Strengthening the Title I Property Improvement and Manufactured
Home Loan Insurance Programs and Title I Lender/Title II Mortgagee
Approval Requirements
[Federal Register: March 30, 2000 (Volume 65, Number 62)]
[Proposed Rules]
[Page 17119-17125]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30mr00-29]
[[Page 17119]]
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Part V
Department of Housing and Urban Development
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24 CFR Parts 201 and 202
Strengthening the Title I Property Improvement and Manufactured Home
Loan Insurance Programs and Title I Lender/Title II Mortgagee Approval
Requirements; Proposed Rule
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 201 and 202
[Docket No. FR-4246-P-01]
RIN: 2502-AG95
Strengthening the Title I Property Improvement and Manufactured
Home Loan Insurance Programs and Title I Lender/Title II Mortgagee
Approval Requirements
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This rule proposes to amend HUD's regulations for the Title I
Property Improvement and Manufactured Housing Loan Insurance programs.
The changes are designed to enhance program controls and strengthen the
financial viability of the programs. Among other amendments, this
proposed rule would require that lenders disburse the proceeds of a
direct property improvement loan in excess of $7,500 using a draw
system, similar to that used in construction lending; expand and
strengthen the on-site inspection requirements applicable to dealer and
direct property improvement loans; and require that a lien securing a
property improvement loan in excess of $7,500 must occupy no less than
a second lien position. The proposed rule would also require that a
lender disburse Title I dealer property improvement loan proceeds
either solely to the borrower, or jointly to the borrower and dealer or
other parties to the transaction. HUD also proposes to increase the
insurance charge for Title I property improvement and manufactured
housing loan insurance. Additionally, the proposed rule would also
conform the liquidity requirements applicable to the Title I program to
those currently applicable to the Title II Single Family Mortgage
Insurance program. Finally, the rule would increase the net worth
requirements applicable to both the Title I and Title II programs.
DATES: Comments due date: May 30, 2000.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410-0500. Communications should
refer to the above docket number and title. Facsimile (FAX) comments
are not acceptable. A copy of each communication submitted will be
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of
Single Family Program Development, Office of Insured Single Family
Housing, Room 9266, U.S. Department of Housing and Urban Development,
451 Seventh Street, SW, Washington, DC 20410-8000; telephone (202) 708-
2700 (this is not a toll-free number). Hearing- or speech-impaired
individuals may access this number via TTY by calling the toll-free
Federal Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. Title I Loan Insurance
Section 2 of Title I of the National Housing Act (12 U.S.C. 1703)
authorizes HUD to insure 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 Loan
Insurance programs are located in 24 CFR part 201. Additionally, the
HUD regulations at 24 CFR part 202 establish minimum standards and
requirements for approval by the Secretary of HUD of lenders and
mortgagees to participate in both the Title I programs and the Title II
Single Family Mortgage Insurance program. The programs are administered
by HUD's Office of Housing-Federal Housing Administration (FHA).
B. Property Improvement Loans
The Title I property improvement loan program is often the most
viable, cost-effective mechanism for individuals to finance property
improvements. Under the program, HUD-FHA makes it easier for consumers
to obtain affordable loans by insuring such loans made by private
lenders to improve properties that meet certain requirements. Title I
loans may be used to finance permanent property improvements that
protect or improve the basic livability or utility of the property.
Only lenders approved by HUD specifically for the program can make
loans covered by Title I insurance. Eligible borrowers include the
owner of the property to be improved, the person leasing the property
(with a fixed lease term that expires not less than 6 calendar months
after the final maturity of the loan), or someone purchasing the
property under a land installment contract.
C. Manufactured Home Loans
HUD has been insuring loans on manufactured homes under Title I
since 1969. By protecting lenders against the risk of default, HUD's
participation has encouraged them to finance manufactured homes, which
had traditionally been financed as personal property through
comparatively high-interest, short term consumer installment loans. The
Title I manufactured home loan program, therefore, increases the
availability of affordable financing for buyers of manufactured homes.
All buyers who plan to purchase manufactured homes as their principal
place of residence are eligible to participate in the program. Approved
lending institutions are eligible for insurance on loans made under the
program. Buyers of manufactured homes may obtain insured loans for
insurance through HUD-approved lenders or through approved dealers.
