HUD Multifamily Rental Projects: Regulatory Revisions, 24363-24372 [2011-10450]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 76, Number 84 (Monday, May 2, 2011)]
[Rules and Regulations]
[Pages 24363-24372]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10450]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200 and 207

[Docket No. FR-5393-F-02]
RIN 2502-A195


HUD Multifamily Rental Projects: Regulatory Revisions

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

ACTION: Final rule.

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SUMMARY: This rule amends certain Federal Housing Administration (FHA) 
regulations to update these regulations to reflect current HUD policy 
in the area of multifamily rental projects. On November 12, 2010, HUD 
published proposed regulations to remove outdated regulatory language 
and policies and to reflect proposed changes in FHA's multifamily 
rental project closing documents, issued for comment in January 2010, 
and again in December 2010. The issuance of revised multifamily rental 
project closing documents for public comment and corresponding 
regulatory changes first commenced in 2004, but was not completed.
    This final rule follows the November 12, 2010 proposed rule, and 
takes into consideration public comments received on the November 2010 
proposed rule, as well as certain comments received on HUD's issuance 
of further revised multifamily rental project closing documents made 
available for public comment by notice published on December 22, 2010. 
Neither the closing documents issued for comment in

[[Page 24364]]

January 2010 and December 2010, nor this final rule include changes 
affecting closing documents or regulations for healthcare facilities, 
nursing homes, intermediate care facilities, board and care homes, and 
assisted living facilities.

DATES: Effective Date: September 1, 2011.

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

SUPPLEMENTARY INFORMATION: 

I. Background

    By notice published in the Federal Register on January 21, 2010 (75 
FR 3544), HUD started anew the process for updating the multifamily 
rental project closing documents (closing documents), a process that 
first commenced with issuance of a notice published on August 2, 2004 
(69 FR 46214).\1\ The majority of these documents, as explained in both 
the 2004 and 2010 notices, had not been revised in years and needed 
updating to ensure that the documents are consistent with modern real 
estate and lending laws.
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    \1\ The update of the closing documents that commenced in 2004 
and which was restarted in 2010 does not include an update of HUD's 
healthcare closing documents.
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    HUD recognized that in updating its closing documents corresponding 
changes would need to be made to certain HUD regulations. Therefore, 
the update effort that commenced in 2004 included an August 2, 2004 
proposed rule (69 FR 46210) to update certain FHA regulations. The 
August 2004 proposed rule served as the basis for HUD's 2010 proposed 
update of regulations published on November 12, 2010 (75 FR 69363), and 
took into consideration public comments received in response to the 
2004 proposed rule. The November 2010 proposed rule also took into 
consideration public comments that affected HUD's regulations. Those 
comments were received in response to the January 21, 2010 solicitation 
of public comment on HUD's proposed closing documents.\2\
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    \2\ In soliciting public comment on closing documents, HUD not 
only sought input from industry and interested members of the public 
on HUD's proposed changes to closing documents, but commenced the 
process for approval of documents required by the Paperwork 
Reduction Act of 1995. In accordance with this act, HUD issued two 
notices for public comment: One published on January 21, 2010 (75 FR 
3544), and the second on December 22, 2010 (75 FR 80517). With each 
notice, HUD made the closing documents available for review, in 
clean form, and redline/strikeout form on HUD's Web site.
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    In addition to the amendments proposed in 2004, the amendments 
offered in the November 12, 2010 proposed rule contained a change to 
the definition of ``eligible mortgagor''. The November 2010 rule 
proposed that an eligible mortgagor must be a single asset owner. The 
amendments to this definition also included removing provisions 
allowing natural persons and tenants in common to serve as eligible 
mortgagors.
    In response to comments on the 2004 proposed rule, HUD also 
proposed a shift in the imposition of the charge imposed on late 
payments from 15 to 10 days. Commenters on the 2004 proposed rule had 
suggested that standardizing the time when the late fee applies would 
facilitate compliance by Government National Mortgage Association 
(Ginnie Mae) issuers with their obligation to make payments to 
investors.
    Further, HUD proposed a revision to the security instrument (HUD 
94000M) in the update of the closing documents. As in the 2004 proposed 
regulatory revisions, the changes proposed in the November 2010 
proposed rule included a two-tiered default structure, a ``Monetary 
Event of Default,'' for financial defaults, which would give the Lender 
an immediate right to an insurance fund claim, and a second class of 
defaults, a ``Covenant Event of Default'' for all other bases for 
default. In the ``Covenant Event of Default,'' HUD's prior written 
approval would be required for the lender to make a claim on the 
insurance fund. Once a monetary default exists under the security 
instrument and continues for a minimum period of 30 days, the Lender 
would become eligible to receive mortgage insurance benefits.
    HUD further proposed amending insurance claim requirements to 
provide, consistent with existing HUD practice and policy, that the 
mortgagee request a three-month extension of the 45-day deadline 
prescribed by the regulations in Sec.  207.258 for a mortgage funded 
with the proceeds of state or local bonds, Ginnie Mae securities, or 
other bond obligations specified by HUD, any of which contains a lock-
out or penalty provision.
    HUD also proposed adding a new provision that would effectively 
allow the Commissioner to incentivize the mortgagee to accelerate 
payment of the outstanding principal balance due under an insured 
mortgage when the mortgagee does not comply promptly with the 
Commissioner's request to accelerate. In such cases, mortgage insurance 
benefits, if requested, would be reduced by an amount equal to the 
difference between the project's market value as of the date of the 
Commissioner's request and the project's market value on the date the 
mortgagee makes an election to assign the mortgage, or convey title to 
the project, as determined by appraisal procedures established by the 
Commissioner.

