19788 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

24 CFR Part 201

[Docket No. FR–3718–I–01]

RIN 2502–AG32

Office of the Assistant Secretary for

Housing—Federal Housing

Commissioner; Title I Property

Improvement and Manufactured Home

Loan Insurance Programs

AGENCY: Office of the Assistant

Secretary for Housing Federal Housing

Commissioner, HUD.

ACTION: Interim rule.

SUMMARY: This interim rule amends the

Department’s regulations implementing

its property improvement and

manufactured home loan insurance

programs under title I, section 2 of the

National Housing Act. This interim rule

amends the regulations to codify

program changes that were previously

effectuated by waiving various

requirements of the regulations, under

the Secretary’s general waiver authority.

The interim rule also makes other

changes that are needed to clarify

program requirements, to enable the

Department to better use the Title I

programs in accomplishing its mission,

and to eliminate unnecessary

regulations.

DATES: Effective date: June 3, 1996.

Comments due date: July 1, 1996.

ADDRESSES: Interested persons are

invited to submit comments regarding

this interim rule to the Rules Docket

Clerk, Office of the General Counsel,

Department of Housing and Urban

Development, Room 10276, 451 Seventh

Street SW., Washington, DC 20410.

Communications should refer to the

above docket number and title. A copy

of each communication submitted will

be available for public inspection and

copying during regular business hours

(7:30 a.m.–5:30 p.m. eastern time) at the

above address. HUD will not accept

comments sent by facsimile (FAX).

FOR FURTHER INFORMATION CONTACT:

Robert J. Coyle, Director, Title I

Insurance Division, 490 L’Enfant Plaza

East, Suite 3214, Washington, DC 20024,

telephone (202) 755–7400. This number

is not toll-free. Hearing- or speechimpaired individuals may access this

number via TTY by calling the Federal

Information Relay Service at (800) 877–

8339.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

Requirements

The information collection

requirements in this interim rule have

been approved by the Office of

Management and Budget (OMB) under

the Paperwork Reduction Act (44 U.S.C.

3501–3520) and were assigned OMB

control number 2502–0328. An agency

may not conduct or sponsor, and a

person is not required to respond to, a

collection of information unless the

collection displays a valid control

number.

Introduction

Under title I, section 2 of the National

Housing Act (12 U.S.C. 1703), the

Department insures approved lenders

against losses sustained as a result of

borrower defaults on property

improvement loans and manufactured

home loans. The regulations

implementing the Title I programs are in

24 CFR part 201.

This interim rule amends part 201 to

codify program changes that were

previously effectuated by waiving

various requirements of the regulations,

under the Secretary’s general waiver

authority in § 201.5(a). The Department

informed all approved Title I lenders of

these changes in three Title I Letters:

TI–428, issued July 22, 1994; TI–429,

issued October 6, 1994; and TI–431,

issued June 5, 1995.

These program changes were the

result of an outreach process in which

the Department received

recommendations from a wide variety of

program participants, including lenders,

State and local government agencies,

nonprofit organizations, manufactured

home retailers and producers, insurance

companies, trade associations, and

owners of manufactured homes. They

reflect a significant redirection of the

Title I programs to serve community

development needs, with a focus on

assisting low- and moderate-income

families in making needed repairs to

their homes, supporting revitalization

and rebuilding efforts in central cities,

upgrading housing in rural areas and

other underserved credit areas, and

enabling first-time homebuyers to

purchase affordable housing.

The waivers announced in TI–428,

TI–429, and TI–431 were limited in

duration until the Department could

make the necessary changes in the

regulations. Accordingly, as of the

effective date of this interim rule, those

waivers are no longer operative.

This interim rule also amends part

201 to make other changes necessary to

clarify program requirements, to enable

the Department to better utilize the Title

I programs in accomplishing its mission,

and to eliminate unnecessary

regulations. Each of the program

changes is discussed in the sections that

follow.

Changes Affecting Both Title I Loan

Programs

Changes in the Title I regulations that

apply to both property improvement

and manufactured home loans include

the following: clarifying dealer approval

requirements; limiting discount points

paid by borrowers; prohibiting discount

points from being collected from

dealers; prohibiting penalties for loan

prepayment; permitting financial

assistance in meeting the borrower’s

initial payment; providing that eligible

fees and charges will be established by

the Secretary, but removing the specific

fees and charges from the regulations;

revising flood insurance requirements;

and eliminating the annual adjustment

in the lender’s insurance reserves.

Dealer Approval Requirements

Section 201.27(a)(2) requires that the

dealer’s financial statement be prepared

by a licensed public accountant. This

licensing requirement was waived in

TI–428, because the Department

determined that it imposed a burden on

small dealers, particularly in the

property improvement loan program. In

place of the licensing requirement, the

Department stated that it expected the

lender to take into consideration

whether the financial statement was

prepared by someone who is

independent of the dealer and is

qualified by education and experience

to prepare such statements.

Accordingly, this interim rule amends

§ 201.27(a)(2) by eliminating the

requirement that the financial statement

be prepared by a licensed public

accountant and substituting the phrase

‘‘someone who is independent of the

dealer and is qualified by education and

experience to prepare such statements.’’

Payment of Discount Points by

Borrowers

Section 201.13 states that the lender

and the borrower may negotiate the

amount of any discount points to be

paid by the borrower as part of the

borrower’s initial payment. As used in

the Title I regulations, the Department

intends the term ‘‘discount points’’ to

have the same meaning it has

throughout the banking, finance, and

investment communities—that is, an up

front fee charged by the lender, separate

from interest but part of the total finance

charge, that is to increase the lender’s

yield on the loan to a competitive
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19789

position with other types of

investments.

In recent years, property improvement

lenders in certain areas of the country

have been charging high up-front fees to

borrowers and calling them ‘‘discount

points,’’ although they seem to have no

relationship to the lender’s overall yield

on the loan. Rather, they are being used

to cover the lender’s costs in originating

the loan and marketing the Title I

program. The Department’s Monitoring

Division has found evidence that these

‘‘discount points’’ are often financed

from the loan proceeds, in

contravention of the program

regulations. The result is that many lowand moderate-income borrowers, who

are otherwise creditworthy and need

Title I loans, cannot obtain them

because of the high discount points.

In TI–431, the Department announced

that the continued practice of

borrowers’ being charged high levels of

‘‘discount points’’ when there was no

benefit to the borrower in the form of a

lower interest rate was no longer

acceptable. TI–431 stated that the

collection of discount points from the

borrower was no longer permitted,

unless the lender could demonstrate a

clear relationship between the charging

of discount points and some tangible

benefit to the borrower such as a

compensating decrease in the interest

rate being charged.

To clarify the Department’s intent,

this interim rule amends § 201.2 to

define ‘‘discount points’’ as ‘‘a fee

charged by the lender, separate from

interest but part of the lender’s total

yield on the loan needed to maintain a

competitive position with other types of

investments. One discount point equals

one percent of the principal amount of

the loan. As discount points on the loan

increase, the interest rate can be

expected to decrease in a fairly

consistent relationship.’’

Payment of Discount Points by Dealers

Section 201.13 states that the lender

and the dealer may negotiate the

amount of any discount points to be

paid by the dealer for the benefit of the

borrower. The purpose of this provision,

which was added to the regulations in

1986, was to enable the dealer to assist

the borrower by paying some of the upfront costs of obtaining a Title I loan, or

by buying down the interest rate so that

the borrower could qualify for the loan.

Some lenders have abused this

provision, charging ‘‘discount points’’ to

dealers for the acceptance of borrowers

with marginal credit, and inflating the

cost of home improvements to the

detriment of low- and moderate-income

borrowers.

In TI–428, the Department clarified

that certain financeable fees and charges

incurred by the lender could be paid by

the dealer. TI–428 stated that the dealer

could advance the funds for these items

and could be reimbursed by the lender

from the loan proceeds. Alternatively,

the lender could advance the funds for

these items and then deduct their cost

from the loan proceeds paid to the

dealer. In either case, TI–428 made clear

that there must be full disclosure that

these items had been added to the price

of the goods and/or services being

provided by the dealer.

The Department informed lenders

that, with this clarification on the fees

and charges that may be paid by dealers,

the collection of discount points from

dealers was no longer necessary. The

Department urged lenders to

discontinue the practice of collecting

discount points from dealers when

those points were unrelated to the

financeable fees and charges. The

Department advised lenders that, if they

failed to comply with this request

voluntarily, the Department would

amend the regulations to prohibit any

collection of discount points from

dealers.

Since TI–428 was issued on July 22,

1994, the Department’s Monitoring

Division has found that many lenders

have continued the practice of

collecting ‘‘discount points’’ that are not

for the benefit of the borrower and bear

no relation to the payment of fees and

charges that may be paid by the dealer.

Therefore, this interim rule amends

§ 201.13 to prohibit the payment of

discount points by any party other than

the borrower. Conforming amendments

are also made to § 201.26(a)(5)(ii),

(b)(3)(vii), (b)(4)(vii), and (b)(4)(viii).

Loan Prepayment Without Penalty

Section 201.17 requires that the loan

note contain a provision permitting full

or partial prepayment of the loan.

