[Federal Register Volume 87, Number 201 (Wednesday, October 19, 2022)]
[Proposed Rules]
[Pages 63458-63464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22538]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 203 and 206

[Docket No. FR-6151-P-02]
RIN 2502-AJ51


Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate 
Indices

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

ACTION: Proposed rule.

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

SUMMARY: HUD is proposing to remove the London Interbank Offered Rate 
(LIBOR) as an approved index for adjustable interest rate mortgages 
(ARMs), and replace LIBOR with the Secured Overnight Financing Rate 
(SOFR) as a Secretary-approved index for newly originated forward ARMs. 
HUD also proposes to codify its removal of LIBOR and approval of SOFR 
as an index for newly-originated Home Equity Conversion Mortgage (HECM 
or reverse mortgage) ARMs. In addition, HUD is proposing to establish a 
spread-adjusted SOFR index as the Secretary-approved

[[Page 63459]]

replacement index to transition existing forward and HECM ARMs off 
LIBOR. HUD also proposes to make clarifying changes to its HECM Monthly 
ARM regulation and establish a lifetime five percent interest rate cap 
for monthly adjustable rate HECMs.

DATES: Public comment due date: November 18, 2022.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street 
SW, Room 10276, Washington, DC 20410-0500. Communications must refer to 
the above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to 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 all federal 
agencies, however, submission of comments by standard mail often 
results in delayed delivery. To ensure timely receipt of comments, HUD 
recommends that comments submitted by standard mail be submitted at 
least two weeks in advance of the deadline. HUD will make all comments 
received by mail available to the public at https://www.regulations.gov.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov website can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    Note: To receive consideration as public comments, comments must be 
submitted through one of the two methods specified above. Again, all 
submissions must refer to the docket number and title of the rule.
    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-402-3055 (this is 
not a toll-free number). Individuals can dial 7-1-1 to access the 
Telecommunications Relay Service (TRS), which permits users to make 
text-based calls, including Text Telephone (TTY) and Speech to Speech 
(STS) calls. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Lisa Saunders, Office of Housing, 
Department of Housing and Urban Development, 451 7th Street SW, 
Washington, DC 20410-8000; telephone number 202-402-2378 (this is not a 
toll-free number); email address [email protected]. Individuals can 
dial 7-1-1 to access the Telecommunications Relay Service (TRS), which 
permits users to make text-based calls, including Text Telephone (TTY) 
and Speech to Speech (STS) calls. Individuals who require an 
alternative aid or service to communicate effectively with HUD should 
email the point of contact listed above and provide a brief description 
of their preferred method of communication.

SUPPLEMENTARY INFORMATION:

I. Background

Statutory Provisions

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

Forward ARMs

    HUD initially provided for mortgage insurance of ARMs for single 
family forward mortgages under 24 CFR part 203 and for part 234 
condominium mortgages in 1984.\1\ As provided in the statute at that 
time, the interest rate on ARMs had to be adjusted annually, and there 
was a 1 percent cap on annual adjustments and an overall cap of 5 
percent above the initial interest rate over the term of the mortgage. 
The index originally used by HUD was the U.S. Constant Maturity 
Treasury (CMT). In 2001 and 2003, statutory changes to Section 251 of 
the NHA, 12 U.S.C. 1715z-16 allowed HUD to insure ARMs that have fixed 
interest rates for 3 years or more and are not subject to interest rate 
caps if the interest rate remains fixed for more than 3 years.\2\ In 
2004, HUD issued a rule (``the 2004 rule'') implementing these 
statutory changes and providing mortgage insurance for forward ARMs 
with interest rates first adjustable in 1 year, 3 years, 5 years, 7 
years, and 10 years.\3\
---------------------------------------------------------------------------

    \1\ 49 FR 23580, June 6, 1984.
    \2\ Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act, 2002 (Pub. 
L. 107-73, approved November 26, 2001); HOPE VI Program 
Reauthorization and Small Community Main Street Rejuvenation and 
Housing Act of 2003 (Pub. L. 108-186, 117 Stat. 2685, approved 
December 16, 2003).
    \3\ 69 FR 11500, March 10, 2004.
---------------------------------------------------------------------------

