EFFECTIVE DATE NOTE: At 53 FR 34281, Sept. 6, 1988, § 200.163 was amended by revising paragraphs (b)(5)(iii) and (d)(1). Under section 7(o)(3) of the Department of Housing and Urban Development Act (42 U.S.C. 3535(o)(3)), this final rule cannot become effective until after the first period of 30 calendar days of continuous session of Congress which occurs after the date of the rule's publication. HUD will publish a notice of the effective date of this rule following expiration of the 30-session-day waiting period. Whether or not the statutory waiting period has expired, this rule will not become effective until HUD's separate notice is published announcing a specific effective date. The text of paragraphs (b)(5)(iii) and (d)(1) remaining in effect until further notice is set forth below.

8 200.163 Direct Endorsement

(b)

(5) *

(iii) A certified copy of the mortgage and note executed upon forms which meet the requirements of the Secretary.

(d)

(1) That the mortgage is excecuted on a form which meets the requirements of the Secretary.

8 200.164 Approval of direct endorsement mortgagees.

(a) Mortgagees shall comply with the following requirements when applying for approval:

(1) Submit an application to the HUD area office in whose jurisdiction the mortgagee seeks to process loans pursuant to § 200.163;

(2) Submit (i) documentation showing compliance with § 200.164 (b), (c) and (d); (ii) the Quality Control Plan which complies with § 200.164(e); and (iii) other such information as the Secretary may require.

(b) To participate in the Direct Endorsement program set forth in § 200.163, a mortgagee must be an approved mortgagee meeting the requirements of 24 CFR 203.3 or 203.4 or 203.7(a), and this section.

(c) The mortgagee must establish that it meets the following qualifications:

(1) The mortgagee has five years of experience in the origination of single family mortgages. The Department will approve mortgagees with less than five years experience in the origination of single family mortgages if a principal officer has had a minimum of five years of managerial experience in the origination of single family mortgages;

(2) The mortgagee, other than a supervised mortgagee or governmental institution, is approved as a Federal National Mortgage Association (FNMA) seller, as an issuer of Government National Mortgage Association (GNMA) mortgage-backed securities, or has a net worth, in assets acceptable to the Secretary, of not less than $250,000.

(d) The mortgagee, to be approved for participation in the Direct Endorsement program, must have on its permanent staff an underwriter approved by the Department for participation in this program and authorized by the mortgagee to bind the mortgagee on matters involving the origination of mortgage loans under this program. The technical staff utilized in the Direct Endorsement program by the mortgagee, including appraisers, construction analysts, inspectors, mortgage credit examiners, architects and engineers, must also be approved by the Department. The technical staff may be employees of the mortgagee or may be hired on a fee basis from a HUD panel. A mortgagee which has a financial interest in, owns, is owned by, or is affiliated with a building/selling entity may originate, under the Direct Endorsement program and process mortgages for this entity, only if the property appraisals and inspections are done by independent appraisers and inspectors approved, and assigned, by the Department, rather than by appraisers or inspectors on the staff of the mortgagee. For proposed construction, where the mortgagee does not obtain a VA CRV, VA MCRV, HUD conditional commitment, or HUD master conditional commitment, or a consumer protection or warranty plan, or submit the plans and specifications for HUD's prior approval, then the mortgagee must utilize an architect, engineer or construc

tion analyst, approved by HUD, to certify that the plans and specifications meet the applicable standards.

(e) A mortgagee shall implement an acceptable Quality Control Plan that is designed to assure mortgagee compliance with HUD underwriting requirements for the Direct Endorsement program. Such plan will be kept current and available upon request for HUD.

(f) A mortgagee's underwriter and technical staff shall satisfactorily complete a training program on HUD underwriting requirements as a condition to approval under this section.

(g) To be eligible to participate in the Direct Endorsement program, a mortgagee qualified to participate in the program pursuant to this Part must submit initially fifteen mortgages processed in accordance with the requirements set forth under § 200.163. The documents required by § 200.163 will be reviewed by the Department and, if acceptable, commitments will be issued prior to endorsement of the loans. If the underwriting and processing of these fifteen mortgages is satisfactory, then the mortgagee may be approved to close subsequent mortgages and submit them directly for endorsement in accordance with the process set forth in § 200.163. Unsatisfactory performance by the mortgagee at this stage constitutes grounds for denial of participation in the program, or for continued pre-endorsement review of a mortgagee's submissions. If participation in the program is denied, such denial is effective immediately and may be appealed in accordance with the procedures set forth in paragraph (h)(2) of this section.

