06-3083. Change in Default Reporting Period

AGENCY:

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

ACTION:

Final rule.

SUMMARY:

This final rule revises the regulations under the single-family mortgage insurance program that require mortgagees to report the status of all single-family mortgages insured by HUD that are 90 or more days delinquent. The rule requires mortgagees to report to HUD mortgages that are 30 or more days delinquent on the last day of the month. The Department believes that the rule would, among other things, provide HUD with more recent delinquency information. The receipt of more up-to-date information will enable HUD to better monitor its loss mitigation program and strengthen the soundness of the Federal Housing Administration (FHA) mortgage insurance funds. This final rule follows publication of a January 21, 2005, proposed rule, and takes into consideration the seven public comments received on the proposed rule. After careful consideration of the comments, HUD has decided to adopt the proposed rule without substantive change.

DATES:

Effective Date: May 1, 2006.

FOR FURTHER INFORMATION CONTACT:

Joseph McCloskey, Director, Office of the Deputy Assistant Secretary for Single Family Housing, Office of Housing, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 9172, Washington, DC 20410-8000; telephone [phone] (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Information Relay Service at [phone].

SUPPLEMENTARY INFORMATION:

I. Background—The January 21, 2005, Proposed Rule

On January 21, 2005 (70 FR 3266), HUD published a proposed rule to revise the regulations under part 203 that require mortgagees to report the status of all single-family mortgages insured by HUD that are 90 or more days delinquent. The proposed rule indicated that the revision to the regulations would require mortgagees to report to HUD mortgages that are 30 or more days delinquent on the last day of the month.

The January 21, 2005, proposed rule contained a detailed rationale for the proposed revision. HUD stated in the proposed rule that the revisions to the regulations would bring FHA's requirements closer to Fannie Mae, Freddie Mac, the Mortgage Bankers Association, and industry standards for delinquency reporting requirements. As such, FHA would be in a better position to integrate itself, should it choose to do so, into a single platform for industry-wide default data reporting. Additionally, mortgagees should better understand references to payments due and unpaid rather than being required to count days from the due date.

The proposed rule further stated that HUD also believes the revisions would contribute to FHA's efforts in protecting the financial integrity of the FHA Mutual Mortgage Insurance Fund. The effect of the revisions is that the Department would receive more recent and timely delinquency and default information, thereby increasing FHA's ability to forecast default volume, future defaults, and potential insurance losses. More timely information, the proposed rule concluded, would also enable FHA to monitor better its loss mitigation program. Monitoring of the loss mitigation program is important to FHA because FHA insures 100 percent of a mortgage loan as compared to private mortgage insurers, which generally insure only 10 to 20 percent of a loan.

II. This Final Rule

This final rule follows publication of the January 21, 2005, proposed rule, and takes into consideration the seven public comments received in response. The public comment period on the rule closed on February 22, 2005. Comments were received from a state housing finance agency, a state housing authority, a trade association, and mortgage companies. After careful consideration of the public comments, HUD has decided to adopt the January 21, 2005, proposed rule with one minor change. For clarification purposes, the clause “or that were reported as delinquent the previous month” is being added to each section. This makes it clear that mortgages previously reported as delinquent or in default the previous month must be reported again in the latest reporting month. Except for that clarification, the proposed rule and this final rule are substantively identical.

III. Discussion of Public Comments Received on the January 21, 2005, Proposed Rule

Comment: Expanded default reporting would provide minimal benefit. The commenter wrote that the proposal would significantly increase the number of reportable events each month. The majority of delinquent loans never get to 90-day delinquent status, thus additional data will provide minimal benefit to HUD in terms of determining potential insurance losses.

HUD Response. HUD acknowledges that requiring mortgagees to report 30- and 60-day delinquencies will result in an increase in the total volume of reportable events. However, most mortgage servicing computer systems are capable of providing this additional data and are in fact currently providing similar data on 30-day plus delinquencies to trade associations, such as the Mortgage Bankers Association, to various private investors and insurers, and to the housing-related Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.

