Delegation of Insuring Authority to Direct Endorsement Mortgagees; Interim Rule

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200, 202, 203, and 206

[Docket No. FR-4169-I-01]

RIN 2502-AC87

Delegation of Insuring Authority to Direct Endorsement

Mortgagees; Interim Rule

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

Commissioner, HUD.

ACTION: Interim rule.

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SUMMARY: This interim rule implements the Lender Insurance program,

under which the Secretary will delegate the authority to insure single

family mortgages to certain mortgagees that are approved under the

Direct Endorsement program. This interim rule provides that eligible

mortgagees that participate in the Lender Insurance program will be

responsible for conducting a pre-insurance review during the

origination of their single family mortgages, and they will be

responsible for insuring the mortgages. HUD intends that delegating

this insurance authority through the Lender Insurance program will be

consistent with HUD's efforts to reinvent the Federal Housing

Administration (FHA) by creating a more efficient and less burdensome

process for providing single family mortgage insurance.

DATES: Effective Date: July 2, 1997. The information collection

requirements in Sec. 203.255(f) of this interim rule, however, will not

be effective until the Office of Management and Budget (OMB) has

approved them under the Paperwork Reduction Act of 1995 and assigned

them a control number. Publication of the control numbers notifies the

public that OMB has approved these information collection requirements.

Deadline for comments on this interim rule: August 1, 1997.

Deadline for comments on the proposed information collection

requirements: August 1, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim rule to the Office of the General Counsel, Rules Docket

Clerk, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW., Washington, DC 20410. Communications should refer

to the above docket number and title. A copy of each communication

submitted will be available for public inspection and copying during

regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above

address. HUD will not accept comments sent by facsimile (FAX).

HUD also invites interested persons to submit comments on the

proposed information collection requirements in Sec. 203.255(f) of this

interim rule. Comments should refer to the above docket number and

title, and should be sent to the Office of Information and Regulatory

Affairs, Office of Management and Budget, Attention: Desk Officer for

HUD, Washington, DC 20503.

FOR FURTHER INFORMATION CONTACT: John J. Coonts, Director, Office of

Insured Single Family Housing, Department of Housing and Urban

Development, Room 9162, 451 7th Street, SW., Washington, DC 20410;

telephone (202) 708-3046 (this number is not toll-free). Persons with

hearing or speech impairments may access this number via TTY by calling

the Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

Section 427 of the Departments of Veterans Affairs and Housing and

Urban Development, and Independent Agencies Appropriations Act, 1997

(Pub. L. 104-204, approved September 26, 1996; 110 Stat. 2874, 2928)

(the Appropriations Act) amended title II of the National Housing Act

(12 U.S.C. 1707 et seq.) to provide that the Secretary may delegate to

Direct Endorsement mortgagees the authority to insure mortgages on

single family properties. Section 427 provided that, in determining

whether to delegate this authority to a mortgagee, the Secretary must

consider the experience and performance of the mortgagee in order to

minimize the risk of loss to the insurance funds. Section 427 also

provided for enforcement of the insurance requirements by expressly

authorizing the Secretary to require indemnification from the mortgagee

under certain circumstances in the event of a claim.

Under the Federal Housing Administration's (FHA's) current

insurance endorsement process, a copy of FHA's Mortgage Insurance

Certificate (MIC) is evidence that FHA has actually insured a mortgage.

The Secretary issues an MIC, endorsing the mortgage for insurance,

after determining that a mortgage meets the eligibility requirements

for insurance. Although issuing MICs is a highly routine process, it is

also a very staff-intensive and time-consuming one, and one that

requires unnecessary paperwork for the mortgagee and HUD. Under section

427 of the Appropriations Act, the Secretary can now delegate the

insuring authority to certain Direct Endorsement mortgagees. This

interim rule will therefore implement a new Lender Insurance program

that will give mortgagees participating in the program the

responsibility of performing their own pre-insurance review, and of

insuring the mortgages they have underwritten.

Consistent with HUD's efforts to reduce the amount of paperwork

associated with FHA insured loans, mortgagees under this new Lender

Insurance program will be required to communicate with HUD in a purely

automated manner. HUD's new electronic system for the Lender Insurance

program is in its final stages of development and should be operational

in several months.

