[Federal Register Volume 83, Number 240 (Friday, December 14, 2018)]
[Rules and Regulations]
[Pages 64269-64272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27116]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-6029-F-01]
RIN 2502-AJ40


Streamlining Warranty Requirements for Federal Housing 
Administration (FHA) Single-Family Mortgage Insurance: Removal of the 
Ten-Year Protection Plan Requirements

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

ACTION: Final rule.

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SUMMARY: This final rule streamlines the home warranty requirements for 
FHA single-family mortgage insurance by removing the regulations that 
require borrowers to purchase 10-year protection plans in order to 
qualify for certain mortgages on newly constructed single-family homes. 
This action conforms with the changes made by the Housing and Economic 
Recovery Act of 2008 (HERA). HUD, however, is retaining the requirement 
that the Warranty of Completion of Construction (form HUD-92544) be 
executed by the builder and the buyer of a new construction home, as a 
condition for FHA mortgage insurance. This final rule follows 
publication of a February 6, 2013, proposed rule, and takes into 
consideration the public comments received on the proposed rule.

DATES: Effective: March 14, 2019.

FOR FURTHER INFORMATION CONTACT: Elissa Saunders, Director, Office of 
Single Family Program Development, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW, Room 9184, 
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 via TTY by calling the Federal Relay Service at 1-
800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--HUD's February 6, 2013, Proposed Rule

    On February 6, 2013, at 78 FR 8448, HUD published a proposed rule 
to streamline the inspection and home warranty requirements for FHA 
single-family home insurance. As part of the February 6, 2013 rule, HUD 
proposed to eliminate its requirement that borrowers purchase a 10-year 
protection plan in order to qualify for FHA mortgage insurance for high 
loan-to-value mortgages where the dwelling was not approved for 
guaranty, insurance, or a direct loan before the beginning of 
construction and where the dwelling is less than one year old.\1\ In 
2008, HERA (Pub. L. 110-289, 122 Stat. 2654, approved July 30, 2008) 
eliminated the requirement of purchasing a consumer protection plan or 
warranty plan for such mortgages. While HUD maintained discretion to 
keep the requirements in place, HUD is no longer statutorily mandated 
to do so. Upon evaluation, HUD believes that the significant 
improvements in building technology and the quality of housing, as well 
as the adoption of uniform building codes and local jurisdictions' more 
stringent enforcement of building codes, mitigate HUD's previous 
concerns about needing to protect property owners from defects in 
workmanship and materials. HUD proposed, however, to retain the 
requirement that the Warranty of Completion of Construction (form HUD-
92544) be executed by the builder and the buyer of a newly constructed 
home, as a condition for FHA mortgage insurance. This warranty provides 
assurance to FHA that the home was built according to plan, and 
protects the buyer against defects in equipment, material, or 
workmanship supplied or performed by the builder, subcontractor, or 
supplier. The warrantor agrees to fix and pay for the defect and 
restore any component of the home damaged in fulfilling the terms and 
conditions of the warranty. The one-year warranty commences on the date 
that title is conveyed to the buyer, the date that construction is 
complete, or upon occupancy, whichever date occurs first.
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    \1\ Codified at 24 CFR 203.18 and 200-209.
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    In addition to eliminating the 10-year protection plan requirements 
and related regulations in 24 CFR 203.18 and 203.200-209, HUD proposed 
to amend 24 CFR 203.50 to reflect the statutory change made by HERA and 
the removal of Sec. Sec.  203.18(a)(3) and 200-209 of the regulations. 
Section 203.50(f) (``Eligibility of rehabilitation loans'') cross-
references Sec.  203.18(a)(3), and because Sec.  203.18(a)(3) was 
proposed for removal, HUD proposed to also amend Sec.  203.50(f) 
accordingly.
    As part of the same publication, HUD also proposed to eliminate the 
FHA Inspector Roster (Roster), which is a list of inspectors approved 
by FHA as eligible to determine if the construction quality of a 
property is acceptable security for an FHA-insured loan in limited 
circumstances. HUD had combined the two proposals as they both involved 
streamlining requirements for FHA single-family mortgage insurance. 
However, the two proposals are distinct and the regulations unrelated. 
In addition to covering separate subjects, the regulations applied to 
different parties. The procedures and requirements related to the 
Roster applied to inspectors and lenders, while the regulations 
regarding 10-year protection plans applied to homebuilders, lenders, 
and borrowers. The public comments reflect this distinction, in that 
they treated these proposals separately, with the exception of 
expressions of general support for both proposals. In order to properly 
address the separate comments received on each proposal and to be more 
transparent about how the regulatory changes will affect different 
parties, this final rule only deals with elimination of the 10-year 
protection plan requirement. HUD published its final rule removing the 
FHA Inspector Roster on July 3, 2018 (83 FR 31038).
    Interested readers are referred to the preamble of the February 6, 
2013, proposed rule for additional historical background and 
explanation of the proposed regulatory changes.

