Section 542(c) Housing Finance Agency Risk Sharing Program, 83435-83446 [2020-27914]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 85, Number 246 (Tuesday, December 22, 2020)]
[Rules and Regulations]
[Pages 83435-83446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27914]



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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 266

[Docket No FR-5881-F-02]
RIN 2502-AJ35


Section 542(c) Housing Finance Agency Risk Sharing Program

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

ACTION: Final rule.

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SUMMARY: Through the Section 542(c) Housing Finance Agency (HFA) Risk 
Sharing program, HUD enters into risk-sharing agreements with qualified 
state and local HFAs so they can provide FHA (Federal Housing 
Administration) mortgage insurance and credit enhancement for new loans 
on multifamily affordable housing properties. This final rule amends 
the program's existing regulations, to better align with the policies 
of other HUD programs, reflect current industry and HUD practices, and 
conform to statutory amendments. Additionally, this rule provides HUD 
with greater flexibility to operate the Section 542(c) HFA Risk Sharing 
program more efficiently and provides HFAs which accept a greater share 
of the risk of loss on mortgages insured under the program with 
expanded program delegation. This rule also updates outdated references 
and terminology and clarifies other provisions.

DATES: Effective January 21, 2021.

FOR FURTHER INFORMATION CONTACT: Carmelita A. James, Office of 
Multifamily Production, Office of Housing, Department of Housing and 
Urban Development, 451 7th Street SW, Room 6146, Washington, DC 20410; 
telephone number (202)-402-2579 (this is not a toll-free number). 
Persons with hearing or speech impairments may access this number 
through TTY by calling the toll-free Federal Relay Service at 800-877-
8339.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 542 of the Housing and Community Development Act of 1992 
(12 U.S.C. 1715z-22) (Section 542) directs HUD to carry out programs 
through FHA to demonstrate the effectiveness of providing new forms of 
Federal credit enhancement for loans on multifamily affordable housing 
properties which are underwritten, processed, serviced, and disposed of 
by HFAs. HUD and the HFAs share in the risk of loss, which enables the 
HFAs to provide more mortgage insurance and credit for new multifamily 
loans. Under the program, qualified state and local HFAs are delegated 
to originate and underwrite loans for new construction, substantial 
rehabilitation, acquisition, refinancing, and housing for the elderly. 
HFAs may elect to share from 10 to 90 percent of the loss on a mortgage 
with HUD. In the event of a claim, HFAs will reimburse HUD for their 
portion of the loss pursuant to their risk-sharing agreement's terms.
    On March 8, 2016, HUD proposed a new rule to update the Section 
542(c) HFA Risk Sharing regulations set out in 24 CFR part 266, which 
were last updated over fifteen years ago. Additional details about the 
proposed rule may be found at 81 FR 12051 (March 8, 2016).

II. This Final Rule

    This final rule follows publication of the March 8, 2016 proposed 
rule and considers the public comments received. HUD is adopting the 
proposed rule as final with no substantive changes.

III. Discussion of Public Comments

    HUD received eight public comments on the proposed rule from 
housing and finance agencies, a law firm, and other interested parties. 
One commenter did not discuss the proposed rule and therefore the 
comment will not be addressed here as it is outside the rulemaking's 
scope. In general, the comments received supported the rule, with no 
expressed opposition.
    The comments largely contained requests for clarification, 
suggested technical changes, and provided additional recommendations. 
Several commenters stated the proposed rule's revisions were necessary 
updates that would help streamline the regulation, add flexibility, and 
make the program more effective. In addition, commenters stated they 
appreciated HUD's extensive outreach and exchanges with HFAs prior to 
issuing the proposed rule.
    HUD appreciates the time that commenters took to provide helpful 
information and valuable suggestions.

A. Affordable Housing Definition

    Comment: The revisions to the definition of ``affordable housing'' 
are helpful. Commenters supported HUD amending the proposed rule's 
definition of ``affordable housing.'' One commenter supported the 
proposed revisions because they would expand the Section 542(c) program 
to better support loans on projects with Federal low-income housing tax 
credits (LIHTC) and synchronize the risk sharing program with the LIHTC 
rules.
    HUD Response: HUD appreciates the support but emphasizes that the 
revised definition of ``affordable housing'' is technical and does not 
expand the program's scope. As discussed in the proposed rule, the 
existing definition of ``affordable housing,'' as well as the 
definitions of ``gross rent'' and ``supportive services,'' are 
unnecessarily repetitive so the proposed change removes redundant 
verbiage and simplifies the regulatory language without substantively 
changing the program's scope. This rule amends the ``affordable 
housing'' definition to more closely conform to the statutory language 
in Section 542(c)(7) of the Housing and Community Development Act of 
1992 and meet the requirements for a qualified low-income housing tax 
credit project under section 42(g) of the Internal Revenue Code.
    Comment: The rule should clarify that cooperatives meet the 
proposed rule's definition of ``affordable housing,'' and that ``gross 
rent'' includes charges for the occupancy of a cooperative unit. A 
commenter stated that the existing Risk-Sharing regulations make it 
clear that loans for cooperatives with five or more units are eligible 
for Risk-Sharing mortgage insurance, but the rule's revision of the 
``affordable housing'' definition makes that less clear. According to 
the commenter, the revision should incorporate all the requirements for 
a qualified low-income housing project that are set forth in I.R.C. 
Section 42(g) and not simply the gross rent rules that are required by 
the Section 542(c) Risk-Sharing statute.
    The commenter stated further that Section 42(g) contains several 
LIHTC-specific concepts that may need to be disregarded when they are 
applied to non-LIHTC, Risk-Sharing projects. Further, Section 42(g) 
should not be interpreted as implying that cooperatives are not 
eligible for Risk Sharing. The commenter suggested clarifying the 
definition of affordable housing so that, for purposes of the Risk-
Sharing regulations, any reference to a residential rental project in 
Section 42(g) includes cooperative projects.
    In addition, the commenter stated that the proposed rule continues 
existing cooperative-related language from the current rule that is 
unnecessarily confusing because charges for a cooperative unit 
occupancy are said to be a form of utility allowance. Lastly, the 
commenter said it is awkward to refer to cooperative occupancy charges 
in such terms, which are otherwise known as ``maintenance fees,'' and 
the final rule should specify that gross rent,

[[Page 83436]]

and not just the utility allowance, is included in the charges for a 
cooperative unit occupancy.
    HUD Response: HUD appreciates the comments on ensuring that the 
rule is clear that cooperative units are eligible as ``affordable 
housing'' for purposes of the Risk Sharing program, if they otherwise 
meet the Risk Sharing statute's other requirements. This rule continues 
to apply to cooperative housing units, and HUD does not believe any 
additional changes are necessary to confirm that.

