[Federal Register Volume 76, Number 36 (Wednesday, February 23, 2011)]
[Rules and Regulations]
[Pages 10136-10163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2659]



[[Page 10135]]

Vol. 76

Wednesday,

No. 36

February 23, 2011

Part III





Department of Housing and Urban Development





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24 CFR Parts 901, 902, and 907



Public Housing Evaluation and Oversight: Changes to the Public Housing 
Assessment System (PHAS) and Determining and Remedying Substantial 
Default; Interim Rule

  Federal Register / Vol. 76, No. 36 / Wednesday, February 23, 2011 / 
Rules and Regulations  

[[Page 10136]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 901, 902, and 907

[Docket No. FR-5094-I-02]
RIN 2577-AC68


Public Housing Evaluation and Oversight: Changes to the Public 
Housing Assessment System (PHAS) and Determining and Remedying 
Substantial Default

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Interim rule.

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SUMMARY: The changes implemented by this interim rule are intended to 
enhance the efficiency and utility of HUD's Public Housing Assessment 
System (PHAS). The interim rule makes 2 sets of amendments to improve 
evaluation and oversight of the Public Housing Program. First, it 
amends the PHAS regulations for the purposes of: Consolidating the 
regulations governing assessment of public housing in one part of the 
Code of Federal Regulations (CFR); revising certain PHAS regulations 
based on HUD's experience with PHAS since it was established as the new 
system for evaluating a public housing agency (PHA) in 1998; and 
updating certain PHAS procedures to reflect recent changes in public 
housing operations from conversion by PHAs to asset management. Second, 
this interim rule establishes new regulations that specify the actions 
or inactions by which a PHA can be determined to be in substantial 
default, the procedures for a PHA to respond to such a determination or 
finding, and the sanctions available to HUD to address and remedy 
substantial default by a PHA.

DATES: Effective date: March 25, 2011.
    Comment due date: April 25, 2011.

ADDRESSES: Interested persons are invited to submit comments on this 
interim 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.
    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 Seventh Street, SW., Room 10276, 
Washington, DC 20410-0500.
    Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
http://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

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

    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 202-402-3055 (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, toll-free, at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Claudia Yarus, Department of Housing 
and Urban Development, Office of Public and Indian Housing, Real Estate 
Assessment Center (REAC), 550 12th Street, SW., Suite 100, Washington, 
DC 20410 at 202-475-8830 (this is not a toll-free number). Persons with 
hearing or speech impairments may access this number through TTY by 
calling the toll-free Federal Information Relay Service at 800-877-
8339. Additional information is available from the REAC Internet site 
at http://www.hud.gov/offices/reac/.

SUPPLEMENTARY INFORMATION:

I. Changes to PHAS

A. Background on PHAS

    The PHAS regulations codified in 24 CFR part 902 were established 
by a final rule published on September 1, 1998 (63 FR 46596). Prior to 
1998, a PHA was evaluated by HUD with respect only to its management 
operations. PHAS expanded assessment of a PHA to four key areas of a 
PHA's operations: (1) The physical condition of the PHA's properties; 
(2) the PHA's financial condition; (3) the PHA's management operations; 
and (4) the residents' service and satisfaction assessment (through a 
resident survey). On the basis of these four indicators, a PHA receives 
a composite score that represents a single score for a PHA's entire 
operation and a corresponding performance designation. PHAs that are 
designated high performers receive public recognition and relief from 
some HUD requirements. PHAs that are designated standard performers may 
be required to take corrective action to remedy identified 
deficiencies. PHAs that are designated substandard performers are 
required to take corrective action to remedy identified deficiencies. 
PHAs that are designated troubled performers are subject to remedial 
action.

B. Public Housing Operating Fund Program

    The regulations governing the Public Housing Operating Fund program 
are of key relevance to the proper operation of PHAs and, consequently, 
to PHAS. Operating Funds are made available to a PHA to provide 
assistance to a PHA for the operation and management of public housing; 
therefore, the regulations applicable to a PHA's operation and 
management of public housing must be considered in any changes proposed 
to PHAS. The regulations for the Public Housing Operating Fund program 
are found at 24 CFR part 990.
    Subpart H of the part 990 regulations (Sec. Sec.  990.255 to 
990.290) establishes the requirements regarding asset management. Under 
Sec.  990.260(a), PHAs that own and operate 250 or more dwelling rental 
units must operate using an asset management model consistent with the 
subpart H regulations. PHAs with fewer than 250 dwelling rental units 
may elect to transition to asset management, but are not required to do 
so. Recent HUD appropriations acts have provided through an 
administrative provision that PHAs that own or operate 400 or fewer 
public housing units may elect to be exempt from any asset management 
requirement imposed by HUD in connection with

[[Page 10137]]

HUD's Operating Fund rule, with one exception--a PHA seeking 
discontinuance of a reduction of subsidy under the operating fund 
formula shall not be exempt from asset management requirements.\1\ 
Since requirements in appropriations acts, unless otherwise indicated, 
apply only to the fiscal year to which the appropriations act is 
directed, HUD's proposed rule to revise PHAS does not reflect this one-
year provision.
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    \1\ See, for example, section 225 of Title IV of Division K of 
the Consolidated Appropriations Act, 2008 (Pub. L. 110-161, approved 
December 26, 2007); section 225 of the Omnibus Appropriations Act, 
2009 (Pub. L. 111-8, approved March 11, 2009); and section 223 of 
the Consolidated Appropriations Act, 2010 (Pub. L. 111-117, approved 
December 16, 2009).
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    The asset management model emphasizes project-based management, as 
well as long-term and strategic planning. For public housing, this 
represents a shift from a PHA-centric management model to a model 
consistent with the norms in the broader multifamily industry. Under 
this model, PHAs must implement project based management, project based 
budgeting, and project based accounting. Similarly, HUD funds and 
monitors PHAs at the project level. A project can be a reasonable 
grouping of buildings under an Annual Contributions Contract (ACC). One 
of the major shifts, then, in this interim rule (as opposed to the 
current rule) is to isolate the performance of individual projects. The 
current regulation, for example, provides Management Operations only at 
the PHA level, which can hide problem properties. The essential 
components of asset management are defined in the regulations in 24 CFR 
part 990, subpart H.

C. Proposed Amendments to PHAS

    On August 21, 2008, at 73 FR 49544, HUD proposed amendments to its 
PHAS regulations. HUD proposed to retain the basic structure of PHAS 
and to require PHAs to be scored on performance based on evaluation of 
four indicators: physical condition, financial condition, management 
operations, and the PHA's management of its Capital Fund program. The 
organization of the four indicators differed from the original PHAS 
indicators in that PHA's management of its Capital Fund program, 
originally part of the management operations indicator, was proposed to 
replace the resident satisfaction indicator. HUD proposed that resident 
services and satisfaction be assessed as part of the management 
operations indicator. The August 21, 2008, proposed rule also retained 
the principle that evaluation under the PHAS indicators would continue 
to rely on information that is verifiable by a third party, wherever 
possible.
Overview of Proposed Changes to PHAS
    The August 21, 2008, rule proposed to modify PHAS primarily to 
conform to the new regulations on the Public Housing Operating Fund 
program and the conversion by PHAs to asset management, including 
project-based budgeting, project-based accounting, and project-based 
performance evaluation. Highlights of some of the major changes 
proposed to each of the four current PHAS indicators are as follows:
    Physical. The physical inspection indicator would have remained 
largely unchanged. Independent physical inspections would have 
continued to be conducted on each public housing project, although the 
frequency of inspections would have depended on the scores of 
individual projects, not the score for the entire PHA. For example, if 
a specific project scored below 80 points, it would be inspected the 
following year, regardless of whether the overall physical score for 
the PHA, based on all projects, was 80 points or higher (as is the case 
in the currently codified PHAS regulations). If a PHA's overall 
physical score were less than 80 points, and one or more projects 
scored 80 points or above, those projects that scored 80 points or 
above would be inspected every other year.
    Financial. The financial assessment system would have been modified 
to include an assessment of the financial condition of each project. A 
PHA would have continued to submit an annual Financial Data Schedule 
(FDS) to HUD that contained financial information on all major programs 
and business activities. However, for purposes of PHAS, the PHA would 
have been scored on the financial condition of each project, and these 
scores would be the basis for a program-wide score.
    Management. The current management operations assessment system 
relies on PHA submission of a range of information that is self-
certified. Under the proposed rule, this current system would have been 
replaced with management reviews conducted of each project by HUD staff 
(or, where applicable, HUD's agents). Preferably, such reviews would 
have been conducted annually, consistent with the standards for HUD's 
subsidized housing programs. As part of this project management review 
process, HUD would have examined a PHA's performance in the area of 
resident programs and participation, thereby eliminating a separate 
resident satisfaction survey.
    Resident Satisfaction Surveys. A PHA's performance in the area of 
resident programs and participation would have been evaluated as part 
of the project management review, thus eliminating the need for a 
separate indicator on resident satisfaction and, therefore, a separate 
satisfaction survey. The project management review would have included 
a subindicator that would measure efforts to coordinate, promote, or 
provide effective programs and activities to promote economic self-
sufficiency of residents, and measure the extent to which residents are 
provided with opportunities for involvement in the administration of 
the public housing. This subindicator would have included all of the 
elements regarding economic self-sufficiency and resident participation 
that are included in the U.S. Housing Act of 1937 (42 U.S.C. 1437 et 
seq.) (1937 Act) at section 6(j) of the 1937 Act (42 U.S.C. 1437d(j)).
    HUD agrees that resident input into the assessment process is 
important. HUD is committed to exploring resident satisfaction, 
participation, and self-sufficiency measures in the final rule that 
will follow this interim rule. Accordingly, HUD seeks input from the 
public in the form of comments to this interim rule on establishing 
more meaningful measures in these areas.
    Capital Fund program. HUD proposed to establish a new indicator, 
previously part of the management operations indicator, which would 
have measured a PHA's performance with respect to the obligation and 
expenditure of Capital Fund program grants. This Capital Fund program 
indicator can only be measured at the PHA level. This Capital Fund 
program indicator, based on a requirement of section 6(j) of the 1937 
Act (42 U.S.C. 1437d(j)(1)(I)(2)), is required by statute to be 
assessed at that level. HUD believes that this is a separate subject 
from the management indicator and therefore is more appropriate as a 
separate indicator. In addition to the changes in the four indicators, 
discussed above, the August 21, 2008, rule proposed to modify the score 
adjustment for physical condition and neighborhood environment. This 
adjustment would have been applied to the management operations 
indicator on a project-by-project basis rather than to the physical 
condition indicator. The statutory language at 42 U.S.C. 
1437d(j)(K)(I)(2) states that HUD shall reflect in the weights assigned 
to the various indicators the differences in the difficulty in managing 
individual projects that result from their physical condition and 
neighborhood

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environment. The application of the adjustment to the management 
operations indicator would specifically address the difficulty in 
managing individual projects, and would also result in a true physical 
condition score without any adjustments outside of the physical 
condition inspection results.
    The proposed rule also included, as appendices, scoring notices for 
the PHAS indicators that provided more detail on how each indicator and 
subindicator would have been scored. Additional proposed changes to 
PHAS included:
     Corrective Action Plans would replace current Improvement 
Plans, addressed in detail at 24 CFR 902.73.
     References to the Troubled Agency Recovery Center (TARC), 
a program office within HUD to which troubled PHAs were referred for 
oversight, monitoring, or other remedial action, would be removed, 
since the TARC no longer exists. The duties and responsibilities of the 
TARCs have been transferred to and assumed by HUD's field offices.
    Finally, the August 21, 2008, rule proposed to establish, in new 
part 907, the regulations governing the determination of, and remedies 
for, substantial default. The regulations applicable to substantial 
default are currently codified in HUD's PHAS regulations. However, a 
determination of substantial default is not limited to troubled 
performance or violation of PHAS requirements. Accordingly, HUD 
determined that it was more appropriate for substantial default 
regulations to be codified in a separate CFR part.

II. Differences Between This Interim Rule and the Proposed Rule

    This interim rule adopts the changes proposed in the August 21, 
2008, proposed rule with the exception of provisions identified in this 
Section II.
    One of the key changes to PHAS proposed by the August 21, 2008, 
rule was to replace the system of PHA self-certification for the 
management operations indicator with onsite management reviews, 
consistent with monitoring practices in HUD's multifamily housing 
programs. Many commenters expressed concern over: (1) Whether HUD would 
have the resources and/or capacity to conduct management reviews of all 
public housing projects every several years; (2) possible issues of 
subjectivity in the scoring of these management reviews; and (3) the 
weights and measures assigned to the scored components of the 
management review.
    In response to these concerns, and to provide both PHAs and HUD 
more time to develop and implement a more objective management review 
tool, this interim rule does not include this proposed change. This 
interim rule provides that the management review will be used as a 
diagnostic and feedback tool. In turn, three components that were part 
of the management review--relating to tenant accounts receivable, 
occupancy rate, and accounts payable--will be derived from the PHA's 
annual FDS. These three items represented 60 percent of the scored 
items on the management review. By relying on the FDS for these three 
items, HUD can issue an annual (or bi-annual, where applicable) overall 
PHAS score for each PHA. In the case where low PHAS scores indicate 
potential management problems, the management review can aid in 
diagnosing the nature of the problem and determining appropriate 
corrective actions.
    As in the proposed rule, this interim rule contains three items--
tenant accounts receivable, occupancy rate, and accounts payable--under 
the management operations indicator. Because other proposed elements 
are not adopted by this interim rule, HUD has rebalanced the scoring 
for the remaining indicators. The proposed management elements not 
adopted here are utility consumption, turnaround time, work orders, 
security, the components based on unit inspections, economic self-
sufficiency, and resident involvement. The physical condition indicator 
has increased from 30 to 40 points; the financial condition indicator 
has increased from 20 to 25 points; and the management operations 
indicator has decreased from 40 to 25 points. The overall value of the 
Capital Fund program indicator (10 points) remains unchanged.
    However, the Capital Fund program indicator itself has been 
restructured in a manner that HUD believes better tracks actual 
performance in respect to the use of Capital Funds for capital 
activities, whereas the proposed rule simply tracked statutory 
compliance. The proposed Capital Fund Program Indicator gave full 
points for timely obligation and expenditure of funds under the 
statute, a metric that does not necessarily measure the actual use of 
capital funds for modernization and capital needs; for example, a PHA 
can transfer a portion of its Capital Fund grant to PHA operations. HUD 
believes that success in addressing capital needs will be reflected in 
higher occupancy rates. This interim rule, therefore, while similarly 
providing 5 points for timely obligation, introduces a new measure 
based on a PHA's occupancy rate. In order to receive the full 5 points, 
a PHA's adjusted occupancy rate (that is, adjusted for HUD-approved 
vacancies) must be 96 percent or more. In recognition of the impact of 
these changes to the Capital Fund subindicators, this interim rule 
revises the definition of Capital Fund-troubled. The new definition 
indicates that a PHA must achieve a score of at least five points, or 
50 percent.
    Small deregulated PHAs with fewer than 250 units will receive a 
PHAS assessment as follows:
     High performers will receive PHAS assessments every 3 
years;
     Standard and substandard performers will receive PHAS 
assessments every other year; and
     Overall troubled and Capital Fund-troubled PHAs will 
receive PHAS assessments every year.
    All projects that score 90 points or higher on their physical 
condition inspections will be inspected every 3 years, consistent with 
HUD's multifamily housing programs. Projects that score at least 80 
points but fewer than 90 points will receive a physical condition 
inspection every other year. Projects that score less than 80 points 
will receive a physical condition inspection every year. All projects 
in overall troubled and Capital Fund-troubled PHAs will receive a 
physical condition inspection every year.
    In the baseline year, every PHA will receive an overall PHAS score 
and in all four of the PHAS indicators: Physical condition; financial 
condition; management operations; and Capital Fund program. This will 
allow a baseline for the physical condition inspections and the 3-2-1 
inspection schedule, as well as a baseline year for the small 
deregulated PHAs.
    In addition to these more significant changes, there were other 
minor changes in this interim rule from the proposed rule. These 
include:
    1. Mixed-finance projects will not receive financial or management 
scores.
    2. The rule has been amended to indicate that, for exigent health 
and safety (EHS) violations, a PHA may abate the effect of the 
violation without necessarily correcting or remedying the condition. 
For example, a PHA may move a family into a different unit until fire 
damage is repaired.
    3. The rule has been amended to modify the standards for Debt 
Service Coverage Ratio (DSCR) such that any project with a DSCR of 1.25 
or higher receives the full points.
    Specific scoring procedures that HUD uses will be published 
separately in the Federal Register for public comment.

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III. Key Differences Between This Interim Rule and Currently Codified 
PHAS Regulation \2\
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    \2\ ``Currently codified PHAS regulation'' refers to the PHAS 
regulation in 24 CFR part 902 (Government Printing Office, April 1, 
2010).
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     The current codified PHAS regulation scores the physical, 
financial condition, management operations, and resident service and 
satisfaction indicators. In this interim rule, HUD removes the resident 
service and satisfaction indicator, as well as the resident survey, 
while HUD considers better means of accurately measuring resident 
satisfaction, tenant participation, and the efficacy of resident self-
sufficiency efforts to be included in the final rule. HUD agrees that 
resident input into the assessment process is important. HUD is 
committed to exploring resident satisfaction, self-sufficiency, and 
participation measures in the final rule, which will be promulgated 
subsequent to and based on HUD's experience with, and the public 
comments on, this interim rule. Accordingly, the agency seeks input 
from the public, including PHA residents and PHAs, as well as other 
interested members of the public, on establishing more meaningful 
measures in these areas, including suggestions for what the specific 
items measured might be and methods of measurement.
     The Capital Fund indicator is added as the 4th indicator.
     Under the interim rule, HUD has removed the management 
operations certification as a scored element. Instead, the management 
operations indicator will be limited to three items in this interim 
rule--occupancy rate, accounts payable, and tenant accounts receivable, 
all drawn from a PHA's annual financial information. The onsite 
management review will not be scored for the management operations 
indicator. As a result, the overall management operations indicator has 
been reduced from 40 points to 25 points.
     The physical condition indicator has increased to 40 
points from 30 points; the financial condition indicator has been 
reduced from 30 points to 25 points; and the new Capital Fund Program 
indicator will be 10 points.
     There are changes to the adjustment for physical condition 
and neighborhood environment. In the currently codified regulation, the 
adjustment allows a total of 3 points, one point each for 3 areas (see 
Sec.  902.25(b)(1)). This interim rule provides for an adjustment of 2 
points, 1 for poor physical condition of the project and 1 for the 
economic condition of the major census tract in which a project is 
located. The physical condition adjustment in this interim rule applies 
to projects at least 28 years old; in the current CFR codification, the 
adjustment applies to 10 year old properties. The neighborhood 
environment adjustment in this interim rule applies to projects located 
in census tracts where at least 40 percent of the families are living 
below the poverty rate. In the currently codified regulation, that 
adjustment applies where 51 percent of the families in the immediately 
surrounding area live below the poverty rate.
     This interim rule provides increased incentive for 
projects that perform well on the physical inspection. Projects in PHAs 
with 250 or more dwelling units that score 90 or higher on their 
physical inspection will be inspected every 3 years under the interim 
rule, while projects that receive at least 80 points but less than 90 
points will be inspected every 2 years. All other projects will receive 
a physical condition inspection every year. All projects that are in 
overall troubled and Capital Fund-troubled PHAs will receive a physical 
condition inspection every year.
     The financial condition indicator under the currently 
codified regulation assesses the financial condition of the entire PHA. 
Under this interim rule, a financial condition score for each project 
will be calculated, as well as a composite score for the entire PHA.
     Under this interim rule, a PHA may immediately abate the 
effect of an exigent health and safety (EHS) violation and later 
correct the condition, under Sec.  902.22(f). Section 902.24(a)(2) of 
the codified regulation allows only for correction.
     References to the former Troubled Agency Recovery Center 
(TARC) are removed. Those former duties are now handled in the HUD 
field office.
    The definition of a high performer remains the same as in the 
currently codified regulation. A PHA that achieves a score of at least 
60 percent of the points available under the physical condition, 
financial condition, and management operations indicators, and at least 
50 percent under the Capital Fund indicator, and achieves an overall 
PHAS score of 90 percent or greater of the total available points under 
PHAS, shall be designated a high performer. A PHA shall not be 
designated a high performer if it scores below the threshold 
established for any indicator.

