[Federal Register Volume 77, Number 165 (Friday, August 24, 2012)]
[Rules and Regulations]
[Pages 51465-51469]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20924]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 25, 30, 201, 202, 203, and 206

[Docket No. FR-5622-F-01]
RIN 2502-AJ13


Federal Housing Administration: Strengthening Risk Management 
Through Responsible FHA-Approved Lenders

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule; clarification and correction.

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SUMMARY: As part of HUD's efforts to strengthen the risk management 
practices of the Federal Housing Administration (FHA), HUD published a 
final rule on April 20, 2010, revising its regulations pertaining to 
the FHA-approval of mortgage lenders. The April 20, 2010, final rule 
increased the net worth requirement for FHA-approved lenders and 
mortgagees, eliminated HUD's approval of loan correspondents, and 
amended the general approval standards for lenders and mortgagees. This 
final rule makes several nonsubstantive clarifications and corrections 
to the provisions of the April 20, 2010, final rule. The changes will 
improve the clarity of HUD's regulatory requirements and, thereby, 
facilitate program participant compliance and improve HUD's ability to 
monitor and enforce its risk management regulations.

DATES: Effective Date: September 24, 2012.

FOR FURTHER INFORMATION CONTACT: Richard Toma, Deputy Director, Office 
of Lender Activities and Program Compliance, Office of Housing, 
Department of Housing and Urban Development, 490 L'Enfant Plaza East 
SW., Room P3214, Washington, DC 20024-8000; telephone number 202-708-
1515 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    As part of HUD's efforts to strengthen FHA risk management, HUD 
published a final rule on April 20, 2010, entitled, ``Federal Housing 
Administration: Continuation of FHA Reform; Strengthening Risk 
Management Through Responsible FHA-Approved

[[Page 51466]]

Lenders'' (75 FR 20718). The April 20, 2010, final rule increased the 
net worth requirement for FHA-approved lenders and mortgagees, 
eliminated HUD's approval of loan correspondents, and amended the 
general approval standards for lenders and mortgagees. This final rule 
makes the following nonsubstantive clarifications and corrections to 
the provisions of the April 20, 2010, final rule. The changes will 
improve the clarity of HUD's regulatory requirements and, thereby, 
facilitate program participant compliance and improve HUD's ability to 
monitor and enforce its risk management regulations.

A. Liquidity REQUIREMENTS for FHA-Approved Lenders and Mortgagees

    The revised net worth requirements established by the April 20, 
2010, final rule are codified in 24 CFR 202.5(n). As of May 20, 2011, 
FHA-approved non-small business lenders and mortgagees were required to 
have a minimum net worth of $1 million ``of which no less than 20 
percent must be liquid assets consisting of cash or its equivalent 
acceptable to the Secretary'' (Sec.  202.5(n)(2)(iii)). As of that same 
date, existing FHA-approved small business lenders and mortgagees were 
required to have a minimum net worth of $500,000 ``of which no less 
than 20 percent must be liquid assets consisting of cash or its 
equivalent acceptable to the Secretary'' (Sec.  202.5(n)(2)(iv)).\1\
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    \1\ A small business lender or mortgagee is an existing lender 
or mortgagee whose size is less than or equal to ``the size standard 
for its industry classification established by the Small Business 
Administration at 13 CFR 121.201 Sector 52 (Finance and Insurance), 
Subsector 522 (Credit Intermediation and Related Activities).''
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    By May 20, 2013, all FHA-approved lenders and mortgagees, 
irrespective of size, are required to have a minimum net worth of $1 
million, plus an additional net worth of one percent of the total 
volume in excess of $25 million of FHA single-family insured mortgages 
originated, underwritten, purchased, or serviced during the prior 
fiscal year. Further, the regulations require that ``[n]o less than 20 
percent of the * * * required net worth must be liquid assets 
consisting of cash or its equivalent acceptable to the Secretary'' 
(Sec.  202.5(n)(3)(i)).
    As the quoted language above indicates, the wording of the 
liquidity requirement differs slightly between Sec.  202.5(n)(2)(iii) 
and (iv) (which establishes the requirements effective on May 20, 2011) 
and Sec.  202.5(n)(3)(i) (which establishes the requirements effective 
on May 20, 2013). Specifically, Sec.  202.5(n)(2)(iii) and (iv) omit 
the word ``required'' when referring to the portion of net worth that 
must be held in liquid assets. This difference is due to the 
grammatical context in which these provisions are located.
    While the intent of the final rule was that the liquidity 
requirements apply solely to the required minimum net worth, HUD is 
concerned that the variation in wording is unclear and has the 
potential to confuse lenders and regulators alike. HUD has consistently 
interpreted the liquidity requirements as applying to the required 
minimum net worth; however, questions have arisen whether FHA-approved 
lenders and mortgagees are required to maintain liquid assets 
equivalent to 20 percent of their total net worth. In order to 
alleviate confusion and institute clarity, this final rule amends Sec.  
202.5(n)(2)(iii) and (iv) to explicitly refer to the approved lender or 
mortgagee's required minimum net worth.
    In addition, this final rule makes a related technical correction 
to Sec.  202.7, which sets forth requirements governing nonsupervised 
lenders and mortgagees. This final rule removes outdated paragraph 
(b)(2) of Sec.  202.7, which formerly contained the liquidity 
requirements for nonsupervised lenders and mortgagees, but has been 
superseded by the liquidity requirements established by the April 20, 
2010, final rule at Sec.  202.5(n). Section 202.5(n) specifies that the 
new net worth and liquidity requirements ``apply to supervised and 
nonsupervised lenders and mortgagees.''

