96-7949. Office of the Assistant Secretary for HousingFederal Housing Commissioner; Regulatory Reinvention; Tax Exemption of Obligations of Public Housing Agencies and Related Amendments  

  • [Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
    [Rules and Regulations]
    [Pages 14456-14463]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 96-7949]
    
    
    
          
    
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    Part XII
    
    
    
    
    
    Department of Housing and Urban Development
    
    
    
    
    
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    24 CFR Part 811
    
    
    
    Office of the Assistant Secretary for Housing--Federal Housing 
    Commissioner: Regulatory Reinvention, Tax Exemption of Obligations of 
    Public Housing Agencies and Related Amendments; Final Rule
    
    Federal Register / Vol. 61, No. 63 / Monday, April 1, 1996 / Rules 
    and Regulations
    
    [[Page 14456]]
    
    
    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
    
    24 CFR Part 811
    
    [Docket No. FR-3985-F-01]
    RIN: 2502-AG64
    
    
    Office of the Assistant Secretary for Housing--Federal Housing 
    Commissioner; Regulatory Reinvention; Tax Exemption of Obligations of 
    Public Housing Agencies and Related Amendments
    
    AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
    Commissioner, HUD.
    
    ACTION: Final rule.
    
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    SUMMARY: This final rule amends HUD's regulations governing the tax 
    exemption of obligations of public housing agencies. In an effort to 
    implement the President's regulatory reform initiative, this rule will 
    streamline these regulations by eliminating provisions that are 
    redundant of statutes or otherwise unnecessary. Further, on April 20, 
    1995 (60 FR 19695), HUD published a rule proposing to amend these 
    regulations to codify the guidelines which have governed Section 8 bond 
    refundings. This rule finalizes the policies and procedures set forth 
    in the April 20, 1995 proposed rule, and discusses the issues raised by 
    public comments submitted on the proposed rule. The rule also makes a 
    clarifying amendment to the existing regulations.
    
    EFFECTIVE DATE: May 1, 1996.
    
    FOR FURTHER INFORMATION CONTACT: James Mitchell, Director, Financial 
    Services Division, Department of Housing and Urban Development, 470 
    L'Enfant Plaza East, room 3120, Washington, DC 20024, telephone number 
    (202) 708-7450, ext. 125 (this is not a toll-free number). For hearing- 
    and speech-impaired persons, this number may be accessed via TDD by 
    calling the Federal Information Relay Service at 1-800-877-8339.
    
    SUPPLEMENTARY INFORMATION:
    
    I. Background
    
    A. Part 811 and the President's Regulatory Reinvention Initiative
    
        On March 4, 1995, President Clinton issued a memorandum to all 
    Federal departments and agencies regarding regulatory reinvention. In 
    response to this memorandum, the Department of Housing and Urban 
    Development conducted a page-by-page review of its regulations to 
    determine which can be eliminated, consolidated, or otherwise improved. 
    As part of this review, HUD examined its regulations at 24 CFR part 
    811, which govern the tax exemption of obligations of public housing 
    agencies. HUD has determined that 24 CFR part 811 can be improved and 
    streamlined by eliminating unnecessary provisions.
        Several provisions in part 811 repeat statutory language from the 
    United States Housing Act of 1937 (42 U.S.C. 1437 et seq.). It is 
    unnecessary to repeat statutory requirements in the Code of Federal 
    Regulations, since these requirements are otherwise fully accessible 
    and binding. Furthermore, regulatory provisions which reiterate 
    statutory language, must be amended each time Congress amends the 
    statute. Therefore, this final rule removes redundant statutory 
    language and replaces it with a citation to the specific statutory 
    section.
        Some provisions in part 811 are now obsolete. For instance, this 
    rule removes obsolete provisions that were designed for the original 
    construction or substantial rehabilitation of subsidized Section 8 
    rental housing. Further, the program described in subpart B of part 
    811, concerning the purchase of GNMA guaranteed mortgage-backed 
    securities with tax exempt obligations, has never been implemented by 
    HUD. Accordingly, this final rule removes subpart B.
        Lastly, some provisions in part 811 are not regulatory 
    requirements. For example, several sections in the regulations contain 
    nonbinding guidance or explanations. While this information is very 
    helpful to HUD's clients, HUD will more appropriately provide this 
    information through handbook guidance or other materials rather than 
    maintain it in title 24 of the Code of Federal Regulations.
    
    B. The April 20, 1995 Proposed Rule
    
    1. Proposed Amendments Made by the April 20, 1995 Rule
        On April 20, 1995 (60 FR 19695), HUD published for public comment a 
    rule proposing to amend 24 CFR part 811 to codify the guidelines that 
    have governed Section 8 bond refundings.
        HUD's regulations at 24 CFR part 811, subpart A govern HUD's 
    issuance of a Notification of Tax Exemption. These regulations were 
    designed for the original construction or substantial rehabilitation of 
    subsidized Section 8 rental housing. Refunding transactions not 
    involving construction funding have required the Assistant Secretary 
    for Housing-FHA Commissioner to issue a Notification of Tax Exemption 
    that waives several sections of 24 CFR part 811, subpart A. This waiver 
    process elevates to the Assistant Secretary level a programmatic 
    approval that has become routine and perfunctory in recent years.
        The April 20, 1995 rule proposed to create a new 
    Sec. 811.119,1 which would codify the policy and procedural 
    guidelines that have governed Section 8 bond refundings since 1989. The 
    new section would provide a self-contained refunding regulation that 
    would dispense with the need for most waivers. The preamble to the 
    April 20, 1995 proposed rule described in detail the amendments to 24 
    CFR part 811, subpart A.
    
