Proposed Rule2021-21512
Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate Indices
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Published
October 5, 2021
Issuing agencies
Housing and Urban Development Department
Abstract
The majority of adjustable rate mortgages (ARMs) insured by the Federal Housing Administration (FHA) are based on the London Interbank Offered Rate (LIBOR), an interest rate index that is likely to become uncertain after December 31, 2021 and no longer be published after June 30, 2023. In reaction to this uncertainty, HUD has begun to transition away from LIBOR as an approved interest rate index. HUD has also approved the Secured Overnight Financing Rate (SOFR) index in some circumstances. HUD recognizes there may be operational difficulties for mortgagees to implement the change to a new index. HUD is considering a rule that would address a Secretary-approved replacement index for existing loans and provide for a transition date consistent with the cessation of the LIBOR index. HUD is also considering replacing the LIBOR index with the SOFR interest rate index, with a compatible spread adjustment to minimize the impact of the replacement index for legacy ARMs.
Full Text
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<title>Federal Register, Volume 86 Issue 190 (Tuesday, October 5, 2021)</title>
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[Federal Register Volume 86, Number 190 (Tuesday, October 5, 2021)]
[Proposed Rules]
[Pages 54876-54879]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-21512]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 190 / Tuesday, October 5, 2021 /
Proposed Rules
[[Page 54876]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 203 and 206
[Docket No. FR-6151-A-01]
RIN 2502-AJ51
Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate
Indices
AGENCY: Office of Housing, HUD.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The majority of adjustable rate mortgages (ARMs) insured by
the Federal Housing Administration (FHA) are based on the London
Interbank Offered Rate (LIBOR), an interest rate index that is likely
to become uncertain after December 31, 2021 and no longer be published
after June 30, 2023. In reaction to this uncertainty, HUD has begun to
transition away from LIBOR as an approved interest rate index. HUD has
also approved the Secured Overnight Financing Rate (SOFR) index in some
circumstances.
HUD recognizes there may be operational difficulties for mortgagees
to implement the change to a new index. HUD is considering a rule that
would address a Secretary-approved replacement index for existing loans
and provide for a transition date consistent with the cessation of the
LIBOR index. HUD is also considering replacing the LIBOR index with the
SOFR interest rate index, with a compatible spread adjustment to
minimize the impact of the replacement index for legacy ARMs.
DATES: Public comment due date: December 6, 2021.
ADDRESSES: Interested persons are invited to submit comments regarding
this advanced notice of proposed rulemaking to the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street SW, Room 10276, Washington, DC 20410-0500.
Communications must refer to the above docket number and title. There
are two methods for submitting public comments. All submissions must
refer to the above docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 7th Street SW, Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
<a href="http://www.regulations.gov">www.regulations.gov</a>. 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
<a href="http://www.regulations.gov">www.regulations.gov</a> website 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 between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an advance appointment to review the public comments must be
scheduled by calling the Regulations Division at 202-402-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this number via TTY by calling the Federal Information Relay
Service, toll-free, at 800-877-8339. Copies of all comments submitted
are available for inspection and downloading at <a href="http://www.regulations.gov">www.regulations.gov</a>.
FOR FURTHER INFORMATION CONTACT: Joshua J. Miller, Senior Advisor to
the Deputy Assistant Secretary for Single Family Housing, Office of
Housing, Department of Housing and Urban Development, 451 7th Street
SW, Washington, DC 20410-8000; telephone number 202-402-5052 (this is
not a toll-free number). Hearing- and speech-impaired persons may
access this number through TTY by calling the Federal Relay Service at
800-877-8339 (this is a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Provisions
Section 251(a) of the National Housing Act (NHA) (12 U.S.C. 1715z-
16(a)) authorizes HUD to insure ARMs, and provides that adjustments to
the interest rate shall correspond to a specified interest rate index
approved in regulations by the Secretary, which must be readily
accessible to mortgagors from generally available published sources.
For Home Equity Conversion Mortgages (HECM or reverse mortgages),
Section 255(d) of the National Housing Act (12 U.S.C. 1715z-20(d))
authorizes FHA to insure variable rate HECMs and impose additional
eligibility requirements on HECMs, which could include requirements for
HECM ARMs.
B. Forward Mortgages
HUD initially provided for mortgage insurance of ARMs for single
family forward mortgages under part 203 and for part 234 condominium
mortgages in 1984 (49 FR 23580, June 6, 1984). As provided in the
statute at this time, such mortgages had to be adjusted annually, and
there was a 1 percent cap on annual adjustments and an overall cap of 5
percent above the initial interest rate over the term of the mortgage.
