[Federal Register Volume 66, Number 131 (Monday, July 9, 2001)]
[Rules and Regulations]
[Pages 35846-35847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17010]



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Part III





Department of Housing and Urban Development





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24 CFR Parts 27 and 290



Prohibited Purchasers in Foreclosure Sales of Multifamily Projects With 
HUD-Held Mortgages and Sales of Multifamily HUD-Owned Projects; Final 
Rule

  Federal Register / Vol. 66, No. 131 / Monday, July 9, 2001 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 27 and 290

[Docket No. FR-4583-F-02]
RIN 2501-AC69


Prohibited Purchasers in Foreclosure Sales of Multifamily 
Projects With HUD-Held Mortgages and Sales of Multifamily HUD-Owned 
Projects

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule prohibits a mortgagor or any related party 
from bidding on or acquiring a multifamily property that was, itself, 
the subject of the mortgagor's default. The purpose of this rule is to 
prevent the mortgagor from benefiting from its default and failure to 
meet obligations under the term of its loan agreement. This rule 
follows a July 5, 2000 proposed rule and takes into consideration the 
public comments received on the proposed rule. After careful 
consideration of all the public comments received on the July 5, 2000 
proposed rule, HUD has decided to adopt the proposed rule without 
change.

DATES: Effective Date: August 8, 2001.

FOR FURTHER INFORMATION CONTACT: Marc Harris, Director, Field Asset 
Management Division, Office of Asset Management, Department of Housing 
and Urban Development, Room 6164, 451 Seventh Street SW, Washington, DC 
20410, telephone (202) 708-2654. Hearing or speech-impaired individuals 
may call 1-800-877-8339 (Federal Information Relay Service TTY). (Other 
than the ``800'' number, these are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. The July 5, 2000 Proposed Rule

    On July 5, 2000 (65 FR 41538) HUD published for comment a proposed 
rule amending HUD's regulations contained at 24 CFR parts 27 and 290 
governing disposition procedures applicable to (1) the foreclosure of 
multifamily properties subject to a HUD-held mortgage and (2) the sale 
of HUD-owned multifamily properties. The rule codifies current HUD 
policy by adding a new paragraph (f) to Sec. 27.20 and a new 
Sec. 290.18, respectively, to prohibit the defaulting mortgagor or a 
related party as defined at 24 CFR 24.105 from bidding on or acquiring 
the property that secured the defaulted mortgage.
    The rule supports HUD's asset management responsibilities by 
preventing the defaulting party from benefiting from the re-purchase of 
a multifamily property that was either foreclosed or sold directly from 
HUD's real estate inventory. For example, there have been occasions 
where mortgagors intentionally allowed a property to go into 
foreclosure and subsequently re-purchased the property for less than 
the debt amount or at more lenient terms than contained in the original 
mortgage. Permitting a current or prior mortgagor who is or was in such 
serious default as to lead to foreclosure or HUD acquisition to make an 
``end-run'' around its loan agreement is antithetical to HUD's 
objective of promoting efficient and equitable administration of 
housing resources. Furthermore, it permits borrowers that are unwilling 
to comply with mortgage requirements, including permissible loan 
modifications, to reap an unfair benefit at the expense of the public. 
The rule does, however, preserve the authority of the Assistant 
Secretary for Housing--Federal Housing Commissioner to waive bidding or 
purchase restrictions in cases where HUD's best interest is served by 
permitting the defaulting mortgagor or a related party to acquire the 
property.

II. Public Comments Generally

    The public comment period for the proposed rule closed on September 
5, 2000. HUD received three comments in response to the proposed rule. 
Two were from law firms representing multifamily housing groups and one 
was from an association of multifamily rental developers and operators.
    All three commenters opposed the rule. The objections centered on 
the prohibitive tenor of the rule and its corresponding limitation on 
the ability of any defaulting mortgagor to participate in the 
disposition process.

III. This Final Rule

    The following section of the preamble contains a summary of the 
significant issues raised by the public commenters and HUD's response 
to their comments. For the reasons noted below, HUD has decided to 
adopt the proposed rule without change.

IV. Discussion of Public Comments Received on the July 5, 2000 
Proposed Rule

    Comment: The rule unfairly limits the opportunity of a mortgagor to 
participate in the disposition process and, in doing so, deprives HUD 
of the benefit of increased competition. (#1,2,3)
    HUD's Response: HUD agrees that the rule severely limits the 
opportunity of a defaulting mortgagor to participate in the disposition 
process. The rule is not, however, unfair. The underlying purpose of 
the rule is to prevent the mortgagor from benefiting from its default 
and failure to meet obligations under the term of its loan agreement 
with HUD. While this limitation may decrease competition by one, it 
supports HUD's asset management responsibilities by preventing a 
defaulting mortgagor from deriving an unfair benefit at the public 
expenses. HUD has therefore determined that prohibiting the mortgagor 
from bidding is more important than the minimal loss of competition 
that may result.
    Comment: The rule makes a presumption of guilt, and by precluding 
participation by all defaulting mortgagors, eliminates the benefit of 
bidding by parties with specific project knowledge and the motivation 
to submit a fair offer. (#1,2)
    HUD's Response: The purpose of the rule is to prevent the mortgagor 
from benefiting from its default and failure to meet obligations under 
the term of its loan agreement by purchasing the property at a 
foreclosure sale or from the HUD-owned inventory for less than the 
outstanding debt. The defaulting mortgagor can always pay off the 
outstanding debt in full prior to the foreclosure sale.
    The failure of a project to meet its commitments to HUD is, in most 
cases, directly related to the mortgagor's failure to comply with one 
or more aspects of the agreements between HUD and the mortgagor/former 
mortgagor. In the rare event that the mortgagor can show that it should 
not be prohibited from bidding less than the debt, a waiver of this 
regulation by the Assistant Secretary for Housing--Federal Housing 
Commissioner, is permitted.
    Comment: The rule should establish a detailed process for obtaining 
a waiver in cases where the mortgagor was not at fault. (#2)
    HUD's Response: HUD will follow its usual process and consider a 
waiver request of this regulatory requirement for good cause shown on a 
case-by-case basis.
    Comment: The rule should be redrafted in order to presume the 
eligibility of all parties to bid and allow the Assistant Secretary for 
Housing--Federal Housing Commissioner to exclude by waiver only upon a 
showing of sufficient cause. (#2)
    HUD's Response: A waiver to the rule is contemplated only in 
narrowly-drawn circumstances where the defaulting mortgagor has 
demonstrated good cause to HUD's that it should be allowed the 
opportunity to participate in the disposition process. Thus, the burden 
rests with the defaulting mortgagor to

