[Federal Register Volume 78, Number 25 (Wednesday, February 6, 2013)]
[Proposed Rules]
[Pages 8448-8456]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02668]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200 and 203

[Docket No. FR-5457-P-01]
RIN 2502-AJ03


Streamlining Inspection and Warranty Requirements for Federal 
Housing Administration (FHA) Single-Family Mortgage Insurance: Removal 
of the FHA Inspector Roster and of the Ten-Year Protection Plan 
Requirements for High Loan-to-Value Ratio Mortgages

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would streamline the inspection and home 
warranty requirements for FHA single-family mortgage insurance. First, 
HUD proposes to remove the regulations for the FHA Inspector Roster 
(Roster). The Roster is a list of inspectors approved by FHA as 
eligible to determine if the construction quality of a one- to four-
unit property is acceptable as security for an FHA-insured loan. HUD's 
regulations currently require the use of an inspector from the Roster 
as a condition for FHA mortgage insurance where the local jurisdiction 
does not perform necessary inspections. HUD's proposal to remove the 
Roster regulations is based on the recognition of the sufficiency and 
quality of inspections carried out by certified inspectors and other 
qualified individuals. Second, this proposed rule would also remove the 
regulations

[[Page 8449]]

requiring 10-year protection plans in order to qualify for high loan-
to-value (LTV), FHA-insured mortgages as a condition of closing for 
newly constructed single-family homes. The Housing and Economic 
Recovery Act of 2008 (HERA) removed the statutory requirement for a 
warranty plan and other special requirements for high LTV mortgages. 
HUD, however, is retaining the requirement that the Warranty of 
Completion of Construction (form HUD-92544) be executed by the builder 
and the buyer of a new construction home, as a condition for FHA 
mortgage insurance.

DATES: Comment due date: April 8, 2013.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street 
SW., Room 10276, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0001.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule. No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.

    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the toll-free Federal Relay 
Service at 800-877-8339. Copies of all comments submitted are available 
for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Karin Hill, Director, Office of Single 
Family Program Development, Office of Housing, Department of Housing 
and Urban Development, 451 7th Street SW., Room 9278, Washington, DC 
20410-8000; telephone number 202-708-2121 (this is not a toll-free 
number). Persons with hearing or speech impairments may access this 
number via TTY by calling the Federal Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

    Through FHA, HUD insures mortgages made by qualified lenders to 
people purchasing or refinancing a primary residence. The National 
Housing Act (12 U.S.C. 1709 et seq.) authorizes HUD to provide mortgage 
insurance so that qualified borrowers may use the insured mortgage to 
finance the purchase of new or existing one-to-four unit (single-
family) housing. FHA's single family mortgage insurance is an important 
tool through which the Federal Government expands homeownership 
opportunities for first-time homebuyers and other borrowers who would 
not otherwise qualify for conventional mortgages on affordable terms, 
as well as for those who live in underserved areas where mortgages may 
be harder to get.
    Under its statutory authority, HUD has issued various regulations 
that govern the inspection and warranty requirements of these FHA-
insured mortgages. Since the promulgation of these regulations, the 
quality of housing and building technology has improved significantly. 
In addition, local jurisdictions have adopted more uniform building 
codes, while more vigorously enforcing their building codes. As a 
result, HUD recognizes that some of its former requirements for 
mortgage insurance are no longer necessary to protect lenders against 
the risk of default. With this rule, HUD proposes to remove those 
requirements it no longer believes to be necessary, thereby reducing 
some of the administrative burden on both homeowners and HUD, while 
also producing dollar savings for homeowners who obtain FHA-insured 
mortgages.
    First, HUD proposes to eliminate its national Inspector Roster 
(Roster). The Roster is a list of inspectors, approved by HUD, to 
perform inspections in the limited circumstances when either: (1) A 
local jurisdiction did not already perform its own inspections for new 
construction, and issue building permits and certificates of occupancy; 
or (2) when the inspection of a repair or renovation was not performed 
by a licensed professional as specified by regulation. See 24 CFR 
200.170(b). HUD originally created the Roster to standardize the 
inspection process for properties with FHA-insured mortgages. Before 
the Roster, cities and states developed their own building codes, which 
had little uniformity or consistency with each other. Now, however, the 
International Residential Code (IRC) is in use or adopted in 49 states, 
the District of Columbia, and the U.S. Virgin Islands. The 
International Code Council (ICC), which developed the IRC, also 
certifies Residential Combination Inspectors (RCIs). To be certified by 
the ICC, RCIs must pass a rigorous set of examinations, which includes 
testing their knowledge of the IRC.\1\ As a result, there is no longer 
a need for HUD to maintain and administer its own standardization 
process for inspectors.
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    \1\ See http://www.iccsafe.org/Accreditation/Documents/ComboCertificate.pdf.
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    Second, HUD proposes to eliminate its requirement that borrowers 
purchase a 10-year protection plan for all high loan-to-value (LTV) 
mortgages in order to qualify for FHA mortgage insurance. In 1979, when 
Congress authorized HUD to insure mortgages with a high LTV ratio (in 
excess of 90 percent of the appraised property value), Congress also 
required that, to qualify for FHA insurance for such mortgages, 
borrowers would have to purchase a consumer protection plan or warranty 
plan acceptable to HUD. (Pub. L. 96-153, 93 Stat. 1101, approved 
December 21, 1979.) But in 2008, Congress eliminated the requirement of 
purchasing a consumer protection plan or warranty plan. (Pub. L. 110-
289, 122 Stat. 2654, approved July 30, 2008). While HUD may still keep 
the requirements in place, HUD is no longer statutorily mandated to do 
so. Upon evaluation, HUD believes that the significant improvements in 
building technology and the quality of housing, as well as

