[Federal Register Volume 69, Number 232 (Friday, December 3, 2004)]
[Proposed Rules]
[Pages 70344-70346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26591]



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Part III





Department of Housing and Urban Development





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24 CFR Part 206



Home Equity Conversion Mortgages: Long Term Care Insurance; Proposed 
Rule

Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / 
Proposed Rules

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 206

[Docket No. FR-4857-A-01; HUD-2004-0016]
RIN 2502-AI04


Home Equity Conversion Mortgages: Long Term Care Insurance; 
Advance Notice of Proposed Rulemaking

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

ACTION: Advance Notice of Proposed Rulemaking.

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SUMMARY: This notice requests comments on issues related to the 
implementation of a statute that allows for the waiver of the 
collection of a home equity conversion mortgage (HECM) mortgagor's 
single up-front mortgage premium. The statute allows for the waiver 
provided that the HECM future payments to the homeowner are used to pay 
the premiums for a qualified long term care insurance contract.

DATES: Comment Due Date: February 1, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Interested persons may also submit 
comments electronically through either:
    <bullet> The Federal eRulemaking Portal at: www.regulations.gov; or
    <bullet> The HUD electronic Web site at: www.epa.gov/feddocket. 
Follow the link entitled ``View Open HUD Dockets.'' Commenters should 
follow the instructions provided on that site to submit comments 
electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available, without revision, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Copies are also available for inspection and downloading 
at www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Office of Single 
Family Housing, Department of Housing and Urban Development. Room 9278, 
451 Seventh Street, SW., Washington, DC 20410-8000; telephone (202) 
708-2121 (this is not a toll-free number). Persons with hearing or 
speech impairments may access this number through TTY by calling the 
toll-free Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

Background

    Section 201 of the American Homeownership and Economic Opportunity 
Act of 2000 (Pub. L. 106-569, approved December 27, 2000) (AHEO Act) 
amended section 255 of the National Housing Act (12 U.S.C. 1715z-20) to 
add a new subsection (l) to provide for the waiver of up-front premiums 
for HECM mortgages used to fund long-term care insurance. Section 255 
is the statutory authority for the creation of the HECM program. Under 
section 255, the Secretary is authorized to ``carry out a program of 
mortgage insurance designed to meet the special needs of elderly 
homeowners by reducing the effect of the economic hardship caused by 
the increasing costs of meeting health, housing, and subsistence needs 
at a time of reduced income, through the insurance of home equity 
conversion mortgages to permit the conversion of a portion of 
accumulated home equity into liquid assets.''
    HUD regulations at 24 CFR part 206 govern the HECM program. 
Currently, a HECM mortgagor is required to pay to the mortgagee an 
initial or up-front mortgage insurance premium that is two percent of 
the maximum claim amount in addition to a monthly premium thereafter 
(see 24 CFR 206.105). The amendment by section 201 of the AHEO Act 
authorizes the Secretary to waive the two percent premium, provided 
that the HECM proceeds received by the mortgagor are applied to payment 
of the premiums for a ``qualified long-term care insurance contract 
that covers the mortgagor or members of the household residing in the 
property that is subject to the mortgage.'' The mortgagor would 
continue to be required to pay the monthly MIP prescribed in the 
regulations.
    In accordance with new section 255(l)(3) of the National Housing 
Act, the term ``qualified long-term care insurance contract'' has the 
meaning given such term in section 7702B of the Internal Revenue Code 
of 1986 (26 U.S.C. 7702B), except that such contract also shall meet 
the requirements certain sections of the long-term care insurance model 
regulation promulgated by the National Association of Insurance 
Commissioners (NAIC), adopted as of September 2000. The applicable 
sections of the model regulation are: Section 9, Required Disclosure of 
Rating Practices to Consumer; Section 24, Suitability; and Section 26, 
Nonforfeiture Benefit Requirement. Additionally, the qualified long-
term care insurance contract must meet the requirements of Section 8, 
Nonforfeiture Benefits of the Long-Term Care Insurance Model Act (model 
act) promulgated by the NAIC, adopted as of September, 2000.
    The terms ``disclosure,'' ``suitability,'' and ``contingent 
nonforfeiture'' are technical terms addressed in the NAIC model 
regulation and model act, and in long-term care policies. For purposes 
of discussion in this notice, however, it is sufficient to describe 
these terms as follows:
    ``Disclosure'' in the model regulation pertains specifically to a 
long-term care policy that has the possibility of experiencing an 
increase in the amount of the premium rate. Thus, an insurer or agent 
of the long-term care insurance (LTCI) contract is required to provide 
a statement to an applicant indicating the possibility of a future 
premium rate increase, including information about any premium 
increases that have occurred over the past ten years.
    ``Suitability'' addresses the suitability of long-term care 
insurance for a prospective purchaser of a policy (e.g., taking into 
account such factors as the person's age, health, assets, income, 
etc.). Various worksheets and disclosure forms are required to assist 
an applicant to understand better the nature and suitability of a LTCI 
policy. While the decision to purchase insurance ultimately rests with 
the applicant, the insurance carrier must offer guidance to the 
purchaser concerning suitability, as described here, before the 
decision is made.
    The ``contingent nonforfeiture'' benefit is more readily understood 
by reference to the nature of a ``nonforfeiture'' benefit. Typically, 
an applicant will receive the option to pay an increased premium rate 
for ``nonforfeiture'' coverage. In exchange for what is, relatively 
speaking, a very expensive premium rate, the applicant can receive a 
substantial benefit, such as the return of all premiums paid, if the 
policy is surrendered after a requisite period of time. NAIC defines 
the nonforfeiture benefit as a policy feature that returns at least a 
part of the premiums to a policyholder if he or she cancels the policy 
or allows it to lapse. However, if an applicant chooses not to purchase 
the nonforfeiture option, under the NAIC model act and regulation, the 
contingent nonforfeiture benefit must become effective automatically. 
In essence, the nonforfeiture benefit recognizes the possibility of a 
huge and unanticipated increase in a premium schedule that could force 
a policyholder to surrender

