Implementation of Mark-to-Market Program Revisions, 13222-13229 [06-2343]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 71, Number 49 (Tuesday, March 14, 2006)]
[Proposed Rules]
[Pages 13222-13229]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-2343]



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Part II





Department of Housing and Urban Development





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24 CFR Parts 200 and 401



Implementation of Mark-to-Market Program Revisions; Proposed Rule

Federal Register / Vol. 71 , No. 49 / Tuesday, March 14, 2006 / 
Proposed Rules

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200 and 401

[Docket No. FR-4751-P-01; HUD 2006-0003]
RIN 2502-AH86


Implementation of Mark-to-Market Program Revisions

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Proposed rule.

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SUMMARY: Based on statutory changes and HUD's technical operational 
experience in administering the program, this proposed rule would 
implement a number of changes to the Mark-to-Market (M2M) program, 
HUD's mortgage restructuring program for FHA-insured projects with 
project-based Section 8 assistance, to facilitate processing. Unlike 
the M2M proposed and final rules addressing renewal of expiring Section 
8 project-based assistance contracts that HUD published on January 12, 
2006, this rule addresses a range of administrative and programmatic 
issues other than the project-based assistance contracts.

DATES: Comment Due Date: May 15, 2006.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Room 10276, Washington, DC 20410-0500. Interested persons also may 
submit comments electronically through the Federal eRulemaking Portal 
at: https://www.regulations.gov. Commenters should follow the 
instructions provided on that site to submit comments electronically. 
Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available, without change, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, please schedule an appointment to review the public comments 
by calling the Regulations Division at (202) 708-3055 (this is not a 
toll-free number). Copies are also available for inspection and 
downloading at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Theodore Toon, Acting Deputy Assistant 
Secretary, Office of Affordable Housing Preservation (OAHP), Department 
of Housing and Urban Development, 451 Seventh Street, SW., Room 6230, 
Washington, DC 20024, (202) 708-0001 (this is not a toll-free number). 
Persons with hearing or speech impairments may access this number via 
TTY by calling the toll-free Federal Information Relay Service at (800) 
877-8389.

SUPPLEMENTARY INFORMATION:

I. Background

    The Multifamily Assisted Housing Reform and Affordability Act 
(MAHRA) became law on October 27, 1997. (See Pub. L. 105-65, 111 Stat. 
1384, 42 U.S.C. 1437f note.) The Departments of Veterans Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Act for Fiscal Year 1999 (Pub. L. 105-276, approved October 21, 1998) 
revised section 524(a)(2) of MAHRA to make renewal of expiring 
contracts under that section subject to section 516 of MAHRA, which 
prohibits mortgage restructuring and consideration of requests for 
contract renewals in the case of certain kinds of conduct by the 
project owner. On October 20, 1999, the Departments of Veterans 
Affairs, Housing and Urban Development, and Independent Agencies 
Appropriations Act for Fiscal Year 2000, Public Law 106-74, 113 Stat. 
1047, at 1110, extensively revised section 524 of MAHRA. Among other 
changes, the revisions changed the method for calculating rents when an 
expiring or terminating Section 8 contract is renewed, and required 
reduction to comparable market rents for certain projects that, prior 
to expiration or termination, had rents that exceeded such comparable 
market rents.
    The Mark-to-Market Extension Act of 2001 (Title VI of Pub. L. 107-
116, approved January 10, 2002) (Mark-to-Market Extension Act) amended 
sections 512, 514, 517, and 524 of MAHRA and section 223(a)(7) of the 
National Housing Act (12 U.S.C. 1715n). Part II of this preamble 
discusses the proposed implementation of those amendments and 
additional proposed revisions to HUD's mortgage restructuring program 
in this notice of proposed rulemaking (NPRM).
    MAHRA is currently implemented in HUD's regulations at 24 CFR parts 
401 and 402. These regulations were initially published as an interim 
rule on September 11, 1998 (63 FR 48926). On March 22, 2000, HUD 
published a final rule implementing 24 CFR part 401 and portions of 24 
CFR part 402 (65 FR 15485).
    In order to facilitate restructurings under MAHRA, this rule also 
amends HUD's regulations at part 200. Part 200 is the introductory 
section addressing HUD's mortgage insurance programs under the National 
Housing Act, 12 U.S.C. 1701 et seq. The specific sections being amended 
are 24 CFR 200.20, which applies to the refinancing of insured 
mortgages, and 24 CFR 200.40, which sets HUD's fees and charges for its 
mortgage insurance programs.

II. This Notice of Proposed Rulemaking (NPRM)

A. Section 200.20 Refinancing Insured Mortgages

    Section 615 of the Mark-to-Market Extension Act amended section 
223(a)(7) of the National Housing Act (NHA) to permit refinancing 
mortgages under that section for existing mortgages subject to 
restructuring under MAHRA. This NPRM proposes a revision to 24 CFR 
200.20 to implement this provision. The term of such mortgages would be 
limited to 30 years, and the mortgages would have to meet the legal 
requirements of section 223(a)(7) of the NHA and pertinent regulatory 
requirements established by HUD.

B. Section 200.40 HUD Fees

    HUD, in its regulations implementing its insured mortgage programs 
under the NHA, typically charges various transactional fees that HUD is 
authorized, but not required, to collect. In its experience, HUD has 
found that these fees have discouraged participation in the Mark-to-
Market program. This NPRM proposes to revise Sec.  200.40(h) by 
exempting transfer fees where the transfer of physical assets or 
substitution of mortgagors is in connection with a restructuring plan 
under HUD's regulations implementing MAHRA. This NPRM also proposes to 
revise 200.40(j) to state that an application or commitment fee shall 
not be required in connection with the insurance of a mortgage used to 
facilitate a restructuring plan under HUD's MAHRA regulations.

