97-17402. Title I Property Improvement and Manufactured Home Loan Insurance Programs  

  • [Federal Register Volume 62, Number 128 (Thursday, July 3, 1997)]
    [Proposed Rules]
    [Pages 36194-36197]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-17402]
    
    
    
    [[Page 36193]]
    
    _______________________________________________________________________
    
    Part V
    
    
    
    
    
    Department of Housing and Urban Development
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    24 CFR Parts 201 and 202
    
    
    
    _______________________________________________________________________
    
    
    
    Title I Property Improvement and Manufactured Home Loan Insurance 
    Programs; Proposed Rule
    
    Federal Register / Vol. 62, No. 128 / Thursday, July 3, 1997 / 
    Proposed Rules
    
    [[Page 36194]]
    
    
    
    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
    
    24 CFR Parts 201 and 202
    
    [Docket No. FR-4242-P-01]
    RIN 2502-AG94
    
    
    Title I Property Improvement and Manufactured Home Loan Insurance 
    Programs
    
    AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
    Commissioner, HUD.
    
    ACTION: Proposed rule.
    
    -----------------------------------------------------------------------
    
    SUMMARY: This rule proposes to amend HUD's regulations for the Title I 
    Property Improvement program. In this rule, HUD proposes to eliminate 
    the portion of the program through which sellers, contractors, or 
    suppliers of goods or services assist borrowers in preparing credit 
    applications or otherwise obtaining Title I property improvement loans 
    from HUD-insured lenders. Property improvement loans would still, 
    however, be available directly from lenders. HUD anticipates that this 
    proposed rule will end the abuses and excessive claims that HUD has 
    experienced in the dealer loan portion of the Title I Property 
    Improvement Loan program. HUD is also proposing technical and 
    conforming amendments to various sections referring to ``dealers'' or 
    ``dealer loans'' to clarify that they apply only to the manufactured 
    home loan program.
    
    DATES: Comment Due Date: September 2, 1997.
    
    ADDRESSES: HUD invites interested persons to submit comments regarding 
    this proposed rule to the Rules Docket Clerk, Office of the General 
    Counsel, Department of Housing and Urban Development, Room 10276, 451 
    Seventh Street, S.W., 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 at the above address. HUD will not accept 
    comments sent by facsimile (FAX).
    
    FOR FURTHER INFORMATION CONTACT: Mark W. Holman, Acting Director, Home 
    Mortgage Insurance Division, Department of Housing and Urban 
    Development, Room 9270, 451 Seventh Street, S.W., Washington, DC 20410; 
    telephone (202) 708-2121. This number is not toll-free. Persons with 
    hearing or speech impairments may access this number via TTY by calling 
    the Federal Information Relay Service at (800) 877-8339.
    
    SUPPLEMENTARY INFORMATION:
    
