Single Family Mortgage Insurance Premium

SUMMARY: This proposed rule would provide many benefits to the mortgage

lenders that would reduce their servicing costs and the confusion

generated by adjustments to the annual mortgage insurance premium (MIP)

on cases not endorsed within the first six months after amortization.

The rule would change the method of payment, and the reconciliation

schedule, and clarify the due date. The changes would result in an

increase in MIP income, thereby strengthening the FHA insurance fund.

Also, it would cut down on the costly reconciliation now done by HUD.

Specifically, this proposed rule would provide that the FHA

Commissioner can accrue MIP from the beginning of amortization (as

defined in 24 CFR 203.251) on all Section 530 (of the National Housing

Act) loans and risk-based loans, no matter what time frame exists

between the endorsement date and the beginning of amortization. It

would also amend the existing regulation by requiring that mortgagees

pay the monthly installments as due on or before the 10th of the month,

whether or not collected from the mortgagor. A new system is being

developed (and expected to be operational by January 1997) which would

produce a monthly notice of premiums due, and the reconciliation would

be made monthly by the lender when the premium is paid. There would be

no requirement for annual reconciliation.

DATES: Comment due date: March 26, 1996.

ADDRESSES: Interested persons are invited to submit comments regarding

this rule to the Rules Docket Clerk, Office of General Counsel, Room

10276, Department of Housing and Urban Development, 451 Seventh Street

SW., Washington, DC 20410-0500.

Communications should refer to the above docket number and title.

Facsimile (FAX) comments are not acceptable. A copy of each

communication submitted will be available for public inspection and

copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Christopher Peterson, Director, Office

of Mortgage Insurance Accounting and Servicing, Room 2108, Department

of Housing and Urban Development, 451 7th Street SW., Washington, DC

20410, telephone (202) 708-1046. For telephone communication, contact

Anne Baird-Bridges, Single Family Insurance Operations Division, at

(202) 708-2438. Hearing or speech-impaired individuals may call HUD's

TDD number (202) 708-4594. These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

Section 320 of the Housing and Community Development Act of 1980

(Pub. L. 96-399) amended Title V of the National Housing Act (the Act)

(12 U.S.C. 1702 et seq.) to add a new section 530. Section 530

requires, with respect to insurance of mortgages under Title II of the

Act, the payment of MIPs upon receipt from the borrower, except HUD may

approve payment of such premiums within 24 months of such receipt if

the financial institution or mortgagee pays interest to the insurance

fund. On July 15, 1982, at 47 FR 30750, the Department published a

final rule that implemented section 530 by requiring mortgagees to pay

the MIP in installments due on or before the 10th day of the month

following the month in which payments are due from the mortgagors. On

June 23, 1983, at 48 FR 28794, the Department published a final rule

which set forth the requirement that the borrower pay a single premium

when the mortgage loan is closed, which represents the total premium

obligation for the insured loan. This change applied to all new

mortgages insured under the Mutual Mortgage Insurance Fund; therefore,

after the change took effect, section 530 was limited to mortgages

insured under the Special Risk and General Insurance Funds.

Section 530 loans include all FHA loans endorsed prior to September

30, 1983, and all FHA loans insured under the Special Risk and General

Insurance Funds after September 1983. Lenders are required to remit

annual MIP in 12 monthly payments totalling one-half of one percent of

the average outstanding principal obligation of the mortgage.

The risk-based premium became effective on July 1, 1991, for all

loans insured under the provisions of the Mutual Mortgage Insurance

Fund, in accordance with the Omnibus Budget Reconciliation Act of 1990

(Pub. L. 101-508) and the National Affordable Housing Act of 1990 (Pub.

L. 101-625). Sections 203.284 and 203.285 of title 24 of the Code of

Federal Regulations were promulgated to implement the provisions

governing risk-based premiums (See 57 FR 15208, April 24, 1992, and 58

FR 40996, July 30, 1993). Risk-based premiums have two components: the

up-front premium and the periodic premium. Periodic premiums on risk-

based loans are collected over a set number of years, depending on the

loan-to-value ratio of the mortgage. Premium payments are paid in

twelve monthly installments totalling one-half of one percent of the

insured principal balance of the mortgage, minus any amounts included

to finance up-front MIP. However, there is an exception under

Sec. 203.285 for any mortgage with a term of 15 years or less, which

requires premium payments totalling one-fourth of one percent of the

insured principal balance.

