[Federal Register Volume 69, Number 169 (Wednesday, September 1, 2004)]
[Rules and Regulations]
[Pages 53558-53562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19862]



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Part IV





Department of Housing and Urban Development





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24 CFR Part 236



Retention of Excess Income in the Section 236 Program; Final Rule

  Federal Register / Vol. 69 , No. 169 / Wednesday, September 1, 2004 / 
Rules and Regulations  

[[Page 53558]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 236

[Docket No. FR-4689-F-02]
RIN 2502-AH68


Retention of Excess Income in the Section 236 Program

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

ACTION: Final rule.

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SUMMARY: This final rule amends HUD's regulations governing the Section 
236 program of the Federal Housing Administration (FHA) to establish 
the terms and procedures by which owners of multifamily housing 
projects that receive Section 236 rental assistance may retain some or 
all of their excess rental income. This final rule follows publication 
of an August 12, 2002, proposed rule, takes into consideration the 
public comments received in response to the proposed rule, and makes 
certain changes in response to the public comments.

DATES: Effective Date: October 1, 2004.

FOR FURTHER INFORMATION CONTACT: Willie Spearmon, Director, Office of 
Housing Assistance and Grant Administration, Room 6134, Department of 
Housing and Urban Development, 451 Seventh Street, SW., Washington, DC 
20410-8000, telephone (202) 708-3000 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
through TTY by calling the toll-free Federal Information Relay Service 
at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    The FHA Section 236 program, authorized by Section 236 of the 
National Housing Act (NHA) (12 U.S.C. 1715z-1), was established to 
facilitate the construction and substantial rehabilitation of 
affordable multifamily rental housing (referred to as projects in the 
Section 236 program) for lower-income households. Under the Section 236 
program, HUD provides a long-term interest subsidy (known as interest 
reduction payments) and mortgage insurance to project owners to reduce 
the interest rate on the owner's mortgage to help the owner maintain 
the rental affordability of the project. Within the last few years, 
several appropriations acts amended Section 236 of the NHA with respect 
to excess rental income received by owners of Section 236 projects 
(mortgagors).
    The Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act, 1999 (Pub. L. 
105-276, approved October 21, 1998) (FY1999 Appropriations Act) amended 
Section 236(g) of the NHA (12 U.S.C. 1715z-1(g)) to permit the 
Secretary to authorize mortgagors to retain excess rental income 
(Excess Income) upon terms and conditions established by HUD. (See 
section 227 of Title II of the FY1999 Appropriations Act.) Permitting 
mortgagors to retain Excess Income is an exception to the general 
requirement of section 236(g) of the NHA that project owners must pay 
to HUD all rental charges collected on a unit-by-unit basis that are in 
excess of the basic rental charges.
    The Departments of Veterans Affairs, Housing and Urban Development, 
Independent Agencies Appropriations Act, 2000 (Pub. L. 106-74, approved 
October 20, 1999) (FY2000 Appropriations Act) also amended section 
236(g) of the NHA to further address the conditions under which 
mortgagors are eligible to retain Excess Income. (See section 532 of 
Title V of the FY2000 Appropriations Act.) Section 236(g) of the NHA, 
as amended by the FY2000 Appropriations Act, allows mortgagors to 
retain Excess Income, if so authorized by the Secretary and if the 
income is used for the project upon terms and conditions established by 
HUD. The FY2000 Appropriations Act also authorizes the Secretary to 
permit mortgagors to retain Excess Income for non-project use after a 
determination by HUD that the project is well-maintained and in good 
condition and that the mortgagor has not engaged in material adverse 
financial or managerial actions or omissions as described in section 
516 of the Multifamily Assisted Housing Reform and Affordability Act of 
1997 (42 U.S.C. 1437f note).
    Section 532 of the FY2000 Appropriations Act also authorized HUD, 
for FY2000, to return any Excess Income remitted to HUD by mortgagors 
since October 21, 1998, the date of enactment of the FY1999 
Appropriations Act.
    Section 861(b) of the American Homeownership and Economic 
Opportunity Act of 2000 (Pub. L. 106-569, approved December 27, 2000) 
also did not amend section 236(g) of the NHA, but nevertheless provided 
permanent authority for HUD to return Excess Income remitted to HUD by 
mortgagors since October 20, 1999, the date of enactment of the FY2000 
Appropriations Act.