[[Page 8450]]

the adoption of uniform building codes and local jurisdictions' more 
stringent enforcement of building codes, mitigate HUD's previous 
concerns about needing to protect property owners from defects in 
workmanship and materials.
    HUD expects the elimination of these two requirements to have an 
anticipated total savings of $29,569,957. By eliminating the Roster, 
HUD expects to save approximately $42,770 in administrative costs. In 
addition, lenders will have a greater number of inspectors to choose 
from, thereby increasing competition among qualified inspectors and 
potentially driving down the fees that inspectors charge lenders. 
Inspectors remain subject to other certification requirements, 
therefore minimizing any potential risk of unnoticed structural defects 
in properties secured by FHA-insured mortgages. Because this risk is 
very small, and because the universe of loans subject to the inspector 
roster requirement is also very small, HUD believes the costs of 
removing this requirement to be minimal.
    By eliminating the 10-year warranty requirement, HUD anticipates 
saving $10,601 in administrative costs. Homeowners are expected save 
approximately $29.4 million from no longer being required to purchase a 
10-year warranty plan in order to secure an FHA-insured mortgage. 
Providers of warranty plans are also expected to save $132,066 from the 
reduced paperwork burden of submitting required protection plans to HUD 
for approval. For those homeowners who still choose to purchase a 
warranty plan, they can choose from the entire market of warranty 
providers and not just those approved by HUD. Allowing homeowners to 
choose any provider they wish should increase competition and, 
possibly, drive down the prices of the protection plans. The costs of 
eliminating the warranty requirement are expected to be minimal. The 
increased quality of construction materials and the standardization of 
building codes have greatly mitigated concerns of defective 
construction that might result from eliminating the warranty 
requirement. Moreover, the number of potential homes affected by the 
elimination of the warranty requirement is very limited.
    Summary of savings resulting from proposed regulatory changes:

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                          FHA Inspection Roster
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Administrative Costs Savings:
    Revised Administrative Costs Savings............             $42,770
        Elimination of the review of applications...              11,250
        Elimination of the fielding with inspectors               11,520
         and data input into FHA Connection.........
        Elimination of the maintenance of the Roster               5,000
         database...................................
        Elimination of the application HUD-925631                 15,000
         (Appication for Fee or Roster Personnel
         Designation) and associated burden hours...
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                          10-Year Warranty Plan
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Elimination of the warranty plan (Saving to                   29,352,615
 Homeowners)........................................
Administrative Costs Savings:
    Revised Administrative Cost Savings.............             142,667
        Lender's (Lender's Review)..................             132,066
        HUD.........................................              10,601
            --HUD Review............................               6,601
            --Elimination of the 10-year warranty                    320
             webpage................................
            --Elimination of the review of Plan                    1,920
             Renewals...............................
            --Elimination of the review of single                  1,280
             state renewals.........................
            --Elimination of burden hours on                         480
             Warranty Providers for Plan Submittal..
Estimated Total Financial Savings:
    Revised Estimated Total Financial Savings.......          29,538,052
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II. Background

FHA Inspection Requirements and the Inspector Roster

    Compliance inspectors, both from the private sector as well as HUD 
staff, have always played a vital role in FHA's mission to provide 
affordable homeownership by providing a means of assessing the 
durability and structural soundness of a home (whether newly 
constructed or under repair or renovation), as well as protecting the 
health and safety of the occupants. This role was particularly crucial 
in the 1930s and the following decades due to the lack of generally 
accepted building codes and code enforcement. Beginning in the early 
1900s, model codes were developed by three separate regional model code 
groups. In addition, by the first part of the 20th century, all major 
cities had developed and adopted their own individual building codes 
with little uniformity or consistency among the various codes.
    In 1990, the three major model code groups combined efforts and 
formed the ICC to develop uniform codes with no regional limitations. 
Since the promulgation of the initial ICC codes, most state and local 
governments that have adopted building codes to regulate and 
standardize the construction of residential and commercial buildings 
have chosen the model codes developed by the ICC. While there is no 
official national building code, since the publication of the most 
recent version of the ICC residential building code in 2009, the IRC is 
in use or adopted in 49 states, the District of Columbia, and the U.S. 
Virgin Islands. (See http://www.iccsafe.org/gr/Pages/adoptions.aspx.) 
The number of adoptions continues to increase. In addition to adopting 
the ICC codes, jurisdictions have developed protocols and standards for 
inspections to ensure compliance with the adopted code.
    Because of the historic lack of uniformity among building codes, 
FHA utilized various methods to standardize the inspection process for 
properties with FHA-insured mortgages. Before 1996, FHA's 81 field 
offices each maintained a panel of fee inspectors who were assigned on 
a rotating basis to perform inspections. From 1996 to 2004, mortgagees 
selected inspectors from a panel of inspectors listed on the Internet. 
This ``Internet panel'' was a compilation of inspectors from the local 
panels established by FHA's field offices. In 2002, FHA issued a 
proposed rule to establish the Roster to take the place of the Internet 
panel of inspectors.

