[Federal Register Volume 63, Number 50 (Monday, March 16, 1998)]
[Proposed Rules]
[Pages 12930-12933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6587]



[[Page 12929]]

_______________________________________________________________________

Part III





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 206



Home Equity Conversion Mortgages; Consumer Protection measures Against 
Excessive Fees; Proposed Rule

  Federal Register / Vol. 63, No. 50 / Monday, March 16, 1998 / 
Proposed Rules  

[[Page 12930]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 206

[Docket No. FR-4306-P-01]
RIN 2502-AH10


Home Equity Conversion Mortgages; Consumer Protection Measures 
Against Excessive Fees

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would amend the regulations for the FHA 
Home Equity Conversion Mortgage (HECM) program under part 206. The HECM 
program offers FHA-insured first mortgages providing payments to 
elderly homeowners based on the accumulated equity in their homes. 
These FHA-insured ``HECMs'' are commonly referred to as ``reverse 
mortgages.'' The rule is designed to protect homeowners in the HECM 
program from becoming liable for payment of excessive fees for third-
party provided services of little or no value.

COMMENT DUE DATE: May 15, 1998.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, room 10276, Office of 
General Counsel, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500. Comments should refer to 
the above docket number and title. A copy of each comment submitted 
will be available for public inspection and copying during regular 
business hours at the above address. Facsimile (FAX) comments are not 
acceptable.

FOR FURTHER INFORMATION CONTACT: Sandy Allison, Office of the Deputy 
Assistant Secretary for Single Family Housing, Room 9282, Department of 
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 
20410. Telephone: (202) 708-2733. (This is not a toll-free number.) For 
hearing- and speech-impaired persons, this number may be accessed via 
TTY by calling the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

    On March 17, 1997, HUD issued Mortgagee Letter 97-07, which 
prohibited FHA-approved lenders from being involved in transactions for 
HECMs referred by estate planning entities charging what HUD deemed to 
be exorbitant fees. Two estate planners engaged in the business of 
making referrals for reverse mortgages sued, seeking a temporary 
restraining order (TRO) and preliminary injunction to require HUD to 
withdraw the Mortgagee Letter on the ground that notice and comment 
rulemaking procedures should have been followed. A TRO was issued on 
March 26, 1997, and a preliminary injunction followed on April 11, 
1997. Mortgagee Letter 97-07 was then withdrawn.
    Due to the Secretary's concern about the need to protect senior 
citizens from practices which may subvert the HECM process, the 
Secretary has determined that it is in the public interest that a rule 
be proposed at this time. The preliminary injunction does not preclude 
the proposed rule set forth below.
    With respect to the FHA insurance program for HECMs, current FHA 
requirements strictly limit the fees that a mortgagee can collect. The 
FHA regulations currently do not have any express provisions that 
protect mortgagors from fees collected by third parties. This proposed 
rule will fill that gap.

Content of Rule

    The specific proposals that follow were developed to address actual 
practices that HUD has identified. HUD is aware that specific responses 
to such known practices may not be fully effective in addressing other 
potential future abusive practices that may develop. In addition to 
seeking comments on whether the specific proposals that follow are 
necessary or will be effective, therefore, HUD seeks information from 
the public on other known or potential areas of abuse directed at 
elderly homeowners who may be interested in the HECM program, and 
suggestions regarding additional regulatory provisions that HUD should 
consider to provide protection. Depending on the nature and extent of 
the additional identified problems and solutions and the need for 
additional public comment on additional or modified provisions not in 
this proposed rule, HUD may include such provisions either in a final 
rule, in an interim rule with opportunity for further public comment, 
or in a separate proposed rule.
    The proposed rule consists of three new sections and amendments to 
two existing sections of 24 part 206.

