[Federal Register Volume 75, Number 13 (Thursday, January 21, 2010)]
[Notices]
[Pages 3544-3591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-957]



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Part II





Department of Housing and Urban Development





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HUD Multifamily Rental Project Closing Documents: Proposed Revisions 
and Updates and Notice of Information Collection; Notice

  Federal Register / Vol. 75, No. 13 / Thursday, January 21, 2010 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5354-N-01]
RIN 2502-AI80


HUD Multifamily Rental Project Closing Documents: Proposed 
Revisions and Updates and Notice of Information Collection

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

ACTION: Notice.

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SUMMARY: This notice advises that HUD is issuing for public comment a 
comprehensive set of revised closing documents for use in Federal 
Housing Administration (FHA) multifamily rental projects. This notice 
starts anew the process for updating the multifamily rental project 
closing documents; that process commenced with an August 2, 2004, 
notice that presented proposed revised closing documents for public 
comment. The August 2004 notice was followed by an August 31, 2006, 
notice in which HUD provided updates on the closing document 
development process, advised of policy decisions that HUD had made at 
that time, and announced a September 21, 2006, public meeting at which 
HUD would take questions on the development process and policy 
decisions announced in the August 31, 2006, notice.
    On June 1, 2009, HUD announced, on its Web site, that it would 
commence review of the multifamily rental project closing documents as 
last revised by the prior Administration and welcomed the public to 
review these documents along with HUD, as well as submit any informal 
comments on the revised closing documents.
    In submitting the comprehensive set of revised multifamily rental 
closing documents for public comment, this notice also complies with 
the Paperwork Reduction Act of 1995. While complying with the Paperwork 
Reduction Act of 1995, this notice provides information beyond that 
normally provided in such notices by identifying changes HUD has made 
to the proposed closing documents published on August 2, 2004, and 
summarizing and responding to issues raised by commenters on the 2004 
proposed closing documents, and to those issues informally presented on 
the revised closing documents recently posted on HUD's Web site.
    In revising these forms, HUD identified language and policies that 
were outdated and needed to be changed to be consistent with modern 
real estate and mortgage lending laws and practices. By reflecting 
current terminology and current lending laws and practices, updated 
multifamily rental project closing documents will better protect and 
benefit all parties involved in these transactions. The multifamily 
closing documents are posted on HUD's Web site at http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

DATES: Comment Due Date: March 22, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this notice to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:
     To receive consideration as public comments, comments must be 
submitted through one of the two methods specified above. Again, all 
submissions must refer to the docket number and title of the rule.

    Redline/Strikeout Submissions. While commenters may submit, as part 
of their comments, a redline/strikeout of any one or more of the 
multifamily rental project closing documents, the redline/strikeout 
drafts, to be considered, must be accompanied by a narrative statement 
that explains the proposed changes.
    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Information Relay 
Service at 800-877-8339. Copies of all comments submitted are available 
for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: John J. Daly, Office of the General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 9226, Washington, DC 20410-0500; telephone number 202-708-
1274 (this is not a toll-free number). Persons with speech or hearing 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. This Notice
III. Overview of Proposed Policy Determinations and Changes Made to 
Closing Documents
    A. Documents to Which No Changes Were Made
    B. Across-the-Board Changes and Policy Determinations
    C. Changes Made to Specific Documents and Addition of New 
Document
IV. Discussion of Public Comments
V. Findings and Certifications
VI. Solicitation of Public Comments

I. Background

    On August 2, 2004, HUD published a notice in the Federal Register 
(69 FR 46214) that advised that, consistent with the Paperwork 
Reduction Act of 1995, it was publishing for public comment a 
comprehensive set of revised closing forms and documents (closing 
documents) for use in the FHA multifamily rental project and health 
care facility (excluding hospitals) programs. In addition to meeting 
the requirements of the Paperwork Reduction Act, HUD advised that it 
was not solely seeking public comment on burden hours, as is the 
primary focus of the Paperwork Reduction Act, but seeking public 
comment for the purpose of receiving input from the lending industry 
and other interested parties in HUD's development and adoption of a

[[Page 3545]]

set of instruments that offer the requisite protection to all parties 
in these FHA-insured mortgage programs, while also being consistent 
with modern real estate practice and mortgage lending laws and 
procedures. The August 2, 2004, notice advised that HUD's closing 
documents were significantly outdated and needed a thorough review and 
update to reflect current HUD policies, as well as current practices in 
real estate and mortgage financing transactions.
    The August 2, 2004, notice followed an earlier informal 
solicitation of public comment on proposed revisions to the closing 
documents, that were posted on HUD's Web site in March 2000. In 
response to the many comments received from the 2000 solicitation of 
public comment, significant revisions were made to the proposed closing 
documents, and these revised documents were published in the Federal 
Register on August 2, 2004, for review and public comment.
    On August 31, 2006, HUD published a notice in the Federal Register 
(71 FR 51842) that announced certain policy decisions that had been 
made with respect to HUD's development of closing documents as of 
August 2006. HUD issued that notice in response to inquiries about the 
status of HUD's development of the closing documents. In that notice, 
HUD also announced that it would hold a meeting on the status of 
development of the closing documents at HUD Headquarters on September 
21, 2006. HUD invited to this meeting the 25 individuals and 
organizations that submitted comments on the August 2, 2004, notice, 
welcomed other interested parties to the meeting, and made phone lines 
available to those unable to participate in person. The purpose of the 
meeting was to brief the commenters and other interested members of the 
public on the status of the development of revised closing documents as 
of August-September 2006.
    In the August 31, 2006, notice and at the meeting, HUD announced 
that the following decisions had been made as of that date.
    1. Health Care Facility (e.g., nursing homes) documents would be 
published again for public comment (e.g., on issues such as treatment 
of accounts receivable financing) as proposed documents;
    2. Revised documents other than documents pertaining exclusively to 
health care facilities (e.g., rental projects) would be published as 
final documents without further comment;
    3. All revised documents would be updated periodically (e.g., every 
3 years to coincide with renewal of Office of Management and Budget 
(OMB) numbers under the Paperwork Reductions Act);
    4. Updates to revised documents that are needed more frequently 
than periodic updates will be made on a case-by-case basis;
    5. Recourse liability for Key Principals would not be a HUD 
requirement, as proposed in the documents in the August 2, 2004, 
Federal Register notice;
    6. A clear definition of ``HUD Directives'' would be provided; and
    7. The effective date for the revised documents would provide time 
for the processing of pending FHA mortgage insurance applications, as 
well as for training on the revised documents.
    HUD was unable to complete the updating of the closing documents 
during the prior Administration. On June 1, 2009, HUD announced, on its 
Web site, that it would commence review of the multifamily rental 
project closing documents, as last revised by the prior Administration, 
and welcomed the public to review these documents along with HUD, as 
well as submit any informal comments on the revised closing documents. 
(See http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.) The 
revised closing documents reflected most of the decisions previously 
made in response to public comments received on the August 2, 2004, 
proposed closing documents, but not necessarily all of the decisions 
announced in the August 2006 notice. The June 2009 Internet posting 
advised that the new HUD Administration had begun its review of the 
closing documents to consider changes that may be appropriate given 
policy decisions by a new Administration and in recognition of changes 
in the multifamily rental housing industry that had occurred since the 
documents were first proposed for public comment. HUD invited its 
industry partners, the legal community, and other interested members of 
the public to review the documents along with HUD and to submit 
informal comments to a specified e-mail address.

II. This Notice

    This notice identifies changes HUD has made to the proposed closing 
documents since it last published them on August 2, 2004. This notice 
also advises the public of changes proposed by the new HUD 
Administration, which reviewed those documents in the context of 
changed industry conditions since 2004 and 2006, and took into 
consideration changes previously decided to be made, and the feedback 
received through the June 2009 informal process. This notice summarizes 
and responds to issues raised in the 2004 public comments and, 
consistent with the Paperwork Reduction Act and HUD's own interest in 
receiving further formal comment on the proposed closing documents, 
solicits public comment on the revised closing documents. All of the 
closing documents, which include the most recent proposed changes, are 
posted on HUD's Web site at http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

III. Overview of Proposed Policy Determinations and Changes Made to 
Closing Documents

    In addition to identifying changes made to the closing documents to 
update terminology and improve clarity and comprehension, this section 
of the preamble highlights some of the more significant changes that 
were made to those closing documents published for public comment in 
August 2004.

A. Documents to Which No Changes Were Made

    As will also be highlighted below, in the overview of key changes 
to the closing documents, no substantive changes to the documents 
published on August 2, 2004, were made to the following documents:

Agreement of Sponsor to Furnish Additional Funds;
Bond Guaranteeing Sponsors' Performance;
Completion Assurance Agreement;
Escrow Agreement for Incomplete Construction;
Escrow Agreement for Latent Defects;
Off-Site Bond--Dual Obligee;
Payment Bond;
Performance Bond;
Request for Approval of Advance of Escrow Funds;
Request for Final Endorsement of Credit Instrument;
Residual Receipts Note Limited Dividend;
Residual Receipts Note Nonprofit;
Surveyors Report.

    In addition, no comments were received and no changes were made to 
the Supplement to Building Loan Agreement.

B. Across-the-Board Changes and Policy Determinations

Section 232 (Health Care Facility) Documents
    As a result of the comments received on the 2004 proposed Section 
232 closing documents, HUD has determined to revise these documents and 
publish them at a future date for additional public comment.

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Recourse Liability
    The introduction of certain limited recourse liability for Key 
Principals in the 2004 proposed closing documents was opposed by 
several public commenters, and HUD's August 31, 2006, notice stated 
that HUD had decided not to include provisions for recourse liability 
of Key Principals. The revised closing documents posted on HUD's Web 
site on June 1, 2009, however, retained some of those provisions. Some 
of the informal comments again opposed inclusion of any recourse 
liability provisions, arguing that inclusion would dissuade individuals 
from participating in HUD- insured multifamily housing transactions.
    In light of the consequences that certain insufficiently regulated 
actions have had on the housing finance markets in recent years, and 
given that public funds are put at risk in HUD multifamily housing 
transactions, it is now HUD's position that it is appropriate for 
principals to have recourse liability for certain ``bad boy acts.'' 
Accordingly, these provisions continue to be included in the revised 
closing documents being issued for comment under this notice.
Directives
    One of the more significant changes made in revising the 2004 
closing documents is to clarify the reference to the term 
``Directives'' in the closing documents. Concern about the inclusion of 
this term and its meaning was an issue raised in many of the comments. 
At HUD's September 21, 2006, meeting to report on the status of the 
development of the closing documents, HUD advised that it would provide 
a clear definition of this term. While a clear definition has been 
provided in the revised closing documents being issued for comment 
under this notice, on further consideration, HUD has determined to use 
the term ``Program Obligations'' rather than ``Directives.'' HUD's view 
is that the term ``Program Obligations'' better captures what was 
intended by use of the term ``Directives,'' namely, to advise parties 
to the closing documents of the additional requirements, beyond those 
included in the documents themselves, to which they are expected to 
adhere. The language would define ``Program Obligations,'' as follows:

    Program Obligations means all applicable statutes and 
regulations, including all amendments to such statutes and 
regulations, as they become effective; and all applicable 
requirements in HUD handbooks, notices, and mortgagee letters that 
apply to the Project, including all updates and changes to such 
handbooks, notices, and mortgagee letters that apply to the Project, 
except that updates and changes subject to notice and comment 
rulemaking shall become effective upon completion of the rulemaking 
process. Handbooks, notices, and mortgagee letters are available on 
HUD's official Web site  (http://www.hudclips.org or a successor 
location to that site).

    The advantage of this language is that it identifies the specific, 
longstanding, and familiar types of requirements (those in statutes, 
regulations, handbooks, notices, and mortgagee letters) to which the 
parties must adhere. To provide an additional level of assurance to 
commenters who expressed concern over the possibility that they would 
be required to comply with any future provision that HUD might issue in 
any manner, the definition also explicitly states that notice and 
comment rulemaking will be followed for any requirements that would be 
subject to such procedures. These procedures address concerns raised 
about adherence to future directives by the commenters, including 
concerns about conflicts with existing requirements, retroactive 
application of new requirements, or lack of time to prepare for 
transition to new requirements.
    For example, the imposition of new or revised information 
collection requirements (that is, generally new or revised forms) must 
undergo the notice and comment processes required by the Paperwork 
Reduction Act of 1995. From time to time, mortgagee letters or other 
types of direct notices will be used to announce new binding 
requirements. These documents are appropriate for announcements when 
new legislation imposes requirements that are effective upon enactment 
and leave HUD no discretion in implementation, and it is important for 
HUD to relay this information to the industry as quickly as possible. 
In such situations, mortgagee letters or other types of direct notices 
are the best vehicles to relay this information to the industry and to 
advise of implementation dates and provide implementation guidance, 
including transition periods where applicable and permitted by statute 
that may be helpful to the industry. From time to time, HUD may also 
issue mortgagee letters or direct notices to announce clarifications, 
interpretations, or certain procedural requirements, such as to which 
HUD offices or HUD officials certain types of executed documents must 
be submitted. In brief, HUD will follow the applicable procedures, as 
directed by statute or regulation, that govern issuance of a document 
which may announce additional policies, processes, forms, or standards 
to which parties to the closing documents must comply.

C. Changes Made to Specific Documents and Addition of New Document

    This section C of the preamble describes changes made to the 
proposed closing documents since they were published for comment on 
August 2, 2004, including changes in response to formal comments on the 
August 2, 2004, proposed closing documents, changes in response to 
informal public comments on the revised closing documents posted on 
June 1, 2009, and changes proposed by the new HUD Administration, which 
reviewed the documents in the context of changed industry conditions. 
Citations to specific sections or paragraphs of the closing documents 
refer to the versions of documents currently posted on HUD's Web site 
and may differ from the section or paragraph designation in which the 
relevant provision appeared in prior versions of the documents.
    In addition, this section C of the preamble addresses a new 
Subordination Agreement that HUD is proposing to require on affordable 
housing transactions with government subordinate debt. The 
Subordination Agreement would replace the rider to the subordinate note 
that HUD presently uses.
Agreement and Certification Changes
    1. In section 4, inserted ``managers, managing members, members'' 
to the Borrower entity which may have an identity of interest with the 
Architect or General Contractor that must be disclosed to HUD.
    2. Removed section 14 that required the General Contractor and 
Borrower to certify that there were no undisclosed side agreements.
Borrower's Oath Changes
    1. Added a new section 4 to require the Borrower to certify that it 
has not and will not enter into any agreement with any party other than 
the Lender that allows perfection of any security interest in the 
Uniform Commercial Code (UCC) Collateral through control under the UCC. 
This change is in accordance with revisions to Article 9 of the UCC.
    2. In response to informal public comment, added a new provision 
regarding knowledge of proposed laws and ordinances that would affect 
the project. This provision has been removed from Opinion of Counsel to 
Borrower and added to the Borrower's Oath, because the Borrower is in a 
better position to have the relevant knowledge.

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Building Loan Agreement Changes
    1. Clarified paragraph 4(c) by inserting language related to ``over 
and above'' funds.
    2. Removed paragraph 19 because it contained references to personal 
liability of Borrower.
    3. Revised paragraph 5 to change the reference to a new Exhibit B, 
which will list applicable charges or items to which advanced funds are 
to be applied.
    4. Revised paragraph 9 to provide that the covered acts constitute 
abandonment, and to define more precisely what acts constitute 
abandonment.
Construction Contract Changes
    1. Inserted a subsection (11) to Article 2 that adds any HUD-
approved change orders.
    2. Inserted the following parenthetical, instructional language 
into Article 4(d): ``(Insert that portion of the sum of interest, 
taxes, insurance, and Mortgage Insurance Premium that appears in 
section G of HUD-92264 attributable to the construction period. If 
there has been a change in the interest rate charged for the 
construction period (see footnote designated \(**)\ on page 1 of HUD-
92443), the dollar amount included in section G of HUD-92264 must be 
adjusted. The adjusted amount must be reflected in the savings 
computation.) Furthermore, the procedures set forth in footnote 
designated \(**)\ on page 1 of HUD-92443 must be followed.''
    3. Added language to Article 6(d) that this section is applicable 
only if ``permitted under state law.''
    4. Added language to Article 7(c) that the land survey map must be 
prepared in accordance with American Land Title Association/American 
Congress on Surveying and Mapping (ALTA/ACSM) standards and the HUD 
Surveyor's Report. Language is also added in the same section that if 
the Contractor has deviated from the Plans and Specifications, the 
Contractor will be responsible, at its own expense, for correcting any 
such deviations.
    5. In Article 2(9), revised the designation for the wage 
determination number and date to include the modification number and 
date.
    6. In Article 2, added a new paragraph 12 to add ``any side 
agreements disclosed to HUD'' to the list of Contract Documents.
Escrow Agreement for Operating Deficit Changes
    1. Changed the term ``sponsor'' to ``maker.''
    2. In accordance with a request in an informal public comment, 
revised section 4 to provide a definition of Sustaining Occupancy, 
which provides that Sustaining Occupancy must have been maintained for 
10 of the prior 12 months.
    3. In response to an informal public comment, revised section 5 to 
permit the Lender to draw upon a letter of credit in escrow and convert 
it to cash, provided that interest accrues to the relevant account.
Escrow Agreement for Noncritical Deferred Repairs Changes
    1. Inserted a new section 4 to clarify how disbursements from the 
escrow are to be authorized by HUD.
    2. Inserted a new section 11 that Lender will hold and disburse the 
escrow at HUD's direction.
Escrow Agreement for Working Capital Changes
    1. In section 1, added ``and/or'' after the checkbox for ``cash'' 
to show HUD's new policy of allowing a mixture of cash and a letter of 
credit.
    2. In section 3, removed the language that interest earned on the 
escrow deposit would be returned to Borrower.
    3. Modified section 3 to indicate that the remaining balance of the 
escrow funds would be returned to Borrower after the date of sustaining 
occupancy.
    4. Removed section 4, in accordance with section 2834 of the 
Housing and Economic Recovery Act of 2008 (Pub. L. 110-289, approved 
July 30, 2008), which prohibits HUD from requiring the deposit into 
escrow of equity from Low Income Housing Tax Credits. The remaining 
sections have been renumbered accordingly.
    5. In section 6, removed the language ``together with interest'' to 
be consistent with the changes in section 3.
Guide for Opinion of Borrower's Counsel Changes
    In connection with HUD's effort to revise the closing documents, 
HUD also analyzed considerable public comment upon the Guide, as well 
as ongoing comments by users and the public in the years that the Guide 
has been in use. The public comment has been invaluable in an effort to 
bring the Guide into compliance with more modern opinion practice, 
while simultaneously recognizing the singular and unique role of an 
attorney representing a Borrower in a HUD mortgage insurance 
transaction in the areas indicated above.
    1. In the introductory section, removed the sentence that describes 
how the loan is to be funded.
    2. In section G, added language that HUD should be listed as 
secured party, as its interest appears.
    3. In section LL, added language to include financing from ``other 
third party sources.''
    4. Removed section ``NN,'' which required review by counsel of the 
architect's certificate.
    5. In new section ``NN'' (old section ``OO''), added ``managing 
member, or similar person or entity of Borrower'' to subsection (iii).
    6. In section 2, removed language that has counsel opining as to 
whether Borrower possesses all necessary governmental certificates, 
permits, licenses, qualifications, and approvals to own and operate the 
Property.
    7. Removed section 4.
    8. Removed section 9.
    9. In section 13 (now new section 11), added ``as its interest 
appears'' with respect to HUD and Lender.
    10. Removed section 14 and moved it to the Lender's Certificate 
(formerly the Mortgagee's Certificate), because it is more appropriate 
to have the Lender certify that the Loan does not violate usury laws 
than to have counsel to Borrower certify this item.
    11. In the last portion of the Guide, where counsel certifies 
certain items, removed sections (e) and (g) and added in (d) a 
reference to interests disclosed and ``approved.''
    12. In response to informal public comments, removed opinions that 
are more appropriately rendered by other parties. For example, the 
Lender, rather than Mortgagor's counsel, is responsible for UCC 
filings, so the relevant provisions have been added to the Lender's 
Certificate. Additionally, section 6, regarding proposed laws and 
ordinances that would affect the project, has been removed and added to 
the Borrower's Oath.
    13. Moved the substance of section 9, regarding pending litigation 
and claims, to confirmations section (h), since it pertains to a 
factual matter rather than a legal opinion.
    14. Provided for signature of the opinion by an authorized partner 
of the law firm.
Instructions to Guide for Opinion of Borrower's Counsel
    Revised the instructions in accordance with changes to the Guide 
for Opinion of Borrower's Counsel, which are described above.
Exhibit A--Certification of Borrower
    1. Changed section 3 to be in conformity with revised Article 9 of 
the Uniform Commercial Code (UCC).
    2. Added a new section 4 identifying the state where Borrower was 
formed.

[[Page 3548]]

    3. Moved section originally designated as 7 (before addition of new 
section 4, noted immediately above), which contained certification for 
sources of funds, to section 20(e) of the Lender's Certificate.
HUD Amendment to AIA Document B181 Between Owner and Architect Changes
    In former section 10, now section 11, inserted ``partners, managers 
or member'' to explain where an identity of interest could exist.
Lease Addendum Changes
    Clarified the document to show that this Lease Addendum is to be 
used for a transaction where the mortgage is secured by a ground lease 
and is not to be used for the lease of commercial space.
Mortgagee's Certificate Changes
    1. Changed the title of the document from ``Mortgagee's 
Certificate'' to ``Lender's Certificate,'' to be consistent with the 
change in all documents that provides for using the term ``Lender'' 
instead of ``Mortgagee.''
    2. Added language to section 1 and a new section 3 that make all 
successors and assigns of the Lender bound by the Lender's Certificate. 
Succeeding sections have been renumbered accordingly.
    3. Removed first checkbox item in section 11, which has been 
redesignated as section 12.
    4. Added language in section 13 that Borrower represents and 
warrants to Lender that no UCC filings have been made against Borrower 
prior to the initial or initial/final endorsement of the Note by HUD.
    5. Changed language in section 14 to allow other investments 
approved in writing by HUD.
    6. Revised section 16 to indicate that Lender agrees to obtain 
HUD's approval and consent when needed, as set forth in the Security 
Instrument, and to furnish HUD with all reports and data as set forth 
in the Security Instrument.
    7. Revised section 20(f) to require the lender to disclose the 
amount of any trade profit that is to be collected in a transaction. 
Trade profit, also known as a ``premium'' or ``marketing gain,'' is the 
amount of additional funds, over and above the mortgage amount, paid by 
the purchaser of the mortgage backed securities that are used to fund 
the HUD-insured loan. The funds are paid in recognition of the 
difference between the mortgage interest rate used in the HUD-insured 
loan and what would generally be available at par in the market at any 
given time.
    8. Added, as section 30, a new certification of Lender that 
Borrower possesses all necessary governmental certificates, permits, 
licenses, qualifications, and approval to own and operate the Property. 
This provision was formerly a part of the Opinion of Counsel to the 
Borrower.
    9. Added, as section 31, a new certification of Lender that 
Borrower has furnished Lender with copies of all authorizations, 
consents, approvals, and permits from all necessary jurisdictions and 
courts.
    10. Added, as section 32, a new certification of Lender that Lender 
has reviewed the title policy for any liens not reflected as exceptions 
to coverage in the title policy.
    11. Added, as section 33, Lender's agreement that violations under 
the Regulatory Agreement will be treated as a default under the 
Security Instrument only when HUD requires Lender to do so and that 
Lender may accelerate the debt only upon the direction of HUD when 
there is a default under the Regulatory Agreement.
    12. Added a section that Lender agrees to require Borrower to keep 
the Mortgaged Property insured at all times.
    13. Added a section that Lender certifies that the insured loan 
does not violate usury laws.
    14. Added a section that Lender certifies that, if there is a sale 
or transfer of all or a partial interest in the Note or a change in the 
Service Provider, Lender shall ensure that Borrower is given notice of 
this change.
Multifamily Regulatory Agreement Changes
    1. Changed definitions of Fixtures, Mortgaged Property, Personalty, 
and Principals to be consistent with the Security Instrument 
definition.
    2. Changed definition of Elderly person to be consistent with the 
definition in the current Regulatory Agreement.
    3. Changed the definition of Mortgaged Property to add items (6) 
insurance policies and (16) deposits and escrows under collateral 
agreements.
    4. Subject to the additional change described below in item number 
21, changed the definition of Reasonable Operating Expense to include 
routine repairs.
    5. Changed definition for Rents.
    6. Added definition for Waste consistent with the Security 
Instrument.
    7. Added provision to section 13, ``Property and Operation; 
Encumbrances'' that Borrower must notify HUD of any bankruptcy filing 
or insolvency or reorganization or the retention of any attorneys, 
consultants, or other professionals in anticipation of such a filing 
(versus an absolute prohibition--HUD is merely giving them notification 
requirements), that Borrower must notify HUD of all payments received 
from an insurer and that tax penalties shall not be charged to the 
Project.
    8. Removed section 17.
    9. Added provision to section 23 (now designated section 22), 
``Management Agreement,'' that a management agreement cannot be 
assigned without prior written HUD approval.
    10. Changed section 26 (now designated section 25) to require that 
contracts for goods, materials, supplies, and services be obtained at 
costs, amounts, and terms that do not exceed reasonable and necessary 
levels and those customarily paid in the vicinity, and that the 
purchase price is based on quality, durability, and scope of work and 
shall be most advantageous terms to Project operation.
    11. Removed the third-party beneficiary provision from section 28 
(now designated section 27).
    12. Revised and combined sections 34, 35, 36, and 37 into one 
section.
    13. In section 37(k) (previously designated section 42(k)), changed 
the litigation costs from $25,000 to $100,000 and qualified its 
application to situations not funded by proceeds from professional 
liability insurance.
    14. Section 44 has been redesignated section 39, and previous 
section 44(g), allowing HUD under certain circumstances to direct 
Borrower to replace certain parties, has been removed.
    15. Changed section 46, now designated section 41, to revise 
references to personal liability of any entity or person and to provide 
for personal liability of listed Key Principals under the stated 
circumstances.
    16. In section 47, now designated section 43, removed language at 
end of section regarding tenant protection rights.
    17. Revised section I.1.a to define ``Affiliate,'' by cross-
referencing to the definition of ``Affiliate'' in 24 CFR 200.215(a).
    18. In section I.1.s, revised the definition for Non-Profit 
Borrower, to provide that the term means an entity that is treated 
under the firm commitment as an entity organized for purposes other 
than for profit or gain, pursuant to section 501(c)(3) or other 
applicable provisions of the Internal Revenue Code of 1986. This change 
responds to an informal public comment and recognizes that in most 
cases a borrower that meets the

[[Page 3549]]

requirements of the Internal Revenue Service (IRS) for not-for-profit 
entities will also meet HUD's requirements, but that there are some 
circumstances in which a not-for-profit entity will not be treated as a 
Non-Profit Borrower.
    19. In section I.1.w, revised the definition of ``Principal,'' to 
cross reference to the definition of ``Principal'' in 24 CFR 
200.215(e). This change is consistent with that made to the Security 
Agreement, discussed above.
    20. In section I.1.x, revised the definition for ``Project 
Assets''. This change responds to informal public comments and provides 
a clearer distinction between funds that are subject to HUD 
requirements and funds that are not.
    21. In section I.1.bb, revised the definition for ``Reasonable 
Operating Expenses'' to cross-reference Program Obligations.
    22. Revised section 11.c to clarify that the Borrower must provide 
for investment of Reserve for Replacement funds in accordance with 
Program Obligations. This change responds to an informal public comment 
stating that the Borrower does not have direct control over funds that 
remain in the possession of the Lender.
    23. In response to an informal public comment, revised section 
11(e) to clarify that the reference is to ``this Agreement'' and to 
remove the word ``charter.''
    24. Added a section 11.f to clarify that upon satisfaction of all 
HUD obligations, the Borrower shall receive any remaining Reserve for 
Replacement funds, so long as HUD has determined that all other 
obligations have been paid. This change responds to an informal public 
comment requesting that the disposition of such funds be clarified.
    25. Revised section 15 to provide that upon completion of all 
repairs, HUD may permit escrowing of Distributions, pending inspection 
of the Project.
    26. Revised section 22 to remove the requirement for management 
agreements to be approved in writing by HUD, but provides that they 
must be consistent with Program Obligations.
    27. Revised section 32(a) to permit the Borrower to exclude 
children in certain projects, in accordance with Fair Housing Act 
requirements and as approved in writing by HUD. This change responds to 
an informal public comment stating that the previous language seemed to 
prohibit housing designated exclusively for elderly persons.
    28. Revised section 37(j) to provide a non-exhaustive list of 
amendments to the organizational documents that require prior HUD 
approval, and to require copies of all amendments to the organizational 
amendments that must submitted to HUD within specified time frames. 
This change responds to an informal public comment suggesting that some 
changes to organizational documents are immaterial to HUD and should 
not require prior HUD approval.
    29. Revised and consolidated the signature block and certification 
so that the Borrower's principals are required to sign the Regulatory 
Agreement only once. Although HUD disagrees with an informal public 
comment that the certification serves to expand upon standard recourse 
carve-outs, HUD agrees that the signature block should be consolidated 
so that multiple signatures are not required.

    Note: 1. The reference to Healthcare Facility has been dropped 
from the title of the document.
    2. Added new section 8(d) regarding Borrower's obligation to 
indemnify under section 51, now designated section 49, of the 
Security Instrument.
    3. An alternative section 9(a)(1) has been added to provide that 
the prepayment lockout language will be included in a rider to the 
Note that will provide appropriate language for the particular 
transaction involved because it is not possible to include all forms 
of lockout provisions in the Note.
    4. Revised section 7, Late Charge, to provide that the late 
charge applies when the lender does not receive payment within 10 
days after the payment is due. The change responds to an informal 
public comment that suggested that standardizing the time when the 
late fee applies would facilitate compliance by Ginnie Mae issuers 
with their obligation to make payments to investors.

Request for Endorsement of Credit Instrument Changes
    I. Certificate of Lender:
    1. Redesignated section 14, in which Lender certifies that the 
insured loan does not violate usury laws, as section D.13.
    2. Removed section 28 related to off-site components and the filing 
of UCC financing statements.
    3. Redesignated section 32 as new section A.14.
    4. Redesignated section 33 as new section A.13.
    5. Redesignated section 34 as new section A.9.
    6. Redesignated section 35, which states that if the Security 
Instrument is assigned to HUD, HUD is not bound by the requirements of 
this document, as section A.12.
    7. Revised section 13 to reflect additional lender responsibilities 
and required representations related to UCC security interests, 
including performance of UCC searches and the perfection and 
maintenance of UCC security interests. The provisions have been removed 
from the Guide for Opinion of Borrower's Counsel to reflect that the 
Lender, rather than Mortgagor's counsel, is responsible for these UCC 
matters.
    8. Revised section 15 to remove the requirement for the Lender to 
notify HUD when it knows that the Borrower is not in compliance with 
Program Obligations with respect to Residual Receipts. The change 
responds to an informal public comment stating that the Lender is not 
likely to know whether or not the Borrower has deposited the correct 
amounts with the Lender.
    9. Revised section 38 to clarify the definition of Finance Charges.
    10. Added section 40, in which the Lender certifies that a 
perfected first lien security interest has been established in favor of 
the Lender and HUD.
    II. Certificate of Borrower:
    1. Removed sections 1, 3, and 5.
    2. Added a new section B.4 regarding UCC filings.
Security Agreement Changes
    1. Changed title from ``Multifamily/Health Care (Mortgage, Deed of 
Trust, or Other Designation as Appropriate in Jurisdiction) Assignment 
of Rents and Security Agreement'' to ``Multifamily (Mortgage, Deed of 
Trust, or Other Designation as Appropriate in Jurisdiction) Assignment 
of Leases and Rents and Security Agreement.''
    2. Replaced the term ``Directives'' with ``Program Obligations'' 
and provided a definition for ``Program Obligations.'' (Please see 
discussion of ``Directives'' and ``Principal Obligations'' earlier in 
this preamble.)
    3. Changed the definition of ``Mortgaged Property'', now designated 
section 1(y), to add insurance policies to section 1(y)(6).
    4. Added as section 1(y)(16) in the definition of ``Mortgaged 
Property,'' that all deposits and/or escrows held by or on behalf of 
the Lender under collateral agreements are part of the Mortgaged 
Property.
    5. Changed the definitions of ``Fixtures'' and ``Personalty'' to be 
consistent with the revised Article 9 of the UCC.
    6. Changed definition of ``Waste.''
    7. Changed section 6, ``Exculpation,'' to indicate that no personal 
liability is being imposed on Borrower except such judgment or decree 
as may be necessary to foreclose or bar Borrower's interest in the 
Mortgaged Property and all other property mortgaged, pledged, conveyed, 
or assigned to secure payment of the Indebtedness.

