Federal Register: October 1, 2007 (Volume 72, Number 189)]
[Rules and Regulations]
[Page 56001-56007]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc07-18]
[[Page 56001]]
———————————————————————–
Part IV
Department of Housing and Urban Development
———————————————————————–
24 CFR Part 203
Standards for Mortgagor’s Investment in Mortgaged Property: Final Rule
[[Page 56002]]
———————————————————————–
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-5087-F-02]
RIN 2502-AI52
Standards for Mortgagor’s Investment in Mortgaged Property
AGENCY: Office of the Assistant Secretary for Housing–Federal Housing
Commissioner, HUD.
ACTION: Final rule.
———————————————————————–
SUMMARY: This final rule amends the Department’s regulations governing
the specific standards for a mortgagor’s investment in property for
which the mortgage is insured by the Federal Housing Administration
(FHA). Specifically, this final rule codifies HUD’s longstanding
practice, authorized by statute, of allowing a mortgagor’s investment
to be derived from gifts by family members and certain organizations.
The standards established by this final rule address a situation in
which the mortgagor’s investment is derived from a gift, loan, or other
payment that is provided by any donor, including an individual or an
organization, and also specify prohibited sources for a mortgagor’s
investment. The final rule establishes that a prohibited source of
downpayment assistance is a payment that consists, in whole or in part,
of funds provided by any of the following parties before, during, or
after closing of the property sale: The seller, or any other person or
entity that financially benefits from the transaction; or any third
party or entity that is reimbursed directly or indirectly by the
seller, or any other person or entity that financially benefits from
the transaction.
This final rule follows publication of a May 11, 2007, proposed
rule and takes into consideration the public comments received on the
proposed rule. After considering all comments received, HUD is adopting
the May 11, 2007, proposed rule with certain minor clarification
changes.
DATES: Effective Date: October 31, 2007.
FOR FURTHER INFORMATION CONTACT: Margaret Burns, Director, Office of
Single Family Program Development, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410; telephone
number (202) 708-2121 (this is not a toll-free number). Persons with
hearing or speech impairments may access this number through TTY by
calling the toll-free Federal Information Relay Service at (800) 877-
8339.
SUPPLEMENTARY INFORMATION:
I. Background
In order for a mortgage to be eligible for insurance by the Federal
Housing Administration (FHA), section 203(b)(9) of the National Housing
Act (12 U.S.C. 1709(b)(9)) requires the mortgagor (with narrow
exceptions) to pay on account of the property at least 3 percent of the
cost of acquisition. The statute and the implementing regulation at 24
CFR 203.19 are silent about permissible or impermissible sources of the
mortgagor’s investment, except that some loans are permitted sources
under the statute. For example, section 203(b)(9) of the National
Housing Act permits family members to provide loans to other family
members, and permits the mortgagor’s downpayment to be paid by a
corporation or person other than the mortgagor in certain
circumstances, such as when the mortgagor is 60 years of age or older,
or when the mortgage covers a housing unit in a homeownership program
under the Homeownership and Opportunity Through HOPE Act (Title IV of
Pub. L. 101-625, 104 Stat. 4148, approved November 28, 1990). HUD has
long taken the position that downpayment funding from the seller of the
home to be purchased by a borrower with an FHA-insured loan is not a
permissible source of the mortgagor’s investment in the property. FHA’s
experience is that loans made to borrowers who rely on these types of
seller-funded assistance perform very poorly.
Although FHA has attempted to preclude downpayment funding derived
from contributions of the seller of the property, some so-called
charitable organizations have been able to circumvent these
restrictions in various ways, including the establishment of a fund
that provides the so-called “gift'’ to the homebuyer. The situations
that cause FHA concern are those in which a so-called charitable
organization provides a so-called gift to a homebuyer from funds that
it receives, directly or indirectly, from the seller. In these cases,
there is a clear quid pro quo between the homebuyer’s purchase of the
property and the seller’s “contribution'’ or payment to the charitable
organization. This is also true if the contribution to the charitable
organization comes from an entity, other than the seller, that has an
expectation of being reimbursed by the seller. Often, these
contributions function as an inducement to purchase the home. It is
these concerns that prompted HUD’s rulemaking in 1999, which did not
result in final regulations, and now again, in 2007.
