Federal Housing Administration (FHA): Section 232 Healthcare Facility Insurance Program-Strengthening Accountability and Regulatory Revisions Update, 26218-26229 [2012-10690]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 77, Number 86 (Thursday, May 3, 2012)]
[Proposed Rules]
[Pages 26218-26229]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10690]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5, 200, 207, and 232

[Docket No. FR-5465 P-01]
RIN-2502-AJ05


Federal Housing Administration (FHA): Section 232 Healthcare 
Facility Insurance Program-Strengthening Accountability and Regulatory 
Revisions Update

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

ACTION: Proposed rule.

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SUMMARY: In 2010 through 2011, HUD commenced and completed the process 
of revising regulations applicable to, and closing documents used in, 
FHA insurance of multifamily rental projects, to reflect current policy 
and practices in the multifamily mortgage market. The multifamily 
rental project regulations and closing documents had not been updated 
in more than 20 years. Through this proposed rule, HUD commences a 
similar process for its regulations governing insurance of healthcare 
facilities under section 232 of the National Housing Act, and the 
closing documents used in such transactions. HUD's Section 232 program 
insures mortgage loans to facilitate the construction, substantial 
rehabilitation, purchase, and refinancing of nursing homes, 
intermediate care facilities, board and care homes, and assisted-living 
facilities. This rule proposes amendments to update HUD's Section 232 
regulations, to reflect current policy and practices, and to improve 
accountability and strengthen risk management.

DATES: Comment Due Date: July 2, 2012.

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

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
rule. No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.


[[Page 26219]]


    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at (202) 708-3055 (this 
is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal Relay 
Service at 1-800-877-8339. Copies of all comments submitted are 
available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Michael B. Vaughn, Director, Office of 
Residential Care Facilities, Office of Healthcare Programs, Office of 
Housing, Department of Housing and Urban Development, 451 7th Street 
SW., Room 6264, Washington, DC 20410-8000; telephone number 202-708-
0599 (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 Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    The American population is undergoing a significant demographic 
change as an increasing portion is age 65 or older or approaching 
65.\1\ As several governmental and private organizations have reported, 
the growing number of older adults is placing increased demands on the 
public health system and on medical and social services.\2\ These 
demands include greater need for nursing homes, long-term care 
facilities, and assisted living arrangements. Further, although options 
for long-term care and assisted living have expanded, nursing homes 
will likely retain a major role in caring for the most severely 
impaired and vulnerable populations.\3\ Moreover, nursing homes are 
increasingly offering medical services similar to those offered in 
hospitals after surgery, illness, or other sudden medical problems. In 
those situations, older adults in particular need a higher level of 
care because hospital stays are shorter than previously.\4\
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    \1\ See https://www.aoa.gov/aoaroot/aging_statistics/index.aspx.
    \2\ See https://www.cdc.gov/mmwr/preview/mmwrhtml/mm5206a2.htm.
    \3\ Bercovitz, Anita, Decker, Frederic H., Jones, Adrienne, 
Remsburg, Robin, End of Life Care in Nursing Homes: 2004 National 
Nursing Home Survey, National Health Statistics Reports, No. 9, 
October 8, 2008, pages 1 and 2.
    \4\ See https://www.healthinaging.org/agingintheknow/chapters_print_ch_trial.asp?ch=15.
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The Section 232 Program

    Section 232 of the National Housing Act (12 U.S.C. 1715w) (Section 
232) authorizes FHA to insure mortgages made by private lenders to 
finance the development of nursing homes, intermediate care facilities, 
board and care homes, and assisted living facilities (collectively, 
residential healthcare facilities). The Section 232 program allows for 
long-term, fixed-rate financing for new and rehabilitated properties 
for up to 40 years. Existing properties without rehabilitation can be 
financed with or without Ginnie Mae \5\ Mortgage Backed Securities for 
up to 35 years.
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    \5\ Ginnie Mae is a registered service mark of the Government 
National Mortgage Association; See https://www.ginniemae.gov/.
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    Eligible borrowers under the Section 232 program include investors, 
builders, developers, public entities (nursing homes), and private 
nonprofit corporations and associations. For nursing homes only, 
applicants may be public agencies that are licensed or regulated by a 
state to care for convalescents and people who need nursing or 
intermediate care. The documents executed at loan closing provide that 
the borrower entity may not engage in any other business or activity.
    Facilities covered by an FHA-insured mortgage under the Section 232 
program must accommodate 20 or more residents who require skilled 
nursing care and related medical services, or those who, while not in 
need of nursing home care, are in need of minimum but continuous care 
provided by licensed or trained personnel. Assisted living facilities, 
nursing homes, intermediate care facilities, and board and care homes 
may be combined in the same facility covered by an insured mortgage or 
may be in separate facilities. Insured mortgages may include the cost 
of major movable equipment, daycare facilities, and the installation of 
fire safety equipment. Assisted living facilities, nursing homes, 
intermediate care homes, and board and care homes must be licensed or 
regulated by the appropriate state agency, municipality, or other 
political subdivision where the facility is located.
    The maximum amount of the loan for new construction and substantial 
rehabilitation is equal to 90 percent (95 percent for nonprofit 
organization sponsors) of the estimated value of physical improvements 
and major movable equipment. For existing projects, the maximum is 85 
percent (90 percent for nonprofit organization sponsors) of the 
estimated value of the physical improvements and major movable 
equipment.
    As the need for residential care facilities has expanded, requests 
to FHA to make mortgage insurance available for such facilities has 
also expanded. As with any program expansion, FHA seeks to ensure that 
program requirements currently in place are sufficient to meet 
increased demand, and prevent mortgage defaults that not only impose a 
risk to the FHA insurance fund but also jeopardize residents of Section 
232 facilities.

The Need for Regulatory Update

    HUD's regulations governing the Section 232 program are codified in 
24 CFR part 232. These regulations were promulgated in 1971, with some 
revisions made in the 1970s and the 1980s. Two regulatory updates were 
issued in the 1990s. On November 29, 1994, HUD issued a final rule that 
amended the Section 232 regulations to implement statutory authority to 
insure assisted living facilities for the care of frail elderly 
persons, as authorized by section 511 of the Housing and Community 
Development Act of 1992 (Pub. L. 102-550, approved October 28, 1992). 
(See 59 FR 61228.) On April 1, 1996, HUD issued a final rule to comply 
with the then-Administration's regulatory review initiative to 
streamline regulations, including by removing obsolete ones. (See 63 FR 
14396.) The preamble to that final rule stated that the only changes 
being made to the Section 232 regulations were to remove the regulatory 
provisions concerning lender eligibility and to provide a cross-
reference to 24 CFR part 200, subpart A, which addressed the general 
eligibility requirements to be approved as an FHA-approved lender. (See 
63 FR 14397.) The 1996 rule was the last time that HUD amended the 
Section 232 regulations. Given the far greater demand today for nursing 
homes, and long-term care and assisted living facilities, and the 
changes, over the years, in how these facilities offer services to an 
aging population, as discussed above, HUD's Section 232 regulations 
need to be revised and updated.
    In the 1970s, regulations governing FHA-insured transactions were 
generally structured so that details pertaining to the duties and 
obligations of parties involved in the transaction were primarily 
addressed in contractual documents, and that has been the case as well 
for the Section 232 regulations.

[[Page 26220]]

This approach has offered FHA and the parties to a transaction the 
necessary flexibility to adjust requirements as may be appropriate 
given the specifics of a given transaction, and HUD believes they 
should be retained for certain transaction aspects. After 16 years, 
however, certain policy and practices have developed that are not 
unique to certain parties and transactions and should be reflected in 
regulation. For example, since the operating revenues of the healthcare 
facility determine the financial health of the project and the FHA 
insurance fund, it has become clear that oversight by FHA of such 
revenues is vital.

