(D) = (C)*20%
(E) = (D)*1.8%
(F) = (A)*(E)
Number of
mortgagees
Net worth
(B)
Average net
worth
Average required
increase in net
worth
Average increase
in liquid assets
Aggregate opportunity cost
Aggregate opportunity cost
$250K ...............................
$250K ...............................
$1M–$2.5M ......................
>$2.5M .............................
24
465
350
369
$250,000
539,345
1,537,509
164,252,737
$2,250,000
1,960,655
962,491
$450,000
392,131
192,498
$8,100
7,058
3,465
$194,400
3,282,137
1,212,738
Total ..........................
1,208
............................
............................
............................
............................
4,689,275
If all mortgagees selected option 2, the
economic impact again would issue
from lost revenue derived from those
aspects of the FHA mortgage lending
process they no longer would be
permitted to perform and the added
costs they would be required to pay to
their sponsor for processing and
underwriting. There are four primary
ways in which a lender can receive
income from the mortgage business: (1)
Origination fees, (2) servicing release
premiums, (3) servicing fees, and (4)
income derived from securitization. The
potential income derived from these
revenue streams is as follows:
(1) FHA origination fees are capped at
1 percent of the loan amount.
(2) The industry standard for
servicing release premiums is between
75 to 100 basis points of a loan’s unpaid
principal balance at the time of sale.
(3) The average annual servicing fee of
an FHA loan is 30 basis points on the
unpaid principal balance.
(4) Income derived from securitization
will not be considered because a
mortgagee must meet the higher net
worth already required by Ginnie Mae,
Fannie Mae, and Freddie Mac in order
to participate in the respective
securitization programs.
FHA analyzed the origination patterns
of the mortgagees that would be affected
over a 2-year period from August 31,
2007 to September 30, 2009. It should
be noted that the vast majority of
lenders reviewed do not service a
mortgage portfolio but rather sell their
mortgages to aggregators.
As is seen in Table 3 below, of the 489
lenders with a net worth less than the
proposed $1 million, 355 have
originated at least one loan in the 2-year
sample period. Of the 350 lenders above
the proposed $1 million net worth but
below the proposed $2.5 million, 299
have originated at least one loan during
the 2-year sample period. Since the
affected mortgagees still would be
permitted to originate FHA loans for a
fee and would be entitled to income
streams derived from servicing release
premiums, the only economic impact
would be from the costs these lenders
pay to FHA-approved lenders for the
processing and underwriting of the
mortgages sold. Table 3 provides
information regarding the economic
impact if all lenders opted to relinquish
their FHA approval and operate via a
relationship with an FHA-approved
mortgagee. Column A lists the number
of lenders in each net worth category.
Column B lists only the number of
lenders in each category that originated
at least one loan in the 2-year period
from August 31, 2007, to September 30,
2009. Column C provides the average
yearly originations performed by each
stratum for the 2-year period. Column D
calculates the average number of
originations performed per lender by
dividing Column C by column B.
Column E calculates the average total
processing and underwriting fees paid
by loan correspondents for loans they
originated by multiplying the amount in
Column D times $200, the average fee
required by a mortgagee for these
services. Column F calculates the total
cost of these fees for loan
correspondents by multiplying Column
E by Column B. As is seen from Table
3, the economic impact of this option is
$45.1 million.
TABLE 3—CALCULATION OF LOST REVENUE FOR MORTGAGEES THAT RELINQUISH THEIR FHA APPROVAL
(A)
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
(C)
(D) = (C)/(B)
(E) = (D)*$200
(F) = (E)*(B)
Total number of
lenders
>$250K < $1M .................
$1M–$2.5M ......................
Total ..........................
(B)
Lenders w/originations in 2-year
period
Avg. number of
yearly originations
Avg. number of
orig/lender
Avg. loan processing fee/lender
Aggregate loan
processing fee
489
350
............................
355
299
............................
87,455
138,289
............................
246
463
............................
$49,200
92,600
............................
As is evidenced above, under either
option a mortgagee adopts to
accommodate the proposed increase in
net worth requirements, the total
economic impact is below $100 million.
FHA believes that the method of
assessment outlined here is the most
true and accurate accounting of the
economic impacts of this proposed rule.
As part of the public comments that
HUD is soliciting on this rule, HUD also
solicits public comment on its analysis
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
and welcomes feedback on potential
effects that commenters believe this rule
will have on competition in financial
and housing markets, with particular
emphasis on the ability of mortgagees to
transfer assets in order to increase their
net worth.
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,
PO 00000
Frm 00012
Fmt 4702
Sfmt 4702
$17,466,000
27,687,400
45,153,400
Washington, DC 20410–0500. Due to
security measures at the HUD
Headquarters building, please schedule
an appointment to review the docket file
by calling the Regulations Division at
202–402–3055 (this is not a toll-free
number). Individuals with speech or
hearing impairments may access this
number via TTY by calling the Federal
Information Relay Service at 800–877–
8339.
E:\FR\FM\30NOP1.SGM
30NOP1
62528
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
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.
Currently, there are 13,831 FHAapproved lending entities. Of these
approved entities, 28 percent are
approved mortgagees, 68 percent are
approved correspondents, and the
remaining 4 percent constitute
government mortgagees or investing
mortgagees. Of FHA-approved
mortgagees, only 60 percent currently
have a net worth of $1 million or more.
An additional 20 percent of approved
mortgagees have a net worth greater
than $500,000. Thus, a significant
portion of these mortgagees could be
expected to achieve a net worth of $1
million within the one year period prior
to the net worth requirement taking
effect. Those that are unable to meet the
new net worth requirement in that time
would still be able to participate in FHA
programs by partnering with an
approved mortgagee.
The small entities that participate in
the FHA loan origination have, to date,
largely been loan correspondents. As
discussed in this preamble, the
proposed rule would not deny loan
correspondents the ability to continue to
participate in the origination of FHAinsured loans. Rather, the proposed
regulatory changes would alleviate the
administrative burden imposed on loan
correspondents by no longer requiring
them to apply separately for FHA
approval. The changes proposed by this
rule allow smaller entities to continue to
be involved in the origination of FHAinsured loans without having to come
under the FHA approval process and
meet net worth requirements.
Accordingly, 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 the preamble to this rule.
Environmental Impact
This rule does not direct, provide for
assistance or loan and mortgage
insurance for, or otherwise govern or
regulate, real property acquisition,
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
disposition, leasing, rehabilitation,
alteration, demolition or new
construction, or establish, revise, or
provide for standards for construction or
construction materials, manufactured
housing, or occupancy. This rule is
limited to the eligibility of those entities
that may be approved as FHA-approved
lenders. Accordingly, under 24 CFR
50.19(c)(1), this rule is categorically
excluded from environmental review
under the National Environmental
Policy Act of 1969 (42 U.S.C. 4321).
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial direct compliance costs on
State and local governments and is not
required by statute, or the rule preempts
State law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
proposed rule would not have
federalism implications and would not
impose substantial direct compliance
costs on State and local governments or
preempt State law within the meaning
of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (2 U.S.C. 1531–
1538) (UMRA) establishes requirements
for Federal agencies to assess the effects
of their regulatory actions on State,
local, and Tribal governments, and on
the private sector. This proposed rule
would not impose any Federal mandates
on any State, local, or Tribal
governments, or on the private sector,
within the meaning of the UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic
Assistance (CFDA) Program number is
14.183.
List of Subjects in 24 CFR Part 202
Administrative practice and
procedure, Home improvement,
Manufactured homes, Mortgage
insurance, Reporting and recordkeeping
requirements.
Accordingly, for the reasons stated
above, HUD proposes to amend 24 CFR
part 202 as follows:
PART 202—APPROVAL OF LENDING
INSTITUTIONS AND MORTGAGEES
1. The authority citation for 24 CFR
part 202 continues to read as follows:
Authority: 12 U.S.C. 1703, 1709, and
1715b; 42 U.S.C. 3535(d).
PO 00000
Frm 00013
Fmt 4702
Sfmt 4702
2. In § 202.2, the definition mortgagee
or Title II mortgagee is revised to read
as follows:
§ 202.2
Definitions.
*
*
*
*
*
Mortgagee or Title II mortgagee means
a mortgage lender that is approved to
participate in the Title II programs as a
supervised mortgagee under § 202.6, a
nonsupervised mortgagee under § 202.7,
an investing mortgagee under § 202.9, or
a governmental or similar institution
under § 202.10.
*
*
*
*
*
3. In § 202.3, revise paragraphs (a)
introductory text and (a)(1) to read as
follows:
§ 202.3 Approval status for lenders and
mortgagees.
(a) Initial approval. A lender or
mortgagee may be approved for
participation in the Title I or Title II
programs upon filing a request for
approval on a form prescribed by the
Secretary and signed by the applicant.
The approval form shall be
accompanied by such documentation as
may be prescribed by the Secretary.
(1) Approval is signified by:
(i) The Secretary’s agreement that the
lender or mortgagee is considered
approved under the Title I or Title II
programs, except as otherwise ordered
by the Mortgagee Review Board or an
officer or subdivision of the Department
to which the Mortgagee Review Board
has delegated its power, unless the
lender or mortgagee voluntarily
relinquishes its approval;
(ii) Consent by the lender or
mortgagee to comply at all times with
the general approval requirements of
§ 202.5, and with additional
requirements governing the particular
class of lender or mortgagee for which
it was approved as described under
subpart B at §§ 202.6 through 202.10;
and
(iii) Under the Title I program, the
issuance of a Contract of Insurance
constitutes an agreement between the
Secretary and the lender and which
governs participation in the Title I
program.
