Supplemental Security Income for the Aged, Blind, and Disabled; Treatment of Promissory Notes in Home Replacement Situations

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Social Security Administration

20 CFR Part 416

[Regulations No. 16]

RIN 0960-AD61

Supplemental Security Income for the Aged, Blind, and Disabled;

Treatment of Promissory Notes in Home Replacement Situations

AGENCY: Social Security Administration, HHS.

ACTION: Final rule.

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SUMMARY: This regulation explains how the Social Security

Administration treats promissory notes and similar installment sales

contracts and the proceeds generated therefrom when received as a

result of the sale of a home which is excluded from resources under the

supplemental security income (SSI) program. This regulation provides

for application of the ``home replacement exclusion'' in situations

where timely reinvestment of the installments into another home, which

is similarly excludable as the principal place of residence, is made.

EFFECTIVE DATE: This final regulation is effective August 23, 1994.

FOR FURTHER INFORMATION CONTACT: Regarding this Federal Register

document--Henry D. Lerner, Legal Assistant, Office of Regulations,

Social Security Administration, 6401 Security Boulevard, Baltimore, MD

21235, (410) 965-1762; regarding eligibility or filing for benefits--

our national toll-free number, 1-800-772-1213.

SUPPLEMENTARY INFORMATION:

Section 1613(a)(1) of the Social Security Act (the Act) excludes an

individual's home from resources for purposes of determining

eligibility for SSI payments. Further, Sec. 416.1212(d) of our

regulations allows the proceeds from the sale of an excluded home to be

excluded from resources to the extent the proceeds are intended to be

used and are, in fact, used within 3 months of the date of their

receipt to purchase a replacement home which is similarly excluded.

When that regulation was published in 1975, conventional financial

arrangements were the norm. It was reasonable to expect an individual

to receive the full purchase price of the former home in cash and to

reinvest fully and immediately all cash proceeds from the sale.

Therefore, no provision was included in the regulations for the

treatment of home purchase financing other than full cash payment at or

near the time of sale. Over the years, however, less conventional

arrangements involving proceeds other than cash (such as promissory

notes or installment sales contracts) have become more common.

Under our regulations defining resources in the SSI program at

Sec. 416.1201, promissory notes or installment sales contracts received

as proceeds from the sale of a home are considered resources as long as

the SSI claimant owns them and has the legal right to convert them to

cash to be used for his or her support and maintenance. Such

instruments can be excluded, however, under Sec. 416.1212(d) if they

are converted to cash and used for the purchase of a replacement home

within 3 months of receipt of the note or contract. In fact, prior to

September 1989, we required that they be so converted in order to be

considered an excluded resource. Accordingly, under this

interpretation, the claimant's options were limited to selling the

house for cash (possibly below market value) or liquidating the

promissory note or installment sales contract likely at a substantial

loss. Either of these options could have jeopardized the opportunity to

acquire or maintain a replacement home without losing SSI eligibility.

On September 11, 1986, the United States Court of Appeals for the

Ninth Circuit rejected this interpretation of Sec. 416.1212(d) in the

case of Hart v. Bowen, 799 F.2d 567. The Hart case involved an

individual who sold her home under an installment sales contract. She

applied the downpayment she received toward the downpayment on a new

home. She also applied each of the monthly installment payments she

received toward the mortgage on the new home. Her SSI benefits were

terminated because the installment contract from the sale of her former

home constituted an excess resource. The Ninth Circuit Court of Appeals

found that the current market value of an installment sales contract

resulting from the sale of an individual's excluded home is part of the

value of the replacement home and thus excluded from countable

resources, provided the payments generated by the contract were

reinvested timely in the excluded replacement home. In May 1987, as a

result of the decision rendered by the Ninth Circuit in Hart v. Bowen,

we issued Acquiescence Ruling AR 87-3(9) to comply with the decision in

the Ninth Circuit States.

In September 1989, we changed our national practice and published

Social Security Ruling SSR 89-5p, effective September 6, 1989. The

ruling explained that the value of an installment sales contract

constitutes a ``proceed'' from the sale of an excluded home which can

be excluded from resources under Sec. 416.1212(d) if: (a) the contract

results from the sale of an individual's home as described in

Sec. 416.1212(a); (b) within 3 months of receipt (execution) of the

contract, the individual purchases a replacement home which also fits

the description in Sec. 416.1212(a); and (c) all contract generated

sale proceeds are reinvested in the replacement home within 3 months of

receipt of such proceeds. In addition, the ruling provided that when

payments against the principal that result from the installment sales

contract are being reinvested timely (i.e., within 3 months of receipt)

in a new home, such payments are also excluded from resources. The

ruling further provided that if the home replacement exclusion is not

applicable because one or more installment payments have not been

timely reinvested, the exclusion may be applied effective with the

month following the month of receipt of a timely reinvested payment.

