[Federal Register Volume 63, Number 50 (Monday, March 16, 1998)]
[Proposed Rules]
[Pages 12930-12933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6587]
[[Page 12929]]
_______________________________________________________________________
Part III
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 206
Home Equity Conversion Mortgages; Consumer Protection measures Against
Excessive Fees; Proposed Rule
Federal Register / Vol. 63, No. 50 / Monday, March 16, 1998 /
Proposed Rules
[[Page 12930]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 206
[Docket No. FR-4306-P-01]
RIN 2502-AH10
Home Equity Conversion Mortgages; Consumer Protection Measures
Against Excessive Fees
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would amend the regulations for the FHA
Home Equity Conversion Mortgage (HECM) program under part 206. The HECM
program offers FHA-insured first mortgages providing payments to
elderly homeowners based on the accumulated equity in their homes.
These FHA-insured ``HECMs'' are commonly referred to as ``reverse
mortgages.'' The rule is designed to protect homeowners in the HECM
program from becoming liable for payment of excessive fees for third-
party provided services of little or no value.
COMMENT DUE DATE: May 15, 1998.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Rules Docket Clerk, room 10276, Office of
General Counsel, Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410-0500. Comments should refer to
the above docket number and title. A copy of each comment submitted
will be available for public inspection and copying during regular
business hours at the above address. Facsimile (FAX) comments are not
acceptable.
FOR FURTHER INFORMATION CONTACT: Sandy Allison, Office of the Deputy
Assistant Secretary for Single Family Housing, Room 9282, Department of
Housing and Urban Development, 451 Seventh Street, SW, Washington, DC
20410. Telephone: (202) 708-2733. (This is not a toll-free number.) For
hearing- and speech-impaired persons, this number may be accessed via
TTY by calling the Federal Information Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
Background
On March 17, 1997, HUD issued Mortgagee Letter 97-07, which
prohibited FHA-approved lenders from being involved in transactions for
HECMs referred by estate planning entities charging what HUD deemed to
be exorbitant fees. Two estate planners engaged in the business of
making referrals for reverse mortgages sued, seeking a temporary
restraining order (TRO) and preliminary injunction to require HUD to
withdraw the Mortgagee Letter on the ground that notice and comment
rulemaking procedures should have been followed. A TRO was issued on
March 26, 1997, and a preliminary injunction followed on April 11,
1997. Mortgagee Letter 97-07 was then withdrawn.
Due to the Secretary's concern about the need to protect senior
citizens from practices which may subvert the HECM process, the
Secretary has determined that it is in the public interest that a rule
be proposed at this time. The preliminary injunction does not preclude
the proposed rule set forth below.
With respect to the FHA insurance program for HECMs, current FHA
requirements strictly limit the fees that a mortgagee can collect. The
FHA regulations currently do not have any express provisions that
protect mortgagors from fees collected by third parties. This proposed
rule will fill that gap.
Content of Rule
The specific proposals that follow were developed to address actual
practices that HUD has identified. HUD is aware that specific responses
to such known practices may not be fully effective in addressing other
potential future abusive practices that may develop. In addition to
seeking comments on whether the specific proposals that follow are
necessary or will be effective, therefore, HUD seeks information from
the public on other known or potential areas of abuse directed at
elderly homeowners who may be interested in the HECM program, and
suggestions regarding additional regulatory provisions that HUD should
consider to provide protection. Depending on the nature and extent of
the additional identified problems and solutions and the need for
additional public comment on additional or modified provisions not in
this proposed rule, HUD may include such provisions either in a final
rule, in an interim rule with opportunity for further public comment,
or in a separate proposed rule.
The proposed rule consists of three new sections and amendments to
two existing sections of 24 part 206.
1. Definition of Estate Planning Service Firm
A key term--estate planning service firm--is defined in an
amendment to Sec. 206.3. The term identifies such firms as individuals
or entities that are not HUD-approved mortgagees or housing counseling
agencies and that charge any of three types of fees or charges
characteristic of firms charging excessive fees for services to HECM
mortgagors: (a) fees other than those charged by the lender that are
contingent on the homeowner obtaining a HECM, and often based on a
percentage of the mortgage amount, (b) fees for information that
housing counseling agencies are otherwise required to make available to
mortgagors at little or no cost, or (c) fees for services that are
purported to improve the homeowner's access to the HECM program.