[[Page 3550]]

    8. Removed section 9 dealing with collateral agreements, moved text 
to section 7(c), and renumbered remaining sections.
    9. Added ``upon reasonable notice'' to the notice provision in 
section 14, which previously was designated as section 15.
    10. Revised the introductory language of section 15(b) (section 15 
was previously designated as section 16) to clarify that Borrower 
provides the listed information for review by Lender, added new section 
15(e) and redesignated section (e) as section (f), and redesignated 
remaining section accordingly.
    11. Removed section 20 (Management Contracts) and renumbered 
remaining sections.
    12. Added to section 23 (renumbered as section 21) new sections (d) 
and (e) to address ownership changes due to corporate restructuring and 
first-user syndications, respectively.
    13. Removed section 22(b)(5) (section 22 was previously designated 
section 24), which included bankruptcy as a Class B Event of Default.
    14. Removed from section 40, previously designated as section 42, 
the waiver of Borrower rights concerning disclosures of information.
    15. Removed section 51(b)(i) and (ii) (section 51 is now 
redesignated as section 48) and renumbered remaining sections. 
Additional changes to the environmental requirements in section 51, now 
redesignated section 48, are discussed in the responses to the public 
comments on these requirements that appear below in this preamble.
    16. In section 1, revised the definition of Principal to cross-
reference to the definition of this word in 24 CFR 200.215(e). This 
change responds to an informal public comment that expressed concern 
about uncertainty that might arise from inconsistent definitions.
    17. In section 2, updated provisions governing the perfection of 
security interests, in accordance revised Article 9 of the UCC.
    18. Removed section 4(f)(3), which set forth provisions that must 
be included in telecommunications leases. This change responds to an 
informal public comment stating that the conditions were too 
prescriptive, and allows approval of any proposed nonresidential lease 
to be considered by HUD on a case-by-case basis.
    19. Revised section 21 to permit the Lender to charge the Borrower 
a fee, in accordance with Program Obligations, for the Lender's 
increased responsibilities in reviewing a proposed transfer of physical 
assets. This change responds to informal public comments expressing 
concern that a Lender should not be expected to perform additional 
responsibilities without reasonable compensation.
    20. In response to informal public comment, clarified section 
22(a), by replacing the potentially confusing term ``grace period'' 
with the term ``period.''
Surplus Cash Note
    1. In response to an informal public comment, revised the 
introductory paragraph to provide for the possibility of semi-annual 
payment.
    2. In response to an informal public comment, revised paragraph 7 
to clarify that the Surplus Cash Note shall not be prepaid, except from 
non-Project sources and with written approval from HUD.
HUD Survey Instructions and Report Changes
    Changed reference to the land Title Surveys standards of the ALTA 
and ACSM from the 1999 version to the 2005 version.
Supplementary Conditions of the Contract for Construction
    Changed article 1.B.3(ii) regarding the required submission of 
payroll records without individuals' Social Security numbers and 
addresses. The change conforms to revisions to Department of Labor 
regulations at 29 CFR 5.5.
Additional Proposed Closing Document: Subordination Agreement
    HUD is also proposing to require a new Subordination Agreement on 
affordable housing transactions with government subordinate debt. The 
Subordination Agreement would replace the rider to the subordinate note 
that HUD presently uses. Use of a HUD-proscribed form of Subordination 
Agreement is consistent with the established practice in the wider 
lending industry and better protects HUD's security in the real estate. 
The Subordination Agreement contains specific conditions on allowing 
the subordinate debt in order to protect HUD's first lien security. The 
Subordination Agreement is more expansive than the Rider, and it 
addresses a variety of legal issues that arise in the relationship 
between senior and subordinate lenders. Finally, the Subordination 
Agreement is a recorded instrument that appears in the chain of title 
and is easily located and amended to accommodate unique loan issues 
that may be important to the subordinate lender and acceptable to HUD.

IV. Discussion of Public Comments

    The public comment period on the August 2, 2004, notice closed on 
October 1, 2004. HUD received 25 comments on the notice. Comments were 
received from law firms, mortgage companies, and industry 
organizations. In addition, five comments were submitted after the 
close of the comment period. Although submitted after the comment 
period, HUD reviewed these comments to determine whether issues were 
raised that had not been raised by the timely submitted comments.
    The following discussion presents the significant issues, 
questions, and suggestions submitted by the public commenters and HUD's 
response to these issues, questions, and suggestions. The discussion 
first addresses general comments, then comments that address particular 
documents. The section or paragraph of a document addressed by the 
comment is also identified. For consistency, the term ``section'' 
rather than ``paragraph'' is used throughout the discussion. This 
discussion addresses comments received in response to the closing 
documents when they were published for public comment on August 2, 
2004, but does not provide individual responses to informal public 
comments on the revised closing documents posted on June 1, 2009. 
Citations to specific sections of the closing documents in the 
summaries of public comments, below, refer to the versions of closing 
documents originally published for public comment on August 2, 2004. 
HUD's responses to the public comments below reflect the versions of 
closing documents currently posted on HUD's Web site. Section 
designations and substantive provisions may differ from versions of the 
closing documents previously published in the Federal Register; 
discussed in the August 31, 2006, Federal Register notice or at the 
September 21, 2006, public meeting; or posted on HUD's Web site on June 
1, 2009.
    As noted above in the discussion of HUD's August 31, 2006, notice 
and September 21, 2006, meeting, the Section 232 Health Care Facility 
documents will be published again for public comment. The comments 
received on the Health Care Facility documents will be discussed when 
these documents are published again for public comment.

General Comments

Comment Period
    Comment: While some commenters commended HUD for providing a notice 
and comment opportunity on the

[[Page 3551]]

revised documents, other commenters wrote that the 60-day comment 
period was not a fair and reasonable response time frame considering 
the magnitude of the changes proposed. Commenters asserted that there 
had been virtually no private sector discussion on matters that FHA 
must have known would raise serious industry concerns and expressed 
concern that while many of the changes may be appropriate, without 
careful coordination, there will be unplanned consequences and 
conflicts with existing HUD documents, many of which may be to HUD's 
detriment. Several commenters requested additional time for 
consideration of the documents and the submission of comments.
    HUD response: Since HUD is issuing revised closing documents once 
again for public comment and allowed for informal comment in 2009, the 
concern raised by the commenters is no longer relevant. Clearly, to 
date, HUD has provided more than 60 days to review revised closing 
documents. Nevertheless, HUD found this concern not to be accurate as 
applied to HUD's 2004 notice soliciting comment on revised closing 
documents. When HUD published revised closing documents for comment in 
2004, HUD's plans to revise these documents were already well known in 
the private sector for a considerable period of time before the 
publication of the 2004 revised documents. This was recognized by 
several commenters who noted, in their comments on the 2004 documents, 
the long gestation period for revised closing documents to be issued. 
As the preamble to the proposed revised documents published in 2004 
noted, HUD determined how the forms could be revised with input from 
HUD attorneys, FHA multifamily lenders, and counsel to parties to HUD-
insured transactions. Drafts of proposed revised closing documents were 
first posted on a HUD Web site at the end of March 2000, and comments 
were solicited from the public and industry representatives. In 
response to the many comments received at that time, significant 
changes were made to several of the draft documents, and those changes 
were incorporated in the proposed closing documents published for 
comment on August 2, 2004.
    With issuance once again of revised closing documents with a 60-day 
period to public comment, and given the opportunity in June 2009 to 
further comment on revised closing documents, HUD believes that the 
adequacy of opportunity to review and comment on revised closing 
documents should no longer be an issue. Given the breadth of the public 
comments received, it does not appear that any significant issue has 
been overlooked. With respect to the careful coordination of changes to 
the documents to avoid unplanned consequences and conflicts, HUD has 
strived to assure clarity and consistency throughout the documents. As 
part of this assurance, it is HUD's intent to undertake regular, 
periodic review of the documents to revise and update them.
Proposed Documents Contain Profound Policy Changes That Have Not Been 
Adequately Debated
    Comment: Commenters stated that the documents contain major and 
minor changes in policy and requirements; that there are dozens, 
perhaps hundreds, of changes not related to modernization. The 
commenters stated that certain regulations and several major closing 
documents are being so radically changed that successful, longstanding 
HUD policy and practice are being reversed with little or no 
justification and without apparent consideration for the practical 
impact on affordable housing production, lenders, borrowers, and 
residents. The commenters stated that there is little or no evidence 
that these changes are necessary to reduce the level of insurance 
claims and HUD's losses on claims, and that the tone created by the 
documents is one of great distrust. Other commenters stated that it may 
be the inadvertent result of trying to fit the Freddie Mac loan 
documents to the HUD programs, or a deliberate focus on the complete 
elimination of any risk to HUD without regard to the impact on the 
market. The commenters stated that if there is no difference between 
the programs of HUD and Government Sponsored Enterprises (GSEs), it 
could be argued there is no need for HUD programs at all.
    HUD response: The programs that HUD administers must be conducted 
in accordance with statutory and regulatory requirements that govern 
such programs, and in that way HUD's programs will always differ from 
the lending programs offered by private entities. One of the primary 
differences between HUD programs and those of private lenders is 
demonstrated by the opportunity for review and public comment on 
significant changes made to HUD programs, including changes that HUD 
makes after consideration of the comments before adopting changes in 
final rules.
    While HUD studied the Freddie Mac closing documents as a current 
and widely-used model, HUD's revised closing documents differ from that 
model. Within the parameters of its statutory and regulatory mandates, 
HUD's goal in revising its multifamily housing closing documents is to 
develop forms that are consistent with existing HUD administrative 
policy and that are also consistent with modern lending and credit 
enhancement practices. The forms currently in use and that are proposed 
to be replaced by the revised closing documents have not been changed 
in any significant fashion since the 1960s. The tone of distrust 
perceived by some of the comments may reflect, in part, the changes in 
lending practices over the more than 40 years since the documents have 
been revised. The issue from HUD's perspective is not one of trust or 
distrust, but recognition of responsible practices in which the 
reasonable expectations of the parties are informed by the transparency 
of the transaction, and in which obligations and outcomes are clear.
    Comment: Several commenters wrote that Fannie Mae and Freddie Mac 
regularly negotiate, modify, and waive certain provisions in their form 
documents, to tailor them to the deal at hand, and asked if HUD is 
equipped to negotiate these documents to any extent.
    HUD response: HUD is not a lending entity and does not negotiate 
directly with Borrowers. However, the revised closing documents are not 
absolute in their requirements. The documents often make reference to 
actions or events that are subject to HUD approval. Some documents also 
contain instructions about permitted transactional changes. To that 
extent, the documents provide a degree of direction with respect to 
modification or waiver.
Proposed Documents Add Significant Expense and Administrative Burden
    Comment: Commenters wrote that among many new obligations, the 
proposed modifications would require the mortgagee to notify HUD of 
Regulatory Agreement violations and to review Transfer of Physical 
Asset requests; the proposed Security Instrument would require the 
borrower to provide and the mortgagee to collect extensive books, 
records and financial data; the proposed modifications to the 
Regulatory Agreement would impose new categories of actions that a 
borrower cannot take without obtaining HUD approval; and the proposed 
modifications to the Escrow Agreement impose new responsibility upon 
the mortgagee for approving escrow advances. The commenters stated that 
these additional burdens are imposed without any mechanism for 
compensation for the added expense

[[Page 3552]]

and without any staffing increases at HUD. The commenters further 
stated that additional monitoring and processing requirements are not 
needed to protect or preserve the properties.
    HUD response: HUD has made a deliberate effort to include, in the 
revised closing documents, provisions that specify the oversight and 
diligence that a reasonable, prudent lender would observe in the usual 
course of business, that reflect current policy, and that do not add 
significantly greater burdens. As such, HUD is not requiring 
extraordinary measures that impose extraordinary costs, but is only 
memorializing good practice in a uniform template to provide clarity of 
expectation and a level playing field to all lenders.
    Comment: Several commenters wrote that they believed that current 
HUD staffing, structure, and resources are not adequate to accommodate 
the everyday demands and consequences of the proposed documents and 
regulations.
    HUD response: HUD has considered that there will likely be at least 
an initial increase in the demands upon its resources as a result of 
the revised documents and regulations, and will allocate the resources 
necessary to address them.
    Comment: The documents lack standards for HUD staff to apply in 
considering various approval requests.
    HUD response: HUD will apply the standards of reasonableness and 
good cause, as it does in considering regulatory waivers (see 24 CFR 
5.110). Where more particularized standards become necessary, HUD will 
provide for them in handbooks or regulations, as appropriate.
    Comment: Several commenters wrote that HUD insurance programs could 
well become solely an ``option of last resort.'' Increased operations 
oversight and regulation on unsubsidized projects will further 
frustrate profit-motivated owners and discourage use of the program. As 
the quality of the HUD portfolio diminishes, there will be a higher 
percentage of defaults.
    HUD response: HUD does not consider that any owners will be 
discouraged from participating in HUD's programs, particularly after 
the changes made to the revised closing documents in response to public 
comment. HUD expects that the resulting consolidation and 
simplification of requirements will not only encourage increased 
participation, but will result in better supervision of loans and a 
reduction in claims. In addition, as this preamble and changes to the 
revised closing documents reflect, HUD has responded favorably to 
numerous public comments. One of the main objections was in the area of 
the regulation of health-care facilities. As stated earlier in this 
preamble, HUD has separated those closing documents pertaining 
exclusively to health-care facilities from the rental housing documents 
for further analysis and later public comment.
    Comment: Commenters stated that potential borrowers like the long-
term, fixed-rate, non-callable programs at very competitive rates and 
limited recourse that HUD programs offer. Commenters stated that they 
are willing to tolerate nontraditional costs and impediments/irritants 
such as annual audits, extra origination expenses, restricted profit 
payments, inspections by HUD's Real Estate Assessment Center (REAC), 
management review, and inconsistent timeliness and processing 
requirements. The commenters stated that advantages of long-term, 
fixed-rate non-callable programs will be overcome by the detrimental 
consequences of the proposed recourse liability for Borrowers, 
Principals, and yet-to-be defined Key Principals; increased liability 
issues; increased potential for HUD micro-management; additional duties 
with no further remuneration; and the opportunity to be sued more 
often.
    The commenters stated that proposed changes will render HUD 
programs uncompetitive and unworkable for many Borrowers, including Low 
income Housing Tax Credits (LIHTCs) and nonprofit Borrowers, thereby 
reducing the number of new construction projects, which will 
drastically reduce the current job and tax base growth across the 
country.
    HUD response: Please see the immediately preceding comment and HUD 
response. As discussed above, HUD has determined not to include broad 
recourse liability in the revised proposed closing document but has 
retained recourse liability for certain ``bad boy acts.''
Residual Receipts and Nonprofit Sponsors
    Comment: No public purpose is served by limiting nonprofit sponsor 
access to project surplus cash, which discriminates against this sector 
and only makes nonprofit sponsor operations more confusing and 
problematic.
    HUD response: Consistent with current practice, a nonprofit entity 
may elect to be treated as a for-profit entity. Nonprofits may elect to 
utilize certain programs that are limited to nonprofit and/or limited 
distribution mortgagors because of the benefits provided to such 
mortgagors, e.g., 100 percent mortgages versus the 90 percent mortgages 
typically available to profit-motivated entities. An example of such a 
program is the section 221(d)(3) program (section 221(d)(3) refers to 
section 221(d)(3) of the National Housing Act). In section 221(d)(3) 
transactions, HUD must regulate such nonprofit entities to a greater 
extent than HUD regulates profit-motivated or general mortgagors. If, 
on the other hand, a nonprofit elects to utilize a program designed for 
profit-motivated or general mortgagors, e.g., the section 221(d)(4) 
program, the nonprofit would be regulated in the same fashion as the 
profit-motivated entity. In such instances, the nonprofit entity would 
be entitled to distributions under the HUD regulations. HUD has always 
added the caveat that nonprofits still would be subject to any Internal 
Revenue Service (IRS) regulations as to distributions.
HUD Directives
    Comment: A theme through most of the new closing documents is the 
requirement to comply with HUD ``Directives.'' At a minimum, commenters 
urged that HUD expressly limit the definition of applicable Directives 
to those that do not conflict with regulations in effect at the time of 
commitment issuance and establish a protocol to ensure that any such 
Directives are: (a) Developed with adequate notice and comment and (b) 
widely disseminated and published by HUD in a manner reasonably 
calculated to ensure that the entire HUD Multifamily Accelerated 
Processing (MAP) lender community, current and prospective borrowers, 
and the general public have affirmative notice. Commenters stated that 
mere posting of such proposals or changes on HUD's Web site would not 
be sufficient.
    HUD response: As discussed above under the heading of ``Across the 
Board Changes,'' HUD's use of ``Directives,'' now called ``Program 
Obligations,'' is defined in a manner to address the commenters' 
concerns and assure that adequate notice and comment is provided.
Definition of New Terms
    Comment: Several new and material terms (for example, 
``Directive,'' ``Affiliate,'' and ``Key Principal'') lack clear 
definition, which can result in uncertainty and unfairness.
    HUD response: As noted in the discussion of article definitions, 
HUD has revised many definitions in response to the public comments 
received. HUD will continue to clarify the terms used, as may be 
necessary, in

[[Page 3553]]

the course of HUD's periodic review of these documents.
Exhibits To Be Removed From Closing Checklist
    Comment: The following application exhibits should be removed from 
the HUD closing checklist, as redundant: HUD 2010; Title VI 
Certification; LIHTC Certification; Byrd Amendment Certification; 
Owner's Certification Regarding Architectural and Engineering Fees; and 
Identity of Interest Certification (other than HUD-93306M).
    HUD response: The HUD closing checklist was not one of the 
documents published in the Federal Register for notice and comment in 
2004, and it is not being published under this notice for comment. This 
is a document that is tailored to the needs of each closing.

HUD Multifamily Security Instrument HUD-94000M

State-Specific Components
    Comment: One commenter wrote that the necessary state-specific 
components of the Security Instrument also demand notice and comment. 
Another commenter asked if there are any provisions giving the 
beneficiary the right to appoint a successor trustee or requiring the 
borrower to receive, at the address shown in the Deed of Trust, a 
Notice of Default from the beneficiary.
    HUD response: The state-specific components are imposed by state 
law, not by HUD, and are not subject to HUD's notice and comment 
requirements. Similarly, the provisions that are the subject of the 
commenter's inquiry are governed by state law and would be covered, as 
necessary, by the state-specific components.
Section 1--Definitions
    Comment: The definition of Building Loan Agreement in section 1(b) 
should provide that references to the Building Loan Agreement may be 
removed if not applicable, for example, in refinancing transactions.
    HUD response: Redesignated Section 47 (section 50 in the proposed 
document), the only section of the Security Instrument in which the 
term Building Loan Agreement is used, has been qualified by adding, 
``(If Applicable)'' to the heading of that section. Therefore, a 
determination of whether the section applies will be made on a case-by-
case basis.
    Comment: A definition should be added for ``Business Day'' as ``any 
day other than a Saturday, a Sunday or any other day on which Lender or 
HUD is not open for business.''
    HUD response: Business Day is added as a new definition at section 
1(c) with a cross-reference to section 31, which includes the 
definition suggested by the commenter; it is the only section in which 
the term Business Day is used.
    Comment: A commenter wrote that under section 1(c), agreements of 
Lenders and Borrowers that are proprietary in nature should not be 
included in the definition of ``Collateral Agreement.''
    HUD response: HUD does not agree that proprietary, or any other, 
agreements should be excluded from the definition of Collateral 
Agreement, because HUD needs to have access to all documents to 
understand the risk that it is underwriting. The definition of 
Collateral Agreement has been moved to section 1(e).
    Comment: Collateral Agreement should be defined as ``any separate 
agreement between Borrower and Lender (excluding the Note, this 
Security Instrument and the Building Loan Agreement, if any) for the 
purpose of establishing and/or maintaining any reserves, escrows and/or 
funds that are required by Lender and/or HUD in connection with the 
Mortgaged Property (including, but not limited to, reserves, escrows 
and funds for repairs, replacements, improvements, off-site 
improvements, demolition, assurance of completion, working capital, 
minor moveable equipment, operating deficits, debt service reserves 
and/or sinking funds), as the same may be amended, modified, renewed, 
extended, replaced and/or supplemented from time to time.'' This 
definition better harmonizes with the scheme of insurance closings and 
documentation, and it is broadened to eliminate the need to identify 
specifically the agreements that are captured within this definition.
    HUD response: This suggested revision broadens the definition of 
Collateral Agreement by providing a greater number of examples of 
agreements that may be covered by the definition, but it also narrows 
the scope of the definition by limiting the covered agreements to 
reserves or escrows ``required by Lender and/or HUD.'' The current 
language is broader in scope in that it is ``not limited to those 
reserves and escrows required by HUD.'' The suggested revision is not 
consistent with the goal of full disclosure of, and approval for, all 
agreements executed in connection with the Mortgaged Property, which is 
necessary for HUD to make valid judgments about the risk it is 
underwriting. The original proposed language has, therefore, been 
retained.
    Comment: A definition should be added to state, ``Condemnation has 
the meaning ascribed thereto in section 22(a).''
    HUD response: HUD believes the term ``Condemnation'' is widely 
understood and thus unnecessary to define.
    Comment: A definition should be added to state, ``Contract of 
Insurance means the contract between the Lender and HUD whereby HUD 
insures the Borrower's repayment of the Loan to Lender pursuant to the 
National Housing Act, as amended, the Department of Housing and Urban 
Development Act, as amended, and all other federal laws and regulations 
pertaining to HUD's insurance of the Loan, all applicable Directives, 
and HUD's commitment to insure the Loan.''
    HUD response: HUD has added Contract of Insurance as section 1(g), 
with a cross-reference to section 3(e), which refers to the Contract of 
Insurance, ``as set forth in applicable HUD regulations.'' HUD 
considers this long-used reference to be sufficient to identify the 
Contract of Insurance for purposes of the Security Instrument.
    Comment: A definition should be added for ``Loan means the loan 
made by the Lender to Borrower in connection with the Mortgaged 
property which is evidenced by the Note and secured by this Security 
Instrument.''
    HUD response: A definition of ``Loan'' has been added as section 
1(u), which references ``the opening paragraphs of this Security 
Instrument,'' and a parenthetical reference to Loan has been added to 
the opening paragraphs following the space provided for entering the 
principal amount of the Loan.
    Comment: A definition should be added that ``Loan Application'' 
means the application for mortgage insurance made to HUD in connection 
with the Loan, together with all supporting exhibits, schedules, and 
reports.
    HUD response: ``Loan Application'' has been added as section 1(v) 
with a cross-reference to the definition in redesignated section 41, No 
Change in Facts or Circumstances, which was section 43 in the proposed 
Security Instrument. This definition references the Loan Application 
that is submitted by the Borrower to the Lender, not the Application 
for Mortgage Insurance that is submitted to HUD.
    Comment: The definition of Loan Documents should include ``the 
Building Loan Agreement, the Collateral Agreements, and any other 
documents executed by the Lender and Borrower to evidence or secure the 
Loan.''
    HUD response: The definition of Loan Documents continues to be 
limited to ``the Note, this Security instrument, and the Regulatory 
Agreement.'' These are

[[Page 3554]]

the only documents that HUD will permit to evidence or secure the loan. 
The Building Loan Agreement and Collateral Agreements relate to 
important aspects of the project, but the Note, Security Agreement, and 
Regulatory Agreement are the key documents that relate directly to the 
HUD-insured mortgage.
    Comment: A commenter wrote that the definition of Mortgaged 
Property at section 1(q) (redesignated as section 1(y) in the revised 
document) should expressly include all deposits and/or escrows held by 
or on behalf of the Lender under the Collateral Agreements.
    HUD response: HUD agrees, and has included escrows and deposits in 
the definition of Collateral Agreements as items included in the 
definition of Mortgaged Property at section 1(y)(16).
    Comment: A commenter wrote that in the definition of what is 
included in ``Mortgaged Property,'' section 1(q)(11), now redesignated 
as section 1(y)(11), must provide a carve-out of Surplus Cash and all 
syndication proceeds and partner contributions that are not part of the 
HUD insured loan.
    HUD response: HUD agrees, in part, with the comment. The definition 
of ``Mortgaged Property'' is deliberately broad to make resources 
available in the event there is an underwriting or asset management 
issue. However, to address the concerns in the comment, section 13(a) 
of the Regulatory Agreement has been revised to provide that ``Equity 
or capital contributions shall not include certain syndication 
proceeds, such as proceeds from Low Income Housing Tax Credit 
transactions used to repay bridge loans from members/partners of 
Borrower, all as more fully set forth in Program Obligations.''
    Comment: In the definition of ``Mortgaged Property,'' references to 
personal property (such as section 1(q)(11), now redesignated as 
section 1(y)(11)), should be moved to the definition of ``Personalty''.
    HUD response: HUD declines to make the suggested change. While 
there is some redundancy in listing individual examples of Personalty 
in section 1(y)(11) of the definition of Mortgaged Property, which also 
includes Personalty, generally, at section 1(y)(4), such repetition 
serves to underscore the intended wide breadth of coverage of the term 
``Mortgaged Property.''
    Comment: A commenter wrote that in section 1(q)(14), tenant 
security deposits that ``have not been forfeited'' should be changed to 
``have been forfeited.''
    HUD response: HUD disagrees. Tenant security deposits are funds 
that are held in trust on behalf of a tenant, so long as they have not 
been forfeited.
    Comment: Borrowers should be able to exclude capital contributions 
receivable and syndication proceeds receivable, listed in section 
1(q)(16), from the Mortgaged Property. To include these is a major 
policy change.
    HUD response: As noted above, the definition of ``Mortgaged 
Property'' is deliberately broad to make resources available in the 
event there is an underwriting or asset management issue, but HUD has 
removed ``certain syndication proceeds'' from being included as equity 
or capital contributions.
    Comment: The definition of Mortgaged Property should explicitly 
exclude surplus cash and related Borrower funds, which HUD has not 
traditionally viewed as Project funds.
    HUD response: HUD disagrees. Surplus cash has always been 
considered part of the Mortgaged Property until it has been disbursed.
    Comment: In section 1(q), a leasehold estate should be included in 
the definition of Mortgaged Property.
    HUD response: A leasehold estate is covered by the definition of 
``Land'' (which is redesignated as section (1)(q) in this final 
version) as ``the estate in realty described in Exhibit A'' and which 
appears as the first item listed under the definition of ``mortgaged 
property.''
    Comment: In the definition of ``Principals'' at section 1(t), if, 
for example, the Bank of America is a 25 percent limited partner in an 
LIHTC project, will each vice president be a principal?
    HUD response: HUD has replaced the definition of ``Principals'' 
with a cross-reference in redesignated section 1(dd) to the definition 
at 24 CFR 200.215(e). In accordance with the terms of the definition in 
the 2004 proposed Security Agreement and the definition at 24 CFR 
200.215(e), only vice presidents (or other officers) ``who are directly 
responsible to the board of directors'' would be Principals. HUD 
intends to update the definition at 24 CFR 200.215(e) through 
rulemaking.
    Comment: In section 1(t), the term ``Principal'' must be narrowed 
significantly to capture only those entities that have actual control 
over the project.
    HUD response: The persons listed in the definition included in the 
2004 proposed Security Agreement have authority for actual control and, 
therefore, are appropriately included as principals. HUD intends to 
update the definition at 24 CFR 200.215(e) through rulemaking.
    Comment: The definition of Property Jurisdiction should be changed 
to read, ``means the State in which the Land is located.''
    HUD response: HUD disagrees with the suggested revision, because 
the term Property Jurisdiction is used in the context of identifying 
the governing law for the documents, and governing law may include both 
local and state laws not preempted by federal law. HUD retains the 
definition of Property Jurisdiction in section 32(a) (redesignated as 
section 30(a) in this final document) with an added clarification that 
both state and local jurisdictions are relevant. The phrase, 
``jurisdiction in which the Land is located'' has been revised to read, 
``jurisdictions in which the Land is located'' to describe more 
precisely, the term `` Property Jurisdiction''.
    Comment: A definition should be added for Title Policy to read, 
``Title Policy means the policy of title insurance issued to the Lender 
contemporaneously with the closing of the Loan and insuring the 
priority of the lien of this Security Instrument.''
    HUD response: The term ``Title Policy'' is commonly understood in 
the field of real property transaction, and need not be defined in this 
document.
    Comment: Section 1(y)--The definition of ``waste'' is too broad, 
with no indication how it would be applied to Real Estate Assessment 
Center (REAC) scores.
    HUD response: The references to ``HUD requirements regarding 
physical condition standards for HUD housing'' in the definition of 
``waste'' are removed.
    Comment: There are no appeal rights provided for findings of 
``waste.''
    HUD response: HUD is not aware of any appeal right as an industry-
wide practice with respect to Security Instrument covenant violations. 
Such disputes would be governed by state law.
    Comment: In section 1(y), the definition of ``Waste'' should remove 
all references to financial obligations such as failure to pay taxes 
add a materiality standard in clause (1) add such language as ``in a 
manner customary for similar properties in the area in which the 
Mortgaged Property is located'' to clause (2) and limit clause (4) to 
failure to comply with 24 CFR 5.703.
    HUD response: A failure to meet financial obligations would impair 
the value of the Mortgaged Property, and must therefore be included in 
the definition of waste to protect HUD's interest. A materiality 
standard is added for failure to comply with covenants. A 
reasonableness standard is added to the obligation to maintain and 
repair the property. HUD is removing failure to comply with HUD 
requirements for

[[Page 3555]]

physical condition standards as a basis of waste.
    Comment: The definition of ``Waste'' should be removed.
    HUD response: A definition of Waste is necessary to provide all of 
the parties to the transaction with a common understanding of this 
significant term, which serves to preserve the Mortgaged Property over 
the term of the agreement.
Section 3--Assignment of Rents; Appointment of Receiver; Lender in 
Possession
    Comment: In section 3(c), imposition of personal liability is not 
acceptable.
    HUD response: This section is not an imposition of personal 
liability, but a representation and warranty that there had not been a 
prior assignment of rents.
    Comment: Section 3(c) will need to be revised in the event HUD 
permits any supplemental or subordinate loans (e.g., loans insured 
under Section 223(d) or 241).
    HUD response: A revision to section 3(c) would not be necessary in 
the circumstances described by the comment, because the parenthetical 
clauses in the section provide for exceptions in the cases of 
assignments and collections in connection with commercial transactions 
as ``approved by HUD.''
    Comment: In section 3(d), prior written approval by HUD of actions 
by Lender is impracticable. A Lender must be able to move quickly to 
preserve its collateral.
    HUD response: HUD's prior written approval to take control of the 
Mortgaged Property is required only in the event of a nonmonetary 
default. The remedy of taking control of the Mortgaged Property is not 
frequently exercised in the context of a nonmonetary default, and HUD 
must be consulted before such an extraordinary action can be taken to 
assure that HUD's interest is protected.
    Comment: In section 3(e), to the extent that this section 
exonerates a Lender for negligent or intentional acts, this provision 
will not be enforceable, and Borrower's counsel will take exception to 
it in the Opinion Letter.
    HUD response: Section 3(e) will be enforceable in accordance with 
its specific terms; otherwise, the Lender is released from liability 
``to the fullest extent permitted by law.''
Section 4--Assignment of Leases; Leases Affecting the Mortgaged 
Property
    Comment: In section 4(c), the term ``mortgagee in possession'' 
should be substituted for ``Lender in possession.''
    HUD response: HUD does not agree that the suggested change is 
necessary. The definition of Lender, now at section 1(s), provides that 
the Lender is deemed to be the Mortgagee.
    Comment: Section 4(e) should be revised to contemplate cooperating 
housing arrangements and other instances where flexibility to permit 
Leases with terms longer than 2 years might be desirable by including 
the following language at the end: ``If a Borrower is a cooperative 
housing corporation, association, or other validly organized entity 
under municipal, county, state or federal law, notwithstanding anything 
to the contrary herein, so long as Borrower is not in breach of any 
covenant of this Security Instrument, Lender hereby consents to the 
execution of Leases for terms in excess of two years from Borrower to 
tenant shareholders of Borrower, to the surrender or termination of 
such leases where the surrendered or terminated Lease is immediately 
replaced or where the Borrower makes best efforts to secure such 
immediate replacement by a newly executed Lease of the same residential 
unit to another tenant shareholder of the Borrower. However, no consent 
is hereby given by Lender to any execution, surrender, termination or 
assignment of a Lease under terms that would waive or reduce the 
obligation of the resulting tenant shareholder under such Lease to pay 
cooperative assessments in full when due, or the obligation of the 
former tenant shareholder to pay any unpaid portion of such 
assessments.''
    HUD response: The suggested revision is not necessary because of 
the flexibility provided in section 4(b), which states, in part: 
``Until Lender gives Notice to Borrower of Lender's exercise of its 
rights under this section 4, Borrower shall have all rights, power and 
authority granted to Borrower under any Lease (except as otherwise 
limited by this section or any other provision of this Security 
Instrument), including the right, power and authority to modify the 
terms of any Lease or extend or terminate any Lease.''
    Comment: Section 4(f) should specify that the requirements for 
approval of nonresidential leases apply after the date of execution of 
the Security Instrument.
    HUD response: HUD disagrees with the suggested revision. It is only 
a prudent business practice for the Lender and HUD to know the status 
of all nonresidential leases and consider whether or not they are 
acceptable prior to the execution of the Security Instrument.
    Comment: Section 4(f) should provide that consent of the Lender and 
HUD to modify, extend, or terminate a lease for nonresidential use is 
``not required for the modification or extension of non-residential 
Leases if such modification or extension is required under the terms of 
the Lease or is on terms at least as favorable to Borrower as those 
customary at the time in the applicable market and the annual income 
from the extended or modified Lease will not be less than the income 
from the Lease during the year prior to the effective date of the 
extension or modification.''
    HUD response: HUD does not agree with the comment because the 
suggested revision describes the kind of considerations the Lender or 
HUD would take into account in determining whether to approve a lease 
modification, but additional considerations may also be relevant in any 
particular case. Determining whether or not a lease modification 
satisfies the conditions in the suggested revision would itself be a 
form of approval review. As long as the Lender or HUD would still be 
undertaking a review of a lease modification, it would not be prudent 
for HUD to exclude any relevant considerations. This is not a new 
requirement, and HUD is not prohibiting modifications, extensions, or 
renewals, only prudently requiring that HUD's consent be obtained.
    Comment: A commenter asked whether HUD intends to deny applications 
for mortgage insurance if an existing lease does not meet the 
requirements of 4(f)(1) and the lessee refuses to amend its lease.
    HUD response: Generally, HUD will only approve applications that 
meet HUD requirements except in cases where HUD approves a waiver of a 
requirement.
Section 5--Payment of Indebtedness; Performance Under Loan Documents; 
Prepayment Premium
    Comment: A specific provision to require payment of Mortgage 
Insurance Premium (MIP) should be added to this section, since none of 
the Loan Documents specifically require it.
    HUD response: HUD disagrees with the comment. Section 7(a)(1) 
provides for the payment of MIP.
Section 6--Exculpation
    Comment: The proposed exceptions to Owner nonrecourse liability are 
not acceptable.
    HUD response: HUD has revised section 6 to indicate that no 
personal liability is being imposed on Borrower.