In addition, HUD is developing a system that will allow it to

communicate electronically with all mortgagees that participate in HUD

programs. This new system will eventually eliminate the necessity of

issuing MICs as evidence of insurance. Therefore, this interim rule, in

addition to implementing the Lender Insurance program, will amend the

regulations to allow for future electronic communication with all

mortgagees.

II. The Lender Insurance Program

Mortgagee Participation

Each mortgagee choosing to participate in the Lender Insurance

program will be required to use the Lender Insurance process to insure

all of the loans it originates or underwrites. Only Direct Endorsement

mortgagees with a minimum 2-year acceptable claim and default record

under the Direct Endorsement program will be considered for

participation in the Lender Insurance program. Two years provides HUD

with a sufficient amount of claim and default data on which to examine

the mortgagee's experience and performance. At the time of the lender's

request to participate in this program, HUD will determine the lender's

claim performance based upon the cumulative claim and default rate of

the lender's FHA originated mortgages for the prior two years, as of

the most recent quarter available to HUD.

HUD will compare the mortgagee's claim and default record with that

for all insured mortgages. For the purposes of fairly determining a

mortgagee's performance, HUD will place the mortgagee in one of two

categories: (1) Mortgagees that operate in a single State (Single State

mortgagees), and (2) Mortgagees that operate in more than one State

(Multi-State mortgagees).

[[Page 30223]]

Single State and Multi-State mortgagees that are at or below 150

percent of the national average for claims and defaults will be

eligible for this new authority. In addition, this interim rule will

provide for an exception process for Single State mortgagees that do

not meet the national claim and default average. Under this exception

process, a Single State mortgagee will have the option of having its

claim and default rate compared with the average in the State in which

it operates. Therefore, Single State mortgagees using the exception

process will also be eligible for this new authority if they are at or

below 150 percent of the State average for claims and defaults.

Net worth requirements will be the same as those for Direct

Endorsement mortgagees. HUD does not see the value in establishing

separate net worth requirements for this new program at this time.

A mortgagee's ability to participate in this program will be

reviewed on a yearly basis. Furthermore, HUD will monitor the quality

of the mortgagee's performance in the pre-insurance review process. If

HUD determines that a mortgagee has not performed in accordance with

prudent review techniques and/or HUD's requirements, HUD will take

appropriate action, including the immediate withdrawal of the

mortgagee's authority to participate in the Lender Insurance program.

Pre-Insurance Review

Under the Direct Endorsement program, a mortgagee submits to the

Secretary the documents listed in Sec. 203.255(b), which includes a

property appraisal, an application for insurance, a copy of the

mortgage, and underwriter and mortgagee certifications. The Secretary

reviews the documents for such purposes as to ensure that the mortgage

is properly executed and that it is within the maximum mortgage amount

(Sec. 203.255(c)). After this review, if the Secretary determines that

the mortgage is eligible, the Secretary endorses the mortgage for

insurance by issuing an MIC.

Under the Lender Insurance program implemented through this interim

rule, the program requirements will remain the same as those under the

Direct Endorsement program. Under the Lender Insurance program,

however, HUD is transferring the pre-insurance review function to

participating mortgagees. HUD will directly inform participating

mortgagees of the items that HUD would review prior to endorsement if

it were insuring the mortgage, and the mortgagee's staff that is

insuring the mortgage will review the appropriate items. The

mortgagee's staff reviewing and subsequently insuring the loan must not

be the same staff that originated the loan and/or underwrote the loan

for insurance.

Insurance of the Mortgage

Under the Lender Insurance program, the mortgagee will

electronically transmit the proper amount of mortgage insurance premium

(MIP) and data in a standardized format. HUD's electronic systems will

check to ensure that the proper amount of MIP was paid and determine

that complete mortgage insurance data was provided. Once HUD's systems

acknowledges the mortgagee's information, the mortgage is insured.

Recordkeeping Requirements

This interim rule provides that Lender Insurance mortgagees must

maintain records, including origination files, in a manner and for a

time period to be prescribed by the Assistant Secretary for Housing--

Federal Housing Commissioner, and must make them available to

authorized HUD staff upon request.

