[Federal Register Volume 76, Number 62 (Thursday, March 31, 2011)]
[Notices]
[Pages 17936-17951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7551]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5450-N-03]
RIN 2502-ZA09


Federal Housing Administration (FHA): Notice of FHA PowerSaver 
Home Energy Retrofit Loan Pilot Program

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

[[Page 17937]]


ACTION: Notice.

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SUMMARY: This notice announces HUD's FHA Home Energy Retrofit Loan 
Pilot Program (Retrofit Pilot Program or Pilot Program) known as FHA 
PowerSaver. The Consolidated Appropriations Act, 2010 directs HUD to 
conduct an Energy Efficient Mortgage Innovation pilot program targeted 
to the single family housing market. The Retrofit Pilot Program meets 
this statutory directive and provides funding to support that effort. 
The announcement of this pilot program follows a November 10, 2010, 
Federal Register notice in which HUD submitted for public comment its 
proposal to conduct the Retrofit Pilot Program. This announcement of 
the final structure of the Pilot Program takes into consideration the 
public comments received in response to the November 10, 2010, notice.

DATES: Effective Date: May 2, 2011May 2, 2011

FOR FURTHER INFORMATION CONTACT: Patricia McBarron, Office of Single 
Family Housing Development, Office of Housing, Department of Housing 
and Urban Development, 451 7th Street, SW., Washington, DC 20410-8000; 
telephone number 202-708-2121 (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 800-877-
8339.

SUPPLEMENTARY INFORMATION:

I. Background

    On November 10, 2010 (75 FR 69112), HUD published in the Federal 
Register a notice that announced its proposal to conduct the Retrofit 
Pilot Program. The Consolidated Appropriations Act, 2010 (Pub. L. 111-
117, approved December 16, 2009, 123 Stat. 3034) (2010 Appropriations 
Act), which appropriated Fiscal Year (FY) 2010 funds for HUD, among 
other agencies, appropriated $50 million for an Energy Innovation Fund 
to enable HUD to catalyze innovations in the residential energy 
efficiency sector that have the promise of replicability and help 
create a standardized home energy efficient retrofit market. Of the $50 
million appropriated for the Energy Innovation Fund, the 2010 
Appropriations Act stated that ``$25,000,000 shall be for the Energy 
Efficient Mortgage Innovation pilot program directed at the single 
family housing market.'' (See Pub. L. 111-117, at 123 Stat. 3089.)
    As discussed in detail in the November 10, 2010, notice, in 
considering how to structure the pilot program directed by the 2010 
Appropriations Act, HUD looked to the findings of the Administration's 
Recovery Through Retrofit Report,\1\ which specifically addressed 
retrofitting homes for energy efficiency, and the suitability of 
building the pilot program by supplementing FHA's Title I Property 
Improvement Loan Insurance program (Title I program). HUD determined 
that both the Administration's Recovery through Retrofit Report and 
FHA's Title I program provided the appropriate foundation for 
structuring the Retrofit Pilot Program. (See 75 FR 69113-69114.) With 
respect to the Title I program, HUD determined that utilizing the 
existing FHA Title I program, with additional grant funds and new 
requirements, is the most efficient and effective opportunity it could 
deploy to deliver federally insured financing to homeowners in markets 
that are ready and able to utilize it.
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    \1\ On October 19, 2009, the Administration released the 
Recovery Through Retrofit Report (RTR Report), which builds on the 
foundation laid out in the American Recovery and Reinvestment Act 
(Pub. L. 111-5, approved February 17, 2009) to expand green job 
opportunities in the United States and boost energy savings for 
middle class Americans by retrofitting homes for energy efficiency. 
The White House Council on Environmental Quality, along with 12 
federal departments and agencies (including HUD) and 6 White House 
offices, developed the report through an interagency process. The 
RTR Report recognizes that the funding of residential retrofit 
projects will help create jobs for retrofit workers, while also 
helping homeowners save money by lowering their utility bills. The 
report can be found at http://www.whitehouse.gov/assets/documents/Recovery_Through_Retrofit_Final_Report.pdf.
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    FHA's Title I program is authorized by section 2 of Title I of the 
National Housing Act (12 U.S.C. 1703), and its regulations are codified 
in 24 CFR part 201.

II. The November 10, 2010, Proposal

    As provided in the November 10, 2010, notice, FHA's goals for the 
Retrofit Pilot Program are: (1) To facilitate the testing and scaling 
of a mainstream mortgage product for home energy retrofit loans that 
includes liquidity options for lenders, resulting in more affordable 
and widely available loans than are currently available for home energy 
retrofits; and (2) to establish a robust set of data on home energy 
efficiency improvements and their impact--on energy savings, borrower 
income, property value, and other metrics--for the purpose of driving 
development and expansion of mainstream mortgage products to support 
home energy efficiency retrofits. After determining the viability of 
the Title I program to achieve these goals, FHA also determined that 
several changes to the program are necessary for the purposes of the 
Retrofit Pilot Program. These changes are described in detail in 
Section II.F. of the November 10, 2010, notice. (See 75 FR 69115).) 
Broadly, the modifications to the Title I regulations are intended to 
protect consumers, provide low-cost financing, and generate lender and 
secondary market participation in home energy retrofit loans.
    In the November 10, 2010, notice, HUD solicited public comment on 
the proposed structure of the Retrofit Pilot Program, and also invited 
interested lenders to advise HUD of their interest, as described in 
Appendix A of the notice, so that HUD may contact them and explore 
their interest and the possibility of their participation in the pilot 
program.
    At the close of the public comment period on December 27, 2010, HUD 
received 49 public comments. HUD reviewed the comments, which are 
addressed in section IV of this notice, and made some changes to the 
Retrofit Pilot Program in response to public comment and further 
consideration of issues by HUD. The changes made to the Retrofit Pilot 
Program are addressed in Section III, which immediately follows.

III. Changes to the Proposed Retrofit Pilot Program

    HUD has made the following changes to the November 10, 2010, 
notice:
    1. Lender grant funds. The final notice specifies all of the 
purposes for which lenders may use grant funds. They are: (1) 
Supporting costs associated with creating or enhancing staffing and/or 
systems necessary to deliver or report on PowerSaver-insured loans; (2) 
Funding costs of loan marketing, origination, and/or underwriting; (3) 
Offsetting costs associated with appraisals and other approved methods 
of property valuation; and (4) For lenders that will also service their 
own loans, reducing servicing costs.
    In addition, this notice clarifies that HUD grant funds may not be 
used to directly subsidize or otherwise ``write-down'' the interest 
rate on PowerSaver loans. Non-Federal grant funds may be used for this 
purpose.
    2. Eligible properties (definition of ``single family property 
improvement loans''). This notice broadens the definition of eligible 
properties to include both attached and semidetached single unit, 
owner-occupied principal residences, in addition to detached properties 
of that type. Further, HUD has clarified that condominium units that 
otherwise meet the criteria of an eligible single family property are 
also