    Under the 2004 rule, 1, 3, and 5-year ARMs were capped, for each 
adjustment, in either direction at one percentage point from the 
interest rate in effect for the period immediately preceding the 
adjustment. For the life of the mortgage, the overall 5 percent cap in 
either direction remained. For 7 and 10-year ARMs, HUD raised the per-
adjustment cap to 2 percent of the rate in effect for the immediately 
preceding period, and the life-of-mortgage cap to 6 percent. In all 
cases, changes that exceeded these amounts could not be carried over 
for inclusion in an adjustment for the subsequent year. In 2005, HUD 
revised the regulation to allow for annual adjustments of 2 percent 
change in either direction, and a life-of-mortgage cap of 6 percent in 
either direction for 5-year ARMs in 2005, conforming 5-year ARMs to 
HUD's 7 and 10-year ARM products.\4\
---------------------------------------------------------------------------

    \4\ 70 FR 16080, March 29, 2005.
---------------------------------------------------------------------------

    In 2007 (``the 2007 rule''), HUD added LIBOR, along with the CMT, 
as an acceptable index for ARM adjustments for its ARM products.\5\ For 
forward mortgages, the applicability of these indices is codified at 24 
CFR 203.49. The cap on 1 and 3-year ARMs (no more than 1 percent in 
either direction per single adjustment, with a 5 percent from initial 
contract rate cap over the life of the loan) is codified at Sec.  
203.49(f)(1). The caps for the 5, 7 and 10-year ARMs (2 percent in 
either direction per

[[Page 63460]]

adjustment, with a 6 percent from initial contract rate cap for the 
life of the mortgage) are codified at Sec.  203.49(f)(2). HUD also 
created model note and mortgage documents for forward ARMs and revised 
those model documents over the years. The 2015 Model ARM Note \6\ 
contains a provision for the substitution of an index by the note 
holder based on ``comparable information,'' should the index specified 
in the note become unavailable.
---------------------------------------------------------------------------

    \5\ 72 FR 40047, July 20, 2007.
    \6\ The 2015 Model ARM Note is available on HUD's website at: 
https://www.hud.gov/program_offices/housing/sfh/model_documents.
---------------------------------------------------------------------------

Reverse Mortgages or HECMs

    In 1989, the Home Equity Conversion Mortgage program rule (the HECM 
rule) provided for ARMs with both capped and uncapped interest rate 
adjustments.\7\ For capped HECM ARMs, the HECM rule retained the 5 
percentage point life-of-mortgage limit on interest rate increases and 
decreases in Sec.  203.49, but increased the annual limit on rate 
increases and decreases from 1 percentage point to 2 percentage points. 
The HECM rule also provided for a HECM ARM that sets a maximum interest 
rate that could be charged without a cap on monthly or annual increases 
or decreases.
---------------------------------------------------------------------------

    \7\ 54 FR 24822, June 9, 1989.
---------------------------------------------------------------------------

    In the 2007 rule, in which LIBOR was added for forward mortgages, 
HUD also added LIBOR as an acceptable index for HECM ARM adjustments in 
current Sec. Sec.  206.3 (definitions) and 206.21 (interest rate).\8\ 
HUD's model HECM ARM note and mortgage documents have been revised over 
the years, but the 2015 version contains provisions for the 
substitution of a Secretary-prescribed index, should the index 
specified in the note become unavailable.\9\
---------------------------------------------------------------------------

    \8\ 72 FR 40048, July 20, 2007.
    \9\ The 2015 Model ARM Note is available on HUD's website at: 
https://www.hud.gov/program_offices/housing/sfh/model_documents.
---------------------------------------------------------------------------