This regulation codifies SSR 89-5p and reflects more completely our

policy on the treatment of proceeds from the sale of an excluded home

by designating the existing text in Sec. 416.1212 paragraph (d) as

paragraph (d)(1), and adding two new paragraphs (d)(2) and (d)(3), to

explain the conditions under which the value of a promissory note or

similar installment sales contract, and other proceeds from the sale,

consisting of the downpayment and monthly installment payments towards

the principal, will be excluded from being considered SSI resources. In

addition, we are adding new paragraphs (e), (f), and (g) to

Sec. 416.1212 to explain the effects on SSI eligibility of failure to

reinvest installment payments timely and the receipt of interest

payments. When this final rule is published both SSR 89-5p and AR 87-

3(9) will be rescinded.

Public Comments

We published the proposed rule with a Notice of Proposed Rulemaking

(NPRM) in the Federal Register on October 13, 1993 (58 FR 52943).

Interested persons and organizations were given 60 days to comment. The

comment period closed on December 13, 1993. We received comments from

only one commenter.

We considered carefully all of the comments which this individual

made on the proposed rule. However, for the reasons stated below, we

did not adopt any of them. Accordingly, the final rule is the same as

the proposed rule. A summary of the comments and our responses are

provided below.

Comment: The commenter disagreed with the policy to allow a person

only 3 months to reinvest the proceeds from the sale of an excluded

home into another home since the purchase of a home generally

represents one of the largest transactions a person may make, one which

would require time to make a wise decision. Thus, the commenter

believes that it makes sense to give a person more time. The period

should be increased from 3 months to 6 months similar to the time

allowed for the disposal of other resources, such as retroactive title

II or title XVI payments.

Response: We do not plan to change the 3-month time period for

reinvestment. The substance of our regulatory revision focuses on how

to evaluate as resources certain noncash proceeds from the sale of an

excluded home and not on the time period of reinvestment. The time

period has been longstanding program policy which was not questioned in

the Hart decision. We would expect that individuals selling their homes

would arrange for the purchase of a new home before the former home is

sold. In addition, we have no evidence to support the commenter's

contention that the current time period for reinvestment is too short.

Comment: The commenter criticized the proposed policy to count as a

resource the value of the note as well as any proceeds not timely

invested as being an ``overly harsh penalty.'' Because the individual

has immediate access only to the proceeds of the note that are ``on

hand'' to meet his or her basic needs and not the value of the note

itself, the commenter believed that only the proceeds should be

considered a resource.

Response: This policy is consistent with the relevant provisions of

the Act and other related regulations. Under section 1611(a) of the

Act, Congress specifically has established resource limits for an

individual's eligibility for the needs-based benefits in the SSI

program in addition to income limits. As was stated above, promissory

notes or installment sales contracts received from the sale of an

excluded home are resources, as described in Sec. 416.1201, as long as

the owner has the legal right to liquidate or convert the resource to

cash which could be used for support and maintenance. In general, while

it is true that some resources may not be available to be used

immediately to meet an individual's daily needs, Congress has

recognized that such resources have value in that they can be sold or

``cashed out'' and the money received can be used by the individual for

his or her support and maintenance.

Comment: The commenter stated that the NPRM does not explain how

the Agency will determine the value of a promissory note or similar

installment sales contract.

Response: We provide general guidance on resource valuation

procedures in paragraphs (b) and (c) of Sec. 416.1201 of our

regulations. These paragraphs explain how we evaluate liquid and

nonliquid resources according to their equity value. For purposes of

this evaluation, the equity value of a resource is defined as the price

for which an item can reasonably be expected to sell on the open market

in the particular geographic area involved minus any encumbrances. The

value of a promissory note or installment sales contract will be

determined by using this procedure.

Regulatory Procedures

Executive Order 12866

We have consulted with the Office of Management and Budget (OMB)

and determined that this rule does not meet the criteria for a

significant regulatory action under E.O. 12866. Thus, it was not

subject to OMB review.

Paperwork Reduction Act

This regulation imposes no reporting/recordkeeping requirements

requiring OMB clearance.

Regulatory Flexibility Act

We certify that this regulation will not have a significant

economic impact on a substantial number of small entities because this

regulation affects only individuals and States. Therefore, a regulatory

flexibility analysis as provided in Pub. L. 96-354, the Regulatory

Flexibility Act of 1980, is not required.

(Catalog of Federal Domestic Assistance Program No. 93.807,

Supplemental Security Income).

List of Subjects in 20 CFR Part 416

Administrative practice and procedure, Aged, Blind, Disability

benefits, Public assistance programs, Reporting and recordkeeping

requirements, Supplemental Security Income.