[[Page 17938]]

eligible properties under the pilot program.
    3. New eligible improvements. This notice adds replacement windows 
that meet the most recent Energy Star specifications to the list of 
eligible improvements that may be funded with a PowerSaver loan.
    4. Revisions to eligible improvements listed in the November 10, 
2010, notice. This notice makes the following revisions with respect to 
eligible improvements listed in the November 10, 2010, notice:
    a. Ground source heat pump systems (instead of ``geothermal heat 
pumps'' as in the November 10, 2010, notice) must be installed in 
accordance with ANSI/ACCA Standard 5 QJ-2010; and
    b. Wind turbines must:
    (i) Have a nameplate capacity of not more than 100 kilowatts;
    (ii) Have performance and safety certification to:
    <bullet> The International Electromechanical Commission (IEC) 
standards from an accredited product certification body, or
    <bullet> Certification to the American Wind Energy Association 
(AWEA) standards from the Small Wind Certification Council (SWCC) or a 
nationally recognized testing laboratory; and
    (iii) Be installed by an installer with North American Board of 
Certified Energy Practitioners Small Wind Installer Certification or 
small wind turbine installation training from an accredited training 
organization.
    5. Use of loan proceeds to fund other improvements. Section 
V.F.4(b) of the notice also specifies that homeowners may use up to 25 
percent of PowerSaver loan proceeds to fund, with certain specified 
exceptions, property improvements identified in Title I Letter 470 as 
eligible improvements under the Title I program. A copy of Title I 
Letter 470 may be downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm.
    6. Property valuation. This notice specifies that lenders may use a 
Fannie Mae and Freddie Mac Form 2055 Exterior-Only Inspection 
Residential Appraisal Report (most recent version) to determine 
property value for the purposes of establishing property valuation. The 
notice also specifies that lenders may be able to use Automated 
Valuation Models (AVMs) to establish property value for certain 
borrowers, subject to FHA approval on a case-by case basis. HUD will 
discuss this issue further with lenders in the review of their 
Expression of Interest. HUD notes, however, that potential purchasers 
of PowerSaver loans from originating lenders may have additional or 
more restrictive criteria regarding the use of AVMs, which lenders 
seeking to sell loans to such entities may be required to meet.
    7. Charges to borrower to obtain a loan. This notice specifies the 
list of charges and fees that may be charged in connection with a 
PowerSaver loan and which may be financed as part of a PowerSaver loan.
    8. Criteria for dealer loans. This notice generally affirms that 
``dealer loans'' are not allowed as part of the PowerSaver pilot. 
However, home improvement contractors may provide information to 
homeowners as to how they may obtain a PowerSaver loan, including the 
identity of lenders who are participating in the program.
    9. Insurance claim procedure. This notice continues to provide that 
the holder of the note will be accountable to HUD for origination/
underwriting errors, and that the servicer will be accountable to HUD 
for servicing errors, as long as the servicer is a HUD-approved lender. 
However, based on further internal HUD consideration on how best to 
effectuate this requirement, this notice clarifies that the insured 
lender must enter into an agreement with its servicer, under which the 
servicer agrees to be liable to HUD for such errors, and which 
identifies HUD as a third-party beneficiary of such agreement.

IV. Discussion of Public Comments on the Proposed Retrofit Pilot 
Program

    Comments were submitted by lenders and representatives of the 
lending industry; home performance contractors and representatives of 
the home performance/contracting industry (including one pension fund); 
local officials and representatives of state energy agencies; 
environmental and public health organizations; providers of energy 
services and technologies; community development financial 
institutions; and members of the general public. This section presents 
a summary of the significant issues raised by the commenters on the 
November 10, 2010, notice and HUD's responses to these issues.

A. Comments on Geographic Scope

    In listing the locations that received funding under the Department 
of Energy (DOE) Better Buildings program, all of which are 
automatically eligible locations for lenders to serve in the pilot 
program, the Proposed Notice inadvertently excluded Nashville, 
Tennessee, from the list. This notice corrects this error; Nashville is 
an automatically eligible location for a lender to serve under the 
pilot program. In addition, in December 2010, DOE announced that the 
following State Energy Programs were integrated into BetterBuildings: 
Alabama, Maine, Massachusetts, Michigan, Nevada, Washington, and 
Virginia. As a result, these states are automatically eligible 
locations for lenders to serve under the pilot program.
    Finally, this notice provides that areas where the Home Performance 
with Energy Star program is available are automatically eligible 
locations for lenders to serve under the pilot program.
    Several commenters suggested that certain communities that are not 
covered under DOE's Better Buildings Program should be eligible markets 
for lenders to serve in the pilot program. As noted in the November 10, 
2010, notice, HUD strongly encourages lenders to serve such markets, 
provided lenders can demonstrate, through their Expressions of Interest 
in participating, that such locations are viable markets for the 
deployment of PowerSaver-insured loans. On December 16, 2010, HUD 
posted additional guidance on its Web site to assist lenders in this 
area: http://www.hud.gov/offices/hsg/sfh/title/additionalsaverinformation.pdf.

B. Comments on Lender Eligibility

    Several commenters recommended that HUD allow institutions that may 
not be FHA-approved lenders, such as community development financial 
institutions and state energy agencies, to be eligible lenders under 
the pilot program. HUD hopes and expects that a wide range of entities 
will express interest in participating in the pilot program, including 
entities that have not participated in FHA programs in the past. 
However, as required by the National Housing Act, any entity that 
wishes to make loans insured by FHA under the pilot program must hold a 
valid Title I contract of insurance and be approved by the Secretary. 
HUD notes that approved Title II lenders may obtain Title I eligibility 
under an expedited process.

C. Comments on Lender Grant Funds

    Several commenters suggested uses of the incentive grant funds 
available to lenders under the pilot program in addition to the uses 
specified in the November 10, 2010, notice. Some commenters recommended 
allowing grant funds to be used to support a lender's costs associated 
with creating or enhancing systems necessary to deliver PowerSaver 
loans.
    HUD agrees with this suggestion and this notice specifies that such 
use is allowed with grant funds under the

[[Page 17939]]

pilot program. In addition, this notice specifies that lenders may use 
grant funds to offset costs associated with appraisals.
    Several commenters suggested that HUD grant funds be available to 
lenders to set up loan loss reserves. Due to the current insurance 
structure, HUD does not view this as a viable or optimal use of HUD 
grant funds for the purposes of the pilot program and declines to make 
this change. HUD notes that many communities have access to other funds 
through DOE and other sources that may be available for such purposes. 
HUD is encouraging lenders to work in partnership with other entities 
through the pilot program and will evaluate lender Expressions of 
Interest to participate in part on the extent to which lenders propose 
to do so. HUD's intention is to provide lenders the flexibility to use 
funds so long as any use delivers demonstrable benefit to borrowers, 
such as by making loans more affordable or available. One commenter 
recommended that HUD ensure that lenders who propose to use grant funds 
to lower the interest rate on PowerSaver loans they originate do not 
``over subsidize'' loans. HUD will work closely with each lender to 
size and scope the lender's grant payments so that the payments have 
the most beneficial impact in the market. As stated in the November 10, 
2010, notice, the amount of payment to each lender and the eligible 
uses of funds by each lender will be determined by HUD based on the 
lender's Expression of Interest. A significant factor in determining 
payment amounts to each lender will be the number of loans the lender 
anticipates making during the 2-year period of the pilot program. 
Lenders were required to report to HUD on their use of incentive 
payments funds.

D. Comments on Selection of Lenders

    One commenter recommended that HUD require lenders to secure the 
approval of their Expressions of Interest from ``existing energy 
efficiency program officials'' before submitting them to HUD and 
suggested HUD share Expressions of Interest with ``state energy 
offices'' in states that each lender proposes to serve. HUD declines to 
make this change, as lender Expressions of Interest are nonbinding, and 
so may change as lenders finalize the details of their participation in 
discussions with HUD, and may contain proprietary information. The same 
commenter encouraged HUD to ensure participating lenders collaborate 
closely with state energy efforts and other initiatives that are 
currently supporting home energy improvements in markets the lender 
proposes. HUD does in fact intend to do this, as suggested in the 
November 10, 2010, notice (with reference to the importance of 
partnerships with public sector agencies), and will evaluate lender 
Expressions of Interest in part on this basis.

