Establishing a More Effective Fair Market Rent System; Using Small Area Fair Market Rents in Housing Choice Voucher Program Instead of the Current 50th Percentile FMRs, 39218-39234 [2016-13939]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 81, Number 116 (Thursday, June 16, 2016)]
[Proposed Rules]
[Pages 39218-39234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13939]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 888, 982, 983, and 985

[Docket No. FR-5855-P-02]
RIN 2501-AD74


Establishing a More Effective Fair Market Rent System; Using 
Small Area Fair Market Rents in Housing Choice Voucher Program Instead 
of the Current 50th Percentile FMRs

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

ACTION: Proposed rule.

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SUMMARY: This rulemaking proposes the use of Small Area Fair Market 
Rents (Small Area FMRs) in the administration of the Housing Choice 
Voucher (HCV) program for certain metropolitan areas. HUD is proposing 
to use Small Area FMRs in place of the current 50th percentile rent to 
address high levels of voucher concentration. HUD believes that Small 
Area FMRs gives HCV tenants a more effective means to move into areas 
of higher opportunity and lower poverty areas by providing them with 
subsidy adequate to make such areas accessible and to thereby reduce 
the number of voucher families that reside in areas of high poverty 
concentration.
    HUD proposes to use several criteria for determining which 
metropolitan areas would best be served by application of Small Area 
FMRs in the administration of the HCV program. These criteria include a 
threshold number of vouchers within a metropolitan area, the 
concentration of current HCV tenants in low-income areas, and the 
percentage of renter occupied units within the metropolitan area with 
gross rents above the payment standard basic range. Public housing 
agencies (PHAs) operating in designated metropolitan areas would be 
required to use Small Area FMRs. PHAs not operating in the designated 
areas would have the option to use Small Area FMRs in administering 
their HCV programs. Other programs that use FMRs would continue to use 
area-wide FMRs. HUD's goal in pursuing this rulemaking is to provide 
HCV tenants with a greater ability to move into areas where jobs, 
transportation, and educational opportunities exist.

DATES: Comment Due Date: August 15, 2016.

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 
https://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
https://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

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


[[Page 39219]]


    No Facsimile Comments. Facsimile (fax) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Relay Service, 
toll-free, at 800-877-8339. Copies of all comments submitted are 
available for inspection and downloading at https://ww.regulations.gov.

FOR FURTHER INFORMATION CONTACT: For information about this rule, 
contact Peter B. Kahn, Director, Economic and Market Analysis Division, 
Office of Economic Affairs, Office of Policy Development and Research, 
U.S. Department of Housing and Urban Development, 451 7th Street SW., 
Washington, DC 20410, telephone (202) 402-2409; email: 
SAFMR_Rule@hud.gov. The listed telephone number is not a toll-free 
number. Persons with hearing or speech impairments may access this 
number through TTY by calling Federal Relay Service at 1-800-877-8339 
(this is a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose of This Proposed Rule

    The purpose of this proposed rule is to establish a more effective 
means for HCV tenants to move into areas of higher opportunity and 
lower poverty by providing the tenants with a subsidy adequate to make 
such areas accessible and, consequently, help reduce the number of 
voucher families that reside in areas of high poverty concentration. 
Subsidy for HUD's HCV program is currently determined by a formula that 
considers rent prices across an entire metropolitan area. However, 
rents can vary widely within a metropolitan area depending upon the 
size of the metropolitan area and the neighborhood in the metropolitan 
area within which one resides. The result of determining rents on the 
basis of an entire metropolitan area is that a voucher subsidy may be 
too high or may be too low to cover market rent in a given 
neighborhood. HUD's current policy for addressing high concentrations 
of voucher holders raises the level of the FMR from the 40th percentile 
to the 50th percentile (roughly a 7-8 percent increase) in the whole 
FMR area. This level of added subsidy is not targeted to areas of 
opportunity; consequently, this formula has not proven effective in 
addressing the problem of concentrated poverty and economic and racial 
segregation in neighborhoods. Experience with the 50th percentile 
regime shows that the majority of HCV tenants use their vouchers in 
neighborhoods where rents are low but poverty is generally high. Small 
Area FMRs will complement HUD's other efforts (such as mobility 
counseling) to support households in making informed choices about 
units and neighborhoods with the goal of increasing the share of 
households that choose to use their vouchers in low poverty opportunity 
areas.
    Rather than determine rents on the basis of an entire metropolitan 
area, this rule proposes to determine rents on the basis of ZIP codes. 
ZIP codes are small enough to reflect neighborhood differences and 
provide an easier method of comparing rents within one ZIP code to 
another ZIP code area within a metropolitan area. Based on early 
evidence from PHAs using Small Area FMRs that are in place in certain 
metropolitan areas in the U.S., HUD believes that Small Area FMRs are 
more effective in helping families move to areas of higher opportunity 
and lower poverty.

B. Summary of Major Provisions of This Proposed Rule

    The major provisions of this proposed rule are as follows:
    The existing regulations at 24 CFR 888.113 would be amended to no 
longer provide for FMRs to be set at the 50th percentile rent. However, 
the regulations do not revoke any FMR currently set at the 50th 
percentile rent, and for which the current 3-year term for retaining a 
50th percentile rent has not expired.
    The proposed regulations provide for metropolitan areas with FMRs 
set at the 50th percentile rent to transition to either (1) the 40th 
percentile rent at the expiration of the 3-year period for the 50th 
percentile rent, or (2) designation as a Small Area FMR area in 
accordance with the proposed criteria for determining a Small Area FMR 
area.
    The proposed regulations, in 24 CFR 888.113(d)(2), define Small 
Area FMR areas as the U.S. Postal Service ZIP code areas within a 
designated metropolitan area.
    The proposed regulations would provide that a PHA with jurisdiction 
in a 50th percentile FMR area that reverts to the standard 40th 
percentile FMR may request HUD approval of payment standard amounts 
based on the 50th percentile rent in accordance with the regulations in 
24 CFR 982.503(f), which are not proposed to be changed by this rule. 
PHAs would be required to continue to meet the provisions of 24 CFR 
982.503(f) annually in order to maintain payment standards based on 
50th percentile rents.
    The proposed regulations provide, in 24 CFR 888.113(c), the 
criteria for those areas for which Small Area FMRs will be set. This 
section provides that Small Area FMRs will be set for metropolitan 
areas where at least 2,500 HCVs are under lease; at least 20 percent of 
the standard quality rental stock, within the metropolitan area, is in 
small areas (that is ZIP codes) where the Small Area FMR is more than 
110 percent of the metropolitan FMR; and the measure of the percentage 
of voucher holders living in concentrated low-income areas relative to 
all renters within these areas over the entire metropolitan area 
exceeds 155 percent (or 1.55).
    The proposed regulations provide, in 24 CFR 888.113(c)(2), that 
``concentrated low-income areas'' means those census tracts in the 
metropolitan FMR area with a poverty rate of 25 percent or more; or any 
tract in the metropolitan FMR area where more than 50 percent of the 
households earn incomes at less than 60 percent of the area median 
income (AMI) and are designated as Qualified Census Tracts in 
accordance with section 42 of the Internal Revenue Code (26 U.S.C. 42).
    For all determinations of FMRs, 40th percentile or Small Area FMRs, 
HUD replaces ``the most recent decennial census'' with the ``most 
recent American Community Survey conducted by the U.S. Census Bureau.''
    The proposed regulations provide, in 24 CFR 888.113(c)(3), that if 
a metropolitan area meets the criteria for application of Small Area 
FMRs to the area, all PHAs administering HCV programs in that area will 
be required to use Small Area FMRs.
    The proposed regulations, in 24 CFR 888.113(c)(3), also provide 
that a PHA that is not administering an HCV program in a metropolitan 
area subject to application of Small Area FMRs may opt to use Small 
Area FMRs by seeking approval of HUD's Office of Public and Indian 
Housing through written request to such office.
    The proposed regulations provide in new 24 CFR 888.113(h) that 
Small Area FMRs also apply to project-based vouchers (PBVs), under 
certain conditions, when HUD designates a metropolitan area or approves 
a PHA jurisdiction for application of Small

[[Page 39220]]

Area FMRs. The application of Small Area FMRs to PBVs occurs when a PHA 
notice of owner selection of existing regulations in 24 CFR 983.51(d) 
was made after the effective date of Small Area FMR designation.
    The proposed rule provides HUD will designate Small Area FMR areas 
at the beginning of a Federal fiscal year and make additional area 
designations every 5 years thereafter as new data becomes available.

C. Costs and Benefits of This Proposed Rule

    The main benefit of the proposed rule is that, through setting 
rental subsidy amounts at a more local level, assisted households will 
be more able to afford homes in areas of high opportunity than under 
current policy. Such moves are expected to benefit both individual 
households, for example, through access to better schools or safer 
neighborhoods, and areas as a whole through reducing concentrated 
neighborhood poverty. Other benefits could arise through the reduction 
of overpayment of rent in areas where the neighborhood rent is below 
the metropolitan average. Early evidence from current Small Area FMR 
locations suggests that there could be per-voucher cost decreases 
relative to 50th percentile rents, depending on the choices made by 
tenants. Evidence also suggests that families moved to better 
neighborhoods with higher rents, which resulted in no overall program 
cost increases.\1\ Finally, the proposed rule would eliminate the year 
to year volatility of some areas changing to and from 50th percentile 
FMRs.
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    \1\ Please see Collinson and Ganong, ``The Incidence of Housing 
Voucher Generosity'', available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255799.
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    Potential costs of the proposed rule include the administrative 
expenses associated with implementation on the part of PHAs. 
Additionally, if there are barriers to households moving to areas of 
higher opportunity beyond housing costs, such as transportation 
expenses or social factors, assisted households might be worse off if 
they can no longer afford their current units in their neighborhoods. 
This may be particularly true for elderly families or families with a 
disabled member; however, HUD regulations, not changed by this proposed 
rulemaking, allow PHAs wide latitude in setting payments standards for 
disabled tenants as ``reasonable accommodations'' of their 
disabilities. Finally, if the long-term impacts of the proposed rule 
cause per-voucher costs to rise, fewer households would receive 
assistance without an overall increase in program funds.

II. Background

The Housing Choice Voucher Program and Fair Market Rents

    HUD's HCV program helps low-income households obtain standard 
rental housing and reduces the share of their income that goes toward 
rent. Vouchers issued under the HCV program provide subsidies that 
allow individuals and families to rent eligible units in the private 
market. A key parameter in operating the HCV program is the FMR. In 
general, the FMR for an area is the amount that would be needed to pay 
the gross rent (shelter rent plus utilities) of privately owned, 
decent, and safe rental housing of a modest (non-luxury) nature with 
suitable amenities. In addition, all rents subsidized under the HCV 
program must meet rent reasonableness standards. Rent reasonableness is 
determined by PHAs with reference to rents for comparable unassisted 
units.
    In the HCV program, the FMR is the basis for determining the 
``payment standard amount'' used to calculate the maximum monthly 
subsidy for a voucher household (see 24 CFR 982.503). PHAs may 
establish payment standards between 90 and 110 percent of the FMR.\2\ 
Voucher program households receive a housing assistance payment equal 
to the difference between the payment standard established by the PHAs 
and the family's Total Tenant Payment (TTP), which is generally 30 
percent of the household's adjusted monthly income. Participants in the 
voucher program can choose to live in units with gross rents higher 
than the payment standard, but would be required to pay the full cost 
of the difference between the gross rent and the payment standard, in 
addition to their TTP. Please note that at initial occupancy the 
family's share cannot exceed 40 percent of monthly adjusted income.
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    \2\ Moving to Work (MTW) agencies have the authority to waive 24 
CFR 982.503 and can propose, for HUD approval, alternate rent 
policies in their Annual MTW Plan.
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    HUD establishes FMRs for different geographic areas. Because 
payment standards are based on FMRs, housing assistance payments on 
behalf of the voucher household are limited by the geographic area in 
which the voucher household resides. Currently, HUD calculates FMRs for 
all nonmetropolitan counties and metropolitan areas. The same FMR is 
applicable throughout a nonmetropolitan county or metropolitan area, 
which generally is comprised of several metropolitan counties. FMRs in 
a metropolitan area (Metropolitan FMR) represent the 40th percentile 
(or in special circumstances the 50th percentile) gross rent for 
typical non-luxury, non-substandard rental units occupied by recent 
movers in a local housing market.\3\
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    \3\ General information concerning FMRs including more detailed 
information about their calculation is available at https://www.huduser.gov/portal/datasets/fmr.html.
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    As noted earlier, PHAs may set a payment standard between 90 
percent and 110 percent (inclusive) of the FMR. PHAs may determine that 
payment standards that are higher than 110 percent, or lower than 90 
percent, are appropriate for subareas of their market; in this 
instance, a PHA would request HUD approval for a payment standard below 
90 percent or an exception payment standard above 110 percent. The 
total population of a HUD-approved exception payment area (i.e., an 
area covered by a payment standard that exceeds 110 percent of the FMR) 
may not include more than 50 percent of the population of the FMR area 
(see 24 CFR 982.503).
    On October 2, 2000, at 65 FR 58870, HUD published a rule (2000 
rule) establishing HUD's current policy to set FMRs at the 50th 
percentile for ``areas where higher FMRs are needed to help families, 
assisted under HUD's Housing Choice Voucher Program as well as other 
HUD programs, find and lease decent and affordable housing.'' This 
policy was put in place to achieve two program objectives: (1) Increase 
the ability of low-income families to find and lease decent and 
affordable housing; and (2) provide low-income families with access to 
a broad range of housing opportunities throughout a metropolitan area. 
The policy further provides that PHAs that had been authorized to use 
FMRs set at the 50th percentile rent may later be required to use FMRs 
set at the 40th percentile rent. This would occur if the FMR were set 
at the 50th percentile rent to provide a broad range of housing 
opportunities throughout a metropolitan area for three years, but the 
concentration of voucher holders in the metropolitan area did not 
lessen.
    Since HUD established the 50th percentile FMRs 15 years ago, 
research has emerged \4\ that indicates that 50th

