Section 8 Housing Choice Voucher Program-Demonstration Project of Small Area Fair Market Rents in Certain Metropolitan Areas, Discussion of Comments, and Request for Participation, 22122-22128 [2011-9501]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 76, Number 76 (Wednesday, April 20, 2011)]
[Notices]
[Pages 22122-22128]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-9501]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5413-N-02]


Section 8 Housing Choice Voucher Program--Demonstration Project 
of Small Area Fair Market Rents in Certain Metropolitan Areas, 
Discussion of Comments, and Request for Participation

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, HUD.

ACTION: Final notice establishing the Small Area Fair Market Rent (FMR) 
Demonstration Project and requesting participation from metropolitan 
public housing agencies.

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SUMMARY: Today's notice provides HUD's responses to comments filed in 
response to a May 18, 2010, notice (75 FR 27808) announcing HUD's 
intent to operate a small area FMR demonstration project in several 
metropolitan areas. The purpose of this demonstration project is to 
provide voucher holders with the opportunity to move to areas of 
greater opportunity. This notice provides additional details regarding 
the operation of the tenant-based Housing Choice Voucher (HCV) program 
in areas selected to participate in the demonstration, establishes the 
criteria for selecting public housing agencies (PHAs) for participation 
in the demonstration, and requests interested PHAs to apply for 
participation in the demonstration according to instructions published 
in this notice. Metropolitan PHAs that would like to participate in the 
small area FMR demonstration project may apply, as discussed later in 
this notice, with an anticipated selection date of July 1, 2011. In 
order to assess the impact of the demonstration, participating PHAs 
will be expected to provide HUD with additional data specified in this 
notice beyond what is normally required.

DATES: Date to request participation in demonstration: June 6, 2011.

ADDRESSES: Interested persons are invited to request participation in 
the small area FMR demonstration by submitting a request to the Office 
of General Counsel, Rules Docket Clerk, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-
0001. Communications should refer to the above docket number and title 
and should contain the information specified in the ``Request to 
Participate'' section.
    Public Inspection of Requests. All requests to participate 
submitted to HUD will be available, without charge, 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 requests to participate must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number).

FOR FURTHER INFORMATION CONTACT: For technical information on the 
methodology used to develop small area FMRs, please contact Peter B. 
Kahn or Marie L. Lihn, Economic and Market Analysis Division, Office of 
Economic Affairs, Office of Policy Development and Research, telephone 
number 202-708-0590 (this is not a toll-free number). Persons with 
hearing or speech impairments may access this number through TTY by 
calling the toll-free Federal Information Relay Service at 800-877-
8339. The small area FMR dataset, Federal Register notices, and links 
to participation requests (as well as comments to the original May 18, 
2010, notice) are available on the HUD Web site at https://www.huduser.org/portal/datasets/fmr.html. The HUD USER information line 
at 800-245-2691 may answer questions on this information. (Other than 
the TDD numbers and the HUD USER information line, telephone numbers 
are not toll free.)
    Electronic Data Availability: This Federal Register notice is 
available electronically from the HUD User Web site at https://www.huduser.org/portal/datasets/fmr.html. Federal Register notices also 
are available electronically at https://www.gpo.gov/fdsys/browse/collection.action?collectionCode=FR, the U.S. Government Printing 
Office Web site. A system for looking up small area FMRs based on Final 
Fiscal Year (FY) 2011 FMRs is available at https://www.huduser.org/portal/datasets/fmr/fmrs/index_sa.html.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 8 of the United States Housing Act of 1937 (42 U.S.C. 
1437f) (USHA) authorizes housing assistance to aid lower-income 
families in renting safe and decent housing. In the HCV program, the 
FMR is the basis for determining the ``payment standard amount'' used 
to calculate the maximum monthly subsidy for an assisted family (see 24 
CFR 982.503). In general, the FMR for an area is the amount that would 
be needed to pay the gross rent (shelter rent plus utilities) of 
privately owned, decent, and safe rental housing of a modest 
(nonluxury) nature with suitable amenities. In addition, all rents 
subsidized under the HCV program must meet reasonable rent standards.
    Currently, FMRs are calculated for all nonmetropolitan counties and 
metropolitan areas. The same FMR is available throughout a 
nonmetropolitan county or metropolitan area, which generally is 
comprised of several metropolitan counties. FMRs in a metropolitan area 
represent the 40th-percentile (or in special circumstances the 50th-
percentile) gross rent of the entire HUD-defined metropolitan area. 
PHAs may set a payment standard within 90 percent to 110 percent of the 
FMR. PHAs may determine that payment standards that are higher than 110 
percent, or lower than 90 percent, are needed to make the HCV program 
work in subareas of their market; in such an instance, a PHA would 
request HUD approval for a payment standard below 90 percent or an 
exception payment standard above 110 percent. This request could not 
represent more than 50 percent of the population of the area (see 24 
CFR 982.503).
    On May 18, 2010, HUD published a notice in the Federal Register (75 
FR 27808) seeking public comment on a small area FMR demonstration 
project. Today's notice discusses those comments and provides an 
opportunity for PHAs to volunteer for the demonstration project that 
will begin later in FY 2011.
    The Housing Choice Voucher (HCV) program is the only HUD program 
where small area FMRs will be used during the demonstration. All other 
programs must use the area-wide FMRs listed in Schedule B of the 
current FMR Federal Register notice (75 FR 61253, October 4, 2010). HUD 
expects that small area FMRs will provide HCV tenants with greater 
ability to move into opportunity areas, which are where jobs, 
transportation, and educational opportunities exist, and will reduce 
undue subsidy in lower-rent areas. Small area FMRs will alter some 
administrative responsibilities of PHAs that administer HCV programs, 
but it is unclear what the net effect on administrative costs will be. 
A copy of the Federal Register notice announcing this program can be 
accessed at https://www.huduser.org/portal/datasets/fmr/fmr2010f/Small_Area_FMRs.pdf.

