Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 33941 

the FAA’s Web page at http:// 

www.faa.gov or the Federal Register ’s 

Web page at http://www.gpoaccess.gov/ 

fr/index.html. 

You may review the public docket 

containing the proposal, any comments 

received, and any final disposition in 

person in the Dockets Office (see the 

ADDRESSES section for the address and 

phone number) between 9 a.m. and 5 

p.m., Monday through Friday, except 

federal holidays. An informal docket 

may also be examined during normal 

business hours at the Northwest 

Mountain Regional Office of the Federal 

Aviation Administration, Air Traffic 

Organization, Western Service Area, 

Operations Support Group, 1601 Lind 

Avenue, SW., Renton, WA 98057. 

Persons interested in being placed on 

a mailing list for future NPRM’s should 

contact the FAA’s Office of Rulemaking, 

(202) 267–9677, for a copy of Advisory 

Circular No. 11–2A, Notice of Proposed 

Rulemaking Distribution System, which 

describes the application procedure. 

The Proposal 

The FAA is proposing an amendment 

to title 14 Code of Federal Regulations 

(14 CFR) part 71 by establishing Class E 

airspace at Weiser Municipal Airport, 

Weiser, ID. Controlled airspace is 

necessary to accommodate aircraft using 

the new RNAV (GPS) SIAP at Weiser 

Municipal Airport, Weiser, ID. This 

action would enhance the safety and 

management of aircraft operations at 

Weiser Municipal Airport, Weiser, ID. 

Class E airspace designations are 

published in paragraph 6005 of FAA 

Order 7400.9R, signed August 15, 2007, 

and effective September 15, 2007, which 

is incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document will be 

published subsequently in this Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. 

Therefore, this proposed regulation: (1) 

Is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not 

a ‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034; February 26, 1979); and (3) 

does not warrant preparation of a 

regulatory evaluation as the anticipated 

impact is so minimal. Since this is a 

routine matter that will only affect air 

traffic procedures and air navigation, it 

is certified that this proposed rule, 

when promulgated, would not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

The FAA’s authority to issue rules 

regarding aviation safety is found in title 

49 of the U.S. Code subtitle 1, section 

106, describes the authority for the FAA 

Administrator. Subtitle VII, Aviation 

Programs, describes in more detail the 

scope of the agency’s authority. This 

rulemaking is promulgated under the 

authority described in subtitle VII, part 

A, subpart I, section 40103. 

Under that section, the FAA is 

charged with prescribing regulations to 

assign the use of the airspace necessary 

to ensure the safety of aircraft and the 

efficient use of airspace. This regulation 

is within the scope of that authority as 

it establishes additional controlled 

airspace at Weiser Municipal Airport, 

Weiser, ID. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

The Proposed Amendment 

Accordingly, pursuant to the 

authority delegated to me, the Federal 

Aviation Administration proposes to 

amend 14 CFR part 71 as follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

1. The authority citation for 14 CFR 

part 71 continues to read as follows: 

Authority: 49 U.S.C. 106(g), 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389. 

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of the FAA Order 7400.9R, 

Airspace Designations and Reporting 

Points, signed August 15, 2007, and 

effective September 15, 2007 is 

amended as follows: 

Paragraph 6005 Class E airspace areas 

extending upward from 700 feet or more 

above the surface of the earth. 

* * * * * 

ANM ID, E5 Weiser, ID [New] 

Weiser, Municipal Airport, ID 

(Lat. 44°12′17′′ N, long. 116°57′38′′ W) 

That airspace extending upward from 700 

feet above the surface within a 6-mile radius 

of Weiser Municipal Airport. 

* * * * * 

Issued in Seattle, Washington, on June 9, 

2008. 

Clark Desing, 

Manager, Operations Support Group, Western 

Service Area. 

[FR Doc. E8–13514 Filed 6–13–08; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 203 

[Docket No. FR–5087–N–04] 

RIN 2502–AI52 

Standards for Mortgagor’s Investment 

in Mortgaged Property: Additional 

Public Comment Period 

AGENCY: Office of the Assistant 

Secretary for Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Proposed rule; reopening of 

comment period. 

SUMMARY: This document provides 

additional background information and 

requests additional public comment for 

HUD’s rulemaking on Standards for 

Mortgagor’s Investment in Mortgaged 

Property. 

DATES: Comment Due Date: August 15, 

2008. 

ADDRESSES: Interested persons are 

invited to submit comments regarding 

this rule to the Regulations Division, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 Seventh Street, SW., Room 10276, 

Washington, DC 20410–0500. 

Communications should refer to the 

above docket number and title. 

Comment by Mail. Please note that 

due to security measures at all Federal 

agencies, submission of comments by 

mail often results in delayed delivery. 

Electronic Submission of Comments. 

HUD now accepts comments 

electronically. Interested persons may 

now submit comments electronically 

through the Federal eRulemaking Portal 

at http://www.regulations.gov. HUD 

strongly encourages commenters to 

submit comments electronically. 

Electronic submission allows the 

commenter maximum time to prepare 

and submit a comment, ensures timely 

receipt by HUD, and enables HUD to 

make them immediately available for 

public viewing. Commenters should 

follow the instructions provided at 

http://www.regulations.gov to submit 

comments electronically. 

No Facsimile Comments. Facsimile 

(FAX) comments are not acceptable. In 

all cases, communications must refer to 

the docket number and title. 

Public Inspection of Public 

Comments. All comments and 

communications submitted will be 

available, without revision, for 

inspection and downloading at http:// 

www.regulations.gov. Comments are 

also available for public inspection and 

copying between 8 a.m. and 5 p.m. 

weekdays at the Regulations Division. 


jlentini on PROD1PC65 with PROPOSALS
33942 Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 

Due to security measures at the HUD 

Headquarters building, please schedule 

an appointment to review the comments 

by calling the Regulations Division at 

(202) 708–3055 (this is not a toll-free 

number). 

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 tollfree 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: 

With this notice, HUD is republishing, 

for public comment, a proposed rule 

that would amend HUD policy 

concerning downpayment assistance for 

Federal Housing Administration (FHA) 

borrowers. HUD’s current policies in 

connection with downpayment 

assistance have given rise to a practice 

known informally as seller-funded 

downpayment assistance that has 

resulted in disproportionately high 

borrower default and claim rates among 

FHA borrowers. Over time, the rate of 

defaults, foreclosures, and claims has 

increased so dramatically that the 

practice has significantly jeopardized 

FHA’s ability to maintain the solvency, 

as discussed herein, of its insurance 

fund and to facilitate the provision of 

affordable home financing to millions of 

American families. 

HUD’s proposal, if implemented, will 

without question exact a major change 

in its downpayment assistance policy. It 

would eliminate a practice that has 

heretofore been allowable and that has 

been actively engaged in for many years. 

Even so, the conceptual basis for the 

change is consistent with a 

downpayment assistance policy that has 

been in existence from the inception of 

the FHA single family insurance 

program. 

HUD’s current policy disallows 

downpayment assistance directly from 

an entity, such as a seller of a home, that 

would derive a financial benefit from 

the sale. The basis for this policy is that 

such an entity, standing to derive a 

financial benefit from the sales 

transaction, may promote its own 

interest in the transaction to the 

detriment of the buyer. The current 

policy is aimed at ensuring that 

downpayment assistance is indeed a gift 

to the borrower and that it will not 

ultimately distort the economics of the 

transaction to the detriment of the 

borrower and HUD. 

HUD’s proposal to amend its 

regulation is based on this same 

premise, and seeks to disallow 

downpayment assistance from any 

entity that stands to derive a financial 

benefit from the sales transaction. The 

major proposed change to HUD’s 

downpayment assistance policy is that 

it would apply this prohibition 

irrespective of whether that assistance is 

made directly or indirectly to the 

homebuyer. The data displayed in this 

notice clearly demonstrates the adverse 

impact of allowing the current policy to 

continue. HUD is concerned not only 

about the practice itself, but also about 

the consequences of the practice on 

homebuyers participating in FHA 

insurance programs and on the FHA 

insurance fund that is there to serve 

those homebuyers. A practice simply 

cannot be tolerated when default rates 

and claim rates for more than a third of 

home purchase loans it insures range 

between 2 and 3 times those applicable 

to the norm. The counterargument that 

many people have been helped into 

homeownership by this practice, even if 

accepted at face value, pales in light of 

the damage done to homebuyers who 

have not been able to retain their homes 

and to FHA’s ability to meet its mission 

of increasing access to sustainable 

homeownership. 

Understanding that the current 

situation is untenable, HUD has 

grappled with the issue of how to best 

address the problem over a period of 

years. This is evidenced in actions, 

discussed in the text below, that include 

exploring rulemaking and legislative 

solutions that did not come to fruition. 

While HUD will consider alternative 

measures to eliminating the practice, 

piecemeal solutions do not cure but 

only postpone a viable solution, while 

extending the damage. In essence, 

borrowers are being harmed and the 

solution does not lie in spreading the 

damaging consequences among an even 

broader universe of borrowers. The FHA 

insurance fund is teetering on credit 

insolvency. Such a circumstance is 

never welcomed, but especially not 

when the FHA is trying to be a 

stabilizing force during the worst 

housing crisis in generations. 

Therefore, HUD is proposing an 

action that would advance the interests 

of the public and is a reasonable 

exercise of agency discretion. 

HUD’s decision to publish this notice 

is responsive to court orders issued by 

the U.S. District Courts for the Eastern 

District of California, on February 29, 

2008, and the District of Columbia, on 

March 5, 2008. 

On October 1, 2007, HUD published 

a final rule entitled ‘‘Standards for 

Mortgagor’s Investment in Mortgaged 

Property’’ (72 FR 56002). Like the rule 

reproposed for comment here, that rule 

sought to eliminate the use of 

downpayment assistance from 

financially interested parties in FHAinsured single-family mortgages. The 

October 1, 2007, final rule was 

challenged in the U.S. District Court for 

the District of Columbia and in the U.S. 

District Court for the Eastern District of 

California by organizations that provide 

seller-funded downpayment assistance, 

as defined herein. On February 29, 

2008, the U.S. District Court for the 

Eastern District of California set aside 

the final rule and remanded the matter 

to HUD for further action consistent 

with its order. Nehemiah Corporation of 

America v. Jackson, et al., No. S–07–

2056 (E.D. Cal.). The court found, 

among other things, that HUD failed 

forthrightly to explain that the rule 

reversed its prior practice of allowing 

seller-funded downpayment assistance 

(Id. at 19–20) and that HUD failed to 

respond adequately to certain categories 

of comments (Id. at 21–24). The court 

also disqualified then-HUD Secretary 

Alphonso Jackson from participating in 

the remanded proceedings. 

After issuing an order on October 31, 

2007, preliminarily enjoining HUD’s 

enforcement of the final rule, on March 

5, 2008, the U.S. District Court for the 

District of Columbia vacated the final 

rule and also remanded it to HUD for 

further proceedings consistent with that 

court’s opinion. Ameridream Inc., et. 

al., v. Jackson, No. 07–1752 (D.D.C. 

