HUD Multifamily Rental Project Closing Documents: Proposed Revisions and Updates and Notice of Information Collection, 3544-3591 [2010-957]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 75, Number 13 (Thursday, January 21, 2010)]
[Notices]
[Pages 3544-3591]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-957]



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Part II





Department of Housing and Urban Development





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HUD Multifamily Rental Project Closing Documents: Proposed Revisions 
and Updates and Notice of Information Collection; Notice

Federal Register / Vol. 75, No. 13 / Thursday, January 21, 2010 / 
Notices

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5354-N-01]
RIN 2502-AI80


HUD Multifamily Rental Project Closing Documents: Proposed 
Revisions and Updates and Notice of Information Collection

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

ACTION: Notice.

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SUMMARY: This notice advises that HUD is issuing for public comment a 
comprehensive set of revised closing documents for use in Federal 
Housing Administration (FHA) multifamily rental projects. This notice 
starts anew the process for updating the multifamily rental project 
closing documents; that process commenced with an August 2, 2004, 
notice that presented proposed revised closing documents for public 
comment. The August 2004 notice was followed by an August 31, 2006, 
notice in which HUD provided updates on the closing document 
development process, advised of policy decisions that HUD had made at 
that time, and announced a September 21, 2006, public meeting at which 
HUD would take questions on the development process and policy 
decisions announced in the August 31, 2006, notice.
    On June 1, 2009, HUD announced, on its Web site, that it would 
commence review of the multifamily rental project closing documents as 
last revised by the prior Administration and welcomed the public to 
review these documents along with HUD, as well as submit any informal 
comments on the revised closing documents.
    In submitting the comprehensive set of revised multifamily rental 
closing documents for public comment, this notice also complies with 
the Paperwork Reduction Act of 1995. While complying with the Paperwork 
Reduction Act of 1995, this notice provides information beyond that 
normally provided in such notices by identifying changes HUD has made 
to the proposed closing documents published on August 2, 2004, and 
summarizing and responding to issues raised by commenters on the 2004 
proposed closing documents, and to those issues informally presented on 
the revised closing documents recently posted on HUD's Web site.
    In revising these forms, HUD identified language and policies that 
were outdated and needed to be changed to be consistent with modern 
real estate and mortgage lending laws and practices. By reflecting 
current terminology and current lending laws and practices, updated 
multifamily rental project closing documents will better protect and 
benefit all parties involved in these transactions. The multifamily 
closing documents are posted on HUD's Web site at https://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

DATES: Comment Due Date: March 22, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this notice to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
https://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
https://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:
     To receive consideration as public comments, comments must be 
submitted through one of the two methods specified above. Again, all 
submissions must refer to the docket number and title of the rule.

    Redline/Strikeout Submissions. While commenters may submit, as part 
of their comments, a redline/strikeout of any one or more of the 
multifamily rental project closing documents, the redline/strikeout 
drafts, to be considered, must be accompanied by a narrative statement 
that explains the proposed changes.
    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available 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, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Information Relay 
Service at 800-877-8339. Copies of all comments submitted are available 
for inspection and downloading at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: John J. Daly, Office of the General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 9226, Washington, DC 20410-0500; telephone number 202-708-
1274 (this is not a toll-free number). Persons with speech or hearing 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. This Notice
III. Overview of Proposed Policy Determinations and Changes Made to 
Closing Documents
    A. Documents to Which No Changes Were Made
    B. Across-the-Board Changes and Policy Determinations
    C. Changes Made to Specific Documents and Addition of New 
Document
IV. Discussion of Public Comments
V. Findings and Certifications
VI. Solicitation of Public Comments

I. Background

    On August 2, 2004, HUD published a notice in the Federal Register 
(69 FR 46214) that advised that, consistent with the Paperwork 
Reduction Act of 1995, it was publishing for public comment a 
comprehensive set of revised closing forms and documents (closing 
documents) for use in the FHA multifamily rental project and health 
care facility (excluding hospitals) programs. In addition to meeting 
the requirements of the Paperwork Reduction Act, HUD advised that it 
was not solely seeking public comment on burden hours, as is the 
primary focus of the Paperwork Reduction Act, but seeking public 
comment for the purpose of receiving input from the lending industry 
and other interested parties in HUD's development and adoption of a

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set of instruments that offer the requisite protection to all parties 
in these FHA-insured mortgage programs, while also being consistent 
with modern real estate practice and mortgage lending laws and 
procedures. The August 2, 2004, notice advised that HUD's closing 
documents were significantly outdated and needed a thorough review and 
update to reflect current HUD policies, as well as current practices in 
real estate and mortgage financing transactions.
    The August 2, 2004, notice followed an earlier informal 
solicitation of public comment on proposed revisions to the closing 
documents, that were posted on HUD's Web site in March 2000. In 
response to the many comments received from the 2000 solicitation of 
public comment, significant revisions were made to the proposed closing 
documents, and these revised documents were published in the Federal 
Register on August 2, 2004, for review and public comment.
    On August 31, 2006, HUD published a notice in the Federal Register 
(71 FR 51842) that announced certain policy decisions that had been 
made with respect to HUD's development of closing documents as of 
August 2006. HUD issued that notice in response to inquiries about the 
status of HUD's development of the closing documents. In that notice, 
HUD also announced that it would hold a meeting on the status of 
development of the closing documents at HUD Headquarters on September 
21, 2006. HUD invited to this meeting the 25 individuals and 
organizations that submitted comments on the August 2, 2004, notice, 
welcomed other interested parties to the meeting, and made phone lines 
available to those unable to participate in person. The purpose of the 
meeting was to brief the commenters and other interested members of the 
public on the status of the development of revised closing documents as 
of August-September 2006.
    In the August 31, 2006, notice and at the meeting, HUD announced 
that the following decisions had been made as of that date.
    1. Health Care Facility (e.g., nursing homes) documents would be 
published again for public comment (e.g., on issues such as treatment 
of accounts receivable financing) as proposed documents;
    2. Revised documents other than documents pertaining exclusively to 
health care facilities (e.g., rental projects) would be published as 
final documents without further comment;
    3. All revised documents would be updated periodically (e.g., every 
3 years to coincide with renewal of Office of Management and Budget 
(OMB) numbers under the Paperwork Reductions Act);
    4. Updates to revised documents that are needed more frequently 
than periodic updates will be made on a case-by-case basis;
    5. Recourse liability for Key Principals would not be a HUD 
requirement, as proposed in the documents in the August 2, 2004, 
Federal Register notice;
    6. A clear definition of ``HUD Directives'' would be provided; and
    7. The effective date for the revised documents would provide time 
for the processing of pending FHA mortgage insurance applications, as 
well as for training on the revised documents.
    HUD was unable to complete the updating of the closing documents 
during the prior Administration. On June 1, 2009, HUD announced, on its 
Web site, that it would commence review of the multifamily rental 
project closing documents, as last revised by the prior Administration, 
and welcomed the public to review these documents along with HUD, as 
well as submit any informal comments on the revised closing documents. 
(See https://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.) The 
revised closing documents reflected most of the decisions previously 
made in response to public comments received on the August 2, 2004, 
proposed closing documents, but not necessarily all of the decisions 
announced in the August 2006 notice. The June 2009 Internet posting 
advised that the new HUD Administration had begun its review of the 
closing documents to consider changes that may be appropriate given 
policy decisions by a new Administration and in recognition of changes 
in the multifamily rental housing industry that had occurred since the 
documents were first proposed for public comment. HUD invited its 
industry partners, the legal community, and other interested members of 
the public to review the documents along with HUD and to submit 
informal comments to a specified e-mail address.

