[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Rules and Regulations]
[Pages 19788-19800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10885]
[[Page 19787]]
_______________________________________________________________________
Part VIII
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 201
Title I Property Improvement and Manufactured Home Loan Insurance
Programs; Final Rule
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules
and Regulations
[[Page 19788]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 201
[Docket No. FR-3718-I-01]
RIN 2502-AG32
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner; Title I Property Improvement and Manufactured Home Loan
Insurance Programs
AGENCY: Office of the Assistant Secretary for Housing Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This interim rule amends the Department's regulations
implementing its property improvement and manufactured home loan
insurance programs under title I, section 2 of the National Housing
Act. This interim rule amends the regulations to codify program changes
that were previously effectuated by waiving various requirements of the
regulations, under the Secretary's general waiver authority. The
interim rule also makes other changes that are needed to clarify
program requirements, to enable the Department to better use the Title
I programs in accomplishing its mission, and to eliminate unnecessary
regulations.
DATES: Effective date: June 3, 1996.
Comments due date: July 1, 1996.
ADDRESSES: Interested persons are invited to submit comments regarding
this interim rule to the Rules Docket Clerk, Office of the General
Counsel, Department of Housing and Urban Development, Room 10276, 451
Seventh Street SW., Washington, DC 20410. Communications should refer
to the above docket number and title. A copy of each communication
submitted will be available for public inspection and copying during
regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above
address. HUD will not accept comments sent by facsimile (FAX).
FOR FURTHER INFORMATION CONTACT: Robert J. Coyle, Director, Title I
Insurance Division, 490 L'Enfant Plaza East, Suite 3214, Washington, DC
20024, telephone (202) 755-7400. This number is not toll-free. Hearing-
or speech-impaired individuals may access this number via TTY by
calling the Federal Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act Requirements
The information collection requirements in this interim rule have
been approved by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act (44 U.S.C. 3501-3520) and were assigned OMB
control number 2502-0328. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless the collection displays a valid control number.
Introduction
Under title I, section 2 of the National Housing Act (12 U.S.C.
1703), the Department insures approved lenders against losses sustained
as a result of borrower defaults on property improvement loans and
manufactured home loans. The regulations implementing the Title I
programs are in 24 CFR part 201.
This interim rule amends part 201 to codify program changes that
were previously effectuated by waiving various requirements of the
regulations, under the Secretary's general waiver authority in
Sec. 201.5(a). The Department informed all approved Title I lenders of
these changes in three Title I Letters: TI-428, issued July 22, 1994;
TI-429, issued October 6, 1994; and TI-431, issued June 5, 1995.
These program changes were the result of an outreach process in
which the Department received recommendations from a wide variety of
program participants, including lenders, State and local government
agencies, nonprofit organizations, manufactured home retailers and
producers, insurance companies, trade associations, and owners of
manufactured homes. They reflect a significant redirection of the Title
I programs to serve community development needs, with a focus on
assisting low- and moderate-income families in making needed repairs to
their homes, supporting revitalization and rebuilding efforts in
central cities, upgrading housing in rural areas and other underserved
credit areas, and enabling first-time homebuyers to purchase affordable
housing.
The waivers announced in TI-428, TI-429, and TI-431 were limited in
duration until the Department could make the necessary changes in the
regulations. Accordingly, as of the effective date of this interim
rule, those waivers are no longer operative.
This interim rule also amends part 201 to make other changes
necessary to clarify program requirements, to enable the Department to
better utilize the Title I programs in accomplishing its mission, and
to eliminate unnecessary regulations. Each of the program changes is
discussed in the sections that follow.
Changes Affecting Both Title I Loan Programs
Changes in the Title I regulations that apply to both property
improvement and manufactured home loans include the following:
clarifying dealer approval requirements; limiting discount points paid
by borrowers; prohibiting discount points from being collected from
dealers; prohibiting penalties for loan prepayment; permitting
financial assistance in meeting the borrower's initial payment;
providing that eligible fees and charges will be established by the
Secretary, but removing the specific fees and charges from the
regulations; revising flood insurance requirements; and eliminating the
annual adjustment in the lender's insurance reserves.
Dealer Approval Requirements
Section 201.27(a)(2) requires that the dealer's financial statement
be prepared by a licensed public accountant. This licensing requirement
was waived in TI-428, because the Department determined that it imposed
a burden on small dealers, particularly in the property improvement
loan program. In place of the licensing requirement, the Department
stated that it expected the lender to take into consideration whether
the financial statement was prepared by someone who is independent of
the dealer and is qualified by education and experience to prepare such
statements.
Accordingly, this interim rule amends Sec. 201.27(a)(2) by
eliminating the requirement that the financial statement be prepared by
a licensed public accountant and substituting the phrase ``someone who
is independent of the dealer and is qualified by education and
experience to prepare such statements.''
Payment of Discount Points by Borrowers
Section 201.13 states that the lender and the borrower may
negotiate the amount of any discount points to be paid by the borrower
as part of the borrower's initial payment. As used in the Title I
regulations, the Department intends the term ``discount points'' to
have the same meaning it has throughout the banking, finance, and
investment communities--that is, an up front fee charged by the lender,
separate from interest but part of the total finance charge, that is to
increase the lender's yield on the loan to a competitive
[[Page 19789]]
position with other types of investments.
In recent years, property improvement lenders in certain areas of
the country have been charging high up-front fees to borrowers and
calling them ``discount points,'' although they seem to have no
relationship to the lender's overall yield on the loan. Rather, they
are being used to cover the lender's costs in originating the loan and
marketing the Title I program. The Department's Monitoring Division has
found evidence that these ``discount points'' are often financed from
the loan proceeds, in contravention of the program regulations. The
result is that many low- and moderate-income borrowers, who are
otherwise creditworthy and need Title I loans, cannot obtain them
because of the high discount points.
In TI-431, the Department announced that the continued practice of
borrowers' being charged high levels of ``discount points'' when there
was no benefit to the borrower in the form of a lower interest rate was
no longer acceptable. TI-431 stated that the collection of discount
points from the borrower was no longer permitted, unless the lender
could demonstrate a clear relationship between the charging of discount
points and some tangible benefit to the borrower such as a compensating
decrease in the interest rate being charged.
To clarify the Department's intent, this interim rule amends
Sec. 201.2 to define ``discount points'' as ``a fee charged by the
lender, separate from interest but part of the lender's total yield on
the loan needed to maintain a competitive position with other types of
investments. One discount point equals one percent of the principal
amount of the loan. As discount points on the loan increase, the
interest rate can be expected to decrease in a fairly consistent
relationship.''
Payment of Discount Points by Dealers
Section 201.13 states that the lender and the dealer may negotiate
the amount of any discount points to be paid by the dealer for the
benefit of the borrower. The purpose of this provision, which was added
to the regulations in 1986, was to enable the dealer to assist the
borrower by paying some of the up-front costs of obtaining a Title I
loan, or by buying down the interest rate so that the borrower could
qualify for the loan. Some lenders have abused this provision, charging
``discount points'' to dealers for the acceptance of borrowers with
marginal credit, and inflating the cost of home improvements to the
detriment of low- and moderate-income borrowers.
In TI-428, the Department clarified that certain financeable fees
and charges incurred by the lender could be paid by the dealer. TI-428
stated that the dealer could advance the funds for these items and
could be reimbursed by the lender from the loan proceeds.
Alternatively, the lender could advance the funds for these items and
then deduct their cost from the loan proceeds paid to the dealer. In
either case, TI-428 made clear that there must be full disclosure that
these items had been added to the price of the goods and/or services
being provided by the dealer.
The Department informed lenders that, with this clarification on
the fees and charges that may be paid by dealers, the collection of
discount points from dealers was no longer necessary. The Department
urged lenders to discontinue the practice of collecting discount points
from dealers when those points were unrelated to the financeable fees
and charges. The Department advised lenders that, if they failed to
comply with this request voluntarily, the Department would amend the
regulations to prohibit any collection of discount points from dealers.
Since TI-428 was issued on July 22, 1994, the Department's
Monitoring Division has found that many lenders have continued the
practice of collecting ``discount points'' that are not for the benefit
of the borrower and bear no relation to the payment of fees and charges
that may be paid by the dealer. Therefore, this interim rule amends
Sec. 201.13 to prohibit the payment of discount points by any party
other than the borrower. Conforming amendments are also made to
Sec. 201.26(a)(5)(ii), (b)(3)(vii), (b)(4)(vii), and (b)(4)(viii).
Loan Prepayment Without Penalty
Section 201.17 requires that the loan note contain a provision
permitting full or partial prepayment of the loan.
That section previously contained a requirement that when a loan
was prepaid in full, the lender must rebate all unearned interest on
the loan, except for a minimum retained handling charge if permitted by
State or local law. The Department had intended this requirement to
preclude lenders from exacting a prepayment penalty.
