[Federal Register Volume 60, Number 6 (Tuesday, January 10, 1995)]
[Rules and Regulations]
[Pages 2658-2669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-552]




[[Page 2657]]

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Part VII





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner



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24 CFR Parts 813 and 885



Management Rules for Existing Projects for the Elderly; Final Rule

  Federal Register / Vol. 60, No. 6 / Tuesday, January 10, 1995 / Rules 
and Regulations   
[[Page 2658]]

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner

24 CFR Parts 813 and 885

[Docket No. R-94-1364; FR-1761-F-02]
RIN: 2502-AC03


Management Rules for Existing Projects for the Elderly

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule amends the provisions of 24 CFR part 885 which 
govern projects that received direct loans under section 202 of the 
Housing Act of 1959 and housing assistance under section 8 of the 
United States Housing Act of 1937. The rule adds regulatory provisions 
to govern the housing assistance payments contract, project operations 
and project management.

EFFECTIVE DATE: February 9, 1995.

FOR FURTHER INFORMATION CONTACT: With respect to Section 202 issues 
contact: Margaret Milner, Acting Director, Office of Elderly and 
Assisted Housing, Department of Housing and Urban Development, 451 
Seventh Street SW., Room 6130, Washington, DC 20410; telephone (202) 
708-4542. With respect to Section 8 issues contact: Barbara Hunter, 
Acting Director, Planning and Procedures Division, Office of 
Multifamily Housing Management, Room 6182, Department of Housing and 
Urban Development, 451 Seventh Street, S.W., Washington, D.C. 20410; 
telephone (202) 426-3970. Hearing or speech impaired individuals may 
call HUD's TDD number (202) 708-4594. (These are not toll-free 
numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Burden

    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 assigned OMB 
control number 2502-0371.

II. Background

    HUD's regulations at 24 CFR part 885, subpart B govern projects 
that received direct loans under section 202 of the Housing Act of 1959 
and housing assistance payments under section 8 of the United States 
Housing Act of 1937 (section 202/8 program). This subpart contains 
provisions governing the development of section 202/8 projects 
including the loan fund allocation process, application procedures, and 
loan financing procedures. There are no regulatory provisions governing 
the housing assistance payments contract (HAP contract) (except 
Sec. 885.425 on HAP contract execution) or governing the management and 
operation of section 202/8 projects (except for preference rules 
published on July 18, 1994 at 59 FR 36616). On December 9, 1987 (52 FR 
46614), HUD published a proposed rule adding such provisions. In 
response to the proposed rule, HUD received six comments. The comments 
and HUD's responses are discussed below.
    On June 20, 1989 (54 FR 25960), HUD published a final rule adding a 
new subpart C to part 885. That subpart, which implemented amendments 
to the section 202 program contained in section 162 of the Housing and 
Community Development Act of 1987, governs section 202 housing for 
nonelderly handicapped families and individuals. Such housing does not 
receive assistance under section 8, but receives a new type of project 
assistance. On June 12, 1991, HUD published two interim rules (56 FR 
27104, 56 FR 27070) providing for the continued applicability of part 
885 to projects for which section 202 loan reservations were made in FY 
1990 and prior years. These interim rules also added new parts 889 and 
890 to establish the Supportive Housing for the Elderly Program and 
Supportive Housing for Persons with Disabilities Program and to enable 
FY 1991 funding of projects under those programs. Requirements relating 
to capital advances and project rental assistance contracts (these new 
projects do not receive section 8 rental assistance) were published 
August 12, 1992 at 57 FR 36338 and 57 FR 36330, and management rules 
for these new programs will be published shortly.

