Tiered Pricing

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing

Commissioner

24 CFR Parts 201 and 202

[Docket No. R-94-1636; FR-3021-F-02]

RIN 2502-AF29

Tiered Pricing

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing

Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This rule implements section 203(t) of the National Housing

Act. That section prohibits tiered pricing involving a variation in

mortgage charge rates that exceeds two percentage points for FHA

insured mortgages made by a mortgagee in an area. The purpose of the

rule is to eliminate a mortgagee's discriminatory pricing of FHA

insured mortgages in a particular area that would either discourage

home purchases or place an unfair burden of costs on the borrower. The

rule also implements section 539(a)(2) of the National Housing Act by

providing a procedure for requests for determination of a mortgagee's

compliance with tiered pricing restrictions or compliance by a

mortgagee or Title I lender with related prohibitions on establishing

minimum loan amounts.

EFFECTIVE DATE: March 28, 1994.

FOR FURTHER INFORMATION CONTACT: William Heyman, Director, Office of

Lender Activities and Land Sales Registration, Department of Housing

and Urban Development, room 9156, 451 Seventh Street SW., Washington,

DC 20410, Telephone Number (202) 708-1824; TDD telephone number (202)

708-4594. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Introduction

The information collection requirements contained in this rule have

been approved by the Office of Management and Budget, under section

3504(h) of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520),

and assigned OMB control numbers 2502-0265 and 2502-0059.

Section 330(a) of the Cranston-Gonzalez National Affordable Housing

Act, entitled ``Limitation on Tiered Pricing Practices,'' amended

Section 203 of the National Housing Act to add subsection (t). The new

provision restricts ``tiered pricing'' of single family FHA-insured

mortgages. ``Tiered pricing'' occurs when a mortgagee varies its

charges for the same type of mortgage in the same area, usually based

on the principal amount of the loan.

Under section 203(t), no mortgagee may make or hold FHA insured

mortgages if the customary lending practices of the mortgagee, as

determined by HUD, provide for variations of more than two percentage

points in the mortgage charge rate based on interest rate, level of

discount points, loan origination fees, or any other amount charged to

a mortgagor by the mortgagee with respect to a mortgage made within a

designated area. The section is concerned with lending practices that

may unfairly impose costs and charges that are higher for smaller loans

than for larger loans.

HUD published a proposed rule on July 14, 1993, 58 FR 37885, with a

request for public comments. HUD received 37 public comments. More than

half were from State Bankers Associations; comments also were received

from the American Bankers Association, the Mortgage Bankers

Association, and mortgagees. The following section summarizes the

principal points of the public comments, explains how HUD has responded

to the public comments, and explains additional changes that HUD has

made in the final rule.

II. Public Comments and Provisions of Final Rule

General

Most of the commenters agreed that tiered pricing in the form of

excessive variation in mortgage charge rates should be discouraged, but

most commenters also argued that the proposed rule would drive

mortgagees away from the FHA programs. The principal reasons cited were

the failure of the proposed rule to recognize legitimate differences in

pricing based on the fact that lower balance loans cost more to

originate, and excessive recordkeeping requirements in the proposed

rule. HUD believes that the commenters have overstated the burdensome

effect of the proposed rule (as distinguished from the statutory

command). HUD has concluded, however, that the lending community will

benefit from additional information concerning the manner in which HUD

intends to apply the final rule. The following discussion should

provide additional information on HUD's intentions that may alleviate

some of the commenters' concerns.

Many commenters observed that the two percentage point limit on

variation in mortgage charge rates may force mortgagees to either

suffer losses on the smallest loans (which must still be offered due to

an earlier statutory provision) or overprice the largest loans. Either

effect could lead mortgagees to withdraw from FHA single family

programs. In this rule, HUD has attempted to interpret the statute in a

way that preserves the ability of mortgagees to participate profitably

in FHA single family programs while honoring the letter and spirit of

the statute.

Calculation and Comparison of Mortgage Charge Rate

A. General

Many commenters expressed confusion over how mortgage charge rates

would be calculated and how HUD would determine which variations in

charges were acceptable. Mortgages will be compared to determine excess

variations in mortgage charge rates only if: (1) They are of the same

mortgage type, (2) from the same area and (3) the amounts charged by

the mortgagee were determined on the same day or during some other

reasonably limited period. Items 1 and 2 will be discussed in more

detail later under separate headings. The purpose of the comparison is

to determine whether a mortgagee's customary lending practices include

either variations in mortgage charge rates (determined primarily by the

discount point spread for each interest rate offered) that exceed two

percentage points, or lesser variations that are unrelated to

variations in the mortgagee's actual costs in making loans.

B. Two Percentage Point Variation

As explained in the preamble to the proposed rule, HUD's

determination of whether the permissible two percentage point variation

is exceeded will primarily be based on a review of discount points

charged by the mortgagee. The rule prevents a mortgagee from offering

an interest rate only for certain size loans. For any given interest

rate offered in an area for a mortgage type during the time period

under review, mortgages should be available to all applicants without a

difference in discount points of greater than two percentage points.

Charges collected by the mortgagee for third party services would not

be considered for tiered pricing purposes. HUD's experience is that all

mortgagees typically will collect the maximum 1% origination fee so

that the fee will be disregarded in reviewing variations in charges.

HUD expects a mortgagee to charge a mortgagor only the origination

fee, discount points and interest to cover its costs (excluding

payments for third party services). HUD regulations do not permit

mortgagees to charge other fees such as document preparation fees or

closing fees for services provided by their own employees. (Some

mortgagees are permitted to use appraisers and/or inspectors on their

staffs. For purposes of this rule, the amounts collected by a mortgagee

for the services of its staff appraisers and/or inspectors are

considered analogous to third party services and are not included in

mortgagee charges.)