The Department removed this requirement in a final rule published
in the Federal Register on October 18, 1991 (56 FR 52414, 52430). As
stated in the preamble to the October 18, 1991 final rule, the
Department determined that, since interest on all loans with
applications approved on or after January 15, 1986 must be calculated
according to the actuarial method, there should be no unearned
interest, and therefore the requirement was unnecessary. However, in
amending Sec. 201.17, the Department inadvertently failed to include
the replacement language to prohibit lenders from charging a prepayment
penalty on loans made since January 1986.
Some lenders have taken advantage of this oversight to assess
penalties of as much as six months' advance interest on loans that are
prepaid within the first five years of the loan term. Assessing a high
prepayment penalty prevents many borrowers from refinancing their loans
to take advantage of lower interest rates, even when this may be to
their benefit. Prepayment penalties are particularly troublesome in the
case of low- and moderate-income borrowers who do not have the cash
reserves to pay the penalty.
Accordingly, this interim rule restores the requirement in
Sec. 201.17 that full or partial prepayment of the loan must be without
penalty, except that the borrower may be assessed reasonable and
customary charges for recording a release of the lender's security
interest in the property, if permitted by State law.
Financial Assistance on the Initial Payment
Section 201.23(a) provides that, if any part of the borrower's
initial payment is loaned to the borrower, that loan must be secured by
property or collateral owned by the borrower independently of the
property securing the Title I loan. The Department has had several
cases in which financial assistance was available from a governmental
agency or nonprofit organization to help low- and moderate-income
borrowers meet the up-front costs of obtaining a property improvement
or manufactured home loan. This assistance was in the form of a loan
requiring that the borrower provide a ``soft second'' lien on the
property, so that the loan might be repaid at the time the property is
sold. In these situations, the Department needs greater flexibility to
allow for exceptions to the requirement that the loan be secured by a
different property.
Accordingly, this interim rule amends Sec. 201.23(a) to provide
that if any part of the borrower's initial payment is loaned to the
borrower, that loan must be secured by property or collateral owned by
the borrower independently of the property securing the Title I loan,
unless the Secretary's prior approval is obtained for an exception to
this requirement.
[[Page 19790]]
Eligible Fees and Charges
Section 201.25(a) establishes maximum origination fees that may be
charged in connection with any new or refinanced Title I loan. Section
201.25(b) lists those fees and charges that may be financed in a
property improvement or manufactured home loan, as long as their
inclusion does not increase the total principal obligation beyond the
maximum loan amounts in Sec. 201.10. Section 201.25(c) lists fees and
charges that may be collected from the borrower in the initial payment,
but may not be included in the loan amount or otherwise financed or
advanced by the dealer, manufacturer, or any other party to the loan
transaction.
In TI-429 and TI-431, the Department waived Sec. 201.25(a) and
(c)(1) to increase the maximum origination fee for any new property
improvement loan and to permit this fee to be financed. In TI-428, the
Department waived Sec. 201.25(c) (3) and (4) to permit recording fees,
recording taxes, filing fees, and documentary stamp taxes to be
financed for both property improvement and manufactured home loans. In
that letter, the Department also waived Sec. 201.25(c)(8) to permit
appraisal fees in connection with the purchase or refinancing of a
manufactured home and/or lot to be financed.
However, as a result of the Department's page-by-page review of its
regulations, it has determined that the inclusion of detailed lists of
eligible fees and charges in the program regulations is unnecessary.
Changes to the list of eligible fees and charges are sometimes needed,
and program participants would benefit greatly if these changes could
be made in a more timely manner than through the rulemaking process.
Accordingly, this interim rule amends Sec. 201.25 (a) and (b) to
provide that the Secretary will establish a list of fees and charges
that may be included in property improvement loans and manufactured
home loans, respectively, provided that they are incurred in
originating the loan and their inclusion does not increase the total
principal obligation beyond the maximum loan amounts in Sec. 201.10.
The interim rule also amends Sec. 201.25(c) to provide that the
Secretary will establish a list of fees and charges incurred by the
lender that may be collected from the borrower in the initial payment,
but may not be included in the loan amount or otherwise financed or
advanced by the dealer, the manufacturer, or any other party to the
loan transaction.
Concurrently with the publication of this interim rule, the
Department will issue a Title I Letter that identifies the specific
fees and charges that may be financed in a property improvement or
manufactured home loan, as well as the fees and charges that may be
collected from the borrower but may not be financed in the loan. The
fees and charges that were the subject of waivers in TI-428, TI-429,
and TI-431 will be included in the Title I Letter.
Revised Flood Insurance Requirements
Section 201.28(a) requires flood insurance coverage if the property
securing a Title I loan is located in a special flood hazard area as
identified by the Federal Emergency Management Agency (FEMA). The
National Flood Insurance Reform Act of 1994 (Pub. L. 103-325, approved
September 23, 1994) amended and expanded the flood insurance
requirements of the Flood Disaster Protection Act of 1973 (Pub. L. 93-
234, approved December 31, 1973). The 1994 Act requires that flood
insurance be obtained at any time during the term of the loan that a
supervised lender or its servicer determines that the secured property
is located in a special flood hazard area identified by FEMA. If the
borrower does not obtain flood insurance within 45 days after being
notified by the lender or servicer that it is required, the lender is
expected to force-place the insurance and bill the borrower for the
premiums.
It has been a longstanding policy of the Department that all
secured Title I loans are subject to Federal flood insurance
requirements. The Department expects all lenders, whether supervised or
nonsupervised, to comply fully with the requirements of the 1994 Act.
Accordingly, this interim rule amends Sec. 201.28(a) to reflect the new
statutory requirements and make them applicable to all Title I lenders.
Lenders may make their own flood hazard area determinations, or
they may use outside firms that specialize in providing this
information. If an outside firm is used, the fee for obtaining the
flood hazard area determination, including the cost of life-of-the-loan
determinations, may be included in the loan amount, as long as the
maximum loan amounts in Sec. 201.10 are not exceeded. Permitting these
fees to be financed is a change from previous Departmental policy. The
Title I Letter on fees and charges that is to be issued concurrently
with the publication of this interim rule includes this policy change.
Annual Adjustment in Insurance Reserves
Section 201.32(b) requires that a 10 percent annual reduction be
applied to each lender's insurance coverage reserve account after the
lender has had a Title I contract of insurance for more than five
years. In TI-431, the Department announced that it would no longer
apply an annual adjustment to any lender's insurance reserves,
beginning on October 1, 1995. The Department concluded that the annual
reduction no longer serves the purpose of protecting the Federal
Housing Administration (FHA) insurance fund against excessive claim
losses caused by lenders that exhaust their insurance reserves. Rather,
it has penalized lenders who built their loan volume methodically over
a period of years and those who maintained low claim rates.
The Department instituted the annual adjustment of insurance
reserves in the early 1950s, when the Department was extending the
Title I program for a time period that exceeded the maximum allowable
term of the loans being made. In that lending climate, all lenders held
loans in their own portfolios. The Department's concern was that
lenders might accumulate reserves that were excessive in relation to
the loans remaining in the lenders' portfolios.
In today's lending environment, the annual adjustment has become an
anachronism. Many lenders that originate Title I loans sell them to
servicing lenders; the servicing lenders then sell them to investing
lenders that issue securities backed by the loans for sale to
investors. With the movement of loans from lender to lender, the annual
adjustment is no longer meaningful or effective in protecting the
program against excessive claim losses. Instead, it has been
restricting the growth of the Title I program, creating uncertainty
about the lender's future insurance coverage, and preventing the active
participation of larger, better capitalized lenders in the program.
Accordingly, this interim rule amends Sec. 201.32 by removing
paragraph (b). In addition, the interim rule makes conforming
amendments to Secs. 201.1 and 201.32(a) to remove references to the
annual adjustment in insurance reserves.
Changes Affecting Property Improvement Loans
Changes to the Title I regulations that are applicable only to
property improvement loans include the following: eliminating the
equity requirement for loans over $15,000, increasing the maximum
origination fee and the maximum amount of an unsecured loan, permitting
greater use of the program to improve manufactured homes, removing
impediments to greater use of the program for improving
[[Page 19791]]
multifamily structures, eliminating the completion certificate
requirement under certain circumstances, and revising procedures to
assist victims of major disasters.
Elimination of the Equity Requirement
Sections 201.20(a)(3) and 201.26(a)(1) of the regulations require
that the borrower have equity in the property at least equal to the
loan amount on any property improvement loan (or combination of such
loans) exceeding $15,000. In TI-428, the Department partially waived
this equity requirement, so that it no longer applied when the property
to be improved was occupied by the borrower.
