Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate Indices, 12822-12829 [2023-03952]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 88, Number 40 (Wednesday, March 1, 2023)]
[Rules and Regulations]
[Pages 12822-12829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03952]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 206

[Docket No. FR-6151-F-03]
RIN 2502-AJ51


Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate 
Indices

AGENCY: Office of Housing, U.S. Department of Housing and Urban 
Development (HUD).

ACTION: Final rule.

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SUMMARY: HUD is removing the London Interbank Offered Rate (LIBOR) as 
an approved index for adjustable interest rate mortgages (ARMs), and 
replacing LIBOR with the Secured Overnight Financing Rate (SOFR) as a 
Secretary-approved index for newly originated forward ARMs. HUD is also 
codifying its removal of LIBOR and approval of SOFR as an index for 
newly-originated Home Equity Conversion Mortgage (HECM or reverse 
mortgage) ARMs. In addition, HUD is establishing a spread-adjusted SOFR 
index as the Secretary-approved replacement index to transition 
existing forward and HECM ARMs off LIBOR. HUD is also making clarifying 
changes to its HECM Monthly ARM regulation and establishing a lifetime 
adjustment cap for monthly adjustable rate HECMs. This final rule 
adopts HUD's October 19, 2022, proposed rule with minor changes.

DATES: Effective date: March 31, 2023.

FOR FURTHER INFORMATION CONTACT: Lisa Saunders, Office of Housing, 
Department of Housing and Urban Development, 451 7th Street SW, 
Washington, DC 20410-8000; telephone number 202-402-2378 (this is not a 
toll-free number); email address [email protected]. HUD welcomes and 
is prepared to receive calls from individuals who are deaf or hard of 
hearing, as well as individuals with speech or communication 
disabilities.

[[Page 12823]]

To learn more about how to make an accessible telephone call, please 
visit: https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION: 

I. Background

Statutory Provisions

    Section 251(a) of the National Housing Act (NHA) (12 U.S.C. 1715z-
16(a)) authorizes HUD to insure ARMs and provides that adjustments to 
the interest rate shall correspond to a specified interest rate index 
approved in regulations by the Secretary, information on which must be 
readily accessible to mortgagors from generally available published 
sources. For HECMs, section 255(d) of the NHA (12 U.S.C. 1715z-20(d)) 
authorizes the Federal Housing Administration (FHA) to insure variable 
rate HECMs and imposes additional eligibility requirements on HECMs, 
which include requirements for HECM ARMs.

Forward ARMs

    HUD initially provided mortgage insurance of ARMs for single family 
forward mortgages under 24 CFR part 203 and for part 234 condominium 
mortgages in 1984.\1\ As provided in the statute at that time, the 
interest rate on ARMs had to be adjusted annually, and there was a one 
percent cap on annual adjustments and an overall cap of five percent 
above the initial interest rate over the term of the mortgage. The 
index originally used by HUD was the U.S. Constant Maturity Treasury 
(CMT). In 2001 and 2003, statutory changes to section 251 of the NHA, 
12 U.S.C. 1715z-16 allowed HUD to insure ARMs that have fixed interest 
rates for 3 years or more and are not subject to interest rate caps if 
the interest rate remains fixed for more than 3 years.\2\ In 2004, HUD 
issued a rule (``the 2004 rule'') implementing these statutory changes 
and providing mortgage insurance for forward ARMs with interest rates 
first adjustable in 1 year, 3 years, 5 years, 7 years, and 10 years.\3\
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    \1\ 49 FR 23580, June 6, 1984.
    \2\ Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act, 2002 (Pub. 
L. 107-73, approved November 26, 2001); HOPE VI Program 
Reauthorization and Small Community Main Street Rejuvenation and 
Housing Act of 2003 (Pub. L. 108-186, 117 Stat. 2685, approved 
December 16, 2003).
    \3\ 69 FR 11500, March 10, 2004.
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    Under the 2004 rule, 1, 3, and 5-year ARMs were capped, for each 
adjustment, in either direction at one percentage point from the 
interest rate in effect for the period immediately preceding the 
adjustment. For the life of the mortgage, the overall five percentage 
point cap in either direction remained. For 7 and 10-year ARMs, HUD 
raised the per-adjustment cap to 2 percent of the rate in effect for 
the immediately preceding period, and the life-of-mortgage cap to 6 
percent. In all cases, changes that exceeded these amounts could not be 
carried over for inclusion in an adjustment for the subsequent year. In 
2005, HUD revised the regulation to allow for annual adjustments of a 2 
percent change in either direction, and a life-of-mortgage cap of 6 
percent in either direction for 5-year ARMs in 2005, conforming 5-year 
ARMs to HUD's 7 and 10-year ARM products.\4\
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    \4\ 70 FR 16080, March 29, 2005.
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    In 2007, HUD added LIBOR, along with the CMT, as an acceptable 
index for ARM adjustments for its ARM products (``the 2007 rule'').\5\ 
For forward mortgages, the applicability of these indices is codified 
at 24 CFR 203.49. The cap on 1 and 3-year ARMs (no more than 1 percent 
in either direction per single adjustment, with a five percentage 
points from initial contract rate cap over the life of the loan) is 
codified at Sec.  203.49(f)(1). The caps for the 5, 7 and 10-year ARMs 
(2 percent in either direction per adjustment, with a 6 percent from 
initial contract rate cap for the life of the mortgage) are codified at 
Sec.  203.49(f)(2). HUD also created model note and mortgage documents 
for forward ARMs and revised those model documents over the years. The 
2015 Model ARM Note \6\ contains a provision for the substitution of an 
index by the note holder based on ``comparable information,'' should 
the index specified in the note become unavailable.
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    \5\ 72 FR 40047, July 20, 2007.
    \6\ The 2015 Model ARM Note is available on HUD's website at: 
https://www.hud.gov/program_offices/housing/sfh/model_documents.
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Reverse Mortgages or HECMs

