[Federal Register Volume 66, Number 235 (Thursday, December 6, 2001)]
[Rules and Regulations]
[Pages 63436-63443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30033]



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Part II





Department of Housing and Urban Development





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24 CFR Part 30



Amendments to HUD's Civil Money Penalty Regulations; Final Rule

  Federal Register / Vol. 66, No. 235 / Thursday, December 6, 2001 / 
Rules and Regulations  

[[Page 63436]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 30

[Docket No. FR-4399-F-02]
RIN 2501-AC56


Amendments to HUD's Civil Money Penalty Regulations

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This rule implements sections 561 and 562 of the Multifamily 
Assisted Housing Reform and Affordability Act of 1997. These sections 
concern HUD's ability to impose civil money penalties. Section 561 
expands the list of parties and violations subject to civil money 
penalties related to multifamily properties. Section 562 authorizes HUD 
to impose civil money penalties for violations of Section 8 project-
based housing assistance payments contracts.

DATES: Effective Date: January 7, 2002.

FOR FURTHER INFORMATION CONTACT: Dane M. Narode, Deputy Chief Counsel 
for Administrative Proceedings, Departmental Enforcement Center, U.S. 
Department of Housing and Urban Development, 1250 Maryland Avenue, 
Suite 200, Washington, DC 20024; telephone (202) 708-2350 (this is not 
a toll-free number). Hearing- or speech-impaired persons may access 
this number via TTY by calling the toll-free Federal Information Relay 
Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. The June 26, 2000 Proposed Rule

    The proposed rule proposed to implement section 561 and 562 of the 
Multifamily Assisted Housing Reform and Affordability Act of 1997 (Pub. 
L. 105-65, Title V, 111 Stat. 1384) (the MAHRA), the purpose of which 
is to enhance enforcement against multifamily mortgagors and Section 8 
owners who violate program requirements. Section 561 of the MAHRA 
amended the National Housing Act at 12 U.S.C. 1735f-15, ``Civil Money 
Penalties Against Multifamily Mortgagors,'' to expand the parties 
against whom HUD may seek a civil money penalty, as well as the 
violations potentially subject to a civil money penalty. Under the law, 
civil money penalty liability can extend to mortgagors, general 
partners of mortgagors, officers or directors of corporate mortgagors, 
identity of interest agents, and members of limited liability companies 
that are mortgagors or partners of partnership mortgagors. Additional 
violations for which HUD may seek a civil money penalty under section 
561 include failure to maintain the mortgaged property, failure to 
provide acceptable management, and failure to properly maintain the 
books and accounts of the mortgaged property in accordance with HUD 
requirements.
    Section 562 of the MAHRA added a new section to the U.S. Housing 
Act of 1937, codified at 42 U.S.C. 1437z-1, entitled ``Civil Money 
Penalties Against Section 8 Owners.'' Under this section, potentially 
liable parties include owners, their general partners in the case of a 
partnership owner, and identity of interest agents. A penalty may be 
imposed for any knowing and material breach of a housing assistance 
payments contract, including failure to provide decent, safe and 
sanitary housing, and knowing submission of false or fraudulent 
statements or requests for housing assistance payments to HUD or any 
other government agency.
    The final rule implements these sections by amending the existing 
civil money penalty regulations at 24 CFR part 30. Section 561 of the 
MAHRA is implemented at Sec. 30.45. Amendments to that section include 
new definitions, including definitions of ``identity of interest 
agent'' and further definitions of terms used within that definition. 
The section also incorporates the amended statutory list of violations 
for which HUD may seek a civil money penalty. Section 562 of the MAHRA 
is implemented in a new 24 CFR 30.68.

II. This Final Rule

    The public comment period on the proposed rule closed on August 25, 
2000. HUD received 11 comments. Five were from trade associations 
representing housing owners or managers, four were from groups 
representing tenants, one was from a management corporation on its own 
behalf, and one was from an individual owner.