D. Changes to the Title I Programs
While HUD believes that Title I property improvement and
manufactured home loans fill an important role otherwise unserved by
either public or private lending products, HUD also believes that the
program can be strengthened by implementing new financial and program
controls. HUD recently conducted a comprehensive review of the Title I
programs and concluded that several changes are necessary to strengthen
the financial viability of the programs. Accordingly, HUD is issuing
this proposed rule, which would make several changes to the Title I and
lender approval program regulations at 24 CFR parts 201 and 202,
respectively. HUD believes these amendments are needed to protect the
financial interests of the FHA, taxpayers, and the vast majority of
borrowers and lenders who comply fully with the requirements of the
Title I programs. The proposed changes to the Title I program
regulations are discussed in section II of this preamble.
E. Net Worth Requirements for the Title I and Title II Programs
In addition to the changes described above (which would only apply
to the Title I programs), this proposed rule would also revise 24 CFR
part 202 to raise the current minimum net worth requirements applicable
to loan correspondents under both the Title I and Title II programs.
This proposed change is discussed in section III of this preamble.
[[Page 17121]]
II. Proposed Regulatory Changes to the Title I Program Regulations
The changes that would be made by this proposed rule to HUD's Title
I regulations are as follows. As noted, some of the changes would be
applicable to both the property improvement and manufactured home loan
programs. Other changes would apply solely to Title I property
improvement loans.
1. Two party disbursements of dealer property improvement loan
proceeds (Secs. 201.2 and 201.26). The proposed rule would amend the
definition of ``dealer loan'' in Sec. 201.2 to prohibit lenders from
disbursing property improvement loan proceeds solely to a dealer. The
proposed rule would require that a lender disburse the proceeds either
solely to the borrower or jointly to the borrower and dealer or other
parties to the transaction. The proposed rule would also make a
conforming change to Sec. 201.26, which describes the conditions for
disbursement of property improvement loan proceeds.
This regulatory amendment will reduce the risk that property
improvement loan proceeds might be released without the borrower's
consent. Further, by requiring that the borrower agrees to the payment
of funds to the contractor, the proposed amendment will ensure that all
property improvement work is completed in an acceptable manner. The
proposed requirement will also assure that any disagreements between
the borrower and contractor are brought to the lender's attention as
quickly as possible.
2. Lien position for property improvement loans in excess of $7,500
(Sec. 201.24). The proposed rule would amend Sec. 201.24 (which
describes security requirements) to require that a lien securing a
property improvement loan in excess of $7,500 must occupy no less than
a second lien position. The current regulation does not specify the
position that such a lien must occupy, other than to state that the
Title I property improvement loan must have priority over any lien
securing an uninsured loan made at the same time.
3. Disbursement of direct property improvement loan proceeds in
excess of $7,500 (Sec. 201.26). This proposed rule would amend
Sec. 201.26 (which describes the conditions for loan disbursement) to
modify the disbursement procedures for direct property improvement
loans in excess of $7,500. The proposed rule would require that such
disbursements be made using a ``draw'' system, similar to that used in
construction lending. Lenders would be required to deposit all of the
loan proceeds in an interest bearing escrow account until they are
disbursed. The draws would be made in accordance with criteria
established by the Secretary. The loan proceeds would be disbursed in
three draws--an initial disbursement of 40 percent of the loan
proceeds, a subsequent 40 percent disbursement, and a final 20 percent
disbursement.
This regulatory amendment will help to reduce opportunities for
misuse of funds. However, HUD recognizes that the use of a draw system
will impose some additional administrative and other costs on lenders.
Accordingly, this proposed rule would only require the use of this
disbursement procedure only for direct loans in excess of $7,500.
The proposed draw system would not apply to dealer loans. As
explained elsewhere in this preamble, HUD would establish other
requirements to safeguard the proper use of dealer loan proceeds. These
protections include the prohibition on the disbursement of Title I loan
proceeds solely to a dealer (see the discussion of proposed change
number 1 above). Further, the proposed rule would establish a telephone
interview requirement for the disbursement of dealer loan proceeds (see
the discussion of proposed change number 4 below).