II. Discussion of the Public Comments Related to the Elimination of the 
10-Year Warranty Requirement Received on the February 6, 2013, Proposed 
Rule

    This final rule follows publication of the February 6, 2013, 
proposed rule, and takes into consideration the public comments 
received on the proposed rule. The public comment period closed on 
April 8, 2013. HUD received 7 public comments in response to the 
proposed rule, 5 of which provided comments on elimination of the 10-
year protection plan requirement. These comments were submitted by a 
fair housing consulting group, a home warranty provider, a housing 
trade association, a homebuilder, and an individual.\2\
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    \2\ The public comments on the proposed rule are available for 
download from the Regulations.gov website at the following link: 
http://www.regulations.gov/#!docketBrowser;rpp=25;po=0;dct=PS;D=HUD-
2013-0011.
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    Three of these comments expressed support for eliminating the 10-
year protection plan requirement.

[[Page 64270]]

Commenters said the requirement for a ten-year warranty is expensive 
and unnecessarily increases the cost of homeownership to the consumer. 
One commenter said it agreed with HUD that a 10-year protection plan is 
no longer necessary to safeguard FHA's insurance fund since the quality 
of housing, building technology, and building codes and enforcement 
have improved significantly. This commenter said that the rule would 
benefit homeowners who choose to purchase a protection plan because 
there will be additional market competition, as current FHA approved 
warranty issuers would have to compete with other warranty issuers. 
Further, the commenter said that eliminating the 10-year protection 
plan requirement would relieve warranty providers and HUD of the 
administrative burdens of application, review, and approval of each 
warranty plan.
    Following is a summary of the significant issues pertaining to the 
10-year protection plan requirement raised by the other comments, and 
HUD's responses. As discussed below, after consideration of all of the 
comments, HUD has not changed its proposal to eliminate the 10-year 
protection plan requirement as it was set forth in the February 6, 
2013, proposed rule.
    Comment: Elimination of the 10-Year Warranty Would Adversely Affect 
Minority Homeowners. One commenter opposed eliminating the 10-year 
warranty requirement, writing that African Americans and Hispanic 
Americans make up a high percentage of FHA mortgage holders, and 
persons who are eligible for FHA mortgage insurance are those most 
likely to be targeted with defective products and services and the 
least likely to have the means to protect their investment if a defect 
should occur. The commenter wrote that based on the numbers included in 
the proposed rule used to calculate savings, the average homeowner 
would pay an annual premium of $510, which is a significant cost, but a 
cost that directly benefits the homeowner, unlike other fees designed 
to protect the investor that have no value to the homeowner.
    HUD Response. HUD has not revised the rule in response to this 
comment. HUD takes its mission to expand affordable homeownership 
opportunities in a non-discriminatory manner seriously, and believes 
that the regulatory amendments made by this final rule are consistent 
with those principles. Although the home warranty has been required, 
HUD records do not document that a claim has ever been made against the 
warranty discussed in this rule that resulted in a subsequent claim to 
FHA for unresolved repairs, damages, or foreclosure. Despite this, as 
acknowledged by the commenter, the warranty requirements impose a 
significant cost on FHA borrowers. Congress recognized these 
developments and eliminated the statutory requirement for such plans in 
the FHA programs. This rule follows suit and eliminates the mandate 
that borrowers purchase such plans. The rule, however, does not 
prohibit borrowers who desire, and are able to afford, the extra 
protection from purchasing warranty protection plans. Further, the rule 
retains the requirement that the Warranty of Completion of Construction 
(form HUD-92544) be executed by the builder and the buyer of a newly 
constructed home, as a condition of FHA mortgage insurance.
    Comment: Quality of State and Local Codes is Not Sufficiently High 
to Warrant Removal of 10-Year Warranty Requirement. Two commenters 
challenged the assertion that the quality of construction standards is 
