[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Proposed Rules]
[Pages 66530-66540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30814]



[[Page 66529]]

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Part II





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 5 and 200



Uniform Physical Condition Standards and Physical Inspection 
Requirements for Certain HUD Housing; Administrative Process for 
Assessment of Insured and Assisted Properties; Proposed Rules

  Federal Register / Vol. 64, No. 227 / Friday, November 26, 1999 / 
Proposed Rules  

[[Page 66530]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 200

[Docket No. FR-4452-P-01]
RIN 2501-AC45


Uniform Physical Condition Standards and Physical Inspection 
Requirements for Certain HUD Housing; Administrative Process for 
Assessment of Insured and Assisted Properties

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule establishes for multifamily housing (non-
public housing as more fully described in the Supplementary Information 
section) certain administrative processes by which HUD will notify 
owners of HUD's assessment of the physical condition of their 
multifamily housing; the owners, under certain circumstances, will be 
provided an opportunity to seek technical review of HUD's physical 
condition assessment of the multifamily housing; and HUD may take 
action in certain cases where the housing is found not to be in 
compliance with the physical condition standards.

DATES: Comments Due Date: January 25, 2000.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Regulations Division, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410. Communications should refer 
to the above docket number and title. Facsimile (FAX) comments are not 
acceptable. A copy of each communication submitted will be available 
for public inspection and copying between 7:30 a.m. and 5:30 p.m. 
weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: For further information about 
multifamily issues covered by this rule, contact: Kenneth Hannon, 
Office of Housing, Department of Housing and Urban Development, 451 
Seventh Street, SW, Room 6274, Washington, DC 20410; telephone (202) 
708-0547, ext. 2599 (this is not a toll-free number).
    For further information about the scoring methodology or the 
technical review process, contact: Wanda Funk, Real Estate Assessment 
Center, Department of Housing and Urban Development, 1280 Maryland 
Avenue, SW, Suite 800, Washington, DC, 20024; telephone Customer 
Service Center at 1-888-245-4860 (this is a toll-free number).
    For both offices, persons with hearing or speech impairments may 
access that number via TTY by calling the Federal Information Relay 
Service at 1-800 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background--Uniform Physical Conditions Standards and Uniform 
Physical Inspection Protocols

    On September 1, 1998 (63 FR 46566), HUD published a final rule that 
established uniform physical condition standards for public housing, 
and housing that is insured and/or assisted under certain HUD programs 
(collectively, HUD properties). The September 1, 1998, final rule also 
established uniform physical inspection protocols, based on 
computerized software developed by HUD, that allows HUD to determine 
compliance with these standards. The uniform physical condition 
standards are intended to ensure that HUD program participants carry 
out their legal obligations to maintain HUD properties in a condition 
that is decent, safe, sanitary and in good repair. The uniform 
inspection protocols are intended to assure that, to the greatest 
extent possible, there is uniformity and objectivity in the evaluation 
of the physical condition of HUD properties.
    Before issuance of the September 1, 1998, final rule, HUD 
properties were required to meet physical condition standards and to 
undergo an annual physical inspection. The standards and inspection 
protocols which were then applicable to these properties, however, 
varied from HUD program to HUD program. The September 1, 1998, final 
rule was the first step directed toward achieving uniformity and 
consistency in the physical condition standards applicable to all HUD 
properties and in the inspection procedures to be used. For multifamily 
housing (as defined in Section IV of this preamble), the September 1, 
1998, final rule represented the first step toward uniform and 
standardized assessment of the physical condition of multifamily 
housing properties. This proposed rule proceeds to the next stage which 
is to establish for multifamily housing properties certain 
administrative processes by which (1) HUD will notify owners of HUD's 
assessment of the physical condition of their multifamily housing 
properties; (2) the owners, under certain circumstances, will be 
provided an opportunity to seek technical or other review of HUD's 
physical condition assessment of the multifamily housing properties; 
and (3) HUD may take action in certain cases where a property is found 
not to be in compliance with the physical condition standards.

II. Assessing and Scoring the Physical Condition of HUD 
Properties--HUD's Real Estate Assessment Center

    The establishment of a system by which all HUD properties are 
assessed for compliance with physical conditions standards using 
uniform criteria is one of the key reforms of the HUD 2020 Management 
Reform Plan. The HUD 2020 Management Reform Plan, announced by 
Secretary Andrew Cuomo on June 26, 1997, is directed to (1) empowering 
people and communities to improve themselves, and (2) restoring HUD's 
reputation and credibility by improving the efficiency and 
effectiveness of HUD's programs, operations and delivery of services. 
Under the HUD 2020 Management Reform Plan, HUD's newly established Real 
Estate Assessment Center (REAC) is charged, among other things, with 
the responsibility for assessing and scoring the physical condition of 
HUD properties. Until the establishment of the REAC, HUD's Office of 
Housing and its Office of Public and Indian Housing independently 
operated separate real estate assessment operations, yet the 
administration of both organization's multifamily portfolios is a 
common function of asset management. In the HUD 2020 Management Reform 
Plan, HUD advised that the assessment of all properties of the Office 
of Housing and the Office of Public and Indian Housing would be 
consolidated, and the evaluation standards and procedures would be made 
uniform to the greatest extent possible. The REAC is responsible for 
assessing and scoring the performance of HUD properties.
    With the establishment of the REAC, HUD now has in place an 
effective and comprehensive assessment system for physically inspecting 
and financially assessing all HUD properties using uniform inspection 
protocols. Application of uniform physical condition standards to all 
HUD properties and evaluation through uniform inspection protocols are 
important to a fair assessment process. One of HUD's objectives under 
HUD 2020 Management Reform is not only to identify where performance by 
program participants fails to meet acceptable standards (and to assist 
these participants in improving their performance or take enforcement 
action where appropriate), but also to identify those program 
participants that meet or

[[Page 66531]]

exceed acceptable standards and to provide incentives to these 
participants wherever possible. As part of the administrative processes 
to be established by this proposed rule, the REAC has begun a baseline 
physical inspection review of certain multifamily housing properties 
(baseline review). This review was announced by notice published in the 
Federal Register on February 9, 1999 (64 FR 6370) (February 9, 1999 
Baseline Notice). This review was requested by the Congressional 
conferees in the FY 1999 HUD Appropriations Act.

III. Enforcing Compliance with HUD Program Requirements--HUD's 
Enforcement Center

    Under the HUD 2020 Management Reform Plan, HUD has combined certain 
non-civil rights enforcement actions into one authority--the 
Departmental Enforcement Center (DEC). Before establishment of the DEC, 
each of HUD's program offices (the Office of Community Planning and 
Development, the Office of Housing, and the Office of Public and Indian 
Housing) operated independent enforcement functions, with different 
standards and procedures. The DEC is now the central Departmental 
office for taking action against owners of HUD assisted or insured 
properties determined to be in noncompliance with the rules and 
regulations of the Department or their contractual obligations with the 
Department. As will be discussed in more detail below, the DEC will 
have an important role in the administrative process, proposed in this 
rule, for covered multifamily housing.