II. August 12, 2002, Proposed Rule

    On August 12, 2002, HUD published a proposed rule (67 FR 52526) to 
establish the terms and procedures by which Section 236 mortgagors 
would be eligible to retain some or all of their Excess Income for 
project or non-project use, as well as the procedures for requesting a 
return of Excess Income remitted to HUD. HUD received three public 
comments in response to the August 12, 2002, proposed rule. The 
commenters consisted of an individual and two associations. In response 
to the public comments, this final rule makes certain changes to the 
August 12, 2002, proposed rule as described in Section III of this 
preamble.

III. Changes to the Proposed Rule in This Final Rule

    The following changes to the August 12, 2002, proposed rule are 
made by this final rule. Section IV of this preamble discusses the 
public comments that prompted these changes.
    1. The inclusion of ``New Authorized Rent under the Section 8 mark-
to-market program'' in Sec.  236.60(a) of the proposed rule has been 
removed in the final rule. The reference to New Authorized Rent is not 
necessary because there is no Excess Income generated with units 
receiving Section 8 assistance.
    2. The term ``fully'' is added to Sec.  236.60(d)(1)(i), which now 
reads: ``The mortgagor's Reserve for Replacement is not fully funded.''
    3. The term ``uncorrected'' is added to Sec.  236.60(d)(1)(ii)(C), 
which now reads: ``The existence of uncorrected Exigent Health and 
Safety (EHS) deficiencies identified by REAC.''
    4. The term ``current'' is removed from and the phrase ``and those 
repair or maintenance needs are still outstanding'' is added to Sec.  
236.60(d)(1)(ii)(D), which now reads: ``A Comprehensive Needs 
Assessment that finds there are significant repair or maintenance 
needs, and those repair or maintenance needs are still outstanding.''
    5. Section 236.60(e) is revised to remove the requirement that 
mortgagors request permission annually to retain Excess Income for a 
specific ongoing purpose where the purpose extends beyond the current 
fiscal year.
    6. A sentence is added to Sec.  236.60(g)(2) to clarify that the 
time period covered by the narrative description that must be submitted 
annually is the prior fiscal year of the project, and not the calendar 
year or HUD's fiscal year.

[[Page 53559]]

IV. Discussion of Public Comments Submitted on the Proposed Rule

    This section of the preamble presents a discussion of major issues 
and questions raised by the three commenters. The issues are organized 
according to the section of the rule for which an issue was raised by a 
commenter or commenters. HUD's response follows the presentation of the 
commenter's issue or question.

Section 236.60(c), (e), and (g)--Requests To Retain Excess Income; 
Monthly Report; and Narrative Description

    Comment: A mortgagor should not have to request annual HUD approval 
under Sec.  236.60(e) of the rule to retain Excess Income for project 
use if the mortgagor complies with all reporting requirements of Sec.  
236.60(g)(1) and (2). The annual request is a waste of resources, and a 
late request would jeopardize the use of Excess Income for supportive 
services or capital improvements. Section 236.60(c)(3)(ii), which 
requires that the mortgagor's request to retain Excess Income identify 
the period from which Excess Income is being requested, and Sec.  
236.60(e), which requires that the mortgagor's request be submitted 
each fiscal year, should be eliminated. If these sections are not 
eliminated, HUD should offer an option that allows the mortgagor to 
request retention of Excess Income one time (as opposed to annually) 
for continuing project use of Excess Income.
    HUD Response: A mortgagor that requests to retain Excess Income for 
project use must describe the proposed use of Excess Income, the period 
from which the Excess Income is being retained, and the amount or 
percentage of Excess Income that is requested. HUD agrees that in some 
circumstances, the submission of a request to retain Excess Income on 
an annual basis should not be necessary. Accordingly, Sec.  236.60(e) 
is revised in this final rule to provide that a mortgagor requesting 
approval to retain Excess Income for a specific ongoing purpose where 
the purpose extends beyond the current fiscal year may (1) submit a 
request stating the proposed use of Excess Income, and (2) advise that 
the intended use will extend beyond the current fiscal year. If HUD 
approves the mortgagor's request, the mortgagor will not be required to 
submit a new request each fiscal year provided the use of Excess Income 
remains the same. The mortgagor will still be required to submit the 
monthly report of Excess Income and the end of year narrative. In the 
event that the use of Excess Income changes, the mortgagor must notify 
HUD of the change and submit a new request to retain Excess Income at 
least 90 days prior to the date the mortgagor intends to begin 
retaining Excess Income for the new purpose.

