[Federal Register Volume 69, Number 47 (Wednesday, March 10, 2004)]
[Rules and Regulations]
[Pages 11500-11502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5314]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 203



Eligibility of Adjustable Rate Mortgages; Final Rule

  Federal Register / Vol. 69, No. 47 / Wednesday, March 10, 2004 / 
Rules and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-4745-F-02]
RIN 2502-AH84


Eligibility of Adjustable Rate Mortgages

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

ACTION: Final rule.

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SUMMARY: Pursuant to a recent statutory revision, this rule makes 
available new adjustable rate mortgage (ARM) products for HUD-insured 
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 and for pre-loan disclosure requirements. This 
final rule follows publication of a March 11, 2003, proposed rule. In 
accordance with statutory authority and the public comments received, 
this rule implements the proposed rule without change; that is, it 
provides for seven- and ten-year ARMs adjustable annually by up to two 
percentage points, and for one-, three, and five-year ARMs adjustable 
annually by up to one percentage point. The lifetime cap on adjustments 
for seven- and ten-year ARMs is set at six percentage points.

DATES: Effective Date: April 9, 2004.

FOR FURTHER INFORMATION CONTACT: James Beavers, Director, Home Mortgage 
Insurance Division, Office of Single Family Housing, Office of Housing, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Washington, DC 20410-8000; telephone (202) 708-2121. This is not a 
toll-free number. Persons with hearing or speech impairments may access 
this number through TTY by calling the toll-free Federal Information 
Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

A. Background

    On March 11, 2003 (68 FR 11730), HUD published for comment a 
proposed rule entitled ``Eligibility of Adjustable Rate Mortgages,'' 
which proposed to implement section 251 of the National Housing Act, 12 
U.S.C. 1715z-16 (section 251) as revised by the Departments of Veterans 
Affairs and Housing and Urban Development, and Independent Agencies 
Appropriations Act, 2002 (Pub. L. 107-73, approved November 26, 2001) 
(FY 2002 HUD Appropriations Act). This rule, following statutory 
authority, proposed to permit new categories of hybrid Adjustable Rate 
Mortgages (ARMs). ARMs are mortgages that remain at a fixed rate for a 
certain period of time and then adjust their rates.
    Section 206 of the FY 2002 HUD Appropriations Act added additional 
categories of ARMs to the pre-existing one-year ones (which capped 
adjustments at one percentage point). Under this statutory 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 necessarily limited to 
adjustments of one percentage point if the initial interest rate 
remains fixed for more than five years.
    Pursuant to the FY 2002 statutory revisions, HUD also proposed new 
pre-loan disclosure requirements. Under the statute, HUD must require 
mortgage lenders to make available to the mortgagor a written 
explanation of the features of an ARM at the time the mortgagor applies 
for an ARM under this section. 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.
    HUD also proposed amending 24 CFR 203.49(h) and redesignating it 24 
CFR 203.49(i) to eliminate the exclusionary cross-reference to mortgage 
insurance for disaster victims, 24 CFR 203.18(e). The effect of this 
change would be to permit insurance of ARMs under 203.18(e). Finally, 
technical revisions would be made to Sec.  203.49(i), which is 
redesignated as Sec.  203.49(j) in this final rule.
    Other portions of 24 CFR 203.49 are not affected by this 
rulemaking.