    In 1989, the Home Equity Conversion Mortgage program rule (the HECM 
rule) provided for ARMs with both capped and uncapped interest rate 
adjustments.\7\ For capped HECM ARMs, the HECM rule retained the five 
percentage point life-of-mortgage limit on interest rate increases and 
decreases in Sec.  203.49, but increased the annual limit on rate 
increases and decreases from 1 percentage point to 2 percentage points. 
The HECM rule also provided for a HECM ARM that sets a maximum interest 
rate that could be charged without a cap on monthly or annual increases 
or decreases.
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    \7\ 54 FR 24822, June 9, 1989.
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    In the 2007 rule, in which LIBOR was added for forward mortgages, 
HUD also added LIBOR as an acceptable index for HECM ARM adjustments in 
current Sec. Sec.  206.3 (definitions) and 206.21 (interest rate).\8\ 
HUD's model HECM ARM note and mortgage documents have been revised over 
the years, but the 2015 version contains provisions for the 
substitution of a Secretary-prescribed index, should the index 
specified in the note become unavailable.\9\
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    \8\ 72 FR 40048, July 20, 2007.
    \9\ The 2015 Model ARM Note is available on HUD's website at: 
https://www.hud.gov/program_offices/housing/sfh/model_documents.
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    For the capped option at Sec.  206.21(b)(1), the interest rate cap 
structure is the same as provided in forward mortgages under Sec.  
203.49(a), (b), (d), and (f), except that under Sec.  203.49(d), the 
reference to first debt service payment means the closing in the HECM 
ARM context, and under Sec.  203.49(f)(1), the cap on adjustments for 
one- and three-year mortgages is 2 percentage points in the HECM ARM 
context. Section 206.21(b)(1)(ii) applies the LIBOR and CMT index 
options in the same manner as forward ARMs at Sec.  203.49(b) for both 
the capped and uncapped options. In addition, the uncapped option at 
Sec.  206.21(b)(2) includes options to adjust based on the one-month 
CMT or one-month LIBOR index. Section 206.21(b)(1)(iii) also includes 
ARM interest rate adjustment options for HECMs in the same manner as 
forward mortgages at Sec.  203.49(d).
    On March 11, 2021, in Mortgagee Letter 2021-08, HUD removed LIBOR 
as an approved index and approved the SOFR index for annually 
adjustable HECM ARMs closed on or after May 3, 2021.\10\ A mortgagee 
may set rates using CMT or SOFR for annually adjustable HECM ARMs and 
CMT only for monthly adjustable HECM ARMs. Also, among other changes to 
the ARM requirements in the Mortgagee Letter, HUD published revised 
model mortgage documents with ``fallback'' language intended to address 
future interest rate index transition events. This language was modeled 
after the Alternative Reference Rates Committee's (ARRC) \11\

[[Page 12824]]

published fallback language for residential ARMs.\12\
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    \10\ As explained in Mortgagee Letter 2021-08, the changes made 
by the Mortgagee Letter revised the existing HECM regulations 
pursuant to the authority granted in the Reverse Mortgage 
Stabilization Act of 2013 (Pub. L. 113-29; section 255(h)(3) of the 
National Housing Act (12 U.S.C. 1715z-20(h)(3)).
    \11\ The ARRC is a group of private-market participants convened 
by the Federal Reserve Board and the Federal Reserve Bank of New 
York to help ensure a successful transition from U.S. dollar (USD) 
LIBOR to a more robust reference rate, its recommended alternative, 
the Secured Overnight Financing Rate (SOFR). The ARRC is comprised 
of a diverse set of private-sector entities that have an important 
presence in markets affected by USD LIBOR and a wide array of 
official-sector entities, including banking and financial sector 
regulators, as ex-officio members. https://www.newyorkfed.org/arrc.
    \12\ ARRC Recommendations Regarding More Robust LIBOR Fallback 
Contract Language for New Closed-End, Residential Adjustable Rate 
Mortgages, newyorkfed.org (Nov. 15, 2019), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf.
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Phase-Out of LIBOR