[[Page 39221]]

percentile FMRs are not an effective tool in increasing HCV tenant 
moves from areas of low opportunity to higher opportunity areas. 
Specifically, it appears that much of the benefit of increased FMRs 
simply accrues to landlords in lower rent submarket areas in the form 
of higher rents rather than creating an incentive for tenants to move 
to units in communities with more and/or better opportunities. As 
currently provided in regulation, to determine the 50th percentile 
program's effectiveness, HUD must measure the reduction in 
concentration of HCV tenants (objective 2 above) presumably from high 
poverty areas, over a 3-year period. If there is no measurable 
reduction in the concentration of HCV tenants, the FMR area loses the 
50th percentile FMRs for a 3-year period. A large number of areas have 
been disqualified from the 50th percentile program for failure to show 
measurable reduction in voucher concentration of HCV tenants since 2001 
when the program started, which strongly suggests that the 
deconcentration objective is not being met.\5\
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    \4\ From 2000 to 2010, however, voucher concentration rose in 
the largest metro areas, even though most of those areas used 50th 
percentile FMRs for at least part of that period. Kirk McClure, Alex 
F. Schwartz, and Lydia B. Taghavi, ``Housing Choice Voucher Location 
Patterns a Decade Later,'' November, 2012, p 7. In 2010, 24 percent 
of vouchers in the 50 largest areas were used in tracts where at 
least 10 percent of households used vouchers, compared to 16 percent 
in 2000, p 7.
    \5\ Areas may subsequently requalify for 50th percentile status 
after a 3-year period.
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History of Small Area FMRs

    Since the establishment of the 50th percentile program, HUD has 
developed Small Area FMRs to reflect rents in ZIP code based areas with 
a goal to improve HCV tenant outcomes. Small Area FMRs have been shown 
to be a more direct approach to encouraging tenant moves to housing in 
lower poverty areas by increasing the subsidy available to support such 
moves.\6\ Since 2010, when the United States Census Bureau made 
available data collected over the first 5 years of the American 
Community Survey (ACS), HUD has considered various methodologies that 
would set FMRs at a more granular level. HUD's goal in pursuing the 
Small Area FMR methodology is to create more effective means for HCV 
tenants to move into higher opportunity, lower poverty areas by 
providing them with subsidy adequate to make such areas accessible and 
to thereby reduce the number of voucher families that reside in areas 
of high poverty concentration.
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    \6\ Please see Collinson and Ganong, ``The Incidence of Housing 
Voucher Generosity'', available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255799.
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    Toward this end, through a Federal Register notice published on May 
18, 2010, at 75 FR 27808, HUD announced that in Fiscal Year (FY) 2011 
it would seek to conduct a Small Area FMR demonstration project to 
determine the effectiveness of FMRs which are published using U.S. 
Postal Service ZIP codes as FMR areas within metropolitan areas. HUD 
also solicited public comment on the proposed demonstration. On 
November 20, 2012, at 77 FR 69651, HUD announced the commencement of 
the Small Area FMR Demonstration, for which advance notice was provided 
on May 18, 2010, and further announced the participation of the 
following PHAs: The Housing Authority of the County of Cook (IL), the 
City of Long Beach (CA) Housing Authority, the Chattanooga (TN) Housing 
Authority, the Town of Mamaroneck (NY) Housing Authority, and the 
Housing Authority of Laredo (TX).
    Through a second Federal Register notice published on August 4, 
2010, at 75 FR 46958, HUD mandated the use of Small Area FMRs in place 
of metropolitan-area-wide-FMRs to settle litigation in the Dallas, TX, 
HUD Metro FMR Area.
    While HUD awaits the overall evaluation of the demonstrations for 
wide-scale implementation, HUD is proposing the use of Small Area FMRs 
as an effective alternative to the 50th percentile for addressing high 
levels of voucher concentration. If HUD has additional data and 
information on the effects of these demonstrations prior to publishing 
the final rule, HUD will analyze, review and release those data prior 
to publishing a final rule.
    Small Area FMRs have been in operation in Dallas, Texas, as part of 
a court settlement since 2010, and in a small number of PHAs since 
2012. There is encouraging evidence from Dallas which finds that under 
Small Area FMRs voucher households in Dallas who chose to move are 
moving to significantly safer and lower poverty neighborhoods, with 
about the same average costs for vouchers overall. Collinson and Ganong 
find that Dallas tenants who have chosen to move since the 
implementation of Small Area FMRs have moved to higher quality 
neighborhoods in the southern and eastern portions of the metropolitan 
area from the lowest quality inner city neighborhoods.
    Based on HUD's research and HUD's experience with the Small Area 
FMR demonstrations, HUD believes that amending its current FMR 
regulation to adopt the Small Area FMR methodology would provide HCV 
tenants with greater access to areas of opportunity. As a first step in 
this direction, on June 2, 2015, at 80 FR 31332, HUD published an 
advance notice of proposed rulemaking (ANPR) entitled ``Establishing a 
More Effective Fair Market Rent (FMR) System; Using Small Area Fair 
Market Rents (Small Area FMRs) in Housing Choice Voucher Program 
Instead of the Current 50th Percentile FMRs.'' In this ANPR, HUD 
announced its intention to amend HUD's FMR regulations applicable to 
the HCV program to provide HCV tenants with subsidies that better 
reflect the localized rental market, including subsidies that would be 
relatively higher if they move into areas that potentially have better 
access to jobs, transportation, services, and educational 
opportunities. The ANPR sought public comment on the use of Small Area 
FMRs for the HCV program within certain metropolitan areas. HUD 
received 78 public comments in response to the ANPR. Later in this 
preamble, HUD identifies and responds to significant issues raised by 
the commenters.

III. This Proposed Rule

    Through this rulemaking, HUD proposes to eliminate the use of 50th 
percentile FMRs as a means to reduce HCV tenant concentration and 
implement, in its place, Small Area FMRs. HUD's current policy for 
addressing areas in which voucher holders are particularly concentrated 
is based on a 2000 rule, which established the regulations allowing use 
of the 50th percentile rents, rather than the 40th, based on certain 
criteria which areas must meet. The regulations codified by the 2000 
rule also specified criteria to be used in evaluating areas using the 
50th percentile. The evaluation criteria yielded the unintended 
consequence of areas cycling in and out of 50th percentile FMRs.
    In this rulemaking, HUD proposes to establish FMRs for certain 
metropolitan areas using ZIP codes within the metropolitan area. HUD 
also proposes the following criteria to determine which FMR areas would 
use Small Area FMRs for their voucher program operations:
    1. Current HUD Metropolitan FMR areas where there are at least 
2,500 HCVs under lease; and
    2. Where at least 20 percent of the standard quality rental 
stock,\7\ within

[[Page 39222]]

the Metropolitan FMR, is in Small Areas (ZIP codes) where the Small 
Area FMR is more than 110 percent of the metropolitan FMR; and
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    \7\ To ensure that units are suitable for voucher participants, 
HUD will use its special tabulations of American Community Survey 
data in assessing the location of rental units. Specifically, HUD 
will use the distribution of Adjusted Standard Quality Rental Units. 
Standard quality units are designated rental units, where the renter 
pays cash rent. The unit must be on less than 10 acres, have 
complete plumbing and kitchen facilities and does not include meals 
in rent. In order to also eliminate units that are likely to be 
assisted or otherwise unsuitable for HCV tenants, HUD also provides 
the Census Bureau with a ``public housing cut off'' rent. The Census 
Bureau adjusts the distribution of standard quality units by 
eliminating any unit in the distribution of gross rents with rents 
below the cut off.
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    3. HUD measurement of the percentage of voucher holders living in 
concentrated low-income areas relative to all renters within these 
areas exceeds 155 percent (or 1.55). HUD will calculate the percentage 
of HCV holders living in concentrated low income areas within each 
metropolitan FMR area using the count of HCV renters living in 
concentrated low-income areas divided by the count of HCV renters in 
the metropolitan FMR Area. HUD will then calculate the percentage of 
renter occupied units in concentrated low income areas within each 
metropolitan area using the count of renter occupied units in 
concentrated low income areas within each metropolitan FMR area divided 
by the count of renter occupied units within the metropolitan FMR area. 
HUD will divide the voucher percentage by the renter occupied unit 
percentage to arrive at a propensity or likelihood that a voucher 
holder is more likely to live in a concentrated low-income area than 
are renters in general. If this measure over the entire metropolitan 
area exceeds 155 percent (or 1.55) the area qualifies.\8\
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    \8\ For any given metro area this is (HCVlo/HCVm)/(ROUlo/ROUm) 
where HCV is the count of voucher tenants, ROU is the number of 
renter occupied units, lo represents the set of low opportunity 
tracts in the metropolitan area, and m represents the entire 
metropolitan area.
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    For the purposes of this proposed rule, ``concentrated low-income 
areas'' are defined as those Census tracts in the metropolitan FMR area 
with a poverty rate of 25 percent or more, or any tract in the 
metropolitan FMR area where at least 50 percent of the households earn 
less than 60 percent of the area median income and are designated as 
Qualified Census Tracts (QCT) in accordance with section 42 of the 
Internal Revenue Code (26 U.S.C. 42). HUD is using the QCT income 
qualification standards as it is a normalized measure of low income to 
cover roughly the same population in each metropolitan area. Appendix A 
of this proposed rule lists the areas that currently meet the three 
criteria listed above. All other HUD programs that use FMRs would 
continue to use metropolitan area-wide FMRs.
    In addition to amending Sec.  888.113 to remove the 50th percentile 
FMR approach and establish a Small Area FMR based approach, HUD 
proposes to amend the following regulatory provisions in order to 
facilitate operation of the voucher program under the Small Area FMR 
based approach:
    1. HUD proposes to update paragraph (d) to provide that FMR areas 
include metropolitan and nonmetropolitan areas and Small Areas using 
ZIP Codes within the metropolitan area. HUD also proposes to revise 
Sec.  888.113(e) to reflect current data sources used to determine FMRs 
and paragraphs (f), and (g) to reflect current terminology used in 
determining FMRs.
    2. HUD proposes to add paragraph (h) to Sec.  888.113 to address 
the transition of project based voucher (PBV) assistance to Small Area 
FMRs. Specifically, HUD proposes to make the Small Area FMRs only 
applicable to PBV projects where the PHA notice of owner selection is 
made after the effective date of the Small Area FMR designation. For 
all other PBV projects (those projects under an Housing Assistance 
Payment (HAP) contract or where the PHA notice of owner selection was 
made an Agreement to enter into a Housing Assistance Payment (AHAP) 
contract prior to the effective date of the Small Area FMR 
designation), the metropolitan-wide FMR will remain applicable to the 
project unless the owner and the PHA mutually agree to use the Small 
Area FMR.
    3. HUD proposes to add paragraph (i) to Sec.  888.113 to address 
the transition of those areas designated 50th percentile FMRs for which 
the 3-year period has not expired prior to the effective date of this 
rule. As proposed, a metropolitan area designated as 50th percentile 
FMR area that is designated for Small Area FMRs in accordance with 
Sec.  888.113(c) will transition to the Small Area FMRs upon the 
effective date of the Small Area FMR designation. For 50th percentile 
FMR areas that are not designated as Small Area FMR areas in accordance 
with Sec.  888.113(c), the area will remain under 50th percentile FMRs 
until the expiration of the three-year period, at which time the 
metropolitan area will revert to the standard FMRs based on the 40th 
percentile rent. HUD does not propose removing the ability of PHAs with 
jurisdictions within an FMR area reverting to the standard 40th 
percentile FMR to request HUD approval of payment standard amounts 
based on the 50th percentile rent in accordance with the requirements 
of Sec.  982.503(f). To implement this transition, and establish 
success rate payment standards amounts in accordance with Sec.  
982.503(e), paragraph (i)(3) provides that HUD will continue to 
determine the 50th percentile rents. As is the case for determining 
40th percentile rents, the 50th percentile rents will be drawn from the 
distribution of rents of all units that are occupied by recent movers 
and adjustments are made to exclude public housing units, newly built 
units and substandard units.
    4. HUD proposes to amend two regulatory provisions in part 982. 
Part 982 contains HUD's regulations for the Section 8 Tenant-Based 
Assistance: Housing Choice Voucher Program. Specifically, HUD proposes 
to:
    a. Amend Sec.  982.503, which addresses ``Payment standard amount 
and schedule.'' This rulemaking proposes to amend Sec.  982.503(c), 
which addresses HUD approval of exception payment standard amount and 
which currently reflects the 40th and 50th percentile rent method. This 
paragraph would be amended to reflect the changes proposed to Sec.  
888.113 to implement Small Area FMRs. Specifically, the current 
regulation for exception payment standards relies on rent differentials 
between a small portion of an FMR area and the FMR area itself and 
includes limitations on the size of the exception area based on the 
population of the FMR area. This new regulation is constructed to 
account for the FMR area now being defined as a ZIP code within certain 
metropolitan areas.
    b. In part 982, HUD would also amend Sec.  982.507(a)(2)(ii), which 
addresses ``Rent to owner: Reasonable Rent'' to provide for PHAs using 
Small Area FMRs, rent reasonableness redeterminations would be 
triggered if there is a 10 percent or greater decline in FMRs.
    5. In part 983, HUD proposes to amend Sec.  983.302(a)(2), which 
addresses ``Redetermination of rent to owner'' to provide that for PHAs 
designated to use Small Area FMRs, rent reasonableness redeterminations 
would be triggered if there is a 10 percent or greater decline in FMRs.
    6. HUD would also amend HUD's Section 8 Management Assessment 
Program (SEMAP) regulations in part 985, to amend Sec.  985.3, which 
addresses ``Indicators, HUD verification methods and ratings.'' The 
proposed rule would amend this section to provide that the reasonable 
rent indicator would, for PHAs designated to use Small Area FMRs, 
reference, similar to Sec.  982.507, the 10 percent decline in FMRs in 
lieu of the 5 percent decline in FMRs currently referenced.