IV. Public Comments Received on August 21, 2008, Proposed Rule

    The proposed rule published on August 21, 2008, provided for the 
public comment period to end on October 20, 2008. During that comment 
period, HUD made available to the public on its Web site a scoring 
template. In order to ensure that all commenters had an equal 
opportunity to address this new information, HUD reopened the comment 
period on November 24, 2008, and solicited comments through January 8, 
2009.
    HUD received approximately 138 comments during the first comment 
period and an additional 25 comments during the reopened comment 
period. Comments were from public housing-related trade associations, 
housing authorities, advocacy organizations, and individuals. This 
section of the preamble, which addresses the public comments, organizes 
the comments by subject category, with a brief description of the 
comment and HUD's response to the comment.
    Several commenters expressed their support of the rule rather than 
raising issues to be addressed, including support for focusing on the 
performance of projects, the removal of the ``troubled'' designation 
for substandard agencies, and the elimination of both entity-wide 
scoring and self-certifications for management operations.

General Comments

    Comment: A number of commenters stated that the proposed rule was 
overly complex, burdensome, overly stringent, or contrary to the 
Department's goals of administrative streamlining.
    HUD Response: As the preamble to the proposed rule stated, a 
revised PHAS is made necessary by the transition of public housing's 
budgeting, funding, and reporting systems from one that was entity-wide 
to one that is project-based. Though the evaluation emphasis has 
shifted from the PHA as a whole to individual projects, the interim 
rule does not impose any more regulation than what has been in place. 
By eliminating the resident satisfaction survey, the management 
certification, and, in this interim rule, the management review, HUD 
has considerably streamlined the evaluation process. All of the data 
are collected from three sources--the FDS, the physical inspection, and 
the electronic Line of Credit Control System (eLOCCS). No data point in 
the interim rule requires any submission from a PHA other than what is 
already required. Since the FDS is already generated by the PHA and is 
required by

[[Page 10140]]

existing rule, by OMB A-133, and by the Annual Contributions Contract 
(ACC), using this data to evaluate a project's performance cannot be 
considered burdensome. Moreover, because HUD conducts the physical 
inspection and tallies the results, there is no PHA data submission for 
this indicator.
    Comment: Commenters expressed concern over implementation of the 
onsite management review, which, as proposed, would have accounted for 
40 percent of a PHA's overall PHAS score. Commenters expressed concern 
over the capacity of HUD staff to administer these reviews, the 
specific elements to be scored, the weights and measures associated 
with those elements, potential subjectivity, and the overall weight 
associated with this indicator.
    HUD Response: In response to public comments, HUD has removed the 
management review as a scored element in this interim rule. Instead, 
the management operations indicator will be limited to three items in 
this interim rule--occupancy rate, accounts payable, and tenant 
accounts receivable, all drawn from a PHA's annual financial 
information. As a result, the overall management operations indicator 
has been reduced from 40 points to 25 points, with the remaining points 
assigned to the physical condition indicator and the financial 
condition indicator.
    HUD still regards the onsite management review as critical to its 
task of effective oversight of the public housing portfolio, as is the 
case in multifamily housing. Under this interim rule, management 
reviews will not be scored but instead will be used for both compliance 
(not scored) and as a diagnostic instrument for performance.
    Comment: Commenters requested clarification regarding how the 
proposed rule would apply to Moving-to-Work (MTW) agencies, including 
inspection protocols, information submissions, energy conservation, 
energy audits, and capital fund.
    HUD Response: MTW agencies are subject to their respective MTW 
agreements. In most cases, the MTW agreements require MTW agencies to 
submit annual financial information and be subject to the same 
standards and protocols for physical inspections, management reviews, 
and obligation/expenditure deadlines as non-MTW agencies. However, the 
MTW agreements allow MTW agencies the option of carrying over their 
pre-MTW PHAS scores or being scored under the applicable PHAS 
regulation.
    Comment: Several commenters indicated that, by producing a program-
wide score for a PHA, the proposed rule was inconsistent with the goals 
of asset management (with the focus on project-level performance). 
Another commenter stated that PHAs should be scored at both the 
project-level and the PHA level. One commenter stated that only the 
overall score should be the PHAS score. Some commenters stated that it 
is duplicative to score individual projects on items that are PHA-wide 
responsibilities, such as energy, security, budgeting, tracking of work 
orders, and accounts payable.
    HUD Response: As a result of the Operating Fund program 
regulations, published and developed through negotiated rulemaking, 
both HUD and PHAs have been transitioning to asset management, with 
project-level budgeting, funding, accounting, management, and 
oversight. At the same time, Section 6(j) of the 1937 Act requires HUD 
to develop a system to measure the management performance of whole 
PHAs, along with processes for designating troubled PHAs. This interim 
rule balances the need to provide for measurements at the project 
level, as required for asset management, with the need to designate 
troubled PHAs, as required under the statute.
    Comment: Commenters suggested that the proposed rule should provide 
for a mechanism for adjusting scores (both overall and for particular 
components) as a result of funding shortfalls, noting that operating 
subsidy proration levels were between 84 percent and 90 percent from 
2006 to 2009. Commenters suggested various formulas for this 
adjustment.
    HUD Response: HUD's position is it was not the intent of Congress, 
in establishing section 6(j) of the 1937 Act, to make allowances for 
funding, as the statute makes no mention of funding allowances. The 
statute does, however, mention adjustments for physical condition and 
neighborhood environment (see 42 U.S.C. 1437d(1)(I)(2)), indicating 
that Congress did intend for adjustments based on those items, but did 
not intend for adjustments based on funding levels. Moreover, HUD 
believes that it is the primary intent of the system to provide an 
indication of the performance of public housing, regardless of funding 
levels, which is consistent with the current rule. Finally, it should 
be observed that a number of PHAs have achieved high performance 
ratings with current funding levels.
    Comment: Some commenters stated that performance standards based on 
multifamily housing are inappropriate for public housing, or that the 
rule otherwise uses inappropriate standards more applicable to non-
public housing multifamily projects, such as tax credit projects, which 
can have more amenities than public housing.
    HUD Response: HUD disagrees with these comments. The Operating Fund 
program regulations clearly establish that public housing shall 
transition to asset management, consistent with standards and practices 
in multifamily housing. Furthermore, the physical condition standards 
for HUD public housing and multifamily housing are the same. In 
addition, multifamily properties are assessed by project, as PHAs will 
be assessed under this interim rule.
    Comment: Several comments expressed concern that it was either too 
soon for HUD to change PHAS, overall, or that it was premature to begin 
measuring the performance of projects.
    HUD Response: HUD disagrees with this comment. The transition to 
project-based budgeting, funding, and accounting is in its 5th year, 
with full implementation expected in 2011. An appropriate mechanism is 
needed for measuring the management performance of projects. Moreover, 
it would be a burden on PHAs, which are transitioning to asset 
management, to retain the existing reporting systems established under 
the PHAS regulations, prior to amendment by this interim rule, which 
focus on entity-wide performance.
    Comment: Several commenters expressed concern over whether HUD's 
systems will be ready to implement the new scoring methodologies and 
the different data collection efforts.
    HUD Response: All data elements necessary for scoring are in place 
and currently captured through the Office of Public and Indian Housing 
information technology systems, REAC's physical inspection system, 
eLOCCS, the Public Housing Information Center (PIC), or the FDS, 
greatly simplifying administrative systems.
    Comment: Commenters requested that the implementation be postponed, 
and requested that PHAs have at least one year from date of publication 
to effective date, or some other enlarged time period.
    HUD Response: HUD has not adopted this recommendation. There is no 
adverse impact on PHAs in terms of needing to modify reporting systems 
in order to comply with the various scoring elements under this rule. 
PHAs are already subject to the independent physical inspections, and 
the information that HUD will use to score the financial condition and 
management operations indicators is already contained within the FDS 
that PHAs

[[Page 10141]]

began submitting with fiscal years ending June 30, 2008. Scoring for 
the Capital Fund program indicator is taken directly from eLOCCS and 
the PIC. Moreover, the information that HUD will be using to generate 
PHAS scores is similar to the information scored that has traditionally 
been scored under the currently codified PHAS regulations, only with an 
emphasis on project-level data.
    Comment: Many commenters recommended that the period of assessment 
for the management review conform either with the PHA's fiscal year or 
with calendar years.
    HUD Response: Under the August 21, 2008, rule, HUD proposed that 
certain elements on the management review would be assessed as of the 
most recently completed month or as of the most recent 12-month period, 
but not necessarily the most recently completed fiscal year. Commenters 
generally preferred that the assessment year always coincide with the 
PHA's fiscal year. Because HUD will not be scoring the management 
review, and because both financial and management operations data will 
be derived from the FDS and possible additional points due to the 
physical condition, neighborhood environment (or both) of a project, 
the assessment year under this interim rule will now coincide with the 
PHA's fiscal year, as is the case under the currently codified PHAS 
regulations, which is not changed by this interim rule. Also, using 
fiscal years is an accepted business practice. HUD will use the current 
fiscal year data from the FDS and eLOCCS and the latest physical 
condition score to arrive at the PHAS score.
    Comment: Several commenters requested clarification as to how the 
proposed rule would apply to mixed-finance projects or recommended that 
mixed-finance projects be exempted from PHAS, or that specific 
elements, such as financial condition or management condition scoring, 
not be applied to mixed-finance projects. With respect to financial 
condition, commenters stated that there is a conflict between generally 
accepted accounting principles (GAAP) and the way mixed-finance 
projects are funded and organized.
    HUD Response: This interim rule clarifies that mixed-finance 
projects will continue to be subject to the independent physical 
inspections. These inspection scores will then be included with other 
physical inspection scores to determine the PHA's overall physical 
condition score. However, because of the special nature of mixed-
finance projects, especially in the limited financial data submitted on 
these projects, mixed-finance projects will not receive a financial 
condition or management operations score. Mixed-finance projects are, 
by definition, owned by an entity other than the PHA. As such, PHAs 
report only ``pass-through'' activity on the FDS--essentially, the 
subsidy earned and the subsidy transferred. HUD does not receive 
detailed information on operating revenues or operating expenses on 
mixed-finance projects. Because HUD does not include detailed financial 
information on mixed-finance projects, it cannot determine occupancy, 
accounts payable, or tenant accounts receivable through the FDS. As a 
result, mixed-finance projects will also be excluded from the 
management operations indicator.
    HUD specifically seeks comment on how best to include mixed-finance 
projects under PHAS.
    Comment: A number of comments were received requesting that certain 
fair housing requirements, including accessibility requirements and 
fair housing training for PHA staff, be included as part of the 
management review. One commenter stated that existing methods of 
enforcement should suffice.
    HUD Response: Although, in the operation of public housing, PHAs 
must adhere to various fair housing requirements, the oversight of 
those requirements is the responsibility of HUD's Office of Fair 
Housing and Equal Opportunity (FHEO). Only FHEO, for example, can issue 
fair housing findings. HUD is continuing to work with FHEO, and 
solicits input from the public, to better determine what data elements, 
if any, that PIH staff can obtain during onsite reviews, and through 
other means, that can assist FHEO in its monitoring functions and to 
affirmatively further fair housing.
    Comment: Some commenters recommended that the regulations be 
changed to increase the exemption from asset management (currently 
fewer than 250 public housing units). Other commenters stated that PHAs 
that are exempt from asset management should not be subject to PHAS. 
One other commenter stated that PHAs already subject to inspection by 
other agencies should be exempt from PHAS.
    HUD Response: The regulatory exemption for small PHAs is part of 
the Operating Fund program regulation at 24 CFR part 990. Although, as 
noted earlier in this preamble, the Public Housing Operating Fund 
program regulations are relevant to changes to PHAS, this rulemaking is 
focused on changes to PHAS only, and changes to the Operating Fund 
program are outside the scope of this rulemaking (however, section 223, 
Div. A, Tit. II of the 2010 Consolidated Appropriations Act, Pub. L. 
111-117, states that PHAs ``that own and operate 400 or fewer public 
housing units may elect to be exempt from any asset management 
requirement imposed by the Secretary of Housing and Urban Development 
in connection with the operating fund rule'' (except for stop-loss 
PHAs)). Additionally, even for PHAs that are exempt from asset 
management and which treat their entire public housing portfolio as one 
project, HUD still has a responsibility for monitoring performance. 
Finally, although PHAs may also be reviewed from time to time as to 
certain criteria based on their participation in other programs, PIH 
must also do the assessment of PHAs required by statute (42 U.S.C. 
1437d(j)).
    Comment: A commenter asked for clarification as to whether the term 
``project,'' when used in the rule, also meant ``asset management 
project'' as defined under PIH Notice 2006-10. The same commenter asked 
for HUD to define ``statistically valid sample'' and ``crime-related 
problem.'' Another commenter asked to remove ``decent, safe, and 
sanitary housing'' and replace it with ``affordable.''
    HUD Response: When HUD first required conversion to asset 
management, HUD asked PHAs to identify ``asset management projects,'' 
or AMPs, so as to differentiate with ``developments'' as listed in the 
PIC (Inventory Management System (IMS)). AMPs are now simply referred 
to as ``projects'' and are identified as so in PIC. HUD has added the 
definition of ``statistically valid sample'' in Sec.  902.3 of the 
interim rule. Since the management review under this interim rule will 
not be used to score management operations, it is not currently 
necessary to define ``crime-related problem.'' This interim rule does 
not change the phrase ``decent, safe, and sanitary,'' which is a 
statutory standard for HUD-assisted housing.
    Comment: Several commenters disagreed with the proposal that a PHA 
could not be high-performing if 10 percent of its units fail the 
physical, financial, or management indicators.
    HUD Response: HUD agrees with this comment, and has determined to 
retain the definition of high performer that is in the currently 
codified regulation and not add another layer of complexity to the 
definition.
    Comment: Several commenters stated that certain classifications of 
PHAs should be subject to less frequent PHAS scoring, either because of 
their size

[[Page 10142]]

(small PHAs) or recent performance. Several comments suggested that HUD 
modify the inspection frequency for public housing, consistent with the 
standards in HUD's multifamily housing programs, or alternatively that 
the size of the PHA should not dictate the frequency of inspections, 
but rather that frequency should be based on achieving a certain score. 
With respect to the management assessment, a commenter states that if a 
PHA meets certain goals, it should be exempt from the following year's 
management assessment.
    HUD Response: HUD agrees and has changed the overall PHAS scoring 
frequency in response to these comments for physical condition 
inspections and the Deregulation for Small Public Housing Agencies (68 
FR 37664, June 24, 2003) (small public housing agencies are those with 
fewer than 250 dwelling units). With this rule, HUD is changing the 
frequency of physical inspections, adopting HUD's multifamily housing 
standard. Under the currently codified regulations, a PHA's projects 
are inspected biennially (every 2 years) if they achieve a physical 
condition score of 80 points or higher. In contrast, in HUD's 
multifamily programs, projects with a physical condition score of 90 
points or higher are inspected triennially (every 3 years). The interim 
rule has been modified to reflect HUD's multifamily score-based 
inspection frequency. As a consequence, a public housing project 
scoring 90 points and above will be inspected triennially; a public 
housing project scoring less than 90 and at least 80 points will be 
inspected biennially; and a public housing project scoring below 80 
points will be inspected annually (known as ``3-2-1''). Previously, HUD 
was concerned that extended periods between inspections resulted in 
significant declines in inspection scores; however, recent data for 
public housing properties that scored 90 points or higher does not show 
any significant drop-off in scores when those projects are inspected 
triennially. HUD will continue to monitor the interval data to 
ascertain that this change does not result in adverse effects. Further, 
if a management review or some other event (e.g., multiple Exigent 
Health and Safety (EHS) issues) should cause HUD to believe that the 
project is in need of a physical inspection, it may so schedule one at 
its sole discretion. Likewise, HUD may extend the time between 
inspections for cause as HUD determines.
    With this rule, HUD is providing additional relief to small PHAs 
that are deregulated and is basing the frequency of PHAS assessments on 
the overall PHAS score. A small PHA that is a high performer will 
receive a PHAS assessment every 3 years; a small PHA that is a standard 
or substandard PHA will receive a PHAS assessment every 2 years; and 
all other small PHAs, including overall troubled and Capital Fund-
troubled, will receive a PHAS assessment annually. All overall troubled 
projects receive a physical inspection annually.

Physical Condition Indicator

    Comment: Commenters stated that the physical inspection scoring 
process is overly complex, difficult to understand, and should be 
simplified. Another commenter suggested that the physical inspections 
be modified to capture actual physical needs. Another commenter stated 
that HUD was changing the physical inspection standards to a tougher 
standard than currently used.
    HUD Response: The physical inspection standards, established under 
24 CFR part 5, are outside the scope of this rulemaking. These 
standards are the same for public housing and HUD's multifamily housing 
programs. The physical inspection system is designed to assess the 
livability of a property to the aforementioned ``decent, safe, and 
sanitary'' standard. It is not designed to assess or evaluate the 
remaining useful life of building and property components. HUD plans to 
update its requirements related to the Physical Needs Assessment in a 
separate rulemaking, which should address the concern raised by the 
comment regarding physical needs. The standards for physical 
inspections have not been changed by this interim rule.
    Comment: Several commenters objected to PHAs being penalized when a 
tenant refuses or impedes access to a unit, thereby preventing the 
independent inspector from inspecting the unit, and indicated that 
these situations are beyond a PHA's control, or that a pattern of 
noncompliance rather than one incident should be required to warrant a 
penalty.
    HUD Response: The prior PHAS regulation at Sec.  902.24(d) and at 
Sec.  902.20(f) states that all PHAs are required by the Annual 
Contributions Contract (ACC) to provide HUD or its representative with 
access to its projects and to all units and appurtenances in order to 
permit physical inspections. This provision is now at Sec.  902.20(f) 
in this interim rule, and the substance was not changed. HUD does not 
agree that such situations are beyond a PHA's control because it is the 
responsibility of a PHA to ensure that its residents are aware of the 
physical condition inspection requirement, and if a resident does not 
comply, a PHA may initiate eviction proceedings for noncompliance with 
the lease.
    Comment: One commenter recommended that HUD eliminate the physical 
assessment subsystem (PASS) as too costly.
    HUD Response: HUD disagrees. The independent physical inspections, 
which commenced in 1998, have provided an essential tool for HUD in 
monitoring its public housing and multifamily portfolios and in raising 
the standards of operations with respect to maintaining the physical 
condition of public housing properties. The costs of HUD's physical and 
financial oversight operations amount to a little more than 0.3 percent 
of the Capital Fund appropriation, of which these costs are an 
appropriated administrative offset.
    Comment: One commenter suggested that units being used for non-
residential purposes, such as for community services, be exempt from 
the physical inspections. One commenter suggested that the site not be 
included as an inspectable area.
    HUD Response: HUD disagrees. First, 24 CFR part 5, subpart G, 
requires the inspection of common areas, the site, and dwelling units. 
Secondly, any aspect of a project that may be used by assisted tenants 
should be subject to inspection, as deterioration of any portion of the 
project, including community rooms and common areas, affects the whole 
project.
    Comment: One commenter suggested that HUD create a special 
adjustment factor due to the age of a project.
    HUD Response: The currently codified PHAS regulation provides for 
two adjustments--physical condition and neighborhood environment 
(PCNE). The PCNE adjustment is based on a statutory requirement at 42 
U.S.C. 1437d(j)(1)(I)(2). Under the currently codified regulation, PHAs 
apply for these adjustments through their management operations 
certification, which are calculated using information from HUD data 
systems applied to the physical condition score. Under this interim 
rule, PCNE will be applied to the management operations indicator 
score. Moreover, PCNE is based on: (1) Age of the property, and (2) 
location, which accommodates both the commenter's concern as well as 
HUD's statutory mandate.
    Comment: Several commenters regarded the physical inspections as 
being too subjective, citing instances of large variations in scores 
(depending on the inspector), and stated that the appeals process was 
too cumbersome.

