[Federal Register Volume 59, Number 104 (Wednesday, June 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13224]
[[Page Unknown]]
[Federal Register: June 1, 1994]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Parts 207, 213, 220, 221, 232, 241, 242, and 244
[Docket No. R-94-1662; FR-3224-F-02]
RIN 2502-AF64
Effect of Acquisition of Title by Mortgagee or the Secretary on a
Title Insurance Policy
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule; confirmation of interim rule.
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SUMMARY: This rule adopts as final an interim rule published on June
24, 1993 that removed a provision in current HUD regulations requiring
that any title insurance policy obtained in connection with the
insurance of multifamily mortgages must provide that, upon acquisition
of title by the mortgagee or the Secretary, ``it will become an owner's
policy running to the mortgagee or the Secretary, as the case may be''
and substitute the provision ``it will continue to provide the same
coverage as the original policy, and will run to the mortgagee or the
Secretary, as the case may be''. The purpose of this rulemaking was to
remove a regulatory restriction and to adopt in its place a more
efficient procedure.
EFFECTIVE DATE: July 1, 1994.
FOR FURTHER INFORMATION CONTACT: Gaines E. Hopkins, Managing Attorney,
Multifamily Mortgage Division, Office of General Counsel, Room 9228,
451 Seventh Street, S.W., Washington, D.C. 20410, telephone (202) 708-
4090, TDD (202) 708-3259. (These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION:
I. Background
Section 207.36 of Title 24 of the Code of Federal Regulations
requires a mortgagee to furnish a survey and a policy of title
insurance or its equivalent as a prerequisite to the closing of an
insured multifamily housing loan. Where a title policy is to be
furnished, the regulation requires that the policy name the mortgagee
and HUD as the insured and also provide that, upon acquisition of title
by either the mortgagee or HUD, the policy will become an owner's
policy running to either the mortgagee or HUD.
If a mortgage default occurs and a mortgagee elects to exercise its
right to assign the mortgage to HUD, it must comply with 24 CFR
207.258(b)(4)(ii). This provision requires that all policies of title
insurance or evidences of title submitted to HUD have the original
title coverage extended to include the date of the assignment of the
mortgage. If the mortgagee elects to foreclose on the mortgage itself,
or if it accepts a deed-in-lieu of foreclosure from the mortgagor, the
requirements set out in Secs. 207.258(c)(8) and 207.258a apply. These
sections provide that if title insurance was utilized at the time of
endorsement, the mortgagee will be required to submit an owner's title
policy in favor of HUD that is effective on the date that the project
is conveyed to the Secretary. If, however, an abstract and attorney's
opinion were originally accepted at the time of endorsement, they are
again acceptable. It should be noted that the aforementioned
regulations either are incorporated into, or have a counterpart in, all
parts of Title 24 of the Code of Federal Regulations that are
applicable to multifamily and health care mortgage insurance programs.
There are two basic title insurance policy formats, one for owners/
mortgagors and a second for lenders/mortgagees. Each is used in both
commercial and residential transactions. The standard title policies
have been written and promulgated by the industry trade organization,
American Land Title Association (ALTA), and are used in most
jurisdictions. In jurisdictions that mandate a particular format, HUD
has deferred to state law and accepted the state-mandated format. For
the last two decades, HUD has accepted the 1970 ALTA format, and no
other ALTA format under the aforesaid regulatory requirements, in those
jurisdictions that do not otherwise require the use of a particular
title policy.
Periodically, ALTA has revised its approved standard title policy
to provide for what it perceives as changing legal and market
conditions. At the request of ALTA, HUD has reviewed each new policy
format to assess its positive or negative impact upon the specific
title insurance needs of the Department. In 1987, ALTA published a new
title policy that was reviewed and subsequently approved by HUD, but
only upon the condition that, in multifamily and health care cases,
title companies add an endorsement to the lender's policy providing
that it will automatically ``convert'' to an owner's policy if HUD
becomes the owner of the FHA-insured project as a result of
foreclosure. The HUD Office of General Counsel expressed the opinion
that a ``conversion'' endorsement is necessary to comply with the
requirement in Sec. 207.36(a)(1) ``that upon acquisition of title by
the mortgagee or the Secretary, [the title policy] will become an
owner's policy * * *.'' This endorsement condition has been strongly
resisted by ALTA and some of its individual corporate members,
resulting in situations where it was only with considerable difficulty
that title insurance was obtainable.
