[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29835]
[[Page Unknown]]
[Federal Register: December 5, 1994]
_______________________________________________________________________
Part VI
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
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24 CFR Parts 246 and 266
Housing Finance Agency Risk-Sharing Program for Insured Affordable
Multifamily Project Loans; Final Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Parts 246 and 266
[Docket No. R-94-1685; FR-3383-F-02]
RIN 2502-AF94
Housing Finance Agency Risk-Sharing Program for Insured
Affordable Multifamily Project Loans
AGENCY: Office of Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: On December 3, 1993, the Department published an interim rule
which introduced a new mortgage insurance program authorized by the
Housing and Community Development Act of 1992. The program is designed
to increase the supply of affordable multifamily units by allowing
State and local housing finance agencies (HFAs) to originate and
service mortgage loans that are fully insured by HUD's Federal Housing
Administration. Under the program, participating HFAs are required to
share in the risk associated with monetary losses that may be incurred
as a consequence of any loan defaults. Under the interim rule, 33 HFAs
were approved to participate in the program. This rule finalizes the
standards and procedures of the interim rule after taking into account
the concerns expressed, and the recommendations made, during the rule's
public comment period.
DATES: Effective date: January 4, 1995.
FOR FURTHER INFORMATION CONTACT: For questions concerning Subparts A-E,
contact Jane Luton, Acting Director, Policies and Procedures Division,
Office of Insured Multifamily Housing Development, room 6116, (202)
708-2556; Subpart F, contact Albert B. Sullivan, Director, Office of
Multifamily Housing Management, room 6160, (202) 708-3730; Subpart G,
contact John Stahl, Director Multifamily Accounting and Servicing
Division, room 6258, (202) 708-0223; Department of Housing and Urban
Development 451 Seventh Street SW., Washington, DC 20410. Hearing- and
speech-impaired persons may call (202) 708-4594. (The above listed
telephone numbers are not toll-free.)
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The information collection requirements contained in this rule have
been approved by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520), and have been
assigned OMB control number 2502-0500.
I. Introduction
Section 542(c) of the Housing and Community Development Act of 1992
(Pub. L. 102-550, approved October 28, 1992) (1992 Act) as amended by
the Multifamily Housing Property Disposition Reform Act of 1994 (Pub.
L. 103-233, approved April 11, 1994) (1994 Act) authorizes the HUD
Secretary to enter into risk-sharing agreements with qualified State or
local Housing Finance Agencies (HFAs) to test the effectiveness of
certain Federal mortgage loan credit enhancements. (Section 542(c) is a
part of subtitle C, title V of the 1992 Act. Section 541 provides that
subtitle C, which consists of sections 541 through 544, may be cited as
the ``Multifamily Housing Finance Improvement Act.'' This rule
implements only section 542(c).) The purpose of section 542(c) is to
increase the supply of affordable multifamily housing through
partnerships with housing finance agencies (HFAs) where the Department
provides full insurance under a risk-sharing agreement to test the
effectiveness of providing new forms of Federal credit enhancement for
multifamily loans, an intended benefit of which would be increased
credit ratings on bond-financed mortgage loans. HUD envisions that,
under this program, HFAs will have greater access to capital markets
and be able to provide affordable housing in a manner that is both
timely and efficient.
The term ``partnership'' as used in the preceding paragraph and in
section 542 is used in the generic sense and not in the technical legal
sense. It is not intended to impose any partnership liability on HUD in
the event of negligence or other actionable misconduct by an HFA.
The basic structure of the program allows HFAs to carry out certain
HUD functions under the program, including the assumption of loan
management and property disposition responsibilities for defaulted
loans. In the event of a loan default, the HFA is required to share
with HUD in any loss arising as a consequence of the loan default.
Section 542(c) prescribes certain requirements for this program,
and also authorizes the Secretary to issue such regulations as may be
necessary to carry out the program.
II. Legislative Background
The 1992 Act contains definitions for what constitutes
``multifamily housing'' (section 544(1)), a ``qualified'' HFA (section
544(2)), and ``affordable housing'' (section 542(c)(7)). These
definitions have been incorporated into the regulation at 24 CFR 266.5.
In addition, section 542(c) prescribes a number of requirements for
the program, which may be summarized as follows:
General: HUD is required to execute risk-sharing agreements with
qualified HFAs.
Mortgage insurance: Risk-sharing agreements must provide for HUD to
fully insure mortgage loans originated by or through HFAs, and for
reimbursement to HUD by HFAs for a portion of any losses incurred on
the insured loans.
Risk apportionment: The percentage of loss assumed by HUD and the
HFA (risk apportionment) must be specified in the risk-sharing
agreement between HUD and the HFA. HUD intends to execute a single
agreement with each HFA, but the agreement will recognize that the risk
apportionment may vary among project loans that are originated by a
single HFA. The loan loss percentage for a particular project will be
reflected in that project's underlying loan documentation and in an
addendum to the risk-sharing agreement.
Reimbursement capacity: The application for participation in this
program must demonstrate that the HFA has the financial capacity to
fulfill its reimbursement obligations.
Underwriting standards: A qualified HFA that agrees to accept 50
percent or more of the risk of loss on a loan may employ its own
underwriting standards, loan terms and conditions. However, where HUD
retains more than 50 percent of the risk, it may impose additional
underwriting standards, and loan terms and conditions.
Other requirements: Section 542(c) also requires HUD to establish a
schedule for mortgage insurance premiums that reflects the risk
apportionment for the loan. Lower or nominal premiums will apply to
HFAs that assume a greater share of the risk of loss. In addition, HUD
is prohibited from applying ``identity of interest'' provisions in
risk-sharing agreements (section 542(c)(5)); and GNMA is prohibited
from issuing securities for loans insured under the program (section
542(c)(6)).
Finally, HUD may issue commitments for mortgages that, in the
aggregate, do not exceed 30,000 units between now and September 30,
1995 (section 542(c)(4)). The Congress may expand the program after
that date, but no determination will be made until the Secretary has
submitted reports (including any recommendations for legislation) to
the Congress, as required under section 542(d)(3). (See, section
542(c)(4).)
III. The Regulation
The legislation authorizing this program prescribes certain
requirements in relation to eligibility and risk apportionment. As a
matter of policy, in its formulation of this regulation, HUD has
decided to afford qualified HFAs very broad responsibility for the
administration of the program, although HUD will monitor HFAs'
activities. In addition to underwriting and processing loans, HFAs will
service loans, provide management oversight of the projects, and
dispose of properties subject to mortgages that fall into default. The
regulation provides for sanctions in the event that an HFA is found to
be in noncompliance with the requirements of the regulation.
It is to be noted that for this program the Congress, in section
542(c)(2)(E) of the 1992 Act, has assigned to qualified HFAs the
responsibility for using their own ``underwriting standards and loan
terms and conditions for purposes of loans to be insured under this
subsection'' without further review by the Secretary, except that the
Secretary may impose ``additional underwriting criteria and loan terms
and conditions'' in cases where the Secretary retains more than 50
percent of the risk of loss. Further, Congress has authorized HUD
through section 542(c)(8) to issue such regulations as may be necessary
to carry out this risk-sharing program.
In cases involving ``insurance upon completion,'' HUD will be
responsible for final endorsement of the mortgage note for insurance.
In cases involving ``insurance of advances,'' HUD will be responsible
for the initial and final endorsement of the mortgage note for
insurance in a maximum amount set forth on the note. The amount of the
insurance, however, will be only to the extent of advances approved
during the construction process. The Department has decided to delegate
to HFAs the responsibilities for the insurance of advances and cost
certification functions. These functions are relevant to the insurance
process and are carried out by HUD in full insurance programs under the
National Housing Act.
Since the functions proposed for delegation are integral to the
insurance process, the Department has determined that the delegation
would be legally sustainable if HUD retains the authority to make
adjustments to the insured mortgage amount during the period up to and
including the time of final endorsement, which it has done in
Sec. 266.417 of the rule.
HUD's reservation of final authority to adjust the insured mortgage
amount is not meant to suggest that HUD will, as a matter of policy,
routinely review all decisions of HFAs about the insurance of advances
and cost certification processes. For example, the Commissioner could
review the insurance of advances and cost certification processes on a
random basis and, up to and including the time of final endorsement,
correct errors by adjusting the amount of mortgage insurance. Examples
of such reviews of the insurance of advances process could involve a
HUD evaluation of an HFA's approval of advances to determine whether
such approval is consistent with construction progress. The Department
could assess whether other mortgageable items were supported with
proper bills and/or receipts before funds were approved. The Department
also could consider whether the loan remains in balance by comparison
of actual disbursements against a project completion schedule and other
loan closing documents. Unless additional requirements are imposed by
HUD because it insures more than 50 percent of the risk, the review at
cost certification would only involve an assessment that the maximum
insurable mortgage amount is supported by costs incurred and approved
for the project by the HFA. By this reservation of authority to adjust
the mortgage amount, HUD also is reducing any adverse effect from fees,
which are linked to mortgage amount, that the HFAs may earn in
connection with the project loan.
Notwithstanding the retention by HUD of ultimate authority to
adjust the insured mortgage amount, the HFAs still would be carrying
out an important function in connection with the insurance of advances
and cost certification processes. The delegation of this function is
consistent with Congress' view in section 542(a) of the 1992 Act that
the relationship between HUD and HFAs is to be a partnership and that
major functions are to be the responsibilities of the HFAs as evidenced
by the direct assignment of underwriting functions in section
542(c)(2)(E).
The regulation will be contained in a new part 266 in title 24 of
the Code of Federal Regulations, which consists of six subparts. A
brief summary of each subpart follows.
Subpart A--General Provisions
Subpart A sets forth the purpose and scope of the regulation. It
cites the legislative background, and indicates HUD's policy decision
to vest broad responsibility for the conduct of the program in
participating HFAs. Subpart A also includes definitions of terms used
throughout the regulation.
Section 266.10, Allocations of Authority and Credit Subsidy, states
that HUD will issue notices in the Federal Register inviting State and
local HFAs to apply for participation in the program. Earlier
provisions contained in the interim rule relating to planned HUD
allocations and state-wide caps on the amount of assistance are deleted
in this final rule. Those topics instead will be covered in the Federal
Register Notice.
Section 266.15 describes key components that must be included in
the risk-sharing agreement executed between HUD and the HFA. Among
other things, the risk-sharing agreement will reflect the agreed upon
risk apportionment; the number of units allocated to the HFA;
description (i.e., incorporation by reference) of the HFA's standards
and procedures for underwriting and servicing of loans; and a list of
required HFA certifications designed to assure its proper performance
under the program. (The list of certifications is not comprehensive and
is subject to change as circumstances and experience dictate.)
Appraisals of all properties must be performed by Certified General
Appraisers, licensed in the State in which the property is located, and
must be completed in accordance with the Uniform Standards of
Professional Appraisal Practice. In addition, 24 CFR part 267 (see
final rule published October 3, 1994 at 59 FR 50456), establishes a
reporting requirement for the gender and minority classification for
appraisers. Compliance with this reporting requirement will be included
in the risk sharing agreement.
Subpart A contains sections indicating that future regulatory
amendments will not impair previously recognized contract rights and
that HUD has no obligation to recognize or deal with parties other than
the HFA, in the latter's role as mortgagee of record under a contract
of mortgage insurance. Section 266.30 provides that the provisions of
24 CFR part 246 (Local Rent Control) do not apply to this program. The
Department will not be utilizing its constitutional authority to
preempt local rent control laws for projects with mortgages insured
under part 266. Representatives of HFAs have advised the Department
that many HFAs, both State and local, already have such authority and,
therefore, the absence of access to the Federal preemption authority
would in no way restrict or interfere with the manner in which HFAs
currently operate. Since the program involves risk to both HFAs and the
Federal government, the Federal interest will be adequately protected
by HFAs who use their preemption authority to protect their own
interests.
The interim rule also contains a general waiver provision in
Sec. 266.35. Under that section, the Commissioner may, upon a finding
of good cause, waive any provision in part 266 that is not a statutory
requirement, except that the Commissioner will not consider waivers of
financial requirements for participating HFAs or underwriting standards
required by HUD for Level II participants. All waivers granted under
Sec. 266.35 will be in writing and will be published in the Federal
Register, as required by section 7(q) of the Department of Housing and
Development Act (42 U.S.C. 3535(q)).
Subpart B--Agency Requirements
Subpart B describes the criteria HFAs must meet to qualify under
the program. It became evident during HUD's review of the applications
for participation in the pilot program that there was some confusion as
to the interpretation of the term in section 544(2)(B) which defines a
qualified housing agency as one that ``receives a rating of `A' for its
general obligation bonds.'' Some agencies interpreted this to mean that
an ``A'' rating on bonds financing a particular project met the
definition.
This interpretation would be inconsistent with sections 544(2)(A)
and (2)(C), which require evidence of a strong financial capacity on
the part of the agency. Such a construction would permit an HFA with
one strong bond issue and several other issuances with ratings below
``A'' to claim that they met the qualified agency criteria. The
Department does not construe this to be in accordance with the intent
of Congress. In this final rule, HUD interprets the phrase ``general
obligation bonds'' to mean the rating on bonds issued by the HFA based
on the strength of the general obligation of the agency itself. Like
the ``top-tier'' rating, a rating of ``A'' on general obligation bonds
is provided by nationally recognized rating agencies only after
thorough review and analysis of an agency's financial, administrative
and operational capacity. This rating based on the strength of an
agency's general obligation pertains to issuance of bonds and other
debt instruments that are backed by income/resources from unencumbered
fund balances rather than by cash flow from a particular project or
projects.
Two levels of approval--Level I and Level II--are described in
Sec. 266.100. The primary distinction between the two levels is in the
level of risk apportionment an HFA agrees to undertake. HFAs
participating at Level I are those that will assume 50 percent or more
of the risk associated with a loan default. Level II participants will
assume 10 or 25 percent of the risk.
The regulation requires any applicant HFA (whether it selects
either Level I or Level II, or both Level I and Level II approval) to
meet eligibility standards and application requirements. Eligibility is
predicated on an HFA's demonstrable high financial capacity and/or
experience and capability in the field of multifamily housing.
Application requirements are designed to elicit the HFA's (legal and
other) capacity to function in the program.
Subpart B also sets forth minimum reserve requirements that must be
met by participating HFAs (Sec. 266.110). An HFA is required to
maintain its basic sound financial capacity at all times. An HFA that
qualifies for the program under the criteria in section 544(2) (A) or
(B) of the 1992 Act (i.e., is designated ``top-tier, or the equivalent
thereof'' or receives an overall rating of ``A'' on its general
obligation bonds from a nationally recognized rating agency) will not
be required to maintain additional reserves unless determined necessary
by the Commissioner. ``Other agencies,'' i.e., those that qualify based
on other criteria, will be required to establish minimum reserve
requirements that are set forth in Sec. 266.110(b). Any HFA that
initially qualifies under, but later loses, the ``top-tier or
equivalent'' designation or an overall rating of ``A'' on its general
obligation bonds will be required to immediately establish and maintain
the reserve amounts required for ``other agencies'' by Sec. 266.110(b).
The final rule clarifies two requirements set forth in the interim
rule. First, it makes clear (Sec. 266.105(b)(1)) that there must be
documentation satisfactory to the Commissioner that the HFA meets the
qualification requirements of Sec. 266.100(a). This documentation must
be submitted as a part of its application. Second, it provides that any
dedicated account required under Sec. 266.110(b) must be established
prior to execution of any Risk Sharing Agreement.
Sections 266.115-266.125 describe the monitoring and evaluation
activities and requirements of the program, the kinds of HFA conduct
that could give rise to sanctions by the Department, and the nature of
sanctions that HUD may impose. The rule provides HFAs the right to an
informal hearing where sanctions have been applied.
In this final rule, the language of Sec. 266.15(b)(5) relating to
the availability of HFA financial and other records for HUD inspection
is revised to reflect the statutory phrasing enacted as section
307(b)(2) of the 1994 Act.
Finally, Sec. 266.130 provides that HFAs may obtain reinsurance for
their portion of the risk and describes the conditions under which
reinsurance will be permitted.
Subpart C--Program Requirements
Subpart C contains program requirements such as project eligibility
and fair housing and equal opportunity requirements. It also describes
review functions to be retained by HUD as well as those delegated to
HFAs.
Project size and affordability requirements in the rule follow the
authorizing legislation. Subject to requirements in the regulation,
mortgage insurance will be available under this program for project new
construction and substantial rehabilitation, and for existing projects
without substantial rehabilitation. Similarly, projects receiving
section 8 or other rental subsidies are eligible for insurance under
the program, subject to limitations on the rent levels. These limits
are designed to ensure that project rents are clearly adequate to
support the mortgage. Other eligible projects include single room
occupancy (SRO) projects, board and care and assisted living
facilities, and projects designed for persons 62 years of age or more.
In response to providers of affordable housing, mobile home parks
(exclusive of the mobile homes) have been added as an eligible housing
type. This will permit HFAs to provide this important type of
affordable housing through the Risk-Sharing Program. Transient housing,
hotels, nursing homes and intermediate care facilities, and projects
located in military impact areas are ineligible for insurance under
this program.
The final rule makes clear that, for purposes of this pilot
program, cooperative properties are considered rental housing, just as
they are under the National Housing Act (see Sec. 266.200(a)). While
section 542(c)(7) refers to rents, and section 544 defines multifamily
housing as covering not less than five (5) ``rental'' units on one (1)
site, cooperative carrying charges are similar to rents and HUD does
not believe that Congress intended to preclude the insurance of
mortgages for cooperatives under the program.
HUD will retain responsibility for assessing the ``previous
participation'' of mortgagors, contractors, consultants or management
agents in HUD programs and for intergovernmental and environmental
review. HUD will delegate to HFAs the functions pertaining to a
project's affirmative fair housing marketing plan and certain
activities under the Davis-Bacon Act.
With respect to HUD environmental reviews, it should be noted that
section 307(b)(4) of the 1994 Act authorizes the Secretary of HUD,
under such regulation in lieu of the environmental protection
procedures otherwise applicable, to provide for agreements to endorse
for insurance mortgages under this pilot program upon the request of
qualified HFAs if the State or unit of general local government, as
designated by the Secretary, assumes all of the responsibilities for
environmental review, decision making, and action pursuant to the
National Environmental Policy Act of 1969 and other relevant laws. The
statute goes into further detail as to what specific provisions will be
contained in any regulations the Secretary may issue. The Department
has in process draft regulations to implement this section 307(b)(4) of
the '94 Act, which will be promulgated in the Federal Register as a
separate rule, which will amend both this final rule and 24 CFR part
58--Environmental Review Procedures for the Community Development Block
Grant, Rental Rehabilitation, and Housing Development Grant Programs.
