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U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

April 06, 1994
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 94-16
     TO:  All Approved Mortgagees
     SUBJECT:  Tiered Pricing Final Rule
 
          The purpose of this letter is to announce the publication of the
     Tiered Pricing Final Rule and explain its provisions.  The Rule was
     published February 25, 1994 and became effective March 28, 1994.  The
     Rule implements the provisions of the Cranston-Gonzalez National
     Affordable Housing Act of 1990 and will appear at 24 CFR Part 202.20.
 
          Under the Rule a lender's customary lending practices may not
     provide for a variation in "mortgage charge rates" (discount points,
     origination fee and other such fees) exceeding two percentage points
     on its FHA-insured single family mortgages within a geographic area.
     Any variation within two percentage points must be based on actual
     variations in fees or costs to the lender to make a loan.  Variations
     may take into account the value of servicing rights generated by
     making the loan and other related income to the lender.
 
          The prohibition against tiered pricing includes companies who
     purchase loans from originators.  If the policies of a purchaser have
     the effect of leading to a violation of the tiered pricing
     requirement, the purchaser will be determined to have violated the
     requirement.  This provision includes sponsors of loan correspondents
     but also extends to any purchaser of loans on the secondary market.
 
          The tiered pricing requirement applies to all single family
     programs.  However, the rule only provides for pricing comparisons
     among mortgages of the same mortgage type.  For HUD's initial
     monitoring under this rule, all of the lender's section 203(b) and
     234(c)(condominium) mortgages in an area, including adjustable rate
     mortgages, will be considered one mortgage type.  Section 203(k)
     mortgages will be considered a separate mortgage type.  HUD has
     reserved the right to further define mortgage types if its monitoring
     experience demonstrates that additional types are necessary to avoid
     inappropriate comparisons of mortgages.
 
_____________________________________________________________________
 
          Whenever a lender makes a variation in pricing within the two
     percent, the lender must provide a justification.  A record of the
     justification must be maintained for a period of at least two years
     and must be made available to the Secretary upon demand.  Since
     lenders must already maintain a copy of a loan file for two years,
     this requirement should not be overly burdensome.  During routine
     reviews, the Department's Monitoring Division will review such
     justifications.
 
          A copy of the Final Rule is attached.  We recommend you study the
     preamble to the Rule in which we provide responses to comments we
     received from the industry.  This discussion further clarifies the
     Department's interpretation of tiered pricing.
 
          You are reminded that violation of these provisions will subject
     a lender to the various administrative sanctions available to the
     Department, including civil money penalties.  If you have any
     questions on tiered pricing, you may contact the Office of Lender
     Activities at (202) 708-1824.
 
Sincerely,
 

Nicolas P. Retsinas
Assistant Secretary For Housing
- Federal Housing Commissioner
 
Attachment
 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
 
Office of the Assistant Secretary for Housing-Federal Housing Commissioner
 
24 CFR Parts 201 and 202
 
 Docket No. R-94-1636; FR-3021-F-02
 
RIN 2502-AF29
 
Tiered Pricing
 
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
 
ACTION: Final rule.
 
SUMMARY: This rule implements section 203(t) of the National Housing Act.
That section prohibits tiered pricing involving a variation in mortgage
charge rates that exceeds two percentage points for FHA insured mortgages
made by a mortgagee in an area. The purpose of the rule is to eliminate a
mortgagee's discriminatory pricing of FHA insured mortgages in a particular
area that would either discourage home purchases or place an unfair burden
of costs on the borrower. The rule also implements section 539(a)(2) of the
National Housing Act by providing a procedure for requests for
determination of a mortgagee's compliance with tiered pricing restrictions
or compliance by a mortgagee or Title I lender with related prohibitions on
establishing minimum loan amounts.
 
EFFECTIVE DATE: March 28, 1994.
 
FOR FURTHER INFORMATION CONTACT: William Heyman, Director, Office of Lender
Activities and Land Sales Registration, Department of Housing and Urban
Development, room 9156, 451 Seventh Street SW., Washington, DC 20410,
Telephone Number (202) 708-1824; TDD telephone number (202) 708-4594.
(These are not toll-free numbers.)
 
SUPPLEMENTARY INFORMATION:
 
I. Introduction
 
The information collection requirements contained in this rule have been
approved by the Office of Management and Budget, under section 3504(h) of
the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520), and assigned OMB
control numbers 2502-0265 and 2502-0059.
 
Section 330(a) of the Cranston-Gonzalez National Affordable Housing Act,
entitled "Limitation on Tiered Pricing Practices," amended Section 203 of
the National Housing Act to add subsection (t). The new provision restricts
"tiered pricing" of single family FHA-insured mortgages. "Tiered
pricing" occurs when a mortgagee varies its charges for the same type of
mortgage in the same area, usually based on the principal amount of the
loan.
 
Under section 203(t), no mortgagee may make or hold FHA insured mortgages
if the customary lending practices of the mortgagee, as determined by HUD,
provide for variations of more than two percentage points in the mortgage
charge rate based on interest rate, level of discount points, loan
origination fees, or any other amount charged to a mortgagor by the
mortgagee with respect to a mortgage made within a designated area. The
section is concerned with lending practices that may unfairly impose costs
and charges that are higher for smaller loans than for larger loans.
 
HUD published a proposed rule on July 14, 1993, 58 FR 37885, with a request
for public comments. HUD received 37 public comments. More than half were
from State Bankers Associations; comments also were received from the
American Bankers Association, the Mortgage Bankers Association, and
mortgagees. The following section summarizes the principal points of the
public comments, explains how HUD has responded to the public comments, and
explains additional changes that HUD has made in the final rule.
 
II. Public Comments and Provisions of Final Rule
 
General
 
Most of the commenters agreed that tiered pricing in the form of excessive
variation in mortgage charge rates should be discouraged, but most
commenters also argued that the proposed rule would drive mortgagees away
from the FHA programs. The principal reasons cited were the failure of the
proposed rule to recognize legitimate differences in pricing based on the
fact that lower balance loans cost more to originate, and excessive
recordkeeping requirements in the proposed rule. HUD believes that the
commenters have overstated the burdensome effect of the proposed rule (as
distinguished from the statutory command). HUD has concluded, however, that
the lending community will benefit from additional information concerning
the manner in which HUD intends to apply the final rule. The following
discussion should provide additional information on HUD's intentions that
may alleviate some of the commenters' concerns.
 