B. Housing Finance Agency Requirements

    Comment: Be consistent regarding rating requirements. A commenter 
stated the HFA qualifier with an ``overall rating of `A' on general 
obligation bonds'' used in Sec.  266.110(a) and Sec.  266.120(e)(5) 
should also be used in Sec.  266.100(a)(l). This commenter also 
indicated that while HFAs may qualify to participate in the program if 
they carry an issuer credit rating of ``A'' or better, the regulations 
do not provide that HFAs may qualify if they receive a rating of ``A'' 
or better for their general obligation bonds. In addition, the 
commenter said that, considering this, an ``AA'' or ``AAA'' rating 
would technically not be sufficient, and recommended that the rule 
specify in Sec.  266.100(a)(1), Sec.  266.110(a), and Sec.  
266.120(e)(5) that a HFA can qualify for the program if it receives a 
rating of ``A'' or better for its general obligation bonds.
    The commenter also said it assumes that references to ``general 
obligation bonds'' in the rule mean bonds whose rating depends on the 
issuer's general ability to pay, and area proxy for an issuer rating, 
and are not intended to include general obligation bonds that also have 
pledged collateral that serves as the basis for the rating. The 
commenter said that the mere fact that loans are pledged does not 
necessarily mean they will be the basis for the bond rating, although 
they often are.
    HUD Response: The commenter's requested language is already 
included in Sec.  266.100(a)(2), which remains unchanged, and as such 
there is no need to change Sec.  266.100(a)(l).
    Comment: Reconsider reviewing underwriting standards, loan terms 
and conditions, and asset management and servicing procedures for HFAs 
with Level II approval every five years. A commenter suggested that 
reviewing Level II HFA underwriting standards every five years to align 
them with FHA standards is not necessary and should only apply to 
``large claims made.''
    HUD Response: HUD has the statutory authority to impose additional 
underwriting criteria, loan terms, and conditions when HUD assumes more 
than 50% of the risk of loss and may do so for a variety of risk 
management and program oversight reasons. HUD interprets the commenters 
reference to ``large claims made'' as intending to refer to mortgage 
insurance commitments issued for large loans. HUD disagrees that 
reviewing underwriting standards, loan terms and conditions only as 
they apply to large loans would be sufficient to manage risk and to 
protect the Risk Sharing program's safety and soundness.
    Comment: Termination. One commenter objected to the proposed change 
allowing HUD to withdraw program approval for Level II HFAs that do not 
adopt new underwriting standards, loan terms and conditions, and asset 
management and servicing procedures that HUD may establish every five 
years. The comment stated that termination seems inappropriate for HFAs 
that are otherwise performing under the program. The commenter asked 
that HUD allow for a reasonable transition period and establish 
processes the HFAs can use to negotiate HUD's new standards and to 
appeal a possible termination.
    HUD Response: The language in the proposed rule states that, every 
five years, HUD will review the underwriting standards, loan terms and 
conditions, and asset management and servicing procedures for HFAs with 
Level II approval, under which HFAs assume less than 50% of the risk of 
loss and that HUD may require changes to these standards and procedures 
as a condition of continued Level II approval. The rule does not state 
that HUD will necessarily establish new procedures every five years, 
but only that HUD will review the standards and procedures of HFAs with 
Level II approval every five years. Under this regulation, HUD may 
require changes to these standards and procedures to ensure they are 
updated and that they conform to HUD's standards and requirements, but 
the rule does not state that HUD will necessarily terminate an HFA's 
approval. As noted in the proposed rule's preamble, many of the 
standards used by HFAs with Level II approval have been in place for 
more than 20 years without being reviewed by HUD, and may likely be 
outdated.

C. Program Requirements

    Comment: Clarify eligibility requirements for existing projects and 
projects receiving Section 8 rental subsidies or other rental 
subsidies. A commenter indicated that Sec.  266.200(c)(4), (5), and (7) 
of the proposed rule, which describe eligibility requirements for 
existing projects, relate to projects with Section 8 contracts, but 
none of them states that explicitly, and that beginning each of these 
paragraphs with a phrase such as ``If the project is the subject of a 
Housing Assistance Payments (HAP) contract . . .'' would provide 
clarity. Alternatively, this commenter said that Sec.  266.200(c)(4), 
(5), and (7) could be consolidated into a single subsection that 
addresses Section 8 assisted projects.
    HUD Response: HUD agreed with the suggestions. Sections 
266.200(c)(4), (5) and (7) were consolidated into a single subsection 
(5) for Section 8 assisted projects which begins with the phrase ``If 
the project is subject to a Housing Assistance Payment (HAP) contract . 
. . .'' This paragraph was moved to clarify the circumstances to which 
this applies, after the general provisions in Sec.  266.200.
    Comment: Differences between Sec.  266.200(c)(7) and Sec.  
266.200(d). Under Section 266.200(d), for projects that receive rental 
subsidies, the HUD insured mortgage may not exceed an amount supported 
by the lower of the contract rents under the rental assistance 
agreement or market rents, except for Section 202 projects. Under 
Section 266.200(c)(7), the HUD-insured mortgage may not exceed an 
amount supported by the lower of the unit rents under the rental 
assistance agreement or unit rents at unassisted projects in the market 
area, except for Section 202 projects. The commenter asked why both 
provisions were necessary and how they differed.
    HUD Response: HUD agreed with the commenter that the language in 
both Sections is similar, however, the difference is intentional. 
Section 266.200(c)(7) has requirements for existing projects which may 
or may not have Section 8 subsidies, whereas Section 266.200(d) has 
requirements exclusively for projects receiving Section 8 subsidies.
    Comment: Exception for 202 projects. The exception for 202 projects 
in the revised Sec.  266.200(d) seems to contradict the preamble's 
explanation that the amendment to this Section would result in Level I 
HFAs being subject to the same underwriting standards as for other 
Section 202 projects, in that the loans may be underwritten to contract 
rents. The commenter stated that the ``same underwriting standard'' 
refers to the program allowing Section 202 projects to obtain Risk 
Sharing loans which are underwritten based on contract rents, 
regardless of market

