Final Rule

Thursday,
May 1, 2003

Part II

Department of
Housing and Urban
Development
24 CFR Part 203
Prohibition of Property Flipping in
HUD’s Single Family Mortgage Insurance
Programs; Final Rule

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Federal Register / Vol. 68, No. 84 / Thursday, May 1, 2003 / Rules and Regulations

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 203
[Doc. No. FR–4615–F–02]
RIN 2502–AH57

Prohibition of Property Flipping in
HUD’s Single Family Mortgage
Insurance Programs
AGENCY: Office of the Assistant
Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
SUMMARY: This final rule addresses
property ‘‘flipping,’’ the practice
whereby a property recently acquired is
resold for a considerable profit with an
artificially inflated value, often abetted
by a lender’s collusion with the
appraiser. Specifically, the final rule
establishes certain new requirements
regarding the eligibility of properties to
be financed with Federal Housing
Administration (FHA) mortgage
insurance. The regulatory amendments
will comply with Congressional
mandates to maintain the FHA
Insurance Fund in a sound actuarial
manner. The new requirements will
make flipped properties ineligible for
FHA-insured mortgage financing, thus
precluding FHA home purchasers from
becoming victims of predatory flipping
activity. The final rule follows
publication of a September 5, 2001,
proposed rule and takes into
consideration the public comments
received on the proposed rule.
DATES: Effective Date: June 2, 2003.
FOR FURTHER INFORMATION CONTACT:
Vance T. Morris, Director, Office of
Single Family Program Development,
Office of Insured Single Family
Housing, Room 9266, U.S. 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 individuals
may access this number via TTY by
calling the toll-free Federal Information
Relay Service at (800) 877–8339.
SUPPLEMENTARY INFORMATION:

I. Background—HUD’s September 5,
2001, Proposed Rule
On September 5, 2001 (66 FR 46502),
HUD published a proposed rule for
public comment to address property
‘‘flipping,’’ the predatory lending
practice whereby a property recently
acquired is resold for a considerable
profit with an artificially inflated value,
often abetted by a lender’s collusion
with the appraiser. Most property

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flipping occurs within a matter of days
after acquisition, and usually with only
minor cosmetic improvements, if any. In
the September 5, 2001, proposed rule,
HUD proposed to restrict flipping by
establishing new eligibility
requirements for properties whose
purchase is being financed with FHA
mortgage insurance.
As noted, property flipping involves
the rapid re-sale, often within days, of
a recently acquired property.
Accordingly, HUD proposed to prohibit
FHA financing for any property being
sold within six months after acquisition
by the seller. The proposed six-month
restriction would not have applied to resales by HUD of Real Estate-Owned
(REO) properties under 24 CFR part 291
and single family assets in revitalization
areas pursuant to section 204 of the
National Housing Act (12 U.S.C. 1710).
The proposed rule also provided for
legitimate transactions involving the
quick and profitable re-sale of a recently
acquired property, by authorizing HUD
to grant case-by-case exceptions to the
six-month restriction where the lender
demonstrates that the sales price of the
property corresponds to its market
value.
HUD also proposed to establish a new
owner of record requirement for
properties financed with FHA mortgage
insurance. Unscrupulous investors will
often flip properties they have
contracted to purchase (but have not yet
acquired) by selling or assigning the
rights to the sales contract, often for a
significant profit. The September 5,
2001, proposed rule addressed this issue
by providing that only those properties
purchased from the owner of record
would be eligible for mortgages insured
by FHA.
The preamble to the September 5,
2001, proposed rule provides more
information regarding the proposed
regulatory amendments to the FHA
regulations.
II. Significant Differences Between This
Final Rule and September 5, 2001,
Proposed Rule
This final rule follows publication of
the September 5, 2001, proposed rule,
and takes into consideration the public
comments received on the proposed
rule. The most significant differences
between this final rule and the
September 5, 2001, proposed rule are
summarized below. Additional
information regarding these changes is
provided in the discussion of the public
comments in sections III through VI of
this preamble.
1. Revised time restrictions on resales. In response to significant public
comment on this issue, this final rule

