[Federal Register: September 28, 2007 (Volume 72, Number 188)] [Rules and Regulations] [Page 55637-55654] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr28se07-28] [[Page 55637]] ----------------------------------------------------------------------- Part IV Department of Housing and Urban Development ----------------------------------------------------------------------- 24 CFR Part 214 Housing Counseling Program; Final Rule [[Page 55638]] ----------------------------------------------------------------------- DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Part 214 [Docket No. FR-4798-F-02] RIN 2502-AH99 Housing Counseling Program AGENCY: Office of the Assistant Secretary for Housing--Federal Housing Commissioner, HUD. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This rule establishes regulations for HUD's Housing Counseling program, as authorized by the Housing and Urban Development Act of 1968, and for which, for the past several years, notices of funding availability have been issued on an annual basis. This final rule follows publication of a December 23, 2004, proposed rule that adopted and augmented the Housing Counseling program requirements with which grantees and housing counseling agencies are already familiar. This final rule takes into consideration the public comments that were received in response to the proposed rule and makes several changes to the proposed regulatory text at this final rule stage. DATES: Effective Date: October 29, 2007. FOR FURTHER INFORMATION CONTACT: Ruth Roman, Director, Office of Program Support, Office of Housing, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 9274, Washington, DC 20410- 8000, telephone, (202) 708-0317. (This is not a toll-free number.) Individuals 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 On December 23, 2004 (69 FR 77118), HUD published a proposed rule that would establish regulations for its Housing Counseling program. HUD's Housing Counseling program is authorized by section 106 of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x) (Section 106). Section 106(a) authorizes HUD to provide or contract with organizations to provide ``counseling and advice to tenants and homeowners with respect to property maintenance, financial management and such other matters as may be appropriate to assist them in improving their housing conditions and in meeting the responsibilities of homeownership.'' Further, section 106 authorizes HUD to provide counseling directly or to enter into contracts with, or make grants to, and provide other types of assistance to eligible private or public organizations (including grassroots, faith-based, and other community- based organizations) with special competence and knowledge in providing housing counseling to low- and moderate-income families. HUD's Housing Counseling program offers the counseling services authorized by Section 106 by making grants to, or contracting with, HUD-approved housing counseling agencies to provide this counseling. Housing counseling services offered under HUD's program may include, but are not limited to, the following: Assisting eligible homebuyers to find and purchase homes; helping renters locate and qualify for assisted rental units; helping eligible homebuyers obtain affordable housing; assisting homeowners to avoid foreclosures; assisting renters to avoid evictions; helping the homeless find temporary or permanent shelter; reporting fair housing and discrimination complaints; and addressing housing problems. In the December 23, 2004, rule, HUD proposed the codification of the requirements of the Housing Counseling program. In addition, HUD proposed additional requirements and procedures to improve and strengthen the Housing Counseling program. The preamble to the proposed rule, at 69 FR 77118-77125, provides a more detailed discussion of the regulations proposed for codification for the Housing Counseling program. II. This Final Rule This final rule takes into consideration the public comments received on the December 23, 2004, proposed rule. The following highlights some of the more notable changes made in the final rule. A. Definitions In this final rule, HUD has revised definitions for affiliate, branch or branch office, education, HUD-approved housing counseling agency, housing counseling work plan, housing counseling action plan, housing goal, intermediary, local housing counseling agency, and subgrantee, and added definitions of housing counselor, multi-state organization (MSO), and participating agency. As discussed in more detail in section III of this preamble, HUD created the term ``multi-state organization'' because of the increasing number of local housing counseling agencies that have expanded beyond the definition of a local agency. The MSOs provide housing counseling services through a main office and branches, if applicable, in one state and branch offices located in two or more additional states. This definition was necessary because of the emergence of organizations that did not meet the existing definitions. For clarity, HUD has added the new definition of ``participating agency'' and used the new term throughout the regulatory text. Participating agencies are all housing counseling and intermediary organizations that participate in HUD's Housing Counseling program, including HUD-approved agencies, and affiliates and branches of HUD- approved intermediaries, HUD-approved MSOs, and state housing finance agencies. HUD added this definition because the term ``HUD-approved agency'' does not adequately describe all organizations that participate in the program. In this final rule, HUD also included a definition of ``reverse mortgage,'' which means a mortgage that pays a homeowner loan proceeds drawn from accumulated home equity and that requires no repayment until a future time. The increasing demand for reverse mortgages, including Home Equity Conversion Mortgages (HECMs), demonstrates a related need for housing counseling about additional types of reverse mortgages. As a result, the term ``reverse mortgage'' has been utilized throughout this final rule. B. Counseling Settings Although HUD believes that in-person, face-to-face counseling is ideal, HUD has revised the regulations at Sec. 214.300 to allow for alternative counseling settings when it is in the best interests of the client. Several commenters explained that when clients are facing foreclosure or eviction, they often do not have time or resources to meet face-to-face with a housing counselor at the agency's offices. Under these circumstances, the agency must arrange to meet with such persons at an alternative location or through an alternative format. In addition, agency facilities must meet, when applicable, accessibility requirements under section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794) and HUD's regulations at 24 CFR parts 8 and 9, as well as Title III of the Americans with Disabilities Act. There may also be circumstances where an agency will have to provide a person with a disability counseling in an alternative format or at an alternative location as a reasonable accommodation to the person's disability. The final rule requires that an agency's housing counseling work plan address [[Page 55639]] alternative settings for the provision of housing counseling services. C. Approval Criteria HUD has revised Sec. 214.103(f)(2) (Staff) of the proposed rule to provide greater flexibility to agencies in hiring staff, and the provision is now located at Sec. 214.103(g)(2). Under this final rule, for agencies seeking HUD approval, to maintain HUD approval, and to participate in HUD's Housing Counseling program, at least one-half of an agency's counselors must have the minimum 6 months counseling experience. Recognizing the expanding roles of housing counseling agencies, HUD also revised Sec. 214.103(k) of the proposed rule by removing the requirement that housing counseling agency facilities be located in the communities they serve. In this final rule, proposed Sec. 214.103(k) has been redesignated at Sec. 214.103(l). In addition, HUD has revised Sec. 214.103(l) to provide that agencies must make space available to provide