That section previously contained a

requirement that when a loan was

prepaid in full, the lender must rebate

all unearned interest on the loan, except

for a minimum retained handling charge

if permitted by State or local law. The

Department had intended this

requirement to preclude lenders from

exacting a prepayment penalty.

The Department removed this

requirement in a final rule published in

the Federal Register on October 18,

1991 (56 FR 52414, 52430). As stated in

the preamble to the October 18, 1991

final rule, the Department determined

that, since interest on all loans with

applications approved on or after

January 15, 1986 must be calculated

according to the actuarial method, there

should be no unearned interest, and

therefore the requirement was

unnecessary. However, in amending

§ 201.17, the Department inadvertently

failed to include the replacement

language to prohibit lenders from

charging a prepayment penalty on loans

made since January 1986.

Some lenders have taken advantage of

this oversight to assess penalties of as

much as six months’ advance interest on

loans that are prepaid within the first

five years of the loan term. Assessing a

high prepayment penalty prevents many

borrowers from refinancing their loans

to take advantage of lower interest rates,

even when this may be to their benefit.

Prepayment penalties are particularly

troublesome in the case of low- and

moderate-income borrowers who do not

have the cash reserves to pay the

penalty.

Accordingly, this interim rule restores

the requirement in § 201.17 that full or

partial prepayment of the loan must be

without penalty, except that the

borrower may be assessed reasonable

and customary charges for recording a

release of the lender’s security interest

in the property, if permitted by State

law.

Financial Assistance on the Initial

Payment

Section 201.23(a) provides that, if any

part of the borrower’s initial payment is

loaned to the borrower, that loan must

be secured by property or collateral

owned by the borrower independently

of the property securing the Title I loan.

The Department has had several cases in

which financial assistance was available

from a governmental agency or

nonprofit organization to help low- and

moderate-income borrowers meet the

up-front costs of obtaining a property

improvement or manufactured home

loan. This assistance was in the form of

a loan requiring that the borrower

provide a ‘‘soft second’’ lien on the

property, so that the loan might be

repaid at the time the property is sold.

In these situations, the Department

needs greater flexibility to allow for

exceptions to the requirement that the

loan be secured by a different property.

Accordingly, this interim rule amends

§ 201.23(a) to provide that if any part of

the borrower’s initial payment is loaned

to the borrower, that loan must be

secured by property or collateral owned

by the borrower independently of the

property securing the Title I loan, unless

the Secretary’s prior approval is

obtained for an exception to this

requirement.
19790 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

Eligible Fees and Charges

Section 201.25(a) establishes

maximum origination fees that may be

charged in connection with any new or

refinanced Title I loan. Section

201.25(b) lists those fees and charges

that may be financed in a property

improvement or manufactured home

loan, as long as their inclusion does not

increase the total principal obligation

beyond the maximum loan amounts in

§ 201.10. Section 201.25(c) lists fees and

charges that may be collected from the

borrower in the initial payment, but

may not be included in the loan amount

or otherwise financed or advanced by

the dealer, manufacturer, or any other

party to the loan transaction.

In TI–429 and TI–431, the Department

waived § 201.25(a) and (c)(1) to increase

the maximum origination fee for any

new property improvement loan and to

permit this fee to be financed. In TI–

428, the Department waived § 201.25(c)

(3) and (4) to permit recording fees,

recording taxes, filing fees, and

documentary stamp taxes to be financed

for both property improvement and

manufactured home loans. In that letter,

the Department also waived

§ 201.25(c)(8) to permit appraisal fees in

connection with the purchase or

refinancing of a manufactured home

and/or lot to be financed.

However, as a result of the

Department’s page-by-page review of its

regulations, it has determined that the

inclusion of detailed lists of eligible fees

and charges in the program regulations

is unnecessary. Changes to the list of

eligible fees and charges are sometimes

needed, and program participants

would benefit greatly if these changes

could be made in a more timely manner

than through the rulemaking process.

Accordingly, this interim rule amends

§ 201.25 (a) and (b) to provide that the

Secretary will establish a list of fees and

charges that may be included in

property improvement loans and

manufactured home loans, respectively,

provided that they are incurred in

originating the loan and their inclusion

does not increase the total principal

obligation beyond the maximum loan

amounts in § 201.10. The interim rule

also amends § 201.25(c) to provide that

the Secretary will establish a list of fees

and charges incurred by the lender that

may be collected from the borrower in

the initial payment, but may not be

included in the loan amount or

otherwise financed or advanced by the

dealer, the manufacturer, or any other

party to the loan transaction.

Concurrently with the publication of

this interim rule, the Department will

issue a Title I Letter that identifies the

specific fees and charges that may be

financed in a property improvement or

manufactured home loan, as well as the

fees and charges that may be collected

from the borrower but may not be

financed in the loan. The fees and

charges that were the subject of waivers

in TI–428, TI–429, and TI–431 will be

included in the Title I Letter.

Revised Flood Insurance Requirements

Section 201.28(a) requires flood

insurance coverage if the property

securing a Title I loan is located in a

special flood hazard area as identified

by the Federal Emergency Management

Agency (FEMA). The National Flood

Insurance Reform Act of 1994 (Pub. L.

103–325, approved September 23, 1994)

amended and expanded the flood

insurance requirements of the Flood

Disaster Protection Act of 1973 (Pub. L.

93–234, approved December 31, 1973).

The 1994 Act requires that flood

insurance be obtained at any time

during the term of the loan that a

supervised lender or its servicer

determines that the secured property is

located in a special flood hazard area

identified by FEMA. If the borrower

does not obtain flood insurance within

45 days after being notified by the

lender or servicer that it is required, the

lender is expected to force-place the

insurance and bill the borrower for the

premiums.

It has been a longstanding policy of

the Department that all secured Title I

loans are subject to Federal flood

insurance requirements. The

Department expects all lenders, whether

supervised or nonsupervised, to comply

fully with the requirements of the 1994

Act. Accordingly, this interim rule

amends § 201.28(a) to reflect the new

statutory requirements and make them

applicable to all Title I lenders.

Lenders may make their own flood

hazard area determinations, or they may

use outside firms that specialize in

providing this information. If an outside

firm is used, the fee for obtaining the

flood hazard area determination,

including the cost of life-of-the-loan

determinations, may be included in the

loan amount, as long as the maximum

loan amounts in § 201.10 are not

exceeded. Permitting these fees to be

financed is a change from previous

Departmental policy. The Title I Letter

on fees and charges that is to be issued

concurrently with the publication of

this interim rule includes this policy

change.

Annual Adjustment in Insurance

Reserves

Section 201.32(b) requires that a 10

percent annual reduction be applied to

each lender’s insurance coverage reserve

account after the lender has had a Title

I contract of insurance for more than

five years. In TI–431, the Department

announced that it would no longer

apply an annual adjustment to any

lender’s insurance reserves, beginning

on October 1, 1995. The Department

concluded that the annual reduction no

longer serves the purpose of protecting

the Federal Housing Administration

(FHA) insurance fund against excessive

claim losses caused by lenders that

exhaust their insurance reserves. Rather,

it has penalized lenders who built their

loan volume methodically over a period

of years and those who maintained low

claim rates.

The Department instituted the annual

adjustment of insurance reserves in the

early 1950s, when the Department was

extending the Title I program for a time

period that exceeded the maximum

allowable term of the loans being made.

In that lending climate, all lenders held

loans in their own portfolios. The

Department’s concern was that lenders

might accumulate reserves that were

excessive in relation to the loans

remaining in the lenders’ portfolios.

In today’s lending environment, the

annual adjustment has become an

anachronism. Many lenders that

originate Title I loans sell them to

servicing lenders; the servicing lenders

then sell them to investing lenders that

issue securities backed by the loans for

sale to investors. With the movement of

loans from lender to lender, the annual

adjustment is no longer meaningful or

effective in protecting the program

against excessive claim losses. Instead,

it has been restricting the growth of the

Title I program, creating uncertainty

about the lender’s future insurance

coverage, and preventing the active

participation of larger, better capitalized

lenders in the program.

Accordingly, this interim rule amends

§ 201.32 by removing paragraph (b). In

addition, the interim rule makes

conforming amendments to §§ 201.1 and

201.32(a) to remove references to the

annual adjustment in insurance

reserves.

Changes Affecting Property

Improvement Loans

Changes to the Title I regulations that

are applicable only to property

improvement loans include the

following: eliminating the equity

requirement for loans over $15,000,

increasing the maximum origination fee

and the maximum amount of an

unsecured loan, permitting greater use

of the program to improve manufactured

homes, removing impediments to

greater use of the program for improving
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19791

multifamily structures, eliminating the

completion certificate requirement

under certain circumstances, and

revising procedures to assist victims of

major disasters.

Elimination of the Equity Requirement

Sections 201.20(a)(3) and 201.26(a)(1)

of the regulations require that the

borrower have equity in the property at

least equal to the loan amount on any

property improvement loan (or

combination of such loans) exceeding

$15,000. In TI–428, the Department

partially waived this equity

requirement, so that it no longer applied

when the property to be improved was

occupied by the borrower.

The equity requirement was intended

to provide more secure collateral for

larger property improvement loans.

