Proposed Rule2022-22538
Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate Indices
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 19, 2022
Issuing agencies
Housing and Urban Development Department
Abstract
HUD is proposing to remove the London Interbank Offered Rate (LIBOR) as an approved index for adjustable interest rate mortgages (ARMs), and replace LIBOR with the Secured Overnight Financing Rate (SOFR) as a Secretary-approved index for newly originated forward ARMs. HUD also proposes to codify its removal of LIBOR and approval of SOFR as an index for newly-originated Home Equity Conversion Mortgage (HECM or reverse mortgage) ARMs. In addition, HUD is proposing to establish a spread-adjusted SOFR index as the Secretary-approved replacement index to transition existing forward and HECM ARMs off LIBOR. HUD also proposes to make clarifying changes to its HECM Monthly ARM regulation and establish a lifetime five percent interest rate cap for monthly adjustable rate HECMs.
Full Text
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<title>Federal Register, Volume 87 Issue 201 (Wednesday, October 19, 2022)</title>
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[Federal Register Volume 87, Number 201 (Wednesday, October 19, 2022)]
[Proposed Rules]
[Pages 63458-63464]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-22538]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 203 and 206
[Docket No. FR-6151-P-02]
RIN 2502-AJ51
Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate
Indices
AGENCY: Office of Housing, U.S. Department of Housing and Urban
Development (HUD).
ACTION: Proposed rule.
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SUMMARY: HUD is proposing to remove the London Interbank Offered Rate
(LIBOR) as an approved index for adjustable interest rate mortgages
(ARMs), and replace LIBOR with the Secured Overnight Financing Rate
(SOFR) as a Secretary-approved index for newly originated forward ARMs.
HUD also proposes to codify its removal of LIBOR and approval of SOFR
as an index for newly-originated Home Equity Conversion Mortgage (HECM
or reverse mortgage) ARMs. In addition, HUD is proposing to establish a
spread-adjusted SOFR index as the Secretary-approved
[[Page 63459]]
replacement index to transition existing forward and HECM ARMs off
LIBOR. HUD also proposes to make clarifying changes to its HECM Monthly
ARM regulation and establish a lifetime five percent interest rate cap
for monthly adjustable rate HECMs.
DATES: Public comment due date: November 18, 2022.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule 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. Due to security measures at all federal
agencies, however, submission of comments by standard mail often
results in delayed delivery. To ensure timely receipt of comments, HUD
recommends that comments submitted by standard mail be submitted at
least two weeks in advance of the deadline. HUD will make all comments
received by mail available to the public at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
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 can dial 7-1-1 to access the
Telecommunications Relay Service (TRS), which permits users to make
text-based calls, including Text Telephone (TTY) and Speech to Speech
(STS) calls. 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: Lisa Saunders, Office of Housing,
Department of Housing and Urban Development, 451 7th Street SW,
Washington, DC 20410-8000; telephone number 202-402-2378 (this is not a
toll-free number); email address <a href="/cdn-cgi/l/email-protection#1261747477777670737179527a67763c757d64"><span class="__cf_email__" data-cfemail="c0b3a6a6a5a5a4a2a1a3ab80a8b5a4eea7afb6">[email protected]</span></a>. Individuals can
dial 7-1-1 to access the Telecommunications Relay Service (TRS), which
permits users to make text-based calls, including Text Telephone (TTY)
and Speech to Speech (STS) calls. Individuals who require an
alternative aid or service to communicate effectively with HUD should
email the point of contact listed above and provide a brief description
of their preferred method of communication.
SUPPLEMENTARY INFORMATION:
I. Background
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, information on which must be
readily accessible to mortgagors from generally available published
sources. For HECMs, Section 255(d) of the NHA (12 U.S.C. 1715z-20(d))
authorizes FHA to insure variable rate HECMs and imposes additional
eligibility requirements on HECMs, which include requirements for HECM
ARMs.
Forward ARMs
HUD initially provided for mortgage insurance of ARMs for single
family forward mortgages under 24 CFR part 203 and for part 234
condominium mortgages in 1984.\1\ As provided in the statute at that
time, the interest rate on ARMs 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 originally used by HUD was the U.S. Constant Maturity
Treasury (CMT). In 2001 and 2003, statutory changes to Section 251 of
the NHA, 12 U.S.C. 1715z-16 allowed HUD to insure ARMs 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.\2\ In
2004, HUD issued a rule (``the 2004 rule'') implementing these
statutory changes and providing mortgage insurance for forward ARMs
with interest rates first adjustable in 1 year, 3 years, 5 years, 7
years, and 10 years.\3\
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\1\ 49 FR 23580, June 6, 1984.
