[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Rules and Regulations]
[Pages 19788-19800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10885]




[[Page 19787]]


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Part VIII





Department of Housing and Urban Development





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24 CFR Part 201



Title I Property Improvement and Manufactured Home Loan Insurance 
Programs; Final Rule

Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Rules 
and Regulations

[[Page 19788]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 201

[Docket No. FR-3718-I-01]
RIN 2502-AG32


Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner; Title I Property Improvement and Manufactured Home Loan 
Insurance Programs

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

ACTION: Interim rule.

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

SUMMARY: This interim rule amends the Department's regulations 
implementing its property improvement and manufactured home loan 
insurance programs under title I, section 2 of the National Housing 
Act. This interim rule amends the regulations to codify program changes 
that were previously effectuated by waiving various requirements of the 
regulations, under the Secretary's general waiver authority. The 
interim rule also makes other changes that are needed to clarify 
program requirements, to enable the Department to better use the Title 
I programs in accomplishing its mission, and to eliminate unnecessary 
regulations.

DATES: Effective date: June 3, 1996.
    Comments due date: July 1, 1996.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Rules Docket Clerk, Office of the General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street SW., Washington, DC 20410. Communications should refer 
to the above docket number and title. A copy of each communication 
submitted will be available for public inspection and copying during 
regular business hours (7:30 a.m.-5:30 p.m. eastern time) at the above 
address. HUD will not accept comments sent by facsimile (FAX).

FOR FURTHER INFORMATION CONTACT: Robert J. Coyle, Director, Title I 
Insurance Division, 490 L'Enfant Plaza East, Suite 3214, Washington, DC 
20024, telephone (202) 755-7400. This number is not toll-free. Hearing- 
or speech-impaired individuals may access this number via TTY by 
calling the Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act Requirements

    The information collection requirements in this interim rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act (44 U.S.C. 3501-3520) and were assigned OMB 
control number 2502-0328. 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.

Introduction

    Under title I, section 2 of the National Housing Act (12 U.S.C. 
1703), the Department insures approved lenders against losses sustained 
as a result of borrower defaults on property improvement loans and 
manufactured home loans. The regulations implementing the Title I 
programs are in 24 CFR part 201.
    This interim rule amends part 201 to codify program changes that 
were previously effectuated by waiving various requirements of the 
regulations, under the Secretary's general waiver authority in 
Sec. 201.5(a). The Department informed all approved Title I lenders of 
these changes in three Title I Letters: TI-428, issued July 22, 1994; 
TI-429, issued October 6, 1994; and TI-431, issued June 5, 1995.
    These program changes were the result of an outreach process in 
which the Department received recommendations from a wide variety of 
program participants, including lenders, State and local government 
agencies, nonprofit organizations, manufactured home retailers and 
producers, insurance companies, trade associations, and owners of 
manufactured homes. They reflect a significant redirection of the Title 
I programs to serve community development needs, with a focus on 
assisting low- and moderate-income families in making needed repairs to 
their homes, supporting revitalization and rebuilding efforts in 
central cities, upgrading housing in rural areas and other underserved 
credit areas, and enabling first-time homebuyers to purchase affordable 
housing.
    The waivers announced in TI-428, TI-429, and TI-431 were limited in 
duration until the Department could make the necessary changes in the 
regulations. Accordingly, as of the effective date of this interim 
rule, those waivers are no longer operative.
    This interim rule also amends part 201 to make other changes 
necessary to clarify program requirements, to enable the Department to 
better utilize the Title I programs in accomplishing its mission, and 
to eliminate unnecessary regulations. Each of the program changes is 
discussed in the sections that follow.

Changes Affecting Both Title I Loan Programs

    Changes in the Title I regulations that apply to both property 
improvement and manufactured home loans include the following: 
clarifying dealer approval requirements; limiting discount points paid 
by borrowers; prohibiting discount points from being collected from 
dealers; prohibiting penalties for loan prepayment; permitting 
financial assistance in meeting the borrower's initial payment; 
providing that eligible fees and charges will be established by the 
Secretary, but removing the specific fees and charges from the 
regulations; revising flood insurance requirements; and eliminating the 
annual adjustment in the lender's insurance reserves.

Dealer Approval Requirements

    Section 201.27(a)(2) requires that the dealer's financial statement 
be prepared by a licensed public accountant. This licensing requirement 
was waived in TI-428, because the Department determined that it imposed 
a burden on small dealers, particularly in the property improvement 
loan program. In place of the licensing requirement, the Department 
stated that it expected the lender to take into consideration whether 
the financial statement was prepared by someone who is independent of 
the dealer and is qualified by education and experience to prepare such 
statements.
    Accordingly, this interim rule amends Sec. 201.27(a)(2) by 
eliminating the requirement that the financial statement be prepared by 
a licensed public accountant and substituting the phrase ``someone who 
is independent of the dealer and is qualified by education and 
experience to prepare such statements.''

Payment of Discount Points by Borrowers

    Section 201.13 states that the lender and the borrower may 
negotiate the amount of any discount points to be paid by the borrower 
as part of the borrower's initial payment. As used in the Title I 
regulations, the Department intends the term ``discount points'' to 
have the same meaning it has throughout the banking, finance, and 
investment communities--that is, an up front fee charged by the lender, 
separate from interest but part of the total finance charge, that is to 
increase the lender's yield on the loan to a competitive

[[Page 19789]]

position with other types of investments.
    In recent years, property improvement lenders in certain areas of 
the country have been charging high up-front fees to borrowers and 
calling them ``discount points,'' although they seem to have no 
relationship to the lender's overall yield on the loan. Rather, they 
are being used to cover the lender's costs in originating the loan and 
marketing the Title I program. The Department's Monitoring Division has 
found evidence that these ``discount points'' are often financed from 
the loan proceeds, in contravention of the program regulations. The 
result is that many low- and moderate-income borrowers, who are 
otherwise creditworthy and need Title I loans, cannot obtain them 
because of the high discount points.
    In TI-431, the Department announced that the continued practice of 
borrowers' being charged high levels of ``discount points'' when there 
was no benefit to the borrower in the form of a lower interest rate was 
no longer acceptable. TI-431 stated that the collection of discount 
points from the borrower was no longer permitted, unless the lender 
could demonstrate a clear relationship between the charging of discount 
points and some tangible benefit to the borrower such as a compensating 
decrease in the interest rate being charged.
    To clarify the Department's intent, this interim rule amends 
Sec. 201.2 to define ``discount points'' as ``a fee charged by the 
lender, separate from interest but part of the lender's total yield on 
the loan needed to maintain a competitive position with other types of 
investments. One discount point equals one percent of the principal 
amount of the loan. As discount points on the loan increase, the 
interest rate can be expected to decrease in a fairly consistent 
relationship.''

Payment of Discount Points by Dealers

    Section 201.13 states that the lender and the dealer may negotiate 
the amount of any discount points to be paid by the dealer for the 
benefit of the borrower. The purpose of this provision, which was added 
to the regulations in 1986, was to enable the dealer to assist the 
borrower by paying some of the up-front costs of obtaining a Title I 
loan, or by buying down the interest rate so that the borrower could 
qualify for the loan. Some lenders have abused this provision, charging 
``discount points'' to dealers for the acceptance of borrowers with 
marginal credit, and inflating the cost of home improvements to the 
detriment of low- and moderate-income borrowers.
    In TI-428, the Department clarified that certain financeable fees 
and charges incurred by the lender could be paid by the dealer. TI-428 
stated that the dealer could advance the funds for these items and 
could be reimbursed by the lender from the loan proceeds. 
Alternatively, the lender could advance the funds for these items and 
then deduct their cost from the loan proceeds paid to the dealer. In 
either case, TI-428 made clear that there must be full disclosure that 
these items had been added to the price of the goods and/or services 
being provided by the dealer.
    The Department informed lenders that, with this clarification on 
the fees and charges that may be paid by dealers, the collection of 
discount points from dealers was no longer necessary. The Department 
urged lenders to discontinue the practice of collecting discount points 
from dealers when those points were unrelated to the financeable fees 
and charges. The Department advised lenders that, if they failed to 
comply with this request voluntarily, the Department would amend the 
regulations to prohibit any collection of discount points from dealers.
    Since TI-428 was issued on July 22, 1994, the Department's 
Monitoring Division has found that many lenders have continued the 
practice of collecting ``discount points'' that are not for the benefit 
of the borrower and bear no relation to the payment of fees and charges 
that may be paid by the dealer. Therefore, this interim rule amends 
Sec. 201.13 to prohibit the payment of discount points by any party 
other than the borrower. Conforming amendments are also made to 
Sec. 201.26(a)(5)(ii), (b)(3)(vii), (b)(4)(vii), and (b)(4)(viii).