HUD has expanded and updated the capacity of its own system to accommodate the anticipated increase in overall data volume as well as status and default code changes. These changes were implemented to bring the data requested by HUD in line with what Fannie Mae and Freddie Mac currently require. One of the previous industry complaints was that HUD's status and default reason codes were different from those required by Fannie Mae and Freddie Mac. This effort will bring additional uniformity to the information reported by mortgagees.

The Department believes that the benefits of early delinquency reporting are similar to the benefits derived by early delinquency intervention for the mortgagor. The earlier in the delinquency that intervention is provided, the higher the success percentage. HUD believes that this improved information will enable HUD to better monitor its loss mitigation program, perform more accurate trend analysis, and better secure the soundness of the FHA Mortgage Insurance Fund.

Comment: The proposed change would not bring HUD requirements closer to industry standards. The commenter wrote that the proposed change actually would be more burdensome than the reporting requirements imposed by Fannie Mae and Freddie Mac.

HUD Response. As mentioned earlier, the Department has upgraded and improved its computer systems. Included in these system improvements are the system changes to support the new requirement to begin reporting delinquencies at 30 days. In addition, the Department has implemented changes to simplify the mortgagee's reporting process. The Department also has implemented changes to ensure, to the extent possible, that the delinquency reporting required by HUD is as uniform as possible with the reporting required by both Fannie Mae and Freddie Mac. The Department will provide adequate lead-time for all industry participants to incorporate the new requirements into their computer system.

Comment: HUD grossly underestimates the additional burden in cost and man-hours involved in reporting the additional information. The commenter estimates that the rule would add approximately 387,808 new reportable 30- and 60-day events each month. Thus, the real reporting burden will be four times higher than HUD estimates. The true costs will only be known when the housing industry has more complete information identifying the exact elements that will be required to be reported.

HUD Response. HUD is unable to determine how the commenter arrived at the conclusion that the rule would result in 387,808 new reportable events and that the reporting burden would be four times higher than the burden estimated by HUD. HUD is aware that the volume of reportable events will increase to at least three times the current volume. However, the Department has been careful to maintain, for the most part, the existing reporting structure. Most of the system changes relate to the addition of some status codes and default reason codes that are all defined within the Electronic Data Interchange (EDI) standard Transaction Set 264, Version 4010 and 4040, which most of the housing industry currently uses. The key system logic change will have the various industry systems test for a different level of delinquency. As a result, servicers will be required to do a one-time reprogramming of their systems to identify accounts that have become 30 days delinquent on the last day of the month to begin reporting, rather than selecting accounts that have become 90 days delinquent on the last day of the month. Thereafter, the information will be automatically generated by the updated system without requiring the investment of additional time of the servicers' employees. The computer systems in use today are very efficient and are already selecting accounts for reporting for various purposes that are 30- and 60-days delinquent.

Comment: The rule would require costly systems upgrades.

HUD Response. HUD disagrees to the extent that it was careful to keep new data fields to a minimum and maintain for the most part the existing reporting requirements. The test for when to begin reporting an account will change. At the housing industry's request, many of the status and default reason codes currently in use by Fannie Mae and Freddie Mac will be integrated into HUD's to provide an updated listing that is as uniform as possible. HUD also has removed five status codes that are no longer needed or that the industry found confusing. HUD believes that implementing the changes will result in only a negligible cost to the mortgagee and that the ongoing monthly reporting will generate only a small increase over what is currently incurred.

Comment: The proposed change would increase reporting burdens and increase the opportunity for error to occur. Because the Single Family Default Monitoring System (SFDMS) is currently unable to accept more than one default event per month, the potential for errors to occur and for earlier reportable events to be lost will be greater. Manually inputting the information is both risky and expensive. The commenter recommends that SFDMS allow for complete reporting without supplemental reporting through the FHA Internet Connection when multiple events occur in the same month.