Section 236.60(d)--Retention for Non-Project Use

    Comment: Section 236.60(d) allows retention of Excess Income for 
non-project use. Funds collected from residents living in the project 
should be used only for project use, and the rule should not allow 
these funds to be diverted to the mortgagor for other non-related 
expenditures.
    HUD Response: Retention of Excess Income for non-project use is 
permitted by statute and approved by HUD only for those mortgagors that 
meet specific requirements as outlined in Sec.  236.60(d).

Section 236.60(d)(1)(i)--Reserve for Replacement

    Comment: The proposed rule provides that Excess Income cannot be 
retained for non-project use, if the mortgagor's Reserve for 
Replacement is not funded. The rule should be revised to provide that 
Excess Income cannot be retained for non-project use, if the 
mortgagor's reserve for replacement is not ``fully funded.'' Since 
retention of Excess Income is not an entitlement, it is important that 
there be an affirmative demonstration that the future needs of the 
project are being fully addressed before additional public funds are 
disbursed to a mortgagor for non-project purposes.
    HUD Response: HUD agrees with the comment, and Sec.  
236.60(d)(1)(i) is revised in the final rule to read ``The mortgagor's 
Reserve for Replacement is not fully funded.'' (Reserve for Replacement 
is a defined term in the Section 236 program regulations.)

Section 236.60(d)(1)(ii)(B)--Real Estate Assessment Center (REAC) Score

    Comment: Section 236.60(d)(1)(ii)(B) provides that a REAC physical 
inspection score of below 60 is a basis for determining that a project 
is not ``well-maintained housing in good condition'' and not eligible 
for retention of Excess Income for non-project use. This regulatory 
section sets a housing condition standard that is too low. Setting the 
standard so low presents risks that public funds will be allowed for 
non-project use when the project may have significant physical needs. 
HUD should raise this threshold to a higher level, such as 80 points, 
or set the threshold at a certain portion of the project inventory 
above the minimally acceptable score of 60, such as the upper two-
thirds of projects with scores above 60.
    HUD Response: The REAC score of 60 is consistent with other HUD 
programs that require a minimum REAC physical inspection score of 60 in 
order to participate in a particular HUD program.

Section 236.60(d)(1)(ii)(C)--Exigent Health and Safety Deficiencies

    Comment: The requirement that a project must not receive any 
exigent health and safety (EHS) deficiencies in order for a mortgagor 
to be eligible for retention of Excess Income is too stringent. Only 
those EHS deficiencies that cannot be easily remedied should prevent a 
mortgagor from being permitted to retain Excess Income.
    HUD Response: HUD agrees that deficiencies that are corrected 
should not prevent a mortgagor from being eligible to retain Excess 
Income, and Sec.  236.60(d)(1)(ii)(C) is changed to read: ``The 
existence of uncorrected Exigent Health and Safety (EHS) deficiencies 
identified by REAC.''

Section 236.60(d)(1)(ii)(D)--Comprehensive Needs Assessment

    Comment: Not all projects have had a ``Comprehensive Needs 
Assessment'' and many assessments are several years old and out of 
date. HUD could require up-to-date assessments on all projects for 
which a mortgagor requests to retain Excess Income, or for projects 
with REAC scores of less than 80. HUD could also provide that funding 
of these assessments are an eligible use of Excess Income for non-
project use.
    HUD Response: HUD notes that proposed Sec.  236.60(d)(1)(ii)(D) 
refers to ``current repair or maintenance needs'' and was intended to 
cover repair or maintenance needs that are still outstanding regardless 
of the age of the Comprehensive Needs Assessment.'' To makes this 
intent clear, Sec.  236.60(d)(1)(ii)(D) is changed in this final rule 
to read: ``A Comprehensive Needs Assessment that finds there are 
significant repair or maintenance needs, and those repair or 
maintenance needs are still outstanding.''