    The financial industry is transitioning from use of the LIBOR index 
given its increasing unreliability and speculative nature. As noted by 
the Financial Stability Oversight Council, the scarcity of underlying 
transactions makes LIBOR potentially unsustainable, as many banks have 
grown uncomfortable in providing submissions based on expert judgment 
and may eventually choose to stop submitting altogether.\13\ The 
relatively small number of transactions underpinning LIBOR has been 
driven by changing market structure, regulatory capital, and liquidity 
requirements as well as changes in bank risk appetite for short-term 
funding, thereby creating uncertainty as to the integrity of the index.
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    \13\ See Second Report, The Alternative Reference Rates 
Committee, p. 6 (March 2018), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
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    In July of 2017, the U.K. Financial Conduct Authority (FCA), the 
financial regulator of LIBOR, announced that it would no longer 
persuade or compel contributing banks to submit rates used to calculate 
LIBOR after December 31, 2021, further heightening the uncertainty of 
LIBOR.\14\ On November 30, 2020, the Federal Reserve Board announced 
that regulators had proposed clear end dates for the USD LIBOR 
immediately following the December 31, 2021 publication for the one 
week and two month USD LIBOR settings, and immediately following the 
June 30, 2023 publication for other USD LIBOR tenors.\15\ On March 5, 
2021, the ICE Benchmark Administration Limited (IBA) published the 
feedback it received to a December, 2020, consultation, and announced 
it would cease publication of the one month and one year USD LIBOR 
immediately following the LIBOR publication on June 30, 2023.\16\
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    \14\ Andrew Bailey, The Future of LIBOR, Fin. Conduct Authority 
(July 27, 2017), https://www.fca.org.uk/news/speeches/the-future-of-libor.
    \15\ See Federal Reserve Board Welcomes and Supports Release of 
Proposal and Supervisory Statements that Would Enable Clear End Date 
for U.S. Dollar (USD) LIBOR and Would Promote the Safety and 
Soundness of the Financial System, Board of Governors of the Federal 
Reserve System (Nov. 30, 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130b.htm.
    \16\ ICE LIBOR, Feedback Statement on Consultation on Potential 
Cessation, ICE Benchmark Admin. (March 5, 2021), https://www.theice.com/publicdocs/ICE_LIBOR_feedback_statement_on_consultation_on_potential_cessation.pdf.
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    With the uncertainty and upcoming phase-out of LIBOR, mortgagees 
have been working to transition to a new replacement interest rate 
index for existing ARM contracts. The ARRC, a group of private market 
participants convened by the Federal Reserve Board and the Federal 
Reserve Bank of New York to ensure the transition from USD LIBOR to a 
reliable reference rate, recommended the selection of SOFR for use in 
new USD contracts.\17\ SOFR is published by the Federal Reserve Bank of 
New York in cooperation with the Office of Financial Research, an 
independent bureau with the U.S. Department of the Treasury, and ``. . 
. is a broad measure of the cost of borrowing cash overnight 
collateralized by U.S. Treasury securities in the repurchase agreement 
(repo) market.'' \18\ HUD anticipates that a spread-adjusted SOFR will 
be published to minimize the impact of the transition on legacy ARMs 
and other LIBOR-based contracts.
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    \17\ About, Alternative Reference Rates Comm., https://www.newyorkfed.org/arrc/about (last visited June 10, 2021).
    \18\ Transition from LIBOR, Alternative Reference Rates Comm., 
https://www.newyorkfed.org/arrc/ sofr-transition (last visited June 
10, 2021).
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    According to the ARRC, ``SOFR is suitable to be used across a broad 
range of financial products, including but not limited to, derivatives 
(listed, cleared, and bilateral-OTC), and many variable rate cash 
products that have historically referenced LIBOR.'' \19\
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    \19\ Frequently Asked Questions, Alternative Reference Rates 
Comm (April 21, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf.
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    As part of the Consolidated Appropriations Act, 2022,\20\ Congress 
passed the Adjustable Interest Rate (LIBOR) Act of 2021 (LIBOR Act) 
\21\ to, in part, create a clear and uniform process, on a nationwide 
basis, for replacing LIBOR in existing contracts where the terms do not 
provide for the use of a clearly defined or practicable replacement 
benchmark rate, without affecting the ability of parties to use any 
appropriate benchmark rate in a new contract.\22\ Generally, for LIBOR-
based ARMs without language providing for a specific replacement index, 
the default replacement index will be a spread-adjusted SOFR as 
provided for under the LIBOR Act.
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    \20\ Consolidated Appropriations Act, 2022, Public Law 117-103.
    \21\ Id. at Division U.
    \22\ Id. at Division U, section 102(b)(1).
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    The LIBOR Act establishes that this spread-adjusted replacement 
index will replace LIBOR for existing contracts on the Replacement 
Date, specified in the LIBOR Act as the first London banking day after 
June 30, 2023, unless the Federal Reserve Board specifies another date 
(the ``Replacement Date'').\23\ The LIBOR Act also established a one-
year linear basis to transition the tenor spread adjustment from LIBOR 
to the SOFR spread-adjusted index.\24\ For FHA-insured LIBOR-based 
ARMs, the LIBOR Act authorizes HUD to approve the spread-adjusted SOFR 
index, or another benchmark replacement index selected by HUD, as a 
replacement to LIBOR for existing ARMs starting on the Replacement 
Date.\25\
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    \23\ Id. at Division U, section 103(6), (17), (19) and section 
104(a)(3).
    \24\ Id. at Division U, section 104(e)(2).
    \25\ Id. at Division U, section 103(10) and section 104(c).
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Advanced Notice of Proposed Rulemaking

    On October 5, 2021, HUD published an advanced notice of proposed 
rulemaking (ANPR) to seek input from the public on the transition away 
from LIBOR.\26\ HUD sought comment on how to address a Secretary-
approved replacement index for existing loans and provide for a 
transition date consistent with the cessation of the LIBOR index. HUD 
also sought comment on replacing the LIBOR index with the SOFR interest 
rate index, with a compatible spread adjustment to minimize the impact 
of the replacement index for existing ARMs. The comment period closed 
on December 6, 2021. HUD received nine comments on the ANPR, which were 
considered when drafting the proposed rule.
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    \26\ 86 FR 54876.
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II. The Proposed Rule

