77114 Federal Register / Vol. 69, No. 246 / Thursday, December 23, 2004 / Rules and Regulations 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 203 

[Doc. No. FR–4911–I–01; HUD–2004–0017] 

RIN 2502–AI18 

Prohibition of Property Flipping in 

HUD’s Single Family Mortgage 

Insurance Programs; Additional 

Exceptions to Time Restriction on 

Sales

AGENCY: Office of the Assistant 

Secretary for Housing—Federal Housing 

Commissioner, HUD.

ACTION: Interim rule.

SUMMARY: HUD’s regulations addressing 

the predatory practice of property 

‘‘flipping’’ establish certain time 

restrictions regarding the sale of 

properties whose purchase is being 

financed with Federal Housing 

Administration (FHA) mortgage 

insurance. The regulations include an 

exception from the time restrictions for 

properties acquired and subsequently 

sold by FHA. This interim rule broadens 

the exception to include all other 

federal agencies that acquire properties 

as a result of a function of their 

programs and quickly market and sell 

these acquired properties. The interim 

rule also clarifies that the time 

restrictions on sales do not apply to 

properties that are acquired by 

inheritance.

DATES: Effective Date: January 24, 2005. 

Comment Due Date: February 22, 

2005.

ADDRESSES: Interested persons are 

invited to submit comments regarding 

this rule to the Regulations Division, 

Office of General Counsel, Room 10276, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Washington, DC 20410–0500. Electronic 

comments may be submitted through 

either: 

• The Federal eRulemaking Portal: at 

http://www.regulations.gov; or 

• The HUD electronic Web site at: 

http://www.epa.gov/feddocket. Follow 

the link entitled ‘‘View Open HUD 

Dockets.’’ Commenters should follow 

the instructions provided on that site to 

submit comments electronically. 

Facsimile (FAX) comments are not 

acceptable. In all cases, communications 

must refer to the docket number and 

title. All comments and 

communications submitted will be 

available for public inspection and 

copying between 8 a.m. and 5 p.m. 

weekdays at the above address. Copies 

are also available for inspection and 

downloading at http://www.epa.gov/

feddocket.

FOR FURTHER INFORMATION CONTACT:

Vance C. Morris, Director, Office of 

Single Family Program Development, 

Office of Insured Single Family 

Housing, Room 9266, Department of 

Housing and Urban Development, 451 

Seventh Street SW., Washington, DC 

20410–8000; telephone (202) 708–2121 

(this is not a toll free number). Hearingor speech-impaired individuals may 

access this number through TTY by 

calling the toll-free Federal Information 

Relay Service at (800) 877–8339.

SUPPLEMENTARY INFORMATION: 

I. Background 

On May 1, 2003 (68 FR 23370), HUD 

published a final rule to address 

property ‘‘flipping,’’ a predatory lending 

practice whereby a property that was 

acquired is quickly resold for a 

considerable profit with an artificially 

inflated value, often abetted by a 

mortgagee’s collusion with the property 

appraiser and others involved in the 

mortgage loan transaction. Most 

property flipping occurs within a matter 

of days after the initial acquisition. 

Minor cosmetic improvements, if any, 

may be made to the property to make it 

appeal to an unwary homeowner. The 

final rule, which became effective on 

June 2, 2003, restricts flipping by 

establishing new eligibility 

requirements for properties whose 

purchase is being financed with FHA 

mortgage insurance. These eligibility 

requirements are contained in a new 

§ 203.37a of HUD’s single family 

mortgage insurance regulations at 24 

CFR part 203. 

Among other requirements, § 203.37a 

makes properties that have recently 

been resold ineligible as security for 

FHA-insured mortgage financing. 

Specifically, § 203.37a prohibits FHA 

insured mortgage financing for any 

property being sold within three months 

after acquisition by the seller. Properties 

that are sold between 91 and 180 days 

after acquisition by the sellers to 

homebuyers seeking FHA-insured 

financing are subject to additional 

documentation requirements to ensure 

that any increases in the values of the 

properties are supportable. The 

regulation provides that the time 

restrictions on sales do not apply to 

sales by HUD of its Real Estate-Owned 

(REO) properties pursuant to 24 CFR 

part 291, as well as single family assets 

in revitalization zones that HUD 

acquires and sells under the provisions 

of section 204 of the National Housing 

Act (12 U.S.C. 1710). The time 

restrictions are also inapplicable to the 

sale of properties acquired by an 

employer or relocation agency in 

connection with the relocation of an 

employee who needs to sell his/her 

home in order to relocate. 

II. This Interim Rule 

This interim rule broadens the 

exception to the property flipping time 

restrictions to include all Federal 

agencies that acquire properties as a 

result of a function of their programs 

and quickly market and sell these 

acquired properties. This interim rule 

also clarifies that the time restrictions 

on sales do not apply to properties that 

have been acquired by inheritance. 

