[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]
[[Page 4963]]
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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
[[Page 4964]]
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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