IV. This Proposed Rule--Administrative Process for Scoring and 
Ranking Multifamily Housing Properties

(A) Covered Multifamily Housing Properties

    Multifamily housing properties covered by this rule are the same as 
those listed in 24 CFR 5.701(a) and (b), published on September 1, 
1998.
    These properties are:
    (a) Housing assisted by HUD under the following programs:
    (1) All Section 8 project-based assistance. ``Project-based 
assistance'' means Section 8 assistance that is attached to the 
structure (see 24 CFR 982.1(b)(1) regarding the distinction between 
``project-based'' and ``tenant-based'' assistance);
    (2) Section 202 Program of Supportive Housing for the Elderly 
(Capital Advances);
    (3) Section 811 Program of Supportive Housing for Persons with 
Disabilities (Capital Advances); and
    (4) Section 202 loan program for projects for the elderly and 
handicapped (including 202/8 projects and 202/162 projects).
    (b) Housing with mortgages insured or held by HUD, or housing that 
is receiving insurance from HUD, under the following authorities:
    (1) Section 207 of the National Housing Act (NHA) (12 U.S.C. 1701 
et seq.) (Rental Housing Insurance);
    (2) Section 213 of the NHA (Cooperative Housing Insurance);
    (3) Section 220 of the NHA (Rehabilitation and Neighborhood 
Conservation Housing Insurance);
    (4) Section 221(d)(3) of the NHA (Market Interest Rate (MIR) 
Program);
    (5) Section 221(d)(3) and (5) of the NHA (Below Market Interest 
Rate (BMIR) Program);
    (6) Section 221(d)(4) of the NHA (Housing for Moderate Income and 
Displaced Families);
    (7) Section 231 of the NHA (Housing for Elderly Persons);
    (8) Section 232 of the NHA (Mortgage Insurance for Nursing Homes, 
Intermediate Care Facilities, Assisted Living Facilities, Board and 
Care Homes);
    (9) Section 234(d) of the NHA (Rental) (Mortgage Insurance for 
Condominiums);
    (10) Section 236 of the NHA (Rental and Cooperative Housing for 
Lower Income Families);
    (11) Section 241 of the NHA (Supplemental Loans for Multifamily 
Projects); and
    (12) Section 542(c) of the Housing and Community Development Act of 
1992 (12 U.S.C. 1707 note) (Housing Finance Agency Risk Sharing 
Program).
    As noted above, the covered properties are the same as those listed 
in 24 CFR 5.701(a) and (b) of the September 1, 1998, final rule. In the 
September 1, 1998, final rule, the reference to `section 221(d)(3) and 
(5) of the NHA (Housing for Moderate Income and Displaced Persons)' is 
intended to cover both the section 221(d)(3) BMIR (Below-Market 
Interest Rate) program and the section 221(d)(3) MIR (Market Interest 
Rate) program. HUD now recognizes, however, that there is a possibility 
for confusion with this reference because one could misconstrue the 
reference as only applicable to section 221(d)(3) BMIR properties. A 
section 221(d)(3) BMIR property is insured under section 221(d)(3) of 
the NHA as is the section 221(d)(3) MIR Program, but the below-market 
interest rate for the section 221(d)(3) BMIR Program is provided 
pursuant to section 221(d)(5). Therefore, in this proposed rule, the 
coverage is more precisely delineated by reflecting the separate 
references to both programs.

(B) Process for Assessing, Scoring and Ranking Multifamily Housing 
Properties

    For owners of covered multifamily housing properties, this proposed 
rule would add a new subpart P to 24 CFR part 200, to establish an 
assessment process for multifamily housing properties which would 
include the following components.
    (1) Scoring and Ranking the Physical Condition of Multifamily 
Housing Properties. The rule proposes to establish a system for ranking 
multifamily housing properties covered by the February 9, 1999 Baseline 
Notice. For these properties, the ranking is based on the physical 
inspection results of the baseline review. Newly endorsed multifamily 
properties will be inspected in the first year after endorsement and 
then ranked in accordance with the process described in this proposed 
rule.
    (a) Physical Condition Designations. Depending upon the results of 
its physical condition inspection, a multifamily housing property would 
be assigned one of the following designations: (1) Standard 1 
performing property; (2) standard 2 performing property; or (3) 
standard 3 performing property. The physical condition designation 
assigned to a multifamily housing property will be based on numerical 
thresholds developed as a result of the REAC's baseline review of 
multifamily properties. This rule does not propose to establish at this 
time the numerical scores that will distinguish between the three 
categories of properties. HUD believes that meaningful numerical 
thresholds can only be determined after the REAC substantially 
completes its baseline review (using HUD's new uniform and computerized 
physical inspection protocol), and the REAC has had sufficient time to 
properly evaluate this data.
    (b) Methodology for Ranking. When the baseline review is 
substantially completed, multifamily housing properties will be ranked 
in accordance with the following methodology. Multifamily housing 
properties are scored on the basis of 100 point scale. For each 
designation category, the lowest score in the category becomes the 
numerical threshold for that category.
    (i) Standard 1 Performing Properties--Highest 20 Percent. Covered 
multifamily housing properties scoring in the highest 20 percent of a 
physical

