www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 January 25, 1991 Mortgagee Letter 91-4 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Development - Acceptance of Individual Residential Water Purification Equipment Questions have arisen concerning the use of individual water purification units to provide an acceptable supply of water from individual wells to properties financed with HUD/FHA insured mortgages. In this Mortgagee Letter, the Department is clarifying the requirements which must be met to assure compliance with the conditions imposed by current HUD property standards, particularly in light of Section 424 of the Housing and Community Development Act of 1987 (Attachment A). A. With respect to new construction for which a loan-to-value ratio (LTV) greater than 90% is proposed, the use of water equipment to render water safe and potable would violate 24 CFR 200.926d(f)(2)(ii) and is not permitted. The Department anticipates the publication of a proposed rule designed to eliminate this restriction. Public comments will be solicited on the proposed changes. B. With respect to existing properties and new construction for which an LTV of 90% or less is proposed, including rehabilitation loans under Section 203(k), reliance on water equipment is governed by Handbook 4905.1, Requirements for Existing Housing, paragraph 2-5(a)(1). That paragraph states that each residential unit must be served by a continuing supply of safe and potable water. Paragraph 2-5 (b)(1) explains that in the case of an individual water supply the water quality must meet the requirements of the health authority having jurisdiction. If the local health authority having jurisdiction does not have specific requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) shall apply. For properties under item B above, the following requirements must be complied with prior to water purification equipment being acceptable. The mortgagee must provide appropriate documentation with the submission for insurance endorsement that addresses each of these requirements. _____________________________________________________________________ 2 1. Such equipment must be approved by the National Sanitation Foundation. 2. A local health authority certification must be obtained and submitted to HUD which certifies to the following: a. That a point-of-entry water purification system is presently operating on the property (point-of-use systems are not acceptable), b. That the system is sufficient to assure an uninterrupted supply of safe and potable water, c. That the water supply, when treated by such equipment, meets the requirements of the local health authority, or, alternatively, is within the contaminant levels set by EPA. d. That there exists a Plan providing for the monitoring, servicing, maintenance, and replacement of the water equipment, which Plan meets the requirements of paragraph 7. 3. The prospective mortgagor must be notified in writing prior to the sales contract being signed that the property has a hazardous water supply that requires treatment for it to be acceptable for human consumption. The specific contaminant(s) and the related health hazard(s) must be identified. Also, a good faith estimate of the maintenance and replacement costs of the equipment must be provided in writing with the notification. A copy of the notification statement including cost estimates, dated prior to the date of the sales contract, and signed by the prospective mortgagor must accompany the submission for insurance endorsement. If the sales contract is signed prior to the disclosure being provided to and signed by the prospective mortgagor, another sales contract will have to be executed after the information is provided to the prospective mortgagor and he signs the disclosure. 4. The prospective mortgagor must sign the certification included as Attachment B to this letter at the time the application for mortgage credit approval is signed. This certification must be submitted to HUD. _____________________________________________________________________ 3 5. A service contract between the prospective mortgagor and an organization which is specifically approved by the local health authority to carry out the provisions of the plan for servicing, maintenance, repair and replacement of the water purification equipment must be signed prior to closing. A signed copy must be provided HUD. 6. The mortgagee must establish and maintain an escrow account which provides for the accumulation of funds paid with his monthly mortgage payment to assure proper maintenance and replacement of the equipment. The amount of funds to be collected by the mortgagee shall be based upon information provided by the manufacturer for the maintenance and replacement of the water purification equipment and the charges anticipated by the organization under the service contract. The initial monthly escrow amount shall be stated in the Plan. Disbursements from the account are limited strictly to costs associated with the normal servicing, maintenance, repair or replacement of the water purification equipment to the parties named in the Plan, which shall include the maintenance organization, or its successor, or any agency approved by the local health authority to perform testing or other services on its behalf. So long as water purification is necessary and the mortgage is insured by HUD, the mortgagee must maintain the escrow account. 