Proposed Change

This rule proposes to change the method of payment and the

reconciliation schedule, and to clarify the due date. Specifically,

this proposed rule would provide that the FHA Commissioner can accrue

MIP from the beginning of amortization (as defined in 24 CFR 203.251)

on all Section 530 and risk-based loans, no matter what time frame

exists between the endorsement date and the beginning of amortization.

It would also amend the existing regulation by requiring that

mortgagees pay the monthly installments as due on or before the 10th of

the month, whether or not collected from the mortgagor. A monthly

notice of premiums due would be sent, and reconciliation would be made

monthly by the lender when the MIP payment is made. There would be no

requirement for annual reconciliation.

This rule proposes to revise Secs. 203.262, 203.264, and 203.265 to

reflect the new policy on monthly payment of MIPs. The revised

provisions would also apply to risk-based premiums under Secs. 203.284

and 203.285.

Sections 203.262 and 203.264 apply to the scheduled payments.

Existing Sec. 203.264 requires that ``any portion of the periodic MIP

received by the mortgagee from the mortgagor on or after September 1,

1982, shall be paid to the Commissioner on or before the tenth of the

month following the month in which it was received,'' provided that

[[Page 2645]]

the full annual MIP be paid by the tenth of the month following the

anniversary date of amortization. At the initiation of the Section 530

Program, mortgagees were offered two payment options:

a. The Basic Monthly Payment Method. According to this method, the

lender remits on a monthly basis, on or before the tenth of each month,

a payment equal to all Section 530 MIP amounts collected from

mortgagors during the preceding month, plus any portion of annual MIP

remaining due for the current anniversary month whether collected or

not.

b. Optional Monthly Payment Method. According to this method, the

lender remits a monthly payment equal to \1/12\th of the total of all

annual Section 530 MIPs for all mortgages in the mortgagee's servicing

portfolio for the month, plus any annual premiums remaining due,

without regard to MIP amounts collected from mortgagors.

Most lenders opt to pay the premiums as due. This proposed rule

would eliminate the option to pay the premiums when collected. HUD

systems are set up to reconcile remittances of MIP, late charges, and

interest based on payment of monthly premiums by the 10th of the month;

exceptions must be manually processed.

The two provisions to be modified for Section 530 loans also apply

to the periodic portion of risk-based loans. Mortgagees submitting

risk-based monthly premiums have been following HUD's policy on

adjustment of initial MIP depending on the date of endorsement, and

have been given the option of paying monthly premiums (1) ``as due'' or

(2) ``as collected''.

Section 530 and risk-based monthly payments would be recorded in

the Single Family Premium Collection Subsystem, which is now being

designed. Monthly premiums would be due on the first of the month after

the beginning of amortization (as defined in 24 CFR 203.251) and must

be received on or before the tenth. Reconciliation between amounts

expected by HUD and amounts remitted by the lender would be

accomplished after the date of endorsement, when the insurance

information has been fed into the FHA Single Family Insurance System.

As soon as possible after endorsement, HUD would begin verifying that

the lender has paid the required monthly premiums due at that time on

each case, and would begin notifying the lender on a monthly basis of

any discrepancies existing between expected, versus remitted, amounts.

Until the new system is implemented, lenders would continue to

reconcile risk-based monthly premiums at case level using MGIC Investor

Services Corporation, and Section 530 monthly premiums at portfolio

level based on the Advance Notice of Annual Premiums for Anniversary

Due Date, which is being sent by HUD.

The proposed new Secs. 203.262 and 203.264 would authorize the FHA

Commissioner to accrue annual premiums from the beginning of

amortization (as defined in 24 CFR 203.251) on all Section 530 and

risk-based loans, no matter what time frame exists between the

endorsement date and the beginning of amortization. This rule also

proposes to delete Sec. 203.263 which provides for an adjustment on the

accrual date of the initial annual MIP depending on the date of

endorsement of the loan. Section 203.268 would be revised to provide

that if the insurance contract is terminated, the lender would pay a

portion of the MIP prorated from the beginning of amortization (as

defined in 24 CFR 203.251) to the month in which the loan is

terminated. The final monthly payment would be due on the first of the

month following termination.

The changes proposed in this rule would provide many benefits to

the mortgage lenders that would reduce their servicing costs and the

confusion generated by adjustments to MIP on cases not endorsed within

the first six months after amortization. The result would be an

increase in MIP income, thereby strengthening the FHA insurance fund.