[[Page 22123]]

II. Discussion of Public Comments

    In response to its notice seeking comments on HUD's proposal to 
establish a small area FMR demonstration project, HUD received 19 
comments by the close of the comment period on July 19, 2010. HUD 
requested comments on specific questions. These questions and other 
issues raised by the commenters that concern the small area FMR 
demonstration project will be addressed in this section.
    Most of the commenters support the small area FMR demonstration 
project, noting that it provides real benefits to HCV program 
participants.

Opposition to Demonstration From PHAs Operating in Nonmetropolitan 
Counties

    Comments: Two PHA administrators of nonmetropolitan housing 
agencies expressed opposition to the implementation of small area FMRs. 
One was concerned about the increased administrative burden of 
administering so many more payment schedules with the ``rollout'' of 
small area FMRs nationally; the other was concerned about covering the 
costs of portability when a small area FMR is significantly above the 
current area-wide FMR.
    HUD Response: For the first commenter, it should be noted that even 
with a national rollout of small area FMRs, HUD does not plan to extend 
this new policy to nonmetropolitan counties. This means that the number 
of payment standards will not increase in such areas, which should 
alleviate this concern.
    Regarding the second comment concerning portability, voucher 
portability and funding replacement are components of the HCV program 
regardless of the geography over which FMRs are defined. FMRs and 
payment standards vary considerably across the country under current 
policy, so a tenant may already move from a low-payment standard area 
to a high-payment standard area. The extent to which small area FMRs 
would make this issue a larger problem is not clear. Small area FMRs 
are intended to provide HCV holders with greater access to all parts of 
metropolitan areas and more opportunity to find suitable housing. 
Portability is an important component of the HCV program, and any 
limitations placed on portability would negatively impact tenants' 
ability to obtain decent housing.

Opposition to and Concern Over Demonstration Because FMRs Are Used in 
Financing Affordable Projects

    Comments: A commenter expressed opposition to the small area FMR 
demonstration project, on the basis that rental properties that have 
been developed and operated under federal and state housing programs 
may be adversely impacted. Such programs target affordable housing 
development to distressed areas as part of a plan to foster 
redevelopment and stabilize neighborhoods. Rents are restricted to 
ensure that they are affordable to very low- and low-income households. 
These projects have little additional cash flow available after paying 
debt service and operating costs, to absorb unanticipated negative 
shocks. For properties that rely on HCV use to support long-term 
financing, a permanent hold-harmless provision was recommended.
    Other commenters, while not opposed to the demonstration project, 
asked HUD to apply small area FMRs to the HCV program and other 
programs carefully, as there could be serious unintended consequences. 
Specifically, several commenters were concerned with the application of 
small area FMRs to project-based voucher (PBV) developments and other 
projects that use FMRs for rents.
    HUD Response: During the demonstration, the HCV program is the only 
program that will use small area FMRs, and only in those areas, and by 
those PHAs, selected for the demonstration. To address the concerns 
regarding project-based vouchers (PBVs), PBV units for which a notice-
of-owner selection was issued in accordance with 24 CFR 983.51(d), as 
of the effective date of the PHA's participation in the demonstration, 
will not be subject to the small Area FMRs. This includes PBVs that are 
currently under a Housing Assistance Payment (HAP) contract. The area-
wide FMRs will continue to apply to these PBV units, thus ensuring the 
viability of PBV projects that were in the development pipeline and had 
obtained financing based on area-wide FMRs. However, any PBVs for which 
a notice-of-owner selection is issued after the PHA is selected to 
participate in the demonstration will be subject to the small area 
FMRs. PHAs interested in project-based units and owners interested in 
participating in the PBV program after a PHA is participating in the 
demonstration should be aware of the small area FMRs in place, and 
owners will be able to project costs and plan accordingly. HUD will 
monitor this issue closely throughout the demonstration, will continue 
to assess the likely impact of small area FMRs on other programs, and 
will provide another opportunity for public comment on the issue at a 
future date.