Dated: July 5, 1994.

Shirley Chater,

Commissioner of Social Security.

Approved: August 16, 1994.

Donna E. Shalala,

Secretary of Health and Human Services.

For the reasons set out in the preamble, Part 416 of Chapter III of

Title 20, Code of Federal Regulations, is amended as follows:

PART 416--[AMENDED]

1. The authority citation for Subpart L of Part 416 continues to

read as follows:

Authority: Secs. 1102, 1602, 1611, 1612, 1613, 1614(f), 1621 and

1631 of the Social Security Act; 42 U.S.C. 1302, 1381a, 1382, 1382a,

1382b, 1382c(f), 1382j and 1383; sec. 211 of Pub. L. 93-66; 87 Stat.

154.

2. Section 416.1212 is amended by redesignating the existing text

in paragraph (d) as paragraph (d)(1), adding new paragraphs (d)(2) and

(d)(3), and adding new paragraphs (e), (f) and (g) to read as follows:

Sec. 416.1212 Exclusion of the home.

* * * * *

(d) Proceeds from the sale of an excluded home.

(1) * * *

(2) The value of a promissory note or similar installment sales

contract constitutes a ``proceed'' which can be excluded from resources

if--

(i) The note results from the sale of an individual's home as

described in Sec. 416.1212(a);

(ii) Within 3 months of receipt (execution) of the note, the

individual purchases a replacement home as described in

Sec. 416.1212(a) (see paragraph (e) of this section for an exception);

and

(iii) All note-generated proceeds are reinvested in the replacement

home within 3 months of receipt (see paragraph (f) of this section for

an exception).

(3) In addition to excluding the value of the note itself, other

proceeds from the sale of the former home are excluded resources if

they are used within 3 months of receipt to make payment on the

replacement home. Such proceeds, which consist of the downpayment and

that portion of any installment amount constituting payment against the

principal, represent a conversion of a resource.

(e) Failure to purchase another excluded home timely. If the

individual does not purchase a replacement home within the 3-month

period specified in paragraph (d)(2)(ii) of this section, the value of

a promissory note or similar installment sales contract received from

the sale of an excluded home is a countable resource effective with the

first moment of the month following the month the note is executed. If

the individual purchases a replacement home after the expiration of the

3-month period, the note becomes an excluded resource the month

following the month of purchase of the replacement home provided that

all other proceeds are fully and timely reinvested as explained in

paragraph (f) of this section.

(f) Failure to reinvest proceeds timely. (1) If the proceeds (e.g.,

installment amounts constituting payment against the principal) from

the sale of an excluded home under a promissory note or similar

installment sales contract are not reinvested fully and timely (within

3 months of receipt) in a replacement home, as of the first moment of

the month following receipt of the payment, the individual's countable

resources will include:

(i) The value of the note; and

(ii) That portion of the proceeds, retained by the individual,

which was not timely reinvested.

(2) The note remains a countable resource until the first moment of

the month following the receipt of proceeds that are fully and timely

reinvested in the replacement home. Failure to reinvest proceeds for a

period of time does not permanently preclude exclusion of the

promissory note or installment sales contract. However, previously

received proceeds that were not timely reinvested remain countable

resources to the extent they are retained.

Example 1. On July 10, an SSI recipient received his quarterly

payment of $200 from the buyer of his former home under an

installment sales contract. As of October 31, the recipient has used

only $150 of the July payment in connection with the purchase of a

new home. The exclusion of the unused $50 (and of the installment

contract itself) is revoked back to July 10. As a result, the $50

and the value of the contract as of August 1, are included in a

revised determination of resources for August and subsequent months.

Example 2. On April 10, an SSI recipient received a payment of

$250 from the buyer of his former home under an installment sales

contract. On May 3, he reinvested $200 of the payment in the

purchase of a new home. On May 10, the recipient received another

$250 payment, and reinvested the full amount on June 3. As of July

31, since the recipient has used only $200 of the April payment in

connection with the purchase of the new home, the exclusion of the

unused $50 (and of the installment contract itself) is revoked back

to April 10. As a result, the $50 and the value of the contract as

of May 1 are includable resources. Since the recipient fully and

timely reinvested the May payment, the installment contract and the

payment are again excludable resources as of June 1. However, the

$50 left over from the previous payment remains a countable

resource.

(g) Interest payments. If interest is received as part of an

installment payment resulting from the sale of an excluded home under a

promissory note or similar installment sales contract, the interest

payments do not represent conversion of a resource. The interest is

income under the provisions of Secs. 416.1102, 416.1120, and

416.1121(c).

[FR Doc. 94-20629 Filed 8-22-94; 8:45 am]

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