Until such time as this new rule takes effect, the Department will
retain responsibility for assuring compliance with the National
Environmental Policy Act of 1969 and related laws.
Section 542(c) of the Act does not statutorily require payment of
prevailing wage rates determined by the Secretary of Labor under the
Davis-Bacon Act on projects receiving mortgage insurance under the
pilot program. However, the Department has administratively determined
that it will require payment of Davis-Bacon wage rates on certain
projects receiving mortgage insurance under the program. As provided in
Sec. 266.225 of the rule, Davis-Bacon wage rates will be required to be
paid to all laborers and mechanics (except volunteers) employed by
contractors and subcontractors on projects (1) for which advances are
insured under this part; (2) which involve new construction or
substantial rehabilitation; and (3) which will contain 12 or more
dwelling units. Davis-Bacon requirements will apply only if all of
these conditions are met, unless Davis-Bacon wage rates are applicable
by reason of assistance from another Federal program. (For example, if
assistance under Section 8 is also used in connection with a project
under this part that involves minor rehabilitation, Davis-Bacon
requirements would apply to the project if it contains nine or more
Section 8-assisted units.) The Department has decided to require
payment of Davis-Bacon wage rates to ensure that prevailing wage
requirements under this program are generally comparable to similar
provisions required by statute for multifamily mortgage insurance
programs under the National Housing Act.
The rule also states that while the Commissioner retains
responsibility for enforcement of labor standards under this section,
the Commissioner may delegate to the HFA information collection (e.g.,
payroll review and routine interviews) and other routine administration
and enforcement functions, subject to monitoring by the Commissioner.
The Department intends to delegate such routine administration and
enforcement functions to HFAs. This delegation is consistent with the
Department's decision to delegate many of the functions relating to
insurance of individual projects to the HFAs. The delegation is also
consistent with the Department's longstanding delegation of routine
Davis-Bacon functions to States and local governments under the
Community Development Block Grant program.
Subpart D--Processing, Development, and Approval
Subpart D describes functions that the HFA and HUD will undertake
in relation to a loan origination and HUD insurance endorsement.
An HFA that assumes 50 percent or more of the risk associated with
a loan may use its own underwriting standards and loan terms and
conditions to underwrite and approve loans. Where an HFA assumes less
than 50 percent of the risk, underwriting standards and loan terms and
conditions are subject to HUD review, modification and approval. The
rule provisions also cover responsibilities of HFAs concerning such
matters as project feasibility, acceptability of the mortgagor, and
inspections during the project construction period.
Section 266.310 provides the circumstances where HUD will insure
loan advances, or agree to insure the entire mortgage upon completion
of construction. Where a mortgage is endorsed for insurance, the
interim rule provides that the HFA must remain the mortgagee of record
for as long as mortgage insurance is in force.
Subpart E--Mortgage and Closing Requirements; HUD Endorsement
Subpart E contains requirements that relate to the mortgage and the
property that secures the insured loan.
The Department recognizes that section 542(c)(2)(E) provides that
HFAs are permitted to use their own underwriting standards and loan
terms and conditions for purposes of underwriting loans to be insured
under this program where the HFA is assuming 50 percent or more of the
risk of loss. Where the Secretary retains more than 50 percent of the
risk of loss, section 542(c)(2)(E) permits the Secretary to impose
additional underwriting criteria and loan terms and conditions on loans
to be insured under the program. However, it is the Department's view
that Congress intended, in enacting section 542(c), to develop a
fiscally prudent mortgage insurance program. The interim rule cited
several examples of HUD regulations being imposed by the Department,
including the requirement that the HUD-insured mortgage constitute a
first lien. Subsequent to publication of the interim rule, Congress
expressly amended the Act to establish as a program requirement that
the insured mortgage be a first lien. However, the Department believes
that Congress did not intend to preclude other HUD regulations that
would provide: (1) that the HUD-insured mortgage be regularly
amortizing; (2) that the insured mortgage contain a covenant against
the change in use of the insured property; (3) that the insured
mortgage contain a covenant requiring the mortgagor to keep the
property, which is security for the mortgage, insured against loss due
to fire or other hazards; and (4) that the regulatory agreement
executed by the mortgagor contain a provision requiring that the
mortgagor be a sole asset mortgagor.
Amortization. The Department does not believe that Congress, in its
enactment of section 542(c), intended to permit the use of riskier
financing practices such as balloon payment terms and negative
amortization. Use of these types of financing practices in insured
programs could increase the chances that an insured mortgage would go
into default or otherwise increase the Department's exposure on a
mortgage where the terms of the financing permitted negative
amortization. It is the Department's view that requiring a mortgage to
be regularly amortizing would curtail the use of riskier financing
practices that could jeopardize the stability of the insured loan.
Change in use. The Department's purpose in requiring that a
mortgage insured under this program contain a covenant prohibiting a
change in use of the insured property was to carry out the intent of
Congress that the mortgage insurance be used to provide affordable
residential housing, rather than for some commercial enterprise, such
as a hotel or office building. It has been HUD's view in all of its
insurance programs, and it is HUD's view in this rule, that such a
provision is not intended to preclude the conversion of a project from
rental to cooperative housing since both rental and cooperative housing
are residential housing. The ``change in use'' provision is intended to
preclude the conversion of a project from residential use to some other
form of use, e.g, commercial use.
Hazard insurance. The Department does not believe that Congress, in
enacting the section 542(c) risk-sharing program, intended for the
Secretary to insure a mortgage on a project that is not insured against
damage or destruction due to fire or other hazards. Additionally, the
Department cannot conceive of an HFA making a loan on a project that is
not insured against loss due to hazards. The requirement that a
mortgagor under a mortgage have hazard insurance is a standard mortgage
industry practice. Additionally, it is the Department's position that
hazard insurance is a fundamental requirement of Federal mortgage
insurance to protect the public fisc against loss of public assets and,
therefore, must be required in this program.
Single asset mortgagor. The requirement that a mortgagor be a
single asset mortgagor is a requirement that is critical to the
Department's ability to prevent the mortgagor of an insured project
from commingling funds of the insured project with other assets that a
mortgagor entity might own, if permitted. If the Department were to
allow a mortgagor entity to own assets other than the insured project,
this would increase the chances of a mortgagor siphoning off funds from
an insured project for use in a conventionally financed project. This
could result in the mortgagor of the insured mortgage suffering severe
financial difficulty, possibly defaulting on the insured mortgage and a
subsequent insurance claim being filed by the HFA. In addition, the
assets of an insured project could become at risk, as a result of their
application to the debts of a conventionally financed project in
financial difficulty where both projects have the same owner.
Other provisions in subpart E pertain to the closing of a mortgage
loan. The closing will be held by the HFA, which is then required to
submit a closing docket (with required documentation) to HUD for
insurance endorsement. The required documentation is set forth in the
interim rule as well.
Subpart F--Project Management and Servicing
Subpart F sets out the rules for HFAs to service loans and manage
projects.
The HFA will have broad responsibility for the administration of
this program, including monitoring and determining the compliance of
the project owner with the requirements of this rule. HUD will not hold
or be a party to any mortgage or note instruments between the mortgagor
and the HFA. HUD will, however, monitor the performance of the HFA to
determine its compliance with this subpart.
Section 266.505 lists certain requirements that must be included in
the regulatory agreement that is executed by the HFA and the project
owner. Those requirements are necessary to assure that the owner will
maintain the sound financial and physical condition of the project, and
maintain the project as an affordable housing resource. Section 266.510
describes the responsibilities of the HFA for annual project
inspections, review of an owner's compliance with the affirmative fair
housing marketing plan, and analysis of the owner's annual audit and
recordkeeping.
Subpart G--Contract Rights and Obligations
Subpart G contains provisions with regard to the mortgage insurance
premium (MIP) in Secs. 266.600-266.608. In accordance with section
542(c)(3), the rule provides for a ``sliding scale'' of MIP payments,
with reduced amounts payable in inverse proportion to the increase in
an HFA's risk apportionment. Risk apportionment percentages range from
10 to 90 percent. At the high end, an HFA assuming 90 percent of the
risk would be required to pay a .05 percent MIP based upon the average
outstanding principal balance (without taking into account delinquent
payments or prepayments) per annum. At the other end of the spectrum,
an HFA assuming 10 percent of the risk would be required to pay a .45
percent MIP based upon the average outstanding principal balance per
annum.
Subpart G also contains provisions on insurance endorsement and
assignments. Endorsement of the original credit instrument will
indicate the Commissioner's insurance of the mortgage. Section
542(c)(2)(B) of the 1992 Act provides for full mortgage insurance for
loans originated by or through qualified HFAs. While this provision
clearly permits qualified HFAs to underwrite loans for other HFAs or
mortgage entities or to sell their loans in the secondary market, the
Department discussed this option with HFA representatives with
particular concern about how the HFA would maintain its risk-sharing
obligation in such transactions. In view of the complexities of
implementing this aspect of the statute and the desire to implement the
pilot program in a timely manner, it was agreed between the HFAs and
HUD that entities other than approved HFAs would not be permitted to be
mortgagees originating loans to be insured under this program. The one
exception was with respect to the transfer of partial interest under a
participation agreement. Section 266.616 permits the transfer of up to
100 percent of the beneficial interest in a loan or a pool of loans
insured under part 266, provided that, among other things, the HFA
remains the mortgagee of record and is the party with whom the
Commissioner deals under the contract of mortgage insurance.
Section 266.620 describes the circumstances under which the
contract of insurance will terminate. These are (1) payment in full of
the mortgage; (2) acquisition of the mortgaged property by the HFA and
notification to the Commissioner that no claim for insurance benefits
will be made; (3) acquisition of the property at a foreclosure sale by
a party other than the HFA; (4) notification by the HFA to the
Commissioner of voluntary termination; (5) a finding of fraud or
material misrepresentation on the part of the HFA or its successors
with respect to the contract of insurance; or (6) receipt by the
Commissioner of an application for final claims settlement.
The latter part of subpart G describes the procedures for filing a
claim upon a default, determining the amount of the claim, and payment
of the claim. Section 266.630 describes the requirements for filing for
a partial payment of a claim. This section is intended to avoid full
insurance claim payments by providing the HFA with flexibility to deal
with a nonperforming mortgage where the default is due to circumstances
beyond the mortgagor's control and the financial relief provided by the
HFA is sufficient to restore the financial viability of the project.
When the conditions of this section are met, an HFA may reduce the
unpaid principal balance of the insured mortgage by up to 50 percent
and may defer delinquent interest. The HFA must secure the mortgagor's
repayment of this relief with a second mortgage, which can have
deferred amortization thereby allowing the mortgagor to repay the
second mortgage in increasingly larger amounts as the project's cash
flow improves.
Under this partial claim procedure, upon the HFA providing the
above-described relief, HUD makes a partial claim payment to the HFA in
an amount that is a percentage of the relief provided by the HFA to the
mortgagor. The percentage is equal to HUD's percentage of the risk of
loss on the original mortgage loan or 50 percent, whichever is less.
The HFA, in turn, must remit to HUD the same percentage of all amounts
that it collects on its second mortgage.
When HUD pays a claim (i.e., entire amount, in cash), Sec. 266.638
provides that the HFA will issue a debenture (or a promissory note, a
bond, or any other instrument, hereinafter referred to as
``debenture'') to HUD for the full amount of the claim. The debenture
will have a term of five years in order to afford the HFA ample time to
work with the mortgagor to cure the default or foreclose and/or resell
the project. During the five year period, the HFA will pay HUD interest
on the debenture, due and payable on the anniversary of the claim
payment. At the end of five years, or at the point of settlement when
the debenture is paid, HUD will determine the amount of losses to be
apportioned between HUD and the HFA.
Sections 266.640 through 266.656 concern the final disposition of a
claim, including the HFA's ability to accept a deed-in-lieu of
foreclosure; the use of an appraisal to determine property value in the
absence of a foreclosure sale; the manner in which the amount of a loss
is determined; and final settlement.
IV. Public Comment on Interim Rule
On December 3, 1993 the Department published in the Federal
Register (58 FR 64032) an interim rule entitled Housing Finance Agency
Risk Sharing Program for Insured Affordable Multifamily Loans. What
follows is a description of the significant issues raised by the public
in written comments on the rule along with HUD's responses to each of
these issues.
During the public comment period, the Department received 12
comments from the following commenters:
1. Idaho Housing Agency
2. Massachusetts Housing Finance Agency
3. National Association of Home Builders
4. Congressman Owen Pickett (2nd Dist., Virginia)
5. American Institute of Certified Public Accountants
6. Colorado Housing and Finance Authority
7. National Council of State Housing Agencies
8. Association of Local Housing Agencies
9. Mortgage Bankers Association
10. American Association of Retired Persons
11. President, Hoover Mortgage Company, Spokane, WA
12. Michigan State Housing Development Authority
The commenters generally favored the program, with comments or
recommendations on the specific areas discussed below. The commenters
are referred to by their corresponding numbers as listed above.
Section 266.10 Fund allocations.
Comments. Commenter 7 pointed out that the rule states that HUD
will allocate unused insuring authority at the beginning of FY 1995,
and the draft handbook indicates that HUD may increase or decrease
these allocations at the end of FY 1994 depending upon the number of
units that have received initial endorsement. The commenter recommended
that since HFAs will only have six months to process applications in FY
1994, HUD reduce a participating HFA's allocations only if the HFA
agrees that it will be unable to use all its insurance authority by the
end of FY 1995. Commenter 1 was also concerned about the short time
left in FY 1994 after the application process, and asked whether an HFA
would risk the possibility of losing units that are in the application
process but which have not reached initial endorsement. That commenter
believed that the September 30, 1994 deadline for achieving initial
endorsement seemed very unrealistic.
Commenter 9 referred to the limit of 30,000 units that may be
insured under the pilot program through Fiscal Year 1995, stating that
it does not believe the program will produce a high level of
production. Citing the complicated, staff-intensive, and time-consuming
transactions involved in underwriting loans of this type, the commenter
is of the opinion that risk-sharing with HFAs can only serve as a
modest supplement to existing FHA programs. The commenter recommended
that HUD improve the delivery of multifamily mortgage insurance under
its regular insurance programs as well as under special programs and
initiatives such as this one.
Commenter 11 expressed somewhat similar views and urged improvement
and augmentation of HUD's multifamily housing staff capabilities.
HUD Response. Because the publication of the interim rule and
approval of qualified HFAs occurred later than anticipated, the interim
rule and draft administrative handbook do not reflect the correct
schedule for reallocation of units for the Pilot program. Unit set-
asides and allocations were made in March 1994. Unit allocations may
not be used by an HFA until a Risk-Sharing Agreement (RSA) is executed.
The time required for HFAs to sign RSAs and return them to HUD has been
longer than expected. It is likely that some HFAs may not even have an
executed RSA until some time in FY 1995. Therefore, rather than
reallocating units at the end of FY 1994, HUD will wait until January
1995 to assess usage and reallocate if necessary.
In the meantime, the Department will use a portion of the 10,000
unit holdback on a ``first come, first served'' basis for increases to
HFA set-asides that have been exhausted. In addition, units will be
considered used at an earlier stage--when the Firm Approval Letter is
issued--not at initial endorsement. Credit subsidy for a project will
also be obligated by the firm approval stage which is a change from the
language in the interim rule. Credit subsidy will be obligated and
allocated in accordance with outstanding Department instructions.
With respect to the comment regarding use of the units, the
Department anticipates that the 30,000 units allocated to the program
will be used for the demonstration. The delivery of multifamily
mortgage insurance under HUD's regular programs is not the subject of
this interim rule. The Risk-Sharing program is a partnership with State
and local HFAs to increase the supply of affordable housing; it is not
meant to be a substitute for other HUD insurance programs. However, the
Department does anticipate that the pilot will become a model for
augmenting mortgage insurance capability. In any event, the Department
will carefully study the results of the pilot period and expand the
program accordingly.
In this regard, although not in response to public comment, we note
that it is likely that the program will be expanded, perhaps by another
30,000 units for use beyond the end of FY 1995. The regulation and the
above comments do not currently assume this extension. Should this
occur during the regulation process, further consideration about
reopening the window for application submission and methods for
reallocation of units will be required.
Section 266.15 Risk-Sharing Agreement.
Comments. Commenter 12 suggested that the requirement in
Sec. 266.15(b) (5)(viii) for a certification from the HFA that it has
errors and omissions insurance should be changed or eliminated to
reflect situations where HFA employees are covered by a fidelity bond
that covers all state employees. The same commenter stated that the
requirement in Sec. 266.15(b)(8) for the highest level of appraiser
certification is not necessary. The commenter does not employ the use
of appraisals for the purpose of establishing completed project value
or mortgage amount, but rather to determine the maximum amount of land
value (or an existing building's value in the case of rehab) to be
recognized in the mortgage calculation.
HUD Response. The program does require that HFAs have errors and
omissions insurance and this is reflected in the Risk-Sharing
Agreement. If there is an impediment that precludes the HFA from
obtaining this insurance, the Department will consider waivers for good
cause and with adequate protection under some other means. This
provision has, in fact, been waived for two HFAs that were either
covered under State provisions or where the State was self-insured. In
these cases, this provision of the RSA was modified.
With respect to the comment about use of certified appraisers, the
Risk-Sharing program regulation does require compliance with the
Uniform Standards of Professional Appraisal Practice (USPAP). USPAP
requires use of a Certified General Appraiser for work done under
either Standard 1, for determining value, or Standard 4, real estate
consultations. This latter Standard covers multifamily cases where
value is not determined using the standard three approaches to value
but the appraiser does a rental and expense analysis and calculates a
capitalized value, similar to what HUD does in the Section 221(d)(4)
program.
Subpart B--Housing Finance Agency Requirements
Section 266.100 Qualified HFA.
Comments. Commenter 9 expressed a concern that the number of HFAs
qualified to originate, underwrite, service and manage multifamily
loans is severely limited. The commenter did not question the
importance or relevance of the rule's criteria for an HFA to have a
certain level of internal staff capacity to review and evaluate work of
any contractors it may hire to perform technical services, to make
underwriting conclusions, and to oversee its loan portfolio, and that
an HFA have an established record in multifamily loan processing,
servicing and property disposition, but believes the ability of most
HFAs to hire experienced personnel or train existing staff is limited
because of local and state budget constraints. The commenter believes
that this limited ability to participate will leave many parts of the
country with no representation or service.
