[Federal Register Volume 65, Number 196 (Tuesday, October 10, 2000)]
[Rules and Regulations]
[Pages 60320-60321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25869]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 203



Single Family Mortgage Insurance; Electronic Underwriting; Final Rule

Federal Register / Vol. 65 , No. 196 / Tuesday, October 10, 2000 / 
Rules and Regulations

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4311-F-02]
RIN 2502-AH15


Single Family Mortgage Insurance; Electronic Underwriting

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

ACTION: Final rule.

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SUMMARY: As part of Direct Endorsement processing of a single family 
mortgage for FHA insurance, FHA previously required a Direct 
Endorsement underwriter to review personally the appraisal report and 
credit application, including the analysis performed on the worksheets. 
HUD issued an interim rule in May 1998 to allow a Direct Endorsement 
lender to substitute an acceptable risk classification from a FHA-
approved automated underwriting system (AUS) in lieu of a personal 
review by a Direct Endorsement underwriter. The interim rule is adopted 
without change as a final rule.

EFFECTIVE DATE: November 9, 2000.

FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Office of Home 
Mortgage Insurance, Room 9266, Department Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410, telephone 
(voice) (202) 708-2700. (This is not a toll-free number.) Hearing-
impaired or speech-impaired individuals may access the voice telephone 
listed by calling the Federal Information Relay Service during working 
hours at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

    Until changed by an interim rule published on May 29, 1998 (63 FR 
29506), the Direct Endorsement (DE) procedure required a DE underwriter 
to personally review the appraisal report and credit application, 
including the analysis performed on the worksheets, when a single 
family mortgage was processed for FHA insurance under the Direct 
Endorsement procedure. The DE underwriter would certify that the 
underwriter had personally reviewed the credit application and 
appraisal report on all mortgages originated under the DE procedure. 
With the introduction of automated underwriting systems, the need for 
human underwriters to review certain aspects of the mortgage loan 
application has been substantially diminished. The regulatory change 
made by the interim rule allowed the lender to substitute an ``accept'' 
risk classification from a FHA-approved automated underwriting system 
in lieu of a personal review by a DE underwriter of the borrower's 
credit and capacity to repay the mortgage.
    An automated underwriting system (AUS) performs an analysis of the 
loan application and provides risk grades or classifications as to the 
probability of mortgage default. The AUS either provides an acceptable 
risk classification (using such terms as ``accept'' or ``approve'') for 
the application based on information provided by the lender, or refers 
the application for further review by an individual underwriter. FHA 
controls the approval of all proprietary AUS's, determines the risk it 
is willing to accept (i.e., the score necessary to allow the loan to be 
considered an ``accept'' or an ``approve''), and enters into agreements 
with the AUS vendors outlining what elements of the mortgage 
application it is permitting the AUS to evaluate. FHA, at its 
discretion, may determine that the AUS may be used to review elements 
of the applicant's credit and capacity.
    FHA will continue to require a personal review for those mortgage 
applications referred to an individual underwriter and to require that 
the lender certify that all other aspects of the mortgage transaction, 
including data integrity and eligibility rules, meet FHA requirements. 
Further, the mortgage lender remains responsible for those aspects of 
the credit and capacity not evaluated by the AUS, including eligibility 
requirements, as well as the integrity of the data used by the AUS to 
arrive at the ``accept'' risk classification.

Public Comments

    HUD received one comment on the interim rule from a DE underwriter.
    Comment. The commenter stated that it would be prudent for HUD to 
retain a requirement for a qualified person to sign off on each loan. 
The commenter expressed concern that a person would need to ensure the 
integrity of information, such as that taken from a Builder's 
Certification for a new home, or make judgment calls concerning a need 
for repairs to a home. The same commenter expressed concern over what 
he characterized as ``HUD's choice'' of Freddie Mac's Loan Prospector, 
objecting to Freddie Mac's charge for access to that AUS system.
    HUD Response. Under the rule as revised on May 28, 1998, the lender 
must still sign and submit to HUD, before the mortgage is endorsed for 
insurance, the Form HUD-92900-A that holds the lender accountable for 
data integrity. The lender will have the option to decide who signs for 
the lender on the form certifying to the accuracy of the data used to 
determine the credit and capacity of the borrower, and may designate 
the DE underwriter for this purpose. The DE underwriter will still be 
responsible for review of the property, including repair requirements. 
An AUS will eliminate only the mandatory personal review of credit and 
capacity to repay, not the underlying collateral.
    HUD did not approve Freddie Mac's licensing fees as part of the 
approval process, and does not expect to approve such fees for other 
systems. As other AUSs receive HUD approval, we expect that this will 
lead to market competition regarding fees for access to AUS processing 
for FHA-insured mortgages. Since the interim rule was published, HUD 
has approved Fannie Mae's Desktop Underwriter, as well as PMI Mortgage 
Services' pmiAURA, and is continuing to evaluate other systems.
    HUD has concluded that no change to the interim rule is needed.

Findings and Certifications

Environmental Finding

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations at 24 CFR Part 50, which 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969, at the time of the interim rule. The Finding of No Significant 
Impact remains available for public inspection between 7:30 a.m. and 
5:30 p.m. weekdays in the Office of the Rules Docket Clerk, Office of 
the General Counsel, Department of Housing and Urban Development, Room 
10276, 451 Seventh Street, SW., Washington, DC 20410.

Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on State and local governments and 
is not required by statute, or preempts State law, unless the relevant 
requirements of section 6 of the Executive Order are met. This final 
rule does not have federalism implications and does not impose 
substantial direct compliance costs on State and local governments or 
preempt State law within the meaning of the Executive Order.

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The Regulatory Flexibility Act

    In accordance with 5 U.S.C. 605(b) (the Regulatory Flexibility 
Act), the Secretary by his approval of this rule hereby certifies that 
this rule does not have a significant economic impact on a substantial 
number of small entities because it allows mortgage lenders greater 
flexibility and reduces underwriting time and expense.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) requires Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and on 
the private sector. This final rule does not impose, within the meaning 
of the UMRA, any Federal mandates on any State, local, or, tribal 
governments or on the private sector.

List of Subjects in Part 203

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for this program 
is 14.117.


    Accordingly, the amendment to 24 CFR 203.255(b)(5) made by interim 
rule published on May 29, 1998 at 63 FR 29506 is adopted as a final 
rule without change.

    Dated: October 2, 2000.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 00-25869 Filed 10-6-00; 8:45 am]
BILLING CODE 4210-27-P