IV. Overview of ANPR Comments and HUD Responses

    As noted earlier in this preamble, on June 2, 2015, HUD published 
an ANPR requesting public comment on replacing

[[Page 39223]]

the 50th percentile FMR approach with the Small Area FMR approach. By 
the end of the public comment period on July 2, 2015, HUD received 78 
public comments. The following presents a general summary of the 
comments received and HUD's response to those comments:
    Comment: Complete the current demonstration. Several commenters 
urged HUD to take no further action in moving Small Area FMRs forward 
until the current Small Area FMR demonstration is concluded and a 
report has been issued examining the results of the demonstration.
    HUD Response: HUD agrees that concluding the current demonstration 
and reviewing the results is an important step before deciding whether 
or not to implement Small Area FMRs for all metropolitan FMR areas. 
However, research shows that 50th percentile FMRs do not provide 
adequate subsidy to help voucher holders find suitable units in areas 
of opportunity. While 50th percentile FMRs increase the level of 
subsidy across the entire FMR area, Small Area FMRs better target 
opportunity areas by raising the FMRs in these specific areas. 
Furthermore, regulations pertaining to deconcentration and tri-annual 
recertifications may cause areas to cycle in and out of the 50th 
percentile program. This cycling is detrimental to the operations of 
the HCV program and the HCV tenants in these areas, which is why HUD is 
proposing to remove the 50th percentile approach, and replace it with a 
Small Area FMR based approach. HUD described the selection criteria in 
section III of this preamble. The criteria were selected such that the 
voucher concentration in low-income neighborhoods relative to all 
rental units and the proportion of all rental units with Small Area 
FMRs above the basic range exceed the national averages. The areas that 
meet these criteria by current data include about 564,000 voucher 
tenants, however not all of these voucher tenants will necessarily be 
affected because these areas contain several Moving-to-Work 
Demonstration PHAs that may or may not use Small Area FMRs.
    Comment: Small Area FMR approach would run the risk that units 
currently with vouchers would not be renewed in HCV program. HUD 
received many comments from property owners, landlords and other 
housing providers that expressed this concern. These comments generally 
focused on property owners/managers with current voucher tenants, 
typically within the city of Baltimore, Maryland. These comments 
suggested that if HUD were to move to Small Area FMRs, these units 
would not be renewed in the voucher program because the rents for the 
units would be too low.
    HUD Response: These units would be renewed if the family chooses to 
remain and the rent is reasonable. Furthermore, HUD believes that the 
use of Small Area FMRs removes a barrier that tenants currently have in 
accessing housing units in areas of opportunity; namely, that subsidy 
levels are not high enough to afford rental units in these high 
opportunity neighborhoods. HUD further believes that if housing 
authorities determine that current rents in areas with declining Small 
Area FMRs are reasonable, tools are in place to address these 
situations (exception payment standards, reasonable accommodation, 
etc.)
    Comment: Small Area FMR approach would increase administrative 
burden. Several commenters expressed concern that Small Area FMRs would 
increase the administrative burden of operating the voucher program. 
Commenters stated that this concern is compounded because, as they 
stated, their administrative fee payments are inadequate to meet 
administrative costs.
    HUD Response: HUD recently released a final report on the costs of 
running a high performing housing authority \9\ and HUD is currently 
engaged in a proposed rulemaking effort regarding the administrative 
fee formula. Consequently, this proposed rule does not address the 
adequacy of administrative fees. HUD has undertaken several steps to 
minimize the burden of implementing Small Area FMRs. One of these ways 
is to round Small Area FMRs to the nearest ten dollars to make it 
easier to arrange the small areas into payment standard groups.
---------------------------------------------------------------------------

    \9\ Housing Choice Voucher Program Administrative Fee Study: 
Final Report (available at: https://www.huduser.gov/portal/publications/affhsg/hcv_2015draftfinalreport.html).
---------------------------------------------------------------------------

    Comment: HUD should address the consequence for voucher tenants who 
choose not to move to units where Small Area FMR is below current 
metropolitan FMR. Commenters expressed concern about what happens to 
tenants who choose not to move from their housing units in areas where 
the Small Area FMR is below the current Metropolitan FMR. Commenters 
also expressed concern that a significant and abrupt decrease in the 
FMR for ZIP code areas could reduce housing choices for families by 
closing opportunities in low-rent areas before new opportunities emerge 
in higher rent areas.
    HUD Response: Under the current FMR regulations, tenants in areas 
where the payment standard decreases do not face lower housing 
assistance payments until the second annual reexamination of income 
following the payment standard decline. Depending on the timing of 
income reexaminations, tenants will have between 13 and 24 months 
advanced notification prior to experiencing the payment standard 
decreases. HUD is not proposing any specific changes in this proposed 
rule to the existing payment standard reduction protections for 
families currently under a housing assistance payment (HAP) or the 
existing methodology by which the Small Area FMRs are currently 
determined. If the PHA determines that higher rents are warranted in a 
particular area, PHAs are encouraged to apply for exception payment 
standards under Sec.  982.503(c). PHAs may seek payment standard 
waivers for reasonable accommodations.
    Specific solicitation of comment: HUD is specifically seeking 
comment on these issues for areas that are transitioning to Small Area 
FMRs under this proposed rule so that HUD may make a more informed 
decision on incorporating protections in the final rule. HUD is 
particularly interested in suggestions that may alleviate the above 
concerns without appreciably increasing administrative complexity and 
burden in the HCV program. Please see Section V, Request for Comments, 
below.
    Comment: Use of Small Area FMRs as they related to project-based 
voucher (PBV) units. In the ANPR, HUD solicited comment on the use of 
Small Area FMRs as they relate to PBV subsidized units. HUD received 
several comments in response to this specific solicitation. The 
commenters' recommendations went in a variety of directions (i.e., some 
suggested no PBV should use Small Area FMRs, some suggested only new 
PBVs should use Small Area FMRs, and others suggested that all PBV use 
Small Area FMRs)
    HUD Response: In the PBV program, FMRs will impact the location of 
PBV projects because the rent to the owner generally may not exceed 110 
percent of the applicable FMR for the bedroom count minus any utility 
allowance. Applying Small Area FMRs to project-based vouchers may 
further improve locational outcomes and deconcentrate poverty because 
the PHA may be able to establish PBV rents that will make projects 
financially feasible in higher opportunity neighborhoods that are 
typically out of reach under the metropolitan area FMRs. Project-based 
vouchers can be a very effective strategy for increasing the supply of 
rental units available to voucher families in areas of opportunity, 
especially in those

[[Page 39224]]

neighborhoods where the number of private rental units and landlords 
willing to participate in the program may otherwise be very limited.
    While Small Area FMRs present a promising opportunity to improve 
locational outcomes with respect to future PBV projects, HUD 
acknowledges that transitioning to Small Area FMRs could have negative 
consequences for some existing PBV projects. For example, PBV 
assistance has been used to support reinvestment efforts in 
neighborhoods that have historically experienced disinvestment. These 
projects (and other existing PBV projects) may be located in ZIP code 
areas where the Small Area FMRs are substantially lower than the 
metropolitan-wide FMRs. Some PBV projects may have long-term financing 
that relies on projected rental income that was based on metropolitan-
wide FMRs. Applying the Small Area FMRs to future rent determinations 
may result in significant reductions in project income. These PBV 
projects are an important component of the affordable housing stock in 
many communities and HUD agrees it is important not to place them at 
financial risk when the area is transitioning to Small Area FMRs.
    HUD is therefore proposing to make the Small Area FMRs only 
applicable to PBV projects where the PHA notice of owner selection 
under Sec.  983.51 was made after the effective date of the area's 
designation as a Small Area FMR area. For a PBV project that is already 
under AHAP or HAP contract before the effective date of the Small Area 
FMR designation, or where the PHA notice of owner selection was made 
prior to the effective date of the Small Area FMR designation, the 
Small Area FMRs will not apply. Instead, the metropolitan-wide FMRs 
will remain applicable to the project, unless the PHA and the owner 
mutually agree to apply the Small Area FMRs to the project.
    The application of the Small Area FMRs to a PBV project by mutual 
agreement of the PHA and the owner must be prospective, and the owner 
and PHA may not subsequently choose to revert to the metropolitan area 
FMRs. If the rent to owner will increase as a result of the mutual 
agreement, the owner's rent increase may not go into effect until the 
first annual anniversary of the HAP contract in accordance with Sec.  
983.302(b). If the PHA intends to offer owners the opportunity to 
mutually agree to apply the Small Area FMR to PBV projects, the PHA's 
policies must be included in the PHA's administrative plan.
    Comment: Small Area FMRs will curtail redevelopment. Several 
commenters expressed concern that use of Small Area FMRs will curtail 
redevelopment.
    HUD Response: The primary of objective of the tenant based HCV 
program is to provide families receiving assistance with the 
opportunity to find suitable dwellings throughout the market area. 
Rather than determining or influencing rents in an area, metro FMRs and 
Small Area FMRs are meant to reflect spatial variation in market rents. 
As such, we would not expect them to be the drivers of re-development, 
which is not easily accomplished with tenant-based subsidies. This is 
true at either the metro FMR or Small Area FMR level. By design, the 
voucher program is not a redevelopment program nor is it intended to be 
a catalyst for urban renewal. HUD has a variety of place based programs 
which are designed to spur redevelopment.
    Comment: Use of Small Area FMRs should be voluntary. Some 
commenters stated that the use of Small Area FMRs should be completely 
voluntary.
    HUD Response: In order for Small Area FMRs to work in expanding 
choice for voucher holders within designated metropolitan areas, all 
PHAs operating in the FMR area would be required to use Small Area 
FMRs. It is further noted that a PHA outside of a HUD designated Small 
Area FMR area may opt to use Small Area FMRs by requesting approval 
from HUD to do so.
    Comment: The only selection criteria should not be poverty. 
Commenters stated that poverty should not be the only selection 
criteria.
    HUD Response: Recent research demonstrates that long term outcomes 
for families are improved the sooner the family is able to move out of 
areas with high poverty rates.\10\ However, HUD agrees with commenters 
that additional criteria should be used to determine targeted areas. 
Therefore, HUD has added an income-based criterion to the area 
selection algorithm to identify places where a majority of families 
qualify for HUD rental assistance but the area would not qualify as 
high poverty under a strict poverty only threshold. Specifically, areas 
where more than 50 percent of the households have incomes below 60 
percent of area median family income and are designated as QCTs but do 
not have poverty rates in excess of 25 percent are eligible for to be 
identified as a Small Area FMR metropolitan area, if the other 
selection criteria (number of vouchers, concentration of vouchers) are 
met. By using an income-based criterion in addition to a strict poverty 
based criterion, HUD strives to ensure that lower income families have 
expanded access to areas of opportunity even if they are not currently 
living in areas with high concentrations of voucher holders in extreme 
poverty conditions.
---------------------------------------------------------------------------

    \10\ Chetty, Raj, Nathaniel Hendren, and Lawrence Katz, 2016. 
``The Effects of Exposure to Better Neighborhoods on Children: New 
Evidence from the Moving to Opportunity Project.'' American Economic 
Review 106 (4).
---------------------------------------------------------------------------

    Comment: ZIP Codes may be too large and not constitute a housing 
market. Commenters are concerned that even within ZIP codes, there is 
significant variation among rents and Small Area FMRs do not capture 
these nuances.
    HUD Response: PHAs will still have the ability to establish 
separate payment standard amounts for designated areas within an FMR 
area, so in cases where rents vary significantly, PHAs will be able to 
set multiple payment standards within a ZIP code. PHAs will also have 
the opportunity to request exception payment standards within ZIP 
codes.