housing counseling services, but are not required to limit the use of the space solely for the purpose of providing housing counseling services. HUD made an additional clarification in the list of ineligible activities at Sec. 214.103(c)(2). The final rule has been revised to provide that offenses that reflect upon the responsibility, integrity, or ability of housing counseling agencies to participate in housing counseling activities refers to a criminal offense that can be prosecuted at the local, state, or federal level. An example of such an offense would be if a member of the board of directors, the executive director, or an employee has been indicted or convicted of embezzling city, state, or federal funds. D. Inactive Status for Housing Counseling Agencies This final rule also adds a new status for HUD-approved agencies that, for certain reasons, are temporarily unable to comply with the requirements necessary to be a HUD-approved counseling agency. When an agency is unable to continue to meet the requirements for a HUD- approved counseling agency, HUD will remove an agency from the list of participating agencies until such time as the impediment to compliance is removed. Under current procedures, the HUD-approved agency that fails to meet the program requirements may be terminated and have to reapply for HUD approval. Therefore, this temporary inactive status would be less burdensome for agencies. The new provisions are located in Sec. 214.200 and are described in additional detail in section III of this final rule. E. Client Management System The requirements for a client management system, proposed at Sec. 214.319, were consolidated into the approval criteria in Sec. 214.103. In addition, HUD revised the requirements for a client management system so that participating agencies will utilize such a system for the collection of client-level information including, but not limited to, financial and demographic data, counseling services provided, and outcomes data. The system used must provide the counseling agency with the tools necessary to track and manage all counseling and educational activities associated with each client. Agencies must utilize a system that satisfies HUD's requirements and interfaces with HUD's databases. F. Agency Workload Under Sec. 214.303 (Performance Criteria), HUD proposed that an agency's workload would be a minimum of 50 clients annually and also that an agency maintain funding that enables the agency to provide housing counseling to a minimum workload of 50 clients. In reviewing these related provisions, HUD determined that clarification and changes were necessary. First, HUD revised Sec. 214.303(b) to provide that the workload determination would be changed to a minimum of 30 clients annually. Similarly, HUD redesignated and revised Sec. 214.303(i) by restating the 30-client requirement and requiring that the agency maintain a level of funds that enables it to provide housing counseling to at least this required 30-client workload every year, whether or not the agency receives HUD funding. G. Conflicts of Interest HUD has revised and redesignated the conflicts-of-interest provision in this final rule at Sec. 214.303(f) to make the provisions easier to understand and provide additional flexibility. The revised regulations prohibit directors, employees, and officers of HUD-approved housing counseling agencies and intermediaries from engaging in activities that create a real or apparent conflict of interest. A conflict, for example, could arise if these individuals or their spouse, child, general partner, or organization in which he or she serves as employee (other than with the HUD-approved counseling agency), or with whom he or she is negotiating future employment, has a direct interest in the client as landlord or creditor, or originates, has a financial interest in, services, or underwrites a mortgage on the client's property, owns or purchases a property that the client seeks to rent or purchase, or serves as a collection agent for the client's mortgage lender, landlord, or creditor. Further, the revised regulations prohibit the director, employee, or officer of a HUD-approved housing counseling agency or intermediary from referring clients to mortgage lenders, brokers, builders, or real estate sales agents or brokers in which the individual, his or her spouse, minor child, or general partner has a financial interest. The provisions require the agency, its staff, or any member of his or her immediate family to avoid any action that might result in, or create the appearance of, administering the housing counseling operation for personal or private gain, which includes providing preferential treatment to any organization or person; or undertaking any action that might compromise the agency's ability to ensure compliance with the requirements of this part and to serve the best interests of its clients. HUD may investigate agency practices and may take action to suspend or terminate the agency's approval. H. Housing Counseling Fees Funding for housing counseling is a major concern among participating agencies. In a change in this final rule, HUD is clarifying that it will allow for participating agencies to accept funding from lenders, as long as the relationship does not create a conflict of interest and that the relationship is disclosed to the client (see Sec. Sec. 214.303 and 214.313). In addition, in the final rule, HUD revised the provisions for charging fees to clients. Under this final rule, agencies may charge reasonable fees to clients, as long as the fee does not place a hardship on the client. Acknowledging that a client's ability to pay a fee is based on factors beyond the client's income, HUD revised the requirement that a fee be based solely on the client's income. The housing counseling agency may make a determination about a client's ability to pay based on factors, including, but not limited to, income and debt obligations. Clients should not be turned away because of an inability to pay. Agency fee schedules, as well as determinations of clients' ability to pay, are subject to review by HUD during periodic monitoring conducted in accordance with Sec. 214.307. In another change from the proposed rule, HUD removed the provision that HUD would pre-approve an agency's fee schedule. Instead, HUD will review fee schedules during a review of an agency's application for [[Page 55640]] approval or a performance review, in order to ensure that the fees are consistent with fees charged by similar agencies providing similar services. If a housing counseling client believes that he or she has been unreasonably denied access to counseling because of a fee or other dispute, the client should contact the local HUD field office or HUD Headquarters. I. Recordkeeping HUD has removed the client and counselor signature requirement from Sec. 214.315. Although the action plan is an important document required under Sec. 214.300(a)(2), it is unnecessary and burdensome to require the plan to be signed by both client and counselor. HUD also removed the intake interview requirements at Sec. 214.315. In addition, HUD has revised Sec. 214.315(b) to expand the recordkeeping requirements so that the client file can be a paper file, an electronic file, or a combination. HUD believes that as housing counseling agencies increasingly utilize client management systems, client files will be a combination of electronic and paper files. HUD also revised Sec. Sec. 214.315(e) and (f) to clarify the requirements for client files and education files. Finally, HUD modified Sec. 214.315(d) to include client income data among the client information that agencies collect. J. Phased-In Implementation of New Regulations for Approved Counseling Agencies HUD recognizes that HUD-approved housing counseling agencies will be required to modify their procedures or adopt new protocols as a result of the regulatory changes made by this final rule. Although HUD believes the new requirements are necessary to increase the effectiveness of the Housing Counseling program, the Department also wishes to minimize the costs and regulatory burden of complying with the final rule on