Federal Housing Administration (FHA): Strengthening the Home Equity Conversion Mortgage Program, 31769-31825 [2016-11631]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 81, Number 97 (Thursday, May 19, 2016)]
[Proposed Rules]
[Pages 31769-31825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11631]



[[Page 31769]]

Vol. 81

Thursday,

No. 97

May 19, 2016

Part III





Department of Housing and Urban Development





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24 CFR Parts 30 and 206





Federal Housing Administration (FHA): Strengthening the Home Equity 
Conversion Mortgage Program; Proposed Rule

Federal Register / Vol. 81 , No. 97 / Thursday, May 19, 2016 / 
Proposed Rules

[[Page 31770]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 30 and 206

[Docket No. FR-5353-P-01]
RIN 2502-AI79


Federal Housing Administration (FHA): Strengthening the Home 
Equity Conversion Mortgage Program

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to codify several significant changes to 
FHA's Home Equity Conversion Mortgage program that were previously 
issued under the authority granted to HUD in the Housing and Economic 
Recovery Act of 2008 and the Reverse Mortgage Stabilization Act of 
2013, and to make additional regulatory changes. The Home Equity 
Conversion Mortgage program is FHA's reverse mortgage program that 
enables seniors who have equity in their homes to withdraw a portion of 
the accumulated equity. The intent of the Home Equity Conversion 
Mortgage program is to ease the financial burden on elderly homeowners 
facing increased health, housing, and subsistence costs at a time of 
reduced income. FHA's mission is to serve underserved markets, which 
must be balanced with HUD's inherent, as well as, statutory obligation 
under the National Housing Act to protect the FHA insurance funds. The 
impacts of the recent financial crisis, including a decline in property 
values, shrinking retirement accounts, and changing borrower 
demographics placed seniors with Home Equity Conversion Mortgages at an 
increased risk of losing their homes due to their inability to make tax 
and insurance payments. During this time, the FHA HECM program was the 
only reverse mortgage program available for seniors. The above 
referenced economic and market factors, combined with certain program 
features, resulted in increased risk to the Mutual Mortgage Insurance 
Fund (MMIF). This rulemaking strengthens the FHA HECM program and 
codifies changes made under the Reverse Mortgage Stabilization Act of 
2013 that reduce risk to the MMIF and increase the sustainability of 
this important program for seniors.

DATES: Comment Due Date: July 18, 2016.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street 
SW., Room 10276, Washington, DC 20410-0500. Communications must refer 
to the above docket number and title. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500.
    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 (this is a toll-free number). 
Copies of all comments submitted are available for inspection and 
downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Karin Hill, Senior Policy Advisor, 
Office of Single Family Housing, Department of Housing and Urban 
Development, 451 7th Street SW., Room 9282, Washington, DC 20410-8000; 
telephone number 202-402-3084 (this is not a toll-free number). Persons 
with hearing or speech challenges 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 Regulatory Action

    Since the 2008 housing and economic recession, the Home Equity 
Conversion Mortgage (HECM) portfolio has experienced major borrower 
demographic and behavioral changes that have caused additional risk to 
the Mutual Mortgage Insurance Fund (MMIF). Some of the changes include 
shifting from a predominately adjustable interest rate mortgage with 
borrowers receiving payments over time using the line of credit, 
modified term, or modified tenure payment options to a fixed interest 
rate mortgage with borrowers drawing large amounts of HECM proceeds at 
the time of closing; younger borrowers with higher amounts of property 
indebtedness; and increasing property charge defaults. While program 
changes made prior to and during 2013, such as consolidating the HECM 
Standard and HECM Saver products, did improve the stability of the HECM 
program, the HECM portfolio has continued to experience volatility, 
with an estimated economic value of negative $1.2 billion as reported 
in FHA's Fiscal Year (FY) 2014 report to Congress. The HECM Portfolio 
received favorable actuarial results in 2015 reflecting the positive 
impact of program changes and an improving housing market. However it 
is critical to remain vigilant in monitoring program performance and 
policy to ensure the soundness of the MMIF.
    Recognizing the need to stabilize the HECM program and ensure it 
remains a sustainable program, Congress passed, and the President 
signed into law, the Reverse Mortgage Stabilization Act of 2013 (RMSA). 
The RMSA gave FHA the tools to make, through mortgagee letter,\1\ 
changes to the HECM program that are necessary to improve the fiscal 
safety and soundness of the program. Under this authority, FHA 
implemented a number of changes to the HECM program, including the 
Financial Assessment and Property Charge Funding Requirements; 
deferring the due and payable status for Eligible Non-Borrowing 
Spouses; limiting disbursements during the first 12

[[Page 31771]]

months of the HECM; and eliminating future draws on fixed interest rate 
HECMs. Through this rulemaking, FHA proposes to codify these policies, 
with amendments as discussed in the preamble. In addition, FHA proposes 
a number of new policies, which are discussed below and in the 
preamble. Many of these proposed changes will contribute to the 
stability of the HECM program and decrease risk to the MMIF, and others 
will provide needed updates to a program which began as a 
``demonstration program'' and which has not been substantially updated 
in over 20 years.
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    \1\ Mortgagee letters issued under the authority granted to HUD 
in RMSA will be identified throughout this rule as RMSA mortgagee 
letters.
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    So that all regulatory requirements are codified in the HECM 
regulations, FHA also proposes to codify HECM program changes made by 
mortgagee letter \2\ under the Housing and Economic Recovery Act of 
2008 (HERA), which implemented the HECM for Purchase program and 
established new origination fee limits, and to amend the initial and 
monthly mortgage insurance premium (MIP) limits to correspond with 
statutory changes.
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    \2\ Mortgagee letters issued under the authority granted to HUD 
in HERA will be identified throughout this rule as HERA mortgagee 
letters.
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B. Summary of Major Provisions of the Regulatory Action in Question

    In this rule, FHA proposes to codify existing policy which has been 
implemented by mortgagee letters under various statutory authorities; 
implement statutory changes; issue new origination and servicing 
policies; and clarify existing regulatory language. The main policy 
provisions are discussed below.
Implementing Statutory Changes and Codifying Existing Policies 
Implemented Under Statutory Authority
    Financial Assessment and Property Charge Funding Requirements. As 
implemented through RMSA Mortgagee Letter 2014-21, mortgagees are 
required to perform a Financial Assessment of the prospective borrower 
prior to loan approval, which considers the prospective borrower's 
credit history, cash flow and residual income, extenuating 
circumstances, and compensating factors. Based on the results of the 
Financial Assessment, the mortgagee may require a Life Expectancy Set 
Aside (LESA) for the payment of certain property charges. For fixed 
interest rate HECMs, if a LESA is required, it may only be a Fully-
Funded LESA. For adjustable interest rate HECMs, if a LESA is required, 
the mortgagee may require either a Partially- or Fully-Funded LESA. 
Proceeds from a Partially-Funded LESA will be disbursed to the borrower 
semi-annually to be used to assist in the payment of property charges; 
for Fully-Funded LESA, mortgagees disburse funds directly to the tax 
authority or insurance company for the payment of certain property 
charges when they are due. If the mortgagee does not require a Fully-
Funded LESA, a borrower with an adjustable or fixed interest rate HECM, 
may elect to have a Fully-Funded LESA.
    Deferring the Due and Payable Status for Eligible Non-Borrowing 
Spouses. RMSA Mortgagee Letter 2014-07, as amended by RMSA Mortgagee 
Letter 2015-02, established a Deferral Period, during which the due and 
payable status of a HECM is deferred after the death of the last 
surviving borrower for an Eligible Non-Borrowing Spouse, provided 
eligibility and all other FHA requirements are, and continue to be, 
satisfied. In addition, the new policy required the principal limit to 
be based on the age of the youngest borrower or Eligible Non-Borrowing 
Spouse, instead of only the youngest borrower. The new policy also 
provided for a 30-day period for the Eligible Non-Borrowing Spouse to 
cure a default and to reinstate a Deferral Period.
    Limiting Disbursements during the First 12 Months of the HECM. 
Through RMSA Mortgagee Letter 2014-21, FHA limited initial 
disbursements for HECMs. For fixed and adjustable interest rate HECMs, 
the funds advanced to the borrower at closing and during the First 12-
Month Disbursement Period could not exceed the greater of 60 percent of 
the principal limit; or Mandatory Obligations plus an additional 10 
percent of the principal limit.
    While FHA does not intend to change the current limit at this time, 
this rule provides flexibility for this limit to be changed in the 
future to respond to market changes or other factors. Specifically, 
this rule revises the percentages such that the 60 percent will never 
be less than 50 percent, and the additional percentage will never be 
less than 10 percent.
    Eliminating Future Draws on Fixed Interest Rate HECMs. Ginnie Mae 
issued an All Participants Memorandum, APM 14-04, announcing that fixed 
interest rate HECM loans with future draws would be ineligible for 
securitization on or after June 1, 2014. As a result of APM 14-04, in 
RMSA Mortgagee Letter 2014-11, FHA limited the insurability of fixed 
interest rate mortgages under the HECM program to mortgages with the 
Single Lump Sum payment option, which does not allow for future draws 
after closing.
    HECM for Purchase Program. HECM for Purchase program requirements 
are currently in HERA Mortgagee Letter 2009-11. This rule intends to 
codify the HECM for Purchase program requirements, with a few important 
changes. First, this rule would require prospective borrowers of HECM 
for Purchase transactions to complete the required HECM counseling 
prior to signing a sales contract and/or making an earnest money 
deposit, unless otherwise provided by the Commissioner, instead of 
allowing them to complete the counseling before or after the initial 
application is submitted to the mortgagee. In addition, amendments to 
the prohibition on interested party contributions are proposed in this 
rule. FHA proposes to permit the seller to pay fees required to be paid 
by the seller under state or local law and to purchase the Home 
Warranty policy, and to allow the Commissioner to define the types and 
parameters of other allowable interested party contributions through 
Federal Register notice for comment.
    Allowable Loan Origination Fees and Charges. FHA implemented the 
loan origination fee limits imposed by HERA through HERA Mortgagee 
Letter 2008-34. In this rule, FHA proposes to clarify that such loan 
origination fee limits include expenses incurred in originating, 
processing and closing the HECM.
    Amount of MIP. FHA proposes changes to the allowable initial and 
monthly MIP charges to reflect that HECMs are now obligations of the 
MMIF instead of the General Insurance Fund, and to reflect statutory 
amendments to the National Housing Act providing FHA with a wider range 
of acceptable MIP charges. FHA is not changing actual MIP charges, 
which may be set outside of the rulemaking process by mortgagee letter 
or other similar administrative issuance.
New Origination and Servicing Policies
    Disclosure of Available HECM Program Options. This rule proposes to 
require mortgagees to inform potential HECM borrowers of all of the 
HECM products, features and options that FHA insures, in a manner 
acceptable to the Commissioner, irrespective of the particular HECM 
products offered by the mortgagee.
    Capping Lifetime Interest Rate Adjustments for Adjustable Interest 
Rate Products. For annual adjustable interest rate HECMs, this rule 
proposes to cap periodic interest rate increases and decreases at one 
percentage point and cap lifetime interest rate increases and decreases 
at five percentage points. For monthly adjustable interest rate HECMs, 
this rule proposes to cap lifetime

[[Page 31772]]

increases or decreases to the interest rate at five percentage points.
    Interest Rate Lock-In. This rule proposes to amend the definition 
of ``expected average mortgage interest rate,'' to provide that the 
mortgagee, with the agreement of the borrower, may lock-in the expected 
average mortgage interest rate prior to the date of loan closing or 
establish the expected average mortgage interest rate on the date of 
loan closing.
    Super Liens. This rule proposes to require, as a condition for a 
HECM to be eligible for loan assignment, that the HECM mortgage be in 
lien status prior to homeowners association and condo association 
liens.
    Appraisal Requirements. This rule proposes to require the mortgagee 
to have the property appraised no later than 30 days after receipt of 
the request by an applicable party in connection with a pending 
property sale; the property must be appraised within 30 days of a 
foreclosure sale.
    Limiting Reimbursement of Property Charge Advances. This rule 
proposes to limit insurance claim reimbursement to a mortgagee to two 
years of payments for: (a) Taxes, ground rents, water rates, and 
utility charges that can result in liens prior to the mortgage; (b) 
special assessments, which are noted on the application for insurance 
or which become liens after the insurance of the mortgage; and (c) 
hazard insurance premiums on the mortgaged property not in excess of a 
reasonable rate. The rule also provides flexibility to allow the 
Commissioner to approve an extension of the two-year limit.
    Including Utilities as Property Charges. FHA proposes to amend the 
definition of ``property charges'' to include utilities as a borrower 
responsibility, when failure to pay such utilities would result in a 
lien and would potentially trigger a due and payable event.
    Acquisition and Sale of Property. This rule proposes to replace the 
requirement that the property be sold for at least 95 percent of the 
appraised value with a more flexible provision which allows the 
Commissioner to lower this amount as necessary to adapt to market 
conditions and other factors. This rule also proposes to require that 
the closing costs from the sale be no more than 11 percent of the sales 
price.
    Cash for Keys. This rule proposes to incentivize parties with legal 
authority to dispose of a property that serves as the security for a 
HECM to complete a deed in lieu of foreclosure more quickly.

C. Costs and Benefits

    This proposed rule will codify program changes that have reduced 
risks to both FHA and to borrowers: Implementation of limits on fixed-
rate full draw loans (full draw loans expose FHA to high risk of 
insurance loss, and such loans are often not sustainable solutions for 
borrowers since they do not provide the borrower with future access to 
HECM proceeds); a Financial Assessment to enable mortgagees to 
determine if the HECM enables borrowers to comply with the mortgage 
requirements and that the HECM is a sustainable solution for borrowers; 
protection to Eligible Non-Borrowing Spouses from foreclosure after the 
death of the last borrower, and removed incentives for borrowers to 
obtain higher principal limits by using only the age of the older 
spouse through quit-claiming the younger spouse from the title; and a 
Property Charge Set Aside which will reduce the incidence of borrower 
defaults due to non-compliance with the mortgage obligation for the 
borrower to make timely payment of property taxes, hazard insurance, 
and other charges. The new changes to the HECM program will reduce 
foreclosures arising from these defaults, which will benefit FHA, 
borrowers, and communities where properties are located; give FHA more 
flexibility to accept short sales on properties where market conditions 
warrant; provide homeowners with the ability to purchase a more 
suitable home without incurring the costs of two loan closings and 
offer greater interest rate protection to borrowers who choose an 
adjustable interest rate HECM through new annual and life of loan rate 
adjustment caps. Together, these changes may initially reduce HECM 
origination volume, although the potential demand for HECM is expected 
to remain high.
    The social benefits that may be realized by this rule also include 
reducing resolution costs and borrower distress in cases where loans 
are no longer sustainable; improved sustainability of the MMIF, which 
would enhance the choice and wellbeing of future borrowers; and 
increased protections for borrowers, including those afforded non-
borrowing spouses, those resulting from transfer of more interest rate 
risk from borrowers to lenders (who are likely better able to manage 
this risk), and those from improving the ultimate sustainability of 
HECM loans related to financial assessment changes.
    The policies discussed in this rule may reduce FHA HECM insurance 
endorsements by $1.9 billion per year, representing transfers from 
potential HECM borrowers to other debtors; reduce FHA MMIF credit 
subsidy (equivalent to increasing the economic value to FHA) for the 
HECM portfolio by $42 million per year, representing transfers from 
mortgagees to FHA; reduce foreclosures due to tax and insurance default 
by up to 6,000 cases (totaling about $1.5 billion in loan amount) per 
year, along with reduction in ancillary costs of foreclosures to 
neighborhoods and local governments; reduce loan origination costs for 
2,000 ``HECM for Purchase'' borrowers, saving them $12 million per year 
representing transfers from mortgagees to borrowers; and increase 
margins on adjustable interest rate HECMs paid by all borrowers, 
resulting in transfers from borrowers to mortgagees of between $21.7 
and $27.2 million per year, but which will eventually be offset by 
approximately equal transfers from mortgagees to those borrowers whose 
loans are seasoned in rising rate environments.
    Other costs from the rule would include reduced borrowers' choice 
and the well-being of those borrowers who may not meet the eligibility 
requirements, or who no longer have access to as much upfront cash. The 
table below and the bullet points that follow display the benefits, 
costs, and transfers of this proposed rule.

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          Benefits                    Costs               Transfers
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4,400 fewer foreclosures per  Reduce FHA HECM       Increase margins on
 year from tax and insurance   insurance             HECM ARMs paid by
 default.                      endorsements by       all borrowers,
 $1.1 billion          $1.9 billion per      resulting in
 aggregate unpaid principal    year, thereby         transfers from
 balance.                      reducing choices      borrowers to
                               for potential HECM    mortgagees of
                               borrowers to access   between $21.7 and
                               home equity.          $27.2 million per
                                                     year.
                                                     These
                                                     transfers will
                                                     eventually be
                                                     offset by
                                                     approximately equal
                                                     transfers from
                                                     mortgagees to those
                                                     borrowers whose
                                                     loans are seasoned
                                                     in rising rate
                                                     environments.

[[Page 31773]]

 
     Reduction in
     ancillary costs of
     foreclosures to
     neighborhoods,
     borrowers, and local
     governments
Reduced loan origination      No additional costs.  No additional
 costs for 2,000 ``HECM for                          transfers.
 Purchase'' borrowers per
 year.
     Total benefit
     of $12 million per year
     Frees resources
     for other purposes
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    Other benefits include the following:
     Improving the financial condition of the FHA MMIF due to:
    [cir] Fewer foreclosures;
    [cir] Persistently lower insured loan balances over time, due to 
limits on initial disbursement; and
    [cir] More flexibility for FHA to accept short sales on properties 
where market conditions warrant.
     Improving public perception of HECM regarding overall 
program viability and public benefits derived from program
    [cir] Reduces risks to both FHA and to borrowers associated with 
fixed-rate full draw loans (full draw loans expose FHA to high risk of 
insurance loss, and such loans are often not suitable for borrowers);
    [cir] Helps borrowers and their housing counselors determine if a 
HECM is a sustainable option for them through the use of a Financial 
Assessment;
    [cir] Provides protection to Eligible Non-Borrowing Spouses from 
foreclosure, and removes incentives for borrowers to obtain higher 
principal limits than they would otherwise be eligible for by using 
only the age of the older spouse; and
    [cir] Reduces the incidence of borrower defaults due to non-
compliance with the mortgage obligation.
     Providing greater interest rate protection to borrowers 
who choose an ARM through new annual and life-of-loan rate adjustment 
caps

II. Background

    The HECM program, authorized by section 255 of the National Housing 
Act (NHA) (12 U.S.C. 1715z-20), is FHA's reverse mortgage insurance 
program. Subsection 255(c) of the NHA gives FHA the authority to 
establish the terms and conditions under which it will insure HECMs. 
The regulations for this program are codified in 24 CFR part 206. The 
HECM program enables FHA-approved mortgagees to extend insured mortgage 
financing to eligible borrowers, 62 years of age or older, who want to 
convert the equity in their homes into liquid assets. The withdrawal of 
equity may take a variety of forms, as authorized by the NHA and 
selected by the borrower. The home, which serves as security for the 
mortgage, must be, and continue to be, the borrower's principal 
residence during the life of the borrower. For adjustable interest rate 
HECMs, equity payments to the borrower may be in the form of monthly 
disbursements for life or a fixed term of years, disbursements from a 
line of credit advance or a combination of monthly disbursements and a 
line of credit. For fixed interest rate HECMs, equity payments to the 
borrower must be in the form of a single lump sum disbursement at 
closing.
    The maximum amount of equity in the home that is available to a 
borrower under a HECM loan is the ``principal limit'' that is 
calculated for that loan. The borrower retains ownership of the 
property and may sell the home at any time keeping any residual sale 
proceeds in excess of the outstanding loan balance. Until the mortgage 
is repaid, and regardless of whether or not additional disbursements 
under the mortgage are permissible, interest on the mortgage, mortgage 
insurance premiums, and servicing charges, where applicable, continue 
to accrue.
    The Housing and Economic Recovery Act of 2008 (Public Law 110-289, 
approved July 30, 2008) (HERA) impacted the HECM program in a number of 
important ways, including providing for the HECM for Purchase program, 
establishing new origination fee limits, and transferring obligations 
arising under the HECM program to the Mutual Mortgage Insurance Fund 
(MMIF).
    First, HERA provides HECM borrowers with the opportunity to 
purchase a new principal residence with HECM loan proceeds, known as 
the HECM for Purchase program. Specifically, section 2122(a)(9) of HERA 
amended section 255 of the NHA to authorize FHA to insure HECMs used 
for the purchase of 1- to 4-family dwelling units. In HERA Mortgagee 
Letter 2008-33,\3\ issued on October 20, 2008, FHA provided that these 
new HECM for Purchase transactions must satisfy existing HECM 
requirements and the provisions announced in the HERA mortgagee letter. 
Following the publication of this HERA mortgagee letter, the reverse 
mortgage industry sought additional guidance and clarification 
concerning the HECM for Purchase program. On March 27, 2009, FHA issued 
HERA Mortgagee Letter 2009-11, which contained additional guidance and 
therefore superseded HERA Mortgagee Letter 2008-33. It is FHA's intent 
to codify the HECM for Purchase program requirements throughout FHA's 
part 206 regulations, except as otherwise discussed in this 
preamble.\4\
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    \3\ Mortgagee letters issued under the authority granted to HUD 
in HERA will be identified throughout this rule as HERA mortgagee 
letters.
    \4\ The following sections of HERA Mortgagee Letter 2009-11 are 
guidance in their entirety and will not be codified in this rule: 
Ineligible Property Types, Verification of Funding Sources, Gap 
Financing, Suspensions and Debarments, Enhanced Counseling, Right of 
Rescission, Closing Guidance, Data Entry Requirements, and Required 
Documents for Endorsement. Other guidance provisions in this HERA 
mortgagee letter are identified elsewhere in this preamble.
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    On October 31, 2008, FHA issued HERA Mortgagee Letter 2008-34, 
which, consistent with HERA, established new limits on the origination 
fee that may be charged for HECMs. Specifically, the loan origination 
fee limit is the greater of $2,500; or two percent of the maximum claim 
amount of the mortgage, up to a maximum claim amount of $200,000, plus 
one percent of any portion of the maximum claim amount that is greater 
than $200,000, but not to exceed $6,000.
    Section 2118(b)(2) of HERA transferred obligations arising under 
the HECM program, for loans endorsed on or after October 1, 2008, from 
the FHA General Insurance Fund to the MMIF. By statute, the Secretary 
has a fiduciary duty to protect the MMIF.\5\ In addition, subsection 
202(a)(6) of the NHA provides that if, pursuant to an independent 
actuarial study of the MMIF required under subsection 202(a)(4), the 
Secretary determines that the MMIF is not meeting the operational goals 
established under subsection 202(a)(7) or there is a substantial 
probability that the MMIF will not maintain its established target 
subsidy rate, the Secretary may either make programmatic adjustments 
under this title as necessary to reduce the risk to

[[Page 31774]]

the MMIF, or make appropriate premium adjustments.
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    \5\ See subsection 202(a)(3) of the NHA.
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    FHA's FY 2012 report to Congress on the financial status of the 
MMIF, issued November 16, 2012, reported substantial stress in the HECM 
program and projected the economic value of the HECM portfolio to be 
negative $2.8 billion.\6\ The losses to the MMIF apparent in the FY 
2012 report to Congress provided the impetus for the passage of the 
Reverse Mortgage Stabilization Act of 2013, and the resulting 
administrative actions by FHA, which are discussed below in this 
preamble. Subsequent reports to Congress on the status of the MMIF have 
continued to show substantial stress due to the HECM portfolio, 
necessitating the additional programmatic changes proposed in this 
rule. For example, although the FY 2013 report to Congress showed a 
strengthened capital position of the HECM portfolio, that was the 
result of a combination of a mandatory appropriation of $1.7 billion 
and a transfer of more than $4 billion from the Forward loan portfolio 
to the HECM portfolio.\7\ FHA's FY 2014 report to Congress showed that 
the estimated economic value of the HECM portfolio changed from a 
positive $6.5 billion to a negative $1.2 billion.\8\ These projected 
deficits were the result of many factors, including the impact of the 
recession, the housing crisis, borrowers living longer than 
anticipated, and the shift from borrowers selecting adjustable interest 
rate HECMs with disbursements taken over time to fixed interest rate 
transactions with larger disbursements at closing. The favorable 
actuarial results the HECM Portfolio received in 2015 reflect the 
positive impact of program changes made in response to 2012 through 
2014 performance and an improving housing market.
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    \6\ See https://portal.hud.gov/hudportal/documents/huddoc?id=F12MMIFundRepCong111612.pdf.
    \7\ See https://portal.hud.gov/hudportal/documents/huddoc?id=FY2013RepCongFinStMMIFund.pdf.
    \8\ See https://portal.hud.gov/hudportal/documents/huddoc?id=FY2014FHAAnnRep11_17_14.pdf.
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    In order to mitigate the projected negative impact of future HECM 
books of business on the MMIF and to ensure the continued availability 
of the program as a sustainable solution for the senior borrower, 
immediate action was imperative. Congress passed the Reverse Mortgage 
Stabilization Act of 2013 (RMSA), which was signed into law on August 
9, 2013 (Pub. L. 113-29), giving HUD the tools to make immediate and 
necessary changes to the HECM program. Specifically, RMSA amends 
subsection 255(h) of the NHA to authorize the Secretary to ``establish, 
by notice or mortgagee letter, any additional or alternative 
requirements that the Secretary, in the Secretary's discretion, 
determines are necessary to improve the fiscal safety and soundness of 
the HECM program.'' Using the authority granted to HUD by RMSA, FHA 
made several critical changes to the HECM program through mortgagee 
letters,\9\ and FHA proposes to codify, and in some cases modify, those 
program changes in this rule.
---------------------------------------------------------------------------

    \9\ Mortgagee letters issued under the authority granted to HUD 
in RMSA will be identified throughout this rule as RMSA mortgagee 
letters.
---------------------------------------------------------------------------

    FHA's first action under RMSA was the issuance of RMSA Mortgagee 
Letter 2013-27 \10\ on September 3, 2013, titled ``Changes to the Home 
Equity Conversion Mortgage Program Requirements.'' The RMSA mortgagee 
letter implemented several changes to the HECM program, which included 
initial disbursement limits, the Single Lump Sum payment option,\11\ a 
Financial Assessment of HECM borrowers that assesses their capacity and 
willingness to meet his/her documented financial obligations and the 
ability to comply with the obligations of the HECM and policy 
guidelines regarding the payment of property charges, and a LESA. FHA 
subsequently issued RMSA Mortgagee Letter 2013-33 \12\ on September 25, 
2013, to elaborate on these policy changes and make certain clarifying 
changes.
---------------------------------------------------------------------------

    \10\ RMSA Mortgagee Letter 2013-27 was superseded in its 
entirety by RMSA Mortgagee Letter 2014-21.
    \11\ FHA initially referred to this payment option as the 
``Single Disbursement Lump Sum'' payment option, but for simplicity, 
FHA is renaming this payment option the ``Single Lump Sum'' payment 
option.
    \12\ RMSA Mortgagee Letter 2013-33 was superseded in its 
entirety by RMSA Mortgagee Letter 2014-21.
---------------------------------------------------------------------------

    FHA solicited public comment on RMSA Mortgagee Letter 2013-27 
through a notice published on September 12, 2013, in the Federal 
Register at 78 FR 56576 titled ``Changes to the Home Equity Conversion 
Mortgage Program Requirements: Financial Assessment--Solicitation of 
Comment.'' The public comment period for the September 12, 2013, notice 
closed on October 15, 2013, and FHA received 13 public comments.\13\ 
Comments were received from nonprofit, nongovernmental and advocacy 
organizations serving seniors, a trade organization for financial 
institutions involved in the origination and securitization of reverse 
mortgages, a reverse mortgage firm, and other interested parties. In 
general, the comments applauded FHA's efforts and supported the 
establishment of some type of Financial Assessment to determine whether 
or not a prospective HECM borrower will be able to meet the financial 
obligations of the mortgage and whether the HECM is a sustainable 
option for the senior. However, many commenters expressed concern that 
the new Financial Assessment requirements were unnecessarily onerous to 
accomplishing FHA's goals.
---------------------------------------------------------------------------

    \13\ Comment 0011 was a duplicate of Comment 0012 and has not 
been counted in this number. Comment 0015 was received on October 
22, 2013, but FHA accepted submission of that comment.
---------------------------------------------------------------------------

    In response to these public comments, and in further reliance on 
the authority of the RMSA, FHA issued RMSA Mortgagee Letter 2014-21, 
titled ``Revised Changes to the Home Equity Conversion Mortgage (HECM) 
Program Requirements,'' on November 10, 2014. This RMSA mortgagee 
letter consolidated and revised policy requirements issued under RMSA 
Mortgagee Letters 2013-27 and 2013-33, and superseded those mortgagee 
letters in their entirety. Of significance, this mortgagee letter 
revised FHA's HECM credit standing and Financial Assessment 
requirements, as well as the Property Charge Funding Requirements, and 
set policy for unused LESA funds during a Deferral Period \14\ and upon 
termination of the loan. This RMSA mortgagee letter also revised 
requirements announced in RMSA Mortgagee Letter 2014-11, discussed 
below, to clarify that a borrower with a fixed interest rate HECM may 
be reimbursed for the cost of materials, under certain conditions, when 
repairs must be completed after loan closing.
---------------------------------------------------------------------------

    \14\ The Deferral Period is discussed later in the preamble in 
relation to RMSA Mortgagee Letter 2014-07.
---------------------------------------------------------------------------

    On April 25, 2014, FHA established additional and alternative 
program requirements concerning due and payable status for HECMs with 
Case Numbers assigned on or after August 4, 2014, where there is a Non-
Borrowing Spouse at the time of loan closing, through the issuance of 
RMSA Mortgagee Letter 2014-07. Subsection 255(j) of the NHA provides 
that a HECM that does not contain a ``Safeguard to Prevent Displacement 
of Homeowner,'' which defers repayment of the loan obligation until 
``the homeowner's death, the sale of the home, or the occurrence of 
other events specified in regulations of the Secretary,'' is ineligible 
for FHA insurance. FHA has, since the inception of the HECM program, 
interpreted this provision in its regulations as requiring HECMs be 
called due and payable upon the death of the last surviving borrower, 
the sale of the home, and other conditions,

[[Page 31775]]

including the failure to reside in the property and the failure to pay 
required taxes. FHA continues to believe that its original 
interpretation gives full force and effect to the intent of the 
statute. Nevertheless, an alternative interpretation of subsection 
255(j) of the NHA, which would extend the mortgage insurance 
eligibility requirements concerning the safeguard to the borrower and 
any Eligible Non-Borrowing Spouse of the borrower at the time of 
origination, has been advanced. RMSA Mortgagee Letter 2014-07, as 
amended by RMSA Mortgagee Letter 2015-02,\15\ implemented, 
prospectively only, this alternative interpretation of subsection 
255(j) of the NHA in order to ensure the viability of the HECM program 
and the MMIF.
---------------------------------------------------------------------------

    \15\ RMSA Mortgagee Letter 2015-02 is discussed later in this 
preamble.
---------------------------------------------------------------------------

    In general, RMSA Mortgagee Letter 2014-07 established a Deferral 
Period, during which the due and payable status resulting from the 
death of the last surviving borrower of a HECM is deferred based on the 
continued satisfaction of the established requirements for a Non-
Borrowing Spouse and all other FHA requirements. This RMSA mortgagee 
letter also required that the mortgagee base the principal limit on the 
age of the youngest borrower or Non-Borrowing Spouse, instead of only 
the youngest borrower.
    FHA solicited public comment on RMSA Mortgagee Letter 2014-07 
through a notice published on May 2, 2014, in the Federal Register at 
79 FR 25147 titled ``Home Equity Conversion Mortgage (HECM) Program: 
Non-Borrowing Spouse--Solicitation of Comment.'' The public comment 
period on the May 2, 2014, notice closed on June 2, 2014, and FHA 
received 10 public comments. Comments were received from a HECM 
servicer, a national reverse mortgage association, and other interested 
parties. In general, many comments applauded and supported FHA's 
efforts to provide protections to Non-Borrowing Spouses and ensure the 
viability of the HECM program. However, commenters sought clarification 
on many issues.
    In response to the public comments, FHA issued RMSA Mortgagee 
Letter 2015-02 to amend, and where conflicts were present, to 
supersede, RMSA Mortgagee Letter 2014-07. In general, RMSA Mortgagee 
Letter 2015-02 defined two categories of Non-Borrowing Spouses: 
Ineligible Non-Borrowing Spouse and Eligible Non-Borrowing Spouse. The 
Ineligible Non-Borrowing Spouse is a Non-Borrowing Spouse who is 
ineligible to receive the benefit of the Deferral Period, and as a 
result, whose age will not be used to determine the principal limit. 
The Eligible Non-Borrowing Spouse is a Non-Borrowing Spouse, who, at 
the time of origination, is eligible to receive the benefit of the 
Deferral Period, and as a result, whose age, if younger than the age of 
the borrower(s), will be used to determine the principal limit. The 
RMSA mortgagee letter also provided for a 30-day period to cure a 
default and reinstate a Deferral Period if an Eligible Non-Borrowing 
Spouse fails to meet a required obligation of the Mortgage and provided 
clarification for the ``Seasoning Requirements for Existing Non-HECM 
Liens'' section of RMSA Mortgagee Letter 2014-21, discussed above.
    On June 18, 2014, FHA issued RMSA Mortgagee Letter 2014-11, titled 
``Home Equity Conversion Mortgage (HECM) Program: Limit on Insurability 
of Fixed Interest Rate Products under the HECM Program.'' Prior to 
FHA's issuance of this RMSA mortgagee letter, Ginnie Mae issued an All 
Participants Memorandum, APM 14-04, announcing that fixed interest rate 
HECM loans with future draws would be ineligible for securitization on 
or after June 1, 2014.\16\ As a result of APM 14-04, FHA found it 
necessary to limit the insurability of fixed interest rate mortgages 
under the HECM program to mortgages with the Single Lump Sum payment 
option, and to disallow the use of the Single Lump Sum payment option 
for adjustable interest rate HECMs, which FHA did through the issuance 
of RMSA Mortgagee Letter 2014-11.
---------------------------------------------------------------------------

    \16\ See https://www.ginniemae.gov/doing_business_with_ginniemae/issuer_resources/Pages/mbsguideapmslibdisppage.aspx?ParamID=27.
---------------------------------------------------------------------------

    FHA solicited public comment on RMSA Mortgagee Letter 2014-11 
through a notice published on July 10, 2014, in the Federal Register at 
79 FR 39408 titled ``Home Equity Conversion Mortgage (HECM) Program: 
Limit on Insurability of Fixed Interest Rate Products Under the HECM 
Program--Solicitation of Comment.'' The public comment period for the 
July 10, 2014, notice closed on August 11, 2014, and FHA received 2 
public comments. In response to public comments, and as mentioned 
above, RMSA Mortgagee Letter 2014-21 revised requirements announced in 
RMSA Mortgagee Letter 2014-11.
    The mortgagee letters discussed above, which were issued under HERA 
and RMSA, contain both program changes implemented through requirements 
that, except for the authority granted by HERA or RMSA, would have been 
issued in the format of regulations rather than another form of notice, 
and material that is typically characterized as guidance. It is FHA's 
intent to codify only the regulatory content of Mortgagee Letters 2008-
34, 2009-11, 2014-07, 2014-11, 2014-21, and 2015-02. These mortgagee 
letters will remain in effect for HECMs to which they are applicable 
and which have FHA Case Numbers assigned prior to the effective date of 
a final rule.

III. This Proposed Rule

    The regulatory changes proposed by this rule are summarized below. 
For ease of review, section III.A. of this preamble pertains to changes 
made to 24 CFR part 30 and section III.B. of this preamble pertains to 
changes made to 24 CFR part 206. Section III.B. is organized into three 
sections. Section III.B.1. discusses changes which are proposed to be 
applied across the board to FHA's part 206 regulations. Section 
III.B.2. includes the remaining substantive HECM program amendments 
proposed by this rule, in order of appearance in the codified 
regulations, and identifies whether the amendment simply codifies a 
program change already implemented by mortgagee letter; codifies and 
further amends a program change already implemented by mortgagee 
letter, taking into account changed circumstances and public comments 
received on various Federal Register notices issued for comment; or is 
a new program change. Finally, the technical amendments are discussed 
in section III.B.3. of this preamble.

A. Civil Money Penalties: Certain Prohibited Conduct--24 CFR Part 30

    Currently, HUD's regulation at 24 CFR 30.35, which sets HUD's 
policy regarding taking civil money penalty action against mortgagees 
or lenders, does not include references to the requirements of FHA's 
HECM program in 24 CFR part 206. In this rule, FHA proposes new 
amendments which would expand two provisions to include specific 
reference to the HECM regulations. First, in Sec.  30.35(a)(8), this 
rule proposes to allow the Mortgagee Review Board to initiate a civil 
money penalty action against a mortgagee or lender who knowingly and 
materially fails to timely submit documents that are complete and 
accurate in connection with a claim for insurance benefits in 
accordance with Sec.  206.127. Second, in Sec.  30.35(a)(10), this rule 
proposes to allow the Mortgagee Review Board to initiate a civil money 
penalty action against a mortgagee or lender who

[[Page 31776]]

knowingly and materially fails to service FHA mortgages in accordance 
with the requirements of 24 CFR part 206.

