Federal Housing Administration (FHA): Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages, 26376-26381 [2014-10572]

Download as PDF 26376 Proposed Rules Federal Register Vol. 79, No. 89 Thursday, May 8, 2014 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. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Part 203 [Docket No. FR–5744–P–01] RIN 2502–AJ20 Federal Housing Administration (FHA): Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages Office of the Assistant Secretary for Housing—Federal Housing Commissioner, Department of Housing and Urban Development (HUD). ACTION: Proposed rule. AGENCY: This rule proposes two revisions to FHA’s regulations governing its single family adjustable rate mortgage (ARM) program to align FHA interest rate adjustment and notification regulations with the requirements for notifying mortgagors of ARM adjustments, as required by the regulations implementing the Truth in Lending Act (TILA), as recently revised by the Consumer Financial Protection Bureau (CFPB). The first proposed amendment of this rule would require that an interest rate adjustment resulting in a corresponding change to the mortgagor’s monthly payment for an ARM be based on the most recent index value available 45 days before the date of the rate adjustment. The date that the newly adjusted interest rate goes into effect is often referred to as the ‘‘interest change date.’’ The number of days prior to the interest change date on which the index value is selected is called the ‘‘look-back period.’’ FHA’s current regulations provide for a 30-day lookback period. The second proposed amendment would require that the mortgagee of an FHA-insured ARM comply with the disclosure and notification requirements of the 2013 TILA Servicing Rule, including at least a 60-day but no more than 120-day advance notice of an adjustment to a mortgagor’s monthly payment. FHA’s tkelley on DSK3SPTVN1PROD with PROPOSALS SUMMARY: VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 current regulations provide for notification at least 25 days in advance of an adjustment to a mortgagor’s monthly payment. DATES: Comment Due Date: June 9, 2014. ADDRESSES: Interested persons are invited to submit comments regarding this 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. 2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically. Note: To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule. No Facsimile Comments. Facsimile (fax) comments are not acceptable. Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m., weekdays, at the above address. Due to security measures at the HUD Headquarters building, an appointment to review the public comments must be scheduled in PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 advance by calling the Regulations Division at 202–708–3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Relay Service at 800–877– 8339. Copies of all comments submitted are available for inspection and downloading at www.regulations.gov. FOR FURTHER INFORMATION CONTACT: Patricia J. McClung, Acting Director, Office of Single Family Program Development, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 9278, Washington, DC 20410; telephone number 202–708–3175 (this is not a tollfree number). Persons with hearing or speech impairments may access this number through TTY by calling the tollfree Federal Relay Service at 800–877– 8339. SUPPLEMENTARY INFORMATION: I. Executive Summary A. Purpose of the Regulatory Action This proposed rule would align FHA’s regulations governing its single family ARM program with the interest rate adjustment and disclosure and notification periods required for ARMs by TILA, as implemented by the CFPB in a final rule published in the Federal Register on February 14, 2013, at 78 FR 10902, and entitled ‘‘Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z).’’ 1 This February 2013 final rule, referred to in this preamble as the 2013 TILA Servicing Rule, set the ARM adjustment notice requirement to a period of between 60 days (minimum) and 120 days (maximum) before the newly adjusted payment is due. Additionally, the 2013 TILA Servicing Rule established 45 days as the minimum ARM look-back period. In the preamble to the 2013 TILA Servicing Rule, the CFPB states that FHA’s current 30-day look-back period does not provide sufficient time to notify the mortgagor of an interest rate and monthly payment adjustment. To allow HUD sufficient time to comply with the notification requirements of the 2013 TILA Servicing Rule, the CFPB delayed the effective date of the notification requirements in the 2013 TILA 1 The CFPB initially published the rule on its Web site: https://www.consumerfinance.gov/regulations/ 2013-real-estate-settlement-procedures-actregulation-x-and-truth-in-lending-act-regulation-zmortgage-servicing-final-rules/. E:\FR\FM\08MYP1.SGM 08MYP1 Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed Rules tkelley on DSK3SPTVN1PROD with PROPOSALS Servicing Rule to January 10, 2015, for ARMs insured by FHA with a 30-day look-back period. Therefore, FHAinsured ARMs originated on or after January 10, 2015, must comply with the new notification requirements of the 2013 TILA Servicing Rule. B. Summary of the Major Provisions of the Regulatory Action To comply with the 2013 TILA Servicing Rule, FHA proposes two amendments to its regulations. First, FHA proposes to amend 24 CFR 203.49(d)(2) to require FHA-approved mortgagees, in setting a new interest rate, to use the current index figure that is the most recent index figure available 45 days (rather than the current 30 days) before the date of an interest rate adjustment. Revising the current 30-day look-back period to 45 days would enable FHA-approved mortgagees to meet the 60- to 120-day notification period prior to any adjustment to a mortgagor’s monthly payment that may occur, as required by the 2013 TILA Servicing Rule. The second proposed revision would update 24 CFR 203.49(h) to crossreference the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of § 1026.20(d) govern the initial rate adjustment of an ARM, while those of § 1026.20(c) govern subsequent rate adjustments. Currently, FHA-approved mortgagees must only notify the mortgagor at least 25 days before any adjustment to a mortgagor’s monthly payment may occur and inform the borrower of the new mortgage interest rate, the amount of the new monthly payment, the current index interest rate value, and how the payment adjustment was calculated (see 24 CFR 203.49(h)). In cross-referencing paragraph (c) of 12 CFR 1026.20, HUD would require the mortgagee of an FHA-insured ARM to provide the mortgagor with specific and prescribed disclosures in connection with any adjustment of the interest rate, as required by the loan contract, that results in a corresponding adjustment to the mortgagor’s monthly payment. These required disclosures must be provided to the mortgagor at least 60 days, but not more than 120 days, before the first payment at the adjusted level is due. In cross-referencing paragraph (d) of 12 CFR 1026.20, the mortgagee would be required, the first time the interest rate adjusts the monthly payment of an FHA-insured ARM, to provide the VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 appropriate disclosures to the mortgagor at least 210, but not more than 240, days before the first payment at the adjusted level is due. C. Costs and Benefits Since an overwhelming majority of ARMs originated in the conventional mortgage market currently have a 45day look-back period 2 and were required to comply with the 2013 TILA Servicing Rule notification requirements on January 10, 2014, well before the effective date of this proposed rule, there should be little, if any, burden to apply the same 2013 TILA Servicing Rule requirements on FHA-insured ARMs. Therefore, the anticipated costs of this proposed rule are very minimal. In determining the impact of the adjusted look-back period on a single ARM insured by FHA, the effect upon the mortgagor’s monthly mortgage payment is the difference between the interest rate generated by an index available 45 days before the interest change date from that generated by the same index 30 days before the interest change date. This difference may be due to a trend in rates or the ‘‘noise’’ (minor fluctuations around that trend) or both. However, given any date in the future, it is impossible to know whether the rate will be higher or lower 15 days prior. Even over a period in which a trend is expected, the limited timeframe of 15 days and the noise around that change means the significance of the change to the look-back period is unknowable. Thus, while the 15-day change may affect specific outcomes, this change is not expected to have any generalizable impact on the economy with a clear direction and scale. For mortgagees that would have sent later notice to mortgagors, the proposed changes may potentially increase prepayment risk, the risk that a mortgagor will pay-off a loan before the end of its term by ensuring that borrowers have more time to prepare for a change. Conversely for the mortgagee, the change should also reduce default risk, the risk that the mortgagor will fail to pay in part or in full. For the mortgagor, the primary benefit of the change is an earlier reminder of the adjustment and, consequently, more time to pursue other outcomes prior to the interest change date. Finally, since this proposed change conforms to the 2013 TILA Servicing rule, which was effective for an overwhelming majority of the ARM 2 Approximately 88 percent of the ARMs guaranteed by Fannie Mae and Freddie Mac have 45-day look-back periods. See footnote 163 of the CFPB’s February 14, 2013, final rule at 