E. Comments on Eligible Properties (Definition of ``Single Family 
Property Improvement Loans'')

    Several commenters recommended broadening the definition of 
eligible properties under the pilot program. The following property 
types were recommended: attached and semidetached single unit, owner-
occupied principal residences; manufactured homes; and multifamily 
properties. HUD agrees with the suggestion to allow attached and 
semidetached single unit, owner-occupied principal residences, in 
addition to detached properties of that type. Such properties are fully 
within any common definition of ``single family housing'' and represent 
an important segment of the housing stock in many communities. This 
notice reflects this change. Further, HUD has clarified that 
condominium units that otherwise meet the criteria of an eligible 
single family property are also eligible properties under the pilot 
program.
    HUD declines to make further changes to eligible property types. 
HUD fully agrees with the statements by commenters that many 
manufactured homes and multifamily properties and their residents would 
benefit from energy improvements. However, as noted in the November 10, 
2010, notice, the PowerSaver pilot program is being implemented under 
the statutory directive from Congress to create a pilot program 
directed at the single family housing market.\2\ HUD also notes that 
other HUD programs are designed to support manufactured and multifamily 
housing.
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    \2\ The Consolidated Appropriations Act, 2010 (Pub. L. 111-117, 
approved December 16, 2009, 123 Stat. 3034). Specifically, see 
Public Law 111-117, at 123 Stat. 3089.
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F. Comments on Eligible Use of Loan Proceeds

    Several commenters addressed the subject of eligible uses of loan 
proceeds. Some commenters recommended that the list of eligible 
improvements directly related to home energy performance be revised and 
expanded. Others recommended that HUD allow borrowers flexibility to 
use loan proceeds to fund costs associated with improvements that are 
not on the list. With respect to the first set of comments, HUD has 
made a revision to the list of eligible improvements. Specifically, 
this notice adds replacement windows that meet the most recent Energy 
Star specifications to the list of eligible improvements that may be 
funded under the PowerSaver program.
    In addition, this notice makes the following revisions with respect 
to eligible improvements on the list provided in the November 10, 2010, 
notice:
    1. Ground source heat pump systems (instead of ``geothermal heat 
pumps'' as in the November 10, 2010, notice) must be installed in 
accordance with ANSI/ACCA Standard 5 QJ-2010; and
    2. Wind turbines must:
    (a) Have a nameplate capacity of no more than 100 kilowatts;
    (b) Have performance and safety certification to:
    <bullet> The IEC standards from an accredited product certification 
body, or
    <bullet> Certification to the AWEA standard from the SWCC or a 
nationally recognized testing laboratory; and
    (c) Be installed by an installer with North American Board of 
Certified Energy Practitioners Small Wind Installer Certification or 
small wind turbine installation training from an accredited training 
organization.
    Other commenters recommended that the list of eligible improvements 
include ``home energy management systems'' and ``home lighting 
systems.'' HUD declines to make these changes. While HUD agrees that 
improvements consistent with these terms can improve home energy 
performance, Title I Letter 470 provides that property improvement for 
the purposes of the program must ``[i]n general * * * be permanent, 
hard wired or hard plumbed to the property.'' Another commenter 
recommended stronger and more prescriptive requirements with respect to 
insulation, sealing, skylights, and air conditioning systems. HUD 
declines to make these changes. HUD believes that these recommendations 
generally represent a more aggressive set of requirements than is 
reasonable and necessary to apply across the board to a national pilot 
program. HUD recognizes that in every area of energy-related home 
improvements, technology and practice is continually improving. At this 
early stage in the development of a market for energy efficient home 
improvements, HUD believes the list of eligible improvements as revised 
in this notice strikes the right balance between improving home energy 
performance and ensuring a sufficiently broad range of homeowners and 
communities can benefit from the pilot program.

[[Page 17940]]

    One commenter recommended that power purchase agreements (PPAs) or 
contracts with third-party owners to use electricity generated by on-
site photovoltaic systems, be allowed as eligible improvements, subject 
to certain conditions. HUD is supportive of innovative efforts to 
expand the deployment of clean energy in the residential sector, 
specifically including through PPAs, subject to certain borrower 
disclosures and protections. The recommendation represents a broader 
interpretation than generally has been made of the term ``property 
improvement.'' (The Title I program on which the pilot program is based 
is authorized to support property improvements.) HUD believes that this 
proposed recommendation is worthy of further consideration and is 
interested in better understanding the underwriting and operational 
issues, whether the recommendation is an eligible activity under the 
Title I program, and the risks and protections for homeowners as well 
as FHA. While HUD declines to make the recommended change at this time, 
it may reconsider this decision in the future based on additional 
analysis.
    With respect to recommendations regarding more flexible use of loan 
proceeds, HUD agrees with commenters that flexibility is appropriate 
and likely necessary to encourage and enable many homeowners to fund 
home energy improvements, which many will likely do as part of a 
broader remodeling or renovation of their home. HUD also agrees with 
one commenter that suggested it would be important to ensure homeowners 
can make basic health and safety-related improvements at the time of a 
home energy improvement job. At a nascent stage of consumer awareness 
and interest in home energy improvements, HUD believes it is important 
to make financing products as appealing and marketable as possible, 
while maintaining the focus on the policy goal of more energy efficient 
homes. HUD notes that leading state and local home energy improvement 
loan programs, as well as the Fannie Mae Energy Loan product, allow 
significant flexibility in the use of loan proceeds on this basis.
    Section V.F.4(b) of this notice specifies that homeowners may use 
up to 25 percent of PowerSaver loan proceeds to fund certain property 
improvements identified in Title I Letter 470 as eligible improvements 
under the Title I program. A copy of Title I Letter 470 may be 
downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm.
    HUD recognizes that such flexibility may add some complexity to 
aspects of the evaluation of the pilot program. However, HUD believes 
the reporting requirements of the program, which will generate data on 
the specific energy improvement measures funded with each loan, will be 
sufficient to meet the evaluation goals in this area.
    Also with respect to eligible uses of loan proceeds, several 
commenters recommended that HUD require that homeowners avail 
themselves of a home energy audit or rating to be eligible for a 
PowerSaver loan. HUD declines to require audits/ratings in connection 
with PowerSaver loans at this time. Audit/rating approaches, protocols, 
technologies, and data appear to vary substantially. HUD is concerned 
that there is not an industry consensus or uniform standard for energy 
audits/ratings. (HUD notes that one commenter suggested such standards 
are in development by one industry group and may be available in early 
2011; HUD will be interested in following this development.) DOE is 
currently piloting the new Home Energy Score program, which includes an 
energy audit component. Once the Home Energy Score pilot program is 
complete, HUD may revisit the required use of an energy audit. In 
addition, it is HUD's understanding that comprehensive audits/ratings 
can cost as much as $500, adding a significant additional expense; one 
commenter suggested allowing the cost of audits to be financed as part 
of the PowerSaver loan. For these reasons, a required audit or rating, 
as recommended, may disadvantage certain homeowners and communities.
    HUD generally agrees with these commenters that audits/ratings can 
enable homeowners to better understand the most cost effective energy 
savings improvements for their particular home. For these reasons, the 
November 10, 2010, notice strongly encouraged the use of audits; this 
notice affirms this encouragement. Furthermore, as suggested in the 
November 10, 2010, notice, HUD will consider the extent to which audits 
will be required or encouraged by lenders in lender Expressions of 
Interest to participate in the pilot program. In addition, this notice 
allows the cost of an energy audit/rating to be financed as part of the 
PowerSaver loan.

G. Comments on Property Valuation

    Several commenters addressed the property valuation requirement, 
which is necessary to ensure homeowners do not have total mortgage debt 
(including the PowerSaver loan) in excess of the current value of their 
home at the time of PowerSaver loan origination. One commenter 
recommended that HUD allow lenders to use a Fannie Mae and Freddie Mac 
Form 2055 Exterior-Only Inspection Residential Appraisal Report, on 
which the November 10, 2010, notice specifically solicited comment. 
This notice adopts this recommendation. Some commenters also 
recommended that Automated Valuation Models (AVMs) be allowed for use 
in establishing property valuation. HUD recognizes that AVMs can be an 
effective tool in certain markets and may be appropriate to use with 
respect to borrowers who have built some equity in their homes. The 
notice specifies that lenders may use AVMs to establish property value 
for certain borrowers, subject to FHA approval, on a case-by-case 
basis. HUD will discuss this issue further with lenders in the review 
of their Expression of Interest.
    Some commenters raised the concern that appraisals would add 
inordinate cost to a PowerSaver loan and to the time to close a loan. 
HUD is sensitive to this concern and agrees that the cost and time 
associated with appraisals may pose a challenge to the marketability of 
PowerSaver loans. The availability of various options for determining 
property valuation, as noted above, addresses this concern. A sound 
basis for determining property value is essential for determining a 
borrower's combined-loan-to-value ratio and for establishing PowerSaver 
loans as viable for capital markets investment and liquidity, which is 
a stated goal of the pilot program. As noted above, lenders may propose 
to use incentive grant funds to offset costs associated with appraisals 
and other approved methods of property valuation. In addition, this 
notice specifies that appraisal costs may be financed as part of the 
PowerSaver loan.
    Some commenters recommended that an energy audit suffice for 
establishing the property value. HUD declines to makes this change, as 
energy audits are not currently recognized by the housing finance 
industry as a viable tool for determining home value. HUD is interested 
in working with stakeholders and exploring the extent to which energy 
audits may be able to provide reliable information to inform 
determinations of home value and borrower ability to afford and repay 
mortgage loans. Finally, one commenter suggested that an audit should 
eliminate an appraisal requirement for an unsecured PowerSaver loan. 
The notice clarifies that, as under the Title I Property Improvement 
program, PowerSaver loans of less than $7,500 are

[[Page 17941]]

not required to be secured and appraisal is not required for such 
loans.