The equity requirement was intended to provide more secure
collateral for larger property improvement loans. However, after three
years of experience with the requirement, the Department concluded that
it was costly and time-consuming, with no significant risk protection
for either the lenders or the Department. In the event of default, it
was usually not cost-effective for the lender to foreclose on the
property, because the costs of carrying the first mortgage, disposing
of the property, and maintaining it prior to sale would consume
whatever equity there might be. The equity requirement was preventing
the people that Title I was created to serve (creditworthy borrowers
with limited equity) from obtaining loans to carry out needed
improvements.
The waiver granted by TI-428 has benefited many creditworthy
borrowers, but only when the property was owner-occupied. The
Department is concerned that the equity requirement is preventing the
property improvement loan program from being used in the revitalization
of central cities, where much of the housing stock consists of small
multifamily buildings (e.g., two to ten units). Title I loans are
usually not available for these multifamily buildings because the owner
does not live on-site and does not have enough equity to qualify for a
loan.
Accordingly, this interim rule eliminates the equity requirement in
its entirety by removing Secs. 201.20(a)(3) and 201.26(a)(1)(iii). In
addition, with the publication of this interim rule and upon its
effective date, the Department is withdrawing the Federal Register
notice published on January 8, 1992 (57 FR 610) that established the
procedures for determining the market value of the property and
evaluating whether the borrower had sufficient equity.
Increased Maximum Origination Fee
Section 201.25(a) limits the maximum origination fee that may be
paid by the borrower to one percent of the loan amount on any new Title
I loan, and to one percent of the additional advance on any existing
Title I loan being refinanced by the lender. Section 201.25(c)(1)
specifies that this origination fee may not be financed in the loan.
In TI-429, the Department waived these two limitations to permit
the financing of an origination fee of up to three percent of the loan
amount. However, this waiver was only for single family property
improvement loans made to low- and moderate-income borrowers in
connection with a housing assistance program administered by a State or
local government agency or a nonprofit organization. The waiver was
intended to serve as an inducement for the creation of public-private
partnerships and to reduce the out-of-pocket expenses for low- and
moderate-income borrowers.
In TI-431, the Department extended the waiver of the one percent
limitation on the origination fee to all property improvement loans,
and a maximum origination fee of five percent of the loan amount is now
permitted on all new property improvement loans. In addition, the
Department waived the prohibition against financing this origination
fee, as long as the maximum loan amounts in Sec. 201.10 are not
exceeded. The Department recognized that a one percent origination fee
was simply not enough to cover the lenders' costs in originating these
loans, when the origination fee on the average property improvement
loan of $13,000 is limited to $130. These waivers allow property
improvement lenders to charge a more reasonable origination fee, while
at the same time reducing the out-of-pocket expenses of borrowers
obtaining Title I loans.
As discussed above, the Department is amending Sec. 201.25(a), (b),
and (c) to provide that the Secretary will establish eligible fees and
charges. However, the Department is removing the specific fees and
charges from the regulations. In a Title I Letter to be issued
concurrently with the publication of this interim rule, the Department
is revising the list of fees and charges that may be financed to permit
the lender to charge a maximum origination fee of five percent of the
loan amount on any new property improvement loan, as long as the fee
has been incurred and its inclusion does not increase the total
principal obligation beyond the maximum loan amounts in Sec. 201.10.
The maximum origination fee for a new manufactured home loan remains at
one percent of the loan amount and cannot be financed.
In a related change, the Department is revising the list of
nonfinanceable fees and charges to permit the lender to assess a
handling charge of up to one percent of the new loan amount for
refinancing an existing Title I loan. This change will enable lenders
to charge a more reasonable fee for the work involved in processing a
loan refinancing, and it is included in the Title I Letter that is to
be issued concurrently with the publication of this interim rule.
Maximum Amount for Unsecured Loans
Section 201.24(a) limits the maximum amount of an unsecured
property improvement loan to $5,000. In TI-428, the Department waived
this limitation to allow lenders to make unsecured property improvement
loans up to $7,500. This increase in the unsecured loan amount makes it
possible for lenders to finance small home improvement projects without
obtaining and recording a security interest in the property being
improved. It also sets the threshold for obtaining a security interest
at the same dollar amount required for on-site inspections of property
improvements. Accordingly, this interim rule amends Sec. 201.24(a) by
substituting ``$7,500'' for ``$5,000.''
Manufactured Home Improvement Loans
Under the definition of ``manufactured home improvement loan'' in
Sec. 201.2, the loan proceeds may be used only to improve the
manufactured home, but cannot be used for site improvements. In TI-428,
the Department waived this restriction to permit the proceeds of a
manufactured home improvement loan to be used for site improvements, as
long as the borrower is the owner of the underlying real estate.
Accordingly, this interim rule amends Sec. 201.2 to permit the proceeds
of a manufactured home improvement loan to be used for site
improvements if the borrower is the owner of the underlying real
estate.
In a related change, the interim rule also amends
Sec. 201.10(a)(1)(iv) to increase the maximum loan amount for a
manufactured home improvement loan from $5,000 to $7,500. This increase
is needed to keep pace with the increased cost of home improvements, as
measured by the change in the Home Maintenance and Repair component of
the Consumer Price Index since the $5,000 limit was established in
1980. Between 1980 and 1994, the Home
[[Page 19792]]
Maintenance and Repair component increased by 59 percent. Thus, a 50
percent increase in the maximum loan amount is warranted.
Ownership of Multifamily Properties
The definition of ``multifamily property improvement loan'' in
Sec. 201.2 provides that the multifamily structure may not be owned by
a corporation, partnership, or trust. As noted above, the Department is
interested in expanding the use of Title I property improvement loans
to rehabilitate small multifamily structures in central cities. The
Department has occasionally waived this restriction on ownership to
permit multifamily property improvement loans to be made to nonprofit
corporations or partnerships that own and operate housing primarily for
low- and moderate-income families.
To give the Department greater flexibility in approving these types
of nonprofit entities as Title I borrowers and to eliminate the delays
inherent in the waiver process, this interim rule amends Sec. 201.2 to
allow for exceptions to the prohibition against corporations,
partnerships, and trusts with the prior approval of the Secretary.
Approval for Loan Amounts Over $25,000
Section 201.10(a)(2) requires the prior approval of the Secretary
for any property improvement loan that will result in the borrower
having a total unpaid principal obligation in excess of $25,000,
whether in one Title I loan or several loans. The Department has
determined that, because of staff reductions and the restructuring of
its field offices, the continued imposition of this requirement will
only serve to delay loan originations.
In addition, it is an impediment to the use of multifamily property
improvement loans to rehabilitate small multifamily structures in
central cities. Accordingly, this interim rule amends Sec. 201.10 by
removing paragraph (a)(2).
Completion Certificate Requirements
Section 201.40(b) of the regulations requires that a borrower
obtaining a direct property improvement loan must submit a completion
certificate to the lender after completion of the work, but not later
than 6 months after disbursement of the loan proceeds. In TI-429, the
Department waived the requirement for submitting a completion
certificate for situations in which the borrower applies for a property
improvement loan through a State or local government agency or a
nonprofit organization, the loan proceeds are held in an escrow account
pending completion of the improvements, and the loan proceeds are
disbursed from the escrow account in stages, based upon the percentage
of work completed. The Department determined that, under these
conditions, the controlled disbursement of the loan funds with the
borrower's approval obviates the need for obtaining a completion
certificate.
Accordingly, this interim rule amends Sec. 201.40 by adding a new
paragraph (b)(3) to exempt the borrower from submitting a completion
certificate when the property improvement loan is made by or on behalf
of a State or local government agency or a nonprofit organization, the
loan proceeds are held in an escrow account pending completion of the
improvements, and the loan proceeds are disbursed from the escrow
account in stages, with the written approval of the borrower and based
upon the percentage of work completed.
Assistance to Disaster Victims
Section 201.20(b)(3) provides that the proceeds of a property
improvement loan may be used only for improvements that are started
after loan approval. The Department has waived this limitation in
connection with Presidentially-declared disasters such as the
Northridge, California earthquake and Hurricanes Marilyn and Opal. In
addition, the Department has waived this limitation in individual cases
when the borrower needed to begin emergency repairs prior to loan
approval.
The Department has concluded that greater use would be made of the
Title I program to assist disaster victims in repairing their homes if
the regulations provided for an exception to Sec. 201.20(b)(3) whenever
there is a major disaster declared by the President. In addition, the
Department's ability to address other emergency situations would be
enhanced if greater flexibility were available to grant exceptions to
this limitation on starting the improvements.
Accordingly, this interim rule amends Sec. 201.20(b)(3) to provide
that the loan proceeds shall only be used to finance property
improvements that are started after loan approval, unless (a) the prior
approval of the Secretary is obtained for an exception, or (b) the
property is located in a major disaster area declared as such by the
President, and the lender determines that emergency action is needed to
repair damage resulting from the disaster.
