[Federal Register Volume 63, Number 103 (Friday, May 29, 1998)]
[Rules and Regulations]
[Pages 29506-29507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14043]



[[Page 29505]]

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Part V





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. 63, No.103 / Friday, May 29, 1998 / Rules and 
Regulations

[[Page 29506]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4311-I-01]
RIN 2502-AH15


Single Family Mortgage Insurance; Electronic Underwriting

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

ACTION: Interim rule.

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SUMMARY: Currently, a Direct Endorsement underwriter must personally 
review the appraisal report and credit application, including the 
analysis performed on the worksheets. With the introduction of 
automated underwriting systems, the need for human underwriters to 
review certain aspects of the mortgage loan application is 
substantially diminished. This interim rule amends the regulations on 
Single Family Mortgage Insurance to allow the lender to substitute an 
``accept'' risk classification from a FHA-approved automated 
underwriting system (AUS) in lieu of a personal review by a Direct 
Endorsement underwriter of the borrower's credit and capacity to repay 
the mortgage.

DATES: Effective date: June 29, 1998.
    Comment due date: July 28, 1998.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Rules Docket Clerk, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW, Washington, DC 20410-0500. Communications should refer to the above 
docket number and title. A copy of each communication submitted will be 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the above address. HUD will not process facsimile 
(FAX) communications as comments.

FOR FURTHER INFORMATION CONTACT: John J. Coonts, Director, Office of 
Insured Single Family Housing, Room 9162, Department Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410, telephone 
(voice) (202) 708-3046. (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: Currently, a Direct Endorsement (DE) 
underwriter must personally review the appraisal report and credit 
application, including the analysis performed on the worksheets. With 
the introduction of automated underwriting systems, the need for human 
underwriters to review certain aspects of the mortgage loan application 
is substantially diminished. The current regulatory provision at 24 CFR 
203.255(b)(5) requires a DE underwriter to certify that the underwriter 
has personally reviewed the credit application and appraisal report on 
all mortgages originated under the DE program. The regulatory change 
set forth in this interim rule allows 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 accepts or approves the 
mortgage based on information provided by the lender, or refers the 
application for further review by an individual. 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''), 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.

Other Matters

Justification for Interim Rule

    In general, the Department publishes a rule for public comment 
before issuing a rule for effect, in accordance with its own 
regulations on rulemaking, 24 CFR part 10. Part 10 does provide, 
however, for exceptions from that general rule where the Department 
finds good cause to omit advance notice and public participation. The 
good cause requirement is satisfied when prior public procedure is 
``impracticable, unnecessary, or contrary to the public interest.'' 24 
CFR 10.1. The Department finds that good cause exists to publish this 
rule for effect without first soliciting public comment, in that public 
procedure is contrary to the public interest and unnecessary. Failure 
to permit substitution of the AUS risk classification impedes lenders 
from benefitting from the efficiencies of automated underwriting 
systems, as well as FHA's ability to offer lower cost mortgage 
originations. Furthermore, this rule is not contrary to the public 
interest because applicants who do not receive the automated ``accept'' 
classification will be granted a manual underwriting review. 
Consequently, no applicant will be automatically denied approval as a 
result of the Department's use of this system. Also, in keeping with 
the Administration's effort to reduce the regulatory burden, this rule 
reduces the government regulation of private entities, allows mortgage 
lenders greater flexibility, and reduces underwriting time and expense.

Environmental Finding

    A Finding of No Significant Impact with respect to the environment 
has been 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. The Finding of No Significant Impact is 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, S.W., Washington, D.C. 20410.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this rule will not have substantial direct effects on 
States or their political subdivisions, or the relationship between the 
Federal government and the States, or on the distribution of power and 
responsibilities among the various levels of government. As a result, 
the rule is not subject to review under the Order.

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

[[Page 29507]]

greater flexibility and reduces underwriting time and expense. It does 
not negatively affect small businesses.

Executive Order 12866

    This rule was reviewed by the Office of Management and Budget (OMB) 
under Executive Order 12866 on Regulatory Planning and Review, issued 
by the President on September 30, 1993. Any changes made in the rule 
subsequent to its submission to OMB are identified in the docket file, 
which is available for public inspection as provided under the section 
of this preamble entitled Address.
    HUD recognizes that this rule has a potential economic impact. The 
adoption of AUS by FHA originators will result in system set-up and 
maintenance costs that they may not otherwise incur. The ability to use 
AUS has the potential to significantly reduce the cost of underwriting 
a substantial proportion of FHA loans. These reduced costs may be 
passed on to borrowers through lower origination fees. Alternatively, 
originators may shift Direct Endorsement underwriting personnel and 
other resources away from AUS ``accept'' borrowers to other borrowers. 
The ability to review more intensively applications not given an 
``accept'' rating by the AUS, or to provide credit counseling or other 
services to these applicants, may increase the number of borrowers 
granted FHA loans.
    This rule is not economically significant as described in E.O. 
12866, however. While the rule allows lenders to use AUS ``accept'' 
risk classification in lieu of a personal review by a Direct 
Endorsement underwriter, it does not mandate it. Thus, any economic 
impact of the rule will result from voluntary actions of lenders. If 
lenders do not find that the individual benefits of using AUS outweigh 
individual costs, the rule would have no economic impact.

List of Subjects in 24 CFR Part 203

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

Catalog of Federal Domestic Assistance

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

    Accordingly, 24 CFR part 203 is amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

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

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

    2. Section 203.255 is amended by revising paragraph (b)(5) to read 
as follows:


Sec. 203.255  Insurance of mortgage.

* * * * *
    (b) * * *
    (5) An underwriter certification, on a form prescribed by the 
Secretary, stating that the underwriter has personally reviewed the 
appraisal report and credit application (including the analysis 
performed on the worksheets) and that the proposed mortgage complies 
with HUD underwriting requirements, and incorporating each of the 
underwriter certification items which apply to the mortgage submitted 
for endorsement, as set forth in the applicable handbook or similar 
publication that is distributed to all Direct Endorsement mortgagees, 
except that where an automated underwriting system (AUS) approved by 
the Secretary or Commissioner is used by the lender, and the AUS has 
determined that the application represents an acceptable risk under 
terms and conditions agreed to by the FHA, a Direct Endorsement 
underwriter shall not be required to certify that he/she has personally 
reviewed the credit application (including the analysis performed on 
any worksheets);
* * * * *
    Dated: April 29, 1998.
Art Agnos,
Acting General Deputy Assistant Secretary for Housing--Federal Housing 
Commissioner.
[FR Doc. 98-14043 Filed 5-28-98; 8:45 am]
BILLING CODE 4210-27-P