However, after three years of experience

with the requirement, the Department

concluded that it was costly and timeconsuming, with no significant risk

protection for either the lenders or the

Department. In the event of default, it

was usually not cost-effective for the

lender to foreclose on the property,

because the costs of carrying the first

mortgage, disposing of the property, and

maintaining it prior to sale would

consume whatever equity there might

be. The equity requirement was

preventing the people that Title I was

created to serve (creditworthy borrowers

with limited equity) from obtaining

loans to carry out needed

improvements.

The waiver granted by TI–428 has

benefited many creditworthy borrowers,

but only when the property was owneroccupied. The Department is concerned

that the equity requirement is

preventing the property improvement

loan program from being used in the

revitalization of central cities, where

much of the housing stock consists of

small multifamily buildings (e.g., two to

ten units). Title I loans are usually not

available for these multifamily buildings

because the owner does not live on-site

and does not have enough equity to

qualify for a loan.

Accordingly, this interim rule

eliminates the equity requirement in its

entirety by removing §§ 201.20(a)(3) and

201.26(a)(1)(iii). In addition, with the

publication of this interim rule and

upon its effective date, the Department

is withdrawing the Federal Register

notice published on January 8, 1992 (57

FR 610) that established the procedures

for determining the market value of the

property and evaluating whether the

borrower had sufficient equity.

Increased Maximum Origination Fee

Section 201.25(a) limits the maximum

origination fee that may be paid by the

borrower to one percent of the loan

amount on any new Title I loan, and to

one percent of the additional advance

on any existing Title I loan being

refinanced by the lender. Section

201.25(c)(1) specifies that this

origination fee may not be financed in

the loan.

In TI–429, the Department waived

these two limitations to permit the

financing of an origination fee of up to

three percent of the loan amount.

However, this waiver was only for

single family property improvement

loans made to low- and moderateincome borrowers in connection with a

housing assistance program

administered by a State or local

government agency or a nonprofit

organization. The waiver was intended

to serve as an inducement for the

creation of public-private partnerships

and to reduce the out-of-pocket

expenses for low- and moderate-income

borrowers.

In TI–431, the Department extended

the waiver of the one percent limitation

on the origination fee to all property

improvement loans, and a maximum

origination fee of five percent of the

loan amount is now permitted on all

new property improvement loans. In

addition, the Department waived the

prohibition against financing this

origination fee, as long as the maximum

loan amounts in § 201.10 are not

exceeded. The Department recognized

that a one percent origination fee was

simply not enough to cover the lenders’

costs in originating these loans, when

the origination fee on the average

property improvement loan of $13,000

is limited to $130. These waivers allow

property improvement lenders to charge

a more reasonable origination fee, while

at the same time reducing the out-ofpocket expenses of borrowers obtaining

Title I loans.

As discussed above, the Department is

amending § 201.25(a), (b), and (c) to

provide that the Secretary will establish

eligible fees and charges. However, the

Department is removing the specific fees

and charges from the regulations. In a

Title I Letter to be issued concurrently

with the publication of this interim rule,

the Department is revising the list of

fees and charges that may be financed

to permit the lender to charge a

maximum origination fee of five percent

of the loan amount on any new property

improvement loan, as long as the fee has

been incurred and its inclusion does not

increase the total principal obligation

beyond the maximum loan amounts in

§ 201.10. The maximum origination fee

for a new manufactured home loan

remains at one percent of the loan

amount and cannot be financed.

In a related change, the Department is

revising the list of nonfinanceable fees

and charges to permit the lender to

assess a handling charge of up to one

percent of the new loan amount for

refinancing an existing Title I loan. This

change will enable lenders to charge a

more reasonable fee for the work

involved in processing a loan

refinancing, and it is included in the

Title I Letter that is to be issued

concurrently with the publication of

this interim rule.

Maximum Amount for Unsecured Loans

Section 201.24(a) limits the maximum

amount of an unsecured property

improvement loan to $5,000. In TI–428,

the Department waived this limitation

to allow lenders to make unsecured

property improvement loans up to

$7,500. This increase in the unsecured

loan amount makes it possible for

lenders to finance small home

improvement projects without obtaining

and recording a security interest in the

property being improved. It also sets the

threshold for obtaining a security

interest at the same dollar amount

required for on-site inspections of

property improvements. Accordingly,

this interim rule amends § 201.24(a) by

substituting ‘‘$7,500’’ for ‘‘$5,000.’’

Manufactured Home Improvement

Loans

Under the definition of

‘‘manufactured home improvement

loan’’ in § 201.2, the loan proceeds may

be used only to improve the

manufactured home, but cannot be used

for site improvements. In TI–428, the

Department waived this restriction to

permit the proceeds of a manufactured

home improvement loan to be used for

site improvements, as long as the

borrower is the owner of the underlying

real estate. Accordingly, this interim

rule amends § 201.2 to permit the

proceeds of a manufactured home

improvement loan to be used for site

improvements if the borrower is the

owner of the underlying real estate.

In a related change, the interim rule

also amends § 201.10(a)(1)(iv) to

increase the maximum loan amount for

a manufactured home improvement

loan from $5,000 to $7,500. This

increase is needed to keep pace with the

increased cost of home improvements,

as measured by the change in the Home

Maintenance and Repair component of

the Consumer Price Index since the

$5,000 limit was established in 1980.

Between 1980 and 1994, the Home
19792 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

Maintenance and Repair component

increased by 59 percent. Thus, a 50

percent increase in the maximum loan

amount is warranted.

Ownership of Multifamily Properties

The definition of ‘‘multifamily

property improvement loan’’ in § 201.2

provides that the multifamily structure

may not be owned by a corporation,

partnership, or trust. As noted above,

the Department is interested in

expanding the use of Title I property

improvement loans to rehabilitate small

multifamily structures in central cities.

The Department has occasionally

waived this restriction on ownership to

permit multifamily property

improvement loans to be made to

nonprofit corporations or partnerships

that own and operate housing primarily

for low- and moderate-income families.

To give the Department greater

flexibility in approving these types of

nonprofit entities as Title I borrowers

and to eliminate the delays inherent in

the waiver process, this interim rule

amends § 201.2 to allow for exceptions

to the prohibition against corporations,

partnerships, and trusts with the prior

approval of the Secretary.

Approval for Loan Amounts Over

$25,000

Section 201.10(a)(2) requires the prior

approval of the Secretary for any

property improvement loan that will

result in the borrower having a total

unpaid principal obligation in excess of

$25,000, whether in one Title I loan or

several loans. The Department has

determined that, because of staff

reductions and the restructuring of its

field offices, the continued imposition

of this requirement will only serve to

delay loan originations.

In addition, it is an impediment to the

use of multifamily property

improvement loans to rehabilitate small

multifamily structures in central cities.

Accordingly, this interim rule amends

§ 201.10 by removing paragraph (a)(2).

Completion Certificate Requirements

Section 201.40(b) of the regulations

requires that a borrower obtaining a

direct property improvement loan must

submit a completion certificate to the

lender after completion of the work, but

not later than 6 months after

disbursement of the loan proceeds. In

TI–429, the Department waived the

requirement for submitting a completion

certificate for situations in which the

borrower applies for a property

improvement loan through a State or

local government agency or a nonprofit

organization, the loan proceeds are held

in an escrow account pending

completion of the improvements, and

the loan proceeds are disbursed from

the escrow account in stages, based

upon the percentage of work completed.

The Department determined that, under

these conditions, the controlled

disbursement of the loan funds with the

borrower’s approval obviates the need

for obtaining a completion certificate.

Accordingly, this interim rule amends

§ 201.40 by adding a new paragraph

(b)(3) to exempt the borrower from

submitting a completion certificate

when the property improvement loan is

made by or on behalf of a State or local

government agency or a nonprofit

organization, the loan proceeds are held

in an escrow account pending

completion of the improvements, and

the loan proceeds are disbursed from

the escrow account in stages, with the

written approval of the borrower and

based upon the percentage of work

completed.

Assistance to Disaster Victims

Section 201.20(b)(3) provides that the

proceeds of a property improvement

loan may be used only for

improvements that are started after loan

approval. The Department has waived

this limitation in connection with

Presidentially-declared disasters such as

the Northridge, California earthquake

and Hurricanes Marilyn and Opal. In

addition, the Department has waived

this limitation in individual cases when

the borrower needed to begin emergency

repairs prior to loan approval.

The Department has concluded that

greater use would be made of the Title

I program to assist disaster victims in

repairing their homes if the regulations

provided for an exception to

§ 201.20(b)(3) whenever there is a major

disaster declared by the President. In

addition, the Department’s ability to

address other emergency situations

would be enhanced if greater flexibility

were available to grant exceptions to

this limitation on starting the

improvements.

Accordingly, this interim rule amends

§ 201.20(b)(3) to provide that the loan

proceeds shall only be used to finance

property improvements that are started

after loan approval, unless (a) the prior

approval of the Secretary is obtained for

an exception, or (b) the property is

located in a major disaster area declared

as such by the President, and the lender

determines that emergency action is

needed to repair damage resulting from

the disaster.