Many commenters observed that the two percentage point limit on variation
in mortgage charge rates may force mortgagees to either suffer losses on
the smallest loans (which must still be offered due to an earlier statutory
provision) or overprice the largest loans. Either effect could lead
mortgagees to withdraw from FHA single family programs. In this rule, HUD
has attempted to interpret the statute in a way that preserves the ability
of mortgagees to participate profitably in FHA single family programs while
honoring the letter and spirit of the statute.
 
Calculation and Comparison of Mortgage Charge Rate
 
A. General
 
Many commenters expressed confusion over how mortgage charge rates would be
calculated and how HUD would determine which variations in charges were
acceptable. Mortgages will be compared to determine excess variations in
mortgage charge rates only if: (1) They are of the same mortgage type, (2)
from the same area and (3) the amounts charged by the mortgagee were
determined on the same day or during some other reasonably limited period.
Items 1 and 2 will be discussed in more detail later under separate
headings. The purpose of the comparison is to determine whether a
mortgagee's customary lending practices include either variations in
mortgage charge rates (determined primarily by the discount point spread
for each interest rate offered) that exceed two percentage points, or
lesser variations that are unrelated to variations in the mortgagee's
actual costs in making loans.
 
B. Two Percentage Point Variation
 
As explained in the preamble to the proposed rule, HUD's determination of
whether the permissible two percentage point variation is exceeded will
primarily be based on a review of discount points charged by the mortgagee.
The rule prevents a mortgagee from offering an interest rate only for
certain size loans. For any given interest rate offered in an area for a
mortgage type during the time period under review, mortgages should be
available to all applicants without a difference in discount points of
greater than two percentage points. Charges collected by the mortgagee for
third party services would not be considered for tiered pricing purposes.
HUD's experience is that all mortgagees typically will collect the maximum
1% origination fee so that the fee will be disregarded in reviewing
variations in charges.
 
HUD expects a mortgagee to charge a mortgagor only the origination fee,
discount points and interest to cover its costs (excluding payments for
third party services). HUD regulations do not permit mortgagees to charge
other fees such as document preparation fees or closing fees for services
provided by their own employees. (Some mortgagees are permitted to use
appraisers and/or inspectors on their staffs. For purposes of this rule,
the amounts collected by a mortgagee for the services of its staff
appraisers and/or inspectors are considered analogous to third party
services and are not included in mortgagee charges.)
 
Thus, for purposes of the two percentage point variation there will
ordinarily be no need to consider other fees or charges. Mortgagees that
establish other fees or charges should be certain that they are acceptable
to the local HUD Office as reasonable and customary. Mortgagees are also on
notice that HUD will consider them in determining compliance with the two
percentage point limitation on variations even if the spread in discount
points among mortgages is less than two percent.
 
Several commenters noted that any flat fee will necessarily have a greater
impact on the mortgage charge rate for a small loan than for a larger loan,
making it more difficult to comply with the two percent variation. It is
probable that Congress did not expect significant flat fees for services to
be charged by the mortgagee because such services are ordinarily to be
compensated through the 1% origination fee. However, the statutory
definition of mortgage charge rate refers to "any other amount charged to
a mortgagor with respect to an insured mortgage." The Department
interprets this language as excluding flat fees for mortgagee services
distinct from the actual making of the loan (justifying the treatment of
staff appraisers and staff inspectors described above) but the Department
finds no blanket authority to disregard any flat fees charged by the
mortgagee for any part of its role in the actual underwriting and closing
process.
 
Two commenters addressed the proposed 202.20(d) which would require that
any interest rate offered for a mortgage type be available for mortgages of
any principal amount. HUD has responded to one comment by clarifying in the
final rule that this requirement applies only within an area as defined by
the rule. Another commenter argued that the proposed rule conflicted with
the tiered pricing statute because the proposed rule would require a
mortgagee to recover a variance in costs in making different loans through
variances in points rather than interest rates, whereas the statute left to
the mortgagee the discretion to recover differences through either means or
a combination of them. The commenter is correct that the statute refers to
variations between mortgage charge rates instead of variations in discount
points. If HUD permitted certain interest rates to be reserved for certain
size loans, HUD would have needed to propose a rule that in all cases
required a mathematical calculation of a specific mortgage charge rate,
taking into account at least interest rates, discount points and
origination fees. Under such an approach a mortgagee could have reserved
certain interest rates for certain loans.
 
Such an approach may have been closer than the proposed rule to the literal
language of the statute. HUD determined that the statute permitted a
different and less complex approach. The compliance burden on mortgagees as
well as the monitoring burden on HUD is greatly reduced if the primary
comparison between mortgages is limited to discount points only so that no
calculation is required. A single commenter objected to this approach,
while nearly all commenters urged a reduction in regulatory burden. HUD
will use its simplified approach of focussing on one component of the
mortgage charge rate (discount points) in lieu of a more complex and
burdensome approach.
 
C. Variation in Costs
 
For a mortgagee which is in compliance with the two percentage point
limitation on variation in mortgage charge rates, the statute also requires
that HUD ensure that any variations in mortgage charge rates "are based
only on actual variations in fees or costs to the mortgagee to make the
loan." This requirement was contained in the proposed rule in 202.20(a).
Many commenters expressed concern over how HUD would determine the costs to
make a loan. In effect, commenters wanted to know whether HUD would look
solely at a mortgagee's direct expenditures and overhead in determining the
cost of making a loan or whether the origination fees and value of
servicing rights generated in making the loan would also be considered to
arrive at a net cost. Loans of different sizes might appear to have similar
costs until origination fees and servicing value are considered.
 
Origination fees necessarily vary because they are set at 1% of the loan
amount. Commenters also explained that servicing value might be nonexistent
for the smallest loans but could be a significant factor that partially or
completely offsets costs for a larger loan. If these items were considered
so that net costs were compared and points were allowed to make up the
difference in net costs between small and large loans, mortgagees would
have less difficulty in complying with the rule.
 
