[Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]
[Rules and Regulations]
[Pages 7094-7146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01044]



[[Page 7093]]

Vol. 82

Thursday,

No. 12

January 19, 2017

Part VIII





Department of Housing and Urban Development





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24 CFR Parts 30 and 206





Federal Housing Administration: Strengthening the Home Equity 
Conversion Mortgage Program; Final Rule

  Federal Register / Vol. 82, No. 12 / Thursday, January 19, 2017 / 
Rules and Regulations  

[[Page 7094]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 30 and 206

[Docket No. FR-5353-F-03]
RIN 2502-AI79


Federal Housing Administration: Strengthening the Home Equity 
Conversion Mortgage Program

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

ACTION: Final rule.

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SUMMARY: This final rule codifies several significant changes to FHA's 
Home Equity Conversion Mortgage program that were previously issued 
under the authority granted to HUD in the Housing and Economic Recovery 
Act of 2008 and the Reverse Mortgage Stabilization Act of 2013, and 
makes additional regulatory changes. The HECM program is FHA's reverse 
mortgage program that enables seniors who have equity in their homes to 
withdraw a portion of the accumulated equity. The intent of the Home 
Equity Conversion Mortgage program is to ease the financial burden on 
elderly homeowners facing increased health, housing, and subsistence 
costs at a time of reduced income. FHA's mission is to serve 
underserved markets, which must be balanced with HUD's inherent, as 
well as, statutory obligation under the National Housing Act to protect 
the FHA insurance funds. This rulemaking strengthens the FHA Home 
Equity Conversion Mortgage program and codifies changes that reduce 
risk to the Mutual Mortgage Insurance Fund and increase the 
sustainability of this important program for seniors. This final rule 
follows publication of a May 19, 2016, proposed rule and takes into 
consideration the public comments received on the proposed rule.

DATES: Effective Date: September 19, 2017.

FOR FURTHER INFORMATION CONTACT: Karin Hill, Senior Policy Advisor, 
Office of Single Family Housing, Department of Housing and Urban 
Development, 451 7th Street SW., Room 9282, Washington, DC 20410-8000; 
telephone number 202-402-3084 (this is not a toll-free number). Persons 
with hearing or speech challenges may access this number through TTY by 
calling the toll-free Federal Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION

I. Executive Summary

A. Purpose of Regulatory Action

    Since the 2008 housing and economic recession, the HECM portfolio 
has experienced major borrower demographic and behavioral changes that 
have caused additional risk to the Mutual Mortgage Insurance Fund 
(MMIF). Some of the changes include shifting from a predominantly 
adjustable interest rate mortgage with borrowers receiving payments 
over time using the line of credit, modified term, or modified tenure 
payment options to a fixed interest rate mortgage with borrowers 
drawing large amounts of HECM proceeds at the time of closing; younger 
borrowers with higher amounts of property indebtedness; and increasing 
property charge defaults. While program changes made prior to and 
during 2013, such as consolidating the HECM Standard and HECM Saver 
products, did improve the stability of the HECM program, the HECM 
portfolio has continued to experience volatility. The economic value of 
the HECM portfolio has fluctuated from a negative $1.2 billion reported 
in FHA's Fiscal Year (FY) 2014 submission to Congress, to a positive 
$6.8 billion in FY 2015, to a negative $7.7 billion in FY 2016. Even 
under an improved housing market, the positive impacts of program 
changes on the HECM portfolio overall will be gradual and initially 
difficult to model for purposes of the actuarial study, as they will be 
evidenced only in future cohorts of activity. As a result, it is 
critical to remain vigilant in monitoring program performance and 
policy to ensure the soundness of the MMIF.
    Recognizing the need to stabilize the HECM program and ensure it 
remains a sustainable program, Congress passed and the President signed 
into law, the Reverse Mortgage Stabilization Act of 2013 (RMSA) (Pub. 
L. 113-29). The RMSA gave FHA the tools to make, through mortgagee 
letter,\1\ changes to the HECM program that are necessary to improve 
the fiscal safety and soundness of the program. Under this authority, 
FHA implemented a number of changes to the HECM program, including the 
Financial Assessment and Property Charge Funding Requirements; 
deferring the due and payable status for Eligible Non-Borrowing 
Spouses; limiting disbursements during the first 12 months of the HECM; 
and eliminating future draws on fixed interest rate HECMs.
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    \1\ Mortgagee letters issued under the authority granted to HUD 
in RMSA will be identified throughout this rule as RMSA mortgagee 
letters.
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    On May 19, 2016 (81 FR 31770), HUD published a proposed rule to 
codify these policies, with amendments as discussed in the preamble to 
the proposed rule. In addition, FHA proposed to implement a number of 
new policies. Also, so that all regulatory requirements are codified in 
the HECM regulations, HUD also proposed to codify HECM program changes 
made by mortgagee letter \2\ under the Housing and Economic Recovery 
Act of 2008 (HERA) (Pub. L. 110-289), which implemented the HECM for 
Purchase program and established new origination fee limits, and amends 
the initial and monthly mortgage insurance premium (MIP) limits to 
correspond with statutory changes. This final rule follows publication 
of the May 19, 2016, proposed rule and takes into consideration the 
public comments received on the proposed rule.
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    \2\ Mortgagee letters issued under the authority granted to HUD 
in HERA will be identified throughout this rule as HERA mortgagee 
letters.
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B. Summary of Major Provisions of This Final Rule

    In this rule, FHA codifies existing policy which has been 
implemented by mortgagee letters under various statutory authorities; 
implements statutory changes; issues new origination and servicing 
policies; and clarifies existing regulatory language. The main policy 
provisions are discussed below. All policies which have been 
implemented by mortgagee letters will remain in effect until the 
effective date of this final rule.
Implementing Statutory Changes and Codifying Existing Policies 
Implemented Under Statutory Authority
    Financial Assessment and Property Charge Funding Requirements. RMSA 
Mortgagee Letter 2014-21 required mortgagees to perform a Financial 
Assessment of the prospective borrower prior to loan approval, which 
considers the prospective borrower's credit history, cash flow and 
residual income, extenuating circumstances, and compensating factors. 
Based on the results of the Financial Assessment, the mortgagee may 
require a Life Expectancy Set Aside (LESA) for the payment of certain 
property charges. For fixed interest rate HECMs, if a LESA is required, 
it may only be a Fully-Funded LESA. For adjustable interest rate HECMs, 
if a LESA is required, the mortgagee may require either a Partially- or 
Fully-Funded LESA. Proceeds from a Partially-Funded LESA will be 
disbursed to the borrower semi-annually to be used to assist in the 
payment of

[[Page 7095]]

property charges; for Fully-Funded LESAs, mortgagees disburse funds 
directly to the tax authority or insurance company for the payment of 
certain property charges when they are due. If the mortgagee does not 
require a Fully-Funded LESA, a borrower with an adjustable or fixed 
interest rate HECM, may elect to have a Fully-Funded LESA.
    Deferring the Due and Payable Status for Eligible Non-Borrowing 
Spouses. RMSA Mortgagee Letter 2014-07, as amended by RMSA Mortgagee 
Letter 2015-02, established a Deferral Period, during which the due and 
payable status of a HECM is deferred after the death of the last 
surviving borrower for an Eligible Non-Borrowing Spouse, provided 
eligibility and all other FHA requirements are, and continue to be, 
satisfied. In addition, the new policy required the principal limit to 
be based on the age of the youngest borrower or Eligible Non-Borrowing 
Spouse, instead of only the youngest borrower. The new policy also 
provided for a 30-day period for the Eligible Non-Borrowing Spouse to 
cure a default and to reinstate a Deferral Period.
    Limiting Disbursements During the First 12 Months of the HECM. 
Through RMSA Mortgagee Letter 2014-21, FHA limited initial 
disbursements for HECMs. For fixed and adjustable interest rate HECMs, 
the funds advanced to the borrower at closing and during the First 12-
Month Disbursement Period could not exceed the greater of 60 percent of 
the principal limit; or Mandatory Obligations plus an additional 10 
percent of the principal limit.
    While FHA does not intend to change the current limits of 60 
percent and 10 percent at this time, this rule provides flexibility for 
this limit to be changed in the future to respond to market changes or 
other factors. Specifically, this rule revises the regulations such 
that the 60 percent cap will never be modified to be less than 50 
percent, and the additional percentage will never be modified to be 
less than 10 percent absent future rulemaking.
    Eliminating Future Draws on Fixed Interest Rate HECMs. Ginnie Mae 
issued an All Participants Memorandum, APM 14-04, announcing that fixed 
interest rate HECM loans with future draws would be ineligible for 
securitization on or after June 1, 2014. As a result of APM 14-04, in 
RMSA Mortgagee Letter 2014-11, FHA limited the insurability of fixed 
interest rate mortgages under the HECM program to mortgages with the 
Single Lump Sum payment option, which does not allow for future draws 
after closing.
    HECM for Purchase Program. HECM for Purchase program requirements 
were originally located in HERA Mortgagee Letter 2009-11. This rule 
codifies the HECM for Purchase program requirements, with an important 
change to the existing prohibition on interested party contributions. 
The rule permits the seller to pay fees required to be paid by the 
seller under state or local law and fees that are customarily paid by a 
seller in the locality of the subject property and to purchase the Home 
Warranty policy. The rule also allows the Commissioner to define the 
types and parameters of other allowable interested party contributions 
through Federal Register notice for comment.
    Allowable Loan Origination Fees and Charges. FHA implemented the 
loan origination fee limits imposed by HERA through HERA Mortgagee 
Letter 2008-34. In this rule, FHA clarifies that such loan origination 
fee limits include expenses incurred in originating, processing and 
closing the HECM.
    Amount of MIP. This rule amends the allowable initial and monthly 
MIP charges to reflect that HECMs are now obligations of the MMIF 
instead of the General Insurance Fund and to reflect statutory 
amendments to the National Housing Act providing FHA with a wider range 
of acceptable MIP charges. FHA is not changing actual MIP charges, 
which may be set outside of the rulemaking process by mortgagee letter 
or other similar administrative issuance.
    Seasoning Requirements. HUD implemented seasoning requirements for 
existing non-HECM liens through Mortgagee Letter 2014-21. Under the 
mortgagee letter, borrowers could only pay off existing non-HECM liens 
using HECM proceeds if the liens had been in place longer than 12 
months or resulted in less than $500 cash to the borrower. This rule 
adopts these seasoning requirements for existing non-HECM liens but 
amends them to: (1) Impose the 12-month requirement beginning at the 
date of the HECM closing rather than the HECM loan application; and (2) 
allow the pay-off, at closing, of Home Equity Lines of Credit (HELOCs) 
that do not meet seasoning requirements from borrower funds, the HECM 
funds, or a combination of HECM funds and borrower funds, as long as 
the draw from HECM funds does not exceed the draw limits during the 
first 12 months of the HECM.
New Origination and Servicing Policies
    Disclosure of Available HECM Program Options. This rule requires 
that mortgagees inform potential HECM borrowers of all of the HECM 
products, features, and options that FHA insures, in a manner 
acceptable to the Commissioner, irrespective of the particular HECM 
products offered by the mortgagee.
    Interest Rate Lock-In. This rule amends the definition of 
``expected average mortgage interest rate,'' to provide that the 
mortgagee, with the agreement of the borrower, may lock in the expected 
average mortgage interest rate prior to the date of loan closing or 
establish the expected average mortgage interest rate on the date of 
loan closing.
    Appraisal Requirements. This rule requires the mortgagee to have 
the property appraised no later than 30 days after receipt of the 
request by an applicable party in connection with a pending property 
sale; the property must be appraised within 30 days of a foreclosure 
sale. The rule also allows the Commissioner to approve the use of other 
appraisers when the mortgagee is required to appraise the property.
    Limiting Reimbursement of Property Charge Advances. This rule 
limits insurance claim reimbursement to a mortgagee to two-thirds of 
the total payments for: (a) Taxes, ground rents, and water rates; (b) 
special assessments, which are noted on the application for insurance 
or which become liens after the insurance of the mortgage; and (c) 
hazard insurance premiums on the mortgaged property not in excess of a 
reasonable rate.
    Acquisition and Sale of Property. This rule replaces the 
requirement that the property be sold for at least 95 percent of the 
appraised value with a more flexible provision which allows the 
Commissioner to lower this amount as necessary to adapt to market 
conditions and other factors. This rule also requires that the closing 
costs from the sale be no more than the greater of 11 percent of the 
sales price, or a fixed dollar amount as determined by the Commissioner 
through Federal Register notice.
    Cash for Keys. This rule provides an incentive for parties with 
legal authority to dispose of a property that serves as the security 
for a HECM to complete a deed in lieu of foreclosure more quickly. The 
rule also applies the Cash for Keys incentive when a bona fide tenant 
vacates the property prior to an eviction being initiated by the 
mortgagee in the case of a foreclosure. This rule grants the 
Commissioner the flexibility to increase the minimum amount of time a 
mortgagee shall grant the borrower or bona fide tenant to vacate the 
property and the authority to establish the amount of the financial 
incentive.
    Pay-Off of Debt Not Secured by the Property. This rule allows HECM 
proceeds to be used to pay off debt that is not secured by the 
property, as defined by the Commissioner through

[[Page 7096]]

Federal Register notice, as a mandatory obligation.
    Property Charge Payments. This rule allows the Commissioner, 
through Federal Register notice, to establish an incentive for the 
borrower voluntarily electing a Life Expectancy Set Aside. 
Additionally, the final rule authorizes the Commissioner, through 
Federal Register notice, to expand the borrower's options for electing 
to have the mortgagee make property charge payments.

C. Costs and Benefits of This Rule \3\
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    \3\ Any changes made in this section from what was presented in 
the proposed rule only indicate policy changes that were made based 
on public comments or reconsideration of the issues.
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    This rule codifies the following program changes that have reduced 
risks to both FHA and to borrowers: Implementation of limits on fixed-
rate full draw loans (full draw loans expose FHA to high risk of 
insurance loss, and such loans are often not sustainable solutions for 
borrowers since they do not provide the borrower with future access to 
HECM proceeds); a Financial Assessment to enable mortgagees to 
determine if the HECM enables borrowers to comply with the mortgage 
requirements and that the HECM is a sustainable solution for borrowers; 
protection to Eligible Non-Borrowing Spouses from foreclosure after the 
death of the last borrower; removal of incentives for borrowers to 
obtain higher principal limits by using only the age of the older 
spouse through quit-claiming the younger spouse from the title; and a 
Life Expectancy Set Aside which will reduce the incidence of borrower 
defaults due to non-compliance with the mortgage obligation for the 
borrower to make timely payment of property taxes, and hazard and flood 
insurance payments. The new changes to the HECM program are expected to 
reduce foreclosures arising from these defaults, which will benefit 
FHA, borrowers, and communities where properties are located; give FHA 
more flexibility to accept short sales on properties where market 
conditions warrant; and provide homeowners with the ability to purchase 
a more suitable home without incurring the costs of two loan closings. 
Together, these changes may initially reduce HECM origination volume, 
although the potential demand for HECM is expected to remain high.
    The social benefits that may be realized by this rule also include 
reducing resolution costs and borrower distress in cases where loans 
are no longer sustainable; improved sustainability of the MMIF, which 
would enhance the choice and wellbeing of future borrowers; and 
increased protections for borrowers, including those afforded non-
borrowing spouses and those from improving the ultimate sustainability 
of HECM loans related to financial assessment changes.
    The policies discussed in this rule may reduce FHA HECM insurance 
endorsements by $1.9 billion per year, thereby reducing choices for 
potential HECM borrowers to access home equity and imposing an 
equivalent cost on them; reduce foreclosures due to tax and insurance 
default by up to 6,000 cases (totaling about $1.5 billion in loan 
amount) per year, along with reduction in ancillary costs of 
foreclosures to neighborhoods and local governments; and reduce loan 
origination costs for 2,000 ``HECM for Purchase'' borrowers, saving 
them $12 million per year representing transfers from mortgagees to 
borrowers.
    Other costs from the rule would include reduced borrowers' choice 
and the well-being of those borrowers who may not meet the eligibility 
requirements, or who no longer have access to as much upfront cash. The 
table below and the bullet points that follow display the benefits, 
costs, and transfers of this rule.
    Absent the changes in the HECM program made by mortgagee letters 
issued by HUD under the authority of RMSA, the ongoing operation of the 
HECM program would have required a credit subsidy appropriation under 
the Federal Credit Reform Act of approximately $684 million. The fact 
that this appropriation was not required represents a transfer from 
potential HECM borrowers to taxpayers. This transfer was effected by 
the regulatory mortgagee letters, and not this final rule which merely 
codifies these existing policies in the Code of Federal Regulations. 
This transfer amount is reported in this analysis to inform the public, 
but had no bearing on whether these provisions would be included in the 
final rule.

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          Benefits                    Costs               Transfers
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4,400 fewer foreclosures per  Reduce FHA HECM       Mortgagee letters
 year from tax and insurance   insurance             issued under
 default.                      endorsements by       authority granted
 $1.1 billion          $1.9 billion per      by the Reverse
 aggregate unpaid principal    year, thereby         Mortgage
 balance.                      reducing choices      Stabilization Act
 Reduction in          for potential HECM    and codified by
 ancillary costs of            borrowers to access   this rule reduced
 foreclosures to               home equity.          credit subsidy
 neighborhoods, borrowers,                           appropriations
 and local governments.                              required under the
                                                     Federal Credit
                                                     Reform Act for the
                                                     HECM program from
                                                     $684 million to $0.
                                                     This is a transfer
                                                     from potential HECM
                                                     borrowers to
                                                     taxpayers.
Reduced loan origination      No additional costs.  No additional
 costs for 2,000 ``HECM for                          transfers.
 Purchase'' borrowers per
 year.
 Total benefit of
 $12 million per year..
 Frees resources for
 other purposes..
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    Other benefits include the following:
     Improving the financial condition of the FHA MMIF due to:
    [cir] Fewer foreclosures and lower loss rates;
    [cir] Financial incentives of a Cash for Keys program for short 
sales and REO properties;
    [cir] Persistently lower insured loan balances over time, due to 
limits on initial disbursement; and
    [cir] More flexibility for FHA to accept short sales on properties 
where market conditions warrant.
     Improving overall HECM program viability and in turn 
improving suitability and attractiveness for potential borrowers
    [cir] Reduces risks to both FHA and to borrowers associated with 
fixed-rate full draw loans (full draw loans expose FHA to high risk of 
insurance loss, and such loans are often not suitable for borrowers);
    [cir] Helps borrowers and their housing counselors determine if a 
HECM is a sustainable option for them through the use of a Financial 
Assessment;

[[Page 7097]]

    [cir] Provides protection to Eligible Non-Borrowing Spouses from 
foreclosure, and removes incentives for borrowers to obtain higher 
principal limits than they would otherwise be eligible for by using 
only the age of the older spouse; and
    [cir] Reduces the incidence of borrower defaults due to non-
compliance with the mortgage obligation.

II. Background

A. Program Description

    The HECM program, authorized by section 255 of the National Housing 
Act (NHA) (12 U.S.C. 1715z-20), is FHA's reverse mortgage insurance 
program. The regulations for this program are codified in 24 CFR part 
206. The HECM program enables FHA-approved mortgagees to extend insured 
mortgage financing to eligible borrowers, 62 years of age or older, who 
want to convert the equity in their homes into liquid assets. The 
withdrawal of equity may take a variety of forms, as authorized by the 
NHA and selected by the borrower. The home, which serves as security 
for the mortgage, must be, and continue to be, the borrower's principal 
residence during the life of the borrower. For adjustable interest rate 
HECMs, equity payments to the borrower may be in the form of monthly 
disbursements for life or a fixed term of years, disbursements from a 
line of credit advance or a combination of monthly disbursements and a 
line of credit. For fixed interest rate HECMs, equity payments to the 
borrower must be in the form of a single lump sum disbursement at 
closing.
    The maximum amount of equity in the home that is available to a 
borrower under a HECM loan is the ``principal limit'' that is 
calculated for that loan. The borrower retains ownership of the 
property and may sell the home at any time keeping any residual sale 
proceeds in excess of the outstanding loan balance. Until the mortgage 
is repaid, and regardless of whether or not additional disbursements 
under the mortgage are permissible, interest on the mortgage, mortgage 
insurance premiums, and servicing charges, where applicable, continue 
to accrue.

B. HUD's May 19, 2016, Proposed Rule

    On May 19, 2016, HUD published its proposed rule to implement the 
HERA and RMSA mortgagee letters described above in addition to other 
regulatory changes. HUD proposed to strengthen the HECM program by 
consolidating the requirements of these HERA and RMSA mortgagee letters 
into the regulations and introducing new requirements that would reduce 
risk to the Mutual Mortgage Insurance Fund and increase the 
sustainability of the HECM program for seniors. Interested readers 
should refer to the preamble of the May 19, 2016, proposed rule for 
details regarding the proposed regulatory changes to the HECM program.

C. Solicitation of Comment on Required Assignment

    On August 11, 2016, at 81 FR 53095, HUD published in the Federal 
Register a supplemental notice of proposed rulemaking to solicit 
comment in response to a proposal raised by one of the public 
commenters on the proposed rule. The document opened the public comment 
period solely to address this proposal regarding the mortgagee's option 
to file a claim when the loan balance reaches 98 percent of the maximum 
claim amount.
    The current regulations at Sec.  206.107(a) provide the mortgagee 
an option, before the mortgage is submitted for insurance endorsement, 
to select either: (1) The assignment option, which allows the mortgagee 
to assign the HECM to the Secretary if the mortgage balance is equal to 
or greater than 98 percent of the maximum claim amount; or (2) the 
shared premium option, which allows the mortgagee to retain a portion 
of the monthly MIP but does not allow the mortgagee to assign the 
mortgage unless the mortgagee fails to make payments and the Secretary 
demands assignment. Under the assignment option, the mortgagee may only 
assign the mortgage to the Secretary if the following requirements are 
satisfied: (1) The mortgagee is current in making the required payments 
to the mortgagor; (2) the mortgagee is current in making the required 
MIP payments to the Secretary; (3) the mortgage is not due and payable; 
and (4) the mortgage is a first lien of record and title to the 
property securing the mortgage is good and marketable.
    The public commenter suggested that, under the assignment option, 
HUD should instead require that the mortgagee assign the HECM loan to 
FHA if the outstanding loan balance is equal to or greater than 98 
percent of the maximum claim amount. The commenter stated that, in some 
cases, a mortgagee may decline to file a claim in this scenario if the 
property value has risen rapidly and the loan has an above-market rate. 
The commenter concluded that lenders in this way have a ``put option'' 
and ``can choose to keep the best loans and make claims for the worst 
ones''.
    HUD is deferring its final determination as to whether to adopt the 
commenter's proposal at this time, and after HUD fully reviews and 
takes into consideration the comments received, HUD will issue, or 
choose not to issue, its final determination of this proposal through a 
subsequent final rule.

III. Overview of Final Rule--Key Changes Made at Final Rule Stage

    In the May 19, 2016, proposed rule, HUD explicitly solicited public 
comment on numerous proposed policy changes, including specific 
questions on the maximum closing costs allowed on the sale of a 
property, including utilities as property charges, property 
inspections, non-borrowing spouse communication, and the benefits and 
costs of the rule. HUD received 241 public comments, including 83 
unique comments, on the proposed rule. HUD appreciates all the 
questions raised, and suggestions and recommendations made by the 
public commenters. After review and consideration of the public 
comments and upon further consideration of issues by HUD, the following 
highlights key clarifications and changes made by HUD at the final rule 
stage.
    The final rule:
     Amends the provision limiting the number of mortgages by 
allowing borrowers to provide legal documentation evidencing the 
release of the borrower's financial obligation to satisfy the existing 
HECM rather than requiring the borrower to demonstrate a final divorce 
decree. (See Sec.  206.34.)
     Amends the seasoning requirements for existing non-HECM 
liens to: (1) Impose the 12-month requirement beginning at the date of 
the HECM closing rather than the HECM loan application; and (2) allow 
the pay-off at closing of Home Equity Lines of Credit (HELOCs) that do 
not meet the seasoning requirements from borrower funds, the HECM 
funds, or a combination of HECM funds and borrower funds, as long as 
the draw from HECM funds does not exceed the draw limits during the 
first 12 months of the HECM. (See Sec.  206.36.)
     Includes required pay-off of debt not secured by the 
property, as defined by the Commissioner through Federal Register 
notice, as a mandatory obligation. (See Sec.  206.25(b) and Sec.  
206.25(c).)
     Clarifies that the mortgagees are required to request 
borrowers to designate, at the borrower's discretion, an alternative 
individual for the purpose of communicating with the mortgagee if the 
mortgagee has not been able to reach the borrower directly. (See Sec.  
206.40(c).)
     Retains the current policy requirement that the mortgagor 
must provide the mortgagee with a physical copy of the housing 
counseling

[[Page 7098]]

certificate, and removes the requirement that the HECM counselor upload 
the certificate to an electronic database. (See Sec.  206.41(c).)
     Clarifies that the mortgagee shall provide any disclosures 
required by law when asking the borrower about any costs or other 
obligations that the borrower has incurred to obtain the mortgage. (See 
Sec.  206.43(a).)
     Allows fees customarily paid by the seller in the subject 
property locality to be included as an interested party contribution. 
(See Sec.  206.44(c).)
     Clarifies the requirement for maintaining flood insurance 
coverage. (See Sec.  206.45(c).)
     Grants the FHA Commissioner the authority, where a HECM is 
due and payable, to increase the maximum closing costs allowable for 
selling the property above 11% of the sales price by establishing a 
fixed dollar amount as determined through Federal Register notice. (See 
Sec.  206.125(a)(2)(ii).)
     Allows the FHA Commissioner to approve the use of 
qualified appraisers acceptable to and identified by the Commissioner 
when the mortgagee is required to appraise the property. (See Sec.  
206.125(b).)
     Authorizes the FHA Commissioner to expand availability of 
the Cash for Keys incentive, in an amount to be determined by the 
Commissioner, on REO properties with bona fide tenants. (See Sec.  
206.125(g)(4).)
     For the Cash for Keys incentive, authorizes the 
Commissioner to increase the minimum amount of time a mortgagee shall 
grant the borrower or bona fide tenant to vacate the property. (See 
Sec.  206.125(f)(1)(ii) and Sec.  206.125(g)(4).)
     Amends the limitation on reimbursements for advances made 
by the mortgagee for property charges to cover two-thirds of the 
overall advances made by the mortgagee rather than the full value of 
the first two years of such advances. (See Sec.  206.129(d)(3).)
     Removes the ability for the borrower to elect that the 
mortgagee pay ground rents through the borrower's voluntary election to 
have the mortgagee pay property charges. (See Sec.  206.205(b)(2) & 
Sec.  206.205(d).)
     Authorizes the Commissioner to establish an incentive for 
voluntarily electing a Life Expectancy Set Aside through Federal 
Register notice. (See Sec.  206.205(b)(2)(ii).)
     Authorizes the Commissioner to expand the borrower's 
options for property charge payment by the mortgagee through Federal 
Register notice. (See Sec.  206.205(d).)
Deferred Final Determination
    Additionally, in order to fully consider the comments received on 
these issues, HUD will defer making its final determination of the 
policies listed below from the proposed rule and afterwards, HUD will 
issue its final determination on these issues in a final rule.
     The change to the cap on interest rate adjustments for 
annually adjustable interest rate products and the imposition of a five 
percent cap on interest rate adjustments for monthly adjustable 
interest rate products;
     The establishment of extenuating circumstances exceptions 
for exceeding the Initial Disbursement Limit or Borrower's Advance 
during the First 12-Month Disbursement Period;
     Post-closing property inspections;
     The requirement to undergo counseling before signing a 
HECM for Purchase contract and/or making an earnest money deposit; and
     The definition of property charges to include utilities.

IV. Public Comments and HUD's Response to Public Comments

A. The Public Comments Generally

    HUD received 241 public comments, including duplicate mass 
mailings, resulting in 83 unique public submissions covering a wide 
range of issues. Comments came from a wide variety of entities, 
including lenders, servicers, interest groups, real estate agents, and 
academics. In general, the public commenters expressed support for 
codifying policy implemented via Mortgage Letter under statutory 
authority, updating CFR part 206 and a number of the proposed 
regulatory changes. Many commenters also raised questions or offered 
suggestion for changes at the final rule stage. This section of the 
preamble discusses the significant issues raised by the commenters and 
provides HUD's responses to the comments received. All public comments 
can be viewed at https://www.regulations.gov/docket?D=HUD-2016-0052.