Loan Prepayment Without Penalty

    Section 201.17 requires that the loan note contain a provision 
permitting full or partial prepayment of the loan.
    That section previously contained a requirement that when a loan 
was prepaid in full, the lender must rebate all unearned interest on 
the loan, except for a minimum retained handling charge if permitted by 
State or local law. The Department had intended this requirement to 
preclude lenders from exacting a prepayment penalty.
    The Department removed this requirement in a final rule published 
in the Federal Register on October 18, 1991 (56 FR 52414, 52430). As 
stated in the preamble to the October 18, 1991 final rule, the 
Department determined that, since interest on all loans with 
applications approved on or after January 15, 1986 must be calculated 
according to the actuarial method, there should be no unearned 
interest, and therefore the requirement was unnecessary. However, in 
amending Sec. 201.17, the Department inadvertently failed to include 
the replacement language to prohibit lenders from charging a prepayment 
penalty on loans made since January 1986.
    Some lenders have taken advantage of this oversight to assess 
penalties of as much as six months' advance interest on loans that are 
prepaid within the first five years of the loan term. Assessing a high 
prepayment penalty prevents many borrowers from refinancing their loans 
to take advantage of lower interest rates, even when this may be to 
their benefit. Prepayment penalties are particularly troublesome in the 
case of low- and moderate-income borrowers who do not have the cash 
reserves to pay the penalty.
    Accordingly, this interim rule restores the requirement in 
Sec. 201.17 that full or partial prepayment of the loan must be without 
penalty, except that the borrower may be assessed reasonable and 
customary charges for recording a release of the lender's security 
interest in the property, if permitted by State law.

Financial Assistance on the Initial Payment

    Section 201.23(a) provides that, if any part of the borrower's 
initial payment is loaned to the borrower, that loan must be secured by 
property or collateral owned by the borrower independently of the 
property securing the Title I loan. The Department has had several 
cases in which financial assistance was available from a governmental 
agency or nonprofit organization to help low- and moderate-income 
borrowers meet the up-front costs of obtaining a property improvement 
or manufactured home loan. This assistance was in the form of a loan 
requiring that the borrower provide a ``soft second'' lien on the 
property, so that the loan might be repaid at the time the property is 
sold. In these situations, the Department needs greater flexibility to 
allow for exceptions to the requirement that the loan be secured by a 
different property.
    Accordingly, this interim rule amends Sec. 201.23(a) to provide 
that if any part of the borrower's initial payment is loaned to the 
borrower, that loan must be secured by property or collateral owned by 
the borrower independently of the property securing the Title I loan, 
unless the Secretary's prior approval is obtained for an exception to 
this requirement.

[[Page 19790]]

Eligible Fees and Charges

    Section 201.25(a) establishes maximum origination fees that may be 
charged in connection with any new or refinanced Title I loan. Section 
201.25(b) lists those fees and charges that may be financed in a 
property improvement or manufactured home loan, as long as their 
inclusion does not increase the total principal obligation beyond the 
maximum loan amounts in Sec. 201.10. Section 201.25(c) lists fees and 
charges that may be collected from the borrower in the initial payment, 
but may not be included in the loan amount or otherwise financed or 
advanced by the dealer, manufacturer, or any other party to the loan 
transaction.
    In TI-429 and TI-431, the Department waived Sec. 201.25(a) and 
(c)(1) to increase the maximum origination fee for any new property 
improvement loan and to permit this fee to be financed. In TI-428, the 
Department waived Sec. 201.25(c) (3) and (4) to permit recording fees, 
recording taxes, filing fees, and documentary stamp taxes to be 
financed for both property improvement and manufactured home loans. In 
that letter, the Department also waived Sec. 201.25(c)(8) to permit 
appraisal fees in connection with the purchase or refinancing of a 
manufactured home and/or lot to be financed.
    However, as a result of the Department's page-by-page review of its 
regulations, it has determined that the inclusion of detailed lists of 
eligible fees and charges in the program regulations is unnecessary. 
Changes to the list of eligible fees and charges are sometimes needed, 
and program participants would benefit greatly if these changes could 
be made in a more timely manner than through the rulemaking process.
    Accordingly, this interim rule amends Sec. 201.25 (a) and (b) to 
provide that the Secretary will establish a list of fees and charges 
that may be included in property improvement loans and manufactured 
home loans, respectively, provided that they are incurred in 
originating the loan and their inclusion does not increase the total 
principal obligation beyond the maximum loan amounts in Sec. 201.10. 
The interim rule also amends Sec. 201.25(c) to provide that the 
Secretary will establish a list of fees and charges incurred by the 
lender that may be collected from the borrower in the initial payment, 
but may not be included in the loan amount or otherwise financed or 
advanced by the dealer, the manufacturer, or any other party to the 
loan transaction.
    Concurrently with the publication of this interim rule, the 
Department will issue a Title I Letter that identifies the specific 
fees and charges that may be financed in a property improvement or 
manufactured home loan, as well as the fees and charges that may be 
collected from the borrower but may not be financed in the loan. The 
fees and charges that were the subject of waivers in TI-428, TI-429, 
and TI-431 will be included in the Title I Letter.

Revised Flood Insurance Requirements

    Section 201.28(a) requires flood insurance coverage if the property 
securing a Title I loan is located in a special flood hazard area as 
identified by the Federal Emergency Management Agency (FEMA). The 
National Flood Insurance Reform Act of 1994 (Pub. L. 103-325, approved 
September 23, 1994) amended and expanded the flood insurance 
requirements of the Flood Disaster Protection Act of 1973 (Pub. L. 93-
234, approved December 31, 1973). The 1994 Act requires that flood 
insurance be obtained at any time during the term of the loan that a 
supervised lender or its servicer determines that the secured property 
is located in a special flood hazard area identified by FEMA. If the 
borrower does not obtain flood insurance within 45 days after being 
notified by the lender or servicer that it is required, the lender is 
expected to force-place the insurance and bill the borrower for the 
premiums.
    It has been a longstanding policy of the Department that all 
secured Title I loans are subject to Federal flood insurance 
requirements. The Department expects all lenders, whether supervised or 
nonsupervised, to comply fully with the requirements of the 1994 Act. 
Accordingly, this interim rule amends Sec. 201.28(a) to reflect the new 
statutory requirements and make them applicable to all Title I lenders.
    Lenders may make their own flood hazard area determinations, or 
they may use outside firms that specialize in providing this 
information. If an outside firm is used, the fee for obtaining the 
flood hazard area determination, including the cost of life-of-the-loan 
determinations, may be included in the loan amount, as long as the 
maximum loan amounts in Sec. 201.10 are not exceeded. Permitting these 
fees to be financed is a change from previous Departmental policy. The 
Title I Letter on fees and charges that is to be issued concurrently 
with the publication of this interim rule includes this policy change.

Annual Adjustment in Insurance Reserves

    Section 201.32(b) requires that a 10 percent annual reduction be 
applied to each lender's insurance coverage reserve account after the 
lender has had a Title I contract of insurance for more than five 
years. In TI-431, the Department announced that it would no longer 
apply an annual adjustment to any lender's insurance reserves, 
beginning on October 1, 1995. The Department concluded that the annual 
reduction no longer serves the purpose of protecting the Federal 
Housing Administration (FHA) insurance fund against excessive claim 
losses caused by lenders that exhaust their insurance reserves. Rather, 
it has penalized lenders who built their loan volume methodically over 
a period of years and those who maintained low claim rates.
    The Department instituted the annual adjustment of insurance 
reserves in the early 1950s, when the Department was extending the 
Title I program for a time period that exceeded the maximum allowable 
term of the loans being made. In that lending climate, all lenders held 
loans in their own portfolios. The Department's concern was that 
lenders might accumulate reserves that were excessive in relation to 
the loans remaining in the lenders' portfolios.
    In today's lending environment, the annual adjustment has become an 
anachronism. Many lenders that originate Title I loans sell them to 
servicing lenders; the servicing lenders then sell them to investing 
lenders that issue securities backed by the loans for sale to 
investors. With the movement of loans from lender to lender, the annual 
adjustment is no longer meaningful or effective in protecting the 
program against excessive claim losses. Instead, it has been 
restricting the growth of the Title I program, creating uncertainty 
about the lender's future insurance coverage, and preventing the active 
participation of larger, better capitalized lenders in the program.
    Accordingly, this interim rule amends Sec. 201.32 by removing 
paragraph (b). In addition, the interim rule makes conforming 
amendments to Secs. 201.1 and 201.32(a) to remove references to the 
annual adjustment in insurance reserves.

Changes Affecting Property Improvement Loans

    Changes to the Title I regulations that are applicable only to 
property improvement loans include the following: eliminating the 
equity requirement for loans over $15,000, increasing the maximum 
origination fee and the maximum amount of an unsecured loan, permitting 
greater use of the program to improve manufactured homes, removing 
impediments to greater use of the program for improving

[[Page 19791]]

multifamily structures, eliminating the completion certificate 
requirement under certain circumstances, and revising procedures to 
assist victims of major disasters.

