Source: https://www.federalregister.gov/articles/2014/05/08/2014-10572/federal-housing-administration-fha-adjustable-rate-mortgage-notification-requirements-and-look-back
Timestamp: 2015-07-04 10:10:09
Document Index: 792883080

Matched Legal Cases: ['§ 1026', '§ 1026', '§ 203', 'art 1026', '§ 203', '§ 1026', '§ 1026', '§ 203']

Federal Register | Federal Housing Administration (FHA): Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages
-26381 (6 pages)
Document Number: 2014-10572
Shorter URL: https://federalregister.gov/a/2014-10572 Related Topics
FR–5744–P–01 Federal Housing Administration (FHA): Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages
Federal Housing Administration (FHA): Adjustable Rate Mortgage Notification Requirements And Look-Back Period For FHA-Insured Single Family Mortgages 3 actions from May 8th, 2014 to August 2014
This proposed rule would align FHA's regulations governing its single family ARM program with the interest rate adjustment and disclosure and notification periods required for ARMs by TILA, as implemented by the CFPB in a final rule published in the Federal Register on February 14, 2013, at 78 FR 10902, and entitled “Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z).”
This February 2013 final rule, referred to in this preamble as the 2013 TILA Servicing Rule, set the ARM adjustment notice requirement to a period of between 60 days (minimum) and 120 days (maximum) before the newly adjusted payment is due. Additionally, the 2013 TILA Servicing Rule established 45 days as the minimum ARM look-back period. In the preamble to the 2013 TILA Servicing Rule, the CFPB states that FHA's current 30-day look-back period does not provide sufficient time to notify the mortgagor of an interest rate and monthly payment adjustment. To allow HUD sufficient time to comply with the notification requirements of the 2013 TILA Servicing Rule, the CFPB delayed the effective date of the notification requirements in the 2013 TILA Servicing Rule to January 10, 2015, for ARMs insured by FHA with a 30-day look-back period. Therefore, FHA-insured ARMs originated on or after January 10, 2015, must comply with the new notification requirements of the 2013 TILA Servicing Rule.
The second proposed revision would update 24 CFR 203.49(h) to cross-reference the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of § 1026.20(d) govern the initial rate adjustment of an ARM, while those of § 1026.20(c) govern subsequent rate adjustments.
Since an overwhelming majority of ARMs originated in the conventional mortgage market currently have a 45-day look-back period
and were required to comply with the 2013 TILA Servicing Rule notification requirements on January 10, 2014, well before the effective date of this proposed rule, there should be little, if any, burden to apply the same 2013 TILA Servicing Rule requirements on FHA-insured ARMs. Therefore, the anticipated costs of this proposed rule are very minimal.
The types of ARMs that FHA insures are those for which the interest rate may be adjusted annually by the FHA-approved mortgagee, beginning after 1, 3, 5, 7, or 10 years from the date of the mortgagor's first debt service payment.
FHA's ARM program provides that changes in the interest rate charged on an ARM must correspond either to changes in the 1-year London Interbank Offered Rate (LIBOR) or to changes in the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of 1 year (see 24 CFR 203.49(b)). The regulations further provide that except as may be otherwise specified in the regulations, each change in the mortgage interest rate must correspond to the upward and downward change in the index.
FHA's current regulations establish a maximum amount that interest rates may increase or decrease. For 1- and 3- year ARMs, no single adjustment to the interest rate may result in a change in either direction of more than 1 percentage point from the interest rate in effect for the period immediately preceding that adjustment. Additionally, index changes in excess of 1 percentage point 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 these ARMs may not result in a change, in either direction, of more than 5 percentage points from the initial contract interest rate. For 5-, 7-, and 10-year ARMs, no single adjustment to the interest rate may result in a change, in either direction, of more than 2 percentage points from the interest rate in effect for the period immediately preceding that adjustment. Similar to the 1- and 3-year ARMs, index changes in excess of 2 percentage points may not be carried over for inclusion in an adjustment in a subsequent year. For these ARMs, 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 6 percentage points from the initial contract rate.
As discussed above, the 2013 TILA Servicing Rule, which became effective January 10, 2014, revised the time frame for providing the ARM adjustment notice from the current requirement to between 60 and 120 days before the newly adjusted monthly payment is due (see 12 CFR 1026.20(c)). The preamble to the 2013 TILA Servicing Rule explains the reasons for, and identifies research supporting, this change.
The revised period is designed to provide borrowers with additional time to adjust their finances or to pursue meaningful alternatives such as refinancing, home sale, loan modification, forbearance, or deed-in-lieu of foreclosure. The preamble to the 2013 TILA Servicing Rule cites research indicating that the Nation's largest mortgage lenders take an average of more than 70 days to complete a refinance. The preamble to the 2013 TILA Servicing Rule also explains that the revised look-back period of 45 days is consistent with the business practices of ARM servicers. The preamble states that most ARM servicers determine the index value from which the new interest rate and payment will be calculated at least 45 days before the date of the interest rate adjustment. Because interest on consumer mortgage credit generally is paid one month in arrears, this means that ARM servicers know the index value approximately 75 days before the due date of the first new payment.
III. This Proposed Rule Back to Top
Second, FHA proposes to change § 203.49(h), which addresses the disclosure and notification requirements of an interest rate adjustment by the mortgagee to the mortgagor. This proposed rule would require the mortgagee to provide the disclosures and to comply with the timing and notification requirements of the 2013 TILA Servicing Rule at 12 CFR part 1026.
In proposing to revise the look-back period from 30 days to 45 days, and in order to comply with the 2013 TILA Servicing Rule, HUD is required to change its current 30-day look-back period to a period of no less than 45 days. HUD proposes to adopt the minimum period of 45 days, which is also the industry norm.