The proposed changes would cut down on the costly reconciliation now

done by HUD. (The cost of reconciliation on Section 530 and monthly

risk based premiums exceeded $7.5 million in FY 1994.)

According to research completed on FY 1993 cases, approximately 7%

of cases were not endorsed within the first six months of amortization.

Currently some lenders escrow the premiums received from the homeowners

on Section 530 and risk-based loans and remit the premiums to HUD at

the beginning of amortization rather than when the case is endorsed for

insurance. This has led to much confusion and variations in the

computation of initial premiums due, because some contingencies cannot

be forseen at settlement; i.e., endorsement before the beginning of

amortization. The revised regulation would prevent confusion for those

cases endorsed outside the six-month window by requiring lenders to

follow the same guidelines for all cases needing periodic MIP.

MIP income would increase by approximately $15 million per year.

This amount represents the reduction in premiums now taken by the

lenders for both Section 530 loans and risk-based loans, when the loans

are endorsed over six months from the beginning of amortization.

Lenders should not receive a reduction in monthly MIP due because of

late endorsement for the following reasons:

a. This is inconsistent with HUD's policy on one-time and up-front

MIP. These amounts are paid within 15 days of closing, and no reduction

is given based on the date of endorsement. On risk based loans,

Sec. 203.284 requires payment of periodic MIP for a specific number of

years, depending on the loan-to-value ratio. When the loan is endorsed

after the six-month window, the period of time for which payments are

due is being reduced.

b. Often the late endorsement results from late submission of the

closing package by the lenders to the Field Office.

The new Sec. 203.264 would require that payment of the periodic MIP

be received from the mortgagee on or before the tenth day of the month

following the month in which it was due from the mortgagor. For

example, for a case closed in August, the initial premium would be

remitted by the lender by September 10. Monthly reconciliation would

replace annual reconciliation. Once the new system is implemented,

monthly notices would reflect a breakdown by case number and by month

of the cumulative amounts of monthly premium, late charge, and interest

due.

The proposed rule changes the method of payment, and the

reconciliation schedule, and clarifies the due date. Payment of the

periodic MIP by the lender would be made monthly, regardless when

collected. Upon implementation of the new system, a monthly notice from

HUD would be sent and reconciliation would be made monthly by the

lender when the MIP payment is made. There would be no requirement for

annual reconciliation. Remittances would be due, not payable, on or

before the tenth day of the month.

Lenders would be informed that they are responsible for all loans

in their portfolio for which monthly payments are due, even if they do

not appear on the monthly notice. Because of servicing transfers,

endorsement delays, and terminations, monthly notices may not reflect

the current status of the lender's portfolio and may require

reconciliation.

The proposed changes would provide benefits to the mortgage lenders

and to HUD. Most lenders choose the ``payment when due'' option; the

choice is made by the lender when they begin

[[Page 2646]]

to send in premiums and is indicated on the Form 2748 or 2752. The

lender may change from the ``Payment as Received'' to the ``Payment

When Due'' option without permission, but must receive permission from

Headquarters before changing from the ``Payment When Due'' to the

``Payment as Received'' option.

The current Single Family Premium Collection System (A31) used for

MIP collection is not set up to reconcile payments received under the

``Payment as Received'' option. The new Single Family Premiums

Collection System (SFPCS) is not being set up to reconcile these

payments either. The system enhancements necessary to accommodate this

option would not be cost effective, and are not necessary, because most

lenders have chosen the other option anyway.

It should be noted that Sec. 203.284(f) ``Applicability of Other

Sections'' does not include Sec. 203.264 as applicable to mortgages

covered by Sec. 203.284, although HUD has taken the position that this

provision is properly applicable to mortgages with risk-based premiums.

This rule would re-insert a reference to Sec. 203.264 that was

inadvertently deleted when that section was published as a final rule

(See 57 FR 15209, April 24, 1992). The rule would also insert

references to Secs. 203.262 and 203.265 in lieu of the current

Secs. 203.284(d) and (e) which are being deleted. Similar changes would

be made to Sec. 203.285(c).

Other Matters

Environmental Review

A Finding of No Significant Impact with respect to the environment

has been made in accordance with the HUD regulation at 24 CFR part 50,

which implements section 102(2)(C) of the National Environmental Policy

Act of 1969. The Finding of No Significant Impact is available for

public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

Office of the Rules Docket Clerk.