C. Section 401.2 What Special Definitions Apply to This Part?

    This rule makes a conforming change to the definition of ``Office 
of Multifamily Housing Assistance Restructuring'' (OMHAR) at Sec.  
401.2 to include the Office of Affordable Housing Preservation (OAHP) 
or any successor office. This change will obviate the need for 
extensive conforming revisions to part 401 in the event of subsequent 
administrative changes at HUD.

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D. Section 401.101 Which Owners Are Ineligible To Request Restructuring 
Plans?

    Section 612(c) of the Mark-to-Market Extension Act amended section 
516(d) of MAHRA by requiring the Office of Multifamily Housing 
Restructuring to notify tenants if a mortgage restructuring plan was 
rejected, and made this duty delegable to the participating 
administrative entity (PAE). At 24 CFR 401.500(f)(2), HUD currently 
requires the PAE to make the notification. This NPRM proposes to amend 
Sec.  401.500(f)(2) to require HUD or the PAE to provide the necessary 
notice. Also under this NPRM, 24 CFR 401.101(d) would be amended to 
reflect this requirement, for consistency and clarity.

E. Section 401.304 Portfolio Restructuring Agreement (PRA) Provisions 
on PAE Compensation

    As additional properties come into the mortgage restructuring 
program, HUD determines whether existing PAEs are willing and able to 
add those properties to their portfolios. This process allows HUD to 
determine whether existing PAE compensation, including base fees and 
incentives, is adequate. HUD's experience shows that it can adjust 
PAE's compensation accurately through this process, and that the 
requirement in the current rule for an annual market survey is 
unnecessary. Therefore, in the interests of regulatory simplification, 
this NPRM proposes to remove the market survey requirement from 24 CFR 
401.304(a)(2). The proposed amendment to 24 CFR 401.304(b) would 
clarify that all PAEs potentially have the opportunity to earn the same 
amount of incentives per completed transaction.

F. Section 401.309 PRA Term and Termination Provisions; Other 
Provisions

    HUD has from time to time negotiated with PAEs for the removal of 
assets from PRAs, in exchange for partial base fees and reimbursement 
of amounts incurred by the PAE for third-party vendors. This NPRM 
proposes to amend 24 CFR 401.309(b)(2) to give HUD regulatory authority 
to require removal of assets in PRAs. This NPRM also proposes to amend 
Sec.  401.309(c) to clarify HUD's ability to recover damages from a PAE 
during the term of the PRA.

G. Section 401.401 Consolidated Restructuring Plans

    This NPRM proposes to add a new sentence to the end of 24 CFR 
401.401 stating that HUD's decision whether to approve a consolidated 
restructuring plan will be made on a case-by-case basis.

H. Section 401.452 Property Standards for Rehabilitation

    Section 612(e) of the Mark-to-Market Extension Act added a new 
section 517(c)(2) to MAHRA authorizing a restructuring plan to require 
the addition to a project of ``significant features,'' such as an 
elevator, air conditioning, and community space, which are not required 
for rehabilitation of the project to a non-luxury standard adequate to 
the rental market in which the project is located, and specifying the 
funding and amount of owner contribution for such features. The NPRM 
proposes revising 24 CFR 401.452 to state that rehabilitation under the 
restructuring plan may include the addition of significant features, 
and to refer to 24 CFR 401.472, which would contain further 
requirements regarding significant features.

I. Section 401.461 HUD-Held Second Mortgage

    Section 612(g)(1) of the Mark-to-Market Extension Act amended 
section 517(a)(1)(B) of MAHRA to provide that a restructuring plan 
shall include a second mortgage in an amount not more than the greater 
of the full or partial payment of claim or the difference between the 
restructured first mortgage and the original indebtedness prior to 
restructuring. In addition, an overall cap was imposed that limits the 
second mortgage to an amount that HUD or the PAE determines can 
reasonably be expected to be repaid. The change made by section 
612(g)(1) of the Mark-to-Market Extension Act is proposed to be 
implemented in 24 CFR 401.461(a)(2)(ii).
    The second, and any additional, mortgage to HUD secures repayment 
of HUD funds used in a restructuring transaction. HUD funds are 
available from either the section 541(b) full or partial payment of 
claim, or from residual receipts accumulated pursuant to the expiring 
housing assistance payments (HAP) contract subject to the regulatory 
provisions in 24 CFR 880.205(e), 881.205(e), and 883.306(e).
    Section 517(b)(6) of MAHRA provides for the use of surplus project 
accounts to facilitate restructuring under MAHRA. Surplus project 
accounts are available when the combination of a pre-restructuring 
reserve for replacement account and residual receipt account balances 
are greater than the initial deposit to the reserve for replacement 
required after restructuring. MAHRA provides that up to 10 percent of 
such surplus may be released to the owner (see section 517(b)(6) of 
MAHRA). The remaining surplus funds are to be used for other purposes, 
including facilitating the debt restructuring transaction. Generally, 
for restructuring of FHA-insured mortgages, the surplus funds are used 
to reduce the amount of the partial payment of claim. For the 
restructuring of HUD-held mortgages, there would be no need for a 
partial payment of claim; in such a case, the typical use is to 
increase the net cash proceeds of the restructuring and thus reduce the 
``write-down.'' This NPRM proposes amending 24 CFR 401.461(a)(1) to 
include, among the situations where a full payment of claim is not 
needed, those cases where section 517(b)(6) surplus accounts are 
available to facilitate the restructuring.
    To the extent the source of the surplus project accounts is 
existing reserve for replacement funds, or residual receipts not 
subject to 24 CFR 880.205(e), 881.205(e), and 883.306(e) (which allow 
HUD to place such funds into an account to be used for reduction of 
housing assistance payments or other project purposes), HUD's 
restructuring plan would not take back an additional mortgage. For the 
restructuring of HUD-held mortgages, the surplus funds increase the net 
cash proceeds of the restructuring to provide partial repayment of the 
previously paid FHA claim. To the extent the residual receipts are 
subject to 24 CFR 880.205(e), 881.205(e), and 883.306(e) (which allow 
surplus project funds to be used for reducing housing assistance 
payments or other project purposes), the surplus funds will be treated 
as HUD funds and will be reflected in an increased second mortgage 
amount (or third mortgage, as applicable). However, where the reduction 
in principal amount of the restructured HUD-held mortgage is not caused 
by a source of new mortgage funds or amounts subject to 24 CFR 
880.205(e), 881.205(e), or 883.306(e) the proposed amendment to 24 CFR 
401.461(c) provides that the restructuring plan may require the owner 
to give an additional mortgage to HUD in the amount of the difference 
between the reduced principal amount of the restructured mortgage and 
the principal amount of the second mortgage.
    HUD is also proposing in this rule to remove the prohibition 
against compound interest on second and third HUD-held mortgages. The 
existing regulations (Sec.  401.461(b)(1)) require that the interest 
rate on the second mortgage created in the M2M debt restructuring must 
have an interest rate of at least 1 percent but not more than the