78 FR 10902, at 10984. PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 26377 market on January 10, 2014, HUD does not anticipate that the revised disclosure requirements will impose significant costs on FHA-approved mortgagees, since they were required to make these notification adjustments by January 10, 2014. Additionally, since a majority of ARMs already have lookback periods of 45 days, the revised 45day look-back period proposed by FHA is consistent with current industry norms. II. Background Section 251 of the National Housing Act (12 U.S.C. 1715z–16) authorizes FHA to insure mortgagees against default by the mortgagors that obtain home purchase loans or refinancing loans with interest rates that will change over time, such as ARMs. The interest rates on these loans are initially lower than that of a fixed rate mortgage, but may increase or decrease over the life of the loan. An ARM provides a home mortgage option for a mortgagor who may be planning to own his or her home for only a few years, expects an increase in future earnings, or finds the prevailing interest rate for a fixed-rate mortgage to be too high. The regulations governing FHA’s ARM program presently are codified in 24 CFR 203.49. The types of ARMs that FHA insures are those for which the interest rate may be adjusted annually by the FHAapproved mortgagee, beginning after 1, 3, 5, 7, or 10 years from the date of the mortgagor’s first debt service payment.3 FHA’s ARM program provides that changes in the interest rate charged on an ARM must correspond either to changes in the 1-year London Interbank Offered Rate (LIBOR) or to changes in the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of 1 year (see 24 CFR 203.49(b)). The regulations further provide that except as may be otherwise specified in the regulations, each change in the mortgage interest rate must correspond to the upward and downward change in the index. FHA’s current regulations establish a maximum amount that interest rates may increase or decrease. For 1- and 33 FHA sometimes uses the terms ‘‘standard 1-year ARM’’ and ‘‘hybrid ARM’’ to describe the different periods of time that the initial interest rate of a mortgage is held constant before adjusting to the appropriate market index. A standard 1-year ARM product offers an initial interest rate held constant for 1 year. A hybrid ARM offers an initial interest rate that is constant for either the first 3, 5, 7, or 10 years of the mortgage, depending on its terms. For purposes of this proposed rule, the term ‘‘ARM’’ refers to both a standard 1-year ARM and hybrid ARM products. For an explanation of FHA-insured ARM products see: https://portal.hud.gov/ hudportal/HUD?src=/program_offices/housing/sfh/ ins/203armt. E:\FR\FM\08MYP1.SGM 08MYP1 tkelley on DSK3SPTVN1PROD with PROPOSALS 26378 Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed Rules year ARMs, no single adjustment to the interest rate may result in a change in either direction of more than 1 percentage point from the interest rate in effect for the period immediately preceding that adjustment. Additionally, index changes in excess of 1 percentage point may not be carried over for inclusion in an adjustment for a subsequent year. Adjustments in the effective rate of interest over the entire term of these ARMs may not result in a change, in either direction, of more than 5 percentage points from the initial contract interest rate. For 5-, 7-, and 10year ARMs, no single adjustment to the interest rate may result in a change, in either direction, of more than 2 percentage points from the interest rate in effect for the period immediately preceding that adjustment. Similar to the 1- and 3-year ARMs, index changes in excess of 2 percentage points may not be carried over for inclusion in an adjustment in a subsequent year. For these ARMs, adjustments in the effective rate of interest over the entire term of the mortgage may not result in a change, in either direction, of more than 6 percentage points from the initial contract rate. FHA’s existing ARM program provides that interest rate changes may be implemented only through adjustments to the mortgagor’s monthly payments. FHA’s regulations provide that FHA-approved mortgagees must disclose to the mortgagor the terms of the ARM at the time of loan application. The regulations further provide that FHA-approved mortgagees must notify the mortgagor at least 25 days before any adjustment to a mortgagor’s monthly payment may occur, informing the borrower of the new mortgage interest rate, the amount of the new monthly payment, the current index interest rate value, and how the payment adjustment was calculated (see 24 CFR 203.49(h)). To set a new interest rate, the FHAapproved mortgagee will determine if there is a change between the initial (i.e., base) index figure and the current index figure or will add a specific margin to the current index figure. The regulations provide that the initial index figure shall be the most recent figure available before the date of the mortgage loan origination, and the current index figure shall be the most recent index figure available 30 days before the date of each interest rate adjustment. Thus, HUD’s existing regulations establish a 30-day look-back period for determining the current index figure (see 24 CFR 203.49(d)(2)). At the time FHA adopted the at-least25-day advance notification period and the 30-day look-back period, these time VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 periods were consistent with the regulations implementing TILA, as promulgated by the Federal Reserve Board (FRB), which had, until July 21, 2011, responsibility for oversight of compliance with TILA (15 U.S.C. 1601 et seq.). The predecessor FRB regulations, codified at 12 CFR part 1026, required notice of rate adjustments between 25 days and 120 days prior to the due date of the new payment. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111–203, approved July 21, 2010), transferred this responsibility to the CFPB, and the CFPB revised Regulation Z and changed the periods for advance notice of rate adjustments. As discussed above, the 2013 TILA Servicing Rule, which became effective January 10, 2014, revised the time frame for providing the ARM adjustment notice from the current requirement to between 60 and 120 days before the newly adjusted monthly payment is due (see 12 CFR 1026.20(c)). The preamble to the 2013 TILA Servicing Rule explains the reasons for, and identifies research supporting, this change.4 The revised period is designed to provide borrowers with additional time to adjust their finances or to pursue meaningful alternatives such as refinancing, home sale, loan modification, forbearance, or deed-in-lieu of foreclosure. The preamble to the 2013 TILA Servicing Rule cites research indicating that the Nation’s largest mortgage lenders take an average of more than 70 days to complete a refinance. The preamble to the 2013 TILA Servicing Rule also explains that the revised look-back period of 45 days is consistent with the business practices of ARM servicers. The preamble states that most ARM servicers determine the index value from which the new interest rate and payment will be calculated at least 45 days before the date of the interest rate adjustment. Because interest on consumer mortgage credit generally is paid one month in arrears, this means that ARM servicers know the index value approximately 75 days before the due date of the first new payment. The preamble to the 2013 TILA Servicing Rule notes that some ARMs, including those insured by FHA and guaranteed by the Department of Veterans Affairs (VA), currently have look-back periods that are less than 45 days. Accordingly, the CFPB recognizes that servicers of these ARMs will not be able to comply with the revised notification requirements of 12 CFR 1026.20(c) (see 78 FR 10984). Also, as stated above, FHA’s current regulations 4 See PO 00000 78 FR 10902, at 10924. Frm 00003 Fmt 4702 Sfmt 4702 require at least 25 days’ notice before the date the mortgagor’s monthly payment would adjust based on the new interest rate. This present notification requirement is inconsistent with the 2013 TILA Servicing Rule requirements that require at least 60 days advance notice of an adjustment to a mortgagor’s monthly payment. Since mortgagees originating loans insured by FHA and VA also must comport with the requirements and regulations established by those agencies at the time of origination, the 2013 TILA Servicing Rule ‘‘grandfathers’’ ARMs with lookback periods of less than 45 days and originated prior to one year after the effective date of the final rule; i.e., such ARMs originated prior to January 10, 2015 (see 78 FR 10982). This accommodation allows time for HUD to amend its regulation to allow for compliance with the 2013 TILA Servicing Rule. III. This Proposed Rule In response to the CFPB’s amendments to the interest rate adjustment notification in 12 CFR 1026(c), this rule proposes two changes: First, FHA proposes to change 24 CFR 203.49(d)(2) to require FHA-approved mortgagees, in setting a new interest rate, to use the current index figure that is the most recent index figure available 45 days (rather than 30 days) before the date of an interest rate adjustment. This change applies to all single family forward FHA-insured ARMs. Second, FHA proposes to change § 203.49(h), which addresses the disclosure and notification requirements of an interest rate adjustment by the mortgagee to the mortgagor. This proposed rule would require the mortgagee to provide the disclosures and to comply with the timing and notification requirements of the 2013 TILA Servicing Rule at 12 CFR part 1026. In proposing to revise the look-back period from 30 days to 45 days, and in order to comply with the 2013 TILA Servicing Rule, HUD is required to change its current 30-day look-back period to a period of no less than 45 days. HUD proposes to adopt the minimum period of 45 days, which is also the industry norm.5 HUD agrees with the CFPB that a period of 45 days would allow a mortgagee to comply with the 60- to 120-day notice to the mortgagor as required in 12 CFR 1026.20(c). Mortgagees holding or servicing an ARM with a 45-day, or longer, look-back period should be able to comply with the requirement to 5 See E:\FR\FM\08MYP1.SGM 78 FR 10902, at 10926. 