Post-Insurance Technical Review

Under the Direct Endorsement program, the Secretary may review the

mortgage documentation after the mortgage is insured to ensure that the

mortgage satisfies the Secretary's requirements. Under the Lender

Insurance program, mortgagees will not be expected to submit case

binders on mortgages that they insure themselves, unless they are

chosen by HUD's electronic system for post-insurance technical review.

HUD's electronic system will notify mortgagees that a loan has been

selected for post-insurance technical review when it reviews the

mortgage insurance data transmitted by the mortgagee. Prudent quality

control measures require that HUD perform an underwriting review on a

sample of loans relatively soon after they are insured.

Indemnification

Section 427 of the Appropriations Act provides for a mortgagee to

indemnify the Secretary for losses incurred if fraud or

misrepresentation was involved in the origination of the loan,

regardless of when the claim is paid. Section 427 also provides that

the Secretary may require indemnification for those loans involving

violations of the Secretary's requirements.

A requirement of indemnification in a case of fraud or

misrepresentation may arise when HUD reviews the origination package in

the case of a claim. HUD may, however, notify mortgagees of the

possibility of indemnification prior to a claim--as the result of a

post-insurance technical review or a mortgagee monitoring audit. This

right of indemnification under the Lender Insurance program in the case

of fraud or misrepresentation will not affect HUD's rights to otherwise

seek indemnification, or to refer matters to the Mortgagee Review

Board.

When considering this right of indemnification in cases other than

when fraud or misrepresentation are present, HUD does not intend to

require indemnification on the basis of errors related to those items

that the mortgagee is responsible for reviewing prior to insuring the

mortgage under the Lender Insurance program. HUD will, however, retain

the authority to take enforcement steps, including the immediate

withdrawal of the mortgagee's authority to participate in the Lender

Insurance program, Mortgagee Review Board action, or proposed

indemnifications on select cases.

Claims

Mortgagees participating in the Lender Insurance program will

follow the current claim procedures in subpart B of part 203.

Conforming Changes; Correction

This interim rule makes several amendments to HUD's single family

regulations in parts 200, 202, 203, and 206 to include references to

the Lender Insurance program.

This interim rule also makes a correction to Sec. 203.415(b) that

is unrelated to the Lender Insurance program. That paragraph was

revised on December 9, 1992 to include a reference to the Direct

Endorsement program (57 FR 58326). The December 9, 1992 final rule,

however, inadvertently changed the date described in Sec. 203.415(b) to

September 2, 1984, rather than September 2, 1964. This interim rule

will correct that date to read September 2, 1964.

III. Justification for Interim Rulemaking

HUD generally publishes a rule for public comment before issuing a

rule for effect, in accordance with its own regulations on rulemaking

in 24 CFR part 10. However, part 10 provides that prior public

procedure will be omitted if HUD determines that it is ``impracticable,

unnecessary, or contrary to the public interest'' (24 CFR 10.1). HUD

finds that prior public procedure is unnecessary.

Delegating the insuring authority to mortgagees through the Lender

[[Page 30224]]

Insurance program is consistent with HUD's efforts to reinvent the

Federal Housing Administration (FHA). The Lender Insurance process will

be a more efficient and less burdensome process for providing single

family mortgage insurance. While this interim rule makes the Lender

Insurance process available, it does not require mortgagees to

participate, nor does it withdraw any procedures that are otherwise

available to mortgagees. However, HUD is allowing for a full 60-day

public comment period on the provisions of this interim rule, and HUD

will consider the relevant issues raised by the commenters in its

development of a final rule for the Lender Insurance program.

IV. Findings and Certifications

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this rule under

Executive Order 12866, Regulatory Planning and Review, issued by the

President on September 30, 1993. OMB determined that this rule is a

``significant regulatory action,'' as defined in section 3(f) of the

Order (although not economically significant, as provided in section

3(f)(1) of the Order). Any changes made in this rule subsequent to its

submission to OMB are identified in the docket file, which is available

for public inspection between 7:30 a.m. and 5:30 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.