March 5, 2008) and Penobscot Indian 

Nation, et. al., v. HUD, No. 07–1282–

PLF (D.D.C. March 5, 2008). The court 

found, among other things, that HUD 

violated the Administrative Procedure 

Act by failing to allow comment on 

critical factual material and by failing to 

offer a rational explanation for the final 

rule. Id. at 6. The court held that an 

internal analysis of HUD’s loan portfolio 

referenced only in the final rule 

constituted critical factual information 

that, with at least a summary of the 

specific data and methodology on which 

the analysis relied, should have been 

disclosed during the rulemaking 

proceeding. Id. at 11–12. The court also 

held that HUD’s explanation for the rule 

relied on sources that did not support 

its conclusions. Id. at 18. 

Pursuant to the courts’ orders, this 

publication provides notice that now 

former Secretary Jackson, who resigned 

effective April 18, 2008, has not 

participated in the further promulgation 

of the rule proposed on May 11, 2007, 

entitled ‘‘Standards for Mortgagor’s 

Investment in Mortgaged Property’’ (72 

FR 27048). HUD will separately publish 


jlentini on PROD1PC65 with PROPOSALS
Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 33943 

1For 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). 

a notice vacating the October 1, 2007, 

final rule. This publication also 

addresses the courts’ concerns by 

acknowledging that the proposed rule 

marks a clear departure from HUD’s 

prior practice. With respect to the 

concern that HUD previously had failed 

to provide critical factual information 

and otherwise provided an insufficient 

rationale for the rule, this notice 

provides additional explanation and 

data, including analyses of HUD’s loan 

portfolio and access to the data on 

which those analyses rely. The 

Regulatory Flexibility Act section has 

been revised to address only the impact 

on entities that would be directly 

affected by the rule. This notice also 

reopens the comment period for 60 days 

for the submission of comments on that 

additional information and on the May 

11, 2007, proposed rule, as revised by 

the October 1, 2007, rule. At the end of 

the comment period, HUD will review 

the comments and determine whether to 

issue a final rule, and will publish a 

response to significant comments as 

appropriate. To address the courts’

concern with HUD’s response to prior 

public comments, if HUD decides to 

issue a final rule, HUD will also provide 

additional responses to those significant 

comments submitted in response to the 

May 11, 2007, Notice of Proposed 

Rulemaking. 

If, after reviewing the comments, HUD 

issues a final rule, it would be effective 

180 days from the date of publication 

with regard to all insured mortgages 

involving properties for which contracts 

of sale are dated on or after the effective 

date. 

I. The Proposed Rule 

Section 203(b)(9) of the National 

Housing Act (12 U.S.C. 1709(b)(9)) 

requires, for a mortgage to be eligible for 

insurance by FHA, the mortgagor (with 

narrow exceptions) to pay on account of 

the property at least 3 percent of the 

cost of acquisition. The current 

implementing regulations at 24 CFR 

203.19 are silent about permissible or 

impermissible sources of the 

mortgagor’s investment, although some 

sources are specifically permitted under 

the statute.1

Paragraph 2–10.C. of FHA’s 

underwriting guidelines, HUD 

Handbook 4155.1, has long provided 

that the 3 percent cost of acquisition, 

i.e., the downpayment, may include an 

‘‘outright gift’’ to the borrower from 

relatives, charitable organizations, 

government entities, and certain others. 

(HUD Handbook 4155.1 is available at 

http://www.hud.gov/offices/adm/ 

hudclips/handbooks/hsgh/4155.1/ 

index.cfm.) It further provides, however, 

that gifts may not be made by any 

person or entity with an interest in the 

sale of the property. Such payments are 

considered self-interested inducements 

to purchase a particular property rather 

than true gifts for the borrower’s 

personal investment. In other words, 

downpayment assistance from those 

who receive a financial benefit from the 

sale may promote the sale on any terms, 

even terms that may be adverse to the 

sustainability of the borrower’s 

mortgage and homeownership. A 

disinterested gift of downpayment 

funds, on the other hand, does not 

distort the fundamental economics of 

the transaction and so does not conflict 

with the borrower’s interest in achieving 

sustainable homeownership. 

On May 11, 2007, HUD published a 

proposed rule to do two things: codify 

standards governing a mortgagor’s 

investment in property with a mortgage 

insured by FHA, and specify prohibited 

sources for a mortgagor’s investment. 

Specifically, the proposed rule would 

have codified HUD’s longstanding 

practice of allowing a mortgagor’s 

investment to be derived from gifts by 

family members and certain 

organizations, but not from gifts by 

sellers or other persons that financially 

benefit from the transaction. It had also 

been HUD’s practice to permit a 

mortgagor’s investment to be derived 

from funds provided by charitable 

organizations that were ultimately 

reimbursed directly or indirectly by 

sellers of the properties involved in the 

transactions. The May 11, 2007, 

proposed rule marked a clear departure 

from this last-noted practice. The rule 

would have 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 that is reimbursed directly or 

indirectly by any of the parties listed in 

clause (1). Throughout this preamble, 

such a third-party payment as described 

in clause (2) is referred to as ‘‘sellerfunded downpayment assistance’’

(SFDPA). 

HUD concluded that this practice 

permits the seller or other party that 

financially benefits from the transaction 

to accomplish indirectly what could not 

be done directly. For example, when 

funds are advanced to the buyer by a 

downpayment assistance provider that 

is reimbursed by the seller, there is a 

quid pro quo between the homebuyer’s 

purchase of the property and the seller’s 

‘‘contribution’’ to the downpayment 

assistance provider. This scheme 

facilitates the sale at terms potentially 

more favorable to the seller and, because 

funds are fungible, it is reasonable to 

conclude that the donor’s funds are the 

equivalent of the seller’s funds. Viewed 

in this way, it becomes apparent that a 

prohibited inducement to purchase is 

present in these transactions, and HUD 

has concluded that such payments 

amount to an impermissible gift 

provided by a person or entity that 

financially benefits from the transaction. 

In a transaction involving SFDPA, both 

the seller, who is the ultimate source of 

the payment, and the entity that funnels 

or advances the payment for the seller 

to the homebuyer (and receives 

reimbursement and a fee from the seller 

for its role in the transaction) have an 

interest in the sale of the property that 

makes their payments an impermissible 

source of the buyer’s equity investment. 

HUD’s conclusion is reinforced by a 

report of the Government 

Accountability Office (GAO), Report No. 

06–24, Mortgage Financing: Additional 

Action Needed to Manage Risks of FHAInsured Loans with Down Payment 

Assistance (November 2005) 

(hereinafter, November 2005 GAO 

Report). At the request of Congress, 

GAO examined the trends in the use of 

downpayment assistance with FHAinsured loans, its impact on purchase 

transactions and house prices, and how 

it influenced the performance of FHAinsured loans. GAO found that 

downpayment assistance from sellerfunded entities alters the structure of 

the purchase transaction in important 

ways. First, it creates an indirect 

funding stream from property sellers to 

homebuyers that does not exist in other 

transactions, even those involving some 

other type of downpayment assistance. 

Second, property sellers who provided 

downpayment assistance through 

nonprofit organizations often raised the 

sales price of the homes involved in 

order to recover the required payments 

that went to the organizations. GAO’s 

analyses of empirical data showed that 

FHA-insured homes bought with sellerfunded downpayment assistance 

appraised at and sold for higher prices 

than comparable homes bought without 


jlentini on PROD1PC65 with PROPOSALS
33944 Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 

2November 2005 GAO Report, pp. 3–4. This 

report can be found at http://www.gao.gov/

new.items/d0624.pdf. 

3See H.R. 3755, Zero Downpayment Act of 2004, 

at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.

cgi?dbname=108_cong_bills&docid=f

:h3755ih.txt.pdf. 

4An Examination of Downpayment Gift Programs 

Administered by Non-Profit Organizations, Final 

Report, HUD Contract C–OPC–22550/M0001, March 

1, 2005. Available at: http://www.hud.gov/offices/

hsg/comp/rpts/dpassist/conmenu.cfm. 

5See H.R. 3043, Zero Downpayment Pilot 

Program Act of 2005, at http://frwebgate.access.gpo.

gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&

docid=f:h3043ih.txt.pdf. 

6An FHA zero downpayment product would not 

pose the credit risks associated with SFDPA, for a 

number of reasons. First, homebuyers would 

understand upfront that they are buying a home 

with no initial equity and would have a realistic 

view of their options for resale. Also, underwriting 

requirements and insurance pricing are more easily 

developed and enforced when tied to a loan 

product than when tied to variable downpayment 

sources. In addition, the zero downpayment option 

is not tied to a particular property whose seller 

participates in an SFDPA program so that 

homebuyers can shop and negotiate with any 

number of sellers with the same bargaining power 

as a buyer with a true equity investment, which 

would also help prevent the concentration of 100 

percent LTV loans in weak housing markets. 

7See Report No. 05–194, Mortgage Financing: 

Actions Needed to Help FHA Manage Risks from 

New Mortgage Loan Products (February 2005); and 

November 2005 GAO Report. 

such assistance, resulting in larger loans 

for the same collateral and higher 

effective loan-to-value (LTV) ratios. That 

is, homebuyers had less equity in the 

transaction than would otherwise be the 

case.2

The original 60-day comment period 

provided in the May 11, 2007, proposed 

rule was extended by notice (72 FR 

37500; July 10, 2007) for an additional 

30 days. When the public comment 

period ended on August 10, 2007, HUD 

had received approximately 15,000 

public comments on the proposed rule, 

mostly brief statements in similar format 

and wording that opposed the rule and 

urged HUD not to eliminate 

downpayment assistance in connection 

with FHA-insured mortgages. 

On October 1, 2007, HUD 

promulgated the rule, with a few 

clarifying revisions, as a final rule to be 

effective October 31, 2007. The October 

1, 2007, rule clarified 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 if 

prerequisites in the rule were satisfied, 

and also more closely aligned the 

description of tax-exempt charitable 

organizations with the description used 

by the Internal Revenue Service (IRS) 

for such organizations. This rule never 

went into effect, however, since it was 

enjoined and then vacated by the courts. 

II. Historical Policy Regarding SellerFunded Downpayment Assistance 

The issue of SFDPA came to HUD’s 

attention in the late 1990s. When this 

funding scheme first came into being, 

some local HUD offices approved 

mortgages with SFDPA for FHA 

insurance, and other HUD offices did 

not. As a result, in 1997, a provider of 

this type of assistance brought a lawsuit 

against HUD (Nehemiah Progressive 

Housing Development Corporation v. 

Cuomo, et al., No. S–97–2311–GEB/ 

PAN (E.D. Cal.)) seeking consistent 

treatment. That suit was settled when 

the plaintiff’s status was confirmed as a 

tax-exempt charitable organization 

under Internal Revenue Code (IRC) 

section 501(c)(3), a permissible source 

of assistance. HUD also acknowledged 

that based upon the program-specific 

information accompanying the 

plaintiff’s submission to the IRS, the 

program complied with HUD’s 

regulations and guidance pertaining to 

the source of funds for the borrowers’

downpayments. Although 

downpayment assistance from 

charitable organizations is permitted, 

HUD continued to have concerns where 

the funds provided by an organization 

to the homebuyer were reimbursed by 

the seller in the transaction when the 

seller made a contribution of funds to 

the charitable organization, often after 

loan closing. 