[[Page 10143]]

    HUD Response: Over the past 12 years, HUD has invested significant 
resources to assure consistent application of established standards, 
including a team of HUD ``quality assurance'' inspectors. While always 
striving to continue to improve the accuracy of its inspections, HUD 
believes that the inspection process provides a reasonable indication 
of the physical condition at the time of inspection of each project. Of 
course, conditions can vary from year to year. Additionally, HUD has 
established a process of appeals. HUD is required by statute, 42 U.S.C. 
1437d(j)(2)(A)(iii), to establish procedures for appealing a 
designation of ``troubled.'' HUD's appeals process has been in 
existence since 1998. The appeals process is, in fact, quite 
streamlined and uses a bare minimum of procedural requirements. For 
example, an appeal is initiated by a simple written request.
    Comment: Several commenters asked that HUD modify the method of 
scheduling inspections to allow more flexibility for PHAs.
    HUD Response: The scheduling of inspections is part of the Reverse 
Auction Program that is not part of the PHAS rule. Physical inspection 
procedures call for adequate notice to the PHA. Inspectors are 
encouraged to be flexible when the PHA expresses insurmountable 
difficulties in meeting the inspection date. However, inspectors are 
not obligated to change inspection dates, and at times cannot do so 
because of their workload and the need to complete inspections in a 
timely and efficient manner. The PHAS regulations were not changed in 
response to this comment.
    Comment: Several commenters suggested that PHAs have the option to 
``abate'' EHS violations, rather than to correct or repair them within 
24 hours.
    HUD Response: HUD agrees that this is a reasonable differentiation. 
Consequently, this interim rule adopts the following language in Sec.  
902.22(f) on EHS deficiencies, ``The project or PHA shall correct, 
remedy, or act to abate all EHS deficiencies cited in the deficiency 
report * * *.''
    Comment: Commenters stated that the 72-hour deadline for non-
exigent health and safety deficiencies, and the 24-hour timeline for 
EHS, are too short. The deadline for EHS could result in a PHA having 
to do emergency procurement, which will increase costs.
    HUD Response: EHS deficiencies are, by definition, ones that pose a 
danger to tenants and so must be corrected or abated quickly. Adding 
the option to abate the deficiencies and subsequently do a final repair 
gives PHAs more flexibility, which should address the expenditure 
issue. As for other deficiencies, the 3 days for an ``A'' is the 
average, and HUD believes that this is reasonable for a high performing 
PHA.
    Comment: A commenter stated that Sec.  902.26(a)(4) (triple 
deduction for uncorrected EHS deficiencies that the PHA had certified 
were corrected) is overly harsh and seems intended to dissuade PHAs 
from availing themselves of their right to appeal and given the 
subjective nature of inspections.
    Response: The triple penalty referenced in this section is not 
related to a PHA's right to appeal; rather, it is a penalty for a false 
statement to HUD. In general, false statements to the government are 
often punished harshly in order to deter such behavior. The PHAS system 
relies heavily on PHAs correctly certifying information and on 
following through with promised repairs.
    Comment: Several commenters suggested that PHAs should be able to 
challenge EHS deficiencies.
    HUD Response: A PHA may always challenge an inspector's 
determination of what constitutes an EHS issue. However, such a 
challenge does not remove the PHA's obligation to correct or abate the 
deficiency within the time required by the regulation. EHS violations 
are scored, with the exception of smoke detectors, and, therefore, 
properly belong in the PHAS regulations. A PHA also has the option of 
requesting a technical review or submitting an appeal if the PHA 
believes that the inspector was in error.
    Comment: Several commenters stated that it is too difficult and 
time consuming to obtain database adjustments and changes. Commenters 
stated that requiring PHAs to annually file the same requests adds 
another layer of bureaucracy and HUD should be required to actually 
make a permanent adjustment to its database for items that do not 
belong to the PHA. The paperwork involved in requesting a database 
adjustment from the HUD field office can be unnecessarily time 
consuming. The inspector should be given the authority to make an 
onsite adjustment in cases that are clearly warranted. Also, because 
maintenance does not automatically stop when an inspector arrives, 
ongoing maintenance work should not reflect negatively on a PHA's 
overall rating, but should be noted as an adjustment by the inspector.
    HUD Response: There has been a mechanism in place since 1998 for 
making database adjustments. HUD notes that PHAs are required to 
present compelling evidence that deficient items noted in the physical 
inspection report are issues of ownership or code enforcement that are: 
(1) Outside of the PHA's property; (2) owned and maintained by another 
entity (such as a municipality); or (3) items normally expected to be 
code violations (e.g., window security bars) are permitted by the 
locality. These database adjustments are permanent once a PHA goes 
through the initial process and submits the justifying documentation, 
and when granted, are automatic for the next inspection. Other database 
adjustments, such as units undergoing comprehensive modernization, 
rehabilitation or conversion, are temporary. To the extent that a 
unit's status carries over from one inspection to the next, the 
temporary adjustment must be re-verified. Due to the fact that the 
field office is required to verify a PHA's request for a database 
adjustment based on a PHA's supporting documentation, the inspector 
cannot make an adjustment while on-site. Since the physical inspection 
of a unit is a snapshot in time, if maintenance work is in progress 
during the inspection of a unit, the physical condition of the unit is 
recorded in the inspection report. Accordingly the PHAS regulations 
have not been changed in this regard. However, to be consistent with 
multifamily regulations, the time frame for requesting database 
adjustments has been increased to 45 days.
    Comment: Several commenters suggested various clarifications in the 
``definitions'' related to physical inspections, such as project area 
versus building area, normalized sub-area weight, and how scattered 
sites are scored in the building area score calculation, project area 
score calculation, and property score calculation.
    HUD Response: HUD has clarified the definitions related to physical 
inspections, as appropriate, in the physical condition scoring notice.
    Comment: The physical inspection standards should be weighted more 
toward assuring major capital systems are not neglected.
    HUD Response: The elements scored by PHAS are statutory, and 
related to the ongoing physical condition and management of public 
housing projects and PHAs as a whole. Major capital systems are 
addressed in the Physical Needs Assessment (PNA).
    Comment: Several commenters disagreed with the use of contractors 
for inspection, stating that HUD field office personnel know the local 
communities and have an interest in improving the projects.

[[Page 10144]]

    HUD Response: The use of contractors is within HUD's administrative 
discretion.
    Comment: A commenter asks whether HUD is considering changing the 
understanding that smoke detectors do not affect the overall score.
    HUD Response: No, HUD is not changing that understanding.

Financial Condition Indicator

    Comment: One commenter indicated that a PHA should receive bonus 
points under the financial condition indicator for a ``clean'' 
independent audit. Another commenter stated that there was a conflict, 
in terms of timeframe for submitting audits, between the proposed rule 
and the Single Audit Act.
    HUD Response: A clean, independent audit is a minimum acceptable 
performance standard for any financial entity, including PHAs. Bonus 
points will not be awarded simply because a PHA maintains its books and 
records properly. There is no conflict between the proposed rule, and 
now this interim rule and the requirements of the Single Audit Act, 
because both require the submission of a PHA's audit within 9 months of 
a PHA's fiscal year end. HUD can waive the submission of audited 
information to HUD, but it cannot waive the PHA's submission of audited 
information to the Federal Audit Clearinghouse, which is required by 
the Single Audit Act and OMB Circular A-133.
    Comment: Several commenters requested greater clarification on the 
three scored elements, Quick Ratio (QR), Months Expendable Net Assets 
Ratio (MENAR), and the Debt Service Coverage Ratio (DSCR), under the 
financial condition indicator, whether they will only be applied to the 
public housing program, and whether scores will be based on audited or 
unaudited statements.
    HUD Response: The financial condition scoring notice provides 
further clarification as to how the subindicators under financial 
condition are scored. All PHAs will receive scores on the submission of 
the unaudited FDS. For those PHAs that expend more than $500,000 in 
federal funds and where audited information is required, financial 
condition indicator scoring may be revised based on the audited 
submission. The score based on the audited information will replace the 
score based on the unaudited FDS because audited information is more 
reliable as the audit is performed by a third party that attests to the 
information. HUD does not agree that it should ignore the audited 
financial information in computing the PHAS score, because audited 
financial information has an assurance of reliability that is important 
for those PHAs where audited information is required, as a greater 
amount of funding is involved, and such audits are required under OMB 
Circular A-133. PHAs that expend less than the A-133 threshold amount, 
currently $500,000, are not required to have an audit performed. 
However, PHAs that received operating subsidy for an audit are required 
to have a non-A-133 audit performed. Accordingly, the PHA will select a 
non-A-133 audit when submitting to Financial Assessment Subsystem--
Public Housing (FASS-PH).
    The interim rule is clear that PHAS measures the financial 
condition of projects. It does not score the Central Office Cost Center 
(COCC), the PHA's operation of a Section 8 voucher program, any other 
PHA program, or a PHA's business activities.
    Comment: One commenter stated there is a conflict between 
Sec. Sec.  902.60 and 902.62 regarding the deadlines for filing 
financial audits, with Sec.  902.60 implying that a 9-month deadline 
for audited financial statements can be deferred and Sec.  902.62 
stating that it cannot.
    HUD Response: The commenter misunderstands the waiver of deadlines 
provision. The only deadlines that may be waived are those other than 
the 9-month deadline for the audited financial statement under the 
Single Audit Act, such as the financial statements required under 24 
CFR part 5, subpart H.
    Comment: Several commenters believed that the financial condition 
standards should be modified. Others commented that the standards for 
the DSCR were too high (a project would need a DSCR of 2.0 to receive 
full points). One commenter stated that MENAR and QR should be prorated 
to account for underfunding, and provided examples. One commenter 
questioned the fact that bad debt is removed as a separate element in 
this interim rule.
    HUD Response: The QR and the MENAR are very similar to the Current 
Ratio and the Months Expendable Fund Balance that are used in the 
currently codified regulation, with the major change being made by this 
interim rule is that they are applied to public housing projects and 
rolled up to reflect a PHA's public housing financial activity.
    The QR compares quick assets to current liabilities. Quick assets 
are cash, assets, receivables, and investments that are easily 
convertible to cash and do not include inventory. Current liabilities 
are those liabilities that are due within the next 12 months.
    The MENAR measures a project's ability to operate using its net 
available, unrestricted resources without relying on additional 
funding. This ratio compares the adjusted net available unrestricted 
resources, such as cash, receivables, and investments, to the average 
monthly operating expenses. The result of this calculation shows how 
many months of operating expenses can be covered with currently 
available, unrestricted resources. Because MENAR is a measure of 
reserve adequacy, HUD views one month's reserves, a MENAR of 1.0, as a 
minimum adequacy for which minimal points are awarded. The greater the 
adequacy of reserves, the higher the MENAR, and the greater number of 
points awarded.
    Both QR and MENAR specifically exclude Capital Fund Financing 
program short term liabilities from their calculations. As to 
underfunding, funding levels for PHAs are determined by Congress. HUD 
declines to ``prorate'' these measures. All PHAs are subject to the 
availability of appropriations, and PHAs that make the most efficient 
use of their available resources will, and should, score the most 
points under these indicators. As a result, the QR and the MENAR have 
not been changed by this interim rule.
    However, HUD will consider revisions to the QR metric in the final 
rule subject to these guidelines. The responsible maintenance of 
operating reserves is a critical component of effective property 
management. Scoring for the QR subindicator should acknowledge the fine 
line between adequate and excessive reserve levels. HUD is concerned 
that projects that maintain excess reserves may not be providing 
adequate services to its residents or effective property maintenance. 
HUD will continue to explore ways in which the maintenance of 
appropriate operating reserves can be encouraged through the final PHAS 
rule. However, the public is advised that a different measurement tool 
may be used, or, if HUD retains the QR, that HUD may explore how it 
should be tightened to recognize that high QRs might not indicate 
effective property management. HUD invites the public to comment on 
these and other issues regarding the QR.
    The DSCR is the ratio of net operating income available to make 
debt payments, to the amount of the debt payments. This subindicator is 
used if the PHA has taken on long-term obligations.
    It was not the intent of Congress, in establishing section 6(j) of 
the 1937 Act,

[[Page 10145]]

42 U.S.C. 1437d(j), to make allowances for funding, because the statute 
makes no provision for funding allowances.
    Bad debt is included in the tenant accounts receivable indicator in 
the Management Operations component.
    HUD agrees that the standards originally proposed for DSCR were too 
high and has modified the scoring for DSCR such that any project with a 
DSCR of 1.25 or higher receives the full points. This standard conforms 
to Fannie Mae's Tier 2 underwriting specifications as well as Freddie 
Mac's affordable multifamily mortgage requirements. HUD specifically 
seeks public comments on this issue.
    Comment: One commenter stated disagreement with the way the 
proposed rule would address differences between unaudited and audited 
financial audits by making an adjustment under Sec.  902.64(a), in that 
the proposed rule used as an example a downward adjustment only. This 
commenter also stated that PHAs that are exempt from providing audited 
financial statements could be treated differently from PHAs that file 
both audited and unaudited statements, and that financial scores should 
be based entirely on the audited statements only if a PHA files both.
    Response: This interim rule revises the language in Sec.  
902.64(a)(1) to simply state that scores may be adjusted in the case of 
significant differences. However, HUD does not agree with the commenter 
that unaudited results should be completely disregarded. Audited 
results are an important check on the accuracy of unaudited results, 
and if the PHA is following proper accounting practices, there should 
not be significant differences.
    Comment: Several commenters believed that HUD should retain the 
``peer grouping'' aspect of financial condition scoring, as exists 
under the currently codified regulation.
    HUD Response: HUD disagrees. In its multifamily housing programs, 
HUD does not provide any adjustment in the financial assessment of a 
project because the project is owned by a ``large'' property owner or 
because the project is located in a certain area. A project is 
financially stable because it meets or exceeds certain basic thresholds 
that are generally accepted in HUD multifamily asset management. Peer 
grouping, as it has existed under scoring notices pursuant to the 
currently codified PHAS rule (an explanation of peer grouping appears 
in the July 17, 2006, 2006 financial condition scoring notice at 71 FR 
40535, first column), was proposed to be removed in the August 21, 
2008, proposed rule and is removed in this current rule as a 
consequence of the change to asset management. Peer grouping is based 
on the size of the PHA as a function of the number of units it 
administers, along with an adjustment for geographic location. Peer 
grouping, in other words, was a result of the fact that entire PHAs 
were being scored, and there had to be some way to account for 
differences among PHAs that could affect their financial score. 
However, now that financial scoring is being done on an individual 
project basis, all projects are essentially similar and judged by the 
same criteria and peer grouping is no longer required.
    Comment: A commenter suggested that PHAs be provided with an 
additional 30 days to submit unaudited financial statements.
    HUD Response: HUD disagrees. Although HUD provided extra time for 
PHAs to submit unaudited financial statements during the first year of 
conversion to asset management, a PHA should be able to submit 
unaudited statements within 2 months, as is the case under the PHAS 
regulations that are currently codified.

Management Operations Indicator

    Comment: A number of commenters stated that there should be no 
onsite management assessment, stating that it is too costly or 
logistically difficult.
    HUD Response: As noted in response to the general comments, HUD is 
not scoring the onsite management review, pending further study. 
However, given the extensive public comment on many aspects of the 
management review, HUD wishes to further test the management review 
mechanism as a diagnostic and feedback tool.
    Comment: One commenter suggested that PHAs not be evaluated based 
on individual projects but based on the public housing program as a 
whole.
    HUD Response: HUD disagrees. Project-based evaluation is 
fundamental to asset management.
    Comment: Commenters stated that the management assessment scoring 
notice is overly complex, not streamlined, and seeks too much 
information. One commenter suggests removing the non-scored areas.
    HUD Response: HUD has significantly reduced the scored portion of 
the management operations indicator in this interim rule. The 
management review mechanism will be further tested by HUD to record 
non-scored site visits by HUD field staff to public housing projects. 
For that use only, the review mechanism may include scored and non-
scored items.
    Comment: One commenter suggested that HUD retain the current 
management operations certification.
    HUD Response: HUD disagrees. The current management operations 
certification does not capture data on individual projects.
    Comment: Several commenters regarded the 40 points assigned to the 
Management Operations Indicator as disproportionally high.
    HUD Response: Because HUD is not scoring the management review and 
is, instead, evaluating the management operations from discreet data 
from a project's FDS (occupancy, tenant accounts receivable, and 
accounts payable), at this interim rule stage, HUD has changed the 
scoring weights as follows:
Physical Condition--40
Financial Condition--25
Management Operations--25
Capital Fund--10
    Comment: Several commenters suggested changes to the 3 elements in 
the management operations indicator (i.e., occupancy, tenant accounts 
receivable, and accounts payable) that will be scored. Commenters 
suggested that there are ``too many variables'' that can impact 
accounts payable, which render its measurement moot, and made various 
suggestions for the percentage of accounts payable indicator, including 
different scoring and clarification to the applicable time frame. 
Similar comments were received relative to rent collections (tenant 
accounts receivable in the interim rule). One commenter suggested that 
this element be scored not based on actual performance but based on 
efforts undertaken.
    HUD Response: HUD has not made this change in the interim rule in 
response to these comments. HUD disagrees that there are too many 
variables that can impact accounts payable because all of the variables 
cited by the commenters are fully within the management purview of the 
project and/or PHA. It is a management responsibility to arrange for 
vendor services, monitor the work, and make payment. Such arrangements 
are essential to managing a multifamily real estate enterprise. A well-
managed property or PHA should already be tracking accounts payable. 
Therefore, HUD's measurement under PHAS should not represent a burden 
to the PHA.
    HUD disagrees with the comments on rent collection. It is a 
standard multifamily housing practice that performance is measured by 
actual collections, not by efforts initiated. HUD has not made this 
change at this interim rule stage.
    Comment: Several commenters stated that the standard for denial of 
admission based on ``reason to believe'' that the

