[Federal Register: November 21, 2003 (Volume 68, Number 225)]
[Rules and Regulations]
[Page 65823-65827]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21no03-8]
[[Page 65823]]
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Part IV
Department of Housing and Urban Development
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24 CFR Part 203
FHA TOTAL Mortgage Scorecard; Interim Rule
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-4835-I-01]
RIN 2502-AI00
FHA TOTAL Mortgage Scorecard
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This interim rule would codify the procedures that mortgagees
and automated underwriting system vendors must observe if they opt to
use the ``Technology Open To Approved Lenders'' (TOTAL) mortgage
scorecard offered by the Federal Housing Administration (FHA). This
rule follows a December 6, 2000, Federal Register notice, which
announced the Department's intention to deploy the TOTAL mortgage
scorecard. The interim rule also clarifies that the underwriting
requirements to which FHA mortgagees must adhere are not altered by
this rule. This rule only provides the requirements and procedures for
use of the TOTAL mortgage scorecard.
EFFECTIVE DATE: December 22, 2003.
Comment Due Date: January 20, 2004.
ADDRESSES: Interested persons are invited to submit comments regarding
this rule to the Regulations Division, Office of General Counsel, Room
10276, Department of Housing and Urban Development, 451 Seventh Street,
SW., Washington, DC 20410-0500. Communications should refer to the
above docket number and title. Facsimile (FAX) comments are not
acceptable. A copy of each communication submitted will be available
for public inspection and copying between 7:30 a.m. and 5:30 p.m.
weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of
Single Family Program Development, Room 9278, Department of Housing and
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-8000;
telephone (202) 708-2121. (This is not a toll-free number.) Hearing- or
speech-impaired persons may access this number by calling the toll-free
Federal Information Relay Service number at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
On December 6, 2000, the Department published a notice in the
Federal Register (65 FR 76273), announcing its intention to deploy the
FHA TOTAL (originally an acronym for ``Technology Open To All
Lenders,'' but now more accurately standing for ``Technology Open To
Approved Lenders'') Mortgage Scorecard for mortgage industry use. The
TOTAL Mortgage Scorecard (or Scorecard), developed by HUD, assesses the
credit worthiness of FHA mortgagors by evaluating certain mortgage
application and mortgagor credit information that has been
statistically proven to accurately predict the likelihood of mortgagor
default. The TOTAL Mortgage Scorecard is not an automated underwriting
system (AUS); rather, it is a mathematical equation intended for use
within an automated underwriting system.
The December 6, 2000, notice (Notice) described the Department's
purpose and objectives in deploying the TOTAL Mortgage Scorecard. The
objectives for the use of the TOTAL Mortgage Scorecard, which were
first stated in the Notice, are (1) to provide an improved credit
evaluation system for FHA loans that has been statistically proven to
accurately predict the likelihood of mortgagor default while providing
a uniform system protective of borrowers; (2) to expand access to
mortgage credit for low- and moderate-income mortgagors and discourage
unlawful discrimination against mortgagors protected by the Fair
Housing Act and the Equal Credit Opportunity Act; (3) to facilitate
access to, and reduce the cost and time associated with, originating
HUD/FHA-insured mortgages; and (4) to encourage a standardized,
industry-wide capability for communication and exchange of information
among members of the mortgage lending community.
The Notice also advised that approval would be rescinded for the
two individual privately developed mortgage scorecards used in the
processing of FHA mortgage loans, and that after deployment of the
TOTAL Mortgage Scorecard, HUD would require use of the Scorecard in any
AUS. The Notice also indicated that users of the TOTAL Mortgage
Scorecard would receive documentation relief and credit policy waivers
provided by HUD. Further, the Notice advised that HUD also had
developed a Use Agreement that established the requirements and
responsibilities for implementation and use of the TOTAL Mortgage
Scorecard by qualified mortgagees and others that purchase, sell,
underwrite, or document HUD mortgage loans for mortgagees under HUD's
Direct Endorsement program. Two organizations have been working with
HUD to test the use of the TOTAL Mortgage Scorecard. While HUD, through
individual approvals, could authorize other organizations to use the
TOTAL Mortgage Scorecard, HUD has decided that a more efficient course
of action is to promulgate regulations for the use of the Scorecard
consistent with the purpose and objectives announced in the Notice
instead of executing individual approvals that establish the
requirements and responsibilities for use of the Scorecard.
