[Federal Register Volume 75, Number 19 (Friday, January 29, 2010)]
[Proposed Rules]
[Pages 4964-4971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-1488]



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Part III





Department of Housing and Urban Development





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24 CFR Part 242



 Federal Housing Administration (FHA): Hospital Mortgage Insurance 
Program--Refinancing Hospital Loans; Proposed Rule

  Federal Register / Vol. 75 , No. 19 / Friday, January 29, 2010 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 242

[Docket No. FR-5334-P-01]
RIN 2502-AI74


Federal Housing Administration (FHA): Hospital Mortgage Insurance 
Program--Refinancing Hospital Loans

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

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise the regulations governing FHA's 
Section 242 Hospital Mortgage Insurance Program (Section 242 program) 
for the purpose of codifying, in regulation, FHA's implementation of 
its authority that allows hospitals to refinance existing loans, 
without requiring such refinancing to take place only in conjunction 
with the expenditure of funds for construction or renovation, which is 
the existing program requirement. The current downturn in the economy, 
which has reduced the availability of private financing, has not only 
adversely affected the housing industry, but has had a serious impact 
on hospitals across the Nation. At a time when the demand for health 
care services is on the rise, the lack of access to capital has made it 
difficult for hospitals to obtain financing for facility, equipment, 
and technology needs, as well as to meet obligations on existing debt. 
By expanding FHA's Hospital Mortgage Insurance Program to allow for 
refinancing of existing debt without conditioning such refinancing on 
new construction or renovation, HUD believes it can contribute to 
alleviating financial stress on hospitals and maintaining the 
availability of hospitals in many communities. This refinancing 
authority is specifically for the refinancing of non-FHA-insured loans 
of hospitals. Hospitals currently insured under FHA's Section 242 
program may refinance under the National Housing Act.
    In order to allow eligible hospitals seeking to refinance debt the 
opportunity to immediately apply for a refinanced loan under the 
Section 242 program, FHA proceeded to implement this authority by 
notice issued on July 1, 2009, and, as subsequently revised by a 
January 2010 notice. This proposed rule provides the regulatory format 
for such implementation and seeks comment on the implementation. 
Comments received in response to this rule will be taken into 
consideration in the development of a final rule that will codify in 
regulation FHA's refinancing authority for hospitals.

DATES: Comment Due Date: March 30, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule 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 Web 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.

    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 through 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: Roger E. Miller, Director, Office of 
Insured Health Care Facilities, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street, SW., Washington, DC 
20410-8000; telephone number 202-708-0599 (this is not a toll-free 
number). Hearing- and speech-impaired persons may access this number 
through TTY by calling the Federal Information Relay Service at 800-
877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background--The Section 242 Hospital Mortgage Insurance Program

    Section 242 of the National Housing Act (12 U.S.C. 1715z-7) 
authorizes FHA to insure mortgages to finance the construction or 
rehabilitation of public or private nonprofit and propriety hospitals, 
including for major movable equipment, as well as to refinance existing 
debt. Section 242 of the National Housing Act (NHA) provides this 
authority to FHA to: (1) Assist in maintaining the availability of 
hospitals needed for the care and treatment of persons who are acutely 
ill or who otherwise require medical care and related services of the 
kind customarily furnished only (or most effectively) by hospitals (see 
12 U.S.C. 1715z-7(a)); and (2) encourage the provision of comprehensive 
health care, including outpatient and preventive care, as well as 
hospitalization. In the case of public hospitals, Section 242 of the 
NHA (Section 242) is designed to encourage programs to provide health 
care services to all members of a community regardless of ability to 
pay. (See 12 U.S.C. 1715z-7(f).)
    Entities that are insured under FHA's Section 242 program include 
health-care facilities that range in size from large urban teaching 
hospitals to small rural hospitals, and critical access hospitals 
(hospitals with 25 beds or less that have received designation as such 
by states and the U.S. Department of Health and Human Services). To be 
eligible for mortgage insurance under the Section 242 program, 
facilities must be properly licensed, provide primarily acute patient 
care, and be able to demonstrate the need for the project. Key program 
criteria include a maximum loan-to-value of 90 percent and a loan term 
of 25 years.\1\
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    \1\ More information about HUD's Section 242 program can be 
found at: http://portal.hud.gov/portal/page?_pageid=73,1826910&_dad=portal&_schema=PORTAL.

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    The regulations for the Section 242 program are codified in 24 CFR 
part 242. In 2005, HUD initiated rulemaking to update the Section 242 
program regulations and to bring them in conformity with current 
hospital financing practices of that time. Prior to the initiation of 
the 2005 rulemaking, the regulations were last amended in 1995. (See 
proposed rule published on January 10, 2005, at 70 FR 17250.) That 
rulemaking resulted in final regulations being promulgated on November 
28, 2007. (See final rule published on November 28, 2007, at 72 FR 
67524.) Although HUD has long had the authority, under section 223(f) 
of the NHA,\2\ to provide for refinancing of hospital debt without 
conditioning such refinancing on new construction or renovation, and 
HUD has implemented this authority for multifamily rental housing and 
health care facilities, HUD has not implemented this authority for 
hospitals. To date, it has been HUD's view that private capital to help 
hospitals refinance debt was sufficiently available, and that the 
demand for this type of refinancing was not as great as was the need 
for financing for new construction, renovation and rehabilitation, and 
equipment purchases.
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    \2\ Section 223(f)(1) provides that ``Notwithstanding any of the 
provisions of this Act, the Secretary is authorized, in his 
discretion, to insure under any section of this title a mortgage 
executed in connection with the purchase or refinancing of an 
existing multifamily housing project or the purchase or refinancing 
of existing debt of an existing hospital (or existing nursing home, 
existing assisted living facility, existing intermediate care 
facility, existing board and care home, or any combination 
thereof).'' (12 U.S.C. 1715n(f).)
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    Since HUD initiated rulemaking to update its Section 242 program 
regulations, the availability of credit has rapidly declined. Just as 
HUD has initiated programs and initiatives to assist troubled 
homeowners, through this rule, HUD believes it can provide relief to 
hospitals that are experiencing increased debt-services costs. A report 
issued by the American Hospital Association on January 6, 2009, 
describes the financial problems facing hospitals and health care 
facilities today, and recommends actions that could be undertaken to 
alleviate the financial stress on hospitals. One of those 
recommendations is for FHA to implement its authority in section 223(f) 
of the NHA (Section 223(f)) to refinance existing hospital debt. (See 
http://www.aha.org/aha/content/2009/pdf/090106-economic-recovery-mo.pdf.) HUD has considered this recommendation and has determined that 
implementing the refinance authority in section 223(f) of the NHA for 
hospitals is an action that could and should be taken at this time.

