[Federal Register Volume 65, Number 237 (Friday, December 8, 2000)]
[Rules and Regulations]
[Pages 77230-77244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31306]



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Part VII





Department of Housing and Urban Development





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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; Final Rule

  Federal Register / Vol. 65, No. 237 / Friday, December 8, 2000 / 
Rules and Regulations  

[[Page 77230]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 200

[Docket No. FR-4452-F-02]
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: Final rule.

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SUMMARY: This rule establishes for multifamily housing 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. This rule follows publication of a November 26, 1999 
proposed rule and takes into consideration public comment received on 
the proposed rule.

DATES: Effective Date: January 8, 2001.

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 Technical 
Assistance 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. Uniform Physical Conditions Standards and Uniform Physical 
Inspection Protocol

    This final rule follows publication of a November 26, 1999, 
proposed rule (65 FR 66539) and builds on the rule issued by HUD on 
September 1, 1998 (63 FR 46566), 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 a 
uniform physical inspection protocol, 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 protocol is 
intended to assure that, to the greatest extent possible, there is 
uniformity and objectivity in the evaluation of the physical condition 
of HUD properties.
    The preamble to the November 26, 1999, proposed rule provided a 
detailed overview of HUD's proposal for the administrative process for 
the assessment of insured and assisted housing, and the basis for HUD's 
proposal. The preamble to this rule does not repeat that information.

II. Significant Changes Made at This Final Rule Stage

    The following highlights significant changes made to the proposed 
regulations at this final rule stage.
     HUD amends Sec. 5.705 to remove paragraph (b). Paragraph 
(b) of this section provides that HUD will notify the public when the 
inspection software for HUD's physical inspection protocols and the 
accompanying guidebook are issued and available. This section further 
provides that HUD will publish a notice in the Federal Register to 
inform the public when the software and guidebook are available, and 
the notice will provide 30 days within which covered entities must 
prepare to conduct inspections in accordance with part 5, subpart G. 
The notice described by Sec. 5.705 was published earlier in the Federal 
Register. Since HUD has published the notice in accordance with 
Sec. 5.705(b), paragraph (b) is no longer relevant and is removed by 
this rule.
     HUD amends Sec. 200.853, which lists the HUD multifamily 
programs to which HUD's physical condition standards and physical 
inspection protocols are applicable. For the Section 241 Program 
(Section 241 of the National Housing Act--Supplemental Loans for 
Multifamily Projects), HUD clarifies that Section 241 properties are 
subject to inspection, except where the primary (first or senior) loan 
is insured or assisted by HUD under another program listed in 
Sec. 200.853. Without this clarification, the regulatory language would 
subject Section 241 properties to two inspections--one inspection under 
the Section 241 program, and one inspection under another program 
covered by this subpart.
     HUD amends Sec. 200.855 to add a new paragraph (b) to 
clarify that for a property with more than one HUD insured loan, only 
the first mortgage lender is required to conduct the physical 
inspection. The second mortgage lender, however, must be provided a 
copy of the physical inspection report by the first mortgage lender.
     HUD also amends Sec. 200.855 to add a new paragraph (c) 
that specifies when the responsible entity must perform the required 
physical inspection. For example, all annual inspections must be 
performed in the following calendar year and no earlier than 9 months 
and no later than 15 months from the date of the last inspection. 
Comparable time periods are provided for inspections that must occur 
every two years and those that must occur every three years.
    This new paragraph (c) also provides that a newly endorsed 
multifamily property will receive its first physical inspection no 
earlier than 21 months but not later than 27 months from the date of 
final endorsement, but in no event shall the inspection be performed 
after the end of the calendar year following the two year anniversary 
date of final endorsement.
    HUD is aware that linking the timing of the inspection to the 
calendar year may constrain the flexibility to schedule some 
inspections, but HUD believes that coordinating the timing of the 
inspection with the end of a calendar year is important to ensuring 
that information required to be reported by the end of a calendar year 
is reported by such deadline and properties are scheduled for 
inspection at their appropriate cycle.
    On the subject of when the responsible entity must conduct its 
physical inspection, HUD advises in this preamble and in the notice 
published elsewhere in today's edition of the Federal Register that HUD 
will complete all annual inspections required of properties covered by 
this part through December 31, 2000. Responsible entities should begin 
preparations for either one year and two year cycle inspections in 
accordance with this rule.
     HUD amends Sec. 200.857 to provide for designation of 
properties as either standard 1, standard 2, or standard 3, on the 
basis of fixed points, not percentile

[[Page 77231]]

groupings as provided by the proposed rule. Properties receiving scores 
of 90 points or higher on a physical inspection will be designated as 
standard 1. Properties receiving scores of 80 points or higher but less 
than 90 on a physical inspection will be designated as standard 2. 
Properties receiving scores of less than 80 will be designated as 
standard 3. Because scores can include fractions (e.g. 89.3), a score 
that includes a fraction below one half point will be rounded down, and 
a score that includes a fraction of one half point or higher will be 
rounded up. For example, a property score of 89.5 or 89.6 will be 
rounded to 90 and the property will be designated as standard 1. A 
property score of 89.4 will be rounded down to 89 and the property will 
be designated as standard 2.
    HUD received considerable comment on the method provided in the 
proposed rule by which properties are designated as standard 1, 2 or 3. 
The commenters opposed designation on the basis of percentile groupings 
and recommended that designation be made on the basis of fixed points. 
HUD agreed with the recommendations of the commenters and has made this 
change at this final rule stage. HUD recognizes that fixed points 
provide a clear standard, understandable by those being rated at the 
time they are rated. HUD also recognizes that fixed point scores 
provide additional incentive for improvement since with a fixed score, 
owners know that improvement to a cut point will result in a less 
burdensome inspection schedule. HUD welcomes any additional comments on 
the change from a percentile approach to a fixed point approach in the 
designation of properties as standard 1, 2, or 3, and may make 
adjustments on the basis of comments received.
     HUD amends paragraph (a) of Sec. 200.857 to remove 
reference to REAC's baseline physical inspection of properties. The 
baseline review has been completed.
     HUD amends paragraph (c) of Sec. 200.857 to clarify that 
the 72 hours to report correction of exigent health and safety 
violations refers to 3 business days from the date of the physical 
inspection.
     HUD amends paragraph (d)(4) of Sec. 200.857 to revise the 
definition of ``significant improvement'' to mean 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), or result in an increase of 10 points or more 
(new language is highlighted).
     HUD amends paragraph (e) of Sec. 200.857 to provide that 
if an owner requests an adjustment of the physical condition score 
based on considerations other than those for technical review after the 
physical inspection report has been submitted to the owner (either 
electronically through the internet or by mail), the owner must make a 
request for adjustment to REAC within 45 days following submission of 
the report to the owner by REAC. HUD may, but is not required to 
consider requests made after that period. However, since the items that 
may be requested as a basis for score adjustment are unique and not 
subject to addition and change from period to period, owners are 
strongly encouraged to request database corrections prior to 
inspections. In this way, the inspection results can fully consider 
approved corrections, eliminating score deductions for approved 
database corrections and the need for post report adjustments. HUD also 
amends this paragraph to provide that requests for database adjustments 
are to be directed to REAC. The proposed rule provided for requests to 
be submitted to the applicable HUD Field Office. Since REAC, however, 
is the point of contact for requests for technical review, HUD 
determined that REAC is also the appropriate point of contact for 
requests for database adjustments.
     HUD adds a new paragraph (f) to Sec. 200.857 to clarify 
when an owner's physical condition score becomes final. This new 
paragraph also notes that final physical condition scores will be made 
public by HUD, and the owner must make its physical inspection 
information (the physical inspection report, scores) available to 
residents to review upon request during business hours. Paragraph (f), 
(g) and (h) in the proposed rule are redesignated (h), (i) and (j), 
respectively.
     HUD adds a new paragraph (g) to Sec. 200.857 to require an 
owner to notify its residents of upcoming physical inspections of the 
owner's property and to clarify the documents related to the physical 
condition scoring process that the owner must make available to its 
residents and when these documents must be made available. HUD also 
welcomes any additional comments on new paragraph (g).
     HUD amends newly designated paragraph (h) of Sec. 200.857 
to provide that a multifamily property that receives a score of 30 
points or less on its physical condition inspection will be referred to 
HUD's Departmental Enforcement Center for evaluation.
    In addition to these changes, HUD has made certain editorial and 
technical changes throughout the rule for the purposes of clarity.