II. This Final Rule--Overview of Significant Changes

    This section presents a brief overview of key changes made at this 
final rule stage based on consideration of issues raised by the 
commenters in response to the November 2010 proposed rule, and HUD's 
own further consideration of issues related to regulations 
corresponding to changes made in the closing documents. In this final 
rule:
     HUD modified the definition of ``eligible mortgagor'' to 
allow a non-single asset entity to be an eligible mortgagor under 
certain terms and conditions determined acceptable to the Commissioner. 
However, no regulatory exception is provided for natural persons and 
tenants in common.
     HUD modified its proposal to allow cash flow generated 
during a workout to be used once a default has been cured.
     HUD modified its insurance claim requirements to allow the 
mortgagee to file its application for insurance benefits based on HUD's 
acknowledgement of the mortgagee's election to assign.
     HUD provides that application of the regulations 
promulgated by this final rule and use of the corresponding updated 
closing documents will not be mandatory until September 1, 2011; that 
is, the new regulations and updated closing documents will apply to a 
firm commitment for mortgage insurance issued by HUD on or after 
September 1, 2011. The updated closing documents have completed review 
by the Office of Management and Budget (OMB) under the Paperwork 
Reduction Act, and the announcement of OMB approval and the assignment 
of an OMB control number is published elsewhere in today's Federal 
Register. With a September 1, 2011, effective date, HUD is providing a 
four-month transition period before the new regulations and updated 
closing documents become applicable. The regulations allow for 
application of the regulations and use of corresponding updated closing

[[Page 24365]]

documents in effect prior to September 1, 2011, to be used after 
September 1, 2011, in the case of a borrower that demonstrates to the 
satisfaction of the Commissioner that financial hardship would result 
to the borrower from application of the regulations and use of the 
closing documents that become effective September 1, 2011.
    In addition to the foregoing changes, commenters and other 
interested members of the public will see that many of the commenters' 
requests for changes are addressed in the final versions of the closing 
documents posted on HUD's Web site.
    For example, in commenting on HUD's proposed changes to the closing 
documents and the regulations, parties expressed concern about the 
applicability of new requirements that HUD would impose after the 
multifamily rental project transaction had closed. Commenters expressed 
concern that such requirements would be applied to existing borrowers, 
and, without appropriate notice or time to transition to new 
requirements, such new requirements might have an adverse economic 
effect on the operation of a project. In response to this concern, HUD, 
in appropriate places in several of the closing documents, included the 
term ``program obligations'' to clarify the process by which HUD issues 
new requirements that program participants will be required to meet. 
The definition clarifies that notice and comment rulemaking is followed 
for any requirements that would be subject to such procedures. In 
essence, HUD makes explicit that it will follow the applicable 
procedures, as directed by statute or regulation, which govern issuance 
of a document that would announce new binding requirements, policies, 
processes, forms, or standards to which parties to the closing 
documents must comply. The definition further clarifies that changes to 
HUD handbooks, guides, notices and mortgagee letters shall be 
applicable to a project only to the extent that these changes 
interpret, clarify and implement terms in the relevant loan document.
    Because this rule is not making changes related to HUD's healthcare 
programs, for the following regulations, the wording of the regulatory 
change is presented in a manner that clarifies that the regulatory 
change is not applicable to FHA's healthcare programs: Sec. Sec.  
200.5,\3\ 200.255, 207.256b, and 207.259.
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    \3\ The revision to Sec.  200.88 made by this final rule does 
not address late charges for hospital insurance payments as those 
fees are separately addressed in Sec.  242.38, which is not being 
revised by this rule.
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III. Discussion of Public Comments

    The public comment period on the November 12, 2010, proposed rule 
closed on December 13, 2010. HUD received 13 comments. This section 
presents the significant issues, questions, and suggestions submitted 
by public commenters, and HUD's response to these issues, questions and 
suggestions.

Eligible Mortgagor (24 CFR 200.5)

    Comment: Two commenters stated that incorporating requirements into 
regulations, which can be handled administratively, was not necessary. 
For example, they stated that incorporation of the term single asset 
entity, which is in the closing documents, into regulatory language was 
unnecessary. They further suggested that HUD allow waiver from the 
single asset requirement for natural persons, tenants in common, and 
trusts. The commenters also suggested that, like the single asset 
requirement itself, a waiver process should be established at the 
administrative level, rather than the regulatory level, as it would be 
a more efficient use of agency resources.
    HUD Response: The definition of ``eligible mortgagor'' has long 
been in regulations. The entity requirement is part of that definition 
and therefore needs to be part of the regulation. HUD further notes 
that the single asset entity form of ownership has become the standard 
form of ownership for commercial real estate transactions, and it is 
therefore an important change for HUD to convey in regulations.
    However, HUD agrees with commenters that there should be some 
flexibility. HUD recognizes that in certain instances, perhaps in the 
situation of trusts, the Commissioner may choose to allow other 
entities to qualify as mortgagors. Thus, the regulations provide that 
except under circumstances, terms and conditions, approved by the 
Commissioner, mortgagors shall be a single asset mortgagor entity 
acceptable to the Commissioner, as limited by the applicable section of 
the Act,\4\ and shall possess the powers necessary and incidental to 
operating the project. Single asset entities shall not be natural 
persons and tenancies in common. The regulation does not contemplate 
any circumstances in which an exception to the prohibition on natural 
persons and tenancies in common would be made and consequently does not 
include exception language.
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    \4\ A mortgagor is defined in section 201(b) of the National 
Housing Act (12 U.S.C. 1707(b)).
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    As noted in the proposed rule, ownership by an individual has been 
largely abandoned by the commercial lending industry, and is used in 
extremely limited circumstances in the Fannie Mae and Freddie Mac 
multifamily insurance programs. In their discussion of natural persons 
as eligible borrowers, commenters expressed concern that natural 
persons would be dissuaded from seeking refinancing of projects because 
certain states would impose transfer taxes if project ownership was 
converted from a natural person into a single asset structure. HUD 
finds that state tax avoidance is not an acceptable rationale to adopt 
this change at the final rule stage, and that natural persons can 
create a single asset ownership structure to participate in the 
program.
    HUD is further concerned that ownership by natural persons would 
allow creditors to reach the assets of the insured project. That could 
occur for example, if the natural person were to declare bankruptcy. 
HUD therefore declines to adopt the recommendation.
    In addition, several commenters suggested that HUD allow properties 
to be held by tenants-in-common (TIC), a fractional form of ownership. 
One commenter noted that it was customary for properties financed with 
commercial mortgage backed securities in the late 1990s and early 2000s 
to be established as special purpose entities in the operating 
agreements for tenants in common borrowers. The commenter stated that 
if the ownership entity was structured as a single member limited 
liability company, where the operating agreement for each tenant in 
common can provide that its sole purpose is to own an undivided tenant 
in common interest in the specific project, both the concerns of the 
Internal Revenue Service (IRS) and HUD could be satisfied.
    HUD notes, as mentioned previously, that commenters stated that 
Fannie Mae and Freddie Mac had established criteria for TIC properties. 
Their comment suggests that alternative financing is available from 
those sources, and Fannie Mae and Freddie Mac will be able to meet 
those market needs. Consequently, HUD believes financing is available 
for those borrowers who choose the TIC structure. While Fannie Mae and 
Freddie Mac may accommodate these types of borrowers to facilitate, for 
example, like kind exchanges, HUD notes that FHA's financing 
requirements (non-recourse, single-asset mortgagor entity) and asset 
management capabilities are different

