[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Rules and Regulations]
[Pages 14456-14463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7949]
[[Page 14455]]
_______________________________________________________________________
Part XII
Department of Housing and Urban Development
_______________________________________________________________________
24 CFR Part 811
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner: Regulatory Reinvention, Tax Exemption of Obligations of
Public Housing Agencies and Related Amendments; Final Rule
Federal Register / Vol. 61, No. 63 / Monday, April 1, 1996 / Rules
and Regulations
[[Page 14456]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 811
[Docket No. FR-3985-F-01]
RIN: 2502-AG64
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner; Regulatory Reinvention; Tax Exemption of Obligations of
Public Housing Agencies and Related Amendments
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule amends HUD's regulations governing the tax
exemption of obligations of public housing agencies. In an effort to
implement the President's regulatory reform initiative, this rule will
streamline these regulations by eliminating provisions that are
redundant of statutes or otherwise unnecessary. Further, on April 20,
1995 (60 FR 19695), HUD published a rule proposing to amend these
regulations to codify the guidelines which have governed Section 8 bond
refundings. This rule finalizes the policies and procedures set forth
in the April 20, 1995 proposed rule, and discusses the issues raised by
public comments submitted on the proposed rule. The rule also makes a
clarifying amendment to the existing regulations.
EFFECTIVE DATE: May 1, 1996.
FOR FURTHER INFORMATION CONTACT: James Mitchell, Director, Financial
Services Division, Department of Housing and Urban Development, 470
L'Enfant Plaza East, room 3120, Washington, DC 20024, telephone number
(202) 708-7450, ext. 125 (this is not a toll-free number). For hearing-
and speech-impaired persons, this number may be accessed via TDD by
calling the Federal Information Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. Part 811 and the President's Regulatory Reinvention Initiative
On March 4, 1995, President Clinton issued a memorandum to all
Federal departments and agencies regarding regulatory reinvention. In
response to this memorandum, the Department of Housing and Urban
Development conducted a page-by-page review of its regulations to
determine which can be eliminated, consolidated, or otherwise improved.
As part of this review, HUD examined its regulations at 24 CFR part
811, which govern the tax exemption of obligations of public housing
agencies. HUD has determined that 24 CFR part 811 can be improved and
streamlined by eliminating unnecessary provisions.
Several provisions in part 811 repeat statutory language from the
United States Housing Act of 1937 (42 U.S.C. 1437 et seq.). It is
unnecessary to repeat statutory requirements in the Code of Federal
Regulations, since these requirements are otherwise fully accessible
and binding. Furthermore, regulatory provisions which reiterate
statutory language, must be amended each time Congress amends the
statute. Therefore, this final rule removes redundant statutory
language and replaces it with a citation to the specific statutory
section.
Some provisions in part 811 are now obsolete. For instance, this
rule removes obsolete provisions that were designed for the original
construction or substantial rehabilitation of subsidized Section 8
rental housing. Further, the program described in subpart B of part
811, concerning the purchase of GNMA guaranteed mortgage-backed
securities with tax exempt obligations, has never been implemented by
HUD. Accordingly, this final rule removes subpart B.
Lastly, some provisions in part 811 are not regulatory
requirements. For example, several sections in the regulations contain
nonbinding guidance or explanations. While this information is very
helpful to HUD's clients, HUD will more appropriately provide this
information through handbook guidance or other materials rather than
maintain it in title 24 of the Code of Federal Regulations.
B. The April 20, 1995 Proposed Rule
1. Proposed Amendments Made by the April 20, 1995 Rule
On April 20, 1995 (60 FR 19695), HUD published for public comment a
rule proposing to amend 24 CFR part 811 to codify the guidelines that
have governed Section 8 bond refundings.
HUD's regulations at 24 CFR part 811, subpart A govern HUD's
issuance of a Notification of Tax Exemption. These regulations were
designed for the original construction or substantial rehabilitation of
subsidized Section 8 rental housing. Refunding transactions not
involving construction funding have required the Assistant Secretary
for Housing-FHA Commissioner to issue 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.
The April 20, 1995 rule proposed to create a new
Sec. 811.119,1 which would codify the policy and procedural
guidelines that have governed Section 8 bond refundings since 1989. The
new section would provide a self-contained refunding regulation that
would dispense with the need for most waivers. The preamble to the
April 20, 1995 proposed rule described in detail the amendments to 24
CFR part 811, subpart A.
\1\ As a result of the streamlining amendments made in
compliance with President Clinton's regulatory reform initiative,
several sections in part 811 have been renumbered. This rule
finalizes proposed Sec. 811.119 at Sec. 811.110. Substantively,
Sec. 811.110 is identical to proposed Sec. 811.119, except where
changes have been made in response to public comment. The preamble
to this final rule contains a discussion of the public comments
received on the April 20, 1995 proposed rule, and HUD's responses to
them.
