Payment of Insurance Claims by Book Entry Form of Debentures and Statute of Limitations on Payment of Distributive Shares

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing Federal Housing

Commissioner

24 CFR Parts 200, 203, 207, 220, 221, 235, 236, 237, 241 and 242

[Docket No. R-94-1751; FR-3434-F-02]

RIN 2502-AG01

Payment of Insurance Claims by Book Entry Form of Debentures and

Statute of Limitations on Payment of Distributive Shares

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This rule implements provisions in the Housing and Community

Development Act of 1992 that authorize the Secretary to pay mortgage

insurance claims with book entry forms of debentures and establish a

statute of limitations on payments of Mutual Mortgage Insurance Fund

distributive shares.

EFFECTIVE DATE: October 31, 1994.

FOR FURTHER INFORMATION CONTACT: Christopher Peterson, Director, Office

of Mortgage Insurance Accounting and Servicing, Room 2108, Department

of Housing and Urban Development, 451 Seventh Street, SW, Washington,

DC 20410, telephone: voice (202) 708-1046; the telecommunications

device for the deaf (TDD) telephone number is (202) 708-4594. (These

are not toll-free numbers.)

SUPPLEMENTARY INFORMATION: This rule implements two provisions

contained in the Housing and Community Development Act of 1992, Pub. L.

102-550, approved October 28, 1992 (the 1992 Act). Section 516 of the

1992 Act amends sections 204, 207, 220 and 221(g), of the National

Housing Act to authorize the Secretary of HUD to pay virtually any

mortgage insurance claim in book entry or other form of debentures an

well as in the current certificated registered form. Section 508 of the

1992 Act establishes a 6-year statute of limitation on the payment of

distributive shares from the Mutual Mortgage Insurance Fund.

Authority To Pay Mortgage Insurance Claims With Book Entry and Other

Forms of Debentures

The rule amends parts 200, 203, 207, 220, 221, 235, 236, 237, 241

and 242 of title 24 of the Code of Federal Regulations to authorize

payment of mortgage insurance claims with book entry or other forms of

debentures.

Under HUD's mortgage insurance programs, when a mortgage goes into

default, the mortgagee is entitled to receive insurance benefits that

are payable in cash or debentures. HUD currently pays most, but not

all, claims in cash. One notable exception is that, under section

221(g)(4) of the National Housing Act, holders of single family

mortgages insured under section 221 that are current after 20 years

from final endorsement may assign the mortgages to HUD and receive

debentures in exchange. Holders of current section 221 multifamily

mortgages may likewise assign such mortgages to HUD in exchange for

debentures if the mortgage is not sold through the auction process

mandated by section 221(g)(4)(C). HUD also issues debentures for the

difference between the amount of redeemed debentures and the amount of

the mortgage insurance premium due, when mortgagees pay their MIP and

then exercise their right to send in the debentures for redemption.

Since 1938, the Department of the Treasury has acted as Fiscal

Agent for the Federal Housing Administration and HUD with respect to

debentures, and has carried out debenture processing functions on FHA's

and HUD's behalf. Since 1988, Treasury has delegated much of the

debenture processing functions to the Federal Reserve Bank of

Philadelphia (FRBP) acting in its capacity as Fiscal Agent of the

United States. The computer system used by FRBP is designed to

accommodate use of book entry, as well as certificated debentures.

Processing book entry debentures is considerably less costly than

processing certificated debentures. Section 516 of the 1992 Act

provides explicit statutory authority for HUD to convert to a book

entry system.

Under current statutory authority, FRBP issues certificated

debentures in multiples of $50, and issues a cash adjustment for the

balance. The certificated debenture system is extremely cumbersome and

expensive to administer, since FRBP must have the debenture stock

printed, store and handle the debenture stock under secure conditions,

process the issuance of debentures manually, transmit the debentures

physically, and issue the cash adjustment separately. The certificated

debentures are also cumbersome and expensive for holders to store and

negotiate. Such debentures must be held under secure conditions, and

the pledging and assignment through physical transfer could cause

delays or lead to loss or theft.

Because of these considerations, Treasury and a number of Federal

government agencies have switched from certificated to book entry

securities, a shift paralleled in the equity and corporate and

municipal bond markets. However, since Congress apparently contemplated

the use of certificated debentures when it enacted the current

provisions of sections 204, 207, and 220 of the National Housing Act,

Section 516 of the 1992 Act was enacted to clarify HUD's authority to

pay claims through the issuance of book entry debentures.

