[Federal Register Volume 78, Number 132 (Wednesday, July 10, 2013)]
[Proposed Rules]
[Pages 41339-41342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-16456]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 207

[Docket No. FR-5583-P-01]
RIN 2502-AJ16


Federal Housing Administration (FHA) Multifamily Mortgage 
Insurance; Capturing Excess Claim Proceeds

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule would amend HUD's regulations covering the 
contract rights and obligations of mortgagees participating in FHA 
multifamily mortgage insurance programs, to address reimbursement to 
FHA of excess claim proceeds. When a mortgagee finances mortgages 
through the issuance and sale of bonds or through bond anticipation 
notes, the mortgagee uses the FHA insurance claim funds to pay off the 
remaining bond debts. At times, the amount paid by the FHA insurance 
claim is greater than the remaining bond debts. This proposed rule 
would require mortgagees to return to FHA the excess bond funds that 
remain after FHA's payment is used to satisfy the bonds. HUD requires 
similar payments of excess bond funds on obligations of public housing 
agencies and, thus, the proposed rule would provide consistency in the 
administration of HUD's bond financing programs.

DATES: Comment Due Date: September 9, 2013.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed 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. There are two methods for 
submitting public comments. All submissions must refer to the above 
docket number and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
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 
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 appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Relay Service, at toll free,

[[Page 41340]]

800-877-8339. Copies of all comments submitted are available for 
inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: James Mitchell, Project Officer, 
Office of Multifamily Housing Programs, Office of Asset Management, 
Office of Housing, Department of Housing and Urban Development, 451 7th 
Street SW., Room 7164, Washington, DC 20410; telephone number 202-708-
2612 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the Federal 
Relay Service, toll free, at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    FHA provides mortgage insurance on loans made by FHA-approved 
lenders for single-family and multifamily homes. FHA mortgage insurance 
provides lenders with protection against losses as the result of 
single-family and multifamily project owners defaulting on their 
mortgage loans. By insuring loans made to FHA-approved lenders, FHA 
facilitates the availability of mortgage financing and helps to expand 
affordable housing. The FHA multifamily insurance program is authorized 
by section 207 of the National Housing Act (12 U.S.C. 1713). HUD's 
regulations implementing multifamily mortgage insurance eligibility 
requirements and contract rights and obligations can be found at 24 CFR 
part 207 (entitled ``Multifamily Housing Mortgage Insurance'').
    Under part 207, upon an assignment of the mortgage or a conveyance 
of the property to FHA, FHA will pay insurance benefits to the 
mortgagee. When the loan is bond financed \1\, the lender remits the 
payment to the bond trustee who pays off the bond debts, debt services 
on the bond, and fees and expenses owed to parties (such as the trustee 
or the bond issuer). The amount of the claim is determined in 
compliance with a regulatory formula \2\ and is meant to provide only 
the funds needed to settle the claim. Most of the factors in 
determining the proper claim amount are known. However, the bond trust 
indenture (contract) requires that certain reserves be held, including 
a debt service reserve, to maintain payments to bond holders prior to a 
default in the case where the mortgagor does not make proper payment. 
Funds in the reserve accounts earn interest and, given the passage of 
time and uncertainty of short-term interest rates, it is difficult to 
know how much more money will be in the reserves at the time the claim 
is settled and all the obligations are finally paid. As a result, the 
trustee is sometimes left with additional funds, also known as ``excess 
bond funds.''
---------------------------------------------------------------------------

    \1\ HUD's regulation at 24 CFR 207.258 provides that mortgages 
may be funded with the proceeds of state or local bonds, Government 
National Mortgage Association (GNMA or Ginnie Mae) mortgage-backed 
securities, participation certificates, or other bond obligations, 
as may be specified by the FHA Commissioner.
    \2\ See 24 CFR 207.259.
---------------------------------------------------------------------------

    Excess bond funds are then distributed by the bond trustee, 
according to the trust indenture agreement, to the mortgagor, the 
mortgagee, FHA, or other third parties. As a result, the mortgagor or 
the mortgagee may receive excess bond funds stemming from FHA's payment 
on the insurance claim. FHA's insurance payment is designed to make the 
mortgagee whole when the mortgagor defaults on the mortgage loan. Under 
the current distribution, a multifamily project owner and lender may 
benefit from the mortgage default, which is contrary to the intended 
results of FHA mortgage insurance to increase the availability of 
affordable housing.