Title Industry Position
The title industry argues that a lender's policy cannot be
``converted'' to an owner's policy as HUD has requested and raises
arguments relating to (1) distinctions between the two formats that
bear directly upon the ``value'' of the coverage; (2) cost schedules
that are on file with state insurance commissioners; (3) the
unavailability of coverage to other mortgagees or private mortgage
insurers; (4) the prior practice of FHA; (5) a different interpretation
of the regulation; and (6) the opinion that either HUD or the lender
should pay the entire cost of a new owner's policy. Inasmuch as HUD, by
this rule, is removing the regulatory restriction, it is not necessary
to set forth the relative merits and demerits of this industry
position.
Current HUD Procedure
At present, HUD acquires title to a project pursuant to one of
several procedures. The most common procedure is for the mortgagee to
assign the mortgage to HUD when there is a default. As part of the
assignment process, the mortgagee is required, at its own expense, to
extend the coverage of the original mortgagee policy to include the
time period between the dates of original endorsement for insurance and
the assignment. This is usually accomplished by a limited title search
and a ``date-down'' endorsement of the existing title policy, but may
also be done through the purchase of an entirely new lender's policy.
After assignment of a mortgage, if the default continues, it is HUD's
policy to employ an attorney who practices in the jurisdiction where
the project is located to act as a commissioner or trustee in the
foreclosure. It is the responsibility of the foreclosure commissioner
to perform a limited title search covering the time period between the
assignment of the mortgage to HUD and the institution of proceedings
under the Federal Foreclosure Act. Even though no title policy is
obtained by HUD as a result of the foreclosure commissioner's findings
and report, HUD would have the power to bring a malpractice action
against the licensed attorney who acted as the foreclosure commissioner
if the work product were flawed.
A lender also may elect not to assign, but to institute foreclosure
proceedings on its own or to take title from the mortgagor by a deed-
in-lieu of foreclosure and to convey title directly to HUD. After the
lender obtains title to the project by means of foreclosure or a deed-
in-lieu, it is entitled to transfer title directly to HUD. If the
lender chooses to proceed in this manner, Sec. 207.258a requires that
it purchase, at its own expense, an owner's title policy ``effective on
or after the date of the recording of the conveyance to the
Commissioner.''
It should also be noted that Section 207(k) of the National Housing
Act and the implementing regulations also give HUD the option of either
proceeding to foreclosure or taking a deed-in-lieu of foreclosure
directly from the mortgagor, following the assignment of the project
mortgage to the Secretary.
HUD Response
Title insurance is necessary in virtually all primary and secondary
mortgage market transactions. Although individual title companies may
still be willing to issue the 1970 ALTA lender's title policy on a
case-by-case basis in those states where they are not forbidden by
state regulation from doing so, the 1992 ALTA lender's policy format
now represents the only title policy format that has the official
approval of the title industry's trade association for use by title
companies nationwide. The Department has determined that it is
necessary to change its regulations so that the 1992 ALTA title policy
format can be accepted by HUD for use in FHA-insured multifamily
mortgage transactions.
Consequently, the Department's regulations are revised to remove
the requirement that the Secretary, in every case, be issued an owner's
title policy. HUD would retain the flexibility, however, to make such a
determination on a case-by-case basis. Accordingly, in this rule HUD is
revising 24 CFR 207.36(a)(1) and conforming other relevant sections by
removing the phrase ``it will become an owner's policy running to the
mortgagee or the Secretary as the case may be,'' and substituting ``it
will continue to provide the same coverage as the original policy, and
will run to the mortgagee or the Secretary, as the case may be''.
As a consequence of having removed the regulatory requirement in
Sec. 207.36 requiring the purchase of an owner's policy, HUD could
either purchase an owner's title policy after acquisition of title, or
HUD could choose to self-insure after acquisition of title. After this
rule takes effect HUD will decide on a case-by-case basis either to
purchase an owner's policy at its own expense, or to self-insure for
the time period after acquisition of title.
II. Public Comment on Earlier Interim Rule
On June 24, 1993 (58 FR 34213), the Department published in the
Federal Register, an interim rule. A request was made for comment by
the public on this interim rule. One comment has been received. The
commenter, a private individual, quotes the following paragraph from
the Preamble to the interim rule and asks the following question:
``As a consequence of having removed the regulatory requirement in
Sec. 207.36 requiring the purchase of an owner's policy, HUD could
either purchase an owner's title policy after acquisition of title, or
HUD could choose to self-insure after acquisition of title. After this
rule takes effect HUD will decide on a case-by-case basis either to
purchase an owner's policy at its own expense, or to self-insure for
the time period after acquisition of title.''