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Applicable Federal Rate (AFR). The regulations further require that the 
interest rate ``will accrue but not compound.'' The intent of this 
requirement was to minimize the debt burden created by accruals on the 
unpaid balance of the M2M second mortgage. The additional mortgage 
(third mortgage) described in Sec.  401.461(c) requires the same terms 
and conditions as the second mortgage.
    The number of debt restructurings being financed with equity raised 
under the Low Income Housing Tax Credit (LIHTC) program is increasing. 
A portion of these tax credit restructurings involve what is referred 
to in the industry as ``9 percent credits,'' which generate far more 
equity for the redevelopment of the project than the more readily 
available ``4 percent credits.'' HUD has been informed by tax counsel 
to a number of tax credit purchasers that the Internal Revenue Service 
(IRS) will not allow the M2M subordinate debt to be used as ``basis'' 
in a ``9 percent credit'' transaction if the debt is set at less than 
the AFR and if the interest does not compound. The M2M rate of 1 
percent at simple interest is considered by IRS to be ``subsidized 
debt'' and, as a result, the 9 percent credits are reduced to 4 percent 
credits.
    The existing regulations allow the interest rate to be set at the 
AFR, but HUD has had to issue regulatory waivers on a number of these 
transactions to allow the rate to compound. The waivers have clearly 
served the best interests of both HUD and the project. This regulatory 
change removes the reference to simple interest and thereby allows HUD 
to use its administrative discretion in requiring simple or compounding 
interest. Simple interest will remain the program standard, but 
compounding will be allowed where it serves the best interest of the 
government and the individual debt restructuring. The regulations 
governing the third mortgage would also be amended to conform to the 
language governing the second mortgage.
    This NPRM proposes to revise 24 CFR 401.461(b)(5) to implement 
section 612(g)(2) of the Mark-to-Market Extension Act. Section 
612(g)(2) amended section 517(a)(5) of MAHRA to provide that, in 
addition to modifying or forgiving all or part of the second mortgage, 
HUD may assign the second mortgage to a purchaser that is a tenant 
organization or tenant-endorsed community-based nonprofit or public 
agency. Such a purchaser is currently defined at Sec.  401.2 as a 
priority purchaser. This rule would also add a new Sec.  401.480(e), as 
discussed below in this preamble, to provide a procedure for a 
community-based non-profit or public agency that is a purchaser to 
obtain tenant endorsement in order to qualify as a priority purchaser.
    This rule would also revise Sec.  401.461(c), which addresses 
additional mortgages to HUD, to provide that if HUD modifies, assigns, 
or forgives a second mortgage in accordance with Sec.  401.461(e) 
pursuant to section 517(a)(5) of MAHRA, that it may modify, assign, or 
forgive the additional mortgage (third mortgage or contingent repayment 
mortgage) that is part of the same restructuring. Specifically, Sec.  
401.461(c) would provide that, as part of a restructuring, HUD may 
elect either to not create an additional mortgage or to create an 
additional mortgage in an amount less than required if the anticipated 
recovery on the additional mortgage is less than the servicing costs; 
or if the restructuring plan approved the modification, forgiveness, or 
assignment of a second mortgage (Mortgage Repayment Mortgage) created 
under Sec.  401.461(b)(5) pursuant to section 517(a)(5) of MAHRA.
    Example of second mortgages in a restructuring transaction. Assume 
an FHA-insured property subject to a Restructuring Plan has a pre-
restructuring first mortgage of $2 million, and can support $900,000 of 
first-mortgage debt after restructuring. After the required owner 
contributions, additional funding of $270,000 is needed for the repair 
escrow, for the initial deposit to the reserve for replacement, and for 
transaction costs. If no surplus project account funding is available, 
the section 541(b) partial payment of claim would be increased by 
$270,000 (i.e., from $1.1 million to $1.37 million) to make available 
some of the proceeds from the new first mortgage to fund the repair 
escrow, initial deposit to the reserve for replacement, and transaction 
costs. In this case, the second mortgage would be limited by the lesser 
of: (1) The amount reasonably repayable; or (2) $1.37 million. The 
potential third mortgage amount would be up to the difference, if any, 
between $1.37 million and the second mortgage.
    If surplus project accounts of $400,000 from other than residual 
receipts pursuant to 24 CFR 880.205(e), 881.205(e), or 883.306(e), and 
after 10 percent of the surplus was released to the owner, were 
available, the partial payment of claim required and the maximum second 
mortgage would be reduced accordingly to $970,000. If the source of the 
surplus project accounts were residual receipts accumulated pursuant to 
24 CFR 880.205(e), 881.205(e), or 883.306(e), HUD would take back a 
second mortgage of $1.37 million, assuming that amount could be 
reasonably expected to be repaid, reflecting the total HUD funds to be 
used in the restructuring ($970,000 from the partial payment of claim 
and $400,000 from the residual receipts).
    If a HUD-held first mortgage is being restructured, there is no 
need for a partial payment of claim. Thus, the second mortgage is 
limited by section 517(a)(1)(B)(ii) of MAHRA to the difference in the 
first mortgage indebtedness before and after restructuring ($1.1 
million in the example). To the extent that the amount of the HUD-held 
debt is not refinanced through a new first or Mark-to-Market second 
mortgage, or repaid from the net cash proceeds of the restructuring, 
HUD would either take back a third mortgage pursuant to 24 CFR 
401.461(c), or, if a third mortgage is not to be taken back, or is 
taken back in a lesser amount, HUD would originate the third mortgage 
at the closing, and then cancel or modify it accordingly.
    OAHP has provided additional guidance in its Operating Procedures 
Guide (OPG) and through an underwriting model used by PAEs. The OPG and 
underwriting model are both available at OAHP's Web site, https://www.
hud.gov/ offices/omhar.