*
*
*
*
*
4. Revise § 202.5 to read as follows:
§ 202.5
General approval standards.
To be approved for participation in
the Title I or Title II programs, and to
maintain approval, a lender or
mortgagee shall meet and continue to
meet the general requirements of
paragraphs (a) through (n) of this section
(except as provided in § 202.10(b)) and
the requirements for one of the eligible
E:\FR\FM\30NOP1.SGM
30NOP1
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
classes of lenders or mortgagees in
§§ 202.6 through 202.10.
(a) Business form. (1) The lender or
mortgagee shall be a corporation or
other chartered institution, a permanent
organization having succession, or a
partnership. A partnership must meet
the requirements of paragraphs (a)(1)(i)
through (iv) of this section.
(i) Each general partner must be a
corporation or other chartered
institution consisting of two or more
persons.
(ii) One general partner must be
designated as the managing general
partner. The managing general partner
shall comply with the requirements of
paragraphs (b), (c), and (f) of this
section. The managing general partner
must have as its principal activity the
management of one or more
partnerships, all of which are mortgage
lenders or property improvement or
manufactured home lenders, and must
have exclusive authority to deal directly
with the Secretary on behalf of each
partnership. Newly admitted partners
must agree to the management of the
partnership by the designated managing
general partner. If the managing general
partner withdraws or is removed from
the partnership for any reason, a new
managing general partner shall be
substituted, and the Secretary shall be
immediately notified of the substitution.
(iii) The partnership agreement shall
specify that the partnership shall exist
for the minimum term of years required
by the Secretary. All insured mortgages
and Title I loans held by the partnership
shall be transferred to a lender or
mortgagee approved under this part
prior to the termination of the
partnership. The partnership shall be
specifically authorized to continue its
existence if a partner withdraws.
(iv) The Secretary must be notified
immediately of any amendments to the
partnership agreement that would affect
the partnership’s actions under the Title
I or Title II programs.
(2) Use of business name. The lender
or mortgagee must use its HUDregistered business name in all
advertisements and promotional
materials related to FHA programs.
HUD-registered business names include
any alias or ‘‘doing business as’’ (DBA)
on file with FHA. The lender or
mortgagee must keep copies of all print
and electronic advertisements and
promotional materials for a period of 2
years from the date that the materials
are circulated or used to advertise.
(3) Non-FHA-approved entities. A
lender or mortgagee that accepts a loan
application by a non-FHA-approved
entity must determine that the nonFHA-approved entity is not subject to
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
the sanctions or administrative actions
listed in paragraph (j) of this section,
and that the entity’s legal name and Tax
ID number are included in the FHA loan
origination system record for the subject
loan. The loan to be insured by FHA
must be underwritten by and closed in
the name of the FHA-approved lender or
mortgagee.
(b) Employees. The lender or
mortgagee shall employ competent
personnel trained to perform their
assigned responsibilities in consumer or
mortgage lending, including origination,
servicing, and collection activities, and
shall maintain adequate staff and
facilities to originate and service
mortgages or Title I loans, in accordance
with applicable regulations, to the
extent the mortgagee or lender engages
in such activities.
(c) Officers. All employees who will
sign applications for mortgage insurance
on behalf of the mortgagee or report
loans for insurance shall be corporate
officers or shall otherwise be authorized
to bind the lender or mortgagee in the
origination transaction. The lender or
mortgagee shall ensure that an
authorized person reports all
originations, purchases, and sales of
Title I loans or Title II mortgages to the
Secretary for the purpose of obtaining or
transferring insurance coverage.
(d) Escrows. The lender or mortgagee
shall not use escrow funds for any
purpose other than that for which they
were received. It shall segregate escrow
commitment deposits, work completion
deposits, and all periodic payments
received under loans or insured
mortgages on account of ground rents,
taxes, assessments, and insurance
charges or premiums, and shall deposit
such funds with one or more financial
institutions in a special account or
accounts that are fully insured by the
Federal Deposit Insurance Corporation
or the National Credit Union
Administration, except as otherwise
provided in writing by the Secretary.
(e) Servicing. A lender shall service or
arrange for servicing of the loan in
accordance with the requirements of 24
CFR part 201. A mortgagee shall service
or arrange for servicing of the mortgage
in accordance with the servicing
responsibilities contained in subpart C
of 24 CFR part 203 and in 24 CFR part
207, with all other applicable
regulations contained in this title, and
with such additional conditions and
requirements as the Secretary may
impose.
(f) Business changes. The lender or
mortgagee shall provide prompt
notification to the Secretary, in such
form as prescribed by the Secretary, of:
PO 00000
Frm 00014
Fmt 4702
Sfmt 4702
62529
(1) All changes in its legal structure,
including, but not limited to, mergers,
terminations, name, location, control of
ownership, and character of business;
and
(2) Any officer, partner, director,
principal, manager, supervisor, loan
processor, loan underwriter, loan
originator, or employee of the lender or
mortgagee, or the lender or mortgagee
itself, that is subject to one or more of
the sanctions in paragraph (j) of this
section.
(g) Financial statements. The lender
or mortgagee shall furnish to the
Secretary a copy of its annual audited
financial statement within 90 days of its
fiscal year end, furnish such other
information as the Secretary may
request, and submit to an examination
of that portion of its records that relates
to its Title I and/or Title II program
activities.
(h) Quality control plan. The lender or
mortgagee shall implement a written
quality control plan, acceptable to the
Secretary, that assures compliance with
the regulations and other issuances of
the Secretary regarding loan or mortgage
origination and servicing.
(i) Fees. The lender or mortgagee,
unless approved under § 202.10, shall
pay an application fee and annual fees,
including additional fees for each
branch office authorized to originate
Title I loans or submit applications for
mortgage insurance, at such times and
in such amounts as the Secretary may
require. The Secretary may identify
additional classes or groups of lenders
or mortgagees that may be exempt from
one or more of these fees.
(j) Ineligibility. For a lender or
mortgagee to be eligible for FHA
approval, neither the lender or
mortgagee, nor any officer, partner,
director, principal, manager, supervisor,
loan processor, loan underwriter, loan
originator, or employee of the lender or
mortgagee shall:
(1) Be suspended, debarred, under a
limited denial of participation (LDP), or
otherwise restricted under 2 CFR part
2424 or 24 CFR part 25, or under similar
procedures of any other Federal agency;
(2) Be indicted for, or have been
convicted of, an offense that reflects
adversely upon the integrity,
competency, or fitness to meet the
responsibilities of the lender or
mortgagee to participate in the Title I or
Title II programs;
(3) Be subject to unresolved findings
as a result of HUD or other
governmental audit, investigation, or
review;
(4) Be engaged in business practices
that do not conform to generally
accepted practices of prudent
E:\FR\FM\30NOP1.SGM
30NOP1
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
62530
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
mortgagees or that demonstrate
irresponsibility;
(5) Be convicted of, or have pled
guilty or nolo contendre to, a felony
related to participation in the real estate
or mortgage loan industry:
(i) During the 7-year period preceding
the date of the application for licensing
and registration; or
(ii) At any time preceding such date
of application, if such felony involved
an act of fraud, dishonesty, or a breach
of trust or money laundering;
(6) In violation of provisions of the
Secure and Fair Enforcement (SAFE)
Mortgage Licensing Act of 2008
(12.U.S.C. 5101 et seq.) or any
applicable provision of State law; or
(7) In violation of any other
requirement established by the
Secretary.
(k) Branch offices. A lender may,
upon approval by the Secretary,
maintain branch offices for the
origination of Title I loans. A branch
office of a mortgagee must be registered
with the Department in order to
originate mortgages or submit
applications for mortgage insurance.
The lender or mortgagee shall remain
fully responsible to the Secretary for the
actions of its branch offices.
(l) Conflict of interest and
responsibility. (1) A mortgagee may not
pay anything of value, directly or
indirectly, in connection with any
insured mortgage transaction or
transactions to any person or entity if
such person or entity has received any
other consideration from the mortgagor,
seller, builder, or any other person for
services related to such transactions or
related to the purchase or sale of the
mortgaged property, except that
consideration, approved by the
Secretary, may be paid for services
actually performed. The mortgagee shall
not pay a referral fee to any person or
organization.
(2) Responsibility. FHA-approved
lenders and mortgagees assume
responsibility for ensuring that the
lending entities with which they do
business (e.g., loan correspondents,
mortgage brokers) are not ineligible (as
provided in paragraph (j) of this section)
to participate in the origination of FHAinsured loans.
(m) Reports. Each lender and
mortgagee must submit a yearly
verification report on a form prescribed
by the Secretary. Upon application for
approval and with each annual
recertification, each lender and
mortgagee must submit a certification
that it has not been refused a license
and has not been sanctioned by any
State or States in which it will originate
insured mortgages or Title I loans. In
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
addition, each mortgagee shall file the
following:
(1) An audited or unaudited financial
statement, within 30 days of the end of
each fiscal quarter in which the
mortgagee experiences an operating loss
of 20 percent of its net worth, and until
the mortgagee demonstrates an
operating profit for 2 consecutive
quarters or until the next recertification,
whichever is the longer period; and
(2) A statement of net worth within 30
days of the commencement of voluntary
or involuntary bankruptcy,
conservatorship, receivership, or any
transfer of control to a Federal or State
supervisory agency.