    Background
    
        Under section 2 of title I of the National Housing Act (12 U.S.C. 
    1703) (the Act), HUD 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. The regulations currently provide for 
    two methods of obtaining a Title I property improvement loan. The 
    borrower may arrange for a loan directly with the lender (a direct 
    loan), or through the intervention or assistance of a dealer (a dealer 
    loan), such as a seller, a contractor, or a supplier of goods or 
    services. In this proposed rule, HUD seeks to amend the regulations in 
    part 201 to eliminate the dealer loan process for property improvement 
    loans. This proposed rule would not, however, affect the availability 
    of Title I property improvement loans through the direct loan process, 
    nor would it affect the process through which borrowers can obtain 
    Title I manufactured home loans.
        HUD's decision to omit dealers from the Title I Property 
    Improvement Loan program stems from a long-standing concern regarding 
    the effectiveness of, and abuses in, the Title I program. As early as 
    1986, HUD's Office of Inspector General identified significant fraud 
    and abuse in the program, specifically relating to dealer-originated 
    loans. In particular, the Inspector General noted a high percentage of 
    borrowers being taken advantage of by dealers/contractors, problems 
    with approval and supervision of dealers by lenders, and unsatisfactory 
    underwriting of dealer originated loans. In 1993 and 1994, monitoring 
    reviews by HUD's Quality Assurance Division of major Title I lenders 
    revealed extensive dealer fraud and noncompliance with HUD 
    requirements. In 1994 the Inspector General recommended termination of 
    the entire Title I program because of the higher risk these consumer 
    loans represent.
        While HUD believes that the Title I property improvement loans fill 
    a niche otherwise unserved by either public or private lending 
    products, HUD is concerned with the need to minimize the financial 
    liability of this program. In particular, HUD has repeatedly addressed 
    the issue of dealer participation in the Title I Property Improvement 
    Loan program. HUD instituted a series of reforms in 1985-1986 to 
    provide for improved lender oversight of dealer participation. (See 50 
    FR 43516, 43521; October 25, 1985). HUD again amended its regulations 
    in 1991 to tighten dealer requirements and lender oversight further (56 
    FR 52414; October 18, 1991).
        Earlier this year, HUD again reviewed dealer participation in the 
    Title I Property Improvement program. HUD reviewed 245 complaints filed 
    against dealers since December 1995. Those complaints reveal many of 
    the same abuses identified by the Inspector General. These abuses have 
    included deceptive advertising practices, fraudulent certification of 
    work completed, failure to complete specified improvements, 
    falsification of documents, overpricing, and kickbacks.
        In addition, a review of claim rates reveals a consistently higher 
    claim rate, dating back to 1987, for dealer loans as compared to direct 
    loans. HUD's analysis of the loans originated in 1987-1994 shows a 
    claim rate for dealer loans of 6.0 percent, and only a 3.5 percent 
    claim rate for direct loans. When analysis of loan performance is 
    focused on those loans outside of California (where both types of loans 
    have a very high 9.2 percent claim rate) dealer loans have a claim rate 
    over 3 times higher than direct loans. The dealer loan claim rate is 
    5.5 percent, compared to 1.6 percent for direct loans.
        HUD believes that the elimination of dealer loans from the Title I 
    Property Improvement Loan program is an appropriate step to protect 
    borrowers from unscrupulous business practices, to ensure greater 
    accountability in the program, and to reduce program claim rates. HUD 
    notes that this proposed rule would not prevent current property 
    improvement dealers from continuing to provide goods and services to 
    borrowers pursuant to the program, but it would require direct lender 
    approval and supervision of the Title I loan that funds these goods and 
    services.
        While HUD believes that the elimination of dealer loans from the 
    Title I Property Improvement Loan program is an appropriate step to 
    take to address the longstanding problems with the dealer loan 
    component of the program, HUD invites comments on ways to address this 
    problem other than through the elimination of dealer loans. HUD 
    requests that commenters who submit proposals on alternative ways to 
    resolve this problem specifically address how the proposed alternative 
    would address the systemic flaws and inherent conflicts of interest 
    that currently exist in the dealer loan component of the Title I 
    Property Improvement Loan program.
    
    [[Page 36195]]
    
    Proposed Amendments to Parts 201 and 202
    
        This rule proposes to amend the definitions of ``Dealer'' and 
    ``Dealer loan'' in Sec. 201.2 to eliminate the references to property 
    improvement loans, thereby limiting dealers and dealer loans to the 
    manufactured home portion of the Title I program. This rule would also 
    remove references to property improvement dealer loans in Sec. 201.26 
    regarding conditions for loan disbursement, in Sec. 201.27 regarding 
    requirements for dealer loans, and in Sec. 201.40 regarding 
    postdisbursement loan requirements (such as completion certificates).
        In order to strengthen and clarify the prohibition against property 
    improvement dealer loans, however, this proposed rule would do more 
    than simply remove references to such loans from the regulations. This 
    proposed rule would add a sentence to Sec. 201.29 regarding ineligible 
    participants to provide that property improvement dealers (including 
    contractors or their affiliates) cannot assist borrowers in obtaining a 
    property improvement loan. This proposed rule would similarly add a new 
    paragraph to Sec. 201.26 regarding conditions for loan disbursement to 
    provide that the lender must ensure that any contractor used to perform 
    property improvement work must not have had any role in assisting the 
    borrower in obtaining the loan. To supplement these new provisions, 
    this proposed rule would add definitions for the terms ``Affiliate,'' 
    ``Contractor,'' and ``Property improvement dealer.''
        This rule also proposes to amend 24 CFR part 202 regarding the 
    approval of lending institutions. Part 202 establishes minimum 
    standards and requirements for the Secretary's approval of lenders to 
    participate in the Title I program. The regulations in part 202 were 
    recently revised as part of HUD's regulatory reinvention efforts (62 FR 
    20080; April 24, 1997). Today's rule proposes to amend the new 
    Secs. 202.6 and 202.7 regarding supervised lenders and nonsupervised 
    lenders (respectively), to provide that HUD-insured lenders cannot make 
    Title I property improvement loans through the dealer loan process.
    
