[Federal Register Volume 76, Number 84 (Monday, May 2, 2011)]
[Rules and Regulations]
[Pages 24363-24372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10450]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 200 and 207
[Docket No. FR-5393-F-02]
RIN 2502-A195
HUD Multifamily Rental Projects: Regulatory Revisions
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This rule amends certain Federal Housing Administration (FHA)
regulations to update these regulations to reflect current HUD policy
in the area of multifamily rental projects. On November 12, 2010, HUD
published proposed regulations to remove outdated regulatory language
and policies and to reflect proposed changes in FHA's multifamily
rental project closing documents, issued for comment in January 2010,
and again in December 2010. The issuance of revised multifamily rental
project closing documents for public comment and corresponding
regulatory changes first commenced in 2004, but was not completed.
This final rule follows the November 12, 2010 proposed rule, and
takes into consideration public comments received on the November 2010
proposed rule, as well as certain comments received on HUD's issuance
of further revised multifamily rental project closing documents made
available for public comment by notice published on December 22, 2010.
Neither the closing documents issued for comment in
[[Page 24364]]
January 2010 and December 2010, nor this final rule include changes
affecting closing documents or regulations for healthcare facilities,
nursing homes, intermediate care facilities, board and care homes, and
assisted living facilities.
DATES: Effective Date: September 1, 2011.
FOR FURTHER INFORMATION CONTACT: John Daly, Associate General Counsel
for Insured Housing, Office of General Counsel, Department of Housing
and Urban Development, 451 7th Street, SW., Washington, DC 20410-0500;
telephone 202-708-1274 (this is not a toll-free number). Persons with
hearing or speech impairments may access this number through TTY by
calling the toll-free Federal Information Relay Service at 800-877-
8339.
SUPPLEMENTARY INFORMATION:
I. Background
By notice published in the Federal Register on January 21, 2010 (75
FR 3544), HUD started anew the process for updating the multifamily
rental project closing documents (closing documents), a process that
first commenced with issuance of a notice published on August 2, 2004
(69 FR 46214).\1\ The majority of these documents, as explained in both
the 2004 and 2010 notices, had not been revised in years and needed
updating to ensure that the documents are consistent with modern real
estate and lending laws.
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\1\ The update of the closing documents that commenced in 2004
and which was restarted in 2010 does not include an update of HUD's
healthcare closing documents.
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HUD recognized that in updating its closing documents corresponding
changes would need to be made to certain HUD regulations. Therefore,
the update effort that commenced in 2004 included an August 2, 2004
proposed rule (69 FR 46210) to update certain FHA regulations. The
August 2004 proposed rule served as the basis for HUD's 2010 proposed
update of regulations published on November 12, 2010 (75 FR 69363), and
took into consideration public comments received in response to the
2004 proposed rule. The November 2010 proposed rule also took into
consideration public comments that affected HUD's regulations. Those
comments were received in response to the January 21, 2010 solicitation
of public comment on HUD's proposed closing documents.\2\
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\2\ In soliciting public comment on closing documents, HUD not
only sought input from industry and interested members of the public
on HUD's proposed changes to closing documents, but commenced the
process for approval of documents required by the Paperwork
Reduction Act of 1995. In accordance with this act, HUD issued two
notices for public comment: One published on January 21, 2010 (75 FR
3544), and the second on December 22, 2010 (75 FR 80517). With each
notice, HUD made the closing documents available for review, in
clean form, and redline/strikeout form on HUD's Web site.
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In addition to the amendments proposed in 2004, the amendments
offered in the November 12, 2010 proposed rule contained a change to
the definition of ``eligible mortgagor''. The November 2010 rule
proposed that an eligible mortgagor must be a single asset owner. The
amendments to this definition also included removing provisions
allowing natural persons and tenants in common to serve as eligible
mortgagors.
In response to comments on the 2004 proposed rule, HUD also
proposed a shift in the imposition of the charge imposed on late
payments from 15 to 10 days. Commenters on the 2004 proposed rule had
suggested that standardizing the time when the late fee applies would
facilitate compliance by Government National Mortgage Association
(Ginnie Mae) issuers with their obligation to make payments to
investors.
Further, HUD proposed a revision to the security instrument (HUD
94000M) in the update of the closing documents. As in the 2004 proposed
regulatory revisions, the changes proposed in the November 2010
proposed rule included a two-tiered default structure, a ``Monetary
Event of Default,'' for financial defaults, which would give the Lender
an immediate right to an insurance fund claim, and a second class of
defaults, a ``Covenant Event of Default'' for all other bases for
default. In the ``Covenant Event of Default,'' HUD's prior written
approval would be required for the lender to make a claim on the
insurance fund. Once a monetary default exists under the security
instrument and continues for a minimum period of 30 days, the Lender
would become eligible to receive mortgage insurance benefits.
HUD further proposed amending insurance claim requirements to
provide, consistent with existing HUD practice and policy, that the
mortgagee request a three-month extension of the 45-day deadline
prescribed by the regulations in Sec. 207.258 for a mortgage funded
with the proceeds of state or local bonds, Ginnie Mae securities, or
other bond obligations specified by HUD, any of which contains a lock-
out or penalty provision.
HUD also proposed adding a new provision that would effectively
allow the Commissioner to incentivize the mortgagee to accelerate
payment of the outstanding principal balance due under an insured
mortgage when the mortgagee does not comply promptly with the
Commissioner's request to accelerate. In such cases, mortgage insurance
benefits, if requested, would be reduced by an amount equal to the
difference between the project's market value as of the date of the
Commissioner's request and the project's market value on the date the
mortgagee makes an election to assign the mortgage, or convey title to
the project, as determined by appraisal procedures established by the
Commissioner.
II. This Final Rule--Overview of Significant Changes
This section presents a brief overview of key changes made at this
final rule stage based on consideration of issues raised by the
commenters in response to the November 2010 proposed rule, and HUD's
own further consideration of issues related to regulations
corresponding to changes made in the closing documents. In this final
rule:
HUD modified the definition of ``eligible mortgagor'' to
allow a non-single asset entity to be an eligible mortgagor under
certain terms and conditions determined acceptable to the Commissioner.
