Section 542(c) Housing Finance Agencies Risk-Sharing Program: Revisions to Regulations, 12051-12062 [2016-04595]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 81, Number 45 (Tuesday, March 8, 2016)]
[Proposed Rules]
[Pages 12051-12062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04595]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 266

[Docket No FR-5881-P-01]
RIN 2502-AJ35


Section 542(c) Housing Finance Agencies Risk-Sharing Program: 
Revisions to Regulations

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

ACTION: Proposed rule.

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SUMMARY: Through the Section 542(c) HFA Risk-Sharing program, HUD 
enters into risk-sharing agreements with State and local housing 
finance agencies (HFAs) so that HFAs can provide more insurance and 
credit for multifamily loans. This proposed rule would amend existing 
regulations for the program so that they better align with policies for 
other HUD programs, reflect current industry and HUD practices, and 
conform to statutory amendments. Additionally, this proposed rule would 
provide HUD with greater flexibility in operating the Section 542(c) 
HFA Risk-Sharing program 0s,over time, and would provide more 
flexibility for certain HFAs accepting a greater share of the risk of 
loss on mortgages insured under the program. This proposed rule would 
also update references and terminology that are now outdated and 
clarify certain provisions.

DATES:  Comment Due Date: April 7, 2016.

ADDRESSES: Interested persons are invited to submit comments regarding 
this notice to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.

[[Page 12052]]

    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 this 
document.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m., weekdays, at 
the above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance 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 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Diana Talios, Office of Multifamily 
Production, Office of Housing, Department of Housing and Urban 
Development, 451 7th Street SW., Room 6156, Washington, DC 20410; 
telephone number (202) 402-7125 (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 800-877-
8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 542 of the Housing and Community Development Act of 1992 
(12 U.S.C. 1707 1715z-22) (Section 542) directs HUD to carry out 
programs through the Federal Housing Administration (FHA) to 
demonstrate the effectiveness of providing new forms of Federal credit 
enhancement for multifamily loans. Originally enacted as a pilot 
program, the Section 542(c) HFA Risk-Sharing program was made a 
permanent multifamily insurance program by section 235 of title II of 
Public Law 106-377,\1\ HUD's Fiscal Year 2001 appropriations act (FY 
2001 HUD Appropriations Act).
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    \1\ Approved October 27, 2000.
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    The purpose of the Section 542(c) HFA Risk-Sharing program is to 
provide credit enhancement for mortgages of multifamily housing 
projects whose loans are underwritten, processed, serviced, and 
disposed of by HFAs. HUD and HFAs share in the risk of the mortgage, 
which enables HFAs to provide more insurance and credit for multifamily 
loans. Under the program, qualified State and local HFAs may originate 
and underwrite affordable housing loans including new construction, 
substantial rehabilitation, refinancing, and housing for the elderly. 
HFAs may elect to share from 10 to 90 percent of the loss on a loan 
with HUD. In the event of a claim, the HFA reimburses HUD pursuant to 
terms of the risk-sharing agreement.
    HUD's regulations governing the Section 542(c) HFA Risk-Sharing 
program are set out in 24 CFR part 266. Part 266 was last updated in 
the year 2000 and is now outdated in certain respects.

II. This Proposed Rule

    HUD proposes to revise 24 CFR part 266 in order to update the 
regulations, to better align them with current HUD policies and 
industry practices, and to provide HUD and certain HFAs with 
flexibility to operate the Section 542(c) HFA Risk-Sharing program more 
efficiently.

A. Conforming Amendments

    This proposed rule would revise sections of part 266 to conform to 
Section 542(c), as it was amended by the FY 2001 HUD Appropriations 
Act. Specifically, this proposed rule would amend part 266 to remove 
references to the program being a pilot.
    Additionally, this proposed rule would amend the definition of 
affordable housing in Sec.  266.5 so that it more closely conforms to 
the statutory language of Section 542. Specifically, this proposed rule 
would amend the definition of ``affordable housing'' for the Section 
542 HFA Risk-Sharing program to mean a project that meets the 
requirements for a qualified low-income housing project under section 
42(g) of the Internal Revenue Code (26 U.S.C. title 26) (IRC).
    Currently, Sec.  266.5 specifies that affordable housing means a 
project in which 20 percent or more of the units are both rent-
restricted and occupied by families whose income is 50 percent or less 
of the area median income as determined by HUD, with adjustments for 
household size, or in which 40 percent \2\ or more of the units are 
both rent-restricted and occupied by families whose income is 60 
percent or less of the area median income as determined by HUD, with 
adjustments for household size. The existing definition also says that 
a residential unit is rent-restricted if the gross rent with respect to 
such unit does not exceed 30 percent of the imputed income limitation 
applicable to such unit.
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    \2\ Twenty five percent in New York City as a result of section 
142(d)(6) of the IRC establishing a special rule for projects 
located in a specified high cost housing area.
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    The regulatory language unnecessarily repeats what is already 
provided in statute. Section 542(c)(7) states that housing securing 
loans insured under the section qualifies as affordable only if the 
housing is occupied by very low-income families and bears rents not 
greater than the gross rent for rent-restricted residential units as 
determined under section 42(g)(2) of the IRC. Section 42(g) of the IRC 
provides qualifications for low-income housing projects to be eligible 
for a low-income housing tax credit. While the definition in Section 
542 cross references only to IRC subsection 42(g)(2), the rent limits 
established in subsection (g)(2) can be understood only through a 
reading of IRC subsection (g) in its entirety as a result of internal 
cross references in the IRC statutory language. Because ``gross rent'' 
and ``supportive service'' are both defined in section 42(g) of the 
IRC, this proposed rule would remove the definitions of these two terms 
from Sec.  266.5, but would include in the definition of ``affordable 
housing'' the provision currently in the ``gross rent'' definition that 
a utility allowance includes charges for the occupancy of a cooperative 
unit. The proposed regulatory change will remove unnecessary regulatory 
verbiage and simplify the part 266 regulations.
    Further, Sec.  266.210(b) of the existing regulations is outdated 
in that it provides that compliance with the

[[Page 12053]]

National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) 
(NEPA) is the responsibility of the HUD Field Office or other 
responsible entity. However, Section 542(c)(9) of the Housing and 
Community Development Act of 1992, as amended by the Multifamily 
Housing Property Disposition Reform Act of 1994 (Pub. L. 103-233), 
provides that HUD may provide for assumption of its environmental 
review requirements. This proposed regulation thus moves the paragraph 
on NEPA compliance requirements from Sec.  266.210, HUD-retained review 
functions, to a new section, Sec.  266.217, titled ``Environmental 
review requirements.'' This proposed rule would also change the 
phrasing of the existing environmental review requirements to make it 
clear that Responsible Entities assume legal responsibility for 
environmental compliance, but HUD may make a finding in accordance with 
24 CFR 58.11 (Legal capacity and performance) and may perform the 
environmental review itself under 24 CFR part 50 (Protection and 
enhancement of environmental quality). Relatedly, this proposed rule 
would revise Sec.  266.300(b) and Sec.  266.305(b), which describe HFA 
responsibilities, to reflect that the HFA has a responsibility to 
arrange for the environmental review.
    This proposed rule would also amend certain sections of the 
regulations to conform to other HUD regulations. The proposed rule 
would revise Sec.  266.215(e) to reflect that HFAs must follow Lead-
Based Paint requirements in 24 CFR part 35, and it would also update 
Sec.  266.220(b) to reflect HUD's equal access rule, which requires 
that HUD-assisted and HUD-insured housing be made available without 
regard to actual or perceived sexual orientation, gender identity, or 
marital status (See 77 FR 5662, February 3, 2012). Currently, Sec.  
266.220(b) states that the mortgagor must certify that it will not 
discriminate against any family because of the sex of the head of 
household. This proposed rule would update the section to state that 
the mortgagor must certify that it will provide housing without regard 
to sexual orientation, gender identity, or marital status, and will 
refrain from making improper inquiries, in accordance with 24 CFR 
5.105(a)(2).