The index initially used was the Constant Maturity Treasury (CMT) rate.
Subsequent to the statutory change allowing HUD to insure ARMs for
mortgages that have fixed interest rates for 3 years or more and are
not subject to interest rate caps if the interest rate remains fixed
for more than 3 years, HUD, in 2004, issued a rule providing mortgage
insurance for forward ARMs with rates first adjustable 1 year, 3 years,
5 years, 7 years, and 10 years from the date of the mortgagor's first
debt service payment (69 FR 11500, March 10, 2004, codified at 24 CFR
203.49(d)).
Under the 2004 rule, for 1-year, and 3-year, and 5-year ARMs, each
adjustment provided for a cap in either direction of one percentage
point from
[[Page 54877]]
the interest rate in effect for the period immediately preceding the
adjustment. For the life of the mortgage the overall 5 percent cap
remained from the initial contract rate. For 7-year and 10-year ARMs,
HUD raised the per-adjustment cap to 2 percent of the rate in effect
for the immediately preceding period, and the life-of-mortgage cap to 6
percent from the initial contract rate. In all cases, changes of more
than these amounts could not be carried over for inclusion in an
adjustment for the subsequent year. In 2005, HUD revised the regulation
to allow for annual adjustments of 2 percent for, and a life-of-
mortgage cap of 6 percent for 5-year ARMs in 2005 (70 FR 16080, March
29, 2005), conforming 5-year ARMs to HUD's 7-year and 10-year ARM
products.
In 2007, HUD added the LIBOR, along with the CMT, as acceptable
indices for ARM adjustments for its ARM products. For forward
mortgages, the applicability of these indices is codified at 24 CFR
203.49. The cap on 1-year and 3-year ARMs (no more than 1 percent in
either direction per single adjustment, with a 5 percent from initial
contract rate cap over the life of the loan) is codified at Sec.
203.49(f)(1). The caps for 5-year, 7-year and 10-year ARMs (2 percent
in either direction per adjustment, with a six percent from initial
contract rate cap for the life of the mortgage) are located at Sec.
203.49(f)(2). HUD also created model note documents for forward
mortgages, which may have varied over the years. The 2015 model note
contains provisions for the substitution of an index by the note holder
based on ``comparable information,'' should the index specified in the
note become unavailable.
C. Reverse Mortgages or HECMs
In 1989, the Home Equity Conversion Mortgage program rule provided
for capped and uncapped ARMs (54 FR 24822, June 9, 1989). For capped
HECM ARMs, the rule retained the 5 percentage point life-of-mortgage
limit on interest rate increases and decreases in Sec. 203.49, but
increased the annual limit on rate increases and decreases from 1
percentage point to 2 percentage points (54 FR 24825). The rule also
provided for an ARM that set a maximum interest rate that could be
charged without a cap on monthly or annual increases or decreases. Id.
In 2007, in the same rule in which LIBOR was added for forward
mortgages, HUD added the LIBOR as an acceptable index for HECM ARM
adjustments (72 FR 40048, July 20, 2007); these changes are codified in
current Sec. Sec. 206.3 (definitions) and 206.21 (interest rate).
HUD's model HECM notes may have varied over the years, but the 2015
version contains provisions for the substitution of a Secretary-
prescribed index, should the index specified in the note become
unavailable.
For the capped option at Sec. 206.21(b)(1), the interest rate cap
structure is the same as provided in forward mortgages under Sec.
203.49(a), (b), (d), and (f), except that under Sec. 203.49(d), the
reference to first debt service payment means the date of closing in
the HECM context, and under Sec. 203.49(f)(1), the cap on adjustments
for 1-year and 3-year mortgages is 2 percentage points in the HECM
context. Section 206.21(b)(1)(ii) applies the LIBOR and CMT index
options in the same manner as forward mortgages at Sec. 203.49(b) for
both the capped and uncapped options. In addition, the uncapped option
at Sec. 206.21(b)(2) includes options to adjust based on the one-month
CMT or one-month LIBOR index. Section 206.21(b)(1)(iii) also includes
ARM interest rate adjustment options for HECMs in the same manner as
forward mortgages at Sec. 203.49(d).