Paperwork Reduction Act

The information collection requirement contained in Sec. 203.255(f)

of this interim rule have been submitted to the Office of Management

and Budget (OMB) for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3501-3520). An agency may not conduct or

sponsor, and a person is not required to respond to, a collection of

information unless the collection displays a valid control number. The

OMB control number, when assigned, will be announced by separate notice

in the Federal Register.

As required under 5 CFR 1320.8(d)(1), HUD and OMB are seeking

comments from members of the public and affected agencies concerning

the proposed collection of information to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to

be collected; and

(4) Minimize the burden of the collection of information on those

who are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses. Interested persons are

invited to submit comments according to the instructions in the DATES

and ADDRESSES sections in the preamble of this interim rule.

This document also provides the following information:

Title of Proposal: Request for Insurance Endorsement under the

Direct Endorsement Program.

OMB Control Number: OMB has previously approved the information

collection requirements for the Direct Endorsement Program under

control number 2502-0365. HUD is seeking to reinstate that previously

approved collection, incorporating the information collection

requirement contained in Sec. 203.255(f) of this rule.

Description of the Need for the Information and Proposed Use:

Lenders must submit certain information regarding the mortgages to HUD

so that HUD can, as generally required by statute, produce statistics

and reports, and track repair escrows, certain types of mortgages, and

warranties. This information is also necessary for HUD to monitor

lender calculations of qualifying ratios.

Form Numbers: HUD-54111; however, lenders are free to tailor this

format to their individual procedures and needs.

Members of Affected Public: Business or other for-profit.

Estimation of the Total Number of Hours Needed to Prepare the

Information Collection including Number of Respondents, Frequency of

Response, and Hours of Response:

----------------------------------------------------------------------------------------------------------------

Est. avg.

Number of respondents Total annual response time Est. annual

responses (hours) burden (hrs.)

----------------------------------------------------------------------------------------------------------------

4,800........................................................ 600,000 .0833 50,040

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HUD estimates that 95 percent of the responses will be collected

electronically; therefore, since the requested information is already

in lenders' files and computers, the reporting burden is minimal.

Environmental Impact

A Finding of No Significant Impact with respect to the environment

was 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. 4223). The Finding is available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules

Docket Clerk, Office of General Counsel, Room 10276, Department of

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

20410.

Regulatory Flexibility Act

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

U.S.C. 605(b)), has reviewed this interim rule before publication and

by approving it certifies that this rule would not have a significant

economic impact on a substantial number of small entities. This interim

rule does not require mortgagees to participate, nor does it otherwise

withdraw any procedures that are otherwise available to mortgagees.

Small entities are specifically invited, however, to comment on whether

this rule will significantly affect them, and to provide any

alternatives for less burdensome compliance.

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 interim 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.

[[Page 30225]]

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this interim rule would

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 will result from promulgation of this rule, as those policies

and programs relate to family concerns.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-

4; approved March 22, 1995) (UMRA) establishes requirements for Federal

agencies to assess the effects of their regulatory actions on State,

local, and tribal governments, and the private sector. This rule does

not impose any Federal mandates on any State, local, or tribal

governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 200

Administrative practice and procedure, Claims, Equal employment

opportunity, Fair housing, Home improvement, Housing standards,

Incorporation by reference, Lead poisoning, Loan programs--housing and

community development, Minimum property standards, Mortgage insurance,

Organization and functions (Government agencies), Penalties, Reporting

and recordkeeping requirements, Social security, Unemployment

compensation, Wages.

24 CFR Part 202

Administrative practice and procedure, Home improvement,

Manufactured homes, Mortgage insurance, Reporting and recordkeeping

requirements.

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 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, for the reasons stated in the preamble, parts 200,

202, 203, and 206 of title 24 of the Code of Federal Regulations, are

amended as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

1. The authority citation for 24 CFR part 200 continues to read as

follows:

Authority: 12 U.S.C. 1701-1715z-18; 42 U.S.C. 3535(d).

2. In Sec. 200.926, paragraph (a)(2)(i) is revised to read as

follows:

Sec. 200.926 Minimum property standards for one and two family

dwellings.