B. Home Equity Conversion Mortgage Insurance--24 CFR Part 206

1. Global Changes to Part 206
    Throughout the regulations, the term ``Secretary'' will be changed 
to ``Commissioner'' because ``Commissioner,'' rather than ``Secretary'' 
is the term used to refer to the official who heads FHA and in most 
cases, ``FHA'' will replace ``HUD'' to provide more specificity. In 
addition, in most cases, the term ``mortgagor'' will be changed to 
``borrower'' which will be defined in Sec.  206.3 to mean a mortgagor 
who is an original borrower under the Loan Agreement and Note, not 
including a borrower's successors and assigns. In most cases, the term 
``payment'' will be changed to ``disbursement''. These changes are 
designed to help bring consistency to the terminology used regarding 
the HECM program and eliminate confusion about the meaning of certain 
terms.
2. Substantive Changes to Regulations
Subpart A--General
Definitions (Sec.  206.3)
    Borrower. In order to distinguish borrowers from mortgagors, this 
rule proposes to add a definition of ``borrower'' to mean a mortgagor 
who is an original borrower under the HECM Loan Agreement and Note, not 
including a borrower's successors and assigns. Each borrower shall be 
on title, shall also be a mortgagor, and shall sign all applicable HECM 
loan documents.
    Borrower's Advance. The definition of ``Borrower's Advance'' 
originated in RMSA Mortgagee Letter 2014-11, and was subsequently 
updated in RMSA Mortgagee Letter 2014-21. Taken together, those RMSA 
mortgagee letters provided that ``Borrower's Advance'' means funds 
advanced to the borrower at the closing of a fixed interest rate HECM 
which may not exceed the greater of 60 percent of the principal limit; 
or Mandatory Obligations plus an additional 10 percent of the principal 
limit. In this rule, FHA proposes to codify a definition of 
``Borrower's Advance'' that does not include the actual calculation, 
which can more appropriately be found in the section regarding the 
calculation of payments, Sec.  206.25, such that the ``Borrower's 
Advance'' would be the funds advanced to the borrower at the closing of 
a fixed interest rate HECM. In this rule, FHA proposes to make changes 
to the calculation of the Borrower's Advance to allow the Commissioner 
flexibility in setting these amounts, but such changes are discussed 
later in this preamble in relation to Sec.  206.25.
    CMT Index. This proposed rule eliminates the definition of One-
month Constant Maturity Treasury (CMT) Index and instead adds a more 
general definition of CMT Index, since FHA's regulations also permit 
the use of the one-year CMT Index.
    Commissioner. This proposed rule adds a definition of 
``Commissioner'' to mean the Federal Housing Commissioner or the 
Commissioner's authorized representative, and as a result of this 
addition, eliminates the now unnecessary definition of ``Secretary''.
    Contract of insurance. FHA proposes to define ``contract of 
insurance'' instead of citing to 24 CFR 203.251(j), and proposes to 
amend the definition to specifically be applicable to FHA's part 206 
regulations such that ``contract of insurance'' means the agreement 
evidenced by the issuance of a Mortgage Insurance Certificate or by the 
endorsement of the Commissioner upon the credit instrument given in 
connection with an insured mortgage, incorporating by reference 
regulations in subpart C of this part and the applicable provisions of 
the NHA.
    Deferral Period. The term ``Deferral Period'' was introduced and 
defined in RMSA Mortgagee Letter 2014-07, and subsequently updated in 
RMSA Mortgagee Letter 2015-02. Taken together, those RMSA mortgagee 
letters provide that ``Deferral Period'' means the period of time 
following the death of the last surviving borrower during which the due 
and payable status of a HECM is deferred for an Eligible Non-Borrowing 
Spouse provided that the Qualifying Attributes and all other FHA 
requirements continue to be satisfied. FHA proposes to codify this 
definition.
    Eligible Non-Borrowing Spouse. The term ``Eligible Non-Borrowing 
Spouse'' was introduced in RMSA Mortgagee Letter 2015-02. ``Eligible 
Non-Borrowing Spouse'' means a Non-Borrowing Spouse who meets all 
Qualifying Attributes for a Deferral Period. FHA proposes to codify 
this definition.
    Estate planning service firm. This rule proposes to update the 
definition of ``estate planning service firm'' in Sec.  206.3 to 
conform to changes made to Sec.  206.41 which specify counseling 
requirements for Eligible and Ineligible Non-Borrowing Spouses. In 
addition, because participating agencies are approved under subpart B 
of 24 CFR part 214, not Sec.  206.41, this rule proposes to change 
references regarding the approval of participating agencies in Sec.  
206.41 to more accurately reflect the requirements of subpart B of 24 
CFR part 214.
    Expected average mortgage interest rate. ``Expected average 
mortgage interest rate'' is currently defined at Sec.  206.3 to mean 
the interest rate used to calculate the principal limit and the future 
disbursements to the borrower. RMSA Mortgagee Letter 2014-11 amended 
the definition of ``expected average mortgage interest rate'' for fixed 
interest rate HECMs to provide that the expected average mortgage 
interest rate is the same as the fixed mortgage (Note) interest rate 
and is set simultaneously with the fixed interest rate. This rule 
proposes to codify that amendment, and to also further amend the 
definition of ``expected average mortgage interest rate'' due to an 
inadvertent past error. On July 20, 2007, at 72 FR 40048, FHA published 
a final rule adding additional indices to adjust interest rates for 
FHA-insured single family mortgage loans, including HECM loans. The 
July 20, 2007, final rule inadvertently amended the definition in the 
HECM regulations of ``expected average mortgage interest rate'' to mean 
that the expected average mortgage interest rate is ``[e]stablished 
based on the date the initial loan is signed by the mortgagor.'' 
However, industry practice has been that the mortgagee may lock-in the 
expected average mortgage interest rate for HECMs at the time the 
initial loan application is signed by the borrower or prior to the date 
of closing. Locking in the expected average mortgage interest rate 
provides HECM borrowers with the comfort of knowing that the expected 
average mortgage interest rate cannot increase during the interest rate 
lock-in period and subsequently reduce the principal limit. FHA 
therefore proposes to amend the definition of ``expected average 
mortgage interest rate,'' to provide that the mortgagee, with the 
agreement of the borrower, may lock in the expected average mortgage 
interest rate prior to the date of loan closing or establish the 
expected average mortgage interest rate on the date of loan closing. In 
accordance with changes proposed to Sec.  206.21(b), if the expected 
average mortgage interest rate is locked in prior to closing, the 
margin on an adjustable interest rate loan is also locked in at the 
same time and is the difference between the expected average mortgage 
interest rate and the value of the appropriate index at the time of 
rate lock-in.
    First 12-Month Disbursement Period. This proposed rule codifies the 
definition of ``First 12-Month Disbursement Period'' from RMSA 
Mortgagee Letter 2014-21 to mean the

[[Page 31777]]

period beginning on the day of loan closing and ending on the day 
before the loan closing anniversary date. When the day before the 
anniversary date of loan closing falls on a Federally-observed holiday, 
Saturday, or Sunday, the end period will be on the next business day 
after the Federally-observed holiday, Saturday, or Sunday.
    HECM. This proposed rule adds a definition of ``HECM'' to mean a 
Home Equity Conversion Mortgage.
    HECM counselor. The current definition of ``Home Equity Conversion 
Mortgage (HECM) counselor'' in Sec.  206.3 defines a HECM counselor as 
an ``individual who provides statutorily required counseling to clients 
who may be eligible for or interested in obtaining an FHA-insured HECM 
. . .'' However, it has recently come to FHA's attention that 
interested parties may be providing counseling, and their financial 
relationship with prospective or current HECM borrowers or Non-
Borrowing Spouses may impact their provision of counseling services. In 
Sec.  206.3, FHA proposes to change the term ``Home Equity Conversion 
Mortgage (HECM) counselor'' to ``HECM counselor'', for simplicity, and 
to amend the definition to state, consistent with subsection 
255(d)(2)(B) of the NHA, that a HECM counselor must be an independent 
third-party that is currently active on FHA's HECM Counselor Roster and 
that is not, either directly or indirectly, associated with or 
compensated by, a party involved in originating, servicing, or funding 
the HECM, or the sale of annuities, investments, long-term care 
insurance or any other type of financial or insurance product.
    Ineligible Non-Borrowing Spouse. The term ``Ineligible Non-
Borrowing Spouse'' was introduced in RMSA Mortgagee Letter 2015-02 to 
mean a Non-Borrowing Spouse who does not meet all Qualifying Attributes 
for a Deferral Period. FHA proposes to codify this definition.
    Initial Disbursement Limit. The phrase ``Initial Disbursement 
Limit'' is defined in RMSA Mortgagee Letter 2014-21 to mean the maximum 
disbursement to a borrower of an adjustable interest rate HECM allowed 
at loan closing and during the First 12-Month Disbursement Period, 
which is the greater of 60 percent of the principal limit; or the sum 
of Mandatory Obligations and 10 percent of the principal limit. In this 
rule, FHA proposes to codify a definition of ``Initial Disbursement 
Limit'' that does not include the actual calculation, which can more 
appropriately be found in the section regarding the calculation of 
payments, Sec.  206.25, such that the ``Initial Disbursement Limit'' 
would be the maximum amount of funds that can be advanced to the 
borrower of an adjustable interest rate HECM at loan closing and during 
the First 12-Month Disbursement Period. FHA proposes to make changes to 
the calculation of the Initial Disbursement Limit to allow the 
Commissioner flexibility in setting the limit, but such changes are 
discussed later in the preamble in relation to Sec.  206.25.
    Loan documents. FHA currently defines ``mortgage'' to include the 
credit instrument, or Note, secured by the lien, and the loan 
agreement. In this rulemaking, FHA takes the opportunity to add a 
specific definition for ``loan documents'' which would include the 
credit instrument, or Note, secured by the lien, and the loan agreement 
because these documents are not actually the mortgage.
    Mandatory Obligations. The term ``Mandatory Obligations'' was 
defined in RMSA Mortgagee Letter 2014-21 as the fees and charges 
incurred in connection with the origination of the HECM that are 
requirements for loan approval or disbursements for a Repair Set Aside. 
In this rule, FHA proposes to clarify that Mandatory Obligations are 
fees and charges incurred in connection with the origination of the 
HECM that are requirements for loan approval and which will be paid 
either at closing or during the First 12-Month Disbursement Period in 
accordance with Sec.  206.25. In Sec.  206.25, as discussed later in 
this preamble, FHA proposes to codify the lists of Mandatory 
Obligations from RMSA Mortgagee Letter 2014-21, but also proposes to 
amend the lists to give the Commissioner the flexibility to include, as 
Mandatory Obligations, other charges or fees established through 
notice.\17\
---------------------------------------------------------------------------

    \17\ The term ``notice'' includes mortgagee letters and other 
forms of written notice, unless otherwise specified.
---------------------------------------------------------------------------

    Maximum claim amount. The ``maximum claim amount'' is currently 
defined in Sec.  206.3 as the lesser of the appraised value of the 
property, as determined by the appraisal used in underwriting the loan, 
or the maximum dollar amount for an area established by the Secretary 
for a one-family residence under subsection 203(b)(2) of the NHA, as 
adjusted where applicable under section 214 of the NHA, as of the date 
of loan closing. In this rule, FHA proposes to instead reference 
subsections 255(g) and (m) of the NHA because section 255 of the NHA 
contains the statutory requirements of the HECM program. FHA also 
proposes to include, as an option for determining the maximum claim 
amount, the sales price of the property being purchased for the sole 
purpose of being the principal residence, such that the ``maximum claim 
amount'' means the lesser of the appraised value of the property, the 
sales price of the property, or the national mortgage limit, which is 
consistent with the maximum claim amount calculation in HERA Mortgagee 
Letter 2009-11.
    MIP. FHA proposes to amend the definition of ``MIP'' in Sec.  206.3 
to replace the cross-cite to 24 CFR 203.251(k) with the actual 
definition, such that ``MIP'' means the mortgage insurance premium paid 
by the mortgagee to the Commissioner in consideration of the contract 
of insurance.
    Mortgage. In an effort to provide greater clarity, FHA proposes to 
remove the last sentence in the definition of ``mortgage'' in Sec.  
206.3. The loan documents which are not actually the mortgage will be 
more appropriately defined under a new definition of ``loan documents'' 
and FHA will eliminate the unnecessary and partially inaccurate 
reference to the parties to the loan agreement.
    Mortgagee. FHA proposes to amend the definition of ``mortgagee'' in 
Sec.  206.3 to replace the reference to subsection 255(b)(2) of the NHA 
with the actual definition, such that ``mortgagee'' means the original 
lender under a mortgage and its successors and assigns, as are approved 
by the Commissioner.
    Mortgagor. In order to distinguish HECM mortgagors from HECM 
borrowers, FHA proposes to clarify the definition of a HECM 
``mortgagor'' in Sec.  206.3 to mean each original HECM mortgagor under 
a HECM and his heirs, executors, administrators and assigns. HECM 
mortgagors also include non-borrowing owners who are on title to the 
property and, consequently, must sign the HECM Mortgage but do not sign 
the HECM Note or Loan Agreement, and therefore are not borrowers. A 
Non-Borrowing Spouse may or may not be a mortgagor; for example, in a 
community property state, a Non-Borrowing Spouse will always be a 
mortgagor.
    Non-Borrowing Spouse. The term ``Non-Borrowing Spouse'' was 
introduced in RMSA Mortgagee Letter 2014-07 and means the spouse, as 
defined by the law of the state in which the spouse and borrower reside 
or the state of celebration, of the HECM borrower at the time of 
closing and who is also not a borrower. FHA proposes to codify this 
definition.
    Participating agency. FHA proposes to use the term ``participating 
agency'' in Sec.  206.302 and in the definition of ``estate planning 
service firm'' in

[[Page 31778]]

Sec.  206.3, and therefore proposes to provide a definition for the 
term in Sec.  206.3. The definition would mirror the definition in the 
Housing Counseling regulations at Sec.  214.3, such that 
``participating agency'' means all housing counseling and intermediary 
organizations participating in HUD's Housing Counseling program, 
including HUD-approved agencies, and affiliates and branches of HUD-
approved intermediaries, HUD-approved multi-state organizations (MSOs), 
and state housing finance agencies.
    Principal limit. FHA proposes to update the definition of 
``principal limit'' to reflect the changes made in RMSA Mortgagee 
Letters 2014-07 and 2015-02 regarding Non-Borrowing Spouses, and in 
RMSA Mortgagee Letter 2014-11 regarding the changes made to the fixed 
interest rate product, as well as new changes discussed below. 
``Principal limit'' would be amended to mean the maximum amount 
calculated by taking into account the age of the youngest borrower or 
Eligible Non-Borrowing Spouse, the expected average mortgage interest 
rate, and the maximum claim amount. Because individual principal limit 
factors are published, FHA proposes to eliminate the sentence stating 
that a person who is over the age of 95 will be treated as though he is 
95 for the purposes of calculating the principal limit. However, in 
order to eliminate this sentence in Sec.  206.3 and not impact the 
formula for the calculation of tenure payments in Sec.  206.25(f), FHA 
proposes to make clear in Sec.  206.25(f) that in calculating tenure 
payments for a borrower over the age of 95, the age of 95 will be used. 
In addition, the current regulatory definition states that the 
principal limit increases each month at a rate equal to one-twelfth of 
the mortgage interest rate in effect at that time, plus one-twelfth of 
one-half percent per annum. FHA proposes to amend this calculation such 
that the principal limit increases each month at a rate equal to one-
twelfth of the mortgage interest rate in effect at that time, plus one-
twelfth of the annual mortgage insurance rate, so that a regulatory 
change is not necessary if the Commissioner changes the annual MIP, 
which the Commissioner may do through notice under existing authority. 
As stated in RMSA Mortgagee Letter 2014-11, for adjustable interest 
rate HECMs, the increase in principal limit may be made available to 
the borrower each month, except that there may be restrictions on draws 
during the First-12 Month Disbursement Period; for fixed interest rate 
HECMs, although the principal limit will continue to increase at the 
rate established by the Commissioner, the funds will not be available 
for the borrower to draw against after loan closing.
    Principal residence. The definition of ``principal residence'' was 
amended in RMSA Mortgagee Letter 2014-07 to account for changes made 
regarding Non-Borrowing Spouses, and is being further amended in this 
proposed rule to account for additional changes made in RMSA Mortgagee 
Letter 2015-02 which introduced the concepts of Eligible and Ineligible 
Non-Borrowing Spouses. ``Principal residence'' will be amended to mean 
the dwelling where the borrower and, if applicable, Non-Borrowing 
Spouse, maintains his permanent place of abode, and typically spends 
the majority of the calendar year. Content from Sec.  206.39 that 
addresses a borrower who is in a health care institution, as clarified 
in RMSA Mortgagee Letter 2014-07, has been moved to the definition of 
``principal residence'' in Sec.  206.3. The definition of ``principal 
residence'' will also cover a Non-Borrowing Spouse who is temporarily 
in a health care institution provided certain conditions are met. In 
addition, during a Deferral Period, the property shall continue to be 
considered the principal residence of any Eligible Non-Borrowing Spouse 
who is temporarily in a health care institution, provided certain 
conditions are met.
    Property charges. The term ``property charges'' was defined in RMSA 
Mortgagee Letter 2014-21, and FHA proposes to codify that definition 
with only slight revisions, to mean the obligations of the borrower 
that are, unless otherwise specified, defined as property taxes, hazard 
insurance premiums, any applicable flood insurance premiums, ground 
rents, condominium fees, planned unit development fees, homeowners 
association fees, any other special assessments that may be levied by 
municipalities or state law, and utilities. While RMSA Mortgagee Letter 
2014-21 did not include utilities in the definition of ``property 
charges,'' FHA proposes to include utilities as a borrower 
responsibility. FHA has experienced situations where borrowers have not 
paid utilities, and as a result, large liens for utilities are placed 
on the property. When FHA pays the insurance claim on the property, FHA 
reimburses the mortgagee for the utility lien amount. Failure to pay 
utilities that result in a lien against the property would potentially 
trigger a due and payable event. By expressly including these utilities 
as borrower responsibilities, FHA is limiting reimbursement of such 
expenses.
    Qualifying Attributes. The term ``Qualifying Attributes'' was 
introduced in RMSA Mortgagee Letter 2014-07. FHA proposes to amend the 
definition of ``Qualifying Attributes'' to fit with additional program 
changes introduced in RMSA Mortgagee Letter 2015-02, to mean the 
requirements which must be met by a Non-Borrowing Spouse in order to be 
an Eligible Non-Borrowing Spouse.
Preemption (Sec.  206.8)
    In this rule, FHA proposes to add counseling charges as an example 
of loan advances to be included in the amount secured by the mortgage, 
and FHA also proposes to condense some previously listed examples that 
meet the definition of ``property charges'', as newly defined in Sec.  
206.3.
Subpart B--Eligibility; Endorsement
Disclosure of Available HECM Program Options (Sec.  206.13)
    Section 206.17 allows mortgagees to provide all payment plan 
options and fixed and adjustable interest rate mortgages to HECM 
borrowers. Section 206.43(a) requires mortgagees to disclose the costs 
of obtaining the mortgage, and provide a Good Faith Estimate and other 
applicable Truth in Lending disclosures to the borrower so the borrower 
has knowledge of which charges are, and which charges are not, required 
to obtain the mortgage.
    For several years, the fees and charges associated with reverse 
mortgages have been structured to allow the borrower to benefit in a 
manner of their choosing by selecting from various HECM products. 
However, the volume of adjustable interest rate HECMs declined to 
approximately 30 percent of the total HECMs endorsed for insurance 
during 2010-2012. On June 28, 2012, the Consumer Financial Protection 
Bureau (CFPB) published its ``Reverse Mortgages Report to 
Congress'',\18\ which revealed the practice of many mortgagees failing 
to inform borrowers of the availability and benefits of adjustable 
interest rate mortgages.
---------------------------------------------------------------------------

    \18\ See https://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
---------------------------------------------------------------------------

    In response to these concerns, this rule proposes to add Sec.  
206.13, which would require that mortgagees inform potential HECM 
borrowers of all of the HECM products, features and options that FHA 
insures, in a manner acceptable to the Commissioner, irrespective of 
the particular HECM products offered by the mortgagee,

[[Page 31779]]

including (1) fixed interest rate mortgages with the Single Lump Sum 
payment option; (2) adjustable interest rate mortgages with tenure, 
term, and line of credit disbursement options, or a combination of 
these disbursement options; (3) any other disbursement options that FHA 
will insure; and (4) initial mortgage insurance premium options, and 
how those affect the availability of other mortgage and disbursement 
options. This regulatory change is designed to provide a balanced 
approach in educating and equipping borrowers with the information 
needed to determine which options will best meet their short- and long-
term goals, as well as their financial capacity.
Insurance (Sec.  206.15)
    It has come to FHA's attention that the last sentence in Sec.  
206.15, which currently states, ``The mortgagee shall execute for the 
Secretary the loan agreement included in the term `mortgage' as defined 
in Sec.  206.3,'' may result in confusion regarding FHA's role in the 
loan agreement. The loan agreement has been, and continues to be, an 
agreement between the borrower and the mortgagee. FHA is taking the 
opportunity provided by this rulemaking to eliminate any potential 
confusion caused by the language in Sec.  206.15 regarding the 
execution of the loan agreement by removing the last sentence in this 
section.
    In addition, because the Lender Insurance program is currently 
unavailable for the HECM program, FHA proposes to remove reference to 
the Lender Insurance program in Sec.  206.15 at this time.
Eligible Mortgages: General (Sec.  206.17)
    In RMSA Mortgagee Letter 2013-27,\19\ FHA introduced the Single 
Lump Sum payment option as a payment option for fixed and adjustable 
interest rate HECMs. In RMSA Mortgagee Letter 2014-11, however, FHA 
limited fixed interest rate HECMs to the Single Lump Sum payment 
option, and prohibited adjustable interest rate HECMs from using the 
Single Lump Sum payment option. These changes require FHA to amend 
Sec.  206.17 to bring it into alignment with the current HECM program 
requirements. Because the payment options are now dependent upon the 
type of interest rate, FHA proposes to merge the content of current 
paragraphs (a) and (b) into one paragraph (b), while reserving 
paragraph (a). The new paragraph (b) would further specify that fixed 
interest rate HECMs must use the Single Lump Sum payment option, and 
that adjustable interest rate HECMs must provide for the term, tenure, 
line of credit, modified term or modified tenure payment options.
---------------------------------------------------------------------------

    \19\ Mortgagee Letter 2013-27 was later superseded by Mortgagee 
Letter 2014-21, but the applicable policy change which this rule 
proposes to codify was announced in Mortgagee Letter 2014-11, prior 
to the publication of Mortgagee Letter 2014-21.
---------------------------------------------------------------------------

Payment Options (Sec.  206.19)
    Current Sec.  206.19 describes term, tenure and line of credit 
payment options. FHA proposes to amend this section by also including 
descriptions of the Single Lump Sum, modified term and modified tenure 
payment options. As mentioned above, the Single Lump Sum payment option 
was first introduced in RMSA Mortgagee Letter 2013-27, and then 
subsequently discussed and limited to fixed interest rate HECMs in RMSA 
Mortgagee Letter 2014-11. FHA proposes to codify the description and 
requirements of the Single Lump Sum payment option in Sec.  206.19. 
Sections 206.17 and 206.25 currently provide for modified term or 
modified tenure payment options, but Sec.  206.19 did not previously 
describe the modified term or modified tenure payment options by 
themselves; they were listed as a subparagraph of paragraph (d), which 
discusses principal limit set asides. When a portion of the principal 
limit is set aside to be drawn down as a line of credit, such ``set 
aside'' is more appropriately characterized as a payment option 
(modified term or modified tenure payment option) than as a principal 
limit set aside, so FHA proposes to update Sec.  206.19 accordingly in 
this rulemaking.
    FHA also proposes to amend current paragraph (d) (proposed 
paragraph (f)) to reflect changes made to FHA's principal limit set 
aside policies. The LESA was first introduced in RMSA Mortgagee Letter 
2013-27, but, after considering public comments, the LESA was 
substantially revised through RMSA Mortgagee Letter 2014-21. The LESA 
is discussed in more detail later in this preamble, as FHA proposes to 
codify its requirements in Sec.  206.205, but FHA proposes to also 
amend Sec.  206.19 to reflect that when required by FHA's regulations 
in Sec.  206.205, or selected by the borrower in accordance with Sec.  
206.205, the mortgagee shall set aside a portion of the principal limit 
in a LESA to be used to pay certain property taxes, including special 
assessments levied by municipalities or state law, and flood and hazard 
insurance premiums. In addition, when the borrower has an adjustable 
interest rate HECM and is not required to have a LESA, the borrower may 
elect to have the mortgagee pay property charges.
    In this section, FHA also proposes to codify requirements announced 
in RMSA Mortgagee Letters 2014-11 and 2014-21 regarding the limitation 
on disbursements during the First 12-Month Disbursement Period. Under 
these RMSA mortgagee letters, disbursements may not be made during the 
First 12-Month Disbursement Period in excess of the Initial 
Disbursement Limit or the Borrower's Advance, as applicable. In this 
rule, however, FHA is requesting public comment regarding exceptions to 
this limitation. While FHA's intent of limiting draws during the first 
12 months of the HECM was to ensure that funds remained available to 
borrowers over time and were available when borrowers needed them, FHA 
recognizes that there may be some limited circumstances, such as 
medical emergencies or death of a loved one, which may necessitate 
allowing draws beyond the established limits.
    FHA specifically requests public comment on the following 
questions:
    (1) What types of medical emergencies or other circumstances may 
result in exceptions to the draw limits during the First 12-Month 
Disbursement Period, such as hospice care, illness requiring extensive 
therapy (e.g., chemotherapy, dialysis, physical therapy), terminal 
medical conditions, serious illness, and catastrophic accidents 
resulting in incapacitation of the borrower or death of a spouse?
    (2) What kind of documentation should be required to support the 
anticipated or actual financial impact of such exigent circumstances?
    Finally, in new Sec.  206.19(h), which incorporates the contents of 
current paragraph (f), FHA proposes to clarify the policy announced in 
RMSA Mortgagee Letter 2014-21 regarding partial repayment for term, 
tenure, line of credit, modified term and modified tenure payment 
options in paragraph (h)(2). RMSA Mortgagee Letter 2014-21 states that 
if a borrower makes a partial repayment of the outstanding loan balance 
during the First 12-Month Disbursement Period, the mortgagee must 
increase the available principal limit by the amount applied toward the 
outstanding loan balance, up to an amount not to exceed the Initial 
Disbursement Limit or the principal limit, as applicable. FHA proposes 
to clarify that any partial repayment shall be applied in accordance 
with the terms contained in the Note. Similarly, in Sec.  206.19(h)(3), 
FHA proposes to clarify that for the Single Lump Sum payment option, if 
the borrower makes a partial repayment of the outstanding loan

[[Page 31780]]

balance any time after loan closing and before the contract of 
insurance is terminated, the mortgagee shall apply the funds in 
accordance with the terms contained in the Note, but that any resulting 
increase in the principal limit shall not be available for the borrower 
to draw against.
Interest Rate (Sec.  206.21)
    Section 206.21 provides requirements related to fixed and 
adjustable interest rate HECMs, including disclosure requirements. As 
discussed earlier in this preamble in the discussion of the definition 
of ``expected average mortgage interest rate'' in Sec.  206.3, FHA 
proposes to amend paragraph Sec.  206.21(b), which applies to 
adjustable interest rate HECMs, to make conforming changes consistent 
with the proposed changes to that definition, which would allow for the 
interest rate to be locked-in prior to closing. If the interest rate 
was locked-in prior to closing, then amended Sec.  206.21(b) would 
provide that the margin used to determine interest rate adjustments is 
the difference between the expected average mortgage interest rate and 
the value of the appropriate index at the time of rate lock-in.
    Current regulations at Sec.  206.21(b) provide that for annual 
adjustable interest rate HECMs, periodic interest rate increases and 
decreases are capped at two percentage points and there is a five or 
six percentage point cap over the life of the loan, depending on 
whether the loan is a one- or three-year adjustable rate mortgage (five 
percentage point cap) or a five-, seven-, or ten-year adjustable rate 
mortgage (six percentage point cap). These caps, although modeled after 
Sec.  203.49, vary from the levels set in Sec.  203.49. FHA proposes to 
remove reference to three-, five-, seven-, and ten-year adjustable 
interest rate HECMs because FHA only offers to insure one-year annual 
adjustable interest rate HECMs and monthly adjustable interest rate 
HECMs.
    FHA also proposes to amend the cap level on one-year annual 
adjustable rate HECMs to more closely align with those of forward 
mortgages and to provide enhanced interest rate protection for 
borrowers. As such, FHA proposes that for the annual adjustable 
interest rate mortgages, periodic interest rate increases and decreases 
are capped at one percentage point and there is a five percentage point 
cap over the life of the loan.
    Section 206.21(b)(2) permits mortgagees who offer an annual 
adjustable interest rate mortgage the opportunity to offer a monthly 
adjustable interest rate mortgage using the Constant Maturity Treasury 
(CMT) or London Interbank Offer Rate (LIBOR) interest rate index 
without defining the rate of change that can occur during a 12-month 
cycle or over the life to the loan. A similar limit on lifetime 
interest rate adjustments for monthly adjustable interest rate HECMs 
would reduce risk to the borrower and the MMIF by reducing potential 
principal balance growth, and providing access to additional funds for 
the borrower. Therefore, this proposal revises Sec.  206.21(b)(2) to 
provide that adjustments to the mortgage interest rate over the entire 
term of the monthly adjustable interest rate HECM may not result in a 
change in either direction from the initial contract interest rate of 
more than five percentage points.
    In addition, in Sec.  206.21(b), FHA references regulations in 
Sec.  203.49. Specifically in Sec.  206.21(b)(2), FHA references an 
``index as provided in Sec.  203.49(a), (b), and (f)(1).'' To provide 
greater clarity, FHA proposes to restate these requirements in FHA's 
part 206 regulations, as applicable to the HECM program, instead of 
cross-referencing to other parts of FHA's regulations.
    Finally, in Sec.  206.21(c), which pertains to pre-loan disclosures 
as related to interest rates, FHA proposes to make very minor changes 
to further clarify FHA's regulation and to update its reference to 
Truth in Lending disclosures, which are now codified at 12 CFR part 
1026.
Shared Appreciation (Sec.  206.23)
    FHA seeks public comment on the utility of FHA's shared 
appreciation regulation. Specifically, FHA requests comment on the 
following questions: Do mortgagees have an interest in offering this 
program or if there is little or no interest, should HUD remove it from 
the regulations?
Calculation of Disbursements (Sec.  206.25)
    Sections 206.25, titled ``Calculation of payments'', and 206.29, 
titled ``Initial disbursement of mortgage proceeds'' of FHA's current 
regulations contain similar content and FHA would like to take the 
opportunity provided by this rulemaking to streamline these sections by 
moving content of Sec.  206.29 into Sec.  206.25(d) as applicable, and 
removing Sec.  206.29. Specifically, FHA proposes to add a new 
paragraph (d) which provides that mortgage proceeds may not be 
disbursed until closing or after the expiration of the 3-day rescission 
period under 12 CFR part 1026, if applicable. Items that were 
previously listed as exceptions to the prohibition on disbursements are 
now covered as Mandatory Obligations. The remaining paragraphs in Sec.  
206.25 will be renumbered.
    FHA also proposes to make other changes to Sec.  206.25, including 
codifying program changes implemented through RMSA mortgagee letters 
and making related programmatic changes, as discussed below in this 
preamble.
    FHA implemented changes to the maximum initial disbursement 
available to borrowers in RMSA Mortgagee Letter 2014-21. The Initial 
Disbursement Limit is applicable to all adjustable interest rate HECMs 
and is the maximum disbursement allowed to a borrower at loan closing 
and during the First 12-Month Disbursement Period. In RMSA Mortgagee 
Letter 2014-21, the Initial Disbursement Limit was set at the greater 
of 60 percent of the principal limit; or the sum of Mandatory 
Obligations and 10 percent of the principal limit. In this rule, FHA 
proposes to revise this formula to allow the Commissioner flexibility 
in setting these limits, such that the Initial Disbursement Limit shall 
not exceed the lesser of: (1) The greater of an amount established by 
the Commissioner through notice which shall not be less than 50 percent 
of the principal limit; or the sum of Mandatory Obligations and a 
percentage of the principal limit established by the Commissioner 
through notice which shall not be less than 10 percent; or (2) the 
principal limit less the sum of the funds in the LESA for payment 
beyond the First 12-Month Disbursement Period and the Servicing Fee Set 
Aside. While FHA does not intend to change the current amounts at this 
time, which are set at 60 percent and 10 percent, respectively, this 
change is necessary for FHA to have the flexibility to raise or lower 
these amounts to meet the operational goals of the MMIF and respond to 
future market changes or other factors as necessary.
    In addition, while it is FHA's current policy that the amount drawn 
at any point in time and over time may not exceed the available 
principal limit, FHA's new language makes clear that the Initial 
Disbursement Limit may never exceed the amount of the principal limit 
remaining after the funds in the LESA for payment beyond the First 12-
Month Disbursement Period and the Servicing Fee Set Aside are 
subtracted; the funds in these set asides are not available to the 
borrower. If the greater of the percentage of the principal limit 
established by the Commissioner or Mandatory Obligations plus a 
percentage of the principal limit established by the Commissioner 
exceeds the amount of the principal limit available to the borrower, 
the

[[Page 31781]]

borrower may only receive the amount of the principal limit available.
    FHA also proposes to clarify that if the borrower draws or will 
draw an additional percentage beyond Mandatory Obligations in 
accordance with the Initial Disbursement Limit calculation in Sec.  
206.25(a)(1), the borrower must notify the mortgagee at closing of the 
exact amount of the additional percentage of the principal limit that 
the borrower will draw or that the borrower wants to have available for 
future draws during the First 12-Month Disbursement Period, and that 
such election cannot be increased or decreased after closing. The 
amount drawn impacts the initial MIP amount, so it is particularly 
important for borrowers and mortgagees to know if the amount the 
borrower elects to withdraw during the First 12-Month Disbursement 
Period will exceed the lesser MIP threshold.
    The Borrower's Advance is applicable to all fixed interest rate 
HECMs and is calculated using the same formula as the Initial 
Disbursement Limit. In this rule, FHA proposes to make the same changes 
to the calculation of the Borrower's Advance, such that the Borrower's 
Advance shall not exceed the lesser of: (1) The greater of an amount 
established by the Commissioner through notice which shall not be less 
than 50 percent of the principal limit; or the sum of Mandatory 
Obligations and a percentage of the principal limit established by the 
Commissioner through notice which shall not be less than 10 percent; or 
(2) the principal limit less the sum of the funds in the LESA for 
payment beyond the First 12-Month Disbursement Period and the Servicing 
Fee Set Aside. While FHA does not intend to change the current amounts 
at this time, which are set at 60 percent and 10 percent, respectively, 
this change is necessary for FHA to have the flexibility to raise or 
lower these amounts to meet the operational goals of the MMIF and to 
respond to future market changes or other factors as necessary.
    In addition, while it is FHA's current policy that the amount drawn 
at any point in time and over time may not exceed the available 
principal limit, FHA's new language makes clear that the Borrower's 
Advance may never exceed the amount of the principal limit remaining 
after the funds in the LESA for payment beyond the First 12-Month 
Disbursement Period and the Servicing Fee Set Aside are subtracted; the 
funds in these set asides are not available to the borrower. If the 
greater of the percentage of the principal limit established by the 
Commissioner or Mandatory Obligations plus a percentage of the 
principal limit established by the Commissioner exceeds the amount of 
the principal limit available to the borrower, the borrower may only 
receive the amount of the principal limit available.
    FHA also proposes to clarify that if the borrower draws or will 
draw an additional percentage beyond Mandatory Obligations in 
accordance with the Borrower's Advance calculation in Sec.  
206.25(a)(2), the borrower must notify the mortgagee at closing of the 
exact amount of the additional percentage of the principal limit that 
the borrower will draw at closing, and that such election cannot be 
increased or decreased after closing. The amount drawn impacts the 
initial MIP amount, so it is particularly important for borrowers and 
mortgagees to know if the amount the borrower elects to withdraw at 
closing will exceed the lesser MIP threshold.
    Mandatory Obligations for traditional, refinance and purchase 
transactions were listed in RMSA Mortgagee Letter 2014-21. In this 
rule, FHA proposes to codify those lists in Sec.  206.25(b) and Sec.  
206.25(c), but also proposes to add flood certifications to the lists, 
which was inadvertently excluded from the lists in RMSA Mortgagee 
Letter 2014-21.
    FHA proposes to make conforming changes to the term, tenure and 
line of credit paragraphs, and proposes to codify changes made to these 
payment options in RMSA Mortgagee Letters 2014-07 and 2014-21, 
including the requirement that the sum of disbursements made during the 
First 12-Month Disbursement Period may not exceed the Initial 
Disbursement Limit or Borrower's Advance, as applicable. Consistent 
with changes proposed to Sec.  206.19(h) regarding disbursement limits, 
FHA also proposes to amend Sec.  206.25 to provide the Commissioner 
with flexibility to allow disbursements during the First 12-Month 
Disbursement Period to exceed the Initial Disbursement Limit. Further, 
FHA clarifies that at the end of the First 12-Month Disbursement 
Period, the borrower may request a payment plan change or merely a 
recalculation of the current payment plan.
    In Sec.  206.25, FHA also proposes to add a new paragraph (h) to 
describe the Single Lump Sum payment option and codify the requirements 
for this payment option, as set out in RMSA Mortgagee Letter 2014-21. 
Although the name has slightly changed from the ``Single Lump Sum 
Disbursement'' payment option to the ``Single Lump Sum'' payment 
option, the requirements set out in the RMSA mortgagee letter are 
unchanged.
    Finally, FHA proposes to slightly amend current paragraph (e) 
titled ``Payment of MIP and interest,'' which will be renamed paragraph 
(i), to provide greater clarity around the timing of when the MIP is 
due.
Change in Payment Option (Sec.  206.26)
    Section 206.26 allows the borrower to request a change in payment 
option, provided certain conditions are met. Changes implemented by 
RMSA Mortgagee Letters 2014-11 and 2014-21 impacted the conditions 
under which a payment plan change is permitted, and FHA proposes to 
codify those changes in Sec.  206.26.
    RMSA Mortgagee Letter 2014-11 instituted limits on the fixed 
interest rate product, such that fixed interest rate HECMs are only 
eligible for the Single Lump Sum payment option. Multiple draws are not 
permitted under this option, and therefore borrowers with fixed 
interest rate HECMs may not request a change in payment option. 
Adjustable interest rate HECMs, on the other hand, are eligible for 
payment option changes. However, during the First 12-Month Disbursement 
Period, payment option changes which would cause disbursements to 
exceed the Initial Disbursement Limit are not permissible. At the end 
of the First 12-Month Disbursement Period, borrowers may request a 
recalculation of their current payment option, or may change to any 
other permissible payment option.
    Together, RMSA Mortgagee Letters 2014-11 and 2014-21 also provide 
that for adjustable interest rate HECMs, when repairs are completed 
without using all of the Repair Set Aside, the mortgagee must transfer 
the remaining funds available in the Repair Set Aside to a line of 
credit. In this rule, FHA proposes to include the option to transfer 
the remaining funds to a modified term or modified tenure payment 
option in order to provide borrowers with more options when they have 
an existing term or tenure payment option and there are funds left in 
the Repair Set Aside that the mortgagee needs to transfer to them. For 
fixed interest rate HECMs, on the other hand, unused funds in the 
Repair Set Aside may not be provided to the borrower, except that the 
borrower may be able to be reimbursed for repair materials purchased by 
the borrower (but not for labor provided by the borrower).
Mortgage Provisions (Sec.  206.27)
    RMSA Mortgagee Letter 2014-07, as amended by RMSA Mortgagee Letter

[[Page 31782]]

2015-02, requires the mortgage to include provisions deferring the due 
and payable status that occurs as a result of the death of the last 
surviving borrower, for an Eligible Non-Borrowing Spouse, and 
prohibiting the continuation of payments under the reverse mortgage 
during a Deferral Period. FHA proposes to codify these requirements in 
Sec.  206.27(b).
    Section 206.27(b)(2) currently requires the borrower to maintain 
hazard insurance on the property in an amount acceptable to the 
Secretary and the mortgagee. FHA proposes to add more specificity to 
this provision to remove the potential risk of litigation related to 
hazard insurance coverage. Specifically, FHA proposes to require the 
borrower to insure all improvements on the property that serves as 
collateral for the HECM whether now in existence or subsequently 
erected, against any hazards, casualties, and contingencies, including 
but not limited to fire and flood, for which the mortgagee requires 
insurance. FHA also proposes to provide that such insurance shall be 
maintained in the amount, and for the period of time, that are 
necessary to protect the mortgagee's investment. Whether or not the 
mortgagee imposes a flood insurance requirement, FHA proposes to 
require the borrower to, at a minimum, insure all improvements on the 
property, whether now in existence or subsequently erected, against 
loss by floods to the extent required by the Commissioner. If the 
mortgagee imposes insurance requirements, all insurance would be 
required to be carried with companies acceptable to the mortgagee, and 
the insurance policies and any renewals would be required to be held by 
the mortgagee and include loss payable clauses in favor of and in a 
form acceptable to the mortgagee.
    Section 206.27(b)(6) currently requires the borrower to pay taxes, 
hazard insurance premiums, ground rents and assessments in a timely 
manner. As a result of changes made to property charge payment 
requirements in RMSA Mortgagee Letter 2014-21, FHA proposes to amend 
this paragraph to require that the borrower provide for the payment of 
property charges in accordance with Sec.  206.205. This will cover 
circumstances in which property charges are paid from a LESA, where a 
borrower elects to have the mortgagee pay the property charges, or 
where a borrower pays property charges. A discussion of the property 
charge payment requirements can be found later in the preamble.
    Section 206.27(c) lists the conditions which cause the HECM to 
become due and payable, which include when the borrower dies and the 
property is not the principal residence of at least one surviving 
borrower. As mentioned above, RMSA Mortgagee Letters 2014-07 and 2015-
02 provide for a deferral of the due and payable status upon the death 
of the last surviving borrower where there is an Eligible Non-Borrowing 
Spouse. Therefore, it is necessary to amend Sec.  206.27(c) to provide 
an exception that defers the due and payable status if the requirements 
of the Deferral Period are met.
    Another condition which may result in the HECM becoming due and 
payable is when the borrower does not pay property charges as required 
by the mortgage and Sec.  206.205. This specific situation has always 
been captured under the current provision in Sec.  206.27(c)(2)(iii), 
which provides that the outstanding loan balance is due and payable 
upon HUD-approval when an obligation of the borrower under the mortgage 
is not performed. Due to an increase in property charge defaults, 
however, FHA proposes to specifically and clearly articulate that the 
borrower's non-payment of property charges in accordance with Sec.  
206.205 is a condition which can cause the HECM to become due and 
payable with the approval of the Commissioner.
    Finally, Sec.  206.27(d) discusses second mortgages. This section 
requires that unless otherwise provided, a second mortgage must be 
given to HUD before a Mortgage Insurance Certificate is issued. Where 
the Commissioner elects to not require a second mortgage prior to the 
issuance of a Mortgage Insurance Certificate, it is important that FHA 
is still able to protect its security interest; therefore, FHA proposes 
to allow the Commissioner to require a second mortgage at a later date 
when not required prior to issuance of the Mortgage Insurance 
Certificate. RMSA Mortgagee Letter 2014-11 changed the structure of the 
fixed interest rate product to allow only a single disbursement and 
eliminated the need for fixed interest rate HECMs to have a second 
mortgage. FHA does not need to codify this policy because it is covered 
under the language ``unless otherwise provided'' in the current 
regulation.
Allowable Charges and Fees (Sec.  206.31)
    Current section 206.31(a)(1) permits loan origination fees and 
allows the Secretary to establish fee limits. However, in 2008, HERA 
established limits on the loan origination fee that may be charged for 
HECMs, such that the loan origination fee limit is the greater of 
$2,500 or two percent of the maximum claim amount of the mortgage, up 
to a maximum claim amount of $200,000, plus one percent of any portion 
of the maximum claim amount that is greater than $200,000; and the 
total amount of the loan origination fee may not exceed $6,000. FHA 
implemented these limits through HERA Mortgagee Letter 2008-34 and in 
this rule, FHA proposes to codify these limits in Sec.  206.31(a)(1). 
FHA also proposes to clarify that such loan origination fee includes 
expenses incurred in originating, processing and closing the HECM.
    Current section 206.31(a)(1) also prohibits borrowers from paying 
any origination fees in addition to those that are permitted to be paid 
to the mortgagee (which includes amounts paid by a mortgagee to a 
mortgage broker or sponsored third-party originator). This paragraph 
permits a mortgage broker's fee to be included as part of the 
origination fee if the mortgage broker was engaged independently by the 
borrower and there is no financial interest between the mortgage broker 
and the mortgagee. This provision has caused significant confusion, and 
to address that confusion, FHA proposes to amend Sec.  206.31(a)(1) to 
clarify that the prohibition is on additional fees paid by a borrower 
beyond the loan origination fee limit, and does not prohibit the 
provision of compensation to a sponsored third-party originator by a 
mortgagee.
No Outstanding Unpaid Obligations (Sec.  206.32)
    FHA proposes to amend this section to make conforming changes that 
correspond with the introduction of Mandatory Obligations in RMSA 
Mortgagee Letter 2014-21. Pursuant to RMSA Mortgagee Letter 2014-21, 
initial Repair Set Asides to pay for repairs where the need for repairs 
was discovered prior to or at closing are considered Mandatory 
Obligations and are included in the initial disbursement. Therefore, 
they should not be included as an exception in this section.
Age of Borrower (Sec.  206.33)
    Section 206.33 requires the youngest borrower to be at least 62 
year of age at the time the mortgagee submits the application for 
insurance. FHA finds that it is unnecessary for the youngest borrower 
to be 62 at the loan application stage, and instead proposes to require 
that the youngest borrower be at least 62 years of age at the time of 
loan closing which will insure compliance with the statutory 
requirement that the borrower be 62 at endorsement.

