Office of the Assistant Secretary for HousingFederal Housing Commissioner; Single Family Mortgage Insurance Premium

SUMMARY: This rule makes final the proposed rule published by the

Department on January 26, 1996, which proposed 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 changes the method of payment and the

reconciliation schedule and clarifies the due date. It is expected that

the changes will result in an increase in MIP income, thereby

strengthening the FHA insurance fund. Also, costly reconciliation now

done by HUD will be cut.

Specifically, the rule provides 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 also amends 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 Summer 1997) which would produce a

monthly notice of premiums due, and the reconciliation will be made

monthly by the lender when the premium is paid. A new Single Family

Premium Collection Subsystem-Periodic (SFPCS-P) is being developed (and

expected to be operational by Summer 1997) which will produce a monthly

notice of premiums due, and the reconciliation will be made monthly by

the lender when the MIP is paid, thus eliminating the requirement for

annual reconciliation.

EFFECTIVE DATE: August 19, 1996.

FOR FURTHER INFORMATION CONTACT: John L. Stahl, Acting 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

TTY 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

remaining 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.

This Rule

On January 26, 1996, the Department published a proposed rule at 61

FR 2644. The public was afforded a 60-day comment period. No changes to

the January 26, 1996 proposed rule are needed as a result of the

comments. Therefore, this final rule adopts the proposed rule without

change. Below is a discussion of the changes made by this rule.

This rule changes the method of payment and the reconciliation

schedule and clarifies the due date. Specifically, the rule provides

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 also amends 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.

The rule revises Secs. 203.262, 203.264, and 203.265 to reflect the

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

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

anniversary date of amortization. At the initiation of

[[Page 37799]]

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. 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. This rule eliminates the option to pay the

premiums when collected.

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 premium payments will 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 will 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 will begin verifying

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

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

any discrepancies existing between expected, versus remitted, amounts.

Until SFPCS-P is implemented, lenders will 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.

New Secs. 203.262 and 203.264 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 deletes 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 is revised to

provide that if the insurance contract is terminated, the lender will

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 will be due on the first of the

month following termination.

The changes made by this rule provide many benefits to the mortgage

lenders that 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 expected is an increase in MIP income,

thereby strengthening the FHA insurance fund. The changes 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 foreseen at settlement; i.e., endorsement before the beginning of

amortization. The revised regulation prevents 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 is expected to 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 requires 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 and amortized in September, the

initial premium is payable to HUD by the lender no later than October

10. Monthly reconciliation replaces annual reconciliation. Once SFPCS-P

is implemented, monthly notices will reflect a breakdown by case number

and by month of the cumulative amounts of monthly premium, late charge,

and interest due.

The rule changes the method of payment, and the reconciliation

schedule, and clarifies the due date. Payment of the periodic MIP by

the lender is to be made monthly, regardless when collected. Upon

implementation of SFPCS-P, a monthly notice from HUD will be sent and

reconciliation will be made monthly by the lender when the MIP payment

is paid, thus eliminating the requirement for annual reconciliation.

MIP shall be due, and payable to the Commissioner, no later than the

tenth day of the month.

Lenders will 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 current Single Family Monthly Collection System used for MIP

collection is not set up to reconcile payments received under the

``Payment as Received'' option. The new SFPCS-P 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

[[Page 37800]]

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 re-inserts 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 also inserts 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 are made to

Sec. 203.285(c).

Public Comments

Comments were received from three commenters on the January 26,

1996 proposed rule: One housing development fund and two mortgage

corporations. One of the mortgage corporations fully supports the

proposed rule. Below is a listing of the comments presented from the

other two commenters. After each comment is the Department's response.

Comment: There are terminology conflicts between the regulations

and the HUD approved Deed of Trust, and clarification of the terms and

the changes to the HUD approved forms are requested before the rule

goes into effect.

