[Federal Register Volume 73, Number 123 (Wednesday, June 25, 2008)]
[Rules and Regulations]
[Pages 35920-35923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14131]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 242

[Docket No. FR-4927-F-03]
RIN 2502-A122


Revisions to the Hospital Mortgage Insurance Program: Technical 
and Clarifying Amendments

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

ACTION: Final rule.

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SUMMARY: On November 28, 2007, HUD published a final rule revising 
HUD's regulations on mortgage insurance for hospitals. This publication 
corrects certain non-substantive errors and omissions that occurred in 
the final rule, as well as makes certain additional amendments designed 
to enhance clarity of certain of the rule's provisions.

DATES: Effective Date: July 25, 2008.

[[Page 35921]]


FOR FURTHER INFORMATION CONTACT: Roger E. Miller, Director, Office of 
Insured Health Care Facilities, Office of Housing, Department of 
Housing and Urban Development, 451 Seventh Street, SW., Room 9224, 
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

    On November 28, 2007 (72 FR 67524), HUD published a final rule 
revising its regulations governing mortgage insurance for hospitals. 
This final rule followed a January 10, 2005 (70 FR 1750), proposed rule 
and took into consideration public comment submitted on the proposed 
rule. The November 2007 final rule made certain changes in response to 
public comment and became effective on January 28, 2008. HUD's 
regulations promulgated by the November 2007 final rule implement 
section 242 of the National Housing Act (12 U.S.C. 1715z-7), and are 
codified at 24 CFR part 242.