II. The May 11, 2007, Proposed Rule
On May 11, 2007, HUD published a proposed rule (72 FR 27047) for
public comment to codify standards regarding the use of gifts as a
source of the mortgagor’s investment in the mortgaged property, and to
also specify prohibited sources for a mortgagor’s investment. The
proposed rule established that a prohibited source of downpayment
assistance is a payment that consists, in whole or in part, of funds
provided by any of the following parties before, during, or after
closing of the property sale: (1) The seller, or any other person or
entity that financially benefits from the transaction; or (2) any third
party or entity (referred to as a “donor'’) that is reimbursed
directly or indirectly by any of the parties listed in clause (1).
As discussed in the proposed rule, FHA’s primary concern with these
transactions is that the sales price is often increased to ensure that
the seller’s net proceeds are not diminished, and such increase in
sales price is often to the detriment of the borrower and FHA. A
Government Accountability Office (GAO) report released in 2005 entitled
“Mortgage Financing: Actions Needed to Help FHA Manage Risks from New
Loan Products’ (GAO Mortgage Financing Report) stated that Fannie Mae
and Freddie Mac do not allow seller-related contributions to the
downpayment, and that seller-related contributions could contribute to
an overvaluation of the price of the property (GAO Mortgage Financing
Report, at page 16).
In May 2006, the Internal Revenue Service (IRS) addressed these
same concerns by issuing Revenue Ruling 2006-27, which provides
guidelines on organizations that may provide downpayment assistance to
homebuyers and qualify as tax-exempt charitable or educational
organizations under Internal Revenue Code (IRC) section 501(c)(3), and
those that do not qualify for this tax-exempt status. The IRS, in its
press announcement of the ruling, stated that funneling downpayment
assistance from sellers to buyers through “self-serving, circular-
financing arrangements'’ is inconsistent with operation as a section
501(c)(3) charitable organization. The IRS stated that, in a typical
scheme, there is a direct correlation between the amount of the
downpayment assistance provided to the buyer and the payment received
from the seller, the seller pays the organization only if the sale
closes, and the organization usually charges an
[[Page 56003]]
additional fee for its services. The IRS noted that so-called charities
that manipulate the system do more than mislead honest homebuyers;
these organizations ultimately cause an increase in the cost of the
home and damage the image of honest, legitimate charities. (See IRS
News Release of May 4, 2006, at http://www.irs.gov/newsroom/article/0
,id=156675,00.html.)
As the IRS also noted in its press release, inflated sales prices
are often found on properties purchased with downpayment assistance
from seller-funded nonprofit programs. Unlike true gifts that reduce
the amount of the purchase price financed by the homeowner, such seller
contributions increase the sales price of the home and result in higher
mortgage payments.
Given that seller-funded gift programs thrive in stagnant or
depreciating housing markets, the risk to FHA increases if FHA cannot
recover the full amount owed when FHA acquires and resells a home that
had been purchased by a participating borrower who had defaulted on the
FHA-insured loan. While these situations represent a financial burden
for FHA and taxpayers, of equal if not greater concern, is that they
hurt the families who lose their homes and the neighborhoods in which
those homes are located.
III. This Final Rule
For the foregoing reasons, HUD is proceeding, through this final
rule, to codify the regulations submitted for public comment in the May
11, 2007, proposed rule. This final rule makes the following change to
the May 11, 2007, proposed rule in response to public comment. This
final rule clarifies in Sec. 203.19(f) that a tribal government or a
tribally designated housing entity (TDHE), as defined at 25 U.S.C.
4103(21), is a permissible source of downpayment assistance.
