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A Proposed Rule by the
Entry Type: Proposed Rule
Action: Proposed rule.
Document Citation: 79 FR 26376
Page: 26376 -26381 (6 pages)
CFR: 24 CFR 203
Agency/Docket Number: Docket No. FR-5744-P-01
Document Number: 2014-10572
Shorter URL: https://federalregister.gov/a/2014-10572
This rule proposes two revisions to FHA's regulations governing its single family adjustable rate mortgage (ARM) program to align FHA interest rate adjustment and notification regulations with the requirements for notifying mortgagors of ARM adjustments, as required by the regulations implementing the Truth in Lending Act (TILA), as recently revised by the
Comment Due Date:
Interested persons are invited to submit comments regarding this rule to the Regulations Division,
1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division,
2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically. Note:
To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule.
No Facsimile Comments. Facsimile (fax) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying
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I. Executive Summary
A. Purpose of the Regulatory Action
This proposed rule would align FHA's regulations governing its single family ARM program with the interest rate adjustment and disclosure and notification periods required for ARMs by TILA, as implemented by the
B. Summary of the Major Provisions of the Regulatory Action
To comply with the 2013 TILA Servicing Rule, FHA proposes two amendments to its regulations. First, FHA proposes to amend 24 CFR 203.49(d)(2) to require FHA-approved mortgagees, in setting a new interest rate, to use the current index figure that is the most recent index figure available 45 days (rather than the current 30 days) before the date of an interest rate adjustment. Revising the current 30-day look-back period to 45 days would enable FHA-approved mortgagees to meet the 60- to 120-day notification period prior to any adjustment to a mortgagor's monthly payment that may occur, as required by the 2013 TILA Servicing Rule.
The second proposed revision would update 24 CFR 203.49(h) to cross-reference the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of section 1026.20(d) govern the initial rate adjustment of an ARM, while those of section 1026.20(c) govern subsequent rate adjustments.
Currently, FHA-approved mortgagees must only notify the mortgagor at least 25 days before any adjustment to a mortgagor's monthly payment may occur and inform the borrower of the new mortgage interest rate, the amount of the new monthly payment, the current index interest rate value, and how the payment adjustment was calculated (see 24 CFR 203.49(h)). In cross-referencing paragraph (c) of 12 CFR 1026.20, HUD would require the mortgagee of an FHA-insured ARM to provide the mortgagor with specific and prescribed disclosures in connection with any adjustment of the interest rate, as required by the loan contract, that results in a corresponding adjustment to the mortgagor's monthly payment. These required disclosures must be provided to the mortgagor at least 60 days, but not more than 120 days, before the first payment at the adjusted level is due. In cross-referencing paragraph (d) of 12 CFR 1026.20, the mortgagee would be required, the first time the interest rate adjusts the monthly payment of an FHA-insured ARM, to provide the appropriate disclosures to the mortgagor at least 210, but not more than 240, days before the first payment at the adjusted level is due.
C. Costs and Benefits
Since an overwhelming majority of ARMs originated in the conventional mortgage market currently have a 45-day look-back period  and were required to comply with the 2013 TILA Servicing Rule notification requirements on
In determining the impact of the adjusted look-back period on a single ARM insured by FHA, the effect upon the mortgagor's monthly mortgage payment is the difference between the interest rate generated by an index available 45 days before the interest change date from that generated by the same index 30 days before the interest change date. This difference may be due to a trend in rates or the "noise" (minor fluctuations around that trend) or both. However, given any date in the future, it is impossible to know whether the rate will be higher or lower 15 days prior. Even over a period in which a trend is expected, the limited timeframe of 15 days and the noise around that change means the significance of the change to the look-back period is unknowable. Thus, while the 15-day change may affect specific outcomes, this change is not expected to have any generalizable impact on the economy with a clear direction and scale. For mortgagees that would have sent later notice to mortgagors, the proposed changes may potentially increase prepayment risk, the risk that a mortgagor will pay-off a loan before the end of its term by ensuring that borrowers have more time to prepare for a change. Conversely for the mortgagee, the change should also reduce default risk, the risk that the mortgagor will fail to pay in part or in full. For the mortgagor, the primary benefit of the change is an earlier reminder of the adjustment and, consequently, more time to pursue other outcomes prior to the interest change date.