B. Specific Public Comments

1. Definitions
    Comment: The definition of ``borrower'' should be consistent with 
the definition used in the Mortgagee Optional Election Assignment 
guidance (Mortgagee Letter 2015-15) to mean the ``original borrower 
under a note and mortgage.'' The commenter encouraged the use of 
consistent definitions throughout HECM program guidance.
    HUD Response: With the recent changes to the HECM program, 
particularly the protections and benefits for non-borrowing spouses, it 
was necessary for HUD to revise the definitions of ``borrower'' and 
``mortgagor'' in order to resolve title issues involving quit claiming 
practices of non-borrowing spouses or other non-borrowing owners. The 
definition of ``borrower,'' as provided in 206.3, ``means a mortgagor 
who is an original borrower under the HECM Loan Agreement and Note. The 
term does not include successors or assigns of a borrower.''
    Comment: HUD should clarify that the new proposed definition of 
``mortgagee'' does not conflict with the rule change regarding sales to 
other FHA-approved entities, as proposed in Sec.  206.101(d)(2). The 
commenter stated that ``mortgagee'' is defined as the original lender 
under a mortgage and its successors and assigns, as approved by the 
Commissioner, but that HUD also proposed to include a non-FHA-approved 
entity as a possible successor or assign, in some limited cases.
    HUD Response: These requirements are not new additions to the HECM 
program. They were previously listed in the regulations at 24 CFR part 
203 and incorporated into the HECM program by reference. This rule 
simply moves the regulations into part 206 in order to reduce the 
number of cross-references. HUD intends to retain these regulatory 
requirements.
2. State Statutes of Limitations
    Comment: HUD should state that when a HECM loan is assigned to HUD, 
any state statute of limitations on collecting or foreclosing upon the 
loan does not apply to HUD. The commenter also suggested that HUD state 
that any such state law is preempted by HUD HECM regulations and 
program guidelines.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future rulemaking and policy guidance. However, 
FHA reminds mortgagees that the model loan document provided must be 
adapted by the lenders to local and state requirements that preserve 
first lien status.
3. Program Complex/Disclosures
    Comment: The HECM program is incredibly complex and could be 
improved by the use of plain language educational materials and 
software.
    HUD Response: HUD agrees that the program is complex. The HECM 
program is unique and was designed to reduce the effects of economic 
hardships that senior homeowners may experience. Over the years, 
changing

[[Page 7099]]

borrower and industry practices have required HUD to respond with 
appropriate policymaking to manage risk to the MMIF and support 
sustainability of the program. HUD supports consumer education and 
awareness through its HECM counseling requirement. HUD understands the 
need to provide plain language educational materials and appreciates 
suggested content. However, prospective borrowers must understand the 
terms and conditions of the mortgage as defined in the legal documents.
    Comment: The program changes are overly restrictive and protective 
of senior borrowers. The commenter stated that seniors are not 
necessarily uneducated and have had many years of experience. The 
commenter also stated that the current disclosure and guideline 
requirements are sufficient.
    HUD Response: HUD's mission is to serve underserved markets, which 
must be balanced with HUD's inherent, as well as, statutory obligation 
under the NHA to protect the MMIF. Knowing that many seniors are 
educated and resourceful, HUD must take every precaution to ensure 
seniors who need a reverse mortgage are equipped with the information 
necessary to make an informed decision of whether the HECM is a 
sustainable solution that enhances their financial position.
    Comment: The changes in this rule are less about protecting seniors 
and more about controlling the marketplace, lenders, and seniors, and 
that the same policies do not apply to forward mortgages.
    HUD Response: Despite the varying opinions concerning the recent 
changes to the HECM program, HUD's mission is to serve underserved 
markets, which must be balanced with HUD's inherent, as well as 
statutory, obligation under the NHA to protect the MMIF. Governance of 
the marketplace is beyond HUD's purview and the reverse mortgage 
industry must examine its practices to determine what is acceptable and 
beneficial for the survival of this program. The requirements of the 
HECM program are unique and it is important to note that the program 
has a very different risk profile than Forward Mortgages. Where 
feasible, HUD strives to adopt forward mortgage requirements that can 
be applied to the HECM Program.
    Comment: HUD should expand the disclosure requirement to allow for 
new and improved methods with which to inform potential HECM borrowers. 
One commenter proposed that HUD host a technology roundtable to discuss 
and evaluate a new consumer-friendly marketing campaign. Another 
commenter stated that HUD should elaborate on the disclosure 
requirement and further define the extent to which lenders must 
disclose all products, features, and options that HUD will insure. 
Commenters stated that the description of these products should include 
overall access to equity, costs, and the amount of funds available 
during the first 12 months.
    HUD Response: Mortgagees are required to explain in clear, 
consistent language all requirements and features of the HECM program. 
Mortgagees have the flexibility to identify and use methods that will 
ensure borrowers are properly informed of all features and products 
that are available.
    Comment: HUD should discourage product-steering by lenders.
    HUD Response: HUD believes its requirement that mortgagees must 
disclose all products, whether they are offered by the mortgagee or 
not, will discourage product-steering.
    Comment: HUD should promulgate suitability rules to ensure that 
lenders only recommend reverse mortgage loans that are suitable for 
borrowers' needs.
    HUD Response: Housing counseling and the Financial Assessment are 
prudent practices for evaluating whether the HECM is a sustainable 
solution. Both practices promote the participation of homeowners who 
are well-informed and financially well-positioned for a HECM loan.
    Comment: Disclosing too many options may be confusing to borrowers.
    HUD Response: HUD disagrees and believes that the full disclosure 
of all products is necessary to insure borrowers are aware of all 
options and to avoid potential steering.
4. Interest Rate Lock-In
    Comment: HUD should eliminate the credit line growth feature of 
adjustable-rate HECM loans. The commenter stated that the growth is 
determined by interest rate, lender margin, and mortgage insurance 
premiums, and borrowers have access to increasing amounts of funds even 
if home prices fall, which leads to greater risk for the MMIF.
    HUD Response: The HECM program was designed to allow the line 
growth feature to insure borrowers had access to equity. Other program 
features balance risk such as principal limit factors, MIP, controls 
over large cash draws upfront, and no future draws on fixed rate 
product.
    Comment: HUD should clarify that rate locks are optional.
    HUD Response: The rate lock is optional. HUD notes that the 
proposed rule, in its definition ``expected average mortgage interest 
rate,'' indicates that mortgagees, with the agreement of the borrower, 
may lock in the expected average mortgage interest rate and the 
mortgagee's margin prior to the date of loan closing or on the date of 
loan closing. HUD retains this option in this final rule.
    Comment: HUD should maintain the current policy regarding the 
timing of when the mortgagee may lock in the rate that determines the 
principal limit, which is the application date.
    HUD Response: HUD appreciates the feedback but believes the 
borrower should have the flexibility of setting the expected average 
mortgage interest rate and mortgagee's margin, if applicable, any time 
prior to closing or at closing.
    Comment: HUD should continue to permit the ``float down'' option 
whereby the principal limit may be recalculated at closing if the 
expected interest rate has declined and is lower than at application 
date.
    HUD Response: HUD will continue to permit the ``float down'' 
option, per ML 2006-22.
    Comment: HUD should allow the borrower to keep the rate lock they 
have chosen or the expected rate based on the index in effect at 
closing, whichever is most beneficial to the borrower.
    HUD Response: HUD will continue to permit the ``float down'' 
option, per ML 2006-22.
    Comment: HUD should elaborate on the interest rate lock-in 
timeframes and further clarify the terms used.
    HUD Response: The guidance found in ML 2006-22 provides useful 
background for interest rate lock-in timeframes.
5. Shared Premium/Shared Appreciation
    Comment: Shared appreciation should not be utilized in the HECM 
market. One commenter stated that the terms of a shared appreciation 
reverse mortgage are heavily weighted towards benefiting the mortgagee 
and not the borrower. Another commenter stated that there should be a 
prohibition against shared appreciation schemes, due to the harm done 
to the borrower.
    HUD Response: The National Housing Act provides for a shared 
appreciation option, and HUD will retain the shared appreciation option 
in the regulations to allow for future potential product design.
    Comment: The shared appreciation option has not been utilized, but 
may be useful in the future. One commenter stated that shared 
appreciation could be an example of a product that seems unnecessary 
but eventually becomes popular due to changing market

[[Page 7100]]

conditions. The commenter stated that ``low balance'' HECM options or 
the HECM Saver product could be other examples of such products. 
Commenters stated that these items could allow for important product 
design and innovation in the future. Some commenters suggested that 
this could give an opportunity for further review and study on how such 
features may be used to design new products and features. Some 
commenters also stated that the product could be used in the future to 
reduce risk to the MMIF. One commenter stated that these options have 
the potential for creating competitive loan products in the 
marketplace.
    HUD Response: HUD will retain the shared appreciation option in the 
regulations for future potential product design.
    Comment: More information is needed on the shared premium and 
shared appreciation options. The commenter also stated that the 2009 
PLF tables do not include the shared premium basis points as in 
previous versions, and that there is little explanation of how the 
shared premium and shared appreciation options are administered or 
audited by HUD, or whether these loans are eligible for securitization.
    HUD Response: We do not currently administer these options.
6. Deferral of Due & Payable Status
    Comment: Eligible Non-Borrowing Spouses should continue to enjoy 
the benefits of any monthly distributions or the availability of any 
line of credit funds once the last borrower dies. The commenter stated 
that the eligible NBS should still have access to these benefits since 
the amount available to the borrower is determined by the age of the 
NBS.
    HUD Response: The NBS is not a borrower and as such is not a party 
to the Loan Agreement. The Loan Agreement is a contract solely between 
the borrower and the mortgagee, not the NBS. Upon the last surviving 
borrower's death, the terms of the Loan Agreement provide that no 
further funds can be made available to a person who is not a party to 
the Agreement.
    Comment: Ninety days is insufficient for a grieving spouse to take 
practical measures to secure her or his right to the property. One 
commenter stated that the probate process alone can take longer than 
ninety days for reasons outside of the surviving spouse's control. 
Commenters suggested that the time frame should be extended to 180 
days. Another commenter suggested 120 days would be sufficient. One 
commenter also suggested that HUD may require that a probate action be 
opened within a reasonable time after the borrower's death.
    HUD Response: HUD appreciates the recommendation. HUD would like to 
remind the public that a NBS does not have to obtain legal title in 
order to be eligible for a deferral period. A NBS must establish a 
legal right to remain in the property, which may be accomplished 
through means other than obtaining legal title to the property. While 
HUD understands and appreciates that concerns raised about the time 
required to obtain legal title, as it is not the requirement and the 
NBS has other means in which to establish a legal right to remain, HUD 
will not adopt this recommendation at this time.
    Comment: Thirty days after a deferral period ceases is not a 
sufficient time frame to cure a default. The commenter stated that most 
spouses will need more time to obtain documentation or evidence from a 
taxing authority to provide timely payment and to successfully navigate 
the servicer's protocols.
    HUD Response: Non-borrowing spouses are provided the same 
timeframes and opportunity during a deferral period to cure a default 
as a borrower is provided during his or her lifetime and HUD believes 
this timeframe to be sufficient. Additionally, borrowers and non-
borrowing spouses can cure a default up until the foreclosure sale 
occurs.
    Comment: HUD should expand the definition of events that are able 
to trigger the deferral period under Sec.  206.55. The commenter 
recommended that the definition should be expanded to cover all events 
that are outside the control of the borrower, such as significant 
health or life events. Another commenter stated that due and payable 
status should also be deferred when a borrower is no longer residing in 
the home serving as collateral property but there is an Eligible NBS 
present and occupying the home.
    HUD Response: HUD understands the issue raised by the commenter but 
is unable to adopt this suggestion to expand events that would be 
eligible for a deferral period. The other events that would give rise 
to a due and payable status result from a borrower failing to comply 
with his or her obligations of the mortgage. As such, HUD cannot 
provide for a deferral where there is a breach of a contractual duty. 
Additionally, by providing a deferral period for a NBS where the 
borrowing spouse has died, the requirements of this provision in the 
NHA are satisfied.
7. Initial Disbursement Limit/Borrower's Advance
    Comment: HUD should allow any funds disbursed as a monthly tenure 
payment to the borrower to exceed the Initial Disbursement Limit (IDL) 
during the first 12 months. One commenter stated that applying the 
Initial Disbursement Limit to monthly tenure payments causes confusion 
by requiring the payments to be reduced so that they remain less than 
the IDL during the first 12 months, and then recast at the end of the 
first year to recapture the amount reduced during that time period.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future rulemaking or policy guidance.
    Comment: HUD should clarify what constitutes fees and charges for 
real estate purchase contracts, warranties, inspections, surveys, and 
engineer certifications.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
    Comment: HUD should only require the borrower to report whether the 
amount drawn during the First 12-Month Disbursement Period will exceed 
the 60 percent limit. Commenters stated that reporting the exact 
percentage would be confusing and unnecessary.
    HUD Response: HUD has amended the language in this final rule to 
remove the word ``exact'' from Sec.  206.25(a) to avoid any confusion. 
HUD will continue to require the borrower to indicate what percentage, 
up to 10% of the principal limit, she or he chooses to receive during 
the first year. The additional amount that the borrower plans to use 
during the First 12-Month Disbursement Period is needed for the initial 
MIP calculations.
    Comment: HUD should not further amend the limits on the initial 
disbursements during the first 12 months.
    HUD Response: HUD appreciates the concern raised. However, the 
flexibility in the regulation will enable HUD to react to market 
conditions, for the viability of the HECM program, and to protect the 
fiscal soundness of the MMIF. The flexibility in place at Sec.  
206.25(a) allows the Commissioner to raise or lower the maximum initial 
draw but cannot go lower than 50% and the additional percentage cannot 
be less than 10%.
    Comment: HUD should be careful not to set limits at a point in 
which it eliminates access to the program for many potential borrowers. 
The commenter referenced examples of

[[Page 7101]]

seniors who were convinced to withdraw the maximum amount at closing 
and immediately invest in financial products.
    HUD Response: The flexibility in place at Sec.  206.25(a) only 
allows the Commissioner to raise or lower the maximum initial draw but 
cannot go lower than 50% and the additional percentage cannot be less 
than 10%. This limitation was specifically designed to reduce initial 
draws and is presently set at the amount of Mandatory Obligations or 
60% plus an additional 10% of the Principal Limit. In addition, the MIP 
Structure also provides a lower upfront rate of 0.50% for draws of 60% 
or less and 2.50% for draws in excess of 60%. Mortgagee Letter 2014-10 
provides specific guidance regarding the borrower's right to determine 
the amount of the initial disbursement and requires mortgagees to 
inform them of these rights.
8. Allowable Charges and Fees
    Comment: HUD should clarify in the preamble to the final rule that 
the origination fee limit does not include and does not apply to third 
party closing costs or fees. Another commenter stated that including 
more fees without increasing the allowable origination fee is reducing 
funds for a company to operate even though the costs of operating a 
business and the cost of living is increasing.
    HUD Response: HUD is not seeking to include additional borrower 
charges in the loan origination fee. The amendments to Sec.  206.31 in 
this final rule clarify the loan origination fee includes expenses 
incurred in originating, processing, and closing the HECM. Third party 
closing costs or fees such as an appraisal fee, MIP, transfer fees, 
etc., are the responsibility of the borrower. The practice of the 
lender using the loan origination fee to cover the full amount or a 
portion of those fees and charges to reduce the borrower's out-of-
pocket expenses may continue.
    Comment: HUD should clarify the ability of mortgagees to charge 
other fees, which should also be included as allowable Mandatory 
Obligations. Commenters stated the following should fall under this 
category: Tax history verifications, credit report fees, 4506T tax 
verifications, and other verifications such as verification of 
employment, income, bank statements, and assets. Another commenter 
requested that HUD allow mortgagees to incur and pass along to HECM 
borrowers a document delivery or technology fee that allows for the 
delivery of loan documents and disclosures as well as any required 
document review fee such as those mandated by state law. Another 
commenter requested additional clarification on the allowance of 
closing charges and fees.
    HUD Response: Section 206.25 was amended by the proposed rule to 
include credit report fees as mandatory obligations. The final rule 
retains this language. HUD issued ML 2016-10 to permit a Third Party 
Property Tax Verification Fee to verify the borrower's property tax 
payment history and the annual amount of property taxes due for a 
specific property. HUD will use its administrative authority to clarify 
its policy concerning the handling of reasonable and customary fees and 
charges that are required to do business as an FHA-approved lender.
    Comment: HUD should consider adding regulations to limit broker 
compensation, particularly as to adjustable rate line of credit reverse 
mortgages where the Truth in Lending Act regulations do not apply. The 
commenter provided an example of a mortgage broker receiving a yield 
spread premium of 15 percent of the loan amount in exchange for 
acceptance of a higher-than-market interest rate, without the 
borrower's understanding of the situation.
    HUD Response: HUD does not have regulatory authority to issue these 
requirements. Loan originator compensation is regulated by the CFPB 
under the Truth in Lending Act and its implementing Regulation Z (12 
CFR part 1026). The provisions apply to closed-end consumer credit 
transactions secured by a dwelling, including reverse mortgages that 
are not home equity lines of credit under 12 CFR 1026.40. See 12 CFR 
1026.36.
    Comment: HUD should consider addressing the allowance of Appraisal 
Management Company fees and document preparation fees as part of the 
allowable loan origination fees and charges.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
    Comment: A second HECM should be allowed in the case of a divorce. 
Commenters stated that the divorced co-borrower must show a divorce 
decree and/or a copy of the deed indicating the former spouse is 
responsible for the prior marital home.
    HUD Response: HUD is adopting in this final rule the proposed rule 
change that allows for a new HECM when the existing HECM is satisfied 
prior to or at the closing of the new HECM, or the borrower provides 
legal documentation, acceptable to the Commissioner, evidencing release 
of financial obligation to satisfy the existing HECM, which may include 
a divorce.
    Comment: A second HECM should be allowed when the individual is no 
longer on title to the property with the existing HECM and a new 
primary residence has been established. The commenter stated that the 
proposed rule solved for married individuals only and not other 
situations such as domestic partners or relatives.
    HUD Response: HUD is adopting in this final rule the proposed rule 
change that allows for a new HECM when the existing HECM is satisfied 
prior to or at the closing of the new HECM, or the borrower provides 
legal documentation, acceptable to the Commissioner, evidencing release 
of financial obligation to satisfy the existing HECM. This requirement 
is applicable to all borrowers and not just married individuals.
10. Title of Property Which Is Security for the HECM
    Comment: HUD should allow the NBS to go on title without having to 
refinance or qualify for another loan. The commenter stated that there 
are many examples of spouses not qualifying under the new regulations 
and as a result, they have to stay off title, which causes other legal 
issues not pertaining to the mortgage on the property.
    HUD Response: The new definitions for ``mortgagor'' and 
``borrower'' in Sec.  206.3 of this final rule address the commenter's 
concern.
    Comment: Allowing non-borrowing spouses to remain on the title 
could open the door to claims by other non-borrowing owners. Commenters 
expressed concerns over whether other co-owners could demand the sale 
of the property or demand to receive their share of the home title. One 
commenter asked if HUD could limit the ability to remain on title to 
eligible NBSs only or perhaps only to owners who also reside in the 
home. Another commenter suggested that HUD should limit the ability of 
a non-borrower to remain on title to spouses, or alternatively, grant a 
life estate right to the borrower so that the borrower could keep the 
home.
    HUD Response: While HUD understands the potential issues that could 
arise from shared legal ownership of a property, HUD has determined it 
is not in a place to dictate to a homeowner or homeowners how to best 
structure legal ownership to a property. Further, even should HUD be 
inclined to limit those individuals on title at origination, there is 
nothing that would prevent the borrower from subsequently adding 
additional individuals to title. These

[[Page 7102]]

individuals whether added before or after origination would have 
certain legal rights as would any other legal owner of a property. 
Ultimately, how a homeowner or homeowners elect to hold title is within 
their control.
    Comment: HUD should clarify when a certification must be signed by 
all non-borrowing spouses and non-borrowing owners to consent to the 
borrower obtaining a HECM. The commenter recommended that the 
certification be required at the time of closing or funding.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance.
    Comment: HUD should clarify that HECM servicers may encourage 
borrowers on currently outstanding HECMs to add NBSs and heirs to the 
title when preparing for end-of-life arrangements.
    HUD Response: HUD has determined it is not appropriate to dictate 
to a homeowner or homeowners how to best structure legal ownership to a 
property.
12. Seasoning Requirements for Existing Non-HECM Liens
    Comment: An unintended consequence of the rule is that it disallows 
a HECM even when the non-HECM lien would not result in exceeding the 60 
percent of the initial disbursement limit. Some commenters suggested 
that the policy should be changed so that liens seasoned for less than 
one year can be paid off at closing if the PLU is 60 percent or less.
    HUD Response: HUD has considered this proposal and is incorporating 
a change to the final rule for HELOCs. The final rule allows borrowers 
to pay off unseasoned HELOCs using their own funds, HECM funds, or a 
combination of HECM funds and non-HECM funds. The final rule allows the 
use of HECM funds to pay off unseasoned HELOCs if the IDL or Borrower's 
Advance remains at or under the percentage set by the Commissioner in 
Sec.  206.25(a).
    Comment: The seasoning requirement should be eliminated altogether. 
The commenter stated that many seniors take out a home equity line of 
credit without realizing a reverse mortgage would be a better option. 
The commenter explained that if an emergency makes it difficult for 
this senior to make monthly payments on the HELOC, it would put the 
borrower in an even worse financial situation if the borrower could not 
apply for a HECM for twelve months. Another commenter stated that this 
requirement only hurts the seniors who have to wait up to twelve months 
to get their HECM loan. One commenter asked what is wrong with allowing 
debts to be paid off at closing. Some commenters stated that it is not 
reasonable to expect a homeowner to possibly know that an ordinary 
consumer transaction such as opening a home equity line of credit will 
close the door to a HECM. One commenter suggested two alternatives: (1) 
Reduce the seasoning requirement to draws made in the last 60 to 90 
days; or (2) make the effective date the date of closing rather than 
the date of application.
    HUD Response: This final rule retains an amended seasoning 
requirement that imposes the 12-month requirement beginning at the date 
of the HECM closing rather than the HECM loan application, and at 
closing, allows the pay-off of HELOCs that do not meet seasoning 
requirements from borrower funds, HECM funds, or a combination of a 
borrower's own funds and HECM funds if the IDL or Borrower's Advance 
remains under the percentage set by the Commissioner in Sec.  
206.25(a).
    Comment: The seasoning requirement should be rewritten to exclude 
construction and rehab loans, as long as the borrower can show that all 
loan proceeds were paid to contractors. One commenter stated that in 
many cases, these loans are required to bring the property into 
compliance for a HECM.
    HUD Response: Existing policy does not consider funds paid to third 
parties for construction and rehab to be ``cash to the borrower''. As 
long as documentation is provided to show that loan proceeds in excess 
of $500 were paid to a contractor, the seasoning requirement in Sec.  
206.36 is considered satisfied.
    Comment: HUD should clarify the current interpretation by wholesale 
lenders concerning such loan proceeds passing through the bank account 
of the borrower.
    HUD Response: If documentation is provided to show that the loan 
proceeds in excess of $500 were paid to a third party, funds that were 
received by the borrower and paid through the borrower's bank account 
satisfies the seasoning requirement in Sec.  206.36.
    Comment: Rather than allowing the Commissioner to impose additional 
seasoning requirements through notice and comment, the seasoning 
requirements under Mortgagee Letter 2014-21 should remain the same and 
be incorporated into the regulations.
    HUD Response: As stated in the proposed rule and retained in the 
final rule in Sec.  206.36, the seasoning requirements that may be 
established by the Commissioner will not prohibit the payoff of non-
HECM liens if the liens have been in place for longer than 12 months or 
have resulted in cash to the borrower in an amount of $500 or less.
    Comment: HUD should allow for greater flexibility for paying off 
existing mortgages by imposing a 1.75 percent upfront MIP cap rather 
than a 2.5 percent cap or by increasing the percentage allowable from 
42 percent to 52 percent with a 60 percent cap on distributions.
    HUD Response: HUD will take these comments under consideration when 
implementing future policy guidance.
11. Financial Assessment
    Comment: The introduction of non-property related expenses is 
outside the scope of the financial assessment. One commenter stated 
that a senior will pay the property taxes when given a choice between 
paying the property taxes or paying off a credit card.
    HUD Response: It is critical to evaluate the willingness (credit 
history) and financial capacity of the borrower in order to determine 
whether the HECM loan is a sustainable solution for the borrower in 
order to reduce defaults and manage risk to the MMIF.
    Comment: Proof of on-time property taxes and insurance payments 
should not be required. The commenter stated that those who have a 
history of less-than-stellar credit, even if they pass the Financial 
Assessment, should be considered for a LESA.
    HUD Response: Current regulations in Sec.  206.205 require that if 
the borrower does not meet the Financial Assessment requirements that a 
Fully- or Partially-Funded LESA is required. And all HECM borrowers 
have the option to voluntarily request a LESA for payment of taxes and 
insurance or voluntarily request the mortgagee to pay taxes and 
insurance out of the HECM proceeds if a LESA is not required.
    Comment: Willingness is the primary cause of tax and insurance 
defaults.
    HUD Response: HUD rejects this comment and recognizes the majority 
of its borrowers demonstrate a willingness to pay their property 
charges in a timely manner. HUD's guidance, as provided in the revised 
HECM Financial Assessment and Property Charge Guide attached to 
Mortgagee Letter 2016-10, includes instructions for reviewing and 
evaluating the applicant's credit history, including tax and insurance 
payment history, and extenuating circumstances of prospective borrowers 
to determine whether the HECM loan is a sustainable solution and 
whether a LESA must be required.
    Comment: Borrowers with a certain minimum credit score should be 
exempt from the income assessment.

[[Page 7103]]

    HUD Response: HUD is receptive to adding FICO Scores to the 
Financial Assessment process; however, at this time, sufficient 
performance data is not available to support the implementation of FICO 
score criteria for HECMs. HUD is now collecting FICO information on 
HECM borrowers and will, over time, evaluate how that may be 
incorporated in the Financial Assessment process.
    Comment: Additional compensating factors should be taken into 
consideration at the discretion of the direct endorsement underwriter, 
just as in traditional mortgages.
    HUD Response: HUD does not allow additional compensating factors to 
be taken into consideration of the direct endorsement underwriter on 
forward mortgages and does not intend to adopt this recommendation for 
the HECM program.
    Comment: HUD should audit recent financial assessments to determine 
how much documentation is unnecessary. One commenter stated that many 
guideline requirements are beyond risk management and ambiguous, and 
suggested that HUD could establish quarterly meetings with industry 
underwriters and sales leaders for a path toward closing good loans 
with limited documentation.
    HUD Response: HUD continues to closely monitor performance of the 
HECM portfolio and will update guidance on the Financial Assessment as 
needed.
    Comment: HUD should wait to implement further changes to the 
financial assessment, since the impact of the changes that took effect 
in April 2015 are not yet fully understood.
    HUD Response: The proposed rule does not include any changes to the 
Financial Assessment requirements. HUD continues to closely monitor the 
performance of the HECM portfolio and will update guidance on the 
Financial Assessment as needed.
    Comment: HUD should allow seniors to pay off revolving debt at 
closing from proceeds in order to qualify under the financial 
assessment rules, particularly since this can be done with forward 
mortgages.
    HUD Response: In this final rule, HUD has included use of HECM 
proceeds to be used to pay-off unsecured debt, as defined by the 
Commissioner through Federal Register notice, as a mandatory 
obligation.
    Comment: The financial assessment guidelines are overly restricting 
access to the HECM program. One commenter stated that a LESA eliminates 
some concern regarding residual income, since a person with a full LESA 
is covered with regards to tax and insurance. Another commenter stated 
that the Financial Assessment guidelines apply HUD practices designed 
for younger, employment-aged consumers and should be more closely 
correlated to the actual situation of aging homeowners over time. The 
commenter suggested that the rule should recognize the evolving nature 
of the Financial Assessment protocol and require further review to 
expand the population of low-risk senior homeowners who are eligible to 
participate in the HECM program. Another commenter stated that even 
borrowers with excellent credit are forced to go through many 
underwriting conditions that would not be required for an FHA forward 
mortgage. Another commenter stated that the process of obtaining a HECM 
has become unnecessarily documentation-intensive and rigid with respect 
to the specific documentation format.
    HUD Response: As stated in Sec.  206.37(b)(1), the financial 
capacity of the borrower must be evaluated to determine whether the 
HECM is a sustainable solution for the borrower. HUD has always 
required full documentation for borrowers on all its mortgage programs, 
except for streamlined refinances. Providing specific documentation 
requirements ensures consistency and these requirements may vary from 
forward mortgages because of the different profile of the programs and 
the borrowers. However, a significant amount of the required financial 
assessment documentation reflects standard documentation criteria for 
real estate secured loans. The need to require additional cash flow and 
projected financial documentation on HECMs reflects the unique 
structure of this type of mortgage and borrower. HUD appreciates the 
recommendation and will take it under consideration for future policy 
guidance.
    Comment: The requirement to use the prior year's tax bill amount 
multiplied by 1.04 or an amount set by the Commissioner through notice 
is unnecessary as the LESA formula already has a 1.2 times multiplier 
to the annual taxes and insurance.
    HUD Response: When the mortgagee requires the payment of taxes and 
flood and hazard insurance at closing, or the borrower requests that 
their property charges are paid at closing, and a new tax bill has not 
been issued or is unavailable, the 1.04 multiplier is used to calculate 
the projected amount of taxes and insurance to be disbursed during the 
first 12 months. The 1.2 multiplier is used for the LESA and takes into 
account expected increases in property taxes and hazard and flood 
insurance over the life expectancy of the youngest mortgagor.
    Comment: HUD should clarify that Financial Assessment underwriting 
should not include utility payments in the expenses of HECM borrowers.
    HUD Response: Utility payments, using the residual income formula 
in the Financial Assessment Guide, is a requirement and HUD does not 
intend to change this policy at this time.
13. Disclosure, Verification, & Certifications
    Comment: HUD should clarify, in guidance if not in the regulations, 
that borrowers will not be required to grant the agent specified power 
of attorney with the ability to access HECM funds. Some commenters 
stated that some borrowers will not know someone trustworthy enough for 
that purpose. Another commenter suggested that HUD should restrict this 
person's role to that of a ``trusted contact'' person. One commenter 
stated that HUD should clarify that the designation of an additional 
contact is optional on the part of HECM borrowers.
    HUD Response: It was not HUD's intent to have all borrowers 
designate an agent with the authority to make financial decisions or 
withdraw funds. It is HUD's intent that HECM borrowers be requested to 
designate a point of contact that mortgagees would be required to use 
in the event a problem arises or in the event of the borrower's death 
or incapacitation. Accordingly, HUD has revised Sec.  206.40(c) to 
clarify that the contact person is not acting as an agent and that the 
mortgagee will be required to request the designation, but that the 
borrower is not required to designate such a contact person.
    Comment: HUD should require borrowers to provide a trusted contact 
at the time of loan origination, who would be notified in the event HUD 
could not establish contact with the borrower. The commenter stated 
that a failure to respond by the borrower would result in a 
notification sent to the trusted contact.
    HUD Response: HUD has revised Sec.  206.40(c) to clarify that the 
contact person will not be an ``agent'' and that the mortgagee will 
only request that the borrower designate such a contact person that 
mortgagees would be required to use if they cannot reach the borrower 
directly in the event a problem arises or in the event of the 
borrower's death or incapacitation.
    Comment: The servicer should verify the agent's information 
annually when the borrower's certification of residency is obtained, to 
ensure that the information is up-to-date.