Additionally, the final rule revises in Sec. 203.19(f) the description
of tax-exempt organizations that are permissible sources of gifts to
more closely align this description with the description used by IRS of
such organizations.
In addition, notwithstanding the effective date provided under the
DATES caption of this rule, pursuant to an April 1998 settlement
agreement resolving litigation between the Nehemiah Progressive Housing
Development Corporation (Nehemiah) and HUD, the effective date shall be
March 31, 2008 for the Nehemiah downpayment assistance program
described in the settlement agreement between Nehemiah and HUD.
While this rule prevents sellers from funding downpayments in their
own home sales transactions, the rule is not intended to preclude
sellers from contributing to charitable organizations that provide
downpayment assistance that is unrelated in any manner to any
properties sold by the seller. In addition, the rule is not intended to
preclude reasonable assistance with closing costs not related to the
minimum investment, which may be permitted under local practice.
Nothing in this rule changes HUD’s policy of allowing builders and
other sellers to offer cash incentives to homebuyers, provided that any
cash or cash equivalent given to a homebuyer before, at, or after
closing results in a proportionate reduction to the mortgage; an amount
which the homebuyer then would have to provide as additional funds at
closing. The primary focus of this rule is to establish appropriate
standards for downpayment assistance to a homebuyer that is categorized
as a gift.
IV. Discussion of Key Issues Raised by Public Commenters on Proposed
Rule
The public comment period for the May 11, 2007, proposed rule was
initially set to close on July 10, 2007, but HUD extended the comment
period to August 10, 2007. HUD received approximately 15,000 public
comments on the proposed rule. The overwhelming majority of these
comments consisted of brief statements opposing HUD’s rule, with the
majority also submitting their comments in a standard similar format
and wording, and urging HUD not to eliminate downpayment assistance in
connection with FHA-insured mortgages. However, a number of comments
supported the rule, and approved of FHA’s efforts to harmonize its
regulations regarding downpayment assistance with recent rulings of the
IRS. These commenters shared HUD’s concerns about home price inflation
and the associated risks for increased delinquency and foreclosure.
They stated that inflated home prices affect a community’s housing
market, and can magnify existing housing affordability problems.
The following provides a summary of the major themes and issues
raised during the public comment period on the proposed rule.
Comment: HUD should not eliminate downpayment assistance, but
regulate such assistance, or establish standards for downpayment
supported loans, including taking action to improve appraisals and
require stricter underwriting and a higher insurance premium for such
loans.
HUD response: Many commenters, through their statements urging HUD
not to eliminate downpayment assistance, indicated that they believed
the May 11, 2007, proposed rule would eliminate all downpayment
assistance. HUD’s May 11, 2007, rule did not propose to eliminate
downpayment assistance, but rather proposed to regulate such assistance
as the commenters requested. Additionally, HUD is not eliminating all
privately funded downpayment assistance. Such assistance is permitted,
for example, from family members, the borrower’s employer, state or
local governments, charitable organizations that do not rely upon a
party with a financial interest in the transaction for downpayment
assistance, or labor organizations. The proposed rule, however, did
propose to preclude as acceptable downpayment assistance, assistance
that, in whole or in part, is funded by the seller or any other person
or entity that financially benefits from the transaction or any third
party or entity that is reimbursed, directly or indirectly, by the
seller or any other party that financially benefits from the
transaction.
Comment: Although downpayment assistance presents risks, HUD should
address what an acceptable level of risk is, and determine how the risk
can be maintained at or below that level.
HUD response: Based on HUD’s analysis of its loan portfolio going
back to 1998, HUD has assessed that risk and has determined that there
is 2 to 3 times greater risk of default and claim with purchase loans
that receive downpayment assistance from the seller or other persons or
entities that financially benefit from the sale of a home to the
borrower than from all other loans with downpayment assistance from all
other sources.