III. Public Comments

A. Comments Arguing That the Rule Unfairly Burdens Mortgagors/Owners

    Comment: The potential maximum penalty will cause financial 
hardship to small owners. Many of the owners subject to the rule are 
single asset entities with only the one property and the related 
assistance as their sole source of income. Many of these are small 
businesses or non-profits with limited outside revenue, individuals, 
elderly, and other like entities. These owners cannot afford the 
maximum $30,000 penalty being proposed. The reason such owners often 
fail to maintain properties or submit audited financial statements are 
income shortages, and the proposed penalty will only exacerbate the 
problem.
    Response: While the maximum amount of civil money penalty is set as 
a statutory matter, the rule does not require HUD to assess the maximum 
civil penalty in any given case of a violation subject to such penalty. 
Rather, in assessing a penalty, HUD, by statute, must assess a variety 
of factors, including an entity's ability to pay. (See 12 U.S.C. 1735f-
15(d)(3); 12 U.S.C. 1701q-1((d)(3); and 42 U.S.C. 1437z-1(c)(3)(C).) 
HUD's civil money penalty regulations implement this statutory 
requirement at 24 CFR 30.80(c). Thus, there is already sufficient 
statutory and regulatory protection of small owners. HUD has made no 
change to the rule as a result of this comment.
    Comment: The cash flow from assisted projects can be too low for 
owners to fully comply with all HUD standards. It is unfair to require 
owners to maintain projects at a higher level than the project income 
allows. There needs to be balance in the system so that owners who are 
doing a good job of managing the project within the constraints of the 
rent they can charge are not subject to penalties. It is not fair to 
require owners to reach into their own pockets to supplement the rent. 
HUD field officials should be trained in this standard.
    Response: HUD is required to consider ``the gravity of the 
offense'' and ``the degree of the violator's culpability'' when 
determining whether to seek a civil money penalty and, if so, how much 
to seek. (See 24 CFR 30.80(a) and (h).) These mandatory considerations 
should provide sufficient protection to the owner in the scenario 
described, where an owner is generally doing a good job but is found to 
have committed a violation. In addition, HUD expects owners with income 
shortfalls to seek relief that may be available, including budget-based 
rents or other permitted rent increases, or mortgage restructuring, if 
applicable. If such relief is available and an owner fails to seek it, 
HUD will consider that failure as part of its analysis of the gravity 
of the offense and the degree of culpability. Nonetheless, lack of 
income is not per se an excuse for an owner's failure to comply with 
legal obligations. Civil money penalties are always a potential result 
of failure to comply.
    As to the commenter's request that HUD provide training, the 
Departmental Enforcement Center currently provides employees engaged in 
the civil penalty process with adequate training in applying HUD's 
regulations on such

[[Page 63437]]

penalties, including the standards discussed above. For these reasons, 
HUD makes no change to the rule as a result of this comment.
    Comment: Since owners generally rely on HAP payments to correct 
violations, and since the owners face civil money penalties if they 
apply for HAP payments knowing that violations exist, there would never 
be funds available to correct the violations and return the property to 
compliance. Therefore, the procedures should allow for an evaluation of 
the cause of a property's financial distress before imposing monetary 
penalties.
    Response: HUD existing procedures allow sufficient flexibility to 
consider a variety of circumstances. These procedures include a general 
requirement that HUD consider ``such matters as justice may require,'' 
24 CFR 30.80(j). However, HUD believes that it is important that the 
agency retain maximum flexibility regarding civil penalties, within the 
general standards and procedures stated in the regulations. Therefore, 
after consideration, HUD has decided not to change the rule to address 
the specific situation raised by the comment. Rather, as to that 
situation and other individual situations that may arise, owners can 
consult with legal counsel and/or HUD field office staff, as 
appropriate.
    Comment: Civil money penalties will be ``detrimental'' to housing 
managers and hinder the operation of their properties.
    Response: While HUD considers the ability to pay in assessing a 
civil money penalty under 24 CFR 30.80(c), it is also true that the 
purpose of civil money penalties is to provide a disincentive for a 
manager, or any party statutorily subject to civil money penalties, to 
violate its legal obligations regarding HUD-assisted housing 
developments. Thus, the fact that civil money penalties might be 
detrimental does not argue against their imposition in appropriate 
cases. HUD makes no change to the rule as a result of this comment.

B. Comments on the Proposed Amount of Penalties

    Comment: HUD should seek penalties appropriate to the violations, 
and not excessive penalties. A number of commenters stated that the 
amount of penalties should not be excessive and should relate to the 
severity of the violation, the financial condition of the violator, and 
whether there was good faith in attempting to comply with HUD 
regulations. Some commenters specifically cited the Small Business 
Regulatory Flexibility Act (``SBRFA''), 5 U.S.C. 612(b), and one 
commenter stated that some of the SBRFA policies should be incorporated 
into the final rule so that owners and managers will have a basic 
understanding of them.
    Response: HUD's existing regulations governing civil penalties 
within which the new rule will be codified already provide for 
consideration of these factors. The regulations require consideration 
of, among other things, the gravity of the offense (24 CFR 30.80(a)); 
the violator's ability to pay (which of necessity includes the 
financial condition)(24 CFR 30.80(c)); and whether there was good faith 
(24 CFR 30.80(h)). Furthermore, in order to assess a civil penalty, HUD 
must show that there was a ``knowing and material'' violation. (See, 
e.g., 24 CFR 30.45(b)(1)(ii) and (c).) Lack of knowledge would be a 
form of good-faith defense that a respondent could raise. Regarding 
SBRFA-related matters, HUD has fully complied with SBRFA requirements, 
and has published material on its SBRFA policies, so that it is not 
necessary to repeat this material in each individual rule. For more 
information, please see below the section entitled ``Small Entities and 
HUD Enforcement Actions.'' In addition, information on HUD's SBRFA 
policies can be found on the World Wide Web by choosing the ``Small 
Business'' link from HUD's home page, http://www.hud.gov, and clicking 
on the link to ``1996 Law (SBREFA).''
    Comment: Civil money penalties could be crippling in many 
circumstances, and owners and managers need a clear understanding of 
their exposure to deter potential wrongdoing.
    Response: Under its current statutory authority to assess civil 
money penalties for multifamily housing, section 202 and section 811 
developments, as adjusted under the Federal Civil Penalties Inflation 
Adjustment Act of 1990, 28 U.S.C. 2461 note, HUD may assess a civil 
money penalty of up to $30,000. For section 8 properties, the Inflation 
Adjustment Act currently does not result in an increase above the 
original $25,000 statutory amount (See 42 U.S.C. 1437z-1(b)(3)). Owners 
and managers should consider these amounts their maximum potential 
civil money penalty exposure. (For the pre-adjustment penalty for 
multifamily housing, see 12 U.S.C. 1715f-15(c)(2).) See the preamble to 
the proposed rule for an explanation as to the section 202 and 811 
programs, 65 FR 39502-39504 (June 26, 2000).)
    Comment: Four commenters supported increased civil money penalties. 
One also supported the expansion of parties potentially subject to 
civil money penalties. Others stated that aggressive enforcement of 
civil money penalties is the best remedy to insure that tenants get 
decent homes and HUD funds are spent wisely.
    Response: These comments do not seek any change in the regulation. 
Therefore, no change is necessary as a result.