III. Discussion of Public Comments

    At the close of the public comment period on the November 26, 1999, 
proposed rule, HUD received 53 public comments. The commenters included 
residents, resident organizations and resident advocates, two housing 
authorities, nonprofit housing providers and housing industry 
organizations and associations.
    In the discussion of public comments that follows, the heading 
``Comment'' states the issue, opinion, recommendation or question 
raised by the commenter or commenters, and the heading ``Response'' 
presents HUD's response to the issue, question or recommendation raised 
by the commenters.

Resident Involvement in the Physical Inspection Process

    Many of the resident commenters on the rule stated that the rule 
should provide for more resident involvement in the physical inspection 
process. The comments on resident involvement are as follows.
    Comment. The proposed rule omits almost completely resident 
involvement in the physical inspection process. The rule should provide 
for resident involvement in the physical inspection process and 
specifically, provide for residents to be notified of the physical 
inspection results, as well as be provided with copies of the 
inspection report, any related documents, any owner appeals, and 
compliance plans. The rule also should provide for the issuance of 
quality control reports that include the input of residents. These 
recommended provisions should be placed in a new regulatory section 
that will address how residents will participate in the physical 
inspection process.
    Response. HUD recognizes the importance of involving residents in 
the physical inspection process to ensure that their housing is decent, 
safe, sanitary and in good repair. HUD declines, however, to adopt the 
suggestion that the rule require resident involvement in the physical 
inspection of the housing as recommended by the commenters. HUD has had 
many discussions with resident groups on this topic and has explained 
that the inspection process itself does not lend itself to 
conversational input. Instead,

[[Page 77232]]

the process relies on objective observation.
    To ensure that there is sufficient opportunity for the residents to 
participate in seeing that all necessary repairs are made in a timely, 
efficient and comprehensive manner, HUD is making several changes to 
the rule at this final rule stage. As noted earlier in this preamble, 
HUD is requiring owners to notify their residents of upcoming physical 
inspections of their units and the housing development, generally. HUD 
is also requiring owners to make the physical inspection information 
(the physical inspection report, scores) available to residents to 
review upon request during regular business hours. With respect to the 
results of a property's physical condition, HUD will make public the 
results of the physical inspection scores of the properties similar to 
the manner in which HUD makes public the results of physical inspection 
scores of public housing under the Public Housing Assessment System.
    Comment. Residents should have the same right of appeal of physical 
inspection scores that is provided to owners. Residents should have the 
right to appeal any and all aspects of the physical inspection finding, 
and appeals should not be limited to material errors.
    Response. The responsibility for the physical condition of the 
property rests with the owner. It is the owner's responsibility to 
review the physical inspection report, and to submit information 
clearly describing the errors and omissions that have a significant 
impact on the physical inspection score in accordance with the 
conditions and requirements of the rule. However, as discussed earlier 
in this preamble, HUD has added a new paragraph at this final rule 
stage that requires owners to notify residents of upcoming physical 
inspections of the properties and to make documents related to the 
physical inspection available to the residents, and that also invites 
residents to submit comments directly to HUD on the condition of the 
housing in which they reside.
    Comment. A resident representative should be present for the on-
site physical inspections.
    Response. HUD declines to impose this requirement in its rule. The 
intent of the physical inspection process is to limit the inconvenience 
to the owner and the residents of the property being inspected. HUD 
believes that increasing the number of participants in the physical 
inspection process could slow down the inspection (thereby increasing 
inconvenience) and also jeopardize the objectivity of the inspection 
process.
    Comment. The rule should provide for residents, rather than owners 
and managers, to verify that any exigent health and safety violations 
have been corrected by the managers and owners.
    Response. Again, the physical condition of the property is the 
owner's responsibility and correction of exigent health and safety 
violations (as well as other deficiencies) is the owner's 
responsibility, as is the verification that these violations have been 
corrected. The sanctions can be severe if an owner falsely certifies 
exigent health and safety violations have been corrected.
    Comment. The rule should provide that the property inspector is 
required to meet with the residents of the property. The rule also 
should provide that the inspectors are to leave a resident a notice if 
a unit was inspected and no one was at home.
    Response. HUD declines to adopt these suggestions. The duties of 
the inspector are limited to conducting the physical inspection of the 
property. Notification to absent residents is the owner's 
responsibility. This is one reason an owner's representative is 
required to accompany the inspector.
    HUD notes that several resident commenters made suggestions about 
how a resident survey should be conducted. Although resident surveys 
were part of the rulemaking for HUD's Public Housing Assessment System 
(PHAS) regulations, they are not part of this rulemaking, but HUD is 
further considering this issue.

Physical Inspection Coverage

    Comment. HUD's physical inspection software should address tenant 
malfeasance or nonfeasance and the owner should not be penalized for 
tenant noncompliance. The physical inspection needs to be limited to 
habitability issues, not tenant housekeeping/tenant caused conditions, 
unless these conditions are a direct threat to structural soundness or 
a safety issue.
    Response. HUD's physical inspection system is objective and does 
not distinguish between those defects that are the fault of a resident 
and those that are the fault of the owner. The physical inspection 
system is simply a tool for observing and transmitting data regarding 
the physical condition of the property at the time of the inspection. 
An owner of HUD assisted or insured housing is contractually 
responsible for maintaining the physical condition of the property. HUD 
anticipates that owners of such assisted or insured rental properties, 
like all landlords, will rely on lease provisions regarding the 
resident maintenance or destruction of the units, and HUD encourages 
owner to do so in compliance with the physical condition standards. 
Good property management, which includes regular housekeeping and 
preventative maintenance inspections through the year, coupled with 
strict lease enforcement will result in well-maintained housing that 
meets the standard.
    Comment. The rule should view as health and safety issues the basic 
accessibility design features which are required in federally funded 
housing units to assure all people can safely utilize the dwellings. 
Proper and required accessible design features contribute to the 
overall well being, both physically and financially of the housing. The 
rule also should clarify that deficiencies with any physical 
accessibility features of the units (or the housing, generally, will be 
classified as Exigent Health and Safety Deficiencies and shall require 
resolution.
    Response. Housing design, including accessibility design, is not a 
feature of HUD's Uniform Physical Condition Standards. HUD's Uniform 
Physical Condition Standards focus on whether the housing is habitable, 
is decent, safe, sanitary and in good repair. HUD's Office of Fair 
Housing and Equal Opportunity is charged with determining compliance 
with accessibility requirements under the Fair Housing Act or Section 
504 of the Rehabilitation Act of 1973 where complaints of violation of 
these statutory requirements have been alleged. (This office, however, 
is not responsible for ongoing inspections of maintenance of 
accessibility features in a unit or building.) To assist HUD's Office 
of Fair Housing and Equal Opportunity in its task, the inspection 
collects specific information related to general accessibility. This 
information is provided to the Office of Fair Housing and Equal 
Opportunity in the event such information reveals a absence of 
accessible features where these features should exist.