Public Comments

    Part 813. A commenter requested that HUD provide further 
information regarding the relationship between part 813 and part 885. 
The commenter also requested clarification concerning which part will 
govern if there are inconsistencies between the parts.
    Section 813.1, which was not proposed for amendment in the proposed 
rule, currently provides the definitions, policies, and procedures 
related to income limits, and the determination of eligibility, income 
and rent for applicants and tenants in housing assisted under section 8 
including section 8 projects for which loans are made under section 202 
of the Housing Act of 1959. HUD is unaware of any inconsistencies 
between part 813 and part 885, other than differences between the 
definitions of elderly and handicapped families. These differences 
reflect statutory definitions applicable to the section 8 and section 
202 programs (see the definition of ``families'' and ``elderly family'' 
in section 3(b)(3) of the United States Housing Act of 1937, and the 
definition of ``elderly or handicapped families'' in section 
202(d)(4)). To the extent of these or any other inconsistencies, the 
part that more specifically addresses the program (i.e., part 885) will 
govern. References have been added for part 889 (Supportive Housing for 
the Elderly) and part 890 (Supportive Housing for Persons with 
Disabilities).
    Definitions (Sec. 885.5). A new definition of handicapped person or 
individual was added to part 885 in the final rule published June 20, 
1989 implementing section 162 of the Housing and Community Development 
Act of 1987. In that rule, HUD proposed the same definition of 
handicapped person or individual that was contained in the proposed 
rule for the section 202/8 program. (Both proposed rules included a 
revised definition of handicapped person or individual that contained 
specific definitions of developmentally disabled and chronically 
mentally ill. Alcoholism and drug addiction were specifically excluded 
from the definition of chronically mentally ill unless the individual 
has a disabling condition required for eligibility.)
    Commenters to both proposed rules made substantially the same 
comments on the proposed definition. Some commenters argued that the 
exclusion of alcoholism and drug addiction was contrary to section 504 
of the Rehabilitation Act of 1973 which specifically extends coverage 
to alcoholics and drug addicts. Other commenters supported the 
exclusion of such persons.
    In the June 20, 1989 final rule, HUD responded to these objections 
and substituted new language that provided that a person whose sole 
impairment is alcoholism or drug addiction (i.e., who does not have a 
developmental disability, chronic mental illness or physical disability 
which is the disabling condition required for eligibility in a 
particular project) will not be considered to be handicapped for the 
purposes of the section 202 program. The discussion of these changes 
can be found at that rule at 54 FR 25962, and is adopted without change 
for the [[Page 2659]] purposes of this rule. Because the definitions 
section of part 885 governs both the section 202 handicapped housing 
program and the section 202/8 program, the text of the final rule 
adopted today does not include a definition.
    Term of HAP contract (Sec. 885.505). The proposed rule at 
Sec. 885.505 provided that the term of the HAP contract for assisted 
units in section 202/8 projects is 20 years. If the project is 
completed in stages, the term of the HAP contract for all assisted 
units in all stages of a project may not exceed 22 years. One commenter 
recommended that HUD should provide short extensions of the HAP 
contract if the facility or the tenants would suffer an undue hardship 
without the extension. Section 885.535 already provides that HUD and 
the Borrower may agree to extend the term of the HAP contract or to 
renew the HAP contract upon the expiration of the term of the contract. 
This section has been clarified to state that any extension or renewal 
is subject to the availability of funding.
    Fair Market rents. One commenter recommended that the Department 
develop additional language in part 885 specifying how fair market 
rents (FMRs) will be calculated for section 202/8 facilities. This 
commenter claimed that the Department's method of calculating FMRs was 
not economically feasible for many section 202 facilities. Under the 
section 202/8 program, the applicable published FMRs were used in 
development processing to determine the amount reserved for the section 
8 funding and served as a limit on the amount of the section 202 loan 
that could be made. They served as the initial contract rents (although 
they could be adjusted based on the amount of the loan). Thereafter, 
the contract rents are adjusted based on the project's approved budget 
or by the annual (and special) adjustment factor as specified in the 
contract. HUD believes that the regulations are sufficiently specific. 
No additional provisions have been included in this rule, particularly 
since no new reservations are subject to section 8 FMRs.
    Leasing to eligible families (Sec. 885.515). Proposed Sec. 885.515 
implemented section 325(1) of the Housing and Community Development Act 
of 1981 which requires that HAP contracts for new construction and 
substantial rehabilitation must provide that during the term of the HAP 
contract, the owner shall make available for occupancy by eligible 
families the number of units for which assistance is committed under 
the HAP contract. Under the proposed rule making units available for 
occupancy by eligible families required the Borrower: (1) to conduct 
marketing in accordance with Sec. 885.600(a) (i.e., the Borrower must 
commence and continue diligent marketing activities not later than 90 
days before the anticipated date of availability for occupancy of the 
first unit and marketing must be performed in accordance with a HUD-
approved affirmative marketing plan and all fair housing and equal 
opportunity requirements); (2) lease or make good faith efforts to 
lease the units to eligible and otherwise acceptable families, 
including taking all feasible actions to fill vacancies by renting to 
such families; and (3) not reject any such applicant family except for 
reasons acceptable to HUD. The proposed rule stated that if the 
Borrower is temporarily unable to lease all assisted units to families 
that are eligible to occupy them, one or more units may, with the prior 
approval of HUD, be leased to ``ineligible families'' (i.e., families 
that meet the section 202 handicapped or elderly eligibility 
requirements, but cannot meet the income eligibility requirements).
    A commenter argued that the proposed rules do not adequately ensure 
that effective outreach techniques will be used. The commenter argued 
that once the Borrower complies with HUD's general fair housing and 
equal opportunity requirements and continues this outreach strategy for 
90 days, its marketing obligations would be fulfilled and the Borrower 
would be free to rent to ineligible tenants. The commenter argued that 
the final rule should require Borrowers to specifically target the 
elderly and handicapped populations in their outreach strategies. 
Further, the commenter suggested that HUD provide for the use of a 
centralized computer system for matching Borrowers and tenant 
applicants.
    HUD believes that the regulations are adequate to ensure that the 
Borrower will market to eligible handicapped and elderly families. HUD 
notes that, in addition to the marketing requirements cited by the 
commenter, making units available to eligible families requires the 
Borrower to demonstrate that it has leased or is making good faith 
efforts to lease units to eligible and otherwise acceptable families. 
Without such a showing, HUD will not approve a Borrower's request for 
permission to lease to ineligible families. Moreover, the Affirmative 
Fair Housing Marketing Plan is in effect for the duration of the 
Federal financial assistance. While affirmative marketing efforts must 
commence at least 90 days prior to the initial rent-up, they also must 
continue throughout the life of the Federal financial assistance. In 
light of the expense involved in the establishment of a centralized 
computer system and questions concerning the necessity of a system, HUD 
has rejected the commenter suggestion regarding the provision of a 
computerized system for matching Borrowers and tenant-applicants.
    One commenter argued that the provision permitting the Borrower to 
lease to ineligible families is unnecessary since sufficient numbers of 
income-eligible families can be located if Borrowers make an effort. 
The commenter feared that this exception would lead to other practices 
or exceptions that would undermine efforts to serve the poor and the 
homeless.
    The proposed provision has been retained in the final rule. The 
failure to achieve necessary occupancy could impair project operations 
to the detriment of tenants and would ultimately create a danger of a 
default on the section 202 loan. Such a default and foreclosure could 
result in the project being entirely disassociated from its original 
purpose, if purchased by an outside bidder. Accordingly, HUD has 
concluded that the proposed provision may be essential in order to 
preserve certain projects for the benefit of present and future 
eligible tenants. HUD believes that the requirement for prior approval 
will ensure adequate supervision of the project and will prevent the 
abuses predicted by the commenter.
    A commenter suggested that the final rule should be revised to 
permit Borrowers, without prior HUD authorization, to rent up to five 
percent of the units to low-income families where very low-income 
families are not available to fill a vacancy. Section 16 of the United 
States Housing Act of 1937 establishes limitations on the admission to 
the Section 8 and public housing programs of low-income families, but 
not very low income. HUD has implemented this national limitation by 
prohibiting the admission of families in this category, unless the 
owner has received prior HUD approval (see Secs. 813.105 and 913.105). 
Section 103 of the Housing and Community Development Act of 1987 and 
section 1001 of the Stewart B. McKinney Homeless Assistance Amendments 
Act of 1988 amended the United States Housing Act of 1937 to state that 
HUD may not totally prohibit admission of lower income families other 
than very low-income families, shall establish an appropriate specific 
percentage of lower income families other than very low- 
[[Page 2660]] income families that may be assisted in each assisted 
housing program, and shall prohibit project owners from selecting 
families for residence in an order different from the order on the 
waiting list for the purpose of selecting relatively higher income 
families for residence. A final rule implementing the 1987 amendment 
was published on September 6, 1988 (53 FR 34412).
    Section 16(b) of the United States Housing Act of 1937 was amended 
by the Cranston-Gonzalez National Affordable Housing Act (CGNAHA) by 
striking 5% and inserting 15% and adding the following new paragraph: 
``Not more than 25 percent of the dwelling units in any project of any 
agency shall be available for occupancy by low-income families other 
than very low-income families. The limitation shall not apply in the 
case of any project in which, before the enactment of the CGNAHA, such 
low-income families occupy more than 25 percent of the dwelling 
units.'' The Department is pursuing rulemaking to implement these 
changes.
    Notice upon HAP contract expiration (Sec. 885.530). Proposed 
Sec. 885.530 implements section 8(c)(8) of the United States Housing 
Act of 1937 which governs the Borrower's notification of tenants upon 
the expiration of the HAP contract. A commenter recommended that the 
final rule also include a requirement that HUD notify the Borrower one 
year before the expiration of the contract term. Section 262 of the 
Housing and Community Development Act of 1987 added a new section 
8(c)(9) to the United States Housing Act of 1937. This new provision 
imposed a requirement on the owner to give one year's notice prior to 
the termination. This new provision was self-implementing and HUD 
issued instructions on this provision to all Section 8 owners 
(including section 202/8 owners) in a memorandum dated July 6, 1988.
    Responsibilities of Borrower (Sec. 885.600). Paragraph (d)(1) of 
Sec. 885.600 (responsibilities of Borrower) provided that financial 
statements must be provided to HUD 60 days after the end of each fiscal 
year of operations. A commenter suggested that Borrowers be given an 
option in the HAP contract (with provisions for adjustment) to 
determine the dates to be used for the fiscal year. The HAP contract 
permits fiscal years ending on March 31, June 30, September 30, or 
December 31. While Borrowers may request a fiscal year ending on any of 
these dates, such requests are subject to approval by HUD.
    Under Sec. 885.600(d)(2), the Borrower must provide such other 
statements regarding project operation, financial condition, and 
occupancy as HUD may require to administer the HAP contract and to 
monitor project operations. A commenter requested HUD to explain or 
provide examples of such ``other statements''. Other statements will 
include: monthly accounting statements; tenant assistance payments 
requests and special claims requests (claims for unpaid rent, tenant 
damages and other charges and claims for vacancy loss); and quarterly 
and annual occupancy reports.
    Proposed paragraph (e) required the maintenance of a project fund 
account. All funds remaining in the project fund account following the 
expiration of the project's fiscal year (i.e., the excess of project 
income over project operating expenses, required principal and interest 
payment and deposits to the replacement reserve) were required to be 
deposited in the replacement reserve account following the expiration 
of the fiscal year. The final rule has been revised to conform to the 
practices currently applied in the section 8 program. These practices 
provide that the remaining funds are deposited in a residual receipts 
account. Amounts in this account may be used to reduce housing 
assistance payments and for other project purposes with the approval of 
HUD. Upon termination of the contract any excess funds must be remitted 
to HUD.
    Replacement reserve (Sec. 885.605). One commenter thought that 
proposed Sec. 885.605, which governs the amount of the replacement 
reserve, required a contribution of .6 percent for the first year and 
.4 percent for the second year of operations. After the first two 
years, the commenter recommended the use of a sliding scale (based on 
the age of the building) to maintain an adequate reserve.
    This commenter has misread the proposed rule. The proposed rule 
provided that the annual amount of the deposit is .6 percent of the 
cost of the total structure (for new construction projects) or .4 
percent of the cost of the initial mortgage (for all other projects). 
This amount would have been required for deposit and adjusted yearly by 
the amount of the annual adjustment factor and may be reduced if HUD 
determines that the reserve has reached a level sufficient to meet 
project requirements (see Sec. 885.605(b) and (c)). To provide 
flexibility, HUD has decided not to specify a percentage of cost amount 
in the final rule, instead HUD will determine the amount whenever 
appropriate.
    Another commenter suggested that HUD permit Borrowers to use the 
replacement reserve for preventive and maintenance efforts, and for 
physical adjustments necessary to accommodate the needs of residents 
aging in place. The proposed change has not been made. The purpose of 
the replacement reserve is to ensure that sufficient funds will be 
available to provide for extraordinary maintenance, and repair and 
replacement of capital items (e.g., replacement of structural elements 
and mechanical equipment in the project.) Operating expenses such as 
day-to-day maintenance requirements and preventive maintenance expenses 
are to be paid from operating revenues. Currently, Borrowers may 
request HUD to approve the use of the replacement reserve for payments 
for some items to accommodate aging residents. If such requests are 
approved, however, HUD requires the Borrower to replenish the reserve.
    Selection and admission of tenants (Sec. 885.610). Proposed 
Sec. 885.610 stated that the Borrower is responsible for deciding 
whether an applicant is eligible for admission to the project. 
Applicants for admission must meet the eligibility requirements 
applicable to them under the section 202/8 program concerning age or 
handicap, and income. The preamble noted that in addition to these 
admission requirements, Borrowers would be permitted to develop and 
implement additional tenant selection criteria.
    A commenter representing a disability group argued that the rule 
would give Borrowers too much discretion in the selection of tenants 
and would require Borrowers to make determinations beyond their areas 
of expertise. The commenter objected to the example cited in the 
preamble that stated that a Borrower could refuse to admit an otherwise 
eligible applicant, if the applicant is unable to live independently in 
the project without support services that he or she needs, but which 
are not available. The commenter predicted that such Borrower 
determinations could be arbitrary and constitute discrimination against 
the handicapped. The commenter suggested that these determinations 
should be left to the tenant-applicant.
    Section 8 allows owners the discretion to establish which of the 
eligible applicants they want to admit as tenants. This allows an owner 
to establish ``suitability'' requirements, such as that tenants be able 
to live independently, and, concomitantly, to make decisions on whether 
a particular applicant meets those criteria. HUD, through this 
regulation, is creating a procedure to appeal an owner's initial 
[[Page 2661]] admission determination, if an applicant thinks it is 
wrong. Therefore, an applicant will have an opportunity to correct an 
owner's suitability decision to the extent it leads to an unlawful 
admission determination (such as one in violation of the civil rights 
laws, including section 504).
    While the owner of section 202 ``elderly'' project may only 
consider applicants ``suitable'' if they can live independently--an 
applicant for a section 202 ``handicapped'' project must ``have an 
impairment which * * * substantially impedes his ability to live 
independently'' and that ``could be improved by more suitable housing 
conditions.'' See section 202(d)(4).
    The example in the preamble to the section 202 rule regarding 
ability to live independently reflected the proposed rule implementing 
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794). The 
proposed section 504 rule defined qualified handicapped person, in 
part, with regard to the person's capacity for independent living. In 
the final section 504 rule published June 2, 1988 (53 FR 20216), HUD 
dropped references to the ability to live independently from the 
definition of qualified individual with handicaps. Instead, the 
definition was revised to focus on the handicapped individual's 
capacity to comply with all obligations of occupancy whether without 
supportive services or with supportive services provided by persons 
other than the recipient. Thus, Borrowers must make a determination 
whether an applicant can fulfill all obligations of occupancy. In a 
project that does not provide supportive services, it is irrelevant 
whether the obligations of tenancy are met by the individual alone or 
with assistance that the individual with handicaps arranges. Further, 
in making eligibility determinations, a presumption in favor of the 
individual's own assessment of his or her capabilities is warranted in 
absence of evidence to the contrary.
    Under the proposed rule, a tenant-applicant may request a review of 
the Borrower's determination of ineligibility. The review would be made 
by a member of the Borrower's staff who did not make the initial 
decision to reject. A commenter noted that many projects would be 
unable to comply with this requirement because their staffs are too 
small. As an alternative, the commenter suggested that HUD permit such 
Borrowers to convene a panel to review determinations.
    The final rule has been revised to permit the Borrower (with prior 
HUD approval) to appoint a panel of individuals to review eligibility 
determinations, if the size of the Borrower's staff will not permit a 
review by a member of the staff that did not make the original 
decision. Under these circumstances, HUD will approve the panel if the 
Borrower demonstrates that the members of the panel are qualified to 
make eligibility determinations (e.g., members of the staff of a 
comparable section 8 project in the area).
    Based on the broad discretion provided to Borrowers in the 
development and implementation of tenant selection procedures, one 
commenter suggested that HUD should provide a review of Borrower's 
selections through the provision of administrative hearings to 
applicants that are rejected for tenancy. HUD is mindful of its duty to 
assure that the policies implemented by Borrowers are enforced in a 
non-arbitrary and non-discriminatory manner. However, rather than 
establishing a burdensome administrative review process, HUD believes 
that its role should be limited to the provision of tenant selection 
guidance by regulations and through other issuances, and to the review 
of the Borrower's tenant selection plan and procedures during the 
management review of the project. HUD has limited authority in this 
area, i.e., to reject an owner's criteria for selecting among 
statutorily eligible applicants only when the criteria the owner uses 
to determine whether applicants would be suitable tenants would violate 
the civil rights laws, such as section 504 of the Rehabilitation Act.