The interim rule also amends Sec. 201.54(b)(2) to permit the
Secretary to extend the claim filing period on a property improvement
loan when the borrower had experienced a loss of income or other
financial difficulties directly attributable to a major disaster
declared by the President, and additional time was needed to provide
forbearance.
Changes Affecting Manufactured Home Loans
Changes in the Title I regulations that are applicable only to
manufactured home loans include the following: reducing the minimum
required downpayment and revising the maximum loan amount to compensate
for the lower downpayment, increasing the maximum expense-to-income
ratios for borrowers purchasing energy-efficient manufactured homes,
and increasing the maximum dollar allowances for repossession expenses
and legal fees.
Reduced Downpayment Requirements
Section 201.23 of the regulations requires a minimum cash
downpayment of five percent of the first $5,000 and ten percent of the
balance of the purchase price to obtain a new manufactured home or a
manufactured home and lot. To purchase an existing manufactured home or
a developed lot on which to place a manufactured home, the minimum
downpayment is ten percent of the purchase price.
In TI-428, the Department waived the present downpayment
requirements to require a minimum cash downpayment of five percent of
the purchase price for all manufactured home purchase loans,
manufactured home lot loans, and combination loans. The Department
decided that a five percent minimum downpayment would help restore
Title I as a financing vehicle for first-time buyers to achieve
affordable homeownership. It would create a different loan program from
conventional financing and would enable lenders and dealers to offer
low- and moderate-income families a real alternative.
Accordingly, this interim rule amends Sec. 201.23(b), (c), and (d)
by replacing the existing downpayment requirements in these sections
with ``five percent of the purchase price.''
Changes in Maximum Loan Calculation
Because of the reduction in the minimum downpayment to five
percent, TI-428 also granted waivers that apply to the maximum loan
amount calculations in Sec. 201.10(b), (c), and (d). The maximum loan
amount for the purchase of a new manufactured home under
Sec. 201.10(b)(1) or for the purchase of a new manufactured home and
lot under Sec. 201.10(d)(1) was based upon 125 percent of the wholesale
(base)
[[Page 19793]]
price of the home, itemized options, and freight charge. The Department
increased the percentage to 130 percent to conform with the reduced
downpayment requirement.
In a related change, the Department also waived the maximum dollar
allowances applicable to delivery and set-up of the home in
Sec. 201.10(b)(1) and (d)(1), and to skirting in Sec. 201.10(b)(1).
These waivers ensure that the downpayment is a true 5 percent in most
cases, and give lenders and dealers greater flexibility in dealing with
State and local variations in installation standards.
For the purchase of an existing manufactured home under
Sec. 201.10(b)(2) or a manufactured home lot under Sec. 201.10(c), the
maximum loan amount was calculated at 90 percent of the appraised value
or purchase price, whichever was less. To conform with the reduced
downpayment requirement, the Department increased the percentage to 95
percent.
Accordingly, this interim rule amends Sec. 201.10(b), (c), and (d)
in the following respects:
1. By replacing ``125 percent'' with ``130 percent'' in
Sec. 201.10(b)(1)(i) and (d)(1)(i);
2. By removing ``not to exceed $750 per module'' in
Sec. 201.10(b)(1)(iii);
3. By replacing ``Skirting costs, not to exceed $500'' with ``The
actual dealer's cost of skirting'' in Sec. 201.10(b)(1)(iv);
4. By replacing ``90 percent'' with ``95 percent'' in
Sec. 201.10(b)(2) and (c); and
5. By removing ``not to exceed $1,200 per module'' in
Sec. 201.10(d)(1)(iii).
Increase in Expense-to-Income Ratios
Section 201.22(b) states that, for any Title I loan, the borrower's
income must be adequate to meet the periodic payments required by the
loan, as well as the borrower's other housing expenses and recurring
charges. For a borrower's income to be considered adequate, housing
expenses and total fixed expenses generally may not exceed maximum
percentages of effective gross income established by the Secretary. On
October 18, 1991 (56 FR 52438), the Department published a notice in
the Federal Register setting the maximum expense-to-income ratios for
manufactured home loans at 29 percent for total housing expenses and 41
percent for total fixed expenses.
In TI-428, the Department waived the 29 percent and 41 percent
ratios in favor of higher ratios of 31 percent and 43 percent,
respectively, for borrowers who purchased manufactured homes with a
date of manufacture on or after October 25, 1994, the effective date of
the Department's new energy conservation standards. The Department
adopted the higher ratios to recognize that while energy-efficient
homes are more expensive, borrowers will be spending less of their
income on fuel costs.
Since the Department has already notified lenders of this change in
the maximum expense-to-income ratios by Title I Letter, this interim
rule amends Sec. 201.22(b)(1) to eliminate the need for publication of
a Federal Register notice to advise lenders of the change. The
Department has decided that lenders can be more effectively notified of
future changes in maximum expense-to-income ratios through Title I
Letters or by including the information in program handbooks.
Repossession Expenses and Legal Fees
Section 201.55(b)(3) sets the maximum dollar allowances for removal
and transportation of a repossessed manufactured home to an off-site
location at $750 per module. In TI-428, the Department waived this
limit to permit an increase in the allowance to $1,000 per module,
which more accurately reflects the lender's cost for this activity.
Accordingly, this interim rule amends Sec. 201.55(b)(3) by substituting
``$1,000'' for ``$750.''
Section 201.55(b)(7) sets the maximum dollar allowance for
attorney's fees in connection with a claim on a manufactured home loan
at $500. In TI-428, the Department waived this limit to permit an
increase in the allowance to $1,000, which more accurately reflects the
cost for legal services. Accordingly, this interim rule amends
Sec. 201.55(b)(7) by substituting ``$1,000'' for ``$500.''
Clarifying and Conforming Amendments
The Department is also amending other sections of part 201 to
clarify the regulations and conform them with current practice in the
operation of the Title I program. The Department calls particular
attention to the following amendments:
1. In Sec. 201.2, the Department is revising the definition of
``existing structure'' to clarify that the 90-day completion and
occupancy requirement applies to all manufactured homes, whether they
are real or personal property. In a conforming change, the Department
is revising Sec. 201.20(b)(1) to remove redundant language on the 90-
day completion and occupancy requirement.
2. In Sec. 201.2, the Department is revising the definition of
``manufactured home'' to clarify that the construction standards for
existing manufactured homes apply only to loans for the purchase or
refinancing of such homes, and not to property improvement loans on
manufactured homes.
3. In Sec. 201.2, the Department is revising the definition of
``State'' to substitute ``the Commonwealth of the Northern Mariana
Islands'' for ``the Trust Territory of the Pacific Islands,'' since the
remainder of the Trust Territory is now independent and is no longer
eligible to participate in the Title I programs.
4. In Sec. 201.3, the Department is removing paragraph (b), which
indicates the applicability of amendments made to part 201 by a final
rule that was published in the Federal Register on October 18, 1991 (56
FR 52414). The paragraph is now obsolete because many of the regulatory
sections listed in the paragraph have been eliminated or changed. To
the extent that it is still applicable, the preamble to the final rule
contains the same information.
5. The Department is revising Sec. 201.10(b)(3) and (d)(3) to
clarify that the ``purchase price'' used in connection with
manufactured home purchase loans and combination loans includes the
retail cost to the borrower of all items set forth in the purchase
contract, not just those items that are eligible for inclusion in the
Title I loan.
6. The Department is revising Secs. 201.10(f)(3) and 201.11(c)(2)
to clarify that these provisions apply to the refinancing of any
uninsured manufactured home loan, and are not limited to manufactured
home purchase loans and combination loans.
7. The Department is revising Secs. 201.10(f)(4) and 201.11(c)(3)
to clarify that these provisions apply anytime the borrower is
refinancing a manufactured home lot already owned by the borrower in
connection with the purchase of a manufactured home.
8. The Department is revising Secs. 201.10(f)(5) and 201.11(c)(4)
to clarify that these provisions apply anytime the borrower is
refinancing a manufactured home already owned by the borrower in
connection with the purchase of a manufactured home lot. The Department
is also increasing the maximum loan amount in Sec. 201.10(f)(5) to
$64,800, in conformance with a final rule published in the Federal
Register on July 30, 1993 (58 FR 40996).
9. The Department is revising Sec. 201.11 to add a new paragraph
(a)(3), limiting the maximum term for an historic preservation loan to
15 years and 32 days. The Department inadvertently omitted this
provision when it changed the maximum term for other types of property
improvement loans in a final rule published in the Federal Register on
September 30, 1992 (57 FR 45244).
[[Page 19794]]
10. The Department is revising Sec. 201.12, which sets forth
requirements for the note, to remove a prohibition against the use of
discount or add-on notes in connection with any Title I loan approved
on or after January 15, 1986. Although such loans remain uninsurable,
the Department believes that it is no longer necessary to spell out
this prohibition, since the Department is revising Sec. 201.13 as
described in paragraph 10, below.