Section 236.60(g)(1) and (2)--Post-Approval Requirements

    Comment: The requirement for both monthly and annual reporting is 
an unnecessary burden. The rule should provide only for an annual 
report that describes the uses of Excess Income in the prior fiscal 
year and quarterly filing of the HUD 93104.
    HUD Response: The reporting requirements are not new. Section 236 
mortgagors have always been required to submit a monthly report of 
Excess Income to HUD. This form enables HUD to know the amount of 
Excess Income,

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if any, that is generated each month. Additionally, if the mortgagor 
has been approved to retain Excess Income, it enables HUD to know the 
amount that the mortgagor is retaining each month. In addition, HUD 
requires an audited annual financial statement that enables HUD staff 
to monitor the project's accounts. This is a requirement in the 
regulatory agreement.

Section 236.60(g)(2)--Annual Narrative Description

    Comment: Section 236.60(g)(2) requires mortgagors that retain 
Excess Income for project use to provide HUD, on an annual basis, two 
copies of a narrative description of the amount and the uses made of 
Excess Income during the prior fiscal year. Clarification is needed 
concerning to which fiscal year HUD refers in this section (the 
calendar year, HUD's fiscal year, or the project's fiscal year).
    HUD Response: Section 236.60(g)(2) of the proposed rule states that 
the requirement is for the prior fiscal year of the project. The 
calendar year or HUD's fiscal year is not relevant to this requirement 
unless the fiscal year of the project happens to coincide with the 
calendar year or HUD's fiscal year. For the sake of clarity, the final 
rule includes this explicit statement.

Additional Paperwork Burden Issues

    Comment: Under existing regulatory requirements, projects that have 
no ability to generate Excess Income (e.g., projects that have been 
marked down to market) must still submit a monthly report. This is an 
unnecessary requirement and paperwork burden.
    HUD Response: Although a project may not generate Excess Income for 
a year or two after being marked down to market, Excess Income may be 
generated in future years. This requirement remains a method by which 
HUD can monitor projects.

V. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been submitted to the Office of Management and Budget (OMB) for review 
under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35) and 
have been assigned OMB control number 2502-0086. In accordance with the 
Paperwork Reduction Act, HUD may not conduct or sponsor, and a person 
is not required to respond to, a collection of information unless the 
collection displays a currently valid OMB control number.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (entitled ``Regulatory Planning and Review''). 
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 to the rule as a result of that review are identified in the 
docket file, which is available for public inspection in the 
Regulations Division, Room 10276, Office of General Counsel, Department 
of Housing and Urban Development, 451 Seventh Street, SW., Washington, 
DC 20410-0500.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) establishes requirements for federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments and the private sector. This rule will not impose any 
federal mandates on any state, local, or tribal government or the 
private sector within the meaning of the Unfunded Mandates Reform Act 
of 1995.

Environmental Review

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was made in accordance with HUD regulations in 24 CFR part 
50 that implement section 102(2)(C) of the National Environmental 
Policy Act of 1969 (42 U.S.C. 4332(2)(C)) at the proposed rule stage of 
this final rule, and continues to apply. The FONSI is available for 
public inspection in the Regulations Division, Room 10276, Office of 
General Counsel, Department of Housing and Urban Development, 451 
Seventh Street, SW., Washington, DC 20410-0500.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule and in so 
doing certifies that the rule would not have a significant economic 
impact on a substantial number of small entities. The rule only 
establishes the requirements for mortgagors of section 236 projects to 
retain and use Excess Income.

Executive Order 13132, Federalism

    Executive Order 13132 (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 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.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Number for Section 236 
program assistance is 14.103.

List of Subjects in 24 CFR Part 236

    Grant programs--housing and community development, Low- and 
moderate-income housing, Mortgage insurance, Rent subsidies, Reporting 
and recordkeeping requirements.

0
Accordingly, HUD amends 24 CFR part 236 as follows:

PART 236--MORTGAGE INSURANCE AND INTEREST REDUCTION

0
1. The authority citation for 24 CFR part 236 continues to read as 
follows:

    Authority: 12 U.S.C. 1715b and 1715z-1; 42 U.S.C. 3535(d).


0
2. In Subpart A, a new Sec.  236.60 is added to read as follows:


Sec.  236.60  Excess Income.