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revises the proposed time restrictions on
re-sales. The final rule reduces the time
restriction on FHA mortgage insurance
to short-term re-sales occurring within
90 days following acquisition by the
seller.
The rule, however, provides
additional measures that HUD may take
after 90 days, depending upon the
circumstances of the re-sale. If the resale is between 91 days and 180 days
following acquisition by the seller, the
final rule requires the lender to
document the re-sale value if the re-sale
price is a certain percentage, as
established by HUD, over the purchase
price. The percentage established by
HUD will be between 50 to 150 percent
over the purchase price. The final rule
provides the lender a number of options
to meet this requirement. Specifically,
the lender may obtain a second
appraisal that supports the increased
value. As an alternative, the lender may
document its file to establish that the
increased value is the result of
rehabilitation to the property. The
requirement for additional
documentation will be set at a level that,
as determined by HUD, will deter
unscrupulous purchasers from
attempting to flip property while
simultaneously ensuring that legitimate
rehabilitation of properties continues.
This final rule would establish the level
that triggers the additional
documentation requirement at 100
percent above the original purchase
price. HUD may revise the level that
triggers this documentation requirement
by Federal Register notice.
In addition to requiring
documentation for re-sales within the 91
to 180 day period, the final rule
authorizes HUD to impose additional
protections against ‘‘flipping’’ for resales up to 12 months following
acquisition by the seller. To address
specific circumstances or locations
where HUD identifies property flipping
as a problem, the final rule authorizes
that HUD may require the lender, for resales occurring between 91 days and 12
months, to obtain additional
documentation to support the re-sale
value if the re-sale price is 5 percent or
greater than the lowest sales price of the
property during the preceding 12
months (as evidenced by the contract of
sale). Should HUD exercise this
authority, it would supersede the higher
threshold established for the 91 day to
180 day period. At HUD’s discretion,
this documentation must include, but is
not limited to, an appraisal from another
appraiser.
HUD will announce its determination
to require additional value
documentation for re-sales up to 12

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months following acquisition by the
seller through Federal Register notice.
The requirement for additional value
documentation may be established
either on a nationwide or regional basis.
The Federal Register notice will specify
the percentage increase in the re-sale
price that will trigger the need for
additional documentation, and will
specify the acceptable types of
documentation. The Federal Register
notice may also exclude re-sales of less
than a specific dollar amount from the
additional value documentation
requirements. In order to provide the
public with sufficient time to adjust to
the additional documentation
procedures, any such Federal Register
notice, and any subsequent revisions,
will be issued at least thirty days before
taking effect.
If the additional documentation
supports a value that is more than 5
percent lower than the value supported
by the first appraisal, the lower value
will be used in calculating the
maximum insured mortgage amount.
Otherwise, the value supported by the
first appraisal will be used to calculate
the maximum mortgage amount.
If the re-sale date is more than 12
months following the date of acquisition
by the seller, the property is eligible for
a mortgage insured by FHA.
2. Clarification of relevant dates for
time restrictions on re-sales. The final
rule clarifies that, for purposes of the
time restrictions on re-sales, the seller’s
date of acquisition will be based upon
the date of settlement. The re-sale date
will be based on the date of execution
of the sales contract that will result in
FHA mortgage insurance.
3. Elimination of case-by-case
exceptions to time restrictions on resales. The final rule no longer provides
for case-by-case exceptions to the time
restrictions on re-sales.
4. Inapplicability of time restrictions
on re-sales. The final rule continues to
provide that the time restrictions on resales do not apply to re-sales by HUD
of REO properties under 24 CFR part
291 and single family assets in
revitalization areas pursuant to section
204 of the National Housing Act. In
addition, the final rule also provides
that the time restrictions do not apply
to the re-sale of properties acquired by
an employer or relocation agency in
connection with the relocation of an
employee.
5. Owner of record documentation
requirements. The final rule adopts the
owner of record requirements contained
in the proposed rule, but clarifies that
lenders will be required to verify
compliance with the requirement. The
final rule provides that the lender must

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submit documentation verifying that the
seller is the owner of record as part of
the application for mortgage insurance.
This documentation may include, but is
not limited to, a property sales history
report, a copy of the recorded deed, or
other documentation (such as a copy of
a property tax bill, a title commitment,
or binder) indicating the seller’s
ownership of the property.
6. Sanctions and indemnification. The
final rule clarifies that failure of a lender
to comply with the regulatory antiflipping requirements may result in
HUD requesting indemnification of the
mortgage loan and/or seeking other
appropriate remedies.
7. Conforming changes to § 203.255.
The final rule amends § 203.255 of the
FHA regulations, which lists the items
that must be included in a mortgage
insurance application, to reflect the
anti-flipping documentation required by
this rule.
III. Discussion of Public Comments
Received on the September 5, 2001,
Proposed Rule
The public comment period on the
September 5, 2001, proposed rule closed
on November 5, 2001. HUD received
120 public comments on the proposed
rule. Comments were received from
national associations representing
realtors, individual realtors,
homebuilders and contractors, mortgage
bankers, state and local housing and
community development agencies, and
other commenters. Many commenters
submitted identical ‘‘form’’ letters.
Sections IV, V, and VI of this preamble
present a summary of the most
significant issues raised by the public
commenters, and HUD’s responses to
these issues. Section IV of the preamble
discusses the public comments
regarding the proposed six-month
restriction on re-sales. Section V
discusses the public comments on the
provisions regarding case-by-case
exceptions and the owner of record
requirements. Section VI of the
preamble discusses the other public
comments received by HUD on the
September 5, 2001, proposed rule.
IV. Comments Regarding Time
Restriction on Re-Sales
Under the September 5, 2001,
proposed rule, any property sold within
six months after acquisition by the seller
would not be eligible for a mortgage
insured by FHA. The proposed sixmonth restriction would not have
applied to re-sales by HUD of REO
properties under 24 CFR part 291 and of
single family assets in revitalization
areas pursuant to section 204 of the
National Housing Act. This provision of