B. Definition of Sponsored Third-Party Originator

    The April 20, 2010, final rule eliminated HUD's approval of loan 
correspondents. Loan correspondents may continue to participate in the 
origination of FHA mortgage loans as sponsored third-party originators 
through association with a sponsoring FHA-approved mortgagee, but 
sponsored third-party originators are no longer subject to the FHA 
lender approval process.
    Removing the required HUD approval for loan correspondents was not 
meant to preclude FHA-approved mortgagees from acting as sponsored 
third-party originators. However, the current definition of a sponsored 
third-party originator in Sec.  202.8(a)(3) could be read as 
prohibiting FHA-approved mortgagees from acting as sponsored third-
party originators. It states that a ``third-party originator does not 
hold a Title I Contract of Insurance or Title II Origination Approval 
agreement * * *.'' This final rule revises the definition of a 
sponsored third-party originator to clarify that a sponsored third-
party originator may hold a Title I Contract of Insurance or Title II 
Origination Approval Agreement if it is also an FHA-approved lender or 
mortgagee.

C. Consistent Use of the Term ``Sponsored Third-Party Originator'' in 
FHA Regulations

    In addition, this rule will make technical corrections to HUD's 
regulations by removing references to loan correspondents, loan 
originators, and other outdated terms, where applicable. Where 
appropriate, this final rule replaces these terms with ``sponsored 
third-party originator.'' However, since HUD does not approve sponsored 
third-party originators, references to loan correspondents, loan 
originators, and like phrases will be removed without replacement where 
the regulations are applicable only to FHA-approved entities.
    The HUD regulations affected by these corrections are those 
governing the Mortgagee Review Board (24 CFR part 25), civil money 
penalties (24 CFR part 30), FHA Title I property improvements and 
manufactured home loans (24 CFR part 201), approval of lending 
institutions and mortgagees (24 CFR part 202), single-family mortgage 
insurance (24 CFR part 203) and home equity conversions mortgage 
insurance (24 CFR part 206). The specific regulations revised by this 
final rule are Sec. Sec.  25.3, 25.5, 25.6, 30.10, 30.36, 30.60, 201.2, 
202.8, 203.5, 203.255, and 206.31.

II. Justification for Final Rulemaking

    In general, HUD publishes a rule for public comment before issuing 
a rule for effect, in accordance with HUD's regulations on rulemaking 
at 24 CFR part 10. Part 10, however, provides, in Sec.  10.1, for 
exceptions from that general rule where HUD finds good cause to omit 
advance notice and public participation. The good cause requirement is 
satisfied when the prior public procedure is ``impracticable, 
unnecessary, or contrary to the public interest.''
    HUD finds that good cause exists to publish this rule for effect 
without soliciting public comment, on the basis that public procedure 
is unnecessary. All of the changes made by this rule are technical in 
nature and do not make any substantive changes to HUD's requirements 
for individuals and entities participating in FHA programs. This rule 
merely makes conforming changes to provisions regarding the liquidity 
requirements of FHA-approved lenders and mortgagees in order to provide 
clarification, removes or replaces obsolete references to ``loan

[[Page 51467]]

correspondents'' and other outdated terms, and clarifies the original 
intent of the sponsored third-party originator definition.