HUD Response. The Department was pleased to approve 33 applicants
under the Risk-Sharing Pilot including 26 States, the District of
Columbia, Puerto Rico and 5 localities. The States approved included
many of the most populous States--California, New York, Texas, Florida,
Pennsylvania, Illinois, Michigan, New Jersey and Massachusetts.
Section 266.105 Application requirements.
Comments. Commenter 5 questioned the requirement in
Sec. 266.105(b)(12) for an unaudited interim financial statement if the
latest audit statement of an HFA is more than six months old. The
commenter stated that the requirement should be more specific about the
information to be provided, the time period to be covered, and the
standard of accounting to be used. The same commenter stated that the
information requested in the additional application requirements for
HFAs without top-tier designation or overall rating of ``A'' (paragraph
(c)) could be derived from an HFA's comprehensive annual financial
report that also includes its audited financial statements. The
commenter suggested that the information be provided only if
unavailable in other documents submitted.
Commenter 12 stated that the ``highest quality compliance plan''
requirement in Sec. 266.105(b)(4) is redundant, since other
requirements in the application process will ensure the same result.
HUD Response. The Department has determined after reviewing the
large number of applications submitted for participation in the pilot
program that the requirement in paragraph Sec. 266.105(b)(12) for an
unaudited interim financial statement if the latest HFA audit is more
than 6 months old is not only unclear but is unnecessary. This
requirement has been removed from the text of this final rule.
However, the requirement for submission of the Questionnaire
outlined in the Notice of Invitation and referred to in Sec. 266.105(c)
is critical to HUD's capacity to review applications. HFAs with a
``top-tier'' designation or ``A'' rating on their general obligation
bonds from a national rating agency are subject to an intensive in-
depth review of their operations, financial status, administrative
capability and a host of other components comprising the other items on
the Questionnaire by the rating agencies. Absent that review, HUD must
make the same kind of analysis based on the Questionnaire, which is in
a clear, concise and focused form. It also affords the HFA the
opportunity to present their operations and capacity in a concise and
positive way to the Department during the review process.
The quality control plan supplements the other descriptive material
submitted relative to underwriting standards and procedures, staff
capacity, etc., by indicating the checks and balances within the HFA to
ensure compliance with procedures and requirements whether performed by
in-house staff or, more particularly, by contract personnel.
Section 266.115 Program monitoring and evaluation.
Comments. Commenter 9 expressed a concern about the program
allowing Level I participants to use their own underwriting criteria,
fearing that it will make monitoring and reviewing by HUD more
difficult. The commenter used the example of HUD's failure to
adequately monitor coinsuring lenders who used HUD-established
underwriting criteria and to impose sanctions when necessary. The
commenter recommended that HUD reconsider its ability to monitor before
delegating so much authority to third parties.
Commenter 12 suggested that the Sec. 266.115 requirement for
semiannual reports is burdensome, and should be changed to annual
reports. The commenter also believes that these reports should only
contain information indicating a problem or workout. The commenter also
suggested that annual physical inspection and audit reports be sent to
HUD only in cases where the HFA determines there is a likelihood of a
claim.
HUD Response. With respect to Level I participants using their own
underwriting criteria, the statute specifies that HFAs taking 50
percent or more of the risk (i.e., Level I participants) may use their
own underwriting standards and loan terms and conditions. As to the
comment on semiannual reports, the Department feels it is imperative
that we be able to assess the progress and identify any impending
problems through this reporting system. The data requested will also
help HUD track other matters, such as MIP. Coupled with annual physical
inspection reports and project audit reports, this data will aid HUD in
meeting its oversight and monitoring responsibility to make its own
informed decision as to whether there is a likelihood of a claim.
Sections 266.120, 266.125 Sanctions.
Comments. Commenter 12 pointed out that Sec. 266.120(e)(13) should
be changed to make clear that Level I lenders cannot potentially be
penalized for following their own underwriting standards. The commenter
also recommended eliminating the provision in Sec. 266.125(a)(4) that
allows HUD to terminate insurance in cases of fraud or material
misrepresentation by the HFA. The commenter fears that the provision
will be unacceptable to bond holders or secondary mortgage market
investors who will not be able to rely on the insurance. According to
the commenter, the government's interests are adequately protected
under Sec. 266.125(a)(2) by the HFA being required to assume a higher
risk level.
HUD Response. Level I HFAs may use their own underwriting standards
but must, nevertheless, also act prudently in accordance with generally
accepted practices. This provision is not intended to penalize
participants for plausible judgments about underwriting considerations
but, rather, to prohibit the wide-scale abuse that occurred under the
coinsurance program. We also note that the provision in
Sec. 266.125(a)(4) that allows HUD to terminate insurance in cases of
fraud or material misrepresentation by the HFA is the same as for HUD-
processed insurance programs under the National Housing Act. Projects
insured under the National Housing Act are often bond-financed or sold
on the secondary market, so this provision should not be unacceptable
to bond holders or secondary markets. Moreover, two of the major rating
agencies have thoroughly reviewed this program and have determined this
provision, among others, to be satisfactory. They anticipate that they
will be rating such loans with bond financing as AAA.
Subpart C--Program Requirements
Sections 266.200, 266.205 Eligible and ineligible projects.
Comments. Transaction costs. Three commenters (1, 2, 7) objected to
the requirement that HUD determine whether the transaction costs for
existing projects to be acquired are reasonable. The commenters believe
this is inconsistent with the statute that allows HFAs to use their own
underwriting standards.
Section 8 projects. Commenter 7 also objected to the provision that
Section 8 projects may be insured under the program only if the
mortgage does not exceed an amount supportable by the lower of the unit
rents being collected under the rental assistance agreement or market
rents in similar projects. The commenter stated that HUD should allow
HFAs to insure Section 8 project mortgages without restriction, because
it is common for Section 8 rents to exceed market rents, and the
restriction unnecessarily and unreasonably limits the use of the
program to support financing those projects. Further, the commenter
stated that HUD does not provide incentives to reduce the cost of
Section 8 projects through refinancing, and believes HFAs should be
allowed to retain savings from refinancing those projects.
Board and care/assisted living facilities. Two comments (10, 12)
were directed to the restrictions on services that can be provided by
board and care/assisted living facilities. Both commenters recommended
clarification with regard to the ineligibility of retirement service
centers, stating that central kitchens and dining rooms are not
necessarily ``luxury accommodations,'' especially where residents are
not required to use them. Commenter 10 stated that a strict
interpretation of the provision would effectively forbid financing of
board and care or assisted living facilities despite its explicit
intention of doing so.
Commenter 10 also included a lengthy discussion of the need for
special regulations and underwriting standards to govern the financing
of assisted living facilities under the risk-sharing demonstration. The
commenter pointed out that HUD's own findings when it issued new
underwriting standards for the Retirement Service Center (RSC) program
just before suspension of the program strongly argue for different
underwriting standards for such projects. The commenter argues that the
program did not fail because too many services were offered, but rather
because the Department underestimated the care needs of the residents
and did not adequately examine the financing of necessary services.
According to the commenter, the HFA Risk-Sharing program ignores the
fundamental lesson of the RSC program that supportive services are
essential to a project's success.
Military impact area. Commenters 3 and 4 objected to the definition
of ``military impact area,'' stating that it is too broad. First, they
argue that the designation of such an area as one in which military-
connected households comprise 20 percent or more of the total
households in the market area would exclude areas with stable military
populations at installations with a certain future. Further, they state
that the definition of a ``military-connected household'' is too broad
and the data to ascertain such households are unavailable. Secondly,
the commenters object to the total reduction in military households
test, stating that it does not apply to many areas in the country where
a ``total'' reduction is not a meaningful possibility.
HUD Response. Transaction costs and Section 8 projects. It was not
the original intent of the Department to include either existing
projects or Section 8 (or other rental assistance) projects in the
Risk-Sharing program. The legislation and legislative history emphasize
the expansion of affordable housing opportunities through the program.
However, discussions with the industry convinced us that there were
certain limited circumstances where the Risk-Sharing program might be
warranted for such projects. The compromise reached as a result of
these consultations was: (1) the limitation on transaction costs for
existing projects, and (2) the requirements relative to establishing
the processing rents to be used in determining the maximum insurable
mortgage for Section 8 projects that would ensure that project rents
are clearly adequate to support the insured mortgage even when the
rental assistance contract is shorter than the mortgage term. (This
provision is similar to procedures for processing of Section 8 projects
by HUD Field Offices.) To permit insurance of Section 8 projects
without restriction would either create risk or put the Department in
the position of ensuring the continued funding of the Section 8
Contract.
Board and care/assisted living facilities. The definition of board
and care/assisted living facilities stands on its own. Projects meeting
the definition are eligible. These facilities are residential health
care facilities regulated by State or local government. The Department
knows of no States that do not require food service in such facilities.
The definition of board and care/assisted living does not conflict with
that of retirement service centers. Retirement service centers are
unassisted rental projects, not residential health care facilities such
as board and care and assisted living, that include luxurious
accommodations (such as large living units, and amenities such as
tennis courts etc.), mandatory services, and central kitchens and
dining rooms. While it is unlikely that such projects could be
developed within the affordability parameters of the Risk-Sharing
program, the Department wants to exclude any possibility of insuring
this kind of rental project which has been so unsuccessful under the
regular insurance programs. A discussion of why this kind of project
was unsuccessful is not a subject of this preamble.
Military impact area. This definition of military impact area is
the general definition the Department has been using for some time.
Although few areas have been designated as military impact areas, the
ones that have been so designated have been isolated markets with
little housing market other than the military base. However, based on
the comments, we have revised the interim rule language to clarify and
expand the definition of military impact areas. The administrative
instructions will also discuss procedures for making of military impact
determinations based on these regulatory standards.
Section 266.210 HUD-retained review functions.
Comments. Commenters 3 and 9 expressed concerns about the review
functions retained by HUD. The commenters believe that the ``dual
processing'' will result in processing delays, stating that this may
limit the program's effectiveness. Both commenters commended the
Department's efforts to seek statutory changes in the legislation that
would eliminate any legal requirements for the dual processing system.
HUD Response. The major HUD-retained review is the environmental
review. At the time of the interim rule, HUD was not authorized to
delegate this review. The Multifamily Housing Property Disposition
Reform Act of 1994 has now provided authority to delegate this review.
The Department currently is developing a rule to implement this new
delegation authority.
Section 266.215 Functions delegated by HUD to HFAs.
Comments. Two comments (1, 7) addressed the rule's requirement that
cost certification functions be performed subject to terms specified by
the Commissioner, and a provision in the draft handbook that the cost
certification be in a form acceptable to the HFA. The commenters
recommended that these two provisions, which seem to be conflicting, be
clarified. The commenters believe that, under the statute authorizing
the program, HFAs are to use their own underwriting standards.
HUD Response. The regulation and handbook procedures which relate
to cost certification referenced by the commenter are not in conflict
with one another. Each provision relates to a different stage of the
cost certification process. The handbook provision sets forth what
procedures that a mortgagor of a mortgage insured under section 542(c)
must follow when submitting cost certification to the HFA. Section
266.215 sets forth what standards (those established by the
Commissioner) the HFA must follow in developing cost certification
procedures to impose on mortgagors of projects to be insured pursuant
to section 542(c). HUD standards require that HFAs establish cost
certification procedures which take into consideration the underwriting
procedures utilized by the HFA to process the loan. These cost
certification procedures are designed to ensure that the actual costs
approved were in fact incurred by the mortgagor and that such costs
bear a direct relationship to the underwriting utilized in processing
the loan.
Section 266.225 Labor standards.
Comments. Three commenters (1, 6, and 7) objected to the
requirement that HFAs monitor the administration of the Davis-Bacon
Act. Commenter 6 stated that compliance monitoring should not be
delegated to entities without authority or compensation for its
enforcement. Commenter 1 objected to the provision that HFAs bear
financial responsibility for violations, stating that compliance with
Davis-Bacon is the responsibility of the owner and contractor.
Commenter 7 agreed, stating that no financial liability should be
placed on HFAs except for gross negligence in fulfilling reasonable
responsibilities to notify applicants of the applicability of Davis-
Bacon.
HUD Responses. The Risk-Sharing program delegates to HFAs, to the
maximum extent possible, the responsibilities for processing,
underwriting, servicing and other aspects of program operation of
projects. The ministerial functions of labor standards requirements
comprise one of those delegated tasks. While HUD retains the
enforcement function for labor standards, HFAs are delegated the
payroll review and routine interviews generally carried out as part of
the construction inspection function. This is consistent with the
Department's long-standing delegation of routine Davis-Bacon functions
to States and localities under the Community Development Block Grant
program. The financial liability provision is the same as other
delegations of labor standards functions.
Section 266.310 Insurance of advances or insurance upon completion;
applicability of requirements.
Comment. Commenter 12 asked that ``completion of construction'' in
paragraph (c) be defined so as not to preclude closing subject to
escrows acceptable to the HFA, in order to assure completion of non-
critical items that remain to be done.
HUD Response. The regulation does not define ``completion of
construction'' since the exact definition will likely vary among the
procedures of the 33 approved program participants. Because the
Department wishes to allow HFAs to use their own procedures to the
maximum extent possible, we do not think that a specific definition is
necessary or desirable. This issue will be addressed further in the
administrative instructions.
Section 266.405 Title.
Comment. Commenter 12 recommended deleting the requirement that
marketable title to the mortgaged property be vested in the mortgagor
on the date the mortgage is filed for record, stating that adequate
protection is provided in Sec. 266.405(b) and Sec. 266.410(c).
HUD Response. The meaning of this comment is obscure. Paragraph (a)
states that marketable title is required and when. Paragraph (b)
describes what evidence of title consists of. Section 266.410(c)
discusses that the mortgage must be a first lien.
Section 266.410 Mortgage provisions.
Comments. Commenter 3 objected to the requirement that the mortgage
provide for full amortization of the loan over the term of the
mortgage. The commenter stated that an HFA should be allowed to set the
amortization period and term of the mortgage in order to have full
access to capital resources. Commenter 12 suggested that use
restrictions (paragraph (f)) should also be included in the regulatory
agreement. The same commenter stated that the provision in paragraph
(h) regarding modification of terms of the mortgage must result in a
reduction of Section 8 rents should be deleted. The commenter stated
that the Section 8 statute, regulations, and contract rights should
determine HUD's rights to adjust rents, and that this provision could
prove harmful where a project is in trouble financially and refinancing
at a lower rate could provide the means to address the problem without
causing a claim on the insurance fund.
HUD Response. Fully amortizing loan. While the Department wishes to
permit HFAs participating in the program to use their own standards and
requirements as much as possible, we nevertheless are obliged to
develop a fiscally prudent program. Mortgages that are not fully
amortizing have an inherent risk that the Department does not wish to
incur, particularly in a pilot program that will test so many aspects
of this new partnership.
Use restriction. The commenter suggests that the use restriction in
the insured mortgage prohibiting the use of the property for any
purpose other than that intended on the day the mortgage is executed
also be included in the regulatory agreement between the HFA and the
mortgagor. Section 266.505(b)(4) on the requirements of the regulatory
agreement already contains this provision.
Section 8 projects. Section 8 projects are subject to the Section 8
statute, regulations and contract rights, as well as other HUD
guidelines that may arise from time to time in response to
Congressional or other requirements. This provision in the Risk-Sharing
rule merely notifies participants of current requirements relative to
reduction of Section 8 rents in certain circumstances.
Section 266.415 Mortgage lien and other obligations.
Comment. Commenter 12 suggested adding language to the end of
paragraph (b) (contractual obligations) to allow a final closing to
occur where there may be outstanding lien claims not yet determined by
a court in situations where a mortgage lien is protected through title
insurance.
HUD Response. The commenter's point is unclear. Paragraph (a) on
liens and paragraph (b) on contractual obligations permit inferior
liens and obligations that are acceptable to the HFA as long as the HUD
mortgage is first in line for payment. If the commenter is referring to
mechanics' and similar liens, HUD permits such liens in its own
projects where the title company is willing to insure over such liens.
There is nothing to preclude HFAs from using this procedure if it is
acceptable to them.
Section 266.417 Authority to adjust mortgage insurance amount.
Comments. Three commenters (1, 7, and 12) raised questions about
HUD retaining the authority to adjust the insured mortgage amount at
any time up to final endorsement. The commenters are concerned that
this will undermine the underwriting authority of HFAs.
HUD Response. The authority to adjust the mortgage amount is
discussed at length in the preambles to both this rule and the interim
rule. It is required because neither the current statutory language in
section 542(c) nor the legislative history contains a delegation to
HFAs for insurance of advances and cost certification, among other
things. In developing the interim rule, the Department examined the
legal propriety of such delegations because of the desire to make these
delegations to HFAs for maximum program efficiency and determined that
such delegations would be sustainable if HUD retains the authority to
make adjustments to the insured mortgage amount up to and including the
time of final endorsement. As long as the Department retains such
ultimate authority, case law supports the legality of such delegation.
HUD's reservation of final authority to adjust the insured mortgage
amount is not meant to suggest that HUD will, as a matter of policy,
routinely review all decisions about insured advances and cost
certification. On the contrary, the draft administrative instructions
advise HUD Field Office staff to review a random sample against the
HFA's procedures, not HUD's. Further, it states that few projects would
likely be subject to any reduction in the mortgage amount. It is noted
further that in HUD's own cost certification processes, few mortgage
reductions are actually made. It has been emphasized in both written
and oral communications to the Field staff that the Risk-Sharing
program is a partnership and that the HUD Offices and HFAs should
develop a strong working relationship where expectations on both sides
are clear, including procedures for insured advances and cost
certification.
Section 266.510 HFA responsibilities.
Comment. Commenter 12 suggested that annual audits (paragraph (b))
be required to be sent to HUD only when conditions are discovered
which, in the judgment of the HFA, are likely to result in a claim.
HUD Response. With respect to the suggestion that annual project
audits be submitted to HUD only when the HFA determines that there is a
problem, please see discussion of Sec. 266.115 relative to HUD's
monitoring responsibilities. Receipt of the annual project audit and
physical inspection report is essential to this monitoring
responsibility.
