[Federal Register Volume 75, Number 245 (Wednesday, December 22, 2010)]
[Notices]
[Pages 80517-80524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32185]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

 [Docket No. FR-5354-N-02]


HUD Multifamily Rental Project Closing Documents--Revisions and 
Updates Notice of Information Collection; 30-Day Notice

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

ACTION: Notice.

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SUMMARY: On January 21, 2010, and consistent with the Paperwork 
Reduction Act of 1995, HUD published for public comment, for a period 
of 60 days, a notice advising that HUD was updating and revising a set 
of closing documents used in Federal Housing Administration (FHA) 
multifamily rental projects. The 60-day notice published on January 21, 
2010, started anew the process for updating the multifamily rental 
project closing documents, and obtaining approval of these documents 
under the Paperwork Reduction Act, a process that had originally 
commenced on August 2, 2004.
    This 30-day notice published today will complete the public comment 
process required by the Paperwork Reduction Act of 1995. With the 
issuance of this notice, HUD will submit the information collection for 
the closing documents to the Office of Management and Budget (OMB) for 
review and approval, and assignment of OMB control numbers. In 
accordance with the Paperwork Reduction Act, the closing documents will 
undergo the public comment process every three years to retain OMB 
approval.
    While complying with the Paperwork Reduction Act of 1995, this 30-
day notice, as was the case with the 60-day notice, provides 
information beyond that normally provided in such notices. The 60-day 
notice published on January 21, 2010, responded to the public comments 
submitted on the proposed closing documents issued for comment on 
August 2, 2004, and summarized and responded to the public comments. 
Similarly, this notice issued today identifies substantive changes that 
HUD has made to the closing documents in response to public comment 
submitted on the January 21, 2010, notice, and responds to significant 
issues raised by commenters on the closing documents.
    The multifamily closing documents that HUD is submitting to OMB are 
posted on HUD's Web site at http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.

DATES: Comment Due Date: January 21, 2011.

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

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

    .No Facsimile Comments. Facsimile (FAX) comments are not 
acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing impairments 
may access this number via TTY by calling the Federal Information Relay 
Service at 800-877-8339. Copies of all comments submitted are available 
for inspection and downloading at http://www.regulations.gov.

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

SUPPLEMENTARY INFORMATION:

I. Background

    On June 1, 2009, HUD announced, on its Web site, that it would 
commence review of the multifamily rental project closing documents, 
for which review had started but was not completed

[[Page 80518]]

under the prior Administration. HUD posted the documents on its Web 
site and welcomed the public to review these documents as HUD began its 
internal review prior to commencement of formal review and solicitation 
of public comment under the Paperwork Reduction Act of 1995 (PRA). (See 
http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm.)
    Under the prior Administration, HUD published a notice in the 
Federal Register on August 2, 2004 (69 FR 46214) that advised that, 
consistent with the PRA, it was publishing for public comment a 
comprehensive set of revised closing forms and documents (closing 
documents) for use in the FHA multifamily rental project and health 
care facility (excluding hospitals) programs. In the notice, HUD 
advised that, in addition to seeking public comment on burden hours, 
which is the primary focus of the PRA, HUD welcomed input from the 
lending industry and other interested parties on whether the documents 
offer the requisite protection to all parties in these FHA-insured 
mortgage programs, while being consistent with modern real estate 
practice and mortgage lending laws and procedures. The August 2, 2004, 
notice, in turn, followed an earlier informal solicitation of public 
comment on proposed revisions to the closing documents that were posted 
on HUD's Web site in March 2000. In response to the comments received 
from the 2000 solicitation of public comment, significant revisions 
were made to the proposed closing documents, and these revised 
documents were published in the Federal Register on August 2, 2004, for 
review and public comment. Although HUD reviewed the public comments 
and advised of initial policy decisions in response to certain comments 
(see HUD's notice published on August 31, 2006, at 71 FR 51842), HUD 
was unable to complete the updating of the closing documents during the 
prior Administration.
    Consistent with its announcement on June 1, 2009 that HUD would 
start anew the updating of the closing documents, HUD published a 
notice in the Federal Register on January 21, 2010 (75 FR 3544), which 
solicited public comment for a period of 60 days on the closing 
documents. The January 21, 2010, notice commenced the formal review and 
public input required by the PRA. However, consistent with the approach 
to updating the documents that HUD took in 2004, the January 21, 2010, 
notice went beyond the information generally provided in PRA notices. 
The notice identified changes HUD made to the closing documents since 
they were last published for comment in August 2004. That January 21, 
2010 notice also summarized the significant issues that commenters 
raised in response to both the 2004 publications and to HUD's posting 
of documents on its Web site in 2009. In addition to the summary, the 
January 2010 Notice also provided responses to the significant issues 
raised by the commenters.
    As noted in the Summary portion of this notice, this 30-day notice 
published today will complete the public comment process required by 
the PRA for the closing documents. Related to the closing documents is 
a proposed rule that HUD published on November 12, 2010 (See 75 FR 
6393, HUD Multifamily Rental Projects: Regulatory Revisions.) The 
November 12, 2010 proposed rule proposes to amend certain FHA 
regulations to update regulations to reflect current HUD policy in the 
area of multifamily rental projects. Similar to HUD's updating of the 
closing documents, HUD seeks to have its regulations reflect current 
terminology, lending laws, and practices with respect to multifamily 
projects.