---------------------------------------------------------------------------
2. Discussion of Public Comments on the April 20, 1995 Proposed Rule
The public comment period on the proposed rule expired on June 19,
1995. By close of business on that date, a total of 6 comments had been
received. The following section of the preamble presents a summary of
the significant issues raised by the public commenters on the proposed
rule, and HUD's responses to these comments.
Proposed Sec. 811.119(g) Exceeded HUD Authority
Comment. Paragraph (g) of proposed Sec. 811.119 stated that ``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 * * * 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.'' Four of the
commenters believed that this provision exceeded HUD's authority.
The commenters noted that the provisions of proposed paragraph (g)
were not included in the ``old reg'' version of 24 CFR part 811, which
was effective from September, 1977 until March, 1979. These commenters
believed that to the extent paragraph (g) purported to apply to
transactions financed under the ``old regs'', HUD would be violating
the contractual rights of participants in those transactions. The
commenters noted that there appears to be no legal basis for the
requirement that HUD approve the
[[Page 14457]]
release of reserves from trust indentures that are being refunded,
defeased or prepaid. In most ``old reg'' transactions those reserves
belong to the project owners upon defeasance of the prior bonds. The
commenters believed that HUD's attempt to condition the release of the
owner's money upon the owner's entrance into a use agreement raised
serious legal and constitutional issues.
HUD Response. HUD interprets the prohibition of refundings
described in Sec. 811.106(d) of the ``old regs'' to apply to refundings
of outstanding section 11(b) bonds by any means, not only by a new
section 11(b) bond issue. Therefore, a waiver of ``old reg''
Sec. 811.106(d) is required to refund ``old reg'' bonds. The waiver of
a regulatory provision is more than a perfunctory function, since HUD
must first determine that the public will benefit by the waiver.
HUD does not dispute that project owners or PHAs are entitled to
reserve balances as provided in ``old reg'' indentures. However, HUD
considers it sensible to review the condition of the project and its
future as low-income housing before these usually large sources of
funds are used for purposes unrelated to the project. Further, it is
not unreasonable for PHAs to extend low-income occupancy for a period
of ten years in return for use of the released reserves.
HUD also notes that many ``old reg'' indentures specifically
require that HUD consent to the refunding of the bonds. The ``old
regs'' at Sec. 811.107(d) provide that excess reserves shall be used
for project purposes. HUD has waived this requirement to accommodate
refundings which use reserves for other purposes, provided that HUD
found no need for physical repairs. However, HUD believes it is
reasonable to give the project first consideration.
The final rule has been revised to increase flexibility in the case
of privately owned projects. Specifically, the final rule provides that
the use extension may be waived on the basis of some other public
benefit, such as transfer of ownership to a nonprofit entity, or
correction of project physical or operating deficiencies. This exercise
of HUD waiver authority to secure a sound resource of low-income
housing will benefit HUD, PHAs, owners, and project residents.
This final rule also clarifies that in those instances involving a
simple defeasance without pay-off of ``old reg'' section 11(b) bonds,
HUD will review the financing terms only to the extent that a HUD
approval is needed in the transaction.
Proposed Rule's Relation to 24 CFR Part 883 Unclear
Comment. Three commenters wondered whether the proposed rule
applied to bonds issued by approved state housing finance agencies
pursuant to 24 CFR part 883. One of the commenters wrote that the April
20, 1995 proposed rule was contradictory on the issue of its
applicability to part 883. The preamble to the proposed rule stated
that the rule applied only to refundings of bonds exempt under Section
11(b). However, the commenter noted that proposed Sec. 811.119
contained at least one reference to part 883 in paragraph (c), and
paragraphs (f) and (h) appeared to address all McKinney Act refundings
of Section 8 projects regardless of the source of the tax-exemption.
Another commenter was particularly concerned about paragraph (c) of
proposed Sec. 811.119. The first sentence of paragraph (c) stated that
``[c]ompliance 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 [United States Housing Act of 1937].'' The
commenter believed that by stating that non-11(b) bonds need not comply
with Secs. 811.104 and 811.105, it could be argued that bonds issued
pursuant to part 883 must comply with all other provisions of part 811.
The commenter also worried about the second sentence of paragraph
(c), which stated that ``compliance with the provisions of 24 CFR part
883 shall be required to the extent bond counsel finds such provisions
applicable.'' The commenter believed that this sentence could be
interpreted to permit bond counsel, in part 883 refundings of part 883
bonds, to select those provisions of part 883 it thought applicable,
and ignore the rest of the regulatory provisions.
The commenter suggested that paragraph (c) of proposed Sec. 811.119
be revised to state that it does not apply to bonds issued by State
Agencies under 24 CFR part 883 and which derive tax exemption from
authority other than Section 11(b) of the United States Housing Act of
1937.
