**U. S. Department of Housing and Urban Development**

**Washington, D. C. 20410-8000**

December 7, 2001

> **TI-473**

**TO: ALL APPROVED TITLE I LENDERS**

**SUBJECT:** Publication of Final Rule on November 7, 2001 Regarding:

> Strengthening the Title I Property Improvement and
>
> Manufactured Home Loan Insurance Programs
>
> and Title I Lender/Title II Mortgagee Approval Requirements

This Title I Letter provides information about the Final Rule on the
Title I Property Improvement and Manufactured Home Loan Insurance
Programs and Title I Lender/Title II Mortgagee Approval requirements
published on November 7, 2001. The rule can be downloaded at
**www.hudclips.org**. Unless otherwise stated, the information contained
in this letter is effective December 7, 2001.

## Increase in Title I Insurance Charge

The Final Rule changes the Insurance Premium for both the Property
Improvement loan program and the Manufactured Home loan program. The
Property Improvement loan insurance charge has been increased to 1.00
percent (from .50 percent) of the loan amount, multiplied by the number
of years in the loan term. The Manufactured Housing loan insurance
charge is changing in two ways; the rate is increasing from .5 percent
to 1 percent and the previous front-loaded structure of paying is
changing to a flat payment structure described above for Property
Improvement loans.

These changes are applicable for any loan (including refinances) in
which the **credit application was dated on or after December 7, 2001.**
In order to provide lenders sufficient time to disburse loans in their
pipelines, all loans with a **disbursement date on or after**

**January 7, 2002,** **will receive the higher insurance rate.**

**[First or Second Lien Position Required for Property Improvement Loans
in excess of \$7,500]{.underline}**

The Final Rule **requires that all property improvement loans with a
credit application dated on or after December 7, 2001,** and in excess
of \$7,500, must be secured by a recorded first or second lien on the
improved property. In underwriting the loan, lenders must obtain
evidence of verification of ownership of the improved property. This
evidence must confirm that the recorded lien position in which the lien
would be recorded would be in no less than first or second position.

In order to not unduly burden those individuals who want to use the
Title I program in conjunction with other programs, HUD has provided two
exceptions to this new requirement. The exceptions listed below would
permit a Title I loan to be in a third position:

1.  The first and second mortgages were made at the same time for the
    purchase of the home, i.e., the second mortgage was used to
    eliminate private mortgage insurance on a conventional mortgage. (A
    home equity line of credit second mortgage does not meet the
    requirement of loans made at the same time for purchase of the home
    because it is not being made for the purpose of paying the
    downpayment).

> 2\. A State or local government agency provided funds for a
> downpayment assistance
>
> program, resulting in a second mortgage for these funds.

HUD realizes that interest rates have dropped and many consumers have
taken advantage of the lower rates in refinancing their first mortgage
when they had originally purchased their home utilizing a two-lien
position program. The refinance of the first mortgage at a lower rate
will now have a different date than the second lien. In order to verify
that this loan is just a refinance of the original first mortgage loan
that was made at the same time, title documentation should be obtained
that reflects that the first mortgage was refinanced and the second lien
had been subordinated so that it retains its proper second position. The
refinanced first mortgage can include closing costs and reasonable
financing fees, but it cannot contain additional funds for improvements,
debt consolidation, delinquent taxes, etc.

This regulatory change was promulgated to reduce losses resulting from
liens placed in junior positions that were far beyond the value of the
property. The Title I Regulations at

Section 201.24(a) previously did not specify a lien position.

Some lenders require liens to be placed on all their loans regardless of
the amount of the loan. Lenders who require liens on property
improvement loans in the amount of \$7,500 OR LESS, do not need to apply
this requirement for these loans below HUD's security threshold.

**[Important Changes to the Property Improvement Dealer
Program]{.underline}**

## Requirement Ending Dealer-Only Loan Disbursements

For property improvement dealer loans with a **credit application** date
of

**December 7, 2001**, or later, lenders may not disburse loan proceeds
only to the dealer. The Final Rule requires that for dealer loans,
lenders must disburse funds solely to the borrower, or jointly to the
borrower and the dealer or other parties to the transaction.

## Requirement for Telephone Interviews on Dealer Loans Prior to Fund Disbursement

For property improvement dealer loans with a **credit application** date
of

**December 7, 2001**, or later, the Final Rule requires lenders to
conduct a telephone interview prior to disbursing funds. This telephone
interview with the borrower(s) is in addition to the credit underwriting
telephone interview required by Section 201.22(a)(9). Lenders conduct
this second telephone interview after the borrower(s) and the dealer
sign the Completion Certificate,

HUD 56002. Telephone interviews will be used to confirm that the dealer
has completed the work, the work is satisfactory, and the Completion
Certificate was actually signed by the borrower and the dealer.