    (a) Definition. Excess Income consists of cash collected as rent 
from the residents by the mortgagor, on a unit-by-unit basis, that is 
in excess of the HUD-approved unassisted Basic Rent. The unit-by-unit 
requirement necessitates that, if a unit has Excess Income, the Excess 
Income must be returned to HUD. It is not permissible to do an 
aggregate calculation of the Excess Income for all occupied rent-paying 
units, and then to offset or subtract from that figure any unpaid rent 
from occupied or vacant units, before remitting Excess Income to HUD.
    (b) General requirement to return Excess Income. Except as 
otherwise provided in this section, or as agreed to by HUD pursuant to 
a plan of action approved under 24 CFR part 248 or in connection with 
an adjustment of contract rents under section 8 of the United States 
Housing Act of 1937 Act (1937 Act) (42 U.S.C. 1437f), the mortgagor 
shall agree to pay monthly to HUD the total of all Excess Income in 
accordance with procedures prescribed by HUD.
    (c) Retention of Excess Income for project use.--(1) Eligible 
mortgagors. Any mortgagor of a project receiving Section 236 interest 
reduction payments may apply to retain Excess Income for project use 
unless the mortgagor owes

[[Page 53561]]

prior Excess Income and is not current in payments under a HUD-approved 
Workout or Repayment Agreement.
    (2) Eligible uses. Excess Income retained by a mortgagor for 
project use may be used for any necessary and reasonable operating 
expense of the project. Examples of necessary and reasonable operating 
expenses are:
    (i) Project operating shortfalls, including repair costs;
    (ii) Repair costs identified in the Comprehensive Needs Assessment, 
including increasing deposits to the Reserve Fund for Replacements to a 
limit necessary to adequately fund the reserve;
    (iii) Service coordinators;
    (iv) Neighborhood networks located at the project for project 
residents; and
    (v) Enhanced supportive services for the residents.
    (3) Request for approval to retain Excess Income. A mortgagor must 
submit a written request to retain Excess Income for project use to the 
local HUD Field Office. The request must describe:
    (i) The amount or percentage of Excess Income requested;
    (ii) The period from which Excess Income is being requested; and
    (iii) The proposed use of the requested Excess Income.
    (d) Retention of Excess Income for non-project use.--(1) Eligible 
mortgagors. Any mortgagor of a project receiving Section 236 interest 
reduction payments may apply to retain Excess Income for non-project 
use unless the mortgagor owes prior Excess Income and is not current in 
payments under a HUD-approved Workout or Repayment Agreement or the 
mortgagor falls within any of the following categories:
    (i) The mortgagor's Reserve for Replacement is not fully funded;
    (ii) The mortgagor's project is not well maintained housing in good 
condition, as evidenced by:
    (A) Failure to maintain the project in decent, safe, and sanitary 
condition and in good repair in accordance with HUD's Uniform Physical 
Condition Standards and Inspection Requirements in 24 CFR part 5, 
subpart G;
    (B) A score below 60 on the physical inspection conducted by HUD's 
Real Estate Assessment Center (REAC);
    (C) The existence of uncorrected Exigent Health and Safety (EHS) 
deficiencies identified by REAC; or
    (D) A Comprehensive Needs Assessment that finds there are 
significant repair or maintenance needs, and those repair or 
maintenance needs are still outstanding;
    (iii) The mortgagor has engaged in any one of the following 
material adverse financial or managerial actions or omissions:
    (A) Materially violating any federal, state, or local law or 
regulation with regard to the project or any other federally assisted 
project, including any applicable civil rights law or regulation, after 
receipt of notice and an opportunity to cure;
    (B) Materially breaching a contract for assistance under section 8 
of the 1937 Act, after receipt of notice and an opportunity to cure;
    (C) Materially violating any applicable regulatory or other 
agreement with HUD or a participating administrative entity, after 
receipt of notice and an opportunity to cure;