Ranking and Thresholds for Designation

    The overwhelming majority of commenters who commented on the 
proposed performance designations (i.e., Standard 1, Standard 2, 
Standard 3), which were based on percentile groupings, were opposed to 
the percentage groupings and requested that performance categorizations 
be based on fixed scores. The comments on this issue included the 
following.
    Comments. The ranking classification in the proposed rule fails to 
provide guidance as to the numeric cut-off for each performance 
designation (i.e.,

[[Page 77233]]

standard 1, standard 2, standard 3.). The rule should only use numeric 
classifications.
    The issuance of grades by curving results will not work. The 
numeric scoring has in fact become the standard in the past 1\1/2\ 
years and should not be changed. A curved ranking is at odds with the 
possibility of a meaningful appeal.
    HUD needs to explain the rationale in holding public housing to an 
absolute standard (under PHAS) and private HUD assisted housing to a 
relative standard based on an absolute grade.
    HUD should not use percentages, but set a score to objectively rank 
properties and then conduct annual inspection only for the marginal 
properties in the bottom 17% or so.
    With baseline results completed, to distinguish between properties 
that all are deemed to be satisfactory based on the percentages in the 
proposed rule is arbitrary and it increases lender inspection costs 
with no apparent benefit.
    An absolute score is preferable to the standards in the proposed 
rule.
    Response. As noted earlier in this preamble, this final rule sets 
the numeric standards for all three categories. As noted earlier in 
this preamble, HUD recognizes the need by owners for a clear standard, 
understandable by those being rated at the time they are rated, and 
fixed points provide this standard. HUD recognizes that the percentile 
approach was obscure in this regard.
    Comment. The rule did not advise how HUD will make known the 
numeric thresholds for the three tiers and how often the thresholds 
will be evaluated. If numerical thresholds are to be applied based on 
national numerical thresholds or will regions have their own discrete 
numerical assignments on the administrative significant thresholds.
    Response. All thresholds will be national. Any changes to the 
thresholds will be made only as needed to maintain the health of HUD's 
portfolio, and HUD will provide appropriate notification of any changes 
to the numerical thresholds.

Frequency of Inspection and Post-Inspection Processes

    Comment. Physical inspections of properties should be mandatory 
when requested by 10% or more of the residents of a property, or when 
requested by a resident organization that meets HUD's standards.
    Response. HUD declines to adopt this suggestion as a regulatory 
requirement. If there are concerns by residents of the property in 
which they reside, they are encouraged to contact their local HUD Field 
Office and relay these concerns, and HUD will make the appropriate 
inquiries to follow-up on these concerns.
    Comment. The frequency of inspections should be determined by the 
property's score on the 100 point scale, rather than its score relative 
to other properties. It is the condition of the building that is of 
concern and it is only the building's condition that is within the 
owner's power to control--not the score relative to other projects.
    Response. As noted earlier in this matter, the rule has been 
revised to provide for fixed point scores and the frequency of 
inspections is based on these fixed point scores.

Verification That Repairs Have Been Made

    Comment. Owners should not be allowed to self-certify that repairs 
have been made. This self-certification is at odds with HUD's emphasis 
on strict, objective, and professional inspections. When an inspector 
finds violations, management is not concerned about correction of these 
violations because no one comes back for two or three years, and when 
HUD returns, it is a different inspector who does not review the 
previous report. The rule should require reinspections by the same 
inspector to confirm that repairs have been made.
    Response. HUD does not agree that it is practical or necessary to 
require that subsequent inspections be conducted by the same person, 
year after year. HUD and mortgagees will generally use contract 
inspectors, and it is not unusual for contractors or personnel employed 
by contractors to change from year to year. In addition, the design of 
HUD's physical inspection system focuses on an inspection of the 
property that will produce objective, consistent results. Therefore, 
the person who undertakes the inspection, provided the person is 
trained and certified to use HUD's inspection system, is not a 
determining factor in the outcome of the inspection. Additionally, 
those properties for which there are serious physical concerns are 
inspected annually, not every two or three years as the comment 
suggests. Given how the inspection process is conducted, the 
certification required of owners is not at odds with HUD's inspection 
system. The owners' certification that repairs have been completed is 
part of an ongoing monitoring plan which will assist HUD in determining 
if conditions have improved.
    Comment. HUD should take strong action against owners with 
seriously substandard buildings--that is the owners who fail to comply 
with the physical condition standards. The owner's properties should be 
transferred to a non-profit or to resident owners who will maintain the 
properties as decent, safe and affordable housing.
    Response. HUD has no authority to require the transfer of owners' 
properties that have been found substandard, to a non-profit 
organization or residents or resident organization but, if these 
organizations have the resources to correct the problems, they may be 
eligible purchasers of the properties. The rule, however, provides for 
the full range of enforcement actions available to HUD to initiate 
against owners who refuse or fail to comply with HUD's physical 
condition standards.
    Comment. With respect to administrative review of properties and 
enforcement actions, the rule should provide that reinspection of 
properties is mandatory where there is a Departmental Enforcement 
Center (DEC) Compliance Plan in place.
    Response. HUD declines to adopt this recommendation as a regulatory 
requirement, but HUD notes that the DEC has the option to take this 
action under the rule. Properties under evaluation by the DEC as a 
result of physical condition deficiencies would be reinspected 
annually.

Properties Covered by the Rule

    Comment. Nursing homes, intermediate care facilities, assisted 
living facilities, and board and care homes should be excluded from the 
rule's coverage.
    Response. HUD requires inspection of these properties to determine 
if Federal Housing Administration (FHA) funds are at risk and if the 
physical condition meets the needs of the resident population. Since 
these properties are insured or HUD-held, a physical inspection is 
appropriate.
    Comment. Reference to coverage of Section 241 of the National 
Housing Act (NHA) projects (Supplemental Loans for Multifamily 
Projects) in the rule should be modified to provide that these projects 
are to be inspected except where the underlying mortgage is insured or 
assisted by HUD under a program covered in this part. Without this 
qualification, there may be duplication of inspection.
    Response. As noted earlier in the preamble (see Section II), HUD 
has made this clarification in this final rule.
    Comment. The proposed rule does not address new construction 
properties. New properties in conformance with HUD's final cost 
certification should be

[[Page 77234]]

given a 3 year waiver before inspection begins.
    Response. As discussed earlier in this preamble (under Section II), 
the final rule addresses newly endorsed properties and provides for a 
physical inspection to be conducted within approximately two years from 
final endorsement.

The Training and Qualifications of the Physical Inspectors

    Comment. The training provided to inspectors is still not 
sufficient to ensure proper application of the physical condition 
standards consistently between properties. While HUD's physical 
condition and inspection system is clearly more objective in its 
design, it is still subject to wide variations in its implementation 
which is attributable, in part, to minimally trained inspectors looking 
at similar conditions and reporting them with varying degrees of 
severity. HUD should implement a uniform method of training and 
certification.
    Response. The training of inspectors who are certified in the use 
of the HUD inspection protocol is standardized. To ensure appropriate 
and adequate training of inspectors, HUD sought experts in the field 
who would take the lead in actually presenting the materials developed 
by HUD and training the inspectors. In addition to selecting experts in 
the field to perform the training, every inspector candidate must meet 
the minimum qualification requirements determined by HUD. The inspector 
candidates also must take the required course and then take and pass a 
test. HUD monitors and controls all aspects of this training process 
through REAC.
    Since the inspection under HUD's new standards and physical 
condition protocols began in approximately October 1998, the initial 
start-up involved some refining as one would expect given the size and 
magnitude of the portfolio to be inspected. In certain cases, problems 
were encountered and HUD responded to these problems. HUD believes that 
the process overall, however, is now running smoothly. HUD is striving 
to constantly improve and refine the process and will continue to do so 
in the future. In this regard, HUD also provides for periodic 
retraining of the inspectors, to ensure that the inspectors are up-to-
date and familiar with any changes made to the physical condition 
protocol and software.
    HUD acknowledges that even with qualification and training 
requirements imposed on inspectors, some inspectors, as is the case in 
any profession, perform better than others. REAC monitors the 
inspectors, and HUD invites owners that have concerns about an 
inspector's ability to contact REAC through its Technical Assistance 
Center (1-888-245-4860).
    Comment. Inspectors need to have knowledge of local building and 
fire codes in order to conduct an accurate and informed inspection.
    Response. HUD disagrees with this suggestion. HUD's physical 
inspection protocol have some basis in a national codes (e.g., fire 
safety) but there is too much variation among local and state codes to 
make the use of local code an efficient and effective alternative to 
HUD's physical inspection protocols. Additionally, the responsibility 
of HUD contract inspectors is to determine whether HUD assisted and 
assured housing meets HUD's Uniform Physical Condition Standards, not 
to ensure enforcement of local building codes.
    It is the responsibility of the owner to be cognizant of and abide 
by all local codes. HUD notes, however, that there are allowances built 
into HUD's physical inspection protocols, as noted in the November 26, 
1999 proposed rule, that provide for an owner to notify HUD of 
significant conflicts between HUD's Uniform Physical Condition 
Standards and local code requirements or other local requirements 
applicable to the property.
    Comment. HUD requires the use of qualified and trained inspectors 
but gives no information on this process so that a lender's inspector 
can benefit from this training and meet HUD's qualifications.
    Response. The response to an earlier comment described the 
requirements that individuals must meet to become HUD contract 
inspectors. Persons and firms that are required to comply with HUD's 
Uniform Physical Condition Standards may seek to have their own 
employees trained and certified. The common element is that the party 
that actually performs an inspection (to conform with HUD requirements) 
must complete and pass HUD's qualification training and testing for 
property inspectors. Each successful candidate will be issued 
identification from REAC as evidence that the candidate has met all 
requirements. It is important to note that parties that wish to better 
understand the REAC protocol, may participate in REAC monitored 
training. However, only inspectors who are working for HUD contractors, 
multifamily lenders or who perform inspections under independent third 
party contracts will be issued final identification. The information 
about how to become a HUD contract inspector is (and has been) 
available from REAC's Internet site at http://www.hud.gov/reac. 
Additionally, interested parties are welcome to call REAC's Technical 
Assistance Center at 1-888-245-4860.

