[Federal Register Volume 64, Number 177 (Tuesday, September 14, 1999)]
[Proposed Rules]
[Pages 49956-49958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23921]
[[Page 49955]]
_______________________________________________________________________
Part XII
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 203
Sources of Homeowner Downpayment; Proposed Rule
Federal Register / Vol. 64, No. 177 / Tuesday, September 14, 1999 /
Proposed Rules
[[Page 49956]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-4469-P-01]
RIN 2502-AH38
Sources of Homeowner Downpayment
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: HUD proposes to establish specific standards regarding the
mortgagor's investment in the mortgaged property when a gift is
provided by a charitable or other nonprofit organization. A gift could
not be used for the mortgagor's investment if the organization received
funds for the gift--directly or indirectly--from the seller of the
property. The proposed rule is intended to prevent a seller from
providing funds to an organization as a quid pro quo for that
organization's downpayment assistance for purchases of one or more
homes from the seller. In addition, HUD proposes to redraft in a more
readable, accurate and up-to-date form, without substantive change in
policy, the current regulation on the mortgagor's investment in the
property.
DATES: Comments Due Date: November 15, 1999.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, Office of General
Counsel, Room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410-0500. Communications should
refer to the above docket number and title. Facsimile (FAX) comments
are not acceptable. A copy of each communication submitted will be
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Home Mortgage
Insurance Division, Room 9266, Department of Housing and Urban
Development, 451 Seventh Street, SW, Washington, DC 20410-8000, (202)
708-2700 (this is not a toll-free number). For hearing- and speech-
impaired persons, this number may be accessed via TTY (text telephone)
by calling the Federal Information Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
Background
This proposed rule would accomplish two purposes. Its primary
purpose is to publish for public comment a proposal to establish
specific standards regarding the use of gifts by charitable or other
nonprofit organizations as a source of the mortgagor's investment in
the mortgaged property. Gifts could not be made from funds that the
organization received--directly or indirectly--from the seller of the
property. In addition, we propose to take this opportunity to redraft
in a more readable, accurate and up-to-date form, without substantive
change in policy, current Sec. 203.19 on the mortgagor's investment in
the property.
Section 203(b)(9) of the National Housing Act requires mortgagors
(with narrow exceptions) to pay on account of the property at least 3
percent of the cost of acquisition in order for the mortgage to be
eligible for insurance by FHA. The statute, and the implementing
regulation at 24 CFR 203.19, are silent about permissible and/or
impermissible sources of the mortgagor's investment, except that some
loans are permitted sources under the statute and other sources (by
implication) are not permitted sources. For example, legislation was
enacted in 1996 to amend section 203(b)(9) of the National Housing Act
to permit family members to provide gifts and loans to other family
members.
FHA has specified through its handbooks and mortgagee letters a
broad range of other permissible sources of the mortgagor's investment
beyond the homebuyer's own cash savings, none of which include the
seller of the property. In addition to loans permitted by statute,
permissible sources include gifts from family members, the borrower's
employer or labor union, governmental agencies and public entities
engaged in the provision of homeownership assistance, and charitable
organizations. It is this last group that is of concern.
Proposed Substantive Change
Although FHA has attempted to preclude downpayment funding derived
from the seller of the property, either directly or indirectly, some
charitable organizations have been able to circumvent these
restrictions in various ways, including the establishment of a fund
that provides the ``gift'' to the homebuyer. However, the fund is
immediately replenished by the seller providing a ``charitable
donation'' or paying a ``service fee'' to the nonprofit from the
proceeds of the sale of the house and does so only if the homebuyer is
using the charitable organization's downpayment assistance program.
There is a clear quid pro quo between the homebuyer's purchase of the
property and the seller's ``contribution'' or payment to the nonprofit
organization.
FHA has several concerns with these programs. First, borrowers with
limited cash investments into the sale transactions represent
significantly greater risk to the insurance fund. In many cases,
homebuyers using these downpayment assistance programs need only one
percent of their own money for the downpayment. In some programs, they
are not required to invest any cash at all. While many States and
public entities may have similar programs regarding the homebuyer's
cash investment requirements, those programs generally carry with them
substantive underwriting criteria above and beyond FHA's minimum
standards as well as program eligibility requirements (usually
restrictions on the borrower's maximum income so that the program
benefits low- and moderate-income clients); these are generally missing
in the programs of the nonprofits recently reviewed by FHA. FHA's
second concern is that the sales price is often increased so that the
seller's net proceeds are not diminished. This increases FHA's risk
that it will not recover the full amount owed if forced to acquire and
resell a home purchased by a participating borrower who then defaults
on the loan.