(n) Net worth. (1) Effective on [date 1
year after the effective date of final
rule], each supervised or nonsupervised
lender or mortgagee approved under
§ 202.6 and § 202.7 and each investing
lender and mortgagee approved under
§ 202.9 shall have a net worth of not less
than $1,000,000, of which no less than
20 percent must be liquid assets
consisting of cash or its equivalent
acceptable to the Secretary.
(2) Effective on [date 3 years after the
effective date of final rule], each
supervised or nonsupervised lender or
mortgagee approved under § 202.6 and
§ 202.7 and each investing lender and
mortgagee approved under § 202.9 shall
have a net worth of not less than
$2,500,000, of which no less than 20
percent must be liquid assets consisting
of cash or its equivalent acceptable to
the Secretary.
5. Revise § 202.6 to read as follows:
§ 202.6 Supervised lenders and
mortgagees.
(a) Definition. A supervised lender or
mortgagee is a financial institution that
is a member of the Federal Reserve
System or an institution whose accounts
are insured by the Federal Deposit
Insurance Corporation or the National
Credit Union Administration. A
supervised mortgagee may submit
applications for mortgage insurance. A
supervised lender or mortgagee may
originate, purchase, hold, service or sell
loans or insure mortgages, respectively.
(b) Additional requirements. In
addition to the general approval
requirements in § 202.5, a supervised
lender or mortgagee shall meet the
following requirements:
(1) Net worth. The net worth
requirements appear in § 202.5(n).
(2) Notification. A lender or
mortgagee shall promptly notify the
Secretary in the event of termination of
its supervision by its supervising
agency.
(3) Fidelity bond. A Title II mortgagee
shall have fidelity bond coverage and
PO 00000
Frm 00015
Fmt 4702
Sfmt 4702
errors and omissions insurance
acceptable to the Secretary and in an
amount required by the Secretary, or
have alternative insurance coverage,
approved by the Secretary, that assures
the faithful performance of the
responsibilities of the mortgagee.
6. Revise § 202.8 to read as follows:
§ 202.8
Loan correspondents.
(a) Definitions.
Loan correspondent. A loan
correspondent lender does not hold a
Title I Contract of Insurance and may
not purchase or hold loans but may be
approved to originate Title I direct loans
for sale or transfer to a sponsor or
sponsors, as defined in this section,
which holds a valid Title I Contract of
Insurance and is not under suspension,
subject to the sponsor determining that
the loan correspondent has met the
eligibility criteria of paragraph (b) this
section.
Sponsor. (1) With respect to Title I
programs, a sponsor is a lender that
holds a valid Title I Contract of
Insurance and meets the net worth
requirement for the class of lender to
which it belongs.
(2) With respect to Title II programs,
a sponsor is a mortgagee that holds a
valid origination approval agreement, is
approved to participate in the Direct
Endorsement program, and meets the
net worth requirement for the class of
mortgagee to which it belongs.
(b) Eligibility to originate FHA insured
loans. A loan correspondent may
originate FHA insured loans provided:
(1) The loan correspondent is working
with and through an FHA-approved
lender or mortgagee; and
(2) The loan correspondent or an
officer, partner, director, principal,
manager, supervisor, loan processor, or
employee of the loan correspondent has
not been subject to the sanctions or
administrative actions listed in § 202.5,
as determined and verified by the FHAapproved lender or mortgagee.
7. Revise § 202.11 to read as follows:
§ 202.11
Title I.
(a) Types of administrative action. In
addition to termination of the Contract
of Insurance, certain sanctions may be
imposed under the Title I program. The
administrative actions that may be
applied are set forth in 24 CFR part 25.
Civil money penalties may be imposed
against Title I lenders and mortgagees
pursuant to 24 CFR part 30.
(b) Grounds for action. Administrative
actions shall be based upon both the
grounds set forth in 24 CFR part 25 and
as follows:
(1) Failure to properly supervise and
monitor dealers under the provisions of
part 201 of this title;
E:\FR\FM\30NOP1.SGM
30NOP1
Federal Register / Vol. 74, No. 228 / Monday, November 30, 2009 / Proposed Rules
(2) Exhaustion of the general
insurance reserve established under part
201 of this title;
(3) Maintenance of a Title I claims/
loan ratio representing an unacceptable
risk to the Department; or
(4) Transfer of a Title I loan to a party
that does not have a valid Title I
Contract of Insurance.
8. Revise § 202.12(a)(1) to read as
follows:
§ 202.12
Title II.
(a) Tiered pricing. (1) General
requirements. (i) Prohibition against
excess variation. The customary lending
practices of a mortgagee for its single
family insured mortgages shall not
provide for a variation in mortgage
charge rates that exceeds two percentage
points. A variation is determined as
provided in paragraph (a)(6) of this
section.
(ii) Customary lending practices. The
customary lending practices of a
mortgagee include all single family
insured mortgages originated by the
mortgagee, including those funded by
the mortgagee or purchased from the
originator if requirements of the
mortgagee have the effect of leading to
violation of this section by the
originator.
(iii) Basis for permissible variations.
Any variations in the mortgage charge
rate up to two percentage points under
the mortgagee’s customary lending
practices must be based on actual
variations in fees or cost to the
mortgagee to make the mortgage loan,
which shall be determined after
accounting for the value of servicing
rights generated by making the loan and
other income to the mortgagee related to
the loan. Fees or costs must be fully
documented for each specific loan.
*
*
*
*
*
Dated: November 12, 2009.
David H. Stevens,
Assistant Secretary for Housing–Federal
Housing Commissioner.
[FR Doc. E9–28335 Filed 11–27–09; 8:45 am]
WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS
BILLING CODE 4210–67–P
VerDate Nov<24>2008
14:57 Nov 27, 2009
Jkt 220001
NATIONAL ARCHIVES AND RECORDS
ADMINISTRATION
Information Security Oversight Office
32 CFR Part 2004
[NARA–09–0005]
RIN 3095–AB34
National Industrial Security Program
Directive No. 1
AGENCY: Information Security Oversight
Office, NARA.
ACTION: Proposed rule.
SUMMARY: The Information Security
Oversight Office (ISOO), National
Archives and Records Administration
(NARA), is proposing to amend National
Industrial Security Program Directive
No. 1. This proposed amendment to
Directive No. 1 provides guidance to
agencies on release of certain classified
information (referred to as ‘‘proscribed
information’’) to contractors that are
owned or under the control of a foreign
interest and have had the foreign
ownership or control mitigated by an
arrangement known as a Special
Security Agreement. Currently, there is
no Federal standard across agencies on
release of proscribed information to this
group. The proposed amendment will
provide standardization and consistency
to the process across the Federal
Government, and will enable greater
efficiency in determining the release of
the information as appropriate. This
proposed amendment also moves the
definitions section to the beginning of
the part for easier use, and adds
definitions for the terms ‘‘Cognizant
Security Office,’’ ‘‘National Interest
Determination,’’ and ‘‘Proscribed
Information,’’ to accompany the new
guidelines. Finally, this proposed
amendment makes a minor
typographical change to the authority
citation to make it more accurate.
DATES: Submit comments on or before
January 29, 2010.
ADDRESSES: NARA invites interested
persons to submit comments on this
proposed rule. Please include ‘‘Attn:
3095–AB34’’ and your name and
mailing address in your comments.
Comments may be submitted by any of
the following methods:
• Federal eRulemaking Portal: Go to:
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: Submit comments by facsimile
transmission to 301–837–0319.
• Mail: Send comments to
Regulations Comments Desk (NPOL),
Room 4100, Policy and Planning Staff,
National Archives and Records
PO 00000
Frm 00016
Fmt 4702
Sfmt 4702
62531
Administration; Policy and Planning
Office; Attn: Laura McCarthy, Room
4100, 8601 Adelphi Road, College Park,
MD 20740.
• Hand Delivery or Courier: Deliver
comments to 8601 Adelphi Road,
College Park, MD.
FOR FURTHER INFORMATION CONTACT:
William J. Bosanko, Director, ISOO, at
202–357–5250.
SUPPLEMENTARY INFORMATION: As of
November 17, 1995, ISOO became a part
of NARA and subsequently published
Part 2004, National Industrial Program
Directive No. 1, pursuant to section
102(b)(1) of E.O. 12829, January 6, 1993
(58 FR 3479), as amended by E.O.
12885, December 14, 1993, (58 FR
65863). The Executive Order established
a National Industrial Security Program
(NISP) to safeguard Federal Government
classified information released to
contractors, licensees, and grantees
(collectively referred to here as
‘‘contractors’’) of the United States
Government. This amendment to
Directive No. 1 proposes to add
guidelines on release of proscribed
information to this category of
contractors.
ISOO maintains oversight over E.O.
12958, as amended, and policy
oversight over E.O. 12829, as amended,
and issuing this proposed amendment
fulfills one of the ISOO Director’s
delegated responsibilities under these
Executive Orders. Nothing in Directive
No. 1 or this proposed amendment shall
be construed to supersede the authority
of the Secretary of Energy or the Nuclear
Regulatory Commission under the
Atomic Energy Act of 1954, as amended
(42 U.S.C. 2011, et seq.), or the authority
of the Director of National Intelligence
under the National Security Act of 1947,
as amended, E.O. 12333, December 8,
1981, and the Intelligence Reform and
Terrorism Prevention Act of 2004.
