[Federal Register Volume 68, Number 47 (Tuesday, March 11, 2003)]
[Proposed Rules]
[Pages 11730-11732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5890]



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Part V





Department of Housing and Urban Development





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24 CFR Part 203



Eligibility of Adjustable Rate Mortgages; Proposed Rule

  Federal Register / Vol. 68, No. 47 / Tuesday, March 11, 2003 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4745-P-01]
RIN 2502-AH84


Eligibility of Adjustable Rate Mortgages

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

ACTION: Proposed rule.

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SUMMARY: Pursuant to a recent statutory revision, this rule makes 
available new adjustable rate mortgage products for single-family homes 
tailored to the needs of borrowers. This rule also makes provisions for 
the frequency and amount of interest rate changes for these new 
products.

DATES: Comment Due Date: May 12, 2003.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Rules Docket Clerk, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Communications should refer to the 
above docket number and title. Facsimile (FAX) comments are not 
acceptable. A copy of each communication submitted will be available 
for public inspection and copying between 7:30 a.m. and 5:30 p.m. 
weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: James Beavers, Home Mortgage Insurance 
Division, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC 20410, at (202) 708-2121. Persons with 
hearing- or speech-impairments may access these numbers via TTY by 
calling the Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 251 of the National Housing Act, 12 U.S.C. 1715z-16 
(Section 251) authorizes the Secretary to insure adjustable rate 
mortgages (ARMs). Congress enacted revisions to this statute in the 
Veterans Affairs, HUD, and Independent Agencies Appropriations Act for 
Fiscal Year 2002 (Pub. L. 107-73, approved November 26, 2001; 115 Stat. 
651, at 674). Prior to this statutory change, Section 251 permitted the 
Secretary to insure ARMs where the adjustments: (1) Were made on an 
annual basis; (2) were, as to each adjustment, limited to an annual cap 
of 1 percentage point on the outstanding loan balance; and (3) were 
limited, for the life of the loan, to a maximum increase of 5 
percentage points above the initial interest rate.
    The recently-enacted revision adds additional categories of ARMs to 
these pre-existing ones. Under this revision, which adds a new 
subsection (d) to Section 251, the Secretary may insure ARMs on single-
family properties that have interest rates that are fixed for the first 
three years or more of the mortgage term; that are thereafter adjusted 
annually; and are not limited to adjustments of one percentage point if 
the interest rate remains fixed for more than five years.
    The new statute also amends the information disclosure requirements 
of Section 251. HUD must require mortgage lenders to make available to 
the mortgagor, at the time of applying for an ARM under this section, a 
written explanation of the features of an adjustable rate mortgage. 
This explanation must be consistent with the disclosure requirements 
under the Truth in Lending Act, 15 U.S.C. 1601 et seq., applicable to 
variable rate mortgages secured by a principal dwelling. The regulation 
includes this provision; however, the provision would be self-
implementing even were it absent from the regulation.
    The rate index provisions remain unchanged. As in the statute prior 
to the recent revisions, the interest rate must be based on a national 
index approved in regulations, information about which is readily 
accessible to borrowers from generally published sources.
    HUD's current regulations on adjustable rate mortgages eligible for 
mortgage insurance are found at 24 CFR 203.49. This proposed rule would 
amend that section.