    Findings and Certifications
    
    Executive Order 12866
    
        The Office of Management and Budget (OMB) reviewed this proposed 
    rule under Executive Order 12866, Regulatory Planning and Review, 
    issued by the President on September 30, 1993. Any changes made in this 
    proposed 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, S.W., Washington, DC 20410.
    
    Environmental Impact
    
        A Finding of No Significant Impact with respect to the environment 
    was made in accordance with HUD regulations in 24 CFR part 50 that 
    implement section 102(2)(C) of the National Environmental Policy Act of 
    1969 (42 U.S.C. 4223). The Finding is available for public inspection 
    during regular business hours in the Office of the Rules Docket Clerk, 
    Office of General Counsel, Department of Housing and Urban Development, 
    Room 10276, 451 Seventh Street, S.W., Washington, DC 20410.
    
    Regulatory Flexibility Act
    
        The Secretary, in accordance with the Regulatory Flexibility Act (5 
    U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
    doing certifies that it will not have a significant economic impact on 
    a substantial number of small entities. The provisions of this proposed 
    rule would prevent dealers from assisting borrowers in preparing credit 
    applications or otherwise obtaining Title I property improvement loans. 
    (The provisions would not prevent dealers from providing information 
    about lenders that participate in the Title I property improvement 
    program.) This proposed rule would not, however, prevent dealers from 
    continuing to provide goods and other services to borrowers with Title 
    I property improvement loans. Additionally, the majority of the Title I 
    property improvement dealer loans involve dealers and dealer lenders 
    that are not small entities and, therefore, HUD does not anticipate 
    that this proposed rule would, if implemented, have a significant 
    economic impact on a substantial number of small entities within the 
    meaning of the Regulatory Flexibility Act. HUD recognizes, however, 
    that the uniform application of requirements on entities of differing 
    sizes often places a disproportionate burden on small entities. 
    Therefore, HUD specifically solicits comments as to whether this 
    proposed rule would significantly impact a substantial number of small 
    entities, and as to any less burdensome alternatives.
    
    Executive Order 12612, Federalism
    
        The General Counsel, as the Designated Official under section 6(a) 
    of Executive Order 12612, Federalism, has determined that this proposed 
    rule will not have substantial direct effects on States or their 
    political subdivisions, on 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 proposed 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, this 
    proposed rule is not subject to review under the Order.
    
    Unfunded Mandates Reform Act
    
        Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
    4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
    agencies to assess the effects of their regulatory actions on State, 
    local, and tribal governments, and on the private sector. This proposed 
    rule would not impose any Federal mandates on any State, local, or 
    tribal governments, or on the private sector, within the meaning of the 
    UMRA.
    
    Catalog of Federal Domestic Assistance
    
        The Catalog of Federal Domestic Assistance 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
    
    24 CFR Part 201
    
        Health facilities, Historic preservation, Home improvement, Loan 
    programs--housing and community development, Manufactured homes, 
    Mortgage insurance, Reporting and recordkeeping requirements.
    
    24 CFR Part 202
    
        Administrative practice and procedure, Home improvement, 
    Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
    requirements.
        Accordingly, in chapter II of title 24 of the Code of Federal 
    Regulations, parts 201 and 202 are proposed to be amended as follows:
    
    [[Page 36196]]
    
    PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS
    
        1. The authority citation for 24 CFR part 201 is revised to read as 
    follows:
    
        Authority: 12 U.S.C. 1703; 42 U.S.C. 3535(d).
    
        2. Section 201.2 is amended by adding new definitions of 
    ``Affiliate'', ``Contractor'', and ``Property improvement dealer'', in 
    alphabetical order; and by revising the definitions of ``Dealer'' and 
    ``Dealer loan''; to read as follows:
    
    
    Sec. 201.2  Definitions.
    