II. This Notice

    This notice identifies changes HUD has made to the proposed closing 
documents since it last published them on August 2, 2004. This notice 
also advises the public of changes proposed by the new HUD 
Administration, which reviewed those documents in the context of 
changed industry conditions since 2004 and 2006, and took into 
consideration changes previously decided to be made, and the feedback 
received through the June 2009 informal process. This notice summarizes 
and responds to issues raised in the 2004 public comments and, 
consistent with the Paperwork Reduction Act and HUD's own interest in 
receiving further formal comment on the proposed closing documents, 
solicits public comment on the revised closing documents. All of the 
closing documents, which include the most recent proposed changes, are 
posted on HUD's Web site at https://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

III. Overview of Proposed Policy Determinations and Changes Made to 
Closing Documents

    In addition to identifying changes made to the closing documents to 
update terminology and improve clarity and comprehension, this section 
of the preamble highlights some of the more significant changes that 
were made to those closing documents published for public comment in 
August 2004.

A. Documents to Which No Changes Were Made

    As will also be highlighted below, in the overview of key changes 
to the closing documents, no substantive changes to the documents 
published on August 2, 2004, were made to the following documents:

Agreement of Sponsor to Furnish Additional Funds;
Bond Guaranteeing Sponsors' Performance;
Completion Assurance Agreement;
Escrow Agreement for Incomplete Construction;
Escrow Agreement for Latent Defects;
Off-Site Bond--Dual Obligee;
Payment Bond;
Performance Bond;
Request for Approval of Advance of Escrow Funds;
Request for Final Endorsement of Credit Instrument;
Residual Receipts Note Limited Dividend;
Residual Receipts Note Nonprofit;
Surveyors Report.

    In addition, no comments were received and no changes were made to 
the Supplement to Building Loan Agreement.

B. Across-the-Board Changes and Policy Determinations

Section 232 (Health Care Facility) Documents
    As a result of the comments received on the 2004 proposed Section 
232 closing documents, HUD has determined to revise these documents and 
publish them at a future date for additional public comment.

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Recourse Liability
    The introduction of certain limited recourse liability for Key 
Principals in the 2004 proposed closing documents was opposed by 
several public commenters, and HUD's August 31, 2006, notice stated 
that HUD had decided not to include provisions for recourse liability 
of Key Principals. The revised closing documents posted on HUD's Web 
site on June 1, 2009, however, retained some of those provisions. Some 
of the informal comments again opposed inclusion of any recourse 
liability provisions, arguing that inclusion would dissuade individuals 
from participating in HUD- insured multifamily housing transactions.
    In light of the consequences that certain insufficiently regulated 
actions have had on the housing finance markets in recent years, and 
given that public funds are put at risk in HUD multifamily housing 
transactions, it is now HUD's position that it is appropriate for 
principals to have recourse liability for certain ``bad boy acts.'' 
Accordingly, these provisions continue to be included in the revised 
closing documents being issued for comment under this notice.
Directives
    One of the more significant changes made in revising the 2004 
closing documents is to clarify the reference to the term 
``Directives'' in the closing documents. Concern about the inclusion of 
this term and its meaning was an issue raised in many of the comments. 
At HUD's September 21, 2006, meeting to report on the status of the 
development of the closing documents, HUD advised that it would provide 
a clear definition of this term. While a clear definition has been 
provided in the revised closing documents being issued for comment 
under this notice, on further consideration, HUD has determined to use 
the term ``Program Obligations'' rather than ``Directives.'' HUD's view 
is that the term ``Program Obligations'' better captures what was 
intended by use of the term ``Directives,'' namely, to advise parties 
to the closing documents of the additional requirements, beyond those 
included in the documents themselves, to which they are expected to 
adhere. The language would define ``Program Obligations,'' as follows:

    Program Obligations means all applicable statutes and 
regulations, including all amendments to such statutes and 
regulations, as they become effective; and all applicable 
requirements in HUD handbooks, notices, and mortgagee letters that 
apply to the Project, including all updates and changes to such 
handbooks, notices, and mortgagee letters that apply to the Project, 
except that updates and changes subject to notice and comment 
rulemaking shall become effective upon completion of the rulemaking 
process. Handbooks, notices, and mortgagee letters are available on 
HUD's official Web site  (https://www.hudclips.org or a successor 
location to that site).

    The advantage of this language is that it identifies the specific, 
longstanding, and familiar types of requirements (those in statutes, 
regulations, handbooks, notices, and mortgagee letters) to which the 
parties must adhere. To provide an additional level of assurance to 
commenters who expressed concern over the possibility that they would 
be required to comply with any future provision that HUD might issue in 
any manner, the definition also explicitly states that notice and 
comment rulemaking will be followed for any requirements that would be 
subject to such procedures. These procedures address concerns raised 
about adherence to future directives by the commenters, including 
concerns about conflicts with existing requirements, retroactive 
application of new requirements, or lack of time to prepare for 
transition to new requirements.
    For example, the imposition of new or revised information 
collection requirements (that is, generally new or revised forms) must 
undergo the notice and comment processes required by the Paperwork 
Reduction Act of 1995. From time to time, mortgagee letters or other 
types of direct notices will be used to announce new binding 
requirements. These documents are appropriate for announcements when 
new legislation imposes requirements that are effective upon enactment 
and leave HUD no discretion in implementation, and it is important for 
HUD to relay this information to the industry as quickly as possible. 
In such situations, mortgagee letters or other types of direct notices 
are the best vehicles to relay this information to the industry and to 
advise of implementation dates and provide implementation guidance, 
including transition periods where applicable and permitted by statute 
that may be helpful to the industry. From time to time, HUD may also 
issue mortgagee letters or direct notices to announce clarifications, 
interpretations, or certain procedural requirements, such as to which 
HUD offices or HUD officials certain types of executed documents must 
be submitted. In brief, HUD will follow the applicable procedures, as 
directed by statute or regulation, that govern issuance of a document 
which may announce additional policies, processes, forms, or standards 
to which parties to the closing documents must comply.