However, no regulatory exception is provided for natural persons and
tenants in common.
HUD modified its proposal to allow cash flow generated
during a workout to be used once a default has been cured.
HUD modified its insurance claim requirements to allow the
mortgagee to file its application for insurance benefits based on HUD's
acknowledgement of the mortgagee's election to assign.
HUD provides that application of the regulations
promulgated by this final rule and use of the corresponding updated
closing documents will not be mandatory until September 1, 2011; that
is, the new regulations and updated closing documents will apply to a
firm commitment for mortgage insurance issued by HUD on or after
September 1, 2011. The updated closing documents have completed review
by the Office of Management and Budget (OMB) under the Paperwork
Reduction Act, and the announcement of OMB approval and the assignment
of an OMB control number is published elsewhere in today's Federal
Register. With a September 1, 2011, effective date, HUD is providing a
four-month transition period before the new regulations and updated
closing documents become applicable. The regulations allow for
application of the regulations and use of corresponding updated closing
[[Page 24365]]
documents in effect prior to September 1, 2011, to be used after
September 1, 2011, in the case of a borrower that demonstrates to the
satisfaction of the Commissioner that financial hardship would result
to the borrower from application of the regulations and use of the
closing documents that become effective September 1, 2011.
In addition to the foregoing changes, commenters and other
interested members of the public will see that many of the commenters'
requests for changes are addressed in the final versions of the closing
documents posted on HUD's Web site.
For example, in commenting on HUD's proposed changes to the closing
documents and the regulations, parties expressed concern about the
applicability of new requirements that HUD would impose after the
multifamily rental project transaction had closed. Commenters expressed
concern that such requirements would be applied to existing borrowers,
and, without appropriate notice or time to transition to new
requirements, such new requirements might have an adverse economic
effect on the operation of a project. In response to this concern, HUD,
in appropriate places in several of the closing documents, included the
term ``program obligations'' to clarify the process by which HUD issues
new requirements that program participants will be required to meet.
The definition clarifies that notice and comment rulemaking is followed
for any requirements that would be subject to such procedures. In
essence, HUD makes explicit that it will follow the applicable
procedures, as directed by statute or regulation, which govern issuance
of a document that would announce new binding requirements, policies,
processes, forms, or standards to which parties to the closing
documents must comply. The definition further clarifies that changes to
HUD handbooks, guides, notices and mortgagee letters shall be
applicable to a project only to the extent that these changes
interpret, clarify and implement terms in the relevant loan document.
Because this rule is not making changes related to HUD's healthcare
programs, for the following regulations, the wording of the regulatory
change is presented in a manner that clarifies that the regulatory
change is not applicable to FHA's healthcare programs: Sec. Sec.
200.5,\3\ 200.255, 207.256b, and 207.259.
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\3\ The revision to Sec. 200.88 made by this final rule does
not address late charges for hospital insurance payments as those
fees are separately addressed in Sec. 242.38, which is not being
revised by this rule.
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III. Discussion of Public Comments
The public comment period on the November 12, 2010, proposed rule
closed on December 13, 2010. HUD received 13 comments. This section
presents the significant issues, questions, and suggestions submitted
by public commenters, and HUD's response to these issues, questions and
suggestions.
Eligible Mortgagor (24 CFR 200.5)
Comment: Two commenters stated that incorporating requirements into
regulations, which can be handled administratively, was not necessary.
For example, they stated that incorporation of the term single asset
entity, which is in the closing documents, into regulatory language was
unnecessary. They further suggested that HUD allow waiver from the
single asset requirement for natural persons, tenants in common, and
trusts. The commenters also suggested that, like the single asset
requirement itself, a waiver process should be established at the
administrative level, rather than the regulatory level, as it would be
a more efficient use of agency resources.
HUD Response: The definition of ``eligible mortgagor'' has long
been in regulations. The entity requirement is part of that definition
and therefore needs to be part of the regulation. HUD further notes
that the single asset entity form of ownership has become the standard
form of ownership for commercial real estate transactions, and it is
therefore an important change for HUD to convey in regulations.
However, HUD agrees with commenters that there should be some
flexibility. HUD recognizes that in certain instances, perhaps in the
situation of trusts, the Commissioner may choose to allow other
entities to qualify as mortgagors. Thus, the regulations provide that
except under circumstances, terms and conditions, approved by the
Commissioner, mortgagors shall be a single asset mortgagor entity
acceptable to the Commissioner, as limited by the applicable section of
the Act,\4\ and shall possess the powers necessary and incidental to
operating the project. Single asset entities shall not be natural
persons and tenancies in common. The regulation does not contemplate
any circumstances in which an exception to the prohibition on natural
persons and tenancies in common would be made and consequently does not
include exception language.
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\4\ A mortgagor is defined in section 201(b) of the National
Housing Act (12 U.S.C. 1707(b)).
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As noted in the proposed rule, ownership by an individual has been
largely abandoned by the commercial lending industry, and is used in
extremely limited circumstances in the Fannie Mae and Freddie Mac
multifamily insurance programs. In their discussion of natural persons
as eligible borrowers, commenters expressed concern that natural
persons would be dissuaded from seeking refinancing of projects because
certain states would impose transfer taxes if project ownership was
converted from a natural person into a single asset structure. HUD
finds that state tax avoidance is not an acceptable rationale to adopt
this change at the final rule stage, and that natural persons can
create a single asset ownership structure to participate in the
program.
HUD is further concerned that ownership by natural persons would
allow creditors to reach the assets of the insured project. That could
occur for example, if the natural person were to declare bankruptcy.
HUD therefore declines to adopt the recommendation.
In addition, several commenters suggested that HUD allow properties
to be held by tenants-in-common (TIC), a fractional form of ownership.