II. The January 21, 2010 Notice (The 60-Day Notice)

A. The 60-Day Public Comment Process, Generally

    While this 30-day notice addresses significant issues raised by the 
public commenters on the 60-day notice, HUD is not providing the 
detailed comment and response section as HUD did in the 60-day notice. 
At the time of the first issuance of proposed updated closing documents 
in 2004, HUD was not accepting comments electronically through a 
publicly available Web site, and consequently, the public did not have 
a readily and easily available mechanism to review public comments on 
the August 2, 2004, notice. Therefore to compensate for the lack of 
publicly available Web site where all public comments could be viewed, 
HUD provided a detailed summary of the comments and HUD's responses to 
these comments. For the January 21, 2010, notice, however, all the 
public comments submitted on the proposed updated closing documents can 
be viewed at http://www.regulations.gov, which included proposed mark-
ups of several of the closing documents.

B. The Public Comments, Generally

    At the close of the public comment period on March 22, 2010, HUD 
received 47 public comments. The commenters included lenders, home 
builders, construction companies, attorneys, real estate agencies, and 
organizations such as the Mortgage Bankers Association and the American 
Bar Association. Several of the commenters, as noted earlier, submitted 
with their comments HUD's updated closing documents revised as certain 
commenters preferred to see the documents structured. HUD also held 
three public roundtables to obtain input from affected parties; on 
February 19 and 23, 2010 and March 9, 2010. (See http://170.97.167.13/offices/hsg/mfh/mfhlcd/roundtableinvitation.pdf.) HUD carefully 
reviewed all of the comments and appreciates the thorough review 
provided by the majority of the commenters as well as the time taken by 
several commenters to draft and submit for HUD's consideration revised 
or alternative language. While HUD is not providing a detailed summary 
of the comments as it did in the January 2010 notice, the following 
highlights some of the significant issues raised by the commenters.
General Comments
    General concerns identified by commenters about the closing 
documents were as follows: The documents impose greater burdens and 
legal consequences on HUD borrowers (Borrowers) and lenders (Lenders), 
thereby potentially discouraging participation in HUD's multifamily 
programs, especially for nonprofit organizations; the documents would 
result in fundamental changes in the nature of the mortgage insurance 
contract and shift additional risk to Lenders and Borrowers alike; the 
increased burdens on HUD call into question whether HUD staff, because 
of decreasing HUD personnel resources, can timely perform under the 
requirements of the new documents; and certain provisions in the 
documents appear to conflict with existing statutes regulations, and 
HUD handbooks.
    HUD acknowledges that with the updating of the closing documents, 
the majority of which have not been updated in over 20 years, the 
changes appear to impose greater burdens on HUD Lenders and Borrowers. 
However, HUD submits that the changes result in no greater burden than 
that involved in non-FHA private sector multifamily rental project 
closings. Further, although Lenders and Borrowers will need some time 
to become familiar with the updated closing documents, the existing 
closing documents, which these updated closing documents will replace, 
often necessitated the development of individual and additional 
documents for a transaction. Developing unique documents for a 
transaction frequently caused delays in the processing of the

[[Page 80519]]