(In addition to the regulatory guidance found in the final rule, HUD 
notes that Occupancy Requirements of Subsidized Multifamily Housing 
Programs (HUD handbook-4350.3 Chg-1, 2-15, 2-16 and 2-17) require 
Borrowers to develop a written tenant selection plan covering such 
matters as procedures for accepting applications and screening tenants, 
fair housing and equal opportunity requirements, preferences and 
priorities required by HUD or established by the Borrower, etc., and 
provide additional administrative guidance on permitted and prohibited 
screening criteria.)
    Federal selection preferences. A final rule revising tenant 
selection preferences including preferences requirements for this 
program was published on July 18, 1994 at 59 FR 36616. Section 885.427 
was revised to incorporate the preference provisions of Secs. 880.613-
880.617.
    Overcrowded and underoccupied units (Sec. 885.620). Proposed 
Sec. 885.620 governs unit transfers where the Borrower has determined 
that an assisted unit is overcrowded or underoccupied. A commenter was 
concerned that the proposed regulations would permit a Borrower to 
force a tenant to change apartments in order to comply with the unit 
size requirements. The commenter argued that this requirement may 
conflict with State and local laws that prohibit a landlord from moving 
an unwilling tenant. The commenter recommended that the final rule 
permit flexibility in complying with HUD requirements.
    The Department is charged with the responsibility for assuring that 
housing assistance payments are used efficiently, including the 
appropriate assignment and reassignment of families to units of a 
proper size. Accordingly, the final rule provides that the Borrower 
will, as promptly as possible, offer the family an appropriate 
alternate unit. Contrary to the commenter's fears, the rule would not 
permit the Borrower to force an unwilling tenant to move. The existing 
HUD procedures permit the tenant to remain in the unit and pay the 
market rent, or move within 30 days of the notification that a unit of 
the required size is available within the project.
    Lease requirements (Sec. 885.625). Under Sec. 885.625, the lease 
must contain all required provisions and none of the prohibited 
provisions specified by HUD. One commenter argued that HUD should 
prepare a new model lease for section 202/8 projects. This commenter 
attached a copy of a proposed lease and encouraged HUD to adopt it in 
the Section 202 handbook. HUD has prepared a new model lease and it is 
available from HUD Field Offices and is contained in the 4350.3 
Handbook Chg. 22, Appendix 19C, dated June 1992.
    Security Deposits (Sec. 885.635). Under proposed Sec. 885.635, the 
Borrower must require each family occupying an assisted unit to pay a 
security deposit in an amount equal to one month's total tenant payment 
or $50, whichever is greater. A commenter argued that the minimum 
security deposit should be increased to $100. The commenter argued that 
this amount represents a reasonable minimum tenant contribution, would 
safeguard the Borrower, and would reduce the cost of unpaid charge 
claims and tenant damage reimbursement requests.
    The $50 limit is the minimum deposit that is currently required 
under the section 202/8 and related section 8 programs. It balances the 
ability of the targeted tenant population (i.e., low and very low 
income persons) to pay a security deposit with the Borrower's need for 
an adequate resource to offset damages caused to the unit. (HUD notes 
that the family's security deposit [[Page 2662]] balance is not the 
only resource available to a Borrower to recover sums owed. Under the 
final rule (Sec. 885.635(c)), if the family's security deposit is 
insufficient to reimburse the Borrower for any unpaid rent, or other 
amount which the family owes under the lease for an assisted unit, the 
Borrower may claim reimbursement from HUD in an amount not to exceed 
the lesser of the amount owed to the Borrower or one month's contract 
rent, minus the amount of the family's security deposit.) The $50 
minimum has been retained in the final rule.
    Adjustment of Rents (Sec. 885.640). Section 885.640 governs the 
adjustment of contract rents. Adjustments are made by one of two 
methods. Generally, HAP contracts that were entered into prior to 1981 
provide for adjustments using an automatic annual adjustment factor and 
special additional adjustments. Contracts executed or amended after 
1981 provided for adjustment based on a HUD-approved budget.
    One commenter encouraged HUD to allow, within the rent adjustment, 
an annual adjustment for utility costs based on the projected costs 
established by utility companies, rather than the past years' actual 
expenditures. Contrary to the commenter's assumption, rent adjustments 
based on the HUD-approved budget may not necessarily be performed as 
frequently as annually. However, when such adjustments are performed 
HUD does consider the actual utility rates that are in effect and 
approved utility rate increases that will be implemented during the 
year. HUD does not believe it is necessary to revise the rule to 
accommodate the commenter's suggestion.
    Where the HAP contract provides that rent adjustments will be based 
on the application of an annual adjustment factor the procedures are 
different. The Department considers the average annual cost of 
utilities for the prior year in determining the section 8 annual 
adjustment factor. If the annual adjustment factor is insufficient to 
cover the cost of an approved increase, the Borrower may request HUD to 
approve a special adjustment under Sec. 885.640(a)(2)(ii).