4. Telephone interviews for dealer property improvement loan
disbursements (Sec. 201.26). The proposed rule would amend Sec. 201.26
to require that the lender must conduct a telephone interview with the
borrower before the disbursement of dealer property improvement loan
proceeds. The lender, at a minimum, must obtain an oral affirmation
from the borrower to release funds to the dealer. As with the proposed
dual disbursement requirement discussed above (see proposed change
number 1), it is expected that the telephone interview will help to
ensure borrower satisfaction with the work being performed by the
dealer/contractor. The lender shall document the borrower's oral
affirmation.
5. Liquidity requirement (Secs. 201.27, 202.6, 202.7, and 202.8).
The proposed rule would amend the regulations at 24 CFR parts 201 and
202 to conform the liquidity requirements applicable to the Title I
program to those currently applicable to the Title II Single Family
Mortgage Insurance program. The proposed liquidity requirement would
apply to Title I supervised lenders (Sec. 202.6), Title I unsupervised
lenders (Sec. 202.7), Title I loan correspondent lenders (Sec. 202.8),
and Title I dealers (Sec. 201.27). Under the proposed rule, these Title
I participants would be required to have liquid assets consisting of
cash (or its equivalent acceptable to the Secretary) in the amount of
20 percent of their net worth, up to a maximum liquidity requirement of
$100,000. For purposes of this proposed rule, HUD will not consider
lines of credit to be liquid assets, nor loans or mortgages held for
resale by the mortgagee. Liquid assets include cash on hand, checking
accounts, savings accounts, certificates of deposit, and marketable
securities.
HUD believes that the proposed liquidity requirement will protect
the interests of the FHA and consumers by ensuring that only
financially sound program participants are eligible to participate in
the Title I programs. Further, the liquidity requirement would provide
Title I lenders, dealers, and loan correspondents with a reserve of
cash upon which to draw if unexpected expenditures arise. HUD believes
the new requirement would reduce the temptation to misuse trust funds
and escrow accounts. The proposed liquidity requirements would not
become applicable until six months after the effective date of the
final rule. This delayed effective date will provide Title I lenders,
dealers and loan correspondents with adequate time to meet the new
requirement.
6. Reporting of loans for insurance (Sec. 201.30). The proposed
rule would amend Sec. 201.30 to clarify that required loan reports must
be submitted on the form prescribed by the Secretary, and must contain
the data prescribed by HUD. This change will ensure that information
vital to the proper monitoring of Title I loans (such as the address of
the borrower and the applicable interest rate) is properly collected
and transmitted to HUD.
7. Increase in insurance charge for property improvement and
manufactured home loans (Sec. 201.31). The proposed rule would revise
Sec. 201.31(a) to increase the insurance charge for Title I property
improvement and manufactured home loan insurance. Currently, Title I
lenders are required to pay an insurance charge of 0.50 percent of the
loan amount, multiplied by the number of years of the loan term. This
proposed rule would increase the applicable percentage to 1.00 percent
of the loan amount. The current charge amount has proven insufficient
in covering the costs of insurance claims paid by HUD under the
program. The proposed increase is necessary to strengthen the financial
viability of the Title I program.
Further, the proposed rule would amend Sec. 201.31(b) to conform
the procedures governing the payment of the insurance charge for
manufactured
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home loans with the insurance charge payment procedures for property
improvement loans. The current regulations establish an accelerated
payment schedule for manufactured home loans with a maturity in excess
of 25 months. Given the proposed increase in the insurance charge, HUD
also proposes to eliminate this ``front loading'' system for
manufactured home loans. Under the proposed rule, the payment schedule
for manufactured homes loans with a maturity in excess of 25 months
would be identical to that applicable to comparable property
improvement loans. Specifically, insurance charge payments for both
types of loans would be made in annual installments of 1.00 percent of
the loan amount until the insurance charge is paid.
8. Inspection requirements for all dealer and direct property
improvement loans (Sec. 201.40). HUD proposes to expand the current on-
site inspection requirements for dealer and direct property improvement
loans at Sec. 201.40. Specifically, the proposed rule would require
that on-site inspections be conducted for all dealer and direct
property improvement loans (not just for loans where the principal
obligation is $7,500 or more, or where the borrower fails to submit a
completion certificate). In the case of dealer and direct property
improvement loans of $7,500 or less, the lender would be required to
conduct two inspections--a pre-construction inspection and a post-
construction inspection. For dealer and direct loans in excess of
$7,500 the lender would also be required to conduct a third inspection.