HUD addressed the subject of 

prohibited sources of downpayment 

assistance in a 1999 proposed rule. (See 

HUD’s proposed rule published on 

September 14, 1999, 64 FR 49956.) In 

2001, HUD withdrew the 1999 proposed 

rule, which had received a large number 

of public comments critical of the 

proposal. (See January 12, 2001, notice 

of withdrawal of proposed rule at 66 FR 

2851.) At the time, the volume of loans 

with such assistance and their potential 

impact were small. Also, because the 

payment to the buyers did not come 

directly from the sellers, it was not clear 

that inducements to purchase were 

present in the transactions. Moreover, 

while FHA had serious concerns about 

SFDPA, it lacked the historical data to 

substantiate its adverse effects. 

By 2003, with the seller-funded 

downpayment assistance business 

growing exponentially, FHA had data 

tending to show that the performance of 

the loans made to borrowers relying on 

SFDPA was poor and that the program 

flaws could not be addressed with 

underwriting changes. FHA determined 

that the most feasible and appropriate 

solution was to create a new FHA 

insurance product to serve consumers 

who were unable to save funds for a 

downpayment, which would obviate the 

need for seller-funded downpayment 

assistance. 

In early 2004, a bill was introduced in 

Congress that would provide FHA with 

authority to insure a 100 percent 

financing product.3 At the same time, 

FHA commissioned an independent 

research firm, Concentrance Consulting 

Group, Inc., to conduct a comprehensive 

examination of downpayment gift 

programs administered by nonprofit 

organizations. The report was the 

culmination of a 10-month effort, 

beginning in January 2004, to 

understand the influence of sellerfunded nonprofit downpayment 

assistance on FHA-insured home loans. 

The study involved travel to 10 cities 

and interviews of more than 400 

persons involved in mortgage 

transactions—from homebuyers and 

sellers to realtors, appraisers, 

underwriters, loan officers, builders, 

and downpayment assistance providers. 

Published on March 1, 2005, the report 

focused on the operational aspects of 

the programs in an effort to understand 

the financial relationships between the 

various parties involved. It highlighted 

the harmful features of the programs 

and concluded that the programs create 

unsustainable homeownership 

arrangements.4 The report served as the 

basis for FHA’s strong push for new 

legislative authority to offer a 100 

percent financing option to borrowers 

who might otherwise rely on a risky 

SFDPA program. 

In June 2005, when Congress 

introduced another piece of Zero Down 

legislation, H.R. 3043,5 a reformulation 

of the previous bill, HUD supported the 

bill because an FHA Zero Down product 

would be a more affordable, yet still 

financially sound, alternative for 

families without savings for a 

downpayment.6

Also in 2005, the research arm of 

Congress, GAO, produced two reports 

concerning the risks associated with 

various proposed and existing FHA 

insurance products, including loans 

with zero downpayment and those with 

SFDPA.7 HUD agrees with the court, in 

Ameridream, Inc., v. Jackson and 

Penobscot Indian Nation v. HUD, that 

the first of these two reports (the 

February 2005 report discussing 

proposed FHA insurance products) 

provides little meaningful support for 

the current rule, which addresses the 

risks associated with SFDPA. However, 

the November 2005 GAO Report directly 

addressed the risks associated with 

loans with SFDPA and represents 

independent corroboration of the 


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8See November 2005 GAO Report, pp. 89–91. 

9This comports with the November 2005 GAO 

Report indicating that about 93 percent of 

assistance from nonprofit organizations was funded 

by sellers. See November 2005 GAO Report, p. 14. 

findings of HUD’s internal data analyses 

and the Concentrance study. 

The November 2005 GAO Report 

found that the problems associated with 

SFDPA loans (e.g., home price inflation 

and risk of defaults) are grave enough to 

merit an outright ban on SFDPA. The 

FHA Commissioner responded to the 

GAO’s draft report in a letter dated 

October 25, 2005, which is incorporated 

in the final published report. The 

Commissioner acknowledged that 

GAO’s findings confirmed FHA’s own 

analysis and those of the Concentrance 

study, but expressed the agency’s 

reasons for not pursuing GAO’s 

recommended ban on SFDPA. The 

Commissioner expressed the agency’s 

desire to provide safer financing 

without having to exclude traditional 

FHA borrowers, who are often in need 

of downpayment funds, and pointed to 

FHA’s pursuit of a zero downpayment 

insurance product and higher insurance 

premiums as better alternatives to 

achieve those goals than banning 

SFDPA would be. The response to GAO 

also reiterated a legal opinion of HUD’s 

Office of General Counsel that the 

structure and the timing of payments in 

SFDPA transactions did not violate the 

letter of HUD’s underwriting 

guidelines.8

For the reasons noted in the October 

25, 2005, response letter to GAO, HUD 

continued to tolerate SFDPA programs, 

even though HUD had an ongoing 

concern about the risks inherent in 

SFDPA-generated loans, especially 

given the ever-increasing proportion of 

these loans in FHA’s portfolio. 

In May 2006, the IRS issued Revenue 

Ruling 2006–27, which analyzed a 

model transaction typical of SFDPA 

programs and explained that 

organizations participating in such 

programs do not qualify as organizations 

described in IRC section 501(c)(3), 

because the assistance involved not a 

downpayment gift, but rather, 

‘‘represents a rebate or purchase price 

reduction.’’ The Revenue Ruling stated 

that in these transactions, the so-called 

downpayment gifts ‘‘do not proceed 

from detached and disinterested 

generosity, but are in response to an 

anticipated economic benefit, namely 

facilitating the sale of a seller’s home.’’

HUD acknowledges the court’s 

finding in Ameridream, Inc., v. Jackson 

and Penobscot Indian Nation v. HUD 

that IRS Revenue Ruling 2006–27 on its 

face does not prove that seller-funded 

downpayment assistance loans are 

inherently and unacceptably risky. 

Nevertheless, the Revenue Ruling 

reinforced HUD’s concerns with these 

transactions through its determination 

that they do not involve a gift, but a 

quid pro quo. The Revenue Ruling also 

highlighted an inconsistency in HUD’s 

prior interpretation of these transactions 

with those of other Executive Branch 

agencies. 

HUD did not take regulatory action at 

any point in time from 1999 through 

2006, because the agency was 

anticipating a legislative solution to the 

problem. During that time frame, the 

portion of borrowers relying on SFDPA 

grew to represent over a third of all 

home purchase loans insured by FHA. 

As a result of the growth in the business 

and the poor performance, these loans 

have increased risk to FHA’s fiscal 

soundness, a risk that threatens the 

opportunities of all (not just 

homeowners in need of downpayment 

assistance) to obtain single family FHAinsured financing. Because no 

legislative solution has yet materialized, 

HUD determined that the most prudent 

option was, and remains, to prohibit 

SFDPA through the rule that HUD 

initially proposed on May 11, 2007. 

III. HUD’s Analysis of Its Loan Portfolio 

Data 

A. HUD’s Database 

HUD, using information submitted by 

lenders, regularly monitors the 

performance of FHA-insured loans. 

Since the mid-1990s, FHA has 

maintained a Single Family Data 

Warehouse (SFDW), where data from its 

various program systems are uploaded 

on a monthly basis. At the present time, 

the SFDW contains 34,000,000 records, 

each capturing the characteristics and 

performance of a loan insured by FHA. 

Because each FHA program system uses 

the same case number for each insured 

loan, the SFDW is able to link more than 

400 fields containing borrower 

demographic and loan application, 

origination, termination, and recovery 

data in one database. These data are 

used by an independent contractor to 

assess the performance of insured loans 

for the annual actuarial review of the 

Mutual Mortgage Insurance Fund 

(MMIF or Fund), FHA’s largest 

insurance fund. These data are also used 

by HUD staff to calculate FHA’s 

mortgage insurance liability for FHA’s 

annual financial statements and to 

estimate credit subsidy for HUD’s 

budget. For this reason, the data are 

audited by the independent auditor 

hired by HUD’s Office of Inspector 

General and are closely reviewed by the 

Office of Management and Budget 

(OMB). 

For the single-family portfolio, HUD’s 

monitoring includes tracking 

performance by source of downpayment 

funds, such as the borrower’s own 

funds, or funds provided by family 

members, government agencies, or 

nonprofit organizations, as reported to 

HUD by lenders. The ‘‘nonprofit’’

category source of downpayment funds 

consists of entities that hold the status 

of charitable organizations. Analysis of 

the data, however, indicates, by 

identifying the entities that provide the 

downpayment assistance, that more 

than 95 percent of the downpayment 

assistance provided under the 

‘‘nonprofit’’ category is seller-funded.9

Therefore, the term ‘‘nonprofit,’’ as used 

in this preamble discussion and tables, 

refers to organizations that hold the 

status of charitable organizations and 

provided SFDPA. Though HUD does not 

publish information on performance by 

downpayment source in formal reports, 

the data are regularly reviewed 

internally by HUD, and they have been 

made available at various times to GAO, 

OMB, and Congress. As demonstrated 

by the discussion in this preamble and 

the related tables included in the 

Appendix to this publication, loan 

performance data maintained by HUD 

on FHA-insured mortgages has provided 

a consistent story over time: Loans with 

nonprofit downpayment assistance, i.e., 

SFDPA, perform much worse than do 

other single family loans insured by 

FHA. 

To give the public the opportunity to 

examine and comment fully on HUD’s 

data analyses, HUD is making the 

underlying data available online during 

this additional comment period. The 

data files provide loan-level records that 

will enable interested parties to explore 

issues regarding downpayment 

assistance provided to homebuyers 

utilizing FHA insured mortgage 

financing. The files are compressed 

using standard protocols that should be 

readable by a wide variety of software. 

The particular software product used to 

create these files is WinZip 9.0 (SR–1). 

The URL for the FHA Purchase Loan 

Endorsement Data Web page is: http:// 

www.hud.gov/offices/hsg/comp/rpts/

pled/pledmenu.cfm. 

B. Increase of Seller-Funded 

Downpayment Assistance Loans 

The substantial increase over time of 

loans with downpayment assistance 

from nonprofit groups (nonprofitassisted loans) in the FHA-insured 

single-family portfolio has dramatically 

changed the fundamental insurance risk 


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10Since October 2006, HUD has collected 

information on all loan defaults, starting at 30-days 

delinquency. Ninety-day delinquencies, however, 

are an industry standard for defining the point at 

which foreclosure (and insurance claim payment) 

become a significant concern. Therefore, HUD 

analysis of the potential risk of insurance claim 

payments continues to use 90-day delinquency as 

the defining metric of default. 

11November 2005 GAO Report, pp. 26–27. 

12The lender/servicer bids at the foreclosure 

auction. Once the foreclosure has been completed, 

the lender/servicer, as the winning bidder, usually 

transfers title of the property to HUD. FHA then 

pays an insurance claim to the lender upon 

conveyance of acceptable title to HUD. 

of that portfolio. As can be seen in Table 

1 in the Appendix to this rule, these 

loans in Fiscal Year (FY) 2007 made up 

more than 35 percent of all home 

purchase loans insured by FHA. In FY 

2000, they were less than 2 percent of 

FHA’s single family purchase loan 

activity. 

