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