II. This Proposed Rule

    Through this rule, and similar to HUD's recent update of 
multifamily rental project regulations and closing documents, HUD 
proposes to update its Section 232 regulations and related closing 
documents. Notice of the publication of the documents is provided 
separately in the Federal Register through Notice FR-5623-N-01, Federal 
Housing Administration (FHA) Healthcare Facility Documents: Proposed 
Revisions and Updates and Notice of Information Collection. Through 
this proposed rule, HUD updates terminology and makes amendments to 
reflect current policy and practices. The specific amendments proposed 
to update HUD's Section 232 regulations by this rule follow. The update 
includes amendments to 24 CFR parts 5, 200, 207, and 232 dealing with, 
respectively, Uniform Reporting Standards, Real Estate Assessment 
Center (REAC) inspections, Multifamily Mortgage Insurance contract 
requirements, and strengthening of the eligibility and oversight 
provisions of the healthcare programs. As the most significant 
proposals are in 24 CFR part 232, these are addressed first in this 
part of the preamble.

A. Mortgage Insurance for Nursing Homes, Intermediate Care Facilities, 
Board and Care Homes, and Assisted Living Facilities (Part 232)

Nomenclature Change
    In its review of the regulations in 24 CFR part 232, HUD noted that 
the regulations use both the term ``borrower'' and ``mortgagor.'' These 
terms have the same meaning, and to avoid any misunderstanding that 
they have different meanings, this proposed rule would substitute the 
term ``borrower'' for ``mortgagor'' throughout the part 232 
regulations. Closing documents for the Section 232 program may 
sometimes refer to the borrower as the ``mortgagor,'' ``lessor,'' and/
or the ``owner.''
Eligibility Requirements (Subpart A)
    Subpart A of the part 232 regulations, entitled ``Eligibility 
Requirements,'' would be revised as follows:
    The rule would revise eligibility requirements under Sec.  232.1 to 
establish an exception from the multifamily program requirements for 
eligible borrowers. Eligible borrowers for multifamily projects are 
addressed in 24 CFR 200.5.
    A new Sec.  232.3 is added to part 232 to provide an appropriate 
definition of an eligible borrower for healthcare facilities. In a 
Section 232 transaction, HUD maintains a relationship with the 
borrower, and the borrower assumes a responsibility to ensure the 
appropriate maintenance and use of project assets. Given the importance 
of this relationship, the proposed rule would include a new definition 
of eligible borrower in Sec.  232.3. This revised definition would 
conform to current legal changes in the forms of commercial property 
ownership. HUD notes that the single asset entity form of ownership has 
become the standard form of ownership for commercial real estate 
transactions. The revised definition, therefore, provides that the 
borrower shall be a single asset borrower entity acceptable to the 
Federal Housing Commissioner (Commissioner) and shall possess the power 
necessary and incidental to operating the project. The regulation 
provides that the Commissioner may approve an exception to this single 
asset requirement in limited circumstances based upon such criteria as 
may be specified by the Commissioner.
    The rule would redesignate existing eligibility requirements 
presently contained in current Sec.  232.3. That section presently 
establishes the standards for healthcare facility bathroom and resident 
ratios and access. Moving this section to Sec.  232.7 would merely 
restructure the sequence of the eligibility requirements in the 
regulations.
    The rule would add a new Sec.  232.9 to define mortgaged property. 
Mortgaged property would be defined to include all of the borrower's 
interest in any property, real, personal, or mixed, covered by the 
mortgage or mortgages securing the note endorsed for insurance or held 
by the Secretary. This definition is consistent with the definition of 
mortgaged property currently in the Security Agreement, used in Section 
232 transactions, and as used in the revised Borrower's Security 
Instrument.
    The rule would add Sec.  232.11 to require borrowers to establish 
at final closing and maintain throughout the term of the mortgage loan 
a long-term debt service reserve account. Given the complexities of, 
and volatility of both funding for and market demand for residential 
care facilities, such reserve account is important for improved risk 
management. The reserve account may be financed from mortgage proceeds, 
provided that the loan remains within the loan to value ratio. (See 
Sec.  232.903, discussed below.) The amount required to be initially 
placed in the borrower's long-term debt service reserve account, and 
the minimum long-term balance to be maintained in that account, will be 
determined during underwriting and separately identified in the firm 
commitment. Although HUD may, under certain circumstances, permit the 
balance to fall below the required minimum long-term balance, the owner 
may not take any distribution except when both the long-term debt 
service reserve account is funded at the minimal long-term level and 
such distribution is otherwise permissible. The proposed establishment 
of the long-term debt service reserve account is in conjunction with 
the proposals governing the use and distribution of project funds, 
which is discussed below. This long-term reserve account would be 
required for new loans and refinancings.
Contract Rights and Obligations (Subpart B)
    Subpart B of the part 232 regulations addresses contract rights and 
obligations to which all section 232 transactions are subject unless 
otherwise specified in another regulatory section in part 232.
    Section 232.251, entitled ``Cross-Reference,'' would be retitled 
``Other Applicable Regulations'' and would continue to include the 
regulations cross-referenced in existing Sec.  232.251, but also 
clarify the applicability of the new provisions included in subpart B.
    The rule would add a new Sec.  232.254 to provide that borrowers 
may, to the extent allowed in their transactional loan documents and 
applicable law, make and take distributions of mortgaged property. 
Although previously the borrower could take distributions only annually 
(or, in limited circumstances, semi-annually), the proposed rule would 
allow borrowers to take distributions more frequently, provided that, 
upon making a calculation of borrower surplus cash, no less frequently 
than semi-annually, they can demonstrate positive surplus cash in their 
semi-annual financial reports or repay any distributions made

[[Page 26221]]

