[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29835]


[[Page Unknown]]

[Federal Register: December 5, 1994]


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Part VI





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



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24 CFR Parts 246 and 266




Housing Finance Agency Risk-Sharing Program for Insured Affordable 
Multifamily Project Loans; Final Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 246 and 266

[Docket No. R-94-1685; FR-3383-F-02]
RIN 2502-AF94

 
Housing Finance Agency Risk-Sharing Program for Insured 
Affordable Multifamily Project Loans

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

ACTION: Final rule.

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SUMMARY: On December 3, 1993, the Department published an interim rule 
which introduced a new mortgage insurance program authorized by the 
Housing and Community Development Act of 1992. The program is designed 
to increase the supply of affordable multifamily units by allowing 
State and local housing finance agencies (HFAs) to originate and 
service mortgage loans that are fully insured by HUD's Federal Housing 
Administration. Under the program, participating HFAs are required to 
share in the risk associated with monetary losses that may be incurred 
as a consequence of any loan defaults. Under the interim rule, 33 HFAs 
were approved to participate in the program. This rule finalizes the 
standards and procedures of the interim rule after taking into account 
the concerns expressed, and the recommendations made, during the rule's 
public comment period.

DATES: Effective date: January 4, 1995.

FOR FURTHER INFORMATION CONTACT: For questions concerning Subparts A-E, 
contact Jane Luton, Acting Director, Policies and Procedures Division, 
Office of Insured Multifamily Housing Development, room 6116, (202) 
708-2556; Subpart F, contact Albert B. Sullivan, Director, Office of 
Multifamily Housing Management, room 6160, (202) 708-3730; Subpart G, 
contact John Stahl, Director Multifamily Accounting and Servicing 
Division, room 6258, (202) 708-0223; Department of Housing and Urban 
Development 451 Seventh Street SW., Washington, DC 20410. Hearing- and 
speech-impaired persons may call (202) 708-4594. (The above listed 
telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    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 1980 (44 U.S.C. 3501-3520), and have been 
assigned OMB control number 2502-0500.

I. Introduction

    Section 542(c) of the Housing and Community Development Act of 1992 
(Pub. L. 102-550, approved October 28, 1992) (1992 Act) as amended by 
the Multifamily Housing Property Disposition Reform Act of 1994 (Pub. 
L. 103-233, approved April 11, 1994) (1994 Act) authorizes the HUD 
Secretary to enter into risk-sharing agreements with qualified State or 
local Housing Finance Agencies (HFAs) to test the effectiveness of 
certain Federal mortgage loan credit enhancements. (Section 542(c) is a 
part of subtitle C, title V of the 1992 Act. Section 541 provides that 
subtitle C, which consists of sections 541 through 544, may be cited as 
the ``Multifamily Housing Finance Improvement Act.'' This rule 
implements only section 542(c).) The purpose of section 542(c) is to 
increase the supply of affordable multifamily housing through 
partnerships with housing finance agencies (HFAs) where the Department 
provides full insurance under a risk-sharing agreement to test the 
effectiveness of providing new forms of Federal credit enhancement for 
multifamily loans, an intended benefit of which would be increased 
credit ratings on bond-financed mortgage loans. HUD envisions that, 
under this program, HFAs will have greater access to capital markets 
and be able to provide affordable housing in a manner that is both 
timely and efficient.
    The term ``partnership'' as used in the preceding paragraph and in 
section 542 is used in the generic sense and not in the technical legal 
sense. It is not intended to impose any partnership liability on HUD in 
the event of negligence or other actionable misconduct by an HFA.
    The basic structure of the program allows HFAs to carry out certain 
HUD functions under the program, including the assumption of loan 
management and property disposition responsibilities for defaulted 
loans. In the event of a loan default, the HFA is required to share 
with HUD in any loss arising as a consequence of the loan default.
    Section 542(c) prescribes certain requirements for this program, 
and also authorizes the Secretary to issue such regulations as may be 
necessary to carry out the program.

II. Legislative Background

    The 1992 Act contains definitions for what constitutes 
``multifamily housing'' (section 544(1)), a ``qualified'' HFA (section 
544(2)), and ``affordable housing'' (section 542(c)(7)). These 
definitions have been incorporated into the regulation at 24 CFR 266.5.
    In addition, section 542(c) prescribes a number of requirements for 
the program, which may be summarized as follows:
    General: HUD is required to execute risk-sharing agreements with 
qualified HFAs.
    Mortgage insurance: Risk-sharing agreements must provide for HUD to 
fully insure mortgage loans originated by or through HFAs, and for 
reimbursement to HUD by HFAs for a portion of any losses incurred on 
the insured loans.
    Risk apportionment: The percentage of loss assumed by HUD and the 
HFA (risk apportionment) must be specified in the risk-sharing 
agreement between HUD and the HFA. HUD intends to execute a single 
agreement with each HFA, but the agreement will recognize that the risk 
apportionment may vary among project loans that are originated by a 
single HFA. The loan loss percentage for a particular project will be 
reflected in that project's underlying loan documentation and in an 
addendum to the risk-sharing agreement.
    Reimbursement capacity: The application for participation in this 
program must demonstrate that the HFA has the financial capacity to 
fulfill its reimbursement obligations.
    Underwriting standards: A qualified HFA that agrees to accept 50 
percent or more of the risk of loss on a loan may employ its own 
underwriting standards, loan terms and conditions. However, where HUD 
retains more than 50 percent of the risk, it may impose additional 
underwriting standards, and loan terms and conditions.
    Other requirements: Section 542(c) also requires HUD to establish a 
schedule for mortgage insurance premiums that reflects the risk 
apportionment for the loan. Lower or nominal premiums will apply to 
HFAs that assume a greater share of the risk of loss. In addition, HUD 
is prohibited from applying ``identity of interest'' provisions in 
risk-sharing agreements (section 542(c)(5)); and GNMA is prohibited 
from issuing securities for loans insured under the program (section 
542(c)(6)).
    Finally, HUD may issue commitments for mortgages that, in the 
aggregate, do not exceed 30,000 units between now and September 30, 
1995 (section 542(c)(4)). The Congress may expand the program after 
that date, but no determination will be made until the Secretary has 
submitted reports (including any recommendations for legislation) to 
the Congress, as required under section 542(d)(3). (See, section 
542(c)(4).)

III. The Regulation

    The legislation authorizing this program prescribes certain 
requirements in relation to eligibility and risk apportionment. As a 
matter of policy, in its formulation of this regulation, HUD has 
decided to afford qualified HFAs very broad responsibility for the 
administration of the program, although HUD will monitor HFAs' 
activities. In addition to underwriting and processing loans, HFAs will 
service loans, provide management oversight of the projects, and 
dispose of properties subject to mortgages that fall into default. The 
regulation provides for sanctions in the event that an HFA is found to 
be in noncompliance with the requirements of the regulation.
    It is to be noted that for this program the Congress, in section 
542(c)(2)(E) of the 1992 Act, has assigned to qualified HFAs the 
responsibility for using their own ``underwriting standards and loan 
terms and conditions for purposes of loans to be insured under this 
subsection'' without further review by the Secretary, except that the 
Secretary may impose ``additional underwriting criteria and loan terms 
and conditions'' in cases where the Secretary retains more than 50 
percent of the risk of loss. Further, Congress has authorized HUD 
through section 542(c)(8) to issue such regulations as may be necessary 
to carry out this risk-sharing program.
    In cases involving ``insurance upon completion,'' HUD will be 
responsible for final endorsement of the mortgage note for insurance. 
In cases involving ``insurance of advances,'' HUD will be responsible 
for the initial and final endorsement of the mortgage note for 
insurance in a maximum amount set forth on the note. The amount of the 
insurance, however, will be only to the extent of advances approved 
during the construction process. The Department has decided to delegate 
to HFAs the responsibilities for the insurance of advances and cost 
certification functions. These functions are relevant to the insurance 
process and are carried out by HUD in full insurance programs under the 
National Housing Act.
    Since the functions proposed for delegation are integral to the 
insurance process, the Department has determined that the delegation 
would be legally sustainable if HUD retains the authority to make 
adjustments to the insured mortgage amount during the period up to and 
including the time of final endorsement, which it has done in 
Sec. 266.417 of the rule.
    HUD's reservation of final authority to adjust the insured mortgage 
amount is not meant to suggest that HUD will, as a matter of policy, 
routinely review all decisions of HFAs about the insurance of advances 
and cost certification processes. For example, the Commissioner could 
review the insurance of advances and cost certification processes on a 
random basis and, up to and including the time of final endorsement, 
correct errors by adjusting the amount of mortgage insurance. Examples 
of such reviews of the insurance of advances process could involve a 
HUD evaluation of an HFA's approval of advances to determine whether 
such approval is consistent with construction progress. The Department 
could assess whether other mortgageable items were supported with 
proper bills and/or receipts before funds were approved. The Department 
also could consider whether the loan remains in balance by comparison 
of actual disbursements against a project completion schedule and other 
loan closing documents. Unless additional requirements are imposed by 
HUD because it insures more than 50 percent of the risk, the review at 
cost certification would only involve an assessment that the maximum 
insurable mortgage amount is supported by costs incurred and approved 
for the project by the HFA. By this reservation of authority to adjust 
the mortgage amount, HUD also is reducing any adverse effect from fees, 
which are linked to mortgage amount, that the HFAs may earn in 
connection with the project loan.
    Notwithstanding the retention by HUD of ultimate authority to 
adjust the insured mortgage amount, the HFAs still would be carrying 
out an important function in connection with the insurance of advances 
and cost certification processes. The delegation of this function is 
consistent with Congress' view in section 542(a) of the 1992 Act that 
the relationship between HUD and HFAs is to be a partnership and that 
major functions are to be the responsibilities of the HFAs as evidenced 
by the direct assignment of underwriting functions in section 
542(c)(2)(E).
    The regulation will be contained in a new part 266 in title 24 of 
the Code of Federal Regulations, which consists of six subparts. A 
brief summary of each subpart follows.

Subpart A--General Provisions

    Subpart A sets forth the purpose and scope of the regulation. It 
cites the legislative background, and indicates HUD's policy decision 
to vest broad responsibility for the conduct of the program in 
participating HFAs. Subpart A also includes definitions of terms used 
throughout the regulation.
    Section 266.10, Allocations of Authority and Credit Subsidy, states 
that HUD will issue notices in the Federal Register inviting State and 
local HFAs to apply for participation in the program. Earlier 
provisions contained in the interim rule relating to planned HUD 
allocations and state-wide caps on the amount of assistance are deleted 
in this final rule. Those topics instead will be covered in the Federal 
Register Notice.
    Section 266.15 describes key components that must be included in 
the risk-sharing agreement executed between HUD and the HFA. Among 
other things, the risk-sharing agreement will reflect the agreed upon 
risk apportionment; the number of units allocated to the HFA; 
description (i.e., incorporation by reference) of the HFA's standards 
and procedures for underwriting and servicing of loans; and a list of 
required HFA certifications designed to assure its proper performance 
under the program. (The list of certifications is not comprehensive and 
is subject to change as circumstances and experience dictate.)
    Appraisals of all properties must be performed by Certified General 
Appraisers, licensed in the State in which the property is located, and 
must be completed in accordance with the Uniform Standards of 
Professional Appraisal Practice. In addition, 24 CFR part 267 (see 
final rule published October 3, 1994 at 59 FR 50456), establishes a 
reporting requirement for the gender and minority classification for 
appraisers. Compliance with this reporting requirement will be included 
in the risk sharing agreement.
    Subpart A contains sections indicating that future regulatory 
amendments will not impair previously recognized contract rights and 
that HUD has no obligation to recognize or deal with parties other than 
the HFA, in the latter's role as mortgagee of record under a contract 
of mortgage insurance. Section 266.30 provides that the provisions of 
24 CFR part 246 (Local Rent Control) do not apply to this program. The 
Department will not be utilizing its constitutional authority to 
preempt local rent control laws for projects with mortgages insured 
under part 266. Representatives of HFAs have advised the Department 
that many HFAs, both State and local, already have such authority and, 
therefore, the absence of access to the Federal preemption authority 
would in no way restrict or interfere with the manner in which HFAs 
currently operate. Since the program involves risk to both HFAs and the 
Federal government, the Federal interest will be adequately protected 
by HFAs who use their preemption authority to protect their own 
interests.
    The interim rule also contains a general waiver provision in 
Sec. 266.35. Under that section, the Commissioner may, upon a finding 
of good cause, waive any provision in part 266 that is not a statutory 
requirement, except that the Commissioner will not consider waivers of 
financial requirements for participating HFAs or underwriting standards 
required by HUD for Level II participants. All waivers granted under 
Sec. 266.35 will be in writing and will be published in the Federal 
Register, as required by section 7(q) of the Department of Housing and 
Development Act (42 U.S.C. 3535(q)).

Subpart B--Agency Requirements

    Subpart B describes the criteria HFAs must meet to qualify under 
the program. It became evident during HUD's review of the applications 
for participation in the pilot program that there was some confusion as 
to the interpretation of the term in section 544(2)(B) which defines a 
qualified housing agency as one that ``receives a rating of `A' for its 
general obligation bonds.'' Some agencies interpreted this to mean that 
an ``A'' rating on bonds financing a particular project met the 
definition.
    This interpretation would be inconsistent with sections 544(2)(A) 
and (2)(C), which require evidence of a strong financial capacity on 
the part of the agency. Such a construction would permit an HFA with 
one strong bond issue and several other issuances with ratings below 
``A'' to claim that they met the qualified agency criteria. The 
Department does not construe this to be in accordance with the intent 
of Congress. In this final rule, HUD interprets the phrase ``general 
obligation bonds'' to mean the rating on bonds issued by the HFA based 
on the strength of the general obligation of the agency itself. Like 
the ``top-tier'' rating, a rating of ``A'' on general obligation bonds 
is provided by nationally recognized rating agencies only after 
thorough review and analysis of an agency's financial, administrative 
and operational capacity. This rating based on the strength of an 
agency's general obligation pertains to issuance of bonds and other 
debt instruments that are backed by income/resources from unencumbered 
fund balances rather than by cash flow from a particular project or 
projects.
    Two levels of approval--Level I and Level II--are described in 
Sec. 266.100. The primary distinction between the two levels is in the 
level of risk apportionment an HFA agrees to undertake. HFAs 
participating at Level I are those that will assume 50 percent or more 
of the risk associated with a loan default. Level II participants will 
assume 10 or 25 percent of the risk.
    The regulation requires any applicant HFA (whether it selects 
either Level I or Level II, or both Level I and Level II approval) to 
meet eligibility standards and application requirements. Eligibility is 
predicated on an HFA's demonstrable high financial capacity and/or 
experience and capability in the field of multifamily housing. 
Application requirements are designed to elicit the HFA's (legal and 
other) capacity to function in the program.
    Subpart B also sets forth minimum reserve requirements that must be 
met by participating HFAs (Sec. 266.110). An HFA is required to 
maintain its basic sound financial capacity at all times. An HFA that 
qualifies for the program under the criteria in section 544(2) (A) or 
(B) of the 1992 Act (i.e., is designated ``top-tier, or the equivalent 
thereof'' or receives an overall rating of ``A'' on its general 
obligation bonds from a nationally recognized rating agency) will not 
be required to maintain additional reserves unless determined necessary 
by the Commissioner. ``Other agencies,'' i.e., those that qualify based 
on other criteria, will be required to establish minimum reserve 
requirements that are set forth in Sec. 266.110(b). Any HFA that 
initially qualifies under, but later loses, the ``top-tier or 
equivalent'' designation or an overall rating of ``A'' on its general 
obligation bonds will be required to immediately establish and maintain 
the reserve amounts required for ``other agencies'' by Sec. 266.110(b).
    The final rule clarifies two requirements set forth in the interim 
rule. First, it makes clear (Sec. 266.105(b)(1)) that there must be 
documentation satisfactory to the Commissioner that the HFA meets the 
qualification requirements of Sec. 266.100(a). This documentation must 
be submitted as a part of its application. Second, it provides that any 
dedicated account required under Sec. 266.110(b) must be established 
prior to execution of any Risk Sharing Agreement.
    Sections 266.115-266.125 describe the monitoring and evaluation 
activities and requirements of the program, the kinds of HFA conduct 
that could give rise to sanctions by the Department, and the nature of 
sanctions that HUD may impose. The rule provides HFAs the right to an 
informal hearing where sanctions have been applied.
    In this final rule, the language of Sec. 266.15(b)(5) relating to 
the availability of HFA financial and other records for HUD inspection 
is revised to reflect the statutory phrasing enacted as section 
307(b)(2) of the 1994 Act.
    Finally, Sec. 266.130 provides that HFAs may obtain reinsurance for 
their portion of the risk and describes the conditions under which 
reinsurance will be permitted.