For example, for loans endorsed for insurance in Fiscal Year (FY)
2001, the cumulative claim rate as of July 2007 was 7.1 percent for
loans with downpayment assistance from relatives, public agencies, and
employers, but 15.8 percent for loans with downpayment assistance from
nonprofit entities that received reimbursements from sellers. A
cumulative claim rate is calculated by dividing the number of claims
that have occurred to date by the number of loans endorsed in a
particular fiscal year. In conjunction with the FY 2006 Actuarial
Review of the Mutual Mortgage Insurance Fund, FHA’s independent
actuaries estimated that the ultimate claim rate for 30-year fixed-rate
purchase loans endorsed in FY 2008 would be 11.04 percent if they did
not have seller-funded downpayment assistance, but 23.06 percent if
they did. An ultimate claim rate is defined as the total number of
[[Page 56004]]
claims expected to occur over the 30-year life of a book of business
divided by the total number of loans endorsed in a particular fiscal
year. The difference between these rates represents the difference
between acceptable and unacceptable levels of risk to the FHA insurance
fund.
In addition, HUD has determined that loans with downpayment
assistance from sellers or other parties with a financial interest in
the transaction are also associated with a higher loss rate than other
single family loans insured by FHA. In other words, homeowners with
this type of downpayment assistance have a two to three times higher
possibility of losing their home. This rule, therefore, is HUD’s effort
to mitigate an unacceptable level of risk.
Comment: HUD can mitigate the risk from downpayment assistance by
requiring full disclosure of the amount of downpayment assistance for
underwriting and to appraisers.
HUD response: FHA requirements currently require disclosure of the
full amount of downpayment assistance.
Comment: Rather than eliminate downpayment assistance, HUD can
further mitigate risk by requiring a complete home inspection, to avoid
potentially huge repair costs to the homeowner. HUD could also require
the owner to obtain a homeowner’s warranty for a specified period of
time, to avoid high repair cost as a potential source of default and
foreclosure. Alternatively, HUD could require downpayment assistance
companies to offer mandatory risk mitigation tools or offer insurance
to the buyer.
HUD response: HUD reiterates that downpayment assistance is not
being eliminated by this rule. The commenters’ recommendations are
noted, but the suggested actions are outside the scope of the present
rule. In addition, the recommendations pertaining to warranty or
insurance does not deal directly with sales price inflation, which is a
separate issue from repair costs a homeowner may face after purchasing
a home.
Comment: Price inflation does not arise from downpayment
assistance, but from the appraisal process. The appraisal process
should be reformed, for example, by establishing a blind pool appraiser
selection process for loans with downpayment assistance.
HUD response: Downpayment assistance can be an independent source
of price inflation separate from, or in conjunction with, any price
inflation that may arise from the appraisal process, which, while noted
by HUD, is an issue beyond the scope of the present rule. HUD has
already taken steps to address the appraisal issue. HUD’s Appraiser
Roster, for which the regulations can be found in 24 CFR part 200,
subpart G, is intended to ensure fairness and accuracy in the appraisal
process for FHA-insured mortgages.
Comment: HUD should make rules to deal with predatory lenders and
lenders who charge outrageous rates. Such lenders are the real problem,
rather than downpayment assistance. It is a lender’s responsibility to
ensure that people cannot buy more than they can afford, and
downpayment assistance should not be affected because of bad lender
decisions.
HUD response: HUD acknowledges that problems may arise at each
stage of, and with each party to, a complex transaction such as
purchasing a home. In addition, problems change over time, and the way
any given problem is addressed also changes. This rule addresses an
aspect, other than predatory lending, of the home purchase transaction
that has been identified as a problem. HUD notes the recommendation is
outside the scope of this rule. Although HUD does not regulate non-FHA
lending practices, HUD has taken steps, such as issuing rules on
property flipping, appraisal reform, and lender accountability, to
address predatory lending, and continues to monitor this problem and
develop new ways of addressing it. FHA has also taken steps to mitigate
mortgage insurance losses with the development and implementation of
Credit Watch, Neighborhood Watch, and Appraiser Watch. FHA also
strengthened its education efforts by doubling housing counseling grant
funds, creating anti-predatory lending brochures, featuring anti-
predatory lending messages in advertising, and increasing training
opportunities for FHA’s program participants.
