56002 Federal Register / Vol. 72, No. 189 / Monday, October 1, 2007 / Rules and Regulations 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 203 

[Docket No. FR–5087–F–02] 

RIN 2502–AI52 

Standards for Mortgagor’s Investment 

in Mortgaged Property 

AGENCY: Office of the Assistant 

Secretary for Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Final rule. 

SUMMARY: This final rule amends the 

Department’s regulations governing the 

specific standards for a mortgagor’s 

investment in property for which the 

mortgage is insured by the Federal 

Housing Administration (FHA). 

Specifically, this final rule codifies 

HUD’s longstanding practice, authorized 

by statute, of allowing a mortgagor’s 

investment to be derived from gifts by 

family members and certain 

organizations. 

The standards established by this 

final rule address a situation in which 

the mortgagor’s investment is derived 

from a gift, loan, or other payment that 

is provided by any donor, including an 

individual or an organization, and also 

specify prohibited sources for a 

mortgagor’s investment. The final rule 

establishes that a prohibited source of 

downpayment assistance is a payment 

that consists, in whole or in part, of 

funds provided by any of the following 

parties before, during, or after closing of 

the property sale: The seller, or any 

other person or entity that financially 

benefits from the transaction; or any 

third party or entity that is reimbursed 

directly or indirectly by the seller, or 

any other person or entity that 

financially benefits from the transaction. 

This final rule follows publication of 

a May 11, 2007, proposed rule and takes 

into consideration the public comments 

received on the proposed rule. After 

considering all comments received, 

HUD is adopting the May 11, 2007, 

proposed rule with certain minor 

clarification changes. 

DATES: Effective Date: October 31, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Margaret Burns, Director, Office of 

Single Family Program Development, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Washington, DC 20410; telephone 

number (202) 708–2121 (this is not a 

toll-free number). Persons with hearing 

or speech impairments may access this 

number through TTY by calling the tollfree Federal Information Relay Service 

at (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In order for a mortgage to be eligible 

for insurance by the Federal Housing 

Administration (FHA), section 203(b)(9) 

of the National Housing Act (12 U.S.C. 

1709(b)(9)) requires the mortgagor (with 

narrow exceptions) to pay on account of 

the property at least 3 percent of the 

cost of acquisition. The statute and the 

implementing regulation at 24 CFR 

203.19 are silent about permissible or 

impermissible sources of the 

mortgagor’s investment, except that 

some loans are permitted sources under 

the statute. For example, section 

203(b)(9) of the National Housing Act 

permits family members to provide 

loans to other family members, and 

permits the mortgagor’s downpayment 

to be paid by a corporation or person 

other than the mortgagor in certain 

circumstances, such as when the 

mortgagor is 60 years of age or older, or 

when the mortgage covers a housing 

unit in a homeownership program 

under the Homeownership and 

Opportunity Through HOPE Act (Title 

IV of Pub. L. 101–625, 104 Stat. 4148, 

approved November 28, 1990). HUD has 

long taken the position that 

downpayment funding from the seller of 

the home to be purchased by a borrower 

with an FHA-insured loan is not a 

permissible source of the mortgagor’s 

investment in the property. FHA’s 

experience is that loans made to 

borrowers who rely on these types of 

seller-funded assistance perform very 

poorly. 

Although FHA has attempted to 

preclude downpayment funding derived 

from contributions of the seller of the 

property, some so-called charitable 

organizations have been able to 

circumvent these restrictions in various 

ways, including the establishment of a 

fund that provides the so-called ‘‘gift’’ to 

the homebuyer. The situations that 

cause FHA concern are those in which 

a so-called charitable organization 

provides a so-called gift to a homebuyer 

from funds that it receives, directly or 

indirectly, from the seller. In these 

cases, there is a clear quid pro quo 

between the homebuyer’s purchase of 

the property and the seller’s 

‘‘contribution’’ or payment to the 

charitable organization. This is also true 

if the contribution to the charitable 

organization comes from an entity, other 

than the seller, that has an expectation 

of being reimbursed by the seller. Often, 

these contributions function as an 

inducement to purchase the home. It is 

these concerns that prompted HUD’s 

rulemaking in 1999, which did not 

result in final regulations, and now 

again, in 2007. 