[[Page 24366]]

from Fannie Mae and Freddie Mac. Although FHA does adopt some 
requirements comparable to those of Fannie Mae and Freddie Mac, FHA 
also includes additional measures essential to support FHA's different 
program requirements. Tailoring FHA's standardized documents for 
individual transactions, for example, which would be required for TIC 
borrowers, is inconsistent with HUD's goal of developing uniform 
documents and streamlining the underwriting process.
    Commenters further stated that foreclosing availability of FHA 
insurance as an option under this regulation for tenants in common 
borrowers will have an adverse economic impact on the borrower and 
result in restructuring that will have unfavorable tax implications for 
the borrowers. As previously noted for borrowers who are natural 
persons, HUD does not consider tax avoidance a strong reason for HUD to 
accommodate a regulatory change.
    HUD further notes that the structure contemplated by the IRS is 
insufficient in any case to meet HUD's enforcement needs. From HUD's 
perspective, it is difficult to identify the particular responsible 
party among the many fractional owners in a tenants in common structure 
which could serve as a contact for HUD. This ownership issue arises in 
attempts to identify the responsible party who would be furnishing 
financial statements. Moreover, identification of the responsible party 
would be exacerbated when enforcement issues arise, such as failure to 
comply with HUD Program Obligations regarding property maintenance, and 
a party must be designated to implement remedies.

Defaults for Purposes of Insurance Claim (Two-Tiered Default) (24 CFR 
207.255)

    Comment: Two commenters suggested removing the references to 
``Covenant Event of Default'' and ``Monetary Event of Default'' in the 
regulation. Commenters on the November 12, 2010, proposed rule 
suggested that the terms ``Monetary Event of Default'' and ``Covenant 
Event of Default'' were not accurate descriptions of the processes that 
were set forth in the closing documents
    HUD Response: HUD declines to adopt the commenters' 
recommendations. HUD's regulation, prior to amendment by this rule, 
addressed only monetary defaults. In the August 2, 2004, proposed rule 
and accompanying documents, HUD first proposed the two tiered default 
system. That 2004 two tiered system proposed a category of defaults for 
financial, or monetary, defaults, and a category of defaults for all 
other bases for default.
    Commenters on the regulatory and document changes which were 
proposed in 2004, specifically suggested labeling these categories of 
defaults ``Monetary Events of Default'' and ``Covenant Events of 
Default.'' HUD agreed with this suggestion and adopted this terminology 
in its January 21, 2010, notice describing these categories of default, 
but did not use the terminology in the closing documents proposed on 
January 21, 2010.
    HUD's position is that it is important to distinguish between these 
two categories of defaults, and that the regulatory changes proposed on 
November 12, 2010, and the document changes proposed on December 22, 
2010, make such distinction. The terms are accurate descriptions of the 
categories of default under the revised Security Instrument posted on 
HUD's Web site in connection with the publication of the December 22, 
2010, notice. In that revision, a ``Monetary Event of Default'' occurs 
when a borrower fails to make a payment required by the Note or 
Security Instrument. The ``Covenant Event of Default'' includes 
material failures by the borrower to perform any obligations under the 
Security Instrument. In addition, the Security Instrument provides 
additional detail specifying the circumstances and specific actions 
which will constitute a Covenant Event of Default.

Monetary Event of Default

    Comment: Commenters suggested clarifying the date of default for 
monetary defaults and coordinating it with the Security Instrument. A 
commenter stated in particular that the regulatory language provides 
that if a default continues for a minimum period of 30 days, the 
mortgagee shall be entitled to receive the benefits of the insurance 
provided for the mortgage. The commenter suggested that the regulatory 
language be revised to make the period of default in the regulation 
consistent with the language in the Security Instrument. The language 
would thus provide that the 30 day time period in the regulations is 
coterminous with the 30 day grace period that exists under the Security 
Instrument and the Note, and is not sequential to that grace period.
    HUD Response: HUD agrees with the commenters' suggestion and the 
final versions of the Security Instrument and Note have been revised 
accordingly. Both the regulation and the Security Instrument provide 
that if the default is not cured within 30 days, then the lender will 
be able to accelerate. HUD believes that the change clarifies the date 
of default for monetary default.

Covenant Event of Default

    Comment: Commenters suggested that the regulation include language 
in the date of default for covenant events of default to refer to grace 
periods established in the Security Instrument.
    HUD Response: The Security Instrument specifies several bases for 
default, e.g. fraud, material misrepresentation, or the commencement of 
a forfeiture action, which cannot be cured retroactively. Therefore, 
providing a grace period for a cure is impractical. For example, one 
``covenant event of default'' provides that a fraudulent or material 
misrepresentation in the loan application constitutes a ``covenant 
event of default'' under which the lender can exercise its right to 
declare a default under the Security Instrument. Since such a past 
misrepresentation cannot be cured, providing a 30 day cure period is 
infeasible. Consequently, the recommended regulatory language change 
cannot, as a practical matter, be implemented.
    Comment: Commenters proposed additional clarifying language to 
specifically refer to the Regulatory Agreement as a basis for default, 
which they submitted would effectively implement HUD's right to direct 
the lender to accelerate the default upon a Declaration of Default by 
HUD under the Regulatory Agreement.
    HUD Response: The commenters should find that their concerns are 
addressed in the version of the Security Instrument and Regulatory 
Agreement posted on HUD's Web site (at https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/mfhclosingdocuments) in 
connection with publication of the December 22, 2010, notice. HUD's 
rights have been modified in those documents. As noted in an earlier 
response, several specific bases for default related to the Regulatory 
Agreement are included in the Security Instrument. Moreover, Section 9 
of the revised Security Instrument specifically states that the 
Regulatory Agreement is incorporated and made a part of the Security 
Instrument. Further, Section 9 specifically states that upon Default of 
the Regulatory Agreement and upon the request of HUD, the lender, at 
its option may declare the whole of the Indebtedness to be due and 
payable. Further, under the revised Regulatory Agreement, HUD notifies 
the holder of the Note of a default under the