11. The Department is revising Sec. 201.13 to state that interest
on a Title I loan shall be ``calculated on a simple interest basis,''
rather than ``calculated according to the actuarial method.''
12. The Department is revising Sec. 201.20(a)(2) to specify that
the manufactured home must be the principal residence of the borrower
to be eligible for a manufactured home improvement loan. In a
conforming change, this interim rule removes the same provision from
Sec. 201.20(b)(1), since that section deals with the use of the loan
proceeds.
13. The Department is further revising Sec. 201.20(b)(1) to include
provisions previously found in Sec. 201.26(a)(2). As revised,
Sec. 201.20(b)(1) requires that, if the borrower plans to use a dealer
or contractor to carry out the property improvements, the lender shall
obtain a copy of a proposal or contract that describes in detail the
work to be performed and the estimated or actual cost. Alternatively,
if the borrower plans to carry out the work without the services of a
dealer or contractor, the borrower shall be required to furnish a
detailed written description of the work to be performed, the materials
to be furnished, and their estimated cost. In a conforming change, the
Department is revising Sec. 201.26(a)(2) to remove the present language
and to refer to the requirements of Sec. 201.20(b)(1).
14. The Department is revising Secs. 201.20(b)(2) and 201.21(b)(5)
to eliminate the need for publication of a Federal Register notice to
notify lenders about items and activities that are ineligible for
financing in property improvement or manufactured home loans. The
Department has decided that lenders are more effectively notified of
this information through Title I Letters or by including the
information in program handbooks.
15. The Department is revising Sec. 201.21(b)(3) to specify that
wheels and axles cannot be purchased with the proceeds of a
manufactured home loan, and to clarify that the cost of furniture,
wheels, and axles shall not be included in the maximum loan amount
calculated under Sec. 201.10(b)(1) or (d)(1). The Department
inadvertently omitted the reference to wheels and axles from this
section when it implemented the prohibition against financing these
items in a final rule published in the Federal Register on October 18,
1991 (56 FR 52414).
16. In Sec. 201.22(b)(2), the Department is revising the definition
of ``other recurring charges'' to remove child care expenses as an item
that must be considered in determining whether the borrower's income is
adequate to qualify for a property improvement or manufactured home
loan. This change is consistent with modifications in credit
underwriting requirements that have taken place in the Department's
other loan and mortgage insurance programs.
17. The Department is revising Sec. 201.22(c)(1) to clarify the
prohibition against a lender approving a Title I loan if the borrower
is in default on a previous loan obligation owed to or insured or
guaranteed by the Federal Government.
18. The Department is revising Sec. 201.24(a)(1) to clarify that
the requirement that the Title I loan must have lien priority over any
uninsured loan made by the lender at the same time does not apply when
the uninsured loan is a first mortgage loan for the purchase or
refinancing of the property.
19. The Department is revising Sec. 201.25(d) to clarify that
neither the lender nor the borrower may pay a referral fee to any third
party in connection with the origination of a Title I loan. Prohibiting
the borrower from paying a referral fee is consistent with the wording
in the preambles to both the proposed rule published in the Federal
Register on January 29, 1991 (56 FR 3302) and the final rule published
in the Federal Register on October 18, 1991 (56 FR 52414), but the
Department inadvertently omitted this prohibition from the text of the
regulation.
20. The Department is revising Sec. 201.26(b)(6) to clarify that an
inspection by the lender or its agent on a direct manufactured home
loan is required only when the transaction involves the relocation of
the manufactured home to a new homesite.
21. The Department is revising Sec. 201.27(a)(5) to clarify that
the lender is required to notify the Department that it has terminated
its approval of a dealer only if the termination was because the dealer
did not satisfactorily perform its contractual obligations to
borrowers, did not comply with Title I requirements, or was
unresponsive to the lender's supervision and monitoring requirements.
22. The Department is removing Sec. 201.27(b)(2), which provided
for limited recourse agreements between manufactured home lenders and
dealers for uninsurable loans, because it is obsolete.
23. In Sec. 201.32(a)(1), the Department is eliminating the
requirement that separate Title I contracts of insurance and separate
reserve accounts be established for lenders that originate, purchase,
or hold both property improvement and manufactured home loans. The
Department has determined that requiring two contracts of insurance
poses an unnecessary obstacle to more widespread lender participation
in the Title I program.
24. The Department is revising Sec. 201.52 to clarify that when a
lender accepts a voluntary conveyance of title or a voluntary surrender
of the property securing a manufactured home loan, it is not necessary
to send the borrower the notice of default and acceleration that is
otherwise required by Sec. 201.50(b).
25. The Department is revising Sec. 201.53 to clarify that in
determining the best price obtainable for a manufactured home property,
cost items other than repairs may be deducted from the actual sales
price, so that a valid comparison can be made with the appraised value
of the property before repairs.
Justification for Interim Rulemaking
The Department generally publishes a rule for public comment before
issuing a rule for effect, in accordance with its regulations on
rulemaking in 24 CFR part 10. However, part 10 provides that prior
public procedure will be omitted if HUD determines that it is
``impracticable, unnecessary, or contrary to the public interest'' (24
CFR 10.1).
Many of the changes in this interim rule merely codify the
Secretary's waiver of burdensome regulatory requirements. As noted
earlier, the Department developed many of these changes through an
outreach process that involved a wide variety of program participants,
and the Department notified all approved lenders of the changes through
Title I Letters. The Department considered the alternatives and
determined that these changes are generally compatible with industry
practice and are necessary to increase the availability of credit to
qualified borrowers and to further the goals of the National Housing
Act. Greater use of the Title I program will help preserve the nation's
existing housing stock and rebuild neighborhoods.
Furthermore, implementation of the interim rule's provisions is
needed as soon as possible to eliminate the practice of lenders
collecting discount
[[Page 19795]]
points from dealers that are not for the benefit of borrowers, and to
stop the continued assessment of excessive prepayment penalties that
are preventing low- and moderate-income borrowers from refinancing
their loans. Therefore, the Department has determined that good cause
exists to omit prior public procedure for this interim rule because
such delay would be contrary to the public interest and unnecessary.
However, the Department is interested in obtaining as much public
input as possible as to how this interim rule could be further improved
or streamlined. The Department is allowing for a 60-day public comment
period, after which it will consider the issues raised by the
commenters in its development of a final rule.
Regulatory Reinvention
Consistent with Executive Order 12866 and President Clinton's
memorandum of March 4, 1995 to all Federal departments and agencies on
the subject of regulatory reinvention, the Department is conducting a
page-by-page review of all its regulations to determine whether certain
regulations can be eliminated. As part of this review, the Department
is publishing this interim rule, which eliminates from the Code of
Federal Regulations many of the burdensome substantive requirements in
the Title I programs. This interim rule also removes from the
regulations the lists of eligible fees and charges under the Title I
programs. It is unnecessary and burdensome for these lists to be
included in the regulations. The Secretary will instead notify lenders
of these fees and charges directly through Title I Letters.
Findings and Other Matters
Executive Order 12866
The Office of Management and Budget (OMB) reviewed this interim
rule under Executive Order 12866, Regulatory Planning and Review,
issued by the President on September 30, 1993. Any changes made in this
interim rule subsequent to its submission to OMB are identified in the
docket file, which is available for public inspection during regular
business hours in the Office of the Rules Docket Clerk, Office of the
General Counsel, Department of Housing and Urban Development, Room
10276, 451 Seventh Street SW., Washington, DC 20410.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
was made in accordance with the Department's regulations at 24 CFR Part
50, which implement section 102(2)(C) of the National Environmental
Policy Act of 1969. The Finding of No Significant Impact is available
for public inspection as provided under the section of this preamble
entitled ``Executive Order 12866.''
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this interim rule, and in so
doing certifies that it will not have a significant economic impact on
a substantial number of small entities. The majority of institutions
that participate in the Title I program are large depository
institutions, and nearly all of the changes relieve regulatory burdens
for all entities seeking to conduct Title I loan transactions.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this interim
rule will not have substantial direct effects on States or their
political subdivisions, or the relationship between the Federal
Government and the States, or on the distribution of power and
responsibilities among the various levels of Government. Specifically,
the requirements of this interim rule are directed to lenders and
borrowers, and will not impinge upon the relationship between the
Federal Government and State and local governments. As a result, the
interim rule is not subject to review under the Order.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12606, The Family, has determined that this interim
rule will not have potential for significant impact on family
formation, maintenance, or general well-being, and thus is not subject
to review under the Order. The interim rule involves requirements for
property improvement and manufactured home loans insured by the
Department. Any effect on the family will likely be indirect and
insignificant.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance program numbers are:
14.110 Manufactured Home Loan Insurance--Financing Purchase of
Manufactured Homes as Principal Residences of Borrowers;
14.142 Property Improvement Loan Insurance for Improving All
Existing Structures and Building of New Nonresidential Structures; and
14.162 Mortgage Insurance--Combination and Manufactured Home Lot
Loans.