J. Section 401.472 Rehabilitation Funding

    This proposed amendment to 24 CFR 401.472 implements section 612(e) 
of the Mark-to-Market Extension Act, which amended section 517 of MAHRA 
to provide for a cap on owner contributions with respect to the 
addition of significant features. For example, the addition of air 
conditioning (including conversions from window air conditioning to 
central air conditioning), an elevator, or additional community space 
will be considered significant. Upgrades (for example, replacement of 
windows with more efficient windows) are not eligible for this capped 
owner contribution. If a restructuring plan includes additions other 
than those specified, and the PAE considers the additions significant, 
the PAE may propose to make those additions subject to the cap on owner 
contributions. In general, the owner will contribute 3 percent toward 
the cost of each significant addition. The PAE may propose a lower or 
higher owner contribution, not to exceed 20 percent, with respect to 
significant additions. The 20 percent ceiling, based on total cost, is 
the equivalent of the statutory 25 percent ceiling, based on the amount 
of assistance. For example, if the cost of an item were $100,000, with 
the owner

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contributing $20,000 and assistance in the amount of $80,000, the owner 
would contribute 20 percent of the total cost and 25 percent of the 
amount of assistance.

K. Section 401.480 Sale or Transfer of Project

    Section 612(d) of the Mark-to-Market Extension Act amends section 
524(e) of MAHRA to provide that properties with plans of action under 
the Emergency Low Income Housing Preservation Act of 1987 (12 U.S.C. 
1715l note) or the Low-Income Housing Preservation and Resident 
Homeownership Act of 1990 (12 U.S.C. 4101 et seq.) are eligible for 
Mark-to-Market restructuring, but only if sold. This NPRM proposes to 
amend 24 CFR 401.480(b) to implement this provision. Sale is a 
condition of restructuring, and so HUD will require the sale to take 
place immediately, and under the original set of escrow instructions, 
if the sale has not occurred prior to the restructuring.
    As noted above in the discussion of HUD-held second mortgages under 
Sec.  401.461, this rule also proposes to add a new Sec.  401.480(e) to 
establish the procedure for a community-based nonprofit organization or 
public agency purchaser to obtain tenant endorsement and qualify as a 
priority purchaser. A community-based nonprofit or public agency 
purchaser requesting tenant endorsement would be required to conduct 
two meetings, the first (the ``Informational Meeting'') to disseminate 
information about the endorsement request and the purchaser's plans for 
the project, and the second (the ``Endorsement Vote'') to conduct the 
voting for the endorsement. The purchaser would be required to provide 
notice of the Informational Meeting and Endorsement Vote to each tenant 
and any tenant organization for the project, and post notices of the 
two meetings in the project. If the purchaser is acting 
contemporaneously with the Restructuring Plan, the Informational 
Meeting would occur at the second meeting of tenants convened by the 
PAE pursuant to Sec.  401.500(d) to discuss the restructuring plan.
    The notices of the date and time for these meetings would be sent 
to each head of household in the project and would contain a ballot 
that includes a proxy authorizing a designated person to vote on behalf 
of such tenant household at the Endorsement Vote. The designated person 
may be the purchaser, the tenant organization, the PAE, or any 
individual that would attend the Endorsement Vote. In each notice, the 
purchaser would provide a narrative outlining its plans for the 
project, including any request made to HUD for debt relief under Sec.  
401.461(b)(5) of the second and any additional mortgage. The rule would 
permit the proxies to be collected from the tenants by the purchaser, 
from any tenant organization for the project, from the PAE, or from 
some other entity approved by HUD at any time, including at the 
Informational Meeting, up to the date and time of the Endorsement Vote.
    The Endorsement Vote would be held at least 10 days after the 
Informational Meeting. Tenant households would cast their ballots and 
any remaining proxies would be gathered. The PAE then would determine 
whether the total of votes cast in person and by proxy equals a quorum 
of at least 10 percent of the total number of tenant households in the 
project. If there is such quorum, the votes would be tallied (including 
those cast by proxy), and a majority of the votes will determine 
whether or not the purchaser has the endorsement of the tenants. HUD 
specifically seeks comment on this proposed procedure to demonstrate 
tenant endorsement, and solicits recommendations for less prescriptive 
and more streamlined procedures that will meet the goal of providing an 
opportunity for the informed participation of tenants in a process that 
results in an endorsement that can reasonably be considered to be 
valid.