        \1\ As a result of the streamlining amendments made in 
    compliance with President Clinton's regulatory reform initiative, 
    several sections in part 811 have been renumbered. This rule 
    finalizes proposed Sec. 811.119 at Sec. 811.110. Substantively, 
    Sec. 811.110 is identical to proposed Sec. 811.119, except where 
    changes have been made in response to public comment. The preamble 
    to this final rule contains a discussion of the public comments 
    received on the April 20, 1995 proposed rule, and HUD's responses to 
    them.
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    2. Discussion of Public Comments on the April 20, 1995 Proposed Rule
        The public comment period on the proposed rule expired on June 19, 
    1995. By close of business on that date, a total of 6 comments had been 
    received. The following section of the preamble presents a summary of 
    the significant issues raised by the public commenters on the proposed 
    rule, and HUD's responses to these comments.
    
    Proposed Sec. 811.119(g) Exceeded HUD Authority
    
        Comment. Paragraph (g) of proposed Sec. 811.119 stated that ``HUD 
    will consent to release reserves, as provided by the Trust Indenture, 
    in an amount remaining after correction of project physical 
    deficiencies and/or replenishment of replacement reserves * * * upon 
    execution by the project owner of a use agreement, and amendment of a 
    regulatory agreement, if applicable, to extend low-income tenant 
    occupancy for ten years after expiration of the HAPC.'' Four of the 
    commenters believed that this provision exceeded HUD's authority.
        The commenters noted that the provisions of proposed paragraph (g) 
    were not included in the ``old reg'' version of 24 CFR part 811, which 
    was effective from September, 1977 until March, 1979. These commenters 
    believed that to the extent paragraph (g) purported to apply to 
    transactions financed under the ``old regs'', HUD would be violating 
    the contractual rights of participants in those transactions. The 
    commenters noted that there appears to be no legal basis for the 
    requirement that HUD approve the
    
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    release of reserves from trust indentures that are being refunded, 
    defeased or prepaid. In most ``old reg'' transactions those reserves 
    belong to the project owners upon defeasance of the prior bonds. The 
    commenters believed that HUD's attempt to condition the release of the 
    owner's money upon the owner's entrance into a use agreement raised 
    serious legal and constitutional issues.
        HUD Response. HUD interprets the prohibition of refundings 
    described in Sec. 811.106(d) of the ``old regs'' to apply to refundings 
    of outstanding section 11(b) bonds by any means, not only by a new 
    section 11(b) bond issue. Therefore, a waiver of ``old reg'' 
    Sec. 811.106(d) is required to refund ``old reg'' bonds. The waiver of 
    a regulatory provision is more than a perfunctory function, since HUD 
    must first determine that the public will benefit by the waiver.
        HUD does not dispute that project owners or PHAs are entitled to 
    reserve balances as provided in ``old reg'' indentures. However, HUD 
    considers it sensible to review the condition of the project and its 
    future as low-income housing before these usually large sources of 
    funds are used for purposes unrelated to the project. Further, it is 
    not unreasonable for PHAs to extend low-income occupancy for a period 
    of ten years in return for use of the released reserves.
        HUD also notes that many ``old reg'' indentures specifically 
    require that HUD consent to the refunding of the bonds. The ``old 
    regs'' at Sec. 811.107(d) provide that excess reserves shall be used 
    for project purposes. HUD has waived this requirement to accommodate 
    refundings which use reserves for other purposes, provided that HUD 
    found no need for physical repairs. However, HUD believes it is 
    reasonable to give the project first consideration.
        The final rule has been revised to increase flexibility in the case 
    of privately owned projects. Specifically, the final rule provides that 
    the use extension may be waived on the basis of some other public 
    benefit, such as transfer of ownership to a nonprofit entity, or 
    correction of project physical or operating deficiencies. This exercise 
    of HUD waiver authority to secure a sound resource of low-income 
    housing will benefit HUD, PHAs, owners, and project residents.
        This final rule also clarifies that in those instances involving a 
    simple defeasance without pay-off of ``old reg'' section 11(b) bonds, 
    HUD will review the financing terms only to the extent that a HUD 
    approval is needed in the transaction.
    
    Proposed Rule's Relation to 24 CFR Part 883 Unclear
    
        Comment. Three commenters wondered whether the proposed rule 
    applied to bonds issued by approved state housing finance agencies 
    pursuant to 24 CFR part 883. One of the commenters wrote that the April 
    20, 1995 proposed rule was contradictory on the issue of its 
    applicability to part 883. The preamble to the proposed rule stated 
    that the rule applied only to refundings of bonds exempt under Section 
    11(b). However, the commenter noted that proposed Sec. 811.119 
    contained at least one reference to part 883 in paragraph (c), and 
    paragraphs (f) and (h) appeared to address all McKinney Act refundings 
    of Section 8 projects regardless of the source of the tax-exemption.
        Another commenter was particularly concerned about paragraph (c) of 
    proposed Sec. 811.119. The first sentence of paragraph (c) stated that 
    ``[c]ompliance with Secs. 811.104 and 811.105 shall not be required for 
    refunding obligations which derive tax exemption from authority other 
    than Section 11(b) of the [United States Housing Act of 1937].'' The 
    commenter believed that by stating that non-11(b) bonds need not comply 
    with Secs. 811.104 and 811.105, it could be argued that bonds issued 
    pursuant to part 883 must comply with all other provisions of part 811.
        The commenter also worried about the second sentence of paragraph 
    (c), which stated that ``compliance with the provisions of 24 CFR part 
    883 shall be required to the extent bond counsel finds such provisions 
    applicable.'' The commenter believed that this sentence could be 
    interpreted to permit bond counsel, in part 883 refundings of part 883 
    bonds, to select those provisions of part 883 it thought applicable, 
    and ignore the rest of the regulatory provisions.
        The commenter suggested that paragraph (c) of proposed Sec. 811.119 
    be revised to state that it does not apply to bonds issued by State 
    Agencies under 24 CFR part 883 and which derive tax exemption from 
    authority other than Section 11(b) of the United States Housing Act of 
    1937.
        HUD Response. HUD has clarified the final rule to explicitly limit 
    its applicability to State Agency Section 8 bond issues to: (1) 
    Reiteration of the prohibition of duplicate fees in part 883; and (2) 
    in the case of McKinney Act refundings, compliance with paragraphs (f) 
    and (h) of Sec. 811.110. Further, in response to the second commenter, 
    HUD has amended the rule to clarify that its requirements apply only to 
    refunding bonds issued pursuant to Sec. 811.110. This final rule also 
    removes the first two sentences of paragraph (c) of proposed 
    Sec. 811.119.
    