Thus, for purposes of the two percentage point variation there will

ordinarily be no need to consider other fees or charges. Mortgagees

that establish other fees or charges should be certain that they are

acceptable to the local HUD Office as reasonable and customary.

Mortgagees are also on notice that HUD will consider them in

determining compliance with the two percentage point limitation on

variations even if the spread in discount points among mortgages is

less than two percent.

Several commenters noted that any flat fee will necessarily have a

greater impact on the mortgage charge rate for a small loan than for a

larger loan, making it more difficult to comply with the two percent

variation. It is probable that Congress did not expect significant flat

fees for services to be charged by the mortgagee because such services

are ordinarily to be compensated through the 1% origination fee.

However, the statutory definition of mortgage charge rate refers to

``any other amount charged to a mortgagor with respect to an insured

mortgage.'' The Department interprets this language as excluding flat

fees for mortgagee services distinct from the actual making of the loan

(justifying the treatment of staff appraisers and staff inspectors

described above) but the Department finds no blanket authority to

disregard any flat fees charged by the mortgagee for any part of its

role in the actual underwriting and closing process.

Two commenters addressed the proposed Sec. 202.20(d) which would

require that any interest rate offered for a mortgage type be available

for mortgages of any principal amount. HUD has responded to one comment

by clarifying in the final rule that this requirement applies only

within an area as defined by the rule. Another commenter argued that

the proposed rule conflicted with the tiered pricing statute because

the proposed rule would require a mortgagee to recover a variance in

costs in making different loans through variances in points rather than

interest rates, whereas the statute left to the mortgagee the

discretion to recover differences through either means or a combination

of them. The commenter is correct that the statute refers to variations

between mortgage charge rates instead of variations in discount points.

If HUD permitted certain interest rates to be reserved for certain size

loans, HUD would have needed to propose a rule that in all cases

required a mathematical calculation of a specific mortgage charge rate,

taking into account at least interest rates, discount points and

origination fees. Under such an approach a mortgagee could have

reserved certain interest rates for certain loans.

Such an approach may have been closer than the proposed rule to the

literal language of the statute. HUD determined that the statute

permitted a different and less complex approach. The compliance burden

on mortgagees as well as the monitoring burden on HUD is greatly

reduced if the primary comparison between mortgages is limited to

discount points only so that no calculation is required. A single

commenter objected to this approach, while nearly all commenters urged

a reduction in regulatory burden. HUD will use its simplified approach

of focussing on one component of the mortgage charge rate (discount

points) in lieu of a more complex and burdensome approach.

C. Variation in Costs

For a mortgagee which is in compliance with the two percentage

point limitation on variation in mortgage charge rates, the statute

also requires that HUD ensure that any variations in mortgage charge

rates ``are based only on actual variations in fees or costs to the

mortgagee to make the loan.'' This requirement was contained in the

proposed rule in Sec. 202.20(a). Many commenters expressed concern over

how HUD would determine the costs to make a loan. In effect, commenters

wanted to know whether HUD would look solely at a mortgagee's direct

expenditures and overhead in determining the cost of making a loan or

whether the origination fees and value of servicing rights generated in

making the loan would also be considered to arrive at a net cost. Loans

of different sizes might appear to have similar costs until origination

fees and servicing value are considered.

Origination fees necessarily vary because they are set at 1% of the

loan amount. Commenters also explained that servicing value might be

nonexistent for the smallest loans but could be a significant factor

that partially or completely offsets costs for a larger loan. If these

items were considered so that net costs were compared and points were

allowed to make up the difference in net costs between small and large

loans, mortgagees would have less difficulty in complying with the

rule.

HUD did not address this issue specifically in the proposed rule.

HUD agrees with commenters that the statute was not intended to prevent

consideration of the variations in origination fee income and servicing

values as factors offsetting other variations in costs. HUD has added

language to Sec. 202.20(a) of the final rule to clarify that net costs

will be considered. Section 202.20(a) has also been revised to improve

organization.

One commenter proposed that variation in mortgage charge rates up

to two percentage points be permitted whenever the mortgagee can

demonstrate that it is not recovering for any mortgage more than its

average cost to originate all mortgages. ``The lender should be

prohibited from creating classes of mortgages and allocating differing

costs to those classes,'' wrote the commenter. The Department agrees

that the mortgagee may allocate the same average basic cost for all

mortgages within a mortgage type, or for all mortgages, provided that

this approach is documented in the mortgagee's records. Information

submitted by commenters suggested that mortgagees do have information

on the average basic cost of originating an FHA-insured mortgage

(without considering the value of servicing) produced by allocating

general overhead among the mortgages originated. One commenter used an

estimate of $1,000 ``unit cost'' plus a commission that varied with

loan size, resulting in a cost range of $1,175-$1,700 for loans of

$25,000-$100,000. Another reported typical loan costs of $1500-$1800.

Another stated that all FHA-insured single family mortgages, regardless

of size, cost approximately the same to originate. An industry study by

the Mortgage Bankers Association of America based on 1991 data from 185

mortgagees (not limited to FHA-insured mortgages) indicated somewhat

higher expenses for producing a loan--an average of $2,332 for all

companies studied, $2,183 for companies that purchase less than 10% of

their loan production, and $1,884 for the ten companies in the study

with the highest profit. HUD will not question a mortgagee that

documents its costs by using an average basic production cost in these

ranges for all sizes of FHA-insured mortgages and any additional

documented costs varying directly due to loan size, such as for

commission. A mortgagee that wants to justify its costs variations by

using differing basic costs for particular mortgages within a mortgage

type will need to document any actual difference in costs but will not

be prohibited from attempting to do so.