C. Changes Made to Specific Documents and Addition of New Document

    This section C of the preamble describes changes made to the 
proposed closing documents since they were published for comment on 
August 2, 2004, including changes in response to formal comments on the 
August 2, 2004, proposed closing documents, changes in response to 
informal public comments on the revised closing documents posted on 
June 1, 2009, and changes proposed by the new HUD Administration, which 
reviewed the documents in the context of changed industry conditions. 
Citations to specific sections or paragraphs of the closing documents 
refer to the versions of documents currently posted on HUD's Web site 
and may differ from the section or paragraph designation in which the 
relevant provision appeared in prior versions of the documents.
    In addition, this section C of the preamble addresses a new 
Subordination Agreement that HUD is proposing to require on affordable 
housing transactions with government subordinate debt. The 
Subordination Agreement would replace the rider to the subordinate note 
that HUD presently uses.
Agreement and Certification Changes
    1. In section 4, inserted ``managers, managing members, members'' 
to the Borrower entity which may have an identity of interest with the 
Architect or General Contractor that must be disclosed to HUD.
    2. Removed section 14 that required the General Contractor and 
Borrower to certify that there were no undisclosed side agreements.
Borrower's Oath Changes
    1. Added a new section 4 to require the Borrower to certify that it 
has not and will not enter into any agreement with any party other than 
the Lender that allows perfection of any security interest in the 
Uniform Commercial Code (UCC) Collateral through control under the UCC. 
This change is in accordance with revisions to Article 9 of the UCC.
    2. In response to informal public comment, added a new provision 
regarding knowledge of proposed laws and ordinances that would affect 
the project. This provision has been removed from Opinion of Counsel to 
Borrower and added to the Borrower's Oath, because the Borrower is in a 
better position to have the relevant knowledge.

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Building Loan Agreement Changes
    1. Clarified paragraph 4(c) by inserting language related to ``over 
and above'' funds.
    2. Removed paragraph 19 because it contained references to personal 
liability of Borrower.
    3. Revised paragraph 5 to change the reference to a new Exhibit B, 
which will list applicable charges or items to which advanced funds are 
to be applied.
    4. Revised paragraph 9 to provide that the covered acts constitute 
abandonment, and to define more precisely what acts constitute 
abandonment.
Construction Contract Changes
    1. Inserted a subsection (11) to Article 2 that adds any HUD-
approved change orders.
    2. Inserted the following parenthetical, instructional language 
into Article 4(d): ``(Insert that portion of the sum of interest, 
taxes, insurance, and Mortgage Insurance Premium that appears in 
section G of HUD-92264 attributable to the construction period. If 
there has been a change in the interest rate charged for the 
construction period (see footnote designated \(**)\ on page 1 of HUD-
92443), the dollar amount included in section G of HUD-92264 must be 
adjusted. The adjusted amount must be reflected in the savings 
computation.) Furthermore, the procedures set forth in footnote 
designated \(**)\ on page 1 of HUD-92443 must be followed.''
    3. Added language to Article 6(d) that this section is applicable 
only if ``permitted under state law.''
    4. Added language to Article 7(c) that the land survey map must be 
prepared in accordance with American Land Title Association/American 
Congress on Surveying and Mapping (ALTA/ACSM) standards and the HUD 
Surveyor's Report. Language is also added in the same section that if 
the Contractor has deviated from the Plans and Specifications, the 
Contractor will be responsible, at its own expense, for correcting any 
such deviations.
    5. In Article 2(9), revised the designation for the wage 
determination number and date to include the modification number and 
date.
    6. In Article 2, added a new paragraph 12 to add ``any side 
agreements disclosed to HUD'' to the list of Contract Documents.
Escrow Agreement for Operating Deficit Changes
    1. Changed the term ``sponsor'' to ``maker.''
    2. In accordance with a request in an informal public comment, 
revised section 4 to provide a definition of Sustaining Occupancy, 
which provides that Sustaining Occupancy must have been maintained for 
10 of the prior 12 months.
    3. In response to an informal public comment, revised section 5 to 
permit the Lender to draw upon a letter of credit in escrow and convert 
it to cash, provided that interest accrues to the relevant account.
Escrow Agreement for Noncritical Deferred Repairs Changes
    1. Inserted a new section 4 to clarify how disbursements from the 
escrow are to be authorized by HUD.
    2. Inserted a new section 11 that Lender will hold and disburse the 
escrow at HUD's direction.
Escrow Agreement for Working Capital Changes
    1. In section 1, added ``and/or'' after the checkbox for ``cash'' 
to show HUD's new policy of allowing a mixture of cash and a letter of 
credit.
    2. In section 3, removed the language that interest earned on the 
escrow deposit would be returned to Borrower.
    3. Modified section 3 to indicate that the remaining balance of the 
escrow funds would be returned to Borrower after the date of sustaining 
occupancy.
    4. Removed section 4, in accordance with section 2834 of the 
Housing and Economic Recovery Act of 2008 (Pub. L. 110-289, approved 
July 30, 2008), which prohibits HUD from requiring the deposit into 
escrow of equity from Low Income Housing Tax Credits. The remaining 
sections have been renumbered accordingly.
    5. In section 6, removed the language ``together with interest'' to 
be consistent with the changes in section 3.
Guide for Opinion of Borrower's Counsel Changes
    In connection with HUD's effort to revise the closing documents, 
HUD also analyzed considerable public comment upon the Guide, as well 
as ongoing comments by users and the public in the years that the Guide 
has been in use. The public comment has been invaluable in an effort to 
bring the Guide into compliance with more modern opinion practice, 
while simultaneously recognizing the singular and unique role of an 
attorney representing a Borrower in a HUD mortgage insurance 
transaction in the areas indicated above.
    1. In the introductory section, removed the sentence that describes 
how the loan is to be funded.
    2. In section G, added language that HUD should be listed as 
secured party, as its interest appears.
    3. In section LL, added language to include financing from ``other 
third party sources.''
    4. Removed section ``NN,'' which required review by counsel of the 
architect's certificate.
    5. In new section ``NN'' (old section ``OO''), added ``managing 
member, or similar person or entity of Borrower'' to subsection (iii).
    6. In section 2, removed language that has counsel opining as to 
whether Borrower possesses all necessary governmental certificates, 
permits, licenses, qualifications, and approvals to own and operate the 
Property.
    7. Removed section 4.
    8. Removed section 9.
    9. In section 13 (now new section 11), added ``as its interest 
appears'' with respect to HUD and Lender.
    10. Removed section 14 and moved it to the Lender's Certificate 
(formerly the Mortgagee's Certificate), because it is more appropriate 
to have the Lender certify that the Loan does not violate usury laws 
than to have counsel to Borrower certify this item.
    11. In the last portion of the Guide, where counsel certifies 
certain items, removed sections (e) and (g) and added in (d) a 
reference to interests disclosed and ``approved.''
    12. In response to informal public comments, removed opinions that 
are more appropriately rendered by other parties. For example, the 
Lender, rather than Mortgagor's counsel, is responsible for UCC 
filings, so the relevant provisions have been added to the Lender's 
Certificate. Additionally, section 6, regarding proposed laws and 
ordinances that would affect the project, has been removed and added to 
the Borrower's Oath.
    13. Moved the substance of section 9, regarding pending litigation 
and claims, to confirmations section (h), since it pertains to a 
factual matter rather than a legal opinion.
    14. Provided for signature of the opinion by an authorized partner 
of the law firm.
Instructions to Guide for Opinion of Borrower's Counsel
    Revised the instructions in accordance with changes to the Guide 
for Opinion of Borrower's Counsel, which are described above.
Exhibit A--Certification of Borrower
    1. Changed section 3 to be in conformity with revised Article 9 of 
the Uniform Commercial Code (UCC).
    2. Added a new section 4 identifying the state where Borrower was 
formed.