Other Matters

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR Part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969, 42 U.S.C. 4332. The Finding of No Significant Impact is 
available for public inspection during regular business hours in the 
Office of the General Counsel, Rules Docket Clerk, Room 10276, 451 
Seventh Street, S.W., Washington, D.C. 20410-0500.
    Under 5 U.S.C. 605(b) (the Regulatory Flexibility Act), the 
Undersigned certifies that this rule does not have a significant 
economic impact on a substantial number of small entities. The contract 
and management provisions incorporated in this rulemaking generally 
reflect existing HUD policies already guiding operators of section 202/
8 projects. This proceeding does not change the goals toward which 
program activities are directed. The rule's effect both on small and 
large entities should be minor.
    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order No. 12611--Federalism, has determined that the final 
rule does not involve the preemption of State law by Federal statute or 
regulation and does not have Federalism implications. The rule reflects 
existing HUD policies guiding non-profit organizations operating 
section 202/8 projects. The rule, to the maximum extent possible, 
defers to State and local policies (see e.g., Secs. 885.635(b)(1), (3) 
and (5)).
    This rule was listed as sequence number 1805 in the Department's 
Semiannual Agenda of Regulations published November 14, 1994 (59 FR 
57632, 57657) under Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects

24 CFR Part 813

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

24 CFR Part 885

    Aged, Individuals with disabilities, Loan programs--housing and 
community development, Low and moderate income housing, Reporting and 
recordkeeping requirements.

    Accordingly, in title 24 of the Code of Federal Regulations, parts 
813 and 885, are amended as follows:

PART 813--DEFINITION OF INCOME, INCOME LIMITS, RENT AND 
REEXAMINATION OF FAMILY INCOME FOR THE SECTION 8 HOUSING ASSISTANCE 
PAYMENTS PROGRAMS AND RELATED PROGRAMS

    1. The authority citation for 24 CFR part 813 continues to read as 
follows:

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

    2. In Sec. 813.109, the section heading and paragraph (a), is 
revised to read as follows:


Sec. 813.109  Initial determination, verification, and reexamination of 
Family income and composition.

    (a) Responsibility for initial determination and reexamination. The 
Owner or PHA shall be responsible for determination of eligibility for 
admission, for determination of Annual Income, Adjusted Income and 
Total Tenant Payment, and for reexamination of Family income and 
composition at least annually, as provided in pertinent program 
regulations and handbooks (see, e.g., 24 CFR part 880, subpart F; 24 
CFR part 881, subpart F; 24 CFR part 882, subparts B and E; 24 CFR part 
883, subpart G; 24 CFR part 884, subpart B; 24 CFR part 885, subparts B 
and C; 24 CFR part 886, subparts A and C; 24 CFR part 887, subpart H; 
and 24 CFR parts 889 and 890.). As used in this part, the ``effective 
date'' of an examination or reexamination refers to:
    (1) In the case of an examination for admission, the effective date 
of initial occupancy; and
    (2) In the case of a reexamination of an existing tenant, the 
effective date of the redetermined housing assistance payment with 
respect to the Housing Voucher program (part 887 of this chapter) and 
the effective date of the redetermined Total Tenant Payment in all 
other cases.
* * * * *

PART 885--LOANS FOR HOUSING FOR THE ELDERLY OR HANDICAPPED

    3. The authority citation for 24 CFR part 885 continues to read as 
follows:

    Authority: 12 U.S.C. 1701q; 42 U.S.C. 1437f and 3535(d).
    4. In Sec. 885.5, the definition of ``Section 8 Program'', is 
revised to read as follows:


Sec. 885.5  Definitions.

* * * * *
    Section 8 Program means the housing assistance payments program 
which implements section 8 of the United States Housing Act of 1937 (42 
U.S.C. 1437f note).
* * * * *
    5. In subpart B, Sec. 885.200 is redesignated as Sec. 885.203, and 
a new Sec. 885.200 is added, to read as follows:


Sec. 885.200  Definitions applicable to Subpart B.

    As used in this subpart B:
    Agreement to enter into housing assistance payments contract means 
the agreement between the Borrower and [[Page 2663]] HUD which provides 
that, upon satisfactory completion of the project in accordance with 
the HUD-approved final proposal, HUD will enter into the HAP contract 
with the Borrower.
    Annual income is defined in part 813 of this chapter.
    Assisted unit means a dwelling unit eligible for assistance under a 
HAP contract.
    Contract rent means the total amount of rent specified in the HAP 
contract as payable by HUD and the tenant to the Borrower for an 
assisted unit.
    Family (eligible family) means an elderly or handicapped family (as 
defined in this section) that meets the project occupancy requirements 
approved by HUD and, if the family occupies an assisted unit, meets the 
requirements described in part 813 of this chapter.
    Gross rent is defined in part 813 of this chapter.
    HAP contract (housing assistance payments contract) means the 
contract entered into by the Borrower and HUD setting forth the rights 
and duties of the parties with respect to the project and the payments 
under the HAP contract.
    Housing assistance payment means the payment made by HUD to the 
Borrower for assisted units as provided in the HAP contract. The 
payment is the difference between the contract rent and the tenant 
rent. An additional payment is made to a family occupying an assisted 
unit when the utility allowance is greater than the total tenant 
payment. A housing assistance payment, known as a ``vacancy payment'', 
may be made to the Borrower when an assisted unit is vacant, in 
accordance with the terms of the HAP contract.
    Project account means a specifically identified and segregated 
account for each project which is established in accordance with 
Sec. 885.510(b) out of the amounts by which the maximum annual 
commitment exceeds the amount actually paid out under the HAP contract 
each year.
    Project occupancy requirements means eligible populations to be 
served under the Section 202 program are qualified individuals or 
families whose head of household or spouse is elderly, physically 
handicapped, developmentally disabled or chronically mentally ill. 
Projects are designed to meet the special needs of the particular 
tenant population which the Borrower was selected to serve. Individuals 
from one eligible group may not be accepted for occupancy in a project 
designed for a different tenant group. However, a Sponsor can propose 
to house eligible tenant groups other than the one it was selected to 
serve, but must apply to the HUD Field Office for permission to do so, 
based on a plan which demonstrates that it can adequately serve the 
proposed tenant group. Upon review and recommendation by the Field 
Office, HUD Headquarters will approve or disapprove the request.
    Rent, in the case of a unit in a cooperative project, means the 
carrying charges payable to the cooperative with respect to occupancy 
of the unit.
    Tenant rent means the monthly amount defined in, and determined in 
accordance with part 813 of this chapter.
    Total tenant payment means the monthly amount defined in, and 
determined in accordance with part 813 of this chapter.
    Utility allowance is defined in part 813 of this chapter and is 
determined or approved by HUD.
    Utility reimbursement is defined in part 813 of this chapter.
    Vacancy payment means the housing assistance payment made to the 
Borrower by HUD for a vacant assisted unit if certain conditions are 
fulfilled, as provided in the HAP contract. The amount of the vacancy 
payment varies with the length of the vacancy period and is less after 
the first 60 days of any vacancy.
    6. In Sec. 885.210, paragraph (b)(5) is revised, to read as 
follows:


Sec. 885.210  Contents of applications.

* * * * *
    (b) * * *
    (5) A narrative description of the anticipated occupancy of the 
project. The Borrower must propose project occupancy requirements that 
limit occupancy to the elderly and/or handicapped.
* * * * *
    7. In Sec. 885.425, the section heading is revised; paragraph (b) 
is removed; paragraphs (c), (d), (e) and (f) are redesignated as 
paragraphs (b), (c), (d) and (e), respectively; to read as follows:


Sec. 885.425  Completion of project, cost certification and HUD 
approvals.

* * * * *
    8. Sections 885.500 through 885.655 are added to subpart B, to read 
as follows:


Sec. 885.500  HAP contract.

