79–006 

110TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 110–905 

FHA SELLER-FINANCED DOWNPAYMENT REFORM AND 

RISK-BASED PRICING AUTHORIZATION ACT OF 2008 

OCTOBER 2, 2008.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. FRANK of Massachusetts, from the Committee on Financial 

Services, submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 6694] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 6694) to revise the requirements for seller-financed 

downpayments for mortgages for single-family housing insured by 

the Secretary of Housing and Urban Development under title II of 

the National Housing Act and to authorize risk-based insurance 

premiums for certain mortgagors under such mortgages, having 

considered the same, report favorably thereon with an amendment 

and recommend that the bill as amended do pass. 

CONTENTS 

Page 

Amendment .............................................................................................................. 2 

Purpose and Summary ............................................................................................ 5 

Background and Need for Legislation .................................................................... 5 

Hearings ................................................................................................................... 8 

Committee Consideration ........................................................................................ 8 

Committee Votes ...................................................................................................... 8 

Committee Oversight Findings ............................................................................... 9 

Performance Goals and Objectives ......................................................................... 9 

New Budget Authority, Entitlement Authority, and Tax Expenditures ............. 9 

Committee Cost Estimate ....................................................................................... 9 

Congressional Budget Office Estimate ................................................................... 10 


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Federal Mandates Statement ................................................................................. 13 

Advisory Committee Statement .............................................................................. 13 

Constitutional Authority Statement ...................................................................... 13 

Applicability to Legislative Branch ........................................................................ 13 

Earmark Identification ............................................................................................ 14 

Section-by-Section Analysis of the Legislation ...................................................... 14 

Changes in Existing Law Made by the Bill, as Reported ..................................... 15 

Dissenting Views ..................................................................................................... 21 

AMENDMENT

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘FHA Seller-Financed Downpayment Reform and 

Risk-Based Pricing Authorization Act of 2008’’. 

SEC. 2. FHA SELLER-FINANCED DOWNPAYMENT PROGRAM. 

Paragraph (9) of section 203(b) of the National Housing Act (12 U.S.C. 1709(b)(9)) 

is amended— 

(1) in subparagraph (C), by striking ‘‘In no case shall the funds required by 

subparagraph (A)’’ and inserting the following: ‘‘Except in the case of a mortgage described in subparagraph (D), the funds required by subparagraph (A) 

shall not’’; and 

(2) by adding at the end the following new subparagraphs: 

‘‘(D) EXCEPTIONS TO PROHIBITED SOURCES.—A mortgage described in this 

subparagraph is any of the following mortgages: 

‘‘(i) A mortgage under which the mortgagor has a credit score equivalent to a FICO score of 680 or greater. 

‘‘(ii) A mortgage under which— 

‘‘(I) the mortgagor has a credit score equivalent to a FICO score 

of at least 620 but less than 680; and 

‘‘(II) mortgage insurance premiums charged are established— 

‘‘(aa) at levels necessary, but no higher than needed, to allow 

such class of loans to be insured without resulting in a need 

for an appropriation for a credit subsidy, which may exceed the 

maximum amount permitted under section 203(c)(2)(B); 

‘‘(bb) in the case of the single premium collected at the time 

of insurance, in an amount not exceeding 3.0 percent of the 

amount of the original principal obligation of the mortgage; 

and 

‘‘(cc) in the case of the annual premium for a mortgage under 

which the mortgagor has a credit score equivalent to a FICO 

score of at least 640 but less than 680, in an amount not exceeding 1.25 percent of the remaining insured principal balance (excluding the portion of the remaining balance attributable to the premium collected at the time of insurance and 

without taking into account delinquent payments or prepayments). 

‘‘(iii) For mortgages insured in fiscal year 2010 or thereafter, a mortgage under which the mortgagor has a credit score equivalent to a 

FICO score of 619 or less, but only if the Secretary certifies that such 

loans can be insured without resulting in a need for an appropriation 

for a credit subsidy. For such mortgages, the Secretary may charge premiums at levels authorized under items (bb) and (cc) of clause (ii)(II) 

and may establish a credit or FICO score limitation or impose such 

other requirements as are necessary to meet the conditions for certification under this clause. 

‘‘(E) REQUIREMENTS FOR DOWNPAYMENT ASSISTANCE ENTITIES.—Any entity 

participating in a program that provides downpayment assistance for a 

mortgage described in subparagraph (D) pursuant to the exception under 

subparagraph (C), which programs shall include programs of governmental 

agencies and private nonprofit organizations, shall, before the closing for 

the loan involved in the mortgage in connection with which such assistance 

is provided— 

‘‘(i) offer to make available, to the mortgagor, counseling regarding 

the responsibilities and financial management involved in homeownership; 


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‘‘(ii) if such offer is accepted by the mortgagor, make such counseling 

available for the mortgagor; and 

‘‘(iii) in the case of any such entity that is a private nonprofit organization, implement a conflict of interest policy that prohibits directors, 

officers, employees, and immediate family members from receiving financial benefits from any entity that is providing the program with 

goods or services other than the homeownership assistance program entity itself or its wholly owned affiliate. 

‘‘(F) CIVIL MONEY PENALTIES FOR IMPROPERLY INFLUENCING APPRAISALS.— 

The Secretary may impose a civil money penalty, in the same manner and 

to the same extent as for a violation under section 536, for compensating, 

instructing, inducing, coercing, or intimidating any person who conducts an 

appraisal of the property to be subject to a mortgage described in subparagraph (D) and under which any part of the funds required by subparagraph 

(A) are provided to a party described in subparagraph (C), or attempting 

to compensate, instruct, induce, coerce, or intimidate such a person, for the 

purpose of causing the appraised value assigned to the property under the 

appraisal to be based on any other factor other than the independent judgment of such person exercised in accordance with applicable professional 

standards.’’. 

SEC. 3. LIMITATIONS ON RISK-BASED PRICING. 

Section 203(c) of the National Housing Act (12 U.S.C. 1709(c)) is amended by adding at the end the following new paragraphs: 

‘‘(3) LIMITATIONS ON RISK-BASED PRICING.—Except as provided in paragraph 

(4), the Secretary of Housing and Urban Development shall not take any action 

on or after October 1, 2008, to implement or carry out— 

‘‘(A) risk-based premiums, which are designed for mortgage lenders to 

offer borrowers an FHA-insured product that provides a range of mortgage 

insurance premium pricing, based on the risk that the insurance contract 

represents, as set forth in the Notice published in the Federal Register on 

May 13, 2008 (Vol. 73, No. 93, Pages 27703 through 27711) (effective July 

14, 2008); or 

‘‘(B) any other risk-based premium product related to the insurance of 

any mortgage on a single family residence under this title, where the premium price for such new product is based in whole or in part on a borrower’s Decision Credit Score, as that term is defined in the Notice referred 

to in subparagraph (A), or any successor thereto. 