[[Page 3556]]

Section 7--Deposit for Taxes, Insurance, and Other Charges
    Comment: This section should be re-titled: ``Imposition Deposits; 
Application of Payments; Advances by Lender for Impositions.''
    HUD response: HUD does not agree that the suggested recommendation 
is necessary.
    Comment: The amount in section 7(a)(1)(ii) should be revised to ``* 
* * an amount equal to one-twelfth of ------ percent * * *'' with the 
blank filled in, since the mortgage insurance premium varies by 
program.
    HUD response: The amount in section 7(a)(1)(ii) refers to the 
service charge when the Note and Security Instrument are held by HUD 
rather than the mortgage insurance premium. This amount remains 
constant across FHA programs.
Section 8--Imposition Deposits
    Comment: A provision should be added that if the Note secured 
hereby (``Junior Note'') is junior in priority to a HUD-insured Note 
(``First Note'') where the First Note holder is collecting Imposition 
Deposits, collection of Imposition Deposits, other than mortgage 
insurance premium deposits on the Junior Note are waived for the period 
the First Note holder continues to collect such Imposition Deposits.
    HUD response: HUD agrees, in part, and has clarified section 8 so 
there should not be confusion with respect to the right of Lender 
regarding any securitization of imposition deposits.
Sections 8 and 9--Lender's Payment of Interest to Borrower
    Comment: Section 8 and section 9 both state, ``unless applicable 
law requires otherwise, lender shall not be required to pay borrower 
any interest, earnings or profits on the Imposition Deposits.'' Section 
11, Reserve for Replacement, of the Regulatory Agreement requires that 
the Reserve for Replacement ``be invested in interest bearing accounts 
or investments, and any interest earned on the investment shall be 
deposited in the Reserve for Replacement for use by the Project.'' This 
inconsistency needs to be resolved.
    HUD response: To resolve this inconsistency, the phrase, ``or as 
otherwise required by HUD,'' is added following, ``unless applicable 
law requires,'' in section 8. Section 9 has been removed.
Section 9--Collateral Agreements
    Comment: Section 9 is probably superfluous in light of the 
provisions of sections 7 and 8, and should be removed.
    HUD response: HUD agrees, and the text of section 9 is removed, 
with the remaining sections renumbered accordingly.
Section 10--Regulatory Agreement Default
    This section is now designated as section 9.
Section 13--Use of Property
    This section is now designated as section 12.
    Comment: This provision precludes a Borrower from establishing any 
condominium or cooperative regime with respect to the mortgaged 
property, if such use did not exist at the time the security agreement 
was executed. The provision should be removed so that this option 
remains available.
    HUD response: HUD has changed ``Unless required by applicable 
law,'' to ``Unless permitted by applicable law,'' so as not to preclude 
a change in use of the property, where permitted.
    Comment: This language should be changed to ``Unless required by 
applicable law and/or approved by Lender and HUD.''
    HUD response: As noted above, HUD has changed ``Unless required by 
applicable law'' to ``Unless permitted by applicable law.''
    Comment: Because there are certain instances in which the use of a 
portion of a Project may change following construction or 
rehabilitation, the first sentence should be qualified by adding 
``except as contemplated in the Loan Application.''
    HUD response: HUD recognizes that in some instances the use may 
change, and the document allows for changes in use, but only with the 
approval of the Lender and HUD. HUD does not agree with the suggested 
revision, which would allow changes in the use of the property without 
the approval of the Lender and HUD.
Section 14--Protection of Lender's Security
    This section is now designated as section 13.
    Comment: Section 14(a) should refer to obligations under the 
Security Instrument or ``any of the other Loan Documents'' to expand 
the list of references to Loan Documents under which the Lender may 
seek recourse to protect its and HUD's interests.
    HUD response: HUD does not consider that including a reference to 
the term ``Loan Documents'' would provide any additional protection of 
a Lender's security beyond the broad power already conferred in section 
14, now redesignated section 13, which extends to any action or 
proceeding that purports to affect the Mortgaged Property or the 
Lender's security and permits the Lender to take, with HUD approval, 
such actions as the Lender deems necessary. The term ``Loan Documents'' 
is defined in section 1(w) to include the Note, Security Instrument, 
and Regulatory Agreement, and redesignated section 13 references the 
obligations under each of these documents.
Section 15--Inspection
    This section is now designated as section 14.
    Comment: This section should provide for proper notice, except 
where there is an emergency or an Event of Default has occurred.
    HUD response: HUD has revised section 15, now redesignated as 
section 14, to provide for inspections ``upon reasonable notice.'' 
Inspections to determine compliance will be conducted in compliance 
with state law, which should address such concerns.
Section 16--Books and Records; Financial Reporting
    This section is now designated as section 15.
    Comment: The period for Borrower to furnish documents to Lender in 
section 16(b)(1) should be changed from 90 days to 120 days, to be 
consistent with Freddie Mac.
    HUD response: HUD has determined that the 90-day period should not 
be changed.
    Comment: The periods for Borrower to furnish documents to Lender in 
sections 16(b)(2) through (b)(4) should be limited to ``upon Lender's 
or HUD's request, but not more frequently than quarterly unless an 
event of default exists.''
    HUD response: HUD has not adopted the suggested revisions. It has 
not been HUD's experience that requests for financial records from 
Borrowers have been excessive or abusive, and HUD does not anticipate 
or condone the development of abusive practices in the future.
    Comment: The certification in section 16(c) should be ``to the best 
knowledge of such individual.''
    HUD response: HUD's purpose and expectation is that the 
certification reflects an active and critical review, more than a 
passive, general acknowledgement of documents, and for that reason does 
not adopt the suggested revision.
    Comment: This section and the corresponding provisions of the 
Regulatory Agreement should be revised so as to be consistent.

[[Page 3557]]

    HUD response: Such a revision is not necessary because the 
documents are not inconsistent. The Security Instrument is a Lender-
specific document and includes provisions that directly affect only the 
Lender.
    Comment: Requiring the Borrower to provide a list of all owners 
with any interest in the Borrower, directly or indirectly, is an 
unnecessary burden, and perhaps impossible. Consider the effect of 
including all the officers of a public company.
    HUD response: HUD is revising this provision to require only a list 
of persons or entities required to be identified by HUD's applicable 
previous participation requirements.
    Comment: Required certifications should be to the knowledge of the 
individual providing the certification.
    HUD response: HUD does not agree with this comment. The Lender and 
HUD are entitled to rely upon the accuracy of the required statements, 
schedules, and reports, and the authorized individual is in a position, 
and has an obligation, to confirm and certify the accuracy of these 
records.
    Comment: The proposed requirements go far beyond current 
requirements by including a statement of income and expenses for 
borrower's operation of the Mortgaged Property, a statement of change 
in financial position, a rent schedule, and an accounting of all 
security deposits, to be submitted to the Lender. What duties and 
obligations are imputed to the Lender by receipt of these documents? 
Such documents should be provided only upon Lender's or HUD's specific 
request.
    HUD response: The obligation to act in the manner of a prudent 
Lender is not a new requirement. The enumeration of specific documents 
to be provided to a Lender empowers Lenders to act prudently in 
performance of their contractual obligations and also does not permit 
Lenders to claim lack of access to pertinent information as an excuse 
for not performing their oversight duties. To remove any doubt and make 
this responsibility clear rather than imputed, the Security Instrument 
is revised to specify that Borrower is furnishing the documents ``for 
review by Lender'' and that Lender must report irregularities to HUD.
    Comment: At the current time, there is no requirement for Borrowers 
to deliver any of these documents to the Mortgagee. There is no 
necessity to have a recourse carve-out for a process HUD has already 
updated by having Borrowers file audited financial statements 
electronically directly to HUD and that HUD already monitors with 
various enforcement remedies.
    HUD response: While the recourse carve-out has been eliminated, the 
requirement to deliver documents to Lender is retained because Lenders 
do not have access to HUD's data.
    Comment: Lender should be allowed to charge a reasonable fee for 
collecting and reviewing any documents.
    HUD response: These activities are a normal part of servicing, and 
should not entail a separate or additional fee.
Section 17--Taxes; Operating Expenses
    This section has been redesignated section 16.
    Comment: Sections 17(a) and 17(b) should state they are also 
subject to the provisions of section 8(c).
    HUD response: HUD does not consider it necessary to include the 
reference to section 8(c) in redesignated sections 16(a) and 16(b), 
both of which are subject to section 16(c). Section 16(c) relieves the 
Borrower from the obligations imposed under sections 16(a) and 16(b) to 
pay impositions and expenses to the extent that sufficient Imposition 
Deposits are held by the Lender. Section 8(c) records the Lender's 
obligation to pay any bill or invoice received for an imposition from, 
and to the extent of, Imposition Deposits held by the Lender. The 
requirement that the Borrower's obligation to pay is relieved only to 
the extent of Imposition Deposits held by the Lender is present in 
16(c), and there is no need to reference section 8(c) too.
    Comment: In section 17(b), ``HUD approved operating budget'' should 
be removed, since there may not always be a HUD-approved operating 
budget.
    HUD response: Section 17(b) in the 2004 proposed Security Agreement 
(now redesignated section 16(b) in the revised proposed Security 
Agreement) creates no difficulties, since it refers to the HUD-approved 
operating budget, ``if any.''
Section 18--Liens; Encumbrances
    This section is now designated as section 17.
    Comment: Subjecting the Borrower to personal liability in the event 
a voluntary or involuntary lien is placed on the Mortgaged Property is 
unacceptable. A lien that might not be material should not 
automatically subject the Borrower to personal liability, and a 
Borrower should have the right to have personal liability removed if 
the new lien is cleared up.
    HUD response: HUD has modified the section to remove the reference 
to personal liability at the end.
    Comment: Inferior liens are not an Event of Default if approved by 
HUD and Lender. The exception should cover inferior or HUD-insured or 
HUD-held superior liens, because such liens may be in existence and 
will continue.
    HUD response: HUD agrees, and has revised the section accordingly.
Section 19--Preservation, Management, and Maintenance of Mortgaged 
Property
    This section has been redesignated section 18.
    Comment: The Borrower should not have the obligation under section 
19(c) to restore the Mortgaged Property when insurance proceeds or 
condemnation awards are not available to cover the costs of such 
restoration or repair. This is unfair and unreasonable.
    HUD response: HUD determined that it is appropriate to require the 
Borrower to restore the Mortgaged Property in order to protect the 
Lender's and HUD's interests in the property, especially since the 
Borrower is in the best position to ensure that adequate and 
appropriate insurance remains in place. However, HUD has revised 
section 19(c) to provide that HUD may approve an exception to this 
requirement if circumstances warrant.
    Comment: Section 19(e) requires the Lender to approve the property 
manager and management contract. Section 20 gives the Lender the right 
to terminate the management contract without cause. What is the purpose 
of giving Lender these new rights, and what standards is a Lender to 
apply in acting under these rights?
    HUD response: Section 19(e), redesignated as section 18(e), has 
been revised to provide that property management approval must be 
``consistent with HUD management certification and/or Program 
Obligations.'' Section 20 has been removed.
    Comment: Section 19(f) requires HUD to be notified of any action or 
proceeding purporting to affect the Mortgaged Property. Does HUD want 
to be inundated with notices of evictions, spurious counter-claims, 
minor slip and fall claims, etc?
    HUD response: HUD agrees, and in the phrase ``purporting to affect 
the Mortgaged Property'' in redesignated section 18(f) is changed to 
``which could impair the Mortgaged Property'' to limit the required 
notifications.
    Comment: A commenter stated that section 19(g) provides that 
Borrower shall not ``remove, demolish, or alter the Mortgaged 
Property'' without HUD approval. The commenter asked whether HUD wants 
to be inundated with permission requests to dispose of insignificant 
personal property or to make minor alterations to projects.

[[Page 3558]]

    HUD response: Section 19(g), redesignated as section 18(g), is 
revised to permit ``minor alterations which do not impair the 
security.''
    Comment: A commenter asked how HUD will define ``reasonable and 
necessary operating expenses.''
    HUD response: The definition of `Reasonable Operating Expenses'' 
from section I.1.bb of the Regulatory Agreement is incorporated by 
reference in the Security Instrument by the introductory paragraph of 
section 1. The document language is conformed in section 18(h) by 
removing ``and necessary.''
    Comment: Provisions in section 19 conflict with the Regulatory 
Agreement, and should be removed in favor of the Regulatory Agreement.
    HUD response: The language ``pursuant to the Regulatory Agreement'' 
is added in redesignated section 18 as appropriate for consistency.
Section 20--Management Contracts
    Comment: If there is no Event of Default, the Lender should not 
have the right to terminate a management contract without cause. 
Provisions conflict with the Regulatory Agreement, and they should be 
removed in favor of the ones in the Regulatory Agreement, which make 
HUD the regulator of management issues.
    HUD response: Due to such concerns, section 20 has been removed.
    Comment: This section should be divided into section (a), a new 
section to require management contract compliance with the Regulatory 
Agreement (RA) so long as the Security Instrument (SI) is insured or 
held by HUD, and section (b), to consist of the current text to allow 
for Lender control over the property manager issues if the SI is no 
longer insured or held by HUD.
    HUD response: Section 20 has been removed.
Section 21--Property and Liability Insurance
    This section is now designated as section 19.
    Comment: Section 21(a) should cover Fixtures and tangible 
Personalty in addition to Improvements.
    HUD response: HUD agrees that the term ``Improvements'' as used in 
section 21(a) and redesignated here as section 19(a), is too narrow for 
the intended purpose of ensuring adequate hazard insurance coverage. In 
the first sentence of 19(a), HUD has substituted for ``Improvements'' 
the term ``Mortgaged Property,'' which provides a wider scope of 
coverage and internal consistency within section 19(a), since 
``Mortgaged Property'' was already used in the third sentence of 
section 19(a). The term ``Improvements'' continues to be used in 
section 19(a) as the appropriate term for purposes of flood insurance.
    Comment: In section 21(b), a requirement that a Borrower deliver to 
its Lender the original or a duplicate original of a policy ``at least 
thirty days prior to the expiration date of any policy'' is 
impracticable, if not impossible. Insurers do not forward a new policy 
to their insured for days or weeks after renewal.
    HUD response: To address the concerns raised in the comment, HUD 
has revised redesignated section 19(b) by removing the requirement that 
Borrower deliver the insurance policy to Lender and by instead 
requiring the delivery of evidence of continuing coverage in form 
satisfactory to Lender.
    Comment: Section 21(b) should specify that the Lender is named as 
loss payee.
    HUD response: HUD agrees with the suggested revision, and 
redesignated section 19(b) is revised to require that the Lender, its 
successors, and assigns be named as loss payee.
    Comment: The current policy stipulating that HUD be listed as an 
additional insured should be retained.
    HUD response: As originally published, section 21(b) already 
provides that policies of property damage insurance must include a 
noncontributing, nonreporting mortgage clause in a form approved by 
Lender, and in favor of Lender and HUD, as their interests may appear. 
In addition to retaining this language, redesignated section 19(b) has 
been revised to require that the Lender, its successors, and assigns be 
named as loss payee.
    Comment: In section 21(g), any Lender discretion to apply insurance 
proceeds to the payment of indebtedness or to the restoration of the 
Mortgaged Property must be exercised reasonably.
    HUD response: The conditions in redesignated section 19(g) that 
limit the Lender's option to apply insurance proceeds to the payment of 
the indebtedness provide a standard of reasonableness for the exercise 
of the Lender's discretion.
    Comment: Section 21(g)(2) should include language that there will 
be sufficient funds to pay all amounts due under the Loan Documents 
during the Restoration period.
    HUD response: HUD does not agree with the suggested language 
because sufficient funds should be available in virtually all cases. In 
those cases where sufficient funds are not available, Lender would 
exercise its options under section 19(f) to use proceeds for either 
Restoration or payment of the Indebtedness in accordance with Program 
Obligations. Generally, insufficient funds would constitute an Event of 
Default under section 19(g)(1).
    Comment: A new section 21(g) should be added (current 21(g) to 
become 21(h)) to exclude HUD or Lender involvement for insurance claims 
arising from casualties up to $10,000 and to allow Borrower adjustment 
with Lender control of proceeds for claims arising from casualties 
ranging from $10,000 to $50,000.
    HUD response: HUD and the Lender may exclude themselves from 
involvement in particular instances, but need to do so on an informed 
basis because of the uncertainties that are inherent in casualty 
claims. For this reason, HUD declines to adopt the suggested revisions.
    Comment: In section 21, language should be added to clarify that 
mortgage payments are still due on time regardless of any insurance 
adjustments and generally to require the Borrower to provide such 
additional documentation as may be required to account for insurance 
proceeds.
    HUD response: There is nothing present in the document to suggest 
that any insurance adjustments affect the Borrower's obligation to pay 
the Indebtedness when due in accordance with section 5, and HUD does 
not consider clarification of that issue to be necessary. However, HUD 
is adopting the suggestion to require the Borrower to provide 
documentation to account for insurance proceeds and is adding to 
redesignated section 19(f) the sentence, ``Borrower shall notify the 
Lender of any payment received from any insurer.''
Section 22--Condemnation
    This section is now designated as section 20.
    Comment: In section 22(a), language should be added that the 
Borrower will reimburse and indemnify the Lender for expenses incurred 
or actions taken in connection with a Condemnation.
    HUD response: The remedy sought by the comment is provided under 
redesignated section 13, ``Protection of the Lender's Security,'' of 
the document. The expenses incurred by the Lender in connection with a 
Condemnation, permitted by section 13(a), would become part of the 
principal of the indebtedness and be immediately due and payable under 
section 13(b).
    Comment: Section 22(b) precludes the ability of the Borrower to 
provide one large principal payment to the Lender in the event there is 
an award of compensation under a condemnation.

[[Page 3559]]

Such payment to the Lender should be allowed.
    HUD response: Section 22(b), redesignated as section 20(b), does 
not preclude a large principal payment in the event of a compensation 
award, but explicitly allows condemnation awards to be applied to 
installments of principal. Condemnation compensation may be applied in 
large principal payments and to the outstanding Indebtedness in 
accordance with the amortization schedule in the Note.
Section 23--Transfers of the Mortgaged Property or Interests in 
Borrower
    This section is now designated as section 21.
    Comment: The extent of required HUD approval here greatly exceeds 
existing requirements, which already exceed those of Freddie Mac or 
Fannie Mac.
    HUD response: There is essentially no change in the requirements, 
other than to clarify and limit the scope of actions subject to HUD 
approval; two additional exceptions are added to redesignated section 
21: Corporate restructuring mergers when there is no change in control 
and first user syndication prior to final endorsement of the Note by 
HUD. To permit additional exceptions, the introductory clause, ``Unless 
permitted by Program Obligations,'' is added to redesignated section 
21.
    Comment: The list of transfers not requiring prior HUD approval 
should include: transfers pursuant to court decrees; leases of units in 
the ordinary course of business; dispositions of obsolete or 
deteriorated Personalty or Fixtures that are replaced by items of equal 
or greater quality and value; creation of mechanic's or judgment liens 
that are released or otherwise remedied to the Lender's satisfaction 
within 90 days after Borrower is notified of such lien; transfers of 
shares or any assignment of occupancy agreements or leases of a housing 
cooperative; and as otherwise specifically permitted under the Loan 
Documents.
    HUD response: Court decrees do not require approval pursuant to 
section 21(c); residential leases are not subject to approval; 
disposition of replaced Personalty or Fixtures is permitted under 
section 18(g); liens are subject to approval under section 17; housing 
cooperatives are governed by a cooperative agreement document, which is 
not relevant in this document; and if an assignment or lease is 
specifically permitted in another loan document, the specific 
requirement takes precedence over the general requirement.
    Comment: There should be an exception to obtaining HUD approval 
prior to the addition of a Principal for properties financed with 
LIHTCs, as currently allowed if the Principals (partners) are brought 
in between initial and final endorsement.
    HUD response: As noted in HUD's response to a previous comment, an 
exception for first-user syndication prior to final endorsement of the 
Note by HUD has been added to section 23, now designated as section 21.
    Comment: HUD has insufficient staff to handle all transfer 
requests.
    HUD response: HUD will allocate its resources as necessary to carry 
out its responsibilities.
    Comment: Imposition of personal liability for unauthorized 
transfers is not acceptable.
    HUD response: References to personal liability have been removed 
from redesignated section 21.
Sections 24 and 45--Two-Tiered Default Approach Will Hamper Ability To 
Minimize Losses and Damages
    Section 24 is now designated as section 22. Section 45 is now 
designated as section 43.
    Comment: The scope of Class B, which includes any failure of 
Borrower to perform any of its obligations under the Security 
Instrument, is too broad.
    HUD response: A standard of material failure of Borrower to perform 
any of the obligations under the Security Instrument has been added to 
narrow the scope of Class B Events of Default in redesignated section 
22.
    Comment: The distinction between Class A and Class B defaults 
places an unreasonable burden of oversight on the Lender, and exposes 
the Lender to litigation by creating a new contractual remedy for 
borrowers to contest the existence of any default.
    HUD response: The Lender's responsibility for prudent oversight of 
the loan, and the exposure to litigation resulting from the exercise of 
that responsibility, are always present, regardless of HUD's 
classification of, and procedures for, Class A and Class B defaults. 
Lenders should have no difficulty in distinguishing between a Class A 
monetary default and a Class B covenant default. To underscore the 
intended reasonable scope of the Lender's responsibility and to 
emphasize that HUD's focus is not on trivial events, a standard of 
materiality has been added in redesignated section 22 to qualify the 
kind of event that would constitute a Class B default. In addition, to 
address the litigation concerns expressed by commenters, and to 
mitigate a Lender's exposure to lawsuits under the Security Instrument, 
the statement in redesignated section 43, concerning a Borrower's right 
to bring an action to assert the nonexistence of an Event of Default, 
is removed.
    Comment: The changes deny the Lender its longstanding right to 
declare a covenant default and exercise its rights under the loan 
documents. The Lender's leverage over the Borrower is eliminated by 
inability to enforce covenant defaults, and will require HUD to handle 
directly all covenant defaults.
    HUD response: The change does not remove the Lender's right to 
declare and ability to handle directly a covenant default, but includes 
HUD, which has a substantial interest in the matter, in the decision to 
proceed. Because the interests of HUD and the Lender will not always 
coincide, HUD has determined it must assert the authority to concur in 
the declaration of a covenant default, to safeguard properly the public 
assets that HUD administers.
    Comment: If HUD retains its two-tiered default scheme, Lender 
should be able to declare a default and exercise all remedies for all 
defaults that involve nonpayment that significantly threaten the 
security of the Lender's collateral, including failure of payment, 
failure to maintain clear title, and failure to maintain insurance.
    HUD response: Section 22(a), which appeared as section 24(a) in the 
August 2, 2004, publication, defines a Class A Event of Default as, 
``Any failure by Borrower to pay or deposit when due any amount 
required by the Note or Section 7(a) or (b) of this Security Instrument 
within a grace period of thirty (30) days after the due date thereof.'' 
Section 43 (section 24(a) in the August 2, 2004, publication), which 
addresses acceleration and remedies, provides: ``At any time during the 
existence of a Class A Event of Default, Lender, at Lender's option, 
may declare the Indebtedness to be immediately due and payable without 
further demand, and may invoke the power of sale and any other remedies 
permitted by applicable law or provided in this Security Instrument or 
in the Note.'' A default that involves nonpayment, including failure to 
maintain insurance, which is specifically covered under section 7(a), 
would be a Class A Default that permits the Lender to exercise all 
remedies. Failure to maintain clear title, however, does not involve 
nonpayment but would be a covenant default, which is a Class B Event of 
Default. Lender action under a Class B Default is subject to prior HUD 
approval.
    Comment: If Lender makes an advance that Borrower does not repay, 
the Lender has no effective recourse.

[[Page 3560]]

    HUD response: The Lender has effective recourse against the 
Borrower under sections 8(a) and 13 (previously designated section 14), 
both of which make sums paid or advanced by the Lender on behalf of the 
Borrower a part of the principal of the Note, bearing interest from the 
date of payment and due and payable on demand. A Borrower's failure to 
repay then would be the basis for a financial, Class A default under 
current section 22(a).
    Comment: Section 45 requiring prior HUD approval before 
accelerating debt contradicts the intent of 24 CFR 207.256, that 
mortgagee must give HUD only notice of covenant defaults, regardless of 
whether the mortgagee has already accelerated the loan.
    HUD response: The rule at 24 CFR 207.256 addresses the notice that 
must be provided to HUD of a mortgagor's failure to comply with a 
covenant, even if such failure does not constitute a default. The cited 
section does not address the question of HUD approval before 
accelerating debt, which section 43, previously designated section 45, 
requires only for covenant defaults.
    Comment: HUD has not provided any criteria for approving a Class B 
default. Would HUD permit the Lender to foreclose on an aging property 
with a REAC score below 60?
    HUD response: As noted earlier, HUD has added a standard of 
materiality for Class B defaults. While HUD does not consider a low 
REAC score to be a trivial matter, HUD will consider each instance 
separately on a case-by-case basis in determining whether to approve a 
Class B default, and will create an administrative record to support 
HUD's decision. Among the elements HUD would consider is the record 
supporting the Lender's decision to accelerate the indebtedness.
    Comment: It would be beneficial to provide Borrowers more 
opportunity than currently available to avoid potential defaults, and 
the period when HUD would decide whether to approve an insurance claim 
could provide such an opportunity. But criteria for HUD approval, 
established after notice and comment, are necessary.
    HUD response: The requirement for HUD to approve covenant defaults 
would likely have the effect of providing Borrowers more opportunity to 
avoid potential defaults. Until experience provides a basis for HUD to 
formulate appropriate, generally applicable criteria, HUD will proceed 
on a case-by-case basis, as described above, when determining whether 
to approve a covenant default.
    Comment: Longstanding rights of Lender, such as right to consent to 
junior mortgages, are essentially eliminated.
    HUD response: Prior HUD approval for an encumbrance of the 
mortgaged property has been a longstanding requirement that is carried 
through into the new documents, leaving the Lender's rights essentially 
unchanged.
    Comment: Fannie Mae and Freddie Mac models allow mortgagee 
discretion to declare default and accelerate the loan. Current HUD 
documents and Fannie Mae and Freddie Mac impart waivers and consents on 
the Borrower's part with respect to certain actions by the Lender, 
which are important protections for the lender, HUD, and the security.
    HUD response: These important protections are preserved in section 
43, previously designated section 45, of the Security Instrument, which 
leaves at the Lender's option the acceleration of the debt and any 
other available remedies upon a financial default. The requirement for 
HUD approval before a Lender may take action upon a covenant default is 
intended to provide additional protection, particularly for HUD and the 
security. Section 43 also waives, on the Borrower's part, a judicial 
hearing prior to the sale of the property exercised by the Lender under 
the Agreement and entitles the Lender to collect all costs and fees 
incurred in pursuing remedies.
Section 27--Loan Charges
    This section is now designated as section 25.
    Comment: This section is not necessary since the Lender should be 
able to determine if the loan is usurious, and because the Lender and 
HUD require an opinion from Borrower's counsel to that effect. In rare 
instances where charges are usurious, the Lender should bear the 
consequences and the Borrower should have the right to recover costs 
and expenses in enforcing penalties.
    HUD response: Section 25 (previously, section 27) of the Security 
Instrument, as well as section 13 of the Note, direct the manner in 
which charges are to be reduced and allocated for achieving and 
determining compliance with laws that limit loan charges. These 
sections also direct how the excess charges paid by the Borrower are to 
be applied in those rare instances, as the commenter acknowledges, 
where loan charges are usurious. As such, these provisions provide 
additional clarity and guidance should this rare instance occur. The 
provisions, however, do not address the issue of recovery of costs.
Section 29--Waiver of Marshalling
    This section is now designated as section 27.
    Comment: It is inappropriate for HUD to have any input in the 
Lender's election of remedies following a default where the Lender has 
elected not to assign the loan.
    HUD response: As noted previously, the interests of HUD and the 
Lender often, but not always, coincide. In order to protect its 
interests from being adversely affected by action that may be taken by 
the Lender, HUD insists on such action being subject to HUD's rights 
and requirements.
    Comment: It is inappropriate to include provisions in the Security 
Instrument, such as section 29 (redesignated as section 27), that 
address the relationship between HUD and the Lender.
    HUD response: HUD disagrees that such provisions are inappropriate. 
Including provisions in section 27 and elsewhere that make certain 
actions subject to requirements of or approval by HUD, which is the 
insurer of the Loan, is appropriate to provide notice to all the 
parties of such requirements.
Section 31--Estoppel Certificate
    This section is now designated as section 29.
    Comment: There is no limit on the number of Estoppel Certificates 
that can be requested. They should be required of Borrower only at 
reasonable intervals.
    HUD response: HUD does not consider a limit on such requests to be 
appropriate, as a limitation would impair the rights of the Lender. HUD 
presumes the right would be exercised reasonably and not abused, but 
HUD will investigate allegations of abuse should they arise.
    Comment: No Borrower can give such a certificate until the loan 
documents are drafted to conform and remove conflicts.
    HUD response: One of the goals of publication, public review, and 
revision of the documents is to ensure their consistency. As discussed 
previously in this preamble, HUD will conduct periodic reviews of the 
documents and update them to maintain and improve consistency.
Section 32--Governing Law; Consent to Jurisdiction and Venue
    This section is now designated as section 30.
    Comment: Section 32(b) should add language to permit Lender and HUD 
to bring actions in any jurisdiction.
    HUD response: HUD declines to adopt this suggestion. Redesignated 
section

[[Page 3561]]