    (a) HAP contract. The housing assistance payments contract sets 
forth rights and duties of the Borrower and HUD with respect to the 
project and the housing assistance payments.
    (b) HAP contract execution. (1) Upon satisfactory completion of the 
project, the Borrower and HUD shall execute the HAP contract on the 
form prescribed by HUD.
    (2) The effective date of the HAP contract may be earlier than the 
date of execution, but no earlier than the date of HUD's issuance of 
the permission to occupy.
    (3) If the project is completed in stages, the procedures of 
paragraph (b) of this section shall apply to each stage.
    (c) Housing assistance payments to owners under the HAP contract. 
The housing assistance payments made under the HAP contract are:
    (1) Payments to the Borrower to assist eligible families leasing 
assisted units. The amount of the housing assistance payment made to 
the Borrower for an assisted unit leased to an eligible family is equal 
to the difference between the contract rent for the unit and the tenant 
rent payable by the family.
    (2) Payments to the Borrower for vacant assisted units (``vacancy 
payments''). The amount of and conditions for vacancy payments are 
described in Sec. 885.650. The housing assistance payments are made 
monthly by HUD upon proper requisition by the Borrower, except payments 
for vacancies of more than 60 days, which are made semiannually by HUD 
upon requisition by the Borrower.
    (d) Payment of utility reimbursement. Where applicable, a utility 
reimbursement will be paid to a family occupying an assisted unit as an 
additional housing assistance payment. The HAP contract will provide 
that the Borrower will make this payment on behalf of HUD. Funds will 
be paid to the Borrower in trust solely for the purpose of making the 
additional payment. The Borrower may pay the utility reimbursement 
jointly to the family and the utility company, or, if the family and 
utility company consent, directly to the utility company.


Sec. 885.505  Term of HAP contract.

    The term of the HAP contract for assisted units shall be 20 years. 
If the project is completed in stages, the term of the HAP contract for 
assisted units in each stage shall be 20 years. The term of the HAP 
contract for all assisted units in all stages of a project shall not 
exceed 22 years.


Sec. 885.510  Maximum annual commitment and project account.

    (a) Maximum annual commitment. The maximum annual amount that may 
be committed under the HAP contract is the total of the contract rents 
and utility allowances for all assisted units in the project.
    (b) Project account. (1) HUD will establish and maintain a 
specifically identified and segregated project account for each 
project. The project [[Page 2664]] account will be established out of 
the amounts by which the maximum annual commitment exceeds the amount 
actually paid out under the HAP contract each year. HUD will make 
payments from this account for housing assistance payments as needed to 
cover increases in contract rents or decreases in tenant income and 
other payments for costs specifically approved by the Secretary.
    (2) If the HUD-approved estimate of required annual payments under 
the HAP contract for a fiscal year exceeds the maximum annual 
commitment for that fiscal year plus the current balance in the project 
account, HUD will, within a reasonable time, take such steps authorized 
by section 8(c)(6) of the United States Housing Act of 1937 (42 U.S.C. 
1437f note), as may be necessary, to assure that payments under the HAP 
contract will be adequate to cover increases in contract rents and 
decreases in tenant income.


Sec. 885.515  Leasing to eligible families.

    (a) Availability of assisted units for occupancy by eligible 
families. (1) During the term of the HAP contract, a Borrower shall 
make available for occupancy by eligible families the total number of 
units for which assistance is committed under the HAP contract. For 
purposes of this section, making units available for occupancy by 
eligible families means that the Borrower:
    (i) Is conducting marketing in accordance with Sec. 885.600(a);
    (ii) Has leased or is making good faith efforts to lease the units 
to eligible and otherwise acceptable families, including taking all 
feasible actions to fill vacancies by renting to such families;
    (iii) Has not rejected any such applicant family except for reasons 
acceptable to HUD.
    (2) If the Borrower is temporarily unable to lease all units for 
which assistance is committed under the HAP contract to eligible 
families, one or more units may, with the prior approval of HUD, be 
leased to otherwise eligible families that do not meet the income 
eligibility requirements of part 813. Failure on the part of the 
Borrower to comply with these requirements is a violation of the HAP 
contract and grounds for all available legal remedies, including an 
action for specific performance of the HAP contract, suspension or 
debarment from HUD programs, and reduction of the number of units under 
the HAP contract as set forth in paragraph (b) of this section.
    (b) Reduction of number of units covered by the HAP contract. HUD 
may reduce the number of units covered by the HAP contract to the 
number of units available for occupancy by eligible families if:
    (1) The Borrower fails to comply with the requirements of paragraph 
(a) of this section; or
    (2) Notwithstanding any prior approval by HUD, HUD determines that 
the inability to lease units to eligible families is not a temporary 
problem.
    (c) Restoration. HUD will agree to an amendment of the HAP contract 
to provide for subsequent restoration of any reduction made under 
paragraph (b) of this section if:
    (1) HUD determines that the restoration is justified by demand;
    (2) The Borrower otherwise has a record of compliance with the 
Borrower's obligations under the HAP contract; and
    (3) Contract and budget authority is available.
    (d) Applicability. In accordance with section 555 of the Cranston-
Gonzalez National Affordable Housing Act of 1990, paragraphs (a) and 
(b) of this section apply to all contracts. An owner who had leased an 
assisted unit to an ineligible family consistent with the regulations 
in effect at the time will continue to lease the unit to that family. 
However, the owner must make the unit available for occupancy by an 
eligible family when the ineligible family vacates the unit.
    (e) Occupancy by families that are not elderly or handicapped. HUD 
may permit units in the project to be leased to other than elderly or 
handicapped families if:
    (1) The Borrower has made reasonable efforts to lease assisted and 
unassisted units to eligible families;
    (2) The Borrower has been granted HUD approval under paragraph (a) 
of this section; and
    (3) The Borrower is temporarily unable to achieve or maintain a 
level of occupancy sufficient to prevent financial default and 
foreclosure under the section 202 loan documents. HUD approval under 
paragraph (e)(3) of this section will be of limited duration. HUD may 
impose terms and conditions to this approval that are consistent with 
program objectives and necessary to protect its interest in the section 
202 loan.


Sec. 885.520  HAP contract administration.

    HUD is responsible for the administration of the HAP Contract.


Sec. 885.525  Default by Borrower.

    (a) HAP contract provisions. The HAP contract will provide:
    (1) That if HUD determines that the Borrower is in default under 
the HAP contract, HUD will notify the Borrower of the actions required 
to be taken to cure the default and of the remedies to be applied by 
HUD including an action for specific performance under the HAP 
contract, reduction or suspension of housing assistance payments and 
recovery of overpayments, where appropriate; and
    (2) That if the Borrower fails to cure the default, HUD has the 
right to terminate the HAP contract or to take other corrective action.
    (b) Loan provisions. Additional provisions governing default under 
the section 202 loan are included in the regulatory agreement and other 
loan documents described in Sec. 885.415.


Sec. 885.530  Notice upon HAP contract expiration.

    (a) Notice required. The HAP contract will provide that the 
Borrower will, at least one year before the end of the HAP contract 
term, notify each family leasing an assisted unit of any increase in 
the amount the family will be required to pay as rent as a result of 
the expiration.
    (b) Service requirements. The notice under paragraph (a) of this 
section shall be accomplished by sending a letter by first class mail, 
properly stamped and addressed, to the family at its address at the 
project, with a proper return address; and serving a copy of the notice 
on any adult person answering the door at the leased dwelling unit, or 
if no adult responds, by placing the notice under or through the door, 
if possible, or else by affixing the notice to the door. Service shall 
not be considered to be effective until both required notices have been 
accomplished. The date on which the notice shall be considered to be 
received by the family shall be the date on which the Borrower mails 
the first class letter provided for in paragraph (b) of this section, 
or the date on which the notice provided for in paragraph (b) of this 
section is properly given, whichever is later.
    (c) Contents of notice. The notice shall advise each affected 
family that, after the expiration date of the HAP contract, the family 
will be required to bear the entire cost of the rent and that the 
Borrower may, subject to requirements and restrictions contained in the 
regulatory agreement, the lease, and State or local law, change the 
rent. The notice also shall state:
    (1) The actual (if known) or the estimated rent that will be 
charged following the expiration of the HAP contract;
    (2) The difference between the new rent and the total tenant 
payment toward rent under the HAP contract; and [[Page 2665]] 
    (3) The date the HAP contract will expire.
    (d) Certification to HUD. The Borrower shall give HUD a 
certification that families have been notified in accordance with this 
section and shall attach to the certification an example of the text of 
the notice.
    (e) Applicability. This section applies to all HAP contracts 
entered into under an agreement to enter into a housing assistance 
payments contract executed on or after October 1, 1981, or entered into 
under such an agreement executed before October 1, 1981 but renewed or 
amended after February 9, 1995.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.535  HAP contract extension or renewal.