[[Page 7104]]

    HUD Response: In Sec.  206.211(a), the proposed rule includes the 
borrower designation of alternate individual as part of the annual 
certification.
    Comment: The requirement to collect an alternative point of contact 
for notifications from the mortgagee should be required at the time of 
loan origination and updated annually.
    HUD Response: HUD has revised Sec.  206.40(c) to clarify the 
mortgagee shall request but not require the borrower to designate an 
alternative individual at origination. In section 206.211(a), the 
proposed rule includes the borrower designation of alternate individual 
as part of the annual certification.
    Comment: HUD should make certain revisions to the Eligible Non-
Borrowing Spouse Certification. The commenter stated that the 
certification should affirm that the NBS does not have, and is not 
aware of, any claims against the mortgagee. The commenter also stated 
that the certification should affirm that the NBS agrees to execute 
documentation reasonably requested in order to toll the running of any 
applicable statute of limitation after the borrower passes away but the 
NBS remains in the property during a deferral period. The commenter 
finally stated that similar changes should be made to the 
certifications issued under FHA Info, prior to the issuance of 
Mortgagee Letter 2016-05 for HECMs subject to the Mortgagee Letter and 
the MOE Assignment election.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance. Additionally, FHA reminds 
mortgagees that the model loan document provided must be adapted by the 
lenders to local and state requirements that preserve first lien 
status.
    Comment: HUD should allow mortgagees to amend the HECM loan 
documents to revise the recitals in the security instrument to make 
clear that the non-borrowing spouse is not a borrower. The commenter 
also stated that the repair rider and other riders should be indicated 
as secured items in the initial recitals of the HECM mortgages.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance. Additionally, FHA reminds 
mortgagees that the model loan document provided must be adapted by the 
lenders to local and state requirements that preserve first lien 
status.
    Comment: HUD should add a seventh Qualifying Attribute that the 
non-borrowing spouse must agree to execute certain documentation in 
order to toll the running of any applicable statute of limitation 
during a deferral period.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through future rulemaking or policy 
guidance. Additionally, FHA reminds mortgagees that the model loan 
document provided must be adapted by the lenders to local and state 
requirements that preserve first lien status.
    Comment: HUD should consider defining the due and payable date as 
the later of when the Eligible NBS no longer meets all of the 
Qualifying Attributes or when the borrower dies, in those cases where 
there is an Eligible NBS present. The commenter stated that this 
language could be used by mortgagees in states that do not allow the 
tolling of a statute of limitations.
    HUD Response: HUD will take these comments under consideration for 
future rulemaking. Additionally, HUD reminds mortgagees that the model 
loan document provided must be adapted to local and state requirements 
that preserve first lien status.
14. Monetary Investment for HECM for Purchase
    Comment: Like most other loan products, there should only be a 
restriction to payment of those items that are reasonable and 
customary. Many commenters stated that seller contribution rules for 
the HECM for Purchase program should be the same as those in the FHA 
forward market. Some commenters stated that further restrictions result 
in the senior borrowers having more of a cost burden than similar 
borrowers using FHA's forward mortgage program as well as conventional 
and VA mortgage borrowers. One commenter stated that HECM buyers are 
currently unnecessarily burdened with paying for transfer tax, owner's 
title insurance, and some escrow fees, whereas forward mortgage buyers 
have these expenses paid by a third party. Another commenter stated 
that these restrictions cause seniors to pay more than what they would 
if they chose a forward mortgage, especially with new construction. One 
commenter stated that not allowing for customary transaction charges 
normally paid by the seller can create confusing market irregularities 
when a HECM is used to purchase a new home. The commenter also stated 
that some HECM rules are in direct conflict with state law.
    HUD Response: In addition to allowing seller payment of fees 
required by State or Local tax laws and a Home Warranty Policy, the 
final rule has been revised to allow fees customarily paid by a seller 
in the subject property locality to be a permissible interested party 
contribution. The final rule also retains the proposed rule language to 
grant flexibility to the Commissioner to consider additional 
permissible interested party contributions through notice for comment, 
and will take these comments under consideration in possibly issuing 
such a future notice.
    Comment: The amount of closing costs that other parties can pay 
should be expanded to further support the use of the HECM for Purchase 
program. Some commenters stated that it does not make sense to prevent 
other parties from helping to cover other borrower costs, when these 
practices are perfectly acceptable for all other types of mortgage 
transactions. Some commenters stated that HUD should allow lenders 
credit for buyer closing costs up to 3 percent. Other commenters 
suggested that the rule be changed to allow the seller to pay 3 to 6 
percent of closing costs, similar to the forward side. Another 
commenter stated that the lender should be able to pay closing costs 
without limitation, other than the counseling fee. Commenters stated 
that the practice of prohibiting sellers from paying customary fees or 
closing costs is unfair to reverse mortgage borrowers. Another 
commenter stated that if HUD allows the same closing costs to be paid 
by the seller as are allowed in a traditional FHA loan, HECM for 
Purchase loans will skyrocket in popularity and greatly benefit the 
senior real estate market. One commenter stated that even a 2 percent 
allowable concession would put the consumer into a better cost 
structure. Another commenter recommended that HUD exclude lender 
closing cost credits, adjustments, and discounts from the definition of 
``interested party'' contributions.
    HUD Response: In addition to allowing seller payment of fees 
required by State or Local tax laws and Home Warranty Policy, the final 
rule has been revised to allow fees customarily paid by a seller in the 
subject property locality to be a permissible interested party 
contribution. The final rule also retains the proposed rule language to 
grant flexibility to the Commissioner to consider additional 
permissible interested party contributions through notice for comment, 
and will take these comments under consideration in possibly issuing 
such a future notice.
    Comment: HUD should specify what it means by ``typical'' and 
``required by state law.''
    HUD Response: HUD appreciates the recommendation and will take it 
under

[[Page 7105]]

consideration for future policy guidance.
    Comment: HUD should allow the seller to pay for the buyer's closing 
costs and thereby increase the popularity of HECM for Purchase loans. 
The commenter stated that many borrowers would use a HECM for Purchase 
loan that they do not intend to live in for the long-term, which would 
be a great loan for the MMIF.
    HUD Response: In addition to the allowing seller payment of fees 
required by State or Local tax laws and Home Warranty Policy, the final 
rule was revised to allow fees and charges customarily paid by a seller 
in the subject property locality to be included as a permissible 
interested party contribution. HUD will continue to explore responsible 
lending practices and protections for the benefit for this protected 
class.
    Comment: Continuing the ban on closing costs is a good idea for new 
construction but not for resales.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
    Comment: HUD should find a way to relieve all closing costs if the 
borrower agrees to dedicate at least part of the funds toward life and/
or annuity products which have prematurity distribution clauses.
    HUD Response: Section 255(o) of the National Housing Act prohibits 
prospective borrowers from being required to purchase additional 
products, such as annuities as a requirement or condition of HECM 
eligibility. Currently, closing costs associated with a HECM are 
limited to certain items such as, but not limited to, MIP, mortgagee's 
title insurance, hazard and/or flood insurance, loan origination fees, 
the discharge of all liens against the property which serves as 
collateral for the HECM, and other reasonable and customary amounts, 
but not more than the amount actually paid by the mortgagee.
    Comment: HUD should clarify that lender-paid broker fees that are 
disclosed as a ``credit'' on the HUD-1 for RESPA purposes are not 
lender credits for purposes of the HECM for Purchase program. The 
commenter stated HUD should clarify that although lender-paid mortgage 
broker fees are reflected as a ``credit'' on line 802 of the HUD-1, 
such fees paid by lenders to mortgage brokers are not a credit for 
purposes of the HECM for Purchase program.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
15. Eligible Properties
    Comment: HUD should require the Certificate of Occupancy as a 
closing condition rather than for purposes of an application. Another 
commenter stated that HUD should remove the requirement for a 
certificate of occupancy to be issued prior to application. The 
commenter stated that the rule as proposed would restrict consumer 
access to the HECM for Purchase program. One commenter stated that the 
builder may not be able to afford to complete the home, and then have 
the buyer apply for the HECM and wait another 3-6 weeks to close.
    HUD Response: The timing for taking the initial loan application 
will be addressed in future policy guidance rather than this final 
rule.
    Comment: Requiring the certificate of occupancy to be completed on 
new construction before the HECM can be originated is very burdensome 
for seniors. Some commenters suggested that the HECM regulations should 
follow standard FHA rules for forward mortgages wherein the case number 
and application may ensue upon 90 percent of property completion with 
the Certificate of Occupancy obtained prior to closing. The commenter, 
and others, stated that this would enable seniors to compete for new 
construction homes in 55-and-over communities and energy efficient 
properties. Another commenter suggested that HUD should allow for an 
order of a case number and appraisal any time after the home is 50 
percent complete. Another commenter stated that newly-built senior 
housing that is more accommodative to aging independently is a major 
national demographic trend.
    HUD Response: HUD appreciates the comments concerning the timing 
for collecting habitability documentation and will take it under 
consideration for future policy guidance.
    Comment: As an alternative, HUD should allow for a ``temporary'' or 
``conditional'' Certificate of Occupancy to be accepted at application. 
The commenter suggested that the conditional or temporary issues to be 
addressed would be sod, landscaping, or perhaps an unfinished driveway.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
    Comment: HUD should clarify that the leasehold period is based on 
the life of the borrower rather than the life of the mortgagor.
    HUD Response: The NHA requires that the leasehold period must be 
under a lease for not less than 99 years that is renewable, or under a 
lease that has a term that ends no earlier than the minimum number of 
years, as specified by the Secretary, beyond the actuarial life 
expectancy of the mortgagor or comortgagor, whichever is the later 
date. The leasehold period cannot be based on the life of the borrower 
as the NHA requires that it be based on the life of the mortgagor.
    Comment: The proposal to add a new flood insurance mandate ``to the 
extent required by the Commissioner'' is vague and unnecessary. One 
commenter stated that the proposed rule does not contain any 
description of the criteria the Commissioner would use to make the 
determination as to whether flood insurance was required. The commenter 
also stated that federal law and the flood insurance program were 
already designed to protect mortgagees and the federal government from 
the risk of property loss due to floods. Another commenter stated that 
HUD should make it clear that flood insurance is not required unless 
required under the National Flood Act because the property is in a 
flood zone.
    HUD Response: These requirements are not new additions to the HECM 
program. They were previously listed in the regulations at 24 CFR part 
203 and incorporated into the HECM program by reference. This rule 
simply moves the regulations into part 206 in order to reduce the 
number of cross-references. HUD intends to retain these regulatory 
requirements.
    Comment: Section 206.45(c)(1)(ii) should be deleted or paragraph 
(1) should be edited by adding a paragraph break after the first comma 
of Sec.  206.45(c)(1)(ii). The commenter stated that, without a 
paragraph break, it is unclear whether the phrase ``if flood insurance 
under the National Flood Insurance Program (NFIP) is available'' 
applies only to paragraph (ii) or paragraph (i) as well.
    HUD Response: The final rule has been revised to clarify the flood 
insurance requirements.
    Comment: HUD should remove its inclusion of collateral 
``subsequently erected'' as it relates to hazard insurance requirements 
because risk can be effectively mitigated through insurance 
requirements for the collateral used to secure the loan at the time of 
origination. One commenter stated that the ability for the servicers to 
monitor collateral that has been subsequently erected by the borrower 
is impractical and would require periodic inspections of the property 
at an added

[[Page 7106]]

cost to the borrower. Another commenter requested that the requirement 
be to protect the collateralized value at the time of origination.
    HUD Response: These requirements are not new additions to the HECM 
program. They were previously listed in the regulations at 24 CFR part 
203 and incorporated into the HECM program by reference. This rule 
simply moves the regulations into part 206 in order to reduce the 
number of cross-references. HUD intends to retain these regulatory 
requirements.
16. Repair Work
    Comment: HUD should clarify that repair administration fees need 
not be listed on the HUD Settlement Statement at closing.
    HUD Response: The HUD-1 Settlement Statement is under the purview 
of the CFPB and is a statement of actual charges and adjustments paid 
by the borrower and the seller, if applicable, to be given to the 
parties in connection with the settlement.
    Comment: HUD should permit the mortgagees to establish a set-aside 
range between 150 and 200 percent of the estimated cost of repairs. The 
commenter stated that when an appraiser makes repair estimates, it 
would be more beneficial to have up to 200 percent of the estimated 
cost set aside, whereas if a qualified contractor makes the repair 
estimates, 150 percent should suffice.
    HUD Response: HUD currently requires the repair set aside to be 
established in an amount equal to 150% of the estimated cost of repairs 
when such required repairs do not exceed 15% of the MCA. The 150% limit 
provides a sufficient range of flexibility; however, borrowers are also 
permitted to add additional funds to the Repair Set Aside, but the 
funds cannot be drawn until the repairs are completed.
17. ``Spot Approval'' Exception for Condominiums
    Comment: The ``spot approval'' exception should be reinstated for 
expired approvals. One commenter stated that in some cases, the ``spot 
approval'' exception is the only way in which some elderly homeowners 
can stay in their condominium unit when the property management does 
not get the entire project FHA approved. One commenter stated that 
without access to FHA, seniors who live in a non-certified condominium 
project are cut off from a major potential source of needed cash to pay 
bills and support their retirement years. The commenter asked whether 
there is still an opportunity to reconsider maintaining the spot 
approval exception and whether there are alternatives to the spot 
approval. Another commenter suggested that if the spot approval process 
is not reinstated, the approval process for condominiums needs to be 
completely revamped because in some markets, it is impossible to get a 
condominium FHA approved. One commenter stated that many condominium 
developments do not fully understand FHA approval and that homeowners 
are afraid to speak up to say that a HECM would improve their financial 
circumstances so that they would be able to continue to stay in the 
development. Another commenter asked whether spot approvals could be 
allowed for HECMs only, as the previous spot approval process was 
poorly handled and abused frequently. The commenter stated that 
condominiums provide an attractive, low-maintenance option for seniors. 
Another commenter requested that HUD re-visit, update, and remedy the 
spot approval process for single-family FHA-insured loans, including 
HECMs.
    HUD Response: HECMs are subject to existing HUD Condominium 
eligibility and approval processes as published in ML 2016-15, ML 2016-
13, ML 2015-27, and ML 2012-18. This final rule updates the existing 
HECM regulations regarding spot loans to comply with condominium 
guidelines that were implemented under HERA via the mortgagee letters 
referenced above. HUD appreciates the recommendation and will take it 
under consideration for future rulemaking and policy guidance.
18. Eligible HECM for Purchase Sales
    Comment: Ninety days after acquisition is too long to require the 
seller to wait in order to re-sell the property. One commenter stated 
that 75 days is plenty of time to fix up a house, get an offer, and 
close, and that a seller could sell to conventional and VA loan 
customers earlier.
    HUD Response: This requirement does not represent a change in the 
regulations. This rule simply restates the requirements of part 203 
that were previously incorporated into part 206 through cross-
references.
19. MIP
    Comment: The MIP is too high. One commenter stated that the 
elevated upfront MIP will often alienate a senior due to cost and 
suggested, alternatively, that the upfront MIP could be added to the 
balance similar to the FHA forward mortgage process. Another commenter 
suggested that the refund of MIP be permitted on a sliding scale or 
prorated basis during the first few years of the loan.
    HUD Response: It has been HUD's longstanding practice to allow 
borrowers to finance the initial MIP charge. In response to the sliding 
scale or proration suggestion, once a mortgage is insured, HUD's 
longstanding policy has been to require termination of the mortgage 
without refunding initial MIP. This practice will continue. The limited 
circumstances for warranting a refund of initial MIP are outlined in 
paragraph 7-13 of HUD Handbook 4235.1.
    Comment: HUD should change the upfront MIP structure for all HECMs. 
Several comments proposed a tiered MIP structure tied to the percent of 
Principal Limit disbursed during the first 12 months of the HECM. One 
commenter suggested a .01 percent upfront MIP for initial draws up to 
25 percent, a half-percent upfront MIP for initial draws between 26 and 
50 percent, two and half percent upfront MIP for initial draws between 
51 and 75 percent, and a three and a half percent upfront MIP for 
initial draws between 76 and 100 percent. Another commenter suggested 
that any initial draw under 50 percent would be charged a half-percent 
upfront MIP; an initial draw between 50 and 60 percent would be charged 
a one percent upfront MIP; an initial draw between 60 and 70 percent 
would be charged one and a half percent upfront MIP; etc.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance.
    Comment: The initial MIP should be refundable for a HECM terminated 
in the first twelve months due to the death of the borrower(s).
    HUD Response: Once a mortgage is insured, HUD's longstanding policy 
has been to require termination of the mortgage without refunding 
initial MIP.
    Comment: HUD should review the legislative history and authority 
regarding HUD's ability to increase the MIP and re-consider proposing 
this change at another time.
    HUD Response: This final rule updates the existing HECM regulations 
to include statutory MIP requirements that were implemented under 
Public Law 111-229 on August 11, 2010, that amended subparagraph (B) of 
section 203(c)(2) of the National Housing Act (12 U.S.C. 
1709(c)(2)(B)).
    Comment: The consumer should only be credited with 100 percent of 
the initial MIP if they are too short to close; otherwise, a fixed 
amount or percentage should be credited. The commenter stated that 
lenders that normally credit 100 percent have the servicing rights so

[[Page 7107]]

they will recoup this credit on the back end, but some other loan 
officers cannot offer the same deal and are disadvantaged.
    HUD Response: HUD requires the payment of initial MIP as a 
condition of endorsement. HUD is responsible for oversight and 
management of the HECM portfolio, not competitive pricing. HUD 
encourages and supports a borrower's decision to look for the best 
financing option that will meet their individual short- and long-term 
needs.
    Comment: HUD should refrain from changing the time period of 10 
days to remit payment of initial MIP to the Commissioner. The commenter 
stated that there are occasional cases in which the commenter is 
unaware of an error with the MIP payment, and 5 days would not be 
sufficient time to resolve the issue and remit payment before incurring 
a late charge.
    HUD Response: FHA is not changing the 15-day requirement to remit 
initial MIP to the Secretary. However, the final rule retains the 
requirement to assess a late charge when MIP is remitted more than 5 
days after the payment date as described in Sec.  206.111(a).
20. Insurance of Mortgage
    Comment: HUD should use the principal limit on the deed instead of 
150 percent of the maximum claim amount. The commenter explained that 
using a deeded amount of 150 percent of the maximum claim amount causes 
reverse mortgage borrowers in certain states to pay approximately 260 
percent of the tax they should owe. The commenter stated that these 
states charge an intangible tax or deed/mortgage tax on the deeded 
amount of the loan.
    HUD Response: HUD appreciates the recommendation and will take it 
under consideration for future policy guidance.
21. Commissioner Authorized to Make Payments
    Comment: If the regulations permit the Commissioner to require or 
not require a subordinate mortgage through notice, HUD should clarify 
how this change will affect the claims process.
    HUD Response: The proposed rule provides flexibility for the 
Commissioner to consider future policy changes. HUD appreciates the 
recommendation and will take it under consideration for future policy 
guidance.
22. Acquisition and Sale of Property
    Comment: Acquiring appraisals in the currently strong real estate 
market typically takes 45-60 days, so the proposed 30-day time frame is 
not realistic. One commenter asked what happens when the appraisal is 
not performed within 30 days of application if the delay is a result of 
borrower action or inaction. Another commenter stated that the longer 
appraisal turnaround time can be attributed to the market, weather, 
review of title prior to appraisal, borrower illness, borrower-created 
delays, or the rural location of a property.
    HUD Response: HUD's longstanding policy has been to use 30 days as 
the appraisal timeframe. However, should there be any issues due to 
market conditions making appraisers unavailable, the mortgagee as 
always may request an extension, which HUD, in its discretion, may 
grant.
    Comment: HUD should revise the proposed language to state that a 
servicing mortgagee must have a valid appraisal in place at the time of 
the foreclosure sale date based on HUD's current definition of a valid 
appraisal.
    HUD Response: HUD will issue guidance subsequent to the publication 
of the final rule in which it will clarify the use of a valid appraisal 
for establishing the bid amount at a foreclosure sale.
    Comment: HUD should provide additional clarity regarding the 
effective date for the correction involving the appraisal date 
following the borrower's death instead of the foreclosure sale. The 
commenter stated that HUD and participating lenders may have disbursed 
excessive funds as a result of multiple appraisal orders and subsequent 
curtailments due to the previous drafting error. Some commenters 
suggested that this drafting error correction should be retroactive in 
order to protect servicing mortgagees for missing the timeline.
    HUD Response: This final rule does not and cannot amend insurance 
contracts for HECM loans.
    Comment: HUD should differentiate the type of ``value'' requested 
in reference to the term, ``appraised value.'' The commenter highly 
recommended, in the case of a foreclosure sale, for the appraisal to 
include an estimate of the property's market value and liquidation 
value.
    HUD Response: HUD intends to retain its longstanding practice of 
requiring the ``as is'' appraised value.
    Comment: HUD should clarify that appraisals for pending property 
sales should be ordered from a HUD-rostered appraiser within 30 days 
according to the uniform standards, while in cases of foreclosure, 
appraisals should be received within 30 days prior to the expected 
foreclosure sale.
    HUD Response: Section 206.125(b) of the final rule was revised to 
provide the Commissioner with the flexibility to have the property 
appraised by an appraiser on the FHA Roster or other qualified 
individual. HUD will publish guidance subsequent to the publication of 
the final rule in which it can clarify the use of a valid appraisal for 
establishing the bid amount at a foreclosure sale.
    Comment: Picky appraisal conditions are infuriating appraisers to 
the point that they are refusing to accept the orders.
    HUD Response: HUD appreciates the comment and will take it under 
consideration for future policy guidance.
    Comment: HUD should tighten appraiser eligibility standards. The 
commenter suggested that HUD consider a requirement for FHA appraisers 
to demonstrate verifiable education on FHA appraisal requirements, as 
authorized by the Housing and Economic Recovery Act of 2008.
    HUD Response: Regulations of appraiser requirements are outside the 
scope of this proposed rule, but HUD appreciates the comment and will 
take it under consideration.
    Comment: There is currently a significant undersupply of 
appraisers. One commenter suggested that the requirements to become an 
appraiser should be revised. Another commenter stated that the 
undersupply is causing borrowers to pay above-market rates and that the 
wait times are beginning to increase beyond one month in certain areas. 
The commenter suggested that some funds should be placed into 
attracting talent into the appraiser pool.
    HUD Response: Regulations of appraiser requirements are outside the 
scope of this proposed rule, but HUD appreciates the comment and will 
take it under consideration.
    Comment: For the Cash for Keys program, the amount should be 
consistent with Mortgagee Letter 2016-03, up to a maximum of $3,000.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance.
    Comment: HUD should allow for the Cash for Keys option in lieu of 
evictions and not merely deed-in-lieu transactions.
    HUD Response: HUD has adopted this change in the final rule and 
will make Cash for Keys available after foreclosure to bona fide 
tenants only. A bona fide tenant means a tenant of the property who is 
not a mortgagor, borrower, a spouse or child of a mortgagor or

[[Page 7108]]

borrower, or any other member of a mortgagor's or borrower's family. 
The incentive to have the borrower or person with legal right to 
dispose of the property provide a deed-in-lieu would be negated if they 
were aware that they could force the mortgagee to foreclose, allowing 
them to remain in the property longer and still be paid a Cash for Keys 
incentive.
    Comment: Cash for Keys should not only be available during the 
first six months following the due date. The commenter stated that 
there may be circumstances in which a property cannot be transferred 
within this time frame, but a deed-in-lieu of foreclosure would still 
be an attractive option for both parties.
    HUD Response: Deeds in lieu are offered as a means to save the time 
it takes to foreclose, particularly in states with long foreclosure 
timeframes and to limit the expenses HUD reimburses in eventual claims. 
As indicated in the preamble to the proposed rule, 9 months allows a 
borrower or other party with the legal right to dispose of the property 
6 full months to sell the property and then 3 additional months for the 
mortgagee to obtain a title search and get the deed signed, provided 
that title is clear. Allowing a deed in lieu to occur after that time 
does not represent the time or cost savings intended by a deed in lieu.
    Comment: Nine months is not sufficient time to allow the borrower 
to attempt to sell the property under the time frame for a deed-in-lieu 
of foreclosure following the time at which the HECM becomes due and 
payable. The commenters stated that deed-in-lieu of foreclosure 
transactions should be allowed up until the foreclosure sale date. The 
commenters also stated that probate proceedings can make it difficult 
for the heirs to sell the property within nine months.
    HUD Response: Deeds in lieu are offered as a means to save the time 
it takes to foreclose, particularly in states with long foreclosure 
timeframes and to limit the expenses HUD reimburses in eventual claims. 
As indicated in the preamble to the proposed rule, 9 months allows a 
borrower or other party with the legal right to dispose of the property 
6 full months to sell the property and then 3 additional months for the 
mortgagee to obtain a title search and get the deed signed, provided 
that title is clear. Allowing a deed in lieu to occur at any time up 
until the foreclosure sale date does not represent the time or cost 
savings intended by a deed in lieu.
    Comment: Sixty days is not sufficient for notice to be provided to 
HUD regarding the mortgage becoming due and payable. One commenter 
stated that death cannot always be discovered within this timeframe, 
which results in servicers facing significant curtailment risk due to 
their inability to provide such timely notice. The commenter suggested 
as an alternative to require mortgagees to report notice of the passing 
of the last surviving borrower within ten days of receiving 
notification of the borrower's death following reasonable diligence in 
monitoring the loan portfolio. Another commenter recommended 
notification within 60 days of the servicer discovering and confirming 
the title was conveyed and that no HECM borrower remains on title. One 
commenter recommended that the required timeline should begin when the 
servicer knew or reasonably should have known of the death.
    HUD Response: The timeframes in the proposed rule for the due date 
did not change, with the exception of adding the end of a deferral 
period. However, the final rule codifies in Sec.  206.125 the guidance 
issued in ML 2015-10, and HUD believes these are acceptable timeframes.
    Comment: The proposal to base the foreclosure on the due date 
conflicts with ML 2015-10 and should remain as is.
    HUD Response: HUD believes the initiation of foreclosure is more 
appropriately aligned with the due date, i.e., the date of notice to 
HUD that the borrower has died or conveyed title to the property or the 
date HUD grants due and payable permission. Basing the foreclosure 
initiation date on when notice is made to the borrower poses increased 
risk to the MMIF because it allows mortgagees to delay the process 
unnecessarily by simply withholding the required notice and thereby 
increasing eventual claim expenses.
23. Payment of Claim
    Comment: As in Mortgagee Letter 2016-03, HUD should require 
servicers to exercise reasonable diligence in prosecuting the 
foreclosure proceedings to completion and in acquiring title to and 
possession of the property pending varying state procedures. The 
commenter stated that the process associated with the foreclosure of a 
property with HECM financing can be lengthy and that the two-year 
reimbursement period would put both the MMIF and servicer at risk.
    HUD Response: HUD has taken public comments into consideration and 
has replaced the two-year reimbursement period in Sec.  206.129(d)(3) 
with a limit of two-thirds of total advances for the allowable expenses 
outlined in this section.
    Comment: HUD should remove the proposed two-year limitation on 
insurance claim reimbursements for property charge advances. One 
commenter stated that if this limitation were applied to existing 
HECMs, the number of HECM foreclosures would increase as servicers 
called the loans due and payable as the two-year limit was reached. The 
commenter also stated that this result would conflict with HUD guidance 
allowing the deferral of due and payable status for low-balance 
arrearages and ``At Risk'' borrowers. Another commenter stated that the 
process can be delayed by factors outside of a servicer's control, such 
as a tax and insurance default and a repayment plan, new tax and 
insurance disbursements, and default/foreclosure timelines.
    HUD Response: HUD has taken public comments into consideration and 
has replaced the two-year reimbursement period in Sec.  206.129(d)(3) 
with a limit of two-thirds of total advances for the allowable expenses 
outlined in this section.
    Comment: Regarding the regulations addressing the amount of payment 
when the borrower sells the property, HUD should include provisions for 
loans assigned prior to the effective date of the rule that are or are 
not in due and payable status. The commenter stated that for such loans 
that are due and payable, the claim amount should be based on the 
outstanding loan balance as of the due date and should include the 
allowance for items to capture the costs of title, foreclosure costs, 
and costs associated with the acquisition of the property.
    HUD Response: The language in the final rule has been revised to 
clearly define what is reimbursable where the borrower sells the 
property, pre and post due and payable, based on the effective date of 
the final rule.
Question 1: Should the HECM program provide for the pro rata 
curtailment of debenture interest and reduction of expenses incurred as 
a result of the mortgagee's delay in filing the mortgage insurance 
claim, and if so, how should such a policy be structured to ensure 
feasible implementation?
    Comment: Debenture interest should be curtailed on a pro rata 
basis, but curtailing expenses could create an incorrect incentive on 
the part of servicers to refrain from expending such amounts, which 
would perhaps impact recoveries and place the MMIF at risk.
    HUD Response: The regulations do not remove the requirement for 
mortgagees to protect the lien interest or to preserve and protect the 
property.

[[Page 7109]]

HUD is exploring options to ensure mortgagees meet required timeframes. 
There is great risk to the FHA MMIF when mortgagees fail to timely 
prosecute foreclosures or take other required actions.
    Comment: Debenture interest should be paid from the date of 
notification to HUD. The commenter stated that servicers must 
demonstrate reasonable diligence in monitoring for death but should not 
be penalized for issues related to reporting bureaus.
    HUD Response: HUD believes without this time frame; mortgagees will 
have little incentive to move the HECM to termination in a timely 
manner. In addition, HUD believes mortgagees have resources to identify 
the borrower's death, but because there may be an expense related to 
such resources, the mortgagees prefer not to subscribe to them. HUD 
contends that 60 days is sufficient time to identify a borrower's death 
through available resources, and move the HECM toward its logical 
conclusion.
    Comment: The debenture interest rate should continue to be based on 
the endorsement date rather than the date on which the default on the 
mortgage occurred.
    HUD Response: HUD did not propose changing the date upon which the 
debenture interest rate is based. It only proposed to restate the 
requirements of part 203 that are applicable to the HECM program 
instead of cross-referencing to part 203, which includes the debenture 
interest calculations.
24. First Lien Status
    Comment: As a result of this rule change, lenders and servicers in 
super lien states will do a more thorough job of monitoring HOA 
payments to ensure that the liens do not occur in the first place. The 
commenter stated that this rule change would allow homeowner 
associations to receive the funds they are owed sooner.
    HUD Response: HUD appreciates the comment.
    Comment: The proposed rule change on the lien priority for 
homeowners' associations and condominiums disregards the laws of 21 
states and the District of Columbia. Commenters noted that allowing 
homeowners' association and condominium ``super liens'' to take 
precedence over HECM liens would probably render such properties un-
loanable. Some commenters stated that the proposed changes would 
effectively eliminate a condominium or house purchase in those states 
by anyone planning to finance with a HECM for Purchase. One commenter 
stated that condominiums provide a maintenance-free lifestyle that is 
especially popular with the HECM customer base. Another commenter 
estimated that there would be about a sixteen percent loss of volume as 
a result of this rule change. One commenter stated that this change may 
cause further restrictions to financing options for senior homeowners 
living in low maintenance condominiums. Commenters stated that the rule 
change exposes community association homeowners and residents, 
including senior citizens, to risk of higher housing costs and unjust 
financial burdens. One commenter stated that these state association 
lien priority laws intend to prevent the unjust enrichment of lenders 
at the expense of community association homeowners that occurred during 
the Great Recession. Another commenter stated that the proposed rule 
may disqualify more than 4 million senior citizens living in 
condominiums. One commenter stated that removing the HECM option for 
homeowners and potential homeowners in these markets would have dire 
consequences on the senior population, the economic stability in those 
markets, and a negative impact on the MMIF due to the reduction of HECM 
loans. Another commenter stated that the difficulty surrounding 
assignment of loans in such markets could result in an inadvertent 
curtailment or cessation of HECM mortgage origination and servicing. 
One commenter stated that seniors move into condominiums without 
considering a HECM, and then find out later that this is not an option.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens for the final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD should prohibit HOA liens of record at the time of 
assignment, and not afterwards. The commenter stated that servicing 
mortgagees have no way to determine whether HOA dues are past due, and 
a lien from past due HOA dues may only be reflected on a title report 
ordered as part of or prior to an assignment.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: The non-payment of HOA/COA fees is already a condition of 
default for HECMs. The commenter encouraged HUD to share data regarding 
the extent of HOA defaults to help advocates better understand the 
scope of this issue.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: Instead of threatening seniors' ability to take advantage 
of the HECM program in certain states, HUD should focus on ensuring 
compliance from the lending community with program rules and guidelines 
concerning foreclosure, property preservation, and title conveyance. 
The commenter stated that the proposed rule threatens pro-homeowner, 
pro-consumer state statutes by excluding senior citizens from the HECM 
program in these states.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD's proposal will likely have a disproportionate, 
negative impact on female HECM borrowers residing in condominiums in 
association lien priority jurisdictions.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a