The interim rule also amends

§ 201.54(b)(2) to permit the Secretary to

extend the claim filing period on a

property improvement loan when the

borrower had experienced a loss of

income or other financial difficulties

directly attributable to a major disaster

declared by the President, and

additional time was needed to provide

forbearance.

Changes Affecting Manufactured Home

Loans

Changes in the Title I regulations that

are applicable only to manufactured

home loans include the following:

reducing the minimum required

downpayment and revising the

maximum loan amount to compensate

for the lower downpayment, increasing

the maximum expense-to-income ratios

for borrowers purchasing energyefficient manufactured homes, and

increasing the maximum dollar

allowances for repossession expenses

and legal fees.

Reduced Downpayment Requirements

Section 201.23 of the regulations

requires a minimum cash downpayment

of five percent of the first $5,000 and ten

percent of the balance of the purchase

price to obtain a new manufactured

home or a manufactured home and lot.

To purchase an existing manufactured

home or a developed lot on which to

place a manufactured home, the

minimum downpayment is ten percent

of the purchase price.

In TI–428, the Department waived the

present downpayment requirements to

require a minimum cash downpayment

of five percent of the purchase price for

all manufactured home purchase loans,

manufactured home lot loans, and

combination loans. The Department

decided that a five percent minimum

downpayment would help restore Title

I as a financing vehicle for first-time

buyers to achieve affordable

homeownership. It would create a

different loan program from

conventional financing and would

enable lenders and dealers to offer lowand moderate-income families a real

alternative.

Accordingly, this interim rule amends

§ 201.23(b), (c), and (d) by replacing the

existing downpayment requirements in

these sections with ‘‘five percent of the

purchase price.’’

Changes in Maximum Loan Calculation

Because of the reduction in the

minimum downpayment to five percent,

TI–428 also granted waivers that apply

to the maximum loan amount

calculations in § 201.10(b), (c), and (d).

The maximum loan amount for the

purchase of a new manufactured home

under § 201.10(b)(1) or for the purchase

of a new manufactured home and lot

under § 201.10(d)(1) was based upon

125 percent of the wholesale (base)
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19793

price of the home, itemized options, and

freight charge. The Department

increased the percentage to 130 percent

to conform with the reduced

downpayment requirement.

In a related change, the Department

also waived the maximum dollar

allowances applicable to delivery and

set-up of the home in § 201.10(b)(1) and

(d)(1), and to skirting in § 201.10(b)(1).

These waivers ensure that the

downpayment is a true 5 percent in

most cases, and give lenders and dealers

greater flexibility in dealing with State

and local variations in installation

standards.

For the purchase of an existing

manufactured home under

§ 201.10(b)(2) or a manufactured home

lot under § 201.10(c), the maximum loan

amount was calculated at 90 percent of

the appraised value or purchase price,

whichever was less. To conform with

the reduced downpayment requirement,

the Department increased the

percentage to 95 percent.

Accordingly, this interim rule amends

§ 201.10(b), (c), and (d) in the following

respects:

1. By replacing ‘‘125 percent’’ with

‘‘130 percent’’ in § 201.10(b)(1)(i) and

(d)(1)(i);

2. By removing ‘‘not to exceed $750

per module’’ in § 201.10(b)(1)(iii);

3. By replacing ‘‘Skirting costs, not to

exceed $500’’ with ‘‘The actual dealer’s

cost of skirting’’ in § 201.10(b)(1)(iv);

4. By replacing ‘‘90 percent’’ with ‘‘95

percent’’ in § 201.10(b)(2) and (c); and

5. By removing ‘‘not to exceed $1,200

per module’’ in § 201.10(d)(1)(iii).

Increase in Expense-to-Income Ratios

Section 201.22(b) states that, for any

Title I loan, the borrower’s income must

be adequate to meet the periodic

payments required by the loan, as well

as the borrower’s other housing

expenses and recurring charges. For a

borrower’s income to be considered

adequate, housing expenses and total

fixed expenses generally may not

exceed maximum percentages of

effective gross income established by

the Secretary. On October 18, 1991 (56

FR 52438), the Department published a

notice in the Federal Register setting

the maximum expense-to-income ratios

for manufactured home loans at 29

percent for total housing expenses and

41 percent for total fixed expenses.

In TI–428, the Department waived the

29 percent and 41 percent ratios in favor

of higher ratios of 31 percent and 43

percent, respectively, for borrowers who

purchased manufactured homes with a

date of manufacture on or after October

25, 1994, the effective date of the

Department’s new energy conservation

standards. The Department adopted the

higher ratios to recognize that while

energy-efficient homes are more

expensive, borrowers will be spending

less of their income on fuel costs.

Since the Department has already

notified lenders of this change in the

maximum expense-to-income ratios by

Title I Letter, this interim rule amends

§ 201.22(b)(1) to eliminate the need for

publication of a Federal Register notice

to advise lenders of the change. The

Department has decided that lenders

can be more effectively notified of

future changes in maximum expense-toincome ratios through Title I Letters or

by including the information in program

handbooks.

Repossession Expenses and Legal Fees

Section 201.55(b)(3) sets the

maximum dollar allowances for removal

and transportation of a repossessed

manufactured home to an off-site

location at $750 per module. In TI–428,

the Department waived this limit to

permit an increase in the allowance to

$1,000 per module, which more

accurately reflects the lender’s cost for

this activity. Accordingly, this interim

rule amends § 201.55(b)(3) by

substituting ‘‘$1,000’’ for ‘‘$750.’’

Section 201.55(b)(7) sets the

maximum dollar allowance for

attorney’s fees in connection with a

claim on a manufactured home loan at

$500. In TI–428, the Department waived

this limit to permit an increase in the

allowance to $1,000, which more

accurately reflects the cost for legal

services. Accordingly, this interim rule

amends § 201.55(b)(7) by substituting

‘‘$1,000’’ for ‘‘$500.’’

Clarifying and Conforming

Amendments

The Department is also amending

other sections of part 201 to clarify the

regulations and conform them with

current practice in the operation of the

Title I program. The Department calls

particular attention to the following

amendments:

1. In § 201.2, the Department is

revising the definition of ‘‘existing

structure’’ to clarify that the 90-day

completion and occupancy requirement

applies to all manufactured homes,

whether they are real or personal

property. In a conforming change, the

Department is revising § 201.20(b)(1) to

remove redundant language on the 90-

day completion and occupancy

requirement.

2. In § 201.2, the Department is

revising the definition of ‘‘manufactured

home’’ to clarify that the construction

standards for existing manufactured

homes apply only to loans for the

purchase or refinancing of such homes,

and not to property improvement loans

on manufactured homes.

3. In § 201.2, the Department is

revising the definition of ‘‘State’’ to

substitute ‘‘the Commonwealth of the

Northern Mariana Islands’’ for ‘‘the

Trust Territory of the Pacific Islands,’’

since the remainder of the Trust

Territory is now independent and is no

longer eligible to participate in the Title

I programs.

4. In § 201.3, the Department is

removing paragraph (b), which indicates

the applicability of amendments made

to part 201 by a final rule that was

published in the Federal Register on

October 18, 1991 (56 FR 52414). The

paragraph is now obsolete because

many of the regulatory sections listed in

the paragraph have been eliminated or

changed. To the extent that it is still

applicable, the preamble to the final

rule contains the same information.

5. The Department is revising

§ 201.10(b)(3) and (d)(3) to clarify that

the ‘‘purchase price’’ used in connection

with manufactured home purchase

loans and combination loans includes

the retail cost to the borrower of all

items set forth in the purchase contract,

not just those items that are eligible for

inclusion in the Title I loan.

6. The Department is revising

§§ 201.10(f)(3) and 201.11(c)(2) to clarify

that these provisions apply to the

refinancing of any uninsured

manufactured home loan, and are not

limited to manufactured home purchase

loans and combination loans.

7. The Department is revising

§§ 201.10(f)(4) and 201.11(c)(3) to clarify

that these provisions apply anytime the

borrower is refinancing a manufactured

home lot already owned by the borrower

in connection with the purchase of a

manufactured home.

8. The Department is revising

§§ 201.10(f)(5) and 201.11(c)(4) to clarify

that these provisions apply anytime the

borrower is refinancing a manufactured

home already owned by the borrower in

connection with the purchase of a

manufactured home lot. The

Department is also increasing the

maximum loan amount in § 201.10(f)(5)

to $64,800, in conformance with a final

rule published in the Federal Register

on July 30, 1993 (58 FR 40996).

9. The Department is revising § 201.11

to add a new paragraph (a)(3), limiting

the maximum term for an historic

preservation loan to 15 years and 32

days. The Department inadvertently

omitted this provision when it changed

the maximum term for other types of

property improvement loans in a final

rule published in the Federal Register

on September 30, 1992 (57 FR 45244).
19794 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

10. The Department is revising

§ 201.12, which sets forth requirements

for the note, to remove a prohibition

against the use of discount or add-on

notes in connection with any Title I

loan approved on or after January 15,

1986. Although such loans remain

uninsurable, the Department believes

that it is no longer necessary to spell out

this prohibition, since the Department is

revising § 201.13 as described in

paragraph 10, below.