    Proposed Rule's Relationship to Internal Revenue Code Unclear
    
        Comment. The first sentence of proposed Sec. 811.119(c) stated that 
    ``[c]ompliance with Secs. 811.104 and 811.105 shall not be required for 
    refunding obligations which derive tax exemption from authority other 
    than Section 11(b).'' Proposed Sec. 811.119(i) stated that 
    ``[r]efunding bonds, including interest thereon, approved under 
    proposed Sec. 811.119 shall be exempt from all taxation now or 
    hereafter imposed by the United States.'' Two commenters pointed out 
    that since 1982 all tax exempt bonds, including section 11(b) bonds, 
    must comply with the Internal Revenue Code. Compliance with 24 CFR part 
    811 alone is no longer sufficient for tax-exemption.
        The commenters believed that paragraphs (c) and (i) could easily be 
    read to suggest that only compliance with 24 CFR part 811 is necessary 
    for tax exemption. The commenters suggested that the final rule 
    explicitly state that compliance with part 811 does not eliminate the 
    need to comply with the Internal Revenue Code.
        HUD Response. HUD agrees with the commenters that the proposed rule 
    required clarification on the relationship between part 811 and the 
    Internal Revenue Code. Accordingly, the final rule has been revised to 
    provide that compliance with the requirements of 24 CFR part 811 does 
    not assure compliance with the relevant provisions of the Internal 
    Revenue Code.
    
    Paragraph (h) of Proposed Sec. 811.119 Was Too Limiting
    
        Comment. The first sentence of paragraph (h) of proposed 
    Sec. 811.119 stated that ``[a]gencies shall have wide latitude in the 
    design of specific delivery vehicles for use of McKinney Act savings.'' 
    Paragraph (h) went on to set forth a list of eligible activities for 
    which savings ``shall'' be utilized. Three commenters believed that the 
    remainder of paragraph (h) contradicted the flexibility promised in the 
    first sentence. Furthermore, the commenters believed that paragraph (h) 
    was more restrictive than current HUD practice.
        The commenters suggested similar remedies for the perceived 
    strictness of paragraph (h). One of the commenters suggested that the 
    word ``shall'' in the second sentence of paragraph (h) be replaced with 
    the word ``may.'' The commenter also recommended that
    
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    HUD include at the end of the sentence an additional phrase permitting 
    ``other activities approved by HUD.'' Another of the commenters 
    recommended that HUD add a new third sentence to the following effect: 
    ``These include programs designed to assist in obtaining shelter such 
    as rent subsidy and similar tenant based programs.''
        HUD Response. HUD agrees with the commenters and has adopted all 
    their suggestions in this final rule.
    
    Rule Should Reference ``Trustee Sweeps''
    
        Comment. Paragraph (d) of proposed Sec. 811.119 stated that the 
    Assistant Secretary's approval of the Notification of Tax Exemption 
    would be based on the conformity of the ``refunding's terms and 
    conditions * * * to subpart A's requirements, including[,] * * * where 
    possible, reduction of Section 8 assistance payments through lower 
    contract rents or equivalent means.'' One of the commenters wondered 
    whether paragraph (d) covered a subsidy recapture method known as the 
    ``Trustee Sweep.'' According to the commenter most of the FHA-Insured 
    Section 8 refundings that have occurred have used this method.
        HUD Response. This final rule clarifies that the ``Trustee Sweep'' 
    is a permissible subsidy recapture method.
    
    Proposed Rule Failed To Take Underwriters Into Account
    
        Comment. Paragraph (e)(1) of proposed Sec. 811.119 stated that 
    HUD's evaluation of the Section 8 refunding proposal ``shall determine 
    that the proposed amount of refunding obligations is the amount needed 
    to * * * fund a debt service reserve to the extent required by bond 
    rating agencies which rate the credit quality of the refunding bonds.'' 
    Two commenters believed that paragraph (e)(1) of proposed Sec. 811.119 
    failed to cover certain financings. The commenters wrote that in 
    financings closed on a non-rated basis, the underwriter, as opposed to 
    the Rating Agency, will often require a debt service reserve fund based 
    upon its determination of investor requirements. The commenters 
    suggested that the final rule allow for the sizing of the debt service 
    reserve in this manner.
        HUD Response. This final rule adopts the recommendation made by the 
    commenters and recognizes that debt service reserves may also be 
    required by credit enhancers and, for unrated bonds, by the 
    underwriter.
    