    * * * * *
        Affiliate. Persons are affiliates of each other if, directly or 
    indirectly, either one controls or has the power to control the other, 
    or a third person controls or has the power to control both. Indicia of 
    control include, but are not limited to: interlocking management or 
    ownership, identity of interests among family members, shared 
    facilities and equipment, common use of employees, or a business entity 
    organized following the suspension or debarment of a person or entity 
    that has the same or similar management, ownership, or principal 
    employees as the suspended, debarred, ineligible, or voluntarily 
    excluded person.
    * * * * *
        Contractor means any individual or other legal entity that submits 
    offers for, or is awarded, or reasonably may be expected to submit 
    offers for or be awarded, a contract to perform improvement work 
    pursuant to a property improvement loan insured in accordance with this 
    part. As used in this part, the term ``contractor'' includes any 
    affiliate of the contractor.
        Dealer means any individual or other legal entity that engages in 
    the business of manufactured home retail sales. All references to the 
    term ``dealer'' in this part apply only in the case of manufactured 
    home loans, unless otherwise specified (see definition for ``Property 
    improvement dealer'' in this section).
        Dealer loan means a manufactured home loan in which a dealer, 
    having a direct or indirect financial interest in the transaction 
    between the borrower and the lender, assists the borrower in preparing 
    the credit application or otherwise assists the borrower in obtaining 
    the loan from the lender. The lender may disburse the loan proceeds 
    solely to the dealer or the borrower, or jointly to the borrower and 
    the dealer or other parties to the transaction.
    * * * * *
        Property improvement dealer means a seller, contractor, or supplier 
    of goods or services for property improvement.
    * * * * *
        3. Section 201.20 is amended by revising paragraph (b)(1) to read 
    as follows:
    
    
    Sec. 201.20  Property improvement loan eligibility.
    
    * * * * *
        (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 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 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.
    * * * * *
        4. Section 201.26 is amended by adding a new paragraph (a)(1)(iv); 
    by removing paragraph (a)(5); by redesignating paragraphs (a)(6) and 
    (a)(7) as paragraphs (a)(5) and (a)(6), respectively; and by revising 
    newly redesignated paragraph (a)(5)(iii), to read as follows:
    
    
    Sec. 201.26  Conditions for loan disbursement.
    
        (a) * * *
        (1) * * *
        (iv) A property improvement dealer (as that term is defined in 
    Sec. 201.2) must not have had any role in procuring, directing, or 
    influencing the origination of the loan to the borrower. This 
    prohibition does not, however, restrict a property improvement dealer 
    from providing information to borrowers about lenders that participate 
    in the Title I Property Improvement Loan program.
    * * * * *
        (5) * * *
        (iii) Constitutes an acknowledgement of the borrower's 
    postdisbursement obligation to furnish a completion certificate and to 
    permit an on-site inspection by the lender or its agent in accordance 
    with Secs. 201.40 (b) and (c).
    * * * * *
        5. Section 201.27 is amended by revising paragraphs (a)(1) and 
    (a)(7) to read as follows:
    
    
    Sec. 201.27  Requirements for dealer loans.
    
        (a) Dealer approval and supervision. (1) The lender may approve 
    only those dealers that, on the basis of experience and information, 
    the lender considers to be reliable, financially responsible, and 
    qualified to perform their contractual obligations to borrowers 
    satisfactorily and to comply with the requirements of this part. In no 
    case, however, may the lender approve a dealer unless the dealer has 
    and maintains a net worth of not less than $50,000 in assets acceptable 
    to the Secretary, and has demonstrated business experience in 
    manufactured home retail sales.
    * * * * *
        (7) As a condition of dealer approval (or reapproval), the lender 
    may require a dealer to execute a written agreement that, if requested 
    by the lender, the dealer will resell any manufactured home repossessed 
    by the lender under a Title I insured manufactured home purchase loan 
    approved by the lender as a dealer loan involving that dealer.
    * * * * *
        6. Section 201.29 is amended by adding a sentence to the end, to 
    read as follows:
    
    
    Sec. 201.29  Ineligible participants.
    
        * * * No property improvement dealer (as that term is defined in 
    Sec. 201.2) is eligible or permitted to procure, direct, or influence 
    the origination of any loan by a lender under this part.
        7. Section 201.40 is amended by revising the introductory text of 
    paragraph (b)(1), by revising (b)(1)(iii), and by revising paragraph 
    (c), to read as follows:
    
    
    Sec. 201.40  Postdisbursement loan requirements.
    