11. The Department is revising

§ 201.13 to state that interest on a Title

I loan shall be ‘‘calculated on a simple

interest basis,’’ rather than ‘‘calculated

according to the actuarial method.’’

12. The Department is revising

§ 201.20(a)(2) to specify that the

manufactured home must be the

principal residence of the borrower to

be eligible for a manufactured home

improvement loan. In a conforming

change, this interim rule removes the

same provision from § 201.20(b)(1),

since that section deals with the use of

the loan proceeds.

13. The Department is further revising

§ 201.20(b)(1) to include provisions

previously found in § 201.26(a)(2). As

revised, § 201.20(b)(1) requires that, if

the borrower plans to use a dealer or

contractor to carry out the property

improvements, the lender shall obtain a

copy of a proposal or contract that

describes in detail the work to be

performed and the estimated or actual

cost. Alternatively, if the borrower plans

to carry out the work without the

services of a dealer or contractor, the

borrower shall be required to furnish a

detailed written description of the work

to be performed, the materials to be

furnished, and their estimated cost. In a

conforming change, the Department is

revising § 201.26(a)(2) to remove the

present language and to refer to the

requirements of § 201.20(b)(1).

14. The Department is revising

§§ 201.20(b)(2) and 201.21(b)(5) to

eliminate the need for publication of a

Federal Register notice to notify lenders

about items and activities that are

ineligible for financing in property

improvement or manufactured home

loans. The Department has decided that

lenders are more effectively notified of

this information through Title I Letters

or by including the information in

program handbooks.

15. The Department is revising

§ 201.21(b)(3) to specify that wheels and

axles cannot be purchased with the

proceeds of a manufactured home loan,

and to clarify that the cost of furniture,

wheels, and axles shall not be included

in the maximum loan amount calculated

under § 201.10(b)(1) or (d)(1). The

Department inadvertently omitted the

reference to wheels and axles from this

section when it implemented the

prohibition against financing these

items in a final rule published in the

Federal Register on October 18, 1991

(56 FR 52414).

16. In § 201.22(b)(2), the Department

is revising the definition of ‘‘other

recurring charges’’ to remove child care

expenses as an item that must be

considered in determining whether the

borrower’s income is adequate to qualify

for a property improvement or

manufactured home loan. This change is

consistent with modifications in credit

underwriting requirements that have

taken place in the Department’s other

loan and mortgage insurance programs.

17. The Department is revising

§ 201.22(c)(1) to clarify the prohibition

against a lender approving a Title I loan

if the borrower is in default on a

previous loan obligation owed to or

insured or guaranteed by the Federal

Government.

18. The Department is revising

§ 201.24(a)(1) to clarify that the

requirement that the Title I loan must

have lien priority over any uninsured

loan made by the lender at the same

time does not apply when the uninsured

loan is a first mortgage loan for the

purchase or refinancing of the property.

19. The Department is revising

§ 201.25(d) to clarify that neither the

lender nor the borrower may pay a

referral fee to any third party in

connection with the origination of a

Title I loan. Prohibiting the borrower

from paying a referral fee is consistent

with the wording in the preambles to

both the proposed rule published in the

Federal Register on January 29, 1991

(56 FR 3302) and the final rule

published in the Federal Register on

October 18, 1991 (56 FR 52414), but the

Department inadvertently omitted this

prohibition from the text of the

regulation.

20. The Department is revising

§ 201.26(b)(6) to clarify that an

inspection by the lender or its agent on

a direct manufactured home loan is

required only when the transaction

involves the relocation of the

manufactured home to a new homesite.

21. The Department is revising

§ 201.27(a)(5) to clarify that the lender is

required to notify the Department that it

has terminated its approval of a dealer

only if the termination was because the

dealer did not satisfactorily perform its

contractual obligations to borrowers, did

not comply with Title I requirements, or

was unresponsive to the lender’s

supervision and monitoring

requirements.

22. The Department is removing

§ 201.27(b)(2), which provided for

limited recourse agreements between

manufactured home lenders and dealers

for uninsurable loans, because it is

obsolete.

23. In § 201.32(a)(1), the Department

is eliminating the requirement that

separate Title I contracts of insurance

and separate reserve accounts be

established for lenders that originate,

purchase, or hold both property

improvement and manufactured home

loans. The Department has determined

that requiring two contracts of insurance

poses an unnecessary obstacle to more

widespread lender participation in the

Title I program.

24. The Department is revising

§ 201.52 to clarify that when a lender

accepts a voluntary conveyance of title

or a voluntary surrender of the property

securing a manufactured home loan, it

is not necessary to send the borrower

the notice of default and acceleration

that is otherwise required by

§ 201.50(b).

25. The Department is revising

§ 201.53 to clarify that in determining

the best price obtainable for a

manufactured home property, cost items

other than repairs may be deducted

from the actual sales price, so that a

valid comparison can be made with the

appraised value of the property before

repairs.

Justification for Interim Rulemaking

The Department generally publishes a

rule for public comment before issuing

a rule for effect, in accordance with its

regulations on rulemaking in 24 CFR

part 10. However, part 10 provides that

prior public procedure will be omitted

if HUD determines that it is

‘‘impracticable, unnecessary, or contrary

to the public interest’’ (24 CFR 10.1).

Many of the changes in this interim

rule merely codify the Secretary’s

waiver of burdensome regulatory

requirements. As noted earlier, the

Department developed many of these

changes through an outreach process

that involved a wide variety of program

participants, and the Department

notified all approved lenders of the

changes through Title I Letters. The

Department considered the alternatives

and determined that these changes are

generally compatible with industry

practice and are necessary to increase

the availability of credit to qualified

borrowers and to further the goals of the

National Housing Act. Greater use of the

Title I program will help preserve the

nation’s existing housing stock and

rebuild neighborhoods.

Furthermore, implementation of the

interim rule’s provisions is needed as

soon as possible to eliminate the

practice of lenders collecting discount
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19795

points from dealers that are not for the

benefit of borrowers, and to stop the

continued assessment of excessive

prepayment penalties that are

preventing low- and moderate-income

borrowers from refinancing their loans.

Therefore, the Department has

determined that good cause exists to

omit prior public procedure for this

interim rule because such delay would

be contrary to the public interest and

unnecessary.

However, the Department is interested

in obtaining as much public input as

possible as to how this interim rule

could be further improved or

streamlined. The Department is

allowing for a 60-day public comment

period, after which it will consider the

issues raised by the commenters in its

development of a final rule.

Regulatory Reinvention

Consistent with Executive Order

12866 and President Clinton’s

memorandum of March 4, 1995 to all

Federal departments and agencies on

the subject of regulatory reinvention, the

Department is conducting a page-bypage review of all its regulations to

determine whether certain regulations

can be eliminated. As part of this

review, the Department is publishing

this interim rule, which eliminates from

the Code of Federal Regulations many of

the burdensome substantive

requirements in the Title I programs.

This interim rule also removes from the

regulations the lists of eligible fees and

charges under the Title I programs. It is

unnecessary and burdensome for these

lists to be included in the regulations.

The Secretary will instead notify

lenders of these fees and charges

directly through Title I Letters.

Findings and Other Matters

Executive Order 12866

The Office of Management and Budget

(OMB) reviewed this interim rule under

Executive Order 12866, Regulatory

Planning and Review, issued by the

President on September 30, 1993. Any

changes made in this interim rule

subsequent to its submission to OMB

are identified in the docket file, which

is available for public inspection during

regular business hours in the Office of

the Rules Docket Clerk, Office of the

General Counsel, Department of

Housing and Urban Development, Room

10276, 451 Seventh Street SW.,

Washington, DC 20410.

Environmental Impact

A Finding of No Significant Impact

with respect to the environment was

made in accordance with the

Department’s regulations at 24 CFR Part

50, which implement section 102(2)(C)

of the National Environmental Policy

Act of 1969. The Finding of No

Significant Impact is available for public

inspection as provided under the

section of this preamble entitled

‘‘Executive Order 12866.’’

Regulatory Flexibility Act

The Secretary, in accordance with the

Regulatory Flexibility Act (5 U.S.C.

605(b)), has reviewed and approved this

interim rule, and in so doing certifies

that it will not have a significant

economic impact on a substantial

number of small entities. The majority

of institutions that participate in the

Title I program are large depository

institutions, and nearly all of the

changes relieve regulatory burdens for

all entities seeking to conduct Title I

loan transactions.

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that this interim rule will

not have substantial direct effects on

States or their political subdivisions, or

the relationship between the Federal

Government and the States, or on the

distribution of power and

responsibilities among the various

levels of Government. Specifically, the

requirements of this interim rule are

directed to lenders and borrowers, and

will not impinge upon the relationship

between the Federal Government and

State and local governments. As a result,

the interim rule is not subject to review

under the Order.

Executive Order 12606, The Family

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12606, The Family, has

determined that this interim rule will

not have potential for significant impact

on family formation, maintenance, or

general well-being, and thus is not

subject to review under the Order. The

interim rule involves requirements for

property improvement and

manufactured home loans insured by

the Department. Any effect on the

family will likely be indirect and

insignificant.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic

Assistance program numbers are:

14.110 Manufactured Home Loan

Insurance—Financing Purchase of

Manufactured Homes as Principal

Residences of Borrowers;

14.142 Property Improvement Loan

Insurance for Improving All Existing

Structures and Building of New

Nonresidential Structures; and

14.162 Mortgage Insurance—

Combination and Manufactured Home

Lot Loans.