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    3. Moved section originally designated as 7 (before addition of new 
section 4, noted immediately above), which contained certification for 
sources of funds, to section 20(e) of the Lender's Certificate.
HUD Amendment to AIA Document B181 Between Owner and Architect Changes
    In former section 10, now section 11, inserted ``partners, managers 
or member'' to explain where an identity of interest could exist.
Lease Addendum Changes
    Clarified the document to show that this Lease Addendum is to be 
used for a transaction where the mortgage is secured by a ground lease 
and is not to be used for the lease of commercial space.
Mortgagee's Certificate Changes
    1. Changed the title of the document from ``Mortgagee's 
Certificate'' to ``Lender's Certificate,'' to be consistent with the 
change in all documents that provides for using the term ``Lender'' 
instead of ``Mortgagee.''
    2. Added language to section 1 and a new section 3 that make all 
successors and assigns of the Lender bound by the Lender's Certificate. 
Succeeding sections have been renumbered accordingly.
    3. Removed first checkbox item in section 11, which has been 
redesignated as section 12.
    4. Added language in section 13 that Borrower represents and 
warrants to Lender that no UCC filings have been made against Borrower 
prior to the initial or initial/final endorsement of the Note by HUD.
    5. Changed language in section 14 to allow other investments 
approved in writing by HUD.
    6. Revised section 16 to indicate that Lender agrees to obtain 
HUD's approval and consent when needed, as set forth in the Security 
Instrument, and to furnish HUD with all reports and data as set forth 
in the Security Instrument.
    7. Revised section 20(f) to require the lender to disclose the 
amount of any trade profit that is to be collected in a transaction. 
Trade profit, also known as a ``premium'' or ``marketing gain,'' is the 
amount of additional funds, over and above the mortgage amount, paid by 
the purchaser of the mortgage backed securities that are used to fund 
the HUD-insured loan. The funds are paid in recognition of the 
difference between the mortgage interest rate used in the HUD-insured 
loan and what would generally be available at par in the market at any 
given time.
    8. Added, as section 30, a new certification of Lender that 
Borrower possesses all necessary governmental certificates, permits, 
licenses, qualifications, and approval to own and operate the Property. 
This provision was formerly a part of the Opinion of Counsel to the 
Borrower.
    9. Added, as section 31, a new certification of Lender that 
Borrower has furnished Lender with copies of all authorizations, 
consents, approvals, and permits from all necessary jurisdictions and 
courts.
    10. Added, as section 32, a new certification of Lender that Lender 
has reviewed the title policy for any liens not reflected as exceptions 
to coverage in the title policy.
    11. Added, as section 33, Lender's agreement that violations under 
the Regulatory Agreement will be treated as a default under the 
Security Instrument only when HUD requires Lender to do so and that 
Lender may accelerate the debt only upon the direction of HUD when 
there is a default under the Regulatory Agreement.
    12. Added a section that Lender agrees to require Borrower to keep 
the Mortgaged Property insured at all times.
    13. Added a section that Lender certifies that the insured loan 
does not violate usury laws.
    14. Added a section that Lender certifies that, if there is a sale 
or transfer of all or a partial interest in the Note or a change in the 
Service Provider, Lender shall ensure that Borrower is given notice of 
this change.
Multifamily Regulatory Agreement Changes
    1. Changed definitions of Fixtures, Mortgaged Property, Personalty, 
and Principals to be consistent with the Security Instrument 
definition.
    2. Changed definition of Elderly person to be consistent with the 
definition in the current Regulatory Agreement.
    3. Changed the definition of Mortgaged Property to add items (6) 
insurance policies and (16) deposits and escrows under collateral 
agreements.
    4. Subject to the additional change described below in item number 
21, changed the definition of Reasonable Operating Expense to include 
routine repairs.
    5. Changed definition for Rents.
    6. Added definition for Waste consistent with the Security 
Instrument.
    7. Added provision to section 13, ``Property and Operation; 
Encumbrances'' that Borrower must notify HUD of any bankruptcy filing 
or insolvency or reorganization or the retention of any attorneys, 
consultants, or other professionals in anticipation of such a filing 
(versus an absolute prohibition--HUD is merely giving them notification 
requirements), that Borrower must notify HUD of all payments received 
from an insurer and that tax penalties shall not be charged to the 
Project.
    8. Removed section 17.
    9. Added provision to section 23 (now designated section 22), 
``Management Agreement,'' that a management agreement cannot be 
assigned without prior written HUD approval.
    10. Changed section 26 (now designated section 25) to require that 
contracts for goods, materials, supplies, and services be obtained at 
costs, amounts, and terms that do not exceed reasonable and necessary 
levels and those customarily paid in the vicinity, and that the 
purchase price is based on quality, durability, and scope of work and 
shall be most advantageous terms to Project operation.
    11. Removed the third-party beneficiary provision from section 28 
(now designated section 27).
    12. Revised and combined sections 34, 35, 36, and 37 into one 
section.
    13. In section 37(k) (previously designated section 42(k)), changed 
the litigation costs from $25,000 to $100,000 and qualified its 
application to situations not funded by proceeds from professional 
liability insurance.
    14. Section 44 has been redesignated section 39, and previous 
section 44(g), allowing HUD under certain circumstances to direct 
Borrower to replace certain parties, has been removed.
    15. Changed section 46, now designated section 41, to revise 
references to personal liability of any entity or person and to provide 
for personal liability of listed Key Principals under the stated 
circumstances.
    16. In section 47, now designated section 43, removed language at 
end of section regarding tenant protection rights.
    17. Revised section I.1.a to define ``Affiliate,'' by cross-
referencing to the definition of ``Affiliate'' in 24 CFR 200.215(a).
    18. In section I.1.s, revised the definition for Non-Profit 
Borrower, to provide that the term means an entity that is treated 
under the firm commitment as an entity organized for purposes other 
than for profit or gain, pursuant to section 501(c)(3) or other 
applicable provisions of the Internal Revenue Code of 1986. This change 
responds to an informal public comment and recognizes that in most 
cases a borrower that meets the

