U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 October 18, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER TI-412 MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Implementation of Title I Program Reforms The Department is implementing major changes to reform the Title I property improvement and manufactured home loan programs. Enclosed are copies of a final rule amending the Title I regulations and a notice on income requirements for borrowers. Both documents were published in today's FEDERAL REGISTER and have an effective date of November 18, 1991. The changes being implemented by the final rule are the most significant since the recodification of the program regulations in January 1986. They are the result of extensive review and analysis by HUD staff over the past two years. On January 29, 1991, the Department published a proposed rule outlining HUD's reform proposals and inviting public comments. The Department received more than 200 comments from lenders, dealers, home manufacturers, trade associations, Members of Congress, and others. All of the comments were carefully considered, and a number of reform proposals were deleted or modified as a result of the comments. The following is a summary of the major changes to the regulations. Other program modifications are described in the preamble. We urge you to read the enclosed documents in their entirety to learn about the changes that affect your institution. GENERAL PROGRAM REFORMS Qualification Standards for Lenders - The minimum net worth for nonsupervised lenders and those supervised lenders that are not members of the Federal Reserve System, or whose accounts are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, has been increased to $250,000. Other supervised lenders not previously covered by minimum net worth requirements are also required to have a minimum net worth of $250,000. In addition, the minimum warehouse line of credit for nonsupervised lenders has been increased to $500,000. Lenders approved prior to November 18, 1991 will have three years to meet these new requirements. _____________________________________________________________________ 2 Approval of Loan Correspondents - To encourage more lending institutions to originate Title I loans, HUD will approve "loan correspondents," whose role will be to originate and fund Title I direct loans for immediate sale or transfer to a sponsoring Title I lender. To be approved, a loan correspondent must have a minimum net worth of $50,000, plus an additional $25,000 for each approved branch office, up to a maximum requirement of $100,000. There is no limit on the number of sponsors that a loan correspondent may have. Prohibition Against Loan Brokers - To strengthen the prohibition against loan broker involvement (see Title I letter TI-405 ), the regulations have been amended to provide that neither the lender nor the borrower may pay a referral fee to any party in connection with the origination of a Title I loan. Dealer Approval and Supervision - A property improvement dealer must have a minimum net worth of $25,000 and have demonstrated business experience as a home improvement contractor or supplier. A manufactured home dealer must have a minimum net worth of $50,000 and have demonstrated business experience in manufactured home retail sales. The documentation to support a dealer's application for approval has also been expanded. As part of reviewing the dealer's performance, the lender must visit the dealer's place of business at least once in every six months. Credit Investigation Procedures - The credit investigation procedures have been revised to require that the lender: o Verify the validity of the borrower's Social Security Number (guidance on the types of documentation that are considered acceptable evidence will be furnished in a separate Title I letter). o If the credit report does not contain the necessary information, verify that the borrower is not over 30 days delinquent on any senior mortgage or deed of trust on the property being improved with a property improvement loan. o Verify, through HUD's Credit Alert system and other sources, whether the borrower is in default or a claim has been paid on any loan obligation owed to or insured or guaranteed by the Federal government. o For any loan over $5,000, obtain written verification of the source of the funds required for the borrower's initial payment, if that payment will exceed five percent of the loan amount. _____________________________________________________________________ 3 o Before making a final determination on the creditworthiness of the borrower, conduct a face-to-face or telephone interview with the borrower, to resolve any discrepancies in the information on the credit application and to assure that the information is accurate and complete. Income Requirements for Borrowers - For manufactured home loans, the maximum expense-to-income ratios have been changed to 29 percent of effective gross income for housing expenses and 41 percent of effective gross income for total fixed expenses. For property improvement loans, a maximum ratio of 45 percent of effective gross income for total fixed expenses is being instituted. Please refer to the enclosed FEDERAL REGISTER notice for more information. Notice Requirements - Before loan disbursement, the lender must provide the borrower with a written notice which states that the loan will be insured by HUD, describes the actions HUD may take to recover the debt if the borrower defaults and a claim is paid, and constitutes the borrower's agreement to the imposition of penalties and administrative costs. In the case of a direct property improvement loan, the notice also constitutes the borrower's agreement to furnish a completion certificate and permit an on-site inspection. A similar notice must be provided to an assumptor prior to execution of an assumption agreement. The language for these notices will be furnished in a separate Title I letter. Refinancing Delinquent Loans - To encourage more rapid decisions by lenders and borrowers on whether or not to refinance delinquent loans, the regulations have been amended to provide that an existing loan in default may not be refinanced for more than the original principal balance of the loan. Loan Assumptions - Specific requirements for the approval of loan assumptions have been added. An existing Title I loan may be assumed at the option of the lender, provided that the assumptor meets the borrower eligibility and credit underwriting requirements of the regulations and executes a satisfactory assumption agreement. If these conditions are met, the lender may release the original borrower from liability for repayment of the loan without HUD's prior approval. The lender may charge up to one percent of the unpaid principal balance as a fee for