Current regulations at 24 CFR 203.255 describe the documentation
requirements mortgagees must follow when underwriting mortgage loans to
be insured by FHA, and state that for mortgage loans rated as
acceptable risks by an approved AUS, a Direct Endorsement underwriter
need not certify that he/she has personally reviewed the credit
application. The regulations do not, however, describe the rules and
procedures that mortgagees and automated underwriting system vendors
must observe if they opt to use the TOTAL Mortgage Scorecard, and to
receive the inherent benefits accompanying its use, including
documentation relief and credit policy revisions.
II. This Interim Rule
This interim rule would revise HUD's regulation at 24 CFR 203.251
to add a definition for ``TOTAL,'' and Sec. 203.255(b)(5) would be
revised to remove the reference to ``an automated underwriting system
approved by the Secretary or Commissioner'' and substitute ``TOTAL
Mortgage Scorecard.'' The requirements governing the use of the TOTAL
Mortgage Scorecard would also be added to Sec. 203.255(b)(5). Any AUS
vendor that ``calls'' the TOTAL Mortgage Scorecard, and any FHA-
approved mortgagee that obtains a risk assessment from the Scorecard,
must abide by the requirements set forth in this regulation. Only AUSs
developed, operated, owned, or used by FHA-approved Direct Endorsement
mortgages, Fannie Mae, or Freddie Mac will be able to access the
scorecard, and only FHA-approved mortgagees will be able to obtain risk
assessments using the TOTAL Mortgage Scorecard. The rule affirms that
Direct Endorsement mortgagees remain solely responsible for the
underwriting decision. Implementation of this regulation will rescind
Mortgagee Letters 96-34, 98-14, and 99-26, which address FHA's review
of individual automated underwriting procedures. This rule does not
alter the underwriting requirements to which FHA mortgagees must
currently adhere. This rule only addresses the use of the TOTAL
Mortgage Scorecard and the
[[Page 65825]]
requirements and procedures to which FHA mortgagees must adhere if they
opt to use the Scorecard. Specifically, this regulation establishes the
conditions for use of the Scorecard.
The TOTAL Mortgage Scorecard is only a tool to assist the mortgagee
in managing its workflow and expediting the endorsement process and is
not a substitute for the mortgagee's reasonable consideration of risk
and credit worthiness. The Department believes that the TOTAL Mortgage
Scorecard is a valuable tool, but that value depends upon proper use of
the Scorecard in accordance with HUD requirements and procedures. To
help assure the TOTAL Mortgage Scorecard is not misused, the rule would
require mortgagees to provide full manual underwriting for mortgage
applicants when the scorecard returns a ``refer'' risk score. The
Scorecard results must not be used as the basis for rejecting any
mortgage applicant.
In addition, the rule would provide that both mortgagees and
vendors must:
--use the scorecard to process FHA and other loan products specified by
the FHA Commissioner only, and for no other purpose;
--implement quality control procedures for scorecard usage and provide,
at FHA's request, reports and loan samples that enable FHA to evaluate
program operation;
--not use the TOTAL Mortgage Scorecard to direct mortgagors into other
non-FHA product offerings (this requirement does not relieve a
mortgagee from its obligations under Sec. 203.10 concerning informed
consumer choice for prospective FHA mortgagors);
--not disassemble, decompile, reverse engineer, derive or otherwise
reproduce any part of the source code or algorithm in the TOTAL
Mortgage Scorecard;
--not provide feedback messages that conflict with the Equal Credit
Opportunity Act; and
--comply with any additional HUD/FHA requirements or procedures, that
are applicable to the TOTAL Mortgage Scorecard and may be issued
through handbooks, mortgagee letters, TOTAL User Guides, or TOTAL
Developers Guide following appropriate advance notification, where
applicable.