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present the necessary level of justification for a waiver. Presuming 
the eligibility of all defaulting mortgagors to bid would be contrary 
to Departmental policy and would defeat the essential purpose of the 
rule.
    Comment: The rule may deprive mortgagors of a constitutional 
property interest by denying their opportunity to bid and thus making 
them subject to a lower sales price that will diminish their equity. 
(#3)
    HUD's Response: The rule does not deprive mortgagors of a 
constitutional property interest. A mortgagor is obligated for the 
amount of the debt and can pay off the outstanding debt prior to a 
foreclosure sale. The rule simply prevents a defaulting mortgagor from 
deriving an unfair benefit by acquiring the underlying property for 
less than the debt amount or with less restrictive loan conditions.
    Comment: The rule is unnecessary because HUD has other, more 
effective remedies such as making a credit bid at foreclosure or 
appointing a receiver. (#3)
    HUD's response: HUD has determined that this rule is needed for the 
reasons specified above. In addition, HUD generally seeks to be outbid 
at foreclosure sales because HUD minimizes its costs by selling 
projects at foreclosure sales rather than bidding the debt, taking 
properties into inventory, and then selling them from the owned 
inventory. Bidding the debt is not a cost effective remedy for HUD. 
Also, appointing a receiver has nothing to do with limiting what a 
mortgagor can bid at a foreclosure sale, and thus is not a remedy.

V. Findings and Certifications

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this rule, and in so doing 
certifies that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule only addresses 
circumstances in which a party may benefit at the public expense by 
defaulting on its obligations, and does not impose any additional costs 
or burdens.

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 
at 24 CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969. That Finding remains applicable to 
this rule and is available for public inspection between 7:30 a.m. and 
5:30 p.m. weekdays in the Office of the Rules Docket Clerk, Office of 
the General Counsel, Regulations Division, Department of Housing and 
Urban Development, Room 10276, 451 Seventh Street SW., Washington, DC 
20410.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This final 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

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and 
the private sector. This final rule does not impose a Federal mandate 
that will result in the expenditure by State, local, or tribal 
governments in the aggregate, or by the private sector, of $100 million 
or more in any one year.

List of Subjects

24 CFR Part 27

    Administrative practice and procedure, Loan programs--housing and 
community development, Mortgages.

24 CFR Part 290

    Loan programs--housing and community development, Low and moderate 
income housing, Mortgage insurance.

    Accordingly, parts 27 and 290 of title 24 of the Code of Federal 
Regulations are amended as follows:

PART 27--NONJUDICIAL FORECLOSURE OF MULTIFAMILY AND SINGLE FAMILY 
MORTGAGES

    1. The authority citation for 24 CFR part 27 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b, 3701-3717; 3751-3768; 42 U.S.C. 
1452b, 3535(d).

    2. In Sec. 27.20, a new paragraph (f) is added to read as follows:


Sec. 27.20  Conditions of foreclosure sale.

* * * * *
    (f) The defaulting mortgagor, or any principal, successor, 
affiliate, or assignee thereof, on the multifamily mortgage being 
foreclosed, shall not be eligible to bid on, or otherwise acquire, the 
property being foreclosed by the Department under this subpart or any 
other provision of law. A ``principal'' and an ``affiliate'' are 
defined as provided at 24 CFR 24.105.

PART 290--DISPOSITION OF MULTIFAMILY PROJECTS AND SALE OF HUD-HELD 
MULTIFAMILY MORTGAGES

    3. The authority citation for 24 CFR part 290 continues to read as 
follows:

    Authority: 12 U.S.C. 1701z-11, 1701z-12, 1713, 1715b, 1715z-1b, 
1715z-11a; 42 U.S.C. 3535(d) and 3535(i).


    4. In subpart A, a new Sec. 290.18 is added, to read as follows:


Sec. 290.18  Restrictions on sale to former mortgagors.

    The defaulting mortgagor, or any principal, successor, affiliate, 
or assignee thereof, on the mortgage on the property at the time of the 
default resulting in acquisition of the property by HUD shall not be 
eligible to purchase the property. A ``principal'' and an ``affiliate'' 
are defined as provided at 24 CFR 24.105.

    Dated: June 28, 2001.
Mel Martinez,
Secretary.
[FR Doc. 01-17010 Filed 7-6-01; 8:45 am]
BILLING CODE 4210-32-P