Finally, since this proposed change conforms to the 2013 TILA Servicing rule, which was effective for an overwhelming majority of the ARM market on
Section 251 of the National Housing Act (12 U.S.C. 1715z-16) authorizes FHA to insure mortgagees against default by the mortgagors that obtain home purchase loans or refinancing loans with interest rates that will change over time, such as ARMs. The interest rates on these loans are initially lower than that of a fixed rate mortgage, but may increase or decrease over the life of the loan. An ARM provides a home mortgage option for a mortgagor who may be planning to own his or her home for only a few years, expects an increase in future earnings, or finds the prevailing interest rate for a fixed-rate mortgage to be too high. The regulations governing FHA's ARM program presently are codified in 24 CFR 203.49.
The types of ARMs that FHA insures are those for which the interest rate may be adjusted annually by the FHA-approved mortgagee, beginning after 1, 3, 5, 7, or 10 years from the date of the mortgagor's first debt service payment.  FHA's ARM program provides that changes in the interest rate charged on an ARM must correspond either to changes in the 1-year London Interbank Offered Rate (LIBOR) or to changes in the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of 1 year (see 24 CFR 203.49(b)). The regulations further provide that except as may be otherwise specified in the regulations, each change in the mortgage interest rate must correspond to the upward and downward change in the index.
FHA's current regulations establish a maximum amount that interest rates may increase or decrease. For 1- and 3- year ARMs, no single adjustment to the interest rate may result in a change in either direction of more than 1 percentage point from the interest rate in effect for the period immediately preceding that adjustment. Additionally, index changes in excess of 1 percentage point may not be carried over for inclusion in an adjustment for a subsequent year. Adjustments in the effective rate of interest over the entire term of these ARMs may not result in a change, in either direction, of more than 5 percentage points from the initial contract interest rate. For 5-, 7-, and 10-year ARMs, no single adjustment to the interest rate may result in a change, in either direction, of more than 2 percentage points from the interest rate in effect for the period immediately preceding that adjustment. Similar to the 1- and 3-year ARMs, index changes in excess of 2 percentage points may not be carried over for inclusion in an adjustment in a subsequent year. For these ARMs, adjustments in the effective rate of interest over the entire term of the mortgage may not result in a change, in either direction, of more than 6 percentage points from the initial contract rate.
FHA's existing ARM program provides that interest rate changes may be implemented only through adjustments to the mortgagor's monthly payments. FHA's regulations provide that FHA-approved mortgagees must disclose to the mortgagor the terms of the ARM at the time of loan application. The regulations further provide that FHA-approved mortgagees must notify the mortgagor at least 25 days before any adjustment to a mortgagor's monthly payment may occur, informing the borrower of the new mortgage interest rate, the amount of the new monthly payment, the current index interest rate value, and how the payment adjustment was calculated (see 24 CFR 203.49(h)).
To set a new interest rate, the FHA-approved mortgagee will determine if there is a change between the initial (i.e., base) index figure and the current index figure or will add a specific margin to the current index figure. The regulations provide that the initial index figure shall be the most recent figure available before the date of the mortgage loan origination, and the current index figure shall be the most recent index figure available 30 days before the date of each interest rate adjustment. Thus, HUD's existing regulations establish a 30-day look-back period for determining the current index figure (see 24 CFR 203.49(d)(2)).
At the time FHA adopted the at-least-25-day advance notification period and the 30-day look-back period, these time periods were consistent with the regulations implementing TILA, as promulgated by the
As discussed above, the 2013 TILA Servicing Rule, which became effective
The preamble to the 2013 TILA Servicing Rule notes that some ARMs, including those insured by FHA and guaranteed by the
III. This Proposed Rule
In response to the
First, FHA proposes to change 24 CFR 203.49(d)(2) to require FHA-approved mortgagees, in setting a new interest rate, to use the current index figure that is the most recent index figure available 45 days (rather than 30 days) before the date of an interest rate adjustment. This change applies to all single family forward FHA-insured ARMs.
Second, FHA proposes to change section 203.49(h), which addresses the disclosure and notification requirements of an interest rate adjustment by the mortgagee to the mortgagor. This proposed rule would require the mortgagee to provide the disclosures and to comply with the timing and notification requirements of the 2013 TILA Servicing Rule at 12 CFR part 1026.