HUD Response. HUD has clarified the final rule to explicitly limit
its applicability to State Agency Section 8 bond issues to: (1)
Reiteration of the prohibition of duplicate fees in part 883; and (2)
in the case of McKinney Act refundings, compliance with paragraphs (f)
and (h) of Sec. 811.110. Further, in response to the second commenter,
HUD has amended the rule to clarify that its requirements apply only to
refunding bonds issued pursuant to Sec. 811.110. This final rule also
removes the first two sentences of paragraph (c) of proposed
Sec. 811.119.
Proposed Rule's Relationship to Internal Revenue Code Unclear
Comment. The first sentence of proposed Sec. 811.119(c) stated that
``[c]ompliance 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).'' Proposed Sec. 811.119(i) stated that
``[r]efunding bonds, including interest thereon, approved under
proposed Sec. 811.119 shall be exempt from all taxation now or
hereafter imposed by the United States.'' Two commenters pointed out
that since 1982 all tax exempt bonds, including section 11(b) bonds,
must comply with the Internal Revenue Code. Compliance with 24 CFR part
811 alone is no longer sufficient for tax-exemption.
The commenters believed that paragraphs (c) and (i) could easily be
read to suggest that only compliance with 24 CFR part 811 is necessary
for tax exemption. The commenters suggested that the final rule
explicitly state that compliance with part 811 does not eliminate the
need to comply with the Internal Revenue Code.
HUD Response. HUD agrees with the commenters that the proposed rule
required clarification on the relationship between part 811 and the
Internal Revenue Code. Accordingly, the final rule has been revised to
provide that compliance with the requirements of 24 CFR part 811 does
not assure compliance with the relevant provisions of the Internal
Revenue Code.
Paragraph (h) of Proposed Sec. 811.119 Was Too Limiting
Comment. The first sentence of paragraph (h) of proposed
Sec. 811.119 stated that ``[a]gencies shall have wide latitude in the
design of specific delivery vehicles for use of McKinney Act savings.''
Paragraph (h) went on to set forth a list of eligible activities for
which savings ``shall'' be utilized. Three commenters believed that the
remainder of paragraph (h) contradicted the flexibility promised in the
first sentence. Furthermore, the commenters believed that paragraph (h)
was more restrictive than current HUD practice.
The commenters suggested similar remedies for the perceived
strictness of paragraph (h). One of the commenters suggested that the
word ``shall'' in the second sentence of paragraph (h) be replaced with
the word ``may.'' The commenter also recommended that
[[Page 14458]]
HUD include at the end of the sentence an additional phrase permitting
``other activities approved by HUD.'' Another of the commenters
recommended that HUD add a new third sentence to the following effect:
``These include programs designed to assist in obtaining shelter such
as rent subsidy and similar tenant based programs.''
HUD Response. HUD agrees with the commenters and has adopted all
their suggestions in this final rule.
Rule Should Reference ``Trustee Sweeps''
Comment. Paragraph (d) of proposed Sec. 811.119 stated that the
Assistant Secretary's approval of the Notification of Tax Exemption
would be based on the conformity of the ``refunding's terms and
conditions * * * to subpart A's requirements, including[,] * * * where
possible, reduction of Section 8 assistance payments through lower
contract rents or equivalent means.'' One of the commenters wondered
whether paragraph (d) covered a subsidy recapture method known as the
``Trustee Sweep.'' According to the commenter most of the FHA-Insured
Section 8 refundings that have occurred have used this method.
HUD Response. This final rule clarifies that the ``Trustee Sweep''
is a permissible subsidy recapture method.
Proposed Rule Failed To Take Underwriters Into Account
Comment. Paragraph (e)(1) of proposed Sec. 811.119 stated that
HUD's evaluation of the Section 8 refunding proposal ``shall determine
that the proposed amount of refunding obligations is the amount needed
to * * * fund a debt service reserve to the extent required by bond
rating agencies which rate the credit quality of the refunding bonds.''
Two commenters believed that paragraph (e)(1) of proposed Sec. 811.119
failed to cover certain financings. The commenters wrote that in
financings closed on a non-rated basis, the underwriter, as opposed to
the Rating Agency, will often require a debt service reserve fund based
upon its determination of investor requirements. The commenters
suggested that the final rule allow for the sizing of the debt service
reserve in this manner.
HUD Response. This final rule adopts the recommendation made by the
commenters and recognizes that debt service reserves may also be
required by credit enhancers and, for unrated bonds, by the
underwriter.
Repayment Term Limit Requires Change
Comment. Two commenters expressed concern over paragraph (e)(2) of
proposed Sec. 811.119, which prohibited the repayment term of the
refunding bonds from exceeding the remaining term of the project's
mortgage, or in the absence of a mortgage, the HAP Contract. One of the
commenters wrote that the proposed paragraph was insufficiently broad.