(a) * * *

(2) * * *

(i) Approved for insurance or other benefits prior to the start of

construction, including approval under the Direct Endorsement process

described in Sec. 203.5 of this chapter, or under the Lender Insurance

process described in Sec. 203.6 of this chapter;

* * * * *

3. In Sec. 200.926d, paragraph (c)(4)(vii) is revised to read as

follows:

Sec. 200.926d Construction requirements.

* * * * *

(c) * * *

(4) * * *

(vii) In all cases in which a Direct Endorsement (DE) mortgagee or

a Lender Insurance (LI) mortgagee seeks to insure a mortgage on a newly

constructed one- to four-family dwelling (including a newly erected

manufactured home) which was processed by the DE or LI mortgagee, the

DE or LI mortgagee shall determine whether the property is located in a

100-year floodplain as designated on maps of the Federal Emergency

Management Agency and, if so, shall obtain a final Letter of Map

Amendment (LOMA) or final Letter of Map Revision (LOMR) before the DE

mortgagee submits the application for insurance to HUD, or before the

LI mortgagee submits all the required data regarding the mortgage to

HUD, as applicable. Under the DE program, such mortgages shall not be

eligible for insurance unless the DE mortgagee submits the LOMA or LOMR

to HUD with the mortgagee's request for endorsement.

* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

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

follows:

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

5. In Sec. 202.3, paragraph (c)(2)(v)(A) is revised to read as

follows:

Sec. 202.3 Approval status for lenders and mortgagees.

* * * * *

(c) * * *

(2) * * *

(v) * * *

(A) The eligibility of the mortgage for insurance, absent fraud or

misrepresentation, if the mortgagor and all terms and conditions of the

mortgage had been approved before the termination by the Direct

Endorsement or Lender Insurance mortgagee or were covered by a firm

commitment issued by the Secretary; however, no other mortgages

originated by the mortgagee shall be insured unless a new originated

approval agreement is accepted by the Secretary;

* * * * *

6. In Sec. 202.8, paragraph (b)(9) is revised to read as follows:

Sec. 202.8 Loan correspondent lenders and mortgagees.

* * * * *

(b) * * *

(9) For mortgages processed through Direct Endorsement under

Secs. 203.5 and 203.255(b) of this chapter, or through Lender Insurance

under Secs. 203.6 and 203.255(f) of this chapter, underwriting shall be

the responsibility of the Direct Endorsement sponsor or Lender

Insurance sponsor (respectively), and the mortgage shall be closed in

the loan correspondent mortgagee's own name or the name of the sponsor

that will purchase the loan. For mortgages not processed through Direct

Endorsement or through Lender Insurance, the mortgage must be both

underwritten and closed in the loan correspondent's own name.

* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

7. The authority citation for 24 CFR part 203 continues to read as

follows:

Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C.

3535(d). Subpart C also is issued under 12 U.S.C. 1715u.

Subpart A--Eligibility Requirements and Underwriting Procedures

8. In subpart A of part 203, the undesignated center heading

between the subpart heading and Sec. 203.1 is revised to read as

follows: ``DIRECT ENDORSEMENT, LENDER INSURANCE, AND COMMITMENTS''.

9. Section 203.1 is revised to read as follows:

Sec. 203.1 Underwriting procedures.

The three underwriting procedures for single family mortgages are:

[[Page 30226]]

(a) Direct Endorsement. This procedure, which is described in

Sec. 203.5, is available for mortgagees that are eligible under

Sec. 203.3.

(b) Lender insurance. This procedure, which is described in

Sec. 203.6, is available for mortgagees that are eligible for the

Direct Endorsement program under Sec. 203.5, and that are also approved

according to Sec. 203.4.

(c) Issuing of commitments through HUD offices. Processing through

HUD offices as described in Sec. 203.7, with issuance of commitments,

is available only for mortgages that are not eligible for Direct

Endorsement processing under Sec. 203.5(b) or to the extent required in

Sec. 203.3(b)(4), Sec. 203.3(d)(1), or as determined by the Secretary.

10. In subpart A, a new Sec. 203.4 is added, to read as follows:

Sec. 203.4 Approval of mortgagees for Lender Insurance.