sufficiently high enough to warrant the removal of the warranty 
requirement. The commenters wrote that warranty companies continue to 
pay out large sums to repair homes due to improper construction, and 
cited incidents from 2005 to 2008, when thousands of households were 
exposed to problem drywall, which caused odd odors, corrosion of metal 
components, failure of electronics and appliances, and physical 
ailments. A commenter also wrote that because new homes are comprised 
of thousands of components, and fallible human beings develop the 
science behind building products, better building and stricter building 
codes will not prevent construction defects. The commenters wrote that 
without the 10-year warranty, homeowners face the possibility that the 
builder may have gone out of business or entered bankruptcy and they 
are unable to identify the source of the defective materials. The 
commenters recommended withdrawing this proposed rule and conducting 
additional research into the number of complaints filed with state 
regulators and local building code officials.
    HUD Response. HUD agrees that the complete elimination of 
construction defects, while a worthwhile goal is most likely not a 
feasible outcome given human fallibility and the limitations of modern 
technology. HUD does not agree, however, that this justifies the 
imposition of a costly warranty mandate. The rule does not prohibit 
homeowners who wish to purchase warranty protection plans from doing 
so, it only eliminates the mandate that they must purchase such plans. 
Further, HUD reiterates that the final rule continues to condition FHA 
mortgage insurance on the Warranty of Completion of Construction (form 
HUD-92544) which provides assurance that the home was built according 
to plan and protects the buyer against construction defects. With 
respect to unforeseen events, such as the concerns noted by the 
commenter regarding problem drywall, HUD will continue to be at the 
forefront of efforts to take or support enforcement action, as 
appropriate, and to provide economic relief for impacted homebuyers. 
For example, HUD encouraged its mortgage lenders nationwide to consider 
extending temporary relief to allow families experiencing problems 
paying their mortgages because of problem drywall, to allow the 
homeowner time to repair their homes.\3\ FHA pursued a policy of loan 
forbearance for one year to borrowers impacted by the drywall problem. 
Further, the United States Consumer Product Safety Commission (CPSC) 
and HUD staff representing the Interagency Task Force on Problem 
Drywall no longer recommended the removal of all electrical wiring in 
homes with problem drywall after a study conducted on behalf of CPSC 
was completed. The change in the government's protocol may have reduced 
the cost of remediation for many homes (CPSC and HUD Issue Updated 
Remediation Protocol for Homes with Problem Drywall, Release Number 11-
176, Release Date: 18, 2011).
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    \3\ See http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2010/HUDNo.10-068.
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III. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. 
Executive Order 13563 (Improving Regulation and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' Executive Order 13563 also directs that where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory

[[Page 64271]]

approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public.
    This rule was determined to be a ``significant regulatory action'' 
as defined in section 3(f) of Executive Order 12866 (although not an 
economically significant regulatory action, as provided under section 
3(f)(1) of the Executive Order). The removal of this requirement is 
consistent with goals of Executive Order 13563.
    The rule does not rise to the level of an economically 
``significant regulatory action'' under section 3(f)(1) of Executive 
Order 12866. HUD expects the elimination of the 10-year warranty plan 
to have economic benefits and costs. However, neither the economic 
costs nor the benefits of the elimination are greater than the $100 
million threshold that determines economic significance under Executive 
Orders 12866 and 13563. The preamble to the February 6, 2013, proposed 
rule at 78 FR 8453-8454, provided a discussion of the anticipated costs 
and benefits of the regulatory amendments. Please see the below section 
on the Summary of Benefits and Costs, which summarizes and updates the 
costs and benefits of the regulatory changes.