L. Subpart F--Owner Dispute of Rejection and Administrative Appeal

    This rule would also revise the administrative appeals procedure in 
subpart F of part 401. Presently, Sec.  401.645 provides an 
intermediate level appeal only for notices of rejection. This rule 
would expand the availability of the intermediate level appeal to 
include a decision by HUD and the PAE to offer a proposed Restructuring 
Commitment that the owner does not execute. The reference to notices of 
rejection in Sec.  401.645 would also be restated in more general terms 
to include any notice of rejection rather than listing specific 
sections under which a notice of rejection may be based. This change 
would eliminate the need for conforming changes if sections of the rule 
were to be revised and renumbered in the future, and would eliminate 
any confusion if a specific section that served as the basis for a 
notice of rejection were inadvertently omitted from the list. Besides 
addressing such procedural issues as providing for the appeals officer 
to be identified in HUD's notice to the owner, this rule would also 
establish the standard of review for appeals: for the intermediate 
level, the standard would be whether HUD's action is reasonable in 
light of all the evidence presented by the owner, and for the final 
level of administrative appeal, whether the determination of the 
appeals officer at the intermediate level was reasonably reached.

III. Findings and Certifications

Paperwork Reduction Act

    The proposed information collection requirements contained in this 
rule have been submitted to the Office of Management and Budget (OMB) 
for review under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520). Under this Act, an agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless the collection displays a valid control number.
    The public reporting burden for this collection of information is 
estimated to include the time for reviewing the instructions, searching 
existing data sources, gathering and maintaining the required data, and 
completing and reviewing the collection of information.
    The following table provides information on the estimated public 
reporting burden:

----------------------------------------------------------------------------------------------------------------
   Information collection Sec.       Number of     Responses per   Total annual      Hours per
           401.480(e)               respondents     respondent       responses       response      Total  hours
----------------------------------------------------------------------------------------------------------------
Nonprofit Groups/Public Agencies               7               1               7              20             140
Tenants/Heads of Households.....             550               1             550               1             550
                                 -------------------------------------------------------------------------------
    Totals......................             557  ..............             557  ..............             690
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
proposed collection of information to:

[[Page 13226]]

    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting responses to be submitted electronically.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Under the 
provisions of 5 CFR 1320, OMB is required to make a decision concerning 
this collection of information between 30 and 60 days after today's 
publication date. Therefore, any comment on the information collection 
requirements is best assured of having its full effect if OMB receives 
the comment within 30 days of today's publication. This time frame does 
not affect the deadline for comments to the agency on the proposed 
rule, however. Comments must refer to the proposal by name and docket 
number (FR-4751-P-01) and must be sent to:

HUD Desk Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, FAX: (202) 395-6974, and
Kathleen O. McDermott, Reports Liaison Officer, Office of the Assistant 
Secretary for Housing--Federal Housing Commissioner, Department of 
Housing and Urban Development, 451 Seventh Street, SW., Room 9116, 
Washington, DC 20410-8000.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) 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, which implements a 
statutory mandate to establish a program for the resolution of a narrow 
category of disputes, will not impose any federal mandates on any 
state, local, or tribal government or the private sector within the 
meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The finding remains available for public 
inspection during regular business hours in the Office of the Rules 
Docket Clerk, Office of General Counsel, Department of Housing and 
Urban Development, 451 Seventh Street, SW., Room 10276, Washington, DC 
20410.

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' (but not 
economically significant) as defined in section 3(f) of the Order. Any 
changes made in this rule subsequent to its submission to OMB are 
identified in the docket file. The docket file is available for public 
inspection between 8 a.m. and 5 p.m. weekdays in the Office of the 
Rules Docket Clerk, Office of General Counsel, Department of Housing 
and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, 
DC.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule does not have a significant 
economic impact on a substantial number of small entities.
    This rule affects only multifamily Section 8 owners. There are very 
few multifamily Section 8 owners who are small businesses. Therefore, 
this rule will not have a significant economic impact on a substantial 
number of small entities.
    Notwithstanding the determination that this rule does not have a 
significant impact on a substantial number of small entities, HUD 
specifically invites any comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    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.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (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 mandates on any state, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Home improvement, Housing standards, Lead 
poisoning, Loan programs--housing and community development, Mortgage 
insurance, Organization and functions (Government agencies), Penalties, 
Reporting and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

24 CFR Part 401

    Grant programs-housing and community development, Housing, Housing 
assistance payments, Housing standards, Insured loans, Loan programs-
housing and community development, Low and moderate income housing, 
Mortgage insurance, Mortgages, Rent subsidies, Reporting and 
recordkeeping requirements.

    Accordingly, HUD proposes to amend 24 CFR parts 200 and 401 as 
follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

    1. The authority citation for part 200 continues to read as 
follows:

    Authority: 12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).

    2. Revise Sec.  200.20 to read as follows:


Sec.  200.20  Refinancing insured mortgages.

    An existing mortgage insured under the Act, or an existing mortgage 
held by the Secretary that is subject to a mortgage restructuring and 
rental assistance sufficiency plan under the Multifamily Assisted 
Housing Reform and Affordability Act, 42 U.S.C. 1437f note (MAHRA), may 
be refinanced pursuant to section 223(a)(7) of the Act and such terms 
and conditions as may be established by the Commissioner. The term of 
such refinancing in connection with the implementation of an approved 
restructuring plan under section 401, subpart C of this title, may be 
up to, but not more than, 30 years.
    3. In Sec.  200.40, revise paragraphs (h) and (j) to read as 
follows.


Sec.  200.40  HUD fees.

* * * * *
    (h) Transfer fee. Upon application for the approval of a transfer 
of physical

[[Page 13227]]

assets or the substitution of mortgagors, a transfer fee of 50 cents 
per thousand dollars shall be paid on the original face amount of the 
mortgage in all cases, except that a transfer fee shall not be paid 
where both parties to the transfer transaction are qualified nonprofit 
purchasers, or when the transfer of physical assets or the substitution 
of mortgagors is in connection with a restructuring plan under part 
401, subpart C of this title.
* * * * *
    (j) Fees not required. (1) The payment of an application, 
commitment, inspection, or reopening fee shall not be required in 
connection with the insurance of a mortgage involving the sale by the 
Secretary of any property acquired under any section or title of the 
Act.
    (2) The payment of an application or commitment fee shall not be 
required in connection with the insurance of a mortgage used to 
facilitate a restructuring plan under part 401, subpart C of this 
title.

