[Federal Register Volume 60, Number 76 (Thursday, April 20, 1995)]
[Proposed Rules]
[Pages 19695-19697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9727]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Part 811
[Docket No. R-95-1779; FR-3692-P-01]
RIN 2502-AG33
Refunding of Tax-Exempt Obligations Issued to Finance Section 8
Housing
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would amend the Department's regulations to
provide the policy and procedural guidelines for Section 8 bond
refundings under which local agency issuers of Section 11(b) tax-exempt
bonds are encouraged to refinance projects at lower interest rates.
DATES: Comments due date June 19, 1995.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Office of General Counsel, Rules Docket
Clerk, room 10276, Department of Housing and Urban Development, 451
Seventh Street, SW., Washington, DC, 20410. Facsimile (FAX) are not
acceptable. A copy of each communication submitted will be available
for public inspection and copying on weekdays between 7:30 a.m. and
5:30 p.m. at the above address.
FOR FURTHER INFORMATION CONTACT: James B. Mitchell, Director, Financial
Services Division, Department of Housing and Urban Development, 470
L'Enfant Plaza East, room 3120, Washington, DC 20024; telephone (202)
755-7450, ext. 125 (TDD number for the hearing- and speech-impaired
(202) 708-4594).
SUPPLEMENTARY INFORMATION:
I. Background
Since May 1989, the Department has conducted on an ad hoc basis a
program of Section 8 assisted housing bond refundings, under which
local agency issuers of Section 11(b) tax-exempt bonds (24 CFR part
811, subpart A) are encouraged to refinance projects at lower interest
rates to reduce Section 8 subsidy. To date, over 400 bond refunding
transactions have closed in which bonds issued during the interest rate
peak years of 1980-1983 are prepaid by a new bond issue at
substantially lower interest cost, resulting in subsidy recapture of
over $500 million.
The Section 11(b) regulations under which HUD issues its
Notification of Tax Exemption were designed for the original financing
of new construction or substantial rehabilitation of 100 percent or
partially subsidized Section 8 rental housing. These rules do not in
all particulars fit a refinancing transaction where construction
funding is not an element. Therefore, each refunding closing
transaction has required that bond counsel for the issuing agency
obtain from the Assistant Secretary for Housing-FHA Commissioner a
Notification of Tax Exemption that waives several sections of 24 CFR
part 811, subpart A. This waiver process elevates to the Assistant
Secretary level a programmatic approval that has become routine and
perfunctory in recent years. In addition, an Office of Inspector
General finding (Interim Audit Report 93-HQ-119-0004) has criticized
the excessive reliance on regulatory waivers to accomplish bond
refundings.
In view of the relatively low interest rate environment that has
prevailed since 1987, HUD has determined that bond refundings should be
treated as an operational program, rather than a temporary market
intervention dependent upon the economic cycle. The proposed rule would
codify the policy and procedural guidelines that have governed Section
8 bond refundings since 1989, and would provide a self-contained
refunding regulation intended to dispense with the need for most
waivers.
II. Other Matters
A. Environmental Impact
In accordance with 40 CFR 1508.4 of the regulations of the Council
on Environmental Quality and 24 50.20(k) of the HUD regulations, the
policies and procedures contained in this proposed rule relate only to
HUD administrative procedures and, therefore, are categorically
excluded from the requirements of the National Environmental Policy
Act.
B. Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that the policies
contained in this proposed rule will not have federalism implications
and, thus, are not subject to review under that order.
C. Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has [[Page 19696]] determined that this
proposed rule does not have potential for significant impact on family
formation, maintenance, and general well-being, and, thus, is not
subject to review under the order. No significant change in existing
HUD policies or programs will result from promulgation of this proposed
rule, as those policies and programs relate to family concerns.
D. Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act
has reviewed and approved this proposed rule, and in so doing certifies
that this proposed rule will not have a significant economic impact on
a substantial number of small entities. There are no anti-competitive
discriminatory aspects of the rule with regard to small entities, and
there are not any unusual procedures that would need to be complied
with by small entities.