II. This Proposed Rule

    This rule proposes to amend FHA's recently updated Section 242 
regulations (which were subject to public comment) to provide for the 
regulatory codification of FHA's authority to refinance hospital debt 
under Section 223(f), without conditioning the refinancing on new 
construction or renovation. The Section 223(f) refinancing authority as 
a component of the Section 242 program is referred to as the Section 
242/223(f) program. This refinancing authority is for hospitals without 
FHA-insured loans. Hospitals with FHA-insured loans are eligible for 
refinancing of debt (without conditioning refinancing on new 
construction or renovation) under section 223(a)(7) of the NHA. 
Specifically, the amendments proposed by this rule would modify the 
regulations in 24 CFR part 242, as described in this section of the 
preamble, to reflect the authority already implemented by notice that 
allows for refinancing without the necessity for new construction or 
renovation. As noted earlier in this preamble, FHA proceeded to 
implement this authority by notice issued on July 1, 2009, and, as 
subsequently revised by a January 2010 notice, which can be found at 
http://www.hud.gov/offices/adm/hudclips/notices/hsg/files/09-05hsgn.doc. All regulations in 24 CFR part 242 would be applicable to 
Section 242/223(f) refinancing--those proposed to be modified by this 
rule and those not modified by this rule.

Definitions (Section 242.1)

    This proposed rule adds a definition of ``hard costs'' to mean the 
costs of the construction and equipment, including construction-related 
fees such as architect and construction manager fees. The rule amends 
the definition of ``substantial rehabilitation'' to provide that it 
includes ``cases where the hard costs of construction and equipment are 
equal to or greater than 20 percent of the mortgage amount.''
    While Section 242 is principally a construction program, HUD has 
allowed up to 80 percent of the mortgage amount to be used for 
refinancing, provided that at least 20 percent is used for construction 
and/or equipment. In determining how to address the issue of repairs, 
renovations, and/or equipment in a Section 242/223(f) case, which is 
directed solely to refinancing debt, HUD decided that, for Section 242/
223(f) refinancing, it would allow loan proceeds to be used for 
repairs, renovations, and/or equipment, the cost of which is less than 
20 percent of the mortgage amount. The statute makes a distinction 
between ``substantial rehabilitation,'' which cannot be carried out 
under Section 223(f) authority, and the relatively less substantial 
work that is allowed under Section 223(f). For this reason, the 
definition of substantial rehabilitation was revised to make clear the 
difference between the work performed in a Section 242 project (20 
percent or more of the mortgage amount) and the work allowed in 
connection with a refinance mortgage under Section 223(f) (under 20 
percent of the mortgage amount). Since the revision to the definition 
of ``substantial rehabilitation'' includes a reference to ``hard 
costs,'' HUD added this definition for clarity purposes.

Eligibility for Insurance and Transition Provision (Section 242.4)

    This rule expands eligibility for insurance to include 
``refinancing of the capital debt of an existing hospital pursuant to 
section 223(f) of the NHA (Section 242/223(f)).''

Limitation on Refinancing of Existing Indebtedness (Section 242.15)

    This rule adds a new paragraph (b) to Sec.  242.15 to provide that, 
in the case of a loan insured under Section 242/223(f), there is no 
requirement for hard costs. However, if there are hard costs, such 
costs must total less than 20 percent of the total mortgage amount.

Applications (Section 242.16)

    The rule amends Sec.  242.16(a)(2) to make certain amendments to 
the regulatory provisions concerning financial eligibility of hospitals 
seeking refinancing under Section 242/223(f). The proposed rule would 
establish threshold requirements designed to determine the need of the 
hospital for refinancing that would not be available through other 
sources, and to screen out hospitals that would have little or no 
chance of having a formal application approved, based on their 
financial performance. HUD specifically seeks comments on these 
threshold requirements.
    To receive consideration for Section 224/223(f) refinancing, the 
hospital must meet two financial thresholds. First, the hospital must 
have a 3-year aggregate operating margin of at least 0 percent and a 3-
year average debt service coverage ratio of at least 1.4. Also, the 
proposed rule provides that the hospital must demonstrate that its 
financial health depends upon refinancing its existing capital debt and 
that it provides an essential service to