D. Other Comments on Mortgage Charge Rates

A few commenters disagreed completely with HUD's approach to

determining mortgage charge rates. They argued that HUD should use the

annual percentage rate (APR) determined under the Truth in Lending Act

as the mortgage charge rate. HUD considered this approach when

developing the proposed rule but did not pursue the idea. The APR could

be useful in determining compliance with the two percentage point limit

on variation, but the simplicity of comparing two APRs does not seem to

be any great advantage over the simplicity of comparing discount points

under the proposed rule. Use of the APR could not help to determine

whether variations in fees and charges within the two percentage point

limitation were justified. In addition, the APR includes charges not

under the control of the mortgagee, such as charges for the appraisal,

credit report and other third party closing services, that would

distort the application of the two percent tolerance that Congress

intended to be applied only to mortgagee charges. It might be possible

to develop some other tolerance applied to APR variations that

approximated the effect of the two percent variation for mortgage

charge rates, but HUD has no clear authority to abandon the specific

terms of the statute. If Congress had intended that HUD attack the

tiered pricing problem through comparison of APRs, it could easily have

said so instead of developing the distinct concept of mortgage charge

rates.

Two commenters questioned the statement in the preamble to the

proposed rule that HUD would review any practices that pass closing

costs and charges to the seller, in addition to items paid by the

mortgagor. The commenters stated that HUD lacked statutory authority to

review fees charged to the seller. One stated that at a minimum the

rule should clarify that fees paid by the seller should be reviewed to

determine whether they were charged to circumvent the tiered pricing

rule and that there would be no other scrutiny.

The commenters' remarks regarding statutory authority presumably

refer to the statutory definition of ``mortgage charge rate'' as

including various items ``charged to a mortgagor with respect to an

insured mortgage.'' This could exclude some items that a mortgagee

would not charge to a mortgagor, such as a seller's share of a

settlement fee in a jurisdiction in which sellers share responsibility

for the mortgagee's cost of conducting a settlement. HUD does not agree

that the law precludes review of one or more items of closing costs

merely because actual payment may have been made by the seller in the

particular transaction. The law applies to the mortgagee's customary

lending practices, not to the terms negotiated between particular

sellers and buyers.

For example, assume that the parties to the sale are able to

negotiate the manner in which they will share the responsibility for

paying discount points to the mortgagee. If the mortgagee charges three

extra points for a small mortgage as compared to a large one at the

same interest rate, the mortgagee is not in compliance with the tiered

pricing restriction merely because the seller in the smaller

transaction has agreed to pay one or two points on behalf of the

mortgagor. That aspect of the seller-mortgagor negotiation does not

modify the mortgagee's customary lending practices, which are to charge

a mortgagor an impermissible amount of extra points for the smaller

loan.

Recordkeeping

Most commenters viewed as excessively burdensome the requirement in

Sec. 202.20(h) of the proposed rule that mortgagees retain for three

years records on pricing information ``satisfactory to the Secretary''.

The following comment represents a typical reaction: ``The creation of

a separate and distinct recordkeeping system for this particular

proposed rule is excessive.'' Another complained of ``the sheer volume

and extent of the loan documentation requirement.'' Another asserted

that the proposal ``requires banks to make extensive calculation of

variables.'' Commenters did not offer any suggestions as to how HUD

could monitor compliance with the statute if it had no access to

historical records on a mortgagee's pricing policies.

HUD deliberately proposed a rule that minimized a mortgagee's

recordkeeping burden and that did not require a separate and distinct

recordkeeping system. HUD might have pursued approaches that would have

placed substantial new recordkeeping and reporting burdens on a

mortgagee, such as requiring all pricing sheets to be submitted to a

local HUD office when they are adopted, or requiring a mortgagee to

calculate a mortgage charge rate for each FHA insured single family

mortgage or requiring a mortgagee to develop its own comparisons of its

mortgage charge rates. HUD chose instead not to specify new records

that a mortgagee must develop and maintain. Under current FHA policies

and under the regulations implementing the Equal Credit Opportunity

Act, 12 CFR part 202, mortgagees must retain loan files for both

rejected and closed loan applications for two years. The rule does not

add significantly to this burden.

Files for closed loans will ordinarily contain information showing

the date and terms when the mortgage charges were locked in. Loan files

for rejected loans should also contain sufficient information on the

pricing of the loan if processing progressed far enough for specific

loans terms to be considered. However, the rule does not require that

pricing information be retained on an individual loan basis. The focus

of the rule is on the ``customary lending practices'' of a mortgagee. A

mortgagee could choose to retain its pricing sheets for two years as

evidence of its general pricing policies and as a simple way to

demonstrate compliance with the regulation. The final rule does not

dictate whether a mortgagee keeps information on mortgage charges on an

individual loan basis, as a general record on its pricing policies, or

both. Similarly, a mortgagee that wishes to ensure consideration of

factors offsetting direct costs may include evidence of variations in

origination fees and the value of servicing rights either in the

individual loan files or in some other form that is available to HUD

monitors.

The comments suggest that the necessary information is routinely

available to a mortgagee with respect to each loan that is underwritten

since the information is a basis for pricing the particular loan. It is

a simple matter and not a substantial new burden to include the

information in the loan file, or otherwise maintain it elsewhere if the

mortgagee so chooses.