\2\ Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 2002 (Pub.
L. 107-73, approved November 26, 2001); HOPE VI Program
Reauthorization and Small Community Main Street Rejuvenation and
Housing Act of 2003 (Pub. L. 108-186, 117 Stat. 2685, approved
December 16, 2003).
\3\ 69 FR 11500, March 10, 2004.
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Under the 2004 rule, 1, 3, and 5-year ARMs were capped, for each
adjustment, in either direction at one percentage point from the
interest rate in effect for the period immediately preceding the
adjustment. For the life of the mortgage, the overall 5 percent cap in
either direction remained. For 7 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. In all
cases, changes that exceeded 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
change in either direction, and a life-of-mortgage cap of 6 percent in
either direction for 5-year ARMs in 2005, conforming 5-year ARMs to
HUD's 7 and 10-year ARM products.\4\
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\4\ 70 FR 16080, March 29, 2005.
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In 2007 (``the 2007 rule''), HUD added LIBOR, along with the CMT,
as an acceptable index for ARM adjustments for its ARM products.\5\ For
forward mortgages, the applicability of these indices is codified at 24
CFR 203.49. The cap on 1 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 the 5, 7 and 10-year ARMs (2 percent in
either direction per
[[Page 63460]]
adjustment, with a 6 percent from initial contract rate cap for the
life of the mortgage) are codified at Sec. 203.49(f)(2). HUD also
created model note and mortgage documents for forward ARMs and revised
those model documents over the years. The 2015 Model ARM Note \6\
contains a provision for the substitution of an index by the note
holder based on ``comparable information,'' should the index specified
in the note become unavailable.
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\5\ 72 FR 40047, July 20, 2007.
\6\ The 2015 Model ARM Note is available on HUD's website at:
<a href="https://www.hud.gov/program_offices/housing/sfh/model_documents">https://www.hud.gov/program_offices/housing/sfh/model_documents</a>.
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Reverse Mortgages or HECMs
In 1989, the Home Equity Conversion Mortgage program rule (the HECM
rule) provided for ARMs with both capped and uncapped interest rate
adjustments.\7\ For capped HECM ARMs, the HECM 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.
The HECM rule also provided for a HECM ARM that sets a maximum interest
rate that could be charged without a cap on monthly or annual increases
or decreases.
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\7\ 54 FR 24822, June 9, 1989.
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In the 2007 rule, in which LIBOR was added for forward mortgages,
HUD also added LIBOR as an acceptable index for HECM ARM adjustments in
current Sec. Sec. 206.3 (definitions) and 206.21 (interest rate).\8\
HUD's model HECM ARM note and mortgage documents have been revised 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.\9\
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\8\ 72 FR 40048, July 20, 2007.
\9\ The 2015 Model ARM Note is available on HUD's website at:
<a href="https://www.hud.gov/program_offices/housing/sfh/model_documents">https://www.hud.gov/program_offices/housing/sfh/model_documents</a>.
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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 closing in the HECM
ARM context, and under Sec. 203.49(f)(1), the cap on adjustments for
one- and three-year mortgages is 2 percentage points in the HECM ARM
context. Section 206.21(b)(1)(ii) applies the LIBOR and CMT index
options in the same manner as forward ARMs 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 and approved the SOFR index for annually
adjustable HECM ARMs closed on or after May 3, 2021.\10\ A mortgagee
may set rates using CMT or SOFR for annually adjustable HECM ARMs and
CMT only for monthly adjustable 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) \11\ published
fallback language for residential ARMs.\12\
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\10\ As explained in Mortgagee Letter 2021-08, 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)).
\11\ The ARRC is a group of private-market participants convened
by the Federal Reserve Board and the Federal Reserve Bank of New
York 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>.
\12\ 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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Phase-Out of LIBOR
The financial industry is transitioning from use of the LIBOR index
given its increasing unreliability and speculative nature. 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.\13\ 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, thereby creating uncertainty as to the integrity of the index.
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\13\ See Second Report, The Alternative Reference Rates
Committee, p.6 (March 2018), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report</a>.