C. Comments Raising Fairness Concerns

    Five commenters raised concerns regarding the fairness of civil 
money penalties. These comments concerned hypothetical situations where 
HUD contributes to a violation; false statement provisions; due process 
concerns; and a concern that potential civil money penalties will 
encourage owners to opt out of assisted housing programs.
    Comment: A provision prohibiting HUD from assessing penalties in 
the case of misconduct by HUD should be more fully implemented in the 
rule. Three commenters stated that, as to Section 8 owners, the rule 
implements the statutory provision that HUD may not impose penalties if 
a material cause of the violation is the failure of HUD or a PHA to 
comply with an existing agreement at 24 CFR 30.68(e) (see 42 U.S.C. 
1437z-1(a)(2). However, the rule does not implement a similar provision 
in 12 U.S.C. 1735f-15(a) relating to HUD-assisted mortgagors. In 
addition, the rule should provide examples of HUD actions to which this 
provision would apply. One of the three commenters cited, as an 
example, HUD denials of requests for rent increases, which the 
commenter argued made it unfair for HUD to impose penalties for non-
compliance. Another commenter similarly argued that the rule should not 
allow HUD to take any enforcement action until the agency has ``fully 
complied'' with its obligations under the regulatory agreement between 
the owner and HUD.
    Response: The commenters correctly observe that the provision in 
question regarding failure to comply with existing agreements is found 
in both authorizing statutes that this rule implements. Therefore, HUD 
sees no reason why HUD should not implement the parallel provision in 
Sec. 30.45. Indeed, failure to do so could be misunderstood to indicate 
that HUD intended to implement this provision for the Section 8 program 
only. Therefore, in accordance with this comment, HUD revises the 
proposed rule to implement this provision in Sec. 30.45.
    However, HUD disagrees with the commenters' assertion that HUD 
should provide examples of conduct to which this provision would apply, 
or address

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the specific issue of the regulatory agreement. In particular, HUD 
disagrees with the commenter's example, citing a denial of a rent 
increase as cause for excuse from civil money penalties for 
noncompliance with HUD regulations. In most circumstances, the ordinary 
denial of a requested rent increase would not be an example of a 
failure to comply with an existing agreement, and would not insulate 
the owner from civil money penalties. Rather, such requests would be 
assessed in accordance with the regulatory requirements governing them, 
and approved or denied based on those requirements. As to the comment 
regarding theoretical future failures of HUD to ``fully comply'' with 
the regulatory agreement, HUD believes that the issue of whether a 
failure to comply with an agreement has occurred, and amounts to a 
violation of the agreement that constitutes a material cause of the 
owner's malfeasance, is of necessity controlled by the facts of 
particular cases, and is best examined on a case by case basis in the 
hearing process. Therefore, HUD makes no change other than to add the 
parallel provision.
    Comment: The provision allowing for civil money penalties to be 
imposed on Section 8 owners in the case of false statements or false 
requests to HUD for housing assistance payments is unfair. Two 
commenters stated that, since it is impossible to determine that each 
unit is ``decent, safe and sanitary'' each day, the certification on 
the HAP voucher exposes the owner to a penalty with each submission. It 
would be an impossible administrative burden for owners to inspect each 
unit prior to submission on the voucher. In addition, minor technical 
violations could unfairly lead to large civil money penalties. 
Therefore, standards need to be set so that de minimis inaccuracies in 
vouchers, which can always be found, do not lead to civil penalties.
    Response: In order to be liable for civil penalties, an owner must 
make a ``knowing or willful'' false submission or statement. While it 
is impossible to comment on future situations that may or may not 
arise, in the type of hypothetical scenario described by the comment, 
the submission might not be ``knowing'' or ``willful,'' and so might 
not meet the standard for assessing a civil penalty. Of course, this 
response does not relieve each owner of the responsibility to make 
reasonable and timely efforts to ascertain the condition of the project 
and take appropriate corrective action when necessary. In close cases, 
HUD is still obligated to consider the gravity of the offense and the 
degree of culpability (see 24 CFR 30.80(a) and (h)). Of course, HUD 
will consider each case on its merits. In questionable cases, potential 
respondents are advised to consult with the HUD field office as well as 
their own counsel. However, the rule as currently written is flexible 
enough to deal with the commenter's concern, and so no further 
modification of the rule is necessary.
    Comment: Owners will opt out of HUD programs. The proposed rule 
provides another incentive for owners to opt out at the earliest 
opportunity. There should be reasonable procedures whereby good owners 
will not be fined for minor and technical violations. It should be 
HUD's goal to create incentives for owners who want to stay in HUD's 
programs.
    Response: Reasonable procedures regarding minor and technical 
violations are already in place. For example HUD is required to 
consider the gravity of the offense when determining the amount of a 
civil money penalty. 12 U.S.C. 1735f-15(d)(3); 12 U.S.C. 1701q-1(d)(3); 
42 U.S.C. 1437z-1(c)(3)(A), implemented at 24 CFR 30.80(a). In 
addition, HUD has provided incentives for owners to remain in 
multifamily assisted housing programs, including mark-to-market and 
mark-up-to market. Whether or not particular owners will choose to opt 
out rather than pay civil money penalties is purely hypothetical. In 
any case, HUD must enforce its program rules, which are for the benefit 
of tenants and the taxpaying public.