1. Definition of Estate Planning Service Firm

    A key term--estate planning service firm--is defined in an 
amendment to Sec. 206.3. The term identifies such firms as individuals 
or entities that are not HUD-approved mortgagees or housing counseling 
agencies and that charge any of three types of fees or charges 
characteristic of firms charging excessive fees for services to HECM 
mortgagors: (a) fees other than those charged by the lender that are 
contingent on the homeowner obtaining a HECM, and often based on a 
percentage of the mortgage amount, (b) fees for information that 
housing counseling agencies are otherwise required to make available to 
mortgagors at little or no cost, or (c) fees for services that are 
purported to improve the homeowner's access to the HECM program. 
Exceptions are provided for payment of fees for bona fide tax or legal 
or financial advice, and other services specifically authorized by HUD, 
including loan origination. This is intended to be an encompassing 
definition that cannot be exploited through a minor change in 
practices. Any legitimate service provider that is concerned about 
overbreadth of coverage can seek specific authorization from HUD to 
exempt it from the new provisions. HUD recognizes that there is likely 
to be a need for additional guidance and, if so, such guidance will be 
issued. It is expected that the public comments on this proposed rule 
will identify any areas of needed guidance.

2. Initial Disbursement to Mortgagor

    The proposed rule adds a new Sec. 206.29 to ensure that funds 
disbursed at closing go to the mortgagor, a relative or legal 
representative of the mortgagor, or a trustee of a trust for the 
benefit of the mortgagor, and not to an interested third party such as 
an estate planning service firm. Exceptions are provided for the 
initial mortgage insurance premium paid to HUD, closing costs 
authorized under 24 CFR 206.31, and amounts required to discharge any 
existing liens on the mortgagor's home.

3. No Payment to Estate Planning Service Firm; No Outstanding 
Obligations After Closing

    The proposed rule adds a new Sec. 206.32 to prevent the mortgagor 
from using the initial draw of loan proceeds to pay an estate planning 
service firm. The mortgagee must also ensure that no commitments that 
the mortgagor incurred in connection with the mortgage transaction, 
such as a commitment to pay an estate planning service firm, will 
remain outstanding after the initial draw at closing, except for 
allowable repairs and mortgage service charges. The proposed rule thus 
addresses a situation where an estate

[[Page 12931]]

planning service firm seeks to ``lend'' to a homeowner the amount of 
its fees and to demand reimbursement after closing. The proposed rule 
does not purport to interfere with any legally enforceable obligations 
that a homeowner might have incurred before closing, but it eliminates 
the HECM program as a possible source of funding for unapproved fees. 
The proposed rule would permit a homeowner to contract in connection 
with the mortgage transaction in advance of closing for post-closing 
repairs only if the repairs are required as a condition of the loan to 
meet FHA property standards for existing housing.

4. Additional Counseling Item

    The proposed rule amends Sec. 206.41 to add a new requirement to 
the mandatory pre-loan counseling of HECM mortgagors. A counselor is 
required to discuss with the mortgagor whether the mortgagor has an 
agreement with an estate planning service firm to pay a fee on or after 
closing. If there is such an agreement, a counselor is required to 
discuss the extent to which services under the contract may not be 
needed or may be available at little or no cost from other sources, 
including a mortgagee. A counselor is not expected to provide any 
advice regarding whether the mortgagor is legally bound to honor the 
contract. The counselor should, however, make sure that a mortgagor 
understands that Sec. 206.32, as discussed above, will prevent a 
mortgage from being eligible under the HECM program if a fee is to be 
paid at or after closing to an estate planning service firm.

5. Disclosure of Costs

    The Act requires full disclosure to the mortgagor of all costs of 
obtaining the HECM. This proposed rule adds a new Sec. 206.43(a) 
1 to clarify that the mortgagee is responsible for ensuring 
that the disclosure occurs. The mortgagee is required to ask the 
mortgagor about any loan-related costs or obligations that the 
mortgagor may have incurred to obtain the HECM (such as the obligation 
to pay a fee to an estate planning service firm if the mortgage closes) 
and that the mortgagee is not required to disclose in its Good Faith 
Estimate. The mortgagee has a limited duty; it may rely on information 
received from the mortgagor (unless the mortgagee has reason to believe 
that the information is faulty) and it need not ask about the fees of 
professionals providing bona fide tax, legal, financial advice or 
estate planning services who do not meet the definition of estate 
planning service firm.
---------------------------------------------------------------------------

    \1\ The former Sec. 206.43 was deleted by a final rule published 
at 61 FR 49033 (September 17, 1996).
---------------------------------------------------------------------------