documents and completion of the closing. The updated closing documents 
are designed to eliminate much of the need for individual document 
development, and reduce the time to process and close HUD multifamily 
rental project transactions.
    Multifamily rental project transactions have changed significantly 
over the last 20 years, and, in certain aspects, are more complex than 
they were over 20 years ago. HUD has strived to make these closing 
documents consistent, to the extent feasible, with non-FHA documents in 
order to minimize differences in transactions, and therefore minimize 
burden often caused by variations between FHA multifamily rental 
project closings and non-FHA multifamily rental closings.
    The changes to the closing documents appropriately reflect the 
responsibilities and risk that are to be borne by HUD and the 
responsibilities and risk that are to borne by Lenders and Borrowers. 
The changes in responsibilities and risks to all parties, as provided 
in these documents, correspond to changes in multifamily rental 
transactions that have taken place over the last two decades. As noted 
earlier, these transactions are not the same as they were 20 years ago. 
There have been significant changes, and not only must the documents 
change to reflect the changes in the transactions, the parties to the 
transactions must accept the risks and responsibilities that are part 
of these transactions as these parties do in non-FHA multifamily rental 
transactions.
    HUD appreciates the concerns about whether HUD staffing levels will 
be sufficient to fulfill HUD's obligations when updated closing 
documents are approved and ready to be used. HUD assures the industry 
and the public that sufficient staff will be available and thoroughly 
familiar with the documents to perform necessary tasks.
    Finally, with respect to concerns about the closing documents 
possibly conflicting with statutes and regulations, HUD notes that the 
review of these documents, including significant review by industry, 
has been thorough, with review commencing as early as 2000, continuing 
through 2004, and 2006, June 2009, and January 2010. (Please see 
preamble discussion in the January 22, 2010, notice at 75 FR 3545, 
first column.) Given this process, and with the aid of industry review, 
HUD believes that any conflicts with existing statutes and regulations 
that may have been in the documents have been addressed.
    In essence, HUD has sought to balance updated legal definitions and 
terms, and transfers of responsibilities to and between program 
participants with the government's interest in managing risk. Further, 
the efficiencies achieved in standardizing and streamlining documents 
will achieve legal certainty and save time in closings which will 
benefit all participants.
    Comments directed at specific closing documents are addressed in 
the next section in the context of changes that were made to the 
closing documents as a result of public comments, and/or further 
consideration of issues by HUD. However, other overarching issues 
raised by the commenters follow.
    Disclosure of Gains From Trading Ginnie Mae Securities. Commenters 
noted that the proposed requirement in the loan documents that Lenders 
disclose gains from trading the Ginnie Mae security would create a 
substantial, significant and notable new policy. Commenters submitted 
that such disclosure does not belong in the closing documents nor 
should it be part of the process for changing loan documents. HUD 
agrees with this concern and has removed this requirement.
    Lender's Determination of Interest Rate. Commenters expressed 
concern that through the process of rewriting their multifamily loan 
documents, FHA was attempting to create policy that altered Lender's 
ability to determine the interest rate. HUD assures that there is no 
restriction on the Lender's ability to determine the interest rate.
    Ability To Charge Origination and Servicing Fees for Increased 
Obligations Imposed by New Documents. Commenters expressed concerns 
that the proposed documents impose augmented obligations and 
liabilities on Lenders with little or no opportunity for Lenders to 
recoup what are sure to be increased origination and servicing costs. 
In some instances, commenters say that there is a significant shift of 
risks and responsibilities from HUD and Borrower's counsel to Lender.
    HUD recognizes that the Lender and Borrower will be undertaking new 
responsibilities and anticipates that there will be negotiations 
between the parties which will result in a corresponding recognition 
and adjustment in fees. For example, HUD had included authority in the 
proposed documents for the Lender to charge the Borrower a fee, in 
accordance with Program Obligations, for the Lender's increased 
responsibilities in reviewing a proposed transfer of physical assets. 
That provision was retained in this document publication. HUD's current 
guidance recognizes that ``reasonable and necessary expenses'' can be 
recovered and anticipates that the Lender and Borrower will negotiate 
applicable fees which, while they can be expenses of the project, 
cannot be insured debt. The issue of costs and fees is further 
discussed later in this preamble.
    Emulating Fannie Mae and Freddie Mac Standards for Multifamily Loan 
Documents. Commenters contended that HUD was seeking to emulate Fannie 
Mae and Freddie Mac as setting modern standards for multifamily loan 
documents, yet also contended that HUD's emulation is more selective 
than rational distinctions justify. They further contended that at the 
same time other Fannie Mae/Freddie Mac loan documents provisions 
proposed for adoption by HUD might be problematic.
    HUD has not attempted to develop documents that emulate Fannie Mae 
and Freddie Mac, but has, in contrast, developed documents that are 
updated for current commercial legal standards, balanced with the 
public policy role that HUD programs serve. To some extent, HUD's 
documents may therefore include provisions similar to Fannie Mae's and 
Freddie Mac's documents, but they do not replicate those documents. 
While HUD acknowledges that certain features of the FHA programs are 
unique, such as the payment of the mortgage insurance premium (MIP), 
execution of the Regulatory Agreement, and surplus cash requirements, 
these elements are essential to protecting the government's financial 
interest and limiting unnecessary risk. Inclusion of such provisions is 
therefore a necessary tradeoff which protects the government's 
financial interest and minimizes risk while providing the benefit of 
federally insured real estate financing.
    Proposed Changes to Section 232 Health Care Processes Should Be 
Incorporated. Commenters stated that several potential health care 
program closing documents innovations were equally appropriate for the 
rental documents, and urged HUD to examine these potential changes.
    HUD is already closely reviewing the current health care program 
documents in the context of developing a separate rule and updated 
documents that will be published for public comment.

C. Status of Changes to Documents

1. Documents Not Revised
    Of the closing documents published in January 2010, the Surveyor's 
Report,

[[Page 80520]]

and HUD Survey Instructions and Report were not revised.\1\
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    \1\ HUD published proposed amendments to American Institute of 
Architects (AIA) Document B-181 in January 2010 and received 
comments on that document. However, the AIA is replacing this 
document with AIA Document B-108 effective May 31, 2011. Given the 
timing of that document change, HUD will complete the notice and 
comment requirements of the Paperwork Reduction Act under separate 
notice.
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 2. Documents Revised
    The remaining documents listed below were revised.