In short, all that the final rule requires is that a mortgagee be

able to provide records to HUD during routine HUD mortgagee monitoring

(or otherwise pursuant to a general inquiry as discussed below in

Section III), in a form determined by the mortgagee and consistent with

existing legal requirements for recordkeeping, that will enable HUD to

obtain answers to a few basic questions: What charges has a mortgagee

imposed on mortgagors for its mortgages, of a particular mortgage type

in a particular area, during a specified time period? If the charges

vary between mortgages of the same interest rate, mortgage type and

area, what is the specific reason for the amount of variance? If the

mortgagee has information available to answer these questions (and HUD

expects that mortgagees already have such information without the

requirements of this rule), then the mortgagee has records

``satisfactory to the Secretary.'' HUD will inform mortgagees if the

records ordinarily retained by mortgagees are found to be insufficient

in the course of applying the rule and more specific requirements are

needed.

A few commenters questioned the reference in Sec. 202.20(h) of the

proposed rule to data required under regulations implementing the Home

Mortgage Disclosure Act (HMDA). The rule does not affect existing HMDA

requirements, either by adding to information that must be reported for

HMDA purposes or by relieving mortgagees of any reporting requirements.

The final rule has been corrected to acknowledge that not all FHA-

approved mortgagees are required to report under HMDA. Mortgagees that

are not covered by HMDA are subject to similar requirements with

respect to applications and closed loans involving FHA-insured

mortgages pursuant to HUD's responsibilities under the Fair Housing

Act, Mortgagee Letter 90-25 and other mortgagee letters, and Handbook

4155.1 REV-4, paragraph 3-14G.1.

Responsibility of Sponsors/Wholesalers/Investors

Ten commenters disagreed with the Department's position in the

preamble to the proposed rule regarding responsibility of sponsors/

wholesalers/investors. The Department proposed to hold responsible for

an originator's tiered pricing violations the sponsor mortgagee (if the

originator was approved by HUD as a loan correspondent) or any

wholesaler/investor mortgagee that had arranged prior to closing to

fund and purchase the mortgage (i.e., through table funding). This

would involve interpreting the statutory phrase ``customary loan

practices'' as applicable to the wholesale purchases of mortgages from

the originator and including the purchased loans.

Commenters stated that the mortgagees/investors at the wholesale

level lacked the ability to dictate the amounts charged to a mortgagor

by the originating mortgagee and therefore should not be held

responsible. Some commenters also stated that a sponsor has no

knowledge of the various prices charged by its loan correspondents and

no way to monitor them. Many commenters also pointed out that an

originating loan correspondent could have many sponsors, and that HUD

should not hold a single sponsor responsible for the loan practices of

the loan correspondent including loans originated for other sponsors.

The Department stated in the proposed rule preamble that its intent

was to ``most effectively regulate those directly responsible for

tiered pricing.'' Responsibility can be the result of action or

inaction by the sponsor or wholesale purchaser. The Department's

experience in examining possible tiered pricing violations has been

that loan originators attribute any violations to the requirements of

mortgagees at the wholesale level. The Department agrees that this is

not always the case. The Department does not view as dispositive,

however, the fact that the tiered pricing practices at the retail level

may not have been expressly dictated by the wholesale mortgagee. The

Department believes that there are other ways in which the wholesaler's

requirements and practices may lead to tiered pricing that is not in

compliance with the statute.

The commenters generally appeared to accept the Department's

position that the practices of wholesale lenders in setting terms for

the mortgages that they fund or purchase can come within the scope of

the statutory term ``customary lending practices'' if they have the

effect of leading to discriminatory pricing by the originating

mortgagees in violation of the tiered pricing restrictions. The

disagreement is over whether, in fact, that effect follows from typical

arrangements.

Current regulations, at 24 CFR 202.15(c)(6), provide that each

sponsor of a loan correspondent shall be responsible to the Secretary

for the actions of its loan correspondent in originating mortgages,

unless applicable law or regulation requires specific knowledge on the

part of the party to be held responsible. This principle applies to the

tiered pricing area. It is limited to those mortgages with which the

particular sponsor mortgagee is involved, not mortgages originated for

sale to other mortgagees. The sponsor is required to underwrite the FHA

insured loans that it will purchase from the loan correspondent, 24 CFR

202.15(c)(1). The sponsor is not ignorant of the lending practices of

its correspondent with respect to such loans. The Department will

provide a sponsor the opportunity to explain why it should not be

regarded as responsible for a particular tiered pricing violation of

its loan correspondent with respect to loans that it underwrites, but

the Department does not agree that sponsors generally cannot be

regarded as responsible for the pricing of loans by loan

correspondents.

In the proposed rule HUD stated its intention to treat wholesale

purchasers providing table funding for a mortgagee in the same manner

as HUD-approved sponsors. At least one commenter specifically objected

to any application of the rule to a table funding situation. The

commenter cited a 1992 ruling of the Emerging Issues Task Force of the

Financial Accounting Standards Board (FASB), the governing body of the

accounting profession, that a table funding arrangement should be

accounted for as a purchase if the loan is legally structured as an

origination by the correspondent and if the correspondent is

independent of the mortgage banking enterprise. HUD does not agree that

this accounting ruling should govern the distinct issue of

responsibility for tiered pricing practices. Even if the mortgagee/

investor providing table funding is not an approved sponsor purchasing

from a loan correspondent, HUD will regard the mortgagee/investor as

responsible for tiered pricing violations if the requirements of the

funding mortgagee have the effect of leading to a tiered pricing

violation by the loan originator. HUD has revised Sec. 202.20(a) to

state this principle in the final rule. HUD continues to distinguish

approved sponsors from other mortgagees providing table funding because

other mortgagees do not have the general responsibility for the

correspondent/originator stated in Sec. 202.15(c)(6).

