72696 Federal Register / Vol. 70, No. 233 / Tuesday, December 6, 2005 / Rules and Regulations 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 203 

[Docket No. FR–4946–F–02] 

RIN 2502–AI26 

Eligibility of Adjustable Rate 

Mortgages 

AGENCY: Office of the Assistant 

Secretary of Housing—Federal Housing 

Commissioner, HUD. 

ACTION: Final rule. 

SUMMARY: On March 29, 2005, HUD 

published an interim rule making 

available a new adjustable rate mortgage 

(ARM) product. In accordance with 

statutory authority, this rule enabled the 

Secretary to insure five-year hybrid 

ARMs with interest rates adjustable up 

to two percentage points annually (this 

type of mortgage is known as a 5/1 

ARM). The lifetime cap on annual 

interest rate adjustments for five-year 

ARMs was set at six percentage points. 

This final rule follows publication of the 

March 29, 2005, interim rule, and makes 

no changes at this final rule stage. 

DATES: Effective Date: January 5, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Margaret Burns, Deputy Director, Office 

of Program Development, Office of 

Insured Single Family Housing, 

Department of Housing and Urban 

Development, 451 Seventh Street, SW., 

Room 9266, Washington, DC 20410– 

8000; telephone (202) 708–2121 (this is 

not a toll-free number). Persons with 

hearing or speech impairments may 

access this number through TTY by 

calling the toll-free Federal Information 

Relay Service at (800) 877–8339. 

SUPPLEMENTARY INFORMATION

I. Background 

Section 251 of the National Housing 

Act (12 U.S.C. 1715z–16) authorizes the 

Secretary to insure adjustable rate 

mortgages (ARMs). ARMs are mortgages 

that remain at a fixed interest rate for a 

certain period of time, but then provide 

for periodic adjustments in the interest 

rate charged on the mortgage. An ARM 

may be attractive to a potential 

homebuyer because it offers a lower 

initial interest rate than most fixed rate 

mortgage loans. 

Section 251 of the National Housing 

Act limits the amount of the annual 

interest rate adjustments on ARMs 

insured by HUD-Federal Housing 

Administration (FHA) depending on the 

duration of the initial fixed interest rate 

term. Section 301 of Public Law 108– 

186 (approved December 16, 2003) 

(2003 Act), amended section 251(d) of 

the National Housing Act to provide for 

greater flexibility in this regard. Prior to 

enactment of the 2003 Act, section 251 

of the National Housing Act limited 

annual interest rate adjustments on 

FHA-insured ARMs to one percentage 

point only if the initial fixed interest 

rate term was for a period of five years 

or less. Section 301 amended section 

251(d)(1)(C) of the National Housing Act 

to reduce this period to three years or 

less. In other words, the annual 

adjustment of one percent only applies 

to ARMs with a fixed term for the first 

three or fewer years. For five-, seven-, 

and ten-year ARMs, the mortgagee may 

make an annual adjustment that exceeds 

one percent. Thus, prior to the 

enactment of the interim rule, 

§ 203.49(f)(1) limited the annual interest 

rate adjustment for five-year ARMs to a 

single percentage point. 

HUD became aware of concerns 

among mortgage lenders and borrowers 

regarding the one percentage point 

limitation on annual interest rate 

adjustments for five-year ARMs. These 

concerns were based primarily on the 

fact that a one percentage point 

limitation on FHA-insured five-year 

ARMs did not accurately reflect the 

realities of the mortgage market. 

Conventional mortgage lenders do not 

offer five-year ARMs with a one 

percentage point cap on annual interest 

rate adjustments. A maximum annual 

increase of one percentage point does 

not provide lenders with sufficient 

interest rate flexibility to offer five-year 

ARMs at an interest rate below the 

traditional 30-year fixed rate mortgage. 

Accordingly, the one percentage point 

limitation undercut HUD’s ability to 

offer mortgage insurance for a full range 

of ARM loans with standing initial 

interest rates lower than those on 

conventional 30-year fixed rate 

mortgages. 

On March 29, 2005 (70 FR 16080), 

HUD published an interim rule that 

enabled the Secretary to insure five-year 

hybrid ARMs with interest rates 

adjustable up to two percentage points 

annually (this type of mortgage is 

known as a 5/1 ARM). In addition, the 

interim rule raised the lifetime cap on 

interest rate adjustments for five-year 

ARMs to six percentage points. This 

change conformed the lifetime cap for 

five-year ARMs to those applicable to 

seven- and ten-year ARMs. 

II. This Final Rule 

This final rule follows publication of 

the March 29, 2005, interim rule and 

takes into consideration the public 

comments received on the interim rule. 

The public comment period for the 

interim rule closed May 31, 2005. HUD 

received one public comment on the 

interim rule from an association 

representing real estate practitioners. 

The commenter wrote that it supports 

the interim rule because the new 

interest rate allows sufficient interest 

rate flexibility and will expand the 

number of available insured mortgage 

options. HUD has decided to adopt the 

March 29, 2005, rule as final without 

change. 

III. Findings and Certifications 

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 on 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 

permits greater flexibility for all lenders, 

regardless of size, to offer a revised 

mortgage product that is eligible for 

FHA insurance. This rule imposes no 

additional economic or monetary 

requirements on businesses. Therefore, 

the undersigned certifies that this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities. 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment was 

made at the interim rule stage in 

accordance with HUD regulations at 24 

CFR part 50, which implements section 

102(2)(C) of the National Environmental 

Policy Act of 1969 (42 U.S.C. 

4332(2)(C)). That Finding remains 

applicable to this final rule and is 

available for public inspection between 

8 a.m. and 5 p.m. weekdays in the 

Regulations Division, Office of General 

Counsel, Department of Housing and 

Urban Development, 451 Seventh Street, 

SW., Room 10276, Washington, DC 

20410–0500. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits, to the extent 

practicable and permitted by law, an 

agency from publishing any rule that 

has federalism implications and either 

imposes substantial direct compliance 

costs on State and local governments 

and is not required by statute, or the 

rule preempts State law, unless the 

agency meets the consultation and 

funding requirements of section 6 of the 

Executive Order. This rule does not 

have federalism implications and does 

not impose substantial direct 

compliance costs on State and local 

Federal Register / Vol. 70, No. 233 / Tuesday, December 6, 2005 / Rules and Regulations 72697 

governments or preempt State law 

within the meaning of the Executive 

Order. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA) (2 U.S.C. 

1531–1538) establishes requirements for 

Federal agencies to assess the effects of 

their regulatory actions on State, local, 

and tribal governments, and the private 

sector. This final rule does not impose 

any Federal mandates on any State, 

local, or tribal government, or the 

private sector within the meaning of 

UMRA. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance numbers applicable to this 

rule are 14.108, 14.117, and 14.119. 

List of Subject in 24 CFR Part 203 

Hawaiian Natives, Home 

improvement, Indians—lands, Loan 

programs—housing and community 

development, Mortgage insurance, 

Reporting and recordkeeping 

requirements, Solar energy. 

■ Accordingly, for the reasons stated in 

the preamble, the interim rule for part 

203 of Title 24 of the Code of Federal 

Regulations, amending § 203.49, 

published on March 25, 2005, at 70 FR 

16080, is promulgated as final, without 

change. 

Dated: November 23, 2005. 

Brian D. Montgomery, 

Assistant Secretary for Housing, Federal 

Housing Commissioner. 

[FR Doc. 05–23648 Filed 12–5–05; 8:45 am] 

BILLING CODE 4210–27–P