II. The May 11, 2007, Proposed Rule 

On May 11, 2007, HUD published a 

proposed rule (72 FR 27047) for public 

comment to codify standards regarding 

the use of gifts as a source of the 

mortgagor’s investment in the 

mortgaged property, and to also specify 

prohibited sources for a mortgagor’s 

investment. The proposed rule 

established that a prohibited source of 

downpayment assistance is a payment 

that consists, in whole or in part, of 

funds provided by any of the following 

parties before, during, or after closing of 

the property sale: (1) The seller, or any 

other person or entity that financially 

benefits from the transaction; or (2) any 

third party or entity (referred to as a 

‘‘donor’’) that is reimbursed directly or 

indirectly by any of the parties listed in 

clause (1). 

As discussed in the proposed rule, 

FHA’s primary concern with these 

transactions is that the sales price is 

often increased to ensure that the 

seller’s net proceeds are not diminished, 

and such increase in sales price is often 

to the detriment of the borrower and 

FHA. A Government Accountability 

Office (GAO) report released in 2005 

entitled ‘‘Mortgage Financing: Actions 

Needed to Help FHA Manage Risks from 

New Loan Products’ (GAO Mortgage 

Financing Report) stated that Fannie 

Mae and Freddie Mac do not allow 

seller-related contributions to the 

downpayment, and that seller-related 

contributions could contribute to an 

overvaluation of the price of the 

property (GAO Mortgage Financing 

Report, at page 16). 

In May 2006, the Internal Revenue 

Service (IRS) addressed these same 

concerns by issuing Revenue Ruling 

2006–27, which provides guidelines on 

organizations that may provide 

downpayment assistance to homebuyers 

and qualify as tax-exempt charitable or 

educational organizations under 

Internal Revenue Code (IRC) section 

501(c)(3), and those that do not qualify 

for this tax-exempt status. The IRS, in 

its press announcement of the ruling, 

stated that funneling downpayment 

assistance from sellers to buyers through 

‘‘self-serving, circular-financing 

arrangements’’ is inconsistent with 

operation as a section 501(c)(3) 

charitable organization. The IRS stated 

that, in a typical scheme, there is a 

direct correlation between the amount 

of the downpayment assistance 

provided to the buyer and the payment 

received from the seller, the seller pays 

the organization only if the sale closes, 

and the organization usually charges an 


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additional fee for its services. The IRS 

noted that so-called charities that 

manipulate the system do more than 

mislead honest homebuyers; these 

organizations ultimately cause an 

increase in the cost of the home and 

damage the image of honest, legitimate 

charities. (See IRS News Release of May 

4, 2006, at http://www.irs.gov/ 

newsroom/article/0,id=156675,00.html.) 

As the IRS also noted in its press 

release, inflated sales prices are often 

found on properties purchased with 

downpayment assistance from sellerfunded nonprofit programs. Unlike true 

gifts that reduce the amount of the 

purchase price financed by the 

homeowner, such seller contributions 

increase the sales price of the home and 

result in higher mortgage payments. 

Given that seller-funded gift programs 

thrive in stagnant or depreciating 

housing markets, the risk to FHA 

increases if FHA cannot recover the full 

amount owed when FHA acquires and 

resells a home that had been purchased 

by a participating borrower who had 

defaulted on the FHA-insured loan. 

While these situations represent a 

financial burden for FHA and taxpayers, 

of equal if not greater concern, is that 

they hurt the families who lose their 

homes and the neighborhoods in which 

those homes are located. 

III. This Final Rule 

For the foregoing reasons, HUD is 

proceeding, through this final rule, to 

codify the regulations submitted for 

public comment in the May 11, 2007, 

proposed rule. This final rule makes the 

following change to the May 11, 2007, 

proposed rule in response to public 

comment. This final rule clarifies in 

§ 203.19(f) that a tribal government or a 

tribally designated housing entity 

(TDHE), as defined at 25 U.S.C. 

4103(21), is a permissible source of 

downpayment assistance. Additionally, 

the final rule revises in § 203.19(f) the 

description of tax-exempt organizations 

that are permissible sources of gifts to 

more closely align this description with 

the description used by IRS of such 

organizations. 

In addition, notwithstanding the 

effective date provided under the DATES

caption of this rule, pursuant to an April 

1998 settlement agreement resolving 

litigation between the Nehemiah 

Progressive Housing Development 

Corporation (Nehemiah) and HUD, the 

effective date shall be March 31, 2008 

for the Nehemiah downpayment 

assistance program described in the 

settlement agreement between 

Nehemiah and HUD. 