D. Due Process Concerns

    Comment: One commenter stated that since the rule does not include 
a detailed appeals procedure, it violates due process.
    Response: The commenter is incorrect. Although these particular 
revisions to 24 CFR part 30 do not include a separate appeals 
procedure, the general procedures incorporated into part 30, where 
these sections will be codified, applies. Under 24 CFR 30.95, hearings 
regarding part 30 civil money penalties are to be conducted under the 
procedures in 24 CFR part 26, subpart B. This subpart contains complete 
hearing procedures that comply with due process, including higher-level 
administrative appeal and judicial review provisions. Furthermore, 
judicial review is authorized by the underlying statutes. (See 12 
U.S.C. 1735f-15(e) and 42 U.S.C. 1437z-1(d)). Therefore, no change is 
necessary as a result of this comment.
    Comment: One commenter stated that the rule should provide that 
civil penalties cannot be imposed until the appeals process is 
completed.
    Response: Generally, the authorizing statutes provide that a civil 
penalty may be imposed only after the respondent ``has received notice 
and an opportunity for a hearing on the record.'' (See 12 U.S.C. 1735f-
15(d)(1)(B) and 42 U.S.C. 1437z-1(c)(1)(B)). Thus, HUD has authority to 
impose the penalty at that point, and sees no reason to refrain from 
imposing a penalty at the time of the initial decision if the 
respondent is found liable. While respondents have the right to seek a 
stay of the penalty during the appeals process, HUD does not believe an 
automatic stay for all cases would be in the public interest, since 
some cases may involve egregious acts of noncompliance for which a stay 
would not be appropriate.

E. Use of Funds Collected Through Civil Penalties

    Three commenters suggested uses of the funds collected through the 
civil penalty process to benefit the specific project found liable.
    Comment: Since the ultimate goal is to provide decent, safe and 
sanitary housing, HUD should permit the penalty or a payment in lieu of 
the penalty to be paid to the project to fix the underlying problems.
    Response: The law does not permit the suggested payment of 
penalties. Penalties collected from multifamily and Section 202 owners 
may only be deposited in the Flexible Subsidy fund established by 
Section 201(j) of the Housing and Community Development Amendments of 
1978. 12 U.S.C. 1735f-15(j); 12 U.S.C. 1701q-1(j). For FHA-insured or 
formerly FHA-insured projects, penalties collected against Section 8 
owners and agents must either be deposited in the appropriate insurance 
fund or in another fund established under 42 U.S.C. 1437 (see 42 U.S.C. 
1437z-1(g)(1)). For projects that are not FHA-insured, penalties 
collected against Section 8 owners and agents must be applied to the 
administrative costs incurred in enforcing HUD programs (see 42 U.S.C. 
1437z-1(g)(2)). Since HUD cannot promulgate rules that violate Federal 
law, HUD makes no change as a result of this comment.
    Comment: The fines should be directed to be used by the property 
solely to address any ``damage'' which was caused to the property for 
failure to meet the defined level of expectation.
    Response: As in the comment above, the law does not permit the 
suggested application of penalties. Penalties collected from 
multifamily and section 202 owners may only be deposited in the 
Flexible Subsidy fund established by section 201(j) of the Housing and 
Community Development Amendments

[[Page 63439]]

of 1978. 12 U.S.C. 1735f-15(j); 12 U.S.C. 1701q-1(j). Penalties 
collected against Section 8 owners and agents must either be deposited 
in the appropriate insurance fund or another fund established by 42 
U.S.C. 1437, or applied to the administrative costs incurred in 
enforcing HUD programs. 42 U.S.C. 1437z-1(g). Since HUD cannot 
promulgate rules that violate Federal law, HUD makes no change as a 
result of this comment.

F. Accessibility Issues

    Comment: Failure to provide accessibility features required by law 
should be a basis for liability for civil penalties. One commenter 
stated that under Sec. 561, failure to maintain the premises should 
include failure to have accessibility features required by law. Failure 
to have acceptable management should include failure to grant 
reasonable accommodations and other fair housing compliance as required 
by law. A commenter stated that under Sec. 562, decent, safe and 
sanitary housing should be changed to ``decent, safe, accessible, and 
sanitary housing.''
    Response: The proposed rulemaking for this rule did not put the 
public on notice that violations of civil rights laws could lead to the 
assessment of civil money penalties under sections 561 and 562 of the 
MAHRA. HUD does not believe it can add entirely new categories of 
penalties at this stage of the rulemaking, but rather would have to do 
so through a new proposed rule. Therefore, HUD makes no change to this 
rule as a result of these comments.