As the discussion and data presented 

below demonstrate, the substantial 

increase over time of nonprofit-assisted 

loans has created a financially 

unsustainable situation for the FHA 

insurance fund. Table 1, as noted, and 

all the other Tables referenced in this 

preamble discussion appear in the 

Appendix at the end of this document. 

C. Default and Claim Rate Comparisons 

for Loans With Nonprofit Downpayment 

Assistance 

1. Default Rates 

Tables 2, 3, and 4 provide a summary 

of default rates on home purchase loans 

insured by FHA. Default is measured 

here as a loan that is at least 90 days in 

arrears. Since the 1980s, loan servicers 

have reported to HUD all 90-day default 

events for FHA-insured loans. Activity 

on each default episode is reported to 

HUD until there is a final resolution, be 

that a cure of the default, a foreclosure, 

or some other outcome.10 Three 

summary statistics are used here—the 

early default rate, the ever-defaulted 

rate, and the current default rate. Each 

one is calculated separately by source of 

downpayment funds used to purchase 

the home, and shown by year of 

insurance endorsement (i.e., an 

‘‘insurance cohort’’). The left half of 

each table lists the calculated default 

rates, and the right half provides a direct 

comparison of the performance of loans 

receiving each type of downpayment 

assistance with the performance of loans 

in which borrowers use their own funds 

for the downpayment. The comparisons 

in each table show that nonprofit 

downpayment-assisted loans have the 

highest default rates among all FHAinsured home-purchase loans. 

The first default statistic, shown in 

Table 2, is the early default rate. It 

measures the share of loans that 

experience a (90-day) default within the 

first 24 months of scheduled mortgage 

payments, and is calculated by dividing 

the number of such loans by the total 

number of insured loans in an insurance 

cohort. HUD uses this statistic as a first 

indication of the level of claim 

payments that might be expected from 

any given insurance cohort. The ratios 

found on the right-hand side of Table 2 

are calculated by dividing the earlydefault rate for each type of 

downpayment assistance by the default 

rate for loans with borrower-funded 

downpayments, within each insurance 

cohort. 

The early default rate of loans with 

nonprofit downpayment assistance has 

consistently been more than twice the 

rate found on loans with borrowerfunded downpayments, with the 

average multiple across the FY 2000–

2005 period being 2.43. The early 

default rate for loans with nonprofit 

downpayment assistance is also nearly 

twice that of loans with downpayments 

provided by a family member. These 

early default rate comparisons are a 

leading indicator of eventual foreclosure 

and claim rate patterns, as will be seen 

in Tables 5 and 6. Loans with nonprofit 

downpayment assistance have elevated 

foreclosure and claim rates 

commensurate with their elevated early 

default rates. 

The second default statistic, found in 

Table 3, is the ever-defaulted rate. This 

measures the share of borrowers who 

have ever had a delinquency that 

extended beyond 90 days. It is 

calculated by dividing the number of 

borrowers with at least one (90-day) 

default since loan origination by the 

number of insured loans in an insurance 

cohort. The ratios on the right-hand side 

of Table 3 are calculated like those in 

Table 2. The ratio of the ever-defaulted 

rate for nonprofit downpaymentassisted homebuyers, to that of 

homebuyers with FHA-insured loans 

using their own downpayment funds, is 

at or above 2.00 for all insurance cohorts 

since FY 2003 and close to that mark for 

FY 2002. The FY 2007 insurance cohort 

shows the same pattern as have earlier 

insurance cohorts. The second default 

statistic shows that, for loans endorsed 

from 2000 to 2005, between 

approximately 24 and 29 percent of 

loans with seller-funded assistance had 

experienced a 90-day delinquency, 

compared to approximately 11 to 16 

percent of loans without downpayment 

assistance. This default statistic is 

consistent with GAO’s findings in 2005 

that loans with downpayment assistance 

from seller-funded nonprofit 

organizations do not perform as well as 

loans with downpayment assistance 

from other sources. GAO used samples 

of FHA-insured, single family purchase 

money loans endorsed in 2000, 2001, 

and 2002 and concluded that between 

22 and 28 percent of loans with sellerfunded assistance had experienced a 90- 

day delinquency, compared to 11 to 16 

percent of loans with downpayment 

assistance from other sources and 8 to 

12 percent of loans without 

downpayment assistance.11

The last default statistic shown in the 

Appendix is the current default rate 

(Table 4). That measure is a snapshot at 

a point in time that focuses on all loans 

still active on a given date. The date 

used for this snapshot is February 29, 

2008. The current default rate is 

computed by dividing the number of 

loans in default on that date by the 

number of loans active on the same date 

in an insurance cohort. The ‘‘Nonprofit’’

column in the right-hand side 

(‘‘Ratios* * *’’) of Table 4 shows that 

the share of loans with nonprofit 

downpayment assistance that were in 

default on the snapshot date was near or 

above two times that of home-purchase 

loans with borrower-funded 

downpayments for all insurance cohorts 

since FY 2001. One will notice that the 

current-default-rate ratios for older 

insurance cohorts are somewhat smaller 

than those for new insurance cohorts. 

This difference is primarily due to the 

fact that the weakest loans in those 

older insurance cohorts have already 

gone to foreclosure and claim, leaving 

fewer weak loans to default in the 

present. When the entire nonprofit 

downpayment assistance portfolio is 

compared to the entire borrower-funded 

downpayment assistance portfolio, 

across all insurance cohort years, the 

default-rate ratio on February 29, 2008, 

was 1.80. The actual default rate for 

loans with nonprofit downpayment 

assistance shown on the left-hand side 

of Table 4 was 11.19 percent and that 

for borrower-funded purchase loans was 

6.22 percent. 

2. Historical Claim Rates 

Table 5 focuses on the insurance 

claim-payment experience of FHA, 

comparing home purchase loans by 

source of downpayment funds and by 

year of insurance cohort. Claims 

generally are paid by FHA to lenders 

after a lender acquires title to a 

property, generally through a 

foreclosure process.12 The metric used 

in the left-hand panel of Table 5 is the 

to-date claim rate, which measures the 

number of insurance claims paid as a 

percentage of all loans insured by FHA, 

as of a given date. The date used here 


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13These other loans are insured under the 

General and the Special Risk Insurance Funds. 

14See Exhibit A–2 on p. A–19 of the FY 2005 

Actuarial Review. 

15See discussion on p. 49 of the FY 2006 

Actuarial Review, and Exhibit V–5 on p. 50. 

16See mortgage insurance premium rates at 12 

U.S.C. 1709(c)(2). 

17The contractor study is that of Concentrance 

Consulting Group, Inc., An Examination of 

Downpayment Gift Programs Administered by NonProfit Organizations, ibid. The GAO study is in the 

November 2005 GAO Report. 

is February 29, 2008. Insurance cohorts 

that are older will have had more time 

for borrowers whose defaults result in 

foreclosure and an FHA insurance 

claim. Consequently, to-date claim rates 

for the FY 2000 and FY 2001 insurance 

cohorts are greater than those for more 

recent insurance cohorts. 

The data in Table 5 indicate that 

when nonprofit downpayment 

assistance is provided, borrowers, as a 

group, are less likely to sustain the 

financial responsibilities of a home 

mortgage than are borrowers receiving 

downpayment funds from other sources. 

With to-date claim rates that exceed 

three times those of borrower-funded 

purchase loans, the insurance risk is 

higher than FHA has ever considered 

acceptable. Such high claim rates cause 

significant harm to families who are 

displaced by foreclosures, and they also 

have the potential of destabilizing 

neighborhoods. 

3. Projected Lifetime Claim Rates 

Each year, HUD hires an independent 

contractor to perform a full actuarial 

study of its single family insured 

portfolio. That study, which is required 

by law, covers all insurance programs 

under the umbrella of the MMIF. The 

Fund encompasses around 90 percent of 

all FHA single family insurance activity. 

Loans not included are those for 

condominiums and section 203(k) 

purchase-and-rehabilitation loans, along 

with some minor targeted programs.13

The formal Actuarial Review published 

from the actuarial study measures todate performance of each insurance 

cohort, and provides projections of 

ultimate claim rates over the 30-year life 

of each insurance cohort. That Actuarial 

Review is forwarded to Congress each 

year. The work of the independent 

contractor is also scrutinized each year 

by independent auditors hired by the 

Office of the Inspector General at HUD. 

For the last 3 years, the actuarial 

study contractor has identified 

nonprofit downpayment assistance as 

adding an especially high risk factor to 

the FHA portfolio. First, in the FY 2005 

Actuarial Review (available at http:// 

www.hud.gov/offices/hsg/comp/rpts/ 

actr/2005actr.cfm), statistical results 

were presented that showed the 

additional risk of claim in any given 

calendar quarter arising from various 

forms of downpayment assistance. The 

additional risk posed by nonprofit 

downpayment assistance was measured 

as three times that from family 

downpayment assistance, and 1.5 times 

that from government assistance.14 The 

FY 2006 Actuarial Review (available at 

http://www.hud.gov/offices/hsg/comp/ 

rpts/actr/2006actr.cfm) alerted HUD 

that continued high concentrations of 

business coming from loans with 

nonprofit downpayment assistance 

would cause FHA to suffer net losses.15

The FY 2007 actuarial study and 

Actuarial Review provide a new level of 

analysis on expected claim rates over 

the life of FHA-insured loans. Since the 

statistical model that predicts claims 

now includes a factor for borrower 

credit scores, the actuarial study 

contractor was able to provide HUD 

with projections of lifetime claim rates 

by cross-sections of credit-score and 

loan-to-value (LTV) classes. Table 6 

shows such cross-sections for loans 

insured in 3 recent years, FY 2005, FY 

2006, and FY 2007. High-LTV loans are 

separated into those with nonprofit 

downpayment assistance, and those 

without. Only the high-LTV group 

(above 95% LTV) needs this separation 

because property sellers that participate 

in, and contribute to the nonprofit 

programs, generally provide only the 

minimum required 3 percent 

downpayment. The ratio of projected 

claim rates on nonprofit assisted loans 

to other above-95%-LTV loans is 

presented in the last column of Table 6. 

Comparisons found in Table 6 show 

smaller differences in lifetime claim 

rates than might be inferred from 

differences in the to-date claim rates 

presented in Table 5. One reason for the 

difference is the comparison in Table 6 

is made only on high-LTV loans, which 

have higher claim rates than do lowerLTV loans. Comparisons in Tables 2, 3, 

4, and 5, however, are across all LTV 

ranges. Nevertheless, for all three 

insurance cohorts shown in Table 6, 

loans with nonprofit downpayment 

assistance are more than twice as likely 

to go to foreclosure and FHA insurance 

claim over their lifetime as all other 

high-LTV loans. 