‘‘(4) FLEXIBLE RISK-BASED PREMIUMS.—Notwithstanding paragraph (3) of this 

subsection and section 2133 of the FHA Modernization Act of 2008 (Public Law 

110–289): 

‘‘(A) AUTHORITY.—In the case only of a mortgage under which the mortgagor has a credit score equivalent to a FICO score of less than 600, the 

Secretary may establish a mortgage insurance premium structure involving 

a single premium payment collected prior to the insurance of the mortgage 

or annual payments (which may be collected on a periodic basis), or both, 

under which the rate of premiums for such a mortgage may vary according 

to the credit risk associated with the mortgagor and the rate of any annual 

premium for such a mortgage may vary according to such credit risk during 

the mortgage term as long as the basis for determining the variable rate 

is established before the execution of the mortgage. The Secretary may 

change a premium structure established under this subparagraph but only 

to the extent that such change is not applied to any mortgage already executed. 

‘‘(B) ESTABLISHMENT AND ALTERATION OF PREMIUM STRUCTURE.—A premium structure shall be established or changed under subparagraph (A) 

only by providing notice to mortgagees and to the Congress, at least 30 

days before the premium structure is established or changed. 

‘‘(C) ANNUAL REPORT REGARDING PREMIUMS.—The Secretary shall submit 

a report to the Congress annually setting forth the rate structures and 

rates established and altered pursuant to this paragraph during the preceding 12-month period and describing how such rates were determined. 

‘‘(D) CONSIDERATIONS FOR PREMIUM STRUCTURE.—When establishing and 

collecting premiums for mortgages insured under a premium structure established under this paragraph, the Secretary shall consider the following: 

‘‘(i) The effect of the proposed premiums or structure on the Secretary’s ability to meet the operational goals of the Mutual Mortgage 

Insurance Fund as provided in section 202(a). 

‘‘(ii) Underwriting variables. 


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‘‘(iii) The extent to which new pricing under the proposed premiums 

or structure has potential for acceptance in the private market. 

‘‘(iv) The administrative capability of the Secretary to administer the 

proposed premiums or structure. 

‘‘(v) The effect of the proposed premiums or structure on the Secretary’s ability to maintain the availability of mortgage credit and provide stability to mortgage markets. 

‘‘(E) AUTHORITY TO BASE PREMIUM PRICES ON PRODUCT RISK.— 

‘‘(i) AUTHORITY.—In establishing premium rates under this title, the 

Secretary may provide for variations in such rates according to the 

credit risk associated with the type of mortgage product that is being 

insured under this title, which may include providing that premium 

rates differ between fixed-rate mortgages and adjustable-rate mortgages insured pursuant to section 251, between mortgages for condominiums and mortgages for other interests in properties, between 

mortgages having different ratios of the principal obligation under the 

mortgage to the appraised value of the property, and between such 

other products as the Secretary considers appropriate. 

‘‘(F) PAYMENT INCENTIVES.— 

‘‘(i) AUTHORITY.—With respect to mortgages for which insured the 

Secretary is authorized to establish a premium structure under this 

paragraph, the Secretary shall provide that the payment incentive 

under subparagraph (ii) applies upon the expiration of the 5-year period beginning upon the time of insurance of such a mortgage, and the 

Secretary may provide that the payment incentive under clause (ii) applies upon the expiration of the 3-year period beginning upon the time 

of insurance of such a mortgage. The Secretary may limit such discretionary authority to mortgages prepaid or paid in full during the 2-year 

period beginning 3 years after the time of insurance of such a mortgage. 

‘‘(ii) PAYMENT INCENTIVE.—In the case of any mortgage to which the 

payment incentive under this subparagraph applies, if, during the period referred to in clause (i), all mortgage payments, including insurance premiums, for such mortgage have been paid on a timely basis, 

upon the expiration of such period the Secretary shall refund to the 

mortgagor, upon payment in full of the obligation of the mortgage, all 

or a portion of— 

‘‘(I) the amount by which the single premium payment for such 

mortgage collected at the time of insurance exceeded the amount 

of the single premium payment chargeable under paragraph (2) at 

the time of insurance for a mortgage of the same product type having the same terms, but for which the mortgagor has a credit score 

equivalent to a FICO score of 600 or more; and 

‘‘(II) in the case only of mortgages for which annual premiums 

are established and collected under subparagraph (G), the amount 

by which the cumulative amount of annual premiums paid exceeded the amount of the maximum annual premium that otherwise 

may be established and collected notwithstanding such subparagraph. 

‘‘(G) OPTION FOR HIGHER ANNUAL PREMIUM IN LIEU OF HIGHER UP-FRONT

PREMIUM.—In the case only of mortgages for which the Secretary is authorized to establish a premium structure under this paragraph, notwithstanding paragraph (2)(B) of this subsection, the Secretary may establish 

and collect, for a period not exceeding the first 5 years of the term of the 

mortgage, annual premium payments in an amount not exceeding 0.75 percent of the remaining insured principal balance of the mortgage (excluding 

the portion of the remaining balance attributable to the premium collected 

under paragraph (2)(A) and without taking into account delinquent payments or prepayments), except that— 

‘‘(i) the Secretary may utilize such authority only for such classes of 

mortgagors that the Secretary determines would otherwise be subject 

to a single premium payment collected at the time of insurance exceeding 2.25 percent of the amount of the original insured principal obligation of the mortgage; and 

‘‘(ii) for such mortgages, the Secretary may not establish or collect a 

single premium payment collected at the time of insurance exceeding 

2.25 percent of such original insured principal obligation.’’. 


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PURPOSE AND SUMMARY

H.R. 6694, the ‘‘FHA Seller-Financed Downpayment Reform and 

Risk-Based Pricing Authorization Act of 2008,’’ includes provisions 

to modify two pending FHA policy changes that were included in 

P.L. 110–289, the ‘‘Housing and Economic Recovery Act of 2008,’’ 

that are scheduled to become effective on October 1, 2008. 

First, the bill would provide an exception to the prohibition included in Section 2113 of P.L. 110–289 against the use of direct or 

indirect assistance from the seller of the property being financed to 

meet the 3.5 percent cash down payment requirement for FHA 

loans. The bill permits such assistance for borrowers with a credit 

score equivalent to a FICO score of at least 680, and for borrowers 

with a credit score equivalent to a FICO score of at least 680, and 

for borrowers with a credit score equivalent of between 620 and 

679, subject to higher premiums being established for this latter 

class of borrowers in amounts necessary to avoid the need for any 

credit subsidy appropriation. 

Second, the bill would eliminate the one-year moratorium, effective October 1st, that was included in Section 2133 of P.L. 110–289, 

on the use of risk-based pricing based on the credit score of the borrower—replacing it with permanent authority to implement riskbased pricing for borrowers below a FICO credit score equivalent 

of 600, but prohibiting such authority for borrowers equal to or 

higher than that 600 level. 