[[Page 31783]]

Limitation on Number of Mortgages (Sec.  206.34)
    Permitting multiple HECMs at one time is contrary to the intent of 
the program to insure the property which serves as the borrower's 
primary residence. FHA is taking the opportunity afforded by this rule 
to clarify policy in this regard. The proposed rule adds a new Sec.  
206.34, which states that once a borrower has obtained an insured HECM, 
the borrower may not close on another HECM unless the existing insured 
mortgage is satisfied at, or prior to, closing, except for cases of 
divorce where an ex-spouse, who had previously jointly obtained a HECM 
with their ex-spouse, has relinquished title as evidenced by a recorded 
deed.
    FHA believes that the final divorce decree and the recorded quit 
claim, or its equivalent, are considered the only legal acknowledgement 
of transfer, but FHA is seeking feedback on the following question: 
What additional forms of documentation should be considered to confirm 
that an ex-spouse has been removed from the existing loan and has no 
financial obligation?
    In addition, FHA intends the prohibition on closing another HECM 
unless the existing insured mortgage is satisfied to mean, in the case 
of a deed in lieu on an existing HECM where a borrower seeks to obtain 
a new HECM, the deed in lieu must be fully executed and recorded before 
a borrower is eligible for a new HECM. New Sec.  206.34 also proposes 
to codify material in HERA Mortgagee Letter 2009-11 to state that 
current HECM borrowers that plan to sell their existing residence and 
use the HECM for Purchase program to obtain a new principal residence 
must pay off the existing FHA-insured mortgage before the HECM for 
Purchase mortgage can be insured. The material on rental properties in 
HERA Mortgagee Letter 2009-11 does not rise to the level of regulation, 
and as such, will not be codified.
Title of Property Which is Security for HECM (Sec.  206.35)
    Currently, Sec.  206.35 requires a HECM borrower or borrowers to 
hold full title to the property which is the security for the mortgage, 
as ``borrower'' is newly defined in Sec.  206.3. It had come to FHA's 
attention that Non-Borrowing Spouses or other non-borrowing owners 
were, at times, quit claiming their interest in the property prior to 
closing, and then being put back onto the title of the property. FHA 
believes that the new Deferral Period policy for Eligible Non-Borrowing 
Spouses has reduced the need for this practice, but nonetheless finds 
it important to amend the full-title requirement to provide that Non-
Borrowing Spouses and non-borrowing owners may stay on title to the 
property serving as the security interest for the HECM, making them 
mortgagors. This proposed change would eliminate the burden on Non-
Borrowing Spouses or other heirs who remain on title of having to 
establish legal ownership of the property upon the death of the 
borrowing spouse.
Seasoning Requirements for Existing Non-HECM Liens (Sec.  206.36)
    RMSA Mortgagee Letter 2014-21, as amended by RMSA Mortgagee Letter 
2015-02, created seasoning requirements for existing non-HECM liens. 
The RMSA mortgagee letters provide that mortgagees can only permit the 
payoff of existing non-HECM liens using HECM proceeds if the liens have 
been in place for longer than 12 months or have resulted in less than 
$500 cash to the borrower, and that mortgagees must review and provide 
the necessary documentation illustrating that the seasoning 
requirements have been met. FHA does not intend to change its current 
policy, whereby mortgagees can only permit the payoff of existing non-
HECM liens using HECM proceeds if the liens have been in place for 
longer than 12 months or have resulted in cash to the borrower in an 
amount of $500 or less. However, FHA recognizes the importance of being 
able to adjust this seasoning requirement in the future if necessitated 
by the market or borrower characteristics. Therefore, FHA proposes to 
allow the Commissioner to impose seasoning requirements through notice, 
but provides that any such requirements imposed by future notice may 
not be more stringent than the policy currently in place. Further, 
although the specific documentation processes were outlined in the RMSA 
mortgagee letters, those processes are more suitable for guidance and 
will not be codified in Sec.  206.36.
Credit Standing (Sec.  206.37)
    In the past, there have been an increasing number of tax and hazard 
insurance defaults by borrowers. Section 206.37 currently provides that 
each borrower must have a general credit standing that is satisfactory, 
but provides no further requirements. Therefore, in RMSA Mortgagee 
Letter 2013-27, FHA established a requirement for a Financial 
Assessment of a potential borrower's financial capacity and willingness 
to comply with mortgage provisions. As mentioned earlier in this 
preamble, after considering public comments, FHA published revised 
Financial Assessment and Property Charge Funding Requirements in RMSA 
Mortgagee Letter 2014-21, which superseded RMSA Mortgagee Letter 2013-
27.
    In this rule, FHA proposes to codify the Financial Assessment 
requirements announced in RMSA Mortgagee Letter 2014-21 in Sec.  
206.37.\20\ Mortgagees will be required to perform a Financial 
Assessment of the prospective borrower prior to loan approval, which 
will consider the prospective borrower's credit history, cash flow and 
residual income, extenuating circumstances, and compensating factors. 
Financial Assessments must be conducted in a uniform manner that does 
not discriminate because of race, color, religion, sex, national 
origin, familial status, disability, marital status, actual or 
perceived sexual orientation, gender identity, source of income of the 
prospective borrower, or location of the property, and which complies 
with all applicable laws and regulations.
---------------------------------------------------------------------------

    \20\ Property Charge Funding Requirements can be found in Sec.  
206.205.
---------------------------------------------------------------------------

    Some of the Financial Assessment material in RMSA Mortgagee Letter 
2014-21 is better suited as guidance and will therefore not be codified 
in Sec.  206.37. For example, the provision permitting mortgagees to 
obtain a credit report prior to the completion of HECM counseling does 
not rise to the level of regulation and should be treated as guidance. 
In addition, the examples of extenuating circumstances and compensating 
factors are more suitable for guidance.
Principal Residence (Sec.  206.39)
    As mentioned earlier, some of the content from Sec.  206.39, as 
clarified by RMSA Mortgagee Letter 2014-07, is being moved to the 
actual definition of ``principal residence'' in Sec.  206.3. In Sec.  
206.39(a), FHA proposes to codify changes implemented in RMSA Mortgagee 
Letter 2015-02 to state that the property must be the principal 
residence of each Eligible Non-Borrowing Spouse at closing and must 
remain the principal residence to maintain eligibility for the Deferral 
Period.
    In new Sec.  206.39(b), FHA proposes to codify program changes made 
in HERA Mortgagee Letter 2009-11 which require borrowers in the HECM 
for Purchase program to occupy the property within 60 days from the 
date of closing, and also to update the HECM for Purchase requirements 
to impose this 60-day requirement on Eligible Non-Borrowing Spouses, 
bringing this provision into

[[Page 31784]]

alignment with the Non-Borrowing Spouse policy announced in RMSA 
Mortgagee Letters 2014-07 and 2015-02.
Disclosure, Verification and Certifications (Sec.  206.40)
    Section 206.40 currently provides for the disclosure and 
verification of Social Security and Employer Identification Numbers for 
the borrower. As a result of changes made to the HECM program regarding 
Non-Borrowing Spouses in RMSA Mortgagee Letter 2014-07, as amended by 
RMSA Mortgagee Letter 2015-02, FHA proposes to amend Sec.  206.40 to 
codify the requirements that an Eligible Non-Borrowing Spouse must 
comply with the same disclosure and verification of Social Security and 
Employer Identification Numbers required of the borrower, and that all 
borrowers and Non-Borrowing Spouses must provide all necessary 
certifications to HUD and the mortgagee.
    In addition, FHA proposes to add a new paragraph (c) to address 
circumstances in which FHA has been unable to find and communicate with 
borrowers concerning their HECMs. In this new paragraph, FHA proposes 
to allow the Commissioner to require a borrower to designate an agent 
or other party to act on his behalf when FHA is unable to make contact 
or communicate with the borrower. Even when not required, FHA would 
allow the borrower to voluntarily designate an agent or other person to 
act on his behalf.
Counseling (Sec.  206.41)
    FHA currently requires prospective borrowers and Non-Borrowing 
Spouses to receive counseling. FHA is taking the opportunity provided 
by this rulemaking to amend Sec.  206.41 to include the specific 
requirements that apply when there are Eligible or Ineligible Non-
Borrowing Spouses, consistent with the program changes implemented by 
RMSA Mortgagee Letters 2014-07 and 2015-02. In addition, FHA proposes 
to provide the Commissioner with the flexibility to require HECM 
counselors, through notice, to discuss any other requirements with 
prospective borrowers and Non-Borrowing Spouses. Finally, consistent 
with current requirements, and as articulated in RMSA Mortgagee Letter 
2014-07, FHA proposes to amend Sec.  206.41(c) to codify the 
requirements that HECM counselors provide each borrower with a 
certificate saying that the borrower and Non-Borrowing Spouse, if 
applicable, have received counseling. Instead of requiring each 
borrower to provide the mortgagee with a copy of the certificate, this 
rule proposes to instead require the HECM counselor to upload the 
certificate into the appropriate electronic database.
    FHA also proposes to require prospective borrowers of HECM for 
Purchase transactions to complete the required HECM counseling prior to 
signing a sales contract and/or making an earnest money deposit, unless 
otherwise provided by the Commissioner, instead of allowing them to 
complete the counseling before or after the initial application is 
submitted to the mortgagee. FHA believes it is beneficial for the 
borrower to understand the requirements of the HECM for Purchase 
program prior to committing to purchase a home using a HECM.
Monetary Investment for HECM for Purchase Program (Sec.  206.44)
    HERA Mortgagee Letter 2009-11 requires that HECM for Purchase 
borrowers provide a monetary investment that will be applied to satisfy 
the difference between the principal limit and the sale price for the 
property, plus any HECM loan-related fees that are not financed into 
the loan, minus the amount of the earnest deposit. The HERA mortgagee 
letter also provides that HECM borrowers may choose to provide a larger 
investment amount in order to retain a portion of the available HECM 
proceeds for future draws, and specifies permissible funding sources. 
FHA proposes to codify these requirements in a new Sec.  206.44, except 
as discussed below.
    In the ``Monetary Investment'' section, the provision that states 
that HECM borrowers may choose to provide a larger investment amount in 
order to retain a portion of the HECM proceeds does not rise to the 
level of regulation and therefore will not be codified.
    In the ``Funding Sources'' section, material regarding the 
disallowed funding sources, which was, at the time of issuance of the 
HERA mortgagee letter, taken directly from a HUD Handbook, was guidance 
and is no longer FHA's policy. In addition, the prohibition on seller 
contributions, which will more accurately be referred to as interested 
party contributions \21\ throughout this rule, will remain in effect 
for FHA Case Numbers assigned prior to the effective date of the final 
rule, but will be amended in this rule for FHA Case Numbers assigned on 
or after the effective date of the final rule. The current prohibition 
on interested party contributions is unique and redirects expenses 
customarily paid by the seller or other interested parties to the buyer 
in HECM for Purchase transactions. In this rule, FHA proposes to permit 
limited interested party contributions, and to allow the Commissioner 
flexibility to define the types and parameters of other allowable 
interested party contributions in the future through Federal Register 
notice for public comment. FHA proposes to specifically allow the 
seller to pay fees required to be paid by the seller under state or 
local law and to purchase the Home Warranty policy. These changes would 
remove barriers to HECM for Purchase transactions which exist in state 
or local jurisdictions which require certain seller-paid costs.
---------------------------------------------------------------------------

    \21\ Interested party contributions encompasses the use of loan 
discount points, interest rate buy-downs, closing cost down payment 
assistance, builder incentives, and gifts of personal property given 
by the seller or any other party involved in the transaction, which 
were set out separately in HERA Mortgagee Letter 2009-11.
---------------------------------------------------------------------------

Eligible Properties (Sec.  206.45)
    Currently, Sec.  206.45(a) provides that a mortgage must be on real 
estate held in fee simple, or on a leasehold under a lease for not less 
than 99 years which is renewable, or under a lease having a remaining 
period of not less than 50 years beyond the date of the 100th birthday 
of the youngest mortgagor. This section was written to implement 
subsection 255(b)(4) of the NHA. However, Public Law 111-22, signed 
into law on May 20, 2009, amended subsection 255(b)(4) of the NHA to 
replace the language regarding a lease having a remaining period of not 
less than 50 years beyond the date of the 100th birthday of the 
youngest mortgagor with ``a lease that has a term that ends no earlier 
than the minimum number of years, as specified by the Secretary, beyond 
the actuarial life expectancy of the mortgagor or comortgagor, 
whichever is the later date.'' FHA is taking the opportunity provided 
by this rulemaking to update its regulation at Sec.  206.45(a) to 
require that, to be eligible for insurance, a mortgage must be on real 
estate held in fee simple; or on a leasehold that is under a lease with 
a duration lasting until the later of: (1) 99 years, if such lease is 
renewable; or (2) the actuarial life expectancy of the youngest 
mortgagor plus a number of years specified by the Commissioner,\22\ 
which shall not be more than 99 years.
---------------------------------------------------------------------------

    \22\ While section 255(b)(4) of the NHA specifically provides 
that the ``Secretary'' shall specify the minimum number of years for 
a lease term, FHA proposes to use the term ``Commissioner'' to more 
accurately reflect HUD's delegations of authority from the Secretary 
to the Commissioner.

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[[Page 31785]]

    In addition, paragraphs (c) and (e) reference requirements in 
Sec. Sec.  203.16a, 203.40, 203.41, and 234.66. To provide greater 
clarity, FHA proposes to restate requirements, as applicable to the 
HECM program, in FHA's part 206 regulations instead of cross-
referencing to other parts of FHA's regulations. Therefore, FHA 
proposes to amend paragraph (c) by restating the flood insurance 
requirements, and to move and restate the property location 
requirements from current paragraph (c) to a new paragraph (f). FHA 
also proposes to restate the permissible restrictions on conveyance in 
paragraph (e).
    In Sec.  206.45(g), FHA proposes to codify and amend requirements 
announced in HERA Mortgagee Letter 2009-11. HERA Mortgagee Letter 2009-
11 defined a ``HECM for Purchase'' as a real estate purchase where 
title to the property is transferred to the HECM borrower and, at the 
time of closing, the HECM first and second liens will be the only liens 
against the property. HERA Mortgagee Letter 2009-11 also provided that 
only properties where construction is completed are eligible for 
insurance under the HECM for Purchase program. While it has always been 
FHA's intent that these properties be habitable, in this rule, FHA 
proposes to include habitability, as evidenced by a Certificate of 
Occupancy or similar document, as a criterion for insurance 
eligibility. FHA will not codify the provision which states that loan 
proceeds may be used to satisfy outstanding payment obligations 
associated with a land contract, contract for deed, or similar purchase 
arrangements that will ensure the property meets FHA's title 
requirements, as this is interpretive guidance.
Property Standards; Repair Work (Sec.  206.47)
    RMSA Mortgagee Letter 2014-11 provided that no unused Repair Set 
Aside funds for fixed interest rate HECMs could be made available to 
the borrower under any circumstance. After issuing RMSA Mortgagee 
Letter 2014-11, FHA published a notice in the Federal Register on July 
10, 2014, at 79 FR 39408, soliciting comment on the RMSA mortgagee 
letter. FHA received two public comments, and one of those comments 
requested clarification on the aforementioned prohibition. In response 
to this comment, FHA clarified its policy in RMSA Mortgagee Letter 
2014-21 to provide that borrowers with either fixed or adjustable 
interest rate HECMs could not be reimbursed for labor, but could be 
reimbursed for the cost of materials, under certain conditions, when 
repairs are being completed after loan closing. FHA proposes to codify 
its policy which allows borrowers to be reimbursed from the Repair Set 
Aside for the actual cost of repair materials by specifying that 
paragraph (c) applies to the reimbursement of contractors and creating 
a new paragraph (d) for the reimbursement of borrowers.
    In paragraphs (c) and (d), FHA proposes amendments related to the 
inspection requirements. Currently, paragraph (c), which is the only 
paragraph in this section that discusses inspections, requires the 
post-repair inspection(s) of the property to be completed by an 
inspector approved by HUD. However, FHA published a proposed rule on 
February 6, 2013, at 78 FR 8448, which, in part, proposed to remove its 
Inspector Roster regulations. Therefore, to allow for consistency 
between inspection requirements for the HECM program and any future 
changes to FHA's forward mortgage program related to inspectors, FHA 
proposes to broaden the language used in Sec.  206.47 to provide that 
the inspector or other qualified individual must be acceptable to the 
Commissioner.
    FHA also proposes to codify HECM for Purchase program requirements 
announced in HERA Mortgagee Letter 2009-11 in a new paragraph (e) to 
state that in HECM for Purchase transactions, where major property 
deficiencies threaten the health and safety of the homeowner or 
jeopardize the soundness and security of the property, all repairs must 
be completed by the seller prior to closing. Appraisers are required to 
complete the appraisal report as ``Subject To'' the completion of the 
repairs. Additional content in the ``Repair and Property Set Asides 
Section'' of HERA Mortgagee Letter 2009-11 listing examples of major 
property deficiencies will not be codified, as it is guidance material. 
In addition, FHA will not codify the material regarding HECM borrowers 
continuing to have the option to elect to have the mortgagee set aside 
funds for the payment of property charges because borrowers are now 
subject to the Financial Assessment Property Charge Funding 
Requirements implemented by RMSA Mortgagee Letter 2014-21, which may or 
may not allow them to elect to have the mortgagee set aside funds for 
the payment of property charges.
Eligibility of Mortgages Involving a Dwelling Unit in a Condominium 
(Sec.  206.51)
    The current regulation at Sec.  206.51 requires that where the 
mortgage involves a dwelling unit in a condominium, the project in 
which the condominium is located must be committed to a plan of 
condominium ownership by deed or other instrument acceptable to the 
Secretary, but the regulation also provides a limited exception for 
some loans on single units in unapproved condominium projects. This 
``spot approval'' exception was removed from the FHA condominium policy 
under HERA, and therefore, this rule proposes to eliminate this 
exception from Sec.  206.51.
Eligible Sale of Property--HECM for Purchase (Sec.  206.52)
    HERA Mortgagee Letter 2009-11 requires that mortgagees providing 
HECM financing for HECM for Purchase transactions comply with the FHA 
regulation at 24 CFR 203.37a. To provide greater clarity, FHA proposes 
to restate these requirements in FHA's part 206 regulations, as 
applicable to the HECM for Purchase program, instead of cross-
referencing to other parts of FHA's regulations. These requirements 
encompass requirements set out in HERA Mortgagee Letter 2009-11 
regarding a mortgagee's responsibility to prohibit property flipping 
practices for properties which are the subject of HECM for Purchase 
transactions. The content regarding the importance of prospective 
borrowers being aware of coercive actions against them is guidance and 
will not be codified.
Refinancings (Sec.  206.53)
    This proposed rule updates FHA's regulation at Sec.  206.105 which 
governs the MIP paid in connection with HECM loans. These proposed 
changes reflect statutory amendments to the NHA that provide FHA with 
additional flexibility in establishing the initial MIP for FHA-insured 
mortgages up to 3 percent of the amount of the original insured 
principal obligation of the mortgage and are discussed later in the 
preamble. The proposed rule makes a conforming change to Sec.  
206.53(c), which describes the initial MIP limit for the refinancing of 
HECM mortgage loans.
    In addition, FHA proposes to move the content of current Sec.  
206.53(c) into a new subparagraph (c)(1), and also proposes to revise 
the wording of new Sec.  206.53(c)(1), for clarity. These proposed 
changes do not alter the substantive aspect of the subject regulation. 
Consistent with subsection 203(c)(2)(A) of the NHA, the revision to 
Sec.  206.53(c) clarifies that the initial MIP may not exceed the 
difference between: Three percent of the maximum claim amount for the 
new HECM loan, and the amount of the initial MIP already

[[Page 31786]]

charged and paid by the borrower for the existing HECM loan being 
refinanced.
    In new Sec.  206.53(c)(2), FHA proposes to codify HECM for Purchase 
program requirements implemented by HERA Mortgagee Letter 2009-11 which 
provide that existing HECM borrowers who participate in a HECM for 
Purchase transaction are ineligible for a refinance transaction because 
the HECM refinance authority is only applicable when the property that 
serves as collateral for FHA-insurance remains the same. As a result of 
this addition, FHA proposes to eliminate the first sentence of Sec.  
206.53(a), which states that this section implements subsection 255(k) 
of the NHA. While that statement remains true, the HECM for Purchase 
program authority rests in subsection 255(m) of the NHA, and to avoid 
any potential confusion, FHA simply prefers to eliminate the specific 
reference to subsection 255(k) of the NHA.
Deferral of Due and Payable Status (Sec. Sec.  206.55, 206.57, 206.59, 
206.61)
    RMSA Mortgagee Letter 2014-07, as amended by RMSA Mortgagee Letter 
2015-02, implemented an alternative interpretation of subsection 255(j) 
of the NHA to provide viable options for Non-Borrowing Spouses to 
remain in the homes they had previously shared with their borrower 
spouses after the death of their spouses. In general, if the last 
surviving borrower predeceases an Eligible Non-Borrowing Spouse, and if 
the Deferral Period requirements are satisfied, the due and payable 
status will be deferred for as long as the Eligible Non-Borrowing 
Spouse continues to meet the Qualifying Attributes, the Deferral Period 
requirements, all applicable terms and conditions of the mortgage and 
loan documents and all other applicable FHA requirements. In addition, 
except for limited circumstances, mortgagees are required to provide 
Eligible Non-Borrowing Spouses with 30 days to cure defaults that occur 
during the Deferral Period and reinstate the Deferral Period.
    In this rule, FHA proposes to codify the Deferral Period 
requirements set out in RMSA Mortgagee Letters 2014-07 and 2015-02 in 
new sections 206.55, 206.57, 206.59, and 206.61, with minor changes as 
discussed below.
    The policy currently in effect as a result of RMSA Mortgagee 
Letters 2014-07 and 2015-02 provides for three Qualifying Attributes: 
(1) The Non-Borrowing Spouse must have been the spouse of a HECM 
borrower at the time of loan closing and remained the spouse of such 
HECM borrower for the duration of the HECM borrower's lifetime; (2) the 
Non-Borrowing Spouse must have been properly disclosed to the mortgagee 
at origination and specifically named as an Eligible Non-Borrowing 
Spouse in the HECM mortgage and loan documents; and (3) the Non-
Borrowing Spouse must have occupied, and must continue to occupy, the 
property securing the HECM as his or her principal residence. In this 
rule, FHA proposes to give the Commissioner flexibility to set other 
Qualifying Attributes criteria as necessary through the publication of 
a Federal Register notice for comment. The Qualifying Attributes 
criteria is found in Sec.  206.55(c).
    RMSA Mortgagee Letter 2015-02 stated that an ``Eligible Non-
Borrowing Spouse may become an Ineligible Non-Borrowing Spouse should 
any of the Qualifying Attributes cease to be met during the loan 
term.'' FHA takes the opportunity provided by this rulemaking to 
replace ``may become'' with ``shall become'' to make clear in Sec.  
206.55(c)(3) that if the Qualifying Attributes cease to be met, the 
previously Eligible Non-Borrowing Spouse will become an Ineligible Non-
Borrowing Spouse.
    FHA also takes the opportunity provided by this rulemaking to 
clarify that ``ongoing legal right to remain'' means a legal right to 
remain for life. This clarified requirement is found in Sec.  
206.55(d)(1). Further, FHA proposes to clarify in Sec.  206.55(f) that 
nothing in Sec.  206.55 may be construed as interrupting or interfering 
with the right of the borrower's estate or heir(s) to dispose of the 
property if they are otherwise legally entitled to do so.
    FHA also proposes to clarify in Sec.  206.59(d) that mortgagees 
must notify the Eligible Non-Borrowing Spouse within 30 days of the 
Deferral Period ending, unless the Deferral Period is reinstated. Also, 
this rule proposes to require the mortgagee to obtain documentation 
validating the reason for the cessation or reinstatement of the 
Deferral Period.
    RMSA Mortgagee Letter 2014-07 specifically states that the proceeds 
of a HECM will not be disbursed to the borrower, borrower's estate, or 
the Non-Borrowing Spouse once the HECM is in a deferred due and payable 
status. FHA proposes to amend this statement in Sec.  206.61(a) to 
broaden it and to clarify that during a Deferral Period, HECM proceeds 
may not be disbursed to any party, except as otherwise determined by 
the Commissioner through notice.
    RMSA Mortgagee Letter 2014-07 also states that funds may be 
disbursed from a Repair Set Aside during a Deferral Period for the 
purpose of paying for repairs identified prior to origination as 
necessary to the insurance of the HECM, but that such repairs may only 
be paid for using the Repair Set Aside if the repairs are 
satisfactorily completed during the time period established in the 
Rider. However, FHA recognizes that there are situations in which, for 
a variety of reasons, repairs may not be completed within the 
originally established timeframe. Therefore, FHA proposes to provide 
flexibility to involved parties by allowing the Commissioner to extend 
the time period in which repairs must be completed in Sec.  206.61(b).
Subpart C--Contract Rights and Obligations
Sale, Assignment and Pledge of Insured Mortgages (Sec.  206.101)
    FHA's current regulation at Sec.  206.101 refers to Sec. Sec.  
203.430 through 203.435. To provide greater clarity, in Sec.  206.101, 
FHA proposes to restate these requirements, as applicable to the HECM 
program, instead of cross-referencing to other parts of FHA's 
regulations.
Insurance Funds (Sec.  206.102)
    Currently, Sec.  206.102 provides that mortgages insured under part 
206 shall be obligations of the General Insurance Fund. However, 
Section 2118(b)(2) of HERA transferred obligations arising under the 
HECM program, for loans endorsed on or after October 1, 2008, from the 
FHA General Insurance Fund to the MMIF. This proposed rule updates the 
regulations accordingly.
Payment of MIP (Sec.  206.103)
    FHA proposes to provide in Sec.  206.103 that the payment of MIP 
shall be made to the Commissioner by the mortgagee in cash until the 
HECM is paid in full, foreclosed or a deed in lieu of foreclosure is 
recorded, or the property is otherwise sold, instead of until the 
contract of insurance is terminated.
Amount of MIP (Sec.  206.105)
    This proposed rule updates Sec.  206.105 which governs the MIP paid 
in connection with HECM loans. Currently, Sec.  206.105(a) provides for 
an initial MIP of two percent of the maximum claim amount; Sec.  
206.105(b) provides for a monthly MIP that accrues daily on the 
outstanding loan balance at a rate equivalent to 0.5 percent per annum 
and is added to the outstanding loan balance when paid to the 
Secretary.
    As previously noted, HERA transferred obligations arising under the 
HECM program from the FHA General Insurance Fund to the MMIF. Each FHA-
insured mortgage which is an obligation of the MMIF is subject to the

[[Page 31787]]

premium structure at subsection 203(c)(2)(A) of the NHA. As amended by 
HERA, subsection 203(c)(2)(A) states, in part, that ``the Secretary 
shall establish and collect, at the time of insurance, a single premium 
payment in an amount not exceeding 3 percent of the amount of the 
original insured principal obligation of the mortgage.''
    In addition, NHA subsection 203(c)(2)(B) addresses annual mortgage 
insurance premiums. On August 12, 2010, the President signed into law 
Public Law 111-229,\23\ which amended NHA subsection 203(c)(2)(B) to 
provide the Secretary with additional flexibility regarding the annual 
mortgage insurance premiums. Subsection 203(c)(2)(B) provides the 
Secretary with the discretion to decide to establish and collect annual 
mortgage insurance premiums in an amount not exceeding 1.50 percent of 
the remaining insured principal balance, or up to 1.55 percent for any 
mortgage involving an original principal obligation that is greater 
than 95 percent of appraised value of the property.
---------------------------------------------------------------------------

    \23\ The title of this public law is ``To increase the 
flexibility of the Secretary of Housing and Urban Development with 
respect to the amount of premiums charged for FHA single family 
housing mortgage insurance and other purposes.''
---------------------------------------------------------------------------

    Public Law 111-229 also provides the Secretary with the discretion 
to adjust the initial MIP and annual MIP through notice published in 
the Federal Register or mortgagee letter which establishes the 
effective date for any premium adjustment therein.
    With respect to the HECM program, for purposes of establishing the 
initial MIP, the original insured principal obligation of the mortgage 
is the maximum claim amount; therefore, consistent with the amendments 
to subsection 203(c)(2)(A) of the NHA, this proposed rule revises Sec.  
206.105(a) to specify that the Commissioner \24\ may charge an initial 
MIP of up to three percent of the maximum claim amount. This rule also 
proposes to revise Sec.  206.105(b), consistent with the amendments to 
subsection 203(c)(2)(B) of the NHA, to provide that the Commissioner 
\25\ may establish and collect an annual MIP, which will accrue from 
the closing date, in an amount not to exceed 1.50 percent of the 
remaining insured principal balance, or up to 1.55 percent for any 
mortgage involving an original principal obligation that is greater 
than 95 percent of the appraised value of the property. FHA proposes to 
clarify that the MIP may be added to the loan balance when paid to the 
Commissioner. Moreover, the proposed rule adds a new paragraph (d) in 
Sec.  206.105 stating the Commissioner's authority to adjust the amount 
of the initial and monthly MIP through notice.\26\
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    \24\ While subsection 203(c)(2)(A) specifically provides that 
the ``Secretary'' shall establish and collect an initial MIP not to 
exceed three percent of the maximum claim amount, FHA proposes to 
use the term ``Commissioner'' to more accurately reflect HUD's 
delegations of authority from the Secretary to the Commissioner.
    \25\ While subsection 203(c)(2)(B) specifically provides the 
``Secretary'' with discretion to decide whether to establish and 
collect annual MIP in an amount not exceeding 1.50 percent of the 
remaining insured principal balance, or up to 1.55 percent for any 
mortgage involving an original principal obligation that is greater 
than 95 percent of appraised value of the property, FHA proposes to 
use the term ``Commissioner'' to more accurately reflect HUD's 
delegations of authority from the Secretary to the Commissioner.
    \26\ While Public Law 111-229 provides the ``Secretary'' with 
the discretion to adjust the initial MIP and annual MIP through 
notice published in the Federal Register or mortgagee letter, FHA 
proposes to use the term ``Commissioner'' to more accurately reflect 
HUD's delegations of authority from the Secretary to the 
Commissioner and ``notice'' to more concisely convey the method of 
notification.
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    In addition, FHA proposes to codify provisions from RMSA Mortgagee 
Letter 2014-21 regarding the calculation of the initial MIP in a new 
paragraph (c) to Sec.  206.105. Under existing authority, and as 
discussed above, the initial MIP may be adjusted by FHA through notice. 
Therefore, FHA proposes to codify the general framework for calculating 
the initial MIP, as described in RMSA Mortgagee Letter 2014-21, but not 
the specific initial MIP amounts, and will instead update the specific 
initial MIP amounts by notice, as necessary. FHA also proposes to make 
clear that any amount of funds set aside in a Servicing Fee Set Aside 
will not affect the initial MIP amount, even for those funds scheduled 
for payment during the First-12 Month Disbursement Period.
Mortgagee Election of Assignment or Shared Premium Option (Sec.  
206.107)
    FHA proposes to make conforming amendments to Sec.  206.107(a) to 
account for the Deferral Period, which was introduced in RMSA Mortgagee 
Letter 2014-07. Specifically, in paragraph (a)(1), FHA proposes to 
clarify that the mortgagee may assign the HECM to the Commissioner if 
the outstanding loan balance is equal to or greater than 98 percent of 
the maximum claim amount, regardless of deferral status, or the 
borrower has requested a payment which exceeds the difference between 
the maximum claim amount and the outstanding loan balance and certain 
conditions, as specified in this section, are met. In subparagraph 
(a)(1)(iii), FHA proposes to expand upon one of these conditions, such 
that the HECM is either not due and payable under Sec.  206.27(c)(1), 
or its due and payable status under Sec.  206.27(c)(1) has been 
deferred pursuant to a Deferral Period.
    FHA is also slightly revising the wording of Sec.  
206.107(a)(1)(iv) to clarify that the mortgagee shall have the option 
of assigning the mortgage to the Commissioner only if an event 
described in Sec.  206.27(c)(2) has not occurred or the Commissioner 
has been notified of such occurrence but has denied approval for the 
mortgage to be due and payable.
    Finally, to provide greater clarity, in Sec.  206.107, FHA proposes 
to replace the cross-references to requirements in FHA's part 203 
regulations with the actual requirements, as applicable to the HECM 
program, or cross-references to other sections within part 206.
    FHA seeks public comment on the utility of FHA's shared premium 
option. Specifically, FHA requests comment on the following questions: 
Do mortgagees anticipate selecting the shared premium option in the 
future, and if not, what is the reasoning for not selecting the shared 
premium option?
Amount of Mortgagee Share of Premium (Sec.  206.109)
    In current Sec.  206.109, the amount of the mortgagee share of 
premium is determined based upon the age of the youngest borrower. To 
be consistent with the changes FHA made to the calculation of the 
principal limit in RMSA Mortgagee Letters 2014-07 and 2015-02, which 
bases the age factor on the age of the youngest borrower or Eligible 
Non-Borrowing Spouse, FHA proposes to amend Sec.  206.109 to base the 
mortgagee share of premium on the age of the youngest borrower or 
Eligible Non-Borrowing Spouse.
Late Charge and Interest (Sec.  206.113)
    In Sec.  206.113(a), FHA currently requires the payment of a late 
charge when initial and monthly MIP are remitted to the Commissioner 10 
days after the payment date in Sec.  206.111(b). In Sec.  206.113(b), 
FHA currently requires the mortgagee to pay interest on initial and 
monthly MIP remitted to the Commissioner more than 30 days after 
closing, and interest on monthly MIP remitted to the Commissioner more 
than 30 days after the payment date prescribed in Sec.  206.111(b). 
However, FHA now has a web-based loan servicing system which was not in 
existence when this section was initially promulgated. This system, 
currently called HERMIT, reduces the amount of time needed to remit 
MIP. Therefore, it is no longer necessary to have such long time 
periods. In paragraph (a) of

[[Page 31788]]

Sec.  206.113, FHA proposes to reduce the time period to 5 days for 
late charges. In paragraph (b) of Sec.  206.113, FHA proposes to 
require the mortgagee to pay interest on initial MIP remitted to the 
Commissioner more than 20 days after closing, and interest on monthly 
MIP remitted to the Commissioner more than 5 days after the date in 
Sec.  206.111(b).
    In paragraph (c) of this section, FHA proposes to clarify that any 
interest, in addition to late charge, owed may not be added to the 
outstanding loan balance and must be paid by the mortgagee.
Insurance of Mortgage (Sec.  206.115)
    FHA proposes to add a new Sec.  206.115 to capture the content of 
Sec.  203.255. As mentioned throughout this preamble, to provide 
greater clarity, FHA proposes to restate content from part 203 in FHA's 
part 206 regulations, as applicable to the HECM program, instead of 
cross-referencing to part 203 of FHA's regulations. Because the Lender 
Insurance program is currently unavailable for the HECM program, the 
Lender Insurance requirements of Sec.  203.255 will not be included in 
this section.
    In this section, FHA also proposes to add content originally from 
Sec.  203.257 regarding creation of the mortgage insurance contract in 
paragraph (f).
Refunds (Sec.  206.116)
    FHA's current regulation provides that no amount of the initial MIP 
shall be refundable. However, FHA recognizes that there are certain 
circumstances in which a refund would be warranted. Therefore, FHA 
proposes to provide for exemptions as authorized by the Commissioner.
Commissioner Authorized To Make Payments (Sec.  206.121)
    Paragraph (c) of Sec.  206.121 addresses second mortgages. 
Subsection 255(i)(2)(C) of the NHA permits FHA to require a subordinate 
mortgage from the borrower at any time in order to secure repayments of 
any funds advanced, or to be advanced to, the borrower. Throughout part 
206, including Sec.  206.121(c), FHA proposes to amend its regulations 
to permit the Commissioner, through notice, to require or not require a 
subordinate mortgage, which will align FHA's policy with the 
flexibility provided by the NHA. This flexibility will allow FHA to 
make a strategic decision about the necessity of subordinate mortgages, 
given various market factors and market changes.
    The Commissioner has already stated, through RMSA Mortgagee Letter 
2014-11, which limited the fixed interest rate product to the Single 
Lump Sum payment option, that the HECM Second Security Instrument and 
HECM Second Note were no longer required for fixed interest rate HECMs 
because there is no longer a risk of the Commissioner having to pay 
future advances to the borrower. At this time, the Commissioner is not 
changing the fixed interest rate HECM subordinate mortgage policy 
announced in RMSA Mortgagee Letter 2014-11. However, instead of 
codifying this change, FHA chooses to maintain the flexibility provided 
by subsection 255(i)(2)(C) of the NHA which allows the Commissioner to 
require a subordinate mortgage from the borrower of fixed or adjustable 
interest rate HECMs.
Claim Procedures in General (Sec.  206.123)
    FHA proposes to make changes to this section that correspond with 
changes made to the definitions in Sec.  206.3. In Sec.  206.3, FHA 
proposes to add a new definition of borrower and amend the definition 
of mortgagor, such that a mortgagor means each original mortgagor under 
a mortgage and his heirs, executors, administrators and assigns; a 
borrower means a mortgagor who is an original borrower under the Loan 
Agreement and Note, but not including a borrower's successors and 
assigns. With these changes, it is no longer necessary for Sec.  
206.123(b) to provide for an expanded definition of mortgagor. 
Therefore, FHA proposes to amend newly renumbered paragraph (a)(2)(iii) 
such that it applies to borrowers and other permissible parties, which 
would include mortgagors as newly defined in Sec.  206.3, and to remove 
and reserve paragraph (b).
Acquisition and Sale of the Property (Sec.  206.125)
    The regulation at Sec.  206.125(a) sets out the initial 
requirements of the mortgagee when the mortgage becomes due and 
payable. Paragraph (a)(1) currently requires the mortgagee to notify 
the Commissioner whenever the mortgage is due and payable under Sec.  
206.27(c)(1) or (c)(2). FHA proposes to provide more specificity to the 
timing of the required notification. FHA also proposes to make 
amendments to this paragraph in conformity with program changes made in 
RMSA Mortgagee Letters 2014-07 and 2015-02 regarding the Deferral 
Period. Together, these changes would require the mortgagee to notify 
the Commissioner within 60 days of the mortgage becoming due and 
payable when the conditions stated in the mortgage, as required by 
Sec.  206.27(c)(1), have occurred or when the Deferral Period ends; the 
mortgagee is also required to notify the Commissioner within 30 days of 
one of the conditions stated in the mortgage, as required by Sec.  
206.27(c)(2), occurring.
    FHA seeks public comment on the following questions: What is an 
appropriate timeframe, and how should such a timeframe be calculated, 
when title to the property insuring the HECM has been conveyed, since 
the mortgagee will not necessarily know that title has been conveyed or 
the date conveyance has occurred?
    The current paragraph (a)(2) requires the mortgagee to provide 
notification to the borrower of the due and payable status, unless the 
mortgage is due and payable as a result of the borrower's death. FHA 
proposes to make conforming amendments to this paragraph as a result of 
program changes made in RMSA Mortgagee Letters 2014-07 and 2015-02 
implementing a Deferral Period for Eligible Non-Borrowing Spouses, such 
that the mortgagee would be required to notify the borrower, Eligible 
Non-Borrowing Spouse, borrower's estate and borrower's heir(s), as 
applicable, within 30 days of the later of notifying the Commissioner 
of the due and payable status or receiving approval, if needed; the 
applicable party would have 30 days to engage in one of the permissible 
actions outlined in paragraph (a)(2) as discussed immediately below.
    FHA proposes to make new changes to the permissible actions 
outlined in paragraph (a)(2), as well as conforming changes to bring 
the regulation in line with policy changes announced in RMSA Mortgagee 
Letter 2015-02. First, FHA proposes to amend paragraph (a)(2)(i) to 
include mortgagee advances as a required item for payment. Second, in 
paragraph (a)(2)(ii), which currently provides that the property may be 
sold for at least 95 percent of the appraised value, FHA proposes to 
provide more flexibility to the Commissioner to alter this percentage. 
The 95 percent requirement has proven at times to be too high, leading 
to unwanted foreclosures that possibly could have been avoided through 
sale of the property. This has been particularly true in recent years. 
The downturn in the housing market has resulted in declining values and 
an oversupply of housing stock. The market downturn highlights the need 
for flexibility in establishing the minimum percentage of the appraised 
value that FHA will accept after sale of the property securing the 
mortgage loan. To address this concern, this rule proposes to replace 
the 95 percent requirement with flexibility for the Commissioner to 
establish such amount, which shall not

[[Page 31789]]

exceed 95 percent of the appraised value. FHA also proposes to make 
changes in this paragraph which will limit the amount of money FHA is 
paying through the claims process for closing costs. In conducting its 
oversight of the claims process, FHA is aware that some mortgagees are 
including excessive closing costs in their insurance claims. To stop 
this from occurring in the future, FHA proposes to more closely align 
HECM's policy regarding net proceeds requirements with those 
requirements for pre-foreclosure and Real Estate-Owned (REO) property 
policies, by requiring that the closing costs from the sale not exceed 
11 percent of the sales price. In paragraph (a)(2)(iv), FHA proposes to 
codify the cure provision announced in RMSA Mortgagee Letter 2015-02, 
and in paragraph (a)(2)(vi), FHA proposes to allow for other actions as 
permitted by the Commissioner through notice.
    FHA proposes to add paragraph (a)(4) to codify program changes 
announced in RMSA Mortgagee Letters 2014-07 and 2015-02 such that an 
Eligible Non-Borrowing Spouse could correct the condition which 
resulted in the Deferral Period ending and have the mortgage reinstated 
in accordance with Sec.  206.57(d).
    FHA proposes to amend paragraph (b) to correct an inadvertent 
drafting error resulting from an interim rule published on August 16, 
1995. Prior to the effective date of this interim rule, Sec.  
206.125(b) provided that when a HECM became due and payable (typically 
upon the borrower's death), the property could be appraised at the 
borrower's request and at the borrower's expense. Section 206.125(b) 
also required the property to be appraised no later than 15 days before 
a foreclosure sale. Since FHA required the mortgagee to bid the 
appraised value for HECM foreclosures, an appraisal was needed before 
the foreclosure. The reason the borrower, or more likely, the 
borrower's estate might also want an appraisal is to help the estate 
decide whether to exercise its option to sell the property for the 
lesser of the outstanding loan balance or appraised value, per Sec.  
206.125(c). This short sale option is in FHA's interest, as it avoids 
foreclosure, holding, and sales expenses. However, to avoid such 
expenses, the estate would need to be provided with the appraised value 
much earlier than 15 days before the foreclosure sale. Therefore, FHA 
published an interim rule on August 16, 1995, at 60 FR 42754, stating 
in the preamble that it was requiring the mortgagee to appraise the 
property within 30 days of the borrower's death ``instead'' of 15 days 
before the foreclosure sale. However, the actual text of the rule 
provided for both the 30-day appraisal and 15-day appraisal, thereby 
inadvertently requiring two appraisals. This proposed change would 
correct multi-appraisal ordering that is costly to the mortgagee and to 
FHA by amending paragraph (b) to instead require the mortgagee to have 
the property appraised no later than 30 days after receipt of the 
request by an applicable party in connection with a potential property 
sale, and when a foreclosure sale is occurring, the appraisal must be 
performed within 30 days of the foreclosure sale.
    In paragraph (c), FHA provides greater clarity around which parties 
are permitted to sell the property. FHA proposes to clarify that when 
the HECM is not due and payable, the borrower or an authorized 
representative of the borrower may sell the property for at least the 
lesser of the outstanding loan balance or appraised value; when the 
HECM is due and payable, the borrower or other party with legal right 
to dispose of the property may sell the property for a discounted 
percentage of appraised value in accordance with Sec.  
206.125(a)(2)(ii).
    To provide more clarity around the timing requirements for 
mortgagees to initiate foreclosure, FHA proposes to amend paragraph 
(d)(1) of this section to base the six month timeframe within which a 
mortgagee must commence foreclosure off of the due date, as newly 
defined in proposed Sec.  206.129(d)(1). Further, in paragraph (d)(2) 
of this section, in order to clarify existing policy, FHA proposes to 
add ``city or municipality'' after State, such that if the laws of the 
State, city or municipality in which the mortgaged property is located 
or Federal bankruptcy law does not permit foreclosure within the 
aforementioned timeframe, the mortgagee must initiate foreclosure 
within six months after the expiration of the time during which such 
foreclosure is prohibited by such laws. FHA also proposes to amend 
paragraph (d)(4) to allow the mortgagee to bid at a foreclosure sale an 
amount at least equal to the sum of the outstanding loan balance and 
incurred expenses, when that amount is less than the appraised value.
    FHA proposes to amend paragraph (f) to clarify that a party with 
legal right to dispose of the property may provide the mortgagee with a 
deed in lieu of foreclosure. This rule also proposes to require that a 
deed in lieu of foreclosure, whether provided by the borrower or other 
party with legal right to dispose of the property, must be provided 
within 9 months of the due date. FHA did not previously impose a time 
period for this requirement, but limiting this to 9 months is important 
because such a timeframe will allow the borrower or other party with 
legal right to dispose of the property 6 months to attempt to sell the 
property and an additional 3 months to obtain a title search and get 
the deed signed, provided that title is clear. In this section, FHA 
also proposes to create a Cash for Keys initiative to incentivize 
borrowers to deed the property within 6 months of the due date.
    Section 206.125(g) requires a mortgagee to make diligent efforts to 
sell the property within six months from the date the mortgagee 
acquired the property. FHA recognizes that there may be circumstances 
in which it is appropriate to provide more time, and therefore has 
reserved the ability to allow for additional time within which the 
mortgagee must sell the property.
Application for Insurance Benefits (Sec.  206.127)
    When the mortgagee acquires title, FHA's current regulation at 
Sec.  206.127 requires mortgagees to apply for the payment of insurance 
benefits within 15 days after the sale of the property by the 
mortgagee. If the property is not sold within six months from the date 
the mortgagee acquired title, the mortgagee must apply for another 
appraisal within a specified time period and apply for insurance 
benefits within 15 days of receipt of the new appraisal. When a party 
other than the mortgagee acquires title, FHA's current regulation at 
Sec.  206.127 requires that the mortgagee apply for payment of the 
insurance benefits within 15 days after the other party acquires title. 
It has come to FHA's attention that mortgagees have experienced 
challenges in meeting these short time periods. Therefore, in this 
rule, FHA proposes to extend these time periods to 30 days, and where 
the mortgagee acquires title, FHA also proposes to provide flexibility 
to the Commissioner to extend the 30-day time period.
    In addition, in Sec.  206.127(a)(2), FHA's current regulation 
requires that mortgagees bear the cost of the appraisal where the 
mortgagee acquires title but does not sell the property within six 
months of acquiring title; however, this cost has historically been 
reimbursed through the claim process. FHA proposes to clarify that 
mortgagees are permitted to add the cost of the appraisal to the claim 
amount.
    Section 206.127(c) refers to Sec. Sec.  203.351 and 203.353. To 
provide greater clarity, FHA proposes to restate these requirements in 
part 206, as applicable