[[Page 24367]]

Regulatory Agreement and the holder of the Note has discretion as to 
whether the note is to be declared due and payable and thereafter 
proceed with either (1) foreclosure of the Security Instrument, or (2) 
assignment of the Note and Security Instrument to HUD as provided in 
Program Obligations. Therefore, under this scenario, HUD is not 
declaring the default, but is notifying the lender, who will make the 
determination of default.
    Comment: Commenters suggested revising the default process to 
eliminate the 30 day period for eligibility of the Lender to receive 
mortgage insurance benefits in the case of a default. Through this 
proposal, the commenters appear to seek to abbreviate the time period 
for an assignment in the event HUD directs the lender to accelerate due 
to a violation of the Regulatory Agreement, which is consistent with 
HUD directing the lender to accelerate the debt.
    HUD Response: HUD declines to adopt this recommendation. Under the 
revised Regulatory Agreement, and as noted in an earlier response, the 
lender will not be subject to HUD's direction, but will have the 
authority to accelerate the debt on its own behalf.
    Comment: A commenter suggested adding a materiality standard for 
the covenant event of default in the Regulatory Agreement, because 
``waste'' is not defined in the regulations.
    HUD Response: HUD believes that commenters were concerned that HUD 
would be exercising its authority to direct the lender to accelerate 
based on small infractions or minor, de minimis technicalities. HUD has 
addressed the commenter's concerns in the contractual documents that 
implement the program. Under the revised documents, HUD has included a 
definition of waste.\5\ Also, HUD is not retaining the right to 
exercise the option of foreclosing based on such de minimis issues. The 
lender now has the authority to commence the acceleration process. HUD 
therefore believes that the flexibility provided to Lenders to 
determine when to commence the acceleration process is sufficient to 
address commenters' concerns. Because the responsibility now lies with 
the lender, which has flexibility and is more knowledgeable about the 
situation, the dynamic has changed. The lender is, in fact less likely 
to accelerate since they are likely to have more substantial 
information than HUD.
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    \5\ Section 1 of the Security Instrument, for example, includes 
the following definition. Waste means a failure to keep the 
Mortgaged Property in decent safe and sanitary condition and in good 
repair. During any period in which HUD insures this Loan or holds a 
security interest on the Mortgaged Property, Waste is committed 
when, without Lender's and HUD's express written consent, Borrower: 
(1) Physically changes the Mortgaged Property, whether negligently 
or intentionally, in a manner that reduces its value; (2) fails to 
maintain and repair the Mortgaged Property in accordance with 
Program Obligations; (3) fails to pay before delinquency any Taxes 
secured by a lien having priority over this Security Instrument; (4) 
materially fails to comply with covenants in the Note, this Security 
Instrument or the Regulatory Agreement respecting physical care, 
maintenance, construction, abandonment, demolition, or insurance 
against casualty of the Mortgaged Property; or (5) retains 
possession of Rents to which Lender or its assigns have the right of 
possession under the terms of the Loan Documents.
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Modification of Mortgage Terms (24 CFR 207.256b)

    Comment: A commenter suggested including language which would make 
it clear that the requirement that the cash flow generated during a 
work-out be held ``in trust for disposition, as directed by the 
Commissioner'' no longer apply when the default has been cured. 
Commenters stated that the language would delay modification, and 
suggested addition of a clarifying phrase specifying that the 
Commissioner's approval for disposition of the cash would not be 
required when the default has been cured.
    HUD Response: HUD has included the clarifying language suggested by 
the commenter.

Commissioner's Right to Require Acceleration (24 CFR 207.257)

    Comment: One commenter stated that there should be no mandatory 
acceleration.
    HUD response: The regulation does not require mandatory 
acceleration, but reserves to HUD the right to require the mortgagee to 
accelerate.
    Comment: A commenter recommended replacing the term ``amortization 
charges'' with the term ``payments,'' on the grounds that the term 
``amortization charges'' is not defined in the regulation and does not 
have a commonly understood meaning. For example, the term could mean 
principal and interest payments or principal amortization payments or 
something else, and, in any event, would not include payments into 
escrows for taxes, insurance, etc. as required under the mortgage.
    HUD Response: HUD made a change in punctuation to the language that 
caused the commenter's confusion. The change adopted in the final rule 
clarifies that ``amortization charges'' is not an umbrella term in the 
regulatory provision.

Mortgagee Notice of Election To Assign for Insurance Benefits (24 CFR 
207.258)