    For the capped option at Sec.  206.21(b)(1), the interest rate cap 
structure is the same as provided in forward mortgages under Sec.  
203.49(a), (b), (d), and (f), except that under Sec.  203.49(d), the 
reference to first debt service payment means the closing in the HECM 
ARM context, and under Sec.  203.49(f)(1), the cap on adjustments for 
one- and three-year mortgages is 2 percentage points in the HECM ARM 
context. Section 206.21(b)(1)(ii) applies the LIBOR and CMT index 
options in the same manner as forward ARMs at Sec.  203.49(b) for both 
the capped and uncapped options. In addition, the uncapped option at 
Sec.  206.21(b)(2) includes options to adjust based on the one-month 
CMT or one-month LIBOR index. Section 206.21(b)(1)(iii) also includes 
ARM interest rate adjustment options for HECMs in the same manner as 
forward mortgages at Sec.  203.49(d).
    On March 11, 2021, in Mortgagee Letter 2021-08, HUD removed LIBOR 
as an approved index and approved the SOFR index for annually 
adjustable HECM ARMs closed on or after May 3, 2021.\10\ A mortgagee 
may set rates using CMT or SOFR for annually adjustable HECM ARMs and 
CMT only for monthly adjustable HECM ARMs. Also, among other changes to 
the ARM requirements in the Mortgagee Letter, HUD published revised 
model mortgage documents with ``fallback'' language intended to address 
future interest rate index transition events. This language was modeled 
after the Alternative Reference Rates Committee's (ARRC) \11\ published 
fallback language for residential ARMs.\12\
---------------------------------------------------------------------------

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

Phase-Out of LIBOR

    The financial industry is transitioning from use of the LIBOR index 
given its increasing unreliability and speculative nature. As noted by 
the Financial Stability Oversight Council, the scarcity of underlying 
transactions makes LIBOR potentially unsustainable, as many banks have 
grown uncomfortable in providing submissions based on expert judgment 
and may eventually choose to stop submitting altogether.\13\ The 
relatively small number of transactions underpinning LIBOR has been 
driven by changing market structure, regulatory capital, and liquidity 
requirements as well as changes in bank risk appetite for short-term 
funding, thereby creating uncertainty as to the integrity of the index.
---------------------------------------------------------------------------

    \13\ See Second Report, The Alternative Reference Rates 
Committee, p.6 (March 2018), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
---------------------------------------------------------------------------

    In July of 2017, the U.K. Financial Conduct Authority (FCA), the 
financial regulator of LIBOR, announced that it would no longer 
persuade or compel contributing banks to submit rates used to calculate 
LIBOR after December 31, 2021, further heightening the uncertainty of 
LIBOR.\14\ On November 30, 2020, the Federal Reserve Board announced 
that regulators had proposed clear end dates for the USD LIBOR 
immediately following the December 31, 2021 publication for the one 
week and two month USD LIBOR settings, and immediately following the 
June 30, 2023 publication for other USD LIBOR tenors.\15\ On March 5, 
2021, the ICE Benchmark Administration Limited (IBA) published the 
feedback it received to a December, 2020, consultation, and announced 
it would cease publication of the one month and one year USD LIBOR 
immediately following the LIBOR publication on June 30, 2023.\16\
---------------------------------------------------------------------------

    \14\ Andrew Bailey, The Future of LIBOR, Fin. Conduct Authority 
(July 27, 2017), https://www.fca.org.uk/news/speeches/the-future-of-libor.
    \15\ See Federal Reserve Board Welcomes and Supports Release of 
Proposal and Supervisory Statements that Would Enable Clear End Date 
for U.S. Dollar (USD) LIBOR and Would Promote the Safety and 
Soundness of the Financial System, Board of Governors of the Federal 
Reserve System (Nov. 30, 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130b.htm.
    \16\ ICE LIBOR, Feedback Statement on Consultation on Potential 
Cessation, ICE Benchmark Admin. (March 5, 2021), https://www.theice.com/publicdocs/ICE_LIBOR_feedback_statement_on_consultation_on_potential_cessation.pdf.
---------------------------------------------------------------------------

    With the uncertainty and upcoming phase-out of LIBOR, mortgagees 
have been working to transition to a new replacement interest rate 
index for existing ARM contracts. The ARRC, a group of private market 
participants convened by the Federal Reserve Board and the Federal 
Reserve Bank of New York to ensure the transition from USD LIBOR to a 
reliable reference rate, recommended the selection of SOFR for use in 
new USD contracts.\17\ SOFR is published by the Federal Reserve Bank of 
New York in cooperation with the Office of Financial Research, an 
independent bureau with the U.S. Department of the Treasury, and ``. . 
. is a broad measure of the cost of borrowing cash overnight 
collateralized by U.S. Treasury securities in the repurchase agreement 
(repo) market.'' \18\ HUD anticipates that a spread-adjusted SOFR will 
be published to minimize the

[[Page 63461]]

impact of the transition on legacy ARMs and other LIBOR-based 
contracts.
---------------------------------------------------------------------------