On March 11, 2021, in Mortgagee Letter 2021-08, HUD removed LIBOR
as an approved index for new HECM ARM originations and approved the
SOFR index for new annually adjusted HECM ARM originations. (As
explained in that Mortgagee Letter, the changes made by the Mortgagee
Letter revised the existing HECM regulations pursuant to the authority
granted in the Reverse Mortgage Stabilization Act of 2013 (Pub. L. 113-
29; Section 255(h)(3) of the National Housing Act (12 U.S.C. 1715z-
20(h)(3)). A mortgagee may set rates using CMT or SOFR for annually
adjusted HECM ARMs and CMT only for monthly adjusted HECM ARMs. Also,
among other changes to the ARM requirements in the Mortgagee Letter,
HUD published revised model mortgage documents with ``fallback''
language intended to address future interest rate index transition
events. This language was modeled after the Alternative Reference Rates
Committee's (ARRC \1\) published fallback language for residential
adjustable rate mortgages.\2\
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\1\ The Alternative Reference Rates Committee (ARRC) is a group
of private-market participants convened by the Federal Reserve Board
and the New York Fed to help ensure a successful transition from
U.S. dollar (USD) LIBOR to a more robust reference rate, its
recommended alternative, the Secured Overnight Financing Rate
(SOFR). The ARRC is comprised of a diverse set of private-sector
entities that have an important presence in markets affected by USD
LIBOR and a wide array of official-sector entities, including
banking and financial sector regulators, as ex-officio members.
<a href="https://www.newyorkfed.org/arrc">https://www.newyorkfed.org/arrc</a>.
\2\ ARRC Recommendations Regarding More Robust LIBOR Fallback
Contract Language for New Closed-End, Residential Adjustable Rate
Mortgages, <a href="http://newyorkfed.org">newyorkfed.org</a> (Nov. 15, 2019), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf</a>.
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D. Phase-Out of LIBOR
The financial industry is seeking to transition from LIBOR given
its increasing unreliability. The publication of US Dollar (USD) LIBOR
tenors of one-month and one-year was recently extended to June 30,
2023.\3\ However, the announcements included supervisory guidance
encouraging banks to stop new USD LIBOR issuances by the end of
2021.\4\
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\3\ Statement on LIBOR Transition--November 30, 2020--<a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf</a>.
\4\ ARRC Applauds Major Milestone in Transition from U.S. Dollar
LIBOR, Alternative Reference Rates Comm. (Nov. 23, 2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Applauds_Milestone_Transition_US_Dollar_LIBOR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Applauds_Milestone_Transition_US_Dollar_LIBOR.pdf</a>.
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As noted by the Financial Stability Oversight Council, the scarcity
of underlying transactions makes LIBOR potentially unsustainable, as
many banks have grown uncomfortable in providing submissions based on
expert judgment and may eventually choose to stop submitting
altogether. Two banks stopped submitting to USD LIBOR in 2016.\5\ The
relatively small number of transactions underpinning LIBOR has been
driven by changing market structure, regulatory capital, and liquidity
requirements as well as changes in bank risk appetite for short-term
funding, creating uncertainty as to the integrity of the rate. In July
of 2017, the U.K. Financial Conduct Authority (FCA), the financial
regulator of LIBOR, announced that it will no longer persuade or compel
contributing banks to submit rates used to calculate LIBOR after
December 31, 2021, which will further heighten the uncertainty of
LIBOR.\6\ On November 30, 2020, the Federal Reserve Board announced
that regulators had proposed clear end dates for the USD LIBOR
immediately following the December 31, 2021 publication for the one
week and two month USD LIBOR settings, and the June 30, 2023
publication for other USD LIBOR tenors to ease transition away from
LIBOR.\7\
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\5\ See Frequently Asked Questions, Alternative Reference Rates
Comm. (Jan. 31, 2019), <a href="https://www.sec.gov/spotlight/fixed-income-advisory-committee/arrc-faqs-041519.pdf">https://www.sec.gov/spotlight/fixed-income-advisory-committee/arrc-faqs-041519.pdf</a>.
\6\ Andrew Bailey, The Future of LIBOR, Fin. Conduct Authority
(July 27, 2017), <a href="https://www.fca.org.uk/news/speeches/the-future-of-libor">https://www.fca.org.uk/news/speeches/the-future-of-libor</a>.
\7\ See Federal Reserve Board Welcomes and Supports Release of
Proposal and Supervisory Statements that Would Enable Clear End Date
for U.S. Dollar (USD) LIBOR and Would Promote the Safety and
Soundness of the Financial System, Board of Governors of the Federal
Reserve System (Nov. 30, 2020), <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130b.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130b.htm</a>.