Elimination of the Equity Requirement

    Sections 201.20(a)(3) and 201.26(a)(1) of the regulations require 
that the borrower have equity in the property at least equal to the 
loan amount on any property improvement loan (or combination of such 
loans) exceeding $15,000. In TI-428, the Department partially waived 
this equity requirement, so that it no longer applied when the property 
to be improved was occupied by the borrower.
    The equity requirement was intended to provide more secure 
collateral for larger property improvement loans. However, after three 
years of experience with the requirement, the Department concluded that 
it was costly and time-consuming, with no significant risk protection 
for either the lenders or the Department. In the event of default, it 
was usually not cost-effective for the lender to foreclose on the 
property, because the costs of carrying the first mortgage, disposing 
of the property, and maintaining it prior to sale would consume 
whatever equity there might be. The equity requirement was preventing 
the people that Title I was created to serve (creditworthy borrowers 
with limited equity) from obtaining loans to carry out needed 
improvements.
    The waiver granted by TI-428 has benefited many creditworthy 
borrowers, but only when the property was owner-occupied. The 
Department is concerned that the equity requirement is preventing the 
property improvement loan program from being used in the revitalization 
of central cities, where much of the housing stock consists of small 
multifamily buildings (e.g., two to ten units). Title I loans are 
usually not available for these multifamily buildings because the owner 
does not live on-site and does not have enough equity to qualify for a 
loan.
    Accordingly, this interim rule eliminates the equity requirement in 
its entirety by removing Secs. 201.20(a)(3) and 201.26(a)(1)(iii). In 
addition, with the publication of this interim rule and upon its 
effective date, the Department is withdrawing the Federal Register 
notice published on January 8, 1992 (57 FR 610) that established the 
procedures for determining the market value of the property and 
evaluating whether the borrower had sufficient equity.

Increased Maximum Origination Fee

    Section 201.25(a) limits the maximum origination fee that may be 
paid by the borrower to one percent of the loan amount on any new Title 
I loan, and to one percent of the additional advance on any existing 
Title I loan being refinanced by the lender. Section 201.25(c)(1) 
specifies that this origination fee may not be financed in the loan.
    In TI-429, the Department waived these two limitations to permit 
the financing of an origination fee of up to three percent of the loan 
amount. However, this waiver was only for single family property 
improvement loans made to low- and moderate-income borrowers in 
connection with a housing assistance program administered by a State or 
local government agency or a nonprofit organization. The waiver was 
intended to serve as an inducement for the creation of public-private 
partnerships and to reduce the out-of-pocket expenses for low- and 
moderate-income borrowers.
    In TI-431, the Department extended the waiver of the one percent 
limitation on the origination fee to all property improvement loans, 
and a maximum origination fee of five percent of the loan amount is now 
permitted on all new property improvement loans. In addition, the 
Department waived the prohibition against financing this origination 
fee, as long as the maximum loan amounts in Sec. 201.10 are not 
exceeded. The Department recognized that a one percent origination fee 
was simply not enough to cover the lenders' costs in originating these 
loans, when the origination fee on the average property improvement 
loan of $13,000 is limited to $130. These waivers allow property 
improvement lenders to charge a more reasonable origination fee, while 
at the same time reducing the out-of-pocket expenses of borrowers 
obtaining Title I loans.
    As discussed above, the Department is amending Sec. 201.25(a), (b), 
and (c) to provide that the Secretary will establish eligible fees and 
charges. However, the Department is removing the specific fees and 
charges from the regulations. In a Title I Letter to be issued 
concurrently with the publication of this interim rule, the Department 
is revising the list of fees and charges that may be financed to permit 
the lender to charge a maximum origination fee of five percent of the 
loan amount on any new property improvement loan, as long as the fee 
has been incurred and its inclusion does not increase the total 
principal obligation beyond the maximum loan amounts in Sec. 201.10. 
The maximum origination fee for a new manufactured home loan remains at 
one percent of the loan amount and cannot be financed.
    In a related change, the Department is revising the list of 
nonfinanceable fees and charges to permit the lender to assess a 
handling charge of up to one percent of the new loan amount for 
refinancing an existing Title I loan. This change will enable lenders 
to charge a more reasonable fee for the work involved in processing a 
loan refinancing, and it is included in the Title I Letter that is to 
be issued concurrently with the publication of this interim rule.

Maximum Amount for Unsecured Loans

    Section 201.24(a) limits the maximum amount of an unsecured 
property improvement loan to $5,000. In TI-428, the Department waived 
this limitation to allow lenders to make unsecured property improvement 
loans up to $7,500. This increase in the unsecured loan amount makes it 
possible for lenders to finance small home improvement projects without 
obtaining and recording a security interest in the property being 
improved. It also sets the threshold for obtaining a security interest 
at the same dollar amount required for on-site inspections of property 
improvements. Accordingly, this interim rule amends Sec. 201.24(a) by 
substituting ``$7,500'' for ``$5,000.''

Manufactured Home Improvement Loans

    Under the definition of ``manufactured home improvement loan'' in 
Sec. 201.2, the loan proceeds may be used only to improve the 
manufactured home, but cannot be used for site improvements. In TI-428, 
the Department waived this restriction to permit the proceeds of a 
manufactured home improvement loan to be used for site improvements, as 
long as the borrower is the owner of the underlying real estate. 
Accordingly, this interim rule amends Sec. 201.2 to permit the proceeds 
of a manufactured home improvement loan to be used for site 
improvements if the borrower is the owner of the underlying real 
estate.
    In a related change, the interim rule also amends 
Sec. 201.10(a)(1)(iv) to increase the maximum loan amount for a 
manufactured home improvement loan from $5,000 to $7,500. This increase 
is needed to keep pace with the increased cost of home improvements, as 
measured by the change in the Home Maintenance and Repair component of 
the Consumer Price Index since the $5,000 limit was established in 
1980. Between 1980 and 1994, the Home

[[Page 19792]]

Maintenance and Repair component increased by 59 percent. Thus, a 50 
percent increase in the maximum loan amount is warranted.

Ownership of Multifamily Properties

    The definition of ``multifamily property improvement loan'' in 
Sec. 201.2 provides that the multifamily structure may not be owned by 
a corporation, partnership, or trust. As noted above, the Department is 
interested in expanding the use of Title I property improvement loans 
to rehabilitate small multifamily structures in central cities. The 
Department has occasionally waived this restriction on ownership to 
permit multifamily property improvement loans to be made to nonprofit 
corporations or partnerships that own and operate housing primarily for 
low- and moderate-income families.
    To give the Department greater flexibility in approving these types 
of nonprofit entities as Title I borrowers and to eliminate the delays 
inherent in the waiver process, this interim rule amends Sec. 201.2 to 
allow for exceptions to the prohibition against corporations, 
partnerships, and trusts with the prior approval of the Secretary.

Approval for Loan Amounts Over $25,000

    Section 201.10(a)(2) requires the prior approval of the Secretary 
for any property improvement loan that will result in the borrower 
having a total unpaid principal obligation in excess of $25,000, 
whether in one Title I loan or several loans. The Department has 
determined that, because of staff reductions and the restructuring of 
its field offices, the continued imposition of this requirement will 
only serve to delay loan originations.
    In addition, it is an impediment to the use of multifamily property 
improvement loans to rehabilitate small multifamily structures in 
central cities. Accordingly, this interim rule amends Sec. 201.10 by 
removing paragraph (a)(2).

Completion Certificate Requirements

    Section 201.40(b) of the regulations requires that a borrower 
obtaining a direct property improvement loan must submit a completion 
certificate to the lender after completion of the work, but not later 
than 6 months after disbursement of the loan proceeds. In TI-429, the 
Department waived the requirement for submitting a completion 
certificate for situations in which the borrower applies for a property 
improvement loan through a State or local government agency or a 
nonprofit organization, the loan proceeds are held in an escrow account 
pending completion of the improvements, and the loan proceeds are 
disbursed from the escrow account in stages, based upon the percentage 
of work completed. The Department determined that, under these 
conditions, the controlled disbursement of the loan funds with the 
borrower's approval obviates the need for obtaining a completion 
certificate.
    Accordingly, this interim rule amends Sec. 201.40 by adding a new 
paragraph (b)(3) to exempt the borrower from submitting a completion 
certificate when the property improvement loan is made by or on behalf 
of a State or local government agency or a nonprofit organization, the 
loan proceeds are held in an escrow account pending completion of the 
improvements, and the loan proceeds are disbursed from the escrow 
account in stages, with the written approval of the borrower and based 
upon the percentage of work completed.

Assistance to Disaster Victims

    Section 201.20(b)(3) provides that the proceeds of a property 
improvement loan may be used only for improvements that are started 
after loan approval. The Department has waived this limitation in 
connection with Presidentially-declared disasters such as the 
Northridge, California earthquake and Hurricanes Marilyn and Opal. In 
addition, the Department has waived this limitation in individual cases 
when the borrower needed to begin emergency repairs prior to loan 
approval.
    The Department has concluded that greater use would be made of the 
Title I program to assist disaster victims in repairing their homes if 
the regulations provided for an exception to Sec. 201.20(b)(3) whenever 
there is a major disaster declared by the President. In addition, the 
Department's ability to address other emergency situations would be 
enhanced if greater flexibility were available to grant exceptions to 
this limitation on starting the improvements.
    Accordingly, this interim rule amends Sec. 201.20(b)(3) to provide 
that the loan proceeds shall only be used to finance property 
improvements that are started after loan approval, unless (a) the prior 
approval of the Secretary is obtained for an exception, or (b) the 
property is located in a major disaster area declared as such by the 
President, and the lender determines that emergency action is needed to 
repair damage resulting from the disaster.
    The interim rule also amends Sec. 201.54(b)(2) to permit the 
Secretary to extend the claim filing period on a property improvement 
loan when the borrower had experienced a loss of income or other 
financial difficulties directly attributable to a major disaster 
declared by the President, and additional time was needed to provide 
forbearance.

