[Federal Register Volume 70, Number 6 (Monday, January 10, 2005)]
[Proposed Rules]
[Pages 1750-1771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-49]



[[Page 1749]]

-----------------------------------------------------------------------

Part II





Department of Housing and Urban Development





-----------------------------------------------------------------------



24 CFR Parts 200 and 242



Revisions to the Hospital Mortgage Insurance Program; Proposed Rule

  Federal Register / Vol. 70, No. 6 / Monday, January 10, 2005 / 
Proposed Rules  

[[Page 1750]]


-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 200 and 242

[Docket No. FR-4927-P-01; HUD-2004-0011]
RIN 2502-AI22


Revisions to the Hospital Mortgage Insurance Program

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would revise the regulations governing the 
Federal Housing Administration (FHA) mortgage insurance program for 
hospitals. The rule would update and incorporate some earlier 
provisions that currently are not published as part of the FHA 
regulations. Further, the rule would add new provisions to make them 
consistent with current industry practices. The rule also would codify 
the relevant regulations that address hospital mortgage insurance in 
one part, and therefore make the regulations more user-friendly.

DATES: Comment Due Date: March 11, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Interested persons may also submit 
comments electronically through either:
     The Federal eRulemaking Portal at: http://www.regulations.gov; or
     The HUD electronic Web site at: http://www.epa.gov/feddocket. Follow the link entitled ``View Open HUD Dockets.'' 
Commenters should follow the instructions provided on that site to 
submit comments electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available, without revision, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Copies are also available for inspection and downloading 
at http://www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Christopher D. Boesen, Director, 
Office of Insured Health Care Facilities, Department of Housing and 
Urban Development, Room 9224, 451 Seventh Street, SW., Washington, DC 
20410-8000; telephone (202) 708-0599 (this is not a toll-free number). 
Hearing- and speech-impaired persons may access this number through TTY 
by calling the Federal Information Relay Service at 800-877-8339 (this 
is a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 242 of the National Housing Act (the Act), codified at 12 
U.S.C. 1715z-7 (section 242), most recently amended in 2003 by the 
Hospital Mortgage Insurance Act of 2003 (Pub. L. 108-91, approved 
October 3, 2003) (HMI Act), authorizes HUD to insure mortgages on 
hospitals in accordance with the terms of the section and upon such 
conditions as HUD may prescribe. The purpose of the law is to ``assist 
the provision of urgently needed hospitals for the care and treatment 
of persons who are acutely ill or who otherwise require medical care 
and related services of the kind customarily furnished only (or most 
effectively) by hospitals.'' (See 12 U.S.C. 1715z-7(a).) Another aspect 
of the statutory purpose is to encourage programs to provide 
comprehensive health care, including outpatient and preventive care as 
well as hospitalization. In the case of public hospitals, the statute 
is designed to encourage programs to provide health care services to 
all members of a community regardless of ability to pay. (See 12 U.S.C. 
1715z-7(f).)
    The statute defines the hospitals that are eligible for insurance 
as those that: (a) Provide community service for inpatient medical care 
of the sick or injured, including obstetrical care; (b) have not more 
than 50 percent of their total patient days customarily assignable to 
the specified categories of convalescent rest, drug and alcoholic, 
epileptic, mentally deficient, nervous and mental health, and 
tuberculosis, with the exception, introduced in the 2003 amendment, of 
critical access hospitals; and (c) are a public facility, proprietary 
facility, or facility of a private nonprofit corporation or 
organization. The statute encourages programs that are undertaken to 
provide essential health care services to all members of a community 
regardless of ability to pay. (See 12 U.S.C. 1517z-7(f).) The 2003 
exception to the 50 percent patient day requirement for critical access 
hospitals lasts until 2006; HUD is to report to Congress no later than 
July 31, 2006, on the effect of the exception for critical access 
hospitals on section 242 hospital mortgage insurance and on the General 
Insurance Fund. (See 12 U.S.C. 1715z-7(b).)
    The statute authorizes mortgage insurance for new and rehabilitated 
hospitals, including equipment. The insured mortgage may involve a 
principal obligation of up to 90 percent of the estimated replacement 
cost of the property or project, including equipment to be used in the 
operation of the hospital when the proposed improvements are completed 
and the equipment is installed and systems to conserve energy where the 
Secretary determines that the systems will be cost-effective. The 
Secretary may exercise regulatory control over the mortgagor's charges 
and methods of financing, corporate entity, capital structure, and rate 
of return. (See 12 U.S.C. 1715z(d)(1)-(2).)
    The statute provides for HUD to take steps to ensure that a 
hospital supported by HUD mortgage insurance is properly established 
and responds to a real need. As to hospital operation, HUD must 
require, before insuring, that satisfactory evidence be provided that 
the hospital will be located in an area with reasonable minimum 
standards of licensure and methods of operation of hospitals. HUD also 
must require a satisfactory assurance that such standards will be 
applied and enforced with respect to the hospital for which mortgage 
insurance is being sought. (See 12 U.S.C. 1715z(d)(4)(A).)
    As to need, the revised statute requires that HUD establish the 
means for determining the need for, and feasibility of the hospital if 
the State does not have an official procedure for making this 
determination. If the State does have a procedure, HUD must require 
that the procedure be followed and documented and that need has ``also 
been established under this procedure.'' (See 12 U.S.C. 1715z-7(d)(4).) 
HUD therefore contemplates that in cases where the State has a 
procedure, both the State procedure and HUD's criteria for determining 
need must be followed, which has been the historical practice. The need 
documentation provision was changed in the 2003 revision made by the 
HMI Act. Prior to that revision, the statute had provided that where 
the State has no procedure for assessing need, the State commission 
must conduct an independent study following certain procedures and 
standards.
    The statute also contains some technical provisions regarding 
mortgage insurance. Section 242(d)(5) of the Act, 12 U.S.C. 1715z-
7(d)(5), places restrictions on mortgage insurance under part 242 on 
mortgages that back Government National Mortgage Association (GNMA) 
securities. The statute provides that in the case where

[[Page 1751]]

HUD requires a private nonprofit organization or public facility 
mortgagor to provide cash money in excess of the amount of the 
mortgage, the mortgagor shall be entitled to use a letter of credit 
instead of cash. In such an event, mortgage proceeds may be advanced to 
the mortgagor prior to any demand being made on the letter of credit. 
(See 12 U.S.C. 1715z-7(d)(6).)
    The statute also gives HUD authority to approve a partial release 
of lien for any insured section 242 mortgage. Accordingly, if a 
hospital wanted to dispose of some of its equipment or some surplus 
property, for example, the lien as to those particular items could be 
released under such terms and conditions as HUD may prescribe. (See 12 
U.S.C. 1715z-7(e).)
    The statute makes applicable certain provisions of section 207 of 
the Act, 12 U.S.C. 1713, entitled ``Rental Housing Insurance.'' These 
applicable provisions are the following sections: 1713(d) (Premium, 
appraisal, and inspection charges); 1713(e) (Adjusted premium charges 
on payment of a mortgage prior to the maturity date); 1713(g) (Payment 
of insurance after default); 1713(h) (Certificate of claim and division 
of excess proceeds); 1713(i) (Debentures); 1713(j) (Form and amounts of 
debentures); 1713(k) (Acquisition of property by conveyance or 
foreclosure); 1713(l) (Handling and disposal of property; settlement of 
claims); and 1713(n) (Default and the rights of parties).
    HUD's current regulations for hospital mortgage insurance 
authorized by section 242, codified in 24 CFR part 242, are extremely 
brief and rely mostly on cross-references to the general regulatory 
provisions applicable to Federal Housing Administration (FHA) programs, 
codified in 24 CFR part 200, and the multifamily housing mortgage 
insurance regulations codified in 24 CFR part 207. The only statutory 
provisions that are reflected in the current part 242 regulations are 
the licensing provisions of 12 U.S.C. 1715z(d)(4)(A) (see 24 CFR 242.2) 
and the provisions on eligible hospitals at 12 U.S.C. 1715z(d) (see 24 
CFR 242.3).
    The last detailed stand-alone regulation for part 242 insurance was 
codified in the April 1, 1995, edition of the Code of Federal 
Regulations (CFR). Where relevant, part II of this preamble entitled 
``This Notice of Proposed Rulemaking'' will reference those prior 
regulations.

II. This Notice of Proposed Rulemaking (NPRM).

    Overall, this NPRM provides more detailed regulations for hospital 
mortgage insurance than either the current streamlined 24 CFR part 242, 
or the detailed section that existed prior to the 1996 edition of the 
CFR. Experience has shown that certain sections of the 1995 regulations 
are still pertinent to the program, while changes in the hospital 
industry, including the increase in applicants for insurance and new 
forms of ownership including mergers and physician participation, 
require some changes. This regulation proposes new details, described 
below, which respond to HUD's actual experience with hospital mortgage 
insurance and to changes in the hospital industry, which have 
dramatically increased every year.
    The hospital mortgage insurance is a unique program (the section 
242 program), unlike the multifamily housing programs in many respects. 
It is believed to be more helpful to the public to include all the 
necessary material in a single part, rather than relying heavily on 
cross-references to the general provisions at 24 CFR part 200. 
Therefore, this NPRM proposes to take a comprehensive approach.
    There has been an overall increase in applications for insurance 
and preapplication contacts. Often, these section 242 applicants are 
new and inexperienced in this program, requiring greater guidance from 
HUD for mortgagees and greater regulatory supervision of mortgagors. 
This regulation provides this greater level of guidance. In addition, 
this regulation provides for a preapplication procedure whereby issues 
and problems can be addressed early in the process, or an application 
that has deficiencies can be identified early in the process before an 
applicant expends substantial resources on preparing it.

Changes to Part 200

    This NPRM proposes to remove references to the hospital program 
from 24 CFR part 200 so that users of the regulation can find 
everything they need in one location and to avoid unnecessary 
repetition. Specifically, 24 CFR 200.24 and 200.25 are revised to 
remove references to 24 CFR part 242, and 24 CFR 200.40 is revised to 
remove material concerning application and commitment fees that would 
be contained entirely in 24 CFR part 242.

Proposed Part 242

Subpart A--General Eligibility Requirements
    In accordance with the more detailed guidance being provided in 
this regulation, this NPRM proposes to introduce an expanded section on 
pertinent definitions in proposed 24 CFR 242.1. Among the more 
significant definitions that would be added are definitions for 
affiliate; hospital, which essentially tracks the statutory definition 
in 12 U.S.C. 1715z-7(b)(1); personalty, which includes hospital 
equipment and which in many cases will be covered by the insured 
mortgage; preliminary review letter, a proposed new element to assist 
in the application process; surplus cash; debt service coverage ratio; 
and working capital. The definition section would also include 
definitions of a variety of other commonly used terms related to 
mortgage insurance.
    The definition of ``hospital'' differs from the definition in the 
1995 and earlier versions of the regulation primarily by adding the 
exemption for critical access hospitals to the 50 percent-of-patient-
days cap on certain forms of care (chronic convalescent and rest, drug 
and alcoholic, epilepsy, mentally deficient, mental and nervous, and 
tuberculosis). This critical access hospital exemption was introduced 
in 2003, and sunsets on July 31, 2006 (see HMI Act).
    Proposed section 242.2 makes explicit that HUD has an obligation to 
protect the soundness of the mortgage insurance fund. Therefore, this 
NPRM proposes to require as an overall principle that HUD seek to avoid 
defaults and claims for insurance and promote the program's financial 
self-sufficiency and actuarial soundness.
    Proposed section 242.3 is similar to 24 CFR 242.2 from the 1995 
stand-alone regulation (24 CFR 242.2, April 1, 1995 edition) (1995 
regulation), and reflects the overall purpose of the statute to 
encourage comprehensive health care (see 12 U.S.C. 1715z-7(f)). This 
NPRM proposes to add an additional sentence to emphasize the intent to 
insure mortgages for public and certain nonpublic hospitals that serve 
a public purpose by providing a substantial amount of care to those who 
have no ability, or limited ability, to pay.
    A number of sections in proposed subpart A establish basic 
eligibility requirements. Sections 242.4, 242.5, 242.6, 242.7, and 
242.10 relate, respectively, to eligible hospitals, eligible 
mortgagees, property requirements, maximum mortgage amounts, and 
eligible mortgagors. Similar material is contained in the 1995 
regulation; this proposed rule would reorganize this material more 
logically at the beginning of the rule. The maximum mortgage amount is 
up to 90 percent of the estimated replacement cost, is statutory (see 
12 U.S.C. 1715z-7(d)(2)), and has not changed since the 1995 
regulation, where the analogous

[[Page 1752]]