Each mortgagee that chooses to participate in the Lender Insurance

program must use the Lender Insurance process to insure all of the

mortgages that it underwrites, unless the mortgages are ineligible for

the Direct Endorsement program as provided in Sec. 203.5(b), or unless

HUD determines that the mortgages are ineligible for the Lender

Insurance program.

(a) Direct Endorsement approval. To be approved for the Lender

Insurance program described in Sec. 203.6, a mortgagee must be

unconditionally approved for the Direct Endorsement program as provided

in Sec. 203.5.

(b) Performance: Claim and default rates. In addition to being

unconditionally approved for the Direct Endorsement program, a

mortgagee must have had an acceptable claim and default record for at

least 2 years prior to its application for participation in the Lender

Insurance program. HUD determines acceptable claim and default record

as follows:

(1) A mortgagee is eligible for the Lender Insurance program if its

claim and default rate is at or below 150 percent of the national

average rate for all insured mortgages.

(2) A mortgagee that operates in a single State (Single State

mortgagee) may choose to have its claim and default rate compared with

the average rate in the State in which it operates, in which case the

Single State mortgagee is eligible for the Lender Insurance program if

its claim and default rate is at or below 150 percent of the State

average rate for insured mortgages.

(c) Annual review. HUD will monitor a mortgagee's eligibility to

participate in the Lender Insurance program on a yearly basis.

(d) Termination of approval. If a mortgagee that has been approved

by HUD for the Lender Insurance program violates the requirements and

procedures established by the Secretary for such program, or if HUD

determines that other good cause exists (including, but not limited to,

HUD's determination that the mortgagee is not using prudent review

techniques), HUD may immediately terminate the mortgagee's approval to

participate in the Lender Insurance program, in accordance with section

256(d) of the National Housing Act (12 U.S.C. 1715z-21(d)). Within 30

days after receiving HUD's notice of termination, a mortgagee may

request an informal conference with the Deputy Assistant Secretary for

Single Family Housing. The conference will be conducted within 30 days

after HUD receives a timely request for the conference. After the

conference, the Deputy Assistant Secretary may decide to affirm the

termination action or to reinstate the mortgagee's Lender Insurance

program approval. The decision will be communicated to the mortgagee in

writing and will be deemed a final agency action.

11. In Sec. 203.5, paragraph (b) is revised to read as follows:

Sec. 203.5 Direct Endorsement process.

* * * * *

(b) Eligible programs. (1) All single family mortgages authorized

for insurance under the National Housing Act must be originated through

the Direct Endorsement program, except the following:

(i) Mortgages underwritten for insurance by mortgagees that have

applied for participation in, and have been approved for, the Lender

Insurance program;

(ii) Mortgages authorized under sections 203(n), 203(p), 213(d),

221(h), 221(i), 225, 233, 237, 809, or 810 of the National Housing Act,

or any other insurance programs announced by Federal Register notice;

or

(iii) As provided in Sec. 203.1.

(2) The provision contained in Sec. 221.55 of this chapter

regarding deferred sales to displaced families is not available in the

Direct Endorsement program.

* * * * *

12. A new Sec. 203.6 is added to read as follows:

Sec. 203.6 Lender Insurance process.

Under the Lender Insurance program, a mortgagee approved for the

program conducts its own pre-insurance review, insures the mortgage,

and agrees to indemnify HUD in accordance with Sec. 203.255(f).

13. The introductory text of Sec. 203.7 is revised to read as

follows:

Sec. 203.7 Commitment process.

For single family mortgage programs that are not eligible for

Direct Endorsement processing under Sec. 203.5, or for Lender Insurance

processing under Sec. 203.6, the mortgagee must submit an application

for mortgage insurance in a form prescribed by the Secretary prior to

making the mortgage loan. If:

* * * * *

14. In Sec. 203.43i, the introductory text of paragraph (d) is

revised, the introductory text of paragraph (g) is revised, and

paragraph (g)(2) is revised; to read as follows:

Sec. 203.43i Eligibility of mortgages on Hawaiian Home Lands insured

pursuant to section 247 of the National Housing Act.

