Definitions (§ 206.3)
Borrower. In order to distinguish borrowers from mortgagors, this rule proposes to add a definition of “borrower” to mean a mortgagor who is an original borrower under the HECM Loan Agreement and Note, not including a borrower’s successors and assigns. Each borrower shall be on title, shall also be a mortgagor, and shall sign all applicable HECM loan documents.
Borrower’s Advance. The definition of “Borrower’s Advance” originated in RMSA Mortgagee Letter 2014-11, and was subsequently updated in RMSA Mortgagee Letter 2014-21.
Taken together, those RMSA mortgagee letters provided that “Borrower’s Advance” means funds advanced to the borrower at the closing of a fixed interest rate HECM which may not
exceed the greater of 60 percent of the principal limit; or Mandatory Obligations plus an additional 10 percent of the principal limit. In this rule, FHA proposes to codify a definition of
“Borrower’s Advance” that does not include the actual calculation, which can more
appropriately be found in the section regarding the calculation of payments, § 206.25, such that the “Borrower’s Advance” would be the funds advanced to the borrower at the closing of a fixed interest rate HECM. In this rule, FHA proposes to make changes to the calculation of the
Borrower’s Advance to allow the Commissioner flexibility in setting these amounts, but such changes are discussed later in this preamble in relation to § 206.25.
CMT Index. This proposed rule eliminates the definition of One-month Constant
Maturity Treasury (CMT) Index and instead adds a more general definition of CMT Index, since FHA’s regulations also permit the use of the one-year CMT Index.
Commissioner. This proposed rule adds a definition of “Commissioner” to mean the Federal Housing Commissioner or the Commissioner’s authorized representative, and as a result of this addition, eliminates the now unnecessary definition of “Secretary”.
Contract of insurance. FHA proposes to define “contract of insurance” instead of citing to 24 CFR 203.251(j), and proposes to amend the definition to specifically be applicable to FHA’s part 206 regulations such that “contract of insurance” means the agreement evidenced by the issuance of a Mortgage Insurance Certificate or by the endorsement of the Commissioner upon the credit instrument given in connection with an insured mortgage, incorporating by reference regulations in subpart C of this part and the applicable provisions of the NHA.
Deferral Period. The term “Deferral Period” was introduced and defined in RMSA Mortgagee Letter 2014-07, and subsequently updated in RMSA Mortgagee Letter 2015-02.
Taken together, those RMSA mortgagee letters provide that “Deferral Period” means the period
of time following the death of the last surviving borrower during which the due and payable status of a HECM is deferred for an Eligible Non-Borrowing Spouse provided that the
Qualifying Attributes and all other FHA requirements continue to be satisfied. FHA proposes to codify this definition.
Eligible Non-Borrowing Spouse. The term “Eligible Non-Borrowing Spouse” was introduced in RMSA Mortgagee Letter 2015-02. “Eligible Non-Borrowing Spouse” means a Non-Borrowing Spouse who meets all Qualifying Attributes for a Deferral Period. FHA proposes to codify this definition.
Estate planning service firm. This rule proposes to update the definition of “estate planning service firm” in § 206.3 to conform to changes made to § 206.41 which specify counseling requirements for Eligible and Ineligible Non-Borrowing Spouses. In addition, because participating agencies are approved under subpart B of 24 CFR part 214, not § 206.41, this rule proposes to change references regarding the approval of participating agencies in § 206.41 to more accurately reflect the requirements of subpart B of 24 CFR part 214.
Expected average mortgage interest rate. “Expected average mortgage interest rate” is currently defined at § 206.3 to mean the interest rate used to calculate the principal limit and the future disbursements to the borrower. RMSA Mortgagee Letter 2014-11 amended the definition of “expected average mortgage interest rate” for fixed interest rate HECMs to provide that the expected average mortgage interest rate is the same as the fixed mortgage (Note) interest rate and is set simultaneously with the fixed interest rate. This rule proposes to codify that amendment, and to also further amend the definition of “expected average mortgage interest rate” due to an inadvertent past error. On July 20, 2007, at 72 FR 40048, FHA published a final rule adding additional indices to adjust interest rates for FHA-insured single family mortgage loans,
including HECM loans. The July 20, 2007, final rule inadvertently amended the definition in the HECM regulations of “expected average mortgage interest rate” to mean that the expected average mortgage interest rate is “[e]stablished based on the date the initial loan is signed by the mortgagor.” However, industry practice has been that the mortgagee may lock-in the expected average mortgage interest rate for HECMs at the time the initial loan application is signed by the borrower or prior to the date of closing. Locking in the expected average mortgage interest rate provides HECM borrowers with the comfort of knowing that the expected average mortgage interest rate cannot increase during the interest rate lock-in period and subsequently reduce the principal limit. FHA therefore proposes to amend the definition of “expected average mortgage interest rate,” to provide that the mortgagee, with the agreement of the borrower, may lock in the expected average mortgage interest rate prior to the date of loan closing or establish the expected average mortgage interest rate on the date of loan closing. In accordance with changes proposed to § 206.21(b), if the expected average mortgage interest rate is locked in prior to closing, the margin on an adjustable interest rate loan is also locked in at the same time and is the difference between the expected average mortgage interest rate and the value of the appropriate index at the time of rate lock-in.