B. Updating Terminology

    This proposed rule would update part 266 to eliminate references to 
outdated terminology. Specifically, Sec. Sec.  266.100(a)(1), 
266.110(a), and 266.120(d)(5) refer to HFAs that have or maintain a top 
tier designation. However, rating agencies no longer offer top tier 
ratings. Rather, current rating agency practice is to provide an issuer 
credit rating that evaluates the agency's capacity and willingness to 
meet its financial commitments. The proposed rule would replace 
requirements for HFAs to have top tier designation with requirements 
that they have an issuer rating of ``A'' or better. Additionally, Sec.  
266.505(b)(10) refers to the General Accounting Office, and this 
proposed rule would change this to reflect the current name of the 
agency: The Government Accountability Office.

C. Revisions To Provide Greater Flexibility

    HUD proposes changing certain requirements to provide both HUD and 
HFAs that assume a larger share of the risk with greater flexibility in 
operating the Section 542(c) HFA Risk-Sharing program.
    Under Sec.  266.100(b), HFAs with Level II approval, that is, HFAs 
that assume less than 50% of the risk of loss on mortgages insured 
under the Section 542(c) HFA Risk-Sharing program, must use 
underwriting standards and loan terms and conditions approved by HUD. 
However, the regulations do not provide that HUD can revisit the 
approval if market conditions or risk standards change. Many of the 
standards used by HFAs with Level II approval have been in place for 
more than 20 years. This proposed rule would amend Sec.  266.100(b) to 
provide that, every five years, HUD will recertify the underwriting 
standards, loan terms and conditions, and asset management and 
servicing procedures for HFAs with Level II approval, and may require 
changes to these procedures as a condition for continued approval. 
HUD's review would periodically benchmark Level II HFA underwriting 
standards against current FHA standards that are analogous to the 
appropriate FHA program. Additionally, Sec.  266.305(a), which 
describes underwriting standards for HFAs accepting less than 50% of 
the risk, would refer to the revised Sec.  266.100(b).
    Similarly, this proposed rule would amend Sec.  266.125(a), which 
describes actions that HUD may take against HFAs that do not comply 
with Section 542(c) HFA Risk-Sharing program requirements, to provide 
that one of the actions that HUD may take is to require the HFA to 
revise any or all of its underwriting, processing, or asset management 
policies as directed by the FHA Commissioner.
    This proposed rule would provide HFAs that assume at least 50% of 
the risk of loss on mortgages insured under the Section 542(c) HFA 
Risk-Sharing program more flexibility in financing existing properties 
without substantial rehabilitation to preserve affordability by 
amending Sec.  266.200(c). Currently, Sec.  266.200(c) provides that 
HFAs may finance existing properties without substantial rehabilitation 
if the financing will result in the preservation of affordable housing, 
project occupancy is not less than 93 percent, the mortgage does not 
exceed an amount supportable by the lower of the units rents being 
collected under the rental assistance agreement or at similar 
unassisted projects in the market area, and the HUD-insured mortgage 
does not exceed the sum of the existing indebtedness, cost of 
refinancing, cost of repairs, and reasonable transaction costs. 
Additionally, HFAs that assume less than 50 percent of the risk may not 
refinance loans that had been in default within the 12 months prior to 
the application for refinancing. The proposed rule maintains these 
requirements, but eliminates the requirement that the HUD-insured 
mortgage may not exceed the sum of the existing indebtedness, cost of 
refinancing, cost of repairs, and reasonable transaction costs for HFAs 
that assume 50 percent or more of the risk. Permitting equity take-outs 
under certain conditions for refinance and acquisition transactions is 
a key preservation tool to ensure long-term affordability. This 
provision is also consistent with similar FHA programs, and industry 
practice.
    In order to mitigate risk to FHA, ensure affordability of projects, 
and consistent with FHA's experience, this proposed rule would add 
additional requirements that all HFAs would have to meet in order to 
finance existing properties: Loans to be refinanced cannot have been in 
default in the 12 months prior to the date of application for 
refinancing, the owner must agree to renew the housing assistance 
payments (HAP) contract for a 20-year term, if applicable, existing and 
post-refinance HAP residual receipts must be set aside to be used to 
reduce future HAP payments, the property must be maintained as 
affordable housing for a period of at least 20 years, regardless of 
whether the loan is prepaid, and a capital needs assessment must be 
performed and funds escrowed for all necessary repairs and replacement 
reserves funded for future capital repairs.
    Additionally, this proposed rule would provide HFAs that assume at 
least 50% of the risk of loss on Section 542(c) mortgages more 
flexibility by providing that certain loans need not be regularly 
amortizing. Section 266.410(e)

[[Page 12054]]

would be revised so that loans of HFAs that assume at least 50% of the 
risk would not need to be regularly amortizing if they have a minimum 
term of 17 years and HUD has approved the HFA's underwriting standards, 
loan terms and conditions, and asset management and servicing 
procedures. Non-fully amortizing (also known as ``balloon'') loans are 
not unusual multifamily lending options. The change will align the 
542(c) program with conventional industry practices, particularly for 
Low Income Housing Tax Credits (LIHTC) transactions. Moreover, balloon 
loans with similar terms are typical in HUD's section 542(b) Risk Share 
program, under which HUD enters into reinsurance agreements with Fannie 
Mae, Freddie Mac, the Federal Housing Finance Board, and other 
Qualified Financial Institutions (QFIs).
    Further, this proposed rule would revise Sec.  266.620, which 
explains circumstances under which the contract of insurance would 
terminate. This proposed rule adds flexibility by providing that, in 
cases where an HFA or its successors commits fraud or makes a material 
misrepresentation, HUD may permit HFAs that assume more than 50% of the 
risk and have an issuer rating of ``A'' or better to indemnify HUD, or 
otherwise reimburse HUD in a manner acceptable to the Commissioner, for 
the full amount of the mortgage claim in lieu of the mortgage insurance 
contract being terminated. This change would provide flexibility for 
HFAs that assume more than 50% of the risk to participate in certain 
financing initiatives offered by HUD under the Section 542(c) HFA Risk-
Sharing program, while protecting the FHA General and Special Risk 
Insurance Fund against losses.