    * * * * *
        (b) Requirements for property improvement loans. (1) After 
    receiving the proceeds of a property improvement loan, and after the 
    work is completed to the borrower's satisfaction, the borrower must 
    submit a completion certificate to the lender, on a HUD-approved form 
    and signed by the borrower under applicable criminal and civil 
    penalties for fraud and misrepresentation, certifying that:
    * * * * *
        (iii) 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 any property improvement 
    dealer as an inducement for the consummation of the loan transaction.
    * * * * *
        (c) Inspection requirement on property improvement loans. The 
    lender or its agent must conduct an on-site inspection on any property
    
    [[Page 36197]]
    
    improvement loan for which the principal obligation is $7,500 or more, 
    and on any property improvement loan for which the borrower fails to 
    submit a completion certificate as required under paragraph (b) of this 
    section. The inspection must be completed within 60 days after receipt 
    of the completion certificate, or as soon as the lender determines that 
    the borrower is unwilling to cooperate in submitting the completion 
    certificate. The purpose of the inspection is to verify the eligibility 
    of the improvements and whether the work has been completed. If the 
    borrower will not cooperate in permitting an on-site inspection, the 
    lender must report this fact to the Secretary.
    * * * * *
    
    PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES
    
        8. The authority citation for 24 CFR part 202 continues to read as 
    follows:
    
        Authority: 12 U.S.C. 1703, 1709, and 1715b; 42 U.S.C. 3535(d).
    
        9. Section 202.6 is amended by revising paragraph (a) to read as 
    follows:
    
    
    Sec. 202.6  Supervised lenders and mortgagees.
    
        (a) Definition. A supervised lender or mortgagee is a financial 
    institution that is a member of the Federal Reserve System or an 
    institution whose accounts are insured by the Federal Deposit Insurance 
    Corporation or the National Credit Union Administration. A supervised 
    mortgagee may submit applications for mortgage insurance. A supervised 
    lender or mortgagee may originate, purchase, hold, service, or sell 
    loans or insured mortgages, respectively. Supervised lenders may not, 
    however, originate a Title I property improvement loan if the 
    origination was procured, directed, or influenced by a property 
    improvement dealer (as that term is defined in 24 CFR 201.2).
    * * * * *
        10. Section 202.7 is amended by revising paragraph (a) to read as 
    follows:
    
    
    Sec. 202.7  Nonsupervised lenders and mortgagees.
    
        (a) Definition. A nonsupervised lender or mortgagee is a lending 
    institution that has as its principal activity the lending or investing 
    of funds in real estate mortgages, consumer installment notes, or 
    similar advances of credit, or the purchase of consumer installment 
    contracts, and that is not approved under any other section of this 
    part. A nonsupervised mortgagee may submit applications for mortgage 
    insurance. A nonsupervised lender or mortgagee may originate, purchase, 
    hold, service, or sell insured mortgages, respectively. Nonsupervised 
    lenders may not, however, originate a Title I property improvement loan 
    if the origination was procured, directed, or influenced by a property 
    improvement dealer (as that term is defined in 24 CFR 201.2).
    * * * * *
        Dated: May 30, 1997.
    Nicolas P. Retsinas,
    Assistant Secretary for Housing--Federal Housing Commissioner.
    [FR Doc. 97-17402 Filed 7-2-97; 8:45 am]
    BILLING CODE 4210-27-P
    
    
    

Document Information

Published:
07/03/1997
Department:
Housing and Urban Development Department
Entry Type:
Proposed Rule
Action:
Proposed rule.
Document Number:
97-17402
Pages:
36194-36197 (4 pages)
Docket Numbers:
Docket No. FR-4242-P-01
RINs:
2502-AG94: Title I Property Improvement and Manufactured Home Loan Insurance Programs (FR-4242)
RIN Links:
https://www.federalregister.gov/regulations/2502-AG94/title-i-property-improvement-and-manufactured-home-loan-insurance-programs-fr-4242-
PDF File:
97-17402.pdf
CFR: (9)
24 CFR 201.2)
24 CFR 201.2
24 CFR 201.20
24 CFR 201.26
24 CFR 201.27
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