The proposed rule generally permits a mortgagor's minimum
investment to come from gifts from charitable organizations and other
non-profit organizations, if HUD has approved the organizations as
sources of gifts. Despite HUD's approval, an organization's gift may
not be used for the mortgagor's minimum investment if the organization
receives from the seller of the property at any time, directly or
indirectly, either the gift funds, or other consideration or
reimbursement for making the gift, including service fees. This
prohibition would apply to sales of existing homes by private sellers
as well as sales by builders, developers, etc., involved in new
construction, or any party with an identity of interest with them. HUD
would not allow any form of downpayment assistance in any of its
programs if those funds are derived, partially or in whole, in any
manner from sellers of the property being purchased with the
assistance.
The proposed rule is intended to prevent a seller from providing
funds to an organization as a quid pro quo for that organization's
downpayment assistance for purchases of one or more homes from the
seller. The proposed rule is not intended to preclude sellers such as
builders from contributing to charitable and other nonprofit
[[Page 49957]]
organizations that provide downpayment assistance unrelated to
properties sold by the seller or that otherwise further affordable
housing.
Proposed Non-Substantive Redrafting of Sec. 203.19
The current Sec. 203.19, entitled ``Mortgagor's minimum
investment'', is a combination of section 203(b)(9) of the National
Housing Act (as it existed before the 1996 amendment) and additional
regulatory policy in two areas. First, Sec. 203.19(a) includes a $200
minimum investment in two cases where section 203(b)(9) does not apply,
due either to an express exclusion (for veterans) or an implicit
exclusion (for disaster victims receiving a 100 percent mortgage under
section 203(h) of the National Housing Act and Sec. 203.18(e) of the
regulations). Second, Sec. 203.19(b) provides detailed guidance
regarding the type of loan for cases (other than family member loans)
where section 203(b)(9) expressly permits loans for the mortgagor's
minimum investment. Regarding loans, Sec. 203.19 does not currently
recognize either family member loans or loans under State or local
housing assistance programs (impliedly permitted by section 528 of the
National Housing Act) although both forms of loans are recognized in
FHA's mortgage credit handbook. There is nothing regarding downpayment
assistance in the form of gifts in the current Sec. 203.19. Therefore,
we have considered it preferable to redraft and update Sec. 203.19, in
a non-substantive manner, instead of simply adding a new substantive
discussion of restrictions for a particular type of gift.
As redrafted, Sec. 203.19 has the following organization. Paragraph
(a) requires a mortgagor to have the funds needed to complete the
transaction (payment of purchase price and settlement costs) in
addition to the funds provided by the insured mortgage itself. This
basic policy was previously stated only in a handbook rather than a
regulation, but it is a basic requirement of mortgage lending and does
not represents a new substantive policy.
Paragraph (b) corresponds to the current Sec. 203.19(a)(1) and the
first part of section 203(b)(9) of the National Housing Act by stating
the basic rule for a 3 percent mortgagor cash investment. The statute
and the current regulation give HUD the discretion to require more than
3 percent, but it is no longer necessary to reserve this discretion in
regulations. In practice, HUD has not demanded more than 3 percent
except as needed to satisfy the basic requirement for cash sufficient
to close the transaction (as stated in proposed new paragraph (a)).
Both the statute and the current regulation except from the 3 percent
requirement for veterans (who can qualify for 100 percent mortgage
financing for a $ 25,000 loan under section 203(b)(2) of the Act) and
disaster victims (who can qualify for 100 percent mortgage financing
under section 203(h) of the National Housing Act). However, the current
Sec. 203.19(a)(2) imposes a $200 minimum cash investment requirement
for those mortgagors. That $ 200 requirement is no longer meaningful in
relation to vast increases in home values and mortgage amounts since
the $200 requirement was adopted, and HUD proposes to delete it from
the regulations in the interests of simplifying mortgage processing.