    Comment: The regulations now codified, which can be found at 24 CFR 
207.258(a), establish the timing for a mortgagee to either file an 
insurance claim or elect to assign the mortgage to the Commissioner 
(referred to as a Notice of Election). The regulatory language proposed 
in the November 2010 rule provides that the lender must, within 45 days 
after the date of eligibility, notify the Commissioner of its intention 
to (1) File a claim, (2) elect to assign, or (3) acquire and convey 
title. If the mortgagee elects to assign the mortgage, under 24 CFR 
207.258(b), the mortgagee must, within 30 days of its election, file 
its application for insurance benefits and assign the mortgage. The 
Commissioner may extend the 30 days in which the mortgagee must file 
its application for insurance benefits and assign the mortgage if the 
Commissioner is considering a partial payment of claim. Section 207.258 
also provides special treatment for certain projects, e.g., those 
funded with proceeds of state and local bonds and Ginnie Mae 
securities.
    Commenters contend that the language in Sec.  207.258(a) detailing 
the ``Notice of Election'' to file an insurance claim or assign under 
the authority provided in Sec.  207.258(b) could mean that HUD could 
actually extend the mortgagees filing of an insurance claim 
indefinitely,
    HUD Response: In response to this concern, HUD added language to 
Sec.  207.258(a) which provides that the Commissioner may extend the 45 
day notice period at the request of the mortgagee. The extension gives 
mortgagees additional time to develop alternatives. The approval of an 
extension shall in no way prejudice the mortgagee's right to file a 
notice of its intention to file an insurance claim and of its election 
to either assign the mortgage to the Commissioner, or to acquire and 
convey title to the Commissioner.
    Comment: A commenter suggested clarifying that for mortgages funded 
with the proceeds of state or local bonds, GNMA securities, 
participation certificates, or other bond obligations which specify a 
prepayment penalty or lock out, mortgagees should request a three month 
extension of the deadline for filing notice of the mortgagees' 
intention to file an insurance claim and the mortgagees' election to 
assign the mortgage or acquire and convey title in accordance with the 
mortgagee certificate. Commenters suggested that the proposed language 
does not specify

[[Page 24368]]

the length of the required extension of the deadline to assign the 
mortgage or acquire and convey title. Commenters suggest that such 
language be included and that this period be three months, as lenders 
must use their own resources and lines of credit to make monthly 
payments on outstanding Ginnie Mae securities during the pendency of a 
default.
    HUD Response: HUD revised Sec.  207.258(a) at this final rule stage 
in part to address the commenters concerns. For ``special treatment 
projects'' HUD understands the commenter's concerns and provided the 
mortgagee with the ability to request a 90 day extension of the 
deadline for filing the notice of the mortgagee's intention to file an 
insurance claim or elect to assign or acquire and convey title, which 
HUD may further extend at the written request of the mortgagee. This 
revision will allow mortgagees to develop alternative funding sources 
and potentially refinance, thus avoiding a claim on the FHA insurance 
fund.
    Comment: A commenter suggested HUD delete language suggesting that 
Lenders ``assist'' borrowers to arrange refinancing to cure a default 
and substitute ``cooperate'' with borrowers to obtain refinancing.
    HUD Response: HUD declines to adopt this suggestion. It is HUD's 
position that the lender should actively engage in assisting the 
borrower with refinancing in order to meet HUD's expectation that 
lenders will be an active participant in seeking and obtaining 
refinancing.
    Comment: A commenter suggested that HUD revise the language on 
prepayment penalties, to be consistent with Mortgagee Letter 87-9,\6\ 
and that HUD also revise the language to reflect a ``prepayment penalty 
of one percent or less.'' The commenter also suggested that HUD modify 
the Lenders Certificate to delete the term penalty.
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    \6\ Mortgagee Letter 87-9 can be found at https://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/87-9ml.txt.
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    HUD Response: HUD has decided to revise the regulatory language to 
reflect the terminology ``prepayment premium'' instead of ``prepayment 
penalty.'' This language change is consistent with the Lender's 
Certificate posted on HUD's Web site in connection with the December 
22, 2010, notice seeking comment on further revised closing documents. 
However, HUD declines to adopt the recommendation to limit the 
mortgagees' alternative election requirements to those situations where 
the ``premium'' is one percent or less. Mortgagee Letter 87-9 allows 
prepayment penalties that initially exceed three percent when certain 
conditions which relate to HUD determinations on the financial 
viability of the project are met. HUD intends to retain the authority 
set forth in Mortgagee letter 87-9 and therefore declines the 
recommendation as such a limitation would unduly restrict the 
circumstances in which the alternative election process would be used.
    Comment: A commenter suggested deleting the requirement that 
successors and assigns certify that they be bound by the prepayment 
provisions.
    HUD Response: HUD has determined to retain this provision. The 
notice provided by the certification and the regulation improves the 
probability that potentially affected parties are aware of this 
requirement.
    Comment: A commenter suggested that HUD delete regulatory language 
that provides the mortgagee authority to assign the mortgage to HUD 
within 30 days of the mortgagee's election to assign. HUD has, in 
practice, provided the mortgagee with a deadline measured from the date 
of HUD's acknowledgement of the mortgagee's election.
    HUD Response: HUD has addressed the commenter's recommendation by 
revising the proposed rule language to comply with HUD's corresponding 
process of linking the deadline to the date of HUD's acknowledgement of 
the request.
    Comment: HUD received comments that the industry would not be able 
to make the changes necessary to adapt their practices to the new loan 
documents by the May 1, 2011 published transition date:
    HUD Response: In acknowledgment of the industry's concerns and the 
recognition that there are projects already in the pipeline, as noted 
earlier in this preamble, HUD has established an effective date of 
September 1, 2011. Application of the regulations promulgated by this 
final rule and use of the corresponding updated closing documents will 
be mandatory for all project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011.

IV. Multifamily Rental Projects--Updating of Regulations and Closing 
Documents

    The updating of HUD's multifamily rental project closing documents 
and corresponding regulations has been an undertaking for many years. 
Although formal solicitation of public comment on updated closing 
documents and regulatory revisions commenced with HUD's August 2, 2004, 
proposed rule (69 FR 46210) and accompanying August 2, 2004, notice (69 
FR 46214) providing revised and updated closing documents, the effort 
to update the closing documents actually began in calendar year 2000. 
The August 2, 2004, notice providing for revised closing documents 
noted that updated closing documents were first presented on HUD's Web 
site in March 2000 (see 69 FR 46214). Through all of these requests for 
comment over the past 11 years, industry and other interested members 
of the public have responded to HUD's solicitation for feedback and 
input and have provided valued information. All of the comments were 
appreciated by HUD and carefully considered. The many times that HUD 
has posted updated documents on its Web site for review and comment, 
not only in clean form but in redline/strikeout form, reflects HUD's 
desire to be open and transparent with industry about all changes being 
made, even small editorial changes.
    It has taken many years to bring these documents and corresponding 
regulations up-to-date with current practices in the industry. HUD 
intends to keep these documents and the corresponding regulations 
current with industry practices and applicable law. The every-3-year 
review and solicitation of public comment required by the Paperwork 
Reduction Act will help keep the closing documents current, and allow 
for industry and other interested members of the public to once again 
provide comment and input on changes they believe are important to 
maintaining the documents up-to-date with current practices.
    The updating of the closing documents and corresponding regulations 
does not only benefit HUD and industry, but meets an important goal of 
the Administration. On January 18, 2011, President Obama signed 
Executive Order 13563, entitled ``Improving Regulation and Regulatory 
Review,'' which was published in the Federal Register on January 21, 
2011 (76 FR 3822). In this executive order, the President reaffirmed 
the principles governing regulatory review established by Executive 
Order 12866, entitled ``Regulatory Planning and Review,'' issued 
September 30, 1993, and published in the Federal Register on October 4, 
1993, at 58 FR 51735. The President also, in this executive order, 
among other things, directed Federal agencies to review existing 
regulations and to determine if existing regulations are outmoded, 
ineffective, insufficient or excessively burdensome, and to modify, 
streamline, expand, or repeal the regulations as may be appropriate.