HUD agrees with the CFPB that a period of 45 days would allow a mortgagee to comply with the 60- to 120-day notice to the mortgagor as required in 12 CFR 1026.20(c). Mortgagees holding or servicing an ARM with a 45-day, or longer, look-back period should be able to comply with the requirement to provide earlier notice to the mortgagor. For example, for an ARM with a 45-day look-back period, the notice would be ready 45 days before the interest change date and, with an approximately 30-day billing cycle between the interest change date and the date that the first payment at the new level would be due, the mortgagee could provide the interest rate adjustment notice to the mortgagor approximately 75 days before the new payment was due. Under these circumstances, the mortgagee should be able to comply with the requirement that notice be provided to the mortgagor at least 60 days before the payment at a new interest rate level is due.
The second proposed revision updates § 203.49(h) to cross-reference the disclosure and notification requirements for interest rate and payment adjustments for ARMs, including the timing, content, and format of such disclosures, contained in the 2013 TILA Servicing Rule at 12 CFR 1026.20(c) and (d). The disclosure requirements of § 1026.20(d) govern the initial rate adjustment of an ARM, while those of § 1026.20(c) govern subsequent rate adjustments. Paragraph (c) of 12 CFR 1026.20 requires the mortgagee of an ARM to provide the mortgagor with disclosures in connection with any adjustment of the interest rate, as required by the loan contract, that results in a corresponding adjustment to the mortgagor's monthly payment. This required disclosure must be provided to the mortgagor at least 60 days, but not more than 120 days, before the first payment at the adjusted level is due.
The cross-references to the TILA requirements not only avoid the repetition of regulatory text, but help to ensure that HUD's codified regulations remain current should the CFPB revise Regulation Z. The alternative of repeating the CFPB regulatory text runs the risk that HUD's regulations may become outdated in the event the CFPB revises the regulatory disclosure and notification requirements, necessitating the need for HUD to undertake potentially time consuming notice and comment rulemaking to update its regulations. In addition to the timing requirements, FHA-approved ARM mortgagees would be required to comply with the requirements of 12 CFR 1026.20(c) governing the content and format of such disclosures. The 2013 TILA Servicing Rule requires specific disclosures, accompanying statements, and tables, including information such as the terms of the mortgagor's ARM, the effective date of the interest rate adjustment and when additional future interest rate adjustments are scheduled to occur, a comparison of the current and new interest rate, and the specific index or formula used in making interest rate adjustments. (For the full list of requirements, see 12 CFR 1026.20(c)(2) and (c)(3).) All such disclosures required under 12 CFR 1026.20(c) must be in the format substantially similar to the sample formats prescribed in the 2013 TILA Servicing Rule, which includes sample formats for such disclosures.
As noted, 12 CFR 1026.20(d) establishes separate disclosure requirements for the initial rate adjustment of an ARM with an initial interest rate that is constant for more than one year. The first time the interest rate adjusts the monthly payment of an FHA-insured ARM, the mortgagee would be required to provide the appropriate disclosures to the mortgagor at least 210, but not more than 240, days before the first payment at the adjusted level is due.
If the new interest rate (or the new payment calculated from the new interest rate) is not known as of the date of the disclosure, an estimate shall be disclosed and labeled as such for the mortgagor. This estimate shall be based on the calculation of the specific index or formula used in making the interest rate adjustment within 15 business days prior to the date of the disclosure.
The required content and format of the initial disclosures are contained in 12 CFR 1026.20(d)(2). These disclosures, accompanying explanatory statements, and tables include information such as an explanation of the terms of the mortgagor's ARM; a comparison of the current and new interest rates; the telephone number of the mortgagee for the mortgagor to call if they anticipate not being able to make their new payments; a list of alternatives to paying at the new rate that the mortgagor may be able to pursue and a brief explanation of each alternative, expressed in simple and clear terms; the Web site to access either the CFPB's or HUD's list of homeownership counselors and counseling organizations; and the toll-free telephone number to access the HUD list of homeownership counselors and counseling organizations. All such disclosures required under 12 CFR 1026.20(d) must be in the format substantially similar to that prescribed by the 2013 TILA Servicing Rule, which includes sample formats for such disclosures.
The initial disclosure requirements of 12 CFR 1026.20(d) do not apply to ARMs with a term where the interest rate would adjust within a 1-year period (see 12 CFR 1026.20(d)(1)(ii)). FHA does not insure ARMs with a term of less than 12 months. The HUD regulation at 24 CFR 203.49(d) describes the frequency of rate changes for ARMs eligible for FHA insurance, providing that “. . . the first adjustment shall be no sooner or later than . . .” as provided in the regulation. The shortest term ARM eligible for FHA insurance is a 1-year ARM with the first rate adjustment occurring no earlier than 12 months. Accordingly, the exemption provided by the 2013 TILA Servicing Rule is not applicable to FHA-insured ARMs.
IV. 30 Day Public Comment Period Back to Top
12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and 1717z-21; 42 U.S.C. 3535(d).
2.Revise the third sentence of paragraph (d)(2) and paragraph (h) to read as follows: § 203.49 Eligibility of adjustable rate mortgages.
1. The CFPB initially published the rule on its Web site: http://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/.
3. FHA sometimes uses the terms “standard 1-year ARM” and “hybrid ARM” to describe the different periods of time that the initial interest rate of a mortgage is held constant before adjusting to the appropriate market index. A standard 1-year ARM product offers an initial interest rate held constant for 1 year. A hybrid ARM offers an initial interest rate that is constant for either the first 3, 5, 7, or 10 years of the mortgage, depending on its terms. For purposes of this proposed rule, the term “ARM” refers to both a standard 1-year ARM and hybrid ARM products. For an explanation of FHA-insured ARM products see: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/203armt.