08MYP1 tkelley on DSK3SPTVN1PROD with PROPOSALS Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed Rules provide earlier notice to the mortgagor. For example, for an ARM with a 45-day look-back period, the notice would be ready 45 days before the interest change date and, with an approximately 30-day billing cycle between the interest change date and the date that the first payment at the new level would be due, the mortgagee could provide the interest rate adjustment notice to the mortgagor approximately 75 days before the new payment was due. Under these circumstances, the mortgagee should be able to comply with the requirement that notice be provided to the mortgagor at least 60 days before the payment at a new interest rate level is due. While HUD may have adopted a lookback period longer than 45 days, HUD’s decision was limited by the servicing timeline described above to provide necessary notification of the adjusted monthly payment within the required 60- to 120-day notification period, which was also required in the 2013 TILA Servicing Rule. Furthermore, if the look-back period was extended beyond 45 days it would create a greater lag time between the relevant index value and the correspondingly adjusted monthly payment. For example, with a 45-day look-back period, if the interest rate change date is September 1, the servicer ‘‘looks back’’ 45 days from the adjustment date, which would be July 18. With a look-back period longer than 45 days, the servicer would go back further than July 18 to set the new monthly payment, and the ARM would be less responsive to the current market. In addition, Ginnie Mae may be unable to pool ARMs with varying lookback periods since different look-back periods have a different response rate to market fluctuation, as illustrated above. A less responsive or more slowly responsive ARM security is a different product from a more responsive security, from a potential investor’s viewpoint. By adopting the uniform 45day look-back period Ginnie Mae may continue to guarantee securities that are backed by pools of mortgages and issued by mortgage lenders. Finally, it would be less burdensome on servicers for HUD to adopt the industry norm 45-day look-back period, instead of continuing to apply different look-back periods for different ARMs. With different look-back periods, there would assumingly be different servicing timelines and notifications, which could lead to potential errors and reduced customer service. The CFPB also notes that once the grandfather period expires 45-day look-back periods will further dominate the market. The second proposed revision updates § 203.49(h) to cross-reference VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of § 1026.20(d) govern the initial rate adjustment of an ARM, while those of § 1026.20(c) govern subsequent rate adjustments. Paragraph (c) of 12 CFR 1026.20 requires the mortgagee of an ARM to provide the mortgagor with disclosures in connection with any adjustment of the interest rate, as required by the loan contract, that results in a corresponding adjustment to the mortgagor’s monthly payment. This required disclosure must be provided to the mortgagor at least 60 days, but not more than 120 days, before the first payment at the adjusted level is due. The cross-references to the TILA requirements not only avoid the repetition of regulatory text, but help to ensure that HUD’s codified regulations remain current should the CFPB revise Regulation Z. The alternative of repeating the CFPB regulatory text runs the risk that HUD’s regulations may become outdated in the event the CFPB revises the regulatory disclosure and notification requirements, necessitating the need for HUD to undertake potentially time consuming notice and comment rulemaking to update its regulations. In addition to the timing requirements, FHA-approved ARM mortgagees would be required to comply with the requirements of 12 CFR 1026.20(c) governing the content and format of such disclosures. The 2013 TILA Servicing Rule requires specific disclosures, accompanying statements, and tables, including information such as the terms of the mortgagor’s ARM, the effective date of the interest rate adjustment and when additional future interest rate adjustments are scheduled to occur, a comparison of the current and new interest rate, and the specific index or formula used in making interest rate adjustments. (For the full list of requirements, see 12 CFR 1026.20(c)(2) and (c)(3).) All such disclosures required under 12 CFR 1026.20(c) must be in the format substantially similar to the sample formats prescribed in the 2013 TILA Servicing Rule, which includes sample formats for such disclosures.6 As noted, 12 CFR 1026.20(d) establishes separate disclosure 6 The disclosures required by 12 CFR 1026.20(c) shall be provided in the form of a table and in the same order as, and with headings and format substantially similar to, forms H–4(D)(1) and (2) in appendix H of the 2013 TILA Servicing Rule (78 FR 11009–11010). PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 26379 requirements for the initial rate adjustment of an ARM with an initial interest rate that is constant for more than one year. The first time the interest rate adjusts the monthly payment of an FHA-insured ARM, the mortgagee would be required to provide the appropriate disclosures to the mortgagor at least 210, but not more than 240, days before the first payment at the adjusted level is due.7 If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the disclosure, an estimate shall be disclosed and labeled as such for the mortgagor. This estimate shall be based on the calculation of the specific index or formula used in making the interest rate adjustment within 15 business days prior to the date of the disclosure. The required content and format of the initial disclosures are contained in 12 CFR 1026.20(d)(2). These disclosures, accompanying explanatory statements, and tables include information such as an explanation of the terms of the mortgagor’s ARM; a comparison of the current and new interest rates; the telephone number of the mortgagee for the mortgagor to call if they anticipate not being able to make their new payments; a list of alternatives to paying at the new rate that the mortgagor may be able to pursue and a brief explanation of each alternative, expressed in simple and clear terms; the Web site to access either the CFPB’s or HUD’s list of homeownership counselors and counseling organizations; and the toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations. All such disclosures required under 12 CFR 1026.20(d) must be in the format substantially similar to that prescribed by the 2013 TILA Servicing Rule, which includes sample formats for such disclosures.8 The initial disclosure requirements of 12 CFR 1026.20(d) do not apply to ARMs with a term where the interest rate would adjust within a 1-year period (see 12 CFR 1026.20(d)(1)(ii)). FHA does not insure ARMs with a term of less than 12 months. The HUD regulation at 7 The 2013 TILA Serving Rule also provides, at 12 CFR 1026.20(d), that if the first payment at the adjusted level is due within the first 210 days after consummation, the initial disclosure shall be provided at consummation. This provision does not apply to FHA since, as more fully discussed below in this preamble, ARMs with terms of less than 12 months are not eligible for FHA insurance. 8 The disclosures required by 12 CFR 1026.20(d) shall be provided in the form of a table and in the same order as, and with headings and format substantially similar to, forms H–4(D)(3) and (4) in appendix H of the TILA Servicing Rule (78 FR 11011–11012). E:\FR\FM\08MYP1.SGM 08MYP1 26380 Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed Rules 24 CFR 203.49(d) describes the frequency of rate changes for ARMs eligible for FHA insurance, providing that ‘‘. . . the first adjustment shall be no sooner or later than . . .’’ as provided in the regulation. The shortest term ARM eligible for FHA insurance is a 1-year ARM with the first rate adjustment occurring no earlier than 12 months. Accordingly, the exemption provided by the 2013 TILA Servicing Rule is not applicable to FHA-insured ARMs. tkelley on DSK3SPTVN1PROD with PROPOSALS IV. 30 Day Public Comment Period In accordance with HUD’s regulations concerning rulemaking at 24 CFR part 10 (entitled, ‘‘Rulemaking Policy and Procedures’’), it is HUD’s policy that the public comment period for proposed rules should be 60 days. In the case of this proposed rule, however, HUD has determined there is good cause to reduce the public comment period to 30 days for the following reasons: First, HUD is required by the 2013 TILA Servicing Rule to make regulatory changes to comply with the 2013 TILA Servicing Rule. The CFPB delayed the effective date of the notification period for FHA-insured ARMs to January 10, 2015, and this allows HUD to go through the rulemaking process to bring FHA’s regulations in conformity with the 2013 TILA Servicing Rule. Second, the notification requirements established in the 2013 TILA Servicing Rule were published in the Federal Register on February 14, 2013, and became effective on January 10, 2014, except for adjustable rate mortgages with look-back periods currently less than 45 days, including FHA-insured and VA-guaranteed ARMs, which are grandfathered until January 10, 2015. Since the industry and interested parties were notified of these regulatory changes, including a statement in the preamble of the rule that directed HUD to revise its regulations to comply with that of the 2013 TILA Servicing Rule, industry and interested parties have been on notice of HUD’s proposed changes well before the publication of this proposed rule. Given that the proposed amendments to HUD’s regulations mirror the requirements of the 2013 TILA Servicing Rule, and the January 10, 2015, deadline, 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. VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 V. 