List of Subjects in 24 CFR Part 201

Health facilities, Historic

preservation, Home improvement, Loan

programs—housing and community

development, Manufactured homes,

Mortgage insurance, Reporting and

recordkeeping requirements.

Accordingly, 24 CFR part 201 is

amended as follows:

PART 201——TITLE I PROPERTY

IMPROVEMENT AND MANUFACTURED

HOME LOANS

1. The authority citation for 24 CFR

part 201 continues to read as follows:

Authority: 12 U.S.C. 1703; 42 U.S.C. 1436a

and 3535(d).

2. Section 201.1 is amended by

adding a period after the phrase

‘‘§ 201.2’’, and by revising the fourth

sentence, to read as follows:

§ 201.1 Purpose.

* * * The insurance can cover up to

10 percent of the amount of all insured

Title I loans in the financial institution’s

portfolio, as reflected in the total

amount of insurance coverage contained

at any time in an insurance coverage

reserve account established by the

Secretary, less amounts for insurance

claims paid. * * *

3. Section 201.2 is amended by:

a. Removing the paragraph

designations (a) through (ll);

b. Adding a new definition of the term

‘‘Discount points’’ in alphabetical order;

c. Revising the first sentence of the

introductory text of the definition of the

term ‘‘Existing structure’’;

d. Revising the second sentence in

paragraph (2) of the definition of the

term ‘‘Lender’’;

e. Revising the third sentence of the

definition of the term ‘‘Manufactured

home’’;

f. Adding a sentence at the end of the

definition of the term ‘‘Manufactured

home improvement loan’’; and

g. Revising the definitions of the

terms ‘‘Multifamily property

improvement loan’’ and ‘‘State’’, to read

as follows:

§ 201.2 Definitions.

* * * * *

Discount points means a fee charged

by the lender, separate from interest but

part of the total finance charges on the

loan, that is part of the lender’s total

yield on the loan needed to maintain a

competitive position with other types of
19796 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

investments. One discount point equals

one percent of the principal amount of

the loan. As discount points on the loan

increase, the interest rate can be

expected to decrease in a fairly

consistent relationship.

Existing structure means a dwelling,

including a manufactured home, that

was completed and occupied at least 90

days prior to an application for a Title

I loan, or a nonresidential structure that

was a completed building with a

distinctive functional use prior to an

application for a Title I loan. * * *

* * * * *

Lender * * *

(2) For purposes of loan origination

under subparts A, B, and C of this part,

the term ‘‘lender’’ also includes a ‘‘loan

correspondent’’ as defined in this

section.

* * * * *

Manufactured home * * * To qualify

for a manufactured home loan insured

under this part, an existing

manufactured home must have been

constructed in accordance with

standards published at 24 CFR part 3280

and must meet standards similar to the

minimum property standards applicable

to existing homes insured under title II

of the Act, as prescribed by the

Secretary.

Manufactured home improvement

loan * * * The proceeds of a

manufactured home improvement loan

may also be used for improvements to

the homesite, as long as the borrower is

the owner of the home and the

underlying real estate.

* * * * *

Multifamily property improvement

loan means a loan to finance the

alteration, repair, improvement, or

conversion of an existing structure used

or to be used as an apartment house or

a dwelling for two or more families. The

multifamily structure may not be owned

by a corporation, partnership, or trust,

unless the prior approval of the

Secretary is obtained for an exception to

this requirement.

* * * * *

State means any State of the United

States, Puerto Rico, the District of

Columbia, Guam, American Samoa, the

Commonwealth of the Northern Mariana

Islands, or the United States Virgin

Islands.

* * * * *

4. Section 201.3 is revised to read as

follows:

§ 201.3 Applicability of the regulations.

The regulations in this part may be

amended by the Secretary at any time.

Such amendment shall not adversely

affect the insurance privileges of a

lender on any loan that has been made

or for which a loan application has been

approved before the effective date of the

amendment.

5. Section 201.10 is amended by:

a. Revising paragraph (a)(1)(iv);

b. Removing paragraph (a)(2);

c. Redesignating paragraph (a)(3) as

paragraph (a)(2); and

d. Revising paragraphs (b)(1)(i),

(b)(1)(iii), (b)(1)(iv), (b)(2)(i), (b)(2)(ii),

(b)(3), (c), (d)(1)(i), (d)(1)(iii), (d)(3),

(f)(3), (f)(4), and (f)(5), to read as follows:

§ 201.10 Loan amounts.

(a) * * *

(1) * * *

(iv) Manufactured home improvement

loans—$7,500.

* * * * *

(b) * * *

(1) * * *

(i) 130 percent of the sum of the

wholesale (base) prices of the home and

any itemized options and the charge for

freight, as detailed in the manufacturer’s

invoice;

* * * * *

(iii) The actual dealer’s cost of

transportation to the homesite, set-up

and anchoring, including the rental of

wheels and axles (if not included in the

freight charges);

(iv) The actual dealer’s cost of

skirting;

* * * * *

(2) * * *

(i) 95 percent of the appraised value

of the home as equipped and furnished

(as determined by a HUD-approved

appraisal) and 95 percent of any

itemized amounts allowed under

paragraphs (b)(1)(iii) through (vii) of this

section, if incurred; or

(ii) 95 percent of the purchase price

of the home.

(3) The purchase price of a

manufactured home financed with a

manufactured home purchase loan shall

include the retail cost to the borrower of

all items set forth in the purchase

contract, including any applicable

charges authorized under § 201.25(b).

(c) Manufactured home lot loans. The

total principal obligation for a loan to

purchase and, if necessary, develop a lot

suitable for a manufactured home,

including on-site water and utility

connections, sanitary facilities, site

improvements and landscaping, shall

not exceed 95 percent of either the

appraised value of the developed lot (as

determined by a HUD-approved

appraisal) or the total of the purchase

price and development costs, whichever

is less, up to a maximum of $16,200.

(d) * * *

(1) * * *

(i) 130 percent of the sum of the

wholesale (base) prices of the home and

any itemized options and the charge for

freight, as detailed in the manufacturer’s

invoice;

* * * * *

(iii) The actual dealer’s cost of

transportation to the homesite, set-up

and anchoring, including the rental of

wheels and axles (if not included in the

freight charge);

* * * * *

(3) The purchase price of a

manufactured home and a lot financed

with a combination loan shall include

the retail cost to the borrower of all

items set forth in the purchase contract

or contracts, including any applicable

charges authorized under § 201.25(b).

* * * * *

(f) * * *

(3) The total principal obligation of a

loan made to refinance a borrower’s

existing uninsured manufactured home

loan shall not exceed the cost to the

borrower of prepaying the existing loan

or the appraised value of the property

(as determined by a HUD-approved

appraisal), whichever is less, up to the

maximum loan amount permitted under

this section for the particular type of

loan.

(4) When a borrower’s existing

manufactured home lot is being

refinanced in connection with the

purchase of a manufactured home, the

total principal obligation of the

combination loan shall be determined in

accordance with paragraph (d)(1) or

(d)(2) of this section.

(5) When a borrower’s existing

manufactured home is being refinanced

in connection with the purchase of a

manufactured home lot, the total

principal obligation of the combination

loan shall not exceed the lesser of the

following amounts, up to a maximum of

$64,800:

(i) The cost to the borrower of

prepaying any existing loan on the

home, plus the purchase price of the lot;

or

(ii) The appraised value of the home

and lot (as determined by a HUDapproved appraisal).

* * * * *

6. Section 201.11 is amended by

revising paragraphs (a)(1) and (a)(2), by

adding a new paragraph (a)(3), and by

revising paragraphs (c)(2), (c)(3), and

(c)(4), to read as follows:

§ 201.11 Loan maturities.

(a) * * *

(1) The maximum term for a single

family property improvement loan on a

manufactured home that qualifies as

real property shall not exceed 15 years

and 32 days from the date of the loan;
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19797

(2) The maximum term for a

manufactured home improvement loan

shall not exceed 12 years and 32 days

from the date of the loan; and

(3) The maximum term for an historic

preservation loan shall not exceed 15

years and 32 days from the date of the

loan.

* * * * *

(c) * * *

(2) The term of a loan made to

refinance a borrower’s existing

uninsured manufactured home loan

shall not exceed the maximum term

permitted under paragraph (b) of this

section for the particular type of loan.

(3) When a borrower’s existing

manufactured home lot is being

refinanced in connection with the

purchase of a manufactured home, the

term of the combination loan shall not

exceed the maximum term permitted

under paragraph (b) of this section for

the particular type of loan.

(4) When a borrower’s existing

manufactured home is being refinanced

in connection with the purchase of a

manufactured home lot, the term of the

combination loan shall not exceed the

maximum term permitted under

paragraph (b) of this section for the

particular type of loan.

7. Section 201.12 is revised to read as

follows:

§ 201.12 Requirements for the note.