30(b), which identifies the Property Jurisdiction as the venue for 
bringing an action, is consistent with redesignated section 30(a), 
which identifies the law of the Property Jurisdiction as governing. The 
courts of the Property Jurisdiction are the most familiar with their 
own requirements and procedures and would be the most competent courts 
to apply those requirements and procedures necessary to resolve a 
controversy. Defining the governing law and venue also permits all of 
the parties to make plans and act on them with a reasonable expectation 
of how controversies will be resolved.
    Comment: A new Section 32(c) should be added to include a waiver by 
Borrower and Lender of right to trial by jury.
    HUD response: HUD declines to adopt, as a matter of HUD policy, the 
imposition of a jury trial waiver upon parties participating in its FHA 
mortgage insurance programs. This policy does not prevent parties from 
agreeing to such a waiver in a collateral agreement subject to HUD 
approval.
Section 35--Single Asset Borrower
    This section is now designated as section 33.
    Comment: This is more appropriately incorporated in the Regulatory 
Agreement.
    HUD response: HUD disagrees with this comment, because the Lender 
also has an interest in imposing and enforcing this provision.
    Comment: Language should be added to clarify that the infusion of 
cash from investors is ``additional property'' that may be owned by 
Borrower and that is not subject to restrictions applying to Project 
assets.
    HUD response: HUD does not permit any unapproved encumbrance of the 
Mortgaged Property. It is HUD's long-established position that any 
infusion of cash, secured or not, is a project asset that is subject to 
withdrawal restrictions.
Section 36--Successors and Assigns Bound
    This section is now designated as section 34.
    Comment: Language should be added to provide that upon assignment 
by Lender of its interest under the Security Instrument, Lender shall 
automatically be released from any and all obligations under the 
Security Instrument, and Borrower shall look solely to the assignee of 
the Security Instrument for the enforcement of any of Borrower's rights 
under the Security Instrument.
    HUD response: HUD does not agree that an assignment should operate 
as a hold harmless provision, particularly with respect to acts that 
are undisclosed or undiscovered at the time of assignment.
Section 38--Third-Party Beneficiaries
    This section is now designated as section 36.
    Comment: Section 38(b) should be modified to make HUD a third-party 
beneficiary of the Security Instrument.
    HUD response: At present, it does not appear that such a 
requirement is necessary to protect HUD's interest in the property, 
particularly in light of the adoption of the revised Regulatory 
Agreement. Additionally, HUD is not the lender, so it is not a 
beneficiary of the Security Instrument. HUD will reconsider this issue 
periodically when reviewing and updating the documents.
Section 42--Disclosure of Information
    This section is now designated as section 40.
    Comment: This provision is overly broad, since ``third party'' is 
not defined. It authorizes the Lender to give information to virtually 
any person.
    HUD response: In addition to being limited to the extent permitted 
by law, the disclosures authorized by section 42 are permitted only to 
third parties ``with an existing or prospective interest in the 
servicing, enforcement, evaluation, performance, purchase or 
securitization of the Indebtedness.''
Section 43--No Change in Facts or Circumstances
    This section is now designated as section 41.
    Comment: This language should be conformed to language in the Event 
of Default section, or cross-referenced to that section, and must 
contain a materiality clause.
    HUD response: Section 43, redesignated section 41, does address 
materiality, and requires that information be ``accurate in all 
material respects and that there has been no material adverse change in 
any fact or circumstance.'' As noted in the discussion of the comments 
that addressed section 24, a standard of materiality has been added to 
Class B covenant defaults.
    Comment: Language should be added that qualifies Borrower's 
certification of facts to be ``to the best of Borrower's knowledge.''
    HUD response: HUD does not agree with this comment. As noted in the 
response to a similar comment on section 16, redesignated as section 
15, the Lender and HUD are entitled to rely upon the accuracy of the 
required statements, schedules, and reports, and the individual 
authorized to certify to this information is in a position, and has an 
obligation, to confirm and certify the accuracy of these records. 
However, the certification is not absolute or focused on petty detail, 
but is qualified by a standard of materiality.
    Comment: The last sentence, ``The submission of false or incomplete 
information shall be a Class B Event of Default,'' should be removed.
    HUD response: HUD does not agree that the last sentence in 
redesignated section 41 should be removed. This section requires 
Borrower to certify that information submitted in, and in connection 
with, the Loan Application is complete and accurate in all material 
respects. A violation of this requirement would be a material failure 
of Borrower to comply with this obligation under the Security 
Instrument, which is included in the definition of Class B Event of 
Default at redesignated section 22(b)(3).
Section 45--Acceleration; Remedies
    This section is now designated as section 43.
    Comment: Waiting for HUD approval could jeopardize a Lender's 
security, and should not be required for Class B defaults.
    HUD response: HUD approval would not jeopardize the security, but 
would tend to safeguard it, because HUD is also concerned with 
preserving the security. Increasing the options for preservation of the 
security is one of HUD's motives in asserting authority to approve 
Class B covenant defaults.
Section 47--Remedies for Waste
    This section is now designated as section 45.
    Comment: The remedies listed create confusion regarding what are, 
or are not, events of default, and how they are determined.
    HUD response: Waste may be the basis for a default, or a remedy for 
Waste may be pursued independently of a default. If a remedy for Waste 
is sought without declaring a default, the remedies listed in section 
45, now designated as section 43, such as collection of all costs and 
expenses, would be available in addition to the remedies specified for 
Waste under section 47, now designated as section 45.
    Comment: Section (c) adds a very broad notion of valuation that 
opens the Borrower to interpretations of value, this increasing 
Borrower's exposure.
    HUD response: HUD disagrees with this comment. Rather than 
broadening the notion of valuation, section 47(c), now designated as 
section 45(c), limits recovery of damages to the extent that

[[Page 3562]]

the Waste has impaired the Lender's security. The effect of such a 
provision would be to narrow, rather than broaden, the Borrower's 
exposure to liability.
Section 50--Construction Financing
    This section is now designated as section 47.
    Comment: Construction financing does not apply to all programs, and 
this section should clarify under which programs this section applies.
    HUD response: Section 47 has been qualified by adding, ``(If 
applicable)'' to the heading of that section. The determination of 
whether the section applies will be made on a per transaction basis.
Section 51--Environmental Hazards
    This section is now designated as section 48.
    Comment: Section 51(f)(2) is confusing because it requires the 
Borrower to warrant to the Lender that no prohibited activities or 
conditions exist or have existed on the site. This warranty could not 
be made if the Borrower has identified such activities or conditions 
and has remedies or plans to remedy them. Section (f)(2) should read 
similarly to (f)(3), which provides for previous disclosures to the 
Lender, and should take into account remedies.
    HUD response: The concern of the commenters is addressed by the 
definition of ``Prohibited Activities or Conditions,'' which appears in 
section 48(b), previously designated section 51(b), and excludes 
``matters covered by a written program of operations and maintenance 
approved in writing by Lender.''
    Comment: The proposed language is overly detailed. The section 
should provide only that: (a) Borrower will comply with all applicable 
environmental laws; (b) Borrower will comply with any remediation plan 
required; and (c) Borrower will indemnify Lender and HUD for any 
environmental violations.
    HUD response: HUD considers the notice provided by the more 
detailed requirements of redesignated section 48 to be of more 
assistance in addressing and avoiding environmental risks that may 
endanger the Mortgaged Property than the very general language 
suggested by the commenter.
    Comment: This section is overly broad and complex, and 
unreasonable. Substantial reworking is necessary.
    HUD response: Section 48 has been revised to address such concerns. 
Sections previously designated 51(b)(i) and (ii), dealing with the 
presence, handling or transportation of Hazardous Materials on the 
Mortgaged Property, are removed, leaving the focus on noncompliance 
with Hazardous Materials Laws or Environmental Permits. Section 48(c) 
now specifies that the exclusion from ``Prohibited Activities or 
Conditions'' applies to supplies customarily used in the operation of 
multifamily properties, and that the exclusion for petroleum products 
used in motor vehicles also applies to motor-operated equipment. 
Section 48(e) is clarified by specifying that persons who must comply 
with the written program of operations and maintenance approved in 
writing by Lender (an ``O&M Program'') are those ``encompassed by the 
O&M Program.'' The introductory clause of section 51(f)(3) (as 
previously designated), ``except to the extent previously disclosed by 
Borrower to Lender in writing,'' is removed as redundant, since the 
last sentence of (f)(3) refers to previous disclosures by the Borrower.
    The language, ``to the best of Borrower's knowledge after 
reasonable and diligent inquiry,'' is moved to qualify all of section 
48(f)(6) and cover actions both pending and threatened. Communications 
of environmental, health, or safety matters subject to section 48(f)(7) 
are limited to those ``which have not already been resolved.'' Section 
48(k) on Borrower's indemnity obligation is revised to permit a 
transferee to assume a Borrower's environmental obligations and to 
remove the provision about presence of Hazardous Materials from 
coverage under section 48(k) as redundant. Section 51(n)(3) (as 
previously designated) is removed as inconsistent with HUD's decision 
to narrow the circumstances under which Key Principals are subject to 
personal liability.
    Comment: The indemnification provision is overly broad. Out of what 
funds (project funds, surplus cash, others) is the Borrower to 
indemnify?
    HUD response: The provisions of section 48(o), previously 
designated as section 51(o), explicitly provide that the covered 
indemnifications are at the Borrower's ``own cost and expense.'' The 
funds available for indemnification are those, such as surplus funds or 
distribution funds, that would be available to the Borrower after 
project costs have been paid.

Mortgagee's Certificate, HUD-92434M

    This document has been renamed ``Lender's Certificate.''
General Comments
    Comment: The term ``Mortgage'' should be changed to ``Security 
Instrument'' or ``Loan,'' as appropriate.
    HUD response: HUD agrees the language used throughout the closing 
documents should be consistent, and is replacing the term ``Mortgage'' 
with the term ``Security Instrument.'' The title of this document and 
usage throughout has been changed from ``Mortgagee's Certificate'' to 
``Lender's Certificate,'' to be consistent with the change from using 
the term ``Mortgagee'' to using the term ``Lender'' in all of the 
documents.
    Comment: In many places, the Certificate refers to attached 
documents. These documents are submitted separately at the closing, and 
attaching them is unnecessarily duplicative.
    HUD response: The requirement to attach certain documents is the 
current practice, which HUD intends to continue under the revised 
documents. Attaching the documents may be an inconvenience initially, 
but is an invaluable convenience subsequently when the documents need 
to be consulted or if an assignment takes place.
    Comment: The Mortgagee's Certificate should be reorganized (i.e., 
one section should list all amounts paid to HUD, another section should 
list all financing charges, and all sections dealing with various 
escrows should be consolidated).
    HUD response: HUD generally agrees with the comment and, while not 
adopting all of the suggested changes, had undertaken considerable 
restructuring from the existing Mortgagee's Certificate that is now 
being replaced by the Lender's Certificate.
Section 2
    Comment: HUD should insert clarifying language to the certification 
in section 2 that Lender certifies only ``to the best of its 
knowledge'' that all conditions of the Commitment have been fulfilled, 
since many conditions (in particular ``special conditions'' inserted by 
HUD offices) are HUD's responsibility.
    HUD response: HUD relies upon this certification to protect HUD's 
interests, and intends for Lender to have an affirmative duty to 
confirm that conditions have been met, consistent with its prudent 
servicing responsibilities. The certification has been clarified to 
cite specifically that all HUD-imposed work conditions have been met.
Section 3
    This section is now designated as section 4.

[[Page 3563]]

    Comment: ``For all cases involving construction advances'' should 
be removed since the Mortgagee's Certificate is only used for this type 
of loan.
    HUD response: HUD disagrees with the comment, because the 
Certificate applies more broadly and is used in construction loan 
transactions as well as in other transactions, e.g., insurance upon 
completion, and refinancing.
    Comment: Language that the Building Loan Agreement is between the 
Borrower and Lender should be added.
    HUD response: HUD does not consider the suggested limiting language 
to be necessary.
Section 5
    This section is now designated as section 6.
    Comment: Rather than an extension of the title policy for each 
insured advance, the alternative of current mechanic lien reports 
should suffice in a state where the insured loan has continued priority 
over liens.
    HUD response: HUD finds the current practice of extending the title 
policy for each insured advance to be uniform and reliable regardless 
of specific state requirements and exceptions and for that reason will 
continue the practice.
    Comment: For Multifamily Accelerated Processing (MAP) loans, 
interim advances are not submitted to HUD prior to disbursement and HUD 
does not approve interim advances, so language reading ``if required'' 
should be added. The same comment applies to advances under section 21.
    HUD response: HUD agrees with the comment and has revised 
redesignated section 6 to provide that applications for insurance of 
advances shall be submitted if and as required. Section 21 has been 
revised to apply to loan advances, if required.
    Comment: In the third sentence, language should be changed from 
``extension'' to ``endorsement.''
    HUD response: Extension is used in a broader, generic sense in the 
third sentence of redesignated section 6 to cover legal obligation of 
the title company to insure the advance. To clarify this intent in the 
document, language is added to identify the referenced title policy as 
insuring Lender and HUD.
    Comment: Language that excepts the ``liens of taxes and assessments 
not delinquent'' from the priority of the Security Instrument should be 
added.
    HUD response: HUD agrees with the comment, and has added ``tax 
liens not delinquent'' to exceptions to the priority of the Security 
Instrument.
Section 6
    This section is now designated as section 7.
    Comment: The language, ``The changes enumerated below are included 
in mortgage proceeds and will be disbursed by the Lender at such time 
as is approved by HUD,'' should be changed to, ``The changes enumerated 
below have been paid or will be paid promptly following the date 
hereof.'' Some or all of these amounts may be paid from sources other 
than mortgage proceeds and not necessarily at a time approved by HUD.
    HUD response: HUD agrees with the reason provided in the comment, 
but rather than adopt the suggested language, HUD is returning to the 
language of the current Mortgagee's Certificate, which is being 
replaced by this Lender's Certificate. This language, which refers to 
charges that have been collected in cash or will be so collected not 
later than the date of initial endorsement, provides a more definite 
time frame for payment than the term ``promptly'' does.
    Comment: The enumerated charges are not included in mortgage 
proceeds but rather in the Total Estimated Development Cost.
    HUD response: Consistent with the revision described in the 
preceding comment, HUD is removing the reference to mortgage proceeds.
    Comment: Title and recording expenses should be removed, since they 
are costs that are not paid to or collected by Lender.
    HUD response: The Lender is in the best position to collect these 
expenses, and this has been a longstanding HUD requirement.
    Comment: Third-party contractor fees should be removed because they 
are typically included in the ``other fees'' or ``organizational 
costs'' line items in the form HUD-92264, and draws from loan proceeds 
to pay or reimburse third-party contractor fees must be supported by 
invoices. Invoices are not required to draw loan proceeds for financing 
charges and HUD fees.
    HUD response: The Lender is in the best position to collect these 
expenses, and this has been a longstanding HUD requirement.
Section 7
    This section is now designated as section 8.
    Comment: An option to disclose a demolition escrow should be added.
    HUD response: HUD has added a new subsection (iv) to section 9(a) 
in order to list other escrows, e.g., demolition.
    Comment: This section should state that working capital deposit 
funds may not be used for any other purpose than in accordance with the 
Escrow Agreement, unless the Lender obtains the prior written approval 
of HUD.
    HUD response: HUD has made an editorial change to redesignated 
section 8 to use specifically the term, ``Escrow Agreement for Working 
Capital.''
Section 8
    This section is now designated as section 9.
    Comment: This section should recognize and provide for a portion of 
the over-and-above money that may consist of eligible costs paid by or 
on behalf of Borrower prior to initial closing.
    HUD response: HUD does not consider it appropriate to list as 
escrows and deposits under the Lender's Certificate costs paid by or on 
behalf of Borrower without going through Lender.
    Comment: The amount of the governmental funding source escrow 
should be specified as 10 percent of the grant/loan proceeds being 
provided by the applicable governmental sources.
    HUD response: HUD agrees, and the Lender's Certificate specifies 10 
percent of the proceeds provided by the governmental source.
    Comment: The offsite escrow language should be moved to section 9 
with other offsite items.
    HUD response: HUD considers the offsite escrow agreement, now 
specifically cited in redesignated section 9 as the Escrow Agreement 
for Off-Site Facilities, to be more appropriately included together 
with other escrows in section 9.
Section 9
    This section is now designated as section 10.
    Comment: In addition to the offsite escrow, a demolition escrow 
provision should be added to this section. Demolition escrows are more 
common than several other escrows included in the Mortgagee's 
Certificate.
    HUD response: Neither the original Mortgagee's Certificate nor the 
new Lender's Certificate specifically addresses demolition activities. 
An additional escrow to address demolition is permissible within the 
scope of the Lender's Certificate, and should be listed under section 
9(a)(iv) in the space provided.
Section 11
    This section is now designated as section 12.
    Comment: The outdated reference to bearer bonds should be removed.
    HUD response: HUD agrees, and the reference to bearer bonds has 
been removed.

[[Page 3564]]

Section 14--Reserve for Replacements Fund
    Comment: The permissible investment of funds is narrower than what 
is currently permitted.
    HUD response: HUD has revised this section to allow other 
investments as approved by HUD or permitted by Program Obligations.
    Comment: The Borrower should be obligated to provide IRS form W-9 
and other documents required by the Lender to facilitate investment.
    HUD response: HUD declines to impose the suggested requirement upon 
Borrower in the context of the Lender's Certificate, but Lender may 
independently require Borrower to provide this information without a 
HUD requirement.
    Comment: Since Lenders often administer thousands of escrows, the 
Lender should have the right to approve and/or select investments.
    HUD response: HUD considers it necessary to review and approve 
investments other than obligations of, or guaranteed by, the United 
States, in order to ensure that HUD's interests are protected. The 
investment administration experience of the Lender and the type of 
investment will be among the factors HUD will consider in determining 
whether to approve another form of investment.
    Comment: HUD should specify the amount to be withdrawn, and if HUD 
fails to do so, the Lender should make an allocation as it deems 
appropriate.
    HUD response: The suggested procedure is the current practice under 
form HUD-9250, which HUD intends to continue following.
    Comment: Deposits into the Reserve for Replacement should be cash 
rather than U.S. Treasury securities, since there is no provision in 
the Regulatory Agreement that provides for the deposit of Treasury 
securities.
    HUD response: HUD disagrees with the comment. Section 11.a. of the 
Regulatory Agreement specifically permits investments in Treasury 
securities.
Section 15--Residual Receipts Fund
    Comment: The responsibility for maintaining and administering the 
Residual Receipts accounts should remain with the Owner and not be 
shifted to the Lender.
    HUD response: Section 15 does not shift any responsibility, but 
maintains the status quo. It has been a longstanding requirement that, 
with the exception of Section 202 project Owners, all project Owners 
are required to deposit Residual Receipts with their Mortgagees/Lenders 
(see, for example, Chapter 25, Residual Receipts, of Housing Handbook 
4350.1, Multifamily Asset Management and Project Servicing).
    Comment: Given the nature of current HUD programs, very few 
projects funded with new loans will likely have residual receipts 
accounts.
    HUD response: Section 15 of the Lender's Certificate refers to 
cases where a Residual Receipts account is required under the 
Regulatory Agreement. Section 12 of the Regulatory Agreement requires 
Section 221(d)(3) and 231 Non-Profit, Public Body, and Limited Dividend 
Borrowers to establish and maintain a Residual Receipts account.
    Comment: Deposits into the Residual Receipts Fund are not fixed as 
to amount or date, and therefore, the Lender will not know whether or 
not the proper amount has been received within the specified time 
frame. Language should be added to require the Lender to review the 
Project's annual financial statements and then notify HUD if a required 
deposit has not been made within 45 days after Lender's receipt of the 
annual statement.
    HUD response: HUD agrees, in part, with the comment, and has added 
language to redesignated section 15 of the Security Instrument to 
provide explicitly that Lender is to review financial information that 
Borrower is required to provide Lender within 90 days of the end of 
Borrower's fiscal year. Based upon this review, Lender should be able 
to determine if Borrower has complied with Residual Receipts 
requirements. Rather than requiring Lender to report any noncompliance 
of Borrower within a specific time frame, such as 45 days, section 15 
of the Lender's Certificate now requires reporting of Borrower's 
noncompliance when known to Lender.
    Comment: Language allowing withdrawals pursuant to the Regulatory 
Agreement without HUD's permission should be removed, since under the 
Regulatory Agreement, HUD's approval is required to make distributions 
from the Residual Receipts account.
    HUD response: HUD agrees with the comment, and the reference to 
withdrawals pursuant to the Regulatory Agreement is withdrawn.
    Comment: Language should be added permitting the investment of 
funds in interest-bearing investments.
    HUD response: HUD agrees with the comment and has added language 
permitting other investments approved in writing by HUD.
    Comment: The last sentence requiring notification to HUD of ``any 
irregularity'' is vague and should be removed. The Lender is already 
required to notify HUD of any shortfall or of any known violation of 
the Regulatory Agreement.
    HUD response: The language of the last sentence of section 15 has 
been clarified by replacing the term ``irregularity'' with the phrase 
``noncompliance with Program Obligations.''
Section 19--Insurance Policies
    Comment: It is inappropriate for the Lender or HUD to be named as a 
``loss payee'' on policies other than property insurance. Such 
insurance as general liability, professional liability, and worker's 
compensation involve defending claims against the Borrower, and 
payments are made to claimants, not to lenders. The Lender and HUD 
should be included as ``additional insureds.''
    HUD response: HUD agrees that it is not appropriate for Lender or 
HUD to be named as loss payees on policies other than property 
insurance where payments are made to claimants. The language ``where 
applicable'' has been added to section 19 to qualify the types of 
insurance where Lender is to be named as a loss payee.
    Comment: In Housing Notice H-92-76, pertaining to ``Directors and 
Officers Liability Insurance versus Indemnification by the 
Corporation,'' issued September 30, 1992, HUD determined that HUD not 
be named as a loss payee on property insurance policies. HUD will be 
included as a payee on settlement checks if it is named as a loss 
payee, and obtaining HUD endorsement of settlement checks is an 
unnecessary burden on the Borrower, the Lender and HUD staff. Naming 
HUD an insured is contrary to current HUD policy and would imply HUD's 
participation in the inspection and funding of claims.
    HUD response: HUD agrees with the comment, and HUD has been removed 
as a loss payee under section 19.
Section 20--Financing Charges
    Comment: Language should be added based on HUD's existing policy 
set forth in the Map Guide at section 12.1.6.D.3c, to reflect that most 
loans made today are ``unitary loans.''
    HUD response: HUD does not consider any additional language to be 
necessary to take into account the cited policy.
    Comment: The circumstances in which Lender may impose 
administrative fees and charges should be expanded, since the greater 
burdens on Lender should appropriately be passed on to Borrower.

[[Page 3565]]

    HUD response: HUD does not consider the revised documents to impose 
any additional obligations upon Lender that are over and above current 
obligations and that would not be ordinarily exercised in the prudent 
conduct of Lender's business.
    Comment: Section 20(e) should be amended to reflect that costs of 
issuance are not collected by Lender, but paid by Borrower from loan 
proceeds or other funds.
    HUD response: In order to better protect HUD's interest, HUD wants 
all costs of issuance to pass through Lender. To clarify this intent, 
HUD has added language to section 20(e) to provide that Lender not only 
collects, but also distributes from loan proceeds amounts to cover the 
costs of issuance.
    Comment: Sections 20(h) and (i) are unnecessary and should be 
removed.
    HUD response: The subsections in section 20 are to be checked and 
completed as they are applicable to the transaction. As noted 
previously, the full disclosure of financing arrangements that HUD 
seeks is necessary to protect HUD's interests.
Section 23--Letter of Credit
    Comment: The requirement that Lender notify an Issuer that its 
letter of credit might be drafted is unnecessary and potentially gives 
the Issuer an excuse not to do what it is otherwise legally required to 
do.
    HUD response: HUD agrees with the comment and accordingly is 
removing section 23(d).
    Comment: The Lender should have the right to negotiate with the 
sponsors and others for recourse against parties other than Borrower if 
the issuer of a letter of credit fails to fund, and reference to ``any 
sponsor, the general contractor or the architect'' should be stricken.
    HUD response: HUD's intention is to ensure the availability of an 
unconditional, irrevocable letter of credit and for that reason it does 
not agree with the comment.
Section 24--Extension of Election To Assign
    Comment: The language in this section is not consistent with the 
proposed change to 24 CFR 207.258.
    HUD response: HUD agrees with the comment, and section 24 is 
revised to refer to procedures set forth in the Contract of Mortgage 
Insurance. HUD plans to make a conforming change to 24 CFR 207.258.
    Comment: ``Participation certificates'' should be included in this 
section to clarify that this commonly used arrangement is subject to 
Sec.  207.258.
    HUD response: HUD considers the current language of section 24 to 
be broad enough to encompass the arrangement described in the comment.
Section 26
    Comment: The language should be changed to state that no portion of 
the amounts included in the Loan for the Borrower's attorneys' fees has 
been paid to the Lender or its employees.
    HUD response: HUD agrees with the comment, and language has been 
added to section 26 to address the concerns raised.
Section 27
    Comment: Language should be added that would limit the 
certification to funds ``except as disclosed in this Certificate (for 
example, funds held in connection with a tax-exempt bond transaction to 
satisfy rating agency requirements)'' and held ``by or at the order of 
Lender.''
    HUD response: HUD agrees in part with the comment, and has added 
language to limit the certification to all funds, escrows, and deposits 
specified in the Certificate and any and all other funds held by or at 
the order of Lender in connection with the Loan transaction covered by 
the Certificate.
Section 28
    Comment: There is no reason to restate in the Mortgagee's 
Certificate HUD's requirements related to components stored off-site. 
Advances for this purpose are extremely rare.
    HUD response: HUD considers it appropriate to include in the 
Lender's Certificate those requirements that apply specifically to the 
Lender, such as those referred to by the commenter.
Section 29--Changes in Forms
    Comment: The process described in this section is cumbersome and 
confusing.
    HUD response: HUD does not consider the requirement to attach a 
memorandum listing changes and modifications to the documents to be 
overly burdensome. The listing of items that are not considered to be 
changes and modifications is intended to make the process even less 
burdensome, but if there is any uncertainty or confusion as to whether 
any particular item is a change, the simple resolution is to err on the 
side of inclusion. HUD must control the form and consistency of the 
documents to present a level playing field to applicants for insurance 
and to protect HUD's interest.
    Comment: The effective date of each form should be included to 
provide a basis for determining the version of each document that was 
used.
    HUD response: Although HUD does not consider the practice 
recommended by the comment to be necessary, because whatever documents 
are used will comprise the loan package for any particular transaction, 
each form will include the paperwork approval expiration date. The 
paperwork approval must be renewed, generally every 3 years, and the 
documents will include the new expiration date following each renewal. 
The latest version of HUD documents will be available from HUD on HUD's 
official Web site (http://www.hudclips.org or a successor location to 
that site).
    Comment: Language relating to ``no changes'' made to HUD's form 
documents should be replaced with whether ``material changes'' have 
been made to such documents.
    HUD response: HUD does not agree with the comment. HUD considers 
the listed exceptions (filling in blanks, attaching exhibits or riders, 
deleting inapplicable provisions, or making changes authorized by 
applicable Program Obligations) to what is included in changes and 
modifications that must be approved by HUD to provide more specific and 
definite guidance than the use of the term ``material changes.''
    Comment: All material changes in the documents should be identified 
by the use of type styles and strike-through that allow all parties to 
easily identify changes.
    HUD response: HUD agrees that all changes, with the exceptions 
noted in section 29, must be identified, but does not consider it 
necessary to specify the method of identification.
    Comment: An Exhibit should be attached to the Lender's Certificate 
that would contain a list of all HUD closing forms and indicate for 
each form: (1) Whether or not the form has been submitted and (2) 
whether or not there have been material changes to the form.
    HUD response: HUD has no objection to Lender preparing a list as 
described in the comment, but HUD does not require and will not accept 
such a list.
Section 30--Lender Violation Notification to HUD
    This section is now designated as section 33.
    Comment: Lender faces a risk of violating this provision if it does 
not report a possible violation that is unclear, or Lender may be 
liable to the Borrower if the Lender reports a possible violation if it 
turns out not to be one.

[[Page 3566]]

    HUD response: Lender is required to report only the facts and 
circumstances that appear to be violations, consistent with prudent 
servicing responsibilities. HUD, not Lender, makes the determination of 
whether or not a violation is actually present.
    Comment: A Lender should be required to advise HUD only of 
material, uncured violations of the Regulatory Agreement by a Borrower. 
Does HUD want to know if a replacement reserve deposit is not received 
on the first day of the month if it is received by the 15th day?
    HUD response: The comment appears to assume more responsibility 
than the requirement is intended to impose. Upon receiving Lender's 
report of the facts and circumstances noted by Lender, HUD will make 
the determination of whether a violation is present, and whether it is 
material. There is currently a reporting requirement in place for 
delinquencies, which is not changed by this section.
    Comment: Lender is not a party to the Regulatory Agreement and 
should not be responsible for reporting violations to HUD.
    HUD response: While Lender is not a Regulatory Agreement party, as 
noted in the comment, the Regulatory Agreement is incorporated into the 
Security Instrument, to which Lender is a party. It is within the 
ordinary course of Lender's responsibility to monitor its Borrower, and 
Lender has greater contact with Borrower and knowledge of Borrower's 
activities than HUD. If, in the course of its routine monitoring and 
contact with Borrower, Lender becomes aware of acts or omissions that 
do not appear to conform to the Regulatory Agreement, HUD expects 
Lender to advise HUD of the situation so that HUD can take appropriate 
action.
    Comment: Lender staff should not be expected to know and understand 
the complex and extensive legal obligations of the Borrower and, if 
applicable, the lessee. It is possible that the Lender's servicing 
staff may be aware of the facts that constitute a violation, but not 
know that those facts constitute a violation.
    HUD response: HUD expects that Lender staff is at least familiar 
with the terms of the documents that underlie Lender's transactions and 
protect Lender's interests, and would recognize issues that could be 
referred to more expert Lender staff for additional consideration and 
guidance.
    Comment: What is HUD's capacity to respond to such notices?
    HUD response: HUD intends to respond to such notices as 
appropriate, considering the materiality and magnitude of any 
violations determined to be present. A pattern of repeated violations, 
even if relatively minor, could draw HUD's attention for closer 
monitoring and identification and correction of systemic problems.
Section 31--Lender Review and Approval of Transfer of Project
    This section is now designated as section 34.
    Comment: HUD does not currently require Lenders to review and 
consent to such transfers, and does not provide reimbursement for 
expense of such activity. HUD should permit a set fee (Fannie Mae and 
Freddie Mac allow $3,000) or remove the requirement.
    HUD response: Rather than a set fee, HUD is permitting Lenders to 
recover the costs of conducting a review. Redesignated section 34 also 
provides that Lender may not unreasonably withhold approval of the 
transfer, with the implication being that Lender could and would 
withhold approval as a part of prudent servicing practices. HUD 
considers the recovery of costs for the exercise of prudent servicing 
to be more than reasonable.
    Comment: Lender should be able to require that the Borrower provide 
a deposit to cover Lender's processing fee and out-of-pocket expenses; 
otherwise, a lender will have no way to collect amounts due if a 
transfer does not go forward if the Lender cannot condition its review 
on receipt of a deposit.
    HUD response: HUD disagrees with the comment because redesignated 
section 34 specifically permits Lender to require Borrower to reimburse 
Lender for expenses incurred in connection with reviewing the transfer, 
and there is no prohibition against a reasonable deposit for this 
purpose.
    Comment: The transfer requirements do not fully address Lender 
concerns, particularly with respect to filing UCC financing statements; 
UCC searches; and tax compliance (e.g., IRS form W-9). The Lender 
should have the right to impose reasonable conditions for approval.
    HUD response: HUD agrees that Lender should have the right to 
impose reasonable conditions for approval, and for that reason, this 
section provides only that Lender will not unreasonably withhold 
approval of the transfer. This provision leaves the door open for the 
imposition of reasonable conditions for approval.
    Comment: Parties should be permitted to use existing documents to 
avoid materially harming the Transfers of Physical Assets market and 
the value of existing insured projects, raising the possibility of 
``takings'' challenges by borrowers.
    HUD response: HUD considers it necessary to update the closing 
documents, and has not observed any significant objection to the 
general proposition of making the documents more reflective of current 
practice, as opposed to objections to only certain changes. With the 
revisions being made to the new documents, such as revising the 
provisions dealing with personal liability of Key Principals, the 
concerns expressed by the comment should be mitigated.
    Comment: Where loans are in lockout, the significantly more 
burdensome requirements of the new forms could preclude transfers 
altogether.
    HUD response: HUD has revised the documents, as noted above, making 
them less burdensome, and does not expect the concern raised by the 
comment to materialize.
Certification
    Comment: It is unreasonable and unfair to require Lender to certify 
to the truth, accuracy, and completeness of the statements and 
representations contained in the ``supporting documentation''--which is 
an undefined term. The certification should be affixed to specific 
items or the specific items should be identified. This language could 
be viewed as making the Lender responsible for the statements and 
representations of others.
    HUD response: HUD agrees with the comment, and the reference to 
``all supporting documentation'' is replaced with the more focused and 
appropriate, ``all documents submitted and executed by Lender in 
connection with this transaction''.