Simplifying and Improving the Scoring Process

    Comment. The rule should provide a simpler and abbreviated physical 
inspection protocol for smaller properties where property facilities 
are less complicated and the loan balance is small. Smaller loan 
balances mean lenders have less money for inspections. These properties 
do not have need for a complicated, multi-tiered inspection on 
amenities and facilities that do not exist. For smaller properties, 
inspections should not be more than every two years.
    Response. HUD is charged with assuring all housing is decent, safe, 
sanitary and in good repair, not just larger properties or properties 
with large loan balances. HUD's physical inspection protocols are 
structured in a manner to adjust for size and properties that have 
amenities and facilities and those that do not. Additionally, HUD's 
rule provides for cost savings through less frequent inspections for 
properties that are well-maintained. HUD's obligation to ensure that 
its assisted and insured housing is decent, safe, sanitary and in good 
repair does not permit HUD to exempt a property from an annual 
inspection, simply because the property is a small property.
    Comment. The physical inspection process would be improved if HUD 
requires the inspector to clearly communicate each observable 
deficiency and ensures that a detailed written report of deficiencies 
is left with the owner.
    Response. HUD agrees with this comment and all inspectors have been 
trained to communicate the defects that the inspector records to the 
owner's representative during the inspection. While HUD acknowledges 
that the owner's representative may have differing views regarding the 
deficiency definitions and may express those views to the inspector, 
the inspectors are trained not to engage in a discussion of the merits 
of the deficiency definitions. Inspectors have no authority or 
discretion to alter the definitions of deficiencies or the severity 
level assigned. Inspectors must record the deficiencies in accordance 
with the inspection protocol. At this time, technology that would allow 
HUD to leave a copy of the inspection report immediately following the 
inspection remains too expensive. Therefore, a

[[Page 77235]]

copy is provided to the owner within a few days of the inspection.
    Comment. HUD's inspection report should show the score of each 
observable deficiency.
    Response. HUD has revised the inspection report to show the points 
deducted for each observed deficiency.
    Comment. HUD's physical inspection protocol should take into 
consideration minor routine repairs in assessment. The weighting that 
minor repairs receive can be as much as deferred maintenance or major 
repairs. Therefore, the inspection protocol software should provide a 
category of noted, routine repairs without a point loss and should note 
the difference between minor, routine repairs and deferred maintenance 
of capital needs, and showing the scoring effect should clarify this.
    Response. HUD's protocol already takes into consideration minor 
defects and repair requirements by way of the scoring process. The 
inspection summary report notes the difference on a summary basis 
between routine repairs and capital needs.
    Comment. The rule should define the meaning and application of 
``health and safety.'' It is unclear what HUD means when it refers to 
health and safety or how health and safety is scored. Clarification is 
important because failure to correct such a deficiency could result in 
demotion from standard 1 or standard 2 to standard 3.
    Response. Health and safety concerns are clarified in 24 CFR 
5.703(f), which this rule cross-references. Exigent health and safety 
deficiencies are a distinct subset of health and safety standards and 
are considered a risk to life. A standard 1 property for which extreme 
hazardous conditions are not corrected would be subject to further 
inspection and may change designation as a result of that reinspection.

Appeal, Technical Review, Burden of Documentation and Reinspection

    Comment. It is unrealistic to require owners to use the ``Items, 
Weights and Criticality'' document to make the determination, within 15 
days, that an error has occurred that if corrected would result in a 
significant improvement in the scoring process. The scoring process is 
very intricate and complicated and point values change dramatically 
depending on elements at each specific property.
    Response. To address this concern, HUD has revised the inspection 
summary reports so that they will show the point value for each cited 
deficiency.
    Comment. The requirement in Sec. 200.857(c) to report to HUD within 
72 hours of the inspection that exigent health and safety items have 
been mitigated is neither practical nor reasonable. HUD should allow a 
response of 10 working days. The rule should clarify that the 72 hour 
limit in Sec. 200.857(c) means 3 business days.
    Response. The final rule makes the clarification that 72 hours 
refers to 3 business days from the date of the physical inspection, the 
date the owner receives the notice of exigent health and safety 
deficiencies. HUD, however, declines to extend this period beyond 3 
business days. This time period mirrors the critical need for the owner 
to repair or mitigate the most serious health and safety conditions 
immediately.
    Comment. The 15 day time period for response and appeals is 
unrealistic. HUD should allow at least 30 days. The time to evaluate 
the complex score and report is the same in order to prepare a detailed 
and adequate response and appeal. HUD should provide owners with a 
reasonable time to challenge inspection results because they have the 
burden of proof and must provide substantial evidence.
    Response. HUD declines to expand the response time. HUD believes 15 
days is sufficient time to prepare a response and submit a request for 
technical review. As noted earlier, HUD requires inspectors to point 
out defects as they are observed on the day of the inspection to the 
owner's representative. The score impact of every item observed is 
known at the time the inspection report is issued to the owner.
    Comment. Because the rule relies on owner responses in prescribed 
time periods following HUD's notification, the rule should state that 
time periods begin after the owner receives notice from HUD. HUD 
correspondence is received/postmarked considerably later than it is 
dated.
    Response. To avoid delays between submission of the report to the 
owner and the owner's response to HUD, HUD is planning to have all 
inspection reports available to the owners through the Internet. For 
those owners without Internet capability, HUD will consider mailing the 
results. However, HUD allows, as an allowable project expense, the 
reasonable cost of an internet service provider so that over time we 
expect that virtually all properties will have access either on site, 
through the agent's off site office or a sharing arrangement with other 
providers.
    Comment. HUD should revise communications with owners in a way that 
the final report presents a more realistic picture on the property. The 
current report focuses on what is wrong and when it is read in a 
vacuum, regardless of the property's score, the report presents an out-
of-line picture.
    Response. The report shows the potential score of all inspectable 
items, not just those items identified as deficiencies. HUD believes 
that the report which now shows the potential score for all inspectable 
items combined with the score for items identified as deficiencies 
allows a balanced view.
    Comment. The rule takes the right approach in providing that 
reinspections are HUD's responsibility. If a mortgagee uses a HUD 
certified inspector and HUD's physical inspection protocols and the 
inspection is technically acceptable then the mortgagee has fulfilled 
its obligations. If the owner challenges the results, the owner will 
request HUD, not the mortgagee, for a reinspection.
    Response. The mortgagee is responsible for performance by its 
employees or contractors in a manner to assess that the product 
transmitted to HUD is of good quality. REAC reviews all inspections 
and, in the event the inspection is not acceptable, the mortgagee, 
which commissioned the inspection, must complete the inspection even 
though this may mean having another inspection completed. REAC makes 
every effort to cure problems arising from the review. If this is not 
possible, REAC will notify the mortgagee of the problems and provide 
time to correct the errors. However, some errors such as inadequate 
sampling are not correctable without another visit to the property to 
complete the sample required.
    Comment. The rule should provide a process for the owner and 
management agent to receive inspection related communications and to 
allow the owner the option to allow simultaneous electronic release of 
this information to additional parties, such as front line manager, 
legal counsel board chair, etc. This would expedite communications and 
allow front line operators to have maximum time to prepare needed 
responses.
    Response. Once electronic Internet access is completed, the owner 
may designate personnel to act to retrieve and respond to inspection 
reports. HUD will, however, always look to the owner of record as the 
party responsible for action or inaction.
    Comment. The errors for which an owner may request a technical 
review and have a reinspection violate the precepts of fairness. The 
definitions of material errors refer to obvious mistakes, but these are 
the exception, not the rule. An inspector's decision