H. Credit Requirements for Borrowers

    Some commenters recommended modest tightening or relaxing of the 
minimum credit score and maximum total debt-to-income for borrowers 
receiving PowerSaver loans. HUD declines to make any changes to these 
features of the program at this time. Homeowners' response and loan 
performance, among other factors, during the pilot program may warrant 
adjustments to credit requirements in the future.

I. Requirements for Dealer Loans

    Several commenters suggested that HUD allow ``dealer loans,'' as 
defined by the FHA Title I Property Improvement Home Loan program, be 
allowed under the PowerSaver pilot program. The Title I Property 
Improvement Home Loan program regulations at Sec.  201.2 define a 
``dealer loan'' as ``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.'' 
HUD agrees with these commenters that responsible home improvement 
contractors can be effective in educating homeowners about home energy 
loan financing options, which is typically important to maintaining 
homeowner interest in a financing option.
    While HUD declines to make this change, home improvement 
contractors may provide information to homeowners as to how they may 
obtain a PowerSaver loan, including the identity of lenders who are 
participating in the program.

J. Evaluating the Success of the Retrofit Pilot Program

    Several commenters made recommendations regarding HUD's planned 
evaluation of the PowerSaver pilot program. Some suggested that HUD 
require homeowners to sign a disclosure in connection with a PowerSaver 
loan to allow access to pre- and post-installation utility bill 
information. HUD recognizes the importance of accessing utility bill 
information and is exploring options for accessing it in a manner that 
ensures homeowner privacy. This notice does not require homeowners to 
provide utility bill information; HUD will discuss this issue 
individually with participating lenders in the review of lender 
Expressions of Interest.
    One commenter suggested that HUD participate in efforts by DOE, the 
Environmental Protection Agency, and industry groups to develop metrics 
and standards for data collection and program evaluation and to 
coordinate to the extent feasible with DOE's Home Energy Score Pilot 
Program. HUD appreciates and agrees with this recommendation and has 
already been in discussions along these lines with DOE and others.

K. Other Comments

    Several commenters recommended increasing the maximum loan amounts 
overall or with respect to unsecured loans. HUD declines to make 
changes to the loan limits. HUD believes that the $25,000 loan limit is 
sufficient to cover all or most of the cost of a comprehensive retrofit 
or the cost of a renewable energy system--and in the latter case a 
variety of subsidies and incentives are available to fund costs that 
the loan cannot. With respect to unsecured loans, the primary purpose 
of the PowerSaver pilot program is to establish the viability of a 
mainstream mortgage product for home energy improvement loans; 
unsecured loan products and credit card options of various types are 
already available in the market. Because the current Title I Property 
Improvement Home Loan program does not require loans under $7,500 to be 
secured, primarily because it would add infeasible cost to such small 
loans, HUD is retaining that feature, with no change, and no additional 
incentives to originate (as one commenter recommended) in the 
PowerSaver pilot program.
    Some commenters broadly suggested that HUD require contractors who 
perform home energy improvements funded by PowerSaver loans to be 
certified on some basis or that broader ``quality assurance'' 
procedures be required. HUD is sympathetic to the concerns expressed by 
the commenters and generally agrees that high quality assurance 
procedures can enhance the prospects that a home improvement job will 
be performed properly and professionally. HUD understands that a number 
of communities implementing comprehensive home energy improvement 
programs are imposing or incentivizing such requirements.
    HUD will ask lenders that submit Expressions of Interest in 
participating in the program to describe the extent to which contractor 
certification and overall quality assurance is reflected in programs 
serving the lender's proposed target market(s) and will evaluate 
Expressions of Interest in part on this basis. In addition, HUD will 
encourage lenders to adopt sound practices in this area. Such practices 
include:
    (1) Verification that contractors have demonstrated business 
experience as home improvement contractors;
    (2) Documentation on file of basic information such as trade name, 
places of business, type of ownership, type of business, and names and 
employment histories of the owners and staff;
    (3) Provision of current financial statement prepared by someone 
who is independent of the contractor and is qualified by education and 
experience to prepare such statements, and a commercial credit report 
on the contractor;
    (4) Procedures for supervising and monitoring contractors' 
activities with respect to loans insured under the Pilot Program; and
    (5) Evidence of homeowner satisfaction with work performed by the 
contractor under the Pilot Program.
    HUD declines to make these or other quality assurance requirements 
mandatory, however. HUD believes that such a requirement would add 
unnecessary administrative burden on lenders in the Pilot Program. In 
addition, HUD expects that it will be able to work closely with 
lenders, as well as local communities, to monitor and help ensure 
quality assurance under the Pilot Program given that only a limited 
number of lenders will participate. In addition, HUD may revisit the 
issue of quality assurance during its evaluation of the pilot program 
to determine whether changes should be made to the Pilot Program along 
the lines suggested by the commenters.
    Several commenters encouraged HUD to implement a ``streamlined 
application procedure'' for PowerSaver loans. HUD recognizes the 
importance of ensuring homeowners can close on PowerSaver loans in a 
timely manner. HUD will utilize the Title I Property Improvement Home 
Loan program platform and system for the PowerSaver pilot program. This 
system, while different from the system used for FHA Title II loan 
products, should enable lenders to make a timely turnaround of loan 
applications. In addition, HUD will consider lenders' expected loan 
procedures and expected turnaround time in evaluating their Expressions 
of Interest to participate in the pilot program.
    One commenter suggested that HUD allow PowerSaver loans to be in 
third lien position in cases where the borrower has a home mortgage 
loan in first position, a home equity loan in second position, and 
sufficient home equity to take on a PowerSaver loan

[[Page 17942]]

without exceeding 100 percent combined loan to value. HUD declines to 
make this change; the Title I regulations at 24 CFR 201.24(a)(1)(iii) 
specify that, in general, liens securing Title-insured loans ``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.'' The regulations 
authorize a Title I loan to hold a third lien position in specified 
limited circumstances: (1) Where the first and second mortgage were 
made at the same time; or (2) the second mortgage was provided by a 
state or local agency in conjunction with a downpayment assistance 
program.

V. The Home Energy Retrofit Loan Pilot Program (FHA PowerSaver)

A. Authority

    The Retrofit Pilot Program is authorized by the Energy Innovation 
Fund of the 2010 Appropriations Act, which directs HUD to conduct an 
Energy Efficient Mortgage Innovation pilot program targeted to the 
single family housing market (Pub. L. 111-117, at 123 Stat. 3089). The 
Pilot Program is based on the requirements of Title I, section 2 of the 
National Housing Act (12 U.S.C. 1703). Under section 2(a) of the 
National Housing Act, HUD is authorized to provide loan insurance in 
order to help homeowners finance alterations, repairs, and improvements 
in connection with existing structures or manufactured homes. HUD's 
implementing regulations are codified at 24 CFR part 201.