6. Lump Sum Disbursement

    The proposed rule also adds a new Sec. 206.43(b) to require the 
mortgagee to make special inquiries of any mortgagor requesting that at 
least 25% of the available funds (i.e., the principal limit amount 
after excluding closing costs and certain principal limit set asides, 
sometimes called ``net principal limit'') be disbursed at closing to 
the mortgagor (or as otherwise permitted by Sec. 206.29, as discussed 
above). The mortgagee must ascertain whether the mortgagor plans to use 
the funds to pay an estate planning service firm, and if so, must 
advise the mortgagor that this use of funds disbursed at closing is 
prohibited by Sec. 206.32, as discussed above.
    This proposed rule would not prevent a mortgagor from obtaining and 
making appropriate payment for services with actual value. Any provider 
of services to HECM mortgagors may seek HUD authorization for the fees 
it imposes and the resultant exclusion from the definition of ``estate 
planning service firm''. HUD seeks to ensure that individuals or 
companies who provide services do not unfairly benefit from the 
substantial amount of cash that is made available to elderly homeowners 
through the HECM program. This would defeat the public purpose of the 
program.

Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements proposed at Secs. 206.32, 
206.41 and 206.43 of this rule have been submitted to the Office of 
Management and Budget (OMB) for review, under section 3507(d) of the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection request displays a 
valid control number.
    The public reporting burden for each of these collections of 
information is estimated to include the time for reviewing 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. Information on the estimated public 
reporting burden is provided in the following table.

----------------------------------------------------------------------------------------------------------------
                                                  Responses      Total                                          
      Information collection         Number of       per        annnual     Hours per   Total hours   Regulatory
                                    respondents   respondent   responses     response                 reference 
----------------------------------------------------------------------------------------------------------------
Evidence of no payment to estate                                                                                
 planning service firm and no                                                                                   
 outstanding unpaid obligations...         8000            1         8000          .10          800       206.32
Information to be provided by                                                                                   
 counselor........................       16,000            1       16,000          .25         4000       206.41
Information to mortgagor..........         8000            1         8000          .25         2000       206.43
                                   -----------------------------------------------------------------------------
      Total annual burden.........       32,000            1       32,000  ...........         6800             
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), the Department is soliciting 
comments from members of the public and affected agencies concerning 
the proposed 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 proposal. Comments must be 
received within sixty (60) days from the date of this proposal. 
Comments must refer to the proposal by name and docket number (FR-4306) 
and must be sent to: Joseph F. Lackey, Jr., HUD Desk Officer, Office of 
Management and

[[Page 12932]]

Budget, New Executive Office Building, Washington, DC 20503.

Executive Order 12866

    This proposed rule was reviewed by the Office of Management and 
Budget under Executive Order 12866 as a significant regulatory action. 
Any changes made in this proposed rule as a result of that review are 
clearly identified in the docket file, which is available for public 
inspection in the Office of HUD's Rules Docket Clerk, Room 10276, 451 
7th Street, S.W., Washington, D.C.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
doing certifies that this rule does not have a significant economic 
impact on a substantial number of small entities. This rule merely 
proposes to codify the Department's position which is consistent with 
the National Housing Act and part 206 regarding consumer protection. 
The rule has no adverse or disproportionate economic impact on small 
businesses. Small businesses are specifically invited, however, to 
comment on whether this rule will significantly affect them, and 
persons are invited to submit comments according to the instructions in 
the DATES and COMMENTS sections in the preamble of this proposed rule.

Environmental Impact

    This proposed rule is exempt from the environmental review 
procedures under HUD regulations in 24 CFR part 50 that implement 
section 102(C) of the National Environmental Policy Act of 1969 (42 
U.S.C. 4332) because of the exemption under Sec. 50.19(c)(1) which 
pertains to ``the approval of policy documents that do not direct, 
provide for assistance or loan and mortgage insurance for, or otherwise 
govern or regulate property acquisition, disposition, lease, 
rehabilitation, alteration, demolition, or new construction, or set out 
to provide for standards for construction or construction materials, 
manufactured housing, or occupancy.'' This proposed rule simply amends 
an existing regulation by increasing the information available to 
mortgagors and by limiting the manner in which funds are disbursed.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this proposed 
rule would not have substantial direct effects on States or their 
political subdivisions, or the relationship between the Federal 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. No 
programmatic or policy changes would result from this rule that affect 
the relationship between the Federal Government and State and local 
governments.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub.L. 104-4; 
approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and on the private sector. This proposed 
rule would not impose any Federal mandates on any State, local, or 
tribal governments, or on the private sector, within the meaning of the 
UMRA.
    Catalog. The Catalog of Federal Domestic Assistance number for the 
HECM program is 14.183.