Additionally, the proposed rule would also require that photographs of
the site be taken as part of all required inspections. The pre-
construction inspection and photograph requirements do not apply where
emergency action is needed to repair damage resulting from a disaster,
as described in Sec. 201.20(b)(3)(ii). The proposed rule would also
authorize HUD to grant exceptions to the pre-construction inspection
and photograph requirements.
The expanded inspection requirements will protect the interests of
borrowers and the FHA by helping to verify that all property
improvement work has been completed in a satisfactory manner. In
addition, the proposed regulatory amendments will help to ensure that
no funding is extended for improvements that were completed prior to
obtaining the Title I loan.
III. Increased Net Worth Requirements
In addition to the regulatory changes described in Section II of
this preamble (which would only apply to the Title I property
improvement and manufactured home programs), this proposed rule would
also increase the net worth requirements for both Title I and Title II
loan correspondents. Specifically, the rule would amend Sec. 202.8 to
raise the minimum net worth requirement for Title II loan correspondent
mortgagees and Title I loan correspondent lenders from $50,000 to
$75,000. The proposed rule would also amend Sec. 201.27 to raise the
current minimum net worth requirements for Title I property improvement
loan and manufactured home dealers from $25,000 and $50,000,
respectively, to $75,000.
The net worth reforms proposed by this rule are directed toward
this goal of ensuring that only responsible and adequately capitalized
entities are program participants. In HUD's experience there is less
stress on well capitalized companies to misuse restricted funds such as
insurance premiums or escrows for operating expenses. The net worth
requirements were last raised in 1992 and HUD believes they need to be
raised again to take into account inflation as well as increased losses
per claim. Since fiscal year 1991, the average Title I claim has
increased from $7,020 to $15,314 while the average loss has increased
from $6,318 to $13,783. The average Title II claim has increased from
$54,905 to $82,226, and the average loss has increased from $24,140 to
$31,800. Even with this modest increase in required net worth, a lender
would only be able cover indemnification for five Title I loans or two
Title II mortgages.
The proposed net worth requirements would not become applicable
until six months after the effective date of the final rule. This
delayed effective date will provide dealers and loan correspondents
with adequate time to meet the new requirements.
IV. Performance-Based Standards for the Title I Program
HUD is planning to develop performance-based standards for
determining the continued eligibility of lenders, correspondents and
dealers in the Title I program. These would identify objective criteria
for loan performance and would ensure management quality. While HUD is
still developing data collection and measurement systems for this
purpose and is not proposing any requirements in this area under this
proposed rule, it is interested in the public's views on using this
tool.
V. Findings and Certifications
Public Reporting Burden
The information collection requirements contained in
Sec. 201.26(a)(7) (the new telephone interview requirement for dealer
property loan disbursements) has been submitted to the Office of
Management and Budget (OMB) under the Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520). This is the only new information collection
requirement that would be established by this proposed rule. 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 average number of dealer transactions per year is 22,000. A
single response to the information collection requirement would be
required per dealer transaction. HUD estimates that the average time
per response would be no more than five minutes. Accordingly, the
estimated annual burden that would be imposed by the proposed
information collection requirement is 1,833 hours.
In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments
from members of the public and affected agencies concerning this
collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Comments must be
received within sixty (60) days from the date of this proposal.
Comments must refer to the proposal by name and docket number (FR-4246)
and must be sent to:
Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and
Budget,
[[Page 17123]]
New Executive Office Building, Washington, DC 20503;
and
Ethelene Washington, Reports Liaison Officer, Office of the Assistant
Secretary for Housing-Federal Housing Commissioner, Department of
Housing and Urban Development, 451--7th Street, SW, Room 9114,
Washington, DC 20410
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, 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 an economically significant
regulatory action under the Order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the office of the Department's Rules
Docket Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-
0500.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969 (42 U.S.C. 4223). The Finding of No Significant Impact is
available for public inspection between the hours of 7:30 a.m. and 5:30
p.m. weekdays in the Office of the Rules Docket Clerk, Office of
General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW, Washington, DC.
