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Friday,

July 20, 2007

Part III

Department of
Housing and Urban
Development
24 CFR Parts 203 and 206
Adjustable Rate and Home Equity
Conversion Mortgages—Additional Index;
Final Rule
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40048 Federal Register / Vol. 72, No. 139 / Friday, July 20, 2007 / Rules and Regulations

DEPARTMENT OF HOUSING AND HUD’s responses to public comments on IV. Discussion of Public Comments
URBAN DEVELOPMENT hybrid ARMs, as presented in the final Received on the June 19, 2006,
rule published on March 10, 2004, at 69 Proposed Rule
24 CFR Parts 203 and 206 FR 11500). However, the growing The public comment period of the
[Docket No. FR–4969–F–02] popularity of the LIBOR index, June 19, 2006, proposed rule closed on
including its acceptance in the August 18, 2006, and HUD received five
RIN 2502–AI32 secondary mortgage market, has led to a comments on the proposed rule.
change in HUD’s policy on this issue. Comments were received from three
Adjustable Rate and Home Equity
Conversion Mortgages—Additional LIBOR is both an international index trade organizations representing
Index determined on the basis of the world mortgage bankers and home builders,
economy and an index that has recently the home mortgage division of a bank,
AGENCY: Office of the Assistant become widely used for ARM loans in and a residential mortgage group.
Secretary for Housing—Federal Housing the United States. LIBOR-based loans All five commenters supported HUD’s
Commissioner, HUD. have become very popular in the proposal to add LIBOR as an acceptable
ACTION: Final rule. secondary market, and this greater index for adjusting the interest rate of
liquidity allows lenders to offer lower HUD-insured ARM products. The
SUMMARY: This final rule adds: The one- commenters wrote that the inclusion of
margins to borrowers.
year London Interbank Offered Rate the LIBOR allows lenders greater
(LIBOR) as an acceptable index for the The LIBOR indices and the
flexibility in offering ARM products,
HUD-insured one-, 3-, 5-, 7-, and 10-year corresponding CMT indices have
provides an incentive for more lenders
Adjustable Rate Mortgage (ARM) historically tracked each other closely to use the FHA program, and broadens
products, and the one-month Constant over time. While the LIBOR rate may mortgage options for FHA borrowers.
Maturity Treasury (CMT), the one- often be slightly higher, the better Two of the commenters requested that
month LIBOR, and the one-year (12- margins available for LIBOR-indexed HUD extend the availability of the
month) LIBOR as acceptable indices to loans often make LIBOR-based loans a LIBOR index to HUD’s HECM products.
adjust interest rates on the HUD-insured better deal for consumers. The commenters wrote that the same
Home Equity Conversion Mortgage In addition, as LIBOR loans become reasoning and benefits apply for
(HECM). Under current regulations, more popular, it is necessary for HUD to allowing the LIBOR indices to be used
only the weekly average yield of U.S. offer a LIBOR option to remain with the HECM program.
Treasury securities, adjusted to a competitive in the secondary market. After careful consideration of the
constant maturity of one year With the large number of lenders now comments requesting that the LIBOR
(commonly referred to as the one-year offering LIBOR-based ARM loans, to be index be allowed for HUD’s HECM
CMT), may be used to adjust interest competitive it no longer makes products, HUD has decided to include
rates on HUD-insured ARMs and economic sense for FHA to restrict itself the aforementioned LIBOR indices as an
HECMs. This final rule follows a June to the Treasury index. option in HUD’s HECM programs.
19, 2006, proposed rule and includes Inclusion of the LIBOR as acceptable
HECMs in response to public comment Under the authority of section 251(a)
of the National Housing Act (12 U.S.C. indices for HECM products does not
on the June 19, 2006, proposed rule. impose any requirement on regulated
1715z–16(a)), HUD may set by
DATES: Effective Date: August 20, 2007. entities or on the public. Rather, it
regulation a national interest rate index,
FOR FURTHER INFORMATION CONTACT:
and information on the index must be permits the use of alternative indices for
James Beavers, Deputy Director, Single readily available to mortgagors. The calculating interest rate adjustments and
Family Program Development, Office of one-month LIBOR and the one-year the expected average mortgage interest
Single Family Housing, Office of LIBOR are widely published and meet rate on HECM loans. Mortgage lenders
Housing, Department of Housing and this availability requirement. that do not wish to use the LIBOR
Urban Development, 451 Seventh Street, Information on LIBOR rates is readily indices as the basis for the interest rate
SW., Washington, DC 20410–8000; available through a variety of media, adjustments on HUD-insured HECMs
telephone number (202) 708–2121 (this including the Internet. can continue using the current one-year
is not a toll-free number). Persons with CMT index. HUD’s HECM regulations
hearing or speech impairments may II. The June 19, 2006, Proposed Rule are also being amended to allow the
access this number through TTY by one-month CMT or one-month LIBOR as
calling the toll-free Federal Information On June 19, 2006, HUD published a an option for lenders and borrowers.
Relay Service at (800) 877–8339. proposed rule that would amend HUD’s Similarly, while this rule adds another
regulations at 24 CFR 203.49(b) to add option for determining interest rate
SUPPLEMENTARY INFORMATION
the LIBOR index as an acceptable index adjustments and expected average
I. Background for determining interest rate mortgage interest rates, members of the
The previous policy of HUD’s Federal adjustments of HUD-insured ARMs (see public continue to have access to HUD-
Housing Administration (FHA) Single 71 FR 35370). The proposed rule did not insured HECMs based on the U.S.
Family mortgage programs had been to cover HECM loans, which are governed Treasury security indices. Further, as
use the weekly average yield of U.S. by separate regulations at 24 CFR part administered, the loans provided today
Treasury securities adjusted to a 206. under the HECM program are
constant maturity of one year as the III. This Final Rule; Significant predominantly ARMs. Allowing the
basis for interest rate adjustments on Changes to the June 19, 2006, Proposed LIBOR indices to be used for HECMs is
HUD-insured ARM loans and to Rule consistent with current HUD policy, as
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determine interest rates on HECM loans. expressed in this final rule. Not only
HUD believed that indices calculated In response to public comments, does the inclusion of the LIBOR indices
and published by the U.S. Government which are discussed in Section IV, this for HECMs foster consistency within
were appropriate for mortgage loans final rule adds HECM loans as eligible HUD’s regulations, but it also conforms
insured by the U.S. Government (see to use the LIBOR indices. HUD practice to that of the rest of the

