www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 5, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 94-46 TO: All Approved Mortgagees SUBJECT:Changes in the Property Improvement Loan Program and Title I Lender Approval Requirements The information contained in this letter was disseminated to all HUD-FHA approved Title I lenders in TI Letter 429. Included are changes to the Title I lender approval procedures for those mortgagees that are presently approved as Title II mortgagees. Because these changes streamline the lender approval process, all approved mortgagees are encouraged to become familiar with the new policies and revised procedures. In TI-428, issued July 22, 1994, the Department announced several major changes in the property improvement and manufactured home loan programs. The Department is implementing additional significant changes to the Title I Property Improvement Loan Program to make it more widely available to low- and moderate-income families. These changes are the result of an outreach process in which the Department received recommendations from a variety of Title I program participants. The changes that are being made are intended to increase access to credit for qualified borrowers, and to direct the focus of the program so that it may more effectively assist low- and moderate-income families to make needed repairs to existing homes in neighborhoods undergoing revitalization and rebuilding. The Department is also making several changes to streamline its process for Title I lender approval. As part of the effort to direct the Title I Property Improvement Loan Program to areas undergoing revitalization and rebuilding, and to expand housing opportunities for low- and moderate-income families, the Department is actively encouraging approved Title I lenders to establish public-private partnerships with state and local government agencies and nonprofit housing organizations that offer low- and moderate-income housing assistance programs. Such partnerships not only offer potential economic benefits for lenders and expand opportunities for housing rehabilitation, but also help lenders to fulfill their Community Reinvestment Act (CRA) obligations. 2 The Department views the Title I Property Improvement Loan Program as an important tool to help meet the housing needs of low- and moderate-income families and to revitalize neighborhoods. The changes announced in this letter and the active participation of all approved Title I lenders will assist in achieving these goals. The changes announced in this letter with respect to the Title I lender approval requirements are effective November 1, 1994. The changes announced in this letter with respect to the Title I Property Improvement Loan Program requirements are effective as of November 1, 1994. They are applicable to any new loan for which a credit application is received on or after this date, including loan refinancing. In order to implement these changes, certain requirements of the Title I program regulations, 24 CFR Part 201, are being waived in whole or in part. These changes will remain effective until the Department completes rule making procedures to change the regulations. TITLE I LENDER APPROVAL CHANGES Streamlined Lender Approval Procedures The Department is centralizing its Title I lender approval process within HUD's Headquarters, reducing the amount of documentation required from presently approved HUD-FHA mortgagees seeking to obtain Title I lender approval, and eliminating the requirement for submission of separate audited fiscal year- end financial statements for Title I lenders that are also HUD-FHA approved mortgagees. These changes are intended to reduce the amount of time for qualified lenders to obtain HUD-FHA Title I lender approval, and to streamline the overall approval process. The new procedures are as follows: -All applications from lenders seeking Title I lender approval must be submitted to: U.S. Department of Housing and Urban Development Lender Approval and Recertification Division 451 Seventh Street, S.W. Room 9146 Washington, DC 20410 3 -Lenders that are presently approved by HUD-FHA as Title II mortgagees (except Loan Correspondents) must submit only the following documentation: -Form 92001-L, Application for Approval as Title I Lender; -Form 92001-LD, Supplement to Application for Approval as Title I Lender; -A certification that the lender is in compliance with all HUD-FHA mortgagee approval requirements, and has not been denied an operating license or otherwise sanctioned by any licensing or regulatory body; and -The applicable fee, accompanied by the form enclosed with this letter. The fee and the form must be sent to: HUD, P.O. Box 198608, Atlanta, GA 30384. -Lenders that have been approved by HUD-FHA as Title II Loan Correspondents for six months or less prior to the submission of an application for Title I lender approval, must submit only the documentation and application fee set forth above. -Lenders that have been approved by HUD-FHA as Title II Loan Correspondents for more than six months at the time they apply for Title I lender approval, must submit the documentation required by HUD Handbook 4700.2, Title I Lender Approval Handbook, and the application fee. -Lenders that are not presently approved by HUD-FHA as a Title II mortgagee or Loan Correspondent must submit the documentation required by HUD Handbook 4700.2 and the application fee. 4 -Approved Title I lenders that are also HUD-FHA approved Title II mortgagees (including Loan Correspondents) are no longer required to submit to the Department separate fiscal year-end audited financial statements. An approved lender or Loan Correspondent may now submit only one audited financial statement provided that the statement meets both Title I and Title II requirements. The financial statement must include a cover sheet stating that the lender is both an approved mortgagee and a Title I lender, and contain the lender's HUD ten digit Title I lender and Title II approved mortgagee identification numbers. PROPERTY IMPROVEMENT LOAN CHANGES Incontestability of Insurance Claim Payment The Title I statute and the regulations in Section 201.54(h) authorize the Department to seek a repurchase of the loan obligation for a period of two years from the date the claim was certified for payment by the Department. As a matter of policy, the Department will strive to review all claim submissions in a timely manner, and limit the period of time within which it will request the repurchase of a property improvement loan to a period of one year. However, the Department may find it necessary with respect to some claim submissions to apply the two-year provision. This change is being made as part of the Department's overall effort to streamline and improve the claims payment process, and to provide lenders with a larger measure of certainty as to the incontestability of a valid claim submission. Financing of Increased Loan Origination Fee for Loans Involving State and Local Government Agencies and Nonprofit Organizations For certain types of loans, the maximum one percent loan origination fee a lender may require the borrower to pay, is being waived to permit a maximum fee of three percent of the loan amount. Where the lender is refinancing an existing Title I property improvement loan with an advance of funds for additional improvements, the maximum loan origination fee is limited to three percent of the additional funds. 