With enactment of section 516, the book entry system administered

by FRBP can be put into operation. Effective with this rule, HUD will

have authority to issue debentures in book entry form. HUD intends to

implement this authority in the very near future with respect to

issuance of all new debentures. An announcement of the implementation

will be made prior to its effective date. Also, once this new authority

is implemented, debentures issued for amounts remaining after payment

of mortgage insurance premiums may also be in book entry form. In

addition, holders of outstanding certificated debentures may, at their

option, exchange such debentures for book entry securities. Debentures

in book entry form will not thereafter be exchangeable for debentures

in certificated form. Book entry debentures will be issued in a minimum

amount of one dollar and increments of one cent. This will allow

debentures to be issued in virtually the exact amount payable to the

holder, with no cash adjustment. Interest and principal payments on

book entry debentures will be made by direct deposit (electronic funds

transfer) to the account and financial institution designated by the

owners of the debentures. Considerable savings will accrue, both to the

Federal government and to holders of debentures, by thus bringing the

FHA debenture process into conformity with modern commercial practices.

Establish a Statute of Limitations on Payments of Distributive Shares

The rule also implements section 508 of the 1992 Act by amending 24

CFR Part 203 to establish a six-year statute of limitations within

which an individual who is eligible for the payment of a distributive

share could claim his or her distributive share. The amendment also

transfers amounts no longer eligible for distribution because of the

statute of limitations from the Participating Reserve Account to the

General Surplus Account to help ensure the actuarial soundness of the

Mutual Mortgage Insurance Fund.

Publication as Final Rule

It is the policy of the Department to publish rules for public

comment before developing a rule for effect. However, in a particular

case where notice and public comment are not required by statute, the

procedure for advance public comment may be omitted if the Department

determines that it is impracticable, unnecessary, or contrary to the

public interest. In this case, revisions to the regulations are limited

to those needed to reflect the clear Congressional mandate to effect a

6-year statute of limitations on claims for distributive shares and to

provide authority to issue debentures in book entry form. The

Department would not be able to change the minimal provisions it is

setting forth in this rule in response to public comments because of

the specificity of the statute being implemented. Consequently, we

believe it unnecessary to accept and review public comments before

putting into effect these statutory provisions.

Other Matters

Regulatory Flexibility

In accordance with 5 U.S.C. 605(b) (the Regulatory Flexibility

Act), the undersigned hereby certifies that this rule does have a

significant economic impact on a substantial number of small entities.

The rule implements Congressional mandates which will prove cost

beneficial for affected business entities both large and small.

NEPA

Under HUD regulations (24 CFR 50.20(k)), this rule is exempt from

the requirements of the National Environmental Policy Act as set forth

in 24 CFR Part 50. The rule relates to internal administrative

procedures, the content of which does not involve development

decisions, and does not affect the physical condition of project areas

or building sites but only relates to the payment of insurance claims

and distributive shares.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule will 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. As a result,

the rule is not subject to review under the order. The rule does not

effect any change in current relationships between HUD, the private

sector and state and local governmental entities.

Executive Order 12606, The Family

The General Counsel, as the designated official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

Regulatory Agenda. This rule was listed as item 1597 in the

Department's Semiannual Agenda of Regulations published on April 25,

1994 (59 FR 20424, 20450) in accordance with Executive Order 12866 and

the Regulatory Flexibility Act.

List of Subjects

24 CFR Part 200

Administrative practice and procedure, Claims, Equal employment

opportunity, Fair housing, Housing standards, Incorporation by

reference, Lead poisoning, Loan programs--housing community

development, Minimum property standards, Mortgage insurance,

Organization and functions (Government agencies), Reporting and

recordkeeping requirements, Social security, Unemployment compensation,

Wages.

24 CFR Part 203

Mortgage insurance.

24 CFR Part 207

Manufactured homes, Mortgage insurance, Reporting and recordkeeping

requirements, Solar energy.

24 CFR Part 220

Home improvement, Loan programs--housing and community development,

Mortgage insurance, Reporting and recordkeeping requirements, Urban

renewal.

24 CFR Part 221

Low and moderate income housing, Mortgage insurance, Reporting and

recordkeeping requirements.

24 CFR Part 235

Condominiums, Cooperatives, Grant programs--housing and community

development, Low and moderate income housing, Mortgage insurance,

Reporting and recordkeeping requirements.