``My question is where does HUD have the authority to purchase a
title insurance policy from its own funds for its own protection? The
long standing policy of the Federal Government, as enunciated
frequently by the General Accounting Office, is that the Government is
a self-insurer and will not purchase commercial insurance against loss
or damage to its own property (presumably HUD inventory property is
considered as Government property.) Does HUD have approval from the
Comptroller to use Government funds to purchase title insurance to
protect its ownership interest?''
HUD Response: It is true that the government is essentially a self-
insurer in certain specific areas, primarily loss or damage to
government property and the liability of government employees. But
there are many situations in which the government buys or pays for
insurance. Among the more well known examples are the Employee's Health
Benefits Program and the Federal Group Life Insurance. Moreover, even
the self-insurance requirement for loss to government property does not
apply in all situations. For example, the rule does not apply to a
wholly-owned government corporation (the Federal Housing Administration
(FHA) is treated as a corportion for this purpose, even though it is
not chartered as one, 53 Comp Gen 337 (1973)). Furthermore, the
Comptroller General has indicated that property acquired by FHA in
exchange for the payment of insurance benefits occupies a different
status from government owned property and does not fall within the
meaning of the policy of not carrying hazard insurance on property it
owns. Finally, the Comptroller General has never even defined title
insurance as insuring property loss and thus prohibited from purchase.
III. Findings and Certifications
Regulatory Agenda
This rule was listed as item 1598 in the Department's Semiannual
Agenda of Regulations published on April 25, 1994 (59 FR 20424, 20450)
under Office of Housing, in accordance with Executive Order 12866 and
the Regulatory Flexibility Act.
Impact on Small Entities.
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before its publication and, by
approving it, certifies that this rule does not have a significant
economic impact on a substantial number of small entities. The rule
effectively liberalizes title insurance requirements which must be met
if a mortgage insurance claim is being made against HUD. Its impact on
small entities will be minimal and any such impact will be beneficial.
Federalism Impact
The General Counsel, as the Designated Official under section 6(a)
of Executive order 12612, Federalism, has determined that the policies
contained in this notice 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. The rule does
not significantly change existing roles and relationships between
federal, state and local governments in any of the programs to which it
applies.
Impact on the Family
The General Counsel, as the Designated Official under Executive
order 12606, The Family, has determined that this notice does not have
potential for significant impact on family formation, maintenance, and
general well-being.
Environment
In accordance with 40 CFR 1508.4 of the regulations of the Council
on Environmental Quality and 24 CFR 50.20(k) of the HUD regulations,
the policies and procedures contained in this rule relate only to
internal administrative procedures whose content does not constitute a
development decision nor affect the physical condition of project areas
or building sites and, therefore, are categorically excluded from the
requirements of the National Environmental Policy Act.
List of Subjects
24 CFR Part 207
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
24 CFR Part 213
Cooperatives, Mortgage insurance, Reporting and record-keeping
requirements.
24 CFR Part 220
Home improvement, Loan programs--housing and community development,
Mortgage insurance, Reporting and recordkeeping requirements, Urban
renewal.
24 CFR Part 221
Low and moderate income housing, Mortgage insurance, Reporting and
recordkeeping requirements.
24 CFR Part 232
Fire prevention, Health facilities, Loan programs--health, Loan
programs--housing and community development, Mortgage insurance,
Nursing homes, Reporting and recordkeeping requirements.
24 CFR Part 241
Energy conservation, Home improvement, Loan programs--Housing and
Community Development, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
24 CFR Part 242
Hospitals, Mortgage insurance, Reporting and recordkeeping
requirements.
24 CFR Part 244
Health facilities, Mortgage insurance, Reporting and record-
keeping requirements.
The Catalog of Federal Domestic Assistance Numbers are: 14.112,
14.126, 14.128, 14.129, 14.134, 14.135, 14.138, 14.139 and 14.155.
Accordingly, the Department adopts as final and without change, the
interim rule published on June 24, 1993 (58 FR 34213) that amended 24
CFR parts 207, 213, 220, 221, 232, 241, 242 and 244.
Dated: May 23, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing, Federal Housing Commissioner.
[FR Doc. 94-13224 Filed 5-31-94; 8:45 am]
BILLING CODE 4210-27-P