B. Discussion of Public Comments

    The public comment period for the proposed rule closed on May 12, 
2003. HUD received four comments on the proposed rule. Commenters were 
generally supportive of the additional ARM options, but asked for 
certain changes in the rule or the underlying legislation. Comments 
were received from mortgage lenders, two banking associations, and an 
association of realtors.
    Comment: One commenter stated that consideration should be given to 
using a different index, specifically, the London Interbank Offered 
Rate (LIBOR) index, as the basis for the interest rate.
    Response: HUD recognizes that LIBOR is used for a host of 
conventional mortgage products, and is well recognized in the mortgage 
industry. Nevertheless, the Federal Housing Administration (FHA), being 
an agency of the United States Government, is best served by retaining 
a domestic index available from the Federal Reserve Board.
    Comment: This commenter also stated that a greater number of ARM 
loans should be permitted. The commenter suggested that an increase for 
ARMs above the limit of 30 percent of the aggregate amount of loans 
insured should be considered.
    Response: The 30 percent of aggregate limitation is statutory (see 
section 251(c) of the National Housing Act, 12 U.S.C. 1715z-16(c)). 
Therefore, HUD cannot increase it by regulation.
    Comment: Three commenters stated that the one percent cap on 
adjustments for five-year ARMs would not work as a practical matter, 
and each stated its support for pending legislation (the ``Access to 
Affordable Mortgages Act,'' H.R. 1443 of the 108th Congress) to change 
this cap to two percent. One of these commenters noted, ``In the 
conventional mortgage markets, lenders do not originate 5/1 ARMs with 
one percent annual caps. A maximum annual increase of one percent * * * 
does not provide sufficient interest rate flexibility to enable lenders 
to offer 5/1 ARMs at a rate below the traditional 30-year fixed rate 
mortgage.'' Another commenter made a similar statement and added that 
as a result ``the program will likely not accomplish its intended 
purpose: to offer FHA borrowers a full range of hybrid ARM loans with 
starting interest rates lower than those on 30-year fixed-rate 
mortgages.'' Another of these commenters also stated that a one percent 
adjustment does not allow sufficient interest rate flexibility and that 
legislation raising the annual cap on five-year ARMs will ``make ARMs a 
more available, affordable alternative for homebuyers.'' One commenter 
also mentioned without discussion that the lifetime cap for five-year 
ARMs should be raised to six percentage points.
    Response: The one percentage point cap on adjustments for ARMs of 
five or fewer years is based on statutory authority current at the time 
the proposed rule was published. (See section 251(d) of the National 
Housing Act, 12 U.S.C. 1715z-16(d)(2003).) HUD acknowledges that there 
is now statutory authority to raise the annual and life-of-loan 
adjustment caps on five-year ARMs under section 301 of the FHA 
Multifamily Loan Limit Adjustment Act of 2003, Pub. L. 108-186. HUD 
will consider changing the

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adjustment caps in a future rulemaking proceeding.
    Comment: Two commenters stated that further changes to HUD-insured 
ARMs should be by mortgagee letter. These commenters stated that if a 
legislative change is made allowing the adjustments in five-year ARMs 
to be capped at two percent, the change should be implemented by 
Mortgagee Letter to avoid the time-consuming rulemaking process.
    Response: HUD believes that changes to the adjustment rates of ARMs 
should be done through rulemaking.

C. This Final Rule

    In view of the general support for additional ARM products and the 
fact that the rule follows statutory authority, this final rule 
implements the proposed rule without substantive change.

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 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.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage in accordance with HUD regulations 
at 24 CFR part 50, which implement Section 102(2)(C) of the National 
Environmental Policy Act of 1969. That finding remains available for 
public inspection between 8 a.m. and 5 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 (2 U.S.C. 
1531-1538) establishes requirements for federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments and the private sector. This final rule does not impose any 
federal mandates on any state, local, or tribal government or the 
private sector within the meaning of the Unfunded Mandates Reform Act 
of 1995.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
OMB determined that this rule is a ``significant regulatory action,'' 
as defined in section 3(f) of the Executive Order (although not 
economically significant, as provided in section 3(f)(1) of the 
Executive Order). Any changes made to the rule subsequent to its 
submission to OMB are identified in the docket file, which is available 
for public inspection between 8 a.m. and 5 p.m. weekdays in the Office 
of the Rules Docket Clerk, Room 10276, 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.

0
For the reasons stated in the preamble, HUD amends 24 CFR part 203 as 
follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
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).
0
2. Sec.  203.49 is revised as follows:
0
a. Redesignate paragraphs (a) through (j) as paragraphs (b) through (k) 
respectively;
0
b. Add a new paragraph (a); and
0
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, calculated from the date of the 
mortgagor's first debt service payment, except that, for these types of 
mortgages, the first adjustment shall be no sooner or later than the 
following:
    (i) One-year adjustable rate mortgages--no sooner than 12 months or 
later than 18 months;
    (ii) Three-year adjustable rate mortgages--no sooner than 36 months 
or later than 42 months;
    (iii) Five-year adjustable rate mortgages--no sooner than 60 months 
or later than 66 months;
    (iv) Seven-year adjustable rate mortgages--no sooner than 84 months 
or later than 90 months; and
    (v) Ten-year adjustable rate mortgages--no sooner than 120 months 
or 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 and shall occur on the anniversary 
date of the first adjustment, 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

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point may not be carried over for inclusion in an adjustment for a 
subsequent year. Adjustments in the effective rate of interest over the 
entire term of the mortgage may not result in a change in either 
direction of more than five percentage points from the initial contract 
interest rate.
    (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 six 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 Sec. Sec.  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), or 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 fiscal year.
* * * * *

    Dated: March 3, 2004.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 04-5314 Filed 3-9-04; 8:45 am]
BILLING CODE 4210-27-P