24 CFR Part 236

Grant programs--housing and community development, Low and moderate

income housing, Mortgage insurance, Rent subsidies, Reporting and

recordkeeping requirements.

24 CFR Part 237

Grant programs--housing and community development, Low and moderate

income housing, Mortgage insurance.

24 CFR Part 241

Energy conservation, Home improvement, Loan programs--housing and

community development, Mortgage insurance, Reporting and recordkeeping

requirements, Solar energy.

24 CFR Part 242

Hospitals, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, in chapter II of title 24 Code of Federal Regulations,

parts 200, 203, 207, 220, 221, 235, 236, 237, 241, and 242, are amended

as follows:

PART 200--INTRODUCTION

1. The authority citation for 24 CFR part 200 is revised to read as

follows:

Authority: 12 U.S.C. 1701-1715z-18, 1701s, and 1715z-11; 42

U.S.C. 3535(d), 3543, and 3544.

2. In Sec. 200.157, paragraphs (b), (c), (d), (e), and (f)(1) are

revised to read as follows:

Sec. 200.157 Provisions and characteristics of debentures.

* * * * *

(b) Registration and denominations. Debentures in certificated form

are issued in denominations of $50, $100, $500, $1,000 and $10,000 with

the name of the owner inscribed on the face of the certificate.

Debentures in book entry form are issued in a minimum amount of one

dollar and in increments of one cent with the name of the owner

recorded in an account master record on the books of the Treasury.

(c) Rate of interest and interchangeability. Debentures carry a

rate of interest prescribed by the Commissioner but not in excess of an

annual rate determined by the Secretary of the Treasury in accordance

with prescribed statutory formula involving yields or prices of

outstanding marketable obligations of the United States. Debentures in

certificated form of the same series bearing the same interest rate and

having the same maturity date shall be freely interchangeable between

the various authorized denominations and may be exchanged for similar

debentures in book entry form. Debentures in book entry form cannot be

exchanged for debentures in certificated form.

(d) Negotiability and Redemption. Debentures in certificated form

are negotiable and, if in book entry form, are transferable in the

manner described in applicable Treasury regulations. Debentures are

fully guaranteed as to principal and interest by the United States.

Debentures are redeemable on call issued by the Commissioner.

(e) Payment of principal and interest. Principal and interest on

debentures shall be payable when due at the Department of the Treasury,

Washington, DC, or any Government agency or agencies in the United

States which the Secretary of the Treasury may from time to time

designate for that purpose. The principal and interest shall be payable

to the owner whose name shall be inscribed on the debenture in

certificated form, to the owner designated as assignee as shown by

executed assignments for maturing or called certificated debentures, or

to the owner whose name shall be recorded in the account master record

of the book entry debentures.

(f) Transfer and use--(1) In general. Debentures in certificated

form are negotiable and, if in book entry form, are transferable in the

manner described in applicable Treasury regulations. They may be used

by approved mortgagees in lieu of cash for payment of FHA mortgage

insurance premiums.

* * * * *

3. In Sec. 200.158, the introductory text is revised and paragraphs

(c) and (d) are removed, to read as follows:

Sec. 200.158 Applicability of Treasury regulations to debenture

transactions.

The Department of the Treasury acts as fiscal agent for the

Commissioner in connection with transactions and operations relating to

debentures. Treasury's General Regulations Governing U.S. Securities

(31 CFR Part 306) and its Supplemental Regulations Governing Federal

Housing Administration Debentures (31 CFR Part 337) have been and are

adopted as revised and amended, to the extent applicable, as the

regulations of the Commissioner governing the issuance of, transactions

in and redemption of debentures, including the payment of interest

thereon with the following exceptions:

* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

4. The authority citation for 24 CFR part 203 continues to read as

follows:

Authority: 12 U.S.C. 1709, 1715b; 42 U.S.C. 3535(d).

5. Paragraph (r) of Sec. 203.251 is revised to read as follows:

Sec. 203.251 Definitions.

* * * * *

(r) Debentures means registered, transferable securities in

certificated or book entry form which are valid and binding

obligations, issued in the name of the Mutual Mortgage Insurance Fund

in accordance with the provisions of this part; such debentures are the

primary liability of the Mutual Mortgage Insurance Fund and are

unconditionally guaranteed as to principal and interest by the United

States.