[[Page 31790]]

to the HECM program, instead of cross-referencing to other parts of 
FHA's regulations. These requirements will be restated, as applicable 
to the HECM program, in Sec. Sec.  206.135(a) and 206.136, 
respectively, and cited to in Sec.  206.127(c).
    Finally, FHA proposes to add a new paragraph (d) to clarify that 
mortgagees may only file an application for insurance benefits provided 
the contract of insurance has not terminated.
Payment of Claim (Sec.  206.129)
    FHA proposes to revise Sec.  206.129(d), which governs the 
computation of the amount of a HECM insurance claim. This determination 
is based on the mortgage ``due date'', which is the date the HECM 
became due and payable. Paragraph (d), as currently written, provides 
that the due date is the date the mortgagee notified the Secretary of 
the borrower's death under Sec.  206.27(c)(1) or the date the Secretary 
granted approval to accelerate the loan under Sec.  206.27(c)(2). These 
regulations do not account for the existence of a Deferral Period, as 
implemented by RMSA Mortgagee Letters 2014-07 and 2015-02. Accordingly, 
FHA proposes to revise Sec.  206.129(d) in paragraph (d)(1) to provide 
that the due date is the date when the mortgagee notifies or should 
have notified the Commissioner that the mortgage is due and payable 
under the conditions stated in Sec.  206.27(c)(1), or the date that the 
Deferral Period, as provided for in the mortgage by Sec.  206.27(c)(3), 
ends; or the date the Commissioner approves a due and payable request 
as provided in the mortgage by Sec.  206.27(c)(2).
    The regulation at Sec.  206.129(d) also provides for reimbursement 
to the mortgagee as part of the mortgage insurance claim when the 
mortgagee advances its corporate funds for the payment of property 
charges. The proposed rule, in general, prospectively limits insurance 
claim reimbursement to a mortgagee for advancement of the following 
property charges to two years of payments for each such charge, except 
that the Commissioner may approve an extension under such 
circumstances, terms, and conditions determined and specified as 
acceptable to the Commissioner: Taxes, ground rents, water rates, and 
utility charges that are liens prior to the mortgage; special 
assessments, which are noted on the application for insurance or which 
become liens after the insurance of the mortgage; and hazard insurance 
premiums on the mortgaged property.
    FHA understands that borrowers may run into unexpected financial 
difficulty, causing their mortgagees to advance property charges in 
order to avoid declaring the loan due and payable. However, it is FHA's 
position that the need for property charge advances for a period 
greater than two years is a strong indication that a borrower's income 
and HECM proceeds are insufficient to meet the borrower's living 
expenses and cover property charges. The new limit on claims for 
insurance benefits for advances of property charges is intended to 
address this concern by encouraging mortgagees and borrowers to 
proactively work out mutually advantageous methods that will enable 
payment of property charges by the borrower or repayment of the 
property charges advanced by the mortgagee to avoid a due and payable 
status. However, FHA also recognizes that an absolute two year 
limitation may be too strict in certain circumstances and potentially 
cut-off attempts by the borrower and mortgagee to work out such 
solutions due to the deadline. Accordingly, this proposed rule 
authorizes limited exceptions to the two year period under 
circumstances prescribed by the Commissioner, but does not convey any 
right to the borrower to reach a resolution with the mortgagee.
    In addition, Sec.  206.129(d) refers to various sections in part 
203 and Sec.  204.322(l). To provide greater clarity, in Sec.  
206.129(d), FHA proposes to restate the requirements of part 203, as 
applicable to the HECM program, instead of cross-referencing to part 
203. FHA also proposes, however, to eliminate the reference to Sec.  
204.322(l) altogether because it no longer exists.
    Finally, FHA seeks feedback on the utility of instituting a pro 
rata interest and expense curtailment policy as was recently proposed 
for FHA's forward mortgages in Federal Housing Administration (FHA): 
Single Family Mortgage Insurance Maximum Time Period for Filing 
Insurance Claims, Curtailment of Interest and Disallowance of Operating 
Expenses Incurred Beyond Certain Established Timeframes (FR-5742-P-01). 
FHA specifically asks the follow questions:
    (1) Should the HECM program provide for the pro rata curtailment of 
debenture interest and reduction of expenses incurred as a result of 
the mortgagee's delay in filing the mortgage insurance claim, and if 
so, how should such a policy be structured to ensure feasible 
implementation?
    (2) What expenses are caused by or increase as a result of the 
mortgagee's delay in filing a mortgage insurance claim, and what 
expenses are not impacted by such a delay?
Termination of Insurance Contract (Sec.  206.133)
    FHA proposes to revise paragraph (b) to renumber current paragraph 
(b) as (b)(1) and to add a new subparagraph (2) specific to termination 
of the insurance contract when a claim for insurance benefits will be 
presented.
    Paragraph (e) of Sec.  206.133 refers to the provisions of Sec.  
203.295 concerning voluntary terminations. To provide greater clarity, 
FHA proposes to restate the requirements of Sec.  203.295, as 
applicable to the HECM program, in this section, instead of cross-
referencing to a section in part 203.
    In paragraph (f) FHA takes the opportunity provided by this 
rulemaking to clarify that when the insurance contract is terminated, 
the rights of the mortgagee shall also terminate. The current 
regulation unintentionally also references the rights of the borrower, 
but the borrower does not have any rights in regards to the insurance 
contract; that contract is between FHA and the mortgagee. In this 
paragraph, FHA also proposes to state that all obligations of the 
Commissioner shall cease immediately upon termination of the insurance 
contract, and such will apply prospectively.
Additional Requirements: Sec. Sec.  206.134-206.146
    As mentioned numerous times throughout this preamble, FHA is using 
the opportunity provided by this rulemaking to eliminate confusing 
cross-references to other parts of FHA's regulations and replace them 
with requirements specifically applicable to the HECM program. This is 
particularly true of part 203 references, for which regulations were 
written for the FHA forward mortgage product; the forward and reverse 
mortgage programs differ in many respects. In addition, cross 
references were appropriate at the time when the HECM program was a 
demonstration program of only 2,500 loans. This is no longer the case 
as the HECM program has been a full-fledged program for almost 20 
years. Therefore, FHA proposes to add sections 206.134 through 206.146, 
which convey the content of a number of part 203 regulations, as 
applicable to the HECM program.
    FHA proposes to make a few substantive changes from these part 203 
provisions. In Sec.  206.134, which contains material from Sec.  
203.343, FHA proposes to account for situations in which a dwelling is 
rebuilt upon an existing lot. Currently this section only allows the 
mortgagee, with the consent of the Commissioner, to accept an addition 
to

[[Page 31791]]

or substitution of security for the purpose of removing a dwelling to a 
new lot, but FHA has encountered situations in which rebuilding a 
dwelling on the same lot is desirable. In Sec.  206.135, which contains 
content from Sec.  203.351, FHA proposes to amend the timing for the 
recorded assignment instrument, such that it must be forwarded to the 
Commissioner as soon as it is received by the mortgagee, but it need 
not be provided on the date the application for assignment is 
submitted. When the application for assignment is submitted, only a 
proposed assignment instrument would be required. Finally, in Sec.  
206.136, FHA proposes to address concerns with super lien states by 
requiring the HECM mortgage to be in first lien status prior to 
homeowners association and condo association liens.
Subpart D--Servicing Responsibilities
Providing Information (Sec.  206.203)
    The current regulation at Sec.  206.203(a) requires that the 
mortgagee provide the borrower with an annual statement summarizing 
mortgage activity during the calendar year. FHA has discovered that 
this requirement may have the potential for deferring notification to 
borrowers of important actions affecting their mortgage accounts. 
Further, current Sec.  206.203(b) provides that the mortgagee shall 
provide the borrower with a statement of the account every time the 
mortgagee makes a line of credit disbursement. This may have the 
potential to impose an undue administrative burden on mortgagees, and 
also to deluge borrowers with multiple statements if several line of 
credit disbursements are requested within a given month. To alleviate 
these concerns, this proposed rule would revise Sec.  206.203 to 
require the mortgagee to provide the borrower with a single statement 
at the end of each month summarizing account activity. The monthly 
statement shall be in a format acceptable to the Commissioner and 
contain the information that is currently required annually under Sec.  
206.203(a) for the specific month covered by the statement, as well as 
for the calendar year as of the date of the statement. This rule would 
therefore remove the requirements that the mortgagee provide the 
borrower with a statement of account activity every time it makes a 
line of credit payment or recalculates the monthly payments.
    The current regulation at Sec.  206.203(c) requires the mortgagee 
to provide the borrower with the name of the mortgagee's employee who 
has been specifically designated to respond to HECM loan inquiries. The 
requirement that a specific individual be named has proven to be 
impracticable, given the large number of HECM loans serviced by 
mortgagees and the fact that such inquiries are typically addressed by 
a team of employees rather than a single individual. Therefore, FHA 
proposes to require that the borrower be provided with the telephone 
number where the borrower may speak to employee(s) designated to 
address inquiries concerning their HECM loans. The use of the word 
``speak'' in the regulatory language is deliberate. Although mortgagees 
would no longer be required to provide the name of a specific employee, 
it is important for mortgagees to ensure that their employees are 
tasked with receiving and responding to calls from HECM borrowers as 
opposed to having such calls routed to voicemail or handled through 
email.
    In addition, because it is necessary for FHA to have access to 
information regarding individual accounts as part of FHA's oversight, 
in Sec.  206.203(c)(3), FHA proposes to require mortgagees to respond 
to FHA requests for information concerning individual accounts, which 
mirrors forward mortgage requirements.
    Finally, the regulation at Sec.  206.203(c) currently provides that 
the ``forward mortgage'' requirements at Sec.  203.508(a) and (b) 
pertaining to loan information to borrowers are also applicable to the 
HECM program. As mentioned earlier in this preamble, in order to 
provide greater clarity, FHA proposes to restate requirements in FHA's 
part 206 regulations, as applicable to the HECM program, instead of 
cross-referencing to other parts of FHA's regulations. Accordingly, FHA 
proposes to amend Sec.  206.203 to provide the actual requirements of 
Sec.  203.508(a) and (b) as applicable to the HECM program.
Property Charges (Sec.  206.205)
    RMSA Mortgagee Letter 2014-21 \27\ implemented substantial changes 
to FHA's Property Charge Funding Requirements in Sec.  206.205 to 
address increasing property charge defaults, which resulted in higher 
payouts of insurance claims. RMSA Mortgagee Letter 2014-21 provided 
that property charges are obligations of the borrower that are defined 
as taxes, hazard insurance premiums, any applicable flood insurance 
premiums, ground rents, condominium fees, and any other special 
assessments that may be levied by municipalities or state law.
---------------------------------------------------------------------------

    \27\ FHA initially implemented changes to HECM's Property Charge 
Funding Requirements in RMSA Mortgagee Letter 2013-27, but that RMSA 
mortgagee letter was superseded by RMSA Mortgagee Letter 2014-21.
---------------------------------------------------------------------------

    The current regulation at Sec.  206.205 provided that borrowers 
were responsible for the payment of property charges, but allowed the 
borrower to elect to require the mortgagee to pay certain property 
charges by withholding funds from monthly payments due to the borrower 
or by charging such funds to a line of credit. FHA's new policy, 
announced in RMSA Mortgagee Letter 2014-21, however, provided 
additional methods for the payment of property charges, and specified 
the conditions under which these methods must or may be used.
    Based on the results of the Financial Assessment, for fixed or 
adjustable interest rate HECMs, the mortgagee may require a LESA for 
the payment of certain property charges. For fixed interest rate HECMs, 
if a LESA is required, it must be a Fully-Funded LESA. For adjustable 
interest rate HECMs only, based on the results of the Financial 
Assessment, the mortgagee may require the LESA to be Partially- or 
Fully-Funded. If the mortgagee does not require a LESA, a borrower who 
selects an adjustable interest rate HECM may elect to have a Fully-
Funded LESA, elect to have the mortgagee pay such property charges, or 
elect to be responsible for the independent payment of all property 
charges. If the mortgagee does not require a LESA, a borrower with a 
fixed interest rate HECM may elect to have a Fully-Funded LESA or elect 
to be responsible for the independent payment of all property charges.
    This rule proposes to amend Sec.  206.205 to codify FHA's property 
charge requirements announced in RMSA Mortgagee Letter 2014-21 with 
some exceptions and further amendments as discussed below.
    As mentioned earlier in this preamble in regards to the definition 
of ``property charges,'' RMSA Mortgagee Letter 2014-21 did not include 
utilities in its definition, but FHA is now proposing to add utilities 
as a borrower responsibility. Corresponding amendments are proposed for 
the definition of ``property charges'' in Sec.  206.3.
    RMSA Mortgagee Letter 2014-21 listed specific details about the 
information that a mortgagee must provide to the borrower in the 
section titled ``Information to the Mortgagor.'' In this rule, FHA does 
not propose to codify in FHA's part 206 regulations the requirement 
regarding information to be provided to borrowers because that section 
of RMSA Mortgagee Letter 2014-21 is more appropriately characterized as 
guidance.

[[Page 31792]]

    Similarly, RMSA Mortgagee Letter 2014-21 listed specific details 
about what is to be included in a notice to the borrower when the 
borrower fails to make property charge payments in sections titled 
``Mortgagor Non-Payment of Property Charges--Fully-Funded Life 
Expectancy Set Aside--Adjustable Rate HECMs'' and ``Mortgagor Non-
Payment of Property Charges--Partially-Funded Life Expectancy Set 
Aside.'' In this rule, FHA does not propose to codify in FHA's part 206 
regulations the requirements regarding information that is to be 
provided to borrowers because that content is more appropriately 
characterized as guidance.
    RMSA Mortgagee Letter 2014-21 states that if the insured first 
mortgage is assigned to the Commissioner, or if payments are made 
through the second mortgage under the Demand Assignment process, the 
Commissioner is not required to assume the responsibility for property 
charge payments, but may continue to administer payments for property 
charges for borrowers from any funds available in the LESA. In this 
rule, FHA proposes to further provide that for adjustable interest rate 
HECMs, if the LESA has a positive remaining balance but funds are 
insufficient to pay all property charges due or semi-annual 
disbursements to the borrower, the Commissioner may provide the 
remaining funds to the borrower as line of credit.
    FHA is also proposing amendments to Sec.  206.205 that were not 
included in RMSA Mortgagee Letter 2014-21 for situations in which the 
borrower is not required to have a LESA and elects to pay the property 
charges himself. The failure to pay required property charges not only 
places the borrower at risk of foreclosure and loss of the home, and 
prompts mortgagees to incur the costs of advancing its corporate funds, 
but it also potentially increases losses to the MMIF. Specifically, FHA 
is proposing to require the mortgagee to notify the borrower and 
Commissioner that an obligation of the mortgage has not been performed 
within 30 days of the mortgagee becoming aware of a missed property 
charge payment and there are no available HECM funds from which the 
mortgagee can make the payment. The borrower would then have 30 days to 
respond to the mortgagee to explain the circumstances which resulted in 
the non-payment. FHA also proposes to state that the mortgagee may 
provide any permissible loss mitigation options to the borrower. If the 
borrower is unable or unwilling to repay the mortgagee for any funds 
advanced by the mortgagee to pay property charges outside of a LESA, 
the mortgagee must submit a due and payable request under the 
provisions of Sec.  206.27(c)(2).
Allowable Charges and Fees After Endorsement (Sec.  206.207)
    In Sec.  206.207(a), FHA's current regulation includes references 
to a number of regulatory provisions in part 203. To provide greater 
clarity, FHA proposes to restate these requirements in FHA's part 206 
regulations, as applicable to the HECM program, instead of cross-
referencing to other parts of FHA's regulations.
    In Sec.  206.207(b), FHA proposes to clarify that a mortgagee may 
collect a servicing charge beginning with the month of closing and 
continuing through a Deferral Period. FHA also proposes to allow a 
servicing charge to be included in the mortgage Note rate, in an amount 
set by the Commissioner through notice which shall be between 36 and 
150 basis points.
    FHA specifically solicits public comment on the following 
questions:
    (1) What is an appropriate servicing fee range (minimum and maximum 
dollar amounts) for the flat monthly servicing fee, and what factors 
support the upper and lower bounds of that range?
    (2) What is an appropriate servicing fee range, in basis points, 
that could be included in the Note rate, and what factors support the 
upper and lower bounds of that range?
Prepayment (Sec.  206.209)
    FHA proposes to make clarifying changes in paragraph (a) to 
distinguish from when a borrower repays a mortgage in full and prepays 
a mortgage in part. FHA also proposes to add a new paragraph (c) to 
specify that any funds received from a partial prepayment must be 
applied in accordance with the Note.
Determination of Principal Residence and Contact Information (Sec.  
206.211)
    The current regulation at Sec.  206.211 requires that the mortgagee 
verify, at least annually, whether the property is the principal 
residence of at least one borrower. To further facilitate 
communications between the mortgagee and borrower, this proposed rule 
builds upon this provision by requiring that the mortgagee also verify 
the borrower's contact information, including whether the borrower may 
voluntarily wish to designate an alternative point of contact for 
notifications from the mortgagee.
    In addition, FHA proposes to codify changes made to the 
determination of principal residence and contact information that were 
implemented by RMSA Mortgagee Letters 2014-07 and 2015-02. Consistent 
with the requirements announced in these RMSA mortgagee letters, FHA 
proposes to amend Sec.  206.211 to require the mortgagee, where an 
Eligible Non-Borrowing Spouse has been identified, to obtain an 
additional certification from the borrower confirming the Eligible Non-
Borrowing Spouse remains his or her spouse and the Eligible Non-
Borrowing Spouse continues to reside in the property as his or her 
principal residence. Upon the death of a borrower with an Eligible Non-
Borrowing Spouse, the Eligible Non-Borrowing Spouse is required to 
submit the annual certification as long as that spouse remains an 
Eligible Non-Borrowing Spouse.
Subpart E--HECM Counselor Roster
HECM Counselor Roster (Sec. Sec.  206.302, 206.304, 206.306 and 
206.308)
    FHA proposes to clarify that counselors, in addition to being 
listed on the HECM Counselor Roster, must be employed by a 
participating agency. FHA proposes to define ``participating agency'' 
in Sec.  206.3.
    FHA proposes to make minor amendments to Sec. Sec.  206.304, 
206.306 and 206.308 to differentiate between when a counselor is a 
``housing counselor,'' and when a counselor becomes a ``HECM 
counselor.''
    In addition, FHA proposes to remove the grandfathering clause in 
Sec.  206.304(c) because the time for which it was applicable has 
passed.
3. Technical Amendments
    The definition of ``principal limit'' in Sec.  206.3 incorrectly 
cites to Sec.  209.209(b). The correct citation is Sec.  206.209(b).
    In Sec.  206.9(a), FHA cites to requirements in section 255(b)(3) 
of the NHA, but Sec.  206.9(a) should actually cite to subsections 
255(b)(2) and 255(d)(1) of the NHA.
    In Sec.  206.16, the reference to Sec.  206.17 should be changed to 
Sec.  206.107.
    In Sec.  206.23(d), the third ``mortgagee'' should be changed to 
``mortgage''.
    In Sec.  206.43(b)(1), the reference to Sec.  206.29 should be 
changed to Sec.  206.25, as Sec.  206.29 has been merged with Sec.  
206.25.
    In Sec.  206.53(b), the references to paragraphs (c) and (d) should 
be changed to (d) and (e), respectively.
    In Sec.  206.125(a)(3), ``forclosure'' is misspelled and should be 
changed to ``foreclosure'' and in Sec.  206.125(c), the two references 
to Sec.  206.27(e) should be changed to Sec.  206.27(d), as paragraph 
(e) does not exist.

[[Page 31793]]

    ``Mortagee'' in Sec.  206.127(a)(2) should be changed to 
``mortgagee'' to correct an inadvertent spelling error.
    In Sec.  206.43(a), a reference is made to 24 CFR 3500.7, and in 
Sec.  206.201(c)(2)(i), a reference is made to 24 CFR 3500.21(e)(2). 
However, effective July 21, 2011, title X of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) transferred 
rulemaking authority for a number of consumer financial protection laws 
from seven Federal agencies to the Bureau of Consumer Financial 
Protection (Bureau) as of July 21, 2011, including, from HUD, the Real 
Estate Settlement Procedures Act of 1974 (RESPA) which had previously 
been implemented in HUD's Regulation X, 24 CFR part 3500. See sections 
1061 and 1098 of the Dodd-Frank Act. In these section, FHA proposes to 
cite to 12 CFR 1024.7 and 12 CFR 1024.21(e)(2), respectively, where 
these provisions are now codified.
    In current Sec.  206.205(d), which FHA proposes to redesignate as 
Sec.  206.205(d)(1), the reference to Sec.  206.121(a) is incorrect and 
should be changed to Sec.  206.121(b).

IV. Questions for Commenters

    HUD welcomes comments on all aspects of the proposal, including the 
Regulatory Impact Analysis (RIA) attached to this proposed rule. In 
addition, there are several provisions in the rule that FHA would like 
to note for special consideration and is seeking public comments.

A. Maximum Closing Costs Allowed on Sale of Property

    The flexibility provided in this rule to sell properties for less 
than the full appraised value necessitates limits to the amount of 
closing costs FHA should allow to be deducted from sales proceeds. This 
rule proposes to require that the closing costs from the sale be no 
more than 11 percent of the sales price. FHA specifically invites 
comments regarding
    1. Is 11 percent a reasonable cap? FHA chose this percentage based 
on the policy for sale of its REO inventory, which allows for payment 
of 6 percent sales commission and 5 percent for other closing costs, 
but is interested in comments to indicate whether the amount should be 
higher or lower, and why the commenter believes the adjustment is 
appropriate.
    2. Should FHA implement a tiered approach to the maximum percent of 
closing costs in relation to the sales price? For example, should a 
property selling for under $100,000 be allowed a higher percentage of 
closing costs than a property selling for over $100,000?
    3. Should FHA implement a tiered approach to the maximum dollar 
amount of closing costs in relation to the sales price? For example, 
should a property selling for under $100,000 be allowed a different 
dollar amount than a property selling for over $100,000?

B. Utilities

    FHA proposes to amend the definition of ``property charges'' to 
include utilities as a borrower obligation under the terms of the 
Mortgage that must be satisfied by the borrower, as applied in Sec.  
206.205 of the proposed rule. Failure to pay utilities that result in a 
lien against the property would potentially trigger a due and payable 
event. FHA requests comments on this proposal and the following:
    1. What utilities, if any, should be defined as property charges?
    2. When should a utility bill result in due and payable status?
    3. How do mortgagees currently receive notice of delinquent utility 
bills and potential liens on the property?

C. Property Inspection & Repairs Subsequent to Closing

    With the dwelling serving as security for the loan, it is important 
that the dwelling be maintained as the loan ages. To ensure that the 
borrower complies with their obligation under the mortgage to maintain 
the property in good repair, FHA is considering establishing a 
requirement in the final rule for Mortgagees to conduct periodic 
inspections of the property for the life of the HECM and allowing the 
cost of inspection to be included as a reasonable and customary charge 
that may be collected and added to the borrower's loan balance. If such 
a requirement is included in the final rule and the property requires 
repairs, FHA anticipates that where funds are available from the HECM 
proceeds for adjustable interest rate HECMs, it may allow the mortgagee 
to establish a Repair Set Aside to ensure that necessary repairs are 
made. FHA would further anticipate that where a property inspection 
during a Deferral Period identifies necessary repairs, a Repair Set 
Aside may not be established. The Eligible Non-Borrowing Spouse would 
be responsible for making any required repairs identified during a 
Deferral Period within a specified timeframe. FHA specifically invites 
comment on the following questions:
    1. What is the appropriate frequency of property inspections, 
including whether more or less frequent inspections may be necessary 
under certain conditions (for example, if a property is newly 
constructed, a prior inspection indicated disrepair, or following a 
disaster event), and whether interior and exterior inspections should 
be required at the same frequency?
    2. Should inspections consist of exterior inspections only, or 
should they also include interior inspections?
    3. Should the borrower be required to complete the repairs within 
one year of the date the property was inspected?
    4. When no HECM funds are available and the borrower or, if 
applicable, Eligible Non-Borrowing Spouse, does not have funds to make 
the needed repairs, how else might repairs be funded?
    5. What types or categories of items for repair should a property 
inspector identify as being necessary? In what ways, if any, should 
this differ from the condition status of the property at origination?
    6. What are the methods and standards the property inspector should 
employ when conducting the property inspection to identify items that 
are in need of repair?
    7. If a Repair Set Aside was established to complete repairs 
identified during a periodic inspection and the HECM borrower passes 
away prior to the completion of repairs, should FHA consider allowing 
funds to be disbursed from a Repair Set Aside during a Deferral Period 
for the purpose of paying for necessary repairs identified during the 
property inspection?
    8. What would be the potential costs to borrowers and servicers 
associated with periodic inspections? What benefits would result from 
periodic inspections and do they outweigh these costs?
    9. As an alternative to the requirement proposed by this rule, HUD 
could require inspections consistent with the risks presented in each 
loan, such as the amount of the outstanding balance in relation to the 
value of the property and the age of the home. Would such an approach 
be more effective for both maintaining the value of the property and 
reducing costs for FHA and borrowers?

D. Non-Borrowing Spouse Communication

    FHA understands that Non-Borrowing Spouses and successors in 
interest may face difficulties after the death of the borrower in 
understanding and exercising their rights with regard to the mortgage. 
In addition to the counseling required for all borrowers, the proposed 
rule would require additional housing counseling for Non-Borrowing 
Spouses

[[Page 31794]]

to explain how and when the HECM would become due and payable. FHA 
specifically invites comment on the following questions:
    1. What difficulties have Non-Borrowing Spouses, heirs, and 
successors in interest had in obtaining information about HECMs and 
understanding and exercising their rights?
    2. What adjustments could FHA make to this rule to address the 
identified difficulties and facilitate communication with Non-Borrowing 
Spouses, heirs, and successors in interest?

E. Regulatory Impact Analysis--Benefits and Costs

    HUD also welcomes comments on all aspects of the RIA to this 
proposed rule and would welcome any additional information or insight 
commenters may have on the benefits and costs of each provision of the 
rule. HUD's full RIA is available for review and comment at 
Regulations.gov.

V. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this proposed 
rule are pending approval by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB Collection Numbers 2502-0524 and 2502-0611. In accordance 
with the Paperwork Reduction Act, an agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless the collection displays a currently valid OMB control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                        Estimated average
        Section reference           Number of    Number of responses  time for requirement    Estimated annual
                                   respondents     per respondent           (in hours)        burden (in hours)
----------------------------------------------------------------------------------------------------------------
206.59 Mortgagee notifies NBS of            10  10,000..............  0.17................  1,700.
 the end of the Deferral Period.
206.125 Mortgagee notifies NBS of           10  10,000..............  0.10................  1,000.
 D&P status and applicable
 options.
206.125 Notification of D&P                 10  10,000..............  0.10................  1,000.
 status to HUD when Deferral
 Period ends.
206.203 Information Sharing with            10  12,844,433            0.15 (automated)....  1,926,665
 HUD.                                       10   (automated).         1 (manual)..........   (automated)
                                                10,000 (manual).....                        10,000 (manual).
206.211 NBS Annual Occupancy                10  24,000..............  0.33................  7,920.
 Certification.
                                  ------------------------------------------------------------------------------
    Totals.......................           10  12,908,433..........  ....................  1,948,285.
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number (FR-5353) and must be sent 
to: HUD Desk Officer, Office of Management and Budget, New Executive 
Office Building, Washington, DC 20503, Fax number: (202) 395-6947 and 
Reports Liaison Officer, Department of Housing and Urban Development, 
451 Seventh Street SW., Washington, DC 20410.

Regulatory Review--Executive Orders 12866 and 13563

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). OMB determined that this rule was an economically 
significant rule under the order. The docket file is available for 
public inspection in the Regulations Division, Office of General 
Counsel, U.S. Department of Housing and Urban Development, 451 7th 
Street SW., Room 10276, Washington, DC, 20410-0500. The Initial 
Economic Analysis prepared for this rule is also available for public 
inspection in the Regulations Division. Due to security measures at the 
HUD Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at (202) 
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.
    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. This rule reduces burdens on mortgagees by 
codifying all regulatory policy related to the HECM program in one 
place. Absent this proposed rule, mortgagees would have to deduce the 
current program requirements by comparing a number of mortgagee letters 
to the current HECM regulations at 24 CFR part 206 and determining 
which regulatory content has, in effect, been superseded by HERA and 
RMSA mortgagee letters.

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

[[Page 31795]]

number of small entities. Many of the policies discussed in this 
proposed rule, such as the requirement that mortgagees perform a 
Financial Assessment of prospective HECM borrowers, the requirements of 
the HECM for Purchase program, the introduction of the Single Lump Sum 
payment option, and the limitation on disbursements during the First 
12-Month Disbursement Period, have already been implemented by 
mortgagees large and small. The codification of these policies will not 
impact large or small mortgagees, other than easing burden by providing 
them with one location to find all HECM regulatory requirements.
    The new policy changes proposed by this rule would address 
important concerns with the HECM program, including the risk the 
program has, in the past, posed to the MMIF, as well as the continued 
availability of this program for seniors. Some of the new policy 
proposals are expected to relieve burdens on all mortgagees, large and 
small. For example, the amendment to the definition of ``expected 
average mortgage interest rate'' providing the mortgagee with the 
ability to lock-in the expected average mortgage interest rate prior to 
the date of loan closing will align the provision with current industry 
policy. Removing the duplicative appraisal requirement and creating a 
Cash for Keys incentive structure will both relieve burden on 
mortgagees. Other policies are expected to increase burdens on 
mortgagees, although are not expected to raise to the level of having a 
significant impact on a substantial number of small entities. For 
example, all mortgagees would be required to disclose all available 
HECM program options. To minimize the effect of this provision on all 
mortgagees, FHA intends to create disclosure documents listing all 
available options for mortgagees to provide to prospective borrowers. 
Also, while new lifetime interest rate caps for monthly adjustable 
interest rate HECMs will affect large and small mortgagees, the impact 
will be limited because the industry currently self-imposes a 10 
percent life-of-loan cap on monthly adjustable interest rate HECMs. FHA 
believes that these policies are reasonable and provide mitigating 
features so that the FHA-approved mortgagees, large and small, will not 
be adversely affect by these policies.
    Notwithstanding FHA's determination that this rule will not have a 
significant effect on a substantial number of small entities, FHA 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in the preamble to this rule.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332(2)(C)). The Finding is available for public 
inspection during regular business hours in the Regulations Division, 
Office of General Counsel, Department of Housing and Urban Development, 
451 7th Street SW., Room 10276, Washington, DC 20410-0500. Due to 
security measures at the HUD Headquarters building, please schedule an 
appointment to review the Finding 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.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
imposes either substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This 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.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for Home Equity 
Conversion Mortgages is 14.183.

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 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.

List of Subjects

24 CFR Part 30

    Administrative practice and procedure, Grant programs-housing and 
community development, Loan programs-housing and community development, 
Mortgage insurance, Penalties.

24 CFR Part 206

    Aged condominiums, loan programs, housing and community 
development, mortgage insurance, reporting and recordkeeping 
requirements.

    Accordingly, for the reasons stated in the preamble, HUD proposes 
to amend 24 CFR parts 30 and 206 to read as follows:

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

0
1. The authority citation for part 30 continues to read as follows:

    Authority: 12 U.S.C. 1701q-1; 1703, 1723i, 1735f-14, and 1735f-
15; 15 U.S.C. 1717a; 28 U.S.C. 2461 note; 42 U.S.C. 1437z-1 and 
3535(d).

0
2. Revise paragraphs (a)(8) and (a)(10) of Sec.  30.35 to read as 
follows:


Sec.  30.35  Mortgagees and lenders.

    (a) * * *
    (8) Fails to timely submit documents that are complete and accurate 
in connection with a conveyance of a property or a claim for insurance 
benefits, in accordance with Sec. Sec.  203.365, 203.366 or 203.368; or 
a claim for insurance benefits in accordance with Sec.  206.127 of this 
title.
* * * * *
    (10) Fails to service FHA insured mortgages, in accordance with the 
requirements of 24 CFR parts 201, 203, 206 and 235.
* * * * *
0
3. Revise part 206 to read as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

Subpart A--General
Sec.
206.1 Purpose.
206.3 Definitions.
206.7 Effect of amendments.
206.8 Preemption.
Subpart B--Eligibility; Endorsement
206.9 Eligible mortgagees.
206.13 Disclosure of available HECM program options.
206.15 Insurance.

 Mortgages

206.17 Eligible Mortgages: General.
206.19 Payment options.
206.21 Interest rate.
206.23 Shared appreciation.
206.25 Calculation of disbursements.
206.26 Change in payment option.
206.27 Mortgage provisions.
206.31 Allowable charges and fees.
206.32 No outstanding unpaid obligations.

[[Page 31796]]

Eligible Borrowers

206.33 Age of borrower.
206.34 Limitation on number of mortgages.
206.35 Title of property which is security for HECM.
206.36 Seasoning requirements for existing non-HECM liens.
206.37 Credit standing.
206.39 Principal residence.
206.40 Disclosure, verification and certifications.
206.41 Counseling.
206.43 Information to borrower.
206.44 Monetary investment for HECM for Purchase program.

Eligible Properties

206.45 Eligible properties.
206.47 Property standards; repair work.
206.51 Eligibility of mortgages involving a dwelling unit in a 
condominium.
206.52 Eligible sale of property--HECM for Purchase.

Refinancing of Existing Home Equity Conversion Mortgages

206.53 Refinancing a HECM loan.

Deferral of Due and Payable Status

206.55 Deferral of due and payable status for Eligible Non-Borrowing 
Spouses.
206.57 Cure provision enabling reinstatement of Deferral Period.
206.59 Obligations of mortgagee.
206.61 HECM proceeds during a Deferral Period.
Subpart C--Contract Rights and Obligations

Sale, Assignment and Pledge

206.101 Sale, assignment and pledge of insured mortgages.
206.102 Insurance Funds.

Mortgage Insurance Premiums

206.103 Payment of MIP.
206.105 Amount of MIP.
206.107 Mortgagee election of assignment or shared premium option.
206.109 Amount of mortgagee share of premium.
206.111 Due date of MIP.
206.113 Late charge and interest.
206.115 Insurance of mortgage.
206.116 Refunds.

HUD Responsibility to Borrowers

206.117 General.
206.119 [Reserved]
206.121 Commissioner authorized to make payments.

Claim Procedure

206.123 Claim procedures in general.
206.125 Acquisition and sale of the property.
206.127 Application for insurance benefits.
206.129 Payment of claim.

Condominiums

206.131 Contract rights and obligations for mortgages on individual 
dwelling units in a condominium.

Termination of Insurance Contract

206.133 Termination of insurance contract.

Additional Requirements

206.134 Partial release, addition or substitution of security.
206.135 Application for insurance benefits and fiscal data.
206.136 Conditions for assignment.
206.137 Effect of noncompliance with regulations.
206.138 Mortgagee's liability for certain expenditures.
206.140 Inspection and preservation of properties.
206.141 Property condition.
206.142 Adjustment for damage or neglect.
206.143 Certificate of property condition.
206.144 Final payment.
206.145 Items deducted from payment.
206.146 Debenture interest rate.
Subpart D--Servicing Responsibilities
206.201 Mortgage servicing generally; sanctions.
206.203 Providing information.
206.205 Property charges.
206.207 Allowable charges and fees after endorsement.
206.209 Prepayment.
206.211 Determination of principal residence and contact 
information.
Subpart E--HECM Counselor Roster
206.300 General.
206.302 Establishment of the HECM Counselor Roster.
206.304 Eligibility for placement on the HECM Counselor Roster.
206.306 Removal from the HECM Counselor Roster.
206.308 Continuing education requirements of counselors listed on 
the HECM Counselor Roster.

    Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).

Subpart A--General


Sec.  206.1  Purpose.

    The purposes of the Home Equity Conversion Mortgage (HECM) 
Insurance program are set out in section 255(a) of the National Housing 
Act, Public Law 73-479, 48 STAT. 1246 (12 U.S.C. 1715z-20) (``NHA'').


Sec.  206.3  Definitions.

    As used in this part, the following terms shall have the meaning 
indicated.
    Borrower means a mortgagor who is an original borrower under the 
HECM Loan Agreement and Note. The term does not include successors or 
assigns of a borrower.
    Borrower's Advance means the funds advanced to the borrower at the 
closing of a fixed interest rate HECM in accordance with Sec.  206.25.
    CMT Index means the U.S. Constant Maturity Treasury Index.
    Commissioner means the Federal Housing Commissioner or the 
Commissioner's authorized representative.
    Contract of insurance means the agreement evidenced by the issuance 
of a Mortgage Insurance Certificate or by the endorsement of the 
Commissioner upon the credit instrument given in connection with an 
insured mortgage, incorporating by reference the regulations in subpart 
C of this part and the applicable provisions of the National Housing 
Act.
    Day means calendar day, except where the term business day is used.
    Deferral Period means the period of time following the death of the 
last surviving borrower during which the due and payable status of a 
HECM is deferred for an Eligible Non-Borrowing Spouse provided that the 
Qualifying Attributes and all other FHA requirements continue to be 
satisfied.
    Eligible Non-Borrowing Spouse means a Non-Borrowing Spouse who 
meets all Qualifying Attributes for a Deferral Period.
    Estate planning service firm means an individual or entity that is 
not a mortgagee approved under part 202 of this chapter or a 
participating agency approved under subpart B of 24 CFR part 214 and 
that charges a fee that is:
    (1) Contingent on the prospective borrower obtaining a mortgage 
loan under this part, except the origination fee authorized by Sec.  
206.31 or a fee specifically authorized by the Commissioner; or
    (2) For information that borrowers and Eligible and Ineligible Non-
Borrowing Spouses, if applicable, must receive under Sec.  206.41, 
except a fee by:
    (i) A participating agency approved under subpart B of 24 CFR part 
214; or
    (ii) An individual or company, such as an attorney or accountant, 
in the bona fide business of generally providing tax or other legal or 
financial advice; or
    (3) For other services that the provider of the services represents 
are, in whole or in part, for the purpose of improving a prospective 
borrower's access to mortgages covered by this part, except where the 
fee is for services specifically authorized by the Commissioner.
    Expected average mortgage interest rate means the interest rate 
used to calculate the principal limit established at closing. For fixed 
interest rate HECMs, the expected average mortgage interest rate is the 
same as the fixed mortgage (Note) interest rate and is set 
simultaneously with the fixed interest rate. For adjustable interest 
rate HECMs, it is either the sum of the mortgagee's margin plus the 
weekly average yield for U.S. Treasury securities adjusted to a 
constant maturity of 10 years, or it is the sum of the mortgagee's 
margin plus the 10-year LIBOR swap rate, depending on which interest 
rate index is chosen by the borrower. The margin is determined

[[Page 31797]]

by the mortgagee and is defined as the amount that is added to the 
index value to compute the expected average mortgage interest rate. The 
index type (CMT or LIBOR) used to calculate the expected average 
mortgage interest rate must be the same index type used to calculate 
mortgage interest rate adjustments--commingling of index types is not 
allowed. The mortgagee's margin is the same margin used to determine 
the initial interest rate and the periodic adjustments to the interest 
rate. Mortgagees, with the agreement of the borrower, may 
simultaneously lock-in the expected average mortgage interest rate and 
the mortgagee's margin prior to the date of loan closing or 
simultaneously establish the expected average mortgage interest rate 
and the mortgagee's margin on the date of loan closing.
    First 12-Month Disbursement Period means the period beginning on 
the day of loan closing and ending on the day before the loan closing 
anniversary date. When the day before the anniversary date of loan 
closing falls on a Federally-observed holiday, Saturday, or Sunday, the 
end period will be on the next business day after the Federally-
observed holiday, Saturday or Sunday.
    HECM means a Home Equity Conversion Mortgage.
    HECM counselor means an independent third-party that is currently 
active on FHA's HECM Counselor Roster and that is not, either directly 
or indirectly, associated with or compensated by, a party involved in 
originating, servicing, or funding the HECM, or the sale of annuities, 
investments, long-term care insurance, or any other type of financial 
or insurance product who provides statutorily required counseling to 
prospective borrowers who may be eligible for or interested in 
obtaining an FHA-insured HECM. This counseling assists elderly 
prospective borrowers who seek to convert equity in their homes into 
income that can be used to pay for home improvements, medical costs, 
living expenses, or other expenses.
    Ineligible Non-Borrowing Spouse means a Non-Borrowing Spouse who 
does not meet all Qualifying Attributes for a Deferral Period.
    Initial Disbursement Limit means the maximum amount of funds that 
can be advanced to a borrower of an adjustable interest rate HECM 
allowed at loan closing and during the First 12-Month Disbursement 
Period in accordance with Sec.  206.25.
    Insured mortgage means a mortgage which has been insured as 
evidenced by the issuance of a Mortgage Insurance Certificate.
    LIBOR means the London Interbank Offered Rate.
    Loan documents mean the credit instrument, or Note, secured by the 
lien, and the loan agreement.
    Mandatory Obligations are fees and charges incurred in connection 
with the origination of the HECM that are requirements for loan 
approval and which will be paid at closing or during the First 12-Month 
Disbursement Period in accordance with Sec.  206.25.
    Maximum claim amount means the lesser of the appraised value of the 
property, as determined by the appraisal used in underwriting the loan; 
the sales price of the property being purchased for the sole purpose of 
being the principal residence; or the national mortgage limit for a 
one-family residence under subsections 255(g) or (m) of the National 
Housing Act (as adjusted where applicable under section 214 of the 
National Housing Act) as of the date of loan closing. The initial 
mortgage insurance premium must not be taken into account in the 
calculation of the maximum claim amount. Closing costs must not be 
taken into account in determining appraised value.
    MIP means the mortgage insurance premium paid by the mortgagee to 
the Commissioner in consideration of the contract of insurance.
    Mortgage means a first lien on real estate under the laws of the 
jurisdiction where the real estate is located. If the dwelling unit is 
in a condominium, the term mortgage means a first lien covering a fee 
interest or eligible leasehold interest in a one-family unit in a 
condominium project, together with an undivided interest in the common 
areas and facilities serving the project, and such restricted common 
areas and facilities as may be designated. The term refers to a 
security instrument creating a lien, whether called a mortgage, deed of 
trust, security deed, or another term used in a particular 
jurisdiction.
    Mortgagee means original lender under a mortgage and its successors 
and assigns, as are approved by the Commissioner.
    Mortgagor means each original mortgagor under a HECM mortgage and 
his heirs, executors, administrators and assigns.
    Non-Borrowing Spouse means the spouse, as defined by the law of the 
state in which the spouse and borrower reside or the state of 
celebration, of the HECM borrower at the time of closing and who is 
also not a borrower.
    Participating agency means all housing counseling and intermediary 
organizations participating in HUD's Housing Counseling program, 
including HUD-approved agencies, and affiliates and branches of HUD-
approved intermediaries, HUD-approved multi-state organizations (MSOs), 
and state housing finance agencies.
    Principal limit means the maximum amount calculated, taking into 
account the age of the youngest borrower or Eligible Non-Borrowing 
Spouse, the expected average mortgage interest rate, and the maximum 
claim amount. The principal limit is calculated for the first month 
that a mortgage could be outstanding using factors provided by the 
Commissioner. It increases each month thereafter at a rate equal to 
one-twelfth of the mortgage interest rate in effect at that time, plus 
one-twelfth of the annual mortgage insurance rate. For an adjustable 
interest rate HECM, the principal limit increase may be made available 
for the borrower each month thereafter except that the availability 
during the First 12-Month Disbursement Period may be restricted. 
Although the principal limit of a fixed interest rate HECM will 
continue to increase at the rate provided by the Commissioner, no 
further funds may be made available for the borrower to draw against 
after closing. The principal limit may decrease because of insurance or 
condemnation proceeds applied to the outstanding loan balance under 
Sec.  206.209(b).
    Principal residence means the dwelling where the borrower and, if 
applicable, Non-Borrowing Spouse, maintain their permanent place of 
abode, and typically spend the majority of the calendar year. A person 
may have only one principal residence at any one time. The property 
shall be considered to be the principal residence of any borrower who 
is temporarily in a health care institution provided the borrower's 
residency in a health care institution does not exceed twelve 
consecutive months. The property shall be considered to be the 
principal residence of any Non-Borrowing Spouse, who is temporarily in 
a health care institution, as long as the property is the principal 
residence of his or her borrower spouse, who physically resides in the 
property. During a Deferral Period, the property shall continue to be 
considered to be the principal residence of any Non-Borrowing Spouse, 
who is temporarily in a health care institution, provided he or she 
qualified as an Eligible Non-Borrowing Spouse and physically occupied 
the property immediately prior to entering the health care institution 
and his or her residency in a health care institution does not exceed 
twelve consecutive months.