    \17\ About, Alternative Reference Rates Comm., https://www.newyorkfed.org/arrc/about (last visited June 10, 2021).
    \18\ Transition from LIBOR, Alternative Reference Rates Comm., 
https://www.newyorkfed.org/arrc/sofr-transition (last visited June 
10, 2021).
---------------------------------------------------------------------------

    According to the ARRC, ``SOFR is suitable to be used across a broad 
range of financial products, including but not limited to, derivatives 
(listed, cleared, and bilateral-OTC), and many variable rate cash 
products that have historically referenced LIBOR.'' \19\
---------------------------------------------------------------------------

    \19\ Frequently Asked Questions, Alternative Reference Rates 
Comm (April 21, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf.
---------------------------------------------------------------------------

    As part of the Consolidated Appropriations Act, 2022,\20\ Congress 
passed the Adjustable Interest Rate (LIBOR) Act of 2021 (LIBOR Act) 
\21\ to, in part, create a clear and uniform process, on a nationwide 
basis, for replacing LIBOR in existing contracts where the terms do not 
provide for the use of a clearly defined or practicable replacement 
benchmark rate, without affecting the ability of parties to use any 
appropriate benchmark rate in a new contract.\22\ Generally, for LIBOR-
based ARMs without language providing for a specific replacement index, 
the default replacement index will be a spread-adjusted SOFR as 
provided for under the LIBOR Act.
---------------------------------------------------------------------------

    \20\ Consolidated Appropriations Act, 2022, Public Law 117-103.
    \21\ Id. at Division U.
    \22\ Id. at Division U, Section 102(b)(1).
---------------------------------------------------------------------------

    The LIBOR Act establishes that this spread-adjusted replacement 
index will replace LIBOR for existing contracts on the Replacement 
Date, specified in the LIBOR Act as the first London banking day after 
June 30, 2023, unless the Federal Reserve Board specifies another date 
(the ``Replacement Date'').\23\ The LIBOR Act also established a one-
year linear basis to transition the tenor spread adjustment from LIBOR 
to the SOFR spread-adjusted index.\24\ For FHA-insured LIBOR-based 
ARMs, the LIBOR Act authorizes HUD to approve the spread-adjusted SOFR 
index, or another benchmark replacement index selected by HUD, as a 
replacement to LIBOR for existing ARMs starting on the Replacement 
Date.\25\
---------------------------------------------------------------------------

    \23\ Id. at Division U, Section 103(6), (17), (19) and Section 
104(a)(3)).
    \24\ Id. at Division U, Section 104(e)(2).
    \25\ Id. at Division U, Section 103(10) and Section 104(c).
---------------------------------------------------------------------------

Advanced Notice of Proposed Rulemaking

    On October 5, 2021, HUD published an advanced notice of proposed 
rulemaking (ANPR) to seek input from the public on the transition away 
from LIBOR.\26\ HUD sought comment on how to address a Secretary-
approved replacement index for existing loans and provide for a 
transition date consistent with the cessation of the LIBOR index. HUD 
also sought comment on replacing the LIBOR index with the SOFR interest 
rate index, with a compatible spread adjustment to minimize the impact 
of the replacement index for existing ARMs. The comment period closed 
on December 6, 2021. HUD received nine comments on the ANPR. Comments 
were mostly supportive of transitioning away from LIBOR and multiple 
commenters specifically suggested the use of SOFR as a replacement 
index. Commenters also provided suggestions on how to smoothly 
transition off LIBOR. HUD has considered these comments in drafting 
this proposed rule.
---------------------------------------------------------------------------

    \26\ 86 FR 54876.
---------------------------------------------------------------------------

II. This Proposed Rule

    HUD proposes three changes. First, HUD proposes to transition from 
LIBOR to a spread-adjusted SOFR index for existing forward and HECM 
ARMs, and to replace LIBOR with SOFR as a Secretary-approved index for 
new ARMs. Second, HUD proposes to clarify its regulations regarding the 
Monthly Adjustable Interest Rate HECMs at Sec.  206.21(b)(2). Third, 
HUD proposes to establish a five percentage point lifetime cap on the 
adjustment of the HECM monthly ARM interest rate.