While this rule prevents sellers from 

funding downpayments in their own 

home sales transactions, the rule is not 

intended to preclude sellers from 

contributing to charitable organizations 

that provide downpayment assistance 

that is unrelated in any manner to any 

properties sold by the seller. In 

addition, the rule is not intended to 

preclude reasonable assistance with 

closing costs not related to the 

minimum investment, which may be 

permitted under local practice. Nothing 

in this rule changes HUD’s policy of 

allowing builders and other sellers to 

offer cash incentives to homebuyers, 

provided that any cash or cash 

equivalent given to a homebuyer before, 

at, or after closing results in a 

proportionate reduction to the mortgage; 

an amount which the homebuyer then 

would have to provide as additional 

funds at closing. The primary focus of 

this rule is to establish appropriate 

standards for downpayment assistance 

to a homebuyer that is categorized as a 

gift. 

IV. Discussion of Key Issues Raised by 

Public Commenters on Proposed Rule 

The public comment period for the 

May 11, 2007, proposed rule was 

initially set to close on July 10, 2007, 

but HUD extended the comment period 

to August 10, 2007. HUD received 

approximately 15,000 public comments 

on the proposed rule. The 

overwhelming majority of these 

comments consisted of brief statements 

opposing HUD’s rule, with the majority 

also submitting their comments in a 

standard similar format and wording, 

and urging HUD not to eliminate 

downpayment assistance in connection 

with FHA-insured mortgages. However, 

a number of comments supported the 

rule, and approved of FHA’s efforts to 

harmonize its regulations regarding 

downpayment assistance with recent 

rulings of the IRS. These commenters 

shared HUD’s concerns about home 

price inflation and the associated risks 

for increased delinquency and 

foreclosure. They stated that inflated 

home prices affect a community’s 

housing market, and can magnify 

existing housing affordability problems. 

The following provides a summary of 

the major themes and issues raised 

during the public comment period on 

the proposed rule. 

Comment: HUD should not eliminate 

downpayment assistance, but regulate 

such assistance, or establish standards 

for downpayment supported loans, 

including taking action to improve 

appraisals and require stricter 

underwriting and a higher insurance 

premium for such loans. 

HUD response: Many commenters, 

through their statements urging HUD 

not to eliminate downpayment 

assistance, indicated that they believed 

the May 11, 2007, proposed rule would 

eliminate all downpayment assistance. 

HUD’s May 11, 2007, rule did not 

propose to eliminate downpayment 

assistance, but rather proposed to 

regulate such assistance as the 

commenters requested. Additionally, 

HUD is not eliminating all privately 

funded downpayment assistance. Such 

assistance is permitted, for example, 

from family members, the borrower’s 

employer, state or local governments, 

charitable organizations that do not rely 

upon a party with a financial interest in 

the transaction for downpayment 

assistance, or labor organizations. The 

proposed rule, however, did propose to 

preclude as acceptable downpayment 

assistance, assistance that, in whole or 

in part, is funded by the seller or any 

other person or entity that financially 

benefits from the transaction or any 

third party or entity that is reimbursed, 

directly or indirectly, by the seller or 

any other party that financially benefits 

from the transaction. 

Comment: Although downpayment 

assistance presents risks, HUD should 

address what an acceptable level of risk 

is, and determine how the risk can be 

maintained at or below that level. 

HUD response: Based on HUD’s 

analysis of its loan portfolio going back 

to 1998, HUD has assessed that risk and 

has determined that there is 2 to 3 times 

greater risk of default and claim with 

purchase loans that receive 

downpayment assistance from the seller 

or other persons or entities that 

financially benefit from the sale of a 

home to the borrower than from all 

other loans with downpayment 

assistance from all other sources. 

For example, for loans endorsed for 

insurance in Fiscal Year (FY) 2001, the 

cumulative claim rate as of July 2007 

was 7.1 percent for loans with 

downpayment assistance from relatives, 

public agencies, and employers, but 

15.8 percent for loans with 

downpayment assistance from nonprofit 

entities that received reimbursements 

from sellers. A cumulative claim rate is 

calculated by dividing the number of 

claims that have occurred to date by the 

number of loans endorsed in a 

particular fiscal year. In conjunction 

with the FY 2006 Actuarial Review of 

the Mutual Mortgage Insurance Fund, 

FHA’s independent actuaries estimated 

that the ultimate claim rate for 30-year 

fixed-rate purchase loans endorsed in 

FY 2008 would be 11.04 percent if they 

did not have seller-funded 

downpayment assistance, but 23.06 

percent if they did. An ultimate claim 

rate is defined as the total number of 


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claims expected to occur over the 30- 

year life of a book of business divided 

by the total number of loans endorsed 

in a particular fiscal year. The difference 

between these rates represents the 

difference between acceptable and 

unacceptable levels of risk to the FHA 

insurance fund. 