Opposition to Use of 2000 Census Data in Determining Small Area FMRs

    Comment: Several commenters asked HUD to delay the small area FMR 
demonstration project until the 5-year American Community Survey (ACS) 
data are published. The notice announcing the demonstration project 
specified HUD would use 2000 Census data to determine the small area 
FMRs for the demonstration project. Many commenters were concerned that 
the 5-year data would be significantly different from the 2000 Census 
data and that significant adjustment to the small area FMRs would be 
disruptive. One commenter wanted HUD to update FMRs every 3 years 
rather than every 5 years, because he stated that most of the new data 
is available on a 3-year basis.
    HUD Response: HUD intends to use the 5-year ACS data to calculate 
small area FMRs for PHAs participating in the demonstration. However, 
due to timing, the special tabulations of 5-year ACS data that are 
required for calculating small area FMRs are not available with the 
publication of this notice requesting applications for the small area 
FMR demonstration. Therefore, PHAs that choose to apply for the 
demonstration based on the rent data currently available that are 
selected for participation in the demonstration will be given the 
opportunity to opt out of the demonstration after reviewing the small 
area FMRs calculated using the 5-year ACS data. Due to the nature of 
the ACS, it is unlikely that 3-year tabulations of data will be 
available for all metropolitan ZIP Codes. Therefore, HUD has not 
requested special tabulations of 3-year data.

Length of Demonstration Unclear

    Comments: Several commenters stated that HUD has been unclear about 
the length of the demonstration project. Most commenters agreed that 
the demonstration project has to be for more than 2 years, because 
existing tenants will not feel the impact of small area FMRs until 
their second recertification. Several commenters requested that the 
demonstration project last 5 years. One commenter did not feel the need 
to establish a demonstration project and urged HUD to change to small 
area FMRs without testing the impact.
    HUD Response: At a minimum, PHAs selected to participate in the 
demonstration will operate using small area FMRs for the HCV program 
until FY 2013.

[[Page 22124]]

Opposition to Demonstration Because Voucher Holders May Pick Very 
Expensive Neighborhoods

    Comment: One commenter appeared to oppose the concept of small area 
FMRs, noting that HCV holders may choose housing in high-income areas, 
where rents may be as high as the 80th percentile of the metropolitan 
area rents. The commenter said that this rent is inappropriate, because 
deeply assisted housing serves only 25 percent of the households 
eligible for housing assistance.
    HUD Response: The purpose of the small area FMR demonstration is to 
expand the options available to HCV holders within participating 
metropolitan areas. Small area FMRs will be approximately the 40th 
percentile rent in each ZIP Code area. Small area FMRs are calculated 
using the relationship of the ZIP Code-based rent and the core-based 
statistical area (CBSA) rent as applied to the 40th percentile FMR for 
that metropolitan area. In addition, as noted in the following section, 
small area FMRs will be capped at 150 percent of the metropolitan area 
FMR. If the voucher holder's selected unit passes the rent 
reasonableness determination, HUD has no objection to the tenant 
renting the unit in question. In fact, giving tenants access to 
previously inaccessible neighborhoods is an intended outcome of the 
small area FMR demonstration.

Implementation of the Small Area FMRs

    Comment: Although HUD requested comments specifically concerning 
caps and floors, many commenters sidestepped this issue, instead asking 
HUD to phase-in decreases for small area FMRs. Some commenters 
suggested that HUD allow increases in FMRs immediately but wait for the 
family's second re-examination for decreases to take effect. Several 
other commenters noted that the proposed legislation known as the 
Section Eight Voucher Reform Act (SEVRA) includes an annual phase-in 
policy of 10 percent and requested that this methodology be followed 
for the small area FMR demonstration project. Some preferred a lower 
phase-in level of 5 percent per year.
    HUD Response: HUD agrees that there should be a phase-in of 
decreases in the small area FMR demonstration project, and the proposed 
caps and floors will be consistent with the Department's long-term 
vision for the Section 8 HCV program. Consequently, HUD will impose a 
10 percent floor on annual decreases in small area FMRs under the 
demonstration project. There will be no additional annual cap except 
for the 150 percent cap on the ratio of the ZIP Code area to the FMR 
area, as discussed below.