Automated underwriting system vendors and mortgagees found to
violate these conditions may have their access to the Scorecard
terminated with appropriate notice. HUD will provide a vendor or
mortgagee with a 30-day notice of a violation and loss of privilege.
The notice will state the nature of the violation, the effective date
of the loss of privilege, and the duration of the loss of privilege. A
party receiving such a notice may appeal to the Deputy Assistant
Secretary for Single Family Housing (DAS-SFH), or the Deputy Assistant
Secretary's designee, before the effective date by providing evidence
to refute the violation. The loss of privilege is stayed until the DAS-
SFH notifies the party that the loss of privilege has been affirmed,
rescinded, or modified. As an additional measure to ensure compliance
with these requirements, access to the TOTAL Mortgage Scorecard by a
FHA mortgagee will be conditioned upon the mortgagee's certification to
comply with the requirements as provided in this rule.
III. Justification for Interim Rulemaking
In general, HUD publishes a rule for public comment before issuing
a rule for effect, in accordance with HUD's own regulations on
rulemaking at 24 CFR part 10. Part 10, however, does provide for
exceptions for that general rule where HUD finds good cause to omit
advance notice and public participation. The good cause requirement is
satisfied when prior public procedure is determined ``impracticable,
unnecessary, or contrary to the public interest.''
HUD finds that good cause exists to publish this interim rule for
effect without first soliciting public comment in that prior public
procedure would be contrary to the public interest. Currently, loan
originators underwrite FHA loans manually or through Fannie Mae and
Freddie Mac's proprietary automated systems that employ scorecards that
were built using data on FHA borrowers but with algorithms known only
to the developers and not to FHA. Over the last four years, HUD has
developed its own FHA TOTAL Scorecard and through validation determined
that it provides an improved credit evaluation system for FHA loans
that has been statistically proven to accurately predict the likelihood
of mortgagor default while providing a uniform system protective of
borrowers. Indeed, the TOTAL Scorecard, among other attributes, better
predicts delinquencies that may occur under FHA loans than any other
underwriting means currently available.
The release of the TOTAL Scorecard and its implementation without
delay through the issuance of this rule will allow FHA to benefit
immediately from this more refined, uniform instrument that will better
measure the credit worthiness of potential borrowers and better protect
the Government from financial losses. This is especially true in an
environment of relatively low interest rates, increased demand for FHA
insurance products, and historically high FHA delinquency rates.
Additionally, because the scorecard is government property and HUD is
prepared to accept data on TOTAL Scorecard performance, immediate
deployment will allow HUD to efficiently track the performance of FHA
loans and FHA lenders and quickly fix and refine the scorecard further.
For borrowers, immediate deployment of the TOTAL Scorecard will
result in the institution of a single system nationwide that will offer
uniform processing.
The interim rule enables, but does not require, FHA mortgage
lenders to use this new automated means of assessing the credit
worthiness of FHA mortgagors. Although use of the TOTAL Scorecard is
not required, the Department believes that this rule makes use of the
TOTAL Scorecard possible for a greater number of mortgagees, and for
the benefit of a greater number of mortgagors, at an earlier point in
time and in a more efficient manner than would execution of individual
approvals to use the TOTAL Scorecard issued in accordance with
outstanding mortgagee letter instructions. For FHA mortgagees that opt
to use the TOTAL Scorecard, use of the TOTAL Scorecard is subject to
several conditions to protect borrowers including that borrowers who
are classified ``refer'' will be processed through manual underwriting.
For the TOTAL Scorecard to provide the intended benefits of accurate
assessment, FHA mortgagees must abide by the terms and conditions for
use. Also, FHA mortgagees may not disassemble, decompile, reverse
engineer, derive or otherwise reproduce any part of the source code or
algorithm in the TOTAL Scorecard. Such tampering may render the TOTAL
Scorecard inaccurate and unusable.