B. Duration and Geographic Scope

    1. Duration. The Retrofit Pilot Program will be conducted for loans 
originated during a period of 2 years commencing on May 2, 2011. HUD, 
however, may extend the duration of the Pilot Program, after its 
commencement, beyond the 2-year period to accurately assess the Pilot's 
effectiveness. In making such determination, HUD will look closely at 
the results of its evaluation of the program as described in Section VI 
of this notice. HUD will announce any such extension through Federal 
Register notice.
    2. Geographic scope. The success of the Retrofit Pilot Program and 
its potential to inform further efforts to expand financing for energy 
efficient home retrofits will be advanced by focusing on properties 
located in communities that have already taken affirmative steps to 
address energy efficiency retrofits. HUD is aware that a number of 
communities have already developed the programmatic infrastructure to 
help ensure that the critical nonfinancial components of a holistic 
retrofit initiative are in place. In selecting communities in which to 
conduct the Pilot Program, HUD will target communities that have 
already developed a robust home energy efficiency retrofit 
infrastructure.
    DOE's Energy Efficiency and Conservation Block Grants (EECBG) 
program is authorized under Title V, Subtitle E of the Energy 
Independence and Security Act (EISA), signed into law on December 19, 
2007. Through formula and competitive grants administered by DOE, this 
program empowers local communities to make strategic investments to 
meet the Nation's long-term goals for energy independence and 
leadership on climate change.
    With funding for the EECBG program provided by the American 
Recovery and Reinvestment Act, DOE initiated the Retrofit Ramp-up 
Program, now known as the Better Buildings program, a demonstration 
program directed to stimulating activities and investments that can: 
(1) Deliver verified energy savings from a variety of projects in the 
local jurisdiction of the applicant, with a particular emphasis on 
efficiency improvements in residential, commercial, industrial, and 
public buildings; (2) achieve broader market participation and greater 
efficiency savings from building retrofits; (3) highly leverage grant 
funding in order to significantly enhance the resources available for 
supporting the program; (4) sustain themselves beyond the grant monies 
and the grant period by designing a viable strategy for program 
sustainability; (5) serve as pilot building-retrofit programs that 
demonstrate the benefits of gaining economy of scale; and (6) serve as 
examples of comprehensive community-scale energy-efficiency approaches 
that could be replicated in other communities across the country.
    Under the Better Buildings Program, approximately $485 million was 
allocated by DOE through competitive grants to initiatives in the 
following locations: Austin, TX; Berlin, Cambridge, Chestertown, 
Cumberland, Denton, Easton, Elkton, Frostburg, Oakland, Princess Anne, 
Dundalk, Westminster, Havre de Grace, Salisbury, Takoma Park, and 
University Park, MD; Fayette County, PA; Bedford, NY; Berlin, Nashua, 
and Plymouth, NH; Boulder County, City and County of Denver, Garfield 
County, and Eagle County, CO; Camden, NJ; Chicago region, IL; 
Cincinnati, Ohio, and northeast Kentucky; a consortium of 14 
Connecticut Towns: Bethany, Cheshire, East Haddam, East Hampton, 
Glastonbury, Lebanon, Mansfield, Portland, Ridgefield, Weston, 
Westport, Wethersfield, Wilton, and Windom; Detroit, Grand Rapids, and 
southeast MI; Greensboro, NC; Indianapolis and Lafayette, IN; Kansas 
City, MO; Los Angeles, San Francisco Bay Area, Sacramento, San Diego, 
and Santa Barbara County, CA; Lowell, MA; Madison, Milwaukee, and 
Racine, WI; Maine statewide; Missouri statewide; Nashville, TN; New 
York statewide; Omaha and Lincoln, NE; Oregon statewide; Philadelphia, 
PA; Phoenix, AZ; Riley County, KS; San Antonio, TX; Seattle, and 
Bainbridge Island, WA; select Southeastern cities: Atlanta, GA; 
Carrboro, Chapel Hill, and Charlotte, NC; Charleston SC; 
Charlottesville, VA; Decatur, GA; Hampton Roads/Virginia Beach, VA; 
Huntsville, AL; Jacksonville, FL; New Orleans, LA; Toledo, OH; and the 
U.S. Virgin Islands. In addition, in December 2010, DOE announced that 
the following State Energy Programs were integrated into 
BetterBuildings: Alabama, Maine, Massachusetts, Michigan, Nevada, 
Washington, and Virginia.
    The locations listed above are all eligible markets for lenders to 
serve in the Pilot. In addition, this notice provides that areas where 
the Home Performance with Energy Star program is available are 
automatically eligible locations for lenders to serve under the pilot 
program. Those areas are listed here: http://www.energystar.gov/index.cfm?c=home_improvement.hm_improvement_hpwes_partners.
    FHA will consider lenders' interest in other communities, subject 
to an assessment of such communities' infrastructure for implementing 
residential retrofit programs. As noted in the November 10, 2010, 
notice, HUD strongly encourages lenders to serve such markets, provided 
lenders can demonstrate, through their Expressions of Interest in 
participating, that such locations are viable markets for the 
deployment of PowerSaver-insured loans. On December 16, 2010, HUD 
posted additional guidance on its Web site to assist lenders in this 
area: http://www.hud.gov/offices/hsg/sfh/title/additionalsaverinformation.pdf. HUD expects to consult with DOE in such 
cases.
    HUD considered targeting the pilot to a smaller number of markets, 
which may have increased the likelihood of lender competition within 
some markets, potentially benefitting consumers. HUD determined that 
such an approach could limit the number and diversity of lenders that 
could participate in the program overall, however. HUD determined it 
was important for the Pilot to be open to a

[[Page 17943]]

reasonably wide range of lenders--by size and type, as well as service 
area--especially given the challenging conditions facing lenders in the 
current environment, which may create barriers to participation for 
some, even if interested. In selecting lenders to participate, HUD will 
evaluate the extent to which lenders intend to provide loans at the 
most favorable rate to consumers, thus directly addressing a major 
benefit that lender competition would potentially foster.

C. Lender Eligibility

    Lender participation in the Retrofit Pilot Program is voluntary. Of 
the pool of interested lenders that meet the criteria described in 
Section II of the November 10, 2010, notice and reiterated below, HUD 
intends to select a limited number of lenders to participate in the 
Retrofit Pilot Program. HUD is currently undertaking efforts to 
identify FHA-approved lenders that may be suitable candidates for 
participation in the Retrofit Pilot Program. HUD reserves the right to 
terminate a lender's participation in the Retrofit Pilot Program for 
unacceptable performance. Examples of unacceptable lender performance 
could include violating the program's underwriting and credit criteria, 
failing to meet HUD reporting requirements, and high defaults among 
originated loans under the program. To be eligible, lenders must 
satisfy the following criteria:
    1. Approval as an FHA Title I or Title II program lender. Lenders 
must hold valid Title I contracts of insurance and be approved pursuant 
to the requirements of 24 CFR part 202 to originate, purchase, hold, 
service, or sell loans insured under the Title I program regulations at 
24 CFR part 201. However, approved Title II lenders may obtain Title I 
eligibility under an expedited process by contacting HUD and submitting 
the Title I approval package described at http://www.hud.gov/offices/hsg/sfh/lender/title1ap.cfm.
    2. Experience with similar lending initiatives. Lenders must be 
able to demonstrate experience with the type of lending initiative 
being undertaken in the Retrofit Pilot Program. In particular, HUD will 
consider the extent to which lenders have experience in successfully 
originating and/or servicing small loans, home equity loans, second 
liens, FHA section 203(k) rehabilitation loans, and Title I Property 
Improvement Loans. Lenders that do not have experience in such lending 
may still be able to participate in the Pilot Program to the extent 
they can demonstrate how their other experience is relevant to 
determining their ability to participate in the pilot, and provided 
they agree to meet the Title I requirements before participation in the 
pilot program.
    3. Computer system capabilities. Lenders must have the technical 
capability to interface with FHA through FHA Connection. In addition, 
lenders must have the technical capability to interface with any other 
computer systems utilized by FHA or its contractors pertaining to the 
Retrofit Pilot Program.
    4. Audit capabilities. Lenders must have a demonstrated capacity to 
provide timely reports to FHA on origination and performance of 
retrofit loans. FHA envisions requiring monthly reports on loan and 
portfolio performance. In addition, a lender must be able to provide an 
electronic loan package to HUD for a random sample of loans chosen for 
quality reviews.
    5. Collaborative capacity. Lenders must have demonstrated capacity 
to work with public sector agencies, nonprofit organizations, and 
utilities or home improvement contractors.