1. Security Instrument
2. Note
3. Multifamily Regulatory Agreement
4. Lender's Certificate
5. Building Loan Agreement
6. Supplement to Building Loan Agreement
7. Construction Contract
8. Supplementary Conditions of the Contract for Construction
9. Guide for Opinion of Borrower's Counsel
10. Instructions to Guide for Opinion of Borrower's Counsel
11. Exhibit A to Opinion of Borrower's Counsel
12. Residual Receipts Note (Non-Profit Borrowers)
13. Residual Receipts Note (Limited Dividend Borrowers)
14. Escrow Agreement for Incomplete Construction
15. Request for Final Endorsement of Credit Instrument
16. Lease Addendum
17. Surplus Cash Note
18. Completion Assurance Agreement
19. Payment Bond
20. Performance Bond
21. Request for Approval of Advance of Escrow Funds
22. Escrow Agreement for Noncritical Deferred Repairs
23. Agreement of Sponsor to Furnish Additional Funds
24. Escrow Agreement for Operating Deficit
25. Bond Guaranteeing Sponsor's Performance
26. Off Site Bond--Dual Obligee
27. Escrow Agreement for Latent Defects
28. Escrow Agreement for Working Capital
29. Agreement and Certification
30. Request for Endorsement of Credit Instrument
31. Borrower's Oath
32. Subordination Agreement \2\

    \2\ This document, which was included in the January 21, 2010, 
notice has not yet been assigned a form number.
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    All changes made to the multifamily closing documents are provided 
in redline/strikeout format on HUD's Web site at http://www.hud.gov/offices/hsg/mfh/mfhclosingdocuments.cfm. These changes capture both 
editorial changes and more substantive changes. The following sections 
of this preamble address some of the significant issues raised by the 
commenters in response to the January 2010 notice. Some commenters, 
however, proposed changes or raised issues that were the same as those 
proposed or raised in response to publication of the proposed revised 
closing documents issued in 2004 and to which HUD has already provided 
responses in the January 2010 notice. In this notice issued today, HUD 
is not repeating responses to proposed changes or issues that were 
addressed in the January 2010 notice.
3. Across-the-Board Changes and Significant Policy Determinations
    HUD adopted many changes submitted by commenters including the 
following:
    Two-tier default. In 2004, HUD developed a new two-tiered default 
scheme as part of the revision to the Security Instrument. Regulatory 
language reflecting these proposed changes were also included in the 
proposed regulations published in 2004. Specifically, HUD proposed that 
there should be one class for financial defaults, which would give the 
lender an immediate right to an insurance fund claim. All other bases 
for default were grouped into a second class. HUD would require the 
lender to obtain HUD's prior written approval for a claim in this 
second category before the lender would be able to make an insurance 
fund claim. This proposal for a two tier default system was also 
included in both the revisions to the Security Instrument published in 
January 2010 and in the proposed changes to the multifamily regulations 
published November 12, 2010.
    Commenters on the changes proposed in 2004 and 2010 suggested that 
HUD update the foreclosure process for current legal terminology. HUD 
has adopted commenters' recommendations to provide more details on the 
two tier default criteria in both the documents and the proposed rule, 
and accepted several of the commenters' suggestions for technical 
language changes.
    Lender/Owner/Attorney Responsibilities. Several commenters 
submitted that HUD has placed new and inappropriate responsibilities on 
them in their respective roles. As an example Borrowers' attorneys 
stated that they should not have to certify that flood insurance was in 
place, as the Lender typically undertook that responsibility. With 
respect to these statements, HUD notes that it has modified 
certifications to require the Lender to certify that there is flood 
insurance on a property, and has adopted similar provisions in other 
documents. The redlined versions of these documents on the web page 
highlight these changes.
    Recourse Liability and Definition of Principals. In the January 
2010 notice, HUD noted that the 2004 proposed revisions to the closing 
documents included certain limited recourse liability for ``Key 
Principals'' which was opposed by several public commenters. While 
HUD's August 31, 2006, notice advising of preliminary decisions on 
proposed revisions did not include provisions for recourse liability of 
Principals, the revised closing documents posted on HUD's Web site on 
June 1, 2009, retained some of the provisions that were questioned. 
Some of the informal comments submitted in response to HUD's posting in 
2009 of proposed changes to the closing documents again opposed 
inclusion of any recourse liability provisions, arguing that inclusion 
would dissuade some individuals from participating in HUD insured 
multifamily housing transactions.
    In the January 2010 notice, HUD highlighted its current position 
that, in light of the consequences that certain insufficiently 
regulated actions have had on the housing finance markets in recent 
years, and given that public funds are put at risk in HUD multifamily 
housing transactions, it is appropriate for principals to be 
responsible for paying damages for certain ``bad boy'' acts. 
Accordingly, these provisions were included in the revised closing 
documents circulated for public comment, and HUD has determined to 
retain these provisions.
    Commenters on the January proposal expressed concerns that HUD had 
broadened liability in the proposed documents for principals, for 
example, for ``bad boy'' acts. HUD does not agree with this 
characterization. These documents retain the historic non-recourse 
nature of FHA-insured financing. Individual principals are not 
personally liable for payment of the Note as a result of default. 
However, acts of fraud and misconduct that put the FHA insurance fund 
at risk will be pursued through contract rights made explicit in these 
documents and other remedies available to the federal government. As a 
result, HUD believes that the ``bad boy'' provisions referred to by 
commentators merely provide more certain legal mechanisms for enforcing 
HUD's statutory, regulatory, and program requirements without 
overburdening those that work hard and play by the rules.