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condition inspection will be designated standard 1 performing 
properties and will be required to undergo a physical inspection once 
every three (3) years.
    (ii) Standard 2 Performing Properties--Next Highest 30 Percent. 
Covered multifamily housing properties scoring in the next highest 30 
percent of a physical condition inspection will be designated standard 
2 performing properties and only will be required to undergo physical 
inspection once every two (2) years.
    (iii) Standard 3 Performing Properties--Remaining 50 Percent. 
Covered multifamily housing properties scoring in the remaining 50 
percent will be designated standard 3 performing properties, will be 
required to continue with the annual physical inspection currently 
required under covered HUD programs.
    Example of Designation Process. To illustrate more clearly how the 
ranking will be done, assume for purposes of this example that the 
baseline review shows that those multifamily housing properties that 
rank in the top 20 percent have physical condition scores ranging from 
100 to 80 with 100 being the maximum number of points that can be 
received for a physical condition inspection. As a result of this 
baseline review, all properties scoring 80 and above will be designated 
standard 1 performing properties.
    Further assume for purposes of this illustration that the 
multifamily housing properties that fall into the next category of 30 
percent have physical condition scores ranging from less than 80 but at 
least 70. These properties will be designated standard 2 performing 
properties, and all properties thereafter scoring at least 70, but less 
than 80, will be standard 2 performing properties.
    The remaining 50 percent of multifamily properties will have scores 
of less than 70. These properties will be designated standard 3 
performing properties, with the threshold being less than 70.
    Resolving Exigent Health and Safety Deficiencies. Owners of 
multifamily housing properties scoring in a standard 1 or standard 2 
range which have been cited by the REAC as having a Exigent Health and 
Safety deficiency(s) are obligated to resolve the deficiency(s) to be 
classified as standard 1 and standard 2 properties. The owners must 
certify and provide reasonable evidence that the deficiency(s) has been 
resolved to the applicable Multifamily Hub Director.
    Meeting Physical Condition Standards Notwithstanding Performance 
Designation. Regardless of the performance designation assigned to an 
owner's property, an owner is obligated to maintain its property in 
accordance with HUD's uniform physical condition standards as required 
by 24 CFR part 5, subpart G, the Regulatory Agreement and/or the 
Housing Assistance Payment (HAP) Contract. Good management principles 
require an owner to conduct routine inspections of its projects, 
develop improvement plans, and again, maintain its property to meet the 
standard of decent, safe, sanitary and in good repair.
    (c) Inspecting and Scoring Individual Properties. The process by 
which scores are developed was discussed in HUD's notice, ``Public 
Housing Assessment System; Notice of Physical Condition Scoring,'' 
published in the Federal Register on May 13, 1999, and again on June 
23, 1999. Although this notice was directed to public housing agencies 
and describes the physical condition scoring process under the Public 
Housing Assessment System, the process for determining scores is the 
same for multifamily housing properties. The physical condition scoring 
process for both public housing and multifamily properties is based on 
HUD's uniform physical condition standards and use of HUD's uniform 
physical inspection protocols.
    The physical condition designation assigned to a multifamily 
housing property does not prohibit HUD (the REAC, DEC or the Office of 
Housing) from conducting an inspection on any covered multifamily 
housing property at any time that HUD has reason to believe that the 
property has deteriorated significantly, or if information is brought 
to HUD that the physical condition of the property has deteriorated 
significantly, since the date that the last inspection was conducted. 
If HUD's new inspection verifies that the multifamily housing property 
has deteriorated significantly, HUD may revise the physical condition 
designation of the property, or take whatever action may be 
appropriate.
    In addition to physical inspections performed to determine the 
physical condition of multifamily properties as provided by this rule, 
HUD may perform interim inspections for certain purposes such as 
section 8 contract renewal, partial release of security, permission to 
sell the security, or in connection with mortgage restructuring.
    (2) Technical Review of Physical Inspection Score Results. This 
rule proposes to adopt as one of the administrative processes for 
multifamily housing properties, the technical review of physical 
inspection results described in HUD's notice, ``Real Estate Assessment 
Center; Technical Review of Physical Inspection Results,'' published in 
the Federal Register on May 13, 1999. The Federal Register notice 
describes the process for requesting (of the REAC) and the granting (by 
the REAC) a technical review of physical inspection results for public 
housing agencies. Based on that notice, this rule proposes to adopt the 
following procedures for covered multifamily housing properties.
    Review of Physical Inspection Report and Identification of 
Objectively Verifiable and Material Error. Upon completion of a 
physical inspection of a multifamily housing property, the REAC will 
provide the owner with a physical inspection report. The physical 
inspection report includes a copy of the physical inspection results, 
the physical condition score and ranking, an explanation of the score 
and the owner's rights to request a technical review no later than 30 
days following issuance of the physical inspection results to the 
owner. The rule imposes the responsibility on the owner to carefully 
review the report, particularly those items classified as exigent 
health and safety (EHS). All EHS items must be mitigated immediately, 
and the owner is required to file a written report with the local HUD 
office within 72 hours of the inspection. The owner is also responsible 
for conducting its own survey of the total project based on the REAC's 
physical inspection findings.
    If the owner reasonably believes that an objectively verifiable and 
material error (or errors) occurred in the inspection of an owner's 
multifamily housing property, which, if corrected, would result in a 
significant improvement in the property's overall score, the owner may 
request a technical review of the physical inspection results of the 
property.
    Request for Technical Review and Burden of Proof. Until electronic 
transmission is arranged between HUD and the owner, the owner has a 
period of 30 calendar days to (i) review the physical inspection 
results and property score and determine if the results and score 
indicate that an objectively verifiable and material error (or errors) 
occurred in the inspection, which if corrected would result in a 
significant improvement in the property's overall score; and (ii) 
request a technical review by the REAC of the property's physical 
inspection results. A request for a technical review of physical 
inspection results must be submitted in writing to the Director of the 
Real Estate Assessment Center and must be received by the REAC, with a 
copy to the Multifamily Hub Director (MFD), no later than the 30th 
calendar day

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following issuance of the physical inspection report to the owner. Note 
that the review period of 30 days will be the requisite review period 
only until electronic transmission of the physical inspection report is 
established. When electronic transmission is arranged between HUD and 
the owner, the review period will be 15 calendar days.
    The request must be received by the REAC and be accompanied by the 
owner's reasonable evidence that an objectively verifiable and material 
error (or errors) occurred, which if corrected would result in a 
significant improvement in the property's overall score. A technical 
review of physical inspection results will not be conducted based on 
conditions that were corrected subsequent to the inspection nor will 
the REAC consider a request for a technical review that is based on a 
challenge to the inspector's findings as to the severity of a 
deficiency (e.g., categorization of the deficiency as minor, major or 
severe).
    The burden of proof rests with the owner to reasonably demonstrate 
that an objectively verifiable and material error occurred in the 
inspection through the submission of evidence, which would result in a 
significant improvement in the property's overall score. To support its 
request for a technical review of the physical inspection results, the 
owner may submit photographic evidence, written material from an 
objective source such as a local fire marshal or building code 
official, or other similar evidence.
    What Constitutes Material Errors. An objectively verifiable 
material error must be present to allow for a technical review of 
physical inspection results. Material errors are those that exhibit 
specific characteristics and meet specific thresholds. The three types 
of material errors are as follows.
    1. Building Data Error. A building data error occurs if the 
inspection includes the wrong building or a building that was not owned 
by the subject project owner, including common or site areas that were 
not a part of the property. Incorrect building data that does not 
affect the score, such as the address, building name, year built, etc., 
would not be considered material, but is information that HUD needs to 
know, and will be corrected upon notice to the REAC.
    2. Unit Count Error. A unit count error occurs if the total number 
of units involved in the scoring process is incorrect. Since the 
scoring process uses total units, the REAC will examine instances where 
the participant can provide evidence that the total units used is 
incorrect.
    3. A Non-Existent Deficiency Error. A non-existent deficiency error 
occurs if the inspection cites a deficiency that does not exist.
    What Constitutes Significant Improvement. Significant improvement 
refers to the correction of a material error, asserted by the owner, 
which causes the score for the owner's property to improve by crossing 
an administratively significant threshold (for example, the property 
would be redesignated from standard 3 performing to standard 2 
performing or from standard 2 performing to standard 1 performing).
    Determining Whether Material Error Occurred and What Action Is 
Warranted. Upon receipt of the owner's request for technical review of 
a property's physical inspection results, the REAC will evaluate the 
owner's property file and the evidence provided by the owner that an 
objectively verifiable and material error occurred which, if corrected, 
would result in a significant improvement in the property's overall 
score. If the REAC's evaluation determines that an objectively 
verifiable and material error (or errors) has been reasonably 
documented by the owner and if corrected would result in a significant 
improvement in the property's overall score, then the REAC shall take 
one or a combination of the following actions: (1) Undertake a new 
inspection; (2) correct the inspection report; or (3) issue a new 
physical condition score.
    For an owner to understand how the REAC may conclude that a 
significant improvement may result from a new inspection, the owner may 
use the REAC's document titled ``Items, Weights and Criticality 
Levels'' to determine whether a significant improvement in the 
property's score may result from a new inspection. This document was 
included as Appendix 1 in the Notice of Physical Condition Scoring, 
published in the Federal Register on May 13, 1999, and republished on 
June 23, 1999 (64 FR 33650). The different severity levels of 
deficiencies (severe, major and minor) are defined in the REAC's 
``Dictionary of Deficiencies Definitions,'' which is included as 
Appendix 2 in the Notice of Physical Condition Score published on May 
13, 1999. These two documents are also available on the REAC Internet 
Site at http://www.hud.gov/reac.
    Responsibility for the Cost of a New Inspection. If a new 
inspection score results in a significant improvement from the original 
physical inspection score, HUD shall bear the expense of the new 
inspection. If no significant improvement in the score is shown, then 
the owner must bear the expense of the new inspection. The cost of the 
new inspection, if paid by the owner, is not a valid project operating 
expense. The new inspection score will be considered the final score.
    (3) Adjustment of Physical Condition Score Based on Considerations 
Other Than Technical Review and Reinspection. Under certain 
circumstances, it may be appropriate for HUD to review the results of a 
physical inspection which are anomalous or have an incorrect result due 
to facts and circumstances affecting the inspected property which are 
not reflected in the inspection or reflected inappropriately in the 
inspection. Circumstances such as, but not necessarily limited to, 
inconsistencies between local code requirements and the HUD physical 
inspection protocol; conditions which are permitted by variance or 
license or which are preexisting physical features non-conformities and 
are inconsistent with the HUD physical condition protocol; or cases 
where the owner has been scored for elements (e.g., roads, sidewalks, 
mail boxes, resident owned appliances, etc.) that it does not own and 
is not responsible for maintaining, may be addressed by a formal 
procedure to be initiated by the owner's notification to the applicable 
HUD Field Office and submission to that office of appropriate proof of 
the anomalous or inappropriate application. This process may result in 
a reinspection and/or rescoring of the inspection based on Office of 
Housing recommendation after review and approval of the owner's 
submission of appropriate proof of the anomalous or inappropriate 
application. An owner may submit the request for this adjustment either 
prior to or after the physical inspection has been concluded. HUD shall 
define, by notice, the procedures to be followed to address 
circumstances described in paragraph (e) of this section. The 
procedures outlined in this Notice shall be binding on the REAC, the 
Office of Housing and the DEC. The notice will be applicable to both 
public housing and multifamily properties.