[[Page 8451]]

The final rule, published on March 10, 2004 (69 FR 11494) and codified 
at 24 CFR 200.170-172, implementing the Roster that is in place today 
provides eligibility standards, procedures, and requirements for 
placement on the Roster. In addition to demonstrating professional 
experience and familiarity with HUD requirements, an applicant for the 
Roster is required to provide verification of passing HUD's 
comprehensive examination for Roster inspectors and possession of an 
inspector's license or certification if the state or local jurisdiction 
where the inspector operates requires such licensing or certification. 
The regulations also provide procedures for removing an inspector from 
the Roster for cause, generally for actions detrimental to HUD or its 
programs.
    The regulations also set forth the circumstances under which FHA-
approved mortgagees are required to use a Roster inspector. For new 
construction, a Roster inspector is needed only where the local 
jurisdiction in which the property is located does not perform 
inspections and does not issue building permits prior to construction 
and certificates of occupancy or equivalent documents upon satisfactory 
completion of construction. See 24 CFR 200.170(b)(1). For repairs or 
renovations to existing construction, a Roster inspector is needed only 
where structural repairs have been made requiring an inspection and 
this inspection is not performed by one of the licensed professionals 
as specified by regulation. See 24 CFR 200.170(b)(2). The licensed 
professional may be a licensed, bonded, and registered engineer; a 
licensed home inspector; or other person specifically registered or 
licensed to conduct such inspections, such as a building inspector in a 
jurisdiction that has adopted a building code and that requires the 
issuance of building permits and subsequent inspections for repairs and 
renovations of existing construction, structural or otherwise.

Insured 10-Year Protection Plan for High LTV Mortgages

    Section 310 of the Housing and Community Development Amendments of 
1979 (Pub. L. 96-153, approved December 21, 1979) (1979 Amendments), 
amended section 203(b)(2) of the National Housing Act (12 U.S.C. 
1709(b)(2)) to permit FHA to insure a mortgage with a high LTV ratio 
(in excess of 90 percent of the appraised property value) for single-
family homes less than one year old if the dwelling was approved for 
mortgage insurance prior to construction or if ``the dwelling is 
covered by a consumer protection plan or warranty plan acceptable to 
the Secretary and satisfies all requirements which would have been 
applicable if such dwelling had been approved for mortgage insurance 
prior to the beginning of construction.''
    Following issuance of a notice of solicitation of public comments 
(49 FR 45075, November 14, 1984) and a proposed rule (52 FR 21961, June 
10, 1987), HUD published a final rule on October 5, 1990 (55 FR 41016), 
that set forth the requirements for a consumer protection plan 
``acceptable to the Secretary,'' in accordance with the 1979 
Amendments. This final rule is codified at 24 CFR 203.18(a)(3) and 
203.200-209. Section 203.18(a)(3) requires high LTV mortgages to be 
accompanied by a 10-year consumer protection plan in order to be 
eligible for FHA mortgage insurance. Sections 203.200 through 203.209 
set forth the criteria that such plans must meet in order to be 
acceptable to HUD, including certain underwriting standards and 
baseline warranty coverage that insures against structural defects. HUD 
currently maintains a database with 17 approved 10-year warranty plan 
providers, which is available on the HUD Web site.\2\ Plan issuers 
apply to have their warranty plans accepted by HUD by submitting the 
plans to HUD for review. HUD then examines the submitted plans for 
compliance with the regulations. In order to maintain acceptance by 
HUD, the plans must be resubmitted for review every 2 years or the 
acceptance will be automatically terminated.
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    \2\ The list of approved 10-year protection plans may be 
downloaded from http://www.hud.gov/offices/hsg/sfh/ins/hoctenyr.pdf.
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    The HERA (Pub. L. 110-289, approved July 30, 2008) eliminated the 
language in section 203(b)(2) that imposed special requirements on high 
LTV mortgages, including the requirement for a consumer protection plan 
or warranty plan deemed acceptable by HUD. Removal of such language 
does not prohibit HUD from retaining these requirements, but HUD is no 
longer statutorily mandated to maintain these requirements for high LTV 
mortgages.

III. This Proposed Rule

Removal of FHA Inspection Requirements and the Inspector Roster

    Along with the increasing prevalence of uniform residential 
building codes promulgated by ICC, there is an increasing number of 
RCIs who are certified by the ICC. RCIs certified by the ICC must pass 
a set of rigorous examinations and must be familiar with the IRC; the 
most widely adopted residential code in the country. Because of this 
and the fact that FHA accepts a local jurisdiction's building permits 
and certificates of occupancy in lieu of an inspection by a Roster 
inspector, FHA has determined that it is no longer necessary to 
maintain an Inspector Roster. For new and proposed construction, as 
well as for repairs and renovations of existing properties, in areas 
where local jurisdictions provide building code enforcement and the 
requisite documentation (issuance of building permits and certificates 
of occupancy or satisfactory inspection notices for work completed, or 
their equivalents), FHA will continue to accept such documentation as 
satisfactory evidence of the completion of work. For the diminishing 
number of jurisdictions that do not provide building code enforcement 
and requisite documentation, FHA proposes to accept inspections by an 
RCI certified by the ICC and who is also licensed or certified as a 
home inspector in accordance with the applicable State and local 
requirements governing the licensing or certification of such 
inspectors in the respective jurisdiction.
    The ICC is a membership association dedicated to building safety 
and fire prevention and develops the great majority of building codes 
and standards used to construct residential and commercial buildings in 
the United States. An RCI is certified by the ICC after successful 
passage of the following standardized examinations, developed and 
administered by the ICC: Residential Building Inspector, Residential 
Electrical Inspector, Residential Mechanical Inspector, and Residential 
Plumbing Inspector. An ICC certification is valid for 3 years and 
renewal is achieved by participating in continuing education and 
professional development activities.
    This rule proposes to amend 24 CFR 200.145, entitled ``Property and 
mortgage assessment,'' to include the fact that property inspections 
are still required despite the removal of the Roster regulations. The 
removal of the Roster regulations does not mean an absence of any 
inspection requirement for a property to be eligible for an FHA-insured 
mortgage. This rule will continue to permit inspections performed by 
local jurisdictions as satisfactory evidence of work completed, as 
discussed above. Where such inspections are not performed by the local 
jurisdiction (e.g., where jurisdictions do not provide for building 
code enforcement or do not provide documentation such as building 
permits and certificates of occupancy), this rule