[[Page 80521]]

    In addition, signers generally are attesting only ``to the best of 
their knowledge,'' and primarily to their own statements and 
representations. In several instances, principals' liability is limited 
by the materiality of the certification to the issue in question.
    HUD has also referenced a definition of principals in the documents 
which is included in 24 CFR 200.215 of HUD's regulations. Consequently, 
any changes to the definition of principals will require regulatory 
change.
    State Specific Provisions. Several commenters suggested that HUD 
develop and include state specific riders to the documents and publish 
them for review. HUD recognizes that publication of state specific 
provisions that are discretionary but not mandatory may be helpful, but 
believes that it is important to await adoption of this set of 
documents and allow some time following implementation to see if 
conflicts of law questions and other state law issues arise in order to 
determine the timing and substance of the next steps.
    Nevertheless, in the meantime, HUD will develop and use those 
limited state specific riders necessary to meet state law mandates. 
These latter provisions are recognized as necessary to complete 
closings and comply with state law requirements. HUD has no authority 
to modify the required language which fulfills those state law 
obligations.
    Program Obligations/Directives. One of the more significant changes 
made in revising this set of closing documents was to replace the term 
``Directives'' with the term ``Program Obligations.'' Commenters raised 
concerns about the use of the term ``Directives'' in light of its 
historic meaning. HUD's view is that the term ``Program Obligations'' 
better captures what was intended by use of the term ``Directives,'' 
namely, to advise parties to the closing documents of the program 
requirements embodied in statute and regulation and other documents 
issued in accordance with law, and not repeated in the closing 
documents, to which the parties must adhere. The language now used in 
the closing documents defines ``Program Obligations,'' as follows:

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

    This language better identifies what HUD intended in its original 
use of the term ``Directives.'' The definition of Program Obligations 
identifies the specific, longstanding, and familiar types of 
requirements (those in statutes, regulations, handbooks, guides, 
notices, and mortgagee letters) to which the parties must adhere.
    In response to commenters' concerns that HUD has unfettered 
discretion to make material changes that will have an economic effect 
on the viability of the project, the definition of ``Program 
Obligations'' explicitly recognizes that notice and comment rulemaking 
will be followed for significant substantive requirements. In fact, HUD 
has currently proposed rules accompanying these documents which can 
serve as an example of the type of changes that are made in rulemaking.
    Borrowers will be subject, as they are in any other government 
program, to prospective programmatic changes. Further, Lenders should 
recognize that they are, to a great extent, protected by and subject to 
the FHA Contract of Insurance. As described previously, HUD has 
referenced HUD rules in several places. The revised Security Instrument 
specifically references the applicable sections of the Code of Federal 
Regulations to address these concerns. For example, because concerns 
have been expressed about the potential liability of principals, 
Section 1(bb) of the new Security Instrument explicitly links to the 
definition of principal in 24 CFR 200.15, and to the definition of 
``contract of insurance'' in 24 CFR part 207, subpart B.
    Additionally, it is important to note that the imposition of new or 
revised information collection requirements (that is, generally new or 
revised forms) must undergo the notice and comment processes, including 
Federal Register publication, required by the Paperwork Reduction Act 
of 1995. From time to time, HUD also uses mortgagee letters or other 
types of direct notices to announce new binding requirements. These 
types of documents are used, for example, when new statutes impose 
requirements that are effective upon enactment and HUD has no 
discretion in implementation. In such situations, mortgagee letters or 
other types of direct notices are the best vehicles to advise the 
industry on implementation dates and provide implementation guidance 
that may be helpful. HUD may also issue mortgagee letters or direct 
notices to announce clarifications, interpretations, or certain 
procedural requirements, such as to which HUD offices or HUD officials 
certain types of executed documents must be submitted. In brief, HUD 
will follow the applicable procedures, as directed by statute or 
regulation that govern issuance of a document, which may announce 
additional policies, processes, forms, or standards to which parties to 
the closing documents must comply.
    Liability and New Responsibilities. The proposed closing documents 
reflected a series of changes directed to Lenders assuming a greater 
role in reviewing documents for the transaction. While commenters 
expressed concerns about this expanded role and potential liabilities, 
they also expressed concerns that the proposed closing documents 
significantly increased burdens on HUD staff at a time of shrinking HUD 
personnel resources and looming retirements.
    Commenters further submitted that the requirement for HUD to review 
and approve minor modifications to commercial leases, review additional 
financial statements, additional diligence with regard to the closing 
documents, and many other requirements all cause significant increases 
to the cost of doing business for which there is no additional 
compensation vehicle.
    HUD has addressed these comments in several ways. Lender liability 
is limited by warranty restrictions. For example, while the Borrower 
grants the Lender a security interest in their Uniform Commercial Code 
(UCC) collateral, the Borrower also warrants to the Lender that no UCC 
filings have been made against the Borrower, the Project, or the 
Project assets. The Borrower makes these warranties to the Lender prior 
to the initial/final endorsement of the Note by HUD. In further 
attempting to address these competing concerns, namely the increased 
due diligence, and transaction specific issues, HUD has provided for 
modification of Lender fees.
    In addition, HUD continues to allow Lenders to recover costs 
through the interest rate and servicing fees, and recover certain 
``reasonable and customary'' fees as noted in the Lender's Certificate. 
The Lender may impose reasonable and customary administrative fees and 
charges (including but not limited to, reimbursements for out-of-pocket 
expenses) for handling and investing the cash held in the Reserve for 
Replacement, the Residual Receipts account, if applicable, and any 
other interest-bearing escrows related to the