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rents, and asked that HUD provide clarity.
    HUD Response: HUD reviewed the proposed Sec.  266.200(b)(7) and 
Sec.  266.200(d) and determined that Level I participants may 
underwrite Section 202 projects to contract rents, regardless of market 
comparable.
    Comment: Clarify Sec.  266.200(c)(4). Commenters asked HUD to 
clarify that Sec.  266.200(c)(4), which requires that property owners 
agree to renew the HAP contract for a 20-year term, applies only to 
Section 8 Project-Based Rental Assistance (PBRA) and not Section 8 
Project-Based Vouchers (PBV). The commenters said that administering 
agencies are not obligated to extend PBV contracts and can let them 
expire, unlike PBRA. Furthermore, even if administering agencies were 
willing to extend PBV contracts, uncertainty regarding third-party 
consent requirements could deter owners from using the Section 542(c) 
program to preserve affordable housing. Additionally, commenters said 
the regulatory requirements for the term of the PBV contracts could 
make compliance with the requirement in this rule problematic, as the 
regulations impose limitations on the total, aggregate term allowed for 
a PBV contract. See 24 CFR 983.205.
    Commenters also asked HUD to clarify whether the requirement for a 
20-year renewal of a HAP contract is deemed satisfied for projects with 
an existing HAP contract if the owner commits to a future extension 
upon the existing HAP contract's expiration, or if it requires that the 
owner enter into a new 20-year HAP contract at the closing on the loan. 
Commenters said the former should achieve HUD's policy goals and will 
avoid any potential detrimental impact on a project's appraised value 
that could result from extending HUD's use agreement now, as would be 
required upon certain types of HAP contract extensions.
    HUD Response: The PBV program permits 20-year contract extensions 
at any time during the contract term, effectively creating a 40-year 
contract option. Extensions are at the PHA's discretion, so a PHA could 
decide not to extend a PBV contract, since PBVs are not like PBRA, 
where owners have a general right to renewal under the Multifamily 
Assisted Housing Reform and Affordability Act. However, even if the 
administering agencies were willing to extend a PBV contract at some 
point during its term, HUD recognizes that uncertainty regarding third-
party consent requirements could deter owners from using the Risk 
Sharing program to preserve the affordable housing. However, as noted 
above, a contract extension could be agreed to at the time of loan 
closing with the mortgagee's consent requested at that time. The 
commenter stated that the regulatory requirements for the PBV 
contract's term (24 CFR 983.205) could make compliance with the 
requirement in this rule problematic, as the regulations impose 
limitations on the total, aggregate term allowed for a PBV contract. 
Section 983.205 has been modified by the Housing Opportunity Through 
Modernization Act (HOTMA), with the initial and extension term language 
contained in the FR Implementation Notice dated 1-18-17, with further 
guidance provided in Notice PIH 2017-21. Eventually, HUD will codify 
these changes. However, HOTMA allows the agency to initially implement 
by FR Notice, which is what has occurred.
    Comment: Residual receipts. Further, commenters asked whether the 
provision in the proposed rule regarding residual receipts to fund 
future Housing Assistance Payments in Sec.  266.200(c)(5) only applies 
to so-called ``New Regulation'' HAP contracts, pursuant to HUD Notice 
2012-14 and the FAQ memo of October 2, 2012, and asked that the rule be 
specific as to which HAP contracts it applies in order to avoid 
restricting distributions where the HAP contract itself has no limit.
    HUD Response: Notice 2012-14 applies to contracts subject to the 
revised Section 8 regulations. HUD will specify the applicable HAP 
contracts in the final rule, in accordance with Notice 2012-14, which 
states: ``For projects subject to 24 CFR part 883, in effect as of 
February 29, 1980, the State Housing Agency, rather than HUD, is 
entitled to make the determination that project funds are more than the 
amount needed and to require that the excess be deposited into an 
interest-bearing account to be used for project purposes.'' See 24 CFR 
883.306(e).
    Comment: Expand the underwriting exception. Commenters requested 
that the rule's exception regarding underwriting to the lower of market 
or HAP rents be expanded. Commenters said that Sec.  266.200(c)(7) and 
Sec.  266.200(d) generally require underwriting rents to be the lower 
of market or Section 8 rents, but there is an exception to underwrite 
at higher HAP contract rents on Section 202 refinances. Commenters said 
there are other exceptions available for other multifamily loans 
insured by FHA, specifically, if the long-term HAP contract rents are 
above market rents and are not subject to being reset to market (for 
example, Mark-to-Market (M2M), Option 4, or some Option 5 Low-Income 
Housing Preservation and Resident Homeownership Act (LIHPRHA) 
projects). The FHA Multifamily Accelerated Processing (MAP) program 
allows rents to be underwritten to the above-market HAP contract rents 
for the full term of the contract. Commenters suggested that the 
proposed rule incorporate comparable provisions for the HFA Risk-
Sharing Program.
    Another commenter asked that HUD extend the flexibility provided 
for Section 202 projects to situations in which Risk-Sharing is used to 
finance loans for projects under other programs, such as M2M, Option 4 
and some Option 5 LIHPRHA deals.
    HUD Response: Under M2M, once a property has gone through an M2M 
restructuring (which sets the Section 8 rents at market), the only 
permitted rent increase is an annual Operating Cost Adjustment Factors 
increase. HUD is unable to act on the commenter's suggestion regarding 
Section 202 projects since that program is governed by its own 
statutory and regulatory structure, which is beyond the scope of the 
Risk Sharing regulation.
    Comment: Expand the Risk-Sharing program. A commenter recommended 
that HUD expand project eligibility to include financing workforce 
housing projects where the resident could earn up to 80-100 percent of 
Area Median Income (AMI). This commenter said that, currently, 
workforce transactions where rents are above 60 percent of AMI and do 
not meet the minimum set-aside defined in the Handbook cannot be 
financed under Risk Sharing. This commenter also recommended that HUD 
expand the definition of senior properties for the Risk Sharing program 
to include renters age 55 and older in order to provide greater 
flexibility for HFAs and to align with current industry practices 
defining a senior property. Further, the commenter asked that the 
regulation clarify whether manufactured housing rental communities can 
be insured under the Section 542(c) program, assuming they meet other 
program requirements.
    HUD Response: Expanding project eligibility to include residents 
earning up to 80 to 100 percent of AMI would not conform to the 
program's statutory requirements, under which the affordability 
restriction must meet the requirements of I.R.C. Sec.  42(g). Projects 
restricted to renters age 55 and older are required to comply with the 
Fair Housing Act's exemption and HUD's Housing for Older Person 
regulations in 24 CFR part 100, subpart E. Manufactured housing rental