Regulatory Agreement, Form HUD-92466M

Introductory Provisions
    Comment: It appears that the Regulatory Agreement is to be used in 
lieu of, or in addition to, Use Agreements in varying transactions.
    HUD response: The Regulatory Agreement would not be used in lieu of 
Use Agreements, but Use Agreements could be used to supplement the 
Regulatory Agreement.
    Comment: In the type of Borrower required to be listed in the 
introductory provisions, ``individuals'' are omitted, although 
referenced later in the document.
    HUD response: Individuals would clearly fall under the type of 
Borrower listed as ``Profit-Motivated'' in the introductory provisions. 
The list of the types of Borrowers in the introductory provisions 
should not be confused with the definition of Borrower, which is

[[Page 3567]]

found in section 1.b. The definition in section 1.b. applies to ``all 
persons or entities identified as Borrower in the first paragraph of 
the Security Instrument,'' and encompasses individuals. If the Borrower 
is an individual, the striking of the ``organized and existing under 
the laws of'' language in the first section of the Security Instrument 
would be a permissible deletion of an inapplicable provision consistent 
with section 29 of the Lender's Certificate.
    Comment: The ``Date of Note'' line should be removed, since the 
information is included in the definition of ``Note'' in section 1.
    HUD response: The line is not being removed. It is important to 
reference the Note in section 1 with particularity because the 
Regulatory Agreement is incorporated into the recorded Security 
Instrument.
    Comment: The line requiring recordation information for the 
Security Instrument should be removed. It is nearly impossible to get 
this information inserted in each deal as the Security Instrument and 
Regulatory Agreement are taken to the recorder's office at the same 
time for simultaneous recording.
    HUD response: This line has been removed.
    Comment: All limited dividend entities are not alike and cannot be 
treated in this document as though they are.
    HUD response: To address this comment, the definition of Limited 
Dividend Borrower, originally at section 1.o. but redesignated here as 
section 1.q., has been broadened to apply to both limited dividend and 
limited distribution entities.
    Comment: The Regulatory Agreement is stated to ensure compliance 
with the National Housing Act, although it also deals with Section 8 
contracts and requirements of the United States Housing Act of 1937.
    HUD response: The introductory provisions refer to compliance with 
the requirements of the National Housing Act and any related 
legislation, which would certainly include the relevant provisions of 
Section 8 of the United States Housing Act of 1937. Further, section 
42, originally designated section 29, requires Borrower to comply with 
all applicable laws, not only with the National Housing Act. Article IX 
of the Regulatory Agreement contains additional provisions that are 
applicable to Projects for which Borrower has entered into a Section 8 
Housing Assistance Payments Contract.
    Comment: It is stated that this document stays in place as long as 
HUD is ``obligated to protect rights of tenants of the Mortgaged 
Property.'' It is not clear why HUD would attempt to keep the 
regulatory agreement in place upon payment of the FHA loan. Are the 
requirements meant to apply where HUD vouchers are used after a loan is 
paid off? HUD's stated purpose to protect the tenants is not well 
founded. Use Agreements may offer protections.
    HUD response: HUD agrees that HUD is obliged to protect tenants 
under Use Agreements and other appropriate legal authority independent 
of the Regulatory Agreement. The reference to that obligation has been, 
accordingly, removed from the Regulatory Agreement.
    Comment: It is stated that violations could cause the Borrower and 
``related parties'' to be subject to adverse actions. The document can 
be enforced only against parties to it.
    HUD response: HUD agrees that the Regulatory Agreement can be 
enforced only against parties to it. The definition of Borrower at 
section 1.b. includes successors, heirs, and assigns, which are the 
``related parties'' that are contemplated in the introductory 
provisions. The unnecessary reference to ``related parties'' in the 
introductory provisions has been replaced with ``other signatories.''
    Comment: The document does not provide for waiver, amendment, 
appeal of decisions, or evidence of authority on the part of HUD 
personnel.
    HUD response: The authority of HUD personnel is provided in 
Delegations of Authority. The Regulatory Agreement does not preclude 
amendment and, in fact, section 42 (originally section 29), Compliance 
With Laws, refers to compliance with all subsequent amendments, 
revisions, promulgations, or enactments of, among other items, 
covenants and agreements recorded against the Mortgaged Property. 
Appeal of decisions, which HUD takes to mean an appeal of a HUD denial 
of an approval required under the Regulatory Agreement, is not 
provided.
    Comment: The introductory items should include lines for ``Project 
Name'' and ``Project Location.''
    HUD response: The suggested changes have been made.
I. Definitions
Definition of ``Affiliate''
    Comment: The reference to post-debarment entities is particularly 
opaque.
    HUD response: The definition of Affiliate in the 2004 proposed 
Regulatory Agreement, including the reference cited in the comment, is 
consistent with, and is commonly understood within the context of, the 
definition of Affiliate at 24 CFR 180.905, a section of the 
governmentwide system of debarment and suspension that is adopted in 
HUD's regulations at 24 CFR part 24. The revised Regulatory Agreement 
now cross-references the definition in 24 CFR 200.215(a), which HUD 
intends to update through rulemaking.
    Comment: It is unreasonable to qualify a person as an affiliate 
merely for sharing facilities or equipment with another. The ability to 
control must be a factor.
    HUD response: HUD agrees that the ability to control is the 
decisive factor. While sharing facilities or equipment can be an 
indication of control, merely sharing facilities with no other indicia 
of control would not lead to a conclusion that control is present.
    Comment: The definition of ``Affiliate'' should explicitly exclude 
non-HUD projects, because HUD should not have the right to control or 
otherwise to restrict property that is not financed with HUD-insured 
loan proceeds.
    HUD response: HUD must have the right to control all security 
property, as well as property owned by the mortgagor entity (and other 
affiliated parties) that affects the security property, in order to 
protect the interests of HUD.
Definition of ``Borrower''
    Comment: HUD can define ``Borrower'' as broadly as it wants, but 
this document cannot bind anyone who has not executed it.
    HUD response: As noted previously, HUD agrees that the Regulatory 
Agreement can be enforced only against parties to it.
Distribution--Definition at Section 1.e.; Procedure at Section 15
    This section is now designated as section 1.f.
    Comment: The definition of ``Distribution'' includes control over 
the distribution of ``any asset of the Borrower,'' while the current 
Regulatory Agreement refers to ``any assets of the project.'' The long-
recognized FHA distinction between ``project assets and expenses'' and 
nonproject assets and expenses should be maintained.
    HUD response: Section 42, formerly section 29, Compliance with 
Laws, specifically requires Borrower to comply with the Security 
Instrument. Redesignated section 33 of the Security Instrument, 
formerly section 35, requires Borrower, as a single asset Borrower or a 
natural person, to maintain the assets of the Mortgaged Property in 
segregated accounts until

[[Page 3568]]

the Indebtedness is paid in full. In addition, under redesignated 
section 33, Borrower, if not a natural person, shall not acquire any 
real or personal property other than the Mortgaged Property and 
personal property related to the operation and maintenance of the 
Mortgaged Property and shall not own or operate any business other than 
the management and operation of the Mortgaged Property. The single 
asset Borrower requirement is a longstanding FHA requirement that does 
not provide the basis for any meaningful distinction between project 
assets and expenses and non-project assets and expenses where Borrower 
is not a natural person. HUD does not intend to restrict disbursements 
of non-project assets of a Borrower who is a natural person.
    Comment: Since it includes control over the distribution of ``any 
asset of the Borrower,'' this definition constitutes a major policy 
change. There has always been a distinction between project assets and 
nonproject assets.
    HUD response: Please see the immediately preceding HUD response.
    Comment: This definition is inconsistent with section 5 in the 
proposed new Surplus Cash Note, which permits payments from sources 
other than project income or assets.
    HUD response: Section 15.a. of the Regulatory Agreement provides 
that no Distribution shall be made or taken from borrowed funds. 
However, section 16 provides that any advances made by Borrower, on 
behalf of Borrower, or for Borrower, must be deposited into the Project 
account. Under section 16, if such advances are used for Reasonable 
Operating Expenses, the advances may be reimbursed, with interest, from 
Surplus Funds and such repayment is not considered a Distribution.
    Comment: The new definition excludes ``payments of expenses that 
are determined by HUD to be reasonable and necessary.'' HUD has 
replaced an objective standard with its own subjective standard, and it 
is no longer sufficient for an expense to be reasonable.
    HUD response: In response to the comment, HUD has replaced the 
``reasonable and necessary'' language with the defined term 
``Reasonable Operating Expenses,'' which has been redesignated as 
section 1.bb.
    Comment: In the definition of ``Distribution,'' ``any asset of the 
Borrower'' should be ``any asset of the Project.'' There does not 
appear to be any reason why nonproject assets such as capital 
contributions should be limited.
    HUD response: It is necessary to use the words, ``any asset of the 
Borrower,'' to protect the interests of HUD.
    Comment: In the definition of ``Distribution,'' ``payment of 
expenses that are determined by HUD to be reasonable and necessary 
expenses'' should be changed to ``payment of reasonable expenses.'' 
Requiring HUD approval replaces management's decision on running the 
project with a decision by HUD, and ``reasonable'' is a sufficient 
standard without the additional requirement of ``necessary.''
    HUD response: As noted previously, the defined term ``Reasonable 
Operating Expenses'' is now used. It is necessary to provide HUD with 
this control to protect the interests of the government.
Definition of ``Elderly Project''
    Comment: The definition of Elderly Project should be revised to 
read ``designed for occupancy by a single person 62 years of age or 
older or a household whose primary occupant is 62 years of age or 
older.''
    HUD response: HUD has decided to address policy considerations 
related to Elderly Projects separately and, consequently, has removed 
the definition from the Regulatory Agreement.
Definition of ``Fixtures''
    Comment: This definition is broader than under any state's law, 
and, therefore, probably is not usable.
    HUD response: The definition of ``Fixtures'' has been revised to 
quote the definition provided in Article 9 of the UCC.
    Comment: In the definition of ``Fixtures,'' the word ``including'' 
should be replaced with ``which may include, but is not limited to.''
    HUD response: HUD agrees and has made this change and a conforming 
change in the Security Instrument.
Definition of ``HUD''
    Comment: In the definition of ``HUD,'' ``Secretary'' should be 
replaced with ``Federal Housing Commissioner.''
    HUD response: In the interest of consistency, all references are to 
the Secretary of HUD rather than to heads of component entities that 
comprise HUD and that act pursuant to delegations of authority from the 
Secretary.
Definition of ``Leases''
    Comment: The definition of ``Leases'' should include language 
stating that the term ``Leases'' does not apply to a lease of the Land 
to Borrower on which Improvements will be constructed.
    HUD response: A parenthetical has been added to the definition of 
``Leases'' to make the suggested clarification.
Definition of ``Mortgaged Property''
    Comment: A leasehold estate should be included in the definition of 
``Mortgaged Property.''
    HUD response: A leasehold estate would be included in the Exhibit 
``A'' description of the estate in realty required under the definition 
of ``Land.'' Land, in turn, is included in the definition of Mortgaged 
Property.
    Comment: This definition seems unrelated to use of the term later 
in the document and therefore is very confusing as to what ``funds,'' 
for example, are being addressed in given situations.
    HUD response: The term Mortgaged Property is broadly defined, and 
its usage in a particular context determines which aspects of the broad 
definition are being addressed.
    Comment: Subparagraph (6) of the definition of Mortgaged Property 
should begin with the phrase, ``all insurance policies covering the 
Mortgaged Property and all payments and * * *.''
    HUD response: HUD agrees in part with the suggested language and 
has made a revision to include language covering ``all insurance 
policies.''
    Comment: In the definition of ``Mortgaged Property,'' subsection 
(8) should provide for agreements for ``use'' in addition to ``sale.''
    HUD response: The ``for use'' wording would permit subleasing, 
which is contrary to HUD policy.
    Comment: Is subsection (8) of the definition of ``Mortgaged 
Property'' intended to include a lease of the Land to Borrower under 
the 207 Lease addendum?
    HUD response: Yes, the definition covers any estate in realty. See 
the definition of ``Land.''
    Comment: In the definition of ``Mortgaged Property,'' subsection 
(9) should include language that proceeds include both non-cash 
proceeds and cash proceeds.
    HUD response: HUD agrees and has the revised definition.
    Comments: In the definition of ``Mortgaged Property,'' subsection 
(11) should include the words, `` * * * commodity accounts, commodity 
contracts, deposit accounts, other funds, receipts, any rights to 
payments evidenced by chattel paper * * *.''
    HUD response: This change was not deemed necessary because the 
definition should be adequate to cover all security property.
    Comment: In the definition of ``Mortgaged Property,'' subsection 
(11)

[[Page 3569]]

should include the words, ``and escrows required by HUD.''
    HUD response: Such escrows are covered by the definition.
Definition of ``Non-Profit Borrower''
    Comment: In section (q), there is no mention of the tax status of 
the organization. HUD should use 501(c)(3) in the definition of ``Non-
Profit Borrower.''
    HUD response: In this context, HUD does not rely upon or examine 
the federal tax status of an organization, and is not required to do 
so. The principal factor in HUD's consideration is the absence of self-
interested financial profit or gain in the purposes of an organization. 
While federal tax status may demonstrate the presence of this factor, 
such status also requires many elements of technical compliance that 
are beyond HUD's purview. An organization formed under, and acting in 
compliance with, a state's nonprofit organization statute could qualify 
as a nonprofit for purposes of HUD's program, even though the 
organization may not have section 501(c)(3) status.
    Comment: This definition is contrary to longstanding HUD policy and 
section 8.12.E of the MAP Guide that permit nonprofit entities to be 
treated as ``for profit'' so long as they have not received benefits 
from HUD due to their nonprofit status.
    HUD response: The definition does not prevent a nonprofit 
organization from electing to be regulated as a for-profit organization 
by HUD in programs not restricted to nonprofits. Such an election would 
require compliance with all of the requirements applicable to a for-
profit organization.
    Comment: In the definition of ``Non-Profit Borrower,'' HUD should 
not change its present policy of treating a legally organized nonprofit 
entity as a for-profit, if it receives no benefits due to its nonprofit 
status, if it signs a for-profit Regulatory Agreement and otherwise 
subjects itself to all HUD for-profit requirements. Such a nonprofit 
sponsor should also be entitled to Surplus Cash distributions to 
affiliate companies.
    HUD response: The definition only applies to nonprofits that use 
the nonprofit status to qualify for HUD program eligibility. In other 
words, if the HUD program requirement is that the mortgagor be a 
nonprofit entity to be eligible, then the definition is applicable to 
that entity. The policy of permitting nonprofit entities to operate 
projects as general mortgagors, public mortgagors, or for-profit 
mortgagors is not changed. Such nonprofit entities would be entitled to 
distributions; however, any IRS restrictions would continue to be 
applicable. The definition does not need to be changed.
    Comment: In ``Non-Profit Borrower,'' the use of the term 
``minimally'' preceding ``the entity may not make Distributions to any 
individual member or shareholder'' is not clear.
    HUD response: HUD agrees and the word, ``minimally,'' has been 
replaced with the words, ``at a minimum.''
    Comment: The language, ``The payment of salaries or other fees for 
services performed to ex-officio members shall not be subject to the 
provisions of this Agreement other than as a normal operating expense 
of the Project'' should be added at end of the definition of ``Non-
Profit Borrower.''
    HUD response: As HUD understands the comment, the suggested policy 
change would be contrary to long standing HUD policy prohibiting the 
payment of salaries and fees to such individuals.
Definition of ``Personalty''
    Comment: The definition of ``Personalty'' should include inventory.
    HUD response: Inventory is included in the definition of 
Personalty.
    Comment: ``Land or the Improvements'' in the definition of 
``Personalty'' should be replaced with ``Mortgaged Property.''
    HUD response: HUD does not agree that such a circular reference 
would be helpful.
    Comment: The definition of ``Personalty'' should include 
certificated securities, certificates of letter, chattel paper, 
documents, electronics chattel paper, general intangibles, financial 
assets, investment property, letter of credit, negotiable instruments, 
promissory notes, security accounts, securities, security certificates, 
security entitlements, tangible chattel paper, uncertificated 
securities, unrestricted cash, and investments derived from the 
Mortgaged Property.
    HUD response: HUD agrees in part with the comment and has added 
investments to the definition.
Definition of ``Principals''
    Comment: If this definition is set in the Regulatory Agreement, it 
will be out of sync with previous participation requirements, thus 
causing confusion.
    HUD response: The definition of Principals in the 2004 proposed 
Regulatory Agreement is not out of sync with previous participation 
requirements, but is based directly on form HUD-2530, Previous 
Participation Certification, which has been in use for a significant 
period of time. The revised proposed Regulatory Agreement now cross-
references the definition at 24 CFR 200.215(e), which HUD intends to 
update through rulemaking.
    Comment: The defined term ``Principals'' should be changed to 
``Principals of the Borrower'' to reflect the actual usage of this term 
in this particular document.
    HUD response: All principals involved in the operation of the 
security property are covered by the term ``Principal.''
    Comment: The term ``natural persons'' in the definition of 
``Principals'' should be qualified by ``who have the authority, acting 
individually, to control or contractually to bind the Borrower.''
    In the definition of ``Principals,'' the 25 percent limited partner 
threshold should be changed to ``greater than 50%;'' the phrase, ``in 
the case of public or private corporations or governmental entities,'' 
should be followed by the phrase ``any officer or director who has the 
authority, acting individually, to control or contractually to bind the 
Borrower;'' the 10 percent stockholder interest threshold should be 
replaced with ``greater than 50%;'' and the 10 percent governance 
interest and the 25 percent financial interest thresholds following 
``members or partners'' should be replaced with ``who have the 
authority, acting individually, to control or contractually to bind the 
Borrower, as well as each member or partner with an interest in the 
Borrower greater than 50%.''
    It is unreasonable to hold individuals, particularly limited 
partners, responsible for the acts of the Borrower if they do not have 
any say over costs and events outside their control. Passive investors 
will not want to expose themselves to liability beyond their equity 
investment.
    HUD response: Because these are matters controlled by the 2530 
regulations (24 CFR part 200, subpart H--Participation and Compliance 
Requirements) and Program Obligations, the suggested changes have not 
been made.
Definition of ``Project''
    Comment: This definition includes assets not traditionally included 
in the definitions of ``project'' and ``project assets.''
    HUD response: The definition, by its own terms, applies only to 
assets used in, owned by, or leased by, the Borrower in conducting the 
business on the Mortgaged Property. Assets unrelated to the business 
conducted on the Mortgaged Property are not affected by the definition.
    Comment: The definition of ``Project'' should read: ``Project means 
the Land

[[Page 3570]]

and the Improvements on the Mortgaged Property.''
    HUD response: The suggested change is not being made because it 
would be too restrictive. The policy of HUD is to include all property, 
as indicated in the definition.
Definition of ``Reasonable Operating Expenses''
    Comment: The meaning intended by the language that Reasonable 
Operating Expenses ``must benefit the project more than the owner'' is 
not easily understood. There needs to be clarification, to prevent HUD 
from using it to suit its purpose from time to time.
    HUD response: The definition of Reasonable Operating Expenses is 
not changed from the definition in use for a substantial period of 
time, and is based on case law. See United States v. Frank, 587 F.2d 
924, 927 (8th Cir. 1978); Arizona Oddfellow-Rebekah Housing, Inc. v. 
United States, 125 F.3d 777 (9th Cir. 1997); United States v. Coleman, 
200 F.Supp.2d 561 (E.D.N.C., 2002); United States v. Schlesinger, 88 
F.Supp.2d 431 (D. Md. 2000). Courts have reviewed many types of project 
expenditures and decided whether or not they are Reasonable Operating 
Expenses, and HUD will follow the guidance provided in such decisions 
in its review of particular disbursements.
    Comment: In the definition of ``Reasonable Operating Expense,'' the 
use of the term ``everyday'' is unclear. What if the expense is 
required only once or twice in any given period?
    HUD response: HUD agrees with the comment and has dropped the word 
``everyday.''
Definition of ``Rents''
    Comment: This definition includes assets not previously included, 
and inclusion of items not within the common meaning of rents is 
inappropriate and misleading.
    HUD response: The definition of Rents is intended to specify, to a 
greater degree, all of the miscellaneous items of value that accrete to 
the mortgaged property and that are not specified elsewhere.
Definition of ``Residual Receipts''
    Comment: The definition of ``Residual Receipts'' should be removed. 
There does not appear to be any underwriting or business purpose 
necessitating different standards based on form of ownership. 
Nonprofits should have same privileges as proprietary sponsors.
    HUD response: HUD rejects the comment, because the longstanding 
policy of HUD is to regulate distributions of nonprofit entities. The 
definition does not represent a change from present practice.
Additional Definitions
    Comment: A definition for ``Construction Contract'' should be 
added, to read ``means the form of the Construction Contract approved 
by HUD for the Project; provided such term is applicable only to those 
transactions for which HUD has issued a Commitment to Insure Upon 
Advances.''
    HUD response: HUD agrees in part with the comment and has revised 
section 6 to read: `` * * * Construction Contract, as approved by 
HUD.'' With this modification, a definition is unnecessary.
II. Construction
    Comment: A provision should be added to remove this section for 
loans that do not involve new construction or substantial 
rehabilitation.
    HUD response: It is clear by its own terms that this section would 
not apply for loans that do not involve new construction or substantial 
rehabilitation.
    Comment: A provision should be added to allow deletion of this 
section as appropriate.
    HUD response: HUD disagrees with the comment. Many of the 
provisions of the section could be applicable to a refinancing 
transaction where there is something less than substantial 
rehabilitation. Furthermore, refinancing transactions are specifically 
excluded where appropriate by specific language.
Section 2--Construction Funds
    Comment: Construction funds and operating funds are to be kept 
separate, but there is no definition of either term, and no definition 
of funds (such as syndication proceeds) that might not logically fall 
into either category.
    HUD response: Construction funds include mortgage proceeds and 
other funds budgeted for the hard and soft costs of construction of the 
project.
    Comment: In section 2, Construction Funds, the Borrower does not 
hold the Construction Funds, so what is the purpose of this provision? 
The entire section should be removed.
    HUD response: Construction funds is not a defined term; however, 
the context makes the meaning clear, that the Borrower is to use funds 
disbursed to the Owner for construction expenses and not to commingle 
or place such funds in the operating accounts of the Project.
Section 3--Unpaid Obligations
    Comment: ``Final closing'' is an undefined term.
    HUD response: HUD has clarified the point at which the unpaid 
obligations requirement is triggered, by specifying it is upon final 
endorsement of the Note by HUD.
Section 4--Lender's Certificate
    Comment: It makes no sense for the Borrower to be bound by various 
provisions of the Mortgagee's Certificate. The Borrower has no control 
over the Mortgagee's actions.
    HUD response: This section has been revised to refer to those terms 
of either the Lender's Certificate or the Request for Endorsement of 
Credit Instrument & and Certificate of Lender, Borrower and General 
Contractor, as applicable, insofar as the applicable document 
establishes or reflects rights and obligations of Borrower. As noted, 
the Mortgagee's Certificate in now entitled ``Lender's Certificate.''
    Comment: The last two lines of this section after the word 
``Certificate'' should be removed. A borrower cannot certify as to a 
future event controlled by some other entity; such certification fails 
to take into account either instance where Lender applies the funds for 
different purposes or where HUD approves a different use of such funds 
in the future.
    HUD response: HUD agrees in part with this comment and has revised 
section 4 to clarify that the obligation only relates to rights and 
obligations of the Borrower.
Section 5--Construction Commencement/Repairs
    Comment: This provision excludes a ``refinance'' but not transfers 
of physical assets and other nonconstruction activities.
    HUD response: Section 5 is a construction-related provision, and 
addresses only early start issues that arise in the construction 
context. The nonconstruction activities described in the comment are 
beyond the scope of this section.
Section 6--Drawings and Specifications
    Comment: Neither ``construction contract'' nor ``drawings and 
specifications'' are defined terms. To add requirements to the 
Regulatory Agreement that do not parallel the construction documents 
(Building Loan Agreement, Construction Contract) is unnecessary and 
will lead only to confusion and paralysis.
    HUD response: To clarify the consistent use of the terms pointed 
out in the comment, the phrase ``as approved by HUD'' is added 
following Construction Contract. The Drawings are to be identified in 
accordance with

[[Page 3571]]

Article 2.A. (6), and the Specifications are to be identified in 
accordance with Article 2.A. (5), of the Construction Contract as 
approved by HUD.
    Comment: In section 6, Drawings and Specifications, the term 
``Construction Contract'' in this section needs to be defined.
    HUD response: The Construction Contract is a closing document and 
goes hand-in-hand with the other construction documents and the 
industry and users are familiar with the document based upon decades of 
use. To provide additional clarity, the phrase ``as approved by HUD'' 
has been added following ``Construction Contract.''
Section 7--Required Permits
    Comment: It must be clear that permits are not required to the 
extent that jurisdictions do not require permits for certain 
activities.
    HUD response: HUD considers the modifier ``all necessary,'' as 
applied to permits in section 7, to be self-explanatory.
Section 8--Outstanding Obligations
    Comment: This section should be revised to accommodate leasehold 
estates.
    HUD response: A leasehold estate is an obligation that is subject 
to HUD approval. Leasehold estates would be covered in section 8 under 
the ``except those approved by HUD'' language. There is no reason to 
change this section to provide such an exception, because such an 
agreement obviously would have been approved in writing by HUD. A 
sentence has been added to section 8 that, ``All contractual 
obligations of Borrower or on behalf of Borrower with any party shall 
be fully disclosed to HUD.'' In addition, HUD has added the following 
parenthetical sentence to the definition of ``leases'' in the 
Regulatory Agreement: ``(Ground leases that are security for the loan 
are not included in this definition.)''
    Comment: With respect to section 8, Outstanding Obligations, 
``Land'' in this section should be replaced with ``Mortgaged 
Property.''
    HUD response: It is clear from the construction-related context of 
the section that the use of the term ``Mortgaged Property'' would be 
inappropriate.
    Comment: Section 8 needs reworking. This section should be 
construction-related only.
    HUD response: It is clear that this section is construction-related 
only. Therefore, changes to address the comment are not necessary.
Section 9--Accounting Requirements
    Comment: ``Receipts and disbursements'' may not be the correct term 
for what is required here, and brings up the question of whether more 
than project funds are covered.
    HUD response: ``Receipts and disbursements'' is the correct 
phraseology. During the construction period, upon initial occupancy and 
through the cost certification cutoff date, the borrower does cash 
accounting of the rental receipts and operational disbursements, and 
any excess of receipts over disbursements offsets construction costs.
    Comment: In section 9, Accounting Requirements, the following 
language should be inserted at end of section 9: ``Such funds can 
either be used to reduce the insured loan amount, or, with HUD's 
approval, deposited into surplus cash or reserve for replacement 
accounts.''
    HUD response: The suggested change is contained in the well-known 
and universally followed HUD cost certification requirements. It would 
be inappropriate to repeat those requirements in this section.
Section III--Financial Management
Section 11--Reserve for Replacement Fund
    Comment: Currently, only Section 223(f) projects require a 
reassessment of the reserve every 10 years. Is this an intentional 
change in policy?
    HUD response: Yes, HUD is adopting this now-common industry 
practice, consistent with prudent servicing, to be applicable to all 
Borrowers.
    Comment: This section purports to put certain requirements on 
Lenders, who are not party to this agreement.
    HUD response: Section 11.a. of the Regulatory Agreement reflects 
section 14 of the Lender's Certificate, which provides Lender must 
require a monthly deposit with Lender or in a depository satisfactory 
to Lender. The wording of section 11.a. has been revised to provide 
that the Reserve for Replacement shall be deposited with Lender, rather 
than held by Lender, to reflect the fact that Lender is not a party to 
the Regulatory Agreement.
    Comment: No one will use FHA financing for new construction if the 
Regulatory Agreement is deemed to give HUD control over investment 
funds.
    HUD response: The requirement to obtain HUD's written approval in 
order to invest Reserve for Replacement funds in forms other than 
insured deposits, obligations of the United States, or obligations 
guaranteed by the United States, is a current requirement for FHA-
insured financing. The Regulatory Agreement does not give HUD control 
over investment funds, but merely provides for HUD's approval, in order 
to ensure that the Reserve for Replacement is not put at risk.
    Comment: The ``contract of mortgage insurance'' should be defined 
in a meaningful way as opposed to saying, ``Read the regulations.''
    HUD response: The contract of mortgage insurance will vary in 
accordance with the section of the National Housing Act and the 
implementing regulations under which the insurance is authorized. For 
that reason, the contract of mortgage insurance is defined by reference 
to the relevant regulations.
    Comment: HUD's ability to increase the monthly deposit must be 
subject to some standards, not be left as an unappealable arbitrary 
decision.
    HUD response: This amount is determined by a formula and is covered 
by the FHA insurance commitment and Program Obligations.
    Comment: HUD should be able to approve alternative ``amounts'' in 
the funds, as well as ``methods.''
    HUD response: HUD is able to approve alternative amounts, as 
specifically provided in the last sentence of section 11.b., and HUD 
may allow alternative methods pursuant to section 11.a.; for example, 
investments other than those federally guaranteed under section 11.a.
    Comment: In section 11(b), a letter of credit should be permitted 
for funding the account.
    HUD response: The policy of HUD is not to permit the use of letters 
of credit to fund the Reserve for Replacement, because mortgaged 
proceeds are used for the initial funding of the Reserve for 
Replacement. Allowing a letter of credit to fund the Reserve for 
Replacement could create a windfall for the mortgagor.
    Comment: Section 11(b) should provide that in the case of section 
223(f)/223(a)(7) projects, the deposit is made at initial/final 
endorsement of the Note.
    HUD response: The deposit is required at endorsement of the Note. 
Since there is only one endorsement for refinancing transactions, the 
suggested change is not necessary.
    Comment: Section 11(b) should allow the cost of the written 
analysis required every 10 years to be paid with funds on deposit in 
the Reserve for Replacement.
    HUD response: HUD agrees that the requested concept is reasonable 
and can permit the payment from the Reserve for Replacement. The 
Regulatory Agreement permits Borrowers to request

[[Page 3572]]

the prior written approval of HUD on a case-by-case basis for this 
procedure.
    Comment In section 11(c), to clarify that there is no change in 
Lender's statutory rights to set the interest per 12 U.S.C. 
1715w(i)(2)(B), language should be added that Lender has no obligation 
to obtain any particular rate of return on the investment of funds, and 
shall not be liable to Borrower for any losses incurred in connection 
with the investment of funds.
    HUD response: The Lender is not a party to the Regulatory Agreement 
and such a provision would be inappropriate therein.
    Comment: A paragraph 11(f) should be added to provide that upon 
termination of this Agreement, any requirement to fund the Reserve for 
Replacement fund will terminate and the monies shall be returned to the 
Borrower, provided the Borrower is not otherwise required to retain the 
fund under any other contract with HUD.
    HUD response: Upon termination of the Regulatory Agreement, HUD 
does not control these assets. It is not necessary for HUD to specify 
what is to be done with assets of the project once HUD's control is 
removed.
Section 12--Residual Receipts
    Comment: A deposit of residual receipts required at the time of a 
semiannual distribution is unheard of.
    HUD response: It is a current and ongoing requirement that, if a 
surplus is declared on a semiannual basis, a deposit must be made at 
that time as well.
    Comment: Consistent with the comments on the definition of 
``Residual Receipts,'' section 13 should be removed and the 
discriminatory Residual Receipt limitation eliminated, or this section 
should be made applicable only if a nonprofit or public body mortgagor 
uses the benefits of nonprofit underwriting.
    HUD response: HUD disagrees with the suggested major change to 
current HUD policy, which is longstanding and designed to protect the 
interests of HUD.
Section 13--Property and Operation; Encumbrances
    Comment: HUD must clarify if the deposit requirements apply to the 
proceeds (equity) from an LIHTC transaction. There should be a 
distinction between the equity required to keep the mortgage loan in 
balance and all other equity belonging to the property.
    HUD response: HUD agrees and has clarified this section to indicate 
that equity or capital contributions shall not include certain 
syndication proceeds, such as proceeds from LIHTC transactions used to 
repay bridge loans from members/partners of Borrower, all as more fully 
set forth in Program Obligations.
    Comment: HUD must define ``Project Property.'' If this is meant to 
capture all of the Borrower's funds, FHA financing is finished.
    HUD response: In response to the comment, HUD has removed the term 
``Project'' from the caption of section 13, leaving the heading as 
``Property and Operation; Encumbrances,'' to avoid the confusion that 
may be suggested by use of the undefined term.
    Comment: In section 13(a), the reference to the deposit of 
receivables should be removed, because receivables cannot be deposited 
in a bank.
    HUD response: HUD agrees in part with the comment in that 
receivables cannot be deposited so the section now reads: ``* * * rents 
and other receipts of the project * * *.''
    Comment: The word ``necessary'' should be removed from ``reasonable 
and necessary expenses'' because this term is too subjective and causes 
too much intrusion into the mortgagor's management of the project.
    HUD response: As noted previously, the defined term ``Reasonable 
Operating Expenses'' is now used.
    Comment: The phrase ``for the benefit of the Project'' should be 
added at the end of section 13(a).
    HUD response: HUD disagrees with the comment because inserting the 
suggested language could cause considerable confusion and conflict 
regarding interpretation of the phrase, ``for the benefit of the 
Project.''
    Comment: Whose delinquent taxes are referenced in section 13(d)?
    HUD response: It is not relevant to whom the delinquent taxes are a 
liability. Such expenses cannot be charged to the project.
Section 14--Security Deposits
    Comment: This section requires the Borrower to pay interest on 
security deposits, which is in conflict with current HUD policy, which 
imposes no requirement beyond state law.
    HUD response: There has been no change in HUD policy on this issue. 
Section 14(b) only provides for interest-bearing accounts only ``to the 
extent required by State or local law.''
    Comment: It is unnecessary for the Borrower to acknowledge that the 
unauthorized use of security deposits ``may'' constitute theft and is 
prosecutable. This is a state law issue and should not be inserted 
gratuitously into this Agreement.
    HUD response: HUD agrees with the comment and has removed the last 
sentence of section 14, which is the sentence that contained the 
statement noted.
Section 15--Distributions
    Comment: The reference in section 15.c. to whoever receives funds 
needing to return the funds to the Project would not affect persons not 
bound by the document.
    HUD response: There is no change here from current requirement, 
which imposes a constructive trust upon Distributions made improperly. 
Borrower should seek the return of the funds.
    Comment: Injecting what a Borrower ``should have known'' in section 
15.b. adds to the muddle about the clarity and legal effect of 
Directives. If Distributions are not to be taken, there should be clear 
standards, not whether the Borrower ``should have known.''
    HUD response: HUD considers the ``due care'' standard for what a 
Borrower ``should have known'' as a basis for suspending Distributions 
under section 15.b. to be in keeping with longstanding practice and to 
be a reasonable standard, particularly when the standard is applied to 
a failure to provide necessary services that Borrower is required to 
provide. To the extent that Program Obligations apply, they will 
clarify the extent of Borrower's obligation and responsibility.
    Comment: In section 15.d., the second sentence should be revised to 
read, ``All such Distributions to Section 220 (if so regulated), 
Section 221(d)(3) and 231 Limited Distribution Borrowers in any one 
fiscal year shall be limited to an amount approved by HUD that is not 
less than 6 percent on the initial equity investment * * * .''
    HUD response: HUD agrees in part with the comment, and has revised 
the second sentence of section 15.d. to refer generally to Limited 
Dividend Borrowers. Rather than specify 6 percent as the minimum 
distribution, HUD has left the percent as a blank, to be completed in 
accordance with market conditions at the time the Regulatory Agreement 
is executed.
    Comment: Prohibiting distributions is problematic and unduly 
punitive when the Borrower receives a nonpassing REAC score and HUD has 
not performed a second inspection. A provision should be added 
requiring HUD to inspect within 60 days and, if not, allowing 
distributions.
    HUD response: HUD's multifamily inspection procedures are governed 
by the regulations in subpart P of 24 CFR part 200. HUD's time frame 
for reinspection is determined in part by the response time of the 
owner in