A. Transition From LIBOR to SOFR Sec. Sec.  203.49, 206.21

    This proposed rule addresses both the transition from LIBOR to SOFR 
for new forward ARM originations and the transition from LIBOR to a 
spread-adjusted SOFR index for existing forward and HECM ARMs. This 
proposed rule would also update the HECM ARM regulation consistent with 
changes already made through Mortgagee Letter 2021-08 regarding new 
originations.
New Originations for Forward and HECM ARMs Sec. Sec.  203.49(b)(1), 
206.21(b)(1)(ii)(A)
    HUD is proposing to remove LIBOR and approve SOFR as a Secretary-
approved interest rate index for FHA-insured ARMs. CMT would continue 
to be a Secretary-approved interest rate, and this rule would provide 
that both CMT and SOFR may be used for periodic adjustments for newly-
originated forward ARMs.
    As discussed above, HUD, through Mortgagee Letter 2021-08, has 
already removed LIBOR and approved SOFR as a Secretary-approved 
interest rate index for HECM ARMs closed on or after May 3, 2021. This 
proposed rule would align forward ARM indices with the change made by 
Mortgagee Letter 2021-08. HUD is also proposing to update Sec.  
206.21(b)(1)(ii)(A) so that HUD's HECM ARM regulations are consistent 
with the changes made by Mortgagee Letter 2021-08. These changes 
include establishing zero as the minimum for the index value used to 
determine the mortgage interest rate for all HECMs to prevent against 
below-zero interest rates in a negative interest rate environment.
    This rule proposes to use the 30-day average SOFR tenor adjusted to 
a constant maturity of one year. However, HUD anticipates that it may 
decide to approve additional SOFR tenors besides the 30-day average 
when additional SOFR tenors are published or more information about 
existing tenors is made available. Therefore, for both forward and HECM 
mortgages, HUD is also proposing that HUD may approve alternative SOFR 
tenors for new originations through notice.
Transition From LIBOR for Existing Forward and HECM Mortgages 
Sec. Sec.  203.49(b)(2), 206.21(b)(1)(ii)(B).
    For existing forward and HECM ARMs using LIBOR, HUD proposes to 
require that, on the Replacement Date, ARMs currently using LIBOR for 
their annual or monthly adjustments, as applicable, transition to the 
spread-adjusted SOFR index as specified in the LIBOR Act. This spread-
adjusted SOFR would be the only Secretary-approved replacement index 
for transitioning existing forward and HECM LIBOR-based ARMs. HUD also 
proposes requiring that mortgagees provide notice to the borrower of 
the replacement in accordance with the terms of the loan documents.
    Before the Replacement Date, the loan documents for these mortgages 
govern the terms of the loan and, as long as the LIBOR index is 
available, mortgagees may not have flexibility to substitute a new 
index without a modification of the existing loan documents or 
executing new loan documents. However, the LIBOR Act specifies that, on 
the Replacement Date, mortgagees will no longer be required to use 
LIBOR and must instead use a replacement index.
    HUD anticipates that possible fluctuations in the interest rate 
from the transition to the spread-adjusted SOFR would be tempered by 
FHA's existing per-adjustment or life of mortgage caps set forth in the 
mortgage documents or FHA regulations.\27\ Additionally, using

[[Page 63462]]

the tenor spread adjustment as provided for in the LIBOR Act would 
further help to mitigate impacts due to the transition because this 
spread adjustment is intended to create as little disruption as 
possible during the transition. Furthermore, the applicable SOFR tenors 
will be identified by the Federal Reserve Board prior to the 
Replacement Date and HUD believes that the spread-adjusted SOFR will 
provide a comparable interest rate consistent with the rate that would 
have been generated by the LIBOR index.
---------------------------------------------------------------------------

    \27\ These caps are set forth in Section 251 of the National 
Housing Act (12 U.S.C. 1715z-16) for insured forward ARMs and 
Section 255 of the National Housing Act (12 U.S.C. 1715z-20) for 
annually adjustable HECMs. See also, Sec. Sec.  203.49(f), Sec.  
206.21(b)(1)(iv).
---------------------------------------------------------------------------

    HUD also proposes that the Secretary will publish through notice 
any additional requirements for transition of existing LIBOR-based ARMs 
to address technical aspects of the transition process, newly published 
SOFR tenors, and any developments arising from the transition.