Paragraph (c) of the proposed rule would state what has long been a
basic HUD policy: the mortgagor's required funds should not come from
the seller of the property. This is necessary to achieve meaningful
application of statutory loan-to-value requirements. Otherwise, there
could be a tendency for sellers to advance funds for closing costs
while inflating the purchase price to recoup the costs, with a higher
mortgage amount being based on the inflated price. Using the lesser of
appraised price or purchase price to determine mortgage amount can
control this tendency to a degree, but additional measures are prudent.
On the other hand, HUD has recognized local market practices in which
sellers customarily agree to pay some of the buyer's closing costs.
Beginning in the mid-1980's, HUD's administrative policies reflected in
Mortgagee Letters and handbooks have permitted some seller
contributions, consistent with local market practices that would be
reflected in local appraisal practices, but never more that 6 percent
of the purchase price. Proposed paragraph (c) would permit HUD to
continue this administrative policy and make any needed adjustment
without rulemaking, as long as the seller does not ever provide the
statutory 3 percent mortgagor's cash investment. Funds from the seller
would be broadly defined as any funds derived directly or indirectly
from any gift or loan made by the seller or any party with an identity
of interest with the seller.
Paragraph (d) states the general policy that funds from loans or
gifts may not be used for any part of the mortgagor's minimum
investment, unless otherwise provided in the rule. Paragraph (e), like
current Sec. 203.19(b), is intended to identify certain loan sources
authorized by statute. The paragraph states clearly HUD's historical
understanding of the Congressional intent behind section 203(b)(9) of
the National Housing Act: loans are a forbidden source of the 3 percent
minimum investment unless a statute provides otherwise, explicitly or
implicitly. Paragraph (e) includes certain statutory authorizations
that HUD relies on but which are currently not stated or referenced in
regulations (family loans and government loan programs). It also
handles by general reference, instead of the more specific language in
current Sec. 203.19(b), certain little-used or unused loan sources
authorized by section 203(b)(9) of the National Housing Act (e.g., HOPE
3).
Although paragraph (e) only restricts the use of loans for the 3
percent minimum cash investment and does not apply to the rest of the
required investment, readers should note that Sec. 203.32 contains
restrictions on secondary financing that is unsecured or secured by the
home. Paragraph (e) would not supersede anything in Sec. 203.32.
Paragraph (e) omits the detail regarding the acceptable form of loan
that currently appears in Sec. 203.19(b), because these are matters
more suitable for a handbook.
Finally, paragraph (f) contains the new substantive policy proposal
regarding gifts discussed above, while also setting forth other
acceptable gift sources permitted by current policy.
Findings and Certifications
Environmental Review
A Finding of No Significant Impact is not required for this
proposed rule because it is covered by the exclusion in 24 CFR
50.19(b)(6).
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this proposed rule before publication and
by approving it certifies that this proposed rule is not anticipated to
have a significant economic impact on a substantial number of small
entities. The primary purpose of this rule, as noted in the preamble,
is to establish standards regarding the use of gifts by charitable or
other nonprofit organizations as a source of an FHA's mortgagor's
investment in the mortgaged property. Specifically, the standards would
provide that gifts could not be made from funds that the organization
received, directly or indirectly, from the seller of the property.
While HUD recognizes that many nonprofit or charitable organizations
may be small entities, HUD does not believe that this rule would have a
significant economic impact on a substantial number of small entities.
HUD's proposed rule does not
[[Page 49958]]
preclude gifts from charitable or other nonprofit organizations. This
proposed rule only precludes these gifts if these organizations receive
from the seller of the property at any time, directly or indirectly,
either the gift funds, or other consideration or reimbursement for
making the gift, including service fees. The purpose of this
restriction is to prevent a seller from providing funds to an
organization as a quid pro quo for that organization's downpayment
assistance for purchase of one or more homes of the seller.