One commenter noted that it was customary for properties financed with
commercial mortgage backed securities in the late 1990s and early 2000s
to be established as special purpose entities in the operating
agreements for tenants in common borrowers. The commenter stated that
if the ownership entity was structured as a single member limited
liability company, where the operating agreement for each tenant in
common can provide that its sole purpose is to own an undivided tenant
in common interest in the specific project, both the concerns of the
Internal Revenue Service (IRS) and HUD could be satisfied.
HUD notes, as mentioned previously, that commenters stated that
Fannie Mae and Freddie Mac had established criteria for TIC properties.
Their comment suggests that alternative financing is available from
those sources, and Fannie Mae and Freddie Mac will be able to meet
those market needs. Consequently, HUD believes financing is available
for those borrowers who choose the TIC structure. While Fannie Mae and
Freddie Mac may accommodate these types of borrowers to facilitate, for
example, like kind exchanges, HUD notes that FHA's financing
requirements (non-recourse, single-asset mortgagor entity) and asset
management capabilities are different
[[Page 24366]]
from Fannie Mae and Freddie Mac. Although FHA does adopt some
requirements comparable to those of Fannie Mae and Freddie Mac, FHA
also includes additional measures essential to support FHA's different
program requirements. Tailoring FHA's standardized documents for
individual transactions, for example, which would be required for TIC
borrowers, is inconsistent with HUD's goal of developing uniform
documents and streamlining the underwriting process.
Commenters further stated that foreclosing availability of FHA
insurance as an option under this regulation for tenants in common
borrowers will have an adverse economic impact on the borrower and
result in restructuring that will have unfavorable tax implications for
the borrowers. As previously noted for borrowers who are natural
persons, HUD does not consider tax avoidance a strong reason for HUD to
accommodate a regulatory change.
HUD further notes that the structure contemplated by the IRS is
insufficient in any case to meet HUD's enforcement needs. From HUD's
perspective, it is difficult to identify the particular responsible
party among the many fractional owners in a tenants in common structure
which could serve as a contact for HUD. This ownership issue arises in
attempts to identify the responsible party who would be furnishing
financial statements. Moreover, identification of the responsible party
would be exacerbated when enforcement issues arise, such as failure to
comply with HUD Program Obligations regarding property maintenance, and
a party must be designated to implement remedies.
Defaults for Purposes of Insurance Claim (Two-Tiered Default) (24 CFR
207.255)
Comment: Two commenters suggested removing the references to
``Covenant Event of Default'' and ``Monetary Event of Default'' in the
regulation. Commenters on the November 12, 2010, proposed rule
suggested that the terms ``Monetary Event of Default'' and ``Covenant
Event of Default'' were not accurate descriptions of the processes that
were set forth in the closing documents
HUD Response: HUD declines to adopt the commenters'
recommendations. HUD's regulation, prior to amendment by this rule,
addressed only monetary defaults. In the August 2, 2004, proposed rule
and accompanying documents, HUD first proposed the two tiered default
system. That 2004 two tiered system proposed a category of defaults for
financial, or monetary, defaults, and a category of defaults for all
other bases for default.
Commenters on the regulatory and document changes which were
proposed in 2004, specifically suggested labeling these categories of
defaults ``Monetary Events of Default'' and ``Covenant Events of
Default.'' HUD agreed with this suggestion and adopted this terminology
in its January 21, 2010, notice describing these categories of default,
but did not use the terminology in the closing documents proposed on
January 21, 2010.
HUD's position is that it is important to distinguish between these
two categories of defaults, and that the regulatory changes proposed on
November 12, 2010, and the document changes proposed on December 22,
2010, make such distinction. The terms are accurate descriptions of the
categories of default under the revised Security Instrument posted on
HUD's Web site in connection with the publication of the December 22,
2010, notice. In that revision, a ``Monetary Event of Default'' occurs
when a borrower fails to make a payment required by the Note or
Security Instrument. The ``Covenant Event of Default'' includes
material failures by the borrower to perform any obligations under the
Security Instrument. In addition, the Security Instrument provides
additional detail specifying the circumstances and specific actions
which will constitute a Covenant Event of Default.
Monetary Event of Default
Comment: Commenters suggested clarifying the date of default for
monetary defaults and coordinating it with the Security Instrument. A
commenter stated in particular that the regulatory language provides
that if a default continues for a minimum period of 30 days, the
mortgagee shall be entitled to receive the benefits of the insurance
provided for the mortgage. The commenter suggested that the regulatory
language be revised to make the period of default in the regulation
consistent with the language in the Security Instrument. The language
would thus provide that the 30 day time period in the regulations is
coterminous with the 30 day grace period that exists under the Security
Instrument and the Note, and is not sequential to that grace period.
HUD Response: HUD agrees with the commenters' suggestion and the
final versions of the Security Instrument and Note have been revised
accordingly. Both the regulation and the Security Instrument provide
that if the default is not cured within 30 days, then the lender will
be able to accelerate. HUD believes that the change clarifies the date
of default for monetary default.
Covenant Event of Default
Comment: Commenters suggested that the regulation include language
in the date of default for covenant events of default to refer to grace
periods established in the Security Instrument.
HUD Response: The Security Instrument specifies several bases for
default, e.g. fraud, material misrepresentation, or the commencement of
a forfeiture action, which cannot be cured retroactively. Therefore,
providing a grace period for a cure is impractical. For example, one
``covenant event of default'' provides that a fraudulent or material
misrepresentation in the loan application constitutes a ``covenant
event of default'' under which the lender can exercise its right to
declare a default under the Security Instrument. Since such a past
misrepresentation cannot be cured, providing a 30 day cure period is
infeasible. Consequently, the recommended regulatory language change
cannot, as a practical matter, be implemented.
Comment: Commenters proposed additional clarifying language to
specifically refer to the Regulatory Agreement as a basis for default,
which they submitted would effectively implement HUD's right to direct
the lender to accelerate the default upon a Declaration of Default by
HUD under the Regulatory Agreement.