D. Revisions To Reflect Current Program Practices

    In addition to amending Sec.  266.410(e) to provide more 
flexibility for certain HFAs, this proposed rule would clarify that the 
existing requirement that the mortgage must be fully amortizing does 
not apply to construction loans. Construction loans have typically been 
non-amortizing, interest-only loans since the inception of the program, 
and this is typical industry practice.
    This proposed rule would also better reflect current program 
practices by removing Sec.  266.10, entitled ``Allocations of 
assistance and credit subsidy.'' Section 266.10 currently provides that 
HUD will announce the availability of assistance under the Section 
542(c) HFA Risk-Sharing program and invite qualified HFAs to submit an 
application. It also provides that credit subsidies will be obligated 
and allocated in accordance with outstanding HUD instructions. This 
section was relevant when the Section 542(c) HFA Risk-Sharing program 
was a pilot program with specific unit counts reserved for each 
participating HFA. Unit allocations and reservations of credit subsidy 
are no longer required because the program is a permanent insurance 
program.
    Relatedly, this proposed rule would amend Sec.  266.105(b), which 
says that applications from HFAs for approval to participate in the 
Section 542(c) HFA Risk-Sharing program will be submitted in response 
to a notice published in the Federal Register. In accordance with 
current practice, which reflects that the Section 542(c) HFA Risk-
Sharing program is now permanent, this section would now state that 
applications may be submitted at any time, in the form and manner 
established by HUD.
    This proposed rule would clarify that in certain circumstances, 
Housing for Older Persons projects, as described in 24 CFR part 100 
subpart E, qualify as eligible projects under Sec.  266.200. Housing 
providers should be aware that projects must comply with all program 
rules and the housing for older persons exemption to the Fair Housing 
Act (42 U.S.C. 3607(b); 24 CFR part 100 subpart E) in order to exclude 
families with children under 18. A housing facility insured under the 
Section 542 program may not invoke the housing for older persons 
exemption to exclude children if it also receives Federal financial 
assistance pursuant to a statute or program in which eligible families 
include children under the age of 18. For example, owners of projects 
that receive rental assistance under any of the Section 8 rental 
assistance programs are bound by the definition of ``families'' and 
``elderly families'' in section 3(b)(3)(B) of the United States Housing 
Act of 1937 and in implementing regulations. Because these definitions 
explicitly include families with children, such projects are not 
eligible for the exemption. The housing for older persons exemption 
allows a housing community to exclude children under 18 years without 
violating the Fair Housing Act's prohibition against familial status 
discrimination. The Fair Housing Act prohibits, inter alia, familial 
status discrimination, which means one or more individuals who have not 
attained the age of 18 years being domiciled with (1) a parent or 
another person having legal custody of such individual or individuals 
or (2) the designee of such parent or other person having such custody, 
with the written permission of such parent or other person. The 
protections against familial status discrimination apply also to 
persons who are pregnant or who are in the process of securing legal 
custody of any individual who is not yet 18 years old. See 42 U.S.C. 
3602(k).
    The housing for older persons exemption may be invoked if the 
housing is either provided under a State or Federal program that the 
Secretary of HUD determines is specifically designed and operated to 
assist elderly persons, or, intended for and solely occupied by, 
persons who are 62 years old or older, or, intended and operated for 
persons who are 55 years of age or older where at least 80 percent of 
the occupied units are occupied by at least one person who is at least 
55 years old, the housing facility publishes and adheres to policies 
and procedures that demonstrate the intent to serve persons 55 years 
old and older, and, the housing facility complies with HUD's rules for 
verification of occupancy. See 42 U.S.C. 3607(b) and 24 CFR 100.300 
through 100.307.
    In order to qualify for the housing for older persons exemption, 
State or Federal programs must be determined by the Secretary to be 
``specifically designed and operated to assist elderly persons (as 
defined in the State or Federal program).'' See 42 U.S.C. 
3607(b)(2)(A); 24 CFR 100.302. HUD, however, has never designated one 
of its own programs as housing for older persons under this exemption.
    Relatedly, the rulemaking proposes to add a clause to the 
description of elderly projects, at Sec.  266.200, specifying that an 
elderly family includes families with minor children. This is to 
distinguish such projects from those that qualify for and claim an 
exemption from the Fair Housing Act's prohibition against familial 
status discrimination at 42 U.S.C. 3607(b)(2).
    Another change this proposed rule would make is to Sec.  
266.420(b)(4), which currently requires that, in periodic advances 
cases, HFAs provide a certification that periodic advances were made 
proportionate to construction progress as part of their closing 
dockets. However, Sec.  266.310, entitled, ``Insurance of advances or 
insurance upon completion; applicability of requirements,'' does not 
require periodic advances to be made proportionate to construction 
progress. This proposed rule therefore revises Sec.  266.420(b)(4) to 
remove the requirement that periodic advances be proportionate to 
construction progress, and instead requires that, as part of their 
closing documents, in periodic advances cases HFAs provide

[[Page 12055]]

certification that the advances were made in accordance with the 
mortgage pursuant to Sec.  266.310.
    This proposed rule would also revise Sec.  266.650, Items deducted 
from total loss, to clarify that where a full claim follows a partial 
payment of claim by HUD, that partial payment of claim is considered an 
amount received by the HFA that will be deducted from the total loss to 
be shared by HUD and the HFA. The existing regulatory language does not 
explicitly provide this.
    Another change this proposed rule would make to reflect current 
program practices is to clarify that where HUD may direct or review an 
HFA's underwriting standards and loan terms and conditions, it may also 
direct or review that HFA's asset management and servicing procedures. 
Thus, this proposed rule adds references to ``asset management and 
servicing procedures'' throughout, and adds a new paragraph to Sec.  
266.500 that explains that asset management and servicing procedures of 
any HFA electing to take less than 50 percent of the risk on certain 
projects are subject to review, modification, and approval by HUD.
    This proposed rule also makes changes for accuracy, such as 
deleting the parenthetical in Sec.  266.100(b)(1) that suggests that 
Level I approval is where an HFA assumes a percentage of the risk of 
loss in ``(increments of 10 percent),'' because the risk percentages 
are not limited to 10 percent increments.

E. Aligning Section 542(c) With Other FHA Programs

    Section 266.200(d) currently provides that projects receiving 
Section 8 rental subsidies or other rental subsidies may be insured 
only if the mortgage does not exceed an amount supportable by the lower 
of contract rents under the rental assistance agreement or market 
rents. However, under HUD's Supportive Housing program, authorized 
under section 202 of the Housing Act of 1959 (12 U.S.C. 1701q), a 
project may be insured if the loan is underwritten to contract rents, 
regardless of market rents. This proposed rule would amend Sec.  
266.200(d) so that Supportive Housing program projects of HFAs assuming 
at least 50 percent of the risk of loss on mortgages insured under the 
Section 542(c) HFA Risk-Sharing program would be subject to the same 
underwriting standard as other Section 202 projects in that the loans 
may be underwritten to contract rents. A similar change is incorporated 
in new Sec.  266.200(c)(7) for existing projects without substantial 
rehabilitation. These changes will better align requirements between 
HUD programs, thereby streamlining and facilitating program 
administration by HFAs, as well as HUD oversight.
    FHA currently requires a National Loan Committee to approve all 
large loans under the Multifamily Accelerated Processing (MAP) Guide as 
a means of managing risk. Loans of HFAs that assume less than 50 
percent of the risk of loss pose a similar risk to FHA as do MAP loans. 
Therefore, this proposed rule would amend Sec.  266.305(a), 
establishing the underwriting standards for HFAs accepting less than 50 
percent of the risk, to add a provision that large loans also require 
prior approval by the FHA Commissioner. What constitutes a large loan 
will be determined using the same process currently used by HUD for 
establishing large loan amounts in other FHA programs.
    This proposed rule would revise Sec.  266.200(b)(2), the 
explanation of substantial rehabilitation projects eligible for the 
Section 542(c) HFA Risk-Sharing program, so that substantial 
rehabilitation would occur when the scope of work to improve an 
existing project exceeds in aggregate cost a sum equal to the base per 
dwelling unit limit times the applicable high cost factor established 
by the Commissioner, or when the scope of work involves the replacement 
of two or more building systems. `Replacement' is when the cost of 
replacement work exceeds 50% of the cost of replacing the entire 
system. The base per dwelling unit limit is $15,000 per unit for 2015, 
and will be adjusted annually based on the percentage change in the 
consumer price index. The rationale for the revision is twofold: The 
current definition of substantial rehabilitation as work that exceeds 
15% of the project's value results in a disproportionate impact to 
projects in high cost areas, particularly for preservation efforts that 
involve moderate rehabilitation; and the proposed change makes the 
program standard comparable to other similar FHA multifamily insurance 
programs that are required to impose prevailing wage requirements.
    Additionally, this proposed rule would revise Sec. Sec.  266.600, 
266.602, and 266.604, which currently refer to specific prescribed 
percentages for calculating an HFA's mortgage insurance premium (MIP). 
These set percentages are no longer appropriate now that the Section 
542(c) HFA Risk-Sharing program is no longer a pilot. This proposed 
rule would revise the regulations to permit MIP changes for the HFA 
Risk-Sharing program to be published through Federal Register notice, 
with an opportunity for public comment, as is the case for other FHA 
programs.

