[Federal Register: March 10, 2004 (Volume 69, Number 47)]
[Rules and Regulations]
[Page 11499-11502]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr04-21]
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Part IV
Department of Housing and Urban Development
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24 CFR Part 203
Eligibility of Adjustable Rate Mortgages; Final Rule
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203
[Docket No. FR-4745-F-02]
RIN 2502-AH84
Eligibility of Adjustable Rate Mortgages
AGENCY: Office of Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: Pursuant to a recent statutory revision, this rule makes
available new adjustable rate mortgage (ARM) products for HUD-insured
single family homes tailored to the needs of borrowers. This rule also
makes provisions for the frequency and amount of interest rate changes
for these new products and for pre-loan disclosure requirements. This
final rule follows publication of a March 11, 2003, proposed rule. In
accordance with statutory authority and the public comments received,
this rule implements the proposed rule without change; that is, it
provides for seven- and ten-year ARMs adjustable annually by up to two
percentage points, and for one-, three, and five-year ARMs adjustable
annually by up to one percentage point. The lifetime cap on adjustments
for seven- and ten-year ARMs is set at six percentage points.
DATES: Effective Date: April 9, 2004.
FOR FURTHER INFORMATION CONTACT: James Beavers, Director, Home Mortgage
Insurance Division, Office of Single Family Housing, Office of Housing,
Department of Housing and Urban Development, 451 Seventh Street, SW.,
Washington, DC 20410-8000; telephone (202) 708-2121. This is not a
toll-free number. Persons with hearing or speech impairments may access
this number through TTY by calling the toll-free Federal Information
Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
A. Background
On March 11, 2003 (68 FR 11730), HUD published for comment a
proposed rule entitled ``Eligibility of Adjustable Rate Mortgages,''
which proposed to implement section 251 of the National Housing Act, 12
U.S.C. 1715z-16 (section 251) as revised by the Departments of Veterans
Affairs and Housing and Urban Development, and Independent Agencies
Appropriations Act, 2002 (Pub. L. 107-73, approved November 26, 2001)
(FY 2002 HUD Appropriations Act). This rule, following statutory
authority, proposed to permit new categories of hybrid Adjustable Rate
Mortgages (ARMs). ARMs are mortgages that remain at a fixed rate for a
certain period of time and then adjust their rates.
Section 206 of the FY 2002 HUD Appropriations Act added additional
categories of ARMs to the pre-existing one-year ones (which capped
adjustments at one percentage point). Under this statutory revision,
which adds a new subsection (d) to section 251, the Secretary may
insure ARMs on single family properties that have interest rates that
are fixed for the first three years or more of the mortgage term, that
are thereafter adjusted annually, and are not necessarily limited to
adjustments of one percentage point if the initial interest rate
remains fixed for more than five years.
Pursuant to the FY 2002 statutory revisions, HUD also proposed new
pre-loan disclosure requirements. Under the statute, HUD must require
mortgage lenders to make available to the mortgagor a written
explanation of the features of an ARM at the time the mortgagor applies
for an ARM under this section. This explanation must be consistent with
the disclosure requirements under the Truth in Lending Act, 15 U.S.C.
1601 et seq., applicable to variable rate mortgages secured by a
principal dwelling.
HUD also proposed amending 24 CFR 203.49(h) and redesignating it 24
CFR 203.49(i) to eliminate the exclusionary cross-reference to mortgage
insurance for disaster victims, 24 CFR 203.18(e). The effect of this
change would be to permit insurance of ARMs under 203.18(e). Finally,
technical revisions would be made to Sec. 203.49(i), which is
redesignated as Sec. 203.49(j) in this final rule.
Other portions of 24 CFR 203.49 are not affected by this
rulemaking.
B. Discussion of Public Comments
The public comment period for the proposed rule closed on May 12,
2003. HUD received four comments on the proposed rule. Commenters were
generally supportive of the additional ARM options, but asked for
certain changes in the rule or the underlying legislation. Comments
were received from mortgage lenders, two banking associations, and an
association of realtors.
Comment: One commenter stated that consideration should be given to
using a different index, specifically, the London Interbank Offered
Rate (LIBOR) index, as the basis for the interest rate.
Response: HUD recognizes that LIBOR is used for a host of
conventional mortgage products, and is well recognized in the mortgage
industry. Nevertheless, the Federal Housing Administration (FHA), being
an agency of the United States Government, is best served by retaining
a domestic index available from the Federal Reserve Board.