In addition, HUD has determined that 

loans with downpayment assistance 

from sellers or other parties with a 

financial interest in the transaction are 

also associated with a higher loss rate 

than other single family loans insured 

by FHA. In other words, homeowners 

with this type of downpayment 

assistance have a two to three times 

higher possibility of losing their home. 

This rule, therefore, is HUD’s effort to 

mitigate an unacceptable level of risk. 

Comment: HUD can mitigate the risk 

from downpayment assistance by 

requiring full disclosure of the amount 

of downpayment assistance for 

underwriting and to appraisers. 

HUD response: FHA requirements 

currently require disclosure of the full 

amount of downpayment assistance. 

Comment: Rather than eliminate 

downpayment assistance, HUD can 

further mitigate risk by requiring a 

complete home inspection, to avoid 

potentially huge repair costs to the 

homeowner. HUD could also require the 

owner to obtain a homeowner’s 

warranty for a specified period of time, 

to avoid high repair cost as a potential 

source of default and foreclosure. 

Alternatively, HUD could require 

downpayment assistance companies to 

offer mandatory risk mitigation tools or 

offer insurance to the buyer. 

HUD response: HUD reiterates that 

downpayment assistance is not being 

eliminated by this rule. The 

commenters’ recommendations are 

noted, but the suggested actions are 

outside the scope of the present rule. In 

addition, the recommendations 

pertaining to warranty or insurance does 

not deal directly with sales price 

inflation, which is a separate issue from 

repair costs a homeowner may face after 

purchasing a home. 

Comment: Price inflation does not 

arise from downpayment assistance, but 

from the appraisal process. The 

appraisal process should be reformed, 

for example, by establishing a blind 

pool appraiser selection process for 

loans with downpayment assistance. 

HUD response: Downpayment 

assistance can be an independent source 

of price inflation separate from, or in 

conjunction with, any price inflation 

that may arise from the appraisal 

process, which, while noted by HUD, is 

an issue beyond the scope of the present 

rule. HUD has already taken steps to 

address the appraisal issue. HUD’s 

Appraiser Roster, for which the 

regulations can be found in 24 CFR part 

200, subpart G, is intended to ensure 

fairness and accuracy in the appraisal 

process for FHA-insured mortgages. 

Comment: HUD should make rules to 

deal with predatory lenders and lenders 

who charge outrageous rates. Such 

lenders are the real problem, rather than 

downpayment assistance. It is a lender’s 

responsibility to ensure that people 

cannot buy more than they can afford, 

and downpayment assistance should 

not be affected because of bad lender 

decisions. 

HUD response: HUD acknowledges 

that problems may arise at each stage of, 

and with each party to, a complex 

transaction such as purchasing a home. 

In addition, problems change over time, 

and the way any given problem is 

addressed also changes. This rule 

addresses an aspect, other than 

predatory lending, of the home purchase 

transaction that has been identified as a 

problem. HUD notes the 

recommendation is outside the scope of 

this rule. Although HUD does not 

regulate non-FHA lending practices, 

HUD has taken steps, such as issuing 

rules on property flipping, appraisal 

reform, and lender accountability, to 

address predatory lending, and 

continues to monitor this problem and 

develop new ways of addressing it. FHA 

has also taken steps to mitigate mortgage 

insurance losses with the development 

and implementation of Credit Watch, 

Neighborhood Watch, and Appraiser 

Watch. FHA also strengthened its 

education efforts by doubling housing 

counseling grant funds, creating antipredatory lending brochures, featuring 

anti-predatory lending messages in 

advertising, and increasing training 

opportunities for FHA’s program 

participants. 

Comment: HUD should require 

homebuyer education instead of 

eliminating downpayment assistance. 

HUD response: HUD notes that it is 

not eliminating downpayment 

assistance but, as requested by many 

commenters, is establishing standards 

for the use of downpayment assistance 

in FHA-insured mortgages. HUD 

encourages and supports homebuyer 

education, and for some programs 

requires homebuyer counseling, but 

addressing that subject is beyond the 

scope of the current rule. 

Comment: HUD should permit sellers 

to directly contribute downpayment 

assistance to buyers without a 

middleman. 

HUD response: HUD has determined 

that contributions to downpayment 

assistance from sellers and other parties 

with a financial interest in the 

transaction, whether direct or indirect, 

present an unacceptable level of risk for 

FHA-insured mortgages. 

Comment: Rather than doing away 

with downpayment assistance, HUD 

should increase FHA loan limits. 

HUD response: It is unclear how 

increasing loan limits would mitigate 

the risk that HUD has experienced with 

seller-funded downpayment assistance. 