Subpart C--Program Requirements

    Subpart C contains program requirements such as project eligibility 
and fair housing and equal opportunity requirements. It also describes 
review functions to be retained by HUD as well as those delegated to 
HFAs.
    Project size and affordability requirements in the rule follow the 
authorizing legislation. Subject to requirements in the regulation, 
mortgage insurance will be available under this program for project new 
construction and substantial rehabilitation, and for existing projects 
without substantial rehabilitation. Similarly, projects receiving 
section 8 or other rental subsidies are eligible for insurance under 
the program, subject to limitations on the rent levels. These limits 
are designed to ensure that project rents are clearly adequate to 
support the mortgage. Other eligible projects include single room 
occupancy (SRO) projects, board and care and assisted living 
facilities, and projects designed for persons 62 years of age or more. 
In response to providers of affordable housing, mobile home parks 
(exclusive of the mobile homes) have been added as an eligible housing 
type. This will permit HFAs to provide this important type of 
affordable housing through the Risk-Sharing Program. Transient housing, 
hotels, nursing homes and intermediate care facilities, and projects 
located in military impact areas are ineligible for insurance under 
this program.
    The final rule makes clear that, for purposes of this pilot 
program, cooperative properties are considered rental housing, just as 
they are under the National Housing Act (see Sec. 266.200(a)). While 
section 542(c)(7) refers to rents, and section 544 defines multifamily 
housing as covering not less than five (5) ``rental'' units on one (1) 
site, cooperative carrying charges are similar to rents and HUD does 
not believe that Congress intended to preclude the insurance of 
mortgages for cooperatives under the program.
    HUD will retain responsibility for assessing the ``previous 
participation'' of mortgagors, contractors, consultants or management 
agents in HUD programs and for intergovernmental and environmental 
review. HUD will delegate to HFAs the functions pertaining to a 
project's affirmative fair housing marketing plan and certain 
activities under the Davis-Bacon Act.
    With respect to HUD environmental reviews, it should be noted that 
section 307(b)(4) of the 1994 Act authorizes the Secretary of HUD, 
under such regulation in lieu of the environmental protection 
procedures otherwise applicable, to provide for agreements to endorse 
for insurance mortgages under this pilot program upon the request of 
qualified HFAs if the State or unit of general local government, as 
designated by the Secretary, assumes all of the responsibilities for 
environmental review, decision making, and action pursuant to the 
National Environmental Policy Act of 1969 and other relevant laws. The 
statute goes into further detail as to what specific provisions will be 
contained in any regulations the Secretary may issue. The Department 
has in process draft regulations to implement this section 307(b)(4) of 
the '94 Act, which will be promulgated in the Federal Register as a 
separate rule, which will amend both this final rule and 24 CFR part 
58--Environmental Review Procedures for the Community Development Block 
Grant, Rental Rehabilitation, and Housing Development Grant Programs. 
Until such time as this new rule takes effect, the Department will 
retain responsibility for assuring compliance with the National 
Environmental Policy Act of 1969 and related laws.
    Section 542(c) of the Act does not statutorily require payment of 
prevailing wage rates determined by the Secretary of Labor under the 
Davis-Bacon Act on projects receiving mortgage insurance under the 
pilot program. However, the Department has administratively determined 
that it will require payment of Davis-Bacon wage rates on certain 
projects receiving mortgage insurance under the program. As provided in 
Sec. 266.225 of the rule, Davis-Bacon wage rates will be required to be 
paid to all laborers and mechanics (except volunteers) employed by 
contractors and subcontractors on projects (1) for which advances are 
insured under this part; (2) which involve new construction or 
substantial rehabilitation; and (3) which will contain 12 or more 
dwelling units. Davis-Bacon requirements will apply only if all of 
these conditions are met, unless Davis-Bacon wage rates are applicable 
by reason of assistance from another Federal program. (For example, if 
assistance under Section 8 is also used in connection with a project 
under this part that involves minor rehabilitation, Davis-Bacon 
requirements would apply to the project if it contains nine or more 
Section 8-assisted units.) The Department has decided to require 
payment of Davis-Bacon wage rates to ensure that prevailing wage 
requirements under this program are generally comparable to similar 
provisions required by statute for multifamily mortgage insurance 
programs under the National Housing Act.
    The rule also states that while the Commissioner retains 
responsibility for enforcement of labor standards under this section, 
the Commissioner may delegate to the HFA information collection (e.g., 
payroll review and routine interviews) and other routine administration 
and enforcement functions, subject to monitoring by the Commissioner. 
The Department intends to delegate such routine administration and 
enforcement functions to HFAs. This delegation is consistent with the 
Department's decision to delegate many of the functions relating to 
insurance of individual projects to the HFAs. The delegation is also 
consistent with the Department's longstanding delegation of routine 
Davis-Bacon functions to States and local governments under the 
Community Development Block Grant program.

Subpart D--Processing, Development, and Approval

    Subpart D describes functions that the HFA and HUD will undertake 
in relation to a loan origination and HUD insurance endorsement.
    An HFA that assumes 50 percent or more of the risk associated with 
a loan may use its own underwriting standards and loan terms and 
conditions to underwrite and approve loans. Where an HFA assumes less 
than 50 percent of the risk, underwriting standards and loan terms and 
conditions are subject to HUD review, modification and approval. The 
rule provisions also cover responsibilities of HFAs concerning such 
matters as project feasibility, acceptability of the mortgagor, and 
inspections during the project construction period.
    Section 266.310 provides the circumstances where HUD will insure 
loan advances, or agree to insure the entire mortgage upon completion 
of construction. Where a mortgage is endorsed for insurance, the 
interim rule provides that the HFA must remain the mortgagee of record 
for as long as mortgage insurance is in force.

Subpart E--Mortgage and Closing Requirements; HUD Endorsement

    Subpart E contains requirements that relate to the mortgage and the 
property that secures the insured loan.
    The Department recognizes that section 542(c)(2)(E) provides that 
HFAs are permitted to use their own underwriting standards and loan 
terms and conditions for purposes of underwriting loans to be insured 
under this program where the HFA is assuming 50 percent or more of the 
risk of loss. Where the Secretary retains more than 50 percent of the 
risk of loss, section 542(c)(2)(E) permits the Secretary to impose 
additional underwriting criteria and loan terms and conditions on loans 
to be insured under the program. However, it is the Department's view 
that Congress intended, in enacting section 542(c), to develop a 
fiscally prudent mortgage insurance program. The interim rule cited 
several examples of HUD regulations being imposed by the Department, 
including the requirement that the HUD-insured mortgage constitute a 
first lien. Subsequent to publication of the interim rule, Congress 
expressly amended the Act to establish as a program requirement that 
the insured mortgage be a first lien. However, the Department believes 
that Congress did not intend to preclude other HUD regulations that 
would provide: (1) that the HUD-insured mortgage be regularly 
amortizing; (2) that the insured mortgage contain a covenant against 
the change in use of the insured property; (3) that the insured 
mortgage contain a covenant requiring the mortgagor to keep the 
property, which is security for the mortgage, insured against loss due 
to fire or other hazards; and (4) that the regulatory agreement 
executed by the mortgagor contain a provision requiring that the 
mortgagor be a sole asset mortgagor.
    Amortization. The Department does not believe that Congress, in its 
enactment of section 542(c), intended to permit the use of riskier 
financing practices such as balloon payment terms and negative 
amortization. Use of these types of financing practices in insured 
programs could increase the chances that an insured mortgage would go 
into default or otherwise increase the Department's exposure on a 
mortgage where the terms of the financing permitted negative 
amortization. It is the Department's view that requiring a mortgage to 
be regularly amortizing would curtail the use of riskier financing 
practices that could jeopardize the stability of the insured loan.
    Change in use. The Department's purpose in requiring that a 
mortgage insured under this program contain a covenant prohibiting a 
change in use of the insured property was to carry out the intent of 
Congress that the mortgage insurance be used to provide affordable 
residential housing, rather than for some commercial enterprise, such 
as a hotel or office building. It has been HUD's view in all of its 
insurance programs, and it is HUD's view in this rule, that such a 
provision is not intended to preclude the conversion of a project from 
rental to cooperative housing since both rental and cooperative housing 
are residential housing. The ``change in use'' provision is intended to 
preclude the conversion of a project from residential use to some other 
form of use, e.g, commercial use.
    Hazard insurance. The Department does not believe that Congress, in 
enacting the section 542(c) risk-sharing program, intended for the 
Secretary to insure a mortgage on a project that is not insured against 
damage or destruction due to fire or other hazards. Additionally, the 
Department cannot conceive of an HFA making a loan on a project that is 
not insured against loss due to hazards. The requirement that a 
mortgagor under a mortgage have hazard insurance is a standard mortgage 
industry practice. Additionally, it is the Department's position that 
hazard insurance is a fundamental requirement of Federal mortgage 
insurance to protect the public fisc against loss of public assets and, 
therefore, must be required in this program.
    Single asset mortgagor. The requirement that a mortgagor be a 
single asset mortgagor is a requirement that is critical to the 
Department's ability to prevent the mortgagor of an insured project 
from commingling funds of the insured project with other assets that a 
mortgagor entity might own, if permitted. If the Department were to 
allow a mortgagor entity to own assets other than the insured project, 
this would increase the chances of a mortgagor siphoning off funds from 
an insured project for use in a conventionally financed project. This 
could result in the mortgagor of the insured mortgage suffering severe 
financial difficulty, possibly defaulting on the insured mortgage and a 
subsequent insurance claim being filed by the HFA. In addition, the 
assets of an insured project could become at risk, as a result of their 
application to the debts of a conventionally financed project in 
financial difficulty where both projects have the same owner.
    Other provisions in subpart E pertain to the closing of a mortgage 
loan. The closing will be held by the HFA, which is then required to 
submit a closing docket (with required documentation) to HUD for 
insurance endorsement. The required documentation is set forth in the 
interim rule as well.

Subpart F--Project Management and Servicing

    Subpart F sets out the rules for HFAs to service loans and manage 
projects.
    The HFA will have broad responsibility for the administration of 
this program, including monitoring and determining the compliance of 
the project owner with the requirements of this rule. HUD will not hold 
or be a party to any mortgage or note instruments between the mortgagor 
and the HFA. HUD will, however, monitor the performance of the HFA to 
determine its compliance with this subpart.
    Section 266.505 lists certain requirements that must be included in 
the regulatory agreement that is executed by the HFA and the project 
owner. Those requirements are necessary to assure that the owner will 
maintain the sound financial and physical condition of the project, and 
maintain the project as an affordable housing resource. Section 266.510 
describes the responsibilities of the HFA for annual project 
inspections, review of an owner's compliance with the affirmative fair 
housing marketing plan, and analysis of the owner's annual audit and 
recordkeeping.

Subpart G--Contract Rights and Obligations

    Subpart G contains provisions with regard to the mortgage insurance 
premium (MIP) in Secs. 266.600-266.608. In accordance with section 
542(c)(3), the rule provides for a ``sliding scale'' of MIP payments, 
with reduced amounts payable in inverse proportion to the increase in 
an HFA's risk apportionment. Risk apportionment percentages range from 
10 to 90 percent. At the high end, an HFA assuming 90 percent of the 
risk would be required to pay a .05 percent MIP based upon the average 
outstanding principal balance (without taking into account delinquent 
payments or prepayments) per annum. At the other end of the spectrum, 
an HFA assuming 10 percent of the risk would be required to pay a .45 
percent MIP based upon the average outstanding principal balance per 
annum.
    Subpart G also contains provisions on insurance endorsement and 
assignments. Endorsement of the original credit instrument will 
indicate the Commissioner's insurance of the mortgage. Section 
542(c)(2)(B) of the 1992 Act provides for full mortgage insurance for 
loans originated by or through qualified HFAs. While this provision 
clearly permits qualified HFAs to underwrite loans for other HFAs or 
mortgage entities or to sell their loans in the secondary market, the 
Department discussed this option with HFA representatives with 
particular concern about how the HFA would maintain its risk-sharing 
obligation in such transactions. In view of the complexities of 
implementing this aspect of the statute and the desire to implement the 
pilot program in a timely manner, it was agreed between the HFAs and 
HUD that entities other than approved HFAs would not be permitted to be 
mortgagees originating loans to be insured under this program. The one 
exception was with respect to the transfer of partial interest under a 
participation agreement. Section 266.616 permits the transfer of up to 
100 percent of the beneficial interest in a loan or a pool of loans 
insured under part 266, provided that, among other things, the HFA 
remains the mortgagee of record and is the party with whom the 
Commissioner deals under the contract of mortgage insurance.
    Section 266.620 describes the circumstances under which the 
contract of insurance will terminate. These are (1) payment in full of 
the mortgage; (2) acquisition of the mortgaged property by the HFA and 
notification to the Commissioner that no claim for insurance benefits 
will be made; (3) acquisition of the property at a foreclosure sale by 
a party other than the HFA; (4) notification by the HFA to the 
Commissioner of voluntary termination; (5) a finding of fraud or 
material misrepresentation on the part of the HFA or its successors 
with respect to the contract of insurance; or (6) receipt by the 
Commissioner of an application for final claims settlement.
    The latter part of subpart G describes the procedures for filing a 
claim upon a default, determining the amount of the claim, and payment 
of the claim. Section 266.630 describes the requirements for filing for 
a partial payment of a claim. This section is intended to avoid full 
insurance claim payments by providing the HFA with flexibility to deal 
with a nonperforming mortgage where the default is due to circumstances 
beyond the mortgagor's control and the financial relief provided by the 
HFA is sufficient to restore the financial viability of the project. 
When the conditions of this section are met, an HFA may reduce the 
unpaid principal balance of the insured mortgage by up to 50 percent 
and may defer delinquent interest. The HFA must secure the mortgagor's 
repayment of this relief with a second mortgage, which can have 
deferred amortization thereby allowing the mortgagor to repay the 
second mortgage in increasingly larger amounts as the project's cash 
flow improves.
    Under this partial claim procedure, upon the HFA providing the 
above-described relief, HUD makes a partial claim payment to the HFA in 
an amount that is a percentage of the relief provided by the HFA to the 
mortgagor. The percentage is equal to HUD's percentage of the risk of 
loss on the original mortgage loan or 50 percent, whichever is less. 
The HFA, in turn, must remit to HUD the same percentage of all amounts 
that it collects on its second mortgage.
    When HUD pays a claim (i.e., entire amount, in cash), Sec. 266.638 
provides that the HFA will issue a debenture (or a promissory note, a 
bond, or any other instrument, hereinafter referred to as 
``debenture'') to HUD for the full amount of the claim. The debenture 
will have a term of five years in order to afford the HFA ample time to 
work with the mortgagor to cure the default or foreclose and/or resell 
the project. During the five year period, the HFA will pay HUD interest 
on the debenture, due and payable on the anniversary of the claim 
payment. At the end of five years, or at the point of settlement when 
the debenture is paid, HUD will determine the amount of losses to be 
apportioned between HUD and the HFA.
    Sections 266.640 through 266.656 concern the final disposition of a 
claim, including the HFA's ability to accept a deed-in-lieu of 
foreclosure; the use of an appraisal to determine property value in the 
absence of a foreclosure sale; the manner in which the amount of a loss 
is determined; and final settlement.

IV. Public Comment on Interim Rule

    On December 3, 1993 the Department published in the Federal 
Register (58 FR 64032) an interim rule entitled Housing Finance Agency 
Risk Sharing Program for Insured Affordable Multifamily Loans. What 
follows is a description of the significant issues raised by the public 
in written comments on the rule along with HUD's responses to each of 
these issues.
    During the public comment period, the Department received 12 
comments from the following commenters:

1. Idaho Housing Agency
2. Massachusetts Housing Finance Agency
3. National Association of Home Builders
4. Congressman Owen Pickett (2nd Dist., Virginia)
5. American Institute of Certified Public Accountants
6. Colorado Housing and Finance Authority
7. National Council of State Housing Agencies
8. Association of Local Housing Agencies
9. Mortgage Bankers Association
10. American Association of Retired Persons
11. President, Hoover Mortgage Company, Spokane, WA
12. Michigan State Housing Development Authority

    The commenters generally favored the program, with comments or 
recommendations on the specific areas discussed below. The commenters 
are referred to by their corresponding numbers as listed above.

Section 266.10  Fund allocations.

    Comments. Commenter 7 pointed out that the rule states that HUD 
will allocate unused insuring authority at the beginning of FY 1995, 
and the draft handbook indicates that HUD may increase or decrease 
these allocations at the end of FY 1994 depending upon the number of 
units that have received initial endorsement. The commenter recommended 
that since HFAs will only have six months to process applications in FY 
1994, HUD reduce a participating HFA's allocations only if the HFA 
agrees that it will be unable to use all its insurance authority by the 
end of FY 1995. Commenter 1 was also concerned about the short time 
left in FY 1994 after the application process, and asked whether an HFA 
would risk the possibility of losing units that are in the application 
process but which have not reached initial endorsement. That commenter 
believed that the September 30, 1994 deadline for achieving initial 
endorsement seemed very unrealistic.
    Commenter 9 referred to the limit of 30,000 units that may be 
insured under the pilot program through Fiscal Year 1995, stating that 
it does not believe the program will produce a high level of 
production. Citing the complicated, staff-intensive, and time-consuming 
transactions involved in underwriting loans of this type, the commenter 
is of the opinion that risk-sharing with HFAs can only serve as a 
modest supplement to existing FHA programs. The commenter recommended 
that HUD improve the delivery of multifamily mortgage insurance under 
its regular insurance programs as well as under special programs and 
initiatives such as this one.
    Commenter 11 expressed somewhat similar views and urged improvement 
and augmentation of HUD's multifamily housing staff capabilities.
    HUD Response. Because the publication of the interim rule and 
approval of qualified HFAs occurred later than anticipated, the interim 
rule and draft administrative handbook do not reflect the correct 
schedule for reallocation of units for the Pilot program. Unit set-
asides and allocations were made in March 1994. Unit allocations may 
not be used by an HFA until a Risk-Sharing Agreement (RSA) is executed. 
The time required for HFAs to sign RSAs and return them to HUD has been 
longer than expected. It is likely that some HFAs may not even have an 
executed RSA until some time in FY 1995. Therefore, rather than 
reallocating units at the end of FY 1994, HUD will wait until January 
1995 to assess usage and reallocate if necessary.
    In the meantime, the Department will use a portion of the 10,000 
unit holdback on a ``first come, first served'' basis for increases to 
HFA set-asides that have been exhausted. In addition, units will be 
considered used at an earlier stage--when the Firm Approval Letter is 
issued--not at initial endorsement. Credit subsidy for a project will 
also be obligated by the firm approval stage which is a change from the 
language in the interim rule. Credit subsidy will be obligated and 
allocated in accordance with outstanding Department instructions.
    With respect to the comment regarding use of the units, the 
Department anticipates that the 30,000 units allocated to the program 
will be used for the demonstration. The delivery of multifamily 
mortgage insurance under HUD's regular programs is not the subject of 
this interim rule. The Risk-Sharing program is a partnership with State 
and local HFAs to increase the supply of affordable housing; it is not 
meant to be a substitute for other HUD insurance programs. However, the 
Department does anticipate that the pilot will become a model for 
augmenting mortgage insurance capability. In any event, the Department 
will carefully study the results of the pilot period and expand the 
program accordingly.
    In this regard, although not in response to public comment, we note 
that it is likely that the program will be expanded, perhaps by another 
30,000 units for use beyond the end of FY 1995. The regulation and the 
above comments do not currently assume this extension. Should this 
occur during the regulation process, further consideration about 
reopening the window for application submission and methods for 
reallocation of units will be required.