III. Findings and Certifications

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
As discussed above in this preamble, this rule does not establish or 
revise any FHA program requirements. This final rule is limited to 
conforming changes, technical corrections, and clarifications that 
reflect existing requirements. The rule does not make any substantive 
changes to HUD's regulations and, therefore, does not affect a 
substantial number of small entities. Accordingly, for the above 
reasons, the undersigned certifies that this rule will not have a 
significant economic impact on a substantial number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule will not have federalism 
implications and would not impose substantial direct compliance costs 
on state and local governments or preempt state law within the meaning 
of the Executive Order.

Environmental Impact

    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. This rule is limited to clarification and 
corrections to HUD's regulations. Accordingly, under 24 CFR 
50.19(c)(1), this rule is categorically excluded from environmental 
review under the National Environmental Policy Act of 1969 (42 U.S.C. 
4321).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This final rule would 
not impose any federal mandates on any state, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

Catalogue of Federal Domestic Assistance

    The Catalogue of Federal Domestic Assistance Number for the 
principal FHA single-family mortgage insurance program is 14.117.

List of Subjects

24 CFR Part 25

    Administrative practice and procedure, Loan programs--housing and 
community development, Organization and functions (Government 
agencies), Reporting and recordkeeping requirements.

24 CFR Part 30

    Administrative practice and procedure, Grant programs--housing and 
community development, Loan programs--housing and community 
development, Mortgages, Penalties.

24 CFR Part 201

    Claims, Health facilities, Historic preservation, Home improvement, 
Loan programs--housing and community development, Manufactured homes, 
Mortgage insurance, Reporting and recording requirements.

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, HUD amends 24 
CFR parts 25, 30, 201, 202, 203, and 206, as follows:

PART 25--MORTGAGEE REVIEW BOARD

0
1. The authority citation for part 25 continues to read as follows:

    Authority: 12 U.S.C. 1708(c), 1708(d), 1709(s), 1715b, and 
1735(f)-14; 42 U.S.C. 3535(d).


0
2. In Sec.  25.3, remove the definition of ``Loan correspondent'' and 
revise the definition of ``Mortgagee'' to read as follows:


Sec.  25.3  Definitions.

* * * * *
    Mortgagee. For purposes of this part, the term ``mortgagee'' 
includes:
    (1) The original lender under the mortgage, as that term is defined 
at sections 201(a) and 207(a)(1) of the National Housing Act (12 U.S.C. 
1707(a), 1713(a)(1));
    (2) A lender, as defined in this section;
    (3) A branch office or subsidiary of the mortgagee or lender; or
    (4) Successors and assigns of the mortgagee or lender, as are 
approved by the Commissioner.
* * * * *

0
3. In Sec.  25.5, revise paragraphs (d)(1)(ii) and (e)(1)(ii) to read 
as follows:


Sec.  25.5  Administrative actions.

* * * * *
    (d) * * *
    (1) * * *
    (ii) During the period of suspension, a lender may not originate 
new Title I loans under its Title I Contract of Insurance or apply for 
a new Contract of Insurance.
* * * * *
    (e) * * *
    (1) * * *
    (ii) During the period of withdrawal, a lender may not originate 
new Title I loans under its Title I Contract of Insurance or apply for 
a new Contract of Insurance. The Board may limit the geographical 
extent of the withdrawal, or limit its scope (e.g., to either the 
single family or multifamily activities of a withdrawn mortgagee). Upon 
the expiration of the period of withdrawal, the mortgagee may file a 
new application for approval under 24 CFR part 202.
* * * * *

0
4. Revise Sec.  25.6(cc) to read as follows:


Sec.  25.6  Violations creating grounds for administrative action.

* * * * *
    (cc) Violation by a Title I lender of any of the applicable 
provisions of this section or 24 CFR 202.11(a)(2).
* * * * *

[[Page 51468]]

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

0
5. The authority citation for part 30 continues to read as follows:

    Authority:  12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, and 1735f-
15; 15 U.S.C. 1717a; 28 U.S.C. 2461 note; 42 U.S.C. 1437z-1 and 
3535(d).