F. Editorial Changes

    Finally, this proposed rule makes a number of minor editorial 
changes to improve readability and clarity, and to ensure consistency 
and accuracy within the rule. For example, this proposed rule, 
throughout, adds and updates reference citations, standardizes the case 
of the term ``contract of insurance,'' replaces the term ``HUD Field 
Office'' with ``local HUD office,'' deletes the term ``his or her'' 
where it is unnecessary, specifies that references to days are measured 
in calendar days, and replaces a reference to the ``Office of General 
Counsel'' with simply ``HUD.'' HUD also has revised Sec.  
266.225(a)(1)(i) to clarify HUD's intent that Davis-Bacon wage 
requirements apply only where advances that are for construction of the 
project are insured under Part 266. This intent is reflected in Sec.  
266.225(d)(2) of the current regulation, which requires that no advance 
for a project subject to Davis-Bacon requirements shall be insured 
unless a certificate is filed with the application for the advance 
certifying that the laborers and mechanics employed in the construction 
of the project have been paid the Davis-Bacon prevailing wages. HUD has 
also revised Sec.  266.225(c) to clarify that HUD has responsibility 
for enforcing Davis-Bacon labor standards under this section, and has 
revised Sec.  266.630(d)(2) to clarify that partial claim payments are 
limited to the amount specified. HUD has made similar editorial changes 
of this nature.

III. Justification for Reduced Comment Period

    For proposed rules issued for public comment, it is HUD's policy to 
afford the public ``not less than sixty days for submission of 
comments'' (24 CFR 10.1). In cases in which HUD determines that a 
shorter public comment period may be appropriate, it is also HUD's 
policy to provide an explanation of why the public comment period has 
been abbreviated. For the following reasons, HUD believes that a 
reduced 30-day comment period is justified for this proposed 
rulemaking.
    This proposed rule updates regulations for the Section 542(c) HFA 
Risk-Sharing program to reflect statutory changes and to revise 
outdated references. These regulatory changes are technical and non-
substantive. The proposed rule also better aligns HUD's regulations 
with current industry and current HUD practices and policies, and 
provides greater flexibility to HUD in operating the program and to 
certain

[[Page 12056]]

HFA's. In general, these amendments alleviate the administrative 
burdens imposed on program participants.
    Further, these policy changes have already been discussed with, and 
are supported by stakeholders. From 2011-2013, HUD discussed proposed 
changes to the Risk-Sharing program with the National Council of State 
Housing Agencies (NCSHA) and a working group of HFAs. In October, 2014, 
HUD circulated a summary matrix of proposed changes to the program to 
NCSHA and HFAs and requested input on the proposals. Comments from 
NCSHA and HFAs have been overwhelmingly supportive of almost all of the 
revisions in the proposed rule.
    Although HUD believes that an abbreviated comment period is 
appropriate, HUD welcomes public input and is soliciting comments for a 
period of 30-days. All comments will be considered in the development 
of the final rule.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and therefore, subject to review by the Office of Management and Budget 
(OMB) in accordance with the requirements of the order. Executive Order 
13563 (Improving Regulations and Regulatory Review) directs 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.''
    This proposed rule updates HUD's regulations pertaining to Housing 
Finance Agency Risk Sharing Program for Insured Affordable Multifamily 
Project Loans, codified in 24 CFR part 266. The program regulations 
were initially promulgated in 1994, with the last updates undertaken in 
2000, but only to a few regulatory sections. This update is undertaken 
to reflect statutory changes and revise outdated references and 
terminology. The proposed rule also better aligns HUD's regulations 
with current industry and current HUD practices and policies. These 
changes would not create additional significant burdens for the public. 
As a result, this rule was determined to not be a significant 
regulatory action under section 3(f) of Executive Order 12866, 
Regulatory Planning and Review, and therefore was not reviewed by the 
Office of Management and Budget.

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.
    The majority of the proposed regulatory amendments would update the 
regulations governing HUD's HFA Risk-Sharing program to conform to 
current industry practices and FHA policies with which HFAs and other 
program participants are already familiar. Other proposed regulatory 
changes will provide greater flexibility for HFAs, alleviating 
administrative burden and related costs of operating the program. While 
there may be some costs for HFAs to update their practices and 
procedures to reflect some of the regulatory changes, these costs are 
minimal in comparison to the streamlining benefits provided by the 
revised program regulations.
    For the reasons presented, the undersigned certifies that this rule 
will not have a significant economic impact on a substantial number of 
small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has Federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive order. This proposed rule would 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.

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)). The Finding of No Significant 
Impact is available for public inspection during regular business hours 
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 number via TTY by calling the Federal Relay Service at 
(800) 877-8339.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and on the private sector. This proposed 
rule does not impose any Federal mandates on any state, local, or 
tribal government, or on the private sector, within the meaning of the 
UMRA.

Information Collection Requirements

    The information collection requirements contained in this proposed 
rule have been approved by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB control number 2502-0500. In accordance with the Paperwork 
Reduction Act of 1995, 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.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance (CFDA) Program number 
for the Housing Finance Agencies Section 542(c) Risk Sharing Program is 
14.188.

List of Subjects in 24 CFR Part 266

    Intergovernmental relations, Low and moderate income housing, 
Mortgage insurance, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated above, HUD proposes to amend 24 
CFR part 266 as follows:

PART 266--HOUSING FINANCE AGENCY RISK-SHARING PROGRAM FOR INSURED 
AFFORDABLE MULTIFAMILY PROJECT LOANS

0
1. The authority citation for 24 CFR part 266 is revised to read as 
follows:

    Authority: 12 U.S.C. 1715z-22.; 42 U.S.C. 3535(d).

0
2. Amend part 266 by removing the words ``Contract of Insurance'' and 
add in their place the words ``contract of insurance'' wherever they 
occur.
0
3. Revise Sec.  266.1 to read as follows:

[[Page 12057]]

Sec.  266.1  Purpose and scope.

    (a) Authority and scope. (1) Section 542 of the Housing and 
Community Development Act of 1992 (12 U.S.C. 1715z-22), directs the 
Secretary of the Department of Housing and Urban Development (HUD), 
acting through the Federal Housing Administration (FHA), to carry out 
programs that will provide new forms of Federal credit enhancement for 
multifamily loans. Section 542, entitled, ``Multifamily Mortgage Credit 
Programs,'' provides insurance authority independent from that provided 
by the National Housing Act.
    (2) Section 542(c) of the Housing and Community Development Act of 
1992 specifically directs HUD to carry out a program of risk-sharing 
with qualified State and local housing finance agencies (HFAs). The 
qualified HFAs are authorized to underwrite and process loans. HUD 
provides full mortgage insurance on affordable multifamily housing 
projects processed by such HFAs under this program. Through risk-
sharing agreements with HUD, HFAs contract to reimburse HUD for a 
portion of the loss from any defaults that occur while HUD insurance is 
in force.
    (3) The extent to which HUD directs qualified HFAs regarding their 
underwriting standards, loan terms and conditions, and asset management 
and servicing procedures is related to the proportion of the risk taken 
by an HFA.
    (b) Purpose. The primary purpose of this program is to provide 
credit enhancement for multifamily loans, i.e., utilization of full 
insurance by HUD, pursuant to risk-sharing agreements with qualified 
housing finance agencies, for the development of affordable housing. 
The utilization of Federal credit enhancements increases access to 
capital markets and, thereby, increases the supply of affordable 
multifamily housing. By permitting HFAs to underwrite, process, and 
service loans and to manage and dispose of properties that fall into 
default, affordable housing is made available to eligible families and 
individuals in a timely manner.
0
4. Amend Sec.  266.5 as follows:
0
a. Remove ``, as amended'' from the definition of ``Act'';
0
b. Revise the definition of ``Affordable housing'';
0
c. Remove from the definition of ``Commissioner'' the words ``his or 
her'' and add in their place the words ``the Commissioner's'';
0
d. Revise the definition of ``Credit subsidy'';
0
e. Remove from the definition of ``Designated offices'' the words ``HUD 
Field Offices'' and add in their place the words ``local HUD offices'';
0
f. Remove the definition of ``Gross rent'';
0
g. Remove from the definition of ``Multifamily housing'' the word 
``Secretary'' and add in its place the word ``Commissioner''; and
0
h. Remove the definition of ``Supportive services''.
    The revisions read as follows:


Sec.  266.5  Definitions.