Application of Rule to All Single Family Programs

Numerous commenters objected to applying the rule to all FHA single

family programs rather than limiting the rule to the section 203

programs mentioned in the legislation. The commenters viewed this as a

major extension of the scope of tiered pricing restrictions, and beyond

HUD's legal authority. One commenter supported HUD's approach.

Section 203(t) can be read as only requiring HUD to consider

section 203 mortgages when determining whether the customary lending

practices of a mortgagee violate the tiered pricing restrictions. Most

Section 203 mortgages are insured under the basic Section 203(b)

program; insurance is also available in specific circumstances under

Sections 203 (h), (i), (n) or (k). HUD does not agree that it lacks

authority to consider practices under other FHA single family programs

and concludes that there is good reason to look beyond section 203 to

other single family programs as well.

For FY 1993, approximately 84.5 percent of single family mortgage

loans receiving FHA insurance were insured under section 203 programs

so that single family mortgagees will not be subject to significant

extra burdens by including other programs in this rule. The principal

non-section 203 mortgage insurance program is the section 234(c)

program for insurance of condominium unit mortgages with approximately

7.7 percent of insured mortgages in FY 1993. There is no policy reason

why the practice of tiered pricing should be viewed differently for

section 234(c) mortgages as for section 203(b) mortgages. It should be

restricted in both programs. In addition, the Department anticipates

that additional significant single family programs may be added to the

National Housing Act outside of section 203 with the same potential for

discriminatory treatment through tiered pricing. The law should not be

interpreted to require specific amendment of section 203(t) as a

prerequisite to addressing tiered pricing concerns in new programs; the

better reading is that the law permits HUD to attack any tiered pricing

concerns for each new program without the need for express new

authority.

The general rulemaking authority in section 211 of the National

Housing Act permits HUD to adopt rules and regulations that it regards

as necessary to carry out Title II of the National Housing Act; that

authority permits HUD to adopt and apply its mortgagee approval

requirements generally to all programs and the tiered pricing

restrictions are being adopted in the regulations as an additional

section of the mortgagee approval requirements. In section 539 of the

National Housing Act, which will be discussed in a later section,

Congress acknowledged the relationship of the tiered pricing

restrictions of section 203(t) with the prohibition of a minimum loan

amount in section 535 of the National Housing Act. Congress required

the Secretary to assess the compliance of a mortgagee with both

requirements in connection with any HUD examination of a mortgagee, and

required a single procedure for a private individual to require

determination of a mortgagee's compliance with both requirements.

Section 535 has already been implemented by regulation for all single

family programs and it is reasonable to keep the same broad approach

for the related provision. The Department is sympathetic to the

commenters' concern that extension of the tiered pricing restrictions

to many minor programs could be burdensome. The Department will respond

to this concern by focusing its review of tiered pricing compliance on

a limited number of mortgage types involving major programs as

discussed below.

Mortgage Type

The proposed rule provides for comparison only of mortgages of the

same mortgage type. Instead of describing each mortgage type, the

proposed rule provided that a mortgage type would include those groups

of mortgages that are closely parallel in important risk

characteristics. The proposed rule would have authorized the Secretary

to develop standards and definitions regarding risk characteristics.

The preamble to the proposed rule suggested that mortgage types could

be based both on approaches to interest rate (fixed rate, ARM, GPM) and

insurance program (sections 203(b) and 234(c) separated from section

203(k)). The Department indicated particular interest in receiving

industry comment.

The commenters provided many suggestions for developing mortgage

types. There was no consensus regarding appropriate typing. The

following were cited by one or more commenters as characteristics that

should place mortgages in separate categories: purchase vs. refinance,

attached/condominium vs. detached (203(b)), high vs. low loan-to-value

ratio, adjustable rate vs. fixed rate level payment vs. fixed rate

graduated payment, new vs. existing construction, no- or low-closing

cost loans (refinances or others) with premium interest rate vs. market

rate, and different FHA mortgage insurance funds.

One commenter stated that mortgage types should be based on cost of

origination instead of risk. The proposed rule reference to risk was

taken from the pertinent discussion in the Conference Committee report

on the statute1, but that report also mentioned expenses. The

report states:

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\1\H.R. Rep. 101-922, p. 393.

This section is intended to apply to Sec. 203 of the National

Housing Act by loan type. For example, mortgages insured under the

section 203(k) program may be priced differently from mortgages

insured under the 203(b) program. The Committee recognizes that

different types of mortgages involve differing levels of risk,

processing expenses or other factors that differentiate them and

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necessitate pricing variation.

The basic objective is to avoid comparing mortgages where one would

ordinarily expect to find interest rate and/or discount point

differences due to the nature of the mortgage even given identical

borrowers, property and loan amount. HUD agrees that the proposed

rule's reference only to ``risk characteristics'' may be too limiting

and additional language has been added to Sec. 202.20(g) that

paraphrases the Conference Committee report.

The Department does not consider it advisable to place a fixed

delineation of mortgage types in the rule because of lack of experience

and potential new mortgage programs and pricing practices. Instead the

Department has retained general language providing for the Secretary to

provide standards and definitions. Based on this authority, HUD's

monitoring for tiered pricing compliance will initially be based on a

mortgage type definition that will divide mortgages only into two types

based on program: section 203(b)/section 234(c) mortgages as one type,

with section 203(k) rehabilitation loans as a separate type. The rule

extends to all single family programs as discussed above, but at this

time HUD intends to restrict routine monitoring to these major

programs.

HUD considered whether each mortgage type based on program should

be further subdivided based on other characteristics of the mortgage

such as those cited by the commenters. HUD has concluded that it does

not have sufficient information and experience to determine additional

appropriate subtypes at this time, given the lack of any consensus

among the commenters who addressed this question. An excessive number

of overly specific mortgage types would result if each of the suggested

methods of grouping mortgages were adopted by HUD. The final rule

permits HUD to further define mortgage types if its monitoring

experience demonstrates that this is necessary to avoid inappropriate

comparisons of mortgages when determining compliance with the rule.