[[Page 77236]]

about the seriousness with which an owner would have a legitimate 
disagreement cannot be challenged. The degree of deficiency is 
subjective. Three different inspectors with the same training and 
manual at the same building could come up with disparate scores because 
of their own unique perspective. The rule should allow an owner to 
request a technical review in any circumstance where the property score 
is below a standard 1 level. The grounds for appeal should be broadened 
to cover serious problems with the inspection definitions and with an 
inspector's failure to carry out the protocol.
    Response. HUD disagrees with the comments. The seriousness of a 
defect is not subjective. Each defect is defined and each inspector is 
fully trained and tested to achieve maximum objectivity in determining 
the severity of defects. In addition, the REAC Quality Assurance 
personnel are charged with reviewing work performed by inspectors at 
regular intervals and at random.
    Comment. A percentage change in the numeric score is a better 
trigger for reinspection and rescoring, not a change in the standard 
classification.
    Response. HUD disagrees. A large percentage score may not move a 
property out of a particular operating mode while a small point 
increase could change the oversight and general program eligibility of 
an owner.
    Comment. The rule should make clear that the lender does not 
conduct follow-up inspections.
    Response. The lender may wish to make follow-up inspections as part 
of its own quality assurance plan. However, if an inspection is 
accepted by REAC, resolution of the deficiencies is the responsibility 
of HUD.
    Comment. An issue arises when a reinspected project may not obtain 
the full benefit of a higher score even if original inspection error is 
rectified. With the ``loss limiting'' algorithms built into the system 
because of the scoring categories, an owner cannot know if removal of 
one of several defects will raise the score to meet a threshold.
    Response. The inspection summary includes the value of all defects 
and thus shows all possible points deducted. The inspection summary 
also shows the total possible points for the site, a given unit or a 
given building exterior, etc., and this allows a determination of the 
extent to which points lost may exceed the loss limit referred to in 
the comment. (Under the scoring algorithms, the points deducted for the 
site of an individual unit building's exterior, systems or common areas 
cannot exceed the possible points.) If an error is found that has 
significant impact on the score, the owner may request a technical 
review. HUD does not wish to burden the system with technical review 
requests that do not have a significant impact.
    Comment. All errors must be corrected, even if the correction would 
not result in the score crossing the threshold. HUD should provide an 
explanation to the owner/manager of the total score that could be 
achieved assuming all identified errors are corrected. If HUD 
determines that error correction will not result in recategorization, 
the score should be adjusted to correct for these errors. If HUD 
determines a new inspection is warranted, it should be at HUD's 
expense. Only when the owner challenges errors that do not exist should 
the owner pay for the reinspection and any reinspection, if not paid by 
HUD, should be an allowable project expense.
    Response. HUD now provides the absolute point reduction for each 
and every defect cited. When no defects are present, the maximum score 
is 100 points. The comment appears to suggest that HUD engage in 
evaluating owner request for technical review for even fractional 
points which have no effect on the property. HUD believes this process 
does not consider the overall objective--which is property that is 
decent, safe, sanitary and in good repair. HUD will require the owner 
to make full payment for a new inspection that is performed based on an 
owner's technical review request where the result does not cross a 
signification threshold. This remains a necessary part of the process 
from HUD's perspective in order not to burden the process with 
inconsequential request.
    Comment. Upon receipt of satisfactory second round inspections, HUD 
should remove from the permanent project file, at the owner's request, 
the first round results.
    Response. HUD disagrees and will not remove the results of 
inspection reports from the permanent project file. However, if a 
subsequent inspection crosses the threshold from standard 2 to standard 
1, the owner will immediately be eligible for the every-three-year 
inspection. The administrative record will continue to hold all valid 
information.
    Comment. The procedures for appeals should be modified in several 
respects to improve effectiveness and efficiency of the approval 
process. The procedures should be modified to allow the expense of the 
appeal to be covered in the budget; to place the burden on HUD to work 
with owners to advise them of the numerical impact of any and all 
elements of interest to the owner until the significant thresholds have 
been published and all inspection reports issued in a way to allow an 
owner to readily determine whether or not certain elements, if 
successfully appealed, would meet the administrative threshold 
requirement; and require HUD to reissue all inspection reports using 
the new end column format showing the numerical value for each 
deficiency at the owner's request.
    Response. If a technical review is successful, HUD issues a new 
report. All reports now show the points deducted for each cited defect. 
The expenses of a reinspection that does not result in a significant 
improvement will remain the responsibility of the owner and will not be 
treated as a property expense.
    Comment. HUD should be flexible in the type of documentation 
required for appeals. Owners may have a notarized letter from the local 
HUD office or from a local building code office, or a similar type of 
declaration in the absence of statutory language.
    Response. HUD is flexible in the type of third party reasonable 
documentation and will continue to be so.
    Comment. The term ``burden of proof'' is a legal standard for 
judicial or administrative settings with trained judges and rules with 
regard to submission of written and oral evidence. This term should not 
be used lightly without definition to control appeals from REAC 
inspectors. It would be appropriate to state the owner is expected to 
provide factual information supporting its appeal, but once HUD has 
that information, HUD's determination should be objective without 
``weighing'' documentation based on HUD's interpretation of the term.
    Response. While ``burden of proof'' is a term used in the judicial 
or administrative hearing context, the use of such term is not confined 
to those settings. HUD believes that Sec. 200.857(d)(2) makes clear the 
standard of factual information and supportive document (i.e., proof) 
that the owner must submit.
    Comment. Responsibility to show errors should not rest solely with 
the owner but with HUD and the inspector as well. When the deficiency 
has a significant numeric impact and the owner cannot locate the 
deficiency, HUD and/or the inspector should be required to produce 
evidence (and visit the site to point out the deficiency). Otherwise, 
HUD should remove the notation and the scoring impact. During 
subsequent inspections, HUD should (i) reinstate the exit interview for