First 12-Month Disbursement Period. This proposed rule codifies the definition of “First 12-Month Disbursement Period” from RMSA Mortgagee Letter 2014-21 to mean the period beginning on the day of loan closing and ending on the day before the loan closing anniversary date. When the day before the anniversary date of loan closing falls on a Federally-observed holiday, Saturday, or Sunday, the end period will be on the next business day after the Federally-observed holiday, Saturday, or Sunday.
HECM. This proposed rule adds a definition of “HECM” to mean a Home Equity
Conversion Mortgage.
HECM counselor. The current definition of “Home Equity Conversion Mortgage (HECM) counselor” in § 206.3 defines a HECM counselor as an “individual who provides statutorily required counseling to clients who may be eligible for or interested in obtaining an FHA-insured HECM...” However, it has recently come to FHA’s attention that interested parties may be providing counseling, and their financial relationship with prospective or current HECM borrowers or Non-Borrowing Spouses may impact their provision of counseling services. In
§ 206.3, FHA proposes to change the term “Home Equity Conversion Mortgage (HECM) counselor” to “HECM counselor”, for simplicity, and to amend the definition to state, consistent with subsection 255(d)(2)(B) of the NHA, that a HECM counselor must be an independent third-party that is currently active on FHA’s HECM Counselor Roster and that is not, either directly or indirectly, associated with or compensated by, a party involved in originating, servicing, or funding the HECM, or the sale of annuities, investments, long-term care insurance or any other type of financial or insurance product.
Ineligible Non-Borrowing Spouse. The term “Ineligible Non-Borrowing Spouse” was introduced in RMSA Mortgagee Letter 2015-02 to mean a Non-Borrowing Spouse who does not meet all Qualifying Attributes for a Deferral Period. FHA proposes to codify this definition.
Initial Disbursement Limit. The phrase “Initial Disbursement Limit” is defined in RMSA Mortgagee Letter 2014-21 to mean the maximum disbursement to a borrower of an adjustable interest rate HECM allowed at loan closing and during the First 12-Month Disbursement Period, which is the greater of 60 percent of the principal limit; or the sum of Mandatory Obligations and 10 percent of the principal limit. In this rule, FHA proposes to codify a definition of “Initial Disbursement Limit” that does not include the actual calculation, which can more appropriately
be found in the section regarding the calculation of payments, § 206.25, such that the “Initial Disbursement Limit” would be the maximum amount of funds that can be advanced to the borrower of an adjustable interest rate HECM at loan closing and during the First 12-Month Disbursement Period. FHA proposes to make changes to the calculation of the Initial
Disbursement Limit to allow the Commissioner flexibility in setting the limit, but such changes are discussed later in the preamble in relation to § 206.25.
Loan documents. FHA currently defines “mortgage” to include the credit instrument, or Note, secured by the lien, and the loan agreement. In this rulemaking, FHA takes the
opportunity to add a specific definition for “loan documents” which would include the credit instrument, or Note, secured by the lien, and the loan agreement because these documents are not actually the mortgage.