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the proposed rule was of significant
public interest, and the majority of
comments on the September 5, 2001,
proposed rule concerned the six-month
restriction on re-sales. Several
commenters supported the restriction,
writing that the proposal would help to
eliminate the most extreme cases of
property flipping. Most of the
commenters, however, expressed
concerns about the six-month restriction
and urged HUD to reconsider its
proposal.
Comment: The proposed time
restriction will hurt HUD’s interests and
the interests of homebuyers. Several
commenters wrote that a six-month
restriction would be too short, and fail
to deter longer-term property flipping
transactions. These commenters
suggested lengthening the re-sale ban to
nine months or one year. Many other
commenters, however, wrote that the
six-month restriction would be too long,
and hurt HUD’s interests and the best
interest of the home buying public. The
commenters wrote that by eliminating
the ability of legitimate investors to
resell homes using HUD financing, the
six-month ban would reduce the
incentive for investors to buy and
rehabilitate these properties. The
commenters wrote that this could mean
that many undesirable properties
remain unsold by the lender for years.
Rather than providing a decent home,
these properties would instead blight
neighborhoods as decaying eyesores.
The commenters wrote that the
unintended consequence of the
proposed rule would be to unwittingly
close down the businesses of many
residential real estate investors while
attempting to outlaw the predatory
practices of a few.
HUD Response. In response to these
concerns raised by the public
commenters, HUD has substantially
revised the proposed time restrictions
on re-sales. HUD agrees with the
commenters who wrote that there are
many legitimate transactions that would
be prohibited by a six-month restriction
on FHA financing. Accordingly, HUD
has revised the rule to accommodate
such re-sales, while still implementing
safeguards to assure that the value of the
property is recognized in the
marketplace and to reduce the
possibility of appraisal fraud.
The final rule reduces the time
restriction on FHA mortgage insurance
to short-term re-sales occurring within
90 days following acquisition by the
seller. HUD will not grant case-by-case
exceptions to the 90-day restriction. If
the re-sale is between 91 and 180 days
following acquisition by the seller, HUD
will require that the lender document

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the increased value of the property if the
re-sale price exceeds an established
value between 50 and 150 percent of the
purchase price. As a further safeguard
against flipping for re-sales up to 12
months following acquisition by the
seller, the final rule authorizes HUD to
require that the lender obtain additional
verification of the value of the property
if the re-sale price is 5 percent or greater
than the lowest sales price of the
property during the preceding 12
months (as evidenced by the contract of
sale).
HUD believes that short re-sales
executed within 90 days imply prearranged transactions that often prove to
be among the most egregious examples
of predatory lending practices and, thus,
will not insure mortgages on these
‘‘flipped’’ properties. Ninety days is also
not an unreasonable waiting period if
actual rehabilitation and repairs of a
property occur before the property is resold. HUD agrees that the previously
proposed six-month ban on re-sales
would have been disruptive to the
industry and would have provided a
disincentive to legitimate contractors
who improve houses—thus increasing
the stock of affordable housing. It was
never HUD’s intention to eliminate the
ability of investors and contractors to
profit from their actions, but rather to
assure that homebuyers are not
purchasing overvalued houses and
becoming the unwitting victims of
predatory practices. To this end, HUD
believes that the final rule accomplishes
this goal. While the most egregious
examples of property flipping consist of
nearly immediate re-sales or ‘‘flips,’’
HUD also agrees with the commenters
who wrote that the six-month restriction
was too short to deter longer-term
predatory flipping transactions. While
an outright ban on FHA mortgage
insurance is not warranted for re-sales
occurring beyond 90 days, HUD agrees
that additional safeguards may be
required to ensure that the value of the
property has not been fraudulently
inflated. Recognizing this, the final rule
requires that lenders document the
increased value of the property if the resale price exceeds an established value
for re-sales occurring between 91 and
180 days following acquisition of the
property. As an additional protection
against flipping, the final rule provides
that HUD may require lenders to obtain
additional documentation that supports
the re-sale price for re-sales within 12
months of the acquisition date if the resale price is 5 percent or greater than the
purchase price if HUD identifies
specific circumstances or locations
where property flipping is a problem.