[[Page 24369]]

The updating of outmoded closing documents and corresponding 
regulations are consistent with the President's executive order.

V. Findings and Certifications

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule was made at the proposed rule stage in accordance with 
HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of 
the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). 
The Finding of No Significant Impact remains applicable to this final 
rule and is available for public inspection between 8 a.m. and 5 p.m. 
weekdays in the Regulations Division, Room 10276, Office of the General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, please schedule an appointment to review the 
docket file by calling the Regulations Division at 202-402-3055 (this 
is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal 
Information Relay Service at 800-877-8339.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments and the private sector. This rule does not impose 
any Federal mandate on any state, local, or tribal government or the 
private sector within the meaning of UMRA.

Impact on Small Entities

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The rule is limited to making certain conforming amendments to FHA 
regulations that address multifamily rental projects to ensure their 
consistency with the recent update and revision of the documents used 
for multifamily rental project closings. Accordingly, the undersigned 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the executive order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the executive order.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for Mortgage 
Insurance for the Purchase or Refinancing of Existing Multifamily 
Housing Projects is 14.155.

List of Subjects

24 CFR Part 200

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

24 CFR Part 207

    Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements, Solar energy.

    Accordingly, for the reasons discussed in this preamble, HUD is 
amending 24 CFR parts 200 and 207 as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

0
1. The authority citation for 24 CFR part 200 continues to read as 
follows:

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


0
2. Revise Sec.  200.5 to read as follows:


Sec.  200.5  Eligible mortgagor.

    (a) Except as provided in paragraph (b) of this section, the 
mortgagor:
    (1) Shall be a single asset mortgagor entity acceptable to the 
Commissioner, as limited by the applicable section of the Act, and 
shall possess the powers necessary and incidental to operating the 
project, except that the Commissioner may approve a non-single asset 
mortgagor entity under such circumstances, terms and conditions 
determined and specified as acceptable to the Commissioner; and
    (2) Shall not be a natural person or tenant in common.
    (b)(1) For multifamily project mortgages for which HUD issued a 
firm commitment for mortgage insurance before September 1, 2011, and 
for multifamily project mortgages insured under section 232 of the Act 
(12 U.S.C. 1715w), the mortgagor shall be a natural person or entity 
acceptable to the Commissioner, as limited by the applicable section of 
the Act, and shall possess the powers necessary and incidental to 
operating the project.
    (2) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011, the 
regulations of paragraph (a) of this section shall apply, unless the 
mortgagor demonstrates to the satisfaction of the Commissioner that 
financial hardship to the mortgagor would result from application of 
the regulations in paragraph (a) of this section due to the reasonable 
expectations of the mortgagor that the transaction would close under 
the regulations in effect prior to September 1, 2011, in which case, 
the regulations of paragraph (b)(1) shall apply.

0
3. Revise Sec.  200.88 to read as follows:


Sec.  200.88  Late charge.

    (a) The mortgage may provide for the collection by the mortgagee of 
a late charge in accordance with terms, conditions, and standards of 
the Commissioner for each dollar of each payment to interest or 
principal:
    (1) More than 10 days in arrears to cover the expense involved in 
handling delinquent payments;
    (2) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance before September 1, 2011, and for 
multifamily project mortgages insured under section 232 of the Act (12 
U.S.C. 1715w), more than 15 days in arrears to cover the expense 
involved in handling delinquent payments.
    (b) Late charges shall be separately charged to and collected from 
the mortgagor and shall not be deducted from any aggregate monthly 
payment.

PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE

0
4. The authority citation for part 207 continues to read as follows:


[[Page 24370]]


    Authority:  12 U.S.C. 1701z-11(e), 1713, and 1715b; 42 U.S.C. 
3535(d).


0
5. Revise Sec.  207.255 to read as follows:


Sec.  207.255  Defaults for purposes of insurance claim.