Regulatory Flexibility Act
The Secretary has reviewed this proposed rule before publication,
and by approving it certifies, in accordance with the Regulatory
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not
have a significant economic impact on a substantial number of small
entities. The reasons for HUD's determination are as follows.
With one exception (the increased net worth requirements for loan
correspondents), the amendments made by this proposed rule exclusively
relate to the Title I program. The majority of financial institutions
participating in the Title I program are large depositary institutions
and thus the proposed changes pose only minimum burdens for smaller
entities seeking to conduct Title I loan transactions. Some of these
proposed requirements (such as two-party disbursements for dealer loan
proceeds, and ensuring at least a second lien position for certain
loans) would impose minimal, or no, economic costs.
Where the proposed rule would impose an economic burden (such as
the increased net worth and liquidity requirements), HUD has attempted
to minimize the costs to lenders. For example, the proposed increased
net worth and liquidity requirements would be ``phased-in,'' and not
take effect until six months after the effective date of the other new
regulatory requirements. This delayed effective date will provide
lenders with additional time to meet the new requirements.
The proposed rule would also increase the net worth requirements
for all Title I and Title II loan correspondents from $50,000 to
$75,000. HUD is proposing to make this modest increase for a variety of
reasons, including the need to make adjustments for inflation since the
net worth requirements were last updated--in 1991 for the Title I
program (October 18, 1991; 56 FR 52414); and 1992 for the Title II
program (December 9, 1992; 57 FR 58326).
Although the primary purpose of setting minimum net worth standards
is not to ensure that a lender can absorb the costs of fines or
indemnifications, HUD notes that the proposed net worth requirement
will cover only three Title I loans, assuming a maximum loan value of
$25,000. The proposed net worth requirement would cover only five
average Title I loans (assuming a $13,000 average loss). The proposed
net worth requirement will cover less than one Title II loan, assuming
a maximum loan value of $219,849. The proposed net worth requirement
would cover two average Title II loans (assuming a $31,000 average
loss). Therefore, the proposed net worth value is not significant in
comparison to the typical size of a Title I and Title II loan.
Notwithstanding HUD's determination that this rule will not have a
significant economic effect on a substantial number of small entities,
HUD specifically invites comments regarding any less burdensome
alternatives to this rule that will meet HUD's objectives as described
in this preamble.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on State and local
governments and is not required by statute, or the rule preempts State
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This proposed rule would not have
federalism implications and would not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) 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 Unfunded Mandates
Reform Act of 1995.
Catalog of Federal Domestic Assistance Numbers
The Catalog of Federal Domestic Assistance program numbers
applicable to the 24 CFR parts 201 and 202 are:
14.110 Manufactured Home Loan Insurance-- Financing Purchase of
Manufactured Homes as Principal Residences of Borrowers;
14.142 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, for the reasons described in the preamble, HUD
proposes to amend 24 CFR parts 201 and 202 to read 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 and 3535(d).
2. In Sec. 201.2, revise the definition of ``Dealer loan'' to read
as follows:
Sec. 201.2 Definitions.
* * * * *
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Dealer loan means a loan where 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.
In the case of a property improvement loan, the lender may disburse the
loan proceeds solely to the borrower, or jointly to the borrower and
the dealer or other parties to the transaction. In the case of a
manufactured home loan, 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.
* * * * *
3. Revise Sec. 201.24(a) to read as follows:
Sec. 201.24 Security requirements.
(a) Property improvement loans. (1) Property improvement loans in
excess of $7,500. (i) 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.
(ii) 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.
(iii) The lien need not be a first lien on the property; however,
the lien securing the Title I loan must hold no less than the second
lien position.
(2) Property improvement loans of $7,500 or less. 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.
(3) Manufactured home improvement loans. Manufactured home
improvement loans need not be secured.
* * * * *
4. Amend Sec. 201.26 as follows:
a. Redesignate paragraphs (a) and (b) as paragraphs (b) and (c),
respectively;
b. Add new paragraph (a);
c. Redesignate newly designated paragraphs (b)(6) and (b)(7) as
paragraphs (b)(8) and (b)(9), respectively; and
d. Add new paragraphs (b)(6) and (b)(7).