[[Page 3573]]

addressing repairs and deficiencies and HUD's subsequent scheduling of 
reinspections into the framework of regularly scheduled inspections. 
HUD's intention is to complete reinspections in a timely manner.
    Comment: In section 15.b.i, what does the phrase ``should have 
known about'' mean and what standard will HUD use to make this 
determination?
    HUD response: HUD believes the language is clear that a due care 
standard will be applied and has made no change.
    Comment: Section 15.c. requires action from parties that do not 
execute this document or otherwise may have no privity with HUD.
    HUD response: This provision is deliberately broad to maximize the 
ability to recover funds in cases of equity skimming, fraud, etc., for 
example by imposing an obligation on the Borrower to attempt such 
recovery.
    Comment: The limitation on Distributions to nonprofits in section 
15.d. should be removed to reflect the argument that nonprofits should 
have the same rights as proprietaries.
    HUD response: Although minor changes have been made for purposes of 
clarification and to provide HUD some flexibility with respect to the 
permissible percentage, the longstanding HUD policy of restricting 
distributions will be continued.
Section 16--Reimbursement of Advances
    Comment: This section appears to prevent such customary 
transactions as reimbursing an employee for purchasing miscellaneous, 
minor items; reimbursing a management company for funds advanced to pay 
employees; or other recurrent problems of short-term advances needed to 
make required payments in advance of rent collection day or when 
Section 8 or other subsidy money is delayed.
    HUD response: HUD disagrees with the comment. Section 16 does not 
prohibit such transactions but only requires advances to be deposited 
in the Project Account prior to being paid out, rather than being used 
to make payments directly. This requirement provides an accurate 
accounting for advances and does not constitute a change from current 
practice. Under section 16, repayment of advances is not considered a 
Distribution and may be done on a monthly basis with HUD approval. The 
requirement for prior HUD approval of repayments other than through 
reimbursements from Surplus Cash at the end of the annual or semiannual 
period is an important control and is HUD's longstanding practice.
    Comment: Is interest on advances permitted?
    HUD response: Yes, interest on advances is permitted with the prior 
written approval of HUD, and a sentence specifying this provision has 
been added to section 16.
    Comment: The term ``project account'' should be defined.
    HUD response: HUD sees no need to define project account, because 
any advances referenced in section 16 could conceivably be made to one 
of several Project accounts, which are specified in several places in 
the Regulatory Agreement. See, for example, the definition of 
``Personalty.''
Section 17--Identity of Interest
    Comment: HUD has previously not objected to a ``captive'' mortgagee 
controlled by the principals of a mortgagor, but now would prohibit 
such a relationship under section 17. Section 223(a)(7) projects are 
not covered in the MAP Guide, yet some local offices are applying the 
MAP Guide to all insured projects, including 223(a)(7). May a local 
office prohibit a mortgagee from making loans to a non-MAP Guide 
project owner having an identity of interest with the Lender?
    HUD response: HUD has determined to withdraw the identity-of-
interest provisions of section 17 for further consideration.
Section 18--Financial Accounting
    This section is now designated as section 17.
    Comment: It is unclear what an ``undocumented expense'' is.
    HUD response: An ``undocumented expense'' is an expense without 
sufficient documentation that provides reasonable identification of the 
basis of the expense. The term includes not only expenses for which 
there is no documentation, but expenses for which the documentation is 
in such unspecific, general terms that the basis of the expense cannot 
be reasonably determined; for example, a notation for ``services 
rendered'' or for ``supplies received.'' This definition has been added 
to the Regulatory Agreement.
Section 19--Books of Management Agents
    This section is now designated as section 18.
    Comment: If a manager manages 50 properties of which only one is 
HUD related, what books must be open to HUD?
    HUD response: The response to the comment is provided in the first 
sentence of redesignated section 18, which addresses only books and 
records ``as they pertain to the operations of the Project.''
Section 20--Annual Financial Audit
    This section is now designated as section 19.
    Comment: What happened to the small project exception?
    HUD response: Small projects are required to submit annual 
financial statements, but they are not required to be audited. HUD has 
added the qualifier, ``subject to Program Obligations.''
    Comment: What type of Borrower certification is required?
    HUD response: Borrower certification is included in the electronic 
Multifamily Financial Management Template currently in use.
    Comment: Can Borrower's auditor also audit an upper-tier investment 
partnership or fund?
    HUD response: The Borrower's Auditor needs to follow prudent 
accounting standards and practices. In every instance, the auditor must 
be guided by American Institute of Certified Public Accountant (AICPA) 
standards.
    Comment: The sentence limiting the Borrower's relationship with the 
certified public accountant (CPA) should be removed. Many elderly 
housing providers use their CPAs as consultants, limiting their 
activities could be harmful to sponsors and ultimately more expensive 
to Borrowers as they go to other firms for managerial and consulting 
services that historically have been provided by their auditors. This 
limitation could also disproportionately affect smaller, 
unsophisticated Borrowers.
    HUD response: This HUD restriction is consistent with the AICPA 
standards, which do not permit a consulting CPA to work also as an 
auditor for the same entity.
    Comment: The list of items (``equipment, buildings, plans, offices, 
apparatus, devices, books, contracts, records, documents, and other 
papers and instruments'') following ``Mortgaged Property,'' which must 
be maintained and are subject to HUD examination, should be removed.
    HUD response: HUD disagrees with the comment, because some of the 
listed items could conceivably fall outside of the definition of 
``Mortgaged Property.'' For example, HUD sometimes requires a lender to 
impose collateral security mortgages upon additional properties of a 
mortgagor and sometimes permits a Lender to release a portion of the 
Mortgaged Property pursuant to the

[[Page 3574]]

partial release of security procedures. Books and records could be 
located in such released property.
Section IV--Project Management
Section 21--Preservation, Management, and Maintenance of the Mortgaged 
Property
    This section has been redesignated as section 20.
    Comment: What does the requirement that there be ``no 
deterioration'' mean? Is normal aging excluded?
    HUD response: HUD agrees that the reference to ``no deterioration'' 
was too broad, and redesignated section 20(a) now requires only that 
Borrower ``shall not commit Waste.'' A definition of Waste has been 
added to section 1.mm. of the Regulatory Agreement, which conforms to 
the definition of Waste in the Security Instrument.
Section 22--Flood Hazards
    This section is now designated as section 21.
    Comment: One can insure for flood hazards only if the insurance is 
available.
    HUD response: HUD agrees with the comment. Redesignated section 21 
is clarified by adding that an area must be identified by the Federal 
Emergency Management Agency, or successor agency, as having special 
flood hazards. If the Improvements are located in such an area and 
flood insurance is not available, the Loan will not be insured by HUD.
Section 23--Management Agreement
    This section is now designated as section 22.
    Comment: Currently, HUD relies on the Management Certification and 
does not review or approve management agreements. Does HUD now intend 
to review and approve such agreements to determine acceptability?
    HUD response: Redesignated section 22 is revised to clarify that 
there is no requirement for the agreement to be approved in writing by 
HUD.
    Comment: The undefined term ``Management Certification'' should be 
replaced with ``HUD form of management certification regarding such 
agreement and other management requirements.''
    HUD response: HUD agrees in part with the comment and has revised 
that portion of the section (now designated section 22) to read, ``* * 
* management certification meeting standards consistent with Program 
Obligations.''
Section 24--Acceptability of Management of the Mortgaged Property
    This section is now designated as section 23.
    Comment: Giving HUD the right to replace the management agent is a 
change from existing HUD policy, which provides such a right only if 
there is a default. What standards will HUD employ in making these 
decisions?
    HUD response: HUD disagrees that there is a change from existing 
HUD policy. Failure to conform the Project to HUD's overall management 
policies consistent with Program Obligations, as stated in redesignated 
section 23 of the Regulatory Agreement, would constitute a default 
under section 18, ``Preservation, Management, and Maintenance of 
Mortgaged Property, of the Security Instrument.'' HUD is linking the 
remedy of replacing the management agent only to the appropriate basis 
of default, rather than to any default. The current management agent's 
certification, form HUD-9839-C, contains an acknowledgement that HUD 
has the right to terminate the management agreement for failure to 
comply with the provisions of the management agent's certification or 
``other good cause.'' Evaluation criteria for a management agent are 
detailed in HUD Handbook 4381.5, The Management Agent Handbook.
Section 25--Termination of Contracts
    This section is now designated as section 24.
    Comment: This section gives HUD the right to direct termination of 
all third-party vendor contracts without penalty and without cause upon 
30 days, notice. This is a significant intrusion into Borrower's 
operation of the project, without any clear benefit to HUD.
    HUD response: This section is linked to redesignated section 23, 
which gives HUD the right to replace management for failure to conform 
the Project to HUD's overall management policies consistent with 
Program Obligations. HUD must be able to direct the termination of 
third-party vendor contracts in order to ensure acceptable overall 
management of the Project, and redesignated section 24 provides notice 
of the requirements that Borrower must include in its contracts to 
allow HUD to do so.
    Comment: This section includes no standards for HUD to apply in 
making decisions.
    HUD response: HUD requires Borrower to include termination 
provisions in management and vendor contracts to allow HUD to act as 
necessary to protect Project assets and the public investment in the 
Project. HUD will make its decisions on a case-by-case basis while 
establishing an administrative record of its actions to demonstrate HUD 
is not acting in an unreasonable or arbitrary manner.
    Comment: The language authorizing HUD to require termination of a 
contract with ``any third-party vendor'' and not just the managerial 
agent is an unjustifiable intrusion into the Borrower's right to 
operate the Project and should be removed. It creates enormous 
potential contract liabilities for the Borrower and HUD, and a HUD 
termination right would make such contracts more costly.
    HUD response: This power of HUD to require Borrower to terminate 
third-party contracts is long standing policy and necessary to protect 
the interests of HUD.
Section 26--Contracts for Goods and Services
    This section is now designated as section 25.
    Comment: Is there a difference between ``amounts customarily paid'' 
and ``costs not in excess?''
    HUD response: HUD has revised redesignated section 25 to make it 
more internally consistent. Costs, amounts, and terms are linked to the 
reasonable and necessary level customarily paid in the vicinity of the 
Land, and the reference to ``costs not in excess'' has been removed.
    Comment: This section, requiring HUD approval of all betterments 
and Improvements will place a tremendous burden on HUD and is an 
unjustifiable intrusion into the Borrower's right to operate the 
project.
    HUD response: HUD will dedicate the resources necessary to carry 
out its responsibilities under the revised closing documents. HUD 
considers such prior approvals to be justifiable and necessary for HUD 
to meet its obligations of preserving the public interest in Projects.
    Comment: This would change the current standard of ``not exceed the 
amount ordinarily paid'' with the unreasonable ``at the lowest possible 
cost.''
    HUD response: HUD agrees that ``lowest possible cost'' will not 
always result in reasonable expenditures for goods and services and has 
removed the reference to ``lowest possible cost'' removed.
    Comment: The meaning of ``betterments'' should be defined.
    HUD response: The term ``betterments'' is now qualified by language 
that states, ``as defined in the

[[Page 3575]]

Property Jurisdiction,'' to clarify the policy of HUD.
Section 28--Tenant Organizations
    This section is now designated as section 27.
    Comment: Tenants may sue Borrowers, but not HUD, and Borrowers may 
not join HUD to any lawsuits brought by tenants. This is unreasonable 
and unnecessary and should be removed. How are tenants, who are not a 
party to the Regulatory Agreement, precluded from suing HUD for 
anything?
    HUD response: HUD is removing the second section of redesignated 
section 27, which contains the provisions identified by the comment.
Section V--Admissions and Occupancy
Section 31--Lease Term
    This section is now designated as section 29.
    Comment: Exceptions should be permitted with HUD's prior written 
approval to accommodate displaced persons, corporate units, etc.
    HUD response: The prohibition against transient housing, meaning 
rental for any period less than 30 days, is required by Section 513 of 
the National Housing Act (12 U.S.C. 1731b), and HUD has no authority to 
permit exceptions.
Section 32--Commercial (Nonresidential) Leases
    This section is now designated as section 30.
    Comment: Borrower should not be required to seek HUD pre-approval. 
As long as there is no use restriction violation, Borrowers should be 
permitted to maximize the property's utility.
    HUD response: The commercial use limitations in redesignated 
section 30 follow existing HUD practice, which reflects HUD's interest 
in prudent management of the Project. A sentence has been added to 
require Borrower to deliver an executed copy of the commercial lease to 
HUD.
Section 33--Subleases
    This section is now designated as section 31.
    Comment: The Regulatory Agreement does not bind tenants. How can 
the Regulatory Agreement do more than require a Borrower to enforce the 
lease?
    HUD response: The Regulatory Agreement does not bind tenants 
directly, but requires Borrower to include certain provisions in leases 
that are then enforceable against tenants by Borrower. Redesignated 
section 31 does not require Borrower to do more than include the 
specified provisions in the lease and enforce the lease.
    Comment: Corporations have rented apartments to employees for short 
periods in section 221(d)(4) transactions. The proposed language would 
no longer permit this.
    HUD response: As noted earlier, the prohibition against transitory 
housing is statutory under Section 513 of the National Housing Act. 
Although the comment is not precise as to the duration of the ``short 
periods'' involved, a period of less than 30 days would not be 
permitted under the statutory provision.
Section 35--Section 231 Projects
    Sections 34, 35, 36, and 37 have been combined into a single, 
revised section 32 entitled ``Tenant Selection/Occupancy.''
    Comment: This section and section 36 should be stricken.
    HUD response: The general reference to complying with all HUD 
regulations and Program Obligations in selecting tenants for Section 
231 Projects in the previous version of section 35 has been replaced 
with the more specific provisions of redesignated sections 32c and d, 
which are longstanding provisions in the Regulatory Agreement. Section 
32c states that at least 75 percent of the units in a Section 231 
Project shall be designed for elderly persons, unless HUD gives its 
written approval for a lesser number of units. Redesignated section 32d 
requires all advertising for Section 231 Project rentals to reflect a 
bona fide effort by Borrower to obtain occupancy by elderly persons. 
The previous section 36 has been replaced by redesignated section 32a 
and is discussed in more detail under the comment heading dealing with 
section 36--Families with Children.
Section 36--Families With Children
    Comment: The Regulatory Agreement should not prohibit 
discrimination against otherwise eligible applicants with children for 
admission to elderly units. Section 3.2.L. of the MAP Guide 
specifically allows for housing that is intended exclusively for the 
elderly, as do the Fair Housing Amendments Act of 1988, Section 542 of 
the Housing and Community Development Act of 1992, and 24 CFR 266.220.
    HUD response: Redesignated section 32.a. clarifies the scope of the 
previous section 35 and provides that Borrower shall not, in selecting 
tenants, except for units designated for elderly persons in a section 
231 Project, discriminate against any person or persons by reason of 
the fact that there are children in the family.
    Comment: As written, this section would also appear to apply to 
loans insured under Section 231 of the National Housing Act, which 
conflicts with discussions held with the Department.
    HUD response: Redesignated section 32a excludes Section 231 from 
the prohibition against discrimination because there are children in 
the family.
    Comment: There is no statutory or regulatory basis for this 
provision as it would apply to the Section 221(d)(4), 223(f), 223(a)(7) 
and 231 programs.
    HUD response: Except as noted for the section 231 program and as 
permitted by the Housing for Older Persons Act, which amended the Fair 
Housing Act, tenants may not be selected on the basis of whether they 
are families with children. (See 42 U.S.C. 3604.) Revised redesignated 
section 32 clarifies that the prohibition applies, except as provided 
in the Fair Housing Act and otherwise approved in writing by HUD.
    Comment: This change requires notice and comment rulemaking, with a 
title and description that clearly state the intent of the proposal. 
The legal consequences of the consolidation and updating of forms are 
different from the consequences of imposing new occupancy requirements.
    HUD response: These provisions, which have been the subject of the 
current notice and comment rulemaking, have been revised merely to 
restate current law.
    Comment: The refusal of FHA to provide mortgage insurance for loans 
on elderly housing properties will significantly restrict the supply of 
affordable elderly housing.
    HUD response: It is not HUD's intent to refuse mortgage insurance 
for elderly housing, as demonstrated by HUD's revision of the 
Regulatory Agreement's occupancy requirements.
    Comment: This provision may call into question the legality of 
Regulatory Agreements for existing elderly housing communities.
    HUD response: As noted above, the provision has been revised to 
restate current law consistent with Regulatory Agreements for existing 
elderly housing communities.
    Comment: This section should provide, ``Except in the case of a 
project specifically designed exclusively for the elderly or insured 
under Section 232.''
    HUD response: As noted previously, HUD has adopted the exclusion 
for projects designed for the elderly. This Regulatory Agreement does 
not apply to nursing home projects with financing insured under Section 
232.

[[Page 3576]]

Section 38--Rents
    This section is now designated as section 33.
    Comment: The method of rent approval depends on the program.
    HUD response: HUD agrees with the comment. The provisions of 
redesignated section 34 are conditioned on the regulation of rent by 
HUD. References to a specific program are not included, so as to 
provide flexibility for the Regulatory Agreement to be used in 
different programs.
Section 39--Charges for Services and Facilities
    This section is now designated as section 34.
    Comment: There is no reason for HUD to use this document to attempt 
to have a blanket prohibition of charges that leases and house rules 
may permit.
    HUD response: This section does not have a blanket prohibition, but 
applies only if the Project is subject to regulation of rent by HUD, as 
is intended to avoid distortion of the HUD-approved rents by the 
imposition of additional charges.
Section 40--Prohibition of Additional Fees
    This section is now designated as section 35.
    Comment: This section is more appropriate in the healthcare context 
and not applicable to apartment projects. Regardless, the Borrower 
should not be prohibited from charging credit check or criminal 
background fees, pet fees, deposits or other fees or charges common in 
the rental marketplace and tailored to a particular purpose.
    HUD response: HUD agrees in part with the comment and has reworded 
the section to limit the section to those ``certain'' described fees 
originally iterated in the section. A sentence has been added to 
redesignated section 36, ``Security Deposits and Other Fees,'' so that 
the additional fees indicated in the comment can be charged. HUD does 
not agree that the section should appear only in the healthcare 
regulatory agreement as seems to be the suggestion. Founder's fees, 
admission fees, etc., could be charged in connection with elderly 
projects, as well as for health care facilities.
Section VI--Actions Requiring the Prior Written Approval of HUD
Section 42--Actions Requiring the Prior Written Approval of HUD
    This section is now designated as section 37.
    Comment: Individually and collectively, the powers reserved by HUD 
may create potential HUD liability to Borrowers and third parties, due 
to the extensive nature of the controls HUD would have.
    HUD response: HUD disagrees that requiring HUD approval would 
create any HUD liability to Borrowers or third parties. Borrower is 
placed on notice of, and agrees to, the requirement of HUD approval in 
the Regulatory Agreement, and would act in disregard of such 
requirement at Borrower's, not HUD's, peril. Similarly, Borrower's acts 
with respect to third parties with knowing disregard of the HUD 
approval requirement would not create any HUD liability to third 
parties. In addition, HUD approval does not constitute a guarantee of 
Borrower's obligations to any party. HUD's primary concerns in 
determining whether or not to provide any required approval are the 
prudent management and preservation of the Project, so as to protect 
HUD's interests, and HUD will not provide approvals for acts and 
obligations that would jeopardize those interests.
    Comment: This section includes 13 separate categories of actions 
that Borrower shall not do without prior written approval by HUD. Will 
HUD have the staffing to accommodate promptly the large number of 
expected requests? These requirements constitute an overwhelming 
workload for HUD.
    HUD response: As noted previously, HUD will commit the resources 
necessary to fulfill its responsibilities.
    Comment: These requirements constitute a massive increase in HUD's 
involvement in Project operations and impose controls far greater than 
Fannie Mae, Freddie Mac, or any other lender.
    HUD response: The remaining approvals required under redesignated 
section 37 are generally consistent with current HUD requirements, 
rather than a ``massive increase in HUD's involvement.'' HUD has 
determined not to impose broad recourse liability on Key Principals and 
considers it necessary to require prior written approvals, as provided 
in redesignated section 37.
    Comment: These requirements suggest a complete lack of trust or 
confidence in a Borrower's ability to operate its own Project. While 
some of these controls may be appropriate during the existence of an 
Event of Default, these controls simply are not workable.
    HUD response: HUD considers the comment's emphasis on trust and 
confidence to be misplaced. HUD is responsible for administering 
programs intended to facilitate transactions that provide a significant 
public and private benefit, but that also place substantial HUD 
resources at risk. HUD is obliged to strike a balance between 
maximizing the facilitation of transactions and minimizing the risk to 
HUD resources, and considers the requirements of these documents, 
developed over a long period of deliberation that took into account 
extensive public comment, to strike an appropriate balance. HUD 
disagrees that the controls are not workable, but expects they will be 
applied in a reasonable manner that will neither discourage enterprise 
nor encourage imprudence.
    Comment: A number of these actions, including incurring 
liabilities, paying out funds, incurring obligations to partners, only 
make sense if they apply to Project funds.
    HUD response: The approvals noted by the comment apply in the 
context of activities in connection with the Project, as required by 
section 13.b. of the Regulatory Agreement.
    Comment: With respect to transfers of property or interests, does 
HUD really intend to review and approve a corporate shareholder going 
from a 9 percent to a 10 percent stake, or a limited partner dropping 
from 25 percent to 23 percent under the definition of Principal and 
proposed section 23 of the Security Instrument (now designated section 
21), which requires prior written approval of HUD if the effect of a 
transfer of any interest in the borrower is the ``creation or 
elimination of a Principal''?
    HUD response: HUD approval of such transactions is a current 
practice that is continued under the revised documents.
    Comment: Section 42(a) effectively prohibits the Borrower from 
hiring contractors to perform repairs or replacements without HUD's 
prior written approval, since such contractors would have rights to 
file mechanic's liens regardless of whether they actually ``establish 
or maintain a lien.''
    HUD response: To the extent that work performed by contractors 
constitutes Reasonable Operating Expenses, as redesignated section 
37.c. has been revised to provide, HUD approval would not be required. 
Work that goes beyond Reasonable Operating Expenses would require HUD 
approval in any event.
    Comment: Section 42(b) requires HUD's consent to borrow funds or 
finance any purchase. If the sponsors wish to loan money to cover a 
project's operating deficit, they cannot do so without getting HUD's 
prior written approval. If a Borrower wants to charge incidental 
purchases to a credit card, HUD's prior written approval, technically, 
would also be required.
    HUD response: As similarly noted in a previous response, to the 
extent loans

[[Page 3577]]

are used for current Reasonable Operating Expenses, prior written 
approval of HUD is not required.
    Comment: Section 42(c), taken literally, prohibits a borrower from 
making payments of principal and interest on the note, payments for 
mortgage insurance premiums, or deposits into the replacement reserve 
(since these items are not reasonable operating expenses or necessary 
repairs) without HUD's prior written approval except from Surplus Cash.
    HUD response: Section 10 of the Regulatory Agreement requires 
Borrower to make promptly all payments due under the Note and Security 
Instrument, and section 11 requires Borrower to establish and maintain 
a reserve for replacement account. HUD approval is not necessary for 
these explicit requirements with which Borrower must comply.
    Comment: Section 42(d) requires approval for payment of any 
compensation to Principals or others with no exception for payments 
from Surplus Cash.
    HUD response: In response to the comment, HUD has revised 
redesignated section 37.d. to exclude ``permissible withdrawals'' of 
Surplus Cash from the requirement for prior written HUD approval.
    Comment: Approval under section 42(e) for any change of a 
management agreement is a dramatic change from current practice that 
only involves HUD if there is a change in the Management Certification.
    HUD response: Because the management contract as a whole is subject 
to HUD approval, HUD approval is also required for any change to a 
management contract, to avoid piecemeal revisions of the original, 
approved terms of the contract. HUD Handbook 4381.5, The Management 
Agent Handbook, details the requirements for HUD approval of the 
Management Agreement, and therefore any changes to it.
    Comment: Would HUD want to approve remodeling of a model unit or a 
leasing office, or the demolition or reconstruction of a carport or a 
storage shed, as would be required under section 42(g)?
    HUD response: HUD agrees, in part, with the comment and 
redesignated section 37(g) will now permit Borrower to dispose of and 
replace Fixtures and Personalty and make minor alterations or changes 
that do not impair the security, without HUD's prior written approval.
    Comment: The prohibition on reconstruction without HUD approval is 
inconsistent with the provision requiring restoration on an 
unconditional basis, even if HUD has failed to meet its obligations.
    HUD response: The requirement for HUD approval for reconstruction 
in redesignated section 37(g) is not inconsistent with the requirement 
under redesignated section 20(c) to restore or repair any damage to the 
Mortgaged Property. To help clarify the intended distinction, section 
37(g) has been revised to allow replacement and disposal of obsolete or 
deteriorated Fixtures or Personalty and minor repairs to be made 
without HUD approval. More substantial undertakings constituting 
``reconstruction'' require HUD approval. In the event of uncertainty in 
a particular situation, approval may be requested, and HUD may 
determine if approval is required.
    Comment: Section 42(g) must include some standard of materiality or 
be limited to expenditures over a certain threshold, e.g. $100,000.
    HUD response: As noted above, redesignated section 37(g) has been 
revised to allow replacement and disposal of obsolete or deteriorated 
Fixtures or Personalty and minor repairs to be made without HUD 
approval.
    Comment: HUD does not have authority for the 42(i) requirement that 
a Borrower cannot receive any endowment that is not pledged to the Loan 
unless prohibited by the terms of the endowment.
    HUD response: HUD has authority to establish the parameters of an 
eligible Borrower, and the requirement with respect to endowments is 
consistent with other requirements concerning the receipt of property 
to be used in connection with the Project.
    Comment: HUD does not underwrite endowment funds (other than to 
meet closing requirements), should not have a security interest 
therein, and should not restrict a Borrower's right to receive 
endowment funds.
    HUD response: As noted above, HUD considers its requirements with 
respect to endowment funds to be consistent with HUD's regulation of 
Borrower use of property in connection with the Project.
    Comment: The section 42(j) requirement that HUD approve virtually 
all amendments to the organizational documents of the Borrower is an 
unreasonable interference with the rights of the Borrower's owners and 
a dramatic change from current practice, which is limited to approvals 
of changes that affect HUD's requirements.
    HUD response: HUD must have the right to approve in advance any 
changes in a Borrower's organizational documents that could affect the 
organization's ability to comply with its contractual and programmatic 
obligations or otherwise affect HUD's interests, so that HUD may 
exercise prudently its duty of oversight of the use of HUD resources. 
Redesignated section 37.j. now provides a nonexhaustive list of the 
types of amendments to the organizational documents that require HUD's 
prior approval.
    Comment: Section 42(j) does not contain any standards for HUD to 
apply to consider requests for amendments to organizational documents.
    HUD response: As noted previously, HUD will make its decisions 
based on the totality of the circumstances and proposed changes, and on 
a case-by case basis, while establishing an administrative record of 
its actions to demonstrate that HUD is not acting in an unreasonable or 
arbitrary manner.
    Comment: The section 42(k) litigation threshold should be increased 
to at least $50,000.
    HUD response: HUD has reconsidered this litigation approval 
threshold in light of current litigation and settlement costs, and has 
increased the threshold in redesignated section 37(k) to $100,000.
    Comment: Section 42(k) would unnecessarily delay the process for 
the Owner and should be removed.
    HUD response: While not removing the requirement for HUD approval 
of litigation, HUD has increased the threshold that triggers the 
approval requirement, as noted above.
    Comment: Section 42(k) is a new requirement with no basis for the 
monetary cap. Is HUD seeking to convert all multifamily housing into a 
form of operated public housing?
    HUD response: HUD has no such intent with respect to multifamily 
housing as stated in the comment. Because litigation may pose a 
substantial threat to the financial well-being of the Project, it is 
necessary for HUD to be apprised of significant activity in this area 
and to object to actions it determines to be inconsistent with that 
well-being. HUD considers the requirement to be reasonable in light of 
HUD's responsibilities.
    Comment: What happens if the statute of limitations expires on a 
claim while HUD is considering a request under section 42(k)?
    HUD response: If the statute of limitations is an issue with 
respect to any particular matter, HUD should be alerted about that 
issue as soon as possible, and HUD will expedite its response.
    Comment: Requiring HUD to be a party to the settlement of 
litigation is not appropriate.

[[Page 3578]]

    HUD response: It is not correct to refer to HUD as a party to the 
settlement of litigation. HUD's involvement is limited to assessing the 
effect of litigation on the Project.
    Comment: Section 42(l), requiring approval of reimbursements for 
payment of expenses or costs of the Project, simply ignores the way 
projects are managed and operated.
    HUD response: HUD has revised redesignated section 37(l) for 
clarity and to conform it more explicitly with other provisions of the 
Regulatory Agreement by adding the phrase, ``except for Reasonable 
Operating Expenses and in a manner consistent with Section 16.'' 
Section 16 requires advances to be deposited into the Project account 
and permits reimbursement of advances without prior HUD approval. HUD 
expects that reimbursements for payments other than for Reasonable 
Operating Expenses will be an infrequent occurrence.
    Comment: Section 42(m), taken literally, would prohibit a Borrower 
from receiving a refund of an overpayment or a payment on account of a 
warranty claim without HUD approval.
    HUD response: HUD has revised redesignated section 37(m) to exclude 
warranty claims from providers of goods and services.
Section VII--Enforcement
Section 43--Violations of Agreement
    This section is now designated as section 38.
    Comment: Violations related to felony criminal convictions or civil 
judgments is not understandable.
    HUD response: The violation in redesignated section 38.c. is not 
any criminal conviction or civil judgment, but a civil or criminal 
forfeiture action. As stated in section 38.c., HUD's concern is 
forfeiture or material impairment of HUD's interest in the Mortgaged 
Property.
Section 44--Declaration of Default
    This section is now designated as section 39.
    Comment: This section contains a new requirement that HUD can 
direct Borrowers to remove their partners. This is a clear violation of 
the Fifth Amendment and the Taking Clause of the Constitution.
    HUD response: Consistent with the reduction of recourse liability 
on Key Principals from the closing documents, HUD has removed from 
redesignated section 39 the language that appeared as section 44.g. and 
that required the removal of partners and other parties.
Section 46--Nonrecourse Debt
    This section is now designated as section 41.
    Comment: Exception to Owner's nonrecourse liability is 
unacceptable. Nonrecourse language here needs to be consistent with the 
nonrecourse provisions in the Note.
    HUD response: Consistent with the decision not to impose broad 
recourse liability on Key Principals, HUD is revising the language that 
appeared in section 46. Redesignated section 41 now contains language 
consistent with the recourse provisions of section 17 of the existing 
Regulatory Agreement that is being replaced by the present document.
Section VIII--Miscellaneous
    Section 42--Compliance with Laws, originally section 28, has been 
moved from Section IV--Project Management to Section VIII--
Miscellaneous in order to reflect HUD's intention that Borrower comply 
with all laws at all times, not just in the context of ``Project 
Management.''
Section 47--Binding Effect
    This section is now designated as section 43.
    Comment: The reference to ``such further time as HUD is * * * 
obligated * * * to protect the tenants of the Project'' should be 
eliminated.
    HUD response: HUD agrees that HUD's obligations with respect to the 
tenants of the Project are independent of the Regulatory Agreement, and 
the reference noted in the comment is removed from redesignated section 
43.
Section 51--Present Assignment
    This section is now designated as section 47.
    Comment: This merely repeats the present assignment in the loan 
documents.
    HUD response: Redesignated section 47 is necessary to perfect a 
security interest for HUD. The Regulatory Agreement is designed to be 
also a security agreement, as per section 53, now designated section 
49.
Section 53--Uniform Commercial Code Security Agreement
    This section is now designated as section 49.
    Comment: What is the reason for HUD to take a separate security 
interest in the UCC Collateral?
    HUD response: HUD takes a separate security interest as a prudent 
measure to protect HUD's interest in the Mortgaged Property.
    Comment: Will this security instrument be subordinate to the 
Lender's security interest?
    HUD response: The UCC financing statement will indicate that HUD's 
security interest runs to HUD ``as HUD's interest appears.''
    Comment: Will HUD file a form UCC-1?
    HUD response: No, Lender is required under section 2 of the 
Security Instrument to perfect the security interest in the Mortgaged 
Property, and the Regulatory Agreement is incorporated in the Security 
Instrument.
Section IX--Section 8 Housing Assistance Payments Contract
Section 58--Incorporation by Reference
    This section is now designated as section 54.
    Comment: It will not be easy to determine where there is a conflict 
between the Section 8 contract and the Regulatory Agreement, or where 
provisions are simply additional.
    HUD response: This provision is a continuation of a provision under 
the existing Regulatory Agreement. The intent is to provide a rule for 
resolution in the event that a conflict is present. A provision that is 
merely additional is not a conflicting provision. In any particular 
case, HUD will make the determination as to whether a conflict is 
actually present.
Signatures
    Comment: HUD has never been clear as to who is an ``authorized 
agent'' and how a Borrower knows that a Regulatory Agreement is validly 
executed.
    HUD response: HUD periodically publishes in the Federal Register 
Delegations of Authority that identify what authority is vested in 
which officials. The most current Delegations of Authority may also be 
found at HUD's Web site.