II. This Proposed Rule

    Through this proposed rule, HUD seeks to address this concern by 
requiring mortgagees to reimburse FHA for the excess bond funds that 
remain after the insurance claim payment is used to satisfy the bonds. 
HUD requires similar payments of excess bond funds on obligations of 
public housing agencies, under 24 CFR part 811, entitled ``Tax 
Exemption of Obligations of Public Housing Agencies and Related 
Amendments'' (see especially 24 CFR 811.108, which addresses debt 
service reserve). Accordingly, the proposed rule would not only rectify 
the possibility that a mortgagor or mortgagee benefits from the 
mortgage default, but would also provide consistency in the 
administration of HUD's bond financing programs. The specific 
regulatory amendments that would be made by this proposed rule are as 
follows:
    This proposed rule would add a new Sec.  207.261 that requires 
mortgagees that use the issuance and sale of bonds or bond anticipation 
notes to finance FHA-insured mortgages on multifamily housing to return 
excess bond funds to FHA.
    New Sec.  207.261 would require the mortgagee to do three things. 
First, the mortgagee must include in the bond trust indenture language 
that, upon a conveyance or assignment of the mortgage, the bond trustee 
must remit to the mortgagee all remaining excess bond funds after the 
issuance of the refunding bond and other required payments. For 
purposes of Sec.  207.261, ``excess bond funds'' would mean (1) money 
remaining in all funds and accounts other than a rebate fund,\3\ and 
(2) any other funds remaining under the indenture after payment, or 
provision for payment, of debt service on the bonds and the fees and 
expenses of the credit enhancer, issuer, trustee, and other such 
parties unrelated to the mortgagor (other than funds originally 
deposited by the mortgagor or related parties on or before the date of 
issuance of the refunding bonds). Second, the mortgagee, upon FHA's 
payment of an insurance claim, must legally enforce the trust indenture 
to collect all of the remaining excess bond funds. Finally, the 
mortgagee must remit to FHA all excess bond funds that result from 
FHA's payment of an insurance claim after a conveyance or assignment of 
the mortgage to FHA, no later than 6 months following the date that FHA 
pays the mortgage insurance claim.
---------------------------------------------------------------------------

    \3\ A rebate fund, also referred to as an arbitrage rebate fund 
is a fund typically established under the bond contract for tax-
exempt bonds in which arbitrage earnings from investments in various 
funds and accounts holding bond proceeds are accumulated in order to 
make arbitrage rebate payments to the Federal Government. See http://www.msrb.org/msrb1/glossary/view_def.asp?param=ARBITRAGEREBATEFUND. See also http://www.irs.gov/pub/irs-tege/part2e02.pdf.
---------------------------------------------------------------------------

    The proposed rule would also amend Sec.  207.251, which is the 
definition section for the part 207, subpart B, regulations, to include 
a definition of ``rebate fund'' which is based on the definitions 
provided in footnote 3 of this preamble.