[[Page 80522]]

Project and for processing, reviewing and approving other matters 
(Administrative Fees). Further, while Lenders are required to pass on 
interest earned on escrows to the Borrower, the Lender is allowed to 
negotiate a reasonable fee with the Borrower based on the particular 
responsibilities taken on in each transaction by the respective parties 
in other respects. For example, HUD has allowed Lenders to recoup costs 
in fees for due diligence related to Transfer of Physical Assets.
    Waste. Commenters expressed concerns that HUD was including a 
definition of ``waste'' that was broad and exceeded industry standards. 
Namely, commenters objected to inclusion of standards related to the 
physical condition of the property, along with the financial condition 
of the property and the potential for fraud. Commenters suggested as an 
alternative, to limit the definition of ``waste'' used in the closing 
documents to fraud and financial issues such as tax delinquency, 
unauthorized retention of funds, and actions reducing the value of the 
property. Commenters also suggested limiting the definition of waste to 
``Program Obligations'' in effect as of the date of HUD's firm 
commitment to insure the loan.
    HUD has the responsibility to ensure that HUD-insured properties 
are decent, safe, sanitary, and in good repair, and to provide 
sufficient information regarding the specific items that HUD will 
review in makings its determination that waste has been committed. 
Accordingly, HUD has retained language defining waste that includes the 
general goal of maintaining decent, safe, and sanitary housing, and a 
list of specific items that provide direction to the Borrower. Within 
the list of specifics that constitute waste, HUD has modified the 
proposed language to include ``failure to maintain and repair'' the 
property in accordance with Program Obligations. (See the preamble 
section labeled Program Obligations/Directives for a discussion of HUD 
requirements under program obligations).
    Transition. Commenters expressed a desire for HUD to coordinate the 
effective date for these documents with training and updated program 
guidance. HUD agrees with these comments and carefully considered them 
in determining an effective date. Updated guidance and a training 
schedule will be published well in advance of any closings that require 
use of the new closing documents. Notwithstanding the many 
opportunities for public comment and input that HUD has provided on 
revisions to the closing documents, which commenced even before the 
formal proposal issued in 2004, commenters requested that Lenders be 
given the option of using current or revised documents for up to three 
years and suggested different mandated effective dates depending on the 
program. HUD disagrees with these comments due to the many 
opportunities already made available to review the proposed documents. 
HUD recognizes that when these documents are issued in final form and 
are ready for use in multifamily rental transactions, that time will be 
needed for parties to adjust practices to use the new documents. As a 
result, these revised closing documents shall be mandatory with respect 
to all (i) mortgage insurance applications for refinancing, or (ii) 
potential applicants that receive a letter of invitation for the 
submission of an application for new construction or substantial 
rehabilitation, on or after May 1, 2011.