Response: HUD Handbook 4165.1 REV-1 CHG. 3, Endorsement for

Insurance for Home Mortgage Premiums (Single Family) dated November 30,

1995 contains new model mortgage and note forms which remove

conflicting terminology. These changes became mandatory on June 1,

1996.

Comment: The reconciliation of the initial notice produced after

the SFPCS-P is completed will most likely contain thousands of

unmatched items for each lender. These will result from years of

unreconciled service transfers, terminations, incorrect case numbers,

and endorsement delays. Therefore, the commenter strongly urges the

Department to conduct a preliminary audit to quantify the extent of the

reconciliation required by both the lenders and HUD and then determine

an approach and implementation date.

Response: Since SFPCS-P is being designed to capture MIP payments

at case level, bills will contain detailed information to enable

lenders to reconcile their portfolios each billing period. Unidentified

cases will not be carried forward on SFPCS-P. HUD is working to resolve

all unidentified cases separately.

Comment: There should be some standard established and required for

the endorsement process. The commenter is concerned that the

elimination of the financial penalty could result in far more than

seven percent of the cases taking more than six months to be endorsed,

which could further complicate the ongoing reconciliation process.

Response: As long as a mortgage is submitted to HUD within 60 days

of closing as required by 24 CFR 203.255(b), HUD is committed to

proceeding within a reasonable time with its pre-endorsement review and

subsequent endorsement if the mortgage is determined to be eligible for

insurance. In nearly all cases that do not raise questions of

eligibility, the Mortgage Insurance Certificate (MIC) should be issued

long before the first half of the amortization year has expired. HUD

policy to date has not permitted Field Offices to deliberately delay

issuance of the MIC until the end of the first half of the amortization

year. HUD's Processing Center in Denver is meeting our national goal by

processing cases for endorsement in 10 days with a reject rate of six

percent or under.

Comment: The examples for timing of remittances and final payments

on terminations need clarification.

Response: To further clarify the example for the timing of

remittance as set forth in the proposed rule, the example has been

revised to read as follows: For a case closed in August with

amortization beginning in September, the initial premium is payable to

HUD by the lender no later than October 10.

For terminations, the final monthly payment would be due on the

first of the month following termination and payable to HUD no later

than the 10th of the month following termination. For example, if a

case is terminated in August, the final monthly payment would be

payable to HUD no later than September 10.

Other Matters

Environmental Review

A Finding of No Significant Impact with respect to the environment

was 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, for the January 26, 1996 proposed rule. Since this final rule

makes no changes to the proposed rule, the Finding of No Significant

Impact for the proposed rule shall serve as the finding for the final

rule. 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.

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 does 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 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. 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.

24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

[[Page 37801]]

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number is 14.117.

Accordingly, the Department amends parts 203 and 221 of title 24 of

the Code of Federal Regulations as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

1. The authority citation for part 203 continues to read as

follows:

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

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

2. Section 203.262 is 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 to

the Commissioner no later than the 10th day after the amortization

anniversary date.

Sec. 203.263 [Removed]

3. Section 203.263 is removed.

4. Section 203.264 is 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

Commissioner 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 September.

5. In Sec. 203.265, paragraph (a) is 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. Section 203.268 is amended by revising paragraph (a) 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. Section 203.284 is amended by removing and reserving paragraphs

(d) and (e) and revising paragraph (f) to read as follows:

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

1, 1991.

* * * * *

(d) [Removed and reserved]

(e) [Removed and reserved]

(f) Applicability of other sections. The provisions of

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

203.269, 203.280, and 203.282 are applicable to mortgages subject to

premiums under this section.

* * * * *

8. Section 203.285 is amended by revising paragraph (c) 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,

203.269, 203.280, 203.282, 203.284(c), 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 citation for part 221 is revised 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. Section 221.251(a) is amended by removing from the list

``203.263 Adjustment of initial MIP.''

Dated: July 10, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-18354 Filed 7-18-96; 8:45 am]

BILLING CODE 4210-27-P