Comment: HUD should require homebuyer education instead of
eliminating downpayment assistance.
HUD response: HUD notes that it is not eliminating downpayment
assistance but, as requested by many commenters, is establishing
standards for the use of downpayment assistance in FHA-insured
mortgages. HUD encourages and supports homebuyer education, and for
some programs requires homebuyer counseling, but addressing that
subject is beyond the scope of the current rule.
Comment: HUD should permit sellers to directly contribute
downpayment assistance to buyers without a middleman.
HUD response: HUD has determined that contributions to downpayment
assistance from sellers and other parties with a financial interest in
the transaction, whether direct or indirect, present an unacceptable
level of risk for FHA-insured mortgages.
Comment: Rather than doing away with downpayment assistance, HUD
should increase FHA loan limits.
HUD response: It is unclear how increasing loan limits would
mitigate the risk that HUD has experienced with seller-funded
downpayment assistance.
Comment: Rather than doing away with downpayment assistance, HUD
should enforce Mortgagee Letter 02-02.
HUD response: While noting again that HUD is not ending downpayment
assistance, HUD also notes that Mortgagee Letter 02-02 addresses a
different issue than that addressed by this rule. Mortgagee Letter 02-
02 addresses a situation where a seller or a nonprofit entity has paid
a homebuyer’s consumer debt, which then makes it easier for the buyer
to meet debt to income ratios. Further, HUD does enforce Mortgagee
Letter 02-02. The focus of this rule is downpayment assistance provided
by a party with a financial interest in the transaction.
Comment: Rather than doing away with downpayment assistance, HUD
should limit the seller contribution to 3 percent.
HUD response: HUD reiterates that it is seeking to establish
reasonable and prudent standards for the use of downpayment assistance,
and that downpayment assistance from a seller or other party with a
financial interest in the transaction presents an unacceptable risk to
FHA.
Comment: Downpayment assistance should be permitted in the 6
percent seller concession for closing costs that FHA allows.
HUD response: The downpayment differs from closing costs in that
the downpayment creates equity in the property for the buyer and
closing costs do not. As such, the downpayment cannot be included in
the mortgage, whereas certain closing costs are permitted to be
included in the mortgage. For this reason, downpayment assistance
cannot be treated as closing costs.
Comment: Downpayment assistance helps first-time, low-credit, and
low-income homebuyers, who are often minority or single-parent
households. HUD should not eliminate or limit such assistance.
HUD response: As noted, HUD is not eliminating downpayment
assistance but is establishing reasonable and prudent standards for the
use of downpayment assistance. All homebuyers will benefit if the debt
[[Page 56005]]
burdens of homeownership are set more realistically and if price
inflation at the time of purchase is mitigated. Further, mortgage
insurance premiums would likely have to be increased without these
standards, which would negatively impact all homebuyers. In addition,
an analysis of HUD Real Estate Owned (REO) sales since 2004 shows that
sales proceeds from this type of downpayment assistance is 3 to 6
percent less than other REO sales. This suggests that the sales prices
of such properties may have been inflated.
Comment: This rule will negatively impact the market devastated by
Hurricane Katrina by reducing the number of families willing to rebuild
or buy in that market.
HUD response: A number of special incentives and forms of
assistance, such as disaster relief loans and grants and lower buyer
investment requirements, are available in disaster zones such as that
created by Hurricane Katrina. FHA, for example, offers eligible
disaster victims section 203(h)-insured mortgages, which require no
downpayment. Such assistance and requirements appropriately leave
homebuyers in a much more favorable position to reestablish
homeownership. The reasonable and prudent standards established by this
rule will help to ensure that the benefits provided to disaster victims
are not undercut by burdensome price and debt inflation.
Comment: The rule will have a negative impact on FHA’s business,
because of the substantial percentage of loans supported by downpayment
assistance. The rule would immediately cause a huge contraction in
FHA’s business.