Section 266.15  Risk-Sharing Agreement.

    Comments. Commenter 12 suggested that the requirement in 
Sec. 266.15(b) (5)(viii) for a certification from the HFA that it has 
errors and omissions insurance should be changed or eliminated to 
reflect situations where HFA employees are covered by a fidelity bond 
that covers all state employees. The same commenter stated that the 
requirement in Sec. 266.15(b)(8) for the highest level of appraiser 
certification is not necessary. The commenter does not employ the use 
of appraisals for the purpose of establishing completed project value 
or mortgage amount, but rather to determine the maximum amount of land 
value (or an existing building's value in the case of rehab) to be 
recognized in the mortgage calculation.
    HUD Response. The program does require that HFAs have errors and 
omissions insurance and this is reflected in the Risk-Sharing 
Agreement. If there is an impediment that precludes the HFA from 
obtaining this insurance, the Department will consider waivers for good 
cause and with adequate protection under some other means. This 
provision has, in fact, been waived for two HFAs that were either 
covered under State provisions or where the State was self-insured. In 
these cases, this provision of the RSA was modified.
    With respect to the comment about use of certified appraisers, the 
Risk-Sharing program regulation does require compliance with the 
Uniform Standards of Professional Appraisal Practice (USPAP). USPAP 
requires use of a Certified General Appraiser for work done under 
either Standard 1, for determining value, or Standard 4, real estate 
consultations. This latter Standard covers multifamily cases where 
value is not determined using the standard three approaches to value 
but the appraiser does a rental and expense analysis and calculates a 
capitalized value, similar to what HUD does in the Section 221(d)(4) 
program.

Subpart B--Housing Finance Agency Requirements

Section 266.100  Qualified HFA.

    Comments. Commenter 9 expressed a concern that the number of HFAs 
qualified to originate, underwrite, service and manage multifamily 
loans is severely limited. The commenter did not question the 
importance or relevance of the rule's criteria for an HFA to have a 
certain level of internal staff capacity to review and evaluate work of 
any contractors it may hire to perform technical services, to make 
underwriting conclusions, and to oversee its loan portfolio, and that 
an HFA have an established record in multifamily loan processing, 
servicing and property disposition, but believes the ability of most 
HFAs to hire experienced personnel or train existing staff is limited 
because of local and state budget constraints. The commenter believes 
that this limited ability to participate will leave many parts of the 
country with no representation or service.
    HUD Response. The Department was pleased to approve 33 applicants 
under the Risk-Sharing Pilot including 26 States, the District of 
Columbia, Puerto Rico and 5 localities. The States approved included 
many of the most populous States--California, New York, Texas, Florida, 
Pennsylvania, Illinois, Michigan, New Jersey and Massachusetts.

Section 266.105  Application requirements.

    Comments. Commenter 5 questioned the requirement in 
Sec. 266.105(b)(12) for an unaudited interim financial statement if the 
latest audit statement of an HFA is more than six months old. The 
commenter stated that the requirement should be more specific about the 
information to be provided, the time period to be covered, and the 
standard of accounting to be used. The same commenter stated that the 
information requested in the additional application requirements for 
HFAs without top-tier designation or overall rating of ``A'' (paragraph 
(c)) could be derived from an HFA's comprehensive annual financial 
report that also includes its audited financial statements. The 
commenter suggested that the information be provided only if 
unavailable in other documents submitted.
    Commenter 12 stated that the ``highest quality compliance plan'' 
requirement in Sec. 266.105(b)(4) is redundant, since other 
requirements in the application process will ensure the same result.
    HUD Response. The Department has determined after reviewing the 
large number of applications submitted for participation in the pilot 
program that the requirement in paragraph Sec. 266.105(b)(12) for an 
unaudited interim financial statement if the latest HFA audit is more 
than 6 months old is not only unclear but is unnecessary. This 
requirement has been removed from the text of this final rule.
    However, the requirement for submission of the Questionnaire 
outlined in the Notice of Invitation and referred to in Sec. 266.105(c) 
is critical to HUD's capacity to review applications. HFAs with a 
``top-tier'' designation or ``A'' rating on their general obligation 
bonds from a national rating agency are subject to an intensive in-
depth review of their operations, financial status, administrative 
capability and a host of other components comprising the other items on 
the Questionnaire by the rating agencies. Absent that review, HUD must 
make the same kind of analysis based on the Questionnaire, which is in 
a clear, concise and focused form. It also affords the HFA the 
opportunity to present their operations and capacity in a concise and 
positive way to the Department during the review process.
    The quality control plan supplements the other descriptive material 
submitted relative to underwriting standards and procedures, staff 
capacity, etc., by indicating the checks and balances within the HFA to 
ensure compliance with procedures and requirements whether performed by 
in-house staff or, more particularly, by contract personnel.

Section 266.115  Program monitoring and evaluation.

    Comments. Commenter 9 expressed a concern about the program 
allowing Level I participants to use their own underwriting criteria, 
fearing that it will make monitoring and reviewing by HUD more 
difficult. The commenter used the example of HUD's failure to 
adequately monitor coinsuring lenders who used HUD-established 
underwriting criteria and to impose sanctions when necessary. The 
commenter recommended that HUD reconsider its ability to monitor before 
delegating so much authority to third parties.
    Commenter 12 suggested that the Sec. 266.115 requirement for 
semiannual reports is burdensome, and should be changed to annual 
reports. The commenter also believes that these reports should only 
contain information indicating a problem or workout. The commenter also 
suggested that annual physical inspection and audit reports be sent to 
HUD only in cases where the HFA determines there is a likelihood of a 
claim.
    HUD Response. With respect to Level I participants using their own 
underwriting criteria, the statute specifies that HFAs taking 50 
percent or more of the risk (i.e., Level I participants) may use their 
own underwriting standards and loan terms and conditions. As to the 
comment on semiannual reports, the Department feels it is imperative 
that we be able to assess the progress and identify any impending 
problems through this reporting system. The data requested will also 
help HUD track other matters, such as MIP. Coupled with annual physical 
inspection reports and project audit reports, this data will aid HUD in 
meeting its oversight and monitoring responsibility to make its own 
informed decision as to whether there is a likelihood of a claim.

Sections 266.120, 266.125  Sanctions.

    Comments. Commenter 12 pointed out that Sec. 266.120(e)(13) should 
be changed to make clear that Level I lenders cannot potentially be 
penalized for following their own underwriting standards. The commenter 
also recommended eliminating the provision in Sec. 266.125(a)(4) that 
allows HUD to terminate insurance in cases of fraud or material 
misrepresentation by the HFA. The commenter fears that the provision 
will be unacceptable to bond holders or secondary mortgage market 
investors who will not be able to rely on the insurance. According to 
the commenter, the government's interests are adequately protected 
under Sec. 266.125(a)(2) by the HFA being required to assume a higher 
risk level.
    HUD Response. Level I HFAs may use their own underwriting standards 
but must, nevertheless, also act prudently in accordance with generally 
accepted practices. This provision is not intended to penalize 
participants for plausible judgments about underwriting considerations 
but, rather, to prohibit the wide-scale abuse that occurred under the 
coinsurance program. We also note that the provision in 
Sec. 266.125(a)(4) that allows HUD to terminate insurance in cases of 
fraud or material misrepresentation by the HFA is the same as for HUD-
processed insurance programs under the National Housing Act. Projects 
insured under the National Housing Act are often bond-financed or sold 
on the secondary market, so this provision should not be unacceptable 
to bond holders or secondary markets. Moreover, two of the major rating 
agencies have thoroughly reviewed this program and have determined this 
provision, among others, to be satisfactory. They anticipate that they 
will be rating such loans with bond financing as AAA.

Subpart C--Program Requirements

Sections 266.200, 266.205  Eligible and ineligible projects.

    Comments. Transaction costs. Three commenters (1, 2, 7) objected to 
the requirement that HUD determine whether the transaction costs for 
existing projects to be acquired are reasonable. The commenters believe 
this is inconsistent with the statute that allows HFAs to use their own 
underwriting standards.
    Section 8 projects. Commenter 7 also objected to the provision that 
Section 8 projects may be insured under the program only if the 
mortgage does not exceed an amount supportable by the lower of the unit 
rents being collected under the rental assistance agreement or market 
rents in similar projects. The commenter stated that HUD should allow 
HFAs to insure Section 8 project mortgages without restriction, because 
it is common for Section 8 rents to exceed market rents, and the 
restriction unnecessarily and unreasonably limits the use of the 
program to support financing those projects. Further, the commenter 
stated that HUD does not provide incentives to reduce the cost of 
Section 8 projects through refinancing, and believes HFAs should be 
allowed to retain savings from refinancing those projects.
    Board and care/assisted living facilities. Two comments (10, 12) 
were directed to the restrictions on services that can be provided by 
board and care/assisted living facilities. Both commenters recommended 
clarification with regard to the ineligibility of retirement service 
centers, stating that central kitchens and dining rooms are not 
necessarily ``luxury accommodations,'' especially where residents are 
not required to use them. Commenter 10 stated that a strict 
interpretation of the provision would effectively forbid financing of 
board and care or assisted living facilities despite its explicit 
intention of doing so.
    Commenter 10 also included a lengthy discussion of the need for 
special regulations and underwriting standards to govern the financing 
of assisted living facilities under the risk-sharing demonstration. The 
commenter pointed out that HUD's own findings when it issued new 
underwriting standards for the Retirement Service Center (RSC) program 
just before suspension of the program strongly argue for different 
underwriting standards for such projects. The commenter argues that the 
program did not fail because too many services were offered, but rather 
because the Department underestimated the care needs of the residents 
and did not adequately examine the financing of necessary services. 
According to the commenter, the HFA Risk-Sharing program ignores the 
fundamental lesson of the RSC program that supportive services are 
essential to a project's success.
    Military impact area. Commenters 3 and 4 objected to the definition 
of ``military impact area,'' stating that it is too broad. First, they 
argue that the designation of such an area as one in which military-
connected households comprise 20 percent or more of the total 
households in the market area would exclude areas with stable military 
populations at installations with a certain future. Further, they state 
that the definition of a ``military-connected household'' is too broad 
and the data to ascertain such households are unavailable. Secondly, 
the commenters object to the total reduction in military households 
test, stating that it does not apply to many areas in the country where 
a ``total'' reduction is not a meaningful possibility.
    HUD Response. Transaction costs and Section 8 projects. It was not 
the original intent of the Department to include either existing 
projects or Section 8 (or other rental assistance) projects in the 
Risk-Sharing program. The legislation and legislative history emphasize 
the expansion of affordable housing opportunities through the program. 
However, discussions with the industry convinced us that there were 
certain limited circumstances where the Risk-Sharing program might be 
warranted for such projects. The compromise reached as a result of 
these consultations was: (1) the limitation on transaction costs for 
existing projects, and (2) the requirements relative to establishing 
the processing rents to be used in determining the maximum insurable 
mortgage for Section 8 projects that would ensure that project rents 
are clearly adequate to support the insured mortgage even when the 
rental assistance contract is shorter than the mortgage term. (This 
provision is similar to procedures for processing of Section 8 projects 
by HUD Field Offices.) To permit insurance of Section 8 projects 
without restriction would either create risk or put the Department in 
the position of ensuring the continued funding of the Section 8 
Contract.
    Board and care/assisted living facilities. The definition of board 
and care/assisted living facilities stands on its own. Projects meeting 
the definition are eligible. These facilities are residential health 
care facilities regulated by State or local government. The Department 
knows of no States that do not require food service in such facilities. 
The definition of board and care/assisted living does not conflict with 
that of retirement service centers. Retirement service centers are 
unassisted rental projects, not residential health care facilities such 
as board and care and assisted living, that include luxurious 
accommodations (such as large living units, and amenities such as 
tennis courts etc.), mandatory services, and central kitchens and 
dining rooms. While it is unlikely that such projects could be 
developed within the affordability parameters of the Risk-Sharing 
program, the Department wants to exclude any possibility of insuring 
this kind of rental project which has been so unsuccessful under the 
regular insurance programs. A discussion of why this kind of project 
was unsuccessful is not a subject of this preamble.
    Military impact area. This definition of military impact area is 
the general definition the Department has been using for some time. 
Although few areas have been designated as military impact areas, the 
ones that have been so designated have been isolated markets with 
little housing market other than the military base. However, based on 
the comments, we have revised the interim rule language to clarify and 
expand the definition of military impact areas. The administrative 
instructions will also discuss procedures for making of military impact 
determinations based on these regulatory standards.

Section 266.210  HUD-retained review functions.

    Comments. Commenters 3 and 9 expressed concerns about the review 
functions retained by HUD. The commenters believe that the ``dual 
processing'' will result in processing delays, stating that this may 
limit the program's effectiveness. Both commenters commended the 
Department's efforts to seek statutory changes in the legislation that 
would eliminate any legal requirements for the dual processing system.
    HUD Response. The major HUD-retained review is the environmental 
review. At the time of the interim rule, HUD was not authorized to 
delegate this review. The Multifamily Housing Property Disposition 
Reform Act of 1994 has now provided authority to delegate this review. 
The Department currently is developing a rule to implement this new 
delegation authority.

Section 266.215  Functions delegated by HUD to HFAs.

    Comments. Two comments (1, 7) addressed the rule's requirement that 
cost certification functions be performed subject to terms specified by 
the Commissioner, and a provision in the draft handbook that the cost 
certification be in a form acceptable to the HFA. The commenters 
recommended that these two provisions, which seem to be conflicting, be 
clarified. The commenters believe that, under the statute authorizing 
the program, HFAs are to use their own underwriting standards.
    HUD Response. The regulation and handbook procedures which relate 
to cost certification referenced by the commenter are not in conflict 
with one another. Each provision relates to a different stage of the 
cost certification process. The handbook provision sets forth what 
procedures that a mortgagor of a mortgage insured under section 542(c) 
must follow when submitting cost certification to the HFA. Section 
266.215 sets forth what standards (those established by the 
Commissioner) the HFA must follow in developing cost certification 
procedures to impose on mortgagors of projects to be insured pursuant 
to section 542(c). HUD standards require that HFAs establish cost 
certification procedures which take into consideration the underwriting 
procedures utilized by the HFA to process the loan. These cost 
certification procedures are designed to ensure that the actual costs 
approved were in fact incurred by the mortgagor and that such costs 
bear a direct relationship to the underwriting utilized in processing 
the loan.

Section 266.225  Labor standards.

    Comments. Three commenters (1, 6, and 7) objected to the 
requirement that HFAs monitor the administration of the Davis-Bacon 
Act. Commenter 6 stated that compliance monitoring should not be 
delegated to entities without authority or compensation for its 
enforcement. Commenter 1 objected to the provision that HFAs bear 
financial responsibility for violations, stating that compliance with 
Davis-Bacon is the responsibility of the owner and contractor. 
Commenter 7 agreed, stating that no financial liability should be 
placed on HFAs except for gross negligence in fulfilling reasonable 
responsibilities to notify applicants of the applicability of Davis-
Bacon.
    HUD Responses. The Risk-Sharing program delegates to HFAs, to the 
maximum extent possible, the responsibilities for processing, 
underwriting, servicing and other aspects of program operation of 
projects. The ministerial functions of labor standards requirements 
comprise one of those delegated tasks. While HUD retains the 
enforcement function for labor standards, HFAs are delegated the 
payroll review and routine interviews generally carried out as part of 
the construction inspection function. This is consistent with the 
Department's long-standing delegation of routine Davis-Bacon functions 
to States and localities under the Community Development Block Grant 
program. The financial liability provision is the same as other 
delegations of labor standards functions.

Section 266.310  Insurance of advances or insurance upon completion; 
applicability of requirements.

    Comment. Commenter 12 asked that ``completion of construction'' in 
paragraph (c) be defined so as not to preclude closing subject to 
escrows acceptable to the HFA, in order to assure completion of non-
critical items that remain to be done.
    HUD Response. The regulation does not define ``completion of 
construction'' since the exact definition will likely vary among the 
procedures of the 33 approved program participants. Because the 
Department wishes to allow HFAs to use their own procedures to the 
maximum extent possible, we do not think that a specific definition is 
necessary or desirable. This issue will be addressed further in the 
administrative instructions.

Section 266.405  Title.

    Comment. Commenter 12 recommended deleting the requirement that 
marketable title to the mortgaged property be vested in the mortgagor 
on the date the mortgage is filed for record, stating that adequate 
protection is provided in Sec. 266.405(b) and Sec. 266.410(c).
    HUD Response. The meaning of this comment is obscure. Paragraph (a) 
states that marketable title is required and when. Paragraph (b) 
describes what evidence of title consists of. Section 266.410(c) 
discusses that the mortgage must be a first lien.

Section 266.410  Mortgage provisions.

    Comments. Commenter 3 objected to the requirement that the mortgage 
provide for full amortization of the loan over the term of the 
mortgage. The commenter stated that an HFA should be allowed to set the 
amortization period and term of the mortgage in order to have full 
access to capital resources. Commenter 12 suggested that use 
restrictions (paragraph (f)) should also be included in the regulatory 
agreement. The same commenter stated that the provision in paragraph 
(h) regarding modification of terms of the mortgage must result in a 
reduction of Section 8 rents should be deleted. The commenter stated 
that the Section 8 statute, regulations, and contract rights should 
determine HUD's rights to adjust rents, and that this provision could 
prove harmful where a project is in trouble financially and refinancing 
at a lower rate could provide the means to address the problem without 
causing a claim on the insurance fund.
    HUD Response. Fully amortizing loan. While the Department wishes to 
permit HFAs participating in the program to use their own standards and 
requirements as much as possible, we nevertheless are obliged to 
develop a fiscally prudent program. Mortgages that are not fully 
amortizing have an inherent risk that the Department does not wish to 
incur, particularly in a pilot program that will test so many aspects 
of this new partnership.
    Use restriction. The commenter suggests that the use restriction in 
the insured mortgage prohibiting the use of the property for any 
purpose other than that intended on the day the mortgage is executed 
also be included in the regulatory agreement between the HFA and the 
mortgagor. Section 266.505(b)(4) on the requirements of the regulatory 
agreement already contains this provision.
    Section 8 projects. Section 8 projects are subject to the Section 8 
statute, regulations and contract rights, as well as other HUD 
guidelines that may arise from time to time in response to 
Congressional or other requirements. This provision in the Risk-Sharing 
rule merely notifies participants of current requirements relative to 
reduction of Section 8 rents in certain circumstances.