[[Page 8452]]

would require that the inspections be performed by an RCI who is also 
licensed or certified as a home inspector in jurisdictions that license 
or certify such inspectors. The number of required inspections would be 
unchanged from current regulatory requirements--three inspections in 
the case of new construction (see Sec.  200.170(b)(1)) and a single 
inspection for existing construction (see Sec.  200.170(b)(2)).
    In those rare instances involving property located in areas where 
there is an absence of such RCIs, the lender shall obtain an inspection 
performed by a third party who is a registered architect, a 
professional engineer, or a tradesman or contractor and has met the 
licensing and bonding requirements of the State in which the property 
is located. Registered architects and professional engineers generally 
must have a minimum of 10 years of documented residential construction 
experience as related to new construction or repairs of a structural 
nature, ranging from building techniques to the installation of 
mechanical, electrical, and plumbing systems.\3\ In cases where 
inspections are performed by RCIs or other qualified third parties in 
areas where there is an absence of RCIs, the inspection must ensure 
that construction was in accordance with any applicable building codes 
in jurisdictions that have building codes in place but either do not 
provide for building code enforcement or do not provide documentation 
such as building permits and certificates of occupancy.
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    \3\ Each State establishes the licensing requirements for 
professional engineers and architects, which generally include 
education requirements and require passing certain examinations. As 
provided, in the following Web site, for example, becoming a 
licensed professional engineer generally requires at least 12 years 
of education and experience. See http://www.heimer.com/pe/index.html.
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    Specific requests for comment. HUD has been unable to determine the 
number of jurisdictions for which there may be an absence of RCIs, and 
specifically requests information that would help HUD determine the 
number of jurisdictions or geographical areas in which RCIs are not 
available to perform inspections. Additionally, HUD is considering and 
seeks comment on whether, for jurisdictions for which RCIs are not 
available, whether HUD should require the lender, in selecting a non-
RCI, albeit an individual licensed and bonded under State law, to 
select a registered architect, engineer, tradesman, or contractor with 
a minimum of 5 years experience.
    By continuing to accept inspections performed by local 
jurisdictions rather than requiring an inspection by an FHA Roster 
inspector, FHA is recognizing that the local jurisdiction is in a 
better position to determine how best to conduct inspections to ensure 
compliance with local building codes. By continuing its practice of 
deferring to the local jurisdiction, FHA would also be mirroring the 
broader residential mortgage lending industry, which has no national 
roster of inspectors and relies upon local jurisdictions to ensure that 
new construction or renovation or repairs to existing construction is 
both durable and safe. By accepting inspections performed by RCIs, HUD 
is conforming its standards to rigorous and well-established nationwide 
criteria for home inspections.
    The number of properties insured by FHA that would require an 
inspection by an RCI (or other qualified individual where an RCI is 
unavailable) is statistically insignificant. Of the 1,946,639 loans 
endorsed by FHA in Fiscal Year (FY) 2009, only 2,975 (0.15 percent) of 
these loans required the use of a Roster inspector. Of the 1,746,367 
loans endorsed by FHA in FY 2010, only 2,155 (0.1 percent) of these 
loans required the use of a Roster inspector. For FY 2011, only 685 out 
of 1,182,512 (0.06 percent) endorsed loans required the use of a Roster 
inspector. This statistical trend, along with the high standards 
required to become an RCI (or the professional qualifications and 
length of experience that would be required for other qualified 
individuals in the absence of an RCI), indicate that the elimination of 
the Inspector Roster will have an insignificant impact on the risk to 
FHA's Insurance Fund. In other words, because so few homes even require 
an inspection by a Roster inspector anymore, and RCIs have such high 
qualifications, it is highly unlikely that eliminating the Inspector 
Roster poses any increased risk of foreclosure because of inadequate 
inspections.