V. Request for Comments

    While HUD seeks comment on all aspects of this proposed rule, HUD 
specifically seeks comment on the following topics:
    1. Should HUD provide for PBVs that are in the pipeline to continue 
using metropolitan FMRs even if the area is designated as a Small Area 
FMR area? Additionally, should HUD require newly proposed PBVs post 
Small Area FMR designation to use Small Area FMRs?
    2. The proposed rule provides for Small Area FMR area selection 
parameters to be codified in regulatory text. HUD is seeking comment on 
whether these parameters should be codified or should be incorporated 
into each annual proposed FMR notice to provide HUD, PHAs, and other 
stakeholders with flexibility, in any given fiscal year, to offer 
changes to these selection parameters and have the opportunity to 
comment before any changes to the parameters are made.
    3. Several commenters to HUD's ANPR suggested that HUD provide for 
tenant rent protections in ZIP codes where the Small Area FMR is below 
the metropolitan area and tenants choose not to move. No additional 
tenant protections were instituted for tenants serviced by PHAs 
accepting HUD's invitation to participate in the Small Area FMR 
demonstration nor were additional tenant protections implemented for 
tenants living in the Dallas, TX HUD Metropolitan Area when Small Area 
FMRs were implemented there. However, as part of a transition strategy 
between Metropolitan FMRs and Small Area

[[Page 39225]]

FMRs, HUD seeks comment on what additional policies or requirements the 
final rule should include that would mitigate the impact of significant 
and abrupt decreases in the FMRs for certain ZIP code areas on families 
currently under HAP contract in those impacted areas.
    4. Related to question 3, HUD seeks comment on whether the final 
rule should limit the potential decline in the FMR for a ZIP code area 
resulting from the implementation of Small Area FMRs in order to ensure 
that sufficient housing opportunities remain available to voucher 
holders? If so, HUD seeks recommendations on specific policies or 
requirements that should be included in the final rule to achieve the 
desired outcome.
    a. For example, an approach would be to allow the PHA to establish 
exception payment standards above the basic range for impacted ZIP code 
areas meeting certain conditions through a streamlined HUD approval 
process. One example of this may be that PHAs could have the discretion 
of setting their payment standards at up to 130 percent of the Small 
Area FMR in the 1st year of transition, at up to 120 percent of the 
Small Area FMR in the 2nd year of transition, and at up to 110 percent 
of the Small Area FMR in the 3rd and subsequent years following 
implementation.
    b. With respect to protections for tenants currently under HAP 
contract, one possibility may be to increase the amount of time that 
the family is held harmless from a decrease in the payment standard. 
For instance, instead of the lower payment standard going into effect 
on the second reexamination following the effective date of the 
decrease in the payment standard, the final rule could provide that the 
lower payment standard would not go into effect for a family under HAP 
contract until a later re-examination (e.g., third, fourth, or fifth 
reexamination).
    5. The proposed rule adds a new paragraph (i) to Sec.  888.113 to 
address the transition of metropolitan areas that were previously 
subject to 50th percentile FMRs. HUD believes that the Small Area FMR 
methodology will provide HCV tenants with greater access to areas of 
opportunity than metropolitan area wide 50th percentile FMRs. As a 
result, this rule proposes that a 50th percentile metropolitan area 
designated for Small Area FMRs would transition to Small Area FMRs on 
the effective date of the Small Area FMR designation. HUD is also 
proposing that a 50th percentile FMR area that is not designated for 
Small Area FMRs would remain under the 50th percentile FMRs until the 
end of the existing 3-year period for the 50th percentile FMRs prior to 
reverting to the standard 40th percentile FMRs. The rule does not 
eliminate provisions that permit a PHA with jurisdiction in a 50th 
percentile FMR area that reverts to the standard 40th percentile FMR to 
request HUD approval of payment standard amounts based on the 50th 
percentile rent in accordance with the existing Sec.  982.503(f); 
however, HUD is specifically seeking comment on whether this provision 
should be eliminated in order to phase out the use of 50th percentile 
rents for deconcentration purposes. HUD would also appreciate comments 
as to whether or not the current SEMAP deconcentration standard is 
appropriate as the basis for PHAs requesting HUD to approve payment 
standards based on 50th percentile rents under existing Sec.  
982.503(f).
    HUD is specifically seeking comment on these proposed polices, as 
well as suggestions for alternative approaches or other recommendations 
on how best to phase-out 50th percentile rent FMRs for impacted 
metropolitan areas and transition the area to either the Small Area 
FMRs or the standard metropolitan-wide 40th percentile FMRs.
    6. HUD is specifically seeking comment on how to reduce the 
administrative burden on PHAs and simplify the transition to Small Area 
FMRs. For example, HUD is proposing to change the percentage decrease 
in FMRs that triggers rent reasonableness redeterminations from 5 
percent to 10 percent for Small Area FMR PHAs. HUD requests comments, 
however, regarding whether 10 percent is the right trigger for program-
wide rent reasonableness redetermination, whether HUD should limit this 
proposal to Small Area FMR decreases, or also change the percentage of 
decrease that triggers rent reasonableness for all FMRs, and whether it 
should revise the trigger for program-wide rent reasonableness 
redeterminations at all. In regards to potentially expanding the 10 
percent trigger for rent reasonableness redetermination to a program-
wide requirement, HUD seeks comments on the trade-offs between 
administrative relief and decreased program oversight on rent levels. 
HUD also requests comments on what other changes would reduce the 
potential administrative burden and complexity for PHAs impacted by the 
implementation of Small Area FMRs.
    7. HUD is currently proposing, through this rulemaking, to expand 
the use of Small Area FMRs within the HCV program. HUD seeks public 
comment as to whether or not other HUD rental assistance programs would 
benefit from using Small Area FMRs in their operations. For example, 
would the rental assistance component of the Housing Opportunities for 
Persons with AIDS (HOPWA) programs be a candidate for Small Area FMR 
treatment? Frequently, metropolitan FMRs are inadequate for HOPWA-
assisted tenants to find units near health care facilities, or in 
neighborhoods with better job opportunities. Should the HOPWA program 
regulations be amended to allow participating jurisdictions the 
flexibility to set tenant-based assistance rents according to Small 
Area FMRs either in areas that would be designated Small Area FMR areas 
or for the HOPWA program more generally? Would other HUD programs 
benefit as well?
    8. As currently proposed, the Small Area FMR policy would apply to 
all residents within a ZIP code who receive housing vouchers. HUD seeks 
comment on whether there are certain situations or any specific groups 
of voucher recipients within the general population, such as persons 
with disabilities or elderly voucher recipients, where an alternate 
policy should apply that should exempt them from having their voucher 
level change as a result of this policy due to specific hardships they 
may encounter by having to choose between staying in their current area 
and receiving a smaller voucher or moving to a new area for the sake of 
obtaining a larger voucher?
    9. Are there specific groups within the general population of 
voucher holders for whom this policy change would be particularly 
burdensome? What are the ways in which this policy change could create 
a disproportionate burden on certain groups like elderly and disabled 
voucher holders?
    10. HUD is seeking comment on the criteria that HUD selected for 
determining which metropolitan areas should be impacted by the shift to 
a Small Area FMR instead of the current 50th percentile policy. Did HUD 
use the correct criteria in making these choices? What other criteria 
should HUD be using to select metropolitan areas that will be impacted 
by this rule change and why are those criteria important?
    11. The proposed rule makes no changes to 24 CFR 888.113(g), the 
FMR for Manufactured home space rental for voucher tenants that own 
manufactured housing units. Under this proposed rule Small Area FMRs 
would apply to manufactured home space rentals in areas designated for 
Small Area FMRs

[[Page 39226]]

(i.e., FMRs for space rentals would be set at 40 percent of the 2-
bedroom Small Area FMR). Given the costly nature of moving a 
manufactured home, HUD is seeking comment on whether or not current 
voucher holders using their voucher for a manufactured home space 
should be exempt from Small Area FMRs at their current address?
    12. HUD has proposed to amend the Exception Payment Standard rules 
at 24 CFR 982.503 to account for the fact that FMR areas in Small Area 
FMR designated metropolitan areas will be ZIP codes. HUD is seeking 
public comment to determine if there are other amendments HUD should 
make to the Exception Payment Standard Regulations to better facilitate 
the approval process of Exception Payment Standards. For example, the 
current exception payment standard regulations require that an 
exception payment standard may not include more than 50 percent of the 
population of the FMR area. This may be an impractical requirement when 
determining exception payment standards within a ZIP code. Similarly, 
given that ZIP codes more narrowly define the FMR area, the provision 
within the regulation that program justification may include helping 
families find housing outside areas of high poverty may not be 
applicable even though an exception payment standard may be necessary. 
Therefore, HUD is soliciting feedback to ensure that the exception 
payment standard regulations are revised so that PHAs may use this 
component of the regulations to optimize the administration of their 
HCV programs.
    13. HUD makes administrative data for research into HUD's programs 
available in a variety of ways (i.e., Public Use Microdata Sample--PUMS 
data, Research Partnerships, and Data License Agreements). HUD seeks 
comment on what additional data or dissemination strategies would be 
helpful to the public to assess the impact of the implementation of the 
Small Area FMR proposed rule.

VI. Commitment To Study Effectiveness of Rule

    If following this proposed rule and consideration of public 
comments on this proposed rule, HUD proceeds to establish use of Small 
Area FMRs in the administration of the HCV program in areas where 
voucher tenants are disproportionately concentrated in high poverty 
neighborhoods, HUD recognizes the importance of monitoring the progress 
of use of Small Area FMRs in addressing high levels of voucher 
concentration. This proposed rule would set FMRs at the ZIP Code level 
as a tool to help voucher tenants deconcentrate rather than the current 
tool of FMRs being based on 50th percentile rents. The core hypothesis 
is that this will significantly expand the ability of HCV holders to 
access housing in neighborhoods with high-quality schools, low crime 
rates, and other indicators of opportunity, as well as integrated 
neighborhoods in support of HUD's goal of affirmatively furthering fair 
housing. However, HVC holders that choose to remain in lower-rent high-
poverty neighborhoods will see a reduction in the subsidy provided by 
the voucher.
    The move to expand the use of Small Area FMRs is a significant 
policy shift for HUD. Consequently, HUD believes that understanding the 
impact of the policy shift away from 50th percentile FMRs to using 
Small Area FMRs for deconcentration is important. There are a variety 
of avenues through which this policy review could be accomplished, in 
terms of assessing the direct effects on the primary goal of 
deconcentration, and in terms of long term, location-related impacts. 
Therefore, HUD is committed to partnering in these research efforts 
through a variety of channels including our current Research 
Partnerships, Data Licensing Agreements, as well as HUD-funded research 
efforts. Initial research efforts will likely focus primarily on 
location outcomes, such as neighborhood characteristics of voucher 
holders both pre- and post-implementation of this policy. This research 
will also look at the effect on after-rent incomes of voucher holders 
who move to new areas and of those who choose to stay in poorer 
neighborhoods. Longer term research efforts could expand to consider 
tenant outcomes and contribute to the growing research findings of the 
importance of neighborhood impacts, particularly on adult outcomes of 
children afforded the opportunity to move to higher quality 
neighborhoods.
    The most immediate studies of nearer term effects of the rule, to 
be undertaken within 5 years of the effective date of a final rule, 
will focus on the following issues:
     ZIP-Code-level FMRs allow greater variation in payment 
standards within a metropolitan area. This increases the range of 
neighborhoods HCV recipients can access using vouchers relative to 
metro-wide FMRs. For examining these issues, research may focus on the 
potential of Small Area FMRs to increase access to opportunity by 
analyzing the characteristics of neighborhoods in the service areas of 
the Small Area FMR PHAs by the share of units renting below the FMR 
before and after introduction of Small Area FMRs. Additionally, the 
research in this arena would focus on the observed effect of the 
adoption of Small Area FMRs on location and relocation outcomes of both 
new and existing HCV families. Such outcomes may focus on neighborhood 
poverty rates pre- and post-implementation, as well as other 
neighborhood characteristics such as crime rates and school rankings. 
Voucher holders financial well-being may also be assessed through an 
examination of rent burdens both before and after the implementation of 
the Small Area FMR policy.
     Landlords' interest in and awareness of the HCV program 
may also be affected by a move to Small Area FMRs. HUD anticipates that 
higher payment standards in high-cost ZIP Codes would attract landlord 
interest while lower payment standards in low-cost ZIP Codes may 
discourage engagement with the program. The market response is likely 
to be based substantially on the extent to which the Small Area FMRs 
and the resulting payment standards actually provide sufficient funding 
to make it possible for tenants to rent units in areas of opportunity. 
While landlords in lower-cost neighborhoods may consider lowering (or 
not increasing) rent to retain a good tenant, it is less likely that 
landlords in opportunity areas will make rent concessions. However, 
landlords are still not required to participate in the HCV program so 
the success of Small Area FMRs in allowing HCV holders to access 
opportunity areas will depend on landlord willingness to participate in 
the program. Consequently, HUD may choose to study if the number of 
rental units in areas where the Small Area FMR is above the 
metropolitan FMR increases and/or the number of landlords offering 
those units increase.
     A switch to Small Area FMRs will also affect the local 
PHAs that administer the HCV program. The change in Small Area FMRs 
could ultimately alter the average amount PHAs pay to landlords for the 
units they offer. Initial estimates of the impact of Small Area FMR-
based payment standards on program cost, where only tenants' current 
locations are observed and before any moves can happen, generally 
predict a reduction in average subsidy cost as current voucher tenants' 
locations bias toward lower rent ZIP Codes. If a large enough share of 
households respond to Small Area FMRs by more frequently moving to or 
selecting higher-cost areas, a PHA may be able to ultimately fund fewer

[[Page 39227]]

vouchers relative to the 40th percentile (or, alternatively, require 
additional funding from HUD to continue serving their baseline number 
of voucher-holders). The need to derive payment standards from Small 
Area FMRs rather than metro FMRs will likely require changes to PHAs' 
administrative processes and systems, particularly for the initial 
switch. Research in this area may rely upon HUD's administrative data 
comparing the changes in Housing Assistance Payment (HAP) costs over 
time. Furthermore, HUD may choose to assess the number of different 
payment standards the PHA administers through their annual SEMAP 
reporting.
    In addition, HUD seeks public comment on any other issues to be 
included in a future retrospective review of a final Small Area FMR 
rule.