0
6. In Sec.  30.10, remove the definition of ``Loan correspondent'' and 
add the definition of ``Sponsored third-party originator'' in 
alphabetical order to read as follows:


Sec.  30.10  Definitions.

* * * * *
    Sponsored third-party originator. A sponsored third-party 
originator as defined at Sec.  202.8 of this title.

0
7. Revise Sec.  30.36(a)(8) to read as follows:


Sec.  30.36  Other participants in FHA programs.

    (a) * * *
    (8) Sponsored third-party originators;
* * * * *

0
8. In Sec.  30.60, revise the section heading, paragraph (a) 
introductory text, and paragraph (a)(3) to read as follows:


Sec.  30.60  Dealers or sponsored third-party originators.

    (a) General. The Assistant Secretary for Housing-Federal Housing 
Commissioner, or his or her designee, may initiate a civil money 
penalty action against any dealer or sponsored third-party originator 
that violates section 2(b)(7) of the National Housing Act (12 U.S.C. 
1703). Such violations include, but are not limited to:
* * * * *
    (3) Failing to sign a credit application if the dealer or sponsored 
third-party originator assisted the borrower in completing the 
application;
* * * * *

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

0
9. The authority citation for part 201 is amended to read as follows:

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


0
10. In Sec.  201.2, remove the definition of ``Loan correspondent'' and 
revise the definition of ``Lender'' to read as follows:


Sec.  201.2  Definitions.

* * * * *
    Lender means a financial institution that:
    (1) Holds a valid Title I contract of insurance and is approved by 
the Secretary under 24 CFR part 202 to originate, purchase, hold, 
service, and/or sell loans insured under this part; or
    (2) Is under suspension or holds a Title I contract of insurance 
that has been terminated, but that remains responsible for servicing or 
selling Title I loans that it holds and is authorized to file insurance 
claims on such loans.
* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

0
11. The authority citation for part 202 continues to read as follows:

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

0
12. In Sec.  202.5, revise paragraphs (n)(2)(iii) and (iv) to read as 
follows:


Sec.  202.5  General approval standards.

* * * * *
    (n) * * *
    (2) * * *
    (iii) Net worth requirements for non-small businesses. Each 
approved lender or mortgagee that exceeds the size standard for its 
industry classification established by the Small Business 
Administration at 13 CFR 121.201 Sector 52 (Finance and Insurance), 
Subsector 522 (Credit Intermediation and Related Activities) shall have 
a required minimum net worth of not less than $1,000,000. No less than 
20 percent of the approved lender or mortgagee's required minimum net 
worth must be liquid assets consisting of cash or its equivalent 
acceptable to the Secretary.
    (iv) Net worth requirements for small businesses. Each approved 
lender or mortgagee that meets the size standard for its industry 
classification established by the Small Business Administration at 13 
CFR 121.201 Sector 52 (Finance and Insurance), Subsector 522 (Credit 
Intermediation and Related Activities) shall have a required minimum 
net worth of not less than $500,000. No less than 20 percent of the 
approved lender or mortgagee's required minimum net worth must be 
liquid assets consisting of cash or its equivalent acceptable to the 
Secretary. If, based on the audited financial statement or other 
financial report that is required to be prepared at the end of its 
fiscal year and provided to HUD at the commencement of the new fiscal 
year, an approved lender or mortgagee no longer meets the Small 
Business Administration size standard for its industry classification, 
the approved lender or mortgagee shall meet the net worth requirements 
set forth in paragraph (n)(2)(iii) of this section for a non-small 
business approved lender or mortgagee by the last day of the fiscal 
year in which the audited financial statement or other financial 
report, as applicable, was submitted.
* * * * *

0
13. In Sec.  202.7, revise paragraph (b)(1), remove paragraph (b)(2), 
and redesignate paragraphs (b)(3), (4), and (5) as paragraphs (b)(2), 
(3), and (4), respectively.
    The revision reads as follows:


Sec.  202.7  Nonsupervised lenders and mortgagees.

* * * * *
    (b) * * *
    (1) Net worth and liquid assets. The net worth and liquidity 
requirements appear in Sec.  202.5(n).
* * * * *

0
14. In Sec.  202.8:
0
a. Revise the section heading;
0
b. In paragraph (a), revise the definition of ``Sponsored third-party 
originator'';
0
c. Revise paragraph (b); and
0
d. Remove paragraph (c).
    The revisions read as follows:


Sec.  202.8  Sponsored third-party originators.