HUD has not developed a form for this client intake, but lenders must
ask for the following information and retain it on company letterhead;
the date of the interview, the name of the lender/interviewer and
borrower, the property address, the date of note, the loan amount, the
name of dealer/contractor, the work performed, the borrower(s)
evaluation of the work (satisfied or not), and the borrower(s)
affirmation to release the funds.

The HUD Financial Operations Center located in Albany, NY, is not
authorized to pay claims on dealer loans with a **credit application**
date on or after **December 7, 2001**, without the signed Completion
Certificate, and documentation to verify the phone interview took place
and reported that the work was completed and the borrower was satisfied.

### Inspection Reports

Inspection Reports are still required on all types of property
improvement loans when the loan equals or exceeds \$7,500 (two-party
check dealer-loans, check to the borrower-only dealer loans and also
direct loans).

## Processing Title I Dealer Loans

The Final Rule requires lenders to modify their procedures for
processing Title I Dealer Loans:

-   Borrower signs Note and security documents (if required).

-   Dealer completes the improvements.

-   Borrower and dealer sign Completion Certificate.

-   Lender receives signed Completion Certificate.

-   Lender conducts telephone interview.

-   Lender cuts check to borrower only, or to borrower and dealer.

-   Lender inspects the improvements (when required).

This list outlines the major steps for processing most standard Title I
dealer loans. This list does not include all of HUD's processing
requirements.

These new requirements will help ensure that the improvements have been
completed satisfactorily and that disagreements between the borrower and
the dealer are brought to the lender's attention. These new requirements
will assist the lender in the proper supervision and monitoring of
dealers with regard to the existence of consumer complaints against the
dealer.

## Direct Loan Program

The direct loan portion remains unchanged (disbursement directly to the
borrower as soon as Notice of Right to Cancel period has expired).

On **direct loans**, if the borrower does not submit a Completion
Certificate on any loan under \$7,500, there must be an inspection done
to verify that the improvements were completed. **If the borrower does
not submit a Completion Certificate, in addition to doing an inspection,
a report of non-compliance must be submitted to the Department.** If the
inspection reveals that the work has not been completed, **this should
also be mentioned in the letter** of non-compliance to the Department.

# [Collection of Additional Data]{.underline}

The Final Rule also announces that HUD will begin collecting additional
data (e.g. Social Security Numbers, property addresses, interest rates,
etc.) on Title I Property Improvement and Manufactured Home loans.
Capturing this additional data will assist the Department in monitoring
the Title I program.

HUD is modifying its computer systems to manifest/report new Title I
loans with this additional information. A Title I letter will be
prepared upon the completion of the systems modification to advise
lenders of the new reporting procedures.

# 

# [Increase in Net Worth Requirements for Title I Lenders and Dealers]{.underline}

Effective May 7, 2002, Title I and Title II loan correspondent lenders
must have and maintain a net worth in assets acceptable to the Secretary
in an amount of \$63,000. In addition, effective May 7, 2002, Title I
property improvement dealers must have and maintain a net worth of not
less than \$32,000. Manufactured Home dealers must have and maintain a
net worth of \$63,000. The required net worth must be maintained in
assets acceptable to the Secretary. When lenders are monitoring their
approved dealers on or after May 7, 2002, they must verify that the
dealer has met and maintained the increased required net worth. Failure
to have increased and maintained the required net worth will require the
lender to terminate doing business with that dealer.

As a reminder**,** Section 201.27(a)(3) requires dealers to apply
annually to the lender for reapproval. The lender is responsible for
supervising and monitoring of each approved dealer's activities with
respect to loans insured under Title I. As part of the monitoring
duties, lenders are required to visit each approved dealer's place of
business at least once every six months to review their Title I
performance and compliance. Lenders must verify that Title I property
improvement dealer/contractors and Manufactured Home dealers meet and
maintain a net worth in assets that is acceptable to the Secretary.
Lenders must maintain a file on each approved dealer which contains the
executed dealer approval for and supporting documentation required under
Section 201.27(a)(2).

Additional information about Net Worth Requirements will be announced in
an upcoming Mortgagee Letter.

The Department remains committed to offering quality home improvement
and manufactured home loan products. These program changes will permit
the Title I program to continue to meet the needs of homeowners who wish
to improve their homes without sacrificing the interests of FHA, the
U.S. taxpayers or others.

If you have questions about this letter, please contact the Home
Mortgage Insurance Division at 202-708-2121. Please direct questions
about the new net worth requirements to the Lender Approval Division at
202-708-3976.

Sincerely,

John C. Weicher

Assistant Secretary for Housing-

Federal Housing Commissioner