Items Where HUD Specifically Requested Comments

1. Should HUD Institute caps and floors on small area FMRs? The current 
cap is 150 percent of the metropolitan FMR, and the current floor is 
the state nonmetropolitan minimum FMR. Are these appropriate, or should 
they be changed or eliminated?
    Comments: Several commenters suggested that a 150 percent cap 
seemed arbitrary. There were suggestions to establish a national rather 
than a local FMR cap, or to establish area-specific caps based on the 
90th FMR percentile. HUD was urged to study the use of the 150 percent 
cap to ensure that few areas had FMRs set at below-market rents. Few 
commenters addressed the issue of a floor on small area FMRs. Those 
commenters approved of the use of the state minimum FMR as a floor.
    HUD Response: HUD intends to maintain the state minimum as its 
small area FMR floor in conjunction with current practice. Based on 
2000 Decennial Census data, the 150 percent cap applies to 
approximately 170 of the more than 17,000 metropolitan ZIP Codes, so 
the 150 percent cap would not meaningfully restrict voucher tenants' 
choices. While this cap is only in effect for a small percentage of 
small areas, HUD intends to maintain the 150 percent cap during the 
demonstration project as one mechanism for ensuring that HCV program 
funds are used as judiciously as possible.
2. Should HUD revise the 50th-percentile FMR policy or eliminate it, 
and why?
    Comments: Many commenters supported the continued use of 50th-
percentile FMRs, calculated on the basis of the core-based statistical 
area (CBSA) or the metropolitan Statistical Area (MSA). One commenter 
noted that HUD should develop regulations that allow the use of higher 
FMRs when local market conditions reduce program success rates and 
utilization. One commenter felt that the use of 50th-percentile FMRs 
would no longer be necessary once small area FMRs are used by all 
metropolitan areas. However, HUD was cautioned to be careful in 
transitioning these areas to 40th-percentile FMRs.
    HUD Response: HUD will base small area FMRs on the 40th-percentile 
rent. From a practical standpoint, the regulatory standard for 
qualifying for a 50th-percentile FMR (i.e., there must be at least 100 
census tracts in the FMR area) is not one that will be met by PHAs if 
they are selected to participate in the small area FMR demonstration 
project since there are no ZIP Code areas with at least 100 census 
tracts. In addition, in certain small area FMR demonstration project 
ZIP Codes, FMRs could increase by as much as 50 percent in a single 
year. Contrast this with the increase from a 40th- to a 50th-percentile 
FMR, which without exception results in a 7 to 8 percent increase in 
FMRs. HUD will not eliminate the 50th-percentile policy for 
metropolitan FMR areas not participating in the small area FMR 
demonstration project.
3. Are there any instances where an exception payment standard policy 
might still be useful?
    Comments: Most commenters supported the continuation of exception 
payment standards, not only for nonmetropolitan areas once the program 
is rolled out nationally, but for metropolitan areas where there are 
substantial rent differences within a ZIP Code. Several commenters 
cited ZIP Codes in their service areas where exception payment 
standards would be helpful. In addition, commenters want to be sure 
that HUD continues to issue special exception payment standards for 
disabled tenants or for disaster areas.
    HUD Response: Exception payment standards are a valuable tool 
available to PHAs to further assist tenants in finding suitable homes. 
Small area FMRs are also intended to provide tenants with access to 
portions of metropolitan areas where previous FMRs have been 
insufficient. With respect to PHAs chosen to participate in the 
demonstration project, HUD would like to work directly with such 
agencies to determine appropriate areas for exception payment 
standards. The regulations regarding family requests for exception 
payment standards as a reasonable accommodation for a person with 
disabilities will continue to apply.
4. Do small area FMRs increase the administrative burden of PHAs, and, 
if so, how can the burden be reduced?
    Comments: Tenant advocacy groups either did not address the issue 
or assumed administrative burden changes would not be significant, 
because rent reasonableness studies may no longer be required. PHAs and 
their advocacy groups were, for the most part, concerned about an 
increase in administrative burden, with some advocating an increase in 
administrative