* * * * *

(d) Conditions for insurance. Mortgages will be eligible for

insurance under this section, according to the procedures in

Secs. 203.5, 203.6, or 203.7 (as applicable), only where the Department

of Hawaiian Home Lands:

* * * * *

(g) Construction advances. Advances made by the mortgagee during

construction are eligible for insurance, according to the procedures in

Secs. 203.5, 203.6, or 203.7 (as applicable), if the Secretary

determines that no feasible financing alternative is available and if:

* * * * *

(2) The advances are made only as provided in the commitment or the

approval by the Direct Endorsement or Lender Insurance underwriter;

* * * * *

15. In Sec. 203.50, paragraph (h) is revised to read as follows:

Sec. 203.50 Eligibility of rehabilitation loans.

* * * * *

(h) Insurance may be available for advances made during

rehabilitation or upon completion of rehabilitation, according to the

procedures in Secs. 203.5, 203.6, or 203.7 (as applicable).

* * * * *

16. Section 203.249 is revised to read as follows:

Sec. 203.249 Effect of amendments.

The regulations in this subpart may be amended by the Secretary at

any time and from time to time, in whole or in part, but such amendment

will not adversely affect the interests of a mortgagee under the

contract of insurance on any mortgage or loan already insured, and will

not adversely affect the interest of a mortgagee on any mortgage or

loan to be insured for which

[[Page 30227]]

either the Direct Endorsement or Lender Insurance mortgagee has

approved the mortgagor and all terms and conditions of the mortgage or

loan, or the Secretary has issued a firm commitment. In addition, such

amendment will not adversely affect the eligibility of specific

property if such property is covered by a conditional commitment issued

by the Secretary, a certificate of reasonable value issued by the

Secretary of Veterans Affairs, or an appraisal report approved by a

Direct Endorsement or Lender Insurance underwriter.

17. In Sec. 203.255, paragraph (a) is revised, and a new paragraph

(f) is added; to read as follows:

Sec. 203.255 Insurance of mortgage.

(a) Mortgages with firm commitments. For applications for insurance

involving mortgages not eligible to be originated under the Direct

Endorsement program under Sec. 203.5, or under the Lender Insurance

program under Sec. 203.6, the Secretary will either endorse the

mortgage for insurance by issuing a Mortgage Insurance Certificate,

provided that the mortgagee is in compliance with the firm commitment,

or will electronically acknowledge that the mortgage has been insured.

* * * * *

(f) Lender Insurance. (1) Pre-insurance review. For applications

for insurance involving mortgages originated under the Lender Insurance

program under Sec. 203.6, the mortgagee is responsible for performing a

pre-insurance review that meets HUD's requirements. HUD will directly

inform participating mortgagees of its minimum requirements for pre-

insurance review. The mortgagee's staff that performs the pre-insurance

review must not be the same staff that originated the mortgage or

underwrote the mortgage for insurance.

(2) Recordkeeping. Mortgagees must maintain records, including

origination files, in a manner and for a time period to be prescribed

by the Assistant Secretary for Housing--Federal Housing Commissioner,

and must make them available to authorized HUD staff upon request.

(3) Insuring the mortgage. If, following this review, the mortgage

is determined to be eligible, the mortgagee will electronically submit

all required data to HUD regarding the mortgage. HUD's electronic

system will acknowledge that the mortgage has been insured. HUD's

electronic system may also issue a notice to the mortgagee that the

mortgage has been selected for post-insurance technical review, and

that the HUD case binder must be sent to the identified HUD office.

(4) Indemnification. By insuring the mortgage, the mortgagee agrees

to indemnify HUD under the conditions of section 256(c) of the National

Housing Act (12 U.S.C. 1717z-21(c)).

18. Section 203.257 is revised to read as follows:

Sec. 203.257 Creation of the contract.

The mortgage shall be an insured mortgage from the date of the

issuance of a Mortgage Insurance Certificate, from the date of the

endorsement of the credit instrument, or from the date of HUD's

electronic acknowledgement to the mortgagee that the mortgage is

insured, as applicable. The Commissioner and the mortgagee are

thereafter bound by the regulations in this subpart with the same force

and to the same extent as if a separate contract had been executed

relating to the insured mortgage, including the provisions of the

regulations in this subpart and of the Act.

19. In Sec. 203.415, paragraph (b) is revised to read as follows:

Sec. 203.415 Delivery of certificate of claim.