HUD did not address this issue specifically in the proposed rule. HUD
agrees with commenters that the statute was not intended to prevent
consideration of the variations in origination fee income and servicing
values as factors offsetting other variations in costs. HUD has added
language to 202.20(a) of the final rule to clarify that net costs will be
considered. Section 202.20(a) has also been revised to improve
organization.
 
One commenter proposed that variation in mortgage charge rates up to two
percentage points be permitted whenever the mortgagee can demonstrate that
it is not recovering for any mortgage more than its average cost to
originate all mortgages. "The lender should be prohibited from creating
classes of mortgages and allocating differing costs to those classes,"
wrote the commenter. The Department agrees that the mortgagee may allocate
the same average basic cost for all mortgages within a mortgage type, or
for all mortgages, provided that this approach is documented in the
mortgagee's records. Information submitted by commenters suggested that
mortgagees do have information on the average basic cost of originating an
FHA-insured mortgage (without considering the value of servicing) produced
by allocating general overhead among the mortgages originated. One
commenter used an estimate of $1,000 "unit cost" plus a commission that
varied with loan size, resulting in a cost range of $1,175-$1,700 for loans
of $25,000-$100,000. Another reported typical loan costs of $1500-$1800.
Another stated that all FHA-insured single family mortgages, regardless of
size, cost approximately the same to originate. An industry study by the
Mortgage Bankers Association of America based on 1991 data from 185
mortgagees (not limited to FHA-insured mortgages) indicated somewhat higher
expenses for producing a loan-an average of $2,332 for all companies
studied, $2,183 for companies that purchase less than 10% of their loan
production, and $1,884 for the ten companies in the study with the highest
profit. HUD will not question a mortgagee that documents its costs by using
an average basic production cost in these ranges for all sizes of
FHA-insured mortgages and any additional documented costs varying directly
due to loan size, such as for commission. A mortgagee that wants to justify
its costs variations by using differing basic costs for particular
mortgages within a mortgage type will need to document any actual
difference in costs but will not be prohibited from attempting to do so.
 
D. Other Comments on Mortgage Charge Rates
 
A few commenters disagreed completely with HUD's approach to determining
mortgage charge rates. They argued that HUD should use the annual
percentage rate (APR) determined under the Truth in Lending Act as the
mortgage charge rate. HUD considered this approach when developing the
proposed rule but did not pursue the idea. The APR could be useful in
determining compliance with the two percentage point limit on variation,
but the simplicity of comparing two APRs does not seem to be any great
advantage over the simplicity of comparing discount points under the
proposed rule. Use of the APR could not help to determine whether
variations in fees and charges within the two percentage point limitation
were justified. In addition, the APR includes charges not under the control
of the mortgagee, such as charges for the appraisal, credit report and
other third party closing services, that would distort the application of
the two percent tolerance that Congress intended to be applied only to
mortgagee charges. It might be possible to develop some other tolerance
applied to APR variations that approximated the effect of the two percent
variation for mortgage charge rates, but HUD has no clear authority to
abandon the specific terms of the statute. If Congress had intended that
HUD attack the tiered pricing problem through comparison of APRs, it could
easily have said so instead of developing the distinct concept of mortgage
charge rates.
 
Two commenters questioned the statement in the preamble to the proposed
rule that HUD would review any practices that pass closing costs and
charges to the seller, in addition to items paid by the mortgagor. The
commenters stated that HUD lacked statutory authority to review fees
charged to the seller. One stated that at a minimum the rule should clarify
that fees paid by the seller should be reviewed to determine whether they
were charged to circumvent the tiered pricing rule and that there would be
no other scrutiny.
 
The commenters' remarks regarding statutory authority presumably refer to
the statutory definition of "mortgage charge rate" as including various
items "charged to a mortgagor with respect to an insured mortgage." This
could exclude some items that a mortgagee would not charge to a mortgagor,
such as a seller's share of a settlement fee in a jurisdiction in which
sellers share responsibility for the mortgagee's cost of conducting a
settlement. HUD does not agree that the law precludes review of one or more
items of closing costs merely because actual payment may have been made by
the seller in the particular transaction. The law applies to the
mortgagee's customary lending practices, not to the terms negotiated
between particular sellers and buyers.
 
For example, assume that the parties to the sale are able to negotiate the
manner in which they will share the responsibility for paying discount
points to the mortgagee. If the mortgagee charges three extra points for a
small mortgage as compared to a large one at the same interest rate, the
mortgagee is not in compliance with the tiered pricing restriction merely
because the seller in the smaller transaction has agreed to pay one or two
points on behalf of the mortgagor. That aspect of the seller-mortgagor
negotiation does not modify the mortgagee's customary lending practices,
which are to charge a mortgagor an impermissible amount of extra points for
the smaller loan.
 
Recordkeeping
 
Most commenters viewed as excessively burdensome the requirement in
202.20(h) of the proposed rule that mortgagees retain for three years
records on pricing information "satisfactory to the Secretary". The
following comment represents a typical reaction: "The creation of a
separate and distinct recordkeeping system for this particular proposed
rule is excessive." Another complained of "the sheer volume and extent of
the loan documentation requirement." Another asserted that the proposal
"requires banks to make extensive calculation of variables." Commenters
did not offer any suggestions as to how HUD could monitor compliance with
the statute if it had no access to historical records on a mortgagee's
pricing policies.
 
HUD deliberately proposed a rule that minimized a mortgagee's recordkeeping
burden and that did not require a separate and distinct recordkeeping
system. HUD might have pursued approaches that would have placed
substantial new recordkeeping and reporting burdens on a mortgagee, such as
requiring all pricing sheets to be submitted to a local HUD office when
they are adopted, or requiring a mortgagee to calculate a mortgage charge
rate for each FHA insured single family mortgage or requiring a mortgagee
to develop its own comparisons of its mortgage charge rates. HUD chose
instead not to specify new records that a mortgagee must develop and
maintain. Under current FHA policies and under the regulations implementing
the Equal Credit Opportunity Act, 12 CFR part 202, mortgagees must retain
loan files for both rejected and closed loan applications for two years.
The rule does not add significantly to this burden.
 
