29506 Federal Register / Vol. 63, No.103 / Friday, May 29, 1998 /Rules and Regulations

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.

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 FHAapproved 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
Federal Register / Vol. 63, No.103 / Friday, May 29, 1998 /Rules and Regulations 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:

§ 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