agencies that have been approved by HUD and are currently in full compliance with existing requirements. Accordingly, this final rule provides that housing counseling agencies approved by HUD on or before the effective date of this final rule have until October 1, 2007, to comply with the requirements of this final rule. Additionally, housing counseling agencies that have submitted applications to HUD as of the publication date of this final rule under the existing requirements and that are subsequently approved, even if the agency is notified of the approval after the effective date of the rule, also will have until October 1, 2007, to comply with the requirements in this final rule. All other agencies approved after the effective date must comply with the requirements of this part. K. Other Changes Finally, in an effort to improve organization, HUD made minor changes in 24 CFR part 214 in this final rule. For example, HUD consolidated proposed subpart E, entitled Grants, into the funding requirements in Sec. 214.311. In addition, HUD clarified that compliance with applicable civil rights laws will be reviewed as part of the performance review under Sec. 214.307. Other minor changes to organization were made in subsections to improve organization of the regulations, but do not effectuate substantive changes. III. Discussion of Public Comments on the December 23, 2004, Proposed Rule The public comment period on the proposed rule closed on February 22, 2005. HUD received 16 public comments on the proposed rule. Comments were received from housing counseling agencies, trade associations, and other interested organizations. The following provides a discussion of key issues raised by public commenters, and HUD's responses to these issues. A. Definitions Comment: For consistency, HUD should revise the definition of ``affiliate'' in the final rule to require that an affiliate be ``duly organized and existing as a tax exempt, nonprofit, 501(c)(3) organization.'' HUD response: HUD agrees with the commenter that the regulatory language concerning definitions and nonprofit status must be consistent. Therefore, HUD revised Sec. 214.3 in this final rule so that the definition of ``affiliate'' means an organization connected with, but separately incorporated from, a regional or national intermediary, or state housing finance agency (SHFA), for the purposes of its HUD-related Housing Counseling program. An affiliate is defined as: (1) Duly organized and existing as a tax-exempt nonprofit organization, (2) in good standing under the laws of the state of the organization, and (3) authorized to do business in the states where it proposes to provide housing counseling services. HUD also clarified Sec. 214.103(a), (Nonprofit and Tax-exempt Status), which applies to affiliates, to require that a housing counseling agency must function as a private or public tax-exempt nonprofit organization, or be a unit of local, county, or state government. The agency must submit evidence of nonprofit status and tax-exempt status under section 501(a), pursuant to section 501(c) of the Internal Revenue Code of 1996 (26 U.S.C. 501). Units of local, county, or state governments must submit proof of their authorization to provide housing counseling services. Comment: In the final rule, HUD should revise the term ``client counseling plan'' to ``client action plan.'' HUD response: HUD agrees with the comment that ``action'' plan is more descriptive of the type of plan that counseling agencies must produce under these regulations, and has, therefore, replaced the term ``Client Counseling Plan'' with ``Action Plan.'' The text of the proposed definition remains unchanged; only the label has been revised to ``Action Plan.'' Comment: The definition of ``education'' in the proposed rule appears to unintentionally exclude legitimate educational services. In the proposed rule, ``education'' was defined as ``information provided in a group or classroom setting.'' One commenter suggested removing the phrase ``in a group or classroom setting.'' HUD response: HUD did not accept this comment. The purpose of this definition is to distinguish between in-person housing counseling services to individuals and members of their household and educational services that are provided to groups of individuals. An education course or workshop differs from counseling in that it is usually conducted in a group setting and it is not tailored to the unique circumstances of the individual. Individualized counseling is more extensive than general education, because it is more rigorous and involves one-on-one and longer-term relationships with a housing counselor. The commenter requested that the definition be more inclusive of activities such as distance learning and home study programs, which may be the only practical action for people with inflexible schedules or which may be necessary as a reasonable accommodation for persons with disabilities. HUD recognizes that advances in computer technologies allow for the development of distance learning curricula that can potentially reach individuals living in rural areas and individuals with mobility disabilities. HUD believes, however, that the use of distance learning curricula is limited at this time in the housing counseling industry and that the majority of education sessions are held in a group or classroom setting. Comment: HUD should more narrowly define the term, ``housing [[Page 55641]] goal.'' One commenter suggested a revised definition that counselors must fully explain to clients the barriers to achieving their goals and work with clients to identify goals more reasonable to their situation. This commenter further recommended that HUD revise the definition to state that counselors could help clients set short- and long-term goals, which may lead to the achievement of their original objective. HUD response: HUD agrees with the commenter and has revised the definition in this final rule to state that housing goal means a realistic, short-, or long-term objective set by the client, with advice from a housing counselor. This revised definition takes into account that an agency can work with a client to set short-term and long-term goals to meet a housing objective that may be difficult for the client to meet on a short-term basis. Comment: To reflect more accurately the meaning of the term, in the final rule, HUD should change the term ``work plan'' to ``housing counseling plan.'' HUD response: HUD believes the term ``work plan,'' as presented in the proposed rule, accurately describes the function of the document, which describes the proposed housing counseling services of the agency, or the network of agencies associated with an intermediary. Comment: The rule should provide geographic requirements for maintaining national and regional status. Specifically, the commenter suggested that the definition of national intermediary be revised to indicate that an intermediary serves at least one-half of the states or at least 26 states. The commenter further suggested that the definition of regional intermediary should be revised to indicate that a regional intermediary has a physical office in fewer than 26 states. HUD response: HUD disagrees with the commenter. HUD believes it is too limiting to define national and regional intermediaries, in this regulation, specifically by the number of states. For example, such a strict definition does not take into account the potential breadth of services a national intermediary may be providing in multiple regions throughout the country. In response to this comment, however, HUD has adopted minor changes to provide clarity in the definition of ``intermediary.'' Comment: The final rule should define the expectation of what percentage of an intermediary's 12-month award should be designated as pass-through funds to intermediary affiliates. HUD response: HUD did not adopt this revision as recommended. The primary purpose of HUD housing counseling grant funds is to support the direct delivery of housing counseling services. Since administrative needs vary by intermediary, HUD believes that the establishment of a designated pass-through percentage would be