Sec. 201.26 Conditions for loan disbursement.
(a) Disbursement of direct property improvement loans in excess of
$7,500. (1) Escrow account. For all direct property improvement loans
in excess of $7,500, the lender must deposit all of the loan proceeds
in an interest-bearing escrow account until they are disbursed in
accordance with the requirements of this section.
(2) Disbursement schedule. Disbursement of the loan proceeds will
be made in a series of ``draws,'' in accordance with criteria
established by the Secretary. Disbursement of the loan proceeds will be
made using the following schedule:
(i) The lender will disburse 40% of the loan proceeds upon the
completion of the pre-construction inspection required under
Sec. 201.40(c)(3)(i).
(ii) Subsequent to the initial 40% draw (but before the final draw
of the loan proceeds) the borrower may draw up to an additional 40% of
the property improvement loan proceeds.
(iii) The lender will disburse the balance of the loan proceeds
upon the completion of the inspection required under
Sec. 201.40(c)(3)(ii).
(b) * * *
(6) In the case of a dealer loan, the lender may disburse the loan
proceeds solely to the borrower, or jointly to the borrower and the
dealer or other parties to the transaction.
(7) In the case of a dealer loan, the lender must conduct a
telephone interview with the borrower before the disbursement of the
loan proceeds. The lender, at minimum, must obtain an oral affirmation
from the borrower to release funds to the dealer. The lender shall
document the borrower's oral affirmation.
* * * * *
5. Revise Sec. 201.27(a)(1) to read as follows:
Sec. 201.27 Requirements for dealer loans.
(a) Dealer approval and supervision. (1) The lender shall approve
only those dealers which, on the basis of experience and information,
the lender considers to be reliable, financially responsible, and
qualified to satisfactorily perform their contractual obligations to
borrowers and to comply with the requirements of this part. However, in
no case shall the lender approve a dealer that is unable to meet the
following minimum qualifications:
(i) Net worth. All property improvement and manufactured home
dealers shall have and maintain a net worth of not less than $75,000,
plus an additional $25,000 for each branch office, in assets acceptable
to the Secretary, up to a maximum required net worth of $250,000.
(ii) Liquid assets. A dealer shall have liquid assets consisting of
cash or its equivalent acceptable to the Secretary in the amount of 20
percent of its net worth, up to a maximum liquidity requirement of
$100,000.
(iii) Business experience. All property improvement loan and
manufactured home dealers must have demonstrated business experience as
a property improvement contractor or supplier, or in manufactured home
retail sales, as applicable.
* * * * *
6. Revise Sec. 201.30(a) to read as follows:
Sec. 201.30 Reporting of loans for insurance.
(a) Date of reports. The lender shall transmit a loan report on
each loan reported for insurance within 31 days from the date of the
loan's origination or purchase from a dealer or another lender. The
loan report must be submitted on the form prescribed by the Secretary,
and must contain the data prescribed by HUD. Any loan refinanced under
this part shall similarly be reported on the prescribed form within 31
days from the date of refinancing. When a loan insured under this part
is transferred to another lender without recourse, guaranty, guarantee,
or repurchase agreement, a report on the prescribed form shall be
transmitted to the Secretary within 31 days from the date of the
transfer. No report is required when a loan insured under this part is
transferred with recourse or under a guaranty, guarantee, or repurchase
agreement.
* * * * *
7. Amend Sec. 201.31 as follows:
a. Revise the first sentence of paragraph (a); and
b. Revise paragraph (b)(2).
Sec. 201.31 Insurance charge.
(a) Insurance charge. For each eligible property improvement loan
and manufactured home loan reported and acknowledged for insurance, the
lender shall pay to the Secretary an insurance charge equal to 1.00
percent of the loan amount, multiplied by the number of years of the
loan term.
* * * * *
(b) * * *
(2)(i) For any loan having a maturity in excess of 25 months,
payment of the insurance charge shall be made in annual installments,
with the first installment due on the 25th calendar day after the date
the Secretary acknowledges the loan report, and the second and
successive installments due
[[Page 17125]]
on the 25th calendar day after the date of billing by the Secretary.