    On October 19, 2022, HUD published for public comment a proposed 
rule to amend 24 CFR parts 203 and 206 (``the proposed rule'').\27\ HUD 
proposed three changes. First, HUD proposed to transition from LIBOR to 
a spread-adjusted SOFR index for existing forward and HECM ARMs, update 
the HECM ARM regulation consistent with changes already made through 
Mortgagee Letter 2021-08 regarding new originations, and replace LIBOR 
with SOFR as a Secretary-approved index for new forward ARMs. HUD also 
proposed that the Secretary will publish through notice any additional 
requirements for transition of existing LIBOR-based

[[Page 12825]]

ARMs to address technical aspects of the transition process, newly 
published SOFR tenors, and any developments arising from the 
transition.
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    \27\ 87 FR 63458.
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    Second, HUD proposed to clarify its regulations regarding the 
Monthly Adjustable Interest Rate HECMs at Sec.  206.21(b)(2) to clarify 
the requirements applicable to monthly adjustments to align with those 
provided for annual adjustments.
    Third, HUD proposed to establish a five percentage point lifetime 
cap on the adjustment of the HECM monthly ARM interest rate to align 
with similar ARM interest rate caps that are currently used for annual 
interest rate HECMs and forward ARMs in the mortgage industry.

III. This Final Rule

    In response to public comments as discussed further below, and in 
further consideration of issues addressed at the proposed rule stage, 
HUD is publishing this final rule with the following changes from the 
proposed rule.

Lifetime Adjustment Cap for Monthly Adjustable Interest Rate HECMs at 
Sec.  206.21(b)(2)(iii)

    HUD proposed to establish a five percentage point cap for monthly 
HECM ARMs. After consideration of comments, HUD is revising Sec.  
206.21(b)(2)(iii) to state that the maximum lifetime adjustment cap for 
monthly HECM mortgages will be set at no more than ten percentage 
points in either direction from the initial mortgage interest rate, and 
that HUD may revise this cap through notice.

Constant Maturity of the SOFR Tenor at Sec. Sec.  203.49(b)(1) and 
206.21(b)(1)(ii)

    In response to comments stating that the language regarding 
constant maturity is unique to the U.S. Treasury and does not apply to 
SOFR, HUD is removing the clause ``adjusted to a constant maturity'' 
from application to SOFR at Sec. Sec.  203.49(b)(1) and 
206.21(b)(1)(ii).

Reorganization of Sec.  206.21(b)

    To make clear that the paragraph regarding application of the 
replacement index to existing mortgages applies to both annual and 
monthly HECM mortgages, HUD is moving the proposed Sec.  
206.21(b)(1)(ii)(B) to a new paragraph at Sec.  206.21(b)(3).

Index Rate Dropping Below Zero at Sec.  206.21(b)(1)(ii) and (b)(2)(i)

    In response to a comment suggesting that it is the index, not the 
mortgage rate, which should be prohibited from going below zero, HUD 
has revised Sec.  206.21(b)(1)(ii) and (b)(2)(i) to replace ``mortgage 
rate'' with ``index figure''.
    HUD is also making two other clarifying changes to these 
paragraphs. First, HUD is revising the word ``change'' to ``periodic 
adjustment'' in both Sec.  206.21(b)(1)(ii) and (b)(2)(i). Second, HUD 
is changing ``Note rate'' to ``mortgage interest rate'' in Sec.  
206.21(b)(2)(i) to align with Sec.  206.21(b)(1)(ii).

IV. Public Comments

    The public comment period for the proposed rule closed on November 
18, 2022. HUD received 4 comments relating to the rule.

Support for the Proposed Rule

    Commenters supported the proposed rule. Commenters stated that SOFR 
rates are more accurate rates based off historical trends, more stable, 
less risky, and less prone to manipulation. A commenter stated that 
without a transition from LIBOR, forward mortgage borrowers could see 
their monthly payments become unaffordable and HECM borrowers could see 
their equity eroded. A commenter noted that SOFR is calculated from 
billions of dollars of actual daily transactions compared to LIBOR, 
which is calculated based on fewer transactions and often uses 
estimates or even simply expert judgment. A commenter stated that 
lenders have manipulated the LIBOR interest rate system and suggested 
that this manipulation contributed to the real estate crash of 2008. 
This commenter stated that LIBOR allowed lenders to manipulate interest 
rates over 3, 6, and 12 month periods. This commenter stated that these 
advantages of SOFR will lead to lower borrowing cost for companies, 
which should help improve the US economy. A commenter noted that SOFR 
is publicly available for free and maintained by an independent, quasi-
governmental entity, compared to LIBOR, which is controlled by a 
private benchmark administrator that restricts access to those who pay 
for it.
    A commenter noted that Fannie Mae and Freddie Mac have already 
replaced LIBOR with SOFR in their uniform instruments, giving 
substantial weight to the use of this index in the mortgage market. 
This commenter also noted that Ginnie Mae has already stopped 
purchasing loans that use LIBOR, and better alternatives (e.g., the 30-
day SOFR) are now available, so it is appropriate for HUD to formally 
prevent the issuance of any more LIBOR loans.
    A commenter, in support of the proposed rule, emphasized that 
without a good transition off LIBOR, forward mortgage borrowers could 
see their monthly payments become unaffordable or more volatile, 
driving them into default and foreclosure, and HECM borrowers could see 
their equity be eroded at an unsustainable pace. This commenter also 
noted the Mutual Mortgage Insurance Fund (MMIF) would bear the 
financial cost of any mismanagement in the LIBOR transition. This 
commenter further noted that borrowers have no control over what 
happens in this process and mortgage contracts provide them with no say 
in the noteholder's decision, and so borrowers' only form of recourse 
would be to complain or initiate litigation.
    This commenter also specifically supported HUD's proposal to 
require noteholders to follow the Alternative Reference Rates 
Committee's (ARRC) recommendation to replace LIBOR with the spread-
adjusted SOFR in existing mortgages. This commenter asserted that the 
spread-adjusted SOFR accurately accounted for SOFR's slightly lower 
historical trend compared to LIBOR, and was therefore the best 
replacement index available.
    HUD Response: HUD appreciates the support for its proposal to 
remove the LIBOR index and add SOFR as a Secretary-approved index for 
newly originated ARMs and to approve a spread-adjusted SOFR index as 
the replacement index for existing forward and HECM ARMs that will 
transition from LIBOR. HUD believes that following the ARRC 
recommendations to replace LIBOR with SOFR is a crucial step for 
aligning with the GSEs and is also in the best interest of borrowers 
and mortgagees. Using a spread-adjusted SOFR as the Secretary-approved 
replacement index should facilitate a smooth transition for existing 
mortgages. HUD will publish a Mortgagee Letter to implement the 
requirements in this final rule.