D. Changes To Highlight Specific Documents

Subordination Agreement
    The creation of a new Subordination Agreement is one example of 
HUD's updates to correspond to current real estate industry practices. 
The new Subordination Agreement incorporates many of the concepts in a 
rider that is currently used by HUD and it is more in line with current 
industry practices for governmental subordinate lenders. The new 
Subordination Agreement also improves upon notification to the public, 
including potential purchasers and lenders, of the government's 
interest as it incorporates, in one recordable document, the specific 
conditions that will protect the government's first lien security 
interest in the property.
Security Agreement/Instrument (HUD 9400M)
    HUD has adopted several changes to specify Lender responsibilities 
under the security instrument while allowing entities to legally own 
properties as single asset entities and limit liability of principals 
regarding ``bad boy'' acts. Some of the key changes, some of which have 
been previously discussed are as follows:
     Provides a contractual definition of waste to provide 
certainty and national standardization for program participants;
     Clarifies the treatment of interest rates, recovery of 
costs, and allowance of administrative fees, such as for Transfers of 
Physical Assets;
     Establishes standards for maintenance of books and records 
consistent with current HUD guidance;
     Adopts technical recommendations from commenters to 
clarify categories of defaults;
     Moderates environmental requirements;
     Defers development of specific state law provisions for 
implementation experience with the current documents, while requiring 
those riders mandated by state law;
     Updates and modernizes the documents to allow Lenders to 
pay advances for certain items related to completion and preservation 
of the property that are added to indebtedness in accordance with 
statutory authority, the regulations, and current practices.
Note (HUD 949001)
    Many of the changes to the Note are the same as those changes made 
to the Security Instrument. Additional changes to the Note are as 
follows:
     Provides alternative clauses for construction and 
refinancing situations;
     Modernizes language to address securitization and bonding 
requirements that have been adopted since the documents were last 
revised; and
     Nonrecourse to the Borrower.
Regulatory Agreement (Form 2466M)
    The Regulatory Agreement is designed to ensure that Borrowers 
participating in these programs comply with HUD rules. Several of the 
definitions of terms used in the Regulatory Agreement were modified in 
both the Regulatory Agreement and the Security Instrument. Some of the 
key changes made to the Regulatory Agreement follow:
     Modification of the definitions of Mortgaged Property, 
Personalty, and Project Assets to address the distinction between 
project assets and non-project entity assets;
     Limitation of the definition of mortgaged property and 
allowing owners more flexibility;
     Including revised definitions to provide for receipt and 
use of financing and revenue sources from for-profit, nonprofit, and 
charitable sources; and
     Adopting a contractual definition of waste in order to 
provide certainty and national standardization for program 
participants.
    In addition, the Regulatory Agreement:
     Provides automatic termination provisions if the loan has 
been repaid and HUD is no longer involved in the property, while 
maintaining HUD's ability to protect the government's interest to 
enforce violations of the agreement prior to termination;
     Clarifies the term ``construction funds'';

[[Page 80523]]

     Qualifies owner construction responsibilities;
     Includes a conflicts provision providing that if there is 
any conflict between the Regulatory Agreement and any other HUD 
agreement executed by Borrower, the agreement which imposes the more 
restrictive requirements on Borrower controls;
     Removes Article IX which referenced Section 8 Housing 
Assistance Payments Contracts;
     Retains restrictions on affiliates;
     Alleviates some restrictions on project management, for 
example contracts with third party vendors;
     Limits requirements to notify HUD of changes in Borrower 
organizational structure to only those which have a material effect;
     Continues liability for payment of damages only for 
certain ``bad boy acts'';
     Maintains UCC references in order to protect HUD's 
security interests;
     Includes a new provision in which Borrower agrees that it 
is not a third-party beneficiary to the Contract of Insurance between 
HUD and Lender; and
     Provides for limited signatories.
Lender's Certificate (HUD 9243M)
    The Lender is required to certify that specific actions have been 
taken before financing is finalized. Lenders are required to certify to 
HUD that certain due diligence has been performed and accordingly, will 
be compensated for these new responsibilities. A key change by HUD in 
response to public comment is modification of the certification 
requirement standards to provide that the Lender will be certifying 
``to the best of the Lender's knowledge'' that the statements in the 
certification are true, accurate and complete.''(paragraph 40). Some of 
the key changes made to the Lender's Certificate are as follows:
     Modifies several provisions regarding fees including:
     Shifting closing fees to a separate attachment in order to 
allow the parties to the transaction to develop a more comprehensive 
and transaction specific list of charges;
     Eliminating the declaration to the Borrower of the trading 
premium earned by Mortgagee upon Sale of Ginnie Mae Securities to allow 
Lenders and Borrowers to negotiate appropriate compensation;
     Allowing negotiation of reasonable and customary 
administrative fees for reimbursement for out of pocket expenses, and 
handling and investing the cash held in reserve for replacement, 
residual receipts, and other interest bearing accounts;
     Removing the term prepayment penalty and substituting the 
term prepayment premium;
     Requiring Lenders to notify HUD if payments are not 
received by the tenth day of the month in which it is due and thus 
imposing a late charge.
    Additional modifications include:
     Adopting limitations on disclosure of future identities of 
interest, as defined in ``Program Obligations,'' during the 
construction period or prior to final endorsement;
     Changing the term ``off-site components'' to ``off-site 
materials'' to be more consistent with modern day terminology; and
     Updating and modernizing the documents, consistent with 
change to the Security Instrument to allow Lenders to pay advances for 
certain items related to completion and preservation of the property 
that are added to indebtedness in accordance with statutory authority, 
the regulations, and current practices.
Opinion (HUD-91725M)
    Some of the key changes made to the Opinion are as follows:
     Removes the requirement that attorneys certify that the 
Borrower has made UCC filings, in response to the comment that 
financing statements are filed by other parties, such as the title 
company; in accordance with HUD's decision, announced in the January 
21, 2010 notice, to shift UCC responsibilities to Lenders;
     Removes the requirement for certification of flood 
insurance as that responsibility now rests with the Lender;
     Qualifies with a knowledge standard the conflicts of 
interest statement e that Borrower's counsel does not represent the 
Lender or other lenders, investors or other parties involved with the 
transaction; and
     Limits certification of knowledge of side deals to those 
that, based upon the certification of the Borrower, and to the best of 
their knowledge, amend or are inconsistent with the terms of the HUD 
Form closing document or commitment between Borrower and any other 
party to the transaction.