[[Page 10146]]

applicant is using illegal drugs or is abusing alcohol would be subject 
to legal challenge.
    HUD Response: Under this interim rule, the security subindicator is 
no longer scored. A review of security, including denials of admission 
based upon standards mandated by federal law and previously promulgated 
HUD regulation, will still be included in protocols for public housing 
onsite management reviews per the requirements of 24 CFR 960.204, 
``Denial of admission for criminal activity or drug abuse by household 
members.''
    Comment: Several commenters stated that the proposed management 
operations indicator for accounts payable is redundant because the 
independent audit should or does capture that and other information, or 
that the indicator is not useful, is overly strict, or is otherwise not 
needed. Some commenters stated that HUD's own funding issues are the 
source of problems in this area.
    HUD Response: The management operations subindicators being 
evaluated in the interim rule (occupancy, tenant accounts receivable, 
and accounts payable) are not subject to A-133 compliance requirements. 
HUD believes that the inclusion of accounts payable in the PHAS score 
properly reflects effective property management practices. As noted 
elsewhere in this preamble, the timely payment of vendor invoices is a 
function fully within the purview of a property's management, and that 
a surplus of accounts payable is generally recognized in the property 
management industry as a prime indicator of a potentially or actually 
troubled property. Further, and also noted elsewhere in this preamble, 
HUD does not consider funding issues relevant to scoring under this 
rule.
    Comment: A number of commenters opposed the ``appearance and market 
appeal'' indicator, and other aspects of the management operations 
indicator such as whether a property looks institutional, as too 
subjective, duplicative of the physical inspection indicator, or both. 
In addition, commenters stated that criteria related to signage, 
graffiti, boarded up windows, window treatments, landscaping, paved 
surfaces, dumpsters, and trash cans, were too difficult to enforce, 
unfair in their application, and overly subjective. As to signage and 
graffiti, commenters noted that this component would not apply well in 
scattered-site developments. As to window treatments, commenters stated 
that the standard was overly intrusive and that deductions for a single 
damaged window treatment were unfair. Commenters stated that 
landscaping components were vague. Some commenters had suggestions for 
changes to the appearance and market appeal, window treatment, and 
institutional appearance components.
    Comment: Commenters stated that the security component should not 
be scored for various reasons. Commenters stated that PHAs have no 
ability to police crime; that it would be burdensome on police agencies 
to generate the required statistics; that the component cannot be 
scored in scattered site developments; and that the standards used are 
overly subjective. Some commenters state that since PHA developments 
are often sited in high-crime areas, they should be scored on programs 
they have implemented to prevent crime and not on results, or on 
matters within the control of the PHA.
    HUD Response: These components will be subject to further 
consideration to create strong and appropriate policies in this area 
and the capability to measure efforts in ensuring a safe environment 
for public housing residents. Through this interim rule, HUD solicits 
additional public comments on the security component and whether 
appearance measures are appropriate and, if so, how they can best be 
measured.
    Comment: Commenters stated that the applicant screening component 
should not apply, stating that scoring this element would place an 
undue burden on the PHA, or sought clarification on how it is scored. 
One commenter stated that because it is a statutory requirement it 
should not be scored.
    Comment: A number of commenters stated that the proposed rule 
improperly handles work order turnaround time. Many commenters stated 
that the 3-day turnaround time to receive an A grade is unrealistically 
short. Commenters stated that the rule improperly prioritized tenant-
generated work orders, which are not always the most urgent. Commenters 
stated that the rule did not take into account that small PHAs might 
not have the necessary staff to meet the required deadlines. Commenters 
stated that work order turnaround might be at the expense of long-term 
maintenance items, and that the relative scoring between the two items 
should be adjusted. Commenters stated that funding and staffing 
reduction should be taken into account. Commenters suggested various 
less stringent scoring guidelines for work order turnaround. Commenters 
stated that measuring improvement over time in the work order component 
could be difficult because it is a new standard and PHAs will not have 
data, and it is unclear what the consequences would be if there were a 
minor reduction in turnaround time, for instance, from 2 to 3 days.
    Comment: A number of commenters stated that the scoring standards 
vacancy rate and vacancy turnaround times were too stringent and 
suggested various revisions, arguing that there are factors outside the 
PHA's control, too many points were assigned, and more strict than in 
the private sector. As to vacancy turnaround time, one commenter stated 
that small PHAs would have particular issues meeting the standard as 
well as other maintenance obligations.
    Comment: Several commenters stated that economic self-sufficiency 
should not be scored, because it is outside a PHA's control, there is 
no funding or staffing allocated to self-sufficiency, it is not a 
program requirement, it is a social service function not appropriate 
for PHAs, and including the standard may cause PHAs to favor higher-
income tenants or impose work requirements. Some commenters suggested 
for changes to the self-sufficiency component, including aligning the 
standard with the Section 8 Management Assessment Program (SEMAP) and 
using the component only for bonus points.
    Comment: One commenter stated that the management operations 
assessment should include a component to assess civil rights compliance 
with respect to admissions, occupancy, accessibility, and other civil 
rights-related program requirements.
    Comment: Several commenters stated that the energy conservation and 
utility consumption component should not be scored, because of funding 
issues, vagueness in the standard, or timing issues involving the 
required energy audit.
    Comment: Several commenters stated that the preventive maintenance 
component should be removed.
    Comment: One commenter stated that the unit inspections component 
should be revised to allow for alternative inspection protocols.
    Comment: Several commenters stated that the time provided for 
clearance of prior management findings in the proposed rule is too 
short.
    HUD Response: HUD agrees that the management review, as proposed, 
contains a number of subjective elements. In response to public 
concerns, and to provide both PHAs and HUD more time to develop and 
implement a more objective management review tool, the interim rule 
provides that the management review will be used as a diagnostic and 
feedback tool and not scored.

[[Page 10147]]

    Comment: One commenter stated that the standard for corrected EHS 
deficiencies should be included in the management review and scored; 
one commenter asked why this element is not scored and more subjective 
elements such as market appeal are.
    Comment: Two commenters stated that the adjustment for physical 
condition and neighborhood environment is more appropriate for the 
physical indicator. Several commenters stated that the point adjustment 
is too small to give relief for viable older properties. Other 
commenters stated that different or tiered property ages should qualify 
for the adjustment, and that the use of census tracts does not 
necessarily reflect the neighborhood.
    HUD Response: Correction and abatement of EHS deficiencies is 
scored under the Physical Condition Indicator. As noted above, HUD has 
decided not to score the management review at this time but to use it 
as a diagnostic and feedback tool.
    Comment: One commenter stated that items that are not scored should 
be removed from PHAS, including lead paint abatement, occupancy review, 
management review findings, other prior review findings, budget 
management, EHS correction, and insurance.
    Comment: Commenters requested clarification of a number of specific 
management review items, including: modernization; resident 
involvement; reduced vacancy rate during the previous 3 years; the 
definition of average number of days that tenant-generated work orders 
remain open; adequate tracking systems; and the scoring under various 
specific Management Assessment Subsystem (MASS) components. Some 
commenters noted that compliance with the resident involvement 
requirement could differ depending on when the review is conducted.
    Comment: Several commenters stated that the rule, specifically the 
Management Operations scoring notice, should be revised to allow force 
account labor.
    HUD Response: As noted above, HUD has withdrawn the management 
review as a source of PHAS scoring. All of the issues mentioned in 
these comments are no longer proposed for PHAS scoring. However, HUD 
has taken the commentary regarding the utility of the management review 
itself into consideration. The current MASS protocol is removed by the 
interim rule.

Removal of the Resident Satisfaction Survey

    Comment: The vast majority of commenters supported HUD's removal of 
the Resident Satisfaction Survey, stating that it does not have 
statistical validity or is otherwise inaccurate and unhelpful. One 
commenter, while not supporting the removal of the survey entirely, 
supported exploring alternatives, and made a number of suggestions, 
including utilizing Resident Advisory Boards (RABs) to obtain feedback, 
and sending to RABs and residents councils the results of the 
management review; having PHAs explain what uses are being made of 
resident participation funding provided by HUD; having HUD hold 
meetings with residents and staff; and allowing for a public comment 
period at PHA board meetings. Also, HUD could make the current survey 
available in PHA common areas, develop complaint forms, and create an 
ombudsman position to assist residents and resident councils. One 
commenter stated that it would be more realistic for an onsite 
management review team to ask residents the survey questions directly.
    Response: HUD's experience is that the Resident Satisfaction Survey 
does not have a sufficient completion rate overall to be useful. HUD 
agrees that resident input into the assessment process is important. 
Notwithstanding the removal of the resident satisfaction component for 
the period during which this interim rule will be in effect, HUD is 
committed to exploring resident satisfaction, self-sufficiency, and 
participation measures in the final rule. Accordingly, HUD seeks 
comments from the public on better methods of measuring resident 
satisfaction, self-sufficiency, and participation.

Capital Fund Program Indicator

    Comment: One commenter indicated that the Capital Fund program 
indicator was unnecessary.
    HUD Response: This indicator is statutory and imposes no reporting 
burden on PHAs because the information is already captured in eLOCCS 
and the PIC.
    Comment: One commenter requested clarification as to how Capital 
Fund Financing Program (CFFP) debt service payments would affect the 
Capital Fund program indicator.
    HUD Response: The Capital Fund program indicator measures 
obligations of Capital Fund program grants. CFFP amounts are treated as 
``obligated'' upon approval and closing of the financing.
    Comment: One commenter suggested that the Capital Fund program 
indicator be revised to reflect more than just the obligation and 
expenditure rates under the Capital Fund program.
    HUD Response: HUD agrees with this comment, and this interim rule 
revises the Capital Fund indicator in order to measure the use of the 
Capital Fund for modernization and other capital needs. HUD believes 
that success in addressing capital needs will be reflected in higher 
occupancy rates, and this interim rule measures Capital Fund in terms 
of timely obligation, as proposed, and adds a new component tied to 
occupancy rate.
    Comment: One commenter suggested that the threshold for meeting the 
timeliness of obligation and expenditure rates be revised.
    HUD Response: The threshold for the obligation subindicator has not 
changed. The interim rule reflects the timeline for obligation of funds 
that is stated in the 1937 Act. However, expenditure of Capital Funds 
is not necessarily a good measure of how well the funds are being used 
for capital expenditures, and this interim rule revises the indicator 
to consider occupancy as well.
    Comment: Several comments identified technical errors creating 
apparent inconsistencies regarding project versus whole PHA scoring or 
the need for clarifications regarding the scoring of the Capital Fund 
program.
    HUD Response: Both the interim rule and the Capital Fund scoring 
notice have been clarified to reflect HUD's intention to score Capital 
Fund program indicator activity only at the PHA level.
    Comment: Several commenters suggested changes in the method of 
determining Capital Fund program bonus funds.
    HUD Response: Currently, HUD awards Capital Fund program bonus 
funds according to a PHA's PHAS scores. HUD does not see a reason to 
modify this procedure.

Substantial Default

    Comment: One commenter suggested that the PHAS regulations could be 
simplified by allowing HUD to declare a substantial default on its own 
prerogative without regard to regulatory criteria.
    HUD Response: Sections 6(j)(3) and (4) of the 1937 Act specifically 
address the events or conditions that constitute substantial default by 
a PHA. Part 907 (24 CFR part 907) codifies those statutory 
requirements.

PHAS Scoring and Audit Reviews

    Comment: One commenter states that it is unclear what the 
``appropriate sanctions'' are under Sec.  902.62(a); and for large 
housing authorities with large

[[Page 10148]]

numbers of AMPs because collecting the data is a large burden.
    HUD Response: The interim rule in Sec.  902.62(a) clearly states 
the appropriate sanction is one (1) PHAS point for each 15 days the 
data submission is delinquent. Large housing authorities have many 
years of experience in aggregating data from their sites and at least 2 
years of experience so far with collecting project level data under 
asset management. Accordingly, the interim rule has not changed the 
PHAS regulations as requested by the commenter.
    In addition, late points and late presumptive failure will only be 
applied to the financial condition indicator. This limitation is 
because the management operations information is derived from the 
financial condition submission, and applying penalties for lateness 
under both indicators would penalize PHAs twice for the same action.
    Comment: One commenter stated that Sec.  902.64(a)(2) allows HUD to 
change a PHAS score based on the audit report, other actions such as 
investigations by HUD's Office of Fair Housing and Equal Opportunity 
(FHEO) or Office of Inspector General (OIG), or reinspection by HUD. 
This commenter stated that arbitrarily changing a PHAS score is not 
appropriate and the regulations should not allow HUD to take this 
action. Another commenter stated that the ``significant difference'' 
between the audited and unaudited results and the amount of downward 
adjustment need to be defined.
    HUD Response: Because the audit report is the PHA's submission to 
HUD, the fact that it may yield different scoring results than the 
unaudited FDS is a proper outcome. HUD notes that adjustments due to 
the audited statement may be adjusted either upward or downward, and a 
management operations score can change as a result of the audited 
submission since the management operations information is derived from 
the financial condition submission. HUD reserves the right to alter 
PHAS scores when instances of bona fide non-compliance, for items 
otherwise subject to routine PHAS scoring mechanisms, are revealed by 
the OIG or FHEO.
    In addition, if a PHA does not submit its unaudited or audited 
information, it will receive a zero for management operations.
    The significant difference between the unaudited and audited 
financial submissions is defined in the Financial Condition Scoring 
Notice.
    Comment: Some commenters stated that the rule should allow for more 
upward scoring adjustments and do more to incentivize high scores.
    HUD Response: HUD has incentivized PASS physical inspection scores 
(see above). The higher the project's PASS score, the less frequently 
HUD inspects the property. As with the prior PHAS rule, high performers 
are eligible for the Capital Fund bonus.
    Comment: Several commenters objected to the removal of the board of 
review and recommended its reinstatement.
    HUD Response: HUD finds that the mechanisms for technical reviews, 
database adjustments and appeals provide sufficient recourse to a PHA, 
where there are issues of record or fact in dispute, that there is no 
longer a need for a board of review. The interim rule has not changed 
the PHAS regulations as requested by the commenters.
    Comment: A commenter suggested that the ``substandard'' performance 
designation should be appealable and that a time limit should be placed 
on HUD's review of appeals.
    HUD Response: A PHA can appeal its PHAS scores, as well as a 
designation as substandard. HUD's position is that a time limit for the 
review of appeals may be counterproductive to ensuring adequate review 
of an appeal since the underlying circumstances involved in the matter 
of the appeal can vary greatly. The interim rule did not change the 
PHAS regulations as requested by the commenters.
    Comment: One commenter suggested that Sec.  902.62(a)(3) should be 
revised to reflect that a PHA may have received a waiver from HUD under 
Sec.  902.60(c), and the PHA's due date for submission of its audited 
financial information may, therefore, be other than 9 months after the 
PHA's fiscal year-end.
    HUD Response: HUD will not penalize a PHA that has received a 
waiver under Sec.  902.60(c), for submitting its audited financial 
statement in accordance with the provisions of the waiver. HUD can 
waive the submission of an audited statement to HUD, but it cannot 
waive the PHA's submission of an audited statement to the Federal Audit 
Clearinghouse pursuant to OMB Circular A-133. The interim rule has not 
changed the PHAS regulations as requested by the commenters.
    Comment: Several commenters objected to: (1) The limited 
circumstances under which a PHA can request a technical review of the 
physical inspection; and (2) limiting appeals only to those that would 
materially affect the physical condition and PHAS scores.
    HUD Response: The technical review and appeals procedures in the 
interim rule are the same procedures that have been in effect since the 
issuance of the PHAS regulations currently codified. The interim rule 
has not changed the PHAS regulations as requested by the commenters.

PHAs With Deficiencies

    Comment: Several commenters suggested that corrective action plans 
be restricted to substandard performers and that HUD should give a PHA 
the option not to deal with substandard housing.
    HUD Response: The operation of decent, safe, and sanitary housing 
is the core of HUD's monitoring obligations under its grant contracts 
with PHAs. To suggest otherwise, especially that a PHA not address 
substandard housing, is unacceptable to HUD. PHAs have a statutory 
obligation to provide decent, safe, and sanitary housing and will be 
held responsible for failure to meet this obligation. The changes to 
the PHAS regulations proposed by the August 21, 2008, proposed rule and 
adopted by this interim rule are designed to better evaluate whether 
this core responsibility is met by PHAS. Finally, there are and will 
continue to be circumstances where deficiencies are noted, but are not 
sufficient to declare a PHA troubled or substandard. In such cases, the 
development of a corrective action plan may be in order. The interim 
rule has not changed the PHAS regulations as requested by the 
commenters.

Troubled Performers

    Comment: One commenter stated that HUD should increase the time for 
a PHA to review and accept a memorandum of agreement (MOA) and that the 
substantial improvement measure under Sec.  902.75(g) be tied to the 
MOA. This commenter stated that the current timeline does not provide 
enough time for meaningful resident participation.
    HUD Response: This interim rule at Sec.  902.75(c) provides that 
HUD may extend both PHA review and acceptance time upon PHA request. 
Since the MOA is designed to remedy a troubled PHA, its substantial 
improvement measures are tied properly to the PHA's PHAS evaluation. In 
addition, the criteria for substantial improvement are statutory. 
Further, ensuring meaningful resident participation is wholly within 
the purview and control of the PHA. As noted above, the PHA may request 
additional time to effect an MOA. HUD has not changed the interim rule 
to reflect these comments.

V. Solicitation of Additional Comment

    HUD generally publishes rules for advance public comment in 
accordance

[[Page 10149]]

with its rules on rulemaking at 24 CFR part 10. However, under 24 CFR 
10.1, HUD may omit prior public notice and comment if it is 
``impracticable, unnecessary, or contrary to the public interest.'' 
Since HUD recently published a proposed rule on this subject on which 
it received extensive public comment, advance public comment on this 
interim rule is unnecessary. While HUD recognizes the concerns 
expressed by many commenters about incorporating the management review 
into the PHAS scoring until such matters as subjectivity, capacity, and 
training can be more fully developed, it is necessary to provide an 
interim mechanism for scoring PHAs. Therefore, HUD is issuing this 
interim rule. Because of the importance and complexity of the issues 
involved, HUD is also providing additional opportunity for public 
comment while also establishing an interim mechanism for scoring. The 
preamble to this interim rule, where appropriate, states several 
specific issues upon which HUD seeks comment.

VI. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements have been submitted to the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501-3520), and have been approved under OMB Control 
Numbers 2577-0237, 2535-0106, 2502-0369, and 2535-0107. 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 the collection displays a currently valid OMB 
control number.

Regulatory Planning and Review

    OMB reviewed this rule under Executive Order 12866, Regulatory 
Planning and Review. This rule was determined to be 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 Seventh Street, SW., Room 10276, Washington, DC 20410-
0500. 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 202-402-3055 (this is not a toll-
free number).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on state, local, and tribal governments and 
the private sector. This rule will not impose any Federal mandates on 
any state, local, or tribal governments or the private sector within 
the meaning of UMRA.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage in accordance with HUD regulations 
in 24 CFR part 50 that implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332). That Finding remains 
applicable to this interim rule and is available for public inspection 
during regular business hours 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 Finding by calling the Regulations Division 
at 202-402-3055 (this is not a toll-free number).

Impact on Small Entities

    The Regulatory Flexibility Act (RFA) (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 number of small entities. 
This rule revises HUD's existing PHAS regulations for the assessment of 
public housing at 24 CFR part 902, to revise the PHAS regulations to 
elaborate upon certain procedures, to conform the PHAS regulations to 
current public housing operations, and to conform to certain statutory 
changes. These revisions impose no significant economic impact on a 
substantial number of small entities. PHAs in general have been 
assessed under PHAS for several years, and this rule imposes no 
additional burdens; rather, it removes the onsite management review, 
further lessening the compliance burdens on all PHAs. Further, small 
PHAs (PHAs with under 250 units) are assessed on a less frequent 
schedule than larger ones. While some commenters on the August 21, 
2008, proposed rule argued for even further lessening of the burdens on 
small PHAs, there were no commenters that suggested that the proposed 
rule violated regulatory flexibility principles. Therefore, the 
undersigned certifies that this rule will not have a significant impact 
on a substantial number of small entities.

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 interim 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.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for the Public 
Housing program is 14.850.

List of Subjects

24 CFR Part 901

    Administrative practice and procedures, public housing, reporting 
and recordkeeping requirements.

24 CFR Part 902

    Administrative practice and procedures, public housing, reporting 
and recordkeeping requirements.

24 CFR Part 907

    Administrative practice and procedures, public housing, reporting 
and recordkeeping requirements.
    Accordingly, HUD amends 24 CFR Chapter IX, as follows:

PART 901--[REMOVED AND RESERVED]

0
1. Under the authority of 42 U.S.C. 1436d(j), remove and reserve 24 CFR 
part 901.
0
2. Revise 24 CFR part 902 to read as follows:

PART 902--PUBLIC HOUSING ASSESSMENT SYSTEM

Subpart A--General Provisions

Sec.
902.1 Purpose, scope, and general matters.
902.3 Definitions.
902.5 Applicability.
902.9 PHAS scoring.
902.11 PHAS performance designation.
902.13 Frequency of PHAS assessments.

[[Page 10150]]

Subpart B--Physical Condition Indicator
902.20 Physical condition assessment.
902.21 Physical condition standards for public housing--decent, 
safe, and sanitary housing in good repair (DSS/GR).
902.22 Physical inspection of PHA projects.
902.24 Database adjustment.
902.25 Physical condition scoring and thresholds.
902.26 Physical Inspection Report.

Subpart C--Financial Condition Indicator

902.30 Financial condition assessment.
902.33 Financial reporting requirements.
902.35 Financial condition scoring and thresholds.

Subpart D--Management Operations Indicator

902.40 Management operations assessment.
902.43 Management operations performance standards.
902.44 Adjustment for physical condition and neighborhood 
environment.
902.45 Management operations scoring and thresholds.