HUD Response: The commenters should find that their concerns are
addressed in the version of the Security Instrument and Regulatory
Agreement posted on HUD's Web site (at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/mfhclosingdocuments) in
connection with publication of the December 22, 2010, notice. HUD's
rights have been modified in those documents. As noted in an earlier
response, several specific bases for default related to the Regulatory
Agreement are included in the Security Instrument. Moreover, Section 9
of the revised Security Instrument specifically states that the
Regulatory Agreement is incorporated and made a part of the Security
Instrument. Further, Section 9 specifically states that upon Default of
the Regulatory Agreement and upon the request of HUD, the lender, at
its option may declare the whole of the Indebtedness to be due and
payable. Further, under the revised Regulatory Agreement, HUD notifies
the holder of the Note of a default under the
[[Page 24367]]
Regulatory Agreement and the holder of the Note has discretion as to
whether the note is to be declared due and payable and thereafter
proceed with either (1) foreclosure of the Security Instrument, or (2)
assignment of the Note and Security Instrument to HUD as provided in
Program Obligations. Therefore, under this scenario, HUD is not
declaring the default, but is notifying the lender, who will make the
determination of default.
Comment: Commenters suggested revising the default process to
eliminate the 30 day period for eligibility of the Lender to receive
mortgage insurance benefits in the case of a default. Through this
proposal, the commenters appear to seek to abbreviate the time period
for an assignment in the event HUD directs the lender to accelerate due
to a violation of the Regulatory Agreement, which is consistent with
HUD directing the lender to accelerate the debt.
HUD Response: HUD declines to adopt this recommendation. Under the
revised Regulatory Agreement, and as noted in an earlier response, the
lender will not be subject to HUD's direction, but will have the
authority to accelerate the debt on its own behalf.
Comment: A commenter suggested adding a materiality standard for
the covenant event of default in the Regulatory Agreement, because
``waste'' is not defined in the regulations.
HUD Response: HUD believes that commenters were concerned that HUD
would be exercising its authority to direct the lender to accelerate
based on small infractions or minor, de minimis technicalities. HUD has
addressed the commenter's concerns in the contractual documents that
implement the program. Under the revised documents, HUD has included a
definition of waste.\5\ Also, HUD is not retaining the right to
exercise the option of foreclosing based on such de minimis issues. The
lender now has the authority to commence the acceleration process. HUD
therefore believes that the flexibility provided to Lenders to
determine when to commence the acceleration process is sufficient to
address commenters' concerns. Because the responsibility now lies with
the lender, which has flexibility and is more knowledgeable about the
situation, the dynamic has changed. The lender is, in fact less likely
to accelerate since they are likely to have more substantial
information than HUD.
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\5\ Section 1 of the Security Instrument, for example, includes
the following definition. Waste means a failure to keep the
Mortgaged Property in decent safe and sanitary condition and in good
repair. During any period in which HUD insures this Loan or holds a
security interest on the Mortgaged Property, Waste is committed
when, without Lender's and HUD's express written consent, Borrower:
(1) Physically changes the Mortgaged Property, whether negligently
or intentionally, in a manner that reduces its value; (2) fails to
maintain and repair the Mortgaged Property in accordance with
Program Obligations; (3) fails to pay before delinquency any Taxes
secured by a lien having priority over this Security Instrument; (4)
materially fails to comply with covenants in the Note, this Security
Instrument or the Regulatory Agreement respecting physical care,
maintenance, construction, abandonment, demolition, or insurance
against casualty of the Mortgaged Property; or (5) retains
possession of Rents to which Lender or its assigns have the right of
possession under the terms of the Loan Documents.
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Modification of Mortgage Terms (24 CFR 207.256b)
Comment: A commenter suggested including language which would make
it clear that the requirement that the cash flow generated during a
work-out be held ``in trust for disposition, as directed by the
Commissioner'' no longer apply when the default has been cured.
Commenters stated that the language would delay modification, and
suggested addition of a clarifying phrase specifying that the
Commissioner's approval for disposition of the cash would not be
required when the default has been cured.
HUD Response: HUD has included the clarifying language suggested by
the commenter.
Commissioner's Right to Require Acceleration (24 CFR 207.257)
Comment: One commenter stated that there should be no mandatory
acceleration.
HUD response: The regulation does not require mandatory
acceleration, but reserves to HUD the right to require the mortgagee to
accelerate.
Comment: A commenter recommended replacing the term ``amortization
charges'' with the term ``payments,'' on the grounds that the term
``amortization charges'' is not defined in the regulation and does not
have a commonly understood meaning. For example, the term could mean
principal and interest payments or principal amortization payments or
something else, and, in any event, would not include payments into
escrows for taxes, insurance, etc. as required under the mortgage.
HUD Response: HUD made a change in punctuation to the language that
caused the commenter's confusion. The change adopted in the final rule
clarifies that ``amortization charges'' is not an umbrella term in the
regulatory provision.
Mortgagee Notice of Election To Assign for Insurance Benefits (24 CFR
207.258)
Comment: The regulations now codified, which can be found at 24 CFR
207.258(a), establish the timing for a mortgagee to either file an
insurance claim or elect to assign the mortgage to the Commissioner
(referred to as a Notice of Election). The regulatory language proposed
in the November 2010 rule provides that the lender must, within 45 days
after the date of eligibility, notify the Commissioner of its intention
to (1) File a claim, (2) elect to assign, or (3) acquire and convey
title. If the mortgagee elects to assign the mortgage, under 24 CFR
207.258(b), the mortgagee must, within 30 days of its election, file
its application for insurance benefits and assign the mortgage. The
Commissioner may extend the 30 days in which the mortgagee must file
its application for insurance benefits and assign the mortgage if the
Commissioner is considering a partial payment of claim. Section 207.258
also provides special treatment for certain projects, e.g., those
funded with proceeds of state and local bonds and Ginnie Mae
securities.
Commenters contend that the language in Sec. 207.258(a) detailing
the ``Notice of Election'' to file an insurance claim or assign under
the authority provided in Sec. 207.258(b) could mean that HUD could
actually extend the mortgagees filing of an insurance claim
indefinitely,
HUD Response: In response to this concern, HUD added language to
Sec. 207.258(a) which provides that the Commissioner may extend the 45
day notice period at the request of the mortgagee. The extension gives
mortgagees additional time to develop alternatives. The approval of an
extension shall in no way prejudice the mortgagee's right to file a
notice of its intention to file an insurance claim and of its election
to either assign the mortgage to the Commissioner, or to acquire and
convey title to the Commissioner.