* * * * *

6. Section 203.408 is revised to read as follows:

Sec. 203.408 Form and amounts of debentures.

Debentures issued under this part shall be in such form and

amounts; and shall be subject to such term and conditions; and shall

include such provisions for redemption, if any, as may be prescribed by

the Secretary, with the approval of the Secretary of the Treasury; and

may be in book entry or certificated registered form, or such other

form as the Secretary by regulation may prescribe.

7. Section 203.411 is revised to read as follows:

Sec. 203.411 Cash adjustment.

Any difference of less than $50 between the amount of debentures to

be issued to the mortgagee and the total amount of the mortgagee's

claim, as approved by the Commissioner, may be adjusted by the issuance

of a check in payment thereof.

8. A new Sec. 203.427 is added after Sec. 203.426 and at the end of

the undesignated center heading, ``Mutual Mortgage Insurance Fund and

Distributive Shares'', to read as follows:

Sec. 203.427 Statute of limitations on payment of distributive shares.

The Commissioner shall not distribute any distributive share to an

eligible mortgagor under Sec. 203.423 beginning on the date which is

six years after the date the Commissioner first transmitted written

notification of eligibility to the last known address of the mortgagor,

unless the mortgagor has applied in accordance with procedures

prescribed by the Commissioner for payment of the share within the six-

year period. The Commissioner shall transfer any amounts no longer

eligible for distribution under this section from the Participating

Reserve Account to the General Surplus Account.

9. Paragraph (f) of Sec. 203.440 is revised to read as follows:

Sec. 203.440 Definitions.

* * * * *

(f) Debentures means registered, transferable securities in book

entry or certificated form which are valid and binding obligations,

unconditionally guaranteed as to principal and interest by the United

States.

10. Section 203.483 is revised to read as follows:

Sec. 203.483 Forms and amounts of debentures.

Debentures issued under this part shall be in such form and

amounts; and shall be subject to such terms and conditions; and shall

include such provisions for redemption, if any, as may be prescribed by

the Secretary, with the approval of the Secretary of the Treasury; and

may be in book entry or certificated registered form, or such other

form as the Secretary by regulation may prescribe.

11. Section 203.487 is revised to read as follows:

Sec. 203.487 Cash adjustment.

Any difference of less than $50 between the amount of debentures to

be issued to the lender and the total amount of the lender's claim, as

approved by the Commissioner, may be adjusted by the issuance of a

check in payment thereof.

PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE

12. The authority citation for 24 CFR part 207 continues to read as

follows:

Authority: 12 U.S.C. 1701z-11(e), 1713, and 1715b; 42 U.S.C.

3335(d).

13. Section 207.259 is amended by revising paragraph (e)(5), to

read as follows:

Sec. 207.259 Insurance benefits.

* * * * *

(e) * * *

(5) Be issued in such forms and amounts; and be subject to such

terms and conditions; and include such provisions for redemption, if

any, as may be prescribed by the Secretary, with the approval of the

Secretary of the Treasury; and may be in book entry or certificated

registered form, or such other form as the Secretary by regulation may

prescribe.

* * * * *

PART 220--MORTGAGE INSURANCE AND INSURED IMPROVEMENT LOANS FOR

URBAN RENEWAL AND CONCENTRATED DEVELOPMENT AREAS

14. The authority citation for 24 CFR part 220 continues to read as

follows:

Authority: 12 U.S.C. 1713, 1715b, 1715k; 42 U.S.C. 3535(d).

15. Section 220.836 is revised to read as follows:

Sec. 220.836 Form and amounts of debentures.

Debentures issued under subpart D of this part shall be in such

form and amounts; and shall be subject to such terms and conditions;

and shall include such provisions for redemption, if any, as may be

prescribed by the Secretary, with the approval of the Secretary of the

Treasury; and may be in book entry or certificated registered form, or

such other form as the Secretary by regulation may prescribe.

16. Section 220.842 is revised to read as follows:

Sec. 220.842 Cash adjustment.

Any difference of less than $50 between the amount of debentures to

be issued to the lender and the total amount of the lender's claim, as

approved by the Commissioner, may be adjusted by the issuance of a

check in payment thereof.

PART 221--LOW COST AND MODERATE INCOME MORTGAGE INSURANCE

17. The authority citation for 24 CFR part 221 is revised to read

as follows:

Authority: 12 U.S.C. 1707(a), 1715b, and 17151, 42 U.S.C.