Section 266.415  Mortgage lien and other obligations.

    Comment. Commenter 12 suggested adding language to the end of 
paragraph (b) (contractual obligations) to allow a final closing to 
occur where there may be outstanding lien claims not yet determined by 
a court in situations where a mortgage lien is protected through title 
insurance.
    HUD Response. The commenter's point is unclear. Paragraph (a) on 
liens and paragraph (b) on contractual obligations permit inferior 
liens and obligations that are acceptable to the HFA as long as the HUD 
mortgage is first in line for payment. If the commenter is referring to 
mechanics' and similar liens, HUD permits such liens in its own 
projects where the title company is willing to insure over such liens. 
There is nothing to preclude HFAs from using this procedure if it is 
acceptable to them.

Section 266.417  Authority to adjust mortgage insurance amount.

    Comments. Three commenters (1, 7, and 12) raised questions about 
HUD retaining the authority to adjust the insured mortgage amount at 
any time up to final endorsement. The commenters are concerned that 
this will undermine the underwriting authority of HFAs.
    HUD Response. The authority to adjust the mortgage amount is 
discussed at length in the preambles to both this rule and the interim 
rule. It is required because neither the current statutory language in 
section 542(c) nor the legislative history contains a delegation to 
HFAs for insurance of advances and cost certification, among other 
things. In developing the interim rule, the Department examined the 
legal propriety of such delegations because of the desire to make these 
delegations to HFAs for maximum program efficiency and determined that 
such delegations would be sustainable if HUD retains the authority to 
make adjustments to the insured mortgage amount up to and including the 
time of final endorsement. As long as the Department retains such 
ultimate authority, case law supports the legality of such delegation.
    HUD's reservation of final authority to adjust the insured mortgage 
amount is not meant to suggest that HUD will, as a matter of policy, 
routinely review all decisions about insured advances and cost 
certification. On the contrary, the draft administrative instructions 
advise HUD Field Office staff to review a random sample against the 
HFA's procedures, not HUD's. Further, it states that few projects would 
likely be subject to any reduction in the mortgage amount. It is noted 
further that in HUD's own cost certification processes, few mortgage 
reductions are actually made. It has been emphasized in both written 
and oral communications to the Field staff that the Risk-Sharing 
program is a partnership and that the HUD Offices and HFAs should 
develop a strong working relationship where expectations on both sides 
are clear, including procedures for insured advances and cost 
certification.

Section 266.510  HFA responsibilities.

    Comment. Commenter 12 suggested that annual audits (paragraph (b)) 
be required to be sent to HUD only when conditions are discovered 
which, in the judgment of the HFA, are likely to result in a claim.
    HUD Response. With respect to the suggestion that annual project 
audits be submitted to HUD only when the HFA determines that there is a 
problem, please see discussion of Sec. 266.115 relative to HUD's 
monitoring responsibilities. Receipt of the annual project audit and 
physical inspection report is essential to this monitoring 
responsibility.

Section 266.616  Assignments.

    Comment. Commenter 12 objected to the prohibition against 
assignment of a mortgage and the requirement that legal title to the 
mortgage be held by the HFA. The commenter stated that substantial 
interest rate savings can be generated if insured loans can be sold 
directly in the market rather than being used as collateral for a bond 
issue. The commenter urged that these requirements be deleted, at least 
for Level I participants, where an HFA has a significant residual 
interest and risk, and where the HFA retains servicing.
    HUD Response. The regulations require that the HFA be the mortgagee 
of record throughout the period of insurance. For the pilot program, 
HUD has determined that this provision is desirable to ensure that the 
HFA fully maintain its risk-sharing obligation in these transactions. 
However, the interim and final rules do allow transfer of up to 100 
percent of the beneficial interest in a loan or pool of loans.

Section 266.656  Recovery of costs after final claim settlement.

    Comment. Commenter 12 suggested deleting this section unless HUD 
also is willing to share additional losses incurred by an HFA after a 
final claim settlement.
    HUD Response. The Department has provided for a full 5 years after 
a claim is paid for an HFA to dispose of a project. HUD must be able to 
assess its total liability and 5 years was considered to be a 
reasonable time period. This should be ample time for disposition by 
the HFA, and the Department fully expects projects to be disposed of 
within this time. Sales of projects within this 5-year period will 
result in a final claim settlement based on the sales price and an 
actual loss amount. However, a final settlement established through 
appraisals that may be artificially low based on failure to sell during 
the 5-year period could result in a significant windfall at the 
Government's expense within a short time. The Department must preclude 
this from happening. In any event, we anticipate and expect that HFAs 
will endeavor to dispose of defaulted properties well within the 5 
years and receive a final claim settlement based on an actual loss 
amount.

V. Other Matters

National Environmental Policy Act

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations at 24 CFR part 50 
implementing section 102(2)(C) of the National Environmental Policy Act 
of 1969 (42 U.S.C. 4332) at the time of development of the proposed 
rule and remains applicable to this final rule. The Finding is 
available for public inspection and copying between 7:30 a.m. and 5:30 
p.m. weekdays at the Office of Rules and Docket Clerk, 451 Seventh 
Street SW., Room 10276, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that the rule will not have a significant 
economic impact on a substantial number of small entities. The program 
will provide a new system of federal credit enhancements to expand the 
Nation's supply of affordable housing. Qualified State and local 
housing finance agencies will participate in the program on a voluntary 
basis.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that the provisions of this 
rule will not have a significant impact on family formation, 
maintenance or well being, except to the extent that the program 
authorized by the rule will increase the supply of affordable housing, 
thereby improving the ability of families to find decent and affordable 
housing. Any such impact is beneficial and merits no further review 
under the Order.

Executive Order 12611, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12611, Federalism, has determined that the policies 
contained in this rule will not have substantial direct effects on 
States or their political subdivisions, or the relationship between the 
Federal government and the States, or on the distribution of power and 
responsibilities among the various levels of government. The Department 
has specifically provided in this rule that its regulation on 
preemption of State or local rent control laws does not apply to this 
program. Any preemption of those laws for purposes of the housing 
provided under the program will be done under authority granted the 
HFAs by State or local law. All authority delegated to HFAs by HUD 
under this program was done so because the Department believes that is 
the intent of Congress under section 542(c).

Semiannual Agenda of Regulations

    This rule was listed as item number 1792 in the Department's 
Semiannual Agenda of Regulations published on November 14, 1994 (59 FR 
57632, 57654) under Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects

24 CFR Part 246

    Grant programs--housing and community development, 
Intergovernmental relations, Loan programs--housing and community 
development, Low and moderate income housing, Rent subsidies.

24 CFR Part 266

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

    In accordance with the reasons set forth in the preamble, title 24 
of the Code of Federal Regulations is amended as follows:
CHAPTER II--OFFICE OF ASSISTANT SECRETARY FOR HOUSING--FEDERAL HOUSING 
COMMISSIONER, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
    1. The heading of subchapter B of chapter II is revised to read
SUBCHAPTER B--MORTGAGE AND LOAN INSURANCE PROGRAMS UNDER NATIONAL 
HOUSING ACT AND OTHER AUTHORITIES

PART 246--LOCAL RENT CONTROL

    2. The authority citation for part 246 is revised to read as 
follows:

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

    3. Section 246.1 is amended by adding paragraph (e) to read as 
follows:


Sec. 246.1  Scope and effect of regulations.

* * * * *
    (e) This part applies to mortgages insured under the National 
Housing Act. It does not apply to mortgages insured under section 
542(c) of the Housing and Community Development Act of 1992 (12 U.S.C. 
1707).
    4. Title 24 of the Code of Federal Regulations is amended by adding 
a new part 266 to read as follows:

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

Subpart A--General Provisions

Sec.
266.1  Purpose and scope.
266.5  Definitions.
266.10  Allocations of assistance and credit subsidy.
266.15  Risk-Sharing Agreement.
266.20  Effect of amendments.
266.25  Limitation on HUD insurance liability.
266.30  Nonapplicability of 24 CFR part 246.
266.35  Waivers.

Subpart B--Housing Finance Agency Requirements

266.100  Qualified housing finance agency (HFA).
266.105  Application requirements.
266.110  Reserve requirements.
266.115  Program monitoring and evaluation.
266.120  Actions for which sanctions may be imposed.
266.125  Scope and nature of sanctions.
266.130  Reinsurance.

Subpart C--Program Requirements

266.200  Eligible projects.
266.205  Ineligible projects.
266.210  HUD-retained review functions.
266.215  Functions delegated by HUD to HFAs.
266.220  Nondiscrimination in housing and employment.
266.225  Labor standards.

Subpart D--Processing, Development, and Approval

266.300  HFAs accepting 50 percent or more of risk.
266.305  HFAs accepting less than 50 percent of risk.
266.310  Insurance of advances or insurance upon completion; 
applicability of requirements.
266.315  Recordkeeping requirements.

Subpart E--Mortgage and Closing Requirements; HUD Endorsement

266.400  Property requirements--real estate.
266.402  Recordation.
266.405  Title.
266.410  Mortgage provisions.
266.415  Mortgage lien and other obligations.
266.417  Authority to adjust mortgage insurance amount.
266.420  Closing and endorsement by the Commissioner.

Subpart F--Project Management and Servicing

266.500  General.
266.505  Regulatory agreement requirements.
266.510  HFA responsibilities.
266.515  Record retention.
266.520  Program monitoring and compliance.

Subpart G--Contract Rights and Obligations

Mortgage Insurance Premiums

266.600  Mortgage insurance premium: Insurance upon completion.
266.602  Mortgage insurance premium: Insured advances.
266.604  Mortgage insurance premium: Other requirements.
266.606  Mortgage insurance premium: Duration and method of paying.
266.608  Mortgage insurance premium: Pro rata refund.

Insurance Endorsement

266.612  Insurance endorsement.

Assignments

266.616  Transfer of partial interest under participation agreement.

Termination

266.620  Termination of Contract of Insurance.
266.622  Notice and date of termination by the Commissioner.

Claim Procedures

266.626  Notice of default and filing an insurance claim.
266.628  Initial claim payments.
266.630  Partial payment of claims.
266.632  Withdrawal of claim.
266.634  Reinstatement of the contract of insurance.
266.636  Insuring new loans for defaulted projects.
266.638  Issuance of HFA Debenture.
266.640  Foreclosure and acquisition.
266.642  Appraisals.
266.644  Application for final claim settlement.
266.646  Determining the amount of loss.
266.648  Items included in total loss.
266.650  Items deducted from total loss.
266.652  Determining share of loss.
266.654  Final claim settlement and HFA Debenture redemption.
266.656  Recovery of costs after final claims settlement.
266.658  Program monitoring and compliance.

    Authority: 12 U.S.C. 1707; 42 U.S.C. 3535(d).

Subpart A--General Provisions


Sec. 266.1  Purpose and scope.

    (a) Authority and scope. (1) Section 542 of the Housing and 
Community Development Act of 1992 directs the Secretary of the 
Department of Housing and Urban Development, acting through the Federal 
Housing Administration, to carry out programs that will demonstrate the 
effectiveness of providing new forms of Federal credit enhancement for 
multifamily loans. Section 542, entitled, ``Multifamily Mortgage Credit 
Demonstrations,'' provides new independent insurance authority that is 
not under the National Housing Act.
    (2) Section 542(c) of the Housing and Community Development Act of 
1992 specifically directs the Secretary to carry out a pilot program of 
risk-sharing with qualified State and local housing finance agencies 
(HFAs). The qualified HFAs are authorized to underwrite and process 
loans. HUD will provide 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 will direct qualified HFAs regarding 
their underwriting standards and loan terms and conditions is related 
to the proportion of the risk taken by an HFA.
    (b) Purpose. The primary purpose of this pilot program is to test 
the effectiveness of providing new forms of 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 should increase access to capital markets and, 
thereby, increase 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, HUD expects 
affordable housing to be made available to eligible families and 
individuals in a timely manner.


Sec. 266.5  Definitions.

    Act means the Housing and Community Development Act of 1992, as 
amended.
    Affordable housing means a project in which 20 percent or more of 
the units are both rent-restricted and occupied by families whose 
income is 50 percent or less of the area median income as determined by 
HUD, with adjustments for household size, or in which 40 percent (25 
percent in New York City) or more of the units are both rent-restricted 
and occupied by families whose income is 60 percent or less of the area 
median income as determined by HUD, with adjustments for household 
size. A residential unit is rent-restricted if the gross rent with 
respect to such unit does not exceed 30 percent of the imputed income 
limitation applicable to such unit.
    Board and Care/Assisted Living Facility means a residential 
facility for independent living that is regulated by State or local 
government that provides continuous protective oversight and assistance 
with the activities of daily living to frail elderly persons or other 
persons needing such assistance. Continuous protective oversight may 
range from as little as awareness on the part of management staff of 
residents' whereabouts (and the ability to intervene in the event of 
crisis) to a higher level of services and assistance. Assistance with 
the activities of daily living may include, but is not limited to, 
bathing, dressing, eating, getting in and out of bed or chairs, 
walking, going outdoors, using the toilet, laundry, home management, 
meal preparation, shopping, supervision of medication, and housework.
    Commissioner means the Federal Housing Commissioner or his or her 
authorized representative.
    Contract of insurance means the agreement evidenced by the 
endorsement of the Commissioner upon the credit instrument given in 
connection with an insured mortgage, incorporating by reference the 
regulations in this part and the applicable provisions of the Act.
    Credit subsidy means the cost of a direct loan or loan guarantee 
under the Federal Credit Reform Act of 1990 as defined in subpart B of 
title 13 of the Omnibus Budget Reconciliation Act of 1990 (Pub.L. 101-
508, approved Nov. 5, 1990).
    Debenture means the instrument issued by the HFA to HUD upon 
payment of an insurance claim by HUD. The instrument must be in the 
standard form of a State or Municipal Debenture issued under the 
Uniform Commercial Code, where applicable, and must be supported by the 
full faith and credit of the HFA. The instrument must define the terms 
and conditions and the risk-sharing portion which the HFA will pay at 
the end of the term of the Debenture, and must be for the full amount 
of the claim payment. The term Debenture may include similar 
instruments, such as promissory notes and bonds, as mutually agreed 
upon by the Commissioner and the HFA.
    Designated offices means the HUD Field Offices that are assigned 
the responsibility for program monitoring, imposing or recommending 
sanctions for program violations, and conducting informal hearings.
    Firm approval letter means a letter issued by HUD to an HFA upon 
the positive completion of the HUD-retained reviews described in 
Sec. 266.210. The letter will apportion units to the project and 
provide that, so long as the HFA is in good standing and absent fraud 
or misrepresentation by the HFA, HUD will endorse the project mortgage 
for insurance upon presentation by the HFA of the required Closing 
Docket and certifications required by this part and the Commissioner's 
administrative requirements.
    Gross rent includes any utility allowance (including charges for 
the occupancy of a cooperative unit) determined by the Secretary after 
taking into account such determination under section 8 of the U.S. 
Housing Act of 1937 (42 U.S.C. 1437f). It does not include any payment 
under section 8 or any comparable rental assistance program (with 
respect to such unit or occupants thereof), nor does it include any fee 
for a supportive service that is paid to the owner of the unit (on the 
basis of the low-income status of the tenant of the unit) by any 
governmental program of assistance (or by an organization described in 
section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) 
and exempt from tax under section 501(a) of the Code (26 U.S.C. 501(a)) 
if such program (or organization) provides assistance for rent and the 
amount of assistance provided for rent is not separable from the amount 
of assistance provided for supportive services. It also does not 
include any rental payment to the owner of the unit to the extent such 
owner pays an equivalent amount to the Farmers Home Administration 
under section 515 of the Housing Act of 1949 (42 U.S.C. 1485).
    Housing finance agency or HFA means any public body, agency, or 
instrumentality created by a specific act of a State legislature or 
local municipality empowered to finance activities designed to provide 
housing and related facilities, through land acquisition, construction 
or rehabilitation. The term State includes the several States, Puerto 
Rico, the District of Columbia, Guam, the Trust Territory of the 
Pacific Islands, American Samoa and the Virgin Islands.
    Insured mortgage means a valid single first lien given to secure 
advances on, or the unpaid purchase price of, real estate, under the 
laws of the State in which the real estate is located, together with 
the credit instrument, if any, secured thereby. Any other financing 
permitting on property insured under this part must be expressly 
subordinate to the insured mortgage.
    Level I participants means HFAs that elect to take 50 percent or 
more of the risk of loss in 10 percent increments on mortgages issued 
under this program.
    Level II participants means HFAs that elect to take 10 or 25 
percent of the risk of loss on mortgages issued under this program, 
dependent on the loan-to-replacement cost or loan-to-value ratio of the 
project to be insured.
    Mortgage means such a single first lien upon the real estate as is 
commonly given to secure advances on, or the unpaid purchase price of, 
real estate under the laws of the jurisdiction where the real estate is 
situated, together with the credit instruments, if any, secured 
thereby.
    Mortgagee means the original lender under a mortgage and its 
successors and assigns approved by the Commissioner.
    Mortgagor means the original borrower under a mortgage and its 
successor and assigns.
    Multifamily housing means housing accommodations on the mortgaged 
property that are designed principally for residential use, conform to 
standards satisfactory to the Secretary, and consist of not less than 5 
rental units (including cooperative units) on 1 site. These units may 
be detached, semidetached, row house, or multifamily structures.
    Qualified HFA means an HFA that meets the requirements described in 
Sec. 266.100(a).
    Risk-Sharing Agreement means a contract between an HFA and the 
Commissioner that incorporates the terms, obligations, and conditions 
specified in this part.
    Secondary financing means any grant, loan, inferior lien, or other 
form of indebtedness used during loan origination prior to HUD 
endorsement to finance a multifamily property insured under this part 
which is inferior to the insured mortgage as defined above and does not 
have first priority for payment.
    Single Room Occupancy, or SRO, projects means multifamily projects 
consisting of units that are not required to contain food preparation 
or sanitary facilities for occupancy by single individuals capable of 
independent living.
    Supportive services means any service provided under a planned 
program of services designed to enable residents of a residential 
rental property to remain independent and avoid placement in a 
hospital, nursing home, or intermediate care facility for the mentally 
or physically handicapped. In the case of a single room occupancy unit, 
the term includes any service provided to assist tenants in locating 
and retaining permanent housing. This definition is to be used in 
conjunction with the ``gross rent'' calculation.