    (D) Repeatedly and materially violating any federal, state, or 
local law or regulation, including any applicable civil rights law or 
regulation, with regard to the project or any other federally assisted 
project;
    (E) Repeatedly and materially breaching a contract for assistance 
under section 8 of the 1937 Act;
    (F) Repeatedly and materially violating any applicable regulatory 
or other agreement with HUD or a participating administrative entity, 
including failure to submit audited financial statements or required 
tenant data;
    (G) Repeatedly failing to make mortgage payments at times when 
project income was sufficient to maintain and operate the project;
    (H) Materially failing to maintain the project in decent, safe, and 
sanitary condition and in good repair after receipt of notice and a 
reasonable opportunity to cure; or
    (I) Committing any actions or omissions that would warrant 
suspension or debarment by HUD.
    (2) Eligible uses. Excess Income retained by a mortgagor for non-
project use may be used for any purpose, except that the non-project 
use of Excess Income by a nonprofit entity mortgagor is limited to 
activities that carry out the entity's nonprofit purpose.
    (3) Request for approval to retain Excess Income. A mortgagor must 
submit a written request to retain Excess Income for non-project use to 
the local HUD Field Office. The request must describe:
    (i) The amount or percentage of Excess Income requested; and
    (ii) The period from which Excess Income is being requested.
    (e) Timing of request to retain Excess Income.--(1) In general. 
Except as provided in paragraph (e)(2) of this section, a mortgagor 
must submit a request to retain Excess Income at least 90 days before 
the beginning of each fiscal year before any other date during a fiscal 
year that the mortgagor plans to begin retaining Excess Income for that 
fiscal year.
    (2) Specific ongoing purpose. A mortgagor requesting approval to 
retain Excess Income for a specific, ongoing purpose where the purpose 
extends beyond the current fiscal year may submit a request that 
describes the proposed use of Excess Income and advises that the 
intended use will extend beyond the current fiscal year. If HUD 
approves the request, following review of the request in accordance 
with paragraph (f) of this section, the mortgagor will not be required 
to submit a new request each fiscal year provided the use of Excess 
Income remains the same. The mortgagor will still be required to submit 
the Monthly Report of Excess Income and the end of year narrative under 
paragraph (g) of this section. If the use of Excess Income changes, the 
mortgagor must notify HUD of the change and submit a new request to 
retain Excess Income 90 days prior to the date the mortgagor intends to 
begin retaining Excess Income for the new purpose.
    (f) HUD review and response procedure. HUD will review a 
mortgagor's request to retain Excess Income and issue a letter of 
approval or denial as follows:
    (1) Approval letter. The approval letter from HUD permitting the 
mortgagor to retain Excess Income must, at a minimum, assert:
    (i) Retention rights are for the time specified in the approval 
letter, but cannot extend beyond the current fiscal year except as 
provided in paragraph (e)(2) of this section;
    (ii) Failure of the mortgagor to maintain the Reserve for 
Replacement account in a fully funded amount at all times is grounds 
for HUD to rescind the approval;
    (iii) Failure of the mortgagor to maintain the project in a decent, 
safe, and sanitary condition and in good repair at all times is grounds 
for HUD to rescind the approval;
    (iv) If the Excess Income requested for project use is not used for 
the proposed purpose described in the mortgagor's request, the income 
must be returned to HUD, unless the mortgagor has obtained prior HUD 
approval for the alternate use; and
    (v) The failure of a mortgagor to return retained Excess Income to 
HUD for not complying with applicable requirements is a violation of 
the Regulatory Agreement for which there are enforcement remedies that 
HUD may take.
    (2) Denial letter. A letter from HUD denying a mortgagor's request 
to retain Excess Income must cite the specific