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the community in which it operates. This demonstration is met by 
providing documentation of the following:
    (1) If the hospital were no longer in operation, the community in 
which it presently operates would suffer from inadequate access to an 
essential service that the hospital presently provides;
    (2) There are few alternative affordable financing vehicles 
available to the hospital; and
    (3) The hospital meets three of the following seven criteria: (i) 
The proposed refinancing would reduce the hospital's total operating 
expenses by at least 0.25 percent; (ii) the interest rate of the 
proposed refinancing would be at least 0.5 percentage points less than 
the interest rate on the debt to be refinanced; (iii) the interest rate 
on the debt that the hospital proposes to refinance has increased by at 
least one percentage point at any time since January 1, 2008, or is 
very likely to increase by at least one percentage point within one 
year of the date of application; (iv) the hospital's annual total debt 
service is in excess of 3.4 percent of total operating revenues, based 
on its most recent audited financial statement; (v) the hospital has 
experienced a withdrawal of its credit enhancement facility, or the 
lender providing its credit enhancement facility has been downgraded, 
or the hospital can demonstrate that one of the events is imminent; 
(vi) the hospital is party to overly restrictive or onerous bond 
covenants; or (vii) there are other circumstances that demonstrate that 
the hospital's financial health depends upon refinancing its existing 
capital debt.
    The inclusion of these threshold factors to determine hospitals 
eligible for consideration for Section 242/223(f) refinancing is 
designed to assure that HUD is assisting those hospitals that merit 
serious consideration based on their financial strength and on need-- 
theirs and that of the communities in which they serve.
    In offering this new insurance product, and as the proposed 
threshold requirements may reflect, HUD is taking a conservative 
approach intended to attract those hospital applicants that already 
meet the minimum operating margin and debt-service coverage ratios 
required for application approval under the current Section 242 
program.
    The rule amends Sec.  242.16(b)(5) to provide that the study of 
market need may not be required, subject to HUD's discretion, for an 
application for Section 242/223(f) mortgage insurance. In most cases, 
however, HUD does require this study. Although HUD may determine not to 
require a study of market need with respect to a Section 242/223(f) 
mortgage, HUD will always consider market need in the preliminary 
threshold requirement phase, as discussed in Sec.  242.16(a)(4).
    The importance of market need varies from case to case. For 
example, an in-depth review of market need might not be necessary for a 
hospital with historically strong utilization and financial statistics 
that is seeking a pure refinancing or a refinancing with minor repairs. 
However, an in-depth review is likely needed in the case of a hospital 
that is using close to 20 percent of the mortgage proceeds (the maximum 
allowed under Section 242/223(f)) for construction and equipment in 
order to expand the services it provides to the public in a competitive 
market area. Other examples of cases where a study may not be needed 
are geographically remote critical access hospitals and sole community 
provider hospitals. These designations by Centers for Medicare and 
Medicaid Services are strong indicators of market need. HUD will 
consider the characteristics of each case in determining whether the 
study must address market need.
    In addition to the amendment to Sec.  242.16(b)(5), this rule 
amends Sec.  242.16(b)(3) to require that, in applications for Section 
242/223(f) refinancing, the applicant must provide a description of any 
repairs, renovations, and/or equipment to be financed with mortgage 
proceeds, and how those repairs, renovations, and/or equipment will 
affect the hospital. The rule amends Sec.  242.16(b)(6) to provide that 
the required architectural plans and specifications are not required of 
an application for Section 242/223(f) mortgage insurance, except when 
requested by HUD. This rule also amends Sec.  242.16(d) to provide that 
an application for Section 242/223(f) mortgage insurance shall be on an 
approved FHA form, submitted jointly by an approved mortgagee and the 
prospective mortgagor.

Commitments (Section 242.17)

    This rule amends Sec.  242.17(a) (Issuance of Commitment) to add a 
new paragraph (a)(2) to provide that in the case of an application for 
Section 242/223(f) mortgage insurance where advances are not needed for 
funding any repairs, renovations, or equipment, a commitment for 
insurance upon completion shall include the mortgage amount, interest 
rate, mortgage term, date of commencement of amortization, and other 
requirements pertaining to the mortgage.\3\
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    \3\ Note that since there is an existing paragraph (a)(2) in 
Sec.  242.17, the existing paragraph ((a)(2)) and the paragraphs 
that follow will be redesignated accordingly). This rule amends 
Sec.  242.17(b) (Type of Commitment) to provide that in the case of 
a commitment for Section 242/223(f) insured refinancing, at HUD's 
discretion the commitment may provide for insurance upon completion.
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    Section 242.17(a) provides for insurance of advances in cases where 
there is a need for advances to fund construction activities and the 
purchase of equipment. This is the case in Section 242 projects and 
Section 242 projects pursuant to Section 241. However, in Section 242 
projects pursuant to Section 223(f), the circumstances of each case 
will determine whether the commitment will be for insurance of advances 
or insurance upon completion. In a pure refinancing, or a refinancing 
with minor repairs, renovations, and/or equipment that the hospital can 
fund from its operations and cash reserves, there is no need for 
advances and the commitment will be for insurance upon completion. 
However, if a significant portion of the mortgage proceeds (subject to 
the 20 percent limitation) is to be used for repairs, renovations, and/
or equipment, and the hospital cannot fund these from its own cash, 
then the commitment may provide for insurance of advances.

Inspection Fee (Section 242.18)

    This rule amends Sec.  242.18 to provide that in the case of 
mortgages insured under Section 242/223(f), the inspection fee shall be 
paid at endorsement, as described in the amendments to Sec.  242.39, as 
discussed below.
    In the traditional Section 242 program, the inspection fee is 
generally 50 basis points on all loans. This fee covers such activities 
as review of architectural plans and specifications, and periodic 
inspection as the construction gets under way. For applicants seeking 
refinancing only, an inspection fee that would involve generally no 
more than a site visit by HUD architects and engineers will not exceed 
10 basis points on the loan.