(C) Administrative Review of Properties Referred to the Departmental 
Enforcement Center

    The files of any of the multifamily housing properties may be 
submitted to HUD's Departmental Enforcement Center (DEC) or to the 
appropriate MFD for evaluation, or both, at the discretion of the 
Office of Housing. For these properties, the following will occur:
    (1) Notification to Owner of Submission of Property File to the MFD 
and DEC. The Department will provide

[[Page 66534]]

for written notification to the owner that the file on the owner's 
property is being submitted to the MFD and/or DEC for evaluation. The 
written notification will be provided by HUD at the time the REAC 
issues the physical inspection report to the owner or at such other 
time as referral occurs.
    (2) 30-Day Period for Owner to Provide the DEC with Supporting and 
Relevant Information and Documentation. The owner has 30 calendar days, 
from the date of written notification to the owner, to provide 
comments, proposals, or any other information which will assist the MFD 
and DEC in conducting a comprehensive evaluation of the property. A 
proposal provided by an owner may include the owner's plan to correct 
deficiencies (corrective action plan), which is encouraged by the DEC. 
During the 30-day response time available to the owner, the DEC may 
encourage the owner to submit a corrective action plan. The corrective 
action plan, if timely submitted during the 30-day period (whether on 
the owner's initiative or at the request of the DEC), may serve as 
additional information for the DEC to consider in determining 
appropriate action to take at the conclusion of the evaluation period. 
A corrective action plan may be required of the owner at the conclusion 
of the DEC's evaluation of the property.
    (3) Evaluation of the Property. During the evaluation period, the 
DEC will perform an analysis of the multifamily housing property. The 
evaluation may include input from tenants, HUD multifamily officials, 
elected officials and others as may be appropriate. The MFD will assist 
with the evaluation of the property. The DEC will have primary 
responsibility for the conclusion of the evaluation of the property 
after taking into consideration the input of the individuals and groups 
listed above. The DEC's evaluation may include a site visit to the 
owner's property.
    The DEC is committed to perform its evaluation as quickly as 
possible. The comments and proposals of the owners which have been 
provided since the REAC inspection, and any repairs that have been made 
since the REAC inspection, will be given serious consideration during 
the DEC evaluation period. During this evaluation period, since the 
owner and the Multifamily Hub have now been made aware of serious 
deficiencies at the property which resulted in the low REAC score, the 
owner must exert a full measure of oversight and ensure that all 
deficiencies are corrected.
    (4) Continuing Responsibilities of HUD Multifamily Program Offices 
and Mortgagee. During the period of DEC evaluation, HUD's multifamily 
program offices continue to be responsible for routine asset management 
tasks on properties and all servicing actions (e.g., rent increase 
decisions, releases from reserve account approvals). In addition, 
during this period of evaluation, for insured mortgages, the mortgagee 
shall continue to carry out its duties and responsibilities with 
respect to the mortgage.
    As part of its evaluation and development of the compliance plan 
(discussed under Section (D) below), the DEC will put together a team 
to evaluate and develop a corrective action plan. The Multifamily Hub 
Program Office will assign a Senior Project Manager to the team, who 
will be a working member of the team and serve as team liaison to the 
HUB Director. If conflict or an impasse develops during the team's 
assignment, the liaison will notify the Multifamily Hub Director who 
will work to mitigate and eliminate all conflict. The Multifamily Hub 
Director may, if appropriate, enlist the assistance of the Office of 
Housing/DEC liaison in Headquarters to resolve any disputes.

(D) Enforcement Action

    If, at the conclusion of the evaluation period, the DEC determines 
that enforcement action is appropriate, the DEC will provide written 
notification to the owner of the DEC's decision to formally accept the 
property for enforcement purposes.
    (1) DEC Owner Compliance Plan. After notification to the owner of 
the DEC's decision, the DEC will produce a proposed action plan (DEC 
Compliance Plan), the purpose of which is to improve the physical 
condition of the owner's property and correct any other known 
violations by the owner of its regulatory, contractual or other 
obligations. The DEC Compliance Plan will describe (1) the actions that 
will be required of the owner to correct, mitigate or eliminate 
identified property deficiencies, problems, hazards, and/or address 
legal violations by owners, and (2) the period of time within which 
these actions must be completed. The DEC Compliance Plan will specify 
the compliance responsibilities of the owner.
    The DEC Compliance Plan will be submitted to the MFD for review and 
concurrence. If the MFD does not concur, the DEC Compliance Plan will 
be submitted to the Deputy Assistant Secretary for Housing and the 
Deputy Director of the DEC for review and concurrence. If the DEC 
Compliance Plan remains unapproved, a final decision on the plan will 
be made by HUD's Deputy Secretary in consultation with the General 
Counsel, the Assistant Secretary for Housing, and the Director of the 
DEC.
    The owner will be provided a period of 30 calendar days to review 
the DEC Compliance Plan and respond to the DEC. If the owner agrees to 
comply with the DEC Compliance Plan, the plan will be forwarded to the 
appropriate Multifamily Office for implementation and monitoring of 
completion of the plan's requirements.
    (2) Counter Compliance Plan Proposal By Owner. The owner may submit 
a counter proposal to the DEC Compliance Plan. An owner's counter 
proposal to a DEC Compliance Plan must be submitted no later than the 
30th day following submission of the DEC Compliance Plan to the owner. 
The DEC, in coordination with the MFD, may enter into discussions with 
the owner to achieve agreement to a revised DEC Compliance Plan. If the 
owner and the DEC agree on a revised DEC Compliance Plan, the revised 
plan will be forwarded to the appropriate Multifamily Office for 
implementation and monitoring of completion of the plan's requirements.
    (3) Non-Cooperation and Non-Compliance by Owner. If at the 
conclusion of the 30th calendar day following submission of the DEC 
Compliance Plan to the owner, the DEC receives no response from the 
owner, or the owner refuses to accept the DEC Compliance Plan or to 
present an acceptable counter compliance plan proposal, or if the owner 
accepts the DEC Compliance Plan or revised DEC Compliance Plan, but 
refuses to take the actions required of the owner in the plan, the DEC 
may take appropriate enforcement action.
    (4) No Limitation on Existing Enforcement Authority. The proposed 
rule will emphasize that the administrative process established for 
multifamily housing properties will not prohibit the Office of Housing, 
the DEC or HUD generally to take whatever immediate action may be 
necessary, as authorized under existing statutes, regulations, 
contracts or other documents, to protect HUD's financial interests in 
multifamily properties and to protect the residents of these 
properties.