[[Page 7110]]

valid, legally enforceable first lien and title to the property 
securing the mortgage must be good and marketable. In the event that 
HUD discovers later that good and marketable title is lacking due to a 
lien, HUD may require repurchase.
    Comment: HUD does not justify this rule change by indicating any 
losses HUD may have suffered insuring reverse mortgages due to state 
law association lien priority.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD should include in the LESA any association assessments 
in states that recognize association lien priority. One commenter 
suggested requiring a set-aside for 6 months' worth of fees for 
borrowers in those markets that have super lien laws. Another commenter 
stated that HUD should explore whether HOA dues should be included as 
part of the required set-aside, as well as what the impact would be on 
low-income households.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: The different treatment of utility charges and condominium 
or HOA fees results in irrational discrimination against owners in such 
associations. The commenter stated that if a nonpayment of utilities 
would result in a lien, then HUD will reimburse the lender for 
advancing the payment as a property charge. However, the commenter 
stated, if the utilities are centrally metered and paid for by a 
condominium association or HOA and reimbursed through assessments, then 
HUD would not have to reimburse the lender for advancing payments.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD should clarify its position and procedures under 
circumstances where state laws limit a mortgage's first lien status.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HOA dues should be considered property charges and treated 
like taxes and insurances with regard to default and repayment plans in 
the super lien states in which delinquent HOA dues may become a 
superior lien to the HECM. Commenters stated that the consumer should 
be allowed to repay any advances made on these liens, just like any 
other property charge. One commenter stated that this would protect 
HUD's lien position and the MMIF, and provide loss mitigation options 
to HECM borrowers.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD should expressly prohibit the extinguishment of HECM 
mortgage lien interests by HOA super liens. Commenters stated that HUD 
has successfully relied on the Constitution's Supremacy Clause to bar 
HOA foreclosure sales from extinguishing first liens deeds of trust in 
Nevada when they are insured through HUD.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
    Comment: HUD should clarify that this requirement would not apply 
to existing HECM loans where HUD has issued a commitment to insure.
    HUD Response: HUD has removed the language referring to homeowners' 
association liens and condo association liens in this final rule. 
However, HUD reminds mortgagees that in order for a HECM to be eligible 
for loan assignment, the mortgage must be a valid, legally enforceable 
first lien and title to the property securing the mortgage must be good 
and marketable. In the event that HUD discovers later that good and 
marketable title is lacking due to a lien, HUD may require repurchase.
25. Effect of Noncompliance With Regulations
    Comment: The proposed new section 206.137 would violate the basic 
precept in the National Housing Act that mortgage insurance on an FHA 
loan is incontestable in the hands of the holder. The commenter stated 
that this provision would cause a problem with loans being pooled or 
sold in the secondary market, as almost all HECM loans are.
    HUD Response: Section 206.137 does not represent a change in the 
regulations. This rule incorporates this provision from 24 CFR part 203 
into part 206, whereas it had previously been incorporated by cross-
reference.
26. Final Payment
    Comment: HUD needs to process all past due HECM supplemental claims 
and streamline the process for paying such claims in the future within 
a time period less than that proposed in new section Sec.  206.144.
    HUD Response: Section 206.144 does not represent a change in the 
regulations. This rule incorporates this provision from 24 CFR part 203 
into part 206, whereas it had previously been incorporated by cross-
reference.
27. Providing Information
    Comment: HUD should expand its requirement to provide the borrower 
with a single statement at the end of each month to include additional

[[Page 7111]]

documentation that will help to modernize the HECM program. The 
commenter suggested that the borrower be provided with visual charts 
and diagrams depicting the loan status, analysis tools for borrowers to 
explore changing the disbursement plan, online banking methods to 
review account statement data, and account statement formats that 
comply with the Plain Writing Act. Another commenter stated that 
specific contact information for HECM experts with the mortgagee or 
servicer should be included on the monthly statement.
    HUD Response: HUD does not intend to prescribe a burdensome process 
for providing monthly statements. However, HUD does not restrict 
mortgagees from offering any additional information through the monthly 
statement. Additionally, servicers' monthly statements already include 
a phone number for borrowers to contact a HECM representative.
    Comment: Mortgagees should be required to provide borrowers with a 
dedicated phone number they can call and speak to employees on a team 
specifically trained to address inquiries concerning HECM mortgages.
    HUD Response: The final rule, as did the proposed rule, states that 
the borrower may speak to the employee or employees specifically 
designated by the mortgagee or its servicer to address inquiries 
concerning mortgages insured under this part. Since the part in 
question is 24 CFR part 206, which deals solely with the HECM program, 
the language in the rule already addresses the commenter's concern.
    Comment: HUD should retain the requirement that the mortgagee 
provide a single point of contact for HECM loan inquiries. The 
commenter stated that as seniors can be targets for fraud or elder 
abuse, providing a consistent point of contact can provide borrowers 
with a level of comfort when dealing with their reverse mortgage 
company.
    HUD Response: With the growth of the HECM portfolio, the staffing 
turnover within the mortgage industry, and the challenges a borrower 
can face if their single point of contact is away from the office when 
needed, it is no longer feasible for borrowers to be provided the name 
of a single person with whom they may speak. HUD feels that having a 
group of mortgagee staff specializing in HECMs available to borrowers 
gives borrowers more opportunity to speak to someone who can assist 
them. HUD is adamant, however, that borrowers must be able to reach a 
live person when calling a mortgagee and not have to rely on voice mail 
and a return call.
28. Life Expectancy Set-Asides
    Comment: HUD should allow the life expectancy set-aside to be re-
evaluated after closing in order to use the correct property tax amount 
for that year rather than the previous year's amount.
    HUD Response: Currently, HUD requires the servicing mortgagee to 
disburse payments based on the actual property tax and insurance 
amounts for that year.
    Comment: Lenders should have the ability to change the first-year 
set-aside to $0, as pre-closing charges are being paid from the loan 
proceeds.
    HUD Response: Currently, HUD permits the mortgagee to require, or 
when requested by the borrower, to disburse funds for payment of taxes 
and insurance at closing, when such property charges are coming due 
within 30-45 days following closing. Payment of taxes and insurance by 
the Mortgagee usually requires multiple disbursements by the lender 
over the initial disbursement period depending on due dates for tax and 
insurance payments, thus, it is not feasible to omit the first year of 
Life Expectancy Set Aside payments.
    Comment: The borrower's election to have the servicer pay taxes and 
insurance by drawing from a line of credit or withholding funds from 
monthly tenure payments should not be irreversible and should be 
available to borrowers at any time during the HECM. One commenter 
stated that few borrowers would elect this option without such 
flexibility.
    HUD Response: HUD appreciates the recommendation and has added 
language that provides the Commissioner with the authority to issue a 
Federal Register Notice to expand the property charge payment options 
at a future date.
    Comment: HUD should eliminate the lifetime and partial LESA and 
implement a three-year tax and insurance reserve set-aside. The 
commenter stated that LESAs can amount to hundreds of thousands of 
dollars or even exceed the entire amount of the potential HECM, 
particularly in higher property tax areas.
    HUD Response: HUD explored various options to address its property 
charge default risk, including shorter periods. After careful 
consideration and review, the LESA provided the most security for 
allowing the borrower to age in place and comply with the terms and 
conditions of the mortgage.
    Comment: Partially-funded LESAs should be paid directly to the tax 
authority or insurance company. The commenter stated that disbursement 
to the borrower introduces additional risk that property charges will 
not be paid.
    HUD Response: HUD explored various options to address its property 
charge default risk, including identifying prospective borrowers who 
have shown a willingness to pay their financial obligations but fall 
short of having the means to make the payment. The Partially-Funded 
LESA fills the gap for allowing the borrower to be responsible for such 
payments. Additionally, tax payments cannot be paid on a partial basis 
and would be operationally infeasible.
    Comment: Thirty days is an insufficient time frame for a borrower 
to respond to the mortgagee's notification of a missed property charge 
payment. The commenter stated that thirty days is a short time to 
respond to the mortgagee's request regarding the non-payment, 
especially when there is a delay in the mortgagee's processing or 
mailing of the initial notice. The commenter suggested that the time 
period be extended to 90 days.
    HUD Response: This provision simply codifies what has been 
implemented through ML 2015-10. HUD believes the timeframe is 
sufficient for a borrower to have contacted the mortgagee to express 
their willingness to repay the funds due.
    Comment: HUD should provide a time frame or guidance concerning how 
the mortgagee is to determine the borrower is unwilling or unable to 
repay the mortgagee for funds advanced to pay property charges outside 
of a LESA.
    HUD Response: ML 2015-11 provides the availability of loss 
mitigation options for a mortgagee to work with the borrower.
29. Allowable Charges and Fees After Endorsement
    Comment: What is the goal of allowing a servicing charge to be 
included in the mortgage Note rate?
    HUD Response: The option for allowing a servicing charge which is 
included in the mortgage Note Rate provides flexibility for the lender 
to cover servicing costs in a manner that is consistent with mortgage 
industry practices if a Servicing Fee Set Aside is not established. In 
addition, allowing the servicing charge to be included in the Note Rate 
provides the borrower access to more funds from which to draw against 
since such funds are not being withheld in the Servicing Fee Set Aside.

[[Page 7112]]

Question 1: What is an appropriate servicing fee range (minimum and 
maximum dollar amounts) for the flat monthly servicing fee, and what 
factors support the upper and lower bounds of that range?
    Comment: HUD should not allow this charge. The commenter stated 
that the charge would infuriate and confuse the borrower, as well as 
complicating the loan and contributing to the headline that reverse 
mortgages are too expensive.
    HUD Response: Servicing fee charges are an allowable fee that has 
been a part of the HECM program since inception. Servicing fees provide 
compensation to servicers for servicing the HECM loan.
    Comment: HUD should increase the dollar amounts for allowable 
servicing fees based on the Consumer Price Index from the last 
servicing fee adjustment in 1998. The commenter stated that reverse 
mortgage borrowers usually require more time spent on servicing-related 
issues as compared to forward mortgage borrowers. The commenter also 
justified a raise in servicing fees based on the increase in servicing 
policy requirements implemented since 1998.
    HUD Response: HUD will take these comments under consideration when 
implementing related policy through guidance.
    Comment: There is no reason for the annual adjustable and fixed 
rate loans to have a different dollar amount servicing fee than the 
monthly adjustable HECMs. The commenter stated that all of these 
products have the same servicing requirements. HUD Response: Adjustable 
rate loans require additional support for future draws and payment plan 
changes.
Question 2: What is an appropriate servicing fee range, in basis 
points, that could be included in the Note rate, and what factors 
support the upper and lower bounds of that range?
    Comment: There is no reason to separate the servicing fee from the 
lender margin. The commenter stated that on a fixed rate loan, the 
lender always has the option of charging a higher interest rate to 
cover increased servicing costs, and on an adjustable rate loan, the 
margin can be increased to cover rising servicing costs.
    HUD Response: The Note rate includes the lender's margin and may 
also include a servicing fee as stated in Sec.  206.207(b).
    Comment: The basis range is acceptable as currently prescribed and 
adjustments to this range should be made by the Government National 
Mortgage Association (GNMA).
    HUD Response: The current prescribed range is in accordance with 
GNMA servicing parameters.
    30. Housing Counseling
    Comment: HUD should include continuing education requirements so 
that counselors keep up-to-date on the ongoing changes in the HECM 
program. The commenter noted that some clients have indicated 
counselors have discouraged them from using a HECM and that the 
counselors seem unaware of the usefulness of a HECM ARM as a financial 
planning tool.
    HUD Response: All counseling sessions are required to cover all the 
potential risk for a HECM, including property charges, ineligible NBS, 
etc. The rule would not change those existing counseling requirements 
in these areas. One of the primary purposes of HECM counseling is to 
provide education on all aspects of HECMs from an objective third 
party. The current HECM counselor roster rule requires that counselors 
take continuing education every 2 years and retake the HECM counselor 
test every 3 years. This ensures that counselors stay current with 
program requirements.
    Comment: Counseling should be mandatory for all seniors considering 
FHA loans. The commenter stated that it is unconscionable for seniors 
to receive a forward 20-30-year loan and not receive counseling on the 
option of a HECM loan. HUD Response: Counseling by a counselor on the 
HECM roster is statutorily required. Given the unique nature of a HECM 
loan, the requirement for counseling is a critical consumer protection 
for an ``at risk'' population.
    Comment: Borrowers are not very well-prepared for the multiple 
downside risks inherent in reverse mortgages. One commenter stated that 
many borrowers are told by unscrupulous loan brokers that there are no 
further obligations to fulfill once they receive the HECM, and that 
current counseling is ineffective at correcting those 
misrepresentations. The commenter suggested that HUD study this 
counseling problem and adjust counseling requirements accordingly. 
Another commenter stated that the counselors should have training and 
additional responsibility to inform the borrower whether a reverse 
mortgage is right for the borrower. Alternatively, the commenter 
stated, the counselor should be required to inform the borrower that 
they should seek financial or legal advice to understand the 
suitability and consequences of the HECM.
    HUD Response: HUD disagrees with these comments. HUD believes HECM 
Roster Counselors are qualified and fully capable, based on their 
training and continuing education, to thoroughly educate clients on 
reverse mortgages. Furthermore, HECM Roster Counselors must follow a 
strict protocol when providing counseling to potential HECM Borrowers. 
The protocol, found in Appendix 2 of HUD Handbook 7610.1, Rev.5, 
requires HECM Counselors to educate clients on the financial 
implications of obtaining a HECM, the effect of obtaining a HECM or 
other reverse mortgage product on public benefits and on borrower and 
non-borrower spouse post-closing obligations for items, including, but 
not limited to, repairs, payment of taxes and insurance and loan re-
payment when the loan becomes due and payable.
    HUD believes that the proper role of a HECM Counselor is to educate 
clients on the features of reverse mortgages and on the appropriateness 
of a reverse mortgage or other financial options to meet the client's 
needs. HUD further believes that it is not the role of the HECM 
Counselor to advise the client whether to proceed with a reverse 
mortgage, or which reverse mortgage product to use, but to provide 
guidance and resources to enable the client to make an informed 
decision. HUD disagrees that HECM Counselors should be required to 
inform clients that they should seek financial or legal advice to 
understand the suitability and consequences of the HECM. As with 
forward mortgages, it is the consumers' decision whether or not to seek 
financial or legal advice before entering into a loan transaction.
    Comment: Counselors should not explicitly tell borrowers to shop 
for loans or that they can get certain terms such as a zero origination 
fee. One commenter stated that the role of the counselor should be 
strictly limited to providing counseling on how the program works and 
not to give the borrower advice.
    HUD Response: A thorough HECM counseling session includes a 
presentation of all the alternatives to a HECM. Counselors may 
recommend that the borrower shop around for better priced products as 
part of such a session, but are not permitted to direct a client to any 
specific lender or provide lender price comparisons.
    Comment: HUD should clarify to what ``electronic database'' the 
counselor needs to upload the counseling certificate. One commenter 
asked whether an electronically uploaded certificate would waive the 
requirement for an original borrower signature on the counseling 
certificate. Another commenter asked for clarification on this point. 
The commenter also stated that HUD should give seniors and

[[Page 7113]]

mortgagees the option to receive a hard copy of the counseling 
certificate.
    HUD Response: Upon further consideration to require HECM counselors 
to upload the certificate to an ``electronic database,'' HUD is no 
longer pursuing this option as it would impose a financial burden upon 
borrowers to send a signed and dated copy of the certificate back to 
the counselor and difficult for the counselor to manage the process.
    Comment: Non-borrowing spouses should not have an additional 
counseling component. The commenter stated that such a requirement 
would cause an unnecessary increase of fees as well as delay time to 
begin the HECM financing process. The commenter also stated that HUD 
would need to address the problem of educating all HECM counselors and 
updating the information they provide to borrowers and non-borrowing 
spouses.
    HUD Response: Non-borrowing spouses have been required to receive 
counseling since 2009. HECM counselors make every effort to counsel 
both borrowers and non-borrowing spouses jointly unless extenuating 
circumstances exist that prevent this. This is part of the guidance to 
counselors in the HECM protocol. HECM counselors are also encouraged to 
include family members in a counseling session. The clients have the 
ultimate decision as to who to include in these sessions, and this may 
include legal counsel, financial advisors, etc.
    Comment: HUD should clarify that mortgagees may denote on the HECM 
mandated counseling disclosure that the borrower is required to undergo 
face-to-face counseling or be counseled by a counselor or counseling 
agency that is ``domiciled'' within a particular state. The commenter 
also suggested that HUD indicate which counseling agencies can provide 
such face-to-face counseling or is domiciled within a state. The 
commenter stated that several states have face-to-face counseling 
requirements or requirements that the senior be counseled by a 
counselor or counseling agency that is ``domiciled'' in a particular 
state.
    HUD Response: HUD will consider this recommendation as part of the 
current HECM counseling protocol revisions.
    Comment: HUD should require information about suitability to be 
provided to prospective borrowers prior to the counseling session. One 
commenter suggested that HUD refer to California Civil Code Section 
1923.5 as a guide for providing the potential borrower such 
information.
    HUD Response: HUD will consider these suggestions as part of the 
current HECM counseling protocol revisions.
    Comment: Counseling should be in-person or face-to-face 
electronically and should be digitally recorded and broken up into two 
sessions. The commenter also suggested that the counseling should 
include all members of the household in a discussion on inter-family 
loans and provide clear information on where to turn for help if the 
borrower later has problems with the reverse mortgage.
    HUD Response: HUD will consider these suggestions as part of the 
current HECM counseling protocol revisions.
    Comment: HUD should not restrict financial professionals from 
helping borrowers seek professional money management advice. The 
commenter stated that HUD should not ask the homeowner if they plan to 
use the HECM proceeds to purchase life or annuity products. The 
commenter also stated that almost all HECM lenders are trying to tie 
the product more closely with the financial and estate planning 
communities.
    HUD Response: The language in the rule is consistent with the 
statutory requirement in Sec.  255(d)(11) of the NHA.
31. Maximum Closing Costs Allowed on Sale of Property
Question 1: Is 11 percent a reasonable cap? HUD chose this percentage 
based on the policy for sale of its REO inventory, which allows for 
payment of 6 percent sales commission and 5 percent for other closing 
costs, but is interested in comments to indicate whether the amount 
should be higher or lower, and why the commenter believes the 
adjustment is appropriate.
    Comment: The maximum closing costs allowed should be based on a 
sliding scale so that the expenses are limited to the greater of 
$15,000 or 11 percent of the sales price of the property. The commenter 
stated that strictly limiting such charges to 11 percent for properties 
that sell for small dollar amounts may not even cover the actual 
expenses incurred by the mortgagee.
    HUD Response: The final rule now states that closing costs shall 
not exceed the greater of: (a) 11 percent of the sales price; or (b) a 
fixed dollar amount as determined by the Commissioner. The amount as 
determined by the Commissioner will be issued through Federal Register 
notice.
    Comment: The schedule of allowable costs under the 11 percent cap 
should include lien payoff, cleaning, and repairs. The commenter stated 
that the economics of a HECM short sale often lead to property 
maintenance issues. The commenter also stated that allowable closing 
costs need to be clearly communicated to servicers.
    HUD Response: Due to the non-recourse nature of HECM loans, short 
sales represent a risk to the FHA MMIF through claims. Furthermore, 
short sales do not allow the borrower or seller to retain any funds and 
the sales price is based on the ``as is'' appraised value. Therefore, 
it is not necessary for the borrower to make extensive repairs.
    Comment: This amount is unworkable for lower balance home values, 
unless there is a tiered approach. One commenter stated that this 
limitation can result in a shortage of closing costs when selling lower 
value homes because many of the costs are fixed and unrelated to the 
sale price of the property.
    HUD Response: The final rule states that closing costs shall not 
exceed the greater of: (a) 11 percent of the sales price; or (b) a 
fixed dollar amount as determined by the Commissioner. The amount as 
determined by the Commissioner will be issued through Federal Register 
notice.
Question 2: Should HUD implement a tiered approach to the maximum 
percent of closing costs in relation to sales price? For example, 
should a property selling for under $100,000 be allowed a higher 
percentage of closing costs than a property selling for over $100,000?
    Comment: HUD should adopt a tiered approach to take into account 
that 11 percent may not be sufficient for lower balance home values. 
One commenter stated that a greater percentage should be assigned to 
lower sales prices.
    HUD Response: The final rule now states that closing costs shall 
not exceed the greater of: (a) 11 percent of the sales price; or (b) a 
fixed dollar amount as determined by the Commissioner. The amount as 
determined by the Commissioner will be issued through Federal Register 
notice.
Question 3: Should HUD implement a tiered approach to the maximum 
dollar amount of closing costs in relation to the sales prices? For 
example, should a property selling for under $100,000 be allowed a 
different dollar amount than a property selling for over $100,000?
    Comment: HUD should set a minimum dollar amount for lower balance 
home values.
    HUD Response: The final rule now states that closing costs shall 
not exceed the greater of: (a) 11 percent of the sales price; or (b) a 
fixed dollar amount as

[[Page 7114]]

determined by the Commissioner. The amount as determined by the 
Commissioner will be issued through Federal Register notice.
    Comment: A fixed closing costs dollar amount limitation in line 
with customary costs would be more appropriate if closing costs are to 
be capped. The commenter volunteered to work with HUD to establish 
customary costs based on the commenter's data and experience.
    HUD Response: The final rule now states that closing costs shall 
not exceed the greater of: (a) 11 percent of the sales price; or (b) a 
fixed dollar amount as determined by the Commissioner. The amount as 
determined by the Commissioner will be issued through Federal Register 
notice.
32. Non-Borrowing Spouse Communication
Question 1: What difficulties have Non-Borrowing Spouses, heirs, and 
successors in interest had in obtaining information about HECMs and 
understanding and exercising their rights?
    Comment: HUD should create a written guide for the heirs that is to 
be delivered by the servicer with the initial letter of repayment. The 
commenter opined that it would be very beneficial for all parties, 
including FHA's MMIF, if a standard guide was created to outline the 
steps the heirs should be taking, and that it would result in faster 
repayment, more participation in the Cash for Keys initiative, and 
fewer foreclosures. The commenter suggested alternatively that the 
guide could be created by a group chosen by NRMLA.
    HUD Response: HUD will take this suggestion under consideration for 
future policy guidance.
    Comment: Many servicers are not properly communicating about how 
someone can qualify as an Eligible Non-Borrowing Spouse. Commenters 
stated that servicers provide conflicting and inaccurate information, 
reject paperwork for unexplained reasons, and lose paperwork. One 
commenter suggested that HUD develop a standardized letter to contact 
non-borrowing spouses or heirs that is written in simple, clear 
language.
    HUD Response: HUD expects mortgagees to comply with the regulatory 
requirements of Sec.  206.125(a)(2), which specifies the information 
required to be provided to the borrower's estate or heirs. HUD does not 
intend to develop a standardized letter.
    Comment: Heirs have had great difficulty getting information from 
the servicer about options and steps required at the time of loan 
repayment.
    HUD Response: HUD has clarified in the final rule that mortgagees 
must request that HECM borrowers designate a point of contact that 
mortgagees would be required to use in the event a problem arises or in 
the event of the borrower's death or incapacitation. Accordingly, HUD 
has revised Sec.  206.40(c) to clarify that the contact person is not 
acting as an agent and that the mortgagee will be required to request 
the designation, but that the borrower is not required to designate 
such a contact person.
Question 2: What adjustments could HUD make to this rule to address the 
identified difficulties and facilitate communication with Non-Borrowing 
Spouses, heirs, and successors in interest?
    Comment: HUD should encourage servicers to request that borrowers 
designate family members or others who are authorized to speak with 
them about a loan on behalf of a borrower or following the death of a 
borrower.
    HUD Response: HUD has clarified in the final rule that mortgagees 
must request that HECM borrowers designate a point of contact that 
mortgagees would be required to use in the event a problem arises or in 
the event of the borrower's death or incapacitation. Accordingly, HUD 
has revised Sec.  206.40(c) to clarify that the contact person is not 
acting as an agent and that the mortgagee will be required to request 
the designation, but that the borrower is not required to designate 
such a contact person. The mortgagee shall communicate with an 
alternate individual if one has been designated by the borrower.
    Comment: HUD should produce and require collateral material 
regarding what happens when the loan is due and payable. The commenter 
stated that the material should be available to the non-borrowing 
spouse and the borrower's heirs, and should be available on HUD's Web 
site.
    HUD Response: HUD will take this suggestion under consideration for 
future policy guidance.
    Comment: HUD should create a template certification packet for all 
servicers to use for surviving non-borrowing spouse situations.
    HUD Response: HUD certification language requirements for NBS are 
contained in ML 14-07 and ML 15-02.
    Comment: HUD should require servicers to provide at least the loan 
balance and standard information about options for repayment to anyone 
who can prove an heir interest in the property, or who is an executor 
of the estate. The commenter stated that the borrower should also be 
encouraged to designate who should have access to detailed information 
about the account.
    HUD Response: HUD has clarified in the final rule that mortgagees 
must request that HECM borrowers designate an alternate individual that 
mortgagees would be required to use in the event a problem arises or in 
the event of the borrower's death or incapacitation. Accordingly, HUD 
has revised Sec.  206.40(c) to clarify that the alternate individual is 
not acting as an agent and that the mortgagee will be required to 
request the designation, but that the borrower is not required to 
designate such an individual. If the borrower has designated an 
alternate individual, mortgagees would be required to contact the 
designated individual if they cannot reach the borrower directly in the 
event a problem arises or in the event of the borrower's death or 
incapacitation. HUD currently has procedures for communicating with the 
borrower's estate upon the death of the last borrower.
33. Benefits & Costs
    Comment: The estimated $1.9 billion cut in endorsements is very 
conservative if the changes to the HECM program are made as proposed. 
The commenter stated that the impact on endorsement volume of the 
financial assessment is not yet fully understood. The commenter also 
stated that the post-closing inspection requirement and including 
utilities as a property charge will drive away many of the affluent 
borrowers that are more common after the establishment of the financial 
assessment. The commenter also pointed to the super lien issue as a 
change that could cause an immediate drop in endorsement volume of $1.9 
billion on its own.
    HUD Response: FHA appreciates your comments and will defer 
implementing this policy to allow further research and analysis to be 
conducted.
    Comment: The RIA fails to quantify how disqualification of 
otherwise eligible HECM borrowers residing in community associations in 
association lien priority jurisdictions balances HUD's duty to protect 
taxpayers and ensure access to credit. The commenter stated that HUD 
did not demonstrate it considered less damaging but effective policy 
alternatives than their proposal on first lien status in the 22 
jurisdictions with association lien priority statutes from the HECM 
program.
    HUD Response: HUD appreciates your comments and will defer 
implementing

[[Page 7115]]

this policy to allow further research and analysis to be conducted.
34. Mortgagee Letter 2015-11
    Comment: HUD should add an additional factor under the critical 
circumstances for the ``at risk'' loss mitigation option: a diagnosis 
of Alzheimer's or other dementia of family member receiving care at the 
residence.
    Comment: HUD should extend the repayment period for property charge 
advances and extend the foreclosure time frames for ``at risk'' 
homeowners.
    HUD Response: These two comments reference a mortgagee letter 
outside the scope of this proposed rule. The proposed rule states, and 
the final rule continues to state, at Sec.  206.205(e)(2)(ii) that 
``the mortgagee may provide any permissible loss mitigation made 
available by the Commissioner through notice.'' Specific discretionary 
loss mitigation options are provided through mortgagee letters, not the 
regulations, and HUD will consider these comments in the development of 
such future policy guidance.
35. Other Comments & Suggestions
    Comment: The limit on HECMs should be raised from $625,000. One 
commenter stated that, due to the strong housing recovery, many housing 
markets have average appraised values well over $625,000, and this 
limit unduly discriminates against seniors, so the cap should be raised 
to $1 million. Another commenter suggested that the cap should be 
raised to $1.5 million, or at the least, should be indexed to 
inflation.
    HUD Response: HUD is unable to adopt this suggestion because HECM 
mortgage limits must comply with current statutory requirements. The 
private sector has the ability to develop a market for larger reverse 
mortgages.
    Comment: There should be a new program using a fixed 5.06 percent 
that will pay off all current liens on the property up to 80 percent of 
the appraisal value regardless of the age of the youngest borrower. The 
current loan programs do not properly cover upside-down borrowers.
    HUD Response: HUD continues to evaluate and monitor risks to the 
program and the MMIF. The current principal limit factors have been set 
to ensure the HECM program remains financially sound and viable for 
current and future senior borrowers.
    Comment: HUD should work towards reducing costs and improving the 
image of its HECM program. One commenter stated that HUD should start a 
public relations campaign to highlight the features and benefits of the 
program, just as it does for forward loans. The commenter also 
suggested that HUD respond to all the false and misleading comments 
made about the HECM program. Another commenter stated that HUD needs to 
improve consumer awareness by confirming safeguards and offering free 
education.
    HUD Response: In addition to the required counseling for 
prospective HECM borrowers, HUD provides various online resources for 
prospective borrowers, HECM counselors, and HECM lenders.
    Comment: HUD should explain why bridge loans are allowed with 
forward loans but not with reverse mortgages.
    HUD Response: HUD does not have restrictions on the use of bridge 
loans for the HECM program. However, Sec.  206.32 states that in order 
for a mortgage to be eligible for a HECM, a borrower must establish to 
the satisfaction of the mortgagee that after the initial payment of 
loan proceeds under Sec.  206.25(a), there will be no outstanding or 
unpaid obligations incurred by the borrower in connection with the 
mortgage transaction, except for mortgage servicing charges permitted 
under Sec.  206.27(b) and any future Repair Set Aside established 
pursuant to Sec.  206.19(f)(1).
    Comment: HUD should clarify what constitutes ``sufficient inquiry'' 
for the purposes under Sec.  206.43. The commenter also asked for 
clarification that the mortgagee does not violate HUD regulations if 
the mortgagee does not make disbursements directly to the estate 
planning firm if it is determined that the borrower may have engaged 
such an estate planning firm.
    HUD Response: HUD will clarify the meaning of ``sufficient 
inquiry'' through guidance.
    Comment: The IRS should make a positive ruling to allow the carry-
forward status of the accrued interest and MIP against retirement 
income.
    HUD Response: The rulings of the IRS are outside of the scope of 
this rule and HUD's authority in general.
    Comment: HUD should emphasize the value of placing the property in 
a living trust with a durable power of attorney. The commenter stated 
that many borrowers may become incapacitated, resulting in default, and 
that the servicer would be unable to discuss home retention or workout 
options without anyone having legal authority.
    HUD Response: Trusts are currently eligible under the HECM program, 
but the homeowner has the responsibility for identifying the proper 
legal measures that can be taken to oversee their personal affairs if 
the homeowner becomes incapacitated.
    Comment: HUD should examine the Property Assessed Clean Energy 
(PACE) program to determine if there is potential for default so that 
immediate notification can be sent to the borrowers warning them not to 
attach these liens to their properties. The commenter stated that PACE 
liens appear to be superior to HECMs and that property taxes may double 
or triple after the placement of the liens.
    HUD Response: This recommendation is outside the scope of this 
rule. HUD's recent guidance on the PACE program (ML 2016-11) states 
that properties with PACE obligations are not eligible for an FHA-
insured HECM loan.
    Comment: For all regulations and mortgagee letters, HUD should 
create accompanying template documents which all lenders and servicers 
are required to use. The commenter stated that such consistent and 
clear guidance would make it easier for HUD to have oversight, 
regulatory control, and enforcement capability.
    HUD Response: HUD does not provide templates for every regulation 
and mortgagee letter because various state laws govern specific 
information that must be provided and because minor changes would 
require HUD to reissue multiple templates. Instead, HUD prescribes what 
information must be communicated and allows servicers to apply their 
business practices in creating the letters.
    Comment: HUD should create or task a unit such as the National 
Servicing Center to help individual consumers understand their rights 
and options, provide immediate response to consumers with urgent issues 
such as foreclosure, and act as liaison between consumer and servicer 
when necessary.
    HUD Response: This comment falls outside the scope of the proposed 
rule, but HUD believes that the National Servicing Center already 
provides many of these services to HECM borrowers.
    Comment: HUD should put a moratorium on all tax and insurance 
defaults until HUD has a structure and system in place to review and 
enforce consumer protections to ensure defaults are compliant with 
consumer protection regulations and valid.
    HUD Response: This is outside the scope of the proposed rule.
    Comment: HUD should not allow changes by the servicer to the HECM 
contract.
    HUD Response: This is outside the scope of the proposed rule.
    Comment: Force-placed insurance premiums should not be a default 
trigger.
    HUD Response: Regulations at Sec.  206.27(b) require the borrower 
to pay

[[Page 7116]]

property charges, including insurance. A borrower's failure to obtain 
insurance causes the mortgagee to force-place insurance. A default 
occurs where there are no HECM funds to pay for insurance and a 
borrower fails to reimburse the mortgagee for the funds advanced to pay 
these charges.
    Comment: There is concern over state law developments that purport 
to impose duties or limitations upon HECM servicers. The commenter 
stated that these state laws are viewed as inconsistent with HECM 
regulations and guidelines, conflicting with generally accepted 
servicing principles, and having the potential effect of harming 
consumers and property values.
    HUD Response: HUD provides requirements that mortgagees must comply 
with to file for claim benefits. It is the mortgagee's responsibility 
to comply with both federal and state requirements in order to obtain 
claim benefits.