[[Page 22125]]

fees for agencies participating in the small area FMR demonstration 
project.
    One commenter suggested that HUD eliminate the rent reasonableness 
requirement for PHAs using small area FMRs to ensure that their 
administrative burden is reduced. In most cases, PHAs operating in 
large cities produce a single set of payment standards, so moving to 
dozens or even hundreds of different FMRs without eliminating rent 
reasonableness will significantly increase administrative burden. 
Another commenter stated that HUD should be able to use the ZIP Code 
FMRs in place of rent reasonableness determinations and that HUD should 
evaluate whether rent reasonableness studies will be required in the 
future.
    HUD Response: Since rent reasonableness is a statutory requirement, 
HUD cannot eliminate or waive it. Additionally, although demonstration 
project FMRs will be based on ZIP Codes, the wide variation in housing 
quality and rents within ZIP Codes mean that PHAs must continue to 
conduct rent reasonableness determinations. However, as part of the 
evaluation of the demonstration, HUD will evaluate whether the small 
area FMRs reduce the number of units with rents outside an initial rent 
reasonableness determination.
5. Is the proposed rounding protocol of $25 appropriate, or should 
small area FMRs be rounded to a larger or smaller amount?
    Comments: FMRs are currently rounded to the nearest dollar; several 
commenters did not want this to change. One commenter supported the 
proposed rounding protocol to the nearest $25, as a measure that helps 
reduce administrative burdens for PHAs. No commenter specifically 
addressed the question of whether state minimums and small area FMRs 
should be rounded before application or addressed the timing of 
subsequent rounding.
    HUD Response: HUD believes there are several benefits to rounding 
small area FMRs. These include, but are not limited to, reducing the 
number of payment standards PHAs will have to administer and limiting 
the year-to-year fluctuations that adding new survey data annually is 
likely to impose. HUD also recognizes that in some cases, rounding to 
the nearest 25 dollars may be too large and contribute to the annual 
fluctuation in FMRs that HUD is trying to alleviate. For example, if in 
year one, the unrounded small area FMR is $512, with 25 dollar rounding 
the published FMR would be $500. If in the next year, the unrounded FMR 
is $513, the rounded value would be $525--a 5 percent change for a $1 
change in the underlying rent. Therefore, in order to maintain the 
benefits of rounding small area FMRs while limiting the impact of 
rounding, HUD will round small area FMRs to the nearest 10 dollars.
6. Should the demonstration be open to smaller metropolitan areas than 
those meeting the size criterion for 50th-percentile FMR eligibility?
    Comments: Several public interest group commenters suggested that 
smaller metropolitan areas be allowed to participate in the 
demonstration project; however, the only comments received from small, 
nonmetropolitan areas were opposed to rolling out small area FMRs in 
their communities. The issue of portability and the reimbursement for 
higher FMRs was of great concern to several commenters representing 
small PHAs. One commenter noted that PHAs do not necessarily know if 
their FMR area meets the size criterion for 50th-percentile FMR 
eligibility (100 census tracts) and asked HUD to provide this 
information.
    HUD Response: HUD will not limit participants in the demonstration 
project to those in areas of 100 census tracts or more, because HUD 
recognizes that eligibility to participate in the Demonstration project 
must result in a representation of the range of metropolitan areas.
7. Should affordable housing concentration criterion be a consideration 
in the selection of participating areas?
    Comments: One commenter considered this as a worthwhile criterion 
and requested that HUD provide information on poverty and racial 
concentration by ZIP Code.
    HUD Response: HUD must select areas with as many different 
characteristics as possible to try to learn as much as possible about 
implementation issues that would occur with a national rollout of small 
area FMRs (though limited to metropolitan areas). Additionally, HUD 
plans to study the effect of the demonstration on PHAs, tenants, 
landlords, program costs, etc. Therefore, it will be important to have 
a diverse selection of participants. The selection criteria for 
participation in the demonstration project are enumerated below in the 
``Small Area FMR demonstration Details'' section of this notice.
8. Is the 80 percent-of-voucher-tenants standard for applicants' 
eligibility to participate in the demonstration project appropriate?
    Comments: Several commenters requested that this requirement be 
relaxed. One large PHA noted that its market area did not meet the 80 
percent-of-voucher-tenants criteria and that other PHAs in its 
metropolitan area would have less need for small area FMRs.
    HUD Response: HUD's initial rationale for suggesting that PHAs 
representing 80 percent of voucher holders in a metropolitan area must 
agree to participate in the demonstration project before being allowed 
to participate was based on the premise that small area FMRs would be 
set for the entire metropolitan area, not just for the PHAs that desire 
participation. This requirement, however, has changed so that now only 
those PHAs in the metropolitan area that agree to participate in the 
demonstration project will set their FMRs at the small area FMR. Other 
PHAs in the metropolitan area will continue to use the area-wide FMR. 
The specific selection criteria are discussed in the ``Small Area FMR 
Demonstration Details'' of this notice, but the 80 percent threshold is 
no longer a minimum criteria.
9. Is demonstrated past use of multiple payment standards an 
appropriate criterion for participation?
    Comments: Several commenters contend that past or current use of 
multiple payment standards should not be a factor in determining which 
FMR areas are selected for the small area FMR demonstration project. 
Commenters stressed that for the demonstration project to be valid, it 
should be as representative as possible of the subset of PHAs in large 
metropolitan areas that will eventually use small area FMRs.
    HUD Response: Because of their experience, PHAs already operating 
with multiple payment standards should be able to implement small area 
FMRs relatively easily. However, to ensure that HUD selects a diverse 
set of PHAs and areas, while avoiding any notion of preselection 
preference, this criterion will not be used as a preference for 
selecting demonstration participants. Please see the section titled 
``Small Area FMR Demonstration Details'' of this notice for specific 
details regarding the selection of participants.