    Repayment Term Limit Requires Change
    
        Comment. Two commenters expressed concern over paragraph (e)(2) of 
    proposed Sec. 811.119, which prohibited the repayment term of the 
    refunding bonds from exceeding the remaining term of the project's 
    mortgage, or in the absence of a mortgage, the HAP Contract. One of the 
    commenters wrote that the proposed paragraph was insufficiently broad. 
    This commenter pointed out that in MBIA transactions the insurer 
    requires that the maturity of the bonds extend a year beyond the 
    mortgage maturity. The bonds are redeemed concurrently with mortgage 
    maturity but the stated maturity is longer.
        The commenter also believed that paragraph (e)(2) would create 
    unnecessary difficulties for some agencies seeking to refinance. The 
    commenter noted that in the original 11(b) financings, the transactions 
    had to be structured based on an estimate of when the project was to be 
    completed. Based on that estimate, the expiration of the HAP contract 
    was derived. This expiration date became the basis for the maturity of 
    the bonds, since the HAP contract was the primary security for the 
    bonds. However, in some financings, the project was completed sooner 
    than anticipated and, therefore, the HAP contract was executed earlier 
    than estimated. In those instances the HAP contract could expire 
    sometime before the maturity date of the bonds.
        The commenter felt that by requiring that refunding bonds mature at 
    a date not exceeding the expiration of the HAP contract, the rule would 
    produce structuring problems as a result of the term of the refunding 
    bonds being forced to be shorter than the term of the bonds they are 
    refunding. However, the commenter noted that if the HAP contract term 
    is later than the original bond term, it might be advantageous to have 
    a bond term that takes full advantage of the HAP contract term. The 
    commenter suggested that HUD allow the term of the bonds on uninsured 
    loan transactions to extend to the later of the expiration of the HAP 
    contract or the final maturity of the refunded bonds.
        Another commenter believed paragraph (e)(2) of proposed 
    Sec. 811.119 posed compliance difficulties for agencies seeking to 
    refinance projects at lower interest rates. The commenter noted that in 
    order to comply with rating agency structuring criteria relating to 
    debt service reserve funds in transactions where there is an insured 
    mortgage loan, the bonds often are structured to mature between 6 
    months and one year after the last required mortgage payment. This is 
    necessary because mortgage loans with grace periods are assumed by 
    rating agencies and bond underwriters to be received at the end of the 
    grace period. A second reason for this requirement is the potential 
    that a mortgage loan might be in default at the time of its stated 
    maturity, requiring an invasion of the debt service reserve fund 
    pending disbursement of FHA mortgage insurance proceeds, which could be 
    received after final due date of the last mortgage payment. Rating 
    agencies typically require a structure in which up to one year is 
    assumed to elapse between the date of default on the mortgage and the 
    receipt of the final installment of FHA mortgage insurance proceeds. 
    Accordingly, the commenter suggested that paragraph (e)(2) be amended 
    to add the words ``by more than one year'' after the phrase ``may not 
    exceed.''
        HUD Response. HUD agrees with these comments and has incorporated 
    them in the final rule.
    
    The Proposed Rule Created Uncertainty About the Continuation of Current 
    HUD Practices
    
        Comment. One commenter believed that paragraph (f) of proposed 
    Sec. 811.119 created uncertainty among agencies seeking to refinance. 
    This paragraph stated that for McKinney Act Projects, HUD would split 
    the savings with an agency, in accordance with the terms of the 
    Refunding Agreement. Paragraph (f) required that the Refunding 
    Agreement incorporate the agency's Housing Plan. The paragraph further 
    mandated that the Housing Plan provide for ``decent, safe, and sanitary 
    housing for very-low income households.'' Additionally, the Housing 
    Plan was required to ``address the physical condition of the projects 
    participating in the refunding which generate[d] the McKinney Act 
    savings and, if necessary, provide for the correction of existing 
    deficiencies which [could] not be funded completely by existing project 
    replacement reserves and/or by a portion of refunding bond proceeds.''
        The commenter believed that paragraph (f) was inconsistent with 
    existing HUD policies. First, the commenter believed paragraph (f) 
    contradicted a HUD memorandum concerning savings splits. Furthermore, 
    the commenter wrote that HUD has approved the application of savings 
    for uses other than those required by paragraph (b). For example, the 
    commenter claimed that HUD has not required that savings be used to 
    benefit a specific project. The commenter also wrote that savings 
    currently need to be
    
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    used in connection with low-income households, as distinguished from 
    very-low-income households.
        HUD Response. HUD acknowledges that the proposed rule did not 
    accurately reflect HUD's current policy regarding savings splits. 
    Accordingly, this final rule corrects this discrepancy by providing 
    that for McKinney Act refundings of projects which did not receive a 
    Financing Adjustment Factor (``FAF''), HUD will allow up to 50 percent 
    of debt service savings to be allocated to the project account. In such 
    cases, the remainder of the debt service savings will be shared equally 
    by the agency and the U.S. Treasury. However, the other assertions made 
    by the commenter are incorrect. For example, section 1012(a) of the 
    McKinney Act restricts assistance to ``very low-income families.'' (42 
    U.S.C. 1437f note.)
    
    Revision of Bond Counsel Certification Requirement
    
        Comment. The last sentence of paragraph (d) of proposed 
    Sec. 811.119 stated that the results of a refunding bond sale had to 
    ``certified'' by bond counsel. One commenter was disturbed by the use 
    of the word ``certified.'' The commenter wrote that bond counsel are 
    not in a position to certify such matters, other than in reliance on 
    information provided by other parties. Another commenter, while not 
    objecting to the term ``certify'', noted that bond counsel are seldom 
    financial experts. The commenter suggested that the rule be amended to 
    permit certification by a bona fide financial expert, such as a 
    certified public accountant or an investment banker.
        HUD Response. HUD has adopted both comments. This final rule uses 
    the term ``written confirmation'', rather than ``certify.'' Further, it 
    permits ``other acceptable closing participants'' to provide written 
    confirmation.
    
    Flexible Yield Limitation Required
    
        Comment. Paragraph (e)(3) of proposed Sec. 811.119 limited the bond 
    yield to not more than 75 basis points above the 20 Bond General 
    Obligation Index ``published by the Daily Bond Buyer for the week 
    immediately preceding the sale of the bonds.'' One commenter felt that 
    this paragraph would place the continuation of current HUD practices in 
    doubt, and might create the necessity for waivers.
        The commenter noted that HUD has in the past waived the bond yield 
    limitation for certain financings. Furthermore, HUD from time to time 
    published notices which allowed a 150 basis point spread on uninsured 
    deals. The commenter suggested that paragraph (e)(3) be amended to add 
    ``except as otherwise approved by HUD'', in order to eliminate the need 
    for waivers.
        HUD Response. In recognition of rating agency concerns about the 
    future renewability of HAP contracts, HUD has revised the final rule to 
    incorporate the phrase suggested by the commenter. However, HUD's 
    experience has shown that the 20 Bond General Obligation Index plus 75 
    basis points provides a valid market sensitive yield limit for a 
    variety of transactions.
    