during the fiscal period to the extent that they are not in a positive 
surplus cash position at the end of the fiscal period in which 
distributions are made. HUD has included language in the proposed 
regulation to clarify that it does not intend to override existing 
transactional agreements.
    The proposed rule provides that upon each calculation of borrower 
surplus cash, the borrower must demonstrate positive surplus cash, or, 
to the extent that surplus cash is negative, the borrower must repay 
any distributions taken during such calculation period within 30 days 
or within such shorter period as may be required by HUD. The borrower 
shall be deemed to have taken distributions to the extent that surplus 
cash is negative unless, in conjunction with the calculation of surplus 
cash, the borrower provides to HUD documentation evidencing, to HUD's 
reasonable satisfaction, a lesser amount of total distributions.
    New Sec.  232.254 would also include a definition of borrower 
surplus cash, which would be defined in the Borrower Regulatory 
Agreement.
    The rule would add a new Sec.  232.256 to require that a borrower 
may not lease any portion of the project, or enter into any agreement 
with an operator without HUD's prior written consent.
    The rule would revise the introductory paragraph of Sec.  232.903, 
relating to the Sec.  232/223(f) program, by amending the maximum 
mortgage amounts to provide that the new debt service reserve account 
may be considered part of the cost of financing. No such amendment is 
necessary for any Sec.  232 programs other than Sec.  232/223(f), 
since, for other programs, funding of the debt service reserve is an 
eligible cost that may be funded from mortgage proceeds to the extent 
that the insured loan remains below the maximum loan to value ratio.
Eligible Operators and Facilities and Restrictions on Fund 
Distributions (New Subpart F)
    This proposed rule would add to part 232 a new subpart F entitled, 
``Eligible Operators and Facilities and Restrictions on Fund 
Distributions.'' As noted earlier in this preamble, operators carry out 
significant day-to-day duties in the administration of healthcare 
facilities. HUD finds that this important role needs to be explicitly 
addressed in regulation, by providing for the requisite accountability 
by such entities. The proposed new provisions recognize that a borrower 
may share its responsibility over the project with another entity. 
However, the fact that a borrower chooses to contract with a separate 
entity to operate the project does not relieve the borrower of its 
obligation to safeguard and ensure the proper use of all project 
assets, or of its obligation to ensure that acts of the operator do not 
cause the borrower to be in noncompliance with the borrower's own 
obligations. Instead, these new provisions are directed to ensuring 
that an operator, which may be an entity separate from the borrower, is 
also required to safeguard and ensure the proper use of all project 
assets.
    New Sec.  232.1001 would advise that the scope of this new subpart 
is to establish the requirements applicable to the operator of a 
residential care facility under the Section 232 regulations.
    New Sec.  232.1003 would define several key terms used in a Section 
232 transaction. Section 232.1003 would define ``project,'' ``identity 
of interest projects,'' ``management agent,'' ``operator,'' and ``owner 
operator''.
    New Sec.  232.1005 would address commingling of funds and direct 
that an operator must not, without HUD's prior approval, allow funds 
attributable to an FHA-insured or HUD-held healthcare facility to be 
commingled with funds attributable to another healthcare facility or 
business.
    New Sec.  232.1007 would provide that payments from operating funds 
for goods and services must be reasonable and not exceed amounts 
normally paid for such goods or services in the geographic area where 
the services are rendered or the goods are furnished, unless otherwise 
approved by HUD.
    New Sec.  232.1009 provides that no principal of the borrower 
entity may receive a salary or any payment of funds derived from 
operation of the project, other than from permissible distributions, 
without HUD's prior approval.
    Violations of these requirements on the use of project assets and 
income would be subject to double damages, in addition to HUD's other 
remedies, pursuant to statutory amendments, described hereinafter, 
enacted in 2004. Section 421 of the Housing and Community Development 
Act of 1987 (12 U.S.C. 1715z-4a), entitled ``Double damages remedy for 
unauthorized use of multifamily housing project assets and income,'' 
was amended by section 220 of Title II of Division I of the 
Consolidated Appropriations Act, 2005 (Public Law 108-447, 118 Stat. 
2809, approved December 8, 2004), to expressly provide that a violation 
by ``any person'' of a regulatory agreement that applies to ``a nursing 
home, intermediate care facility, board and care home, assisted living 
facility, or hospital whose mortgage is or, at the time of the 
violations, was insured or held by the Secretary under title II of the 
National Housing Act'' is subject to the double damages provisions of 
12 U.S.C. 1715z-4a (See 118 Stat. 3320, and 12 U.S.C. 1715z-
4a(a)(1)(A).) Section 220 further amended section 421 to include as 
``any person'' subject to double damages ``any nursing home lessee or 
operator'' and to permit an action for double damages ``to recover any 
assets or income used by a person in violation of * * * any applicable 
regulation.'' (See 12 U.S.C. 1715z-4a(a)(2)(D) and 12 U.S.C. 1715z-
4a(a)(1)(D).) Any assets or income used in violation of these 
regulatory requirements would be subject to double damages under 
section 421, as well as to all other remedies available to HUD, in the 
same way that use of assets or income in violation of a regulatory 
agreement is subject to such double damages and other remedies.
    New Sec.  232.1011 would address financial statements, which are 
also discussed in the proposed amendment to 24 CFR 5.801 below. This 
new section provides that, within 90 days following the end of each 
fiscal year, the owner must provide HUD with audited financial 
statements. These audited financial statements must be prepared and 
certified in accordance with the requirements of 24 CFR 5.801 and 
200.36. The operator must provide HUD with complete quarterly and year-
to-date financial reports based on an examination of the books and 
records of the operator's operations with respect to the healthcare 
facility.
    New Sec.  232.1013 would address leases and would provide that, 
except as provided in residential agreements in the normal course of 
business, an operator may not lease or sublease any portion of the 
project without HUD's prior written approval.
    New Sec.  232.1015 would address the role of management agents in a 
Section 232 project and would provide that an operator may, with the 
prior written approval of HUD, execute a management agent agreement 
setting forth the duties and procedures for managing matters related to 
the project. However, both the management agent and the management 
agent agreement must be acceptable to HUD and approved in writing by 
HUD. New Sec.  232.1015 also provides that an operator may not enter 
into any agreement that provides for a management agent to have rights 
to or claims on funds owed to the operator.
    New Sec.  232.1015 would also address fees paid by an operator or 
borrower to a management agent. This section provides that management 
agent agreements and the fees set forth therein

[[Page 26222]]

must be approved by HUD, and that the fee may not be renegotiated 
without HUD's approval once the management agent agreement has been 
executed. New Sec.  232.1015 also provides that HUD may approve an 
identity-of-interest management agent to be a management agent only if 
amounts paid to the identity-of-interest agent for goods and services 
provided to the healthcare facility are not in excess of amounts that 
would be charged by an independent agent and only if all goods and 
services benefit the project.
    New Sec.  232.1017 would address treatment of project revenue. New 
Sec.  232.1017(a) directs that an operator must deposit in a separate 
segregated account in the project's name all revenue the operator 
receives operating the healthcare facility, and that the account must 
be with a financial institution whose deposits are insured by an agency 
of the Federal Government, provided that, in order to minimize risk to 
the insurance fund, where balances are likely to exceed federal limits 
on insurance of such deposits, funds must be in depository institutions 
acceptable to Ginnie Mae.
    New Sec.  232.1017(b) provides that operators, whether owner-
operators or non-owner operators, must ensure that the healthcare 
facility maintain positive working capital at all times. If a quarterly 
financial statement demonstrates negative working capital, the operator 
must cure such violation or HUD may declare a default of the operator's 
regulatory agreement and pursue remedies.
    New Sec.  232.1019 reflects recognition of the highly regulated 
environment in which many Section 232 projects operate, and would 
require operators, unless HUD determines otherwise, to promptly notify 
the owner, mortgagee, and HUD of certain matters placing the facility's 
viable operation, and thus the mortgage security, at substantial risk. 
These matters include violations of permits and approvals, imposition 
of civil money penalties, or governmental investigations or inquiries 
involving fraud. HUD has determined that, given the responsibilities of 
servicing lenders with respect to risk mitigation of their residential 
care facility portfolio, it is appropriate that the lenders are timely 
provided with the same financial, census, and performance data (of the 
owner entity, as well as operator entity) that HUD is requiring 
borrowers and operators to routinely provide to HUD. Accordingly, this 
regulatory section provides that, concurrently with submitting to HUD 
financial data and census and performance data, the borrower and 
operator also provide this data to the servicing lender.
    In addition to the amendments made to the Section 232 regulations, 
HUD makes the following conforming amendments to 24 CFR parts 5, 200, 
and 207.