approving the assumptor and preparing the assumption agreement. Lender Efforts to Cure Default - Lenders now have the option of either a face-to-face or telephone contact with the borrower to discuss the reasons for the default and to seek its cure. _____________________________________________________________________ 4 Claim Filing Procedures - The time limit for filing a manufactured home claim has been changed to three months after the sale of the property, but not more than 18 months after the date of default. A six-month time limit has been set for resubmitting denied claims and for submitting supplemental claims. A reprocessing fee of $100 will be charged in connection with supplemental claims only. Insurance Coverage Reserve Accounts - The Department has decided that the method for adjusting reserves outlined in the proposed rule is not workable. Thus, there will be no change from the ten percent annual reserve deduction that now applies to any lender that has held a contract of insurance for more than five years. PROPERTY IMPROVEMENT LOAN REFORMS Equity Requirements for Certain Loans - For any property improvement loan (or combination of such loans) with a principal balance that exceeds $15,000, the borrower must have equity in the property being improved at least equal to the loan amount. However, this equity requirement does not apply to any loan originated by or on behalf of a governmental institution to provide assistance to a low- or moderate-income family or individual. Acceptable procedures for determining the market value of the property and evaluating whether the borrower has sufficient equity in the property will be furnished in a separate Title I letter. Title examination costs and appraisal fees may be financed with the loan proceeds; however, appraisal fees are only eligible for financing if the appraisal is needed to establish whether a borrower meets the equity requirement. Documentation of Planned Improvements - If the borrower plans to use a dealer or contractor to carry out the property improvements, the lender must obtain a copy of the proposal or contract that describes in detail the work to be performed and the estimated or actual cost. If the borrower plans to carry out the work without the services of a dealer or contractor, the borrower must furnish the lender with a detailed written description of the work, the materials to be furnished, and their estimated cost. Completion Certificates for Direct Loans - The requirement that a contractor or seller must sign the completion certificate on a direct property improvement loan has been deleted. Property Inspections - The requirement for a site inspection in connection with a ten percent sample of property improvement loans under $7,500 has been deleted. The requirement for _____________________________________________________________________ 5 post-disbursement inspection on all loans of $7,500 or more has been retained, and a 60-day time limit for completing the inspection has been added. A site inspection is also required on any direct loan where the lender determines that the borrower is unwilling to cooperate in submitting a completion certificate. Proceeding Against the Loan Security - A lender will now be able to proceed against the secured property and later submit a claim if the prior approval of HUD is obtained. HUD's decision will be based on such factors as the appraisal value, the amount of all outstanding loans on the property, the estimated costs of foreclosure and disposition, and the anticipated time to dispose of the property. MANUFACTURED HOME LOAN REFORMS Manufacturer's Certification - The certification on the manufacturer's invoice or invoice supplement has been revised to make it clear that (a) the prices and charges shown on the invoice or invoice supplement exclude certain payments that are not permitted under the regulations, and (b) the manufacturer has not made and will not make any payments to or for the benefit of the dealer and/or home purchaser that are not disclosed on the invoice or invoice supplement. Nonfinanceable Items - The number of years of hazard insurance and secured interest protection coverage that may be financed in a manufactured home loan has been reduced to one year. In addition, the cost of purchasing wheels and axles and the cost of extended warranties and extended service contracts may no longer be included in the maximum loan amount calculation. HUD expects to propose a future change in the regulations to require that lenders establish and maintain escrow accounts to pay for hazard insurance premiums. Increased Fees and Charges - The maximum allowance for transportation, set-up and anchoring charges on a manufactured home purchase loan is increased to $750 per module, and the maximum allowance for skirting costs is increased to $500. Site Inspections - For any loan involving the sale of a manufactured home by a dealer, the lender (or an agent of the lender that is not a dealer) must conduct a site inspection to verify that the terms and conditions of the purchase agreement have been met, and the home and any options and appurtenances have been delivered and installed. This inspection must be completed within 60 days after the date of disbursement. In the case of a direct loan, the lender or its agent must conduct an inspection prior to disbursement, and it must include a _____________________________________________________________________ 6 determination that the home is properly erected or installed on the homesite and all plumbing, mechanical and electrical systems are fully operational. Refinancing of Combination Loans - The proceeds of a combination loan may now be used for the purchase of a manufactured home lot in connection with the refinancing of a manufactured home already owned by the borrower. Proceeding Against the Loan Security - A visual inspection and preparation of a condition report must be carried out by the lender or its agent on all manufactured home loans prior to repossession or foreclosure. If the lender determines that the property has been abandoned, a notice of default and acceleration must still be sent to the borrower; however, the lender may take such steps as are permitted under State or local law to repossess or foreclose upon the property, without waiting for the thirty-day notice period to run. The HUD-approved appraisal must be performed on the homesite, unless the site owner requires that the home be removed before the appraisal can be done. FOR FURTHER INFORMATION If you have any questions about this letter, please write to Robert J. Coyle, Director, Title I Insurance Division, Room 9158, 451 Seventh Street, S.W., Washington, D.C. 20410, or call the Department toll-free at 1-800-733-HOME (1-800-733-4663). Sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner Enclosures