V. Findings and Certifications

Paperwork Reduction Act

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

Regulatory Planning and 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 OMB in accordance with the 
requirements of the order. This rule was determined to be a 
``significant regulatory action,'' as defined in section 3(f) of 
Executive Order 12866.
    Executive Order 13563 (Improving Regulations and Regulatory Review) 
directs executive agencies to analyze regulations that are outmoded, 
ineffective, insufficient, or excessively burdensome and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned. Executive Order 13563 also directs that, where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public. This rule reduces burdens on mortgagees by 
codifying in one place all the regulatory policy related to the HECM 
program. Prior to this rule, mortgagees had to deduce the current 
program requirements by determining which HECM regulations in 24 CFR 
part 206 were superseded by HERA and RMSA mortgagee letters.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (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. Many of the policies 
discussed in this rule, such as the requirement that mortgagees perform 
a Financial Assessment of prospective HECM borrowers, the requirements 
of the HECM for Purchase program, the introduction of the Single Lump 
Sum payment option, and the limitation on disbursements during the 
First 12-Month Disbursement Period, have already been implemented by 
mortgagees large and small. The codification of these policies will not 
impact large or small mortgagees, other than easing burden by providing 
them with one location to find all HECM regulatory requirements.
    The new policy changes in this rule would address important 
concerns with the HECM program, including the risk the program has, in 
the past, posed to the MMIF, as well as the continued availability of 
this program for seniors. Some of the new policy proposals are expected 
to relieve burdens on all mortgagees, large and small. For example, the 
amendment to the definition of ``expected average mortgage interest 
rate'', providing the mortgagee with the ability to lock in the 
expected average mortgage interest rate prior to the date of loan 
closing, will align the provision with current industry policy. 
Removing the duplicative appraisal requirement and creating a Cash for 
Keys incentive structure will both relieve burden on mortgagees. Other 
policies contained in the rule may result in mortgagees incurring 
additional costs. However, as detailed in the regulatory impact 
analysis for the rule, these costs are not estimated to rise to the 
level of having a significant impact on a substantial number of small 
entities. Moreover, HUD has attempted to mitigate the economic impacts 
of these provisions. One example is the requirement that all mortgagees 
disclose all available HECM program options. To minimize the effect of 
this provision on all mortgagees, FHA intends to create disclosure 
documents listing all available options for mortgagees to provide to 
prospective borrowers. Another example is the limitation on insurance 
claim reimbursement for the mortgagee's payment of certain property 
charges. Rather than limiting this reimbursement based on the timing of 
the property charges, requiring mortgagees to track when each property 
charge occurred, HUD is limiting the reimbursement to two-thirds of all 
property charges, consistent with how mortgagees are reimbursed for 
foreclosure costs.
    FHA believes that these policies are reasonable and provide 
mitigating features so that the FHA-approved mortgagees, large and 
small, will not be adversely affected by these policies.
    Accordingly, the undersigned certifies that this rule would not 
have a significant economic impact on a substantial number of small 
entities.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment has been made at the proposed rule state in accordance with 
HUD regulations in 24 CFR part 50, which implemented section 102(2)(C) 
of the National Environmental Policy Act of 1969 (42 U.S.C. 
4332(2)(C)). The FONSI remains applicable to this final rule and is 
available for public inspection during regular business hours in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the FONSI by calling the 
Regulations Division at (202) 708-3055 (this is not a toll-free 
number). Individuals with speech or hearing impairments may access this 
number via TTY by calling the Federal Relay Service at (800) 877-8339.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, 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

[[Page 7117]]

compliance costs on state and local governments or preempt state law 
within the meaning of the executive order.

Catalog of Federal Domestic Assistance

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

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This rule would not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 30

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

24 CFR Part 206

    Aged condominiums, Loan programs, Housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

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

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

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

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


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


Sec.  30.35  Mortgagees and lenders.

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

0
3. Revise part 206 to read as follows:

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

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

Eligible Mortgages

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

Eligible Borrowers

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

Eligible Properties

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

Refinancing of Existing Home Equity Conversion Mortgages

206.53 Refinancing a HECM loan.

Deferral of Due and Payable Status

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

Sale, Assignment and Pledge

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

Mortgage Insurance Premiums

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

HUD Responsibility to Borrowers

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

Claim Procedure

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

Condominiums

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

Termination of Insurance Contract

206.133 Termination of insurance contract.

Additional Requirements

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

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

Subpart A--General


Sec.  206.1  Purpose.

    The purposes of the Home Equity Conversion Mortgage (HECM) 
Insurance

[[Page 7118]]

program are set out in section 255(a) of the National Housing Act, 
Public Law 73-479, 48 Stat. 1246 (12 U.S.C. 1715z-20) (``NHA'').


Sec.  206.3  Definitions.

    As used in this part, the following terms shall have the meaning 
indicated.
    Bona fide tenant means a tenant of the property who is not a 
mortgagor, borrower, a spouse or child of a mortgagor or borrower, or 
any other member of a mortgagor's or borrower's family.
    Borrower means a mortgagor who is an original borrower under the 
HECM Loan Agreement and Note. The term does not include successors or 
assigns of a borrower.
    Borrower's Advance means the funds advanced to the borrower at the 
closing of a fixed interest rate HECM in accordance with Sec.  206.25.
    CMT Index means the U.S. Constant Maturity Treasury Index.
    Commissioner means the Federal Housing Commissioner or the 
Commissioner's authorized representative.
    Contract of insurance means the agreement evidenced by the issuance 
of a Mortgage Insurance Certificate or by the endorsement of the 
Commissioner upon the credit instrument given in connection with an 
insured mortgage, incorporating by reference the regulations in subpart 
C of this part and the applicable provisions of the National Housing 
Act.
    Day means calendar day, except where the term business day is used.
    Deferral Period means the period of time following the death of the 
last surviving borrower during which the due and payable status of a 
HECM is deferred for an Eligible Non-Borrowing Spouse provided that the 
Qualifying Attributes and all other FHA requirements continue to be 
satisfied.
    Eligible Non-Borrowing Spouse means a Non-Borrowing Spouse who 
meets all Qualifying Attributes for a Deferral Period.
    Estate planning service firm means an individual or entity that is 
not a mortgagee approved under part 202 of this chapter or a 
participating agency approved under subpart B of 24 CFR part 214 and 
that charges a fee that is:
    (1) Contingent on the prospective borrower obtaining a mortgage 
loan under this part, except the origination fee authorized by Sec.  
206.31 or a fee specifically authorized by the Commissioner; or
    (2) For information that borrowers and Eligible and Ineligible Non-
Borrowing Spouses, if applicable, must receive under Sec.  206.41, 
except a fee by:
    (i) A participating agency approved under subpart B of 24 CFR part 
214; or
    (ii) An individual or company, such as an attorney or accountant, 
in the bona fide business of generally providing tax or other legal or 
financial advice; or
    (3) For other services that the provider of the services represents 
are, in whole or in part, for the purpose of improving a prospective 
borrower's access to mortgages covered by this part, except where the 
fee is for services specifically authorized by the Commissioner.
    Expected average mortgage interest rate means the interest rate 
used to calculate the principal limit established at closing. For fixed 
interest rate HECMs, the expected average mortgage interest rate is the 
same as the fixed mortgage (Note) interest rate and is set 
simultaneously with the fixed interest rate. For adjustable interest 
rate HECMs, it is either the sum of the mortgagee's margin plus the 
weekly average yield for U.S. Treasury securities adjusted to a 
constant maturity of 10 years, or it is the sum of the mortgagee's 
margin plus the 10-year LIBOR swap rate, depending on which interest 
rate index is chosen by the borrower. The margin is determined by the 
mortgagee and is defined as the amount that is added to the index value 
to compute the expected average mortgage interest rate. The index type 
(CMT or LIBOR) used to calculate the expected average mortgage interest 
rate must be the same index type used to calculate mortgage interest 
rate adjustments--commingling of index types is not allowed. The 
mortgagee's margin is the same margin used to determine the initial 
interest rate and the periodic adjustments to the interest rate. 
Mortgagees, with the agreement of the borrower, may simultaneously lock 
in the expected average mortgage interest rate and the mortgagee's 
margin prior to the date of loan closing or simultaneously establish 
the expected average mortgage interest rate and the mortgagee's margin 
on the date of loan closing.
    First 12-Month Disbursement Period means the period beginning on 
the day of loan closing and ending on the day before the loan closing 
anniversary date. When the day before the anniversary date of loan 
closing falls on a Federally-observed holiday, Saturday, or Sunday, the 
end period will be on the next business day after the Federally-
observed holiday, Saturday or Sunday.
    HECM means a Home Equity Conversion Mortgage.
    HECM counselor means an independent third party who is currently 
active on FHA's HECM Counselor Roster and who is not, either directly 
or indirectly, associated with or compensated by, a party involved in 
originating, servicing, or funding the HECM, or the sale of annuities, 
investments, long-term care insurance, or any other type of financial 
or insurance product who provides statutorily required counseling to 
prospective borrowers who may be eligible for or interested in 
obtaining an FHA-insured HECM. This counseling assists elderly 
prospective borrowers who seek to convert equity in their homes into 
income that can be used to pay for home improvements, medical costs, 
living expenses, or other expenses.
    Ineligible Non-Borrowing Spouse means a Non-Borrowing Spouse who 
does not meet all Qualifying Attributes for a Deferral Period.
    Initial Disbursement Limit means the maximum amount of funds that 
can be advanced to a borrower of an adjustable interest rate HECM 
allowed at loan closing and during the First 12-Month Disbursement 
Period in accordance with Sec.  206.25.
    Insured mortgage means a mortgage which has been insured as 
evidenced by the issuance of a Mortgage Insurance Certificate.
    LIBOR means the London Interbank Offered Rate.
    Loan documents mean the credit instrument, or Note, secured by the 
lien, and the loan agreement.
    Mandatory Obligations are fees and charges incurred in connection 
with the origination of the HECM that are requirements for loan 
approval and which will be paid at closing or during the First 12-Month 
Disbursement Period in accordance with Sec.  206.25.
    Maximum claim amount means the lesser of the appraised value of the 
property, as determined by the appraisal used in underwriting the loan; 
the sales price of the property being purchased for the sole purpose of 
being the principal residence; or the national mortgage limit for a 
one-family residence under subsections 255(g) or (m) of the National 
Housing Act (as adjusted where applicable under section 214 of the 
National Housing Act) as of the date of loan closing. The initial 
mortgage insurance premium must not be taken into account in the 
calculation of the maximum claim amount. Closing costs must not be 
taken into account in determining appraised value.
    MIP means the mortgage insurance premium paid by the mortgagee to 
the Commissioner in consideration of the contract of insurance.
    Mortgage means a first lien on real estate under the laws of the 
jurisdiction where the real estate is located. If the

[[Page 7119]]

dwelling unit is in a condominium, the term mortgage means a first lien 
covering a fee interest or eligible leasehold interest in a one-family 
unit in a condominium project, together with an undivided interest in 
the common areas and facilities serving the project, and such 
restricted common areas and facilities as may be designated. The term 
refers to a security instrument creating a lien, whether called a 
mortgage, deed of trust, security deed, or another term used in a 
particular jurisdiction.
    Mortgagee means original lender under a mortgage and its successors 
and assigns, as are approved by the Commissioner.
    Mortgagor means each original mortgagor under a HECM mortgage and 
his heirs, executors, administrators, and assigns.
    Non-Borrowing Spouse means the spouse, as defined by the law of the 
state in which the spouse and borrower reside or the state of 
celebration, of the HECM borrower at the time of closing and who is 
also not a borrower.
    Participating agency means all housing counseling and intermediary 
organizations participating in HUD's Housing Counseling program, 
including HUD-approved agencies, and affiliates and branches of HUD-
approved intermediaries, HUD-approved multi-state organizations (MSOs), 
and state housing finance agencies.
    Principal limit means the maximum amount calculated, taking into 
account the age of the youngest borrower or Eligible Non-Borrowing 
Spouse, the expected average mortgage interest rate, and the maximum 
claim amount. The principal limit is calculated for the first month 
that a mortgage could be outstanding using factors provided by the 
Commissioner. It increases each month thereafter at a rate equal to 
one-twelfth of the mortgage interest rate in effect at that time, plus 
one-twelfth of the annual mortgage insurance rate. For an adjustable 
interest rate HECM, the principal limit increase may be made available 
to the borrower each month thereafter except that the availability 
during the First 12-Month Disbursement Period may be restricted. 
Although the principal limit of a fixed interest rate HECM will 
continue to increase at the rate provided by the Commissioner, no 
further funds may be made available for the borrower to draw against 
after closing. The principal limit may decrease because of insurance or 
condemnation proceeds applied to the outstanding loan balance under 
Sec.  206.209(b).
    Principal residence means the dwelling where the borrower and, if 
applicable, Non-Borrowing Spouse, maintain their permanent place of 
abode, and typically spend the majority of the calendar year. A person 
may have only one principal residence at any one time. The property 
shall be considered to be the principal residence of any borrower who 
is temporarily in a health care institution provided the borrower's 
residency in a health care institution does not exceed twelve 
consecutive months. The property shall be considered to be the 
principal residence of any Non-Borrowing Spouse, who is temporarily in 
a health care institution, as long as the property is the principal 
residence of his or her borrower spouse, who physically resides in the 
property. During a Deferral Period, the property shall continue to be 
considered to be the principal residence of any Non-Borrowing Spouse, 
who is temporarily in a health care institution, provided he or she 
qualified as an Eligible Non-Borrowing Spouse and physically occupied 
the property immediately prior to entering the health care institution 
and his or her residency in a health care institution does not exceed 
twelve consecutive months.
    Property charges means, unless otherwise specified, obligations of 
the borrower that include property taxes, hazard insurance premiums, 
any applicable flood insurance premiums, ground rents, condominium 
fees, planned unit development fees, homeowners' association fees, and 
any other special assessments that may be levied by municipalities or 
state law.
    Qualifying Attributes means the requirements which must be met by a 
Non-Borrowing Spouse in order to be an Eligible Non-Borrowing Spouse.


Sec.  206.7  Effect of amendments.

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


Sec.  206.8  Preemption.

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

Subpart B--Eligibility; Endorsement


Sec.  206.9  Eligible mortgagees.

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


Sec.  206.13  Disclosure of available HECM program options.

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


Sec.  206.15  Insurance.

    Mortgages originated under this part must be endorsed through the 
Direct Endorsement program under Sec.  203.5 of this chapter, except 
that any references to Sec.  203.255 in Sec.  203.5 shall mean Sec.  
206.115. The mortgagee shall submit the information as described in 
Sec.  206.115(b) for the Direct Endorsement

[[Page 7120]]

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

Eligible Mortgages


Sec.  206.17  Eligible mortgages: general.

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


Sec.  206.19  Payment options.

    (a) Term payment option. Under the term payment option, equal 
monthly payments are made by the mortgagee to the borrower for a fixed 
term of months chosen by the borrower in accordance with this section 
and Sec.  206.25(e), unless the mortgage is prepaid in full or becomes 
due and payable earlier under Sec.  206.27(c).
    (b) Tenure payment option. Under the tenure payment option, equal 
monthly payments are made by the mortgagee to the borrower in 
accordance with this section and with Sec.  206.25(f), unless the 
mortgage is prepaid in full or becomes due and payable under Sec.  
206.27(c).
    (c) Line of credit payment option. Under the line of credit payment 
option, payments are made by the mortgagee to the borrower at times and 
in amounts determined by the borrower as long as the amounts do not 
exceed the payment amounts permitted by Sec.  206.25.
    (d) Modified term or modified tenure payment option. Under the 
modified term or modified tenure payment options, equal monthly 
payments are made by the mortgagee and the mortgagee shall set aside a 
portion of the principal limit to be drawn down as a line of credit as 
long as the amounts do not exceed the payment amounts permitted by 
Sec.  206.25.
    (e) Single Lump Sum payment option. Under the Single Lump Sum 
payment option, the Borrower's Advance will be made by the mortgagee to 
the borrower in an amount that does not exceed the payment amount 
permitted in Sec.  206.25. The Single Lump Sum payment option will be 
available only for fixed interest rate HECMs. Set asides requiring 
disbursements after close may be offered in accordance with paragraphs 
(f)(1) through (3) of this section.
    (f) Principal limit set asides--(1) Repair Set Aside. When repairs 
required by Sec.  206.47 will be completed after closing, the mortgagee 
shall set aside a portion of the principal limit equal to 150 percent 
of the Commissioner's estimated cost of repairs, plus the repair 
administration fee.
    (2) Property Charge Set Aside--(i) Life Expectancy Set Aside 
(LESA). When required by Sec.  206.205(b)(1) or selected by the 
borrower under Sec.  206.205(b)(2)(i)(B), the mortgagee shall set aside 
a portion of the principal limit, consistent with the requirements of 
Sec.  206.205, for payment of the following property charges: property 
taxes including special assessments levied by municipalities or state 
law, and flood and hazard insurance premiums.
    (ii) Borrower elects to have mortgagee pay property charges--(A) 
First year property charges. When required by Sec.  206.205(d), the 
mortgagee shall set aside a portion of the principal limit for payment 
of the following property charges that must be paid during the First 
12-Month Disbursement Period: property taxes including special 
assessments levied by municipalities or state law, and flood and hazard 
insurance premiums. The mortgagee's estimate of withholding amount 
shall be based on the best information available as to probable 
payments which will be required to be made for property charges in the 
coming year. The mortgagee may not require the withholding of amounts 
in excess of the current estimated total annual requirement, unless 
expressly requested by the borrower. Each month's withholding for 
property charges shall equal one-twelfth of the annual amounts as 
reasonably estimated by the mortgagee.
    (B) Property charges for subsequent years. For subsequent year 
property charges, the mortgagee's estimate of withholding amount shall 
be based on the best information available as to probable payments 
which will be required to be made for property charges in the coming 
year. If actual disbursements during the preceding year are used as the 
basis, the resulting estimate may deviate from those disbursements by 
as much as ten percent. The mortgagee may not require the withholding 
of amounts in excess of the current estimated total annual requirement, 
unless expressly requested by the borrower. Each month's withholding 
for property charges shall equal one-twelfth of the annual amounts as 
reasonably estimated by the mortgagee.
    (3) Servicing Fee Set Aside. When servicing charges will be made as 
permitted by Sec.  206.207(b), the mortgagee shall set aside a portion 
of the principal limit sufficient to cover charges through a period 
equal to the payment term which would be used to calculate tenure 
payments under Sec.  206.25(f).
    (g) Interest accrual and repayment. The interest charged on the 
outstanding loan balance shall begin to accrue from the funding date 
and shall be added to the outstanding loan balance monthly as provided 
in the mortgage. Under all payment options, repayment of the 
outstanding loan balance is deferred until the mortgage becomes due and 
payable under Sec.  206.27(c).
    (h) Disbursement limits. (1) For all HECMs, no disbursements shall 
be made under any of the payment options, notwithstanding anything to 
the contrary in this section or in Sec.  206.25, in an amount which 
shall cause the outstanding loan balance after the payment to exceed 
any maximum mortgage amount stated in the security instruments or to 
otherwise exceed the amount secured by a first lien.
    (2) For adjustable interest rate HECMs:
    (i) No disbursements shall be made under any of the payment options 
during the First 12-Month Disbursement Period in excess of the Initial 
Disbursement Limit.
    (ii) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (3) For fixed interest rate HECMs, if the borrower makes a partial 
prepayment of the outstanding loan balance any time after loan closing 
and before the contract of insurance is terminated, the mortgagee shall 
apply the funds from the partial prepayment

[[Page 7121]]

in accordance with the Note. Any increase in the available principal 
limit by the amount applied towards the outstanding loan balance shall 
not be available for the borrower to draw against.


Sec.  206.21  Interest rate.

    (a) Fixed interest rate. A fixed interest rate is agreed upon by 
the borrower and mortgagee.
    (b) Adjustable interest rate. An initial expected average mortgage 
interest rate, which defines the mortgagee's margin, is agreed upon by 
the borrower and mortgagee as of the date of loan closing, or as of the 
date of rate lock-in, if the expected average mortgage interest rate 
was locked in prior to closing. The interest rate shall be adjusted in 
one of two ways depending on the option selected by the borrower, in 
accordance with paragraphs (b)(1) and (b)(2) of this section. Whenever 
an interest rate is adjusted, the new interest rate applies to the 
entire loan balance. The difference between the initial interest rate 
and the index figure applicable when the firm commitment is issued 
shall equal the margin used to determine interest rate adjustments. If 
the expected average mortgage interest rate is locked in prior to 
closing, the difference between the expected average mortgage interest 
rate and the value of the appropriate index at the time of rate lock-in 
shall equal the margin used to determine interest rate adjustments.
    (1) Annual adjustable interest rate HECMs. A mortgagee offering an 
annual adjustable interest rate shall offer a mortgage with an interest 
rate cap structure that limits the periodic interest rate increases and 
decreases as follows:
    (i) Types of mortgages insurable. The types of adjustable interest 
rate mortgages that are insurable are those for which the interest rate 
may be adjusted annually by the mortgagee, beginning after one year 
from the date of the closing.
    (ii) Interest rate index. Changes in the interest rate charged on 
an adjustable interest rate mortgage must correspond either to changes 
in the one-year LIBOR or to changes in the weekly average yield on U.S. 
Treasury securities, adjusted to a constant maturity of one year. 
Except as otherwise provided in this section, each change in the 
mortgage interest rate must correspond to the upward and downward 
change in the index.
    (iii) Frequency of interest rate changes. (A) The interest rate 
adjustments must occur annually, calculated from the date of the 
closing, except that the first adjustment shall be no sooner than 12 
months or later than 18 months.
    (B) To set the new interest rate, the mortgagee will determine the 
change between the initial (i.e., base) index figure and the current 
index figure, or will add a specific margin to the current index 
figure. The initial index figure shall be the most recent figure 
available before the date of mortgage loan origination. The current 
index figure shall be the most recent index figure available 30 days 
before the date of each interest rate adjustment.
    (iv) Magnitude of changes. The adjustable interest rate mortgage 
initial contract interest rate shall be agreed upon by the mortgagee 
and the borrower. The first adjustment to the contract interest rate 
shall take place in accordance with the schedule set forth under 
paragraph (b)(1)(iii) of this section. Thereafter, for all annual 
adjustable interest rate mortgages, the adjustment shall be made 
annually and shall occur on the anniversary date of the first 
adjustment, subject to the following conditions and limitations:
    (A) For all annual adjustable interest rate HECMs, no single 
adjustment to the interest rate shall result in a change in either 
direction of more than 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 for a subsequent year. Adjustments in the 
effective rate of interest over the entire term of the mortgage may not 
result in a change in either direction of more than five percentage 
points from the initial contract interest rate.
    (B) At each adjustment date for annual adjustable interest rate 
HECMs, changes in the index interest rate, whether increases or 
decreases, must be translated into the adjusted mortgage interest rate, 
except that the mortgage may provide for minimum interest rate change 
limitations and for minimum increments of interest rate changes.
    (2) Monthly adjustable interest rate HECMs. If a mortgage meeting 
the requirements of paragraph (b)(1) of this section is offered, the 
mortgagee may also offer a mortgage which provides for monthly 
adjustments to the interest rate such that changes in the interest rate 
charged on an adjustable interest rate mortgage correspond either to 
changes in the one-year LIBOR or to changes in the weekly average yield 
on U.S. Treasury securities, adjusted to a constant maturity of one 
year (except as otherwise provided in this section, each change in the 
mortgage interest rate must correspond to the upward and downward 
change in the index), or to the one-month CMT index or one-month LIBOR 
index, and which sets a maximum interest rate that can be charged.
    (c) Pre-loan disclosure. (1) At the time the mortgagee provides the 
borrower with a loan application, a mortgagee shall provide a borrower 
with a written explanation of all adjustable interest rate features of 
a mortgage. The explanation must include the following items:
    (i) The circumstances under which the rate may increase;
    (ii) Any limitations on the increase; and
    (iii) The effect of an increase.
    (2) Compliance with pre-loan disclosure provisions of 12 CFR part 
1026 (Truth in Lending) shall constitute full compliance with paragraph 
(c)(1) of this section.
    (d) Post-loan disclosure. At least 25 days before any adjustment to 
the interest rate may occur, the mortgagee must advise the borrower of 
the following:
    (1) The current index amount;
    (2) The date of publication of the index; and
    (3) The new interest rate.


Sec.  206.23  Shared appreciation.

    (a) Additional interest based on net appreciated value. Any 
mortgage for which the mortgagee has chosen the shared premium option 
(Sec.  206.107) may provide for shared appreciation. At the time the 
mortgage becomes due and payable or is paid in full, whichever occurs 
first, the borrower shall pay an additional amount of interest equal to 
a percentage of any net appreciated value of the property during the 
life of the mortgage. The percentage of net appreciated value to be 
paid to the mortgagee, referred to as the appreciation margin, shall be 
no more than twenty-five percent, subject to an effective interest rate 
cap of no more than twenty percent.
    (b) Computation of mortgagee share. The mortgagee's share of net 
appreciated value is computed as follows:
    (1) If the outstanding loan balance at the time the mortgagee's 
share of net appreciated value becomes payable is less than the 
appraised value of the property at the time of loan origination, the 
mortgagee's share is calculated by subtracting the appraised value at 
the time of loan origination from the adjusted sales proceeds (i.e., 
sales proceeds less transfer costs and capital improvement costs 
incurred by the borrower, but excluding any liens) and multiplying by 
the appreciation margin.

[[Page 7122]]

    (2) If the outstanding loan balance is greater than the appraised 
value at the time of loan origination but less than the adjusted 
proceeds, the mortgagee's share is calculated by subtracting the 
outstanding loan balance from the adjusted sales proceeds and 
multiplying by the appreciation margin.
    (3) If the outstanding loan balance is greater than the adjusted 
sales proceeds, the net appreciated value is zero.
    (4) If there has been no sale or transfer involving satisfaction of 
the mortgage at the time the mortgagee's share of net appreciated value 
becomes payable, sales proceeds for purposes of this section shall be 
the appraised value as determined in accordance with procedures 
approved by the Commissioner.
    (c) Effective interest rate. To determine the effective interest 
rate, the amount of interest which accrued in the twelve months prior 
to the sale of the property or the prepayment is added to the 
mortgagee's share of the net appreciated value. The sum of the 
mortgagee's share of the net appreciated value and the interest, when 
divided by the sum of the outstanding loan balance at the beginning of 
the twelve-month period prior to sale or prepayment plus the payments 
to or on behalf of the borrower (but not including interest) in the 
twelve months prior to the sale or prepayment, shall not exceed an 
effective interest rate of twenty percent.
    (d) Disclosure. At the time the mortgagee provides the borrower 
with a loan application for a mortgage with shared appreciation, the 
mortgagee shall disclose to the borrower the principal limit, payments 
and interest rate which are applicable to a comparable mortgage offered 
by the mortgagee without shared appreciation.


Sec.  206.25  Calculation of disbursements.