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. As discussed above in this preamble, the proposed rule would align the lookback requirements for FHA-insured ARMs to the revised TILA notification requirements established in the 2013 TILA Servicing Rule. Consistent with the goals of Executive Order 13563, the proposed amendments would simplify and standardize the ARM look-back and notification requirements established by the CFPB and in effect for the conventional ARM market on January 10, 2014. As a result, this rule was determined to not be a significant regulatory action under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and therefore was not reviewed by OMB. 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. As discussed in this preamble, this proposed rule aligns the look-back requirements for FHA-insured ARMs to the revised TILA notification requirements established in the 2013 TILA Servicing Rule. HUD does not have the discretion not to align its ARM notification requirements with new TILA requirements established by the CFPB as implemented in its 2013 TILA Servicing Rule. The revised look-back period and disclosure requirements would apply to FHA-approved PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 mortgagees originating ARMs in January 2015, whether or not HUD takes action. It is HUD’s position that it is important for FHA regulations to be in compliance with TILA, and therefore HUD has initiated this rulemaking. In this rule, HUD proposes to adopt the minimum look-back period, 45 days, which would allow FHA-approved mortgagees to meet the TILA minimum requirements governing notification to borrowers. As also discussed in this preamble, the CFPB noted in its rulemaking, that the majority of ARMs in the conventional market have look-back periods of 45 days or longer. With the 2013 TILA Servicing Rule taking effect on January 10, 2014, any lenders originating in the conventional market ARMs that did not have a minimum look-back period of 45 days, have now adjusted to the new TILA requirements. As with the proposed changes regarding the look-back period, the revisions to the disclosure requirements simply conform HUD requirements to the 2013 TILA Servicing Rule and the procedures currently followed in the conventional mortgage lending market. For the reasons presented, the undersigned certifies that this 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 less burdensome alternatives to this rule that will meet HUD’s objectives as described in the preamble to this rule. Environmental Impact The proposed rule does not direct, provide for assistance or loan and mortgage insurance for, or otherwise govern or regulate, real property acquisition, disposition, leasing, rehabilitation, alteration, demolition, or new construction, or establish, revise or provide for standards for construction or construction materials, manufactured housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this proposed rule is categorically excluded from environmental review under the National Environmental Policy Act of 1969 (42 U.S.C. 4321). Executive Order 13132, Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either (i) imposes substantial direct compliance costs on state and local governments and is not required by statute, or (ii) preempts state law, unless the agency meets the consultation and funding E:\FR\FM\08MYP1.SGM 08MYP1 Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed Rules requirements of section 6 of the Executive order. This proposed rule would not have federalism implications and would 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) (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 the private sector, within the meaning of the UMRA. Catalog of Federal Domestic Assistance The Catalog of Federal Domestic Assistance number for Mortgage Insurance-Homes is 14.117. 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. Accordingly, for the reasons discussed in this preamble, HUD proposes to amend 24 CFR part 203 as follows: 1. The authority citation for 24 CFR part 203 continues to read as follows: ■ Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z–16, 1715u, and 1717z–21; 42 U.S.C. 3535(d). 2. Revise the third sentence of paragraph (d)(2) and paragraph (h) to read as follows: ■ § 203.49 Eligibility of adjustable rate mortgages. tkelley on DSK3SPTVN1PROD with PROPOSALS * * * * (d) * * * (2) * * * The current index figure shall be the most recent index figure available 30 days before the date of each interest rate adjustment, except that for forward mortgages originated on or after [effective date of final rule to be inserted at final rule stage], 30 days shall mean 45 days. * * * * * (h) Disclosures. The mortgagee of an adjustable rate mortgage shall provide mortgagors with the disclosures in the timing, content, and format required by the regulations implementing the Truth VerDate Mar<15>2010 17:32 May 07, 2014 Jkt 232001 Dated: April 17, 2014. Carol J. Galante, Assistant Secretary for Housing—Federal Housing Commissioner. www.regulations.gov as they are received without change, including any personal identifiers or contact information. FOR FURTHER INFORMATION CONTACT: Mr. Ronald R. McCully, 571–372–0473. [FR Doc. 2014–10572 Filed 5–7–14; 8:45 am] SUPPLEMENTARY INFORMATION: BILLING CODE 4210–67–P Executive Summary I. Purpose of the Regulatory Action DEPARTMENT OF DEFENSE Office of the Secretary 32 CFR Part 197 [Docket ID: DOD–2013–OS–0108] RIN 0790–AJ07 Historical Research in the Files of the Office of the Secretary of Defense (OSD) Department of Defense. Proposed rule. AGENCY: ACTION: This proposed rule updates and clarifies procedures regarding the review and accessibility to records and information in the custody of the Secretary of Defense and the OSD Components. The purpose of this rule is to provide such guidance to former Cabinet level officials and former Presidential appointees (FPAs), including their personnel, aides, and official researchers. This rule is part of DoD’s retrospective plan, completed in August 2011, under Executive Order 13563, ‘‘Improving Regulation and Regulatory Review.’’ DoD’s full plan and updates can be accessed at: https:// exchange.regulations.gov/exchange/ topic/eo-13563. DATES: Comments must be received by July 7, 2014. ADDRESSES: You may submit comments, identified by docket number and/or Regulatory Information Number (RIN) and title, by any of the following methods: • Federal Rulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Mail: Federal Docket Management System Office, 4800 Mark Center Drive, East Tower, Suite 02G09, Alexandria, VA 22350–3100. Instructions: All submissions received must include the agency name and docket number or RIN for this Federal Register document. The general policy for comments and other submissions from members of the public is to make these submissions available for public viewing on the Internet at https:// SUMMARY: PART 203—SINGLE FAMILY MORTGAGE INSURANCE * in Lending Act (15 U.S.C. 1601 et seq.) at 12 CFR 1026.20(c) and (d). * * * * * 26381 PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 a. The Office of the Secretary of Defense (OSD) is issuing a proposed rule that would update Part 197 of Title 32, Code of Federal Regulations. This proposed rule updates and clarifies procedures regarding the review and accessibility to records and information in the custody of the Secretary of Defense and the OSD Components. The purpose of this rule is to provide such guidance to former Cabinet level officials and former Presidential appointees (FPAs), including their personnel, aides, and official researchers. b. In accordance with Title 5 of the United States Code, ‘‘Government Organization and Employees,’’ this rule updates procedures for the programs that permit authorized personnel to perform historical research in records created by or in the custody of Office of the Secretary of Defense and its components consistent with federal regulations. II. Summary of the Major Provisions of the Regulatory Action in Question This proposed rule updates and clarifies procedures regarding the review and accessibility to records and information in the custody of the Secretary of Defense and the OSD Components. The purpose of this rule is to provide such guidance to former Cabinet level officials and former Presidential appointees (FPAs), including their personnel, aides, and official researchers. 1. Explanation of FOIA Exemptions and Classification Categories Explanation of restrictions applicable to the public’s request for information within OSD files. 2. Responsibilities Outlines the responsibilities of Director of Administration and Management (D&AM); OSD Records Administrator, and the OSD Components. E:\FR\FM\08MYP1.SGM 08MYP1