unreasonably restrictive for intermediaries. For example, a newly approved intermediary may need to devote more resources to training and technical assistance than an established intermediary would devote to administrative resources. Comment: HUD should revise the definition of Local Housing Counseling Agency (LHCA) to indicate that an LHCA has only one location or a main office with one or more branch offices within the same state or no more than two contiguous states. HUD response: HUD agrees with the commenter and has revised the definition of LHCA so that it reflects that an LHCA may have a main office, and one or more branch offices, in no more than two contiguous states. Moreover, a recent trend in the industry is for agencies to merge in order to enjoy economies of scale regarding accounting and other costs. Accordingly, in order to accommodate this new model of agency, and support the cost savings associated with them, HUD added a definition in Sec. 214.3 for ``multi-state organizations.'' Comment: In the final rule, HUD should provide additional guidance around acceptable forms of outreach and marketing activities. HUD response: The final rule now has been revised by adding a definition at Sec. 214.3 of ``marketing and outreach'' (see also Sec. 214.300(c)(2)). Under this definition, marketing and outreach mean the provision of information to raise awareness about critical housing topics, such as predatory lending or fair housing issues, and the availability of housing counseling and other forms of assistance, including, but not limited to: Distributing materials; presenting at community events; conducting informational campaigns such as public service announcements (PSAs), advertisements, or other forms of media campaigns; and advocating with lenders and other industry partners. B. Approval Criteria 1. One Year in Operation Comment: HUD should clarify whether agencies certified by HUD- approved intermediaries are subject to the provision that an agency must have been in operation for at least one year before it can be considered for HUD certification. HUD response: To be considered as part of an intermediary's approval application, and to be eligible to receive HUD housing counseling sub-grant funding from an intermediary, MSO, or SHFA, affiliates and branches must be in operation for at least one year. To clarify this requirement, HUD revised Sec. 214.103 to provide that the criteria for approval apply to all agencies, including, for SHFAs and intermediaries, the branches and affiliates in the HUD portion of their Housing Counseling program. In addition, an intermediary must have operated in an intermediary capacity for at least one year. To be considered part of an intermediary's approval application, and to participate in the HUD-approved portion of the intermediary's Housing Counseling program, affiliates and branches must have successfully administered a Housing Counseling program for at least one year. HUD has established this criterion in order to ensure that any entity that is listed on HUD's Web site has at least one year of experience administering a Housing Counseling program that demonstrates at least a basic level of knowledge, capacity, and experience in providing these services. However, this does not prohibit SHFAs and intermediaries from developing the capacity of new organizations, with the intention of including them in the HUD portion of their program once they meet the experience requirement and other requirements. 2. Ineligible Participants Comment: In the final rule, HUD should provide an explanation about what constitutes ``offenses that reflect upon the responsibility, integrity, or ability of a housing counseling agency to participate in housing counseling activities.'' HUD response: At Sec. 214.103(c)(2), the final rule clarifies that offenses that reflect upon the responsibility, integrity, or ability of housing counseling agencies to participate in housing counseling activities refers to a criminal offense that can be prosecuted at a local, state, or federal level. An example of such an offense would be if a member of the board of directors, the executive director, or an employee has been indicted or convicted of embezzling city, state, or federal funds. Comment: The provision at Sec. 214.103(c)(3), which prohibits an agency from being ``subject to unresolved findings as a result of HUD or other government audit or investigation,'' is too broad and should [[Page 55642]] be narrowed or eliminated in the final rule. One commenter suggested the provision could result in government agencies prolonging their findings and appeals process, resulting in denying a program participant timely due process and effectively eliminating a counseling agency from the program, thus creating harm to the agency and clients. The commenter recommended that HUD provide all audit or investigation findings to all applicable parties within 90 days of initiating the investigation, with the counseling agency having 30 days to respond to HUD and or the government agency filing the findings having 30 days to issue its final ruling. HUD response: HUD disagrees. HUD undertakes considerable effort to complete an audit or investigation in a timely manner to avoid undue disruption to agency operations or services being provided to clients. However, the length of an audit or an investigation varies because of the nature, complexity, and individual circumstances related to a specific audit or investigation. Comment: The term ``generally-accepted practices of prudent agencies'' is ambiguous and could lead to uneven and inconsistent determinations by reviewers of how a counseling agency conducts its operations, even though the agencies are operating within the guidelines of the HUD handbook and regulations. HUD response: HUD agrees that this provision may elicit confusion and it has been removed. 3. Six Months Experience as a Counselor Comment: This requirement that a counselor must have at least 6 months of previous experience as a housing counselor should be removed because it is too narrow. Two commenters stated that HUD certification should depend on the agency and not the individual counselor, since it is the agency's responsibility to hire capable staff. It may be advantageous for an agency to hire staff from other fields, because they bring additional skills to the position. HUD response: HUD agrees with the commenter that it is the agency's responsibility to hire capable staff. HUD also agrees that it may be difficult to hire and maintain an entire staff with at least 6 months of experience per person. In response to these comments, HUD has revised the requirement that all housing counseling agency staff must have a minimum of 6 months of experience as a housing counselor. The revised provision at Sec. 214.103(g)(2) requires that one-half of an agency's counselors must have the minimum of 6 months of experience. Comment: The 6-month housing counselor experience requirement should be extended 6 months to one year for agencies that are seeking HUD approval for the first time. This commenter further stated that the counselor experience requirement should be limited to obtaining HUD approval and not be required in order to maintain HUD approval. The commenter suggested that every HUD-approved agency should have experienced staff, but this should not inhibit them from hiring and training staff new to the housing counseling field. HUD response: HUD agrees with the commenter that every HUD-approved agency should have experienced housing counselors. Agencies are encouraged to hire and train new staff. It is essential, however, for new housing counseling agencies that are seeking HUD approval and for all participating agencies to maintain approval, to have at least half of its housing counselors with at least 6 months of experience. 