section is 24 CFR 242.27. Eligible activities are the same as stated in 
the 1995 regulation in 24 CFR 242.12, ``Eligible hospitals,'' and 
include the new construction or substantial rehabilitation or 
replacement of a hospital (see 12 U.S.C. 1715z-7(d)). The section on 
``eligible mortgagees'' simply clarifies that the requirements in 24 
CFR part 202 apply, and is similar to 24 CFR 242.25 from the 1995 
regulation. The property requirements are the same as found in the 1995 
regulation at 24 CFR 242.87 and provide assurance of long-term 
ownership.
    Proposed 24 CFR 242.8, ``Standards for licensure and methods of 
operation,'' implements 12 U.S.C. 1715z(d)(4)(A). The same material was 
contained within a larger section dealing with certification 
requirements in the 1995 regulation at 24 CFR 242.5.
    Proposed 24 CFR 242.10, ``Eligible mortgagors,'' is similar to 
242.23 of the 1995 regulations. The proposed rule would give greater 
specificity to the types of for-profit mortgagors that would be 
eligible, specifically excluding joint ventures, natural persons, and 
general partnerships. These entities are specifically excluded because 
of an increased exposure to liability caused by the continuity problems 
which can arise with these specific entities. HUD needs assurance that 
the hospital will remain in existence for the duration of the insured 
mortgage loan and that the mortgagor will not be engaging in other 
business activities that could affect the ability of the mortgagor to 
make timely payment under the terms of the insured loan.
    Proposed 24 CFR 242.9, ``Physician ownership,'' is a new provision 
that is designed to recognize the reality of increased physician 
participation in the ownership of hospitals, within certain limits. 
Under current HUD Handbook guidelines, ``a proposal in which the 
mortgagor is controlled in any manner by the professionals practicing 
in the hospital will not be eligible.'' (Handbook 4615.1, ``Mortgage 
Insurance for Hospitals,'' ] 1-4(b).) HUD has been administratively 
waiving this prohibition under certain conditions. These are: a 
determination that the proposed mortgagor will be at low risk for 
violations of regulations of the Department of Health and Human 
Services and other Federal and State regulations governing kickbacks; 
self-referrals; and other issues that could increase the risk of 
default. HUD proposes to codify this standard for approval of physician 
ownership in the new regulation.
    Proposed 242.11, ``Regulatory compliance required,'' would set an 
eligibility criterion that hospitals be in substantial compliance with 
government regulations. Hospitals under investigation would generally 
not be eligible for the program, unless the Commissioner determines 
that the investigation is minor in nature, that is, unlikely to result 
in substantial liability or otherwise harm the creditworthiness of the 
hospital.
    Proposed 242.13, ``Parents and affiliates,'' recognizes the 
increase in mergers, affiliations, and multi-provider systems in the 
hospital industry. This section gives HUD express authority to take 
actions to mitigate the insurance risks posed by these arrangements.
    Proposed 242.14, ``Mortgage reserve fund,'' adapts the reserve 
requirements to current industry conditions. The Section 242 program 
long required that the mortgagor contribute to a depreciation reserve 
fund, and in some cases, contribute additional reserve funds. The 
depreciation reserve fund was designed for the era when insurers 
reimbursed hospitals for their costs, including capital costs. The fund 
was available in the later years of the mortgage to provide cash flow 
to the hospital as depreciation and interest expense declined. Also, 
the fund was available to help the hospital through unexpected cash 
flow difficulties at any time during the mortgage term. With the shift 
from cost reimbursement to reimbursement by case, the rationale for the 
depreciation reserve fund is no longer valid. However, a reserve fund 
is still needed to provide a cushion in times of financial difficulty 
to help the hospital and the Commissioner avoid mortgage defaults. 
Beginning in 2000, hospitals coming into the program were required to 
maintain a Mortgage Reserve Fund (MRF) instead of a depreciation 
reserve fund and hospitals with existing insured mortgage loans were 
permitted to convert their depreciation reserve fund to an MRF if they 
met certain conditions. The contribution requirements of the MRF are 
lower than those for the depreciation reserve fund. The language in 
Sec.  242.14 permits variation in fund requirements on a case-by-case 
basis, especially for critical access hospitals and others that receive 
partial cost-based reimbursement.
    Finally, proposed 24 CFR 242.15 provides that some preexisting 
long-term debt may be refinanced under the Section 242 program; 
however, the ``hard costs'' of construction and equipment must 
represent at least 20 percent of the total mortgage amount. The types 
of loans that may be refinanced under this provision may or may not be 
HUD-insured.
Subpart B--Application Procedures and Commitments
    Proposed 24 CFR 242.16, ``Applications,'' includes new material 
along with elements of the application procedures that have been in 
place in the program. For example, the requirement that the approval 
process entails a determination of market need in proposed Sec.  
242.16(a) is statutory (12 U.S.C. 1715z-7(d)(4)(B)) and also was found 
in the 1995 regulation in Sec.  242.3(a). Both proposed Sec.  242.16(c) 
on the application fee and Sec.  242.16(d) on filing are unchanged from 
Sec. Sec.  242.3(b) and 242.3(c) of the 1995 regulation.
    The NPRM also proposes some important new elements in the 
application procedure. In many cases, these are codifications of 
procedures the Department is currently using.
    The rule proposes, at 24 CFR 242.16(a)(1)(ii), a list of relevant 
factors in determining market need. These factors include matters such 
as the service area definition; current and projected future 
population; the occupancy rates of the applicant and competing 
hospitals; outpatient volume; and other factors related to assessing 
the need for the hospital and the services it would provide in the 
area. These factors are to be addressed, as applicable. This is in 
addition to the State's procedure, if any, for determining market need. 
In cases where the State has such a procedure, the State's procedure 
must be followed prior to application submission (proposed 24 CFR 
242.16(a)(1)(i)), and HUD's own determination of need must also be 
made. Also, the rule clarifies that for start-up hospitals or major 
expansions, it generally must be demonstrated that existing hospital 
capacity or services are not adequate to meet the needs of the 
population in the service area.
    The NPRM would also change long-standing policy for operating 
margin and financial feasibility. These standards are necessary to 
protect the soundness of the insurance fund. Proposed Sec.  
242.16(a)(2) would require a positive three-year aggregate operating 
margin, with discretion for HUD to find eligibility on the basis of a 
financial turnaround in the most recent year, and a debt service 
coverage ratio of 1.25 in the three most recent audited years, unless 
the Commissioner finds a financial turnaround, based on the audited 
financial data, resulting in a debt service coverage ratio of at least 
1.40 in the most recent year. Proposed Sec.  242.16(a)(3) contains 
detailed factors for determining whether the project is financially 
feasible; that is, whether it will be able to meet its debt service

[[Page 1753]]

obligations over the life of the mortgage that is proposed to be 
insured. Among the factors included are a current debt service coverage 
ratio of 1.25 or higher and a projected debt service coverage ratio of 
1.40 or higher, and a balance sheet that shows the resources to 
withstand a short period of net operating losses without jeopardizing 
financial viability.
    Because of the overall increase in applications for the Section 242 
program, and an increase in the number of new applicants, the rule 
would codify in Sec.  242.16(a)(4) the preliminary review process that 
HUD has used in recent years. This process is designed to forestall 
problems and provide guidance to applicants early in the process. The 
preliminary review is performed at the request of a hospital, a 
hospital's financial consultant, or a HUD-approved lender for the 
purpose of identifying any factor that would likely cause an 
application to be rejected before the applicant spends substantial 
resources on the application. The applicant submits a preliminary 
information package to the Commissioner, and, on that basis, the rule 
proposes that the Commissioner would issue a preliminary review letter 
stating either that the application would likely result in a rejection, 
or that there appears to be no bar to proceeding to the next step in 
the application process. The rule specifies that this latter 
determination is not to be construed to imply that the application will 
necessarily be approved.
    If a finding is made of probable rejection, the applicant may not 
seek another preliminary review for one year from the date of 
notification, unless the Commissioner grants an exception based on a 
determination that the circumstances which led to the conclusion of a 
likely rejection have changed. If a finding is made that the 
application may go forward, the complete application should be 
submitted within one year from the date of notification, or a new 
preliminary review may be required.
    Section 242.16(a)(5) provides that the next step in the application 
process is a preapplication meeting between the applicant and HUD. The 
result of this meeting will be either a determination that there is no 
bar to further process, or that there are issues that must be resolved 
before an application should be submitted.
    The remainder of Sec.  242.16 contains administrative components of 
application processing. Section 242.16(b) specifies the application 
contents. Section 242.16(e) provides that only technically complete 
applications will be processed and that the Commissioner, upon 
determination that an application is complete, issue a Completeness 
Letter to the applicant stating that the application is complete. 
Completeness letters generally are endeavored to be issued three weeks 
from the date that the application is determined to be complete. 
Section 242.16(f), ``Application review,'' gives the Commissioner broad 
discretion to consider any relevant factors in determining whether to 
grant an application, to solicit the advice of experts within and 
outside of government, and to request additional information from the 
applicant. At a minimum, HUD will consider eligibility, market need, 
financial feasibility, and compliance with applicable regulations. 
Section 242.16(f) also states that the Commissioner will render a 
decision within 12 months of the date of the completeness letter, 
unless the Commissioner for good cause extends the period of review. 
The review period could also be shorter than 12 months, depending 
generally on when the necessary information and materials are received 
and on the completeness of the materials.
    The remainder of subpart B concerns commitments to insure the 
mortgage. Much of this portion of the regulation--including inspection 
fees (proposed Sec.  242.18); fees in increases in commitments prior to 
endorsement (Sec.  242.19(a)) and increases between initial and final 
endorsement (Sec.  242.19(b)); reopening of expired commitments (Sec.  
242.20); refund of fees (Sec.  242.21); adjusted and reduced mortgage 
amounts (Sec.  242.23(a) and (b))--are similar to the analogous 
sections in the 1995 regulations. In other cases, technical changes are 
proposed. For example, where the 1995 regulations provide that 
insurance on advances may be made, this proposed rule would require 
such insurance on advances and specifies that they reflect the mortgage 
amount, interest rate, mortgage term, date of commencement of 
amortization, and other requirements (proposed Sec.  242.17(a)). The 
proposed regulation would also change the term of the commitment from 
180 days stated in the 1995 regulation to 90 days, subject to 
extensions not to exceed 180 days (proposed Sec.  242.17(c)).
    There are also proposed changes from the 1995 provisions to the 
lender's maximum fees and charges (proposed Sec.  242.22) to include a 
3\1/2\ percent permanent financing fee, and technical changes to 
regulations dealing with the Commissioner's discretion to evaluate the 
amount of cash equity that any mortgagor must supply, as well as 
discretion as to whether a nonprofit or public entity mortgagor may use 
a letter of credit in lieu of cash. (See proposed Sec.  242.23(c).) The 
latter section requires that the loan-to-value ratio not exceed 90 
percent, although it may be less than 90 percent. In no case may the 
equity contribution be proceeds from a loan. Finally, proposed Sec.  
242.24 would give the Commissioner discretion to evaluate, on a case-
by-case basis, the amount of working capital that must be available to 
the new hospital at the commencement of operations. Minimum working 
capital is required to ensure that hospitals, especially new hospitals, 
have sufficient operating cash on hand pending the receipt of income 
from operations. Generally, the working capital shall not be borrowed 
funds, unless the Commissioner determines that there are offsetting 
financial strengths to compensate for the risks associated with 
borrowing.
Subpart C--Mortgage Requirements
    Many of the requirements in this subpart are adopted without change 
from the 1995 regulations, and have been ongoing features of the 
program. This section of the preamble focuses on new or changed 
requirements proposed to be introduced in this NPRM. The following 
table shows the substantially equivalent sections:

                    Substantially Equivalent Sections
------------------------------------------------------------------------
             1995 Regulation                       Proposed rule
------------------------------------------------------------------------
242.31(a)................................  242.25(a)(1)
242.31(b)................................  242.25(b)
242.33(a)................................  242.26(a)
242.33(b)................................  242.26(b)
242.35...................................  242.27
242.37...................................  242.29
242.39...................................  242.30
242.41(a)................................  242.31(a)
242.41(b)................................  242.31(b)
242.51(b)................................  242.37(b)
242.51(b)(1).............................  242.37(b)(1)
242.51(b)(2).............................  242.37(b)(2)
------------------------------------------------------------------------

    Proposed Sec.  242.32 is a covenant against liens other than the 
insured mortgage, with an exception for other liens that the 
Commissioner may approve. This section codifies a policy that has been 
part of the standard regulatory agreement. In HUD mortgage insurance 
programs generally, the insured loan must have priority over other 
liens. Permitting the Commissioner to approve additional secondary 
liens for hospitals may enable hospitals to benefit from programs 
offered by the Department of Health and Human Services and States.
    The mortgage lien certifications proposed in Sec.  242.35 would add 
a new element to the 1995 equivalent section, 24 CFR 242.49, that is, a 
certification

[[Page 1754]]

that the security agreement and Uniform Commercial Code (UCC) financing 
statements establish a first lien on the personalty of the mortgagor. 
``Personalty'' would be defined in this regulation as well.
    The 1995 regulations generally grant a prepayment privilege except 
in the case of mortgage loans that have been funded by the issuance and 
sale of bonds or bond anticipation notes (24 CFR 242.51(a) and (c)), in 
which case the mortgage may contain a prepayment restriction. Proposed 
Sec.  242.37(a), however, would allow the Commissioner to establish 
additional exceptions to the prepayment privilege. Proposed Sec.  
242.37(c) would allow for prepayment restrictions in the case of bond 
funding as in the 1995 regulation, as well as where the mortgage 
secures GNMA mortgage-backed securities, in those cases where the 
statute allows such mortgages to be insured under this part (see 
Section 242(d)(5) of the Act, 12 U.S.C. l715z-7(d)(5) for the 
restrictions on insuring mortgages that are used to collateralize GNMA 
securities). Proposed Sec.  242.37(d) would provide that in the event 
of a default, the Commissioner could override any prepayment penalty in 
order to facilitate a refinancing of the property to avoid a claim on 
the insurance fund.
    There is a change from the 1995 regulations in the area of late 
charges. Where the 1995 regulation imposed a limitation on the amount 
of late charges, the proposed rule would be flexible in this area, 
allowing the Commissioner to establish the terms and conditions for 
late charges. (Compare 24 CFR 242.52 of the 1995 regulation with 
proposed Sec.  242.38.) This aligns the current rule with HUD's 
regulations in other insurance programs on this subject, as codified in 
24 CFR 200.88.
Subpart D--Endorsement for Insurance
    The proposed sections on endorsement for insurance essentially 
track similar requirements in 24 CFR part 200. This proposed rule would 
add to those typical insurance provisions specific requirements as to 
the application of cost savings in proposed Sec. Sec.  242.41(b) and 
242.43. These requirements for the application of cost savings codify 
current program practice.
Subpart E--Construction
    Proposed Sec. Sec.  242.44 through 242.53 would establish 
construction standards for the hospital mortgage insurance program. 
Proposed Sec.  242.44 would codify as the minimum standard the 
Guidelines for Construction and Equipment of Hospital and Medical 
Facilities published by the American Institute of Architects, which is 
the standard currently being used in the program.
    Proposed Sec.  242.45 would codify the practice of approving, for 
good cause shown and with the concurrence of the Commissioner, early 
commencement of work; that is, commencement of certain preliminary work 
before the commitment to insure the mortgage. In such cases, the 
inspection fee must be prepaid before the commencement of the early 
work. Section 242.45 also makes clear the fact that no preliminary site 
work may be started prior to HUD doing an environmental review under 24 
CFR part 50 and indicating its approval of the proposed work.
    Proposed Sec.  242.46, ``Insured advances--building loan 
agreement,'' and 242.47, ``Insured advances for building components 
stored off-site,'' would simply recodify similar sections of the 1995 
regulations. (See Sec. Sec.  242.53 and 242.54 of the 1995 
regulations.) Proposed Sec.  242.46 would provide for progress payments 
during construction. Proposed Sec.  242.47 would allow for insured 
advances for building components stored off-site if certain 
requirements are met. On-site storage must be impractical because of 
size or weight or the threat of weather damage or other adverse 
conditions at the site. This section also contains certain storage and 
labeling requirements, and places responsibility for storage, 
transportation, and insurance of the components on the general 
contractor.
    Proposed Sec.  242.48 would provide for insurance of ``long lead 
items,'' that is, items for which an interim payment is needed in order 
to insure the timely production and delivery to the project site of the 
item. This provision for such items is a codification of existing 
program practice.
    Proposed Sec.  242.49 would provide that the Commissioner may 
require the mortgagor to make a deposit of cash or securities. The 
Commissioner may also permit the use of a letter of credit instead of 
cash or securities. This provision would be similar to 24 CFR 242.55 of 
the 1995 regulation, the primary difference being that if a letter of 
credit is used, it must be issued by an institution with a Standard & 
Poor's rating of AA or equivalent.
    Proposed Sec.  242.50, ``Funds and finances--off-site utilities and 
streets'' would recodify 24 CFR 242.59 of the 1995 regulations. This 
section requires assurance of completion of off-site public utilities 
and streets except in cases where a municipality or other local 
governmental body agrees to install streets and utilities without cost 
to the mortgagor.
    Proposed Sec.  242.51 provides for assurances of completion in the 
form of surety bonds, and would abbreviate 24 CFR 242.61 of the 1995 
regulation to remove references to Hill-Burton grants and costs of less 
than $500,000. It is HUD's experience that these elements are not 
needed for hospitals now applying for loans. The section also provides 
that its requirements are a minimum, and that the mortgagee may require 
more stringent sureties of completion. Proposed Sec.  242.52, 
``Construction contracts,'' would require the mortgagor to enter into a 
construction contract with a builder selected by competitive bidding 
procedures. Proposed Sec.  242.52(b) would allow for such a contract to 
take a variety of forms, including a lump sum contract; a construction 
management contract with a guaranteed maximum price, the final costs of 
which are subject to a certification acceptable to the Commissioner; a 
design-build contract; or such other contract as the Commissioner may 
approve. This section would differ from a similar section of the 1995 
regulation by not providing for a waiver of competitive bidding, and by 
expanding the types of contracts that may be used (formerly, only a 
lump sum contract was allowed). By doing so, the rule would allow for a 
wider variety of participants who may wish to use a variety of 
contracting methods.
    Proposed Sec.  242.53 would require that contracts relating to 
construction of the project not be made with any firm that has been 
found to be ineligible to participate by HUD or the Department of 
Labor. These restrictions on ineligible contractors are similar to 
those found in 24 CFR 242.71 of the 1995 regulation, with an additional 
provision prohibiting identity of interest contracts, as determined by 
the Commissioner, between the applicant and the general contractor.
Subpart F--Nondiscrimination and Wage Rates
    Proposed Sec. Sec.  242.54 and 242.55 would reference the basic 
nondiscrimination and Davis-Bacon wage rate requirements applicable to 
this program as well as the special requirement for payment of overtime 
to laborers and mechanics that applies to this program under section 
212 of the Act.
Subpart G--Regulatory Agreement, Accounting and Reporting, and 
Financial Requirements
    Proposed Sec. Sec.  242.56-242.93 would primarily focus on improved 
HUD supervision of the insured mortgagor, as well as on administrative 
provisions