BACKGROUND AND NEED FOR LEGISLATION

Seller-financed loans 

For many years, an important component of FHA single family 

loans has been the Seller-Financed Gift Downpayment Loan Program. Under this program, otherwise creditworthy homebuyers 

that are unable to meet the 3 percent FHA cash down payment requirement (subsequently raised to 3.5 percent under P.L. 110–289) 

have been able to meet the FHA down payment requirement 

through down payment assistance through qualified nonprofit 

intermediaries, which provide such assistance in whole or in part 

through assistance provided by the seller of the property being financed. 

The FY 2009 HUD budget placed this program into a separate 

line item and proposed its elimination, arguing that the program 

has incurred unacceptable losses, and that is ongoing existence 

could jeopardize the FHA single family loan program. As a result, 

continued existence of the full program would have required appropriators to make a substantial appropriation, in excess of $1 billion, 

to provide the authority to continue the program as is. 

In response, Section 2213 of the ‘‘Housing and Economic Recovery Act’’ (P.L. 110–289) included language explicitly prohibiting 

these loans from being insured after October 1, 2008. 

However, a review of the rule HUD proposed on May 11, 2008 

to eliminate such loans demonstrates that a complete elimination 

of the program is not needed to address the fiscal concerns that 

precipitated the Congressional elimination of the program. Supplemental data published on June 16 for that rule included detailed 

data on different classes of seller-financed gift downpayment loans. 

Data from that publication shows that seller financed gift down 


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payment loans to borrowers with a FICO score of 680 and higher 

actually make a profit for taxpayers (i.e., there is a negative credit 

subsidy rate). Further, data shows that borrowers between a 620 

and 679 FICO score incur a modest loss; however, the loss for such 

class of borrowers could be covered by charging the new higher upfront 3 percent fee permitted under P.L. 110–289 and by charging 

higher annual fees of around 1.25 percent for borrowers with a 

FICO score equivalent of 640 to 679, and a slightly higher fee for 

borrowers between 620 and 639. 

Section 2 of H.R. 6694, relying on data from the HUD rule, provides a limited exception to the pending prohibition against sellerfinanced gift down payment loans by permitting such loans to borrowers above a 680 FICO score equivalent. Section 2 also permits 

loans to borrowers between a 620 and 680 FICO score, but specifically authorizes higher annual premiums up to the 1.25 percent 

level for borrowers between 640 and 679 and higher fees as necessary for borrowers between 620 and 639. This section includes 

language explicitly requiring that premiums be set ‘‘at levels necessary, but no higher than needed, to allow such class of loans to 

be insured without resulting in a need for an appropriation for a 

credit subsidy.’’ Such language effectively requires the loans to be 

financially self-sufficient. 

Finally, Section 2 permits loans to borrowers below a FICO score 

equivalent of 620 in fiscal year 2010 and beyond—but only if the 

Secretary certifies that this can be done without the need for a 

credit subsidy, again requiring that any such loans be financially 

self-sufficient. Authority is granted to HUD to ‘‘impose such other 

requirement as are necessary’’ to meet the conditions for such certification, thus granting authority for other reforms that might reduce risk. 

In order to address program concerns regarding the reliability of 

appraisals, the bill includes a provision, adopted as a committee 

amendment, to give HUD authority to impose civil money penalties 

to any person who either does, or tries to, compensate, instruct, induce, coerce, or intimidate any person conducting an appraisal of 

a loan financed with seller-financed assistance for the purpose of 

causing the appraised value to be based on any other factor than 

the independent judgment of such person in accordance with applicable professional standards. 

Risk-based pricing 

On April 5, 2006, HUD unveiled its legislative proposal to modernize the Federal Housing Administration. The top priority identified in that letter was the granting of authority for FHA to utilize risk-based pricing under its single family loan program, and 

HUD has continued to advocate this provision as a critical priority 

from that time through the ultimate enactment this summer of 

FHA reform legislation. 

Risk-based pricing permits different levels of premiums to be 

charged to different classes of borrowers, based on their credit risk. 

There has not been much real dispute that it is appropriate for 

FHA to be able to charge different levels of premiums based on features of the loan itself—e.g., the level of loan to value (LTV), 

whether the loan is fixed rate or variable rate, and whether the 

loan is for a condominium vs. for a fee simple property. 


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The issue in contention is whether FHA should charge different 

premium levels (either upfront, annual, or both) for different borrowers with the same loan characteristics, but with different credit 

or FICO scores. Historically, FHA has not engaged in risk based 

pricing based on credit risk. However, while HUD has been asking 

Congress to explicitly authorize such risk based pricing in statute, 

HUD has taken the position that it has inherent authority to do 

this. On May 13, 2008, HUD published a notice in the Federal Register, effective July 14, which implements risk-based pricing on a 

broad scale. Prior to this notice, FHA charged all borrowers an upfront fee of 1.5 percent. The May 13 notice implemented risk-based 

pricing, with upfront premiums for loans above a 95 percent loan 

to value (LTV) ranging from 1.25 percent for borrowers over a 680 

Decision Credit (FICO) score to 2.25 percent for borrowers between 

a 500 and 559 FICO score equivalent. 

However, two weeks later, on July 30, the President signed into 

law P.L. 110–289, the ‘‘Housing and Economic Recovery Act of 

2008.’’ Section 2133 of that act imposes a one-year moratorium, 

starting on October 1st, of any risk based pricing relative to a borrower’s Decision Credit Score. Thus, at the end of this month, HUD 

will have to return to a uniform pricing schedule based on a borrower’s credit risk, and has stated that it may have to raise premiums if such authority lapses. 

Proponents of risk-based pricing argue that such authority provides for a more accurate pricing of the loan relative to the risk of 

default, foreclosure, and loss. HUD has argued that in the absence 

of such authority, the uniform price it has to charge will overcharge better credit risk borrowers and undercharge higher risk 

borrowers, relative to risk. Most significantly, this might result in 

FHA not being able to serve certain classes of riskier borrowers at 

all, where a uniform fee is not sufficient to cover the risk of such 

borrowers. 

Opponents of risk-based pricing have argued that risk-based pricing undermines a long established tradition of cross-subsidization 

in FHA loans, in which profits from higher credit quality borrowers 

can partially subsidize the cost of loans to lower credit quality borrowers. Critics argue that the result of risk-based pricing is that 

fees are raised for lower credit quality borrowers—precisely the 

borrowers for whom affordable homeownership is most challenging. 

Another criticism made against risk-based pricing is that HUD’s 

proposals to cut fees for better quality borrowers reflect an effort 

to increase market share at the expense of private sector lenders, 

rather than furthering the mission of filling gaps in the private sector. 