(E) Clarification of Certain Issues Related to Physical Inspection of 
Multifamily Housing Properties

    (1) Recurring Inspection of Properties. In response to concerns 
raised at the

[[Page 66535]]

time of issuance of the September 1, 1998, final rule, about the 
possibility of more inspections being performed prior to the property's 
normal inspection schedule, this rule proposes to clarify that any 
additional inspection will occur under the following circumstances: (i) 
The REAC's baseline inspection of the property after the mortgagee has 
conducted its own inspection in accordance with existing requirements; 
(ii) at the request of the owner in accordance with the procedures 
discussed earlier in this preamble; (iii) as part of the administrative 
review process described in this proposed rule; (iv) in response to 
HUD's belief that the property has deteriorated significantly since its 
previous physical inspection, or information brought to HUD that a 
property has significantly deteriorated since its previous physical 
inspection; (v) as part of quality control to assure that inspections 
are being conducted properly; (vi) for special purposes including but 
not limited to partial release of security, permission to sell the 
security, or in connection with mortgage restructuring; or (vii) to 
conduct an inspection in conjunction with any possible enforcement 
action by HUD.
    (2) Information about the Physical Inspection System. In the 
preamble to the September 1, 1998, uniform physical conditions final 
rule, HUD advised that it would make the inspection software and 
guidebook available from the REAC. Both the software and guidebook are 
available from the REAC web page at www.hud.gov/reac, or through the 
REAC Customer Service Center at no cost (besides nominal cost of 
shipping) by calling 1-888-245-4860. Public versions of the physical 
inspection software will be available on compact disk (CD) and can be 
obtained by calling the REAC Customer Service Center. REAC may update 
or revise the physical inspection software and guidebook from time to 
time. When requesting the physical inspection software and guidebook, 
the requestor will be asked to provide the Uniform Resource Locator 
(URL) for their firm or organization, the requester's e:mail address 
and post office mailing address.
    (3) Material Alteration of Physical Inspection Software. In 
response to concerns raised at the time of issuance of the September 1, 
1998, final rule, about the cost of the physical inspection protocol, 
HUD advises that it will not materially alter the physical inspection 
requirements in a manner which would materially increase the cost of 
performing the inspection.

(F) Enforcement Issues of Concern to Small Entities

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121, 110 Stat. 847, approved March 29, 1996) (``SBREFA'') 
provides, among other things, for agencies to establish specific 
policies or programs to assist small entities. Small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. On May 21, 1998 (63 FR 28214), HUD published a Federal 
Register notice describing HUD's actions on implementation of SBREFA.
    Section 223 of SBREFA requires agencies that regulate the 
activities of small entities to establish a policy or program to reduce 
or, under appropriate circumstances, waive civil penalties when a small 
entity violates a statute or regulation. Where penalties are determined 
appropriate, HUD's policy is to consider: (1) The nature of the 
violation (the violation must not be one that is repeated or multiple, 
willful, criminal or poses health or safety risks), (2) whether the 
entity has shown a good faith effort to comply with the regulations; 
and (3) the resources of the regulated entity. Depending upon the 
circumstances surrounding the violation, it is not HUD's intent to put 
any individual or entity out of business by the penalties or settlement 
amounts paid to the Federal Government.
    With respect to DEC enforcement actions taken in accordance with 
this proposed rule, HUD is cognizant that section 222 of SBREFA 
requires the Small Business and Agriculture Regulatory Enforcement 
Ombudsman to ``work with each agency with regulatory authority over 
small businesses to ensure that small business concerns that receive or 
are subject to an audit, on-site inspection, compliance assistance 
effort or other enforcement related communication or contact by agency 
personnel are provided with a means to comment on the enforcement 
activity conducted by this personnel.'' To implement this statutory 
provision, the Small Business Administration has requested that 
agencies include the following language on agency publications and 
notices which are provided to small businesses concerns at the time the 
enforcement action is undertaken. The language is as follows:

Your Comments Are Important

    The Small Business and Agriculture Regulatory Enforcement 
Ombudsman and 10 Regional Fairness Boards were established to 
receive comments from small businesses about federal agency 
enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to 
small business. If you wish to comment on the enforcement actions of 
[insert agency name], call 1-888-REG-FAIR (1-888-734-3247).

    As HUD stated in its May 21, 1998 notice, HUD intends to work with 
the Small Business Administration to provide small entities with 
information on the Fairness Boards and National Ombudsman program, at 
the time enforcement actions are taken, to ensure that small entities 
have the full means to comment on the enforcement activity conducted by 
HUD.

V. Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget for review under 
section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35).
    Estimates of the total reporting and recordkeeping burden that will 
result from the collection of information are as follows:
    Reporting and Recordkeeping Burden:

----------------------------------------------------------------------------------------------------------------
                                                                                 Est. Avg. time
              Section reference                  Number of     Annual freq. of  for requirement    Est. annual
                                                  parties        requirement        (hours)       burden (hrs.)
----------------------------------------------------------------------------------------------------------------
Sec.  200.857...............................          29,000                1                3           87,000
    Total Reporting and Recordkeeping Burden
     (Hours)................................
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;

[[Page 66536]]

    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Comments must be 
received within sixty (60) days from the date of this proposal. 
Comments must refer to the proposal by name and docket number (FR-4452) 
and must be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and 
Budget, New Executive Office Building, Washington, DC 20503
        and
Oliver Walker, Reports Liaison Officer, Office of the Assistant 
Secretary for Housing--Federal Housing Commissioner, Department of 
Housing and Urban Development, 451--7th Street, SW, Room 4238, 
Washington, DC 20410