III. Small Area FMR Methodology

    In calculating small area FMRs, HUD will use the methodology set 
forth in the

[[Page 22126]]

May 18, 2010, Federal Register notice announcing the demonstration, 
with the following changes: (1) HUD intends to use the 5-year ACS data 
to calculate small area FMRs for the demonstration project, and (2) HUD 
will round small area FMRs to the nearest $10 instead of the nearest 
$25. In summary, HUD will calculate a rental rate ratio for each ZIP 
Code area within a metropolitan area in the following manner:

Rental Rate Ratio = Median Gross Rent for ZIP Code area/Median Gross 
Rent for CBSA

    If the ZIP Code within the CBSA does not have 1,000 cash rental 
units, then the rental rate relationship is calculated as:

Rental Rate Ratio = Median Gross Rent STCO/Median Gross Rent of the 
CBSA

where STCO is the county within the state containing the ZIP Code.\1\ 
For metropolitan areas, FMRs will be calculated and published for each 
small area. HUD chose ZIP Codes because they localize rents, and a 
unit's ZIP Code is easily identifiable by PHAs, landlords, and tenants.
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    \1\ For ZIP Codes that cross county boundaries, the Median Gross 
Rent in the numerator is calculated as the rental unit weighted 
average of the Median Gross rents for each county containing the ZIP 
Code.
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    The individual ZIP-Code-level, two-bedroom FMR for each part of the 
FMR area is the product of the rental rate ratio and the two-bedroom 
FMR for that area's CBSA, as calculated using methods employed for past 
metropolitan area FMR estimates (for a description of the methodology 
currently in place to calculate FMRs, please see HUD's Federal Register 
notice (75 FR 61254) announcing Final FY 2011 FMRs). HUD then compares 
this product to the state nonmetropolitan minimum, two-bedroom rent for 
the state in which the area is located and, if the ZIP Code rent 
determined using the rental rate ratio is less than the minimum, the 
ZIP Code rent is set at the nonmetropolitan minimum for that state. HUD 
will calculate the relationship between two-bedroom units and other 
bedroom sizes from the 5-year ACS for the metropolitan area for the 
large area of geography. HUD anticipates updating the bedroom rental 
rate ratios once every 5 years when the 5-year ACS sample is 
replaced.\2\ As discussed in the ``Response to Comments'' section, the 
final calculated rents are then rounded to the nearest $10. Small area 
FMRs based on 2000 Decennial Census data and Final FY 2011 FMRs for all 
metropolitan areas are available for viewing and download from the 
Internet at https://www.huduser.org/portal/datasets/fmr.html.
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    \2\ The current decennial data is not robust enough to lead HUD 
to believe that updating bedroom ratios on a more frequent basis 
would provide meaningful changes. The current bedroom ratios are 
constrained by ranges that reflect the average relationship to the 
two-bedroom rent and, for the three-bedroom and four-bedroom rents, 
bonuses have been added to assist with the operation of the Section 
8 HCV program.
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IV. Small Area FMR Demonstration Details