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[[Page 54878]]
In December 2020, the ICE Benchmark Administration Limited (IBA)
announced a consultation on its intention to cease publication of
certain LIBOR tenors. On March 5, 2021, the IBA published the feedback
to its consultation, announcing it will cease publication of the one
month and one year USD LIBOR immediately following the LIBOR
publication on June 30, 2023.\8\
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\8\ ICE LIBOR[supreg] Feedback Statement on Consultation on
Potential Cessation, ICE Benchmark Admin. (March 5, 2021), <a href="https://www.theice.com/publicdocs/ICE_LIBOR_feedback_statement_on_consultation_on_potential_cessation.pdf">https://www.theice.com/publicdocs/ICE_LIBOR_feedback_statement_on_consultation_on_potential_cessation.pdf</a>.
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With the uncertainty of LIBOR and upcoming phase-out, mortgagees
must prepare to select a new replacement interest rate index for
existing ARM contracts. The ARRC, a group of private market
participants convened by the Federal Reserve Board and the Federal
Reserve Bank of New York to ensure the transition from USD LIBOR to a
reliable reference rate, has recommended selection of the SOFR for use
in new USD contracts.\9\ SOFR is published by the Federal Reserve Bank
of New York in cooperation with the Office of Financial Research, an
independent bureau with the U.S. Department of the Treasury, and ``. .
. is a broad measure of the cost of borrowing cash overnight
collateralized by U.S. Treasury securities in the repurchase agreement
(repo) market.'' \10\ It is anticipated that a spread-adjusted SOFR
will be published to minimize the impact of the transition on legacy
ARMs and other LIBOR-based contracts.
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\9\ About, Alternative Reference Rates Comm., <a href="https://www.newyorkfed.org/arrc/about">https://www.newyorkfed.org/arrc/about</a> (last visited June 10, 2021).
\10\ Transition from LIBOR, Alternative Reference Rates Comm.,
<a href="https://www.newyorkfed.org/arrc/sofr-transition">https://www.newyorkfed.org/arrc/sofr-transition</a> (last visited June
10, 2021).
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According to the ARRC, ``SOFR is suitable to be used across a broad
range of financial products, including but not limited to, derivatives
(listed, cleared, and bilateral-OTC), and many variable rate cash
products that have historically referenced LIBOR.'' \11\
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\11\ Frequently Asked Questions, Alternative Reference Rates
Comm (April 21, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf</a>.
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II. This Advanced Notice of Proposed Rulemaking
HUD intends to issue a proposed rulemaking to remove LIBOR as an
available interest rate index and provide a new available index for
periodic adjustments for newly-insured forward and HECM ARMs, to
recommend a replacement comparable index for existing forward
mortgages, and to implement a Secretary-prescribed replacement index
for existing HECMs. Upon the cessation of LIBOR, a mortgagee would be
able to replace LIBOR with the spread adjusted index approved by HUD.
HUD intends to propose two separate transitions: A transition to
replace LIBOR for existing mortgages and a transition to remove LIBOR
and approve a new index for new forward originations.
HUD recognizes that existing mortgages and new originations present
different challenges. For existing mortgages, the contract (i.e., loan
documents) for each loan governs the terms of the loan. As long as the
LIBOR index is available, mortgagees may not have flexibility under
their loan contracts to substitute a new index without a modification
or a new contract, depending on which FHA model note form was used.
Under some existing ARM contracts, a lender may only use a substitute
index when the initial index ``is no longer available.'' Once the
publication of the one-month and 12-month LIBOR cease to be published,
mortgagees will be able to use a replacement index and provide notice
to the borrower of the replacement, in accordance with the terms of the
loan documents. HUD's goal is to avoid disrupting existing loans or
causing unnecessary confusion during the transition. HUD also seeks to
transition to an index which will best serve the goals of HUD's forward
and reverse mortgage programs. HUD intends that changes made to the
existing forward mortgage program and reverse mortgage program occur
simultaneously. While HUD has already made certain regulatory
amendments to the HECM ARM origination requirements in Mortgagee Letter
2021-08 pursuant to the authority granted in the Reverse Mortgage
Stabilization Act of 2013 (Pub. L. 113-29; NHA section 255(h)(3)(12
U.S.C. 1715z-20(h)(3)), HUD will codify those requirements in the
rulemaking. Also, HUD did not address the LIBOR transition for legacy
HECM contracts in Mortgagee Letter 2021-08.