[[Page 3549]]

requirements of the Internal Revenue Service (IRS) for not-for-profit 
entities will also meet HUD's requirements, but that there are some 
circumstances in which a not-for-profit entity will not be treated as a 
Non-Profit Borrower.
    19. In section I.1.w, revised the definition of ``Principal,'' to 
cross reference to the definition of ``Principal'' in 24 CFR 
200.215(e). This change is consistent with that made to the Security 
Agreement, discussed above.
    20. In section I.1.x, revised the definition for ``Project 
Assets''. This change responds to informal public comments and provides 
a clearer distinction between funds that are subject to HUD 
requirements and funds that are not.
    21. In section I.1.bb, revised the definition for ``Reasonable 
Operating Expenses'' to cross-reference Program Obligations.
    22. Revised section 11.c to clarify that the Borrower must provide 
for investment of Reserve for Replacement funds in accordance with 
Program Obligations. This change responds to an informal public comment 
stating that the Borrower does not have direct control over funds that 
remain in the possession of the Lender.
    23. In response to an informal public comment, revised section 
11(e) to clarify that the reference is to ``this Agreement'' and to 
remove the word ``charter.''
    24. Added a section 11.f to clarify that upon satisfaction of all 
HUD obligations, the Borrower shall receive any remaining Reserve for 
Replacement funds, so long as HUD has determined that all other 
obligations have been paid. This change responds to an informal public 
comment requesting that the disposition of such funds be clarified.
    25. Revised section 15 to provide that upon completion of all 
repairs, HUD may permit escrowing of Distributions, pending inspection 
of the Project.
    26. Revised section 22 to remove the requirement for management 
agreements to be approved in writing by HUD, but provides that they 
must be consistent with Program Obligations.
    27. Revised section 32(a) to permit the Borrower to exclude 
children in certain projects, in accordance with Fair Housing Act 
requirements and as approved in writing by HUD. This change responds to 
an informal public comment stating that the previous language seemed to 
prohibit housing designated exclusively for elderly persons.
    28. Revised section 37(j) to provide a non-exhaustive list of 
amendments to the organizational documents that require prior HUD 
approval, and to require copies of all amendments to the organizational 
amendments that must submitted to HUD within specified time frames. 
This change responds to an informal public comment suggesting that some 
changes to organizational documents are immaterial to HUD and should 
not require prior HUD approval.
    29. Revised and consolidated the signature block and certification 
so that the Borrower's principals are required to sign the Regulatory 
Agreement only once. Although HUD disagrees with an informal public 
comment that the certification serves to expand upon standard recourse 
carve-outs, HUD agrees that the signature block should be consolidated 
so that multiple signatures are not required.

    Note: 1. The reference to Healthcare Facility has been dropped 
from the title of the document.
    2. Added new section 8(d) regarding Borrower's obligation to 
indemnify under section 51, now designated section 49, of the 
Security Instrument.
    3. An alternative section 9(a)(1) has been added to provide that 
the prepayment lockout language will be included in a rider to the 
Note that will provide appropriate language for the particular 
transaction involved because it is not possible to include all forms 
of lockout provisions in the Note.
    4. Revised section 7, Late Charge, to provide that the late 
charge applies when the lender does not receive payment within 10 
days after the payment is due. The change responds to an informal 
public comment that suggested that standardizing the time when the 
late fee applies would facilitate compliance by Ginnie Mae issuers 
with their obligation to make payments to investors.

