Single Family Mortgage Insurance; Informed Consumer Choice Disclosure Notice

SUMMARY: This final rule implements a recent statutory amendment to

HUD's Federal Housing Administration (FHA) Single Family Mortgage

Insurance Program. The statutory amendment requires an original lender

to provide certain information, in the form of a disclosure notice, to

prospective borrowers who have applied for an FHA-insured home

mortgage; and that HUD develop this disclosure notice. Specifically,

through the disclosure notice, the lender must provide the prospective

FHA borrower with an analysis comparing the mortgage costs of the FHA-

insured mortgage with the mortgage costs of other similar conventional

mortgage products that the lender offers and that the borrower may

qualify for. The disclosure notice must also provide information about

when the requirement to pay FHA mortgage insurance premiums terminates.

This final rule takes into consideration public comment received on the

February 16, 1999 proposed rule.

DATES: Effective Date: July 2, 1999.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Home

Mortgage Insurance Division, Office of Insured Single Family Housing,

Room 9270, U.S. Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410-8000; telephone (202) 708-2700

(this is not a toll-free number). Hearing or speech-impaired

individuals may access this number via TTY by calling the toll-free

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

SUPPLEMENTARY INFORMATION:

I. Background on the Informed Consumer Choice Disclosure

Requirement

HUD's February 16, 1999 proposed rule (64 FR 7726) advised the

public of our proposal to amend the Federal Housing Administration

(FHA) Single Family Mortgage Insurance Program regulations to require

lenders to disclose, through a notice, certain consumer information to

prospective FHA borrowers. Because a number of comments received on the

proposed rule indicated some misunderstanding about the reasons for

this rulemaking, we believe it may be helpful to repeat, in this final

rule, the background of the new informed consumer choice disclosure

requirement.

a. New Statutory Requirement--Lenders Must Disclose Certain Information

to Borrowers in Form of a Notice and HUD Must Develop the Notice

Section 225(a) of the Departments of Veterans Affairs and Housing

and Urban Development, and Independent Agencies Appropriations Act,

1999 (Pub. L. 105-276, 112 Stat. 2461)(FY 1999 HUD Appropriations Act)

amended section 203(b)(2) of the National Housing Act (12 U.S.C.

1709(b)(2))(NHA) by adding the following language at the end of the

section:

In conjunction with any loan insured under this section, an

original lender shall provide to each prospective borrower a

disclosure notice that provides a one page analysis of mortgage

products offered by that lender and for which the borrower would

qualify. This notice shall include: (i) A generic analysis comparing

note rate (and associated interest payments), insurance premiums,

and other costs and fees that would be due over the life of the loan

for a loan insured by the Secretary under this subsection with note

rates, insurance premiums (if applicable), and other costs and fees

that would be expected to be due if the mortgagor obtained instead

other mortgage products offered by the lender and for which the

borrower would qualify with similar loan-to-value ratio in

connection with a conventional mortgage . . . assuming prevailing

interest rates; and (ii) a statement regarding when the mortgagor's

requirement to pay mortgage insurance premiums for a mortgage

insured under this section would terminate or a statement that the

requirement will terminate only if the mortgage is refinanced, paid

off, or otherwise terminated.

1. Statutory Obligations Imposed on Lenders

This statutory amendment requires original lenders to provide

prospective FHA-insured mortgage borrowers with:

(1) A one page analysis comparing the mortgage costs of the FHA-

insured mortgage with the mortgage costs of other similar conventional

mortgage products that the lender offers and that the borrower may

qualify for; and

(2) Information about when the requirement to pay FHA mortgage

insurance premiums terminates.

2. Statutory Obligations Imposed on HUD

Section 225(b) of the FY 1999 HUD Appropriations Act directs HUD

to:

(1) Develop the disclosure notice document, through which the

lender must disclose this information; and

(2) Develop this notice within 150 days of enactment of the FY 1999

HUD Appropriations Act through notice and comment rulemaking.

b. How the February 16, 1999 Rule Proposed To Implement These Statutory

Requirements

HUD's February 16, 1999 proposed rule included, for comment, a

model disclosure notice that provided the consumer information required

to be disclosed by section 225(a) of the FY 1999 HUD Appropriations Act

(or more accurately by amended section 203(b)(2) of the NHA). The

proposed rule also included an amendment to HUD's regulations at 24 CFR

part 203 that would add a new Sec. 203.10. New Sec. 203.10 would

conform HUD's FHA Single Family Mortgage Insurance Program regulations

to the statutory lender disclosure requirement.