[[Page 31798]]

    Property charges means, unless otherwise specified, obligations of 
the borrower that include property taxes, hazard insurance premiums, 
any applicable flood insurance premiums, ground rents, condominium 
fees, planned unit development fees, homeowners association fees, any 
other special assessments that may be levied by municipalities or state 
law, and utilities.
    Qualifying Attributes means the requirements which must be met by a 
Non-Borrowing Spouse in order to be an Eligible Non-Borrowing Spouse.


Sec.  206.7  Effect of amendments.

    The regulations in this part may be amended by the Commissioner at 
any time and from time to time, in whole or in part, but amendments to 
subparts B and C of this part will not adversely affect the interests 
of a mortgagee on any mortgage to be insured for which either the 
Direct Endorsement mortgagee or Lender Insurance mortgagee has approved 
the borrower and all terms and conditions of the mortgage, or the 
Commissioner has made a commitment to insure. Such amendments will not 
adversely affect the interests of a borrower in the case of a default 
by a mortgagee where the Commissioner makes payments to the borrower.


Sec.  206.8  Preemption.

    (a) Lien priority. The full amount secured by the mortgage shall 
have the same priority over any other liens on the property as if the 
full amount had been disbursed on the date the initial disbursement was 
made, regardless of the actual date of any disbursement. The amount 
secured by the mortgage shall include all direct payments by the 
mortgagee to the borrower and all other loan advances permitted by the 
mortgage for any purpose, including loan advances for interest, 
property charges, mortgage insurance premiums, required repairs, 
servicing charges, counseling charges and costs of collection, 
regardless of when the payments or loan advances were made. The 
priority provided by this section shall apply notwithstanding any State 
constitution, law or regulation.
    (b) Second mortgage. If the Commissioner holds a second mortgage, 
it shall have a priority subordinate only to the first mortgage (and 
any senior liens permitted by paragraph (a) of this section).

Subpart B--Eligibility; Endorsement


Sec.  206.9  Eligible mortgagees.

    (a) Statutory requirements. See sections (b)(2) and 255(d)(1) of 
the NHA.
    (b) HUD approved mortgagees. Any mortgagee authorized under 
paragraph (a) of this section and approved under part 202 of this 
chapter, except an investing mortgagee approved under Sec.  202.9 of 
this chapter, is eligible to apply for insurance. A mortgagee approved 
under Sec. Sec.  202.6, 202.7, 202.9 or 202.10 of this chapter may 
purchase, hold and sell mortgages insured under this part without 
additional approval.


Sec.  206.13  Disclosure of available HECM program options.

    At the time of initial contact, the mortgagee shall inform the 
prospective HECM borrower, in a manner acceptable to the Commissioner, 
of all products, features and options of the HECM program that FHA will 
insure under this part, including: Fixed interest rate mortgages with 
the Single Lump Sum payment option; adjustable interest rate mortgages 
with tenure, term, and line of credit disbursement options, or a 
combination of these; any other FHA insurable disbursement options; and 
initial mortgage insurance premium options, and how those affect the 
availability of other mortgage and disbursement options.


Sec.  206.15  Insurance.

    Mortgages originated under this part must be endorsed through the 
Direct Endorsement program under Sec.  203.5 of this chapter, except 
that any references to Sec.  203.255 in Sec.  203.5 shall mean Sec.  
206.115. The mortgagee shall submit the information as described in 
Sec.  206.115(b) for the Direct Endorsement program; the certificate of 
housing counseling as described in Sec.  206.41; a copy of the title 
insurance commitment satisfactory to the Commissioner (or other 
acceptable title evidence if the Commissioner has determined not to 
require title insurance under Sec.  206.45(a)); the mortgagee's 
election of either the assignment or shared premium option under Sec.  
206.107; and any other documentation required by the Commissioner. If 
the mortgagee has complied with the requirements of Sec. Sec.  203.3 
and 203.5, except that any reference to Sec.  203.255 in these sections 
shall mean Sec.  206.115 for purposes of this section, and other 
requirements of this part, and the mortgage is determined to be 
eligible, the Commissioner will endorse the mortgage for insurance by 
issuing a Mortgage Insurance Certificate.

Eligible Mortgages


Sec.  206.17  Eligible Mortgages: General.

    (a) [Reserved]
    (b) Interest rate and payment options. A HECM shall provide for 
either fixed or adjustable interest rates in accordance with Sec.  
206.21.
    (1) Fixed interest rate mortgages shall use the Single Lump Sum 
payment option (Sec.  206.19(e)).
    (2) Adjustable interest rate mortgages shall initially provide for 
the term (Sec.  206.19(a)), the tenure (Sec.  206.19(b)), the line of 
credit (Sec.  206.19(c)), or a modified term or modified tenure (Sec.  
206.19(d)) payment option, subject to a later change in accordance with 
Sec.  206.26.
    (c) Shared appreciation. A mortgage may provide for shared 
appreciation in accordance with Sec.  206.23.


Sec.  206.19  Payment options.

    (a) Term payment option. Under the term payment option, equal 
monthly payments are made by the mortgagee to the borrower for a fixed 
term of months chosen by the borrower in accordance with this section 
and Sec.  206.25(e), unless the mortgage is prepaid in full or becomes 
due and payable earlier under Sec.  206.27(c).
    (b) Tenure payment option. Under the tenure payment option, equal 
monthly payments are made by the mortgagee to the borrower in 
accordance with this section and with Sec.  206.25(f) unless the 
mortgage is prepaid in full or becomes due and payable under Sec.  
206.27(c).
    (c) Line of credit payment option. Under the line of credit payment 
option, payments are made by the mortgagee to the borrower at times and 
in amounts determined by the borrower as long as the amounts do not 
exceed the payment amounts permitted by Sec.  206.25.
    (d) Modified term or modified tenure payment option. Under the 
modified term or modified tenure payment options, equal monthly 
payments are made by the mortgagee and the mortgagee shall set aside a 
portion of the principal limit to be drawn down as a line of credit as 
long as the amounts do not exceed the payment amounts permitted by 
Sec.  206.25.
    (e) Single Lump Sum payment option. Under the Single Lump Sum 
payment option, the Borrower's Advance will be made by the mortgagee to 
the borrower in an amount that does not exceed the payment amount 
permitted in Sec.  206.25. The Single Lump Sum payment option will be 
available only for fixed interest rate HECMs. Set asides requiring 
disbursements after close may be offered in accordance with paragraphs 
(f)(1) through (3) of this section.
    (f) Principal limit set asides. (1) Repair Set Aside. When repairs 
required by Sec.  206.47 will be completed after closing, the mortgagee 
shall set aside a portion of the principal limit equal to 150 percent 
of the Commissioner's

[[Page 31799]]

estimated cost of repairs, plus the repair administration fee.
    (2) Property Charge Set Aside. (i) Life Expectancy Set Aside 
(LESA). When required by Sec.  206.205(b)(1) or selected by the 
borrower under Sec.  206.205(b)(2)(ii), the mortgagee shall set aside a 
portion of the principal limit, consistent with the requirements of 
Sec.  206.205, for payment of the following property charges: Property 
taxes including special assessments levied by municipalities or state 
law, and flood and hazard insurance premiums.
    (ii) Borrower elects to have mortgagee pay property charges. (A) 
First year property charges. When required by Sec.  206.205(d), the 
mortgagee shall set aside a portion of the principal limit for payment 
of the following property charges that must be paid during the First 
12-Month Disbursement Period: Property taxes including special 
assessments levied by municipalities or state law, and flood and hazard 
insurance premiums. The mortgagee's estimate of withholding amount 
shall be based on the best information available as to probable 
payments which will be required to be made for property charges in the 
coming year. The mortgagee may not require the withholding of amounts 
in excess of the current estimated total annual requirement, unless 
expressly requested by the borrower. Each month's withholding for 
property charges shall equal one-twelfth of the annual amounts as 
reasonably estimated by the mortgagee.
    (B) Property charges for subsequent years. For subsequent year 
property charges, the mortgagee's estimate of withholding amount shall 
be based on the best information available as to probable payments 
which will be required to be made for property charges in the coming 
year. If actual disbursements during the preceding year are used as the 
basis, the resulting estimate may deviate from those disbursements by 
as much as ten percent. The mortgagee may not require the withholding 
of amounts in excess of the current estimated total annual requirement, 
unless expressly requested by the borrower. Each month's withholding 
for property charges shall equal one-twelfth of the annual amounts as 
reasonably estimated by the mortgagee.
    (3) Servicing Fee Set Aside. When servicing charges will be made as 
permitted by Sec.  206.207(b), the mortgagee shall set aside a portion 
of the principal limit sufficient to cover charges through a period 
equal to the payment term which would be used to calculate tenure 
payments under Sec.  206.25(f).
    (g) Interest accrual and repayment. The interest charged on the 
outstanding loan balance shall begin to accrue from the funding date 
and shall be added to the outstanding loan balance monthly as provided 
in the mortgage. Under all payment options, repayment of the 
outstanding loan balance is deferred until the mortgage becomes due and 
payable under Sec.  206.27(c).
    (h) Disbursement limits. (1) For all HECMs, no disbursements shall 
be made under any of the payment options, notwithstanding anything to 
the contrary in this section or in Sec.  206.25, in an amount which 
shall cause the outstanding loan balance after the payment to exceed 
any maximum mortgage amount stated in the security instruments or to 
otherwise exceed the amount secured by a first lien.
    (2) For adjustable interest rate HECMs: (i) No disbursements shall 
be made under any of the payment options during the First 12-Month 
Disbursement Period in excess of the Initial Disbursement Limit, unless 
otherwise permitted by the Commissioner.
    (ii) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (3) For fixed interest rate HECMs, if the borrower makes a partial 
prepayment of the outstanding loan balance any time after loan closing 
and before the contract of insurance is terminated, the mortgagee shall 
apply the funds from the partial prepayment in accordance with the 
Note. Any increase in the available principal limit by the amount 
applied towards the outstanding loan balance shall not be available for 
the borrower to draw against.


Sec.  206.21  Interest rate.

    (a) Fixed interest rate. A fixed interest rate is agreed upon by 
the borrower and mortgagee.
    (b) Adjustable interest rate. An initial expected average mortgage 
interest rate, which defines the mortgagee's margin, is agreed upon by 
the borrower and mortgagee as of the date of loan closing, or as of the 
date of rate lock-in, if the expected average mortgage interest rate 
was locked-in prior to closing. The interest rate shall be adjusted in 
one of two ways depending on the option selected by the borrower, in 
accordance with paragraphs (b)(1) and (b)(2) of this section. Whenever 
an interest rate is adjusted, the new interest rate applies to the 
entire loan balance. The difference between the initial interest rate 
and the index figure applicable when the firm commitment is issued 
shall equal the margin used to determine interest rate adjustments. If 
the expected average mortgage interest rate is locked-in prior to 
closing, the difference between the expected rate and the value of the 
appropriate index at the time of rate lock-in shall equal the margin 
used to determine interest rate adjustments.
    (1) Annual adjustable interest rate HECMs. A mortgagee offering an 
annual adjustable interest rate shall offer a mortgage with an interest 
rate cap structure that limits the periodic interest rate increases and 
decreases as follows:
    (i) Types of mortgages insurable. The types of adjustable interest 
rate mortgages that are insurable are those for which the interest rate 
may be adjusted annually by the mortgagee, beginning after one year 
from the date of the closing.
    (ii) Interest rate index. Changes in the interest rate charged on 
an adjustable interest rate mortgage must correspond either to changes 
in the one-year LIBOR or to changes in the weekly average yield on U.S. 
Treasury securities, adjusted to a constant maturity of one year. 
Except as otherwise provided in this section, each change in the 
mortgage interest rate must correspond to the upward and downward 
change in the index.
    (iii) Frequency of interest rate changes. (A) The interest rate 
adjustments must occur annually, calculated from the date of the 
closing, except that the first adjustment shall be no sooner than 12 
months or later than 18 months.
    (B) To set the new interest rate, the mortgagee will determine the 
change between the initial (i.e., base) index figure and the current 
index figure, or will add a specific margin to the current index 
figure. The initial index figure shall be the most recent figure 
available before the date of mortgage loan origination. The current 
index figure shall be the most recent index figure available 30 days 
before the date of each interest rate adjustment.
    (iv) Magnitude of changes. The adjustable interest rate mortgage 
initial contract interest rate shall be agreed upon by the mortgagee 
and the borrower. The first adjustment to the contract interest rate 
shall take place in accordance with the schedule set forth under 
paragraph (b)(1)(iii) of this section. Thereafter, for all annual 
adjustable interest 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:

[[Page 31800]]

    (A) For all annual adjustable interest rate HECMs, no single 
adjustment to the interest rate shall 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 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.
    (B) At each adjustment date for annual adjustable interest rate 
HECMs, 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.
    (2) Monthly adjustable interest rate HECMs. (i) If a mortgage 
meeting the requirements of paragraph (b)(1) of this section is 
offered, the mortgagee may also offer a mortgage which provides for 
monthly adjustments to the interest rate such that changes in the 
interest rate charged on an adjustable interest rate mortgage 
correspond either to changes in the one-year LIBOR or to changes in the 
weekly average yield on U.S. Treasury securities, adjusted to a 
constant maturity of one year (except as otherwise provided in this 
section, each change in the mortgage interest rate must correspond to 
the upward and downward change in the index), or to the one-month CMT 
index or one-month LIBOR index, and which sets a maximum interest rate 
that can be charged.
    (ii) 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.
    (c) Pre-loan disclosure. (1) At the time the mortgagee provides the 
borrower with a loan application, a mortgagee shall provide a borrower 
with a written explanation of all adjustable interest rate features of 
a mortgage. The explanation must include the following items:
    (i) The circumstances under which the rate may increase;
    (ii) Any limitations on the increase; and
    (iii) The effect of an increase.
    (2) Compliance with pre-loan disclosure provisions of 12 CFR part 
1026 (Truth in Lending) shall constitute full compliance with paragraph 
(c)(1) of this section.
    (d) Post-loan disclosure. At least 25 days before any adjustment to 
the interest rate may occur, the mortgagee must advise the borrower of 
the following:
    (1) The current index amount;
    (2) The date of publication of the index; and
    (3) The new interest rate.


Sec.  206.23  Shared appreciation.

    (a) Additional interest based on net appreciated value. Any 
mortgage for which the mortgagee has chosen the shared premium option 
(Sec.  206.107) may provide for shared appreciation. At the time the 
mortgage becomes due and payable or is paid in full, whichever occurs 
first, the borrower shall pay an additional amount of interest equal to 
a percentage of any net appreciated value of the property during the 
life of the mortgage. The percentage of net appreciated value to be 
paid to the mortgagee, referred to as the appreciation margin, shall be 
no more than twenty-five percent, subject to an effective interest rate 
cap of no more than twenty percent.
    (b) Computation of mortgagee share. The mortgagee's share of net 
appreciated value is computed as follows:
    (1) If the outstanding loan balance at the time the mortgagee's 
share of net appreciated value becomes payable is less than the 
appraised value of the property at the time of loan origination, the 
mortgagee's share is calculated by subtracting the appraised value at 
the time of loan origination from the adjusted sales proceeds (i.e., 
sales proceeds less transfer costs and capital improvement costs 
incurred by the borrower, but excluding any liens) and multiplying by 
the appreciation margin.
    (2) If the outstanding loan balance is greater than the appraised 
value at the time of loan origination but less than the adjusted 
proceeds, the mortgagee's share is calculated by subtracting the 
outstanding loan balance from the adjusted sales proceeds and 
multiplying by the appreciation margin.
    (3) If the outstanding loan balance is greater than the adjusted 
sales proceeds, the net appreciated value is zero.
    (4) If there has been no sale or transfer involving satisfaction of 
the mortgage at the time the mortgagee's share of net appreciated value 
becomes payable, sales proceeds for purposes of this section shall be 
the appraised value as determined in accordance with procedures 
approved by the Commissioner.
    (c) Effective interest rate. To determine the effective interest 
rate, the amount of interest which accrued in the twelve months prior 
to the sale of the property or the prepayment is added to the 
mortgagee's share of the net appreciated value. The sum of the 
mortgagee's share of the net appreciated value and the interest, when 
divided by the sum of the outstanding loan balance at the beginning of 
the twelve month period prior to sale or prepayment plus the payments 
to or on behalf of the borrower (but not including interest) in the 
twelve months prior to the sale or prepayment, shall not exceed an 
effective interest rate of twenty percent.
    (d) Disclosure. At the time the mortgagee provides the borrower 
with a loan application for a mortgage with shared appreciation, the 
mortgagee shall disclose to the borrower the principal limit, payments 
and interest rate which are applicable to a comparable mortgage offered 
by the mortgagee without shared appreciation.


Sec.  206.25  Calculation of disbursements.

    (a) Initial disbursements-- (1) Initial Disbursement Limit--
Adjustable Interest Rate HECMs: for term, tenure, line of credit, 
modified term, and modified tenure payment options:
    (i) The mortgagee is responsible for determining the maximum 
Initial Disbursement Limit.
    (ii) The maximum disbursement allowed at closing and during the 
First 12-Month Disbursement Period is the lesser of:
    (A) The greater of an amount established by the Commissioner 
through notice which shall not be less than 50 percent of the principal 
limit; or the sum of Mandatory Obligations and a percentage of the 
principal limit established by the Commissioner through notice which 
shall not be less than 10 percent; or
    (B) The principal limit less the sum of the funds in the LESA for 
payment beyond the First 12-Month Disbursement Period and the Servicing 
Fee Set Aside.
    (iii) The maximum amount in the First 12-Month Disbursement Period 
or at any point in time may not exceed the principal limit.
    (iv) Mortgagees shall monitor and track all disbursements that 
occur at loan closing and during the First 12-Month Disbursement 
Period; the total amount of disbursements shall not exceed the maximum 
Initial Disbursement Limit, unless otherwise permitted by Sec.  
206.19(h).
    (v) The borrower shall notify the mortgagee at loan closing of the 
exact amount of the additional percentage of

[[Page 31801]]

the principal limit beyond Mandatory Obligations that the borrower will 
draw or that will remain available to be drawn during the First 12-
Month Disbursement Period. The borrower may not increase or decrease 
this election after closing.
    (2) Borrower's Advance--Fixed Interest Rate HECMs: For the Single 
Lump Sum payment option:
    (i) The mortgagee is responsible for determining the maximum 
Borrower's Advance.
    (ii) The disbursement shall only be taken at the time of closing 
and the maximum disbursement shall not exceed the lesser of:
    (A) The greater of an amount established by the Commissioner 
through notice which shall not be less than 50 percent of the principal 
limit; or the sum of Mandatory Obligations and a percentage of the 
principal limit established by the Commissioner through notice which 
shall not be less than 10 percent; or
    (B) The principal limit less the sum of the funds in the LESA for 
payment beyond the First 12-Month Disbursement Period and the Servicing 
Fee Set Aside.
    (iii) The maximum amount in the First 12-Month Disbursement Period 
or at any point in time may not exceed the principal limit.
    (iv) The borrower shall notify the mortgagee at loan closing of the 
exact amount of the additional percentage of the principal limit beyond 
Mandatory Obligations that the borrower will draw. The borrower may not 
increase or decrease this election after closing.
    (b) Mandatory Obligations for traditional and refinance 
transactions include:
    (1) Initial MIP under Sec.  206.105(a);
    (2) Loan origination fee;
    (3) HECM counseling fee;
    (4) Reasonable and customary amounts, but not more than the amount 
actually paid by the mortgagee for any of the following items:
    (i) Recording fees and recording taxes, or other charges incident 
to the recordation of the insured mortgage;
    (ii) Credit report;
    (iii) Survey, if required by the mortgagee or the borrower;
    (iv) Title examination;
    (v) Mortgagee's title insurance;
    (vi) Fees paid to an appraiser for the initial appraisal of the 
property; and
    (vii) Flood certifications.
    (5) Repair Set Asides;
    (6) Repair administration fee;
    (7) Delinquent Federal debt;
    (8) Amounts required to discharge any existing liens on the 
property;
    (9) Customary fees and charges for warranties, inspections, 
surveys, and engineer certifications;
    (10) Funds to pay contractors who performed repairs as a condition 
of closing, in accordance with standard FHA requirements for repairs 
required by the appraiser;
    (11) Property tax and flood and hazard insurance payments required 
by the mortgagee to be paid at loan closing;
    (12) Property charges not included in paragraph (b)(11) of this 
section and which are scheduled for payment during the First 12-Month 
Disbursement Period, as follows:
    (i) Adjustable Interest Rate HECMs. (A) The total amount of 
property charge payments scheduled for payment from the borrower 
authorized option under Sec.  206.205(d) during the First 12-Month 
Disbursement Period;
    (B) The total amount of semi-annual disbursements scheduled to be 
made during the First 12-Month Disbursement Period to the borrower from 
a Partially-Funded LESA; or
    (C) The total amount of property charges scheduled for payment 
during the First 12-Month Disbursement Period from a Fully-Funded LESA.
    (D) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice.
    (ii) Fixed Interest Rate HECMs. (A) The total amount of property 
charges scheduled for payment during the First 12-Month Disbursement 
Period from a Fully-Funded LESA.
    (B) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice; and
    (13) Other charges as authorized by the Commissioner through 
notice.
    (c) Mandatory Obligations for HECM for Purchase transactions 
include:
    (1) Initial MIP under Sec.  206.105(a);
    (2) Loan origination fee;
    (3) HECM counseling fee:
    (4) Reasonable and customary amounts, but not more than the amount 
actually paid by the mortgagee for any of the following items:
    (i) Recording fees and recording taxes, or other charges incident 
to the recordation of the insured mortgage;
    (ii) Credit report;
    (iii) Survey, if required by the mortgagee or the borrower;
    (iv) Title examination;
    (v) Mortgagee's title insurance;
    (vi) Fees paid to an appraiser for the initial appraisal of the 
property; and
    (vii) Flood certifications.
    (5) Delinquent Federal debt;
    (6) Fees and charges for real estate purchase contracts, 
warranties, inspections, surveys, and engineer certifications;
    (7) The amount of the principal that is advanced towards the 
purchase price of the subject property;
    (8) Property tax and flood and hazard insurance payments required 
by the mortgagee to be paid at loan closing;
    (9) Property charges not included in paragraph (c)(8) of this 
section and which are scheduled for payment during the First 12-Month 
Disbursement Period, as follows:
    (i) Adjustable Interest Rate HECMs. (A) The total amount of 
property charge payments scheduled for payment from the borrower 
authorized option under Sec.  206.205(d) during the First 12-Month 
Disbursement Period;
    (B) The total amount of semi-annual disbursements scheduled to be 
made during the First 12-Month Disbursement Period to the borrower from 
a Partially-Funded LESA; or
    (C) The total amount of property charges scheduled for payment 
during the First 12-Month Disbursement Period from a Fully-Funded LESA.
    (D) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice.
    (ii) Fixed Interest Rate HECMs. (A) The total amount of property 
charges scheduled for payment during the First 12-Month Disbursement 
Period from a Fully-Funded LESA.
    (B) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice; and
    (10) Other charges as authorized by the Commissioner through 
notice.
    (d) Timing of disbursements. Mortgage proceeds may not be disbursed 
until after the expiration of the 3-day rescission period under 12 CFR 
part 1026, if applicable.
    (e) Monthly disbursements--term option. (1) Using factors provided 
by the Commissioner, the mortgagee shall calculate the monthly 
disbursement so that the sum of paragraphs (e)(1)(i) or (e)(1)(ii) of 
this section added to paragraphs (e)(1)(iii), (e)(1)(iv), and (e)(1)(v) 
of this section shall be equal to

[[Page 31802]]

the principal limit at the end of the payment term.
    (i) An initial disbursement under paragraph (a) of this section 
plus any initial servicing charge set aside under Sec.  206.19(f)(3); 
or
    (ii) The outstanding loan balance at the time of a change in 
payment option in accordance with Sec.  206.26, plus any remaining 
servicing charge set aside under Sec.  206.19(f)(3); and
    (iii) The amount of the principal limit set aside in accordance 
with Sec.  206.19(f) which is not included in amount set aside in 
paragraphs (e)(1)(i) or (e)(1)(ii) of this section;
    (iv) All MIP or monthly charges due to the Commissioner in lieu of 
mortgage insurance premiums due through the payment term; and
    (v) All interest through the remainder of the payment term. The 
expected average mortgage interest rate shall be used for this purpose.
    (2) The mortgagee shall make all monthly disbursements through the 
payment term even if the outstanding loan balance exceeds the principal 
limit because the actual average mortgage interest rate exceeds the 
expected average mortgage interest rate unless the HECM becomes due and 
payable under Sec.  206.27(c). In the event of a deferral of due and 
payable status in accordance with Sec.  206.27(c)(3), disbursements 
shall cease immediately upon the death of the borrower and no further 
disbursements are permissible.
    (3) Mortgagees shall ensure that term monthly disbursements made to 
the borrower during the First 12-Month Disbursement Period do not 
exceed the Initial Disbursement Limit. If the sum of disbursements made 
during the First 12-Month Disbursement Period would exceed the Initial 
Disbursement Limit for that time period, the mortgagee shall decrease 
the monthly disbursements during the First 12-Month Disbursement Period 
to conform with the Initial Disbursement Limit; upon conclusion of the 
First 12-Month Disbursement Period, the borrower may request a payment 
plan recalculation.
    (4) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (5) If the mortgagee receives repayment from insurance or 
condemnation proceeds after restoration or repair of the damaged 
property, the available principal limit and outstanding loan balance 
shall be reduced by the amount of such payments.
    (f) Monthly disbursements--tenure option. (1) Monthly disbursements 
under the tenure payment option shall be calculated as if the number of 
months in the payment term equals 100 minus the lesser of the age of 
the youngest borrower or 95, multiplied by 12, but payments shall 
continue until the mortgage becomes due and payable under Sec.  
206.27(c), except that in the event that payments would exceed any 
maximum mortgage amount stated in the security instrument or would 
otherwise exceed the amount secured by the first lien, in accordance 
with Sec.  206.19(h) payments will cease immediately; payments may be 
reinstated only in the event a new Note and mortgage are executed in 
accordance with Sec.  206.27(b)(10); and in the event of a deferral of 
due and payable status in accordance with Sec.  206.27(c)(3) payments 
will cease immediately upon the death of the borrower.
    (2) Mortgagees shall ensure that tenure monthly disbursements made 
to the borrower during the First 12-Month Disbursement Period do not 
exceed the Initial Disbursement Limit. If the sum of disbursements made 
during the First 12-Month Disbursement Period would exceed the Initial 
Disbursement Limit for that time period, the mortgagee shall decrease 
the monthly disbursements during the First 12-Month Disbursement Period 
to conform with the maximum Initial Disbursement Limit; upon conclusion 
of the First 12-Month Disbursement Period, the borrower may request a 
payment plan recalculation.
    (3) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (4) If the mortgagee receives repayment from insurance or 
condemnation proceeds after restoration or repair of the damaged 
property, the available principal limit and outstanding loan balance 
shall be reduced by the amount of such payments.
    (g) Line of credit separately or with monthly disbursements. If the 
borrower has a line of credit, separately or combined with the term or 
tenure payment option, the principal limit is divided into an amount 
set aside for servicing charges under Sec.  206.19(f)(3), an amount 
equal to the line of credit (including any portion of the principal 
limit set aside for repairs or property charges under Sec.  
206.19(f)(1) or (2)), and the remaining amount of the principal limit 
(if any). The line of credit amount increases at the same rate as the 
total principal limit increases under Sec.  206.3. The sum of 
disbursements made during the First 12-Month Disbursement Period shall 
not exceed the Initial Disbursement Limit. If a requested disbursement 
would exceed the Initial Disbursement Limit, the mortgagee may make a 
partial disbursement to the borrower for the amount that will not 
exceed the limit. Upon the conclusion of the First 12-Month 
Disbursement Period, the borrower may request subsequent disbursements 
up to the available principal limit.
    (h) Single Lump Sum payment option. (1) Under the Single Lump Sum 
payment option, the Borrower's Advance shall be made by the mortgagee 
to the borrower in an amount that does not exceed the maximum allowable 
Borrower's Advance under paragraph (a)(2) of this section.
    (2) If the borrower makes a partial prepayment of the outstanding 
loan balance any time after loan closing and before the contract of 
insurance is terminated, the mortgagee shall apply the funds from the 
partial prepayment in accordance with the Note.
    (i) Payment of MIP and interest. At the end of each month, 
including the first month, interest accrued during that month shall be 
added to the outstanding loan balance. Where the first month is a 
partial month, a prorated amount of interest shall be added. Monthly 
MIP, which will accrue from the closing date, shall be added to the 
outstanding loan balance beginning with the first day of the second 
month after closing when paid to the Commissioner.
    (j) Mortgagee late charge. The mortgagee shall pay a late charge to 
the borrower for any late disbursement. If the mortgagee does not mail 
or electronically transfer a scheduled monthly disbursement to the 
borrower on the first business day of the month or make a line of 
credit disbursement within 5 business days of the date the mortgagee 
received the request, the late charge shall be 10 percent of the entire 
amount that should have been paid to the borrower for that month or as 
a result of that request. In no event shall the total late charge 
exceed five hundred dollars. For each additional day that the borrower 
does not receive payment, the mortgagee shall pay interest at the 
mortgage interest rate on the late payment. Any late charge and 
interest shall be paid from the mortgagee's funds and shall not be 
added to the outstanding loan balance.
    (k) No minimum payments. A mortgagee shall not require, as a 
condition of providing a loan secured by a mortgage insured under this 
part, that

[[Page 31803]]

the monthly payments under the term or tenure payment option or draws 
under the line of credit payment option exceed a minimum amount 
established by the mortgagee.


Sec.  206.26  Change in payment option.

    (a) General. The payment option may be changed as provided in this 
section.
    (b) Borrower request for payment plan change--(1) Adjustable 
Interest Rate HECMs. (i) During the First 12-Month Disbursement Period, 
no payment plan change shall cause disbursements to exceed the Initial 
Disbursement Limit.
    (ii) After the First 12-Month Disbursement Period, as long as the 
outstanding loan balance is less than the principal limit, a borrower 
may request a recalculation of the current payment option, a change 
from any payment option to another available payment option or a 
disbursement of any amount (not to exceed the difference between the 
principal limit and the sum of the outstanding loan balance and any set 
asides for repairs, servicing charges or property charges). A mortgage 
will continue to bear interest at an adjustable interest rate as agreed 
between the mortgagee and the borrower at loan origination. The 
mortgagee shall recalculate any future monthly payments in accordance 
with Sec.  206.25.
    (iii) Fee for change in payment. The mortgagee may charge a fee, 
not to exceed an amount determined by the Commissioner, whenever there 
is a payment plan change or whenever payments are recalculated.
    (iv) Limitations. The Commissioner may, through notice, establish 
limitations on the frequency of payment plan changes, a minimum notice 
period that a borrower must provide in order to make a request under 
paragraph (b)(1)(ii) of this section, or other limitations on payment 
plan change requests by the borrower.
    (2) Fixed Interest Rate HECMs. Borrowers may not request a change 
in payment option.
    (c) Change due to initial repairs. When initial repairs after 
closing under Sec.  206.47 are required using a Repair Set Aside, 
mortgagees shall comply with the following:
    (1) Adjustable Interest Rate HECMs. (i) If repairs after closing 
under Sec.  206.47 are completed without using all of the funds set 
aside for repairs, the mortgagee shall transfer the remaining amount to 
a line of credit, modified term or modified tenure payment option and 
inform the borrower of the sum available to be drawn.
    (ii) If repairs after closing under Sec.  206.47 cannot be 
completed with the funds set aside for repairs, the mortgagee may 
advance additional funds to complete repairs from an existing line of 
credit. If a line of credit is not sufficient to make the advance or if 
no line of credit exists, future monthly disbursements shall be 
recalculated for use as a line of credit in accordance with Sec.  
206.25.
    (iii) If repairs are not completed when required by the mortgage, 
the mortgagee shall stop monthly payments and the mortgage shall 
convert to the line of credit payment option. Until the repairs are 
completed, the mortgagee shall make no line of credit disbursements 
except as needed to pay for repairs required by the mortgage.
    (2) Fixed Interest Rate HECMs. No unused set aside funds shall be 
made available to the borrower, except that a borrower may be 
reimbursed for the cost of repair materials (not including labor), in 
accordance with Sec.  206.47, under conditions established by the 
Commissioner.


Sec.  206.27  Mortgage provisions.

    (a) Form. The mortgage shall be in a form meeting the requirements 
of the Commissioner.
    (b) Provisions. The terms of the mortgage shall contain an 
explanation of how payments will be made to the borrower, how interest 
will be charged and when the mortgage will be due and payable. The 
mortgage shall include a provision deferring the due and payable status 
that occurs because of the death of the last surviving borrower for an 
Eligible Non-Borrowing Spouse. It shall also contain provisions 
designed to ensure compliance with this part and provisions on the 
following additional matters:
    (1) Disbursements by the mortgagee under the term or tenure payment 
options shall be mailed to the borrower or electronically transferred 
to an account of the borrower on the first business day of each month 
beginning with the first month after closing. Disbursements under the 
line of credit payment option shall be mailed to the borrower or 
electronically transferred to an account of the borrower within five 
business days after the mortgagee has received a written request for 
disbursement by the borrower. In accordance with Sec.  206.55, in no 
event may disbursements continue during a Deferral Period.
    (2) The borrower shall insure all improvements on the property that 
serves as collateral for the HECM whether now in existence or 
subsequently erected, against any hazards, casualties, and 
contingencies, including but not limited to fire and flood, for which 
the mortgagee requires insurance. Such insurance shall be maintained in 
the amount and for the period of time that is necessary to protect the 
mortgagee's investment. Whether or not the mortgagee imposes a flood 
insurance requirement, the borrower shall at a minimum insure all 
improvements on the property, whether now in existence or subsequently 
erected, against loss by floods to the extent required by the 
Commissioner. If the mortgagee imposes insurance requirements, all 
insurance shall be carried with companies acceptable to the mortgagee, 
and the insurance policies and any renewals shall be held by the 
mortgagee and shall include loss payable clauses in favor of and in a 
form acceptable to the mortgagee.
    (3) The borrower shall not participate in a real estate tax 
deferral program or permit any liens to be recorded against the 
property, unless such liens are subordinate to the insured mortgage 
and, if applicable, any second mortgage held by the Commissioner.
    (4) A mortgage may be prepaid in full or in part in accordance with 
Sec.  206.209.
    (5) The borrower must keep the property in good repair.
    (6) The borrower must provide for the payment of property charges 
in accordance with Sec.  206.205.
    (7) The payment of monthly MIP may be added to the outstanding 
principal balance.
    (8) The borrower shall have no personal liability for payment of 
the outstanding loan balance. The mortgagee shall enforce the debt only 
through sale of the property. The mortgagee shall not be permitted to 
obtain a deficiency judgment against the borrower if the mortgage is 
foreclosed.
    (9) If the mortgage is assigned to the Commissioner under Sec.  
206.121(b), the borrower shall not be liable for any difference between 
the insurance benefits paid to the mortgagee and the outstanding loan 
balance including accrued interest, owed by the borrower at the time of 
the assignment.
    (10) If State law limits the first lien status of the mortgage as 
originally executed and recorded to a maximum amount of debt or a 
maximum number of years, the borrower shall agree to execute any 
additional documents required by the mortgagee and approved by the 
Commissioner to extend the first lien status to an additional amount of 
debt and an additional number of years and to cause any other liens to 
be removed or subordinated.
    (c) Date the mortgage comes due and payable. (1) The mortgage shall 
state that the outstanding loan balance will be due and payable in full 
if a borrower dies and the property is not the

[[Page 31804]]

principal residence of at least one surviving borrower, except that the 
due and payable status shall be deferred in accordance with paragraph 
(c)(3) of this section if the requirements of the Deferral Period are 
met; or if a borrower conveys all of his or her title in the property 
and no other borrower retains title to the property. For purposes of 
the preceding sentence, a borrower retains title in the property if the 
borrower continues to hold title to any part of the property in fee 
simple, as a leasehold interest as set forth in Sec.  206.45(a), or as 
a life estate.
    (2) The mortgage shall state that the outstanding loan balance 
shall be due and payable in full, upon approval of the Commissioner, if 
any of the following occur:
    (i) The property ceases to be the principal residence of a borrower 
for reasons other than death and the property is not the principal 
residence of at least one other borrower;
    (ii) For a period of longer than 12 consecutive months, a borrower 
fails to occupy the property because of physical or mental illness and 
the property is not the principal residence of at least one other 
borrower;
    (iii) The borrower does not provide for the payment of property 
charges in accordance with Sec.  206.205; or
    (iv) An obligation of the borrower under the mortgage is not 
performed.
    (3) Deferral of due and payable status. The mortgage documents 
shall contain a provision deferring due and payable status, called the 
Deferral Period, for an Eligible Non-Borrowing Spouse until the death 
of the last Eligible Non-Borrowing Spouse or the requirements of the 
Deferral Period in Sec.  206.55 cease to be met and have not been cured 
as provided for in Sec.  206.57.
    (d) Second mortgage to Commissioner. Unless otherwise provided by 
the Commissioner, a second mortgage to secure any payments by the 
Commissioner as provided in Sec.  206.121(c) must be given to the 
Commissioner before a Mortgage Insurance Certificate is issued for the 
mortgage. If the Commissioner does not require a second mortgage to be 
given to the Commissioner prior to the issuance of a Mortgage Insurance 
Certificate, the Commissioner may require a second mortgage to be given 
to the Commissioner at a later day in order to secure payments by the 
Commissioner as provided in Sec.  206.121(c).


Sec.  206.31  Allowable charges and fees.

    (a) Fees at closing. The mortgagee may collect, either in cash at 
the time of closing or through an initial payment under the mortgage, 
the following charges and fees incurred in connection with the 
origination, processing and closing of the mortgage loan:
    (1) Loan Origination Fee. Mortgagees may charge a loan origination 
fee and may use such fee to pay for services performed by a sponsored 
third-party originator. The loan origination fee limit shall be the 
greater of $2,500 or two percent of the maximum claim amount of 
$200,000, plus one percent of any portion of the maximum claim amount 
that is greater than $200,000. Mortgagees may accept a lower 
origination fee. Mortgagees may pay fees for services performed by a 
sponsored third-party originator and these fees may be included as part 
of the loan origination fee. The total amount of the loan origination 
fee may not exceed $6,000, except that the Commissioner may through 
notice adjust the maximum limit in accordance with the annual 
percentage increase in the Consumer Price Index of the Bureau of Labor 
Statistics of the Department of Labor in increments of $500 only when 
the percentage increase in such index, when applied to the maximum 
origination fee, produces dollar increases that exceed $500. The loan 
origination fee may be fully financed with the mortgage.
    (2) Reasonable and customary amounts. Reasonable and customary 
amounts, but not more than the amount actually paid by the mortgagee, 
for any of the following items:
    (i) Recording fees and recording taxes, or other charges incident 
to the recordation of the insured mortgage;
    (ii) Credit report;
    (iii) Survey, if required by the mortgagee or the borrower;
    (iv) Title examination;
    (v) Mortgagee's title insurance;
    (vi) Fees paid to an appraiser for the initial appraisal of the 
property;
    (vii) Flood certifications; and
    (viii) Such other charges as may be authorized by the Commissioner.
    (b) Repair administration fee. If the property requires repairs 
after closing in order to meet FHA requirements, the mortgagee may 
collect a fee for each occurrence as compensation for administrative 
duties relating to repair work pursuant to Sec.  206.47(c) and (d), not 
to exceed the greater of one and one-half percent of the amount 
advanced for the repairs or fifty dollars. The mortgagee shall collect 
the repair fee by adding it to the outstanding loan balance.