HUD is aware that there are other 

Federal Government agencies that 

handle quick sales of acquired single 

family properties where the purchasers 

of such properties may want to avail 

themselves of the ability to obtain FHAinsured mortgage financing. These 

agencies include, but are not limited to, 

the Rural Housing Service of the 

Department of Agriculture, the 

Department of Veterans Affairs, and the 

Federal Deposit Insurance Corporation. 

The Federal Government does not 

engage in the predatory lending practice 

of inflating sales prices for the sale of 

acquired properties under its various 

programs, and thus, Federal agencies 

should not be subject to the time 

restrictions contained in § 203.37a. 

In addition to the broadened 

exception for Federal agencies, this 

interim rule also clarifies that the time 

restrictions do not apply to sales of 

inherited properties. As discussed 

above, the purpose of the time 

restrictions is to curb fraudulent 

property ‘‘flips’’ whereby a property is 

deliberately acquired through a sale for 

the purpose of a quick sale at an 

artificially inflated value. Although an 

individual who has inherited a property 

may turn the property over quickly and 

at a profit, the property was not 

acquired through a sale. Accordingly, 

the sales of inherited properties fall 

outside the intended scope of the 

regulatory restrictions established by 

HUD’s May 1, 2003, final rule. Since 

publication of the final rule, HUD has 

received questions regarding the 

applicability of the time restrictions on 

inherited properties. HUD has taken the 

opportunity afforded by this interim 

rule to clarify its regulations by 

specifying that the sale of an inherited 

property is not subject to the property 

flipping time restrictions. 

HUD has also received questions as to 

whether the exception could be 

extended to situations involving bank 

foreclosures and incidents where a 

builder has a program to purchase the 

Federal Register / Vol. 69, No. 246 / Thursday, December 23, 2004 / Rules and Regulations 77115

old home of an individual buying one 

of the builder’s new homes. HUD 

understands that lenders and builders 

have the incentive to turn over these 

properties quickly. There is more risk, 

however, that in some of these sales, 

predatory lending activities could occur. 

HUD believes that extending the 

exception to cover these situations 

would substantially weaken the 

regulatory safeguards against property 

flipping. Accordingly, the scope of this 

interim rule is limited to Federal 

Government agencies and inherited 

properties. The broadened exception 

does not include sales of such 

properties by the government sponsored 

enterprises (Fannie Mae and Freddie 

Mac) nor by private entities. 

Although the scope of this interim 

rule is limited to the two additional 

exceptions described above (for Federal 

agencies and inherited properties), HUD 

recognizes that there may be other 

circumstances or categories of sales 

where an exception to the time 

restrictions may be appropriate and 

consistent with the goals of the property 

flipping restrictions. Accordingly, HUD 

is issuing these regulatory amendments 

on an interim basis and is providing the 

public with a 60-day comment period. 

HUD welcomes comments on the 

regulatory amendments made by this 

interim rule and on whether the 

regulations should provide for 

additional exceptions to the time 

restrictions on sales. The public 

comments will be addressed in the final 

rule.

III. Justification for Interim 

Rulemaking 

HUD generally publishes a rule for 

public comment before issuing a rule for 

effect, in accordance with its own 

regulations on rulemaking in 24 CFR 

part 10. However, part 10 provides for 

exceptions to the general rule if the 

agency finds good cause to omit 

advanced notice and public 

participation. The good cause 

requirement is satisfied when prior 

public procedure is ‘‘impractical, 

unnecessary, or contrary to the public 

interest’’ (see 24 CFR 10.1). 

This interim rule broadens the 

exception to the property flipping time 

restrictions to include all Federal 

agencies that acquire properties as a 

result of a function of their programs 

and quickly market and sell these 

acquired properties. Since the effective 

date of HUD’s final rule on property 

flipping, HUD has become aware of 

instances where individuals wishing to 

purchase an REO home from another 

Federal agency have been unable to 

obtain FHA financing due to the 

regulatory time restriction on sales. As 

noted above in this preamble, the 

Federal Government does not engage in 

the predatory lending practice of 

inflating sales prices for the sale of 

acquired properties under its various 

programs. Delaying the effectiveness of 

this rule to solicit public comment, 

therefore, would unnecessarily continue 

to deny FHA mortgage financing to 

otherwise eligible homebuyers wishing 

to purchase an REO home from another 

Federal agency. Accordingly, HUD has 

determined that it is in the public 

interest to issue these amendments as an 

interim rule. 

In addition to the broadened 

exception for Federal agencies, this 

interim rule also clarifies that the time 

restrictions do not apply to sales of 

inherited properties. As explained 

above in this preamble, transactions 

involving the sale of inherited 

properties fall outside the intended 

scope of the regulatory time restrictions. 

Since publication of the May 1, 2003, 

final rule, HUD has received questions 

regarding the applicability of the time 

restrictions on inherited properties. 

HUD has taken the opportunity afforded 

by this final rule to clarify its 

regulations by specifying that sales of 

inherited properties are not subject to 

the property flipping time restrictions. 

This amendment does not impose new, 

nor modify existing, regulatory 

requirements. Rather, the new 

regulatory language is designed to 

clarify the scope of the existing 

requirements and to assist homebuyers 

and lenders comply with the HUD 

requirements. Accordingly, HUD has 

determined that it is unnecessary to 

delay the effectiveness of this 

amendment to solicit prior public 

comment. 