Changes Affecting Manufactured Home Loans

    Changes in the Title I regulations that are applicable only to 
manufactured home loans include the following: reducing the minimum 
required downpayment and revising the maximum loan amount to compensate 
for the lower downpayment, increasing the maximum expense-to-income 
ratios for borrowers purchasing energy-efficient manufactured homes, 
and increasing the maximum dollar allowances for repossession expenses 
and legal fees.

Reduced Downpayment Requirements

    Section 201.23 of the regulations requires a minimum cash 
downpayment of five percent of the first $5,000 and ten percent of the 
balance of the purchase price to obtain a new manufactured home or a 
manufactured home and lot. To purchase an existing manufactured home or 
a developed lot on which to place a manufactured home, the minimum 
downpayment is ten percent of the purchase price.
    In TI-428, the Department waived the present downpayment 
requirements to require a minimum cash downpayment of five percent of 
the purchase price for all manufactured home purchase loans, 
manufactured home lot loans, and combination loans. The Department 
decided that a five percent minimum downpayment would help restore 
Title I as a financing vehicle for first-time buyers to achieve 
affordable homeownership. It would create a different loan program from 
conventional financing and would enable lenders and dealers to offer 
low- and moderate-income families a real alternative.
    Accordingly, this interim rule amends Sec. 201.23(b), (c), and (d) 
by replacing the existing downpayment requirements in these sections 
with ``five percent of the purchase price.''

Changes in Maximum Loan Calculation

    Because of the reduction in the minimum downpayment to five 
percent, TI-428 also granted waivers that apply to the maximum loan 
amount calculations in Sec. 201.10(b), (c), and (d). The maximum loan 
amount for the purchase of a new manufactured home under 
Sec. 201.10(b)(1) or for the purchase of a new manufactured home and 
lot under Sec. 201.10(d)(1) was based upon 125 percent of the wholesale 
(base)

[[Page 19793]]

price of the home, itemized options, and freight charge. The Department 
increased the percentage to 130 percent to conform with the reduced 
downpayment requirement.
    In a related change, the Department also waived the maximum dollar 
allowances applicable to delivery and set-up of the home in 
Sec. 201.10(b)(1) and (d)(1), and to skirting in Sec. 201.10(b)(1). 
These waivers ensure that the downpayment is a true 5 percent in most 
cases, and give lenders and dealers greater flexibility in dealing with 
State and local variations in installation standards.
    For the purchase of an existing manufactured home under 
Sec. 201.10(b)(2) or a manufactured home lot under Sec. 201.10(c), the 
maximum loan amount was calculated at 90 percent of the appraised value 
or purchase price, whichever was less. To conform with the reduced 
downpayment requirement, the Department increased the percentage to 95 
percent.
    Accordingly, this interim rule amends Sec. 201.10(b), (c), and (d) 
in the following respects:
    1. By replacing ``125 percent'' with ``130 percent'' in 
Sec. 201.10(b)(1)(i) and (d)(1)(i);
    2. By removing ``not to exceed $750 per module'' in 
Sec. 201.10(b)(1)(iii);
    3. By replacing ``Skirting costs, not to exceed $500'' with ``The 
actual dealer's cost of skirting'' in Sec. 201.10(b)(1)(iv);
    4. By replacing ``90 percent'' with ``95 percent'' in 
Sec. 201.10(b)(2) and (c); and
    5. By removing ``not to exceed $1,200 per module'' in 
Sec. 201.10(d)(1)(iii).

Increase in Expense-to-Income Ratios

    Section 201.22(b) states that, for any Title I loan, the borrower's 
income must be adequate to meet the periodic payments required by the 
loan, as well as the borrower's other housing expenses and recurring 
charges. For a borrower's income to be considered adequate, housing 
expenses and total fixed expenses generally may not exceed maximum 
percentages of effective gross income established by the Secretary. On 
October 18, 1991 (56 FR 52438), the Department published a notice in 
the Federal Register setting the maximum expense-to-income ratios for 
manufactured home loans at 29 percent for total housing expenses and 41 
percent for total fixed expenses.
    In TI-428, the Department waived the 29 percent and 41 percent 
ratios in favor of higher ratios of 31 percent and 43 percent, 
respectively, for borrowers who purchased manufactured homes with a 
date of manufacture on or after October 25, 1994, the effective date of 
the Department's new energy conservation standards. The Department 
adopted the higher ratios to recognize that while energy-efficient 
homes are more expensive, borrowers will be spending less of their 
income on fuel costs.
    Since the Department has already notified lenders of this change in 
the maximum expense-to-income ratios by Title I Letter, this interim 
rule amends Sec. 201.22(b)(1) to eliminate the need for publication of 
a Federal Register notice to advise lenders of the change. The 
Department has decided that lenders can be more effectively notified of 
future changes in maximum expense-to-income ratios through Title I 
Letters or by including the information in program handbooks.

Repossession Expenses and Legal Fees

    Section 201.55(b)(3) sets the maximum dollar allowances for removal 
and transportation of a repossessed manufactured home to an off-site 
location at $750 per module. In TI-428, the Department waived this 
limit to permit an increase in the allowance to $1,000 per module, 
which more accurately reflects the lender's cost for this activity. 
Accordingly, this interim rule amends Sec. 201.55(b)(3) by substituting 
``$1,000'' for ``$750.''
    Section 201.55(b)(7) sets the maximum dollar allowance for 
attorney's fees in connection with a claim on a manufactured home loan 
at $500. In TI-428, the Department waived this limit to permit an 
increase in the allowance to $1,000, which more accurately reflects the 
cost for legal services. Accordingly, this interim rule amends 
Sec. 201.55(b)(7) by substituting ``$1,000'' for ``$500.''

Clarifying and Conforming Amendments

    The Department is also amending other sections of part 201 to 
clarify the regulations and conform them with current practice in the 
operation of the Title I program. The Department calls particular 
attention to the following amendments:
    1. In Sec. 201.2, the Department is revising the definition of 
``existing structure'' to clarify that the 90-day completion and 
occupancy requirement applies to all manufactured homes, whether they 
are real or personal property. In a conforming change, the Department 
is revising Sec. 201.20(b)(1) to remove redundant language on the 90-
day completion and occupancy requirement.
    2. In Sec. 201.2, the Department is revising the definition of 
``manufactured home'' to clarify that the construction standards for 
existing manufactured homes apply only to loans for the purchase or 
refinancing of such homes, and not to property improvement loans on 
manufactured homes.
    3. In Sec. 201.2, the Department is revising the definition of 
``State'' to substitute ``the Commonwealth of the Northern Mariana 
Islands'' for ``the Trust Territory of the Pacific Islands,'' since the 
remainder of the Trust Territory is now independent and is no longer 
eligible to participate in the Title I programs.
    4. In Sec. 201.3, the Department is removing paragraph (b), which 
indicates the applicability of amendments made to part 201 by a final 
rule that was published in the Federal Register on October 18, 1991 (56 
FR 52414). The paragraph is now obsolete because many of the regulatory 
sections listed in the paragraph have been eliminated or changed. To 
the extent that it is still applicable, the preamble to the final rule 
contains the same information.
    5. The Department is revising Sec. 201.10(b)(3) and (d)(3) to 
clarify that the ``purchase price'' used in connection with 
manufactured home purchase loans and combination loans includes the 
retail cost to the borrower of all items set forth in the purchase 
contract, not just those items that are eligible for inclusion in the 
Title I loan.
    6. The Department is revising Secs. 201.10(f)(3) and 201.11(c)(2) 
to clarify that these provisions apply to the refinancing of any 
uninsured manufactured home loan, and are not limited to manufactured 
home purchase loans and combination loans.
    7. The Department is revising Secs. 201.10(f)(4) and 201.11(c)(3) 
to clarify that these provisions apply anytime the borrower is 
refinancing a manufactured home lot already owned by the borrower in 
connection with the purchase of a manufactured home.
    8. The Department is revising Secs. 201.10(f)(5) and 201.11(c)(4) 
to clarify that these provisions apply anytime the borrower is 
refinancing a manufactured home already owned by the borrower in 
connection with the purchase of a manufactured home lot. The Department 
is also increasing the maximum loan amount in Sec. 201.10(f)(5) to 
$64,800, in conformance with a final rule published in the Federal 
Register on July 30, 1993 (58 FR 40996).
    9. The Department is revising Sec. 201.11 to add a new paragraph 
(a)(3), limiting the maximum term for an historic preservation loan to 
15 years and 32 days. The Department inadvertently omitted this 
provision when it changed the maximum term for other types of property 
improvement loans in a final rule published in the Federal Register on 
September 30, 1992 (57 FR 45244).