IV. Findings and Certifications
Paperwork Reduction Act
The proposed new information collection requirements contained in
Sec. 203.255(b)(5) have been submitted to the Office of Management and
Budget (OMB) for review under the Paperwork Reduction Act of 1995 (44
U.S.C. 3501-3520). Under this Act, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the collection displays a valid control number.
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The public reporting burden for this new collection of information
is estimated to include the time for reviewing the instructions,
searching existing data sources, gathering and maintaining the data
needed, and completing and reviewing the collection of information.
Information on the estimated public reporting burden is provided in the
following table:
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Number of Responses per Total annual Hours per
Information collection respondents respondent responses response Total hours
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6,000 1 6,000 1 6,000
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In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments
from members of the public and affected agencies concerning the
proposed collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond, including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Comments must be
received by January 20, 2004. Comments must refer to the proposal by
name and docket number (FR-4835-I-01) and must be sent to:
Lauren Wittenberg, HUD Desk Officer, Office of Management and Budget,
New Executive Office Building, Washington, DC 20503-0009, Lauren_Wittenberg@omb.eop.gov, and
Gloria Diggs, Reports Liaison Officer, Office of the Assistant
Secretary for Housing-Federal Housing Commissioner, Room 9116, U.S.
Department of Housing and Urban Development, 451 Seventh Street, SW.,
Washington, DC 20410-8000.
Environmental Review
A Finding of No Significant Impact with respect to the environment
for this rule has been made in accordance with HUD regulations at 24
CFR part 50, which implement section 102(2)(C) of the National
Environmental Policy Act of 1969. The Finding of No Significant Impact
is available for public inspection between 7:30 a.m. and 5:30 p.m.
weekdays in the office of the Rules Docket Clerk, Office of the General
Counsel, Department of Housing and Urban Development, Room 10276, 451
Seventh Street, SW., Washington, DC 20410-0500.
Unfunded Mandates Reform Act
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538)
establishes requirements for federal agencies to assess the effects of
their regulatory actions on state, local, and tribal governments and
the private sector. This interim rule does not impose a federal mandate
that will result in expenditure by state, local, or tribal governments,
within the meaning of the Unfunded Mandates Reform Act of 1995.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that this rule would not have a significant
economic impact on a substantial number of small entities. The rule
governs access to, and use of, an automated, electronic tool to assist
mortgagees in managing workflow and expediting the endorsement process.
There are no anti-competitive discriminatory aspects of the rule with
regard to small entities, and there are not any unusual procedures that
would need to be complied with by small entities. Although HUD has
determined that this interim rule would not have a significant economic
impact on a substantial number of small entities, HUD welcomes comments
regarding any less burdensome alternatives to this rule that will meet
HUD's objectives as described in this preamble.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either (1) imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (2) the rule
preempts state law, unless the agency meets the consultation and
funding requirements of section 6 of the Executive Order. This interim
rule would not have federalism implications and would not impose
substantial direct compliance costs on state and local governments or
preempt state law within the meaning of the Executive Order.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled ``Regulatory Planning and Review'').
OMB determined that this rule is a ``significant regulatory action,''
as defined in section 3(f) of the Order (although not economically
significant, as provided in section 3(f)(1) of the Order). Any changes
made to the interim rule subsequent to its submission to OMB are
identified in the docket file, which is available for public inspection
in the Regulations Division, Office of the General Counsel, Room 10276,
Department of Housing and Urban Development, 451 Seventh Street, SW.,
Washington, DC 20410-0500.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance Numbers for 24 CFR part
203 are 14.117 and 14.133.
List of Subjects in 24 CFR Part 203
Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
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Accordingly, for the reasons described in the preamble, HUD proposes to
amend 24 CFR part 203 to read as follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
1. The authority citation for 24 CFR part 203 continues to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C.
3535(d).
0
2. Amend Sec. 203.251 by adding paragraph (t) to read as follows:
Sec. 203.251 Definitions.