    Paragraph (d) of Proposed Sec. 811.119 Required Clarification
    
        Comment. One commenter raised several concerns over paragraph (d) 
    of proposed Sec. 811.119. This paragraph stated that ``[u]pon 
    conclusion of the sale of refunding bonds, the results must be 
    certified to HUD by bond counsel, including a schedule of the specific 
    amount of savings in Section 8 assistance where applicable, and a final 
    statement of Sources and Uses.''
        The commenter pointed out that the term ``sale'' usually signifies 
    the signing of a Bond Purchase Agreement, at which time it may be 
    premature to provide the information requested by paragraph (d). This 
    commenter suggested that the word ``closing'' be substituted for 
    ``sale.'' The commenter was also uncertain about the information HUD 
    meant to include in the term ``results.''
        HUD Response. HUD agrees with the points raised by the commenter. 
    Accordingly, the final rule has been revised to use the term 
    ``closing'', rather than ``sale.'' Further, this final rule replaces 
    the term ``results'' with a specific list of the closing information 
    required by HUD.
    
    Paragraph (e) of Proposed Sec. 811.119 Was Vague
    
        Comment. One of the commenters believed that paragraph (e) of 
    proposed Sec. 811.119 was vague. For example, paragraph (e)(2) 
    prohibited the repayment term of the refunding bonds from exceeding the 
    remaining term of the ``project mortgage, or in the absence of a 
    mortgage, the remaining term of the Housing Assistance Payments 
    Contract (the `HAPC').'' The commenter wondered whether HUD meant an 
    insured or uninsured mortgage. The commenter also believed that 
    paragraph (e)(3) required further clarification on servicing and 
    trustee fees. The proposed rule limited these fees to ``[a]n amount not 
    to exceed one-fourth of one percent annually of the bonds.'' The 
    commenter felt it would be ``advisable to allow for the calculation of 
    fees to be based on the outstanding mortgage balance.''
        HUD Response. HUD has amended the final rule to provide the 
    clarification requested by the commenter. The final rule clarifies that 
    the term ``project mortgage'' refers to an insured mortgage. Further, 
    the final rule specifies that the limit on servicing and trustee fees 
    is based on the outstanding principal balance of the bonds.
    
    Definition of McKinney Act Project Was Vague
    
        Paragraph (f) of proposed Sec. 811.119 concerned ``projects placed 
    under HAPC between January 1, 1979 and December 31, 1984 (otherwise 
    known as `McKinney Act Projects').'' One commenter believed that HUD 
    should clarify what constitutes a ``McKinney Act Project.'' The 
    commenter pointed out that HUD has construed this ambiguous statutory 
    language to cover projects for which the date of HAPC execution fell 
    within January 1, 1979 and December 31, 1984, as distinguished from the 
    effective date of the HAPC, or conceivably the AHAP date. The commenter 
    suggested that the final rule make this construction explicit.
        HUD Response. HUD has adopted the recommendation made by the 
    commenter. The final rule defines a ``McKinney Act Project'' as a 
    project ``for which the Agreement to enter into the HAPC was executed 
    between January 1, 1979 and December 31, 1984.''
    
    Paragraph (g) of Proposed Sec. 811.119 Ambiguous in the Case of HAPCs 
    With Renewable Five-Year Terms
    
        Comment. Paragraph (g) of proposed Sec. 811.119 conditioned the 
    release of reserves upon the project owner's agreement ``to extend low 
    income tenant occupancy for ten years after expiration of the HAPC.'' 
    One commenter believed that this provision could be ambiguous in the 
    case of a HAPC with renewable five-year terms. The commenter wondered 
    whether paragraph (g) meant ten years after HUD's or the Contract 
    Administrator's first right to terminate, ten years after the owner's 
    first opt-out date without HUD consent, or ten years after the budget 
    authority term.
        HUD Response. HUD has revised the final rule to specify that the 
    use agreement must extend for ten years past the owner's first opt-out 
    date.
    
    Payments to Providers of Professional Services
    
        Comment. One of the commenters felt there was some ambiguity in the 
    relationship between the last two sentences of paragraph (h) of 
    proposed Sec. 811.119. The penultimate sentence
    
    [[Page 14460]]
    authorized homeownership counseling as an eligible use of savings. 
    However, the last sentence prohibited payments to third party 
    consultants.
        HUD Response. This final rule permits fees to providers of 
    professional services required in an agency's McKinney Act program.
    
    C. Clarifying Amendment to Sec. 811.105
    
        This rule also makes a clarifying technical amendment to paragraph 
    (b) of Sec. 811.105. Under Sec. 811.102, the term ``Agency or 
    Instrumentality PHA'' is defined as an ``organization that is 
    authorized to engage or assist in the development or operation of low-
    income housing.'' However, paragraph (b) of Sec. 811.105 requires that 
    the ``charter or other organic document establishing the [Agency or 
    Instrumentality PHA] shall limit the activities to be performed * * * 
    to carrying out Section 8 projects.''
        Paragraph (b) of Sec. 811.105 unnecessarily restricts the 
    activities which may be undertaken by an Agency or Instrumentality PHA. 
    This limitation does not conform to the broad language of the 
    definition in Sec. 811.102. Further, Sec. 811.105 does not comply with 
    HUD's goal of expanding low-income housing opportunities through the 
    part 811 program regulations. The current language also requires that 
    HUD waive Sec. 811.105 each time an Agency or Instrumentality PHA seeks 
    to undertake an activity which is not a Section 8 project. The 
    imposition of this additional administrative barrier is contrary to the 
    goals of the President's reinvention Initiative, which calls for the 
    elimination of unnecessary bureaucratic delays.
        This final rule amends paragraph (b) of Sec. 811.105 to provide 
    that Agency and Instrumentality PHAs may carry out Section 8 projects 
    and ``other low-income housing projects approved by the Secretary.'' 
    This change will conform Sec. 811.105 to HUD's original intention in 
    the issuance of the part 811 regulations.
    