In the February 16, 1999 proposed rule, we specifically solicited

comments and recommendations regarding the format of the proposed

disclosure notice. As we stated in the proposed rule, HUD anticipates

lenders will develop generic disclosure notices that compare a typical

FHA mortgage in the marketplace with typical conventional mortgages

offered by that lender using a $100,000 sales price (or another amount

that may be typical within the lender's market). We noted in the rule

that lenders will be expected to modify their disclosure notices

accordingly as conventional mortgage offerings and pricing change over

time.

We also stated in the proposed rule that it was HUD's assessment

that a generic disclosure notice (similar to those provided with ARMs)

reflects the intent of Congress in passing this statutory requirement

and does not place an unreasonable burden on lenders. Therefore, we are

not requiring, through this rulemaking, a case-specific disclosure

notice for each borrower who may qualify for both an FHA-insured

mortgage and conventional financing. We reiterate the statement, made

in the proposed rule, that to do otherwise would significantly increase

mortgage origination costs and be counter to the intent of Congress in

enacting the informed consumer choice requirement and the Paperwork

Reduction Act of 1995.

II. Public Comments on the Proposed Rule

In order to complete rulemaking by the deadline imposed by section

225(b) of the FY 1999 HUD Appropriation Act,

[[Page 29759]]

we found it necessary to shorten the public comment period for the

February 16, 1999 proposed rule to 30 days. By the close of the public

comment period on March 18, 1999, we had received 27 comments on the

proposed rule. The commenters primarily included mortgage lending

institutions and associations representing lenders.

This section of the preamble presents a summary of the significant

issues raised by the commenters and HUD's responses to their comments.

a. Support for the Proposal--HUD's Proposal Strikes a Reasonable

Balance

The majority of the commenters were supportive of the proposed

model disclosure notice and commended HUD's efforts to strike a balance

between the borrower's need for information and minimizing the

administrative burden placed on lenders. The following reflects a

comment typical of these commenters:

[We] applaud HUD's efforts to develop the Informed Consumer

Choice Disclosure in a manner that provides consumers with

meaningful, relevant information without adding to the

administrative burden being borne by lenders. By not requiring case-

specific examples, the proposed disclosure format allows lenders to

be flexible but consistent in the way which pertinent information is

provided to borrowers thereby striking a reasonable balance between

the borrower's need for information and the effort required for

lenders to produce the disclosure.

b. Opposition to the Proposal--Do Not Mandate Disclosure; Do Not

Mandate Use of HUD's Proposed Disclosure Notice

Comments. Several commenters stated their opposition to the

requirement that lenders provide a disclosure notice to prospective FHA

borrowers. Other commenters in this group recognized that the

disclosure requirement was statutory but objected to HUD's proposed

model disclosure notice. These commenters stated that HUD's disclosure

notice was too summary or brief in form and, therefore, was not very

informative. These commenters stated that, because of its brevity, the

disclosure notice might be misleading or confusing for the borrower.

Other commenters stated that the consumer is buried with

information that he or she has little interest in receiving, and even

less ability to decipher, and that implementing the disclosure in any

form will only heighten the confusion surrounding mortgage lending.

Another commenter stated that responsible lenders already follow

procedures that ensure applicants are properly informed of the various

products available to them and of the costs associated with mortgage

loans. The commenter stated that HUD should focus on the few lenders

that do not inform applicants of the various products available to

them, instead of mandating that the whole industry adopt another

disclosure notice.

HUD Response. As stated in the proposed rule, and reiterated in

this final rule, section 225(a) of the FY 1999 HUD Appropriations Act

(amended section 203(b)(2) of the NHA) imposes this disclosure

requirement on lenders. We have no authority to waive this requirement.

The statute specifies that the disclosure notice is to provide a one

page analysis of mortgage products offered by the lender for which the

prospective FHA borrower would qualify, and that this analysis is to

offer comparison information. The statute imposes an obligation on HUD

to develop the disclosure notice through notice and comment rulemaking.

We have complied with this statutory obligation through this

rulemaking.