H.R. 1852, the House-passed FHA reform bill from last year, attempted to strike a balance between these two competing concerns, 

by permitting risk-based pricing for borrowers below a 560 equivalent FICO score, and prohibiting it above such levels. This would 

have allowed FHA to charge the higher premiums necessary to 

serve the lowest credit quality borrowers, while retaining substantial cross subsidization benefits from the borrowers above that 

level. This pricing framework is also consistent with historical private sector lending practices. Finally, to protect borrowers below 

the credit cutoff point, the bill included a ‘‘Payment Incentives’’ 

provision, based on a previous HUD budget, which provided that 


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if a borrower made five years of on-time payments, the borrower 

would be entitled to a refund of the higher premiums paid at the 

time when the loan was paid off in full. Thus, borrowers who ultimately turned out not to be a higher credit risk do not in the end 

pay higher premiums. 

Section 3 of H.R. 6694 would eliminate the moratorium from P.L. 

110–289, and replace it with permanent statutory authority, using 

a framework similar to that found in H.R. 1852, including authorizing refunds of the higher premiums caused by risk-based pricing 

for borrowers that make at least five years of on-time payment. 

The major difference from H.R. 1852 is that Section 3 sets a slightly higher cutoff (600) than was included in H.R. 1852, in order to 

reflect more information, including detailed pricing grids available 

under the July 14 rule. Thus, the bill permits risk-based pricing 

based on credit score to borrowers below a 600 FICO score equivalent, but bars such pricing for borrowers at or above this 600 level. 

HEARINGS

The Subcommittee on Housing and Community opportunity held 

a hearing on June 22, 2007 entitled ‘‘Homeowner Downpayment 

Assistance Programs and Related Issues.’’ The following witnesses 

testified: 

Panel One 

• Ms. Margaret Burns, Director, Office of Single Family Housing 

Program Development, Federal Housing Administration. 

• Mr. James Heist, Assistant Inspector General for Audits, Office 

of the Inspector General, U.S. Department of Housing and Urban 

Development. 

• Mr. William B. Shear, Director, Financial Markets and Community Investment, U.S. Government Accountability Office. 

Panel Two 

• Ms. Ann Ashburn, Ameridream Inc., President and Chief Executive Officer. 

• Mr. Scott C. Syphax, President and Chief Executive Officer, 

Nehemiah Corporation of America. 

• Mr. John Osta, Vice President, Gallinger Realty USA. 

• Mr. C. Todd Richardson, Vice President of Legal Affairs, C. P. 

Morgan. 

• Dr. Steven Fuller, Center for Regional Analysis, George Mason 

University School of Public Policy. 

• Ms. Beverly Queen, Homeowner. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

September 16, 2008, and ordered H.R. 6694, the ‘‘FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008’’, as amended, favorably reported by a voice vote. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. No record votes were 


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taken with in conjunction with the consideration of this legislation. 

A motion by Mr. Frank to report the bill, as amended, to the House 

with a favorable recommendation was agreed to by a voice vote. 

During the consideration of the bill, the following amendments 

were considered: 

An amendment by Ms. Brown-Waite (and Mr. Wilson), No. 1, regarding civil money penalties for improperly influencing appraisals, 

was agreed to by a voice vote. 

An amendment by Mr. Al Green (and Mr. Gary Miller, Ms. Waters and Mr. Shays), No. 2, manager’s amendment making various 

technical and substantive changes, was agreed to by a voice vote. 

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee held a hearing and made findings that are reflected in this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee establishes the following performance related goals and objectives for this legislation: 

H.R. 6694 includes provisions to modify two pending FHA policy 

changes that were included in P.L. 110–289, the ‘‘Housing and Economic Recovery Act of 2008.’’ First, the bill would provide an exception to the prohibition in Section 2113 of P.L. 110–289 against the 

use of direct or indirect assistance from the seller of the property 

being financed to meet the 3.5 percent cash down payment requirement for FHA loans. The bill permits such assistance for borrowers 

with a credit score equivalent to a FICO score of at least 680, and 

for borrowers with a credit score equivalent of between 620 and 

679, subject to higher premiums being established for this latter 

class of borrowers in amounts necessary to avoid the need for any 

credit subsidy appropriation. Second, the bill would eliminate the 

one-year moratorium, effective October 1st, that was included in 

Section 2133 of P.L. 110–289, on the use of risk-based pricing 

based on the credit score of the borrower—replacing it with permanent authority to implement risk-based pricing for borrowers below 

a FICO credit score equivalent of 600, but prohibiting such authority for borrowers above such a credit score equivalent. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 


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CONGRESSIONAL BUDGET OFFICE ESTIMATE

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

SEPTEMBER 29, 2008. 

Hon. BARNEY FRANK, 

Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 6694, the FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Susanne S. Mehlman. 

Sincerely, 

PETER R. ORSZAG. 

Enclosure. 

H.R. 6694—FHA Seller-Financed Downpayment Reform and RiskBased Pricing Authorization Act of 2008 

Summary: H.R. 6694 would amend the Housing and Economic 

Recovery Act of 2008 (HERA) to provide exceptions to the prohibition that becomes effective on October 1, 2008, on seller contributions to homebuyers’ downpayments. Seller contributions are a 

form of downpayment assistance to homebuyers that is provided by 

the seller (or a third party that is being reimbursed by the seller) 

toward the downpayment on a single-family loan insured by the 

Federal Housing Administration (FHA). Enacting this legislation 

would permit certain borrowers to receive such downpayment assistance and allow FHA to charge higher premiums for its mortgage insurance for such borrowers based on the credit score of the 

borrower. 

Enacting this legislation also would eliminate the one-year moratorium, effective October 1, 2008, included in HERA, prohibiting 

FHA from implementing risk-based pricing of its mortgage insurance based on a borrower’s credit score. The bill would authorize 

a ‘‘flexible risk-based’’ program for FHA that would permit riskbased pricing for borrowers with low credit scores. H.R. 6694 also 

would require FHA under certain circumstances to provide such 

borrowers with refunds of the premiums they paid. 

CBO estimates that implementing H.R. 6694 would result in a 

net decrease in discretionary spending of $13 million over the 

2009–2013 period, assuming enactment of appropriation laws necessary to implement FHA’s single-family program and the Mortgage-Backed Securities (MBS) program of the Government National Mortgage Association (GNMA). 

Enacting this legislation also would establish civil penalties 

(which are recorded in the budget as revenues) for certain violations related to real estate appraisals by interested parties in connection with the downpayment assistance program. CBO estimates 

that any increase in revenues resulting from those civil penalties 


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1FICO scores are derived from models developed by the Fair Isaac Corporation and are used 

by lenders and others to assess the credit risk of a prospective borrower. 

would not be significant. Enacting this bill would not affect direct 

spending. 

H.R. 6694 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) 

and would impose no costs on state, local, or tribal governments. 

Estimated Cost to the Federal Government: The estimated budgetary impact of H.R. 6694 is shown in the following table. The costs 

of this legislation fall within budget function 370 (commerce and 

housing credit). 