    II. Justification for Final Rulemaking
    
        HUD generally publishes a rule for public comment before issuing a 
    rule for effect, in accordance with its own regulations on rulemaking 
    in 24 CFR part 10. However, part 10 provides for exceptions to the 
    general rule if the agency finds good cause to omit advance notice and 
    public participation. The good cause requirement is satisfied when 
    prior public procedure is ``impracticable, unnecessary, or contrary to 
    the public interest'' (24 CFR 10.1). HUD finds that in this case it is 
    unnecessary to solicit public comment.
        HUD has already solicited public comment for those amendments to 
    part 811 described in the April 20, 1995 proposed rule. The preamble to 
    this final rule contains a discussion of the comments received and of 
    HUD's responses to them. The streamlining amendments made in conformity 
    with the President's regulatory reinvention initiative do not affect or 
    establish policy. These amendments merely remove regulatory provisions 
    which are redundant of statutes or for which codification in the Code 
    of Federal Regulations is unnecessary. Further, it is unnecessary for 
    HUD to solicit comment on the clarifying amendment to Sec. 811.105. 
    This revision merely removes an administrative barrier which currently 
    limits the flexibility of program applicants. The change will eliminate 
    the necessity for waivers and will conform the regulations to HUD's 
    original intent in issuing 24 CFR part 811.
    
    III. Other Matters
    
    A. Regulatory Flexibility Act
    
        The Secretary, in accordance with the Regulatory Flexibility Act (5 
    U.S.C. 605(b)), has reviewed and approved this final rule, and in so 
    doing certifies that this rule will not have a significant economic 
    impact on a substantial number of small entities. This rule merely 
    streamlines regulations by removing unnecessary provisions. The rule 
    will have no adverse or disproportionate economic impact on small 
    businesses.
    
    B. Environmental Impact
    
        This rulemaking does not have an environmental impact. This 
    rulemaking simply amends an existing regulation by consolidating and 
    streamlining provisions and does not alter the environmental effect of 
    the regulations being amended. A Finding of No Significant Impact with 
    respect to the environment was made in accordance with HUD regulations 
    in 24 CFR part 50 that implement section 102(2)(C) of the National 
    Environmental Policy Act of 1969 (42 U.S.C. 4332) at the time of 
    development of regulations implementing the Tax Exempt Obligations 
    Program. That finding remains applicable to this rule, and is available 
    for public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
    Office of the Rules Docket Clerk, Office of General Counsel, Room 
    10276, Department of Housing and Urban Development, 451 Seventh Street, 
    SW, Washington, DC.
    
    C. Executive Order 12612, Federalism
    
        The General Counsel, as the Designated Official under section 6(a) 
    of Executive Order 12612, Federalism, has determined that 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. No programmatic or policy changes 
    will result from this rule that would affect the relationship between 
    the Federal Government and State and local governments.
    
    D. Executive Order 12606, The Family
    
        The General Counsel, as the Designated Official under Executive 
    Order 12606, The Family, has determined that this rule will not have 
    the potential for significant impact on family formation, maintenance, 
    or 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.
    
    List of Subjects in 24 CFR Part 811
    
        Public housing, Securities, Taxes.
    
        Accordingly, 24 CFR part 811 is amended to read as follows:
    
    PART 811--TAX EXEMPTION OF OBLIGATIONS OF PUBLIC HOUSING AGENCIES 
    AND RELATED AMENDMENTS
    
        1. The authority citation for 24 CFR part 811 continues to read as 
    follows:
    
        Authority: 42 U.S.C. 1437, 1437a, 1437c, 1437f, and 3535(d).
    
    Subpart A--[Removed]
    
        2. The heading for subpart A is removed.
        3. Section 811.101 is revised to read as follows:
    
    
    Sec. 811.101  Purpose and scope.
    
        (a) The purpose of this part is to provide a basis for determining 
    tax exemption of obligations issued by public housing agencies pursuant 
    to Section 11(b) of the United States Housing Act of 1937 (42 U.S.C. 
    1437i) to refund bonds for Section 8 new construction or substantial 
    rehabilitation projects.
        (b) This part does not apply to tax exemption pursuant to Section 
    11(b) for low-income housing projects developed pursuant to 24 CFR 
    parts 950 and 941.
        4. Section 811.102 is amended by:
        a. Removing the paragraph designations;
        
    [[Page 14461]]
    
        b. Removing the definitions of ``Capitalized Interest During 
    Construction'' and ``Development Cost''; and
        c. Revising the definition of ``Obligations'' to read as follows:
    
    
    Sec. 811.102  Definitions.
    
    * * * * *
        Obligations. Bonds or other evidence of indebtedness that are 
    issued to provide permanent financing of a low-income housing project. 
    Pursuant to Section 319(b) of the Housing and Community Development Act 
    of 1974, the term obligation shall not include any obligation secured 
    by a mortgage insured under Section 221(d)(3) of the National Housing 
    Act (12 U.S.C. 1715l) and issued by a public agency as mortgagor in 
    connection with the financing of a project assisted under Section 8 of 
    the Act. This exclusion does not apply to a public agency as mortgagee.
    * * * * *
        5. Section 811.105 is amended by revising the first sentence in 
    paragraph (b) to read as follows:
    
    
    Sec. 811.105  Approval of agency or instrumentality PHA.
    
    * * * * *
        (b) The charter or other organic document establishing the 
    applicant shall limit the activities to be performed by the applicant, 
    and funds and assets connected therewith, to carrying out or assisting 
    in carrying out Section 8 projects and other low-income housing 
    projects approved by the Secretary. * * *
    * * * * *
    
    
    Sec. 811.106  [Amended]
    
        6. Section 811.106 is amended by revising the section heading; by 
    removing paragraphs (a), (b), and (c); and by removing the paragraph 
    designation to paragraph (d), to read as follows:
    
    
    Sec. 811.106 Default under the contract.
    
    * * * * *
        7. Section 811.107 is revised to read as follows:
    
    
    Sec. 811.107  Financing documents and data.
    