4. Contracts or Agreements To Provide Eligible Housing Counseling Services Comment: In the final rule, HUD should allow sub-grantees and affiliates of intermediaries to contract part or all of their counseling services, if there is not another HUD-approved local agency serving the geographic area. This commenter stated that to reach a rural or underserved area, reach particular subpopulations, and contract for services not currently offered by the affiliate, each requires a contract with a sub-grantee to provide part or all of that counseling service. HUD response: HUD disagrees. The rule as proposed would allow housing counseling agencies or intermediary housing counseling organizations to contract with housing counseling services in geographic areas where a need for housing counseling services is demonstrated and no HUD-approved housing counseling agency or branch, affiliate, or sub-grantee exists. Comment: One commenter suggested that HUD revise the final rule to provide that, in the event that HUD determines a geographic area of the country is not served or underserved by an LHCA, or a regional or national intermediary, HUD will contract with a national intermediary to provide counseling services through their existing network of branches, affiliates, and sub-grantees. In this case, the commenter suggested it is permissible for a national intermediary to offer housing counseling services exclusively by telephone or the Internet. HUD response: HUD agrees. No change in the rule is necessary. The rule as proposed and as adopted in this final rule would allow housing counseling agencies or intermediary housing counseling organizations to contract out housing counseling services in geographic areas where a need for housing counseling services is demonstrated and where no HUD- approved housing counseling agency, or its branches or affiliates, exists. Comment: HUD should identify which Office of Management and Budget (OMB) Circulars and regulations are applicable. HUD response: HUD agrees and has revised this provision to refer to 24 CFR parts 84 and 85. Parts 84 and 85 contain the uniform grant requirements for nonprofit organizations and states, respectively, and describe in detail the applicable OMB Circulars. 5. Facilities Comment: The final rule should include more flexibility than ``agencies must be located in communities they serve.'' One commenter stated that their agency covers a broad area and the clients and counselors meet ``mid-point.'' HUD response: HUD agrees with this commenter that the proposed regulation necessitated additional flexibility and has revised Sec. 214.103(l). The revised regulation recognizes the expansion that has taken place among participating agencies and that the proposed requirement for facilities to be located in the communities they serve may unduly limit an agency's ability to serve its clients. Therefore, in this final rule, HUD has removed this requirement. Comment: The final rule should include a provision at Sec. 214.103 that states, ``an agency may provide more than housing counseling services in the same office space.'' This commenter stated that many HUD-approved housing counseling agencies are multi-purpose agencies operating out of one location. It is an unreasonable burden to require separate facilities or portions of a building when one part-time counselor can easily meet the HUD minimum workload requirement. HUD response: HUD believes that it is important for agencies to provide office space that is dedicated to the provision of housing counseling to clients. HUD acknowledges, however, that office space may need to be used for multiple purposes. Therefore, HUD has revised Sec. 214.103(l) to provide that agencies must make space available to provide housing counseling services, but is not [[Page 55643]] requiring them to limit the use of the space solely for the purpose of providing housing counseling services. Comment: To ensure client privacy, a provision should be added in this final rule stating that housing counselors should have access to private offices or meeting facilities that allow for an uninterrupted and confidential meeting between counselor and client. This commenter stated that hard copies of client files should be kept in locked filing cabinets and that electronic client files should be kept secure and accessible only by authorized employees. HUD response: It is important for housing counseling agencies to provide an environment that provides privacy for in-person counseling and confidentiality of client records. Section 214.103(l) requires that housing counseling agencies provide such a space. In response to the request to maintain the privacy and confidentiality of electronic files, HUD has revised Sec. 214.103(e) in this final rule to require that HUD-approved agencies maintain the confidentiality of each client's file, both electronic and paper, in accordance with safeguards for client files at Sec. 214.315. 6. Housing Counseling Work Plan Comment: If an agency does not provide in-person counseling beyond its primary education services, it should only be required to provide referrals to an affiliate or partner that can provide more specialized in-person services. HUD response: HUD disagrees, because it considers in-person counseling a key component to the work of a HUD-approved counseling agency. C. Termination of HUD-Approved Status Comment: The final rule should explain what is meant by ``best interests of the Department.'' HUD response: HUD believes that ``best interests of the Department'' may not appropriately describe HUD's actions and has revised the final rule to provide that HUD-approved status, and participating agencies, may be terminated for good cause. The provision is designed to account for unforeseen circumstances or conditions that might warrant termination of HUD approval. Comment: HUD should create an exception for staff turnover within the agency in the ``lack of capacity'' provision, as long as new staff is hired within a reasonable time. HUD response: Agency ``inactive status'' that HUD has added to the final rule addresses this type of situation. An agency placed in inactive status because of lack of sufficient and experienced staff would not be listed on HUD's Web site until adequate staffing and capacity is restored. As discussed in section II, HUD has added new provisions in this final rule in response to these comments. D. Counseling Services 1. Basic Requirements--In-Person Counseling Comment: In-person counseling is an important aspect of the Housing Counseling program. One commenter recommended that this provision be preserved in the final rule. Alternatively, four commenters stated that the requirement for ``in-person'' counseling is outdated and not in the best interest of the client. HUD response: While in-person counseling between the counselor and the client is the form of counseling preferred by HUD, HUD recognizes that in many cases in-person counseling is not practical due to distance, health, transportation, crisis situations, and other issues. In addition, there may be circumstances where a person with a disability needs to receive counseling in an alternative setting or format as a reasonable accommodation to that person's disability. Therefore, if the one-on-one counseling setting is not practical, the housing counseling work plan should describe the housing counseling agency's plans to provide counseling in alternative settings where needed. Consequently, HUD revised Sec. 214.300(a) and Sec. 214.103(m) to allow for alternatives to in-person counseling where the counseling agency and the client mutually agree to an alternative setting. Comment: Provisions in the final rule should acknowledge that it is often impossible for housing counselors to follow up with clients, especially when they are homeless. HUD response: HUD understands that many factors may make it impossible for counselors to reach clients. The regulatory provision, as proposed, required that the agency ``follow-up'' with clients. HUD believes that agencies should continue to make reasonable efforts to reach clients, when possible, to assure that the client is progressing toward his or her housing goal, to modify or terminate housing counseling, and to learn and report outcomes. 