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

[[Page 7123]]

    (c) Mandatory Obligations for HECM for Purchase transactions 
include:
    (1) Initial MIP under Sec.  206.105(a);
    (2) Loan origination fee;
    (3) HECM counseling fee:
    (4) Reasonable and customary amounts, but not more than the amount 
actually paid by the mortgagee for any of the following items:
    (i) Recording fees and recording taxes, or other charges incident 
to the recordation of the insured mortgage;
    (ii) Credit report;
    (iii) Survey, if required by the mortgagee or the borrower;
    (iv) Title examination;
    (v) Mortgagee's title insurance;
    (vi) Fees paid to an appraiser for the initial appraisal of the 
property; and
    (vii) Flood certifications.
    (5) Delinquent Federal debt;
    (6) Fees and charges for real estate purchase contracts, 
warranties, inspections, surveys, and engineer certifications;
    (7) The amount of the principal that is advanced towards the 
purchase price of the subject property;
    (8) Property tax and flood and hazard insurance payments required 
by the mortgagee to be paid at loan closing;
    (9) Property charges not included in paragraph (c)(8) of this 
section and which are scheduled for payment during the First 12-Month 
Disbursement Period, as follows:
    (i) Adjustable Interest Rate HECMs. (A) The total amount of 
property charge payments scheduled for payment from the borrower 
authorized option under Sec.  206.205(d) during the First 12-Month 
Disbursement Period;
    (B) The total amount of semi-annual disbursements scheduled to be 
made during the First 12-Month Disbursement Period to the borrower from 
a Partially-Funded LESA; or
    (C) The total amount of property charges scheduled for payment 
during the First 12-Month Disbursement Period from a Fully-Funded LESA.
    (D) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice.
    (ii) Fixed Interest Rate HECMs. (A) The total amount of property 
charges scheduled for payment during the First 12-Month Disbursement 
Period from a Fully-Funded LESA.
    (B) Mortgagees shall use the actual insurance premium and actual 
tax amount; if a new tax bill has not been issued, the mortgagee must 
use the prior year's amount multiplied by 1.04 or an amount set by the 
Commissioner through notice;
    (10) Required pay-off of debt not secured by the property, as 
defined by the Commissioner through Federal Register notice; and
    (11) Other charges as authorized by the Commissioner through 
notice.
    (d) Timing of disbursements. Mortgage proceeds may not be disbursed 
until after the expiration of the 3-day rescission period under 12 CFR 
part 1026, if applicable.
    (e) Monthly disbursements--term option. (1) Using factors provided 
by the Commissioner, the mortgagee shall calculate the monthly 
disbursement so that the sum of paragraphs (e)(1)(i) or (e)(1)(ii) of 
this section added to paragraphs (e)(1)(iii), (e)(1)(iv), and (e)(1)(v) 
of this section shall be equal to the principal limit at the end of the 
payment term.
    (i) An initial disbursement under paragraph (a) of this section 
plus any initial servicing charge set aside under Sec.  206.19(f)(3); 
or
    (ii) The outstanding loan balance at the time of a change in 
payment option in accordance with Sec.  206.26, plus any remaining 
servicing charge set aside under Sec.  206.19(f)(3); and
    (iii) The amount of the principal limit set aside in accordance 
with Sec.  206.19(f) which is not included in the amount set aside in 
paragraphs (e)(1)(i) or (e)(1)(ii) of this section;
    (iv) All MIP or monthly charges due to the Commissioner in lieu of 
mortgage insurance premiums due through the payment term; and
    (v) All interest through the remainder of the payment term. The 
expected average mortgage interest rate shall be used for this purpose.
    (2) The mortgagee shall make all monthly disbursements through the 
payment term even if the outstanding loan balance exceeds the principal 
limit because the actual average mortgage interest rate exceeds the 
expected average mortgage interest rate unless the HECM becomes due and 
payable under Sec.  206.27(c). In the event of a deferral of due and 
payable status in accordance with Sec.  206.27(c)(3), disbursements 
shall cease immediately upon the death of the borrower and no further 
disbursements are permissible.
    (3) Mortgagees shall ensure that term monthly disbursements made to 
the borrower during the First 12-Month Disbursement Period do not 
exceed the Initial Disbursement Limit. If the sum of disbursements made 
during the First 12-Month Disbursement Period would exceed the Initial 
Disbursement Limit for that time period, the mortgagee shall decrease 
the monthly disbursements during the First 12-Month Disbursement Period 
to conform with the Initial Disbursement Limit; upon conclusion of the 
First 12-Month Disbursement Period, the borrower may request a payment 
plan recalculation.
    (4) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (5) If the mortgagee receives repayment from insurance or 
condemnation proceeds after restoration or repair of the damaged 
property, the available principal limit and outstanding loan balance 
shall be reduced by the amount of such payments.
    (f) Monthly disbursements--tenure option. (1) Monthly disbursements 
under the tenure payment option shall be calculated as if the number of 
months in the payment term equals 100 minus the lesser of the age of 
the youngest borrower or 95, multiplied by 12, but payments shall 
continue until the mortgage becomes due and payable under Sec.  
206.27(c), except that in the event that payments would exceed any 
maximum mortgage amount stated in the security instrument or would 
otherwise exceed the amount secured by the first lien, in accordance 
with Sec.  206.19(h) payments will cease immediately; payments may be 
reinstated only in the event a new Note and mortgage are executed in 
accordance with Sec.  206.27(b)(10); and in the event of a deferral of 
due and payable status in accordance with Sec.  206.27(c)(3) payments 
will cease immediately upon the death of the borrower.
    (2) Mortgagees shall ensure that tenure monthly disbursements made 
to the borrower during the First 12-Month Disbursement Period do not 
exceed the Initial Disbursement Limit. If the sum of disbursements made 
during the First 12-Month Disbursement Period would exceed the Initial 
Disbursement Limit for that time period, the mortgagee shall decrease 
the monthly disbursements during the First 12-Month Disbursement Period 
to conform with the maximum Initial Disbursement Limit; upon conclusion 
of the First 12-Month Disbursement Period, the borrower may request a 
payment plan recalculation.
    (3) If the borrower makes a partial prepayment of the outstanding 
loan balance during the First 12-Month Disbursement Period, the 
mortgagee shall apply the funds from the partial prepayment in 
accordance with the Note.
    (4) If the mortgagee receives repayment from insurance or

[[Page 7124]]

condemnation proceeds after restoration or repair of the damaged 
property, the available principal limit and outstanding loan balance 
shall be reduced by the amount of such payments.
    (g) Line of credit separately or with monthly disbursements. If the 
borrower has a line of credit, separately or combined with the term or 
tenure payment option, the principal limit is divided into an amount 
set aside for servicing charges under Sec.  206.19(f)(3), an amount 
equal to the line of credit (including any portion of the principal 
limit set aside for repairs or property charges under Sec.  
206.19(f)(1) or (2)), and the remaining amount of the principal limit 
(if any). The line of credit amount increases at the same rate as the 
total principal limit increases under Sec.  206.3. The sum of 
disbursements made during the First 12-Month Disbursement Period shall 
not exceed the Initial Disbursement Limit. If a requested disbursement 
would exceed the Initial Disbursement Limit, the mortgagee may make a 
partial disbursement to the borrower for the amount that will not 
exceed the limit. Upon the conclusion of the First 12-Month 
Disbursement Period, the borrower may request subsequent disbursements 
up to the available principal limit.
    (h) Single Lump Sum payment option. (1) Under the Single Lump Sum 
payment option, the Borrower's Advance shall be made by the mortgagee 
to the borrower in an amount that does not exceed the maximum allowable 
Borrower's Advance under paragraph (a)(2) of this section.
    (2) If the borrower makes a partial prepayment of the outstanding 
loan balance any time after loan closing and before the contract of 
insurance is terminated, the mortgagee shall apply the funds from the 
partial prepayment in accordance with the Note.
    (i) Payment of MIP and interest. At the end of each month, 
including the first month, interest accrued during that month shall be 
added to the outstanding loan balance. Where the first month is a 
partial month, a prorated amount of interest shall be added. Monthly 
MIP, which will accrue from the closing date, shall be added to the 
outstanding loan balance beginning with the first day of the second 
month after closing when paid to the Commissioner.
    (j) Mortgagee late charge. The mortgagee shall pay a late charge to 
the borrower for any late disbursement. If the mortgagee does not mail 
or electronically transfer a scheduled monthly disbursement to the 
borrower on the first business day of the month or make a line of 
credit disbursement within 5 business days of the date the mortgagee 
received the request, the late charge shall be 10 percent of the entire 
amount that should have been paid to the borrower for that month or as 
a result of that request. In no event shall the total late charge 
exceed five hundred dollars. For each additional day that the borrower 
does not receive payment, the mortgagee shall pay interest at the 
mortgage interest rate on the late payment. Any late charge and 
interest shall be paid from the mortgagee's funds and shall not be 
added to the outstanding loan balance.
    (k) No minimum payments. A mortgagee shall not require, as a 
condition of providing a loan secured by a mortgage insured under this 
part, that the monthly payments under the term or tenure payment option 
or draws under the line of credit payment option exceed a minimum 
amount established by the mortgagee.


Sec.  206.26  Change in payment option.

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


Sec.  206.27  Mortgage provisions.

    (a) Form. The mortgage shall be in a form meeting the requirements 
of the Commissioner.
    (b) Provisions. The terms of the mortgage shall contain an 
explanation of how payments will be made to the borrower, how interest 
will be charged, and when the mortgage will be due and payable. The 
mortgage shall include a provision deferring the due and payable status 
that occurs because of the death of the last surviving borrower for an 
Eligible Non-Borrowing Spouse. It shall also contain provisions 
designed to ensure compliance with this part and provisions on the 
following additional matters:
    (1) Disbursements by the mortgagee under the term or tenure payment 
options shall be mailed to the borrower or electronically transferred 
to an account of the borrower on the first

[[Page 7125]]

business day of each month beginning with the first month after 
closing. Disbursements under the line of credit payment option shall be 
mailed to the borrower or electronically transferred to an account of 
the borrower within five business days after the mortgagee has received 
a written request for disbursement by the borrower. In accordance with 
Sec.  206.55, in no event may disbursements continue during a Deferral 
Period.
    (2) The borrower shall insure all improvements on the property that 
serves as collateral for the HECM whether in existence at the time of 
origination or subsequently erected, against any hazards, casualties, 
and contingencies, including but not limited to fire and flood, for 
which the mortgagee requires insurance. Such insurance shall be 
maintained in the amount and for the period of time that is necessary 
to protect the mortgagee's investment. Whether or not the mortgagee 
imposes a flood insurance requirement, the borrower shall at a minimum 
insure all improvements on the property, whether in existence at the 
time of origination or subsequently erected, against loss by floods to 
the extent required by the Commissioner. If the mortgagee imposes 
insurance requirements, all insurance shall be carried with companies 
acceptable to the mortgagee, and the insurance policies and any 
renewals shall be held by the mortgagee and shall include loss payable 
clauses in favor of and in a form acceptable to the mortgagee.
    (3) The borrower shall not participate in a real estate tax 
deferral program or permit any liens to be recorded against the 
property, unless such liens are subordinate to the insured mortgage 
and, if applicable, any second mortgage held by the Commissioner.
    (4) A mortgage may be prepaid in full or in part in accordance with 
Sec.  206.209.
    (5) The borrower must keep the property in good repair.
    (6) The borrower must provide for the payment of property charges 
in accordance with Sec.  206.205.
    (7) The payment of monthly MIP may be added to the outstanding 
principal balance.
    (8) The borrower shall have no personal liability for payment of 
the outstanding loan balance. The mortgagee shall enforce the debt only 
through sale of the property. The mortgagee shall not be permitted to 
obtain a deficiency judgment against the borrower if the mortgage is 
foreclosed.
    (9) If the mortgage is assigned to the Commissioner under Sec.  
206.121(b), the borrower shall not be liable for any difference between 
the insurance benefits paid to the mortgagee and the outstanding loan 
balance including accrued interest, owed by the borrower at the time of 
the assignment.
    (10) If State law limits the first lien status of the mortgage as 
originally executed and recorded to a maximum amount of debt or a 
maximum number of years, the borrower shall agree to execute any 
additional documents required by the mortgagee and approved by the 
Commissioner to extend the first lien status to an additional amount of 
debt and an additional number of years and to cause any other liens to 
be removed or subordinated.
    (c) Date the mortgage comes due and payable. (1) The mortgage shall 
state that the outstanding loan balance will be due and payable in full 
if a borrower dies and the property is not the principal residence of 
at least one surviving borrower, except that the due and payable status 
shall be deferred in accordance with paragraph (c)(3) of this section 
if the requirements of the Deferral Period are met; or if a borrower 
conveys all of his or her title in the property and no other borrower 
retains title to the property. For purposes of the preceding sentence, 
a borrower retains title in the property if the borrower continues to 
hold title to any part of the property in fee simple, as a leasehold 
interest as set forth in Sec.  206.45(a), or as a life estate.
    (2) The mortgage shall state that the outstanding loan balance 
shall be due and payable in full, upon approval of the Commissioner, if 
any of the following occur:
    (i) The property ceases to be the principal residence of a borrower 
for reasons other than death and the property is not the principal 
residence of at least one other borrower;
    (ii) For a period of longer than 12 consecutive months, a borrower 
fails to occupy the property because of physical or mental illness and 
the property is not the principal residence of at least one other 
borrower;
    (iii) The borrower does not provide for the payment of property 
charges in accordance with Sec.  206.205; or
    (iv) An obligation of the borrower under the mortgage is not 
performed.
    (3) Deferral of due and payable status. The mortgage documents 
shall contain a provision deferring due and payable status, called the 
Deferral Period, for an Eligible Non-Borrowing Spouse until the death 
of the last Eligible Non-Borrowing Spouse or the requirements of the 
Deferral Period in Sec.  206.55 cease to be met and have not been cured 
as provided for in Sec.  206.57.
    (d) Second mortgage to Commissioner. Unless otherwise provided by 
the Commissioner, a second mortgage to secure any payments by the 
Commissioner as provided in Sec.  206.121(c) must be given to the 
Commissioner before a Mortgage Insurance Certificate is issued for the 
mortgage. If the Commissioner does not require a second mortgage to be 
given to the Commissioner prior to the issuance of a Mortgage Insurance 
Certificate, the Commissioner may require a second mortgage to be given 
to the Commissioner at a later day in order to secure payments by the 
Commissioner as provided in Sec.  206.121(c).


Sec.  206.31   Allowable charges and fees.

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

[[Page 7126]]

    (viii) Such other charges as may be authorized by the Commissioner.
    (b) Repair administration fee. If the property requires repairs 
after closing in order to meet FHA requirements, the mortgagee may 
collect a fee for each occurrence as compensation for administrative 
duties relating to repair work pursuant to Sec.  206.47(c) and (d), not 
to exceed the greater of one and one-half percent of the amount 
advanced for the repairs or fifty dollars. The mortgagee shall collect 
the repair fee by adding it to the outstanding loan balance.


Sec.  206.32   No outstanding unpaid obligations.

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

Eligible Borrowers


Sec.  206.33  Age of borrower.

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


Sec.  206.34   Limitation on number of mortgages.

    (a) Once a borrower has obtained an insured mortgage under this 
part, the borrower is eligible to obtain future insured HECM loan 
financing if the existing HECM is satisfied prior to or at the closing 
of the new HECM, or the borrower provides legal documentation, in a 
manner acceptable to the Commissioner, evidencing release of the 
borrower's financial obligation to satisfy the existing HECM.
    (b) Current HECM borrowers that plan to sell their existing 
residence and use the HECM for Purchase program to obtain a new 
principal residence must pay off the existing FHA-insured mortgage 
before the HECM for Purchase mortgage can be insured.


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

    (a) A mortgagor is not required to be a borrower; however, any 
borrower is required to be on title to the property which serves as 
collateral for the HECM, and is therefore, by definition, also a 
mortgagor.
    (b) The mortgagor shall hold title to the entire property which is 
the security for the mortgage. If there are multiple mortgagors, all 
the mortgagors must collectively hold title to the entire property 
which is the security for the mortgage. If one or more mortgagors hold 
a life estate in the property, for purposes of this section only, the 
term ``mortgagor'' shall include each holder of a future interest in 
the property (remainder or reversion) who has executed the mortgage.
    (c) If Non-Borrowing Spouses and non-borrowing owners of the 
property will continue to hold title to the property which serves as 
collateral for the HECM, such Non-Borrowing Spouses and non-borrowing 
owners must sign the mortgage as mortgagors, evidencing their 
commitment of the property as security for the mortgage.
    (d) All Non-Borrowing Spouses and non-borrowing owners shall sign a 
certification that:
    (1) Consents to their spouse or other borrowing owner obtaining the 
HECM;
    (2) Acknowledges the terms and conditions of the mortgage; and
    (3) Acknowledges that the property will serve as collateral for the 
HECM as evidenced by mortgage lien(s).


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

    (a) The Commissioner may establish, through notice, seasoning 
requirements for existing non-HECM liens. Such seasoning requirements 
shall not prohibit the payoff of existing non-HECM liens using HECM 
proceeds if the liens have been in place for longer than 12 months 
prior to the HECM closing or if the liens have resulted in cash to the 
borrower in an amount of $500 or less, whether at closing or through 
cumulative draws prior to the date of the HECM closing.
    (b) Mortgagees must provide documentation satisfactory to the 
Commissioner as established by notice that the seasoning requirement 
was met.
    (c) Home Equity Lines of Credit. The borrower may pay off, at 
closing, a Home Equity Line of Credit (HELOC) that does not meet 
seasoning requirements from borrower funds, the HECM funds, or a 
combination of HECM funds and borrower funds, as long as the draw from 
HECM funds does not exceed the percentage approved by the Commissioner 
under the authority of Sec.  206.25(a).


Sec.  206.37   Credit standing.

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

[[Page 7127]]

applicable laws and regulations, including but not limited to, the 
following:
    (A) Fair Housing Act (42 U.S.C. 3601 et seq.);
    (B) Fair Credit Reporting Act (15 U.S.C. 1681 et seq.);
    (C) Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.); and
    (D) Regulation B (12 CFR part 1002).


Sec.  206.39   Principal residence.

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


Sec.  206.40   Disclosure, verification and certifications.

    (a) Disclosure and certification of Social Security and Employer 
Identification Numbers--(1) Borrower. The borrower must meet the 
requirements for the disclosure and verification of Social Security and 
Employer Identification Numbers, as provided by part 200, subpart U, of 
this chapter.
    (2) Eligible Non-Borrowing Spouse. The Eligible Non-Borrowing 
Spouse shall comply with the requirements for disclosure and 
verification of Social Security and Employer Identification Numbers by 
borrowers in paragraph (a)(1) of this section.
    (b) Certifications. Each borrower and each Non-Borrowing Spouse 
shall provide all required certifications to HUD and the mortgagee, as 
required by the Commissioner.
    (c) Designation of alternate individual. At the time of 
origination, the mortgagee shall request that the borrower designate an 
alternate individual for the purpose of communicating with the 
mortgagee if the mortgagee has not been able to reach the borrower. The 
designation of the alternate individual is at the discretion of the 
borrower. If the mortgagee is unable to make contact or communicate 
with the borrower for any reason, including death or incapacitation, 
the mortgagee shall communicate with the alternate individual, if one 
has been designated by the borrower.


Sec.  206.41   Counseling.

    (a) List provided. At the time of the initial contact with the 
prospective borrower, the mortgagee shall give the borrower a list of 
the names, addresses, and telephone numbers of HECM counselors and 
their employing agencies, which have been approved by the Commissioner, 
in accordance with subpart E of this part, as qualified and able to 
provide the information described in paragraph (b) of this section. The 
borrower, any Eligible or Ineligible Non-Borrowing Spouse, and any non-
borrowing owner must receive counseling.
    (b) Information to be provided. (1) A HECM counselor must discuss 
with the borrower:
    (i) The information required by section 255(f) of the NHA;
    (ii) Whether the borrower has signed a contract or agreement with 
an estate planning service firm that requires, or purports to require, 
the borrower to pay a fee on or after closing that may exceed amounts 
permitted by the Commissioner or this part;
    (iii) If such a contract has been signed under paragraph (b)(1)(ii) 
of this section, the extent to which services under the contract may 
not be needed or may be available at nominal or no cost from other 
sources, including the mortgagee; and
    (iv) Any other requirements determined by the Commissioner.
    (2) If the HECM borrower has an Eligible Non-Borrowing Spouse, in 
addition to meeting the requirements of paragraph (b)(1) of this 
section, a HECM counselor shall discuss with the borrower and Eligible 
Non-Borrowing Spouse:
    (i) The requirement that the Eligible Non-Borrowing Spouse must 
obtain ownership of the property or other legal right to remain in the 
property for life, upon the death of the last surviving borrower;
    (ii) A failure to obtain ownership or other legal right to remain 
in the property for life will result in the HECM becoming due and 
payable and the Eligible Non-Borrowing Spouse will not receive the 
benefit of the Deferral Period;
    (iii) The requirement that the property must be the principal 
residence of the Eligible Non-Borrowing Spouse prior to and after the 
death of the borrowing spouse;
    (iv) The requirement that the Eligible Non-Borrowing Spouse 
fulfills all obligations of the mortgage, including the payment of 
property charges and upkeep of the property; and
    (v) Any other requirements determined by the Commissioner.
    (3) If the HECM borrower has an Ineligible Non-Borrowing Spouse, in 
addition to meeting the requirements of paragraph (b)(1) of this 
section, a HECM counselor shall discuss with the borrower and 
Ineligible Non-Borrowing Spouse:
    (i) The Deferral Period will not be applicable;
    (ii) The HECM will become due and payable upon the death of the 
last surviving borrower; and
    (iii) Any other requirements determined by the Commissioner.
    (c) Certificate. The HECM counselor will provide the borrower with 
a certificate stating that the borrower, Non-Borrowing Spouse, and non-
borrowing owner, as applicable, has received counseling. The borrower 
shall provide the mortgagee with a physical copy of the certificate.


Sec.  206.43   Information to borrower.

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


Sec.  206.44   Monetary investment for HECM for Purchase program.

    (a) Monetary investment. At closing, HECM for Purchase borrowers 
shall provide a monetary investment that will be applied to satisfy the 
difference between the principal limit and the sale

[[Page 7128]]

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

Eligible Properties


Sec.  206.45   Eligible properties.

    (a) Title. A mortgage must be on real estate held in fee simple; or 
on a leasehold that is under a lease with a duration lasting until the 
later of: 99 years, if such lease is renewable; or the actuarial life 
expectancy of the mortgagor plus a number of years specified by the 
Commissioner, which shall not be more than 99 years. The mortgagee 
shall obtain a title insurance policy satisfactory to the Commissioner. 
If the Commissioner determines that title insurance for reverse 
mortgages is not available for reasonable rates in a state, then the 
Commissioner may specify other acceptable forms of title evidence in 
lieu of title insurance.
    (b) Type of property. The property shall include a dwelling 
designed principally as a residence for one family or such additional 
families as the Commissioner shall determine. A condominium unit 
designed for one-family occupancy shall also be an eligible property.
    (c) Borrower and mortgagee requirement for maintaining flood 
insurance coverage. (1) During such time as the mortgage is insured, 
the borrower and mortgagee shall be obligated, by a special condition 
to be included in the mortgage commitment, to obtain and to maintain 
National Flood Insurance Program (NFIP) flood insurance coverage on the 
property improvements (dwelling and related structures/equipment 
essential to the value of the property and subject to flood damage) if 
NFIP flood insurance is available with respect to the property 
improvements that:
    (i) Are located in an area designated by the Federal Emergency 
Management Agency (FEMA) as a floodplain area having special flood 
hazards; or
    (ii) Are otherwise determined by the Commissioner to be subject to 
a flood hazard.
    (2) No mortgage may be insured that covers property improvements 
located in an area that has been identified by FEMA as an area having 
special flood hazards, unless the community in which the area is 
situated is participating in the NFIP and such insurance is obtained by 
the borrower. Such requirement for flood insurance shall be effective 
one year after the date of notification by FEMA to the chief executive 
officer of a flood prone community that such community has been 
identified as having special flood hazards.
    (3) The flood insurance must be maintained during such time as the 
mortgage is insured in an amount at least equal to the lowest of the 
following:
    (i) 100 percent replacement cost of the insurable value of the 
improvements, which consists of the development or project cost less 
estimated land cost; or
    (ii) The maximum amount of the NFIP insurance available with 
respect to the particular type of the property; or
    (iii) The outstanding principal balance of the loan.
    (d) Lead-based paint poisoning prevention. If the appraiser of a 
dwelling constructed prior to 1978 finds defective paint surfaces, 24 
CFR 200.810(d) shall apply unless the borrower certifies that no child 
who is less than six years of age resides or is expected to reside in 
the dwelling, except that any reference to ``mortgagor'' in 24 CFR 
200.810(d) shall mean ``borrower'' for purposes of this paragraph.
    (e) Restrictions on conveyance. The property must be freely 
marketable. Conveyance of the property may only be restricted as 
permitted under 24 CFR 203.41 or 24 CFR 234.66 and this part, except 
that a right of first refusal to purchase a unit in a condominium 
project is permitted if the right is held by the condominium 
association for the project.
    (f) Location of property. The mortgaged property shall be located 
within the United States, Puerto Rico, Guam, the Virgin Islands, the 
Commonwealth of the Northern Mariana Islands, and American Samoa. The 
mortgaged property, if otherwise acceptable to the Commissioner, may be 
located in any location where the housing standards meet the 
requirements of the Commissioner.
    (g) HECM for Purchase. (1) A HECM for Purchase transaction is where 
title to the property is transferred to the HECM borrower and, at the 
time of closing, the HECM first and second liens, if applicable, will 
be the only liens against the property.
    (2) Properties are eligible for FHA insurance under the HECM for 
Purchase program when construction is completed and the property is 
habitable, as evidenced by the issuance of a Certificate of Occupancy 
or its equivalent, by the local jurisdiction.


Sec.  206.47   Property standards; repair work.

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

[[Page 7129]]

Commissioner and meets all reimbursement requirements established by 
the Commissioner.
    (e) HECM for Purchase. For HECM for Purchase transactions, where 
major property deficiencies threaten the health and safety of the 
homeowner or jeopardize the soundness and security of the property, all 
repairs must be completed by the seller prior to closing. Appraisers 
shall complete the appraisal report as ``Subject To'' the completion of 
the repairs.


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

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


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

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

Refinancing of Existing Home Equity Conversion Mortgages


Sec.  206.53   Refinancing a HECM loan.

    (a) General. Except as otherwise provided in this section, all 
requirements applicable to the insurance of HECMs under this part apply 
to the insurance of refinanced HECMs. FHA may, upon application by a 
mortgagee, insure any mortgage given

[[Page 7130]]

to refinance an existing HECM insured under this part, including loans 
assigned to the Commissioner as described in Sec.  206.107(a)(1) and 
Sec.  206.121(b).
    (b) Definition of ``total cost of the refinancing''. For purposes 
of paragraphs (d) and (e) of this section, the term ``total cost of the 
refinancing'' means the sum of the allowable charges and fees permitted 
under Sec.  206.31 and the initial MIP described in Sec.  206.105(a) 
and paragraph (c) of this section.
    (c) Initial MIP limit. (1) The initial MIP paid by the mortgagee 
pursuant to Sec.  206.105(a) shall not exceed the difference between: 
three percent of the increase in the maximum claim amount for the new 
HECM, minus the amount of the initial MIP already charged and paid by 
the borrower for the existing HECM that is being refinanced. No refunds 
will be given if the initial MIP paid on the existing HECM exceeds the 
initial MIP due on the new HECM.
    (2) The HECM refinance authority is only applicable when the 
property that serves as collateral for the FHA-insured mortgage remains 
the same.
    (3) Existing HECM borrowers refinancing an existing HECM are 
eligible for a MIP reduction under the conditions of this section, but 
existing HECM borrowers who participate in a HECM for Purchase 
transaction are ineligible for a reduction in the initial MIP.
    (d) Anti-churning disclosure--(1) Contents of anti-churning 
disclosure. In addition to providing the required disclosures under 
Sec.  206.43, the mortgagee shall provide to the borrower its best 
estimate of:
    (i) The total cost of the refinancing to the borrower; and
    (ii) The increase in the borrower's principal limit as measured by 
the estimated initial principal limit on the mortgage to be insured 
less the current principal limit on the HECM that is being refinanced 
under this section.
    (2) Timing of anti-churning disclosure. The mortgagee shall provide 
the anti-churning disclosure concurrently with the disclosures required 
under Sec.  206.43.
    (e) Waiver of counseling requirement. The borrower and any Non-
Borrowing Spouse may elect not to receive counseling under Sec.  
206.41, but only if:
    (1) The original HECM was assigned a Case Number on or after August 
4, 2014, and the borrower and Non-Borrowing Spouse, if applicable, 
received counseling required under Sec.  206.41; or where the original 
HECM was assigned a Case Number prior to August 4, 2014, and there is 
no applicable Non-Borrowing Spouse.
    (2) The borrower has received the anti-churning disclosure required 
under paragraph (d) of this section.
    (3) The increase in the borrower's principal limit (as provided in 
the anti-churning disclosure) exceeds the total cost of the refinancing 
by an amount established by the Commissioner through Federal Register 
notice. FHA may periodically update this amount through publication of 
a notice in the Federal Register. Publication of any such revised 
amount will occur at least 30 days before the revision becomes 
effective.
    (4) The time between the date of the closing on the original HECM 
and the date of the application for refinancing under this section does 
not exceed five years (even if less than five years have passed since a 
previous refinancing under this section).

Deferral of Due and Payable Status


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

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


Sec.  206.57   Cure provision enabling reinstatement of Deferral 
Period.

    (a) When the mortgagee is required by Sec.  206.55(b)(2) to provide 
an Eligible Non-Borrowing Spouse with 30 days to cure the default, this 
section shall apply.
    (b) If the default is cured within the 30-day timeframe, the 
Deferral Period shall be reinstated, unless:

[[Page 7131]]

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


Sec.  206.59   Obligations of mortgagee.

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


Sec.  206.61   HECM proceeds during a Deferral Period.

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

Subpart C--Contract Rights and Obligations

Sale, Assignment and Pledge


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

    (a) Sale of interests in insured mortgages. No mortgagee may sell 
or otherwise dispose of any mortgage insured under this part, or group 
of mortgages insured under this part, or any partial interest in such 
mortgage or mortgages by means of any agreement, arrangement or device 
except pursuant to this subpart.
    (b) Sale of insured mortgage to approved mortgagee. A mortgage 
insured under this part may be sold to another approved mortgagee. The 
seller shall notify the Commissioner of the sale within 15 calendar 
days, on a form prescribed by the Commissioner and acknowledged by the 
buyer.
    (c) Effect of sale of insured mortgage. When a mortgage insured 
under this part is sold to another approved mortgagee, the buyer shall 
thereupon succeed to all the rights and become bound by all the 
obligations of the seller under the contract of insurance and the 
seller shall be released from its obligations under the contract, 
provided that the seller shall not be relieved of its obligation to pay 
mortgage insurance premiums until the notice required by Sec.  
206.101(b) is received by the Commissioner.
    (d) Assignments, pledges and transfers by approved mortgagee. (1) 
An assignment, pledge, or transfer of a mortgage or group of mortgages 
insured under this part, not constituting a final sale, may be made by 
an approved mortgagee to another approved mortgagee provided the 
following requirements are met:
    (i) The assignor, pledgor or transferor shall remain the mortgagee 
of record.
    (ii) The Commissioner shall have no obligation to recognize or deal 
with any party other than the mortgagee of record with respect to the 
rights, benefits and obligations of the mortgagee under the contract of 
insurance.
    (2) An assignment or transfer of an insured mortgage or group of 
insured mortgages may be made by an approved mortgagee to other than an 
approved mortgagee provided the requirements under paragraphs (d)(1)(i) 
and (d)(1)(ii) of this section are met and the following additional 
requirements are met:
    (i) The assignee or transferee shall be a corporation, trust or 
organization (including but not limited to any pension trust or profit-
sharing plan) which certifies to the approved mortgagee that:

[[Page 7132]]

    (A) It has assets of $100,000 or more; and
    (B) It has lawful authority to hold an insured mortgage or group of 
insured mortgages.
    (ii) The assignment or transfer shall be made pursuant to an 
agreement under which the transferor or assignor is obligated to take 
one of the following alternate courses of action within 1 year from the 
date of the assignment or within such additional period of time as may 
be approved by the Commissioner:
    (A) The transferor or assignor shall repurchase and accept a 
reassignment of such mortgage or group of mortgages.
    (B) The transferor or assignor shall obtain a sale and transfer of 
such mortgage or group of mortgages to an approved mortgagee.
    (3) Notice to or approval of the Commissioner is not required in 
connection with assignments, pledges or transfers pursuant to this 
section.
    (e) Declaration of trust. A sale of a beneficial interest in a 
group of mortgages insured under this part, where the interest to be 
acquired is related to all of the mortgages as an entirety, rather than 
an interest in a specific mortgage, shall be made only pursuant to a 
declaration of trust, which has been approved by the Commissioner prior 
to any such sale.
    (f) Transfers of partial interests. A partial interest in a 
mortgage insured under this part may be transferred under a 
participation agreement without obtaining the approval of the 
Commissioner, if the following conditions are met:
    (1) Principal mortgagee. The insured mortgage shall be held by an 
approved mortgagee which, for the purposes of this section, shall be 
referred to as the principal mortgagee.
    (2) Interest of principal mortgagee. The principal mortgagee shall 
retain and hold for its own account a financial interest in the insured 
mortgage.
    (3) Qualification for holding partial interest. A partial interest 
in an insured mortgage shall be issued to and held only by:
    (i) A mortgagee approved by the Commissioner; or
    (ii) A corporation, trust or organization (including, but not 
limited to any pension fund, pension trust, or profit-sharing plan) 
which certifies to the principal mortgagee that:
    (A) It has assets of $100,000 or more; and
    (B) It has lawful authority to acquire a partial interest in an 
insured mortgage.
    (4) Participation agreement provisions. The participation agreement 
shall include provisions that:
    (i) The principal mortgagee shall retain title to the mortgage and 
remain the mortgagee of record under the contract of mortgage 
insurance.
    (ii) The Commissioner shall have no obligation to recognize or deal 
with anyone other than the principal mortgagee with respect to the 
rights, benefits and obligations of the mortgagee under the contract of 
insurance.
    (iii) The mortgage and loan documents shall remain in the custody 
of the principal mortgagee.
    (iv) The responsibility for servicing the insured mortgages shall 
remain with the principal mortgagee.