* * * * *
    (a) * * *
    Sponsored third-party originator. A sponsored third-party 
originator may hold a Title I Contract of Insurance or Title II 
Origination Approval Agreement if it is an FHA-approved lender or 
mortgagee. If the sponsored third-party originator is not an FHA-
approved lender or mortgagee, then the sponsored third-party originator 
may not hold a Title I Contract of Insurance or Title II Origination 
Approval Agreement. A sponsored third-party originator is authorized to 
originate Title I direct loans or Title II mortgage loans for sale or 
transfer to a sponsor or sponsors, as defined in this section, that 
holds a valid Title I Contract of Insurance or Title II Origination 
Approval Agreement and is not under suspension, subject to the sponsor 
determining that the third-party originator has met the eligibility 
criteria of paragraph (b) of this section.
    (b) Eligibility to originate loans to be insured by FHA. A 
sponsored third-party originator may originate loans to be insured by 
FHA, provided that:
    (1) The sponsored third-party originator is working with and 
through an FHA-approved lender or mortgagee; and
    (2) The sponsored third-party originator or an officer, partner, 
director, principal, manager, supervisor, loan processor, or loan 
originator of the

[[Page 51469]]

sponsored third-party originator has not been subject to the sanctions 
or administrative actions listed in Sec.  202.5(j), as determined and 
verified by the FHA-approved lender or mortgagee.

0
15. Revise Sec.  202.12(a)(1)(ii) to read as follows:


Sec.  202.12  Title II.

* * * * *
    (a) * * *
    (1) * * *
    (ii) Customary lending practices. The customary lending practices 
of a mortgagee include all single family insured mortgages originated 
by the mortgagee, including mortgages that were originated by the 
mortgagee's sponsored third-party originator(s).
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
16. The authority citation for part 203 continues to read as follows:

    Authority:  12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and 
1717z-21; 42 U.S.C. 3535(d).


0
17. Revise Sec.  203.5(e)(3) to read as follows:


Sec.  203.5  Direct Endorsement process.

* * * * *
    (e) * * *
    (3) A mortgagee and an appraiser must ensure that an appraisal and 
related documentation satisfy FHA appraisal requirements, and both bear 
responsibility for the quality of the appraisal in satisfying such 
requirements. A Direct Endorsement Mortgagee that submits, or causes to 
be submitted, an appraisal or related documentation that does not 
satisfy FHA requirements is subject to administrative sanction by the 
Mortgagee Review Board pursuant to parts 25 and 30 of this title.

0
18. Revise Sec.  203.255(b)(11) to read as follows:


Sec.  203.255  Insurance of mortgage.

* * * * *
    (b) * * *
    (11) A mortgage certification on a form prescribed by the 
Secretary, stating that the authorized representative of the mortgagee 
who is making the certification has personally reviewed the mortgage 
documents and the application for insurance endorsement, and certifying 
that the mortgage complies with the requirements of paragraph (b) of 
this section. The certification shall incorporate each of the mortgagee 
certification items that apply to the mortgage loan submitted for 
endorsement, as set forth in the applicable handbook or similar 
publication that is distributed to all Direct Endorsement mortgagees;
* * * * *

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

0
19. The authority citation for part 206 continues to read as follows:

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


0
20. In Sec.  206.31, revise paragraph (a)(1) to read as follows:


Sec.  206.31  Allowable charges and fees.

    (a) * * *
    (1) A charge to compensate the mortgagee for expenses incurred in 
originating and closing the mortgage loan, which may be fully financed 
with the mortgage. The Secretary may establish limitations on the 
amount of any such charge. HUD will publish any such limit in the 
Federal Register at least 30 days before the limitation takes effect. 
The mortgagor is not permitted to pay any additional origination fee of 
any kind to a mortgage broker or sponsored third-party originator. A 
mortgage broker's fee can be included as part of the origination fee 
only if the mortgage broker is engaged independently by the homeowner 
and there is no financial interest between the mortgage broker and the 
mortgagee.
* * * * *

    Dated: August 20, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2012-20924 Filed 8-23-12; 8:45 am]
BILLING CODE 4210-67-P