Removal of Requirement for Insured 10-Year Protection Plan for High-LTV 
Mortgages

    The new inspection requirements proposed by this rule will apply to 
all single-family dwellings insured by FHA, for both new and existing 
construction, including high LTV FHA-insured mortgages. In this regard, 
HUD proposes to remove the regulations governing 10-year protection 
plans for high LTV mortgages, found at 24 CFR 203.18(a)(3) and 200-209. 
As discussed above in the Background section of this preamble, HERA 
eliminated any special requirements for high LTV mortgages, therefore 
HUD proposes to amend its regulations to follow suit. In proposing to 
remove in regulation the requirement for a 10-year protection plan, it 
is HUD's position that in the more than 20 years since the promulgation 
of the 10-year protection plan regulations, the necessity of requiring 
consumer protection plans appears to have lessened. The quality of 
housing and building technology has improved significantly, as has the 
proliferation of more uniform building codes and building code 
enforcement.
    Requiring protection plans increases, in most cases, the cost of 
buying a home, as well as the regulatory burden on lenders and 
homebuyers. Builders will frequently factor in the cost of a 10-year 
protection plan and this increase in cost adds to the cost of the home.
    In addition, although HUD is no longer mandated by statute to 
require a consumer protection plan or warranty plan, HUD is retaining 
the requirement that the Warranty of Completion of Construction (form 
HUD-92544) be executed by the builder and the buyer of a newly 
constructed home, as a condition for FHA mortgage insurance. This 
warranty provides assurance to FHA that the home was built according to 
plan, and protects the buyer against defects in equipment, material, or 
workmanship supplied or performed by the builder, subcontractor, or 
supplier. The warrantor agrees to fix and pay for the defect and 
restore any component of the home damaged in fulfilling the terms and 
conditions of the warranty. The one-year warranty commences on the date 
that title is conveyed to the buyer, the date that construction is 
complete, or upon occupancy, whichever date occurs first.
    The regulations regarding 10-year protection plans were promulgated 
more than 20 years ago, and because of the increase in the quality of 
construction and the stringent requirements for building inspections 
proposed by this rule, HUD has determined that 10-year protection plans 
are no longer necessary to safeguard FHA's Insurance Fund. Reliance on 
inspections performed by local jurisdictions, RCIs, or other qualified 
individuals, as proposed by this rule, adequately protects the 
Insurance Fund and streamlines FHA's processing requirements. In fact, 
in HUD's final 1990 rule that followed the 1987 proposed rule and 
established the 10-year protection plan regulations, HUD, at the final 
rule stage, eliminated proposed criteria for acceptability of a plan on 
the basis that the criteria removed were satisfactorily addressed by 
state insurers and HUD did not need

[[Page 8453]]

to impose these requirements, adding to the burden of entities seeking 
HUD's approval of warranty plans.\4\ Therefore, from the outset of 
establishing the warranty plan regulations, it was never HUD's 
intention to duplicate requirements that were satisfactorily being 
addressed at the State or local level. HUD, however, is retaining the 
requirement that the Warranty of Completion of Construction (form HUD-
92544) be executed by the builder and the buyer of the home, as a 
condition for FHA mortgage insurance. The warranty of completion, as 
the title indicates, addresses homes for which construction has not 
been completed. Before committing to insure a loan on a home that has 
not yet been completed, FHA requires a signed warranty of completion. 
The 10-year warranty plan, as has been discussed in this preamble, is 
designed to protect against construction defects. Again, however, it is 
HUD's position that the quality of construction and more stringent 
building code requirements and inspections makes the 10-year warranty 
plan no longer necessary.
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    \4\ In the preamble to the October 5, 1990, final rule, HUD 
stated as follows: ``The Department has reconsidered its position 
[on certain plan acceptability criteria] in light of these and 
similar comments and has determined to continue the existing system 
of accepting Plans that have State approval. This means that Plans 
will not, as a separate matter, have to satisfy the independent 
criteria formerly proposed in the sections referenced above. State 
approval serves the purpose of those now abandoned sections--
ensuring that Plans have adequate financial and insurance backing. 
Removal of these sections also has the incidental benefit of 
eliminating a potential administrative burden on both HUD and Plan 
issuers. This action means that Plan issuers will not have to 
furnish the information that would have been required under these 
now-removed sections and, consequently, HUD will not have to 
evaluate each submission to ensure compliance with the regulatory 
criteria. HUD, along with homeowners, is still assured of the 
financial soundness of a Plan, since Plans backed by insurance 
companies must demonstrate their acceptance in each State in which 
they are doing business.'' (See 55 FR at 41017)
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    Further, removal of these regulations is consistent with the 
President's Executive Order 13563, entitled ``Improving Regulation and 
Regulatory Review,'' signed by the President on January 18, 2011, and 
published on January 21, 2011, at 76 FR 3821. This Executive Order 
requires executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' For the reasons discussed in this preamble, HUD has 
determined that the requirement of a 10-year protection plan for high 
LTV mortgages is outmoded and may be unnecessarily costly to homebuyers 
and, therefore, proposes to remove the regulations.

Conforming Change

    This rule would also amend Sec.  203.50 to reflect the statutory 
change made by HERA and the removal of Sec. Sec.  203.18(a)(3) and 200-
209 of the regulations. Section 203.50(f) (``Eligibility of 
rehabilitation loans'') cross-references Sec.  203.18(a)(3), and 
because Sec.  203.18(a)(3) is being removed, this rule will amend Sec.  
203.50(f) accordingly.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. 
Executive Order 13563 (Improving Regulation and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' Executive Order 13563 also directs that where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public. This rule was determined to be a ``significant 
regulatory action'' as defined in section 3(f) of Executive Order 12866 
(although not an economically significant regulatory action, as 
provided under section 3(f)(1) of the Executive Order).
    As already discussed in this preamble, this rule would remove 
conditions on closing an FHA-insured mortgage that HUD believes are no 
longer necessary and that add to the closing process unnecessary costs 
for the buyer. As discussed, HUD's proposal to remove the Inspector 
Roster is based on the recognition of the sufficiency and quality of 
inspections carried out by certified inspectors and other qualified 
individuals. In proposing to remove the requirement for a 10-year 
protection plan, HUD submits that in the more than 20 years since the 
promulgation of the 10-year protection plan regulations, the necessity 
of requiring consumer protection plans has lessened. The quality of 
housing and building technology has improved significantly, as has the 
proliferation of more uniform building codes and building code 
enforcement.
    HUD expects both the elimination of the national Inspector Roster 
and the elimination of the 10-year warranty plan to have economic 
benefits and costs. However, neither the economic costs nor the 
benefits of the elimination of the two requirements are greater than 
the $100 million threshold that determines economic significance under 
Executive Orders 12866 and 13563. By eliminating the national Inspector 
Roster, HUD anticipates benefits of approximately $27,770 in savings. 
By eliminating the 10-year warranty requirement, HUD anticipates 
benefits in the form of approximately $29.5 million in savings.