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Federal Register / Vol. 72, No. 139 / Friday, July 20, 2007 / Rules and Regulations 40049

mortgage industry, which offers LIBOR- calculate the LIBOR-based interest rate HUD Response: HUD agrees that
based ARM and reverse mortgage loans. yield curve for maturities greater than borrowers choosing ARMs, for forward
Section 255 of the National Housing one year. The U.S. dollar-denominated and reverse mortgages, should be
Act, 12 U.S.C. 1715z-20, provided for LIBOR swap rate curve shows the fixed- provided with sufficient disclosures
the establishment of the HECM program. rate leg (i.e., portion of the swap) of regarding adjustable rate mortgage
The HECM provides elderly ordinary fixed-for floating rate swap products, and will continue to require
homeowners with an opportunity to contracts where the floating-rate leg is that lenders provide ARM disclosures
convert home equity into monthly the 6-month LIBOR rate expressed in prescribed by the Federal Reserve.
streams of income and/or lines of credit. dollars. However, HUD will not require lenders
In establishing the HECM loan, the A swap is a financial derivative under to develop ARM disclosures specific to
lender must compute two interest rates. which two parties exchange two streams FHA mortgage insurance programs.
The first interest rate is the expected of future cash flows. The transaction is Comment: Increasing the annual cap
average mortgage interest rate, which is called a ‘‘plain vanilla’’ interest-rate to 2 percentage points and a life-of-loan
a rate that remains fixed for the life of swap if both cash flow streams are in cap of 6 percentage points would benefit
the loan and is used to calculate the the same currency and involve an consumers. One commenter wrote that
loan’s principal limit and payment plan. exchange of fixed-rate for floating-rate HUD should allow HUD’s 5/1 ARM
A long-term rate is utilized as the interest payments on the same product to be offered with 2/6 caps. The
benchmark for the expected average hypothetical (or ‘‘notional’’) loan commenter realized that this is current
mortgage interest rate, as it better amount. For example, in the case of a HUD policy, but that FHA sponsors
predicts performance for the life of the plain vanilla interest rate swap with a have not yet made these products
loan than does a short-term rate. The term of 10 years, the banks could agree available.
second interest rate computed is the to swap fixed-rate dollar payments at HUD Response: The HUD regulation
mortgage interest (accrual or note) rate, 5.1 percent on a notional loan amount at 24 CFR 203.49(f)(2) allows for 5-,
which is a short-term rate. Currently, of $100,000 in exchange for dollar- 7-, and 10 year ARMs to adjust as much
the fixed HECM expected rate and the denominated 6-month LIBOR payments as 2 percentage points annually after the
adjustable HECM mortgage interest rates on the same notional loan amount. The initial contract period, and a maximum
are both tied to yields on U.S. Treasury 5.1 percent fixed-rate leg of the swap of 6 percentage points over the life of
securities, which are adjusted to a contract would correspond to the 10- the loan. HUD makes insured interest
constant maturity of one year for the year point on the LIBOR swap rate rate products such as ARM loans
mortgage interest rate and to a constant curve. available to the market; however, HUD
maturity of 10 years for the expected As such, the U.S. dollar-denominated does not mandate that any lender offer
average mortgage interest rate. any or all of the ARM products
10-year LIBOR swap rate is a long-term
HUD’s regulations at 24 CFR 206.3 are available. Whether or not a lender offers
market-based interest rate calculation
being amended to add the LIBOR index a particular product depends on market