Executive Order 12866

This proposed rule was reviewed by the Office of Management and

Budget (OMB) under Executive Order 12866 on Regulatory Planning and

Review, issued by the President on September 30, 1993. Any changes made

in this interim rule as a result of that review are clearly identified

in the docket file, which is available for public inspection in the

office of the Department's Rules Docket Clerk, Room 10276, 451 Seventh

Street SW., Washington, DC.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)) has reviewed and approved this rule, and in so doing

certifies that this rule would not have a significant economic impact

on a substantial number of small entities. A review of the universe of

approved mortgagees indicates that only a small percentage of them have

assets of less than $10 million. These can be considered ``small

entities'' for purposes of this regulation. The number of ``small

entities'' affected, therefore, is not substantial. Further, HUD

records indicate smaller companies hold relatively few insured

mortgages, and they tend to concentrate their business in the

conventional mortgage market. Thus, even for those ``small entities''

affected, the impact is expected to be relatively insignificant.

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 would not have substantial direct effects on

states or their political subdivisions, or the relationship between the

federal government and the states, or on the distribution of power and

responsibilities among the various levels of government. As a result,

the rule is not subject to review under the order.

Executive Order 12606, the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs would

result from promulgation of this rule, as those policies and programs

relate to family concerns.

List of Subjects

24 CFR Part 203

Hawaiian Natives, Home improvement, Indians--lands, Loan programs--

housing and community development, Mortgage insurance, Reporting and

recordkeeping requirements, Solar energy.

List of Subjects

24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

Accordingly, the Department proposes to amend Subtitle B, Chapter

II, Subchapter B, of Title 24 of the Code of Federal Regulations as

follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

1. The authority for part 203 would continue to read as follows:

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

Subpart C also is issued under 12 U.S.C. 1715u.

2. Section 203.262 would be revised to read as follows:

Sec. 203.262 Due date of periodic MIP.

The full initial and each annual MIP shall be due and payable no

later than the 10th day after the amortization anniversary date.

Sec. 203.263 [Removed]

3. Section 203.263 would be removed.

4. Section 203.264 would be revised to read as follows:

Sec. 203.264 Payment of periodic MIP.

The mortgagee shall pay each MIP in twelve equal monthly

installments. Each monthly installment shall be due and payable to the

Secretary no later than the tenth day of each month, beginning in the

month in which the mortgagor is required to make the first monthly

mortgage payment or, if later, in (insert the first month after the

effective date of the rule).

5. In Sec. 203.265, paragraph (a) would be revised to read as

follows:

Sec. 203.265 Mortgagee's late charge and interest.

(a) Periodic MIP which are received by the Commissioner after the

payment dates prescribed by Secs. 203.262 and 203.264 shall include a

late charge of four percent of the amount paid.

* * * * *

6. In Sec. 203.268, paragraph (a) would be revised to read as

follows:

Sec. 203.268 Pro rata payment of periodic MIP.

(a) If the insurance contract is terminated before the due date of

the initial MIP, the mortgagee shall pay a portion of the MIP prorated

from the beginning of amortization, as defined in Sec. 203.251, to the

date of termination.

* * * * *

7. In Sec. 203.284, paragraphs (d) and (e) would be removed, and

paragraph (f) would be revised to read as follows:

Sec. 203.284 Calculation of up-front and annual MIP on or after July

1, 1991.

* * * * *

[[Page 2647]]

(f) Applicability of other sections. The provisions of

Secs. 203.261, 203.262, 203.264, 203.265, 203.266, 203.267, 203.268,

203.280, and 203.282 are applicable to mortgages subject to premiums

under this section.

* * * * *

8. In Sec. 203.285, paragraph (c) would be revised to read as

follows:

Sec. 203.285 Fifteen-year mortgages: Calculation of up-front and

annual MIP on or after December 26, 1992.

* * * * *

(c) Applicability of certain provisions. The provisions of

Secs. 203.261, 203.262, 203.264, 203.265, 203.266, 203.267, 203.268,

203.280, 203.282, and 203.284(g) are applicable to mortgages subject to

premiums under this section.

* * * * *

PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE

9. The authority for part 221 would continue to read as follows:

Authority: 12 U.S.C. 1715b, 1715l; 42 U.S.C. 3535(d). Section

221.544(a)(3) is also issued under 12 U.S.C. 1707(a).

Sec. 221.251 [Amended]

10. In Sec. 221.251, paragraph (a) would be amended by removing the

reference to ``203.263 Adjustment of initial MIP.''

Dated: November 8, 1995.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-1305 Filed 1-25-96; 8:45 am]

BILLING CODE 4210-27-P