This commenter pointed out that in MBIA transactions the insurer
requires that the maturity of the bonds extend a year beyond the
mortgage maturity. The bonds are redeemed concurrently with mortgage
maturity but the stated maturity is longer.
The commenter also believed that paragraph (e)(2) would create
unnecessary difficulties for some agencies seeking to refinance. The
commenter noted that in the original 11(b) financings, the transactions
had to be structured based on an estimate of when the project was to be
completed. Based on that estimate, the expiration of the HAP contract
was derived. This expiration date became the basis for the maturity of
the bonds, since the HAP contract was the primary security for the
bonds. However, in some financings, the project was completed sooner
than anticipated and, therefore, the HAP contract was executed earlier
than estimated. In those instances the HAP contract could expire
sometime before the maturity date of the bonds.
The commenter felt that by requiring that refunding bonds mature at
a date not exceeding the expiration of the HAP contract, the rule would
produce structuring problems as a result of the term of the refunding
bonds being forced to be shorter than the term of the bonds they are
refunding. However, the commenter noted that if the HAP contract term
is later than the original bond term, it might be advantageous to have
a bond term that takes full advantage of the HAP contract term. The
commenter suggested that HUD allow the term of the bonds on uninsured
loan transactions to extend to the later of the expiration of the HAP
contract or the final maturity of the refunded bonds.
Another commenter believed paragraph (e)(2) of proposed
Sec. 811.119 posed compliance difficulties for agencies seeking to
refinance projects at lower interest rates. The commenter noted that in
order to comply with rating agency structuring criteria relating to
debt service reserve funds in transactions where there is an insured
mortgage loan, the bonds often are structured to mature between 6
months and one year after the last required mortgage payment. This is
necessary because mortgage loans with grace periods are assumed by
rating agencies and bond underwriters to be received at the end of the
grace period. A second reason for this requirement is the potential
that a mortgage loan might be in default at the time of its stated
maturity, requiring an invasion of the debt service reserve fund
pending disbursement of FHA mortgage insurance proceeds, which could be
received after final due date of the last mortgage payment. Rating
agencies typically require a structure in which up to one year is
assumed to elapse between the date of default on the mortgage and the
receipt of the final installment of FHA mortgage insurance proceeds.
Accordingly, the commenter suggested that paragraph (e)(2) be amended
to add the words ``by more than one year'' after the phrase ``may not
exceed.''
HUD Response. HUD agrees with these comments and has incorporated
them in the final rule.
The Proposed Rule Created Uncertainty About the Continuation of Current
HUD Practices
Comment. One commenter believed that paragraph (f) of proposed
Sec. 811.119 created uncertainty among agencies seeking to refinance.
This paragraph stated that for McKinney Act Projects, HUD would split
the savings with an agency, in accordance with the terms of the
Refunding Agreement. Paragraph (f) required that the Refunding
Agreement incorporate the agency's Housing Plan. The paragraph further
mandated that the Housing Plan provide for ``decent, safe, and sanitary
housing for very-low income households.'' Additionally, the Housing
Plan was required to ``address the physical condition of the projects
participating in the refunding which generate[d] the McKinney Act
savings and, if necessary, provide for the correction of existing
deficiencies which [could] not be funded completely by existing project
replacement reserves and/or by a portion of refunding bond proceeds.''
The commenter believed that paragraph (f) was inconsistent with
existing HUD policies. First, the commenter believed paragraph (f)
contradicted a HUD memorandum concerning savings splits. Furthermore,
the commenter wrote that HUD has approved the application of savings
for uses other than those required by paragraph (b). For example, the
commenter claimed that HUD has not required that savings be used to
benefit a specific project. The commenter also wrote that savings
currently need to be
[[Page 14459]]
used in connection with low-income households, as distinguished from
very-low-income households.
HUD Response. HUD acknowledges that the proposed rule did not
accurately reflect HUD's current policy regarding savings splits.
Accordingly, this final rule corrects this discrepancy by providing
that for McKinney Act refundings of projects which did not receive a
Financing Adjustment Factor (``FAF''), HUD will allow up to 50 percent
of debt service savings to be allocated to the project account. In such
cases, the remainder of the debt service savings will be shared equally
by the agency and the U.S. Treasury. However, the other assertions made
by the commenter are incorrect. For example, section 1012(a) of the
McKinney Act restricts assistance to ``very low-income families.'' (42
U.S.C. 1437f note.)
Revision of Bond Counsel Certification Requirement
Comment. The last sentence of paragraph (d) of proposed
Sec. 811.119 stated that the results of a refunding bond sale had to
``certified'' by bond counsel. One commenter was disturbed by the use
of the word ``certified.'' The commenter wrote that bond counsel are
not in a position to certify such matters, other than in reliance on
information provided by other parties. Another commenter, while not
objecting to the term ``certify'', noted that bond counsel are seldom
financial experts. The commenter suggested that the rule be amended to
permit certification by a bona fide financial expert, such as a
certified public accountant or an investment banker.