Files for closed loans will ordinarily contain information showing the date
and terms when the mortgage charges were locked in. Loan files for rejected
loans should also contain sufficient information on the pricing of the loan
if processing progressed far enough for specific loans terms to be
considered. However, the rule does not require that pricing information be
retained on an individual loan basis. The focus of the rule is on the
"customary lending practices" of a mortgagee. A mortgagee could choose to
retain its pricing sheets for two years as evidence of its general pricing
policies and as a simple way to demonstrate compliance with the regulation.
The final rule does not dictate whether a mortgagee keeps information on
mortgage charges on an individual loan basis, as a general record on its
pricing policies, or both. Similarly, a mortgagee that wishes to ensure
consideration of factors offsetting direct costs may include evidence of
variations in origination fees and the value of servicing rights either in
the individual loan files or in some other form that is available to HUD
monitors.
 
The comments suggest that the necessary information is routinely available
to a mortgagee with respect to each loan that is underwritten since the
information is a basis for pricing the particular loan. It is a simple
matter and not a substantial new burden to include the information in the
loan file, or otherwise maintain it elsewhere if the mortgagee so chooses.
 
In short, all that the final rule requires is that a mortgagee be able to
provide records to HUD during routine HUD mortgagee monitoring (or
otherwise pursuant to a general inquiry as discussed below in Section III),
in a form determined by the mortgagee and consistent with existing legal
requirements for recordkeeping, that will enable HUD to obtain answers to a
few basic questions: What charges has a mortgagee imposed on mortgagors for
its mortgages, of a particular mortgage type in a particular area, during a
specified time period? If the charges vary between mortgages of the same
interest rate, mortgage type and area, what is the specific reason for the
amount of variance? If the mortgagee has information available to answer
these questions (and HUD expects that mortgagees already have such
information without the requirements of this rule), then the mortgagee has
records "satisfactory to the Secretary." HUD will inform mortgagees if
the records ordinarily retained by mortgagees are found to be insufficient
in the course of applying the rule and more specific requirements are
needed.
 
A few commenters questioned the reference in 202.20(h) of the proposed rule
to data required under regulations implementing the Home Mortgage
Disclosure Act (HMDA). The rule does not affect existing HMDA requirements,
either by adding to information that must be reported for HMDA purposes or
by relieving mortgagees of any reporting requirements. The final rule has
been corrected to acknowledge that not all FHA-approved mortgagees are
required to report under HMDA. Mortgagees that are not covered by HMDA are
subject to similar requirements with respect to applications and closed
loans involving FHA-insured mortgages pursuant to HUD's responsibilities
under the Fair Housing Act, Mortgagee Letter 90-25 and other mortgagee
letters, and Handbook 4155.1 REV-4, paragraph 3-14G.1.
 
Responsibility of Sponsors/Wholesalers/Investors
 
Ten commenters disagreed with the Department's position in the preamble to
the proposed rule regarding responsibility of
sponsors/wholesalers/investors. The Department proposed to hold responsible
for an originator's tiered pricing violations the sponsor mortgagee (if the
originator was approved by HUD as a loan correspondent) or any
wholesaler/investor mortgagee that had arranged prior to closing to fund
and purchase the mortgage (i.e., through table funding). This would involve
interpreting the statutory phrase "customary loan practices" as
applicable to the wholesale purchases of mortgages from the originator and
including the purchased loans.
 
Commenters stated that the mortgagees/investors at the wholesale level
lacked the ability to dictate the amounts charged to a mortgagor by the
originating mortgagee and therefore should not be held responsible. Some
commenters also stated that a sponsor has no knowledge of the various
prices charged by its loan correspondents and no way to monitor them. Many
commenters also pointed out that an originating loan correspondent could
have many sponsors, and that HUD should not hold a single sponsor
responsible for the loan practices of the loan correspondent including
loans originated for other sponsors.
 
The Department stated in the proposed rule preamble that its intent was to
"most effectively regulate those directly responsible for tiered
pricing." Responsibility can be the result of action or inaction by the
sponsor or wholesale purchaser. The Department's experience in examining
possible tiered pricing violations has been that loan originators attribute
any violations to the requirements of mortgagees at the wholesale level.
The Department agrees that this is not always the case. The Department does
not view as dispositive, however, the fact that the tiered pricing
practices at the retail level may not have been expressly dictated by the
wholesale mortgagee. The Department believes that there are other ways in
which the wholesaler's requirements and practices may lead to tiered
pricing that is not in compliance with the statute.
 
The commenters generally appeared to accept the Department's position that
the practices of wholesale lenders in setting terms for the mortgages that
they fund or purchase can come within the scope of the statutory term
"customary lending practices" if they have the effect of leading to
discriminatory pricing by the originating mortgagees in violation of the
tiered pricing restrictions. The disagreement is over whether, in fact,
that effect follows from typical arrangements.
 
Current regulations, at 24 CFR 202.15(c)(6), provide that each sponsor of a
loan correspondent shall be responsible to the Secretary for the actions of
its loan correspondent in originating mortgages, unless applicable law or
regulation requires specific knowledge on the part of the party to be held
responsible. This principle applies to the tiered pricing area. It is
limited to those mortgages with which the particular sponsor mortgagee is
involved, not mortgages originated for sale to other mortgagees. The
sponsor is required to underwrite the FHA insured loans that it will
purchase from the loan correspondent, 24 CFR 202.15(c)(1). The sponsor is
not ignorant of the lending practices of its correspondent with respect to
such loans. The Department will provide a sponsor the opportunity to
explain why it should not be regarded as responsible for a particular
tiered pricing violation of its loan correspondent with respect to loans
that it underwrites, but the Department does not agree that sponsors
generally cannot be regarded as responsible for the pricing of loans by
loan correspondents.
 