As claim rates rise for all loans 

insured during housing market 

downturns, such as FY 2007, the high 

insurance claim ratio for loans with 

nonprofit downpayment assistance and 

the large share of loans utilizing those 

downpayment assistance programs 

present a severe financial challenge to 

FHA. The expected lifetime claim rate 

on loans with nonprofit downpayment 

assistance in the FY 2005 insurance 

cohort is close to 17 percent, and for FY 

2007 is above 28 percent. The 16.79 

percent for FY 2005 contrasts with a 

6.94 percent expected lifetime claim 

rate for other high-LTV loans insured 

during the same period. FY 2007 is a 

particularly challenging year as it starts 

with a decline in home prices across 

much of the nation. The 28.49 percent 

expected claim rate on loans with 

nonprofit downpayment assistance 

insured in FY 2007 contrasts with a 

12.25 percent expected claim rate on all 

other high-LTV loans. It is not possible 

under current law to charge insurance 

premiums in an amount sufficient to 

cover this increased insurance claim 

risk, even if the maximum allowable 

insurance premiums were charged to all 

FHA-insured homebuyers.16

The claim rates shown in Table 6 are 

under the base case economic scenario 

of August 2007, which relied upon 

forecasts of house prices and interest 

rates provided by Global Insight Inc. 

Since that time, housing market 

conditions have deteriorated more than 

was expected, and the projected claim 

rates on the FY 2005 to FY 2007 

insurance cohorts are now even higher 

than those shown in Table 6. Because 

the expected claim rates on loans with 

nonprofit downpayment assistance are 

well above the rate that can be 

supported by reasonable premium 

charges in normal economic conditions, 

the financial problems caused by these 

loans are only compounded during 

housing market downturns. 

4. Higher Losses on Claims 

An additional problem with loans 

with nonprofit downpayment assistance 

is that homes purchased using this form 

of assistance are often purchased at 

inflated prices. The price increase is 

made, or the seller refrains from 

accepting a lower price that would have 

been acceptable in an arms-length 

transaction, so that the seller can receive 

the same net proceeds from selling to 

the homebuyer needing downpayment 

assistance, as the seller would receive 

from a buyer without downpayment 

assistance. This business practice was 

confirmed in a field study performed for 

HUD by an independent contractor, and 

statistically validated in research 

performed by the GAO.17

In the November 2005 GAO Report, 

the GAO analyzed ‘‘a sample of FHAinsured loans settled in March 2005,’’

and found that ‘‘for loans with sellerfunded down payment assistance, the 


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18November 2005 GAO Report, pp. 22–23. 

19Concentrance Consulting Group Report, p 6. 

20November 2005 GAO Report, p. 32. 

21FICO is a credit score developed by the Fair 

Isaac Corporation and is an acronym for it. 

appraised value and sales price were 

higher as compared with loans without 

such assistance.’’18 The March 2005 

study by Concentrance Consulting 

Group, commissioned by HUD, 

interviewed more than 400 persons 

involved in the mortgage industry and 

corroborates GAO’s assessment. The 

Concentrance study ‘‘found 

overwhelming evidence that the cost of 

the seller-funded down payment 

assistance is added to the sales price, 

which then increases the allowable FHA 

loan amount and eliminates any 

borrower equity in the property.’’ 19

Such an inflated sale price does not 

represent the true value of the property 

and leads to a higher mortgage amount. 

The effect on FHA, in addition to an 

increase in the amount of insurance 

claim payments, is increased net losses 

after disposing of foreclosed properties. 

Not only do loans with nonprofit 

assistance have significantly elevated 

insurance claim rates, 76 percent greater 

according to the same GAO study,20 but 

FHA ultimately suffers greater losses on 

those claims. The FY 2006 Actuarial 

Review documents differentiate net loss 

rates—as a percentage of the unpaid 

loan balance at the time of default and 

claim by loans having or not having 

nonprofit downpayment assistance (see 

Appendix B of the FY 2006 Actuarial 

Review). 

D. FHA Insurance Fund Solvency 

FHA program data is used by an 

independent contractor to conduct the 

annual actuarial review of the MMIF, 

FHA’s largest insurance fund. MMIF 

programs are required to be selfsupporting and to generate sufficient 

receipts to fund a Capital Reserve 

Account in an amount equal to at least 

2 percent of its outstanding insurancein-force. (See 12 U.S.C. 1711(f).) This 

Account provides a vehicle for 

recording the balance of payments 

between MMIF programs and the federal 

budget over time. Growth of the Reserve 

Account occurs as MMIF programs 

generate budget receipts and as Account 

balances earn interest over time. Reserve 

Account balances fall when HUD needs 

to fund unexpected claims on 

outstanding loan guarantees. In its 74- 

year history, the MMIF has always been 

self-supporting and never required 

additional appropriations beyond its 

initial capitalization in 1934, which was 

paid back by FHA decades ago. 

All funds associated with MMIF 

insurance program operations—

including premium collections, claim 

payments, and proceeds from the sale of 

foreclosed properties—flow through a 

separate MMIF Financing Account. In 

accordance with the Federal Credit 

Reform Act of 1990, 2 U.S.C. 661, et 

seq., which requires agencies to estimate 

the long-term cost to the government of 

guaranteeing credit (referred to as ‘‘the 

subsidy cost’’), FHA must maintain a 

balance in the MMIF Financing Account 

for each insurance cohort (i.e., the loans 

endorsed in a single fiscal year) 

sufficient to cover the net cash outflows 

projected for the insurance cohort over 

its lifetime. Each year, in the course of 

preparing the President’s Budget, FHA 

estimates the subsidy cost for the 

upcoming insurance cohort. As long as 

expected premium revenues outweigh 

expected claim costs, HUD can fund the 

required Financing Account balance 

and provide net budget receipts that 

help build Capital Reserve Account 

balances. Were a situation to arise in 

which expected premium revenues 

could not cover expected claim costs, 

then FHA programs would require a 

budget appropriation from Congress to 

help fund the required Financing 

Account balance. 

In order for FHA MMIF programs to 

both maintain required capital reserves 

and avoid budgetary appropriations, 

they must be managed in such a way 

that generates what is called a ‘‘negative 

credit subsidy rate.’’ The credit subsidy 

rate (CSR) is the ratio of expected 

budget outlays or receipts to expected 

loan volumes. The CSR also is the 

government’s estimated long-term cost, 

excluding administrative costs, as a 

percentage of the amount of loans 

guaranteed. The rate is calculated on a 

net present value basis over the life of 

the loans guaranteed in a given fiscal 

year. The CSR is thus a helpful 

summary measure of actuarial 

soundness. 

HUD currently has an internal target 

for a normal-economy CSR of around 

¥1.00 percent for MMIF programs in an 

insurance cohort. The negative sign 

means negative outlays, which 

translates into positive budget receipts. 

Having such a target provides a cushion 

for economic downturns, minimizing 

the chance that the CSR could actually 

turn positive. Such a target, however, is 

impossible to achieve today with the 

resource drain caused by SFDPA. Taken 

as a whole, loans with SFDPA have a 

CSR of over +6.00 percent, which means 

that supporting them costs the FHA 

program 6 cents for every dollar of these 

insured loans. Current premium rates 

cannot cover the cost of such a large 

CSR for these downpayment-assisted 

loans. HUD is at the point where 

continuing to support loans with 

SFDPA will require budget 

appropriations for all of the FHA MMIF 

loans. 

On the basis of the FY 2007 

independent Actuarial Review, FHA has 

estimated its credit subsidy 

requirements for FY 2009. FHA has 

concluded that if it continued to charge 

the same 1.5 percent up-front and 50 

basis point annual insurance premiums, 

and continued to serve the same mix of 

borrowers it served in FY 2007, 

including the same share using SFDPA, 

the MMIF program would have a 

positive credit subsidy rate of 1.12 

percent. Assuming estimated loanguarantee obligations of $110 billion, 

the MMIF program would require a 

credit subsidy appropriation of $1.4 

billion in order to begin operations in 

FY 2009. To ward off this eventuality, 

HUD is proposing to eliminate SFDPA. 

E. Sustainable Cross-Subsidization 

The data presented above in HUD’s 

analysis of its loan portfolio shows the 

poor performance of loans with SFDPA 

relative to loans without such 

assistance. Due to this poor 

performance, borrowers with SFDPA 

require an unsustainable level of 

premium cross-subsidies from other 

borrowers. Any attempt to raise 

premiums to help to cover part of that 

cost could result in other borrowers 

being discouraged from using financing 

with FHA mortgage insurance by the 

high relative cost to them of providing 

cross-subsidies to the seller-funded 

portfolio. This phenomenon is known as 

‘‘adverse selection’’ and results in the 

need to continually raise premiums 

when the pool of cross-subsidizing 

borrowers declines with each round of 

price/premium increases. By proposing 

to eliminate FHA insurance on loans 

with SFDPA, FHA is endeavoring to 

reestablish a sustainable level of crosssubsidization in its portfolio so that it 

can serve more homebuyers, including 

first-time and minority homebuyers, 

without the continual need for 

appropriations. Avoiding a general 

premium-rate increase is all the more 

important because lower-income 

borrowers, who benefit most from 

FHA’s MMIF program, are concentrated 

in its less risky credit score and loan-tovalue categories of borrowers, i.e., the 

categories that would be discouraged 

from using the program by higher 

premium rates. See Table 7. 

Table 8 shows the distribution of 

FHA-insured purchase loans in FY 

2007, over FICO 21 and loan-to-value 

ratio categories. Purchase loans with 


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SFDPA appear in the SFDPA row. In FY 

2007, such homebuyers constituted over 

33 percent of FHA-insured homebuyers 

(see Table 8). 

Table 9 shows the expected lifetime 

claim rates for purchase loans in each of 

the FICO and LTV categories defined in 

Table 8. Expected claim rates increase 

with increases in LTV and with 

decreases in FICO scores. That is, they 

rise as one moves from the upper left to 

the lower right of the table. Some of 

these groups of borrowers have 

excessively high claim rates—above 25 

percent. HUD has determined that such 

high rates are incompatible with 

homeownership sustainability. In the 

worst case, borrowers with SFDPA who 

have FICO scores below 500 have 

expected claim rates of 61.4 percent. 

While these borrowers constituted only 

0.6 percent of all purchase loans 

endorsed in FY 2007 (see Table 8), for 

all homebuyers with SFDPA, the 

weighted average expected claim rate 

was over 28 percent. 

Even a small number of borrowers 

with very high expected claim rates 

places a substantial burden on the 

remaining borrowers who must provide 

premium revenues sufficient to cover 

losses incurred on the high claim-rate 

group. Table 10 shows credit subsidy 

rates calculated for loans in each FICO 

and LTV grouping. It shows that credit 

subsidy rates for different categories of 

borrowers vary between ¥2.95 percent 

and +20.41 percent. A credit subsidy 

rate of ¥2.0 percent generates $2,000 in 

receipts on a $100,000 loan and $4,000 

on a $200,000 loan. On the other hand, 

a credit subsidy rate of +20.4 percent 

requires $20,400 in subsidies—from 

some combination of higher premiums 

on all borrowers and direct budget 

appropriations—for a $100,000 loan and 

$40,800 in subsidies for a $200,000 

loan. With such high positive credit 

subsidy requirements, too many 

borrowers with good credit are needed 

to offset the cost of higher-risk, and 

frequently higher-income, borrowers. 