Maximum Mortgage Amounts and Cash Equity Requirements (Section 242.23)

    One of the more significant amendments made to the regulations in 
24 CFR part 242 is made to Sec.  242.23, to establish the maximum 
mortgage amounts and cash equity amounts for mortgages insured under 
Section 242/223(f).
    The rule adds a new paragraph (b) to Sec.  242.23 to provide that, 
in addition to meeting the requirements of Sec.  242.7 (which addresses 
maximum mortgage

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amounts applicable to all mortgages insured under the Section 242 
program) \4\, if the existing hospital debt is to be refinanced by the 
insured mortgage (i.e., without a change in ownership or with the 
hospital sold to a purchaser who has an identity of interest, as 
defined by the FHA Commissioner, with the seller), the maximum mortgage 
amount must not exceed the cost to refinance the existing indebtedness.
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    \4\ Section 242.7 (24 CFR 242.7) provides: ``The mortgage shall 
involve a principal obligation not in excess of 90 percent of HUD's 
estimate of the replacement cost of the hospital, including the 
equipment to be used in its operation when the proposed improvements 
are completed and the equipment is installed.''
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    The rule provides that the existing indebtedness will consist of 
the following items, the eligibility and amounts of which must be 
determined by the FHA Commissioner: (1) The amount required to pay off 
the existing indebtedness; (2) reasonable and customary legal, 
organization, title, and recording expenses, including mortgagee fees 
under Sec.  242.22; (3) the estimated costs, if any, of repairs, 
renovation, and/or equipment totaling less than 20 percent of the 
mortgage amount; and (4) architect's and engineer's fees, municipal 
inspection fees, and any other required professional or inspection 
fees.
    The rule also provides in the new paragraph (b) added to Sec.  
242.23, that, in addition to meeting the requirements of Sec.  242.7, 
if mortgage proceeds are to be used for an acquisition, the maximum 
mortgage amount must not exceed the cost to acquire the hospital, which 
will consist of the following items, the eligibility and amounts of 
which must be determined by the FHA Commissioner: (1) The actual 
purchase price of the land and improvements or HUD's estimate (prior to 
repairs, renovation, and/or equipment replacement) of the fair market 
value of such land and improvements, whichever is the lesser; (2) 
reasonable and customary legal, organization, title, and recording 
expenses, including mortgagee fees under Sec.  242.22; (3) the 
estimated costs, if any, of repairs, renovation, and/or equipment 
totaling less than 20 percent of the mortgage amount; and (4) 
architect's and engineer's fees, municipal inspection fees, and any 
other required professional or inspection fees.
    Because Sec.  242.23 already has a paragraph (b), the existing 
paragraph (b) and the paragraphs that follow will be redesignated 
accordingly.

Insurance Endorsement (Section 242.39)

    This rule amends Sec.  242.39 to divide this section into two main 
parts. The existing section is designated as paragraph (a) and entitled 
``New Construction/Substantial Rehabilitation.'' New paragraph (b), 
entitled ``Section 242/223(f) Refinancing,'' provides that in cases 
that do not involve advances of mortgage proceeds, endorsement shall 
occur after all relevant terms and conditions have been satisfied, 
including, if applicable, completion of any repairs, renovations, and/
or equipment, or upon assurance acceptable to the FHA Commissioner that 
all required repairs will be completed by a date certain following 
endorsement. New paragraph (b) provides that in cases where advances of 
mortgage proceeds are used to fund repairs, renovation, and/or 
equipment, endorsement shall occur as described in Sec.  242.39(a) 
immediately above for new construction/substantial rehabilitation.

Labor Standards (Section 242.55)

    This rule amends Sec.  242.55(c) to reflect that the labor 
standards referenced in that regulatory section are applicable to a 
refinancing loan under section 223(f) of the NHA.

Eligibility of Refinancing Transactions (Section 242.91)

    This rule amends Sec.  242.91 to consolidate the existing section 
into a new paragraph (a), and to add a new paragraph (b) that provides 
that a mortgage given to refinance the debt of an existing hospital 
under Section 242 of the NHA may be insured pursuant to Section 223(f) 
of the NHA. The new paragraph (b) also provides that a mortgage may be 
executed in connection with the purchase or refinancing of an existing 
hospital without substantial rehabilitation. In addition, the new 
paragraph (b) provides that the FHA Commissioner shall prescribe such 
terms and conditions as the Commissioner deems necessary to assure 
that: (1) The refinancing is employed to lower the monthly debt-service 
costs (taking into account any fees or charges connected with such 
refinancing) of such existing hospital; (2) the proceeds of any 
refinancing will be employed only to: retire (a) the existing 
indebtedness; (b) pay for repairs, renovation, and/or equipment 
totaling less than 20 percent of the mortgage amount; and (c) pay the 
necessary cost of refinancing on such existing hospital; (3) such 
existing hospital is economically viable; and (4) the applicable 
requirements of Section 242 for certificates, studies, and statements 
have been met.