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Should HUD exercise this authority, this
authority would supersede the higher
threshold established for the 91 day to
180 day period. At HUD’s discretion,
this additional documentation must
include, but is not limited to, an
appraisal from another appraiser. As an
alternative, the lender may document its
file to establish that the increased value
is the result of rehabilitation to the
property.
For re-sales between 91 and 180 days,
HUD will establish the level that triggers
this documentation requirement at 100
percent above the original purchase
price. HUD believes that setting the
level at 100 percent above the original
purchase price will deter unscrupulous
purchasers from attempting to flip
property while simultaneously ensuring
that legitimate rehabilitation of
properties continues. The final rule
provides HUD the authority to revise the
level. Should HUD determine that the
level is not effectively deterring
property flipping, HUD may lower the
trigger. Similarly, HUD may increase the
level if HUD determines that legitimate
rehabilitation of properties is adversely
affected by the documentation
requirement, and that adverse effect is
not justified by a significant deterrent
effect on property flipping. HUD may
revise the trigger level by Federal
Register notice. In order to provide the
public with sufficient time to adjust to
the additional documentation
procedures, revisions to the standard
will be issued at least thirty days before
taking effect.
If HUD identifies specific
circumstances or locations where
property flipping is a problem, HUD
may require the lender, for re-sales up
to 12 months following acquisition of
the property, to provide additional
documentation if the re-sale price is 5
percent or greater than the purchase
price. Should HUD exercise this
authority, this authority would
supersede the higher threshold
established for the 91 day to 180 day
period. HUD will announce its
determination to require additional
value documentation through issuance
of a Federal Register notice. The
requirement for additional value
documentation may be established on a
nationwide or regional basis. Further,
the Federal Register notice will specify
the percentage increase in the re-sale
price that will trigger the need for
additional documentation, and will
specify the acceptable types of
documentation. The Federal Register
notice may also exclude re-sales of less
than a specific dollar amount from the
additional value documentation
requirements. In order to provide the

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public with sufficient time to adjust to
the additional documentation
procedures, any such Federal Register
notice, and any subsequent revisions,
will be issued at least thirty days before
taking effect.
If the additional documentation
supports a value that is more than 5
percent lower than the value supported
by the first appraisal, the lower value
will be used in calculating the
maximum insured mortgage amount.
Otherwise, the original value supported
by the first appraisal will be used to
calculate the maximum mortgage
amount.
Comment: Re-sales involving only a
modest increase over the previous sales
price should be exempt from the time
restrictions. Several commenters wrote
that when the sale price increases only
a small amount between the previous
sale and the new sale to be financed
with an FHA-insured mortgage, HUD’s
concern with property flipping is
drastically diminished.
HUD Response. HUD agrees that its
concerns with property flipping are
reduced when the sales price increases
only a small amount between the
previous sale and the new sale to be
financed with an FHA-insured
mortgage. As described in more detail in
the preceding response, HUD may
exclude re-sales of less than a specific
dollar amount from any additional
valuation requirements.
Comment: The proposed rule could
have significant negative consequences
on government and corporate employees
relocated yearly by their employers.
Several commenters wrote that the sixmonth restriction would have a negative
impact on the thousands of government
and private sector employees that are
relocated each year. The commenters
wrote that, from an employer’s
standpoint, any house purchased from a
relocating employee would essentially
be unsaleable through the FHA
programs because the six-month waiting
period would result in unacceptably
large carrying costs. Several of the
commenters advocated that the final
rule exempt properties acquired by an
employer in connection with an
employee’s relocation from the
restriction on re-sales.
HUD Response. HUD agrees with the
commenters and has revised the
proposed rule at the final rule stage
accordingly. The final rule exempts
properties acquired by an employer or
relocation agency in connection with
the relocation of an employee from the
time restriction on re-sales.
Comment: The final rule should
provide clarification regarding the
relevant dates for calculating the time

