U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 July 22, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER TI-428 MEMORANDUM FOR: ALL TITLE I LENDING INSTITUTIONS Attn: Installment Loan Department SUBJECT: Major Changes in the Title I Property Improvement and Manufactured Home Loan Programs The Department is making several major changes in the Title I property improvement and manufactured home loan programs. These changes are the result of an outreach process in which the Department received recommendations from a wide variety of program participants, including lenders, manufactured home retailers and producers, State and local government agencies, nonprofit organizations, insurance companies, trade associations, and owners of manufactured homes. The Department is committed to the creation of cohesive, economically healthy communities and to the expansion of housing opportunities for low and moderate income families. The Department sees Title I as an important tool in meeting the changing housing needs of these families. Title I provides increased access to credit for qualified borrowers, so that they can make the repairs needed to meet community health and safety standards, help revitalize their neighborhoods, and purchase affordable manufactured housing. The changes announced in this letter represent a significant change in direction and focus by the Department, not only to make the Title I programs more available and more widely used, but also to encourage greater use of these programs to help preserve the nation's existing housing stock, rebuild neighborhoods, and enable first-time homebuyers to purchase affordable housing. Throughout the next year, the Department will be evaluating the performance of the Title I programs in meeting these goals. The Department has determined that the application of certain requirements of the program regulations in 24 CFR Part 201 adversely affects achievement of the purposes of Title I, section 2 of the National Housing Act. Therefore, these requirements are being waived, in whole or in part, to effectuate the changes described in this letter. Except as indicated elsewhere, the changes are applicable to any new loan for which a credit application is received on or after August 15, 1994, and to any loan refinancing approved by the lender on or after that date. These changes shall remain in effect until rulemaking procedures to change the regulations have been carried out. _____________________________________________________________________ 2 PROPERTY IMPROVEMENT LOAN CHANGES Elimination of Equity Requirement on Loans Over $15,000 The requirement in § 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 being eliminated, but only under the following conditions: o The property being improved must be owner-occupied; and o The structure thereon must have been completed and occupied for at least six months prior to the date of the Title I loan application. This change will relieve most owner-occupants of the need to obtain and pay for a property appraisal to qualify for a loan over $15,000. However, the equity requirement is being retained for loans over $15,000 where the property is not owner-occupied or where the structure has not been completed and occupied for at least six months. Maximum Amount for Unsecured Loans The maximum amount of an unsecured property improvement loan in §201.24(a) is being increased from $5,000 to $7,500. This increase will make it possible for lenders to finance small home improvement projects without the necessity of obtaining and recording a security interest in the property being improved. In addition, since the regulations require an on-site inspection on any property improvement loan of $7,500 or more, it makes sense to set the threshold for obtaining a security interest at the same dollar amount. Manufactured Home Improvement Loans The definition of "manufactured home improvement loan" in §201.2(t) is being expanded to permit the proceeds of a manufactured home improvement loan to be used for site improvements, as long as the borrower is the owner of the underlying real estate. At present, a manufactured home improvement loan may only be used for improvements to the manufactured home. To use the loan for site improvements, the borrower must meet the definition of "owner" in § 201.2(aa). Fees and Charges That May be Financed The list of fees and charges that may be financed in connection with a property improvement loan in § 201.25(b)(1) is being modified to permit the financing of recording fees, recording taxes, filing fees, and documentary stamp taxes, as long as the maximum loan amounts in § 201.10(a)(1) are not exceeded. In a conforming change, §201.25(c)(3) _____________________________________________________________________ 3 and (4), which prohibit the financing of these items, are being deleted. This change will reduce the out-of-pocket expenses of borrowers obtaining property improvement loans. MANUFACTURED HOME LOAN CHANGES Downpayment Requirements The minimum cash downpayment required for manufactured home purchase loans, manufactured home lot loans, and combination loans is being reduced from the present level to five percent of the purchase price of the home and/or lot. At present, the minimum downpayment required by § 201.23(b), (c) and (d) is at or close to ten percent of the purchase price. The Department has decided that a five percent minimum downpayment will help restore Title I to its traditional role as the preferred financing vehicle for first-time homebuyers seeking affordable homeownership. A lower downpayment will create a distinctly different loan program from conventional financing, and enables lenders and dealers to offer these families a real alternative. Therefore, all references to the minimum cash downpayment in § 201.23(b), (c) and (d) are being changed to five percent of the purchase price. Maximum Loan Calculation Because of the reduction in the minimum downpayment to five percent, adjustments are needed to the maximum loan amount calculations in § 201.10(b), (c) and (d). The maximum loan amount for the purchase of a new manufactured home under § 201.10(b)(1)(i) or for the purchase of a new manufactured home and lot under § 201.10(d)(1)(i) is to be based upon 130 percent of the wholesale (base) price of the home, itemized options and freight charge, rather than 125 percent of these amounts. In a related change, the maximum dollar allowances applicable to the delivery and set-up of the home in § 201.10(b)(1) and (d)(1), and to skirting costs in § 201.10(b)(1), are being eliminated. These changes are to assure that the downpayment is a true five percent in most cases, and to give lenders and dealers greater flexibility in dealing with State and local variations in installation standards. In determining the maximum loan amount for the