70344 Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 

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. 

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: 

• The Federal eRulemaking Portal at: 

www.regulations.gov; or 

• 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 

Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 70345

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 nonmortgagor 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 (nonmortgagor) 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 

70346 Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 

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