VII. Findings and Certifications

Regulatory Planning and Review

    OMB reviewed this proposed rule under Executive Order 12866 
(entitled ``Regulatory Planning and Review''). This rulemaking was 
determined to be an ``economically significant regulatory action,'' as 
defined in section 3(f)(1) of the order. The accompanying Regulatory 
Impact Analysis (RIA) for this rulemaking addresses the costs and 
benefits that would result if this proposed rule were to be implemented 
can be found at https://www.regulations.gov. The docket file 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 7th Street SW., Room 
10276, Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the docket file 
must be scheduled by calling the Regulations Division at 202-708-3055 
(this is not a toll-free number). Hearing- or speech-impaired 
individuals may access this number through TTY by calling the Federal 
Relay Service at 800-877-8339 (this is not a toll-free number).

Unfunded Mandates Reform Act

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

Environmental Impact

    This proposed rule does not direct, provide for assistance or loan 
and mortgage insurance for, or otherwise govern, or regulate, real 
property acquisition, disposition, leasing (other than tenant-based 
assistance), rehabilitation, alteration, demolition, or new 
construction, or establish, revise or provide for standards for 
construction or construction materials, manufactured housing, or 
occupancy. Accordingly, under 24 CFR 50.19(c)(1), this proposed rule is 
categorically excluded from environmental review under the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321).

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. 
HUD has prepared an Initial Regulatory Flexibility Analysis (IRFA) of 
the proposed rule, which is found in Appendix B to this proposed rule. 
HUD finds in the IRFA that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
The IRFA, which is found in Appendix B to this proposed rule and can 
also be found at www.regulations.gov, elaborates, and provides details 
on how HUD made this finding. HUD invites comments regarding any less 
burdensome alternatives to this rule that will meet HUD's objectives, 
as described in this preamble, and elaborated upon in the IRFA.

Executive Order 13132, Federalism

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

Catalog of Federal Domestic Assistance Number

    The Catalog of Federal Domestic Assistance number for 24 CFR part 
982 is 14.871.

List of Subjects

24 CFR Part 888

    Grant programs--housing and community development, Rent subsidies.

24 CFR Part 982

    Grant programs--housing and community development, Grant programs--
Indians, Indians, Public housing, Rent subsidies, Reporting and 
recordkeeping requirements.

24 CFR Part 983

    Grant programs--housing and community development, Low and moderate 
income housing, Rent subsidies, Reporting and recordkeeping 
requirements.

24 CFR Part 985

    Grant programs--housing and community development, Public housing, 
Rent subsidies, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, HUD proposes 
to amend 24 CFR parts 888, 982, 983, and 985 as follows:

PART 888--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM--FAIR 
MARKET RENTS AND CONTRACT RENT ANNUAL ADJUSTMENT FACTORS

0
1. The authority statement for part 888 continues to read as follows:

    Authority:  42 U.S.C. 1437f and 3535d.

0
2. Revise Sec.  888.113 to read as follows:


Sec.  888.113  Fair market rents for existing housing: Methodology.

    (a) Basis for setting fair market rents. Fair Market Rents (FMRs) 
are estimates of rent plus the cost of utilities, except telephone. 
FMRs are housing market-wide estimates of rents that provide 
opportunities to rent standard quality housing throughout the 
geographic area in which rental housing units are in competition. The 
level at which FMRs are set is expressed as a percentile point within 
the rent distribution of standard quality rental housing units in the 
FMR area. FMRs are set at the 40th percentile rent, the dollar amount 
below which the rent for 40 percent of standard quality rental housing 
units fall within the FMR area. The 40th percentile rent is drawn from 
the distribution of rents of all units within the FMR area that are 
occupied

[[Page 39228]]

by recent movers. Adjustments are made to exclude public housing units, 
newly built units and substandard units.
    (b) Setting FMRs at the 40th percentile rent. Generally HUD will 
set the FMRs at the 40th percentile rent.
    (c) Setting Small Area FMRs. (1) HUD will set Small Area FMRs for 
metropolitan FMR areas where:
    (i) There are at least 2,500 Housing Choice Vouchers under lease; 
and
    (ii) At least 20 percent of the standard quality rental stock, 
within the metropolitan FMR area is in small areas (ZIP codes) where 
the Small Area FMR is more than 110 percent of the metropolitan FMR; 
and
    (iii) The measure of the percentage of voucher holders living in 
concentrated low income areas relative to all renters within these 
areas over the entire metropolitan area exceeds 155 percent (or 1.55).
    (2) For purposes of determining applicability of Small Area FMRs to 
a metropolitan area, the term ``concentrated low-income areas'' means:
    (i) Those census tracts in the metropolitan FMR area with a poverty 
rate of 25 percent or more; or
    (ii) Any tract in the metropolitan FMR area where at least 50 
percent of the households earn less than 60 percent of the area median 
income and are designated as Qualified Census Tracts in accordance with 
section 42 of the Internal Revenue Code (26 U.S.C. 42).
    (3) If a metropolitan area meets the criteria of paragraph (c)(1) 
of this section, the metropolitan area will be designated a Small Area 
FMR and all PHAs administering HCV programs in that area will be 
required to use Small Area FMRs. A PHA administering an HCV program in 
a metropolitan area not subject to the application of Small Area FMRs 
may opt to use Small Area FMRs by seeking approval from HUD's Office of 
Public and Indian Housing (PIH) through written request to PIH.
    (4) HUD will designate Small Area FMR areas at the beginning of a 
Federal fiscal year, and make such area designations every 5 years 
thereafter as new data becomes available.
    (d) FMR Areas. FMR areas comprise metropolitan and nonmetropolitan 
areas and Small Areas FMR areas as follows:
    (1) Generally, FMR areas are metropolitan areas and nonmetropolitan 
counties (nonmetropolitan parts of counties in the New England States). 
With several exceptions, the most current Office of Management and 
Budget (OMB) metropolitan area definitions of Metropolitan Statistical 
Areas (MSAs) are used because of their generally close correspondence 
with housing market area definitions. HUD may make exceptions to OMB 
definitions if the MSAs encompass areas that are larger than housing 
market areas. The counties deleted from the HUD-defined FMR areas in 
those cases are established as separate metropolitan county FMR areas. 
FMRs are established for all areas in the United States, the District 
of Columbia, Puerto Rico, the Virgin Islands, and the Pacific Islands.
    (2) Small Area FMR areas are the U.S. Postal Service ZIP code areas 
within a designated metropolitan area.
    (e) Data sources. (1) HUD uses the most accurate and current data 
available to develop the FMR estimates and may add other data sources 
as they are discovered and determined to be statistically valid. The 
following sources of survey data are used to develop the base-year FMR 
estimates:
    (i) The most recent American Community Survey conducted by the U.S. 
Census Bureau, which provides statistically reliable rent data.
    (ii) Locally collected survey data acquired through Address-Based 
Mail surveys or Random Digit Dialing (RDD) telephone survey data, based 
on a sampling procedure that uses computers to select statistically 
random samples of rental housing.
    (iii) Statistically valid information, as determined by HUD, 
presented to HUD during the public comment and review period.
    (2) Base-year recent mover adjusted FMRs are updated and trended to 
the midpoint of the program year they are to be effective using 
Consumer Price Index (CPI) data for rents and for utilities.
    (f) Unit size adjustments. (1) For most areas the ratios developed 
incorporating the most recent American Community Survey data are 
applied to the two-bedroom FMR estimates to derive FMRs for other 
bedroom sizes. Exceptions to this procedure may be made for areas with 
local bedroom intervals below an acceptable range. To help the largest 
most difficult to house families find units, higher ratios than the 
actual market ratios may be used for three-bedroom and larger-size 
units.
    (2) The FMR for single room occupancy housing is 75 percent of the 
FMR for a zero bedroom unit.
    (g) Manufactured home space rental. The FMR for a manufactured home 
space rental (for the voucher program under 24 CFR part 982) is 40 
percent of the FMR for a two bedroom unit.
    (h) Small Area FMRs and Project-based Vouchers. (1) This paragraph 
applies to project-based voucher (PBV) assistance when HUD designates a 
metropolitan area or approves a PHA jurisdiction for Small Area FMRs 
under paragraph (c)(3) of this section.
    (i) The Small Area FMRs apply to all PBV projects where the PHA 
notice of owner selection under 24 CFR 983.51(d) was made after the 
effective date of the Small Area FMR designation.
    (ii) The metropolitan area FMRs continue to apply to PBV projects 
where the PHA notice of owner selection under 24 CFR 983.51(d) was made 
on or before to the effective date of the Small Area FMR designation, 
unless the PHA and owner mutually agree to apply the Small Area FMRs to 
the PBV project. This category includes all PBV projects that were 
under Housing Assistance Payment (HAP) contract or an Agreement to 
enter into a Housing Assistance Payment (AHAP) contract prior to the 
effective date of the Small Area FMR designation.
    (iii) If the PHA and owner mutually agree to apply the Small Area 
FMR, the application of the Small Area FMRs must be prospective. The 
owner and PHA may not subsequently choose to revert back to the use of 
the metropolitan-wide FMRs for the PBV project. If the rent to owner 
will increase as a result of the mutual agreement to apply the Small 
Area FMRs to the PBV project, the rent increase shall not be effective 
until the first annual anniversary of the HAP contract in accordance 
with 24 CFR 983.302(b).
    (2) For purposes of this section, the term ``effective date of the 
Small Area FMR designation'' means:
    (i) The date that HUD designated a metropolitan area as a Small 
Area FMR area; or
    (ii) The date that HUD approved a PHA request to voluntarily opt to 
use Small Area FMRs for its HCV program, as applicable.
    (i) Transition of metropolitan areas previously subject to 50th 
percentile FMRs. (1) A metropolitan area designated as 50th percentile 
FMR areas for which the 3-year period has not expired prior to 
[Effective Date of the Final Rule] shall transition to Small Area FMRs 
as follows:
    (i) A 50th percentile FMR area that is designated for Small Area 
FMRs in accordance with paragraph (c) of this section will transition 
to the Small Area FMRs upon the effective date of the Small Area FMR 
designation;
    (ii) A 50th percentile metropolitan FMR area not designated as a 
Small Area FMRs in accordance with paragraph (c) of this section, will 
remain a 50th percentile FMR until the expiration of the three-year 
period, at which time the metropolitan area will revert to the standard 
FMR based on the

[[Page 39229]]

40th percentile rent for the metropolitan area.
    (2) A PHA with jurisdiction in a 50th percentile FMR area that 
reverts to the standard 40th percentile FMR may request HUD approval of 
payment standard amounts based on the 50th percentile rent in 
accordance with 24 CFR 982.503(f).
    (3) HUD will calculate the 50th percentile rents for certain 
metropolitan areas for purposes of this transition and to approve 
success rate payment standard amounts in accordance with 24 CFR 
982.503(e). As is the case for determining 40th percentile rent, the 
50th percentile rent is drawn from the distribution of rents of all 
units that are occupied by recent movers and adjustments are made to 
exclude public housing units, newly built units and substandard units.

PART 982--SECTION 8 TENANT-BASED ASSISTANCE: HOUSING CHOICE VOUCHER 
PROGRAM

0
3. The authority statement for part 982 continues to read as follows:

    Authority:  42 U.S.C. 1437f and 3535d.

0
4. Amend Sec.  982.503 as follows:
0
a. Revise paragraphs (c)(2) introductory text and (c)(2)(ii);
0
b. In paragraph (f), introductory text, remove ``Sec.  888.113(c)'' and 
add in its place ``Sec.  888.113(i)(3)''; and
0
c. In paragraph (f)(2), remove ``Sec.  888.113(c)'' and add in its 
place ``Sec.  888.113(i)(3)'';
    The revisions to read as follows:


Sec.  982.503  Payment standard amount and schedule.