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In July of 2017, the U.K. Financial Conduct Authority (FCA), the
financial regulator of LIBOR, announced that it would no longer
persuade or compel contributing banks to submit rates used to calculate
LIBOR after December 31, 2021, further heightening the uncertainty of
LIBOR.\14\ 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 immediately following the
June 30, 2023 publication for other USD LIBOR tenors.\15\ On March 5,
2021, the ICE Benchmark Administration Limited (IBA) published the
feedback it received to a December, 2020, consultation, and announced
it would cease publication of the one month and one year USD LIBOR
immediately following the LIBOR publication on June 30, 2023.\16\
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\14\ 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>.
\15\ 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>.
\16\ ICE LIBOR, 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 and upcoming phase-out of LIBOR, mortgagees
have been working to transition to 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, recommended the selection of SOFR for use in
new USD contracts.\17\ 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.'' \18\ HUD anticipates that a spread-adjusted SOFR will
be published to minimize the
[[Page 63461]]
impact of the transition on legacy ARMs and other LIBOR-based
contracts.
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\17\ 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).
\18\ 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.'' \19\
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\19\ 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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As part of the Consolidated Appropriations Act, 2022,\20\ Congress
passed the Adjustable Interest Rate (LIBOR) Act of 2021 (LIBOR Act)
\21\ to, in part, create a clear and uniform process, on a nationwide
basis, for replacing LIBOR in existing contracts where the terms do not
provide for the use of a clearly defined or practicable replacement
benchmark rate, without affecting the ability of parties to use any
appropriate benchmark rate in a new contract.\22\ Generally, for LIBOR-
based ARMs without language providing for a specific replacement index,
the default replacement index will be a spread-adjusted SOFR as
provided for under the LIBOR Act.
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\20\ Consolidated Appropriations Act, 2022, Public Law 117-103.
\21\ Id. at Division U.
\22\ Id. at Division U, Section 102(b)(1).
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The LIBOR Act establishes that this spread-adjusted replacement
index will replace LIBOR for existing contracts on the Replacement
Date, specified in the LIBOR Act as the first London banking day after
June 30, 2023, unless the Federal Reserve Board specifies another date
(the ``Replacement Date'').\23\ The LIBOR Act also established a one-
year linear basis to transition the tenor spread adjustment from LIBOR
to the SOFR spread-adjusted index.\24\ For FHA-insured LIBOR-based
ARMs, the LIBOR Act authorizes HUD to approve the spread-adjusted SOFR
index, or another benchmark replacement index selected by HUD, as a
replacement to LIBOR for existing ARMs starting on the Replacement
Date.\25\
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\23\ Id. at Division U, Section 103(6), (17), (19) and Section
104(a)(3)).
\24\ Id. at Division U, Section 104(e)(2).
\25\ Id. at Division U, Section 103(10) and Section 104(c).
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Advanced Notice of Proposed Rulemaking
On October 5, 2021, HUD published an advanced notice of proposed
rulemaking (ANPR) to seek input from the public on the transition away
from LIBOR.\26\ HUD sought comment on how to address a Secretary-
approved replacement index for existing loans and provide for a
transition date consistent with the cessation of the LIBOR index. HUD
also sought comment on replacing the LIBOR index with the SOFR interest
rate index, with a compatible spread adjustment to minimize the impact
of the replacement index for existing ARMs. The comment period closed
on December 6, 2021. HUD received nine comments on the ANPR. Comments
were mostly supportive of transitioning away from LIBOR and multiple
commenters specifically suggested the use of SOFR as a replacement
index. Commenters also provided suggestions on how to smoothly
transition off LIBOR. HUD has considered these comments in drafting
this proposed rule.
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\26\ 86 FR 54876.
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II. This Proposed Rule
HUD proposes three changes. First, HUD proposes to transition from
LIBOR to a spread-adjusted SOFR index for existing forward and HECM
ARMs, and to replace LIBOR with SOFR as a Secretary-approved index for
new ARMs. Second, HUD proposes to clarify its regulations regarding the
Monthly Adjustable Interest Rate HECMs at Sec. 206.21(b)(2). Third,
HUD proposes to establish a five percentage point lifetime cap on the
adjustment of the HECM monthly ARM interest rate.
A. Transition From LIBOR to SOFR Sec. Sec. 203.49, 206.21
This proposed rule addresses both the transition from LIBOR to SOFR
for new forward ARM originations and the transition from LIBOR to a
spread-adjusted SOFR index for existing forward and HECM ARMs. This
proposed rule would also update the HECM ARM regulation consistent with
changes already made through Mortgagee Letter 2021-08 regarding new
originations.