G. Additional Factors in Assessing Penalties

    Two commenters argued for the inclusion of additional factors when 
assessing civil money penalties.
    Comment: A past pattern of violation, prior to the publication of 
the final rule, and/or evidence of continuing violation should be given 
``material weight'' in whether or not to establish penalties and in 
establishing their amount.
    Response: 24 CFR 30.80(b) requires HUD to consider any history of 
past violations in determining whether to assess a civil penalty and 
the amount of such penalty. Therefore, no further revision to part 30 
is necessary as a result of this comment.
    Comment: The rule should clarify that mortgagors/owners who are in 
noncompliance with HUD procedures and management standards, 
particularly those affecting tenant living conditions and security of 
tenure, will be subject to penalties. For example, failure by the owner 
to comply with the notice requirements for Section 8 opt-outs and/or 
mortgage prepayments should be subject to penalties. Similarly, common 
violations of HUD management standards stated in handbooks, such as 
failure to maintain proper waiting lists for vacancies or transfers, 
improper charges to tenants, violations of local and State landlord/
tenant laws and tenants' rights under leases, should be subject to 
penalties.
    Response: HUD agrees that the violation of programatic procedures 
and standards, including the examples given by the commenter, are 
indicators of unsatisfactory management. The rule has been clarified to 
include this interpretation. However, the rule also makes clear that 
HUD does not believe that a single programmatic violation, unless 
extraordinarily serious, constitutes unacceptable management for which 
a civil money penalty may be imposed.
    Comment: The rule should clarify that failure to respect the right 
of tenants to organize, should be subject to civil penalties. One 
commenter states that rule on tenant organization did not include civil 
penalties as an enforcement mechanism, and that HUD advised tenant 
representatives that this was an oversight that could be corrected by a 
subsequent rulemaking.
    Response: HUD agrees with the comment, and the final rule has been 
revised accordingly.

H. Opt-Out Projects

    One commenter stated that the rule should be extended to cover 
project-based Section 8 developments that opt out and convert to 
preservation vouchers.
    Comment: HUD has authority to apply the civil penalty rule to 
projects that opt out because the MAHRAA statute which extended ``civil 
monetary authority'' over Section 8 units has been amended to provide 
for preservation vouchers in the event of an opt out. Doing so would 
eliminate the different standards used for units receiving preservation 
vouchers as opposed to project-based assistance. Ultimately, the 
commenter would prefer that oversight of units receiving preservation 
vouchers be transferred from PIH to the Office of Multifamily Housing. 
In the meantime, HUD should seek to equalize the standards. If further 
research suggests that MAHRAA, as amended, does not give HUD the 
authority to do this, HUD should propose legislation to accomplish this 
objective.
    Response: HUD does not believe that it has the authority under the 
statute being implemented by this rule to take the steps suggested by 
the commenter under the MAHRAA, which states that a penalty may be 
imposed for a knowing and material breach of a HAP contract. (See 42 
U.S.C. 1437z-1(b)(2).) This provision applies to owners, general 
partners, and identity-of-interest management agents of projects 
receiving project-based Section 8, 42 U.S.C. 1437z-1(b)(1). However, 
the enhanced vouchers granted to opt-out projects are generally tenant-
based, and projects receiving project-based vouchers are generally not 
projects that have opted out. Thus, the statute being implemented by 
this rule does not appear to grant HUD the authority over projects that 
opt out as the commenter claims. Furthermore, HUD is reluctant to seek 
an expansion of its civil money penalty authority until it has gained 
sufficient experience to determine the effectiveness of its existing 
authority. Therefore, HUD makes no change to the rule as a result of 
this comment.

I. Tenant Participation in Civil Penalty Proceedings

    Comment: Tenants and tenant organizations should be able to have a 
voice in HUD's process for assessing civil money penalties. 
Specifically, tenants should get notice of any proposed civil 
penalties; access to information regarding the administrative record of 
such proceedings, including all correspondence between HUD and owners 
on proposed penalties; and the right to comment before HUD's final 
decision. This should be done because tenants have the greatest stake 
in the maintenance of HUD standards, and they aspire to be major 
partners with HUD in the oversight of their homes. Allowing tenants to 
participate will allow tenants to be HUD's ``eyes and ears'' and 
enhance HUD's ability to gather evidence.
    Response: The civil penalty process, by statute, is conducted by 
the government. HUD does not believe that involvement by tenants in the 
actual conduct of civil penalty cases is authorized, and therefore 
declines to adopt this suggestion.
    As to the portion of the comment seeking information regarding 
ongoing civil penalty proceedings, the Freedom of Information Act would 
apply to those requests.

J. Clarification of Terms

    Five commenters requested that the meaning of various terms used in 
the rule be clarified.
    Comment: The definition of ``ownership interest in'' is too broad 
and should be clarified to mean persons holding legal title to 
interests in the subject entity.