III. Cost and Benefits of the Proposed Rule

    The proposed rule would amend HUD's regulations covering the 
contract rights and obligations of mortgagees participating in FHA 
multifamily insurance programs and using tax-exempt bonds under section 
103 of the Internal Revenue Code (IRC),\4\ to make explicit that 
proceeds remaining after bond debts have been paid off as the result of 
a claim must be returned to FHA. The existence and possible value of 
any excess bond funds to individual private entities cannot be 
precisely stated, as such measures are dependent on the following: the 
occurrence and timing of a default (which is by definition an 
unforeseen result of any nonfraudulent lending in the program); the 
current interest rate environment; \5\

[[Page 41341]]

the bond indenture; and, then, on the independent actions that HUD and 
the trustee take. As a result, the value of any windfall is likely to 
be limited. Approximately 3 percent of total claims are financed by 
issuing section 103 tax-exempt bonds. In 2012, there were $189 million 
in claims and 3 percent of this number, $5.67 million, provides an 
estimate of the total claims for tax-exempt bond financed projects. HUD 
estimates that about 1.16 percent of outstanding balances are subject 
to recapture; therefore, in 2012 there was an estimated $66,000 in 
excess claims that would be recaptured by this rule.
---------------------------------------------------------------------------

    \4\ Under section 103, payments of interest on State or local 
bonds are excludable from gross income. (See 26 U.S.C. 103.)
    \5\ Reserve funds may grow more slowly due to low interest rates 
and the low rates on taxable financing have made tax-exempt 
financing less advantageous to developers.
---------------------------------------------------------------------------

    The transfer of excess claim funds to FHA as proposed by this rule 
makes explicit that FHA's payment of a claim for bond debts is not to 
result in either a windfall for the mortgagee, the mortgagor, or any 
third party. Given the inherently unexpected nature and uncertain value 
of any excess claims, the proposed rule, if enacted, is not expected to 
have a significant impact on future mortgagees or their interest or 
behavior in the program. If mortgagee participation in the program is 
unlikely to be affected, the proposed rule is also unlikely to affect 
how future mortgagors or others experience the program. It should be 
noted that, while the impact of the proposed rule on any individual 
entity is likely to be inconsequential, there is value to FHA from the 
proposed change. Across all of its borrowers, the occurrence of 
defaults and the payment of excess claims are statistically likely 
events, and the aggregate amount of program funds currently expended on 
such windfall payouts across all claims over time is sufficient to 
motivate the proposed rule. However, based on the 2012 data pertaining 
to claims for tax-exempt bond financed projects, as discussed in the 
preceding paragraph, the aggregate amount of funds is well below the 
amount that would make this rule economically significant.

IV. Findings and Certifications

Paperwork Reduction Act

    The information collection requirements contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). In 
accordance with the Paperwork Reduction Act, an agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless the collection displays a currently valid OMB 
control number.
    The burden of the information collections in this proposed rule is 
estimated as follows:

                                       Reporting and Recordkeeping Burden
                                [Office of Housing to provide matrix information]
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
                                                                     Number of     average time      Estimated
                Section reference                    Number of     responses per        for        annual burden
                                                    respondents     respondent      requirement     (in hours)
                                                                                    (in hours)
----------------------------------------------------------------------------------------------------------------
Sec.   207.261(a)...............................              15               1              .5             7.5
                                                 ---------------------------------------------------------------
    Totals......................................  ..............  ..............  ..............             7.5
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning this 
collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology; e.g., 
through permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this rule. Comments must refer 
to the proposal by name and docket number and must be sent to:

HUD Desk Officer, Office of Management and Budget, New Executive Office 
Building, Washington, DC 20503, Fax number: 202-395-6947

and

Reports Liaison Officer, Office of Housing, Department of Housing and 
Urban Development, Room 9128, 451 7th Street SW., Washington, DC 20410.

    Interested persons may submit comments regarding the information 
collection requirements 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.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 605(b)) generally requires 
an agency to conduct 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. The proposed rule 
would not impose any economic burdens on FHA-approved mortgagees. The 
proposed regulatory amendments would not modify the terms of FHA 
mortgage insurance through which mortgagees are made financially whole 
in the case of a mortgage default and filing of a mortgage insurance 
claim. Rather, the proposed rule seeks to rectify the possibility that 
a mortgagor and mortgagee may profit from a mortgage

[[Page 41342]]

default, which is inconsistent with HUD's public housing bond financing 
regulations, the purpose of the FHA programs, and the proper 
administration of the FHA mortgage insurance funds. Accordingly, the 
undersigned certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant economic impact on a substantial number of small entities, 
HUD specifically invites comments regarding less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule will not have federalism 
implications and would not impose substantial direct compliance costs 
on state and local governments or preempt state law within the meaning 
of the Executive Order.