Comment: Rather than doing away 

with downpayment assistance, HUD 

should enforce Mortgagee Letter 02–02. 

HUD response: While noting again 

that HUD is not ending downpayment 

assistance, HUD also notes that 

Mortgagee Letter 02–02 addresses a 

different issue than that addressed by 

this rule. Mortgagee Letter 02–02 

addresses a situation where a seller or 

a nonprofit entity has paid a 

homebuyer’s consumer debt, which 

then makes it easier for the buyer to 

meet debt to income ratios. Further, 

HUD does enforce Mortgagee Letter 02–

02. The focus of this rule is 

downpayment assistance provided by a 

party with a financial interest in the 

transaction. 

Comment: Rather than doing away 

with downpayment assistance, HUD 

should limit the seller contribution to 3 

percent. 

HUD response: HUD reiterates that it 

is seeking to establish reasonable and 

prudent standards for the use of 

downpayment assistance, and that 

downpayment assistance from a seller 

or other party with a financial interest 

in the transaction presents an 

unacceptable risk to FHA. 

Comment: Downpayment assistance 

should be permitted in the 6 percent 

seller concession for closing costs that 

FHA allows. 

HUD response: The downpayment 

differs from closing costs in that the 

downpayment creates equity in the 

property for the buyer and closing costs 

do not. As such, the downpayment 

cannot be included in the mortgage, 

whereas certain closing costs are 

permitted to be included in the 

mortgage. For this reason, 

downpayment assistance cannot be 

treated as closing costs. 

Comment: Downpayment assistance 

helps first-time, low-credit, and lowincome homebuyers, who are often 

minority or single-parent households. 

HUD should not eliminate or limit such 

assistance. 

HUD response: As noted, HUD is not 

eliminating downpayment assistance 

but is establishing reasonable and 

prudent standards for the use of 

downpayment assistance. All 

homebuyers will benefit if the debt 


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burdens of homeownership are set more 

realistically and if price inflation at the 

time of purchase is mitigated. Further, 

mortgage insurance premiums would 

likely have to be increased without 

these standards, which would 

negatively impact all homebuyers. In 

addition, an analysis of HUD Real Estate 

Owned (REO) sales since 2004 shows 

that sales proceeds from this type of 

downpayment assistance is 3 to 6 

percent less than other REO sales. This 

suggests that the sales prices of such 

properties may have been inflated. 

Comment: This rule will negatively 

impact the market devastated by 

Hurricane Katrina by reducing the 

number of families willing to rebuild or 

buy in that market. 

HUD response: A number of special 

incentives and forms of assistance, such 

as disaster relief loans and grants and 

lower buyer investment requirements, 

are available in disaster zones such as 

that created by Hurricane Katrina. FHA, 

for example, offers eligible disaster 

victims section 203(h)-insured 

mortgages, which require no 

downpayment. Such assistance and 

requirements appropriately leave 

homebuyers in a much more favorable 

position to reestablish homeownership. 

The reasonable and prudent standards 

established by this rule will help to 

ensure that the benefits provided to 

disaster victims are not undercut by 

burdensome price and debt inflation. 

Comment: The rule will have a 

negative impact on FHA’s business, 

because of the substantial percentage of 

loans supported by downpayment 

assistance. The rule would immediately 

cause a huge contraction in FHA’s 

business. 

HUD response: HUD does not intend 

to maintain or expand the volume of 

FHA business at the expense of sound 

and sustainable purchases by 

homebuyers. Such a result would be 

contrary to the public purposes 

underlying FHA’s business. 

Comment: The rule is not supported 

by data. The analysis of the Government 

Accountability Office (GAO) found that 

downpayment-assisted loans had higher 

default and claim rates than other FHA 

loans, but did not segregate the effects 

of downpayment assistance from those 

of low downpayments and low credit 

ratings. HUD should conduct additional 

research because the data presented 

does not appear to be conclusive. 

HUD response: HUD has collected 

and analyzed additional data through its 

portfolio analysis. This analysis 

provides additional verification of the 

higher level of risk associated with 

downpayments funded by a seller or 

other financially interested party 

compared to downpayments funded 

from other sources, which HUD 

continues to permit. HUD’s analysis has 

also established that loans with 

downpayment assistance from sellers or 

other parties with a financial interest in 

the transaction have a higher loss rate 

associated with them and currently 

represent 30 percent of FHA’s REO 

portfolio. 

Comment: Prohibition of 

downpayment assistance would harm 

otherwise qualified borrowers, who will 

have to delay or forego homeownership 

or turn to the subprime market. 