Comment: A commenter suggested clarifying that for mortgages funded
with the proceeds of state or local bonds, GNMA securities,
participation certificates, or other bond obligations which specify a
prepayment penalty or lock out, mortgagees should request a three month
extension of the deadline for filing notice of the mortgagees'
intention to file an insurance claim and the mortgagees' election to
assign the mortgage or acquire and convey title in accordance with the
mortgagee certificate. Commenters suggested that the proposed language
does not specify
[[Page 24368]]
the length of the required extension of the deadline to assign the
mortgage or acquire and convey title. Commenters suggest that such
language be included and that this period be three months, as lenders
must use their own resources and lines of credit to make monthly
payments on outstanding Ginnie Mae securities during the pendency of a
default.
HUD Response: HUD revised Sec. 207.258(a) at this final rule stage
in part to address the commenters concerns. For ``special treatment
projects'' HUD understands the commenter's concerns and provided the
mortgagee with the ability to request a 90 day extension of the
deadline for filing the notice of the mortgagee's intention to file an
insurance claim or elect to assign or acquire and convey title, which
HUD may further extend at the written request of the mortgagee. This
revision will allow mortgagees to develop alternative funding sources
and potentially refinance, thus avoiding a claim on the FHA insurance
fund.
Comment: A commenter suggested HUD delete language suggesting that
Lenders ``assist'' borrowers to arrange refinancing to cure a default
and substitute ``cooperate'' with borrowers to obtain refinancing.
HUD Response: HUD declines to adopt this suggestion. It is HUD's
position that the lender should actively engage in assisting the
borrower with refinancing in order to meet HUD's expectation that
lenders will be an active participant in seeking and obtaining
refinancing.
Comment: A commenter suggested that HUD revise the language on
prepayment penalties, to be consistent with Mortgagee Letter 87-9,\6\
and that HUD also revise the language to reflect a ``prepayment penalty
of one percent or less.'' The commenter also suggested that HUD modify
the Lenders Certificate to delete the term penalty.
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\6\ Mortgagee Letter 87-9 can be found at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/87-9ml.txt.
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HUD Response: HUD has decided to revise the regulatory language to
reflect the terminology ``prepayment premium'' instead of ``prepayment
penalty.'' This language change is consistent with the Lender's
Certificate posted on HUD's Web site in connection with the December
22, 2010, notice seeking comment on further revised closing documents.
However, HUD declines to adopt the recommendation to limit the
mortgagees' alternative election requirements to those situations where
the ``premium'' is one percent or less. Mortgagee Letter 87-9 allows
prepayment penalties that initially exceed three percent when certain
conditions which relate to HUD determinations on the financial
viability of the project are met. HUD intends to retain the authority
set forth in Mortgagee letter 87-9 and therefore declines the
recommendation as such a limitation would unduly restrict the
circumstances in which the alternative election process would be used.
Comment: A commenter suggested deleting the requirement that
successors and assigns certify that they be bound by the prepayment
provisions.
HUD Response: HUD has determined to retain this provision. The
notice provided by the certification and the regulation improves the
probability that potentially affected parties are aware of this
requirement.
Comment: A commenter suggested that HUD delete regulatory language
that provides the mortgagee authority to assign the mortgage to HUD
within 30 days of the mortgagee's election to assign. HUD has, in
practice, provided the mortgagee with a deadline measured from the date
of HUD's acknowledgement of the mortgagee's election.
HUD Response: HUD has addressed the commenter's recommendation by
revising the proposed rule language to comply with HUD's corresponding
process of linking the deadline to the date of HUD's acknowledgement of
the request.
Comment: HUD received comments that the industry would not be able
to make the changes necessary to adapt their practices to the new loan
documents by the May 1, 2011 published transition date:
HUD Response: In acknowledgment of the industry's concerns and the
recognition that there are projects already in the pipeline, as noted
earlier in this preamble, HUD has established an effective date of
September 1, 2011. Application of the regulations promulgated by this
final rule and use of the corresponding updated closing documents will
be mandatory for all project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011.
IV. Multifamily Rental Projects--Updating of Regulations and Closing
Documents
The updating of HUD's multifamily rental project closing documents
and corresponding regulations has been an undertaking for many years.
Although formal solicitation of public comment on updated closing
documents and regulatory revisions commenced with HUD's August 2, 2004,
proposed rule (69 FR 46210) and accompanying August 2, 2004, notice (69
FR 46214) providing revised and updated closing documents, the effort
to update the closing documents actually began in calendar year 2000.
The August 2, 2004, notice providing for revised closing documents
noted that updated closing documents were first presented on HUD's Web
site in March 2000 (see 69 FR 46214). Through all of these requests for
comment over the past 11 years, industry and other interested members
of the public have responded to HUD's solicitation for feedback and
input and have provided valued information. All of the comments were
appreciated by HUD and carefully considered. The many times that HUD
has posted updated documents on its Web site for review and comment,
not only in clean form but in redline/strikeout form, reflects HUD's
desire to be open and transparent with industry about all changes being
made, even small editorial changes.
It has taken many years to bring these documents and corresponding
regulations up-to-date with current practices in the industry. HUD
intends to keep these documents and the corresponding regulations
current with industry practices and applicable law. The every-3-year
review and solicitation of public comment required by the Paperwork
Reduction Act will help keep the closing documents current, and allow
for industry and other interested members of the public to once again
provide comment and input on changes they believe are important to
maintaining the documents up-to-date with current practices.