We recognize that a lender may want to provide a borrower with more

comparison information than a one page disclosure notice makes

possible. We also recognize, as some commenters pointed out, that many

lenders already provide this type of information in booklets and

brochures that are readily available to borrowers. Nevertheless, by

creating this statutory disclosure requirement, the Congress appears to

have sought specific assurances that lenders are advising prospective

FHA borrowers of any comparable conventional mortgage products that

they may qualify for. The implementation of this requirement through

regulation does not prohibit a lender from providing a borrower with

information the lender has already compiled in addition to the one-page

disclosure notice.

c. Specific Comments on the Model Disclosure Notice and New Sec. 203.10

Comment--Additional Information Should Be Included in the Notice,

and Certain Terms Should be Changed. Several commenters suggested

various changes to the proposed model disclosure notice. Some of these

suggestions consisted of stylistic or editorial changes. Other

suggestions included substantive changes to the model notice. These

changes included:

--Adding a line to compare the annual percentage rate (APR) of the

mortgage products;

--Adding a ``total payment'' line to include the monthly mortgage

insurance premium in line 6;

--Adding a third column to show the dollar differences between the

first two columns;

--Changing the title of line 4 to ``Downpayment and Closing Costs'';

--Changing the title of line 4 to ``Required Equity Investment'';

--Changing the title of line 4 ``Cash Needed at Closing'';

--Clarifying that closing costs do not include points;

--Providing more explanation on how mortgage insurance payments change;

--Defining the percentage of private mortgage insurance coverage

required;

--Identifying conditions under which mortgage insurance may not be

dropped under a conventional mortgage; and

--Identifying any conditions that attach to the conventional loan that

may require the continuation of mortgage insurance.

This list does not include all suggestions made by the commenters,

but provides an overview of the various types of changes suggested by

the commenters.

HUD Response--Model Notice Adheres to Statutory Requirements;

Lenders Have Flexibility to Add Information They Believe Relevant. HUD

appreciates all the suggestions that commenters offered on how the

proposed model notice could be improved. As the model notice included

in this final rule reflects, we adopted some, but clearly not all, of

the changes recommended by the commenters. Consistent with President

Clinton's memorandum on plain language (entitled ``Plain Language in

Government'', 63 FR 31885, June 10, 1998), we revised some language in

an effort to make the model notice conform with the President's

directive. Of the suggested changes that we did not adopt in the final

model notice, we note that many of the suggested changes would require

more detailed information than a one-page analysis can reasonably

include. More importantly, many of the suggested changes would require

more information than the statute requires be included in the

disclosure notice.

In developing the disclosure notice, we were cognizant of both the

considerable information already provided to borrowers by many lenders

and the degree of information we believe that Congress intended lenders

to provide to borrowers in a one page analysis. We believe that

Congress, in imposing this requirement on lenders, sought assurances

that FHA borrowers would be made aware of any non-FHA mortgage products

that they may qualify for, and determined that a one page

[[Page 29760]]

analysis would provide the appropriate ``notification'' of these non-

FHA mortgage products. We believe that this ``notification of possible

mortgage options'' was the main objective of this statutory

requirement. For more complete information, the FHA borrower, once

notified by the disclosure notice, can then follow-up with the lender

and obtain more information on any conventional mortgages that the

borrower may qualify for. We believe that the statutory language is

clear that Congress was not mandating a detailed comparison of FHA

versus conventional mortgage products, nor was it mandating a notice

that would explain all applicable mortgage terms.

In developing the model disclosure notice, HUD's intent was to

adhere to the statutorily required components of the notice and not to

go beyond these requirements. Therefore, we structured the model notice

to provide only the information statutorily required, which is to say,

only the information sufficient to put the prospective FHA borrower on

notice of conventional mortgage products that the borrower may qualify

for, and to provide this information in a manner and format that would

not impose an undue administrative burden on lenders.

As discussed in the proposed rule and later in this preamble,

lenders may want to make additions to their disclosure notices. The

model notice included in the final rule merely represents the format

prescribed by the Commissioner. The model notice contains the minimum

elements of an informed consumer choice disclosure notice. These

elements must be included in a lender's notice. The lender may want to

include additional lines, columns, or mortgage features that better

reflect their mortgage products, or define terms lenders believe should

be explained.

Comment--The Title of the Second Column of the FHA mortgage

insurance Premium Information Tables is Unclear. Two commenters wrote

that the titles of the second columns of the FHA mortgage insurance

premium tables (entitled ``You will make payments for:'') were unclear.