III. Corresponding Implementation Notice

    As noted earlier in this preamble, in an effort to immediately 
address the lack of adequate private financing available to hospitals, 
HUD issued a notice on July 1, 2009, as recently amended in January 
2010, which can be found at http://www.hud.gov/hudclips/, that 
implemented FHA's longstanding refinance authority under section 223(f) 
of the NHA to hospitals. The issue of the availability of hospitals and 
other health care facilities in communities is one of the important 
health care issues to be addressed. With an aging population, and 
health care demands on the rise, hospitals need access to capital to 
expand and improve facilities, technology, and equipment. Without 
access to capital, hospitals and facilities will close or needed 
improvements in facility, technology, and equipment will not be 
addressed.
    While HUD recognizes that all financing needs of the hospitals and 
health-care facilities will not be addressed by extending to hospitals, 
through the Section 242 program, the refinancing authority of Section 
223(f) of the NHA, HUD believes that through the action taken initially 
in the implementing notice of July 1, 2009, as amended in January 2010, 
and by following through with this rulemaking, it may be able to 
contribute to alleviating the financial stress faced by many hospitals 
today. Additionally, the action taken is consistent with HUD's 
statutory purpose under Section 242, which includes assisting in the 
availability of needed hospitals for the care and treatment of persons 
who are acutely ill or who otherwise require medical care and related 
services of the kind customarily furnished only (or most effectively) 
by hospitals.
    HUD determined that with minimal amendments to its regulations in 
24 CFR part 242 (recently the subject of public comment and revised, in 
part, in response to such comment), HUD could commence receiving 
applications for Section 242/223(f) mortgage insurance, and that is 
what the July 1, 2009, implementing notice allowed.
    Although HUD determined to proceed to implement, through notice, 
the Section 223(f) refinancing authority for hospitals, HUD recognizes 
the value and importance of public input in determining final policy 
and developing final application and review procedures. It has always 
been HUD's strategy to supplement its implementing notice with a 
proposed rule that would solicit

[[Page 4968]]

public comment and commence the process of development of a final 
regulatory structure that will govern the Section 242/223(f) 
refinancing authority. Before HUD issued its companion proposed rule to 
the July 1, 2009, notice, HUD received informal feedback from hospitals 
and hospital representative organizations that the threshold 
requirements presented a ``refinancing only'' bar that is too high. In 
response to such feedback, HUD has amended the threshold requirements, 
which, again, were designed to determine refinancing need, but not 
serve as a substitute for the insurance eligibility requirements of the 
Section 242 program. Those requirements and standards remain in place. 
This proposed rule, therefore, not only solicits comment specifically 
on the threshold requirements presented in the companion notice and 
proposed to be codified by this rule, but on all other aspects of the 
changes made to the Section 242 regulations to codify the 
implementation of FHA's Section 223(f) refinancing authority for 
hospitals with non-FHA-insured loans. The final rule, when issued and 
in effect, will apply to applications submitted for Section 242/223(f) 
refinancing authority following the effective date of the rule.

IV. Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action,'' as defined in 
section 3(f) of the order (although not an economically significant 
regulatory action under the order). The docket file is available for 
public inspection in the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street, 
SW., Room 10276, Washington, DC 20410-0500. Due to security measures at 
the HUD Headquarters building, please schedule an appointment to review 
the docket file by calling the Regulations Division at 202-402-3055 
(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.
    This Section 242/223(f) program is specifically for the refinancing 
of non-FHA loans. In offering this new insurance product, and as the 
proposed threshold requirements reflect, HUD is taking a conservative 
approach intended to attract hospital applicants that already meet the 
minimum operating margin and debt-service coverage ratios required for 
application approval under the current Section 242 program. The rule is 
not structured to address all financing needs. The goal in implementing 
HUD's Section 223(f) refinancing authority for hospitals is to assist 
those hospitals saddled with unexpectedly high interest rates, and 
where refinancing is urgently needed for the hospital to continue to 
remain open and adequately serve its surrounding community. The primary 
beneficiaries of this rule are the hospitals that receive an FHA-
insured loan to refinance debt, and, through such loan insurance, are 
able to reduce their capital costs by refinancing into a lower interest 
rate loan through the proposed program. The economic effect constitutes 
a transfer from the public to hospitals that would not otherwise have 
been able to refinance out of their current high-cost loans.
    HUD estimates that the average decrease in the annual interest cost 
resulting from an eligible hospital's refinancing its current loan with 
an FHA loan is 2 percentage points. After the cost of the insurance 
premium is deducted, the net benefit is 1.5 percentage points. The 
average loan size from FHA's construction loan portfolio is $60 
million, which is used as an estimate of the size of the principal of 
loans to be refinanced. Assuming the hospital's current interest rate 
is 7.75 percent, and it is refinanced down to 5.75 percent (effectively 
6.25 percent when the insurance premium is factored in), the annual 
savings to the hospital would be $688,740.
    The program has not been designed for the entire industry of 5,000 
hospitals. As noted earlier, the pool of applicants is limited by the 
proposed threshold restrictions. Industry experts have estimated that 
there would be a lead time of approximately 3 months while hospitals 
and lenders organized their efforts and began to prepare applications. 
After that (starting, in all likelihood, early in calendar year 2010), 
they estimated that FHA would receive from 35 to 50 applications during 
the first year of the program. Assuming that the maximum of 50 
applications are received in the first year, that they arrive steadily 
during the year (4.17 applications per month), and that the average 
time to process them to commitment is 60 days, 10 months' worth of 
applications received (approximately 41) could receive insurance 
commitments in 2010. The economic impact would amount to approximately 
$28.2 million annually.
    In addition to commenting on the rule, HUD welcomes comment on its 
assessment of costs and benefits, as set out in this section of the 
preamble, and on the number of applications HUD expects to receive upon 
implementation of the Section 223(f) refinancing authority, as further 
revised by the January 2010 notice.

Information Collection Requirements

    The information collection requirements contained in this rule were 
reviewed by OMB under the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520) and assigned OMB Control Number 2502-0518. 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.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment has been made in accordance with HUD regulations at 24 CFR 
part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The FONSI is 
available for public inspection between the hours of 8 a.m. and 5 p.m. 
weekdays in the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street, SW., Room 
10276, Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, please schedule an appointment to review the 
FONSI 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.