Environmental Review

    This final rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern, or regulate, real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this 
final rule is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Unfunded Mandates Reform Act

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

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for FHA mortgage 
insurance for the purchase or refinancing of existing multifamily 
housing projects is 14.155.

List of Subjects in 24 CFR Part 207

    Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements, Solar energy.

    Accordingly, for the reasons stated in the preamble, HUD proposes 
to revise 24 CFR part 207 as follows:

PART 207--MULTIFAMILY HOUSING MORTGAGE INSURANCE

0
1. The authority citation for part 207 continues to read as follows:

    Authority: 12 U.S.C. 1701z-11(e), 1709(c)(1), 1713, and 1715b; 
42 U.S.C. 3535(d)

0
2. Revise Sec.  207.251 to read as follows:


Sec.  207.251  Definitions.

    As used in this subpart:
    Act means the National Housing Act, as amended.
    Commissioner means the Federal Housing Commissioner.
    Contract of insurance means the agreement evidenced by such 
endorsement and includes the terms, conditions and provisions of this 
part and of the National Housing Act.
    Insured mortgage means a mortgage which has been insured by the 
endorsement of the credit instrument by the Commissioner, or his duly 
authorized representative.
    Mortgage means such a first lien upon real estate and other 
property as is commonly given to secure advances on, or the unpaid 
purchase price of, real estate under the laws of the State, district or 
territory in which the real estate is located, together with the credit 
instrument or instruments, if any, secured thereby. In any instance 
where an operating loss loan is involved, the term shall include both 
the original mortgage and the instrument securing the operating loss 
loan.
    Mortgagee means the original lender under a mortgage its successors 
and such of its assigns as are approved by the Commissioner, and 
includes the holders of the credit instruments issued under a trust 
indenture, mortgage or deed of trust pursuant to which such holders act 
by and through a trustee therein named.
    Mortgagor means the original borrower under a mortgage and its 
successors and such of its assigns as are approved by the Commissioner.
    Rebate fund means a separate fund established under a contract or 
agreement for tax-exempt bonds in which amounts (excess interest 
earnings from the tax-exempt bonds) must be deposited to make rebate 
payments to the federal government under the Internal Revenue Code.
0
3. Add Sec.  207.261 to read as follows:


Sec.  207.261  Rebate of excess claim proceeds.

    A mortgagee that finances housing insured under this part through 
the issuance and sale of bonds or bond anticipation notes shall:
    (a) Include language in the trust indenture that states that in the 
event of an assignment or conveyance of the mortgage, subsequent to the 
issuance of the bonds, all money remaining in all funds and accounts 
other than the rebate fund, and any other funds remaining under the 
indenture after payment or provision for payment of debt service on the 
bonds and the fees and expenses of the credit enhancer, issuer, 
trustee, and other such parties unrelated to the mortgagor (other than 
funds originally deposited by the mortgagor or related parties on or 
before the date of issuance of the refunding bonds) shall be returned 
to the mortgagee; and
    (b) Upon the Commissioner's payment of a mortgage insurance claim 
under Sec.  207.258, the mortgagee shall take all legally entitled 
actions to enforce the clause required by paragraph (a) of this section 
and pay the Commissioner any remaining bond funds returned to the 
mortgagee by the bond trustee, no later than 6 months after the date of 
the Commissioner's payment of the mortgage insurance claim.

    Dated: June 12, 2013.
Carol J. Galante,
 Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2013-16456 Filed 7-9-13; 8:45 am]
BILLING CODE 4210-67-P