By fiscal year, in millions of dollars— 

2009 2010 2011 2012 2013 2009– 

2013 

CHANGES IN SPENDING SUBJECT TO APPROPRIATION 

Cost of Seller-Financed Downpayment Assistance: 

Estimated Authorization Level ............................................. 0 * * * * * 

Estimated Outlays ............................................................... 0 * * * * * 

Additional GNMA Offsetting Collections: 

Estimated Authorization Level ............................................. ¥13 ¥13 ¥13 ¥13 ¥13 ¥65 

Estimated Outlays ............................................................... ¥13 ¥13 ¥13 ¥13 ¥13 ¥65 

Cost of Payment Incentives: 

Estimated Authorization Level ............................................. 0 13 13 13 13 52 

Estimated Outlays ............................................................... 0 13 13 13 13 52 

Total Changes: 

Estimated Authorization Level ............................................. ¥13 0 0 0 0 ¥13 

Estimated Outlays ............................................................... ¥13 0 0 0 0 ¥13 

Note: GNMA = Government National Mortgage Association; *= costs or savings of less than $500,000. 

Basis of Estimate: For this estimate, CBO assumes that the bill 

will be enacted near the beginning of fiscal year 2009. 

Seller-Financed Downpayment Program 

Under this legislation, a borrower would be permitted to use seller-financed assistance towards a downpayment if the borrower has 

a FICO 1 score of at least 620. In addition, FHA would be permitted 

to charge an up-front premium (a fee applied to the loan’s value) 

and annual premium (a fee applied to the loan’s outstanding balance) at levels that correspond to a borrower’s risk, within certain 

limits. 

Budgeting procedures for federal credit programs require that 

funds must be appropriated in advance to cover the estimated subsidy cost of loan guarantees on a present-value basis. Based on information from the Office of Management and Budget (OMB), CBO 

assumes that FHA would charge premiums that would result in an 

average subsidy rate near zero. Thus, CBO estimates that this provision would result in a negligible cost or savings of less than 

$500,000 a year over the 2009–2013 period. 

Starting in 2010, this legislation also would permit borrowers 

with FICO scores of less than 620 to receive an FHA guarantee, 

but only if the Secretary of Housing and Urban Development certifies that such loans could be insured without the need for an appropriation to cover any credit subsidy costs. Based on information 

from OMB, however, CBO estimates that the subsidy rate for such 

loans would likely exceed zero. Therefore, we estimate that this 


wwoods2 on PRODPC68 with REPORTS
12 

provision would result in no additional loan guarantees over the 

2009–2013 period. 

GNMA savings 

GNMA is responsible for guaranteeing securities backed by pools 

of mortgages that are insured by the federal government. In exchange for a fee charged to lenders or issuers of the securities, 

GNMA guarantees the timely payments of scheduled principal and 

interest due on the pooled mortgages that back those securities. 

Because the value of the fees collected by GNMA is estimated to 

exceed the cost of loan defaults in each year, the Administration estimates that the GNMA MBS program will have a subsidy rate of 

¥0.21 percent in 2009, resulting in the net collection of receipts to 

the federal government. 

CBO estimates that most of the new loan guarantees made under 

this legislation would be included in GNMA’s MBS program and 

that FHA would insure an additional $6 billion in new loan guarantees annually as a result of changes to the seller-financed downpayment program. Thus, CBO estimates that implementing the 

MBS program under this legislation would result in about $65 million in additional offsetting collections ( a credit against discretionary spending) over the 2009–2013 period, assuming appropriation action to establish a dollar limitation for the GNMA securities 

program. 

Flexible risk-based pricing and payment incentives 

The bill also would authorize a program for FHA that would permit risk-based pricing for certain borrowers. Under this provision, 

FHA could charge risk-based premiums to borrowers who have 

FICO scores of less than 600. This legislation also would require 

FHA to refund either all or a portion of the higher fees resulting 

from the borrower being subject to risk-based pricing if the borrower makes at least five years of timely mortgage payments. Such 

refunds would be made at the time the loan is paid off in full. (H.R. 

6694 also would permit FHA to issue refunds to borrowers after 

three years of timely mortgage payments.) 

Because of the one-year moratorium on risk-based pricing imposed by HERA, CBO has evaluated the cost of enacting this provision in 2009 with the assumption that FHA would charge the same 

premiums for every borrower within each product category in 2009. 

Based on information from FHA, CBO estimates that the average 

subsidy rate for single-family borrowers with low credit scores 

would be near zero under current law in 2009. It is unclear how 

FHA would implement risk-based pricing under this bill, and there 

are many options for doing so. However, because the average subsidy rate for the program in 2009 is estimated to be near zero, CBO 

expects that FHA would not exercise the authority provided in this 

legislation to charge higher rates for certain borrowers. Consequently, absent the higher premium charges, FHA would not provide any premium refunds. As a result, we estimate that this provision would have no budgetary effect in 2009. 

In subsequent years, CBO expects that FHA would implement 

risk-based pricing under current law for all types of borrowers with 

the intent to realize an average subsidy rate that is near zero. CBO 

does not expect that FHA would charge borrowers added premiums 


wwoods2 on PRODPC68 with REPORTS
13 

to account for the cost of potential premium refunds to borrowers 

after three-to-five years. Under that assumption, the requirement 

to provide refunds to certain borrowers would increase the initial 

subsidy costs of the loan guarantees. 

CBO estimates that the borrowers of about $5 billion in FHAguaranteed mortgages made annually would eventually be eligible 

for refunds under this provision. This estimate of loan volume assumes that FHA would initially insure about $15 billion in loans 

with FICO scores of at least 600. Furthermore, CBO assumes that 

of this $15 billion in loan guarantees, about 65 percent would not 

be eligible for refunds because we expect that after five years the 

borrower would have defaulted, prepaid the mortgage, or have been 

late on payments. 

The cost of refunds would depend on the premiums set by FHA. 

The agency has not yet set premiums for 2010, but based on information from FHA, CBO estimates that the refund provision would 

increase subsidy costs for the affected loan guarantees by an average of 0.25 percent. Under the Federal Credit Reform Act, such 

costs require the appropriation of funds. By applying this average 

cost to the potential volume of loan guarantees that would be eligible for refunds, CBO estimates that appropriations of about $13 

million would be required annually over the 2010–2013 period. 

Intergovernmental and Private-Sector Impact: H.R. 6694 contains no intergovernmental or private-sector mandates as defined 

in UMRA and would impose no costs on state, local, or tribal governments. 

Estimate prepared by: Federal costs: Susanne S. Mehlman; Impact on state, local, and tribal governments: Elizabeth Cove; Impact on the private sector: Paige Piper/Bach. 

Estimate approved by: Peter H. Fontaine, Assistant Director for 

Budget Analysis. 

FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee finds that the Constitutional 

Authority of Congress to enact this legislation is provided by Article 1, section 8, clause 1 (relating to the general welfare of the 

United States) and clause 3 (relating to the power to regulate interstate commerce). 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 


wwoods2 on PRODPC68 with REPORTS
14 

accommodations within the meaning of section 102(b)(3) of the Congressional Accountability Act. 