Request for Endorsement of Credit Instrument Changes
    I. Certificate of Lender:
    1. Redesignated section 14, in which Lender certifies that the 
insured loan does not violate usury laws, as section D.13.
    2. Removed section 28 related to off-site components and the filing 
of UCC financing statements.
    3. Redesignated section 32 as new section A.14.
    4. Redesignated section 33 as new section A.13.
    5. Redesignated section 34 as new section A.9.
    6. Redesignated section 35, which states that if the Security 
Instrument is assigned to HUD, HUD is not bound by the requirements of 
this document, as section A.12.
    7. Revised section 13 to reflect additional lender responsibilities 
and required representations related to UCC security interests, 
including performance of UCC searches and the perfection and 
maintenance of UCC security interests. The provisions have been removed 
from the Guide for Opinion of Borrower's Counsel to reflect that the 
Lender, rather than Mortgagor's counsel, is responsible for these UCC 
matters.
    8. Revised section 15 to remove the requirement for the Lender to 
notify HUD when it knows that the Borrower is not in compliance with 
Program Obligations with respect to Residual Receipts. The change 
responds to an informal public comment stating that the Lender is not 
likely to know whether or not the Borrower has deposited the correct 
amounts with the Lender.
    9. Revised section 38 to clarify the definition of Finance Charges.
    10. Added section 40, in which the Lender certifies that a 
perfected first lien security interest has been established in favor of 
the Lender and HUD.
    II. Certificate of Borrower:
    1. Removed sections 1, 3, and 5.
    2. Added a new section B.4 regarding UCC filings.
Security Agreement Changes
    1. Changed title from ``Multifamily/Health Care (Mortgage, Deed of 
Trust, or Other Designation as Appropriate in Jurisdiction) Assignment 
of Rents and Security Agreement'' to ``Multifamily (Mortgage, Deed of 
Trust, or Other Designation as Appropriate in Jurisdiction) Assignment 
of Leases and Rents and Security Agreement.''
    2. Replaced the term ``Directives'' with ``Program Obligations'' 
and provided a definition for ``Program Obligations.'' (Please see 
discussion of ``Directives'' and ``Principal Obligations'' earlier in 
this preamble.)
    3. Changed the definition of ``Mortgaged Property'', now designated 
section 1(y), to add insurance policies to section 1(y)(6).
    4. Added as section 1(y)(16) in the definition of ``Mortgaged 
Property,'' that all deposits and/or escrows held by or on behalf of 
the Lender under collateral agreements are part of the Mortgaged 
Property.
    5. Changed the definitions of ``Fixtures'' and ``Personalty'' to be 
consistent with the revised Article 9 of the UCC.
    6. Changed definition of ``Waste.''
    7. Changed section 6, ``Exculpation,'' to indicate that no personal 
liability is being imposed on Borrower except such judgment or decree 
as may be necessary to foreclose or bar Borrower's interest in the 
Mortgaged Property and all other property mortgaged, pledged, conveyed, 
or assigned to secure payment of the Indebtedness.

[[Page 3550]]

    8. Removed section 9 dealing with collateral agreements, moved text 
to section 7(c), and renumbered remaining sections.
    9. Added ``upon reasonable notice'' to the notice provision in 
section 14, which previously was designated as section 15.
    10. Revised the introductory language of section 15(b) (section 15 
was previously designated as section 16) to clarify that Borrower 
provides the listed information for review by Lender, added new section 
15(e) and redesignated section (e) as section (f), and redesignated 
remaining section accordingly.
    11. Removed section 20 (Management Contracts) and renumbered 
remaining sections.
    12. Added to section 23 (renumbered as section 21) new sections (d) 
and (e) to address ownership changes due to corporate restructuring and 
first-user syndications, respectively.
    13. Removed section 22(b)(5) (section 22 was previously designated 
section 24), which included bankruptcy as a Class B Event of Default.
    14. Removed from section 40, previously designated as section 42, 
the waiver of Borrower rights concerning disclosures of information.
    15. Removed section 51(b)(i) and (ii) (section 51 is now 
redesignated as section 48) and renumbered remaining sections. 
Additional changes to the environmental requirements in section 51, now 
redesignated section 48, are discussed in the responses to the public 
comments on these requirements that appear below in this preamble.
    16. In section 1, revised the definition of Principal to cross-
reference to the definition of this word in 24 CFR 200.215(e). This 
change responds to an informal public comment that expressed concern 
about uncertainty that might arise from inconsistent definitions.
    17. In section 2, updated provisions governing the perfection of 
security interests, in accordance revised Article 9 of the UCC.
    18. Removed section 4(f)(3), which set forth provisions that must 
be included in telecommunications leases. This change responds to an 
informal public comment stating that the conditions were too 
prescriptive, and allows approval of any proposed nonresidential lease 
to be considered by HUD on a case-by-case basis.
    19. Revised section 21 to permit the Lender to charge the Borrower 
a fee, in accordance with Program Obligations, for the Lender's 
increased responsibilities in reviewing a proposed transfer of physical 
assets. This change responds to informal public comments expressing 
concern that a Lender should not be expected to perform additional 
responsibilities without reasonable compensation.
    20. In response to informal public comment, clarified section 
22(a), by replacing the potentially confusing term ``grace period'' 
with the term ``period.''
Surplus Cash Note
    1. In response to an informal public comment, revised the 
introductory paragraph to provide for the possibility of semi-annual 
payment.
    2. In response to an informal public comment, revised paragraph 7 
to clarify that the Surplus Cash Note shall not be prepaid, except from 
non-Project sources and with written approval from HUD.
HUD Survey Instructions and Report Changes
    Changed reference to the land Title Surveys standards of the ALTA 
and ACSM from the 1999 version to the 2005 version.
Supplementary Conditions of the Contract for Construction
    Changed article 1.B.3(ii) regarding the required submission of 
payroll records without individuals' Social Security numbers and 
addresses. The change conforms to revisions to Department of Labor 
regulations at 29 CFR 5.5.
Additional Proposed Closing Document: Subordination Agreement
    HUD is also proposing to require a new Subordination Agreement on 
affordable housing transactions with government subordinate debt. The 
Subordination Agreement would replace the rider to the subordinate note 
that HUD presently uses. Use of a HUD-proscribed form of Subordination 
Agreement is consistent with the established practice in the wider 
lending industry and better protects HUD's security in the real estate. 
The Subordination Agreement contains specific conditions on allowing 
the subordinate debt in order to protect HUD's first lien security. The 
Subordination Agreement is more expansive than the Rider, and it 
addresses a variety of legal issues that arise in the relationship 
between senior and subordinate lenders. Finally, the Subordination 
Agreement is a recorded instrument that appears in the chain of title 
and is easily located and amended to accommodate unique loan issues 
that may be important to the subordinate lender and acceptable to HUD.