* * * * *
    (c) * * *
    (2) Above 110 percent of FMR to 120 percent of published FMR. The 
HUD Field Office may approve an exception payment standard amount from 
above 110 percent of the published FMR to 120 percent of the published 
FMR (upper range) if the HUD Field Office determines that approval is 
justified by the median rent method or the 40th percentile rent or the 
Small Area FMR method as described in paragraph (c)(2)(ii) of this 
section (and that such approval is also supported by an appropriate 
program justification in accordance with paragraph (c)(4) of this 
section).
* * * * *
    (ii) 40th percentile rent or Small Area FMR method. In this method, 
HUD determines that the area exception payment standard amount equals 
application of the 40th percentile of rents for standard quality rental 
housing in the exception area or the Small Area FMR. HUD determines 
whether the 40th percentile rent or Small Area FMR applies in 
accordance with the methodology described in 24 CFR 888.113 for 
determining FMRs. A PHA must present statistically representative 
rental housing survey data to justify HUD approval.
* * * * *
0
5. Revise Sec.  982.507(a)(2)(ii) to read as follows:


Sec.  982.507  Rent to owner: Reasonable rent.

    (a) * * *
    (2) * * *
    (ii) If there is a 5 percent or greater decrease in the published 
FMR in effect 60 days before the contract anniversary (for the unit 
size rented by the family) as compared with the FMR in effect 1 year 
before the contract anniversary, unless the Small Area FMRs under 24 
CFR 888.113(c)(3) are applicable to the PHA, in which case the decrease 
in the published FMR is 10 percent or greater; or
* * * * *

PART 983--PROJECT-BASED VOUCHER (PBV) PROGRAM

0
6. The authority statement for part 983 continues to read as follows:

    Authority: 42 U.S.C. 1437f and 3535d.

0
7. Revise Sec.  983.301(a)(3) to read as follows:


Sec.  983.301  Determining the rent to owner.

    (a) * * *
    (3) The rent to owner is also redetermined in accordance with Sec.  
983.302.
* * * * *
0
8. Revise Sec.  983.302(a)(2) to read as follows:


Sec.  983.302  Redetermination of rent to owner.

    (a) * * *
    (2) When there is a five percent or greater decrease in the 
published FMR; unless the Small Area FMRs under 24 CFR 883.113(c)(3) 
are applicable to the PHA, in which case the decrease in the published 
FMR is ten percent or greater.
* * * * *
0
9. Revise Sec.  983.303(b)(1) to read as follows:


Sec.  983.303  Reasonable rent.

* * * * *
    (b) * * *
    (1) Whenever there is a 5 percent or greater decrease in the 
published FMR in effect 60 days before the contract anniversary (for 
the unit sizes specified in the HAP contract) as compared with the FMR 
in effect 1 year before the contract anniversary; unless the Small Area 
FMRs under 24 CFR 883.113(c)(3) are applicable to the PHA, in which 
case the decrease in the published FMR is ten percent or greater.
* * * * *

PART 985--SECTION 8 MANAGEMENT ASSESSMENT PROGRAM (SEMAP)

0
10. The authority statement for part 985 continues to read as follows:

    Authority: 42 U.S.C. 1437a, 1437c, 1437f, and 3535(d).

0
11. In Sec.  985.3 revise paragraphs (b)(1), (b)(3)(i)(B), and 
(b)(3)(ii) to read as follows:


Sec.  985.3  Indicators, HUD verification methods and ratings.

* * * * *
    (b) * * *
    (1) This indicator shows whether the PHA has and implements a 
reasonable written method to determine and document for each unit 
leased that the rent to owner is reasonable based on current rents for 
comparable unassisted units: At the time of initial leasing; if there 
is any increase in the rent to owner; at the HAP contract anniversary 
if there is a 5 percent decrease in the published fair market rent 
(FMR) in effect 60 days before the HAP contract anniversary, or a 10 
percent or greater decrease in the published FMR if the Small Area FMRs 
under 24 CFR 883.113(c)(3) are applicable to the PHA. The PHA's method 
must take into consideration the location, size, type, quality and age 
of the units, and the amenities, housing services, and maintenance and 
utilities provided by the owners in determining comparability and the 
reasonable rent. (24 CFR 982.4, 24 CFR 982.54(d)(15), 982.158(f)(7) and 
982.507)
* * * * *
    (3) * * *
    (i) * * *
    (B) Based on the PHA's quality control sample of tenant files, the 
PHA follows its written method to determine reasonable rent and has 
documented its determination that the rent to owner is reasonable in 
accordance with Sec.  982.507 of this chapter for at least 98 percent 
of units sampled at the time of initial leasing, if there is any 
increase in the rent to owner, and at the HAP contract anniversary if 
there is a 5 percent decrease in the published FMR in effect 60 days 
before the HAP contract anniversary, or a 10 percent decrease in the 
published FMR if the Small Area FMRs under 24 CFR 883.113(c)(3) are 
applicable to the PHA. 20 points.
    (ii) The PHA's SEMAP certification includes the statements in 
paragraph (b)(3)(i) of this section, except that the

[[Page 39230]]

PHA documents its determination of reasonable rent for only 80 to 97 
percent of units sampled at initial leasing, if there is any increase 
in the rent to owner, and at the HAP contract anniversary if there is a 
5 percent decrease in the published FMR in effect 60 days before the 
HAP contract anniversary, or a 10 percent decrease in the published FMR 
if the Small Area FMRs under 24 CFR 883.113(c)(3) are applicable to the 
PHA. 15 points.
* * * * *

    Dated: June 8, 2016.
Katherine O'Regan,
Assistant Secretary for Policy Development and Research.

    The following appendixes will not be published in the Code of 
Federal Regulations.

Appendix A--HUD Metropolitan FMR Areas Proposed for Small Area FMRs

------------------------------------------------------------------------
                                                                 Voucher
            HUD Metropolitan Fair Market Rent Area               count *
------------------------------------------------------------------------
New York, NY HUD Metro FMR Area...............................   119,362
Chicago-Joliet-Naperville, IL HUD Metro FMR Area..............    62,472
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA...............    32,631
Washington-Arlington-Alexandria, DC-VA-MD HUD Metro FMR Area..    32,109
Atlanta-Sandy Springs-Marietta, GA HUD Metro FMR Area.........    28,697
Oakland-Hayward-Berkeley, CA Metro Division...................    28,355
Dallas-Plano-Irving, TX Metro Division........................    28,135
San Diego-Carlsbad-San Marcos, CA MSA.........................    27,970
Tampa-St. Petersburg-Clearwater, FL MSA.......................    16,456
Pittsburgh, PA HUD Metro FMR Area.............................    15,739
San Antonio-New Braunfels, TX HUD Metro FMR Area..............    14,633
San Jose-Sunnyvale-Santa Clara, CA HUD Metro FMR Area.........    14,307
Hartford-West Hartford-East Hartford, CT HUD Metro FMR Area...    12,831
Sacramento-Arden-Arcade-Roseville, CA HUD Metro FMR Area......    12,672
Fort Worth-Arlington, TX HUD Metro FMR Area...................    12,620
Virginia Beach-Norfolk-Newport News, VA-NC HUD Metro FMR Area.    12,291
Nassau County-Suffolk County, NY Metro Division...............    11,593
Bergen-Passaic, NJ HUD Metro FMR Area.........................    11,503
Fort Lauderdale-Pompano Beach-Deerfield Beach, FL Metro           10,486
 Division.....................................................
Charlotte-Gastonia-Rock Hill, NC-SC HUD Metro FMR Area........     7,951
Monmouth-Ocean, NJ HUD Metro FMR Area.........................     7,811
West Palm Beach-Boca Raton-Delray Beach, FL Metro Division....     6,058
Jacksonville, FL HUD Metro FMR Area...........................     5,872
Oxnard-Thousand Oaks-Ventura, CA MSA..........................     5,612
Tacoma-Lakewood, WA Metro Division............................     5,341
Jackson, MS HUD Metro FMR Area................................     4,742
Urban Honolulu, HI MSA........................................     4,146
Gary, IN HUD Metro FMR Area...................................     3,305
Colorado Springs, CO HUD Metro FMR Area.......................     2,957
North Port-Bradenton-Sarasota, FL MSA.........................     2,592
Palm Bay-Melbourne-Titusville, FL MSA.........................     2,565
------------------------------------------------------------------------
* Voucher Counts as of June 30, 2015--Includes MTW, Excludes PBV.

Appendix B--Initial Regulatory Flexibility Analysis

Initial Regulatory Flexibility Analysis Establishing a More Effective 
Fair Market Rent System; Using Small Area Fair Market Rents in Housing 
Choice Voucher Program Instead of the Current 50th Percentile FMRs

1. Introduction

    The Regulatory Impact Analysis of the proposed Small Area Fair 
Market Rent (Small Area FMR) rule identifies two types of small 
entities that would be affected by the rule: Small Public Housing 
Agencies (PHAs) and small private landlords. The Initial Regulatory 
Flexibility Analysis (IRFA) furthers the analysis of the impact of 
the rule on small entities by including more data on the relevant 
sectors as well as a more rigorous definition of what is a ``small'' 
PHA. The analysis of the proposed rule satisfies Section 603 of the 
Regulatory Flexibility Act. The requirements of the IRFA are listed 
below.\11\
---------------------------------------------------------------------------

    \11\ HUD is not a covered agency, as defined in section 
609(d)(2), and so is not required to comply with (d)(1) or (d)(2).
---------------------------------------------------------------------------

    (a) The agency shall prepare and make available for public 
comment an initial regulatory flexibility analysis. Such analysis 
shall describe the impact of the proposed rule on small entities. 
The initial regulatory flexibility analysis or a summary shall be 
published in the Federal Register at the time of the publication of 
general notice of proposed rulemaking for the rule. This requirement 
is satisfied by the present IRFA.
    (b) Each initial regulatory flexibility analysis required under 
this section shall contain--
    (1) A description of the reasons why action by the agency is 
being considered: This requirement is met by Sections 2.1 and 2.3 of 
the IRFA. A lengthier discussion can be found in the Regulatory 
Impact Analysis and the Preamble of the Proposed Rule.
    (2) A succinct statement of the objectives of, and legal basis 
for, the proposed rule: This requirement is met by Sections 2.1 and 
2.3 of the IRFA. A lengthier discussion can be found in the 
Regulatory Impact Analysis and the Preamble of the Proposed Rule.
    (3) A description of and, where feasible, an estimate of the 
number of small entities to which the proposed rule will apply: This 
requirement is met by Sections 3.1 and 4.1 of the IRFA.
    (4) A description of the projected reporting, recordkeeping and 
other compliance requirements of the proposed rule, including an 
estimate of the classes of small entities which will be subject to 
the requirement and the type of professional skills necessary for 
preparation of the report or record: This requirement is met 
Sections 3.2 and 4.2 of the IRFA.
    (5) An identification, to the extent practicable, of all 
relevant Federal rules which may duplicate, overlap or conflict with 
the proposed rule: This requirement is met by Section 7 of the IRFA.
    (c) Each initial regulatory flexibility analysis shall also 
contain a description of any significant alternatives to the 
proposed rule which accomplish the stated objectives of applicable 
statutes and which minimize any significant economic impact of the 
proposed rule on small entities. Consistent with the stated 
objectives of applicable statutes, the analysis shall discuss 
significant alternatives such as--
    (1) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities: This requirement is met by Sections 5 
and 6 of the IRFA.
    (2) The clarification, consolidation, or simplification of 
compliance and reporting requirements under the rule for such small 
entities: This requirement is met by Sections 5 and 6 of the IRFA.
    (3) The use of performance rather than design standards: This 
requirement is met by Sections 5 and 6 of the IRFA.
    (4) An exemption from coverage of the rule, or any part thereof, 
for such small entities: This requirement is met by Sections 5 and 6 
of the IRFA.
    Before proceeding further, Section 2 of the IRFA provides a 
brief summary of the main findings from the Regulatory Impact 
Analysis. The summary is provided for those readers who do not have 
ready access to the Regulatory Impact Analysis. Some readers may 
want more details on the anticipated economic effects of the 
regulation. A wide-ranging discussion can be found in the Regulatory 
Impact Analysis. Most of the Initial Regulatory Flexibility Analysis 
is dedicated to a description of the primary small entities 
affected: Private landlords and Public Housing Authorities (PHAs).

2. Summary of the Regulatory Impact Analysis

    The summary of the Regulatory Impact Analysis provides: An 
overview of the proposed rule, a statement of the objectives of the 
rule, a justification for the regulatory action, and a brief 
description of the economic impacts. Readers who are familiar with 
the Regulatory Impact Analysis may skip to the subsequent sections.

[[Page 39231]]

2.1. Overview of Proposed Rule

    This proposed rule proposes the use of Small Area Fair Market 
Rents (Small Area FMRs) in the administration of the Housing Choice 
Voucher (HCV) program for certain metropolitan areas. HUD is 
proposing to use Small Area FMRs in place of the current 50th 
percentile rent to address high levels of voucher concentration. HUD 
believes that Small Area FMRs gives HCV tenants a more effective 
means to move into areas of higher opportunity and lower poverty 
areas by providing them with subsidy adequate to make such areas 
accessible and to thereby reduce the number of voucher families that 
reside in areas of high poverty concentration.
    HUD proposes to use several criteria for determining which 
metropolitan areas would best be served by application of Small Area 
FMRs in the administration of the HCV program. These criteria 
include a threshold number of vouchers within a metropolitan area, 
the concentration of current HCV tenants in low-income areas, and 
the percentage of renter occupied units within the metropolitan area 
with Small Area FMRs above the payment standard basic range. Public 
housing agencies (PHAs) operating in designated metropolitan areas 
would be required to use Small Area FMRs. PHAs not operating in the 
designated areas would have the option to use Small Area FMRs in 
administering their HCV programs. Other programs that use FMRs would 
continue to use area-wide FMRs.