HUD Response. As mentioned earlier, HUD has updated its computer systems not only to incorporate the new requirement but also to accept more than one status code during the month. This will be particularly helpful for those accounts where first legal action to initiate foreclosure was taken and before the last day of the month the mortgagor filed bankruptcy. HUD will be able to accept both codes, and both will be a part of HUD's delinquency history for the account. Mortgagees will need to ensure that they update their systems so that they do not erroneously block one or the other code from being correctly reported.

Comment: The limitations of SFDMS puts servicers at greater risk of delaying, losing, or missing a “first legal” action. This delay may result in a loss of debenture interest amounting to several thousands of dollars per case. The commenter requests that, in connection with 30- and 60-day delinquencies, HUD waive any curtailment of debenture interest penalties until the SFDMS is enhanced to accept multiple default events.

HUD Response. As stated previously, HUD anticipated a need for accepting multiple codes for each month, and has updated its system to accommodate this need. HUD will provide sufficient advance notification for all industry participants to complete the required system changes before requiring the new information to be reported.

Comment: The mortgage industry has technology constraints limiting its quick compliance with the rule. According to a number of commenters, most servicers use platforms and software provided by third parties. These providers need time to update and redesign the systems/programs to allow for expanded reporting. A commenter asked whether a lender or mortgagee that develops its own automated client system would be required to submit it to HUD for approval.

HUD Response: As previously mentioned, HUD will provide sufficient notification and time for all industry participants to upgrade and test their systems. For those mortgagees that use EDI, the Department will support some form of beta testing of the revised reporting requirements.

Comment: The use of data fields for reporting the delinquencies. HUD should not utilize the same set of data fields on the 90-day delinquencies to report the 30-day delinquencies because items such as occupancy status and reason for default are often not known at that time. The commenter requested that HUD avoid creating new default codes for 30- and 60-day delinquencies. The commenter also requested that HUD clarify what information is needed and when it would be needed in light of the expanded reporting requirements. The commenter supports efforts to revise the “usage definition” of code 42.

HUD Response. As stated before, HUD has updated its computer systems not only to incorporate the new 30-day delinquency requirement but also to accept more than one status code for the monthly reporting cycle. HUD recognizes that the level of detail secured from the mortgagor by the time the account has become 90 or more days delinquent will exceed the level of detail known about an account that has just become 30 days delinquent. Therefore, it will be acceptable to advise the Department that the reason for the default is unknown and/or that the mortgagor had not yet been contacted to determine the reason for the delinquency when reporting on 30-or 60-day delinquent accounts. There will not be new codes established for reporting 30- and 60-day accounts. Where the loan is in default but there is no other reportable status (such as a payment plan, etc.), the servicer will report the default using status code 42. HUD will calculate the number of months the loan is delinquent based on the date of the oldest unpaid installment, as reported by the servicer. HUD intends, immediately following the publication of this final rule, to issue administrative guidelines with respect to codes and data elements that it will require in light of the reporting requirements established by this rule.

Comment: Clarify whether HUD will be adjusting the current deadline for reporting. The commenter requests that the current “reporting cycles” not be shortened at this time.

HUD Response. The reporting cycles will remain the same. Reporting will be required once a month and mortgagees will be allowed the first five business days of each month to complete the reporting for the prior month. With the exception of the first five business days of the month, which are set aside to allow servicers to report the status of loans as of the last day of the previous month, mortgagees are free to report specific events as soon as they happen. For example, if the first legal action to initiate foreclosure occurs on July 18, 2005, the mortgagee may submit status code 68 advising HUD that the first legal action to initiate foreclosure occurred. The mortgagee need not wait until the last day of the month.

IV. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

The Office of Management and Budget (OMB) reviewed this rule under Executive Order 12866 (entitled “Regulatory Planning and Review”). OMB determined that this rule is a “significant regulatory action,” as defined in section 3(f) of the Order (although not economically significant, as provided in section 3(f)(1) of the Order). Any changes made to the rule subsequent to its submission to OMB are identified in the docket file, which is available for public inspection at the Department of Housing and Urban Development, Office of General Counsel, Regulations Division, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-0500. Due to security measures at the HUD Headquarters building, please schedule an appointment to review the docket file by calling the Regulations Division at [phone] (this is not a toll-free number).