HUD response: HUD notes again that 

the current rule does not prohibit or 

eliminate downpayment assistance, but 

only establishes reasonable and prudent 

standards for its use that will benefit, 

and not harm, homebuyers. The purpose 

of the rule is to mitigate the harm 

caused by downpayment assistance 

from sources with a financial interest in 

the transaction, and help assure 

continued homeownership. As 

previously stated, downpayment 

assistance from parties with a financial 

interest in the transaction have higher 

default and claim rates and higher loss 

rates. 

Comment: Downpayment assistance 

should not be prohibited because it 

provides borrowers instant equity when 

they purchase a home. 

HUD response: HUD agrees, and the 

rule does not prohibit all downpayment 

assistance. 

Comment: The rule will have a 

negative impact on the housing market 

and on the economy. 

HUD response: To the contrary, HUD 

expects that the reasonable and prudent 

approach taken by this rule will have a 

positive impact on the housing market 

and on the economy by reducing the 

number of mortgages that would 

otherwise default and go into 

foreclosure, driving down property 

values and negatively impacting a 

community’s tax base and economic 

viability. 

Comment: HUD should partner with 

downpayment assistance programs to 

promote homeownership. A zero 

downpayment program or 

downpayment assistance is needed to 

address the subprime crisis, because 

there is little or no equity in a 

substantial number of troubled 

properties. HUD should postpone action 

on downpayment assistance until 100 

percent financing is permitted. 

HUD response: HUD does sponsor 

downpayment assistance programs 

through such programs as the American 

Dream Downpayment Initiative, and 

others in which the assistance is not 

linked to the financial interest of parties 

other than the homebuyer. HUD 

currently does not have the authority for 

a zero downpayment program; however, 

a zero downpayment program would 

not address this issue of the financial 

interest of the providers of 

downpayment assistance. Reasonable 

standards would still be necessary for 

downpayment assistance, even if there 

is no requirement for a minimum 

investment by the homebuyer. 

Comment: HUD is replacing a private 

sector program that works and is forcing 

people to rely on government 

bureaucracy. In addition, governmentsponsored downpayment assistance has 

eligibility requirements such as income 

limits. Private downpayment assistance 

is available to anyone. The rule will 

vastly increase the size and cost of 

government. 

HUD response: Many of the comments 

recognized the value of, and the need 

for, reasonable standards, and the 

eligibility requirements noted here 

provide such standards. The cost of 

government is controlled by prioritizing 

the availability of benefits to those who 

need them most. Private downpayment 

assistance that does not rely upon a 

party with a financial interest in the 

transaction is not affected by this rule, 

which establishes reasonable and 

prudent standards for the use of 

downpayment assistance. This rule 

addresses certain forms of 

downpayment assistance that increase 

the cost of government because they 

increase FHA mortgage insurance 

payments for losses attributable to loan 

defaults and lower REO sales proceeds. 

Comment: A developer should be able 

to offer buyers incentives to purchase 

properties. 

HUD response: A developer’s ability 

to offer incentives, such as a reduced 

purchase price or a lower interest rate, 

is not affected by this rule. These 

incentives are distinguishable from 

downpayment assistance, and only the 

provision of downpayment assistance 

by a seller or a party with a financial 

interest in the transaction is prohibited 

by this rule. 

Comment: Real estate agents should 

be permitted to use their commission to 

fund the downpayment where the real 

estate agent is the buyer/mortgagor, 

because the commission is earned, and 

not a seller contribution or gift. 

HUD response: The circumstance 

described by this comment are not 

affected by this rule, because a 

borrower’s earned income, such as a real 

estate agent’s commission, is a 

permissible source of downpayment. 

Comment: The rule should not 

exclude Indian tribes or tribally 

designated housing entities (TDHEs) 


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from the governments considered in the 

rule. In taking this significant action, 

HUD did not follow its own policy on 

tribal consultation and the rule should 

be withdrawn until HUD follows the 

consultation procedure. 

HUD response: The rule did not 

intend to exclude Indian tribes or 

TDHEs from the governments 

considered in the rule. This final rule 

specifically clarifies the treatment of 

downpayment assistance from Indian 

tribes and TDHEs. As with other rules 

that are generally applicable and, thus, 

also incidentally apply to Indian tribes, 

HUD did not undertake tribal 

consultation. HUD’s tribal consultation 

policy states, ‘‘Tribal Coordination, 

Collaboration and Consultation applies 

when any proposed policies, programs 

or actions are identified by HUD as 

having a substantial direct effect on an 

Indian tribe.’’ (66 FR 49785). Since the 

effect of the rule on tribes is only 

incidental and since the rule applies to 

all FHA-insured single family 

mortgages, the tribal consultation policy 

is not applicable. All providers of 

downpayment assistance are subject to 

the general standard of this rule and 

their downpayment assistance cannot be 

funded by sellers or other parties with 

a financial interest in the transaction. 