Definition of ``Area''

The statute applies the two percentage point limitation on mortgage

charge rate variation to mortgages on dwellings in an ``area''. The

statute states that ``area'' shall have the meaning given the term

under section 203(b)(2) of the National Housing Act. The pertinent

sentence in section 203(b)(2) states that ``area'' means a county or a

metropolitan statistical area (MSA) as established by the Office of

Management and Budget, whichever results in the higher dollar amount.

This definition is ordinarily used when implementing HUD's authority to

designate ``high-cost'' areas where--due to high median area house

prices--the FHA maximum mortgage limit can exceed the $67,500 amount

that would otherwise apply for a 1-family residence. There is some

ambiguity in applying this definition of ``area'' to the tiered pricing

context.

The proposed rule regarded the statutory reference to the section

203(b)(2) definition as an indication that the areas for tiered pricing

purposes should be the high-cost areas already designated by HUD to

determine maximum mortgage amounts. These areas currently cover most of

the population of the country and include most MSAs as well as some

counties that are not part of any MSA. Under the reading of the statute

adopted in the proposed rule, there is no specific statutory guidance

regarding how other parts of the country should be divided into areas

for purposes of tiered pricing comparisons. The proposed rule would

have divided the rest of the country (i.e, excluding the designated

high-cost areas) by using the jurisdictional lines of HUD Field

Offices.

HUD received 5 comments--all negative--on its proposed approach to

defining areas. Several commenters indicated that the proposed rule was

difficult to understand. Three commenters made specific suggestions for

different approaches. One asserted that the statutory reference to the

section 203(b)(2) definition of area simply means that loans made in

metropolitan statistical areas are compared with other loans made in

the same metropolitan statistical area, and loans made outside of

metropolitan statistical areas are compared on a county by county

basis. This commenter also recommended use of counties because HMDA

data is compiled by counties. HMDA data is not compiled for loans

outside MSAs, however, so that HMDA precedent is not pertinent

regarding defining rural land into ``areas'' for tiered pricing

purposes. Another commenter accepted HUD's use of designated high-cost

areas as areas for purposes of the rule, but also suggested that the

remainder of the country be compared on a county-by-county basis

instead of using HUD Field Office jurisdictions. A third commenter also

objected to use of HUD Field Office jurisdictions and suggested the use

of areas served by the lender's own offices as they might change from

time to time. Another commenter noted that different counties or states

may require different pricing levels even though they are both in the

same HUD Office jurisdiction, without offering any alternative

approach. None of the commenters submitted any information regarding

how lenders typically vary pricing levels geographically. No evidence

was submitted indicating that pricing typically varies on a county-by-

county basis.

After reviewing the comments, HUD continues to conclude that the

most likely intent of the statutory reference to the section 203(b)(2)

definition of area was to require use of the same high-cost areas that

are used for designating mortgage limits under section 203(b)(2). It is

unlikely that the statute demands use of county-by-county comparisons

outside of MSAs, as one commenter suggested, because of the lack of

evidence that mortgages are priced on a county basis and because of the

very large number of separate rural areas that would result--with very

few mortgages made by any one mortgagee in most of the areas. County

comparisons are unlikely to reveal any excessive tiered pricing that

may be occurring over broader areas outside of MSAs.

It is possible that the statute does not mandate any tiered pricing

comparisons outside of high-cost areas. If so, HUD still would possess

authority to extend the rule's coverage through its general rulemaking

authority and HUD believes that it is not appropriate to exclude parts

of the country from coverage of the final rule. There is no reason to

conclude that excessive tiered pricing, to the extent that it exists,

is limited to high-cost areas.

Any dividing of the rural and non-high-cost MSAs will be somewhat

arbitrary and will not match exactly any mortgagee's perception of

different mortgage markets. Use of political jurisdictional lines could

result in too many areas (counties) or too few and too large areas

(states). HUD has concluded that use of HUD Office jurisdictional lines

is an appropriate compromise. In large sparsely populated states which

are unlikely to be divided into well-defined separate mortgage pricing

areas, there is typically a single HUD Office. In the more populous

state there are likely to be several HUD offices, as well as high-cost

areas, so that the state will be divided into a number of different

areas for tiered pricing comparisons. HUD has previously decided to use

HUD Office jurisdictions as a means of dividing up mortgage markets for

monitoring purposes. For example, 24 CFR 202.11(d)(i) defines the

``normal rate'' of claims and defaults in an area on the basis of HUD

Office jurisdictions.

Therefore, HUD has not made any substantive changes in the

definition of area in the final rule. A technical change has been made

in the reference to the regulation on high-cost areas to reflect

revisions made by a final rule that implemented a revision of section

203(b)(2) in the Housing and Community Development Act of 1992 (58 FR

40996, July 30, 1993.)

Variations From Customary Lending Practices

The commenters raised a number of questions involving cases where

the actual charges for the mortgage might differ in special cases from

the prevailing policy of the mortgagee. Commenters asked about reduced

rates for certain loans as a promotion or to gain market share in an

area or on a ``random basis,'' about par-plus pricing, about negotiated

interest rates or points needed to attract a particular mortgagor from

a competitor lender, and about loan officer overages. Rather than

discuss each of these situations in detail, the Department will point

out that the statute is directed at a mortgagee's ``customary lending

practices''. It is permissible for a mortgagee to have a lending policy

that permits occasional deviations from the standard terms it is

generally offering to customers in its lending area, even if beyond a

two percent variation, provided that those deviations are not applied

in a discriminatory fashion and are available to purchasers on lower as

well as higher priced homes on an individual case basis. The loan file

should document why special pricing was applied. The two percent

variation limitation is permitted by law not to recognize the

occasional exceptions to a pricing policy, but to permit the

mortgagee's pricing policy itself to contain some variations among

loans, principally to ensure that a mortgagee can afford to make loans

of all sizes.