List of Subjects in 24 CFR Part 201
Health facilities, Historic preservation, Home improvement, Loan
programs--housing and community development, Manufactured homes,
Mortgage insurance, Reporting and recordkeeping requirements.
Accordingly, 24 CFR part 201 is amended as follows:
PART 201----TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME
LOANS
1. The authority citation for 24 CFR part 201 continues to read as
follows:
Authority: 12 U.S.C. 1703; 42 U.S.C. 1436a and 3535(d).
2. Section 201.1 is amended by adding a period after the phrase
``Sec. 201.2'', and by revising the fourth sentence, to read as
follows:
Sec. 201.1 Purpose.
* * * The insurance can cover up to 10 percent of the amount of all
insured Title I loans in the financial institution's portfolio, as
reflected in the total amount of insurance coverage contained at any
time in an insurance coverage reserve account established by the
Secretary, less amounts for insurance claims paid. * * *
3. Section 201.2 is amended by:
a. Removing the paragraph designations (a) through (ll);
b. Adding a new definition of the term ``Discount points'' in
alphabetical order;
c. Revising the first sentence of the introductory text of the
definition of the term ``Existing structure'';
d. Revising the second sentence in paragraph (2) of the definition
of the term ``Lender'';
e. Revising the third sentence of the definition of the term
``Manufactured home'';
f. Adding a sentence at the end of the definition of the term
``Manufactured home improvement loan''; and
g. Revising the definitions of the terms ``Multifamily property
improvement loan'' and ``State'', to read as follows:
Sec. 201.2 Definitions.
* * * * *
Discount points means a fee charged by the lender, separate from
interest but part of the total finance charges on the loan, that is
part of the lender's total yield on the loan needed to maintain a
competitive position with other types of
[[Page 19796]]
investments. One discount point equals one percent of the principal
amount of the loan. As discount points on the loan increase, the
interest rate can be expected to decrease in a fairly consistent
relationship.
Existing structure means a dwelling, including a manufactured home,
that was completed and occupied at least 90 days prior to an
application for a Title I loan, or a nonresidential structure that was
a completed building with a distinctive functional use prior to an
application for a Title I loan. * * *
* * * * *
Lender * * *
(2) For purposes of loan origination under subparts A, B, and C of
this part, the term ``lender'' also includes a ``loan correspondent''
as defined in this section.
* * * * *
Manufactured home * * * To qualify for a manufactured home loan
insured under this part, an existing manufactured home must have been
constructed in accordance with standards published at 24 CFR part 3280
and must meet standards similar to the minimum property standards
applicable to existing homes insured under title II of the Act, as
prescribed by the Secretary.
Manufactured home improvement loan * * * The proceeds of a
manufactured home improvement loan may also be used for improvements to
the homesite, as long as the borrower is the owner of the home and the
underlying real estate.
* * * * *
Multifamily property improvement loan means a loan to finance the
alteration, repair, improvement, or conversion of an existing structure
used or to be used as an apartment house or a dwelling for two or more
families. The multifamily structure may not be owned by a corporation,
partnership, or trust, unless the prior approval of the Secretary is
obtained for an exception to this requirement.
* * * * *
State means any State of the United States, Puerto Rico, the
District of Columbia, Guam, American Samoa, the Commonwealth of the
Northern Mariana Islands, or the United States Virgin Islands.
* * * * *
4. Section 201.3 is revised to read as follows:
Sec. 201.3 Applicability of the regulations.
The regulations in this part may be amended by the Secretary at any
time. Such amendment shall not adversely affect the insurance
privileges of a lender on any loan that has been made or for which a
loan application has been approved before the effective date of the
amendment.
5. Section 201.10 is amended by:
a. Revising paragraph (a)(1)(iv);
b. Removing paragraph (a)(2);
c. Redesignating paragraph (a)(3) as paragraph (a)(2); and
d. Revising paragraphs (b)(1)(i), (b)(1)(iii), (b)(1)(iv),
(b)(2)(i), (b)(2)(ii), (b)(3), (c), (d)(1)(i), (d)(1)(iii), (d)(3),
(f)(3), (f)(4), and (f)(5), to read as follows:
Sec. 201.10 Loan amounts.
(a) * * *
(1) * * *
(iv) Manufactured home improvement loans--$7,500.
* * * * *
(b) * * *
(1) * * *
(i) 130 percent of the sum of the wholesale (base) prices of the
home and any itemized options and the charge for freight, as detailed
in the manufacturer's invoice;
* * * * *
(iii) The actual dealer's cost of transportation to the homesite,
set-up and anchoring, including the rental of wheels and axles (if not
included in the freight charges);
(iv) The actual dealer's cost of skirting;
* * * * *
(2) * * *
(i) 95 percent of the appraised value of the home as equipped and
furnished (as determined by a HUD-approved appraisal) and 95 percent of
any itemized amounts allowed under paragraphs (b)(1)(iii) through (vii)
of this section, if incurred; or
(ii) 95 percent of the purchase price of the home.
(3) The purchase price of a manufactured home financed with a
manufactured home purchase loan shall include the retail cost to the
borrower of all items set forth in the purchase contract, including any
applicable charges authorized under Sec. 201.25(b).
(c) Manufactured home lot loans. The total principal obligation for
a loan to purchase and, if necessary, develop a lot suitable for a
manufactured home, including on-site water and utility connections,
sanitary facilities, site improvements and landscaping, shall not
exceed 95 percent of either the appraised value of the developed lot
(as determined by a HUD-approved appraisal) or the total of the
purchase price and development costs, whichever is less, up to a
maximum of $16,200.
(d) * * *
(1) * * *
(i) 130 percent of the sum of the wholesale (base) prices of the
home and any itemized options and the charge for freight, as detailed
in the manufacturer's invoice;
* * * * *
(iii) The actual dealer's cost of transportation to the homesite,
set-up and anchoring, including the rental of wheels and axles (if not
included in the freight charge);
* * * * *
(3) The purchase price of a manufactured home and a lot financed
with a combination loan shall include the retail cost to the borrower
of all items set forth in the purchase contract or contracts, including
any applicable charges authorized under Sec. 201.25(b).
* * * * *
(f) * * *
(3) The total principal obligation of a loan made to refinance a
borrower's existing uninsured manufactured home loan shall not exceed
the cost to the borrower of prepaying the existing loan or the
appraised value of the property (as determined by a HUD-approved
appraisal), whichever is less, up to the maximum loan amount permitted
under this section for the particular type of loan.
(4) When a borrower's existing manufactured home lot is being
refinanced in connection with the purchase of a manufactured home, the
total principal obligation of the combination loan shall be determined
in accordance with paragraph (d)(1) or (d)(2) of this section.
(5) When a borrower's existing manufactured home is being
refinanced in connection with the purchase of a manufactured home lot,
the total principal obligation of the combination loan shall not exceed
the lesser of the following amounts, up to a maximum of $64,800:
(i) The cost to the borrower of prepaying any existing loan on the
home, plus the purchase price of the lot; or
(ii) The appraised value of the home and lot (as determined by a
HUD-approved appraisal).
* * * * *
6. Section 201.11 is amended by revising paragraphs (a)(1) and
(a)(2), by adding a new paragraph (a)(3), and by revising paragraphs
(c)(2), (c)(3), and (c)(4), to read as follows:
Sec. 201.11 Loan maturities.
(a) * * *
(1) The maximum term for a single family property improvement loan
on a manufactured home that qualifies as real property shall not exceed
15 years and 32 days from the date of the loan;
[[Page 19797]]
(2) The maximum term for a manufactured home improvement loan shall
not exceed 12 years and 32 days from the date of the loan; and
(3) The maximum term for an historic preservation loan shall not
exceed 15 years and 32 days from the date of the loan.
* * * * *
(c) * * *
(2) The term of a loan made to refinance a borrower's existing
uninsured manufactured home loan shall not exceed the maximum term
permitted under paragraph (b) of this section for the particular type
of loan.
(3) When a borrower's existing manufactured home lot is being
refinanced in connection with the purchase of a manufactured home, the
term of the combination loan shall not exceed the maximum term
permitted under paragraph (b) of this section for the particular type
of loan.
(4) When a borrower's existing manufactured home is being
refinanced in connection with the purchase of a manufactured home lot,
the term of the combination loan shall not exceed the maximum term
permitted under paragraph (b) of this section for the particular type
of loan.
7. Section 201.12 is revised to read as follows:
Sec. 201.12 Requirements for the note.
The note shall bear the genuine signature of each borrower and of
any co-maker or co-signer, be valid and enforceable against the
borrower and any co-maker or co-signer, and be complete and regular on
its face. The borrower and any co-maker or co-signer shall execute the
note for the full amount of the loan obligation. Although the note may
be executed by the borrower on an earlier date, the date of the loan
shall be the date that the loan proceeds are disbursed by the lender.