B. Monthly Adjustable Interest Rate HECMs Sec.  206.21(b)(2)

    When HUD issued its HECM final rule in January 2017, HUD removed 
cross references to 24 CFR part 203 and added specific language to 
discuss the annual adjustments for HECM ARMs, but did not include the 
same level of specific structure for monthly adjustments.\28\ HUD is 
proposing to restructure Sec.  206.21(b)(2) to clarify the requirements 
applicable to monthly adjustments to align with those provided for 
annual adjustments.
---------------------------------------------------------------------------

    \28\ 82 FR 7094, January 19, 2017.
---------------------------------------------------------------------------

C. Five Percent Lifetime Cap Sec.  206.21(b)(2)(iii)

    HUD proposes a limit on the adjustment of the HECM ARM monthly 
interest rate in either direction of no more than five percentage 
points from the initial contract interest rate. This change would align 
with similar ARM interest rate caps that are currently used for annual 
interest rate HECMs and forward ARMs in the mortgage industry. This 
proposal would reduce risk to the borrower and the Mutual Mortgage 
Insurance Fund (MMIF) by reducing potential loan balance growth.

III. 30-Day Public Comment Period

    In accordance with HUD's regulations on rulemaking at 24 CFR part 
10, it is HUD's policy that the public comment period for proposed 
rules should be 60 days. In the case of this proposed rule, however, 
HUD has determined there is good cause to reduce the public comment 
period to 30 days.
    HUD's October 5, 2021, ANPR sought 60 days of public comment on 
alternate indexes and best methods of transitioning off LIBOR. HUD 
received nine comments in response to HUD's ANPR that were generally 
supportive of the course of action HUD now proposes in this rule.
    After HUD published its ANPR, Congress passed and the President 
signed into law the LIBOR Act, which provides for a clear and uniform 
nationwide process for replacing LIBOR in existing contracts. The LIBOR 
Act answered many of the questions that were uncertain at the time when 
HUD published its ANPR.
    HUD believes the LIBOR Act, which HUD's proposed rule would 
implement, creates such an overwhelming industry standard that few if 
any questions remain regarding how HUD should proceed. HUD also 
believes that the comments received in response to its ANPR indicate 
that 30 days is sufficient time for commenters to consider and respond 
to this proposed rule.
    HUD also believes that, with the discontinuation of LIBOR due for 
June 30, 2023, a 30-day comment period would aid HUD in moving toward a 
final rule as quickly as possible. Providing more time between the 
final rule and the discontinuation of LIBOR would ease the transition 
off LIBOR by ensuring that the regulatory structure and necessary 
guidance is in place to transition existing forward and HECM ARMs to a 
spread-adjusted replacement index, and to allow for the origination of 
new forward ARMs on a replacement index by June 30, 2023.
    Given the above justifications, HUD believes that good cause exists 
to reduce the public comment period to 30 days. All comments received 
during the 30-day public comment period will be considered in the 
development of the final rule.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

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

Unfunded Mandates Reform Act

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

[[Page 63463]]

the private sector, within the meaning of the UMRA.

Environmental Review

    This proposed rule consists of ``[s]tatutorily required and/or 
discretionary establishment and review of interest rates, mortgage 
limits, building cost limits, prototype costs, fair market rent 
schedules, HUD-determined prevailing wage rates, income limits and 
exclusions with regard to eligibility for or calculation of HUD housing 
assistance or rental assistance, and similar rate and cost 
determinations and related external administrative or fiscal 
requirements or procedures which do not constitute a development 
decision that affects the physical condition of specific project areas 
or building sites.'' Accordingly, under 24 CFR 50.19(c)(6), this 
proposed rule is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Regulatory Flexibility Act

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

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

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

Paperwork Reduction Act

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

List of Subjects

24 CFR Part 203

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

24 CFR Part 206

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

    For the reasons stated in the preamble, HUD proposes to amend 24 
CFR parts 203 and 206 as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

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

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

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


Sec.  203.49  Eligibility of adjustable rate mortgages.

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

[[Page 63464]]

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

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

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

Subpart A--General

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


Sec.  206.3  Definitions.

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

Subpart B--Eligibility; Endorsement

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


Sec.  206.21  Interest rate.

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

Julia R. Gordon,
Assistant Secretary for Housing--FHA Commissioner.
[FR Doc. 2022-22538 Filed 10-18-22; 8:45 am]
BILLING CODE 4210-67-P