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866, Regulatory Planning and Review, 
issued by the President on September 30, 1993. OMB determined that this 
proposed rule is a ``significant regulatory action,'' as defined in 
section 3(f) of the Order (although not economically significant, as 
provided in section 3(f)(1) of the Order). Any changes made in this 
proposed rule subsequent to its submission to OMB are identified in the 
docket file, which 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.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been 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. 4223). The Finding of No Significant Impact 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.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this proposed rule before publication and 
by approving it certifies that this proposed rule is not anticipated to 
have a significant economic impact on a substantial number of small 
entities. As stated in the June 30, 1998, proposed rule and September 
1, 1998, final rule on uniform physical condition standards, all HUD 
housing has been subject to physical condition standards and a physical 
inspection requirement. There are statutory directives to maintain HUD 
housing in a condition that is decent, safe, and sanitary. The rules on 
uniform physical conditions standards and uniform physical inspections 
do not alter these requirement, nor do they shift responsibility with 
respect to who conducts the physical inspection of the property. The 
entities and individuals responsible for the inspection of HUD 
subsidized properties remain responsible. This proposed rule is a 
follow-up to the September 1, 1998, final rule on uniform physical 
inspection standards by establishing an administrative process by which 
multifamily housing properties are analyzed, scored and ranked. With 
the exception of exigent circumstances, the administrative process, as 
described in the preamble, allows for appropriate and reasonable notice 
and opportunity for review and comment, and a reasonable period for 
corrective action. With respect to the physical inspection process 
itself, in the preamble to this proposed rule, HUD reiterated its 
commitment to provide the software at no cost to covered entities as 
well as the accompanying guidebooks and to publish a notice that gives 
covered entities reasonable notice of when the software and guidance 
are available. With the implementation of any new or modified program 
requirement, HUD intends to provide guidance to the covered entities, 
particularly small entities, to assist them in understanding the 
changes being made. Notwithstanding HUD's determination that this 
proposed rule would not have a significant economic impact on small 
entities, HUD specifically invites comments regarding alternatives to 
this proposed rule that would meet HUD's objectives as described in 
this preamble.

Executive Order, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on State and local governments and 
is not required by statute, or preempts State law, unless the relevant 
requirements of section 6 of the Executive Order are met. This rule 
does not have federalism implications and does not impose substantial 
direct compliance costs on State and local governments or preempt State 
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers for the 
programs that would be affected by this proposed rule are:

14.126--Mortgage Insurance--Cooperative Projects (Section 213)
14.129--Mortgage Insurance--Nursing Homes, Intermediate Care 
Facilities, Board and Care Homes and Assisted Living Facilities 
(Section 232)
14.134--Mortgage Insurance--Rental Housing (Section 207)
14.135--Mortgage Insurance--Rental and Cooperative Housing for 
Moderate Income Families and Elderly, Market Rate Interest (Sections 
221(d) (3) and (4))
14.138--Mortgage Insurance--Rental Housing for Elderly (Section 231)
14.139--Mortgage Insurance--Rental Housing in Urban Areas (Section 
220 Multifamily)
14.157--Supportive Housing for the Elderly (Section 202)
14.181--Supportive Housing for Persons with Disabilities (Section 
811)
14.188--Housing Finance Agency (HFA) Risk Sharing Pilot Program 
(Section 542(c))
14.856--Lower Income Housing Assistance Program--Section 8 Moderate 
Rehabilitation

List of Subjects in 24 CFR Parts 5 and 200

    Administrative practice and procedure, Aged, Claims, Drug abuse, 
Drug traffic control, Grant programs--housing and community 
development, Grant programs--Indians, Individuals with disabilities, 
Loan programs--housing and community development, Low- and moderate-
income housing, Mortgage insurance, Pets, Public

[[Page 66537]]

housing, Rent subsidies, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, title 24 of 
the CFR is proposed to be amended as follows:

PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS

    1. The authority citation for 24 CFR Part 5 continues to read as 
follows:

    Authority: 42 U.S.C. 3535(d), unless otherwise noted.

    2. In Sec. 5.701, paragraph (a) is revised, and a new paragraph (b) 
is added to read as follows:


Sec. 5.701  Applicability.

    (a) This subpart applies to housing assisted under the HUD programs 
listed in 24 CFR 200.853(a).
    (b) This subpart applies to housing with mortgages insured or held 
by HUD, or housing that is receiving assistance from HUD, under the 
programs listed in 24 CFR 200.853(b).
* * * * *

PART 200--INTRODUCTION TO FHA PROGRAMS

    3. The authority citation for 24 CFR part 200 continues to read as 
follows:

    Authority: 12 U.S.C. 1701-1715-18; 42 U.S.C. 2535(d).

    4. A new subpart P is added to 24 CFR part 200 to read as follows:

Subpart P--Physical Condition of Multifamily Properties

Sec.
200.850  Purpose.
200.853  Applicability.
200.855  Physical condition standards.
200.857  Administrative process for scoring and ranking the physical 
condition of multifamily housing properties.

Subpart P--Physical Condition of Multifamily Properties


Sec. 200.850  Purpose.

    The purpose of this subpart is to establish the physical conditions 
standards and physical inspection requirements that are applicable to 
certain multifamily housing properties.


Sec. 200.853  Applicability.

    This subpart applies to:
    (a) Housing assisted by HUD under the following programs:
    (1) All Section 8 project-based assistance. ``Project-based 
assistance'' means Section 8 assistance that is attached to the 
structure (see 24 CFR 982.1(b)(1) regarding the distinction between 
``project-based'' and ``tenant-based'' assistance);
    (2) Section 202 Program of Supportive Housing for the Elderly 
(Capital Advances);
    (3) Section 811 Program of Supportive Housing for Persons with 
Disabilities (Capital Advances); and
    (4) Section 202 loan program for projects for the elderly and 
handicapped (including 202/8 projects and 202/162 projects).
    (b) Housing with mortgages insured or held by HUD, or housing that 
is receiving insurance from HUD, under the following authorities:
    (1) Section 207 of the National Housing Act (NHA) (12 U.S.C. 1701 
et seq.) (Rental Housing Insurance);
    (2) Section 213 of the NHA (Cooperative Housing Insurance);
    (3) Section 220 of the NHA (Rehabilitation and Neighborhood 
Conservation Housing Insurance);
    (4) Section 221(d)(3) of the NHA (Market Interest Rate (MIR) 
Program);
    (5) Section 221(d)(3) and (5) of the NHA (Below Market Interest 
Rate (BMIR) Program);
    (6) Section 221(d)(4) of the NHA (Housing for Moderate Income and 
Displaced Families);
    (7) Section 231 of the NHA (Housing for Elderly Persons);
    (8) Section 232 of the NHA (Mortgage Insurance for Nursing Homes, 
Intermediate Care Facilities, Assisted Living Facilities, Board and 
Care Homes);
    (9) Section 234(d) of the NHA (Rental) (Mortgage Insurance for 
Condominiums);
    (10) Section 236 of the NHA (Rental and Cooperative Housing for 
Lower Income Families);
    (11) Section 241 of the NHA (Supplemental Loans for Multifamily 
Projects); and
    (12) Section 542(c) of the Housing and Community Development Act of 
1992 (12 U.S.C. 1707 note) (Housing Finance Agency Risk Sharing 
Program).


Sec. 200.855  Physical condition standards and physical inspection 
requirements.

    The physical condition standards and physical inspection 
requirements in 24 CFR part 5, subpart G, are applicable to the 
properties assisted or insured that are listed in Sec. 200.853.


Sec. 200.857  Administrative process for scoring and ranking the 
physical condition of multifamily housing properties.