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communities are eligible for Risk Sharing in accordance with 24 CFR 
266.200(a)--Eligible Projects, if all other statutory and regulatory 
requirements of the Risk Sharing program are met.
    Comment: Revise HFA environmental review requirements. A commenter 
said HFAs that serve as a Responsible Entity (RE) for conducting the 
environmental assessment for Risk-Sharing mortgages must follow 24 CFR 
part 58 regulations, but that HUD follows 24 CFR part 50 for mortgage 
insurance applications processed under the MAP program. The commenter 
suggested changing the Risk-Sharing regulations to allow HFAs that take 
at least 50 percent risk of loss to utilize 24 CFR part 50 for the 
environmental reviews in order to align Risk-Sharing loans with the 
same standards as the MAP program, which will result in more 
streamlined reviews and a more expedited process.
    HUD Response: The National Environmental Policy Act required 
environmental reviews are lengthy and create an additional 
responsibility for already overburdened HUD field offices. To lessen 
this burden and to facilitate more expeditious processing of 
applications for mortgage insurance, HUD will continue to serve in a 
monitoring role for environmental reviews performed by the HFAs. 
Assumption of this authority is critical to giving the HFAs the maximum 
authority to carry out the Risk Sharing program's intent.

D. Mortgage Requirements

    Comment: Provide further information about the rule's fully 
amortizing loan requirement and exceptions. A commenter stated that 
Sec.  266.410(e) provides that the rule's fully amortizing loan 
requirement does not apply to Level I participants, where the loan can 
have a minimum 17-year term and the HFA's underwriting standards have 
been approved by HUD. This commenter stated that the industry standard 
for a LIHTC first mortgage loan is 30-year amortization with a 17-year 
term, and the commenter said it presumed this provision is intended to 
apply to properties of this type. The commenter also said the rule does 
not require a specific amortization period since HUD has the ultimate 
veto of the HFA's underwriting criteria. Another commenter suggested 
giving HFAs the ability to extend the maximum amortization period to 40 
years for loans that will have a shorter term. This commenter also 
suggested the rule clarify HUD's flexibility to extend the mortgage 
insurance at the time a term loan balloon payment is due provided the 
HFA is willing to extend the loan term.
    HUD Response: HUD agreed with the comment and the language was 
changed accordingly.
    Comment: Provide specificity regarding HUD's authority to adjust 
the amount of mortgage insurance. Commenters said that the current 
Sec.  266.417 allows HUD to modify the insured loan amount up until 
final endorsement but does not specify the factors that HUD would 
consider in doing so. Commenters said this potential reduction is 
separate from HUD's right to challenge the cost certification under 
Sec.  266.310(d)(4) and to deny endorsement based on a finding of fraud 
or misrepresentation under Sec.  266.300(e). The uncertainty regarding 
how HUD might exercise its discretion to adjust the amount of insurance 
under Sec.  266.417 can be problematic for Low Income Tax Credit equity 
investors and developers. As a result, commenters said it would be 
helpful if the rule could be revised to limit HUD's discretion to 
reduce the insured loan amount to certain specific factors.
    HUD Response: HUD reserves the right to mitigate the risks posed by 
delegation of underwriting, servicing, and processing of Risk Sharing 
loans to HFAs. By retaining final authority to adjust the insured 
mortgage amount up to and including the final endorsement, HUD is not 
suggesting that it will, as a matter of policy, routinely review all 
decisions about insured advances or cost certification.

E. Claim Procedure

    Comment: Permit more time for HFAs to use initial claim payments to 
retire bonds. A commenter said that the proposed Sec.  266.628(a)(3) 
requires that an HFA use the initial claim payment's proceeds to retire 
bonds within 30 days of the claim payment, but this may not be 
realistic in many instances and cannot always be accomplished under the 
controlling bond documents. Commenter suggested that the proposed rule 
require redemption as soon as reasonably permitted by the bond 
resolution or indenture, and that the claim payment be returned if not 
used to call bonds within 60 days instead of 30 days.
    HUD Response: The 30-day requirement is in the existing regulations 
and the only change made in this rule is to clarify that 30 days means 
30 calendar days. HUD did not believe that this requirement was 
problematic for HFAs when the existing regulations were issued, and HUD 
will not change the requirement at this time.
    Comment: Revise the current regulation's termination of insurance 
effective date provisions. Commenters said that the current Sec.  
266.622 does not contemplate a refinancing that involves the payoff or 
cancellation of an existing Risk Sharing loan with the proceeds from a 
new Risk-Sharing (or other FHA-insured) loan. Additionally, commenters 
said the Form 9807 instructions, which state that voluntary insurance 
terminations are effective on the date that all requirements are met, 
seems inconsistent with Sec.  266.620, which refers to a termination 
being effective at the end of the month when the requirements are met. 
Commenters suggested that Sec.  266.622 provide that ``The termination 
shall be the last day of the month in which one of the events specified 
in Sec.  266.620 occurs except in the case of a prepayment termination 
under Sec.  266.620(a) or voluntary termination under Sec.  266.620(d), 
which shall be effective at the time or upon the conditions requested 
by the HFA in the request to terminate, provided that in the event such 
prepayment termination or voluntary termination is in coordination with 
the issuance of Risk-Sharing (or other FHA) insurance on new financing 
for the subject project, the prepayment termination or voluntary 
termination shall in no event be effective later than the date of the 
initial disbursement of funds under such new insured loan.''
    HUD Response: Section 266.620(d) states if ``[t]he HFA notifies the 
Commissioner of Termination of Insurance (voluntary termination);'' 
then Sec.  266.622 specifies ``[t]he termination shall be the last day 
of the month in which one of the events specified in Sec.  266.620 
occurs.'' Voluntary termination, by submitting HUD Form 9807, must be 
completed before the initial endorsement of a new refinancing loan can 
proceed. Therefore, it is vital that the Form 9807 is submitted in a 
timely manner to ensure that the existing project is terminated in 
HUD's systems before the new project can be added. HUD agrees that the 
requirements of the Form 9807 are inconsistent with regulations in 
Sec.  266.622. Form 9807 was primarily designed for mortgage 
terminations insured under the National Housing Act and does not 
include any instructions on Risk Sharing terminations. HUD will explore 
revising the Form 9807 to include instructions for terminating Risk 
Sharing loans. However, HFAs are instructed that when submitting 
terminations, Block #5 of the Form 9807 should indicate the 
``official''

[[Page 83439]]

termination date (the last day of the month).