The interpretive guidance contained
in this proposed amendment will only
assist agencies to implement E.O. 12829,
as amended; users of Directive No. 1
shall refer concurrently to the Executive
Order for guidance.
This proposed amendment is not a
significant regulatory action for the
purposes of E.O. 12866. The proposed
amendment is also not a major rule as
defined in 5 U.S.C. Chapter 8,
Congressional Review of Agency
Rulemaking. As required by the
Regulatory Flexibility Act, we certify
that the proposed amendment will not
have a significant impact on a
substantial number of small entities
because it applies only to Federal
agencies.
E:\FR\FM\30NOP1.SGM
30NOP1
]]>Agencies
[Federal Register Volume 74, Number 228 (Monday, November 30, 2009)]
[Proposed Rules]
[Pages 62521-62531]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-28335]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 202
[Docket No. FR 5356-P-01]
RIN 2502-AI81
Federal Housing Administration (FHA): Continuation of FHA
Reform--Strengthening Risk Management Through Responsible FHA-Approved
Lenders
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
[[Page 62522]]
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: Through this proposed rule, HUD continues its efforts to
streamline, modernize, and strengthen the mortgage insurance functions
and responsibilities of FHA, as authorized by provisions contained in
the National Housing Act, as amended by the FHA Modernization Act of
2008, and further supported by the Helping Families Save Their Homes
Act of 2009. First, FHA proposes to no longer approve loan
correspondents as approved participants in FHA programs. Mortgagees
would be required to ensure that their loan correspondents meet
applicable requirements. The FHA-approved mortgagee will, in turn, act
as sponsor as it has in the past. However, in using a sponsor/
correspondent relationship, the sponsoring mortgagee must agree to
assume responsibility for any loan correspondent that works with the
mortgagee in the FHA insured loan, and assume liability for the FHA-
insured loan underwritten and closed in the name of the FHA-approved
mortgagee. Second, this proposed rule would update the FHA regulations
to incorporate criteria specified in the Helping Families Save Their
Homes Act of 2009 that precludes certain lending entities from
originating an FHA-insured loan, and are designed to ensure that only
entities of integrity are involved in the origination of FHA-insured
transactions. Third, and consistent with the objective to work with and
rely upon responsible mortgagees, FHA proposes to increase the net
worth requirement for FHA-approved mortgagees for the purpose of
ensuring that approved mortgagees are sufficiently capitalized.
DATES: Comment Due Date: December 30, 2009.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Department of Housing and Urban Development, 451 7th Street,
SW., Room 10276, Washington, DC 20410-0500. Communications must refer
to the above docket number and title. There are two methods for
submitting public comments. All submissions must refer to the above
docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street, SW., Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
https://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
https://www.regulations.gov Web site can be viewed by other commenters
and interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule.
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an appointment to review the public comments must be
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or
hearing impairments may access this number via TTY by calling the
Federal Information Relay Service at 800-877-8339. Copies of all
comments submitted are available for inspection and downloading at
https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Office of Lender Activities and
Program Compliance, Department of Housing and Urban Development, 451
7th Street, SW., Washington, DC 20410-8000; telephone number 202-708-
1515 (this is not a toll-free number). Persons with hearing or speech
impairments may access this number through TTY by calling the toll-free
Federal Information Relay Service at 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
The FHA Modernization Act of 2008, Title I of Division B of the
Housing and Economic Recovery Act of 2008 (Pub. L. 110-289, approved
July 30, 2008), made or authorized HUD to make significant changes to
the way in which FHA conducts several areas of its mortgage insurance
operations. The FHA Modernization Act increased maximum mortgage
limits, overhauled and streamlined FHA's Title I manufactured housing
and condominium mortgage insurance programs, allowed a Home Equity
Conversion Mortgage (HECM) to be used to purchase a home, and allowed
for the insurance of cooperatives, to name a few of the significant
changes made by this 2008 statute. A key theme of many of the changes
made by the FHA Modernization Act centered on streamlining and
modernizing existing FHA programs.
The Helping Families Save Their Homes Act (HFSH Act), Division A of
Public Law 111-22, strengthened HUD's enforcement authority to ensure
the integrity and safety of FHA's mortgage insurance programs. The HFSH
Act contains several provisions designed to ensure that predatory
lending entities and individuals are not allowed to participate in FHA-
insured mortgage programs, and specifically requires FHA approval of
all parties participating in the FHA single family mortgage origination
process. The HFSH Act authorizes HUD to impose civil money penalties
against loan originators who are not FHA-approved and yet participate
in FHA loan originations. The HFSH Act strengthens HUD's enforcement
authority by authorizing the imposition of civil money penalties not
only for violation of statutory requirements, but for violation of any
FHA implementing regulation, handbook, or mortgagee letter issued under
title II of the National Housing Act. The HFSH Act directs FHA to
strengthen the existing FHA lender approval process, including
strengthening by ensuring that only lenders of integrity are approved
by FHA as approved mortgagees.
With the authority and direction presented by these two statutes,
which support and enhance the existing authority of the National
Housing Act, FHA proposes to both streamline and strengthen the FHA
lender approval process. Except as modified by this proposed rule, all
other components of the lender approval process would remain the same,
including those provisions regarding the monitoring and enforcement of
FHA requirements, the imposition of sanctions (enhanced by the HFSH
Act), and the opportunity to appeal adverse determinations.
II. This Proposed Rule
A. Strengthening and Streamlining Lender Approval
1. Limiting Approval to Mortgagees. Through this rule, FHA proposes
changes to the eligibility criteria for FHA lender approval. Currently,
through the FHA lender approval
[[Page 62523]]
process, FHA approves two types of lenders. First, FHA approves
mortgagees. Mortgagees can perform any lender origination and/or
service function and can own FHA-insured loans. Second, FHA approves
loan correspondents, but with limited functions. Loan correspondents
are allowed to perform any origination function except underwriting and
cannot service or own FHA-insured loans. This rule proposes to limit
the FHA lender approval process to mortgagees. This rule does not
propose to alter, however, the approval process of investing mortgagees
and governmental institutions as addressed in 24 CFR 202.9 and 202.10.
FHA will continue to approve investing mortgagees and government
institutions.
The limitation of the FHA approval process to mortgagees reflects
recognition that the mortgagee, by underwriting, servicing, or owning a
loan, is the most critical lending party to a mortgage transaction.
Accordingly, the mortgagee should be the party that is subject to FHA's
rigorous lender-approval and oversight processes, and bear the greatest
degree of responsibility and liability for the loan obtained by the
borrower and insured by FHA. Loan correspondents will continue to be
authorized to participate in the origination of FHA loans through
association with an FHA-approved mortgagee, but these entities no
longer will be subject to the FHA lender-approval process.
FHA-approved mortgagees would be required to ensure that their loan
correspondents meet applicable requirements. The FHA-approved mortgagee
acts as sponsor as it has in the past, but in using a sponsor/
correspondent relationship, the sponsoring mortgagee must agree to
assume responsibility for any loan correspondent that works with the
mortgagee in the FHA-insured loan for activities related to the loan
origination, and assume liability for the FHA-insured loan underwritten
and closed in the name of the FHA-approved mortgagee. Not only would
FHA-approved mortgagees be required to ensure that sponsoring loan
correspondents meet standards assuring their integrity and financial
soundness, including those recently emphasized in the HFSH Act (see
Section II.A.2 of this preamble), but to also ensure compliance by all
parties to an FHA transaction with FHA's requirements regarding loan
origination, processing, underwriting, and servicing and found in
relevant statutes, regulations, HUD handbooks, and mortgagee letters.
Although loan correspondents no longer would be subject to lender
approval requirements, the FHA-approved mortgagee must ensure that any
loan correspondent that the mortgagee sponsors complies with the
requirements that make loans eligible for FHA insurance. Failure to
comply with these requirements may result in FHA seeking sanctions
against the FHA-approved mortgagee.
FHA-approved mortgagees will be authorized to underwrite for and
acquire FHA mortgage applications from loan correspondents and non-FHA-
approved lenders, such as mortgage brokers, provided that these
parties: (1) Are in compliance with the requirements of the Secure and
Fair Enforcement (SAFE) Mortgage Licensing Act (Title V of Division A
of Pub. L. 110-289, approved July 30, 2008), when such requirements
become applicable under the State or States in which these parties
conduct business, and (2) are not suspended, debarred, or otherwise
excluded from participating in the origination of an FHA loan. If the
loan application is taken by an entity that is not the FHA-approved
Direct Endorsement mortgagee that underwrote the loan, the entity must
include the following in the FHA loan origination system for the
subject loan: (1) The entity's FHA identification number (if the entity
is FHA-approved) or (2) the entity's legal name and tax identification
number (if the entity is not FHA-approved). The loan must be
underwritten by and closed in the name of the FHA-approved mortgagee.
As contemplated by this proposed rule, upon promulgation of the
final rule that will follow this proposed rule, entities that are
already approved by FHA as loan correspondents would not be permitted
to renew their status, or convert their approval to mortgagee, and only
FHA-approved mortgagees would be allowed to request FHA case numbers.
The advantages of this limitation of FHA lender approval authority
are twofold. First, this change focuses the administrative burden of
the lender approval process to those entities (and HUD recognizes that
a stringent approval process necessitates some administrative burden)
that bear the greatest responsibility for the validity and eligibility
of the loan for FHA insurance. It is the mortgagee that determines
whether a borrower qualifies for the mortgage for which the borrower
applied and, therefore, determines the risk of lending money to the
borrower. This is the most critical determination of the mortgage
process. Second, the change allows loan correspondents to continue to
participate in the FHA loan origination process, but without having to
undergo the lender approval process.