    (a) Scoring and ranking of the physical condition of multifamily 
housing properties. (1) HUD's Real Estate Assessment Center (REAC) will 
score and rank the physical condition of certain multifamily housing 
insured properties listed in Sec. 200.853 upon the REAC's completion of 
its physical inspection of these properties (the baseline review), as 
described in HUD's Baseline Review Notice published on February 9, 
1999. Newly endorsed multifamily properties will be inspected in the 
first year after endorsement and then ranked in accordance with the 
process described in this proposed rule.
    (2) Depending upon the results of its physical condition 
inspection, a multifamily housing property will be assigned one of 
three designations--standard 1 performing, standard 2 performing and 
standard 3 performing--in accordance with the ranking process described 
in paragraph (b) of this section.
    (b) Methodology for Ranking. (1) Multifamily housing properties 
will be ranked in accordance with the methodology provided in this 
paragraph (b). Multifamily housing properties are scored on the basis 
of 100 point scale. For each designation category, the lowest score in 
the category becomes the numerical threshold for that category.
    (i) Standard 1 Performing Property--Highest 20 Percent. If a 
property scores in the highest 20 percent of the physical condition 
inspection of multifamily housing properties, the property will be 
designated a standard 1 performing property. Properties designated as 
standard 1 performing properties will be required to undergo a physical 
inspection once every three (3) years.
    (ii) Standard 2 Performing Property--Next Highest 30 Percent. If a 
property scores in the next highest 30 percent of the physical 
condition inspection of multifamily housing properties, the property 
will be designated a standard 2 performing property. Properties 
designated as standard 2 performing properties will be required to 
undergo a physical inspection once every two (2) years.
    (iii) Standard 3 Performing Property--Remaining 50 Percent. If a 
property scores in the remaining 50 percent in the physical condition 
inspection of multifamily housing properties, the property will be 
designated a standard 3 performing property. Properties designated as 
standard 3 performing properties will continue to undergo an annual 
physical inspection as currently required under covered HUD programs.
    (2) Owners of multifamily housing properties scoring in a standard 
1 or standard 2 range which have been cited by the REAC as having a 
Exigent Health and Safety deficiency(s) are obligated to resolve the 
deficiency(s) to be classified as standard 1 and standard 2 properties. 
The owners must certify and provide reasonable evidence that the

[[Page 66538]]

deficiency(s) has been resolved to the applicable Multifamily Hub 
Director.
    (3) Regardless of the performance designation assigned to an 
owner's property, an owner is obligated to maintain its property in 
accordance with HUD's uniform physical condition standards as required 
by 24 CFR part 5, subpart G, the Regulatory Agreement and/or the 
Housing Assistance Payment (HAP) Contract. Good management principles 
require an owner to conduct routine inspections of its projects, 
develop improvement plans, and again, maintain its property to meet the 
standard of decent, safe, sanitary and in good repair.
    (c) Owner's review of physical inspection report and identification 
of objectively verifiable and material error. (1) Upon completion of a 
physical inspection of a multifamily housing property, the REAC will 
provide the owner with a physical inspection report. The physical 
inspection report includes a copy of the physical inspection results, 
the physical condition score and ranking, an explanation of the score 
and the owner's right to request a technical review of the physical 
inspection results as described in paragraph (d) of this section.
    (2) The owner must carefully review the report, particularly those 
items classified as exigent health and safety (EHS). The owner is also 
responsible for conducting its own survey of the total project based on 
the REAC's physical inspection findings. The owner must mitigate all 
EHS items immediately, and the owner must file a written report with 
the local HUD office within 72 hours of the inspection.
    (3) If, following review of the physical inspection results and 
score, the owner reasonably believes that an objectively verifiable and 
material error (or errors) occurred in the inspection, which, if 
corrected, will result in a significant improvement in the property's 
overall score, the owner may request a technical review within the 
following period, as applicable:
    (i) 15 calendar days if the results and score are electronically 
transmitted to the owner; or
    (ii) 30 calendar days if the results and score are transmitted to 
the owner by hard copy by certified mail.
    (d) Technical review of physical inspection results. A request for 
a technical review of physical inspection results must be submitted in 
writing to the Director of the Real Estate Assessment Center and must 
be received by the REAC no later than the 15th calendar day or 30th 
calendar day, as applicable under paragraph (c)(3) of this section, 
following issuance of the physical inspection report to the owner.
    (1) Request for technical review. The request must be accompanied 
by the owner's reasonable evidence that an objectively verifiable and 
material error (or errors) occurred which if corrected will result in a 
significant improvement in the overall score of the owner's property. A 
technical review of physical inspection results will not be conducted 
based on conditions that were corrected subsequent to the inspection. 
Upon receipt of this request from the owner, and recommendation of the 
appropriate HUD Multifamily Hub Director, the REAC will review the 
physical inspection and the owner's evidence. If the REAC's review 
determines that an objectively verifiable and material error (or 
errors) has been documented and that it is likely to result in a 
significant improvement in the property's overall score, the REAC will 
take one or a combination of the following actions: undertake a new 
inspection; correct the original inspection; or issue a new physical 
condition score.
    (2) Burden of proof that error occurred rests with owner. The 
burden of proof rests with the owner to demonstrate that an objectively 
verifiable and material error (or errors) occurred in the REAC's 
inspection through submission of evidence, which if corrected will 
result in a significant improvement in the property's overall score. To 
support its request for a technical review of the physical inspection 
results, the owner may submit photographic evidence, written material 
from an objective source such as a local fire marshal or building code 
official, or other similar evidence.
    (3) Material errors. An objectively verifiable material error must 
be present to allow for a technical review of physical inspection 
results. Material errors are those that exhibit specific 
characteristics and meet specific thresholds. The three types of 
material errors are as follows.
    (i) Building data error. A building data error occurs if the 
inspection includes the wrong building or a building that was not owned 
by the property, including common or site areas that were not a part of 
the property. Incorrect building data that does not affect the score, 
such as the address, building name, year built, etc., would not be 
considered material, but is of great interest to HUD and will be 
corrected upon notice to the REAC.
    (ii) Unit count error. A unit count error occurs if the total 
number of units considered in scoring is incorrect. Since scoring uses 
total units, the REAC will examine instances where the participant can 
provide evidence that the total units used is incorrect.
    (iii) A non-existent deficiency error. A non-existent deficiency 
error occurs if the inspection cites a deficiency that does not exist.
    (4) Significant improvement. Significant improvement refers to the 
correction of a material error, asserted by the owner, which causes the 
score for the owner's property to cross an administratively significant 
threshold (for example, the property would be redesignated from 
standard 3 performing to standard 2 performing or from standard 2 
performing to standard 1 performing).
    (5) Determining whether material error occurred and what action is 
warranted. Upon receipt of the owner's request for technical review of 
a property's physical inspection results, the REAC will evaluate the 
owner's property file and the evidence provided by the owner that an 
objectively verifiable and material error occurred which, if corrected, 
would result in a significant improvement in the property's overall 
score. If the REAC's evaluation determines that an objectively 
verifiable and material error (or errors) has been reasonably 
documented by the owner and if corrected would result in a significant 
improvement in the property's overall score, then the REAC shall take 
one or a combination of the following actions:
    (i) Undertake a new inspection;
    (ii) Correct the inspection report; or
    (iii) Issue a new physical condition score.
    (6) Responsibility for the cost of a new inspection. If a new 
inspection is undertaken by the REAC and the new inspection score 
results in a significant improvement in the property's overall score, 
then HUD shall bear the expense of the new inspection. If no 
significant improvement occurs, then the owner must bear the expense of 
the new inspection. The inspection cost of a new inspection, if paid by 
the owner, is not a valid project operating expense. The new inspection 
score will be considered the final score.
    (e) Adjustment of physical condition score based on considerations 
other than technical review and reinspection. Under certain 
circumstances, it may be appropriate for HUD to review the results of a 
physical inspection which are anomalous or have an incorrect result due 
to facts and circumstances affecting the inspected property which are 
not reflected in the inspection or reflected inappropriately in the 
inspection. Circumstances such as, but not necessarily limited to, 
inconsistencies between local code