(ii) For any loan having a maturity in excess of 25 months, payment
shall be made in annual installments of 1.00 percent of the loan amount
until the insurance charge is paid.
* * * * *
8. In Sec. 201.40, revise the section heading and paragraph (c) to
read as follows:
Sec. 201.40 Pre- and Post-disbursement loan requirements.
* * * * *
(c) Inspection requirement on dealer and direct property
improvement loans. (1) General. The lender or its agent shall conduct
on-site inspections on all dealer and direct property improvement
loans.
(2) Inspections for dealer and direct property improvement loans of
$7,500 or less. For dealer and direct property improvement loans of
$7,500 or less, the lender or its agent shall conduct:
(i) A pre-construction inspection within 30 days before the start
of construction; and
(ii) A post-construction inspection within 60 days after the
receipt of the completion certificate, or as soon as the lender
determines that the borrower is unwilling to cooperate in submitting a
completion certificate, as required under paragraph (b) of this
section.
(3) Inspections for dealer and direct property improvement loans in
excess of $7,500. For dealer and direct property improvement loans in
excess of $7,500, the lender or its agent shall conduct:
(i) A pre-construction inspection within 30 days before the start
of construction;
(ii) An inspection within 60 days before the disbursement of the
loan proceeds (in the case of a dealer loan), or within 60 days before
the final draw of the loan proceeds (in the case of a direct loan--see
Sec. 200.26(a)(2)(iii)); and
(iii) A post-construction inspection within 60 days after the
receipt of the completion certificate, or as soon as the lender
determines that the borrower is unwilling to cooperate in submitting a
completion certificate, as required under paragraph (b) of this
section.
(4) Purpose of inspections. The purpose of the inspections is to
verify the eligibility of the improvements and whether the work has
been completed. Photographs of the site must be taken as part of all
inspections. If the borrower will not cooperate in permitting an on-
site inspection, the lender shall report this fact to the Secretary.
(5) Exceptions. The pre-construction inspection and photograph
requirements do not apply where emergency action is needed to repair
damage resulting from a disaster, as described in
Sec. 201.20(b)(3)(ii). Exceptions to the pre-construction inspection
and photograph requirements can be granted in other circumstances if
the prior approval of the Secretary is obtained.
* * * * *
PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES
8. The authority citation for part 202 continues to read as
follows:
Authority: 12 U.S.C. 1703, 1709 and 1715b; 42 U.S.C. 3535(d).
9. Revise Sec. 202.6(b)(2) to read as follows:
Sec. 202.6 Supervised lenders and mortgagees.
* * * * *
(b) * * *
(2) Liquid assets. The lender or mortgagee shall have liquid assets
consisting of cash or its equivalent acceptable to the Secretary in the
amount of 20 percent of its net worth, up to a maximum liquidity
requirement of $100,000.
* * * * *
10. Revise Sec. 202.7(b)(2) to read as follows:
Sec. 202.7 Nonsupervised lenders and mortgagees.
* * * * *
(b) Liquid assets. The lender or mortgagee shall have liquid assets
consisting of cash or its equivalent acceptable to the Secretary in the
amount of 20 percent of its net worth, up to a maximum liquidity
requirement of $100,000.
* * * * *
11. Amend Sec. 202.8 by revising paragraphs (b)(1) and (b)(4) to
read as follows:
Sec. 202.8 Loan correspondent lenders and mortgagees.
* * * * *
(b) * * *
(1) Net worth. A loan correspondent lender or mortgagee shall have
a net worth of not less than $75,000 in assets acceptable to the
Secretary, plus an additional $25,000 for each branch office authorized
by the Secretary, up to a maximum requirement of $250,000, except that
a multifamily mortgagee shall have a net worth of not less than
$250,000 in assets acceptable to the Secretary.
* * * * *
(4) Liquid assets. A loan correspondent lender or mortgagee shall
have liquid assets consisting of cash or its equivalent acceptable to
the Secretary in the amount of 20 percent of its net worth, up to a
maximum liquidity requirement of $100,000.
* * * * *
Dated: March 7, 2000.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 00-7771 Filed 3-29-00; 8:45 am]
BILLING CODE 4210-27-P
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