Such date shall be entered on the note when disbursement occurs. The
note shall separately recite the principal amount and any interest at
an agreed annual rate that comprises the borrower's payment obligation.
The lender shall assure that the note and all other documents
evidencing the loan transaction are in compliance with applicable
Federal, State, and local laws. If the note is executed on behalf of a
corporation, partnership, or trust by an authorized representative, it
shall create a binding obligation on such entity.
8. Section 201.13 is revised to read as follows:
Sec. 201.13 Interest and discount points.
The interest rate for any loan shall be negotiated and agreed to by
the borrower and the lender, and such interest rate shall be fixed for
the full term of the loan and recited in the note. Interest on the loan
shall accrue from the date of the loan, and shall be calculated on a
simple interest basis. The lender and the borrower may negotiate the
amount of discount points, if any, to be paid by the borrower as part
of the borrower's initial payment. The lender shall not require or
allow any party other than the borrower to pay any discount points or
other financing charges in connection with the loan transaction.
9. Section 201.17 is revised to read as follows:
Sec. 201.17 Prepayment provision.
The note shall contain a provision permitting full or partial
prepayment of the loan without penalty, except that the borrower may be
assessed reasonable and customary charges for recording a release of
the lender's security interest in the property, if permitted by State
law.
10. Section 201.20 is amended by revising paragraph (a)(2), by
removing paragraph (a)(3), and by revising paragraph (b), to read as
follows:
Sec. 201.20 Property improvement loan eligibility.
(a) * * *
(2) To be eligible for a manufactured home improvement loan, the
borrower shall have at least a one-half interest in the manufactured
home, and the home must be the principal residence of the borrower.
(b) Eligible use of the loan proceeds. (1) The loan proceeds shall
be used only for the purposes disclosed in the loan application. If the
borrower plans to use a dealer or contractor to carry out the
improvement work, the lender shall obtain a copy of a proposal or
contract that describes in detail the work to be performed and the
estimated or actual cost. If the borrower plans to carry out the
improvement work without the services of a dealer or contractor, the
borrower shall be required to furnish a detailed written description of
the work to be performed, the materials to be furnished, and their
estimated cost.
(2) The loan proceeds shall be used only to finance property
improvements that substantially protect or improve the basic livability
or utility of the property. The Secretary will establish a list of
items and activities that may not be financed with the proceeds of any
property improvement loan. If a lender has any doubt as to the
eligibility of any item or activity, it shall request a specific ruling
by the Secretary before making a loan.
(3) The loan proceeds shall only be used to finance property
improvements that are started after loan approval, unless:
(i) The prior approval of the Secretary is obtained for an
exception to this requirement; or
(ii) The property is located in a major disaster area declared by
the President, and the lender determines that emergency action is
needed to repair damage resulting from the disaster.
* * * * *
11. Section 201.21 is amended by revising paragraphs (b)(3) and
(b)(5), to read as follows:
Sec. 201.21 Manufactured home loan eligibility.
* * * * *
(b) * * *
(3) The proceeds of a loan to purchase a new manufactured home or a
new manufactured home and lot shall not be used to purchase furniture
or wheels and axles, and the cost of these items shall not be included
in the total principal obligation calculated under Sec. 201.10(b)(1) or
(d)(1).
* * * * *
(5) The Secretary will establish a list of items and activities
that may not be financed with the proceeds of any manufactured home
loan. If a lender has any doubt as to the eligibility of any item or
activity, it shall request a specific ruling by the Secretary before
making a loan.
* * * * *
12. Section 201.22 is amended by revising paragraphs (b)(1),
(b)(2)(iv), and (c)(1), to read as follows:
Sec. 201.22 Credit requirements for borrowers.
* * * * *
(b) * * *
(1) For any Title I loan, the credit application and review must
establish that the borrower's income will be adequate to meet the
periodic payments required by the loan, as well as the borrower's other
housing expenses and recurring charges. For a borrower's income to be
considered adequate, housing expenses and total fixed expenses
generally may not exceed maximum percentages of effective gross income
established by the Secretary. If these expense-to-income ratios are
exceeded, the borrower's income may be considered adequate only if the
lender determines and documents in the loan file the existence of
compensating factors concerning the borrower's
[[Page 19798]]
creditworthiness that support approval of the loan.
(2) * * *
(iv) Other recurring charges include all payments on automobile
loans, furniture loans, student loans, installment loans, revolving
charge accounts, alimony or child support, and any other debt for which
the obligation is expected to continue for six months or more.
(c) * * *
(1) The borrower is past due more than 30 days as to the payment of
principal or interest under the original terms of a loan obligation
owed to or insured or guaranteed by the Federal Government, unless the
debt has since been discharged or satisfied; or
* * * * *
13. Section 201.23 is revised to read as follows:
Sec. 201.23 Borrower's initial payment.
(a) General requirement. The borrower shall be responsible for the
payment in cash of any costs that will not be paid, or are not eligible
to be paid, from the proceeds of the loan. Such costs payable by the
borrower may include any required downpayment, any discount points to
be paid by the borrower to the lender, any other fees and charges that
may not be financed, and any other costs in excess of the loan amount.
No part of such costs payable by the borrower may be loaned, advanced,
or paid to or for the benefit of the borrower by the dealer, the
manufacturer, or any other party to the loan transaction. If the
borrower obtains all or any part of such costs through a gift or a loan
from some other source, the borrower must disclose the source of such
gift or loan on the credit application. Any such loan must be secured
by property or collateral owned by the borrower independently of the
property securing repayment of the Title I loan, unless the prior
approval of the Secretary is obtained for an exception to this
requirement. The lender shall consider any such loan obligation in
performing the credit investigation. Documentation of any initial
payment shall be retained by the lender in the loan file.
(b) Manufactured home purchase loans. In the case of a manufactured
home purchase loan, the borrower shall make a minimum cash downpayment
of at least five percent of the purchase price of the home. The
borrower's equity in an existing manufactured home and any movable
appurtenances may be traded-in on a new home and accepted in lieu of
full or partial cash downpayment, but without any cash payment to the
borrower. The existing manufactured home being traded-in shall be
clearly identified, and the borrower's equity in the home shall be
based upon the retail value of the home and appurtenances (as
determined by a HUD-approved appraisal), less the total of all loans
outstanding on the home and appurtenances.
(c) Manufactured home lot loans. In the case of a manufactured home
lot loan, the borrower shall make a minimum cash downpayment of at
least five percent of the total of the purchase price and development
costs for the lot.
(d) Combination loans. In the case of a combination loan, the
borrower shall make a minimum cash downpayment of at least five percent
of the purchase price of the manufactured home and lot. If the borrower
already owns a manufactured home or a lot on which a manufactured home
is to be placed, the borrower's equity in such home or lot may be
accepted in lieu of full or partial cash downpayment on a combination
loan, but without any cash payment to the borrower.
14. Section 201.24 is amended by revising paragraphs (a)(1) and
(a)(2) to read as follows:
Sec. 201.24 Security requirements.
(a) * * *
(1) Any property improvement loan in excess of $7,500 shall be
secured by a recorded lien on the improved property. The lien shall be
evidenced by a mortgage or deed of trust, executed by the borrower and
all other owners in fee simple. If the borrower is a lessee, the
borrower and all owners in fee simple must execute the mortgage or deed
of trust. If the borrower is purchasing the property under a land
installment contract, the borrower, all owners in fee simple, and all
intervening contract sellers must execute the mortgage or deed of
trust. The lien need not be a first lien on the property; however, the
lien securing the Title I loan must have priority over any lien
securing an uninsured loan made at the same time and in connection with
the same property, unless the uninsured loan is a first mortgage loan
for the purchase or refinancing of the property.
(2) Any property improvement loan for $7,500 or less (other than a
manufactured home improvement loan) shall be similarly secured if,
including such loan, the total amount of all Title I loans on the
improved property is more than $7,500.
* * * * *
15. Section 201.25 is revised to read as follows:
Sec. 201.25 Charges to borrower to obtain loan.
(a) Fees and charges that may be financed in a property improvement
loan. The Secretary will establish a list of fees and charges that may
be included in a property improvement loan. Such fees and charges shall
have been incurred in connection with the origination of the loan, and
their inclusion shall not increase the total principal obligation
beyond the maximum loan amounts in Sec. 201.10.
(b) Fees and charges that may be financed in a manufactured home
loan. The Secretary will establish a list of fees and charges that may
be included in a manufactured home loan. Such fees and charges shall
have been incurred in connection with the origination of the loan, and
their inclusion shall not increase the total principal obligation
beyond the maximum loan amounts in Sec. 201.10.