2. Approved Housing Counseling Activities Comment: The final rule should present a clear distinction between counseling ``activities and topics.'' HUD response: In this final rule, HUD revised Sec. 214.300 to better clarify housing counseling services. The basic requirement is for agencies to provide counseling to current and potential homeowners and tenants to assist them in improving their housing conditions and in meeting the responsibilities of homeownership or tenancy. Section 214.300(c) has been revised to better illustrate approved housing counseling education and outreach topics. Comment: The final rule should more broadly define housing counseling activities. Activities limited to single-family houses, condominiums, and cooperatives are too narrow to meet the existing housing opportunities. One commenter suggested that manufactured homes should be added to the list. HUD response: HUD agrees that the universe of housing opportunities is broad and not exhaustively covered by the examples in the regulations. HUD points out, however, that the list of education and outreach topics is not intended to cover every housing opportunity. Housing counseling agencies are encouraged to tailor housing counseling activities to the needs of the individual client. E. Performance Criteria 1. Workload Comment: The final rule should clarify what is meant by the client base as ``determined by HUD.'' One commenter recommended that this provision be revised and published for additional public comment, because the methodology for determining measures of success is crucial to intermediaries' and agencies' ability to compete for funding. HUD response: Consistent with the requirements for HUD approval, HUD has revised the performance criteria workload requirement at Sec. 214.303(b) to clarify that the minimum workload in order to maintain HUD approval is 30 clients annually. 2. Client Referrals Comment: Three commenters stated that the requirement that all HUD- approved agencies must accept all referrals from HUD and HUD-approved agencies is too broad. One commenter suggested that agencies can only serve as many clients as possible and that workloads may vary. Another commenter suggested adding a provision that the agency must accept the referral if it has the resources to do so. In addition, another commenter recommended that the language of the proposed rule could lead to a circle of [[Page 55644]] inappropriate referrals and discourage use of community-based resources that are not HUD-approved. This commenter suggested the language be modified, as follows: ``If an agency does not have the experience or skills to meet the needs of a client, it must refer the client to another appropriate HUD-approved agency or other appropriate nonprofit organization.'' HUD response: HUD understands that agencies often have limited resources; however, it is important that all clients are served. In cases where the agency does not offer the unique services requested by the client or does not have sufficient resources, the agency must refer the client to another HUD-approved housing counseling agency, preferably in the area. If a HUD-approved agency is not available in the client's area, the client should be referred to another HUD- approved agency outside the client's area that can help the client meet his or her needs. 3. Conflicts of Interest Comment: The final rule should be revised to account for unique challenges of providing HECM counseling. One commenter presented a description of its own unique conflict-of-interest challenges that require solutions that may not fit other types of housing counseling. This commenter noted that lenders often provide donations or other monetary compensation to counseling agencies. The commenter cautioned that agencies that accept closing-payments from lenders must choose between serving client interests and serving lender interests (and, by association, the counseling agency's interests). HUD response: HUD believes that counseling agencies should not have to choose between serving client interests and serving lender interests. Whether the agency is counseling potential HECM borrowers or a homeowner facing foreclosure, the counseling agency must be careful to follow the program regulations, and, in particular, the conflicts- of-interest requirements. These requirements are designed to preserve and protect the relationship between the client and the agency. In response to this and other comments concerning conflicts of interest, HUD has revised Sec. 214.303(f) in order to allow for additional flexibility. See section II.G for a detailed description of the revised conflicts-of-interest requirements. Comment: Many agencies have sought lender support, because of insufficient funding from HUD, and because such support would create conflicts of interest. One commenter suggested that charging a fee to the client would remove the reliance on lenders for support and therefore remove a potential conflict of interest. HUD response: HUD has revised the conflicts-of-interest provision in Sec. 214.303 so that accepting resources from lenders, within certain circumstances, would not create a conflict. Under the revised regulations, individuals who are directors or employees, or their family members, of a housing counseling agency may not accept a fee or any other consideration for referring a client to mortgage lenders, brokers, builders, or real estate sales agents or brokers. Further, the regulations require the agency, its staff, or any member of their immediate family to avoid any action that might result in, or create the appearance of, administering the housing counseling operation for personal or private gain; providing preferential treatment to any organization or person; or undertaking any action that might compromise the agency's ability to ensure compliance with the requirements of this part and to serve the best interests of its clients. Accordingly, within these parameters, as well as the requirements of Sec. 214.313(e), an agency may accept fees from lenders. Comment: The definition of a conflict of interest should not prevent housing counseling agencies from providing opportunities in mortgage underwriting, pricing, houses, or services to its clients because those opportunities are provided by the same agency as the housing counseling. HUD response: The agency must maintain the ability to represent fully the best interests of the client and the conflicts-of-interest requirements are in place to protect both the agency and the client. HUD believes, however, that the conflicts-of-interest requirements should not limit the housing counseling agency from providing additional, related services. Therefore, as discussed above, HUD has revised the conflicts-of-interest provision to allow for additional flexibility in agency activities. 4. Disclosure Requirements Comment: A commenter stated that agencies receive hundreds of inquiry calls on a daily basis, and that providing full disclosure statements to all clients is an ``incredible burden.'' This commenter added that providing clients with a list of ``alternative services, programs, and products'' defeats the purpose of being a HUD-approved housing counseling agency. HUD response: HUD believes that the need for adequate disclosure far outweighs the corresponding burden, but acknowledges the challenges faced by agencies. Accordingly, to minimize the burden on agencies, HUD has removed from Sec. 214.303(f) the reference to ``potential clients.'' Comment: HUD's proposed disclosure provision is too broad and vague to make complete compliance possible. The commenter recommended that agencies be required to disclose only relationships that are likely to have a significant impact on the specific client. Disclosing exclusive partnerships not relevant to a particular client or of minimal impact serve no practical purpose and may confuse clients. HUD response: HUD believes that full disclosure of relationships is good business practice and promotes the highest ethical standards in these agencies supported by federal funds. Because not every potential conflict is foreseeable, the disclosures described in the proposed rule have been preserved in this final rule. Comment: In the final rule, HUD should address lender fee-for- service relationships with housing counseling agencies. These are common relationships and HUD should address and provide guidance for lender and housing counseling agency fee-for-service relationships. HUD response: HUD agrees with the commenter. As discussed in section II of this preamble, HUD has revised the funding provisions at Sec. 214.313 to allow for alternative funding sources, including charging fees to clients and accepting fees from lenders. 