Opposition to a Five Percent Lifetime Rate Cap

    Commenters opposed HUD's proposal to cap HECM ARMs at five 
percentage points. A commenter disagreed with HUD's assertion that, 
currently, HECM ARMs may be uncapped. The commenter stated that lenders 
must set a maximum interest rate to comply with section 1204 of the 
Competitive Equality Banking Act of 1987 (``CEBA''). This commenter 
stated that CEBA does not specify what the rate cap might be, but in 
the commenter's experience, lenders set their rate caps between five 
and ten percentage points over the initial interest rate. The commenter 
objected to HUD's statement that setting a five

[[Page 12826]]

percentage point rate cap would reduce risk to borrowers and the MMIF, 
stating that HUD offers no evidence to support the assertion. The 
commenter also objected that the statement ignores that lenders have 
been voluntarily offering monthly ARMs with a five percentage point 
rate cap. The commenter noted that if HUD required a five percentage 
point rate cap, lenders might increase the initial rate by increasing 
the margin, and suggested that lenders have indicated that the ability 
to set the rate cap at ten percentage points allows lenders to offer 
lower margins which could be more beneficial to borrowers and the MMIF 
than the proposed rate cap. This commenter also noted that taking away 
the lower rate option by mandating a specific rate cap would increase 
risk for GNMA and HMBS issuers, where in an increasing rate 
environment, participations subject to lower rate caps can trade below 
par. This commenter concluded by requesting that FHA recognize that 
monthly adjustable HECM ARMs per current law cannot be ``uncapped,'' 
recognize existing lender practice, and allow lenders to continue to 
set their own cap.
    Another commenter referred to the ten percentage point cap as being 
``tried and true.'' This commenter warned that the five percentage 
point cap would appear to, but would not actually, benefit senior 
borrowers. The commenter explained that the five percentage point cap 
would have a much more conservative limit to growth in situations where 
the borrower chooses not to access their line of credit immediately, 
and instead lets it grow over time. The commenter noted the importance 
to senior couples or surviving spouses of the ability to use this 
additional growth. This commenter also noted that the five percentage 
point cap would reduce lender participation in the current volatile 
interest rate environment where many of the recent loans in the pool 
are already pushing the limits of the five percentage point caps.
    HUD Response: HUD recognizes that the reverse mortgage industry has 
a ``self-imposed'' ten percent maximum interest rate cap, and more 
recently, some mortgagees have used a maximum interest rate of five 
percent on a monthly ARM. HUD notes that CEBA does not mandate a 
specific cap and the current industry standard may change or may not be 
universally followed. HUD recognizes that there may be situations where 
a ten percent cap is beneficial both to the borrower and mortgagee. 
However, HUD also notes that HUD's responsibility for managing and 
mitigating risks to the MMIF, is challenged when house price 
appreciation slows, the housing market is volatile, or inflation is 
increasing. Therefore, after considering comments, HUD has determined 
it will establish a maximum interest rate cap of up to ten percent 
beyond the initial mortgage interest rate for monthly mortgages, but 
may adjust this cap in the future through notice.
    Overall, setting a cap will reduce risk to the borrower and the 
MMIF by reducing potential loan balance growth and slow the rate at 
which the outstanding principal limit balance reaches 98% of the 
maximum claim amount while reserving the property's equity in a 
declining market. Borrowers would also be protected from the risk of 
entering into a financial product where the maximum interest rate could 
exceed the ten percent limit during a period of higher interest rates. 
This change will also permit mortgagees to continue to offer monthly 
ARMs that align with current mortgagee practices and supports the 
borrower's ability to negotiate with the mortgagee for best interest 
rate terms.
    HUD initially intends to set the cap at up to ten percent above the 
initial mortgage interest rate. If HUD determines it is necessary to 
change the maximum mortgage interest rate range, HUD will examine a 
variety of market factors. These factors may include the FHA portfolio 
analysis of default and claim rates of HECMs with similar attributes, 
analysis of HECMs across geographical areas segmented by the maximum 
mortgage interest rate, and any other relevant factors.