Multifamily Note, Form HUD-94001M

    Comment: Footnotes should be added to the Note (e.g., in sections 
3, 9), which allow for alterations to be made, provided they comply 
with HUD requirements, for matters traditionally left to negotiations 
between Borrower and Lender.
    HUD response: HUD does not agree that such instructional footnotes 
would be appropriate because all changes negotiated by Borrower and 
Lender would have to be approved by HUD.
    Comment: In the introductory section of the note, language should 
be added to recognize that construction loans can have a split rate--
one for construction period and one for the permanent loan.
    HUD response: This concept is set forth in the Note.
    Comment: There should be a section dealing with construction loans 
that

[[Page 3579]]

should include language to reflect standard practice of adjusting 
principal and interest payments after final endorsement to take into 
account the fact that the Loan has not been fully advanced. Such 
language would provide for the payment of interest accrued on the 
outstanding principal balance plus scheduled principal amortization. 
There should be language that the Loan will be reamortized if there is 
a mortgage reduction at final endorsement.
    HUD response: HUD does not view such a modification as a standard 
practice. Notes should be modified after approval in writing by HUD to 
reflect changes in the terms of the insured loan.
    Comment: Language should be added to the Note to comply with the 5-
year prepayment prohibition required by Section 223(f)(3) of the 
National Housing Act.
    HUD response: It would be confusing to attempt to place 
restrictions for all programs in the Note. As has always been the case, 
the Note will need to be amended to accommodate unique program 
requirements that are not universal.
Section 3--Payment of Principal and Interest
    Comment: Section 3 of the Note should be split into ``Alternative 
A--Permanent Loans'' and ``Alternative B--Construction Loans.''
    HUD response: Such a change would be confusing because the Note is 
structured to cover insured advances during the construction phase and 
the permanent financing.
Section 7--Late Charge
    Comment: The previous uniform charge and grace period were widely 
accepted, but now have been made negotiable items. Negotiated fees 
usually mean higher charges for the Borrower, and are a fertile field 
for litigation.
    HUD response: HUD agrees, in part, and has revised section 7 to 
provide that the Late Charge applies after 10 days. The revision is 
consistent with industry practice and facilitates compliance by Ginnie 
Mae issuers with their obligation to make payments to investors. 
However, HUD is leaving the blank for the amount of the Late Charge to 
provide flexibility to the parties in negotiating amounts that reflect 
their preferences and market conditions.
    Comment: The late charge provision in section 7 of the Note should 
be specified as 2 percent after 15 days, which is permitted by HUD.
    HUD response: Although HUD believes that it is preferable to leave 
a blank for the amount of the Late Charge to permit flexibility, HUD 
agrees that number of days should be standardized. However, a period of 
10 days, rather than 15, better reflects current industry practice, 
especially among Ginnie Mae issuers.
Section 8--Limits on Personal Liability
    Comment: Some exceptions are open to interpretation, i.e., why a 
failure to pay rents claimed by the Lender or the manner of applying 
insurance proceeds. Personal liability that could make the entire loan 
come due goes beyond some of the Transfer of Physical Assets 
requirements.
    HUD response: Consistent with HUD's determination not to impose 
broad recourse liability on Key Principals, the references to 
Principals and to exceptions to personal liability in addition to those 
provided in section 8 are removed.
    Comment: If the goal of nonrecourse carve-outs is to hold 
individuals personally liable for certain acts, HUD's current language 
essentially does that (see, e.g., section 17 of current Regulatory 
Agreement). Proposed section 8 goes well beyond current language by 
making a host of Principals liable for actions they did not take or 
authorize, and for events outside their control.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: The Key Principal Acknowledgement may require Ginnie Mae 
to adjust its mortgage-backed securities prospectus to the investor 
community. Any Ginnie Mae secondary mortgage market and investor 
ramifications must be fully explored.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: Section 8(b)--Minor violations of the Note should not 
result in recourse, e.g., a failure to timely deliver books and 
records, statements, schedules, or reports, especially if such failure 
is cured, or a small mechanic's lien placed upon the Mortgaged 
Property.
    HUD response: Borrower is liable only to the extent of any loss or 
damage suffered by Lender, which HUD considers to be a fair and 
reasonable provision.
    Comment: Section 8(b)--Failure to pay rents and security deposits 
to Lender upon demand after default should not result in personal 
liability.
    HUD response: As previously noted, liability is now limited to 
Borrower not to Principals, and continues to be limited to the extent 
of any loss or damage suffered by Lender.
    Comment: Section 8(b)--The failure of the Borrower to apply 
proceeds as required by the Security Instrument should be conditioned 
to cover only proceeds actually received by the Borrower.
    HUD response: Borrower's liability is determined by its failure to 
make required payments, not by its failure to receive proceeds.
    Comment: Most of the individuals in the overly broad definition of 
Principal do not control submission of books and records.
    HUD response: As noted previously, HUD has removed Principals from 
section 8.
    Comment: No measure of the liability is provided, suggesting open-
ended liability.
    HUD response: With the removal of broad recourse liability of Key 
Principals, liability of Borrower is now limited as provided in section 
8: To the extent of the Mortgaged Property and any other collateral 
held by Lender; to the extent of loss or damage suffered by Lender; to 
the extent of repayment of all Indebtedness to Lender; and to the 
extent of indemnification required under redesignated section 48(k) of 
the Security Instrument--a provision added to section 8 to provide 
conformity in the documents.
    Comment: Section 8(b) should recognize, as Fannie Mae and Freddie 
Mac do, that a Borrower may be unable to pay due to a valid court order 
in a bankruptcy, receivership or other judicial proceeding.
    HUD response: The Contract of Mortgage Insurance and the Note 
between the Lender and Borrower require that the Note be paid by 
Borrower and does not provide for any extenuating circumstances, but 
HUD will act appropriately in the event of court proceedings.
    Comment: Under section 8(b) a Principal's liability should be 
limited to the individual's own acts or acts the individual has 
authorized in violation of the applicable documents.
    HUD response: As noted previously, HUD has removed Principals from 
section 8.
    Comment: Section 8(c)--Many older partnership agreements flatly 
prohibit loans that are recourse.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: Section 8(c) creates ``springing recourse,'' since the 
recourse ``springs'' from the occurrence of a listed event. Each 
principal assumes the risk

[[Page 3580]]

of repayment of the entire loan, should any of the events occur. This 
is more extreme than Fannie Mae, which limits liability for some 
events. Springing recourse should be eliminated.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: Section 8(c)--Does HUD really want to approve every 
acquisition of any sort of property, e.g., office supplies?
    HUD response: The Security Agreement and Regulatory Agreement have 
been revised to address such issues. HUD approval is not required for 
payment of Reasonable Operating Expenses under the Regulatory 
Agreement.
    Comment: Section 8(c)--Imposition of personal liability for liens, 
cross-citing section 18 of the Security Instrument, goes too far. The 
negative effect of the lien is already significant.
    HUD response: Liability will be imposed on Borrower only when the 
granting of a lien or encumbrance results in an Event of Default under 
the Security Instrument.
    Comment: Section 8(c)--It is far more serious and inappropriate to 
make an unauthorized transfer a basis of personal liability as opposed 
to an event of default. Under the revised Uniform Limited Partnership 
Act, parties can generally leave, retire, become bankrupt, and sell 
their assets without incurring personal liability.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: Section 8(c)--If a principal commits fraud, investors 
become twice victimized by suffering the fraud and then becoming 
personally liable for repayment of the entire indebtedness for the 
actions of another.
    HUD response: As noted previously, HUD has removed the concept of 
broad recourse liability on Key Principals; therefore, the example of 
liability cited in the comment is no longer relevant.
    Comment: The GSEs permit their borrowers to have unlimited 
transfers of limited partner interests. If HUD is seeking the 
enforcement remedies of the GSE transfer provisions, HUD should adopt 
the transfer rules and other approaches, such as a willingness to 
negotiate, taken by the GSEs.
    HUD response: HUD is no longer seeking the enforcement remedies of 
GSE transfer provisions.
    Comment: This section imposes liability on all principals, not just 
``Key Principals.''
    HUD response: As noted previously, HUD has removed Principals from 
section 8.
Section 9--Voluntary and Involuntary Prepayments
    Comment: The references to prepayment premium under section 9 
should be removed from the list of amounts that become due and payable 
under a Class A Event of Default.
    HUD response: This suggested change was made to achieve uniformity.
    Comment: The references to prepayment premium under section 9 
should be removed from the list of amounts that become due and payable 
under a Class A Event of Default.
    HUD response: This suggested change was made to achieve uniformity.
    Comment: Section 9 of the Note should include two alternatives: 
``Alternative A--Base Form,'' based upon the existing form Note and to 
be used in those circumstances where Alternative B is not available; 
and ``Alternative B,'' based on language from several lenders, 
available as permitted in section 12.1.4H of the MAP Guide.
    HUD response: Section 9 has been revised to comport with current 
HUD policy in Program Obligations.
    Comment: Section 9(1) allows a Borrower to prepay up to 15 percent 
each year without penalty. Section 3(b) provides no prepayment premium 
is due if prepayment is made within some number of days before the 
maturity date. It is not clear if there is a lockout period at all, and 
HUD should clarify this issue.
    HUD response: Lockouts are permitted in accordance with Program 
Obligations, and an alternative paragraph providing for a rider to 
address prepayment restrictions has been added to section 9.
    Comment: Section 9, Prepayments, is incomplete in numerous 
respects. The use of a prepayment prohibition is not contemplated and 
there is no insert language for a prepayment premium per Mortgagee 
Letter 87-9, entitled, ``Mortgage Prepayment Provisions for HUD-Insured 
and Coinsured Multifamily Projects,'' issued February 10, 1987, which 
allows private participants to negotiate prepayment terms and language 
within bounds established by HUD.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: Section 9, while implying a prepayment lockout period and 
corresponding prepayment premium periods, does not clearly address 
these issues and could lead to litigation over its intent. There should 
be a clear statement that the note may not be prepaid in whole or in 
part, except as provided.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: The last sentence in section 9(a)(1) [``No default shall 
exist by reason of nonpayment of any required installment of principal 
so long as the amount of optional additional prepayments of principal 
already made pursuant to the privilege of prepayment set forth in this 
Note equals or exceeds the amount of such required installment of 
principal.''] is inconsistent with Ginnie Mae programs and bond rating 
requirements and should be removed, or a footnote added authorizing 
deletion whenever the loan is funded with Ginnie Mae securities, bonds, 
or other methods that are inconsistent with this sentence.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues. The rider would override any provision such as that noted in 
the comment.
    Comment: Section 9(a)(2) requiring Borrower to pay the prepayment 
premium even if the loan is accelerated makes good business sense and 
protects the investor community.
    HUD response: The provision that was previously found in section 
9(a)(2) has been removed to accommodate the flexibility provided by the 
addition of an alternative paragraph in section 9(a)(1). Previous 
section 9(a)(3) has been redesignated section 9(a)(2).
    Comment: The reference in section 9(a)(2)(ii) to the prepayment 
calculated pursuant to 9(a)(1) is incorrect, since no prepayment 
premium is calculated in 9(a)(1).
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: Section 9(b) provision mandating no prepayment premium 
prior to the Maturity Date is contrary to Mortgagee Letter 87-9, unless 
HUD is changing its policy to allow longer prepayment restrictions.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: There should be an express prohibition on prepayments 
other than as expressly permitted.
    HUD response: There is not currently an express prohibition against 
prepayment, and HUD does not consider such a prohibition to be 
necessary.

[[Page 3581]]

    Comment: Prepayments without penalty should be permitted when 
required by HUD due to a cost certification or similar report or if 
amortization is advanced under applicable HUD regulations.
    HUD response: A reduction in the amount of the mortgage as a result 
of cost certification should occur prior to the commencement of 
amortization and, therefore, should not be applicable. In other 
circumstances, the requirements of 24 CFR 200.87(b) would govern the 
terms of the prepayment.
    Comment: The right of HUD to override a prepayment penalty or 
lockout is missing.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: Can a Lender impose a prepayment premium and, if so, how 
high, if the Loan is accelerated during the lockout period.
    HUD response: The concerns of the comment have been addressed by 
the addition of an alternative paragraph in section 9 to address such 
issues.
    Comment: Is HUD's permission required to prepay the loan?
    HUD response: The loan is designed not to require HUD approval. A 
rider may be added where HUD approval would be appropriate.
Section 10--Costs and Expenses
    Comment: The Borrower should not be required to pay all costs and 
attorney's fees if there is any default. Fees and costs should be 
determined by a court having jurisdiction.
    HUD response: This provision provides an incentive for Lender to 
pursue collection and to enforce the provisions of the Loan Documents. 
When HUD acts in a nonjudicial foreclosure, there is no court to 
determine costs.
Section 13--Loan Charges
    Comment: This section is not necessary since the Lender should be 
able to determine if the loan is usurious, and the Lender and HUD 
require an opinion from Borrower's counsel to that effect. In rare 
instances where charges are usurious, the Lender should bear the 
consequences, and the Borrower should have the right to recover costs 
and expenses in enforcing penalties.
    HUD response: HUD disagrees with the comment. This section 
clarifies the rights and responsibilities of Borrower and Lender in 
this situation, and how the ``excess'' is to be applied. Application of 
the excess to reduce the unpaid principal balance best serves the 
public interest by reducing HUD's exposure to risk.
Section 16--Governing Law
    Comment: The language in the Note conferring exclusive jurisdiction 
on the state or federal courts located in the Property Jurisdiction 
should be removed. There may be circumstances where it may be necessary 
to bring an action against the borrower in a court outside the Property 
Jurisdiction; for example, if a Borrower files bankruptcy in a 
jurisdiction outside the Property Jurisdiction.
    HUD response: Section 16 provides: ``This Note shall be governed by 
the law of the Property Jurisdiction, except as such local law may be 
preempted by federal law.'' This language is adequate to cover the 
concern iterated in the comment. If, for example, Borrower files for 
bankruptcy outside the Property Jurisdiction, a filing in a federal 
court would be governed by federal law, and a filing in a state court 
would be governed by the law of the property jurisdiction as to matters 
that arise under the Note.
Section 20--Waiver of Jury Trial
    Comment: Why should HUD, a federal agency, follow the lead of 
commercial banks that insist on these unfair provisions to Borrowers by 
denying them the fundamental right of a jury trial? This provision 
should be eliminated.
    HUD response: HUD has made a conscious effort to adopt current 
commercial practices in revising the closing documents, and this is a 
current commercial practice.
Acknowledgement and Agreement by Key Principal
    Comment: There has been litigation, which HUD is inviting here, 
over the form and validity of guaranties, whether or not there is 
consideration for the guaranty.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
    Comment: The liability of the guarantor should be limited to monies 
withdrawn from the project in violation of the Regulatory Agreement.
    HUD response: As noted previously, HUD has determined not to impose 
broad recourse liability on Key Principals.
Social Security and Tax Identification Numbers for Signatories
    Comment: Unlike Fannie Mae and Freddie Mac, HUD is subject to the 
Freedom of Information Act, and requiring Social Security and tax 
identification numbers for signatories may result in the dissemination 
of highly sensitive personal material.
    HUD response: Although HUD considers the information identified by 
the comment to be exempt from disclosure under exemption 6 of the 
Freedom of Information Act, HUD is removing the requirement that this 
information be provided by the signatory.

Agreement and Certification, Form HUD-93305M

Section 4
    Comment: In section 4, the list of Principals should include 
``managers'' and ``members.''
    HUD response: HUD agrees with this comment and has added this 
language.
Section 14--Bar Against Undisclosed Side Agreements
    Comment: The current permissibility of certain undisclosed side 
agreements with contractors is abolished. Such agreements provide 
necessary flexibility and additional funding where required and are a 
sound business practice that should not be abandoned. The ability of 
project principals to have their rights and obligations recorded in 
side agreements should not be disallowed or delayed by an unnecessary 
HUD review and/or approval process. HUD's interests will be adequately 
protected by a certification that there are no side agreements, except 
``Permitted Side Agreements,'' defined as agreements relating to 
construction of the project that meet certain requirements, including 
that the borrower shall not be a party thereto or have obligations 
thereunder, and that HUD's requirements prevail in the event of a 
conflict.
    HUD response: HUD has removed this section completely from this 
document. These disclosures are now covered in section 8 of the 
Regulatory Agreement.
    Comment: In section 14, the Construction Contract does not include 
costs of offsite work and certain types of demolition work. This is 
work typically performed on the Project or related property.
    Section 14 also should provide for ``Permitted Side Agreements'' 
defined as ``an agreement which relates to the construction of the 
Project and which meets each of the following requirements:
    (i) The Borrower shall not be a party thereto or have any 
obligation there under; and
    (ii) The Permitted Side Agreement shall include the substance of 
the following provisions:


[[Page 3582]]


    In the event of any conflict between this Section and any other 
provisions of the Agreement, the provisions of this Section shall be 
controlling. In the event of any conflict between any provision and 
this Agreement and any applicable HUD rule, regulation or 
requirement, such HUD rule, regulation or requirement shall be 
controlling. [the Borrower] shall have no obligations under this 
Agreement. Contractor agrees that it will not assert any claim under 
this Agreement against [the Borrower], the Project, proceeds of the 
HUD-insured loan on the Project and/or the interests of [third-Party 
Obligator] in the Project for any obligations of [Third-Party 
Obligor] under this Agreement. The obligations of Contractor under 
the Construction Contract between [the Borrower] and Contractor are 
and shall be separate and independent of the rights and obligations 
of [Third-Party Obligor] and Contractor under this Agreement. 
Without limiting the generality of the foregoing, Contractor shall 
fully perform its obligations under the Construction Contract in 
accordance with its terms regardless of whether or not [Third-Party 
Obligor] has performed its obligations under this Agreement.''

    Finally, with respect to section 14, the suggestion was made that 
HUD not prohibit or review ``side agreements,'' which most often 
address the amount and means of payment of the General Contractor's 
profit. Side agreements may also address other issues such as: The 
profit on change orders; penalties or rewards for meeting a staged 
completion schedule; the time frame for delivery of the General 
Contractor's cost certification; cooperation in release of the 
retainage consistent with HUD requirements; requiring the General 
Contractor to fund HUD-required escrows for incomplete construction 
items; payment of interest on the retainage to the General Contractor 
for some or all of the period between construction completion and final 
endorsement; and requiring the General Contractor to comply with the 50 
to 75 percent Rule.
    HUD response: HUD has removed this clause completely from this 
document. These disclosures are now covered in section 8 of the 
Regulatory Agreement.

Escrow Agreement for Noncritical Deferred Repairs, Form HUD-92476.1M

Responsibility for Approval Not Clear
    Comment: The proposed document removes HUD's signature, removes any 
reference to HUD's approval rights, and makes no reference to the 
revised Request for Approval of Advance of Escrow Funds, which 
continues to provide for HUD approval for withdrawals. If the Lender 
alone is authorized to approve funds withdrawals, the form should 
provide for a reasonable fee. If HUD intends to retain withdrawal 
approval authority, the document must be revised.
    HUD response: HUD has amended the document to clarify HUD's 
approval authority over the release of funds from the escrow portion of 
the loan proceeds.

Escrow Agreement for Working Capital, Form HUD-92412M

    Comment: The language in the third introductory section should be 
removed, which states that the working capital deposit has not been 
included in the Mortgage Loan proceeds, and that the deposit could be 
funded from excess cash available to the Borrower, and that the 
requirement applies to both for-profit and nonprofit Borrowers.
    HUD response: Although HUD has revised the term ``mortgage loan 
proceeds'' to ``Loan proceeds,'' HUD disagrees with the commenter that 
this provision should be removed.
Section 1
    Comment: Since this agreement may be executed and dated before the 
date of initial endorsement, section 1 should be revised to reflect 
that the deposit shall be made at or before initial endorsement.
    HUD response: HUD believes that the language as currently contained 
in the agreement is appropriate. If the deposit is made before initial 
endorsement, the deposit is therefore available at endorsement.
    Comment: Since the Lender may sign the Agreement and the Agreement 
may be dated before initial endorsement, the Lender should not be 
expected to acknowledge receipt of the deposit.
    HUD response: The Agreement contemplates that the Lender will not 
sign unless the Borrower has made the deposit.
    Comment: The Deposit should be permitted to be partially in the 
form of cash and partially in one or more letters of credit, rather 
than cash or a letter of credit.
    HUD response: HUD agrees with this suggestion. In section 1, HUD 
has added ``and/or'' after the checkbox for ``cash'' to show HUD's new 
policy of allowing a mixture of cash and a letter of credit.
Section 3--Interest to Borrower
    Comment: Although the creation of the Escrow Agreement is 
applauded, section 3 requires return to Borrower of any balance of 
funds, together with interest earned. Continuation of current HUD 
policy is urged: The Replacement Reserve Account is only an escrow 
account subject to interest payment to Borrower and only if the 
Borrower specifically requests such payment.
    HUD response: HUD agrees with the comment to continue current HUD 
policy, and the reference to interest has been removed.
    Comment: In section 3, under current HUD requirements, the working 
capital escrow is released one year after the construction completion 
date if the mortgage is not in default, and this date should be 
maintained. The new form provides for release after the date of 
sustaining occupancy. This change brings HUD into the administration of 
an escrow that has always been Lender's responsibility. The change will 
likely result in the earlier release of the deposit, since most 
projects exceed sustaining occupancy in less than one year after 
construction completion and those that have not achieved this by that 
time have often exhausted their working capital escrows well before the 
end of the one-year period.
    HUD response: HUD agrees with the commenter and has revised the 
language of section 3 to provide that any funds remaining in the 
deposit the later of: (a) One year after construction, or (b) after the 
date of sustaining occupancy as determined by HUD, will be returned to 
the Borrower.
    Comment: In section 3, adding ``interest earned on funds'' is not 
appropriate because HUD is not relying on interest earnings in its 
underwriting and no interest earnings would exist if letters of credit 
are used. References to interest should also be dropped from sections 5 
and 6.
    HUD response: HUD agrees with this comment and has removed 
references to interest earned in sections 3 and 6, which deal with the 
disbursement of the Deposit. The reference in section 5, which provides 
how the Deposit is held, is retained.
Section 4
    Comment: In section 4, it is unclear how a borrower ``certifies at 
firm commitment'' that it will apply the balance in the escrow in a 
certain way. This is a firm commitment condition imposed by HUD 
following subsidy layering review.
    HUD response: HUD disagrees with this comment. The borrower in fact 
certifies at firm commitment that it will apply any balance of funds to 
the reserve for replacement or other restricted account specified by 
HUD.
Section 5
    Comment: In section 5, language that allows Lender to draw upon a 
letter of credit at any time and convert it to cash should be added to 
make it more difficult for a borrower to interfere with a draw upon a 
letter of credit, and to

[[Page 3583]]

make the section more consistent with HUD's requirement that such 
letters of credit be unconditional and irrevocable.
    HUD response: HUD agrees with this comment and has added language 
that provides that the Lender may, for purposes of the Escrow Agreement 
for Working Capital, draw upon any letter of credit included in the 
Deposit and convert the same to cash.

Building Loan Agreement, Form HUD-92441M

Section 4--Advances
    Comment: Under section 4(a), advances should include the value of 
materials and equipment purchased but stored off-site.
    HUD response: HUD agrees with the commenter and has revised the 
language in section 4(a) to include the value of materials and 
equipment purchased but stored off-site.
    Comment: HUD should add to section 4(c), ``In any event, 
disbursement of mortgage proceeds in an amount sufficient to satisfy a 
GNMA requirement for good delivery of mortgage-backed securities at 
initial endorsement is permissible.''
    HUD response: HUD has revised section 4(c), but has not 
incorporated the language requested by the commenter.
Section 5--``Soft'' Costs Disbursed by Lender to Borrower
    Comment: The line items listed in section 5 should not be 
interpreted as limiting, with no allowance for adding such typical 
items as architectural fees for design and supervisory services, 
contingency in a rehabilitation project, and Mortgagor's ``other 
fees.'' Section 5 should be tailored to the deal at hand.
    HUD response: HUD agrees with the comment and has revised section 5 
to remove the list of items eligible for payment and has substituted a 
reference to an Exhibit B, in which the parties will itemize applicable 
charges or items.
Section 7--Insured Advances
    Comment: Rather than an extension of the title policy for each 
insured advance, the alternative of current mechanic lien reports 
should suffice in a state where the insured loan has continued priority 
over liens.
    HUD response: HUD disagrees with this comment. The alternative of a 
mechanic's lien report is a lesser standard. The extension of the title 
policy best protects HUD's interest.
Section 14--Wages
    Comment: The end of section 14(b)(ii) should be revised to read, 
``* * * which may be published as of the date the firm commitment was 
first issued.''
    HUD response: The language in section 14(b)(ii) is consistent with 
the Department of Labor regulations at 29 CFR 1.6(a)(3)(N).
Section 19--Liability for Advances
    Comment: Personal liability is an extreme remedy when there could 
be numerous instances where the agreement is violated involuntarily or 
unintentionally by the Borrower; for example, by the owner's contractor 
or if the insured advance is paid out in a way that violates Davis-
Bacon requirements. Personal liability should be limited to knowing and 
deliberate violations. Another comment suggested that such violations 
should only be events of default not resulting in personal liability of 
the Borrower.
    HUD response: HUD agrees and has removed section 19 concerning 
personal liability.
Section 20--HUD not a Party
    Comment: This section should state that HUD has an obligation to 
perform all of its duties in a timely manner.
    HUD response: HUD declined to adopt this comment. HUD is not a 
party to the Building Loan Agreement.

Guide for Opinion of Borrower's Counsel, Form HUD-91725M

Preamble
    Comment: The phrase, ``The Borrower has requested that we deliver 
this opinion and has consented to reliance by Lender's counsel in 
rendering its opinion to Lender * * *'' should be changed to, ``The 
Borrower has requested that we deliver this opinion and has consented 
to reliance by Lender's counsel in its representation of Lender * * 
*.'' Lender's counsel does not typically render an opinion to the 
Lender in connection with the Loan transaction.
    HUD response: HUD agrees in part with this comment and has revised 
the Preamble accordingly.
American Bar Association (ABA) Guidelines
    Comment: HUD fails to acknowledge the ABA Guidelines for 
Preparation of Closing Opinions.
    HUD response: HUD disagrees with this statement. To the extent that 
HUD departs from the ABA Guidelines, it is because HUD needs the 
information to manage prudently the risk to public resources being made 
available. The Opinion is the most appropriate source for the 
information HUD needs.
Increased Cost
    Comment: Changes will substantially increase the cost of an opinion 
letter and reduce the number of competent attorneys willing to provide 
it.
    HUD response: The substantive changes made to the Guide from the 
one in use were minimal and were responsive to suggested changes. The 
changes were largely directed to clarifying changes and some updates in 
terminology where appropriate and have not imposed any stricter 
standards inconsistent with what had been done previously. Some 
sections concerning actions or knowledge of the Lender have been moved 
to the Lender's Certificate. These types of changes will not result in 
a substantial increase in cost or reduce the number of competent 
attorneys willing to provide the opinion.
Not an Opinion
    Comment: One commenter stated that the Certification/Warning is 
inconsistent with the nature of an opinion--an opinion certified to be 
true is not an opinion but a guarantee. Two other commenters stated 
that requiring an Opinion and a Certification/Warning is redundant, 
overkill, and insulting.
    HUD response: HUD agrees in part with these comments. The language 
of the Certification/Warning has been revised to provide: ``This 
instrument has been made, presented, and delivered for the purpose of 
influencing an official action of HUD in insuring the Loan, and may be 
relied upon by HUD.'' Additionally, the heading ``Certification/
Warning'' has been removed.
    Comment: The Guidelines require counsel to opine as to the future 
acts and behavior of individuals or entities a lawyer does not and may 
never represent. Such an opinion would not be covered by malpractice 
insurance.
    HUD response: HUD has revised the Guidelines to ensure the scope of 
counsel's opinion is appropriate to the transaction and to the 
individuals or entities that counsel represents.
Deviations
    Comment: The certification regarding unapproved deviations from the 
form opinion letter would require a corresponding certification from 
HUD counsel as to the approved deviations.
    HUD response: HUD disagrees that a corresponding certification is 
needed. The purpose of the certification regarding unapproved 
deviations from the form opinion letter is to identify and disclose 
changes. HUD's continuation with the closing, in light of the changes 
made to the opinion letter and disclosed to HUD, constitutes HUD's 
approval.

[[Page 3584]]

Scope of Opinion Letter
    Comment: While Fannie Mae and Freddie Mac have reduced the scope of 
their opinion letters, HUD is going in the opposite direction, which 
may place HUD at a competitive disadvantage.
    HUD response: The scope of HUD's opinion letter is not the same as 
the scope of Fannie Mae's and Freddie Mac's opinion letters, because 
the scope of the transactions carried out by HUD, Fannie Mae, and 
Freddie Mac are not the same. HUD provides mortgage insurance on 
construction advances, and neither Fannie Mae nor Freddie Mac provides 
construction advances. The scope of HUD's opinion letter protects the 
scope of HUD's interests in the transaction.
    Comment: It is impracticable to demand that Borrower's Counsel 
personally explain the Regulatory Agreement to each Principal.
    HUD response: HUD agrees and has removed that language, which 
appeared as paragraph (g) under the heading, ``We [I] confirm that:'' 
in the Opinion.
Reliance Language
    Comment: Reliance language should state that the subsequent note 
holder may only rely on the Opinion to the same extent as, not greater 
than, the addressee.
    HUD response: HUD disagrees with this recommendation. The reliance 
language is consistent with modern opinion practice.
    Comment: It is presumptuous of HUD to disregard case law and to 
continue to demand that Borrower's Counsel's Opinion be addressed to 
and relied upon by both HUD and Lender.
    HUD response: HUD disagrees with this view. HUD has a significant 
interest in the loan, and therefore HUD must be able, same as the 
Lender, to rely upon Borrower's Counsel's Opinion.
Financial Interest in Project
    Comment: Certification of no financial interest needs to be 
reevaluated in light of structures of today's transactions. A lawyer's 
holdings in mutual funds, real estate investment trusts (REITS), and 
public companies could all be technically indirect and impermissible 
holdings.
    HUD response: In order to protect HUD's interest, the attorney must 
confirm that he or she has no financial interest, direct or indirect, 
in the Project, the Property, or the Loan, other than as specified in 
paragraph (c) of the opinion Guide. However, in recognition of the 
concerns expressed in the comment, HUD has revised the language in 
paragraph (d) of the opinion Guide regarding undisclosed interests, to 
state that the attorney has no interest in the subject matters of the 
opinion other than as previously disclosed and approved by HUD, and has 
added the phrase ``Except as provided in paragraph (d)'' to paragraph 
(c).
HUD Resources
    Comment: HUD's failure to have adequate staff should not be a 
reason for failure to negotiate an opinion acceptable to different law 
firms and their liability insurers.
    HUD response: The opinion represents HUD's current practice and is 
not related to any resource or staffing issues. It is HUD's intent to 
establish and maintain a uniform set of documents for multifamily 
property transactions to provide stability and predictability for such 
transactions, and to minimize, as much as possible, negotiations and 
the potential for inconsistencies and unanticipated consequences.
Identity of Interest
    Comment: Identity of interest between Lender and Borrower, if 
disclosed, should be permitted in projects not covered by the MAP 
Guide.
    HUD response: HUD agrees and has removed the limiting language, 
which appeared as paragraph (e).
Joint Opinion
    Comment: The opinion should affirmatively take into consideration 
that transactional counsel for Borrower may choose to rely on local or 
specialty counsel with respect to certain issues within the opinion.
    HUD response: HUD agrees with this suggestion, and the Opinion 
includes language to designate either general or special counsel for 
matters that may require a separate opinion by specialty counsel.
Signatory
    Comment: It is the practice to have a signature of the law firm on 
an Opinion, rather than the name and signature of a particular attorney 
at the firm.
    HUD response: It is also still the practice, however, to have the 
signature of an attorney authorized to sign on behalf of the law firm. 
HUD prefers this practice and, therefore, has not changed the document 
as suggested by the commenters.
Liens, Encumbrances
    Comment: Most institutional Lenders do not release their liens 
until they have been paid. In requiring that there ``cannot be any 
liens and encumbrances on the Mortgaged Property when HUD endorses the 
Note for insurance,'' HUD has created a ``Catch-22'' that no other 
Lender in the country insists upon when making a new secured loan that 
pays off an existing secured loan. The normal practice is to process 
releases after closing.
    HUD response: The requirement of a first lien reflects the 
requirement of the National Housing Act. The National Housing Act 
requires that HUD insure a first lien.
Section M
    Comment: The correct name of the escrow (Escrow Agreement for 
Working Capital) should be used in section M, and Lender should be 
included in addition to Borrower as a signatory.
    HUD response: HUD agrees with the comment, and the revision has 
been made to section M.
Section N
    Comment: The section should include form 92412M and signatory 
parties (Borrower, Lender, the General Contractor, and HUD) to the 
Agreement and Certification.
    HUD response: HUD agrees in part and has revised section N to 
include an instruction to insert the appropriate parties.
Section Q
    Comment: The defined term ``Filing Offices'' should be used in 
place of general language (``county and Property Jurisdiction [and 
Organizational Jurisdiction].'')
    HUD response: HUD agrees in part with the comment and has revised 
section Q to require the insertion of the appropriate UCC filing 
office(s).
Section T--Evidence of Zoning Compliance
    Comment: HUD must recognize that some jurisdictions no longer issue 
Zoning Letters.
    HUD response: HUD does recognize this, and the Guide and Opinion 
account for such local law variations.
Section W--Survey
    Comment: The phrase ``showing completed project'' should be 
eliminated or followed by ``if any.''
    HUD response: The ``or'' in the language of section W makes the 
inclusion of ``if any'' unnecessary.
New Article 9
    Comment: The new Article 9 has revised the rules as to perfection 
of security interests in personalty owned by debtors that are 
registered entities. Instead of filing in the jurisdictions where the 
personalty is physically

[[Page 3585]]

located and where the debtor's chief executive office is located, 
perfection is achieved by filing with the Secretary of State in the 
jurisdiction where the debtor is formed. This section should be 
required only for debtors that are individuals and unregistered 
entities, such as general partnerships.
    HUD response: As a result of comments pertaining to the UCC, HUD 
has reviewed all provisions in all documents and has made revisions as 
necessary.
Section 4
    Comment: The first sentence is unqualified and too broad, and the 
second sentence is rendered redundant by the first. A single sentence 
should state that the Borrower has obtained all necessary approvals for 
the execution of the loan documents and the ownership and operation of 
the property.
    HUD response: Section 4 has been removed because HUD agrees that 
certain representations in the section should be made by Lender. The 
Lender's Certificate has been expanded to include them.
Section 5--Loan Documents Subject to Qualifications
    This section is now designated section 4.
    Comment: It is unreasonable to require an opinion as to the 
enforceability of an unenforceable provision.
    HUD response: HUD agrees that would be unreasonable, but the 
document does not require enforceability of an unenforceable provision.
Section 7--Loans Involving Construction or Rehabilitation
    This section is now designated section 6.
    Comment: It is unreasonable to require an opinion as to 
``proposed'' changes of law or ordinance.
    HUD response: The language with respect to proposed changes in (now 
designated) section 6 is qualified by the phrase ``to our knowledge.''
Section 13
    This section is now designated section 11.
    Comment: This section should be revised consistent with section G 
regarding revised Article 9.
    HUD response: HUD agrees with this comment and has revised section 
11, for example, by adding ``as its interests appear'' following the 
reference to HUD.