2. Ineligibility To Participate in Origination of FHA-Insured
Loans. In addition to limiting the FHA lender approval process to
mortgagees, this proposed rule incorporates criteria specified in
section 203 of the HFSH Act that precludes any lending entity not
approved by the Secretary to participate in FHA programs or not in
compliance with the following eligibility requirements from originating
an FHA-insured loan. Section 203(b) of the HFSH Act adds a new
subsection (d) to section 202 of the National Housing Act, provides as
follows: ``LIMITATIONS ON PARTICIPATION IN ORIGINATION AND MORTGAGEE
APPROVAL.--
``REQUIREMENT.--Any person or entity that is not approved
by the Secretary to serve as a mortgagee, as such term is defined in
subsection (c)(7), shall not participate in the origination of an
FHA-insured loan except as authorized by the Secretary.
``ELIGIBILITY FOR APPROVAL.--In order to be eligible for
approval by the Secretary, an applicant mortgagee shall not be, and
shall not have any officer, partner, director, principal, manager,
supervisor, loan processor, loan underwriter, or loan originator of
the applicant mortgagee who is--
[cir] ``currently suspended, debarred, under a limited denial of
participation (LDP), or otherwise restricted under part 25 of title
24 of the Code of Federal Regulations, 2 Code of Federal
Regulations, part 180 as implemented by part 2424, or any successor
regulations to such parts, or under similar provisions of any other
Federal agency;
[cir] ``under indictment for, or has been convicted of, an
offense that reflects adversely upon the applicant's integrity,
competence or fitness to meet the responsibilities of an approved
mortgagee;
[cir] ``subject to unresolved findings contained in a Department
of Housing and Urban Development or other governmental audit,
investigation, or review;
[cir] ``engaged in business practices that do not conform to
generally accepted practices of prudent mortgagees or that
demonstrate irresponsibility;
[cir] ``convicted of, or who has pled guilty or nolo contendre
to, a felony related to participation in the real estate or mortgage
loan industry--
[cir] ``during the 7-year period preceding the date of the
application for licensing and registration; or
[cir] ``at any time preceding such date of application, if such
felony involved an act of fraud, dishonesty, or a breach of trust,
or money laundering;
[cir] ``in violation of provisions of the S.A.F.E. Mortgage
Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable
provision of State law; or
[[Page 62524]]
[cir] ``in violation of any other requirement as established by
the Secretary.''
Given the specificity of the statutory language, implementation of
the criteria does not require rulemaking and the restrictions are,
therefore, currently in effect. These criteria were announced by the
Mortgagee Letter entitled ``Strengthening Counterparty Risk
Management,'' issued September 18, 2009, and can be found as document
number 09-31 at https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm. This rule proposes to update HUD's regulations to
conform to the statutory requirements. Although these are statutory
criteria which the Department does not have the discretion to alter,
HUD nevertheless welcomes comment on these criteria and on any other
comparable requirements that HUD should add to preclude participation
in the origination of FHA-insured loans, and welcomes comment on any of
the criteria for which an affected party seeks elaboration or guidance.
While this rule proposes to codify the new statutory ineligibility
criteria, this rule does not propose to revise current procedures in
place in FHA regulations and handbooks that are applicable to appeals
of adverse determinations. Additionally, these new statutory criteria
do not require HUD to propose enforcement mechanisms and procedures
beyond those already in place for enforcement of FHA requirements.
While the HFSH Act strengthens FHA's enforcement authority by expanding
HUD's ability to impose civil money penalties and strengthening the
authority of the Mortgagee Review Board, this increased authority does
not require additional enforcement procedures. The procedures already
in place by which FHA may take action against mortgagees in violation
of FHA requirements continue to be sufficient.
B. Strengthening the Capacity of FHA-Approved Mortgagees
FHA proposes to increase the net worth requirement for approved
mortgagees and those applicants seeking approval as mortgagees from
$250,000 to $2.5 million. In addition, FHA proposes to require
investing mortgagees to comply with the new net worth requirements. In
order to provide mortgagees with time to adjust to the new
requirements, the proposed rule would phase in the net worth increases
over a 3-year period.
Within one year of the effective date of the final rule resulting
from this rulemaking process, supervised and nonsupervised mortgagees
and investing mortgagees would be required to have a minimum net worth
of $1 million, of which at least 20 percent must be liquid assets
consisting of cash or its equivalent acceptable to the Secretary.
Mortgagees would be required to comply with the minimum net worth
requirement of $2.5 million within 3 years of the effective date of the
final rule, with at least 20 percent of such net worth consisting of
liquid assets.
The net worth requirements have not been updated since 1993. HUD's
proposal to increase the net worth requirements for FHA-approved
mortgagees is consistent with recent increases in net worth
requirements by the government sponsored enterprises. In September
2008, both Fannie Mae and Ginnie Mae increased the net worth
requirements for their business partners. Ginnie Mae now requires a net
worth of $1 million and Fannie Mae requires a net worth of $1.65
million. As of December 31, 2009, Fannie Mae's net worth requirements
will be increased further to $2.5 million plus a dollar amount that
represents one-quarter of one percent (.25 percent) of the outstanding
principal balance of the lender's total portfolio of mortgages serviced
for Fannie Mae. As is evidenced by the actions of Ginnie Mae and Fannie
Mae, the increases in required net worth proposed by FHA are consistent
with industry norms for counterparty risk management.
The net worth increases proposed in this rule reflect not only
necessary adjustments for inflation, but also the lessons learned as a
result of the housing market crisis. The changes will help to ensure
that FHA-approved lenders, including investing mortgagees, are
sufficiently capitalized to meet the potential needs associated with
the financial services they provide.
The proposed rule would also simplify the net worth requirements by
establishing uniform requirements for Title I and Title II mortgagees.
Under the current regulations at 24 CFR 202.5(n), Title II supervised
and unsupervised mortgagees (except multifamily mortgagees) are
required to maintain additional net worth in excess of the existing
requirements of not less than one percent of the mortgage volume
exceeding $25 million, but total net worth is not required to exceed $1
million. This proposed rule would eliminate the additional net worth
requirements for title II mortgagees.
C. Use of HUD Registered Business Name and Business Changes
In addition to the two significant proposed changes presented in
Sections II.A. and II.B. of this preamble, HUD proposes to codify the
statutory requirement presented in section 203 of the HFSH Act, which
directs FHA-approved mortgagees to use their HUD-registered business
names in all advertisements and promotional materials related to FHA
programs. HUD-registered business names include any alias or ``doing
business as'' (DBA) on file with FHA. In addition to codifying this
statutory requirement, this rule also proposes to codify the
requirements specified in FHA's Strengthening Counterparty Risk
Management Mortgagee Letter, issued September 18, 2009, and found at
https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm,
which directs FHA-approved mortgagees to maintain copies of all
advertisements and promotional materials for a period of 2 years from
the date that the materials are circulated or used for advertisement
purposes.
Through this rule, HUD also proposes to codify the requirement in
section 203 of the HFSH Act that requires mortgagees to notify FHA if
individual employees of the lender are subject to any sanction or other
administrative action. In incorporating this requirement, HUD also is
proposing to codify its existing requirements pertaining to
notification to FHA of business changes, such as changes in legal
structure, which are currently found in HUD Handbook 4060.1, REV-2,
Chapters 2 and 6.
D. The General Approval Standards for Mortgagees (24 CFR 202.5)
Section 202.5 of HUD's FHA regulations sets forth the general
approval standards for FHA-approved mortgagees. Because this section
sets forth the approval standards, this is the principal regulation
that is proposed to be amended by this rule. However, with the
exception of adding new provisions in Sec. 202.5(b) to address the use
of business name, and non-FHA approved entities, all other changes
proposed by this rule are changes to existing provisions. For example,
paragraph (f) concerning business changes, and paragraph (j), which
pertains to ineligibility, are expanded to include the statutory
requirements of the HFSH Act. Section 202.5(g), which addresses
financial statements, is proposed to be amended to include reference to
the requirement to submit an audited financial statement within 90 days
of the end of a mortgagee's fiscal year. The requirement to submit an
audited financial statement was initiated in FHA's Strengthening
Counterparty Risk Management Mortgagee Letter, issued September 18,
2009. (See https://
[[Page 62525]]
www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm.)
III. Justification for Shortened Public Comment Period
It is the general practice of the Department to provide a 60-day
public comment period on all proposed rules. The Department, however,
is reducing its usual 60-day public comment period to 30 days for this
proposed rule. As discussed in the preamble, although this rule
proposes to no longer approve loan correspondents as approved
participants in FHA programs, and to limit approval to mortgagees, this
does not mean that loan correspondents may no longer participate in the
FHA-insured loan origination process. Loan correspondents would
continue to be authorized to participate in the origination of FHA
loans through association with an FHA-approved mortgagee, but they
would no longer be subject to the rigorous FHA lender-approval process,
which is more appropriate for those entities that underwrite the loans.
The FHA-approved mortgagee will, in turn, act as sponsor as it has in
the past, and the sponsoring mortgagee will assume responsibility for
any loan correspondent that works with the mortgagee in the FHA-insured
loan, and assume liability for the FHA-insured loan underwritten and
closed in the name of the FHA-approved mortgagee. Therefore, this
change should not result in any loss of business by any currently FHA-
approved lending entity.