        (a) The financing agency shall assure that any official statement 
    or prospectus or other disclosure statement prepared in connection with 
    the financing shall state on the first page that:
        (1) In addition to any security cited in the statement, the bonds 
    may be secured by a pledge of an Annual Contributions Contract and a 
    Housing Assistance Payments Contract, executed by HUD;
        (2) The faith of the United States is solemnly pledged to the 
    payment of annual contributions pursuant to the Annual Contributions 
    Contact or to the payment of housing assistance payments pursuant to 
    the Housing Assistance Payments Contract, and funds have been obligated 
    by HUD for such payments;
        (3) Except as provided in any contract of mortgage insurance, the 
    bonds are not insured by HUD;
        (4) The bonds are not to be construed as a debt or indebtedness of 
    HUD or the United States, and payment of the bonds is not guaranteed by 
    the United States;
        (5) Nothing in the text of a disclosure statement is to be 
    interpreted to conflict with the above; and
        (6) HUD has not reviewed or approved and bears no responsibility 
    for the content of disclosure statements.
        (b) The financing agency shall retain in its files the 
    documentation relating to the financing. A copy of this documentation 
    shall be furnished to HUD upon request.
        8. Section 811.108 is revised to read as follows:
    
    
    Sec. 811.108  Debt service reserve.
    
        (a) FHA-Insured projects. (1) The debt service reserve shall be 
    invested and the income used to pay principal and interest on that 
    portion of the obligations which is attributable to the funding of the 
    debt service reserve. Any excess investment income shall be added to 
    the debt service reserve. In the event such investment income is 
    insufficient, surplus cash or residual receipts, to the extent approved 
    by the field office, may be used to pay such principal and interest 
    costs.
        (2) The debt service reserve and its investment income shall be 
    available only for the purpose of paying principal or interest on the 
    obligations. The use of the debt service reserve for this purpose shall 
    not be a cure for any failure by the owner to make required payments.
        (3) Upon full payment of the principal and interest on the 
    obligations (including that portion of the obligations attributable to 
    the funding of the debt service reserve), any funds remaining in the 
    debt service reserve shall be remitted to HUD.
        (b) Non-FHA-insured projects. (1) Investment income from the debt 
    service reserve, up to the amount required for debt service on the 
    bonds attributable to the debt service reserve, shall be credited 
    toward the owner's debt service payment. Any excess investment income 
    shall be added to and become part of the debt service reserve.
        (2) The debt service reserve and investment income thereon shall be 
    available only for the purpose of paying principal or interest on the 
    obligations. The use of the debt service reserve for this purpose shall 
    not be a cure for any failure by the owner to make required payments.
        (3) Upon full payment of the principal and interest on the 
    obligations (including that portion of the obligations attributable to 
    the funding of the debt service reserve), any funds remaining in the 
    debt service reserve shall be remitted to HUD.
    
    
    Secs. 811.109 through 811.113  [Removed]
    
        9. Sections 811.109 through 811.113 are removed.
    
    
    Sec. 811.114  [Redesignated]
    
        10. Section 811.114 is redesignated as Sec. 811.109 and newly 
    redesignated Sec. 811.109 is amended by removing paragraphs (a) through 
    (c), and by removing the paragraph designation to paragraph (d).
    
    
    Secs. 811.115 through 811.118  [Removed]
    
        11. Sections 811.115 through 811.118 are removed.
        12. Section 811.110 is added to read as follows:
    
    
    Sec. 811.110  Refunding of obligations issued to finance Section 8 
    projects.
    
        (a) This section states the terms and conditions under which HUD 
    will approve refunding or defeasance of certain outstanding debt 
    obligations which financed new construction or substantial 
    rehabilitation of Section 8 projects, including fully and partially 
    assisted projects.
        (b) In the case of bonds issued by State Agencies qualified under 
    24 CFR part 883 to refund bonds which financed projects assisted 
    pursuant to 24 CFR part 883, HUD requires compliance with the 
    prohibition on duplicative fees contained in 24 CFR part 883 and with 
    paragraphs (f) and (h) of this section, as applicable to the projects 
    to be refunded.
        (c) No agency shall issue obligations to refund outstanding 11(b) 
    obligations until the Office of the Assistant Secretary for Housing 
    sends the financing agency a Notification of Tax Exemption based on 
    approval of the proposed refunding's terms and conditions as conforming 
    to this part's requirements, including continued operation of the 
    project as housing for low-income families, and where possible, 
    reduction of Section 8 assistance payments through lower contract rents 
    or an equivalent cash rebate to the U.S. Treasury (i.e. Trustee Sweep). 
    The agency shall submit such documentation as HUD determines is 
    necessary for review and approval of the refunding transaction. Upon 
    conclusion
    