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE 
RESTRUCTURING PROGRAM (MARK-TO-MARKET)

    4. The authority citation for part 401 continues to read as 
follows:

    Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 
1437(c)(8), 1437f(t), 1437f note, and 3535(d).

    5. In Sec.  401.2, revise the definition of OMHAR to read as 
follows:


Sec.  401.2  What special definitions apply to this part?

* * * * *
    OMHAR means the Office of Multifamily Housing Assistance 
Restructuring, the Office of Affordable Housing Preservation (OAHP), 
and any successor office.
* * * * *
    6. In Sec.  401.101, add a new paragraph (d) to read as follows:


Sec.  401.101  Which owners are ineligible to request restructuring 
plans?

* * * * *
    (d) Notice to tenants. The PAE or HUD will give notice to tenants 
of a rejection in accordance with Sec. Sec.  401.500(f)(2), 401.501, 
and 401.502.
    7. In Sec.  401.304, revise paragraphs (a)(2) and (b) to read as 
follows:


Sec.  401.304  PRA provisions on PAE compensation.

    (a) * * *
    (2) HUD will establish a substantially uniform baseline for base 
fees for public entities. The base fee for a PAE will be adjusted if 
necessary after the first term of the PRA.
* * * * *
    (b) Incentives. The PRA may provide for incentives to be paid by 
HUD. While individual components may vary between PAEs (both public and 
private), the total amount potentially payable under the incentive 
package will be uniform. Objectives may include maximizing savings to 
the Federal Government, timely performance, tenant satisfaction with 
the PAE's performance, the infusion of public funds from non-HUD 
sources, and other benchmarks that HUD considers appropriate.
* * * * *
    8. In Sec.  401.309, revise the section heading and paragraphs 
(b)(2) and (c) to read as follows:


Sec.  401.309  PRA term and termination provisions; other provisions.

* * * * *
    (b) * * *
    (2) Termination for convenience of Federal Government. HUD may 
terminate a PRA, and may remove an eligible property from a PRA, at any 
time in accordance with the PRA or applicable law regardless of whether 
the PAE is in default of any of its obligations under the PRA if such 
termination is in the best interests of the Federal Government. The PRA 
will provide for payment to the PAE of a specified percentage of the 
base fee authorized by Sec.  401.304(a) and amounts for reimbursement 
of third-party vendors to the PAE authorized by Sec.  401.304(c).
* * * * *
    (c) Liability for damages. During the term of a PRA, and 
notwithstanding any termination of a PRA, HUD may seek its actual, 
direct, and consequential damages from any PAE for failure to comply 
with its obligations under PRA.
* * * * *
    9. Revise the section heading and add a new sentence to the end of 
Sec.  401.401 to read as follows:


Sec.  401.401  Consolidated Restructuring Plans.

    * * * HUD's decision to approve or disapprove a Consolidated 
Restructuring Plan will be made on a case-by-case basis.
    10. Revise Sec.  401.452 to read as follows:


Sec.  401.452  Property standards for rehabilitation.

    The restructuring plan must provide for the level of rehabilitation 
needed to restore the property to the non-luxury standard adequate for 
the rental market for which the project was originally approved. If the 
standard has changed over time, the rehabilitation may include 
improvements to meet the current standards. The rehabilitation also may 
include the addition of significant features in accordance with Sec.  
401.472. The result of the rehabilitation should be a project that can 
attract non-subsidized tenants, but competes on rent rather than on 
amenities. When a range of options exists for satisfying the 
rehabilitation standard, the PAE must choose the least costly option 
considering both capital and operating costs and taking into account 
the marketability of the property and the remaining useful life of all 
building systems. Nothing in this part exempts rehabilitation from the 
requirements of part 8 of this title concerning accessibility to 
persons with disabilities.
    11. In Sec.  401.461, revise paragraphs (a)(1), (a)(2)(ii), (b)(1), 
(b)(5), and (c) to read as follows:


Sec.  401.461  HUD-held second mortgage.

    (a) Amount. (1) The Restructuring Plan must provide for a second 
mortgage to HUD whenever the Plan provides for either payment of a 
section 541(b) claim or the modification or refinancing of a HUD-held 
first mortgage that results in a first mortgage with a lower principal 
amount. The term ``second mortgage'' in this section also includes a 
new HUD-held first mortgage (not a refinancing mortgage) if a full 
payment of claim is made under Sec.  401.471 or if a full payment of 
claim is unnecessary because surplus project accounts are available to 
facilitate the Restructuring Plan pursuant to section 517(b)(6) of 
MAHRA, or if Sec.  401.460(a) does not permit a restructured first 
mortgage in any amount.
    (2) * * *
    (ii) The greater of:
    (A) The section 541(b) claim (or the difference between the unpaid 
principal balance on HUD-held mortgage debt immediately before and 
after the restructuring), plus surplus project accounts from residual 
receipts accumulated pursuant to 24 CFR 880.205(e), 881.205(e), or 
883.306(e) and derived from an expiring Section 8 Housing Assistance 
Payments contract and not otherwise distributed to the owner and made 
available to facilitate the Restructuring Plan pursuant to section 
517(b)(6) of MAHRA, and
    (B) The difference between the unpaid balance on the first mortgage 
immediately before and after the restructuring.
    (b) Terms and conditions. (1) The second mortgage must have an 
interest