The updating of the closing documents and corresponding regulations
does not only benefit HUD and industry, but meets an important goal of
the Administration. On January 18, 2011, President Obama signed
Executive Order 13563, entitled ``Improving Regulation and Regulatory
Review,'' which was published in the Federal Register on January 21,
2011 (76 FR 3822). In this executive order, the President reaffirmed
the principles governing regulatory review established by Executive
Order 12866, entitled ``Regulatory Planning and Review,'' issued
September 30, 1993, and published in the Federal Register on October 4,
1993, at 58 FR 51735. The President also, in this executive order,
among other things, directed Federal agencies to review existing
regulations and to determine if existing regulations are outmoded,
ineffective, insufficient or excessively burdensome, and to modify,
streamline, expand, or repeal the regulations as may be appropriate.
[[Page 24369]]
The updating of outmoded closing documents and corresponding
regulations are consistent with the President's executive order.
V. Findings and Certifications
Environmental Impact
A Finding of No Significant Impact with respect to the environment
for this rule was made at the proposed rule stage in accordance with
HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of
the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)).
The Finding of No Significant Impact remains applicable to this final
rule and is available for public inspection between 8 a.m. and 5 p.m.
weekdays in the Regulations Division, Room 10276, Office of the General
Counsel, Department of Housing and Urban Development, 451 7th Street,
SW., Washington, DC 20410-0500. Due to security measures at the HUD
Headquarters building, please schedule an appointment to review the
docket file by calling the Regulations Division at 202-402-3055 (this
is not a toll-free number). Individuals with speech or hearing
impairments may access this number via TTY by calling the Federal
Information Relay Service at 800-877-8339.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for Federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments and the private sector. This rule does not impose
any Federal mandate on any state, local, or tribal government or the
private sector within the meaning of UMRA.
Impact on Small Entities
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
The rule is limited to making certain conforming amendments to FHA
regulations that address multifamily rental projects to ensure their
consistency with the recent update and revision of the documents used
for multifamily rental project closings. Accordingly, the undersigned
certifies that this rule will not have a significant economic impact on
a substantial number of small entities.
Federalism Impact
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications and either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of section 6 of the executive order are met. This rule
does not have federalism implications and does not impose substantial
direct compliance costs on state and local governments or preempt state
law within the meaning of the executive order.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number for Mortgage
Insurance for the Purchase or Refinancing of Existing Multifamily
Housing Projects is 14.155.
List of Subjects
24 CFR Part 200
Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Home improvement, Housing standards,
Incorporation by reference, Lead poisoning, Loan programs--housing and
community development, Minimum property standards, Mortgage insurance,
Organization and functions (Government agencies), Penalties, Reporting
and recordkeeping requirements, Social Security, Unemployment
compensation, Wages.
24 CFR Part 207
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Solar energy.
Accordingly, for the reasons discussed in this preamble, HUD is
amending 24 CFR parts 200 and 207 as follows:
PART 200--INTRODUCTION TO FHA PROGRAMS
0
1. The authority citation for 24 CFR part 200 continues to read as
follows:
Authority: 12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).
0
2. Revise Sec. 200.5 to read as follows:
Sec. 200.5 Eligible mortgagor.
(a) Except as provided in paragraph (b) of this section, the
mortgagor:
(1) Shall be a single asset mortgagor entity acceptable to the
Commissioner, as limited by the applicable section of the Act, and
shall possess the powers necessary and incidental to operating the
project, except that the Commissioner may approve a non-single asset
mortgagor entity under such circumstances, terms and conditions
determined and specified as acceptable to the Commissioner; and
(2) Shall not be a natural person or tenant in common.
(b)(1) For multifamily project mortgages for which HUD issued a
firm commitment for mortgage insurance before September 1, 2011, and
for multifamily project mortgages insured under section 232 of the Act
(12 U.S.C. 1715w), the mortgagor shall be a natural person or entity
acceptable to the Commissioner, as limited by the applicable section of
the Act, and shall possess the powers necessary and incidental to
operating the project.
(2) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011, the
regulations of paragraph (a) of this section shall apply, unless the
mortgagor demonstrates to the satisfaction of the Commissioner that
financial hardship to the mortgagor would result from application of
the regulations in paragraph (a) of this section due to the reasonable
expectations of the mortgagor that the transaction would close under
the regulations in effect prior to September 1, 2011, in which case,
the regulations of paragraph (b)(1) shall apply.
0
3. Revise Sec. 200.88 to read as follows:
Sec. 200.88 Late charge.
(a) The mortgage may provide for the collection by the mortgagee of
a late charge in accordance with terms, conditions, and standards of
the Commissioner for each dollar of each payment to interest or
principal:
(1) More than 10 days in arrears to cover the expense involved in
handling delinquent payments;
(2) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance before September 1, 2011, and for
multifamily project mortgages insured under section 232 of the Act (12
U.S.C. 1715w), more than 15 days in arrears to cover the expense
involved in handling delinquent payments.
(b) Late charges shall be separately charged to and collected from
the mortgagor and shall not be deducted from any aggregate monthly
payment.
PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE
0
4. The authority citation for part 207 continues to read as follows:
[[Page 24370]]
Authority: 12 U.S.C. 1701z-11(e), 1713, and 1715b; 42 U.S.C.
3535(d).
0
5. Revise Sec. 207.255 to read as follows:
Sec. 207.255 Defaults for purposes of insurance claim.
(a)(1) Except as provided in paragraph (b) of this section, the
following shall be considered a default under the terms of a mortgage
insured under this subpart:
(i) Failure of the mortgagor to make any payment due under the
mortgage (also referred to as a ``Monetary Event of Default'' in
certain mortgage security instruments); or
(ii) A material violation of any other covenant under the
provisions of the mortgage, if because of such violation, the mortgagee
has accelerated the debt, subject to any necessary HUD approval (also
referred to as a ``Covenant Event of Default'' in certain mortgage
security instruments).
(2) For purposes of a mortgagee filing an insurance claim with the
Commissioner, the failure of the mortgagor to make any payment due
under an operating loss loan or under the original mortgage shall be
considered a default under both the operating loss loan and original
mortgage.
(3) If a default as defined in paragraphs (a)(1) and (a)(2) of this
section continues for a minimum period of 30 days, the mortgagee shall
be entitled to receive the benefits of the insurance provided for the
mortgage, subject to the procedures in this subpart.