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restriction on re-sales. Several
commenters recommended that the final
rule define the date of acquisition of the
property by the seller and the re-sale
date used to calculate the time
restriction on re-sales.
HUD Response. HUD agrees with the
commenters. The final rule clarifies
that, for purposes of the time
restrictions on re-sales, the seller’s date
of acquisition will be based upon the
date of settlement. The re-sale date will
be based on the date of execution of the
sales contract that will result in FHA
mortgage insurance.
V. Comments Regarding Case-by-Case
Exceptions and Owner of Record
Requirements
A. Comments Regarding Case-by-Case
Exceptions to Time Restrictions on ReSales
The September 5, 2001, proposed rule
would have provided HUD with the
authority to grant exceptions to the sixmonth restriction on re-sales, on a caseby-case basis, if the mortgagee provided
written documentation demonstrating
that the sales price of the property
accurately corresponded to its market
value. The proposed rule provided that
such documentation could include, but
would not be limited to, evidence that:
(1) The sales price reflected a rapidly
appreciating real estate market; (2) the
seller had made improvements that
resulted in a corresponding increase in
the value of the property; or (3) the
property was being sold at below market
value due to a distress sale or at a tax
sale.
Comment: Objections and Requested
Clarifications to Proposed Exceptions
Procedure. Several commenters
submitted comments regarding the
proposed exceptions procedure
contained in the proposed rule. Some of
the commenters focused on the process
HUD would use to process exception
requests. These commenters asked HUD
to provide additional details regarding
this process (such as identifying the
entity within HUD that would be
responsible for examining exception
requests.) Some of these commenters
also wrote that HUD does not have
sufficient resources to responsibly
handle this task and that the ‘‘wheels of
bureaucracy’’ could drag the review
process beyond the six-month
restriction period. The commenters
requested that the final rule establish
specific deadlines for speedily
processing and granting exception
requests (for example a 30-day period).
Other commenters objected to the
factors that the proposed rule stated
HUD would consider in determining

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whether to grant an exception. The
commenters wrote that these factors
were all biased toward market
abnormalities and had little relevance to
the amount of time the owner holds a
property. The commenters advocated
that HUD expand the list of factors to
address this perceived deficiency. For
example, some commenters suggested
that the final rule specify that HUD will
permit exceptions as a result of death,
job loss, unemployment/military
transfer, and other reasonable
circumstances beyond the owner’s
control. Other commenters suggested
that the list of factors should be
modified to recognize specific actions
by lenders to justify exceptions to the
six-month restriction, such as obtaining
a home inspection.
HUD Response. HUD has eliminated
the need for case-by-case exceptions by
reducing the time restriction on FHA
mortgage insurance to short-term resales that occur within 90 days
following acquisition of the property by
the seller. HUD believes that the shortterm restriction on re-sales is
reasonable, addresses concerns raised
by the public commenters on the
proposed rule, and will prohibit the
most egregious examples of predatory
lending involving flipped properties.
HUD will not grant case-by-case
exceptions to the revised 90-day
restriction.
B. Comments Regarding Owner of
Record Requirement
The September 5, 2001, proposed rule
provided that only those properties
purchased from the owner of record
would be eligible for a mortgage insured
by FHA.
Comment: The owner of record
requirements require clarification. One
commenter suggested that the owner of
record requirements be expanded and
clarified to ensure that unscrupulous
parties do not avoid the intent of the
rule. The commenter recommended that
the language of the proposed rule be
revised to specify that the property must
be purchased ‘‘solely and completely’’
from the owner of record to be eligible
for a mortgage insured by FHA. The
commenter also suggested that the
proposed rule be revised to clarify that
the sale may not involve any transfer or
assignment of any sales agreement or
any interest therein. Further, the
commenter wrote that the final rule
should clearly prohibit any person
intervening in the sales transaction on
behalf of the owner of record, including
those who transfer ownership to the
buyer and collect the sale proceeds.
HUD Response. HUD agrees and has
modified the proposed rule to clarify

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what constitutes an ‘‘owner of record’’
and the manner in which compliance
with this requirement must be verified.
The final rule clarifies that lenders will
be required to verify compliance with
the requirement. The final rule provides
that the lender must submit
documentation verifying that the seller
is the owner of record as part of the
application for mortgage insurance. This
documentation may include, but is not
limited to, a property sales history
report, a copy of the recorded deed, or
other documentation (such as a copy of
a property tax bill, a title commitment,
or binder) indicating the seller’s
ownership of the property.
VI. Other Comments on the Proposed
Rule
A. General Objections to Proposed Rule
Comment: HUD should focus its
efforts on fraudulent appraisals. Several
commenters wrote that rather than
establishing additional regulatory
requirements, HUD should focus its
enforcement efforts on the root of most
property flipping—poor and fraudulent
appraisals. Several of the commenters
wrote that HUD should conduct
independent appraisals of all properties
being purchased with FHA financing.
Other commenters suggested that HUD
strengthen its requirements concerning
the education and experience of
appraisers conducting FHA appraisals.
Still other commenters recommended
that HUD take more aggressive steps to
identify and sanction unscrupulous
appraisers engaged in property flipping.
HUD Response. HUD agrees that
fraudulent and inflated appraised values
are the source of most predatory
practices involving property flipping,
and the final rule requires additional
appraised value safeguards. HUD does
not agree that FHA should be the entity
to perform the appraisals. Staffing
realities and HUD’s commitment to the
Direct Endorsement (DE) program
compel it to rely on qualified appraisers
and DE lenders to deliver mortgage
financing to the consumer as efficiently
and inexpensively as possible. HUD also
notes that it has implemented several
policies to help ensure the accuracy and
completeness of appraisals on
properties securing FHA-insured
mortgages. For example, HUD has
established the FHA Appraiser Roster,
which lists those appraisers who are
eligible to perform FHA single family
appraisals. HUD is also developing
several other initiatives to strengthen
the quality of FHA appraisals, and to
impose stricter FHA Appraiser Roster
qualifications. In addition, where those
involved in property flipping schemes