II. Technical and Clarifying Amendments

    Following publication of the November 2007 final rule, it was 
brought to HUD's attention that certain provisions of the regulatory 
text contained technical errors. In addition, upon reviewing the final 
rule in response to notification of technical errors, HUD identified 
other provisions in the regulatory text that HUD determined should be 
revised to improve clarity. The correction of these errors and the 
clarifying amendments made to the November 2007 final rule by this rule 
are as follows:
     Authority. The main authority for hospital mortgage 
insurance, section 242 of the National Housing Act (12 U.S.C. 1715z-7) 
was inadvertently omitted. This technical correction makes the 
appropriate revision to the authority citation.
     24 CFR 242.1 (Definitions). The definition in the rule of 
``chronic convalescent and rest'' refers to ``rehabilitation 
services.'' This element is not required by statute. This technical 
correction removes this term from the definition. A comment submitted 
on the proposed rule requested that HUD remove from the definition of 
``chronic convalescent and rest'' the following terms: ``respite care 
services,'' ``hospice services,'' and ``rehabilitation services.'' HUD 
responded to the comment citing the statutory definition of ``chronic 
convalescent and rest'' as the reason for not removing these terms. 
However, while the terms ``respite care services'' and ``hospice 
services'' are part of the definition of ``chronic convalescent and 
rest,'' the term ``rehabilitation services'' is not part of the 
definition. (See 72 FR 67526-67527.) Accordingly, reference to 
``rehabilitation services'' is removed from the definition of ``chronic 
convalescent and rest.''
    This rule also amends the definition of ``mortgagee or lender'' 
because the rule used the term ``mortgagee'' to refer to the applicant 
as well as the original lender. Therefore, a definition of 
``mortgagee'' will clarify any possible ambiguity regarding to whom 
``mortgagee'' refers.
    The definition of ``construction'' inadvertently omitted reference 
to ``substantial rehabilitation''. As is made clear in other parts of 
the rule, including in the definition of ``project,'' substantial 
rehabilitation such as additions and renovations are supported by the 
program. However, to remove any possible ambiguity, the phrase ``or the 
substantial rehabilitation of an existing facility'' is being added to 
the definition of ``construction''.
    With respect to the definition of ``surplus cash,'' it was the 
intent of the final rule that ``surplus cash'' includes cash from prior 
periods. This statement was made in the preamble of the final rule in 
response to public comments. (See 72 FR 67529.) This technical 
correction adds language to make this explicit in the definition of 
``surplus cash''.
     24 CFR 242.10 (Eligible Mortgagors). This final rule 
amends the second sentence of this section because HUD discovered a 
possible unintended contradiction between Sec.  242.10 and Sec.  
242.72. Section 242.10 provides that the mortgagor ``shall possess the 
powers necessary and incidental to operating a hospital''. Under normal 
circumstances, that is indeed a requirement. However, Sec.  242.72 
creates a contradiction by permitting leasing arrangements to comply 
with certain state laws that prohibit public hospitals from mortgaging 
their property. Under such arrangements, the mortgagor of record is an 
entity (which may be created solely for the purpose of enabling the 
financing to take place) that does not ``possess the powers necessary 
and incidental to operating a hospital''. The mortgagor simply serves 
as the owner, and it is the lessee-operator who possesses those powers. 
This amendment therefore removes any possible contradiction.
     24 CFR 242.23 (Maximum Mortgage Amounts and Cash Equity 
Requirements). Where excess cash equity is needed, section 242(d)(6) of 
the National Housing Act (12 U.S.C. 1715z-7(d)(6)), entitles the 
mortgagor to fund the excess with a letter of credit at the option of 
the mortgagee. This is the mortgagee's option, not an option of HUD, 
but the November 28, 2007, final rule inadvertently presents this 
option as HUD's option. This rule corrects that error.
     24 CFR 242.23, 242.35, 242.52, and 242.90 (Reference to 
``Rehabilitation''). The rule contains several references to the term 
``rehabilitation.'' The program insures ``substantial rehabilitation'' 
in addition to new construction and, therefore, references to the term 
``rehabilitation'' are generally in the context of ``substantial 
rehabilitation.'' Therefore, to avoid any possible ambiguity where the 
term ``rehabilitation'' is used alone, the term ``substantial'' has 
been added to precede this term wherever it appears.
     24 CFR 242.33 (Covenant for Malpractice, Fire, and Other 
Hazard Insurance). Section 242.33 requires that the hospital have 
insurance coverage ``acceptable to the mortgagee and HUD.'' The 
amendment removes the word ``and'' from this phrase and substitutes the 
word ``or.'' The final rule did not intend to place the evaluation of 
acceptable insurance solely on the mortgagee. This amendment therefore 
provides the mortgagee with the option of assuming responsibility to 
determine the adequacy of insurance coverage, or leaving such 
determination to HUD.
     24 CFR 50 (Funds and Finances: Off-Site Utilities and 
Streets). The November 2007 final rule inadvertently omitted ``letter 
of credit'' and use of a letter of credit has been a longstanding 
practice in this program. This rule corrects that omission.
     24 CFR 242.56 (Form of Regulation). HUD amends this 
section to add a new sentence at the section's end which would restore 
a provision consistent with longstanding practice. This amendment 
relates to the issue of leasing, which is addressed in Sec. Sec.  
242.10 and 242.72. When leasing is permitted under Sec.  242.72, it is 
the lessee that operates the hospital and whose financial results 
determine whether or not there is an insurance claim. HUD's established 
practice, prior to the final rule, has been to have the lessee, as well 
as the mortgagor of record, sign the Regulatory Agreement and be 
governed by its provisions. HUD did not intend for the revisions to 
Sec. Sec.  242.10 and 242.72 to cause a departure from established 
practice.

[[Page 35922]]

     24 CFR 242.58 (Books, Accounts, and Financial Statements). 
Paragraph (c) of this regulatory section describes the organizations 
that are subject to audit. While paragraph (c)(1) references not-for-
profit organizations, this paragraph inadvertently omits reference to 
state and local governments, which have long been among those 
organizations that are audited in accordance with the Consolidated 
Audit Guide for Audits of HUD Programs and OMB Circular A-133, which 
authorities are referenced in paragraph (c)(1). This rule corrects that 
omission.
    Additionally, a new paragraph (h) is added for the same reasons 
provided in the amendment to Sec.  242.56.
     24 CFR 242.61 (Management). Section 242.61(a) requires 
HUD's written approval before a mortgagor can execute a contract for 
management of the hospital. This technical correction makes explicit 
that this approval requirement refers to the management of the 
hospital, not to management of specific components of the hospital such 
as the pharmacy, cafeteria, etc.