Section 266.616 Assignments.
Comment. Commenter 12 objected to the prohibition against
assignment of a mortgage and the requirement that legal title to the
mortgage be held by the HFA. The commenter stated that substantial
interest rate savings can be generated if insured loans can be sold
directly in the market rather than being used as collateral for a bond
issue. The commenter urged that these requirements be deleted, at least
for Level I participants, where an HFA has a significant residual
interest and risk, and where the HFA retains servicing.
HUD Response. The regulations require that the HFA be the mortgagee
of record throughout the period of insurance. For the pilot program,
HUD has determined that this provision is desirable to ensure that the
HFA fully maintain its risk-sharing obligation in these transactions.
However, the interim and final rules do allow transfer of up to 100
percent of the beneficial interest in a loan or pool of loans.
Section 266.656 Recovery of costs after final claim settlement.
Comment. Commenter 12 suggested deleting this section unless HUD
also is willing to share additional losses incurred by an HFA after a
final claim settlement.
HUD Response. The Department has provided for a full 5 years after
a claim is paid for an HFA to dispose of a project. HUD must be able to
assess its total liability and 5 years was considered to be a
reasonable time period. This should be ample time for disposition by
the HFA, and the Department fully expects projects to be disposed of
within this time. Sales of projects within this 5-year period will
result in a final claim settlement based on the sales price and an
actual loss amount. However, a final settlement established through
appraisals that may be artificially low based on failure to sell during
the 5-year period could result in a significant windfall at the
Government's expense within a short time. The Department must preclude
this from happening. In any event, we anticipate and expect that HFAs
will endeavor to dispose of defaulted properties well within the 5
years and receive a final claim settlement based on an actual loss
amount.
V. Other Matters
National Environmental Policy Act
A Finding of No Significant Impact with respect to the environment
was made in accordance with HUD regulations at 24 CFR part 50
implementing section 102(2)(C) of the National Environmental Policy Act
of 1969 (42 U.S.C. 4332) at the time of development of the proposed
rule and remains applicable to this final rule. The Finding is
available for public inspection and copying between 7:30 a.m. and 5:30
p.m. weekdays at the Office of Rules and Docket Clerk, 451 Seventh
Street SW., Room 10276, Washington, DC 20410-0500.
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this rule before publication and by
approving it certifies that the rule will not have a significant
economic impact on a substantial number of small entities. The program
will provide a new system of federal credit enhancements to expand the
Nation's supply of affordable housing. Qualified State and local
housing finance agencies will participate in the program on a voluntary
basis.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that the provisions of this
rule will not have a significant impact on family formation,
maintenance or well being, except to the extent that the program
authorized by the rule will increase the supply of affordable housing,
thereby improving the ability of families to find decent and affordable
housing. Any such impact is beneficial and merits no further review
under the Order.
Executive Order 12611, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12611, 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. The Department
has specifically provided in this rule that its regulation on
preemption of State or local rent control laws does not apply to this
program. Any preemption of those laws for purposes of the housing
provided under the program will be done under authority granted the
HFAs by State or local law. All authority delegated to HFAs by HUD
under this program was done so because the Department believes that is
the intent of Congress under section 542(c).
Semiannual Agenda of Regulations
This rule was listed as item number 1792 in the Department's
Semiannual Agenda of Regulations published on November 14, 1994 (59 FR
57632, 57654) under Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects
24 CFR Part 246
Grant programs--housing and community development,
Intergovernmental relations, Loan programs--housing and community
development, Low and moderate income housing, Rent subsidies.
24 CFR Part 266
Aged, Fair housing, Intergovernmental relations, Mortgage
insurance, Low and moderate income housing, Reporting and recordkeeping
requirements.
In accordance with the reasons set forth in the preamble, title 24
of the Code of Federal Regulations is amended as follows:
CHAPTER II--OFFICE OF ASSISTANT SECRETARY FOR HOUSING--FEDERAL HOUSING
COMMISSIONER, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
1. The heading of subchapter B of chapter II is revised to read
SUBCHAPTER B--MORTGAGE AND LOAN INSURANCE PROGRAMS UNDER NATIONAL
HOUSING ACT AND OTHER AUTHORITIES
PART 246--LOCAL RENT CONTROL
2. The authority citation for part 246 is revised to read as
follows:
Authority: 12 U.S.C. 1715b; 42 U.S.C. 3535(d).
3. Section 246.1 is amended by adding paragraph (e) to read as
follows:
Sec. 246.1 Scope and effect of regulations.
* * * * *
(e) This part applies to mortgages insured under the National
Housing Act. It does not apply to mortgages insured under section
542(c) of the Housing and Community Development Act of 1992 (12 U.S.C.
1707).
4. Title 24 of the Code of Federal Regulations is amended by adding
a new part 266 to read as follows:
PART 266--HOUSING FINANCE AGENCY RISK-SHARING PROGRAM FOR INSURED
AFFORDABLE MULTIFAMILY PROJECT LOANS
Subpart A--General Provisions
Sec.
266.1 Purpose and scope.
266.5 Definitions.
266.10 Allocations of assistance and credit subsidy.
266.15 Risk-Sharing Agreement.
266.20 Effect of amendments.
266.25 Limitation on HUD insurance liability.
266.30 Nonapplicability of 24 CFR part 246.
266.35 Waivers.
Subpart B--Housing Finance Agency Requirements
266.100 Qualified housing finance agency (HFA).
266.105 Application requirements.
266.110 Reserve requirements.
266.115 Program monitoring and evaluation.
266.120 Actions for which sanctions may be imposed.
266.125 Scope and nature of sanctions.
266.130 Reinsurance.
Subpart C--Program Requirements
266.200 Eligible projects.
266.205 Ineligible projects.
266.210 HUD-retained review functions.
266.215 Functions delegated by HUD to HFAs.
266.220 Nondiscrimination in housing and employment.
266.225 Labor standards.
Subpart D--Processing, Development, and Approval
266.300 HFAs accepting 50 percent or more of risk.
266.305 HFAs accepting less than 50 percent of risk.
266.310 Insurance of advances or insurance upon completion;
applicability of requirements.
266.315 Recordkeeping requirements.
Subpart E--Mortgage and Closing Requirements; HUD Endorsement
266.400 Property requirements--real estate.
266.402 Recordation.
266.405 Title.
266.410 Mortgage provisions.
266.415 Mortgage lien and other obligations.
266.417 Authority to adjust mortgage insurance amount.
266.420 Closing and endorsement by the Commissioner.
Subpart F--Project Management and Servicing
266.500 General.
266.505 Regulatory agreement requirements.
266.510 HFA responsibilities.
266.515 Record retention.
266.520 Program monitoring and compliance.
Subpart G--Contract Rights and Obligations
Mortgage Insurance Premiums
266.600 Mortgage insurance premium: Insurance upon completion.
266.602 Mortgage insurance premium: Insured advances.
266.604 Mortgage insurance premium: Other requirements.
266.606 Mortgage insurance premium: Duration and method of paying.
266.608 Mortgage insurance premium: Pro rata refund.
Insurance Endorsement
266.612 Insurance endorsement.
Assignments
266.616 Transfer of partial interest under participation agreement.
Termination
266.620 Termination of Contract of Insurance.
266.622 Notice and date of termination by the Commissioner.
Claim Procedures
266.626 Notice of default and filing an insurance claim.
266.628 Initial claim payments.
266.630 Partial payment of claims.
266.632 Withdrawal of claim.
266.634 Reinstatement of the contract of insurance.
266.636 Insuring new loans for defaulted projects.
266.638 Issuance of HFA Debenture.
266.640 Foreclosure and acquisition.
266.642 Appraisals.
266.644 Application for final claim settlement.
266.646 Determining the amount of loss.
266.648 Items included in total loss.
266.650 Items deducted from total loss.
266.652 Determining share of loss.
266.654 Final claim settlement and HFA Debenture redemption.
266.656 Recovery of costs after final claims settlement.
266.658 Program monitoring and compliance.
Authority: 12 U.S.C. 1707; 42 U.S.C. 3535(d).
Subpart A--General Provisions
Sec. 266.1 Purpose and scope.
(a) Authority and scope. (1) Section 542 of the Housing and
Community Development Act of 1992 directs the Secretary of the
Department of Housing and Urban Development, acting through the Federal
Housing Administration, to carry out programs that will demonstrate the
effectiveness of providing new forms of Federal credit enhancement for
multifamily loans. Section 542, entitled, ``Multifamily Mortgage Credit
Demonstrations,'' provides new independent insurance authority that is
not under the National Housing Act.
(2) Section 542(c) of the Housing and Community Development Act of
1992 specifically directs the Secretary to carry out a pilot program of
risk-sharing with qualified State and local housing finance agencies
(HFAs). The qualified HFAs are authorized to underwrite and process
loans. HUD will provide full mortgage insurance on affordable
multifamily housing projects processed by such HFAs under this program.
Through risk-sharing agreements with HUD, HFAs contract to reimburse
HUD for a portion of the loss from any defaults that occur while HUD
insurance is in force.
(3) The extent to which HUD will direct qualified HFAs regarding
their underwriting standards and loan terms and conditions is related
to the proportion of the risk taken by an HFA.
(b) Purpose. The primary purpose of this pilot program is to test
the effectiveness of providing new forms of credit enhancement for
multifamily loans, i.e., utilization of full insurance by HUD, pursuant
to risk-sharing agreements with qualified housing finance agencies, for
the development of affordable housing. The utilization of Federal
credit enhancements should increase access to capital markets and,
thereby, increase the supply of affordable multifamily housing. By
permitting HFAs to underwrite, process, and service loans and to manage
and dispose of properties that fall into default, HUD expects
affordable housing to be made available to eligible families and
individuals in a timely manner.
Sec. 266.5 Definitions.
Act means the Housing and Community Development Act of 1992, as
amended.
Affordable housing means a project in which 20 percent or more of
the units are both rent-restricted and occupied by families whose
income is 50 percent or less of the area median income as determined by
HUD, with adjustments for household size, or in which 40 percent (25
percent in New York City) or more of the units are both rent-restricted
and occupied by families whose income is 60 percent or less of the area
median income as determined by HUD, with adjustments for household
size. A residential unit is rent-restricted if the gross rent with
respect to such unit does not exceed 30 percent of the imputed income
limitation applicable to such unit.
Board and Care/Assisted Living Facility means a residential
facility for independent living that is regulated by State or local
government that provides continuous protective oversight and assistance
with the activities of daily living to frail elderly persons or other
persons needing such assistance. Continuous protective oversight may
range from as little as awareness on the part of management staff of
residents' whereabouts (and the ability to intervene in the event of
crisis) to a higher level of services and assistance. Assistance with
the activities of daily living may include, but is not limited to,
bathing, dressing, eating, getting in and out of bed or chairs,
walking, going outdoors, using the toilet, laundry, home management,
meal preparation, shopping, supervision of medication, and housework.
Commissioner means the Federal Housing Commissioner or his or her
authorized representative.
Contract of insurance means the agreement evidenced by the
endorsement of the Commissioner upon the credit instrument given in
connection with an insured mortgage, incorporating by reference the
regulations in this part and the applicable provisions of the Act.
Credit subsidy means the cost of a direct loan or loan guarantee
under the Federal Credit Reform Act of 1990 as defined in subpart B of
title 13 of the Omnibus Budget Reconciliation Act of 1990 (Pub.L. 101-
508, approved Nov. 5, 1990).
Debenture means the instrument issued by the HFA to HUD upon
payment of an insurance claim by HUD. The instrument must be in the
standard form of a State or Municipal Debenture issued under the
Uniform Commercial Code, where applicable, and must be supported by the
full faith and credit of the HFA. The instrument must define the terms
and conditions and the risk-sharing portion which the HFA will pay at
the end of the term of the Debenture, and must be for the full amount
of the claim payment. The term Debenture may include similar
instruments, such as promissory notes and bonds, as mutually agreed
upon by the Commissioner and the HFA.
Designated offices means the HUD Field Offices that are assigned
the responsibility for program monitoring, imposing or recommending
sanctions for program violations, and conducting informal hearings.
Firm approval letter means a letter issued by HUD to an HFA upon
the positive completion of the HUD-retained reviews described in
Sec. 266.210. The letter will apportion units to the project and
provide that, so long as the HFA is in good standing and absent fraud
or misrepresentation by the HFA, HUD will endorse the project mortgage
for insurance upon presentation by the HFA of the required Closing
Docket and certifications required by this part and the Commissioner's
administrative requirements.
Gross rent includes any utility allowance (including charges for
the occupancy of a cooperative unit) determined by the Secretary after
taking into account such determination under section 8 of the U.S.
Housing Act of 1937 (42 U.S.C. 1437f). It does not include any payment
under section 8 or any comparable rental assistance program (with
respect to such unit or occupants thereof), nor does it include any fee
for a supportive service that is paid to the owner of the unit (on the
basis of the low-income status of the tenant of the unit) by any
governmental program of assistance (or by an organization described in
section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3))
and exempt from tax under section 501(a) of the Code (26 U.S.C. 501(a))
if such program (or organization) provides assistance for rent and the
amount of assistance provided for rent is not separable from the amount
of assistance provided for supportive services. It also does not
include any rental payment to the owner of the unit to the extent such
owner pays an equivalent amount to the Farmers Home Administration
under section 515 of the Housing Act of 1949 (42 U.S.C. 1485).
Housing finance agency or HFA means any public body, agency, or
instrumentality created by a specific act of a State legislature or
local municipality empowered to finance activities designed to provide
housing and related facilities, through land acquisition, construction
or rehabilitation. The term State includes the several States, Puerto
Rico, the District of Columbia, Guam, the Trust Territory of the
Pacific Islands, American Samoa and the Virgin Islands.
Insured mortgage means a valid single first lien given to secure
advances on, or the unpaid purchase price of, real estate, under the
laws of the State in which the real estate is located, together with
the credit instrument, if any, secured thereby. Any other financing
permitting on property insured under this part must be expressly
subordinate to the insured mortgage.
Level I participants means HFAs that elect to take 50 percent or
more of the risk of loss in 10 percent increments on mortgages issued
under this program.
Level II participants means HFAs that elect to take 10 or 25
percent of the risk of loss on mortgages issued under this program,
dependent on the loan-to-replacement cost or loan-to-value ratio of the
project to be insured.
Mortgage means such a single first lien upon the real estate as is
commonly given to secure advances on, or the unpaid purchase price of,
real estate under the laws of the jurisdiction where the real estate is
situated, together with the credit instruments, if any, secured
thereby.
Mortgagee means the original lender under a mortgage and its
successors and assigns approved by the Commissioner.
Mortgagor means the original borrower under a mortgage and its
successor and assigns.
Multifamily housing means housing accommodations on the mortgaged
property that are designed principally for residential use, conform to
standards satisfactory to the Secretary, and consist of not less than 5
rental units (including cooperative units) on 1 site. These units may
be detached, semidetached, row house, or multifamily structures.
Qualified HFA means an HFA that meets the requirements described in
Sec. 266.100(a).
Risk-Sharing Agreement means a contract between an HFA and the
Commissioner that incorporates the terms, obligations, and conditions
specified in this part.
Secondary financing means any grant, loan, inferior lien, or other
form of indebtedness used during loan origination prior to HUD
endorsement to finance a multifamily property insured under this part
which is inferior to the insured mortgage as defined above and does not
have first priority for payment.
Single Room Occupancy, or SRO, projects means multifamily projects
consisting of units that are not required to contain food preparation
or sanitary facilities for occupancy by single individuals capable of
independent living.
Supportive services means any service provided under a planned
program of services designed to enable residents of a residential
rental property to remain independent and avoid placement in a
hospital, nursing home, or intermediate care facility for the mentally
or physically handicapped. In the case of a single room occupancy unit,
the term includes any service provided to assist tenants in locating
and retaining permanent housing. This definition is to be used in
conjunction with the ``gross rent'' calculation.
Sec. 266.10 Allocations of Assistance and Credit Subsidy.
(a) Notice of availability of assistance. HUD will announce the
availability of assistance under this program through publication of a
Notice in the Federal Register. Such Notice will invite qualified HFAs
to submit an application for approval and/or for additional units under
this part. The Notice will indicate the deadline date for submission of
applications, required documentation, the address to which the
applications must be submitted and other relevant information.
(b) Credit subsidy will be obligated and allocated in accordance
with outstanding Department instructions.
Sec. 266.15 Risk-Sharing Agreement.
(a) Requirement for participation. Execution of a Risk-Sharing
Agreement is a prerequisite to participation in this program.
(b) Provisions. The Agreement will include, but not necessarily be
limited to, the following:
(1) The allocation of units for the HFA;
(2) The risk sharing level or levels at which the HFA has been
approved to participate in the program;
(3) The standards and procedures, and loan terms and conditions, to
be used by the HFA in originating, underwriting, closing, project
management and servicing of loans and for disposing of defaulted
properties (which may be incorporated by reference to existing HFA
documents);
(4) The identification of the individuals responsible for the
overall underwriting decision (Chief Underwriter) and for project
management, servicing, and property disposition (Housing Management
Director), principal staff, and identification of individuals, with
specimen signatures, with authority to sign loan documents or otherwise
commit the HFA;
(5) Certifications by the HFA that it:
(i) Will allow periodic auditing and review by the Commissioner and
the HUD Inspector General and their authorized agents regarding the
HFA's participation in the program and permit an inspection and
examination of its financial and other records as the Commissioner
deems necessary for program review and monitoring purposes.
(ii) Will notify HUD promptly in writing any time the HFA changes
principal staff, persons authorized to commit the HFA, and operating
procedures, underwriting standards and procedures, and loan terms and
conditions. Level II HFAs must also obtain the prior written approval
of the Commissioner before implementing any amendment to the HFA's
underwriting standards and procedures, and loan terms and conditions.
(iii) Has fully disclosed all underwriting standards and
procedures, loan terms and conditions;
(iv) Will at all times comply with program financial requirements
and notify HUD of any pending and actual changes that would adversely
affect HFA operations or financial status;
(v) Will provide HUD with a copy of its annual certified audit
report;
(vi) Will comply with all Fair Housing and Equal Opportunity
requirements, i.e., the Fair Housing Act (42 U.S.C. 3601-3619), as
implemented by 24 CFR part 100; title VI of the Civil Rights Act of
1964 (42 U.S.C. 2000d), as implemented by 24 CFR part 1; the Age
Discrimination Act of 1975 (42 U.S.C. 6101-6107), as implemented by 24
CFR part 146; section 504 of the Rehabilitation Act of 1973 (29 U.S.C.