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have been identified, HUD will pursue
those entities and individuals to impose
sanctions available to HUD, and HUD
will enlist the assistance of applicable
federal and local authorities in
prosecuting those individuals.
Comment: HUD should target known
property flippers. Several commenters
wrote that, rather than imposing new
restrictions, HUD should focus its
regulatory efforts on individuals who
are known to have engaged in property
flipping. The commenters suggested that
HUD should review its claim and
default records to identify those persons
currently engaged in predatory lending
practices. The commenters suggested
that those persons should be barred
from participating in the FHA programs
for a specified period (such as 1–3
years). The commenters wrote that in
this way HUD could reduce predatory
lending activity without punishing the
innocent subsequent buyer.
HUD Response: HUD believes it is
better to preclude predatory practices
proactively and eliminate opportunities
for unscrupulous actors, than to
retroactively attempt to find the
perpetrators after the damage to the
homebuyers has been done. As noted,
however, in the response to the
preceding comment, where
unscrupulous actors have been
identified in property flipping schemes,
HUD will take action against those
individuals and entities.
Comment: HUD already has the
enforcement tools necessary to prohibit
property flipping. Several commenters
wrote that HUD should make better use
of its existing sanction and penalty
methods to deter property flipping,
rather than subject the FHA programs to
increased regulation.
HUD Response. HUD agrees in
principle that existing procedures exist
to protect its interests as well as those
of the homebuyers. However, unlike
existing enforcement tools, the
additional safeguards implemented by
this final rule are directly targeted at the
problems associated with property
flipping. The final rule proactively deals
with both the pre-arranged transaction
that often results in predatory practices
against unwitting homebuyers as well as
appraisals that cannot support the value
claimed.
B. Suggested Changes to Proposed Rule
Comment: HUD should establish
additional safeguards for victims of
property flipping. One commenter made
this suggestion. The commenter wrote
that such procedures should include
timely and thorough re-appraisals of
properties where flipping is alleged,
assistance for all homeowners

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victimized by a fraudulent appraisal or
other mortgage fraud, and remediation
to victimized homeowners.
HUD Response. HUD does not agree
that the expansive remedies proposed
by the commenter are necessary, since
this final rule should preclude the most
egregious examples of fraudulent
property flips before they occur.
Comment: HUD should expand the
scope of the rule to include mortgages
insured by other governmental entities.
One commenter made this suggestion.
HUD Response. HUD has not revised
the proposed rule in response to this
comment. HUD has no jurisdiction over
mortgages guaranteed or made by other
government agencies, such as the
Department of Veterans Affairs, and the
Rural Housing Service of the
Department of Agriculture.
Comment: The final rule should
prohibit gifts to potential borrowers that
will enable them to pay off debts that
would otherwise render them ineligible
for FHA mortgage insurance. The
commenters wrote that ‘‘gifts’’ made to
potential borrowers in order to enable
them to pay off debts, including
judgments and liens, are often a
principal tool of those engaged in
property flipping and should be
prohibited in the final rule.
HUD Response. HUD does not believe
that a change to the rule is required.
Mortgagee Letter 2002–02 (issued on
January 16, 2002) already addresses gifts
for the purpose of paying off obligations
and judgments. A copy of this
Mortgagee Letter may be downloaded
from the HUD Client Information and
Policy System (HUDCLIPS) Internet
Web site at http://www.hudclips.org.
C. Miscellaneous Comments
Comment: HUD should consider
modifying the FHA connection
appraisal assignment screen to include
a field for capturing the seller’s name.
The commenter wrote that this would
allow HUD to more easily determine
whether a seller had previously sold a
home to an FHA applicant, and if so,
whether the history of a prior sale is
indicative of possible property flipping.
HUD Response. HUD is considering
the change to the FHA connection
system suggested by the commenter,
and may implement this modification at
a later date.
Comment: HUD should create a
public database of property sales within
neighborhoods and the pricing history
of individual homes. Several
commenters made this
recommendation. The commenters
wrote that the names of the lenders,
brokers, real estate agents, and
appraisers should also be included in