[[Page 1755]]

necessary to run the program. Overall, HUD will exercise financial 
supervision over its insured mortgagors to minimize the risk to the 
insurance fund.
    Proposed Sec.  242.56 would provide for regulation by a Regulatory 
Agreement which can be flexible and include such clauses as the 
Commissioner deems necessary on a case-by-case basis. This section also 
makes clear that the mortgagor will be subject to continuing 
supervision by government agencies and their contractors and agents for 
the life of the insured loan. The purpose of this provision is to 
ensure financial soundness and prevent program abuse.
    Proposed Sec. Sec.  242.57 and 242.59 would restate, respectively, 
24 CFR 242.77 and 242.81 from the 1995 regulation. These sections 
require the mortgagor to maintain the property in good repair and allow 
for HUD to inspect the property, and the mortgagor's books and records, 
at reasonable times. In addition to these provisions, proposed Sec.  
242.58, ``Books, accounts, and financial statements,'' expands on the 
parallel 1995 regulation, 24 CFR 242.79, by specifying details of 
financial reports and when these reports must be filed with the 
Commissioner. This section also expands on the auditing requirements of 
the 1995 regulation. The purpose of these changes is to improve on the 
financial oversight of the mortgagor and reduce risk to the insurance 
fund.
    Proposed Sec.  242.61, ``Management,'' would provide that the 
Commissioner must approve any management contract for the hospital 
insured under this section. Furthermore, HUD could require that the 
principals of the mortgagor and key management employees could be 
removed, substituted, or terminated for cause by written request of the 
Commissioner. Experience has shown that there is a need to ensure 
appropriate management of hospitals insured under this program.
    Under proposed Sec.  262.64, all current and future property and 
equipment will become subject to the HUD-insured mortgage unless the 
Commissioner, for cause, approves otherwise. Given the importance of 
the security for the insured loan, proposed Sec.  242.62, ``Release of 
lien,'' and Sec.  242.65, ``Distribution of assets,'' would contain 
important concepts. Under Sec.  242.62, the mortgagor would not be able 
to dispose of any non-cash assets secured by the mortgage without the 
approval of the mortgage lender and the Commissioner. If such disposal 
of assets involves a partial release of the lien, the lender, subject 
to review by the Commissioner, must make a determination that the 
remaining lien is sufficient to cover the remaining property.
    Proposed Sec.  242.65 would provide for the distribution of assets, 
including surplus cash. Cash, to be considered surplus and available 
for distribution, must either meet the terms of the definition of 
``surplus cash'' in proposed 24 CFR 242.1 or be approved for 
distribution by the Commissioner. This section clarifies to whom 
distributions may occur.
    Two proposed sections would regulate affiliate transactions. 
Proposed Sec.  242.66 would prohibit transactions with affiliates 
except with prior written approval of the Commissioner. Proposed Sec.  
242.67 would prohibit acquisition, development, organization, or 
acquisition of a significant interest in any corporation, subsidiary, 
or affiliate other than those with which the mortgagor was affiliated 
with as of the date of application, without the prior written approval 
of the Commissioner.
Subpart H--Miscellaneous Requirements
    This subpart contains a number of requirements that do not fit 
under other categories of 24 CFR part 242. For example, Sec.  242.68 
refers to disclosure and verification of Social Security and Employer 
Identification numbers. Section 242.69 relates to fees for transfers of 
physical assets.
    Although the program has generally prohibited the leasing of an 
entire hospital, proposed Sec.  242.72 would permit leasing of the 
hospital in two limited instances. One is where there is a State law 
prohibition against State entity mortgaging of health care facilities. 
Another is where the Commissioner determines that leasing is necessary 
to reduce the risk of default by a financially troubled hospital with 
an existing loan under 24 CFR part 242.
    Proposed Sec.  242.73 provides for the waiver of eligibility 
requirements for insurance under the part of a mortgage assigned to the 
Secretary or acquired by the Secretary subsequent to a payment of 
claim. This provision would help to enable the Secretary to dispose of 
such mortgages after such assignment or acquisition, thereby recouping 
losses to the insurance fund.
    Proposed Sec. Sec.  242.74 (smoke detectors), 242.75 (title 
requirements), and 242.76 (title evidence) would restate, without 
substantive change, 1995 Sec. Sec.  242.87, 242.89, and 242.91, 
respectively. Proposed Sec.  242.77 would provide that the hospital 
must be free and clear of all liens other than the insured mortgage, 
except for certain categories of liens as the Commissioner may provide.
    Proposed Sec.  242.89, ``Supplemental loans,'' would provide for a 
loan or advance of credit for financing improvements or additions to a 
hospital covered by this part. This section implements section 241 of 
the Act (12 U.S.C. 1715z-6), for the hospital mortgage insurance 
program.
    Proposed Sec.  242.90, ``Eligibility of mortgages covering 
hospitals in certain neighborhoods,'' restates 24 CFR 242.94 from the 
1995 regulation. The purpose of this section is to provide for hospital 
care in older or declining neighborhoods, subject to certain 
conditions, such as ensuring that the area is reasonably viable and the 
mortgage is an acceptable risk.
    Proposed Sec.  242.91, ``Eligibility of refinancing transactions,'' 
restates 24 CFR 242.96 from the 1995 regulations. Proposed Sec. Sec.  
242.92 (minimum principal loan amount), 242.93 (amendment of 
regulations), and 242.94 (cross reference) restate 24 CFR 242.97, 
242.249, and 242.251 of the 1995 regulations, respectively.

Findings and Certifications

Information Collection Requirements
    The information collection requirements contained in this proposed 
rule are found in Sec. Sec.  242.8, 242.13, 242.16, 242.20, 242.25, 
242.33, 242.35, 242.40, 242.41, 242.42, 242.46, 242.52, 242.57, 242.58, 
242.61, 242.68, and 242.76. As discussed in the preamble of this rule, 
the information collection requirements in these sections are largely 
unchanged from those already in place for the Section 242 program, and 
found in the existing regulations in 24 CFR parts 200, 207 and 242, and 
documents such as form, HUD-92013-HOSP (Application for Hospital 
Project Mortgagee Insurance) and Mortgagee Letter 04-08 (issued 
February 23, 2004), which details the requirements for the market need 
study and financial feasibility study. The existing information 
collection requirements were approved by the Office of Management and 
Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and assigned OMB approval number 2502-0518.
    The existing information collections, which remain unchanged by 
this proposed rule, are found in the following sections: Sec. Sec.  
242.8 (requiring evidence that the hospital is located in a State or a 
political subdivision of a State with reasonable minimum standards for 
licensure and methods of operation), 242.13 (concerning financial and 
operational information about parents and affiliates), 242.20 
(concerning request for reopening

[[Page 1756]]

expired commitment), 242.25 (form of the mortgage), 242.33 (maintenance 
of adequate malpractice liability, fire, and extended coverage 
insurance on the property), 242.40 (form of mortgagee certificate), 
242.41 (concerning agreement precluding excess of mortgage proceeds 
over statutory limitations), 242.42 (mortgagor's certificate of actual 
cost), 242.46 (building loan agreement), 242.50 (assurances of 
completion of off-site public utilities and streets), 242,51 (assurance 
of completion of construction or rehabilitation where cost is more than 
$500,000), 242.52 (a contract for construction or rehabilitation of a 
hospital), 242.56 (execution of regulatory agreement), and 242.75 
(marketable title requirements), and 242.76 (evidence of title).
    The Department has estimated the total burden for the information 
collection currently in place for the Section 242 program, which 
includes the Application for Hospital Project Mortgage Insurance (HUD-
92013-HOSP), the market need and feasibility studies, and the 
requirements set forth in the regulations, as a total of 17,280 hours. 
This total is based on an estimate of 18 applicants a year and 960 
hours per response.
    The additional information collection set forth in this proposed 
rule can be found in the following regulatory sections. Several of 
these sections, such as 242.16 (the application requirements) contain 
the existing requirements, and these requirements have been expanded 
upon by the proposed rule, particularly with respect to the market need 
and feasibility study. In Sec.  242.16(a)(1)(ii), HUD proposes a list 
of additional relevant factors in determining market need, and Sec.  
242.16(a)(3) contains detailed factors for determining whether a 
project is financially feasible. Section 242.35 proposed to add to the 
existing mortgage lien certification a certification that the security 
agreement and UCC financing statements establish a first line on the 
personalty of the mortgagor. Section 242.58 expands upon the 
recordkeeping requirements currently in place. Section 242.61 provides 
for a management contract for the hospital and Sec.  242.68 requires a 
disclosure and verification of Social Security and employer 
identification numbers. The additional burden of the information 
collections in this proposed rule is estimated as follows:

                                       Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                     Number of     average time      Estimated
                Section reference                    Number of     responses per        for         additional
                                                      parties       respondent      requirement    annual burden
                                                                                    (in hours)      (in hours)
----------------------------------------------------------------------------------------------------------------
Sec.   242.16...................................              18               1               5              90
Sec.   242.35...................................              18               1               2              36
Sec.   242.58...................................              18               1               1              18
Sec.   242.61...................................              18               1               3              54
Sec.   242.68...................................              18               1               1              18
                                                 -----------------
    Total Additional Annual Burden Presented by   ..............  ..............  ..............             216
     Proposed Rule..............................
    Total Estimated Annual Burden: 17, 280 hrs +  ..............  ..............  ..............          17,416
     216 hrs....................................
----------------------------------------------------------------------------------------------------------------

    The changed collection of information is being submitted to OMB for 
review and approval. In accordance with 5 CFR 1320.8(d)(1), HUD is 
soliciting comments from members of the public and affected agencies 
concerning this collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology; e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule no later than February 
9, 2005. This time frame does not affect the deadline for comments to 
the agency on the rule, however. Comments on information collection 
2502-0518 must refer to the proposed rule by name and docket number 
(FR-4927-P-01) and must be sent to:

Mark D. Menchik, HUD Desk Officer, Office of Management and Budget, New 
Executive Office Building, Washington, DC 20503, Fax number: (202) 395-
6947, E-mail: [email protected];
     and
Kathleen McDermott, Reports Liaison Officer, Office of Housing-Federal 
Housing Commissioner, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 9116, Washington, DC 20410-8000.

In accordance with the Paperwork Reduction Act, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a currently 
valid OMB control number.
Environmental Impact
    A Finding of No Significant Impact with respect to the environment 
for this rule has been made in accordance with HUD regulations at 24 
CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The Finding of 
No Significant Impact is available for public inspection between 8 a.m. 
and 5 p.m. weekdays in the Regulations Division, Office of the General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street, SW., Washington, DC 20410-5000.
Unfunded Mandates Reform Act
    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
(UMRA) establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and on the private sector. This rule does not impose a 
Federal mandate on any State, local, or tribal government, or on the 
private sector, within the meaning of UMRA.

[[Page 1757]]

Regulatory Flexibility Act
    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities.
    There are no anti-competitive discriminatory aspects of the rule 
with regard to small entities, and there are not any unusual procedures 
that would need to be complied with by small entities. The rule revises 
the regulations under the mortgage insurance program for hospitals to 
update and improve the efficiency of the program.
    Therefore, the undersigned certifies that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities, and an initial regulatory flexibility analysis is not 
required.
    Notwithstanding the determination that this rule would not have a 
significant economic impact on a substantial number of small entities, 
HUD specifically invites comments regarding less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.
Executive Order 13132, Federalism
    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 rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
State and local governments nor preempt State law within the meaning of 
the Executive Order.
Regulatory Planning and Review
    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, 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 an economically significant 
regulatory action under the order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the Regulations Division, Office of 
the General Counsel, Room 10276, 451 Seventh Street, SW., Washington, 
DC 20410-0500.

List of Subjects in 24 CFR Part 200

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number is 14.128.

List of Subjects in 24 CFR Part 242

    Hospitals, Mortgage insurance, Reporting and record keeping 
requirements.

    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR parts 200 and 242 to read as follows:

PART 200--INTRODUCTION TO FHA PROGRAMS

    1. Section 200.24 is revised to read as follows:


Sec.  200.24  Existing projects.

    A mortgage financing the purchase or refinance of an existing 
rental housing project under section 207 of the Act, or for refinancing 
the existing debt of an existing nursing home, intermediate care 
facility, assisted living facility, or board and care home, or any 
combination thereof, under section 232 of the Act, may be insured 
pursuant to provisions of section 223(f) of the Act and such terms and 
conditions established by the Commissioner.
    2. Section 200.25 is revised to read as follows:


Sec.  200.25  Supplemental loans.

    A loan, advance of credit or purchase of an obligation representing 
a loan or advance of credit made for the purpose of financing 
improvements or additions to a project covered by a mortgage insured 
under any section of the Act or Commissioner-held mortgage, or 
equipment for a nursing home, intermediate care facility, board and 
care home, assisted living facility, or group practices facility, may 
be insured pursuant to the provisions of section 241 of the Act and 
such terms and conditions established by the Commissioner.
    3. 24 CFR 200.40 is amended by revising paragraphs (c), (d), and 
(f) to read as follows:


Sec.  200.40  HUD fees.

    The following fees apply to mortgages to be insured under this 
part.
* * * * *
    (c) Application fee--conditional commitment. For a mortgage being 
insured under section 223(f) of the Act (12 U.S.C. 1715n), an 
application-commitment fee of $3 per thousand dollars of the requested 
mortgage amount shall accompany an application for conditional 
commitment.
    (d) Application fee--firm commitment: General. An application for 
firm commitment shall be accompanied by an application-commitment fee 
which, when added to any prior fees received in connection with 
applications for a SAMA letter or a feasibility letter, will aggregate 
$5 per thousand dollars of the requested mortgage amount to be insured. 
The payment of an application-commitment fee shall not be required in 
connection with an insured mortgage involving the sale by the 
government of housing or property acquired, held, or contracted 
pursuant to the Atomic Energy Community Act of 1955 (42 U.S.C. 2301 et 
seq.).
* * * * *
    (f) Fees on increases--in general. This section applies to all 
applications except applications involving hospitals, which are covered 
in 24 CFR part 242.
    (1) Increase in firm commitment before endorsement. An application, 
filed before initial endorsement (or before endorsement in a case 
involving insurance upon completion), for an increase in the amount of 
an outstanding firm commitment shall be accompanied by a combined 
additional application and commitment fee. This combined additional fee 
shall be in an amount which will aggregate $5 per thousand dollars of 
the amount of the requested increase. If an inspection fee was required 
in the original commitment, an additional inspection fee shall be paid 
in an amount computed at the same dollar rate per thousand dollars of 
the amount of increase in commitment as was used for the inspection fee 
required in the original commitment. When insurance of advances is 
involved, the additional inspection fee shall be paid at the time of 
initial endorsement. When insurance upon completion is involved, the 
additional inspection fee shall be paid before the date construction is 
begun or if construction has begun, it shall be paid with the 
application for increase.
    (2) Increase in mortgage between initial and final endorsement. 
Upon an application, filed between initial and final endorsement, for 
an increase in the

[[Page 1758]]

amount of the mortgage, either by amendment or by substitution of a new 
mortgage, a combined additional application and commitment fee shall 
accompany the application. This combined additional fee shall be in an 
amount which will aggregate $5 per thousand dollars of the amount of 
the increase requested. If an inspection fee was required in the 
original commitment, an additional inspection fee shall accompany the 
application in an amount not to exceed the $5 per thousand dollars of 
the amount of the increase requested.
    (3) Loan to cover operating losses. In connection with a loan to 
cover operating losses (see Sec.  200.22), a combined application and 
commitment fee of $5 per thousand dollars of the amount of the loan 
applied for shall be submitted with the application for a firm 
commitment. No inspection fee shall be required.
* * * * *