5. Staff Comment: HUD should define the monitoring activities expected to be utilized for staff supervision, as well as the basic requirements of how those monitoring activities should be documented. HUD response: HUD has revised the regulation to provide that housing counseling agencies must monitor their staff on an annual basis. HUD believes that housing counseling agencies should adequately supervise their staff. It is within the individual counseling agency's discretion to determine the manner in which to monitor its staff. F. Funding Comment: The final rule should be revised to allow for additional flexibility in the funding provision. This commenter explained that most affiliates in their network have the resources to meet the requirement. This commenter stated, however, that in some cases, a national organization has been involved that allows some outside match of other agencies, which in turn allows participation of other affiliates of national organizations that would not [[Page 55645]] have otherwise been able to participate because they have no or very limited resources. HUD response: HUD has revised Sec. 214.303(i) in order to improve clarity and compliance. In the final rule, HUD removed the provision that would have required agencies to maintain a level of funds that enable an agency to serve a minimum of 50 clients each year. HUD recognized that a minimum workload of 50 clients each year raised compliance concerns among small agencies. Therefore, the revised Sec. 214.303(i) requires that a participating agency maintain a level of funds that enables it to provide housing counseling to at least 30 clients every year, whether or not the agency receives HUD funding. The required workload is consistent with Sec. 214.303(b). Comment: HUD should provide additional explanation about how the required workload of ``fifty clients every year whether or not the agency receives HUD funding'' was deemed appropriate. HUD response: The 50-client workload requirement was originally instituted to help ensure that HUD-approved agencies had sufficient resources to handle referrals through HUD's Web site and interactive voice response (IVR) system. HUD agrees with the commenter that this provision may disqualify small agencies that provide intensive services to a relatively small number of individuals. Therefore, HUD has revised the funding workload requirement to make it consistent with the workload requirement of Sec. 214.303(b). This provision provides that the minimum workload is 30 clients annually. Previously, the requirement served to help ensure that agencies had the capacity to handle referrals through HUD's Web site and the IVR system. However, the alternative funding opportunities created by this regulation help ensure that agencies will have the necessary resources, and assuages these concerns. G. Agency Profile Changes Comment: One commenter stated that HUD should limit the requirement to report agency changes to include phone number and location. The commenter explained that in a national network, it is difficult to monitor staff changes. HUD response: HUD disagrees. HUD needs to be notified of staff changes to ensure that agencies have the capacity to adequately serve the individuals that may contact them through HUD's Web site and the IVR system. The process and systems through which these changes occur are undergoing significant changes. It is imperative that agencies update and verify agency profile information in a timely manner, whenever this information is posted on HUD's Web site and communicated through the IVR. Comment: HUD should require, in the final rule, agencies to update profiles during the biannual submission of form HUD-9902 data. One commenter suggested the omission of ``within 15 days'' and replacing with ``biannually.'' HUD response: HUD disagrees that these changes only be made at the time of HUD-9902 submission, which is quarterly. Since agency profile information is posted on HUD's Web site of HUD-approved agencies, changes to an agency's profile must be made by the agency immediately. However, HUD agrees that while submitting the form HUD-9902, and at other times during the year, agencies should periodically verify and validate that their profile information is accurately displayed in the system and on HUD's Web site. Comment: Two commenters recommended that the final rule require only changes in management to be reported to HUD. The commenters recommended that agencies not be required to report every staffing change. HUD response: HUD disagrees. As noted in the response to an earlier comment, HUD needs to be apprised of staff changes to ensure that agencies have the capacity to adequately serve the individuals that may contact them through HUD's Web site and the IVR system. H. Performance Review Comment: HUD should provide meaningful and clear language that all HUD reviewers and monitors use consistent monitoring guidelines. The commenter recommended that when matters of interpretation arise as to whether an agency is in compliance or not, HUD Headquarters provide the final determination. HUD response: HUD agrees with the commenter that all reviewers should use consistent monitoring guidelines. HUD disagrees that the language in this section be revised as the commenter proposes. HUD will continue to work with field staff so that monitoring procedures are administered consistently across the country. HUD Headquarters makes the final determination when policy-related issues arise. I. Fees Comment: Three commenters suggested that HUD-approved fee schedules are unreasonable and unnecessary. One commenter asked how HUD will determine what fee is ``reasonable.'' Another commenter recommended removing this provision, because the rule otherwise provides clear guidance for establishing a fee schedule; the approval process is burdensome and would likely cause a delay in implementation; HUD would have an opportunity to review and approve a fee schedule during the performance review; and it is unclear how this procedure would translate to intermediaries. Another commenter suggested that the fee schedule be made part of the housing counseling plan and that any changes should be reported to HUD for review. A different commenter opined that agencies should be required to submit fee schedules to HUD for review, but not for approval. HUD response: HUD agrees that HUD approval of fee schedules from the rule is unnecessary, and has revised Sec. 214.313 accordingly. As described in section II, HUD removed the requirement that agencies must submit fee schedules for HUD approval. HUD will review fee schedules during a review of an agency's application for approval or a performance review, in order to ensure that the fees are consistent with fees charged by similar agencies providing similar services. Comment: The final regulations should be clear that housing counseling agencies are not prohibited from charging fees based on value of their services on a loan-by-loan basis. HUD should add a provision that would allow lenders to cover the client's fee when the client is unable to pay. HUD response: HUD encourages housing counseling agencies to seek local funding, including lending or real estate organizations, in addition to units of local government. Agencies must assure that any arrangements do not violate the conflicts-of-interest provisions in Sec. 214.303(e). In addition, HUD has revised Sec. 214.313(e) to allow for lender payments, provided that the relationship with the lender is disclosed to the client and that the arrangement does not violate the provisions regarding conflict of interest. Comment: To ensure quality, availability, and independence of consumer HECM counseling, agencies should be able to charge a fee to borrowers. One commenter suggested financing the fee by dedicating a small part of the HECM mortgage insurance premium; capping the lender origination fee in