E. Regulatory Agenda
This proposed rule was listed as sequence number 1779 in the
Department's Semiannual Agenda of Regulations published on November 14,
1994 (59 FR 57632, 57634) in accordance with Executive Order 12866 and
the Regulatory Flexibility Act.
List of Subjects in 24 CFR Part 811
Public housing, Securities, Taxes.
Accordingly, 24 CFR part 811 would be amended as follows:
PART 811--TAX EXEMPTION OF OBLIGATIONS OF PUBLIC HOUSING AGENCIES
AND RELATED AMENDMENTS
1. The authority citation for 24 CFR part 811 would be revised to
read as follows:
Authority: 42 U.S.C. 1437, 1437a, 1437c, 1437f, and 3535(d).
2. A new Sec. 811.119 would be added to subpart A, to read as
follows:
Sec. 811.119 Refunding of obligations issued to finance Section 8
projects.
(a) This section states the terms and conditions under which HUD
will approve tax-exempt financing or defeasance of outstanding
permanent obligations issued under Section 11(b) of the Act or the
Internal Revenue Code to refund outstanding permanent obligations which
financed new construction or substantial rehabilitation of Section 8
projects, including fully and partially assisted projects.
(b) Other sections of part 811, subpart A, shall not apply to bond
refundings except that compliance with the following is required:
Secs. 811.101, 811.102, 811.103, 811.104, 811.105, 811.106(d),
811.108(a)(2)(ii), 811.108(a)(2)(iii), 811.108(b)(3)(ii),
811.108(b)(3)(iii), and 811.114(d), except as applicable provisions are
modified in this section.
(c) Compliance with Secs. 811.104 and 811.105 shall not be required
for refunding obligations which derive tax exemption from authority
other than Section 11(b) of the Act. In the case of bonds issued by
State Agencies qualified under 24 CFR part 883 to refund bonds which
financed projects assisted pursuant to 24 CFR part 883, compliance with
the provisions of 24 CFR part 883 shall be required to the extent bond
counsel finds such provisions applicable to a bond refunding
transaction, as distinguished from requirements related to original
financing of new construction or substantial rehabilitation of Section
8 housing. HUD requires compliance with the prohibition on duplicative
fees contained in Sec. 883.606 of this chapter.
(d) No agency shall issue obligations to refund outstanding 11(b)
obligations until the Office of the Assistant Secretary for Housing
sends the financing agency a Notification of Tax Exemption based on
approval of the proposed refunding's terms and conditions as conforming
to this subpart A's requirements, including continued operation of the
project as housing for low-income families, and where possible,
reduction of Section 8 assistance payments through lower contract rents
or equivalent means. The agency shall submit such documentation as HUD
determines is necessary for review and approval of the refunding
transaction. Upon conclusion of the sale of refunding bonds, the
results must be certified to HUD by bond counsel, including a schedule
of the specific amount of savings in Section 8 assistance where
applicable, and a final statement of Sources and Uses.
(e) (1) HUD approval of the terms and conditions of a Section 8
refunding proposal requires evaluation by HUD Central Office of the
reasonableness of the terms of the Agency's proposed financing plan,
including projected reductions in project debt service where warranted
by market conditions and bond yields. This evaluation shall determine
that the proposed amount of refunding obligations is the amount needed
to pay off outstanding bonds, fund a debt service reserve to the extent
required by bond rating agencies which rate the credit quality of the
refunding bonds, pay credit enhancement fees acceptable to HUD and pay
transaction costs as approved by HUD according to a sliding scale
ceiling based on par amount of refunding bond principal. Exceptions may
be approved by HUD, if consistent with applicable statutes, in the
event that an additional issue amount is required for project purposes.