Benefits and Costs of Eliminating the Inspector Roster

    By eliminating the Roster, HUD believes that this rule would expand 
the number of inspectors from which lenders may choose for the 
inspection of a home where the mortgage is to be insured by FHA. The 
Roster has a total of 3,029 inspectors (in FY 2011, HUD added 90 
inspectors and 29 have been added in FY 2012). HUD is also in the 
process of removing ineligible inspectors from the Roster and 
anticipates a significant reduction in inspectors upon completion of 
this ``sweep.'' The ICC is an international organization, with 49 
states, the District of Columbia, and the U.S. Virgin Islands having 
adopted the IRC published by ICC. By adopting the IRC, the 
jurisdictions have all agreed that, to perform the inspection of such 
codes, the inspectors must be certified by the ICC as RCIs. It is not 
known how many inspectors currently listed on the Roster have ICC 
designation, or how many Roster inspectors without ICC designation 
would earn the designation in order to perform FHA work. Although those 
Roster inspectors who already have ICC designation would lose the 
marketing benefits associated with being listed on the Roster, they 
would continue to be eligible to perform FHA inspections. HUD believes 
that the overall effect of removing Roster inspectors will be to 
increase the number of competent inspectors, since inspectors currently 
on the Roster would no longer have an advantage of the exclusive market 
power of inspecting FHA-insured homes, conveyed by the current Roster 
requirements. A possible benefit of the increased choice of inspectors 
for the lender is that the cost, which is currently averaged to be 
approximately $1,000, may be driven down by the increased competition, 
and those

[[Page 8454]]

savings may be passed on to the homeowners.
    In addition, HUD anticipates savings of approximately $42,770 in 
administrative costs from ceasing to maintain the Roster. To 
successfully administer the program, HUD must, among other 
administrative duties, bear the costs and workload associated with: (1) 
The review and verification of applicant qualifications for placement 
on the Roster; (2) the maintenance of records pertaining to 
application, placement, and removal from the Roster; (3) the monitoring 
of inspector performance; and (4) administrative proceedings to remove 
poor performing inspectors from the Roster. These costs will no longer 
accrue once this rule becomes effective.
    As a matter of costs, the elimination of the Roster would affect a 
very limited number of loans. FHA data shows that the number of FHA-
insured properties that would require an inspection by an RCI or other 
qualified individual where an RCI is unavailable is statistically 
insignificant. These are the properties that would normally go to 
inspectors from the Roster. Of the 1,946,639 loans endorsed by FHA in 
FY 2009, only 2,975 (0.15 percent) of these loans required the use of a 
Roster inspector. Of the 1,746,367 loans endorsed by FHA in FY 2010, 
only 2,155 (0.1 percent) of these loans required the use of a Roster 
inspector. For FY 2011, only 685 out of 1,182,512 (0.06 percent) 
endorsed loans required the use of a Roster inspector.
    Moreover, the increased risk of inadequate inspections because of 
the elimination of the Roster is de minimis, if any. To become an RCI, 
applicants must undergo a rigorous examination and certification 
process that is more robust than the Inspector Roster qualification 
process. In the limited circumstances where an RCI is unavailable in a 
particular jurisdiction, the professional qualifications and length of 
experience that would be required for other qualified individuals are 
sufficiently high thresholds to mitigate the concern of inadequate 
inspections.
    Given that the costs of eliminating the Inspector Roster are 
minimal because so few loans would be affected and that the concern of 
inadequate inspections is mitigated by the now available alternatives 
to Roster inspectors, as compared to the benefits of increased consumer 
choice, administrative savings, and burden reduction, HUD believes the 
benefits of this rule outweigh the minimal costs.

Benefits and Costs of Eliminating the 10-Year Warranty Requirement

    By eliminating the 10-year warranty requirement, homeowners will no 
longer be required to pay warranty premiums. There currently are 16 
FHA-approved warranty issuers. In 2010 and 2011, an average of 57,415 
warranties were issued, with an average warranty rate ranging from 
$2.75 to $3.75 per $1,000 of coverage.\5\ Assuming an average coverage 
of $170,412 (2010 average) and an average of $3.00 per $1,000 of 
coverage,\6\ the total savings for homeowners because of the 
elimination of the warranty requirement is projected to approximate 
$29.4 million.
---------------------------------------------------------------------------