Sec.  206.102   Insurance Funds.

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

Mortgage Insurance Premiums


Sec.  206.103   Payment of MIP.

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


Sec.  206.105   Amount of MIP.

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


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

    (a) Election of option. Before the mortgage is submitted for 
insurance endorsement, the mortgagee shall elect either the assignment 
option or the shared premium option.
    (1) Under the assignment option, the mortgagee shall have the 
option of assigning the mortgage to the Commissioner if the outstanding 
loan balance is equal to or greater than 98 percent of the maximum 
claim amount, regardless of the deferral status, or the borrower has 
requested a payment which exceeds the difference between the maximum 
claim amount and the outstanding loan balance and:
    (i) The mortgagee is current in making the required payments under 
the mortgage to the borrower;
    (ii) The mortgagee is current in its payment of the MIP (and late 
charges and interest on the MIP, if any) to the Commissioner;
    (iii) The mortgage is not due and payable under Sec.  206.27(c)(1), 
or, if due and payable under Sec.  206.27(c)(1), its due and payable 
status has been deferred pursuant to a Deferral Period;

[[Page 7133]]

    (iv) An event described in Sec.  206.27(c)(2) has not occurred, or 
the Commissioner has been so informed but has denied approval for the 
mortgage to be due and payable. At the mortgagee's option, the 
mortgagee may forgo assignment of the mortgage and file a claim under 
any of the circumstances described in Sec.  206.123(a)(3)-(5); and
    (v) The mortgage is a first lien of record and title to the 
property securing the mortgage is good and marketable. The provisions 
of Sec.  206.136 pertaining to mortgagee certifications also apply.
    (2) Under the shared premium option, the mortgagee may not assign a 
mortgage to the Commissioner unless the mortgagee fails to make 
payments and the Commissioner demands assignment (Sec.  206.123(a)(2)), 
but the mortgagee shall only be required to remit a reduced monthly MIP 
to the Commissioner. The mortgagee shall collect from the borrower the 
full amount of the monthly MIP provided in Sec.  206.105(b) but shall 
retain a portion of the monthly MIP paid by the borrower as 
compensation for the default risk assumed by the mortgagee. The portion 
of the MIP to be retained by a mortgagee shall be determined by the 
Commissioner as calculated in Sec.  206.109. For a particular mortgage, 
the applicable portion shall be determined as of the date of the 
commitment. The mortgagee retains the right to file a claim under any 
of the circumstances described in Sec.  206.123(a)(2)-(5).
    (b) No election for shared appreciation. Shared appreciation 
mortgages shall be insured by the Commissioner only under the shared 
premium option.


Sec.  206.109   Amount of mortgagee share of premium.

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


Sec.  206.111   Due date of MIP.

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


Sec.  206.113   Late charge and interest.

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


Sec.  206.115   Insurance of mortgage.

    (a) Mortgages with firm commitments. For applications for insurance 
involving mortgages not eligible to be originated under the Direct 
Endorsement program under Sec.  203.5 (any reference to Sec.  203.255 
in Sec.  203.5 shall mean Sec.  206.115 for purposes of this section), 
the Commissioner will endorse the mortgage for insurance by issuing a 
Mortgage Insurance Certificate.
    (b) Endorsement with Direct Endorsement processing. For 
applications for insurance involving mortgages originated under the 
Direct Endorsement program under Sec.  203.5 (any reference to Sec.  
203.255 in Sec.  203.5 shall mean Sec.  206.115 for purposes of this 
section), the mortgagee shall submit to the Commissioner, within 60 
days after the date of closing of the loan or such additional time as 
permitted by the Commissioner, properly completed documentation and 
certifications as listed in this paragraph (b):
    (1) Property appraisal upon a form meeting the requirements of the 
Commissioner (including, if required, any additional documentation 
supporting the appraised value of the property under Sec.  206.52), and 
a HUD conditional commitment, or a Lender's Notice of Value issued by 
the Lender Appraisal Processing Program (LAPP) approved lender when the 
appraisal was originally completed for use in a VA application, but 
only if the appraiser was also on the FHA roster as of the effective 
date of the appraisal, and all accompanying documents required by the 
Commissioner;
    (2) An application for insurance of the mortgage in a form 
prescribed by the Commissioner;
    (3) A certified copy of the mortgage and loan documents executed 
upon forms which meet the requirements of the Commissioner;
    (4) An underwriter certification, on a form prescribed by the 
Commissioner, stating that the underwriter has personally reviewed the 
appraisal report and credit application (including the analysis 
performed on the worksheets) and that the proposed mortgage complies 
with FHA underwriting requirements, and incorporates each of the 
underwriter certification items that apply to the mortgage submitted 
for endorsement, as set forth in the applicable handbook or similar 
publication that is distributed to all Direct Endorsement mortgagees, 
except that if FHA makes the TOTAL Mortgage Scorecard available to HECM 
mortgagees by setting out requirements applicable for the use of the 
TOTAL Mortgage Scorecard in a Federal Register notice for comment, 
mortgagees may follow such procedures and meet such requirements in 
lieu of providing the underwriter certification;
    (5) Where applicable, a certificate under oath and contract 
regarding use of the dwelling for transient or hotel purposes;
    (6) Where an individual water or sewer system is being used, an 
approval letter from the local health authority indicating approval of 
the system in accordance with Sec.  200.926d(f);
    (7) A mortgage certification on a form prescribed by the 
Commissioner, stating that the authorized representative of the 
mortgagee who is making the certification has personally reviewed the 
mortgage documents and the application for insurance endorsement, and 
certifying that the mortgage complies with the requirements of 
paragraph (b) of this section. The certification shall incorporate each 
of the mortgagee certification items that apply to the mortgage loan 
submitted for endorsement, as set forth in the applicable handbook or 
similar publication that is distributed to all Direct Endorsement 
mortgagees;
    (8) Documents required by Sec.  206.15;
    (9) Documentation providing that the seller is the owner of record 
in accordance with Sec.  206.52(a) and the time restriction 
requirements of Sec.  206.52(b) are met;
    (10) For HECM for Purchase transactions, a Certificate of 
Occupancy, or its equivalent, if required for new construction; and
    (11) Such other documents as the Commissioner may require.
    (c) Pre-endorsement review for Direct Endorsement. (1) Upon 
submission by an approved mortgagee of the documents required by 
paragraph (b) of this section, the Commissioner will

[[Page 7134]]

review the documents and determine that:
    (i) The mortgage is executed on a form which meets the requirements 
of the Commissioner;
    (ii) The mortgage maturity meets the requirements of the applicable 
program;
    (iii) The stated mortgage amount does not exceed 150 percent of the 
maximum claim amount;
    (iv) All documents required by paragraph (b) of this section are 
submitted;
    (v) All necessary certifications are made in accordance with 
paragraph (b) of this section;
    (vi) There is no mortgage insurance premium, late charge or 
interest due to the Commissioner; and
    (vii) The mortgage was not in default when submitted for insurance 
or, if submitted for insurance more than 60 days after closing, the 
mortgagee certifies that the borrower is current in paying all property 
charges or is otherwise in compliance with all the terms and conditions 
of the mortgage documents.
    (2) The Commissioner is authorized to determine if there is any 
information indicating that any certification or required document is 
false, misleading, or constitutes fraud or misrepresentation on the 
part of any party, or that the mortgage fails to meet a statutory or 
regulatory requirement. If, following this review, the mortgage is 
determined to be eligible, the Commissioner will endorse the mortgage 
for insurance by issuance of a Mortgage Insurance Certificate. If the 
mortgage is determined to be ineligible, the Commissioner will inform 
the mortgagee in writing of this determination, and include the reasons 
for the determination and any corrective actions that may be taken.
    (d) Submission by mortgagee other than originating mortgagee. If 
the originating mortgagee assigns the mortgage to another approved 
mortgagee before pre-endorsement review under paragraph (c) of this 
section, the assignee may submit the required documents for pre-
endorsement review in the name of the originating mortgagee. All 
certifications must be executed by the originating mortgagee (or its 
underwriter, if appropriate). The purchasing mortgagee may pay any 
required mortgage insurance premium, late charge and interest.
    (e) Post-Endorsement review for Direct Endorsement. Following 
endorsement for insurance, the Commissioner may review all documents 
required by paragraph (b) of this section. If, following this review, 
the Commissioner determines that the mortgage does not satisfy the 
requirements of the Direct Endorsement program, the Commissioner may 
place the mortgagee on Direct Endorsement probation, or terminate the 
authority of the mortgagee to participate in the Direct Endorsement 
program pursuant to Sec.  206.15, or refer the matter to the Mortgagee 
Review Board for action pursuant to part 25 of this title.
    (f) Creation of the contract. The mortgage shall be an insured 
mortgage from the date of the issuance of a Mortgage Insurance 
Certificate, from the date of the endorsement of the credit instrument, 
or from the date of FHA's electronic acknowledgement to the mortgagee 
that the mortgage is insured, as applicable. The Commissioner and the 
mortgagee are thereafter bound by the regulations in this subpart with 
the same force and to the same extent as if a separate contract had 
been executed relating to the insured mortgage, including the 
provisions of the regulations in this subpart and of the National 
Housing Act.


Sec.  206.116   Refunds.

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

HUD Responsibility to Borrowers


Sec.  206.117   General.

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


Sec.  206.119   [Reserved]


Sec.  206.121   Commissioner authorized to make payments.

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

Claim Procedure


Sec.  206.123   Claim procedures in general.

    (a) Claims. Mortgagees may submit claims for the payment of the 
mortgage insurance benefits if:
    (1) The conditions of Sec.  206.107(a)(1) pertaining to the 
optional assignment of the mortgage by the mortgagee have been met and 
the mortgagee assigns the mortgage to the Commissioner;
    (2) The mortgagee is unable or unwilling to make the payments under 
the mortgage and assigns the mortgage to the Commissioner pursuant to 
the Commissioner's demand, as provided in Sec.  206.121(b);
    (3) The borrower or other permissible party sells the property for 
less than the outstanding loan balance and the mortgagee releases the 
mortgage of record to facilitate the sale, as provided in Sec.  
206.125(c);
    (4) The mortgagee acquires title to the property by foreclosure or 
a deed in lieu

[[Page 7135]]

of foreclosure and sells the property as provided in Sec.  206.125(g) 
for an amount which does not satisfy the outstanding loan balance or 
fails to sell the property as provided in Sec.  206.127(a)(2); or
    (5) The mortgagee forecloses and a bidder other than the mortgagee 
purchases the property for an amount that is not sufficient to satisfy 
the outstanding loan balance, as provided in Sec.  206.125(e).
    (b) [Reserved]


Sec.  206.125   Acquisition and sale of the property.

    (a) Initial action by the mortgagee. (1) The mortgagee shall notify 
the Commissioner within 60 days of the mortgage becoming due and 
payable when the conditions stated in the mortgage, as required by 
Sec.  206.27(c)(1) have occurred or when the Deferral Period ends. The 
mortgagee shall notify the Commissioner within 30 days when one of the 
conditions stated in the mortgage, as required by Sec.  206.27(c)(2), 
has occurred.
    (2) After notifying and receiving approval of the Commissioner when 
needed, the mortgagee shall notify the borrower, Eligible Non-Borrowing 
Spouse, borrower's estate, and borrower's heir(s), as applicable, 
within 30 days of the later of notifying the Commissioner or receiving 
approval, if needed, that the mortgage is due and payable. The 
mortgagee shall give the applicable party 30 days from the date of 
notice to engage in the following actions:
    (i) Pay the outstanding loan balance, including any accrued 
interest, MIP, and mortgagee advances in full;
    (ii) Sell the property for an amount not to be less than the amount 
determined by the Commissioner through notice, which shall not exceed 
95 percent of the appraised value as determined under Sec.  206.125(b), 
with the net proceeds of the sale to be applied towards the outstanding 
loan balance. Closing costs shall not exceed the greater of: 11 percent 
of the sales price; or a fixed dollar amount as determined by the 
Commissioner through Federal Register notice. For the purposes of this 
section, sell includes the transfer of title by operation of law;
    (iii) Provide the mortgagee with a deed in lieu of foreclosure;
    (iv) Correct the condition which resulted in the mortgage coming 
due and payable for reasons other than the death of the last surviving 
borrower;
    (v) For an Eligible Non-Borrowing Spouse, correct the condition 
which resulted in an end to the Deferral Period in accordance with 
Sec.  206.57; or
    (vi) Such other actions as permitted by the Commissioner through 
notice.
    (3) For a borrower, even after a foreclosure proceeding is begun, 
the mortgagee shall permit the borrower to correct the condition which 
resulted in the mortgage coming due and payable and to reinstate the 
mortgage, and the mortgage insurance shall continue in effect. The 
mortgagee may require the borrower to pay any costs that the mortgagee 
incurred to reinstate the borrower, including foreclosure costs and 
reasonable attorney's fees. Such costs shall be paid by adding them to 
the outstanding loan balance. The mortgagee may refuse reinstatement by 
the borrower if:
    (i) The mortgagee has accepted reinstatement of the mortgage within 
the past two years immediately preceding the current notification to 
the borrower that the mortgage is due and payable;
    (ii) Reinstatement will preclude foreclosure if the mortgage 
becomes due and payable at a later date; or
    (iii) Reinstatement will adversely affect the priority of the 
mortgage lien.
    (4) For an Eligible Non-Borrowing Spouse, even after a foreclosure 
proceeding is begun, the mortgagee shall permit the Eligible Non-
Borrowing Spouse to cure the condition which resulted in the Deferral 
Period ceasing, in accordance with Sec.  206.57(d).
    (b) Appraisal. The mortgagee shall have the property appraised by 
an appraiser on the FHA roster, or other appraiser acceptable to, and 
identified by, the Commissioner through Federal Register notice, no 
later than 30 days after receipt of the request by an applicable party 
in connection with a potential property sale. The property shall be 
appraised before a foreclosure sale and have an effective appraisal 
date that is no more than 30 days before such sale. The appraisal shall 
be at the requesting party's expense unless the mortgage is due and 
payable. If the mortgage is due and payable, the appraisal shall be at 
the mortgagee's expense but the mortgagee shall have a right to be 
reimbursed out of the proceeds of any sale by the borrower or other 
permissible party. The Commissioner may, through Federal Register 
notice, identify other acceptable types of valuation for establishing 
the value of HECMs for the purpose of sale.
    (c) Sale by borrower or other permissible party. Where the HECM is 
not due and payable, the borrower or an authorized representative of 
the borrower may sell the property for at least the lesser of the 
outstanding loan balance or the appraised value. Where the HECM is due 
and payable at the time the contract for sale is executed, the borrower 
or other party with legal right to dispose of the property may sell the 
property in accordance with the amount established by Sec.  
206.125(a)(2)(ii). The mortgagee shall satisfy the mortgage of record 
(and the Commissioner will satisfy any second mortgage required by the 
Commissioner under Sec.  206.27(d) of record) in order to facilitate 
the sale, provided that there are no junior liens (except the mortgage 
to secure payments by the Commissioner if required under Sec.  
206.27(d)) and all the net proceeds from the sale are paid to the 
mortgagee.
    (d) Initiation of foreclosure. (1) The mortgagee shall commence 
foreclosure of the mortgage within six months of the due date defined 
in Sec.  206.129(d)(1), or within such additional time as may be 
approved by the Commissioner.
    (2) If the laws of the State, city, or municipality or other 
political subdivision in which the mortgaged property is located or if 
Federal bankruptcy law does not permit the commencement of the 
foreclosure in accordance with Sec.  206.125(d)(1), the mortgagee shall 
commence foreclosure within six months after the expiration of the time 
during which such foreclosure is prohibited by such laws.
    (3) The mortgagee shall give written notice to the Commissioner 
within 30 days after the initiation of foreclosure proceedings, and 
shall exercise reasonable diligence in prosecuting the foreclosure 
proceedings to completion and in acquiring title to and possession of 
the property. A time frame that is determined by the Commissioner to 
constitute ``reasonable diligence'' for each State is made available to 
mortgagees.
    (4) The mortgagee shall bid at the foreclosure sale an amount at 
least equal to the lesser of the sum of the outstanding loan balance 
and any and all other incurred expenses, or the current appraised value 
of the property. Such a bid by any party other than the mortgagee, for 
the full loan balance and all associated expenses, will result in a 
full payoff of the loan and no claim for insurance benefits being 
presented to FHA.
    (e) Other bidders at foreclosure sale. If a party other than the 
mortgagee is the successful bidder at the foreclosure sale, the net 
proceeds of the sale shall be applied to the outstanding loan balance.
    (f) Deed in lieu of foreclosure. (1)(i) In order to avoid delays 
and additional expense as a result of instituting and completing a 
foreclosure action, the mortgagee shall accept a deed in lieu of 
foreclosure from the borrower or other party with legal right to 
dispose of the

[[Page 7136]]

property provided it is filed for recording within 9 months of the due 
date and the mortgagee is able to obtain good and marketable title.
    (ii) Cash for Keys. The Commissioner may provide a financial 
incentive, in an amount to be determined by the Commissioner, to be 
paid by the mortgagee and reimbursed through any subsequent claim where 
a borrower or other party with a legal right to do so deeds the 
property within 6 months of the due date.
    (2) In exchange for the executed and delivered deed, the mortgagee 
shall cancel the credit instrument and deliver it to the borrower and 
satisfy the mortgage of record. If applicable, the mortgagee shall 
request that the Commissioner cancel the credit instrument and deliver 
it to the borrower and satisfy the mortgage of record.
    (g) Sale of the acquired property. (1) Upon acquisition of the 
property by foreclosure or deed in lieu of foreclosure, the mortgagee 
shall take possession of, preserve, and repair the property and shall 
make diligent efforts to sell the property within six months from the 
date the mortgagee acquired the property, or such additional time as 
provided by the Commissioner. The mortgagee shall sell the property for 
an amount not less than the appraised value (as provided under 
paragraph (b) of this section) unless the mortgagee does not file an 
application for insurance benefits or written permission is obtained 
from the Commissioner authorizing a sale at a lower price.
    (2) Repairs shall not exceed those required by local law, or the 
requirements of the Commissioner or the Secretary of Veterans Affairs 
if the sale of the property is financed with a mortgage insured by the 
Commissioner or guaranteed, insured, or taken by the Secretary of 
Veterans Affairs. No other repairs shall be made without the specific 
advance approval of the Commissioner.
    (3) The mortgagee shall not enter into a contract for the 
preservation, repair, or sale of the property with any officer, 
employee, or owner of ten percent or more interest in the mortgagee or 
with any other person or organization having an identity of interest 
with the mortgagee or with any relative of such officer, employee, 
owner, or person.
    (4) The Commissioner may provide financial incentive, in an amount 
to be determined by the Commissioner, to be paid by the mortgagee and 
reimbursed through a subsequent claim when a bona fide tenant vacates 
the property prior to an eviction being initiated by the mortgagee.


Sec.  206.127   Application for insurance benefits.

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


Sec.  206.129   Payment of claim.

    (a) General. If the claim for the payment of the insurance benefits 
is acceptable to the Commissioner, payment shall be made in cash in the 
amount determined under this section.
    (b) Limit on claim amount. (1) For HECMs assigned Case Numbers 
prior to September 19, 2017, in no case may the claim paid under this 
subpart exceed the maximum claim amount. The interest allowance 
provided in paragraphs (d)(3)(x), (e)(2), and (f)(2)(i) of this section 
shall not be included in determining the limit on the claim amount.
    (2) For HECMs assigned Case Numbers on or after September 19, 2017, 
in no case may the claim paid under this subpart exceed the maximum 
claim amount, as defined in Sec.  206.3. The interest allowance 
provided in paragraphs (d)(3)(x), (e)(2) and (f)(2)(ii) of this section 
shall be made in cash in the amount determined under this section and 
shall be included in determining the limit on the claim amount.
    (c) Shared appreciation mortgages. The terms loan balance and 
accrued interest as used in this section do not include interest 
attributable to the mortgagee's share of the appreciated value of the 
property.
    (d) Amount of payment--mortgagee acquires title or is unsuccessful 
bidder. This paragraph describes the amount of payment if the mortgagee 
acquires title by purchase, foreclosure, or deed in lieu of 
foreclosure, or when a party other than the mortgagee is the successful 
bidder at the foreclosure sale.
    (1) Due and payable date means the date when the mortgagee notifies 
or should have notified the Commissioner that the mortgage is due and 
payable under the conditions stated in the mortgage, as required by 
Sec.  206.27(c)(1) or the date that the Deferral Period, as provided 
for in the mortgage by Sec.  206.27(c)(3), ends; or the date the 
Commissioner approved a due and payable request as provided for in the 
mortgage by Sec.  206.27(c)(2).
    (2) The amount of the claim shall be computed by:
    (i) Totaling the outstanding loan balance and any accrued interest 
and servicing fees which have not been added to the outstanding loan 
balance as of the due and payable date, and allowances for items set 
forth in paragraph (d)(3) of this section; and
    (ii) Subtracting from that total the amount for which the property 
was sold (or the appraised value determined under Sec.  206.127(a)(2)) 
and the items set forth in paragraph (d)(4) of this section.
    (3) The claim shall include items listed in paragraphs (d)(3)(i) 
through (xiv) of this section. For HECMs with Case Numbers assigned on 
or after September 19, 2017, the inclusion of items listed in 
paragraphs (d)(3)(i), (ii), and (iii) of this section shall be limited 
to two-thirds of advances made by the mortgagee on such expenses.
    (i) Taxes, ground rents, water rates, and utility charges that are 
liens prior to the mortgage;
    (ii) Special assessments, which are noted on the application for 
insurance or which become liens after the insurance of the mortgage;

[[Page 7137]]

    (iii) Hazard and flood insurance premiums on the mortgaged property 
not in excess of a reasonable rate;
    (A) For purposes of this section, reasonable rate means a rate that 
is not in excess of the rate or advisory rate set by the principal 
State-licensed rating organization for essential property insurance in 
the voluntary market, or if coverage is available under a FAIR Plan, 
the FAIR Plan rate;
    (B) If a State has neither a FAIR Plan nor a State-licensed rating 
organization for essential property insurance in the voluntary market, 
the mortgagee must provide to the Home Ownership Center (HOC) having 
jurisdiction, information concerning the lowest rates available from an 
insurer for the types of coverage involved, with a request for a 
determination of whether the rate is reasonable. FHA will determine the 
rate to be reasonable if it approximates the rate assessed for 
comparable insurance coverage applicable to similarly situated 
properties in a State that offers a FAIR Plan or maintains a State-
licensed rating organization;
    (iv) Taxes imposed upon any deeds or other instruments by which 
said property was acquired by the mortgagee pursuant to Sec.  206.125;
    (v) Reasonable payments made by the mortgagee, with the approval of 
the Commissioner, for the purpose of protecting, operating, or 
preserving the property, or removing debris from the property;
    (vi) Reasonable costs for performing property inspections required 
by Sec.  206.140 and to determine if the property is vacant or 
abandoned are considered to be costs of protecting, operating or 
preserving the property;
    (vii) Charges for the administration, operation, maintenance, or 
repair of community-owned property or the maintenance or repair of the 
mortgaged property, paid by the mortgagee for the purpose of 
discharging an obligation arising out of a covenant filed for record 
prior to the issuance of the mortgage; and charges for the repair or 
maintenance of the mortgaged property required by, and in an amount 
approved by, the Commissioner under Sec.  206.142;
    (viii) Reasonable costs of the title search ordered by the 
mortgagee, in accordance with procedures prescribed by FHA, to 
determine if the criteria for approval of the mortgagee's acceptance of 
a deed in lieu of foreclosure or to determine clear title to complete a 
pre-foreclosure sale;
    (ix) Foreclosure costs or costs of acquiring the property in 
accordance with such conditions as the Commissioner shall prescribe;
    (x) An amount equal to the interest allowance which would have been 
earned, from the due and payable date to the date when payment of the 
claim is made, if the claim had been paid in debentures, except that 
when the mortgagee fails to meet any one of the applicable requirements 
of Sec. Sec.  206.125 and 206.127 of this subpart within the specified 
time, and in a manner satisfactory to the Commissioner (or within such 
further time as the Commissioner may approve in writing), the interest 
allowance in such cash payment shall be computed only to the date on 
which the particular required action should have been taken or to which 
it was extended.
    (A) Debenture interest rate. The debenture interest rate provided 
for in Sec.  206.146 shall be used.
    (B) Maturity of debentures. Debentures shall mature 20 years from 
the date of issue.
    (C) Registration of debentures. Debentures shall be registered as 
to principal and interest.
    (D) Form and amounts of debentures. Debentures issued under this 
part shall be in such form and amounts; and shall be subject to such 
terms and conditions; and shall include such provisions for redemption, 
if any, as may be prescribed by the Commissioner, with the approval of 
the Secretary of the Treasury; and may be in book entry or certificated 
registered form, or such other form as the Commissioner by regulation 
may prescribe.
    (E) Redemption of debentures. Debentures shall, at the option of 
the Commissioner and with the approval of the Secretary of the 
Treasury, be redeemable at par plus accrued interest on any semiannual 
interest payment date on three months' notice of redemption given in 
such manner as the Commissioner shall prescribe. The debenture interest 
on the debentures called for redemption shall cease on the semiannual 
interest payment date designated in the call notice. The Commissioner 
may include with the notice of redemption an offer to purchase the 
debentures at par plus accrued interest at any time during the period 
between the notice of redemption and the redemption date. If the 
debentures are purchased by the Commissioner after such call and prior 
to the named redemption date, the debenture interest shall cease on the 
date of purchase.
    (F) Issue date of debentures. The issue date of debentures is 
determined by the due and payable date as defined in paragraph (d)(1) 
of this section.
    (G) Cash adjustment. Any difference of less than $50 between the 
amount of debentures to be issued to the mortgagee and the total amount 
of the mortgagee's claim, as approved by the Commissioner, may be 
adjusted by the issuance of a check in payment thereof;
    (xi) Any amount of incentive paid by the mortgagee in accordance 
with Sec.  206.125(f)(1)(ii) or Sec.  206.125(g)(4);
    (xii) Costs of any appraisal under Sec. Sec.  206.125 or 206.127, 
provided that the property was appraised after the mortgage became due 
and payable and that the mortgagee is not otherwise reimbursed for such 
costs;
    (xiii) Reasonable payments made by the mortgagee for:
    (A) Preservation and maintenance of the property;
    (B) Repairs necessary to meet the objectives of the property 
standards required for mortgages insured by the Commissioner, those 
required by local law, and such additional repairs as may be 
specifically approved in advance by the Commissioner; and
    (C) Expenses in connection with the sale of the property including 
a sales commission at the rate customarily paid in the community and, 
if the sale to the buyer involves a mortgage insured by the 
Commissioner or guaranteed by the Secretary of Veterans Affairs, a 
discount at a rate not to exceed the maximum allowable by the 
Commissioner, as of the date of execution of the discounted loan. 
Closing costs shall not exceed the greater of: 11 percent of the sales 
price; or a fixed dollar amount as determined by the Commissioner 
through Federal Register notice; and
    (xiv) A certification that the property is undamaged in accordance 
with Sec.  206.143.
    (4) There shall be deducted from the amount computed in paragraph 
(d)(2)(i) of this section:
    (i) The items listed in Sec.  206.145; and
    (ii) Any adjustment for damage or neglect to the property pursuant 
to Sec. Sec.  206.140, 206.141, and 206.142.
    (e) Amount of payment--assigned mortgages. This paragraph describes 
the amount of payment if the mortgagee assigns a mortgage to the 
Commissioner under Sec.  206.107(a)(1) or Sec.  206.121(b).
    (1) When a mortgagee assigns a mortgage which is eligible for 
assignment under Sec.  206.107(a)(1), the amount of payment shall be 
computed by subtracting from the outstanding loan balance on the date 
of assignment all cash retained by the mortgagee, including amounts 
held or deposited for the account of the borrower or to which it is 
entitled under the mortgage transaction that have not been applied in 
reduction of the principal mortgage indebtedness, and any adjustments 
for damage or neglect to the property

[[Page 7138]]

pursuant to Sec. Sec.  206.140, 206.141 and 206.142.
    (2) The claim shall also include:
    (i) Reimbursement for such costs and attorney's fees as the 
Commissioner finds were properly incurred in connection with the 
assignment of the mortgage to the Commissioner; and
    (ii) An amount equivalent to the interest allowance which will have 
been earned from the date the mortgage was assigned to the Commissioner 
to the date the claim is paid, if the claim had been paid in 
debentures, except that if the mortgagee fails to meet any of the 
requirements of Sec.  206.127(c), or Sec.  206.131 if applicable, 
within the specified time and in a manner satisfactory to the 
Commissioner (or within such further time as the Commissioner may 
approve in writing), the interest allowance in the payment of the claim 
shall be computed only to the date on which the particular required 
action should have been taken or to which it was extended. The 
provisions of paragraphs (d)(3)(x)(A)-(G) of this section pertaining to 
debentures are applicable except that the issue date of the debentures 
shall be the date the mortgage was assigned to the Commissioner.
    (3) When a mortgagee assigns a mortgage under Sec.  206.121(b) 
after demand by the Commissioner, the mortgagee will not receive the 
entire claim payment as contained in paragraphs (e)(1) and (2) of this 
section. The amount of the claim shall be computed by totaling the 
payments made by the mortgagee to the borrower or for the benefit of 
the borrower, and subtracting from the total the cash retained by the 
mortgagee, including amounts held or deposited for the account of the 
borrower or to which it is entitled under the mortgage transaction that 
have not been applied in reduction of the principal mortgage 
indebtedness, and any adjustments for damage or neglect to the property 
pursuant to Sec. Sec.  206.141 and 206.142. The claim shall also be 
reduced by an amount determined by the Commissioner to reimburse the 
Commissioner for administrative expenses incurred in assuming the 
mortgagee's responsibility under the mortgage, which may include 
expenses for staff time. If more than one mortgage is assigned to the 
Commissioner, the administrative expenses incurred for all the 
mortgages assigned shall be allocated among the mortgages as determined 
by the Commissioner. The claim shall not include accrued interest 
whether or not it has been included in the loan balance.
    (f) Amount of payment-borrower sells the property. This paragraph 
describes the amount of payment if the property is sold in accordance 
with Sec.  206.125(c) to one other than the mortgagee for less than the 
outstanding loan balance, and the mortgagee releases the mortgage to 
facilitate the sale.
    (1)(i) For HECMs assigned Case Numbers prior to September 19, 2017, 
the amount of the claim shall be computed by totaling the outstanding 
loan balance and any accrued interest and servicing fees which have not 
been added to the outstanding loan balance on the date the deed is 
recorded, and an allowance for items set forth in paragraphs 
(d)(3)(i)--(vii) and (d)(3)(xii) of this section, and subtracting from 
the total the amount for which the property was sold.
    (ii) For HECMs assigned Case Numbers on or after September 19, 
2017, the following provisions apply:
    (A) When the loan is not in due and payable status. The amount of 
the claim shall be computed by totaling the outstanding loan balance 
and any accrued interest and servicing fees which have not been added 
to the outstanding loan balance on the date the deed is recorded, and 
an allowance for items set forth in paragraph (d)(3)(xiii)(C) of this 
section, and subtracting from the total the amount for which the 
property was sold.
    (B) When the loan is in due and payable status. The amount of the 
claim shall be computed by totaling the outstanding loan balance and 
any accrued interest and servicing fees which have not been added to 
the outstanding loan balance as of the due date, the items set forth in 
paragraph (d)(3) of this section, and subtracting from the total the 
amount for which the property was sold.
    (2)(i) For HECMs assigned Case Numbers prior to September 19, 2017, 
the claim shall also include an amount equivalent to the interest 
allowance which would have been earned from the date the deed is 
recorded to the date when payment of the claim is made, if the claim 
had been paid in debentures, and in a manner satisfactory to the 
Commissioner; the interest allowance in such cash payment shall be 
computed only to the date on which the particular action should have 
been taken or to which it was extended. The provisions of paragraphs 
(d)(3)(x)(A)-(G) of this section pertaining to debentures apply except 
that the issue date of the debentures is the date the deed is recorded 
instead of the due date.
    (ii) For HECMs assigned Case Numbers on or after September 19, 
2017, the following provisions apply:
    (A) When the loan is not in due and payable status. The claim shall 
also include an amount equivalent to the interest allowance which would 
have been earned from the date the deed is recorded to the date when 
payment of the claim is made, if the claim had been paid in debentures, 
and in a manner satisfactory to the Commissioner; the interest 
allowance in such cash payment shall be computed only to the date on 
which the particular action should have been taken or to which it was 
extended. The provisions of paragraphs (d)(3)(x)(A)-(G) of this section 
pertaining to debentures apply except that the issue date of the 
debentures shall be the date the deed is recorded.
    (B) When the loan is in due and payable status. The claim shall 
also include an amount equivalent to the interest allowance which would 
have been earned from the due and payable date to the date when payment 
of the claim is made, if the claim had been paid in debentures, except 
that when the mortgagee fails to meet any of the applicable 
requirements of Sec. Sec.  206.125 and 206.127 within the specified 
time determined by the due and payable date, as defined in paragraph 
(d)(1) of this section (or within such further time as the Commissioner 
may approve in writing), and in a manner satisfactory to the 
Commissioner; the interest allowance in such cash payment shall be 
computed only to the date on which the particular action should have 
been taken or to which it was extended. The provisions of paragraphs 
(d)(3)(x)(A)-(G) of this section pertaining to debentures apply.

