U.S.DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON.D.C. 20410-8000 September 18, 1989 OFFICE OF THE ASSISTANT SECRETARY FOR TI-401 HOUSING-FEDERAL HOUSING COMMISSIONER MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Major Changes to Title I Regulations That Become Effective October 9, 1989 On August 31, 1989, the Department published a final rule implementing several major changes to the Title I regulations affecting both property improvement and manufactured home lenders. Enclosed for your information is a copy of the final rule. The final rule makes substantive changes in provisions relating to the maximum amount of unsecured property improvement loans, the financing of furniture in connection with manufactured home loans, the amount of hazard insurance coverage required for manufactured homes, the certification requirements for manufactured home sites, and the manner in which the Department assesses and collects loan insurance premiums on manufactured home loans. Each of these changes is described in detail in the following paragraphs. These changes are applicable to Title I loans whose credit applications are approved on or after October 9, 1989, except that the changes to the premium collection system apply to manufactured home loans for which the date of disbursement is on or after October 9, 1989. Maximum Amount of an Unsecured Property Improvement Loan Section § 201.24(a) has been amended to increase the maximum amount of an unsecured property improvement loan from $2,500 to $5,000. The $2,500 ceiling has been in effect for more than six years. The Department has concluded that the ceiling should be raised to $5,000 in recognition of the increased cost of home repairs over this time period, as well as the fact that foreclosure on a security interest of less than $5,000 is generally not cost-effective. Of course, lenders may continue to require that borrowers provide a security interest on loans of less than $5,000 if they feel it is desirable. Financing of Furniture with a Manufactured Home Loan Section 201.21(5)(3) has been amended to prohibit the use of manufactured home loan proceeds to finance the purchase of furniture; in addition, section 201.10(b)(1) and other sections have been revised to delete all references to furniture as part of the loan transaction. The Department has found that, in most instances of borrower default, the furniture that was financed is in poor condition or has been removed before the lender repossesses the home. Faced with high claim losses, the Department has concluded that loan proceeds should no longer be used to finance furniture. _____________________________________________________________________ 2. This prohibition applies to all movable articles of personal property relating to the home, such as beds, chairs, sofas, lamps, tables, rugs, etc. However, it does not apply to central heating or air conditioning equipment; large appliances such as refrigerators, ovens, ranges, dishwashers, clothes washers or clothes dryers; or built-in items such as wall-to-wall carpeting. The Department recognizes that some first-time homebuyers may need to purchase furniture and will obtain separate financing for these purchases, which could increase the risk of default on the manufactured home loan. We expect that lenders, as part of the credit examination process, will try to ascertain whether borrowers are planing any major furniture purchases and whether they will be financed. When the financing of furniture is anticipated, an estimated monthly amount for furniture payments should be included in the "Other Recurring Charges" under section 201.22(b), and should be considered in the lender's determination of whether the borrower's income is adequate to carry the manufactured home loan obligation. Hazard Insurance on Manufactured Homes Section 201.28(b) has been amended to require that the borrower must carry hazard insurance coverage on the manufactured home in an amount at least equal to the unpaid loan balance, except where State law precludes this type of "stated value" insurance, in which case the amount of coverage must be not less than the actual cash value of the home. Previously, the borrower was only required to carry insurance coverage equal to the unpaid loan balance or the actual cash value of the home, whichever was less. Since manufactured homes often depreciate in value at a faster rate then the loans are being amortized, the lender's interest might not be adequately protected if the borrower carried hazard insurance only on the actual cash value of the home. Therefore, unless State law precludes the practice, borrowers are now required to carry sufficient insurance to pay off the loan in the event of a total loss on the home. Manufactured Home Site Certification Requirements Section 201.21(e)(3) has been amended to eliminate a provision that manufactured home rental parks must comply with minimum standards on site location, storm drainage and landscaping, since most 1ocal jurisdictions do not establish or enforce standards for these aspects of park development. In addition, this section has been changed to require that certifications of site suitability be obtained from "the appropriate State or local government officials," rather than "the State or local authority which licenses such parks." The Department has found that many States and localities do not license manufactured home parks or issue only a business license that is not based upon meeting minimum site suitability standards. The revised language permits lenders to obtain the required certifications from local planning officials, building officials, public health officials, or other governmental entities with responsibility for establishing and enforcing park development standards. _____________________________________________________________________ 3 Section 201.21(e)(4) has been amended to simplify the certification requirements for individual manufactured home lots or homesites. A requirement that the site must be zoned to permit the placement of a manufactured home has been changed to a general requirement that the site must comply with local zoning ordinances or regulations, if any. In addition, a requirement that the site must meet minimum storm drainage standards has been eliminated in favor of a more general certification that "any other minimum local standards and requirements for site suitability are met." Certification by a registered