New Originations for Forward and HECM ARMs Sec. Sec. 203.49(b)(1),
206.21(b)(1)(ii)(A)
HUD is proposing to remove LIBOR and approve SOFR as a Secretary-
approved interest rate index for FHA-insured ARMs. CMT would continue
to be a Secretary-approved interest rate, and this rule would provide
that both CMT and SOFR may be used for periodic adjustments for newly-
originated forward ARMs.
As discussed above, HUD, through Mortgagee Letter 2021-08, has
already removed LIBOR and approved SOFR as a Secretary-approved
interest rate index for HECM ARMs closed on or after May 3, 2021. This
proposed rule would align forward ARM indices with the change made by
Mortgagee Letter 2021-08. HUD is also proposing to update Sec.
206.21(b)(1)(ii)(A) so that HUD's HECM ARM regulations are consistent
with the changes made by Mortgagee Letter 2021-08. These changes
include establishing zero as the minimum for the index value used to
determine the mortgage interest rate for all HECMs to prevent against
below-zero interest rates in a negative interest rate environment.
This rule proposes to use the 30-day average SOFR tenor adjusted to
a constant maturity of one year. However, HUD anticipates that it may
decide to approve additional SOFR tenors besides the 30-day average
when additional SOFR tenors are published or more information about
existing tenors is made available. Therefore, for both forward and HECM
mortgages, HUD is also proposing that HUD may approve alternative SOFR
tenors for new originations through notice.
Transition From LIBOR for Existing Forward and HECM Mortgages
Sec. Sec. 203.49(b)(2), 206.21(b)(1)(ii)(B).
For existing forward and HECM ARMs using LIBOR, HUD proposes to
require that, on the Replacement Date, ARMs currently using LIBOR for
their annual or monthly adjustments, as applicable, transition to the
spread-adjusted SOFR index as specified in the LIBOR Act. This spread-
adjusted SOFR would be the only Secretary-approved replacement index
for transitioning existing forward and HECM LIBOR-based ARMs. HUD also
proposes requiring that mortgagees provide notice to the borrower of
the replacement in accordance with the terms of the loan documents.
Before the Replacement Date, the loan documents for these mortgages
govern the terms of the loan and, as long as the LIBOR index is
available, mortgagees may not have flexibility to substitute a new
index without a modification of the existing loan documents or
executing new loan documents. However, the LIBOR Act specifies that, on
the Replacement Date, mortgagees will no longer be required to use
LIBOR and must instead use a replacement index.
HUD anticipates that possible fluctuations in the interest rate
from the transition to the spread-adjusted SOFR would be tempered by
FHA's existing per-adjustment or life of mortgage caps set forth in the
mortgage documents or FHA regulations.\27\ Additionally, using
[[Page 63462]]
the tenor spread adjustment as provided for in the LIBOR Act would
further help to mitigate impacts due to the transition because this
spread adjustment is intended to create as little disruption as
possible during the transition. Furthermore, the applicable SOFR tenors
will be identified by the Federal Reserve Board prior to the
Replacement Date and HUD believes that the spread-adjusted SOFR will
provide a comparable interest rate consistent with the rate that would
have been generated by the LIBOR index.
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\27\ These caps are set forth in Section 251 of the National
Housing Act (12 U.S.C. 1715z-16) for insured forward ARMs and
Section 255 of the National Housing Act (12 U.S.C. 1715z-20) for
annually adjustable HECMs. See also, Sec. Sec. 203.49(f), Sec.
206.21(b)(1)(iv).
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HUD also proposes that the Secretary will publish through notice
any additional requirements for transition of existing LIBOR-based ARMs
to address technical aspects of the transition process, newly published
SOFR tenors, and any developments arising from the transition.
B. Monthly Adjustable Interest Rate HECMs Sec. 206.21(b)(2)
When HUD issued its HECM final rule in January 2017, HUD removed
cross references to 24 CFR part 203 and added specific language to
discuss the annual adjustments for HECM ARMs, but did not include the
same level of specific structure for monthly adjustments.\28\ HUD is
proposing to restructure Sec. 206.21(b)(2) to clarify the requirements
applicable to monthly adjustments to align with those provided for
annual adjustments.
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\28\ 82 FR 7094, January 19, 2017.