    \5\ This information derives from HUD's survey of its current 
warranty providers. A search on the Internet for home warranty 
insurers and their rates revealed that rates range from $1.50 to 
$7.50 per thousand, annual premium, depending upon the value/amount 
of the property. See, for example, http://www.firstweber.com/consumer-notices/.
    \6\ Another source on home warranty pricing advises that the 
average cost is about $3 per thousand of the selling price of the 
home. See http://www.tcaor.com/Decoding_the_RE_Market/Home_Warranties.pdf. This rate is closer to that being charged by the 
home warranty providers currently participating in FHA's program.
---------------------------------------------------------------------------

    In addition, where homeowners with FHA-insured mortgages choose to 
purchase a protection plan, the FHA-approved warranty issuers would 
have to compete with other warranty issuers for such business. The 
current regulations limit the choices available to homebuyers to those 
warranty plan providers approved by HUD as meeting the regulatory 
requirements. Homebuyers would reap the benefits of heightened market 
competition, as warranty providers vie for their business through 
competitive pricing and expanded warranty coverage.
    As noted earlier in this preamble, requiring protection plans 
increases, in most cases, the cost of buying a home. Builders 
frequently will factor in the cost of a 10-year protection plan and 
this increase in cost adds to the cost of the home. The changes 
proposed by this rule would eliminate, for lenders and homeowners, the 
costs associated with this regulatory burden.
    In addition, the elimination of the warranty requirement also 
eliminates the associated paperwork burden formerly associated with the 
requirement. Assuming again the 2010-2011 average figure of 57,415 
warranties, with 0.10 burden hours for each application, the 
elimination of the warranty requirement saves the public an additional 
$132,066 in burden hours. And finally, HUD has to review warranty plans 
submitted for approval and renewal to ensure compliance with the 
regulatory requirements of Sec. Sec.  203.200-203.209, while also 
maintaining the online list of qualified warranty providers. The cost 
to HUD of providing this administrative service is approximately 
$10,601. In sum, the elimination of the warranty requirement represents 
a total cost savings to the public of $29,352,615 in warranty cost + 
$132,066 in paperwork burden + $10,601 in administrative costs to HUD. 
The cost of eliminating the warranty requirement is that consumers may 
be less protected from construction defects. However, as discussed 
earlier, the increased quality of construction materials, and the 
standardization of building codes and building code enforcement, 
protect consumers much better now than when the warranty requirement 
regulation was first promulgated. Assuming an average coverage of 
$170,412 and computed total cost savings of $29,522,572, 174 of the 
homes impacted by the elimination of this requirement would have to be 
foreclosed upon, due to the financial impact associated with 
construction problems, for the cost savings to be outweighed by the 
costs of the elimination of the warranty requirement. HUD believes that 
this is very unlikely. Thus, HUD believes that the benefit in cost 
savings exceeds the potential cost of eliminating the 10-year warranty 
requirement.
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the docket file by calling the 
Regulation Division at 202-402-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the toll-free Federal Relay Service at 800-877-8339.

Paperwork Reduction Act

    As noted, although HUD proposes to remove the regulations requiring 
10-year protection plans for high LTV FHA-insured mortgages, it is 
retaining the requirement that the Warranty of Completion of 
Construction (form HUD-92544) be executed by the builder and the buyer 
of the home, as a condition for FHA mortgage insurance. The information 
collections contained in form HUD-92544 have been approved by the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501-3520) (PRA) and assigned OMB control number 
2502-0598. The annual reporting burden of this information

[[Page 8455]]

collection is estimated at 478,758 hours and no burden dollars, and 
this proposed rulemaking would not change the estimated burden hours 
for continued use of form HUD-92544.
    The information collection requirements contained in proposed Sec.  
200.145(c), which would codify existing requirements pertaining to 
compliance inspection reports (form HUD-92051) and the mortgagee's 
assurance of completion (form HUD-92300), have been approved by OMB 
under the PRA and assigned OMB Control Number 2502-0189. The annual 
reporting burden of this information collection is estimated at 1,984 
hours and no burden dollars, and this proposed rulemaking would not 
change the estimated burden hours for continued use of these forms. HUD 
would still expect the same number of inspections, just provided by a 
different set of respondents (i.e., RCIs and qualified individuals, as 
opposed to Roster inspectors).
    The chart below represents the savings in paperwork burdens 
proposed in this rule. By eliminating the Inspector Roster, inspectors 
will no longer submit applications for HUD's review and approval. By 
eliminating the warranty requirement, warranty providers will no longer 
need to submit applications for HUD's review and approval.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Number of     Frequency of    Responses per    Burden hour   Annual  burden
         Information collection             respondents      response          annum       per response        hours        Hourly cost     Annual cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inspector Applications/HUD[dash]92563I             1,000               1           1,000             .50             500             $30         $15,000
 (and copy of state certification)......
Warranty providers Sec.   203.202.......              16              *1               8            2.00              16              30            480
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Every 2 years.

    In accordance with the PRA, 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 currently valid OMB 
control number.