3535(d).

18. Section 221.780 is revised to read as follows:

Sec. 221.780 Issuance of debentures.

Upon the exercise of the assignment option and the satisfactory

performance of the requirements as to assignment set out in

Sec. 207.258 of this chapter, the Commissioner shall issue the assignor

mortgagee debentures having a total par value equal to the amount of

the original principal obligation of the mortgage which was unpaid on

the date of the assignment, plus accrued interest to such date.

PART 232--MORTGAGE INSURANCE FOR NURSING HOMES, INTERMEDIATE CARE

FACILITIES, AND BOARD AND CARE HOMES

19. The authority citation for 24 CFR part 232 continues to read as

follows:

Authority: 12 U.S.C. 1715(b), 1715w, 1715z(9); 42 U.S.C.

3535(d).

20. Section 232.893 is revised to read as follows:

Sec. 232.893 Cash adjustment.

Any difference of less than $50 between the amount of debentures to

be issued to the lender and the total amount of the lender's claim, as

approved by the Commissioner, may be adjusted by the issuance of a

check in payment thereof.

PART 235--MORTGAGE INSURANCE AND ASSISTANCE PAYMENTS FOR

HOMEOWNERSHIP AND PROJECT REHABILITATION

21. The authority citation for 24 CFR part 235 continues to read as

follows:

Authority: 12 U.S.C. 1715b and 1715z; 42 U.S.C. 3535(d).

22. Section 235.215 is revised to read as follows:

Sec. 235.215 Method of paying insurance benefits.

If the application for insurance benefits is acceptable to the

Secretary, the insurance claim shall be paid in cash, unless the

mortgagee files a written request with the application for payment in

debentures.

PART 236--MORTGAGE INSURANCE AND INTEREST REDUCTION PAYMENT FOR

RENTAL PROJECTS

23. The authority citation for 24 CFR part 236 continues to read as

follows:

Authority: 12 U.S.C. 1715b and 1715z-1; 42 U.S.C. 3535(d).

24. Paragraph (a) of Sec. 236.265 is revised to read as follows:

Sec. 236.265 Payment of insurance benefits.

* * * * *

(a) Insurance claims shall be paid in cash unless the mortgagee

files a written request for payment in debentures.

* * * * *

PART 237--SPECIAL MORTGAGE INSURANCE FOR LOW AND MODERATE INCOME

FAMILIES

25. The authority citation for 24 part 237 is revised to read as

follows:

Authority: 12 U.S.C. 1709, 1715b, 1715z-2; 42 U.S.C. 3535(d).

26. Section 237.260 is revised to read as follows:

Sec. 237.260 Method of paying insurance benefits.

If the application for insurance benefits is acceptable to the

Commissioner, the insurance claim shall be paid in cash, unless the

mortgagee files a written request with the application for payment in

debentures.

PART 241--SUPPLEMENTARY FINANCING FOR INSURED MULTIFAMILY PROJECTS

27. The authority citation for 24 CFR part 241 is revised to read

as follows:

Authority: 12 U.S.C. 1715b, 1715z-6; 42 U.S.C. 3535(d).

28. Section 241.893 is revised to read as follows:

Sec. 241.893 Cash adjustment.

Any difference of less than $50 between the amount of debentures to

be issued to the lender and the total amount of the lender's claim, as

approved by the Commissioner, may be adjusted by the issuance of a

check in payment thereof.

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

29. The authority citation for 24 CFR part 242 is revised to read

as follows:

Authority: 12 U.S.C. 1715b, 1715n(t), 1715z-7; 42 U.S.C.

3535(d).

30. Section 242.260 is revised to read as follows:

Sec. 242.260 Insurance benefits.

All of the provisions of Sec. 207.259 of this chapter relating to

insurance benefits apply to mortgages on hospitals insured under this

subpart, except that in a case where the mortgage involves the

financing or refinancing of an existing hospital pursuant to

Sec. 242.93 and the commitment for insuring such mortgage is issued on

or after April 1, 1969, the insurance claim shall be paid in cash

unless the mortgagee files a written request for payment in debentures.

Dated: September 21, 1994.

Jeanne K. Engel,

General Deputy Assistant Secretary for Housing--Federal Housing

Commissioner.

[FR Doc. 94-24188 Filed 9-29-94; 8:45 am]

BILLING CODE 4210-27-P