Exceptions are provided for payment of fees for bona fide tax or legal
or financial advice, and other services specifically authorized by HUD,
including loan origination. This is intended to be an encompassing
definition that cannot be exploited through a minor change in
practices. Any legitimate service provider that is concerned about
overbreadth of coverage can seek specific authorization from HUD to
exempt it from the new provisions. HUD recognizes that there is likely
to be a need for additional guidance and, if so, such guidance will be
issued. It is expected that the public comments on this proposed rule
will identify any areas of needed guidance.
2. Initial Disbursement to Mortgagor
The proposed rule adds a new Sec. 206.29 to ensure that funds
disbursed at closing go to the mortgagor, a relative or legal
representative of the mortgagor, or a trustee of a trust for the
benefit of the mortgagor, and not to an interested third party such as
an estate planning service firm. Exceptions are provided for the
initial mortgage insurance premium paid to HUD, closing costs
authorized under 24 CFR 206.31, and amounts required to discharge any
existing liens on the mortgagor's home.
3. No Payment to Estate Planning Service Firm; No Outstanding
Obligations After Closing
The proposed rule adds a new Sec. 206.32 to prevent the mortgagor
from using the initial draw of loan proceeds to pay an estate planning
service firm. The mortgagee must also ensure that no commitments that
the mortgagor incurred in connection with the mortgage transaction,
such as a commitment to pay an estate planning service firm, will
remain outstanding after the initial draw at closing, except for
allowable repairs and mortgage service charges. The proposed rule thus
addresses a situation where an estate
[[Page 12931]]
planning service firm seeks to ``lend'' to a homeowner the amount of
its fees and to demand reimbursement after closing. The proposed rule
does not purport to interfere with any legally enforceable obligations
that a homeowner might have incurred before closing, but it eliminates
the HECM program as a possible source of funding for unapproved fees.
The proposed rule would permit a homeowner to contract in connection
with the mortgage transaction in advance of closing for post-closing
repairs only if the repairs are required as a condition of the loan to
meet FHA property standards for existing housing.
4. Additional Counseling Item
The proposed rule amends Sec. 206.41 to add a new requirement to
the mandatory pre-loan counseling of HECM mortgagors. A counselor is
required to discuss with the mortgagor whether the mortgagor has an
agreement with an estate planning service firm to pay a fee on or after
closing. If there is such an agreement, a counselor is required to
discuss the extent to which services under the contract may not be
needed or may be available at little or no cost from other sources,
including a mortgagee. A counselor is not expected to provide any
advice regarding whether the mortgagor is legally bound to honor the
contract. The counselor should, however, make sure that a mortgagor
understands that Sec. 206.32, as discussed above, will prevent a
mortgage from being eligible under the HECM program if a fee is to be
paid at or after closing to an estate planning service firm.
5. Disclosure of Costs
The Act requires full disclosure to the mortgagor of all costs of
obtaining the HECM. This proposed rule adds a new Sec. 206.43(a)
1 to clarify that the mortgagee is responsible for ensuring
that the disclosure occurs. The mortgagee is required to ask the
mortgagor about any loan-related costs or obligations that the
mortgagor may have incurred to obtain the HECM (such as the obligation
to pay a fee to an estate planning service firm if the mortgage closes)
and that the mortgagee is not required to disclose in its Good Faith
Estimate. The mortgagee has a limited duty; it may rely on information
received from the mortgagor (unless the mortgagee has reason to believe
that the information is faulty) and it need not ask about the fees of
professionals providing bona fide tax, legal, financial advice or
estate planning services who do not meet the definition of estate
planning service firm.
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\1\ The former Sec. 206.43 was deleted by a final rule published
at 61 FR 49033 (September 17, 1996).
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6. Lump Sum Disbursement
The proposed rule also adds a new Sec. 206.43(b) to require the
mortgagee to make special inquiries of any mortgagor requesting that at
least 25% of the available funds (i.e., the principal limit amount
after excluding closing costs and certain principal limit set asides,
sometimes called ``net principal limit'') be disbursed at closing to
the mortgagor (or as otherwise permitted by Sec. 206.29, as discussed
above). The mortgagee must ascertain whether the mortgagor plans to use
the funds to pay an estate planning service firm, and if so, must
advise the mortgagor that this use of funds disbursed at closing is
prohibited by Sec. 206.32, as discussed above.