In the proposed rule HUD stated its intention to treat wholesale purchasers
providing table funding for a mortgagee in the same manner as HUD-approved
sponsors. At least one commenter specifically objected to any application
of the rule to a table funding situation. The commenter cited a 1992 ruling
of the Emerging Issues Task Force of the Financial Accounting Standards
Board (FASB), the governing body of the accounting profession, that a table
funding arrangement should be accounted for as a purchase if the loan is
legally structured as an origination by the correspondent and if the
correspondent is independent of the mortgage banking enterprise. HUD does
not agree that this accounting ruling should govern the distinct issue of
responsibility for tiered pricing practices. Even if the mortgagee/investor
providing table funding is not an approved sponsor purchasing from a loan
correspondent, HUD will regard the mortgagee/investor as responsible for
tiered pricing violations if the requirements of the funding mortgagee have
the effect of leading to a tiered pricing violation by the loan originator.
HUD has revised 202.20(a) to state this principle in the final rule. HUD
continues to distinguish approved sponsors from other mortgagees providing
table funding because other mortgagees do not have the general
responsibility for the correspondent/originator stated in 202.15(c)(6).
 
Application of Rule to All Single Family Programs
 
Numerous commenters objected to applying the rule to all FHA single family
programs rather than limiting the rule to the section 203 programs
mentioned in the legislation. The commenters viewed this as a major
extension of the scope of tiered pricing restrictions, and beyond HUD's
legal authority. One commenter supported HUD's approach.
 
Section 203(t) can be read as only requiring HUD to consider section 203
mortgages when determining whether the customary lending practices of a
mortgagee violate the tiered pricing restrictions. Most Section 203
mortgages are insured under the basic Section 203(b) program; insurance is
also available in specific circumstances under Sections 203 (h), (i), (n)
or (k). HUD does not agree that it lacks authority to consider practices
under other FHA single family programs and concludes that there is good
reason to look beyond section 203 to other single family programs as well.
 
For FY 1993, approximately 84.5 percent of single family mortgage loans
receiving FHA insurance were insured under section 203 programs so that
single family mortgagees will not be subject to significant extra burdens
by including other programs in this rule. The principal non-section 203
mortgage insurance program is the section 234(c) program for insurance of
condominium unit mortgages with approximately 7.7 percent of insured
mortgages in FY 1993. There is no policy reason why the practice of tiered
pricing should be viewed differently for section 234(c) mortgages as for
section 203(b) mortgages. It should be restricted in both programs. In
addition, the Department anticipates that additional significant single
family programs may be added to the National Housing Act outside of section
203 with the same potential for discriminatory treatment through tiered
pricing. The law should not be interpreted to require specific amendment of
section 203(t) as a prerequisite to addressing tiered pricing concerns in
new programs; the better reading is that the law permits HUD to attack any
tiered pricing concerns for each new program without the need for express
new authority.
 
The general rulemaking authority in section 211 of the National Housing Act
permits HUD to adopt rules and regulations that it regards as necessary to
carry out Title II of the National Housing Act; that authority permits HUD
to adopt and apply its mortgagee approval requirements generally to all
programs and the tiered pricing restrictions are being adopted in the
regulations as an additional section of the mortgagee approval
requirements. In section 539 of the National Housing Act, which will be
discussed in a later section, Congress acknowledged the relationship of the
tiered pricing restrictions of section 203(t) with the prohibition of a
minimum loan amount in section 535 of the National Housing Act. Congress
required the Secretary to assess the compliance of a mortgagee with both
requirements in connection with any HUD examination of a mortgagee, and
required a single procedure for a private individual to require
determination of a mortgagee's compliance with both requirements. Section
535 has already been implemented by regulation for all single family
programs and it is reasonable to keep the same broad approach for the
related provision. The Department is sympathetic to the commenters' concern
that extension of the tiered pricing restrictions to many minor programs
could be burdensome. The Department will respond to this concern by
focusing its review of tiered pricing compliance on a limited number of
mortgage types involving major programs as discussed below.
 
Mortgage Type
 
The proposed rule provides for comparison only of mortgages of the same
mortgage type. Instead of describing each mortgage type, the proposed rule
provided that a mortgage type would include those groups of mortgages that
are closely parallel in important risk characteristics. The proposed rule
would have authorized the Secretary to develop standards and definitions
regarding risk characteristics. The preamble to the proposed rule suggested
that mortgage types could be based both on approaches to interest rate
(fixed rate, ARM, GPM) and insurance program (sections 203(b) and 234(c)
separated from section 203(k)). The Department indicated particular
interest in receiving industry comment.
 
The commenters provided many suggestions for developing mortgage types.
There was no consensus regarding appropriate typing. The following were
cited by one or more commenters as characteristics that should place
mortgages in separate categories: purchase vs. refinance,
attached/condominium vs. detached (203(b)), high vs. low loan-to-value
ratio, adjustable rate vs. fixed rate level payment vs. fixed rate
graduated payment, new vs. existing construction, no- or low-closing cost
loans (refinances or others) with premium interest rate vs. market rate,
and different FHA mortgage insurance funds.
 
One commenter stated that mortgage types should be based on cost of
origination instead of risk. The proposed rule reference to risk was taken
from the pertinent discussion in the Conference Committee report on the
statute1(FOOTNOTE), but that report also mentioned expenses. The report
states:
 
(FOOTNOTE)1H.R. Rep. 101-922, p. 393.
 
This section is intended to apply to Sec. 203 of the National Housing Act
by loan type. For example, mortgages insured under the section 203(k)
program may be priced differently from mortgages insured under the 203(b)
program. The Committee recognizes that different types of mortgages involve
differing levels of risk, processing expenses or other factors that
differentiate them and necessitate pricing variation.
 
The basic objective is to avoid comparing mortgages where one would
ordinarily expect to find interest rate and/or discount point differences
due to the nature of the mortgage even given identical borrowers, property
and loan amount. HUD agrees that the proposed rule's reference only to
"risk characteristics" may be too limiting and additional language has
been added to 202.20(g) that paraphrases the Conference Committee report.
 