HUD follows, and will continue to 

follow, its tribal consultation policy 

when identified by HUD as applicable. 

Comment: HUD should clarify 

whether downpayment assistance 

provided by grantees under government 

programs is permitted. 

HUD response: Grant funds made 

available to assist homebuyers may be 

used for downpayment assistance 

because such funds are not linked to the 

sources addressed by this standard, 

namely, the seller or other parties with 

a financial interest in the transaction. 

Grantees act with a public purpose, 

using government-provided funds, 

rather than acting with a private 

financial interest in the transaction or 

using funds from parties with a 

financial interest in the transaction. 

Comment: HUD should provide a 

definition of ‘‘family members.’’

HUD response: The term ‘‘family 

member’’ is defined at section 201(e) of 

the National Housing Act (12 U.S.C. 

1707(e)) and governs regulations issued 

for FHA programs under section 203 of 

the National Housing Act, such as the 

current rule. 

Comment: HUD should permit loans 

for downpayment assistance and second 

mortgages, including loans from the 

seller and from governments. 

HUD response: The rule continues to 

permit loans authorized by statute as a 

source for the minimum investment. 

Loans from sellers are not authorized by 

statute. 

Comment: HUD should clarify that 

this rule does not prohibit assistance 

from nonprofit developers. 

HUD response: HUD permits 

downpayment assistance from 

charitable organizations. Downpayment 

assistance from nonprofit developers is 

permitted as long as it complies with 

this general standard and their 

downpayment assistance cannot be 

funded by sellers or other parties with 

a financial interest in the transaction. 

V. Findings and Certifications 

Regulatory Planning and Review 

The Office of Management and Budget 

(OMB) reviewed the rule under 

Executive Order 12866, Regulatory 

Planning and Review. OMB determined 

that the rule is a ‘‘significant regulatory 

action,’’ as defined in section 3(f) of the 

Order (although not an economically 

significant regulatory action under the 

Order). The docket file was available for 

public inspection in the Regulations 

Division, Office of General Counsel, 

Room 10276, 451 Seventh Street, SW., 

Washington, DC 20410–0500. 

Environmental Review 

A Finding of No Significant Impact 

was not required for the proposed rule. 

Under 24 CFR 50.19(b)(6), the rule is 

categorically excluded from the 

requirements of the National 

Environmental Policy Act (42 U.S.C. 

4332 et seq.) and that categorical 

exclusion continues to apply. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.) generally requires 

an agency to conduct a regulatory 

flexibility analysis of any rule subject to 

notice and comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. 

The purpose of this rule, as noted in 

the preamble, is to establish standards 

regarding the use of gifts by borrowers 

with an FHA-insured mortgage—

primarily standards that would address 

gifts by charitable organizations—as a 

source of an FHA mortgagor’s 

investment in the mortgaged property. 

To date, HUD’s practice has been to 

limit permissible sources of gifts to 

family members, governmental agencies, 

employer of the mortgagor, labor union 

of the mortgagor, or charitable 

organizations. HUD is not narrowing the 

sources of gifts through this rulemaking, 

but rather is striving to ensure that gifts 

are gifts and that, especially in the 

situation of gifts from charitable 

organizations, the gift is not a quid pro 

quo between the homebuyer’s purchase 

of the property and the seller’s 

‘‘contribution’’ or payment to the 

charitable organization. 

The prohibited sources of 

downpayment assistance, as structured 

in the final rule, are narrow and should 

not encompass a substantial number of 

small entities that are engaged in 

downpayment assistance to 

homebuyers, which, to date, have 

primarily been charitable organizations 

with tax-exempt status. Charitable 

organizations, large or small, remain 

eligible to provide downpayment 

assistance to FHA mortgagors, subject to 

meeting the requirements of § 203.19, as 

revised by this final rule. 

Accordingly, the undersigned certifies 

that this rule will not have a significant 

economic impact on a substantial 

number of small entities. 

Executive Order 12612, Federalism 

Executive Order 12612, (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 impose substantial direct 

compliance costs on state and local 

governments or preempt state law 

within the meaning of the Executive 

Order. This final rule solely addresses 

requirements under HUD’s FHA 

mortgage insurance programs. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4, 

approved March 22, 1995) established 

requirements for federal agencies to 

assess the effects of their regulatory 

actions on state, local, and tribal 

governments, and the private sector. 