F. Endorsement and Approval

    Comment: No requirement that large loans require the FHA 
Commissioner's approval. A commenter said that calling for the FHA 
Commissioner to review a ``large loan'' under Risk Sharing is not 
necessary and could delay the loan process.
    HUD Response: As explained in the rule, FHA currently requires a 
National Loan Committee to approve all large loans under the MAP Guide 
for risk management purposes. Risk-sharing loans where the HFA assumes 
less than 50 percent of the risk of loss pose a similar risk to FHA as 
do MAP loans that are fully insured. The National Loan Committee large 
loans review requirement does not impact the time it takes to process 
loans. Loans are usually reviewed and completed within 1-2 days. 
Furthermore, this ensures that the FHA insurance fund is protected from 
potential losses on large loans. Therefore, this final rule maintains 
the revision that amends Sec.  266.305(a) that establishes the 
underwriting standards for HFAs accepting less than 50 percent of the 
risk, to add a provision that large loans processed by these HFAs under 
Risk Sharing also requires the FHA Commissioner's prior approval.
    Comment: Provide that HUD may accept an indemnification from the 
HFA in lieu of refusing to endorse a mortgage note for insurance at 
final endorsement due to fraud or material misrepresentation. 
Commenters stated that they approve of the rule's new provision in 
Sec.  266.620(b) that allows HUD, in its discretion, to accept an 
indemnification from the HFA to avoid insurance cancellation for fraud 
or misrepresentation. Commenters asked that the rule be clarified or 
extended to specify that, for substantial rehabilitation or new 
construction, HUD also has the discretion to accept an indemnification 
from the HFA in lieu of refusing to endorse the mortgage note at final 
endorsement due to fraud or material misrepresentation under Sec.  
266.300(e). Commenters further said that conceptually, the issue is the 
same, and they believe that HUD would be covered by the 
indemnification.
    HUD Response: The new provision in Sec.  266.620(b) is designed to 
provide flexibility for HUD to accept indemnification from an HFA in 
lieu of terminating an existing contract of insurance for the reasons 
stated in the provision and applies to all Risk Sharing transactions, 
including for new construction and substantial rehabilitation. For 
clarification purposes, HUD will specify that all Risk Sharing 
transactions would be subject to this rule. Note that Sec.  266.620 
governs only the potential termination of mortgage insurance for the 
reasons stated in the provision but does not contain any provisions 
governing the Final Endorsement of loans for mortgage insurance. This 
provision gives HUD the flexibility to accept an indemnification from 
an HFA based on the circumstances of a transaction, but does not 
necessarily require that HUD do so.

G. Non-Regulatory Actions

    Comment: Update the Firm Approval and the Closing Docket submission 
process. A commenter asked if HUD considered updates to the submission 
process for both Firm Approval and the Closing Docket to remove 
obsolete references such as utilizing a diskette, as well as an 
amortization schedule for loans ``Insured of Advances'' when being 
submitted for the initial endorsement. The commenter said that the 
current practice is to submit an electronic package as well as a hard 
copy to the local office for review. The commenter said the 
amortization schedule is useful when the note is modified as part of 
the final endorsement but not during the construction period, when loan 
payment is interest only.
    HUD Response: HUD agreed with the commenter and will eliminate all 
obsolete references when the HFA Risk Sharing Handbook 4590.1 is 
revised. The amortization schedule at initial and final endorsement 
submission is used by the Department's Office of Financial Analysis and 
Controls Division and the Office of Insurance Operations to record the 
Department's collections, receivables, and payables.
    Comment: Consider creating an Applicability Matrix for Risk-Sharing 
Loans. A commenter said an ``Applicability Matrix'' is currently used 
for transactions financed under the MAP LIHTC Pilot program and having 
a similar matrix for Risk Sharing loans will ensure consistency among 
HFAs as part of underwriting and loan closing due diligence involving 
LIHTC properties.
    HUD Response: HFA Risk Sharing lenders are granted the maximum 
range of processing responsibilities and flexibilities. Program 
regulations provide for primary decision-making by participating HFAs 
in selecting projects to finance. An Applicability Matrix would be 
inconsistent with the program's basic principles, which is delegating 
the underwriting, including loans' terms and conditions, to the HFA.

IV. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

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

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities.
    The regulatory amendments would update the regulations governing 
HUD's HFA Risk-Sharing program to conform to current industry practices 
and FHA policies with which HFAs and other program participants are 
already familiar. Other regulatory changes will provide greater 
flexibility for HFAs, alleviating administrative burdens and related 
program operating costs. While there may be some costs for HFAs to 
update their practices and procedures to reflect some of the regulatory 
changes, these costs are minimal in comparison to the streamlining 
benefits provided by the revised program regulations.

[[Page 83440]]

    For the reasons presented, the undersigned certifies that this rule 
will not have a significant economic impact on a substantial number of 
small entities.

Executive Order 13132, Federalism

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

Environmental Impact

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

Unfunded Mandates Reform Act

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

Information Collection Requirements

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB 
control number 2502-0500. In accordance with the Paperwork Reduction 
Act of 1995, an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information, unless the 
collection displays a currently valid OMB control number.

Catalog of Federal Domestic Assistance

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

List of Subjects in 24 CFR Part 266

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

    Accordingly, for the reasons stated above, HUD amends 24 CFR part 
266 as follows:

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

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

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


0
2. Amend part 266 by removing the words ``Contract of Insurance'' and 
add in their place the words ``contract of insurance'' wherever they 
occur.

0
3. Revise Sec.  266.1 to read as follows:


Sec.  266.1  Purpose and scope.