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his or her policy. In such a case, the NAIC model Act and regulation 
are designed to assure that the policyholder receives some 
reimbursement for premiums already paid, albeit a much lesser amount 
than that which the policyholder would have received if he or she had 
purchased the nonforfeiture benefit.

Issues for Consideration

1. Who Is Covered by an LTCI Contract?

    An initial question stems from language in the statutory amendment 
to section 255 that pertains to who can be covered by a LTCI contract. 
The statute refers to a LTCI contract that covers ``the mortgagor or 
members of the household residing in the property that is subject to 
the mortgage'' (emphasis added). This language is very broad, in that 
it invites the possibility of any person, irrespective of relationship 
to the mortgagor, being covered by the long term care policy, provided 
that the person is a ``member of the mortgagor's household'' and 
``residing in the property subject to the mortgage.'' Accordingly, 
should HUD limit this eligibility requirement so that being a member of 
the mortgagor's household means having a particular relationship to the 
mortgagor (e.g., a spouse or child)? For practical and programmatic 
reasons, HUD is inclined to limit the eligible ``member of the 
mortgagor's household'' to a person who is part of the mortgagor's 
immediate family.
    A further question is, should a non-mortgagor member of the 
household be required to remain in the household for at least a 
specified minimum amount of time in order to maintain eligibility? 
Conversely, should the HECM loan be used to pay for long term care 
premiums for a non-mortgagor member of the household even after he or 
she has ceased to reside in the property securing the HECM loan? 
Additionally, should HUD regulate the amount of time that a mortgagor, 
or other member of the household, covered by the LTCI policy can 
receive care outside the home before the HECM becomes due and payable? 
HUD is interested in receiving comments on these and related questions 
before it proposes any standards.

2. What Are the Required Features or Options of an LTCI Contract?

    A second issue arises from the fact that the benefits offered in 
long-term care policies are not standardized. Benefits offered under a 
policy will vary depending upon a purchaser's discretion and the amount 
of the premium payments that he or she is willing and able to make. For 
the very reason that premiums rise in accordance with enhanced 
benefits, HUD is reluctant to impose additional requirements upon a 
policyholder's choices when he or she is selecting a benefit package. 
Notably, the statutory requirements described above, applicable to a 
``qualified long-term care insurance policy'' (i.e., disclosure, 
suitability, and contingent nonforfeiture), help to protect the 
consumer but come at a cost (i.e., an increased premium for the 
enhanced protection required). There are certain consumer protection 
features or options that HUD is considering requiring in a qualified 
LTCI policy, even though these options result in increased premiums. 
For example, HUD is considering including a requirement for 
``comprehensive coverage,'' recognizing that a policyholder will pay a 
greater premium amount for this coverage (that allows for care in one's 
own home, a nursing home, an assisted living facility and/or an adult 
day-care facility) as opposed to coverage that limits care to a 
particular kind of facility (i.e., ``facility-based'' care, such as 
care provided in a nursing home).
    HUD is also considering requiring ``portability,'' a feature that 
ensures the policyholder will receive the benefits of a policy 
regardless of whether that (non-mortgagor) policyholder moves to 
another jurisdiction that has different requirements from the one in 
which the policy originally was issued.
    Other requirements could include optional features that impose (1) 
a minimum benefit amount of daily dollar coverage (e.g., at least one 
hundred dollars per day); (2) a minimum care term under the policy 
(e.g., at least five years, as opposed to three years or some other 
minimum term); or (3) an inflation factor, e.g., that the daily amount 
of benefit coverage increases annually by five (or some other) percent; 
or all of these requirements.
    HUD is interested in public comment on what options, if any, should 
be required under the program, given that increased options may offer 
greater protections for the consumer, but also may result in increased 
premiums that can affect the actuarial soundness of the HECM program.
    HUD is also interested in comments on the relationship between 
potential requirements and existing requirements under federal and 
state regulation of long-term care insurance. Specifically, HUD would 
like comments that explore if existing requirements are sufficient to 
protect the consumer and if imposing new requirements would limit the 
availability of insurance to be used under this program.