Agencies

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 79, Number 89 (Thursday, May 8, 2014)]
[Proposed Rules]
[Pages 26376-26381]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10572]

========================================================================
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.

========================================================================

Federal Register / Vol. 79, No. 89 / Thursday, May 8, 2014 / Proposed
Rules

[[Page 26376]]

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-5744-P-01]
RIN 2502-AJ20

Federal Housing Administration (FHA): Adjustable Rate Mortgage
Notification Requirements and Look-Back Period for FHA-Insured Single
Family Mortgages

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, Department of Housing and Urban Development (HUD).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes two revisions to FHA's regulations
governing its single family adjustable rate mortgage (ARM) program to
align FHA interest rate adjustment and notification regulations with
the requirements for notifying mortgagors of ARM adjustments, as
required by the regulations implementing the Truth in Lending Act
(TILA), as recently revised by the Consumer Financial Protection Bureau
(CFPB). The first proposed amendment of this rule would require that an
interest rate adjustment resulting in a corresponding change to the
mortgagor's monthly payment for an ARM be based on the most recent
index value available 45 days before the date of the rate adjustment.
The date that the newly adjusted interest rate goes into effect is
often referred to as the ``interest change date.'' The number of days
prior to the interest change date on which the index value is selected
is called the ``look-back period.'' FHA's current regulations provide
for a 30-day look-back period. The second proposed amendment would
require that the mortgagee of an FHA-insured ARM comply with the
disclosure and notification requirements of the 2013 TILA Servicing
Rule, including at least a 60-day but no more than 120-day advance
notice of an adjustment to a mortgagor's monthly payment. FHA's current
regulations provide for notification at least 25 days in advance of an
adjustment to a mortgagor's monthly payment.

DATES: Comment Due Date: June 9, 2014.

ADDRESSES: Interested persons are invited to submit comments regarding
this 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.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
www.regulations.gov. HUD strongly encourages commenters to submit
comments electronically. Electronic submission of comments allows the
commenter maximum time to prepare and submit a comment, ensures timely
receipt by HUD, and enables HUD to make them immediately available to
the public. Comments submitted electronically through the
www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.

Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule.

No Facsimile Comments. Facsimile (fax) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m., weekdays, at
the above address. Due to security measures at the HUD Headquarters
building, an appointment to review the public comments must be
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or
hearing impairments may access this number via TTY by calling the
Federal Relay Service at 800-877-8339. Copies of all comments submitted
are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Patricia J. McClung, Acting Director,
Office of Single Family Program Development, Office of Housing,
Department of Housing and Urban Development, 451 7th Street SW., Room
9278, Washington, DC 20410; telephone number 202-708-3175 (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 Relay
Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Regulatory Action

This proposed rule would align FHA's regulations governing its
single family ARM program with the interest rate adjustment and
disclosure and notification periods required for ARMs by TILA, as
implemented by the CFPB in a final rule published in the Federal
Register on February 14, 2013, at 78 FR 10902, and entitled ``Mortgage
Servicing Rules Under the Truth in Lending Act (Regulation Z).'' \1\
This February 2013 final rule, referred to in this preamble as the 2013
TILA Servicing Rule, set the ARM adjustment notice requirement to a
period of between 60 days (minimum) and 120 days (maximum) before the
newly adjusted payment is due. Additionally, the 2013 TILA Servicing
Rule established 45 days as the minimum ARM look-back period. In the
preamble to the 2013 TILA Servicing Rule, the CFPB states that FHA's
current 30-day look-back period does not provide sufficient time to
notify the mortgagor of an interest rate and monthly payment
adjustment. To allow HUD sufficient time to comply with the
notification requirements of the 2013 TILA Servicing Rule, the CFPB
delayed the effective date of the notification requirements in the 2013
TILA

[[Page 26377]]

Servicing Rule to January 10, 2015, for ARMs insured by FHA with a 30-
day look-back period. Therefore, FHA-insured ARMs originated on or
after January 10, 2015, must comply with the new notification
requirements of the 2013 TILA Servicing Rule.
---------------------------------------------------------------------------

\1\ The CFPB initially published the rule on its Web site:
https://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/.
---------------------------------------------------------------------------

B. Summary of the Major Provisions of the Regulatory Action

To comply with the 2013 TILA Servicing Rule, FHA proposes two
amendments to its regulations. First, FHA proposes to amend 24 CFR
203.49(d)(2) to require FHA-approved mortgagees, in setting a new
interest rate, to use the current index figure that is the most recent
index figure available 45 days (rather than the current 30 days) before
the date of an interest rate adjustment. Revising the current 30-day
look-back period to 45 days would enable FHA-approved mortgagees to
meet the 60- to 120-day notification period prior to any adjustment to
a mortgagor's monthly payment that may occur, as required by the 2013
TILA Servicing Rule.
The second proposed revision would update 24 CFR 203.49(h) to
cross-reference the disclosure and notification requirements for
interest rate and payment adjustments for ARMs, including the timing,
content, and format of such disclosures, contained in the 2013 TILA
Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure
requirements of Sec. 1026.20(d) govern the initial rate adjustment of
an ARM, while those of Sec. 1026.20(c) govern subsequent rate
adjustments.
Currently, FHA-approved mortgagees must only notify the mortgagor
at least 25 days before any adjustment to a mortgagor's monthly payment
may occur and inform the borrower of the new mortgage interest rate,
the amount of the new monthly payment, the current index interest rate
value, and how the payment adjustment was calculated (see 24 CFR
203.49(h)). In cross-referencing paragraph (c) of 12 CFR 1026.20, HUD
would require the mortgagee of an FHA-insured ARM to provide the
mortgagor with specific and prescribed disclosures in connection with
any adjustment of the interest rate, as required by the loan contract,
that results in a corresponding adjustment to the mortgagor's monthly
payment. These required disclosures must be provided to the mortgagor
at least 60 days, but not more than 120 days, before the first payment
at the adjusted level is due. In cross-referencing paragraph (d) of 12
CFR 1026.20, the mortgagee would be required, the first time the
interest rate adjusts the monthly payment of an FHA-insured ARM, to
provide the appropriate disclosures to the mortgagor at least 210, but
not more than 240, days before the first payment at the adjusted level
is due.