[[Page 66539]]

requirements and the HUD physical inspection protocol; conditions which 
are permitted by variance or license or which are preexisting physical 
features non-conformities and are inconsistent with the HUD physical 
condition protocol; or cases where the owner has been scored for 
elements (e.g., roads, sidewalks, mail boxes, resident owned 
appliances, etc.) that it does not own and is not responsible for 
maintaining, may be addressed by a formal procedure to be initiated by 
the owner's notification to the applicable HUD Field Office and 
submission to that office of appropriate proof of the anomalous or 
inappropriate application. This process may result in a reinspection 
and/or rescoring of the inspection based on Office of Housing 
recommendation after review and approval of the owner's submission of 
appropriate proof of the anomalous or inappropriate application. An 
owner may submit the request for this adjustment either prior to or 
after the physical inspection has been concluded. HUD shall define, by 
notice, the procedures to be followed to address circumstances 
described in paragraph (e) of this section. The procedures outlined in 
this Notice shall be binding on the REAC, the Office of Housing and the 
DEC. The notice will be applicable to both public housing and 
multifamily properties.
    (f) Administrative review of properties. The files of any of the 
multifamily housing properties may be submitted to HUD's Departmental 
Enforcement Center (DEC) or to the appropriate HUD Multifamily Hub 
Director (MFD) for evaluation, or both, at the discretion of the Office 
of Housing.
    (1) Notification to owner of submission of property file to the MFD 
and DEC. The Department will provide for written notification to the 
owner that the file on the owner's property is being submitted to the 
MFD and/or the DEC for evaluation. The notification will be provided at 
the time the REAC issues the physical inspection report to the owner or 
at such other time as a referral occurs.
    (2) 30-Day period for owner to provide the DEC with supporting and 
relevant information and documentation. The owner has 30 calendar days, 
from the date of the REAC written notification to the owner, to provide 
comments, proposals, or any other information to the DEC which will 
assist the MFD and DEC in conducting a comprehensive evaluation of the 
property. A proposal provided by an owner may include the owner's plan 
to correct deficiencies (corrective action plan). During the 30-day 
response time available to the owner, the DEC may encourage the owner 
to submit a corrective action plan. The corrective action plan, if 
timely submitted during the 30-day period (whether on the owner's 
initiative or at the request of the DEC), may serve as additional 
information for the DEC to consider in determining appropriate action 
to take at the conclusion of the evaluation period. If not submitted 
during the 30-day response time, a corrective action plan may be 
required of the owner at the conclusion of the DEC's evaluation of the 
property.
    (3) Evaluation of the property. During the evaluation period, the 
DEC will perform an analysis of the multifamily housing property, which 
may include input from tenants, HUD multifamily officials, elected 
officials, and others as may be appropriate. Although the MFD will 
assist with the evaluation, for insured mortgages, the DEC will have 
primary responsibility for the conclusion of the evaluation of the 
property after taking into consideration the input of interested 
parties as described in this paragraph (f)(2). The DEC's evaluation may 
include a site visit to the owner's property.
    (4) Continuing responsibilities of HUD Multifamily Program Offices 
and Mortgagee. During the period of DEC evaluation, HUD's multifamily 
program offices continue to be responsible for routine asset management 
tasks on properties and all servicing actions (e.g., rent increase 
decisions, releases from reserve account approvals). In addition, 
during this period of evaluation, the mortgagee shall continue to carry 
out its duties and responsibilities with respect to the mortgage.
    (g) Enforcement action. If, at the conclusion of the evaluation 
period, the DEC determines that enforcement action is appropriate, the 
DEC will provide written notification to the owner of the DEC's 
decision to formally accept the property for enforcement purposes.
    (1) DEC Owner Compliance Plan. (i) After notification to the owner 
of the DEC's decision, the DEC will produce a proposed action plan (DEC 
Compliance Plan), the purpose of which is to improve the physical 
condition of the owner's property, and correct any other known 
violations by the owner of its legal obligations. The DEC Compliance 
Plan will describe:
    (A) The actions that will be required of the owner to correct, 
mitigate or eliminate identified property deficiencies, problems, 
hazards, and/or correct any other known violations by the owner;
    (B) The period of time within which these actions must be 
completed; and
    (C) The compliance responsibilities of the owner.
    (ii) The DEC Compliance Plan will be submitted to the MFD for 
review and concurrence. If the MFD does not concur, the DEC Compliance 
Plan will be submitted to the Deputy Assistant Secretary for Housing 
and the Deputy Director of the DEC for review and concurrence. If the 
DEC Compliance Plan remains unapproved, a final decision on the plan 
will be made by HUD's Deputy Secretary in consultation with the General 
Counsel, the Assistant Secretary for Housing, and the Director of the 
DEC.
    (iii) Following submission of the DEC Compliance Plan to the owner, 
the owner will be provided a period of 30 calendar days to review and 
accept the DEC Compliance Plan. If the owner agrees to comply with the 
DEC Compliance Plan, the plan will be forwarded to the appropriate 
Multifamily Office for implementation and monitoring of completion of 
the plan's requirements.
    (2) Counter compliance plan proposal by owner. The owner may submit 
an acceptable counter proposal to the DEC Compliance Plan. An owner's 
counter proposal to a DEC Compliance Plan must be submitted no later 
than the 30th day following submission of the DEC Compliance Plan to 
the owner. The DEC, in coordination with the MFD, may enter into 
discussions with the owner to achieve agreement to a revised DEC 
Compliance Plan. If the owner and the DEC agree on a revised DEC 
Compliance Plan, the revised plan will be forwarded to the appropriate 
Multifamily Office for implementation and monitoring of completion of 
the plan's requirements.
    (3) Non-cooperation and Non-compliance by owner. If at the 
conclusion of the 30th calendar day following submission of the DEC 
Compliance Plan to the owner, the DEC receives no response from the 
owner, or the owner refuses to accept the DEC Compliance Plan, or to 
present a counter compliance plan proposal, or if the owner accepts the 
DEC Compliance Plan or revised DEC Compliance Plan, but refuses to take 
the actions required of the owner in the plan, the DEC may take 
appropriate enforcement action.
    (4) No limitation on existing enforcement authority. The 
administrative process provided in this section does not prohibit the 
Office of Housing, the DEC, or HUD generally, to take whatever action 
may be necessary when necessary (notwithstanding the commencement of 
this process), as authorized under existing statutes, regulations, 
contracts or other

[[Page 66540]]

documents, to protect HUD's financial interests in multifamily 
properties and to protect the residents of these properties.
    (h) Limitations on material alteration of physical inspection 
software. HUD will not materially alter the physical inspection 
requirements in a manner which would materially increase the cost of 
performing the inspection.

    Dated: November 4, 1999.
William C. Apgar,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 99-30814 Filed 11-24-99; 8:45 am]
BILLING CODE 4210-27-P