Mandatory Obligations. The term “Mandatory Obligations” was defined in RMSA Mortgagee Letter 2014-21 as the fees and charges incurred in connection with the origination of the HECM that are requirements for loan approval or disbursements for a Repair Set Aside. In this rule, FHA proposes to clarify that Mandatory Obligations are fees and charges incurred in connection with the origination of the HECM that are requirements for loan approval and which will be paid either at closing or during the First 12-Month Disbursement Period in accordance with § 206.25. In § 206.25, as discussed later in this preamble, FHA proposes to codify the lists of Mandatory Obligations from RMSA Mortgagee Letter 2014-21, but also proposes to amend the lists to give the Commissioner the flexibility to include, as Mandatory Obligations, other charges or fees established through notice.17
Maximum claim amount. The “maximum claim amount” is currently defined in § 206.3 as the lesser of the appraised value of the property, as determined by the appraisal used in
17 The term “notice” includes mortgagee letters and other forms of written notice, unless otherwise specified.
underwriting the loan, or the maximum dollar amount for an area established by the Secretary for a one-family residence under subsection 203(b)(2) of the NHA, as adjusted where applicable under section 214 of the NHA, as of the date of loan closing. In this rule, FHA proposes to instead reference subsections 255(g) and (m) of the NHA because section 255 of the NHA contains the statutory requirements of the HECM program. FHA also proposes to include, as an option for determining the maximum claim amount, the sales price of the property being
purchased for the sole purpose of being the principal residence, such that the “maximum claim amount” means the lesser of the appraised value of the property, the sales price of the property, or the national mortgage limit, which is consistent with the maximum claim amount calculation in HERA Mortgagee Letter 2009-11.
MIP. FHA proposes to amend the definition of “MIP” in § 206.3 to replace the cross-cite to 24 CFR 203.251(k) with the actual definition, such that “MIP” means the mortgage insurance premium paid by the mortgagee to the Commissioner in consideration of the contract of
insurance.
Mortgage. In an effort to provide greater clarity, FHA proposes to remove the last sentence in the definition of “mortgage” in § 206.3. The loan documents which are not actually the mortgage will be more appropriately defined under a new definition of “loan documents” and FHA will eliminate the unnecessary and partially inaccurate reference to the parties to the loan agreement.
Mortgagee. FHA proposes to amend the definition of “mortgagee” in § 206.3 to replace the reference to subsection 255(b)(2) of the NHA with the actual definition, such that
“mortgagee” means the original lender under a mortgage and its successors and assigns, as are approved by the Commissioner.
Mortgagor. In order to distinguish HECM mortgagors from HECM borrowers, FHA proposes to clarify the definition of a HECM “mortgagor” in § 206.3 to mean each original HECM mortgagor under a HECM and his heirs, executors, administrators and assigns. HECM mortgagors also include non-borrowing owners who are on title to the property and,
consequently, must sign the HECM Mortgage but do not sign the HECM Note or Loan Agreement, and therefore are not borrowers. A Non-Borrowing Spouse may or may not be a mortgagor; for example, in a community property state, a Non-Borrowing Spouse will always be a mortgagor.
Non-Borrowing Spouse. The term “Non-Borrowing Spouse” was introduced in RMSA Mortgagee Letter 2014-07 and means the spouse, as defined by the law of the state in which the spouse and borrower reside or the state of celebration, of the HECM borrower at the time of closing and who is also not a borrower. FHA proposes to codify this definition.
Participating agency. FHA proposes to use the term “participating agency” in § 206.302 and in the definition of “estate planning service firm” in § 206.3, and therefore proposes to provide a definition for the term in § 206.3. The definition would mirror the definition in the Housing Counseling regulations at § 214.3, such that “participating agency” means all housing counseling and intermediary organizations participating in HUD’s Housing Counseling program, including HUD-approved agencies, and affiliates and branches of HUD-approved intermediaries, HUD-approved multi-state organizations (MSOs), and state housing finance agencies.
Principal limit. FHA proposes to update the definition of “principal limit” to reflect the changes made in RMSA Mortgagee Letters 2014-07 and 2015-02 regarding Non-Borrowing Spouses, and in RMSA Mortgagee Letter 2014-11 regarding the changes made to the fixed interest rate product, as well as new changes discussed below. “Principal limit” would be
amended to mean the maximum amount calculated by taking into account the age of the youngest borrower or Eligible Non-Borrowing Spouse, the expected average mortgage interest rate, and the maximum claim amount. Because individual principal limit factors are published, FHA proposes to eliminate the sentence stating that a person who is over the age of 95 will be treated as though he is 95 for the purposes of calculating the principal limit. However, in order to eliminate this sentence in § 206.3 and not impact the formula for the calculation of tenure payments in § 206.25(f), FHA proposes to make clear in § 206.25(f) that in calculating tenure payments for a borrower over the age of 95, the age of 95 will be used. In addition, the current regulatory definition states that the principal limit increases each month at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-one-twelfth of one-half percent per annum. FHA proposes to amend this calculation such that the principal limit increases each month at a rate equal to twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of the annual mortgage insurance rate, so that a regulatory change is not necessary if the Commissioner changes the annual MIP, which the Commissioner may do through notice under existing authority. As stated in RMSA Mortgagee Letter 2014-11, for adjustable interest rate HECMs, the increase in principal limit may be made available to the borrower each month, except that there may be restrictions on draws during the First-12 Month Disbursement Period;
for fixed interest rate HECMs, although the principal limit will continue to increase at the rate established by the Commissioner, the funds will not be available for the borrower to draw against after loan closing.