Both commenters were concerned that consumers might not realize that

``payments'' means insurance premium payments, rather than mortgage

payments. One commenter suggested that the titles should be changed to

``You will make premium payments for:''. The other commenter suggested

that the titles should be changed to read: ``You will make mortgage

insurance payments for:''.

HUD Response--Clarification Is Made in Final Version of Model

Notice. We agree that the title of the second column of the FHA

mortgage insurance premium information tables in the February 16, 1999

proposed model notice was unclear. In order to be as clear as possible,

in the model notice included in this final rule, we changed the title

to reflect both commenters' suggestions. The title of the second column

is now ``You will make mortgage insurance premium payments:''.

Comment--Does ``Associated Costs'' Include the Interest Rate? One

commenter asked whether the phrase ``associated costs'' in the first

paragraph of the proposed model notice included the interest rate. The

commenter was concerned that requiring exact interest rate quotes on

the disclosure notice would significantly increase the paperwork burden

of the lender. The commenter suggested that the final model notice

should clarify whether the phrase ``associated costs'' includes the

interest rate.

HUD Response--Interest Rate Not Included in Associated Costs. The

phrase ``associated costs'' does not include the interest rate. The

disclosure notice does not require an interest rate quote.

Comment--Reference to ``Upfront Mortgage Insurance Premium''

Requires Revision. Three commenters made suggestions about line 10 of

the model notice, entitled ``Upfront Mortgage Insurance Premium.'' Two

commenters suggested that line 10 should use the upfront mortgage

insurance premium (UFMIP) for non-first-time homebuyers. One of these

commenters pointed out that the model notice uses the UFMIP for first-

time homebuyers who obtain housing counseling, which implies that

lenders should use this number. The other commenter suggested that line

10 should state the UFMIP as a percentage of the loan amount (either

1.75% or 2.25%), in addition to the dollar amount.

HUD Response--Lender Should Choose Appropriate UFMIP. The

directions in the proposed rule for line 10 of the model notice

provided that the lender should ``[s]how any upfront mortgage insurance

premium charged. . .'' This instruction means that a lender should

choose an appropriate UFMIP. In order to be clear, however, the final

model notice includes a footnote that indicates which UFMIP was used in

the table. Lenders must include a similar footnote.

Comment--The FHA Column Numbers Appear to be Incorrect. One

commenter suggested that some of the numbers in the FHA column are

incorrect. The commenter wrote that, assuming the base mortgage amount

of $97,750 (line 2), the upfront mortgage insurance premium (line 10)

would be $2,199.38, and the adjusted mortgage amount would be $99,949

(line 2 in parentheses). The commenter also suggested that the monthly

mortgage insurance premium (line 8) would be $40.54.

HUD Response--Model Notice Based on First-Time Homebuyer UFMIP. The

numbers in the FHA column in the model notice are based on a first-time

home buyer UFMIP. The numbers suggested by the commenter are based on a

non-first-time homebuyer UFMIP. As mentioned in the response to the

previous comment, the final model notice has been revised to include a

footnote that indicates which UFMIP was used in the table. In the case

of the final model notice, the footnote indicates that the table uses a

first-time homebuyer UFMIP.

Please note, the number listed for the monthly mortgage insurance

premium (line 8) has been revised from $41.44 to $40.73 in the final

model notice. This is a correction. The number listed in the proposed

model notice was based on the mortgage amount including the UFMIP (line

2 in parentheses). It should have been based on the mortgage amount not

including the UFMIP. The number listed on line 8 of the final model

notice is now correct.

Comment--Remove the Phrase ``Lender's Judgment'' from Model Notice.

The proposed model disclosure notice includes a sentence that states

``[I]n your lender's judgment, you may have the credit standing to

qualify for more than one mortgage product.'' A few commenters

requested that the phrase ``in your lender's judgment'' be removed from

the model disclosure notice. These commenters stated that the phrase

tends to indicate that the lender controls the borrower's eligibility

for each mortgage product listed on the disclosure notice and that the

lender has the authority to offer a borrower other mortgage products

when, in some cases, the lender has no such authority.