[[Page 19794]]

    10. The Department is revising Sec. 201.12, which sets forth 
requirements for the note, to remove a prohibition against the use of 
discount or add-on notes in connection with any Title I loan approved 
on or after January 15, 1986. Although such loans remain uninsurable, 
the Department believes that it is no longer necessary to spell out 
this prohibition, since the Department is revising Sec. 201.13 as 
described in paragraph 10, below.
    11. The Department is revising Sec. 201.13 to state that interest 
on a Title I loan shall be ``calculated on a simple interest basis,'' 
rather than ``calculated according to the actuarial method.''
    12. The Department is revising Sec. 201.20(a)(2) to specify that 
the manufactured home must be the principal residence of the borrower 
to be eligible for a manufactured home improvement loan. In a 
conforming change, this interim rule removes the same provision from 
Sec. 201.20(b)(1), since that section deals with the use of the loan 
proceeds.
    13. The Department is further revising Sec. 201.20(b)(1) to include 
provisions previously found in Sec. 201.26(a)(2). As revised, 
Sec. 201.20(b)(1) requires that, if the borrower plans to use a dealer 
or contractor to carry out the property improvements, the lender shall 
obtain a copy of a proposal or contract that describes in detail the 
work to be performed and the estimated or actual cost. Alternatively, 
if the borrower plans to carry out the work without the services of a 
dealer or contractor, the borrower shall be required to furnish a 
detailed written description of the work to be performed, the materials 
to be furnished, and their estimated cost. In a conforming change, the 
Department is revising Sec. 201.26(a)(2) to remove the present language 
and to refer to the requirements of Sec. 201.20(b)(1).
    14. The Department is revising Secs. 201.20(b)(2) and 201.21(b)(5) 
to eliminate the need for publication of a Federal Register notice to 
notify lenders about items and activities that are ineligible for 
financing in property improvement or manufactured home loans. The 
Department has decided that lenders are more effectively notified of 
this information through Title I Letters or by including the 
information in program handbooks.
    15. The Department is revising Sec. 201.21(b)(3) to specify that 
wheels and axles cannot be purchased with the proceeds of a 
manufactured home loan, and to clarify that the cost of furniture, 
wheels, and axles shall not be included in the maximum loan amount 
calculated under Sec. 201.10(b)(1) or (d)(1). The Department 
inadvertently omitted the reference to wheels and axles from this 
section when it implemented the prohibition against financing these 
items in a final rule published in the Federal Register on October 18, 
1991 (56 FR 52414).
    16. In Sec. 201.22(b)(2), the Department is revising the definition 
of ``other recurring charges'' to remove child care expenses as an item 
that must be considered in determining whether the borrower's income is 
adequate to qualify for a property improvement or manufactured home 
loan. This change is consistent with modifications in credit 
underwriting requirements that have taken place in the Department's 
other loan and mortgage insurance programs.
    17. The Department is revising Sec. 201.22(c)(1) to clarify the 
prohibition against a lender approving a Title I loan if the borrower 
is in default on a previous loan obligation owed to or insured or 
guaranteed by the Federal Government.
    18. The Department is revising Sec. 201.24(a)(1) to clarify that 
the requirement that the Title I loan must have lien priority over any 
uninsured loan made by the lender at the same time does not apply when 
the uninsured loan is a first mortgage loan for the purchase or 
refinancing of the property.
    19. The Department is revising Sec. 201.25(d) to clarify that 
neither the lender nor the borrower may pay a referral fee to any third 
party in connection with the origination of a Title I loan. Prohibiting 
the borrower from paying a referral fee is consistent with the wording 
in the preambles to both the proposed rule published in the Federal 
Register on January 29, 1991 (56 FR 3302) and the final rule published 
in the Federal Register on October 18, 1991 (56 FR 52414), but the 
Department inadvertently omitted this prohibition from the text of the 
regulation.
    20. The Department is revising Sec. 201.26(b)(6) to clarify that an 
inspection by the lender or its agent on a direct manufactured home 
loan is required only when the transaction involves the relocation of 
the manufactured home to a new homesite.
    21. The Department is revising Sec. 201.27(a)(5) to clarify that 
the lender is required to notify the Department that it has terminated 
its approval of a dealer only if the termination was because the dealer 
did not satisfactorily perform its contractual obligations to 
borrowers, did not comply with Title I requirements, or was 
unresponsive to the lender's supervision and monitoring requirements.
    22. The Department is removing Sec. 201.27(b)(2), which provided 
for limited recourse agreements between manufactured home lenders and 
dealers for uninsurable loans, because it is obsolete.
    23. In Sec. 201.32(a)(1), the Department is eliminating the 
requirement that separate Title I contracts of insurance and separate 
reserve accounts be established for lenders that originate, purchase, 
or hold both property improvement and manufactured home loans. The 
Department has determined that requiring two contracts of insurance 
poses an unnecessary obstacle to more widespread lender participation 
in the Title I program.
    24. The Department is revising Sec. 201.52 to clarify that when a 
lender accepts a voluntary conveyance of title or a voluntary surrender 
of the property securing a manufactured home loan, it is not necessary 
to send the borrower the notice of default and acceleration that is 
otherwise required by Sec. 201.50(b).
    25. The Department is revising Sec. 201.53 to clarify that in 
determining the best price obtainable for a manufactured home property, 
cost items other than repairs may be deducted from the actual sales 
price, so that a valid comparison can be made with the appraised value 
of the property before repairs.

Justification for Interim Rulemaking

    The Department generally publishes a rule for public comment before 
issuing a rule for effect, in accordance with its regulations on 
rulemaking in 24 CFR part 10. However, part 10 provides that prior 
public procedure will be omitted if HUD determines that it is 
``impracticable, unnecessary, or contrary to the public interest'' (24 
CFR 10.1).
    Many of the changes in this interim rule merely codify the 
Secretary's waiver of burdensome regulatory requirements. As noted 
earlier, the Department developed many of these changes through an 
outreach process that involved a wide variety of program participants, 
and the Department notified all approved lenders of the changes through 
Title I Letters. The Department considered the alternatives and 
determined that these changes are generally compatible with industry 
practice and are necessary to increase the availability of credit to 
qualified borrowers and to further the goals of the National Housing 
Act. Greater use of the Title I program will help preserve the nation's 
existing housing stock and rebuild neighborhoods.
    Furthermore, implementation of the interim rule's provisions is 
needed as soon as possible to eliminate the practice of lenders 
collecting discount

[[Page 19795]]

points from dealers that are not for the benefit of borrowers, and to 
stop the continued assessment of excessive prepayment penalties that 
are preventing low- and moderate-income borrowers from refinancing 
their loans. Therefore, the Department has determined that good cause 
exists to omit prior public procedure for this interim rule because 
such delay would be contrary to the public interest and unnecessary.
    However, the Department is interested in obtaining as much public 
input as possible as to how this interim rule could be further improved 
or streamlined. The Department is allowing for a 60-day public comment 
period, after which it will consider the issues raised by the 
commenters in its development of a final rule.

Regulatory Reinvention

    Consistent with Executive Order 12866 and President Clinton's 
memorandum of March 4, 1995 to all Federal departments and agencies on 
the subject of regulatory reinvention, the Department is conducting a 
page-by-page review of all its regulations to determine whether certain 
regulations can be eliminated. As part of this review, the Department 
is publishing this interim rule, which eliminates from the Code of 
Federal Regulations many of the burdensome substantive requirements in 
the Title I programs. This interim rule also removes from the 
regulations the lists of eligible fees and charges under the Title I 
programs. It is unnecessary and burdensome for these lists to be 
included in the regulations. The Secretary will instead notify lenders 
of these fees and charges directly through Title I Letters.

Findings and Other Matters

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this interim 
rule under Executive Order 12866, Regulatory Planning and Review, 
issued by the President on September 30, 1993. Any changes made in this 
interim rule subsequent to its submission to OMB are identified in the 
docket file, which is available for public inspection during regular 
business hours in the Office of the Rules Docket Clerk, Office of the 
General Counsel, Department of Housing and Urban Development, Room 
10276, 451 Seventh Street SW., Washington, DC 20410.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with the Department's regulations at 24 CFR Part 
50, which implement section 102(2)(C) of the National Environmental 
Policy Act of 1969. The Finding of No Significant Impact is available 
for public inspection as provided under the section of this preamble 
entitled ``Executive Order 12866.''

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this interim rule, and in so 
doing certifies that it will not have a significant economic impact on 
a substantial number of small entities. The majority of institutions 
that participate in the Title I program are large depository 
institutions, and nearly all of the changes relieve regulatory burdens 
for all entities seeking to conduct Title I loan transactions.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this interim 
rule will not have substantial direct effects on States or their 
political subdivisions, or the relationship between the Federal 
Government and the States, or on the distribution of power and 
responsibilities among the various levels of Government. Specifically, 
the requirements of this interim rule are directed to lenders and 
borrowers, and will not impinge upon the relationship between the 
Federal Government and State and local governments. As a result, the 
interim rule is not subject to review under the Order.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12606, The Family, has determined that this interim 
rule will not have potential for significant impact on family 
formation, maintenance, or general well-being, and thus is not subject 
to review under the Order. The interim rule involves requirements for 
property improvement and manufactured home loans insured by the 
Department. Any effect on the family will likely be indirect and 
insignificant.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance program numbers are:
    14.110  Manufactured Home Loan Insurance--Financing Purchase of 
Manufactured Homes as Principal Residences of Borrowers;
    14.142  Property Improvement Loan Insurance for Improving All 
Existing Structures and Building of New Nonresidential Structures; and
    14.162  Mortgage Insurance--Combination and Manufactured Home Lot 
Loans.