Condominiums


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

    (a) Additional requirements. The requirements of this subpart shall 
be applicable to mortgages on individual dwelling units in a 
condominium, except as modified by this section.
    (b) References. The term property as used in this subpart shall be 
construed to include the individual dwelling unit and the undivided 
interest in the common areas and facilities as may be designated.
    (c) Assignment of the mortgage. If the mortgagee assigns the 
mortgage on the individual dwelling unit to the Commissioner, the 
mortgagee shall certify:
    (1) To any changes in the plan of apartment ownership including the 
administration of the property;
    (2) That as of the date the assignment is filed for record, the 
family unit is

[[Page 7139]]

assessed and subject to assessment for taxes pertaining only to that 
unit; and
    (3) To the condition of the property as of the date the assignment 
is filed for record. Section 234.275 of this chapter concerning the 
certification of condition is incorporated by reference.
    (d) Condition of the multifamily structure. The provisions of Sec.  
234.270 (a) and (b) of this chapter concerning the condition of the 
multifamily structure in which the property is located shall be 
applicable to mortgages insured under this part which are assigned to 
the Commissioner.

Termination of Insurance Contract


Sec.  206.133   Termination of insurance contract.

    (a) Payment of the mortgage. The contract of insurance shall be 
terminated if the mortgage is paid in full.
    (b) Acquisition of title. (1) If the mortgagee or a party other 
than the mortgagee acquires title at a foreclosure sale, or the 
mortgagee acquires title by a deed in lieu of foreclosure, and the 
mortgagee notifies the Commissioner that a claim for the payment of the 
insurance benefits will not be presented, the contract of insurance 
shall be terminated.
    (2) For HECMs with Case Numbers assigned on or after September 19, 
2017, if the mortgagee or a party other than the mortgagee acquires 
title at a foreclosure sale or the mortgagee acquires title by a deed 
in lieu of foreclosure and a claim for the payment of the insurance 
benefits will be presented, the contract of insurance shall be 
terminated as of claim payment.
    (c) Mortgagee fails to make payments. If the mortgagee fails to 
make the payments to the borrower as required under the mortgage, and 
does not reimburse the Commissioner or assign the mortgage to the 
Commissioner within 30 days from the demand by the Commissioner for 
reimbursement or assignment, the contract of insurance shall 
automatically terminate. The Commissioner may later reinstate the 
contract of insurance, which shall continue in force as if no 
termination had occurred, upon reimbursement with interest as provided 
in Sec.  206.121. Upon reinstatement, the mortgagee shall be liable for 
all MIP which would have been due if no termination had occurred, 
including late charge and interest as provided in Sec.  206.113.
    (d) Notice of termination. The mortgagee shall give written notice 
to the Commissioner, or other notice acceptable to the Commissioner, 
within 15 days of the occurrence of an event under paragraphs (a) and 
(b) of this section. No contract of insurance shall be terminated under 
paragraphs (a) or (b) of this section unless such notice is given.
    (e) Voluntary termination. The mortgagor and the mortgagee may 
jointly request the Commissioner to approve the voluntary termination 
of the mortgage insurance contract. Prior to approval, the Commissioner 
shall make certain that the borrower is aware of the consequences which 
could arise out of the voluntary termination of the contract of 
insurance. The mortgagee shall cancel the insurance endorsement on the 
Mortgage Insurance Certificate or Note upon receipt of notice from the 
Commissioner that the contract of insurance is terminated. 
Notwithstanding any provision in a mortgage instrument, there shall be 
no voluntary termination charge due the Commissioner on account of the 
voluntary termination of any mortgage insurance contract where the 
request for termination is received by the Commissioner.
    (f) Effect of termination. When the insurance contract is 
terminated, all rights of the mortgagee shall terminate, including the 
right to file a claim for insurance benefits. All obligations of the 
Commissioner shall also cease immediately.

Additional Requirements


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

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


Sec.  206.135   Application for insurance benefits and fiscal data.

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

[[Page 7140]]

    (c) Recorded assignment instrument. The original of the recorded 
assignment of mortgage shall be forwarded to the Commissioner as soon 
as received by the mortgagee, but in no case shall it be longer than 12 
months after recordation. If the original of the assignment is not 
available, a copy shall be furnished and the original forwarded as soon 
as possible.


Sec.  206.136   Conditions for assignment.

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


Sec.  206.137   Effect of noncompliance with regulations.

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


Sec.  206.138   Mortgagee's liability for certain expenditures.

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


Sec.  206.140   Inspection and preservation of properties.

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


Sec.  206.141   Property condition.

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


Sec.  206.142   Adjustment for damage or neglect.

    (a) Except as provided for in paragraphs (a)(1) and (a)(2) of this 
section: if the property has been damaged by fire, flood, earthquake, 
hurricane, or tornado, the damage must be repaired before assignment of 
the mortgage to the Commissioner; if the property has suffered damage 
because of the mortgagee's failure to take action as required by Sec.  
206.140, the damage must be repaired before the mortgagee sells the 
property.
    (1) If the prior approval of the Commissioner is obtained, there 
will be deducted from the insurance benefits the Commissioner's 
estimate of the cost of repairing the damage or any insurance recovery 
received by the mortgagee, whichever is greater.
    (2) If the property has been damaged by fire and was not covered by 
fire insurance at the time of the damage, or the amount of insurance 
coverage was inadequate to repair fully the damage, only the amount of 
insurance recovery received by the mortgagee, if any, will be deducted 
from the insurance benefits, provided the mortgagee certifies, at the 
time that a claim is filed for insurance benefits, that:
    (i) At the time the mortgage was insured, the property was covered 
by fire insurance in an amount at least equal to the lesser of 100 
percent of the insurable value of the improvements, or the principal 
loan balance of the mortgage;
    (ii) The insurer later cancelled this coverage or refused to renew 
it for

[[Page 7141]]

reasons other than nonpayment of premium;
    (iii) The mortgagee made diligent though unsuccessful efforts 
within 30 days of any cancellation or non-renewal of hazard insurance, 
and at least annually thereafter, to secure other coverage or coverage 
under a FAIR Plan, in an amount described in paragraph (a)(2)(i) of 
this section, or if coverage to such an extent was unavailable at a 
reasonable rate, the greatest extent of coverage that was available at 
a reasonable rate;
    (iv) The extent of coverage obtained by the mortgagee in accordance 
with paragraph (a)(2)(iii) of this section was the greatest available 
at a reasonable rate, or if the mortgagee was unable to obtain 
insurance, none was available at a reasonable rate; and
    (v) The mortgagee took the actions required by Sec.  206.140.
    (b) If the property has been damaged during the time of the 
mortgagee's possession by events other than fire, flood, earthquake, 
hurricane, or tornado, or if it was damaged notwithstanding reasonable 
action by the mortgagee as required by Sec.  206.140, the mortgagee 
must provide notice of such damage to the Commissioner and may not sell 
the property until directed to do so by the Commissioner. The 
Commissioner will either:
    (1) Allow the mortgagee to sell the property damaged; or
    (2) Require the mortgagee to repair the damage before sale, and the 
Commissioner will reimburse the mortgagee for reasonable payments not 
in excess of the Commissioner's estimate of the cost of repair, less 
any insurance recovery.


Sec.  206.143   Certificate of property condition.

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


Sec.  206.144   Final payment.

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


Sec.  206.145   Items deducted from payment.

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


Sec.  206.146   Debenture interest rate.

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

Subpart D--Servicing Responsibilities


Sec.  206.201   Mortgage servicing generally; sanctions.

    (a) General. This subpart identifies servicing practices that the 
Commissioner considers acceptable mortgage servicing practices of 
lending institutions servicing mortgages insured by the Commissioner. 
Failure to comply with this subpart shall not be a basis for denial of 
the insurance benefits, but a pattern of refusal or failure to comply 
will be cause for withdrawal of FHA mortgagee approval.
    (b) Importance of timely payments. The paramount servicing 
responsibility is to make timely payments in full as required by the 
mortgage. Any failure of a mortgagee to make all payments required by 
the mortgage in a timely manner will be grounds for administrative 
sanctions authorized by regulations, including 2 CFR part 2424 
(Debarment, Suspension, and Limited Denial of Participation), and 24 
CFR part 25 (Mortgagee Review Board).
    (c) Responsibility for servicing. (1) Servicing of insured 
mortgages must be performed by a mortgagee that is approved by FHA to 
service insured mortgages. The servicer must fully discharge the 
servicing responsibilities of the mortgagee as outlined in this part. 
The mortgagee shall remain fully responsible to the Commissioner for 
proper servicing, and the actions of its servicer shall be considered 
to be the actions of the mortgagee. The servicer also shall be fully 
responsible to the Commissioner for its actions as a servicer.
    (2) Whenever servicing of any mortgage is transferred from one 
mortgagee or servicer to another, notice of the transfer of service 
shall be delivered:
    (i) By the transferor mortgagee or servicer to the borrower. The 
notification shall be delivered not less than 15 days before the 
effective date of the transfer and shall contain the information 
required in 12 CFR 1024.33(b)(4); and
    (ii) By the transferee mortgagee or servicer:
    (A) To the borrower. The notification shall be delivered not less 
than 15 days before the effective date of the transfer and shall 
contain the information required in 12 CFR 1024.33(b)(4); and
    (B) To the Commissioner. This notification shall be delivered 
within 15 days of the transfer, in a format prescribed by the 
Commissioner.


Sec.  206.203   Providing information.

    (a) Statements of account activity. The mortgagee shall provide to 
the borrower

[[Page 7142]]

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


Sec.  206.205   Property charges.

    (a) General. (1) The borrower shall be responsible for the payment 
of the following property charges before or on the due date: ground 
rents, condominium fees, planned unit development fees, and homeowners' 
association fees.
    (2) Payment of the following property charges are obligations of 
the borrower and shall be made through the LESA, by the borrower, or by 
the mortgagee, in accordance with paragraphs (b) through (e) of this 
section on or before the due date: property taxes, including any 
special assessments levied by local or State law, hazard insurance 
premiums, and applicable flood insurance premiums.
    (b) Method of property charge payment--(1) LESA required. For fixed 
or adjustable interest rate HECMs, based on the results of the 
Financial Assessment, the mortgagee may require the borrower to have a 
Fully-Funded LESA for the payment of property charges identified in 
paragraph (a)(2) of this section. For adjustable interest rate HECMs, 
based on the results of the Financial Assessment, the mortgagee may 
require the borrower to have a Partially-Funded LESA for the payment of 
property charges identified in paragraph (a)(2) of this section.
    (2) LESA not required. (i) If, based on the results of the 
Financial Assessment, the mortgagee does not require the borrower to 
have a LESA, the borrower shall elect one of the following at closing, 
whereby an election of the option in paragraph (b)(2)(i)(B) or (C) of 
this section cannot be cancelled by the borrower:
    (A) Borrower is responsible for the independent payment of all 
property charges;
    (B) Borrower elects to have a Fully-Funded LESA for the payment of 
property charges identified in paragraph (a)(2) of this section; or
    (C) For adjustable interest rate HECMs only, borrower elects to 
have the mortgagee pay property charges listed in paragraph (a)(2) of 
this section which would have otherwise been required to be paid by the 
borrower, in accordance with paragraph (d) of this section.
    (ii) Through Federal Register notice, the Commissioner may 
establish an incentive for voluntarily electing a LESA under paragraph 
(b)(2)(i)(B) of this section.
    (c) Life Expectancy Set Aside--(1) General. (i) For a Fully-Funded 
LESA, the mortgagee shall:
    (A) Make payments for property charges identified in paragraph 
(a)(2) of this section before bills become delinquent and establish 
controls to ensure that the information needed to pay such bills is 
obtained on a timely basis;
    (B) Make early payments to take advantage of a discount whenever it 
is to the borrower's advantage;
    (C) Not charge the borrower penalties for late payments for 
property charges unless it can be shown that the penalty was the direct 
result of the borrower's error or omission;
    (D) Ensure that LESA funds are not held in an escrow account;
    (E) Add payments for property charges to the outstanding loan 
balance when the mortgagee disburses funds to the taxing authority or 
insurance carrier; and
    (F) Provide written notification to the borrower and FHA within 30 
days of the mortgagee receiving notification that a property charge 
payment is outstanding when there are no funds or insufficient funds 
remaining in the LESA, and recommend that the borrower speak with a 
HUD-Approved Housing Counselor.
    (ii) For a Partially-Funded LESA, the mortgagee shall:
    (A) Ensure that LESA funds are disbursed to the borrower semi-
annually;
    (B) Establish controls to ensure the taxing authority, insurance 
carrier, or both, received the borrower's payment;
    (C) Ensure the LESA funds are not held in an escrow account;
    (D) Add payments disbursed to the borrower for the payment of 
property charges identified in paragraph (a)(2) to the outstanding loan 
balance when the mortgagee disburses the funds; and
    (E) Provide written notification to the borrower and FHA within 30 
days of the mortgagee receiving notification that a property charge 
payment is outstanding when there are no funds or insufficient funds 
remaining in the LESA, and recommend that the borrower speak with a 
HUD-Approved Housing Counselor.
    (2) Calculation of property charges. (i) The projected cost of 
property charges that will be required over the life expectancy of the 
youngest borrower shall be calculated based on a formula established by 
the Commissioner.
    (ii) The mortgagee shall not require any LESA to be funded in 
excess of the projected cost of property charges.
    (iii) For a Fully-Funded LESA, the amount withheld from the 
mortgage proceeds shall equal the projected cost of property charges.
    (iv) For a Partially-Funded LESA, the amount withheld from the 
mortgage proceeds is based on a calculation of the gap in residual 
income and may not

[[Page 7143]]

exceed the projected cost of property charges.
    (v) Mortgagees shall use the HECM Financial Assessment and Property 
Charge Guide, or subsequent guide issued by the Commissioner, to 
determine whether a LESA is required; view the formula for calculating 
the projected costs of property charges; and view the formulas for 
calculating the Fully- and Partially-Funded LESA amounts.
    (3) Annual analysis of LESA. Mortgagees shall perform an annual 
analysis of the LESA to determine whether the funds are sufficient to 
make required distributions for the next year. If funds are exhausted 
or there is an insufficient balance determination, the mortgagee shall 
notify the borrower, in writing and within 15 calendar days of the 
annual analysis of the determination, that LESA funds are exhausted or 
insufficient and the borrower will be responsible for the payment of 
property charges.
    (4) Non-payment of property charges--(i) Fully-Funded LESA for an 
adjustable interest rate HECM with no remaining funds. (A) If the LESA 
is exhausted and the borrower fails to make property charge payments, 
the mortgagee shall use any available principal limit to pay the 
outstanding property charge amount in full and charge the borrower's 
account.
    (B) The mortgagee shall provide the borrower with a written 
notification within 30 days of the mortgagee receiving notification 
that a property charge payment is outstanding. The borrower shall have 
30 days to respond to the mortgagee to explain the circumstances which 
resulted in the non-payment. (C) If there is no available principal 
limit from which the mortgagee can pay the property charge amount in 
full, and the borrower fails to pay the property charges, the mortgage 
will become due and payable under Sec.  206.27(c)(2).
    (ii) Fully-Funded LESA for a fixed interest rate HECM with no 
remaining funds. If the LESA is exhausted and the borrower fails to 
make property charge payments, the mortgage will become due and payable 
under Sec.  206.27(c)(2).--
    (iii) Partially-Funded LESA with remaining funds. If funds remain 
in the LESA and the borrower fails to make property charge payments, 
the mortgagee shall:
    (A) Immediately suspend future semi-annual payments to the borrower 
from the Partially-Funded LESA, although scheduled and unscheduled 
payments from the borrower's payment option may continue;
    (B) Disburse funds from the Partially-Funded LESA to pay the full 
amount owed for the past due property charge; and
    (C) Provide written notification to the borrower, within 30 days of 
the mortgagee receiving notification that a property charge payment is 
outstanding, that funds were advanced from the Partially-Funded LESA to 
pay the outstanding property charge. The borrower shall have 30 days to 
respond to the mortgagee to explain the circumstances which resulted in 
the non-payment.
    (iv) Partially-Funded LESA with no remaining funds. (A) If the LESA 
is exhausted and the borrower fails to make property charge payments 
when due, the mortgagee shall use any funds available in the principal 
limit to pay the outstanding property charge amount in full and charge 
the borrower's account.
    (B) The mortgagee shall provide written notification to the 
borrower within 30 days of the mortgagee receiving notification that a 
property charge payment is outstanding. The borrower shall have 30 days 
to respond to the mortgagee to explain the circumstances which resulted 
in the non-payment.
    (C) If there is no available principal limit from which the 
mortgagee can pay the property charge amount in full, and the borrower 
fails to pay the property charges, the mortgage will become due and 
payable under Sec.  206.27(c)(2).
    (5) Unused LESA funds. During a Deferral Period or when one of the 
events listed in Sec.  206.27(c)(1) or (c)(2) have occurred, no unused 
funds from the LESA shall be disbursed.
    (6) Assignment of mortgage to the Commissioner. If the insured 
first mortgage is assigned to the Commissioner, or if payments are made 
through the second mortgage under the Demand Assignment process, the 
Commissioner is not required to assume the responsibility for property 
charge payments, but may continue to administer payments for property 
charges for a borrower with a Fully-Funded LESA or semi-annual 
disbursements to a borrower with a Partially-Funded LESA to the extent 
that there are any funds available in the LESA. For adjustable interest 
rate HECMs, if the LESA has a positive remaining balance but funds are 
insufficient to pay all property charges due or semi-annual 
disbursements to the borrower, the Commissioner may provide the 
remaining funds to the borrower as a line of credit.
    (d) Borrower elects to have mortgagee pay property charges. If, 
based on the results of the Financial Assessment, the mortgagee does 
not require the borrower to have a LESA, for adjustable interest rate 
HECMs, the borrower may elect at closing to require the mortgagee to 
pay property charges identified in paragraph (a)(2) of this section by 
withholding funds from monthly payments due to the borrower or by 
charging such funds to a line of credit. This voluntary election to 
have funds withheld by the mortgagee to pay property charges cannot be 
canceled by the borrower at any time. If the sum of the outstanding 
loan balance and any unused set aside for repairs and servicing charges 
has reached the principal limit or the HECM proceeds are otherwise 
insufficient to pay the property charges, the borrower shall pay such 
property charges, even though the borrower elected payment to be made 
by the mortgagee. Through Federal Register notice, the Commissioner may 
expand the borrower's options for property charge payment by the 
mortgagee.
    (1) Assignment of mortgage to the Commissioner. If the insured 
first mortgage is assigned to the Commissioner under Sec.  
206.107(a)(1) or Sec.  206.121(b), or if payments are made through the 
second mortgage under Sec.  206.121(c), the Commissioner is not 
required to assume the mortgagee's responsibility under paragraph (d) 
of this section, despite the election by the borrower.
    (2) Mortgagee's responsibilities. (i) Funds withheld from payments 
due to the borrower for property charges under paragraph (d) of this 
section shall not be paid into an escrow account. When property charges 
are actually paid, the mortgagee may add the amount paid to the 
outstanding loan balance.
    (ii) It is the mortgagee's responsibility to make disbursements for 
property charges before bills become delinquent. Mortgagees shall 
establish controls to ensure that the information needed to pay such 
bills is obtained on a timely basis. Penalties for late payments for 
property charges must not be charged to the borrower unless it can be 
shown that the penalty was the direct result of the borrower's error or 
omission. Early payment of a bill to take advantage of a discount 
should be made whenever it is to the borrower's benefit.
    (iii) Not later than the end of the second loan year the mortgagee 
shall establish a system for the periodic analysis of the amounts 
withheld from monthly payments. The analysis shall be performed at 
least once a year thereafter. The amount shall be adjusted, after 
analysis, to provide sufficient available funds to make anticipated 
disbursements during the

[[Page 7144]]

ensuing year. The borrower shall be given at least ten days' notice of 
adjustment in the amount of withholding and an adequate explanation of 
the reasons for any change. When the amount withheld is analyzed in 
accordance with this paragraph, any surplus shall be paid to the 
borrower and added to the outstanding loan balance. Any shortage shall 
be corrected through increasing the monthly withholding as provided in 
paragraph (d)(2)(iv) of this section. If amounts withheld are 
insufficient to pay a property charge before it is delinquent, and the 
borrower could request a payment equal to the shortage under Sec.  
206.26(b), then the mortgagee shall pay the full property charge and 
treat payment of the shortage as a payment requested by the borrower 
under Sec.  206.26(b).
    (iv) The mortgagee's estimate of withholding amount shall be based 
on the best information available as to probable payments which will be 
required to be made for property charges in the coming year. If actual 
disbursements during the preceding year are used as the basis, the 
resulting estimate may deviate from those disbursements by as much as 
ten percent. The mortgagee may not require withholding in excess of the 
current estimated total annual requirement, unless expressly requested 
by the borrower. Each monthly withholding for property charges shall 
equal one-twelfth of the annual amounts as reasonably estimated by the 
mortgagee.
    (e) Borrower elects to pay property charges. (1) If, based on the 
results of the Financial Assessment, the mortgagee does not require the 
borrower to have a LESA, the borrower may elect to be responsible for 
the independent payment of all property charges and shall pay all 
property charges in a timely manner and shall provide evidence of 
payment to the mortgagee as required in the mortgage.
    (2) Failure to pay property charges. If the borrower fails to pay 
the property charges in a timely manner, and has not elected to have 
the mortgagee make the payments in accordance with paragraph (d) of 
this section:
    (i) The mortgagee may make the payment for the borrower and charge 
the borrower's account if there are available funds from which the 
mortgagee may make payment. If a pattern of missed payments occurs, the 
mortgagee may establish procedures to pay the property charges from the 
borrower's funds as if the borrower elected to have the mortgagee pay 
the property charges under this section.
    (ii) The mortgagee shall provide a written notification to the 
borrower and notify the Commissioner that an obligation of the mortgage 
has not been performed within 30 days of the mortgagee receiving 
notification of a missed payment when there are no available HECM funds 
from which the mortgagee may make payment. The borrower shall have 30 
days to respond to the mortgagee to explain the circumstances which 
resulted in the non-payment. The mortgagee may provide any permissible 
loss mitigation made available by the Commissioner through notice. If 
the borrower is unable or unwilling to repay the mortgagee for any 
funds advanced by the mortgagee to pay property charges outside of a 
LESA, the mortgagee shall submit a due and payable request under the 
provisions of Sec.  206.27(c)(2).


Sec.  206.207   Allowable charges and fees after endorsement.

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

[[Page 7145]]

    (iii) Amounts to pay the charge are set aside as a portion of the 
principal limit in accordance with Sec.  206.19(f)(3); and
    (iv) The charge is payable only from the Servicing Fee Set Aside.


Sec.  206.209   Prepayment.

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


Sec.  206.211   Determination of principal residence and contact 
information.

    (a) Annual certification. At least once during each calendar year, 
the mortgagee shall verify the contact information for the borrower(s) 
and determine whether or not the property is the principal residence of 
at least one borrower. The mortgagee shall require each borrower to 
make an annual certification of his or her contact information and 
principal residence. As part of the annual certification, the borrower 
may designate an alternate individual as specified in Sec.  206.40 to 
receive copies of the notifications from the mortgagee, and who the 
mortgagee shall contact if the borrower is unwilling or unable to reply 
to requests from the mortgagee. The mortgagee may rely on the 
certification unless it has information indicating that the 
certification may be false.
    (b) Requirements when an Eligible Non-Borrowing Spouse exists. 
Where an Eligible Non-Borrowing Spouse has been identified, the 
mortgagee shall obtain an additional annual certification from the 
borrower confirming the Eligible Non-Borrowing Spouse remains his or 
her spouse and the Eligible Non-Borrowing Spouse continues to reside in 
the property as his or her principal residence.
    (1) Death of borrower with Eligible Non-Borrowing Spouse. If a 
borrower with an Eligible Non-Borrowing Spouse has died, the mortgagee 
shall obtain the annual certification in paragraph (a) of this section 
from the Eligible Non-Borrowing Spouse. For purposes of this paragraph, 
the term ``Eligible Non-Borrowing Spouse'' shall replace the term 
``borrower'' in paragraph (a) of this section.
    (2) Failure of previously Eligible Non-Borrowing Spouse to reside 
in the property as his or her principal residence. If a Non-Borrowing 
Spouse fails to reside in the property as his or her principal 
residence, the Non-Borrowing Spouse becomes an Ineligible Non-Borrowing 
Spouse and the deferral of due and payable status that would prevent 
the displacement of an Eligible Non-Borrowing Spouse will no longer be 
in effect. Once this occurs, the Eligible Non-Borrowing Spouse annual 
certifications are no longer required to be obtained.

Subpart E--HECM Counselor Roster


Sec.  206.300   General.

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


Sec.  206.302   Establishment of the HECM Counselor Roster.

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


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

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


Sec.  206.306   Removal from the HECM Counselor Roster.

    (a) General. FHA reserves the right to remove a HECM counselor from 
the Roster, in accordance with this section.
    (b) Cause for removal. Cause for removal of a HECM counselor from 
the Roster includes, but is not limited to:
    (1) Failure to comply with the education and training requirements 
of Sec.  206.308;
    (2) Failure to respond within a reasonable time to HUD inquiries or 
requests for documentation;
    (3) Misrepresentation or fraudulent statements;
    (4) Promotion, representation, or recommendation of any specific 
mortgagee;
    (5) Failure to comply with applicable fair housing and civil rights 
requirements;
    (6) Failure to comply with applicable statutes and regulations;
    (7) Failure to comply with applicable statutory counseling 
requirements found at section 255(f) of the National Housing Act, which 
include, but are not limited to, providing information about: options 
other than a HECM, the financial implications of entering into a HECM, 
the tax consequences of a HECM, and any other information that HUD or 
the applicant may request;
    (8) Failure to maintain any registration, license, or certification 
requirements of a State or local authority;
    (9) Unsatisfactory performance in providing counseling to HECM loan 
applicants. FHA may determine that a HECM counselor's performance is

[[Page 7146]]

unsatisfactory based on a review of counseling files or other 
monitoring activities, or if the counselor fails to employ the minimum 
competencies, as measured by the FHA-administered HECM counseling exam; 
or
    (10) For any other reason HUD determines to be so serious as to 
justify an administrative sanction.
    (c) Automatic removal from HECM Counselor Roster for failure to 
maintain required State or local licensure. A HECM counselor who is 
required to maintain a State or local registration, license, or 
certification and whose registration or certification is revoked, 
suspended, or surrendered will be automatically suspended from the 
Roster until FHA receives evidence demonstrating that the local- or 
State-imposed sanction has been lifted.
    (d) Removal procedure. Except as provided in paragraph (c) of this 
section, the following procedures apply to removal of a HECM counselor 
from the Roster.
    (1) FHA will give the HECM counselor written notice of the proposed 
removal. The notice will state the reasons for and the duration of the 
proposed removal.
    (2) The HECM counselor will have 30 days from the date of receipt 
of the notice (or such time as described in the notice, but in no event 
less than a period of 30 days) to submit a written appeal of the 
proposed removal, along with a written request for a conference.
    (3) An FHA official will review the appeal and render a response 
affirming, modifying, or canceling the removal. The FHA official will 
not be a person who was involved in FHA's initial removal decision. FHA 
will respond with a decision within 30 days after the date of receiving 
the appeal or, if the HECM counselor has requested a conference, within 
30 days after the conference was held. FHA may extend the 30-day period 
by providing written notice to the counselor.
    (4) If the HECM counselor does not submit a timely written 
response, the removal will be effective 31 days after the date of FHA's 
initial removal notice (or after the period provided in the notice, if 
longer than 30 days). If a written response is submitted, and the 
removal decision is affirmed or modified, the removal will be effective 
on the date of FHA's notice affirming or modifying the initial removal 
decision.
    (e) Maximum time period of removal. The maximum time period for 
removal from the Roster is 12 months from the effective date of removal 
for all removed counselors. A counselor who has been removed must apply 
for reinstatement on the Roster.
    (f) Placement on the Roster after removal. A counselor who has been 
removed from the Roster must apply for reinstatement on the Roster (in 
accordance with Sec.  206.304) after the period of the counselor's 
removal from the Roster has expired. FHA may require the counselor to 
retake and pass the HECM exam for reinstatement when the reason for 
removal from the Roster was particularly egregious. Typically, the 
counselor will not be required to take and pass the HECM exam; however, 
FHA must be ensured by the counselor that the HECM counseling 
requirements are understood and will be followed. An application from a 
counselor for reinstatement on the Roster will be rejected if the 
period of the counselor's removal from the Roster has not expired.
    (g) Voluntary removal. A HECM counselor will be removed from the 
Roster upon FHA's receipt of a written request from the counselor.
    (h) Other action. Nothing in this section prohibits HUD from taking 
such other action against a HECM counselor or from seeking any other 
remedy against a counselor available to HUD by statute or other 
authority.


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

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

    Dated: January 12, 2017.
Nani A. Coloretti,
Deputy Secretary.
[FR Doc. 2017-01044 Filed 1-18-17; 8:45 am]
 BILLING CODE 4210-67-P