HUD Response--Phrase Removed but Statute Requires Lenders to

Exercise Judgment. Although we removed this phrase from the final model

notice, we have included this language in the text of the final

regulation. The statute expects lenders to exercise their judgment in

determining whether a prospective FHA borrower may be eligible for a

conventional mortgage product. The statute provides that ``in

conjunction with any loan insured under this section (section 203(b)(2)

of

[[Page 29761]]

the NHA) an original lender shall provide to each prospective borrower

a disclosure notice that provides a one page analysis of mortgage

products offered by that lender and for which the borrower would

qualify'' (emphasis added). We believe that this language requires the

lender to determine, based on the information the lender has about the

prospective FHA borrower, whether the borrower may qualify for a

conventional mortgage product. If the lender determines that the

prospective FHA borrower may qualify for a conventional mortgage

product, the lender must provide the disclosure notice to the borrower.

The final rule does not require, however, that this determination

be a formal determination in any way. The final rule only requires the

lender to make a determination based on the lender's initial assessment

of the prospective FHA borrower's eligibility for a conventional

mortgage product. We believe that the Congress intended the disclosure

notice to pose as minimal a burden on lenders as possible. We also

believe that Congress intended that, to be most useful, the disclosure

be provided to borrowers as early as possible in the process. Requiring

that the determination be based only on an initial assessment satisfies

both these requirements because a lender need only make a quick initial

determination, perhaps within a few minutes of meeting with a borrower,

before deciding whether to hand out the notice.

The final rule emphasizes that the nature of determination is

informal by using the language ``may qualify'' (Sec. 203.10(a)) in

place of the statutory language ``would qualify''. The word ``may''

indicates a less certain determination than the word ``would''

requires. The use of the word ``may'' in the final rule indicates that

the lender's determination need only be an informal, initial

determination. Because we also believe that Congress intended the

notice to be distributed as widely as possible, the final rule states

that if a lender is unsure about a borrower's eligibility the lender

should distribute the disclosure notice.

Comment--Providing the Disclosure Notice Will Mislead Borrowers

That They Are Eligible for Non-FHA Products. A few commenters requested

clarification regarding to whom the lender must provide the informed

consumer choice disclosure notice. One commenter stated that providing

the disclosure will lead the average applicant to believe that he or

she will be equally likely to qualify for either FHA or conventional

financing. This commenter stated that in most cases the average FHA

applicant will not qualify for conventional financing. Other commenters

asked whether a lender is to provide the disclosure only to applicants

who will likely qualify for conventional financing.

HUD Response--The Statute Requires the Lender to Provide the

Disclosure to a Prospective FHA Borrower Who ``Would Qualify'' for a

Non-FHA Mortgage Product Offered by the Lender. The statute does not

require a lender to provide every prospective borrower or every

prospective FHA borrower with an informed consumer choice disclosure

notice. As mentioned in the response to the previous comment regarding

the phrase ``lender's judgment'', a lender is required to determine,

based on the lender's initial assessment, whether a prospective FHA

borrower may be eligible for a conventional mortgage product. If the

lender determines that the borrower may be eligible, then the lender

must provide a disclosure notice to the borrower.

Again, in imposing this requirement on lenders, we believe that

there was concern on the part of the Congress that there are

individuals who qualify for both an FHA-insured mortgage and a

conventional mortgage, and Congress wanted assurances that these

borrowers would be made aware of their choice of financing. In order to

ensure that all prospective FHA borrowers that must receive a

disclosure notice do, in fact, receive a disclosure notice, the lender

should err on the side of providing a disclosure notice to a

prospective FHA borrower. The final rule emphasizes this by stating

that if a lender is unsure about a prospective FHA borrower's

eligibility, the lender should provide a disclosure notice to the

borrower.

One commenter suggested that a lender should be able to include in

the disclosure notice a comparison of key underwriting requirements

between conventional and FHA loan products, and this information would

assist the consumer in understanding why conventional financing would

not be a viable alternative. The statute, however, does not mandate

this action on the part of the lender.