794), as implemented by 24 CFR part 8; titles II and III of the
Americans with Disabilities Act of 1990 (42 U.S.C. 12101-12213), as
implemented by 28 CFR part 35; section 3 of the Housing and Urban
Development Act of 1968 (12 U.S.C. 1701u), as implemented by 24 CFR
part 135; the Equal Credit Opportunity Act (15 U.S.C. 1691-1691f), as
implemented by 12 CFR part 202; Executive Order 11063, as amended by
Executive Order 12259) (3 CFR 1958-1963 Comp., p. 652 and 3 CFR 1980
Comp., p. 307), as implemented by 24 CFR part 107; Executive Order
11246 (3 CFR 1964-1965 Comp., p. 339), as implemented by 41 CFR part
60; other applicable Federal laws and all regulations issued pursuant
to these authorities in lending or investing funds in real estate
mortgages; and applicable State and local fair housing and equal
opportunity laws.
(vii) Will perform all functions in connection with loans
originated under this program including underwriting, loan approval,
servicing (including workouts), and disposition functions;
(viii) Has Lender's fidelity bond/surety bond and errors and
omissions insurance;
(ix) Will abide by all applicable requirements issued by HUD for
performing its functions under this part;
(x) Will issue debentures acceptable to HUD as collateral pending
final settlement of a claim;
(xi) Will comply with the affordable housing requirements set forth
under this part;
(xii) Will remain mortgagee of record on each loan underwritten
under this part for the term of the mortgage insurance;
(xiii) Will follow other applicable Federal rules and regulations.
(6) An agreement to submit an annual certification that there has
been no basic change in its organization, business activities,
financial status or other information that was submitted in its
application to participate in the program, and that the HFA has
complied with all eligibility requirements during the past year, and if
there has been any such change, the certification required by this
paragraph must state the nature of the change;
(7) An agreement that any reinsurance of the HFA's share of the
loss will be subordinate to the HUD insured first mortgage and will not
affect reimbursement to HUD notwithstanding the timing of the actual
settlement between the HFA and the reinsurer; and
(8) An agreement that all appraisal functions will be completed by
Certified General Appraisers, licensed in the State in which the
property is located, that all appraisal functions will be completed in
accordance with the Uniform Standards of Professional Appraisal
Practice, and that the HFA will comply with the gender and minority
status reporting requirement of 24 CFR 267.3(c) and submit data as
required by 24 CFR 267.3(c)(5)(i). In the selection of an appraiser,
there shall be no discrimination on the basis of race, color, religion,
national origin, sex, age or disability.
Sec. 266.20 Effect of amendments.
The Commissioner may amend the regulations in this part from time
to time. Amendments to the regulations will not adversely affect the
interest of a lender under a Contract of Insurance on any mortgage
already insured or on any mortgage to be insured on which HUD has
already issued its firm approval letter.
Sec. 266.25 Limitation on HUD insurance liability.
The Commissioner shall have no obligation to recognize or deal with
anyone other than the HFA in its role as mortgagee of record and as
party to a risk-sharing agreement with HUD with respect to the rights,
benefits, and obligations of the HFA under the contract of insurance.
Sec. 266.30 Nonapplicability of 24 CFR part 246.
The provisions of 24 CFR part 246 do not apply to projects that are
security for mortgages insured under this part.
Sec. 266.35 Waivers.
Upon completion of a determination and finding of good cause, the
Commissioner may waive any provision of this part in any particular
case subject only to statutory limitations, except that no waivers will
be provided with respect to financial requirements for participating
HFAs or underwriting standards required for Level II participants. Each
waiver must be in writing supported by documentation of the facts and
reasons that formed the basis for the waiver. HUD will publish a
Federal Register notice informing the public of all waivers granted
under this section in accordance with section 7(q) of the Department of
Housing and Urban Development Act and HUD policies regarding
publication of waivers.
Subpart B--Housing Finance Agency Requirements
Sec. 266.100 Qualified housing finance agency (HFA).
(a) Qualifications. To participate in the program, an HFA must
apply and be specifically approved for the pilot program described in
this part, in addition to being a HUD-approved mortgagee in accordance
with 24 CFR 202.10 through 202.19. The HFA must maintain eligibility by
continuing to comply with the requirements set forth in the Risk-
Sharing Agreement and this part. To qualify for participation in the
program described in this part, an HFA must:
(1) Carry the designation of ``top tier'' or its equivalent as
evaluated by Standard and Poor's or any other nationally recognized
rating Agency; or
(2) Receive an overall rating of ``A'' for the HFA for its general
obligation bonds from a nationally recognized rating agency; or
(3) Otherwise demonstrate its capacity as a sound and experienced
HFA based on, but not limited to, experience in financing multifamily
housing, fund balances, administrative capabilities, investment policy,
internal controls, financial management, portfolio quality, and State
or local support; and
(4) Be a HUD-approved multifamily mortgagee in good standing; and
(5) Have at least five years experience in multifamily
underwriting; and
(6) Certify that:
(i) The Department of Justice has not brought a civil rights suit
against the Agency, and no suit is pending;
(ii) There has not been an adjudication of a civil rights violation
in a civil action brought against the HFA by a private individual,
unless the HFA is operating in compliance with a court order, or
implementing a HUD-approved compliance agreement designed to correct
the areas of noncompliance;
(iii) There are no outstanding findings of noncompliance with civil
rights statutes, Executive Orders, or regulations as a result of formal
administrative proceedings, or the Secretary has not issued a charge
against the HFA under the Fair Housing Act, unless the HFA is operating
under a compliance agreement designed to correct the areas of
noncompliance.
(b) Approval levels. Approval levels consist of the following:
(1) Level I approval to originate, service, and dispose of
multifamily mortgages where the HFA uses its own underwriting standards
and loan terms and conditions, and assumes 50 to 90 percent of the risk
of loss (increments of 10 percent).
(2) Level II approval to originate, service, and dispose of
multifamily mortgages where the HFA uses underwriting standards and
loan terms and conditions approved by HUD, and:
(i) When the loan-to-replacement cost ratio for new construction
and substantial rehabilitation projects or the loan-to-value ratio for
existing projects is greater than or equal to 75 percent, the HFA shall
assume 25 percent of the risk of loss.
(ii) When the loan-to-replacement cost ratio for new construction
and substantial rehabilitation or the loan-to-value ratio for existing
projects is less than 75 percent, the HFA shall assume 10 percent, or
25 percent at the HFA's option, of the risk of loss.
(3) For HFAs who plan to use Level I and Level II processing, the
underwriting standards and loan terms and conditions to be used on
Level II loans must be approved by HUD.
Sec. 266.105 Application requirements.
(a) Applications for approval as a HUD-approved multifamily
mortgagee. HFAs that are not HUD-approved mortgagees at the time of
their application to participate in the pilot program must submit,
concurrently, separate applications for approval to participate in the
program and for approval to operate as a HUD-approved mortgagee.
Application for approval as HUD-approved mortgagee must be submitted to
HUD in accordance with the requirements established under 24 CFR 202.10
through 202.19.
(b) Applications for participation in pilot program. Applications
from HFAs for approval to participate in the pilot program under this
part must contain:
(1) Documentation satisfactory to the Commissioner that it meets
the qualification requirements set forth in Sec. 266.100(a).
(2) Evidence that the application fee of $10,000 has been wire-
transferred to the U.S. Treasury in accordance with instructions in the
Notice described in Sec. 266.10(a). This fee will not be refunded once
the application has been accepted for review.
(3) Opinion of legal counsel that the HFA has the necessary powers
to participate in the pilot program. The opinion for an HFA with an
overall rating of ``A'' on its general obligation bonds must also state
that the general obligation will extend to the HFA's responsibilities
under the Risk-Sharing Agreement and any debenture issued by the HFA to
the Commissioner. If the opinion of counsel does not include this
statement, the HFA must comply with the provisions of Sec. 266.110(b).
(4) A copy of the HFA's procedures manual which describes, among
other things, the manner in which the HFA will process mortgage loans,
including their underwriting standards; a description of the approval
process; the HFA fee schedule; a description of loan management, loan
servicing, and property disposition activities; and the manner in which
the HFA's and mortgagor's reserves and escrows (including letters of
credit) will be established and controlled. The manual must also
include a processing flow chart and an organizational chart.
(5) A plan describing how the HFA will ensure the highest quality
compliance with all HFA and HUD requirements for the origination,
processing, underwriting, insurance of advances, cost certification,
loan closing, construction and permanent loan management, servicing and
disposition of all projects insured or proposed to be insured under
this part and for monitoring all work performed by contract personnel,
if any.
(6) Identification of the individual responsible for the overall
underwriting decision (chief underwriter), and the individual
responsible for project management, loan servicing and property
disposition (housing management director). These functions may not be
contracted out by the HFA. The HFA may contract with outside sources
for technical processing and loan servicing services. However, the
application must demonstrate internal staff capacity to review and
evaluate the work product of the contract sources and to make final
underwriting, servicing, and property disposition conclusions.
(7) A description of oversight by State or local governmental
agencies.
(8) A copy of the HFA's administrative manual covering its
investment policies and overall business and financial practices.
(9) A statement containing the number of units the HFA proposes to
process to firm approval letter during the period specified in the
relevant Federal Register Notice published pursuant to Sec. 266.10 of
this part.
Note: The Federal Fiscal Year begins on October 1st, and ends on
September 30th.
(10) HFA declaration of the risk-sharing arrangement it has
selected i.e., Level I, Level II, or both Level I and Level II.
(11) Documentation containing:
(i) For HFAs that carry the designation of ``top tier'' or its
equivalent, as evaluated by Standard and Poors or any other nationally
recognized rating agency, evidence of such designation;
(ii) For HFAs that currently receive an overall rating of ``A'' for
their general obligation bonds from a nationally recognized rating
agency, evidence of such a rating; or
(iii) For any other HFA, evidence, as described in paragraph (c) of
this section, that demonstrates its capacity as a sound and experienced
agency based on, but not limited to, its experience in financing
multifamily housing, fund balances, administrative capabilities,
investment policy, internal controls and financial management,
portfolio quality and State or local support.
(12) A certification from the HFA that it will at all times comply
with the financial requirements in Sec. 266.110 and, where applicable,
maintain required reserves in a dedicated account in liquid funds
(i.e., cash, cash equivalents, or readily marketable securities) in a
financial institution acceptable to HUD.
(13) Copies of audited financial statements for the HFA's last
three fiscal years.
(14) Sample debenture form issued by the HFA.
(c) Additional application requirements for HFAs without top-tier
designation or overall rating of ``A'' on general obligation bonds.
HFAs without top-tier designation or an overall rating of ``A'' on
general obligation bonds must submit, in addition to the items
described in paragraph (b) of this section, such further information
specified and required in the Federal Register notice published
pursuant to Sec. 266.10 of this part. This may include, but is not
limited to, information concerning the geographic boundaries served
(e.g., city, county); a description of the organizational history which
includes the authority to issue bonds and tax credits; length of time
in business; general portfolio statistics; a description of all
mortgage lending activities, including volume and default and
foreclosure rates; a summary of delinquent loans in the last 12 months
and the present status of each; relationship to the State or local
Government, subsidiary or similar entity; and experience in multifamily
housing.
Sec. 266.110 Reserve requirements.
(a) HFAs with top-tier designation or overall rating of ``A'' on
general obligation bonds. An HFA with a top tier or equivalent
designation or an HFA with an overall rating of ``A'' on its general
obligation bonds is not required to have additional reserves so long as
the HFA maintains that designation or rating, unless the Commissioner
determines that a prescribed level of reserves is necessary. If the
designation or rating is lost, the HFA must immediately establish a
reserve account funded in accordance with the requirements set forth in
paragraph (b) of this section. The reserve account must reflect all
loans in the HFA's portfolio endorsed under this part.
(b) Other HFAs. (1) For other HFAs, a specifically identified
dedicated account consisting entirely of liquid assets (i.e., cash or
cash equivalents or readily marketable securities) must be established
and maintained in a financial institution acceptable to HUD. This
account may be drawn upon by HUD and may be used by the HFA only with
the prior written approval of HUD for the purpose of meeting the HFA's
risk-sharing obligations under this part. The account must be
established prior to the execution of any Risk Sharing Agreement under
this part in an initial amount of not less than $500,000. Thereafter,
the HFA must deposit at each loan closing and thereafter maintain the
following additional amounts in the dedicated account:
(i) $10.00 per $1,000 of the unpaid principal balance that is equal
to or less than $50 million; plus
(ii) $7.50 per $1,000 of the unpaid principal balance that is
greater than $50 million and less than $150 million; plus
(iii) $5.00 per $1,000 of the unpaid principal balance that is
greater than $150 million.
(2) The Commissioner may determine that higher levels of reserves
may be necessary.
Sec. 266.115 Program monitoring and evaluation.
(a) HFA certifications. HUD will rely heavily on the certifications
required of an HFA under this part and such additional certifications
as the Commissioner may require in his or her administrative
procedures. An HFA's continued participation in the program is
predicated upon compliance with these certifications and its
recommending for endorsement only those mortgages that comply with
requirements of the program, including the HFA's origination,
underwriting and closing procedures incorporated by reference into the
Risk-Sharing Agreement.
(b) Monitoring and evaluation. Monitoring and evaluation activities
will focus on compliance with program requirements and performance of
the HFA in meeting program objectives of providing affordable housing.
They will enable HUD to evaluate the effectiveness of the program as
required by section 542(d)(3) of the Act.
(c) Responsibility for monitoring and evaluation. The Commissioner
or his or her designee will be responsible for overall program
monitoring and evaluation.
(d) HFA submissions. (1) For each loan insured under this part,
basic underwriting and closing information must be submitted in a
format specified by HUD and must accompany the closing docket submitted
in accordance with Sec. 266.420(b). Information relative to project
management and servicing (including disposition) will be required after
endorsement.
(2) The HFA must submit semi-annual reports setting forth the
original mortgage amounts and outstanding principal balances on
mortgages the HFA has underwritten, and the status of all projects
insured under this part (e.g., current, in default, acquired, under
workout agreement, in bankruptcy). For projects where the mortgagor has
declared bankruptcy, the HFA must submit information containing the
date the bankruptcy was filed and the date the HFA requested the Court
to dismiss the bankruptcy proceedings.
Sec. 266.120 Actions for which sanctions may be imposed.
Results of monitoring or other reviews may serve as the basis for
the Commissioner's imposing sanctions on the HFA. Violations for which
sanctions may be imposed include, but are not limited to:
(a) Commission of fraud or making a material misrepresentation by
the HFA with respect to any mortgage insured or to any other matter
under this part.
(b) Assignment or transfer of interest in any insured mortgage not
in accord with the requirements of this part.
(c) Engagement in business practices that do not conform to
generally accepted practices of prudent lenders or that demonstrate
irresponsibility.
(d) Actions or conduct for which sanctions may be imposed against
the HFA by HUD's Mortgagee Review Board under 24 CFR 25.9.
(e) Failure to:
(1) Reveal in its application for participation in the program all
the information required by this part;
(2) Notify HUD in a timely manner of any pending or actual changes
that would adversely affect HFA operations or financial status;
(3) Comply with all eligibility requirements for participation in
the program;
(4) Issue debentures in the event of an initial claim payment by
HUD, or to reimburse HUD for payment of a claim;
(5) Maintain its top tier designation or overall rating of ``A'' on
general obligation bonds (or if such designation or rating is lost,
comply with paragraph (e)(6) of this section);
(6) Establish and maintain a dedicated account, if required, or
meet other financial obligations under this program;
(7) Perform underwriting, insurance of advances, cost
certification, management, servicing or property disposition functions
in a prudent and acceptable manner based on the standards incorporated
by reference into the Risk-sharing Agreement;
(8) Submit financial and other reports required by this part;
(9) Comply with any regulatory requirement or with the Risk-Sharing
Agreement;
(10) Maintain any other standards HUD may establish for
participation in this program;
(11) Enforce the regulatory agreement provisions with respect to
individual projects;
(12) Maintain a default ratio acceptable to HUD relative to the
HFA's own portfolio and the defaults experienced under this part by
other program participants;
(13) Consider adequately special risk circumstances without
compensating for the higher risks of such transactions (e.g., high
loan-to-value ratios in areas with high vacancy or default rates); or
(14) Remit mortgage insurance premiums on a timely basis or failure
to refund or credit mortgagor's accounts with overpaid mortgage
insurance premiums.
Sec. 266.125 Scope and nature of sanctions.
(a) Actions by Designated Office. Depending on the nature and
extent of the noncompliance with the requirements of this part, the
Designated Office may take any of the following actions:
(1) Require that the HFA execute a trust agreement, establish a
trust account in accordance with such agreement, and fund such account
which may be drawn upon by HUD for purposes of meeting the HFA's risk-
sharing obligations;
(2) Require the HFA to assume a higher portion of risk for the
subject and future mortgages;
(3) Recommend to the Commissioner that the HFA be required to
contract its loan servicing or property disposition functions to a
third party;
(4) Recommend to the Commissioner that the mortgage insurance be
terminated in cases of fraud or material misrepresentation by the HFA,
or transfer of interest in an insured mortgage or assignment of the
mortgage not in accord with the requirements of this part;
(5) Recommend to the Commissioner that approval for the HFA to
participate in the program be suspended or withdrawn;
(6) Recommend to the Commissioner that the HFA's mortgagee approval
be withdrawn pursuant to 24 CFR part 25 and/or that penalties be
imposed pursuant to 24 CFR part 30;
(7) Require additional financial or other reports as may be
necessary to monitor the activities of the HFA more closely.
(b) Actions by Headquarters. HUD Headquarters may impose any of the
sanctions set forth or recommended in paragraph (a) of this section
based upon its responsibilities for monitoring and overall program
oversight.
(c) Effect of suspension or withdrawal. A suspension or withdrawal
action will not affect any mortgage insurance endorsement in effect on
the date of the suspension or withdrawal action.
(d) HFA right to informal hearing. (1) Any sanction imposed by a
Designated Office in writing will be immediately effective, will state
the grounds for the action, and provide for the HFA's right to an
informal hearing before the Designated Office Representative or his or
her designee in the Designated Office. The HFA may request an informal
hearing within 10 working days of receipt of the suspension or
withdrawal action and the Designated Office shall give the HFA an
opportunity to be heard within 10 working days of receipt of the HFA's
request. The HFA may be represented by counsel. The Designated Office
Representative, or his or her designee, will advise the HFA in writing
of the decision within 10 working days of the informal hearing, which
decision will constitute final HUD action.