In proposing to revise the look-back period from 30 days to 45 days, and in order to comply with the 2013 TILA Servicing Rule, HUD is required to change its current 30-day look-back period to a period of no less than 45 days. HUD proposes to adopt the minimum period of 45 days, which is also the industry norm.  HUD agrees with the
While HUD may have adopted a look-back period longer than 45 days, HUD's decision was limited by the servicing timeline described above to provide necessary notification of the adjusted monthly payment within the required 60- to 120-day notification period, which was also required in the 2013 TILA Servicing Rule. Furthermore, if the look-back period was extended beyond 45 days it would create a greater lag time between the relevant index value and the correspondingly adjusted monthly payment. For example, with a 45-day look-back period, if the interest rate change date is
Finally, it would be less burdensome on servicers for HUD to adopt the industry norm 45-day look-back period, instead of continuing to apply different look-back periods for different ARMs. With different look-back periods, there would assumingly be different servicing timelines and notifications, which could lead to potential errors and reduced customer service. The
The second proposed revision updates section 203.49(h) to cross-reference the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of section 1026.20(d) govern the initial rate adjustment of an ARM, while those of section 1026.20(c) govern subsequent rate adjustments. Paragraph (c) of 12 CFR 1026.20 requires the mortgagee of an ARM to provide the mortgagor with disclosures in connection with any adjustment of the interest rate, as required by the loan contract, that results in a corresponding adjustment to the mortgagor's monthly payment. This required disclosure must be provided to the mortgagor at least 60 days, but not more than 120 days, before the first payment at the adjusted level is due.
The cross-references to the TILA requirements not only avoid the repetition of regulatory text, but help to ensure that HUD's codified regulations remain current should the
As noted, 12 CFR 1026.20(d) establishes separate disclosure requirements for the initial rate adjustment of an ARM with an initial interest rate that is constant for more than one year. The first time the interest rate adjusts the monthly payment of an FHA-insured ARM, the mortgagee would be required to provide the appropriate disclosures to the mortgagor at least 210, but not more than 240, days before the first payment at the adjusted level is due.  If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the disclosure, an estimate shall be disclosed and labeled as such for the mortgagor. This estimate shall be based on the calculation of the specific index or formula used in making the interest rate adjustment within 15 business days prior to the date of the disclosure.
The required content and format of the initial disclosures are contained in 12 CFR 1026.20(d)(2). These disclosures, accompanying explanatory statements, and tables include information such as an explanation of the terms of the mortgagor's ARM; a comparison of the current and new interest rates; the telephone number of the mortgagee for the mortgagor to call if they anticipate not being able to make their new payments; a list of alternatives to paying at the new rate that the mortgagor may be able to pursue and a brief explanation of each alternative, expressed in simple and clear terms; the Web site to access either the
The initial disclosure requirements of 12 CFR 1026.20(d) do not apply to ARMs with a term where the interest rate would adjust within a 1-year period (see 12 CFR 1026.20(d)(1)(ii)). FHA does not insure ARMs with a term of less than 12 months. The HUD regulation at 24 CFR 203.49(d) describes the frequency of rate changes for ARMs eligible for FHA insurance, providing that ". . . the first adjustment shall be no sooner or later than . . ." as provided in the regulation. The shortest term ARM eligible for FHA insurance is a 1-year ARM with the first rate adjustment occurring no earlier than 12 months. Accordingly, the exemption provided by the 2013 TILA Servicing Rule is not applicable to FHA-insured ARMs.
IV. 30 Day Public Comment Period
In accordance with HUD's regulations concerning rulemaking at 24 CFR part 10 (entitled, "Rulemaking Policy and Procedures"), it is HUD's policy that the public comment period for proposed rules should be 60 days. In the case of this proposed rule, however, HUD has determined there is good cause to reduce the public comment period to 30 days for the following reasons:
First, HUD is required by the 2013 TILA Servicing Rule to make regulatory changes to comply with the 2013 TILA Servicing Rule. The
Second, the notification requirements established in the 2013 TILA Servicing Rule were published in the
Given that the proposed amendments to HUD's regulations mirror the requirements of the 2013 TILA Servicing Rule, and the
[*Federal RegisterVJ 2014-05-08]
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