IV. Discussion of Public Comments

    The public comment period on the August 2, 2004, notice closed on 
October 1, 2004. HUD received 25 comments on the notice. Comments were 
received from law firms, mortgage companies, and industry 
organizations. In addition, five comments were submitted after the 
close of the comment period. Although submitted after the comment 
period, HUD reviewed these comments to determine whether issues were 
raised that had not been raised by the timely submitted comments.
    The following discussion presents the significant issues, 
questions, and suggestions submitted by the public commenters and HUD's 
response to these issues, questions, and suggestions. The discussion 
first addresses general comments, then comments that address particular 
documents. The section or paragraph of a document addressed by the 
comment is also identified. For consistency, the term ``section'' 
rather than ``paragraph'' is used throughout the discussion. This 
discussion addresses comments received in response to the closing 
documents when they were published for public comment on August 2, 
2004, but does not provide individual responses to informal public 
comments on the revised closing documents posted on June 1, 2009. 
Citations to specific sections of the closing documents in the 
summaries of public comments, below, refer to the versions of closing 
documents originally published for public comment on August 2, 2004. 
HUD's responses to the public comments below reflect the versions of 
closing documents currently posted on HUD's Web site. Section 
designations and substantive provisions may differ from versions of the 
closing documents previously published in the Federal Register; 
discussed in the August 31, 2006, Federal Register notice or at the 
September 21, 2006, public meeting; or posted on HUD's Web site on June 
1, 2009.
    As noted above in the discussion of HUD's August 31, 2006, notice 
and September 21, 2006, meeting, the Section 232 Health Care Facility 
documents will be published again for public comment. The comments 
received on the Health Care Facility documents will be discussed when 
these documents are published again for public comment.

General Comments

Comment Period
    Comment: While some commenters commended HUD for providing a notice 
and comment opportunity on the

[[Page 3551]]

revised documents, other commenters wrote that the 60-day comment 
period was not a fair and reasonable response time frame considering 
the magnitude of the changes proposed. Commenters asserted that there 
had been virtually no private sector discussion on matters that FHA 
must have known would raise serious industry concerns and expressed 
concern that while many of the changes may be appropriate, without 
careful coordination, there will be unplanned consequences and 
conflicts with existing HUD documents, many of which may be to HUD's 
detriment. Several commenters requested additional time for 
consideration of the documents and the submission of comments.
    HUD response: Since HUD is issuing revised closing documents once 
again for public comment and allowed for informal comment in 2009, the 
concern raised by the commenters is no longer relevant. Clearly, to 
date, HUD has provided more than 60 days to review revised closing 
documents. Nevertheless, HUD found this concern not to be accurate as 
applied to HUD's 2004 notice soliciting comment on revised closing 
documents. When HUD published revised closing documents for comment in 
2004, HUD's plans to revise these documents were already well known in 
the private sector for a considerable period of time before the 
publication of the 2004 revised documents. This was recognized by 
several commenters who noted, in their comments on the 2004 documents, 
the long gestation period for revised closing documents to be issued. 
As the preamble to the proposed revised documents published in 2004 
noted, HUD determined how the forms could be revised with input from 
HUD attorneys, FHA multifamily lenders, and counsel to parties to HUD-
insured transactions. Drafts of proposed revised closing documents were 
first posted on a HUD Web site at the end of March 2000, and comments 
were solicited from the public and industry representatives. In 
response to the many comments received at that time, significant 
changes were made to several of the draft documents, and those changes 
were incorporated in the proposed closing documents published for 
comment on August 2, 2004.
    With issuance once again of revised closing documents with a 60-day 
period to public comment, and given the opportunity in June 2009 to 
further comment on revised closing documents, HUD believes that the 
adequacy of opportunity to review and comment on revised closing 
documents should no longer be an issue. Given the breadth of the public 
comments received, it does not appear that any significant issue has 
been overlooked. With respect to the careful coordination of changes to 
the documents to avoid unplanned consequences and conflicts, HUD has 
strived to assure clarity and consistency throughout the documents. As 
part of this assurance, it is HUD's intent to undertake regular, 
periodic review of the documents to revise and update them.
Proposed Documents Contain Profound Policy Changes That Have Not Been 
Adequately Debated
    Comment: Commenters stated that the documents contain major and 
minor changes in policy and requirements; that there are dozens, 
perhaps hundreds, of changes not related to modernization. The 
commenters stated that certain regulations and several major closing 
documents are being so radically changed that successful, longstanding 
HUD policy and practice are being reversed with little or no 
justification and without apparent consideration for the practical 
impact on affordable housing production, lenders, borrowers, and 
residents. The commenters stated that there is little or no evidence 
that these changes are necessary to reduce the level of insurance 
claims and HUD's losses on claims, and that the tone created by the 
documents is one of great distrust. Other commenters stated that it may 
be the inadvertent result of trying to fit the Freddie Mac loan 
documents to the HUD programs, or a deliberate focus on the complete 
elimination of any risk to HUD without regard to the impact on the 
market. The commenters stated that if there is no difference between 
the programs of HUD and Government Sponsored Enterprises (GSEs), it 
could be argued there is no need for HUD programs at all.
    HUD response: The programs that HUD administers must be conducted 
in accordance with statutory and regulatory requirements that govern 
such programs, and in that way HUD's programs will always differ from 
the lending programs offered by private entities. One of the primary 
differences between HUD programs and those of private lenders is 
demonstrated by the opportunity for review and public comment on 
significant changes made to HUD programs, including changes that HUD 
makes after consideration of the comments before adopting changes in 
final rules.
    While HUD studied the Freddie Mac closing documents as a current 
and widely-used model, HUD's revised closing documents differ from that 
model. Within the parameters of its statutory and regulatory mandates, 
HUD's goal in revising its multifamily housing closing documents is to 
develop forms that are consistent with existing HUD administrative 
policy and that are also consistent with modern lending and credit 
enhancement practices. The forms currently in use and that are proposed 
to be replaced by the revised closing documents have not been changed 
in any significant fashion since the 1960s. The tone of distrust 
perceived by some of the comments may reflect, in part, the changes in 
lending practices over the more than 40 years since the documents have 
been revised. The issue from HUD's perspective is not one of trust or 
distrust, but recognition of responsible practices in which the 
reasonable expectations of the parties are informed by the transparency 
of the transaction, and in which obligations and outcomes are clear.
    Comment: Several commenters wrote that Fannie Mae and Freddie Mac 
regularly negotiate, modify, and waive certain provisions in their form 
documents, to tailor them to the deal at hand, and asked if HUD is 
equipped to negotiate these documents to any extent.
    HUD response: HUD is not a lending entity and does not negotiate 
directly with Borrowers. However, the revised closing documents are not 
absolute in their requirements. The documents often make reference to 
actions or events that are subject to HUD approval. Some documents also 
contain instructions about permitted transactional changes. To that 
extent, the documents provide a degree of direction with respect to 
modification or waiver.
Proposed Documents Add Significant Expense and Administrative Burden
    Comment: Commenters wrote that among many new obligations, the 
proposed modifications would require the mortgagee to notify HUD of 
Regulatory Agreement violations and to review Transfer of Physical 
Asset requests; the proposed Security Instrument would require the 
borrower to provide and the mortgagee to collect extensive books, 
records and financial data; the proposed modifications to the 
Regulatory Agreement would impose new categories of actions that a 
borrower cannot take without obtaining HUD approval; and the proposed 
modifications to the Escrow Agreement impose new responsibility upon 
the mortgagee for approving escrow advances. The commenters stated that 
these additional burdens are imposed without any mechanism for 
compensation for the added expense