    (a)(1) Except as provided in paragraph (b) of this section, the 
following shall be considered a default under the terms of a mortgage 
insured under this subpart:
    (i) Failure of the mortgagor to make any payment due under the 
mortgage (also referred to as a ``Monetary Event of Default'' in 
certain mortgage security instruments); or
    (ii) A material violation of any other covenant under the 
provisions of the mortgage, if because of such violation, the mortgagee 
has accelerated the debt, subject to any necessary HUD approval (also 
referred to as a ``Covenant Event of Default'' in certain mortgage 
security instruments).
    (2) For purposes of a mortgagee filing an insurance claim with the 
Commissioner, the failure of the mortgagor to make any payment due 
under an operating loss loan or under the original mortgage shall be 
considered a default under both the operating loss loan and original 
mortgage.
    (3) If a default as defined in paragraphs (a)(1) and (a)(2) of this 
section continues for a minimum period of 30 days, the mortgagee shall 
be entitled to receive the benefits of the insurance provided for the 
mortgage, subject to the procedures in this subpart.
    (4) For the purposes of paragraph (b) of this section, the date of 
default shall be:
    (i) The date of the first failure to make a monthly payment that 
subsequent payments by the mortgagor are insufficient to cover when 
those subsequent payments are applied by the mortgagee to the overdue 
monthly payments in the order in which they became due; or
    (ii) The date of the first uncorrected violation of a covenant or 
obligation for which the mortgagee has accelerated the debt.
    (5) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011, the 
regulations of paragraph (a) of this section shall apply, unless the 
mortgagor demonstrates to the satisfaction of the Commissioner that 
financial hardship to the mortgagor would result from application of 
the regulations in paragraph (a) of this section due to the reasonable 
expectations of the mortgagor that the transaction would close under 
the regulations in effect prior to September 1, 2011, in which case, 
the regulations of paragraph (b) shall apply.
    (b)(1) For multifamily project mortgages for which HUD issued a 
firm commitment for mortgage insurance before September 1, 2011, and 
for multifamily project mortgages insured under section 232 of the Act 
(12 U.S.C. 1715w), and section 242 of the Act (12 USC 1715z-7), the 
following shall be considered a default under the terms of a mortgage 
insured under this subpart:
    (i) Failure of the mortgagor to make any payment due under the 
mortgage; or
    (ii) Failure to perform any other covenant under the provisions of 
the mortgage, if the mortgagee, because of such failure, has 
accelerated the debt.
    (2) In the case of an operating loss loan, the failure of the 
mortgagor to make any payment due under such loan or under the original 
mortgage shall be considered a default under both the loan and original 
mortgage.
    (3) If such defaults, as defined in paragraph (b) of this section, 
continue for a period of 30 days the mortgagee shall be entitled to 
receive the benefits of the insurance hereinafter provided.
    (4) For the purposes of this section, the date of default shall be 
considered as:
    (i) The date of the first uncorrected failure to perform a covenant 
or obligation; or
    (ii) The date of the first failure to make a monthly payment which 
subsequent payments by the mortgagor are insufficient to cover when 
applied to the overdue monthly payments in the order in which they 
became due.

0
6. Revise Sec.  207.256 to read as follows:


Sec.  207.256  Notice to the Commissioner of default.

    (a) If a default as defined in Sec.  207.255(a) or (b) is not cured 
within the grace period of 30 days provided under Sec.  207.255(a)(3) 
or (b)(3), the mortgagee must, within 30 days after the date of the end 
of the grace period, notify the Commissioner of the default, in the 
manner prescribed in 24 CFR part 200, subpart B.
    (b) The mortgagee must give notice to the Commissioner, in the 
manner prescribed in 24 CFR part 200, subpart B, of the mortgagor's 
violation of any covenant, whether or not the mortgagee has accelerated 
the debt.

0
7. Revise Sec.  207.256a to read as follows:


Sec.  207.256a  Reinstatement of defaulted mortgage.

    If, after default and prior to the completion of foreclosure 
proceedings, the mortgagor cures the default, the insurance shall 
continue on the mortgage as if a default had not occurred, provided the 
mortgagee gives notice of reinstatement to the Commissioner, in the 
manner prescribed in 24 CFR part 200, subpart B.

0
8. Revise Sec.  207.256b to read as follows:


Sec.  207.256b  Modification of mortgage terms.

    (a) The mortgagor and the mortgagee may, with the approval of the 
Commissioner, enter into an agreement that extends the time for curing 
a default under the mortgage or modifies the payment terms of the 
mortgage.
    (b)(1) Except as provided in paragraph (b)(2), the Commissioner's 
approval of the type of agreement specified in paragraph (a) of this 
section shall not be given, unless the mortgagor agrees in writing 
that, during such period as the mortgage continues to be in default, 
and payments by the mortgagor to the mortgagee are less than the 
amounts required under the terms of the original mortgage, the 
mortgagor or mortgagee, as may be appropriate in the particular 
situation, will hold in trust for disposition, as directed by the 
Commissioner, all rents or other funds derived from the secured 
property that are not required to meet actual and necessary expenses 
arising in connection with the operation of such property, including 
amortization charges, under the mortgage.
    (2) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance before September 1, 2011, and for 
multifamily project mortgages insured under section 232 of the Act (12 
U.S.C. 1715w), and section 242 (12 USC 1715z-7), the Commissioner's 
approval of the type of agreement specified in paragraph (a) of this 
section shall not be given unless the mortgagor agrees in writing that, 
during such period as payments to the mortgagee are less than the 
amounts required under the terms of the original mortgage, the 
mortgagor will hold in trust for disposition as directed by the 
Commissioner all rents or other funds derived from the property which 
are not required to meet actual and necessary expenses arising in 
connection with the operation of such property, including amortization 
charges, under the mortgage.
    (3) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011, the 
regulations of paragraph (b)(1) of this section shall apply, unless the 
mortgagor demonstrates to the

[[Page 24371]]

satisfaction of the Commissioner that financial hardship to the 
mortgagor would result from application of the regulations in paragraph 
(b)(1) of this section due to the reasonable expectations of the 
mortgagor that the transaction would close under the regulations in 
effect prior to September 1, 2011, in which case, the regulations of 
paragraph (b)(2) shall apply.
    (c) The Commissioner may exempt a mortgagor from the requirement of 
paragraph (b) of this section in any case where the Commissioner 
determines that such exemption does not jeopardize the interests of the 
United States.

0
9. Revise Sec.  207.257 to read as follows:


Sec.  207.257  Commissioner's right to require acceleration.

    Upon receipt of notice of violation of a covenant, as provided for 
in Sec.  207.256(b), or otherwise being apprised of the violation of a 
covenant, the Commissioner reserves the right to require the mortgagee 
to accelerate payment of the outstanding principal balance due in order 
to protect the interests of the Commissioner.

0
10. Amend Sec.  207.258, as follows:
0
a. Revise paragraph (a);
0
b. Redesignate paragraphs (b)(1) through (b)(5) as (b)(2) through 
(b)(6) respectively;
0
c. Redesignate the introductory text of paragraph (b) as paragraph 
(b)(1); and
0
d. Revise newly designated paragraph (b)(1), to read as follows:


Sec.  207.258  Insurance claim requirements.