E. Miscellaneous Documents

    In addition to the foregoing documents HUD has a number of 
additional closing documents which are used in specific situations, 
such as escrows for incomplete construction, escrows for latent 
defects, and a completion assurance agreement. In response to 
suggestions made by commenters, HUD has adopted several concurring 
changes across these forms to ensure that there is consistency in all 
forms. In addition, HUD is seeking to ensure that practices are 
consistent in all field offices with respect to releases of escrowed 
funds in order to encourage program participation while providing 
financing and servicing certainty. As noted earlier in this notice 
published today, changes to these documents are displayed in redline/
strikeout format posted on HUD's Web page.

III. Findings and Certifications

Paperwork Reduction Act

    The proposed new information collection requirements contained in 
this notice have been submitted to OMB for review under the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520). In accordance with the 
Paperwork Reduction Act, an agency may not conduct or sponsor and a 
person is not required to respond to a collection of information unless 
it displays a currently valid OMB control number.
    The public reporting burden for this new collection of information 
is estimated to include:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Number of     Frequency of    Responses per   Burden hours    Annual burden                   Total annual
         Information collection             respondents      response          annum       per response        hours        Hourly cost        cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
HUD-91710M..............................             600               1             600            0.5              300             $26          $7,800
HUD-91712M..............................             600               1             600            0.5              300              26           7,800
HUD-92023M..............................             600               1             600            1                600              26          15,600
HUD-92070M..............................             600               1             600            0.5              300              26           7,800
HUD-92223M..............................             600               1             600            0.5              300              26           7,800
HUD-92412M..............................             600               1             600            0.5              300              26           7,800
HUD-92414M..............................             600               1             600            0.5              300              26           7,800
HUD-92450M..............................             600               1             600            0.5              300              26           7,800
HUD-92452A-M............................             600               1             600            0.5              300              26           7,800
HUD-92452M..............................             600               1             600            0.5              300              26           7,800

[[Page 80524]]

 
HUD-92455M..............................             600               1             600            1                600              26          15,600
HUD-92456M..............................             600               1             600            0.5              300              26           7,800
HUD-92457A-M............................             600               1             600            0.5              300              26           7,800
HUD-92457M..............................             600               1             600            0.5              300              26           7,800
HUD-92464M..............................             600               1             600            1                600              46          27,600
HUD-92476.1M............................             600               1             600            0.5              300              26           7,800
HUD-92476a-M............................             600               1             600            0.5              300              26           7,800
HUD-92477M..............................             600               1             600            0.5              300              26           7,800
HUD-92478M..............................             600               1             600            0.5              300              26           7,800
HUD-92479M..............................             600               1             600            0.5              300              26           7,800
HUD-91725M..............................             600               1             600            1                600             125          75,000
HUD-91725M-CERT.........................             600               1             600            1                600              46          27,600
HUD-91725M-INST.........................               0               0               0            0                  0               0               0
HUD-92434M..............................             600               1             600            1                600              26           7,800
HUD-92441M-SUPP.........................             600               1             600            0.75             450              26          11,700
HUD-92441M..............................             600               1             600            0.75             450              26          11,700
HUD-92442M..............................             600               1             600            1                600              58          34,800
HUD-92466M..............................             600               1             600            1                600              58          34,800
HUD-92554M..............................             600               1             600            0.5              300              26           7,800
HUD-94000M..............................             600               1             600            0.75             450              26          11,700
HUD-94001M..............................             600               1             600            1                600              26          15,600
HUD-93305M..............................             600               1             600            0.5              300              26           7,800
HUD-92476M..............................             600               1             600            0.5              300              26          12,300
HUD-92420M..............................             600               1             600            0.5              300              26           7,800
                                         ---------------------------------------------------------------------------------------------------------------
    Totals..............................             600  ..............          19,800  ..............       13,050.00  ..............      457,800.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The hourly rate is an estimate based on an average annual salary of 
$62,000 for developers and mortgagees.
    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
proposed collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Comments must be 
received by January 21, 2011. Comments must refer to the proposal by 
name and docket number (FR-5354-N-02) and must be sent to: HUD Desk 
Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, Fax number: (202) 395-6947; and 
Paperwork Reduction Act Program Manager, Office of the Chief 
Information Officer, Department of Housing and Urban Development, 451 
Seventh Street, SW., Room 4178, Washington, DC 20410.

    Dated: December 17, 2010.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2010-32185 Filed 12-21-10; 8:45 am]
BILLING CODE 4210-67-P