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

    4. Part 242 is revised to read as follows:

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

Subpart A--General Eligibility Requirements
Sec.
242.1 Definitions.
242.2 Program financial self-sufficiency.
242.3 Encouragement of certain programs.
242.4 Eligible hospitals.
242.5 Eligible mortgagees.
242.6 Property requirements.
242.7 Maximum mortgage amounts.
242.8 Standards for licensure and methods of operation.
242.9 Physician ownership.
242.10 Eligible mortgagors.
242.11 Regulatory compliance required.
242.13 Parents and affiliates.
242.14 Mortgage reserve fund.
242.15 Limitation on refinancing of existing indebtedness.
Subpart B--Application Procedures and Commitments
242.16 Applications.
242.17 Commitments.
242.18 Inspection fee.
242.19 Fees on increases.
242.20 Reopening of expired commitments.
242.21 Refund of fees.
242.22 Maximum fees and charges by mortgagee.
242.23 Adjusted and reduced mortgage amounts.
242.24 Working capital.
Subpart C--Mortgagee Requirements
242.25 Mortgage form and disbursement of mortgage proceeds.
242.26 Agreed interest rate.
242.27 Maturity.
242.28 Alllowable costs for consultants.
242.29 Payment requirements.
242.30 Application of payments.
242.31 Accumulation of accruals.
242.32 Covenant against liens.
242.33 Covenant for malpractice, fire and other hazard insurance.
242.35 Mortgage lien certifications.
242.37 Mortgage prepayment.
242.38 Late charge.
Subpart D--Endorsement for Insurance
242.39 Insurance endorsement.
242.40 Mortgagee Certificate.
242.41 Certification of cost requirements.
242.42 Certificates of actual cost.
242.43 Application of cost savings.
Subpart E--Construction
242.44 Construction standards.
242.45 Early commencement of work.
242.46 Insured advances--building loan agreement.
242.47 Insured advances for building components stored off-site.
242.48 Insured advances for certain equipment and long lead items.
242.49 Funds and finances: Deposits and letters of credit.
242.50 Funds and finances: Off-site utilities and streets.
242.51 Funds and finances: Insured advances and assurance of 
completion.
242.52 Construction contracts.
242.53 Ineligible contractors.
Subpart F--Nondiscrimination and Wage Rates
242.54 Nondiscrimination.
242.55 Labor standards.
Subpart G--Regulatory Agreement, Accounting and Reporting, and 
Financial Reporting
242.56 Form of regulation.
242.57 Maintenance of hospital facility.
242.58 Books, accounts, and financial statements.
242.59 Inspection of facilities by Commissioner.
242.61 Management.
242.62 Releases of lien.
242.63 Additional indebtedness and leasing.
242.64 Current and future property.
242.65 Distribution of assets.
242.66 Affiliate transactions.
242.67 New corporations, subsidiaries, affiliations, and mergers.
Subpart H--Miscellaneous Requirements
242.68 Disclosure and verification of Social Security and Employer 
Identification Numbers.
242.69 Transfer fee.
242.70 Fees not required.
242.72 Leasing of hospital.
242.73 Waiver of eligibility requirements for mortgage insurance.
242.74 Smoke detectors.
242.75 Title requirements.
242.76 Title evidence.
242.77 Liens.
242.78 Zoning, deed, and building restrictions.
242.79 Environmental quality determinations and standards.
242.81 Lead-based paint poisoning prevention.
242.82 Energy conservation.
242.83 Debarment and suspension.
242.84 Previous participation and compliance requirements.
242.86 Property and mortgage assessment.
242.87 Certifications.
242.89 Supplemental loans.
242.90 Eligibility of mortgages covering hospitals in certain 
neighborhoods.
242.91 Eligibility of refinancing transactions.
242.92 Minimum principal loan amount.
242.93 Amendment of regulations.
242.94 Cross-reference.

    Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
3535(d).

Subpart A--General Eligibility Requirements

Sec.  242.1 Definitions.
    As used in this subpart, the following terms shall have the meaning 
indicated: Act means the National Housing Act (12 U.S.C. 1701 et seq.).
    Affiliate means a person or entity which, directly or indirectly, 
either controls or has the power to control or exert significant 
influence on the other, or a person and entity both controlled by a 
third person or entity, which may be a parent entity. Indicia of 
control include, but are not limited to: interlocking management or 
ownership, identity of interests among family members, shared 
facilities and equipment, common use of employees, or a business entity 
organized following the suspension or debarment of a person or entity 
which has the same or similar management, ownership, or principal 
employees as the suspended, debarred, ineligible, or voluntarily 
excluded person or entity or as defined in the Medicare reimbursement 
regulations.
    Chronic convalescent and rest means skilled nursing services, 
intermediate care services, respite care services, hospice services, 
rehabilitation services, and other services of a similar nature.
    Commissioner means the Assistant Secretary for Housing--Federal 
Housing Commissioner or his or her authorized representatives. (The 
operation of the hospital mortgage insurance program is centralized 
directly under the Commissioner.)
    Debt service coverage ratio is a measure of a hospital's ability to 
pay interest and principal with cash generated from current operations. 
A high coverage ratio indicates that an institution is in good 
financial position to meet its long-term obligations (including its 
FHA-insured loan) and service its debt. Higher values are

[[Page 1759]]

preferable. Debt service coverage ratio is calculated as follows:

Debt Service Coverage Ratio =
[GRAPHIC] [TIFF OMITTED] TP10JA05.005

    Hospital means a facility that has been proposed for approval or 
has been approved by the Commissioner under the provisions of this 
subpart, and:
    (1) Which provides community services for inpatient medical care of 
the sick or injured (including obstetrical care);
    (2) Where not more than 50 percent of the total patient days during 
any year are customarily assignable to the categories of chronic 
convalescent and rest, drug and alcoholic, epileptic, mentally 
deficient, mental, nervous and mental, and tuberculosis, except that 
the 50 percent patient day restriction does not apply to Critical 
Access Hospitals (hospitals designated as such under the Medicare Rural 
Hospital Flexibility Program) between [effective date of final rule] 
and July 31, 2006.
    (3) Which is a facility licensed or regulated by the State (or, if 
there is no such State law providing for such licensing or regulation 
by the State, by the municipality or other political subdivision in 
which the facility is located) and is:
    (i) A public facility owned by a State or unit of local government 
or by an instrumentality thereof, or owned by a public benefit 
corporation established by a State or unit of local government or by an 
instrumentality thereof;
    (ii) A proprietary facility; or
    (iii) A facility of a private nonprofit corporation or association.
    Identity of interest means a relationship that must be disclosed 
and may be prohibited pursuant to the requirements of the Regulatory 
Agreement.
    Mortgage means such classes of first liens as are commonly given to 
secure advances on, or the unpaid purchase price of, real estate under 
the laws of the State in which the real estate is located, together 
with any credit instrument secured thereby. The mortgage may be in the 
form of one or more trust mortgages or mortgage indentures or deeds of 
trust securing notes, bonds, or other credit instruments; and by the 
same instrument or by a separate instrument, it may create a security 
interest in the personalty, including, but not limited to, the 
equipment whether or not the equipment is attached to the realty, and 
in the revenues and receivables of the hospital.
    Mortgagee or lender means the original lender under a mortgage, and 
its successors and assigns, and includes the holders of credit 
instruments issued under a trust indenture, mortgage, or deed of trust 
pursuant to which such holders act by and through a trustee therein 
named. (All official contacts and actions by the Commissioner shall be 
with or through a HUD-approved lender.)
    Mortgagor means the original borrower under a mortgage and its 
successors and assigns.
    Mortgage Reserve Fund means a trustee-held account to which the 
mortgagor contributes and from which withdrawals must be approved by 
the Commissioner. The purpose of the fund is to provide the 
Commissioner a means to assist the hospital to avoid mortgage defaults 
and to preserve the value of the mortgaged property or the hospital's 
business.
    Non-operating revenues and expenses are those revenues and expenses 
not directly related to patient care, hospital-related patient 
services, or the sale of hospital-related goods. Examples of items 
classified as non-operating are State and Federal income tax, general 
contributions, gains and losses from investments, unrestricted income 
from endowment funds, and income from related entities. Classification 
of items as operating or non-operating shall follow written guidance by 
the Commissioner.
    Operating margin is operating income divided by operating revenue, 
where:
    Operating revenue is the revenue from the core patient care 
operations of the hospital. It includes revenues from the provision of 
such items as patient care (including hospital-based nursing home and 
physicians' clinics); transfers from temporarily restricted accounts 
that are used for current operating expenses; and patient-related 
activities such as the operation of the cafeteria, parking facilities, 
television services to patients, sale of medical scrap or waste, etc. 
(Additional sources of revenue, which are classified as non-operating, 
are deliberately excluded from this measure.)
    Operating income is operating revenue minus operating expenses, 
where operating expenses are the expenses incurred in providing patient 
care, including such items as salaries, supplies, and the cost of 
capital.
    Parent means an organization or entity that controls or has a 
controlling interest in another organization or entity.
    Personalty means all furniture, furnishings, equipment, machinery, 
building materials, appliances, goods, supplies, tools, books, records 
(whether in written or electronic form), computer equipment (hardware 
and software) and other tangible or electronically stored personal 
property (other than fixtures) which are owned or leased by the 
borrower or the lessee now or in the future in connection with the 
ownership, management or operation of the land or the improvements or 
are located on the land or in the improvements, and any operating 
agreements relating to the land or the improvements, and any surveys, 
plans and specifications and contracts for architectural, engineering 
and construction services relating to the land or the improvements, 
choses in action and all other intangible property and rights relating 
to the operation of, or used in connection with, the land or the 
improvements, including all governmental permits relating to any 
activities on the land. Personalty also includes all tangible and 
intangible personal property used for health care (such as major 
movable equipment and systems), accounts, licenses, bed authorities, 
certificates of need required to operate the project and to receive 
benefits and reimbursements under provider agreements with Medicaid, 
Medicare, State and local programs, payments from health care insurers 
and any other assistance providers (``Receivables''); all permits, 
instruments, rents, lease and contract rights, and equipment leases 
relating to the use, operation, maintenance, repair, and improvement of 
the hospital. Generally, intangibles shall also include all cash and 
cash escrow funds, such as but not limited to: depreciation reserve 
fund or mortgage reserve fund accounts, bank accounts, residual receipt 
accounts, all contributions, donations, gifts, grants, bequests and 
endowment funds by donors, and all other revenues and accounts 
receivable from whatever source paid or payable. All personalty shall 
be securitized with appropriate

[[Page 1760]]

UCC filings and any excluded personalty shall be indicated in the 
Regulatory Agreement.
    Preapplication meeting means a meeting between HUD and a potential 
applicant for mortgage insurance where there has been a positive 
Preliminary Review of the proposed project. The preapplication meeting 
is an opportunity for the potential applicant to summarize the proposed 
project, for HUD to summarize the application process, and for issues 
that could affect the eligibility or underwriting of the proposed loan 
to be identified and discussed.
    Preliminary Review Letter means a letter from the Commissioner to a 
potential applicant communicating the result of the Preliminary Review. 
The letter may state that an application for mortgage insurance would 
result in a rejection and provide the reasons for this determination, 
or state that no factors that would cause an application to be rejected 
have been identified, and therefore there appears to be no bar to the 
applicant proceeding to the next step in the application process.
    Project means the construction, modernization, expansion, or 
renovation of an eligible hospital, including equipment, which has been 
proposed for approval or has been approved by the Commissioner under 
the provisions of this subpart, including the financing and 
refinancing, if any, plus all related activities involved in completing 
the improvements to the property.
    Regulatory Agreement means the agreement under which all mortgagors 
shall be regulated by the Commissioner, as long as the Commissioner is 
the insurer or holder of the mortgage, in a published format determined 
by the Commissioner, and such additional covenants and restrictions as 
may be determined necessary by the Commissioner on a case-by-case 
basis.
    Security instrument means a mortgage, deed of trust, and any other 
security for the indebtedness, and shall be deemed to be the mortgage 
as defined by the National Housing Act, as amended, implementing 
regulations, and HUD directives.
    State includes the several States, Puerto Rico, the District of 
Columbia, Guam, the Trust Territory of the Pacific Islands, American 
Samoa, and the Virgin Islands.
    Surplus Cash means any cash earned in the applicable fiscal period, 
including accounts receivable, remaining after the following have been 
achieved:
    (1) Mortgage payments for the preceding 12 months have been made 
when due, including any grace period;
    (2) There is a Debt Service Coverage Ratio greater than or equal to 
1.50;
    (3) Days in Accounts Receivable are less than or equal to 80;
    (4) Days in Accounts Payable are less than or equal to 80;
    (5) The Mortgage Reserve Fund is compliant with the scheduled 
balance;
    (6) All income, property, and statutory employer payroll taxes and 
employee payroll withholding contributions have been deposited as 
required;
    (7) The Current Ratio is greater than or equal to 1.50;
    (8) Days of cash on hand are greater than or equal to 15 days; and
    (9) The payment of:
    (i) All sums due or currently required to be paid under the terms 
of the Mortgage Note and Regulatory Agreement due on the first day of 
the month following the end of the fiscal period, including, without 
limitation, in the Mortgage Reserve Fund or any other reserves as may 
be required by HUD; and
    (ii) All other obligations of the hospital (accounts payable and 
accrued, unescrowed expenses), unless funds for payment are set aside 
or HUD has approved deferment of payment.
    Secretary means the Secretary of Housing and Urban Development or 
his or her authorized representatives.
    Working capital means the excess of current assets over current 
liabilities.


Sec.  242.2  Program financial self-sufficiency.

    The Commissioner shall administer the Section 242 program in such a 
way as to encourage financial self-sufficiency and actuarial soundness; 
i.e., to avoid mortgage defaults and claims for insurance benefits in 
order to protect the mortgage insurance fund.


Sec.  242.3  Encouragement of certain programs.

    The activities and functions provided for in this part shall be 
carried out so as to encourage provision of comprehensive health care, 
including outpatient and preventive care as well as hospitalization, to 
a defined population, and in the case of public and certain not-for-
profit hospitals, to encourage programs that are undertaken to provide 
essential health care services to all residents of a community 
regardless of ability to pay.


Sec.  242.4  Eligible hospitals.

    The hospital to be financed with a mortgage insured under this part 
shall involve the construction of a new hospital or the substantial 
rehabilitation (or replacement) of an existing hospital.


Sec.  242.5  Eligible mortgagees.

    The lender requirements set forth in 24 CFR part 202 regarding 
approval, recertification, withdrawal of approval, approval for 
servicing, report requirements and conditions for supervised 
mortgagees, nonsupervised mortgagees, investing mortgagees, and 
governmental and similar institutions, apply to these programs.


Sec.  242.6  Property requirements.

    The mortgage, to be eligible for insurance, shall be on property 
located in a State, as defined in Sec.  242.1. The mortgage shall cover 
real estate in which the mortgagor has one of the following interests:
    (a) A fee simple title.
    (b) A lease for not less than 99 years that is renewable.
    (c) A lease having a term of not less than 50 years to run from the 
date the mortgage is executed.


Sec.  242.7  Maximum mortgage amounts.

    The mortgage shall involve a principal obligation not in excess of 
90 percent of the Commissioner's estimate of the replacement cost of 
the hospital, including the equipment to be used in its operation when 
the proposed improvements are completed and the equipment is installed.


Sec.  242.8  Standards for licensure and methods of operation.

    The Secretary shall require satisfactory evidence that the hospital 
will be located in a State or political subdivision of a State with 
reasonable minimum standards of licensure and methods of operation for 
hospitals, and satisfactory assurance that such standards will be 
applied and enforced with respect to the hospital.