7. With respect to the Plan which must be approved and certified by the local health authority, certain conditions must be met. The certification by the local health authority must assure that the following requirements are met: a. The Plan sets forth the respective responsibilities to be assumed by each of the parties who will implement the Plan, i.e., the local health authority, the maintenance organization, the mortgagor and the mortgagee. In part, the Plan must state the responsibilities of the local health authority for monitoring and enforcing performance of the maintenance organization, including any successor that the authority may be compelled to name. By its certification of the Plan, the local health authority documents its acceptance of these responsibilities and the Plan should so indicate. _____________________________________________________________________ 4 b. The Plan provides for the monitoring of the operation of the water purification equipment as well as for servicing (including disinfecting), repairing and replacing the system, as often as needed, taking into consideration its design, anticipated use, and the type and level of contaminants present. Such services must be performed by an organization which is specifically qualified to install, service, repair and replace water purification devices and other system components, such as piping, storage, and power supply. The organization must be approved by the local health authority. c. Under the Plan, responsibility for monitoring the performance of the organization and for assuring that the system is properly serviced, repaired, and replaced rests with the public agency that has given its approval to the Plan. The Plan must confer on the public agency all power necessary to effect compliance by the organization. Such power shall include the ability of the public agency to discharge the organization from its responsibilities for cause and the appointment of a successor organization. d. The Plan provides for the mortgagor to make periodic escrow payments as called for by the mortgage and for the mortgagee to disburse funds from the account as required, to the appropriate party or parties. Special language to be included as part of the mortgage instrument may be obtained from HUD. e. The Plan provides that in the event the dwelling is refinanced, sold or otherwise transferred with a HUD/FHA insured mortgage, the Plan shall continue in full force and effect. The plan shall impose an obligation on the mortgagor to notify the purchaser or transferee of the necessity for the system and for its proper maintenance, as well as the obligation to make escrow payments and shall further require the mortgagor to furnish the purchaser with a copy of the Plan. _____________________________________________________________________ 5 f. The Plan provides that an analysis of the water supply shall be obtained from the local health authority no less than once a year but more frequently if deemed necessary by the local health authority or the organization. If you have questions, contact the HUD Field Office in your jurisdiction. Very Sincerely yours, Arthur J. Hill Acting Assistant Secretary for Housing-Federal Housing Commissioner Attachments _____________________________________________________________________ Attachment A SEC. 424. APPROVAL OF INDIVIDUAL RESIDENTIAL WATER PURIFICATION OR TREATMENT UNITS. (a) IN GENERAL.--When the existing water supply does not meet the minimum property standards established by the Department of Housing and Urban Development and a permanent alternative acceptable water supply is not available, a continuous supply of water may be provided through the use of approved residential water treatment equipment or a water purification unit that provides bacterially and chemically safe drinking water. (b) APPROVAL PROCESS.--A performance-based approval of the equipment or unit and the maintenance, monitoring, and replacement plan for such equipment or unit shall be certified by field offices of the Department of Housing and Urban Development based upon general standards recognized by the Department as modified for local or regional conditions. As a part of such approved plan, a separate monthly escrow account may be required to be established through the lender to cover the cost of the approved yearly maintenance and monitoring schedule and projected replacement of the equipment or unit. _____________________________________________________________________ Attachment B Mortgagor's Certificate. I hereby acknowledge and understand that the home I am purchasing has a water purification system which I am responsible for maintaining. I understand that the individual water supply is unsafe for consumption unless the system is operating properly. I am aware that if I do not properly maintain the system, the water supply will not be purified or treated properly, thereby rendering the water supply unsafe for consumption. I also understand that the Department of Housing and Urban Development does not warrant the condition of the property, is not authorized to give me any money for repairs to the water Purification system, and has relied upon the local health authority to assure that the water supply, when processed by properly maintained equipment, is acceptable for human use and consumption. ________________________________ Mortgagor's Signature and date