    Upon expiration of the term of the HAP contract, HUD and the 
Borrower may agree (subject to available funds) to extend the term of 
the HAP contract or to renew the HAP contract. The number of assisted 
units under the extended or renewed HAP contract shall equal the number 
of assisted units under the original HAP contract, except that--
    (a) HUD and the Borrower may agree to reduce the number of assisted 
units by the number of assisted units that are not occupied by eligible 
families at the time of the extension or renewal; and
    (b) HUD and the Borrower may agree to permit reductions in the 
number of assisted units during the term of the extended or renewed HAP 
contract as assisted units are vacated by eligible families. Nothing in 
this section shall prohibit HUD from reducing the number of units 
covered under the extended or renewed HAP contract in accordance with 
Sec. 885.515(b).


Sec. 885.600  Responsibilities of Borrower.

    (a) Marketing. (1) The Borrower must commence and continue diligent 
marketing activities not later than 90 days before the anticipated date 
of availability for occupancy of the first unit of the project. Market 
activities shall include the provision of notices of availability of 
housing under the program to operators of temporary housing for the 
homeless in the same housing market.
    (2) Marketing must be done in accordance with the HUD-approved 
affirmative fair housing marketing plan and all Federal, State or local 
fair housing and equal opportunity requirements. The purpose of the 
plan and requirements is to achieve a condition in which eligible 
families of similar income levels in the same housing market have a 
like range of housing choices available to them regardless of 
discriminatory considerations, such as their race, color, creed, 
religion, familial status, disability, sex or national origin. 
Marketing must also be done in accordance with the communication and 
notice requirements of Section 504 at 24 CFR 8.6 and 24 CFR 8.54, i.e., 
TDD requirements for all housing providers and methods to reach those 
with speech, visual and hearing impairments.
    (3) At the time of HAP contract execution, the Borrower must submit 
to HUD a list of leased and unleased assisted units, with a 
justification for the unleased units, in order to qualify for vacancy 
payments for the unleased units.
    (b) Management and maintenance. The Borrower is responsible for all 
management functions. These functions include selection and admission 
of tenants, required reexaminations of incomes for families occupying 
assisted units, collection of rents, termination of tenancy and 
eviction, and all repair and maintenance functions (including ordinary 
and extraordinary maintenance and replacement of capital items). All 
functions must be performed in compliance with equal opportunity 
requirements.
    (c) Contracting for services. (1) With HUD approval, the Borrower 
may contract with a private or public entity for performance of the 
services or duties required in paragraphs (a) and (b) of this section. 
However, such an arrangement does not relieve the Borrower of 
responsibility for these services and duties. All such contracts are 
subject to the restrictions governing prohibited contractual 
relationships described in Sec. 885.5. (These prohibitions do not 
extend to management contracts entered into by the Borrower with the 
sponsor or its non-profit affiliate).
    (2) Consistent with the objectives of Executive Order 11625 (3 CFR, 
1971-1975 Comp., p. 616, unless otherwise noted), Executive Order 12432 
(3 CFR, 1983 Comp., p. 198, unless otherwise noted), and Executive 
Order 12138 (3 CFR, 1979 Comp., p. 393, unless otherwise noted), the 
Borrower will promote awareness and participation of minority and 
women's business enterprises in contracting and procurement activities.
    (d) Submission of financial and operating statements. The Borrower 
must submit to HUD:
    (1) Within 60 days after the end of each fiscal year of project 
operations, financial statements for the project audited by an 
independent public accountant and in the form required by HUD; and
    (2) Other statements regarding project operation, financial 
conditions and occupancy as HUD may require to administer the HAP 
contract and to monitor project operations.
    (e) Use of project funds. The Borrower shall maintain a separate 
project fund account in a depository or depositories which are members 
of the Federal Deposit Insurance Corporation or National Credit Union 
Share Insurance Fund and shall deposit all rents, charges, income and 
revenues arising from project operation or ownership to this account. 
All project funds are to be deposited in Federally-insured accounts. 
All balances shall be fully insured at all times, to the maximum extent 
possible. Project funds must be used for the operation of the project 
(including required insurance coverage), to make required principal and 
interest payments on the section 202 loan, and to make required 
deposits to the replacement reserve under Sec. 885.605, in accordance 
with a HUD-approved budget. Any project funds in the project funds 
account (including earned interest) following the expiration of the 
fiscal year shall be deposited in a Federally-insured residual receipts 
account within 60 days following the end of the fiscal year. 
Withdrawals from this account may be made only for project purposes and 
with the approval of HUD. If there are funds remaining in the residual 
receipts account when the mortgage is satisfied, such funds shall be 
returned to HUD.
    (f) Reports. The Borrower shall submit such reports as HUD may 
prescribe to demonstrate compliance with applicable civil rights and 
equal opportunity requirements.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.605  Replacement reserve.

    (a) Establishment of reserve. The Borrower shall establish and 
maintain a replacement reserve to aid in funding extraordinary 
maintenance, and repair and replacement of capital items.
    (b) Deposits to reserve. The Borrower shall make monthly deposits 
to the replacement reserve in an amount determined by HUD.
    (c) Level of reserve. The reserve must be built up to and 
maintained at a level determined by HUD to be sufficient to meet 
projected requirements. Should the reserve reach that level, the amount 
of the deposit to the reserve may be reduced with the approval of HUD.
    (d) Administration of reserve. Replacement reserve funds must be 
deposited with HUD or in a Federally-insured depository in an interest-
bearing account (s) whose balances are [[Page 2666]] fully insured at 
all times. All earnings including interest on the reserve must be added 
to the reserve. Funds may be drawn from the reserve and used only in 
accordance with HUD guidelines and with the approval of, or as directed 
by, HUD.


Sec. 885.610  Selection and admission of tenants.