[[Page 63440]]

    Response: HUD believes that the suggested revision is too 
restrictive, as there are a variety of legal and equitable forms of 
ownership interest. Furthermore, for purposes of determining whether 
there is an identity of interest between ownership and the managing 
agent, the commenter's suggested definition is inadequate. HUD 
therefore declines to adopt the suggested change.
    Comment: The definition of ``effective control'' is too broad and 
should be clarified to mean actual or apparent legal authority to bind 
the subject entity.
    Response: HUD believes that effective control means much more than 
the authority to bind, and includes various forms of influence over 
others in the organization. Such influence is often based on financial 
or family considerations. HUD has thus adopted a functional definition 
of ``effective control.'' The suggested clarification would prevent HUD 
from taking relevant factors into consideration when determining 
whether an identity of interest relationship exists between an owner 
and a management agent. Therefore, HUD declines to adopt the suggested 
change.
    Comment: HUD should amend ``agent employed to manage the property 
that has an identity of interest'' so it is the same as for ``identity 
of interest agent'' in Handbook 4381.5 REV-2, Chapter 1.
    Response: The definition for identity of interest agent used in the 
rule is statutory, and HUD does not believe it has the authority to 
alter it. (See 12 U.S.C. 1735f-15-1(k), 42 U.S.C. 1437z-1(h).)
    Comment: The rule should contain more precise cross-references to 
new Section 29 of the U.S. Housing Act of 1937 and the corresponding 
provisions of 24 CFR parts 26 and 30.
    Response: The ``Authority'' statement at the beginning of the rule 
and the discussion in the preamble provide appropriate cross-references 
to the underlying statutory authority.
    Comment: The definition of ``entity'' is too broad. In the case of 
a public corporation, a low-level staff member such as a ``low ranking 
Vice President'' can be the owner of a small number of shares in an 
employee stock ownership plan, and could be included in the definition. 
Similarly, the definition of ``entity'' in 30.45(a)(3) as ``any other 
organization or group of people'' is overly broad. The same problem 
occurs in section 30.68. The definition should be narrowed to limit the 
scope of liability to those with actual responsibility for violations.
    Response: Although the commenter seems to take the position that 
one can become liable for civil penalties simply by meeting the 
definition of ``entity,'' in fact the definition of ``entity'' does not 
control who is potentially liable for civil penalties; rather, the only 
potentially liable parties are those listed under 12 U.S.C. 1735f-
15(c)(1)(A) and 42 U.S.C. 1437z-1(b)(1). HUD does not believe, as the 
commenter fears, that the relevant statutory sections and rule would 
allow HUD to hold a person liable for a civil money penalty for the 
sole reason that he or she is a ``low-level staff member'' of, or holds 
a few shares in, the management agent. The proposed definition of 
``entity'' properly takes account of the various legal and business 
entities that can be involved in housing transactions.
    Comment: Entities subject to fines in Secs. 30.45(b)(1) and (c)(1) 
and 30.68(b) should include the officers or directors of a corporate 
general partner in a partnership entity. This is necessary to prevent 
bad landlords from avoiding liability by using complex corporate 
structures to shield themselves.
    Response: Applicable statutes do not give HUD authority to impose 
civil money penalties directly against the parties mentioned in the 
comment. 12 U.S.C. 1735f-15(c)(1)(A); 12 U.S.C. 1701q-1(b)(1) and 
(c)(1); 42 U.S.C. 1437z-1(b)(1). Of course, ``any'' general partners, 
including corporate ones, are covered under 12 U.S.C. 1735f-15(c)(1)(A) 
and 42 U.S.C. 1437z-1(b)(1).

K. Effective Date

    Comment: The rule should be effective retroactively. The effective 
date should be amended to include past patterns of violation or 
continuing violations that have not been corrected as of the date of 
publication of the rule. This is essential to prevent bad landlords who 
have escaped effective enforcement action for years from getting away 
with impunity by claiming that only violations going forward from the 
date of rule publication are subject to fines. HUD should be able to 
take into account a previous administrative record of non-compliance 
with HUD standards in assessing fines quickly and firmly after the date 
of publication.(#8)
    Response: HUD currently has the authority to impose civil money 
penalties for violations listed in the original civil penalty statutes 
which occurred after December 15, 1989, the effective date of those 
statutes. Sections 108(b) and 109(b) of the Department of Housing and 
Urban Development Reform Act of 1989, Public Law 101-235, 103 Stat. 
2007, 2011. With respect to violations which were added by Section 561 
of MAHRAA, HUD has statutory authority to impose civil money penalties 
only for violations which take place after the effective date of the 
final rule implementing section 561. (See Public Law 105-65 at section 
561(c)(1). Section 562 has a similar provision. (See Public Law 105-65 
at section 562(b).
    Although HUD cannot make violators liable under the new laws for 
conduct occurring prior to the effective date of final regulations, HUD 
does consider a history of past violations in determining whether to 
assess a civil penalty and how much. 24 CFR 30.80(b).

L. Section 811 and 202 Properties

    Comment: Four commenters support the application of the rule to 811 
and 202 properties.
    Response: Since these comments seek no change in the proposed rule, 
no response is necessary.

IV. Small Entities and HUD Enforcement Actions

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

[[Page 63441]]

implement this statutory provision, the Small Business Administration 
has requested that agencies include the following language on agency 
publications and notices which are provided to small businesses 
concerns at the time the enforcement action is undertaken. The language 
is as follows:

Your Comments Are Important

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

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

V. Findings and Certifications

Environmental Impact

    In accordance with 40 CFR 1508.4 of the Council on Environmental 
Quality regulations and 24 CFR 50.19(c)(1) and (c)(6) of the HUD 
regulations, the policies and procedures contained in this final rule 
are determined not to have the potential of having a significant impact 
on the human environment and are therefore exempt from further 
environmental review under the National Environmental Policy Act of 
1969 (42 U.S.C. 4321).