as an acceptable index for determining that is driven by factors similar to those
that affect the 10-year CMT. Not only demand and other economic factors. For
interest rate adjustments of HECM example, in a rising interest rate
loans. The rule now adds the one-month does the 10-year LIBOR swap rate derive
from a calculation of what the one-year environment, 2/6 ARMs may not be
CMT, the one-month LIBOR, and the desirable for borrowers. However, the
one-year LIBOR as acceptable indices to LIBOR index would be if it operated on
a long-term basis, but it also has product requested by the comment is, in
adjust interest rates on the HECM, and fact, legally available.
to require use of the 10-year LIBOR historically performed closely to the 10-
swap rate to establish the expected year CMT. V. Findings and Certifications
average mortgage interest rate on the The addition of the LIBOR indices is
beneficial to homeowners as well as Impact on Small Entities
HECM product, if the note is indexed to
either the one-month or one-year LIBOR entities in the mortgage community. Use The Regulatory Flexibility Act (5
rate. The rule provides additional of the LIBOR indices would attract new U.S.C. 601 et seq.) generally requires an
options in the case of monthly adjusting investors to HECMs, thus increasing agency to conduct a regulatory
HECM loans, in that it provides for the liquidity in the secondary mortgage flexibility analysis of any rule subject to
option, which may be preferable, of market, which in turn would drive notice and comment rulemaking
using the one-month LIBOR index or down costs and interest rates for the requirements, unless the agency certifies
one-month CMT index to adjust the mortgagor. Therefore, HUD believes it is that the rule will not have a significant
interest rate of monthly adjusting HECM reasonable to permit the use of LIBOR economic impact on a substantial
loans. However, the one-year CMT may indices for HECM loans at the final rule number of small entities.
continue to be used to adjust the interest phase. This rule would permit greater
rate of monthly adjustable HECM loans. In addition to the comments flexibility for lenders that, in offering
The rule also provides for the option of requesting the availability of the LIBOR ARMs and HECMs to homebuyers, want
using the one-year LIBOR index or one- index in HUD’s HECM program, the to have a choice of indices for
year CMT index to adjust the interest following two comments were also determining interest rate adjustments
rate of annually adjusting HECM loans. made. for the ARM and HECM, and for
In order to calculate the expected Comment: Borrowers need sufficient establishing the expected mortgage
average mortgage interest rate on either information so that they can make interest rate on HECM loans. However,
monthly adjusting or annually adjusting informed decisions. One commenter this rule would not require any small
HECMs indexed to LIBOR, the U.S. wrote that HUD should include in the business to take any action or meet any
dollar denominated 10-year LIBOR regulation a disclosure requirement to requirements. Therefore, this rule would
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swap rate will be used. Since LIBOR ensure that prospective FHA borrowers create no impact on small entities.
rates are short-term rates (ranging from receive sufficient information to make Accordingly, the undersigned certifies
maturities of one week through 12 informed decisions as to indices, based that this final rule will not have a
months), the financial community relies on historical and prospective borrowing significant economic impact on a
on the LIBOR ‘‘swap rate curve’’ to costs. substantial number of small entities,

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40050 Federal Register / Vol. 72, No. 139 / Friday, July 20, 2007 / Rules and Regulations