Executive Order 13771

    Executive Order 13771, entitled ``Reducing Regulation and 
Controlling Regulatory Costs,'' was issued on January 30, 2017. This 
final rule is considered an E.O. 13771 deregulatory action. Details on 
the estimated cost savings of this proposed rule can be found below in 
the Summary of Benefits and Costs, and in the rule's Regulatory Impact 
Analysis.

Summary of Benefits and Costs of Final Rule

    Concurrently with this final rule, HUD is publishing its final 
Regulatory Impact Analysis (RIA) that examines the costs and benefits 
of this final rule. The RIA is available on-line at: http://www.regulations.gov. The major findings in the RIA are presented in 
this summary.
    Reducing risk to borrowers and FHA of substandard construction was 
the primary purpose of requiring the purchase of a home warranty. 
Positive trends in the housing sector have weakened the need for such a 
requirement. Increased quality of construction materials, and the 
standardization of building codes and building code enforcement, 
protect consumers better now than when the warranty requirement 
regulation was first promulgated. Although the home warranty is 
required, HUD records do not document that a claim has ever been made 
against the warranty discussed in this rule that resulted in a 
subsequent claim to FHA for unresolved repairs, damages, or 
foreclosure. Thus, HUD believes that the benefit in cost savings to 
consumers would exceed the potential cost of any risk introduced.
    To understand the magnitude of the potential gain to consumers, HUD 
first approximated the resources devoted to the purchase of home 
warranties. On an annual basis, from 50,000 to 60,000 warranties are 
issued to FHA borrowers (data provided by FHA). The analysis uses 
55,000 to represent a typical year. The average coverage of the 
mandated warranty plans is $200,000. The average premium charged under 
the plans is $2.70 per $1,000 of coverage (data provided by warranty 
companies). The average annual cost per homeowner is approximately $540 
($2.70/$1,000 x $200,000). Over ten years, the present value of the 
$540 annual payment would range from $4,060 (at 7 percent) to $4,740 
(at 3 percent).
    If the home warranty were a regulatory burden of no utility, then 
the annual savings to consumers would equal the full amount of the fee 
of $540. The aggregate savings would be approximately $30 million ($540 
times 55,000 warranties). However, the gain is likely less than the 
estimate of $30 million. There are homebuyers who would demand and 
sellers who would supply a long-term warranty even when not required. 
If a buyer is extremely risk-averse or if a seller prefers to use home 
warranties to facilitate sales, their purchase of the home warranty 
would be unaffected by a rule not requiring it. Estimates of the 
general prevalence of home warranties vary, with studies finding that 
between 10 and 30 percent of homes have warranties. If 10 percent of 
homebuyers would have purchased a long-term warranty without the 
requirement, then consumer savings would be $27 million, and if 30 
percent of homebuyers would have purchased a long-term warranty without 
the requirement, then the consumer savings would average $21 million.
    The elimination of the warranty requirement also eliminates 
paperwork burden. Lenders face paperwork burden from reviewing the home 
warranty before closing. HUD estimates that a lender requires 0.1 hours 
to process one warranty. Loan officers earn a median hourly wage of 
$31; \4\ the opportunity cost of their time would be twice \5\ that, or 
$62 per hour. The burden per warranty is $6.20 (0.1 hours x $62). At a 
volume of 55,000 warranties, the total paperwork burden relieved is 
$341,000. Savings will extend to the U.S. government. The elimination 
of the warranty requirement eliminates the cost to HUD associated with 
review of the warranty plans submitted for approval and renewal. 
Administrative burdens to HUD include review of warranty plans for 
acceptance, review of plan renewals, and maintenance of HUD's home 
warranty web page.
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    \4\ https://www.bls.gov/ooh/business-and-financial/loan-officers.htm.
    \5\ Includes benefits, management overhead, rent, employer 
taxes, and equipment.
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    There is a potential risk to FHA from eliminating the requirement 
of construction warranties for high-LTV loans. A major structural 
defect would adversely affect the value of a property and potentially 
lead to a foreclosure. FHA would bear the cost of the claim directly, 
and if systemic these costs could be passed on to program participants 
through higher premiums. Advances in detecting the causes of structural 
failure reduce both the probability and cost of any structural failure. 
To ensure that there are no observable construction defects in newly 
built homes bought by FHA-insured borrowers, HUD is retaining the 
requirement that the Warranty of Completion of Construction (form HUD-
92544) be executed by the builder and the buyer of the home, as a 
condition for FHA mortgage insurance. In addition, the rule requires 
that inspections be performed by qualified individuals, to further 
mitigate risk. If all these safeguards fail, then HUD estimates that 
the average aggregate loss to FHA (a transfer of risk) is $1.3 million, 
which is far below the consumer benefits generated by the rule.