Sec.  242.9  Physician ownership.

    Ownership of an interest in the mortgagor by physicians or other 
professionals practicing in the hospital is permitted within limits 
determined by the Commissioner to avoid insurance risks that may be 
associated with such ownership. The Commissioner shall determine if the 
proposed mortgagor will be at low risk for violation of regulations of 
the U. S. Department of Health and Human Services, other Federal 
regulations, and State regulations governing kickbacks, self-referrals, 
and other issues that could increase the risk of eventual default. The 
Commissioner's determination shall be based on an unqualified legal 
opinion as to compliance with

[[Page 1761]]

applicable Federal law, among other considerations.


Sec.  242.10  Eligible mortgagors.

    The mortgagor shall be a public mortgagor (i.e., an owner of a 
public facility), a private nonprofit corporation or association, or a 
profit-motivated mortgagor meeting the definition of ``hospital'' in 
Sec.  242.1. The mortgagor shall be approved by the Commissioner and 
shall possess the powers necessary and incidental to operating a 
hospital. Eligible proprietary or profit-motivated mortgagors may 
include for-profit corporations, limited partnerships, and limited 
liability corporations and companies, but may not include natural 
persons, joint ventures, and general partnerships. Any proposed 
mortgagor must demonstrate that it has a continuity of organization 
commensurate with the term of the mortgage loan being insured. For new 
organizations, or those whose continuity is necessarily dependent upon 
an individual or individuals, broad community participation is 
required.


Sec.  242.11  Regulatory compliance required.

    An application for insurance of a mortgage under this part shall be 
considered only in connection with a hospital that is in substantial 
compliance with regulations of the Department of Health and Human 
Services and the various States governing the operation and 
reimbursement of hospitals. A hospital that is under investigation by 
any State or Federal agency for statutory or regulatory violations is 
not eligible so long as the investigation is unresolved, unless the 
Commissioner determines that the investigation is minor in nature, that 
is, the investigation has little chance of resulting in substantial 
liabilities or of otherwise substantially harming the creditworthiness 
of the hospital.


Sec.  242.13  Parents and affiliates.

    As a condition of issuing a commitment, the Commissioner may 
require corporate parents, affiliates, or principals of the proposed 
mortgagor to provide assurances, guarantees, or collateral. The 
Commissioner may also require financial and operational information on 
the parent, other businesses owned by the parent, or affiliates of the 
proposed mortgagor and may also require a parent or affiliate to be 
regulated by the Commissioner as to certain actions which could impact 
on the insurance of a mortgage loan for the benefit of the hospital.


Sec.  242.14  Mortgage reserve fund.

    As a condition of issuing a commitment, the Commissioner shall 
require establishment of a Mortgage Reserve Fund (MRF), a trustee-held 
account to which the mortgagor will contribute and from which 
withdrawals must be approved by the Commissioner. The mortgagor shall 
be required to make contributions to the MRF such that, with fund 
earnings, the MRF will build to one year of debt service at five years 
following commencement of amortization, increasing thereafter to two 
years of debt service on and after ten years according to a schedule 
established by the Commissioner, unless the Commissioner determines 
that a different schedule of contributions is appropriate based on the 
mortgagor's risk profile, reimbursement structure, or other 
characteristics. In particular, hospitals that receive cost-based 
reimbursement may be required to have MRFs that build to more than two 
years of debt service. Expenditures from the fund are made at the 
Commissioner's sole discretion or in accordance with the mortgagor's 
MRF Schedule. Upon termination of insurance, the balance of the MRF 
shall be returned to the mortgagor provided that all obligations to HUD 
have been met.


Sec.  242.15  Limitation on refinancing of existing indebtedness.

    Some existing long-term debt may be refinanced with the proceeds of 
a section 242 insured loan; however, the hard costs of construction and 
equipment must represent at least 20 percent of the total mortgage 
amount.

Subpart B--Application Procedures and Commitments


Sec.  242.16  Applications.

    (a) Application process. (1) Market need. The approval process 
entails a determination of the market need of the proposal and 
stresses, on a market-wide basis, the impact of the proposed facility 
on, and its relationship to, other health care facilities and services 
(particularly other hospitals with mortgages insured under this part 
and hospitals that have a disproportionate share of Medicaid and 
uninsured patients or provide a substantial amount of charity care); 
the number and percentage of any excess beds; and demographic 
projections. Generally, section 242 insurance may support start-up 
hospitals or major expansions of existing hospitals only if existing 
hospital capacity or services are clearly not adequate to meet the 
needs of the population in the service area.
    (i) If the State has an official procedure for determining need for 
hospitals, the Commissioner shall require that such procedure be 
followed before the application for insurance is submitted, and that 
the application shall document that need has also been established 
under that procedure.
    (ii) The following factors are relevant in evaluating market need 
for the project and should be addressed, as applicable, in the study of 
market need and feasibility submitted with the application. Because 
each hospital presents a unique situation, there is no formula or 
cutoff level that applies to all applications:
    (A) Service area definition;
    (B) Existing or proposed hospital;
    (C) Designation as sole community provider, critical access 
hospital, or rural referral center;
    (D) Community-wide use rates (discharges and days/1000);
    (E) Statewide use rates (for benchmarking purposes);
    (F) Current population and five-year projection by age cohort;
    (G) Staffed vs. licensed beds;
    (H) Applicant hospital's occupancy rate;
    (I) Competitors' occupancy rates;
    (J) Outpatient volume;
    (K) Availability of emergency services;
    (L) Teaching hospital status;
    (M) Services offered by hospitals in the service area;
    (N) Migration of patients out of the service area;
    (O) Planned construction at other facilities in the region;
    (P) Historical market share by major service category;
    (Q) Disproportionate Share Hospital designation; and
    (R) Distance to other hospitals.
    (2) Operating margin and debt service coverage ratio. (i) Hospitals 
with an aggregate operating margin of less than 0.00 when calculated 
from the three most recent annual audited financial statements are not 
eligible for section 242 insurance unless the Commissioner determines, 
based on the financial data in those statements, that the hospital has 
achieved a financial turnaround resulting in a positive operating 
margin in the most recent year, calculated using classifications of 
items as operating or non-operating in accordance with guidance that 
shall be provided in written directives by the Commissioner.
    (ii) Hospitals with an average debt service coverage ratio of less 
than 1.25 in the three most recent audited years are not eligible for 
section 242 insurance unless the Commissioner determines, based on the 
audited financial data, that the hospital has achieved a financial 
turnaround resulting in a debt service

[[Page 1762]]

coverage ratio of at least 1.40 in the most recent year. In cases of 
refinancing at a lower interest rate, the Commissioner may authorize 
the use of the projected debt service requirement in lieu of the 
historical debt in calculating the debt service coverage ratios for 
each of the prior three years. In cases where the Commissioner 
authorizes the use of the projected debt service requirement in lieu of 
the historical debt to determine the debt service coverage ratio, 
hospitals must have an average debt service coverage ratio of 1.40 or 
greater.
    (3) Financial Feasibility. The approval process entails a 
determination of the financial feasibility of the proposal, i.e., a 
determination that it is probable that the proposed mortgagor will be 
able to meet its debt service requirements during the life of the 
proposed mortgage. It includes analysis of the reimbursement structure 
of the proposed hospital (including patient/payer mix); actions of 
competitors; and the probable projected impact on the proposed hospital 
of general health care system trends, such as the development of 
alternative health care delivery systems and new reimbursement methods. 
In addition to historical operating margin, determination of financial 
feasibility includes, but is not limited to, evaluation of the 
following factors. The application must address, and HUD will review, 
each of the following factors:
    (i) Current and projected gains from operations and a manageable 
debt load using reasonable assumptions;
    (ii) Current debt service coverage ratio of 1.25 or higher and 
projected debt service coverage ratio of 1.40 or higher;
    (iii) Cushion in the balance sheet sufficient to demonstrate the 
ability to withstand short periods of net operating losses without 
jeopardizing financial viability;
    (iv) Patient utilization forecasts (including average length of 
stay, case intensity, discharges, area-wide use rates) that are 
consistent with the hospital's historical trends, future service mix, 
market trends, population forecasts, and business climate;
    (v) The hospital's demonstrated ability to position itself to 
compete in its marketplace;
    (vi) Organizational affiliations or relationships that help 
optimize financial, clinical, and operational performance;
    (vii) Management's demonstrated ability to operate effectively and 
efficiently, and to develop effective strategies for addressing problem 
areas;
    (viii) Systems in place to monitor hospital operations, revenues, 
and costs accurately and in a timely manner;
    (ix) A Board that is appropriately constituted and provides 
effective oversight;
    (x) Required licensures and approvals; and
    (xi) Favorable ratings from the Joint Commission on Accreditation 
of Healthcare Organizations or other organization acceptable to the 
Commissioner.
    (4) Preliminary Review. A Preliminary Review is a general overview 
of the acceptability of a potential mortgagor performed at the request 
of a hospital, a financial consultant representing a hospital, or a 
lender, to identify any factors that would likely cause an application 
to be rejected, should an application be submitted.
    (i) The purpose of the preliminary review is for HUD to identify 
any obvious factors that would cause an application to be rejected, 
before the potential applicant expends the resources needed to prepare 
an application and before the Commissioner expends resources to review 
it. The hospital, financial consultant, or lender shall submit a 
preliminary information package to the Commissioner that provides 
evidence of statutory eligibility, market need, financial strength, and 
such other documentation as the Commissioner may require.
    (ii) If the Commissioner identifies factors that would cause an 
application to be rejected, the Commissioner shall issue a Preliminary 
Review Letter notifying the potential applicant that an application for 
mortgage insurance would result in a rejection and providing the 
reasons for this decision. Also, no further request from the proposed 
applicant for a Preliminary Review shall be entertained for a period of 
one year from the date of the Commissioner's notification. The 
Commissioner may grant an exception to this one-year limitation if, 
during the year, there is a major change in the circumstances that 
caused the Commissioner to determine that the project would be 
rejected. For example, if the sole reason for the Commissioner's 
determination was the hospital's failure to meet the historical 
operating margin test, and a new audited annual financial statement 
contains results that would cause the hospital to meet the test, then 
the lender may request a new Preliminary Review within one year of the 
Commissioner's notification.
    (iii) If the Commissioner does not identify any factors that would 
cause an application to be rejected, the Commissioner shall issue a 
Preliminary Review Letter advising the potential applicant that there 
appears to be no bar to the applicant's proceeding to the next step in 
the application process, provided that if a complete application is not 
received by the Commissioner within one year following the date of the 
Commissioner's letter, another Preliminary Review may be required, at 
the Commissioner's discretion, before the application process may 
proceed.
    (iv) The Commissioner's determination in the preliminary review 
phase that no factors have been identified that would cause an 
application to be rejected shall in no way be construed as an 
indication that a subsequent application will be approved.
    (5) Preapplication meeting. The next step in the application 
process is the preapplication meeting. At the Commissioner's 
discretion, this meeting may be held at HUD Headquarters in Washington, 
DC, or at another site agreeable to the Commissioner and the potential 
applicant. The preapplication meeting is an opportunity for the 
potential applicant to summarize the proposed project, for HUD to 
summarize the application process, and for issues that could affect the 
eligibility or underwriting of the project to be identified and 
discussed to the extent possible. Following the meeting, the 
Commissioner may:
    (i) Advise the potential applicant that there appears to be no bar 
to submitting an application for mortgage insurance; or
    (ii) Identify issues that must be resolved before a full 
application should be submitted for processing.
    (b) Application contents. The application for mortgage insurance 
shall include exhibits that follow such guidance as to content and 
format that the Commissioner shall provide from time to time. The 
application shall include:
    (1) A description of the proposed sources and uses of funds;
    (2) A description of the mortgagor entity, its ownership structure, 
and its directors and managers;
    (3) A description of the project, the business plan of the 
hospital, and how the project will further that plan;
    (4) Historical audited financial statements and interim year-to-
date financial results (for existing hospitals);
    (5) A study of market need and financial feasibility, addressing 
the factors listed in paragraphs (a)(1)(ii), (a)(2) and (a)(3) of this 
section, with assumptions and financial forecast clearly presented, and 
prepared by a

[[Page 1763]]

certified accounting firm acceptable to HUD;
    (6) Architectural plans and specifications;
    (7) Evidence that the hospital will be located in a State or 
political subdivision of a State with reasonable minimum standards of 
licensure and methods of operation for hospitals and satisfactory 
assurance that such standards will be applied and enforced with respect 
to the hospital;
    (8) If the State has an official procedure for determining need for 
hospitals, evidence that such procedure has been followed and that need 
has been established under that procedure;
    (9) Evidence of compliance with Federal and State environmental 
regulations; and
    (10) Such other exhibits as the Commissioner shall require based 
upon the facts pertaining to the particular case.
    (c) Fee. An application fee of $1.50 per thousand dollars of the 
amount of the loan to be insured shall be paid to the Commissioner at 
the time the application is submitted to the Commissioner for approval.
    (d) Filing of application. An application for insurance of a 
mortgage on a project shall be submitted on an approved FHA form by an 
approved mortgagee and by the sponsors of such project to the FHA 
Office of Insured Health Care Facilities.
    (e) Complete application. Only technically complete applications 
will be processed. Partial applications cannot be processed. Upon 
determination that an application is complete, the Commissioner shall 
issue a Completeness Letter to the applicant stating that the 
application is complete.
    (f) Application Review. Upon receipt of a complete application, the 
Commissioner shall evaluate the application to determine if 
eligibility, market need, financial feasibility, and compliance with 
applicable regulations (including but not limited to federal 
environmental regulations, wage rate regulations, and health care 
regulations) have been demonstrated, and to evaluate any other factors, 
including but not limited to risk to the Insurance Fund, that should be 
considered in determining if the application for mortgage insurance 
should be approved. As a part of this review, the Commissioner may 
solicit the advice of private consultants and expert staff in the 
Department of Health and Human Services and other Federal agencies. 
Based on review of the complete application, the Commissioner may 
request additional information from the applicant. The timeliness of 
the applicant's submission of the additional information may affect the 
approval or disapproval of the application. The Commissioner's decision 
shall be communicated in the form of a Commitment Letter or a Rejection 
Letter within 12 months of the date of the Completeness Letter, unless 
the Commissioner for good cause extends the period of review.


Sec.  242.17  Commitments.

    (a) Issuance of commitment. Upon approval of an application for 
insurance, a commitment shall be issued by the Commissioner setting 
forth the terms and conditions under which an insurance endorsement 
shall be issued for the hospital. The commitment shall include the 
following:
    (1) A commitment for insurance of advances reflecting the mortgage 
amount, interest rate, mortgage term, date of commencement of 
amortization, and other requirements pertaining to the mortgage and 
construction project;
    (2) HUD's computation of the replacement cost and maximum insurable 
mortgage amount;
    (3) Financial requirements for closing;
    (4) Approval covenants, including any special conditions that must 
be satisfied prior to initial endorsement;
    (5) Mortgage Reserve Fund Agreement.
    (b) Type of commitment. The commitment will provide for the 
insurance of advances of mortgage funds during construction.
    (c ) Term of commitment. (1) The initial commitment shall be issued 
for a period of 90 days.
    (2) The term of a commitment may be extended in such manner as the 
Commissioner may prescribe, provided, however, that the combined term 
of the original commitment and any extensions do not exceed 180 days.
    (d) Commitment fee. A commitment fee which, when added to the 
application fee, will aggregate $3.00 per thousand dollars of the 
amount of the loan set forth in the commitment, shall be paid within 30 
days of the date of issuance of the commitment. If such fee is not paid 
within this 30-day period, the commitment shall automatically 
terminate.


Sec.  242.18  Inspection fee.