Comment: This commenter also stated that a greater number of ARM
loans should be permitted. The commenter suggested that an increase for
ARMs above the limit of 30 percent of the aggregate amount of loans
insured should be considered.
Response: The 30 percent of aggregate limitation is statutory (see
section 251(c) of the National Housing Act, 12 U.S.C. 1715z-16(c)).
Therefore, HUD cannot increase it by regulation.
Comment: Three commenters stated that the one percent cap on
adjustments for five-year ARMs would not work as a practical matter,
and each stated its support for pending legislation (the ``Access to
Affordable Mortgages Act,'' H.R. 1443 of the 108th Congress) to change
this cap to two percent. One of these commenters noted, ``In the
conventional mortgage markets, lenders do not originate 5/1 ARMs with
one percent annual caps. A maximum annual increase of one percent * * *
does not provide sufficient interest rate flexibility to enable lenders
to offer 5/1 ARMs at a rate below the traditional 30-year fixed rate
mortgage.'' Another commenter made a similar statement and added that
as a result ``the program will likely not accomplish its intended
purpose: to offer FHA borrowers a full range of hybrid ARM loans with
starting interest rates lower than those on 30-year fixed-rate
mortgages.'' Another of these commenters also stated that a one percent
adjustment does not allow sufficient interest rate flexibility and that
legislation raising the annual cap on five-year ARMs will ``make ARMs a
more available, affordable alternative for homebuyers.'' One commenter
also mentioned without discussion that the lifetime cap for five-year
ARMs should be raised to six percentage points.
Response: The one percentage point cap on adjustments for ARMs of
five or fewer years is based on statutory authority current at the time
the proposed rule was published. (See section 251(d) of the National
Housing Act, 12 U.S.C. 1715z-16(d)(2003).) HUD acknowledges that there
is now statutory authority to raise the annual and life-of-loan
adjustment caps on five-year ARMs under section 301 of the FHA
Multifamily Loan Limit Adjustment Act of 2003, Pub. L. 108-186. HUD
will consider changing the
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adjustment caps in a future rulemaking proceeding.
Comment: Two commenters stated that further changes to HUD-insured
ARMs should be by mortgagee letter. These commenters stated that if a
legislative change is made allowing the adjustments in five-year ARMs
to be capped at two percent, the change should be implemented by
Mortgagee Letter to avoid the time-consuming rulemaking process.
Response: HUD believes that changes to the adjustment rates of ARMs
should be done through rulemaking.
C. This Final Rule
In view of the general support for additional ARM products and the
fact that the rule follows statutory authority, this final rule
implements the proposed rule without substantive change.
Findings and Certifications
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this rule, and in so doing
certifies that this rule will not have a significant economic impact on
a substantial number of small entities. This rule permits greater
flexibility in HUD-insured ARMs, thus providing more products for
potential homebuyers.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
was made at the proposed rule stage in accordance with HUD regulations
at 24 CFR part 50, which implement Section 102(2)(C) of the National
Environmental Policy Act of 1969. That finding remains available for
public inspection between 8 a.m. and 5 p.m. weekdays in the Office of
the Rules Docket Clerk, Office of the General Counsel, Department of
Housing and Urban Development, Room 10276, 451 Seventh Street, SW.,
Washington, DC 20410-0500.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of section 6 of the Executive Order are met. This 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.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) establishes requirements for federal agencies to assess the
effects of their regulatory actions on state, local, and tribal
governments and the private sector. This final rule does not impose any
federal mandates on any state, local, or tribal government or the
private sector within the meaning of the Unfunded Mandates Reform Act
of 1995.
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled ``Regulatory Planning and Review'').
OMB determined that this rule is a ``significant regulatory action,''
as defined in section 3(f) of the Executive Order (although not
economically significant, as provided in section 3(f)(1) of the
Executive Order). Any changes made to the rule subsequent to its
submission to OMB are identified in the docket file, which is available
for public inspection between 8 a.m. and 5 p.m. weekdays in the Office
of the Rules Docket Clerk, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410-0500.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance numbers applicable to
this rule are 14.108, 14.117, and 14.119.
List of Subjects in 24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
0
For the reasons stated in the preamble, HUD amends 24 CFR part 203 as
follows:
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
1. The authority citation for 24 CFR part 203 is revised to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, and 1715u; 42
U.S.C. 3535(d).