Sec. 266.10  Allocations of Assistance and Credit Subsidy.

    (a) Notice of availability of assistance. HUD will announce the 
availability of assistance under this program through publication of a 
Notice in the Federal Register. Such Notice will invite qualified HFAs 
to submit an application for approval and/or for additional units under 
this part. The Notice will indicate the deadline date for submission of 
applications, required documentation, the address to which the 
applications must be submitted and other relevant information.
    (b) Credit subsidy will be obligated and allocated in accordance 
with outstanding Department instructions.


Sec. 266.15  Risk-Sharing Agreement.

    (a) Requirement for participation. Execution of a Risk-Sharing 
Agreement is a prerequisite to participation in this program.
    (b) Provisions. The Agreement will include, but not necessarily be 
limited to, the following:
    (1) The allocation of units for the HFA;
    (2) The risk sharing level or levels at which the HFA has been 
approved to participate in the program;
    (3) The standards and procedures, and loan terms and conditions, to 
be used by the HFA in originating, underwriting, closing, project 
management and servicing of loans and for disposing of defaulted 
properties (which may be incorporated by reference to existing HFA 
documents);
    (4) The identification of the individuals responsible for the 
overall underwriting decision (Chief Underwriter) and for project 
management, servicing, and property disposition (Housing Management 
Director), principal staff, and identification of individuals, with 
specimen signatures, with authority to sign loan documents or otherwise 
commit the HFA;
    (5) Certifications by the HFA that it:
    (i) Will allow periodic auditing and review by the Commissioner and 
the HUD Inspector General and their authorized agents regarding the 
HFA's participation in the program and permit an inspection and 
examination of its financial and other records as the Commissioner 
deems necessary for program review and monitoring purposes.
    (ii) Will notify HUD promptly in writing any time the HFA changes 
principal staff, persons authorized to commit the HFA, and operating 
procedures, underwriting standards and procedures, and loan terms and 
conditions. Level II HFAs must also obtain the prior written approval 
of the Commissioner before implementing any amendment to the HFA's 
underwriting standards and procedures, and loan terms and conditions.
    (iii) Has fully disclosed all underwriting standards and 
procedures, loan terms and conditions;
    (iv) Will at all times comply with program financial requirements 
and notify HUD of any pending and actual changes that would adversely 
affect HFA operations or financial status;
    (v) Will provide HUD with a copy of its annual certified audit 
report;
    (vi) Will comply with all Fair Housing and Equal Opportunity 
requirements, i.e., the Fair Housing Act (42 U.S.C. 3601-3619), as 
implemented by 24 CFR part 100; title VI of the Civil Rights Act of 
1964 (42 U.S.C. 2000d), as implemented by 24 CFR part 1; the Age 
Discrimination Act of 1975 (42 U.S.C. 6101-6107), as implemented by 24 
CFR part 146; section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 
794), as implemented by 24 CFR part 8; titles II and III of the 
Americans with Disabilities Act of 1990 (42 U.S.C. 12101-12213), as 
implemented by 28 CFR part 35; section 3 of the Housing and Urban 
Development Act of 1968 (12 U.S.C. 1701u), as implemented by 24 CFR 
part 135; the Equal Credit Opportunity Act (15 U.S.C. 1691-1691f), as 
implemented by 12 CFR part 202; Executive Order 11063, as amended by 
Executive Order 12259) (3 CFR 1958-1963 Comp., p. 652 and 3 CFR 1980 
Comp., p. 307), as implemented by 24 CFR part 107; Executive Order 
11246 (3 CFR 1964-1965 Comp., p. 339), as implemented by 41 CFR part 
60; other applicable Federal laws and all regulations issued pursuant 
to these authorities in lending or investing funds in real estate 
mortgages; and applicable State and local fair housing and equal 
opportunity laws.
    (vii) Will perform all functions in connection with loans 
originated under this program including underwriting, loan approval, 
servicing (including workouts), and disposition functions;
    (viii) Has Lender's fidelity bond/surety bond and errors and 
omissions insurance;
    (ix) Will abide by all applicable requirements issued by HUD for 
performing its functions under this part;
    (x) Will issue debentures acceptable to HUD as collateral pending 
final settlement of a claim;
    (xi) Will comply with the affordable housing requirements set forth 
under this part;
    (xii) Will remain mortgagee of record on each loan underwritten 
under this part for the term of the mortgage insurance;
    (xiii) Will follow other applicable Federal rules and regulations.
    (6) An agreement to submit an annual certification that there has 
been no basic change in its organization, business activities, 
financial status or other information that was submitted in its 
application to participate in the program, and that the HFA has 
complied with all eligibility requirements during the past year, and if 
there has been any such change, the certification required by this 
paragraph must state the nature of the change;
    (7) An agreement that any reinsurance of the HFA's share of the 
loss will be subordinate to the HUD insured first mortgage and will not 
affect reimbursement to HUD notwithstanding the timing of the actual 
settlement between the HFA and the reinsurer; and
    (8) An agreement that all appraisal functions will be completed by 
Certified General Appraisers, licensed in the State in which the 
property is located, that all appraisal functions will be completed in 
accordance with the Uniform Standards of Professional Appraisal 
Practice, and that the HFA will comply with the gender and minority 
status reporting requirement of 24 CFR 267.3(c) and submit data as 
required by 24 CFR 267.3(c)(5)(i). In the selection of an appraiser, 
there shall be no discrimination on the basis of race, color, religion, 
national origin, sex, age or disability.


Sec. 266.20  Effect of amendments.

    The Commissioner may amend the regulations in this part from time 
to time. Amendments to the regulations will not adversely affect the 
interest of a lender under a Contract of Insurance on any mortgage 
already insured or on any mortgage to be insured on which HUD has 
already issued its firm approval letter.


Sec. 266.25  Limitation on HUD insurance liability.

    The Commissioner shall have no obligation to recognize or deal with 
anyone other than the HFA in its role as mortgagee of record and as 
party to a risk-sharing agreement with HUD with respect to the rights, 
benefits, and obligations of the HFA under the contract of insurance.


Sec. 266.30  Nonapplicability of 24 CFR part 246.

    The provisions of 24 CFR part 246 do not apply to projects that are 
security for mortgages insured under this part.


Sec. 266.35  Waivers.

    Upon completion of a determination and finding of good cause, the 
Commissioner may waive any provision of this part in any particular 
case subject only to statutory limitations, except that no waivers will 
be provided with respect to financial requirements for participating 
HFAs or underwriting standards required for Level II participants. Each 
waiver must be in writing supported by documentation of the facts and 
reasons that formed the basis for the waiver. HUD will publish a 
Federal Register notice informing the public of all waivers granted 
under this section in accordance with section 7(q) of the Department of 
Housing and Urban Development Act and HUD policies regarding 
publication of waivers.

Subpart B--Housing Finance Agency Requirements


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 pilot program described in 
this part, in addition to being a HUD-approved mortgagee in accordance 
with 24 CFR 202.10 through 202.19. The HFA must maintain eligibility by 
continuing to comply with the requirements set forth in the Risk-
Sharing Agreement and this part. To qualify for participation in the 
program described in this part, an HFA must:
    (1) Carry the designation of ``top tier'' or its equivalent as 
evaluated by Standard and Poor's or any other nationally recognized 
rating Agency; or
    (2) Receive an overall rating of ``A'' for the HFA for its general 
obligation bonds from a nationally recognized rating agency; or
    (3) Otherwise demonstrate its capacity as a sound and experienced 
HFA based on, but not limited to, experience in financing multifamily 
housing, fund balances, administrative capabilities, investment policy, 
internal controls, financial management, portfolio quality, and State 
or local support; and
    (4) Be a HUD-approved multifamily mortgagee in good standing; and
    (5) Have at least five years experience in multifamily 
underwriting; and
    (6) Certify that:
    (i) The Department of Justice has not brought a civil rights suit 
against the Agency, and no suit is pending;
    (ii) There has not been an adjudication of a civil rights violation 
in a civil action brought against the HFA by a private individual, 
unless the HFA is operating in compliance with a court order, or 
implementing a HUD-approved compliance agreement designed to correct 
the areas of noncompliance;
    (iii) There are no outstanding findings of noncompliance with civil 
rights statutes, Executive Orders, or regulations as a result of formal 
administrative proceedings, or the Secretary has not issued a charge 
against the HFA under the Fair Housing Act, unless the HFA is operating 
under a compliance agreement designed to correct the areas of 
noncompliance.
    (b) Approval levels. Approval levels consist of the following:
    (1) Level I approval to originate, service, and dispose of 
multifamily mortgages where the HFA uses its own underwriting standards 
and loan terms and conditions, and assumes 50 to 90 percent of the risk 
of loss (increments of 10 percent).
    (2) Level II approval to originate, service, and dispose of 
multifamily mortgages where the HFA uses underwriting standards and 
loan terms and conditions approved by HUD, and:
    (i) When the loan-to-replacement cost ratio for new construction 
and substantial rehabilitation projects or the loan-to-value ratio for 
existing projects is greater than or equal to 75 percent, the HFA shall 
assume 25 percent of the risk of loss.
    (ii) When the loan-to-replacement cost ratio for new construction 
and substantial rehabilitation or the loan-to-value ratio for existing 
projects is less than 75 percent, the HFA shall assume 10 percent, or 
25 percent at the HFA's option, of the risk of loss.
    (3) For HFAs who plan to use Level I and Level II processing, the 
underwriting standards and loan terms and conditions to be used on 
Level II loans must be approved by HUD.


Sec. 266.105  Application requirements.

    (a) Applications for approval as a HUD-approved multifamily 
mortgagee. HFAs that are not HUD-approved mortgagees at the time of 
their application to participate in the pilot program must submit, 
concurrently, separate applications for approval to participate in the 
program and for approval to operate as a HUD-approved mortgagee. 
Application for approval as HUD-approved mortgagee must be submitted to 
HUD in accordance with the requirements established under 24 CFR 202.10 
through 202.19.
    (b) Applications for participation in pilot program. Applications 
from HFAs for approval to participate in the pilot program under this 
part must contain:
    (1) Documentation satisfactory to the Commissioner that it meets 
the qualification requirements set forth in Sec. 266.100(a).
    (2) Evidence that the application fee of $10,000 has been wire-
transferred to the U.S. Treasury in accordance with instructions in the 
Notice described in Sec. 266.10(a). This fee will not be refunded once 
the application has been accepted for review.
    (3) Opinion of legal counsel that the HFA has the necessary powers 
to participate in the pilot program. The opinion for an HFA with an 
overall rating of ``A'' on its general obligation bonds must also state 
that the general obligation will extend to the HFA's responsibilities 
under the Risk-Sharing Agreement and any debenture issued by the HFA to 
the Commissioner. If the opinion of counsel does not include this 
statement, the HFA must comply with the provisions of Sec. 266.110(b).
    (4) A copy of the HFA's procedures manual which describes, among 
other things, the manner in which the HFA will process mortgage loans, 
including their underwriting standards; a description of the approval 
process; the HFA fee schedule; a description of loan management, loan 
servicing, and property disposition activities; and the manner in which 
the HFA's and mortgagor's reserves and escrows (including letters of 
credit) will be established and controlled. The manual must also 
include a processing flow chart and an organizational chart.
    (5) A plan describing how the HFA will ensure the highest quality 
compliance with all HFA and HUD requirements for the origination, 
processing, underwriting, insurance of advances, cost certification, 
loan closing, construction and permanent loan management, servicing and 
disposition of all projects insured or proposed to be insured under 
this part and for monitoring all work performed by contract personnel, 
if any.
    (6) Identification of the individual responsible for the overall 
underwriting decision (chief underwriter), and the individual 
responsible for project management, loan servicing and property 
disposition (housing management director). These functions may not be 
contracted out by the HFA. The HFA may contract with outside sources 
for technical processing and loan servicing services. However, the 
application must demonstrate internal staff capacity to review and 
evaluate the work product of the contract sources and to make final 
underwriting, servicing, and property disposition conclusions.
    (7) A description of oversight by State or local governmental 
agencies.
    (8) A copy of the HFA's administrative manual covering its 
investment policies and overall business and financial practices.
    (9) A statement containing the number of units the HFA proposes to 
process to firm approval letter during the period specified in the 
relevant Federal Register Notice published pursuant to Sec. 266.10 of 
this part.

    Note: The Federal Fiscal Year begins on October 1st, and ends on 
September 30th.

    (10) HFA declaration of the risk-sharing arrangement it has 
selected i.e., Level I, Level II, or both Level I and Level II.
    (11) Documentation containing:
    (i) For HFAs that carry the designation of ``top tier'' or its 
equivalent, as evaluated by Standard and Poors or any other nationally 
recognized rating agency, evidence of such designation;
    (ii) For HFAs that currently receive an overall rating of ``A'' for 
their general obligation bonds from a nationally recognized rating 
agency, evidence of such a rating; or
    (iii) For any other HFA, evidence, as described in paragraph (c) of 
this section, that demonstrates its capacity as a sound and experienced 
agency based on, but not limited to, its experience in financing 
multifamily housing, fund balances, administrative capabilities, 
investment policy, internal controls and financial management, 
portfolio quality and State or local support.
    (12) A certification from the HFA that it will at all times comply 
with the financial requirements in Sec. 266.110 and, where applicable, 
maintain required reserves in a dedicated account in liquid funds 
(i.e., cash, cash equivalents, or readily marketable securities) in a 
financial institution acceptable to HUD.
    (13) Copies of audited financial statements for the HFA's last 
three fiscal years.
    (14) Sample debenture form issued by the HFA.
    (c) Additional application requirements for HFAs without top-tier 
designation or overall rating of ``A'' on general obligation bonds. 
HFAs without top-tier designation or an overall rating of ``A'' on 
general obligation bonds must submit, in addition to the items 
described in paragraph (b) of this section, such further information 
specified and required in the Federal Register notice published 
pursuant to Sec. 266.10 of this part. This may include, but is not 
limited to, information concerning the geographic boundaries served 
(e.g., city, county); a description of the organizational history which 
includes the authority to issue bonds and tax credits; length of time 
in business; general portfolio statistics; a description of all 
mortgage lending activities, including volume and default and 
foreclosure rates; a summary of delinquent loans in the last 12 months 
and the present status of each; relationship to the State or local 
Government, subsidiary or similar entity; and experience in multifamily 
housing.


Sec. 266.110  Reserve requirements.

    (a) HFAs with top-tier designation or overall rating of ``A'' on 
general obligation bonds. An HFA with a top tier or equivalent 
designation or an HFA with an overall rating of ``A'' on its general 
obligation bonds is not required to have additional reserves so long as 
the HFA maintains that designation or rating, unless the Commissioner 
determines that a prescribed level of reserves is necessary. If the 
designation or rating is lost, the HFA must immediately establish a 
reserve account funded in accordance with the requirements set forth in 
paragraph (b) of this section. The reserve account must reflect all 
loans in the HFA's portfolio endorsed under this part.
    (b) Other HFAs. (1) For other HFAs, a specifically identified 
dedicated account consisting entirely of liquid assets (i.e., cash or 
cash equivalents or readily marketable securities) must be established 
and maintained in a financial institution acceptable to HUD. This 
account may be drawn upon by HUD and may be used by the HFA only with 
the prior written approval of HUD for the purpose of meeting the HFA's 
risk-sharing obligations under this part. 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. Thereafter, 
the HFA must deposit at each loan closing and thereafter maintain the 
following additional amounts in the dedicated account:
    (i) $10.00 per $1,000 of the unpaid principal balance that is equal 
to or less than $50 million; plus
    (ii) $7.50 per $1,000 of the unpaid principal balance that is 
greater than $50 million and less than $150 million; plus
    (iii) $5.00 per $1,000 of the unpaid principal balance that is 
greater than $150 million.
    (2) The Commissioner may determine that higher levels of reserves 
may be necessary.


Sec. 266.115  Program monitoring and evaluation.

    (a) HFA certifications. HUD will rely heavily on the certifications 
required of an HFA under this part and such additional certifications 
as the Commissioner may require in his or her administrative 
procedures. An HFA's continued participation in the program is 
predicated upon compliance with these certifications and its 
recommending for endorsement only those mortgages that comply with 
requirements of the program, including the HFA's origination, 
underwriting and closing procedures incorporated by reference into the 
Risk-Sharing Agreement.
    (b) Monitoring and evaluation. Monitoring and evaluation activities 
will focus on compliance with program requirements and performance of 
the HFA in meeting program objectives of providing affordable housing. 
They will enable HUD to evaluate the effectiveness of the program as 
required by section 542(d)(3) of the Act.
    (c) Responsibility for monitoring and evaluation. The Commissioner 
or his or her designee will be responsible for overall program 
monitoring and evaluation.
    (d) HFA submissions. (1) For each loan insured under this part, 
basic underwriting and closing information must be submitted in a 
format specified by HUD and must accompany the closing docket submitted 
in accordance with Sec. 266.420(b). Information relative to project 
management and servicing (including disposition) will be required after 
endorsement.
    (2) The HFA must submit semi-annual reports setting forth the 
original mortgage amounts and outstanding principal balances on 
mortgages the HFA has underwritten, and the status of all projects 
insured under this part (e.g., current, in default, acquired, under 
workout agreement, in bankruptcy). For projects where the mortgagor has 
declared bankruptcy, the HFA must submit information containing the 
date the bankruptcy was filed and the date the HFA requested the Court 
to dismiss the bankruptcy proceedings.


Sec. 266.120  Actions for which sanctions may be imposed.