Unfunded Mandates Reform Act

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

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial

[[Page 4969]]

number of small entities. The amendments proposed by this rule will 
expand the availability of financing for hospitals and health care 
facilities, both large and small, under FHA's Section 242 program, 
based on regulations that were recently the subject of notice and 
comment. HUD defines a small hospital entity similar to the definition 
used by the Health Care Financing Administration of the U.S. Department 
of Health and Human Services: as a hospital of 50 or fewer beds. As 
noted earlier in this preamble, hospitals, large or small, currently 
receiving Section 242-insured financing, large or small, are eligible 
for refinancing under section 223(a)(7) of the NHA. Currently, 21 
(approximately 25 percent) of the hospitals with Section 242-insured 
financing have 50 or fewer beds. HUD has approached development of its 
eligibility for section 223(f) refinancing to take into consideration 
criteria that all hospitals, large or small, can meet. The basis for 
FHA's implementation of its refinancing authority, as has been 
discussed in this preamble, is to assist hospitals that provide 
valuable services needed by the communities in which they are located, 
and for which other refinancing sources are not available. HUD believes 
that the criteria presented in this rule strikes the appropriate 
balance.
    Accordingly, it is HUD's view that this rule will not have a 
significant economic impact on a substantial number of small entities, 
and an initial regulatory flexibility analysis is not required. 
However, as provided in HUD's analysis under Executive Order 12866 
(Regulatory Planning and Review), the impact of this rule on the 
economy is not anticipated to be significant. This impact encompasses 
large and small hospital entities, and the impact on small entities 
does not rise to a level of a significant economic impact on a 
substantial number of small entities; in this case, small hospitals.
    Notwithstanding HUD's determination that this rule does not have a 
significant economic impact on a substantial number of small entities, 
HUD specifically invites comments from all entities, including small 
entities, regarding less burdensome alternatives to this rule that 
would meet HUD's objectives as described in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments nor preempt state law within the meaning of 
the Executive Order.

List of Subjects in 24 CFR Part 242

    Hospitals, Mortgage insurance, Reporting and recordkeeping 
requirements.

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

PART 242--MORTGAGE INSURANCE FOR HOSPITALS

    1. The authority citation for 24 CFR part 242 is revised to read as 
follows:

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

    2. In Sec.  242.1, definitions for ``hard costs'' and ``Section 
242/223(f)'' are added, and the definition of ``substantial 
rehabilitation'' is revised to read as follows:


Sec.  242.1  Definitions.

* * * * *
    Hard costs means the costs of the construction and equipment, 
including construction-related fees such as architect and construction 
manager fees.
* * * * *
    Section 242/223(f) refers to a loan insured under Section 242 of 
the Act pursuant to Section 223(f) of the Act.
* * * * *
    Substantial rehabilitation means additions, expansion, remodeling, 
renovation, modernization, repair, and alteration of existing 
buildings, including acquisition of new or replacement equipment, in 
cases where the hard costs of construction and equipment are equal to 
or greater than 20 percent of the mortgage amount.
* * * * *
    3. In Sec.  242.4, the section heading and paragraph (a) are 
revised to read as follows:


Sec.  242.4  Eligible hospitals.

    (a) The hospital to be financed with a mortgage insured under this 
part shall involve the construction of a new hospital, the substantial 
rehabilitation (or replacement) of an existing hospital, or the 
refinancing of the capital debt of an existing hospital pursuant to 
Section 242/223(f), or the acquisition of an existing hospital pursuant 
to Section 242/223(f).
* * * * *
    4. In Sec.  242.15, the existing text of this section is 
redesignated as paragraph (a), and a new paragraph (b) is added to read 
as follows:


Sec.  242.15  Limitation on refinancing existing indebtedness.

* * * * *
    (b) In the case of a loan insured under Section 242/223(f), there 
is no requirement for hard costs. However, if there are hard costs, 
such costs must total less than 20 percent of the total mortgage 
amount.
    5. In Sec.  242.16:
    a. Paragraphs (a)(3) through (a)(5) are redesignated paragraphs 
(a)(4) through (a)(6), respectively;
    b. New paragraph (a)(3) is added;
    c. Newly redesignated paragraph (a)(6) introductory text is 
revised; and
    d. Paragraphs (b)(3), (5), and (6) and paragraph (d) are revised to 
read as follows:


Sec.  242.16  Applications.

    (a) * * *
    (3) Threshold requirements--refinancing candidates. For an 
application to be considered for refinancing pursuant to Section 
223(f), a hospital must meet the following requirements in lieu of 
those described in paragraph (a)(2) of this section:
    (i) The hospitals must have an aggregate operating margin of at 
least 0 percent, when calculated from the three most recent annual 
audited financial statements.
    (ii) The hospitals must have an average debt service coverage ratio 
of at least 1.4 when calculated from the three most recent annual 
audited financial statements.
    (iii) HUD may, at its discretion, recast the operating margin and 
debt service coverage ratio for prior periods by using its estimate of 
the projected interest rate in lieu of the historical interest rate(s).
    (iv) The hospital must demonstrate that its financial health 
depends upon refinancing its existing capital debt and that it provides 
an essential service to the community in which it operates. This 
demonstration is met by providing documentation of the following:
    (A) If the hospital were no longer in operation, the community in 
which it presently operates would suffer from inadequate access to an 
essential service that the hospital presently provides;
    (B) There are few alternative affordable refinancing vehicles 
available to the hospital.
    (C) The hospital meets three of the following seven criteria:
    (1) The proposed refinancing would reduce the hospital's total 
operating expenses by at least 0.25 percent;

[[Page 4970]]