B. Uniform Financial Reporting Standards (24 CFR Part 5; Sec.  5.801)

    This proposed rule would amend the reporting requirements of 24 CFR 
5.801 to include operators of projects with mortgages insured or held 
by HUD under the Section 232 program as entities that must submit 
financial reports. Borrowers are currently subject to this regulatory 
reporting requirement. HUD has determined that the audited financial 
statements of a borrower/owner are not sufficient to assess the 
financial status of a Section 232 project, because the viability of the 
project is heavily dependent on the operator's financial performance. 
HUD must also receive and review the financial statements of the 
operator, as may be applicable, for an accurate assessment of the 
project's financial status.
    This proposed rule would, therefore, require owners to submit 
audited financial statements on an annual basis and would require 
operators to submit financial statements quarterly, covering separately 
the most recent quarter and the fiscal year to date. Quarterly and 
year-to-date financial statements are appropriate for operators for a 
number of reasons. First, they provide much more timely notice of 
operator financial weaknesses and trends than annual statements would 
provide. The timeliness is further enhanced in that the operator 
statements may be operator-certified rather than audited, allowing the 
operator to provide them much more promptly at the end of a reporting 
period. With respect to the skilled nursing facilities (of which a 
large portion of HUD's residential care facility portfolio is 
comprised), much of the information is also furnished in Medicare and 
Medicaid Cost Reports to fulfill other government obligations and serve 
as a basis for reimbursement, a practice that provides an additional 
check on accuracy.
    This proposed rule also amends the reporting requirements with 
respect to facilities insured under Section 232, by specifying that the 
financial statements being submitted to HUD must be concurrently 
submitted to the servicing lender. Given the servicing lenders' 
responsibilities with respect to risk mitigation of their residential 
care facility portfolio, and given the difficulty that some lenders 
have in obtaining financial data related to the facility, it is 
appropriate that the lenders be timely provided the same financial data 
(of the owner entity, as well as the operator entity) that HUD is 
requiring borrowers and operators to routinely provide to HUD. Both 
owner and operator financial reporting requirements would apply 
beginning with the year in which the final rule following this proposed 
rule becomes effective.

C. Introduction to FHA Programs: Physical Condition of Multifamily 
Properties (Part 200, Subpart P)

    Section 200.855(c) of HUD's regulations (24 CFR 200.855(c)), which 
addresses timing of inspections, would narrow and streamline the scope 
of Section 232 facilities that are routinely inspected by the Real 
Estate Assessment Center (REAC). In particular, facilities such as 
assisted living facilities and board and care facilities would be 
subject to routine REAC inspections unless the state or local 
government had a reliable and adequate inspection system in place. The 
remainder of the Section 232 properties, and properties that are 
routinely surveyed pursuant to regulations of the Centers for Medicare 
and Medicaid Services, would be inspected only when and if HUD 
determined, on a case-by-case basis and on the basis of information 
received, that inspection of such facility is needed to assure 
protection of residents or the adequate preservation of the project. 
This amendment would help assure that facilities surveyed frequently by 
state regulatory agencies, for physical condition matters related to 
resident care and safety, are not subject to duplicative inspections. 
HUD- and FHA-approved mortgagees now have ready electronic access to 
the results of state agency inspections conducted pursuant to 
requirements of the Centers for Medicare and Medicaid Services.

D. Multifamily Housing Mortgage Insurance (Part 207)

Contract Rights and Obligations (Subpart B)
    Subpart B of the part 232 regulations addresses contract rights and 
obligations and the rights and duties of the mortgagee under the 
contract of insurance.
    HUD is taking this opportunity to make changes to HUD's regulations 
in this subpart affecting the Section 232 programs. These proposed 
changes alter several of the amendments to the multifamily regulations 
adopted last spring. (See 76 FR 24363 May 11, 2011, HUD Multifamily 
Rental Projects: Regulatory Revisions.)

[[Page 26223]]

    Section 207.255, ``Defaults for purposes of insurance claim,'' 
includes language defining the date of defaults. This proposed rule 
revises Sec.  207.255(a)(4) by clarifying the dates on which certain 
monetary and other defaults occur.
    This proposed rule modifies Sec.  207.258, ``Insurance claim 
requirements,'' by deleting in paragraph (a)(2) a parenthetical 
expression.
    This proposed rule also modifies Sec.  207.258(b)(1)(i) by 
clarifying the time period within which a mortgagee may elect to assign 
a mortgage to the Commissioner.

E. Costs and Benefits of Proposed Revisions to the Section 232 Program 
Regulations

    As discussed in this preamble, this proposed rule updates HUD's 
Section 232 program regulations similar to the 2011 updates that were 
made to HUD's multifamily rental project regulations and accompanying 
closing documents. The revisions proposed by this rule update the 
Section 232 regulations to reflect existing practices in financing and 
refinancing healthcare facilities, and to decrease risk to the program 
due to outdated regulations and the need for greater accountability by 
healthcare facility operators. Key changes highlighted in the preamble 
include requiring borrowers to establish a long term debt-service 
reserve account, requiring operators to submit quarterly and year-to-
date self-certified financial reports, and reducing duplicative 
physical inspections.
    The valued benefits from fewer physical inspections, and the costs 
from increased financial reporting and the opportunity cost of the debt 
service reserve fund, each total less than $1 million. Unvalued 
benefits include uninterrupted services of healthcare facilities, which 
otherwise would close due to foreclosure. Transfers from avoided claim 
payments total $13 million. The total costs, benefits, and transfers of 
this rule will not in any year exceed the $100 million threshold set by 
Executive Order 12866 (Regulatory Planning and Review). Therefore, the 
rule is not economically significant.
    The risk mitigation requirements proposed by this rule are 
necessary due to the combination of two particular risks facing 
healthcare facilities. First, similar to multifamily residential 
properties, the owner usually relies on a separate entity to operate 
the facility. The performance of the operator is crucial to the 
mortgagor's ability to repay the mortgage. Since the operator may not 
be known to FHA at the time of underwriting, or may change during the 
term of the mortgage, the risk of operator deficiency is difficult to 
assess. Second, unlike residential or other commercial properties, the 
value of a poorly maintained and operated facility can decrease 
dramatically because the building was designed specifically for 
healthcare use and may not retain the mortgaged value at resale due to 
a lack of alternative uses. Thus, FHA may face more uncertainty when 
selling foreclosed healthcare properties than foreclosed residential 
properties. This rule therefore proposes requirements intended to 
identify operator deficiencies earlier and ensure that funds are 
available if financial problems arise.
    The rule also proposes to require the borrower to establish a long-
term debt service reserve fund. Although FHA currently requires owners 
of new construction projects to maintain a reserve fund until 
sustainable occupancy is reached, usually one to two years, this new 
requirement would require a reserve fund to be maintained throughout 
the life of the mortgage and used in case of operator deficiency. Of 
the 30 insurance claims from 2009 to mid-2011, operator deficiencies 
played a role in the property's performance demise in 23. Further, 
these claims were distributed widely over age of loan, not simply in 
the first few years, indicating the need for a reserve fund over the 
life of the mortgage. The maintenance of a reserve is to decrease the 
number of nonperforming mortgages by providing additional time to 
resolve operator deficiencies.
    Based on FHA's experience, a reserve fund can be an important 
source for debt service payments during a period of instability. Thus, 
the reserve can delay the point at which a lender finds it necessary to 
file a claim, providing extra time for the parties to restructure and 
stabilize a project and avoid a claim to HUD. FHA has accepted claims 
where borrowers were pursuing workouts, but stability could not be 
achieved prior to the lenders' expenses becoming too burdensome to 
sustain. The extra time afforded by a debt service reserve makes 
avoiding a claim more likely under such scenarios. In its analysis of 
2009, 2010, and early 2011 claims, HUD found that 5 out of 30 projects 
brought to claim may have benefited from the additional time provided 
by a debt service reserve. Finally, as an additional offset for 
borrowers to the added requirement of debt service reserve, the rule 
also provides greater flexibility to borrowers in the making of 
distributions and use of surplus cash. Assuming that, as a result of 
the rule, 2 fewer claims were paid annually, FHA would save $13 million 
per year, if projected based on the average unpaid balance (UPB) of 
assigned Section 232 mortgages from 2009-2011, which was $6.5 million. 
In the absence of these claim payments, FHA could pass these savings on 
to its mortgagors and thus such savings are best viewed as a transfer 
between borrowers.
    The amount of funds required to be initially placed in the debt 
service reserve fund, and the minimum long-term balance, will be 
determined during underwriting. FHA estimates that on average, a 
borrower's monthly debt service will increase by approximately 1.5 
percent. Based on an expected average of $3.4 billion annually in the 
value of new mortgage endorsements, borrowers would be required, in 
aggregate, to place and maintain $51 million in the fund. The cost to 
borrowers is the lower return from restricting this amount to the 
reserve fund compared to other investment options. This opportunity 
cost of holding these funds in a reserve account is, therefore, 
calculated as the difference between the average market rate of return 
and the risk-free interest rate. The average market rate is represented 
by the real annualized return of the S&P 500 between 1990 and 2011, 
which equals 5.37 percent. The risk-free interest rate is the average 
10-year Treasury rate between 1990 and 2011, which equals 2.6 percent. 
The opportunity cost of holding the estimated funds in a reserve fund 
totals $141,270.
    This rule also requires operators to submit annual and year-to-date 
financial reports. Currently, the borrower, but not the operator, is 
required to provide audited financial statements. Although submission 
of the operator's financial reports is a new requirement, the expense 
of such reports is mitigated by allowing the operator to submit self-
certified, rather than audited statements. Moreover, the required 
operator financial information is data that operators need to maintain 
in the normal course of business in order to monitor and manage their 
own operations effectively. FHA estimates this will require 
approximately 10,000 employee hours annually to prepare and submit 
these reports (2,500 respondents, 4 reports per year and 1 hour to 
generate each report). The median wage of the employees who prepare 
these reports is approximately $75 per hour. Thus, the total cost of 
complying with this requirement would be $750,000.
    Finally, this rule exempts facilities from FHA physical inspection 
requirements if they are inspected by