B. This Proposed Rule

    This proposed rule would add a new paragraph (a) between the 
introductory paragraph and current Sec.  203.49(a), which is 
redesignated as Sec.  203.49(b). The effect of this paragraph would be 
to recognize specific categories of adjustable rate mortgages as 
eligible for insurance, based on the year of the loan in which the rate 
may first be adjusted. These categories are one, three, five, seven and 
ten-year ARMs.
    Proposed Sec.  203.49(d) would specify the time periods mortgages 
must be adjusted for each of the different types of ARMs. In each case, 
in accordance with current practice, the rule proposes a six-month 
``window'' for adjustment. In other words, groups of mortgages, the 
anniversary dates of which fall into a six-month period, can be 
adjusted together. This is convenient for lenders, and also allows 
GNMA, when pooling mortgages for purposes of issuing mortgage-backed 
securities, to have larger pools. For example, if the adjustment date 
of a particular set of mortgages to be pooled is June 1, 2001, GNMA can 
include mortgages with adjustment dates going back to January 1, 2001, 
in the pool. Those January 1 mortgages would not adjust until June 1, 
2001. This proposed window for adjustments is a matter of 
administrative convenience and would not change the fact that five-year 
ARMs fall under the maximum cap provisions (one percentage point for 
the annual adjustment and five percent total variance in rates for the 
life of the loan) in 12 U.S.C. 1715z-16(a).
    Proposed Sec.  203.49(e), ``Magnitude of changes,'' is redesignated 
as Sec.  203.49(f) and revised to take into account the new types of 
ARMs. Section 203.49(f)(1) covers one, three and five-year ARMs. 
Following the statutory provisions applicable to adjustable rate 
mortgages that have an interest rate that is fixed for five or fewer 
years, adjustments would be limited to a maximum of one percentage 
point in variance from the prior interest rate. If the underlying index 
changes more than one percentage point, the rule proposes that the 
excess amount may not be made up in an adjustment the following year. 
Finally, the overall total cap in adjustments of five percentage points 
over the life of the loan from 12 U.S.C. 1715z-16(a) would be 
implemented in this paragraph. Because of the insertion of new Sec.  
203.49(f)(2), described in the following paragraph, new Sec.  
203.49(f)(3) contains the material in current Sec.  203.49(e)(2).
    Proposed Sec.  203.49(f)(2) would implement the somewhat different 
requirements for seven and ten-year ARMs. The one-year and total loan 
adjustment caps do not apply to ARMs in these categories. The proposed 
rule would permit for these ARMs a change in annual adjustments of up 
to two percentage points, and the total mortgage change may go up to 
six percentage points.
    Proposed Sec.  203.49(i), redesignated from Sec.  203.49(h) in the 
current rule, would amend the cross-references to eliminate the cross-
reference to mortgage insurance for disaster victims, 24 CFR 203.18(e). 
The effect of this change is to permit insurance of ARMs under this 
provision. Finally, technical revisions would be made to Sec.  
203.49(i), which is redesignated as Sec.  203.49(j) in this proposed 
rule.

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    Other portions of 24 CFR 203.49 are not affected by this 
rulemaking, and will remain as currently codified in the Code of 
Federal Regulations.

Findings and Certifications

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This rule permits 
greater flexibility in HUD-insured ARMs, thus providing more products 
for potential homebuyers. This rule imposes no requirements on 
businesses.
    Notwithstanding HUD's determination that this rule does not have a 
significant economic impact on a substantial number of small entities, 
HUD specifically invites comment regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in the preamble.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR Part 50, 
which implement Section 102(2)(C) of the National Environmental Policy 
Act of 1969. This finding is available for public inspection between 
7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules Docket 
Clerk, Office of the General Counsel, Department of Housing and Urban 
Development, Room 10276, 451 Seventh Street, SW., Washington, DC 20410-
0500.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (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 does not impose any Federal mandates on any state, local, or 
tribal governments, or on the private sector, within the meaning of the 
UMRA.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). OMB determined that this proposed rule is a ``significant 
regulatory action,'' as defined in section 3(f) of the Order (although 
not economically significant, as provided in section 3(f)(1) of the 
Order). Any changes made to the proposed rule subsequent to its 
submission to OMB are identified in the docket file, which is available 
for public inspection in the Office of the Rules Docket Clerk, Room 
10276, U.S. Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC, 20410-0500.

Catalog of Federal Domestic Assistance.

    The Catalog of Federal Domestic Assistance numbers applicable to 
this rule are 14.108, 14.117, and 14.119.

List of Subjects in 24 CFR Part 203

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

    For the reasons stated in the preamble, HUD proposes to amend 24 
CFR part 203 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for 24 CFR part 203 is revised to read as 
follows:

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

    2. Section 203.49 is amended as follows:
    a. Redesignate paragraphs (a) through (j) as paragraphs (b) through 
(k) respectively;
    b. Add a new paragraph (a); and
    c. Revise newly designated paragraphs (d), (f), (g), (i) and (j).
    The additions and revisions read as follows:


Sec.  203.49  Eligibility of adjustable rate mortgages.