    The commitment may provide for the payment of an inspection fee in 
an amount not to exceed $5 per thousand dollars of the commitment. The 
inspection fee shall be paid at the time of initial endorsement.


Sec.  242.19  Fees on increases.

    (a) Increase in commitment prior to endorsement. An application, 
filed prior to initial endorsement, for an increase in the amount of an 
outstanding commitment, shall be accompanied by an additional 
application fee of $1.50 per thousand dollars computed on the amount of 
the increase requested. Any increase in the amount of a commitment 
shall be subject to the payment of an additional commitment fee which, 
when added to the additional application fee, will aggregate $3.00 per 
thousand dollars of the amount of the increase. The additional 
commitment fee shall be paid within 30 days after the date of the 
amended commitment. If the additional commitment fee is not paid within 
30 days, the commitment novation providing for the increased amount 
will automatically terminate and the previous commitment will be 
reinstated. If an inspection fee was required in the original 
commitment, an additional inspection fee shall be paid in an amount not 
to exceed $5.00 per thousand dollars of the amount of increase in 
commitment. The additional inspection fee shall be paid at the time of 
initial endorsement.
    (b) Increase in mortgage between initial and final endorsement. 
Upon an application, filed between initial and final endorsement, for 
an increase in the amount of the mortgage, either by amendment or by 
substitution of a new mortgage, an additional application fee of $1.50 
per thousand dollars computed on the amount of the increase requested 
shall accompany the application. The approval of any increase in the 
amount of the mortgage shall be subject to the payment of an additional 
commitment fee which, when added to the additional application fee, 
will aggregate $3.00 per thousand dollars of the amount of the increase 
granted. If an inspection fee was required in the original commitment, 
an additional inspection fee shall be paid in an amount not to exceed 
$5.00 per thousand dollars of the amount of the increase granted. The 
additional commitment and inspection fees shall be paid within 30 days 
after the date that the increase is granted.


Sec.  242.20  Reopening of expired commitments.

    An expired commitment may be reopened if a request for reopening is 
received by the Commissioner no later than 90 days after the date of 
expiration of the commitment. The reopening request shall be 
accompanied by a fee of 50 cents per thousand dollars of the amount of 
the expired commitment. A commitment which has expired because of 
failure to pay the commitment fee

[[Page 1764]]

may be reopened only upon payment of the commitment fee and the 
reopening fee. If the reopening request is not received by the 
Commissioner within the required 90-day period, a new application, 
accompanied by an application fee, must be submitted. If a commitment 
for an increased amount has expired because of failure to pay an 
additional commitment fee based on the amount of the increase, the 
reopening fee shall be computed on the basis of the amount of the 
commitment increase rather than on the amount of the original 
commitment.


Sec.  242.21  Refund of fees.

    Commitment, inspection, and reopening fees (but not application 
fees) may be refunded, in whole or in part, if the Commissioner 
determines that the construction or financing of the project has been 
prevented because of condemnation proceedings or other legal action 
taken by a government body or public agency, or in such other instances 
as the Commissioner may determine as being beyond the control of the 
applicant and resulting from no fault of the applicant. A transfer fee 
may be refunded only in such instances as the Commissioner may 
determine.


Sec.  242.22  Maximum fees and charges by mortgagee.

    The mortgagee may collect from the mortgagor the amount of the fees 
provided for in this subpart. The mortgagee may also collect from the 
mortgagor an initial service charge not to exceed two percent of the 
original principal amount of the mortgage to reimburse the mortgagee 
for the cost of closing the transaction. A permanent financing fee not 
to exceed three and one-half percent may be collected from the 
mortgagor; however, the combined initial service charge and permanent 
financing fee may not exceed five and one-half percent in bond 
transactions and three and one-half percent in all other transactions. 
Any additional charges or fees collected from the mortgagor shall be 
subject to prior approval of the Commissioner and shall be clearly 
disclosed in the Mortgagee's Certificate.


Sec.  242.23  Adjusted and reduced mortgage amounts.

    (a) Adjusted mortgage amount-rehabilitation projects. A mortgage 
financing the rehabilitation of an existing hospital shall be subject 
to the following limitations, in addition to those set forth in Sec.  
242.7:
    (1) Property held unencumbered. If the mortgagor is the fee simple 
owner of the property and the ownership is not encumbered by an 
outstanding indebtedness, the mortgage shall not exceed 100 percent of 
the Commissioner's estimate of the cost of the proposed rehabilitation.
    (2) Property subject to existing mortgage. If the mortgagor owns 
the property subject to an outstanding indebtedness, which is to be 
refinanced with part of the insured mortgage, the mortgage shall not 
exceed the total of the following:
    (i) The Commissioner's estimate of the cost of rehabilitation, plus
    (ii) Such portion of the outstanding indebtedness as does not 
exceed 90 percent of the Commissioner's estimate of the fair market 
value of such land and improvements prior to rehabilitation.
    (3) Property to be acquired. If the property is to be acquired by 
the mortgagor and the purchase price is to be financed with a part of 
the insured mortgage, the mortgage shall not exceed 90 percent of the 
total of the following:
    (i) The Commissioner's estimate of the cost of rehabilitation, plus
    (ii) The actual purchase price of the land and value of 
improvements or the Commissioner's estimate (prior to rehabilitation) 
of the fair market value of such land and improvements, whichever is 
the lesser.
    (b) Reduced mortgage amount--leaseholds. In the event the mortgage 
is secured by a leasehold estate rather than a fee simple estate, the 
value or replacement cost of the property described in the mortgage 
shall be the value or replacement cost of the leasehold estate (as 
determined by the Commissioner), which shall in all cases be less than 
the value or replacement cost of the property in fee simple.
    (c) Cash equity. The Commissioner shall have the discretion to 
evaluate, on a case-by-case basis, the amount of equity that a 
mortgagor must supply depending upon the financial circumstances of 
each hospital facility. Exercise of this discretion shall never cause 
loan-to-value to exceed 90 percent, although it may cause it to be less 
than 90 percent. A private mortgagor must supply equity in cash. The 
equity contribution may not be made from borrowed funds. A nonprofit or 
public mortgagor, in the Commissioner's discretion and subject to 24 
CFR 242.49, may supply equity in the form of a letter of credit.


Sec.  242.24  Working capital.

    In the case of a new hospital or a hospital expansion, the 
Commissioner shall establish, on a case-by-case basis, the amount of 
working capital that must be deposited in cash or a letter of credit 
(or combination) to be available to the new hospital upon commencement 
of operations. Generally, the working capital shall not be borrowed 
funds unless the Commissioner determines that there are offsetting 
financial strengths to compensate for the risk associated with 
borrowing.

Subpart C--Mortgage Requirements


Sec.  242.25  Mortgage form and disbursement of mortgage proceeds.

    (a) Mortgage form. The mortgage shall be:
    (1) Executed on a form approved by the Commissioner for use in the 
jurisdiction in which the property covered by the mortgage is situated, 
which form shall not be changed without the prior written approval of 
the Commissioner.
    (2) Executed by an eligible mortgagor.
    (b) Disbursement of mortgage proceeds. The mortgagee shall be 
obligated, as a part of the mortgage transaction, to disburse the 
principal amount of the mortgage to (or for the account of) the 
mortgagor or to his or her creditors for his or her account and with 
his or her consent.


Sec.  242.26  Agreed interest rate.

    (a) The mortgage shall bear interest at the rate agreed upon by the 
mortgagee and the mortgagor.
    (b) The amount of any increase approved by the Commissioner in the 
mortgage amount between initial and final endorsement in excess of the 
amount that the Commissioner had committed to insure at initial 
endorsement shall bear interest at the rate agreed upon by the 
mortgagee and the mortgagor.


Sec.  242.27  Maturity.

    The mortgage shall have a maturity not to exceed 25 years from the 
date amortization begins.


Sec.  242.28  Allowable costs for consultants.

    Consulting fees for work essential to the development of the 
project may be included in the insured mortgage. Allowable consulting 
fees include those for analysis of market demand, expected revenues, 
and costs; site analysis; architectural and engineering design; and 
such other fees as the Commissioner may determine to be essential to 
project development. Fees for work performed more than one year prior 
to application are not allowable. Fees for work performed by any party 
with an identity of interest with the proposed mortgagor or mortgagee 
are not allowable.

[[Page 1765]]

Sec.  242.29  Payment requirements.

    The mortgage shall provide for payments on the first day of each 
month in accordance with an amortization plan agreed upon by the 
mortgagor, the mortgagee and the Commissioner.


Sec.  242.30  Application of payments.

    All payments to be made by the mortgagor to the mortgagee shall be 
added together and the aggregate amount thereof shall be paid by the 
mortgagor each month in a single payment. The mortgagee shall apply 
each payment received to the following items in the following order:
    (a) Premium charges under the contract of mortgage insurance;
    (b) Ground rents, taxes, special assessments, and fire and other 
hazard insurance premiums;
    (c) Interest on the mortgage; and
    (d) Amortization of the principal of the mortgage.


Sec.  242.31  Accumulation of accruals.

    (a) The mortgage shall provide for payments by the mortgagor to the 
mortgagee on each interest payment date of an amount sufficient to 
accumulate in the hands of the mortgagee one payment period prior to 
its due date, the next annual mortgage insurance premium payable by the 
mortgagee to the Commissioner. Such payments shall continue only so 
long as the contract of insurance shall remain in effect.
    (b) The mortgage shall provide for such equal monthly payments by 
the mortgagor to the mortgagee as will amortize the ground rents, if 
any, and the estimated amount of all taxes, water charges, special 
assessments, and fire and other hazard insurance premiums, within a 
period ending one month prior to the dates on which the same become 
delinquent. The mortgage shall further provide that such payments shall 
be held by the mortgagee, for the purpose of paying such items before 
they become delinquent. The mortgage shall also make provision for 
adjustments in case such estimated amounts shall prove to be more, or 
less, than the actual amounts so paid therefore by the mortgagor.


Sec.  242.32  Covenant against liens.

    The mortgage shall contain a covenant against the creation by the 
mortgagor of liens against the property superior or inferior to the 
lien of the mortgage except for such liens as may be approved by the 
Commissioner.


Sec.  242.33  Covenant for malpractice, fire and other hazard 
insurance.

    The mortgage shall contain a covenant binding the mortgagor to 
maintain adequate malpractice liability, fire, and extended coverage 
insurance on the property.


Sec.  242.35  Mortgage lien certifications.

    The mortgagor shall certify at the final endorsement of the 
mortgage for insurance as to each of the following:
    (a) That the mortgage is the first lien upon and covers the entire 
hospital, as hospital is defined in Sec.  242.1.
    (b) That the property upon which the improvements have been made or 
constructed and the equipment financed with mortgage proceeds are free 
and clear of all liens other than the insured mortgage and such other 
secondary liens as may be approved by the Commissioner.
    (c) That the Security Agreement and Uniform Commercial Code 
financing statements establish a first lien on the personalty of the 
mortgagor, including but not limited to equipment, either acquired with 
mortgage proceeds or otherwise before or after initial endorsement of 
the mortgage, and on the personalty of the hospital all as defined in 
the Regulatory Agreement between the Commissioner and the hospital.
    (d) That the certificate sets forth all unpaid obligations in 
connection with the mortgage transaction, the purchase of the mortgaged 
property, the construction or rehabilitation of the project, or the 
purchase of the equipment financed with mortgage proceeds.


Sec.  242.37  Mortgage prepayment.

    (a) Prepayment privilege. Except as provided in paragraph (c) of 
this section or otherwise established by the Commissioner, the mortgage 
shall contain a provision permitting the mortgagor to prepay the 
mortgage in whole or in part upon any interest payment date, after 
giving the mortgagee 30 days notice in writing in advance of its 
intention to so prepay.
    (b) Prepayment charge. The mortgage may contain a provision for 
such charge, in the event of prepayment of principal, as may be agreed 
upon between the mortgagor and the mortgagee, subject to the following:
    (1) The mortgagor shall be permitted to prepay up to 15 percent of 
the original principal amount of the mortgage in any one calendar year 
without any such charge.
    (2) Any reduction in the original principal amount of the mortgage 
resulting from the certification of cost, which the Commissioner may 
require, shall not be construed as a prepayment of the mortgage.
    (c) Prepayment of bond-financed or GNMA-securitized mortgages. 
Where the mortgage is given to secure GNMA mortgage-backed securities 
or a loan made by a lender that has obtained the funds for the loan by 
the issuance and sale of bonds or bond anticipation notes, or both, the 
mortgage may contain a prepayment restriction and prepayment penalty 
charge acceptable to the Commissioner as to term, amount, and 
conditions.
    (d) HUD override of prepayment restrictions. In the event of a 
default, the Commissioner may override any lockout, prepayment penalty, 
or combination of penalties in order to facilitate a partial or full 
refinancing of the mortgaged property and avoid a claim.


Sec.  242.38  Late charge.

    The mortgage may provide for the collection by the mortgagee of a 
late charge in accordance with terms, conditions, and standards of the 
Commissioner for each dollar of each payment to interest or principal 
more than 15 days in arrears to cover the expense involved in handling 
delinquent payments. Late charges shall be separately charged to and 
collected from the mortgagor and shall not be deducted from any 
aggregate monthly payment.

Subpart D--Endorsement for Insurance


Sec.  242.39  Insurance endorsement.

    Initial endorsement of the credit instrument shall occur before any 
mortgage proceeds are insured and the time of final endorsement shall 
be as set forth in paragraph (b) of this section.
    (a) Initial endorsement. The Commissioner shall indicate the 
insurance of the mortgage by endorsing the original credit instrument 
and identifying the section of the Act and the regulations under which 
the mortgage is insured and the date of insurance.
    (b) Final endorsement. When all advances of mortgage proceeds have 
been made and all the terms and conditions of the commitment have been 
met to the Commissioner's satisfaction, the Commissioner shall indicate 
on the original credit instrument the total of all advances approved 
for insurance and again endorse such instrument.
    (c) Contract rights and obligations. The Commissioner and the 
mortgagee or lender shall be bound from the date of initial endorsement 
by the provisions of the Contract of Mortgage Insurance set forth in 
subpart B of this part.

[[Page 1766]]

Sec.  242.40  Mortgagee Certificate.

    At initial endorsement the mortgagee shall execute a Mortgagee 
Certificate in a form prescribed by the Commissioner.


Sec.  242.41  Certification of cost requirements.

    Before initial endorsement of the mortgage for insurance, the 
mortgagor, the mortgagee, and the Commissioner shall enter into an 
agreement in form and content satisfactory to the Commissioner for the 
purpose of precluding any excess of mortgage proceeds over statutory 
limitations. Under this agreement, the mortgagor shall disclose its 
relationship with the builder, including any collateral agreement, and 
shall agree:
    (a) To execute a Certificate of Actual Costs, upon completion of 
all physical improvements on the mortgaged property.
    (b) To apply any cost savings in accordance with the provisions 
below.


Sec.  242.42  Certificates of actual cost.

    (a) The mortgagor's certificate of actual cost, in a form 
prescribed by the Commissioner, shall be submitted upon completion of 
the physical improvements to the satisfaction of the Commissioner and 
before final endorsement, except that in the case of an existing 
hospital that does not require substantial rehabilitation and where the 
commitment provides for completion of specified repairs after 
endorsement, a supplemental certificate of actual cost will be 
submitted covering the completed costs of any such repairs. The 
certificate shall show the actual cost to the mortgagor, after 
deduction of any kickbacks, rebates, trade discounts, or other similar 
payments to the mortgagor, or to any of its officers, directors, 
stockholders, partners or other entity member ownership, of 
construction and other costs, as prescribed by the Commissioner.
    (b) The Certificate of Actual Cost shall be verified by an 
independent certified public accountant or independent public 
accountant in a manner acceptable to the Commissioner.
    (c) Upon the Commissioner's approval of the mortgagor's 
certification of actual cost, such certification shall be final and 
incontestable except for fraud or material misrepresentation on the 
part of the mortgagor.