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C. Five Percent Lifetime Cap Sec. 206.21(b)(2)(iii)
HUD proposes a limit on the adjustment of the HECM ARM monthly
interest rate in either direction of no more than five percentage
points from the initial contract interest rate. This change would align
with similar ARM interest rate caps that are currently used for annual
interest rate HECMs and forward ARMs in the mortgage industry. This
proposal would reduce risk to the borrower and the Mutual Mortgage
Insurance Fund (MMIF) by reducing potential loan balance growth.
III. 30-Day Public Comment Period
In accordance with HUD's regulations on rulemaking at 24 CFR part
10, 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.
HUD's October 5, 2021, ANPR sought 60 days of public comment on
alternate indexes and best methods of transitioning off LIBOR. HUD
received nine comments in response to HUD's ANPR that were generally
supportive of the course of action HUD now proposes in this rule.
After HUD published its ANPR, Congress passed and the President
signed into law the LIBOR Act, which provides for a clear and uniform
nationwide process for replacing LIBOR in existing contracts. The LIBOR
Act answered many of the questions that were uncertain at the time when
HUD published its ANPR.
HUD believes the LIBOR Act, which HUD's proposed rule would
implement, creates such an overwhelming industry standard that few if
any questions remain regarding how HUD should proceed. HUD also
believes that the comments received in response to its ANPR indicate
that 30 days is sufficient time for commenters to consider and respond
to this proposed rule.
HUD also believes that, with the discontinuation of LIBOR due for
June 30, 2023, a 30-day comment period would aid HUD in moving toward a
final rule as quickly as possible. Providing more time between the
final rule and the discontinuation of LIBOR would ease the transition
off LIBOR by ensuring that the regulatory structure and necessary
guidance is in place to transition existing forward and HECM ARMs to a
spread-adjusted replacement index, and to allow for the origination of
new forward ARMs on a replacement index by June 30, 2023.
Given the above justifications, HUD believes that good cause exists
to reduce the public comment period to 30 days. All comments received
during the 30-day public comment period will be considered in the
development of the final rule.
IV. 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 indices 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 prevent HUD's rules on ARMs from becoming obsolete as well
as to avoid the risk of financial harm for all ARM lenders and
borrowers, and the larger ARM market, and the MMIF.
HUD does not expect the rule to have an economic impact as a result
of the transition to the alternative rate. For newly endorsed forward
ARMs, SOFR will become an available index in addition to the one-year
CMT index. HUD has already removed LIBOR and approved SOFR for new
annually adjustable HECM ARM originations. As of the Effective Date or
prior to the cessation of LIBOR, existing LIBOR indexed FHA-insured
ARMs may transition to a spread-adjusted SOFR to make it a comparable
rate for existing LIBOR-based ARMs. Transition to the spread-adjusted
SOFR will align FHA-insured ARMs with other LIBOR contracts covered by
the LIBOR Act.
For existing mortgages that transition to spread-adjusted SOFR, we
do not anticipate a significant economic impact. For all existing FHA-
insured ARMs, the per-adjustment and lifetime caps on total adjustments
will continue to apply, minimizing the impact to borrowers or
mortgagees as a result of the transition to SOFR.
This rule was not subject to OMB review. This rule is not a
``significant regulatory action'' as defined in Section 3(f) of
Executive Order 12866, and is not an economically significant
regulatory action.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for federal
agencies to assess the effects of their regulatory actions on state,
local, and tribal governments, and on the private sector. This proposed
rule would not impose any federal mandates on any state, local, or
tribal governments, or on
[[Page 63463]]
the private sector, within the meaning of the UMRA.
Environmental Review
This proposed rule consists of ``[s]tatutorily required and/or
discretionary establishment and review of interest rates, mortgage
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
proposed rule is categorically excluded from environmental review under
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
This rule would provide for the removal of LIBOR as an allowable index
rate for adjustments for new FHA-insured forward ARMs and establish
SOFR as a new index along with the CMT for new forward ARMs, aligning
it with the available indices for annually adjustable HECM ARMs. There
would be a Secretary-approved spread-adjusted SOFR for existing FHA-
insured ARMs transitioning from LIBOR.
The change of this proposed rule requires mortgagees to, where
appropriate, utilize a new approved index. Mortgagees are already
required to substitute an index under the terms of their existing loan
documents when the index used becomes unavailable. Additionally, this
proposed rule establishes a new index for origination of new forward
ARMs, which mortgagees regularly provide when originating a loan.