Subpart E--Capital Fund Program Indicator

902.50 Capital Fund program assessment.
902.53 Capital Fund program scoring and thresholds.

Subpart F--PHAS Scoring

902.60 Data collection.
902.62 Failure to submit data.
902.64 PHAS scoring and audit reviews.
902.66 Withholding, denying, and rescinding designation.
902.68 Technical review of results of PHAS physical condition 
indicator.
902.69 PHA right of petition and appeal.
Subpart G--PHAS Incentives and Remedies
902.71 Incentives for high performers.
902.73 PHAs with deficiencies.
902.75 Troubled performers.
902.79 Verification and records.
902.81 Resident petitions for remedial action.
902.83 Sanctions for troubled performer PHAs.

    Authority:  42 U.S.C. 1437d(j), 42 U.S.C. 3535(d).

Subpart A--General Provisions


Sec.  902.1  Purpose, scope, and general matters.

    (a) Purpose. The purpose of the Public Housing Assessment System 
(PHAS) is to improve the delivery of services in public housing and 
enhance trust in the public housing system among public housing 
agencies (PHAs), public housing residents, and the general public, by 
providing a management tool for effectively and fairly measuring the 
performance of a PHA in essential housing operations of projects, on a 
program-wide basis and individual project basis, and providing rewards 
for high performers and remedial requirements for poor performers.
    (b) Scope. PHAS is a strategic measure of the essential housing 
operations of projects and PHAs. PHAS does not evaluate the compliance 
of a project or PHA with every HUD-wide or program-specific requirement 
or objective. Although not specifically evaluated through PHAS, PHAs 
are responsible for complying with nondiscrimination and equal 
opportunity requirements, including but not limited to those specified 
in 24 CFR 5.105, for affirmatively furthering fair housing, 
requirements under section 504 of the Rehabilitation Act of 1973 (29 
U.S.C. 794), and requirements of other federal programs under which the 
PHA is receiving assistance. A PHA's adherence to these requirements 
will be monitored in accordance with the applicable program regulations 
and the PHA's Annual Contributions Contract (ACC).
    (c) PHAS indicators. HUD will assess and score the performance of 
projects and PHAs based on the indicators, which are more fully 
addressed in Sec.  902.9: Physical condition, financial condition, 
management operations, and the Capital Fund program.
    (d) Assessment tools. HUD will make use of uniform and objective 
criteria for the physical inspection of projects and PHAs and the 
financial assessment of projects and PHAs, and will use data from 
appropriate agency data systems to assess management operations. For 
the Capital Fund program indicator, HUD will use information provided 
in the electronic Line of Credit Control System (eLOCCS), the Public 
Housing Information Center (PIC), or their successor systems. On the 
basis of this data, HUD will assess and score the results, advise PHAs 
of their scores, and identify low-scoring and poor-performing projects 
and PHAs so that these projects and PHAs will receive the appropriate 
attention and assistance.
    (e) Small PHAs. A PHA with fewer than 250 units that does not 
convert to asset management will be considered as one project by HUD.
    (f) HUD's scoring procedures will be published from time to time in 
the Federal Register for public comment.


Sec.  902.3  Definitions.

    As used in this part:
    Act means the U.S. Housing Act of 1937 (42 U.S.C. 1437 et seq.)
    Alternative management entity (AME) is a receiver, private 
contractor, private manager, or any other entity that is under contract 
with a PHA, under a management agreement with a PHA, or that is 
otherwise duly appointed or contracted (for example, by court order or 
agency action), to manage all or part of a PHA's operations.
    Assessed fiscal year is the PHA fiscal year that has been/is being 
assessed under PHAS.
    Assistant Secretary means the Assistant Secretary for Public and 
Indian Housing.
    Capital Fund-troubled refers to a PHA that does not meet the 
minimum passing score of 5 points or 50 percent under the Capital Fund 
indicator.
    Corrective Action Plan means a plan, as provided in Sec.  
902.73(a), that is developed by a PHA that specifies the actions to be 
taken, including timetables, that shall be required to correct 
deficiencies identified under any of the PHAS indicators and 
subindicators, and identified as a result of a PHAS assessment, when a 
memorandum of agreement (MOA) is not required.
    Criticality means one of five levels that reflect the relative 
importance of the deficiencies for an inspectable item.
    (1) Based on the importance of the deficiency, reflected in its 
criticality value, points are deducted from the score for an 
inspectable area.

------------------------------------------------------------------------
                       Criticality                             Level
------------------------------------------------------------------------
Critical................................................               5
Very Important..........................................               4
Important...............................................               3
Contributes.............................................               2
Slight Contribution.....................................               1
------------------------------------------------------------------------

     (2) The Item Weights and Criticality Levels document lists all 
deficiencies with their designated levels, which vary from 1 to 5, with 
5 as the most critical, and the point values assigned to them.
    Days mean calendar days, unless otherwise specified.
    Decent, safe, sanitary housing and in good repair (DSS/GR) is HUD's 
standard for acceptable basic housing conditions and the level to which 
a PHA is required to maintain its public housing.
    Deficiency means any finding or determination that requires 
corrective action, or any score below 60 percent of the available 
points for the physical condition, financial condition, or management 
operations indicators, and any score below 50 percent for the Capital 
Fund indicator. In the context of physical condition and physical 
inspection in subpart B of this part, ``deficiency'' means a specific 
problem, as described in the Dictionary of Deficiency Definitions, such 
as a hole in a wall or a damaged refrigerator in the kitchen that can 
be recorded for inspectable items.

[[Page 10151]]

    Dictionary of Deficiency Definitions means the Dictionary of 
Deficiency Definitions document that is utilized in the PHAS Physical 
Condition Scoring procedure, and which contains specific definitions of 
each severity level for deficiencies under this subpart.
    Direct Funded RMC (DF-RMC) means a Resident Management Corporation 
to which HUD directly provides operating and capital assistance under 
the provisions of 24 CFR 964.225(h).
    Inspectable areas (or area) mean any of the five major components 
of public housing that are inspected, which are: Site, building 
exteriors, building systems, dwelling units, and common areas.
    Inspectable item means the individual parts, such as walls, 
kitchens, bathrooms, and other things, to be inspected in an 
inspectable area. The number of inspectable items varies for each area. 
Weights are assigned to each item as shown in the Item Weights and 
Criticality Levels document.
    Item Weights and Criticality Levels document means the Item Weights 
and Criticality Levels document that is utilized in the Physical 
Condition scoring procedure, and which contains a listing of the 
inspectable items, item weights, observable deficiencies, criticality 
levels and values, and severity levels and values that apply to this 
subpart.
    Memorandum of Agreement (MOA) is defined in Sec.  902.75(b).
    Normalized weights mean weights adjusted to reflect the inspectable 
items or areas that are present to be inspected.
    Resident Management Corporation (RMC) is defined in 24 CFR 964.7.
    Score for a project under the physical condition inspection means a 
number on a scale of 0 to 100 that reflects the physical condition of a 
project, inspectable area, or subarea. To record a health or safety 
deficiency, a specific designation (such as a letter--a, b, or c) is 
added to the project score that highlights that a health or safety 
deficiency (or deficiencies) exists. If smoke detectors are noted as 
inoperable or missing, another designation (such as an asterisk (*)) is 
added to the project score. Although inoperable or missing smoke 
detectors do not reduce the score, they are fire safety hazards and are 
included in the Notification of Exigent and Fire Safety Hazards 
Observed Deficiency list that the inspector gives the PHA's project 
representative.
    Severity under the physical condition inspection means one of three 
levels, level 1 (minor), level 2 (major), and level 3 (severe), that 
reflect the extent of the damage or problem associated with each 
deficiency. The Item Weights and Criticality Levels document shows the 
severity levels for each deficiency. Based on the severity of each 
deficiency, the score is reduced. Points deducted are calculated as the 
product of the item weight and the values for criticality and severity. 
For specific definitions of each severity level, see the Dictionary of 
Deficiency Definitions.
    Statistically valid sample refers to a scientific sampling 
performed in a rigorous, random manner.
    Subarea means an inspectable area for one building. For example, if 
a project has more than one building, each inspectable area for each 
building in the project is treated as a subarea.
    Unit-weighted average means the average of the PHA's individual 
indicator scores, weighted by the number of units in each project, 
divided by the total number of units in all of the projects of the PHA. 
In order to compute a unit-weighted average, an individual project 
score for a particular indicator is multiplied by the number of units 
in each project to determine a ``weighted value.'' For example, for a 
PHA with two projects, one with 200 units and a score of 90, and the 
other with 100 units and a score of 60, the unit-weighted average score 
for the indicator would be (200 x 90 + 100 x 60)/300 = 80.


Sec.  902.5  Applicability.

    (a) PHAs, RMCs, AMEs. This part applies to PHAs, Resident 
Management Corporations (RMCs), and AMEs. This part is also applicable 
to RMCs that receive direct funding from HUD in accordance with section 
20 of the 1937 Act (DF-RMCs).
    (1) Scoring of RMCs and AMEs. (i) RMCs and DF-RMCs will be assessed 
and issued their own numeric scores under PHAS based on the public 
housing or portions of public housing that they manage and the 
responsibilities they assume that can be scored under PHAS. References 
in this part to PHAs include RMCs, unless stated otherwise. References 
in this part to RMCs include DF-RMCs, unless stated otherwise.
    (ii) AMEs are not issued PHAS scores. The performance of the AME 
contributes to the PHAS score of the project(s)/PHA(s) for which they 
assumed management responsibilities.
    (2) ACC. The ACC makes a PHA legally responsible for all public 
housing operations, except where DF-RMC assumes management operations.
    (i) Because the PHA and not the RMC or AME is ultimately 
responsible to HUD under the ACC, the PHAS score of a PHA will be based 
on all of the projects covered by the ACC, including those with 
management operations assumed by an RMC or AME (including a court-
ordered or administrative receivership agreement, if applicable).
    (ii) A PHA's PHAS score will not be based on projects managed by a 
DF-RMC.
    (3) This part does not apply to Moving-to-Work (MTW) agencies that 
are specifically exempted in their grant agreement.
    (b) Implementation of PHAS. The regulations in this part are 
applicable to PHAs beginning with the first fiscal year end date after 
the effective date of this rule, and thereafter.


Sec.  902.9  PHAS scoring.

    (a) Indicators and subindicators. Each PHA will receive an overall 
PHAS score, rounded to the nearest whole number, based on the four 
indicators: Physical condition, financial condition, management 
operations, and the Capital Fund program. Each of these indicators 
contains subindicators, and the scores for the subindicators are used 
to determine a single score for each of these PHAS indicators. 
Individual project scores are used to determine a single score for the 
physical condition, financial condition, and management operations 
indicators. The Capital Fund program indicator score is entity-wide.
    (b) Overall PHAS score and indicators. The overall PHAS score is 
derived from a weighted average of score values for the four 
indicators, as follows:
    (1) The physical condition indicator is weighted 40 percent (40 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart B of this part.
    (2) The financial condition indicator is weighted 25 percent (25 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart C of this part.
    (3) The management operations indicator is weighted 25 percent (25 
points) of the overall PHAS score. The score for this indicator is 
obtained as indicated in subpart D of this part.
    (4) The Capital Fund program indicator is weighted 10 percent (10 
points) of the overall PHAS score for all Capital Fund program grants 
for which fund balances remain during the assessed fiscal year. The 
score for this indicator is obtained as indicated in subpart E of this 
part.


Sec.  902.11  PHAS performance designation.

    All PHAs that receive a PHAS assessment shall receive a performance 
designation. The performance designation is based on the overall PHAS 
score and the four indicator scores, as set forth below.

[[Page 10152]]

    (a) High performer. (1) A PHA that achieves a score of at least 60 
percent of the points available under the financial condition, physical 
condition, and management operations indicators and at least 50 percent 
of the points available under the Capital Fund indicator, and achieves 
an overall PHAS score of 90 percent or greater of the total available 
points under PHAS shall be designated a high performer. A PHA shall not 
be designated a high performer if it scores below the threshold 
established for any indicator.
    (2) High performers will be afforded incentives that include relief 
from reporting and other requirements, as described in Sec.  902.71.
    (b) Standard performer. (1) A PHA that is not a high performer 
shall be designated a standard performer if the PHA achieves an overall 
PHAS score of at least 60 percent, and at least 60 percent of the 
available points for the physical condition, financial condition, and 
management operations indicators, and at least 50 percent of the 
available points for the Capital Fund indicator.
    (2) At HUD's discretion, a standard performer may be required by 
the field office to submit and operate under a Corrective Action Plan.
    (c) Substandard performer. A PHA shall be designated a substandard 
performer if the PHA achieves a total PHAS score of at least 60 percent 
and achieves a score of less than 60 percent under one or more of the 
physical condition, financial condition, or management operations 
indicators. The PHA shall be designated as substandard physical, 
substandard financial, or substandard management, respectively. The HUD 
office with jurisdiction over the PHA shall require a Corrective Action 
Plan if the deficiencies have not already been addressed in a current 
Corrective Action Plan.
    (d) Troubled performer. (1) A PHA that achieves an overall PHAS 
score of less than 60 percent shall be designated as a troubled 
performer.
    (2) In accordance with section 6(j)(2)(A)(i) of the Act (42 U.S.C. 
1437d(j)(2)(A)(i)), a PHA that receives less than 50 percent under the 
Capital Fund program indicator under subpart E of this part will be 
designated as a troubled performer and subject to the sanctions 
provided in section 6(j)(4) of the Act (42 U.S.C. 1437(d)(j)(4)).


Sec.  902.13  Frequency of PHAS assessments.

    The frequency of a PHA's PHAS assessments is determined by the size 
of the PHA's Low-Rent program and its PHAS designation. HUD may, due to 
unforeseen circumstances or other cause as determined by HUD, extend 
the time between assessments by direct notice to the PHA and relevant 
resident organization or resident management entity, and any other 
general notice that HUD deems appropriate.
    (a) Small PHAs. HUD will assess and score the performance of a PHA 
with fewer than 250 public housing units, as follows:
    (1) A small PHA that is a high performer may receive a PHAS 
assessment every 3 years;
    (2) A small PHA that is a standard or substandard performer may 
receive a PHAS assessment every other year; and
    (3) All other small PHAs may receive a PHAS assessment every year, 
including a PHA that is designated as troubled or Capital Fund-troubled 
in accordance with Sec.  902.75.
    (b) Frequency of scoring for PHAs with 250 units or more.
    (1) All PHAs, other than stated in paragraph (a) of this section, 
may be assessed on an annual basis.
    (2) The physical condition score for each project will determine 
the frequency of inspections of each project. For projects with a 
physical condition score of 90 points or higher, physical inspections 
will be conducted every 3 years at the project. For projects with a 
physical condition score of less than 90 points but at least 80 points, 
physical inspection will be conducted every 2 years at the project. The 
physical condition score of 80 points or higher will be carried over to 
the next assessment period and averaged with the other project physical 
condition score(s) for the next assessment year for an overall PHAS 
physical condition indicator score. For projects whose physical 
condition score for a project is less than 80 points, physical 
inspections will be conducted annually at the project.
    (3) If a PHA is designated as a troubled performer, all projects 
will receive a physical condition inspection regardless of the 
individual project physical condition score.
    (4) In the baseline year, every PHA will receive an overall PHAS 
score and in all four of the PHAS indicators: Physical condition; 
financial condition; management operations; and Capital Fund program. 
This will allow a baseline for the physical condition inspections and 
the 3-2-1 inspection schedule, as well as a baseline year for the small 
deregulated PHAs.
    (c) Financial submissions. HUD shall not issue a PHAS score for the 
unaudited and audited financial information in the years that a PHA is 
not being assessed under PHAS. Although HUD shall not issue a PHAS 
score under such circumstances, a PHA shall comply with the 
requirements for submission of annual unaudited and audited financial 
statements in accordance with subpart C of this part and 24 CFR 5.801.

Subpart B--Physical Condition Indicator


Sec.  902.20  Physical condition assessment.

    (a) Objective. The objective of the physical condition indicator is 
to determine whether a PHA is meeting the standard of decent, safe, 
sanitary housing in good repair (DSS/GR), as this standard is defined 
in 24 CFR 5.703.
    (b) Method of assessment. The physical condition assessment is 
based on an independent physical inspection of a PHA's projects 
provided by HUD and performed by contract inspectors, and conducted 
using HUD's Uniform Physical Condition Standards (UPCS) under 24 CFR 
part 5, subpart G.
    (c) Method of transmission. After the inspection is completed, the 
inspector transmits the results to HUD, where the results are verified 
for accuracy and then scored in accordance with the procedures in this 
subpart B.
    (d) PHA physical inspection requirements. The physical inspections 
conducted under this part do not relieve the PHA of the responsibility 
to inspect public housing units, as provided in section 6(f)(3) of the 
Act (42 U.S.C. 1437d(f)(3)).
    (e) Compliance with state and local codes. The physical condition 
standards in this part do not supersede or preempt state and local 
building and maintenance codes with which the PHA's public housing must 
comply. PHAs must continue to adhere to these codes.
    (f) HUD access to PHA projects. All PHAs are required by the ACC to 
provide HUD or its representative with full and free access to all 
facilities in its projects. All PHAs are required to provide HUD or its 
representative with access to its projects and to all units and 
appurtenances in order to permit physical inspections, monitoring 
reviews, and quality assurance reviews under this part. Access to the 
units shall be provided whether or not the resident is home or has 
installed additional locks for which the PHA did not obtain keys. In 
the event that the PHA fails to provide access as required by HUD or 
its representative, the PHA shall be given a physical condition score 
of zero for the project or projects involved. This score of zero shall 
be used to calculate the physical condition indicator score and the 
overall PHAS score.

[[Page 10153]]

Sec.  902.21  Physical condition standards for public housing--decent, 
safe, and sanitary housing in good repair (DSS/GR).

    (a) General. Public housing must be maintained in a manner that 
meets the physical condition standards set forth in this part in order 
to be considered DSS/GR (standards that constitute acceptable basic 
housing conditions). These standards address the major physical areas 
of public housing: Site, building exterior, building systems, dwelling 
units, and common areas (see paragraph (b) of this section). These 
standards also identify health and safety considerations (see paragraph 
(c) of this section). These standards address acceptable basic housing 
conditions, not the adornment, d[eacute]cor, or other cosmetic 
appearance of the housing.
    (b) Major inspectable areas. (1) Site. The site includes the 
components and must meet the requirements of 24 CFR 5.703(a).
    (2) Building exterior. The building exterior includes the 
components and must meet the standards stated in 24 CFR 5.703(b).
    (3) Building systems. The building's systems include components 
such as domestic water, electrical system, elevators, emergency power, 
fire protection, heating/ventilation/air conditioning (HVAC), and 
sanitary system. Each building's systems must meet the standards of 24 
CFR 5.703(c).
    (4) Dwelling units. Each dwelling unit within a building must meet 
the standards of 24 CFR 5.703(d).
    (5) Common areas. Each common area must meet the standards of 24 
CFR 5.703(e).
    (c) Health and safety concerns. All areas and components of the 
housing must be free of health and safety hazards, as provided in 24 
CFR 5.703(f).


Sec.  902.22  Physical inspection of PHA projects.