Sec.  206.32  No outstanding unpaid obligations.

    In order for a mortgage to be eligible under this part, a borrower 
must establish to the satisfaction of the mortgagee that after the 
initial payment of loan proceeds under Sec.  206.25(a), there will be 
no outstanding or unpaid obligations incurred by the borrower in 
connection with the mortgage transaction, except for mortgage servicing 
charges permitted under Sec.  206.207(b) and any future Repair Set 
Aside established pursuant to Sec.  206.19(f)(1)(ii); and the initial 
disbursement will not be used for any payment to or on behalf of an 
estate planning service firm.

Eligible Borrowers


Sec.  206.33  Age of borrower.

    The youngest borrower shall be 62 years of age or older at the time 
of loan closing.


Sec.  206.34  Limitation on number of mortgages.

    (a) Once a borrower has obtained an insured mortgage under this 
part, the borrower is eligible to obtain future insured HECM loan 
financing if the existing HECM is satisfied prior to or at the closing 
of the new HECM, or as part of divorce or annulment of a marriage the 
ex-spouse, who had previously jointly obtained a HECM with their ex-
spouse, presents a final divorce decree awarding all financial 
obligation of the prior HECM to the other ex-spouse, and has 
relinquished title as evidenced by a recorded deed.
    (b) Current HECM borrowers that plan to sell their existing 
residence and use the HECM for Purchase program to obtain a new 
principal residence must pay off the existing FHA-insured mortgage 
before the HECM for Purchase mortgage can be insured.


Sec.  206.35  Title of property which is security for HECM.

    (a) A mortgagor is not required to be a borrower; however, any 
borrower is required to be on title to the property which serves as 
collateral for the HECM, and is therefore, by definition, also a 
mortgagor.
    (b) The mortgagor shall hold title to the entire property which is 
the security for the mortgage. If there are multiple mortgagors, all 
the mortgagors must collectively hold title to the entire property 
which is the security for the mortgage. If one or more mortgagors hold 
a life estate in the property, for purposes of this section only, the 
term ``mortgagor'' shall include each holder of a future interest in 
the property (remainder or reversion) who has executed the mortgage.
    (c) If Non-Borrowing Spouses and non-borrowing owners of the 
property will continue to hold title to the property which serves as 
collateral for

[[Page 31805]]

the HECM, such Non-Borrowing Spouses and non-borrowing owners must sign 
the mortgage as mortgagors, evidencing their commitment of the property 
as security for the mortgage.
    (d) All Non-Borrowing Spouses and non-borrowing owners shall sign a 
certification that:
    (1) Consents to their spouse or other borrowing owner obtaining the 
HECM;
    (2) Acknowledges the terms and conditions of the mortgage; and
    (3) Acknowledges that the property will serve as collateral for the 
HECM as evidenced by mortgage lien(s).


Sec.  206.36  Seasoning requirements for existing non-HECM liens.

    (a) The Commissioner may establish, through notice, seasoning 
requirements for existing non-HECM liens. Such seasoning requirements 
shall not prohibit the payoff of existing non-HECM liens using HECM 
proceeds if the liens have been in place for longer than 12 months or 
if the liens have resulted in cash to the borrower in an amount of $500 
or less, whether at closing or through cumulative draws prior to the 
date of the initial HECM loan application.
    (b) Mortgagees must provide documentation satisfactory to the 
Commissioner as established by notice that the seasoning requirement 
was met.


Sec.  206.37  Credit standing.

    (a) Each borrower shall have a general credit standing satisfactory 
to the Commissioner.
    (b) Required Financial Assessment--(1) Requirement for Financial 
Assessment prior to loan approval. Prior to loan approval, the 
mortgagee shall assess the financial capacity of the borrower to comply 
with the terms of the mortgage and evaluate whether the HECM is a 
sustainable solution for the borrower, in accordance with instructions 
established by the Commissioner through notice. The Financial 
Assessment shall consider the borrower's credit history, cash flow and 
residual income, extenuating circumstances, and compensating factors.
    (i) Credit history. In accordance with FHA guidelines in existence 
at the time of FHA Case Number assignment, mortgagees shall conduct an 
in-depth credit history analysis to determine if the borrower has 
demonstrated the willingness to meet his or her financial obligations.
    (ii) Cash flow and residual income analysis. In accordance with FHA 
guidelines in existence at the time of FHA Case Number assignment, 
mortgagees shall conduct a cash flow and residual income analysis to 
determine the capacity of the borrower to meet his or her documented 
financial obligations with his or her documented income.
    (iii) Extenuating circumstances. Where the borrower's credit 
history does not meet the criteria set by the mortgagee based on FHA 
guidelines in existence at the time of FHA Case Number assignment, 
mortgagees shall consider and document, as part of the Financial 
Assessment, extenuating circumstances that led to the credit issues.
    (iv) Compensating factors. The mortgagee shall document and 
identify in the Financial Assessment any considered compensating 
factors.
    (2) Completion and approval of Financial Assessment. The Financial 
Assessment shall be completed and approved by a DE Underwriter 
registered in HUD's system of record by the underwriting mortgagee.
    (3) Nondiscrimination. (i) The Financial Assessment shall be 
conducted in a uniform manner that shall not discriminate because of 
race, color, religion, sex, national origin, familial status, 
disability, marital status, actual or perceived sexual orientation, 
gender identity, source of income of the borrower, location of the 
property, or because the applicant has in good faith exercised any 
right under the Consumer Credit Protection Act (15 U.S.C. 1601 et 
seq.).
    (ii) The Financial Assessment shall be conducted in compliance with 
all applicable laws and regulations, including but not limited to, the 
following:
    (A) Fair Housing Act (42 U.S.C. 3601 et seq.);
    (B) Fair Credit Reporting Act (15 U.S.C. 1681 et seq.);
    (C) Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.); and
    (D) 12 CFR part 1002.


Sec.  206.39  Principal residence.

    (a) The property must be the principal residence of each borrower, 
and if applicable, Eligible Non-Borrowing Spouse, at closing.
    (b) HECM for Purchase. For HECM for Purchase transactions, each 
borrower, and if applicable, Eligible Non-Borrowing Spouse, must occupy 
the property within 60 days from the date of closing.


Sec.  206.40  Disclosure, verification and certifications.

    (a) Disclosure and certification of Social Security and Employer 
Identification Numbers.
    (1) Borrower. The borrower must meet the requirements for the 
disclosure and verification of Social Security and Employer 
Identification Numbers, as provided by part 200, subpart U, of this 
chapter.
    (2) Eligible Non-Borrowing Spouse. The Eligible Non-Borrowing 
Spouse shall comply with the requirements for disclosure and 
verification of Social Security and Employer Identification Numbers by 
borrowers in paragraph (a)(1) of this section.
    (b) Certifications. Each borrower and each Non-Borrowing Spouse 
shall provide all required certifications to HUD and the mortgagee, as 
required by the Commissioner.
    (c) Designation of agent. At the time of origination, the 
Commissioner may require a borrower to designate an agent or other 
party to act on his behalf when FHA is unable to make contact or to 
communicate with the borrower. If such designation is not required by 
the Commissioner, and at any time, the borrower may voluntarily 
designate such agent or other person to act on his behalf.


Sec.  206.41  Counseling.

    (a) List provided. At the time of the initial contact with the 
prospective borrower, the mortgagee shall give the borrower a list of 
the names, addresses, and telephone numbers of HECM counselors and 
their employing agencies, which have been approved by the Commissioner, 
in accordance with subpart E of this part, as qualified and able to 
provide the information described in paragraph (b) of this section. The 
borrower, any Eligible or Ineligible Non-Borrowing Spouse and any non-
borrowing owner must receive counseling.
    (b) Information to be provided. (1) A HECM counselor must discuss 
with the borrower:
    (i) The information required by subsection 255(f) of the NHA;
    (ii) Whether the borrower has signed a contract or agreement with 
an estate planning service firm that requires, or purports to require, 
the borrower to pay a fee on or after closing that may exceed amounts 
permitted by the Commissioner or this part;
    (iii) If such a contract has been signed under paragraph (b)(1)(ii) 
of this section, the extent to which services under the contract may 
not be needed or may be available at nominal or no cost from other 
sources, including the mortgagee; and
    (iv) Any other requirements determined by the Commissioner.
    (2) If the HECM borrower has an Eligible Non-Borrowing Spouse, in 
addition to meeting the requirements of paragraph (b)(1) of this 
section, a HECM

[[Page 31806]]

counselor shall discuss with the borrower and Eligible Non-Borrowing 
Spouse:
    (i) The requirement that the Eligible Non-Borrowing Spouse must 
obtain ownership of the property or other legal right to remain in the 
property for life, upon the death of the last surviving borrower;
    (ii) A failure to obtain ownership or other legal right to remain 
in the property for life will result in the HECM becoming due and 
payable and the Eligible Non-Borrowing Spouse will not receive the 
benefit of the Deferral Period;
    (iii) The requirement that the property must be the principal 
residence of the Eligible Non-Borrowing Spouse prior to and after the 
death of the borrowing spouse;
    (iv) The requirement that the Eligible Non-Borrowing Spouse 
fulfills all obligations of the mortgage, including the payment of 
property charges and upkeep of the property; and
    (v) Any other requirements determined by the Commissioner.
    (3) If the HECM borrower has an Ineligible Non-Borrowing Spouse, in 
addition to meeting the requirements of paragraph (b)(1) of this 
section, a HECM counselor shall discuss with the borrower and 
Ineligible Non-Borrowing Spouse:
    (i) The Deferral Period will not be applicable;
    (ii) The HECM will become due and payable upon the death of the 
last surviving borrower; and
    (iii) Any other requirements determined by the Commissioner.
    (c) Certificate. The HECM counselor will provide the borrower with 
a certificate stating that the borrower, Non-Borrowing Spouse and non-
borrowing owner, as applicable, has received counseling. The HECM 
counselor shall upload the certificate to the appropriate electronic 
database.
    (d) HECM for Purchase. For HECM for Purchase transactions, 
prospective borrowers shall complete the required HECM counseling prior 
to signing a sales contract and/or making an earnest money deposit, 
unless a later date is provided for by the Commissioner.


Sec.  206.43  Information to borrower.

    (a) Disclosure of costs of obtaining mortgage. The mortgagee shall 
ensure that the borrower has received full disclosure of all costs of 
obtaining the mortgage. The mortgagee shall ask the borrower about any 
costs or other obligations that the borrower has incurred to obtain the 
mortgage, as defined by the Commissioner, in addition to providing the 
Good Faith Estimate required by 12 CFR 1024.7. The mortgagee shall 
clearly state to the borrower which charges are required to obtain the 
mortgage and which are not required to obtain the mortgage.
    (b) Lump sum disbursement. (1) If the borrower requests that at 
least 25 percent of the principal limit amount (after deducting amounts 
excluded in the following sentence) be disbursed at closing to the 
borrower (or as otherwise permitted by Sec.  206.25), the mortgagee 
must make sufficient inquiry at closing to confirm that the borrower 
will not use any part of the amount disbursed for payments to or on 
behalf of an estate planning service firm, with an explanation of Sec.  
206.32 as necessary or appropriate.
    (2) This paragraph does not apply to any part of the principal 
limit used for the following:
    (i) Initial MIP under Sec.  206.105(a) or fees and charges allowed 
under Sec.  206.31(a) paid by the mortgagee from mortgage proceeds 
instead of by the borrower in cash; and
    (ii) Amounts set aside in accordance with Sec.  206.19(f) for 
repairs under Sec.  206.47, for property charges under Sec.  206.205, 
or for servicing charges under Sec.  206.207(b).


Sec.  206.44  Monetary investment for HECM for Purchase program.

    (a) Monetary investment. At closing, HECM for Purchase borrowers 
shall provide a monetary investment that will be applied to satisfy the 
difference between the principal limit and the sale price for the 
property, plus any HECM loan-related fees that are not financed into 
the loan, minus the amount of the earnest deposit.
    (b) Funding sources. To satisfy the required monetary investment, 
borrowers may use:
    (1) Cash on hand;
    (2) Cash from the sale or liquidation of the borrower's assets;
    (3) HECM mortgage proceeds; or
    (4) Other approved funding sources as determined by the 
Commissioner through notice.
    (c) Interested party contributions. (1) The following interested 
party contributions are permissible:
    (i) Fees required to be paid by a seller under state or local law; 
and
    (ii) The purchase of the Home Warranty policy by the seller.
    (2) The Commissioner may define additional permissible interested 
party contributions and impose requirements for permissible interested 
party contributions through a notice for comment published in the 
Federal Register.

Eligible Properties


Sec.  206.45  Eligible properties.

    (a) Title. A mortgage must be on real estate held in fee simple; or 
on a leasehold that is under a lease with a duration lasting until the 
later of: 99 years, if such lease is renewable; or the actuarial life 
expectancy of the mortgagor plus a number of years specified by the 
Commissioner, which shall not be more than 99 years. The mortgagee 
shall obtain a title insurance policy satisfactory to the Commissioner. 
If the Commissioner determines that title insurance for reverse 
mortgages is not available for reasonable rates in a state, then the 
Commissioner may specify other acceptable forms of title evidence in 
lieu of title insurance.
    (b) Type of property. The property shall include a dwelling 
designed principally as a residence for one family or such additional 
families as the Commissioner shall determine. A condominium unit 
designed for one-family occupancy shall also be an eligible property.
    (c) Borrower and mortgagee requirement for maintaining flood 
insurance coverage. (1) If the mortgage is to cover property 
improvements (dwelling and related structures or equipment essential to 
the value of the property and subject to flood damage) that:
    (i) Are located in an area designated by the Federal Emergency 
Management Agency (FEMA) as a floodplain area having special flood 
hazards; or
    (ii) Are otherwise determined by the Commissioner to be subject to 
a flood hazard, and if flood insurance under the National Flood 
Insurance Program (NFIP) is available with respect to these property 
improvements, the borrower and mortgagee shall be obligated, by a 
special condition to be included in the mortgage commitment, to obtain 
and to maintain NFIP flood insurance coverage on the property 
improvements during such time as the mortgage is insured.
    (2) No mortgage may be insured that covers property improvements 
located in an area that has been identified by FEMA as an area having 
special flood hazards, unless the community in which the area is 
situated is participating in the NFIP and such insurance is obtained by 
the borrower. Such requirement for flood insurance shall be effective 
one year after the date of notification by FEMA to the chief executive 
officer of a flood prone community that such community has been 
identified as having special flood hazards.
    (3) The flood insurance must be maintained during such time as the

[[Page 31807]]

mortgage is insured in an amount at least equal to the lowest of the 
following:
    (i) 100 percent replacement cost of the insurable value of the 
improvements, which consists of the development or project cost less 
estimated land cost; or
    (ii) The maximum amount of the NFIP insurance available with 
respect to the particular type of the property; or
    (iii) The outstanding principal balance of the loan.
    (d) Lead-based paint poisoning prevention. If the appraiser of a 
dwelling constructed prior to 1978 finds defective paint surfaces, 24 
CFR 200.810(d) shall apply unless the borrower certifies that no child 
who is less than six years of age resides or is expected to reside in 
the dwelling, except that any reference to ``mortgagor'' in 24 CFR 
200.810(d) shall mean ``borrower'' for purposes of this paragraph.
    (e) Restrictions on conveyance. The property must be freely 
marketable. Conveyance of the property may only be restricted as 
permitted under this section, except that a right of first refusal to 
purchase a unit in a condominium project is permitted if the right is 
held by the condominium association for the project.
    (1) As used in this section, legal restrictions on conveyance means 
any provision in any legal instrument, law or regulation applicable to 
the borrower or the mortgaged property, including but not limited to a 
lease, deed, sales contract, declaration of covenants, declaration of 
condominium, option, right of first refusal, will, or trust agreement, 
that attempts to cause a conveyance (including a lease) made by the 
borrower to:
    (i) Be void or voidable by a third party;
    (ii) Be the basis of contractual liability of the borrower for 
breach of an agreement not to convey, including rights of first 
refusal, pre-emptive rights or options related to borrower efforts to 
convey;
    (iii) Terminate or subject to termination all or a part of the 
interest held by the borrower in the mortgaged property if a conveyance 
is attempted;
    (iv) Be subject to the consent of a third party;
    (v) Be subject to limits on the amount of sales proceeds retainable 
by the seller; or
    (vi) Be grounds for acceleration of the insured mortgage or 
increase in the interest rate.
    (2) Policy of free assumability with no restrictions. A HECM shall 
not be eligible for insurance if the property securing the HECM is 
subject to legal restrictions on conveyance, except as permitted by 
this section.
    (3) Exception for protective covenants excluding non-elderly. 
Mortgaged property may be subject to protective covenants which 
prohibit or restrict occupancy by, or transfer to, persons who are not 
elderly if:
    (i) The restrictions do not have an undue effect on marketability; 
and
    (ii) The restrictions do not constitute illegal discrimination and 
are consistent with the Fair Housing Act and all other applicable 
nondiscrimination laws.
    (4) Exceptions for specific jurisdictions. Notwithstanding the 
provisions of paragraph (e)(2) of this section, mortgages insured on 
property in the Northern Mariana Islands or American Samoa shall not be 
ineligible for insurance under this section solely because applicable 
law does not permit free alienability of title to all persons.
    (f) Location of property. The mortgaged property shall be located 
within the United States, Puerto Rico, Guam, the Virgin Islands, the 
Commonwealth of the Northern Mariana Islands, and American Samoa. The 
mortgaged property, if otherwise acceptable to the Commissioner, may be 
located in any location where the housing standards meet the 
requirements of the Commissioner.
    (g) HECM for Purchase. (1) A HECM for Purchase transaction is where 
title to the property is transferred to the HECM borrower and, at the 
time of closing, the HECM first and second liens, if applicable, will 
be the only liens against the property.
    (2) Properties are eligible for FHA insurance under the HECM for 
Purchase program when construction is completed and the property is 
habitable, as evidenced by the issuance of a Certificate of Occupancy 
or its equivalent, by the local jurisdiction.


Sec.  206.47  Property standards; repair work.

    (a) Need for repairs. Properties must meet the applicable property 
requirements of the Commissioner in order to be eligible. Properties 
that do not meet the property requirements must be repaired in order to 
ensure that the repaired property will serve as adequate security for 
the insured mortgage.
    (b) Assurance that repairs are made. The mortgage may be closed 
before the repair work is completed if the Commissioner estimates that 
the cost of the remaining repair work will not exceed 15 percent of the 
maximum claim amount and the mortgage contains provisions approved by 
the Commissioner concerning payment for the repairs.
    (c) Reimbursement to contractor. When repair work is completed 
after closing by a contractor, the mortgagee shall cause one or more 
inspections of the property to be made by an inspector or other 
qualified individual acceptable to the Commissioner in order to ensure 
that the repair work is satisfactory, and prior to the release of funds 
from the Repair Set Aside. The mortgagee shall hold back a portion of 
the contract price attributable to the work done before each interim 
release of funds, and the total of the hold backs will be released 
after the final inspection and approval of the release by the 
mortgagee. The mortgagee shall ensure that all mechanics' and 
materialmen's liens are released of record.
    (d) Reimbursement to borrower. The mortgagee shall not reimburse 
the borrower for any labor the borrower performed. The mortgagee may 
reimburse the borrower for the actual cost of repair materials from the 
Repair Set Aside, provided that the mortgagee causes one or more 
inspections of the property by an inspector or other qualified 
individual acceptable to the Commissioner and meets all reimbursement 
requirements established by the Commissioner.
    (e) HECM for Purchase. For HECM for Purchase transactions, where 
major property deficiencies threaten the health and safety of the 
homeowner or jeopardize the soundness and security of the property, all 
repairs must be completed by the seller prior to closing. Appraisers 
shall complete the appraisal report as ``Subject To'' the completion of 
the repairs.


Sec.  206.51  Eligibility of mortgages involving a dwelling unit in a 
condominium.

    If the mortgage involves a dwelling unit in a condominium, the 
project in which the unit is located shall have been committed to a 
plan of condominium ownership by deed, or other recorded instrument, 
that is acceptable to the Commissioner.


Sec.  206.52  Eligible sale of property-HECM for Purchase.

    (a) Sale by owner of record-- (1) Owner of record requirement. To 
be eligible for a mortgage insured by FHA, the property must be 
purchased from the owner of record and the transaction may not involve 
any sale or assignment of the sales contract.
    (2) Supporting documentation. The mortgagee shall obtain 
documentation verifying that the seller is the owner of record and must 
submit this documentation to FHA as part of the application for 
mortgage insurance, in

[[Page 31808]]

accordance with Sec. Sec.  206.15 and 206.115(b)(9).
    (b) Time restrictions on re-sales. (1) General. The eligibility of 
a property for a mortgage insured by FHA is dependent on the time that 
has elapsed between the date the seller acquired the property (based 
upon the date of settlement) and the date of execution of the sales 
contract that will result in the FHA mortgage insurance (the re-sale 
date). The mortgagee shall obtain documentation verifying compliance 
with the time restrictions described in this paragraph and must submit 
this documentation to FHA as part of the application for mortgage 
insurance, in accordance with Sec.  206.115(b).
    (2) Re-sales occurring 90 days or less following acquisition. If 
the re-sale date is 90 days or less following the date of acquisition 
by the seller, the property is not eligible for a mortgage to be 
insured by FHA.
    (3) Re-sales occurring between 91 days and 180 days following 
acquisition. (i) If the re-sale date is between 91 days and 180 days 
following acquisition by the seller, the property is generally eligible 
for a mortgage insured by FHA.
    (ii) However, FHA will require that the mortgagee obtain additional 
documentation if the re-sale price is 100 percent over the purchase 
price. Such documentation must include an appraisal from another 
appraiser. The mortgagee may also document its loan file to support the 
increased value by establishing that the increased value results from 
the rehabilitation of the property.
    (iii) FHA may revise the level at which additional documentation is 
required under paragraph (b)(3) of this section at 50 to 150 percent 
over the original purchase price. FHA will revise this level by Federal 
Register notice with a 30 day delayed effective date.
    (4) Authority to address property flipping for re-sales occurring 
between 91 days and 12 months following acquisition. (i) If the re-sale 
date is more than 90 days after the date of acquisition by the seller, 
but before the end of the twelfth month after the date of acquisition, 
the property is eligible for a mortgage to be insured by FHA.
    (ii) However, FHA may require that the mortgagee provide additional 
documentation to support the re-sale value of the property if the re-
sale price is 5 percent or greater than the lowest sales price of the 
property during the preceding 12 months (as evidenced by the contract 
of sale). At FHA's discretion, such documentation must include, but is 
not limited to, an appraisal from another appraiser. FHA may exclude 
re-sales of less than a specific dollar amount from the additional 
value documentation requirements.
    (iii) If the additional value documentation supports a value of the 
property that is more than 5 percent lower than the value supported by 
the first appraisal, the lower value will be used to calculate the 
maximum claim amount. Otherwise, the value supported by the first 
appraisal will be used to calculate the maximum claim amount.
    (iv) FHA will announce its determination to require additional 
value documentation through issuance of a Federal Register notice. The 
requirement for additional value documentation may be established 
either on a nationwide or regional basis. Further, the Federal Register 
notice will specify the percentage increase in the re-sale price that 
will trigger the need for additional documentation, and will specify 
the acceptable types of documentation. The Federal Register notice may 
also exclude re-sales of less than a specific dollar amount from the 
additional value documentation requirements. Any such Federal Register 
notice, and any subsequent revisions, will be issued at least thirty 
days before taking effect.
    (v) The level at which additional documentation is required under 
paragraph (b)(4) of this section shall supersede that under paragraph 
(b)(3) of this section.
    (5) Re-sales occurring more than 12 months following acquisition. 
If the re-sale date is more than 12 months following the date of 
acquisition by the seller, the property is eligible for a mortgage 
insured by FHA.
    (c) Exceptions to the time restrictions on sales. The time 
restrictions on sales described in paragraph (b) of this section do not 
apply to:
    (1) Sales by HUD of Real Estate-Owned (REO) properties under 24 CFR 
part 291 and of single family assets in revitalization areas pursuant 
to section 204 of the NHA (12 U.S.C. 1710);
    (2) Sales by another agency of the United States Government of REO 
single family properties pursuant to programs operated by these 
agencies;
    (3) Sales of properties by nonprofit organizations approved to 
purchase HUD REO single family properties at a discount with resale 
restrictions;
    (4) Sales of properties that were acquired by the sellers by 
inheritance;
    (5) Sales of properties purchased by an employer or relocation 
agency in connection with the relocation of an employee;
    (6) Sales of properties by state- and federally-chartered financial 
institutions and government-sponsored enterprises (GSEs);
    (7) Sales of properties by local and state government agencies; and
    (8) Only upon announcement by FHA through issuance of a notice, 
sales of properties located in areas designated by the President as 
federal disaster areas. The notice will specify how long the exception 
will be in effect.
    (d) Sanctions and indemnification. Failure of a mortgagee to comply 
with the requirements of this section may result in HUD requesting 
indemnification of the mortgage loan, or seeking other appropriate 
remedies under 24 CFR part 25.

Refinancing of Existing Home Equity Conversion Mortgages


Sec.  206.53  Refinancing a HECM loan.

    (a) General. Except as otherwise provided in this section, all 
requirements applicable to the insurance of HECMs under this part apply 
to the insurance of refinanced HECMs. FHA may, upon application by a 
mortgagee, insure any mortgage given to refinance an existing HECM 
insured under this part, including loans assigned to the Commissioner 
as described in Sec.  206.107(a)(1) and Sec.  206.121(b) of this part.
    (b) Definition of ``total cost of the refinancing''. For purposes 
of paragraphs (d) and (e) of this section, the term ``total cost of the 
refinancing'' means the sum of the allowable charges and fees permitted 
under Sec.  206.31 and the initial MIP described in Sec.  206.105(a) 
and paragraph (c) of this section.
    (c) Initial MIP limit. (1) The initial MIP paid by the mortgagee 
pursuant to Sec.  206.105(a) shall not exceed the difference between: 
Three percent of the increase in the maximum claim amount for the new 
HECM, minus the amount of the initial MIP already charged and paid by 
the borrower for the existing HECM that is being refinanced. No refunds 
will be given if the initial MIP paid on the existing HECM exceeds the 
initial MIP due on the new HECM.
    (2) The HECM refinance authority is only applicable when the 
property that serves as collateral for the FHA-insured mortgage remains 
the same.
    (3) Existing HECM borrowers refinancing an existing HECM are 
eligible for a MIP reduction under the conditions of this section, but 
existing HECM borrowers who participate in a HECM for Purchase 
transaction are ineligible for a reduction in the initial MIP.
    (d) Anti-churning disclosure-- (1) Contents of anti-churning 
disclosure. In addition to providing the required

[[Page 31809]]

disclosures under Sec.  206.43, the mortgagee shall provide to the 
borrower its best estimate of:
    (i) The total cost of the refinancing to the borrower; and
    (ii) The increase in the borrower's principal limit as measured by 
the estimated initial principal limit on the mortgage to be insured 
less the current principal limit on the HECM that is being refinanced 
under this section.
    (2) Timing of anti-churning disclosure. The mortgagee shall provide 
the anti-churning disclosure concurrently with the disclosures required 
under Sec.  206.43.
    (e) Waiver of counseling requirement. The borrower and any Non-
Borrowing Spouse may elect not to receive counseling under Sec.  
206.41, but only if:
    (1) The original HECM was assigned a Case Number on or after August 
4, 2014, and the borrower and Non-Borrowing Spouse, if applicable, 
received counseling required under Sec.  206.41; or where the original 
HECM was assigned a Case Number prior to August 4, 2014, and there is 
no applicable Non-Borrowing Spouse.
    (2) The borrower has received the anti-churning disclosure required 
under paragraph (d) of this section.
    (3) The increase in the borrower's principal limit (as provided in 
the anti-churning disclosure) exceeds the total cost of the refinancing 
by an amount established by the Commissioner through Federal Register 
notice. FHA may periodically update this amount through publication of 
a notice in the Federal Register. Publication of any such revised 
amount will occur at least 30 days before the revision becomes 
effective.
    (4) The time between the date of the closing on the original HECM 
and the date of the application for refinancing under this section does 
not exceed five years (even if less than five years have passed since a 
previous refinancing under this section).

Deferral of Due and Payable Status


Sec.  206.55  Deferral of due and payable status for Eligible Non-
Borrowing Spouses.

    (a) Deferral Period. If the last surviving borrower predeceases an 
Eligible Non-Borrowing Spouse, and if the requirements of paragraph (d) 
of this section are satisfied, the due and payable status will be 
deferred for as long as the Eligible Non-Borrowing Spouse continues to 
meet the Qualifying Attributes in paragraph (c) of this section and the 
requirements of paragraphs (d) and (e).
    (b) End of Deferral Period. (1) If a Deferral Period ceases or 
becomes unavailable because a Non-Borrowing Spouse no longer satisfies 
the Qualifying Attributes and has become an Ineligible Non-Borrowing 
Spouse, a mortgagee may not provide an opportunity to cure the default, 
and the HECM will become immediately due and payable as a result of the 
death of the last surviving borrower.
    (2) If a Deferral Period ceases but the Eligible Non-Borrowing 
Spouse continues to meet the Qualifying Attributes, the mortgagee must 
provide an Eligible Non-Borrowing Spouse with 30 days to cure the 
default, in accordance with Sec.  206.57.
    (c) Qualifying Attributes. (1) In order to qualify as an Eligible 
Non-Borrowing Spouse, the Non-Borrowing Spouse must:
    (i) Have been the spouse of a HECM borrower at the time of loan 
closing and remained the spouse of such HECM borrower for the duration 
of the HECM borrower's lifetime;
    (ii) Have been properly disclosed to the mortgagee at origination 
and specifically named as an Eligible Non-Borrowing Spouse in the HECM 
mortgage and loan documents;
    (iii) Have occupied, and continue to occupy, the property securing 
the HECM as his or her principal residence; and
    (iv) Meet any other requirements as the Commissioner may prescribe 
by Federal Register notice for comment.
    (2) A Non-Borrowing Spouse who meets the Qualifying Attributes in 
paragraph (c)(1) of this section at origination is an Eligible Non-
Borrowing Spouse and may not elect to be ineligible for the Deferral 
Period. A Non-Borrowing Spouse that is ineligible for the Deferral 
Period at the time of loan origination because he or she failed to 
satisfy the Qualifying Attributes requirements in paragraph (c)(1) of 
this section is not subsequently eligible for a Deferral Period when 
the borrowing spouse dies or moves out of the home.
    (3) An Eligible Non-Borrowing Spouse shall become an Ineligible 
Non-Borrowing Spouse should any of the Qualifying Attributes 
requirements in paragraph (c)(1) of this section cease to be met.
    (d) Additional requirements for Deferral Period. An Eligible Non-
Borrowing Spouse must satisfy and continue to satisfy the following 
requirements:
    (1) Within 90 days from the death of the last surviving HECM 
borrower, establish legal ownership or other ongoing legal right to 
remain for life in the property securing the HECM;
    (2) After the death of the last surviving borrower, ensure all 
other obligations of the HECM borrower(s) contained in the loan 
documents continue to be satisfied; and
    (3) After the death of the last surviving borrower, ensure that the 
HECM does not become eligible to be called due and payable for any 
other reason.
    (e) Unaffected terms of HECM. All applicable terms and conditions 
of the mortgage and loan documents, and all FHA requirements, continue 
to apply and must be satisfied.
    (f) Nothing in this section may be construed as interrupting or 
interfering with the ability of the borrower's estate or heir(s) to 
dispose of the property if they are otherwise legally entitled to do 
so.


Sec.  206.57  Cure provision enabling reinstatement of Deferral Period.

    (a) When the mortgagee is required by Sec.  206.55(b)(2) to provide 
an Eligible Non-Borrowing Spouse with 30 days to cure the default, this 
section shall apply.
    (b) If the default is cured within the 30-day timeframe, the 
Deferral Period shall be reinstated, unless:
    (1) The mortgagee has reinstated the Deferral Period within the 
past two years immediately preceding the current notification to the 
Eligible Non-Borrowing Spouse that the mortgage is due and payable;
    (2) The reinstatement of the Deferral Period will preclude 
foreclosure if the mortgage becomes due and payable at a later date; or
    (3) The reinstatement of the Deferral Period will adversely affect 
the priority of the mortgage lien.
    (c) If the default is not cured within the 30-day timeframe, the 
mortgagee shall proceed in accordance with the established timeframes 
to initiate foreclosure and reasonable diligence in prosecuting 
foreclosure.
    (d) Even after a foreclosure proceeding has been initiated, the 
mortgagee shall permit an Eligible Non-Borrowing Spouse to cure the 
condition which resulted in the Deferral Period ceasing, consistent 
with Sec.  206.55(b)(2), and to reinstate the mortgage and Deferral 
Period, and the mortgage insurance shall continue in effect. The 
mortgagee may require the Eligible Non-Borrowing Spouse to pay any 
costs that the mortgagee incurred to reinstate the mortgage, including 
foreclosure costs and reasonable attorney's fees. Such costs may not be 
added to the outstanding loan balance and shall be paid from some other 
source of funds. The mortgagee shall reinstate the Deferral Period 
unless:

[[Page 31810]]

    (1) The mortgagee has reinstated the Deferral Period within the 
past two years immediately preceding the latest notification to the 
Eligible Non-Borrowing Spouse that the mortgage is due and payable;
    (2) The reinstatement of the Deferral Period will preclude 
foreclosure if the mortgage becomes due and payable at a later date; or
    (3) The reinstatement of the Deferral Period will adversely affect 
the priority of the mortgage lien.


Sec.  206.59  Obligations of mortgagee.

    (a) Certifications and disclosures at closing. At closing, the 
mortgagee shall obtain the appropriate certification from each borrower 
identified as married as well as from each identified Non-Borrowing 
Spouse. When a HECM borrower has identified an Ineligible Non-Borrowing 
Spouse, the mortgagee shall also disclose the amount of mortgage 
proceeds that would have been available under the HECM if he or she 
were an Eligible Non-Borrowing Spouse.
    (b) Divorce. In the event of a divorce between the HECM borrower 
and Eligible Non-Borrowing Spouse, a mortgagee shall obtain a copy of 
the final divorce decree and shall not require the now Ineligible Non-
Borrowing Spouse to fulfill any further requirements.
    (c) Death of borrower. Within 30 days of being notified of the 
death of the borrower, the mortgagee shall:
    (1) Obtain all certifications, as required by the Commissioner, 
from the Eligible Non-Borrowing Spouse, and continue to obtain the 
required certifications no less than annually thereafter for the 
duration of the Deferral Period; and
    (2) Notify any Eligible Non-Borrowing Spouse that the due and 
payable status of the loan is in a Deferral Period only for the amount 
of time that such Eligible Non-Borrowing Spouse continues to meet all 
requirements established by the Commissioner.
    (d) Non-compliance with requirements. If the Eligible Non-Borrowing 
Spouse ceases to meet any requirements established by the Commissioner, 
the mortgagee shall notify the Eligible Non-Borrowing Spouse within 30 
days that the Deferral Period has ended and the HECM is immediately due 
and payable, unless the Deferral Period is reinstated in accordance 
with Sec.  206.57. The mortgagee shall obtain documentation validating 
the reason for the cessation of the Deferral Period and, if applicable, 
the reason for reinstatement of the Deferral Period.


Sec.  206.61  HECM proceeds during a Deferral Period.

    (a) The HECM is not assumable. HECM proceeds may not be disbursed 
to any party during a Deferral Period, except as determined by the 
Commissioner through notice.
    (b) If a Repair Set Aside was established as a condition of the 
HECM, funds may be disbursed from the Repair Set Aside during a 
Deferral Period for the sole purpose of paying the cost of those 
repairs that were specifically identified prior to origination as 
necessary to the insurance of the HECM. Repairs under this paragraph 
shall only be paid for using funds from the Repair Set Aside if the 
repairs are satisfactorily completed during the time period established 
in the Repair Rider or such additional time as provided by the 
Commissioner. Unused funds remaining beyond the established time period 
shall not be disbursed.

Subpart C--Contract Rights and Obligations

Sale, Assignment and Pledge


Sec.  206.101  Sale, assignment and pledge of insured mortgages.

    (a) Sale of interests in insured mortgages. No mortgagee may sell 
or otherwise dispose of any mortgage insured under this part, or group 
of mortgages insured under this part, or any partial interest in such 
mortgage or mortgages by means of any agreement, arrangement or device 
except pursuant to this subpart.
    (b) Sale of insured mortgage to approved mortgagee. A mortgage 
insured under this part may be sold to another approved mortgagee. The 
seller shall notify the Commissioner of the sale within 15 calendar 
days, on a form prescribed by the Commissioner and acknowledged by the 
buyer.
    (c) Effect of sale of insured mortgage. When a mortgage insured 
under this part is sold to another approved mortgagee, the buyer shall 
thereupon succeed to all the rights and become bound by all the 
obligations of the seller under the contract of insurance and the 
seller shall be released from its obligations under the contract, 
provided that the seller shall not be relieved of its obligation to pay 
mortgage insurance premiums until the notice required by Sec.  
206.101(b) is received by the Commissioner.
    (d) Assignments, pledges and transfers by approved mortgagee. (1) 
An assignment, pledge, or transfer of a mortgage or group of mortgages 
insured under this part, not constituting a final sale, may be made by 
an approved mortgagee to another approved mortgagee provided the 
following requirements are met:
    (i) The assignor, pledgor or transferor shall remain the mortgagee 
of record.
    (ii) The Commissioner shall have no obligation to recognize or deal 
with any party other than the mortgagee of record with respect to the 
rights, benefits and obligations of the mortgagee under the contract of 
insurance.
    (2) An assignment or transfer of an insured mortgage or group of 
insured mortgages may be made by an approved mortgagee to other than an 
approved mortgagee provided the requirements under paragraphs (d)(1)(i) 
and (d)(1)(ii) of this section are met and the following additional 
requirements are met:
    (i) The assignee or transferee shall be a corporation, trust or 
organization (including but not limited to any pension trust or profit-
sharing plan) which certifies to the approved mortgagee that:
    (A) It has assets of $100,000 or more; and
    (B) It has lawful authority to hold an insured mortgage or group of 
insured mortgages.
    (ii) The assignment or transfer shall be made pursuant to an 
agreement under which the transferor or assignor is obligated to take 
one of the following alternate courses of action within 1 year from the 
date of the assignment or within such additional period of time as may 
be approved by the Commissioner:
    (A) The transferor or assignor shall repurchase and accept a 
reassignment of such mortgage or group of mortgages.
    (B) The transferor or assignor shall obtain a sale and transfer of 
such mortgage or group of mortgages to an approved mortgagee.
    (3) Notice to or approval of the Commissioner is not required in 
connection with assignments, pledges or transfers pursuant to this 
section.
    (e) Declaration of trust. A sale of a beneficial interest in a 
group of mortgages insured under this part, where the interest to be 
acquired is related to all of the mortgages as an entirety, rather than 
an interest in a specific mortgage, shall be made only pursuant to a 
declaration of trust, which has been approved by the Commissioner prior 
to any such sale.
    (f) Transfers of partial interests. A partial interest in a 
mortgage insured under this part may be transferred under a 
participation agreement without obtaining the approval of the 
Commissioner, if the following conditions are met:
    (1) Principal mortgagee. The insured mortgage shall be held by an 
approved mortgagee which, for the purposes of

[[Page 31811]]

this section, shall be referred to as the principal mortgagee.
    (2) Interest of principal mortgagee. The principal mortgagee shall 
retain and hold for its own account a financial interest in the insured 
mortgage.
    (3) Qualification for holding partial interest. A partial interest 
in an insured mortgage shall be issued to and held only by:
    (i) A mortgagee approved by the Commissioner; or
    (ii) A corporation, trust or organization (including, but not 
limited to any pension fund, pension trust, or profit-sharing plan) 
which certifies to the principal mortgagee that:
    (A) It has assets of $100,000 or more; and
    (B) It has lawful authority to acquire a partial interest in an 
insured mortgage.
    (4) Participation agreement provisions. The participation agreement 
shall include provisions that:
    (i) The principal mortgagee shall retain title to the mortgage and 
remain the mortgagee of record under the contract of mortgage 
insurance.
    (ii) The Commissioner shall have no obligation to recognize or deal 
with anyone other than the principal mortgagee with respect to the 
rights, benefits and obligations of the mortgagee under the contract of 
insurance.
    (iii) The mortgage and loan documents shall remain in the custody 
of the principal mortgagee.
    (iv) The responsibility for servicing the insured mortgages shall 
remain with the principal mortgagee.


Sec.  206.102  Insurance Funds.

    Loans endorsed for insurance under this part, prior to October 1, 
2008, shall be obligations of the General Insurance Fund. Loans 
endorsed for insurance under this part, on or after October 1, 2008, 
shall be obligations of the Mutual Mortgage Insurance Fund.

Mortgage Insurance Premiums


Sec.  206.103  Payment of MIP.

    (a) The payment of any MIP due under this subpart shall be made to 
the Commissioner by the mortgagee in cash until an event described in 
paragraph (b) or (c) of this section occurs.
    (b) Payment of the mortgage. The MIP shall no longer be remitted if 
the mortgage is paid in full.
    (c) Acquisition of title. (1) If the mortgagee or a party other 
than the mortgagee acquires title at a foreclosure sale, or the 
mortgagee acquires title by a deed in lieu of foreclosure, and the 
mortgagee notifies the Commissioner that a claim for the payment of the 
insurance benefits will not be presented, the MIP shall no longer be 
remitted.
    (2) If the mortgagee or a party other than the mortgagee acquires 
title at a foreclosure sale or the mortgagee acquires title by a deed 
in lieu of foreclosure, or where the property is sold in accordance 
with Sec.  206.125(c), and a claim for the payment of the insurance 
benefits will be presented, the MIP shall no longer be remitted as of 
the date of the foreclosure sale, the date the deed in lieu of 
foreclosure is recorded, or the date in which the sale in accordance 
with Sec.  206.125(c) is completed, as applicable.