Constant Maturity of the SOFR Tenor

    A commenter noted that HUD proposed to use the 30-day average SOFR 
tenor ``adjusted to a constant maturity of one year,'' but the concept 
of adjustments to a constant maturity is a U.S. treasury concept and 
does not apply to SOFR. This commenter therefore suggested that HUD 
issue either in the final rule or in a concurrent mortgagee letter, 
that for the replacement index for existing ARMs indexed to LIBOR, that 
HUD approved SOFR tenors are the spread-adjusted SOFR rates published 
by Refinitiv for the one-, three-, six-, and twelve-month indices.
    HUD Response: HUD appreciates the feedback and has adopted the 
change suggested by commenters to remove ``adjusted to a constant 
maturity of one year'' from Sec. Sec.  203.49(b)(1) and 
206.21(b)(1)(ii) since this reference is not applicable to the 30-day 
average SOFR tenor. HUD also recognizes the index selected must be 
appropriate and from a publicly available source such as the one 
suggested. HUD will take this suggestion into consideration when it 
publishes the notice establishing approved indices.

Applicability of Sec.  206.21(b)(1)(ii)(B) to Monthly Adjustable HECMs

    A commenter noted that the proposed rule established the 
replacement index for mortgages with an existing adjustable interest 
rate indexed to LIBOR in Sec.  206.21(b)(1)(ii)(B), but the commenter 
noted that Sec.  206.21(b)(1) addresses annually adjustable HECM ARMs, 
whereas monthly adjustable HECMs are primarily addressed in Sec.  
206.21(b)(2). This commenter requested that HUD make clear that the 
entirety of Sec.  206.21(b)(1)(ii)(B) applies to monthly adjustable 
HECMs. This commenter also requested that HUD clarify that for any 
monthly adjustable HECM ARMs, the remainder of the contract provisions 
of the HECM loan notes will remain unchanged, which the commenter said 
was clearly required under Sec.  206.21(b)(1)(ii)(B), but did not 
clearly also apply to Sec.  206.21(b)(2).
    HUD Response: HUD appreciates the concerns raised by this commenter 
and has restructured Sec.  206.21(b) by creating a new paragraph (b)(3) 
to avoid confusion and ensure the requirements for transitioning 
existing HECMs from LIBOR to the Secretary-approved spread-adjusted 
SOFR replacement index is applicable to annual and monthly HECM ARMs.

Calculating a New Interest Rate

    A commenter noted that the proposed Sec.  206.21(b)(2)(ii) differed 
from language included in section 5(C) of the Model Note for HECMs as 
updated in March of 2021 and suggested that HUD revise Sec.  
206.21(b)(2)(ii) to align with the Model Note.
    This commenter also requested that HUD clarify that the index only 
needs to be rounded 3 digits to the right of the decimal point.
    HUD Response: HUD appreciates the feedback provided; however, HUD 
believes the changes made to Sec.  206.21(b)(2) accomplishes its intent 
to clarify the requirements applicable to monthly ARMs in a similar 
manner that is currently provided for annual ARMs. HUD will revise and 
publish a Model Note that corresponds to the requirements in this final 
rule.
    Currently, the mortgage interest rate that is entered into HUD's 
systems must be rounded to 3 digits to the right of the decimal point. 
HUD does not anticipate making changes to this requirement.

[[Page 12827]]

Index Rate Dropping Below Zero

    A commenter noted HUD proposed that the downward change in the 
index ``will not result in a mortgage interest rate that is less than 
zero'' and suggested changing ``mortgage interest rate'' to ``index'', 
consistent with HUD's Model HECM ARM Note.
    HUD Response: HUD appreciates the feedback provided and has adopted 
the suggested language to replace ``mortgage interest rate'' with 
``index figure''.

Effective Dates of Specific SOFR Rates

    A commenter requested that HUD issue guidance that SOFR rates 
``established on Mondays and going into effect on Tuesday and are good 
until the following week's index is established.'' This commenter noted 
that this would be consistent with the method used for LIBOR rates 
under Mortgagee Letter 2007-13.
    HUD Response: HUD will consider this comment when issuing guidance 
to implement the requirements in this final rule.

Unsecured Debt

    A commenter suggested the HECM program should align with the 
forward mortgage program and allow borrowers to immediately qualify by 
paying off unsecured debt. The commenter stated that not allowing a 
client to participate in the HECM program due to not being able to 
restructure debt in a better way had no justification.
    HUD Response: HUD appreciates this comment, but this recommendation 
is outside the scope of this rulemaking.

V. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the Order. 
Executive Order 13563 (Improving Regulations and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned. Executive Order 13563 also directs that, where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public.
    The current rules providing for the use of LIBOR as an index for 
interest rate adjustments for ARMs in HUD's forward and reverse 
mortgage insurance programs are becoming obsolete as LIBOR is in the 
process of being phased out. HUD is required by statute to approve by 
regulation interest rate indices for its forward ARM products. HUD must 
also amend by regulation its permitted interest rate indices for HECM 
ARM products and permit lenders to transition from LIBOR to a 
replacement index for existing HECM ARMs. Therefore, this rule is 
necessary to prevent HUD's rules on ARMs from becoming obsolete as well 
as to avoid the risk of financial harm for all ARM lenders and 
borrowers, and the larger ARM market, and the MMIF.
    HUD does not expect the rule to have an economic impact as a result 
of the transition to the alternative rate. For newly endorsed forward 
ARMs, SOFR will become an available index in addition to the one-year 
CMT index. HUD has already removed LIBOR and approved SOFR for new 
annually adjustable HECM ARM originations. As of the Effective Date or 
prior to the cessation of LIBOR, existing LIBOR indexed FHA-insured 
ARMs may transition to a spread-adjusted SOFR to make it a comparable 
rate for existing LIBOR-based ARMs. Transition to the spread-adjusted 
SOFR will align FHA-insured ARMs with other LIBOR contracts covered by 
the LIBOR Act.
    For existing mortgages that transition to spread-adjusted SOFR, we 
do not anticipate a significant economic impact. For all existing FHA-
insured ARMs, the per-adjustment and lifetime caps on total adjustments 
will continue to apply, minimizing the impact to borrowers or 
mortgagees as a result of the transition to SOFR.
    This rule was not subject to OMB review. This rule is not a 
``significant regulatory action'' as defined in section 3(f) of 
Executive Order 12866, and is not an economically significant 
regulatory action.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and on the private sector. This rule 
does not impose any Federal mandates on any State, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