    (a) Alternative election by mortgagee. (1) When the mortgagee 
becomes eligible to receive mortgage insurance benefits pursuant to 
Sec.  207.255(a)(3) or (b)(3), the mortgagee must, within 45 days after 
the date of eligibility, give the Commissioner notice of its intention 
to file an insurance claim and of its election either to assign the 
mortgage to the Commissioner, as provided in paragraph (b) of this 
section, or to acquire and convey title to the Commissioner, as 
provided in paragraph (c) of this section. Notice of this election must 
be provided to the Commissioner in the manner prescribed in 24 CFR part 
200, subpart B. HUD may extend the notice period at the request of the 
mortgagee under the following conditions:
    (i) The request must be made to and approved by HUD prior to the 
45th day after the date of eligibility; and
    (ii) The approval of an extension shall in no way prejudice the 
mortgagee's right to file its notice of its intention to file an 
insurance claim and of its election either to assign the mortgage to 
the Commissioner or to acquire and convey title to the Commissioner 
within the 45 day period or any extension prescribed by the 
Commissioner.
    (2) For mortgages funded with the proceeds of state or local bonds, 
GNMA mortgage-backed securities, participation certificates, or other 
bond obligations specified by the Commissioner (such as an agreement 
under which the insured mortgagee has obtained the mortgage funds from 
third party investors and has agreed in writing to repay such investors 
at a stated interest rate and in accordance with a fixed repayment 
schedule), any of which contains a lock-out or prepayment premium, the 
mortgagee must, in the event of a default during the term of the 
prepayment lock-out or prepayment premium (i.e., prior to the date on 
which prepayments may be made with a premium):
    (i) Request a 90-day extension of the deadline for filing the 
notice of the mortgagee's intention to file an insurance claim and the 
mortgagee's election to assign the mortgage or acquire and convey title 
in accordance with the mortgagee certificate, which HUD may further 
extend at the written request of the mortgagee;
    (ii) Assist the mortgagor in arranging refinancing to cure the 
default and avert an insurance claim, if the Commissioner grants the 
requested (or a shorter) extension of notice filing deadline;
    (iii) Report to the Commissioner at least monthly on any progress 
in arranging refinancing;
    (iv) Cooperate with the Commissioner in taking reasonable steps in 
accordance with prudent business practices to avoid an insurance claim;
    (v) Require successors or assigns to certify in writing that they 
agree to be bound by these conditions for the remainder of the term of 
the prepayment lock-out or prepayment premium; and
    (vi) After commencement of amortization of the refinanced mortgage, 
notify HUD of a delinquency when a payment is not received by the 10th 
day after the date the payment is due.
    (3) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011, the 
regulations of paragraph (a)(2) of this section shall apply, unless the 
mortgagor demonstrates to the satisfaction of the Commissioner that 
financial hardship to the mortgagor would result from application of 
the regulations in paragraph (a)(2) of this section due to the 
reasonable expectations of the mortgagor that the transaction would 
close under the regulations in effect prior to September 1, 2011, in 
which case, the regulations of paragraph (a)(2) shall not apply.
    (b) Assignment of mortgage to Commissioner. (1) Timeframe; request 
for extension.
    (i) Except for multifamily project mortgages insured under section 
232 of the Act (12 U.S.C. 1715w), and section 242 (12 U.S.C. 1715z-7), 
if the mortgagee elects to assign the mortgage to the Commissioner, the 
mortgagee shall, at any time within 30 days after the date HUD 
acknowledges the notice of election, file its application for insurance 
benefits and assign to the Commissioner, in such manner as the 
Commissioner may require, any applicable credit instrument and the 
realty and chattel security instruments.
    (ii) The Commissioner may extend this 30-day period by written 
notice that a partial payment of insurance claim under Sec.  207.258b 
is being considered. A mortgagee may consider failure to receive a 
notice of an extension approval by the end of the 30-day time period a 
denial of the request for an extension.
    (iii) The extension shall be for such term, not to exceed 60 days, 
as the Commissioner prescribes; however, the Commissioner's 
consideration of a partial payment of claim, or the Commissioner's 
request that a mortgagee accept partial payment of a claim in 
accordance with Sec.  207.258b, shall in no way prejudice the 
mortgagee's right to file its application for full insurance benefits 
within either the 30-day period or any extension prescribed by the 
Commissioner.
    (iv) The requirements of paragraphs (b)(2) through (b)(6) of this 
section shall also be met by the mortgagee.
* * * * *

0
11. In Sec.  207.259, revise paragraph (b)(2)(iii), and new paragraphs 
(b)(2)(vi) and (b)(2)(vii) to read as follows:


Sec.  207.259  Insurance benefits.

* * * * *
    (b) * * *
    (2) * * *
    (iii) The sum of the cash items retained by the mortgagee pursuant 
to Sec.  207.258(b)(6), except the balance of the mortgage loan not 
advanced to the mortgagor.
    * * *
    (vi) Except for multifamily project mortgages for which HUD issued 
a firm commitment for mortgage insurance before September 1, 2011, and 
for multifamily project mortgages insured under section 232 of the Act 
(12 U.S.C. 1715w) and under section 242 of the Act (12 U.S.C. 1715z-7), 
when there is a covenant default as defined in

[[Page 24372]]

Sec.  207.255(a)(1)(ii) and a mortgagee refuses to comply promptly with 
the Commissioner's request to accelerate payment pursuant to Sec.  
207.257, an amount equal to the difference between the project's market 
value as of the date of the Commissioner's request and the project's 
market value as of the date the mortgagee makes an election to assign 
the mortgage, or convey title to the project, as determined by 
appraisal procedures established by the Commissioner.
    (vii) For multifamily project mortgages for which HUD issued a firm 
commitment for mortgage insurance on or after September 1, 2011, the 
regulations of paragraph (b)(2)(vi) of this section shall apply, unless 
the mortgagor demonstrates to the satisfaction of the Commissioner that 
financial hardship to the mortgagor would result from application of 
the regulations in paragraph (b)(2)(vi) of this section due to the 
reasonable expectations of the mortgagor that the transaction would 
close under the regulations in effect prior to September 1, 2011, in 
which case, the regulations of paragraph (b)(2)(vi) shall not apply.
* * * * *

    Dated: April 26, 2011.
 Robert C. Ryan,
Acting Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2011-10450 Filed 4-29-11; 8:45 am]
BILLING CODE 4210-67-P