One commenter objected to the lack of a good faith exception

process for what it characterized as ``good faith noncompliance based

on circumstances which do not violate the spirit of a regulation * * *

There should be the ability to show that in good faith, tiered pricing

was not based on loan amounts or other discriminatory factors.'' HUD

does not interpret the statute as authorizing a formal good faith

exception although, as stated above, the statute is concerned with

customary practices instead of the actual terms of each individual

mortgage. Monitoring and enforcement in this area, as in other areas,

can take into account actual circumstances when determining appropriate

responses to a mortgagee's noncompliance. The mere lack of intent to

engage in forbidden discrimination is not a defense. The statute

prohibits customary lending practices with variation in mortgage charge

rates on greater than two percentage points regardless of any

legitimate business motive for the excess variation. The statute

requires HUD to determine that lesser variations in mortgage charge

rates are based on actual variations in fees or costs to the mortgagee.

The mere lack of an illegitimate discriminatory motive for variations

is not enough.

III. Implementation of Section 539(a) of the National Housing Act

Section 330(b) of the Cranston-Gonzalez National Affordable Housing

Act added a new section 539(a) to the National Housing Act (NHA). The

new section requires, among other things, that the Secretary establish

a procedure whereby any person may file a request for a determination

on whether a mortgagee is in compliance with: (1) The new section

203(t) on tiered pricing, and (2) certain other provisions of the

National Housing Act that prohibit minimum loan amounts for insured

mortgages and Title I loans. The Secretary must also establish a

procedure to inform each requestor of the disposition of its request

for determination and to publish in the Federal Register the

disposition of any case referred to the Mortgagee Review Board for

action.

HUD published a notice setting forth the procedure for filing a

request for determination of compliance with section 203(t) and the

minimum loan amount prohibitions (56 FR 33455, July 22, 1991.) Section

330(b) requires that this notice be followed by a final rule. The

substance of the notice is included in this rule as a new subsection

(i) to Sec. 202.20. The Department has also amended Sec. 201.10(g) to

refer to new Sec. 202.20(i) because the procedure also applies to Title

I Lenders.

Many commenters, primarily State Banking Associations, objected to

this provision as a ``private right of action'' that would cause HUD to

conduct ``fishing expeditions'' at great expense to mortgagees. HUD

believes that the commenters misunderstood the intent of the provision.

HUD has done no more than follow the requirements of section 539(a)(2)

of the National Housing Act. Those requirements must be read together

with section 539(a)(1), which directs the Secretary to assess the

performance of a mortgagee in meeting the tiered pricing and minimum

loan amount prohibitions ``[i]n connection with any examination of a

mortgagee by the Secretary pursuant to this [National Housing] Act.''

In other words, a tiered pricing review generally would be conducted as

part of the regular mortgagee monitoring conducted by HUD.

Section 539(b)(2) ensures that HUD can receive evidence of

violations outside of its regular mortgagee monitoring so that special

investigations can be made if appropriate. The law and the rule do not

compel HUD to conduct an investigation at the demand of any person. A

person may ``request'' a HUD determination of compliance, and HUD must

inform the person of the disposition of the request, which could be a

decision that no investigation was warranted. One commenter suggested

that requests be published. They will be available to the public upon

request under the Freedom of Information Act (except to the extent that

withholding is determined to be necessary under the ``investigatory

records'' exception to disclosure) but HUD does not plan a formal

publication system.

An investigation might not be warranted if the requestor provides

no reason to suspect a tiered pricing violation by the mortgagee or if

the request appears to have been solely for harassment purposes. HUD

has limited investigative and monitoring resources and will not waste

those resources in pursuing all requests no matter how unsupported or

frivolous. HUD will respond vigorously when it receives reason to

suspect a tiered pricing violation even though a violation may not have

been identified through the regular mortgagee monitoring process.

IV. Procedural Requirements

Assistance Numbers

The Catalog of Federal Domestic Assistance program numbers are:

14.108, 14.110, 14.117, 14.119, 14.120, 14.121, 14.122, 14.123, 14.133,

14.142 and 14.162.

Regulatory Flexibility Act

Under 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the

Undersigned hereby certifies that this rule does not have a significant

economic impact on a substantial number of small entities. The rule

carries out a statutory mandate designed to ensure that FHA mortgagees

will not discriminate against FHA mortgagors with low principal loans.

The Department believes that the rule does this in a manner which

interferes to the minimum extent feasible with ordinary business

operations of small entities.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule do not have ``federalism implications'' within

the meaning of the Order. The rule does not alter existing

relationships between the Department, state and local governments and

the private sector.

Executive Order 12606, the Family

The General Counsel, as the Designated Official for Executive Order

12606, the Family, has determined that the provisions of this rule do

not have the potential significant impact on family formation,

maintenance, and general well-being within the meaning of the Order.

The tiered pricing rule serves primarily as a tool for prohibiting

discrimination against mortgagors who apply for low-principal loans.

Environmental Impact

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations in 24 CFR part 50 that

implement section 102(2)(C) of the National Environmental Policy Act of

1969. (42 U.S.C. 4332) The Finding of No Significant Impact is

available for public inspection and copying through Friday, 7:30 a.m.

until 6:00 p.m. in the Office of the Rules Docket Clerk, Office of

General Counsel, room 10276, Department of Housing and Urban

Development, 451 Seventh Street SW., Washington, DC 20410.