* * * * *
    Affordable housing means a project that meets the requirements for 
a qualified low-income housing project under section 42(g) of the 
Internal Revenue Code of 1986 (26 U.S.C. 42(g)). For purposes of this 
part, the reference to a utility allowance in 26 U.S.C. 42(g) includes 
charges for the occupancy of a cooperative unit.
* * * * *
    Credit subsidy means the cost of a direct loan or loan guarantee 
under the Federal Credit Reform Act of 1990 (subtitle B of title XIII 
of the Omnibus Budget Reconciliation Act of 1990, Public Law 101-508, 
approved Nov. 5, 1990).
* * * * *


Sec.  266.10  [Removed]

0
5. Remove Sec.  266.10.
0
6. Revise Sec.  266.30 to read as follows:


Sec.  266.30  Nonapplicability of 24 CFR part 246.

    The regulations at 24 CFR part 246, pertaining to local rent 
control, do not apply to projects that are security for mortgages 
insured under this part.
0
7. In Sec.  266.100:
0
a. Revise the first sentence of paragraph (a);
0
b. Revise paragraphs (a)(1), (a)(6)(i), and(b)(1);
0
c. Revise the introductory text of paragraph (b)(2);
0
d. Revise paragraph (b)(3); and
0
e. Add paragraph (b)(4).
    The revisions and additions read as follows:


Sec.  266.100  Qualified housing finance agency (HFA).

    (a) Qualifications. To participate in the program, an HFA must 
apply and be specifically approved for the program described in this 
part, in addition to being approved as a mortgagee under Sec.  202.10 
of this part. * * *
    (1) Carry an issuer credit rating of ``A'' or better, or an 
equivalent as evaluated by Standard and Poor's or any other nationally 
recognized rating agency; or
* * * * *
    (6) * * *
    (i) The Department of Justice has not brought a civil rights suit 
against the HFA, and no suit is pending;
* * * * *
    (b) * * *
    (1) Level I approval to originate, service, and dispose of 
multifamily mortgages where the HFA uses its own underwriting 
standards, loan terms and conditions, and asset management and 
servicing procedures, and assumes 50 to 90 percent of the risk of loss 
(in 10 percent increments).
    (2) Level II approval to originate, service, and dispose of 
multifamily mortgages where the HFA uses underwriting standards, loan 
terms and conditions, and asset management and servicing procedures 
approved by HUD, and:
* * * * *
    (3) For HFAs who plan to use Level I and Level II processing, the 
underwriting standards, loan terms and conditions, and asset management 
and servicing procedures to be used on Level II loans must be approved 
by HUD.
    (4) Every five years, HUD will review the underwriting standards, 
loan terms and conditions, and asset management and servicing 
procedures for HFAs with Level II approval. HUD may require changes to 
these procedures as a condition for continued Level II approval.
0
8. Revise Sec.  266.105(b) to read as follows:


Sec.  266.105  Application requirements.

* * * * *
    (b) Applications for participation in program. Applications from 
HFAs for approval to participate in the program under this part may be 
submitted at any time, and must be submitted in the form and manner 
established by HUD.
0
9. In Sec.  266.110, revise the paragraph heading and the first 
sentence of paragraph (a) and the third sentence of paragraph (b)(1) to 
read as follows:


Sec.  266.110  Reserve requirements.

    (a) HFAs with an issuer credit rating of ``A'' or better or overall 
rating of ``A'' on general obligation bonds. An HFA with an issuer 
credit rating of ``A'' or better, or an equivalent designation, or an 
HFA with an overall rating of ``A'' on its general obligation bonds, is 
not required to have additional reserves so long as the HFA maintains 
that designation or rating, unless the Commissioner determines that a 
prescribed level of reserves is necessary. * * *
* * * * *
    (b) * * *

[[Page 12058]]

    (1) * * * The account must be established prior to the execution of 
any risk-sharing agreement under this part in an initial amount of not 
less than $500,000. * * *
* * * * *


Sec.  266.115  [Amended]

0
10. Amend Sec.  266.115 to remove the words ``his or her'' from the 
first sentence in paragraph (a) and from paragraph (c).
0
11. In Sec.  266.120, revise paragraphs (d) and (e)(5) to read as 
follows:


Sec.  266.120  Actions for which sanctions may be imposed.

* * * * *
    (d) Actions or conduct for which sanctions may be imposed against 
the HFA by HUD's Mortgagee Review Board under 24 CFR 25.9, which 
pertains to ``notice of administrative action''.
    (e) * * *
    (5) Maintain an issuer credit rating of ``A'' or better, or an 
equivalent designation, or overall rating of ``A'' on general 
obligation bonds (or if such rating is lost, comply with paragraph 
(e)(6) of this section);
* * * * *
0
12. In Sec.  266.125, revise paragraph (a)(6), add paragraph (a)(8), 
and revise the first sentence of paragraph (d)(1) to read as follows:


Sec.  266.125  Scope and nature of sanctions.

    (a) * * *
    (6) Recommend to the Commissioner that the HFA's mortgagee approval 
be withdrawn pursuant to 24 CFR part 25 (regulations of the Mortgagee 
Review Board) and/or that penalties be imposed pursuant to 24 CFR part 
30 (regulations pertaining to Civil Money Penalties; Certain Prohibited 
Contact);
* * * * *
    (8) Require the HFA to revise any or all of its underwriting, 
processing, asset management, or servicing policies and procedures as 
directed by the Commissioner.
* * * * *
    (d) * * *
    (1) Any sanction imposed by a designated office in writing will be 
immediately effective, will state the grounds for the action, and 
provide for the HFA's right to an informal hearing before the 
designated office representative or designee in the designated office. 
* * *
* * * * *
0
13. In Sec.  266.200:
0
a. Revise paragraphs (b)(2), (c), (d), (e), and (g);
0
b. Redesignate paragraph (h) as paragraph (i); and
0
c. Add new paragraph (h).
    The revisions and additions read as follows:


Sec.  266.200  Eligible projects.

* * * * *
    (b) * * *
    (2) Substantial rehabilitation occurs when the scope of work to 
improve an existing project exceeds in aggregate cost a sum equal to 
the base per dwelling unit limit times the applicable high cost factor 
established by the Commissioner, or when the scope of work involves the 
replacement of two or more building systems. Replacement is when the 
cost of replacement work exceeds 50% of the cost of replacing the 
entire system. The base per dwelling unit limit is $15,000 for 2015, 
and will be adjusted annually based on the percentage change in the 
consumer price index.
    (c) Existing projects. Financing of existing properties for 
acquisition or refinancing without substantial rehabilitation is 
allowed.
    (1) If the financing will result in the preservation of affordable 
housing, where the property will be maintained as affordable housing 
for a period of at least 20 years, regardless of whether the loan is 
prepaid; and
    (2) Project occupancy is not less than 93 percent (to include 
consideration of rent in arrears), based on the average occupancy in 
the project over the most recent 12 months; and
    (3) The loan to be refinanced has not been in default within the 12 
months prior to the date of the application for refinancing; and
    (4) If applicable, the owner of the property agrees to renew the 
Housing Assistance Payments (HAP) contract for a 20-year term; and
    (5) Existing and post-refinance HAP residual receipts are set aside 
to be used to reduce future HAP payments; and
    (6) A capital needs assessment must be performed and funds escrowed 
for all necessary repairs and replacement reserves funded for future 
capital repairs; and
    (7) The HUD-insured mortgage does not exceed an amount supportable 
by the lower of the unit rents being collected under the rental 
assistance agreement or the unit rents being collected at unassisted 
projects in the market area that are similar in amenities and location 
to the project for which insurance is being requested, although this 
paragraph does not apply to Level I participants if those projects are 
financed under section 202 of the Housing Act of 1959 (12 U.S.C. 
1701q); and
    (8) For Level II participants only, the HUD-insured mortgage may 
not exceed the sum of the existing indebtedness, cost of refinancing, 
or acquisition, the cost of repairs and reasonable transaction costs as 
determined by the Commissioner. This paragraph does not apply to Level 
I participants.
    (d) Projects receiving section 8 rental subsidies or other rental 
subsidies. Projects receiving project-based housing assistance payments 
under section 8 of the U.S. Housing Act of 1937 (42 U.S.C. 1437f) or 
other rental subsidies and meeting the requirements of this part may be 
insured under this part only if the mortgage does not exceed an amount 
supportable by the lower of the unit rents being or to be collected 
under the rental assistance agreement or the unit rents being collected 
at unassisted projects in the market that are similar in amenities and 
location to the project for which insurance is being requested. This 
paragraph does not apply to projects of Level I participants if those 
projects are financed under section 202 of the Housing Act of 1959 (12 
U.S.C. 1701q).
    (e) SRO projects. Single room occupancy (SRO) projects, as defined 
in Sec.  266.5, are eligible for insurance under this part. Units in 
SRO projects must be subject to 30-calendar day or longer leases; 
however, rent payments may be made on a weekly basis in SRO projects.
* * * * *
    (g) Elderly projects. Projects or parts of projects specifically 
designed for the use and occupancy by elderly families. An elderly 
family means any household where the head or spouse is 62 years of age 
or older, including children under 18, and also any single person who 
is 62 years of age or older.
    (h) Housing for older persons. Projects eligible for and in 
compliance with 42 U.S.C. 3607(b) and 24 CFR part 100, subpart E.
* * * * *