This proposed rule would not prevent a mortgagor from obtaining and
making appropriate payment for services with actual value. Any provider
of services to HECM mortgagors may seek HUD authorization for the fees
it imposes and the resultant exclusion from the definition of ``estate
planning service firm''. HUD seeks to ensure that individuals or
companies who provide services do not unfairly benefit from the
substantial amount of cash that is made available to elderly homeowners
through the HECM program. This would defeat the public purpose of the
program.
Findings and Certifications
Paperwork Reduction Act Statement
The information collection requirements proposed at Secs. 206.32,
206.41 and 206.43 of this rule have been submitted to the Office of
Management and Budget (OMB) for review, under section 3507(d) of the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection request displays a
valid control number.
The public reporting burden for each of these collections of
information is estimated to include the time for reviewing
instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information. Information on the estimated public
reporting burden is provided in the following table.
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Responses Total
Information collection Number of per annnual Hours per Total hours Regulatory
respondents respondent responses response reference
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Evidence of no payment to estate
planning service firm and no
outstanding unpaid obligations... 8000 1 8000 .10 800 206.32
Information to be provided by
counselor........................ 16,000 1 16,000 .25 4000 206.41
Information to mortgagor.......... 8000 1 8000 .25 2000 206.43
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Total annual burden......... 32,000 1 32,000 ........... 6800
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In accordance with 5 CFR 1320.8(d)(1), the Department is soliciting
comments from members of the public and affected agencies concerning
the proposed collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond; including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this proposal. Comments must be
received within sixty (60) days from the date of this proposal.
Comments must refer to the proposal by name and docket number (FR-4306)
and must be sent to: Joseph F. Lackey, Jr., HUD Desk Officer, Office of
Management and
[[Page 12932]]
Budget, New Executive Office Building, Washington, DC 20503.
Executive Order 12866
This proposed rule was reviewed by the Office of Management and
Budget under Executive Order 12866 as a significant regulatory action.
Any changes made in this proposed rule as a result of that review are
clearly identified in the docket file, which is available for public
inspection in the Office of HUD's Rules Docket Clerk, Room 10276, 451
7th Street, S.W., Washington, D.C.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so
doing certifies that this rule does not have a significant economic
impact on a substantial number of small entities. This rule merely
proposes to codify the Department's position which is consistent with
the National Housing Act and part 206 regarding consumer protection.
The rule has no adverse or disproportionate economic impact on small
businesses. Small businesses are specifically invited, however, to
comment on whether this rule will significantly affect them, and
persons are invited to submit comments according to the instructions in
the DATES and COMMENTS sections in the preamble of this proposed rule.
Environmental Impact
This proposed rule is exempt from the environmental review
procedures under HUD regulations in 24 CFR part 50 that implement
section 102(C) of the National Environmental Policy Act of 1969 (42
U.S.C. 4332) because of the exemption under Sec. 50.19(c)(1) which
pertains to ``the approval of policy documents that do not direct,
provide for assistance or loan and mortgage insurance for, or otherwise
govern or regulate property acquisition, disposition, lease,
rehabilitation, alteration, demolition, or new construction, or set out
to provide for standards for construction or construction materials,
manufactured housing, or occupancy.'' This proposed rule simply amends
an existing regulation by increasing the information available to
mortgagors and by limiting the manner in which funds are disbursed.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this proposed
rule would not have substantial direct effects on States or their
political subdivisions, or the relationship between the Federal
government and the States, or on the distribution of power and
responsibilities among the various levels of government. No
programmatic or policy changes would result from this rule that affect
the relationship between the Federal Government and State and local
governments.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (Pub.L. 104-4;
approved March 22, 1995) (UMRA) establishes requirements for Federal
agencies to assess the effects of their regulatory actions on State,
local, and tribal governments, and on the private sector. This proposed
rule would not impose any Federal mandates on any State, local, or
tribal governments, or on the private sector, within the meaning of the
UMRA.
Catalog. The Catalog of Federal Domestic Assistance number for the
HECM program is 14.183.
List of Subjects in 24 CFR Part 206
Aged, Condominiums, Loan programs--housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
Accordingly, the Department proposes to amend part 206 of title 24
of the Code of Federal Regulations as follows:
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
1. The authority citation for 24 CFR part 206 continues to read as
follows:
Authority: 12 U.S.C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).