The note shall bear the genuine

signature of each borrower and of any

co-maker or co-signer, be valid and

enforceable against the borrower and

any co-maker or co-signer, and be

complete and regular on its face. The

borrower and any co-maker or co-signer

shall execute the note for the full

amount of the loan obligation. Although

the note may be executed by the

borrower on an earlier date, the date of

the loan shall be the date that the loan

proceeds are disbursed by the lender.

Such date shall be entered on the note

when disbursement occurs. The note

shall separately recite the principal

amount and any interest at an agreed

annual rate that comprises the

borrower’s payment obligation. The

lender shall assure that the note and all

other documents evidencing the loan

transaction are in compliance with

applicable Federal, State, and local

laws. If the note is executed on behalf

of a corporation, partnership, or trust by

an authorized representative, it shall

create a binding obligation on such

entity.

8. Section 201.13 is revised to read as

follows:

§ 201.13 Interest and discount points.

The interest rate for any loan shall be

negotiated and agreed to by the

borrower and the lender, and such

interest rate shall be fixed for the full

term of the loan and recited in the note.

Interest on the loan shall accrue from

the date of the loan, and shall be

calculated on a simple interest basis.

The lender and the borrower may

negotiate the amount of discount points,

if any, to be paid by the borrower as part

of the borrower’s initial payment. The

lender shall not require or allow any

party other than the borrower to pay any

discount points or other financing

charges in connection with the loan

transaction.

9. Section 201.17 is revised to read as

follows:

§ 201.17 Prepayment provision.

The note shall contain a provision

permitting full or partial prepayment of

the loan without penalty, except that the

borrower may be assessed reasonable

and customary charges for recording a

release of the lender’s security interest

in the property, if permitted by State

law.

10. Section 201.20 is amended by

revising paragraph (a)(2), by removing

paragraph (a)(3), and by revising

paragraph (b), to read as follows:

§ 201.20 Property improvement loan

eligibility.

(a) * * *

(2) To be eligible for a manufactured

home improvement loan, the borrower

shall have at least a one-half interest in

the manufactured home, and the home

must be the principal residence of the

borrower.

(b) Eligible use of the loan proceeds.

(1) The loan proceeds shall be used only

for the purposes disclosed in the loan

application. If the borrower plans to use

a dealer or contractor to carry out the

improvement work, the lender shall

obtain a copy of a proposal or contract

that describes in detail the work to be

performed and the estimated or actual

cost. If the borrower plans to carry out

the improvement work without the

services of a dealer or contractor, the

borrower shall be required to furnish a

detailed written description of the work

to be performed, the materials to be

furnished, and their estimated cost.

(2) The loan proceeds shall be used

only to finance property improvements

that substantially protect or improve the

basic livability or utility of the property.

The Secretary will establish a list of

items and activities that may not be

financed with the proceeds of any

property improvement loan. If a lender

has any doubt as to the eligibility of any

item or activity, it shall request a

specific ruling by the Secretary before

making a loan.

(3) The loan proceeds shall only be

used to finance property improvements

that are started after loan approval,

unless:

(i) The prior approval of the Secretary

is obtained for an exception to this

requirement; or

(ii) The property is located in a major

disaster area declared by the President,

and the lender determines that

emergency action is needed to repair

damage resulting from the disaster.

* * * * *

11. Section 201.21 is amended by

revising paragraphs (b)(3) and (b)(5), to

read as follows:

§ 201.21 Manufactured home loan

eligibility.

* * * * *

(b) * * *

(3) The proceeds of a loan to purchase

a new manufactured home or a new

manufactured home and lot shall not be

used to purchase furniture or wheels

and axles, and the cost of these items

shall not be included in the total

principal obligation calculated under

§ 201.10(b)(1) or (d)(1).

* * * * *

(5) The Secretary will establish a list

of items and activities that may not be

financed with the proceeds of any

manufactured home loan. If a lender has

any doubt as to the eligibility of any

item or activity, it shall request a

specific ruling by the Secretary before

making a loan.

* * * * *

12. Section 201.22 is amended by

revising paragraphs (b)(1), (b)(2)(iv), and

(c)(1), to read as follows:

§ 201.22 Credit requirements for

borrowers.

* * * * *

(b) * * *

(1) For any Title I loan, the credit

application and review must establish

that the borrower’s income will be

adequate to meet the periodic payments

required by the loan, as well as the

borrower’s other housing expenses and

recurring charges. For a borrower’s

income to be considered adequate,

housing expenses and total fixed

expenses generally may not exceed

maximum percentages of effective gross

income established by the Secretary. If

these expense-to-income ratios are

exceeded, the borrower’s income may be

considered adequate only if the lender

determines and documents in the loan

file the existence of compensating

factors concerning the borrower’s
19798 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

creditworthiness that support approval

of the loan.

(2) * * *

(iv) Other recurring charges include

all payments on automobile loans,

furniture loans, student loans,

installment loans, revolving charge

accounts, alimony or child support, and

any other debt for which the obligation

is expected to continue for six months

or more.

(c) * * *

(1) The borrower is past due more

than 30 days as to the payment of

principal or interest under the original

terms of a loan obligation owed to or

insured or guaranteed by the Federal

Government, unless the debt has since

been discharged or satisfied; or

* * * * *

13. Section 201.23 is revised to read

as follows:

§ 201.23 Borrower’s initial payment.

(a) General requirement. The borrower

shall be responsible for the payment in

cash of any costs that will not be paid,

or are not eligible to be paid, from the

proceeds of the loan. Such costs payable

by the borrower may include any

required downpayment, any discount

points to be paid by the borrower to the

lender, any other fees and charges that

may not be financed, and any other

costs in excess of the loan amount. No

part of such costs payable by the

borrower may be loaned, advanced, or

paid to or for the benefit of the borrower

by the dealer, the manufacturer, or any

other party to the loan transaction. If the

borrower obtains all or any part of such

costs through a gift or a loan from some

other source, the borrower must disclose

the source of such gift or loan on the

credit application. Any such loan must

be secured by property or collateral

owned by the borrower independently

of the property securing repayment of

the Title I loan, unless the prior

approval of the Secretary is obtained for

an exception to this requirement. The

lender shall consider any such loan

obligation in performing the credit

investigation. Documentation of any

initial payment shall be retained by the

lender in the loan file.

(b) Manufactured home purchase

loans. In the case of a manufactured

home purchase loan, the borrower shall

make a minimum cash downpayment of

at least five percent of the purchase

price of the home. The borrower’s

equity in an existing manufactured

home and any movable appurtenances

may be traded-in on a new home and

accepted in lieu of full or partial cash

downpayment, but without any cash

payment to the borrower. The existing

manufactured home being traded-in

shall be clearly identified, and the

borrower’s equity in the home shall be

based upon the retail value of the home

and appurtenances (as determined by a

HUD-approved appraisal), less the total

of all loans outstanding on the home

and appurtenances.

(c) Manufactured home lot loans. In

the case of a manufactured home lot

loan, the borrower shall make a

minimum cash downpayment of at least

five percent of the total of the purchase

price and development costs for the lot.

(d) Combination loans. In the case of

a combination loan, the borrower shall

make a minimum cash downpayment of

at least five percent of the purchase

price of the manufactured home and lot.

If the borrower already owns a

manufactured home or a lot on which a

manufactured home is to be placed, the

borrower’s equity in such home or lot

may be accepted in lieu of full or partial

cash downpayment on a combination

loan, but without any cash payment to

the borrower.

14. Section 201.24 is amended by

revising paragraphs (a)(1) and (a)(2) to

read as follows:

§ 201.24 Security requirements.

(a) * * *

(1) Any property improvement loan in

excess of $7,500 shall be secured by a

recorded lien on the improved property.

The lien shall be evidenced by a

mortgage or deed of trust, executed by

the borrower and all other owners in fee

simple. If the borrower is a lessee, the

borrower and all owners in fee simple

must execute the mortgage or deed of

trust. If the borrower is purchasing the

property under a land installment

contract, the borrower, all owners in fee

simple, and all intervening contract

sellers must execute the mortgage or

deed of trust. The lien need not be a first

lien on the property; however, the lien

securing the Title I loan must have

priority over any lien securing an

uninsured loan made at the same time

and in connection with the same

property, unless the uninsured loan is a

first mortgage loan for the purchase or

refinancing of the property.

(2) Any property improvement loan

for $7,500 or less (other than a

manufactured home improvement loan)

shall be similarly secured if, including

such loan, the total amount of all Title

I loans on the improved property is

more than $7,500.

* * * * *

15. Section 201.25 is revised to read

as follows:

§ 201.25 Charges to borrower to obtain

loan.

(a) Fees and charges that may be

financed in a property improvement

loan. The Secretary will establish a list

of fees and charges that may be included

in a property improvement loan. Such

fees and charges shall have been

incurred in connection with the

origination of the loan, and their

inclusion shall not increase the total

principal obligation beyond the

maximum loan amounts in § 201.10.

(b) Fees and charges that may be

financed in a manufactured home loan.

The Secretary will establish a list of fees

and charges that may be included in a

manufactured home loan. Such fees and

charges shall have been incurred in

connection with the origination of the

loan, and their inclusion shall not

increase the total principal obligation

beyond the maximum loan amounts in

§ 201.10.