HUD seeks public comment on the best method of making such a
transition for legacy loans and new originations. For each of the
questions asked below, and regarding any other issue, HUD is interested
specifically in public comment on whether and how HUD should take a
different course of action for HECM and forward mortgages. While the
following lists are not exhaustive, HUD is particularly interested in
comments on the following questions:
Questions Regarding Replacing LIBOR for Existing Loans
Question for Comment 1: What alternative index would be preferred
and/or what alternative index would be considered ``comparable'' to
LIBOR?
Question for Comment 2: Will servicing mortgagees seek to replace
the interest rate index from LIBOR prior to the last one-month and
twelve-month USD LIBOR publication on June 30, 2023?
Question for Comment 3: What documentation would servicing
mortgagees need to modify in moving to an alternative index? Would this
documentation need to be modified before or after the Transition date,
or both?
Question for Comment 4: How long would servicing mortgagees need to
transition technology to an alternative index?
Question for Comment 5: How long would servicing mortgagees need to
transition operations to an alternative index?
Question for Comment 6: What communication plan is being considered
from servicing mortgagees to borrowers and how should borrower
protections be addressed for this population?
Question for Comment 7: Do servicing mortgagees have any alternate
proposals to negotiating new agreements?
Question for Comment 8: If servicing mortgagees intend to replace
the index for existing ARMs prior to LIBOR ceasing to be published, how
long would servicing mortgagees need to negotiate new agreements with
borrowers to incorporate a new interest rate including providing a
revised annual total cost of the loan?
Question for Comment 9: Do industry partners anticipate any
concerns over a single interest rate change date for all existing
mortgages?
Question for Comment 10: What methods of communication would
servicing mortgagees expect to be most beneficial in communicating with
borrowers on this index change?
Question for Comment 11: What issues do servicing mortgagees
anticipate regarding HECM principal limit growth resulting from an
index change?
Questions Regarding Removal of LIBOR and Establishing a New Index for
New Originations
Question for Comment 12: What alternative index would be preferred?
Question for Comment 13: What tenure rate(s) would be preferred for
the alternative index?
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Question for Comment 14: How many tenure rate(s) would be needed
for the alternative index?
III. Findings and Certifications
Regulatory Review--Executive Orders 12866 and 13563
Under Executive Order 12866 (Regulatory Planning and Review), a
determination must be made whether a regulatory action is significant
and, therefore, subject to review by the Office of Management and
Budget (OMB) in accordance with the requirements of the order.
Executive Order 13563 (Improving Regulations and Regulatory Review)
directs executive agencies to analyze regulations that are ``outmoded,
ineffective, insufficient, or excessively burdensome, and to modify,
streamline, expand, or repeal them in accordance with what has been
learned.'' Executive Order 13563 also directs that, where relevant,
feasible, and consistent with regulatory objectives, and to the extent
permitted by law, agencies are to, ``identify and consider regulatory
approaches that reduce burdens and maintain flexibility and freedom of
choice for the public.''
The current rules providing for the use of LIBOR as an index for
interest rate adjustments for ARMs in HUD's forward and reverse
mortgage insurance programs are becoming obsolete as LIBOR is in the
process of being phased out. HUD is required by statute to approve by
regulation interest rate indexes for its forward ARM products. HUD must
also amend by regulation its permitted interest rate indices for HECM
ARM products and permit lenders to transition from LIBOR to a
replacement index for existing HECM ARMs. Therefore, this rule is
necessary to avoid HUD's rules on ARMs from becoming obsolete as well
as to avoid the risk of financial harm for ARM lenders, borrowers, and
the larger ARM market.
This advanced notice of proposed rulemaking has been reviewed by
OMB. As a result of this review, OMB determined that this advanced
notice of proposed rulemaking is not significant under Executive Order
12866 and Executive Order 13563.
Environmental Review
This advanced notice of proposed rulemaking consists of
``[s]tatutorily required and/or discretionary establishment and review
of interest rates, loan limits, building cost limits, prototype costs,
fair market rent schedules, HUD-determined prevailing wage rates,
income limits and exclusions with regard to eligibility for or
calculation of HUD housing assistance or rental assistance, and similar
rate and cost determinations and related external administrative or
fiscal requirements or procedures which do not constitute a development
decision that affects the physical condition of specific project areas
or building sites.'' Accordingly, under 24 CFR 50.19(c)(6), this
advanced notice of proposed rulemaking is categorically excluded from
environmental review under the National Environmental Policy Act of
1969 (42 U.S.C. 4321).
Lopa P. Kolluri,
Principal Deputy Assistant Secretary, Office of Housing--Federal
Housing Administration.
[FR Doc. 2021-21512 Filed 10-4-21; 8:45 am]
BILLING CODE 4210-67-P
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