(2) Sanctions imposed by Headquarters will be handled in a similar
manner, except that the informal hearing shall be before the
Commissioner or his or her designee.
Sec. 266.130 Reinsurance.
Reinsurance will be permitted for the portion of the HFA risk,
subject to the following requirements:
(a) Neither HUD's nor the HFA's position shall be subordinated;
(b) The reinsurance may not be used to reduce any reserve or fund
balance requirements; and
(c) Such reinsurance does not incur an obligation to the Federal
Government.
Subpart C--Program Requirements
Sec. 266.200 Eligible projects.
(a) Minimum project size. Projects insured under this part must
consist of five or more rental dwelling units (including cooperative
dwelling units) on one site. The site may consist of two or more non-
contiguous parcels of land situated so as to comprise a readily
marketable real estate entity within an area small enough to allow
convenient and efficient management. The units may be detached, semi-
detached, row houses, multifamily structures, or mobile home parks
(exclusive of the mobile homes).
(b) New construction or substantial rehabilitation. Insurance under
this part shall be for the purpose of financing the new construction or
substantial rehabilitation of projects meeting the other requirements
of this part as follows:
(1) New construction occurs when all project and construction
elements are installed as part of the work.
(2) Substantial rehabilitation is any combination of the following
work to the existing facilities of a project that aggregates to at
least 15 percent of project's value after the rehabilitation and that
results in material improvement of the project's economic life,
liveability, marketability, and profitability: Replacement, alteration
and/or modernization of building spaces, long-lived building or
mechanical system components, or project facilities. Substantial
rehabilitation may include but not consist solely of any combination
of: minor repairs, replacement of short-lived building or mechanical
system components, cosmetic work, or new project additions.
(c) Existing projects. Financing of existing properties without
substantial rehabilitation is allowed.
(1) If an existing multifamily project is being acquired and HUD
insurance under this part will be used to facilitate the acquisition of
projects to increase the supply of affordable housing, such
acquisitions are permissible if the HUD insured mortgage does not
exceed the sum of the total cost of acquisition, cost of financing,
cost of repairs, and reasonable transaction costs as determined by the
Commissioner.
(2) If the property is subject to an HFA-financed loan to be
refinanced and such refinancing will result in the preservation of
affordable housing, refinancing of these properties is permissible if
project occupancy is not less than 93 percent (to include consideration
of rent in arrears), based on the average occupancy in the project over
the most recent 12 months, and the mortgage does not exceed an amount
supportable by the lower of the unit rents being collected under the
rental assistance agreement or the unit rents being collected at
unassisted projects in the market area that are similar in amenities
and location to the project for which insurance is being requested. The
HUD-insured mortgage may not exceed the sum of the existing
indebtedness, cost of refinancing, the cost of repairs and reasonable
transaction costs as determined by the Commissioner. If a loan to be
refinanced has been in default within the 12 months prior to
application for refinancing, the HFA must assume not less than 50
percent of the risk.
(d) Projects receiving Section 8 rental subsidies or other rental
subsidies. Projects receiving project-based housing assistance payments
under section 8 of the U.S. Housing Act of 1937 or other rental
subsidies and meeting the requirements of this part may be insured
under this part only if the mortgage does not exceed an amount
supportable by the lower of the unit rents being or to be collected
under the rental assistance agreement or the unit rents being collected
at unassisted projects in the market that are similar in amenities and
location to the project for which insurance is being requested.
(e) SRO projects. Single room occupancy (SRO) projects, as defined
in Sec. 266.5, are eligible for insurance under this part. Units in SRO
projects must be subject to 30-day or longer leases; however, rent
payments may be made on a weekly basis in SRO projects.
(f) Board and care/assisted living facilities. Board and care
projects and assisted living facilities may be insured if the
facilities meet the definition of those terms in Sec. 266.5.
(g) Elderly projects. Projects or parts of projects specifically
designed for the use and occupancy by elderly families. An elderly
family means any household where the head or spouse is 62 years of age
or older, and also any single person who is 62 years of age or older.
(h) Zoning requirements. Projects insured under this part must meet
applicable zoning and other State/local government requirements.
Sec. 266.205 Ineligible projects.
The following projects and facilities are not eligible for
insurance under this part:
(a) Transient housing or hotels. Rental for transient or hotel
purposes. For purposes of this part, rental for transient or hotel
purposes means:
(1) Rental for any period less than 30 days, or
(2) Any rental, if the occupants of the housing accommodations are
provided customary hotel services such as room service for food and
beverages, maid service, furnishing and laundering of linens, or valet
service.
(b) Projects in military impact areas. A project located in a
military impact area, as determined by HUD. A military impact area is
generally a small or medium size metropolitan housing market area or a
remote or isolated nonmetropolitan area where:
(1) Military-connected households comprise 25 percent or more of
the total households in the market area. Military-connected households
include active duty military personnel, civilian employees of the
military service (Department of Defense) or other Federal agency at or
in support of the installation, and employees of contractors and sub-
contractors directly associated with the military installation, and
their dependents. Unaccompanied active duty military personnel housed
in military-controlled group quarters housing (barracks, BOQ's) are
excluded; and
(2) There is concern about the continued stability of the current
level of military strength and mission at the installation based on
public announcements from the Department of Defense or the military
service of impending changes; and
(3) The complete reduction of military-connected households living
in nonmilitary rental housing over a 5 year period, at an annual
average decline of 20 percent, would, taking into account growth in the
civilian economy and normal changes in the housing inventory, cause an
adverse impact on the private rental market resulting in an increase in
the rental vacancy rate in the housing market of 10 percent or more at
the end of that period.
(c) Retirement service centers. Projects designed for the elderly
with extensive services and luxury accommodations that provide for
central kitchens and dining rooms with food service or mandatory
services.
(d) Nursing homes or intermediate care facilities. Nursing homes
and intermediate care facilities licensed and regulated by State or
local government and providing nursing and medical care.
Sec. 266.210 HUD-retained review functions.
Certain functions are retained by the Commissioner. The HFA must
submit any information or certification required by the Commissioner to
permit determination of compliance with requirements concerning:
(a) Previous participation of principals. Previous participation of
the principals of the mortgagor, general contractor, consultant or
management agent in accordance with the Previous Participation and
Clearance Review Procedures of 24 CFR 200.210 through 200.218.
(b) Environmental review requirements. To determine compliance with
the requirements of the National Environmental Policy Act of 1969 and
related laws and authorities, the HUD Field Office will visit each
project site proposed for insurance under this part and prepare the
applicable environmental reviews as set forth in 24 CFR part 50 and for
the related environmental criteria and standards in 24 CFR part 51.
These requirements must be completed before HUD may issue the firm
approval letter.
(c) Intergovernmental review. Intergovernmental review of Federal
programs under Executive Order 12372, as implemented in 24 CFR part 52.
(d) Subsidy layering. The Commissioner, or Housing Credit Agencies
through such delegation as may be in effect by regulation hereafter,
shall review all projects receiving tax credits and some form of HUD
assistance for any excess subsidy provided to individual projects and
reduce subsidy sources in accordance with outstanding guidelines.
(e) Davis-Bacon Act. The Commissioner shall obtain and provide to
the HFA the appropriate Department of Labor wage rate determinations
under the Davis-Bacon Act, where they apply under this part.
Sec. 266.215 Functions delegated by HUD to HFAs.
The following functions are delegated by HUD to the HFAs:
(a) Affirmative Fair Housing Marketing Plan (AFHMP). The HFA will
perform information collection, reviews and ministerial activities
associated with the review and approval of the AFHMP for all projects.
(Enforcement of fair housing and equal opportunity laws is the
responsibility of HUD.)
(b) Labor standards and prevailing wage requirements. The HFA will
perform information collection (e.g., payroll review and routine
interviews) and other routine administration and enforcement functions
regarding labor standards, in accordance with Sec. 266.225(e).
(Enforcement of Davis-Bacon prevailing wage requirements and labor
standards is the responsibility of HUD.)
(c) Insurance of advances. In cases involving insured advances, the
HFA will approve periodic advances of mortgage insurance proceeds
during construction of the project subject to terms specified by the
Commissioner.
(d) Cost certification. The HFA will perform cost certification
functions on each insured loan subject to terms specified by the
Commissioner.
(e) Lead-Based Paint. The HFA will perform functions related to
Lead-Based Paint requirements subject to terms specified by the
Commissioner.
Sec. 266.220 Nondiscrimination in housing and employment.
The mortgagor must certify to the HFA that, so long as the mortgage
is insured under this part, it will:
(a) Not use tenant selection procedures that discriminate against
families with children, except in the case of a project that
constitutes ``housing for older persons'' as defined in section
807(b)(2) of the Fair Housing Act (42 U.S.C. 3607(b)(2));
(b) Not discriminate against any family because of the sex of the
head of household;
(c) Comply with the Fair Housing Act (42 U.S.C. 3601-3619), as
implemented by 24 CFR part 100; titles II and III of the Americans with
Disabilities Act of 1990 (42 U.S.C. 12101-12213), as implemented by 28
CFR part 35; section 3 of the Housing and Urban Development Act of 1968
(12 U.S.C. 1701u), as implemented by 24 CFR part 135; the Equal Credit
Opportunity Act (15 U.S C. 1691-1691f), as implemented by 12 CFR part
202; Executive Order 11063, as amended by Executive Order 12259 (3 CFR
1958-1963 Comp., p. 652 and 3 CFR 1980 Comp., p. 307), and implemented
by 24 CFR part 107; Executive Order 11246 (3 CFR 1964-1965 Comp., p.
339), as implemented by 41 CFR part 60; other applicable Federal laws
and regulations issued pursuant to these authorities; and applicable
State and local fair housing and equal opportunity laws. In addition, a
mortgagor that receives Federal financial assistance must also certify
to the HFA that, so long as the mortgage is insured under this part, it
will comply with title VI of the Civil Rights Act of 1964 (42 U.S.C.
2000d), as implemented by 24 CFR part 1; the Age Discrimination Act of
1975 (42 U.S.C. 6101-6107), as implemented by 24 CFR part 146; and
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794), as
implemented by 24 CFR part 8.
Sec. 266.225 Labor standards.
(a) Applicability of Davis-Bacon. (1) All laborers and mechanics
employed by contractors or subcontractors on a project insured under
this part shall be paid not less than the wages prevailing in the
locality in which the work was performed for the corresponding classes
of laborers and mechanics employed in construction of a similar
character, as determined by the Secretary of Labor in accordance with
the Davis-Bacon Act, as amended (40 U.S.C. 276a-276a-5), where the
project meets all of the following conditions:
(i) Advances for the project are insured under this part;
(ii) The project involves new construction or substantial
rehabilitation; and
(iii) The project will contain 12 or more dwelling units.
(2) Projects that do not meet these conditions are not subject to
Davis-Bacon wage rates except to the extent required as a condition of
other Federal assistance to the project.
(b) Volunteers. The provisions of this section shall not apply to
volunteers under the conditions set out in 24 CFR part 70. In applying
part 70, insurance under this part shall be treated as a program for
which there is a statutory exemption for volunteers.
(c) Labor standards. Any contract, subcontract, or building loan
agreement executed for a project subject to Davis-Bacon wage rates
under paragraph (a) of this section shall comply with all labor
standards and provisions of 29 CFR parts 1, 3 and 5 that would be
applicable to a mortgage insurance program to which Davis-Bacon wage
rates are made applicable by statute.
(d) Advances. (1) No advance under a mortgage on a project subject
to Davis-Bacon wage rates under paragraph (a) of this section shall be
eligible for insurance under this part unless the HFA determines (in
accordance with the Commissioner's administrative procedures) that the
general contractor or any subcontractor or any firm, corporation,
partnership or association in which the contractor or subcontractor has
a substantial interest was not, on the date the contract or subcontract
was executed, on the ineligible list established by the Comptroller
General, pursuant 29 CFR 5.12, issued by the Secretary of Labor.
(2) No advance under any mortgage on a project subject to Davis-
Bacon wage rates under paragraph (a) of this section shall be insured
under this part unless there is filed with the application for the
advance, and no such mortgage shall be insured under this part unless
there is filed with the HFA after completion of the construction or
substantial rehabilitation, a certificate or certificates in the form
required by the Commissioner, supported by such other information as
the Commissioner may prescribe, certifying that the laborers and
mechanics employed in the construction of the project involved have
been paid not less than the wages determined by the Secretary of Labor
to be prevailing in accordance with paragraph (a) of this section.
(e) Responsibility for enforcement and administration. The
Commissioner retains responsibility for enforcement of labor standards
under this section, but the Commissioner may delegate to the HFA
information collection (e.g., payroll review and routine interviews)
and other routine administration and enforcement functions, subject to
monitoring by the Commissioner. Where routine administration and
enforcement functions are delegated to the HFA, the HFA shall bear
financial responsibility for any deficiency in payment of prevailing
wages or, where applicable under 29 CFR part 1, any increase in
compensation to a contractor, that is attributable to any failure
properly to carry out its delegated functions. For example, failure of
an HFA to supply or ensure inclusion of the proper contract clauses or
wage determination in a contract or building loan agreement may require
the HFA to fund increased compensation to a contractor as the result of
increased wages attributable to incorporation of the proper clauses and
wage determination.
Subpart D--Processing, Development, and Approval
Sec. 266.300 HFAs accepting 50 percent or more of risk.
(a) Underwriting standards. An HFA electing to take 50 percent or
more of the risk on loans may use its own underwriting standards and
loan terms and conditions (as disclosed and submitted with its
application) to underwrite and approve loans without further review by
HUD.
(b) HFA responsibilities. The HFA is responsible for the
performance of all functions except those HUD-retained functions
specified in Secs. 266.210 and 266.225(e). After acceptance of an
application for a loan to be insured under this part, the HFA must:
(1) Determine that a market for the project exists, taking into
consideration any comments from the HUD Field Office relative to the
potential adverse impact the project will have on existing or proposed
Federally insured and assisted projects in the area.
(2) Establish the maximum insurable mortgage and review plans and
specifications for compliance with HFA standards;
(3) Determine the acceptability of the proposed mortgagor and
management agent;
(4) Approve the Affirmative Fair Housing Marketing Plan; and
(5) Make any other determinations necessary to ensure acceptability
of the proposed project.
(c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec. 266.210(a), (b), and (c), the HUD
Field Office will issue a firm approval letter.
(d) Inspections and other reviews. The HFA is responsible for
inspections during construction, processing and approving advances of
mortgage proceeds during construction, review and approval of cost
certification, and closing of the loan.
(e) Endorsement of mortgage note for insurance. So long as the HFA
is in good standing, and absent fraud or material misrepresentation on
the part of the HFA, the Commissioner or designee will endorse the
mortgage note for insurance upon presentation by the HFA of the Closing
Docket and certifications required in Sec. 266.420(b), subject to HUD's
right to adjust under Sec. 266.417.
Sec. 266.305 HFAs accepting less than 50 percent of risk.
(a) Underwriting standards. The underwriting standards and loan
terms and conditions of any HFA electing to take less than 50 percent
of the risk on certain projects are subject to review, modification,
and approval by HUD in accordance with Sec. 266.100(b)(2). These HFAs
may assume 25 percent or 10 percent of the risk depending upon the
loan-to-replacement-cost or loan-to-value ratios of the projects to be
insured as specified in Sec. 266.100(b)(2)(i) and (ii).
(b) HFA responsibilities. The HFA is responsible for the
performance of all functions except those HUD-retained functions
specified in Sec. 266.210 and 266.225(e). After acceptance of an
application for a loan to be insured under this part, the HFA must:
(1) Determine that a market for the project exists, taking into
consideration any comments from the HUD Field Office relative to the
potential adverse impact the project will have on existing or proposed
Federally insured and assisted projects in the area;
(2) Establish the maximum insurable mortgage, and review plans and
specifications for compliance with HFA standards as approved by HUD;
(3) Determine the acceptability of the proposed mortgagor and
management agent;
(4) Approve the Affirmative Fair Housing Marketing Plan; and
(5) Make any other determinations necessary to ensure acceptability
of the proposed project.
(c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec. 266.210 (a), (b), and (c), the HUD
Field Office will issue a firm approval letter which, among other
things, will apportion units and obligate credit subsidy to the
project.
(d) Inspections and other reviews. The HFA is responsible for
inspections during construction, processing and approving advances of
mortgage proceeds during construction, review and approval of cost
certification, and closing of the loan.
(e) Endorsement of mortgage note for insurance. So long as the HFA
is in good standing, and absent fraud or material misrepresentation on
the part of the HFA, the Commissioner or designee will endorse the
mortgage note for insurance upon presentation by the HFA of the Closing
Docket and certifications required in Sec. 266.420(b), subject to HUD's
right to adjust under Sec. 266.417.
Sec. 266.310 Insurance of advances or insurance upon completion;
applicability of requirements.
(a) General. HUD will agree to insure periodic advances of mortgage
proceeds or to insure the entire mortgage upon completion of
construction for projects involving new construction or substantial
rehabilitation. Existing projects without the need for substantial
rehabilitation will be considered insurance upon completion cases. In
insurance upon completion cases, only the permanent loan is insured and
a single endorsement is required after satisfactory completion of
construction, substantial rehabilitation or repairs. In periodic
advances cases, progress payments approved by the HFA and both an
initial and final endorsement on the mortgage are required.
(b) Insurance of advances. Periodic advances will be authorized by
the HFA subject to terms specified by the Commissioner.
(c) Insurance upon completion. (1) New construction and substantial
rehabilitation. An HFA may approve a loan that will be insured upon
completion of construction of the project. The HFA approval must
prescribe a designated period during which the mortgagor must start
construction or substantial rehabilitation. If construction or
rehabilitation is started as required, the approval will be valid for
the period estimated by the HFA for construction and loan closing,
including any extension approved by the HFA.
(2) Existing projects with no substantial rehabilitation. Existing
projects with or without repairs are only insured upon completion,
although HFAs may permit noncritical repairs to be completed after
endorsement upon establishment of escrows acceptable to the HFA.