Federalism Impact

    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 Executive Order 
13132 (entitled ``Federalism'').

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule. In so doing, 
the Secretary certifies that this final rule would not have a 
significant economic impact on a substantial number of small entities. 
This rule implements sections 561 and 562 of the Multifamily Reform 
Act. The rule makes conforming changes to HUD's regulations at 24 CFR 
part 30 to reflect statutory changes made to the National Housing Act 
and the United States Housing Act of 1937. These changes were mandated 
by the Multifamily Reform Act and are not discretionary on the part of 
HUD.
    The purpose of these amendments is to grant HUD additional 
enforcement tools to use against those who violate agreements and 
program requirements. The Multifamily Reform Act expanded the list of 
persons and the types of violations subject to civil money penalties 
under HUD's insured housing and Section 8 programs. To the extent that 
these statutory changes impact small entities, it will be as a result 
of actions taken by the small entities themselves--that is, by 
violating multifamily and Section 8 program regulations and 
requirements.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) requires Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and on 
the private sector. This final rule does not, within the meaning of the 
UMRA, impose any Federal mandates on any State, local, or tribal 
governments nor on the private sector.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). OMB determined that this proposed rule is a ``significant 
regulatory action,'' as defined in section 3(f) of the Order (although 
not economically significant, as provided in section 3(f)(1) of the 
Order). Any changes made to the proposed rule subsequent to its 
submission to OMB are identified in the docket file, which is available 
for public inspection in the office of the Rules Docket Clerk, Room 
10276, U.S. Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC, 20410-0500.

List of Subjects in 24 CFR Part 30

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


    Accordingly, for the reasons stated in the preamble, HUD amends 24 
CFR part 30 as follows:

PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT

    1. The authority citation for 24 CFR part 30 is revised to read as 
follows:

    Authority: 12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, and 1735f-
15; 15 U.S.C. 1717a; 28 U.S.C. 2461 note; 42 U.S.C. 1437z-1 and 
3535(d).

    2. Add paragraph (f) to Sec. 30.5 to read as follows:


Sec. 30.5  Effective dates.

* * * * *
    (f) Under Sec. 30.68, a civil money penalty may be imposed for 
violations, or for those parts of continuing violations, occurring on 
or after January 7, 2002.

    3. Revise Sec. 30.45 to read as follows:


Sec. 30.45  Multifamily and section 202 or 811 mortgagors.

    (a) Definitions. The following definitions apply to this section 
only:
    (1) Agent employed to manage the property that has an identity of 
interest and identity of interest agent. An entity:
    (i) That has management responsibility for a project;
    (ii) In which the ownership entity, including its general partner 
or partners (if applicable) and its officers or directors (if 
applicable), has an ownership interest; and
    (iii) Over which the ownership entity exerts effective control.
    (2) Effective control. The ability to direct, alter, supervise, or 
otherwise influence the actions, policies, decisions, duties, 
employment, or personnel of the management agent.
    (3) Entity. An individual corporation; company; association; 
partnership; authority; firm; society; trust; state, local government 
or agency thereof; or any other organization or group of people.
    (4) Multifamily property. Property that includes 5 or more living 
units and that has a mortgage insured, co-insured, or held pursuant to 
the National Housing Act (12 U.S.C. 1702 et seq.).
    (5) Ownership interest. Any direct or indirect interest in the 
stock, partnership interests, beneficial interests (for a trust) or 
other medium of equity participation. An indirect interest includes 
equity participation in any entity that holds a management interest 
(e.g. general partner, managing member of an LLC, majority stockholder, 
trustee) or minimum equity interest (e.g., a 25% or more limited 
partner, 10% or more stockholder) in the ownership entity of the 
management agent.
    (6) Section 202 or 811 property. Property that includes 5 or more 
living units and that has a mortgage held pursuant to a direct loan or 
capital

[[Page 63442]]