Additionally, although the proposed rule would raise the net worth
requirement for FHA-approved mortgagees, which have not been increased
in more than 15 years, the net worth requirements proposed are at a
level comparable to industry standard, as already discussed in the
preamble and as further discussed in Section IV of this preamble.
Additionally, to provide FHA-approved mortgagees with sufficient time
to meet the new requirements, HUD would phase in the net worth
increases over a 3-year period from the effective date of the final
rule resulting from this rulemaking. Within one year from the effective
date of the final rule, FHA-approved mortgagees would be required to
have a net worth of $1 million. At present, 60 percent of approved
mortgagees have a net worth of $1 million or more. Those that do not
currently meet the $1 million net worth requirement may choose to
increase their net worth to meet the new requirements or may
participate by partnering with an approved FHA mortgagee, as is the
case for loan correspondents. Within 3 years from the effective date of
the final rule, mortgagees would be required to have a net worth of
$2.5 million, a figure that is consistent with industry practice. It is
HUD's view, therefore, that this change, given the proposed net worth
requirement and the time to meet such requirement, as well as the other
avenues of participation in FHA programs available to those mortgagees
not able to meet the new net worth requirements, would not
significantly restrict any currently FHA-approved mortgagees from the
opportunity to participate in FHA programs.
The proposed rule would also update HUD's regulations to
incorporate criteria specified in the HFSH Act that precludes any
lending entity not approved by the Secretary to participate in FHA
programs or not in compliance with applicable eligibility requirements
from originating an FHA-insured loan. These are statutory restrictions,
which HUD does not have the authority to modify in response to comment.
The statutory provisions are currently in effect and the proposed
regulatory changes merely update HUD's regulations to conform to the
language of the HFSH Act.
Given that the changes proposed by this rule bring FHA up to date
with current industry standards and conform to explicit statutory
language, and would not result in significant changes to current FHA
participation, FHA believes a 30-day public comment period presents a
sufficient period for comment. Although HUD has determined that a
reduced comment period is merited in this case, the Department
continues to value public input in the rulemaking process. As noted,
the proposed rule solicits public comment for a period of 30 days, and
all comments received will be considered in the development of the
final rule.
IV. Findings and Certifications
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this proposed
rule under Executive Order 12866 (entitled ``Regulatory Planning and
Review''). A determination, as provided below, was made that this
proposed rule is a ``significant regulatory action,'' as defined in
section 3(f) of the Order (although not economically significant, as
provided in section 3(f)(1) of the Order).
The changes to the lender-approval process do not prevent
participation by entities that have to date been involved in FHA
programs, but rather limits the actual approval process to those
entities that underwrite, service, or own FHA-insured mortgages.
Therefore, loan correspondents and other non-FHA approved lenders can
continue to be involved in FHA loan origination by working with FHA-
approved mortgagees. Loan correspondents and other third-party
originators would be exempt, however, from completing the FHA lender
approval process.
The increase in net worth requirements, while seemingly a
significant increase from the current net worth requirements
established in 1993, is not significant when one considers the
following: the net worth requirement for FHA-approved lending entities
has not been increased in more than 15 years; the net worth increase
would not apply to loan correspondents; and, as previously discussed in
this preamble, the proposed net worth requirements are consistent with
those currently required by other Federal financial institutions with
which FHA-approved mortgagees conduct business and whose requirements
they must meet. The following provides further analysis of the
estimated impact of the increase in net requirements that supports
HUD's determination that this rule is not an economically significant
rule as defined by Executive Order 12866.
FHA does not presently collect audited financial statements from
supervised institutions. As a result, it is not possible to determine
if any of these entities that are currently FHA-approved would be
unable to meet the proposed increased net worth requirements.
Therefore, for the purposes of the following analysis, only data from
approved non-supervised mortgagees is considered. However, based upon
the fact that supervised institutions must meet much higher capital
standards established by Federal banking regulators (and to comply with
international Basel II standards), it is very unlikely that any
supervised institutions would fail to meet the proposed net worth
requirements. As a proxy, FHA analyzed Ginnie Mae net worth data for
its supervised lender issuers and discovered that none of these lenders
had a net worth below FHA's proposed requirement. In fact, the average
net worth of this cohort was $2.4 billion.
The enactment of the proposed rule would present two options to
mortgagees that currently possess a net worth below the proposed
$2,500,000 requirement:
1. Increase their net worth, within the 3 years of enactment of the
final rule, from the current $250,000 to $2.5
[[Page 62526]]
million, 20 percent of which must be held in liquid assets; or
2. Relinquish their status as an FHA-approved mortgagee and
continue conducting FHA business as a loan correspondent by initiating
a relationship with an approved mortgagee.
The actual economic impact of the proposed rule is the opportunity
cost of option 1 and the lost revenue and additional costs associated
with option 2. For mortgagees that choose option 1, it is anticipated
that the increase in net worth would be met largely by changing the
title of existing assets from the individual holdings of a mortgagees'
owners to those of the institutions. Returns on the assets would be
earned by the same individuals, whether they were held in the names of
the individuals or by the mortgagees that they owned. Thus, increasing
the minimum net worth requirement affects only the rate of return of
the capital invested, which is the true measure of the economic impact
of option 1. The impacts associated with this option are further
discussed below.
For mortgagees that choose option 2, the functional impact of the
option is that they no longer would be able to underwrite and process
the loans they originate. The economic impact that would result from
those limitations would be the loss of income from those aspects of the
FHA mortgage lending process they no longer would be permitted to
perform and the added costs they would be required to pay to their
sponsor for processing and underwriting. An analysis of the impacts for
mortgagees in choosing this option also is provided below.
If all mortgagees selected option 1 and transferred title from
existing assets, the actual impact of such an action is the opportunity
cost of holding those assets as net worth rather than investing them in
other potentially higher-yielding investments. The true measure of
economic impact is found by drilling down even farther to consider only
the opportunity cost associated with those assets that must be
converted to liquid form. Because assets held for net worth may still
be invested elsewhere, it is only the 20 percent liquid asset portion
of a mortgagee's capital that is affected by the increased net worth
requirement. However, the analysis below depicts both the opportunity
cost of the total capital transfer required to meet the higher net
worth standard, and the opportunity cost of the liquid assets necessary
to meet the requirement.
Table 1 below calculates the opportunity cost for mortgagees in
meeting the proposed net worth requirements based upon total net worth
needed. Table 2 calculates the opportunity cost in terms of required
liquid assets. Based on data from FHA's Lender Assessment SubSystem
(LASS), 24 mortgagees have a net worth equal to $250,000, 465
mortgagees have a net worth between $250,000 and $1 million, 350
mortgagees have a net worth between $1 million and $2.5 million, and
369 mortgagees have a net worth of greater than $2.5 million.
In Table 1 below, Column A lists the number of lenders in the
aforementioned categories. Column B lists the average net worth of the
mortgagees in each category. Column C subtracts the average net worth
from the new requirement of $2.5 million per mortgagee. Column D then
calculates the average opportunity cost per lender for each stratum.
The aggregate cost of this provision totals the opportunity cost of
holding the amount shown in Column C in net worth rather than investing
it in other potentially higher-yielding investments. The opportunity
cost in Column D therefore is calculated as the difference between the
average market rate of return and the risk-free interest rate. The
average market rate is represented by the real annualized return of the
S&P 500 between 1990 and 2008, which equals 4.5 percent. The risk-free
interest is the average 10-year Treasury rate between 1990 and 2008,
which equals 2.7 percent. The difference between these two rates equals
1.8 percent. Finally, the average opportunity cost of the increase in
the net worth requirement per mortgagee, shown in Column D, was
multiplied times Column A, the number of mortgagees in each category,
to calculate the total cost of the net worth requirement imposed by
this regulation, shown in Column E. As shown in Table 1, the total
opportunity cost for all mortgagees of holding the additional funds in
net worth totals $23.4 million.
Table 1--Calculation of Opportunity Cost to FHA-Approved Mortgagees for Full Capitalization
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) = (C)*1.8% (E) = (A)*(D)
-----------------------------------------------------------------------------------------
Net worth Average required
Number of Average net increase in net Average Aggregate
mortgagees worth worth opportunity cost opportunity cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K......................................................... 24 $250,000 $2,250,000 $40,500 $972,000
$250K......................................................... 465 539,345 1,960,655 35,292 16,410,780
$1M-$2.5M..................................................... 350 1,537,509 962,491 17,325 6,063,750
>$2.5M........................................................ 369 164,252,737
-----------------------------------------------------------------------------------------
Total..................................................... 1,208 ................ ................ ................ 23,446,530
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 2 below further extrapolates this data to assess the
opportunity cost associated with only that portion of net worth held in
liquid assets. The actual cost of this provision totals the opportunity
cost of holding 20 percent of total net worth as liquid assets rather
than investing it in other potentially higher-yielding investments. The
opportunity cost therefore is calculated in essentially the same
fashion as for Table 1. However, Column D of Table 2 lists the average
increase in required liquid assets for lenders in each category. The
opportunity cost is then calculated in the same fashion as described
for Table 1, by multiplying the amount shown in Column D times 1.8
percent. This figure is shown in Column E. The total cost of the
provision was then determined by multiplying the amount in Column E
times the number of lenders in each stratum listed in Column A. As
shown in Table 2, the opportunity cost of holding the additional
required liquid assets in net worth totals $4.7 million.\1\
---------------------------------------------------------------------------
\1\ Even if the percentage of required net worth held in liquid
assets were to yield no return whatsoever, utilizing the 4.5 percent
average market rate of return mentioned previously, the total
opportunity cost of the uninvested liquid assets would total just
$11,723,184.