Regulatory Agenda

This rule was listed as sequence number 1528 in the Department's

Semiannual Agenda of Regulations published on October 25, 1993 (58 FR

56402, 56428) pursuant to Executive Order 12866 and the Regulatory

Flexibility Act.

List of Subjects

24 CFR Part 201

Health facilities, Historic preservation, Home improvement, Loan

programs--housing and community development, Manufactured homes,

Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 202

Administrative practice and procedure, Home improvement,

Manufactured homes, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, 24 CFR parts 201 and 202 are amended to read as

follows:

PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS

1. The authority citation for 24 CFR part 201 is revised to read as

follows:

Authority: 12 U.S.C. 1703; 42 U.S.C. 3535(d).

2. In Sec. 201.10, paragraph (g) is amended by adding to the end of

the paragraph a new sentence to read as follows:

Sec. 201.10 Loan amounts.

* * * * *

(g) * * * A person may request the Secretary to determine

compliance of a lender with this section as provided in Sec. 202.20(i)

of this chapter.

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

3. The authority citation for 24 CFR part 202 continues to read as

follows:

Authority: 12 U.S.C. 1703, 1709, and 1715(b); 42 U.S.C. 3535(d).

Subpart B--Approval of Mortgages

4. Part 202, subpart B, is amended by adding a new Sec. 202.20 to

read as follows:

Sec. 202.20 Tiered Pricing.

(a) Customary lending practices. (1) The customary lending

practices of a mortgagee for its FHA insured single family mortgages

shall not provide for a variation in mortgage charge rates that exceeds

two percentage points. A variation is determined as provided in

paragraph (f) of this section.

(2) The customary lending practices of a mortgagee include all FHA

insured single family mortgages originated by the mortgagee. They also

include FHA insured single family mortgages funded by the mortgagee or

purchased from the originator if requirements of the mortgagee have the

effect of leading to violation of this section by the originator. The

responsibility of sponsors of loan correspondents is also governed by

Sec. 202.15(c)(6).

(3) Any variations in the mortgage charge rate up to two percentage

points under the mortgagee's customary lending practices must be based

on actual variations in fees or cost to the mortgagee to make the loan,

which shall be determined after accounting for the value of servicing

rights generated by making the loan and other income to the mortgagee

related to the loan. Fees or costs must be fully documented for each

specific loan.

(b) Area. For purposes of this section, an area is:

(1) An area used by HUD for purposes of Sec. 203.18(a) of this

chapter to determine the median 1-family house price for an area; or

(2) The area served by a HUD field office but excluding any area

included in paragraph (b)(1) of this section.

(c) Mortgage charges. Mortgage charges include any charges under

the control of the mortgagee and not collected for the benefit of third

parties, including, but not limited to interest discount points and

loan origination fees.

(d) Interest rate. Whenever a mortgagee offers a particular

interest rate for a mortgage type in an area, it may not restrict the

availability of the rate in the area on the basis of the principal

amount of the mortgage. A mortgagee may not direct mortgage applicants

to any specific interest rate category on the basis of loan size.

(e) Mortgage charge rate. The mortgage charge rate is defined as

the amount of mortgage charges for an FHA insured mortgage expressed as

a percentage of the initial principal amount of the mortgage.

(f) Determining excess variations. Variation in mortgage charge

rates for a mortgage type is determined by comparing all mortgage

charge rates offered by the mortgagee within an area for the mortgage

type for a designated day or other time period, including mortgage

charge rates for all actual mortgage applications.

(g) Mortgage type. A mortgage type for purposes of paragraph (f) of

this section will include those mortgages that are closely parallel in

important characteristics affecting pricing and charges, such as level

of risk or processing expenses. The Secretary may develop standards and

definitions regarding mortgage types.

(h) Recordkeeping. Mortgagees are required to maintain records on

pricing information, satisfactory to the Secretary, that would allow

for reasonable inspection by HUD for a period of at least two years.

Additionally, many mortgagees are required to maintain racial, ethnic,

and gender data under the regulations implementing the Home Mortgage

Disclosure Act (12 U.S.C. 2801-2810).

(i) Request for determination of compliance. Pursuant to section

539(a) of the Cranston-Gonzalez National Affordable Housing Act, any

person may file a request that the Secretary determine whether a

mortgagee or Title I lender is in compliance with this section or with

sections implementing sections 223(a)(7) and 535 of the National

Housing Act such as Secs. 201.10(g), 203.18d and 203.43(c)(5) of this

chapter.2 The request for determination shall be made to the

following address: Department of Housing and Urban Development, Office

of Lender Activities and Land Sales Registration, 451 Seventh Street

SW., Room 9146, Washington, DC 20410. Each request shall include the

requestor's name and address and the name and address of the mortgagee

or Title I lender involved. A complete explanation of the circumstances

and the mortgagee's or Title I lender's practices, to the extent known,

must be delineated. Any documented evidence that the requestor may

have, including copies of advertisements, HUD-1 Settlement Statements,

sales contracts, or other relevant documents would greatly expedite the

Department's review and the resultant determination. The Secretary

shall inform the requestor of the disposition of the request. The

Secretary shall publish in the Federal Register the disposition of any

case referred by the Secretary to the Mortgagee Review Board.

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\2\Only section 535 applies to Title I lenders.

(Approved by the Office of Management and Budget under control

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numbers 2502-0265 and 2502-0059)

Dated: February 15, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 94-4331 Filed 2-24-94; 8:45 am]

BILLING CODE 4210-27-P