[[Page 26224]]

state or local agencies in order to eliminate duplicative inspections. 
FHA estimates that, as a result, approximately 1,391 inspections would 
be avoided per year. The estimated cost per inspection totals $475, 
which would mean a total annual inspection savings of $660,725.
    In addition to the valued benefits, this rule also provides 
benefits that are less easily quantified. As explained above, HUD 
expects the reserve fund and financial reporting requirements to 
decrease the number of claims paid. While some troubled facilities may 
be stabilized and continue operating, at this stage of delinquency, 
they are often forced to close. Thus, there is a disruption of 
healthcare services to the community and costs to moving residents from 
one facility to another. In smaller communities, there are fewer 
alternatives for facility residents, and the benefits of avoiding 
foreclosure are greater as residents may be without needed services for 
a long period. In larger cities, existing facilities may be able to 
absorb the additional demand fairly quickly. In both of these cases, 
however, residents bear costs associated with transferring between 
facilities. Although the avoided loss or interruption of services is 
difficult to quantify and varies by city, the avoided loss or 
interruption of services is an important benefit that this rule is 
trying to achieve.

                             Summary of Valued Annual Benefits, Costs, and Transfers
----------------------------------------------------------------------------------------------------------------
                                                                   Benefits          Costs          Transfers
----------------------------------------------------------------------------------------------------------------
Debt Service Reserve Fund....................................        $660,725         $141,270      $13,000,000
Financial Reporting..........................................  ...............         750,000   ...............
Physical Inspections.........................................
                                                              --------------------------------------------------
    Total....................................................         660,725          891,270       13,000,000
----------------------------------------------------------------------------------------------------------------

III. Findings and Certifications

Executive Order 13563, Regulatory Review

    The President's Executive Order (EO) 13563, entitled ``Improving 
Regulation and Regulatory Review,'' was signed by the President on 
January 18, 2011, and published on January 21, 2011, at 76 FR 3821. 
This EO requires executive agencies to analyze regulations that are 
``outmoded, ineffective, insufficient, or excessively burdensome, and 
to modify, streamline, expand, or repeal them in accordance with what 
has been learned.'' Section 4 of the EO, entitled ``Flexible 
Approaches,'' provides, in relevant part, that where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, each agency shall identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public. As discussed earlier in this preamble, the 
Section 232 regulations have not been updated since 1996. HUD submits 
that the changes proposed by this rule to the Section 232 regulations 
are consistent with the EO's directions. As the preceding section 
discussed, the changes proposed by this rule will modernize the Section 
232 program, reduce burden by eliminating duplicative physical 
inspections, providing flexibility to borrowers in the making of 
distributions and use of surplus cash, and increasing accountability to 
strengthen the program, thereby helping it ensure that it remains 
viable for the financing of healthcare facilities.

Regulatory Flexibility Act

    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.
    This rule is directed to creating transparency in HUD's Section 232 
program by, codifying existing and longstanding provisions imposed on a 
Section 232 borrower, and strengthening this program through stronger 
risk management practices, such as making operators more accountable 
for their role in administering Section 232 healthcare facilities. As 
noted under the discussion of EO 13563, this rule proposes amendments 
that will enhance HUD's oversight ability, while minimizing the burdens 
on private actors, to the benefit of participants and facility clients. 
Additionally, by clarifying and codifying existing requirements, the 
rule makes it easier for borrowers and operators to comply with their 
legal obligations. Through this rule, the viability of the Section 232 
program and HUD's enforcement authority are increased, and waste, 
fraud, and abuse are reduced.
    Approximately 3,343 of the anticipated annual participants in the 
Section 232 program are small entities, including approximately 2,500 
entities involved in nursing homes, 725 entities involved in assisted 
living facilities, and 70 other entities. (The total figure exceeds the 
number of facilities involved, because a single transaction many 
involve distinct legal entities serving as the operator and owner.) The 
changes required by this rule do not impose significant economic 
impacts on these small entities or otherwise adversely 
disproportionately burden such small entities. The reporting 
requirements of this rule have been tailored to complement normal 
business accounting practices. Accordingly, the undersigned certifies 
that this rule will not have a significant economic impact on a 
substantial number of small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made, 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)). That finding is available for 
public inspection between the hours of 8 a.m. and 5 p.m. weekdays in 
the Regulations Division, Office of General Counsel, Department of 
Housing and Urban Development, 451 Seventh Street SW., Room 10276, 
Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, please schedule an appointment to review the 
finding 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

[[Page 26225]]

number via TTY by calling the Federal Relay Service at 800-877-8339.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either: (1) Imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (2) preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule will not have federalism 
implications and would not impose substantial direct compliance costs 
on state and local governments or preempt state law within the meaning 
of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (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 on the private sector. This proposed rule does 
not impose any federal mandates on any state, local, or tribal 
governments, or on the private sector, within the meaning of UMRA.