Findings and Certifications

Justification for Final Rulemaking

    In general, the Department publishes a rule for public comment 
before issuing a rule for effect, in accordance with its own 
regulations on rulemaking, 24 CFR part 10. However, part 10 does 
provide for exceptions from that general rule where the agency finds 
good cause to omit advance notice and public participation. The good 
cause requirement is satisfied when prior public procedure is 
``impracticable, unnecessary, or contrary to the public interest'' (24 
CFR 10.1). In this case, public comment is unnecessary because HUD is 
making only technical corrections and clarifying amendments to a 
previously published final rule.

Regulatory Flexibility Act

    The undersigned, in accordance with the Regulatory Flexibility Act 
(5 U.S.C. 605(b)), has reviewed and approved this rule, and in so doing 
certified that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule only makes technical 
corrections and clarifying amendments to a previously published final 
rule.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
was made in connection with this rulemaking 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 remains applicable, and is available 
for public inspection between 8 a.m. and 5 p.m. weekdays in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, 
DC 20410-5000.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute, or preempts state law, unless the relevant 
requirements of section 6 of the Executive Order are met. This final 
rule does not have federalism implications and does not impose 
substantial direct compliance costs on state and local governments or 
preempt state law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of 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 final rule does not 
impose any federal mandates on any state, local, or tribal government, 
or on the private sector, within the meaning of UMRA.

List of Subjects in 24 CFR Part 242

    Hospitals, Mortgage insurance, Reporting and recordkeeping 
requirements.

0
Accordingly, for the reasons described in the preamble, HUD amends 24 
CFR part 242 to read as follows:

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

0
1. The authority citation is revised to read:

    Authority: 12 U.S.C. 1709, 1710, 1715b, 1715u, and 1715z-7; 42 
U.S.C. 3535d.

Subpart A--General Eligibility Requirements

0
2. Amend Sec.  242.1 by revising the definitions of ``chronic 
convalescent and rest,'' ``construction,'' ``mortgagee or lender'' and 
first sentence of the definition of ``surplus cash,'' to read as 
follows:


Sec.  242.1  Definitions.

* * * * *
    Chronic convalescent and rest means skilled nursing services, 
intermediate care services, respite care services, hospice services, 
and other services of a similar nature.
    Construction means the creation of a new or replacement hospital 
facility, or the substantial rehabilitation of an existing facility. 
The cost of acquiring new or replacement equipment may be included in 
the cost of construction. * * *
    Mortgagee or lender means the applicant for insurance or the 
original lender under a mortgage. * * *
    Surplus Cash means any cash remaining after all of the following 
conditions have been met:
* * * * *

0
3. Revise the second sentence of Sec.  242.10 as follows:


Sec.  242.10  Eligible mortgagors.

    * * * The mortgagor shall be approved by HUD and, except in those 
cases where the hospital is leased as permitted in Sec.  242.72, shall 
possess the powers necessary and incidental to operating a hospital. * 
* *

Subpart B--Application Procedures and Commitments

0
4. Revise Sec.  242.23(a) and the last sentence of paragraph (c) to 
read as follows:


Sec.  242.23  Maximum mortgage amounts and cash equity requirements.

    (a) Adjusted mortgage amount-rehabilitation projects. A mortgage 
financing the substantial 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 property is not encumbered by an 
outstanding indebtedness, the mortgage shall not exceed 100 percent of 
HUD's estimate of the cost of the proposed substantial 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 substantial 
rehabilitation, plus
    (ii) Such portion of the outstanding indebtedness as does not 
exceed 90 percent of HUD's estimate of the fair market value of such 
land and improvements prior to substantial rehabilitation.