[[Page 62527]]
Table 2--Calculation of Opportunity Cost to FHA-Approved Mortgagees for Liquid Holdings
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) = (C)*20% (E) = (D)*1.8% (F) = (A)*(E)
-----------------------------------------------------------------------------------------------------------
Net worth Average required
Number of Average net increase in net Average increase Aggregate Aggregate
mortgagees worth worth in liquid assets opportunity cost opportunity cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
$250K....................................... 24 $250,000 $2,250,000 $450,000 $8,100 $194,400
$250K....................................... 465 539,345 1,960,655 392,131 7,058 3,282,137
$1M-$2.5M................................... 350 1,537,509 962,491 192,498 3,465 1,212,738
>$2.5M...................................... 369 164,252,737
-----------------------------------------------------------------------------------------------------------
Total................................... 1,208 ................ ................ ................ ................ 4,689,275
--------------------------------------------------------------------------------------------------------------------------------------------------------
If all mortgagees selected option 2, the economic impact again
would issue from lost revenue derived from those aspects of the FHA
mortgage lending process they no longer would be permitted to perform
and the added costs they would be required to pay to their sponsor for
processing and underwriting. There are four primary ways in which a
lender can receive income from the mortgage business: (1) Origination
fees, (2) servicing release premiums, (3) servicing fees, and (4)
income derived from securitization. The potential income derived from
these revenue streams is as follows:
(1) FHA origination fees are capped at 1 percent of the loan
amount.
(2) The industry standard for servicing release premiums is between
75 to 100 basis points of a loan's unpaid principal balance at the time
of sale.
(3) The average annual servicing fee of an FHA loan is 30 basis
points on the unpaid principal balance.
(4) Income derived from securitization will not be considered
because a mortgagee must meet the higher net worth already required by
Ginnie Mae, Fannie Mae, and Freddie Mac in order to participate in the
respective securitization programs.
FHA analyzed the origination patterns of the mortgagees that would
be affected over a 2-year period from August 31, 2007 to September 30,
2009. It should be noted that the vast majority of lenders reviewed do
not service a mortgage portfolio but rather sell their mortgages to
aggregators.
As is seen in Table 3 below, of the 489 lenders with a net worth
less than the proposed $1 million, 355 have originated at least one
loan in the 2-year sample period. Of the 350 lenders above the proposed
$1 million net worth but below the proposed $2.5 million, 299 have
originated at least one loan during the 2-year sample period. Since the
affected mortgagees still would be permitted to originate FHA loans for
a fee and would be entitled to income streams derived from servicing
release premiums, the only economic impact would be from the costs
these lenders pay to FHA-approved lenders for the processing and
underwriting of the mortgages sold. Table 3 provides information
regarding the economic impact if all lenders opted to relinquish their
FHA approval and operate via a relationship with an FHA-approved
mortgagee. Column A lists the number of lenders in each net worth
category. Column B lists only the number of lenders in each category
that originated at least one loan in the 2-year period from August 31,
2007, to September 30, 2009. Column C provides the average yearly
originations performed by each stratum for the 2-year period. Column D
calculates the average number of originations performed per lender by
dividing Column C by column B. Column E calculates the average total
processing and underwriting fees paid by loan correspondents for loans
they originated by multiplying the amount in Column D times $200, the
average fee required by a mortgagee for these services. Column F
calculates the total cost of these fees for loan correspondents by
multiplying Column E by Column B. As is seen from Table 3, the economic
impact of this option is $45.1 million.
Table 3--Calculation of Lost Revenue for Mortgagees That Relinquish Their FHA Approval
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) = (C)/(B) (E) = (D)*$200 (F) = (E)*(B)
-----------------------------------------------------------------------------------------------------------
Lenders w/ Avg. number of Avg. loan
Total number of originations in yearly Avg. number of processing fee/ Aggregate loan
lenders 2-year period originations orig/lender lender processing fee
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$250K < $1M................................ 489 355 87,455 246 $49,200 $17,466,000
$1M-$2.5M................................... 350 299 138,289 463 92,600 27,687,400
Total................................... ................ ................ ................ ................ ................ 45,153,400
--------------------------------------------------------------------------------------------------------------------------------------------------------
As is evidenced above, under either option a mortgagee adopts to
accommodate the proposed increase in net worth requirements, the total
economic impact is below $100 million. FHA believes that the method of
assessment outlined here is the most true and accurate accounting of
the economic impacts of this proposed rule.
As part of the public comments that HUD is soliciting on this rule,
HUD also solicits public comment on its analysis and welcomes feedback
on potential effects that commenters believe this rule will have on
competition in financial and housing markets, with particular emphasis
on the ability of mortgagees to transfer assets in order to increase
their net worth.
The docket file is available for public inspection in the
Regulations Division, Office of General Counsel, Department of Housing
and Urban Development, 451 7th Street, SW, Room 10276, Washington, DC
20410-0500. Due to security measures at the HUD Headquarters building,
please schedule an appointment to review the docket file by calling the
Regulations Division at 202-402-3055 (this is not a toll-free number).
Individuals with speech or hearing impairments may access this number
via TTY by calling the Federal Information Relay Service at 800-877-
8339.
[[Page 62528]]
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.
Currently, there are 13,831 FHA-approved lending entities. Of these
approved entities, 28 percent are approved mortgagees, 68 percent are
approved correspondents, and the remaining 4 percent constitute
government mortgagees or investing mortgagees. Of FHA-approved
mortgagees, only 60 percent currently have a net worth of $1 million or
more. An additional 20 percent of approved mortgagees have a net worth
greater than $500,000. Thus, a significant portion of these mortgagees
could be expected to achieve a net worth of $1 million within the one
year period prior to the net worth requirement taking effect. Those
that are unable to meet the new net worth requirement in that time
would still be able to participate in FHA programs by partnering with
an approved mortgagee.
The small entities that participate in the FHA loan origination
have, to date, largely been loan correspondents. As discussed in this
preamble, the proposed rule would not deny loan correspondents the
ability to continue to participate in the origination of FHA-insured
loans. Rather, the proposed regulatory changes would alleviate the
administrative burden imposed on loan correspondents by no longer
requiring them to apply separately for FHA approval. The changes
proposed by this rule allow smaller entities to continue to be involved
in the origination of FHA-insured loans without having to come under
the FHA approval process and meet net worth requirements.
Accordingly, 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 the preamble to this rule.
Environmental Impact
This rule does not direct, provide for assistance or loan and
mortgage insurance for, or otherwise govern or regulate, real property
acquisition, disposition, leasing, rehabilitation, alteration,
demolition or new construction, or establish, revise, or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. This rule is limited to the eligibility of those
entities that may be approved as FHA-approved lenders. Accordingly,
under 24 CFR 50.19(c)(1), this rule is categorically excluded from
environmental review under the National Environmental Policy Act of
1969 (42 U.S.C. 4321).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on State and local
governments and is not required by statute, or the rule preempts State
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This proposed rule would not have
federalism implications and would not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for Federal agencies to
assess the effects of their regulatory actions on State, local, and
Tribal governments, and on the private sector. This proposed rule would
not impose any Federal mandates on any State, local, or Tribal
governments, or on the private sector, within the meaning of the UMRA.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance (CFDA) Program number is
14.183.
List of Subjects in 24 CFR Part 202
Administrative practice and procedure, Home improvement,
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, for the reasons stated above, HUD proposes to amend 24
CFR part 202 as follows:
PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES
1. The authority citation for 24 CFR part 202 continues to read as
follows:
Authority: 12 U.S.C. 1703, 1709, and 1715b; 42 U.S.C. 3535(d).
2. In Sec. 202.2, the definition mortgagee or Title II mortgagee
is revised to read as follows:
Sec. 202.2 Definitions.
* * * * *
Mortgagee or Title II mortgagee means a mortgage lender that is
approved to participate in the Title II programs as a supervised
mortgagee under Sec. 202.6, a nonsupervised mortgagee under Sec.
202.7, an investing mortgagee under Sec. 202.9, or a governmental or
similar institution under Sec. 202.10.
* * * * *
3. In Sec. 202.3, revise paragraphs (a) introductory text and
(a)(1) to read as follows:
Sec. 202.3 Approval status for lenders and mortgagees.
(a) Initial approval. A lender or mortgagee may be approved for
participation in the Title I or Title II programs upon filing a request
for approval on a form prescribed by the Secretary and signed by the
applicant. The approval form shall be accompanied by such documentation
as may be prescribed by the Secretary.
(1) Approval is signified by:
(i) The Secretary's agreement that the lender or mortgagee is
considered approved under the Title I or Title II programs, except as
otherwise ordered by the Mortgagee Review Board or an officer or
subdivision of the Department to which the Mortgagee Review Board has
delegated its power, unless the lender or mortgagee voluntarily
relinquishes its approval;
(ii) Consent by the lender or mortgagee to comply at all times with
the general approval requirements of Sec. 202.5, and with additional
requirements governing the particular class of lender or mortgagee for
which it was approved as described under subpart B at Sec. Sec. 202.6
through 202.10; and
(iii) Under the Title I program, the issuance of a Contract of
Insurance constitutes an agreement between the Secretary and the lender
and which governs participation in the Title I program.