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB 
Control Numbers 2502-0059 (Warranty of Completion of Construction (form 
HUD-92544)). In accordance with the Paperwork Reduction Act, an agency 
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.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking

[[Page 64272]]

requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
As noted above in this preamble, this rule is a deregulatory action 
taken by HUD that will alleviate the economic costs borne by 
participants in the FHA single family mortgage insurance programs. As 
discussed in this preamble, removal of the requirement for a 10-year 
protection plan would ease burdens on lenders and homebuilders and does 
not preclude borrowers from purchasing such plans. HUD is removing this 
requirement because it has deemed they are no longer necessary. 
Therefore, the undersigned certifies that this rule will not have a 
significant impact on a substantial number of small entities.

Environmental Impact

    This rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. In addition, part of this rule changes a 
statutorily required and/or discretionary establishment and review of 
loan limits. Accordingly, under 24 CFR 50.19(c)(1) and (c)(6), this 
rule is categorically excluded from environmental review under the 
National Environmental Policy Act of 1969 (42 U.S.C. 4321).

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 or is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule will 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) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments, and on the private sector. This rule does not 
impose any federal mandates on any State, local, or tribal governments, 
or on the private sector, within the meaning of UMRA.

Catalogue of Federal Domestic Assistance

    The Catalogue of Federal Domestic Assistance Number for the 
principal FHA single-family mortgage insurance program is 14.117.

List of Subjects in 24 CFR Part 203

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

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

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for part 203 continues to read as follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42 
U.S.C. 3535(d).


Sec.  203.18  [Amended]

0
2. In Sec.  203.18, remove paragraph (a)(3) and redesignate paragraph 
(a)(4) as paragraph (a)(3).

0
3. In Sec.  203.50, revise paragraph (f)(1) to read as follows:


Sec.  203.50  Eligibility of rehabilitation loans.

* * * * *
    (f) * * *
    (1)(i) The limits prescribed in Sec.  203.18(a)(1) (in the case of 
a dwelling to be occupied as a principal residence, as defined in Sec.  
203.18(f)(1));
    (ii) The limits prescribed in Sec.  203.18(a)(1) and (3) (in the 
case of a dwelling to be occupied as a secondary residence, as defined 
in Sec.  203.18(f)(2));
    (iii) 85 percent of the limits prescribed in Sec.  203.18(c), or 
such higher limit, not to exceed the limits set forth in Sec.  
203.18(a)(1), as Commissioner may prescribe (in the case of an eligible 
non-occupant mortgagor as defined in Sec.  203.18(f)(3));
    (iv) The limits prescribed in Sec.  203.18a, based upon the sum of 
the estimated cost of rehabilitation and the Commissioner's estimate of 
the value of the property before rehabilitation; or
* * * * *


Sec. Sec.  203.200 through 203.209  [Removed]

0
4. Remove the undesignated center heading ``Insured Ten-Year Protection 
Plans (Plan)'' and Sec. Sec.  203.200 through 203.209.

    Dated: December 3, 2018.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2018-27116 Filed 12-13-18; 8:45 am]
BILLING CODE 4210-67-P