purchase of an existing manufactured home under 201.10(b)(2) or for the purchase of a manufactured home lot under 201.10(c), the calculation is to be based upon 95 percent of the appraised value or purchase price, whichever is less, rather than 90 percent. _____________________________________________________________________ 4 Credit Underwriting Standards The allowable expense-to-income ratios adopted in accordance with 201.22(b) of the regulations are being increased for borrowers who purchase new manufactured homes meeting HUD's new energy conservation standards. The present ratios of 29 percent for housing expenses and 41 percent for total fixed expenses are being increased to 31 percent and 43 percent, respectively, to recognize that, while energy-efficient homes are more expensive, borrowers will be spending less of their income on fuel costs. HUD's new energy conservation standards were published in the Federal Register on October 25, 1993 and become effective for all new manufactured homes produced on or after October 25, 1994. Therefore, this change in the allowable expense-to-income ratios will apply to any manufactured home loan where the home's date of manufacture is on or after October 25, 1994. Fees and Charges That May be Financed The list of fees and charges that may be financed in connection with a manufactured home loan in 201.25(b)(2) is being modified to permit the financing of appraisal fees in connection with the purchase or refinancing of an existing manufactured home and/or lot, as well as recording fees, recording taxes, filing fees, and documentary stamp taxes, as long as the maximum loan amounts in 201.10(b), (c) and (d) are not exceeded. In a conforming change, 201.25(c)(3), (4) and (8), which prohibit the financing of these items, are being deleted. This change will reduce the out-of-pocket expenses of borrowers obtaining manufactured home loans. Repossession or Foreclosure Expenses The maximum allowances for certain expenses incurred in connection with repossession or foreclosure on a manufactured home and/or lot are being increased to more accurately reflect the actual cost of these items to the lender. The Department considered repossession and resale cost data furnished by several lenders and reviewed recent claims in arriving at the following changes: o The allowance for the costs of removal and transportation of a repossessed home to an off-site location in 201.55(b)(3), which is now limited to $750 per module, is being increased to $1,000 per module. o The allowance for attorney's fees in 201.55(b)(7), which is now limited to $500, is being increased to $1,000, in recognition of the legal costs that may be incurred when the lender has to pursue judicial foreclosure, must obtain a _____________________________________________________________________ 5 deficiency judgment against a defaulted borrower, or is involved in a lengthy bankruptcy proceeding. Changes to these maximum allowances will apply to any manufactured home loan with a date of default for claim filing purposes that is on or after August 15, 1994. CHANGES APPLICABLE TO BOTH PROGRAMS Dealer Approval Requirements The provision in § 201.27(a)(2) which requires that the dealer's financial statement be prepared by a licensed public accountant is being deleted. The Department has determined that this licensing requirement imposes a burden on small dealers, particularly in the property improvement loan program. In place of the licensing requirement, the Department expects the lender to take into consideration whether the financial statement was prepared by someone who is independent of the dealer and is qualified by education and experience to prepare such statements. Fees and Charges Paid by Dealers Sections 201.25(b)(1) and (2) list the fees and charges that may be included in the loan amount. However, these sections do not make clear how the following fees and charges incurred by the lender are to be handled in the case of a dealer loan: o Credit report costs; o Title examination costs; o Appraisal fees in connection with the purchase or refinancing of an existing manufactured home and/or lot; o Recording fees, recording taxes, and filing fees; o Documentary stamp taxes; and o Fees for inspection of the property by the lender or its agent. The Department has determined that the dealer may advance the funds for these items and be reimbursed by the lender from the loan proceeds. Alternatively, the lender may advance the funds for these items and deduct their cost from the loan proceeds paid to the _____________________________________________________________________ 6 dealer. In either case, there must be full disclosure to the borrower that these items have been added to the price of the goods and/or services being provided by the dealer. Permitting the dealer to advance the funds for these items and be reimbursed from the loan proceeds clearly benefits the borrower, because the out-of-pocket expenses of borrowers obtaining Title I loans are reduced or eliminated. The Department wants to make it clear that the dealer shall not accept any reimbursement for these items directly from the borrower. In addition, the dealer shall not be involved in ordering credit reports, title examination reports, appraisal reports or inspection reports or in receiving these reports from the third parties preparing them. Payment of Discount Points by Dealers With this clarification on the treatment of fees and charges incurred by the lender in connection with dealer loans, the Department believes that the provision in 201.13 which permits a lender to collect discount points from the dealer is no longer needed. In adding this provision to the regulations in 1986, the Department's intention was to enable the dealer to assist the borrower by paying some of the up-front costs of obtaining a Title I loan, or by buying down the interest rate so that the borrower could qualify for the loan. Some lenders have abused this provision, charging discount points to dealers for the acceptance of borrowers with marginal credit, and inflating the cost of home improvements to the detriment of low and moderate income borrowers. Lenders are urged to discontinue the practice of collecting discount points from dealers, when those points are unrelated to the financeable fees and charges discussed in the previous section of this letter. If lenders fail to comply with this request voluntarily, the Department will undertake a change in the regulations to prohibit discount points entirely. FOR FURTHER INFORMATION If you have any questions about this letter, please write to Robert J. Coyle, Director, Title I Insurance Division, 490 L'Enfant Plaza East, Suite 3214, Washington, D.C. 20024, or call the Division at 202-755-7400. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing-Federal Housing Commissioner