    (2) The interest rate of the proposed refinancing would be at least 
0.5 percentage points less than the interest rate on the debt to be 
refinanced;
    (3) The interest rate on the debt that the hospital proposes to 
refinance has increased by at least one percentage point at any time 
since January 1, 2008, or is very likely to increase by at least one 
percentage within one year of the date of application;
    (4) The hospital's annual total debt service is in excess of 3.4 
percent of total operating revenues, based on its most recent audited 
financial statement;
    (5) The hospital has experienced a withdrawal or expiration of its 
credit enhancement facility, or the lender providing its credit 
enhancement facility has been downgraded, or the hospital can 
demonstrate that one of these events is imminent;
    (6) The hospital is party to overly restrictive or onerous bond 
covenants; and
    (7) There are other circumstances that demonstrate that the 
hospital's financial health depends upon refinancing its existing 
capital debt.
* * * * *
    (6) Preapplication meeting. The next step in the application 
process is the preapplication meeting (this step is optional, at HUD's 
discretion, in Section 242/223(f) cases). At HUD's discretion, this 
meeting may be held at HUD Headquarters in Washington, DC, or at 
another site agreeable to HUD and the potential applicant. The 
preapplication meeting is an opportunity for the potential mortgagor to 
summarize the proposed project, for HUD to summarize the application 
process, and for issues that could affect the eligibility or 
underwriting of the project to be identified and discussed to the 
extent possible. Following the meeting, HUD may:
    (b) * * *
    (3) A description of the project, the business plan of the 
hospital, and how the project will further that plan, or, for 
applications pursuant to Section 223(f), a description of any repairs, 
renovations, and/or equipment to be financed with mortgage proceeds and 
how those repairs, renovations, and/or equipment will affect the 
hospital;
* * * * *
    (5) A study of market need and financial feasibility, addressing 
the factors listed in paragraphs (a)(1)(ii), (a)(2), and (a)(3) of this 
section, with assumptions and financial forecast clearly presented, and 
prepared by a certified accounting firm acceptable to HUD, except that 
in the case of an application for Section 242/223(f) mortgage 
insurance, at HUD's discretion, the study may not be required to 
address market need and, at HUD's discretion, there may be no 
requirement for involvement of a certified accounting firm;
    (6) Architectural plans and specifications in sufficient detail to 
enable a reasonable estimate of cost (not applicable to a Section 242/
223(f) application, except when architectural plans and specifications 
are requested by HUD);
* * * * *
    (d) Filing of application. An application for insurance of a 
mortgage on a project shall be submitted on an approved FHA form, by an 
approved mortgagee and by the sponsors of such project, to the FHA 
Office of Insured Health Care Facilities. An application for insurance 
of a mortgage pursuant to Section 223(f) shall be submitted on an 
approved FHA form by an approved mortgagee and by the proposed 
mortgagor.
* * * * *
    6. In Sec.  242.17, paragraphs (a)(2) through (5) are redesignated 
as paragraphs (a)(3) through (6), a new paragraph (a)(2) is added, and 
paragraph (b) is revised to read as follows:


Sec.  242.17  Commitments.

    (a) * * *
    (2) In the case of an application for Section 242/223(f) insurance 
where advances are not needed for funding any repairs, renovations, or 
equipment, a commitment for insurance upon completion, reflecting the 
mortgage amount, interest rate, mortgage term, date of commencement of 
amortization, and other requirements pertaining to the mortgage that 
will be issued.
* * * * *
    (b) Type of commitment. The commitment will provide for the 
insurance of advances of mortgage funds during construction. In the 
case of a commitment for Section 242/223(f)-insured refinancing, at 
HUD's discretion the commitment may provide for insurance upon 
completion.
* * * * *
    7. Section 242.18 is revised to read as follows:


Sec.  242.18  Inspection fee.

    The commitment may provide for the payment of an inspection fee in 
an amount not to exceed $5 per thousand dollars of the commitment. The 
inspection fee shall be paid at the time of initial endorsement. In the 
case of mortgages insured pursuant to section 223(f), the inspection 
fee shall be paid at endorsement, as described in Sec.  242.39 of this 
subpart. For applicants seeking refinancing only, an inspection fee 
that would involve a site visit by HUD architects and/or engineers, or 
their review of a site visit report prepared by the architects and/or 
engineers of the applicant hospital, will not exceed 10 basis points on 
the loan.
    8. In Sec.  242.23, paragraphs (b) and (c) are redesignated as 
paragraphs (c) and (d), respectively, and a new paragraph (b) is added 
to read as follows:


Sec.  242.23  Maximum mortgage amounts and cash equity requirements.

* * * * *
    (b) Section 242/223(f) refinancing--additional limit. (1) In 
addition to meeting the requirements of Sec.  242.7, if the existing 
hospital debt is to be refinanced by the insured mortgage (i.e., 
without a change in ownership or with the hospital sold to a purchaser 
who has an identity of interest, as defined by the FHA Commissioner, 
with the seller), the maximum mortgage amount must not exceed the cost 
to refinance the existing indebtedness, which will consist of the 
following items, the eligibility and amounts of which must be 
determined by the FHA Commissioner:
    (i) The amount required to pay off the existing indebtedness;
    (ii) Reasonable and customary legal, organization, title, and 
recording expenses, including mortgagee fees under Sec.  242.22;
    (iii) The estimated costs, if any, of repairs, renovation, and/or 
equipment totaling less than 20 percent of the mortgage amount;
    (iv) Architect's and engineer's fees, municipal inspection fees, 
and any other required professional or inspection fees.
    (2) In addition to meeting the requirements of Sec.  242.7, if 
mortgage proceeds are to be used for an acquisition, the maximum 
mortgage amount must not exceed the cost to acquire the hospital, which 
will consist of the following items, the eligibility and amounts of 
which must be determined by the FHA Commissioner:
    (i) The actual purchase price of the land and improvements or HUD's 
estimate (prior to repairs, renovation, and/or equipment replacement) 
of the fair market value of such land and improvements, whichever is 
less;
    (ii) Reasonable and customary legal, organization, title, and 
recording expenses, including mortgagee fees under Sec.  242.22;
    (iii) The estimated costs, if any, of repairs, renovation, and/or 
equipment totaling less than 20 percent of the mortgage amount;