[[Page 13228]]

rate of at least 1 percent, but not more that the applicable federal 
rate.
* * * * *
    (5) HUD will consider modification, assignment to the acquiring 
entity, or forgiveness of all or part of the second mortgage if the 
Secretary holds the second mortgage and if the project has been sold or 
transferred to a tenant organization or tenant-endorsed community-based 
nonprofit or public agency that meets eligibility guidelines determined 
by HUD, accepts additional affordability requirements acceptable to 
HUD, and requests such modification, assignment, or forgiveness. A 
community-based nonprofit group or public agency demonstrates that it 
is tenant-endorsed in accordance with Sec.  401.480(e).
    (c) Additional mortgage to HUD. (1) A Restructuring Plan shall 
require the owner to give an additional mortgage on the project to HUD 
in an amount that:
    (i) For the restructuring of a mortgage insured by HUD, does not 
exceed the difference between:
    (A) The amount of a section 541(b) claim paid under Sec.  401.471 
increased by any residual receipts pursuant to 24 CFR 880.205(e), 
881.205(e), or 883.306(e); and
    (B) The principal amount of the second mortgage; or
    (ii) For the restructuring of a mortgage held by HUD, does not 
exceed the difference between:
    (A) The principal amount of a restructured HUD-held mortgage and 
the sum of, as applicable, a restructured HUD-held first mortgage at 
reduced principal amount, new mortgage funds paid to HUD at closing, 
surplus project accounts other than residual receipts pursuant to 24 
CFR 880.205(e), 881.205(e), or 883.306(e); and
    (B) The principal amount of the second mortgage.
    (2) HUD may approve a Plan that does not require an additional 
mortgage, or provides for less than the full difference to be payable 
under the additional mortgage, or allows for subsequent modification, 
assignment, or forgiveness of the additional mortgage under any of the 
following circumstances:
    (i) The anticipated recovery on the additional mortgage is less 
than the servicing costs; or
    (ii) HUD has approved modification, assignment, or forgiveness of 
the second mortgage pursuant to paragraph (b)(5) of this section.
    (3) With respect to the second mortgage required by paragraph (a) 
of this section, any additional mortgage must:
    (i) Be junior in priority;
    (ii) Bear interest at the same rate; and
    (iii) Require no payment until the second mortgage is satisfied, 
when it will be payable upon demand of HUD or as otherwise agreed by 
HUD.
    12. Revise Sec.  401.472(b) to read as follows:


Sec.  401.472  Rehabilitation funding.

* * * * *
    (b) Statutory restrictions. Any rehabilitation funded from the 
sources described in paragraph (a) of this section is subject to the 
requirements in section 517(c) of MAHRA for an owner contribution.
    (1) Addition of significant features. With respect to significant 
added features, the required owner contribution will be as proposed by 
the PAE and approved by HUD, not to exceed 20 percent of the total 
cost. Significant added features include the addition of air 
conditioning (including conversions from window air conditioning to 
central air conditioning), an elevator, or additional community space.
    (2) Cap on owner contribution. If a restructuring plan includes 
additions other than those specified, and the PAE considers the 
additions significant, the PAE may propose to make those additions 
subject to the cap on owner contribution. In general, the owner will 
contribute three percent toward the cost of each significant addition. 
The PAE may propose a lower or higher owner contribution, not to exceed 
20 percent, with respect to significant additions.
    (3) Other rehabilitation. With respect to other rehabilitation, the 
required owner contribution will be calculated as 20 percent of the 
total cost of rehabilitation, unless HUD or the PAE determines that a 
higher percentage is required. The owner contribution must include a 
reasonable proportion (as determined by HUD) of the total cost of 
rehabilitation from non-governmental resources.
    (4) Cooperatives. The PAE may exempt housing cooperatives from the 
owner contribution requirement.
* * * * *
    13. In Sec.  401.480 revise paragraph (b) and add paragraph (e) to 
read as follows:


Sec.  401.480  Sale or transfer of project.

* * * * *
    (b) When must the restructuring plan include sale or transfer of 
the property? If the owner is determined to be ineligible pursuant to 
Sec.  401.101 or Sec.  401.403, or if the property is subject to an 
approved plan of action under the Emergency Low Income Housing 
Preservation Act of 1987 or the Low Income Housing Preservation and 
Resident Homeownership Act of 1990 as described in section 524(e)(3) of 
MAHRA, the Restructuring Plan must include a condition that the owner 
sell or transfer the property to a purchaser acceptable to HUD in 
accordance with paragraph (c) of this section. Such sale or transfer 
shall be a condition to the implementation of the Restructuring Plan.
* * * * *
    (e) Tenant endorsement procedure for priority purchaser status.
    (1) Required meetings. A community-based nonprofit or public agency 
purchaser requesting tenant endorsement to obtain priority purchaser 
status must conduct two meetings:
    (i) An Informational Meeting to disseminate information about both 
the endorsement request and the purchaser's plans for the project must 
be held with the tenants of the project. If the purchaser is acting 
contemporaneously with the Restructuring Plan, the Informational 
Meeting must occur at the second meeting of tenants convened by the PAE 
pursuant to Sec.  401.500(d) to discuss the restructuring plan; and
    (ii) An Endorsement Vote Meeting to conduct the voting for the 
endorsement must be held at least 10 days after the Informational 
Meeting.
    (2) Parties who must receive notice. The purchaser must deliver 
notice of the Informational Meeting and the Endorsement Vote Meeting to 
each tenant household in the project and any tenant organization for 
the project, and post notices of the two meetings in the project.
    (3) Notice contents. The notice must identify the place, dates, and 
times of the required meetings, include a brief description of the 
purpose of each meeting, and provide a narrative outlining the 
purchaser's plans for the project, including any request made to HUD 
for debt relief under Sec.  401.461(b)(5) of the second and any 
additional mortgage. A notice delivered to a tenant household must also 
contain a ballot that includes a proxy authorizing a designated person 
to vote on behalf of such tenant household at the Endorsement Vote 
Meeting.
    (4) Tenant voting. (i) Each tenant household in the project may 
cast one vote to either endorse or not endorse the purchaser.
    (ii) A tenant household may cast its vote in person at the 
Endorsement Vote Meeting or by proxy.
    (5) Proxy vote. (i) In lieu of casting its vote in person, a tenant 
household may use the proxy included in the meeting