    (a) The inspection, generally. The PHA's score for the physical 
condition indicator is based on an independent physical inspection of a 
PHA's project(s) provided by HUD and using HUD's Uniform Physical 
Condition Standard (UPCS) inspection protocols to ensure projects meet 
DSS/GR standards that constitute acceptable basic housing conditions. 
Mixed-finance projects will be subject to the physical condition 
inspections.
    (b) Pursuant to Sec.  902.13(a), PHAs with less than 250 public 
housing units will receive a PHAS assessment, based on their PHAS 
designation, as follows:
    (1) A small PHA that is a high performer will receive a PHAS 
assessment every 3 years;
    (2) A small PHA that is a standard or substandard performer will 
receive a PHAS assessment every other year; and
    (3) All other small PHAs will receive a PHAS assessment every year, 
including a PHA that is designated as troubled or Capital Fund-troubled 
in accordance with Sec.  902.75.
    (c) In the baseline year, every PHA will receive an overall PHAS 
score and in all four of the PHAS indicators: Physical condition; 
financial condition; management operations; and Capital Fund program. 
This will allow a baseline score to be established for the physical 
condition inspections and the 3-2-1 inspection schedule, as well as a 
baseline year for the small deregulated PHAs.
    (d) Physical inspection under the PHAS physical condition 
indicator. (1) To achieve the objective of paragraph (a) of this 
section, HUD will provide for an independent physical inspection of a 
PHA's project(s) that includes, at a minimum, a statistically valid 
sample of the units in the PHA's projects, to determine the extent of 
compliance with the DSS/GR standard.
    (2) Only occupied units will be inspected as dwelling units (except 
units approved by HUD for nondwelling purposes, e.g., daycare or 
meeting rooms, which are inspected as common areas). Vacant units that 
are not under lease at the time of the physical inspection will not be 
inspected. The categories of vacant units not under lease that are 
exempted from physical inspection are as follows:
    (i) Units undergoing vacant unit turnaround--vacant units that are 
in the routine process of turnover; i.e., the period between which one 
resident has vacated a unit and a new lease takes effect;
    (ii) Units undergoing rehabilitation--vacant units that have 
substantial rehabilitation needs already identified, and there is an 
approved implementation plan to address the identified rehabilitation 
needs and the plan is fully funded;
    (iii) Offline units--vacant units that have repair requirements 
such that the units cannot be occupied in a normal period of time 
(considered to be between 5 and 7 days) and which are not included 
under an approved rehabilitation plan.
    (e) Observed deficiencies. During the physical inspection of a 
project, an inspector looks for deficiencies for each inspectable item 
within the inspectable areas, such as holes (deficiencies) in the walls 
(item) of a dwelling unit (area). The dwelling units inspected in a 
project are a randomly selected, statistically valid sample of the 
units in the project, excluding vacant units not under lease at the 
time of the physical inspection, as provided in paragraph (d)(2) of 
this section.
    (f) Exigent health and safety (EHS) deficiencies and health and 
safety (H&S) deficiencies. (1) EHS deficiencies. To ensure prompt 
correction of EHS deficiencies, before leaving the site the inspector 
gives the project representative a Notification of Exigent and Fire 
Safety Hazards Observed form that calls for immediate attention or 
remedy. The project representative acknowledges receipt of the 
deficiency report by signature. The project or PHA shall correct, 
remedy, or act to abate all EHS deficiencies cited in the deficiency 
report within 24 contiguous hours of the project representative's 
receipt of the Notification of Exigent and Fire Safety Hazards Observed 
form. In addition, the project or PHA must certify to HUD within 3 
business days of the project representative's receipt of the 
Notification of Exigent and Fire Safety Hazards Observed form that all 
EHS deficiencies were corrected, remedied, or acted upon to abate 
within 24 continuous hours.
    (2) H&S deficiencies. The project or the PHA, or both, as 
appropriate, is required to expeditiously correct, remedy, or act to 
abate all H&S deficiencies after receipt of the Physical Inspection 
Report.
    (g) Compliance with civil rights/nondiscrimination requirements. 
Elements related to accessibility will be reviewed during the physical 
inspection to determine possible indications of noncompliance with the 
Fair Housing Act (42 U.S.C. 3601-3619) and section 504 of the 
Rehabilitation Act of 1973 (29 U.S.C. 794). A PHA will not be scored on 
those elements. Any indication of possible noncompliance will be 
referred to HUD's Office of Fair Housing and Equal Opportunity.


Sec.  902.24  Database adjustment.

    (a) Adjustments for factors not reflected or inappropriately 
reflected in physical condition score. Under circumstances described in 
this section, HUD may determine it is appropriate to review the results 
of a project's physical inspection that are unusual or incorrect due to 
facts and circumstances affecting the PHA's project that are not 
reflected in the inspection or that are reflected inappropriately in 
the inspection.
    (1) The circumstances described in this section are not the 
circumstances that may be addressed by the technical review process 
described in Sec.  902.68. The circumstances addressed in this 
paragraph (a)(1) of this section may include inconsistencies between 
local

[[Page 10154]]

code requirements and the HUD physical inspection protocol; conditions 
that are permitted by local variance or license or which are 
preexisting physical features that do not conform to, or are 
inconsistent with, HUD's physical condition protocol; or the project or 
PHA having been scored for elements (e.g., roads, sidewalks, mail 
boxes, resident-owned appliances, etc.) that it does not own and is not 
responsible for maintaining. To qualify for an adjustment on this 
basis, the project or PHA must have notified the proper authorities 
regarding the deficient element.
    (2) An adjustment due to these circumstances may be initiated by a 
project or PHA's notification to the applicable HUD field office, and 
such notification shall include appropriate proof of the reasons for 
the unusual or incorrect result. Projects and PHAs may submit the 
request for this adjustment either prior to or after the physical 
inspection has been concluded. If the request is made after the 
conclusion of the physical inspection, the request must be made within 
45 days of issuance of the project's or PHA's physical condition score. 
Based on the recommendation of the applicable HUD office following its 
review of the project evidence or documentation submitted by the 
project or PHA, HUD may determine that a reinspection and/or rescoring 
of the project or PHA is necessary.
    (b) Adjustments for adverse conditions beyond the control of the 
PHA. Under certain circumstances, HUD may determine that certain 
deficiencies that adversely and significantly affect the physical 
condition score of the project were caused by circumstances beyond the 
control of the PHA. The correction of these conditions, however, 
remains the responsibility of the PHA.
    (1) The circumstances addressed by this paragraph (b)(1) may 
include, but are not limited to, damage caused by third parties (such 
as a private entity or public entity undertaking work near a public 
housing project that results in damage to the project) or natural 
disasters. The circumstances addressed in this paragraph (b)(1) are not 
those addressed by the technical review process in Sec.  902.68.
    (2) To adjust a physical condition score based on circumstances 
addressed in this paragraph, the PHA must submit a request to the 
applicable HUD field office requesting a reinspection or rescoring of 
the PHA's project(s) dependent on the severity of the deficiency. The 
request must be submitted within 45 days of the issuance of the 
physical condition score to the PHA. If the PHA is requesting a 
reinspection, the request must be accompanied by a certification that 
all deficiencies identified in the original report have been corrected. 
Based on the recommendation of the applicable HUD office following its 
review of the project's or PHA's evidence or documentation, HUD may 
determine that a reinspection and rescoring of the PHA's project(s) is 
necessary.
    (c) Adjustments for modernization work in progress. HUD may 
determine that occupied dwelling units or other areas of a PHA's 
project, which are subject to physical inspection under this subpart, 
and which are undergoing modernization work, require an adjustment to 
the physical condition score.
    (1) An occupied dwelling unit or other areas of a PHA's project 
undergoing modernization are subject to physical inspection; the 
unit(s) and other areas of the PHA's project are not exempt from 
physical inspection. All elements of the unit or of the other areas of 
the PHA's project that are subject to inspection and are not undergoing 
modernization at the time of the inspection (even if modernization is 
planned) will be subject to HUD's physical inspection protocol without 
adjustment. For those elements of the unit or of the project that are 
undergoing modernization, deficiencies will be noted in accordance with 
HUD's physical inspection protocol, but the project or PHA may request 
adjustment of the physical condition score as a result of modernization 
work in progress.
    (2) An adjustment due to modernization work in progress may be 
initiated by a project's or PHA's notification to the applicable HUD 
field office, and the notification shall include supporting 
documentation of the modernization work under way at the time of the 
physical inspection. A project or PHA may submit the request for this 
adjustment either prior to or after the physical inspection has been 
concluded. If the request is made after the conclusion of the physical 
inspection, the request must be made within 45 days of issuance of the 
physical condition score. Based on the recommendation of the applicable 
HUD office, HUD may determine that a reinspection and rescoring of the 
PHA's project(s) are necessary.


Sec.  902.25  Physical condition scoring and thresholds.

    (a) Scoring. Under the physical condition indicator, a score will 
be calculated for individual projects, as well as for the overall 
condition of a PHA's public housing portfolio.
    (b) Overall PHA physical condition indicator score. The overall 
physical condition indicator score is a unit-weighted average of 
project scores. The sum of the unit-weighted values is divided by the 
total number of units in the PHA's portfolio to derive the overall 
physical condition indicator score.
    (c) Thresholds. (1) The project or projects' 100-point physical 
condition score is converted to a 40-point basis for the overall 
physical condition indicator score. The project scores on the 100-point 
basis are multiplied by .40 in order to derive a 40-point equivalent 
score to compute the overall physical condition score and overall PHAS 
score.
    (2) In order to receive a passing score under the physical 
condition indicator, the PHA must achieve a score of at least 24 
points, or 60 percent.
    (3) A PHA that receives fewer than 24 points will be categorized as 
a substandard physical condition agency.


Sec.  902.26  Physical Inspection Report.

    (a) Following the physical inspection of each project and the 
computation of the score(s) under this subpart, the PHA receives a 
Physical Inspection Report. The Physical Inspection Report allows the 
PHA to see the points lost by inspectable area, and the impact on the 
score of the H&S and EHS deficiencies.
    (1) If EHS items are identified in the report, the PHA shall have 
the opportunity to correct, remedy, or act to abate all EHS 
deficiencies and may request a reinspection.
    (2) The request for reinspection must be made within 45 days of the 
PHA's receipt of the Physical Inspection Report. The request for 
reinspection must be accompanied by the PHA's identification of the EHS 
deficiencies that have been corrected, remedied, or acted upon to abate 
and by the PHA's certification that all such deficiencies identified in 
the report have been corrected, remedied, or acted upon to abate.
    (3) If HUD determines that a reinspection is appropriate, it will 
arrange for a complete reinspection of the project(s) in question, not 
just the deficiencies previously identified. The reinspection will 
constitute the final physical inspection for the project, and HUD will 
issue a new inspection report (the final inspection report).
    (4) If any of the previously identified EHS deficiencies that the 
PHA certified were corrected, remedied, or acted upon to abate are 
found during the reinspection not to have been corrected, remedied, or 
acted upon to abate, the score in the final inspection report will

[[Page 10155]]

reflect a point deduction of triple the value of the original 
deduction, up to the maximum possible points for the unit or area, and 
the PHA must reimburse HUD for the cost of the reinspection.
    (5) If a request for reinspection is not made within 45 days after 
the date that the PHA receives the Physical Inspection Report, the 
Physical Inspection Report issued to the PHA will be the final Physical 
Inspection Report.
    (b) A Physical Inspection Report includes the following items:
    (1) Normalized weights as the ``possible points'' by area;
    (2) The area scores, taking into account the points deducted for 
observed deficiencies;
    (3) The H&S (nonlife threatening) and EHS (life threatening) 
deductions for each of the five inspectable areas; a listing of all 
observed smoke detector deficiencies; and a projection of the total 
number of H&S and EHS problems that the inspector potentially would see 
in an inspection of all buildings and all units; and
    (4) The overall project score.

Subpart C--Financial Condition Indicator


Sec.  902.30  Financial condition assessment.

    (a) Objective. The objective of the financial condition indicator 
is to measure the financial condition of each public housing project 
within a PHA's public housing portfolio for the purpose of evaluating 
whether there are sufficient financial resources to support the 
provision of housing that is DSS/GR. Individual project scores for 
financial condition, as well as overall financial condition scores, 
will be issued.
    (b) Financial reporting standards. A PHA's financial condition will 
be assessed under this indicator by measuring the combined performance 
of all public housing projects in each of the subindicators listed in 
Sec.  902.35, on the basis of the annual financial report provided in 
accordance with Sec.  902.33.
    (c) Exclusions. Mixed-finance projects are excluded from the 
financial condition indicator.


Sec.  902.33  Financial reporting requirements.

    (a) Annual financial report. All PHAs must submit their unaudited 
and audited financial data to HUD on an annual basis. The financial 
information must be:
    (1) Prepared in accordance with Generally Accepted Accounting 
Principles (GAAP), as further defined by HUD in supplementary guidance; 
and
    (2) Submitted electronically in the format prescribed by HUD using 
the Financial Data Schedule (FDS).
    (b) Annual unaudited financial information report filing dates. The 
unaudited financial information to be submitted to HUD in accordance 
with paragraph (a) of this section must be submitted to HUD annually, 
no later than 2 months after the PHA's fiscal year end, with no penalty 
applying until the 16th day of the 3rd month after the PHA's fiscal 
year end, in accordance with Sec.  902.62.
    (c) Annual audited financial information compliance dates. Audited 
financial statements will be required no later than 9 months after the 
PHA's fiscal year end, in accordance with the Single Audit Act and OMB 
Circular A-133 (see 24 CFR 85.26).
    (d) Year-end audited financial information. All PHAs that meet the 
federal assistance threshold stated in the Single Audit Act and OMB 
Circular A-133 must also submit year-end audited financial information.
    (e) Submission of information. In addition to the submission of 
information required by paragraph (a) of this section, a PHA shall 
provide one copy of the completed audit report package and the 
Management Letter issued by the Independent Auditor to the local HUD 
field office having jurisdiction over the PHA.


Sec.  902.35  Financial condition scoring and thresholds.

    (a) Scoring. (1) Under the financial condition indicator, a score 
will be calculated for each project based on the values of financial 
condition subindicators and an overall financial condition score, as 
well as audit and internal control flags. Each financial condition 
subindicator has several levels of performance, with different point 
values for each level.
    (2) The financial condition score for projects will be based on the 
annual financial condition information submitted to HUD for each 
project under 24 CFR 990.280 and 990.285. The financial condition score 
for PHAs will be based on a unit-weighted average of project scores.
    (b) Subindicators of the financial condition indicator. The 
subindicators of financial condition indicator are:
    (1) Quick Ratio (QR). The QR compares quick assets to current 
liabilities. Quick assets are cash and assets that are easily 
convertible to cash and do not include inventory. Current liabilities 
are those liabilities that are due within the next 12 months. A QR of 
less than one indicates that the project's ability to make payments on 
a timely basis may be at risk.
    (2) Months Expendable Net Assets Ratio (MENAR). The MENAR measures 
a project's ability to operate using its net available, unrestricted 
resources without relying on additional funding. This ratio compares 
the adjusted net available unrestricted resources to the average 
monthly operating expenses. The result of this calculation shows how 
many months of operating expenses can be covered with currently 
available, unrestricted resources.
    (3) Debt Service Coverage Ratio (DSCR). The DSCR is the ratio of 
net operating income available to make debt payments, to the amount of 
the debt payments. This subindicator is used if the PHA has taken on 
long-term obligations. A DSCR of less than one would indicate that the 
project would have difficulty generating sufficient cash flow to cover 
both its expenses and its debt obligations.
    (c) Overall PHA financial condition indicator score. The overall 
financial condition indicator score is a unit-weighted average of 
project scores. The sum of the weighted values is then divided by the 
total number of units in the PHA's portfolio to derive the overall 
financial condition indicator score.
    (d) Thresholds. (1) The PHA's financial condition score is based on 
a maximum of 25 points.
    (2) In order for a PHA to receive a passing score under the 
financial condition indicator, the PHA must achieve a score of at least 
15 points, or 60 percent of the available points under this indicator.
    (3) A PHA that receives fewer than 15 points available under this 
indicator will be categorized as a substandard financial condition 
agency.

Subpart D--Management Operations Indicator


Sec.  902.40  Management operations assessment.

    (a) Objective. The objective of the management operations indicator 
is to measure the PHA's performance of management operations through 
the management performance of each project.
    (b) Exclusions. Mixed-finance projects are excluded from the 
management operations indicator.


Sec.  902.43  Management operations performance standards.

    (a) Management operations subindicators. The following 
subindicators listed in this section will be used to assess the 
management operations of projects and PHAs,

[[Page 10156]]

consistent with section 6(j)(1) of the Act (42 U.S.C. 1437d(j)(1)). 
Individual project scores for management operations, as well as overall 
PHA management operations scores, will be issued.
    (1) Occupancy. This subindicator measures the occupancy for the 
project's fiscal year, adjusted for allowable vacancies.
    (2) Tenant accounts receivable. This subindicator measures the 
tenant accounts receivable of a project against the tenant charges for 
the project's fiscal year.
    (3) Accounts payable. This subindicator measures the money that a 
project owes to vendors at the end of the project's fiscal year for 
products and services purchased on credit against total operating 
expenses.
    (b) Assessment under the Management Operations Indicator. Projects 
will be assessed under this indicator through information that is 
electronically submitted to HUD through the FDS.


Sec.  902.44  Adjustment for physical condition and neighborhood 
environment.

    (a) General. In accordance with section 6(j)(1)(I)(2) of the Act 
(42 U.S.C. 1437d(j)(1)(I)(2)), the overall management operations score 
for a project will be adjusted upward to the extent that negative 
conditions are caused by situations outside the control of the project. 
These situations are related to the poor physical condition of the 
project or the overall depressed condition of the major census tract in 
which a project is located. The intent of this adjustment is to avoid 
penalizing such projects, through appropriate application of the 
adjustment.
    (b) Definitions. Definitions and application of physical condition 
and neighborhood environment factors are:
    (1) Physical condition adjustment applies to projects at least 28 
years old, based on the unit-weighted average Date of Full Availability 
(DOFA) date.
    (2) Neighborhood environment adjustment applies to projects located 
in census tracts where at least 40 percent of the families have an 
income below the poverty rate, as documented by the most recent census 
data. If a project is located in more than one census tract, the census 
data for the census tract where the majority of the project's units are 
located shall be used.
    (c) Adjustment for physical condition and neighborhood environment. 
HUD will adjust the management operations score of a project, subject 
to one or both of the physical condition and neighborhood environment 
conditions. The adjustments will be made to the overall management 
operations score for each project so as to reflect the difficulty in 
managing the projects. In each instance where the actual management 
operations score is rated below the maximum score of 25 points, one 
point each will be added for physical condition and neighborhood 
environment, but not to exceed the maximum number of 25 points 
available for the management operations indicator.
    (d) Application of adjustment. The adjustment for physical 
condition and neighborhood environment will be calculated by HUD and 
applied to all eligible projects.


Sec.  902.45  Management operations scoring and thresholds.

    (a) Scoring. Under the management operations indicator, HUD will 
calculate a score for each project, as well as for the overall 
management operations of a PHA, that reflects weights based on the 
relative importance of the individual management subindicators.
    (b) Overall PHA management operations indicator score. The overall 
management operations indicator score is a unit-weighted average of 
project scores. The sum of the weighted values is divided by the total 
number of units in the PHA's portfolio to derive the overall management 
operations indicator score.
    (c) Thresholds. (1) The PHA's management operations score is based 
on a maximum of 25 points.
    (2) In order to receive a passing score under the management 
operations indicator, a PHA must achieve a score of at least 15 points 
or 60 percent.
    (3) A PHA that receives fewer than 15 points will be categorized as 
a substandard management operations agency.

Subpart E--Capital Fund Program Indicator


Sec.  902.50  Capital Fund program assessment.

    (a) Objective. The Capital Fund program indicator examines the 
period of time taken by a PHA to obligate funds and occupy units in 
relation to statutory deadlines for obligation for all Capital Fund 
program grants for which fund balances remain during the assessed 
fiscal year. Funds from the Capital Fund program under section 9(d) of 
the Act (42 U.S.C. 1437g(d)) do not include HOPE VI program funds.
    (b) Applicability. This indicator is applicable on a PHA-wide 
basis, and not to individual projects. This indicator is not applicable 
to PHAs that choose not to participate in the Capital Fund program 
under section 9(d) of the Act.
    (c) Capital Fund subindicators. The subindicators pursuant to 
section 9(d) of the Act are:
    (1) Timeliness of fund obligation. This subindicator examines the 
period of time it takes for a PHA to obligate funds from the Capital 
Fund program under section 9(j)(1) of the 1937 Act (42 U.S.C. 
1437g(9)(j)).
    (2) Occupancy rate. This subindicator measures the PHA's occupancy 
rate as of the end of the PHA's fiscal year.
    (d) Method of assessment. The assessment required under the Capital 
Fund program indicator will be performed through analysis of obligated 
amounts in HUD's eLOCCS (or its successor) for all Capital Fund program 
grants that were open during the assessed fiscal year. This 
subindicator measures a statutory requirement for the Capital Fund 
program. Other aspects of the Capital Fund program will be monitored by 
HUD through other types of reviews, and in this indicator through 
considering occupancy rates.
    (1) PHAs are responsible to ensure that their Capital Fund program 
information is submitted to eLOCCS by the submission due date.
    (2) A PHA may not appeal its PHAS score, Capital Fund program 
score, or both, based on the fact that it did not submit its Capital 
Fund program information to eLOCCS and/or the PIC systems by the 
submission due date.