Selection of Participants

    In the May 18, 2010, notice, HUD proposed that entire CBSAs be 
named demonstration areas (i.e., all PHAs operating in the CBSA would 
participate, whether all PHAs apply or not). The primary reason for 
this was to facilitate comparison of participating CBSAs to 
nonparticipating CBSAs. However, HUD has determined that the 
demonstration will be served best by PHAs that actively volunteer to 
participate. Therefore, only PHAs that apply will take part in the 
demonstration, but a preference will be given to areas where a larger 
share of PHAs covering a larger share of HCV tenants in the area apply 
to participate.
    The following lists the selection criteria for participation:
    1. Percentage of Voucher Tenants in the CBSA Covered by applying 
PHAs (calculated by HUD using HUD's administrative data). [Weighted 35 
percent];
    2. Percentage of PHAs in the CBSA Covered by applying PHAs in the 
CBSA (calculated by HUD using HUD's administrative data). [Weighted 35 
percent];
    3. Concentration of Voucher Tenants--The concentration of voucher 
tenants will be measured using the same metric that is used to 
determine if an area qualifies for 50th-percentile FMRs (25 percent or 
more of voucher tenants in the CBSA reside in 5 percent of the census 
tracts for the CBSA). See 24 CFR 888.113 (c)(iii). [Weighted 10 
percent];
    4. Racial Segregation--In order to affirmatively further fair 
housing, a CBSA's racial segregation will be assessed based on the non-
Hispanic White/all minority Dissimilarity Index calculated at the 
census tract level for the CBSA from 2010 Decennial Census data. 
[Weighted 10 percent];
    5. Dissimilarity of rents within the area--Using an unbiased 
measure of the dispersion of rent ratios. [Weighted 10 percent].
    The CBSAs containing the applicant PHAs will be ranked according to 
each of the statistics specified above, and then a weighted average 
ranking will be calculated according to the weights specified above. 
The highest-ranking PHA applicant groups will be chosen subject to the 
requirements for selecting representatives of the different types of 
metropolitan areas described below.
    In addition to the scored criteria above, HUD has established 
criteria for evaluating a PHA's administrative capacity in order to 
participate in this demonstration. All applicants must meet the 
following threshold requirements:
    1. Reporting Requirements. Each applicant must meet PIC reporting 
requirements. All PHAs are required to submit Family Reports (form HUD-
50058) for at least 95 percent of voucher families leased at the end of 
the last quarter prior to the application deadline date as verified by 
the PIC Delinquency Report. All PHAs must also be timely in their 
reporting.
    2. SEMAP. Each applicant must not be designated as troubled for its 
most recently assessed fiscal year.
    HUD will also evaluate the PHA on the following areas:
    3. Administrative Capacity. The Office of Field Operations will be 
consulted regarding administrative capacity. In making this 
determination, the field office may consider things such as any 
unresolved program management findings from an Inspector General's 
audit, HUD management review or Independent Public Accountant (IPA) 
audit for the PHA's HCV program, fraud or misconduct, or other 
significant program compliance problems that were not resolved or were 
in the process of being resolved prior to the application deadline.
    4. Litigation. The PHA must not be involved in litigation where HUD 
determines that the litigation may seriously impede the ability of the 
applicant to administer the vouchers.

Number of Participants

    In order to create similar groups of metropolitan areas for 
analysis of the demonstration, all metropolitan areas were classified 
based on five general categories of characteristics: demographics, 
economic conditions, PHA structure, tenant characteristics, and housing 
market conditions. HUD assigned 31 variables to one of these 5 
categories, and standardized and weighted the variables to maintain 
equal weight across categories. Based on the results of the analysis of 
these characteristics, the metropolitan areas have been clustered into 
5 groups. Each metropolitan area in the same group has similar 
characteristics. For each area with PHAs participating in the 
demonstration, for the purposes of evaluating the demonstration, HUD 
will

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identify a similar area from the same group where no PHAs are 
participating.
    If applications permit, at least one PHA or PHA applicant group in 
the five metropolitan areas will be selected to participate in the 
demonstration--at least one metropolitan area from each of the five 
groups. This will allow for analysis of demonstration differences or 
similarities across characteristics of the areas (groups).

PHA Administrative Responsibilities

    In determining whether to apply for this demonstration, PHAs should 
consider the additional administrative and programmatic factors that 
will be impacted by implementing small area FMRs, including but not 
limited to the following:
    1. Converting software to handle larger numbers of payment 
standards;
    2. Additional outreach and briefings for families and landlords on 
new FMR methodology and how this affects the payment standards;
    3. Developing additional briefing materials for new housing 
markets;
    4. Revising current forms and briefing packages;
    5. Financial analysis to determine appropriate payment standards 
and ongoing monitoring of financial impacts;
    6. Staff training;
    7. Ability to manage additional workload; and
    8. Potential changes to rent reasonableness determinations/
methodology.
    HUD will provide technical assistance and assist PHAs throughout 
the demonstration to reduce the burden of these activities as much as 
possible.