[[Page 77237]]

inspectors to point out deficiencies as they enter them so owners can 
locate them and understand the type, (ii) make notations in the 
comments section of repairs done in presence of inspectors, and (iii) 
include the owner's statements about long range maintenance plans, etc.
    Response. HUD agrees and both the proposed rule and this final rule 
allow for mutual resolution of the claim of a non-existent deficiency. 
HUD believes, however, that the first level of claim that an error has 
occurred must come from the owner in the form of reasonable 
documentation. Examples of reasonable documentation have already been 
provided.
    Additionally, as noted earlier in this preamble, inspectors are now 
requested to communicate observed deficiencies orally on site. All 
inspectors have been trained to ``call out'' inspection deficiencies as 
they are observed. This methodology eliminates the need for the ``close 
out conference'' and provides the owner or owner's representative with 
a running account of what is being recorded as the inspection process 
is conducted. Revised definitions concerning deficiencies allow the 
inspector to consider specific areas that may be cured on site in the 
presence of the inspector. For example, if an electrical panel in a 
unit is blocked but the blockage (such as a picture) can be easily 
moved in the presence of the inspector, the defect will not be 
recorded. An additional example is the following--in the event that the 
site shows significant litter in and around a small area, the inspector 
will not record the defect if staff is actively working to remove the 
litter.
    Comment. Owners should not have to bear costs of reinspection even 
if results do not change classification. It is punitive for owners to 
bear the cost of reinspection and it serves to dissuade appeals if 
owners bear the cost when the appeal is unsuccessful. If inspectors 
make technical/obvious mistakes that would improve a numeric score from 
32 to 58, owners should not bear the cost. Owners should not have to 
pay for what in most circumstances will be an honest difference of 
opinion.
    Response. A difference of opinion is not the same as an error. HUD 
does not wish to attempt to dispute an owner's opinion but is willing 
and able to correct errors committed by inspectors. As noted in Section 
II of this preamble, HUD has revised the rule at this final rule stage 
to include in the definition of ``significant improvement'' a movement 
of 10 points or more as a result of the technical review. Payment for 
reinspections that result in less than significant improvement will be 
the responsibility of the owner.
    Comment. HUD should clarify that a third party inspection is 
objective evidence supporting any claim of technical error. HUD also 
should clarify that the evidence may be from the owner if it is 
reasonable and supported with more than a new allegation.
    Response. If an owner believes that such an inspection meets the 
standard of reasonable documentation, it will be considered. However, 
such inspection should be comparable to the REAC inspection. The 
inspection should present documentation that cites specific HUD 
requirements not opinions.
    Comment. A shortfall of the proposed rule is the inability of the 
owner/manager to obtain a revised higher score by completing repairs or 
presenting an acceptable plan for completion to HUD. The rule should 
permit an owner/manager to petition for reinspection based on repaired 
conditions, with the owner paying for all or part of the reinspection 
cost.
    Response. The inspection protocol is intended to capture the 
condition of the property at a certain point in time. HUD realizes 
there will always be some outstanding maintenance items. Routine 
maintenance needs have no significant impact on the score.

Enforcement Actions

    Comment. Dividing appeal decisions between REAC and HUD Field 
Offices makes for a complicated and confusing appeal system. REAC is 
responsible for the technical aspects of inspections, inputting data, 
scoring, and objective information. HUD Field Offices and Hubs are 
responsible for area specific, qualitative judgments such as local code 
conflicts with inspection protocol or whether the facilities are the 
responsibility of a third party or whether ongoing rehabilitation or 
maintenance should delay the inspection. Appeals should be directed to 
one HUD office. All appeals should be directed to the Office of 
Housing.
    Response. HUD does not use the term ``appeal'' in the rule but 
understands that the issues the commenters are raising concern the 
technical review process that is under REAC's jurisdiction and the 
adjustment of physical condition score due to local circumstance which, 
the proposed rule provided was under the jurisdiction of the applicable 
HUD Field Office or Hub. HUD agrees with the commenters that requests 
for review of concerns about a property's score should all be directed 
to one office and the final rule provides that the office is REAC.
    Comment. The rule needs to provide a standard for when the HUD 
Field Office determines to refer a matter to HUD's Departmental 
Enforcement Center (DEC).
    Response. The final rule provides that a property that receives a 
physical inspection score of 30 or below will be referred to the DEC 
for evaluation. This is a clear and objective standard.
    Comment. The rule is clear about the owner's responsibilities, but 
less clear about the owner's right to receive a copy of its file so 
that everyone is reviewing the same information. The file includes 
information and history beyond the physical inspection report.
    Response. The significant information for the owner is the 
inspection report. To the extent other information is needed as 
background, the information is generally available to the owner from 
the local HUD Field Office.
    Comment. The role of HUD's Field Offices should be clarified in the 
rule and Field Office staff should be encouraged to make judgments when 
their experience is at variance with inspection results.
    Response. While HUD highly values input from its Field Office 
staff, the key feature of HUD's physical inspection process is to 
provide for an objective system. Conclusions drawn from relationships 
with owners and personal knowledge of the properties are inconsistent 
with an objective evaluation of the physical condition of a property.
    Comment. The rule should provide assurance that no enforcement 
action would be initiated prior to a decision on appeal.
    Response. HUD cannot make this commitment. Circumstances may compel 
HUD to take immediate enforcement action. In fact, the rule 
specifically provides that the administrative process described in the 
rule does not prohibit the Office of Housing, the Departmental 
Enforcement Center or HUD generally from taking whatever action may be 
necessary (when necessary) as authorized under existing statutes, 
regulations, contracts or other documents to protect HUD's interests in 
multifamily properties and to protect the residents of these 
properties. (See 24 CFR 200.857(h)(4).)
    Comment. The rule states that the administrative process in the 
rule will not be construed to limit HUD's ability to take other 
enforcement actions; however the extent to which such actions can be 
taken should be described in the rule.
    Response. HUD declines to repeat in this regulation the enforcement 
actions that are available to HUD and that are

[[Page 77238]]

listed in other HUD program regulations that may be applicable to 
owners (depending on the HUD program in which they participate) or 
contracts or other documents. Generally, HUD participants that are 
covered by these other requirements are familiar with them.
    Comment. The rule should make clear that HUD, not the lender, is 
responsible for the compliance plan process. Section 200.857(h) refers 
to the owner's compliance action but does not refer to HUD's 
participation in the process.
    Response. This section clearly provides for the actions and duties 
that the DEC may and will undertake and the DEC is a part of HUD.
    Comment. HUD should establish a Departmental Evaluation Center in 
addition to the Departmental Enforcement Center. Section 200.857(f) of 
the proposed rule speaks of evaluation through administrative review. 
It is problematic for properties to emerge from DEC even when no fault 
is found and scoring problems result from complicated property 
situations.
    Response. HUD's Departmental Enforcement Center has the expertise 
to perform the administrative review described in Sec. 200.857(f). 
There is no need to establish a separate evaluation center.

Cost of the Physical Inspection

    Comment. The rule does not specify or limit the financial burden of 
an inspection to be placed on lenders. The rule should state that there 
will be no material change in the inspection process that will 
materially increase costs, and the rule should define ``material 
increase in cost'' to be no greater than 5 percent.
    Response. Although the rule does not specify a limitation to the 
financial cost of an inspection placed on lenders, as discussed in the 
November 1999 proposed rule, HUD has taken significant steps to 
minimize the costs of inspection to lenders and owners. HUD's 
inspection software and guidebook is distributed to HUD's program 
participants without cost. HUD also has placed these materials on the 
web so that they can be downloaded and therefore no shipping costs are 
incurred. Additionally, in the proposed rule, HUD advised that it would 
not materially alter the physical inspection requirements in a manner 
which would material increase the cost of performing the inspection 
(see 64 FR 66535, middle column.)
    Comment. Section 200.857(h) in the rule should be revised to remove 
the word ``software'' because this raises concern that HUD may add 
features that are enhancements (provide pictures from digital camera) 
but not necessary to the inspection process and therefore make the 
software more costly.
    Response. The use of the word ``software'' is the appropriate term. 
The term describes that set of stored procedures and operating 
instructions that allow the data collection device to function. 
Inspection data is already in the software. Digital pictures are not 
part of the functionality of the software.

Regulatory Amendments That Adversely Affect FHA Lenders

    Comment. The changes to the physical inspection process proposed by 
the November 1999 rule would be a violation of Sec. 207.499 and the 
mortgage insurance contracts. The change in the inspection process, as 
provided in this rule, is likely to change and increase costs for 
lenders in a manner not contemplated in existing mortgage insurance 
contracts. The changes expand the role and scope if the inspections 
performed to date. HUD will greatly increase the costs by requiring new 
computer systems and software and these new protocols may exceed the 
lender's service income. To control costs there must be (i) an adequate 
number of certified inspectors and inspection companies to ensure 
competition; and (ii) reduced frequency of inspections for better 
performing properties.
    Response. The insurance contract provides for the mortgagee to 
perform the inspection pursuant to HUD requirements and, the insurance 
contract has not been adversely affected.
    Comment. HUD should add a provision to this rule that states that 
the FHA Commissioner may amend these regulations but the amendments 
shall not adversely affect the interest of a mortgagee or lender under 
the contract of insurance.
    Response. HUD declines to add this provision to the rule. HUD needs 
the flexibility to promulgate such amendments that HUD believes are 
necessary to make the housing programs effective and to fulfill the 
statutory obligations and objectives imposed on HUD for these programs.