(d) Requirements applicable to both periodic advances and insurance
upon completion cases.--(1) Inspections. The HFA must inspect projects
under this part at such times during construction, substantial
rehabilitation, or repairs as the HFA determines. The inspections must
be conducted to assure compliance with plans and specifications, work
write-ups, and other contract documents.
(2) Approval of advances. At all times, the loan must be kept in
balance, and advances approved only if warranted by construction
progress evidenced through HFA inspection, as well as in accord with
plans, specifications, work write-ups and other contract documents. In
approving advances, HFAs must make certain that other mortgageable
items are supported with proper bills and/or receipts before funds can
be approved and advanced for insurance.
(3) Cost certification. In order to ensure that the final amount
for insurance is supported by certified costs:
(i) The mortgagor (and general contractor, if there is an identity
of interest with the mortgagor) must execute a certificate of actual
costs, in a form acceptable to the HFA, when all physical improvements
are completed to the satisfaction of the HFA and before final
endorsement; and
(ii) The cost certification provided by the mortgagor must be
audited by an independent public accountant.
(4) Contestability. Although the HFA has authority to approve the
mortgagor's (and general contractor's) certification of cost, the
certification will be contestable by the Commissioner during the period
up to and including final endorsement of the mortgage. After final
endorsement, the certification will be final and incontestable except
for fraud or material misrepresentation on the part of the mortgagor
(and/or general contractor).
(5) Assurance of completion. The mortgagor must furnish assurance
of completion of the project in accordance with any requirements of the
HFA as to form and amount.
(6) Latent defects escrow. The mortgagor must furnish an escrow or
other form of assurance required by the HFA to ensure that latent
defects can be remedied within the time period required by the HFA.
(e) Mortgagee of record. The HFA must remain the mortgagee of
record as long as mortgage insurance is in force.
Sec. 266.315 Recordkeeping requirements.
The mortgagor and the builder, if there is an identity of interest
with the mortgagor, shall keep and maintain records of all costs of any
construction or other cost items not representing work under the
general contract and to make available such records for review by the
HFA or HUD, if requested.
Subpart E--Mortgage and Closing Requirements; HUD Endorsement
Sec. 266.400 Property requirements--real estate.
The mortgage must be on real estate held:
(a) In fee simple;
(b) Under a renewable lease of not less than 99 years; or
(c) Under a lease executed by a governmental agency, or other
lessor approved by the HFA, that has a term at least 10 years beyond
the end of the mortgage term.
Sec. 266.402 Recordation.
At the time of initial endorsement in the case of insurance of
advances or at the time of final endorsement in the case of insurance
upon completion, the HFA shall make certain that the mortgage and the
regulatory agreement are recorded.
Sec. 266.405 Title.
(a) Eligibility of title. Marketable title to the mortgaged
property must be vested in the mortgagor on the date the mortgage is
filed for record.
(b) Title evidence. The HFA must receive a title insurance policy
that ensures that marketable title is vested in the mortgagor, that a
survey acceptable to the HFA has been performed, and that no existing
impediments to title concern, or exist on, the property.
Sec. 266.410 Mortgage provisions.
(a) Form. The mortgage and note must be executed on a form approved
by the HFA for use in the jurisdiction in which the property is
located.
(b) Mortgagor. The mortgage must be executed by a mortgagor
determined eligible by the HFA.
(c) First lien. The mortgage must be a single first lien on
property that has first priority for payment and that conforms with
property standards prescribed by the HFA.
(d) Single asset mortgagor. The mortgage must require that the
mortgagor is a single asset mortgagor.
(e) Amortization. The mortgage must provide for complete
amortization (i.e., regularly amortizing) over the term of the
mortgage.
(f) Use restrictions. The mortgage must contain a covenant
prohibiting the use of the property for any purpose other than the
purpose intended on the day the mortgage was executed. The conversion
of a project from rental to cooperative is not a ``change in use'' as
that term is employed in the mortgage since the property will continue
to have a residential use both before and after conversion.
(g) Hazard insurance. The mortgage must contain a covenant,
acceptable to the HFA, that binds the mortgagor to keep the property
insured by one or more standard policies for fire and other hazards
stipulated by the HFA. A standard mortgagee clause making loss payable
to the HFA must be included in the mortgage. The HFA is responsible for
assuring that insurance is maintained in force and in the amount
required by this paragraph and the mortgage. The HFA must ensure that
the insurance coverage is in an amount that will comply with the
coinsurance clause applicable to the location and character of the
property, but not less than 80 percent of the actual cash value of the
insurable improvements and equipment. If the mortgagor does not obtain
the required insurance, the HFA must do so and assess the mortgagor for
such costs. These insurance requirements apply as long as the HFA
retains an interest in the project and final claim settlement has not
been completed or the contract of insurance has not been otherwise
terminated.
(h) Modification of terms. The mortgage must contain a covenant
requiring that, in the event that the HFA and owner agree to a
modification of the terms of the mortgage (e.g., to reflect a reduction
of the interest rate if reductions are realized in the underlying bond
rates for the project), Section 8 rents would be reduced in accordance
with HUD guidelines.
(i) Regulatory Agreement. The mortgage must contain a provision
incorporating the Regulatory Agreement by reference.
Sec. 266.415 Mortgage lien and other obligations.
(a) Liens. At the initial and final closing of the loan, the
mortgagor and the HFA must certify, and the HFA must determine, that
the property covered by the mortgage is free from all liens other than
the lien of the insured mortgage, except that the property may be
subject to such inferior lien or liens as approved by the HFA as long
as the insured mortgage has first priority for payment.
(b) Contractual obligations. At the final closing of the loan, the
mortgagor and the HFA must certify, and the HFA must determine, that
all contractual obligations in connection with the mortgage
transaction, including the purchase of the property and the
improvements to the property, are paid. An exception is made for
obligations that are approved by the HFA and determined by the HFA to
be of a lesser priority for payment than the obligation of the insured
mortgage.
Sec. 266.417 Authority to adjust mortgage insurance amount.
In order to protect the mortgage insurance funds, the Commissioner
has authority in his or her sole discretion, at any time prior to and
including final endorsement, to adjust the amount of the mortgage
insurance.
Sec. 266.420 Closing and endorsement by the Commissioner.
(a) Closing. Before disbursement of loan advances in periodic
advances cases, and in all cases after completion of construction,
repair or substantial rehabilitation, the HFA must hold a closing and
submit a closing docket with required documentation to the Commissioner
or the Commissioner's authorized Departmental representative for
insurance of the mortgage by endorsement of the mortgage note. The note
must provide that the mortgage is insured under section 542(c) of the
Housing and Community Development Act of 1992 and the regulations set
forth at 24 CFR part 266 in effect on the date of endorsement. The note
must also specify the date of endorsement, i.e., the date of HUD
endorsement of the project mortgage, and the risk of loss assumed by
the HFA and by HUD.
(b) Closing docket. The HFA's submission must include a
certification that it has obtained written HUD approval of compliance
with the requirements referred to in Sec. 266.210, and certifications
and information as follows:
(1) Information concerning the mortgage amount and term, location,
number and type of units, income and expenses, rents, projects and
market occupancy percentages, value/replacement cost, interest rate,
and similar statistical information in accordance with the
Commissioner's administrative procedures.
(2) Copies of the amortization schedule, Note and Risk-Sharing
Agreement.
(3) Certification that the loan has been processed, prudently
underwritten (including a determination that a market exists for the
project), cost certified (if the project is being submitted for final
endorsement) and closed in full compliance with the HFA's standards and
requirements (or where the mortgage is insured under Level II, in full
compliance with the underwriting standards and loan terms and
conditions as approved by HUD).
(4) At the time of final endorsement, a certification for periodic
advances cases, if submitted for final endorsement, that advances were
made proportionate to construction progress.
(5) A copy of the HFA-approved cost certification if the project is
submitted for final endorsement.
(6) A certification that equal employment requirements are
followed.
(7) A certification that the HFA has reviewed and approved the
Affirmative Fair Housing Marketing Plan and found it acceptable.
(8) A certification that a dedicated account, if required, has been
increased in accordance with Sec. 266.110(b).
(9) Certifications required under Sec. 266.415 concerning liens and
contractual obligations.
(10) Copies of the Hazard Insurance Policy with a clause making the
loss payable to the HFA.
(11) For projects subject to Davis-Bacon prevailing requirements
under Sec. 266.225, the certification and information concerning
payment of prevailing wage rates required by Sec. 266.225(d).
(12) Certified copies of mortgage (deed of trust) with attached
regulatory agreement, and note for HUD files.
Subpart F--Project Management and Servicing
Sec. 266.500 General.
The HFA will have full responsibility for the administration of the
provisions of this subpart and for managing and servicing projects
insured under this part. The HFA is responsible for monitoring and
determining the compliance of the project owner in accordance with the
provisions of this subpart. HUD will monitor the performance of the
HFA, not the project owner, to determine its compliance with the
provisions covered under this subpart.
Sec. 266.505 Regulatory agreement requirements.
(a) General. (1) The HFA must execute a Regulatory Agreement, in
recordable form, between the mortgagor and the HFA to be in force for
the duration of the insured mortgage and note or bond. The Regulatory
Agreement must include a description of the property. The Regulatory
Agreement must be incorporated by reference into the mortgage and
recorded with the mortgage.
(2) The Regulatory Agreement executed between the HFA and the
mortgagor must be binding upon the mortgagor and any of its successors
and assigns and upon the HFA and any of its successors for so long as
the mortgage is insured by HUD or HUD holds an HFA debenture issued in
connection with a claim arising from the insured mortgage. The HFA may
not assign the Regulatory Agreement.
(3) The HFA will enforce the Regulatory Agreement and take actions
against any mortgagors who violate its provisions. Such actions may
involve a declaration of default and application to any court for
specific performance of the agreement.
(b) Requirements. The Regulatory Agreement must require the
mortgagor to comply with the provisions of this part and obligate the
mortgagor, among other things, to:
(1) Make all payments due under the mortgage and note/bond.
(2) Where necessary, establish a sinking fund for future capital
needs.
(3) Maintain the project as affordable housing, as defined in
Sec. 266.5.
(4) Continue to use dwelling units for their original purposes.
(5) Comply with such other requirements as may be established by
the HFA and set forth in the Regulatory Agreement.
(6) Maintain the project in good physical condition.
(7) Maintain complete books and records established solely for the
project and provide the HFA with an audited financial statement based
on these books and records and performed in accordance with standards
for financial audits of the U. S. General Accounting Office's
government auditing standards, issued by the Comptroller of the United
States.
(8) Comply with the Affirmative Fair Housing Marketing Plan and all
other fair housing and equal opportunity requirements.
(9) Operate as a single asset mortgagor.
(10) Make books and records available for HUD or General Accounting
Office (GAO) review with appropriate notification.
(11) Permit HUD officials or employees to inspect the project upon
request by the Commissioner.
(c) Enforcement. The Regulatory Agreement shall be enforced by the
HFA.
Sec. 266.510 HFA responsibilities.
(a) Inspections. The HFA must perform annual physical inspections
of the projects and provide a copy of the inspection report to HUD. If
a project is not in safe and sanitary condition, the HFA must provide a
summary to HUD of actions required, with target dates, to correct
unresolved findings.
(b) Annual audits of projects. The HFA must analyze projects'
annual audits and provide a copy to HUD along with a summary of
unresolved findings and actions planned, with target dates, to correct
unresolved findings.
(c) HFA's annual financial statement. The HFA must provide HUD with
an annual audited financial statement in accordance with the
requirements of 24 CFR part 44.
Sec. 266.515 Record retention.
(a) Loan origination and servicing. Records pertaining to the
mortgage loan origination and servicing of the loan must be maintained
for as long as the insurance remains in force.
(b) Defaults and claims. Records pertaining to a mortgage default
and claim must be retained from the date of default through final
settlement of the claim for a period of no less than three years after
final settlement.
Sec. 266.520 Program monitoring and compliance.
HUD will monitor the performance of the HFA in accordance with the
provisions covered under this subpart.
Subpart G--Contract Rights and Obligations
Mortgage Insurance Premiums
Sec. 266.600 Mortgage insurance premium: Insurance upon completion.
(a) Initial premium. For projects insured upon completion, on the
date of the final closing, the HFA shall pay to the Commissioner an
initial premium equal to the prescribed percentage, in the sliding
scale chart that is shown in Sec. 266.604(b), of the face amount of the
mortgage.
(b) Premium payable with first payment of principal. On the date of
the first payment of principal the HFA shall pay a second premium
(calculated on a per annum basis) equal to the prescribed percentage of
the average outstanding principal obligation of the mortgage from the
final closing date to the year following the date of the first
principal payment, less the amount paid on the date of the final
closing.
(c) Subsequent premiums. Until one of the conditions is met under
Sec. 266.606(a), the HFA on each anniversary of the date of the first
principal payment shall pay to the Commissioner an annual mortgage
insurance premium equal to the prescribed percentage of the average
outstanding principal obligation of the mortgage, without taking into
account delinquent payments, or partial claim payment under
Sec. 266.630, or prepayments, for the year following the date on which
the premium becomes payable.
Sec. 266.602 Mortgage insurance premium: Insured advances.
(a) Initial premium. For projects involving insured advances, on
the date of the initial closing, the HFA shall pay to the Commissioner
an initial premium equal to the prescribed percentage, in the sliding
scale chart that is shown in Sec. 266.604(b), of the face amount of the
mortgage.
(b) Interim premium. On each anniversary of the initial closing,
the HFA shall pay an interim mortgage insurance premium equal to the
prescribed percentage of the face amount of the mortgage. The HFA shall
continue to pay the interim mortgage insurance premiums until the date
of the first principal payment.
(c) Premium payable with first payment of principal. On the date of
the first principal payment, the HFA shall pay a mortgage insurance
premium equal to the prescribed percentage of the average outstanding
principal obligation of the mortgage for the year following the date of
the first principal payment. The HFA shall adjust this payment by
deducting an amount equal to the portion of the last premium paid that
is attributable to the months after the date of the first payment to
principal. Any partial month is to be counted as a whole month. The HFA
shall remit the net adjusted mortgage premium to the Commissioner and
refund the amount of the adjustment (overpayment) to the mortgagor.
(d) Subsequent premiums. Until one of the conditions is met under
Sec. 266.606(a), the HFA on each anniversary of the date of the first
principal payment shall pay to the Commissioner an annual mortgage
insurance premium equal to the prescribed percentage of the average
outstanding principal obligation of the mortgage, without taking into
account delinquent payments, prepayments, or a partial claim payment
under Sec. 266.630, for the year following the date on which the
premium becomes payable.
Sec. 266.604 Mortgage insurance premium: Other requirements.
(a) Premium calculations on or after first principal payment. The
premiums payable to the Commissioner on and after the first principal
payment shall be calculated in accordance with the amortization
schedule prepared by the HFA for final closing and the prescribed
percentage as set forth in the sliding scale chart in paragraph (b) of
this section without taking into account delinquent payments or
prepayments.
(b) Prescribed percentages. The following sliding scale chart
provides the prescribed percentage, based upon the respective share of
risk, that is to be used in calculating mortgage insurance premiums
under this section:
------------------------------------------------------------------------
Percentage share of risk Prescribed percentage
------------------------------------------------ for calculating HFA's
HUD HFA annual MIP
------------------------------------------------------------------------
90..................... 10 .45
75..................... 25 .375
50..................... 50 .25
40..................... 60 .2
30..................... 70 .15
20..................... 80 .1
10..................... 90 .05
------------------------------------------------------------------------
(c) Closing information. The HFA shall provide final closing
information to the Commissioner within 15 days of the final closing in
a format prescribed by the Commissioner. In addition, the HFA shall
submit a copy of the amortization schedule. This amortization shall be
used to compute and collect all future mortgage insurance premiums
subject to Sec. 266.600(c) or Sec. 266.602(d). If the mortgage is
modified, the HFA shall submit to the Commissioner a copy of the
revised amortization schedule, which shall be used to compute and
collect all future mortgage insurance premiums subject to
Sec. 266.600(c) or Sec. 266.602(d).
(d) Due date for premium payments. Mortgage insurance premiums are
due on the first day of the month of the anniversary of the first
payment to principal. Any premium received by the Commissioner more
than 15 days after the due date shall be assessed a late charge of 4
percent of the amount of the premium payment due. Mortgage insurance
premiums that are paid to the Commissioner more than 30 days after the
due date shall begin to accrue interest at the rate prescribed by the
Treasury Fiscal Requirements Manual.
Sec. 266.606 Mortgage insurance premium: Duration and method of
paying.
(a) Duration of payments. Mortgage insurance premium payments must
continue annually until one of the following occurs:
(1) The mortgage is paid in full;
(2) A deed to the HFA is filed for record;
(3) An application for initial claim payment is received by the
Commissioner; or
(4) The Contract of Insurance is otherwise terminated.
(b) Method of payment. The HFA shall pay any mortgage insurance
premium required by this part in cash.
Sec. 266.608 Mortgage insurance premium: Pro rata refund.
If the Contract of Insurance is terminated by payment in full or is
terminated by the HFA on a form prescribed by the Commissioner, after
the date of the first payment to principal, the Commissioner shall
refund any mortgage insurance premium for the period after the
effective date of the termination of insurance. The refund shall be
mailed to the HFA for credit to the mortgagor's account. In computing
the pro rata portion of the annual mortgage insurance premium, the date
of termination of insurance shall be the last day of the month in which
the mortgage is prepaid or the Commissioner receives a notification of
termination, whichever is later. No refund shall be made if the
insurance was terminated because of the submission of an application
for initial claim payment or if the termination occurs before the date
of the first payment to principal.
Insurance Endorsement
Sec. 266.612 Insurance endorsement.
(a) Initial endorsement. The Commissioner shall indicate his or her
insurance of the mortgage by endorsing the original credit instrument.
(b) Final endorsement. When all advances of mortgage proceeds have
been made and all other applicable terms and conditions have been
complied with to the satisfaction of the Commissioner, the Commissioner
shall indicate on the original credit instrument the total of all
advances that have been approved for insurance and again endorse such
instrument.
(c) Effect of endorsement. From the date of initial endorsement,
the Commissioner and the HFA shall be bound by the provisions of this
subpart to the same extent as if they had executed a contract including
the provisions of this subpart and the applicable sections of the Act.
Assignments
Sec. 266.616 Transfer of partial interest under participation
agreement.