Sec.  206.105  Amount of MIP.

    (a) Initial MIP. The mortgagee shall pay to the Commissioner an 
initial MIP that does not exceed three percent of the maximum claim 
amount.
    (b) Monthly MIP. The Commissioner may establish and collect a 
monthly MIP, which will accrue daily from the closing date, at a rate 
not to exceed 1.50 percent of the remaining insured principal balance, 
or up to 1.55 percent for any mortgage involving an original principal 
obligation that is greater than 95 percent of appraised value of the 
property. A mortgagee may only add the monthly MIP to the loan balance 
when paid to the Commissioner.
    (c) Calculation of the initial MIP. The mortgagee shall calculate 
the initial MIP based on the amount of funds the borrower has elected 
to be made available during the First 12-Month Disbursement Period, 
except that the calculation shall not include any funds set aside in 
the Servicing Fee Set Aside, if applicable. The initial MIP calculation 
shall be determined based on the sum of the following amounts:
    (1) For adjustable interest rate HECMs, the amount of Mandatory 
Obligations, the amount disbursed to the borrower at loan closing, and 
the amount of the available Initial Disbursement Limit not taken by the 
borrower at loan closing that the borrower selects to remain available 
during the First 12-Month Disbursement Period.
    (2) For fixed interest rate HECMs, the amount of Mandatory 
Obligations and the amount disbursed to the borrower at loan closing.
    (d) Adjustments to initial or monthly MIP. The Commissioner may 
adjust the amount of any initial or monthly MIP through notice. Such 
notice shall establish the effective date of any premium adjustment 
therein.


Sec.  206.107  Mortgagee election of assignment or shared premium 
option.

    (a) Election of option. Before the mortgage is submitted for 
insurance endorsement, the mortgagee shall elect either the assignment 
option or the shared premium option.
    (1) Under the assignment option, the mortgagee shall have the 
option of assigning the mortgage to the Commissioner if the outstanding 
loan balance is equal to or greater than 98 percent of the maximum 
claim amount, regardless of the deferral status, or the borrower has 
requested a payment which exceeds the difference between the maximum 
claim amount and the outstanding loan balance and:
    (i) The mortgagee is current in making the required payments under 
the mortgage to the borrower;
    (ii) The mortgagee is current in its payment of the MIP (and late 
charges and interest on the MIP, if any) to the Commissioner;
    (iii) The mortgage is not due and payable under Sec.  206.27(c)(1), 
or, if due and payable under Sec.  206.27(c)(1), its due and payable 
status has been deferred pursuant to a Deferral Period;
    (iv) An event described in Sec.  206.27(c)(2) has not occurred, or 
the Commissioner has been so informed but has denied approval for the 
mortgage to be due and payable. At the mortgagee's option, the 
mortgagee may forgo assignment of the mortgage and file a claim under 
any of the circumstances described in Sec.  206.123(a)(3)-(5); and
    (v) The mortgage is a first lien of record and title to the 
property securing the mortgage is good and marketable. The provisions 
of Sec.  206.136 pertaining to mortgagee certifications also apply.
    (2) Under the shared premium option, the mortgagee may not assign a 
mortgage to the Commissioner unless the mortgagee fails to make 
payments and the Commissioner demands assignment (Sec.  206.123(a)(2)), 
but the mortgagee shall only be required to remit a reduced monthly MIP 
to the Commissioner. The mortgagee shall collect from the borrower the 
full amount of the monthly MIP provided in Sec.  206.105(b) but shall 
retain a portion of the monthly MIP paid by the borrower as 
compensation for the default risk assumed by the mortgagee. The portion 
of the MIP to be retained by a mortgagee shall be determined by the 
Commissioner as calculated in Sec.  206.109. For a particular mortgage, 
the applicable portion shall be determined as of the date of the 
commitment. The mortgagee retains the right to file a claim under any 
of the circumstances described in Sec.  206.123(a)(2)-(5).

[[Page 31812]]

    (b) No election for shared appreciation. Shared appreciation 
mortgages shall be insured by the Commissioner only under the shared 
premium option.


Sec.  206.109  Amount of mortgagee share of premium.

    Using the factors provided by the Commissioner, the amount of the 
mortgagee share of the premium shall be determined for each mortgage 
based upon the age of the youngest borrower or Eligible Non-Borrowing 
Spouse and the expected average mortgage interest rate.


Sec.  206.111  Due date of MIP.

    (a) Initial MIP. The mortgagee shall pay the initial MIP to the 
Commissioner within fifteen days of closing and as a condition to the 
endorsement of the mortgage for insurance.
    (b) Monthly MIP. Each monthly MIP shall be due to the Commissioner 
on the first business day of each month except the month in which the 
mortgage is closed.


Sec.  206.113  Late charge and interest.

    (a) Late charge. Initial MIP remitted to the Commissioner more than 
5 days after the payment date in Sec.  206.111(a) and monthly MIP 
remitted to the Commissioner more than 5 days after the payment date in 
Sec.  206.111(b) shall include a late charge of four percent of the 
amount owed.
    (b) Interest. In addition to any late charge provided in paragraph 
(a) of this section, the mortgagee shall pay interest on any initial 
MIP remitted to the Commissioner more than 20 days after closing, and 
interest on any monthly MIP remitted to the Commissioner more than 5 
days after the payment date prescribed in Sec.  206.111(b). Such 
interest rate shall be paid at a rate set in conformity with the 
Treasury Financial Manual.
    (c) Paid by mortgagee. Any late charge and interest owed may not be 
added to the outstanding loan balance and must be paid by the 
mortgagee.


Sec.  206.115  Insurance of mortgage.

    (a) Mortgages with firm commitments. For applications for insurance 
involving mortgages not eligible to be originated under the Direct 
Endorsement program under Sec.  203.5 (any reference to Sec.  203.255 
in Sec.  203.5 shall mean Sec.  206.115 for purposes of this section), 
the Commissioner will endorse the mortgage for insurance by issuing a 
Mortgage Insurance Certificate.
    (b) Endorsement with Direct Endorsement processing. For 
applications for insurance involving mortgages originated under the 
Direct Endorsement program under Sec.  203.5 (any reference to Sec.  
203.255 in Sec.  203.5 shall mean Sec.  206.115 for purposes of this 
section), the mortgagee shall submit to the Commissioner, within 60 
days after the date of closing of the loan or such additional time as 
permitted by the Commissioner, properly completed documentation and 
certifications as listed in this paragraph (b):
    (1) Property appraisal upon a form meeting the requirements of the 
Commissioner (including, if required, any additional documentation 
supporting the appraised value of the property under Sec.  206.52), and 
a HUD conditional commitment, or a Lender's Notice of Value issued by 
the Lender Appraisal Processing Program (LAPP) approved lender when the 
appraisal was originally completed for use in a VA application, but 
only if the appraiser was also on the FHA roster as of the effective 
date of the appraisal, and all accompanying documents required by the 
Commissioner;
    (2) An application for insurance of the mortgage in a form 
prescribed by the Commissioner;
    (3) A certified copy of the mortgage and loan documents executed 
upon forms which meet the requirements of the Commissioner;
    (4) An underwriter certification, on a form prescribed by the 
Commissioner, stating that the underwriter has personally reviewed the 
appraisal report and credit application (including the analysis 
performed on the worksheets) and that the proposed mortgage complies 
with FHA underwriting requirements, and incorporates each of the 
underwriter certification items that apply to the mortgage submitted 
for endorsement, as set forth in the applicable handbook or similar 
publication that is distributed to all Direct Endorsement mortgagees, 
except that if FHA makes the TOTAL Mortgage Scorecard available to HECM 
mortgagees by setting out requirements applicable for the use of the 
TOTAL Mortgage Scorecard in a Federal Register notice for comment, 
mortgagees may follow such procedures and meet such requirements in 
lieu of providing the underwriter certification;
    (5) Where applicable, a certificate under oath and contract 
regarding use of the dwelling for transient or hotel purposes;
    (6) Where an individual water or sewer system is being used, an 
approval letter from the local health authority indicating approval of 
the system in accordance with Sec.  200.926d(f);
    (7) A mortgage certification on a form prescribed by the 
Commissioner, stating that the authorized representative of the 
mortgagee who is making the certification has personally reviewed the 
mortgage documents and the application for insurance endorsement, and 
certifying that the mortgage complies with the requirements of 
paragraph (b) of this section. The certification shall incorporate each 
of the mortgagee certification items that apply to the mortgage loan 
submitted for endorsement, as set forth in the applicable handbook or 
similar publication that is distributed to all Direct Endorsement 
mortgagees;
    (8) Documents required by Sec.  206.15;
    (9) Documentation providing that the seller is the owner of record 
in accordance with Sec.  206.52(a) and the time restriction 
requirements of Sec.  206.52(b) are met;
    (10) For HECM for Purchase transactions, a Certificate of 
Occupancy, or its equivalent, if required for new construction; and
    (11) Such other documents as the Commissioner may require.
    (c) Pre-endorsement review for Direct Endorsement. (1) Upon 
submission by an approved mortgagee of the documents required by 
paragraph (b) of this section, the Commissioner will review the 
documents and determine that:
    (i) The mortgage is executed on a form which meets the requirements 
of the Commissioner;
    (ii) The mortgage maturity meets the requirements of the applicable 
program;
    (iii) The stated mortgage amount does not exceed 150 percent of the 
maximum claim amount;
    (iv) All documents required by paragraph (b) of this section are 
submitted;
    (v) All necessary certifications are made in accordance with 
paragraph (b) of this section;
    (vi) There is no mortgage insurance premium, late charge or 
interest due to the Commissioner; and
    (vii) The mortgage was not in default when submitted for insurance 
or, if submitted for insurance more than 60 days after closing, the 
mortgagee certifies that the borrower is current in paying all property 
charges or is otherwise in compliance with all the terms and conditions 
of the mortgage documents.
    (2) The Commissioner is authorized to determine if there is any 
information indicating that any certification or required document is 
false, misleading, or constitutes fraud or misrepresentation on the 
part of any party, or that the mortgage fails to meet a statutory or 
regulatory requirement. If, following this review, the mortgage is 
determined to be eligible, the

[[Page 31813]]

Commissioner will endorse the mortgage for insurance by issuance of a 
Mortgage Insurance Certificate. If the mortgage is determined to be 
ineligible, the Commissioner will inform the mortgagee in writing of 
this determination, and include the reasons for the determination and 
any corrective actions that may be taken.
    (d) Submission by mortgagee other than originating mortgagee. If 
the originating mortgagee assigns the mortgage to another approved 
mortgagee before pre-endorsement review under paragraph (c) of this 
section, the assignee may submit the required documents for pre-
endorsement review in the name of the originating mortgagee. All 
certifications must be executed by the originating mortgagee (or its 
underwriter, if appropriate). The purchasing mortgagee may pay any 
required mortgage insurance premium, late charge and interest.
    (e) Post-Endorsement review for Direct Endorsement. Following 
endorsement for insurance, the Commissioner may review all documents 
required by paragraph (b) of this section. If, following this review, 
the Commissioner determines that the mortgage does not satisfy the 
requirements of the Direct Endorsement program, the Commissioner may 
place the mortgagee on Direct Endorsement probation, or terminate the 
authority of the mortgagee to participate in the Direct Endorsement 
program pursuant to Sec.  206.15, or refer the matter to the Mortgagee 
Review Board for action pursuant to part 25 of this title.
    (f) Creation of the contract. The mortgage shall be an insured 
mortgage from the date of the issuance of a Mortgage Insurance 
Certificate, from the date of the endorsement of the credit instrument, 
or from the date of FHA's electronic acknowledgement to the mortgagee 
that the mortgage is insured, as applicable. The Commissioner and the 
mortgagee are thereafter bound by the regulations in this subpart with 
the same force and to the same extent as if a separate contract had 
been executed relating to the insured mortgage, including the 
provisions of the regulations in this subpart and of the National 
Housing Act.


Sec.  206.116  Refunds.

    No amount of the initial MIP shall be refundable except as 
authorized by the Commissioner.

HUD Responsibility to Borrowers


Sec.  206.117  General.

    The Commissioner is required by statute to take any action 
necessary to provide a borrower with funds to which the borrower is 
entitled under the mortgage and which the borrower does not receive 
because of the default of the mortgagee. The Commissioner may hold a 
second mortgage to secure repayment by the borrower under Sec.  
206.27(d). Where the Commissioner does not hold a second mortgage, but 
makes a payment to the borrower, and such payment is not reimbursed by 
the mortgagee, the Commissioner shall accept assignment of the first 
mortgage.


Sec.  206.119  [Reserved]


Sec.  206.121  Commissioner authorized to make payments.

    (a) Investigation. The Commissioner will investigate all complaints 
by a borrower concerning late payments. If the Commissioner determines 
that the mortgagee is unable or unwilling to make all payments required 
under the mortgage, including late charges, the Commissioner shall pay 
such payments and late charges to the borrower.
    (b) Reimbursement or assignment. The Commissioner may demand that 
within 30 days from the demand, the mortgagee reimburse the 
Commissioner, with interest from the date of payment by the 
Commissioner, or assign the insured mortgage to the Commissioner. 
Interest shall be paid at a rate set in conformity with the Treasury 
Financial Manual. If the mortgagee complies with the reimbursement 
demand, then the contract of insurance shall not be affected. If the 
mortgagee complies by assigning the mortgage for record within 30 days 
of the demand, then the Commissioner shall pay an insurance claim as 
provided in Sec.  206.129(e)(3) and assume all responsibilities of the 
mortgagee under the first mortgage. If the mortgagee fails to comply 
with the demand within 30 days, the contract of insurance will 
terminate as provided in Sec.  206.133(c).
    (c) Second mortgage. If the contract of insurance is terminated as 
provided in Sec.  206.133(c), all payments to the borrower by the 
Commissioner will be secured by the second mortgage, unless otherwise 
provided by the Commissioner. Payments will be due and payable in the 
same manner as under the insured first mortgage. The liability of the 
borrower under the first mortgage shall be limited to payments actually 
made by the mortgagee to or on behalf of the borrower (including prior 
recoupment of the MIP remitted by the mortgagee and billed to the 
borrower), and shall exclude accrued interest, whether or not it has 
been included in the outstanding loan balance, and shared appreciation, 
if any. Interest will stop accruing on the first mortgage when the 
Commissioner begins to make payments under the second mortgage. The 
first mortgage will not be due and payable until the second mortgage is 
due and payable.

Claim Procedure


Sec.  206.123  Claim procedures in general.

    (a) Claims. Mortgagees may submit claims for the payment of the 
mortgage insurance benefits if:
    (1) The conditions of Sec.  206.107(a)(1) pertaining to the 
optional assignment of the mortgage by the mortgagee have been met and 
the mortgagee assigns the mortgage to the Commissioner;
    (2) The mortgagee is unable or unwilling to make the payments under 
the mortgage and assigns the mortgage to the Commissioner pursuant to 
the Commissioner's demand, as provided in Sec.  206.121(b);
    (3) The borrower or other permissible party sells the property for 
less than the outstanding loan balance and the mortgagee releases the 
mortgage of record to facilitate the sale, as provided in Sec.  
206.125(c);
    (4) The mortgagee acquires title to the property by foreclosure or 
a deed in lieu of foreclosure and sells the property as provided in 
Sec.  206.125(g) for an amount which does not satisfy the outstanding 
loan balance or fails to sell the property as provided in Sec.  
206.127(a)(2); or
    (5) The mortgagee forecloses and a bidder other than the mortgagee 
purchases the property for an amount that is not sufficient to satisfy 
the outstanding loan balance, as provided in Sec.  206.125(e).
    (b) [Reserved]


Sec.  206.125  Acquisition and sale of the property.

    (a) Initial action by the mortgagee. (1) The mortgagee shall notify 
the Commissioner within 60 days of the mortgage becoming due and 
payable when the conditions stated in the mortgage, as required by 
Sec.  206.27(c)(1) have occurred or when the Deferral Period ends. The 
mortgagee shall notify the Commissioner within 30 days of one of the 
conditions stated in the mortgage, as required by Sec.  206.27(c)(2), 
occurring.
    (2) After notifying and receiving approval of the Commissioner when 
needed, the mortgagee shall notify the borrower, Eligible Non-Borrowing 
Spouse, borrower's estate and borrower's heir(s), as applicable, within 
30 days of the later of notifying the Commissioner or receiving 
approval, if needed, that the mortgage is due and payable. The 
mortgagee shall give the applicable party 30 days from the date of 
notice to engage in the following actions:

[[Page 31814]]

    (i) Pay the outstanding loan balance, including any accrued 
interest, MIP, and mortgagee advances in full;
    (ii) Sell the property for an amount not to be less than the amount 
determined by the Commissioner through notice, which shall not exceed 
95 percent of the appraised value as determined under Sec.  206.125(b), 
with the net proceeds of the sale to be applied towards the outstanding 
loan balance. In no event shall closing costs exceed 11 percent of the 
sales price. For the purposes of this section, sell includes the 
transfer of title by operation of law;
    (iii) Provide the mortgagee with a deed in lieu of foreclosure;
    (iv) Correct the condition which resulted in the mortgage coming 
due and payable for reasons other than the death of the last surviving 
borrower;
    (v) For an Eligible Non-Borrowing Spouse, correct the condition 
which resulted in an end to the Deferral Period in accordance with 
Sec.  206.57; or
    (vi) Such other actions as permitted by the Commissioner through 
notice.
    (3) For a borrower, even after a foreclosure proceeding is begun, 
the mortgagee shall permit the borrower to correct the condition which 
resulted in the mortgage coming due and payable and to reinstate the 
mortgage, and the mortgage insurance shall continue in effect. The 
mortgagee may require the borrower to pay any costs that the mortgagee 
incurred to reinstate the borrower, including foreclosure costs and 
reasonable attorney's fees. Such costs shall be paid by adding them to 
the outstanding loan balance. The mortgagee may refuse reinstatement by 
the borrower if:
    (i) The mortgagee has accepted reinstatement of the mortgage within 
the past two years immediately preceding the current notification to 
the borrower that the mortgage is due and payable;
    (ii) Reinstatement will preclude foreclosure if the mortgage 
becomes due and payable at a later date; or
    (iii) Reinstatement will adversely affect the priority of the 
mortgage lien.
    (4) For an Eligible Non-Borrowing Spouse, even after a foreclosure 
proceeding has been initiated, the mortgagee shall permit the Eligible 
Non-Borrowing Spouse to cure the condition which resulted in the 
Deferral Period ceasing, in accordance with Sec.  206.57(d).
    (b) Appraisal. The mortgagee shall have the property appraised by 
an appraiser on the FHA roster no later than 30 days after receipt of 
the request by an applicable party in connection with a potential 
property sale. The property shall be appraised before a foreclosure 
sale and have an effective appraisal date that is no more than 30 days 
before such sale. The appraisal shall be at the requesting party's 
expense unless the mortgage is due and payable. If the mortgage is due 
and payable, the appraisal shall be at the mortgagee's expense but the 
mortgagee shall have a right to be reimbursed out of the proceeds of 
any sale by the borrower or other permissible party.
    (c) Sale by borrower or other permissible party. Where the HECM is 
not due and payable, the borrower or an authorized representative of 
the borrower may sell the property for at least the lesser of the 
outstanding loan balance or the appraised value. Where the HECM is due 
and payable at the time the contract for sale is executed, the borrower 
or other party with legal right to dispose of the property may sell the 
property in accordance with the amount established by Sec.  
206.125(a)(2)(ii). The mortgagee shall satisfy the mortgage of record 
(and the Commissioner will satisfy any second mortgage required by the 
Commissioner under Sec.  206.27(d) of record) in order to facilitate 
the sale, provided that there are no junior liens (except the mortgage 
to secure payments by the Commissioner if required under Sec.  
206.27(d)) and all the net proceeds from the sale are paid to the 
mortgagee.
    (d) Initiation of foreclosure. (1) The mortgagee shall commence 
foreclosure of the mortgage within six months of the due date defined 
in Sec.  206.129(d)(1), or within such additional time as may be 
approved by the Commissioner.
    (2) If the laws of the State, city or municipality or other 
political subdivision in which the mortgaged property is located or if 
Federal bankruptcy law does not permit the commencement of the 
foreclosure in accordance with Sec.  206.125(d)(1), the mortgagee shall 
commence foreclosure within six months after the expiration of the time 
during which such foreclosure is prohibited by such laws.
    (3) The mortgagee shall give written notice to the Commissioner 
within 30 days after the initiation of foreclosure proceedings, and 
shall exercise reasonable diligence in prosecuting the foreclosure 
proceedings to completion and in acquiring title to and possession of 
the property. A time frame that is determined by the Commissioner to 
constitute ``reasonable diligence'' for each State is made available to 
mortgagees.
    (4) The mortgagee shall bid at the foreclosure sale an amount at 
least equal to the lesser of the sum of the outstanding loan balance 
and any and all other incurred expenses, or the current appraised value 
of the property.
    (e) Other bidders at foreclosure sale. If a party other than the 
mortgagee is the successful bidder at the foreclosure sale, the net 
proceeds of the sale shall be applied to the outstanding loan balance.
    (f) Deed in lieu of foreclosure. (1)(i) In order to avoid delays 
and additional expense as a result of instituting and completing a 
foreclosure action, the mortgagee shall accept a deed in lieu of 
foreclosure from the borrower or other party with legal right to 
dispose of the property provided it is within 9 months of the due date 
and the mortgagee is able to obtain good and marketable title.
    (ii) Cash for Keys. The Commissioner may provide a financial 
incentive, in an amount to be determined by the Commissioner, to be 
paid by the mortgagee and reimbursed through any subsequent claim where 
a borrower or other party with a legal right to do so deeds the 
property within 6 months of the due date.
    (2) In exchange for the executed and delivered deed, the mortgagee 
shall cancel the credit instrument and deliver it to the borrower and 
satisfy the mortgage of record. If applicable, the mortgagee shall 
request that the Commissioner cancel the credit instrument and deliver 
it to the borrower and satisfy the mortgage of record.
    (g) Sale of the acquired property. (1) Upon acquisition of the 
property by foreclosure or deed in lieu of foreclosure, the mortgagee 
shall take possession of, preserve and repair the property and shall 
make diligent efforts to sell the property within six months from the 
date the mortgagee acquired the property, or such additional time as 
provided by the Commissioner. The mortgagee shall sell the property for 
an amount not less than the appraised value (as provided under 
paragraph (b) of this section) unless the mortgagee does not file an 
application for insurance benefits or written permission is obtained 
from the Commissioner authorizing a sale at a lower price.
    (2) Repairs shall not exceed those required by local law, or the 
requirements of the Commissioner or the Secretary of Veterans Affairs 
if the sale of the property is financed with a mortgage insured by the 
Commissioner or guaranteed, insured or taken by the Secretary of 
Veterans Affairs. No other repairs shall be made without the specific 
advance approval of the Commissioner.
    (3) The mortgagee shall not enter into a contract for the 
preservation, repair or sale of the property with any officer, 
employee, or owner of ten percent or more interest in the mortgagee or 
with any other person or organization having

[[Page 31815]]

an identity of interest with the mortgagee or with any relative of such 
officer, employee, owner or person.


Sec.  206.127  Application for insurance benefits.

    (a) Mortgagee acquires title. (1) The mortgagee shall apply for the 
payment of the insurance benefits within 30 days after the sale of the 
property by the mortgagee or within such additional time as approved by 
the Commissioner. Application shall be made by notifying the 
Commissioner of the sale of the property, the sale price, and income 
and expenses incurred in connection with the acquisition, repair and 
sale of the property.
    (2) If the property will not be sold within six months from the 
date the mortgagee acquired title, the mortgagee shall, at least 15 
days prior to the expiration of the six month period, have the property 
appraised. Within 30 days of receipt of the appraisal, the mortgagee 
shall apply for the insurance benefits as provided in paragraph (a) of 
this section, substituting the appraised value for the sale price. The 
mortgagee may add the cost of the appraisal to the claim amount.
    (b) Party other than the mortgagee acquires title. The mortgagee 
shall apply for the payment of the insurance benefits within 30 days 
after a party other than the mortgagee acquires title to the property. 
Application shall be made by notifying the Commissioner of the sale of 
the property and the sale price. Transferring a portfolio that includes 
REO properties to another entity does not constitute a ``sale'' under 
this section.
    (c) Mortgagee assigns the mortgage. The mortgagee shall file its 
claim for the payment of the insurance benefits within 15 days after 
the date the mortgage is assigned for record to the Commissioner. The 
application for the payment of the insurance benefits shall include the 
items listed in Sec.  206.135(a) and the certification required under 
Sec.  206.136.
    (d) Contract of insurance not terminated. Mortgagees may only file 
an application for insurance benefits provided the contract of 
insurance has not terminated.


Sec.  206.129  Payment of claim.

    (a) General. If the claim for the payment of the insurance benefits 
is acceptable to the Commissioner, payment shall be made in cash in the 
amount determined under this section.
    (b) Limit on claim amount. (1) For HECMs assigned Case Numbers 
prior to [insert effective date of final rule], in no case may the 
claim paid under this subpart exceed the maximum claim amount. The 
interest allowance provided in paragraphs (d)(3)(x), (e)(2) and 
(f)(2)(i) of this section shall not be included in determining the 
limit on the claim amount.
    (2) For HECMs assigned Case Numbers on or after [insert effective 
date of final rule], in no case may the claim paid under this subpart 
exceed the maximum claim amount, as defined in Sec.  206.3. The 
interest allowance provided in paragraphs (d)(3)(x), (e)(2) and 
(f)(2)(ii) of this section shall be made in cash in the amount 
determined under this section.
    (c) Shared appreciation mortgages. The terms loan balance and 
accrued interest as used in this section do not include interest 
attributable to the mortgagee's share of the appreciated value of the 
property.
    (d) Amount of payment--mortgagee acquires title or is unsuccessful 
bidder. This paragraph describes the amount of payment if the mortgagee 
acquires title by purchase, foreclosure, or deed in lieu of 
foreclosure, or when a party other than the mortgagee is the successful 
bidder at the foreclosure sale.
    (1) Due date means the date when the mortgagee notifies or should 
have notified the Commissioner that the mortgage is due and payable 
under the conditions stated in the mortgage, as required by Sec.  
206.27(c)(1) or the date that the Deferral Period, as provided for in 
the mortgage by Sec.  206.27(c)(3), ends; or the date the Commissioner 
approved a due and payable request as provided for in the mortgage by 
Sec.  206.27(c)(2).
    (2) The amount of the claim shall be computed by:
    (i) Totaling the outstanding loan balance and any accrued interest 
and servicing fees which have not been added to the outstanding loan 
balance as of the due date, and allowances for items set forth in 
paragraph (d)(3) of this section; and
    (ii) Subtracting from that total the amount for which the property 
was sold (or the appraised value determined under Sec.  206.127(a)(2)) 
and the items set forth in paragraph (d)(4) of this section.
    (3) The claim shall include items listed in paragraphs (d)(2)(i) 
through (xiv) of this section. For HECMs with Case Numbers assigned on 
or after [insert effective date of final rule], the inclusion of items 
listed in paragraphs (d)(2)(i), (ii), and (iii) of this section shall 
be limited to two years of advances made by the mortgagee on such 
expenses. The Commissioner may approve an extension of the two-year 
limitation under such circumstances, terms, and conditions determined 
and specified as acceptable to the Commissioner.
    (i) Taxes, ground rents, water rates, and utility charges that are 
liens prior to the mortgage;
    (ii) Special assessments, which are noted on the application for 
insurance or which become liens after the insurance of the mortgage;
    (iii) Hazard and flood insurance premiums on the mortgaged property 
not in excess of a reasonable rate;
    (A) For purposes of this section, reasonable rate means a rate that 
is not in excess of the rate or advisory rate set by the principal 
State-licensed rating organization for essential property insurance in 
the voluntary market, or if coverage is available under a FAIR Plan, 
the FAIR Plan rate;
    (B) If a State has neither a FAIR Plan nor a State-licensed rating 
organization for essential property insurance in the voluntary market, 
the mortgagee must provide to the Home Ownership Center (HOC) having 
jurisdiction, information concerning the lowest rates available from an 
insurer for the types of coverage involved, with a request for a 
determination of whether the rate is reasonable. FHA will determine the 
rate to be reasonable if it approximates the rate assessed for 
comparable insurance coverage applicable to similarly situated 
properties in a State that offers a FAIR Plan or maintains a State-
licensed rating organization;
    (iv) Taxes imposed upon any deeds or other instruments by which 
said property was acquired by the mortgagee pursuant to Sec.  206.125;
    (v) Reasonable payments made by the mortgagee, with the approval of 
the Commissioner, for the purpose of protecting, operating, or 
preserving the property, or removing debris from the property;
    (vi) Reasonable costs for performing property inspections required 
by Sec.  206.140 and to determine if the property is vacant or 
abandoned are considered to be costs of protecting, operating or 
preserving the property;
    (vii) Charges for the administration, operation, maintenance, or 
repair of community-owned property or the maintenance or repair of the 
mortgaged property, paid by the mortgagee for the purpose of 
discharging an obligation arising out of a covenant filed for record 
prior to the issuance of the mortgage; and charges for the repair or 
maintenance of the mortgaged property required by, and in an amount 
approved by, the Commissioner under Sec.  206.142;
    (viii) Reasonable costs of the title search ordered by the 
mortgagee, in accordance with procedures prescribed by FHA, to 
determine if the criteria for

[[Page 31816]]

approval of the mortgagee's acceptance of a deed in lieu of foreclosure 
or to determine clear title to complete a pre-foreclosure sale;
    (ix) Foreclosure costs or costs of acquiring the property in 
accordance with such conditions as the Commissioner shall prescribe;
    (x) An amount equal to the interest allowance which would have been 
earned, from the due date to the date when payment of the claim is 
made, if the claim had been paid in debentures, except that when the 
mortgagee fails to meet any one of the applicable requirements of 
Sec. Sec.  206.125 and 206.127 of this subpart within the specified 
time, and in a manner satisfactory to the Commissioner (or within such 
further time as the Commissioner may approve in writing), the interest 
allowance in such cash payment shall be computed only to the date on 
which the particular required action should have been taken or to which 
it was extended.
    (A) Debenture interest rate. The debenture interest rate provided 
for in Sec.  206.146 shall be used.
    (B) Maturity of debentures. Debentures shall mature 20 years from 
the date of issue.
    (C) Registration of debentures. Debentures shall be registered as 
to principal and interest.
    (D) Form and amounts of debentures. Debentures issued under this 
part shall be in such form and amounts; and shall be subject to such 
term and conditions; and shall include such provisions for redemption, 
if any, as may be prescribed by the Commissioner, with the approval of 
the Secretary of the Treasury; and may be in book entry or certificated 
registered form, or such other form as the Commissioner by regulation 
may prescribe.
    (E) Redemption of debentures. Debentures shall, at the option of 
the Commissioner and with the approval of the Secretary of the 
Treasury, be redeemable at par plus accrued interest on any semiannual 
interest payment date on three months' notice of redemption given in 
such manner as the Commissioner shall prescribe. The debenture interest 
on the debentures called for redemption shall cease on the semiannual 
interest payment date designated in the call notice. The Commissioner 
may include with the notice of redemption an offer to purchase the 
debentures at par plus accrued interest at any time during the period 
between the notice of redemption and the redemption date. If the 
debentures are purchased by the Commissioner after such call and prior 
to the named redemption date, the debenture interest shall cease on the 
date of purchase.
    (F) Issue date of debentures. The issue date of debentures is 
determined by the due date as defined in paragraph (d)(1) of this 
section.
    (G) Cash adjustment. Any difference of less than $50 between the 
amount of debentures to be issued to the mortgagee and the total amount 
of the mortgagee's claim, as approved by the Commissioner, may be 
adjusted by the issuance of a check in payment thereof;
    (xi) Any amount of incentive paid by the mortgagee in accordance 
with Sec.  206.125(f)(1)(ii);
    (xii) Costs of any appraisal under Sec. Sec.  206.125 or 206.127, 
provided that the property was appraised after the mortgage became due 
and payable and that the mortgagee is not otherwise reimbursed for such 
costs;
    (xiii) Reasonable payments made by the mortgagee for:
    (A) Preservation and maintenance of the property;
    (B) Repairs necessary to meet the objectives of the property 
standards required for mortgages insured by the Commissioner, those 
required by local law, and such additional repairs as may be 
specifically approved in advance by the Commissioner; and
    (C) Expenses in connection with the sale of the property including 
a sales commission at the rate customarily paid in the community and, 
if the sale to the buyer involves a mortgage insured by the 
Commissioner or guaranteed by the Secretary of Veterans Affairs, a 
discount at a rate not to exceed the maximum allowable by the 
Commissioner, as of the date of execution of the discounted loan; and
    (xiv) A certification that the property is undamaged in accordance 
with Sec.  206.143.
    (4) There shall be deducted from the amount computed in paragraph 
(d)(2)(i) of this section:
    (i) The items listed in Sec.  206.145; and
    (ii) Any adjustment for damage or neglect to the property pursuant 
to Sec. Sec.  206.140, 206.141, and 206.142.
    (e) Amount of payment--assigned mortgages. This paragraph describes 
the amount of payment if the mortgagee assigns a mortgage to the 
Commissioner under Sec.  206.107(a)(1) or Sec.  206.121(b).
    (1) When a mortgagee assigns a mortgage which is eligible for 
assignment under Sec.  206.107(a)(1), the amount of payment shall be 
computed by subtracting from the outstanding loan balance on the date 
of assignment all cash retained by the mortgagee, including amounts 
held or deposited for the account of the borrower or to which it is 
entitled under the mortgage transaction that have not been applied in 
reduction of the principal mortgage indebtedness, and any adjustments 
for damage or neglect to the property pursuant to Sec. Sec.  206.140, 
206.141 and 206.142.
    (2) The claim shall also include:
    (i) Reimbursement for such costs and attorney's fees as the 
Commissioner finds were properly incurred in connection with the 
assignment of the mortgage to the Commissioner; and
    (ii) An amount equivalent to the interest allowance which will have 
been earned from the date the mortgage was assigned to the Commissioner 
to the date the claim is paid, if the claim had been paid in 
debentures, except that if the mortgagee fails to meet any of the 
requirements of Sec.  206.127(c), or Sec.  206.131 if applicable, 
within the specified time and in a manner satisfactory to the 
Commissioner (or within such further time as the Commissioner may 
approve in writing), the interest allowance in the payment of the claim 
shall be computed only to the date on which the particular required 
action should have been taken or to which it was extended. The 
provisions of paragraphs (d)(3)(x)(A)-(G) of this section pertaining to 
debentures are applicable except that the issue date of the debentures 
shall be the date the mortgage was assigned to the Commissioner.
    (3) When a mortgagee assigns a mortgage under Sec.  206.121(b) 
after demand by the Commissioner, the mortgagee will not receive the 
entire claim payment as contained in paragraphs (e)(1) and (2) of this 
section. The amount of the claim shall be computed by totaling the 
payments made by the mortgagee to the borrower or for the benefit of 
the borrower, and subtracting from the total the cash retained by the 
mortgagee, including amounts held or deposited for the account of the 
borrower or to which it is entitled under the mortgage transaction that 
have not been applied in reduction of the principal mortgage 
indebtedness, and any adjustments for damage or neglect to the property 
pursuant to Sec. Sec.  206.141 and 206.142. The claim shall also be 
reduced by an amount determined by the Commissioner to reimburse the 
Commissioner for administrative expenses incurred in assuming the 
mortgagee's responsibility under the mortgage, which may include 
expenses for staff time. If more than one mortgage is assigned to the 
Commissioner, the administrative expenses incurred for all the 
mortgages assigned shall be allocated among the mortgages as determined 
by the Commissioner. The

[[Page 31817]]

claim shall not include accrued interest whether or not it has been 
included in the loan balance.
    (f) Amount of payment-borrower sells the property. This paragraph 
describes the amount of payment if the property is sold in accordance 
with Sec.  206.125(c) to one other than the mortgagee for less than the 
outstanding loan balance, and the mortgagee releases the mortgage to 
facilitate the sale.
    (1)(i) For HECMs assigned Case Numbers prior to [insert effective 
date of final rule], the amount of the claim shall be computed by 
totaling the outstanding loan balance and any accrued interest and 
servicing fees which have not been added to the outstanding loan 
balance on the date the deed is recorded, and an allowance for items 
set forth in paragraph (d)(3)(i)-(vii) and (d)(3)(xi) of this section, 
and subtracting from the total the amount for which the property was 
sold.
    (ii) For HECMs assigned Case Numbers on or after [insert effective 
date of final rule], the following provisions apply.
    (A) When the loan is not in due and payable status. The amount of 
the claim shall be computed by totaling the outstanding loan balance 
and any accrued interest and servicing fees which have not been added 
to the outstanding loan balance on the date the deed is recorded, and 
an allowance for items set forth in paragraph (d)(3)(xiii)(C) of this 
section, and subtracting from the total the amount for which the 
property was sold.
    (B) When the loan is in due and payable status. The amount of the 
claim shall be computed by totaling the outstanding loan balance and 
any accrued interest and servicing fees which have not been added to 
the outstanding loan balance as of the due date, the items set forth in 
paragraph (d)(3) of this section, and subtracting from the total the 
amount for which the property was sold.
    (2)(i) For HECMs assigned Case Numbers prior to [insert effective 
date of final rule], the claim shall also include an amount equivalent 
to the interest allowance which would have been earned from the date 
the deed is recorded to the date when payment of the claim is made, if 
the claim had been paid in debentures, and in a manner satisfactory to 
the Commissioner; the interest allowance in such cash payment shall be 
computed only to the date on which the particular action should have 
been taken or to which it was extended. The provisions of paragraphs 
(d)(3)(x)(A)-(G) of this section pertaining to debentures apply except 
that the issue date of the debentures is the date the deed is recorded 
instead of the due date.
    (ii) For HECMs assigned Case Numbers on or after [insert effective 
date of final rule], the following provisions apply:
    (A) When the loan is not in due and payable status. The claim shall 
also include an amount equivalent to the interest allowance which would 
have been earned from the date the deed is recorded to the date when 
payment of the claim is made, if the claim had been paid in debentures, 
and in a manner satisfactory to the Commissioner; the interest 
allowance in such cash payment shall be computed only to the date on 
which the particular action should have been taken or to which it was 
extended. The provisions of paragraphs (d)(3)(x)(A)-(G) of this section 
pertaining to debentures apply except that the issue date of the 
debentures shall be the date the deed is recorded.
    (B) When the loan is in due and payable status. The claim shall 
also include an amount equivalent to the interest allowance which would 
have been earned from the due date to the date when payment of the 
claim is made, if the claim had been paid in debentures, except that 
when the mortgagee fails to meet any of the applicable requirements of 
Sec. Sec.  206.125 and 206.127 within the specified time determined by 
the due date, as defined in paragraph (d)(1) of this section (or within 
such further time as the Commissioner may approve in writing), and in a 
manner satisfactory to the Commissioner; the interest allowance in such 
cash payment shall be computed only to the date on which the particular 
action should have been taken or to which it was extended. The 
provisions of paragraphs (d)(3)(x)(A)-(G) of this section pertaining to 
debentures apply.

Condominiums


Sec.  206.131  Contract rights and obligations for mortgages on 
individual dwelling units in a condominium.

    (a) Additional requirements. The requirements of this subpart shall 
be applicable to mortgages on individual dwelling units in a 
condominium, except as modified by this section.
    (b) References. The term property as used in this subpart shall be 
construed to include the individual dwelling unit and the undivided 
interest in the common areas and facilities as may be designated.
    (c) Assignment of the mortgage. If the mortgagee assigns the 
mortgage on the individual dwelling unit to the Commissioner, the 
mortgagee shall certify:
    (1) To any changes in the plan of apartment ownership including the 
administration of the property;
    (2) That as of the date the assignment is filed for record, the 
family unit is assessed and subject to assessment for taxes pertaining 
only to that unit; and
    (3) To the condition of the property as of the date the assignment 
is filed for record. Section 234.275 of this chapter concerning the 
certification of condition is incorporated by reference.
    (d) Condition of the multifamily structure. The provisions of Sec.  
234.270 (a) and (b) of this chapter concerning the condition of the 
multifamily structure in which the property is located shall be 
applicable to mortgages insured under this part which are assigned to 
the Commissioner.

Termination of Insurance Contract


Sec.  206.133  Termination of insurance contract.

    (a) Payment of the mortgage. The contract of insurance shall be 
terminated if the mortgage is paid in full.
    (b) Acquisition of title. (1) If the mortgagee or a party other 
than the mortgagee acquires title at a foreclosure sale, or the 
mortgagee acquires title by a deed in lieu of foreclosure, and the 
mortgagee notifies the Commissioner that a claim for the payment of the 
insurance benefits will not be presented, the contract of insurance 
shall be terminated.
    (2) For HECMs with Case Numbers assigned on or after [insert 
effective date of final rule], if the mortgagee or a party other than 
the mortgagee acquires title at a foreclosure sale or the mortgagee 
acquires title by a deed in lieu of foreclosure and a claim for the 
payment of the insurance benefits will be presented, the contract of 
insurance shall be terminated as of claim payment.
    (c) Mortgagee fails to make payments. If the mortgagee fails to 
make the payments to the borrower as required under the mortgage, and 
does not reimburse the Commissioner or assign the mortgage to the 
Commissioner within 30 days from the demand by the Commissioner for 
reimbursement or assignment, the contract of insurance shall 
automatically terminate. The Commissioner may later reinstate the 
contract of insurance, which shall continue in force as if no 
termination had occurred, upon reimbursement with interest as provided 
in Sec.  206.121. Upon reinstatement, the mortgagee shall be liable for 
all MIP which would have been due if no termination had occurred, 
including late charge and interest as provided in Sec.  206.113.

[[Page 31818]]

    (d) Notice of termination. The mortgagee shall give written notice 
to the Commissioner, or other notice acceptable to the Commissioner, 
within 15 days of the occurrence of an event under paragraphs (a) and 
(b) of this section. No contract of insurance shall be terminated under 
paragraphs (a) or (b) of this section unless such notice is given.
    (e) Voluntary termination. The borrower and the mortgagee may 
jointly request the Commissioner to approve the voluntary termination 
of the mortgage insurance contract. Prior to approval, the Commissioner 
shall make certain that the borrower is aware of the consequences which 
could arise out of the voluntary termination of the contract of 
insurance. The mortgagee shall cancel the insurance endorsement on the 
Mortgage Insurance Certificate or Note upon receipt of notice from the 
Commissioner that the contract of insurance is terminated. 
Notwithstanding any provision in a mortgage instrument, there shall be 
no voluntary termination charge due the Commissioner on account of the 
voluntary termination of any mortgage insurance contract where the 
request for termination is received by the Commissioner.
    (f) Effect of termination. When the insurance contract is 
terminated all rights of the mortgagee shall terminate, including the 
right to file a claim for insurance benefits. All obligations of the 
Commissioner shall also cease immediately.