[[Page 3552]]

and without any staffing increases at HUD. The commenters further 
stated that additional monitoring and processing requirements are not 
needed to protect or preserve the properties.
    HUD response: HUD has made a deliberate effort to include, in the 
revised closing documents, provisions that specify the oversight and 
diligence that a reasonable, prudent lender would observe in the usual 
course of business, that reflect current policy, and that do not add 
significantly greater burdens. As such, HUD is not requiring 
extraordinary measures that impose extraordinary costs, but is only 
memorializing good practice in a uniform template to provide clarity of 
expectation and a level playing field to all lenders.
    Comment: Several commenters wrote that they believed that current 
HUD staffing, structure, and resources are not adequate to accommodate 
the everyday demands and consequences of the proposed documents and 
regulations.
    HUD response: HUD has considered that there will likely be at least 
an initial increase in the demands upon its resources as a result of 
the revised documents and regulations, and will allocate the resources 
necessary to address them.
    Comment: The documents lack standards for HUD staff to apply in 
considering various approval requests.
    HUD response: HUD will apply the standards of reasonableness and 
good cause, as it does in considering regulatory waivers (see 24 CFR 
5.110). Where more particularized standards become necessary, HUD will 
provide for them in handbooks or regulations, as appropriate.
    Comment: Several commenters wrote that HUD insurance programs could 
well become solely an ``option of last resort.'' Increased operations 
oversight and regulation on unsubsidized projects will further 
frustrate profit-motivated owners and discourage use of the program. As 
the quality of the HUD portfolio diminishes, there will be a higher 
percentage of defaults.
    HUD response: HUD does not consider that any owners will be 
discouraged from participating in HUD's programs, particularly after 
the changes made to the revised closing documents in response to public 
comment. HUD expects that the resulting consolidation and 
simplification of requirements will not only encourage increased 
participation, but will result in better supervision of loans and a 
reduction in claims. In addition, as this preamble and changes to the 
revised closing documents reflect, HUD has responded favorably to 
numerous public comments. One of the main objections was in the area of 
the regulation of health-care facilities. As stated earlier in this 
preamble, HUD has separated those closing documents pertaining 
exclusively to health-care facilities from the rental housing documents 
for further analysis and later public comment.
    Comment: Commenters stated that potential borrowers like the long-
term, fixed-rate, non-callable programs at very competitive rates and 
limited recourse that HUD programs offer. Commenters stated that they 
are willing to tolerate nontraditional costs and impediments/irritants 
such as annual audits, extra origination expenses, restricted profit 
payments, inspections by HUD's Real Estate Assessment Center (REAC), 
management review, and inconsistent timeliness and processing 
requirements. The commenters stated that advantages of long-term, 
fixed-rate non-callable programs will be overcome by the detrimental 
consequences of the proposed recourse liability for Borrowers, 
Principals, and yet-to-be defined Key Principals; increased liability 
issues; increased potential for HUD micro-management; additional duties 
with no further remuneration; and the opportunity to be sued more 
often.
    The commenters stated that proposed changes will render HUD 
programs uncompetitive and unworkable for many Borrowers, including Low 
income Housing Tax Credits (LIHTCs) and nonprofit Borrowers, thereby 
reducing the number of new construction projects, which will 
drastically reduce the current job and tax base growth across the 
country.
    HUD response: Please see the immediately preceding comment and HUD 
response. As discussed above, HUD has determined not to include broad 
recourse liability in the revised proposed closing document but has 
retained recourse liability for certain ``bad boy acts.''
Residual Receipts and Nonprofit Sponsors
    Comment: No public purpose is served by limiting nonprofit sponsor 
access to project surplus cash, which discriminates against this sector 
and only makes nonprofit sponsor operations more confusing and 
problematic.
    HUD response: Consistent with current practice, a nonprofit entity 
may elect to be treated as a for-profit entity. Nonprofits may elect to 
utilize certain programs that are limited to nonprofit and/or limited 
distribution mortgagors because of the benefits provided to such 
mortgagors, e.g., 100 percent mortgages versus the 90 percent mortgages 
typically available to profit-motivated entities. An example of such a 
program is the section 221(d)(3) program (section 221(d)(3) refers to 
section 221(d)(3) of the National Housing Act). In section 221(d)(3) 
transactions, HUD must regulate such nonprofit entities to a greater 
extent than HUD regulates profit-motivated or general mortgagors. If, 
on the other hand, a nonprofit elects to utilize a program designed for 
profit-motivated or general mortgagors, e.g., the section 221(d)(4) 
program, the nonprofit would be regulated in the same fashion as the 
profit-motivated entity. In such instances, the nonprofit entity would 
be entitled to distributions under the HUD regulations. HUD has always 
added the caveat that nonprofits still would be subject to any Internal 
Revenue Service (IRS) regulations as to distributions.
HUD Directives
    Comment: A theme through most of the new closing documents is the 
requirement to comply with HUD ``Directives.'' At a minimum, commenters 
urged that HUD expressly limit the definition of applicable Directives 
to those that do not conflict with regulations in effect at the time of 
commitment issuance and establish a protocol to ensure that any such 
Directives are: (a) Developed with adequate notice and comment and (b) 
widely disseminated and published by HUD in a manner reasonably 
calculated to ensure that the entire HUD Multifamily Accelerated 
Processing (MAP) lender community, current and prospective borrowers, 
and the general public have affirmative notice. Commenters stated that 
mere posting of such proposals or changes on HUD's Web site would not 
be sufficient.
    HUD response: As discussed above under the heading of ``Across the 
Board Changes,'' HUD's use of ``Directives,'' now called ``Program 
Obligations,'' is defined in a manner to address the commenters' 
concerns and assure that adequate notice and comment is provided.
Definition of New Terms
    Comment: Several new and material terms (for example, 
``Directive,'' ``Affiliate,'' and ``Key Principal'') lack clear 
definition, which can result in uncertainty and unfairness.
    HUD response: As noted in the discussion of article definitions,