3. What Standards Should Govern an Insurer of an LTCI Contract?

    A related consumer protection issue concerns the viability of the 
carrier that is offering long-term care insurance. How can HUD be 
certain that the insurer is a qualitatively sound entity? What minimum 
standards, if any, should HUD impose regarding the qualifications of 
the carrier?
    HUD welcomes comments suggesting possible additional safeguards.

4. What Requirements Should Govern the Lender?

    Another area of interest pertains to the responsibility of HUD and/
or the mortgage lender for making sure that the LTCI policy meets the 
requirements in the statute (i.e., provisions of the model act and 
model regulation promulgated by the NAIC) as well as any requirements 
that may be imposed by HUD. What requirements should HUD reasonably 
impose upon the mortgagee in this area? Should the mortgage lender be 
responsible for making premium payments directly to the long-term care 
insurer on behalf of the HECM mortgagor, given that the statutory 
amendment requires the entire HECM benefit be applied to the LTCI 
policy premium (other than amounts used to satisfy outstanding mortgage 
obligations ``in accordance with such limitations as the Secretary 
shall prescribe'' and to pay various fees described in the statutory 
amendment)?

5. How Should HECM Proceeds Be Addressed To Ensure Sufficient Funds 
Remain for LTCI?

    The use of the HECM proceeds gives rise to additional questions. 
First, how can HUD best comply with the statutory amendment that 
imposes limits on the amount that can be used to retire outstanding 
mortgage obligations, thereby assuring that adequate funds remain 
available to fund long-term care insurance? Is it practical or even 
possible for HUD to devise a standard, by formula or otherwise, to 
determine an appropriate amount?
    Second, once any outstanding debt and other permissible fees are 
paid off by the HECM proceeds, the statute requires all remaining 
payments be applied to the LTCI policy premiums. Thus, under this 
particular program, and unlike the existing HECM program, the mortgagor 
will not have access to any HECM proceeds for discretionary spending 
purposes. Will this requirement in the statutory amendment

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affect consumer interest in the HECM/long term care program?

6. How Should the Program Handle Defaults?

    Another area of concern upon which HUD seeks comment pertains to 
default events and consequences. HUD proposes to make the HECM loan due 
and payable upon a mortgagor's voluntary termination of the LTCI 
policy. However, it is conceivable that a policy could lapse through no 
fault of the HECM mortgagor. For example, the termination of the policy 
may reflect an unanticipated or inappropriate action on behalf of the 
LTCI carrier. In such an event, HUD is considering that the HECM loan 
should be deemed due and payable unless, within 90 days of the date 
that (1) the HECM mortgagor purchases a new LTCI policy or (2) 
reimburses the Department an amount equal to the two-percent upfront 
mortgage insurance premium that was waived at the time that the HECM 
was issued. There is also the question of the source of the funds for 
the new policy if it would cost more than the undisbursed mortgage 
proceeds.

7. What Is the Likely Demand for This Program?

    As this would be a new program, HUD is interested in comments that 
discuss or estimate (or both) the likely volume of potential consumer 
demand for these loans. HUD is also interested in comments on factors 
that could positively or negatively influence demand for this new 
product.

General Solicitation of Comments

    HUD seeks comments on how the issues described in this notice 
should be addressed. HUD also invites commenters to raise any other 
areas that should be addressed in implementing a HECM LTCI policy and 
to provide suggestions on how these additional areas should be 
addressed.

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this advance 
notice of proposed rulemaking (ANPR) under Executive Order 12866, 
Regulatory Planning and Review, issued by the President on September 
30, 1993. Any changes made in this ANPR subsequent to its submission to 
OMB are identified in the docket file, which is available for public 
inspection between 8 a.m. and 5 p.m. weekdays in the Regulations 
Division, Office of the General Counsel, Department of Housing and 
Urban Development, Room 10276, 451 Seventh Street, SW., Washington, DC 
20410-5000.

    Dated: November 5, 2004.
John C. Weicher,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 04-26591 Filed 12-2-04; 8:45 am]
BILLING CODE 4210-27-U