(4) For the purposes of paragraph (b) of this section, the date of
default shall be:
(i) The date of the first failure to make a monthly payment that
subsequent payments by the mortgagor are insufficient to cover when
those subsequent payments are applied by the mortgagee to the overdue
monthly payments in the order in which they became due; or
(ii) The date of the first uncorrected violation of a covenant or
obligation for which the mortgagee has accelerated the debt.
(5) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011, the
regulations of paragraph (a) of this section shall apply, unless the
mortgagor demonstrates to the satisfaction of the Commissioner that
financial hardship to the mortgagor would result from application of
the regulations in paragraph (a) of this section due to the reasonable
expectations of the mortgagor that the transaction would close under
the regulations in effect prior to September 1, 2011, in which case,
the regulations of paragraph (b) shall apply.
(b)(1) For multifamily project mortgages for which HUD issued a
firm commitment for mortgage insurance before September 1, 2011, and
for multifamily project mortgages insured under section 232 of the Act
(12 U.S.C. 1715w), and section 242 of the Act (12 USC 1715z-7), the
following shall be considered a default under the terms of a mortgage
insured under this subpart:
(i) Failure of the mortgagor to make any payment due under the
mortgage; or
(ii) Failure to perform any other covenant under the provisions of
the mortgage, if the mortgagee, because of such failure, has
accelerated the debt.
(2) In the case of an operating loss loan, the failure of the
mortgagor to make any payment due under such loan or under the original
mortgage shall be considered a default under both the loan and original
mortgage.
(3) If such defaults, as defined in paragraph (b) of this section,
continue for a period of 30 days the mortgagee shall be entitled to
receive the benefits of the insurance hereinafter provided.
(4) For the purposes of this section, the date of default shall be
considered as:
(i) The date of the first uncorrected failure to perform a covenant
or obligation; or
(ii) The date of the first failure to make a monthly payment which
subsequent payments by the mortgagor are insufficient to cover when
applied to the overdue monthly payments in the order in which they
became due.
0
6. Revise Sec. 207.256 to read as follows:
Sec. 207.256 Notice to the Commissioner of default.
(a) If a default as defined in Sec. 207.255(a) or (b) is not cured
within the grace period of 30 days provided under Sec. 207.255(a)(3)
or (b)(3), the mortgagee must, within 30 days after the date of the end
of the grace period, notify the Commissioner of the default, in the
manner prescribed in 24 CFR part 200, subpart B.
(b) The mortgagee must give notice to the Commissioner, in the
manner prescribed in 24 CFR part 200, subpart B, of the mortgagor's
violation of any covenant, whether or not the mortgagee has accelerated
the debt.
0
7. Revise Sec. 207.256a to read as follows:
Sec. 207.256a Reinstatement of defaulted mortgage.
If, after default and prior to the completion of foreclosure
proceedings, the mortgagor cures the default, the insurance shall
continue on the mortgage as if a default had not occurred, provided the
mortgagee gives notice of reinstatement to the Commissioner, in the
manner prescribed in 24 CFR part 200, subpart B.
0
8. Revise Sec. 207.256b to read as follows:
Sec. 207.256b Modification of mortgage terms.
(a) The mortgagor and the mortgagee may, with the approval of the
Commissioner, enter into an agreement that extends the time for curing
a default under the mortgage or modifies the payment terms of the
mortgage.
(b)(1) Except as provided in paragraph (b)(2), the Commissioner's
approval of the type of agreement specified in paragraph (a) of this
section shall not be given, unless the mortgagor agrees in writing
that, during such period as the mortgage continues to be in default,
and payments by the mortgagor to the mortgagee are less than the
amounts required under the terms of the original mortgage, the
mortgagor or mortgagee, as may be appropriate in the particular
situation, will hold in trust for disposition, as directed by the
Commissioner, all rents or other funds derived from the secured
property that are not required to meet actual and necessary expenses
arising in connection with the operation of such property, including
amortization charges, under the mortgage.
(2) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance before September 1, 2011, and for
multifamily project mortgages insured under section 232 of the Act (12
U.S.C. 1715w), and section 242 (12 USC 1715z-7), the Commissioner's
approval of the type of agreement specified in paragraph (a) of this
section shall not be given unless the mortgagor agrees in writing that,
during such period as payments to the mortgagee are less than the
amounts required under the terms of the original mortgage, the
mortgagor will hold in trust for disposition as directed by the
Commissioner all rents or other funds derived from the property which
are not required to meet actual and necessary expenses arising in
connection with the operation of such property, including amortization
charges, under the mortgage.
(3) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011, the
regulations of paragraph (b)(1) of this section shall apply, unless the
mortgagor demonstrates to the
[[Page 24371]]
satisfaction of the Commissioner that financial hardship to the
mortgagor would result from application of the regulations in paragraph
(b)(1) of this section due to the reasonable expectations of the
mortgagor that the transaction would close under the regulations in
effect prior to September 1, 2011, in which case, the regulations of
paragraph (b)(2) shall apply.
(c) The Commissioner may exempt a mortgagor from the requirement of
paragraph (b) of this section in any case where the Commissioner
determines that such exemption does not jeopardize the interests of the
United States.
0
9. Revise Sec. 207.257 to read as follows:
Sec. 207.257 Commissioner's right to require acceleration.
Upon receipt of notice of violation of a covenant, as provided for
in Sec. 207.256(b), or otherwise being apprised of the violation of a
covenant, the Commissioner reserves the right to require the mortgagee
to accelerate payment of the outstanding principal balance due in order
to protect the interests of the Commissioner.
0
10. Amend Sec. 207.258, as follows:
0
a. Revise paragraph (a);
0
b. Redesignate paragraphs (b)(1) through (b)(5) as (b)(2) through
(b)(6) respectively;
0
c. Redesignate the introductory text of paragraph (b) as paragraph
(b)(1); and
0
d. Revise newly designated paragraph (b)(1), to read as follows:
Sec. 207.258 Insurance claim requirements.