Therefore, the changes in this proposed rule should not have a
significant economic impact on mortgagees. If there is an economic
effect on mortgagees, it would fall equally on all mortgagees who
originate or service ARMs. Further, HUD anticipates that allowing an
additional index for newly originated ARMs would have a net positive
economic impact on borrowers and mortgagees by providing additional
market opportunities, decreasing the cost of credit associated with
these ARMs.
Therefore, the undersigned certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
Notwithstanding HUD's determination that this rule will not have a
significant effect on a substantial number of small entities, HUD
specifically invites comments regarding any less burdensome
alternatives to this rule that will meet HUD's objectives as described
in the preamble to this rule.
Executive Order 13132, Federalism 64 FR 43255; August 10, 1999
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either: (1) imposes substantial direct compliance costs on State and
local governments and is not required by statute, or (2) preempts State
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
Paperwork Reduction Act
The information collection requirements contained in this proposed
rule are currently approved by OMB and have been given OMB Control
Number 2502-0322 and OMB Control Number 2502-0524 and 2502-0611. In
accordance with the Paperwork Reduction Act, an agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless the collection displays a currently valid OMB
control number.
List of Subjects
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loans
programs--housing and community development, Mortgage insurance,
Reporting and recordkeeping requirements, Solar energy.
24 CFR Part 206
Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, HUD proposes to amend 24
CFR parts 203 and 206 as follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
1. The authority citation for part 203 continues to read as follows:
Authority: 12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u,
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
0
2. Amend Sec. 203.49 by revising paragraph (b) to read as follows:
Sec. 203.49 Eligibility of adjustable rate mortgages.
* * * * *
(b) Interest-rate index. (1) CMT and SOFR Indices. Changes in the
interest rate charged on an adjustable rate mortgage must correspond
either to changes in the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year (CMT); to the
30-day average Secured Overnight Financing Rate (SOFR) published by the
Federal Reserve Bank of New York (or a successor administrator),
adjusted to a constant maturity of one year; or to an alternative SOFR
tenor approved by the Secretary. The Secretary may publish approved
SOFR tenors as alternatives to the 30-day SOFR tenor through notice.
(2) Transition for existing mortgages indexed to LIBOR. Mortgages
with an existing adjustable interest rate indexed to the London
Interbank Offered Rate (LIBOR) must be transitioned to the spread-
adjusted SOFR replacement index approved by the Secretary by the next
interest rate adjustment date for the mortgage on or after the
Replacement Date, which means the first London banking day after June
30, 2023, unless the Board of Governors of the Federal Reserve System
determines that any LIBOR tenor will cease to be published or cease to
be representative on a different date. In such case, Replacement Date
means the first business day following the date announced by the Board
of Governors of the Federal Reserve System. Notice of the transition to
the SOFR replacement index must be sent to the borrower in accordance
with the mortgage documents. The Secretary will publish through notice
any additional requirements for the transition of existing mortgages.
(3) Changes in the mortgage interest rate. Except as otherwise
provided in this section, each change in the mortgage interest rate
must correspond to the upward and downward change in the index.
* * * * *
[[Page 63464]]
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
0
3. The authority citation for part 206 continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).
Subpart A--General
0
4. Amend Sec. 206.3 by revising the definition of ``Expected average
mortgage interest rate'' and adding, in alphabetical order, definitions
for ``Margin'', ``Replacement Date'', and ``SOFR'' to read as follows:
Sec. 206.3 Definitions.
* * * * *
Expected average mortgage interest rate means the interest rate
used to calculate the principal limit established at closing.
(1) For fixed interest rate HECMs, the expected average mortgage
interest rate is the same as the fixed mortgage (Note) interest rate
and is set simultaneously with the fixed interest (Note) rate.
(2) For adjustable interest rate HECMs, the expected average
mortgage interest rate is the sum of the mortgagee's margin plus the
weekly average yield for U.S. Treasury securities (CMT) adjusted to a
constant maturity of 10 years or an additional SOFR index as approved
by the Secretary. Commingling the index type used to calculate the
expected average mortgage interest rate and the index type used to
calculate the adjustable mortgage interest (Note) rate and adjustments
is only permissible as provided for by the Secretary.
(3) Mortgagees, with the agreement of the borrower, may
simultaneously lock in the expected average mortgage interest rate and
the mortgagee's margin prior to the date of mortgage closing or
simultaneously establish the expected average mortgage interest rate
and the mortgagee's margin on the date of mortgage closing.