The HFA may not assign the mortgage. However, a partial interest in
an insured mortgage or pool of insured mortgages may be transferred
under a participation agreement or arrangement (such as a declaration
of trust or the issuance of pass-through certificates), without
obtaining the approval of the Commissioner, if the following conditions
are met:
(a) Legal title to the insured mortgage or mortgages shall be held
by the HFA; and
(b) The participation agreement, declaration of trust or other
instrument under which the partial interest is transferred shall
provide that:
(1) The HFA shall remain mortgagee of record under the contract of
mortgage insurance;
(2) The Commissioner shall have no obligation to recognize or deal
with anyone other than the HFA with respect to the rights, benefits,
and obligations of the mortgagee under the contract of insurance; and
(3) The mortgagor shall have no obligation to recognize or do
business with any one other than the HFA or, if applicable, its
servicing agent with respect to rights, benefits, and obligations of
the mortgagor or the mortgagee under the mortgage.
Termination
Sec. 266.620 Termination of Contract of Insurance.
The Contract of Insurance shall terminate if any of the following
occurs:
(a) The mortgage is paid in full;
(b) The HFA acquires the mortgaged property and notifies the
Commissioner that it will not file an insurance claim;
(c) A party other than HFA acquires the property at a foreclosure
sale;
(d) The HFA notifies the Commissioner of Termination of Insurance
(voluntary termination);
(e) The HFA or its successors commit fraud or make a material
misrepresentation to the Commissioner with respect to information
culminating in the Contract of Insurance on the mortgage or while the
Contract of Insurance is in existence;
(f) The receipt by the Commissioner of an Application for Final
Claims Settlement;
(g) If the HFA acquires the mortgaged property and fails to make an
initial claim.
Sec. 266.622 Notice and date of termination by the Commissioner.
The Commissioner shall notify the HFA that the Contract of
Insurance has been terminated and shall establish the effective date of
termination. The termination shall be the last day of the month in
which one of the events specified in Sec. 266.620 occurs.
Claim Procedures
Sec. 266.626 Notice of default and filing an insurance claim.
(a) Definition of default. (1) A monetary default exists when the
mortgagor fails to make any payment due under the mortgage.
(2) A covenant default exists when the mortgagor fails to perform
any other covenant under the provision of the mortgage or the
regulatory agreement, which is incorporated by reference in the
mortgage. An HFA becomes eligible for insurance benefits on the basis
of a covenant default only after the HFA has accelerated the debt and
the owner has failed to pay the full amount due, thus converting a
covenant default into a monetary default.
(b) Date of default. For purposes of this subpart, the date of
default is:
(1) The date of the first uncorrected failure to perform a mortgage
covenant or obligation; or
(2) The date of the first failure to make a monthly payment that is
not covered by subsequent payments, when such subsequent payments are
applied to the overdue monthly payments in the order in which they were
due.
(c) Notice of default. If a default (as defined in paragraph (a) of
this section) continues for a period of 30 days, the HFA must notify
the Commissioner within 10 days thereafter, unless the default is cured
within the 30-day period. Unless waived by the Commissioner, the HFA
must submit this notice monthly, on a form prescribed by the
Commissioner, until the default has been cured or the HFA has filed an
application for an initial claim payment. In cases of mortgage
acceleration, the mortgagee must first give notice of the default.
(d) Timing of claim filing. Unless a written extension is granted
by HUD, the HFA must file an application for initial claim payment (or,
if appropriate, for partial claim payment) within 75 days from the date
of default and may do so as early as the first day of the month
following the month for which a payment was missed. Upon request of the
HFA, HUD may extend, up to 180 days from the date of default, the
deadline for filing a claim. In those cases where the HFA certifies
that the project owner is in the process of transacting a bond
refunder, refinancing the mortgage, or changing the ownership for the
purpose of curing the default and bringing the mortgage current, HUD
may extend the deadline for filing a claim beyond 180 days, not to
exceed 360 days from the date of default.
Sec. 266.628 Initial claim payments.
(a) Determination of initial claim amount. (1) The initial claim
amount is based on the unpaid principal balance of the mortgage note as
of the date of default, plus interest at the mortgage note rate from
date of default to date of initial claim payment. The mortgage note
interest component of the initial claim amount is subject to
curtailment as provided in paragraph (b) of this section.
(2) HUD shall make an initial claim payment to the HFA that is
equal to the initial claim amount, less any delinquent mortgage
insurance premiums, late charges and interest, assessed under
Sec. 266.604(d).
(3) The HFA must use the proceeds of the initial claim payment to
retire any bonds or any other financing mechanisms securing the
mortgage within 30 days of the initial claim payment. Any excess funds
resulting from such retirement or repayment shall be returned to HUD
within 30 days of the retirement.
(b) Curtailment of interest for late filings. In determining the
mortgage note interest component of the initial claim amount, if the
HFA fails to meet any of the requirements of this section within the
specified time (including any granted extension of time), HUD shall
curtail the accrual of mortgage note interest by the number of days by
which the required action was late.
(c) Method of payment. HUD shall pay the claim in cash.
Sec. 266.630 Partial payment of claims.
(a) General. When the Commissioner receives a claim for a partial
payment under Sec. 266.626(d), the Commissioner may make a partial
payment of claim in accordance with the requirements of this section.
If the HFA has not previously received a partial claim payment, the HFA
may file a claim for a partial claim payment under Sec. 266.630.
Otherwise, the HFA must file for an initial claim payment under
Sec. 266.628.
(b) HFA submission. In addition to any other requirements set forth
in administration instructions, the HFA must provide the following
information with its application for a partial claim payment:
(1) The amount by which the HFA will reduce the principal on the
insured mortgage and the amount of delinquent interest on the insured
mortgage that the HFA will defer based on the anticipated closing date;
and
(2) A certification that:
(i) The amount of the principal reduction of the insured first
mortgage does not exceed 50 percent of the unpaid principal balance;
(ii) The relief resulting from the partial claim payment when
considered with other resources available to the project are sufficient
to restore the financial viability of the project;
(iii) The project is or can (at reasonable cost) be made
structurally sound;
(iv) The management of the project is satisfactory;
(v) The default under the insured mortgage was beyond the control
of the mortgagor.
(c) Claim processing.--(1) Acceptable application. If the HFA's
application is acceptable, the Commissioner shall notify the HFA to
process the partial payment, which will include the modification of the
existing mortgage and the execution by the mortgagor of a second
mortgage payable to the HFA. When the second mortgage is closed, the
HFA shall notify the Commissioner, in a form and manner prescribed in
administrative instructions. Upon receipt of notice from the HFA, the
Commissioner shall make the partial claim payment.
(2) Unacceptable application. If the application is unacceptable,
the Commissioner shall either advise the HFA of the information needed
to make the application acceptable or return the application for
further action. The HFA is granted an extension of 30 days from the
date of any notification for further action.
(d) Requirements--(1) One partial claim payment. Only one partial
claim payment may be made under a contract of insurance.
(2) Partial claim payment amount. The amount of the partial claim
payment is equal to the amount of relief provided by the HFA in the
form of a reduction in principal and a reduction of delinquent interest
due on the insured mortgage times the lesser of HUD's percentage of the
risk of loss or 50 percent.
(3) HFA second mortgage. Repayment of the relief provided by the
HFA must be secured by a second mortgage to the HFA. This second
mortgage may provide for postponed amortization and may not be assigned
by the HFA. This second mortgage is not insured under this part and may
not be insured under any other HUD-related insurance program.
(4) Partial claim repayment by HFA. The HFA must remit to HUD a
percentage of all amounts collected on the HFA's second mortgage within
15 days of receipt by the HFA. The applicable percentage is equal to
the percentage used in paragraph (d)(2) of this section to determine
the partial claim payment amount. Payments made after the 15th day must
include a 5 percent late charge plus accrued interest at the debenture
rate.
(5) Certified statements of amounts collected. As long as the
second mortgage remains of record, the HFA must submit to the
Commissioner an annual certified statement of the amounts collected by
the HFA. The HFA must submit a final certified statement within 30 days
after the second mortgage is paid in full, foreclosed, or otherwise
terminated.
Sec. 266.632 Withdrawal of claim.
In case of a default and subsequent filing of claim, the HFA shall
determine the form of workout or modification and will inform HUD of
the type of mortgage relief determined to be appropriate. If the
default is cured after the claim is made but before the initial claim
payment is paid by HUD, the HFA may, in writing, withdraw the claim,
and insurance will continue as if the default had not occurred.
Sec. 266.634 Reinstatement of the contract of insurance.
(a) Conditions for reinstatement. After the initial claim payment,
HUD may reinstate the contract of insurance on the following
conditions:
(1) The HFA has not acquired the project;
(2) The mortgagor has cured the default; and
(3) The HFA requests that HUD reinstate the contract of insurance.
(b) Notification of reinstatement. If reinstatement is acceptable
to HUD, HUD shall notify the HFA of the date the contract of insurance
will be reinstated and shall advise the HFA of the payment needed to
reinstate the contract of insurance.
(c) Payment. Within 30 days of the date of the notice under
paragraph (b) of this section, the HFA shall pay HUD an amount equal to
the initial claim amount, as determined under Sec. 266.628(a)(1), plus
an amount equal to the accrued and unpaid interest on the HFA Debenture
through the reinstatement date, plus an amount equal to the mortgage
insurance premium for the period from the date of reinstatement of the
contract of insurance to the next anniversary date for payment of the
mortgage insurance premium.
(d) Cancellation of debenture. Upon receipt from the HFA of the
amount specified in paragraph (c) of this section, HUD shall return the
HFA debenture for cancellation.
(e) Continuation of contract of insurance. Upon reinstatement, the
contract of insurance shall continue as if the default had not
occurred.
Sec. 266.636 Insuring new loans for defaulted projects.
The HFA may not make another loan that is insured under this part
to the same owner in the same project if HUD has paid a claim under
this part.
Sec. 266.638 Issuance of HFA Debenture.
(a) Condition to initial claim payment. The HFA must issue an
instrument in the form of a debenture to HUD within 30 days of
receiving the initial claim payment. The HFA Debenture shall meet the
following requirements and shall be in a form that has been approved by
HUD as part of the application approval process.
(b) Term of HFA Debenture. The HFA Debenture shall be dated the
same date that the initial claim payment is issued. The HFA Debenture
shall have a term of five years in order to afford the mortgagor ample
time to cure the default or the HFA time to foreclose and/or resell the
project. HUD may provide a written extension of the five year term if
the HFA certifies and provides documentation that the project owner has
filed bankruptcy and the HFA is taking action to have the project
discharged from the bankruptcy. The HFA Debenture shall, during this
extended period, continue to bear interest as described below at HUD's
published debenture rate at the earlier of initial endorsement or final
endorsement. Interest shall be due and payable annually on the
anniversary date of the initial claim payment. Interest is due on the
full face amount of the HFA Debenture through the term of the HFA
Debenture or through the date an application for final claim payment is
received by the Commissioner.
(c) HFA Debenture amount. (1) The HFA Debenture shall be for the
full initial claim amount as determined under Sec. 266.628(a)(1) (minus
any excess funds returned to HUD under Sec. 266.628(a)(3)).
(2) The full amount of the HFA Debenture shall be payable to HUD
upon maturity, unless the HFA Debenture is canceled because of:
(i) A reinstatement of the contract of insurance under
Sec. 266.634; or
(ii) Final claim settlement under Sec. 266.654.
(d) HFA Debenture interest rate. The HFA Debenture shall bear
interest at HUD's published debenture rate at the earlier of initial
endorsement or final endorsement. Interest shall be due and payable
annually on the anniversary date of the initial claim payment and on
the date of redemption when redeemed or canceled before an anniversary
date. Interest shall be computed on the full face amount of the HFA
Debenture through the term of the HFA Debenture.
(e) Form of HFA Debenture. The HFA Debenture should follow the
standard form of a State/Municipal Debenture issued under the Uniform
Commercial Code, where applicable, and shall be supported by the full
faith and credit of the HFA. For HFAs that operate as departments or
divisions of States or units of local government and where such HFAs
cannot pledge the full faith and credit of the HFA, such HFAs may
collateralize their obligation through a letter of credit, reinsurance,
or other forms of credit acceptable to the Commissioner.
(f) Debenture registration. Unless otherwise required by law,
including State or local laws, or other governing bodies, HUD will not
require the HFA Debenture to be ``Registered'' (with the Securities and
Exchange Commission) as it is a direct, or private, placement, and not
a public offering, that is supported by the full faith and credit of
the HFA.
Sec. 266.640 Foreclosure and acquisition.
The HFA is not required to foreclose the insured mortgage. It may
accept a deed-in-lieu of foreclosure.
Sec. 266.642 Appraisals.
Where actions taken or caused to be taken by the HFA have the
effect of the recovery of less than the face amount of the HFA
Debenture held by HUD, an appraisal should be made to determine the
value of the project. The appraisal should assume a willing buyer and a
willing seller. The appraisal must be done within the 45-day period
immediately preceding the date when the HFA files an application for
final claim settlement. If at the time of final claim settlement the
HFA has not sold the project, an appraisal should be made to determine
the value of the project at its highest and best use.
Sec. 266.644 Application for final claim settlement.
The HFA shall file an application for final settlement in
accordance with the Commissioner's administrative procedures not later
than 30 days after any of the following:
(a) Sale of the property after foreclosure or after acquisition by
deed-in-lieu of foreclosure; or
(b) Expiration of the term of the HFA debenture.
Sec. 266.646 Determining the amount of loss.
The amount of the total loss to be shared by HUD and the HFA is
equal to:
(a) The amount of the initial claim payment;
(b) Plus all items set forth in Sec. 266.648; and
(c) Less all items set forth in Sec. 266.650.
Sec. 266.648 Items included in total loss.
In computing the total loss, the following items are added to the
amount described in Sec. 266.646(a):
(a) The amount of all payments that the HFA made from its own funds
and not from project income for:
(1) Taxes, special assessments, and water bills that are liens
before the Mortgage; and
(2) Fire and hazard insurance on the property.
(b) A reasonable amount of acquisition costs actually paid by the
HFA. These costs may not include loss or damage resulting from the
invalidity or unenforceability of the Mortgage lien or the
unmarketability of the Mortgagor's title.
(c) Reasonable payments that the HFA made from its own funds and
not from project income for:
(1) Preservation, operation and maintenance of the property;
(2) Repairs necessary to meet the requirements of local laws;
(3) Expenses in connection with the sale of property; and
(4) Bankruptcy expenses approved by the Office of General Counsel.
(d) The amount of HFA Debenture interest paid by the HFA to HUD.
Sec. 266.650 Items deducted from total loss.
In computing insurance benefits, the following items are deducted
from the amounts described in Sec. 266.646(a) and (b):
(a) All amounts received by the HFA on account of the mortgage
after the date of default;
(b) All cash, and/or funds related to the mortgaged property,
including deposits and escrows made for the account of the mortgagor
that the HFA holds (or to which it is entitled);
(c) The amount of any undrawn balance under a letter of credit that
the HFA accepted in lieu of a cash deposit for an escrow agreement;
(d) Any net income from the mortgaged property/project that the HFA
received after the date of default.
(e) The proceeds from the sale of the project or the appraised
value of the project as provided in Sec. 266.642 as follows:
(1) If the HFA disposes of the project through a negotiated sale,
the amount deducted shall be the higher of the sales price or the
appraised value.
(2) If the HFA disposes of the project through a competitive bid
procedure approved by the Commissioner, the amount deducted shall be
the sales price, even if it is lower than the appraised value.
(3) If the HFA has not disposed of the project within 5 years from
the date of issuance of the HFA Debentures (unless an extension has
been granted pursuant to Sec. 266.638), the amount deducted shall be
the appraised value.
(f) Any and all claims that the HFA has acquired in connection with
the acquisition and sale of the property. Claims include but are not
limited to returned premiums from canceled insurance policies, interest
on investments of reserve for replacement funds, tax refunds, refunds
of deposits left with utility companies, and amounts received as
proceeds of a receivership.
(g) The amount of daily HFA Debenture interest accrued but not paid
from the anniversary date of the last HFA Debenture interest payment to
the date an application for final claim payment is received by the
Commissioner.
Sec. 266.652 Determining share of loss.
The total loss computed in Sec. 266.646 shall be shared by HUD and
the HFA in accordance with their respective percentage of risk as
specified in the note and the addendum to the Risk-Sharing Agreement
between HUD and the HFA.
Sec. 266.654 Final claim settlement and HFA Debenture redemption.
(a) Final claim payment. If the initial claim amount, as determined
under Sec. 266.628(a)(1), is less than HUD's share of the loss, HUD
shall make a final claim payment to the HFA that is equal to the
difference between HUD's share of the loss and the initial claim amount
and shall return the HFA Debenture to the HFA for cancellation.
(b) HFA reimbursement payment. If the initial claim amount, as
determined under Sec. 266.628(a)(1), is more than HUD's share of the
loss, the HFA shall, within 30 days of notification by HUD of the
amount due, remit to HUD an amount that is equal to the difference
between the initial claim amount and HUD's share of the loss. The funds
must be remitted in a manner prescribed in the Commissioner's
administrative procedures. The HFA Debenture will be considered
redeemed upon receipt of the cash payment. A 5 percent penalty will be
charged and interest at the debenture rate will begin to accrue if the
cash payment is not received within the prescribed period. If an HFA is
in default under an existing debenture and files a claim on another
project under this part, HUD will charge the HFA's Dedicated Account
for the amount owed the Department. In cases of top-tier or A-rated
HFA's which are not required to maintain a Dedicated Account, HUD will
inform the rating agencies of the HFA's failure to pay on their debt
obligation and of its violation of the Risk-Sharing Agreement.
(c) Losses. Losses sustained as a consequence of the (sole)
negligence of an HFA (e.g., failure to acquire adequate hazard
insurance where such insurance is available) shall be the sole
obligation of the HFA, notwithstanding the risk apportionment otherwise
agreed to by HUD and the HFA.
(d) Supplemental claim. Any supplemental claim must be filed within
one year from date of final claim settlement.
Sec. 266.656 Recovery of costs after final claim settlement.
If, after final claim settlement, the HFA recovers additional sums
as the result of the sale of the project or otherwise, the total amount
of such recovery shall be shared by HUD and the HFA in accordance with
the prescribed percentage of shared risk.
Sec. 266.658 Program monitoring and compliance.
HUD will monitor the performance of the HFA for compliance with the
provisions of this subpart.
Dated: November 29, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-29835 Filed 12-2-94; 8:45 am]
BILLING CODE 4210-27-P