advances under section 202 of the Housing Act of 1959 (12 U.S.C. 1701q) 
or capital advances under section 811 of the Cranston-Gonzalez National 
Affordable Housing Act (42 U.S.C. 8013).
    (b) Violation of agreement.--(1) General. The Assistant Secretary 
for Housing-Federal Housing Commissioner, or his or her designee, may 
initiate a civil money penalty action against a mortgagor of a section 
202 or 811 property or a mortgagor, general partner of a partnership 
mortgagor, or any officer or director of a corporate mortgagor of a 
multifamily property who:
    (i) Has agreed in writing, as a condition of a transfer of physical 
assets, a flexible subsidy loan, a capital improvement loan, a 
modification of the mortgage terms, or a workout agreement, to use 
nonproject income to make cash contributions for payments due under the 
note and mortgage, for payments to the reserve for replacements, to 
restore the project to good physical condition, or to pay other project 
liabilities; and
    (ii) Knowingly and materially fails to comply with any of the 
commitments listed in paragraph (b)(1)(i) of this section.
    (2) Maximum penalty. The maximum penalty for each violation under 
paragraph (b) of this section is the amount of loss that the Secretary 
would experience at a foreclosure sale, or a sale after foreclosure, of 
the property involved.
    (c) Other violations. The Assistant Secretary for Housing-Federal 
Housing Commissioner, or his or her designee, may initiate a civil 
money penalty action against any of the following who knowingly and 
materially take any of the actions listed in 12 U.S.C. 1735f-
15(c)(1)(B):
    (1) Any mortgagor of a multifamily property;
    (2) Any general partner of a partnership mortgagor of such 
property;
    (3) Any officer or director of a corporate mortgagor;
    (4) Any agent employed to manage the property that has an identity 
of interest with the mortgagor, with the general partner of a 
partnership mortgagor, or with any officer or director of a corporate 
mortgagor of such property; or
    (5) Any member of a limited liability company that is the mortgagor 
of such property or is the general partner of a limited partnership 
mortgagor or is a partner of a general partnership mortgagor.
    (d) Acceptable management. For purposes of this rule, ``management 
acceptable to the Secretary'' under 12 U.S.C. 1735f-15(c)(1)(B)(xiv) 
shall include:
    (1) Proper fiscal management;
    (2) Proper handling of vacancies and tenanting in accordance with 
HUD regulations;
    (3) Appropriate handling of rent collection;
    (4) Proper maintenance;
    (5) Compliance with HUD regulations on tenant organization; and
    (6) Any other matters that pertain to proper management.
    (e) Civil money penalty. A consistent pattern of violations of HUD 
program requirements, or a single violation that causes serious injury 
to the public or tenants, can be a basis for an action to assess a 
civil money penalty.
    (f) Section 202 or 811 projects. The Assistant Secretary for 
Housing-Federal Housing Commissioner, or his or her designee, may 
initiate a civil money penalty action against any mortgagor of a 
section 202 or 811 property who knowingly and materially takes any of 
the actions listed in 12 U.S.C. 1701q-1(c)(1).
    (g) Maximum penalty. The maximum penalty for each violation under 
paragraph (c) of this section is $30,000.
    (h) Payment of penalty. No payment of a civil money penalty levied 
under this section shall be payable out of project income.
    (i) Exceptions. The Secretary may not impose penalties under this 
section for a violation, if a material cause of the violation is the 
failure of the Secretary, an agent of the Secretary, or a public 
housing agency to comply with an existing agreement.

    4. Add Sec. 30.68 to read as follows:


Sec. 30.68  Section 8 owners.

    (a) Definitions. The following definitions apply to this section 
only:
    Agent employed to manage the property that has an identity of 
interest and identity of interest agent. An entity:
    (1) That has management responsibility for a project;
    (2) In which the ownership entity, including its general partner or 
partners (if applicable), has an ownership interest; and
    (3) Over which the ownership entity exerts effective control.
    Effective control. The ability to direct, alter, supervise, or 
otherwise influence the actions, policies, decisions, duties, 
employment, or personnel of the management agent.
    Entity. An individual corporation; company; association; 
partnership; authority; firm; society; trust; state, local government 
or agency thereof; or any other organization or group of people.
    Ownership interest. Any direct or indirect interest in the stock, 
partnership interests, beneficial interests (for a trust) or other 
medium of equity participation. An indirect interest includes equity 
participation in any entity that holds a management interest (e.g. 
general partner, managing member of an LLC, majority stockholder, 
trustee) or minimum equity interest (e.g., a 25% or more limited 
partner, 10% or more stockholder) in the ownership entity of the 
management agent.
    (b) General. The Assistant Secretary for Housing-Federal Housing 
Commissioner, or his or her designee, and the Assistant Secretary for 
Public and Indian Housing, or his or her designee, may initiate a civil 
money penalty action against any owner, any general partner of a 
partnership owner, or any agent employed to manage the property that 
has an identity of interest with the owner or the general partner of a 
partnership owner of a property receiving project-based assistance 
under section 8 of the United States Housing Act of 1937 (42 U.S.C. 
1437f) for a knowing and material breach of a housing assistance 
payments contract, including the following:
    (1) Failure to provide decent, safe, and sanitary housing pursuant 
to section 8 of the United States Housing Act of 1937 and 24 CFR 5.703; 
or
    (2) Knowing or willful submission of false, fictitious, or 
fraudulent statements or requests for housing assistance payments to 
the Secretary or to any department or agency of the United States.
    (c) Maximum penalty. The maximum penalty for each violation under 
this section is $25,000.
    (d) Payment of penalty. No payment of a civil money penalty levied 
under this section shall be payable out of project income.
    (e) Exceptions. The Secretary may not impose penalties under this 
section for a violation, if a material cause of the violation is the 
failure of the Secretary, an agent of the Secretary, or a public 
housing agency to comply with an existing agreement.

    4. Revise Sec. 30.80(k) introductory text, to read as follows:


Sec. 30.80  Factors in determining appropriateness and amount of civil 
money penalty.

* * * * *
    (k) In addition to the above factors, with respect to violations 
under Secs. 30.45, 30.55, 30.60, and 30.68, the Assistant Secretary for 
Housing-Federal Housing Commissioner, or his or her designee, or the 
Assistant Secretary for Public and Indian Housing, or his or her 
designee, shall also consider:
* * * * *


[[Page 63443]]


    Dated: November 26, 2001.
Mel Martinez,
Secretary.
[FR Doc. 01-30033 Filed 12-5-01; 8:45 am]
BILLING CODE 4210-32-P