a way that frees up an amount equal to a borrower counseling fee; or instituting a separate ``stand alone'' fee paid at closing out of loan proceeds, if statutory prohibitions bar the first two options. HUD response: HUD agrees with the commenter that agencies should be able [[Page 55646]] to charge a fee to HECM borrowers, if the cost does not create a financial hardship. However, the Department is not prepared to institute the financing of the fee by either of the first two methods proposed by the commenter. The first method has financial implications on the Federal Housing Administration's (FHA) capital ratio, and further analysis would be necessary to determine if this is a financially viable option. The second method has broader implications on an FHA-approved lender's fee structure. However, instituting a separate ``stand alone'' fee paid at closing out of loan proceeds may provide a solution for clients that choose to move forward and obtain a HECM, but this solution does not cover the costs of counseling for those clients that decide not to obtain a HECM. HUD continues to work in conjunction with industry partners to solve this funding gap and ensure adequate funding for HECM counseling. Comment: A counseling fee should be instituted only if it is linked to specific steps to improve the quality and independence of HECM counseling. HUD response: HUD is taking significant steps to improve the quality of reverse mortgage counseling. For example, an existing $7.75 million training grant is delivering quality reverse mortgage counseling training to many counselors from HUD-approved agencies. HUD will undertake additional measures as it determines is appropriate to improve the effectiveness and quality of counseling provided to homeowners, including HECM borrowers. Comment: HUD must ensure that agencies will be paid for HECM counseling regardless of whether their clients take out a loan. This commenter suggested that to eliminate any incentive for a counselor to limit, downplay, or omit information, HUD must institute a borrower counseling fee if it also provides a way to pay these agencies for HECM counseling that does not result in a HECM closing. This commenter also stated that HUD should prohibit lenders from paying a counseling fee on behalf of their HECM borrowers. HUD response: HUD has not revised the rule in response to this comment, but will take the commenter's suggestion under further consideration. For clients who decide not to obtain a HECM, the Department continues to work in conjunction with industry partners to solve this funding gap and ensure adequate funding for HECM counseling. Comment: One commenter recommended that the provision concerning approval of agency reimbursement for the cost of credit reports, as long as it is not a hardship to the client, should be preserved in the final rule. In contrast, two commenters stated that the credit report is a service to the client, but that it is not education or housing counseling service, and recommended removing the provision. HUD response: This final rule adopts the provision in the proposed rule regarding credit reports. HUD believes it is appropriate to address the issue of fees related to the provision of credit reports to clients. Comment: In setting housing counseling fees, the crucial factors are a client's need and ability to pay, and not merely his or her income. HUD response: HUD agrees and has revised Sec. 214.313. HUD has removed from the final rule the proposed requirement that agencies charge fees on a sliding scale based on the client's income. Accordingly, agencies may charge fees to clients, as long as the fees do not create a financial hardship for the client, and the agency must provide services at no cost to those clients who cannot afford to pay. Comment: Charging fees may have unforeseen, negative impacts on client counseling by increasing or decreasing client interest depending on whether an agency charges a fee. One commenter suggested that HUD assess the ability of housing counseling agencies to create additional revenue building services by engaging in fee-generating services, such as allowing agencies to originate loans, including lending incentives. HUD response: HUD encourages agencies to develop a diversified funding base. To facilitate this, the final rule permits the charging of fees, but also explicitly states that agencies must provide counseling without charge to persons who cannot afford the fees. However, the rule does not require that the agency charge fees. HUD does not oppose counseling agencies getting involved in other revenue- generating activities, including loan origination, provided all requirements regarding conflict of interest and disclosure are adhered to and the agency's activities are in the best interest of the client. J. Recordkeeping Comment: Three commenters stated that the Client Action Plan is an important document, but it is unnecessary and expensive to require the plan to be signed by both the client and counselor and maintained on file for 3 years. Two of these commenters explained that a signed copy does not obligate the client to adhere to any counseling suggestions and merely creates additional paperwork for the file. HUD response: HUD agrees with the commenters and has removed the client and counselor signature requirement from Sec. 214.315. Comment: HUD should expand the term ``hardship'' to allow for ``client preference.'' This commenter stated that, especially with possible foreclosure, a client may seek and prefer help over the telephone. Another commenter stated that this section's use of ``hardship'' is inconsistent with the provisions proposed at Sec. 214.300. HUD response: HUD agrees with the commenters. Clients may prefer help by the telephone, particularly in the case of foreclosure prevention counseling when time is a critical factor. In addition, some individuals may request counseling over the telephone as an accommodation to their disabilities. Consequently, HUD removed the in- person counseling requirement from the client file provision at Sec. 214.315(e). Comment: Two commenters recommended the addition of ``unable to contact'' to the list of reasons to terminate client services, since clients often change addresses without providing their forwarding information. HUD response: HUD agrees and has revised Sec. 214.315(g) accordingly. Comment: The final rule should expand the provision so that the client file can be a paper file, an electronic file, or a combination of the two. Currently, some documents are kept in paper files and others are retained electronically (e.g., credit reports and client logs). HUD response: As housing counseling agencies increasingly utilize client management systems, HUD expects client files to be a combination of electronic and paper. The regulations have been revised accordingly. Comment: HUD should not require that the initial intake be in the form of an interview or that the intake has to be at the office of the agency. One commenter described his or her agency's model for initial interviews as including a group intake and educational workshop during which counselors explain homebuying, housing counseling, and dangers of predatory lending. Following that, clients complete forms that include demographics and permission for a credit report. The commenter believes that this model is extremely effective. HUD response: While in-person counseling is the form of counseling preferred by HUD, HUD recognizes that in many cases in-person counseling is not practical due to distance, health, transportation, crisis situations, and [[Page 55647]] other issues. HUD has removed the intake requirements from the recordkeeping requirements in Sec. 214.315. K. Client Management System Comment: In the final rule or in some other form, HUD should publish criteria for a Client Management System (CMS), rather than requiring costly and difficult transitions from existing systems. HUD response: HUD has developed the criteria for a CMS to interface with HUD's Client Activity Reporting Systems (CARS), and has shared this information with CMS vendors and is working with them to understand and comply with these requirements.