Timing of Implementation of the Rule

    Comment. Implementation of the rule should be four months after 
existing mortgagees have been provided with baseline scores and after 
HUD has successfully tested the computer system for scheduling and 
retrieving inspections.
    Response. To accommodate concerns in this area, HUD has agreed to 
perform all inspections required through December 31, 2000. This will 
allow additional transition and planning time for lenders.
    Comment. Because the parameters and definitions in the current 
baseline inspections are being refined and revised, and the baseline 
inspection is almost complete, it does not make sense to require new 
inspections to be performed during the revision process.
    Response. HUD did not require any new inspections during this 
period of baseline inspections.
    Comment. The rule should provide for retroactive application to 
ensure owners have fair opportunity to address scores and be on record 
that the score is inappropriate. Otherwise, there may be injurious 
results to owners and their reputation which remains permanently on the 
record.
    Response. Owners have always had the opportunity to address scores 
if they believe they are inappropriate. Project Managers will ensure 
that any complaint, inquiry or concern is addressed. Should the Hub/
Program Center Director believe a complaint about a score or anything 
else from an owner is valid, it should be addressed. HUD Field Office 
will forward the complaint to the Office of Asset Management at HUD 
Headquarters for review and action. Should Headquarters believe 
additional follow-up is necessary, Headquarters will forward to HUD's 
Real Estate Assessment Center for appropriate review and action. 
Complaints are posted in ``REMS'' at the Field Office level. If 
forwarded to Headquarters they are logged and monitored to ensure the 
owner receives a response by Headquarters and/or the Real Estate 
Assessment Center.

Entity Responsible for Inspection/Duplicate Inspection Requirements

    Comment. The rule needs to clarify that for properties with more 
than one HUD insured loan, only the first mortgage lender is required 
to conduct the physical inspection with the second mortgage lender 
having access to the inspection. The rule also needs to clarify that 
only one mortgage inspects when there is a first and second mortgage.
    Response. HUD agrees and the final rule makes these clarifications.
    Comment. The rule should specify the responsible party for Section 
8 assisted properties. The rule does not address administrative 
difficulty and duplication of costs for lenders who perform 
inspections, and Section 8 contract administrators. For those 
properties with a mortgagee different from the section 8 contract 
administrator, the rule should provide

[[Page 77239]]

that the Section 8 contract administrator performs the inspection.
    Response. The intent of HUD is to have inspections performed no 
more frequently than annually and that a single inspection will suffice 
for all parties that have a need to perform these inspections. For the 
HUD insured portfolio, the lender will perform all required 
inspections; HUD will not duplicate this effort. Newly appointed 
contract administrators will not perform or arrange for property 
inspections. HUD will perform the property inspection if there is no 
mortgagee. Existing contract administrators are required to inspect 
annually all units in a property that they are responsible for 
administering. However, the oversight the contract administrator 
performs does not include the HUD physical inspection protocol: HUD 
will perform this inspection. When the contracts are renewed, the 
administration will be turned over to more recently appointed contract 
administrators, and at that time, inspections will be performed only by 
HUD.
    Comment. HUD needs to clarify how the Comprehensive Needs 
Assessment, which includes a detailed inspection, interacts with the 
Uniform Physical Conditions Standards inspection. HUD requires owners 
who request Section 8 renewals to have a Comprehensive Needs 
Assessment. Section 8 renewals may be on a 1 to 5 year basis so the CNA 
is used more frequently. HUD needs to eliminate duplicate requirements.
    Response. The Comprehensive Needs Assessment (CNA) and the Uniform 
Physical Condition Standards (UPCS) are related in that they both 
address property assessment but they are different types of property 
assessment. The CNA was designed to estimate the need for capital 
improvement over an extended period into the future. The CNA uses or 
can use the UPCS inspection results as a starting point in the CNA 
assessment. The result of the UPCS inspection, however, is a snapshot 
of the property at a specific point in time. The inspection results are 
statistically valid and therefore are useful as an overall evaluation 
of property condition at the point in time of the inspection. The CNA 
is not valid, in the same statistical manner as the UPCS, but the CNA 
is an estimate of physical needs which allows the owner to make long 
term plans to accumulate resources to assure the long term viability of 
property. The UPCS inspection will provide feedback to the owner and 
HUD about the CNA planning process and its validity as time passes. The 
two are related and should be used together but one cannot take the 
place of the other.
    Comment. There is concern about a statement in the preamble that 
states other HUD offices may inspect for various purposes. The 
possibility of other inspections for other purposes seems duplicative 
and wasteful.
    Response. This statement refers to HUD's statutory and regulatory 
requirements under other programs to monitor compliance with specific 
program requirements, which may include physical inspection, but 
generally are directed to other program requirements. For example, 
HUD's Office of Fair Housing and Equal Opportunity monitors owner 
compliance with requirements for accessibility and/or appropriate 
accommodations for persons with disabilities. This monitoring, however, 
is not a physical inspection to determine the quality and maintenance 
of the accessibility features, but rather one to determine that the 
owner has provided accessibility features and accommodations where they 
are required. The inspection conducted under HUD's Uniform Physical 
Condition Standards does not monitor compliance with accessibility 
requirements. Although HUD's physical inspection process collect 
specific data requested by HUD's Office of Fair Housing, it is 
important to note that this data is not part of the physical condition 
scoring process. Therefore, the examinations of accessibility features 
conducted by HUD's Office of Fair Housing and Equal Opportunity and 
REAC are not duplicative of one another.

Rulemaking Procedures

    Comment. The inspection and scoring process, as noted in the 
preamble to the proposed rule was first introduced in HUD's Public 
Housing Assessment (PHAS) rule, which was limited to PHAs. HUD should 
have specifically sought comment from tenants in multifamily housing if 
it was considering extending that process to multifamily housing.
    Response. HUD did solicit public comment from multifamily 
residents, owners, and lenders through publication of the November 26, 
1999, proposed rule. It is the November 1999 rule that proposed a 
scoring process for multifamily housing properties, and the November 
1999 proposed rule provided a 60-day public comment period.

IV. 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 under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). The information 
collection requirements when approved will be assigned and OMB approval 
number and the public will be notified of this number. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a valid 
control number.

Executive Order 12866

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review, issued by the 
President on September 30, 1993. OMB determined that this 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 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, 
Regulations Division, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC, 20410-8000.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage 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). That Finding remains 
applicable to this final 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, 
20410-8000.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule is not anticipated to have a 
significant economic impact on a substantial number of small entities. 
As stated in HUD's June 30, 1998, proposed rule and September 1, 1998, 
interim rule

[[Page 77240]]

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 requirements, 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 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.

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)
14.856--Lower Income Housing Assistance Program--Section 8 Moderate 
Rehabilitation

List of Subjects

24 CFR Part 5

    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 housing, Rent 
subsidies, Reporting and recordkeeping requirements.

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Home improvement, Housing standards, 
Incorporation by reference, Lead poisoning, Loan programs--housing and 
community development, Minimum property standards, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

    Accordingly, for the reasons stated in the preamble, title 24 of 
the CFR is 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, paragraphs (a) and (b) are revised 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).
* * * * *

    3. Section 5.705 is revised to read as follows:


Sec. 5.705  Uniform physical inspection requirements.

    Any entity responsible for conducting a physical inspection of HUD 
housing, to determine compliance with this subpart, must inspect such 
HUD housing annually in accordance with HUD-prescribed physical 
inspection procedures. The inspection must be conducted annually unless 
the program regulations governing the housing provide otherwise or 
unless HUD has provided otherwise by notice.

PART 200--INTRODUCTION TO FHA PROGRAMS

    4. 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).