    Results of monitoring or other reviews may serve as the basis for 
the Commissioner's imposing sanctions on the HFA. Violations for which 
sanctions may be imposed include, but are not limited to:
    (a) Commission of fraud or making a material misrepresentation by 
the HFA with respect to any mortgage insured or to any other matter 
under this part.
    (b) Assignment or transfer of interest in any insured mortgage not 
in accord with the requirements of this part.
    (c) Engagement in business practices that do not conform to 
generally accepted practices of prudent lenders or that demonstrate 
irresponsibility.
    (d) Actions or conduct for which sanctions may be imposed against 
the HFA by HUD's Mortgagee Review Board under 24 CFR 25.9.
    (e) Failure to:
    (1) Reveal in its application for participation in the program all 
the information required by this part;
    (2) Notify HUD in a timely manner of any pending or actual changes 
that would adversely affect HFA operations or financial status;
    (3) Comply with all eligibility requirements for participation in 
the program;
    (4) Issue debentures in the event of an initial claim payment by 
HUD, or to reimburse HUD for payment of a claim;
    (5) Maintain its top tier designation or overall rating of ``A'' on 
general obligation bonds (or if such designation or rating is lost, 
comply with paragraph (e)(6) of this section);
    (6) Establish and maintain a dedicated account, if required, or 
meet other financial obligations under this program;
    (7) Perform underwriting, insurance of advances, cost 
certification, management, servicing or property disposition functions 
in a prudent and acceptable manner based on the standards incorporated 
by reference into the Risk-sharing Agreement;
    (8) Submit financial and other reports required by this part;
    (9) Comply with any regulatory requirement or with the Risk-Sharing 
Agreement;
    (10) Maintain any other standards HUD may establish for 
participation in this program;
    (11) Enforce the regulatory agreement provisions with respect to 
individual projects;
    (12) Maintain a default ratio acceptable to HUD relative to the 
HFA's own portfolio and the defaults experienced under this part by 
other program participants;
    (13) Consider adequately special risk circumstances without 
compensating for the higher risks of such transactions (e.g., high 
loan-to-value ratios in areas with high vacancy or default rates); or
    (14) Remit mortgage insurance premiums on a timely basis or failure 
to refund or credit mortgagor's accounts with overpaid mortgage 
insurance premiums.


Sec. 266.125  Scope and nature of sanctions.

    (a) Actions by Designated Office. Depending on the nature and 
extent of the noncompliance with the requirements of this part, the 
Designated Office may take any of the following actions:
    (1) Require that the HFA execute a trust agreement, establish a 
trust account in accordance with such agreement, and fund such account 
which may be drawn upon by HUD for purposes of meeting the HFA's risk-
sharing obligations;
    (2) Require the HFA to assume a higher portion of risk for the 
subject and future mortgages;
    (3) Recommend to the Commissioner that the HFA be required to 
contract its loan servicing or property disposition functions to a 
third party;
    (4) Recommend to the Commissioner that the mortgage insurance be 
terminated in cases of fraud or material misrepresentation by the HFA, 
or transfer of interest in an insured mortgage or assignment of the 
mortgage not in accord with the requirements of this part;
    (5) Recommend to the Commissioner that approval for the HFA to 
participate in the program be suspended or withdrawn;
    (6) Recommend to the Commissioner that the HFA's mortgagee approval 
be withdrawn pursuant to 24 CFR part 25 and/or that penalties be 
imposed pursuant to 24 CFR part 30;
    (7) Require additional financial or other reports as may be 
necessary to monitor the activities of the HFA more closely.
    (b) Actions by Headquarters. HUD Headquarters may impose any of the 
sanctions set forth or recommended in paragraph (a) of this section 
based upon its responsibilities for monitoring and overall program 
oversight.
    (c) Effect of suspension or withdrawal. A suspension or withdrawal 
action will not affect any mortgage insurance endorsement in effect on 
the date of the suspension or withdrawal action.
    (d) HFA right to informal hearing. (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 his or 
her designee in the Designated Office. The HFA may request an informal 
hearing within 10 working days of receipt of the suspension or 
withdrawal action and the Designated Office shall give the HFA an 
opportunity to be heard within 10 working days of receipt of the HFA's 
request. The HFA may be represented by counsel. The Designated Office 
Representative, or his or her designee, will advise the HFA in writing 
of the decision within 10 working days of the informal hearing, which 
decision will constitute final HUD action.
    (2) Sanctions imposed by Headquarters will be handled in a similar 
manner, except that the informal hearing shall be before the 
Commissioner or his or her designee.


Sec. 266.130  Reinsurance.

    Reinsurance will be permitted for the portion of the HFA risk, 
subject to the following requirements:
    (a) Neither HUD's nor the HFA's position shall be subordinated;
    (b) The reinsurance may not be used to reduce any reserve or fund 
balance requirements; and
    (c) Such reinsurance does not incur an obligation to the Federal 
Government.

Subpart C--Program Requirements


Sec. 266.200  Eligible projects.

    (a) Minimum project size. Projects insured under this part must 
consist of five or more rental dwelling units (including cooperative 
dwelling units) on one site. The site may consist of two or more non-
contiguous parcels of land situated so as to comprise a readily 
marketable real estate entity within an area small enough to allow 
convenient and efficient management. The units may be detached, semi-
detached, row houses, multifamily structures, or mobile home parks 
(exclusive of the mobile homes).
    (b) New construction or substantial rehabilitation. Insurance under 
this part shall be for the purpose of financing the new construction or 
substantial rehabilitation of projects meeting the other requirements 
of this part as follows:
    (1) New construction occurs when all project and construction 
elements are installed as part of the work.
    (2) Substantial rehabilitation is any combination of the following 
work to the existing facilities of a project that aggregates to at 
least 15 percent of project's value after the rehabilitation and that 
results in material improvement of the project's economic life, 
liveability, marketability, and profitability: Replacement, alteration 
and/or modernization of building spaces, long-lived building or 
mechanical system components, or project facilities. Substantial 
rehabilitation may include but not consist solely of any combination 
of: minor repairs, replacement of short-lived building or mechanical 
system components, cosmetic work, or new project additions.
    (c) Existing projects. Financing of existing properties without 
substantial rehabilitation is allowed.
    (1) If an existing multifamily project is being acquired and HUD 
insurance under this part will be used to facilitate the acquisition of 
projects to increase the supply of affordable housing, such 
acquisitions are permissible if the HUD insured mortgage does not 
exceed the sum of the total cost of acquisition, cost of financing, 
cost of repairs, and reasonable transaction costs as determined by the 
Commissioner.
    (2) If the property is subject to an HFA-financed loan to be 
refinanced and such refinancing will result in the preservation of 
affordable housing, refinancing of these properties is permissible if 
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 the 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. The 
HUD-insured mortgage may not exceed the sum of the existing 
indebtedness, cost of refinancing, the cost of repairs and reasonable 
transaction costs as determined by the Commissioner. If a loan to be 
refinanced has been in default within the 12 months prior to 
application for refinancing, the HFA must assume not less than 50 
percent of the risk.
    (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 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.
    (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-day or longer leases; however, rent 
payments may be made on a weekly basis in SRO projects.
    (f) Board and care/assisted living facilities. Board and care 
projects and assisted living facilities may be insured if the 
facilities meet the definition of those terms in Sec. 266.5.
    (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, and also any single person who is 62 years of age or older.
    (h) Zoning requirements. Projects insured under this part must meet 
applicable zoning and other State/local government requirements.


Sec. 266.205  Ineligible projects.

    The following projects and facilities are not eligible for 
insurance under this part:
    (a) Transient housing or hotels. Rental for transient or hotel 
purposes. For purposes of this part, rental for transient or hotel 
purposes means:
    (1) Rental for any period less than 30 days, or
    (2) Any rental, if the occupants of the housing accommodations are 
provided customary hotel services such as room service for food and 
beverages, maid service, furnishing and laundering of linens, or valet 
service.
    (b) Projects in military impact areas. A project located in a 
military impact area, as determined by HUD. A military impact area is 
generally a small or medium size metropolitan housing market area or a 
remote or isolated nonmetropolitan area where:
    (1) Military-connected households comprise 25 percent or more of 
the total households in the market area. Military-connected households 
include active duty military personnel, civilian employees of the 
military service (Department of Defense) or other Federal agency at or 
in support of the installation, and employees of contractors and sub-
contractors directly associated with the military installation, and 
their dependents. Unaccompanied active duty military personnel housed 
in military-controlled group quarters housing (barracks, BOQ's) are 
excluded; and
    (2) There is concern about the continued stability of the current 
level of military strength and mission at the installation based on 
public announcements from the Department of Defense or the military 
service of impending changes; and
    (3) The complete reduction of military-connected households living 
in nonmilitary rental housing over a 5 year period, at an annual 
average decline of 20 percent, would, taking into account growth in the 
civilian economy and normal changes in the housing inventory, cause an 
adverse impact on the private rental market resulting in an increase in 
the rental vacancy rate in the housing market of 10 percent or more at 
the end of that period.
    (c) Retirement service centers. Projects designed for the elderly 
with extensive services and luxury accommodations that provide for 
central kitchens and dining rooms with food service or mandatory 
services.
    (d) Nursing homes or intermediate care facilities. Nursing homes 
and intermediate care facilities licensed and regulated by State or 
local government and providing nursing and medical care.


Sec. 266.210  HUD-retained review functions.

    Certain functions are retained by the Commissioner. The HFA must 
submit any information or certification required by the Commissioner to 
permit determination of compliance with requirements concerning:
    (a) Previous participation of principals. Previous participation of 
the principals of the mortgagor, general contractor, consultant or 
management agent in accordance with the Previous Participation and 
Clearance Review Procedures of 24 CFR 200.210 through 200.218.
    (b) Environmental review requirements. To determine compliance with 
the requirements of the National Environmental Policy Act of 1969 and 
related laws and authorities, the HUD Field Office will visit each 
project site proposed for insurance under this part and prepare the 
applicable environmental reviews as set forth in 24 CFR part 50 and for 
the related environmental criteria and standards in 24 CFR part 51. 
These requirements must be completed before HUD may issue the firm 
approval letter.
    (c) Intergovernmental review. Intergovernmental review of Federal 
programs under Executive Order 12372, as implemented in 24 CFR part 52.
    (d) Subsidy layering. The Commissioner, or Housing Credit Agencies 
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.
    (e) Davis-Bacon Act. The Commissioner shall obtain and provide to 
the HFA the appropriate Department of Labor wage rate determinations 
under the Davis-Bacon Act, where they apply under this part.


Sec. 266.215  Functions delegated by HUD to HFAs.

    The following functions are delegated by HUD to the HFAs:
    (a) Affirmative Fair Housing Marketing Plan (AFHMP). The HFA will 
perform information collection, reviews and ministerial activities 
associated with the review and approval of the AFHMP for all projects. 
(Enforcement of fair housing and equal opportunity laws is the 
responsibility of HUD.)
    (b) Labor standards and prevailing wage requirements. The HFA will 
perform information collection (e.g., payroll review and routine 
interviews) and other routine administration and enforcement functions 
regarding labor standards, in accordance with Sec. 266.225(e). 
(Enforcement of Davis-Bacon prevailing wage requirements and labor 
standards is the responsibility of HUD.)
    (c) Insurance of advances. In cases involving insured advances, the 
HFA will approve periodic advances of mortgage insurance proceeds 
during construction of the project subject to terms specified by the 
Commissioner.
    (d) Cost certification. The HFA will perform cost certification 
functions on each insured loan subject to terms specified by the 
Commissioner.
    (e) Lead-Based Paint. The HFA will perform functions related to 
Lead-Based Paint requirements subject to terms specified by the 
Commissioner.


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, it will:
    (a) Not use tenant selection procedures that discriminate against 
families with children, except in the case of a project that 
constitutes ``housing for older persons'' as defined in section 
807(b)(2) of the Fair Housing Act (42 U.S.C. 3607(b)(2));
    (b) Not discriminate against any family because of the sex of the 
head of household;
    (c) Comply with the Fair Housing Act (42 U.S.C. 3601-3619), as 
implemented by 24 CFR part 100; titles II and III of the Americans with 
Disabilities Act of 1990 (42 U.S.C. 12101-12213), as implemented by 28 
CFR part 35; section 3 of the Housing and Urban Development Act of 1968 
(12 U.S.C. 1701u), as implemented by 24 CFR part 135; the Equal Credit 
Opportunity Act (15 U.S C. 1691-1691f), as implemented by 12 CFR part 
202; 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; Executive Order 11246 (3 CFR 1964-1965 Comp., p. 
339), as implemented by 41 CFR part 60; other applicable Federal laws 
and regulations issued pursuant to these authorities; and applicable 
State and local fair housing and equal opportunity laws. In addition, 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 title VI of the Civil Rights Act of 1964 (42 U.S.C. 
2000d), as implemented by 24 CFR part 1; the Age Discrimination Act of 
1975 (42 U.S.C. 6101-6107), as implemented by 24 CFR part 146; and 
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794), as 
implemented by 24 CFR part 8.


Sec. 266.225  Labor standards.

    (a) Applicability of Davis-Bacon. (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 Labor in accordance with 
the Davis-Bacon Act, as amended (40 U.S.C. 276a-276a-5), where the 
project meets all of the following conditions:
    (i) Advances for the project are insured under this part;
    (ii) The project involves new construction or substantial 
rehabilitation; and
    (iii) The project will contain 12 or more dwelling units.
    (2) Projects that do not meet these conditions are not subject to 
Davis-Bacon wage rates except to the extent required as a condition of 
other Federal assistance to the project.
    (b) Volunteers. The provisions of this section shall not apply to 
volunteers under the conditions set out in 24 CFR part 70. In applying 
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 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.
    (d) Advances. (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, pursuant 29 CFR 5.12, issued by the Secretary of Labor.
    (2) No advance under any mortgage on a project subject to Davis-
Bacon wage rates under paragraph (a) of this section shall be insured 
under this part unless there is filed with the application for the 
advance, and no such mortgage shall be insured under this part unless 
there is filed with the HFA after completion of the construction or 
substantial rehabilitation, a certificate or certificates in the form 
required by the Commissioner, supported by such other information as 
the Commissioner may prescribe, certifying that the laborers and 
mechanics employed in the construction of the project involved have 
been paid not less than the wages determined by the Secretary of Labor 
to be prevailing in accordance with paragraph (a) of this section.
    (e) Responsibility for enforcement and administration. The 
Commissioner retains responsibility for enforcement of labor standards 
under this section, but the Commissioner may delegate to the HFA 
information collection (e.g., payroll review and routine interviews) 
and other routine administration and enforcement functions, subject to 
monitoring by the Commissioner. 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, any increase in 
compensation to a contractor, that is attributable to any failure 
properly to carry out its delegated functions. For example, failure of 
an HFA to supply or ensure inclusion of the proper contract clauses or 
wage determination in a contract or building loan agreement may require 
the HFA to fund increased compensation to a contractor as the result of 
increased wages attributable to incorporation of the proper clauses and 
wage determination.

Subpart D--Processing, Development, and Approval


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

    (a) Underwriting standards. An HFA electing to take 50 percent or 
more of the risk on loans may use its own underwriting standards and 
loan terms and conditions (as disclosed and submitted with its 
application) to underwrite and approve loans without further review by 
HUD.
    (b) HFA responsibilities. The HFA is responsible for the 
performance of all functions except those HUD-retained functions 
specified in Secs. 266.210 and 266.225(e). After acceptance of an 
application for a loan to be insured under this part, the HFA must:
    (1) Determine that a market for the project exists, taking into 
consideration any comments from the HUD Field Office relative to the 
potential adverse impact the project will have on existing or proposed 
Federally insured and assisted projects in the area.
    (2) Establish the maximum insurable mortgage and review plans and 
specifications for compliance with HFA standards;
    (3) Determine the acceptability of the proposed mortgagor and 
management agent;
    (4) Approve the Affirmative Fair Housing Marketing Plan; and
    (5) Make any other determinations necessary to ensure acceptability 
of the proposed project.
    (c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec. 266.210(a), (b), and (c), the HUD 
Field Office will issue a firm approval letter.
    (d) Inspections and other reviews. The HFA is responsible for 
inspections during construction, processing and approving advances of 
mortgage proceeds during construction, review and approval of cost 
certification, and closing of the loan.
    (e) Endorsement of mortgage note for insurance. So long as the HFA 
is in good standing, and absent fraud or material misrepresentation on 
the part of the HFA, the Commissioner or designee will endorse the 
mortgage note for insurance upon presentation by the HFA of the Closing 
Docket and certifications required in Sec. 266.420(b), subject to HUD's 
right to adjust under Sec. 266.417.


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)(2). 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).
    (b) HFA responsibilities. The HFA is responsible for the 
performance of all functions except those HUD-retained functions 
specified in Sec. 266.210 and 266.225(e). After acceptance of an 
application for a loan to be insured under this part, the HFA must:
    (1) Determine that a market for the project exists, taking into 
consideration any comments from the HUD Field Office relative to the 
potential adverse impact the project will have on existing or proposed 
Federally insured and assisted projects in the area;
    (2) Establish the maximum insurable mortgage, and review plans and 
specifications for compliance with HFA standards as approved by HUD;
    (3) Determine the acceptability of the proposed mortgagor and 
management agent;
    (4) Approve the Affirmative Fair Housing Marketing Plan; and
    (5) Make any other determinations necessary to ensure acceptability 
of the proposed project.
    (c) HUD-retained reviews. After positive completion of the HUD-
retained reviews specified in Sec. 266.210 (a), (b), and (c), the HUD 
Field Office will issue a firm approval letter which, among other 
things, will apportion units and obligate credit subsidy to the 
project.
    (d) Inspections and other reviews. The HFA is responsible for 
inspections during construction, processing and approving advances of 
mortgage proceeds during construction, review and approval of cost 
certification, and closing of the loan.
    (e) Endorsement of mortgage note for insurance. So long as the HFA 
is in good standing, and absent fraud or material misrepresentation on 
the part of the HFA, the Commissioner or designee will endorse the 
mortgage note for insurance upon presentation by the HFA of the Closing 
Docket and certifications required in Sec. 266.420(b), subject to HUD's 
right to adjust under Sec. 266.417.


Sec. 266.310  Insurance of advances or insurance upon completion; 
applicability of requirements.