Sec.  266.205  [Amended]

0
14. Amend Sec.  266.205 by adding the word ``calendar'' after the 
number ``30'' in paragraph (a)(1) and adding the letters ``U.S.'' 
before the term ``Department of Defense'' in paragraph (b)(2).
0
15. In Sec.  266.210:
0
a. Remove paragraph (b);
0
b. Redesignate paragraphs (c), (d) and (e) as paragraphs (b), (c) and 
(d), respectively; and
0
c. Revise newly redesignated paragraphs (c) and (d) to read as follows:


Sec.  266.210  HUD-retained review functions.

* * * * *

[[Page 12059]]

    (c) Subsidy layering. The Commissioner, or Housing Credit Agencies 
as defined by section 42 of the Internal Revenue Code of 1986 (26 
U.S.C. 42), through such delegation as may be in effect by regulation 
hereafter, shall review all projects receiving tax credits and some 
form of HUD assistance for any excess subsidy provided to individual 
projects and reduce subsidy sources in accordance with outstanding 
guidelines.
    (d) Davis-Bacon Act. The Commissioner shall obtain and provide to 
the HFA the appropriate U.S. Department of Labor wage rate 
determinations under the Davis-Bacon Act, where they apply under this 
part.
0
16. Revise Sec.  266.215(e) to read as follows:


Sec.  266.215  Functions delegated by HUD to HFAs.

* * * * *
    (e) Lead-based paint. The HFA will perform functions related to 
Lead-based paint requirements as set forth in 24 CFR part 35, subparts 
A, B, G, and R.
0
17. Add Sec.  266.217 to read as follows:


Sec.  266.217  Environmental review requirements.

    The responsible entity, as defined in 24 CFR part 58 (Environmental 
Review Procedures for Entities Assuming HUD Environmental 
Responsibilities), assumes legal responsibility for compliance with the 
requirements of the National Environmental Policy Act of 1969 and 
related laws and authorities. The responsible entity will visit each 
project site proposed for insurance under this part and prepare the 
applicable environmental reviews as set forth in 24 CFR part 58. HUD 
may make a finding in accordance with 24 CFR 58.11 and may perform the 
environmental review itself under 24 CFR part 50 (Protection and 
Enhancement of Environmental Quality). In all cases the environmental 
review must be completed before HUD may issue the firm approval letter.
0
18. Revise Sec.  266.220 to read as follows:


Sec.  266.220  Nondiscrimination in housing and employment.

    The mortgagor must certify to the HFA that, so long as the mortgage 
is insured under this part, the mortgagor will:
    (a) Not use tenant selection procedures that discriminate against 
families with children, except in the case of a project qualifying for 
and complying with the requirements of the ``housing for older 
persons'' exemption, as defined in section 807(b)(2) of the Fair 
Housing Act (42 U.S.C. 3607(b)) and further described in 24 CFR part 
100, subpart E. Projects receiving Federal financial assistance in 
which elderly families include minor children may not avail themselves 
of the housing for older persons exemption;
    (b) Determine eligibility for admission and continued occupancy 
without regard to actual or perceived sexual orientation, gender 
identity, or marital status and refrain from inquiries about sexual 
orientation and gender identity in accordance with 24 CFR 5.105(a)(2);
    (c)(1) Comply with:
    (i) The Fair Housing Act (42 U.S.C. 3601 through 3619), as 
implemented by 24 CFR part 100;
    (ii) Titles II and III of the Americans with Disabilities Act of 
1990 (42 U.S.C. 12101 through 12213), as implemented by 28 CFR part 35;
    (iii) Section 3 of the Housing and Urban Development Act of 1968 
(12 U.S.C. 1701u), as implemented by 24 CFR part 135;
    (iv) The Equal Credit Opportunity Act (15 U.S C. 1691-1691f), as 
implemented by 12 CFR part 202;
    (v) Executive Order 11063, as amended by Executive Order 12259 (3 
CFR 1958-1963 Comp., p. 652 and 3 CFR 1980 Comp., p. 307), and 
implemented by 24 CFR part 107;
    (vi) Executive Order 11246 (3 CFR 1964-1965 Comp., p. 339), as 
implemented by 41 CFR part 60; and
    (vii) Other applicable Federal laws and regulations issued pursuant 
to these authorities; and applicable State and local fair housing and 
equal opportunity laws.
    (2) In addition to the authorities listed in paragraph (c)(1) of 
this section, a mortgagor that receives Federal financial assistance 
must also certify to the HFA that, so long as the mortgage is insured 
under this part, it will comply with:
    (i) Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d), as 
implemented by 24 CFR part 1;
    (ii) The Age Discrimination Act of 1975 (42 U.S.C. 6101 through 
6107), as implemented by 24 CFR part 146; and
    (iii) Section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 
794), as implemented by 24 CFR part 8.
0
19. In Sec.  266.225, revise the introductory text of paragraph (a)(1), 
and revise paragraphs (a)(1)(i), (b), (c), (d)(1), and the second 
sentence of paragraph (e) to read as follows:


Sec.  266.225  Labor standards.

    (a) * * *
    (1) All laborers and mechanics employed by contractors or 
subcontractors on a project insured under this part shall be paid not 
less than the wages prevailing in the locality in which the work was 
performed for the corresponding classes of laborers and mechanics 
employed in construction of a similar character, as determined by the 
Secretary of the U.S. Department of Labor (Secretary of Labor) in 
accordance with the Davis-Bacon Act, as amended (40 U.S.C. 3141 et 
seq.), where the project meets all of the following conditions:
    (i) Advances for construction of the project are insured under this 
part;
* * * * *
    (b) Volunteers. The provisions of this section shall not apply to 
volunteers under the conditions set out in 24 CFR part 70 (Use of 
Volunteers on Projects Subject to Davis-Bacon and HUD-Determined Wage 
Rates). In applying 24 CFR part 70, insurance under this part shall be 
treated as a program for which there is a statutory exemption for 
volunteers.
    (c) Labor standards. Any contract, subcontract, or building loan 
agreement executed for a project subject to Davis-Bacon wage rates 
under paragraph (a) of this section shall comply with all labor 
standards and provisions of the U.S. Department of Labor regulations in 
29 CFR parts 1, 3, and 5 that would be applicable to a mortgage 
insurance program to which Davis-Bacon wage rates are made applicable 
by statute, provided, that regulatory provisions relating to 
investigations and enforcement by the U.S. Department of Labor shall 
not be applicable, and enforcement of Davis-Bacon labor standards shall 
be the responsibility of the Commissioner in accordance with paragraph 
(e) of this section.
    (d) * * *
    (1) No advance under a mortgage on a project subject to Davis-Bacon 
wage rates under paragraph (a) of this section shall be eligible for 
insurance under this part unless the HFA determines (in accordance with 
the Commissioner's administrative procedures) that the general 
contractor or any subcontractor or any firm, corporation, partnership 
or association in which the contractor or subcontractor has a 
substantial interest was not, on the date the contract or subcontract 
was executed, on the ineligible list established by the Comptroller 
General of the United States, pursuant 29 CFR 5.12, issued by the 
Secretary of Labor.
* * * * *
    (e) * * * Where routine administration and enforcement functions 
are delegated to the HFA, the HFA shall bear financial responsibility 
for any deficiency in payment of prevailing wages or, where applicable

[[Page 12060]]

under 29 CFR part 1 (Procedures for Predetermination of Wage Rates), 
any increase in compensation to a contractor, that is attributable to 
any failure properly to carry out its delegated functions. * * *
0
20. In Sec.  266.300:
0
a. Revise paragraph (b)(1);
0
b. Redesignate existing paragraphs (b)(3), (b)(4), and (b)(5) as 
paragraphs (b)(4), (b)(5), and (b)(6), respectively;
0
c. Add new paragraph (b)(3);
0
d. Revise newly redesignated paragraph (b)(5); and
0
e. Revise paragraph (c).
    The revisions and additions read as follows:


Sec.  266.300  HFAs accepting 50 percent or more of risk.