5 This waiver applies only to single family property improvement loans made in connection with low- and moderate-income housing assistance programs administered by state and local government agencies or nonprofit organizations which assist lenders in making loans within the community. Lenders should include in the loan file sufficient information to document why this waiver applies to a loan. The increased loan origination fee may be included in the loan amount, as long as it does not increase the total principal obligation beyond the twenty five thousand dollars ($25,000) limit permitted in Section 201.10(a)(1)(i). This waiver is being made as an incentive to increase public-private lending partnerships, and to reduce the out-of-pocket expenses for low- and moderate-income families in obtaining a Title I property improvement loan. The limitation in Section 201.25(a) is being waived to permit this increased loan origination fee, and Sections 201.25(b)(1) and 201.25(c)(1) relating to fees and charges that may or may not be financed are being modified accordingly. Elimination of Completion Certificate Requirement for Loans with Controlled Disbursements The requirement set forth in Section 201.40(b) that the borrower submit a completion certificate promptly upon completion of the home improvement work is being waived, but only under the following conditions: -The borrower must have applied for a Title I loan through a state or local government agency, or nonprofit organization, and the loan proceeds are to be held in an escrow account pending the completion of the home improvement work; and -The loan proceeds are disbursed from the escrow account based upon a percentage of work completed, or upon completion of the home improvement work on the property. The Department has determined that where a state or local government agency, or a nonprofit organization is involved, and the loan funds are held in escrow, a controlled disbursement transaction negates the need for a completion certificate which is often difficult to obtain. 6 Closing Agents Lenders may collect from borrowers fees for the services of qualified closing agents (attorneys, escrow agents, settlement agents, title companies) to assist in closing Title I direct loans within their existing lending areas under the following conditions: -The lender must prepare all loan documents without any involvement by the closing agent; -The duties of the closing agent are limited to the following: oVerifying the identities of those who are to sign the loan documents, and notarizing that the signatures on the note and security instrument are genuine; oExplaining the loan documents to the borrower and outlining the responsibilities involved in entering into the loan transaction, including the consequences if the borrower defaults on the loan and an insurance claim is paid by HUD; oProviding any additional instructions on loan terms and procedures for repayment furnished by the lender; oReceiving the initial payment made by the borrower; oCompleting and making available the HUD-1 Settlement Statement on secured property improvement loans; oRecording and perfecting the security instrument on behalf of the lender in the manner specified by State law, if requested to do so by the lender; and oReturning the signed documents and the initial payment to the lender. 7 -The closing agent shall furnish the lender with a signed statement certifying that the closing agent has properly completed all of the loan closing activities specified by the lender. -Under 24 CFR 201.25(c)(12), a fee for the services of the closing agent may be collected from the borrower as part of the initial payment, but may not be included in the loan amount. An invoice for the fee incurred by the lender and evidence that it was paid shall be retained in the loan file. Clarification of Equity Requirement on Loans Over $15,000 TI-428 issued on July 22, 1994, announced the waiver of the equity requirement for property improvement loans over $15,000 if certain conditions are met. The Department has received a number of inquiries from lenders for further clarification of the conditions under which the equity requirement is waived. The following supersedes the instructions in TI-428. The requirements set forth in Sections 201.20(a)(3) and 201.26(a)(1) that the borrower have equity at least equal to the loan amount on any property improvement loan (or combination of such loans) over $15,000 is eliminated under the following conditions: -The property being improved must be owner-occupied; and -The structure thereon must have been completed for at least six months prior to the date of the Title I loan application. Some lenders were under the impression that an owner-occupant must have resided in the property for a period of six months in order for the equity requirement to be eliminated. The six months provision relates solely to the completion date of the dwelling, and does not require previous occupancy by the applicant for a six-month period. 8 With your help in making the Title I Home Improvement Loan Program more widely available in revitalization areas and central city neighborhoods, housing opportunities can be expanded for low- and moderate-income families. The Department will seek partnerships with state and local housing agencies, lenders, private developers, the secondary loan market, and state and local governments to expand the supply of housing, revitalize neighborhoods, and promote healthy livable communities. During the next year, the Department will review and evaluate the performance of the Title I property improvement loan program in helping to rebuild and maintain communities, and meeting the housing needs of low- and moderate-income families. FOR FURTHER INFORMATION If you have any questions concerning the Title I lender approval requirements in this letter, please contact Ms. Karen Garner-Wing, Director, Lender Approval and Recertification Division, 451 Seventh Street, SW, Room 9146, Washington, DC 20410, telephone (202) 708-3976. If you have any questions concerning the Title I property improvement loan requirements in this letter, please contact Mr. Robert J. Coyle, Director, Title I Insurance Division, 490 L'Enfant Plaza East, Suite 3214, Washington, DC 20024, telephone (202) 755-7400. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing Federal Housing Commissioner Attachment APPLICATION FEE for TITLE I LENDER APPROVAL This form MUST accompany all application fee payments. Mail this form and your check to: HUD, P. O. Box 198608, Atlanta, GA 30384. ___________________________ Mortgagee Name ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ Federal Tax Identification Number ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ HUD/FHA Identification Number (if available) Type of application: (please check the appropriate box) ____ Initial Application ($250) ____ Branch Application ($50) ____ Additional Sponsor Requests ($100) ____ Conversion Fee (Convert Mortgagee Type) ($100) Lenders seeking first time approval (initial applications) must enter their federal tax identification number in the memo portion of the check. Lenders filing all other types of applications should put their 10 digit HUD/FHA identification number in the memo portion of the check.