PHA Reporting Requirements

    HUD needs to evaluate the demonstration project in terms of 
effectiveness in meeting the primary goal of improving tenants' housing 
choices in areas of opportunity. In addition, the administrative 
changes for PHAs participating in the demonstration project must also 
be evaluated. All PHAs in the demonstration project will be required to 
report additional data to HUD, in addition to the normal HCV program 
reporting requirements. Information such as the following will be 
requested concerning the following topics:
    a. Additional procedures implemented to brief tenants and owners on 
small area FMRs and collect information on demonstration project;
    b. Impact/interaction with current rent reasonableness 
determinations;
    c. Software/systems issues;
    d. Impact on staffing and resources;
    e. Any funding-related impact;
    f. Success rate for new HCVs; must be able to be compare with 
success rate prior to the demonstration project;
    g. Time taken for new families to use an HCV;
    h. Lease-up rate, for new families; must be able to compare with 
lease-up rate prior to the demonstration project;
    i. Number of participants who elect to move and the differential in 
the FMR/payment standard; race, age of head of household, number of 
children, and ages of children must be reported;
    j. Reason given by new participants and existing participant for 
their location choice;
    k. Changes in landlord retention and recruitment;
    l. Number of vouchers issued and the number of families that 
successfully lease a unit. In accordance with PIH Notice 2010-25, PHAs 
are expected to enter the issuance of vouchers in PIC; and
    m. Voucher holders requesting to use portability to move into 
demonstration areas to take advantage of small area FMRs and the number 
of those families who were successful in leasing up in higher and lower 
FMR areas.

Program Operation

    Participating PHAs will use small area FMRs as the basis for 
setting payment standards for the tenants that they serve. PHAs 
applying to participate in the demonstration and operating in areas 
that are currently eligible for 50th-percentile FMRs will use small 
area FMRs calculated using 40th-percentile rents. All existing program 
rules will apply under this demonstration project.

Implementation Date

    HUD will work with each of the PHAs selected to participate in the 
demonstration to determine the implementation date of the small area 
FMRs based on individual PHA circumstances. However, HUD will expect 
all PHAs to have the small area FMRs fully operational no later than 90 
days after the selection date.

Applicability of Small Area FMRs to Project-based Vouchers

    The small area FMRs will not apply to project-based vouchers (PBVs) 
for which a notice of owner selection was issued in accordance with 24 
CFR 983.51(d) as of the effective date of the PHA's participation in 
the demonstration (i.e., the date that the small area FMRs go into 
effect for the PHA). This includes units currently under HAP contract. 
However, any PBVs for which a notice of owner selection is issued after 
the effective date of the PHA's participation in the demonstration will 
be subject to the small area FMRs. In cases where the small area FMRs 
are not applicable to PBV units, the area-wide FMRs will continue to 
apply.

V. Requests for Participation in the Small Area FMR Demonstration 
Project

    Any PHA operating an HCV program in a metropolitan area may apply 
to participate in the small area FMR demonstration. Due to the 
flexibility already provided to PHAs operating in the Moving To Work 
(MTW) program, HUD does not believe that MTW PHAs need to be included 
in the demonstration in order to use small area FMRs. Therefore, HUD 
will not consider the HCVs of an MTW agency when determining the 
proportion of the metropolitan area's HCVs that a PHA (or group of 
PHAs) represent. This does not preclude MTW agencies, however, from 
participating in the small area FMR demonstration.
    A PHA wishing to be considered for inclusion in the demonstration 
should respond with a letter to HUD signed by its executive director. 
PHAs applying jointly should submit a single letter signed by all of 
the participating PHAs' executive directors. The letter must include a 
resolution from the PHA Board of Commissioners authorizing the PHA to 
participate in the demonstration. (In the case of a joint letter, a 
resolution for each participating PHA is required.) The request letters 
should include the PHAs' affirmative declaration to participate and 
include the number of vouchers the PHAs collectively administer in the 
metropolitan area. Additionally, the application should include an 
attachment describing the expected financial impact of implementing 
small area FMRs in the PHAs jurisdiction. Letters should be addressed 
to: Small Area FMR Demonstration Project Applications, Office of 
General Counsel, Rules Docket Clerk, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Room 10276, Washington, DC 20410-
0001.
    Once the response period has ended, HUD will compile all of the 
selection criteria data and determine which areas will be selected to 
participate. The executive directors of the selected PHAs will be 
contacted, and a final roster of participants, along with updated small 
area FMRs based on 2005-2009 ACS data, will be published in a Federal 
Register notice.

VI. Paperwork Reduction Act

    In accordance with the Section 3507 of the Paperwork Reduction Act 
of 1995

[[Page 22128]]

(44 U.S.C. 4321), HUD will request approval from the Office of 
Management and Budget (OMB) to collect data under the reporting 
requirements that PHAs are not currently providing.

VII. Environmental Impact

    This notice involves the establishment of a small area FMR 
demonstration project, which does not constitute a development decision 
affecting the physical condition of specific project areas or building 
sites. Accordingly, under 24 CFR 50.19(c)(6), this notice is 
categorically excluded from environmental review under the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321).

    Dated: April 7, 2011.
Raphael W. Bostic,
Assistant Secretary for Policy Development and Research.
[FR Doc. 2011-9501 Filed 4-19-11; 8:45 am]
BILLING CODE 4210-67-P