Sec.  242.43  Application of cost savings.

    Any cost savings identified through the cost certification process 
shall be used to:
    (a) Reduce the principal amount of the mortgage and the mortgagor's 
cash equity contribution proportionally, and/or
    (b) Fund any additional construction, modernization, 
rehabilitation, or purchase of equipment approved by the Commissioner.

Subpart E--Construction


Sec.  242.44  Construction standards.

    Work designed and performed under this section shall conform to the 
standards adopted by the Commissioner, which as a minimum, shall 
include the ``Guidelines for Construction and Equipment of Hospital and 
Medical Facilities,'' which is regularly updated and published by the 
American Institute of Architects.


Sec.  242.45  Early commencement of work.

    (a) Pre-commitment work. Prior to the issuance of a commitment by 
the Commissioner, the mortgagor may request for good cause the 
commencement of certain necessary preliminary site work of the project 
within legal guidelines and State law. Such work can commence only 
after the review and concurrence of the work by the Commissioner, 
including the environmental review under 24 CFR 242.79, and the 
agreement to certain conditions by the applicant. The work must meet 
all requirements and guidelines as if it were approved for mortgage 
insurance and is accomplished at the sole risk of the applicant prior 
to the initial endorsement.
    (b) Early Start. Subsequent to the issuance of a commitment, if the 
mortgagor requests the commencement of the project, the work may 
commence after the review of the request by the Commissioner, including 
the environmental review under 24 CFR 242.79, and the agreement to 
certain conditions by the applicant. Prior to the initial endorsement, 
the work is accomplished at the sole risk of the applicant.
    (c) Prepayment of inspection fee. The applicant shall pay the 
inspection fee to HUD before pre-commitment or early start work 
commences.
    (d) Work started prior to application submission. The Commissioner 
has the sole discretion to allow certain initial site preparation to be 
incorporated into the application if HUD has reviewed and approved the 
drawings and specifications and has inspected the work.
    (e) No expressed or implied intent. Approval to proceed under 
paragraphs (a) and (b) of this section shall in no way be construed as 
indicating any intent, expressed or implied, on the part of the 
Commissioner to approve, disapprove, or make any undertaking or promise 
whatsoever with respect to the application or with respect to any 
commitment for mortgage insurance. Any work under paragraphs (a) and 
(b) of this section shall be accomplished at the sole risk and 
responsibility of the applicant.


Sec.  242.46  Insured advances--building loan agreement.

    Prior to the initial endorsement of the mortgage for insurance, the 
mortgagor and mortgagee shall execute a building loan agreement, 
approved by the Commissioner, setting forth the terms and conditions 
under which progress payments may be advanced during construction. To 
be covered by mortgage insurance, or to be included as an eligible 
cost, each progress payment involving mortgage proceeds and the owner's 
equity requirement shall be approved by the Commissioner.


Sec.  242.47  Insured advances for building components stored off-site.

    (a) Building components. In insured advances for building 
components stored off-site, the term building component shall mean any 
manufactured or pre-assembled part of a structure which the 
Commissioner has specifically identified for incorporation into the 
property and has designated for off-site storage because it is of such 
size or weight that:
    (1) Storage of the number of components required for timely 
construction progress at the construction site is impractical, or
    (2) Weather damage or other adverse conditions prevailing at the 
construction site would make storage at the site impractical or unduly 
costly.
    (b) Storage. (1) An insured advance may be made for up to 90 
percent of the invoice value (to exclude costs of transportation and 
storage) of the building components stored off-site if the components 
are stored at a location approved by the mortgagee and the 
Commissioner.
    (2) Each building component shall be adequately marked so as to be 
readily identifiable in the inventory of the off-site location. Each 
component shall be kept together with all other building components of 
the same manufacturer intended for use in the same project for which 
insured advances have been made and separate and apart from similar 
units not for use in the project.
    (3) Storage costs, if any, shall be borne by the contractor.
    (c) Responsibility for transportation, storage, and insurance of 
off-site building components. The general contractor of the insured 
mortgaged property shall have the responsibility for:

[[Page 1767]]

    (1) Insuring the components in the name of the mortgagor while in 
transit and storage; and
    (2) Delivering or contracting for the delivery of the components to 
the storage area and to the construction site, including payment of 
freight.
    (d) Advances. (1) Before an advance for a building component stored 
off-site is insured:
    (i) The mortgagor shall:
    (A) Obtain a bill of sale for the component;
    (B) Give the mortgagee a security agreement, and
    (C) File a financing statement in accordance with the Uniform 
Commercial Code, and
    (ii) The mortgagee shall warrant to the Commissioner that the 
security instruments are a first lien on the building components 
covered by the instruments except for such other liens or encumbrances 
as may be approved by the Commissioner.
    (2) Before each advance for building components stored off-site is 
insured, the mortgagor's architect shall certify to the Commissioner 
that the components, in their intended use, comply with HUD-approved 
contract plans and specifications. Under those circumstances permitted 
by the Commissioner in which there is no architect, compliance with the 
HUD-approved contract plans and specifications shall be determined by 
the Commissioner.
    (3) Advances may be made only for components stored off-site in a 
quantity required to permit uninterrupted installation at the site.
    (4) At no time shall the invoice value of building components being 
stored off-site, for which advances have been HUD insured, represent 
more than 50 percent of the total estimated construction costs for the 
insured mortgaged project as specified in the construction contract. 
Notwithstanding the preceding sentence and other regulatory 
requirements that set bonding requirements, the percentage of total 
estimated construction costs insured by advances under this section may 
exceed 25 percent but not 50 percent if the mortgagor furnishes 
assurance of completion in the form of a corporate surety bond for the 
payment and performance each in the amount of 100 percent of the amount 
of the construction contract. In no event will insurance of components 
stored off-site be made in the absence of a payment, and a performance 
bond.
    (5) No single advance which is to be insured shall be in an amount 
less than ten thousand dollars ($10,000).


Sec.  242.48  Insured advances for certain equipment and long lead 
items.

    The Commissioner may allow advances for certain pieces of equipment 
or other construction materials for which a manufacturer, fabricator, 
or other source requires an interim payment(s) in order to assure the 
timely manufacture or fabrication and delivery to the project site. 
Such advances can be made only if a bill of sale or invoice describes 
the material or equipment and its completion and delivery dates in no 
uncertain terms, and that such displayed timetable is necessary to meet 
the requirements of the overall construction schedule cited in the 
construction contract.


Sec.  242.49  Funds and finances: deposits and letters of credit.

    (a) Deposits. Where the Commissioner requires the mortgagor to make 
a deposit of cash or securities, such deposit shall be with the 
mortgagee or a depository acceptable to the mortgagee. The deposit 
shall be held by the mortgagee in a special account or by the 
depository under an appropriate agreement approved by the Commissioner.
    (b) Letter of credit. Where the use of a letter of credit is 
acceptable to the Commissioner in lieu of a deposit of cash or 
securities, the letter of credit shall be issued to the mortgagee by a 
banking institution with a Standard & Poor's credit rating of at least 
AA or equivalent or by another entity acceptable to the Commissioner 
and shall be unconditional and irrevocable. The mortgagee shall be 
responsible to the Commissioner for collection under the letter of 
credit. In the event a demand for payment thereunder is not immediately 
met, the mortgagee shall forthwith provide a cash deposit equivalent to 
the undrawn balance of the letter of credit.
    (c) Mortgagee not issuer. The mortgagee of record may not be the 
issuer of the letter of credit without the prior written consent of the 
Commissioner.


Sec.  242.50  Funds and finances: off-site utilities and streets.

    The Commissioner shall require assurance of completion of off-site 
public utilities and streets in all cases, except where a municipality 
or other public body has by agreement (acceptable to the Commissioner) 
agreed to install such utilities and streets without cost to the 
mortgagor. Where such assurance is required, it shall be either in the 
form of a cash escrow deposit or the retention of a specified amount of 
mortgage proceeds by the mortgagee. If a cash escrow is used, it shall 
be deposited with the mortgagee or with an acceptable trustee or escrow 
agent designated by the mortgagee. If mortgage proceeds are used, the 
mortgagee shall retain under terms approved by the Commissioner, rather 
than disburse at the initial closing of the mortgage, a portion of the 
mortgage proceeds allocated to land in the project analysis. As 
additional assurance, the Commissioner may also require a surety 
company bond or bonds.


Sec.  242.51  Funds and finances: insured advances and assurance of 
completion.

    (a) Where the estimated cost of construction or rehabilitation is 
more than $500,000, the mortgagor shall furnish assurance of completion 
in the form of corporate surety bonds for payment and performance, each 
in the minimum amount of 100 percent of the accepted bid prices.
    (b) All types of assurance of completion shall be on forms approved 
by the Commissioner. All surety companies executing a bond and all 
parties executing a personal indemnity agreement must be satisfactory 
to the Commissioner.
    (c) A mortgagee may prescribe more stringent requirements for 
assurance of completion than the minimum requirements provided for in 
this section.


Sec.  242.52  Construction contracts.

    (a) Awarding of contract. A contract for the construction or 
rehabilitation of a hospital shall be entered into by a mortgagor with 
a builder selected by a competitive bidding procedure acceptable to the 
Commissioner.
    (b) Form of contract. The construction contract shall be a lump sum 
form providing for payment of a specified amount; a construction 
management contract with a guaranteed maximum price, the final costs of 
which are subject to a certification acceptable to the Commissioner; a 
design-build contract with terms and certification requirements 
acceptable to the Commissioner; or such other form of contract as may 
be acceptable to the Commissioner.
    (c) Competitive bidding. A competitive bidding procedure acceptable 
to the Commissioner must be used in the selection of bidders to perform 
work or otherwise provide service to the project, the costs of which 
are included in any form of construction contract cited in paragraph 
(b) of this section. Fixed equipment not included in the construction 
contract, and movable equipment, may be purchased by securing 
quotations or by using competitive bidding procedures.

[[Page 1768]]

Sec.  242.53  Ineligible contractors.

    (a) Contracts relating to the construction of the project shall not 
be made with a general contractor, a subcontractor, or construction 
manager (or any firm, corporation, partnership, or association in which 
such contractor, subcontractor, or construction manager has a 
substantial interest), the name of which is on the list of ineligible 
contractors, subcontractors, or construction managers established by 
the Commissioner, or by the Comptroller General under the applicable 
regulations of the Secretary of the U.S. Department of Labor.
    (b) Contracts relating to the construction of the project shall not 
be made with a general contractor that has an identity of interest, as 
defined by the Commissioner, with the applicant.
    (c) If the Commissioner determines that a contract has been made 
contrary to the requirements of paragraphs (a) or (b) of this section 
and so notifies the mortgagee, the Commissioner may refuse to insure 
any subsequent advances of mortgage proceeds.

Subpart F--Nondiscrimination and Wage Rates


Sec.  242.54  Nondiscrimination.

    Hospital facilities financed with mortgages insured under this part 
must be made available without discrimination as to race, color, 
religion, sex, age, disability, or national origin. Hospitals must be 
operated in compliance with all applicable civil rights laws and 
regulations, including 24 CFR part 200, subpart J (Equal Employment 
Opportunity), and the Americans with Disabilities Act (42 U.S.C. 12101 
et seq.). Racially restrictive covenants are per se illegal and their 
use is prohibited.


Sec.  242.55  Labor standards.

    Projects financed under this part (except under 24 CFR 242.91) must 
comply with the prevailing wage standards under the Davis-Bacon Act (40 
U.S.C. 3141 et seq.), and implementing U.S. Department of Labor 
regulations.
    (a) The requirements set forth in 29 CFR parts 1, 3, and 5 for 
compliance with labor standards laws apply to projects under this 
program to the extent that labor standards apply as provided in section 
212 of the Act, provided that:
    (1) Supplemental loans under section 241 of the Act made in 
connection with loans insured under this part are subject to the 
provisions of section 212 applicable to mortgages insured under section 
242 of the Act.
    (b) The requirements stated in 24 CFR part 70 governing HUD waiver 
of Davis-Bacon prevailing wage rates for volunteers apply to hospitals 
with mortgages insured under this part.
    (c) Each laborer or mechanic employed on any facility covered by a 
mortgage insured under this part (except under 24 CFR 242.91) shall 
receive compensation at a rate not less than one and one-half times the 
basic rate of pay for all hours worked in any workweek in excess of 
eight hours in any workday or 40 hours in the workweek.
    (d) Project commitments, contracts, and agreements, as determined 
by the Commissioner, and construction contracts and subcontracts, shall 
include terms, conditions, and standards for compliance with applicable 
requirements set forth in 29 CFR parts 1, 3, and 5 and section 212 of 
the Act.
    (e) No advance under a loan or mortgage that is subject to the 
requirements of section 212 shall be eligible for insurance unless 
there is filed with the application for the advance a certificate as 
required by the Commissioner certifying that the laborers and mechanics 
employed in construction of the project have been paid not less than 
the wage rates required under section 212.

Subpart G--Regulatory Agreement, Accounting and Reporting, and 
Financial Requirements


Sec.  242.56  Form of regulation.

    As long as the Commissioner is the insurer or holder of the 
mortgage, all mortgagors shall be regulated by the Commissioner through 
the use of a regulatory agreement in a published format determined by 
the Commissioner and such additional covenants and restrictions as may 
be determined necessary by the Commissioner on a case-by-case basis. In 
addition, all mortgagors shall be subject to the provisions of 24 CFR 
part 24 and such other enforcement provisions as may be applicable. The 
mortgager shall be subject to monitoring by HUD and the U.S. Department 
of Health and Human Services, and their agents, employees, and 
contractors, on an ongoing basis for the life of the insured mortgage 
to ensure against the risk of default, and the mortgagor must make its 
financial records available to the monitoring agencies upon request.


Sec.  242.57  Maintenance of hospital facility.

    The mortgagor shall maintain the hospital's grounds and buildings 
and the equipment financed with mortgage proceeds in good repair and 
shall promptly complete such repairs and maintenance as the 
Commissioner considers necessary.


Sec.  242.58  Books, accounts, and financial statements.

    (a) Books and accounts. The mortgagor's books and accounts relating 
to the operation of the physical facilities of the hospital shall be 
established in a manner satisfactory to the Commissioner, and shall be 
kept in accordance with the requirements of the Commissioner as long as 
the mortgage is insured or held by the Commissioner.
    (b) Financial reports. The mortgagor shall file with the 
Commissioner:
    (i) Annual audited financial statements in accordance with the 
guidance below,
    (ii) Quarterly unaudited financial reports, within 40 days 
following the end of each quarter of the mortgagor's fiscal year,
    (iii) If requested by the Commissioner, monthly financial reports 
within 40 days following the end of each month,
    (iv) Board-certified annual financial results within 120 days 
following the close of the fiscal year (if the annual audited financial 
statement has not yet been filed with the Commissioner) and at such 
other times as the Commissioner may designate on a case-by-case basis, 
and
    (v) Such other financial and utilization reports as the 
Commissioner may require.
    (c) Audits. (1) Not-for-profit organizations shall conduct audits 
in accordance with the Consolidated Audit Guide for Audits of HUD 
Programs (Handbook 2000.04) and OMB Circular A-133 (Audits of States, 
local governments and nonprofit organizations).
    (2) For-profit organizations shall conduct audits in accordance 
with the Consolidated Audit Guide for Audits of HUD Programs (Handbook 
2000.04).
    (d) Changes in accounting policies. The annual audited financial 
statements shall identify any changes in accounting policies and their 
financial effect on the balance sheet and on the income statement.
    (e) Compliance reporting. The mortgagor shall instruct the auditor 
of the annual financial statement to include in its report an 
evaluation of the mortgagor's compliance with the Regulatory Agreement.
    (f) Books of management agents. The books and records of management 
agents, lessees, operators, managers, and affiliates, as they pertain 
to the operations of the project, shall be maintained in accordance 
with Generally Accepted Accounting

[[Page 1769]]

Principles (GAAP) and shall be open and available to inspection by HUD, 
after reasonable prior notice, during normal office hours, at the 
project or other mutually agreeable location. Every contract executed 
on behalf of the project with any of the aforesaid parties shall 
include the provision that the books and records of such entities shall 
be properly maintained and open to inspection during normal business 
hours by HUD at the project or other mutually agreeable location.
    (g) Medicare cost reports. Upon request, the mortgagor shall 
provide to the Commissioner a copy of the Medicare Cost Report most 
recently submitted to the Centers for Medicare and Medicaid Services 
(an agency of the Department of Health and Human Services), along with 
related financial documents.