    (a) Written tenant selection procedures. The Owner shall adopt 
written tenant selection procedures which ensure nondiscrimination in 
the selection of tenants and that are consistent with the purpose of 
improving housing opportunities for very low-income elderly or 
handicapped persons; and reasonably related to program eligibility and 
an applicant's ability to perform the obligations of the lease. The 
Owner must comply with the following nondiscrimination authorities: 
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794) and the 
implementing regulations at 24 CFR part 8; the Fair Housing Act (42 
U.S.C. 3600-3619) and the implementing regulations at 24 CFR parts 100, 
108, 109, and 110; Title VI of the Civil Rights Act of 1964 (42 U.S.C. 
2000d) and the implementing regulations at 24 CFR part 1; section 3 of 
the Housing and Urban Development Act of 1968 (12 U.S.C. 1701u) and the 
implementing regulations at 24 CFR part 135; the Age Discrimination Act 
of 1975 (42 U.S.C. 6101-6107) and the implementing regulations at 24 
CFR part 146; Executive Order 11246 (as amended), 3 CFR, 1964-1965 
Comp., p. 339, and the implementing regulations at 41 CFR Chapter 60; 
Executive Order 11063 (Equal Opportunity in Housing), 3 CFR, 1959-1963 
Comp., p. 652 and the implementing regulations at 24 CFR part 107; the 
Americans with Disabilities Act (42 U.S.C. 12101 et seq.) to the extent 
applicable; and other applicable Federal, State and local laws 
prohibiting discrimination and promoting equal opportunity. While local 
residency requirements are prohibited, local residency preferences may 
be applied in selecting tenants only to the extent that they are not 
inconsistent with affirmative fair housing marketing objectives and the 
Owner's HUD-approved affirmative fair housing marketing plan. 
Preferences may not be based on the length of time the applicant has 
resided in the jurisdiction. With respect to any residency preference, 
persons expected to reside in the community as a result of current or 
planned employment will be treated as residents. Owners shall promptly 
notify in writing any rejected applicant of the grounds for any 
rejection. Additionally, owners shall maintain a written, chronological 
waiting list showing the name, race, gender, ethnicity and date of each 
person applying for the program.
    (b) Application for admission. The Borrower must accept 
applications for admission to the project in the form prescribed by HUD 
and is obligated to confirm all information provided by the applicant 
families on the application. Applicant families must be requested to 
complete a release of information consent for verification of 
information. Applicants applying for assisted units must complete a 
certification of eligibility as part of the application for admission. 
Applicant families must meet the disclosure and verification 
requirements for Social Security Numbers, as provided by 24 CFR part 
750. Applicant families must sign and submit consent forms for the 
obtaining of wage and claim information from State Wage Information 
Collection Agencies, as provided by 24 CFR part 760. Both the Borrower 
and the applicant must complete and sign the application for admission. 
On request, the Borrower must furnish copies of all applications for 
admission to HUD.
    (c) Determination of eligibility and selection of tenants. The 
Borrower is responsible for determining whether applicants are eligible 
for admission and for the selection of families. To be eligible for 
admission, an applicant must be an elderly or handicapped family as 
defined in Sec. 885.5, must meet any project occupancy requirements 
approved by HUD under Sec. 885.225(a)(1), must meet the disclosure and 
verification requirements for Social Security Numbers, as provided by 
24 CFR part 750), must sign and submit consent forms for obtaining of 
wage and claim information from State Wage Information Collection 
Agencies, as provided by 24 CFR part 760, and must, if applying for an 
assisted unit, be eligible for admission under part 813 of this 
chapter.
    (d) Unit assignment. If the Borrower determines that the family is 
eligible and is otherwise acceptable and units are available, the 
Borrower will assign the family a unit. The Borrower will assign the 
family a unit of the appropriate size in accordance with HUD's general 
occupancy guidelines. If no suitable unit is available, the Borrower 
will place the family on a waiting list for the project and notify the 
family of when a suitable unit may become available. If the waiting 
list is so long that the applicant would not be likely to be admitted 
for the next 12 months, the Borrower may advise the applicant that no 
additional applications for admission are being considered for that 
reason, except that the Borrower may not refuse to place an applicant 
on the waiting list if the applicant is otherwise eligible for 
assistance and claims that he or she qualifies for a Federal preference 
as provided in Sec. 885.427.
    (e) Ineligibility determination. If the Borrower determines that an 
applicant is ineligible for admission or the Borrower is not selecting 
the applicant for other reasons, the Borrower will promptly notify the 
applicant in writing of the determination, the reasons for the 
determination, and that the applicant has a right to request a meeting 
with the Borrower or managing agent to review the rejection, in 
accordance with HUD requirements. The review, if requested, may not be 
conducted by a member of the Borrower's staff who made the initial 
decision to reject the applicant. The applicant may also exercise other 
rights (e.g., rights granted under Federal, State or local civil rights 
laws) if the applicant believes he or she is being discriminated 
against on a prohibited basis. The informal review provisions for the 
denial of a Federal preference are provided at Sec. 880.613(h) of this 
chapter.
    (f) Records. Records on applicants and approved eligible families, 
which provide racial, ethnic, gender, handicap status, and place of 
previous residency data required by HUD, must be retained for three 
years.
    (g) Reexamination of family income and composition--(1) Regular 
reexaminations. The Borrower must reexamine the income and composition 
of the family at least every 12 months. Upon verification of the 
information, the Borrower shall make appropriate adjustments in the 
total tenant payment in accordance with part 813 of this chapter and 
determine whether the family's unit size is still appropriate. The 
Borrower must adjust tenant rent and the housing assistance payment and 
must carry out any unit transfer in accordance with the administrative 
instructions issued by HUD. At the time of reexamination under 
paragraph (g)(1) of this section, the Borrower must require the family 
to meet the disclosure and verification requirements for Social 
Security Numbers, as provided by 24 CFR part 750. For requirements 
regarding the signing and submitting of consent forms by families for 
obtaining of wage and claim information from State Wage Information 
Collection Agencies, see 24 CFR part 760.
    (2) Interim reexaminations. The family must comply with the 
provisions in its lease regarding interim reporting of changes in 
income. If the Borrower receives information concerning a 
[[Page 2667]] change in the family's income or other circumstances 
between regularly scheduled reexaminations, the Borrower must consult 
with the family and make any adjustments determined to be appropriate. 
See 24 CFR 750.10(d)(2)(i) for the requirements for the disclosure and 
verification of Social Security Numbers at interim reexaminations 
involving new family members. For requirements regarding the signing 
and submitting of consent forms by families for the obtaining of wage 
and claim information from State wage information collection agencies, 
see 24 CFR part 760. Any change in the family's income or other 
circumstances that results in an adjustment in the total tenant 
payment, tenant rent and housing assistance payment must be verified.
    (3) Continuation of housing assistance payments. (i) A family shall 
remain eligible for housing assistance payments until the total tenant 
payment equals or exceeds the gross rent. The termination of subsidy 
eligibility will not affect the family's other rights under its lease. 
Housing assistance payments may be resumed if, as a result of changes 
in income, rent or other relevant circumstances during the term of the 
HAP contract, the family meets the income eligibility requirements of 
part 813 of this chapter and housing assistance is available for the 
unit under the terms of the HAP contract. The family will not be 
required to establish its eligibility for admission to the project 
under the remaining requirements of paragraph (c) of this section.
    (ii) A family's eligibility for housing assistance payments may be 
terminated in accordance with HUD requirements for such reasons as 
failure to submit requested verification information, including 
information related to disclosure and verification of Social Security 
Numbers (as provided by 24 CFR part 750) or failure to sign and submit 
consent forms for the obtaining of wage and claim information from 
State wage information collection agencies (as provided by 24 CFR part 
760).

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.615  Obligations of the family.

    (a) Requirements. The family shall:
    (1) Pay amounts due under the lease directly to the Borrower.
    (2) Supply such certification, release of information, consent, 
complete forms or documentation as the Borrower or HUD determines 
necessary, including information and documentation relating to the 
disclosure and verification of Social Security Numbers, as provided by 
24 CFR part 750, and the signing and submission of consent forms for 
the obtaining of wage and claim information from State Wage Information 
Collection Agencies, as provided by 24 CFR part 760;
    (3) Allow the Borrower to inspect the dwelling unit at reasonable 
times and after reasonable notice;
    (4) Notify the Borrower before vacating the dwelling unit; and
    (5) Use the dwelling unit solely for residence by the family, and 
as the family's principal place of residence.
    (b) Prohibitions. The family shall not:
    (1) Assign the lease or transfer the unit; or
    (2) Occupy, or receive assistance for the occupancy of, a unit 
governed under this part while occupying, or receiving assistance for 
occupancy of, another unit assisted under any Federal housing 
assistance program, including any section 8 program.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.620  Overcrowded and underoccupied units.

    If the Borrower determines that because of change in family size, a 
unit is smaller than appropriate for the eligible family to which it is 
leased, or that the unit is larger than appropriate, housing assistance 
payments with respect to the unit will not be reduced or terminated 
until the eligible family has been relocated to an appropriate 
alternate unit. If possible, the Borrower will, as promptly as 
possible, offer the family an appropriate alternate unit. The Borrower 
may receive vacancy payments for the vacated unit if the Borrower 
complies with the requirements of Sec. 885.650.


Sec. 885.625  Lease requirements.

    (a) Term of lease. The term of the lease may not be less than one 
year. Unless the lease has been terminated by appropriate action, upon 
expiration of the lease term, the family and Borrower may execute a new 
lease for a term not less than one year, or may take no action. If no 
action is taken, the lease will automatically be renewed for successive 
terms of one month.
    (b) Termination by the family. All leases may contain a provision 
that permits the family to terminate the lease upon 30 days advance 
notice. A lease for a term that exceeds one year must contain such 
provision.
    (c) Form. The Borrower shall use the lease form prescribed by HUD. 
In addition to required provisions in the lease form, the Borrower may 
include a provision in the lease permitting the Borrower to enter the 
leased premises, at any time, without advance notice where there is 
reasonable cause to believe that an emergency exists or that health or 
safety of a family member is endangered.


Sec. 885.630  Termination of tenancy and modification of lease.

    The provisions of part 247 of this title apply to all decisions by 
a Borrower to terminate the tenancy or modify the lease of a family 
residing in a unit.


Sec. 885.635  Security deposits.