2. Section 206.3 is amended by adding a new definition of ``estate
planning service firm'' to read as follows:
Sec. 206.3 Definitions.
* * * * *
Estate planning service firm means an individual or entity that is
not a mortgagee approved under part 202 of this title or a housing
counseling agency approved under Sec. 206.41 and that charges a fee
that is:
(a) Contingent on the homeowner obtaining a mortgage loan under
this part, except the origination fee authorized by Sec. 206.31 or a
fee specifically authorized by the Secretary; or
(b) For information that homeowners must receive under Sec. 206.41,
except a fee by:
(1) A housing counseling agency approved under Sec. 206.41; or
(2) An individual or company, such as an attorney or accountant, in
the bona fide business of generally providing tax or other legal or
financial advice; or
(c) For other services that the provider of the services represents
are, in whole or in part, for the purpose of improving an elderly
homeowner's access to mortgages covered by this part 206, except where
the fee is for services specifically authorized by the Secretary.
* * * * *
3. A new section 206.29 is added to read as follows:
Sec. 206.29 Initial disbursement of mortgage proceeds.
Mortgage proceeds may not be disbursed at closing except:
(a) Disbursements to the mortgagor, a relative or legal
representative of the mortgagor, or a trustee for benefit of the
mortgagor;
(b) Disbursements for the initial MIP under Sec. 206.105(a);
(c) Fees that the mortgagee is authorized to collect under
Sec. 206.31; and
(d) Amounts required to discharge any existing liens on the
property.
4. A new section 206.32 is added to read as follows:
Sec. 206.32 No outstanding unpaid obligations.
In order for a mortgage to be eligible under this part, a mortgagor
must establish to the satisfaction of the mortgagee that:
(a) After the initial payment of loan proceeds under
Sec. 206.25(a), there will be no outstanding or unpaid obligations
incurred by the mortgagor in connection with the mortgage transaction,
except for repairs to the property required under Sec. 206.47 and
mortgage service charges permitted under Sec. 206.207(b); and
(b) The initial payment will not be used for any payment to or on
behalf of an estate planning service firm.
5. Section 206.41 is amended by revising paragraph (b) to read as
follows:
Sec. 206.41 Counseling.
(a) * * *
(b) Information to be provided. A counselor must discuss with the
mortgagor:
(1) The information required by section 255(f) of the NHA; and
(2) Whether the mortgagor has signed a contract or agreement with
an estate planning service firm that requires, or
[[Page 12933]]
purports to require, the mortgagor to pay a fee on or after closing
that may exceed amounts permitted by the Secretary or this part.
(3) If such a contract has been signed under Sec. 206.41(b)(2), the
extent to which services under the contract may not be needed or may be
available at nominal or no cost from other sources, including the
mortgagee.
* * * * *
6. A new Sec. 206.43 is added to read as follows:
Sec. 206.43 Information to mortgagor.
(a) Disclosure of costs of obtaining mortgage. The mortgagee must
ensure that the mortgagor has received full disclosure of all costs of
obtaining the mortgage. The mortgagee must ask the mortgagor about any
costs or other obligations that the mortgagor has incurred to obtain
the mortgage, as defined by the Secretary, in addition to providing the
Good Faith Estimate required by Sec. 3500.7 of this title.
(b) Lump sum disbursement. If the mortgagor requests that at least
25% of the principal limit amount (after deducting amounts excluded in
the following sentence) be disbursed at closing to the mortgagor (or as
otherwise permitted by Sec. 203.29), the mortgagee must make sufficient
inquiry at closing to confirm that the mortgagor will not use any part
of the amount disbursed for payments to or on behalf of an estate
planning service firm, with an explanation of Sec. 206.32 as necessary
or appropriate. This paragraph does not apply to the following:
(1) Initial MIP under Sec. 206.105(a) or fees and charges allowed
under Sec. 206.31(a) paid by the mortgagee from mortgage proceeds
instead of by the mortgagor in cash; and
(2) Amounts set aside under Sec. 206.47 for repairs, under
Sec. 206.205(f) for property charges, or Sec. 206.207(b).
Dated: February 3, 1998.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 98-6587 Filed 3-13-98; 8:45 am]
BILLING CODE 4210-27-P