List of Subjects in 24 CFR Part 201

    Health facilities, Historic preservation, Home improvement, Loan 
programs--housing and community development, Manufactured homes, 
Mortgage insurance, Reporting and recordkeeping requirements.
    Accordingly, 24 CFR part 201 is amended as follows:

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

    1. The authority citation for 24 CFR part 201 continues to read as 
follows:

    Authority: 12 U.S.C. 1703; 42 U.S.C. 1436a and 3535(d).

    2. Section 201.1 is amended by adding a period after the phrase 
``Sec. 201.2'', and by revising the fourth sentence, to read as 
follows:


Sec. 201.1  Purpose.

    * * * The insurance can cover up to 10 percent of the amount of all 
insured Title I loans in the financial institution's portfolio, as 
reflected in the total amount of insurance coverage contained at any 
time in an insurance coverage reserve account established by the 
Secretary, less amounts for insurance claims paid. * * *
    3. Section 201.2 is amended by:
    a. Removing the paragraph designations (a) through (ll);
    b. Adding a new definition of the term ``Discount points'' in 
alphabetical order;
    c. Revising the first sentence of the introductory text of the 
definition of the term ``Existing structure'';
    d. Revising the second sentence in paragraph (2) of the definition 
of the term ``Lender'';
    e. Revising the third sentence of the definition of the term 
``Manufactured home'';
    f. Adding a sentence at the end of the definition of the term 
``Manufactured home improvement loan''; and
    g. Revising the definitions of the terms ``Multifamily property 
improvement loan'' and ``State'', to read as follows:


Sec. 201.2  Definitions.

* * * * *
    Discount points means a fee charged by the lender, separate from 
interest but part of the total finance charges on the loan, that is 
part of the lender's total yield on the loan needed to maintain a 
competitive position with other types of

[[Page 19796]]

investments. One discount point equals one percent of the principal 
amount of the loan. As discount points on the loan increase, the 
interest rate can be expected to decrease in a fairly consistent 
relationship.
    Existing structure means a dwelling, including a manufactured home, 
that was completed and occupied at least 90 days prior to an 
application for a Title I loan, or a nonresidential structure that was 
a completed building with a distinctive functional use prior to an 
application for a Title I loan. * * *
* * * * *
    Lender * * *
    (2) For purposes of loan origination under subparts A, B, and C of 
this part, the term ``lender'' also includes a ``loan correspondent'' 
as defined in this section.
* * * * *
    Manufactured home * * * To qualify for a manufactured home loan 
insured under this part, an existing manufactured home must have been 
constructed in accordance with standards published at 24 CFR part 3280 
and must meet standards similar to the minimum property standards 
applicable to existing homes insured under title II of the Act, as 
prescribed by the Secretary.
    Manufactured home improvement loan * * * The proceeds of a 
manufactured home improvement loan may also be used for improvements to 
the homesite, as long as the borrower is the owner of the home and the 
underlying real estate.
* * * * *
    Multifamily property improvement loan means a loan to finance the 
alteration, repair, improvement, or conversion of an existing structure 
used or to be used as an apartment house or a dwelling for two or more 
families. The multifamily structure may not be owned by a corporation, 
partnership, or trust, unless the prior approval of the Secretary is 
obtained for an exception to this requirement.
* * * * *
    State means any State of the United States, Puerto Rico, the 
District of Columbia, Guam, American Samoa, the Commonwealth of the 
Northern Mariana Islands, or the United States Virgin Islands.
* * * * *
    4. Section 201.3 is revised to read as follows:


Sec. 201.3  Applicability of the regulations.

    The regulations in this part may be amended by the Secretary at any 
time. Such amendment shall not adversely affect the insurance 
privileges of a lender on any loan that has been made or for which a 
loan application has been approved before the effective date of the 
amendment.
    5. Section 201.10 is amended by:
    a. Revising paragraph (a)(1)(iv);
    b. Removing paragraph (a)(2);
    c. Redesignating paragraph (a)(3) as paragraph (a)(2); and
    d. Revising paragraphs (b)(1)(i), (b)(1)(iii), (b)(1)(iv), 
(b)(2)(i), (b)(2)(ii), (b)(3), (c), (d)(1)(i), (d)(1)(iii), (d)(3), 
(f)(3), (f)(4), and (f)(5), to read as follows:


Sec. 201.10  Loan amounts.

    (a) * * *
    (1) * * *
    (iv) Manufactured home improvement loans--$7,500.
* * * * *
    (b) * * *
    (1) * * *
    (i) 130 percent of the sum of the wholesale (base) prices of the 
home and any itemized options and the charge for freight, as detailed 
in the manufacturer's invoice;
* * * * *
    (iii) The actual dealer's cost of transportation to the homesite, 
set-up and anchoring, including the rental of wheels and axles (if not 
included in the freight charges);
    (iv) The actual dealer's cost of skirting;
* * * * *
    (2) * * *
    (i) 95 percent of the appraised value of the home as equipped and 
furnished (as determined by a HUD-approved appraisal) and 95 percent of 
any itemized amounts allowed under paragraphs (b)(1)(iii) through (vii) 
of this section, if incurred; or
    (ii) 95 percent of the purchase price of the home.
    (3) The purchase price of a manufactured home financed with a 
manufactured home purchase loan shall include the retail cost to the 
borrower of all items set forth in the purchase contract, including any 
applicable charges authorized under Sec. 201.25(b).
    (c) Manufactured home lot loans. The total principal obligation for 
a loan to purchase and, if necessary, develop a lot suitable for a 
manufactured home, including on-site water and utility connections, 
sanitary facilities, site improvements and landscaping, shall not 
exceed 95 percent of either the appraised value of the developed lot 
(as determined by a HUD-approved appraisal) or the total of the 
purchase price and development costs, whichever is less, up to a 
maximum of $16,200.
    (d) * * *
    (1) * * *
    (i) 130 percent of the sum of the wholesale (base) prices of the 
home and any itemized options and the charge for freight, as detailed 
in the manufacturer's invoice;
* * * * *
    (iii) The actual dealer's cost of transportation to the homesite, 
set-up and anchoring, including the rental of wheels and axles (if not 
included in the freight charge);
* * * * *
    (3) The purchase price of a manufactured home and a lot financed 
with a combination loan shall include the retail cost to the borrower 
of all items set forth in the purchase contract or contracts, including 
any applicable charges authorized under Sec. 201.25(b).
* * * * *
    (f) * * *
    (3) The total principal obligation of a loan made to refinance a 
borrower's existing uninsured manufactured home loan shall not exceed 
the cost to the borrower of prepaying the existing loan or the 
appraised value of the property (as determined by a HUD-approved 
appraisal), whichever is less, up to the maximum loan amount permitted 
under this section for the particular type of loan.
    (4) When a borrower's existing manufactured home lot is being 
refinanced in connection with the purchase of a manufactured home, the 
total principal obligation of the combination loan shall be determined 
in accordance with paragraph (d)(1) or (d)(2) of this section.
    (5) When a borrower's existing manufactured home is being 
refinanced in connection with the purchase of a manufactured home lot, 
the total principal obligation of the combination loan shall not exceed 
the lesser of the following amounts, up to a maximum of $64,800:
    (i) The cost to the borrower of prepaying any existing loan on the 
home, plus the purchase price of the lot; or
    (ii) The appraised value of the home and lot (as determined by a 
HUD-approved appraisal).
* * * * *
    6. Section 201.11 is amended by revising paragraphs (a)(1) and 
(a)(2), by adding a new paragraph (a)(3), and by revising paragraphs 
(c)(2), (c)(3), and (c)(4), to read as follows:


Sec. 201.11  Loan maturities.

    (a) * * *
    (1) The maximum term for a single family property improvement loan 
on a manufactured home that qualifies as real property shall not exceed 
15 years and 32 days from the date of the loan;

[[Page 19797]]

    (2) The maximum term for a manufactured home improvement loan shall 
not exceed 12 years and 32 days from the date of the loan; and
    (3) The maximum term for an historic preservation loan shall not 
exceed 15 years and 32 days from the date of the loan.
* * * * *
    (c) * * *
    (2) The term of a loan made to refinance a borrower's existing 
uninsured manufactured home loan shall not exceed the maximum term 
permitted under paragraph (b) of this section for the particular type 
of loan.
    (3) When a borrower's existing manufactured home lot is being 
refinanced in connection with the purchase of a manufactured home, the 
term of the combination loan shall not exceed the maximum term 
permitted under paragraph (b) of this section for the particular type 
of loan.
    (4) When a borrower's existing manufactured home is being 
refinanced in connection with the purchase of a manufactured home lot, 
the term of the combination loan shall not exceed the maximum term 
permitted under paragraph (b) of this section for the particular type 
of loan.
    7. Section 201.12 is revised to read as follows:


Sec. 201.12  Requirements for the note.