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

0
4. Amend Sec.  266.5 by:
0
a. Removing ``, as amended'' from the definition of ``Act'';
0
b. Revising the definition of ``Affordable housing'';
0
c. Removing from the definition of ``Commissioner'' the words ``his or 
her'' and adding in their place the words ``the Commissioner's'';
0
d. Revising the definition of ``Credit subsidy'';
0
e. Removing from the definition of ``Designated offices'' the words 
``HUD Field Offices'' and adding in their place the words ``local HUD 
offices'';
0
f. Removing the definition of ``Gross rent'';
0
g. Removing from the definition of ``Multifamily housing'' the word 
``Secretary'' and add in its place the word ``Commissioner''; and
0
h. Removing the definition of ``Supportive services''.
    The revisions read as follows:


Sec.  266.5  Definitions.

* * * * *
    Affordable housing means a project that meets the requirements for 
a qualified low-income housing project under section 42(g) of the 
Internal Revenue Code of 1986 (26 U.S.C. 42(g)). For purposes of this 
part, the reference to a utility allowance in 26 U.S.C. 42(g) includes 
charges for the occupancy of a cooperative unit.
* * * * *
    Credit subsidy means the cost of a direct loan or loan guarantee 
under the

[[Page 83441]]

Federal Credit Reform Act of 1990 (subtitle B of title XIII of the 
Omnibus Budget Reconciliation Act of 1990, Public Law 101-508, approved 
Nov. 5, 1990).
* * * * *


Sec.  266.10  [Removed]

0
5. Remove Sec.  266.10.

0
6. Revise Sec.  266.30 to read as follows:


Sec.  266.30  Nonapplicability of 24 CFR part 246.

    The regulations at 24 CFR part 246, pertaining to local rent 
control, do not apply to projects that are security for mortgages 
insured under this part.

0
7. Amend Sec.  266.100 by:
0
a. Revising the first sentence of paragraph (a) introductory text;
0
b. Revising paragraphs (a)(1), (a)(6)(i), (b)(1), (b)(2) introductory 
text, and (b)(3); and
0
c. Adding paragraph (b)(4).
    The revisions and addition read as follows:


Sec.  266.100  Qualified housing finance agency (HFA).

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

0
8. Amend Sec.  266.105 by revising paragraph (b) to read as follows:


Sec.  266.105  Application requirements.

* * * * *
    (b) Applications for participation in program. Applications from 
HFAs for approval to participate in the program under this part may be 
submitted at any time, and must be submitted in the form and manner 
established by HUD.

0
9. Amend Sec.  266.110 by revising the paragraph (a) subject heading, 
the first sentence of paragraph (a), and the third sentence of 
paragraph (b)(1) introductory text to read as follows:


Sec.  266.110  Reserve requirements.

    (a) HFAs with an issuer credit rating of ``A'' or better or overall 
rating of ``A'' or better on general obligation bonds. An HFA with an 
issuer credit rating of ``A'' or better, or an equivalent designation, 
or an HFA with an overall rating of ``A'' or better on its general 
obligation bonds, is not required to have additional reserves so long 
as the HFA maintains that designation or rating, unless the 
Commissioner determines that a prescribed level of reserves is 
necessary. * * *
    (b) * * *
    (1) * * * The account must be established prior to the execution of 
any risk-sharing agreement under this part in an initial amount of not 
less than $500,000. * * *
* * * * *


Sec.  266.115  [Amended]

0
10. Amend Sec.  266.115 by removing the words ``his or her'' from the 
first sentence in paragraph (a) and from paragraph (c).

0
11. Amend Sec.  266.120 by revising paragraphs (d) and (e)(5) to read 
as follows:


Sec.  266.120  Actions for which sanctions may be imposed.

* * * * *
    (d) Actions or conduct for which sanctions may be imposed against 
the HFA by HUD's Mortgagee Review Board under 24 CFR 25.9, which 
pertains to ``notice of administrative action''.
    (e) * * *
    (5) Maintain an issuer credit rating of ``A'' or better, or an 
equivalent designation, or overall rating of ``A'' on general 
obligation bonds (or if such rating is lost, comply with paragraph 
(e)(6) of this section);
* * * * *

0
12. Amend Sec.  266.125 by revising paragraph (a)(6), adding paragraph 
(a)(8), and revising the first sentence of paragraph (d)(1) to read as 
follows:


Sec.  266.125  Scope and nature of sanctions.

    (a) * * *
    (6) Recommend to the Commissioner that the HFA's mortgagee approval 
be withdrawn pursuant to 24 CFR part 25 (regulations of the Mortgagee 
Review Board) and/or that penalties be imposed pursuant to 24 CFR part 
30 (regulations pertaining to Civil Money Penalties; Certain Prohibited 
Contact);
* * * * *
    (8) Require the HFA to revise any or all of its underwriting, 
processing, asset management, or servicing policies and procedures as 
directed by the Commissioner.
* * * * *
    (d) * * *
    (1) Any sanction imposed by a designated office in writing will be 
immediately effective, will state the grounds for the action, and 
provide for the HFA's right to an informal hearing before the 
designated office representative or designee in the designated office. 
* * *
* * * * *

0
13. Amend Sec.  266.200 by:
0
a. Revising paragraphs (b)(2), (c), (d), (e), and (g);
0
b. Redesignating paragraph (h) as paragraph (i); and
0
c. Adding new paragraph (h).
    The revisions and addition read as follows:


Sec.  266.200  Eligible projects.

* * * * *
    (b) * * *
    (2) Substantial rehabilitation occurs when the scope of work to 
improve an existing project exceeds in aggregate cost a sum equal to 
the base per dwelling unit limit times the applicable high cost factor 
established by the Commissioner, or when the scope of work involves the 
replacement of two or more building systems. Replacement is when the 
cost of replacement work exceeds 50% of the cost of replacing the 
entire system. The base per dwelling unit limit is $15,933 for 2019, 
and will be adjusted annually based on the percentage change in the 
consumer price index.
    (c) Existing projects. Financing of existing properties for 
acquisition or refinancing without substantial rehabilitation is 
allowed.
    (1) If the financing will result in the preservation of affordable 
housing,