C. Costs and Benefits

Since an overwhelming majority of ARMs originated in the
conventional mortgage market currently have a 45-day look-back period
\2\ and were required to comply with the 2013 TILA Servicing Rule
notification requirements on January 10, 2014, well before the
effective date of this proposed rule, there should be little, if any,
burden to apply the same 2013 TILA Servicing Rule requirements on FHA-
insured ARMs. Therefore, the anticipated costs of this proposed rule
are very minimal.
---------------------------------------------------------------------------

\2\ Approximately 88 percent of the ARMs guaranteed by Fannie
Mae and Freddie Mac have 45-day look-back periods. See footnote 163
of the CFPB's February 14, 2013, final rule at 78 FR 10902, at
10984.
---------------------------------------------------------------------------

In determining the impact of the adjusted look-back period on a
single ARM insured by FHA, the effect upon the mortgagor's monthly
mortgage payment is the difference between the interest rate generated
by an index available 45 days before the interest change date from that
generated by the same index 30 days before the interest change date.
This difference may be due to a trend in rates or the ``noise'' (minor
fluctuations around that trend) or both. However, given any date in the
future, it is impossible to know whether the rate will be higher or
lower 15 days prior. Even over a period in which a trend is expected,
the limited timeframe of 15 days and the noise around that change means
the significance of the change to the look-back period is unknowable.
Thus, while the 15-day change may affect specific outcomes, this change
is not expected to have any generalizable impact on the economy with a
clear direction and scale. For mortgagees that would have sent later
notice to mortgagors, the proposed changes may potentially increase
prepayment risk, the risk that a mortgagor will pay-off a loan before
the end of its term by ensuring that borrowers have more time to
prepare for a change. Conversely for the mortgagee, the change should
also reduce default risk, the risk that the mortgagor will fail to pay
in part or in full. For the mortgagor, the primary benefit of the
change is an earlier reminder of the adjustment and, consequently, more
time to pursue other outcomes prior to the interest change date.
Finally, since this proposed change conforms to the 2013 TILA
Servicing rule, which was effective for an overwhelming majority of the
ARM market on January 10, 2014, HUD does not anticipate that the
revised disclosure requirements will impose significant costs on FHA-
approved mortgagees, since they were required to make these
notification adjustments by January 10, 2014. Additionally, since a
majority of ARMs already have look-back periods of 45 days, the revised
45-day look-back period proposed by FHA is consistent with current
industry norms.

II. Background

Section 251 of the National Housing Act (12 U.S.C. 1715z-16)
authorizes FHA to insure mortgagees against default by the mortgagors
that obtain home purchase loans or refinancing loans with interest
rates that will change over time, such as ARMs. The interest rates on
these loans are initially lower than that of a fixed rate mortgage, but
may increase or decrease over the life of the loan. An ARM provides a
home mortgage option for a mortgagor who may be planning to own his or
her home for only a few years, expects an increase in future earnings,
or finds the prevailing interest rate for a fixed-rate mortgage to be
too high. The regulations governing FHA's ARM program presently are
codified in 24 CFR 203.49.
The types of ARMs that FHA insures are those for which the interest
rate may be adjusted annually by the FHA-approved mortgagee, beginning
after 1, 3, 5, 7, or 10 years from the date of the mortgagor's first
debt service payment.\3\ FHA's ARM program provides that changes in the
interest rate charged on an ARM must correspond either to changes in
the 1-year London Interbank Offered Rate (LIBOR) or to changes in the
weekly average yield on U.S. Treasury securities, adjusted to a
constant maturity of 1 year (see 24 CFR 203.49(b)). The regulations
further provide that except as may be otherwise specified in the
regulations, each change in the mortgage interest rate must correspond
to the upward and downward change in the index.
---------------------------------------------------------------------------

\3\ FHA sometimes uses the terms ``standard 1-year ARM'' and
``hybrid ARM'' to describe the different periods of time that the
initial interest rate of a mortgage is held constant before
adjusting to the appropriate market index. A standard 1-year ARM
product offers an initial interest rate held constant for 1 year. A
hybrid ARM offers an initial interest rate that is constant for
either the first 3, 5, 7, or 10 years of the mortgage, depending on
its terms. For purposes of this proposed rule, the term ``ARM''
refers to both a standard 1-year ARM and hybrid ARM products. For an
explanation of FHA-insured ARM products see: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/203armt.
---------------------------------------------------------------------------

FHA's current regulations establish a maximum amount that interest
rates may increase or decrease. For 1- and 3-

[[Page 26378]]

year ARMs, no single adjustment to the interest rate may result in a
change in either direction of more than 1 percentage point from the
interest rate in effect for the period immediately preceding that
adjustment. Additionally, index changes in excess of 1 percentage point
may not be carried over for inclusion in an adjustment for a subsequent
year. Adjustments in the effective rate of interest over the entire
term of these ARMs may not result in a change, in either direction, of
more than 5 percentage points from the initial contract interest rate.
For 5-, 7-, and 10-year ARMs, no single adjustment to the interest rate
may result in a change, in either direction, of more than 2 percentage
points from the interest rate in effect for the period immediately
preceding that adjustment. Similar to the 1- and 3-year ARMs, index
changes in excess of 2 percentage points may not be carried over for
inclusion in an adjustment in a subsequent year. For these ARMs,
adjustments in the effective rate of interest over the entire term of
the mortgage may not result in a change, in either direction, of more
than 6 percentage points from the initial contract rate.
FHA's existing ARM program provides that interest rate changes may
be implemented only through adjustments to the mortgagor's monthly
payments. FHA's regulations provide that FHA-approved mortgagees must
disclose to the mortgagor the terms of the ARM at the time of loan
application. The regulations further provide that FHA-approved
mortgagees must notify the mortgagor at least 25 days before any
adjustment to a mortgagor's monthly payment may occur, informing the
borrower of the new mortgage interest rate, the amount of the new
monthly payment, the current index interest rate value, and how the
payment adjustment was calculated (see 24 CFR 203.49(h)).
To set a new interest rate, the FHA-approved mortgagee will
determine if there is a change between the initial (i.e., base) index
figure and the current index figure or will add a specific margin to
the current index figure. The regulations provide that the initial
index figure shall be the most recent figure available before the date
of the mortgage loan origination, and the current index figure shall be
the most recent index figure available 30 days before the date of each
interest rate adjustment. Thus, HUD's existing regulations establish a
30-day look-back period for determining the current index figure (see
24 CFR 203.49(d)(2)).
At the time FHA adopted the at-least-25-day advance notification
period and the 30-day look-back period, these time periods were
consistent with the regulations implementing TILA, as promulgated by
the Federal Reserve Board (FRB), which had, until July 21, 2011,
responsibility for oversight of compliance with TILA (15 U.S.C. 1601 et
seq.). The predecessor FRB regulations, codified at 12 CFR part 1026,
required notice of rate adjustments between 25 days and 120 days prior
to the due date of the new payment. The Dodd-Frank Wall Street Reform
and Consumer Protection Act (Pub. L. 111-203, approved July 21, 2010),
transferred this responsibility to the CFPB, and the CFPB revised
Regulation Z and changed the periods for advance notice of rate
adjustments.
As discussed above, the 2013 TILA Servicing Rule, which became
effective January 10, 2014, revised the time frame for providing the
ARM adjustment notice from the current requirement to between 60 and
120 days before the newly adjusted monthly payment is due (see 12 CFR
1026.20(c)). The preamble to the 2013 TILA Servicing Rule explains the
reasons for, and identifies research supporting, this change.\4\ The
revised period is designed to provide borrowers with additional time to
adjust their finances or to pursue meaningful alternatives such as
refinancing, home sale, loan modification, forbearance, or deed-in-lieu
of foreclosure. The preamble to the 2013 TILA Servicing Rule cites
research indicating that the Nation's largest mortgage lenders take an
average of more than 70 days to complete a refinance. The preamble to
the 2013 TILA Servicing Rule also explains that the revised look-back
period of 45 days is consistent with the business practices of ARM
servicers. The preamble states that most ARM servicers determine the
index value from which the new interest rate and payment will be
calculated at least 45 days before the date of the interest rate
adjustment. Because interest on consumer mortgage credit generally is
paid one month in arrears, this means that ARM servicers know the index
value approximately 75 days before the due date of the first new
payment.
---------------------------------------------------------------------------