* * * * *
Margin means the amount added to the index value to compute the
expected average mortgage interest rate and the initial mortgage
interest (Note) rate and periodic adjustments to the mortgage interest
(Note) rate.
* * * * *
Replacement Date means the first London banking day after June 30,
2023, unless the Board of Governors of the Federal Reserve System
determines that any LIBOR tenor will cease to be published or cease to
be representative on a different date. In such case, Replacement Date
means the first business day following the date announced by the Board
of Governors of the Federal Reserve System.
SOFR means the Secured Overnight Financing Rate published by the
Federal Reserve Bank of New York (or a successor administrator).
* * * * *
Subpart B--Eligibility; Endorsement
0
5. Amend Sec. 206.21 by revising paragraphs (b)(1)(ii) and (b)(2) to
read as follows:
Sec. 206.21 Interest rate.
* * * * *
(b) * * *
(1) * * *
(ii) Interest rate index. (A) CMT and SOFR Indices. Changes in the
mortgage interest rate charged on an adjustable interest rate mortgage
must correspond to changes in the weekly average yield on U.S. Treasury
securities (CMT) adjusted to a constant maturity of one year; to the
30-day average Secured Overnight Financing Rate (SOFR) adjusted to a
constant maturity of one year; or to an alternative SOFR tenor approved
by the Secretary. The Secretary may publish approved SOFR tenors as
alternatives to the 30-day SOFR tenor through notice. The index type
used to calculate the initial mortgage interest rate must be the same
index type used to calculate the mortgage interest rate adjustments,
except as provided in (B) of this section. Commingling of index types
for the mortgage interest rate and adjustments is not otherwise
allowed, unless approved by the Secretary. Unless otherwise provided in
this section, each change in the mortgage interest rate must correspond
to the upward and downward change in the index, except that downward
changes in the index will not result in a mortgage interest rate that
is less than zero.
(B) Transition for existing mortgages indexed to LIBOR. Mortgages
with an existing adjustable interest rate indexed to the London
Interbank Offered Rate (LIBOR) must be transitioned to the spread-
adjusted SOFR replacement index approved by the Secretary by the next
interest rate adjustment date for the mortgage on or after the
Replacement Date. Notice of the transition to the SOFR replacement
index must be sent to the borrower in accordance with the mortgage
documents. The Secretary will publish through notice any additional
requirements for the transition of existing mortgages.
* * * * *
(2) Monthly adjustable interest rate HECMs. If a mortgage meeting
the requirements of paragraph (b)(1) of this section is offered, the
mortgagee may also offer a mortgage which provides for monthly
adjustments to the interest rate subject to the following requirements:
(i) Interest Rate Index. Changes in the interest rate charged on an
adjustable interest rate mortgage shall correspond to changes in the
weekly average yield on U.S. Treasury securities (CMT) adjusted to a
constant maturity of one year, to the weekly average yield on CMT
adjusted to one-month, or to an alternative SOFR index approved by the
Secretary. The index type used to calculate the initial mortgage
interest rate must be the same index type used to calculate the
mortgage interest rate adjustments, except as provided in (b)(1)(ii)(B)
of this section. Commingling of index types for the mortgage interest
rate and adjustments is not otherwise allowed, unless approved by the
Secretary. Unless otherwise provided in this section, each change in
the Note rate must correspond to the upward and downward change in the
index, except that downward changes in the index will not result in a
Note rate that is less than zero.
(ii) Frequency of interest rate changes.
(A) The interest rate adjustments must occur monthly, calculated
from the date of the closing, except that the first adjustment shall be
no sooner than 30 days (28 days for February, as applicable) or later
than three months from the date of the closing.
(B) To set the new interest rate, the mortgagee will determine the
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 initial index figure shall be the most recent figure
available before the date of mortgage loan origination. The current
index figure shall be the most recent index figure available 30 days
(28 days for February, as applicable) before the date of each interest
rate adjustment.
(iii) Magnitude of Changes. The initial mortgage interest rate
shall be agreed upon by the mortgagee and the borrower. 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 five percentage
points from the initial contract interest rate.
* * * * *
Julia R. Gordon,
Assistant Secretary for Housing--FHA Commissioner.
[FR Doc. 2022-22538 Filed 10-18-22; 8:45 am]
BILLING CODE 4210-67-P
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