EARMARK IDENTIFICATION

H.R. 6694 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

Includes the short title of the bill, the ‘‘FHA Seller-Financed 

Downpayment Reform and Risk-Based Pricing Authorization Act of 

2008.’’ 

Section 2. FHA seller-financed downpayment program 

Provides an exception to the prohibition in the recently enacted 

‘‘Housing and Economic Recovery Act’’ (P.L. 110–289) against the 

use of direct or indirect assistance from the seller of the property 

being financed to meet the 3.5 percent cash down payment requirement for FHA loans. 

Permits all borrowers with a credit score equivalent to a FICO 

score of at least 680 to utilize such assistance in conjunction with 

FHA loans. Permits borrowers with a credit score equivalent to between 620 and 679 to utilize such assistance, except that (a) FHA 

is required to set premiums at levels necessary, but no higher than 

is needed, to avoid the need for a credit subsidy appropriation, (b) 

annual premiums for borrowers between 640 and 679 be in an 

amount up to 1.25 percent, and (c) there is no cap on annual premiums which may be charged for borrowers between 620 and 639. 

Also gives FHA authority in FY 2010 and subsequent years to 

permit borrowers with a credit score equivalent to a FICO score of 

less than 620, but only if the Secretary certifies that the loans can 

be insured without the need for a credit subsidy appropriation, 

with authority for higher premium levels and authority for such 

other requirements as FHA may impose as are necessary to meet 

this certification requirement. 

Any entity participating in a program that provides downpayment assistance for a mortgage under this section must offer to 

make prepurchase counseling available to all program participants, 

and must make such counseling available if requested by the borrower. In addition, any private nonprofit organization participating 

in such a program must implement a conflict of interest policy that 

prohibits directors, officers, employees, and immediate family members from receiving financial benefits from any entity providing the 

program with goods and services other than the homeownership assistance program entity or its affiliates. 

Gives HUD authority to impose civil money penalties to any person who either does, or tries to, compensate, instruct, induce, coerce, or intimidate any person conducting an appraisal of a loan financed with seller-financed assistance for the purpose of causing 

the appraised value to be based on any other factor than the independent judgment of such person in accordance with applicable 

professional standards. 


wwoods2 on PRODPC68 with REPORTS
15 

Section 3. Authorization for risk-based pricing 

Eliminates the one year moratorium, effective October 1, 2008, 

that was included in the ‘‘Housing and Economic Recovery Act of 

2008’’ (P.L. 110–289) prohibiting HUD from carrying out any riskbased pricing based on a borrower’s credit score. In its place creates a permanent policy which permits risk-based pricing based on 

credit scores for borrowers with a credit score equivalent to a FICO 

score of less than 600 and prohibits such risk-based pricing for borrowers with a credit score equivalent to a FICO score of 600 or 

more. Establishes considerations and procedures to be used in establishing the premium structure under such authority. 

Requires FHA to refund either all or a portion of the higher fees 

resulting from the borrower being subject to risk-based pricing if 

such borrower makes at least five years of on-time mortgage payments, with such refund to be made at the time the loan is paid 

off in full. Also gives FHA discretion to apply such refunds to borrowers that make at least three years of on-time payments. 

Gives FHA the option of charging up to a .75 percent annual fee 

for borrowers subject to risk-based pricing, but only if the upfront 

fee does not exceed 2.25 percent and such borrower would otherwise have been charged an upfront fee in excess of 2.25 percent. 

Clarifies that FHA may charge risk-based premiums based on 

the credit risk of the mortgage itself being insured, including premium differentials based on the loan to value, based on whether 

the loan is a fixed rate or variable rate loan, and based on whether 

the loan is for a condominium or for some other property interest. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

SECTION 203 OF THE NATIONAL HOUSING ACT 

INSURANCE OF MORTGAGES

SEC. 203. (a) * * * 

(b) To be eligible for insurance under this section a mortgage 

shall comply with the following: 

(1) * * * 

* * * * * * * 

(9) CASH INVESTMENT REQUIREMENT.— 

(A) * * * 

* * * * * * * 

(C) PROHIBITED SOURCES.—øIn no case shall the funds 

required by subparagraph (A)¿ Except in the case of a 

mortgage described in subparagraph (D), the funds required by subparagraph (A) shall not consist, in whole or 

in part, of funds provided by any of the following parties 

before, during, or after closing of the property sale: 


wwoods2 on PRODPC68 with REPORTS
16 

(i) * * * 

* * * * * * * 

(D) EXCEPTIONS TO PROHIBITED SOURCES.—A mortgage 

described in this subparagraph is any of the following 

mortgages: 

(i) A mortgage under which the mortgagor has a 

credit score equivalent to a FICO score of 680 or greater. 

(ii) A mortgage under which— 

(I) the mortgagor has a credit score equivalent to 

a FICO score of at least 620 but less than 680; and 

(II) mortgage insurance premiums charged are 

established— 

(aa) at levels necessary, but no higher than 

needed, to allow such class of loans to be insured without resulting in a need for an appropriation for a credit subsidy, which may 

exceed the maximum amount permitted under 

section 203(c)(2)(B); 

(bb) in the case of the single premium collected at the time of insurance, in an amount 

not exceeding 3.0 percent of the amount of the 

original principal obligation of the mortgage; 

and 

(cc) in the case of the annual premium for a 

mortgage under which the mortgagor has a 

credit score equivalent to a FICO score of at 

least 640 but less than 680, in an amount not 

exceeding 1.25 percent of the remaining insured principal balance (excluding the portion 

of the remaining balance attributable to the 

premium collected at the time of insurance 

and without taking into account delinquent 

payments or prepayments). 

(iii) For mortgages insured in fiscal year 2010 or 

thereafter, a mortgage under which the mortgagor has 

a credit score equivalent to a FICO score of 619 or less, 

but only if the Secretary certifies that such loans can 

be insured without resulting in a need for an appropriation for a credit subsidy. For such mortgages, the 

Secretary may charge premiums at levels authorized 

under items (bb) and (cc) of clause (ii)(II) and may establish a credit or FICO score limitation or impose 

such other requirements as are necessary to meet the 

conditions for certification under this clause. 

(E) REQUIREMENTS FOR DOWNPAYMENT ASSISTANCE ENTITIES.—Any entity participating in a program that provides 

downpayment assistance for a mortgage described in subparagraph (D) pursuant to the exception under subparagraph (C), which programs shall include programs of governmental agencies and private nonprofit organizations, 

shall, before the closing for the loan involved in the mortgage in connection with which such assistance is provided— 


wwoods2 on PRODPC68 with REPORTS
17 

(i) offer to make available, to the mortgagor, counseling regarding the responsibilities and financial 

management involved in homeownership; 

(ii) if such offer is accepted by the mortgagor, make 

such counseling available for the mortgagor; and 

(iii) in the case of any such entity that is a private 

nonprofit organization, implement a conflict of interest 

policy that prohibits directors, officers, employees, and 

immediate family members from receiving financial 

benefits from any entity that is providing the program 

with goods or services other than the homeownership 

assistance program entity itself or its wholly owned affiliate. 