Environmental Review

    This rule consists of statutorily required and/or discretionary 
establishment and review of interest rates and similar rate and cost 
determinations and related external administrative or fiscal 
requirements or procedures which do not constitute a development 
decision that affects the physical condition of specific project areas 
or building sites. Accordingly, under 24 CFR 50.19(c)(6), this rule is 
categorically excluded from environmental review under the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This rule provides for the removal of LIBOR as an allowable index rate 
for adjustments for new FHA-insured forward ARMs and establish SOFR as 
a new index along with the CMT for new forward ARMs, aligning it with 
the available indices for annually adjustable HECM ARMs. There will be 
a Secretary-approved spread-adjusted SOFR for existing FHA-insured ARMs 
transitioning from LIBOR.
    The rule requires mortgagees to, where appropriate, utilize a new 
approved index. Mortgagees are already required to substitute an index 
under the terms of their existing loan documents when the index used 
becomes unavailable. Additionally, this rule establishes a new index 
for origination of new forward ARMs, which mortgagees regularly provide 
when originating a loan. Therefore, the changes in this rule should not 
have a significant economic impact on mortgagees. If there is an 
economic effect on mortgagees, it would fall equally on all mortgagees 
who originate or service ARMs. Further, HUD anticipates that allowing 
an additional index for newly originated ARMs will have a net positive 
economic impact on borrowers and mortgagees by providing additional 
market opportunities, decreasing the cost of credit associated with 
these ARMs.
    Therefore, the undersigned certifies that the rule will not have a 
significant economic impact on a substantial number of small entities.

[[Page 12828]]

Executive Order 13132, Federalism (64 FR 43255; August 10, 1999)

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either: (1) imposes substantial direct compliance costs on State and 
local governments and is not required by statute, or (2) preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive order. This rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
State and local governments or preempt State law within the meaning of 
the Executive order.

Paperwork Reduction Act

    The information collection requirements contained in this rule are 
currently approved by OMB and have been given OMB Control Number 2502-
0322 and OMB Control Number 2502-0524 and 2502-0611. In accordance with 
the Paperwork Reduction Act, an agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless the collection displays a currently valid OMB control number.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loans 
programs--housing and community development, Mortgage insurance, 
Reporting and recordkeeping requirements, Solar energy.

24 CFR Part 206

    Aged, Condominiums, Loan programs--housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

    For the reasons discussed in the preamble, HUD amends 24 CFR parts 
203 and 206 as follows:

PART 203--SINGLE FAMILY HOUSING MORTGAGE INSURANCE

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

    Authority: 12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u, 
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).

0
2. Amend Sec.  203.49 by revising paragraph (b) to read as follows:


Sec.  203.49  Eligibility of adjustable rate mortgages.

* * * * *
    (b) Interest-rate index--(1) CMT and SOFR indices. Changes in the 
interest rate charged on an adjustable rate mortgage must correspond 
either to changes in the weekly average yield on U.S. Treasury 
securities, adjusted to a constant maturity of one year (CMT); to the 
30-day average Secured Overnight Financing Rate (SOFR) published by the 
Federal Reserve Bank of New York (or a successor administrator); or to 
an alternative SOFR tenor approved by the Secretary. The Secretary may 
publish approved SOFR tenors as alternatives to the 30-day average SOFR 
tenor through notice.
    (2) Transition for existing mortgages indexed to LIBOR. Mortgages 
with an existing adjustable interest rate indexed to the London 
Interbank Offered Rate (LIBOR) must be transitioned to the spread-
adjusted SOFR replacement index approved by the Secretary by the next 
interest rate adjustment date for the mortgage on or after the 
Replacement Date, which means the first London banking day after June 
30, 2023, unless the Board of Governors of the Federal Reserve System 
determines that any LIBOR tenor will cease to be published or cease to 
be representative on a different date. In such case, Replacement Date 
means the first business day following the date announced by the Board 
of Governors of the Federal Reserve System. Notice of the transition to 
the SOFR replacement index must be sent to the borrower in accordance 
with the mortgage documents. The Secretary will publish through 
Mortgagee Letter any additional requirements for the transition of 
existing mortgages.
    (3) Changes in the mortgage interest rate. Except as otherwise 
provided in this section, each change in the mortgage interest rate 
must correspond to the upward and downward change in the index.
* * * * *

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

0
3. The authority citation for part 206 continues to read as follows:

    Authority:  2 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d)

0
4. Amend Sec.  206.3 by revising the definition of ``Expected average 
mortgage interest rate'' and adding, in alphabetical order, definitions 
for ``Margin'', ``Replacement Date'', and ``SOFR'' to read as follows:


Sec.  206.3  Definitions.