    (a) General. HUD will agree to insure periodic advances of mortgage 
proceeds or to insure the entire mortgage upon completion of 
construction for projects involving new construction or substantial 
rehabilitation. Existing projects without the need for substantial 
rehabilitation will be considered insurance upon completion cases. In 
insurance upon completion cases, only the permanent loan is insured and 
a single endorsement is required after satisfactory completion of 
construction, substantial rehabilitation or repairs. In periodic 
advances cases, progress payments approved by the HFA and both an 
initial and final endorsement on the mortgage are required.
    (b) Insurance of advances. Periodic advances will be authorized by 
the HFA subject to terms specified by the Commissioner.
    (c) Insurance upon completion. (1) New construction and substantial 
rehabilitation. An HFA may approve a loan that will be insured upon 
completion of construction of the project. The HFA approval must 
prescribe a designated period during which the mortgagor must start 
construction or substantial rehabilitation. If construction or 
rehabilitation is started as required, the approval will be valid for 
the period estimated by the HFA for construction and loan closing, 
including any extension approved by the HFA.
    (2) Existing projects with no substantial rehabilitation. Existing 
projects with or without repairs are only insured upon completion, 
although HFAs may permit noncritical repairs to be completed after 
endorsement upon establishment of escrows acceptable to the HFA.
    (d) Requirements applicable to both periodic advances and insurance 
upon completion cases.--(1) Inspections. The HFA must inspect projects 
under this part at such times during construction, substantial 
rehabilitation, or repairs as the HFA determines. The inspections must 
be conducted to assure compliance with plans and specifications, work 
write-ups, and other contract documents.
    (2) Approval of advances. At all times, the loan must be kept in 
balance, and advances approved only if warranted by construction 
progress evidenced through HFA inspection, as well as in accord with 
plans, specifications, work write-ups and other contract documents. In 
approving advances, HFAs must make certain that other mortgageable 
items are supported with proper bills and/or receipts before funds can 
be approved and advanced for insurance.
    (3) Cost certification. In order to ensure that the final amount 
for insurance is supported by certified costs:
    (i) The mortgagor (and general contractor, if there is an identity 
of interest with the mortgagor) must execute a certificate of actual 
costs, in a form acceptable to the HFA, when all physical improvements 
are completed to the satisfaction of the HFA and before final 
endorsement; and
    (ii) The cost certification provided by the mortgagor must be 
audited by an independent public accountant.
    (4) Contestability. Although the HFA has authority to approve the 
mortgagor's (and general contractor's) certification of cost, the 
certification will be contestable by the Commissioner during the period 
up to and including final endorsement of the mortgage. After final 
endorsement, the certification will be final and incontestable except 
for fraud or material misrepresentation on the part of the mortgagor 
(and/or general contractor).
    (5) Assurance of completion. The mortgagor must furnish assurance 
of completion of the project in accordance with any requirements of the 
HFA as to form and amount.
    (6) Latent defects escrow. The mortgagor must furnish an escrow or 
other form of assurance required by the HFA to ensure that latent 
defects can be remedied within the time period required by the HFA.
    (e) Mortgagee of record. The HFA must remain the mortgagee of 
record as long as mortgage insurance is in force.


Sec. 266.315  Recordkeeping requirements.

    The mortgagor and the builder, if there is an identity of interest 
with the mortgagor, shall keep and maintain records of all costs of any 
construction or other cost items not representing work under the 
general contract and to make available such records for review by the 
HFA or HUD, if requested.

Subpart E--Mortgage and Closing Requirements; HUD Endorsement


Sec. 266.400  Property requirements--real estate.

    The mortgage must be on real estate held:
    (a) In fee simple;
    (b) Under a renewable lease of not less than 99 years; or
    (c) Under a lease executed by a governmental agency, or other 
lessor approved by the HFA, that has a term at least 10 years beyond 
the end of the mortgage term.


Sec. 266.402  Recordation.

    At the time of initial endorsement in the case of insurance of 
advances or at the time of final endorsement in the case of insurance 
upon completion, the HFA shall make certain that the mortgage and the 
regulatory agreement are recorded.


Sec. 266.405  Title.

    (a) Eligibility of title. Marketable title to the mortgaged 
property must be vested in the mortgagor on the date the mortgage is 
filed for record.
    (b) Title evidence. The HFA must receive a title insurance policy 
that ensures that marketable title is vested in the mortgagor, that a 
survey acceptable to the HFA has been performed, and that no existing 
impediments to title concern, or exist on, the property.


Sec. 266.410  Mortgage provisions.

    (a) Form. The mortgage and note must be executed on a form approved 
by the HFA for use in the jurisdiction in which the property is 
located.
    (b) Mortgagor. The mortgage must be executed by a mortgagor 
determined eligible by the HFA.
    (c) First lien. The mortgage must be a single first lien on 
property that has first priority for payment and that conforms with 
property standards prescribed by the HFA.
    (d) Single asset mortgagor. The mortgage must require that the 
mortgagor is a single asset mortgagor.
    (e) Amortization. The mortgage must provide for complete 
amortization (i.e., regularly amortizing) over the term of the 
mortgage.
    (f) Use restrictions. The mortgage must contain a covenant 
prohibiting the use of the property for any purpose other than the 
purpose intended on the day the mortgage was executed. The conversion 
of a project from rental to cooperative is not a ``change in use'' as 
that term is employed in the mortgage since the property will continue 
to have a residential use both before and after conversion.
    (g) Hazard insurance. The mortgage must contain a covenant, 
acceptable to the HFA, that binds the mortgagor to keep the property 
insured by one or more standard policies for fire and other hazards 
stipulated by the HFA. A standard mortgagee clause making loss payable 
to the HFA must be included in the mortgage. The HFA is responsible for 
assuring that insurance is maintained in force and in the amount 
required by this paragraph and the mortgage. The HFA must ensure that 
the insurance coverage is in an amount that will comply with the 
coinsurance clause applicable to the location and character of the 
property, but not less than 80 percent of the actual cash value of the 
insurable improvements and equipment. If the mortgagor does not obtain 
the required insurance, the HFA must do so and assess the mortgagor for 
such costs. These insurance requirements apply as long as the HFA 
retains an interest in the project and final claim settlement has not 
been completed or the contract of insurance has not been otherwise 
terminated.
    (h) Modification of terms. The mortgage must contain a covenant 
requiring that, in the event that the HFA and owner agree to a 
modification of the terms of the mortgage (e.g., to reflect a reduction 
of the interest rate if reductions are realized in the underlying bond 
rates for the project), Section 8 rents would be reduced in accordance 
with HUD guidelines.
    (i) Regulatory Agreement. The mortgage must contain a provision 
incorporating the Regulatory Agreement by reference.


Sec. 266.415  Mortgage lien and other obligations.

    (a) Liens. At the initial and final closing of the loan, the 
mortgagor and the HFA must certify, and the HFA must determine, that 
the property covered by the mortgage is free from all liens other than 
the lien of the insured mortgage, except that the property may be 
subject to such inferior lien or liens as approved by the HFA as long 
as the insured mortgage has first priority for payment.
    (b) Contractual obligations. At the final closing of the loan, the 
mortgagor and the HFA must certify, and the HFA must determine, that 
all contractual obligations in connection with the mortgage 
transaction, including the purchase of the property and the 
improvements to the property, are paid. An exception is made for 
obligations that are approved by the HFA and determined by the HFA to 
be of a lesser priority for payment than the obligation of the insured 
mortgage.


Sec. 266.417  Authority to adjust mortgage insurance amount.

    In order to protect the mortgage insurance funds, the Commissioner 
has authority in his or her sole discretion, at any time prior to and 
including final endorsement, to adjust the amount of the mortgage 
insurance.


Sec. 266.420  Closing and endorsement by the Commissioner.

    (a) Closing. Before disbursement of loan advances in periodic 
advances cases, and in all cases after completion of construction, 
repair or substantial rehabilitation, the HFA must hold a closing and 
submit a closing docket with required documentation to the Commissioner 
or the Commissioner's authorized Departmental representative for 
insurance of the mortgage by endorsement of the mortgage note. 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 at 24 CFR part 266 in effect on the date of endorsement. The note 
must also specify the date of endorsement, i.e., the date of HUD 
endorsement of the project mortgage, and the risk of loss assumed by 
the HFA and by HUD.
    (b) Closing docket. The HFA's submission must include a 
certification that it has obtained written HUD approval of compliance 
with the requirements referred to in Sec. 266.210, and certifications 
and information as follows:
    (1) Information concerning the mortgage amount and term, location, 
number and type of units, income and expenses, rents, projects and 
market occupancy percentages, value/replacement cost, interest rate, 
and similar statistical information in accordance with the 
Commissioner's administrative procedures.
    (2) Copies of the amortization schedule, Note and Risk-Sharing 
Agreement.
    (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 and loan terms and 
conditions as approved by HUD).
    (4) At the time of final endorsement, a certification for periodic 
advances cases, if submitted for final endorsement, that advances were 
made proportionate to construction progress.
    (5) A copy of the HFA-approved cost certification if the project is 
submitted for final endorsement.
    (6) A certification that equal employment requirements are 
followed.
    (7) A certification that the HFA has reviewed and approved the 
Affirmative Fair Housing Marketing Plan and found it acceptable.
    (8) A certification that a dedicated account, if required, has been 
increased in accordance with Sec. 266.110(b).
    (9) Certifications required under Sec. 266.415 concerning liens and 
contractual obligations.
    (10) Copies of the Hazard Insurance Policy with a clause making the 
loss payable to the HFA.
    (11) For projects subject to Davis-Bacon prevailing requirements 
under Sec. 266.225, the certification and information concerning 
payment of prevailing wage rates required by Sec. 266.225(d).
    (12) Certified copies of mortgage (deed of trust) with attached 
regulatory agreement, and note for HUD files.

Subpart F--Project Management and Servicing


Sec. 266.500  General.

    The HFA will have full responsibility for the administration of the 
provisions of this subpart and for managing and servicing projects 
insured under 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.


Sec. 266.505  Regulatory agreement requirements.

    (a) General. (1) The HFA must execute a Regulatory Agreement, in 
recordable form, between the mortgagor and the HFA to be in force for 
the duration of the insured mortgage and note or bond. The Regulatory 
Agreement must include a description of the property. The Regulatory 
Agreement must be incorporated by reference into the mortgage and 
recorded with the mortgage.
    (2) The Regulatory Agreement executed between the HFA and the 
mortgagor must be binding upon the mortgagor and any of its successors 
and assigns and upon the HFA and any of its successors for so long as 
the mortgage is insured by HUD or HUD holds an HFA debenture issued in 
connection with a claim arising from the insured mortgage. The HFA may 
not assign the Regulatory Agreement.
    (3) The HFA will enforce the Regulatory Agreement and take actions 
against any mortgagors who violate its provisions. Such actions may 
involve a declaration of default and application to any court for 
specific performance of the agreement.
    (b) Requirements. The Regulatory Agreement must require the 
mortgagor to comply with the provisions of this part and obligate the 
mortgagor, among other things, to:
    (1) Make all payments due under the mortgage and note/bond.
    (2) Where necessary, establish a sinking fund for future capital 
needs.
    (3) Maintain the project as affordable housing, as defined in 
Sec. 266.5.
    (4) Continue to use dwelling units for their original purposes.
    (5) Comply with such other requirements as may be established by 
the HFA and set forth in the Regulatory Agreement.
    (6) Maintain the project in good physical condition.
    (7) Maintain complete books and records established solely for the 
project and provide the HFA with an audited financial statement based 
on these books and records and performed in accordance with standards 
for financial audits of the U. S. General Accounting Office's 
government auditing standards, issued by the Comptroller of the United 
States.
    (8) Comply with the Affirmative Fair Housing Marketing Plan and all 
other fair housing and equal opportunity requirements.
    (9) Operate as a single asset mortgagor.
    (10) Make books and records available for HUD or General Accounting 
Office (GAO) review with appropriate notification.
    (11) Permit HUD officials or employees to inspect the project upon 
request by the Commissioner.
    (c) Enforcement. The Regulatory Agreement shall be enforced by the 
HFA.


Sec. 266.510  HFA responsibilities.

    (a) Inspections. The HFA must perform annual physical inspections 
of the projects and provide a copy of the inspection report to HUD. If 
a project is not in safe and sanitary condition, the HFA must provide a 
summary to HUD of actions required, with target dates, to correct 
unresolved findings.
    (b) Annual audits of projects. The HFA must analyze projects' 
annual audits and provide a copy to HUD along with a summary of 
unresolved findings and actions planned, with target dates, to correct 
unresolved findings.
    (c) HFA's annual financial statement. The HFA must provide HUD with 
an annual audited financial statement in accordance with the 
requirements of 24 CFR part 44.


Sec. 266.515  Record retention.

    (a) Loan origination and servicing. Records pertaining to the 
mortgage loan origination and servicing of the loan must be maintained 
for as long as the insurance remains in force.
    (b) Defaults and claims. Records pertaining to a mortgage default 
and claim must be retained from the date of default through final 
settlement of the claim for a period of no less than three years after 
final settlement.


Sec. 266.520  Program monitoring and compliance.

    HUD will monitor the performance of the HFA in accordance with the 
provisions covered under this subpart.

Subpart G--Contract Rights and Obligations

Mortgage Insurance Premiums


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 equal to the prescribed percentage, in the sliding 
scale chart that is shown in Sec. 266.604(b), of the face amount of the 
mortgage.
    (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) equal to the prescribed percentage of 
the average outstanding principal obligation of the mortgage from the 
final closing date to the year following the date of the first 
principal payment, less the amount paid on the date of the final 
closing.
    (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 equal to the prescribed percentage of the average 
outstanding principal obligation of the mortgage, 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.


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 the prescribed percentage, in the sliding 
scale chart that is shown in Sec. 266.604(b), of the face amount of the 
mortgage.
    (b) Interim premium. On each anniversary of the initial closing, 
the HFA shall pay an interim mortgage insurance premium equal to the 
prescribed percentage of the face amount of the mortgage. The HFA shall 
continue to pay the interim mortgage insurance premiums until the date 
of the first principal payment.
    (c) Premium payable with first payment of principal. On the date of 
the first principal payment, the HFA shall pay a mortgage insurance 
premium equal to the prescribed percentage of the average outstanding 
principal obligation of the mortgage for the year following the date of 
the first principal payment. The HFA shall adjust this payment by 
deducting an amount equal to the portion of the last premium paid that 
is attributable to the months after the date of the first payment to 
principal. Any partial month is to be counted as a whole month. The HFA 
shall remit the net adjusted mortgage premium to the Commissioner and 
refund the amount of the adjustment (overpayment) to the mortgagor.
    (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 equal to the prescribed percentage of the average 
outstanding principal obligation of the mortgage, 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.


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 the prescribed 
percentage as set forth in the sliding scale chart in paragraph (b) of 
this section without taking into account delinquent payments or 
prepayments.
    (b) Prescribed percentages. The following sliding scale chart 
provides the prescribed percentage, based upon the respective share of 
risk, that is to be used in calculating mortgage insurance premiums 
under this section:

------------------------------------------------------------------------
            Percentage share of risk              Prescribed percentage 
------------------------------------------------  for calculating HFA's 
          HUD                      HFA                  annual MIP      
------------------------------------------------------------------------
90.....................                 10                     .45      
75.....................                 25                     .375     
50.....................                 50                     .25      
40.....................                 60                     .2       
30.....................                 70                     .15      
20.....................                 80                     .1       
10.....................                 90                     .05      
------------------------------------------------------------------------

    (c) Closing information. The HFA shall provide final closing 
information to the Commissioner within 15 days of the final closing in 
a format prescribed by the Commissioner. In addition, the HFA shall 
submit a copy of the amortization schedule. This amortization shall be 
used to compute and collect all future mortgage insurance premiums 
subject to Sec. 266.600(c) or Sec. 266.602(d). If the mortgage is 
modified, the HFA shall submit to the Commissioner a copy of the 
revised amortization schedule, which shall be used to compute and 
collect all future mortgage insurance premiums subject to 
Sec. 266.600(c) or Sec. 266.602(d).
    (d) Due date for premium payments. Mortgage insurance premiums are 
due on the first day of the month of the anniversary of the first 
payment to principal. Any premium received by the Commissioner more 
than 15 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 days after the 
due date shall begin to accrue interest at the rate prescribed by the 
Treasury Fiscal Requirements Manual.


Sec. 266.606  Mortgage insurance premium: Duration and method of 
paying.

    (a) Duration of payments. Mortgage insurance premium payments must 
continue annually until one of the following occurs:
    (1) The mortgage is paid in full;
    (2) A deed to the HFA is filed for record;
    (3) An application for initial claim payment is received by the 
Commissioner; or
    (4) The Contract of Insurance is otherwise terminated.
    (b) Method of payment. The HFA shall pay any mortgage insurance 
premium required by this part in cash.


Sec. 266.608  Mortgage insurance premium: Pro rata refund.

    If the Contract of Insurance is terminated by payment in full or is 
terminated by the HFA on a form prescribed by the Commissioner, after 
the date of the first payment to principal, the Commissioner shall 
refund any mortgage insurance premium for the period after the 
effective date of the termination of insurance. The refund shall be 
mailed to the HFA for credit to the mortgagor's account. In computing 
the pro rata portion of the annual mortgage insurance premium, the date 
of termination of insurance shall be the last day of the month in which 
the mortgage is prepaid or the Commissioner receives a notification of 
termination, whichever is later. No refund shall be made if the 
insurance was terminated because of the submission of an application 
for initial claim payment or if the termination occurs before the date 
of the first payment to principal.

Insurance Endorsement


Sec. 266.612  Insurance endorsement.

    (a) Initial endorsement. The Commissioner shall indicate his or her 
insurance of the mortgage by endorsing the original credit instrument.
    (b) Final endorsement. When all advances of mortgage proceeds have 
been made and all other applicable terms and conditions have been 
complied with to the satisfaction of the Commissioner, the Commissioner 
shall indicate on the original credit instrument the total of all 
advances that have been approved for insurance and again endorse such 
instrument.
    (c) Effect of endorsement. From the date of initial endorsement, 
the Commissioner and the HFA shall be bound by the provisions of this 
subpart to the same extent as if they had executed a contract including 
the provisions of this subpart and the applicable sections of the Act.