The Department does not consider it advisable to place a fixed delineation
of mortgage types in the rule because of lack of experience and potential
new mortgage programs and pricing practices. Instead the Department has
retained general language providing for the Secretary to provide standards
and definitions. Based on this authority, HUD's monitoring for tiered
pricing compliance will initially be based on a mortgage type definition
that will divide mortgages only into two types based on program: section
203(b)/section 234(c) mortgages as one type, with section 203(k)
rehabilitation loans as a separate type. The rule extends to all single
family programs as discussed above, but at this time HUD intends to
restrict routine monitoring to these major programs.
 
HUD considered whether each mortgage type based on program should be
further subdivided based on other characteristics of the mortgage such as
those cited by the commenters. HUD has concluded that it does not have
sufficient information and experience to determine additional appropriate
subtypes at this time, given the lack of any consensus among the commenters
who addressed this question. An excessive number of overly specific
mortgage types would result if each of the suggested methods of grouping
mortgages were adopted by HUD. The final rule permits HUD to further define
mortgage types if its monitoring experience demonstrates that this is
necessary to avoid inappropriate comparisons of mortgages when determining
compliance with the rule.
 
Definition of "Area"
 
The statute applies the two percentage point limitation on mortgage charge
rate variation to mortgages on dwellings in an "area". The statute states
that "area" shall have the meaning given the term under section 203(b)(2)
of the National Housing Act. The pertinent sentence in section 203(b)(2)
states that "area" means a county or a metropolitan statistical area
(MSA) as established by the Office of Management and Budget, whichever
results in the higher dollar amount. This definition is ordinarily used
when implementing HUD's authority to designate "high-cost" areas
where-due to high median area house prices-the FHA maximum mortgage limit
can exceed the $67,500 amount that would otherwise apply for a 1-family
residence. There is some ambiguity in applying this definition of "area"
to the tiered pricing context.
 
The proposed rule regarded the statutory reference to the section 203(b)(2)
definition as an indication that the areas for tiered pricing purposes
should be the high-cost areas already designated by HUD to determine
maximum mortgage amounts. These areas currently cover most of the
population of the country and include most MSAs as well as some counties
that are not part of any MSA. Under the reading of the statute adopted in
the proposed rule, there is no specific statutory guidance regarding how
other parts of the country should be divided into areas for purposes of
tiered pricing comparisons. The proposed rule would have divided the rest
of the country (i.e, excluding the designated high-cost areas) by using the
jurisdictional lines of HUD Field Offices.
 
HUD received 5 comments-all negative-on its proposed approach to defining
areas. Several commenters indicated that the proposed rule was difficult to
understand. Three commenters made specific suggestions for different
approaches. One asserted that the statutory reference to the section
203(b)(2) definition of area simply means that loans made in metropolitan
statistical areas are compared with other loans made in the same
metropolitan statistical area, and loans made outside of metropolitan
statistical areas are compared on a county by county basis. This commenter
also recommended use of counties because HMDA data is compiled by counties.
HMDA data is not compiled for loans outside MSAs, however, so that HMDA
precedent is not pertinent regarding defining rural land into "areas" for
tiered pricing purposes. Another commenter accepted HUD's use of designated
high-cost areas as areas for purposes of the rule, but also suggested that
the remainder of the country be compared on a county-by-county basis
instead of using HUD Field Office jurisdictions. A third commenter also
objected to use of HUD Field Office jurisdictions and suggested the use of
areas served by the lender's own offices as they might change from time to
time. Another commenter noted that different counties or states may require
different pricing levels even though they are both in the same HUD Office
jurisdiction, without offering any alternative approach. None of the
commenters submitted any information regarding how lenders typically vary
pricing levels geographically. No evidence was submitted indicating that
pricing typically varies on a county-by-county basis.
 
After reviewing the comments, HUD continues to conclude that the most
likely intent of the statutory reference to the section 203(b)(2)
definition of area was to require use of the same high-cost areas that are
used for designating mortgage limits under section 203(b)(2). It is
unlikely that the statute demands use of county-by-county comparisons
outside of MSAs, as one commenter suggested, because of the lack of
evidence that mortgages are priced on a county basis and because of the
very large number of separate rural areas that would result-with very few
mortgages made by any one mortgagee in most of the areas. County
comparisons are unlikely to reveal any excessive tiered pricing that may be
occurring over broader areas outside of MSAs.
 
It is possible that the statute does not mandate any tiered pricing
comparisons outside of high-cost areas. If so, HUD still would possess
authority to extend the rule's coverage through its general rulemaking
authority and HUD believes that it is not appropriate to exclude parts of
the country from coverage of the final rule. There is no reason to conclude
that excessive tiered pricing, to the extent that it exists, is limited to
high-cost areas.
 
Any dividing of the rural and non-high-cost MSAs will be somewhat arbitrary
and will not match exactly any mortgagee's perception of different mortgage
markets. Use of political jurisdictional lines could result in too many
areas (counties) or too few and too large areas (states). HUD has concluded
that use of HUD Office jurisdictional lines is an appropriate compromise.
In large sparsely populated states which are unlikely to be divided into
well-defined separate mortgage pricing areas, there is typically a single
HUD Office. In the more populous state there are likely to be several HUD
offices, as well as high-cost areas, so that the state will be divided into
a number of different areas for tiered pricing comparisons. HUD has
previously decided to use HUD Office jurisdictions as a means of dividing
up mortgage markets for monitoring purposes. For example, 24 CFR
202.11(d)(i) defines the "normal rate" of claims and defaults in an area
on the basis of HUD Office jurisdictions.
 
Therefore, HUD has not made any substantive changes in the definition of
area in the final rule. A technical change has been made in the reference
to the regulation on high-cost areas to reflect revisions made by a final
rule that implemented a revision of section 203(b)(2) in the Housing and
Community Development Act of 1992 (58 FR 40996, July 30, 1993.)
 