* * * * *
    (b) * * *
    (1) Determine that a market for the project exists, taking into 
consideration any comments from the local HUD office relative to the 
potential adverse impact the project will have on existing or proposed 
Federally insured and assisted projects in the area.
* * * * *
    (3) Arrange for the performance of an environmental review in 
accordance with Sec.  266.217;
* * * * *
    (5) Approve the Affirmative Fair Housing Marketing Plan, required 
by Sec.  266.215(a); and
* * * * *
    (c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec.  266.210(a) and (b) the local HUD 
office will issue a firm approval letter.
* * * * *
0
21. In Sec.  266.305:
0
a. Revise paragraphs (a) and (b)(1);
0
b. Redesignate existing paragraphs (b)(3), (b)(4), and (b)(5) as 
paragraphs (b)(4), (b)(5), and (b)(6), respectively;
0
c. Add new paragraph (b)(3);
0
d. Revise newly redesignated paragraph (b)(5), and
0
e. Revise paragraph (c).
    The revisions and additions read as follows:


Sec.  266.305  HFAs accepting less than 50 percent of risk.

    (a) Underwriting standards. The underwriting standards and loan 
terms and conditions of any HFA electing to take less than 50 percent 
of the risk on certain projects are subject to review, modification, 
and approval by HUD in accordance with Sec.  266.100(b). These HFAs may 
assume 25 percent or 10 percent of the risk depending upon the loan-to-
replacement-cost or loan-to-value ratios of the projects to be insured 
as specified in Sec.  266.100(b)(2)(i) and (ii). Large loans, as 
defined by HUD for its insured multifamily mortgage programs, require 
prior approval by the Commissioner.
    (b) * * *
    (1) Determine that a market for the project exists, taking into 
consideration any comments from the local HUD office relative to the 
potential adverse impact the project will have on existing or proposed 
Federally insured and assisted projects in the area;
* * * * *
    (3) Arrange for the performance of an environmental review in 
accordance with Sec.  266.217;
* * * * *
    (5) Approve the Affirmative Fair Housing Marketing Plan, required 
by Sec.  266.215(a); and
* * * * *
    (c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec.  266.210(a) and (b), the local HUD 
office will issue a firm approval letter.
* * * * *
0
22. In Sec.  266.410, revise paragraph (e) to read as follows:


Sec.  266.410  Mortgage provisions.

* * * * *
    (e) Amortization. The mortgage must provide for complete 
amortization (i.e., be regularly amortizing) over the term of the 
mortgage. The complete amortization requirement does not apply to:
    (1) Construction loans, or
    (2) Level I participants where the loan has a minimum term of 17 
years and the HFA's underwriting standards, loan terms and conditions, 
and asset management and servicing procedures have been approved by 
HUD.
* * * * *
0
23. In Sec.  266.420, revise the second sentence of paragraph (a) and 
paragraphs (b)(3), (4), and (7), and add paragraph (b)(13) to read as 
follows:


Sec.  266.420  Closing and endorsement by the Commissioner.

    (a) * * * The note must provide that the mortgage is insured under 
section 542(c) of the Housing and Community Development Act of 1992 and 
the regulations set forth in this part that are in effect on the date 
of endorsement. * * *
* * * * *
    (b) * * *
    (3) Certification that the loan has been processed, prudently 
underwritten (including a determination that a market exists for the 
project), cost certified (if the project is being submitted for final 
endorsement) and closed in full compliance with the HFA's standards and 
requirements (or where the mortgage is insured under Level II, in full 
compliance with the underwriting standards, loan terms and conditions, 
and asset management and servicing procedures, as approved by HUD).
    (4) At the time of final endorsement, for periodic advances cases, 
a certification that the advances were made in accordance with the 
mortgage pursuant to Sec.  266.310.
* * * * *
    (7) A certification that the HFA has reviewed and approved the 
Affirmative Fair Housing Marketing Plan, required by Sec.  266.215(a), 
and found it acceptable.
* * * * *
    (13) Certification that housing claiming the housing for older 
persons exemption is eligible for and complies with 42 U.S.C. 3607(b) 
and 24 CFR part 100, subpart E.
0
24. Revise Sec.  266.500 to read as follows:


Sec.  266.500  General.

    (a) HFA responsibility for monitoring project owners. The HFA will 
have full responsibility for managing and servicing projects insured 
under this part (in accordance with procedures disclosed and submitted 
with its application and the requirements of this part). The HFA is 
responsible for monitoring and determining the compliance of the 
project owner in accordance with the provisions of this subpart. HUD 
will monitor the performance of the HFA, not the project owner, to 
determine its compliance with the provisions covered under this 
subpart.
    (b) HUD review of procedures for HFAs with Level II approval. Asset 
management and servicing procedures of any HFA electing to take less 
than 50 percent of the risk on certain projects are subject to review, 
modification, and approval by HUD in accordance with Sec.  266.100(b).


Sec.  266.505  [Amended]

0
25. Amend Sec.  266.505:
0
a. In paragraph (b)(8), after the word ``Plan'' by adding the phrase 
``, required by Sec.  266.215(a),'';
0
b. In paragraph (b)(10), by removing the words ``General Accounting'' 
and adding in their place ``U.S. Government Accountability''.
0
26. Revise Sec.  266.507 to read as follows:


Sec.  266.507  Maintenance requirements.

    The mortgagor must maintain the project in accordance with the 
physical

[[Page 12061]]

condition standards in 24 CFR part 5, subpart G (Physical Condition 
Standards and Inspection Requirements).
0
27. Revise Sec.  266.510(a) to read as follows:


Sec.  266.510  HFA responsibilities.

    (a) Inspections. The HFA must perform inspections in accordance 
with the physical inspection procedures in 24 CFR part 5, subpart G 
(Physical Condition Standards and Inspection Requirements).
* * * * *
0
28. Revise Sec.  266.600 to read as follows:


Sec.  266.600  Mortgage insurance premium: insurance upon completion.

    (a) Initial premium. For projects insured upon completion, on the 
date of the final closing, the HFA shall pay to the Commissioner an 
initial premium in an amount established by the Commissioner under 
Sec.  266.604.
    (b) Premium payable with first payment of principal. On the date of 
the first payment of principal the HFA shall pay a second premium 
(calculated on a per annum basis) in an amount established by the 
Commissioner under Sec.  266.604.
    (c) Subsequent premiums. Until one of the conditions is met under 
Sec.  266.606(a), the HFA on each anniversary of the date of the first 
principal payment shall pay to the Commissioner an annual mortgage 
insurance premium in an amount established by the Commissioner under 
Sec.  266.604, without taking into account delinquent payments, or 
partial claim payment under Sec.  266.630, or prepayments, for the year 
following the date on which the premium becomes payable.
0
29. In Sec.  266.602, revise paragraph (a), the first sentence of 
paragraph (b), the first sentence of paragraph (c), and paragraph (d) 
to read as follows:


Sec.  266.602  Mortgage insurance premium: Insured advances.