Additional Requirements


Sec.  206.134  Partial release, addition or substitution of security.

    (a) A mortgagee shall not release the security or any part thereof, 
while the mortgage is insured, without the prior consent of the 
Commissioner.
    (b) A mortgagee may, with the prior consent of the Commissioner, 
accept an addition to, or substitution of, security for the purpose of 
removing the dwelling to a new lot or replacing the dwelling with a 
similar or like kind on the existing lot under the following 
conditions:
    (1) The mortgagee obtains a good and valid first lien on the 
property to which the dwelling is removed or the existing lot upon 
which the dwelling is rebuilt;
    (2) All damages to the structure are repaired or all rebuilding of 
the structure is completed without cost to FHA; and
    (3) The property to which the dwelling is removed or rebuilt is in 
an area known to be reasonably free from natural hazards or, if in a 
flood zone, the borrower will insure or reinsure under the National 
Flood Insurance Program.
    (c) A mortgagee may, without the prior consent of the Commissioner, 
accept an addition to, or substitution of, security for the purpose of 
removing the dwelling to a new lot under the following conditions:
    (1) The dwelling has survived an earthquake or other disaster with 
little damage, but continued location on the property might be 
hazardous;
    (2) The conditions stated in paragraph (b) of this section exist; 
and
    (3) Immediately following the emergency removal the mortgagee 
notifies the Commissioner of the reasons for removal.


Sec.  206.135  Application for insurance benefits and fiscal data.

    (a) On the date the application for assignment is filed, the 
mortgagee shall submit to the Commissioner:
    (1) Credit and security instrument. The original credit and 
security instruments assigned without recourse or warranty, except that 
no act or omission of the mortgagee shall have impaired the validity 
and priority of the mortgage.
    (2) Proposed assignment instrument. A copy of the proposed 
assignment of mortgage.
    (3) Hazard and flood insurance. All hazard and flood insurance (if 
applicable) policies held in connection with the mortgaged property, 
together with a copy of the mortgagee's notification to the carrier 
authorizing the amendment of the loss payable clause substituting the 
Commissioner as the mortgagee.
    (4) Rights and interests. An assignment of all rights and interests 
arising under the mortgage, and all claims of the mortgagee against the 
borrower or others arising out of the mortgage transaction.
    (5) Property. All property of the borrower held by the mortgagee or 
to which it is entitled (other than the cash items which are to be 
retained by the mortgagee).
    (6) Records and accounts. All records, ledger cards, documents, 
books, papers and accounts relating to the mortgage transaction.
    (7) Additional information. Any additional information or data 
which the Commissioner may require.
    (8) Title evidence. All title evidence held by the mortgagee. It 
need not be extended to include the recordation of the assignment. The 
title insurance policy shall be endorsed from the mortgage insurance 
company up to the point of assignment. At the point of assignment, the 
Commissioner shall be named insured under such policy.
    (b) All documents required in paragraph (a) of this section must be 
submitted and approved before a claim for assignment may be submitted.
    (c) Recorded assignment instrument. The original of the recorded 
assignment of mortgage shall be forwarded to the Commissioner as soon 
as received by the mortgagee, but in no case shall it be longer than 12 
months after recordation. If the original of the assignment is not 
available, a copy shall be furnished and the original forwarded as soon 
as possible.


Sec.  206.136  Conditions for assignment.

    (a) In order for a HECM to be eligible for assignment, the 
following must be met:
    (1) Priority of mortgage to liens. The mortgage is prior to all 
mechanics' and materialmen's liens, homeowners association liens or 
condo association liens filed of record, regardless of when such liens 
attach, and prior to all liens and encumbrances, or defects which may 
arise based on any act or omission by the mortgagee except such liens 
or other matters as may have been approved by the Commissioner.
    (2) Amount due. The amount stated in the instrument of assignment 
is actually due and owing under the mortgage.
    (3) Offsets or counterclaims. There are no offsets or counterclaims 
thereto and the mortgagee has a good right to assign.
    (b) The mortgagee shall certify that the conditions of paragraph 
(a) have been met.


Sec.  206.137  Effect of noncompliance with regulations.

    If, for any reason, the mortgagee fails to comply with the 
regulations in this subpart, the Commissioner may hold processing of 
the application for insurance benefits in abeyance for a reasonable 
time in order to permit the mortgagee to comply. In the alternative to 
holding processing in abeyance, the Commissioner may reconvey title to 
the property or reassign the mortgage to the mortgagee, in which event 
the application for insurance benefits shall be considered as cancelled 
and the mortgagee shall refund the insurance benefits to the 
Commissioner as well as other funds required by Sec.  206.138 of this 
part. The mortgagee may reapply for insurance benefits at a subsequent 
date; provided, however, that the mortgagee may not be reimbursed for 
any expenses incurred in connection with the property after it has been 
reconveyed or the mortgage reassigned by the Commissioner, or paid any 
debenture interest accrued after the date of initial conveyance, 
whichever is earlier, and there will be deducted from the

[[Page 31819]]

insurance benefits any reduction in the Commissioner's estimate of the 
value of the property occurring from the time of reconveyance or 
mortgage reassignment to the time of reapplication.


Sec.  206.138  Mortgagee's liability for certain expenditures.

    Where the Commissioner accepts an assignment, acquires a property 
after accepting an assignment of a mortgage, or otherwise pays a claim 
for insurance benefits and thereafter it becomes necessary for the 
Commissioner to either reconvey the property or reassign the mortgage 
to the mortgagee due to the mortgagee's noncompliance with these 
regulations, the mortgagee shall reimburse the Commissioner for all 
expenses incurred in connection with such acquisition and reconveyance 
or reassignment. The reimbursement shall include interest on the amount 
of insurance benefits refunded by the mortgagee from the date the 
insurance benefits were paid to the date of refund at an interest rate 
set in conformity with the Treasury Fiscal Requirements Manual, and the 
Commissioner's cost of holding the property or servicing the mortgage, 
accruing on a daily basis, from the date of assignment or claim payment 
to the date of reconveyance or reassignment. These costs are based on 
the Commissioner's estimate of the taxes, maintenance and operating 
expenses of the property, and administrative expenses. Appropriate 
adjustments shall be made by the Commissioner on account of any income 
received from the property.


Sec.  206.140  Inspection and preservation of properties.

    The mortgagee, upon learning that a property subject to a mortgage 
insured under this part is vacant or abandoned, shall be responsible 
for the inspection of such property at least monthly, if the loan is in 
a due and payable status. When a mortgage is in due and payable status 
and efforts to reach the borrower or applicable party by telephone 
within that period have been unsuccessful, the mortgagee shall be 
responsible for a visual inspection of the security property to 
determine whether the property is vacant. The mortgagee shall take 
reasonable action to protect and preserve such security property when 
it is determined or should have been determined to be vacant or 
abandoned until assigned to the Commissioner or an application for 
insurance benefits is filed, if such action does not constitute an 
illegal trespass. ``Reasonable action'' includes the commencement of 
foreclosure within the time required by Sec.  206.125.


Sec.  206.141  Property condition.

    (a) Condition at time of transfer. When the mortgage is assigned to 
the Commissioner or the property is sold by the mortgagee, the property 
shall be undamaged by fire, earthquake, flood, or tornado, except as 
set forth in this subpart.
    (b) Damage to property by waste. The mortgagee shall not be liable 
for damage to the property by waste committed by the borrower, its 
heirs, successors or assigns in connection with mortgage insurance 
claims.
    (c) Mortgagee responsibility. The mortgagee shall be responsible 
for:
    (1) Damage by fire, flood, earthquake, hurricane, or tornado; and
    (2) Damage to or destruction of security properties on which the 
loans are in default and which properties are vacant or abandoned, when 
such damage or destruction is due to the mortgagee's failure to take 
reasonable action to inspect, protect and preserve such properties as 
required by Sec.  206.140.
    (d) Limitation. The mortgagee's responsibility for property damage 
shall not exceed the amount of its insurance claim as to a particular 
property.


Sec.  206.142  Adjustment for damage or neglect.

    (a) Except as provided for in paragraphs (a)(1) and (a)(2) of this 
section: if the property has been damaged by fire, flood, earthquake, 
hurricane, or tornado, the damage must be repaired before assignment of 
the mortgage to the Commissioner; if the property has suffered damage 
because of the mortgagee's failure to take action as required by Sec.  
206.140, the damage must be repaired before the mortgagee sells the 
property.
    (1) If the prior approval of the Commissioner is obtained, there 
will be deducted from the insurance benefits the Commissioner's 
estimate of the cost of repairing the damage or any insurance recovery 
received by the mortgagee, whichever is greater.
    (2) If the property has been damaged by fire and was not covered by 
fire insurance at the time of the damage, or the amount of insurance 
coverage was inadequate to repair fully the damage, only the amount of 
insurance recovery received by the mortgagee, if any, will be deducted 
from the insurance benefits, provided the mortgagee certifies, at the 
time that a claim is filed for insurance benefits, that:
    (i) At the time the mortgage was insured, the property was covered 
by fire insurance in an amount at least equal to the lesser of 100 
percent of the insurable value of the improvements, or the principal 
loan balance of the mortgage;
    (ii) The insurer later cancelled this coverage or refused to renew 
it for reasons other than nonpayment of premium;
    (iii) The mortgagee made diligent though unsuccessful efforts 
within 30 days of any cancellation or non-renewal of hazard insurance, 
and at least annually thereafter, to secure other coverage or coverage 
under a FAIR Plan, in an amount described in paragraph (a)(2)(i) of 
this section, or if coverage to such an extent was unavailable at a 
reasonable rate, the greatest extent of coverage that was available at 
a reasonable rate;
    (iv) The extent of coverage obtained by the mortgagee in accordance 
with paragraph (a)(2)(iii) of this section was the greatest available 
at a reasonable rate, or if the mortgagee was unable to obtain 
insurance, none was available at a reasonable rate; and
    (v) The mortgagee took the actions required by Sec.  206.140.
    (b) If the property has been damaged during the time of the 
mortgagee's possession by events other than fire, flood, earthquake, 
hurricane, or tornado, or if it was damaged notwithstanding reasonable 
action by the mortgagee as required by Sec.  206.140, the mortgagee 
must provide notice of such damage to the Commissioner and may not sell 
the property until directed to do so by the Commissioner. The 
Commissioner will either:
    (1) Allow the mortgagee to sell the property damaged; or
    (2) Require the mortgagee to repair the damage before sale, and the 
Commissioner will reimburse the mortgagee for reasonable payments not 
in excess of the Commissioner's estimate of the cost of repair, less 
any insurance recovery.


Sec.  206.143  Certificate of property condition.

    (a) The mortgagee shall certify that as of the date the mortgagee 
sold the property in accordance with Sec.  206.125(g) or assignment of 
the mortgage to the Commissioner, the property was:
    (1) Undamaged by fire, flood, earthquake, hurricane or tornado; and
    (2) Undamaged due to failure of the mortgagee to take action as 
required by Sec.  206.140; and
    (3) Undamaged while the property was in the possession of the 
mortgagee.
    (b) In the absence of evidence to the contrary, the mortgagee's 
certificate or description of the damage shall be accepted by the 
Commissioner as establishing the condition of the property, as of the 
date of mortgagee

[[Page 31820]]

sale or assignment of the mortgage to the Commissioner.


Sec.  206.144  Final payment.

    The mortgagee may not file any supplemental claims to its mortgage 
insurance claim after six months from settlement by the Commissioner of 
the claim payment except where the Commissioner determines it 
appropriate and expressly authorizes an extension of time for 
supplemental claim filings.


Sec.  206.145  Items deducted from payment.

    (a) There shall be deducted from the total of the added items in 
Sec.  206.129 the following cash items:
    (1) All amounts received by the mortgagee on account of the 
mortgage after the institution of foreclosure proceedings or the 
acquisition of the property or otherwise after due and payable.
    (2) All amounts received by the mortgagee from any source relating 
to the property on account of rent or other income after deducting 
reasonable expenses incurred in handling the property.
    (3) All cash retained by the mortgagee including amounts held or 
deposited for the account of the borrower or to which it is entitled 
under the mortgage transaction that have not been applied in reduction 
of the outstanding loan balance.
    (4) With regard to claims filed pursuant to successful short sales, 
all amounts received by the mortgagee relating to the sale of the 
property.
    (b) [Reserved]


Sec.  206.146  Debenture interest rate.

    (a) Debentures shall bear interest from the date of issue, payable 
semiannually on the first day of January and the first day of July of 
each year at the rate in effect as of the day the commitment was 
issued, or as of the date the mortgage was endorsed for insurance, 
whichever rate is higher. For applications involving mortgages 
originated under the single family Direct Endorsement program, 
debentures shall bear interest from the date of issue, payable 
semiannually on the first day of January and on the first day of July 
of each year at the rate in effect as of the date the mortgage was 
endorsed for insurance;
    (b) For mortgages endorsed for insurance after January 23, 2004, if 
an insurance claim is paid in cash, the debenture interest rate for 
purposes of calculating such a claim shall be the monthly average 
yield, for the month in which the default on the mortgage occurred, on 
United States Treasury Securities adjusted to a constant maturity of 10 
years.

Subpart D--Servicing Responsibilities


Sec.  206.201  Mortgage servicing generally; sanctions.

    (a) General. This subpart identifies servicing practices that the 
Commissioner considers acceptable mortgage servicing practices of 
lending institutions servicing mortgages insured by the Commissioner. 
Failure to comply with this subpart shall not be a basis for denial of 
the insurance benefits, but a pattern of refusal or failure to comply 
will be cause for withdrawal of FHA mortgagee approval.
    (b) Importance of timely payments. The paramount servicing 
responsibility is to make timely payments in full as required by the 
mortgage. Any failure of a mortgagee to make all payments required by 
the mortgage in a timely manner will be grounds for administrative 
sanctions authorized by regulations, including 2 CFR part 2424 
(Debarment, Suspension, and Limited Denial of Participation), and 24 
CFR part 25 (Mortgagee Review Board).
    (c) Responsibility for servicing. (1) Servicing of insured 
mortgages must be performed by a mortgagee that is approved by FHA to 
service insured mortgages. The servicer must fully discharge the 
servicing responsibilities of the mortgagee as outlined in this part. 
The mortgagee shall remain fully responsible to the Commissioner for 
proper servicing, and the actions of its servicer shall be considered 
to be the actions of the mortgagee. The servicer also shall be fully 
responsible to the Commissioner for its actions as a servicer.
    (2) Whenever servicing of any mortgage is transferred from one 
mortgagee or servicer to another, notice of the transfer of service 
shall be delivered:
    (i) By the transferor mortgagee or servicer to the borrower. The 
notification shall be delivered not less than 15 days before the 
effective date of the transfer and shall contain the information 
required in 12 CFR 1024.21(e)(2); and
    (ii) By the transferee mortgagee or servicer:
    (A) To the borrower. The notification shall be delivered not less 
than 15 days before the effective date of the transfer and shall 
contain the information required in 12 CFR 1024.21(e)(2); and
    (B) To the Commissioner. This notification shall be delivered 
within 15 days of the transfer, in a format prescribed by the 
Commissioner.


Sec.  206.203  Providing information.

    (a) Statements of account activity. The mortgagee shall provide to 
the borrower a monthly statement regarding the activity of the mortgage 
for each month, as well as for the calendar year. The statement shall 
summarize the total principal amount which has been paid to the 
borrower under the mortgage during that calendar year, the MIP paid to 
the Commissioner and charged to the borrower, the total amount of 
deferred interest added to the outstanding loan balance, the total 
outstanding loan balance and the current principal limit. The mortgagee 
shall include an accounting of all payments for property charges. The 
statement shall be provided to the borrower monthly until the mortgage 
is paid in full by the borrower. The mortgagee shall provide the 
borrower with a new payment plan every time it recalculates monthly 
payments or the payment option is changed. The statements shall be in a 
format acceptable to the Commissioner.
    (b) [Reserved]
    (c) Servicing--Providing information. (1) Mortgagees shall provide 
loan information to borrowers and arrange for individual loan 
consultation on request. The mortgagee must establish written 
procedures and controls to assure prompt responses to inquiries. One or 
more of the following means of making information readily available to 
borrowers is required:
    (i) A servicing office staffed with competent personnel located 
within 200 miles of the property, capable of providing timely responses 
to requests for information. Complete records need not be maintained in 
such an office if the staff is able to secure needed information and 
pass it on to the borrower.
    (ii) Toll-free telephone service at an office capable of providing 
needed information.
    (2)(i) All borrowers must be informed of and reminded annually of 
the system available for obtaining answers to loan inquiries and the 
office from which needed information may be obtained. Toll-free 
telephone service need not be provided to a borrower other than at the 
office designated to serve the borrower nor other than from the 
immediate vicinity of the security property.
    (ii) The mortgagee shall provide the borrower with the telephone 
number where the borrower may speak to employee(s) specifically 
designated by the mortgagee or its servicer to address inquiries 
concerning mortgages insured under this part. Such information shall be 
provided annually and whenever the servicer or the designated employee 
(or employee group) changes.
    (3) Mortgagees must respond to FHA requests for information 
concerning individual accounts.

[[Page 31821]]

Sec.  206.205  Property charges.

    (a) General. (1) The borrower shall be responsible for the payment 
of the following property charges before or on the due date: Ground 
rents, condominium fees, planned unit development fees, homeowners 
association fees and all utilities.
    (2) Payment of the following property charges are obligations of 
the borrower and shall be made through the LESA, by the borrower, or by 
the mortgagee, in accordance with paragraphs (b) through (e) of this 
section on or before the due date: Property taxes, including any 
special assessments levied by local or State law, hazard insurance 
premiums, and applicable flood insurance premiums.
    (b) Method of property charge payment. (1) LESA required. For fixed 
or adjustable interest rate HECMs, based on the results of the 
Financial Assessment, the mortgagee may require the borrower to have a 
Fully-Funded LESA for the payment of property charges identified in 
paragraph (a)(2) of this section. For adjustable interest rate HECMs, 
based on the results of the Financial Assessment, the mortgagee may 
require the borrower to have a Partially-Funded LESA for the payment of 
property charges identified in paragraph (a)(2) of this section.
    (2) LESA not required. If, based on the results of the Financial 
Assessment, the mortgagee does not require the borrower to have a LESA, 
the borrower shall elect one of the following at closing, whereby an 
election of the option in paragraph (b)(2)(ii) or (iii) of this section 
cannot be cancelled by the borrower:
    (i) Borrower is responsible for the independent payment of all 
property charges;
    (ii) Borrower elects to have a Fully-Funded LESA for the payment of 
property charges identified in paragraph (a)(2) of this section; or
    (iii) For adjustable interest rate HECMs only, borrower elects to 
have the mortgagee pay property charges listed in paragraph (a)(2) of 
this section and ground rents which would have otherwise been required 
to be paid by the borrower, in accordance with paragraph (d) of this 
section.
    (c) Life Expectancy Set Aside. (1) General. (i) For a Fully-Funded 
LESA, the mortgagee shall:
    (A) Make payments for property charges identified in paragraph 
(a)(2) of this section before bills become delinquent and establish 
controls to ensure that the information needed to pay such bills is 
obtained on a timely basis;
    (B) Make early payments to take advantage of a discount whenever it 
is to the borrower's advantage;
    (C) Not charge the borrower penalties for late payments for 
property charges unless it can be shown that the penalty was the direct 
result of the borrower's error or omission;
    (D) Ensure that LESA funds are not held in an escrow account;
    (E) Add payments for property charges to the outstanding loan 
balance when the mortgagee disburses funds to the taxing authority or 
insurance carrier; and
    (F) Provide written notification to the borrower and FHA within 30 
days of the mortgagee receiving notification that a property charge 
payment is outstanding when there are no funds or insufficient funds 
remaining in the LESA, and recommend that the borrower speak with a 
HUD-Approved Housing Counselor.
    (ii) For a Partially-Funded LESA, the mortgagee shall:
    (A) Ensure that LESA funds are disbursed to the borrower semi-
annually;
    (B) Establish controls to ensure the taxing authority, insurance 
carrier, or both, received the borrower's payment;
    (C) Ensure the LESA funds are not held in an escrow account;
    (D) Add payments disbursed to the borrower for the payment of 
property charges identified in paragraph (a)(2) to the outstanding loan 
balance when the mortgagee disburses the funds; and
    (E) Provide written notification to the borrower and FHA within 30 
days of the mortgagee receiving notification that a property charge 
payment is outstanding when there are no funds or insufficient funds 
remaining in the LESA, and recommend that the borrower speak with a 
HUD-Approved Housing Counselor.
    (2) Calculation of property charges. (i) The projected cost of 
property charges that will be required over the life expectancy of the 
youngest borrower shall be calculated based on a formula established by 
the Commissioner.
    (ii) The mortgagee shall not require any LESA to be funded in 
excess of the projected cost of property charges.
    (iii) For a Fully-Funded LESA, the amount withheld from the 
mortgage proceeds shall equal the projected cost of property charges.
    (iv) For a Partially-Funded LESA, the amount withheld from the 
mortgage proceeds is based on a calculation of the gap in residual 
income and may not exceed the projected cost of property charges.
    (v) Mortgagees shall use the HECM Financial Assessment and Property 
Charge Guide, or subsequent guide issued by the Commissioner, to 
determine whether a LESA is required; view the formula for calculating 
the projected costs of property charges; and view the formulas for 
calculating the Fully- and Partially-Funded LESA amounts.
    (3) Annual analysis of LESA. Mortgagees shall perform an annual 
analysis of the LESA to determine whether the funds are sufficient to 
make required distributions for the next year. If funds are exhausted 
or there is an insufficient balance determination, the mortgagee shall 
notify the borrower, in writing and within 15 calendar days of the 
annual analysis of the determination, that LESA funds are exhausted or 
insufficient and the borrower will be responsible for the payment of 
property charges.
    (4) Non-payment of property charges--(i) Fully-Funded LESA for an 
adjustable interest rate HECM with no remaining funds. (A) If the LESA 
is exhausted and the borrower fails to make property charge payments, 
the mortgagee shall use any available principal limit to pay the 
outstanding property charge amount in full and charge the borrower's 
account.
    (B) The mortgagee shall provide the borrower with a written 
notification within 30 days of the mortgagee receiving notification 
that a property charge payment is outstanding. The borrower shall have 
30 days to respond to the mortgagee to explain the circumstances which 
resulted in the non-payment.
    (C) If there is no available principal limit from which the 
mortgagee can pay the property charge amount in full, and the borrower 
fails to pay the property charges, the mortgage will become due and 
payable under Sec.  206.27(c)(2).
    (ii) Fully-Funded LESA for a fixed interest rate HECM with no 
remaining funds. If the LESA is exhausted and the borrower fails to 
make property charge payments, the mortgage will become due and payable 
under Sec.  206.27(c)(2).
    (iii) Partially-Funded LESA with remaining funds. If funds remain 
in the LESA and the borrower fails to make property charge payments, 
the mortgagee shall:
    (A) Immediately suspend future semi-annual payments to the borrower 
from the Partially-Funded LESA, although scheduled and unscheduled 
payments from the borrower's payment option may continue;
    (B) Disburse funds from the Partially-Funded LESA to pay the full 
amount owed for the past due property charge; and

[[Page 31822]]

    (C) Provide written notification to the borrower, within 30 days of 
the mortgagee receiving notification that a property charge payment is 
outstanding, that funds were advanced from the Partially-Funded LESA to 
pay the outstanding property charge. The borrower shall have 30 days to 
respond to the mortgagee to explain the circumstances which resulted in 
the non-payment.
    (iv) Partially-Funded LESA with no remaining funds. (A) If the LESA 
is exhausted and the borrower fails to make property charge payments 
when due, the mortgagee shall use any funds available in the principal 
limit to pay the outstanding property charge amount in full and charge 
the borrower's account.
    (B) The mortgagee shall provide written notification to the 
borrower within 30 days of the mortgagee receiving notification that a 
property charge payment is outstanding. The borrower shall have 30 days 
to respond to the mortgagee to explain the circumstances which resulted 
in the non-payment.
    (C) If there is no available principal limit from which the 
mortgagee can pay the property charge amount in full, and the borrower 
fails to pay the property charges, the mortgage will become due and 
payable under Sec.  206.27(c)(2).
    (5) Unused LESA funds. During a Deferral Period or when one of the 
events listed in Sec.  206.27(c)(1) or (c)(2) have occurred, no unused 
funds from the LESA shall be disbursed.
    (6) Assignment of mortgage to the Commissioner. If the insured 
first mortgage is assigned to the Commissioner, or if payments are made 
through the second mortgage under the Demand Assignment process, the 
Commissioner is not required to assume the responsibility for property 
charge payments, but may continue to administer payments for property 
charges for a borrower with a Fully-Funded LESA or semi-annual 
disbursements to a borrower with a Partially-Funded LESA to the extent 
that there are any funds available in the LESA. For adjustable interest 
rate HECMs, if the LESA has a positive remaining balance but funds are 
insufficient to pay all property charges due or semi-annual 
disbursements to the borrower, the Commissioner may provide the 
remaining funds to the borrower as a line of credit.
    (d) Borrower elects to have mortgagee pay property charges. If, 
based on the results of the Financial Assessment, the mortgagee does 
not require the borrower to have a LESA, for adjustable interest rate 
HECMs, the borrower may elect at closing to require the mortgagee to 
pay property charges identified in paragraph (a)(2) of this section and 
ground rents by withholding funds from monthly payments due to the 
borrower or by charging such funds to a line of credit. This voluntary 
election to have funds withheld by the mortgagee to pay property 
charges cannot be canceled by the borrower at any time. If the sum of 
the outstanding loan balance and any unused set aside for repairs and 
servicing charges has reached the principal limit or the HECM proceeds 
are otherwise insufficient to pay the property charges, the borrower 
shall pay such property charges, even though the borrower elected 
payment to be made by the mortgagee.
    (1) Assignment of mortgage to the Commissioner. If the insured 
first mortgage is assigned to the Commissioner under Sec.  
206.107(a)(1) or Sec.  206.121(b), or if payments are made through the 
second mortgage under Sec.  206.121(c), the Commissioner is not 
required to assume the mortgagee's responsibility under paragraph (d) 
of this section, despite the election by the borrower.
    (2) Mortgagee's responsibilities. (i) Funds withheld from payments 
due to the borrower for property charges under paragraph (d) of this 
section shall not be paid into an escrow account. When property charges 
are actually paid, the mortgagee may add the amount paid to the 
outstanding loan balance.
    (ii) It is the mortgagee's responsibility to make disbursements for 
property charges before bills become delinquent. Mortgagees shall 
establish controls to ensure that the information needed to pay such 
bills is obtained on a timely basis. Penalties for late payments for 
property charges must not be charged to the borrower unless it can be 
shown that the penalty was the direct result of the borrower's error or 
omission. Early payment of a bill to take advantage of a discount 
should be made whenever it is to the borrower's benefit.
    (iii) Not later than the end of the second loan year the mortgagee 
shall establish a system for the periodic analysis of the amounts 
withheld from monthly payments. The analysis shall be performed at 
least once a year thereafter. The amount shall be adjusted, after 
analysis, to provide sufficient available funds to make anticipated 
disbursements during the ensuing year. The borrower shall be given at 
least ten days' notice of adjustment in the amount of withholding and 
an adequate explanation of the reasons for any change. When the amount 
withheld is analyzed in accordance with this paragraph, any surplus 
shall be paid to the borrower and added to the outstanding loan 
balance. Any shortage shall be corrected through increasing the monthly 
withholding as provided in paragraph (d)(2)(iv) of this section. If 
amounts withheld are insufficient to pay a property charge before it is 
delinquent, and the borrower could request a payment equal to the 
shortage under Sec.  206.26(b), then the mortgagee shall pay the full 
property charge and treat payment of the shortage as a payment 
requested by the borrower under Sec.  206.26(b).
    (iv) The mortgagee's estimate of withholding amount shall be based 
on the best information available as to probable payments which will be 
required to be made for property charges in the coming year. If actual 
disbursements during the preceding year are used as the basis, the 
resulting estimate may deviate from those disbursements by as much as 
ten percent. The mortgagee may not require withholding in excess of the 
current estimated total annual requirement, unless expressly requested 
by the borrower. Each monthly withholding for property charges shall 
equal one-twelfth of the annual amounts as reasonably estimated by the 
mortgagee.
    (e) Borrower elects to pay property charges. (1) If, based on the 
results of the Financial Assessment, the mortgagee does not require the 
borrower to have a LESA, the borrower may elect to be responsible for 
the independent payment of all property charges and shall pay all 
property charges in a timely manner and shall provide evidence of 
payment to the mortgagee as required in the mortgage.
    (2) Failure to pay property charges. If the borrower fails to pay 
the property charges in a timely manner, and has not elected to have 
the mortgagee make the payments in accordance with paragraph (d) of 
this section:
    (i) The mortgagee may make the payment for the borrower and charge 
the borrower's account if there are available funds from which the 
mortgagee may make payment. If a pattern of missed payments occurs, the 
mortgagee may establish procedures to pay the property charges from the 
borrower's funds as if the borrower elected to have the mortgagee pay 
the property charges under this section.
    (ii) The mortgagee shall provide a written notification to the 
borrower and notify the Commissioner that an obligation of the mortgage 
has not been performed within 30 days of the mortgagee receiving 
notification of a missed payment when there are no available HECM funds 
from which the

[[Page 31823]]

mortgagee may make payment. The borrower shall have 30 days to respond 
to the mortgagee to explain the circumstances which resulted in the 
non-payment. The mortgagee may provide any permissible loss mitigation 
made available by the Commissioner through notice. If the borrower is 
unable or unwilling to repay the mortgagee for any funds advanced by 
the mortgagee to pay property charges outside of a LESA, the mortgagee 
shall submit a due and payable request under the provisions of Sec.  
206.27(c)(2).


Sec.  206.207  Allowable charges and fees after endorsement.

    (a) Reasonable and customary charges. The mortgagee may collect 
reasonable and customary charges and fees from the borrower after 
insurance endorsement, only to the extent that the mortgagee is not 
reimbursed for such fees by FHA, by adding them to the outstanding loan 
balance, but only for: Items listed in paragraph (a)(1) of this 
section; items authorized by the Commissioner under paragraph (a)(2) of 
this section, or as provided at Sec.  206.26(b)(1)(iii); or charges and 
fees related to additional documents described in Sec.  206.27(b)(10) 
and related title search costs.
    (1)(i) Charges for substitution of a hazard insurance policy at 
other than the expiration of term of the existing hazard insurance 
policy;
    (ii) Attorney's and trustee's fees and expenses actually incurred 
(including the cost of appraisals and cost of advertising) when a case 
has been referred for foreclosure in accordance with the provisions of 
this part after a firm decision to foreclose if foreclosure is not 
completed because of a reinstatement of the account (no attorney's fee 
may be charged for the services of the mortgagee's or servicer's staff 
attorney or for the services of a collection attorney other than the 
attorney handling the foreclosure);
    (iii) A trustee's fee if the security instrument in deed-of-trust 
states provides for payment of such a fee for execution of a 
satisfactory, release, or trustee's deed when the deed of trust is paid 
in full;
    (iv) Where permitted by the security instrument, attorney's fees 
and expenses actually incurred in the defense of any suit or legal 
proceeding wherein the mortgagee shall be made a party thereto by 
reason of the mortgage (no attorney's fee may be charged for the 
services of the mortgagee's or servicer's staff attorney); and
    (v) Property preservation expenses incurred pursuant to Sec.  
206.140.
    (2) Such other reasonable and customary charges as may be 
authorized by the Commissioner, but which shall not include:
    (i) Charges for servicing activities of the mortgagee or servicer;
    (ii) Fees charged by independent tax servicer organizations which 
contract to furnish data and information necessary for the payment of 
property taxes;
    (iii) Satisfaction, termination, or reconveyance fees when a 
mortgage is paid in full (other than as provided in paragraph 
(a)(1)(iii) of this section); or
    (iv) The fee for recordation of a satisfaction of the mortgage in 
states where recordation is the responsibility of the mortgagee.
    (b) Servicing charges. (1) If the following conditions are met, the 
mortgagee may include a servicing charge in the mortgage Note rate, 
starting with the month of loan closing and continuing through the life 
of the loan, including any applicable Deferral Period:
    (i) The charge is authorized by the Commissioner;
    (ii) The charge is selected by the mortgagee;
    (iii) The charge is within the range established by the 
Commissioner, which shall be set, through notice, in an amount which 
shall be between 36 and 150 basis points. The Commissioner may, through 
a Federal Register notice for comment, extend the range of permissible 
charges below 36 basis points and above 150 basis points; and
    (iv) The charge is disclosed as required by Sec.  206.43 to the 
borrower in a manner acceptable to the Commissioner at the time the 
mortgagee provides the borrower with a loan application; or
    (2) If the following conditions are met, the mortgagee may collect, 
starting with the month of loan closing and continuing through any 
applicable Deferral Period, a fixed monthly charge for servicing 
activities of the mortgagee or servicer:
    (i) The charge is authorized by the Commissioner;
    (ii) The charge is disclosed as required by Sec.  206.43 to the 
borrower in a manner acceptable to the Commissioner at the time the 
mortgagee provides the borrower with a loan application;
    (iii) Amounts to pay the charge are set aside as a portion of the 
principal limit in accordance with Sec.  206.19(f)(3); and
    (iv) The charge is payable only from the Servicing Fee Set Aside.


Sec.  206.209  Prepayment.

    (a) No charge or penalty. The borrower may repay a mortgage in full 
or prepay a mortgage in part without charge or penalty at any time, 
regardless of any limitations on repayment or prepayment stated in a 
mortgage.
    (b) Insurance and condemnation proceeds. If insurance or 
condemnation proceeds are paid to the mortgagee, the principal limit 
and the outstanding loan balance shall be reduced by the amount of the 
proceeds not applied to restoration or repair of the damaged property.
    (c) Funds received from a partial prepayment shall be applied in 
accordance with the Note.


Sec.  206.211  Determination of principal residence and contact 
information.

    (a) Annual certification. At least once during each calendar year, 
the mortgagee shall verify the contact information for the borrower(s) 
and determine whether or not the property is the principal residence of 
at least one borrower. The mortgagee shall require each borrower to 
make an annual certification of his or her contact information and 
principal residence. As part of the annual certification, the borrower 
may designate a point of contact to receive copies of the notifications 
from the mortgagee, and who the mortgagee may contact if the borrower 
is unwilling or unable to reply to requests from the mortgagee. The 
mortgagee may rely on the certification unless it has information 
indicating that the certification may be false.
    (b) Requirements when an Eligible Non-Borrowing Spouse exists. 
Where an Eligible Non-Borrowing Spouse has been identified, the 
mortgagee shall obtain an additional annual certification from the 
borrower confirming the Eligible Non-Borrowing Spouse remains his or 
her spouse and the Eligible Non-Borrowing Spouse continues to reside in 
the property as his or her principal residence.
    (1) Death of borrower with Eligible Non-Borrowing Spouse. If a 
borrower with an Eligible Non-Borrowing Spouse has died, the mortgagee 
shall obtain the annual certification in paragraph (a) of this section 
from the Eligible Non-Borrowing Spouse. For purposes of this paragraph, 
the term ``Eligible Non-Borrowing Spouse'' shall replace the term 
``borrower'' in paragraph (a) of this section.
    (2) Failure of previously Eligible Non-Borrowing Spouse to reside 
in the property as his or her principal residence. If a Non-Borrowing 
Spouse fails to reside in the property as his or her principal 
residence, the Non-Borrowing Spouse becomes an Ineligible Non-Borrowing 
Spouse and the deferral of due and payable status that would

[[Page 31824]]

prevent the displacement of an Eligible Non-Borrowing Spouse will no 
longer be in effect. Once this occurs, the Eligible Non-Borrowing 
Spouse annual certifications are no longer required to be obtained.

Subpart E--HECM Counselor Roster


Sec.  206.300  General.

    This subpart provides for the establishment of the HECM Counselor 
Roster (Roster) and sets forth the requirements for the operation of 
the HECM Counselor Roster.


Sec.  206.302  Establishment of the HECM Counselor Roster.

    (a) HECM Counselor Roster. FHA maintains a Roster of HECM 
counselors. Only counselors listed on the Roster and employed by a 
participating agency are approved to provide HECM counseling. A 
prospective borrower applying for a HECM loan to be insured by FHA must 
receive the required HECM counseling from one of the counselors on the 
Roster.
    (b) Disclaimer. The inclusion of a HECM counselor on the Roster 
does not create or imply a warranty or endorsement by FHA of the listed 
counselor to a prospective HECM borrower or to any other organization 
or individual, nor does it represent a warranty of any counseling 
provided by the listed HECM counselor. The inclusion of a counselor on 
the Roster means that a listed counselor has met the FHA-prescribed 
qualifications and conditions for inclusion on the Roster and that the 
counselor is approved to provide HECM counseling by telephone or face-
to-face.


Sec.  206.304  Eligibility for placement on the HECM Counselor Roster.

    (a) Application. To be considered for placement on the Roster, a 
housing counselor must apply to FHA in a form and in a manner 
prescribed by the Commissioner.
    (b) Eligibility. FHA will approve an application for placement on 
the Roster if the application demonstrates that the housing counselor:
    (1) Is employed by a HUD-approved housing counseling agency or an 
affiliate of a HUD-approved intermediary or State housing finance 
agency;
    (2) Successfully passed a standardized HECM counseling exam 
administered by FHA, or a party selected by FHA, within the last 3 
years. In order to maintain eligibility, a HECM counselor must 
successfully pass a standardized HECM counseling exam every 3 years;
    (3) Received training and education related to HECMs within the 
prior 2 years;
    (4) Has access to and is supported by technology that enables FHA 
to track the results of the counseling offered to each loan applicant, 
e.g., what action(s), if any, did the client take after receiving the 
HECM counseling; and
    (5) Is not listed on:
    (i) The General Services Administration's Suspension and Debarment 
List;
    (ii) HUD's Limited Denial of Participation List; or
    (iii) HUD's Credit Alert Interactive Response System.


Sec.  206.306  Removal from the HECM Counselor Roster.

    (a) General. FHA reserves the right to remove a HECM counselor from 
the Roster, in accordance with this section.
    (b) Cause for removal. Cause for removal of a HECM counselor from 
the Roster includes, but is not limited to:
    (1) Failure to comply with the education and training requirements 
of Sec.  206.308;
    (2) Failure to respond within a reasonable time to HUD inquiries or 
requests for documentation;
    (3) Misrepresentation or fraudulent statements;
    (4) Promotion, representation, or recommendation of any specific 
mortgagee;
    (5) Failure to comply with applicable fair housing and civil rights 
requirements;
    (6) Failure to comply with applicable statutes and regulations;
    (7) Failure to comply with applicable statutory counseling 
requirements found at subsection 255(f) of the National Housing Act, 
which include, but are not limited to, providing information about: 
Options other than a HECM, the financial implications of entering into 
a HECM, the tax consequences of a HECM, and any other information that 
HUD or the applicant may request;
    (8) Failure to maintain any registration, license, or certification 
requirements of a State or local authority;
    (9) Unsatisfactory performance in providing counseling to HECM loan 
applicants. FHA may determine that a HECM counselor's performance is 
unsatisfactory based on a review of counseling files or other 
monitoring activities, or if the counselor fails to employ the minimum 
competencies, as measured by the FHA-administered HECM counseling exam; 
or
    (10) For any other reason HUD determines to be so serious as to 
justify an administrative sanction.
    (c) Automatic removal from HECM Counselor Roster for failure to 
maintain required State or local licensure. A HECM counselor who is 
required to maintain a State or local registration, license, or 
certification and whose registration or certification is revoked, 
suspended, or surrendered will be automatically suspended from the 
Roster until FHA receives evidence demonstrating that the local- or 
State-imposed sanction has been lifted.
    (d) Removal procedure. Except as provided in paragraph (c) of this 
section, the following procedures apply to removal of a HECM counselor 
from the Roster.
    (1) FHA will give the HECM counselor written notice of the proposed 
removal. The notice will state the reasons for and the duration of the 
proposed removal.
    (2) The HECM counselor will have 30 days from the date of receipt 
of the notice (or such time as described in the notice, but in no event 
less than a period of 30 days) to submit a written appeal of the 
proposed removal, along with a written request for a conference.
    (3) An FHA official will review the appeal and render a response 
affirming, modifying, or canceling the removal. The FHA official will 
not be a person who was involved in FHA's initial removal decision. FHA 
will respond with a decision within 30 days after the date of receiving 
the appeal or, if the HECM counselor has requested a conference, within 
30 days after the conference was held. FHA may extend the 30-day period 
by providing written notice to the counselor.
    (4) If the HECM counselor does not submit a timely written 
response, the removal will be effective 31 days after the date of FHA's 
initial removal notice (or after the period provided in the notice, if 
longer than 30 days). If a written response is submitted, and the 
removal decision is affirmed or modified, the removal will be effective 
on the date of FHA's notice affirming or modifying the initial removal 
decision.
    (e) Maximum time period of removal. The maximum time period for 
removal from the Roster is 12 months from the effective date of removal 
for all removed counselors. A counselor who has been removed must apply 
for reinstatement on the Roster.
    (f) Placement on the Roster after removal. A counselor who has been 
removed from the Roster must apply for reinstatement on the Roster (in 
accordance with Sec.  206.304) after the period of the counselor's 
removal from the Roster has expired. FHA may require the counselor to 
retake and pass the HECM exam for reinstatement when

[[Page 31825]]

the reason for removal from the Roster was particularly egregious. 
Typically, the counselor will not be required to take and pass the HECM 
exam; however, FHA must be ensured by the counselor that the HECM 
counseling requirements are understood and will be followed. An 
application from a counselor for reinstatement on the Roster will be 
rejected if the period of the counselor's removal from the Roster has 
not expired.
    (g) Voluntary removal. A HECM counselor will be removed from the 
Roster upon FHA's receipt of a written request from the counselor.
    (h) Other action. Nothing in this section prohibits HUD from taking 
such other action against a HECM counselor or from seeking any other 
remedy against a counselor available to HUD by statute or other 
authority.


Sec.  206.308  Continuing education requirements of counselors listed 
on the HECM Counselor Roster.

    A HECM counselor listed on the Roster must receive, on a continuing 
basis, training, education, and technical assistance related to HECMs. 
The HECM counselor must maintain evidence of the successful completion 
of such continuing education, and such evidence must be made available 
to FHA upon request. FHA will consider a HECM counselor's successful 
completion of a HECM course no less than once every 2 years as 
satisfying the requirements of this section.

    Dated: April 19, 2016.
Edward L. Golding,
Principal Deputy, Assistant Secretary for Housing.
[FR Doc. 2016-11631 Filed 5-18-16; 8:45 am]
 BILLING CODE 4210-67-P