HUD Response. HUD has adopted both comments. This final rule uses
the term ``written confirmation'', rather than ``certify.'' Further, it
permits ``other acceptable closing participants'' to provide written
confirmation.
Flexible Yield Limitation Required
Comment. Paragraph (e)(3) of proposed Sec. 811.119 limited the bond
yield to not more than 75 basis points above the 20 Bond General
Obligation Index ``published by the Daily Bond Buyer for the week
immediately preceding the sale of the bonds.'' One commenter felt that
this paragraph would place the continuation of current HUD practices in
doubt, and might create the necessity for waivers.
The commenter noted that HUD has in the past waived the bond yield
limitation for certain financings. Furthermore, HUD from time to time
published notices which allowed a 150 basis point spread on uninsured
deals. The commenter suggested that paragraph (e)(3) be amended to add
``except as otherwise approved by HUD'', in order to eliminate the need
for waivers.
HUD Response. In recognition of rating agency concerns about the
future renewability of HAP contracts, HUD has revised the final rule to
incorporate the phrase suggested by the commenter. However, HUD's
experience has shown that the 20 Bond General Obligation Index plus 75
basis points provides a valid market sensitive yield limit for a
variety of transactions.
Paragraph (d) of Proposed Sec. 811.119 Required Clarification
Comment. One commenter raised several concerns over paragraph (d)
of proposed Sec. 811.119. This paragraph stated that ``[u]pon
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.''
The commenter pointed out that the term ``sale'' usually signifies
the signing of a Bond Purchase Agreement, at which time it may be
premature to provide the information requested by paragraph (d). This
commenter suggested that the word ``closing'' be substituted for
``sale.'' The commenter was also uncertain about the information HUD
meant to include in the term ``results.''
HUD Response. HUD agrees with the points raised by the commenter.
Accordingly, the final rule has been revised to use the term
``closing'', rather than ``sale.'' Further, this final rule replaces
the term ``results'' with a specific list of the closing information
required by HUD.
Paragraph (e) of Proposed Sec. 811.119 Was Vague
Comment. One of the commenters believed that paragraph (e) of
proposed Sec. 811.119 was vague. For example, paragraph (e)(2)
prohibited the repayment term of the refunding bonds from exceeding 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').'' The commenter wondered whether HUD meant an
insured or uninsured mortgage. The commenter also believed that
paragraph (e)(3) required further clarification on servicing and
trustee fees. The proposed rule limited these fees to ``[a]n amount not
to exceed one-fourth of one percent annually of the bonds.'' The
commenter felt it would be ``advisable to allow for the calculation of
fees to be based on the outstanding mortgage balance.''
HUD Response. HUD has amended the final rule to provide the
clarification requested by the commenter. The final rule clarifies that
the term ``project mortgage'' refers to an insured mortgage. Further,
the final rule specifies that the limit on servicing and trustee fees
is based on the outstanding principal balance of the bonds.
Definition of McKinney Act Project Was Vague
Paragraph (f) of proposed Sec. 811.119 concerned ``projects placed
under HAPC between January 1, 1979 and December 31, 1984 (otherwise
known as `McKinney Act Projects').'' One commenter believed that HUD
should clarify what constitutes a ``McKinney Act Project.'' The
commenter pointed out that HUD has construed this ambiguous statutory
language to cover projects for which the date of HAPC execution fell
within January 1, 1979 and December 31, 1984, as distinguished from the
effective date of the HAPC, or conceivably the AHAP date. The commenter
suggested that the final rule make this construction explicit.
HUD Response. HUD has adopted the recommendation made by the
commenter. The final rule defines a ``McKinney Act Project'' as a
project ``for which the Agreement to enter into the HAPC was executed
between January 1, 1979 and December 31, 1984.''
Paragraph (g) of Proposed Sec. 811.119 Ambiguous in the Case of HAPCs
With Renewable Five-Year Terms
Comment. Paragraph (g) of proposed Sec. 811.119 conditioned the
release of reserves upon the project owner's agreement ``to extend low
income tenant occupancy for ten years after expiration of the HAPC.''
One commenter believed that this provision could be ambiguous in the
case of a HAPC with renewable five-year terms. The commenter wondered
whether paragraph (g) meant ten years after HUD's or the Contract
Administrator's first right to terminate, ten years after the owner's
first opt-out date without HUD consent, or ten years after the budget
authority term.
HUD Response. HUD has revised the final rule to specify that the
use agreement must extend for ten years past the owner's first opt-out
date.
Payments to Providers of Professional Services
Comment. One of the commenters felt there was some ambiguity in the
relationship between the last two sentences of paragraph (h) of
proposed Sec. 811.119. The penultimate sentence
[[Page 14460]]
authorized homeownership counseling as an eligible use of savings.