Under current law, FHA is prevented 

from raising up-front premiums above 

2.25 percent or annual premiums above 

55 basis points. (See 12 U.S.C. 

1709(c)(2).) Nevertheless, one might ask 

whether it would be possible to charge 

sufficient premiums for loans with 

SFDPA so that they would not require 

cross-subsidization. Table 11 shows 

break-even up-front and annual 

premiums for SFDPA loans by FICO 

score category. Except for borrowers 

with FICO scores greater than 680, upfront and annual premiums would have 

to be raised to very high levels for 

example, 5.56 percent upfront and 0.55 

percent annually for borrowers with 

FICO scores between 640 and 680, and 

12.09 percent up-front and 2.0 percent 

annually for borrowers with FICO scores 

between 500 and 560. Therefore, under 

the current law, it is not possible to 

fully offset the risk of SFDPA simply by 

raising premiums. Even if there were no 

statutory cap on premium rates charged 

by FHA, however, it is unlikely that 

borrowers would opt for an FHAinsured mortgage if the insurance 

premiums were raised as high as needed 

to ensure the sustainability of the 

insurance fund in a scenario where 

SFDPA is allowed to continue. The large 

up-front premiums alone, when added 

to the initial loan balance, would 

increase expected claim rates even 

more, as borrowers could have to wait 

many years before they could sell their 

properties free-and-clear. Therefore, 

raising premium rates to extraordinary 

levels would not be a viable solution, 

even if the Congress were to authorize 

such. 

IV. Downpayment Assistance From 

Nonprofits or Any Other Sources—

Financial Benefit Prohibited 

Although the data and discussion 

above demonstrating the negative 

default, claim, and other adverse effects 

of SFDPA are focused on nonprofit 

organizations, the rule, if implemented, 

would have broader application. It 

would prohibit a mortgagor’s required 

cash investment from consisting, in 

whole or part, of funds provided by the 

seller, or any other person or entity that 

financially benefits from the transaction, 

or any third party or entity reimbursed 

by the seller or other person or entity 

that financially benefits from the 

transaction. HUD has determined that 

this broader prohibition is appropriate 

and justified, as discussed below. 

HUD is not singling out nonprofit 

organizations in proposing to prohibit 

SFDPA because the same scheme of 

funneling or advancing funds for the 

seller, through an intermediary, to the 

homebuyer can be accomplished using 

any person or entity as the intermediary 

or using any number or layers of 

intermediaries. HUD’s rule would apply 

to all such transactions. Whenever the 

funds for the homebuyer’s required 

investment in the property are provided 

by a party that financially benefits from 

the sale of the property, the transaction 

is distorted by the provider’s interest in 

inducing a purchase on any terms, in 

conflict with the borrower’s and FHA’s 

interest in achieving sustainable 

homeownership through a sustainable 

mortgage. This conflict is not abated 

when such funds are provided by an 

intermediary reimbursed by the party 

that financially benefits. It is present 

whether the seller provides the funds 

directly to the homebuyer or indirectly 

through an intermediary to the 

homebuyer. 

Further, when the source of 

downpayment funds financially benefits 

from the transaction, the downpayment 

amount is likely to be added to the sales 

price to ensure that the funder’s net 

benefit is not diminished. Any cost to 

the buyer added to the transaction adds 

to the long-term financial burden to the 

mortgagor and increases the loan 

amount insured by HUD, thereby 

increasing HUD’s risk exposure in the 

event of an insurance claim. 

While it is not certain that the 

downpayment funder’s cost will be 

added dollar for dollar to the transaction 

in every instance, it would be an 

extreme administrative burden to HUD, 

if not an outright impossibility, to 

ensure that the addition of cost has not 

occurred. Even if the cost is not added 

to the sales price, and the property is 

sold for its appraised value, it may be 

deduced that the seller has refrained 

from accepting a lower price that would 

have otherwise been acceptable in an 

arms-length transaction. Therefore, the 

rule would prohibit downpayment 

assistance from any sources that 

financially benefit from the transaction 

in order to eliminate, not only the 

conflict of interest, but the potential for 

additional financial burden imposed 

upon the mortgagor and added 

insurance risk to HUD. 

HUD considers it reasonable to 

conclude that the problems associated 

with SFDPA from nonprofit 

organizations would appear in 

connection with seller- (or other 

financial beneficiary-) funded 

downpayment assistance from any other 

sources. The potential for problems to 

arise is not related to the nature of the 

intermediary that serves as the conduit 

for the assistance but to the quid pro 

quo relationship between the funding of 

a downpayment and the funder’s receipt 

of a financial benefit. Thus, for example, 

although the rule generally permits a 

gift from a family member to be used by 

the mortgagor to meet the minimum 

investment requirement, a payment 

from a family member who is 

reimbursed by the seller, or by another 

party that financially benefits from the 

transaction, would not be permitted by 

the rule. The same outcome would 

result if the payment to the mortgagor 

came from a nonprofit organization, a 

government agency, a tribal government, 

or any other intermediary; if the 

intermediary that serves as the conduit 

for the payment is reimbursed by the 

seller or other party that financially 

benefits, the payment would not be 


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22U.S. Small Business Administration, Table of 

Small Business Size Standards Matched to North 

American Industry Classification System Codes; 

avialable at http://www.sba.gov/idc/groups/public/ 

documents/sbalhomepage/ 

servlsstdltablepdf.pdf. 

permitted. A transaction-distorting 

conflict of interest with the potential for 

adding an above-market burden on the 

borrower and increased risk to the FHA 

fund is present in each such instance. 

This rule would not disturb the 

programs of direct homeownership 

assistance that are administered by 

private, charitable organizations or state, 

local, and tribal governments that are 

not dependent upon payment or 

reimbursement of the assistance by a 

seller or other party that benefits 

financially from a transaction. Programs 

acceptable to HUD do not contain the 

conflict of interest inherent in programs 

and transactions in which 

downpayment assistance is linked to a 

payment or reimbursement by the seller 

or other entity that financially benefits 

from the transaction. For these reasons, 

HUD would continue to allow programs 

in which the downpayment assistance is 

not linked to a payment or 

reimbursement by the seller or other 

entity that benefits financially from 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 is available for 

public inspection in the Regulations 

Division, Office of General Counsel, 451 

Seventh Street, SW., Room 10276, 

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 entities directly affected by this 

rule are FHA-approved ‘‘direct 

endorsement’’ (DE) lenders, i.e., 

mortgage lenders that are approved to 

underwrite and endorse their loans for 

FHA insurance, that must follow FHA 

requirements to have a loan insured by 

the FHA, and that are the party 

‘‘insured’’ by FHA. While other types of 

entities may be indirectly affected by 

this rule, the RFA does not cover such 

indirect effects. 

As a result of this rule, DE lenders 

would no longer be able to obtain FHA 

insurance for loans with seller-funded 

downpayment assistance. Therefore, the 

economic impact, if any, of the rule on 

regulated entities may be estimated by 

attempting to determine what 

proportion of DE lenders’ loan volume 

will be affected by the rule (i.e., what 

proportion consists of FHA-insured 

loans with seller-funded downpayment 

assistance) and how much, if any, 

revenue and profit DE lenders would 

forgo as a result of FHA no longer being 

able to insure that particular category of 

loans. 

A. Estimating the Number of Small 

Entities Potentially Affected 

To determine if the rule would have 

a significant economic impact on a 

substantial number of small entities, 

HUD first identified the total number of 

DE lenders, large or small, with current 

FHA loan activity. According to HUD’s 

records, there were 1,487 DE lenders 

that were actively underwriting FHAinsured loans in 2007. The next step in 

the analysis was to estimate how many 

of these 1,487 DE lenders would be 

considered ‘‘small entities.’’ Under the 

applicable industry classifications, 

banks and other depository institutions 

are considered ‘‘small entities’’ if they 

have $165 million or less in assets; nonbank mortgage lenders are considered 

‘‘small’’ if they have $6.5 million or less 

in annual revenues.22 To begin 

narrowing the field, HUD attempted to 

identify the subset of DE lenders whose 

annual revenue from FHA-insured loans 

was $6.5 million or less. This was done 

by multiplying the total dollar volume 

of FHA-insured loans made by a lender, 

information that HUD collects on an 

annual basis, by a factor of four percent, 

which represents a per-loan revenue 

estimate typically quoted by FHA 

lenders. Out of the original universe of 

1,487, HUD identified 74 DE lenders 

whose estimated annual revenue from 

FHA-insured loans was $6.5 million or 

less. This number still overstates the 

number of DE lenders who actually 

meet the ‘‘small entity test,’’ because 

FHA-insured loans typically are not the 

only line of business or income stream 

for a DE lender. However, it serves the 

useful purpose of flagging the subset of 

DE lenders that potentially fall within 

the ‘‘small entity’’ definition and thus 

require further analysis. 

The next step in the analysis was to 

ascertain how many of the 74 flagged DE 

lenders actually meet the applicable test 

for ‘‘small entity.’’ As noted above, the 

test is different depending on whether 

the entity is a bank or other depository 

institution, on the one hand, or a nonbank mortgage lender on the other. 

Sixty-two of the 74 flagged DE lenders 

were non-bank mortgage lenders; 12 

were banks or other depository 

institutions. With respect to non-bank 

mortgage lenders, HUD has access to 

their annual audited financial 

statements, which they must submit to 

HUD on-line via the Lender Assessment 

Sub-System (LASS) in order to renew 

their FHA lender approval. Of the 62 

flagged non-bank mortgage lenders, 36 

reported annual revenue that would 

qualify them as ‘‘small entities’’ under 

the applicable less-than-$6.5 millionannual-revenue test. 

As noted above, banks and other 

depository institutions are considered 

‘‘small entities’’ if they have $165 

million or less in assets. DE lenders that 

are banking institutions are not required 

to supply financial statements through 

HUD’s LASS. From publicly available 

annual reports, however, HUD was able 

to ascertain that none of the 12 flagged 

banking institutions met this test. Thus, 

36 of the 74 flagged DE lenders are small 

entities subject to this regulation. 

B. Estimating the Number of Small 

Entities That Would Be Significantly 

Impacted by the Rule 

The foregoing discussion 

demonstrated that there are 36 DE 

lenders that qualify as ‘‘small entities’’

under the applicable tests. The next step 

in the analysis is to determine whether 

the rule is likely to have a significant 

economic impact on a substantial 

number of these 36 small entities. In the 

RFA context, a 10 percent loss of profits 

is commonly used as a measure of 

significant impact. HUD does not have 

access to sufficient data to perform a 10 

percent loss-of-profits analysis directly. 

However, HUD can approximate a 10 

percent loss-of-profits analysis by 

determining whether a DE lender’s total 

portfolio of FHA-insured loans consists 

of 10 percent or more loans with sellerfunded downpayment assistance. This 

methodology is more conservative than 

a straightforward 10 percent loss-ofprofits approach, since a 10 percent loss 

of FHA-insured loan business likely 


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23Ninety-two percent of all loans with nonprofit 

downpayment assistance were made by 5 lenders 

that are not small entities. 