Paperwork Reduction Act

The information collection requirements contained in this rule have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0060. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

The burden of the information collections in this final rule is estimated as follows:

Reporting and Recordkeeping Burden

Section reference	Number of parties	Number of responses per respondent	Estimated average time for requirement (in hours)	Estimated annual burden (in hours)
24 CFR 203.330, 24 CFR 203.331, 24 CFR 203.439	Via EDI =120 lenders	12	1.5	2,160
24 CFR 203.466, 24 CFR 203.467	Via FHAC =120 lenders	12	3.5	5,040
Total				7,200

The number of lenders that is currently servicing single-family FHA-insured mortgages has decreased greatly due to many mergers, acquisitions, and consolidations within the mortgage industry. The top 10 lenders (by volume serviced) now service approximately 90 percent of the active FHA-insured mortgages. The larger lenders utilize Electronic Data Interchange (EDI) to submit their delinquency data to HUD. This process means that those lenders must submit only one electronic report to HUD each month to comply with the reporting requirement. In October and November 2005, approximately 120 lenders reported delinquency data to HUD via EDI. There should be very little additional time required for those lenders submitting via EDI as the process will continue to require submission of a single electronic report to HUD, even with an increase of accounts within the report. HUD increased the average burden to 1.5 hours for reporting via EDI to ensure that adequate time is provided.

The remaining lenders utilize an Internet-based application, the FHA Connection (FHAC) to report. Again, with respect to October and November 2005 reporting, approximately 120 lenders submitted delinquency data to HUD via the FHAC with more than 80 of those lenders submitting fewer than 10 accounts per month. Reporting delinquent loans to HUD that previously required approximately an hour on average to report now may require 2 or more hours to complete. As several commenters indicated that the burden may triple, HUD has increased the estimated time for reporting via FHAC to 3.5 hours. The total estimated hours remains at 7,200 hours per year.

Environmental Impact

This rule is categorically excluded from environmental review under the National Environmental Policy Act (42 U.S.C. 4321 et seq.). In keeping with the exclusion provided for in 24 CFR 50.19(c)(1), this rule does not direct, provide for assistance or loan and mortgage insurance for, or otherwise govern or regulate, real property acquisition, disposition, leasing, rehabilitation, alteration, demolition, or new construction, or establish, revise or provide for standards for construction or construction materials, manufactured housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(2), this rule is categorically excluded because it amends an existing document where the existing document as a whole would not fall within the exclusion in 24 CFR 50.19(c)(1) but the amendment by itself would do so.

Unfunded Mandates Reform Act

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 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 rule does not impose a federal mandate on any state, local, or tribal government, nor on the private sector, within the meaning of the Unfunded Mandates Reform Act of 1995.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. This final rule will not materially affect many small businesses participating in the FHA single-family mortgage insurance programs. More than 90 percent of the servicing of FHA single-family mortgage loans is done by a few large entities. There are a very few small lenders that retain the servicing function in-house; most small lenders contract out the function. Consequently, the rule will not impact a substantial number of small entities. Although the rule will require timelier reporting by servicers of delinquent mortgages, the information that the servicers will report is already in their possession. As a result, any new expense to small entities caused by this rule will be negligible. Further, there are no anti-competitive discriminatory aspects of the rule with regard to small entities. Accordingly, the undersigned certifies that this rule will not have a significant economic impact on a substantial number of small entities.

Executive Order 13132, Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial direct compliance costs on state and local governments and is not required by statute, or the rule preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments nor preempt state law within the meaning of the executive order.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number is 14.117.