[[Page 4971]]

    (iv) Architect's and engineer's fees, municipal inspection fees, 
and any other required professional or inspection fees.
* * * * *
    9. In Sec.  242.39, the introductory text is removed and paragraphs 
(a) and (b) are revised to read as follows:


Sec.  242.39  Insurance endorsement.

    (a) New construction/substantial rehabilitation. Initial 
endorsement of the mortgage note shall occur before any mortgage 
proceeds are insured, and the time of final endorsement shall be as set 
forth in paragraph (a)(2) of this section.
    (1) Initial endorsement. The FHA Commissioner shall indicate the 
insurance of the mortgage by endorsing the original mortgage note and 
identifying the section of the Act and the regulations under which the 
mortgage is insured and the date of insurance.
    (2) Final endorsement. When all advances of mortgage proceeds have 
been made and all the terms and conditions of the commitment have been 
met to HUD's satisfaction, HUD shall indicate on the original mortgage 
note the total of all advances approved for insurance and again endorse 
such instrument.
    (3) Contract rights and obligations. The FHA Commissioner and the 
mortgagee or lender shall be bound from the date of initial endorsement 
by the provisions of the Contract of Mortgage Insurance stated in 
subpart B of part 207, which is hereby incorporated by reference into 
this part.
    (b) Section 242/223(f) refinancing. (1) In cases that do not 
involve advances of mortgage proceeds, endorsement shall occur after 
all relevant terms and conditions have been satisfied, including, if 
applicable, completion of any repairs, renovations, and/or equipment, 
or upon assurance acceptable to the FHA Commissioner that all required 
repairs will be completed by a date certain following endorsement.
    (2) In cases where advances of mortgage proceeds are used to fund 
repairs, renovation, and/or equipment, endorsement shall occur as 
described in paragraph (a) of this section immediately above, for new 
construction/substantial rehabilitation.
* * * * *
    10. In Sec.  242.55, paragraph (c) is revised to read as follows:


Sec.  242.55  Labor standards.

* * * * *
    (c) Each laborer or mechanic employed on any facility covered by a 
mortgage insured under this part (except under 24 CFR 242.91(a), but 
including a supplemental loan under section 241 of the Act or a 
refinancing loan under section 223(f) of the Act made in connection 
with a loan insured under this part) shall receive compensation at a 
rate not less than one and one-half times the basic rate of pay for all 
hours worked in any workweek in excess of 8 hours in any workday or 40 
hours in the workweek.
* * * * *
    11. Section 242.91 is revised to read as follows:


Sec.  242.91  Eligibility of refinancing transactions.

    (a) A mortgage given to refinance an existing insured mortgage 
under Section 241 or Section 242 of the Act covering a hospital may be 
insured under this subpart pursuant to Section 223(a)(7) of the Act. 
Insurance of the new, refinancing mortgage shall be subject to the 
following limitations:
    (1) Principal amount. The principal amount of the refinancing 
mortgage shall not exceed the lesser of:
    (i) The original principal amount of the existing insured mortgage; 
or
    (ii) The unpaid principal amount of the existing insured mortgage, 
to which may be added loan closing charges associated with the 
refinancing mortgage, and costs, as determined by HUD, of improvements, 
upgrading, or additions required to be made to the property.
    (2) Debt service rate. The monthly debt service payment for the 
refinancing mortgage may not exceed the debt service payment charged 
for the existing mortgage.
    (3) Mortgage term. The term of the new mortgage shall not exceed 
the unexpired term of the existing mortgage, except that the new 
mortgage may have a term of not more than 12 years in excess of the 
unexpired term of the existing mortgage in any case in which HUD 
determines that the insurance of the mortgage for an additional term 
will inure to the benefit of the FHA Insurance Fund, taking into 
consideration the outstanding insurance liability under the existing 
insured mortgage, and the remaining economic life of the property.
    (4) Minimum loan amount. The mortgagee may not require a minimum 
principal amount to be outstanding on the loan secured by the existing 
mortgage.
    (b) A mortgage given to refinance the debt of an existing hospital 
under Section 242 of the Act may be insured under this subpart pursuant 
to Section 223(f) of the Act. The mortgage may be executed in 
connection with the purchase or refinancing of an existing hospital 
without substantial rehabilitation. A mortgage insured pursuant to this 
subpart shall meet all other requirements of this part. The FHA 
Commissioner shall prescribe such terms and conditions as the FHA 
Commissioner deems necessary to assure that:
    (1) The refinancing is employed to lower the monthly debt service 
costs (taking into account any fees or charges connected with such 
refinancing) of such existing hospital;
    (2) The proceeds of any refinancing will be employed only to retire 
the existing indebtedness; pay for repairs, renovation, and/or 
equipment totaling less than 20 percent of the mortgage amount; and pay 
the necessary cost of refinancing on such existing hospital;
    (3) Such existing hospital is economically viable; and
    (4) The applicable requirements of Section 242 for certificates, 
studies, and statements have been met.

    Dated: December 19, 2009.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-1488 Filed 1-28-10; 8:45 am]
BILLING CODE 4210-67-P