Although HUD believes that good 

cause exists to publish this rule for 

effect without prior public comment, 

HUD recognizes the value of public 

comment in the development of its 

regulations. HUD, therefore, is issuing 

these regulations on an interim basis 

and is providing the public with a 60-

day comment period. HUD welcomes 

comments on the regulatory 

amendments made by this interim rule. 

The public comments will be addressed 

in the final rule.

IV. Findings and Certifications 

Executive Order 12866, Regulatory 

Planning and Review 

The Office of Management and Budget 

(OMB) reviewed this rule under 

Executive Order 12866 (entitled 

‘‘Regulatory Planning and Review’’). 

OMB determined that this rule is a 

‘‘significant regulatory action’’ as 

defined in section 3(f) of the order 

(although not an economically 

significant regulatory action, as 

provided under section 3(f)(1) of the 

order). Any changes made to the rule 

subsequent to its submission to OMB 

are identified in the docket file, which 

is available for public inspection in the 

Regulations Division, Room 10276, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 Seventh Street, SW., Washington, 

DC 20410–0500. 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment was 

made for the May 1, 2003, final rule 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 et 

seq.). That Finding remains applicable 

to this interim rule and is available for 

public inspection between the hours of 

8 a.m. and 5 p.m. weekdays in the 

Regulations Division, Room 10276, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 Seventh Street, SW., Washington, 

DC 20410–0500. 

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 

requirements unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. This interim 

rule does not impose any new or revised 

obligations of any kind on mall entities 

participating in the FHA single family 

mortgage insurance programs. Rather, 

the interim rule is exclusively 

concerned with alleviating a current 

burden imposed on Federal agencies 

that operate REO property disposition 

programs, and clarifying the scope of 

current regulatory requirements. 

Specifically, the interim rule broadens 

the exception to the property flipping 

time restrictions to include all Federal 

agencies that acquire properties as a 

result of a function of their programs 

and quickly market and sell these 

acquired properties. In addition, the 

interim rule clarifies that the time 

restrictions do not apply to the sale of 

inherited properties. To the extent the 

interim rule has any impact on small 

entities, it will be to benefit those small 

entities that assist in the sale of federal 

REO properties and inherited properties 

by facilitating the sale of additional 

properties that otherwise would be 

77116 Federal Register / Vol. 69, No. 246 / Thursday, December 23, 2004 / Rules and Regulations 

deemed ineligible for FHA insured 

mortgage financing. Accordingly, the 

undersigned certifies that this rule will 

not have a significant economic impact 

on a substantial number of small 

entities. 

Notwithstanding HUD’s 

determination that this rule will not 

have a significant economic impact on 

a substantial number of small entities, 

HUD specifically invites comments 

regarding less burdensome alternatives 

to this rule that will meet HUD’s 

objectives as described in this preamble. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial direct compliance costs on 

State and local governments and is not 

required by statute, or the rule preempts 

State law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the order. This interim 

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 

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 interim rule will 

not impose any Federal mandates on 

any State, local, or tribal government, or 

on the private sector, within the 

meaning of UMRA. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance Numbers for 24 CFR part 203 

are 14.117 and 14.133.

List of Subjects for 24 CFR Part 203 

Hawaiian Natives, Home 

improvement, Indians—lands, Loan 

programs—housing and community 

development, Mortgage insurance, 

Reporting and recordkeeping 

requirements, Solar energy.

■ Accordingly, for the reasons described 

in the preamble, HUD amends 24 CFR 

part 203 as follows:

PART 203—SINGLE FAMILY HOUSING 

MORTGAGE INSURANCE

■ 1. The authority citation for 24 CFR 

part 203 continues to read as follows:

Authority: 12 U.S.C. 1709, 1710, 1715b, 

and 1715u; 42 U.S.C. 3535d.

■ 2. Section 203.37a is amended by 

revising paragraph (c) to read as follows:

§ 203.37a Sale of property.

* * * * *

(c) Exceptions to the time restrictions 

on sales. The time restrictions on sales 

described in paragraph (b) of this 

section do not apply to: 

(1) Sales by HUD of Real EstateOwned (REO) properties under 24 CFR 

part 291 and of single family assets in 

revitalization areas pursuant to section 

204 of the National Housing Act (12 

U.S.C. 1710); 

(2) Sales by another agency of the 

United States Government of REO single 

family properties pursuant to programs 

operated by these agencies (this does 

not include the Government Sponsored 

Enterprises); 

(3) Sales of property that were 

acquired by the sellers by inheritance; 

and 

(4) Sales of properties purchased by 

an employer or relocation agency in 

connection with the relocation of an 

employee.

* * * * *

Dated: November 22, 2004. 

John C. Weicher, 

Assistant Secretary for Housing—Federal 

Housing Commissioner.

[FR Doc. 04–28050 Filed 12–22–04; 8:45 am] 

BILLING CODE 4210–27–P