(F) CIVIL MONEY PENALTIES FOR IMPROPERLY INFLUENCING APPRAISALS.—The Secretary may impose a civil 

money penalty, in the same manner and to the same extent 

as for a violation under section 536, for compensating, instructing, inducing, coercing, or intimidating any person 

who conducts an appraisal of the property to be subject to 

a mortgage described in subparagraph (D) and under 

which any part of the funds required by subparagraph (A) 

are provided to a party described in subparagraph (C), or 

attempting to compensate, instruct, induce, coerce, or intimidate such a person, for the purpose of causing the appraised value assigned to the property under the appraisal 

to be based on any other factor other than the independent 

judgment of such person exercised in accordance with applicable professional standards. 

* * * * * * * 

(c)(1) * * * 

* * * * * * * 

(3) LIMITATIONS ON RISK-BASED PRICING.—Except as provided 

in paragraph (4), the Secretary of Housing and Urban Development shall not take any action on or after October 1, 2008, to 

implement or carry out— 

(A) risk-based premiums, which are designed for mortgage lenders to offer borrowers an FHA-insured product 

that provides a range of mortgage insurance premium pricing, based on the risk that the insurance contract represents, as set forth in the Notice published in the Federal 

Register on May 13, 2008 (Vol. 73, No. 93, Pages 27703 

through 27711) (effective July 14, 2008); or 

(B) any other risk-based premium product related to the 

insurance of any mortgage on a single family residence 

under this title, where the premium price for such new 

product is based in whole or in part on a borrower’s Decision Credit Score, as that term is defined in the Notice referred to in subparagraph (A), or any successor thereto. 

(4) FLEXIBLE RISK-BASED PREMIUMS.—Notwithstanding paragraph (3) of this subsection and section 2133 of the FHA Modernization Act of 2008 (Public Law 110–289): 

(A) AUTHORITY.—In the case only of a mortgage under 

which the mortgagor has a credit score equivalent to a 

FICO score of less than 600, the Secretary may establish a 


wwoods2 on PRODPC68 with REPORTS
18 

mortgage insurance premium structure involving a single 

premium payment collected prior to the insurance of the 

mortgage or annual payments (which may be collected on 

a periodic basis), or both, under which the rate of premiums for such a mortgage may vary according to the credit risk associated with the mortgagor and the rate of any 

annual premium for such a mortgage may vary according 

to such credit risk during the mortgage term as long as the 

basis for determining the variable rate is established before 

the execution of the mortgage. The Secretary may change a 

premium structure established under this subparagraph 

but only to the extent that such change is not applied to 

any mortgage already executed. 

(B) ESTABLISHMENT AND ALTERATION OF PREMIUM

STRUCTURE.—A premium structure shall be established or 

changed under subparagraph (A) only by providing notice 

to mortgagees and to the Congress, at least 30 days before 

the premium structure is established or changed. 

(C) ANNUAL REPORT REGARDING PREMIUMS.—The Secretary shall submit a report to the Congress annually setting forth the rate structures and rates established and altered pursuant to this paragraph during the preceding 12- 

month period and describing how such rates were determined. 

(D) CONSIDERATIONS FOR PREMIUM STRUCTURE.—When 

establishing and collecting premiums for mortgages insured 

under a premium structure established under this paragraph, the Secretary shall consider the following: 

(i) The effect of the proposed premiums or structure 

on the Secretary’s ability to meet the operational goals 

of the Mutual Mortgage Insurance Fund as provided in 

section 202(a). 

(ii) Underwriting variables. 

(iii) The extent to which new pricing under the proposed premiums or structure has potential for acceptance in the private market. 

(iv) The administrative capability of the Secretary to 

administer the proposed premiums or structure. 

(v) The effect of the proposed premiums or structure 

on the Secretary’s ability to maintain the availability of 

mortgage credit and provide stability to mortgage markets. 

(E) AUTHORITY TO BASE PREMIUM PRICES ON PRODUCT

RISK.— 

(i) AUTHORITY.—In establishing premium rates 

under this title, the Secretary may provide for variations in such rates according to the credit risk associated with the type of mortgage product that is being insured under this title, which may include providing 

that premium rates differ between fixed-rate mortgages 

and adjustable-rate mortgages insured pursuant to section 251, between mortgages for condominiums and 

mortgages for other interests in properties, between 

mortgages having different ratios of the principal obligation under the mortgage to the appraised value of 


wwoods2 on PRODPC68 with REPORTS
19 

the property, and between such other products as the 

Secretary considers appropriate. 

(F) PAYMENT INCENTIVES.— (i) AUTHORITY.—With respect to mortgages for which 

insured the Secretary is authorized to establish a premium structure under this paragraph, the Secretary 

shall provide that the payment incentive under subparagraph (ii) applies upon the expiration of the 5-year 

period beginning upon the time of insurance of such a 

mortgage, and the Secretary may provide that the payment incentive under clause (ii) applies upon the expiration of the 3-year period beginning upon the time of 

insurance of such a mortgage. The Secretary may limit 

such discretionary authority to mortgages prepaid or 

paid in full during the 2-year period beginning 3 years 

after the time of insurance of such a mortgage. 

(ii) PAYMENT INCENTIVE.—In the case of any mortgage to which the payment incentive under this subparagraph applies, if, during the period referred to in 

clause (i), all mortgage payments, including insurance 

premiums, for such mortgage have been paid on a 

timely basis, upon the expiration of such period the 

Secretary shall refund to the mortgagor, upon payment 

in full of the obligation of the mortgage, all or a portion of— 

(I) the amount by which the single premium payment for such mortgage collected at the time of insurance exceeded the amount of the single premium payment chargeable under paragraph (2) at 

the time of insurance for a mortgage of the same 

product type having the same terms, but for which 

the mortgagor has a credit score equivalent to a 

FICO score of 600 or more; and 

(II) in the case only of mortgages for which annual premiums are established and collected under 

subparagraph (G), the amount by which the cumulative amount of annual premiums paid exceeded 

the amount of the maximum annual premium that 

otherwise may be established and collected notwithstanding such subparagraph. 