    The note shall bear the genuine signature of each borrower and of 
any co-maker or co-signer, be valid and enforceable against the 
borrower and any co-maker or co-signer, and be complete and regular on 
its face. The borrower and any co-maker or co-signer shall execute the 
note for the full amount of the loan obligation. Although the note may 
be executed by the borrower on an earlier date, the date of the loan 
shall be the date that the loan proceeds are disbursed by the lender. 
Such date shall be entered on the note when disbursement occurs. The 
note shall separately recite the principal amount and any interest at 
an agreed annual rate that comprises the borrower's payment obligation. 
The lender shall assure that the note and all other documents 
evidencing the loan transaction are in compliance with applicable 
Federal, State, and local laws. If the note is executed on behalf of a 
corporation, partnership, or trust by an authorized representative, it 
shall create a binding obligation on such entity.
    8. Section 201.13 is revised to read as follows:


Sec. 201.13  Interest and discount points.

    The interest rate for any loan shall be negotiated and agreed to by 
the borrower and the lender, and such interest rate shall be fixed for 
the full term of the loan and recited in the note. Interest on the loan 
shall accrue from the date of the loan, and shall be calculated on a 
simple interest basis. The lender and the borrower may negotiate the 
amount of discount points, if any, to be paid by the borrower as part 
of the borrower's initial payment. The lender shall not require or 
allow any party other than the borrower to pay any discount points or 
other financing charges in connection with the loan transaction.
    9. Section 201.17 is revised to read as follows:


Sec. 201.17  Prepayment provision.

    The note shall contain a provision permitting full or partial 
prepayment of the loan without penalty, except that the borrower may be 
assessed reasonable and customary charges for recording a release of 
the lender's security interest in the property, if permitted by State 
law.
    10. Section 201.20 is amended by revising paragraph (a)(2), by 
removing paragraph (a)(3), and by revising paragraph (b), to read as 
follows:


Sec. 201.20  Property improvement loan eligibility.

    (a) * * *
    (2) To be eligible for a manufactured home improvement loan, the 
borrower shall have at least a one-half interest in the manufactured 
home, and the home must be the principal residence of the borrower.
    (b) Eligible use of the loan proceeds. (1) The loan proceeds shall 
be used only for the purposes disclosed in the loan application. If the 
borrower plans to use a dealer or contractor to carry out the 
improvement work, the lender shall obtain a copy of a proposal or 
contract that describes in detail the work to be performed and the 
estimated or actual cost. If the borrower plans to carry out the 
improvement work without the services of a dealer or contractor, the 
borrower shall be required to furnish a detailed written description of 
the work to be performed, the materials to be furnished, and their 
estimated cost.
    (2) The loan proceeds shall be used only to finance property 
improvements that substantially protect or improve the basic livability 
or utility of the property. The Secretary will establish a list of 
items and activities that may not be financed with the proceeds of any 
property improvement loan. If a lender has any doubt as to the 
eligibility of any item or activity, it shall request a specific ruling 
by the Secretary before making a loan.
    (3) The loan proceeds shall only be used to finance property 
improvements that are started after loan approval, unless:
    (i) The prior approval of the Secretary is obtained for an 
exception to this requirement; or
    (ii) The property is located in a major disaster area declared by 
the President, and the lender determines that emergency action is 
needed to repair damage resulting from the disaster.
* * * * *
    11. Section 201.21 is amended by revising paragraphs (b)(3) and 
(b)(5), to read as follows:


Sec. 201.21  Manufactured home loan eligibility.

* * * * *
    (b) * * *
    (3) The proceeds of a loan to purchase a new manufactured home or a 
new manufactured home and lot shall not be used to purchase furniture 
or wheels and axles, and the cost of these items shall not be included 
in the total principal obligation calculated under Sec. 201.10(b)(1) or 
(d)(1).
* * * * *
    (5) The Secretary will establish a list of items and activities 
that may not be financed with the proceeds of any manufactured home 
loan. If a lender has any doubt as to the eligibility of any item or 
activity, it shall request a specific ruling by the Secretary before 
making a loan.
* * * * *
    12. Section 201.22 is amended by revising paragraphs (b)(1), 
(b)(2)(iv), and (c)(1), to read as follows:


Sec. 201.22  Credit requirements for borrowers.

* * * * *
    (b) * * *
    (1) For any Title I loan, the credit application and review must 
establish that the borrower's income will be adequate to meet the 
periodic payments required by the loan, as well as the borrower's other 
housing expenses and recurring charges. For a borrower's income to be 
considered adequate, housing expenses and total fixed expenses 
generally may not exceed maximum percentages of effective gross income 
established by the Secretary. If these expense-to-income ratios are 
exceeded, the borrower's income may be considered adequate only if the 
lender determines and documents in the loan file the existence of 
compensating factors concerning the borrower's

[[Page 19798]]

creditworthiness that support approval of the loan.
    (2) * * *
    (iv) Other recurring charges include all payments on automobile 
loans, furniture loans, student loans, installment loans, revolving 
charge accounts, alimony or child support, and any other debt for which 
the obligation is expected to continue for six months or more.
    (c) * * *
    (1) The borrower is past due more than 30 days as to the payment of 
principal or interest under the original terms of a loan obligation 
owed to or insured or guaranteed by the Federal Government, unless the 
debt has since been discharged or satisfied; or
* * * * *
    13. Section 201.23 is revised to read as follows:


Sec. 201.23  Borrower's initial payment.

    (a) General requirement. The borrower shall be responsible for the 
payment in cash of any costs that will not be paid, or are not eligible 
to be paid, from the proceeds of the loan. Such costs payable by the 
borrower may include any required downpayment, any discount points to 
be paid by the borrower to the lender, any other fees and charges that 
may not be financed, and any other costs in excess of the loan amount. 
No part of such costs payable by the borrower may be loaned, advanced, 
or paid to or for the benefit of the borrower by the dealer, the 
manufacturer, or any other party to the loan transaction. If the 
borrower obtains all or any part of such costs through a gift or a loan 
from some other source, the borrower must disclose the source of such 
gift or loan on the credit application. Any such loan must be secured 
by property or collateral owned by the borrower independently of the 
property securing repayment of the Title I loan, unless the prior 
approval of the Secretary is obtained for an exception to this 
requirement. The lender shall consider any such loan obligation in 
performing the credit investigation. Documentation of any initial 
payment shall be retained by the lender in the loan file.
    (b) Manufactured home purchase loans. In the case of a manufactured 
home purchase loan, the borrower shall make a minimum cash downpayment 
of at least five percent of the purchase price of the home. The 
borrower's equity in an existing manufactured home and any movable 
appurtenances may be traded-in on a new home and accepted in lieu of 
full or partial cash downpayment, but without any cash payment to the 
borrower. The existing manufactured home being traded-in shall be 
clearly identified, and the borrower's equity in the home shall be 
based upon the retail value of the home and appurtenances (as 
determined by a HUD-approved appraisal), less the total of all loans 
outstanding on the home and appurtenances.
    (c) Manufactured home lot loans. In the case of a manufactured home 
lot loan, the borrower shall make a minimum cash downpayment of at 
least five percent of the total of the purchase price and development 
costs for the lot.
    (d) Combination loans. In the case of a combination loan, the 
borrower shall make a minimum cash downpayment of at least five percent 
of the purchase price of the manufactured home and lot. If the borrower 
already owns a manufactured home or a lot on which a manufactured home 
is to be placed, the borrower's equity in such home or lot may be 
accepted in lieu of full or partial cash downpayment on a combination 
loan, but without any cash payment to the borrower.
    14. Section 201.24 is amended by revising paragraphs (a)(1) and 
(a)(2) to read as follows:


Sec. 201.24  Security requirements.

    (a) * * *
    (1) Any property improvement loan in excess of $7,500 shall be 
secured by a recorded lien on the improved property. The lien shall be 
evidenced by a mortgage or deed of trust, executed by the borrower and 
all other owners in fee simple. If the borrower is a lessee, the 
borrower and all owners in fee simple must execute the mortgage or deed 
of trust. If the borrower is purchasing the property under a land 
installment contract, the borrower, all owners in fee simple, and all 
intervening contract sellers must execute the mortgage or deed of 
trust. The lien need not be a first lien on the property; however, the 
lien securing the Title I loan must have priority over any lien 
securing an uninsured loan made at the same time and in connection with 
the same property, unless the uninsured loan is a first mortgage loan 
for the purchase or refinancing of the property.
    (2) Any property improvement loan for $7,500 or less (other than a 
manufactured home improvement loan) shall be similarly secured if, 
including such loan, the total amount of all Title I loans on the 
improved property is more than $7,500.
* * * * *
    15. Section 201.25 is revised to read as follows:


Sec. 201.25  Charges to borrower to obtain loan.