[[Page 83442]]

where the property will be maintained as affordable housing for a 
period of at least 20 years, regardless of whether the loan is prepaid; 
and
    (2) Project occupancy is not less than 93 percent (to include 
consideration of rent in arrears), based on the average occupancy in 
the project over the most recent 12 months; and
    (3) The loan to be refinanced has not been in default within the 12 
months prior to the date of the application for refinancing; and
    (4) A capital needs assessment is performed, and funds escrowed for 
all necessary repairs and replacement reserves funded for future 
capital repairs; and
    (5) If the project is subject to a Housing Assistance Payment (HAP) 
contract, and is not a project financed under section 202 of the 
Housing Act of 1959 (12 U.S.C. 1701q) by a Level I participant, then:
    (i) The owner of the property agrees to renew the HAP contract for 
a 20-year term;
    (ii) Existing and post-refinance HAP residual receipts are set 
aside to be used to reduce future HAP payments; and
    (iii) The HUD-insured mortgage does not exceed an amount 
supportable by the lower of the unit rents being collected under the 
rental assistance agreement or the unit rents being collected at 
unassisted projects in the market area that are similar in amenities 
and location to the project for which insurance is being requested; and
    (6) For Level II participants only, the HUD-insured mortgage may 
not exceed the sum of the existing indebtedness, cost of refinancing, 
or acquisition, the cost of repairs and reasonable transaction costs as 
determined by the Commissioner. (This paragraph does not apply to Level 
I participants.)
    (d) Projects receiving section 8 rental subsidies or other rental 
subsidies. Projects receiving project-based housing assistance payments 
under section 8 of the U.S. Housing Act of 1937 (42 U.S.C.1437f) or 
other rental subsidies and meeting the requirements of this part may be 
insured under this part only if the mortgage does not exceed an amount 
supportable by the lower of the unit rents being or to be collected 
under the rental assistance agreement or the unit rents being collected 
at unassisted projects in the market that are similar in amenities and 
location to the project for which insurance is being requested. This 
paragraph does not apply to projects of Level I participants if those 
projects are financed under section 202 of the Housing Act of 1959 (12 
U.S.C. 1701q).
    (e) SRO projects. Single room occupancy (SRO) projects, as defined 
in Sec.  266.5, are eligible for insurance under this part. Units in 
SRO projects must be subject to 30-calendar day or longer leases; 
however, rent payments may be made on a weekly basis in SRO projects.
* * * * *
    (g) Elderly projects. Projects or parts of projects specifically 
designed for the use and occupancy by elderly families. An elderly 
family means any household where the head or spouse is 62 years of age 
or older, including children under 18, and also any single person who 
is 62 years of age or older.
    (h) Housing for older persons. Projects eligible for and in 
compliance with 42 U.S.C. 3607(b) and 24 CFR part 100, subpart E.
* * * * *


Sec.  266.205  [Amended]

0
14. Amend Sec.  266.205 in paragraph (a)(1) by adding the word 
``calendar'' after the number ``30'' and in paragraph (b)(2) by adding 
the letters ``U.S.'' before the term ``Department of Defense''.

0
15. Amend Sec.  266.210 by:
0
a. Removing paragraph (b);
0
b. Redesignating paragraphs (c), (d) and (e) as paragraphs (b), (c) and 
(d), respectively; and
0
c. Revising newly redesignated paragraphs (c) and (d).
    The revisions read as follows:


Sec.  266.210  HUD-retained review functions.

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

0
16. Amend Sec.  266.215 by revising paragraph (e) to read as follows:


Sec.  266.215  Functions delegated by HUD to HFAs.

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

0
17. Add Sec.  266.217 to read as follows:


Sec.  266.217  Environmental review requirements.

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

0
18. Revise Sec.  266.220 to read as follows:


Sec.  266.220  Nondiscrimination in housing and employment.

    The mortgagor must certify to the HFA that, so long as the mortgage 
is insured under this part, the mortgagor will:
    (a) Not use tenant selection procedures that discriminate against 
families with children, except in the case of a project qualifying for 
and complying with the requirements of the ``housing for older 
persons'' exemption, as defined in section 807(b)(2) of the Fair 
Housing Act (42 U.S.C. 3607(b)) and further described in 24 CFR part 
100, subpart E. Projects receiving Federal financial assistance in 
which elderly families include minor children may not avail themselves 
of the housing for older persons exemption;
    (b) Determine eligibility for admission and continued occupancy 
without regard to actual or perceived sexual orientation, gender 
identity, or marital status and refrain from inquiries about sexual 
orientation and gender identity in accordance with 24 CFR 5.105(a)(2);
    (c)(1) Comply with:
    (i) The Fair Housing Act (42 U.S.C. 3601 through 3619), as 
implemented by 24 CFR part 100;
    (ii) Titles II and III of the Americans with Disabilities Act of 
1990 (42 U.S.C. 12101 through 12213), as implemented by 28 CFR part 35;
    (iii) Section 3 of the Housing and Urban Development Act of 1968 
(12 U.S.C. 1701u), as implemented by 24 CFR part 135;
    (iv) The Equal Credit Opportunity Act (15 U.S.C. 1691-1691f), as 
implemented by 12 CFR part 202;

[[Page 83443]]

    (v) Executive Order 11063, as amended by Executive Order 12259 (3 
CFR 1958-1963 Comp., p. 652 and 3 CFR 1980 Comp., p. 307), and 
implemented by 24 CFR part 107;
    (vi) Executive Order 11246 (3 CFR 1964-1965 Comp., p. 339), as 
implemented by 41 CFR part 60; and
    (vii) Other applicable Federal laws and regulations issued pursuant 
to these authorities; and applicable State and local fair housing and 
equal opportunity laws.
    (2) In addition to the authorities listed in paragraph (c)(1) of 
this section, a mortgagor that receives Federal financial assistance 
must also certify to the HFA that, so long as the mortgage is insured 
under this part, it will comply with:
    (i) Title VI of the Civil Rights Act of 1964 (42 U.S.C. 2000d), as 
implemented by 24 CFR part 1;
    (ii) The Age Discrimination Act of 1975 (42 U.S.C. 6101 through 
6107), as implemented by 24 CFR part 146; and
    (iii) Section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 
794), as implemented by 24 CFR part 8.

0
19. Amend Sec.  266.225 by revising paragraphs (a)(1) introductory 
text, (a)(1)(i), (b), (c), (d)(1), and the second sentence of paragraph 
(e) to read as follows:


Sec.  266.225  Labor standards.