(G) OPTION FOR HIGHER ANNUAL PREMIUM IN LIEU OF

HIGHER UP-FRONT PREMIUM.—In the case only of mortgages 

for which the Secretary is authorized to establish a premium structure under this paragraph, notwithstanding 

paragraph (2)(B) of this subsection, the Secretary may establish and collect, for a period not exceeding the first 5 

years of the term of the mortgage, annual premium payments in an amount not exceeding 0.75 percent of the remaining insured principal balance of the mortgage (excluding the portion of the remaining balance attributable to the 

premium collected under paragraph (2)(A) and without taking into account delinquent payments or prepayments), except that— 

(i) the Secretary may utilize such authority only for 

such classes of mortgagors that the Secretary deterVerDate Aug 31 2005 06:47 Oct 07, 2008 Jkt 079006 PO 00000 Frm 00019 Fmt 6659 Sfmt 6603 E:\HR\OC\HR905.XXX HR905

wwoods2 on PRODPC68 with REPORTS
20 

mines would otherwise be subject to a single premium 

payment collected at the time of insurance exceeding 

2.25 percent of the amount of the original insured principal obligation of the mortgage; and 

(ii) for such mortgages, the Secretary may not establish or collect a single premium payment collected at 

the time of insurance exceeding 2.25 percent of such 

original insured principal obligation. 

* * * * * * * 


wwoods2 on PRODPC68 with REPORTS
(21) 

1See Federal Register, September 14, 1999, ‘‘Sources of Homeowner Downpayment; Proposed 

Rule’’ page 49956–49958. 2Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction 

and Negatively Affects Loan Performance (GAO–07–1033T June 22, 2007). 

DISSENTING VIEWS 

Just 48 days after the ‘‘Hope For Homeowners Act’’ was enacted 

into law (Public Law 110–289), the Financial Services Committee, 

through H.R. 6694, voted to reverse policy direction and reinstate 

the seller-funded downpayment assistance program on a limited 

basis. While I support gift downpayments by family members, religious organizations, employers, or unions, for example, I cannot 

support seller-funded third-party interest downpayment programs 

that distort the price of homes, increase defaults on governmentinsured mortgages, and lead to possible fraud. Reviving this program is unwise, and I therefore opposed this legislation during 

Committee consideration. 

The controversy surrounding seller-funded downpayment assistance on Federal Housing Administration (FHA)-insured loans dates 

back to 1999, when the Clinton Administration proposed rules to 

address what the Department of Housing and Urban Development 

(HUD), under then-Secretary Andrew Cuomo, perceived as a ‘‘clear 

quid pro quo between the homebuyer’s purchase of the property 

and the seller’s ‘contribution’ or payments to the non-profit organization.’’ 1 While the Clinton administration’s proposed rule was 

never finalized, it did highlight a practice that prompted increasing 

scrutiny and further investigation by several other agencies. 

Indeed, HUD, the Internal Revenue Service (IRS), and the Government Accountability Office (GAO) have all expressed concerns 

about the providers of this assistance and its effect on the future 

solvency of the FHA program. In a 2007 report, GAO stated: 

Assistance from seller-funded nonprofits alters the structure of the purchase transaction in important ways. First, 

because many seller-funded nonprofits require property 

sellers to make a payment to their organization, assistance 

from these nonprofits creates an indirect funding stream 

from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with sellerfunded nonprofit assistance were appraised at and sold for 

about 2 to 3 percent more than comparable homes bought 

without such assistance.2

According to HUD, seller-funded downpayment loans are three 

times more likely to end up in foreclosure as loans without such 

assistance. Nearly 16 percent of loans made with seller-funded 

downpayment assistance in 2000 have already gone to claim, compared to just 6 percent of borrower-funded loans. Similarly, nearly 

7 percent of loans made in 2004 have gone to claim, compared to 

just 1.7 percent of borrower-funded loans. This difference may be 


wwoods2 on PRODPC68 with REPORTS
22 

explained, in part, by the higher sales prices of comparable homes 

bought with seller-funded assistance. 

Below is a chart showing claim rates over the last 7 years for the 

Seller Funded Downpayment Assistance Program. 

To-Date Claim Rates on FHA Single-Family Purchase Loan Endorsements by Source of 

Downpayment Funds 

Fiscal Year Borrower 

(percent) 

Relative 

(percent) 

Government agency 

(percent) 

SFDPA 

(percent) 

Employer 

(percent) 

2000 6.09 8.19 13.26 15.78 9.52 

2001 5.42 6.41 12.79 15.65 7.24 

2002 4.10 4.25 9.76 12.40 5.50 

2003 2.85 3.08 7.64 9.80 3.68 

2004 1.61 2.10 4.23 6.74 3.33 

2005 0.84 0.97 2.04 3.60 1.42 

2006 0.16 0.16 0.42 0.86 0.49 

Data as of December 31, 2007. 

Source: U.S. Dept of HUD. 

Explanatory Note: Claim rates decline each year because newer 

loans have had less time to go to claim 

In 2006, the IRS issued a revenue ruling that stripped these organizations of their tax exempt status, ruling that sellers often 

raise the property price to cover the cost of the downpayment, resulting in no net benefit to the buyer. The IRS stated, as early as 

2002, that ‘‘in a typical scheme, there is a direct correlation between the amount of down-payment assistance provided to the 

buyer and the payment received from the seller. Moreover, the seller pays the organization only if the sale closes, and the organization usually charges an additional fee for its services.’’ 

The IRS added that ‘‘the payments [from the seller] do not proceed from detached and disinterested generosity, but rather are in 

response to an anticipated economic benefit, namely facilitating the 

sale of the seller’s home.’’ Nothing in H.R. 6694 addresses these 

concerns. 

In what appears to be a circumvention of sound lending policy, 

the seller-funded downpayments allow potential homeowners to 

purchase homes without any of their own money at risk. Where I 

come from, this means the homeowner has ‘‘no skin in the game.’’ 

Hence, the potential for defaults and foreclosures increases substantially. 

In testimony earlier this year, FHA Commissioner Brian Montgomery warned this Committee that his agency could lose $4.6 billion in 2008 largely due to expected losses from mortgages issued 

with seller-funded downpayment assistance. 

While I recognize that H.R. 6694 attempts to mitigate some of 

these risks by limiting the use of seller-funded downpayment assistance to borrowers with credit scores above 620, this approach 

does not go far enough, in my view, to address the very serious concerns that prompted the statutory elimination of the seller-funded 

downpayment assistance program in the first place. 

Given the potentially devastating effect of these programs on the 

financial standing of the FHA, it should come as no surprise that 

the Bush administration and HUD have serious concerns about 

this legislation. 


wwoods2 on PRODPC68 with REPORTS
23 

Currently, we are in a housing market environment where the 

overall mortgage delinquency rate is at its highest level in 29 

years, according to data released earlier this month by the Mortgage Bankers Association. Almost 10 percent of all outstanding 

mortgages are now either delinquent or in foreclosure. It does not 

make sound policy to overload the FHA program at a time when 

FHA is already being asked to refinance an estimated 400,000 

troubled borrowers on the brink of default and possible foreclosure 

as part of the ‘‘Hope for Homeowners Act of 2008’’ program created 

just 48 days ago. 

It is for these reasons that I must oppose this legislation. 

SPENCER BACHUS. 

Æ 


wwoods2 on PRODPC68 with REPORTS