[[Page 13229]]

notice to authorize a designated person to vote on its behalf. The 
designated person may be the purchaser, the tenant organization, the 
PAE, or an individual who will attend the Endorsement Vote Meeting.
    (ii) Proxies to be cast at the Endorsement Vote Meeting may be 
collected from tenant households up to the date and time of the 
Endorsement Vote Meeting by the purchaser, the tenant organization, if 
any, for the project, the PAE, or any other entity approved by HUD at 
any time, including at the Informational Meeting.
    (6) Counting the vote. At the Endorsement Vote Meeting, tenant 
households cast their ballots and any remaining proxies are gathered. 
The PAE then determines whether the total of votes cast in person or by 
proxy equals a quorum of at least 10 percent of the total number of 
tenant households in the project. If there is such quorum, the votes 
are tallied (including those cast by proxy), and a majority of the 
votes tallied determine whether or not the purchaser has the 
endorsement of the tenants.
    14. Revise Sec.  401.500(f)(2) to read as follows:


Sec.  401.500  Required notices to third parties and meeting with third 
parties.

* * * * *
    (f) * * *
    (2) Within 10 days after a determination that the Restructuring 
Plan will not move forward for any reason, HUD or the PAE shall provide 
notice to affected tenants that describes the reasons for the failure 
of the Plan to move forward and the availability of tenant-based 
assistance under Sec.  401.602(c).
    15. Revise Sec.  401.645 to read as follows:


Sec.  401.645  Owner request to review HUD decision.

    (a) HUD notice of decision. (1) HUD will provide notice to the 
owner of:
    (i) A decision that the owner or project is not eligible for the 
Mark-to-Market program;
    (ii) A decision not to offer a proposed Restructuring Commitment to 
the owner; and
    (iii) A decision to offer a proposed Restructuring Commitment. The 
proposed Restructuring Commitment provided to the owner constitutes the 
notice of decision for purposes of requesting a review of a HUD 
decision.
    (2) The notice of decision will include the reasons for the 
decision.
    (3) The notice of decision will also notify the owner of the right 
to request a review of the decision or to cure any deficiencies on 
which the decision was based, the date by which the review request must 
be submitted or the deficiencies must be cured, which will be at least 
30 days after the date of the notice of decision, and the address to 
which the review request is to be submitted.
    (b) Review request by owner. (1) Written statement. The review 
request must specify in writing:
    (i) Each item of the decision to which the owner objects;
    (ii) The reasons for the owner's objections; and
    (iii) All information in support of the objections that the owner 
wants HUD to consider.
    (2) Scope of information submitted. HUD will not consider 
information first submitted to HUD in conjunction with an owner's 
request for review except for:
    (i) Information that could not have been submitted previously; and
    (ii) New health and safety information.
    (c) HUD review and final decision. (1) HUD may expand the scope of 
review beyond the issues raised by the owner and may review and modify 
any term within the Restructuring Commitment without regard to whether 
the owner has raised an objection to that term, including adjustments 
to rents or expenses as underwritten by the PAE. If HUD does expand the 
scope of review, HUD will notify the owner of such action and provide 
an additional 30 days for the owner to raise any additional objections 
and provide additional information.
    (2) Within 30 days of HUD's receipt of the owner's review request 
and any additional objections and information, HUD will review the 
request and, using a standard of what is reasonable in light of all of 
the evidence presented, issue a final decision. The final decision 
will:
    (i) Affirm the notice of decision; or
    (ii) Modify the notice of decision and, if applicable, modify the 
Restructuring Commitment, in which event HUD will issue an amended or 
restated Restructuring Commitment that incorporates the final decision; 
or
    (iii) Revoke the notice of decision and, if applicable, terminate 
the Restructuring Commitment and notify the owner that the owner is not 
eligible for participation in the Mark-to-Market program or that a 
restructuring of the property is not feasible.
    16. Revise Sec.  401.650 to read as follows:


Sec.  401.650  When may the owner request an administrative appeal?

    (a) No review request by owner. If the owner does not request a 
review of the notice of decision under Sec.  401.645 or does not 
execute the proposed Restructuring Commitment within the time provided 
in the notice of decision, HUD will send a written notice to the owner 
stating that the notice of decision is HUD's final decision and that 
the owner has 10 days after receipt of the letter to accept the 
decision, including a Restructuring Commitment if applicable, or 
request an administrative appeal in accordance with Sec.  401.651.
    (b) Upon receipt of final decision. HUD will send the owner a 
written notice of the final decision under Sec.  401.645 that will also 
provide the owner with 10 days to request an administrative appeal of 
the final decision.
    (c) HUD decision to accelerate the second mortgage. Upon receipt of 
notice from HUD of a decision to accelerate the second mortgage under 
Sec.  401.461(b)(4), the owner may request an administrative appeal in 
accordance with Sec.  401.651.
    17. In Sec.  401.651, revise paragraph (b) to read as follows:


Sec.  401.651  Appeal procedures.

* * * * *
    (b) Written decision. Within 20 days after the conference, or 20 
days after any agreed-upon extension of time for submission of 
additional materials by or on behalf of the owner, HUD will review the 
evidence presented for the administrative appeal and, using the 
standard of whether the determination of the final decision was 
reasonable, will advise the owner in writing of the decision to 
terminate, modify, or affirm the original decision. HUD will act, as 
necessary, to implement the decision, for example, by offering a 
revised Restructuring Commitment to the owner.
* * * * *

    Dated: February 7, 2006.
Brian D. Montgomery,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 06-2343 Filed 3-13-06; 8:45 am]
BILLING CODE 4210-67-P