(h) Mortgagee sanctions. Depending upon the nature and extent of the noncompliance with the requirements of the Direct Endorsement program, as determined by HUD, HUD may take any of the following actions:

(1) Probation. HUD may place a mortgagee on probation for a specified period of time for the purpose of evaluating the mortgagee's compliance with the requirements of the single family Direct Endorsement program. During the probation period the mortgagee may continue to process mort

gage loans pursuant to § 200.163 subject to conditions required by HUD. HUD may: Require the mortgagee (1) To process mortgages in accordance with paragraph (g) of this section; (ii) to submit to additional training; (iii) to make changes in the Quality Control Plan of paragraph (e) of this section; and (iv) to take other actions, which may include, but are not limited to, periodic reporting to HUD, and submission to HUD on internal audits.

(2) Withdrawal of approval of Direct Endorsement Mortgagees. (1) HUD may withdraw a mortgagee's approval to participate in the Direct Endorsement program upon written notice which states the grounds for the action and which provides for the right to an informal hearing before a decision maker in the local HUD office. Such hearing shall be expeditiously arranged and the mortgagee may be represented by counsel.

(ii) After consideration of the materials presented, the decision maker in the local HUD office shall advise the mortgagee in writing whether the withdrawal is rescinded, modified or affirmed.

(iii) The mortgagee may appeal such decision to the Assistant Secretary for Housing. A decision by the Assistant Secretary shall constitute final agency action.

(3) Withdrawal of HUD-FHA approval. Serious noncompliance with the requirements of the Direct Endorsement program may also result in withdrawal of a mortgagee's HUD/ FHA approval pursuant to 24 CFR Part 25.

(i) Notification of changes. The mortgagee shall promptly notify those field offices which have granted approval under this section of any changes that affect qualifications under paragraphs (b), (c) and/or (d) of this section.

[48 FR 11939, Mar. 22, 1983]

§ 200.164a Waivers.

The Secretary in an individual case may waive any requirement not required by statute if the Secretary finds that application of such requirement would adversely affect achievement of the purposes of the Act. Pro

8 200.167 Credit investigation of borrower.

Property Improvement loans are primarily character loans, and the credit standing and credit instrument of the borrower are of primary importance. In accepting a contract of insurance the lender assumes the responsibility of applying sound principles in the evaluation of credit. The borrower applicant must furnish the lender with an executed credit application on a form approved by the Commissioner and disclosing information sufficient to satisfy the lender that the applicant represents an acceptable credit risk, including information that the loan is for the alteration, repair or improvement of property in which the borrower has an eligible interest as owner or lessee. The determination as to the eligibility of a loan for insurance and the approval of borrower's credit and all other details of the transaction are handled by the lender, without prior examination or approval of the transaction by the Federal Housing Administration, except as specifically required by the regulations.

8 200.168 Other requirements for a Property Improvement loan.

The note or other evidence of the obligation taken by the insured must be valid and enforceable against the borrower and must be payable in installments. The borrower must have either a fee title, life estate, a purchaser's interest in a land contract, or a lease having a fixed term expiring not less than six calendar months after the maturity of the loan. The fee title or life estate may be subject to a mortgage or other lien. The regulations provide maximum maturity and maximum amounts for loans of various classes and sets forth maximum financing charges and certain items which are considered ineligible for loans.

8 200.169 Direct borrower loans.

The Property Improvement loan may be initiated by a borrower who gives his credit application directly to a lender. The proceeds of a loan thus made are delivered directly to such borrower without the intervention or

participation of a dealer or other intermediary.

8 200.170 Loan through a dealer.

Also eligible as Property Improvement loans are dealer-originated cases where the dealer or contractor first obtains a credit application for the loan from the borrower and, after completing the work, has a note and completion certificate signed by the borrower. The dealer presents these documents to the lender and receives the proceeds of the loan, after the lender determines that the transaction is eligible for insurance. The Federal Housing Administration does not approve dealers for participation in the Property Improvement loan program. This is a responsibility of the lender which by investigation must determine that the dealer is reliable, financially responsible and qualified to perform satisfactorily the work to be financed and is equipped to extend proper service to the customer. The lender also makes the initial determination that the transaction is or is not insurable.