* * * * *
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(t) TOTAL is an acronym that stands for ``Technology Open To
Approved Lenders.'' TOTAL is a mortgage scorecard based on a
mathematical equation that is to be used within an automated
underwriting system (AUS). TOTAL is a tool to assist the mortgagee in
managing its workflow and expediting the endorsement process, and is
not a substitute for the mortgagee's reasonable consideration of risk
and credit worthiness. Direct Endorsement mortgagees using TOTAL remain
solely responsible for the underwriting decision.
0
3. Amend Sec. 203.255 by revising paragraph (b)(5) to read as follows:
Sec. 203.255 Insurance of mortgage.
* * * * *
(b) * * *
(5) An underwriter certification, on a form prescribed by the
Secretary, stating that the underwriter has personally reviewed the
appraisal report and credit application (including the analysis
performed on the worksheets) and that the proposed mortgage complies
with HUD underwriting requirements, and incorporates each of the
underwriter certification items that apply to the mortgage submitted
for endorsement, as set forth in the applicable handbook or similar
publication that is distributed to all Direct Endorsement mortgagees,
except that where the TOTAL Mortgage Scorecard is used by the
mortgagee, and the TOTAL Mortgage Scorecard has determined that the
application represents an acceptable risk under terms and conditions
agreed to by the FHA, a Direct Endorsement underwriter shall not be
required to certify that the underwriter has personally reviewed the
credit application (including the analysis performed on any
worksheets). The following requirements are also applicable to the use
of the TOTAL Mortgage Scorecard:
(i) Mortgagees and vendors must certify to compliance with these
requirements:
(A) Permissible users. Only FHA-approved automatic underwriting
systems (AUSs) developed, operated, owned, or used by FHA-approved
Direct Endorsement mortgages, Fannie Mae, or Freddie Mac, may access
TOTAL, and only FHA-approved mortgagees will be able to obtain risk-
assessments using TOTAL;
(B) Limitation on use. Results from TOTAL must not be used as the
basis for rejecting any mortgage applicant. Mortgagees must provide
full manual underwriting for mortgage applicants when TOTAL returns a
``refer'' risk score.
(C) Vendor and mortgagee requirements. Both mortgagees and vendors
must:
(1) Use TOTAL to process FHA and other loan products specified by
the FHA Commissioner only and for no other purpose;
(2) Implement quality control procedures for TOTAL usage and
provide, at FHA's request, reports and loan samples that enable FHA to
evaluate program operation;
(3) Not use TOTAL to direct mortgagors into other non-FHA product
offerings (this requirement does not relieve a mortgagee from its
obligations under Sec. 203.10 concerning informed consumer choice for
prospective FHA mortgagors);
(4) Not disassemble, decompile, reverse engineer, derive or
otherwise reproduce any part of the source code or algorithm in TOTAL;
(5) Not provide feedback messages that conflict with the Equal
Credit Opportunity Act; and
(6) Comply with any additional HUD/FHA requirements or procedures
that are applicable to the Scorecard and may be issued through
handbooks, mortgagee letters, TOTAL User Guides, or TOTAL Developers
Guide following appropriate advance notification, where applicable.
(ii) Loss of privilege to use TOTAL. Mortgagees and AUS vendors
found to violate the requirements applicable to the use of TOTAL may
have their access to TOTAL and all associated privileges terminated
upon appropriate notice in accordance with the following procedure:
(A) Notice. HUD will provide a mortgagee or vendor with a 30-day
notice of a violation and loss of privilege. The notice will state the
nature of the violation, the effective date of the loss of the
privilege, and the duration of the loss of the privilege. The notice
will become effective on the date provided in the notice, unless the
mortgagee or vendor appeals the violation and loss of privilege in
accordance with paragraph (b)(5)(ii)(B) of this section.
(B) Appeal. A party receiving a notice of violation may appeal to
the Deputy Assistant Secretary for Single Family Housing (DAS-SFH), or
his or her designee, before the effective date of the notice by
providing evidence to refute the violation. The loss of privilege is
stayed until the DAS-SFH, or designee, notifies the party that the loss
of privilege has been affirmed, rescinded, or modified.
* * * * *
Dated: October 29, 2003.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 03-29055 Filed 11-20-03; 8:45 am]
BILLING CODE 4210-27-P