    Note to Reader: A more comprehensive summary of the rule can be 
found in the Regulatory Impact Analysis and the Rule itself.

2.2. Objectives of Rule

    This proposed rule, through establishment of Small Area FMRs as 
a means of setting rents in certain metropolitan areas, is intended 
to facilitate the Housing Choice Voucher (HCV) program in achieving 
two program objectives: (1) Increasing the ability of low-income 
families to find and lease decent and affordable housing; and (2) 
providing low-income families with access to a broad range of 
housing opportunities throughout a metropolitan area. HUD's goal in 
pursuing this rulemaking is to provide HCV tenants with a greater 
ability to move into areas where jobs, transportation, and 
educational opportunities exist.

2.3. Justification for Rule

    In October 2000, HUD published an interim final rule \12\ that 
set higher (50th percentile as opposed to 40th percentile \13\) 
metropolitan area Fair Market Rents (FMRs) where program data showed 
that voucher holders and public housing agencies (PHAs) needed 
assistance in achieving the two program objectives specified in 2.2 
above. Setting the metropolitan FMR higher at the 50th percentile 
rent was expected to increase the number of neighborhoods affordable 
with a voucher, thereby aiding the dispersion of voucher holders 
throughout the FMR area.
---------------------------------------------------------------------------

    \12\ See Federal Register edition of October 2, 2000, at 65 FR 
58870.
    \13\ FMRs are typically set at the 40th percentile in the 
distribution of rents paid by recent movers into ``standard 
quality'' units within an FMR area, generally a metropolitan area or 
non-metropolitan county. For more information, see https://www.huduser.gov/portal/datasets/fmr.html.
---------------------------------------------------------------------------

    Under the 2000 rule, FMR areas set at the higher 50th percentile 
rents revert to standard (40th percentile) metropolitan FMR status 
either when voucher holders are no longer considered geographically 
concentrated by the criteria established by the 2000 rule, which is 
codified in 24 CFR part 888, or when the voucher program fails to 
achieve measurable progress toward ``deconcentration'' within three 
years. If the program fails to show progress and loses its 50th 
percentile rent status, reestablishment of rents at the 50th 
percentile can be reconsidered in three years. Areas that 
demonstrate progress with deconcentration undergo reconsideration 
every year.
    Many areas have cycled in and out of 50th percentile status (see 
Appendix of Regulatory Impact Analysis) since the 2000 rule went 
into effect, suggesting it has not been an effective tool in 
deconcentrating voucher households in a lasting way. An emerging 
body of research is confirming this conclusion.\14\ The proposed 
rule therefore would replace the 50th percentile metropolitan FMRs 
with Small Area FMRs. Small Area FMRs are similar to metropolitan 
FMRs but set at the more local ZIP code level. Theory, and the early 
evidence from areas already piloting the Small Area FMRs,\15\ 
suggests that setting FMRs at the ZIP code level will make more 
units available in higher rent neighborhoods while reducing the 
overpayment of rents by the program in lower rent neighborhoods.\16\ 
This, in turn, should make the program more cost effective and 
facilitate a more lasting geographic dispersion of voucher 
households.
---------------------------------------------------------------------------

    \14\ Collinson, R. and Ganong, P. (2015, May) The Incidence of 
Housing Voucher Generosity. Retrieved December 11, 2015 from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255799.
    \15\ Small Area FMRs are only permitted to be used to set 
Section 8 Housing Choice Voucher payment standards in the Dallas, TX 
HUD Metropolitan FMR Area and by PHAs participating in the Small 
Area FMR Demonstration Program. See https://www.huduser.gov/portal/datasets/fmr/smallarea/.
    \16\ See the Final Regulatory Impact Analysis for a detailed 
discussion.
---------------------------------------------------------------------------

    The proposed rule does not treat Small Area FMRs as a temporary 
policy. Once areas are designated for use of Small Area FMRs and the 
new payment standards have been implemented, the rule makes no 
provision for a return to metropolitan FMRs. The 2000 rule was based 
on the assumption that once the 50th percentile metropolitan FMR is 
successful in encouraging voucher households to move to a wider 
range of neighborhoods, rents set at the 50th percentile were no 
longer needed.

2.4. Summary of Economic Impacts

    HUD expects a variety of economic effects stemming from 
implementation of the proposed rule. Transfers involving vouchers 
would be the most sizable of those effects. PHAs will face both 
costs and benefits from the implementation of this rule. Social 
benefits and costs associated with the rule could be generated by a 
new settlement pattern among voucher holders. Quantified incremental 
impacts include an expected transfer of $265 million among 
participants and $4 million of implementation costs to PHAs. The 
Regulatory Impact Analysis includes a lengthy description of 
qualitative impacts as well details concerning the calculation of 
the quantitative impacts.

3. Landlords Affected

    Some owners of rental real estate may experience a minor 
pecuniary impact (either positive or negative) from the regulation. 
Some of this economic impact is likely to be passed onto property 
managers: The lessors of residential building and dwellings \17\ is 
the private industry that is most likely to be affected by the 
regulation. While direct and indirect effects of changing the 
subsidy design is theoretically possible; it is empirically 
unlikely.
---------------------------------------------------------------------------

    \17\ This industry (NAICS 531110) comprises establishments 
primarily engaged in acting as lessors of buildings used as 
residences or dwellings, such as single-family homes, apartment 
buildings, and town homes. Included in this industry are owner 
lessors and establishments renting real estate and then acting as 
lessors in subleasing it to others. The establishments in this 
industry may manage the property themselves or have another 
establishment manage it for them.
---------------------------------------------------------------------------

    The following section describes the property management 
industry. It is important to keep in mind that while many businesses 
rent to voucher tenants, adverse effects are not expected for 
reasons described in this section.

3.1. Industry Data: Lessors of Residential Building and Dwellings

    The Small Business Administration defines a lessor of 
residential real estate to be a small business if it earns annual 
revenues (sales receipts) of less than $27.5 million. In the 2012 
Economic Census, the Census counted approximately 50,000 of which 
approximately 43,000 operated for the entire year of 2012. Our 
comparisons are made using the full-year data to be more consistent 
with the definition of what is small (firms operating the entire 
year).
    Of the 42,911 firms operating all year, 42,618 can be considered 
small firms. Total annual revenue of the industry was $84 
billion,\18\ compared to $43 billion for small firms. Approximately 
300,000 individuals were employed by firms operating all year during 
the pay period observed in March 2012; 200,000 of them were employed 
by small firms. Small lessors account for 99 percent of all firms, 
51 percent of all revenue, 57 percent of all payroll, and 67 percent 
of employees hired during the first quarter. The industry is 
dominated by small firms in numbers of firms and employees, but is 
roughly equivalent to all large firms in terms of revenue and 
payroll.
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    \18\ American Community Survey data indicate that the lessor 
industry revenue is approximately 20 percent of aggregate rents. The 
industry collects twice the average 10 percent commission for 
property managers. This difference could be explained by: Realtors' 
commissions, other activities, and lessors owning property and thus 
collecting the full rent.

[[Page 39232]]



Lessors of Residential Buildings and Dwellings (NAICS Industry 531110) Operated for the Entire Year 2012, United
                                                     States
----------------------------------------------------------------------------------------------------------------
                                                                                                   Employees for
                                                                      Revenue         Payroll         period
              Firm size by revenue                     Firms         ($1,000)        ($1,000)        including
                                                                                                     March 12
----------------------------------------------------------------------------------------------------------------
All firms *.....................................          42,911      83,593,387       9,838,805         303,135
Revenue less than $25,000,000...................          42,618      42,908,437       5,574,606         202,381
Proportion small firms **.......................             99%             51%             57%             67%
----------------------------------------------------------------------------------------------------------------
* Note that there were 50,664 firms altogether but that 42,911 operated all year. Using the larger base would
  reduce the proportion of small firms.
** The official size standard of the SBA is $27.5 million. Statistics are not available for this cut-off so we
  use the closest one leading to a slight underestimate of the proportion ``small.''

    HUD is able to provide information on the number of owners who 
participate in the housing choice voucher program. Note that 
counting real estate owners is not equivalent to lessors that 
operate the property. One would expect there to be many more owners 
than lessors. Nonetheless, the data provides insight as to the 
distribution of vouchers. It is evident that the overwhelming 
proportion of owners rent to very few voucher tenants. Approximately 
two-thirds of owners who rent to voucher tenants rent to only one 
voucher tenant household. Many of these are likely owners of single-
family homes for whom the rental income is not the primary source of 
income. Approximately 90 percent rent to no more than 4 voucher 
tenant households, which could be housed in a large two-story 
building. Very few owners rent to enough voucher tenants to occupy 
multiple buildings.

                   U.S. Residential Real Estate Owners Renting to Voucher Tenant Households *
----------------------------------------------------------------------------------------------------------------
                                                                Number of owners with    Percent of owners with
      Category of owner with voucher tenant households             voucher tenant            voucher tenant
                                                                    households *               households
----------------------------------------------------------------------------------------------------------------
1 Voucher...................................................                   435,653                      67.2
2-4 Vouchers................................................                   142,925                      22.1
5-19 Vouchers...............................................                    55,206                       8.5
20-49 Vouchers..............................................                    10,773                       1.7
50-99 Vouchers..............................................                     2,564                       0.4
100-199 Vouchers............................................                       687                       0.1
200 or more Vouchers........................................                       148                       0.0
                                                             ---------------------------------------------------
    All.....................................................                   647,956                     100.0
----------------------------------------------------------------------------------------------------------------
* This table describes voucher tenants but NOT non-voucher tenants. It is likely that many owners rent to
  additional tenants, making the above table a slight overestimate of the small landlords affected by the rule.

The data on the distribution of owners by number of vouchers implies 
that industry structure is not significantly different for vouchers 
than for other residential rental properties. The tables do not 
correspond perfectly because one describes property managers and the 
other property owners. In addition, the table for owners shows 
information for voucher tenants only and does not include any 
unassisted tenants.
    HUD estimated that 28 percent of all vouchers are likely to be 
affected by the rule. If the number of lessor firms is proportional 
to the number of vouchers, then approximately 12,000 firms operating 
all year round (or 14,000 firms operating at any time) would manage 
units in Small Area FMR areas. They do not necessarily provide 
housing for voucher tenants but would be affected by any market 
externalities engendered by the rule. The median share of voucher 
holders in a census tract is 3.2 percent. Again, assuming 
proportionality we expect 400-500 NAICS industry 531110 firms to 
manage units occupied by voucher tenants in the Small Area FMR areas 
created by the proposed rule. The number of voucher units managed by 
any one firm will vary.

3.2. Economic Impacts and Compliance Requirements on Small Landlords

    There are two types of possible effects of the rule on property 
owners and managers. The first is direct: An owner (and lessor) who 
receives income from a voucher tenant may experience a change in 
rental income without changing the contract or tenant. Consider a 
low-rent area in which the subsidy will decline. The owner (and 
lessor) would be held harmless if the tenant chose to make up the 
difference. However, suppose that the subsidy declined by a critical 
amount such that the tenant can no longer afford the unit. The owner 
has two choices: Search for a new tenant who will pay the market 
rent or lower the rent by enough to maintain the current tenant. The 
former strategy would be chosen if the housing submarket were 
characterized by adequate demand. The latter strategy would be 
chosen if the reduction in rents are offset by the costs of finding 
a new tenant. Thus, while the owner (and lessor) may lose a 
particular voucher tenant, they will not lose the rental income from 
that unit. The rule may generate revenue for lessors of residential 
building and dwellings if a significant number of moves result. 
Managing turnover is one of the primary services provided by a 
lessor to an owner. This would not be a major effect but could serve 
to counterbalance any minor adverse effects on lessors.
    The second type of effect is indirect (a pecuniary externality). 
A reduction (increase) of the voucher subsidy would lower (raise) 
the demand for housing in that submarket. Even properties without 
any voucher tenants would be affected by such a market-wide effect. 
However, a decline in demand would only result if voucher households 
make up a sufficiently large portion of rental households in a given 
neighborhood. Market spillovers are expected to be minimal in many 
areas due to the limited size of the voucher program in relation 
with the entire housing market. Of the 13,200 Census tracts in the 
areas affected by the proposed rule, the median share of voucher 
households is 3.2 percent. Even in areas where the share is larger, 
the rule does not eliminate the subsidy but reduces it. Small 
lessors will be disproportionately impacted by market effects only 
if the units leased by small lessors are disproportionately 
concentrated in low-rent areas.
    The proposed rule does not impose any additional reporting, 
recordkeeping and other compliance requirements. Compliance and unit 
standards remain the same.
    An additional effect of the rule is that six current 50th 
percentile areas will revert to

[[Page 39233]]

40th percentile FMRs, as the Small Area FMR rule uses different 
selection criteria than the 50th percentile rule. These areas 
currently cover 84,000 vouchers. On average, the FY16 40th 
percentile FMR is $79 lower than the 50th percentile FMR, meaning a 
transfer of $6.6 million is expected through a combination of 
landlords accepting lower rent, tenants increasing out of pocket 
rent, or tenants moving to lower cost, less desired units.