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the database. The commenters wrote
that the database would allow potential
buyers to research the market values of
homes in their areas. Additionally, the
commenters wrote that because many
victims of property flipping may not
have access to computers, these services
must be advertised and made available,
possibly at community home counseling
offices. The commenters also
recommended that HUD make available
to the public lists of lenders and
appraisers involved in a high volume of
foreclosures.
HUD Response. HUD does not have
the capacity to develop such a database
for other than FHA-insured mortgages,
and does not believe it should compete
with private-sector service providers
that already have developed property
sales history reporting systems. HUD
already provides public access to
information regarding lenders with high
rates of mortgage defaults through its
Neighborhood Watch system.
Comment: HUD should focus on
educating homebuyers. One commenter
wrote that HUD should help ensure that
low-income buyers are better educated
regarding the risks and responsibilities
of purchasing a home, including
predatory lending abuses.
HUD Response. HUD has long
advocated homeownership counseling
and funds many agencies that provide
such services.
VII. Findings and Certifications
Public Reporting Burden
The information collection
requirements contained in this final rule
have been approved by the Office of
Management and Budget (OMB) under
the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) and assigned
OMB Control Number 2502–0547. In
accordance with the Paperwork
Reduction Act, HUD may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection displays a
currently valid OMB control number.
Regulatory Planning and Review
The Office of Management and Budget
(OMB) reviewed this rule under
Executive Order 12866, 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 an economically
significant regulatory action under the
Order). Any changes made to this rule
as a result of that review are identified
in the docket file, which is available for
public inspection in the office of the
Department’s Rules Docket Clerk, Office
of General Counsel, Room 10276, 451

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Federal Register / Vol. 68, No. 84 / Thursday, May 1, 2003 / Rules and Regulations
Seventh Street, SW., Washington, DC
20410–0500.
Environmental Impact
A Finding of No Significant Impact
with respect to the environment was
made at the proposed rule stage in
accordance with HUD regulations at 24
CFR part 50, which implement section
102(2)(C) of the National Environmental
Policy Act of 1969 (42 U.S.C. 4223).
That Finding remains applicable to this
final rule and is available for public
inspection between the hours of 7:30
a.m. and 5:30 p.m. weekdays in the
office of the Department’s Rules Docket
Clerk, Office of General Counsel, Room
10276, Department of Housing and
Urban Development, 451 Seventh Street,
SW., Washington, DC 20410–0500.
Regulatory Flexibility Act
The Secretary has reviewed this final
rule before publication, and by
approving it certifies, in accordance
with the Regulatory Flexibility Act (5
U.S.C. 605(b)), that this final rule will
not have a significant economic impact
on a substantial number of small
entities. The reasons for HUD’s
determination are as follows. The final
rule is exclusively concerned with
curbing the predatory lending practice
of property flipping. The vast majority
of lenders participating in the FHA
single family mortgage insurance
programs fully comply with all program
requirements and conduct themselves in
an ethical manner. The final rule will
only impact the small minority of
unscrupulous lenders who participate
in the FHA programs and engage in this
predatory practice.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial direct compliance costs on
state and local governments and is not
required by statute, or the rule preempts
state law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
final rule will 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.
Unfunded Mandates Reform Act
Title II of 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 on the

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private sector. This final rule will not
impose any federal mandates on any
state, local, or tribal governments, or on
the private sector, within the meaning of
the Unfunded Mandates Reform Act of
1995.
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.
Accordingly, for the reasons described
in the preamble, HUD amends 24 CFR
part 203 to read as follows:

■

PART 203—SINGLE FAMILY
MORTGAGE INSURANCE
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).
■

2. Add § 203.37a to read as follows:

§ 203.37a

Sale of property.

(a) Sale by owner of record. (1) Owner
of record requirement. To be eligible for
a mortgage insured by FHA, the
property must be purchased from the
owner of record and the transaction may
not involve any sale or assignment of
the sales contract.
(2) Supporting documentation. The
mortgagee shall obtain documentation
verifying that the seller is the owner of
record and must submit this
documentation to HUD as part of the
application for mortgage insurance, in
accordance with § 203.255(b)(12). This
documentation may include, but is not
limited to, a property sales history
report, a copy of the recorded deed from
the seller, or other documentation (such
as a copy of a property tax bill, title
commitment, or binder) demonstrating
the seller’s ownership.
(b) Time restrictions on re-sales. (1)
General. The eligibility of a property for
a mortgage insured by FHA is
dependent on the time that has elapsed
between the date the seller acquired the
property (based upon the date of
settlement) and the date of execution of
the sales contract that will result in the
FHA mortgage insurance (the re-sale
date). The mortgagee shall obtain
documentation verifying compliance
with the time restrictions described in
this paragraph and must submit this
documentation to HUD as part of the