    (a) Initial premium. For projects involving insured advances, on 
the date of the initial closing, the HFA shall pay to the Commissioner 
an initial premium equal to an amount established by the Commissioner 
under Sec.  266.604.
    (b) Interim premium. On each anniversary of the initial closing, 
the HFA shall pay an interim mortgage insurance premium in an amount 
established by the Commissioner under Sec.  266.604. * * *
    (c) Premium payable with first payment of principal. On the date of 
the first principal payment, the HFA shall pay a mortgage insurance 
premium in an amount established by the Commissioner under Sec.  
266.604. * * *
    (d) Subsequent premiums. Until one of the conditions is met under 
Sec.  266.606(a), the HFA on each anniversary of the date of the first 
principal payment shall pay to the Commissioner an annual mortgage 
insurance premium in an amount established by the Commissioner under 
Sec.  266.604, without taking into account delinquent payments, 
prepayments, or a partial claim payment under Sec.  266.630, for the 
year following the date on which the premium becomes payable.
0
30. In Sec.  266.604, revise paragraphs (a) and (b), the first sentence 
of paragraph (c), and the second and third sentences of paragraph (d) 
to read as follows:


Sec.  266.604  Mortgage insurance premium: Other requirements.

    (a) Premium calculations on or after first principal payment. The 
premiums payable to the Commissioner on and after the first principal 
payment shall be calculated in accordance with the amortization 
schedule prepared by the HFA for final closing and an amount 
established by the Commissioner through a notice published in the 
Federal Register and providing a 30-day comment period. After the 
comments have been considered, HUD will publish a final notice 
announcing the premium and its effective date. The premium shall not 
take into account delinquent payments or prepayments.
    (b) Future premium changes. Notice of future premium changes will 
be published in the Federal Register. The Commissioner will propose 
mortgage insurance premium changes for the Risk-Sharing Program and 
provide a 30-calendar day public comment period for the purpose of 
accepting comments on whether the proposed changes are appropriate. 
After the comments have been considered, HUD will publish a final 
notice announcing the premium and its effective date.
    (c) Closing information. The HFA shall provide final closing 
information to the Commissioner within 15 calendar days of the final 
closing in a format prescribed by the Commissioner. * * *
    (d) Due date for premium payments. * * * Any premium received by 
the Commissioner more than 15 calendar days after the due date shall be 
assessed a late charge of 4 percent of the amount of the premium 
payment due. Mortgage insurance premiums that are paid to the 
Commissioner more than 30 calendar days after the due date shall begin 
to accrue interest at the rate prescribed by the Treasury Fiscal 
Requirements Manual.
0
31. In Sec.  266.620:
0
a. Revise the section heading;
0
b. Redesignate the undesignated introductory paragraph as paragraph (a) 
and redesignate existing paragraphs (a) through (g), as paragraphs 
(a)(1) through (7), respectively; and
0
c. Add a new paragraph (b).
    The revision and addition read as follows:


Sec.  266.620  Termination of contract of insurance and 
indemnification.

* * * * *
    (b) In lieu of termination of the mortgage insurance contract 
pursuant to paragraph (a)(5) of this section, the Commissioner may, in 
his or her full discretion, permit a Level I participant rated ``A'' or 
higher to indemnify HUD, or otherwise reimburse HUD in a manner 
acceptable to the Commissioner, for the full amount of the mortgage 
claim.
0
32. In Sec.  266.626, revise the first sentence of paragraph (c) and 
revise paragraph (d) to read as follows:


Sec.  266.626  Notice and date of termination by the Commissioner.

* * * * *
    (c) Notice of default. If a default (as defined in paragraph (a) of 
this section) continues for a period of 30 calendar days, the HFA must 
notify the Commissioner within 10 calendar days thereafter, unless the 
default is cured within the 30-day period. * * *
    (d) Timing of claim filing. Unless a written extension is granted 
by HUD, the HFA must file an application for initial claim payment (or, 
if appropriate, for partial claim payment) within 75 calendar days from 
the date of default and may do so as early as the first day of the 
month following the month for which a payment was missed. Upon request 
of the HFA, HUD may extend, up to 180 calendar days from the date of 
default, the deadline for filing a claim. In those cases where the HFA 
certifies that the project owner is in the process of transacting a 
bond refunder, refinancing the mortgage, or changing the ownership for 
the purpose of curing the default and bringing the mortgage current, 
HUD may extend the deadline for filing a claim beyond 180 calendar 
days, not to exceed 360 calendar days from the date of default.
0
33. Revise Sec.  266.628(a)(3) to read as follows:


Sec.  266.628  Initial claim payments.

    (a) * * *
    (3) The HFA must use the proceeds of the initial claim payment to 
retire any bonds or any other financing mechanisms securing the 
mortgage

[[Page 12062]]

within 30 calendar days of the initial claim payment. Any excess funds 
resulting from such retirement or repayment shall be returned to HUD 
within 30 calendar days of the retirement.
* * * * *
0
34. In Sec.  266.630, revise the second sentence of paragraph (c)(2), 
paragraphs (d)(1), (2), and (4), and the second sentence of paragraph 
(d)(5) to read as follows:


Sec.  266.630  Partial payment of claims.

* * * * *
    (c) * * *
    (2) * * * The HFA is granted an extension of 30 calendar days from 
the date of any notification for further action.
    (d) Requirements--(1) One partial claim payment. Only one partial 
claim payment may be made under a contract of insurance.
    (2) Partial claim payment amount. The amount of the partial claim 
payment is limited to 50% of the amount of relief provided by the HFA 
in the form of a reduction in principal and a reduction of delinquent 
interest due on the insured mortgage times the lesser of HUD's 
percentage of the risk of loss or 50 percent.
* * * * *
    (4) Partial claim repayment by HFA. The HFA must remit to HUD a 
percentage of all amounts collected on the HFA's second mortgage within 
15 calendar days of receipt by the HFA. The applicable percentage is 
equal to the percentage used in paragraph (d)(2) of this section to 
determine the partial claim payment amount. Payments made after the 
15th day must include a 5 percent late charge plus accrued interest at 
the Debenture rate.
    (5) * * * The HFA must submit a final certified statement within 30 
calendar days after the second mortgage is paid in full, foreclosed, or 
otherwise terminated.


Sec.  266.634  [Amended]

0
35. Amend Sec.  266.634(c) by adding the word ``calendar'' immediately 
before the word ``days'' in the first sentence.


Sec.  266.638  [Amended]

0
36. Amend Sec.  266.638 to:
0
a. Add the word ``calendar'' immediately before the word ``days'' in 
the first sentence of paragraph (a);
0
b. Remove the word ``five'' from the second sentence of paragraph (b), 
and add in its place the number ``5'';
0
c. Remove the words ``five year'' from the third sentence of paragraph 
(b) and add in their place ``5-year''.


Sec.  266.642  [Amended]

0
37. Amend the third sentence of Sec.  266.642 to remove the phrase 
``45-day'' and in its place add the phrase ``45-calendar day''.


Sec.  266.644  [Amended]

0
38. Amend Sec.  266.644 to add the word ``calendar'' before the word 
``days'' in the undesignated introductory paragraph


Sec.  266.648  [Amended]

0
39. Amend Sec.  266.648(c)(4) to remove the words ``the Office of 
General Counsel'' and add in their place ``HUD''.
0
40. In Sec.  266.650, revise paragraph (a) to read as follows:


Sec.  266.650  Items deducted from total loss.

* * * * *
    (a) All amounts received by the HFA on account of the mortgage 
after the date of default, including any partial payment of claim paid 
by HUD in the event a full claim follows a partial payment of claim;
* * * * *


Sec.  266.654  [Amended]

0
41. Amend Sec.  266.654(b) to add the word ``calendar'' before the word 
``days'' in the first sentence.

    Dated: February 25, 2016.
Edward Golding,
Principal Deputy Assistant Secretary for Housing.
[FR Doc. 2016-04595 Filed 3-7-16; 8:45 am]
BILLING CODE 4210-67-P