    (a) Fees and charges that may be financed in a property improvement 
loan. The Secretary will establish a list of fees and charges that may 
be included in a property improvement loan. Such fees and charges shall 
have been incurred in connection with the origination of the loan, and 
their inclusion shall not increase the total principal obligation 
beyond the maximum loan amounts in Sec. 201.10.
    (b) Fees and charges that may be financed in a manufactured home 
loan. The Secretary will establish a list of fees and charges that may 
be included in a manufactured home loan. Such fees and charges shall 
have been incurred in connection with the origination of the loan, and 
their inclusion shall not increase the total principal obligation 
beyond the maximum loan amounts in Sec. 201.10.
    (c) Fees and charges that may not be financed. The Secretary will 
establish a list of fees and charges incurred by the lender that may be 
collected from the borrower in the initial payment, but may not be 
included in the loan amount or otherwise financed or advanced by the 
dealer, the manufacturer, or any other party to the loan transaction.
    (d) Fees and charges that may not be paid. Neither the lender nor 
the borrower may pay a referral fee to any dealer, home manufacturer, 
contractor, supplier, real estate broker, loan broker, or any other 
party in connection with the origination of a loan insured under this 
part.
    16. Section 201.26 is amended by revising paragraphs (a)(1), 
(a)(2), (a)(5)(ii), (a)(6)(i), (b)(3)(vi), (b)(3)(vii), (b)(4)(vi), and 
(b)(4)(vii); by removing paragraph (b)(4)(viii); and by revising 
paragraph (b)(6) introductory text, to read as follows:


Sec. 201.26  Conditions for loan disbursement.

    (a) * * *
    (1) The lender shall ensure that the following conditions are met:
    (i) The borrower is eligible for a property improvement loan in 
accordance with Sec. 201.20(a) (1) or (2); and
    (ii) The interest of the borrower in the property is valid, through 
such title or other evidence as is generally acceptable to prudent 
lending institutions and leading attorneys in the community in which 
the property is situated.
    (2) The proposed use of the loan proceeds shall be documented in 
accordance with the requirements of Sec. 201.20(b)(1).
* * * * *

[[Page 19799]]

    (5) * * *
    (ii) The borrower has not obtained the benefit of and will not 
receive any cash payment, rebate, cash bonus, sales commission, or 
anything of more than nominal value from the dealer as an inducement 
for the consummation of the transaction.
    (6) * * *
    (i) States that the loan will be insured by HUD and describes the 
actions the Secretary may take to recover the debt if the borrower 
defaults on the loan and an insurance claim is paid;
* * * * *
    (b) * * *
    (3) * * *
    (vi) The borrower has paid the remaining unpaid balance on any 
other manufactured home loan secured by a different property, unless 
the prior approval of the Secretary is obtained for an exception to 
this requirement; and
    (vii) The borrower has not obtained the benefit of and will not 
receive any cash payment, rebate, cash bonus, or anything of more than 
nominal value from the manufacturer or dealer as an inducement for the 
consummation of the transaction.
    (4) * * *
    (vi) Any initial payment required under Sec. 201.23 was made by the 
borrower, and no part of the initial payment was loaned, advanced, or 
paid to or for the benefit of the borrower by the manufacturer, dealer, 
or any other party to the loan transaction; and
    (vii) The borrower has not obtained the benefit of and will not 
receive any cash payment, rebate, cash bonus, or anything of more than 
nominal value from the manufacturer or dealer as an inducement for the 
consummation of the transaction.
* * * * *
    (6) For any direct manufactured home purchase loan or combination 
loan involving the relocation of the manufactured home to a new 
homesite owned or leased by the borrower, the lender (or an agent of 
the lender that is not a manufactured home dealer) shall conduct a 
site-of-placement inspection to verify that:
* * * * *
    17. Section 201.27 is amended by revising the second sentence of 
paragraph (a)(2) and by revising paragraph (a)(5); by removing 
paragraph (b)(2); and by redesignating paragraph (b)(1) as paragraph 
(b), to read as follows:


Sec. 201.27  Requirements for dealer loans.

    (a) * * *
    (2) * * * The dealer shall furnish a current financial statement 
prepared by someone who is independent of the dealer and is qualified 
by education and experience to prepare such statements, together with 
such other documentation as the lender deems necessary to support its 
approval of the dealer. * * *
* * * * *
    (5) If a dealer does not satisfactorily perform its contractual 
obligations to borrowers, does not comply with Title I program 
requirements, or is unresponsive to the lender's supervision and 
monitoring requirements, the lender shall terminate the dealer's 
approval and immediately notify the Secretary with written 
documentation of the facts. A dealer whose approval is terminated under 
these circumstances shall not be reapproved without prior written 
approval from the Secretary. The lender may in its discretion terminate 
the approval of a dealer for other reasons at any time.
* * * * *
    18. Section 201.28 is amended by revising paragraph (a) to read as 
follows:


Sec. 201.28  Flood and hazard insurance, and Coastal Barriers 
properties.

    (a) Flood insurance. No property improvement loan or manufactured 
home loan shall be eligible for insurance under this part if the 
property securing repayment of the loan is located in a special flood 
hazard area identified by the Federal Emergency Management Agency 
(FEMA), unless flood insurance on the property is obtained by the 
borrower in compliance with section 102 of the Flood Disaster 
Protection Act of 1973 (42 U.S.C. 4012a). Such insurance shall be 
obtained at any time during the term of the loan that the lender 
determines that the secured property is located in a special flood 
hazard area identified by FEMA, and shall be maintained by the borrower 
for the remaining term of the loan, or until the lender determines that 
the property is no longer in a special flood hazard area, or until the 
property is repossessed or foreclosed upon by the lender. The amount of 
such insurance shall be at least equal to the unpaid balance of the 
Title I loan, and the lender shall be named as the loss payee for flood 
insurance benefits.
* * * * *
    19. Section 201.32 is amended by revising paragraph (a); by 
removing paragraph (b); and by redesignating paragraphs (c), (d), and 
(e) as paragraphs (b), (c), and (d), respectively, to read as follows:


Sec. 201.32  Insurance coverage reserve account.

    (a) Establishment. The Secretary shall establish an insurance 
coverage reserve account for each lender. The amount of insurance 
coverage in each reserve account shall equal 10 percent of the amount 
disbursed, advanced, or expended by the lender in originating or 
purchasing eligible loans registered for insurance under this part, 
less the amount of all insurance claims approved for payment in 
connection with losses on such loans.
* * * * *
    20. Section 201.40 is amended by adding a new paragraph (b)(3) to 
read as follows:


Sec. 201.40  Post-disbursement loan requirements.

* * * * *
    (b) * * *
    (3) The borrower is not required to submit a completion certificate 
when the property improvement loan is made by or on behalf of a State 
or local government agency or a nonprofit organization, the loan 
proceeds are held in an escrow account pending completion of the 
improvements, and the loan proceeds are disbursed from the escrow 
account in stages, with the written approval of the borrower and based 
upon the percentage of work completed.
* * * * *
    21. Section 201.52 is amended by adding a sentence at the end, to 
read as follows:


Sec. 201.52  Acquisition by voluntary conveyance or surrender.

    * * * If the lender accepts a voluntary conveyance of title or a 
voluntary surrender of the property, the notice of default and 
acceleration under Sec. 201.50(b) shall not be required.
    22. Section 201.53 is amended by:
    a. Redesignating the paragraph as introductory text;
    b. Revising the third sentence of the newly designated introductory 
text; and
    c. Adding paragraphs (a) and (b), to read as follows:


Sec. 201.53  Disposition of manufactured home loan property.

    * * * The best price obtainable shall be the greater of:
    (a) The actual sales price of the property, after deducting the 
cost of repairs, furnishings, and equipment needed to make the property 
marketable, and after deducting the cost of transportation, set-up, and 
anchoring if the manufactured home is moved to a new homesite; or
    (b) The appraised value of the property before repairs (as 
determined by a HUD-approved appraisal obtained in accordance with 
Sec. 201.51(b)(3)).

[[Page 19800]]

    23. Section 201.54 is amended by revising paragraph (b)(2), to read 
as follows:


Sec. 201.54  Insurance claim procedure.

* * * * *
    (b) * * *
    (2) The Secretary may extend the claim filing period in a 
particular case, but only if the lender shows clear evidence that the 
delay in claim filing was in the interest of the Secretary or was 
caused by one of the following:
    (i) Litigation related to the loan;
    (ii) Management control of the lender or the Title I loan portfolio 
was assumed by a Federal or State agency; or
    (iii) The borrower had experienced a loss of income or other 
financial difficulties directly attributable to a major disaster 
declared by the President, and additional time was needed to provide 
forbearance on a property improvement loan.
* * * * *
    24. Section 201.55 is amended by revising the introductory text of 
paragraph (a), the introductory text of paragraph (b), and paragraphs 
(b)(3) and (b)(7), to read as follows:


Sec. 201.55  Calculation of insurance claim payment.

* * * * *
    (a) Property improvement loans. For property improvement loans, the 
insurance claim payment shall be 90 percent of the following amounts:
* * * * *
    (b) Manufactured home loans. For manufactured home loans, the 
insurance claim payment shall be 90 percent of the sum of the following 
amounts:
* * * * *
    (3) For manufactured home purchase loans, the amount of costs paid 
to a dealer or other third party to repossess and preserve the 
manufactured home and other property securing repayment of the loan 
(including the costs of site inspection, property appraisal, hazard 
insurance premiums, personal property taxes, and site rental, as 
appropriate), plus actual costs not to exceed $1,000 per module for 
removing and transporting the home to a dealer's lot or other off-site 
location.
* * * * *
    (7) The amount of attorney's fees on an hourly or other basis for 
time actually expended and billed, not to exceed $1,000.
* * * * *
    Dated: January 11, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-10885 Filed 5-01-96; 8:45 am]
BILLING CODE 4210-27-P