HUD response: HUD does not intend to maintain or expand the volume
of FHA business at the expense of sound and sustainable purchases by
homebuyers. Such a result would be contrary to the public purposes
underlying FHA’s business.
Comment: The rule is not supported by data. The analysis of the
Government Accountability Office (GAO) found that downpayment-assisted
loans had higher default and claim rates than other FHA loans, but did
not segregate the effects of downpayment assistance from those of low
downpayments and low credit ratings. HUD should conduct additional
research because the data presented does not appear to be conclusive.
HUD response: HUD has collected and analyzed additional data
through its portfolio analysis. This analysis provides additional
verification of the higher level of risk associated with downpayments
funded by a seller or other financially interested party compared to
downpayments funded from other sources, which HUD continues to permit.
HUD’s analysis has also established that loans with downpayment
assistance from sellers or other parties with a financial interest in
the transaction have a higher loss rate associated with them and
currently represent 30 percent of FHA’s REO portfolio.
Comment: Prohibition of downpayment assistance would harm otherwise
qualified borrowers, who will have to delay or forego homeownership or
turn to the subprime market.
HUD response: HUD notes again that the current rule does not
prohibit or eliminate downpayment assistance, but only establishes
reasonable and prudent standards for its use that will benefit, and not
harm, homebuyers. The purpose of the rule is to mitigate the harm
caused by downpayment assistance from sources with a financial interest
in the transaction, and help assure continued homeownership. As
previously stated, downpayment assistance from parties with a financial
interest in the transaction have higher default and claim rates and
higher loss rates.
Comment: Downpayment assistance should not be prohibited because it
provides borrowers instant equity when they purchase a home.
HUD response: HUD agrees, and the rule does not prohibit all
downpayment assistance.
Comment: The rule will have a negative impact on the housing market
and on the economy.
HUD response: To the contrary, HUD expects that the reasonable and
prudent approach taken by this rule will have a positive impact on the
housing market and on the economy by reducing the number of mortgages
that would otherwise default and go into foreclosure, driving down
property values and negatively impacting a community’s tax base and
economic viability.
Comment: HUD should partner with downpayment assistance programs to
promote homeownership. A zero downpayment program or downpayment
assistance is needed to address the subprime crisis, because there is
little or no equity in a substantial number of troubled properties. HUD
should postpone action on downpayment assistance until 100 percent
financing is permitted.
HUD response: HUD does sponsor downpayment assistance programs
through such programs as the American Dream Downpayment Initiative, and
others in which the assistance is not linked to the financial interest
of parties other than the homebuyer. HUD currently does not have the
authority for a zero downpayment program; however, a zero downpayment
program would not address this issue of the financial interest of the
providers of downpayment assistance. Reasonable standards would still
be necessary for downpayment assistance, even if there is no
requirement for a minimum investment by the homebuyer.
Comment: HUD is replacing a private sector program that works and
is forcing people to rely on government bureaucracy. In addition,
government-sponsored downpayment assistance has eligibility
requirements such as income limits. Private downpayment assistance is
available to anyone. The rule will vastly increase the size and cost of
government.
HUD response: Many of the comments recognized the value of, and the
need for, reasonable standards, and the eligibility requirements noted
here provide such standards. The cost of government is controlled by
prioritizing the availability of benefits to those who need them most.
Private downpayment assistance that does not rely upon a party with a
financial interest in the transaction is not affected by this rule,
which establishes reasonable and prudent standards for the use of
downpayment assistance. This rule addresses certain forms of
downpayment assistance that increase the cost of government because
they increase FHA mortgage insurance payments for losses attributable
to loan defaults and lower REO sales proceeds.
Comment: A developer should be able to offer buyers incentives to
purchase properties.
HUD response: A developer’s ability to offer incentives, such as a
reduced purchase price or a lower interest rate, is not affected by
this rule. These incentives are distinguishable from downpayment
assistance, and only the provision of downpayment assistance by a
seller or a party with a financial interest in the transaction is
prohibited by this rule.