Variations From Customary Lending Practices
 
The commenters raised a number of questions involving cases where the
actual charges for the mortgage might differ in special cases from the
prevailing policy of the mortgagee. Commenters asked about reduced rates
for certain loans as a promotion or to gain market share in an area or on a
"random basis," about par-plus pricing, about negotiated interest rates
or points needed to attract a particular mortgagor from a competitor
lender, and about loan officer overages. Rather than discuss each of these
situations in detail, the Department will point out that the statute is
directed at a mortgagee's "customary lending practices". It is
permissible for a mortgagee to have a lending policy that permits
occasional deviations from the standard terms it is generally offering to
customers in its lending area, even if beyond a two percent variation,
provided that those deviations are not applied in a discriminatory fashion
and are available to purchasers on lower as well as higher priced homes on
an individual case basis. The loan file should document why special pricing
was applied. The two percent variation limitation is permitted by law not
to recognize the occasional exceptions to a pricing policy, but to permit
the mortgagee's pricing policy itself to contain some variations among
loans, principally to ensure that a mortgagee can afford to make loans of
all sizes.
 
One commenter objected to the lack of a good faith exception process for
what it characterized as "good faith noncompliance based on circumstances
which do not violate the spirit of a regulation * * * There should be the
ability to show that in good faith, tiered pricing was not based on loan
amounts or other discriminatory factors." HUD does not interpret the
statute as authorizing a formal good faith exception although, as stated
above, the statute is concerned with customary practices instead of the
actual terms of each individual mortgage. Monitoring and enforcement in
this area, as in other areas, can take into account actual circumstances
when determining appropriate responses to a mortgagee's noncompliance. The
mere lack of intent to engage in forbidden discrimination is not a defense.
The statute prohibits customary lending practices with variation in
mortgage charge rates on greater than two percentage points regardless of
any legitimate business motive for the excess variation. The statute
requires HUD to determine that lesser variations in mortgage charge rates
are based on actual variations in fees or costs to the mortgagee. The mere
lack of an illegitimate discriminatory motive for variations is not enough.
 
III. Implementation of Section 539(a) of the National Housing Act
 
Section 330(b) of the Cranston-Gonzalez National Affordable Housing Act
added a new section 539(a) to the National Housing Act (NHA). The new
section requires, among other things, that the Secretary establish a
procedure whereby any person may file a request for a determination on
whether a mortgagee is in compliance with: (1) The new section 203(t) on
tiered pricing, and (2) certain other provisions of the National Housing
Act that prohibit minimum loan amounts for insured mortgages and Title I
loans. The Secretary must also establish a procedure to inform each
requestor of the disposition of its request for determination and to
publish in the Federal Register the disposition of any case referred to the
Mortgagee Review Board for action.
 
HUD published a notice setting forth the procedure for filing a request for
determination of compliance with section 203(t) and the minimum loan amount
prohibitions (56 FR 33455, July 22, 1991.) Section 330(b) requires that
this notice be followed by a final rule. The substance of the notice is
included in this rule as a new subsection (i) to 202.20. The Department has
also amended 201.10(g) to refer to new 202.20(i) because the procedure also
applies to Title I Lenders.
 
Many commenters, primarily State Banking Associations, objected to this
provision as a "private right of action" that would cause HUD to conduct
"fishing expeditions" at great expense to mortgagees. HUD believes that
the commenters misunderstood the intent of the provision. HUD has done no
more than follow the requirements of section 539(a)(2) of the National
Housing Act. Those requirements must be read together with section
539(a)(1), which directs the Secretary to assess the performance of a
mortgagee in meeting the tiered pricing and minimum loan amount
prohibitions " i n connection with any examination of a mortgagee by the
Secretary pursuant to this  National Housing  Act." In other words, a
tiered pricing review generally would be conducted as part of the regular
mortgagee monitoring conducted by HUD.
 
Section 539(b)(2) ensures that HUD can receive evidence of violations
outside of its regular mortgagee monitoring so that special investigations
can be made if appropriate. The law and the rule do not compel HUD to
conduct an investigation at the demand of any person. A person may
"request" a HUD determination of compliance, and HUD must inform the
person of the disposition of the request, which could be a decision that no
investigation was warranted. One commenter suggested that requests be
published. They will be available to the public upon request under the
Freedom of Information Act (except to the extent that withholding is
determined to be necessary under the "investigatory records" exception to
disclosure) but HUD does not plan a formal publication system.
 
An investigation might not be warranted if the requestor provides no reason
to suspect a tiered pricing violation by the mortgagee or if the request
appears to have been solely for harassment purposes. HUD has limited
investigative and monitoring resources and will not waste those resources
in pursuing all requests no matter how unsupported or frivolous. HUD will
respond vigorously when it receives reason to suspect a tiered pricing
violation even though a violation may not have been identified through the
regular mortgagee monitoring process.
 
IV. Procedural Requirements
 
Assistance Numbers
 
The Catalog of Federal Domestic Assistance program numbers are: 14.108,
14.110, 14.117, 14.119, 14.120, 14.121, 14.122, 14.123, 14.133, 14.142 and
14.162.
 
Regulatory Flexibility Act
 
Under 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the Undersigned
hereby certifies that this rule does not have a significant economic impact
on a substantial number of small entities. The rule carries out a statutory
mandate designed to ensure that FHA mortgagees will not discriminate
against FHA mortgagors with low principal loans. The Department believes
that the rule does this in a manner which interferes to the minimum extent
feasible with ordinary business operations of small entities.
 
Executive Order 12612, Federalism
 
The General Counsel, as the Designated Official under section 6(a) of
Executive Order 12612, Federalism, has determined that the policies
contained in this rule do not have "federalism implications" within the
meaning of the Order. The rule does not alter existing relationships
between the Department, state and local governments and the private sector.
 
Executive Order 12606, the Family
 
The General Counsel, as the Designated Official for Executive Order 12606,
the Family, has determined that the provisions of this rule do not have the
potential significant impact on family formation, maintenance, and general
well-being within the meaning of the Order. The tiered pricing rule serves
primarily as a tool for prohibiting discrimination against mortgagors who
apply for low-principal loans.
 
Environmental Impact
 
A Finding of No Significant Impact with respect to the environment has been
made in accordance with HUD regulations in 24 CFR part 50 that implement
section 102(2)(C) of the National Environmental Policy Act of 1969. (42
U.S.C. 4332) The Finding of No Significant Impact is available for public
inspection and copying through Friday, 7:30 a.m. until 6:00 p.m. in the
Office of the Rules Docket Clerk, Office of General Counsel, room 10276,
Department of Housing and Urban Development, 451 Seventh Street SW.,
Washington, DC 20410.
 