3.3. Public Comment in Response To Advance Notice of Proposed 
Rulemaking Concerning Impact on Housing Providers

    Comment: Small Area FMR approach would run the risk that units 
currently with vouchers would not be renewed in HCV program. HUD 
received many comments from property owners, landlords and other 
housing providers that expressed this concern. These comments 
generally focused on property owners/managers with current voucher 
tenants, typically within the city of Baltimore, MD. These comments 
suggested that if HUD were to move to Small Area FMRs, these units 
would not be renewed in the voucher program because the rents for 
the units would be too low.
    HUD Response. These units would be renewed if the family chooses 
to remain and the rent is reasonable. HUD's regulation at 24 CFR 
982.507 directs that PHAs must determine if the rent to owner is 
reasonable at time of determining the initial rent to owner or when 
the FMR decreases by more than 5 percent (this proposed rule 
proposed to change the standard to 10 percent). Consequently, if 
after an FMR decrease, if the PHA deems that the rent is reasonable, 
the unit may be renewed, albeit with the tenant increasing their 
portion of the rent. Furthermore, HUD believes that the use of Small 
Area FMRs removes a barrier that tenants currently have in accessing 
housing units in areas of opportunity; namely, that subsidy levels 
are not high enough to afford rental units in these high opportunity 
neighborhoods. HUD further believes that if housing authorities 
determine that current rents in areas with declining Small Area FMRs 
are reasonable, tools are in place to address these situations 
(exception payment standards, reasonable accommodation, etc.)

4. Public Housing Agencies Affected

    PHAs operating in metropolitan areas that meet the established 
Small Area FMR criteria of the proposed rule will be required to use 
Small Area FMRs in their HCV programs. As of issuance of this 
proposed rule, there are 31 areas listed that meet these criteria. 
These areas contain approximately 564,000 (28 percent) of the HCV 
households nationwide.\19\ Of these 564,000 vouchers, 387,000 
vouchers are administered by PHAs that may not yet use multiple 
payment standards.
---------------------------------------------------------------------------

    \19\ This number includes areas that have already implemented 
Small Area FMRs and Moving to Work Agencies, which may not be 
compelled to adjust their payment standards as a result of the rule. 
The analysis below considers these exceptions.
---------------------------------------------------------------------------

4.1. Data: Small PHAs

    A small PHA is defined by HUD to be one of less than 250 
units.\20\ Using this definition, approximately half of the PHAs 
(1,100 out of 2,200) that administer HCVs are considered small. In 
the 31 metropolitan areas affected by the proposed rule, there are 
292 PHAs, of which 80 are small. The Regulatory Flexibility Analysis 
authorizes an agency to adopt and apply definitions of small, 
``which are appropriate to the activities of the agency'' for each 
category of small entity.\21\ The 250 unit limit is one 
traditionally used by HUD in data collection as well as by city 
governments. In addition, it has been shown that PHAs of this size 
class face greater average costs of administering housing choice 
vouchers.\22\ A greater average cost is an indicator for smaller 
entities is suggestive evidence of fixed costs of operation. Small 
PHAs make up 27 percent of the PHAs in affected areas and would 
manage no more than 4 percent of the vouchers.
---------------------------------------------------------------------------

    \20\ For regulatory definitions of small PHAs, see: Deregulation 
of Small PHAs Final Rule, 24 CFR part 902, 903, and 985.
    \21\ The RFA standard definition of a ``small governmental 
jurisdiction'' is the government of a city, county, town, school 
district or special district with a population of less than 50,000.
    \22\ Abt Associates, 2015.
---------------------------------------------------------------------------

4.2. Economic Impacts and Compliance Requirements for PHAs

    PHAs administering Small Area FMRs will likely face higher 
administrative costs. Initial costs would include training employees 
and setting up new systems. Periodic costs include costs related to 
payment standard and rent determinations as well any increase in 
moves and contract rent changes than those operating under one 
metropolitan FMR. PHAs change their payment standards as the FMR 
changes. Once the payment standard is established, and the PHA board 
approves, the PHA creates materials to inform their customers (and 
landlords) of the new payment standards. Making the transition from 
one to many payment standards is likely to impose some burden at 
initial implementation of the Small Area FMR rule.
    There are at least two ways that a PHA would respond to the 
increased complexity of multiple payment standards. First, it could 
pursue a more labor-intensive solution and ask staff to determine 
the payment standard manually. This would not be particularly 
difficult for a small PHA with few payment standards. Small PHAs 
typically have smaller service areas with fewer ZIP codes and 
therefore fewer Small Area FMR-based payments standards to determine 
and administer than do larger PHAs. Another solution is to make an 
upfront investment to automate the process of subsidy determination. 
A unit's address is already entered into a PHA's database. All that 
is needed is a tool that calculates the rental subsidy as a function 
of the address. HUD has the intention of developing such an 
application for PHAs and voucher holders tenants. For it to work, 
PHAs will have to provide data on their payment standard decisions 
to HUD. Thus, compliance costs of PHAs are expected to rise slightly 
but not significantly. Because the tool will be developed, tested, 
and provided by HUD, it is not expected that the cost of 
implementation will be disproportionate.
    A 2015 study \23\ reports that, according to a Dallas PHA 
official, implementation costs of multiple payment standards were 
minimal at roughly $10 a household. Though it is unclear what this 
estimate considers, and assuming it can be applied elsewhere, as a 
rough measure of magnitude this would mean $3.9 million to $5.6 
million in implementation costs over the 31 areas designated and 292 
PHAs affected by this proposed rule. The more accurate estimate is 
the lower because it is based on PHAs that do not already use 
multiple payment standards. Both were considered for completeness. 
The impact on small entities would be a fraction of this impact. 
Assuming that all PHAs are affected and that all small PHAs are at 
the maximum, then the total impact on all small PHAs would be 
$200,000 (80 x 250 x $10). Such a conservative estimate would reduce 
any downwards bias in the estimate of the impact stemming from 
returns to scale.
---------------------------------------------------------------------------

    \23\ Collinson and Ganong, (2015, May).
---------------------------------------------------------------------------

    The Small Area FMR rule will be beneficial to PHAs in some 
important respects. First, the rule intends to eliminate the 
possibility that an area will cycle in and out of the 50th 
percentile FMR as it can currently occur under the 2000 rule. This 
change is expected to reduce the year-to-year administrative 
uncertainty and the costs of adjusting the program to changing FMR 
calculations over time. Second, the proposed rule is also expected 
to facilitate PHA and regional compliance with consolidated planning 
and Fair Housing requirements and allow counseling and similar 
efforts to be more effective.\24\ Finally, the use of Small Area 
FMRs is expected to decrease the costs of rent reasonableness 
determinations as the payment standards better reflect local rent 
levels.
---------------------------------------------------------------------------

    \24\ Advancing mobility is one of the costliest activities of a 
PHA.
---------------------------------------------------------------------------

4.3. Public Comment in Response to Advance Notice of Proposed 
Rulemaking Concerning PHA Compliance Burden

    Comment: Small Area FMR approach would increase administrative 
burden. Several commenters expressed concern that Small Area FMRs 
would increase the administrative burden of operating the voucher 
program. Commenter stated that this concern is compounded because, 
as they stated, their administrative fee payments are inadequate to 
meet administrative costs.
    HUD Response: HUD recently released a final report on the costs 
of running a high performing housing authority \[1]\ and HUD is 
currently engaged in a proposed rulemaking effort regarding the 
administrative fee formula. Consequently, this proposed rule does 
not address the adequacy of administrative fees. HUD has undertaken 
several steps to minimize the burden of implementing Small Area 
FMRs. One of these ways is to round Small Area FMRs to

[[Page 39234]]

the nearest ten dollars to make it easier to arrange the small areas 
into payment standard groups.
---------------------------------------------------------------------------

    \[1]\ Housing Choice Voucher Program Administrative Fee Study: 
Final Report (available at: https://www.huduser.gov/portal/publications/affhsg/hcv_2015draftfinalreport.html).
---------------------------------------------------------------------------

5. Major Policy Alternatives Considered and Rejected

    There were several major alternatives to Small Area FMR rule, 
all of them either less effective or more costly than what was 
finally proposed. The obvious alternative was to retaining metro 
level FMRs at either the 40th or 50th percentile. However, an FMR 
that does not vary geographically within a metropolitan area has not 
achieved the policy objective of promoting location choice. Even 
making the subsidy more generous by increasing it from the 40th to 
50th percentile has not led to long-term success in encouraging 
geographic mobility.
    More appropriate alternatives concern the implementation of the 
Small Area FMR by changing the scope of the rule to extend the Small 
Area FMR to more (or fewer) metropolitan areas. The proposed rule 
mandates the use of the Small Area FMRs in metropolitan areas 
meeting specific criteria and makes it voluntary elsewhere. A 
reasonable alternative to consider would be mandating use of Small 
Area FMRs everywhere. The disadvantage of such an expansive approach 
is that it may include metropolitan areas whether one or both of the 
following is true: (1) There is no problem to be solved (i.e., 
voucher tenants are not especially concentrated in high-poverty 
neighborhoods), and/or (2) the Small Area FMR is not a viable 
solution (i.e., nearly all opportunity areas have Small Area FMRs 
within the basic range of the metropolitan FMR). The Small Area FMR 
selection criteria in the proposed rule validate that the HCV 
population are unevenly distributed before implementing the program. 
If not, then there is no reason to impose the potential 
administrative costs of a deconcentration policy. If already 
deconcentrated, then either there is no friction in the housing 
market or the PHA has found alternative means of solving this 
problem. Second, the criteria ensure that the Small Area FMR is a 
potential solution by qualifying only housing markets with 
sufficient housing stock in areas with Small Area FMRs above the 
basic range (more than 110 percent) of the metropolitan FMR. 
Providing higher rent subsidies for high-rent ZIP codes will have 
little impact if there is demand but no supply. Thus, the proposed 
rule is a judicious trade-off between the mobility gains of voucher 
holders and administrative costs of PHAs.

6. Alternatives Which Minimize Impact on Small Entities

    Under the Initial Regulatory Flexibility Analysis, HUD must 
discuss alternatives that minimize the economic impact on small 
entities. In order to lessen the burden on PHAs, and specifically 
small PHAs, HUD has taken, or is committed to taking, several 
measures in implementing Small Area FMRs designed to facilitate 
transition to this approach and minimize costs and burdens. 
Specifically, HUD is pursuing the following strategies to mitigate 
adverse impacts:
     Publish Small Area FMRs grouped by overlapping 
potential payment standards. Although the proposed rule does not 
specifically address the format of HUD's publication of Small Area 
FMRs, in on-line materials HUD will provide a version of Small Area 
FMRs formatted and organized so as to facilitate compliance by PHAs.
     Develop a mobile application to automate payment 
standard determination and significantly reduce administrative costs 
of implementing the Small Area FMR rule for all parties involved 
(tenant, landlord, PHA). As noted above, HUD will be developing such 
an application for PHAs, voucher holders, and landlords.
     Allow the rounding of Small Area FMRs to the nearest 
ten dollars to make it easier to arrange the small areas into 
payment standard groups. Although the proposed rule does not specify 
the calculation methods for Small Area FMR estimates, HUD's practice 
in the Dallas, TX HUD Metro FMR Area and in the Small Area FMR 
demonstration sites has been to round Small Area FMR estimates to 
the nearest $10.00 to make it easier to arrange small areas into 
payment standard groups. Doing so reduces the number of payment 
standards PHAs would be required to administer.
     Consider an exemption for PHAs administering very few 
vouchers in Small Area FMR areas. The proposed rule exempts HUD 
Metropolitan FMR Areas with less than 2,500 HCVs under lease from 
using Small Area FMRs. HUD is seeking public comment in this 
proposed rule on allowing small PHAs in Small Area FMR areas to 
continue to use metropolitan FMRs, particularly if such PHAs' 
tenants are not concentrated in high poverty neighborhoods.
    In addition to the above, the presentation of the information in 
HUD's proposed revision to its PHA administrative fee formula would 
also soften any adverse impact by providing additional resources to 
small PHAs generally.

7. Overlapping Federal Regulations

    The Housing Choice Voucher program is the major rental 
assistance program of the federal government, providing assistance 
to 2.2 million households. While there are many other government 
policies aimed at providing affordable housing, the Small Area FMR 
change in policy will not adversely interact with any one of them. 
Instead, the rule will make it easier for PHAs to comply with HUD's 
Affirmatively Furthering Fair Housing rule by providing greater 
access to areas of opportunity. In other efforts, HUD has cooperated 
with other federal agencies through the Rental Policy Working Group 
to identify and eliminate overlap or duplication that increase the 
cost of providing affordable housing.

8. Conclusion

    The majority of lessors of residential real estate and a 
substantial fraction of PHAs are characterized as small. If there 
were disproportionate effects on small entities, then a more 
detailed regulatory flexibility analysis would be merited. However, 
after an in-depth discussion of the industry structure and impact of 
the rule, HUD cannot conclude that there is a significant and 
disproportionate impact on small entities. It is true that many 
lessors may receive income from voucher tenants but it is not likely 
that they will be adversely affected once market forces are 
accounted for. Small PHAs could face an additional administrative 
burden but HUD has offered solutions to significantly reduce any 
burden.

[FR Doc. 2016-13939 Filed 6-15-16; 8:45 am]
BILLING CODE 4210-67-P