24Moreover, when the total number of small 

entities in the whole relevant industry is 

considered, including mortgage lenders that are not 

approved to underwrite FHA loans and are 

therefore not affected by the regulation, the figure 

of five small entities that may be significantly 

impacted becomes even more insubstantial. Based 

on data provided in the preamble to a rule proposed 

earlier this year by the Board of Governors of the 

Federal Reserve System, of the 17,618 depository 

institutions reporting data to the Board, more than 

10,000 were small mortgage lenders. See Truth in 

Lending: Proposed Rule, 73 FR 1671, 1719 (January 

9, 2008). Including small, non-depository mortgage 

lenders would only increase that universe beyond 

10,000. 

represents a lesser percent of an entity’s 

overall business. HUD is not aware of 

any FHA-approved lender whose 

business consists exclusively of FHAinsured loans; thus, even if a lender’s 

FHA-insured loan volume fell by a 

margin of 10 percent or more, its overall 

profits from all segments of its business 

would not necessarily be affected by the 

same margin. Although HUD is unaware 

of any other institution, public or 

private, that will insure loans with 

seller-funded downpayment assistance, 

the regulation’s impact could be further 

mitigated to the extent that other 

SFDPA-loan insurers exist. 

Only five of the 36 identified small 

DE lenders had FY 2007 FHA-insured 

loan portfolios consisting of at least 10 

percent loans with nonprofit 

downpayment assistance.23 Therefore, 

the maximum number of small entities 

that might be significantly affected by 

the regulation is 5 out of a field of 36 

small DE lenders. Most likely, not even 

all of these 5 will be significantly 

affected, because to the extent they have 

any revenue-generating activities other 

than FHA-insured loans, SFDPA FHAinsured loans may well comprise under 

10 percent of the entity’s total business 

even if they comprise more than 10 

percent of the entity’s FHA-insured loan 

business. In any event, even 5 

economically impacted small entities is 

not in itself a substantial number; nor is 

it a substantial portion of the total 

number of small entities in the field.24

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 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 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 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 rule also applies 

through cross-referencing to FHA 

mortgage insurance for condominium 

units (14.133), and other smaller single 

family programs. 

List of Subjects in 24 CFR Part 203 

Loan programs—housing and 

community development, Mortgage 

insurance, Reporting and recordkeeping 

requirements. 

Accordingly, the Department 

proposes to amend 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 


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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 of 1986; 

(5) Disaster relief grants; and 

(6) Other sources as may be approved 

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

Dated: June 10, 2008. 

Brian D. Montgomery, 

Assistant Secretary for Housing, Federal 

Housing Commissioner. 

Appendix—Tables 

Note: This Appendix will not be codified 

in the Code of Federal Regulations. 

TABLE 1.—FHA SINGLE-FAMILY PURCHASE LOAN ENDORSEMENTS, SHARES BY DOWNPAYMENT SOURCE TYPE AND

FISCAL YEAR

Fiscal year 

Source of downpayment funds in percent 

Borrower Family Nonprofit Govt 

agency Employer 

2000 ................................................................................................................... 75.75 20.28 1.74 2.14 0.09 

2001 ................................................................................................................... 77.52 15.64 4.92 1.83 0.10 

2002 ................................................................................................................... 74.95 13.75 9.18 2.04 0.09 

2003 ................................................................................................................... 63.53 15.25 18.40 2.70 0.12 

2004 ................................................................................................................... 53.97 15.59 27.19 3.12 0.12 

2005 ................................................................................................................... 48.44 14.18 33.09 4.17 0.12 

2006 ................................................................................................................... 48.73 12.93 32.78 5.43 0.13 

2007 ................................................................................................................... 47.52 12.02 35.09 5.25 0.12 

2008 a ................................................................................................................. 46.05 12.25 37.30 4.32 0.09 

a Data for five months, October through February. 

Source: U.S. Department of Housing and Urban Development. 

TABLE 2.—EARLY DEFAULT RATE COMPARISONS ON FHA-INSURED HOME PURCHASE LOANS BY SOURCE OF

DOWNPAYMENT FUNDS AND FISCAL YEAR OF INSURANCE ENDORSEMENT

Fiscal year of insurance 

endorsement 

Early default rates in percent Ratios to ‘‘borrower’’ early default rates 

Borrower Family Nonprofit Govt 

agency Employer Family Nonprofit Govt agency Employer 

2000 ......................................... 3.89 5.26 7.98 6.76 4.37 1.36 2.05 1.74 1.12 

2001 ......................................... 7.43 9.10 16.32 13.17 8.51 1.22 2.20 1.77 1.15 

2002 ......................................... 6.99 8.56 15.22 12.62 11.93 1.23 2.18 1.81 1.71 

2003 ......................................... 5.79 7.34 13.90 12.17 9.28 1.27 2.40 2.10 1.60 

2004 ......................................... 5.84 7.79 14.33 12.36 10.42 1.33 2.46 2.12 1.78 

2005 ......................................... 7.08 9.24 16.43 12.81 9.95 1.30 2.32 1.81 1.41 

2000–2005 ............................... 6.08 7.57 14.80 11.56 9.00 1.24 2.43 1.90 1.48 

Source: HUD. 

Notes: FHA-insured home-purchase loans; early default is defined as a 90-day (3 month) delinquency within the first 2 years of scheduled payments on the mortgage. 

TABLE 3.—EVER-DEFAULTED RATE COMPARISONS ON FHA-INSURED HOME PURCHASE LOANS BY SOURCE OF

DOWNPAYMENT FUNDS AND FISCAL YEAR OF INSURANCE ENDORSEMENT

Fiscal year of insurance 

endorsement 

Ever-defaulted rates in percent Ratios to ‘‘borrower’’ ever-defaulted rates 

Borrower Family Nonprofit Govt 

agency Employer Family Nonprofit Govt agency Employer 

2000 ......................................... 16.40 21.39 28.69 27.79 21.83 1.30 1.75 1.69 1.33 

2001 ......................................... 15.28 18.36 28.38 28.40 19.70 1.20 1.86 1.86 1.29 

2002 ......................................... 13.24 15.30 25.30 24.47 17.30 1.16 1.91 1.85 1.31 

2003 ......................................... 11.86 14.26 25.05 23.68 17.53 1.20 2.11 2.00 1.48 

2004 ......................................... 10.60 13.57 23.94 20.88 17.92 1.28 2.26 1.97 1.69 

2005 ......................................... 10.75 13.80 23.28 18.46 15.40 1.28 2.16 1.72 1.43 

2006 ......................................... 8.16 10.59 17.67 12.31 16.22 1.30 2.16 1.51 1.99 

2007 ......................................... 4.13 5.26 9.90 5.70 4.22 1.27 2.40 1.38 1.02 

Source: HUD; FHA-insured home-purchase loans; data as of February 29, 2008. 

Notes: Default is defined as a 90-day (3 month) delinquency; ever-defaulted represents having had at least one default episode.


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TABLE 4.—CURRENT DEFAULT RATE COMPARISONS ON FHA-INSURED HOME PURCHASE LOANS BY SOURCE OF

DOWNPAYMENT FUNDS AND FISCAL YEAR OF INSURANCE ENDORSEMENT

Fiscal year of insurance 

endorsement 

Current default rates in percent Ratios to ‘‘borrower’’ current default rates 

Borrower Family Nonprofit Govt 

agency Employer Family Nonprofit Govt agency Employer 

2000 ......................................... 11.83 14.80 17.33 13.50 19.12 1.25 1.46 1.14 1.62 

2001 ......................................... 10.69 12.75 19.51 13.65 21.69 1.19 1.82 1.28 2.03 

2002 ......................................... 8.23 10.01 15.97 11.83 4.20 1.22 1.94 1.44 0.51 

2003 ......................................... 5.63 6.92 11.64 9.26 8.18 1.23 2.07 1.65 1.45 

2004 ......................................... 5.36 7.41 12.33 8.64 10.92 1.38 2.30 1.61 2.04 

2005 ......................................... 5.55 7.43 12.64 8.76 9.43 1.34 2.28 1.58 1.70 

2006 ......................................... 4.94 6.46 10.97 6.98 9.81 1.31 2.22 1.41 1.99 

2007 ......................................... 2.86 3.78 7.47 3.92 3.05 1.32 2.61 1.37 1.07 

All Years ................................... 6.22 7.68 11.19 8.07 9.02 1.24 1.80 1.30 1.45 

Source: HUD. 

Note: Data are as of February 29, 2008. 

TABLE 5.—DATE CLAIM RATE COMPARISONS ON FHA-INSURED HOME PURCHASE LOANS BY SOURCE OF DOWNPAYMENT

FUNDS AND FISCAL YEAR OF INSURANCE ENDORSEMENT

Fiscal year of insurance 

endorsement 

To-date claim rates in percent Ratios to ‘‘borrower’’ to-date claim rates 

Borrower Family Nonprofit Govt 

agency Employer Family Nonprofit Govt agency Employer 

2000 ......................................... 6.29 8.38 16.07 13.58 9.52 1.33 2.56 2.16 1.51 

2001 ......................................... 5.67 6.68 16.23 13.34 7.24 1.18 2.86 2.35 1.28 

2002 ......................................... 4.45 4.58 13.27 10.72 6.16 1.03 2.98 2.41 1.38 

2003 ......................................... 3.31 3.58 11.22 8.84 4.57 1.08 3.39 2.67 1.38 

2004 ......................................... 2.21 2.77 8.89 5.80 3.75 1.25 4.02 2.62 1.69 

2005 ......................................... 1.61 1.88 6.29 3.81 2.61 1.17 3.91 2.36 1.62 

2006 ......................................... 0.73 0.85 2.91 1.60 2.21 1.17 3.99 2.19 3.03 

2007 ......................................... 0.08 0.09 0.41 0.17 0.00 1.12 5.07 2.14 0.00 

Source: HUD; claims paid as of February 29, 2008. 