Regulatory Agenda
 
This rule was listed as sequence number 1528 in the Department's Semiannual
Agenda of Regulations published on October 25, 1993 (58 FR 56402, 56428)
pursuant to Executive Order 12866 and the Regulatory Flexibility Act.
 
List of Subjects
 
24 CFR Part 201
 
Health facilities, Historic preservation, Home improvement, Loan
programs-housing and community development, Manufactured homes, Mortgage
insurance, Reporting and recordkeeping requirements.
 
24 CFR Part 202
 
Administrative practice and procedure, Home improvement, Manufactured
homes, Mortgage insurance, Reporting and recordkeeping requirements.
 
Accordingly, 24 CFR parts 201 and 202 are amended to read as follows:
 
PART 201-TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS
 
1. The authority citation for 24 CFR part 201 is revised to read as
follows:
 
Authority: 12 U.S.C. 1703; 42 U.S.C. 3535(d).
 
2. In 201.10, paragraph (g) is amended by adding to the end of the
paragraph a new sentence to read as follows:
 
201.10  Loan amounts.
 
* * * * *
 
(g) * * * A person may request the Secretary to determine compliance of a
lender with this section as provided in 202.20(i) of this chapter.
 
PART 202-APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES
 
3. The authority citation for 24 CFR part 202 continues to read as follows:
 
Authority: 12 U.S.C. 1703, 1709, and 1715(b); 42 U.S.C. 3535(d).
 
Subpart B-Approval of Mortgages
 
4. Part 202, subpart B, is amended by adding a new 202.20 to read as
follows:
 
202.20  Tiered Pricing.
 
(a) Customary lending practices. (1) The customary lending practices of a
mortgagee for its FHA insured single family mortgages shall not provide for
a variation in mortgage charge rates that exceeds two percentage points. A
variation is determined as provided in paragraph (f) of this section.
 
(2) The customary lending practices of a mortgagee include all FHA insured
single family mortgages originated by the mortgagee. They also include FHA
insured single family mortgages funded by the mortgagee or purchased from
the originator if requirements of the mortgagee have the effect of leading
to violation of this section by the originator. The responsibility of
sponsors of loan correspondents is also governed by 202.15(c)(6).
 
(3) Any variations in the mortgage charge rate up to two percentage points
under the mortgagee's customary lending practices must be based on actual
variations in fees or cost to the mortgagee to make the loan, which shall
be determined after accounting for the value of servicing rights generated
by making the loan and other income to the mortgagee related to the loan.
Fees or costs must be fully documented for each specific loan.
 
(b) Area. For purposes of this section, an area is:
 
(1) An area used by HUD for purposes of 203.18(a) of this chapter to
determine the median 1-family house price for an area; or
 
(2) The area served by a HUD field office but excluding any area included
in paragraph (b)(1) of this section.
 
(c) Mortgage charges. Mortgage charges include any charges under the
control of the mortgagee and not collected for the benefit of third
parties, including, but not limited to interest discount points and loan
origination fees.
 
(d) Interest rate. Whenever a mortgagee offers a particular interest rate
for a mortgage type in an area, it may not restrict the availability of the
rate in the area on the basis of the principal amount of the mortgage. A
mortgagee may not direct mortgage applicants to any specific interest rate
category on the basis of loan size.
 
(e) Mortgage charge rate. The mortgage charge rate is defined as the amount
of mortgage charges for an FHA insured mortgage expressed as a percentage
of the initial principal amount of the mortgage.
 
(f) Determining excess variations. Variation in mortgage charge rates for a
mortgage type is determined by comparing all mortgage charge rates offered
by the mortgagee within an area for the mortgage type for a designated day
or other time period, including mortgage charge rates for all actual
mortgage applications.
 
(g) Mortgage type. A mortgage type for purposes of paragraph (f) of this
section will include those mortgages that are closely parallel in important
characteristics affecting pricing and charges, such as level of risk or
processing expenses. The Secretary may develop standards and definitions
regarding mortgage types.
 
(h) Recordkeeping. Mortgagees are required to maintain records on pricing
information, satisfactory to the Secretary, that would allow for reasonable
inspection by HUD for a period of at least two years. Additionally, many
mortgagees are required to maintain racial, ethnic, and gender data under
the regulations implementing the Home Mortgage Disclosure Act (12 U.S.C.
2801-2810).
 
(i) Request for determination of compliance. Pursuant to section 539(a) of
the Cranston-Gonzalez National Affordable Housing Act, any person may file
a request that the Secretary determine whether a mortgagee or Title I
lender is in compliance with this section or with sections implementing
sections 223(a)(7) and 535 of the National Housing Act such as 201.10(g),
203.18d and 203.43(c)(5) of this chapter.2(FOOTNOTE) The request for
determination shall be made to the following address: Department of Housing
and Urban Development, Office of Lender Activities and Land Sales
Registration, 451 Seventh Street SW., Room 9146, Washington, DC 20410. Each
request shall include the requestor's name and address and the name and
address of the mortgagee or Title I lender involved. A complete explanation
of the circumstances and the mortgagee's or Title I lender's practices, to
the extent known, must be delineated. Any documented evidence that the
requestor may have, including copies of advertisements, HUD-1 Settlement
Statements, sales contracts, or other relevant documents would greatly
expedite the Department's review and the resultant determination. The
Secretary shall inform the requestor of the disposition of the request. The
Secretary shall publish in the Federal Register the disposition of any case
referred by the Secretary to the Mortgagee Review Board.
 
(FOOTNOTE)2Only section 535 applies to Title I lenders.
 
(Approved by the Office of Management and Budget under control numbers
2502-0265 and 2502-0059)
 
Dated: February 15, 1994.
 
Nicolas P. Retsinas,
 
Assistant Secretary for Housing-Federal Housing Commissioner.
 
 FR Doc. 94-4331 Filed 2-24-94; 8:45 am
 
BILLING CODE 4210-27-P