* * * * *
4. Revise Sec. 202.5 to read as follows:
Sec. 202.5 General approval standards.
To be approved for participation in the Title I or Title II
programs, and to maintain approval, a lender or mortgagee shall meet
and continue to meet the general requirements of paragraphs (a) through
(n) of this section (except as provided in Sec. 202.10(b)) and the
requirements for one of the eligible
[[Page 62529]]
classes of lenders or mortgagees in Sec. Sec. 202.6 through 202.10.
(a) Business form. (1) The lender or mortgagee shall be a
corporation or other chartered institution, a permanent organization
having succession, or a partnership. A partnership must meet the
requirements of paragraphs (a)(1)(i) through (iv) of this section.
(i) Each general partner must be a corporation or other chartered
institution consisting of two or more persons.
(ii) One general partner must be designated as the managing general
partner. The managing general partner shall comply with the
requirements of paragraphs (b), (c), and (f) of this section. The
managing general partner must have as its principal activity the
management of one or more partnerships, all of which are mortgage
lenders or property improvement or manufactured home lenders, and must
have exclusive authority to deal directly with the Secretary on behalf
of each partnership. Newly admitted partners must agree to the
management of the partnership by the designated managing general
partner. If the managing general partner withdraws or is removed from
the partnership for any reason, a new managing general partner shall be
substituted, and the Secretary shall be immediately notified of the
substitution.
(iii) The partnership agreement shall specify that the partnership
shall exist for the minimum term of years required by the Secretary.
All insured mortgages and Title I loans held by the partnership shall
be transferred to a lender or mortgagee approved under this part prior
to the termination of the partnership. The partnership shall be
specifically authorized to continue its existence if a partner
withdraws.
(iv) The Secretary must be notified immediately of any amendments
to the partnership agreement that would affect the partnership's
actions under the Title I or Title II programs.
(2) Use of business name. The lender or mortgagee must use its HUD-
registered business name in all advertisements and promotional
materials related to FHA programs. HUD-registered business names
include any alias or ``doing business as'' (DBA) on file with FHA. The
lender or mortgagee must keep copies of all print and electronic
advertisements and promotional materials for a period of 2 years from
the date that the materials are circulated or used to advertise.
(3) Non-FHA-approved entities. A lender or mortgagee that accepts a
loan application by a non-FHA-approved entity must determine that the
non-FHA-approved entity is not subject to the sanctions or
administrative actions listed in paragraph (j) of this section, and
that the entity's legal name and Tax ID number are included in the FHA
loan origination system record for the subject loan. The loan to be
insured by FHA must be underwritten by and closed in the name of the
FHA-approved lender or mortgagee.
(b) Employees. The lender or mortgagee shall employ competent
personnel trained to perform their assigned responsibilities in
consumer or mortgage lending, including origination, servicing, and
collection activities, and shall maintain adequate staff and facilities
to originate and service mortgages or Title I loans, in accordance with
applicable regulations, to the extent the mortgagee or lender engages
in such activities.
(c) Officers. All employees who will sign applications for mortgage
insurance on behalf of the mortgagee or report loans for insurance
shall be corporate officers or shall otherwise be authorized to bind
the lender or mortgagee in the origination transaction. The lender or
mortgagee shall ensure that an authorized person reports all
originations, purchases, and sales of Title I loans or Title II
mortgages to the Secretary for the purpose of obtaining or transferring
insurance coverage.
(d) Escrows. The lender or mortgagee shall not use escrow funds for
any purpose other than that for which they were received. It shall
segregate escrow commitment deposits, work completion deposits, and all
periodic payments received under loans or insured mortgages on account
of ground rents, taxes, assessments, and insurance charges or premiums,
and shall deposit such funds with one or more financial institutions in
a special account or accounts that are fully insured by the Federal
Deposit Insurance Corporation or the National Credit Union
Administration, except as otherwise provided in writing by the
Secretary.
(e) Servicing. A lender shall service or arrange for servicing of
the loan in accordance with the requirements of 24 CFR part 201. A
mortgagee shall service or arrange for servicing of the mortgage in
accordance with the servicing responsibilities contained in subpart C
of 24 CFR part 203 and in 24 CFR part 207, with all other applicable
regulations contained in this title, and with such additional
conditions and requirements as the Secretary may impose.
(f) Business changes. The lender or mortgagee shall provide prompt
notification to the Secretary, in such form as prescribed by the
Secretary, of:
(1) All changes in its legal structure, including, but not limited
to, mergers, terminations, name, location, control of ownership, and
character of business; and
(2) Any officer, partner, director, principal, manager, supervisor,
loan processor, loan underwriter, loan originator, or employee of the
lender or mortgagee, or the lender or mortgagee itself, that is subject
to one or more of the sanctions in paragraph (j) of this section.
(g) Financial statements. The lender or mortgagee shall furnish to
the Secretary a copy of its annual audited financial statement within
90 days of its fiscal year end, furnish such other information as the
Secretary may request, and submit to an examination of that portion of
its records that relates to its Title I and/or Title II program
activities.
(h) Quality control plan. The lender or mortgagee shall implement a
written quality control plan, acceptable to the Secretary, that assures
compliance with the regulations and other issuances of the Secretary
regarding loan or mortgage origination and servicing.
(i) Fees. The lender or mortgagee, unless approved under Sec.
202.10, shall pay an application fee and annual fees, including
additional fees for each branch office authorized to originate Title I
loans or submit applications for mortgage insurance, at such times and
in such amounts as the Secretary may require. The Secretary may
identify additional classes or groups of lenders or mortgagees that may
be exempt from one or more of these fees.
(j) Ineligibility. For a lender or mortgagee to be eligible for FHA
approval, neither the lender or mortgagee, nor any officer, partner,
director, principal, manager, supervisor, loan processor, loan
underwriter, loan originator, or employee of the lender or mortgagee
shall:
(1) Be suspended, debarred, under a limited denial of participation
(LDP), or otherwise restricted under 2 CFR part 2424 or 24 CFR part 25,
or under similar procedures of any other Federal agency;
(2) Be indicted for, or have been convicted of, an offense that
reflects adversely upon the integrity, competency, or fitness to meet
the responsibilities of the lender or mortgagee to participate in the
Title I or Title II programs;
(3) Be subject to unresolved findings as a result of HUD or other
governmental audit, investigation, or review;
(4) Be engaged in business practices that do not conform to
generally accepted practices of prudent
[[Page 62530]]
mortgagees or that demonstrate irresponsibility;
(5) Be convicted of, or have pled guilty or nolo contendre to, a
felony related to participation in the real estate or mortgage loan
industry:
(i) During the 7-year period preceding the date of the application
for licensing and registration; or
(ii) At any time preceding such date of application, if such felony
involved an act of fraud, dishonesty, or a breach of trust or money
laundering;
(6) In violation of provisions of the Secure and Fair Enforcement
(SAFE) Mortgage Licensing Act of 2008 (12.U.S.C. 5101 et seq.) or any
applicable provision of State law; or
(7) In violation of any other requirement established by the
Secretary.
(k) Branch offices. A lender may, upon approval by the Secretary,
maintain branch offices for the origination of Title I loans. A branch
office of a mortgagee must be registered with the Department in order
to originate mortgages or submit applications for mortgage insurance.
The lender or mortgagee shall remain fully responsible to the Secretary
for the actions of its branch offices.
(l) Conflict of interest and responsibility. (1) A mortgagee may
not pay anything of value, directly or indirectly, in connection with
any insured mortgage transaction or transactions to any person or
entity if such person or entity has received any other consideration
from the mortgagor, seller, builder, or any other person for services
related to such transactions or related to the purchase or sale of the
mortgaged property, except that consideration, approved by the
Secretary, may be paid for services actually performed. The mortgagee
shall not pay a referral fee to any person or organization.
(2) Responsibility. FHA-approved lenders and mortgagees assume
responsibility for ensuring that the lending entities with which they
do business (e.g., loan correspondents, mortgage brokers) are not
ineligible (as provided in paragraph (j) of this section) to
participate in the origination of FHA-insured loans.
(m) Reports. Each lender and mortgagee must submit a yearly
verification report on a form prescribed by the Secretary. Upon
application for approval and with each annual recertification, each
lender and mortgagee must submit a certification that it has not been
refused a license and has not been sanctioned by any State or States in
which it will originate insured mortgages or Title I loans. In
addition, each mortgagee shall file the following:
(1) An audited or unaudited financial statement, within 30 days of
the end of each fiscal quarter in which the mortgagee experiences an
operating loss of 20 percent of its net worth, and until the mortgagee
demonstrates an operating profit for 2 consecutive quarters or until
the next recertification, whichever is the longer period; and
(2) A statement of net worth within 30 days of the commencement of
voluntary or involuntary bankruptcy, conservatorship, receivership, or
any transfer of control to a Federal or State supervisory agency.
(n) Net worth. (1) Effective on [date 1 year after the effective
date of final rule], each supervised or nonsupervised lender or
mortgagee approved under Sec. 202.6 and Sec. 202.7 and each investing
lender and mortgagee approved under Sec. 202.9 shall have a net worth
of not less than $1,000,000, of which no less than 20 percent must be
liquid assets consisting of cash or its equivalent acceptable to the
Secretary.
(2) Effective on [date 3