Information Collection Requirements

    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In 
accordance with the Paperwork Reduction Act, an agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information, unless the collection displays a currently valid OMB 
control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                     Number of     average time      Estimated
                Section reference                    Number of    responses  per        for        annual burden
                                                    respondents      respondent     requirement     (in hours)
                                                                                    (in hours)
----------------------------------------------------------------------------------------------------------------
24 CFR 5.801(c)(4) Financial information........           2,500               4               1          10,000
24 CFR 232.11 HUD written approval..............             100               1               1             100
24 CFR 232.1005 HUD written approval............              25               1               1              25
24 CFR 232.1007 HUD approval....................              25               1               1              25
24 CFR 232.1009 HUD written approval............              50               1               1              50
24 CFR 232.1011 Financial statement.............           2,500               1              60         150,000
24 CFR 232.1013 Specifications for lease                      25               1               1              25
 agreement, HUD written approval................
24 CFR 232.1015 HUD written approval............              25               1               1              25
24 CFR 232.1017 HUD written approval............              25               1               1              25
24 CFR 232.1019 HUD written approval............           1,750               2             .50           1,750
                                                 ---------------------------------------------------------------
    Totals......................................           7,025              14            68.5         162,025
----------------------------------------------------------------------------------------------------------------

     In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agency concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of HUD, including 
whether the information will have practical utility;
    (2) Evaluate the accuracy of HUD's estimate of the burden of the 
proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology; e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number (FR-5465-P-01) and must be 
sent to:
    HUD Desk Officer, Office of Management and Budget, New Executive 
Office Building, Washington, DC 20503. Fax number: 202-395-6947. and
    Reports Liaison Officer, Office of Housing, Department of Housing 
and Urban Development, 451 Seventh Street SW., Room 9116, Washington, 
DC 20410-8000.
    Interested persons may submit comments regarding the information 
collection requirements electronically through the Federal eRulemaking 
Portal at https://www.regulations.gov. HUD strongly encourages 
commenters to submit comments electronically. Electronic submission of 
comments allows the commenter maximum time to prepare and submit a 
comment, ensures timely receipt by HUD, and enables HUD to make them 
immediately available to the public. Comments submitted electronically 
through the https://www.regulations.gov Web site can be viewed by other 
commenters and interested members of the public. Commenters should 
follow the instructions provided on that site to submit comments 
electronically.

List of Subjects

24 CFR Part 5

    Administrative practice and procedure, Aged, Claims, Grant 
programs--housing and community development, Individuals with 
disabilities, Intergovernmental relations, Loan programs--housing and 
community development, Low and moderate income housing, Mortgage 
insurance, Penalties, Pets, Public housing, Rent subsidies, Reporting 
and recordkeeping requirements, Social Security, Unemployment 
compensation, Wages.

24 CFR Part 200

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

24 CFR Part 207

    Mortgage insurance--Nursing homes, Intermediate care facilities, 
Board and

[[Page 26226]]

care homes, and Assisted living facilities.

24 CFR Part 232

    Fire prevention, Health facilities, Loan programs--health, Loan 
programs--housing and community development, Mortgage insurance, 
Nursing homes, Reporting and recordkeeping requirements.

    Accordingly, parts 5, 200, 207, and 232 of title 24 of the Code of 
Federal Regulations are proposed to be amended as follows:

PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS

    1. The authority citation for 24 CFR part 5 continues to read as 
follows:

    Authority: 42 U.S.C. 1437a, 1437c, 1437d, 1437f, 1437n, 3535(d), 
and Sec. 327, Pub. L. 109-115, 119 Stat. 2936.

    2. Amend Sec.  5.801 to:
    a. Add paragraph (a)(6),
    b. Revise the first sentence of the introductory text of paragraph 
(b),
    c. Add paragraph (b)(4),
    d. Revise the heading of paragraph (c),
    e. Add paragraph (c)(4), and
    f. Add paragraph (d)(4) to read as follows:


Sec.  5.801  Uniform financial reporting standards.

    (a) * * *
    (6) Operators of projects with mortgages insured or held by HUD 
under section 232 of the Act (Mortgage Insurance for Nursing Homes, 
Intermediate Care Facilities, Board and Care Homes).
    (b) Entities (or individuals) to which this subpart is applicable 
must provide to HUD such financial information as required by HUD. Such 
information must be provided on an annual basis, except as required 
more frequently under paragraph (c)(4) of this section. * * *
* * * * *
    (4) With respect to financial reports relating to properties 
insured under Section 232 of the Act, concurrently with submitting the 
information to HUD, this information must also be submitted to the 
mortgagee in a format and manner prescribed by the Secretary.
    (c) Filing of financial reports. * * *
    * * *
    (4) For entities listed in paragraph (a)(6) of this section, the 
financial information to be submitted to HUD in accordance with 
paragraph (b) of this section must be submitted to HUD on a quarterly 
and fiscal-year-to-date basis, within 30 days of the end of each 
quarterly reporting period. The financial statements submitted pursuant 
to paragraph (a)(6) of this section may, at the operator's option, be 
operator-certified rather than audited, provided, however, that if the 
operator is also the borrower, then that entity's obligation to submit 
an annual audited financial statement within 90 days of its fiscal year 
end (in addition to its obligation as an operator to submit financial 
information on a quarterly and year-to-date basis) remains and is not 
obviated. Additionally, if HUD has reason to believe that a particular 
operator's operator-certified statements may be unreliable or are 
presented in a manner that is inconsistent with Generally Accepted 
Accounting Principles, HUD may, on a case-by-case basis, require 
audited financial statements from the operator. Additionally, with 
respect to facilities with FHA-insured or HUD-held Section 232 
mortgages, HUD may request more frequent financial statements from the 
borrower, as specified under (a)(4)(x), and/or the operator on a case-
by-case basis when the circumstances warrant. Nothing in the 
regulations in this section limits HUD's ability to obtain further or 
more frequent information when appropriate pursuant to the applicable 
regulatory agreement.
    (d) * * *
    (4) Entities described in paragraph (a)(6) of this section must 
comply with the requirements of this section with respect to fiscal 
years ending [a date of one year after the effective date of the final 
rule to be inserted at the final rule stage] and later.
* * * * *

PART 200--INTRODUCTION TO FHA PROGRAMS

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

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

    4. In 200.855, add a new paragraph (c)(5) to read as follows:


Sec.  200.855  Physical condition standards and physical inspection 
requirements.

* * * * *
    (c) * * *
    (5)(i) For Assisted Living Facilities and Board and Care 
Facilities, the initial inspection required under this subpart will be 
conducted within the same time restrictions set forth in paragraph 
200.855(c)(4) immediately above, and any further inspections will be 
conducted at a frequency determined consistent with Sec.  200.857, and
    (ii) For any other Section 232 facilities, the inspection will be 
conducted only when and if HUD determines, on the basis of information 
received, such as through a complaint, site inspection, or referral by 
a state agency, on a case-by-case basis, that inspection of a 
particular facility is needed to assure protection of the residents or 
the adequate preservation of the project.

PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE

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

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

    6. In Sec.  207.255(a)(4) introductory text, remove the reference 
to ``paragraph (b)'' and add in its place a reference to ``paragraph 
(a)''.
    7. In Sec.  207.258 revise paragraphs (a)(2) introductory text and 
(b)(1)(i) to read as follows:


Sec.  207.258  Insurance claim requirements.

    (a) * * *
    (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:
* * * * *
    (b) * * *
    (1) * * *
    (i) 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.
* * * * *

PART 232--MORTGAGE INSURANCE FOR NURSING HOMES, INTERMEDIATE CARE 
FACILITIES, BOARD AND CARE HOMES, AND ASSISTED LIVING FACILITIES

    8. The authority citation for 24 CFR part 232 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715w; 42 U.S.C. 3535(d).


[[Page 26227]]


    9. Throughout part 232, the word ``mortgagor'' is revised to read 
``borrower'' wherever it appears.
    10. Revise Sec.  232.1 to read as follows:


Sec.  232.1  Eligibility requirements.

    All of the requirements, except Sec.  200.5, set forth in 24 CFR 
part 200 subpart A, apply to project mortgages insured under Section 
232 of the National Housing Act (12 U.S.C. 1715w), as amended.
    11. Redesignate Sec.  232.3 as Sec.  232.7 and add a new Sec.  
232.3 to read as follows:


Sec.  232.3  Eligible borrower.

    For mortgages originated after [a date of one year after the 
effective date of the final rule to be inserted at the final rule 
stage], the borrower shall be a single asset 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 
borrower entity under such circumstances, terms, and conditions 
determined and specified as acceptable to the Commissioner.
    12. Add new Sec. Sec.  232.9 and 232.11 to read as follows:


Sec.  232.9  Mortgaged property.