(a) Alternative election by mortgagee. (1) When the mortgagee
becomes eligible to receive mortgage insurance benefits pursuant to
Sec. 207.255(a)(3) or (b)(3), the mortgagee must, within 45 days after
the date of eligibility, give the Commissioner notice of its intention
to file an insurance claim and of its election either to assign the
mortgage to the Commissioner, as provided in paragraph (b) of this
section, or to acquire and convey title to the Commissioner, as
provided in paragraph (c) of this section. Notice of this election must
be provided to the Commissioner in the manner prescribed in 24 CFR part
200, subpart B. HUD may extend the notice period at the request of the
mortgagee under the following conditions:
(i) The request must be made to and approved by HUD prior to the
45th day after the date of eligibility; and
(ii) The approval of an extension shall in no way prejudice the
mortgagee's right to file its notice of its intention to file an
insurance claim and of its election either to assign the mortgage to
the Commissioner or to acquire and convey title to the Commissioner
within the 45 day period or any extension prescribed by the
Commissioner.
(2) For mortgages funded with the proceeds of state or local bonds,
GNMA mortgage-backed securities, participation certificates, or other
bond obligations specified by the Commissioner (such as an agreement
under which the insured mortgagee has obtained the mortgage funds from
third party investors and has agreed in writing to repay such investors
at a stated interest rate and in accordance with a fixed repayment
schedule), any of which contains a lock-out or prepayment premium, the
mortgagee must, in the event of a default during the term of the
prepayment lock-out or prepayment premium (i.e., prior to the date on
which prepayments may be made with a premium):
(i) Request a 90-day extension of the deadline for filing the
notice of the mortgagee's intention to file an insurance claim and the
mortgagee's election to assign the mortgage or acquire and convey title
in accordance with the mortgagee certificate, which HUD may further
extend at the written request of the mortgagee;
(ii) Assist the mortgagor in arranging refinancing to cure the
default and avert an insurance claim, if the Commissioner grants the
requested (or a shorter) extension of notice filing deadline;
(iii) Report to the Commissioner at least monthly on any progress
in arranging refinancing;
(iv) Cooperate with the Commissioner in taking reasonable steps in
accordance with prudent business practices to avoid an insurance claim;
(v) Require successors or assigns to certify in writing that they
agree to be bound by these conditions for the remainder of the term of
the prepayment lock-out or prepayment premium; and
(vi) After commencement of amortization of the refinanced mortgage,
notify HUD of a delinquency when a payment is not received by the 10th
day after the date the payment is due.
(3) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011, the
regulations of paragraph (a)(2) of this section shall apply, unless the
mortgagor demonstrates to the satisfaction of the Commissioner that
financial hardship to the mortgagor would result from application of
the regulations in paragraph (a)(2) of this section due to the
reasonable expectations of the mortgagor that the transaction would
close under the regulations in effect prior to September 1, 2011, in
which case, the regulations of paragraph (a)(2) shall not apply.
(b) Assignment of mortgage to Commissioner. (1) Timeframe; request
for extension.
(i) Except for multifamily project mortgages insured under section
232 of the Act (12 U.S.C. 1715w), and section 242 (12 U.S.C. 1715z-7),
if the mortgagee elects to assign the mortgage to the Commissioner, the
mortgagee shall, at any time within 30 days after the date HUD
acknowledges the notice of election, file its application for insurance
benefits and assign to the Commissioner, in such manner as the
Commissioner may require, any applicable credit instrument and the
realty and chattel security instruments.
(ii) The Commissioner may extend this 30-day period by written
notice that a partial payment of insurance claim under Sec. 207.258b
is being considered. A mortgagee may consider failure to receive a
notice of an extension approval by the end of the 30-day time period a
denial of the request for an extension.
(iii) The extension shall be for such term, not to exceed 60 days,
as the Commissioner prescribes; however, the Commissioner's
consideration of a partial payment of claim, or the Commissioner's
request that a mortgagee accept partial payment of a claim in
accordance with Sec. 207.258b, shall in no way prejudice the
mortgagee's right to file its application for full insurance benefits
within either the 30-day period or any extension prescribed by the
Commissioner.
(iv) The requirements of paragraphs (b)(2) through (b)(6) of this
section shall also be met by the mortgagee.
* * * * *
0
11. In Sec. 207.259, revise paragraph (b)(2)(iii), and new paragraphs
(b)(2)(vi) and (b)(2)(vii) to read as follows:
Sec. 207.259 Insurance benefits.
* * * * *
(b) * * *
(2) * * *
(iii) The sum of the cash items retained by the mortgagee pursuant
to Sec. 207.258(b)(6), except the balance of the mortgage loan not
advanced to the mortgagor.
* * *
(vi) Except for multifamily project mortgages for which HUD issued
a firm commitment for mortgage insurance before September 1, 2011, and
for multifamily project mortgages insured under section 232 of the Act
(12 U.S.C. 1715w) and under section 242 of the Act (12 U.S.C. 1715z-7),
when there is a covenant default as defined in
[[Page 24372]]
Sec. 207.255(a)(1)(ii) and a mortgagee refuses to comply promptly with
the Commissioner's request to accelerate payment pursuant to Sec.
207.257, an amount equal to the difference between the project's market
value as of the date of the Commissioner's request and the project's
market value as of the date the mortgagee makes an election to assign
the mortgage, or convey title to the project, as determined by
appraisal procedures established by the Commissioner.
(vii) For multifamily project mortgages for which HUD issued a firm
commitment for mortgage insurance on or after September 1, 2011, the
regulations of paragraph (b)(2)(vi) of this section shall apply, unless
the mortgagor demonstrates to the satisfaction of the Commissioner that
financial hardship to the mortgagor would result from application of
the regulations in paragraph (b)(2)(vi) of this section due to the
reasonable expectations of the mortgagor that the transaction would
close under the regulations in effect prior to September 1, 2011, in
which case, the regulations of paragraph (b)(2)(vi) shall not apply.
* * * * *
Dated: April 26, 2011.
Robert C. Ryan,
Acting Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2011-10450 Filed 4-29-11; 8:45 am]
BILLING CODE 4210-67-P