    [[Page 14462]]
    of the closing of refunding bonds, written confirmation must be sent to 
    the Office of Multifamily Housing by bond counsel, or other acceptable 
    closing participant, including a schedule of the specific amount of 
    savings in Section 8 assistance where applicable, CUSIP number 
    information, and a final statement of Sources and Uses.
        (d) (1) HUD approval of the terms and conditions of a Section 8 
    refunding proposal requires evaluation by HUD's Office of Multifamily 
    Housing of the reasonableness of the terms of the Agency's proposed 
    financing plan, including projected reductions in project debt service 
    where warranted by market conditions and bond yields. This evaluation 
    shall determine that the proposed amount of refunding obligations is 
    the amount needed to: pay off outstanding bonds; fund a debt service 
    reserve to the extent required by credit enhancers or bond rating 
    agencies, or bond underwriters in the case of unrated refunding bonds; 
    pay credit enhancement fees acceptable to HUD; and pay transaction 
    costs as approved by HUD according to a sliding scale ceiling based on 
    par amount of refunding bond principal. Exceptions may be approved by 
    HUD, if consistent with applicable statutes, in the event that an 
    additional issue amount is required for project purposes.
        (2) The stated maturity of the refunding bonds may not exceed by 
    more than one year the remaining term of the project mortgage, or in 
    the case of an uninsured loan, the later of expiration date of the 
    Housing Assistance Payments Contract (the ``HAPC'') or final maturity 
    of the refunded bonds.
        (3) The bond yield may not exceed by more than 75 basis points the 
    20 Bond General Obligation Index published by the Daily Bond Buyer for 
    the week immediately preceding the sale of the bonds, except as 
    otherwise approved by HUD. An amount not to exceed one-fourth of one 
    percent annually of the bonds' outstanding principal balance may be 
    allowed for servicing and trustee fees.
        (e) For projects for which the Agreement to enter into the HAPC was 
    executed between January 1, 1979, and December 31, 1984 (otherwise 
    known as ``McKinney Act Projects''), for which a State or local agency 
    initiates a refunding, the Secretary shall make available to an 
    eligible issuing agency 50 percent of the Section 8 savings of a 
    refunding, as determined by HUD on a project-by-project basis, to be 
    used by the agency in accordance with the terms of a Refunding 
    Agreement executed by the Agency and HUD which incorporates the 
    Agency's Housing Plan for use of savings to provide decent, safe, and 
    sanitary housing for very low-income households. In determining the 
    amount of savings recaptured on a project-by-project basis, as 
    authorized by section 1012(b) of the McKinney Act, HUD will take into 
    account the physical condition of the projects participating in the 
    refunding which generate the McKinney Act savings and, if necessary, 
    HUD will finance in refunding bond debt service correction of existing 
    deficiencies which cannot be funded completely by existing project 
    replacement reserves or by a portion of reserves released from the 
    refunded bond's indenture. For McKinney Act refundings of projects 
    which did not receive a Financing Adjustment Factor (``FAF''), HUD will 
    allow up to 50 percent of debt service savings to be allocated to the 
    project account; in which case, the remainder will be shared equally by 
    the Agency and the U.S. Treasury.
        (f) For refundings of Section 8 projects other than McKinney Act 
    Projects, and for all transactions which substitute collateral for, but 
    do not redeem, outstanding obligations, and for which a HUD approval is 
    needed (such as assignment of a HAPC or insured mortgage note), the 
    Office of Multifamily Housing in consultation with HUD Field Office 
    Counsel will review the HAPC, the Trust Indenture for the outstanding 
    obligations, applicable HUD regulations, and reasonableness of proposed 
    financing terms. In particular, HUD review should be obtained for the 
    release of reserves from the trust indenture of the outstanding 11(b) 
    bonds that are being refunded, defeased, or pre-paid. A proposal to 
    distribute to a non-Federal entity the benefits of a refinancing, such 
    as debt service savings and/or balances in reserves held under the 
    original Trust Indenture, should be referred to the Office of 
    Multifamily Housing for further review. In proposals submitted for HUD 
    approval, HUD will consent to release reserves, as provided by the 
    Trust Indenture, in an amount remaining after correction of project 
    physical deficiencies and/or replenishment of replacement reserves, 
    where needed. In the case of a refunding of 11(b) bonds by a public 
    agency issuer which is the owner of the project and is entitled to 
    reserves held under the Trust Indenture, HUD requires execution by the 
    project owner of a use agreement, and amendment of a regulatory 
    agreement, if applicable, to extend low-income tenant occupancy for ten 
    years after expiration of the original HAPC term. In the case of HAP 
    contracts with renewable 5-year terms, the Use Agreement shall extend 
    for 10 years after the project owners first opt-out date. The Use 
    Agreement may also be required of private entity owners, unless the 
    refunding is incidental to a transfer of project ownership or a 
    transaction which provides a substantial public benefit, as determined 
    by the Office of Multifamily Housing. Proposed use of benefits shall be 
    consistent with applicable appropriations law, the HAPC, and other 
    requirements applicable to the original project financing, and the 
    proposed financing terms must be reasonable in relation to bond market 
    yields and transaction fees, as approved by the HUD Office of 
    Multifamily Housing.
        (g) Agencies shall have wide latitude in the design of specific 
    delivery vehicles for use of McKinney Act savings, subject to HUD audit 
    of each Agency's performance in serving the targeted income eligible 
    population. Savings may be used for shelter costs of providing housing, 
    rental, or owner-occupied, to very low-income households through new 
    construction, rehabilitation, repairs, and acquisition with or without 
    rehab, including assistance to very low-income units in mixed-income 
    developments. These include programs designed to assist in obtaining 
    shelter, such as rent or homeownership subsidies. Self-sufficiency 
    services in support of very low-income housing are also eligible, and 
    may include, but are not limited to, homeownership counseling, 
    additional security measures in high-crime areas, construction job 
    training for residents' repair of housing units occupied by very low-
    income families, and empowerment activities designed to support 
    formation and growth of resident entities. Except for the cost of 
    providing third-party program audit reports to HUD, eligible costs 
    exclude consultant fees or reimbursement of Agency staff expenses, but 
    may include fees for professional services required in the Agency's 
    McKinney Act programs of assistance to very low-income families. Unless 
    otherwise specified by HUD in a McKinney Agreement, savings shall be 
    subject to the above use requirements for 10 years from the date of 
    receipt of the savings.
        (h) Refunding bonds, including interest thereon, approved under 
    this Section shall be exempt from all taxation now or hereafter imposed 
    by the United States, and the notification of approval of tax exemption 
    shall not be subject to revocation by HUD. Whether refunding bonds 
    approved under this section meet the requirements of
    
    [[Page 14463]]
    Section 103 or any other provisions of the Internal Revenue Code is not 
    within the responsibilities of HUD to determine. Such bonds shall be 
    prepaid during the HAPC term only under such conditions as HUD shall 
    require.
    
        Dated: March 27, 1996.
    Nicolas P. Retsinas,
    Assistant Secretary for Housing--Federal Housing Commissioner.
    [FR Doc. 96-7949 Filed 3-29-96; 8:45 am]
    BILLING CODE 4210-27-P
    
    

Document Information

Effective Date:
5/1/1996
Published:
04/01/1996
Department:
Housing and Urban Development Department
Entry Type:
Rule
Action:
Final rule.
Document Number:
96-7949
Dates:
May 1, 1996.
Pages:
14456-14463 (8 pages)
Docket Numbers:
Docket No. FR-3985-F-01
PDF File:
96-7949.pdf
CFR: (11)
24 CFR 811.106(d)
24 CFR 811.119,1
24 CFR 811.101
24 CFR 811.102
24 CFR 811.105
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