Instructions to Opinion, Form HUD-91725M

Section OO--Docket Search
    Comment: The statement that a docket search in the jurisdiction 
where the Borrower is located is not necessary if a sole-asset Borrower 
is being created should be clarified to indicate the time frame in 
which the sole-asset Borrower is created, i.e., not more than 90 days 
preceding initial endorsement.
    HUD response: HUD agrees and this clarification has been made for 
the docket search provision, which is now section NN.
    Comment: Does the requirement for a docket search of a general 
partner of a mortgagor mean that a search of a managing member of a 
limited liability company mortgagor is not required?
    HUD response: The language has been revised to clarify that the 
search is limited to the location of the project, unless the Borrower 
is created or located in a jurisdiction other than the project, in 
which case record searches in both jurisdictions will be necessary. HUD 
believes this revised language addresses the commenter's concern.

Certification of Borrower, Form HUD-91725M (Exhibit A)

Section 3 Location of Secured Property
    Comment: This section should be updated to comply with revised 
Article 9.
    HUD response: HUD agrees and has updated accordingly.
Section 7--Source of Funds
    Comment: The first sentence should be clarified to read, ``The 
source(s) of any funds advanced by Borrower for purposes of meeting any 
equity requirement, including second debt, of HUD or contributing to 
the * * * .''
    HUD response: This section was removed completely from the 
Certification of the Borrower. Source of funds is now addressed in the 
Lender's Certification.

Construction Contract, Form HUD-92422M

Contractor's Progress Schedule
    Comment: It would make sense to require integration of a 
Contractor's Progress Schedule into the Construction Contract with 
conditions for reasonable extensions to prevent amending the Schedule 
without HUD consent.
    HUD response: HUD disagrees with this recommendation. The 
Contractor's Progress Schedule is used as an underwriting tool and 
therefore not appropriate to insert into a legally binding document.
Article 2--Identification of Contract Documents
    Comment: In section A(2) of Article 2, excepting the mandatory 
arbitration provisions contained in AIA A201-1997, General Conditions, 
would be to exclude standard industry practice for resolving numerous 
construction complaints, issues, and disputes.
    HUD response: HUD disagrees. This provision assists in maintaining 
the appropriate level of flexibility, and it is necessary to protect 
HUD's interest.
    Comment: In section A(2) of Article 2, the present contract 
references only the current form of General Conditions; is there a 
reason for requiring the 1997 edition?
    HUD response: The 1997 edition represents the latest revision that 
HUD has approved.
    Comment: The list of Contract documents should include, ``All 
Change Orders (as defined in section D below).''
    HUD response: HUD agrees in part with the comment and has revised 
the list to include the following language: ``Any change orders 
approved by HUD after the execution of this Contract.''
Article 3--Time
    Comment: The requirement that completion of all punch list items 
and the otherwise open nature of the prerequisites for execution of the 
final Trip Report is potentially counterintuitive and could cause 
delay.
    HUD response: HUD disagrees. The requirement is not a new 
requirement, and HUD has no information to indicate that the execution 
of the final Trip Report is potentially counterintuitive and could 
cause delay.
Article 7--Obligations of Contractor
    Comment: In section C of Article 7, the introductory language 
should read: ``Upon completion of construction, the Contractor shall 
furnish at the Contractor's expense a survey map meeting HUD 
requirements * * * .''
    HUD response: HUD disagrees and did not revise the introductory 
language as suggested by the commenter. However, HUD has revised this 
provision to include the following language: ``To the extent such data 
shows that the Contractor has deviated from the Plans and 
Specifications, Contractor shall be responsible, at its own expense, 
for correcting such deviations.''
    Comment: In section 7C, rather than attempt to enumerate all survey 
requirements in the Construction Contract, it would be much more 
economical from a drafting standpoint simply to require the Contractor 
to

[[Page 3586]]

produce an as-built survey and Surveyor's Report in accordance with HUD 
requirements and otherwise acceptable to Lender and HUD.
    HUD response: HUD does not generally agree with the comment but has 
amended section 7C to indicate that the survey has to be prepared in 
accordance with ALTA-ACSM standards.
Article 9--Waiver of Lien or Claim
    Comment: With respect to section A of Article 9, requiring lien 
waivers from subcontractors should be eliminated. It would be 
impossible in some states (e.g., California) to obtain such waivers 
from subcontractors or suppliers.
    HUD response: HUD prefers to address this issue on a case-by-case 
basis. This provision is important and HUD, therefore, is not removing 
it completely from this contract.
    Comment: In section B of Article 9, the second sentence should also 
be prefaced by ``In jurisdictions where permitted by law * * *''
    HUD response: HUD does not consider the recommended change to be 
necessary.
    Comment: Article 9 should state that a contractor lien will likely 
result in termination of further advances under the Building Agreement.
    HUD response: The contractor is not a party to the Building 
Agreement, and the recommendation is not adopted.
Signature Page
    Comment: Rather than specifying ``six (6) counterparts,'' the 
signature line should refer to ``multiple'' counterparts.
    HUD response: HUD considered the issue raised by the comment and 
determined that at least six counterparts are required in all cases. 
Therefore, ``at least'' language has been added to cover any 
contingency where more will be required.

Lease Addendum, Form HUD-92070M

Section (b) (HUD acquires title)
    Comment: This provision giving HUD an option to purchase fee simple 
title to a leasehold estate where HUD acquires title to the leasehold 
estate will not be acceptable to a Ground Lessor and will eliminate 
HUD-insured loans secured by a ground leasehold. The reference back to 
section (b) in section (e)(1) should also be removed.
    HUD response: The option is not new, but represents a longstanding 
HUD policy.
Section (f) (Lease Termination)
    Comment: Sixty days for notice of monetary default from Lender to a 
Tenant is too long and will be unacceptable to most landlords.
    HUD response: HUD disagrees. HUD believes that 60 days presents a 
reasonable time frame.
    Comment: The 180-day cure period is too long and a commercially 
unreasonable requirement to impose upon a Ground Lessor.
    HUD response: HUD disagrees. HUD believes that 180 days presents a 
reasonable time frame.
    Comment: Where a Ground Lessor gives HUD or a Lender additional 
rights, it will want to be paid all monetary obligations to be kept 
whole, and will want to be assured that HUD or the Lender pays property 
taxes, insurance, and other obligations of the tenant.
    HUD response: If there is a default on the Mortgage, Lender is 
obligated to pay costs such as taxes and insurance to preserve the 
property.
Section (g) (Possession of Property)
    Comment: A Landlord will never agree, after termination of the 
Ground Lease and retaking possession of the Property, to give Landlord 
or HUD an additional 6 months to enter into a new Lease with the 
Landlord.
    HUD response: HUD considers this a reasonable time to enter into a 
new Lease. This period is also the maximum allowed, and is not expected 
to be the norm.
Section (h) (Landlord Joining Tenant in Applications)
    Comment: This section should allow modifications in the event the 
Landlord is a public agency, as HUD has previously permitted, for 
example, providing the public agency/Landlord 30 days to join the 
tenant, and adding a qualification ``to the extent that it may within 
the exercise of its municipal powers and responsibilities.'' Further a 
public agency cannot irrevocably appoint the Tenant as its attorney-in-
fact to execute papers.
    HUD response: HUD has added the suggested qualification to this 
paragraph.

Request for Endorsement of Credit Instrument, Form HUD-92455M

    Comment: The Lender should be required to submit a Security 
Agreement only for Personalty that state licensing officials mandate to 
be maintained at a Facility for licensing purposes.
    HUD response: The Lender is required to submit a Security Agreement 
for Personalty necessary for operation of the project. This 
requirement, which appeared in an unnumbered paragraph, is now included 
in a paragraph designated as section 2.
Section 2--Impounds
    This section is now designated as section 8.
    Comment: A statement should be added that impound accounts for 
taxes and insurance (excluding mortgage insurance premiums) if 
collected by a first mortgagee may be deferred until the first mortgage 
is paid in full.
    HUD response: HUD disagrees with the suggestion. These requirements 
apply only to the first mortgage.
Section 8--Reserve Fund for Replacements
    Comment: A statement should be added that reserves for replacement 
should be allowed to remain with the first mortgagee until payment in 
full of the first mortgage. Thereafter, the second mortgagee would 
begin collecting replacement reserves.
    HUD response: HUD disagrees with the suggestion. This requirement 
applies only to the first mortgage. However, this provision has been 
removed from the Request for Endorsement form.
Section 19--Approval of Transfer of Project
    This section is now designated as section 13.
    Comment: Rather than limit the Lender's fee for reviewing a 
transfer to actual expenses incurred, Borrower should reimburse Lender 
for reasonable, actual, and necessary expenses.
    HUD response: HUD disagrees, and has not adopted this 
recommendation.
    Comment: Section 19 is part of a document that is probably not 
binding on successor mortgagees; its provisions should be made part of 
the Deed of Trust.
    HUD response: The requirement has been removed from the Request for 
Endorsement form and is included in the Lender's Certification, which 
has been clarified to apply to successors and assigns.

Residual Receipts Note (Limited Dividend Mortgagors), Form HUD-91712M

Section 3--Prepayments
    Comment: This section prohibits prepayment of interest prior to 
maturity of the note. Why is prepayment of principal permitted, but not 
prepayment of interest?
    HUD response: Prepayment of principal is permitted only from 
residual receipts and only upon obtaining prior written approval from 
HUD. This is longstanding HUD policy, and HUD considers it an 
appropriate limitation for Limited Dividend Mortgagors. If a Limited 
Dividend

[[Page 3587]]

Mortgagor were permitted to take interest, which generally would occur 
after several years when interest would be compounded, this would make 
it possible for the mortgagor to exhaust the funds that would otherwise 
be available to the Project and could have the effect of increasing 
distributions if interest prepayment were permitted.

Surplus Cash Note, Form HUD-92223M

General
    Comment: HUD should allow payments to be made semi-annually since 
surplus cash may be distributed semi-annually.
    HUD response: HUD agrees and has clarified the undesignated 
introductory paragraph to provide that payment may be made semi-
annually.
    Comment: A section should be added to allow for principal payments 
from surplus cash.
    HUD response: HUD does not restrict the owner's discretion on the 
use of surplus cash. The owner retains the discretion to use surplus 
cash.
    Comment: A section should be added that allows for other provisions 
that are not inconsistent to be added to the document.
    HUD response: HUD does seek consistency in the use of its form 
documents, and does not consider open-ended documents to be 
appropriate. However, where necessary, other provisions would be 
included, consistent with section 29 of the Lender's Certificate, which 
addresses changes in the closing forms.
Section 2--Payment From Surplus Cash
    Comment: It is unreasonable for the Maker/Owner to be in default 
for not making payments even in instances when surplus cash is not 
available.
    HUD response: HUD disagrees. Payments would not be made if surplus 
cash were not available.
    Comment: The language ``to the extent of available Surplus Cash'' 
should be added to the end of section 2, as follows: The restriction on 
payment imposed by this section shall not excuse any default caused by 
the failure of the maker to pay the indebtedness evidenced by the Note 
to the extent of available Surplus Cash.''
    HUD response: As HUD noted in a response to an earlier comment, HUD 
does not restrict the owner's discretion on the use of surplus cash. 
The owner retains the discretion to use surplus cash prudently.
Section 4--Prepayment
    Comment: This section allows Maker to pay principal on Note ``on 
any interest payment date,'' but the Note provides that interest is 
payable annually, so that principal can only be paid once a year. The 
first sentence should be revised to read, ``Maker may pay any part or 
all of the principal and interest on this note without penalty at any 
time.
    HUD response: HUD has not adopted the change recommended by the 
commenter.
Section 5--Payment From Other Than Project Assets
    Comment: This is inconsistent with section 2, which limits payments 
to surplus cash. In addition, section 5 is inconsistent with the new 
Regulatory Agreement.
    HUD response: There is no inconsistency with section 2 or the 
Regulatory Agreement because section 5 pertains to payments from 
sources other than Project Assets.
Section 7
    Comment: Section 7 should also be cited as ``Notwithstanding'' in 
section 5. Section 7 should be modified so that prepayments from non-
Project sources (often tax credit syndication proceeds) are permitted 
prior to final closing.
    HUD response: The modifications requested to be made to section 7 
were not adopted, because they would nullify the certification 
requirements pertaining to all sources of income.
Section 8
    Comment: Section 8 should remove language that does not allow the 
note to be sold, transferred, assigned, or pledged without HUD's prior 
written approval. HUD does not evaluate the original payee of a surplus 
cash note, so why would evaluation of a successor payee be necessary? 
HUD approval would place an unnecessary burden on the payee and HUD 
field offices.
    HUD response: The information required by section 8 is necessary to 
protect HUD's interest.
Section 9
    Comment: Section 9 should be removed. HUD should allow for the 
compounding of interest in order to give the parties to the surplus 
cash note more flexibility. Since HUD does not regulate the interest on 
surplus cash notes, it should not matter to HUD that such interest is 
compounded.
    HUD response: HUD does not allow interest to compound because it 
would create an insurmountable amount of debt owed by Mortgagor, since 
the Surplus Cash Note becomes due upon the payoff of the HUD-insured 
mortgage.

Performance Bond--Form 92452M

    Comment: Generally, many provisions extend the surety's risk beyond 
what is normally contemplated in the surety's underwriting and premium. 
Such an expansion of risk ultimately results in greater construction 
costs for the project owner.
    HUD response: HUD has not made any substantive changes to the 
Performance Bond document from the existing version currently in use, 
which has performed satisfactorily.
Section 3--Increase of Obligation
    Comment: Increasing the obligation of Obligors by any approved 
increase in the contract price would increase the surety's exposure 
beyond typical levels, which is normally limited by the penal sum of 
the bond. This provision should be eliminated or subject to negotiation 
by the surety, particularly since section 9 waives the Surety's notice 
of any increase.
    HUD response: Section 3 reflects the language of the Performance 
Bond currently in use. The cost of any increase in Surety's exposure 
may be addressed in a rider to the Performance Bond, which specifically 
provides a check-off for whether or not there are riders to the bond.
Section 4--Contractor's Indemnification
    Comment: This form lacks the AIA A311 (1970) provision that 
requires a Contractor to be formally declared by the Owner to be in 
default under the Contract.
    HUD response: HUD considers this issue to be sufficiently covered 
by the document. Section 2 states that Lender desires protection in 
event of default by Contractor under the Contract. Section 4 refers to 
all expenses that any Obligee may incur in making good any such 
default. AIA A311 (1970) is no longer published; it has been replaced 
by AIA A312-1984.
    Comment: The wording ``all costs and damages'' is substantially 
broader than industry standard forms.
    HUD response: As noted previously, HUD has not made any substantive 
changes to the Performance Bond document from the version currently in 
use.
    Comment: There is no requirement that costs incurred by the Obligee 
are ``reasonable,'' and it could be construed to include such items as 
attorney's fees.
    HUD response: HUD considers that the law of the Property 
Jurisdiction would govern as to what costs are indemnified.
    Comment: The four options that a Surety traditionally has in the 
event of

[[Page 3588]]

a declared default under the Contract are severely limited.
    HUD response: As noted previously, HUD has not made any substantive 
changes to the Performance Bond document from the version currently in 
use, which has performed satisfactorily.
Section 5--Surety's Liability to Obligee
    Comment: The requirement that Surety only, not the Principal, 
notify Obligee in writing if Obligee fails to make payments or perform 
obligations under the Contract, and giving the Obligee a reasonable 
period of time to cure such failure, deviates from industry standard in 
AIA A311.
    HUD response: As noted previously, HUD has not made any substantive 
changes to the Performance Bond document from the version currently in 
use. AIA A311 no longer is published.
    Comment: This provision eliminates the incentive to make timely 
payments.
    HUD response: Rather than eliminating the incentive to make timely 
payment, HUD considers Section 5 to provide Owner and Lender a period 
to cure their failure to make payments, consistent with HUD regulations 
that provide a 30-day grace period before declaration of a default.
    Comment: The last sentence, which requires Surety to monitor the 
Obligee's performance, should be removed.
    HUD response: Providing Obligees with an opportunity to cure a 
failure to pay or perform before a Surety shall be liable under the 
Performance Bond protects the Project from premature and unintended 
default. HUD insists on a grace period to avoid such outcomes. Given 
the involvement and possible economic loss to the Surety coupled with 
the defense available to the Surety, the Surety would be in the best 
position to monitor the payments made by the Obligees.
Section 7--Surety's Subrogation Rights
    Comment: Provision that ``No amounts paid to the Owner without the 
written consent of the Lender shall reduce the liability of Surety to 
Lender under this Performance Bond'' is unusual and deviates from the 
industry standard. What happens if the Lender refuses or unreasonably 
delays to give written consent?
    HUD response: As noted previously, HUD has not made any substantive 
changes to the Performance Bond document from the existing version 
currently in use. Surety makes payments that are not in accordance with 
the terms of the Bond at its own risk.
    Comment: This provision could place the Surety in the middle of 
Lender-Owner disputes and increase the bond penalty amount above the 
limit stated in the bond. This may result in the Surety's violation of 
various regulatory mandates.
    HUD response: HUD disagrees with the comment. The intended effect 
of the provision is to allow Surety to wait until Lender and Owner 
settle their disputes before making payment.
    Comment: This provision wrongly places on the Surety the 
responsibility to manage the flow of funds between Lender and Owner.
    HUD response: Rather than requiring management of the flow of funds 
by Surety, this provision requires no action by Surety, other than to 
obtain Lender's consent before making payment to owner.
Section 9--Waiver of Notice
    Comment: This section should be revised to provide notice of more 
than 10 percent change in price and requiring Surety's consent to 
increase penal sum in Bond for increases exceeding 25 percent.
    HUD response: As noted previously, the cost of any increase in 
Surety's exposure may be addressed in a rider to the Performance Bond.

Payment Bond, Form HUD--92452M

Prefer Current Document
    Comment: The existing Payment Bond closely parallels AIA A311 
(1970), which is an industry standard, and should continue to be used.
    HUD response: As noted previously, AIA A311 is no longer published.
Missing Provisions
    Comment: Provisions that would constitute a statutory payment bond 
under California law are missing.
    HUD response: HUD acknowledges that the closing documents when used 
in different states may require amendment for purpose of compliance 
with different state laws. Such a process is contemplated in section 29 
of the Lender's Certificate, which addresses changes in the closing 
forms.
    Comment: There is no express requirement that labor, materials, and 
equipment furnished for use be directly applicable to the Contract.
    HUD response: Section 2 expressly provides that the sum, as noted, 
is to pay for labor, materials, and equipment furnished for use in the 
performance of the Contract.
    Comment: There is no express requirement that the Surety has waived 
notice of changes to the Contract.
    HUD response: Such a waiver appears in section 7 of the Payment 
Bond.
    Comment: There is no express requirement that no amounts paid to 
the Owner without the written consent of the Lender shall reduce the 
liability of the Surety to the Lender under the Bond.
    HUD response: Such a requirement appears in section 6 of the 
Payment Bond.
    Comment: The definition of Claimant is broader in the existing 
form.
    HUD response: The term Claimant is not used in the current form 
HUD-92452A.
Contrary Provisions
    Comment: A number of the bond provisions (e.g., statute of 
limitations, what constitutes a claimant, release of bond provisions) 
are contrary to the rights of claimants under California law.
    HUD response: As noted previously, HUD acknowledges that the 
closing documents when used in different states may require amendment 
for purpose of compliance with different state laws. Such a process is 
contemplated in section 29 of the Lender's Certificate, which addresses 
changes in the closing forms.
    Comment: Provisions for adding obligees are unnecessary, as payment 
bond runs only to claims qualifying as mechanic's lien (at least in 
California).
    HUD response: Adjustments to the documents may be made as required 
to meet the legal requirements of different jurisdictions.
Additional Surety Rider
    Comment: The requirement of prior HUD approval for an additional 
surety is contrary to statute (31 U.S.C. 9304-9305) and implementing 
regulations of the Department of the Treasury that address the 
parameters of a surety's authority to write bonds required by U.S. law. 
Under 31 CFR 223.10, a surety may write a bond in excess of its 
underwriting limitation if a co-surety joins the bond and the bond 
amount is no more than the combined underwriting limitations of the co-
sureties. This regulation does not provide an agency the ability to 
foreclose this option.
    HUD response: The fact that law permits an additional Surety does 
not prevent HUD from exercising its authority to approve the additional 
Surety. HUD must be apprised when the required bond exceeds the 
underwriting authority of the Surety.
Section 2
    Comment: Section 2 is similar to section 3 of the Performance Bond, 
and the same comments are applicable.

[[Page 3589]]

    HUD response: The same HUD comments, respectively, are applicable.
Section 6
    Comment: Section 6 is similar to section 7 of the Performance Bond, 
and the same comments are applicable.
    HUD response: The same HUD comments, respectively, are applicable.
    Comment: A provision regarding payment to the owner under the 
Payment Bond is not applicable, because Claimants would be the 
exclusive recipients of payments under the Bond.
    HUD response: An Owner would qualify as a Claimant under section 9, 
which generally defines a Claimant as one having a direct contract with 
Contractor or with a subcontractor of Contractor for labor, materials, 
or equipment used in the performance of the Contract.

Off-Site Bond, Form HUD-92479M

    Comment: Several provisions (e.g., Surety waives all notices of 
changes, any increase in the Off-Site Contract price increases 
accordingly the monetary obligation of Obligors, and the amount of time 
the Owner can pursue damages) deviate from industry standard.
    HUD response: The issues noted have been addressed in the context 
of the HUD responses to comments on the Performance Bond and the 
Payment Bond.

Escrow Agreement for Latent Defects, Form HUD-92414M

    Comment: This agreement leaves out the contractor, whose money or 
letter of credit funds the escrow in most cases, who was responsible 
for the work, and who has the contractual relationship with the 
subcontractors and material suppliers who would be called upon to 
correct the problem.
    HUD response: HUD does not intend to rely exclusively upon the 
original Contractor, who may no longer be extant when the latent 
defects need to be addressed.

Escrow Agreement: Additional Contribution by Sponsors for Operating 
Deficit, Form HUD-92476a-M

General
    Comment: The name of the document should be changed to ``Escrow 
Agreement for Operating Deficit,'' to reflect that the escrow may not 
be funded by the sponsor.
    HUD response: HUD agrees with the commenter and has changed the 
name of the document accordingly.
    Comment: The language should be made consistent, wherever possible, 
with the Escrow Agreement for Working Capital.
    HUD response: HUD has reviewed both documents in final form and 
does not believe that the two documents are inconsistent with each 
other. They are different documents with different purposes and 
therefore to the extent terminology is different, such difference is 
appropriate.
Section 5
    Comment: A section should be added that the Lender may draw against 
any letter of credit and convert it to cash to be held and disbursed as 
part of the Deposit.
    HUD response: Section 5 of the document already contains the 
language recommended by the commenter.
    Comment: The requirement in section 5 that the Lender provide cash 
to cover a letter of credit, which cannot be converted to cash, is a 
matter between HUD and the Lender, addressed in the Mortgagee's 
Certificate. This language is not included in the current form, is 
inappropriate, and should be removed.
    HUD response: HUD disagrees and believes that this provision is 
appropriate for the Escrow Agreement for Operating Deficit.
    Comment: The language in section 5 regarding bonds is obsolete and 
should be removed.
    HUD response: HUD agrees with this comment and has removed the 
reference to bonds in section 5.
    Comment: The language of section 5 should be replaced with language 
that allows for the lender to hold and disburse the Deposit at the sole 
direction of HUD.
    HUD response: HUD disagrees and believes that the language, which 
provides for the Depository to hold and disburse the escrow at the sole 
discretion of HUD, is appropriate.

HUD Amendment to AIA Document B181, HUD-92408M

Heading
    Comment: The document heading should be changed. This document will 
typically be signed before an application for mortgage insurance is 
submitted to HUD. Therefore, it is impractical to include the HUD 
Project number.
    HUD response: HUD did not adopt this recommendation. Although AIA 
Document B181 will typically be signed before an application for 
mortgage insurance is submitted to HUD, the HUD Amendment would not be 
executed at that time. The HUD Amendment is part of the insurance 
application process. It is important, and not impractical, to include 
the HUD Project number at that point.
Section 1
    Comment: In section 1, a definition of ``Original Owner'' should be 
added and used in the document to reflect that the Owner-Architect 
Agreement is often signed by an affiliate of the Borrower. A definition 
of ``HUD'' also should be added.
    HUD response: HUD considers a definition of Original Owner not to 
be necessary and has not adopted this recommendation. HUD also believes 
that the acronym ``HUD'' does not require a definition, since the 
header for the document states ``U.S. Department of Housing and Urban 
Development.'' In addition, the prefatory section now specifies the 
definitions in the ``Regulatory Agreement'' and ``Security Instrument'' 
are applicable.
Section 3
    This section has been redesignated as section 4.
    Comment: In section 3, language should be added to allow Agreement 
to be assigned from the Original Owner to Borrower without HUD consent.
    HUD response: As the insurer of the mortgage, it is important for 
HUD to be apprised of and approve any changes in circumstances that 
would affect HUD's interest. HUD declines to adopt this change.
    Comment: Language requiring Owner not to contract with disbarred 
individuals/firms should be removed. Requirements of this type 
applicable to the Borrower should be included in the mortgage insurance 
application or regulatory agreement rather than as an addendum to an 
agreement between two private parties.
    HUD response: HUD disagrees with this comment. At the time this 
document is executed as part of the mortgage insurance application, 
Owner is Borrower, and it is important to retain this language in this 
document.
Section 4
    This section has been redesignated as section 5.
    Comment: Sections 4 and 12 should include language to provide that 
the Architect cannot withhold documents due to nonpayment for 
reimbursable expenses, termination expenses, and fees for additional 
services, collectively referred to as ``additional payments.''
    HUD response: HUD disagrees with this comment. This concern is 
adequately addressed in section 12, and additional clarification is not 
necessary.
Section 8
    This section has been redesignated as section 9.

[[Page 3590]]

    Comment: Section 8 is too broad. It is not accurate to say that 
``any action or determination by either the Owner or the Architect is 
subject to acceptance by the Mortgagee and by HUD,'' particularly 
during the period prior to initial closing.
    HUD response: HUD disagrees with this suggested change. 
Redesignated section 9, as currently worded, is necessary to protect 
the interest of the Lender and HUD. In addition, the introductory 
language of the HUD Amendment, now redesignated as section 2, 
specifically provides that, ``The provisions of this Amendment 
supersede and void all inconsistent provisions that may exist between 
this Amendment and the Agreement.''
Section 10
    This section has been redesignated as section 11.
    Comment: In section 10, the parties identified for identity-of-
interest purposes should include ``managers'' and ``members.''
    HUD response: HUD agrees with this comment and has made this change 
in all documents where the identity-of-interest provisions appear.
Section 12
    This section has been redesignated as section 13.
    Comment: In section 12, the references to Section 202/811 should be 
removed.
    HUD response: HUD disagrees, because this document is frequently 
used in Section 202/811 transactions.
Certification
    Comment: The separate certification has no purpose.
    HUD response: HUD disagrees. The certification in the Amendment is 
needed to verify the validity of representations made and provides an 
enforcement tool if such representations are not in fact true.
    Comment: There is no reason to have HUD sign a certification.
    HUD response: HUD agrees with this recommendation, and a HUD 
representative no longer appears as a signatory.

V. Findings and Certifications

Paperwork Reduction Act

    The proposed new information collection requirements contained in 
this notice have been submitted to OMB for review under the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520). Under this 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 valid 
control number.
    The public reporting burden for this new collection of information 
is estimated to include the time for reviewing the instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Information on the estimated public reporting burden is provided in the 
following table: Estimated burden hours and costs to the respondents:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Number of     Frequency of    Responses per   Burden hours    Annual burden                   Total annual
         Information collection             respondents      response          annum       per response        hours        Hourly cost        cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
HUD-91710M..............................             600            1.00             600             0.5             300             $26          $7,800
HUD-91712M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92023M..............................             600            1.00             600               1             600              26          15,600
HUD-92070M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92223M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92408M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92412M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92413M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92414M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92450M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92452A-M............................             600            1.00             600             0.5             300              26           7,800
HUD-92452M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92455M..............................             600            1.00             600               1             600              26          15,600
HUD-92456M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92457A-M............................             600            1.00             600             0.5             300              26           7,800
HUD-9257M...............................             600            1.00             600             0.5             300              26           7,800
HUD-9464M...............................             600            1.00             600               1             600              46          27,600
HUD-92476.1M............................             600            1.00             600             0.5             300              26           7,800
HUD-92476A-M............................             600            1.00             600             0.5             300              26           7,800
HUD-92477M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92478M..............................             600            1.00             600             0.5             300              26           7,800
HUD-92479M..............................             600            1.00             600             0.5             300              26           7,800
HUD-91725M..............................             600            1.00             600               1             600             125          75,000
HUD-91725M-CER..........................             600            1.00             600               1             600              46          27,600
HUD-91725M-INST.........................               0               0               0               0               0               0               0
HUD-92434M..............................             600            1.00             600               1             600              26           7,800
HUD-92441M-SUPP.........................             600            1.00             600            0.75             450              26          11,700
HUD-92441M..............................             600            1.00             600            0.75             450              26          11,700
HUD-92442M..............................             600            1.00             600               1             600              58          34,800
HUD-92466M..............................             600            1.00             600               1             600              58          34,800
HUD-92466M-HCFRA........................             600            1.00             600            0.75             450              26          11,700
HUD-92554M..............................             600            1.00             600             0.5             300              26           7,800
HUD-94000M..............................             600            1.00             600            0.75             450              26          11,700
HUD-94001M..............................             600            1.00             600               1             600              26          15,600
HUD-93305M..............................             600            1.00             600             0.5             300              26           7,800
                                         ---------------------------------------------------------------------------------------------------------------
    Totals..............................  ..............  ..............  ..............  ..............       13,500.00  ..............     $433,831.00
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 3591]]

    The hourly rate is an estimate based on an average annual salary of 
$62,000 for developers and mortgagees.
    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
proposed 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 proposal. Comments must be 
received by March 22, 2010. Comments must refer to the proposal by name 
and docket number (FR-5354-N-01) and must be sent to:
    HUD Desk Officer, Office of Management and Budget, New Executive 
Office Building, Washington, DC 20503, Fax number: (202) 395-6947; and 
Leroy McKinney Jr., Paperwork Reduction Act Program Manager, Office of 
the Chief Information Officer, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Room 4178, Washington, DC 20410.

VI. Solicitation of Public Comments

    Section IV of this preamble, which discusses and presents HUD's 
responses to public comments, highlights the many changes that HUD made 
to the closing documents in response to public comment. HUD welcomes 
public comments from industry and other interested members of the 
public on this most recent issuance of revised closing documents, 
posted at http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

    Dated: January 12, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-957 Filed 1-20-10; 8:45 am]
BILLING CODE 4210-67-P