civil engineer will be required only when local standards for water supply and sewage disposal are not established or enforced. A number of lenders have experienced problems in complying with sections 201.21(e)(3) and (e)(4) because some local officials are reluctant to sign certifications of site suitability prepared by the lender. Where this occurs, the Department has determined that the lender may accept a copy of a license, building permit or occupancy permit issued by a State or local government official in lieu of a separate certification, provided that its issuance is predicated upon compliance with minimum site development standards and there has been a site inspection to assure such compliance. Manufactured Home Loan Insurance Charges Sections 201.31(a) and (b) have been amended to change the manner in which loan insurance premium charges for manufactured home loans are assessed and collected. The Department has determined that these changes are needed to restore actuarial soundness to the program, by collecting more of the total insurance charge in the early years of the loan when the risks of default are greatest. Previously, the loan insurance charge was collected in equal annual installments of 0.54 percent of the loan amount over the term of the loan. Under the new collection system, the insurance charge on a typical 15-year manufactured home loan will be 1.00 percent of the loan amount for each of the first four years, 0.75 percent for years 5 through 7, 0.50 percent for years 8 and 9, and 0.25 percent in year 10. There would be no insurance charge for years 11 through 15. Section 201.31(b) gives the collection schedule for loan terms other than 15 years. The total insurance charge on a manufactured home loan will not exceed 0.50 percent of the loan amount, multiplied by the number of years of the loan term. Thus, for a 15-year loan, the total insurance charge will not exceed 7.50 percent, compared with 8.10 percent under the previous regulations. As noted earlier, this new collection system will be in effect for all manufactured home loans with disbursement dates on or after October 9, 1989. Insurance charges on loans with disbursement dates before October 9, 1989 will be calculated at the old rate of 0.54 percent of tile loan amount, regardless c)f when the loan is reported for insurance. _____________________________________________________________________ 4. Other Changes in the Final Rule The final rule also makes a number of clarifying and editorial changes to the Title I regulations that affect both property improvement and manufactured home lenders. Because these changes are clarifications of existing HUD policy, they are applicable to all Title I loans, without regard to when the loans are originated or reported for insurance. 1. Late Charges. Section 201.15 has been amended to make it clear that late charges may be assessed as prescribed in the regulations, unless State law prescribes standards that are more beneficial to the borrower. This section has also been revised to clarify that late charges may not be deducted from the borrower's monthly payment of principal and interest. Also, late charges may not be assessed if the note provides for interest to accrue on late installments on a daily basis. 2. Appurtenances to Manufactured Homes. Sections 201.10(b)(1), 201.21(i))(4), and 201.24(b) have been amended to clarify that the proceeds of a manufactured home purchase loan may be used for the purchase, construction or installation of a garage, carport, patio or other comparable appurtenance to the manufactured home, provided that (a) the Department has approved the particular type of appurtenance for financing, and (b) any appurtenance being financed is secured by a first lien. These changes simply codify the current policy on the financing of appurtenances, as stated in a Notice published in the FEDERAL REGISTER on March 21, 1986. 3. Fees and Charges Which Cannot Be Financed. Section 201.25(c) has been amended to clarify that certain fees and charges that are incurred by the lender (and are not eligible for financing) may be paid by the lender, as a cost of doing business, and do not have to be collected from the borrower. For example, a lender might determine that it will pay for recording fees from its own funds, rather than collecting this small amount in cash from the borrower. 4. Proofs of Claim in Bankruptcy and Probate. In response to many questions from lenders, section 201.42 has been amended to exempt lenders From the requirement to file a proof of claim when (a) the bankruptcy court has identified the proceeding as a "no asset" case, or (b) the lender determines that there will not be a probate proceeding. This section has also been revised to make it clear that the, lender must take all steps necessary to protect the interest of the creditor on loans assigned to the United States, until the Department has paid the lender's insurance claim. The Department's position is that the lender's assignment of the loan obligation to HUD is a conditional assignment which is only accepted upon payment of the claim. _____________________________________________________________________ 5. 5. Appraisals of Repossessed Manufactured Homes. Section 201.51(b))(3) has ben amended to explicitly state that the appraisal of a manufactured home following repossession must be based upon comparables in the same geographic area where the repossession occurred. The Department has found that some manufactured homes are being moved to other areas for the purpose of obtaining lower appraisals, thereby increasing the Department's claim exposure. One means of minimizing this type of program abuse is to require that the appraisal be obtained in the same area where the home was repossessed, before moving the home to another area. 6. Hazard Insurance in Combination Loan Claims. Section 201.55(b)(5) has been amended to provide that hazard insurance premiums paid by the lender on a foreclosed manufactured home and lot are an allowable expense in calculating a Title I claim. This cost item was inadvertently omitted from the regulations when they were revised in 1935. For Further Information If you have questions about this letter, please write to Robert J. Coyle, Director, Title I Insurance Division, 451 Seventh Street, S.W., Room 9160, Washington, D.C. 20410 or call the Division on (202) 755-6880. Sincerely yours, C. Austin Fitts Assistant Secretary Enclosure