List of Subjects in 24 CFR Part 203

• Hawaiian Natives
• Home improvement
• Indians-lands
• Loan programs-housing and community development
• Mortgage insurance
• Reporting and recordkeeping requirements
• Solar energy

Accordingly, for the reasons described in the preamble, HUD amends 24 CFR part 203 to read as follows:

PART 203—SINGLE FAMILY MORTGAGE INSURANCE

1. The authority citation for part 203 continues to read as follows:

Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 3535(d).

2. Revise § 203.330 to read as follows:

§ 203.330

Definition of delinquency and requirement for notice of delinquency to HUD.

(a) A mortgage account is delinquent any time a payment is due and not paid.

(b) Once each month on a day prescribed by HUD, the mortgagee shall report to HUD all mortgages insured under this part that were delinquent on the last day of the month, or that were reported as delinquent the previous month. The report shall be made in a manner prescribed by HUD.

3. Revise § 203.331 to read as follows:

§ 203.331

Definition of default, date of default, and requirement of notice of default to HUD.

(a) Default. If the mortgagor fails to make any payment or to perform any other obligation under the mortgage, and such failure continues for a period of 30 days, the mortgage shall be considered in default for the purposes of this subpart.

(b) Date of default. For the purposes of this subpart, the date of default shall be considered as 30 days after:

(1) The first uncorrected failure to perform any obligation under the mortgage; or

(2) The first failure to make a monthly payment that subsequent payments by the mortgagor are insufficient to cover when applied to the overdue monthly payments in the order in which they became due.

(c) Notice of default. Once each month, on a day prescribed by HUD, the mortgagee shall report to HUD all mortgages that were in default on the last day of the month, or that were reported as in default the previous month. The report shall be made in a manner prescribed by HUD.

(d) Number of days in month. For the purposes of this section, each month shall be considered to have 30 days.

§ 203.332

[Removed and reserved]

4. Remove and reserve § 203.332.

5. Amend § 203.439 by revising paragraph (c) to read as follows:

§ 203.439

Mortgages on Hawaiian home lands insured pursuant to section 247 of the National Housing Act.

* * * * *

(c) Notice of delinquency. Once each month on a day prescribed by HUD, the mortgagee shall notify the Department of Hawaiian Home Lands of all mortgages insured pursuant to section 247 of the National Housing Act on leaseholds of Hawaiian home lands that are delinquent on the last day of the month, or that were reported as delinquent the previous month. The notice is in addition to the requirement in §§ 203.330 and 203.331.

6. Revise § 203.466 to read as follows:

§ 203.466

Definition of delinquency and requirement for notice of delinquency to HUD.

(a) A mortgage account is delinquent any time a payment is due and not paid.

(b) Once each month on a day prescribed by HUD, the mortgagee shall report to HUD all mortgages insured under this part that were delinquent on the last day of the month, or that were reported as delinquent the previous month. The report shall be made in a manner prescribed by HUD.

7. Revise § 203.467 to read as follows:

§ 203.467

Definition of default, date of default, and requirement of notice of default to HUD.

(a) Default. If the mortgagor fails to make any payment or to perform any other obligation under the mortgage, and such failure continues for a period of 30 days, the mortgage shall be considered in default for the purposes of this subpart.

(b) Date of default. For the purposes of this subpart, the date of default shall be considered as 30 days after:

(1) The first uncorrected failure to perform any obligation under the mortgage; or

(2) The first failure to make a monthly payment that subsequent payments by the borrower are insufficient to cover when applied to the overdue monthly payments in the order in which they became due.

(c) Notice of default. Once each month, on a day prescribed by HUD, the mortgagee shall report to HUD all mortgages that were in default on the last day of the month, or that were reported as in default the previous month. The report shall be made on a form prescribed by HUD.

(d) Number of days in month. For the purposes of this section, each month shall be considered to have 30 days.

§ 203.468

[Removed and reserved]

8. Remove and reserve § 203.468.

Dated: March 24, 2006.

Brian D. Montgomery,

Assistant Secretary for Housing-Federal Housing Commissioner.