* * * * *
    Expected average mortgage interest rate means the interest rate 
used to calculate the principal limit established at closing.
    (1) For fixed interest rate HECMs, the expected average mortgage 
interest rate is the same as the fixed mortgage (Note) interest rate 
and is set simultaneously with the fixed interest (Note) rate.
    (2) For adjustable interest rate HECMs, the expected average 
mortgage interest rate is the sum of the mortgagee's margin plus the 
weekly average yield for U.S. Treasury securities (CMT) adjusted to a 
constant maturity of 10 years or an additional SOFR index as approved 
by the Secretary. Commingling the index type used to calculate the 
expected average mortgage interest rate and the index type used to 
calculate the adjustable mortgage interest (Note) rate and adjustments 
is only permissible as provided for by the Secretary.
    (3) Mortgagees, with the agreement of the borrower, may 
simultaneously lock in the expected average mortgage interest rate and 
the mortgagee's margin prior to the date of mortgage closing or 
simultaneously establish the expected average mortgage interest rate 
and the mortgagee's margin on the date of mortgage closing.
* * * * *
    Margin means the amount added to the index value to compute the 
expected average mortgage interest rate and the initial mortgage 
interest (Note) rate and periodic adjustments to the mortgage interest 
(Note) rate.
* * * * *
    Replacement Date means the first London banking day after June 30, 
2023, unless the Board of Governors of the Federal Reserve System 
determines that any LIBOR tenor will cease to be published or cease to 
be representative on a different date. In such case, Replacement Date 
means the first business day following the date announced by the Board 
of Governors of the Federal Reserve System.
    SOFR means the Secured Overnight Financing Rate published by the 
Federal Reserve Bank of New York (or a successor administrator).

0
5. Amend Sec.  206.21 by revising paragraphs (b)(1)(ii) and (b)(2) and 
adding paragraph (b)(3) to read as follows:


Sec.  206.21  Interest rate.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Interest rate index. Changes in the mortgage interest rate 
charged on an adjustable interest rate mortgage must correspond to 
changes in the weekly average yield on U.S. Treasury

[[Page 12829]]

securities (CMT) adjusted to a constant maturity of one year; to the 
30-day average Secured Overnight Financing Rate (SOFR); or to an 
alternative SOFR tenor approved by the Secretary. The Secretary may 
publish approved SOFR tenors as alternatives to the 30-day average SOFR 
tenor through notice. The index type used to calculate the initial 
mortgage interest rate must be the same index type used to calculate 
the mortgage interest rate adjustments, except as provided in paragraph 
(b)(3) of this section. Commingling of index types for the mortgage 
interest rate and adjustments is not otherwise allowed, unless approved 
by the Secretary. Unless otherwise provided in this section, each 
periodic adjustment in the mortgage interest rate must correspond to 
the upward and downward change in the index, except that downward 
changes in the index will not result in an index figure that is less 
than zero.
* * * * *
    (2) Monthly adjustable interest rate HECMs. If a mortgage meeting 
the requirements of paragraph (b)(1) of this section is offered, the 
mortgagee may also offer a mortgage which provides for monthly 
adjustments to the interest rate subject to the following requirements:
    (i) Interest rate index. Changes in the interest rate charged on an 
adjustable interest rate mortgage shall correspond to changes in the 
weekly average yield on U.S. Treasury securities (CMT) adjusted to a 
constant maturity of one year, to the weekly average yield on CMT 
adjusted to one-month, or to an alternative SOFR index approved by the 
Secretary. The index type used to calculate the initial mortgage 
interest rate must be the same index type used to calculate the 
mortgage interest rate adjustments, except as provided in paragraph 
(b)(3) of this section. Commingling of index types for the mortgage 
interest rate and adjustments is not otherwise allowed, unless approved 
by the Secretary. Unless otherwise provided in this section, each 
periodic adjustment in the mortgage interest rate must correspond to 
the upward and downward change in the index, except that downward 
changes in the index will not result in an index figure that is less 
than zero.
    (ii) Frequency of interest rate changes. (A) The interest rate 
adjustments must occur monthly, calculated from the date of the 
closing, except that the first adjustment shall be no sooner than 30 
days (28 days for February, as applicable) or later than three months 
from the date of the closing.
    (B) To set the new interest rate, the mortgagee will determine the 
change between the initial (i.e., base) index figure and the current 
index figure, or will add a specific margin to the current index 
figure. The initial index figure shall be the most recent figure 
available before the date of mortgage loan origination. The current 
index figure shall be the most recent index figure available 30 days 
(28 days for February, as applicable) before the date of each interest 
rate adjustment.
    (iii) Magnitude of changes. The initial mortgage interest rate 
shall be agreed upon by the mortgagee and the borrower. Adjustments in 
the effective rate of interest over the entire term of the mortgage 
(the lifetime adjustment cap) may result in a change in either 
direction of no more than ten percentage points from the initial 
contract interest rate. The Secretary may change this lifetime 
adjustment cap through notice.
    (3) Transition for existing mortgages indexed to LIBOR. Mortgages 
with an existing adjustable interest rate indexed to the London 
Interbank Offered Rate (LIBOR) must be transitioned to the spread-
adjusted SOFR replacement index approved by the Secretary by the next 
interest rate adjustment date for the mortgage on or after the 
Replacement Date. Notice of the transition to the SOFR replacement 
index must be sent to the borrower in accordance with the mortgage 
documents. The Secretary will publish through Mortgagee Letter any 
additional requirements for the transition of existing mortgages.
* * * * *

Julia R. Gordon,
Assistant Secretary for Housing--FHA Commissioner.
[FR Doc. 2023-03952 Filed 2-28-23; 8:45 am]
BILLING CODE 4210-67-P