D. Lender Grant Funds

    HUD recognizes that even with federal mortgage insurance such as 
would be available under the Pilot Program, small loans for home energy 
retrofits may have relatively high transaction costs for lenders, 
discouraging some from offering such loans and forcing others that do 
offer them to increase costs to borrowers. HUD will utilize the 
appropriated funds provided under the 2010 Appropriations Act to 
provide lender incentive payments to support activities that lower 
costs to borrowers. Eligible uses of such payments are: (1) Supporting 
costs associated with creating or enhancing staffing and/or systems 
necessary to deliver or report on PowerSaver insured loans; (2) Funding 
costs of loan marketing, origination, or underwriting; (3) Offsetting 
costs associated with appraisals and other approved methods of property 
valuation; and (4) For lenders that will also service their own loans, 
reducing servicing costs.
    HUD will also consider other proposed uses of such funds. Any use 
of funds must show, to HUD's satisfaction, bona fide benefit to 
borrowers. The amount of payment to each lender and the eligible uses 
of funds by each lender will be determined by HUD based on the lender's 
Expression of Interest. A significant factor in determining payment 
amounts to each lender will be the number of loans the lender 
anticipates making during the 2-year period of the Pilot Program. 
Lenders will be required to report to HUD on their use of incentive 
payment funds. HUD anticipates that the amount of grant funds will not 
exceed $5 million per lender.
    In addition, this notice clarifies that HUD grant funds may not be 
used to directly subsidize or otherwise ``write down'' the interest 
rate on PowerSaver loans. Non-Federal grant funds may be used for this 
purpose.
    Grant funds may be available to lenders who request them, but are 
not required for participation. Lenders who do not seek funds may still 
participate in the Pilot Program.

E. Selection of Lenders

    As noted above, lenders interested in potentially participating in 
the Retrofit Pilot Program were required to submit an Expression of 
Interest using the template in Appendix A and by following the 
instructions provided in the November 10, 2010, notice.
    In evaluating Expressions of Interest and selecting lenders to 
participate, HUD will first review each Expression of Interest to 
verify that the lender is eligible to participate in the program. HUD 
will then evaluate the Expressions of Interest from all eligible 
lenders primarily by weighing the following factors in the Expression 
of Interest: (1) The lender's anticipated loan volume and target 
markets; (2) the lender's business model for participating in the 
pilot; (3) the lender's capacity (experience and/or potential) to work 
in public-private partnerships; and (4) the extent to which the lender 
intends to deliver the most favorable loan product to consumers. HUD 
anticipates that these primary weighting factors will have generally 
equal weighting significance. In addition, HUD may consider the 
following factors in selecting lenders to participate: (1) Diversity of 
lender type and target market; and (2) impact on low-income households 
and communities.

F. Differences Between Retrofit Pilot Program and Existing Title I 
Program

    With the exceptions discussed below, the Retrofit Pilot Program 
will be governed by the Title I program regulations at 24 CFR part 201. 
This notice does not make any changes to the current Title I Property 
Improvement Program. The differences specified in this notice are only 
applicable to lenders selected to participate in the Pilot Program.
    Lenders selected to participate in the Retrofit Pilot Program must 
enter into a Retrofit Pilot Program Agreement by which they commit to 
adhere to the Title I program regulations, except as

[[Page 17944]]

modified in this notice and in subsequent refinements, such 
modifications being applicable only to loans insured under the Retrofit 
Pilot Program. There will also be other requirements applicable to the 
Retrofit Pilot Program; for example, insuring Retrofit Pilot Program 
loans only in communities selected for the Pilot Program.
    In summary, the changes described below, in combination with the 
appropriated funds, have the effect of creating an innovative pilot 
program that accords with Congress' direction in the Act. These changes 
fall into the following categories: (1) Changes designed to enhance 
underwriting of program loans; (2) changes related to FHA 
administration of the program, specifically in the areas of loan 
servicing, claim procedures, and reporting; (3) changes to target the 
pilot program specifically for its purpose of improving home energy 
performance; and (4) changes to provide additional benefits to 
borrowers. Finally, as noted, FHA will augment these changes with grant 
funds for lenders, using funding appropriated under the 2010 
Appropriations Act. In summary, these changes adjust the current 
flexible framework for the Title I program to enable it to encourage 
and directly support home improvements that improve energy performance, 
while reducing barriers to making financing under the program more 
widely available and more affordable.
    1. Definition 24 CFR 201.2. For purposes of the Retrofit Pilot 
Program, the following terms have the following meanings.
    a. Single family property improvement loans. Only ``single family 
property improvement loans'' as that term is defined in 24 CFR 201.2 
are eligible for FHA insurance and the Retrofit Pilot Program. 
Properties must also be principal residences as defined in 24 CFR 
201.2. For purposes of the Retrofit Pilot Program, the term includes 
detached, semidetached, and attached single family properties. 
Condominium units that otherwise meet the criteria of an eligible 
single family property are also eligible properties under the pilot 
program.
    Loans used to finance the property improvements for manufactured 
homes and multifamily properties \3\ are not eligible for the Retrofit 
Pilot Program, but remain eligible for Title I program insurance under 
24 CFR part 201.
---------------------------------------------------------------------------

    \3\ Manufactured home improvement loan and multifamily property 
improvement loan are terms defined in Sec.  201.2.
---------------------------------------------------------------------------

    2. Loan maturities (24 CFR 201.11). Under the Title I program 
regulations at 24 CFR 201.11 an insured loan may have a term as long as 
20 years. Under the Retrofit Pilot Program, loan terms generally will 
be limited to 15 years to better align the term of financing with the 
useful life of, and benefits from, most energy retrofit improvements. 
Under the Pilot Program, loan terms that are for 20 years can be used 
only for certain specified improvements: renewable energy measures, 
ground source heat pump systems, and other improvements as approved by 
HUD. See ``Eligible use of loan proceeds'' in Section V.D.4(b) below.
    3. Interest and discount points (24 CFR 201.13). Under the Title I 
program regulations at 24 CFR 201.13, the lender may not require or 
allow any party, other than the borrower, to pay discount points or 
other financing charges in connection with the loan transaction. This 
restriction, while helping to assure that borrowers have a personal 
stake in the repayment of the loan, also has the effect of hindering 
state and local efforts to support home energy retrofits by lowering 
the cost of capital to consumers, such as through interest rate write-
downs. The Retrofit Pilot Program expressly contemplates that third 
parties (including state and local governments, private organizations, 
and nonprofit organizations) may pay discount points or other financing 
charges in connection with the Title I loan transaction and encourages 
third parties to work with participating lenders on this basis. In 
addition, as noted, lenders may utilize HUD incentive payments for this 
purpose under the Pilot Program.
    The interest shall be calculated on a traditional mortgage interest 
basis.
    4. Property improvement loan eligibility (24 CFR 201.20).
    a. Borrower eligibility (24 CFR 201.20(a)). As under Title I loans, 
Retrofit Pilot Program borrowers shall have at least a one-half 
interest in one of the following:
    (i) Fee simple title of the property; or
    (ii) A properly recorded land installment contract.
    Unlike the Title I program, lessees of the property will not be 
eligible to participate in the Pilot Program. The limitation of 
eligibility to owner-occupied properties is designed to reduce the 
variables in the Pilot Program for purposes of evaluation, as well as 
to help ensure compliance with the minimum property loan-to-value 
ratios described in section V.F.5. below.
    b. Eligible use of the loan proceeds (24 CFR 201.20(b)). Similar to 
the Title I program, loan proceeds shall be used only for the purposes 
disclosed in the loan application. Under the standard Title I loan, 
proceeds shall be used only to finance property improvements that 
substantially protect or improve the basic livability or utility of the 
property. Further, HUD has established a list of items and activities 
that may not be financed with the proceeds of any property improvement 
loan.
    A list of eligible measures is attached as an appendix to this 
notice. Homeowners may use up to 25 percent of the PowerSaver loan 
proceeds to fund, with the following exceptions, any property 
improvement that is identified in Title I Letter 470 as an eligible 
improvement under the Title I program. The following property 
improvements, although listed in Title I Letter 470 as eligible 
improvements under the Title I program, are not eligible for funding 
with PowerSaver loan proceeds:

<bullet> Barns
<bullet> Boathouses
<bullet> Boatslips
<bullet> Bookcases (built-in)
<bullet> Cabinets (unless the improvement would result in health 
benefits)
<bullet> Choir lofts
<bullet> Decks, Gazebos
<bullet> Docks
<bullet> Door chimes
<bullet> Driveways
<bullet> Lattice work
<bullet> Piers
<bullet> Porches
<bullet> Safes/vaults

    A copy of Title I Letter 470 may be downloaded at: http://www.hud.gov/offices/adm/hudclips/letters/title1/index.cfm. If a lender 
has any doubt as to the eligibility of any item or activity, the lender 
must request a determination from FHA before making a loan. HUD 
strongly encourages the use of home energy audits and other tools to 
enable consumers to determine the most beneficial improvements they 
should seek to undertake.
    5. Property valuation (24 CFR 201.20). The combined loan-to-value 
ratio of any previously existing mortgage and PowerSaver loan cannot 
exceed 100 percent. As under the Title I Property Improvement program, 
this requirement does not apply in cases involving PowerSaver loans of 
less than $7,500 and not secured by the property. Lenders may either 
use a Fannie Mae and Freddie Mac Form 2055 Exterior-Only Inspection 
Residential Appraisal Report (most current version) or an Automated 
Valuation Model (AVM) to establish property value. Any use of AVMs by 
any lender participating in the pilot program must be approved by FHA 
on a case-by-case basis. HUD will

[[Page 17945]]

discuss this issue further with lenders in the review of their 
Expression of Interest. HUD notes, however, that potential purchasers 
of PowerSaver loans from originating lenders may have additional or 
more restrictive criteria regarding the use of AVMs, which lenders 
seeking to sell loans to such entities may be required to meet.
    6. Credit requirements for borrowers (24 CFR 201.22). In addition 
to the requirements under the Title I program, all borrowers 
participating in the Retrofit Pilot Program must have a decision credit 
score of 660 or higher. The decision credit score used by FHA is based 
on methodologies developed by the FICO Corporation. FICO scores, which 
range from a low of 300 to a high of 850, are calculated by each of the 
three National Credit Bureaus and are based upon credit-related 
information reported by creditors, specific to each applicant. Lower 
credit scores indicate greater risk of default on any new credit 
extended to the applicant. The decision credit score is based on the 
middle of three National Credit Bureau scores or the lower of two 
scores when all three are not available, for the lowest scoring 
applicant.
    The borrower's total debt-to-income ratio cannot exceed 45 percent, 
as under the Title I program. HUD recognizes that requiring a minimum 
credit score for participation in the pilot program will mean that some 
homeowners cannot participate. However, given that this is a pilot 
program, HUD has determined to limit the Retrofit Pilot Program to 
borrowers with these credit scores in order to make an initial 
assessment of the interaction of credit ratings and repayment in 
connection with home energy retrofit loans.
    7. Charges to borrower to obtain loan (24 CFR 201.25). The 
regulations provide for a HUD-established list of fees and charges that 
may be included in a property improvement loan. A slightly different 
list of fees and charges is established for the Retrofit Pilot Program 
in an appendix to this notice. The list indicates which of those fees 
and charges may be financed as part of a PowerSaver loan.
    8. Conditions for loan disbursement (24 CFR 201.26). In addition to 
current Title I requirements pertaining to disbursement of loan 
proceeds, the Retrofit Pilot Program funds shall be disbursed to the 
borrower(s) in two increments: (1) 50 percent of the proceeds shall be 
disbursed at loan funding/closing; and (2) the remaining 50 percent of 
the proceeds shall be disbursed after the energy retrofit improvements 
have been completed as evidenced by an executed Completion Certificate 
for Property Improvements (form HUD-56002) by the borrower(s), and a 
lender-required inspection.
    9. Dealer loans (24 CFR 201.27). Under the Title I program, a 
dealer loan (defined at 24 CFR 201.2) ``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.''
    Dealer loans will not be permitted in the Retrofit Pilot Program. 
The reason for this limitation is that dealer loans have been 
disproportionately correlated with poor loan performance under Title I 
and other home improvement loan programs in the past. While HUD 
recognizes that there are many responsible dealers who can and would 
provide financing through dealer loans in a responsible manner, it is 
limiting the Retrofit Pilot Program to ``direct loans.'' ``Direct 
loans'' is defined under the Title I program (at 24 CFR 201.2) as ``a 
loan for which a borrower makes application directly to a lender 
without any assistance from a dealer.'' HUD believes that home 
improvement contractors and others whose activity may be described 
under the definition of ``dealer'' for the Title I program will play an 
important role in ensuring the pilot's success by performing the actual 
work related to the retrofits.
    However, home improvement contractors may provide information to 
homeowners as to how they may obtain a PowerSaver loan, including the 
identity of lenders who are participating in the program.
    10. Loan servicing (24 CFR 201.41). Under the Title I program, 
lenders remain responsible for proper collection efforts, even though 
actual loan servicing and collection may be performed by an agent of 
the lender. In addition to these requirements, the servicer of a 
Retrofit Pilot Program loan, whether the servicer is the original 
lender or a subsequent servicer, as under FHA's major single family 
program (commonly referred to as the Title II program), is fully 
responsible for the required servicing responsibilities. As under the 
Title II program, ``the mortgagee shall remain fully responsible for 
proper servicing, and the actions of its servicer shall be considered 
to be the actions of the mortgagee.'' HUD emphasizes that the servicer 
shall also be fully responsible for its actions as a servicer. HUD 
intends to seek recovery from servicers if FHA losses are attributable 
to servicing errors.
    In addition, as noted, lenders that also service loans they 
originate under the pilot program may utilize HUD incentive payments 
under the program to reduce servicing costs that deliver bona fide 
benefits to borrowers.
    11. Insurance claim procedure (24 CFR 201.54). Under the Title I 
program, HUD requires that insurance claims be fully documented.
    Under the Pilot Program, the holder of the note will be accountable 
to HUD for origination/underwriting errors, and the servicer will be 
accountable to HUD for servicing errors, as long as the servicer is a 
HUD-approved lender. To effectuate this, the insured lender must enter 
into an agreement with its servicer, under which the servicer agrees to 
be liable to HUD for such errors, and which identifies HUD as a third-
party beneficiary of such agreement.