    Mortgaged property includes all of Borrower's interests in 
property, real, personal, or mixed, covered by the mortgage or 
mortgages securing the note endorsed for insurance or held by the 
Secretary, as further defined in the mortgage documents.


Sec.  232.11  Establishment and maintenance of long-term debt service 
reserve account.

    To be eligible for insurance under this part, and except with 
respect to Supplemental Loans to Finance Purchase and Installation of 
Fire Safety Equipment (subpart C of this part), the borrower must 
establish at final closing and maintain throughout the term of the 
mortgage a long-term debt service reserve account. This long-term debt 
service reserve account may be financed as part of the initial mortgage 
amount, provided that the maximum mortgage amount as otherwise 
calculated is not thereby exceeded. The amount required to be initially 
placed in the long-term debt service reserve account and the minimum 
long-term balance to be maintained in that account will be determined 
during underwriting and separately identified in the firm commitment. 
Although HUD may, when appropriate to avert a mortgage insurance claim, 
permit the balance to fall below the required minimum long-term 
balance, the borrower may not take any distribution of mortgaged 
property except when both the long-term debt service reserve account is 
funded at the minimal long-term level and such distribution is 
otherwise permissible.

Subpart B--Contract Rights and Obligations

    13. Revise Sec.  232.251 to read as follows:


Sec.  232.251  Other applicable regulations.

    (a) Cross-reference. (1) All of the provisions, except Sec.  
207.258b, of 24 CFR part 207, subpart B, relating to mortgages insured 
under section 207 of the National Housing Act, apply to mortgages 
insured under section 232 of the Act.
    (2) For the purposes of this subpart, all references in 24 CFR part 
207 to section 207 of the Act shall be construed to refer to section 
232 of the Act.
    (3) Unless otherwise specified in this part, the regulations in 
this subpart B apply to all mortgages insured under section 232 of the 
Act.
    (b) [Reserved]
    14. Add new Sec. Sec.  232.254 and 232.256, to read as follows:


Sec.  232.254  Withdrawal of project funds, including for repayments of 
advances from the borrower, operator, or management agent.

    (a) General. Borrower may make and take distributions of mortgaged 
property, as set forth in the mortgage loan transactional documents, to 
the extent and as permitted by the law of the applicable jurisdiction, 
provided that, upon each calculation of borrower surplus cash, which 
calculation shall be made no less frequently than semi-annually, 
borrower must demonstrate positive surplus cash, or to the extent 
surplus cash is negative, repay any distributions taken during such 
calculation period within 30 days or within such shorter period as may 
be required by HUD. Borrower shall be deemed to have taken 
distributions to the extent that surplus cash is negative unless, in 
conjunction with the calculation of surplus cash, borrower provides to 
HUD documentation evidencing, to HUD's reasonable satisfaction, a 
lesser amount of total distributions. To the extent that the provisions 
of this paragraph (a) are inconsistent with the provisions in a 
borrower's existing transactional loan documents, including without 
limitation any HUD-required regulatory agreement, the provisions of the 
transactional loan documents shall apply.
    (b) Definition. Borrower surplus cash means any cash remaining in 
the Borrower's accounts after:
    (1) The payment of:
    (i) All sums due or currently required to be paid under the terms 
of any mortgage or note insured or held by the Secretary;
    (ii) All amounts required to be deposited in the project's reserve 
fund for replacements, long-term debt service reserve account, or 
residual receipts account; and
    (iii) All project obligations of the borrower other than the 
insured mortgage, unless funds for payment are set aside or deferment 
of payment has been approved by the Secretary; and
    (2) The segregation of:
    (i) An amount equal to the aggregate of all special funds required 
to be maintained by the project, including the long-term debt service 
escrow account;
    (ii) Any tenant security deposits held; and
    (iii) All other accrued items payable by borrower within 30 days 
after the end of the annual or semi-annual fiscal period for which 
surplus cash is calculated.


Sec.  232.256  Leases.

    A borrower may not lease any portion of the project or enter into 
any other agreement with an operator without HUD's prior written 
consent.
    15. Revise the introductory text of Sec.  232.903, and Sec.  
232.903(c) and (d) to read as follows:


Sec.  232.903  Maximum mortgage limitations.

    Notwithstanding the maximum mortgage limitations set forth in Sec.  
200.15 of this chapter, a mortgage within the limits set forth in this 
section shall be eligible for insurance under this subpart.
* * * * *
    (c) Project to be refinanced--additional limit. (1) In addition to 
meeting the requirements of paragraphs (a) and (b) of this section, if 
the Project is to be refinanced by the insured mortgage, the maximum 
mortgage amount must not exceed the cost to refinance the existing 
indebtedness. For the purposes of this requirement:
    (i) The Project shall not have changed ownership, or
    (ii) The Project shall have been sold to a purchaser who has an 
identity of interest with the seller (as defined by the Commissioner).
    (2) The existing indebtedness will consist of the following items, 
the eligibility and amounts of which must be determined by the 
Commissioner:
    (i) The amount required to pay off the existing indebtedness;

[[Page 26228]]

    (ii) The amount of the initial deposit for the reserve fund for 
replacements;
    (iii) Reasonable and customary legal, organization, title, and 
recording expenses, including mortgagee fees under Sec.  232.15;
    (iv) The estimated repair costs, if any;
    (v) Architect's and engineer's fees, municipal inspection fees, and 
any other required professional or inspection fees;
    (vi) The amount of any debt service reserve account required by the 
Commissioner.
    (d) Project to be acquired--additional limit. In addition to 
meeting the requirements of paragraphs (a) and (b) of this section, if 
the project is to be acquired by the borrower and the purchase price is 
to be financed with the insured mortgage, the maximum amount must not 
exceed 85 percent for a profit-motivated borrower and 90 percent for a 
private nonprofit borrower of the cost of acquisition as determined by 
the Commissioner. The cost of acquisition shall consist of the 
following items, to the extent that each item (except for item numbered 
(1)) is paid by the purchaser separately from the purchase price. The 
eligibility and amounts of these items must be determined in accordance 
with standards established by the Commissioner.
    (1) Purchase price is indicated in the purchase agreement;
    (2) An amount for the initial deposit to the reserve fund for 
replacements;
    (3) Reasonable and customary legal, organizational, title, and 
recording expenses, including mortgagee fees under Sec.  232.15;
    (4) The estimated repair cost, if any;
    (5) Architect's and engineer's fees, municipal inspection fees, and 
any other required professional or inspection fees;
    (6) The amount of any debt service reserve account required by the 
Commissioner.
    16. Add new subpart F to read as follows:
Subpart F--Eligible Operators and Facilities and Restrictions on Fund 
Distributions
Sec.
232.1001 Scope.
232.1003 Definitions.
232.1005 Treatment of project operating accounts.
232.1007 Operating expenses.
232.1009 Payments to borrower principals prohibited.
232.1011 Financial reports.
232.1013 Leases.
232.1015 Management agents.
232.1017 Restrictions on deposit, withdrawal, and distribution of 
funds, and repayment of advances.
232.1019 Prompt notification to HUD and mortgagee of circumstances 
placing the value of the security at risk.

Subpart F--Eligible Operators and Facilities and Restrictions on 
Fund Distributions


Sec.  232.1001  Scope.

    This subpart establishes requirements applicable to the operators 
of healthcare facilities and the facilities under this part.


Sec.  232.1003  Definitions.