This final rule does not impose any 

federal mandates on any state, local, or 

tribal governments or the private sector 

within the meaning of the Unfunded 

Mandates Reform Act of 1995. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance Number for the principal 

FHA single family mortgage insurance 

program is 14.117. This final rule also 

applies through cross-referencing to 

FHA mortgage insurance for 

condominium units (14.133), and other 

smaller single family programs. 


rwilkins on PROD1PC63 with RULES3
Federal Register / Vol. 72, No. 189 / Monday, October 1, 2007 / Rules and Regulations 56007 

List of Subjects in 24 CFR Part 203 

Loan programs—housing and 

community development, Mortgage 

insurance, Reporting and recordkeeping 

requirements. 

■ Accordingly, the Department amends 

24 CFR part 203, as follows: 

PART 203—SINGLE FAMILY 

MORTGAGE INSURANCE 

■ 1. The authority citation for part 203 

continues to read as follows: 

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

1715z–16, and 1715u; 42 U.S.C. 3535(d). 

■ 2. Section 203.19 is revised to read as 

follows: 

§ 203.19 Mortgagor’s investment in the 

property. 

(a) Required funds. The mortgagor 

must have available funds equal to the 

difference between: 

(1) The cost of acquisition, which is 

the sum of the purchase price of the 

home and settlement costs acceptable to 

the Secretary; and 

(2) The amount of the insured 

mortgage. 

(b) Mortgagor’s minimum cash 

investment. The required funds under 

paragraph (a) of this section must 

include an investment in the property 

by the mortgagor, in cash or cash 

equivalent, equal to at least 3 percent of 

the cost of acquisition, as determined by 

the Secretary, unless the mortgagor is: 

(1) A veteran meeting the 

requirements of § 203.18(b); or 

(2) A disaster victim meeting the 

requirements of § 203.18(e). 

(c) Restrictions on seller funding. 

Notwithstanding paragraphs (e) and (f) 

of this section, the funds required by 

paragraph (a) of this section 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: 

(1) The seller or any other person or 

entity that financially benefits from the 

transaction; or 

(2) Any third party or entity that is 

reimbursed, directly or indirectly, by 

any of the parties described in 

paragraph (c)(1) of this section. 

(d) Gifts and loans usually prohibited 

for minimum cash investment. A 

mortgagor may not use funds for any 

part of the minimum cash investment 

under paragraph (b) of this section if the 

funds were obtained through a loan or 

a gift from any person, except as 

provided in paragraphs (e) and (f) of this 

section, respectively. 

(e) Permissible sources of loans. 

(1) Statutory authorization needed. A 

statute must authorize a loan as a source 

of the mortgagor’s minimum cash 

investment under paragraph (b) of this 

section. 

(2) Examples. The following loans are 

authorized by statute as a source for the 

minimum investment: 

(i) A loan from a family member, a 

loan to a mortgagor who is at least 60 

years old when the mortgage is accepted 

for insurance, or a loan that is otherwise 

expressly authorized by section 

203(b)(9) of the National Housing Act; 

(ii) A loan made or held by, or insured 

by, a federal, state, or local government 

agency or instrumentality under terms 

and conditions approved by the 

Secretary; 

(iii) A loan made or held by, or 

insured by, a tribal government or an 

agency or instrumentality thereof, 

including a tribally designated housing 

entity as defined at 25 U.S.C. 4103(21), 

which is treated as a state or local 

government under applicable state or 

local law, under terms and conditions 

approved by the Secretary; and 

(iv) A federal disaster relief loan. 

(f) Permissible sources of gifts. The 

following are permissible sources of 

gifts or grants used for the mortgagor’s 

minimum investment under paragraph 

(b) of this section: 

(1) Family members and 

governmental agencies and 

instrumentalities eligible under 

paragraphs (e)(2)(i) and (ii) of this 

section; 

(2) A tribal government or an agency 

or instrumentality thereof, including a 

tribally designated housing entity, as 

defined at 25 U.S.C. 4103(21); 

(3) An employer or labor union of the 

mortgagor; 

(4) Organizations described in section 

501(c)(3) and exempt from taxation 

under section 501(a) of the Internal 

Revenue Code; 

(5) Disaster relief grants; and 

(6) Other sources as may be approved 

by the Secretary on a case-by-case basis. 

Dated: September 26, 2007. 

Brian D. Montgomery, 

Assistant Secretary for Housing—Federal 

Housing Commissioner. 

[FR Doc. 07–4846 Filed 9–28–07; 8:45 am] 

BILLING CODE 4210–67–P 


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