Comment: Real estate agents should be permitted to use their
commission to fund the downpayment where the real estate agent is the
buyer/mortgagor, because the commission is earned, and not a seller
contribution or gift.
HUD response: The circumstance described by this comment are not
affected by this rule, because a borrower’s earned income, such as a
real estate agent’s commission, is a permissible source of downpayment.
Comment: The rule should not exclude Indian tribes or tribally
designated housing entities (TDHEs)
[[Page 56006]]
from the governments considered in the rule. In taking this significant
action, HUD did not follow its own policy on tribal consultation and
the rule should be withdrawn until HUD follows the consultation
procedure.
HUD response: The rule did not intend to exclude Indian tribes or
TDHEs from the governments considered in the rule. This final rule
specifically clarifies the treatment of downpayment assistance from
Indian tribes and TDHEs. As with other rules that are generally
applicable and, thus, also incidentally apply to Indian tribes, HUD did
not undertake tribal consultation. HUD’s tribal consultation policy
states, “Tribal Coordination, Collaboration and Consultation applies
when any proposed policies, programs or actions are identified by HUD
as having a substantial direct effect on an Indian tribe.'’ (66 FR
49785). Since the effect of the rule on tribes is only incidental and
since the rule applies to all FHA-insured single family mortgages, the
tribal consultation policy is not applicable. All providers of
downpayment assistance are subject to the general standard of this rule
and their downpayment assistance cannot be funded by sellers or other
parties with a financial interest in the transaction. HUD follows, and
will continue to follow, its tribal consultation policy when identified
by HUD as applicable.
Comment: HUD should clarify whether downpayment assistance provided
by grantees under government programs is permitted.
HUD response: Grant funds made available to assist homebuyers may
be used for downpayment assistance because such funds are not linked to
the sources addressed by this standard, namely, the seller or other
parties with a financial interest in the transaction. Grantees act with
a public purpose, using government-provided funds, rather than acting
with a private financial interest in the transaction or using funds
from parties with a financial interest in the transaction.
Comment: HUD should provide a definition of “family members.'’
HUD response: The term “family member'’ is defined at section
201(e) of the National Housing Act (12 U.S.C. 1707(e)) and governs
regulations issued for FHA programs under section 203 of the National
Housing Act, such as the current rule.
Comment: HUD should permit loans for downpayment assistance and
second mortgages, including loans from the seller and from governments.
HUD response: The rule continues to permit loans authorized by
statute as a source for the minimum investment. Loans from sellers are
not authorized by statute.
Comment: HUD should clarify that this rule does not prohibit
assistance from nonprofit developers.
HUD response: HUD permits downpayment assistance from charitable
organizations. Downpayment assistance from nonprofit developers is
permitted as long as it complies with this general standard and their
downpayment assistance cannot be funded by sellers or other parties
with a financial interest in the transaction.
V. Findings and Certifications
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed the rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that the rule is a “significant regulatory action,'’ as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). The docket file was available for
public inspection in the Regulations Division, Office of General
Counsel, Room 10276, 451 Seventh Street, SW., Washington, DC 20410-
0500.
Environmental Review
A Finding of No Significant Impact was not required for the
proposed rule. Under 24 CFR 50.19(b)(6), the rule is categorically
excluded from the requirements of the National Environmental Policy Act
(42 U.S.C. 4332 et seq.) and that categorical exclusion continues to
apply.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The purpose of this rule, as noted in the preamble, is to establish
standards regarding the use of gifts by borrowers with an FHA-insured
mortgage–primarily standards that would address gifts by charitable
organizations–as a source of an FHA mortgagor’s investment in the
mortgaged property. To date, HUD’s practice has been to limit
permissible sources of gifts to family members, governmental agencies,
employer of the mortgagor, labor union of the mortgagor, or charitable
organizations. HUD is not narrowing the sources of gifts through this
rulemaking, but rather is striving to ensure that gifts are gifts and
that, especially in the situation of gifts from charitable
organizations, the gift is not a quid pro quo between the homebuyer’s
purchase of the property and the seller’s “contribution'’ or payment
to the charitable organization.