However, the last sentence prohibited payments to third party
consultants.
HUD Response. This final rule permits fees to providers of
professional services required in an agency's McKinney Act program.
C. Clarifying Amendment to Sec. 811.105
This rule also makes a clarifying technical amendment to paragraph
(b) of Sec. 811.105. Under Sec. 811.102, the term ``Agency or
Instrumentality PHA'' is defined as an ``organization that is
authorized to engage or assist in the development or operation of low-
income housing.'' However, paragraph (b) of Sec. 811.105 requires that
the ``charter or other organic document establishing the [Agency or
Instrumentality PHA] shall limit the activities to be performed * * *
to carrying out Section 8 projects.''
Paragraph (b) of Sec. 811.105 unnecessarily restricts the
activities which may be undertaken by an Agency or Instrumentality PHA.
This limitation does not conform to the broad language of the
definition in Sec. 811.102. Further, Sec. 811.105 does not comply with
HUD's goal of expanding low-income housing opportunities through the
part 811 program regulations. The current language also requires that
HUD waive Sec. 811.105 each time an Agency or Instrumentality PHA seeks
to undertake an activity which is not a Section 8 project. The
imposition of this additional administrative barrier is contrary to the
goals of the President's reinvention Initiative, which calls for the
elimination of unnecessary bureaucratic delays.
This final rule amends paragraph (b) of Sec. 811.105 to provide
that Agency and Instrumentality PHAs may carry out Section 8 projects
and ``other low-income housing projects approved by the Secretary.''
This change will conform Sec. 811.105 to HUD's original intention in
the issuance of the part 811 regulations.
II. Justification for Final Rulemaking
HUD generally publishes a rule for public comment before issuing a
rule for effect, in accordance with its own regulations on rulemaking
in 24 CFR part 10. However, part 10 provides for exceptions to the
general rule if the agency finds good cause to omit advance notice and
public participation. The good cause requirement is satisfied when
prior public procedure is ``impracticable, unnecessary, or contrary to
the public interest'' (24 CFR 10.1). HUD finds that in this case it is
unnecessary to solicit public comment.
HUD has already solicited public comment for those amendments to
part 811 described in the April 20, 1995 proposed rule. The preamble to
this final rule contains a discussion of the comments received and of
HUD's responses to them. The streamlining amendments made in conformity
with the President's regulatory reinvention initiative do not affect or
establish policy. These amendments merely remove regulatory provisions
which are redundant of statutes or for which codification in the Code
of Federal Regulations is unnecessary. Further, it is unnecessary for
HUD to solicit comment on the clarifying amendment to Sec. 811.105.
This revision merely removes an administrative barrier which currently
limits the flexibility of program applicants. The change will eliminate
the necessity for waivers and will conform the regulations to HUD's
original intent in issuing 24 CFR part 811.
III. Other Matters
A. Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this final rule, and in so
doing certifies that this rule will not have a significant economic
impact on a substantial number of small entities. This rule merely
streamlines regulations by removing unnecessary provisions. The rule
will have no adverse or disproportionate economic impact on small
businesses.
B. Environmental Impact
This rulemaking does not have an environmental impact. This
rulemaking simply amends an existing regulation by consolidating and
streamlining provisions and does not alter the environmental effect of
the regulations being amended. A Finding of No Significant Impact with
respect to the environment was made in accordance with HUD regulations
in 24 CFR part 50 that implement section 102(2)(C) of the National
Environmental Policy Act of 1969 (42 U.S.C. 4332) at the time of
development of regulations implementing the Tax Exempt Obligations
Program. That finding remains applicable to this rule, and is available
for public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the
Office of the Rules Docket Clerk, Office of General Counsel, Room
10276, Department of Housing and Urban Development, 451 Seventh Street,
SW, Washington, DC.
C. Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this rule
will not have substantial direct effects on States or their political
subdivisions, or the relationship between the Federal government and
the States, or on the distribution of power and responsibilities among
the various levels of government. No programmatic or policy changes
will result from this rule that would affect the relationship between
the Federal Government and State and local governments.
D. Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this rule will not have
the potential for significant impact on family formation, maintenance,
or 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 rule.
List of Subjects in 24 CFR Part 811
Public housing, Securities, Taxes.
Accordingly, 24 CFR part 811 is amended to read as follows:
PART 811--TAX EXEMPTION OF OBLIGATIONS OF PUBLIC HOUSING AGENCIES
AND RELATED AMENDMENTS
1. The authority citation for 24 CFR part 811 continues to read as
follows:
Authority: 42 U.S.C. 1437, 1437a, 1437c, 1437f, and 3535(d).
Subpart A--[Removed]
2. The heading for subpart A is removed.
3. Section 811.101 is revised to read as follows:
Sec. 811.101 Purpose and scope.