§ 200.171 Notice to borrower.

At least six calendar days prior to making disbursement to a dealer the lender is required to give the borrower written notice of the insured's intention to disburse the proceeds of the loan if the application is approved. Although the borrower need not acknowledge receipt of the notice the lender must have a record of having mailed or delivered such notice.

DISBURSEMENT

8 200.172 Disbursement of proceeds to dealer.

In connection with all loans not made directly to the borrower, the lender must have investigated and approved the dealer and have in its possession, properly signed and dated:

(a) Completion certificate signed by borrower indicating work or materials have been satisfactorily completed or delivered by dealer.

(b) Copy of dealer's contract or sales agreement signed by borrower and dealer describing the type and extent of improvements to be made and the material to be used.

(c) Borrower's authorization certificate, if note is payable to lender.

$ 200.173 Disbursement of proceeds to borrower.

The lender may disburse the proceeds of the note directly to the borrower by cash, by check or money order drawn solely in favor of the borrower, or by crediting the borrower's account. In such transactions, the dealer does not participate in the disbursement in any manner and the borrower, has complete control of the funds at all times.

REPORT AND RESERVE

8 200.174 Report of loans.

Within 31 days after the loan is made or the note is purchased from the dealer the lender submits to the Federal Housing Administration individual reports setting forth on a prescribed form the details of each transaction. This information, including the name of the borrower, the location of the property, the amount of loan advanced, the finance charges, the date of the note, and the terms of payment is the basis for computing the insurance premium which will be due and payable by the lender and is the official record of the transaction with the Administration. This report results in the automatic insurance of the loan as soon as the required insurance premium is paid.

8 200.175 Insurance charge.

The regulations provide for an annual insurance charge based on a fractional percentage of the net proceeds of each loan reported for insurance. The lender is billed once a month on all loans reported for insurance during the previous period the receipt of which have been acknowledged by the Commissioner.

§ 200.176 Insurance reserves.

For each lender holding a contract of insurance, there is established by the Federal Housing Administration a general insurance reserve the amount of which is based upon the number of loans the institution reports for insurance during certain periods. For each

eligible loan reported by a lender and accepted for insurance, 10 percent of the net proceeds of the loan is credited to the lenders' insurance reserve. The cumulative credits to the insurance reserve for each lender thus equals 10 percent of the net amount advanced by it on all eligible loans and affords insurance against losses on its overall lending operation.

CLAIMS FOR REIMBURSEMENT FOR Loss

§ 200.177 Claims for payment.

Claim for reimbursement for loss on an eligible Property Improvement loan may be made to the Federal Housing Administrator by the lender after the borrower's default, provided demand has been made for the full unpaid balance of the note. The claim must be made within a prescribed period and be accompanied by the lender's complete credit and collection file for the transaction. The note and any security held or judgment taken must be duly assigned to the United States. An examination and audit of each claim is made to determine compliance with the provisions of the National Housing Act and the regulations.

8 200.178 Amount of claim.

(a) After it has been determined that the loan and the lender's claim for loss are eligible, the lender is reimbursed by a U.S. Treasury check for 90 percent of the loss sustained on the defaulted obligation. In addition, the lender may be reimbursed as provided by the regulations for a certain proportion of attorney's fees and uncollected court costs arising out of efforts to collect the note.

(b) If the claim is disapproved the lender is notified of the basis of such disapproval, with return to it of the insurance premium and all related papers and documents. Appeal for reconsideration of disapproval may be had by addressing a written request to Headquarters Office in Washington,

D.C.

8 200.179 Establishment of account.

The moneys derived from premium charges and all moneys collected as fees of any kind in connection with insurance of financial institutions, and

all moneys derived from the sale, collection, disposition, or compromise of any debt, contract, claim, property or security assigned or held by the Commissioner are deposited in an account in the Treasury of the United States, which account is available for defraying the operating expenses of the Federal Housing Administration in connection with insurance of financial institutions and any amounts in such account which are not needed for such purpose are available for the payment of claims in connection with the insurance granted under the statute.