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

0
20. Amend Sec.  266.300 by:
0
a. Revising paragraph (b)(1);
0
b. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(4), 
(5), and (6), respectively;
0
c. Adding new paragraph (b)(3);
0
d. Revising newly redesignated paragraph (b)(5); and
0
e. Revising paragraph (c).
    The revisions and addition read as follows:


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

* * * * *
    (b) * * *
    (1) Determine that a market for the project exists, taking into 
consideration any comments from the local HUD office relative to the 
potential adverse impact the project will have on existing or proposed 
Federally insured and assisted projects in the area.
* * * * *
    (3) Arrange for the performance of an environmental review in 
accordance with Sec.  266.217;
* * * * *
    (5) Approve the Affirmative Fair Housing Marketing Plan, required 
by Sec.  266.215(a); and
* * * * *
    (c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec.  266.210(a) and (b) the local HUD 
office will issue a firm approval letter.
* * * * *

0
21. Amend Sec.  266.305 by:
0
a. Revising paragraphs (a) and (b)(1);
0
b. Redesignating paragraphs (b)(3), (4), and (5) as paragraphs (b)(4), 
(5), and (6), respectively;
0
c. Adding new paragraph (b)(3);
0
d. Revising newly redesignated paragraph (b)(5), and
0
e. Revising paragraph (c).
    The revisions and additions read as follows:


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

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

[[Page 83444]]

Sec.  266.210(a) and (b), the local HUD office will issue a firm 
approval letter.
* * * * *

0
22. Amend Sec.  266.410 by revising paragraph (e) to read as follows:


Sec.  266.410  Mortgage provisions.

* * * * *
    (e) Amortization. The mortgage must provide for complete 
amortization (i.e., be regularly amortizing) over the term of the 
mortgage. The complete amortization requirement does not apply to:
    (1) Construction loans, or
    (2) Level I participants where the loan has a minimum term of 17 
years that would amortize over a maximum period of 40 years and the 
HFA's underwriting standards, loan terms and conditions, and asset 
management and servicing procedures have been approved by HUD.
* * * * *

0
23. Amend Sec.  266.420 by revising the second sentence of paragraph 
(a) and paragraphs (b)(3), (4), and (7) and adding paragraph (b)(13) to 
read as follows:


Sec.  266.420  Closing and endorsement by the Commissioner.

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

0
24. Revise Sec.  266.500 to read as follows:


Sec.  266.500   General.

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


Sec.  266.505   [Amended]

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

0
26. Revise Sec.  266.507 to read as follows:


Sec.  266.507  Maintenance requirements.

    The mortgagor must maintain the project in accordance with the 
physical condition standards in 24 CFR part 5, subpart G (Physical 
Condition Standards and Inspection Requirements).

0
27. Amend Sec.  266.510 by revising paragraph (a) to read as follows:


Sec.  266.510  HFA responsibilities.

    (a) Inspections. The HFA must perform inspections in accordance 
with the physical inspection procedures in 24 CFR part 5, subpart G 
(Physical Condition Standards and Inspection Requirements).
* * * * *

0
28. Revise Sec.  266.600 to read as follows:


Sec.  266.600  Mortgage insurance premium: Insurance upon completion.

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

0
29. Amend Sec.  266.602 by revising paragraph (a), the first sentence 
of paragraph (b), the first sentence of paragraph (c), and paragraph 
(d) to read as follows:


Sec.  266.602  Mortgage insurance premium: Insured advances.

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

0
30. Amend Sec.  266.604 by revising paragraphs (a) and (b), the first 
sentence of paragraph (c), and the second and third sentences of 
paragraph (d) to read as follows:

[[Page 83445]]

Sec.  266.604  Mortgage insurance premium: Other requirements.

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

0
31. Amend Sec.  266.620 by:
0
a. Revising the section heading;
0
b. Redesignating the introductory text as paragraph (a) and 
redesignating paragraphs (a) through (g), as paragraphs (a)(1) through 
(7), respectively; and
0
c. Adding new paragraph (b).
    The revision and addition read as follows:


Sec.  266.620   Termination of contract of insurance and 
indemnification.

* * * * *
    (b) In lieu of termination of the mortgage insurance contract 
pursuant to paragraph (a)(5) of this section, the Commissioner may, in 
his or her full discretion, permit a Level I participant rated ``A'' or 
higher to indemnify HUD, or otherwise reimburse HUD in a manner 
acceptable to the Commissioner, for the full amount of the mortgage 
claim.

0
32. Amend Sec.  266.626 by revising the first sentence of paragraph (c) 
and revising paragraph (d) to read as follows:


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

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

0
33. Amend Sec.  266.628 by revising paragraph (a)(3) to read as 
follows:


Sec.  266.628   Initial claim payments.

    (a) * * *
    (3) The HFA must use the proceeds of the initial claim payment to 
retire any bonds or any other financing mechanisms securing the 
mortgage within 30 calendar days of the initial claim payment. Any 
excess funds resulting from such retirement or repayment shall be 
returned to HUD within 30 calendar days of the retirement.
* * * * *

0
34. Amend Sec.  266.630 by revising the second sentence of paragraph 
(c)(2), paragraphs (d)(1), (2), and (4), and the second sentence of 
paragraph (d)(5) to read as follows:


Sec.  266.630  Partial payment of claims.

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


Sec.  266.634  [Amended]

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


Sec.  266.638   [Amended]

0
36. Amend Sec.  266.638 by:
0
a. Adding the word ``calendar'' before the word ``days'' in the first 
sentence of paragraph (a);
0
b. Removing the word ``five'' from the second sentence of paragraph (b) 
and adding in its place the number ``5'';
0
c. Removing the words ``five year'' from the third sentence of 
paragraph (b) and adding in their place ``5-year''.


Sec.  266.642   [Amended]

0
37. Amend Sec.  266.642 in the third sentence of by removing the phrase 
``45-day'' and adding in its place the phrase ``45-calendar-day''.


Sec.  266.644   [Amended]

0
38. Amend Sec.  266.644 in the introductory text by adding the word 
``calendar'' before the word ``days''.


Sec.  266.648   [Amended]

0
39. Amend Sec.  266.648 in paragraph (c)(4) by removing the words ``the 
Office of General Counsel'' and adding in their place ``HUD''.

0
40. AmendSec.  266.650 by revising paragraph (a) to read as follows:

[[Page 83446]]

Sec.  266.650  Items deducted from total loss.

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


Sec.  266.654   [Amended]

0
41. Amend Sec.  266.654 in paragraph (b) by adding the word 
``calendar'' before the word ``days'' in the first sentence.

Dana T. Wade,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2020-27914 Filed 12-21-20; 8:45 am]
BILLING CODE 4210-67-P