(2) The repayment term of the refunding bonds may not exceed the
remaining term of the project mortgage, or in the absence of a
mortgage, the remaining term of the Housing Assistance Payments
Contract (the ``HAPC'').
(3) The bond yield may not exceed by more than 75 basis points the
20 Bond General Obligation Index published by the Daily Bond Buyer for
the week immediately preceding the sale of the bonds. An amount not to
exceed one-fourth of one percent annually of the bonds may be allowed
for servicing and trustee fees.
(f) For projects placed under HAPC between January 1, 1979, and
December 31, 1984 (otherwise known as ``McKinney Act Projects''), for
which a State or local agency initiates a refunding, the Secretary
shall make available to an eligible issuing agency 50 percent of the
Section 8 savings of a refunding, as determined by HUD on a project-by-
project basis, to be used by the agency in accordance with the terms of
a Refunding Agreement executed by the Agency and HUD which incorporates
the Agency's Housing Plan for use of savings to provide decent, safe,
and sanitary housing for very low-income households. The Housing Plans
submitted for HUD review and approval shall address the physical
condition of the projects participating in the refunding which generate
the McKinney Act savings and, if necessary, provide for correction of
existing deficiencies which cannot be funded completely by existing
project replacement reserves and/or by a portion of refunding bond
proceeds (including reserves released from the refunded bond's
indenture), as approved by HUD.
(g) For refundings of Section 8 projects other than McKinney Act
Projects, and for all transactions which substitute collateral for, but
do not redeem, outstanding obligations, the Office of Housing in
consultation with HUD Field Office Counsel will review the HAPC, the
Trust Indenture for the outstanding obligations, and the applicable
part 811 Regulations to determine what HUD approvals are required. In
particular, HUD approval must be obtained for the release of reserves
from the trust indenture of the bonds that are being refunded,
defeased, or pre-paid. If the proposal contemplates distribution to a
non- [[Page 19697]] Federal entity of benefits of the refinancing, such
as debt service savings and/or balances in reserves held under the
original Trust Indenture, such proposal shall be referred to the Office
of the Assistant Secretary for Housing for further review. HUD will
consent to release reserves, as provided by the Trust Indenture, in an
amount remaining after correction of project physical deficiencies and/
or replenishment of replacement reserves, where needed, upon execution
by the project owner of a use agreement, and amendment of a regulatory
agreement, if applicable, to extend low-income tenant occupancy for ten
years after expiration of the HAPC. Proposed use of benefits shall be
consistent with applicable appropriations law, the HAPC, and other
requirements applicable to the original project financing, and the
proposed financing terms must be reasonable in relation to bond market
yields and transaction fees, as approved by HUD Central Office.
(h) Agencies shall have wide latitude in the design of specific
delivery vehicles for use of McKinney Act savings, subject to HUD audit
of each Agency's performance in serving the targeted income eligible
population. Savings shall be used for shelter costs of providing
housing, rental, or owner-occupied, to very low-income households
through new construction, rehabilitation, repairs, and acquisition with
or without rehab, including assistance to very low-income units in
mixed-income developments. Self-sufficiency services in support of very
low-income housing are also eligible, specifically, homeownership
counseling, additional security measures in high-crime areas,
construction job training for residents' repair of housing units
occupied by very low-income families, and empowerment activities
designed to support formation and growth of resident entities. Except
for the cost of providing third-party program audit reports to HUD,
eligible costs exclude consultant fees or reimbursement of Agency staff
expenses, even though the services may involve programs of assistance
to very low-income families.
(i) Refunding bonds, including interest thereon, approved under
this Section shall be exempt from all taxation now or hereafter imposed
by the United States, and the notification of approval of tax exemption
shall not be subject to revocation by HUD. Such bonds shall be prepaid
during the HAPC term only under such conditions as HUD shall require.
Dated: March 20, 1995.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 95-9727 Filed 4-19-95; 8:45 am]
BILLING CODE 4210-27-P