List of Subjects in 24 CFR Part 206

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

    Accordingly, the Department proposes to amend part 206 of title 24 
of the Code of Federal Regulations as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

    1. The authority citation for 24 CFR part 206 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).

    2. Section 206.3 is amended by adding a new definition of ``estate 
planning service firm'' to read as follows:


Sec. 206.3  Definitions.

* * * * *
    Estate planning service firm means an individual or entity that is 
not a mortgagee approved under part 202 of this title or a housing 
counseling agency approved under Sec. 206.41 and that charges a fee 
that is:
    (a) Contingent on the homeowner obtaining a mortgage loan under 
this part, except the origination fee authorized by Sec. 206.31 or a 
fee specifically authorized by the Secretary; or
    (b) For information that homeowners must receive under Sec. 206.41, 
except a fee by:
    (1) A housing counseling agency approved under Sec. 206.41; or
    (2) 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
    (c) For other services that the provider of the services represents 
are, in whole or in part, for the purpose of improving an elderly 
homeowner's access to mortgages covered by this part 206, except where 
the fee is for services specifically authorized by the Secretary.
* * * * *
    3. A new section 206.29 is added to read as follows:


Sec. 206.29  Initial disbursement of mortgage proceeds.

    Mortgage proceeds may not be disbursed at closing except:
    (a) Disbursements to the mortgagor, a relative or legal 
representative of the mortgagor, or a trustee for benefit of the 
mortgagor;
    (b) Disbursements for the initial MIP under Sec. 206.105(a);
    (c) Fees that the mortgagee is authorized to collect under 
Sec. 206.31; and
    (d) Amounts required to discharge any existing liens on the 
property.
    4. A new section 206.32 is added to read as follows:


Sec. 206.32  No outstanding unpaid obligations.

    In order for a mortgage to be eligible under this part, a mortgagor 
must establish to the satisfaction of the mortgagee that:
    (a) After the initial payment of loan proceeds under 
Sec. 206.25(a), there will be no outstanding or unpaid obligations 
incurred by the mortgagor in connection with the mortgage transaction, 
except for repairs to the property required under Sec. 206.47 and 
mortgage service charges permitted under Sec. 206.207(b); and
    (b) The initial payment will not be used for any payment to or on 
behalf of an estate planning service firm.
    5. Section 206.41 is amended by revising paragraph (b) to read as 
follows:


Sec. 206.41  Counseling.

    (a) * * *
    (b) Information to be provided. A counselor must discuss with the 
mortgagor:
    (1) The information required by section 255(f) of the NHA; and
    (2) Whether the mortgagor has signed a contract or agreement with 
an estate planning service firm that requires, or

[[Page 12933]]

purports to require, the mortgagor to pay a fee on or after closing 
that may exceed amounts permitted by the Secretary or this part.
    (3) If such a contract has been signed under Sec. 206.41(b)(2), 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.
* * * * *
    6. A new Sec. 206.43 is added to read as follows:


Sec. 206.43  Information to mortgagor.

    (a) Disclosure of costs of obtaining mortgage. The mortgagee must 
ensure that the mortgagor has received full disclosure of all costs of 
obtaining the mortgage. The mortgagee must ask the mortgagor about any 
costs or other obligations that the mortgagor has incurred to obtain 
the mortgage, as defined by the Secretary, in addition to providing the 
Good Faith Estimate required by Sec. 3500.7 of this title.
    (b) Lump sum disbursement. If the mortgagor requests that at least 
25% of the principal limit amount (after deducting amounts excluded in 
the following sentence) be disbursed at closing to the mortgagor (or as 
otherwise permitted by Sec. 203.29), the mortgagee must make sufficient 
inquiry at closing to confirm that the mortgagor 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. This paragraph does not apply to the following:
    (1) 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 mortgagor in cash; and
    (2) Amounts set aside under Sec. 206.47 for repairs, under 
Sec. 206.205(f) for property charges, or Sec. 206.207(b).

    Dated: February 3, 1998.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 98-6587 Filed 3-13-98; 8:45 am]
BILLING CODE 4210-27-P