[[Page 35923]]

    (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 substantial 
rehabilitation, plus
    (ii) The actual purchase price of the land and improvements or 
HUD's estimate (prior to substantial rehabilitation) of the fair market 
value of such land and improvements, whichever is the lesser. * * *
    (c) Cash equity. * * *. A private nonprofit or public mortgagor, 
but not a proprietary mortgagor, at the mortgagee's option and subject 
to 24 CFR 242.49, may provide any such required equity in the form of a 
letter of credit.

Subpart C--Mortgage Requirements

0
5. Revise Sec.  242.33 to read as follows:


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

    The mortgage shall contain a covenant binding the mortgagor to 
maintain adequate liability, fire, and extended coverage insurance on 
the property. The mortgage shall also contain a covenant binding the 
mortgagor to maintain adequate malpractice coverage. All coverage shall 
be acceptable to the mortgagee or HUD.

0
6. Revise Sec.  242.35(d) to read as follows:


Sec.  242.35  Mortgage lien certifications.

* * * * *
    (d) The mortgagor has notified HUD in writing of all unpaid 
obligations in connection with the mortgage transaction, the purchase 
of the mortgaged property, the construction or substantial 
rehabilitation of the project, or the purchase of the equipment 
financed with mortgage proceeds.

Subpart E--Construction

0
7. Revise the second sentence of Sec.  242.50 to read as follows:


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

    * * * Where such assurance is required, it shall be in the form of 
a cash escrow deposit, a letter of credit, the retention of a specified 
amount of mortgage proceeds by the mortgagee, or a combination thereof.
* * * * *
0
8. Revise Sec.  242.52(a) to read as follows:


Sec.  242.52  Construction contracts.

    (a) Awarding of contract. A contract for the construction or 
substantial rehabilitation of a hospital shall be entered into by a 
mortgagor, with a builder selected by a competitive bidding procedure 
acceptable to HUD.
* * * * *

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

0
9. Amend Sec.  242.56 by adding a new sentence at the end of the 
section to read as follows:


Sec.  242.56  Form of regulation.

    * * * In those cases in which the hospital facility is leased as 
permitted by Sec.  242.72, the provisions of this section also shall 
apply to the lessee.

0
10. Revise Sec.  242.58(c)(1) and add a new paragraph (h) to read as 
follows:


Sec.  242.58  Books, accounts, and financial statements.

* * * * *
    (c) * * * (1) Not-for-profit and state and local governments 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). * * 
*
    (h) In those cases in which the hospital facility is leased as 
permitted by Sec.  242.72, the requirements pertaining to the mortgagor 
in Sec.  242.58 (a) through (g) also shall pertain to the lessee.

0
11. Revise Sec.  242.61(a) to read as follows:


Sec.  242.61  Management.

    * * * (a) Contract Management of Hospital. The mortgagor shall not 
execute a management agreement or any other contract for management of 
the hospital without HUD's prior written approval. (Management of the 
hospital, which requires HUD's prior written approval, refers to 
management of the hospital not management of components within the 
hospital such as the hospital cafeteria or hospital pharmacy.) Any 
management agreement or contract for management of the hospital shall 
contain a provision that it shall be subject to termination without 
penalty and with or without cause, upon written request by HUD 
addressed to the mortgagor and management agent.
* * * * *

Subpart H--Miscellaneous Requirements

0
12. Revise Sec.  242.90(a) to read as follows:


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

    (a) A mortgage financing the repair, substantial 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.
* * * * *

    Dated: June 16, 2008.
Brian D. Montgomery,
Assistant Secretary for Housing-Federal Housing Commissioner.
 [FR Doc. E8-14131 Filed 6-24-08; 8:45 am]
BILLING CODE 4210-67-P