U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 January 3, 1992 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER TI-415 MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Equity Requirement for Property Improvement Loans In Excess of $15,000 In the final rule published in the FEDERAL REGISTER on October 18, 1991 (56 FR 52414), the Department has, for the first time, established an equity requirement for certain property improvement loans. The final rule added a new 201.20(a)(3) to 24 CFR Part 201 to require that, for any property improvement loan (or combination of such loans on the same property) with a total principal balance in excess of $15,000, the borrower must have equity in the property being improved at least equal to the loan amount. However, this equity requirement is not applicable to any loan originated by or on behalf of a governmental institution to provide assistance to a low- or moderate-income family. This letter provides lenders with procedures to follow in determining the market value of the property to be improved and in evaluating whether the borrower has sufficient equity in the property to qualify for a loan. These procedures are applicable to any qualifying property improvement loan (or combination of such loans) for which a credit application is approved on or after November 18, 1991. On loans originated by a loan correspondent, compliance with these procedures is the responsibility of the loan correspondent. Definitions In determining whether a loan is exempted from the equity requirement by virtue of the fact that it will be originated by or on behalf of a governmental institution to provide assistance to a low- or moderate-income family, the following definitions are applicable: "Governmental institution" shall be a Federal, State or municipal agency, a Federal Reserve Bank, a Federal Home Loan Bank, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation. _____________________________________________________________________ 2 "Low-income family" is one whose annual income does not exceed 80 percent of the median income for the area, with adjustments for smaller and larger families. This is the same standard used by the Department for virtually all of its housing assistance programs (see 24 CFR 813.102). "Moderate-income family" is one whose annual income is between 80 and 115 percent of the median income for the area, with adjustments for smaller and larger families. This is the standard used by many State and local public agencies that utilize the Title I program in connection with their housing assistance and neighborhood revitalization efforts. Determining the Borrower's Equity To determine the amount of the borrower's equity in the property being improved, the lender shall ascertain the market value of the property without taking into account any value that would be added by the proposed improvements, and then subtract the outstanding principal balances of all other loans that are secured by the property. The lender may use a real property appraisal received from another source to document the market value of the property, if that appraisal was completed within one year prior to the date of loan approval and meets the appraisal requirements specified in this letter. In those localities where real estate tax assessments are updated on an annual basis, the lender may accept the current tax assessment as documentation that the equity requirement has been met. Appraisal Requirements All real property appraisals shall be carried out in accordance with the current edition of the Uniform Standards of Professional Appraisal Practice, as adopted by the Appraisal Standards Board of The Appraisal Foundation. The real property appraisal report shall be in writing, and the lender shall retain a copy of the completed appraisal report, including any worksheets or computations prepared by the appraiser, in the loan file. Qualifications of the Appraiser Lenders may use either staff appraisers or independent fee appraisers; however, only fully qualified appraisers shall be _____________________________________________________________________ 3 selected to perform these appraisals. If the State where the property is located has adopted appraiser licensing or certification requirements, the appraiser must have a valid license or certification in that State. Evidence that the appraiser has been licensed or certified by the State shall be retained by the lender. For those States that do not yet require a license or certification to perform appraisals, the appraiser must meet the minimum education and experience criteria for a Licensed Real Property Appraiser as adopted by the Appraiser Qualifications Board of The Appraisal Foundation. These minimum criteria include 75 classroom hours of courses in subjects related to real estate appraisal which include coverage of the Uniform Standards of Professional Appraisal Practice, and the equivalent of two years of appraisal experience. A resume or other evidence that the appraiser meets these minimum criteria shall be retained by the lender. A detailed description of the appraiser qualifications criteria adopted by the Appraiser Qualifications Board may be obtained from: The Appraisal Foundation 1029 Vermont Avenue, N.W., Suite 900 Washington, D.C. 20005 Telephone 202-347-7722 Appraisal Fees The Title I regulations at 24 CFR 201.25(b)(1) have been revised to permit an appraisal fee to be financed with the proceeds of a property improvement loan, if such fee is incurred by the lender in connection with a loan in excess of $15,000. The lender may collect the appraisal fee from the borrower at the time of loan application; if the loan is made, the appraisal fee may then be included in the loan proceeds disbursed to the borrower, as long as the total amount disbursed does not exceed the maximum loan amount specified in 24 CFR 201.10(a)(1). In the case of a dealer loan, the dealer may pay the appraisal fee from its own resources in the form of discount points paid to the lender, as long as the dealer does not accept any reimbursement for such payment from the borrower or any other party to the loan transaction. Since the payment of the appraisal fee by a dealer is for the benefit of the borrower, this procedure is permitted under 24 CFR 201.13. _____________________________________________________________________ 4 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