Comment--Clarify the Type of Comparison of FHA/Conventional

Mortgage Products That Is Required. One commenter stated that it was

the intent of the Congress that the disclosure notice should provide

consumers with a broader comparison of conventional loan products and

not just a single conventional loan product. Other commenters requested

that the final rule make clear that the disclosure notice assumes

hypothetical loan terms; that the notice is for illustration purposes

only (that actual customer rate and loan terms may be different); or

that where a lender serves more than one market, the lender can develop

a generic notice suitable for all markets. Other commenters stated that

the notice should require lenders to provide only a comparison of the

most commonly required FHA mortgages and most commonly available

conventional mortgage products, and requested that the final rule

clarify that the lender may select a typical, conventional loan for

comparison. Another commenter stated that HUD should stipulate to

lenders that conventional loans used for comparison should include

consideration of all conventional products offered by the lender that

the borrower may qualify for with the best alternative used for

comparison with the comparable FHA loan parameters. One commenter

suggested that HUD's model notice include the following language for

clarity purposes: ``As such, your lender has prepared a comparison of

typical FHA and alternative conventional mortgage products for your

review. The information below reflects terms and conditions that we

have used recently for our FHA and conventional loans. The loan amount,

costs, interest rate, premiums, and other information in the comparison

will vary from your own loan transaction.''

HUD Response--The Lender Need Only Provide A Generic Comparison. We

believe that the proposed rule was clear about the type of comparison

that is required by the statute, that is a generic comparison. We

stated in the February 16, 1999 proposed rule that HUD would not

require a case-specific notice for each prospective FHA borrower who

may qualify for both an FHA-insured mortgage and conventional

financing. We stated that the disclosure notice should compare a

typical FHA mortgage in the marketplace with a typical conventional

mortgage offered by the lender. We understand, however, the concerns of

lenders about the type of comparison that must be made, and have

included additional language in the final rule and in the model notice

that we believe eliminates ambiguity about the type of comparison

required.

Comment--HUD's Proposal For the Time At Which the Lender Must

Provide the Disclosure Should Be Changed. Two commenters stated that

borrowers want and need to see the information provided in the

disclosure notice before they begin their application process. Other

commenters stated that the timing of the disclosure notice should

conform to the timing of disclosure established

[[Page 29762]]

for statements required by the Real Estate Settlement Procedures Act

(RESPA) and the Truth in Lending Act (TILA). Another commenter

suggested that the trigger event should not be the signing of the loan,

but when the application is received or prepared by the lender. These

same commenters stated that, at a minimum, the final rule must clarify

that when the proposed rule stated ``three days,'' HUD meant three

business days.

HUD Response--Disclosure Notice Must Be Provided No Later Than

Three Days After the Lender's Receipt of the Application. We appreciate

these comments and recognize the need for clarification with respect to

the time at which the lender must provide the disclosure notice. The

final rule provides that the disclosure notice must be provided to a

prospective FHA borrower no later than three business days after the

lender's receipt of the application.

Comment--Rule Should Clarify If Mortgage Brokers Are Responsible

for Providing the Disclosure Notice. A few commenters asked whether a

mortgage broker is responsible for delivering the disclosure notice if

the application is taken by a mortgage broker. One commenter noted that

in the situation in which a broker takes the application, the broker

might not deliver the application to the lender until well after the

three-day period has expired.

HUD Response--A Mortgage Broker Is Not An Original Lender; Lender

Is Responsible for Providing Disclosure Notice. The statute provides

that the ``original lender'' must provide the informed consumer choice

disclosure. Therefore, a mortgage broker providing the disclosure

notice to the borrower will not fulfill the lender's obligation under

the statute. As noted in the previous response, the final rule

clarifies that the timing of the disclosure notice is no later than 3

business days after the lender's receipt of the application.

Comment--The Disclosure Notice Should Be Updated Only Once

Annually. Several commenters were concerned about the frequency with

which they would be required to update the disclosure notice. These

commenters stated that since pricing of mortgage products can change as

frequently as daily or weekly, it would appear that the expectation is

that the lenders would be required to update the disclosure notices

with the same frequency. The commenters stated that to update the

disclosure notices for pricing changes as frequently as they occur

defeats the intent of Congress in mandating a generic comparison. These

lenders requested that the final rule provide that lenders need only

update the disclosure notice once every 12 months.

HUD Response--The Final Rule Provides that the Disclosure Notice

Need Only Be Updated Once Annually. We agree with the commenters that

market conditions could technically require frequent revisions to the

disclosure notice that would result in an undue administrative burden

on lenders. HUD encourages lenders to update their disclosure notices

periodically so that the notice remains meaningful to their borrowers,

but the final rule only requires lenders to update their disclosure

notices once annually.