0
2. Sec. 203.49 is revised as follows:
0
a. Redesignate paragraphs (a) through (j) as paragraphs (b) through (k)
respectively;
0
b. Add a new paragraph (a); and
0
c. Revise newly designated paragraphs (d), (f), (g), (i), and (j).
The additions and revisions read as follows:
Sec. 203.49 Eligibility of adjustable rate mortgages.
* * * * *
(a) Types of mortgages insurable. The types of adjustable rate
mortgages that are insurable are those for which the interest rate may
be adjusted annually by the mortgagee, beginning after one, three,
five, seven, or ten years from the date of the mortgagor's first debt
service payment.
* * * * *
(d) Frequency of interest rate changes. (1) The interest rate
adjustments must occur annually, calculated from the date of the
mortgagor's first debt service payment, except that, for these types of
mortgages, the first adjustment shall be no sooner or later than the
following:
(i) One-year adjustable rate mortgages--no sooner than 12 months or
later than 18 months;
(ii) Three-year adjustable rate mortgages--no sooner than 36 months
or later than 42 months;
(iii) Five-year adjustable rate mortgages--no sooner than 60 months
or later than 66 months;
(iv) Seven-year adjustable rate mortgages--no sooner than 84 months
or later than 90 months; and
(v) Ten-year adjustable rate mortgages--no sooner than 120 months
or later than 126 months.
(2) 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
before the date of each interest rate adjustment.
* * * * *
(f) Magnitude of changes. The adjustable rate mortgage initial
contract interest rate shall be agreed upon by the mortgagee and the
mortgagor. The first adjustment to the contract interest rate shall
take place in accordance with the schedule set forth under paragraph
(d) of this section. Thereafter, for all adjustable rate mortgages, the
adjustment shall be made annually and shall occur on the anniversary
date of the first adjustment, subject to the following conditions and
limitations:
(1) For one-, three-, and five-year adjustable rate mortgages, no
single adjustment may result in a change in either direction of more
than one percentage point from the interest rate in effect for the
period immediately preceding that adjustment. Index changes in excess
of one percentage
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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 the mortgage may not result in a change in either
direction of more than five percentage points from the initial contract
interest rate.
(2) For seven- and ten-year adjustable rate mortgages, no single
adjustment to the interest rate shall result in a change in either
direction of more than two percentage points from the interest rate in
effect for the period immediately preceding that adjustment. Index
changes in excess of two percentage points may not be carried over for
inclusion in an adjustment in a subsequent year. 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 six percentage
points from the initial contract rate.
(3) At each adjustment date, changes in the index interest rate,
whether increases or decreases, must be translated into the adjusted
mortgage interest rate, except that the mortgage may provide for
minimum interest rate change limitations and for minimum increments of
interest rate changes.
(g) Pre-Loan Disclosure. The mortgagee is required to make
available to the mortgagor, at the time of loan application, a written
explanation of the features of an adjustable rate mortgage consistent
with the disclosure requirements applicable to variable rate mortgages
secured by a principal dwelling under the Truth in Lending Act, 15
U.S.C. 1601 et seq.
* * * * *
(i) Cross-reference. Sections 203.21 (level payment amortization
provisions) and 203.44 (open-end advances) do not apply to this
section. This section does not apply to a mortgage that meets the
requirements of Sec. Sec. 203.18(a)(4) (mortgagors of secondary
residences), 203.18(c) (eligible non-occupant mortgagors), 203.18(d)
(outlying area properties), 203.43 (miscellaneous type mortgages),
203.43c (mortgages involving a dwelling unit in a cooperative housing
development), 203.43d (mortgages in certain communities), 203.43e
(mortgages covering houses in federally impacted areas), 203.45
(graduated payment mortgages), or 203.47 (growing equity mortgages).
(j) Aggregate amount of mortgages insured. The aggregate number of
adjustable rate mortgages insured pursuant to this section and 24 CFR
part 234 in any fiscal year may not exceed 30 percent of the aggregate
number of mortgages and loans insured by the Secretary under Title II
of the National Housing Act during the preceding fiscal year.
* * * * *
Dated: March 3, 2004.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 04-5314 Filed 3-9-04; 8:45 am]
BILLING CODE 4210-27-P