(a) The purpose of this part is to provide a basis for determining
tax exemption of obligations issued by public housing agencies pursuant
to Section 11(b) of the United States Housing Act of 1937 (42 U.S.C.
1437i) to refund bonds for Section 8 new construction or substantial
rehabilitation projects.
(b) This part does not apply to tax exemption pursuant to Section
11(b) for low-income housing projects developed pursuant to 24 CFR
parts 950 and 941.
4. Section 811.102 is amended by:
a. Removing the paragraph designations;
[[Page 14461]]
b. Removing the definitions of ``Capitalized Interest During
Construction'' and ``Development Cost''; and
c. Revising the definition of ``Obligations'' to read as follows:
Sec. 811.102 Definitions.
* * * * *
Obligations. Bonds or other evidence of indebtedness that are
issued to provide permanent financing of a low-income housing project.
Pursuant to Section 319(b) of the Housing and Community Development Act
of 1974, the term obligation shall not include any obligation secured
by a mortgage insured under Section 221(d)(3) of the National Housing
Act (12 U.S.C. 1715l) and issued by a public agency as mortgagor in
connection with the financing of a project assisted under Section 8 of
the Act. This exclusion does not apply to a public agency as mortgagee.
* * * * *
5. Section 811.105 is amended by revising the first sentence in
paragraph (b) to read as follows:
Sec. 811.105 Approval of agency or instrumentality PHA.
* * * * *
(b) The charter or other organic document establishing the
applicant shall limit the activities to be performed by the applicant,
and funds and assets connected therewith, to carrying out or assisting
in carrying out Section 8 projects and other low-income housing
projects approved by the Secretary. * * *
* * * * *
Sec. 811.106 [Amended]
6. Section 811.106 is amended by revising the section heading; by
removing paragraphs (a), (b), and (c); and by removing the paragraph
designation to paragraph (d), to read as follows:
Sec. 811.106 Default under the contract.
* * * * *
7. Section 811.107 is revised to read as follows:
Sec. 811.107 Financing documents and data.
(a) The financing agency shall assure that any official statement
or prospectus or other disclosure statement prepared in connection with
the financing shall state on the first page that:
(1) In addition to any security cited in the statement, the bonds
may be secured by a pledge of an Annual Contributions Contract and a
Housing Assistance Payments Contract, executed by HUD;
(2) The faith of the United States is solemnly pledged to the
payment of annual contributions pursuant to the Annual Contributions
Contact or to the payment of housing assistance payments pursuant to
the Housing Assistance Payments Contract, and funds have been obligated
by HUD for such payments;
(3) Except as provided in any contract of mortgage insurance, the
bonds are not insured by HUD;
(4) The bonds are not to be construed as a debt or indebtedness of
HUD or the United States, and payment of the bonds is not guaranteed by
the United States;
(5) Nothing in the text of a disclosure statement is to be
interpreted to conflict with the above; and
(6) HUD has not reviewed or approved and bears no responsibility
for the content of disclosure statements.
(b) The financing agency shall retain in its files the
documentation relating to the financing. A copy of this documentation
shall be furnished to HUD upon request.
8. Section 811.108 is revised to read as follows:
Sec. 811.108 Debt service reserve.
(a) FHA-Insured projects. (1) The debt service reserve shall be
invested and the income used to pay principal and interest on that
portion of the obligations which is attributable to the funding of the
debt service reserve. Any excess investment income shall be added to
the debt service reserve. In the event such investment income is
insufficient, surplus cash or residual receipts, to the extent approved
by the field office, may be used to pay such principal and interest
costs.
(2) The debt service reserve and its investment income shall be
available only for the purpose of paying principal or interest on the
obligations. The use of the debt service reserve for this purpose shall
not be a cure for any failure by the owner to make required payments.
(3) Upon full payment of the principal and interest on the
obligations (including that portion of the obligations attributable to
the funding of the debt service reserve), any funds remaining in the
debt service reserve shall be remitted to HUD.
(b) Non-FHA-insured projects. (1) Investment income from the debt
service reserve, up to the amount required for debt service on the
bonds attributable to the debt service reserve, shall be credited
toward the owner's debt service payment. Any excess investment income
shall be added to and become part of the debt service reserve.
(2) The debt service reserve and investment income thereon shall be
available only for the purpose of paying principal or interest on the
obligations. The use of the debt service reserve for this purpose shall
not be a cure for any failure by the owner to make required payments.
(3) Upon full payment of the principal and interest on the
obligations (including that portion of the obligations attributable to
the funding of the debt service reserve), any funds remaining in the
debt service reserve shall be remitted to HUD.