Comment--Delay the Effective Date of its Rule Requiring Informed

Consumer Choice Disclosure. A few commenters requested that HUD delay

implementation of the informed consumer choice disclosure notice until

after the Homeownership Protection Act (Pub. L. 105-216, 12 U.S.C. 4901

et seq.) (HPA) becomes effective on July 29, 1999. These commenters

noted that this statute will change the maximum number of years that

mortgage insurance will be required. The HPA requires automatic

termination of private mortgage insurance (PMI), generally when the

loan-to-value (LTV) is scheduled to reach 78 percent of its original

level. The commenters stated that in addition to the HPA, the Federal

Reserve Board plans to revise the Official Staff Commentary on

Regulation Z to explain the interaction between the HPA and TILA.

HUD Response--Statute Provides No Authority for Delaying

Implementation. We understand the concerns of the commenters, but

believe that the FY 1999 HUD Appropriations Act does not provide HUD

with the authority to delay implementation. In requiring HUD to develop

the disclosure notice 150 days after enactment of the HUD FY 1999

Appropriations Act and to develop the disclosure notice through notice

and comment rulemaking, we interpret this to mean that the only delay

in implementation of this statutory requirement is to be HUD's

development of the notice. To ensure prompt development, the Congress

imposed a statutory deadline on HUD for development of the notice.

Comment--HUD Needs to Provide Additional Guidance on How

Calculations Are to Be Made in the Comparison Chart and More Detailed

Instructions on Preparing the Notice. A few commenters asked technical

questions about how precisely calculations were to be done in the

disclosure notice to provide a meaningful comparison to consumers.

HUD Response--HUD Will Provide Lenders More Detailed Instructions

Through Mortgagee Letter. It is our intent that the disclosure notice

impose as minimal an administrative burden on FHA approved mortgagees

as possible. This rule is not the appropriate place to provide detailed

processing instructions and additional guidance on calculations to

lenders. We will be issuing a Mortgagee Letter and will provide

specific guidance to lenders about the disclosure notice.

III. The Informed Consumer Choice Disclosure Notice--HUD's Model

Notice

The following provides HUD's model informed consumer choice

disclosure notice. To complete the generic disclosure format shown

below, lenders should use the following instructions. At the lender's

discretion, a lender may revise the disclosure notice to include

additional line items or columns, further define terms, or explain

additional features that better reflect the lender's FHA and

conventional mortgage products so as to make a meaningful comparison.

BILLING CODE 4210-27-P

[[Page 29763]]

[GRAPHIC] [TIFF OMITTED] TR02JN99.006

[[Page 29764]]

[GRAPHIC] [TIFF OMITTED] TR02JN99.007

BILLING CODE 4210-27-C

[[Page 29765]]

IV. Findings and Certifications

Paperwork Reduction Act Statement

The information collection requirements contained in this rule have

been approved by the Office of Management and Budget (OMB) in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-

3520) and assigned OMB control number 2502-0537. 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.

Environmental Impact

In accordance with 24 CFR 50.19(c)(1) of HUD's regulations, this

rule does not direct, provide for assistance or loan and mortgage

insurance for, or otherwise govern or regulate, real property

acquisition, disposition, leasing, rehabilitation, alteration,

demolition, or new construction, or establish, revise, or provide for

standards for construction or construction materials, manufactured

housing, or occupancy. Therefore, this rule is categorically excluded

from the requirements of the National Environmental Policy Act of 1969

(Pub. L. 91-190, 83 Stat. 852, codified as amended at 42 U.S.C. 4321-

4347).

Regulatory Flexibility Act

The Secretary has reviewed this final rule before publication and

by approving it certifies, in accordance with section 3(a) of the

Regulatory Flexibility Act (5 U.S.C. 605(b)), that this rule would not

have a significant economic impact on a substantial number of small

entities. The rule implements a statutory disclosure requirement

imposed on lenders and provides lenders with a model format for that

disclosure so that the lenders may comply with the statutory

requirements.

Federalism

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

of Executive Order 12612 (entitled ``Federalism''), has determined that

the policies contained in this rule would not have substantial direct

effects on States or their political subdivisions, on the relationship

between the Federal Government and the States, or on the distribution

of power and responsibilities among the various levels of government.

Accordingly, review under the order is not required.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (5 U.S.C.

1531-1538)(UMRA) requires Federal agencies to assess the effects of

their regulatory actions on State, local, and tribal governments and on

the private sector. This final rule does not impose, within the meaning

of the UMRA, any Federal mandates on any State, local, or tribal

governments or on the private sector.