\4\ See 78 FR 10902, at 10924.
---------------------------------------------------------------------------

The preamble to the 2013 TILA Servicing Rule notes that some ARMs,
including those insured by FHA and guaranteed by the Department of
Veterans Affairs (VA), currently have look-back periods that are less
than 45 days. Accordingly, the CFPB recognizes that servicers of these
ARMs will not be able to comply with the revised notification
requirements of 12 CFR 1026.20(c) (see 78 FR 10984). Also, as stated
above, FHA's current regulations require at least 25 days' notice
before the date the mortgagor's monthly payment would adjust based on
the new interest rate. This present notification requirement is
inconsistent with the 2013 TILA Servicing Rule requirements that
require at least 60 days advance notice of an adjustment to a
mortgagor's monthly payment. Since mortgagees originating loans insured
by FHA and VA also must comport with the requirements and regulations
established by those agencies at the time of origination, the 2013 TILA
Servicing Rule ``grandfathers'' ARMs with look-back periods of less
than 45 days and originated prior to one year after the effective date
of the final rule; i.e., such ARMs originated prior to January 10, 2015
(see 78 FR 10982). This accommodation allows time for HUD to amend its
regulation to allow for compliance with the 2013 TILA Servicing Rule.

III. This Proposed Rule

In response to the CFPB's amendments to the interest rate
adjustment notification in 12 CFR 1026(c), this rule proposes two
changes:
First, FHA proposes to change 24 CFR 203.49(d)(2) to require FHA-
approved mortgagees, in setting a new interest rate, to use the current
index figure that is the most recent index figure available 45 days
(rather than 30 days) before the date of an interest rate adjustment.
This change applies to all single family forward FHA-insured ARMs.
Second, FHA proposes to change Sec. 203.49(h), which addresses the
disclosure and notification requirements of an interest rate adjustment
by the mortgagee to the mortgagor. This proposed rule would require the
mortgagee to provide the disclosures and to comply with the timing and
notification requirements of the 2013 TILA Servicing Rule at 12 CFR
part 1026.
In proposing to revise the look-back period from 30 days to 45
days, and in order to comply with the 2013 TILA Servicing Rule, HUD is
required to change its current 30-day look-back period to a period of
no less than 45 days. HUD proposes to adopt the minimum period of 45
days, which is also the industry norm.\5\ HUD agrees with the CFPB that
a period of 45 days would allow a mortgagee to comply with the 60- to
120-day notice to the mortgagor as required in 12 CFR 1026.20(c).
Mortgagees holding or servicing an ARM with a 45-day, or longer, look-
back period should be able to comply with the requirement to

[[Page 26379]]

provide earlier notice to the mortgagor. For example, for an ARM with a
45-day look-back period, the notice would be ready 45 days before the
interest change date and, with an approximately 30-day billing cycle
between the interest change date and the date that the first payment at
the new level would be due, the mortgagee could provide the interest
rate adjustment notice to the mortgagor approximately 75 days before
the new payment was due. Under these circumstances, the mortgagee
should be able to comply with the requirement that notice be provided
to the mortgagor at least 60 days before the payment at a new interest
rate level is due.
---------------------------------------------------------------------------

\5\ See 78 FR 10902, at 10926.
---------------------------------------------------------------------------

While HUD may have adopted a look-back period longer than 45 days,
HUD's decision was limited by the servicing timeline described above to
provide necessary notification of the adjusted monthly payment within
the required 60- to 120-day notification period, which was also
required in the 2013 TILA Servicing Rule. Furthermore, if the look-back
period was extended beyond 45 days it would create a greater lag time
between the relevant index value and the correspondingly adjusted
monthly payment. For example, with a 45-day look-back period, if the
interest rate change date is September 1, the servicer ``looks back''
45 days from the adjustment date, which would be July 18. With a look-
back period longer than 45 days, the servicer would go back further
than July 18 to set the new monthly payment, and the ARM would be less
responsive to the current market.
In addition, Ginnie Mae may be unable to pool ARMs with varying
look-back periods since different look-back periods have a different
response rate to market fluctuation, as illustrated above. A less
responsive or more slowly responsive ARM security is a different
product from a more responsive security, from a potential investor's
viewpoint. By adopting the uniform 45-day look-back period Ginnie Mae
may continue to guarantee securities that are backed by pools of
mortgages and issued by mortgage lenders.
Finally, it would be less burdensome on servicers for HUD to adopt
the industry norm 45-day look-back period, instead of continuing to
apply different look-back periods for different ARMs. With different
look-back periods, there would assumingly be different servicing
timelines and notifications, which could lead to potential errors and
reduced customer service. The CFPB also notes that once the grandfather
period expires 45-day look-back periods will further dominate the
market.
The second proposed revision updates Sec. 203.49(h) to cross-
reference the disclosure and notification requirements for interest
rate and payment adjustments for ARMs, including the timing, content,
and format of such disclosures, contained in the 2013 TILA Servicing
Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of Sec.
1026.20(d) govern the initial rate adjustment of an ARM, while those of
Sec. 1026.20(c) govern subsequent rate adjustments. Paragraph (c) of
12 CFR 1026.20 requires the mortgagee of an ARM to provide the
mortgagor with disclosures in connection with any adjustment of the
interest rate, as required by the loan contract, that results in a
corresponding adjustment to the mortgagor's monthly payment. This
required disclosure must be provided to the mortgagor at least 60 days,
but not more than 120 days, before the first payment at the adjusted
level is due.
The cross-references to the TILA requirements not only avoid the
repetition of regulatory text, but help to ensure that HUD's codified
regulations remain current should the CFPB revise Regulation Z. The
alternative of repeating the CFPB regulatory text runs the risk that
HUD's regulations may become outdated in the event the CFPB revises the
regulatory disclosure and notification requirements, necessitating the
need for HUD to undertake potentially time consuming notice and comment
rulemaking to update its regulations. In addition to the timing
requirements, FHA-approved ARM mortgagees would be required to comply
with the requirements of 12 CFR 1026.20(c) governing the content and
format of such disclosures. The 2013 TILA Servicing Rule requires
specific disclosures, accompanying statements, and tables, including
information such as the terms of the mortgagor's ARM, the effective
date of the interest rate adjustment and when additional future
interest rate adjustments are scheduled to occur, a comparison of the
current and new interest rate, and the specific index or formula used
in making interest rate adjustments. (For the full list of
requirements, see 12 CFR 1026.20(c)(2) and (c)(3).) All such
disclosures required under 12 CFR 1026.20(c) must be in the format
substantially similar to the sample formats prescribed in the 2013 TILA
Servicing Rule, which includes sample formats for such disclosures.\6\
---------------------------------------------------------------------------

\6\ The disclosures required by 12 CFR 1026.20(c) shall be
provided in the form of a table and in the same order as, and with
headings and format substantially similar to, forms H-4(D)(1) and
(2) in appendix H of the 2013 TILA Servicing Rule (78 FR 11009-
11010).
---------------------------------------------------------------------------

As noted, 12 CFR 1026.20(d) establishes separate disclosure
requirements for the initial rate adjustment of an ARM with an initial
interest rate that is constant for more than one year. The first time
the interest rate adjusts the monthly payment of an FHA-insured ARM,
the mortgagee would be required to provide the appropriate disclosures
to the mortgagor at least 210, but not more than 240, days before the
first payment at the adjusted level is due.\7\ If the new interest rate
(or the new payment calculated from the new interest rate) is not known
as of the date of the disclosure, an estimate shall be disclosed and
labeled as such for the mortgagor. This estimate shall be based on the
calculation of the specific index or formula used in making the
interest rate adjustment within 15 business days prior to the date of
the disclosure.
---------------------------------------------------------------------------