and an initial regulatory flexibility Reporting and recordkeeping the mortgagee and is defined as the
analysis is not required. requirements. amount that is added to the index value
■ Therefore, for the reasons stated in the to compute the mortgage interest rate.
Environmental Impact
preamble, HUD amends 24 CFR parts The index type (i.e., CMT or LIBOR)
This final rule involves the used to calculate the expected average
discretionary establishment of interest 203 and 206, as follows:
mortgage interest rate must be the same
rates and external administrative or PART 203—SINGLE FAMILY index type used to calculate mortgage
fiscal requirements or procedures that MORTGAGE INSURANCE interest rate adjustments—commingling
do not constitute a development of index types is not allowed (e.g., it is
decision that affects the physical ■ 1. The authority citation for 24 CFR not permissible to use the 10-year CMT
condition of specific project areas or part 203 continues to read as follows: to determine the expected average
building sites. Accordingly, under 24 Authority: 12 U.S.C. 1709, 1710, 1715b, mortgage interest rate and use the one-
CFR 50.19(c)(6), this rule is categorically 1715z–16, and 1715u; 42 U.S.C. 3535(d). year LIBOR index to adjust the interest
excluded from environmental review rate). The mortgagee’s margin is the
under the National Environmental ■ 2. Amend § 203.49 by revising the first
same margin used to determine the
Policy Act of 1969 (42 U.S.C. 4321 et sentence of § 203.49(b) to read as
periodic adjustments to the interest rate.
seq.). follows:
* * * * *
Executive Order 13132, Federalism § 203.49 Eligibility of adjustable rate LIBOR means the London Interbank
mortgages. Offered Rate.
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits, to the extent * * * * * * * * * *
practicable and permitted by law, an (b) Interest rate index. Changes in the One-month Constant Maturity
agency from promulgating a regulation interest rate charged on an adjustable Treasury (CMT) Index means the
that has federalism implications and rate mortgage must correspond either to average weekly yield of U.S. Treasury
either imposes substantial direct changes in the one-year London securities adjusted to a constant
compliance costs on state and local Interbank Offered Rate (LIBOR) or to maturity of one month.
governments and is not required by changes in the weekly average yield on * * * * *
statute, or preempts state law, unless the U.S. Treasury securities, adjusted to a
■ 5. In § 206.21, revise paragraphs (b)(1)
relevant requirements of section 6 of the constant maturity of one year. * * *
and (b)(2) to read as follows:
Executive Order are met. This final rule * * * * *
does not have federalism implications § 206.21 Interest rate.
and does not impose substantial direct PART 206–HOME EQUITY * * * * *
compliance costs on state and local CONVERSION MORTGAGE (b) * * *
governments or preempt state law INSURANCE (1) A mortgagee offering an adjustable
within the meaning of the Executive interest rate shall offer a mortgage with
■ 3. The authority citation for 24 CFR
Order. an interest rate cap structure that limits
part 206 continues to read as follows:
the periodic interest rate increases and
Unfunded Mandates Reform Act Authority: 12 U.S.C. 1715b, 1715z–1720; decreases as provided in § 203.49(a), (b),
Title II of the Unfunded Mandates 42 U.S.C. 3535(d). (d), and (f) of this chapter, except that
Reform Act of 1995 (UMRA) (2 U.S.C. ■ 4. Amend § 206.3 by revising the reference to mortgagor’s first debt
1531–1538) establishes requirements for definition of ‘‘Expected average service payment in § 203.49(d) shall
federal agencies to assess the effects of mortgage interest rate’’ and adding, in mean closing, and references in
their regulatory actions on state, local, proper alphabetical order, definitions of § 203.49(f)(1) to one percentage point
and tribal governments, and the private ‘‘LIBOR’’ and ‘‘One-month Constant shall mean two percentage points.
sector. This final rule would not impose Maturity Treasury (CMT) Index’’ to read (2) If a mortgage meeting the
any federal mandates on any state, local, as follows: requirements of paragraph (b)(1) of this
or tribal government, or the private section is offered, the mortgagee may
sector within the meaning of UMRA. § 206.3 Definitions. also offer a mortgage which provides for
* * * * * monthly adjustments to the interest rate,
Catalog of Federal Domestic Assistance Expected average mortgage interest corresponding to an index as provided
The Catalog of Federal Domestic Assistance rate means the interest rate used to in § 203.49(a), (b), and (f)(1), or to the
number applicable to this rule is 14.175. calculate the principal limit and the one-month CMT index or one-month
List of Subjects future payments to the mortgagor and is LIBOR index, and which sets a
established based on the date on which maximum interest rate that can be
24 CFR Part 203 the initial loan application is signed by charged without limiting monthly or
Hawaiian Natives, Home the borrower. For fixed rate HECMs, it annual increases or decreases. The first
improvement, Indians—lands, Loan is the fixed mortgage interest rate. For adjustment must occur on the first day
programs—housing and community adjustable rate HECMs, it is either the of the second full month after closing.
development, Mortgage insurance, sum of the mortgagee’s margin plus the * * * * *
Reporting and recordkeeping weekly average yield for U.S. Treasury
securities adjusted to a constant Dated: July 13, 2007.
requirements, Solar energy.
maturity of 10 years, or it is the sum of Brian D. Montgomery,
24 CFR Part 206 the mortgagee’s margin plus the 10-year Assistant Secretary for Housing—Federal
Aged, Condominiums, Loan LIBOR swap rate, depending on which Housing Commissioner.
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programs—housing and community interest rate index is chosen by the [FR Doc. E7–14030 Filed 7–19–07; 8:45 am]
development, Mortgage insurance, mortgagor. The margin is determined by BILLING CODE 4210–67–P

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