    5. 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 and physical inspection 
requirements.
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:

[[Page 77241]]

    (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). (Where, however, the primary mortgage of a Section 241 
property is insured or assisted by HUD under a program covered in this 
part, the coverage by two HUD programs does not trigger two 
inspections); 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.

    (a) Applicable standards and 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.
    (b) Entity responsible for inspection of property. The regulations 
that govern the programs listed in Sec. 200.853, or regulatory 
agreements or contracts, identify the entity responsible for conducting 
the physical inspection of the property which is HUD, the lender or the 
owner. For properties with more than one HUD insured loan, only the 
first mortgage lender is required to conduct the physical inspection. 
The second mortgage lender will be provided a copy of the physical 
inspection report by the first mortgage lender.
    (c) Timing of inspections. (1) For a property subject to an annual 
inspection under this subpart, the inspection shall be conducted no 
earlier than 9 months and no later than 15 months from the date of the 
last required inspection. In no event, however, shall the physical 
inspection be conducted after the end of the calendar year following 
the one year anniversary date of the last required inspection.
    (2) For a property subject to an inspection every two years under 
this subpart, the inspection shall be conducted no earlier than 21 
months and no later than 27 months from the date of the last required 
inspection. In no event, however, shall the physical inspection be 
conducted after the end of the calendar year following the two year 
anniversary date of the last required inspection.
    (3) For a property subject to an inspection every three years under 
this subpart, the inspection shall be conducted no earlier than 33 
months and no later than 39 months from the date of the last required 
inspection. In no event, however, shall the physical inspection be 
conducted after the end of the calendar year following the three year 
anniversary date of the last required inspection.
    (4) For a newly endorsed multifamily property, the first inspection 
required under this subpart will be conducted no earlier than 21 months 
but not later than 27 months from the date of final endorsement. In no 
event, however, shall the inspection be conducted after the end of the 
calendar year following the two year anniversary date of final 
endorsement.


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 in accordance with the 
procedures described in this section. The physical condition inspection 
of the property, upon which REAC bases its score and ranking, is 
conducted by the responsible entity in accordance with Sec. 200.855.
    (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 a 100 point scale. Because scores may include fractions, a score 
that includes a fraction below one half point will be rounded to the 
next lower full point and a score that includes a fraction of one half 
point or higher will be rounded to the next higher full point (e.g., 
89.4 will be rounded to 89, 89.5 will be rounded to 90).
    (i) Standard 1 Performing Property. If a property receives a score 
of 90 points or higher on its physical condition inspection, 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. If a property receives a score 
of 80 points or higher but less than 90 on its physical condition 
inspection, 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. If a property receives a 
score of less than 80 points, 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 (EHS) deficiency(s) must resolve the 
deficiency(s), as required by paragraph (c)(2) of this section, to be

[[Page 77242]]

classified as standard 1 and standard 2 properties.
    (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 or owner's representative, on the date of the 
physical inspection, notice of any items classified as EHS 
deficiencies. REAC also will provide the owner with the entire physical 
inspection report (electronically through the internet or by mail 
approximately 10 working days from the date of the report), which 
provides the physical inspection results and other information relevant 
to the inspection, including any items classified as EHS deficiencies 
and already provided to the owner, on the date of the inspection (EHS 
deficiencies are relayed by the inspector on the date of the 
inspection).
    (2) The owner must carefully review the physical inspection report, 
particularly those items classified as 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 applicable Multifamily Hub Director within 3 business days of the 
date of the inspection, which is the date the owner was provided with 
the EHS notice. The report filed by the owner must provide a 
certification and reasonable evidence that the EHS items have been 
resolved.
    (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 (``significant improvement'' is defined in paragraph 
(d)(4) of this section), the owner may request a technical review 
within the following period, as applicable:
    (i) 15 calendar days from the date the owner receives the physical 
condition score from REAC if the results and score are electronically 
transmitted via the Internet to the owner; or
    (ii) 30 calendar days from the date the owner receives the physical 
condition score from REAC 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 submission of the physical inspection report to the owner as 
provided in paragraph (c)(1) of this section.
    (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, 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), or to result in an increase of 10 
points or more.
    (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

[[Page 77243]]

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. (1) Under certain 
circumstances, HUD may find it appropriate 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. These circumstances include, but are 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.
    (2) To seek a score adjustment on the basis of these circumstances 
as provided in paragraph (e) of this section, the owner must submit a 
request for an adjustment to REAC with appropriate proof of the 
circumstances that resulted in the incorrect physical conditions 
results. This process may result in a reinspection and/or rescoring of 
the inspection after review and approval of the owner's submission of 
appropriate proof of the anomalous or inappropriate application.
    (3) An owner may submit the request for this adjustment to REAC 
either prior to or after the physical inspection has been concluded. If 
the owner submits a request for adjustment after the physical 
inspection has been concluded, the owner must submit its request to 
REAC within 45 days following the submission of the physical inspection 
report, as provided in paragraph (c)(1) of this section. HUD may, but 
is not required to review a request made after this period has expired.
    (4) This adjustment process, provided in this paragraph (g), may 
result in a reinspection and/or rescoring of the inspection after 
review and approval of the owner's submission of appropriate proof of 
the anomalous or inappropriate application.
    (f) Issuance of final score and publication of score. (1) The 
physical condition score of the property is the final score if the 
owner files no request for technical review, as provided in paragraph 
(c) of this section, or for other adjustment of the physical condition 
score, as provided in paragraph (e) of this section. If the owner files 
a request for technical review or score adjustments in accordance with 
paragraphs (c) and (e) of this section, the final physical condition 
score is the score issued by HUD after any adjustments are determined 
necessary and made by HUD at the conclusion of these processes.
    (2) HUD will make public the final scores of the owners through 
posting on HUD's internet site, or through Federal Register publication 
or other appropriate means.
    (g) Owner's responsibility to notify residents of inspection; and 
availability of documents to residents.
    (1) Notification to residents. An owner must notify its residents 
of any planned physical inspections of their units or the housing 
development generally.
    (2) Availability of documents for review. Once the technical review 
and database adjustment periods have expired, as provided in paragraphs 
(d) and (e) of this section, respectively, the owner must make its 
physical inspection report and all related documents available to its 
residents during regular business hours upon reasonable request for 
review and copying. Related documents include the owner's survey plan, 
plan of correction, certification and related correspondence.
    (i) Once the owner's final physical condition score is issued and 
published, the owner must make any additional information, such as the 
results of any reinspection, appeal requests, available for review and 
copying by its residents upon reasonable request during regular 
business hours.
    (ii) The owner must maintain the documents related to the physical 
inspection of the property, as described in this paragraph (g)(2), 
available for review by residents for a period of 60 days from the date 
of submission to the owner of the physical condition score for the 
property in which the residents reside.
    (3) The owner must post a notice to the residents in the owner's 
management office and on any bulletin boards in all common areas that 
advises residents of the availability of the materials described in 
paragraphs (g)(2) of this section. The notice should include the name, 
address and telephone number of the HUD Project Manager.
    (4) Residents are encouraged to comment on this information 
provided by the owners and submit any comments directly to the 
applicable Field Office. Should residents discover the owner provided 
HUD with a false certification during the review they are encouraged to 
notify the Hub or Program Center where appropriate inquiry and action 
will be taken.
    (h) Administrative review of properties. The file of a multifamily 
property that receives a score of 30 points or less on its physical 
condition inspection will be referred to HUD's Departmental Enforcement 
Center (DEC) for evaluation. The files of any of the multifamily 
housing properties may be submitted to the 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 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 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

[[Page 77244]]

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 (h)(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.
    (i) Enforcement action. If, at the conclusion of the evaluation 
period, the DEC determines that enforcement action is appropriate, the 
DEC will provide 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 documents, to protect HUD's financial interests in 
multifamily properties and to protect the residents of these 
properties.
    (j) 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: December 4, 2000.
William C. Apgar,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 00-31306 Filed 12-7-00; 8:45 am]
BILLING CODE 4210-27-P