The prohibited sources of downpayment assistance, as structured in
the final rule, are narrow and should not encompass a substantial
number of small entities that are engaged in downpayment assistance to
homebuyers, which, to date, have primarily been charitable
organizations with tax-exempt status. Charitable organizations, large
or small, remain eligible to provide downpayment assistance to FHA
mortgagors, subject to meeting the requirements of Sec. 203.19, as
revised by this final rule.
Accordingly, the undersigned certifies that this rule will not have
a significant economic impact on a substantial number of small
entities.
Executive Order 12612, Federalism
Executive Order 12612, (entitled “Federalism'’) prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of section 6 of the Executive Order are met. This final
rule does not impose substantial direct compliance costs on state and
local governments or preempt state law within the meaning of the
Executive Order. This final 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, approved March 22, 1995) established requirements for federal
agencies to assess the effects of their regulatory actions on state,
local, and tribal governments, and the private sector. This final rule
does not impose any federal mandates on any state, local, or tribal
governments or the private sector within the meaning of the 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 program is 14.117. This final rule
also applies through cross-referencing to FHA mortgage insurance for
condominium units (14.133), and other smaller single family programs.
[[Page 56007]]
List of Subjects in 24 CFR Part 203
Loan programs–housing and community development, Mortgage
insurance, Reporting and recordkeeping requirements.
0
Accordingly, the Department amends 24 CFR part 203, as follows:
PART 203–SINGLE FAMILY MORTGAGE INSURANCE
0
1. The authority citation for part 203 continues to read as follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42
U.S.C. 3535(d).
0
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 cost of acquisition, which is 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) Mortgagor’s 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(b); or
(2) A disaster victim meeting the requirements of Sec. 203.18(e).
(c) Restrictions on seller funding. Notwithstanding paragraphs (e)
and (f) of this section, the funds required by paragraph (a) of this
section shall not consist, in whole or in part, of funds provided by
any of the following parties before, during, or after closing of the
property sale:
(1) The seller or any other person or entity that financially
benefits from the transaction; or
(2) Any third party or entity that is reimbursed, directly or
indirectly, by any of the parties described in paragraph (c)(1) of this
section.
(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 loan or a gift from any person, except as provided
in paragraphs (e) and (f) of this section, respectively.
(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.
(2) Examples. The following loans are authorized 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 or held by, or insured by, a federal, state, or
local government agency or instrumentality under terms and conditions
approved by the Secretary;
(iii) A loan made or held by, or insured by, a tribal government or
an agency or instrumentality thereof, including a tribally designated
housing entity as defined at 25 U.S.C. 4103(21), which is treated as a
state or local government under applicable state or local law, under
terms and conditions approved by the Secretary; and
(iv) A federal disaster relief loan.
(f) Permissible sources of gifts. The following are permissible
sources of gifts or grants used for the mortgagor’s minimum investment
under paragraph (b) of this section:
(1) Family members and governmental agencies and instrumentalities
eligible under paragraphs (e)(2)(i) and (ii) of this section;
(2) A tribal government or an agency or instrumentality thereof,
including a tribally designated housing entity, as defined at 25 U.S.C.
4103(21);
(3) An employer or labor union of the mortgagor;
(4) Organizations described in section 501(c)(3) and exempt from
taxation under section 501(a) of the Internal Revenue Code;
(5) Disaster relief grants; and
(6) Other sources as may be approved by the Secretary on a case-by-
case basis.
Dated: September 26, 2007.
Brian D. Montgomery,
Assistant Secretary for Housing–Federal Housing Commissioner.
[FR Doc. 07-4846 Filed 9-28-07; 8:45 am]
BILLING CODE 4210-67-P