\7\ The 2013 TILA Serving Rule also provides, at 12 CFR
1026.20(d), that if the first payment at the adjusted level is due
within the first 210 days after consummation, the initial disclosure
shall be provided at consummation. This provision does not apply to
FHA since, as more fully discussed below in this preamble, ARMs with
terms of less than 12 months are not eligible for FHA insurance.
---------------------------------------------------------------------------

The required content and format of the initial disclosures are
contained in 12 CFR 1026.20(d)(2). These disclosures, accompanying
explanatory statements, and tables include information such as an
explanation of the terms of the mortgagor's ARM; a comparison of the
current and new interest rates; the telephone number of the mortgagee
for the mortgagor to call if they anticipate not being able to make
their new payments; a list of alternatives to paying at the new rate
that the mortgagor may be able to pursue and a brief explanation of
each alternative, expressed in simple and clear terms; the Web site to
access either the CFPB's or HUD's list of homeownership counselors and
counseling organizations; and the toll-free telephone number to access
the HUD list of homeownership counselors and counseling organizations.
All such disclosures required under 12 CFR 1026.20(d) must be in the
format substantially similar to that prescribed by the 2013 TILA
Servicing Rule, which includes sample formats for such disclosures.\8\
---------------------------------------------------------------------------

\8\ The disclosures required by 12 CFR 1026.20(d) shall be
provided in the form of a table and in the same order as, and with
headings and format substantially similar to, forms H-4(D)(3) and
(4) in appendix H of the TILA Servicing Rule (78 FR 11011-11012).
---------------------------------------------------------------------------

The initial disclosure requirements of 12 CFR 1026.20(d) do not
apply to ARMs with a term where the interest rate would adjust within a
1-year period (see 12 CFR 1026.20(d)(1)(ii)). FHA does not insure ARMs
with a term of less than 12 months. The HUD regulation at

[[Page 26380]]

24 CFR 203.49(d) describes the frequency of rate changes for ARMs
eligible for FHA insurance, providing that ``. . . the first adjustment
shall be no sooner or later than . . .'' as provided in the regulation.
The shortest term ARM eligible for FHA insurance is a 1-year ARM with
the first rate adjustment occurring no earlier than 12 months.
Accordingly, the exemption provided by the 2013 TILA Servicing Rule is
not applicable to FHA-insured ARMs.

IV. 30 Day Public Comment Period

In accordance with HUD's regulations concerning rulemaking at 24
CFR part 10 (entitled, ``Rulemaking Policy and Procedures''), it is
HUD's policy that the public comment period for proposed rules should
be 60 days. In the case of this proposed rule, however, HUD has
determined there is good cause to reduce the public comment period to
30 days for the following reasons:
First, HUD is required by the 2013 TILA Servicing Rule to make
regulatory changes to comply with the 2013 TILA Servicing Rule. The
CFPB delayed the effective date of the notification period for FHA-
insured ARMs to January 10, 2015, and this allows HUD to go through the
rulemaking process to bring FHA's regulations in conformity with the
2013 TILA Servicing Rule.
Second, the notification requirements established in the 2013 TILA
Servicing Rule were published in the Federal Register on February 14,
2013, and became effective on January 10, 2014, except for adjustable
rate mortgages with look-back periods currently less than 45 days,
including FHA-insured and VA-guaranteed ARMs, which are grandfathered
until January 10, 2015. Since the industry and interested parties were
notified of these regulatory changes, including a statement in the
preamble of the rule that directed HUD to revise its regulations to
comply with that of the 2013 TILA Servicing Rule, industry and
interested parties have been on notice of HUD's proposed changes well
before the publication of this proposed rule.
Given that the proposed amendments to HUD's regulations mirror the
requirements of the 2013 TILA Servicing Rule, and the January 10, 2015,
deadline, 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.

V. 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.
As discussed above in this preamble, the proposed rule would align
the look-back requirements for FHA-insured ARMs to the revised TILA
notification requirements established in the 2013 TILA Servicing Rule.
Consistent with the goals of Executive Order 13563, the proposed
amendments would simplify and standardize the ARM look-back and
notification requirements established by the CFPB and in effect for the
conventional ARM market on January 10, 2014. As a result, this rule was
determined to not be a significant regulatory action under section 3(f)
of Executive Order 12866, Regulatory Planning and Review, and therefore
was not reviewed by OMB.

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.
As discussed in this preamble, this proposed rule aligns the look-
back requirements for FHA-insured ARMs to the revised TILA notification
requirements established in the 2013 TILA Servicing Rule. HUD does not
have the discretion not to align its ARM notification requirements with
new TILA requirements established by the CFPB as implemented in its
2013 TILA Servicing Rule. The revised look-back period and disclosure
requirements would apply to FHA-approved mortgagees originating ARMs in
January 2015, whether or not HUD takes action. It is HUD's position
that it is important for FHA regulations to be in compliance with TILA,
and therefore HUD has initiated this rulemaking. In this rule, HUD
proposes to adopt the minimum look-back period, 45 days, which would
allow FHA-approved mortgagees to meet the TILA minimum requirements
governing notification to borrowers.
As also discussed in this preamble, the CFPB noted in its
rulemaking, that the majority of ARMs in the conventional market have
look-back periods of 45 days or longer. With the 2013 TILA Servicing
Rule taking effect on January 10, 2014, any lenders originating in the
conventional market ARMs that did not have a minimum look-back period
of 45 days, have now adjusted to the new TILA requirements.
As with the proposed changes regarding the look-back period, the
revisions to the disclosure requirements simply conform HUD
requirements to the 2013 TILA Servicing Rule and the procedures
currently followed in the conventional mortgage lending market.
For the reasons presented, the undersigned certifies that this 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 less burdensome
alternatives to this rule that will meet HUD's objectives as described
in the preamble to this rule.

Environmental Impact

The proposed rule does not direct, provide for assistance or loan
and mortgage insurance for, or otherwise govern or regulate, real
property acquisition, disposition, leasing, rehabilitation, alteration,
demolition, or new construction, or establish, revise or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this
proposed rule is categorically excluded from environmental review under
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Executive Order 13132, Federalism

Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either (i) imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (ii) preempts
state law, unless the agency meets the consultation and funding

[[Page 26381]]

requirements of section 6 of the Executive order. This proposed rule
would not have federalism implications and would 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) (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 the private sector, within the meaning of the UMRA.

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number for Mortgage
Insurance-Homes is 14.117.

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.

Accordingly, for the reasons discussed in this preamble, HUD
proposes to amend 24 CFR part 203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
1. The authority citation for 24 CFR part 203 continues to read as
follows:

Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and
1717z-21; 42 U.S.C. 3535(d).

0
2. Revise the third sentence of paragraph (d)(2) and paragraph (h) to
read as follows:

Sec. 203.49 Eligibility of adjustable rate mortgages.

* * * * *
(d) * * *
(2) * * * The current index figure shall be the most recent index
figure available 30 days before the date of each interest rate
adjustment, except that for forward mortgages originated on or after
[effective date of final rule to be inserted at final rule stage], 30
days shall mean 45 days.
* * * * *
(h) Disclosures. The mortgagee of an adjustable rate mortgage shall
provide mortgagors with the disclosures in the timing, content, and
format required by the regulations implementing the Truth in Lending
Act (15 U.S.C. 1601 et seq.) at 12 CFR 1026.20(c) and (d).
* * * * *

Dated: April 17, 2014.
Carol J. Galante,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2014-10572 Filed 5-7-14; 8:45 am]
BILLING CODE 4210-67-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.