Assignments


Sec. 266.616  Transfer of partial interest under participation 
agreement.

    The HFA may not assign the mortgage. However, a partial interest in 
an insured mortgage or pool of insured mortgages may be transferred 
under a participation agreement or arrangement (such as a declaration 
of trust or the issuance of pass-through certificates), without 
obtaining the approval of the Commissioner, if the following conditions 
are met:
    (a) Legal title to the insured mortgage or mortgages shall be held 
by the HFA; and
    (b) The participation agreement, declaration of trust or other 
instrument under which the partial interest is transferred shall 
provide that:
    (1) The HFA shall remain mortgagee of record under the contract of 
mortgage insurance;
    (2) The Commissioner shall have no obligation to recognize or deal 
with anyone other than the HFA with respect to the rights, benefits, 
and obligations of the mortgagee under the contract of insurance; and
    (3) The mortgagor shall have no obligation to recognize or do 
business with any one other than the HFA or, if applicable, its 
servicing agent with respect to rights, benefits, and obligations of 
the mortgagor or the mortgagee under the mortgage.

Termination


Sec. 266.620  Termination of Contract of Insurance.

    The Contract of Insurance shall terminate if any of the following 
occurs:
    (a) The mortgage is paid in full;
    (b) The HFA acquires the mortgaged property and notifies the 
Commissioner that it will not file an insurance claim;
    (c) A party other than HFA acquires the property at a foreclosure 
sale;
    (d) The HFA notifies the Commissioner of Termination of Insurance 
(voluntary termination);
    (e) The HFA or its successors commit fraud or make a material 
misrepresentation to the Commissioner with respect to information 
culminating in the Contract of Insurance on the mortgage or while the 
Contract of Insurance is in existence;
    (f) The receipt by the Commissioner of an Application for Final 
Claims Settlement;
    (g) If the HFA acquires the mortgaged property and fails to make an 
initial claim.


Sec. 266.622  Notice and date of termination by the Commissioner.

    The Commissioner shall notify the HFA that the Contract of 
Insurance has been terminated and shall establish the effective date of 
termination. The termination shall be the last day of the month in 
which one of the events specified in Sec. 266.620 occurs.

Claim Procedures


Sec. 266.626  Notice of default and filing an insurance claim.

    (a) Definition of default. (1) A monetary default exists when the 
mortgagor fails to make any payment due under the mortgage.
    (2) A covenant default exists when the mortgagor fails to perform 
any other covenant under the provision of the mortgage or the 
regulatory agreement, which is incorporated by reference in the 
mortgage. An HFA becomes eligible for insurance benefits on the basis 
of a covenant default only after the HFA has accelerated the debt and 
the owner has failed to pay the full amount due, thus converting a 
covenant default into a monetary default.
    (b) Date of default. For purposes of this subpart, the date of 
default is:
    (1) The date of the first uncorrected failure to perform a mortgage 
covenant or obligation; or
    (2) The date of the first failure to make a monthly payment that is 
not covered by subsequent payments, when such subsequent payments are 
applied to the overdue monthly payments in the order in which they were 
due.
    (c) Notice of default. If a default (as defined in paragraph (a) of 
this section) continues for a period of 30 days, the HFA must notify 
the Commissioner within 10 days thereafter, unless the default is cured 
within the 30-day period. Unless waived by the Commissioner, the HFA 
must submit this notice monthly, on a form prescribed by the 
Commissioner, until the default has been cured or the HFA has filed an 
application for an initial claim payment. In cases of mortgage 
acceleration, the mortgagee must first give notice of the default.
    (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 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 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 days, not to 
exceed 360 days from the date of default.


Sec. 266.628  Initial claim payments.

    (a) Determination of initial claim amount. (1) The initial claim 
amount is based on the unpaid principal balance of the mortgage note as 
of the date of default, plus interest at the mortgage note rate from 
date of default to date of initial claim payment. The mortgage note 
interest component of the initial claim amount is subject to 
curtailment as provided in paragraph (b) of this section.
    (2) HUD shall make an initial claim payment to the HFA that is 
equal to the initial claim amount, less any delinquent mortgage 
insurance premiums, late charges and interest, assessed under 
Sec. 266.604(d).
    (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 days of the initial claim payment. Any excess funds 
resulting from such retirement or repayment shall be returned to HUD 
within 30 days of the retirement.
    (b) Curtailment of interest for late filings. In determining the 
mortgage note interest component of the initial claim amount, if the 
HFA fails to meet any of the requirements of this section within the 
specified time (including any granted extension of time), HUD shall 
curtail the accrual of mortgage note interest by the number of days by 
which the required action was late.
    (c) Method of payment. HUD shall pay the claim in cash.


Sec. 266.630  Partial payment of claims.

    (a) General. When the Commissioner receives a claim for a partial 
payment under Sec. 266.626(d), the Commissioner may make a partial 
payment of claim in accordance with the requirements of this section. 
If the HFA has not previously received a partial claim payment, the HFA 
may file a claim for a partial claim payment under Sec. 266.630. 
Otherwise, the HFA must file for an initial claim payment under 
Sec. 266.628.
    (b) HFA submission. In addition to any other requirements set forth 
in administration instructions, the HFA must provide the following 
information with its application for a partial claim payment:
    (1) The amount by which the HFA will reduce the principal on the 
insured mortgage and the amount of delinquent interest on the insured 
mortgage that the HFA will defer based on the anticipated closing date; 
and
    (2) A certification that:
    (i) The amount of the principal reduction of the insured first 
mortgage does not exceed 50 percent of the unpaid principal balance;
    (ii) The relief resulting from the partial claim payment when 
considered with other resources available to the project are sufficient 
to restore the financial viability of the project;
    (iii) The project is or can (at reasonable cost) be made 
structurally sound;
    (iv) The management of the project is satisfactory;
    (v) The default under the insured mortgage was beyond the control 
of the mortgagor.
    (c) Claim processing.--(1) Acceptable application. If the HFA's 
application is acceptable, the Commissioner shall notify the HFA to 
process the partial payment, which will include the modification of the 
existing mortgage and the execution by the mortgagor of a second 
mortgage payable to the HFA. When the second mortgage is closed, the 
HFA shall notify the Commissioner, in a form and manner prescribed in 
administrative instructions. Upon receipt of notice from the HFA, the 
Commissioner shall make the partial claim payment.
    (2) Unacceptable application. If the application is unacceptable, 
the Commissioner shall either advise the HFA of the information needed 
to make the application acceptable or return the application for 
further action. The HFA is granted an extension of 30 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 equal to 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.
    (3) HFA second mortgage. Repayment of the relief provided by the 
HFA must be secured by a second mortgage to the HFA. This second 
mortgage may provide for postponed amortization and may not be assigned 
by the HFA. This second mortgage is not insured under this part and may 
not be insured under any other HUD-related insurance program.
    (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 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) Certified statements of amounts collected. As long as the 
second mortgage remains of record, the HFA must submit to the 
Commissioner an annual certified statement of the amounts collected by 
the HFA. The HFA must submit a final certified statement within 30 days 
after the second mortgage is paid in full, foreclosed, or otherwise 
terminated.


Sec. 266.632  Withdrawal of claim.

    In case of a default and subsequent filing of claim, the HFA shall 
determine the form of workout or modification and will inform HUD of 
the type of mortgage relief determined to be appropriate. If the 
default is cured after the claim is made but before the initial claim 
payment is paid by HUD, the HFA may, in writing, withdraw the claim, 
and insurance will continue as if the default had not occurred.


Sec. 266.634  Reinstatement of the contract of insurance.

    (a) Conditions for reinstatement. After the initial claim payment, 
HUD may reinstate the contract of insurance on the following 
conditions:
    (1) The HFA has not acquired the project;
    (2) The mortgagor has cured the default; and
    (3) The HFA requests that HUD reinstate the contract of insurance.
    (b) Notification of reinstatement. If reinstatement is acceptable 
to HUD, HUD shall notify the HFA of the date the contract of insurance 
will be reinstated and shall advise the HFA of the payment needed to 
reinstate the contract of insurance.
    (c) Payment. Within 30 days of the date of the notice under 
paragraph (b) of this section, the HFA shall pay HUD an amount equal to 
the initial claim amount, as determined under Sec. 266.628(a)(1), plus 
an amount equal to the accrued and unpaid interest on the HFA Debenture 
through the reinstatement date, plus an amount equal to the mortgage 
insurance premium for the period from the date of reinstatement of the 
contract of insurance to the next anniversary date for payment of the 
mortgage insurance premium.
    (d) Cancellation of debenture. Upon receipt from the HFA of the 
amount specified in paragraph (c) of this section, HUD shall return the 
HFA debenture for cancellation.
    (e) Continuation of contract of insurance. Upon reinstatement, the 
contract of insurance shall continue as if the default had not 
occurred.


Sec. 266.636  Insuring new loans for defaulted projects.

    The HFA may not make another loan that is insured under this part 
to the same owner in the same project if HUD has paid a claim under 
this part.


Sec. 266.638  Issuance of HFA Debenture.

    (a) Condition to initial claim payment. The HFA must issue an 
instrument in the form of a debenture to HUD within 30 days of 
receiving the initial claim payment. The HFA Debenture shall meet the 
following requirements and shall be in a form that has been approved by 
HUD as part of the application approval process.
    (b) Term of HFA Debenture. The HFA Debenture shall be dated the 
same date that the initial claim payment is issued. The HFA Debenture 
shall have a term of five years in order to afford the mortgagor ample 
time to cure the default or the HFA time to foreclose and/or resell the 
project. HUD may provide a written extension of the five year term if 
the HFA certifies and provides documentation that the project owner has 
filed bankruptcy and the HFA is taking action to have the project 
discharged from the bankruptcy. The HFA Debenture shall, during this 
extended period, continue to bear interest as described below at HUD's 
published debenture rate at the earlier of initial endorsement or final 
endorsement. Interest shall be due and payable annually on the 
anniversary date of the initial claim payment. Interest is due on the 
full face amount of the HFA Debenture through the term of the HFA 
Debenture or through the date an application for final claim payment is 
received by the Commissioner.
    (c) HFA Debenture amount. (1) The HFA Debenture shall be for the 
full initial claim amount as determined under Sec. 266.628(a)(1) (minus 
any excess funds returned to HUD under Sec. 266.628(a)(3)).
    (2) The full amount of the HFA Debenture shall be payable to HUD 
upon maturity, unless the HFA Debenture is canceled because of:
    (i) A reinstatement of the contract of insurance under 
Sec. 266.634; or
    (ii) Final claim settlement under Sec. 266.654.
    (d) HFA Debenture interest rate. The HFA Debenture shall bear 
interest at HUD's published debenture rate at the earlier of initial 
endorsement or final endorsement. Interest shall be due and payable 
annually on the anniversary date of the initial claim payment and on 
the date of redemption when redeemed or canceled before an anniversary 
date. Interest shall be computed on the full face amount of the HFA 
Debenture through the term of the HFA Debenture.
    (e) Form of HFA Debenture. The HFA Debenture should follow the 
standard form of a State/Municipal Debenture issued under the Uniform 
Commercial Code, where applicable, and shall be supported by the full 
faith and credit of the HFA. For HFAs that operate as departments or 
divisions of States or units of local government and where such HFAs 
cannot pledge the full faith and credit of the HFA, such HFAs may 
collateralize their obligation through a letter of credit, reinsurance, 
or other forms of credit acceptable to the Commissioner.
    (f) Debenture registration. Unless otherwise required by law, 
including State or local laws, or other governing bodies, HUD will not 
require the HFA Debenture to be ``Registered'' (with the Securities and 
Exchange Commission) as it is a direct, or private, placement, and not 
a public offering, that is supported by the full faith and credit of 
the HFA.


Sec. 266.640  Foreclosure and acquisition.

    The HFA is not required to foreclose the insured mortgage. It may 
accept a deed-in-lieu of foreclosure.


Sec. 266.642  Appraisals.

    Where actions taken or caused to be taken by the HFA have the 
effect of the recovery of less than the face amount of the HFA 
Debenture held by HUD, an appraisal should be made to determine the 
value of the project. The appraisal should assume a willing buyer and a 
willing seller. The appraisal must be done within the 45-day period 
immediately preceding the date when the HFA files an application for 
final claim settlement. If at the time of final claim settlement the 
HFA has not sold the project, an appraisal should be made to determine 
the value of the project at its highest and best use.


Sec. 266.644  Application for final claim settlement.

    The HFA shall file an application for final settlement in 
accordance with the Commissioner's administrative procedures not later 
than 30 days after any of the following:
    (a) Sale of the property after foreclosure or after acquisition by 
deed-in-lieu of foreclosure; or
    (b) Expiration of the term of the HFA debenture.


Sec. 266.646  Determining the amount of loss.

    The amount of the total loss to be shared by HUD and the HFA is 
equal to:
    (a) The amount of the initial claim payment;
    (b) Plus all items set forth in Sec. 266.648; and
    (c) Less all items set forth in Sec. 266.650.


Sec. 266.648  Items included in total loss.

    In computing the total loss, the following items are added to the 
amount described in Sec. 266.646(a):
    (a) The amount of all payments that the HFA made from its own funds 
and not from project income for:
    (1) Taxes, special assessments, and water bills that are liens 
before the Mortgage; and
    (2) Fire and hazard insurance on the property.
    (b) A reasonable amount of acquisition costs actually paid by the 
HFA. These costs may not include loss or damage resulting from the 
invalidity or unenforceability of the Mortgage lien or the 
unmarketability of the Mortgagor's title.
    (c) Reasonable payments that the HFA made from its own funds and 
not from project income for:
    (1) Preservation, operation and maintenance of the property;
    (2) Repairs necessary to meet the requirements of local laws;
    (3) Expenses in connection with the sale of property; and
    (4) Bankruptcy expenses approved by the Office of General Counsel.
    (d) The amount of HFA Debenture interest paid by the HFA to HUD.


Sec. 266.650  Items deducted from total loss.

    In computing insurance benefits, the following items are deducted 
from the amounts described in Sec. 266.646(a) and (b):
    (a) All amounts received by the HFA on account of the mortgage 
after the date of default;
    (b) All cash, and/or funds related to the mortgaged property, 
including deposits and escrows made for the account of the mortgagor 
that the HFA holds (or to which it is entitled);
    (c) The amount of any undrawn balance under a letter of credit that 
the HFA accepted in lieu of a cash deposit for an escrow agreement;
    (d) Any net income from the mortgaged property/project that the HFA 
received after the date of default.
    (e) The proceeds from the sale of the project or the appraised 
value of the project as provided in Sec. 266.642 as follows:
    (1) If the HFA disposes of the project through a negotiated sale, 
the amount deducted shall be the higher of the sales price or the 
appraised value.
    (2) If the HFA disposes of the project through a competitive bid 
procedure approved by the Commissioner, the amount deducted shall be 
the sales price, even if it is lower than the appraised value.
    (3) If the HFA has not disposed of the project within 5 years from 
the date of issuance of the HFA Debentures (unless an extension has 
been granted pursuant to Sec. 266.638), the amount deducted shall be 
the appraised value.
    (f) Any and all claims that the HFA has acquired in connection with 
the acquisition and sale of the property. Claims include but are not 
limited to returned premiums from canceled insurance policies, interest 
on investments of reserve for replacement funds, tax refunds, refunds 
of deposits left with utility companies, and amounts received as 
proceeds of a receivership.
    (g) The amount of daily HFA Debenture interest accrued but not paid 
from the anniversary date of the last HFA Debenture interest payment to 
the date an application for final claim payment is received by the 
Commissioner.


Sec. 266.652  Determining share of loss.

    The total loss computed in Sec. 266.646 shall be shared by HUD and 
the HFA in accordance with their respective percentage of risk as 
specified in the note and the addendum to the Risk-Sharing Agreement 
between HUD and the HFA.


Sec. 266.654  Final claim settlement and HFA Debenture redemption.

    (a) Final claim payment. If the initial claim amount, as determined 
under Sec. 266.628(a)(1), is less than HUD's share of the loss, HUD 
shall make a final claim payment to the HFA that is equal to the 
difference between HUD's share of the loss and the initial claim amount 
and shall return the HFA Debenture to the HFA for cancellation.
    (b) HFA reimbursement payment. If the initial claim amount, as 
determined under Sec. 266.628(a)(1), is more than HUD's share of the 
loss, the HFA shall, within 30 days of notification by HUD of the 
amount due, remit to HUD an amount that is equal to the difference 
between the initial claim amount and HUD's share of the loss. The funds 
must be remitted in a manner prescribed in the Commissioner's 
administrative procedures. The HFA Debenture will be considered 
redeemed upon receipt of the cash payment. A 5 percent penalty will be 
charged and interest at the debenture rate will begin to accrue if the 
cash payment is not received within the prescribed period. If an HFA is 
in default under an existing debenture and files a claim on another 
project under this part, HUD will charge the HFA's Dedicated Account 
for the amount owed the Department. In cases of top-tier or A-rated 
HFA's which are not required to maintain a Dedicated Account, HUD will 
inform the rating agencies of the HFA's failure to pay on their debt 
obligation and of its violation of the Risk-Sharing Agreement.
    (c) Losses. Losses sustained as a consequence of the (sole) 
negligence of an HFA (e.g., failure to acquire adequate hazard 
insurance where such insurance is available) shall be the sole 
obligation of the HFA, notwithstanding the risk apportionment otherwise 
agreed to by HUD and the HFA.
    (d) Supplemental claim. Any supplemental claim must be filed within 
one year from date of final claim settlement.


Sec. 266.656  Recovery of costs after final claim settlement.

    If, after final claim settlement, the HFA recovers additional sums 
as the result of the sale of the project or otherwise, the total amount 
of such recovery shall be shared by HUD and the HFA in accordance with 
the prescribed percentage of shared risk.


Sec. 266.658  Program monitoring and compliance.

    HUD will monitor the performance of the HFA for compliance with the 
provisions of this subpart.

    Dated: November 29, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 94-29835 Filed 12-2-94; 8:45 am]
BILLING CODE 4210-27-P