Sec.  242.59  Inspection of facilities by Commissioner.

    The mortgaged property (including buildings and equipment) and the 
books, records, and documents relating to the operation of the physical 
facilities of the hospital shall be subject to inspection and 
examination by the Commissioner or his or her authorized representative 
at all reasonable times.


Sec.  242.61  Management.

    The mortgagor shall provide for management of the hospital in a 
manner satisfactory to the Commissioner.
    (a) Contract management. The mortgagor shall not execute a 
management agreement or any other contract for management of the 
hospital without the Commissioner's prior written approval. Any 
management agreement or contract shall contain a provision that it 
shall be subject to termination without penalty and with or without 
cause, upon written request by the Commissioner addressed to the 
mortgagor and management agent.
    (b) Principals. HUD shall have the authority to require that any 
principals of the mortgagor, including but not limited to board members 
of a corporate entity, be removed, substituted, or terminated for cause 
upon written request by the Commissioner addressed to the mortgagor.
    (c) Employees. HUD shall have the authority to require that any key 
management employees of the mortgagor (as defined and determined solely 
by HUD) be terminated for cause upon written request by the 
Commissioner addressed to the mortgagor.
    (d) Procedures upon receipt of request under paragraphs (a) through 
(c) of this section. Upon receipt of such requests under paragraphs (a) 
through (c) of this section, the mortgagor shall immediately terminate 
said management agreement, principals or employees within the shortest 
applicable period the Commissioner determines appropriate and shall 
make arrangements satisfactory to the Commissioner for on-going proper 
management of the hospital.


Sec.  242.62  Releases of lien.

    The mortgagor shall not sell, dispose of, transfer, or permit to be 
encumbered any security property without the prior approval of the 
lender and Commissioner, subject to thresholds the Commissioner may 
establish for the approval requirement. Where there is a partial 
release of lien, the lender must make a determination, subject to 
review by the Commissioner, that the remaining or replacement property 
subject to the first lien provides adequate security for the remaining 
principal indebtedness.


Sec.  242.63  Additional indebtedness and leasing.

    The mortgagor shall not enter into any long-term debt, short-term 
debt, or equipment leases except in conformance with policies and 
procedures established by the Commissioner.


Sec.  242.64  Current and future property.

    All current or future property or personalty (all as defined in the 
Regulatory Agreement) of the mortgagor on or off mortgaged real estate 
(except that specifically restricted by donors or specifically excluded 
by the Commissioner) will be considered as part of the HUD-insured 
hospital and subject to all provisions of the HUD regulatory agreement. 
All equipment acquired by the hospital following initial endorsement 
and at any time during the term of the loan shall become subject to the 
lien of the security agreement and any Uniform Commercial Code 
Financing Statements filed pursuant to the security agreement, unless 
the mortgagor specifically requests and the Commissioner for good cause 
approves, subordination of the lien of the insured mortgagee on 
specific personalty for specific periods of time. The first lien on the 
realty (as defined in the regulatory agreement and as identified in the 
security instrument) cannot be subordinated in whole or in part.


Sec.  242.65  Distribution of assets.

    The Commissioner shall establish financial thresholds and 
procedures for the distribution of surplus cash and other assets. 
Surplus cash that meets the definition in 24 CFR 242.1, or cash that 
has been expressly approved for distribution by the Commissioner, may 
be distributed to other organizations formally affiliated with the 
mortgagor, a parent organization with which the mortgagor is also 
affiliated, partners, or stockholders, in accordance with those 
financial thresholds and procedures set forth in the regulatory 
agreement. Other assets may be distributed to other organizations 
formally affiliated with the mortgagor, a parent organization with 
which the mortgagor is also affiliated, partners, or stockholders, in 
accordance with those financial thresholds and procedures set forth in 
the regulatory agreement, and in accordance with the release of lien 
conditions in 24 CFR 242.62, if applicable.


Sec.  242.66  Affiliate transactions.

    Transactions that are arms-length are permitted as specified in the 
Regulatory Agreement. Transactions with affiliates that are not arms-
length are not permitted except with the prior written approval of the 
Commissioner in accordance with such policies and procedures as the 
Commissioner shall prescribe.


Sec.  242.67  New corporations, subsidiaries, affiliations, and 
mergers.

    The mortgagor shall not establish, develop, organize, acquire, 
become the sole member of, or acquire an interest sufficient to require 
disclosure on the audited financial statements of the mortgagor, in any 
corporation, subsidiary, or affiliate organization other than those 
with which the mortgagor was affiliated as of date of application, 
without the prior approval of the Commissioner. The mortgagor shall 
obtain the Commissioner's written approval for all future mergers.

Subpart H--Miscellaneous Requirements


Sec.  242.68  Disclosure and verification of Social Security and 
Employer Identification Numbers.

    The requirements set forth in 24 CFR part 5, regarding the 
disclosure and verification of social security numbers and employer 
identification numbers, and employer identification numbers by 
applicants and participants in assisted mortgage and loan insurance and 
related programs, apply to this program.


Sec.  242.69  Transfer fee.

    Upon application for review of a transfer of physical assets or the 
substitution of mortgagors, a transfer fee of 50 cents per thousand 
dollars of the outstanding principal balance of the mortgage shall be 
paid to the

[[Page 1770]]

Commissioner. A transfer fee is not required if both parties to the 
transfer transaction are not-for-profit or public organizations.


Sec.  242.70  Fees not required.

    The payment of an application, commitment, inspection, or reopening 
fee shall not be required in connection with the insurance of a 
mortgage involving the sale by the Secretary of any property acquired 
under any section or title of the Act.


Sec.  242.72  Leasing of hospital.

    Leasing of a hospital in its entirety is prohibited. 
Notwithstanding this prohibition, any proposal in which leasing of the 
entire facility is a factor due to State law prohibitions against the 
mortgaging of health care facilities by State entities shall be 
considered on a case-by-case basis. Also, leasing of a hospital that 
has an existing Section 242 insured loan is permitted if the 
Commissioner determines that leasing is necessary to reduce the risk of 
default by a financially troubled hospital.


Sec.  242.73  Waiver of eligibility requirements for mortgage 
insurance.

    The Secretary may insure under this part, without regard to any 
limitation upon eligibility contained in this subpart, any mortgage 
assigned to him or her in connection with payment under a contract of 
mortgage insurance, or executed in connection with a sale by him or her 
of any property previously insured under this part and acquired 
subsequent to a claim.


Sec.  242.74  Smoke detectors.

    Each occupied room must include at least one battery-operated or 
hard-wired smoke detector in proper working condition. If the room is 
occupied by hearing-impaired persons, the smoke detector must have an 
alarm system designed for hearing-impaired persons, unless the smoke 
alarm is connected to a central alarm system that is monitored on a 24-
hour basis, or otherwise meets industry standards.


Sec.  242.75  Title requirements.

    In order for the mortgaged property to be eligible for insurance, 
the Commissioner shall determine that marketable title thereto is 
vested in the mortgagor as of the date the mortgage is filed for 
record. The title evidence shall be examined by the Commissioner and 
the endorsement of the credit instrument for insurance shall be 
evidence of its acceptability.


Sec.  242.76  Title evidence.

    Upon insurance of the mortgage, the mortgagee shall furnish to the 
Commissioner a survey of the mortgage property, satisfactory to the 
Commissioner, and a policy of title insurance covering the property, as 
provided in paragraph (a) of this section. If, for reasons the 
Commissioner considers to be satisfactory, title insurance cannot be 
furnished, the mortgagee shall furnish such evidence of title in 
accordance with paragraph (b) or (c) of this section as the 
Commissioner may require. Any survey, policy of title insurance, or 
evidence of title required under this section shall be furnished 
without expense to the Commissioner. The types of title evidence are:
    (a) A policy of title insurance issued by a company and in a form 
satisfactory to the Commissioner. The policy shall name as the insureds 
the mortgagee and the Secretary of Housing and Urban Development, as 
their respective interests may appear. The policy shall provide that 
upon acquisition of title by the mortgagee or the Secretary, it will 
continue to provide the same coverage as the original policy, and will 
run to the mortgagee or the Secretary, as the case may be.
    (b) An abstract of title satisfactory to the Commissioner, prepared 
by an abstract company or individual engaged in the business of 
preparing abstracts of title, accompanied by a legal opinion 
satisfactory to the Commissioner as to the quality of such title, 
signed by an attorney-at-law experienced in the examination of titles.
    (c) A Torrens or similar title certificate.


Sec.  242.77  Liens.

    The hospital must be free and clear of all liens other than the 
insured mortgage, except that the property may be subject to a lien as 
provided by terms and conditions established by the Commissioner as 
follows:
    (a) An inferior lien made or held by a Federal, State, or local 
government instrumentality;
    (b) An inferior lien required in connection with a supplemental 
loan insured pursuant to section 241 of the Act;
    (c) An inferior or superior lien on equipment as may be approved in 
connection with an equipment leasing program approved by the 
Commissioner;
    (d) An inferior or superior lien on accounts receivable as approved 
by the Commissioner as collateral for a line of credit or other 
borrowing by a hospital insured under this part that has extraordinary 
needs such as cash flow difficulties; or
    (e) Similar liens otherwise approved by the Commissioner.


Sec.  242.78  Zoning, deed, and building restrictions.

    The project when completed shall not violate any material zoning or 
deed restrictions applicable to the project site, and shall comply with 
all applicable building and other governmental codes, ordinances, 
regulations, and requirements.


Sec.  242.79  Environmental quality determinations and standards.

    Requirements set forth in 24 CFR part 50, Protection and 
Enhancement of Environmental Quality, 24 CFR part 51, Environmental 
Criteria and Standards, and 24 CFR part 55, Implementation of Executive 
Order 11988, Flood Plain Management governing environmental review 
responsibilities (as applicable) and as otherwise required by the 
Commissioner apply to this program.


Sec.  242.81  Lead-based paint poisoning prevention.

    Requirements set forth in 24 CFR part 35 apply to this program.


Sec.  242.82  Energy conservation.

    Construction, mechanical equipment, and energy and metering 
selections shall provide cost-effective energy conservation in 
accordance with standards established by the Commissioner.


Sec.  242.83  Debarment and suspension.

    The requirements set forth in 24 CFR part 24, except subpart F, 
apply to this program.


Sec.  242.84  Previous participation and compliance requirements.

    The requirements set forth in 24 CFR part 200, subpart H, apply to 
this program.


Sec.  242.86  Property and mortgage assessment.

    The requirements set forth in 24 CFR part 200, subpart E, regarding 
the mortgagor's responsibility for making those investigations, 
analysis, and inspections it deems necessary for protecting its 
interests in the property apply to these programs.


Sec.  242.87  Certifications.

    Any agreement, undertaking, statement, or certification required by 
the Commissioner shall specifically state that it has been made, 
presented, and delivered for the purpose of influencing an official 
action of the FHA, and of the Commissioner, and may be relied upon by 
the Commissioner as a true statement of the facts contained therein.

[[Page 1771]]

Sec.  242.89  Supplemental loans.

    A loan, advance of credit, or purchase of an obligation 
representing a loan or advance of credit made for the purpose of 
financing improvements or additions to a hospital covered by a mortgage 
insured under this section of the Act or for a Commissioner-held 
mortgage, or equipment for a hospital, may be insured pursuant to the 
provisions of section 241 of the Act and under the provisions of this 
part as applicable and such additional terms and conditions as 
established by the Commissioner. See subpart B of 24 CFR part 241 with 
respect to the contract of mortgage insurance for all loans insured 
under section 241 of the Act. See 24 CFR part 241, subpart C, for 
energy improvements.


Sec.  242.90  Eligibility of mortgages covering hospitals in certain 
neighborhoods.

    (a) A mortgage financing the repair, rehabilitation, or 
construction of a hospital located in an older declining urban area 
shall be eligible for insurance under this subpart subject to 
compliance with the additional requirements of this section.
    (b) The mortgage shall meet all of the requirements of this 
subpart, except such requirements (other than those relating to labor 
standards and prevailing wages) as are judged to be not applicable on 
the basis of the following determinations to be made by the 
Commissioner.
    (1) That the conditions of the area in which the property is 
located prevent the application of certain eligibility requirements of 
this subpart.
    (2) That the area is reasonably viable, and there is a need in the 
area for an adequate hospital to serve low and moderate income 
families.
    (3) That the mortgage to be insured is an acceptable risk.
    (c) Mortgages complying with the requirements of this section shall 
be insured under this subpart pursuant to section 223(e) of the 
National Housing Act. Such mortgages shall be insured under and be the 
obligation of the Special Risk Insurance Fund.


Sec.  242.91  Eligibility of refinancing transactions.

    A mortgage given to refinance an existing insured mortgage under 
section 241 or section 242 of the Act covering a hospital may be 
insured under this subpart pursuant to section 223(a)(7) of the Act. 
Insurance of the new, refinancing mortgage shall be subject to the 
following limitations:
    (a) Principal amount. The principal amount of the refinancing 
mortgage shall not exceed the lesser of:
    (1) The original principal amount of the existing insured mortgage, 
or
    (2) The unpaid principal amount of the existing insured mortgage, 
to which may be added loan closing charges associated with the 
refinancing mortgage, and costs, as determined by the Commissioner, of 
improvements, upgrading, or additions required to be made to the 
property.
    (b) Debt service rate. The monthly debt service payment for the 
refinancing mortgage may not exceed the debt service payment charged 
for the existing mortgage.
    (c) Mortgage term. The term of the new mortgage shall not exceed 
the unexpired term of the existing mortgage, except that the new 
mortgage may have a term of not more than 12 years in excess of the 
unexpired term of the existing mortgage in any case in which the 
Commissioner determines that the insurance of the mortgage for an 
additional term will inure to the benefit of the FHA Insurance Fund, 
taking into consideration the outstanding insurance liability under the 
existing insured mortgage, and the remaining economic life of the 
property.
    (d) Minimum loan amount. The mortgagee may not require a minimum 
principal amount to be outstanding on the loan secured by the existing 
mortgage.


Sec.  242.92  Minimum principal loan amount.

    A mortgagee may not require, as a condition of providing a loan 
secured by a mortgage insured under this part, that the principal 
amount of the mortgage exceed a minimum amount established by the 
mortgagee.


Sec.  242.93  Amendment of regulations.

    The regulations in this subpart may be amended by the Commissioner 
at any time and from time to time, in whole or in part, but such 
amendment shall not adversely affect the interests of a mortgagee or 
lender under the insurance on any mortgage or loan already insured and 
shall not adversely affect the interests of a mortgagee or lender on 
any mortgage or loan to be insured on which the Commissioner has issued 
a commitment to insure.


Sec.  242.94  Cross-reference.

    All of the provisions of 24 CFR part 207, subpart B, relating to 
mortgages insured under section 207 of the Act, apply to mortgages on 
hospitals insured under section 242 of the Act, except Sec.  207.259 
(Insurance benefits).

    Dated: November 19, 2004.
John C. Weicher,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 05-49 Filed 1-7-05; 8:45 am]
BILLING CODE 4210-27-P