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 noted above in this preamble, this proposed rule is a deregulatory 
action taken by HUD that will alleviate the economic costs borne by 
participants in the FHA single family mortgage insurance programs. As 
an initial matter, HUD notes that the RFA, under its own terms, applies 
to entities and not to individuals. The procedures and requirements for 
placement on the Roster apply to individual inspectors, not to 
entities. Accordingly, the RFA does not apply to the Roster component 
of this proposed rule. In addition to removing the Roster regulations, 
HUD also proposes to remove the regulations regarding the 10-year 
protection plans required in order to qualify for high LTV FHA-insured 
mortgages as a condition of closing for newly constructed single-family 
homes. As discussed in this preamble, removal of the requirement for a 
10-year protection plan would ease burdens on lenders and homebuilders 
and does not preclude borrowers from purchasing such plans. HUD is 
removing these regulations because it has deemed they are no longer 
necessary. The proposed regulatory changes recognize the sufficiency 
and quality of inspections carried out by local jurisdictions as a 
result of the building permit and certification of occupancy processes. 
Therefore, the undersigned certifies that this rule will not have a 
significant impact on a substantial number of small entities.
    Notwithstanding HUD's view that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule.

Environmental Impact

    This proposed 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. In addition, part of this rule changes a 
statutorily required and/or discretionary establishment and review of 
loan limits. Accordingly, under 24 CFR 50.19(c)(1) and (c)(6), this 
rule is categorically excluded from environmental review under the 
National Environmental Policy Act of 1969 (42 U.S.C. 4321).

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.

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 rule does not 
impose any federal mandates on any State, local, or tribal governments, 
or on the private sector, within the meaning of 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 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Housing standards, Lead poisoning, Loan 
programs-housing and community development, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social Security, Unemployment 
compensation, Wages.

[[Page 8456]]

24 CFR Part 203

    Hawaiian natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.
    Accordingly, for the reasons discussed in the preamble, HUD 
proposes to amend 24 CFR parts 200 and 203 to read as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

0
1. The authority citation for part 200 continues to read as follows:

    Authority: 12 U.S.C. 1702-1715-z-21; 42 U.S.C. 3535(d).

0
2. In Sec.  200.145, add paragraph (c) to read as follows:


Sec.  200.145  Property and mortgage assessment.

* * * * *
    (c) For all new construction as well as structural repairs and/or 
renovations of existing properties, to the extent that an inspection is 
required to determine if construction quality of a one- to four-unit 
property is acceptable as security for an FHA-insured loan, the 
following requirements apply:
    (1)(i) In areas where local jurisdictions provide building code 
enforcement and the requisite documentation, the lender shall provide a 
copy of:
    (A) The building permit, or its equivalent, and a copy of the 
certificate of occupancy, or its equivalent; or
    (B) A satisfactory inspection notice for work completed, or its 
equivalent.
    (ii) The documentation provided under paragraph (c)(1)(i) of this 
section shall be considered satisfactory evidence of completion of the 
work.
    (2) In jurisdictions that do not provide building code enforcement 
and requisite documentation, three inspections are required for new 
construction. For existing construction, only one inspection and 
certification of work completed for repairs and renovations is 
required. For both new and existing construction, the lender shall, in 
order to ensure compliance with FHA requirements:
    (i) Select a Residential Combination Inspector (or its successor 
designation) certified by the International Code Council (or its 
successor organization) who is licensed or certified as a home 
inspector in accordance with the applicable State and local 
requirements governing the licensing or certification of those 
jurisdictions that license or certify such inspectors in the respective 
jurisdiction. The lender shall provide a certification from such 
inspector that the new construction and/or structural repair or 
renovation work is completed satisfactorily and in compliance with any 
applicable building code.
    (ii) In the absence of such Residential Combination Inspector, the 
lender shall obtain an inspection performed by a third party, who is a 
registered architect, a professional engineer, or a tradesman or 
contractor, and who has met the licensing and bonding requirements of 
the State in which the property is located. The lender shall provide a 
certification from such inspector that the inspector is licensed and 
bonded under applicable State law, and that the new construction and/or 
structural repair or renovation work is completed satisfactorily and in 
compliance with any applicable building code.
0
3. Remove the undesignated center heading ``FHA Inspector Roster'' and 
Sec. Sec.  200.170-172.

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

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

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


Sec.  203.18  [Amended]

0
5. In Sec.  203.18, remove paragraph (a)(3) and redesignate paragraph 
(a)(4) as paragraph (a)(3).
0
6. In Sec.  203.50, revise paragraph (f)(1) to read as follows:


Sec.  203.50  Eligibility of rehabilitation loans.

* * * * *
    (f) * * *
    (1)(i) The limits prescribed in Sec.  203.18(a)(1) (in the case of 
a dwelling to be occupied as a principal residence, as defined in Sec.  
203.18(f)(1));
    (ii) The limits prescribed in Sec.  203.18(a)(1) and (3) (in the 
case of a dwelling to be occupied as a secondary residence, as defined 
in Sec.  203.18(f)(2));
    (iii) 85 percent of the limits prescribed in Sec.  203.18(c), or 
such higher limit, not to exceed the limits set forth in Sec.  
203.18(a)(1), as Commissioner may prescribe (in the case of an eligible 
nonoccupant mortgagor as defined in Sec.  203.18(f)(3));
    (iv) The limits prescribed in Sec.  203.18a, based upon the sum of 
the estimated cost of rehabilitation and the Commissioner's estimate of 
the value of the property before rehabilitation; or
* * * * *


Sec. Sec.  203.200   through 203.209 [Removed]

0
7. Remove the undesignated center heading ``Insured Ten-Year Protection 
Plans (Plan)'' and Sec. Sec.  203.200 through 203.209.

    Dated: January 8, 2013.
Carol J. Galante
Assistant Secretary for Housing- Federal Housing Commissioner.
[FR Doc. 2013-02668 Filed 2-5-13; 8:45 am]
BILLING CODE 4210-67-P