    (a) Collection of security deposit. At the time of the initial 
execution of the lease, the Borrower:
    (1) Will require each family occupying a unit to pay a security 
deposit in an amount equal to one month's total tenant payment or $50, 
whichever is greater; and
    (2) May require each family occupying an unassisted unit to pay a 
security deposit equal to one month's rent payable by the family. The 
family is expected to pay the security deposit from its own resources 
and other available public or private resources. The Borrower may 
collect the security deposit on an installment basis.
    (b) Security deposit provisions applicable to assisted and 
unassisted units.--(1) Administration of security deposit. The Borrower 
must place the security deposits in a segregated interest-bearing 
account. The Borrower shall maintain a record of the amount in this 
account that is attributable to each family in residence in the 
project. Annually for all families, and when computing the amount 
available for disbursement under paragraph (b)(3) of this section, the 
Borrower shall allocate to the family's balance, the interest accrued 
on the balance during the year. Unless prohibited by State or local 
law, the Borrower may deduct for the family, from the accrued interest 
for the year, the administrative cost of computing the allocation to 
the family's balance. The amount of the administrative cost adjustment 
shall not exceed the accrued interest allocated to the family's balance 
for the year. The amount of the segregated, interest-bearing account 
maintained by the Borrower must at all times equal the total amount 
collected from the families then in occupancy plus any accrued interest 
and less allowable administrative cost adjustments. The Borrower must 
comply with any applicable State and local laws concerning interest 
payments on security deposits.
    (2) Family notification requirement. In order to be considered for 
the refund of the security deposit, a family must [[Page 2668]] provide 
the Borrower with a forwarding address or arrange to pick up the 
refund.
    (3) Use of security deposit. The Borrower, subject to State and 
local law and the requirements of paragraph (b)(3) of this section, may 
use the family's security deposit balance as reimbursement for any 
unpaid family contribution or other amount which the family owes under 
the lease. Within 30 days (or shorter time if required by State or 
local law) after receiving notification under paragraph (b)(2) of this 
section the Borrower must:
    (i) Refund to a family which does not owe any amount under the 
lease the full amount of the family's security deposit balance;
    (ii) Provide to a family owing under the lease a list itemizing 
each amount, along with a statement of the family's rights under State 
and local law. If the amount which the Borrower claims is owed by the 
family is less than the amount of the family's security deposit 
balance, the Borrower must refund the excess balance to the family. If 
the Borrower fails to provide the list, the family will be entitled to 
the refund of the full amount of the family's security deposit balance.
    (4) Disagreements. If a disagreement arises concerning 
reimbursement of the security deposit, the family will have the right 
to present objections to the Borrower in an informal meeting. The 
Borrower must keep a record of any disagreements and meetings in a 
tenant file for inspection by HUD. The procedures of paragraph (b)(4) 
of this section do not preclude the family from exercising its rights 
under State or local law.
    (5) Decedent's interest in security deposit. Upon the death of a 
member of a family, the decedent's interest, if any, in the security 
deposit will be governed by State or local law.
    (c) Reimbursement by HUD for assisted units. If the family's 
security deposit balance is insufficient to reimburse the Borrower for 
any unpaid amount which the family owes under the lease for an assisted 
unit and the Borrower has provided the family with the list required by 
paragraph (b)(3)(ii) of this section, the Borrower may claim 
reimbursement from HUD for an amount not to exceed the lesser of:
    (1) The amount owed the Borrower; or
    (2) One month's contract rent, minus the amount of the family's 
security deposit balance. Any reimbursement under this section will be 
applied first toward any unpaid tenant rent due under the lease. No 
reimbursement may be claimed for unpaid rent for the period after 
termination of the tenancy. The Borrower may be eligible for vacancy 
payments following a vacancy in accordance with the requirements of 
Sec. 885.650.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.640  Adjustment of rents.

    (a) Contract rents.--(1) Adjustment based on approved budget. If 
the HAP contract provides, or has been amended to provide, that 
contract rents will be adjusted based upon a HUD-approved budget, HUD 
will calculate contract rent adjustments based on the sum of the 
project's operating costs and debt service (as calculated by HUD), with 
adjustments for vacancies, the project's non-rental income, and other 
factors that HUD deems appropriate. The calculation will be made on the 
basis of information provided by the Borrower on a form acceptable to 
the Secretary. The automatic adjustment factor described in part 888 of 
this chapter is not used to adjust contract rents under paragraph 
(a)(1) of this section, except to the extent that the amount of the 
replacement reserve deposit is adjusted under Sec. 880.602 of this 
chapter.
    (2) Annual and special adjustments. If the HAP contract provides 
that contract rents will be adjusted based on the application of an 
automatic adjustment factor and by special additional adjustments:
    (i) Consistent with the HAP contact, contract rents may be adjusted 
in accordance with part 888 of this chapter;
    (ii) Special additional adjustments will be granted, to the extent 
determined necessary by HUD, to reflect increases in the actual and 
necessary expenses of owning and maintaining the assisted units which 
have resulted from substantial general increases in real property 
taxes, assessments, utility rates or similar costs (i.e., assessments 
and utilities not covered by regulated rates), and which are not 
adequately compensated for by an annual adjustment. The Borrower must 
submit to HUD required supporting data, financial statements and 
certifications for the special additional adjustment.
    (b) Rent for unassisted units. The rent payable by families 
occupying units that are not assisted under the HAP contract shall be 
equal to the contract rent computed under paragraph (a) of this 
section.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.645  Adjustment of utility allowances.

    In connection with adjustments of contract rents as provided in 
Sec. 885.640(a), the Borrower must submit an analysis of any project's 
utility allowances. Such data as changes in utility rates and other 
facts affecting utility consumption should be provided as part of this 
analysis to permit appropriate adjustments in the utility allowances 
for assisted units. In addition, when approval of a utility rate change 
would result in a cumulative increase of 10 percent or more in the most 
recently approved utility allowances, the Borrower must advise HUD and 
request approval of new utility allowances. Whenever a utility 
allowance for an assisted unit is adjusted, the Borrower will promptly 
notify affected families and make a corresponding adjustment of the 
tenant rent and the amount of the housing assistance payment.

(Approved by the Office of Management and Budget under control 
number 2502-0371).


Sec. 885.650  Conditions for receipt of vacancy payments for assisted 
units.

    (a) General. Vacancy payments under the HAP contract will not be 
made unless the conditions for receipt of these housing assistance 
payments set forth in this section are fulfilled.
    (b) Vacancies during rent-up. For each unit that is not leased as 
of the effective date of the HAP contract, the Borrower is entitled to 
vacancy payments in the amount of 80 percent of the contract rent for 
the first 60 days of vacancy, if the Borrower:
    (1) Conducted marketing in accordance with Sec. 885.600(a) and 
otherwise complied with Sec. 885.600;
    (2) Has taken and continues to take all feasible actions to fill 
the vacancy; and
    (3) Has not rejected any eligible applicant except for good cause 
acceptable to HUD.
    (c) Vacancies after rent-up. If an eligible family vacates a unit, 
the Borrower is entitled to vacancy payments in the amount of 80 
percent of the contract rent for the first 60 days of vacancy if the 
Borrower:
    (1) Certifies that it did not cause the vacancy by violating the 
lease, the HAP contract, or any applicable law;
    (2) Notified HUD of the vacancy or prospective vacancy and the 
reasons for the vacancy immediately upon learning of the vacancy or 
prospective vacancy;
    (3) Has fulfilled and continues to fulfill the requirements 
specified in Sec. 885.600(a) (2) and (3) and Sec. 885.650(b) (2) and 
(3); and
    (4) For any vacancy resulting from the Borrower's eviction of an 
eligible family, certifies that it has complied with Sec. 885.630.
    (d) Vacancies for longer than 60 days. If a unit continues to be 
vacant after the 60-day period specified in paragraph (b) or (c) of 
this section, the Borrower may [[Page 2669]] apply to receive 
additional vacancy payments in an amount equal to the principal and 
interest payments required to amortize that portion of the debt service 
attributable to the vacant unit for up to 12 additional months for the 
unit if:
    (1) The unit was in decent, safe and sanitary condition during the 
vacancy period for which payment is claimed;
    (2) The Borrower has fulfilled and continues to fulfill the 
requirements specified in paragraph (b) or (c) of this section, as 
appropriate; and
    (3) The Borrower has demonstrated to the satisfaction of HUD that:
    (i) For the period of vacancy, the project is not providing the 
Borrower with revenues at least equal to project expenses (exclusive of 
depreciation) and the amount of payments requested is not more than the 
portion of the deficiency attributable to the vacant unit; and
    (ii) The project can achieve financial soundness within a 
reasonable time.
    (e) Prohibition of double compensation for vacancies. If the 
Borrower collects payments for vacancies from other sources (tenant 
rent, security deposits, payments under Sec. 885.635(c), or 
governmental payments under other programs), the Borrower shall not be 
entitled to collect vacancy payments to the extent these collections 
from other sources plus the vacancy payment exceed contract rent.

(Approved by the Office of Management and Budget under control 
number 2502-0371).

    Dated: December 22, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-552 Filed 1-9-95; 8:45 am]
BILLING CODE 4210-27-P