* * * * *

(b) If the mortgage was accepted for insurance pursuant to a

commitment issued on or after September 2, 1964, or under the Direct

Endorsement, Lender Insurance, or Coinsurance programs, no certificate

of claim will be issued.

20. Section 203.499 is revised to read as follows:

Sec. 203.499 Effect of amendments.

The regulations in this subpart may be amended by the Secretary at

any time and from time to time, in whole or in part, but such amendment

will not adversely affect the interests of a mortgagee under the

contract of insurance on any mortgage or loan already insured, and will

not adversely affect the interest of a mortgagee on any mortgage or

loan to be insured for which either the Direct Endorsement or Lender

Insurance mortgagee has approved the mortgagor and all terms and

conditions of the mortgage or loan, or the Secretary has issued a firm

commitment. In addition, such amendment will not adversely affect the

eligibility of specific property if such property is covered by a

conditional commitment issued by the Secretary, a certificate of

reasonable value issued by the Secretary of Veterans Affairs, or an

appraisal report approved by a Direct Endorsement or Lender Insurance

underwriter.

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

21. The authority citation for 24 CFR part 206 continues to read as

follows:

Authority: 12 U.S.C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).

22. In Sec. 206.3, the definition of ``Maximum claim amount'' is

revised to read as follows:

Sec. 206.3 Definitions.

* * * * *

Maximum claim amount means the lesser of the appraised value of the

property or maximum dollar amount for an area established by the

Secretary for a one-family residence under section 203(b)(2) of the

National Housing Act (as adjusted where applicable under section 214 of

the National Housing Act). Both the appraised value and the maximum

dollar amount for the area must be as of the date the Direct

Endorsement or Lender Insurance underwriter receives the appraisal

report. Closing costs must not be taken into account in determining

appraised value.

* * * * *

23. Section 206.7 is revised to read as follows:

Sec. 206.7 Effect of amendments.

The regulations in this part may be amended by the Secretary at any

time and from time to time, in whole or in part, but amendments to

subparts B and C of this part will not adversely affect the interests

of a mortgagee on any mortgage to be insured for which either the

Direct Endorsement mortgagee or Lender Insurance mortgagee has approved

the mortgagor and all terms and conditions of the mortgage, or the

Secretary has made a commitment to insure. Such amendments will not

adversely affect the interests of a mortgagor in the case of a default

by a mortgagee where the Secretary makes payments to the mortgagor.

24. Section 206.15 is revised to read as follows:

Sec. 206.15 Insurance.

Mortgages originated under this part must be endorsed through the

Direct Endorsement program under Sec. 203.5 of this chapter, or insured

through the Lender Insurance program under Sec. 203.6 of this chapter,

except as provided in Secs. 203.1 or 203.4 of this chapter. The

mortgagee must submit the information as described in Sec. 203.255 (b)

or (f) of this chapter, as applicable; the certificate of housing

counselling as described in Sec. 206.41; a copy of the title insurance

commitment satisfactory to the

[[Page 30228]]

Secretary (or other acceptable title evidence if the Secretary has

determined not to require title insurance under Sec. 206.45(a)); the

mortgagee's election of either the assignment or shared premium option

under Sec. 206.17; and any other documentation required by the

Secretary. Section 203.255 (c), (d), (e), and (f) of this chapter,

pertaining to the processes for Direct Endorsement and Lender

Insurance, apply to mortgages under this part. If the mortgagee has

complied with the requirements of Secs. 203.3, 203.4, 203.5, 203.6, and

203.255 of this chapter (as applicable), and the requirements of this

part, and the mortgage is determined to be eligible, the Secretary will

either endorse the mortgage for insurance by issuing a Mortgage

Insurance Certificate or will electronically acknowledge that the

mortgage has been insured. The mortgagee under the Lender Insurance

program shall execute for the Secretary the loan agreement included in

the term ``mortgage'' as defined in Sec. 206.3.

Dated: April 23, 1997.

Stephanie A. Smith,

General Deputy Assistant Secretary for Housing--Federal Housing

Commissioner.

[FR Doc. 97-14215 Filed 5-30-97; 8:45 am]

BILLING CODE 4210-27-P