* * * * *
    (a) Types of mortgages insurable. The types of adjustable rate 
mortgages that are insurable are those for which the interest rate may 
be adjusted annually by the mortgagee, beginning after one, three, 
five, seven or ten years from the date of the mortgagor's first debt 
service payment.
* * * * *
    (d) Frequency of Interest Rate Changes. (1) The interest rate 
adjustments must occur annually from the date of the mortgagor's first 
debt service payment, except, for these types of mortgages, the first 
adjustment shall be no sooner nor later than the following:
    (i) One year adjustable rate mortgages--no sooner than 12 months 
nor later than 18 months;
    (ii) Three year adjustable rate mortgages--no sooner than 36 months 
nor later than 42 months;
    (iii) Five year adjustable rate mortgages--no sooner than 60 months 
nor later than 66 months;
    (iv) Seven year adjustable rate mortgages--no sooner than 84 months 
nor later than 90 months; and
    (v) Ten year adjustable rate mortgages--no sooner than 120 months 
nor later than 126 months.
    (2) To set the new interest rate, the mortgagee will determine the 
change between the initial (i.e., base) index figure and the current 
index figure, or will add a specific margin to the current index 
figure. The initial index figure shall be the most recent figure 
available before the date of mortgage loan origination. The current 
index figure shall be the most recent index figure available 30 days 
before the date of each interest rate adjustment.
* * * * *
    (f) Magnitude of changes. The adjustable rate mortgage initial 
contract interest rate shall be agreed upon by the mortgagee and the 
mortgagor. The first adjustment to the contract interest rate shall 
take place in accordance with the schedule set forth under paragraph 
(d) of this section. Thereafter, for all adjustable rate mortgages, the 
adjustment shall be made annually, subject to the following conditions 
and limitations:
    (1) For one, three and five year adjustable rate mortgages, no 
single adjustment may result in a change in either direction of more 
than one percentage point from the interest rate in effect for the 
period immediately preceding that adjustment. Index changes in excess 
of one percentage point may not be carried over for inclusion in an 
adjustment for the following 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

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than five percentage points from the initial contract interest rate.
    (2) For seven and ten year adjustable rate mortgages, no single 
adjustment to the interest rate shall result in a change in either 
direction of more than two percentage points from the interest rate in 
effect for the period immediately preceding that adjustment. Index 
changes in excess of two percentage points may not be carried over for 
inclusion in an adjustment in a subsequent year. Adjustments in the 
effective rate of interest over the entire term of the mortgage may not 
result in a change in either direction of more than 6 percentage points 
from the initial contract rate.
    (3) At each adjustment date, changes in the index interest rate, 
whether increases or decreases, must be translated into the adjusted 
mortgage interest rate, except that the mortgage may provide for 
minimum interest rate change limitations and for minimum increments of 
interest rate changes.
    (g) Pre-Loan Disclosure. The mortgagee is required to make 
available to the mortgagor, at the time of loan application, a written 
explanation of the features of an adjustable rate mortgage consistent 
with the disclosure requirements applicable to variable rate mortgages 
secured by a principal dwelling under the Truth in Lending Act, 15 
U.S.C. 1601 et seq.
* * * * *
    (i) Cross-reference. Sections 203.21 (level payment amortization 
provisions) and 203.44 (open-end advances) do not apply to this 
section. This section does not apply to a mortgage that meets the 
requirements of Sections 203.18(a)(4) (mortgagors of secondary 
residences), 203.18(c) (eligible non-occupant mortgagors), 203.18(d) 
(outlying area properties), 203.43 (miscellaneous type mortgages), 
203.43c (mortgages involving a dwelling unit in a cooperative housing 
development), 203.43d (mortgages in certain communities), 203.43e 
(mortgages covering houses in federally impacted areas), 203.45 
(graduated payment mortgages), and 203.47 (growing equity mortgages).
    (j) Aggregate amount of mortgages insured. The aggregate number of 
adjustable rate mortgages insured pursuant to this section and 24 CFR 
part 234 in any fiscal year may not exceed 30 percent of the aggregate 
number of mortgages and loans insured by the Secretary under Title II 
of the National Housing Act during the preceding year.
* * * * *

    Dated: January 9, 2003.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 03-5890 Filed 3-10-03; 8:45 am]
BILLING CODE 4210-27-P