[[Page 53562]]

reasons for denial and state what requirements the mortgagor must meet 
to receive HUD's approval to retain Excess Income.
    (3) Environmental review. Before approving a request to retain 
Excess Income for project use, HUD will perform an environmental review 
to the extent required under 24 CFR part 50 for activities that are not 
excluded under 24 CFR 50.19(b).
    (g) Post-approval requirements.--(1) Monthly report. A mortgagor 
approved to retain Excess Income must continue to prepare and submit to 
HUD a revised Form HUD-93104, Monthly Report of Excess Income, or 
successor form.
    (2) Other reporting requirements. A mortgagor that retains Excess 
Income for project use must provide HUD, on an annual basis, two copies 
of a narrative description of the amount and the uses made of Excess 
Income during the prior fiscal year of the project. The calendar year 
or HUD's fiscal year is not relevant to this requirement unless the 
fiscal year of the project coincides with the calendar year or HUD's 
fiscal year. HUD may request additional follow-up information on a 
case-by-case basis. The report must contain the following 
certification: ``I certify that (1) the amount of Excess Income 
retained and used was for the purposes approved by HUD; (2) all 
eligibility requirements for retaining Excess Income were satisfied for 
the entire reporting period; and (3) all the facts and data on which 
this report is based are true and accurate. Warning: HUD will prosecute 
false claims and statements. Conviction may result in criminal or civil 
penalties, or both (18 U.S.C. 1001, 1010, 1012; and 31 U.S.C. 3729 and 
3802).''
    (h) Return of remitted Excess Income.--(1) For project use. A 
mortgagor that is eligible to retain Excess Income for project use 
under paragraph (c)(1) of this section may apply for the return of 
Excess Income remitted to HUD since October 21, 1998, in accordance 
with the procedures of paragraph (c)(3) of this section. A mortgagor 
that is eligible to retain Excess Income for project use may not apply 
for the return of Excess Income that was:
    (i) Repaid in accordance with a Workout or Repayment Agreement with 
HUD; or
    (ii) Generated between October 1, 2000, and October 27, 2000, by 
projects with state agency non-insured Section 236-assisted mortgages 
or HUD-held Section 236 mortgages
    (2) For non-project use. A mortgagor that is eligible to retain 
Excess Income for non-project use under paragraph (d)(1) of this 
section may apply for the return of Excess Income remitted to HUD since 
October 21, 1998, in accordance with paragraph (d)(3) of this section. 
A mortgagor that is eligible to retain Excess Income for non-project 
use under paragraph (d)(1) of this section may not apply to retain 
Excess Income that was:
    (i) Repaid in accordance with a Workout or Repayment Agreement with 
HUD; or
    (ii) Generated between October 1, 2000, and October 27, 2000, by 
projects with state agency non-insured Section 236-assisted mortgages 
or HUD-held Section 236 mortgages.
    (3) Reporting requirement. A mortgagor that receives returned 
Excess Income requested for project use is subject to the reporting 
requirements of paragraph (g)(2) of this section with respect to the 
returned Excess Income.
    (4) Time limit. After September 1, 2005, a mortgagor may no longer 
apply for the return of any Excess Income remitted to HUD.
    (i) HUD withdrawal of approval to retain Excess Income.--(1) Bases 
for withdrawal of approval. HUD may withdraw approval for any of the 
following reasons:
    (i) If, at any time after approval, a mortgagor fails to meet the 
eligibility requirements of paragraph (c)(1) or (d)(1) of this section, 
as applicable;
    (ii) If the mortgagor does not use the Excess Income requested for 
project use for purposes and activities as approved by HUD; or
    (iii) If at any time during the fiscal year that such approval is 
in effect, mortgagor, approved to retain Excess Income for non-project 
use, fails to maintain the project in decent, safe, and sanitary 
condition and in good repair, or maintain the Reserve for Replacement 
account in a fully funded amount.
    (2) Notification of withdrawal of approval. HUD will notify the 
mortgagor by certified mail that the authorization to retain Excess 
Income is withdrawn. The notification will state:
    (i) Specific reasons for HUD's withdrawal of approval;
    (ii) The effective termination date, which may be the date of the 
violation resulting in the withdrawal or the date of HUD's 
determination that the mortgagor was out of compliance;
    (iii) The amount of retained Excess Income improperly retained that 
must be returned to HUD; and
    (iv) The actions that the mortgagor must take to restore the 
authorization to retain Excess Income.
    (3) Mortgagor's request for reconsideration.--(i) Letter of 
reconsideration. A mortgagor may request that HUD reconsider its 
decision by submitting, to the Hub/Field Office Director or other party 
identified by HUD in the notification, within 30 days of receipt of the 
notification of withdrawal, a letter stating the basis for 
reconsideration. The letter must include documentation supporting a 
review of the withdrawal.
    (ii) HUD response. Within 30 days of HUD's receipt of the 
mortgagor's request for reconsideration, HUD will make a final 
determination and respond in writing to the mortgagor. HUD's response 
may:
    (A) Affirm the withdrawal of authority to retain Excess Income;
    (B) Reverse the withdrawal of authority to retain Excess Income; or
    (C) Request additional information from the mortgagor before 
affirming or reversing the withdrawal of authority to retain Excess 
Income.

    Dated: August 24, 2004.
Sean Cassidy,
General Deputy Assistant Secretary for Housing.
[FR Doc. 04-19862 Filed 8-31-04; 8:45 am]
BILLING CODE 4210-27-P