Principal residence. The definition of “principal residence” was amended in RMSA Mortgagee Letter 2014-07 to account for changes made regarding Non-Borrowing Spouses, and is being further amended in this proposed rule to account for additional changes made in RMSA
Mortgagee Letter 2015-02 which introduced the concepts of Eligible and Ineligible Non-Borrowing Spouses. “Principal residence” will be amended to mean the dwelling where the borrower and, if applicable, Non-Borrowing Spouse, maintains his permanent place of abode, and typically spends the majority of the calendar year. Content from § 206.39 that addresses a borrower who is in a health care institution, as clarified in RMSA Mortgagee Letter 2014-07, has been moved to the definition of “principal residence” in § 206.3. The definition of “principal residence” will also cover a Non-Borrowing Spouse who is temporarily in a health care institution provided certain conditions are met. In addition, during a Deferral Period, the property shall continue to be considered the principal residence of any Eligible Non-Borrowing Spouse who is temporarily in a health care institution, provided certain conditions are met.
Property charges. The term “property charges” was defined in RMSA Mortgagee Letter 2014-21, and FHA proposes to codify that definition with only slight revisions, to mean the obligations of the borrower that are, unless otherwise specified, defined as property taxes, hazard insurance premiums, any applicable flood insurance premiums, ground rents, condominium fees, planned unit development fees, homeowners association fees, any other special assessments that may be levied by municipalities or state law, and utilities. While RMSA Mortgagee Letter 2014-21 did not include utilities in the definition of “property charges,” FHA proposes to include utilities as a borrower responsibility. FHA has experienced situations where borrowers have not paid utilities, and as a result, large liens for utilities are placed on the property. When FHA pays the insurance claim on the property, FHA reimburses the mortgagee for the utility lien amount.
Failure to pay utilities that result in a lien against the property would potentially trigger a due and payable event. By expressly including these utilities as borrower responsibilities, FHA is
limiting reimbursement of such expenses.
Qualifying Attributes. The term “Qualifying Attributes” was introduced in RMSA Mortgagee Letter 2014-07. FHA proposes to amend the definition of “Qualifying Attributes” to fit with additional program changes introduced in RMSA Mortgagee Letter 2015-02, to mean the requirements which must be met by a Borrowing Spouse in order to be an Eligible Non-Borrowing Spouse.
Preemption (§ 206.8)
In this rule, FHA proposes to add counseling charges as an example of loan advances to be included in the amount secured by the mortgage, and FHA also proposes to condense some previously listed examples that meet the definition of “property charges”, as newly defined in
§ 206.3.
Subpart B—Eligibility; Endorsement
Disclosure of available HECM program options (§ 206.13)
Section 206.17 allows mortgagees to provide all payment plan options and fixed and adjustable interest rate mortgages to HECM borrowers. Section 206.43(a) requires mortgagees to disclose the costs of obtaining the mortgage, and provide a Good Faith Estimate and other applicable Truth in Lending disclosures to the borrower so the borrower has knowledge of which charges are, and which charges are not, required to obtain the mortgage.
For several years, the fees and charges associated with reverse mortgages have been structured to allow the borrower to benefit in a manner of their choosing by selecting from various HECM products. However, the volume of adjustable interest rate HECMs declined to approximately 30 percent of the total HECMs endorsed for insurance during 2010-2012. On
For several years, the fees and charges associated with reverse mortgages have been structured to allow the borrower to benefit in a manner of their choosing by selecting from various HECM products. However, the volume of adjustable interest rate HECMs declined to approximately 30 percent of the total HECMs endorsed for insurance during 2010-2012. On