Sec.  902.53  Capital Fund program scoring and thresholds.

    (a) Scoring. The Capital Fund program indicator score provides an 
assessment of a PHA's ability to obligate Capital Fund program grants 
in a timely manner on capital and modernization needs.
    (b) Thresholds.
    (1) The PHA's Capital Fund program score is based on a maximum of 
10 points.
    (2) In order to receive a passing score under the Capital Fund 
program indicator, a PHA must achieve a score of at least 5 points, or 
50 percent.

Subpart F--PHAS Scoring


Sec.  902.60  Data collection.

    (a) Fiscal year reporting period--limitation on changes after PHAS 
effective date. To allow for a period of consistent assessments to 
refine and make necessary adjustments to PHAS, a PHA is not permitted 
to change its fiscal year for the first 3 full fiscal years following 
the effective date of this regulation, unless such change is approved 
by HUD for good cause.
    (b) Request for extension of time to submit unaudited financial 
information. In the event of extenuating

[[Page 10157]]

circumstances, a PHA may request extensions of time to submit its 
unaudited financial information. To receive an extension, a PHA must 
ensure that HUD receives the extension request electronically 15 days 
before the submission due date. The PHA's electronic extension request 
must include an objectively verifiable justification as to why the PHA 
cannot submit the information by the submission due date. PHAs shall 
submit their requests for extensions of time for the submission of 
unaudited financial information through the FASS-PH Secure Systems Web 
site. HUD shall forward its determination electronically to the 
requesting PHA.
    (c) Request for waiver of due date for PHA submission of audited 
financial information. (1) HUD, for good cause, may grant PHAs a waiver 
of the due date of the submission of audited financial information to 
HUD. HUD shall consider written requests from PHAs for a waiver of the 
report submission due date (established by the Single Audit Act and OMB 
Circular A-133 as no later than 9 months after the end of the fiscal 
year). The PHA's written request for a waiver of the due date of the 
submission of audited financial information must include an objectively 
verifiable justification as to why the PHA cannot submit the 
information by the submission due date. A PHA shall submit its written 
request for such a waiver, 30 days prior to the submission due date, to 
its local field office. HUD shall forward its written determination of 
the waiver request to the PHA and, if appropriate, establish a new 
submission due date for the audited financial information.
    (2) A waiver of the due date for the submission of audited 
financial information to HUD does not relieve a PHA of its 
responsibility to submit its audited information to OMB's Federal Audit 
Clearinghouse no later than 9 months after the end of its fiscal year.
    (d) Rejected unaudited financial submissions. When HUD rejects a 
PHA's year-end unaudited financial information after the due date, a 
PHA shall have 15 days from the date of the rejection to resubmit the 
information without a penalty being applied, in accordance with Sec.  
902.62.
    (e) Late points and late presumptive failure. Late points and late 
presumptive failure will only be applied to the financial condition 
indicator since the management operations information is derived from 
the financial condition submission.
    (f) Score change. A management operations score can change as a 
result of the audited submission since the management operations 
information is derived from the financial condition submission.


Sec.  902.62  Failure to submit data.

    (a) Failure to submit data by due date. (1) If a PHA without a 
finding of good cause by HUD does not submit its year-end financial 
information, required by this part, or submits its unaudited year-end 
financial information more than 15 days past the due date, appropriate 
sanctions may be imposed, including a reduction of one point in the 
total PHAS score for each 15-day period past the due date.
    (2) If the unaudited year-end financial information is not received 
within 3 months past the due date, or extended due date, the PHA will 
receive a presumptive rating of failure for its unaudited information 
and shall receive zero points for its unaudited financial information 
and the final financial condition indicator score. The subsequent 
timely submission of audited information does not negate the score of 
zero received for the unaudited year-end financial information 
submission.
    (3) The PHA's audited financial statement must be received no later 
than 9 months after the PHA's fiscal year-end, in accordance with the 
Single Audit Act and OMB Circular A-133 (see Sec.  902.33(c)). If the 
audited financial statement is not received by that date, the PHA will 
receive a presumptive rating of failure for the financial condition 
indicator.
    (b) Verification of information submitted. (1) A PHA's year-end 
financial information and any supporting documentation are subject to 
review by an independent auditor, as authorized by section 6(j)(6) of 
the Act (42 U.S.C. 1437(d)(j)(6)). Appropriate sanctions for 
intentional false certification will be imposed, including civil 
penalties, suspension or debarment of the signatories, the loss of high 
performer designation, a lower score under the financial condition 
indicator, and a lower overall PHAS score.
    (2) A PHA that cannot provide justifying documentation to HUD for 
the assessment under any indicator(s) or subindicator(s) shall receive 
a score of zero for the relevant indicator(s) or subindicator(s) and 
its overall PHAS score shall be lowered accordingly.
    (c) Failure to submit. If a PHA does not submit its unaudited or 
audited information, it will receive a zero for management operations.


Sec.  902.64  PHAS scoring and audit reviews.

    (a) Adjustments to PHAS score. (1) Adjustments to the score may be 
made after a PHA's audit report for the fiscal year being assessed is 
transmitted to HUD. If significant differences are noted between 
unaudited and audited results, a PHA's PHAS score will be adjusted in 
accordance with the audited results.
    (2) A PHA's PHAS score under individual indicators or 
subindicators, or its overall PHAS score, may be changed by HUD in 
accordance with data included in the audit report or obtained through 
such sources as HUD project management and other reviews, 
investigations by HUD's Office of Fair Housing and Equal Opportunity, 
investigations or audits by HUD's Office of Inspector General, or 
reinspection by HUD, as applicable.
    (b) Issuance of a score by HUD. (1) An overall PHAS score will be 
issued for each PHA after the later of one month after the submission 
due date for financial data or one month after submission by the PHA of 
its financial data. The overall PHAS score becomes the PHA's final PHAS 
score after any adjustments requested by the PHA and determined 
necessary under the processes provided in Sec. Sec.  902.25(d), 
902.35(a), and 902.68; any adjustments resulting from the appeal 
process provided in Sec.  902.69; and any adjustments determined 
necessary as a result of the independent public accountant (IPA) audit.
    (2) Each PHA (or RMC) shall post a notice of its final PHAS score 
and designation in appropriate conspicuous and accessible locations in 
its offices within 2 weeks of receipt of its final PHAS score and 
designation. In addition, HUD will post every PHA's PHAS score and 
designation on HUD's Internet site.
    (c) Review of audit. (1) Quality control review. HUD may undertake 
a quality control review of the audit work papers or as part of the 
Department's ongoing quality assurance process.
    (2) Determination of deficiency. If HUD determines that the PHA's 
financial statements, electronic financial submission, or audit are 
deficient, it shall notify the PHA of such determination in writing. 
The PHA will have 30 days in which to respond to the notice of 
deficiency and to establish that the determination is erroneous. 
Following consideration of any PHA response, HUD will issue a final 
determination in writing to the PHA.
    (i) Deficient financial statements. Deficient financial statements 
are statements that are not presented, in some material respect, in 
accordance with accounting principles generally accepted in the United 
States, as set forth by the Government Accounting

[[Page 10158]]

Standards Board, or if applicable, the Financial Accounting Standards 
Board.
    (ii) Deficient electronic submission. A deficient electronic 
financial submission is a filing that was not made, in some material 
respect, in accordance with HUD requirements or attested to in 
accordance with the Standards for Attestation Engagements issued by the 
American Institute of Certified Public Accountants or Generally 
Accepted Government Auditing Standards.
    (iii) Deficient audit. A deficient audit is one that was not 
performed, in some material respect, in compliance with Generally 
Accepted Government Auditing Standards; Generally Accepted Auditing 
Standards; the Single Audit Act and OMB Circular A-133, when 
applicable; or HUD requirements.
    (3) HUD actions. If HUD determines that the financial statements, 
electronic financial submission, or audit are deficient, HUD may adjust 
the financial indicator score to zero and/or reduce the overall PHAS 
score in accordance with the provisions of this section. Additionally, 
if HUD determines that the audit is deficient, HUD may, at its 
discretion, elect to serve as the audit committee for the PHA for the 
next fiscal year and select the audit firm that will perform the audit 
in question.


Sec.  902.66  Withholding, denying, and rescinding designation.

    (a) Withholding designation. In exceptional circumstances, even 
though a PHA has satisfied all of the PHAS indicators for high 
performer or standard performer designation, HUD may conduct any review 
as it may determine necessary, and may deny or rescind incentives or 
high performer designation or standard performer designation, in the 
case of a PHA that:
    (1) Is operating under a special agreement with HUD (e.g., a civil 
rights compliance agreement);
    (2) Is involved in litigation that bears directly upon the 
physical, financial, or management performance of a PHA;
    (3) Is operating under a court order;
    (4) Demonstrates substantial evidence of fraud or misconduct, 
including evidence that the PHA's certifications, submitted in 
accordance with this part, are not supported by the facts, as evidenced 
by such sources as a HUD review, routine reports, an Office of 
Inspector General investigation/audit, an independent auditor's audit, 
or an investigation by any appropriate legal authority; or
    (5) Demonstrates substantial noncompliance in one or more areas of 
a PHA's required compliance with applicable laws and regulations, 
including areas not assessed under PHAS. Areas of substantial 
noncompliance include, but are not limited to, noncompliance with civil 
rights, nondiscrimination and fair housing laws and regulations, or the 
ACC. Substantial noncompliance casts doubt on the capacity of a PHA to 
preserve and protect its public housing projects and operate them 
consistent with federal laws and regulations.
    (b) High performer and standard designations. If a high performer 
designation is denied or rescinded, the PHA shall be designated either 
a standard performer, substandard performer, or troubled performer, 
depending on the nature and seriousness of the matter or matters 
constituting the basis for HUD's action. If a standard performer 
designation is denied or rescinded, the PHA shall be designated as a 
substandard performer or troubled performer.
    (c) Effect on score. The denial or rescission of a designation of 
high performer or standard performer shall not affect the PHA's 
numerical PHAS score, except where the denial or rescission is under 
paragraph (a)(4) of this section.


Sec.  902.68  Technical review of results of PHAS physical condition 
indicator.

    (a) Request for technical reviews. This section describes the 
process for requesting and granting technical reviews of physical 
inspection results.
    (1) For these reviews, the burden of proof is on the PHA to show 
that an error occurred.
    (2) A request for technical review must be submitted in writing to 
the Real Estate Assessment Center, Attention: TAC--Technical Review, 
550 12th Street, SW., Suite 100, Washington, DC 20410 and must be 
received by HUD no later than 30 days following the issuance of the 
applicable results to the PHA.
    (b) Technical review of results of physical inspection results. (1) 
For each project inspected, the results of the physical inspection and 
a score for that project will be provided to the PHA. If the PHA 
believes that an objectively verifiable and material error(s) occurred 
in the inspection of an individual project, the PHA may request a 
technical review of the inspection results for that project. Material 
errors are the only grounds for technical review of physical inspection 
results.
    (2) A PHA's request for a technical review must be accompanied by 
the PHA's evidence that an objectively verifiable and material error(s) 
has occurred. The documentation submitted by the PHA may be 
photographic evidence; written material from an objective source, such 
as a local fire marshal or building code official or a licensed or 
registered architect or professional engineer with the authority to 
sign and seal or ``stamp'' documents, thus taking the legal 
responsibility for them, or other similar evidence that is specific to 
the inspectable area and item being challenged. The evidence must be 
more than a disagreement with the inspector's observations, or the 
inspector's finding regarding the severity of the deficiency.
    (3) A technical review of a project's physical inspection will not 
be conducted based on conditions that were corrected subsequent to the 
inspection, nor will a request for a technical review be considered if 
the request is based on a challenge to the inspector's findings as to 
the severity of the deficiency (i.e., minor, major, or severe).
    (4) Upon receipt of a PHA's request for technical review of a 
project's inspection results, the PHA's file will be reviewed, 
including any objectively verifiable evidence produced by the PHA. If 
HUD's review determines that an objectively verifiable and material 
error(s) has been documented, then one or a combination of the 
following actions may be taken by HUD:
    (i) Undertake a new inspection;
    (ii) Correct the physical inspection report;
    (iii) Issue a corrected physical condition score; and
    (iv) Issue a corrected PHAS score.
    (5) In determining whether a new inspection of the project is 
warranted and a new PHAS score must be issued, the PHA's file will be 
reviewed, including any evidence submitted, to determine whether the 
evidence supports that there may have been a material contractor error 
in the inspection that results in a significant change from the 
project's original physical condition score and the PHAS designation 
assigned to the PHA (i.e., high performer, standard performer, 
substandard performer, or troubled performer). If HUD determines that a 
new inspection is warranted, and the new inspection results in a 
significant change from the original physical condition score, and from 
the PHA's PHAS score and PHAS designation, the PHA shall be issued a 
new PHAS score.
    (6) Material errors are those that exhibit specific characteristics 
and meet specific thresholds. The three types of material errors are:
    (i) Building data error. A building data error occurs if the 
inspection includes the wrong building or a

[[Page 10159]]

building that was not owned by the PHA, including common or site areas 
that were not a part of the project. Incorrect building data that does 
not affect the score, such as the address, building name, year built, 
etc., would not be considered material, but will nonetheless be 
corrected upon notice to HUD.
    (ii) Unit count error. A unit count error occurs if the total 
number of public housing units considered in scoring is incorrect. 
Since scoring uses total public housing units, HUD will examine 
instances where the participant can provide evidence that the total 
units used is incorrect.
    (iii) Nonexistent deficiency error. A nonexistent deficiency error 
occurs if the inspection cites a deficiency that does not exist.
    (7) HUD's decision on a request for technical review is final and 
may not be further appealed under the administrative process in Sec.  
902.69.


Sec.  902.69  PHA right of petition and appeal.

    (a) Appeal of troubled performer designation and petition for 
removal of troubled performer designation. A PHA may take any of the 
following actions:
    (1) Appeal its troubled performer designation (including Capital 
Fund program troubled performer designation);
    (2) Appeal its final overall PHAS score;
    (3) Petition for removal of troubled performer designation;
    (4) Appeal any refusal of a petition to remove troubled performer 
designation; and
    (5) Appeal actions under Sec.  902.66.
    (b) Appeal of PHAS score. (1) If a PHA believes that an objectively 
verifiable and material error(s) exists in any of the scores for its 
PHAS indicators, which, if corrected, will result in a significant 
change in the PHA's PHAS score and its designation (i.e., as troubled 
performer, substandard performer, standard performer, or high 
performer), the PHA may appeal its PHAS score in accordance with the 
procedures of paragraphs (c), (d), and (e) of this section. A 
significant change in a PHAS score is a change that would cause the 
PHA's PHAS score to increase, resulting in a higher PHAS designation 
for the PHA (i.e., from troubled performer to substandard performer or 
standard performer, or from standard performer to high performer).
    (2) A PHA may not appeal its PHAS score, physical condition score, 
or both, based on the subsequent correction of deficiencies identified 
as a result of a project's physical inspection or the denial of a 
technical review request.
    (3) A PHA may not appeal its PHAS score, Capital Fund program 
score, or both, based on the fact that it did not submit its Capital 
Fund program information to eLOCCS by the submission due date.
    (c) Appeal and petition procedures. (1) To appeal a troubled 
performer designation or a final overall PHAS score, a PHA must submit 
a request in writing to the Deputy Assistant Secretary of the Real 
Estate Assessment Center, which must be received by HUD no later than 
30 days following the issuance of the overall PHAS score to the PHA. To 
petition the removal of a troubled performer designation, a PHA must 
submit its request in writing to the Deputy Assistant Secretary of the 
Real Estate Assessment Center.
    (2) To appeal the denial of a petition to remove a troubled 
performer designation, a PHA must submit a written request to the 
Deputy Assistant Secretary of the Real Estate Assessment Center, which 
must be received by HUD no later than 30 days after HUD's decision to 
refuse to remove the PHA's troubled performer designation.
    (3) To appeal the petition for the removal of a troubled performer 
designation, or appeal the denial of a petition to remove a troubled 
performer designation, a PHA shall submit its request in writing to the 
Deputy Assistant Secretary of the Real Estate Assessment Center.
    (4) An appeal of a troubled performer designation, the petition for 
removal of a troubled performer designation, or the appeal of a refusal 
of a petition to remove a troubled performer designation must include 
the PHA's supporting documentation and reasons for the appeal or 
petition. An appeal of a PHAS score must be accompanied by the PHA's 
evidence that a material error occurred. An appeal or petition 
submitted to HUD without supporting documentation will not be 
considered and will be returned to the PHA.
    (d) Denial, withholding, or rescission. A PHA that disagrees with 
the basis for denial, withholding, or rescission of its designation 
under Sec.  902.66 may make a written request for reinstatement within 
30 days of notification by HUD of the denial or rescission of the 
designation to the Assistant Secretary, and the request shall include 
reasons for the reinstatement.
    (e) Consideration of petitions and appeals. (1) Consideration of a 
petition or the appeal of a final overall PHAS score, of a troubled 
performer designation, or of a petition to remove troubled performer 
designation. Upon receipt of such an appeal or a petition from a PHA, 
HUD will evaluate the appeal and its merits for purposes of determining 
whether a reassessment of the PHA is warranted. HUD will review the 
PHA's file and the evidence submitted by the PHA to determine whether 
an error occurred.
    (2) Consideration of an appeal of refusal to remove a troubled 
performer designation. Upon receipt of an appeal of refusal to remove a 
troubled performer designation, HUD will evaluate the appeal and its 
merits for the purposes of determining whether a reassessment of the 
PHA is warranted. The HUD staff initially evaluating an appeal of 
refusal to remove a troubled performer designation will not be the same 
HUD staff who evaluated the PHA's petition to remove the troubled 
performer designation. The Assistant Secretary will render the final 
determination of such an appeal.
    (f) Notice and finality of decisions. (1) If HUD determines that 
one or more objectively verifiable and material error has occurred, HUD 
will undertake a new inspection of the project, arrange for audit 
services, adjust the PHA's score, or perform other reexamination of the 
financial, management, or Capital Fund program information, as 
appropriate in light of the nature of the error that occurred. A new 
score will be issued and an appropriate performance designation made by 
HUD. HUD's decision on appeal of a PHAS score, issuance of a troubled 
performer designation, or refusal to remove a troubled performer 
designation will be final agency action. No reconsideration will be 
given by HUD of such decisions.
    (2) HUD will issue a written decision on all appeals and petitions 
made under this section.

Subpart G--PHAS Incentives and Remedies


Sec.  902.71  Incentives for high performers.

    (a) Incentives for high performer PHAs. A PHA that is designated a 
high performer will be eligible for the following incentives, and such 
other incentives that HUD may determine appropriate and permissible 
under program statutes or regulations.
    (1) Relief from specific HUD requirements. A PHA that is designated 
a high performer will be relieved of specific HUD requirements (e.g., 
will receive fewer reviews and less monitoring), effective upon 
notification of a high performer designation.
    (2) Public recognition. High performer PHAs and RMCs that receive a 
score of at least 60 percent of the points available for the physical 
condition, financial condition, and management operations indicators, 
and at least 50

[[Page 10160]]

percent of the points available for the Capital Fund indicator, and 
achieve an overall PHAS score of 90 percent or greater of the total 
available points under PHAS shall be designated a high performer and 
will receive a Certificate of Commendation from HUD, as well as special 
public recognition, as provided by the field office.
    (3) Bonus points in funding competitions. A high performer PHA may 
be eligible for bonus points in HUD's funding competitions, where such 
bonus points are not restricted by statute or regulation governing the 
funding program and are provided in the relevant notice of funding 
availability.
    (b) Compliance with applicable federal laws and regulations. Relief 
from any standard procedural requirement that may be provided under 
this section does not mean that a PHA is relieved from compliance with 
the provisions of federal law and regulations or other handbook 
requirements. For example, although a high performer or standard 
performer may be relieved of requirements for prior HUD approval for 
certain types of contracts for services, the PHA must still comply with 
all other federal and state requirements that remain in effect, such as 
those for competitive bidding or competitive negotiation (see 24 CFR 
85.36).
    (c) Audits and reviews not relieved by designation. A PHA 
designated as a high performer or standard performer remains subject 
to:
    (1) Regular independent auditor audits;
    (2) Office of Inspector General audits or investigations as 
circumstances may warrant; and
    (3) Reviews identified by the regional or field office in its 
current Risk Assessment of PHAs and projects.