List of Subjects in 24 CFR Part 203

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

housing and community development, Mortgage insurance, Reporting and

recordkeeping requirements, Solar energy.

For the reasons discussed in the preamble, HUD amends 24 CFR part

203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

1. 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).

2. Add Sec. 203.10 to read as follows:

Sec. 203.10 Informed consumer choice for prospective FHA mortgagors.

(a) Mortgagee to provide disclosure notice. A mortgagee must

provide a prospective FHA mortgagor with an informed consumer choice

disclosure notice if, in the mortgagees's judgment, the prospective FHA

mortgagor may qualify for similar conventional mortgage products

offered by the mortgagee. The mortgagee should base this judgment on

the mortgagee's initial assessment of the prospective FHA mortgagor's

eligibility for a conventional mortgage product. If a mortgagee is

unsure about a prospective FHA mortgagor's eligibility for a

conventional mortgage product, the mortgagee should provide the

prospective FHA mortgagor with an informed consumer choice disclosure

notice.

(b) Informed consumer choice disclosure notice. (1) Contents of

notice. The informed consumer choice disclosure notice must:

(i) Provide a one page generic analysis comparing the mortgage

costs of an FHA-insured mortgage with the mortgage costs of similar

conventional mortgage products offered by the mortgagee that the

prospective FHA mortgagor may qualify for;

(ii) Provide information about when the requirement to pay FHA

mortgage insurance premiums terminates; and

(iii) Meet the requirements of section 203(b)(2) of the National

Housing Act (12 U.S.C. 1709(b)(2)).

(2) Format of disclosure notice. The informed consumer choice

disclosure notice must be provided in a format prescribed by the

Commissioner. HUD has prepared a model informed consumer choice

disclosure notice that represents this format and that meets the

requirements of section 203(b)(2) of the National Housing Act (12

U.S.C. 1709(b)(2)). The model informed consumer choice disclosure

notice contains the minimum elements of an informed consumer choice

disclosure notice. These elements must be included in a mortgagee's

informed consumer choice disclosure notice. A mortgagee, however, may

include additional elements in an informed consumer choice disclosure

notice to better reflect the mortgagee's products or to provide

information that the mortgagee believes is meaningful and helpful to

the mortgagee's customers.

(3) Availability of model disclosure notice. HUD's model informed

consumer choice disclosure notice is made available to FHA-approved

mortgagees through Mortgagee Letter and is available to the public

through the internet at HUD's web site at http://www.hud.gov or by

contacting: Home Mortgage Insurance Division, Office of Insured Single

Family Housing, U.S. Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410-8000; telephone (202) 708-2700

(this is not a toll-free number), or the nearest HUD Homeownership

Center (Atlanta, GA (888) 696-4687; Denver, CO (800) 543-9378;

Philadelphia, PA (800) 440-8647; or Santa Ana, CA (888) 827-5605).

Hearing- or speech-impaired individuals may access these numbers via

TTY by calling the toll-free Federal Information Relay Service at (800)

877-8339.

(c) Timing. When required under paragraph (a) of this section, a

mortgagee must provide an informed consumer choice disclosure notice to

a prospective FHA mortgagor not later than three business days after

the mortgagee receives the prospective FHA mortgagor's application.

(d) Revision of notice. A mortgagee should revise its informed

consumer choice disclosure notice periodically to reflect prevailing

market conditions. To ensure that the informed consumer choice

disclosure notice reflects prevailing market conditions, a mortgagee

must revise its informed consumer choice disclosure notice at least

once annually.

(e) Applicability. This section applies to any application for

mortgage insurance authorized under section 203(b) of the National

Housing Act (12 U.S.C. 1709) that the mortgagee receives on or after

July 2, 1999.

(f) Definitions. As used in this section:

[[Page 29766]]

Application means the submission of financial information in

anticipation of a credit decision.

Conventional mortgage means conventional mortgage as used in

section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12

U.S.C. 1454(a)(2)) or section 302(b)(2) of the Federal National

Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), as applicable.

Mortgagee means mortgagee as defined in Sec. 202.2 of this chapter.

Prospective FHA mortgagor means a person who submits an application

to a mortgagee to obtain mortgage insurance authorized under section

203(b) of the National Housing Act (12 U.S.C. 1709).

Dated: May 12, 1999.

William C. Apgar,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 99-13917 Filed 6-1-99; 8:45 am]

BILLING CODE 4210-27-P