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23375

application for mortgage insurance, in
accordance with § 203.255(b).
(2) Re-sales occurring 90 days or less
following acquisition. If the re-sale date
is 90 days or less following the date of
acquisition by the seller, the property is
not eligible for a mortgage to be insured
by FHA.
(3) Re-sales occurring between 91
days and 180 days following
acquisition. (i) If the re-sale date is
between 91 days and 180 days following
acquisition by the seller, the property is
generally eligible for a mortgage insured
by FHA.
(ii) However, HUD will require that
the mortgagee obtain additional
documentation if the re-sale price is 100
percent over the purchase price. Such
documentation must include an
appraisal from another appraiser. The
mortgagee may also document its loan
file to support the increased value by
establishing that the increased value
results from the rehabilitation of the
property.
(iii) HUD may revise the level at
which additional documentation is
required under § 203.37a(b)(3) at 50 to
150 percent over the original purchase
price. HUD will revise this level by
Federal Register notice with a 30 day
delayed effective date.
(4) Authority to address property
flipping for re-sales occurring between
91 days and 12 months following
acquisition.
(i) If the re-sale date is more than 90
days after the date of acquisition by the
seller, but before the end of the twelfth
month after the date of acquisition, the
property is eligible for a mortgage to be
insured by FHA.
(ii) However, HUD may require that
the lender provide additional
documentation to support the re-sale
value of the property if the re-sale price
is 5 percent or greater than the lowest
sales price of the property during the
preceding 12 months (as evidenced by
the contract of sale). At HUD’s
discretion, such documentation must
include, but is not limited to, an
appraisal from another appraiser. HUD
may exclude re-sales of less than a
specific dollar amount from the
additional value documentation
requirements.
(iii) If the additional value
documentation supports a value of the
property that is more than 5 percent
lower than the value supported by the
first appraisal, the lower value will be
used to calculate the maximum
mortgage amount under § 203.18.
Otherwise, the value supported by the
first appraisal will be used to calculate
the maximum mortgage amount.

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(iv) HUD will announce its
determination to require additional
value documentation through issuance
of a Federal Register notice. The
requirement for additional value
documentation may be established
either on a nationwide or regional basis.
Further, the Federal Register notice will
specify the percentage increase in the
re-sale price that will trigger the need
for additional documentation, and will
specify the acceptable types of
documentation. The Federal Register
notice may also exclude re-sales of less
than a specific dollar amount from the
additional value documentation
requirements. Any such Federal
Register notice, and any subsequent
revisions, will be issued at least thirty
days before taking effect.
(v) The level at which additional
documentation is required under
§ 203.37a(b)(4) shall supersede that
under § 203.37a(b)(3).
(5) Re-sales occurring more than 12
months following acquisition. If the resale date is more than 12 months
following the date of acquisition by the
seller, the property is eligible for a
mortgage insured by FHA.

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(c) Exceptions to time restrictions on
re-sales. The time restrictions on resales described in paragraph (b) of this
section do not apply to:
(1) Re-sales by HUD of Real EstateOwned (REO) properties under 24 CFR
part 291 and of single family assets in
revitalization areas pursuant to section
204 of the National Housing Act (12
U.S.C. 1710); and
(2) Re-sales of properties purchased
by an employer or relocation agency in
connection with the relocation of an
employee.
(d) Sanctions and indemnification.
Failure of a mortgagee to comply with
the requirements of this section may
result in HUD requesting
indemnification of the mortgage loan, or
seeking other appropriate remedies
under 24 CFR part 25.
■ 3. Amend § 203.255 as follows:
■ a. Revise paragraph (b)(1);
■ b. Redesignate paragraph (b)(13) as
(b)(14); and
■ c. Add a new paragraph (b)(13) to read
as follows:
§ 203.255

*

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Insurance of mortgage.

*
*
(b) * * *

Frm 00008

*

*

(1) Property appraisal upon a form
meeting the requirements of the
Secretary (including, if required, any
additional documentation supporting
the appraised value of the property
under § 203.37a), or a HUD conditional
commitment (for proposed construction
only), or a Department of Veterans
Affairs certificate of reasonable value,
and all accompanying documents
required by the Secretary;
*
*
*
*
*
(13) The documentation required
under § 203.37a providing that:
(i) The seller is the owner of record;
and
(ii) That more than 90 days elapsed
between the date the seller acquired the
property (based upon the date of
settlement) and the date of execution of
the sales contract that will result in the
FHA mortgage insurance.
*
*
*
*
*
Dated: February 7, 2003.
John C. Weicher,
Assistant Secretary for Housing—Federal
Housing Commissioner.
[FR Doc. 03–10778 Filed 4–30–03; 8:45 am]
BILLING CODE 4210–27–P

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