    The following definitions apply throughout this part.
    Identity-of-interest projects refers to those projects that are 
operated by a licensed operator and/or managed by a management agent 
who shares an identity of interest with the ownership entity.
    Management agent means an entity that, pursuant to a contract with 
the operator or borrower, manages matters related to the project, 
subject to limitations set forth in Sec.  232.1015.
    Operator means a single asset entity acceptable to the 
Commissioner, and shall possess the powers necessary and incidental to 
operating the healthcare facility, except that the Commissioner may 
approve a non-single asset entity under such circumstances, terms, and 
conditions determined and specified as acceptable to the Commissioner.
    Owner operator means an owner who operates its own project and does 
not lease the project or otherwise contract with an eligible operator. 
In that instance, the borrower entity and the operating entity are the 
exact same legal entity, and the owner operator must comply with 
regulatory provisions governing the use of funds for both operators and 
borrowers in Sec.  232.254, Sec.  232.1005, and Sec.  232.1017.
    Project means any and all assets of whatever nature or wherever 
situated related to the insured mortgage loan, including without 
limitation the mortgaged property, any site improvements, and any 
collateral owned by operators securing the insured mortgage loan.


Sec.  232.1005  Treatment of project operating accounts.

    (a) All accounts deriving from the operation of the property, 
including operator accounts and including all funds received from any 
source or derived from the operation of the facility, are project 
assets subject to control under the insured mortgage loan's 
transactional documents, including, without limitation, the operator's 
regulatory agreement. Funds generated by the operation of the 
healthcare facility shall be deposited into a federally insured bank 
account in the name of the single asset operator of the facility, 
provided that an account held in an institution acceptable to the 
Government National Mortgage Association may have a balance that 
exceeds the amount to which such insurance is limited. If the borrower 
is not also the operator, any of owner's project-related funds shall be 
deposited into a federally insured bank account in the name of the 
single asset borrower.
    (b) An operator must not allow funds attributable to the healthcare 
facility to be commingled with funds attributable to another healthcare 
facility or any other business unless approved by HUD. Any centralized 
accounting system involving project funds must have prior HUD approval 
and must clearly delineate which portion of the funds in an account are 
attributable to the particular facility.
    (c) Except to the extent that the healthcare facility maintains 
positive working capital, an operator may not advance or otherwise use 
funds attributable to the operator's business at a project under this 
part to pay expenses attributable to any other project or business 
without the advance written approval of HUD.


Sec.  232.1007  Operating expenses.

    Goods and services purchased or acquired in connection with the 
Project shall be reasonable and necessary for the operation or 
maintenance of the Project, and the costs of such goods and services 
incurred by the borrower or operator shall not exceed amounts normally 
paid for such goods or services in the area where the services are 
rendered or the goods are furnished, except as otherwise approved by 
HUD.


Sec.  232.1009  Payments to borrower principals prohibited.

    No principal of the borrower entity may receive a salary or any 
payment of funds derived from operation of the project, other than from 
permissible distributions, except as approved by HUD.


Sec.  232.1011  Financial reports.

    Within 90 days following the end of each entity's fiscal year, the 
borrower must provide HUD an audited annual financial report based on 
an examination of its books and records, in such form and substance 
required by HUD in accordance with 24 CFR 5.801 and 200.36. Operators 
must submit financial statements quarterly within 30 days of the date 
of the end of each fiscal quarter, setting forth both quarterly and

[[Page 26229]]

fiscal year-to-date information in accordance with 24 CFR 5.801(c)(4).


Sec.  232.1013  Leases.

    Except to enter into resident agreements in the standard course of 
operating the healthcare facility, an operator may not lease or 
sublease any portion of the project without HUD's prior written 
approval.


Sec.  232.1015  Management agents.

    (a) An operator or borrower may, with the prior written approval of 
HUD, execute a management agent agreement setting forth the duties and 
procedures for matters related to the management of the project. Both 
the management agent and the management agent agreement must be 
acceptable to HUD and approved in writing by HUD.
    (b) An operator or borrower may not enter into any agreement that 
provides for a management agent to have rights to or claims on funds 
owed to the operator.
    (c) Management agent fees may not be renegotiated without HUD's 
written approval once the management agent agreement has been executed.
    (d) HUD may approve an identity of interest between a management 
agent and a borrower or operator only to the extent that the goods and 
services provided benefit the project and if the operator clearly 
establishes that the amounts paid to the identity-of-interest 
management agent for goods and services provided to the healthcare 
facility are not in excess of amounts that would be charged by an 
independent management agent.


Sec.  232.1017  Restrictions on deposit, withdrawal, and distribution 
of funds, and repayment of advances.

    (a) Deposit of funds. An operator must deposit all revenue the 
operator receives directly or indirectly in connection with the 
operation of the healthcare facility in a separate, segregated account. 
The account must be with a financial institution whose deposits are 
insured by an agency of the Federal Government, provided that an 
account held in an institution acceptable to the Government National 
Mortgage Association may have a balance that exceeds the amount to 
which such insurance is limited.
    (b) Withdrawals of funds. Operators, whether or not an operator is 
also the borrower, shall at all times maintain positive working capital 
for the healthcare facility. If a quarterly financial statement, 
required pursuant to Sec.  232.1011, demonstrates negative working 
capital for the healthcare facility, the operator must cure such 
violation or HUD may pursue such remedies as set forth in the insured 
mortgage loan's transactional documents.


Sec.  232.1019  Prompt notification to HUD and mortgagee of 
circumstances placing the value of the security at risk.

    (a) HUD and the mortgagee shall be informed of any notification of 
any failure to comply with governmental requirements including the 
following:
    (1) The licensed operator of a project shall promptly provide the 
mortgagee and HUD with a copy of any notification that has placed the 
licensure, a provider funding source, and/or the ability to admit new 
residents at risk, and any responses to those notices, provided that 
HUD may determine certain information to be exempt from this 
requirement based upon severity level. Such required information shall 
include, but is not limited to, the following types of notices and 
responses:
    (i) The operator shall deliver to HUD and the mortgagee 
electronically, within 48 hours after the date of receipt, copies of 
any and all notices, reports, surveys, and other correspondence 
(regardless of form) received by the operator from any governmental 
authority that includes any statement, finding, or assertion that:
    (A) The operator or the project is or may be in violation of (or 
default under) any of the permits and approvals or any governmental 
requirements applicable thereto;
    (B) Any of the permits and approvals is to be terminated, limited 
in any way, or not renewed;
    (C) Any civil money penalty (other than a de minimis amount) is 
being or may be imposed; or
    (D) The operator or the project is subject to any governmental 
investigation or inquiry involving fraud.
    (ii) The operator shall also deliver to HUD and the mortgagee, 
simultaneously with delivery to any governmental authority, any and all 
responses given by or on behalf of the operator to any of the foregoing 
and shall provide to HUD and the mortgagee, promptly upon request, such 
additional information relating to any of the foregoing as HUD or the 
mortgagee may request. The receipt by HUD and/or the mortgagee of 
notices, reports, surveys, correspondence, and other information shall 
not in any way impose any obligation or liability on HUD, the 
mortgagee, or their respective agents, representatives, or designees to 
take (or refrain from taking) any action; and HUD, the mortgagee, and 
their respective agents, representatives, and designees shall have no 
liability for any failure to act thereon or as a result thereof.
    (2) The operator shall provide additional and ongoing information 
as requested by the borrower, mortgagee, or HUD pertaining to matters 
related to that risk. Controlling documents between or among any of the 
parties may provide further requirements with respect to such 
notification and communication.
    (b) This section is applicable to all operators on the effective 
date of this regulation.

    Dated: April 12, 2012.
Carol J. Galante,
 Acting Assistant Secretary for Housing--Federal Housing Commissioner .
[FR Doc. 2012-10690 Filed 5-2-12; 8:45 am]
BILLING CODE 4210-67-P