Sec.  902.73  PHAs with deficiencies.

    (a) Oversight and action. Standard and substandard performers will 
be referred to the field office for appropriate oversight and action.
    (1) A standard performer that receives a total score of at least 60 
percent shall be required to correct the deficiencies in performance 
within the time period for correction, as stated in Sec.  902.73(c). If 
the PHA fails to correct the deficiencies, HUD may either require the 
PHA to enter into a Corrective Action Plan, or HUD may take other 
action, as appropriate.
    (2) A substandard performer, i.e., a PHA that achieves a PHAS score 
of at least 60 percent and achieves a score of less than 60 percent of 
the total points available under one or more of the physical condition, 
management operations, or financial condition PHAS indicators, shall be 
required to correct the deficiencies in performance within the time 
period for correction. If the PHA fails to correct the deficiencies, 
HUD may require the PHA to enter into a Corrective Action Plan, or take 
other action, as appropriate.
    (3) A PHA with a project(s) that receives less than 60 percent of 
the points available for the physical condition, management operations, 
or financial condition PHAS indicators, or less than 50 percent of the 
points available for the capital fund indicator, shall be required to 
correct the deficiencies in performance within the time period for 
correction, as stated in Sec.  902.73(b). If the PHA fails to correct 
the deficiencies within the time period allowed, HUD may either require 
the PHA to enter into a Corrective Action Plan, or take other action, 
as appropriate.
    (b) Correction of deficiencies. (1) Time period for correction. 
After a PHA's (or DF-RMC's) receipt of its final overall PHAS score and 
designation as: A standard performer, within the range described in 
Sec.  902.73(a)(1); or substandard performer, within the range 
described in Sec.  902.73(a)(2), or, in the case of an RMC, after 
notification of its score from a PHA, a PHA or RMC shall correct any 
deficiency indicated in its assessment within 90 days, or within such 
period as provided in the HUD-executed Corrective Action Plan, if 
required.
    (2) Notification and report to regional or field office. A PHA 
shall notify the regional or field office of its action to correct a 
deficiency. A PHA shall also forward to the regional or field office an 
RMC's report of its action to correct a deficiency. A DF-RMC shall 
forward directly to the regional or field office its report of its 
action to correct a deficiency.
    (c) Failure to correct deficiencies. (1) If a PHA (or DF-RMC or 
RMC) fails to correct deficiencies within the time period noted in 
paragraph (b) of this section, or to correct deficiencies within the 
time specified in a Corrective Action Plan, or within such extensions 
as may be granted by HUD, the field office will notify the PHA of its 
noncompliance.
    (2) The PHA (or DF-RMC or RMC) will provide the field office with 
its reasons for lack of progress in negotiating, executing, or carrying 
out the Corrective Action Plan, within 30 days of the PHA's receipt of 
the noncompliance notification. HUD will advise the PHA as to the 
acceptability of its reasons for lack of progress.
    (3) If HUD finds the PHA's (or DF-RMC or RMC's) reasons for lack of 
progress unacceptable, HUD will notify the PHA (or DF-RMC or RMC) that 
it will take such actions as it may determine appropriate in accordance 
with the provisions of the 1937 Act and other statutes, the ACC, this 
part, and other HUD regulations, including, but not limited to, the 
remedies available for substantial default.


Sec.  902.75  Troubled performers.

    (a) General. Upon a PHA's designation as a troubled performer, in 
accordance with the requirements of section 6(j)(2)(B) of the Act (42 
U.S.C. 1437d(j)(2)(B)) and in accordance with this part, HUD must 
notify the PHA and shall refer each troubled performer PHA to the PHA's 
field office, or other designated office(s) at HUD, for remedial 
action, oversight, and monitoring. The actions to be taken by HUD and 
the PHA will include statutorily required actions, and such other 
actions as may be determined appropriate by HUD.
    (b) Memorandum of agreement (MOA). Within 30 days of notification 
of a PHA's designation as a troubled performer, HUD will initiate 
activities to negotiate and develop an MOA. An MOA is required for a 
troubled performer. The final MOA is a binding contractual agreement 
between HUD and a PHA. The scope of the MOA may vary depending upon the 
extent of the problems present in the PHA. It shall include, but not be 
limited to:
    (1) Baseline data, which should be data without adjustments or 
weighting but may be the PHA's score in each of the PHAS indicators or 
subindicators identified as a deficiency;
    (2) Performance targets for such periods specified by HUD (e.g., 
annual, semiannual, quarterly, monthly), which may be the attainment of 
a higher score within an indicator or subindicator that is a problem, 
or the description of a goal to be achieved;
    (3) Strategies to be used by the PHA in achieving the performance 
targets within the time period of the MOA, including the identification 
of the party responsible for the completion of each task and for 
reporting progress;
    (4) Technical assistance to the PHA provided or facilitated by HUD; 
for example, the training of PHA employees in specific management areas 
or assistance in the resolution of outstanding HUD monitoring findings;
    (5) The PHA's commitment to take all actions within its control to 
achieve the targets;
    (6) Incentives for meeting such targets, such as the removal of a 
troubled performer designation or troubled with respect to the program 
for

[[Page 10161]]

assistance from the Capital Fund program under section 9(d) of the Act 
(42 U.S.C. 1437g(d)) and HUD recognition for the most-improved PHAs;
    (7) The consequences of failing to meet the targets, which include, 
but are not limited to, the interventions stated in 24 CFR part 907 and 
in section 6(j)(3) of the Act (42 U.S.C. 1437d(j)(3)); and
    (8) A description of the involvement of local public and private 
entities, including PHA resident leaders, in carrying out the agreement 
and rectifying the PHA's problems. A PHA shall have primary 
responsibility for obtaining active local public and private entity 
participation, including the involvement of public housing resident 
leaders, in assisting PHA improvement efforts. Local public and private 
entity participation should be premised upon the participant's 
knowledge of the PHA, ability to contribute technical expertise with 
regard to the PHA's specific problem areas, and authority to make 
preliminary commitments of support, financial or otherwise.
    (c) PHA review of MOA. The PHA will have 10 days to review the MOA. 
During this 10-day period, the PHA shall resolve any claimed 
discrepancies in the MOA with HUD, and discuss any recommended changes 
and target dates for improvement to be incorporated in the final MOA. 
Unless the time period is extended by HUD, the MOA is to be executed 15 
days following issuance of the draft MOA.
    (d) Maximum recovery period. (1) Expiration of the first-year 
improvement period. Upon the expiration of the one-year period that 
started on the date on which the PHA receives initial notice of a 
troubled performer designation, the PHA shall, by the next PHAS 
assessment that is at least 12 months after the initial notice of the 
troubled performer designation, improve its performance by at least 50 
percent of the difference between the initial PHAS assessment score 
that led to the troubled performer status and the score necessary to 
remove the PHA's designation as a troubled performer.
    (2) Expiration of 2-year recovery period. Upon the expiration of 
the 2-year period that started on the date on which the PHA received 
the initial notice of a troubled performer designation, the PHA shall, 
by the next PHAS assessment that is at least 24 months after the 
initial notice of the troubled performer designation, improve its 
performance and achieve an overall PHAS score of at least 60 percent of 
the total points available.
    (e) Parties to the MOA. An MOA shall be executed by:
    (1) The PHA Board Chairperson (supported by a Board resolution), or 
a receiver (pursuant to a court-ordered receivership agreement, if 
applicable) or other AME acting in lieu of the PHA Board;
    (2) The PHA Executive Director, or a designated receiver (pursuant 
to a court-ordered receivership agreement, if applicable), or other 
AME-designated Chief Executive Officer; and
    (3) The field office
    (f) Involvement of resident leadership in the MOA. HUD encourages 
the inclusion of the resident leadership in the execution of the MOA.
    (g) Failure to execute MOA or make substantial improvement under 
MOA. (1) If a troubled performer PHA fails or refuses to execute an MOA 
within the period provided in paragraph (c) of this section, or a 
troubled performer PHA operating under an executed MOA does not show a 
substantial improvement, as provided in paragraph (d) of this section, 
toward a passing PHAS score following the issuance of the failing PHAS 
score by HUD, the field office shall refer the PHA to the Assistant 
Secretary to determine such remedial actions, consistent with the 
provisions of the ACC and other HUD regulations, including, but not 
limited to, remedies available for substantial default.
    (2) For purposes of paragraph (g) of this section, substantial 
improvement is defined as the improvement required by paragraph (d) of 
this section. The maximum period of time for remaining in troubled 
performer status before being referred to the Assistant Secretary is 2 
years after the initial notification of the troubled performer 
designation. Therefore, the PHA must make substantial improvement in 
each year of this 2-year period.
    (3) The following example illustrates the provisions of paragraph 
(g)(1) of this section:
    Example: A PHA receives a score of 50 points on the physical 
condition, management operations, or financial condition PHAS 
indicators; 60 points is a passing score. Upon the expiration of the 
one-year period that started on the date on which the PHA received the 
initial notification of the troubled performer designation, the PHA 
must achieve at least 55 points (50 percent of the 10 points necessary 
to achieve a passing score of 60 points) to continue recovery efforts. 
In the second year, the PHA must achieve a minimum score of 60 points 
(a passing score). If, in the first year that started on the date on 
which the PHA received the initial notification of the troubled 
designation, the PHA fails to achieve the 5-point increase, or if the 
PHA achieves the 5 point increase within the first year that started on 
the date on which the PHA received the initial notification of the 
troubled designation, but fails to achieve the minimum passing score of 
60 points after the second year after the initial notification, HUD 
will notify the PHA that it will take such actions as it may determine 
appropriate in accordance with the provisions of the ACC and other HUD 
regulations, including, but not limited to, the remedies available for 
substantial default.
    (h) Audit review. For a PHA designated as a troubled performer, HUD 
may perform an audit review and may, at its discretion, select the 
audit firm that will perform the audit of the PHA; and HUD may, at its 
discretion, serve as the audit committee for the audit in question.
    (i) Continuation of services to residents. To the extent feasible, 
while a PHA is in a troubled performer status, all services to 
residents will continue uninterrupted.


Sec.  902.79  Verification and records.

    All project and PHA certifications, year-end financial information, 
and supporting documentation are subject to HUD verification at any 
time, including review by an independent auditor. All PHAs must retain 
supporting documents for any certifications and for asset management 
reviews for at least 3 years. Failure to maintain and provide 
supporting documentation for a period of 3 years for any indicator(s), 
subindicator(s), or other methods used to assess performance shall 
result in a score of zero for the indicator(s) or subindicator(s), and 
a lower overall PHAS score for the applicable assessment period.


Sec.  902.81  Resident petitions for remedial action.

    Residents of a PHA designated as troubled pursuant to section 
6(j)(2)(A) of the Act (42 U.S.C. 1437d(j)(2)(A)) may petition HUD in 
writing to take one or more of the actions referred to in section 
6(j)(3)(A) of the Act (42 U.S.C. 1437d(j)(3)(A)). HUD will consider any 
petition from a group of residents totaling at least 20 percent of the 
PHA's residents, or from an organization or organizations of residents 
whose membership equals at least 20 percent of the PHA's residents. HUD 
shall respond to such petitions in a timely manner with a written 
description of the actions, if any, HUD plans to take and, where 
applicable, the reasons why such actions differ from the course 
proposed by the residents. Nothing in this section shall limit HUD's 
discretion to determine whether a substantial default

[[Page 10162]]

has occurred or to select the appropriate intervention upon such 
determination.


Sec.  902.83   Sanctions for troubled performer PHAs.

    (a) If a troubled performer PHA fails to make substantial 
improvement, as set forth in Sec.  902.75(d), HUD shall:
    (1) In the case of a troubled performer PHA with 1,250 or more 
units, declare substantial default in accordance with Sec.  907.3(b)(3) 
of this chapter and petition for the appointment of a receiver pursuant 
to section 6(j)(3)(A)(ii) of the Act (42 U.S.C. 1437d(j)(3)(A)(ii)); or
    (2) In the case of a troubled performer PHA with fewer than 1,250 
units, declare substantial default in accordance with Sec.  907.3(b)(3) 
of this chapter and either petition for the appointment of a receiver 
pursuant to section 6(j)(3)(A)(ii) of the Act (42 U.S.C. 
1437d(j)(3)(A)(ii)), or take possession of the PHA (including all or 
part of any project or program of the PHA) pursuant to section 
6(j)(3)(A)(iv) of the Act (42 U.S.C. 1437d(j)(3)(A)(iv)), and appoint, 
on a competitive or noncompetitive basis, an individual or entity as an 
administrative receiver to assume the responsibilities of HUD for the 
administration of all or part of the PHA (including all or part of any 
project or program of the PHA).
    (3) In the case of substantial default by a troubled performer PHA, 
nothing in this section shall be construed to limit the courses of 
action available to HUD under this part, 24 CFR part 907, or section 
6(j)(3)(A) of the Act (42 U.S.C. 1437d(j)(3)(A)) for any other 
substantial default by a PHA.
    (b) If a troubled performer PHA fails to execute or meet the 
requirements of an MOA in accordance with Sec.  902.75, other than as 
specified in paragraph (a) of this section, the PHA may be deemed to be 
in substantial default by HUD and any remedy available therefore may be 
invoked in the discretion of HUD.
    3. Add part 907 to read as follows:

PART 907--SUBSTANTIAL DEFAULT BY A PUBLIC HOUSING AGENCY

Sec.
907.1 Purpose and scope.
907.3 Bases for substantial default.
907.5 Procedures for declaring substantial default.
907.7 Remedies for substantial default.

    Authority:  42 U.S.C. 1437d(j), 42 U.S.C. 3535(d).


Sec.  907.1  Purpose and scope.

    This part provides the criteria and procedures for determining and 
declaring substantial default by a public housing agency (PHA) and the 
actions available to HUD to address and remedy substantial default by a 
PHA. Nothing in this part shall limit the discretion of HUD to take any 
action available under the provisions of section 6(j)(3)(A) of the 1937 
Act (42 U.S.C. 1437d(j)(3)(A)), any applicable annual contributions 
contract (ACC), or any other law or regulation that may authorize HUD 
to take actions against a PHA that is in substantial default.


Sec.  907.3  Bases for substantial default.

    (a) Violations of laws and agreements. A PHA may be declared in 
substantial default when the PHA:
    (1) Violates a federal statute;
    (2) Violates a federal regulation; or
    (3) Violates one or more terms of an ACC, or other covenants or 
conditions to which the PHA is subject.
    (b) Failure to act. In addition to the violations listed in 
paragraph (a) of this section, in the case where a PHA is designated as 
a troubled performer under PHAS, the PHA shall be in substantial 
default if the PHA:
    (1) Fails to execute an MOA;
    (2) Fails to comply with the terms of an MOA; or
    (3) Fails to show substantial improvement, as provided in Sec.  
902.75(d) of this chapter.


Sec.  907.5  Procedures for declaring substantial default.

    (a) Notification of finding of substantial default. If the PHA is 
found in substantial default, the PHA shall be notified of such 
determination in writing. Except in situations as described in 
paragraph (d) of this section, the PHA shall have an opportunity to 
respond to the written determination, and an opportunity to cure the 
default, if a cure of the default is determined appropriate by HUD. The 
determination of substantial default shall be transmitted to the 
Executive Director of the PHA, the Chairperson of the Board of the PHA, 
and the appointing authority(ies) of the PHA's Board of Commissioners, 
and shall:
    (1) Identify the specific statute, regulation, covenants, 
conditions, or agreements of which the PHA is determined to be in 
violation;
    (2) Identify the specific events, occurrences, or conditions that 
constitute the violation;
    (3) Specify the time period, which shall be a period of 10 but not 
more than 30 days, during which the PHA shall have an opportunity to 
demonstrate that the determination or finding is not substantively 
accurate, if required;
    (4) If determined by HUD to be appropriate, provide for an 
opportunity to cure and specify the time period for the cure; and
    (5) Notify the PHA that, absent a satisfactory response in 
accordance with paragraph (b) of this section, action shall be taken as 
determined by HUD to be appropriate.
    (b) Receipt of notification and response. Upon receipt of the 
notification described in paragraph (a) of this section, the PHA may 
submit a response, in writing and within the specified time period, 
demonstrating:
    (1) The description of events, occurrences, or conditions described 
in the written determination of substantial default is in error, or 
establish that the events, occurrences, or conditions described in the 
written determination of substantial default do not constitute 
noncompliance with the statute, regulation, covenants, conditions, or 
agreements that are cited in the notification under paragraph (a) of 
this section; or
    (2) If any opportunity to cure is provided, that the violations 
have been cured or will be cured in the time period specified by HUD.
    (c) Waiver of notification and the opportunity to respond. A PHA 
may waive, in writing, receipt of written notification from HUD of a 
finding of substantial default and the opportunity to respond to such 
finding. HUD may then immediately proceed with the remedies as provided 
in Sec.  907.7.
    (d) Emergency situations. A PHA shall not be afforded the 
opportunity to respond to a written determination or to cure a 
substantial default in any case where:
    (1) HUD determines that conditions exist that pose an imminent 
threat to the life, health, or safety of public housing residents or 
residents of the surrounding neighborhood; or
    (2) The events or conditions precipitating the default are 
determined to be the result of criminal or fraudulent activity.


Sec.  907.7  Remedies for substantial default.

    (a) Except as provided in Sec.  907.7(c), upon determining that 
events have occurred or conditions exist that constitute a substantial 
default, HUD may:
    (1) Take any action provided for in section 6(j)(3) of the Act (42 
U.S.C. 1437d(j)(3));
    (2) Provide technical assistance for existing PHA management staff; 
or
    (3) Provide assistance deemed necessary, in the discretion of HUD, 
to remedy emergency conditions.
    (b) HUD may take any of the actions described in paragraph (a) of 
this section sequentially or simultaneously in any combination.

[[Page 10163]]

    (c) In the case of a substantial default by a troubled PHA pursuant 
to Sec.  902.83(b):
    (1) For a PHA with 1,250 or more units, HUD shall petition for the 
appointment of a receiver pursuant to section 6(j)(3)(A)(ii) of the 
1937 Act (42 U.S.C. 1437d(j)(3)(A)(ii)); or
    (2) For a PHA with fewer than 1,250 units, HUD shall either 
petition for the appointment of a receiver pursuant to section 
6(j)(3)(A)(ii) of the Act (42 U.S.C. 1437d(j)(3)(A)(ii)), or take 
possession of the PHA (including all or part of any project or program 
of the PHA) pursuant to section 6(j)(3)(A)(iv) of the 1937 Act (42 
U.S.C. 1437d(j)(3)(A)(iv)), and appoint, on a competitive or 
noncompetitive basis, an individual or entity as an administrative 
receiver to assume the responsibilities of HUD for the administration 
of all or part of the PHA (including all or part of any project or 
program of the PHA).
    (d) To the extent feasible, while a PHA is operating under any of 
the actions that may have been taken by HUD, all services to residents 
will continue uninterrupted.
    (e) HUD may limit remedies under this part to one or more of a 
PHA's specific operational areas (e.g., maintenance, capital 
improvement, occupancy, or financial management), to a single program 
or group of programs, or to a single project or a group of projects. 
For example, HUD may select, or participate in the selection of, an AME 
to assume management responsibility for a specific project, a group of 
projects in a geographical area, or a specific operational area, while 
permitting the PHA to retain responsibility for all programs, 
operational areas, and projects not so designated.

    Dated: February 1, 2011.
Sandra B. Henriquez,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 2011-2659 Filed 2-18-11; 8:45 am]
BILLING CODE 4210-67-P