Secs. 811.109 through 811.113 [Removed]
9. Sections 811.109 through 811.113 are removed.
Sec. 811.114 [Redesignated]
10. Section 811.114 is redesignated as Sec. 811.109 and newly
redesignated Sec. 811.109 is amended by removing paragraphs (a) through
(c), and by removing the paragraph designation to paragraph (d).
Secs. 811.115 through 811.118 [Removed]
11. Sections 811.115 through 811.118 are removed.
12. Section 811.110 is added to read as follows:
Sec. 811.110 Refunding of obligations issued to finance Section 8
projects.
(a) This section states the terms and conditions under which HUD
will approve refunding or defeasance of certain outstanding debt
obligations which financed new construction or substantial
rehabilitation of Section 8 projects, including fully and partially
assisted projects.
(b) 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, HUD requires compliance with the
prohibition on duplicative fees contained in 24 CFR part 883 and with
paragraphs (f) and (h) of this section, as applicable to the projects
to be refunded.
(c) 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 part'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 an equivalent cash rebate to the U.S. Treasury (i.e. Trustee Sweep).
The agency shall submit such documentation as HUD determines is
necessary for review and approval of the refunding transaction. Upon
conclusion
[[Page 14462]]
of the closing of refunding bonds, written confirmation must be sent to
the Office of Multifamily Housing by bond counsel, or other acceptable
closing participant, including a schedule of the specific amount of
savings in Section 8 assistance where applicable, CUSIP number
information, and a final statement of Sources and Uses.
(d) (1) HUD approval of the terms and conditions of a Section 8
refunding proposal requires evaluation by HUD's Office of Multifamily
Housing 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 credit enhancers or bond rating
agencies, or bond underwriters in the case of unrated 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 stated maturity of the refunding bonds may not exceed by
more than one year the remaining term of the project mortgage, or in
the case of an uninsured loan, the later of expiration date of the
Housing Assistance Payments Contract (the ``HAPC'') or final maturity
of the refunded bonds.
(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, except as
otherwise approved by HUD. An amount not to exceed one-fourth of one
percent annually of the bonds' outstanding principal balance may be
allowed for servicing and trustee fees.
(e) For projects for which the Agreement to enter into the HAPC was
executed 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. In determining the
amount of savings recaptured on a project-by-project basis, as
authorized by section 1012(b) of the McKinney Act, HUD will take into
account the physical condition of the projects participating in the
refunding which generate the McKinney Act savings and, if necessary,
HUD will finance in refunding bond debt service correction of existing
deficiencies which cannot be funded completely by existing project
replacement reserves or by a portion of reserves released from the
refunded bond's indenture. For McKinney Act refundings of projects
which did not receive a Financing Adjustment Factor (``FAF''), HUD will
allow up to 50 percent of debt service savings to be allocated to the
project account; in which case, the remainder will be shared equally by
the Agency and the U.S. Treasury.
(f) 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, and for which a HUD approval is
needed (such as assignment of a HAPC or insured mortgage note), the
Office of Multifamily Housing in consultation with HUD Field Office
Counsel will review the HAPC, the Trust Indenture for the outstanding
obligations, applicable HUD regulations, and reasonableness of proposed
financing terms. In particular, HUD review should be obtained for the
release of reserves from the trust indenture of the outstanding 11(b)
bonds that are being refunded, defeased, or pre-paid. A proposal to
distribute to a non-Federal entity the benefits of a refinancing, such
as debt service savings and/or balances in reserves held under the
original Trust Indenture, should be referred to the Office of
Multifamily Housing for further review. In proposals submitted for HUD
approval, 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. In the case of a refunding of 11(b) bonds by a public
agency issuer which is the owner of the project and is entitled to
reserves held under the Trust Indenture, HUD requires 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 original HAPC term. In the case of HAP
contracts with renewable 5-year terms, the Use Agreement shall extend
for 10 years after the project owners first opt-out date. The Use
Agreement may also be required of private entity owners, unless the
refunding is incidental to a transfer of project ownership or a
transaction which provides a substantial public benefit, as determined
by the Office of Multifamily Housing. 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 the HUD Office of
Multifamily Housing.
(g) 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 may 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. These include programs designed to assist in obtaining
shelter, such as rent or homeownership subsidies. Self-sufficiency
services in support of very low-income housing are also eligible, and
may include, but are not limited to, 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, but
may include fees for professional services required in the Agency's
McKinney Act programs of assistance to very low-income families. Unless
otherwise specified by HUD in a McKinney Agreement, savings shall be
subject to the above use requirements for 10 years from the date of
receipt of the savings.
(h) 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. Whether refunding bonds
approved under this section meet the requirements of
[[Page 14463]]
Section 103 or any other provisions of the Internal Revenue Code is not
within the responsibilities of HUD to determine. Such bonds shall be
prepaid during the HAPC term only under such conditions as HUD shall
require.
Dated: March 27, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-7949 Filed 3-29-96; 8:45 am]
BILLING CODE 4210-27-P