VI. Evaluating the Success of the Retrofit Pilot Program

    As stated in the November 10, 2010, notice, HUD's goals for the 
Pilot Program are: (1) To facilitate the testing and scaling of a 
mainstream mortgage product for home energy retrofit loans that 
includes liquidity options for lenders, resulting in more affordable 
and widely available loans than are currently available for home energy 
retrofits; and (2) to establish a robust set of data on home energy 
efficiency improvements and their impact--on energy savings, borrower 
income, property value, and other metrics--for the purpose of driving 
development and expansion of mainstream mortgage products to support 
home energy retrofits.
    HUD's evaluation of PowerSaver will be focused on the extent to 
which the pilot program achieves those goals. To address the first 
goal, HUD, through its internal staff and systems, will closely assess 
lender performance and experience in marketing, originating, servicing 
and selling PowerSaver loans. As a pilot program in which a small 
number of lenders will participate, PowerSaver will afford HUD an 
unusual ability to learn from lenders as they deploy PowerSaver loans. 
As the PowerSaver program launches and lenders establish marketing 
plans, loan interest rates, and strategies for holding and/or selling 
loans, HUD will be in position to assess market impacts as they 
develop. HUD, working with its lender partners in the pilot program, 
will get a sense of the factors that contribute to (or impede) consumer 
demand for home energy efficiency improvement financing. In addition, 
as noted, lenders will be reporting regularly to HUD on loan 
performance and the uses of loan proceeds for various improvements. 
Thus, HUD will

[[Page 17946]]

have a sense of performance and preference within specific lender 
programs and markets, as well as potential trends across the portfolio 
of lenders. HUD will not attempt to rush to conclusions, and will 
expect possible changes in trends as the pilot program matures and 
expands.
    As a pilot program, one of the principal purposes of the Pilot is 
to generate data on key questions that can help make the case for 
additional mainstream mortgage products to support home energy 
retrofits, including first mortgage options. HUD is therefore committed 
to a robust evaluation program in connection with the Pilot. (The 
evaluation will also enable HUD to assess the success of possible 
modifications to the existing Title I program before initiating, 
through rulemaking, any changes to the Title I regulations.)
    To address the second goal, HUD will focus on three overarching 
questions: (1) Did homes reduce their energy consumption after 
retrofits were completed? (2) Did homeowners realize lower energy bills 
as a result of the retrofits? and (3) Were home values affected as a 
result of the retrofits? Data from the PowerSaver Pilot Program 
suggesting answers to these questions will help fill a major void and 
start to establish a basis for analyzing other financing.
    This component of the evaluation will be conducted by a third party 
with which HUD will contract. That entity will be under contract as the 
pilot program launches and lenders begin to make loans. HUD anticipates 
that a critical component of this part of the evaluation will be the 
third party's ability to access pre- and post-retrofit utility data 
from at least a sample of PowerSaver homeowners. HUD is aware of 
effective practices for third parties to access this information, on a 
confidential basis, and will encourage the evaluation contractor to 
utilize such practices, including those developed and implemented by 
DOE.
    HUD acknowledges that the issues identified can be challenging 
impacts to evaluate, for reasons ranging from ``rebound effects'' to 
consumer concerns about access to utility billing data. HUD believes 
that it must attempt to do so, however, and believes that additional, 
useful information at a meaningful scale can be obtained through the 
PowerSaver program. HUD believes that continued progress on mainstream 
mortgage financing options for home energy retrofits requires attention 
to these issues.
    HUD recognizes that an evaluation of PowerSaver could also consider 
other important questions. HUD will explore, internally and with its 
contractor, the feasibility of adding to the core evaluation scope, 
potentially including: (1) Lender costs for originating and servicing; 
(2) impact of interest rates on consumer participation; (3) relative 
effectiveness of nonfinancial programmatic elements (consumer 
education, product marketing, auditing tools, and workforce quality 
assurance); and (4) the extent to which specific home energy 
improvements are chosen and the results from specific measures.
    The results of the evaluation program will heavily inform HUD's 
determination of whether to make the PowerSaver pilot program a 
permanent FHA program, subject to any desired changes and pursuant to 
any appropriate rulemaking process that HUD may determine is necessary. 
A successful pilot program, and a sound basis for making PowerSaver a 
permanent program would be reflected in an evaluation that HUD believes 
demonstrates that: (1) Lenders demonstrate that there is a market for 
PowerSaver loans in their communities that they can serve on a viable 
continuing basis, facilitated to the extent necessary by an ability to 
sell or securitize PowerSaver loans; (2) the best available data 
suggests that PowerSaver loans are resulting in more home energy 
retrofits (and related jobs and economic benefits), lower energy use, 
and lower energy bills; and (3) FHA systems and staff indicate that FHA 
can continue and potentially expand the program in a safe and sound 
manner.

VII. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements in this notice have been 
approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) and 
assigned OMB Control Number 2502-0596. In accordance with the PRA, an 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information, unless it displays a currently 
valid OMB control number.

Executive Order 12866, Regulatory Planning and Review

    OMB reviewed this notice rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). As was the case with the November 
10, 2010, notice, this notice has been determined to be an 
``economically significant regulatory action,'' as defined in section 
3(f)(1) of the Order. The revised impact analysis for this notice is 
available at http://www.hud.gov/offices/adm/hudclips/ia/. The following 
provides a brief summary of the finding relating to the aggregate 
costs, benefits, and transfers of the pilot program contained in the 
analysis:
    Introduction. As discussed more fully in the accompanying impact 
analysis, HUD envisions that the pilot program will provide insurance 
for up to 24,000 loans over the 2-year period of the pilot program, 
with an expected average loan size of $12,500. The program is therefore 
expected to result in the extension of up to $300 million in FHA-
insured energy efficiency property improvement loans over the 2-year 
period and a resulting energy-saving valued at as much as $630 million 
(in present discounted value).
    Benefits. The aggregate net benefits are obtained by multiplying 
the individual net benefits by the expected number of loans and adding 
the expected social benefits of reduced energy consumption. As a base 
case, HUD assumes a consumer household with annual savings of $1,000, a 
0 percent price growth, and a 7 percent discount rate. The present 
value of a technical retrofit for this base case scenario is $11,400. 
Assuming a rebound effect of 30 percent yields a comfort benefit of 
$3,400 and energy savings of $8,000 per participant.\4\ As noted, 
approximately 24,000 loans are expected over 2 years. For the base case 
scenario, this would equal $41 million in comfort benefits and $96 
million in energy savings for each year of the program. The benefits of 
the FHA program may not equal the sum of the benefits of all retrofits 
financed through the program, but only reflect the benefits of the 
retrofits that would not have occurred without the program; however, 
the existence of significant market imperfections and the lack of 
affordable financing make it reasonable to assume that a large 
proportion, if not all of the loans, will generate benefits.
---------------------------------------------------------------------------

    \4\ The ``rebound effect'' refers to the fact that the reaction 
of the consumer to the energy-saving technology will not necessarily 
reduce energy consumption by what is technically possible. By 
increasing energy efficiency, the retrofit reduces the expense of 
physical comfort and will thus increase the demand for comfort. In 
fact, the retrofit may have been driven for a demand for more 
heating in the winter or cooling in the summer. The size of the 
rebound effect will depend on the income of the household and the 
path of energy prices.
---------------------------------------------------------------------------

    Costs. The cost of receiving the energy-savings is the upfront 
investment plus the costs of financing the investment. The cost per 
investment is thus equal to the size of the loan, or $14,880 on 
average.
    Transfers to Consumers. The transfer to consumers is equal to the 
difference

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between the FHA interest rate and the interest rates on other loans 
available for the same purpose. As discussed, alternative means of 
financing are limited and come with higher interest costs. However, if 
the next best interest rate for the consumer were fairly low at 10 
percent, then this loan would represent a transfer of approximately 
$5,000 per household. Aggregated over 12,000 participants, the 
aggregate annual consumer transfer through lower interest costs would 
be $62 million.
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th 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 202-402-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the Federal Information Relay Service at 800-877-
8339.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was prepared 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. 4332(2)(C)). Individual 
mortgage insurance actions taken under the pilot program are 
categorically excluded under HUD's regulations at 24 CFR 50.19(b)(17) 
and not subject to the federal laws and authorities cited in 24 CFR 
50.4, other than 24 CFR 50.4(b)(1) and (c)(1), and 24 CFR 51.303(a)(3). 
The FONSI is available for public inspection between the hours of 8 
a.m. and 5 p.m. weekdays in the Regulations Division, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
7th Street, SW., Washington, DC 20410. Due to security measures at the 
HUD Headquarters building, please schedule an appointment to review the 
FONSI by calling the Regulations Division at 202-708-3055 (this is not 
a toll-free number). Individuals with speech or hearing impairments may 
access this number via TTY by calling the toll-free Federal Information 
Relay Service at 800-877-8339.

    Dated: March 24, 2011.
Joseph F. Smith,
General Deputy Assistant Secretary for Housing--Federal Housing 
Commissioner.

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[FR Doc. 2011-7551 Filed 3-30-11; 8:45 am]
BILLING CODE 4210-67-C