While this restriction is an important one to place on the use of
gifts as a source of downpayment, HUD believes that few entities, large
or small, would be affected by this restriction. Nevertheless, HUD is
sensitive to the fact that uniform application of requirements on
entities of differing sizes often places a disproportionate burden on
small entities. Therefore, small entities are specifically invited to
comment on whether this proposed rule will significantly affect them,
and to make any recommendations on alternatives for compliance the
requirements of this rule. Comments should be submitted in accordance
with the instructions in the DATES and ADDRESSES sections in the
preamble of this proposed rule.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this proposed
rule would not have ``federalism implications'' because it does not
have substantial direct effects on the States (including their
political subdivisions), or on the distribution of power and
responsibilities among the various levels of government. This proposed
rule solely addresses requirements under HUD's FHA mortgage insurance
programs.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995, Pub.L. 104-4,
established requirements for Federal agencies to assess the effects of
their regulatory actions on State, local, and tribal governments and
the private sector. This proposed rule does not impose any Federal
mandates on any State, local, or tribal governments or the private
sector within the meaning of Unfunded Mandates Reform Act of 1995.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance Number for the principal
FHA single family mortgage insurance is 14.117. This proposed rule
would also apply through cross-referencing to FHA mortgage insurance
for condominium units (14.133), and other smaller single family
programs.
List of Subjects in 24 CFR Part 203
Loan programs--housing and community development, Mortgage
insurance, Reporting and recordkeeping requirements.
Accordingly, the Department proposes to amend 24 CFR part 203 as
follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
1. The authority citation for part 203 continues to read:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715u; 42 U.S.C.
3535(d).
2. Section 203.19 is revised to read as follows:
Sec. 203.19 Mortgagor's investment in the property.
(a) Required funds. The mortgagor must have available funds equal
to the difference between:
(1) The sum of the purchase price of the home and settlement costs
acceptable to the Secretary; and
(2) The amount of the insured mortgage.
(b) Minimum cash investment. The required funds under paragraph (a)
of this section must include an investment in the property by the
mortgagor, in cash or cash equivalent, equal to at least 3 percent of
the cost of acquisition as determined by the Secretary, unless the
mortgagor is:
(1) A veteran meeting the requirements of Sec. 203.18(a)(3); or
(2) A disaster victim meeting the requirements of Sec. 203.18(e).
(c) Restrictions on seller funding. None of the required funds
under paragraph (a) of this section may be provided by the seller,
except as approved by the Secretary, notwithstanding paragraphs (e) and
(f) of this section. For purposes of this paragraph and paragraph (f),
funds are provided by the seller if they are derived directly or
indirectly from any gift, loan or other payment, including a service
charge, made by the seller or by any party with an identity of interest
with the seller.
(d) Gifts and loans usually prohibited for minimum cash investment.
A mortgagor may not use funds for any part of the minimum cash
investment under paragraph (b) of this section if the funds were
obtained through a gift or a loan from any person, except as provided
in paragraphs (e) and (f) of this section.
(e) Permissible sources of loans. (1) Statutory authorization
needed. A statute must authorize a loan as a source of the mortgagor's
minimum cash investment under paragraph (b) of this section. The
authority may be explicit or implicit.
(2) Examples. The following loans are authorized (explicitly or
implicitly) by statute as a source for the minimum investment:
(i) A loan from a family member, a loan to a mortgagor who is at
least 60 years old when the mortgage is accepted for insurance, or a
loan that is otherwise expressly authorized by section 203(b)(9) of the
National Housing Act;
(ii) A loan made by, or insured by, a State or local government
agency or instrumentality under terms and conditions approved by the
Secretary; and
(iii) A Federal disaster relief loan.
(f) Permissible sources of gifts. (1) General. The following are
permissible sources of gifts or grants used for the mortgagor's minimum
cash investment under paragraph (b) of this section:
(i) Family members and governmental agencies and instrumentalities
that may make loans under paragraphs (e)(2)(i) and (ii) of this
section;
(ii) An employer or labor union of the mortgagor;
(iii) Charitable organizations or other nonprofit organizations
approved by the Secretary as a source of gifts, subject to paragraph
(2) of this section;
(iv) Disaster relief grants; and
(v) Other sources approved by the Secretary.
(2) Charitable organization and other nonprofit organization. A
gift from a charitable organization or other nonprofit organization may
not be used for the minimum investment if the organization receives
from the seller at any time, directly or indirectly, either the gift
funds, or other consideration or reimbursement for making the gift,
including service fees.
Dated: August 23, 1999.
William C. Apgar,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 99-23921 Filed 9-13-99; 8:45 am]
BILLING CODE 4210-27-P