TABLE 6.—EXPECTED LIFETIME CLAIM RATES ON RECENT FHA INSURANCE ENDORSEMENTS, BY CREDIT SCORE, LTV, 

AND NONPROFIT DOWNPAYMENT ASSISTANCE FIXED-RATE, 30-YEAR MORTGAGES

Credit score ranges 

Loan-to-value ranges 

Ratio of nonprofit to other 

above-95 percent claim 

rates 

Up to 90 

percent 

90.1–95 

percent 

Above 95 percent 

Other 

downpayment funds 

Nonprofit 

assisted 

FY 2005 Insurance Endorsements 

680–850 ....................................................................................................... 2.74 3.19 3.37 6.69 1.99 

640–679 ....................................................................................................... 4.32 5.56 6.23 13.02 2.09 

620–639 ....................................................................................................... 4.54 5.89 6.59 13.36 2.03 

580–619 ....................................................................................................... 6.44 9.17 10.57 21.58 2.04 

540–579 ....................................................................................................... 7.74 12.80 13.52 26.20 1.94 

500–539 ....................................................................................................... 10.56 17.53 17.49 32.92 1.88 

300–499 ....................................................................................................... 13.56 12.21 21.33 46.63 2.19 

None ............................................................................................................. 6.81 9.66 11.04 23.80 2.16 

All ................................................................................................................. 5.60 6.90 6.94 16.79 2.42 

FY 2006 Insurance Endorsements 

680–850 ....................................................................................................... 2.05 3.07 3.80 9.13 2.40 

640–679 ....................................................................................................... 4.04 6.92 8.73 19.25 2.21 

620–639 ....................................................................................................... 3.93 7.22 9.20 20.00 2.17 

580–619 ....................................................................................................... 6.14 12.24 15.21 31.81 2.09 

540–579 ....................................................................................................... 7.41 15.53 19.00 37.34 1.97 

500–539 ....................................................................................................... 10.56 19.54 25.03 46.67 1.86 

300–499 ....................................................................................................... 16.11 27.04 34.47 59.09 1.71 

None ............................................................................................................. 7.91 12.89 16.21 37.02 2.28 


jlentini on PROD1PC65 with PROPOSALS
33954 Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 

TABLE 6.—EXPECTED LIFETIME CLAIM RATES ON RECENT FHA INSURANCE ENDORSEMENTS, BY CREDIT SCORE, LTV, 

AND NONPROFIT DOWNPAYMENT ASSISTANCE FIXED-RATE, 30-YEAR MORTGAGES—Continued 

Credit score ranges 

Loan-to-value ranges 

Ratio of nonprofit to other 

above-95 percent claim 

rates 

Up to 90 

percent 

90.1–95 

percent 

Above 95 percent 

Other 

downpayment funds 

Nonprofit 

assisted 

All ................................................................................................................. 5.22 8.21 9.24 23.21 2.51 

FY 2007 Insurance Endorsements 

680–850 ....................................................................................................... 2.14 3.75 4.9 11.54 2.36 

640–679 ....................................................................................................... 4.45 8.10 11.15 23.78 2.13 

620–639 ....................................................................................................... 4.43 8.68 11.54 24.57 2.13 

580–619 ....................................................................................................... 7.43 14.28 19.47 38.49 1.98 

540–579 ....................................................................................................... 8.71 18.71 24.01 45.03 1.88 

500–539 ....................................................................................................... 10.51 22.73 30.86 53.80 1.74 

300–499 ....................................................................................................... 16.09 33.68 40.82 68.31 1.67 

None ............................................................................................................. 9.21 15.73 21.14 42.85 2.03 

All ................................................................................................................. 6.05 10.01 12.25 28.49 2.33 

Source: Special aggregations performed by Integrated Financial Engineering, Inc., from the FY 2007 actuarial study of the FHA Mutual Mortgage Insurance Fund (available at http://www.hud.gov/offices/hsg/comp/rpts/actr/2007actr.cfm). Lifetime claim rate predictions use base case 

economic forecasts provided by Global Insight, Inc. 

TABLE 7.—MEDIAN INCOMES OF FHA PURCHASE BORROWERS IN FY 2007 

Loan-to-value ratio 

FICO score range 

850–680 679–640 639–620 619–600 599–560 559–500 499–300 None Row 

LE 90 ............................................ $43,404 $42,906 $43,290 $44,550 $48,180 $52,068 $49,200 $32,232 $44,688 

91–95 ........................................... 47,388 49,338 49,800 51,420 53,724 54,984 55,170 37,440 49,920 

96–97 ........................................... 49,512 52,506 53,208 54,996 55,068 55,500 52,824 39,000 51,996 

SFDPA* ........................................ 48,432 50,754 51,024 51,672 51,618 51,732 52,008 36,900 50,136 

Column ......................................... 48,756 51,372 51,936 52,752 53,004 53,388 51,996 37,440 50,760 

* Loans with seller-funded downpayment assistance. 

TABLE 8.—PURCHASE LOAN COMPOSITION IN FY 2007, BY LTV AND FICO SCORE

[In percent] 

Loan-to-value ratio 

FICO score range 

850–680 679–640 639–620 619–600 599–560 559–500 499–300 None LTV sum 

LE 90 ............................................ 1.7 1.4 1.0 1.0 1.9 1.3 0.2 0.6 9.1 

91–95 ........................................... 1.7 1.6 1.0 1.0 1.3 0.7 0.1 0.3 7.8 

96–97 ........................................... 14.3 10.1 5.6 5.6 7.8 3.8 0.4 2.4 49.9 

SFDPA* ........................................ 5.0 5.5 4.1 4.1 7.4 4.8 0.6 1.6 33.2 

FICO Sum .................................... 22.8 18.7 11.7 11.7 18.5 10.6 1.2 5.0 100.0 

* Loans with seller-funded downpayment assistance. 

TABLE 9.—EXPECTED CLAIM RATES FOR ALL FY 2009 LOANS BASED ON FY 2007 ACTUARIAL REVIEW AND RECENT

ECONOMIC ASSUMPTIONS

[In percent] 

Loan-to-value ratio 

FICO score range 

850–680 679–640 639–620 619–600 599–560 559–500 499–300 None 

LE 90 ................................................................ 2.2 4.7 4.5 7.7 8.7 10.2 15.3 9.6 

91–95 ............................................................... 3.1 6.7 7.0 11.6 14.6 18.3 26.0 13.4 

96–97 ............................................................... 3.9 8.9 9.3 15.5 19.0 25.3 36.2 17.7 

SFDPA* ............................................................ 8.9 18.6 19.4 31.7 36.8 47.0 61.4 34.7 

* Loans with seller-funded downpayment assistance. 


jlentini on PROD1PC65 with PROPOSALS
Federal Register / Vol. 73, No. 116 / Monday, June 16, 2008 / Proposed Rules 33955 

TABLE 10.—CREDIT SUBSIDY RATES BY LTV AND FICO SCORE

[In percent] 

Loan-to-value ratio 

FICO score range 

850–680 679–640 639–620 619–600 599–560 559–500 499–300 None 

LE 90 ................................................................ ¥2.95 ¥1.89 ¥2.00 ¥0.69 ¥0.54 ¥0.01 2.41 0.10 

90–95 ............................................................... ¥2.56 ¥1.08 ¥0.94 0.90 1.26 2.62 6.70 1.65 

95–97 ............................................................... ¥2.22 ¥0.18 ¥0.04 2.49 2.88 4.80 10.74 3.37 

SFDPA* ............................................................ ¥0.20 3.73 4.07 8.97 9.57 12.63 20.41 10.12 

* Loans with seller-funded downpayment assistance. 

TABLE 11.—BREAKEVEN UP-FRONT AND ANNUAL INSURANCE PREMIUMS FOR SELLER-FUNDED DOWNPAYMENT

ASSISTANCE LOANS

[In percent] 

FICO score range 

850–680 679–640 639–620 619–600 599–560 559–500 499–300 None 

Up-front Premium ............................................. 0.95 5.56 5.99 5.92 6.88 12.09 28.95 7.77 

Annual Premium .............................................. 0.55 0.55 0.55 2.00 2.00 2.00 2.00 2.00 

[FR Doc. 08–1356 Filed 6–11–08; 2:56 pm] 

BILLING CODE 4210–67–P 

DEPARTMENT OF JUSTICE 

28 CFR Part 0 

[Docket No. USMS 102; AG Order No. 2974–

2008] 

RIN 1105–AB14 

Revision to United States Marshals 

Service Fees for Services 

AGENCY: United States Marshals Service, 

Department of Justice. 

ACTION: Proposed rule. 

SUMMARY: This rule proposes to increase 

the fee from $45 per person per hour to 

$55 per person per hour for process 

served or executed personally by a 

United States Marshals Service 

employee, agent, or contractor. This 

proposed fee increase reflects the 

current costs to the United States 

Marshals Service for service of process 

in federal court proceedings. 

DATES: Written comments must be 

submitted on or before August 15, 2008. 

ADDRESSES: Please submit written 

comments to the Office of General 

Counsel, United States Marshals 

Service, Washington, DC 20530–1000. 

To ensure proper handling, please 

reference Docket No. USMS 102 on your 

correspondence. 

Comments may also be submitted 

electronically to: usmsregs@usdoj.gov or 

to http://www.regulations.gov by using 

the electronic comment form provided 

on that site. Comments submitted 

electronically must include Docket No. 

USMS 102 in the subject box. You may 

also view an electronic version of this 

rule at the http://www.regulations.gov 

site. 

Comments are also available for 

public inspection at the Office of 

General Counsel by calling (202) 307–

9054 to arrange for an appointment. 

FOR FURTHER INFORMATION CONTACT: Joe 

Lazar, Associate General Counsel, 

United States Marshals Service, 

Washington, DC 20530–1000, telephone 

number (202) 307–9054. 

SUPPLEMENTARY INFORMATION: 

Legal Authority for the U.S. Marshals 

Service To Charge Fees 

The Attorney General must establish 

fees to be taxed and collected for certain 

services rendered by the U.S. Marshals 

Service in connection with federal court 

proceedings. 28 U.S.C. 1921(b). These 

services include, but are not limited to, 

serving writs, subpoenas, or 

summonses, preparing notices or bills of 

sale, keeping attached property, and 

certain necessary travel. 28 U.S.C. 

1921(a). To the extent practicable, these 

fees shall reflect the actual and 

reasonable costs of the services 

provided. 28 U.S.C. 1921(b). 

The Attorney General initially 

established the fee schedule in 1991 

based on the actual costs, e.g., salaries, 

overhead, etc., of the services rendered 

and the hours expended at that time. 56 

FR 2436 (Jan. 23, 1991). Due to an 

increase in the salaries and benefits of 

U.S. Marshals Service personnel over 

time, the initial fee schedule was 

amended in 2000. 65 FR 47859 (Aug. 4, 

2000). The current fee schedule is 

inadequate and no longer reflects the 

actual and reasonable costs of the 

services rendered. 

Federal Cost Accounting and Fee 

Setting Standards and Guidelines Being 

Used 

When developing fees for services, the 

U.S. Marshals Service adheres to the 

principles contained in Office of 

Management and Budget Circular No. 

A–25 Revised (‘‘Circular No. A–25’’). 

Circular No. A–25 states that, as a 

general policy, a ‘‘user charge * * * 

will be assessed against each 

identifiable recipient for special benefits 

derived from Federal activities beyond 

those received by the general public.’’

Id. § 6. 

The U.S. Marshals Service follows the 

guidance contained in Circular No. A–

25 to the extent that it is not 

inconsistent with any federal statute. 

Specific legislative authority to charge 

fees for services takes precedence over 

Circular No. A–25 when the statute 

‘‘prohibits the assessment of a user 

charge on a service or addresses an 

aspect of the user charge (e.g., who pays 

the charge; how much is the charge; 

where collections are deposited).’’ Id. 

§ 4(b). When a statute does not address 

issues of how to calculate fees or what 

costs to include in fee calculations, 

Circular No. A–25 instructs that its 

principles and guidance should be 

followed ‘‘to the extent permitted by 

law.’’ Id. According to Circular No. A–

25, federal agencies should charge the 

full cost or the market price of providing 

services that provide a special benefit to 

identifiable recipients. Id. § 6. Circular 

No. A–25 defines full cost as including 

‘‘all direct and indirect costs to any part 

of the Federal Government of providing 


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