(c) Fees and charges that may not be financed. The Secretary will
establish a list of fees and charges incurred by the lender that may be
collected from the borrower in the initial payment, but may not be
included in the loan amount or otherwise financed or advanced by the
dealer, the manufacturer, or any other party to the loan transaction.
(d) Fees and charges that may not be paid. Neither the lender nor
the borrower may pay a referral fee to any dealer, home manufacturer,
contractor, supplier, real estate broker, loan broker, or any other
party in connection with the origination of a loan insured under this
part.
16. Section 201.26 is amended by revising paragraphs (a)(1),
(a)(2), (a)(5)(ii), (a)(6)(i), (b)(3)(vi), (b)(3)(vii), (b)(4)(vi), and
(b)(4)(vii); by removing paragraph (b)(4)(viii); and by revising
paragraph (b)(6) introductory text, to read as follows:
Sec. 201.26 Conditions for loan disbursement.
(a) * * *
(1) The lender shall ensure that the following conditions are met:
(i) The borrower is eligible for a property improvement loan in
accordance with Sec. 201.20(a) (1) or (2); and
(ii) The interest of the borrower in the property is valid, through
such title or other evidence as is generally acceptable to prudent
lending institutions and leading attorneys in the community in which
the property is situated.
(2) The proposed use of the loan proceeds shall be documented in
accordance with the requirements of Sec. 201.20(b)(1).
* * * * *
[[Page 19799]]
(5) * * *
(ii) The borrower has not obtained the benefit of and will not
receive any cash payment, rebate, cash bonus, sales commission, or
anything of more than nominal value from the dealer as an inducement
for the consummation of the transaction.
(6) * * *
(i) States that the loan will be insured by HUD and describes the
actions the Secretary may take to recover the debt if the borrower
defaults on the loan and an insurance claim is paid;
* * * * *
(b) * * *
(3) * * *
(vi) The borrower has paid the remaining unpaid balance on any
other manufactured home loan secured by a different property, unless
the prior approval of the Secretary is obtained for an exception to
this requirement; and
(vii) The borrower has not obtained the benefit of and will not
receive any cash payment, rebate, cash bonus, or anything of more than
nominal value from the manufacturer or dealer as an inducement for the
consummation of the transaction.
(4) * * *
(vi) Any initial payment required under Sec. 201.23 was made by the
borrower, and no part of the initial payment was loaned, advanced, or
paid to or for the benefit of the borrower by the manufacturer, dealer,
or any other party to the loan transaction; and
(vii) The borrower has not obtained the benefit of and will not
receive any cash payment, rebate, cash bonus, or anything of more than
nominal value from the manufacturer or dealer as an inducement for the
consummation of the transaction.
* * * * *
(6) For any direct manufactured home purchase loan or combination
loan involving the relocation of the manufactured home to a new
homesite owned or leased by the borrower, the lender (or an agent of
the lender that is not a manufactured home dealer) shall conduct a
site-of-placement inspection to verify that:
* * * * *
17. Section 201.27 is amended by revising the second sentence of
paragraph (a)(2) and by revising paragraph (a)(5); by removing
paragraph (b)(2); and by redesignating paragraph (b)(1) as paragraph
(b), to read as follows:
Sec. 201.27 Requirements for dealer loans.
(a) * * *
(2) * * * The dealer shall furnish a current financial statement
prepared by someone who is independent of the dealer and is qualified
by education and experience to prepare such statements, together with
such other documentation as the lender deems necessary to support its
approval of the dealer. * * *
* * * * *
(5) If a dealer does not satisfactorily perform its contractual
obligations to borrowers, does not comply with Title I program
requirements, or is unresponsive to the lender's supervision and
monitoring requirements, the lender shall terminate the dealer's
approval and immediately notify the Secretary with written
documentation of the facts. A dealer whose approval is terminated under
these circumstances shall not be reapproved without prior written
approval from the Secretary. The lender may in its discretion terminate
the approval of a dealer for other reasons at any time.
* * * * *
18. Section 201.28 is amended by revising paragraph (a) to read as
follows:
Sec. 201.28 Flood and hazard insurance, and Coastal Barriers
properties.
(a) Flood insurance. No property improvement loan or manufactured
home loan shall be eligible for insurance under this part if the
property securing repayment of the loan is located in a special flood
hazard area identified by the Federal Emergency Management Agency
(FEMA), unless flood insurance on the property is obtained by the
borrower in compliance with section 102 of the Flood Disaster
Protection Act of 1973 (42 U.S.C. 4012a). Such insurance shall be
obtained at any time during the term of the loan that the lender
determines that the secured property is located in a special flood
hazard area identified by FEMA, and shall be maintained by the borrower
for the remaining term of the loan, or until the lender determines that
the property is no longer in a special flood hazard area, or until the
property is repossessed or foreclosed upon by the lender. The amount of
such insurance shall be at least equal to the unpaid balance of the
Title I loan, and the lender shall be named as the loss payee for flood
insurance benefits.
* * * * *
19. Section 201.32 is amended by revising paragraph (a); by
removing paragraph (b); and by redesignating paragraphs (c), (d), and
(e) as paragraphs (b), (c), and (d), respectively, to read as follows:
Sec. 201.32 Insurance coverage reserve account.
(a) Establishment. The Secretary shall establish an insurance
coverage reserve account for each lender. The amount of insurance
coverage in each reserve account shall equal 10 percent of the amount
disbursed, advanced, or expended by the lender in originating or
purchasing eligible loans registered for insurance under this part,
less the amount of all insurance claims approved for payment in
connection with losses on such loans.
* * * * *
20. Section 201.40 is amended by adding a new paragraph (b)(3) to
read as follows:
Sec. 201.40 Post-disbursement loan requirements.
* * * * *
(b) * * *
(3) The borrower is not required to submit a completion certificate
when the property improvement loan is made by or on behalf of a State
or local government agency or a nonprofit organization, the loan
proceeds are held in an escrow account pending completion of the
improvements, and the loan proceeds are disbursed from the escrow
account in stages, with the written approval of the borrower and based
upon the percentage of work completed.
* * * * *
21. Section 201.52 is amended by adding a sentence at the end, to
read as follows:
Sec. 201.52 Acquisition by voluntary conveyance or surrender.
* * * If the lender accepts a voluntary conveyance of title or a
voluntary surrender of the property, the notice of default and
acceleration under Sec. 201.50(b) shall not be required.
22. Section 201.53 is amended by:
a. Redesignating the paragraph as introductory text;
b. Revising the third sentence of the newly designated introductory
text; and
c. Adding paragraphs (a) and (b), to read as follows:
Sec. 201.53 Disposition of manufactured home loan property.
* * * The best price obtainable shall be the greater of:
(a) The actual sales price of the property, after deducting the
cost of repairs, furnishings, and equipment needed to make the property
marketable, and after deducting the cost of transportation, set-up, and
anchoring if the manufactured home is moved to a new homesite; or
(b) The appraised value of the property before repairs (as
determined by a HUD-approved appraisal obtained in accordance with
Sec. 201.51(b)(3)).
[[Page 19800]]
23. Section 201.54 is amended by revising paragraph (b)(2), to read
as follows:
Sec. 201.54 Insurance claim procedure.
* * * * *
(b) * * *
(2) The Secretary may extend the claim filing period in a
particular case, but only if the lender shows clear evidence that the
delay in claim filing was in the interest of the Secretary or was
caused by one of the following:
(i) Litigation related to the loan;
(ii) Management control of the lender or the Title I loan portfolio
was assumed by a Federal or State agency; or
(iii) The borrower had experienced a loss of income or other
financial difficulties directly attributable to a major disaster
declared by the President, and additional time was needed to provide
forbearance on a property improvement loan.
* * * * *
24. Section 201.55 is amended by revising the introductory text of
paragraph (a), the introductory text of paragraph (b), and paragraphs
(b)(3) and (b)(7), to read as follows:
Sec. 201.55 Calculation of insurance claim payment.
* * * * *
(a) Property improvement loans. For property improvement loans, the
insurance claim payment shall be 90 percent of the following amounts:
* * * * *
(b) Manufactured home loans. For manufactured home loans, the
insurance claim payment shall be 90 percent of the sum of the following
amounts:
* * * * *
(3) For manufactured home purchase loans, the amount of costs paid
to a dealer or other third party to repossess and preserve the
manufactured home and other property securing repayment of the loan
(including the costs of site inspection, property appraisal, hazard
insurance premiums, personal property taxes, and site rental, as
appropriate), plus actual costs not to exceed $1,000 per module for
removing and transporting the home to a dealer's lot or other off-site
location.
* * * * *
(7) The amount of attorney's fees on an hourly or other basis for
time actually expended and billed, not to exceed $1,000.
* * * * *
Dated: January 11, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-10885 Filed 5-01-96; 8:45 am]
BILLING CODE 4210-27-P