(c) Fees and charges that may not be

financed. The Secretary will establish a

list of fees and charges incurred by the

lender that may be collected from the

borrower in the initial payment, but

may not be included in the loan amount

or otherwise financed or advanced by

the dealer, the manufacturer, or any

other party to the loan transaction.

(d) Fees and charges that may not be

paid. Neither the lender nor the

borrower may pay a referral fee to any

dealer, home manufacturer, contractor,

supplier, real estate broker, loan broker,

or any other party in connection with

the origination of a loan insured under

this part.

16. Section 201.26 is amended by

revising paragraphs (a)(1), (a)(2),

(a)(5)(ii), (a)(6)(i), (b)(3)(vi), (b)(3)(vii),

(b)(4)(vi), and (b)(4)(vii); by removing

paragraph (b)(4)(viii); and by revising

paragraph (b)(6) introductory text, to

read as follows:

§ 201.26 Conditions for loan

disbursement.

(a) * * *

(1) The lender shall ensure that the

following conditions are met:

(i) The borrower is eligible for a

property improvement loan in

accordance with § 201.20(a) (1) or (2);

and

(ii) The interest of the borrower in the

property is valid, through such title or

other evidence as is generally acceptable

to prudent lending institutions and

leading attorneys in the community in

which the property is situated.

(2) The proposed use of the loan

proceeds shall be documented in

accordance with the requirements of

§ 201.20(b)(1).

* * * * *
Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations 19799

(5) * * *

(ii) The borrower has not obtained the

benefit of and will not receive any cash

payment, rebate, cash bonus, sales

commission, or anything of more than

nominal value from the dealer as an

inducement for the consummation of

the transaction.

(6) * * *

(i) States that the loan will be insured

by HUD and describes the actions the

Secretary may take to recover the debt

if the borrower defaults on the loan and

an insurance claim is paid;

* * * * *

(b) * * *

(3) * * *

(vi) The borrower has paid the

remaining unpaid balance on any other

manufactured home loan secured by a

different property, unless the prior

approval of the Secretary is obtained for

an exception to this requirement; and

(vii) The borrower has not obtained

the benefit of and will not receive any

cash payment, rebate, cash bonus, or

anything of more than nominal value

from the manufacturer or dealer as an

inducement for the consummation of

the transaction.

(4) * * *

(vi) Any initial payment required

under § 201.23 was made by the

borrower, and no part of the initial

payment was loaned, advanced, or paid

to or for the benefit of the borrower by

the manufacturer, dealer, or any other

party to the loan transaction; and

(vii) The borrower has not obtained

the benefit of and will not receive any

cash payment, rebate, cash bonus, or

anything of more than nominal value

from the manufacturer or dealer as an

inducement for the consummation of

the transaction.

* * * * *

(6) For any direct manufactured home

purchase loan or combination loan

involving the relocation of the

manufactured home to a new homesite

owned or leased by the borrower, the

lender (or an agent of the lender that is

not a manufactured home dealer) shall

conduct a site-of-placement inspection

to verify that:

* * * * *

17. Section 201.27 is amended by

revising the second sentence of

paragraph (a)(2) and by revising

paragraph (a)(5); by removing paragraph

(b)(2); and by redesignating paragraph

(b)(1) as paragraph (b), to read as

follows:

§ 201.27 Requirements for dealer loans.

(a) * * *

(2) * * * The dealer shall furnish a

current financial statement prepared by

someone who is independent of the

dealer and is qualified by education and

experience to prepare such statements,

together with such other documentation

as the lender deems necessary to

support its approval of the dealer. * * *

* * * * *

(5) If a dealer does not satisfactorily

perform its contractual obligations to

borrowers, does not comply with Title

I program requirements, or is

unresponsive to the lender’s supervision

and monitoring requirements, the lender

shall terminate the dealer’s approval

and immediately notify the Secretary

with written documentation of the facts.

A dealer whose approval is terminated

under these circumstances shall not be

reapproved without prior written

approval from the Secretary. The lender

may in its discretion terminate the

approval of a dealer for other reasons at

any time.

* * * * *

18. Section 201.28 is amended by

revising paragraph (a) to read as follows:

§ 201.28 Flood and hazard insurance, and

Coastal Barriers properties.

(a) Flood insurance. No property

improvement loan or manufactured

home loan shall be eligible for insurance

under this part if the property securing

repayment of the loan is located in a

special flood hazard area identified by

the Federal Emergency Management

Agency (FEMA), unless flood insurance

on the property is obtained by the

borrower in compliance with section

102 of the Flood Disaster Protection Act

of 1973 (42 U.S.C. 4012a). Such

insurance shall be obtained at any time

during the term of the loan that the

lender determines that the secured

property is located in a special flood

hazard area identified by FEMA, and

shall be maintained by the borrower for

the remaining term of the loan, or until

the lender determines that the property

is no longer in a special flood hazard

area, or until the property is repossessed

or foreclosed upon by the lender. The

amount of such insurance shall be at

least equal to the unpaid balance of the

Title I loan, and the lender shall be

named as the loss payee for flood

insurance benefits.

* * * * *

19. Section 201.32 is amended by

revising paragraph (a); by removing

paragraph (b); and by redesignating

paragraphs (c), (d), and (e) as paragraphs

(b), (c), and (d), respectively, to read as

follows:

§ 201.32 Insurance coverage reserve

account.

(a) Establishment. The Secretary shall

establish an insurance coverage reserve

account for each lender. The amount of

insurance coverage in each reserve

account shall equal 10 percent of the

amount disbursed, advanced, or

expended by the lender in originating or

purchasing eligible loans registered for

insurance under this part, less the

amount of all insurance claims

approved for payment in connection

with losses on such loans.

* * * * *

20. Section 201.40 is amended by

adding a new paragraph (b)(3) to read as

follows:

§ 201.40 Post-disbursement loan

requirements.

* * * * *

(b) * * *

(3) The borrower is not required to

submit a completion certificate when

the property improvement loan is made

by or on behalf of a State or local

government agency or a nonprofit

organization, the loan proceeds are held

in an escrow account pending

completion of the improvements, and

the loan proceeds are disbursed from

the escrow account in stages, with the

written approval of the borrower and

based upon the percentage of work

completed.

* * * * *

21. Section 201.52 is amended by

adding a sentence at the end, to read as

follows:

§ 201.52 Acquisition by voluntary

conveyance or surrender.

* * * If the lender accepts a

voluntary conveyance of title or a

voluntary surrender of the property, the

notice of default and acceleration under

§ 201.50(b) shall not be required.

22. Section 201.53 is amended by:

a. Redesignating the paragraph as

introductory text;

b. Revising the third sentence of the

newly designated introductory text; and

c. Adding paragraphs (a) and (b), to

read as follows:

§ 201.53 Disposition of manufactured

home loan property.

* * * The best price obtainable shall

be the greater of:

(a) The actual sales price of the

property, after deducting the cost of

repairs, furnishings, and equipment

needed to make the property

marketable, and after deducting the cost

of transportation, set-up, and anchoring

if the manufactured home is moved to

a new homesite; or

(b) The appraised value of the

property before repairs (as determined

by a HUD-approved appraisal obtained

in accordance with § 201.51(b)(3)).
19800 Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules and Regulations

23. Section 201.54 is amended by

revising paragraph (b)(2), to read as

follows:

§ 201.54 Insurance claim procedure.

* * * * *

(b) * * *

(2) The Secretary may extend the

claim filing period in a particular case,

but only if the lender shows clear

evidence that the delay in claim filing

was in the interest of the Secretary or

was caused by one of the following:

(i) Litigation related to the loan;

(ii) Management control of the lender

or the Title I loan portfolio was assumed

by a Federal or State agency; or

(iii) The borrower had experienced a

loss of income or other financial

difficulties directly attributable to a

major disaster declared by the President,

and additional time was needed to

provide forbearance on a property

improvement loan.

* * * * *

24. Section 201.55 is amended by

revising the introductory text of

paragraph (a), the introductory text of

paragraph (b), and paragraphs (b)(3) and

(b)(7), to read as follows:

§ 201.55 Calculation of insurance claim

payment.

* * * * *

(a) Property improvement loans. For

property improvement loans, the

insurance claim payment shall be 90

percent of the following amounts:

* * * * *

(b) Manufactured home loans. For

manufactured home loans, the

insurance claim payment shall be 90

percent of the sum of the following

amounts:

* * * * *

(3) For manufactured home purchase

loans, the amount of costs paid to a

dealer or other third party to repossess

and preserve the manufactured home

and other property securing repayment

of the loan (including the costs of site

inspection, property appraisal, hazard

insurance premiums, personal property

taxes, and site rental, as appropriate),

plus actual costs not to exceed $1,000

per module for removing and

transporting the home to a dealer’s lot

or other off-site location.

* * * * *

(7) The amount of attorney’s fees on

an hourly or other basis for time

actually expended and billed, not to

exceed $1,000.

* * * * *

Dated: January 11, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing—Federal

Housing Commissioner.

[FR Doc. 96–10885 Filed 5–01–96; 8:45 am]

BILLING CODE 4210–27–P