[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44628-44683]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17348]



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Vol. 78

Wednesday,

No. 142

July 24, 2013

Part II





Department of Housing and Urban Development





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24 CFR Parts 91 and 92





HOME Investment Partnerships Program: Improving Performance and 
Accountability; Updating Property Standards

  Federal Register / Vol. 78 , No. 142 / Wednesday, July 24, 2013 / 
Rules and Regulations  

[[Page 44628]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 91 and 92

[Docket No. FR-5563-F-02]
RIN 2501-AC94


HOME Investment Partnerships Program: Improving Performance and 
Accountability; Updating Property Standards

AGENCY: Office of the Assistant Secretary for Community Planning and 
Development, HUD.

ACTION: Final rule.

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SUMMARY: HUD's HOME Investment Partnerships Program (HOME program or 
HOME) provides formula grants to states and units of local government 
to fund a wide range of activities directed to producing or maintaining 
affordable housing, including homebuyer and homeowner housing and 
rental housing. This final rule amends the HOME regulations to address 
many of the operational challenges facing participating jurisdictions, 
particularly challenges related to recent housing market conditions and 
the alignment of federal housing programs. The final rule also 
clarifies certain existing regulatory requirements and establishes new 
requirements designed to enhance accountability by States and units of 
local government in the use of HOME funds, strengthen performance 
standards and require more timely housing production. The final rule 
also updates property standards applicable to housing assisted by HOME 
funds.

DATES: Effective Date: August 23, 2013.

FOR FURTHER INFORMATION CONTACT: Virginia Sardone, Deputy Director, 
Office of Affordable Housing Programs, Office of Community Planning and 
Development, Department of Housing and Urban Development, 451 7th 
Street SW., Room 7164, Washington, DC 20410; telephone number 202-708-
2684 (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 Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

    Purpose of the Regulatory Action. The HOME program was authorized 
in 1990, and is the largest federal block grant to State and local 
governments designed exclusively to produce affordable housing for low-
income households. The program provides formula grants for four primary 
purposes: production of new single or multifamily housing units, 
rehabilitation of single or multifamily housing, direct homeownership 
assistance, or time-limited tenant-based rental assistance (for up to 
two years with possibility of renewal). All HOME funds must be used to 
benefit families and individuals who qualify as low-income at or below 
80 percent of area median income. The HOME program provides state and 
local governments with the discretion to determine the type of housing 
product in which they will invest, the location of these investments, 
and the segment of their population that will be housed through these 
investments.
    Although the HOME program is the largest federal block grant 
program for affordable housing, the HOME program regulations have not 
been updated in 16 years. Since the promulgation of the final rule in 
1996, many HOME participating jurisdictions have adopted more complex 
program designs. They have encountered new challenges in administering 
their programs and in managing their growing portfolios of older HOME 
projects. These challenges include reduced availability of State or 
local funding sources, limited private lending, changes in housing 
property standards and energy codes, and reductions in State and local 
government workforces throughout the Nation. These challenges have been 
magnified by current housing and credit market conditions.
    Over the years, HUD has invested significant time and resources in 
helping participating jurisdictions meet these challenges, as well as 
assisting them to correct financial and physical problems that threaten 
the viability of some HOME-assisted rental projects in their 
portfolios. HUD has determined that the most effective way to assist 
participating jurisdictions is to update the HOME program regulations 
to both provide participating jurisdictions with additional tools and 
flexibility to effectively address troubled projects, as well as 
increase accountability on the part of participating jurisdictions and 
oversight by HUD.
    Summary of Major Provisions in the Final Rule. Through this final 
rule, which follows a proposed rule and takes into consideration the 
comments received on the proposed rule, HUD is establishing regulatory 
changes to address the operational challenges facing participating 
jurisdictions, improve understanding of HOME program requirements, 
update property standards to which housing funded by HOME funds must 
adhere, and strengthen participating jurisdictions' accountability for 
both compliance with program requirements and performance. 
Specifically, the final rule updates definitions and adds new 
terminology relevant to the housing market and real estate market, 
modifies the eligibility requirements of community housing development 
organizations that seek to participate in the HOME program to help 
ensure that they have the capacity to undertake their responsibilities 
under the HOME Program; establishes deadlines for project completion in 
an effort to ensure that housing units needed by low-income households 
are constructed and made available timely, strengthens conflict of 
interest provisions, and clarifies language in several existing HOME 
regulatory provisions to remove any possible ambiguity as to what is 
expected of participating jurisdictions, community housing development 
organizations and other entities that participate in the HOME program.
    HUD is also taking the opportunity afforded by this final rule to 
make several technical, non-substantive changes. Specifically, HUD is 
revising several incorrect or outdated citations in Sec.  92.353(c)(1) 
and (2) related to displacement, relocation and acquisition. The 
existing reference to 24 CFR 5.613 is replaced with 24 CFR 5.628. HUD 
is also updating the provisions of Sec.  92.257 (Faith-Based 
Activities) to reflect the amendments made by Executive Order 13559 
(Fundamental Principles and Policymaking Criteria for Partnerships with 
Faith-Based and Other Neighborhood Organizations) issued by President 
Obama on November 17, 2010, and published in the Federal Register on 
November 22, 2010 (75 FR 71319) to Executive Order 13279 (Equal 
Protection of the Laws for Faith-Based and Community Organizations) 
issued by President Bush on December 12, 2002, and published in the 
Federal Register on December 16, 2002 (67 FR 77141).
    Costs and Benefits. The regulatory changes being established by 
this rule that are designed to improve program performance and 
oversight are expected to lead to a more efficient allocation of 
resources within the program and the provision of more affordable 
housing. As discussed in more detail in the accompanying regulatory 
impact analysis for this rule, some elements of the rule have the 
potential to impose compliance costs on participants. However, these 
costs will either be absorbed by the HOME program or can be avoided 
through more efficient behavior on the part of participating 
jurisdictions and developers. For the most part, the changes in the 
rule do not establish new requirements; rather, they

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clarify or modify existing requirements, so they do not add costs to 
the participating jurisdictions or developers. Although the rule is 
expected to create some efficiencies within the HOME program, the rule 
is not expected to have a measurable impact beyond the grant program.

II. Background--The HOME Program

    The HOME program was authorized by Title II of the Cranston-
Gonzalez National Affordable Housing Act (42 U.S.C. 12721 et seq.), 
known as NAHA, and has been in operation for 20 years. The HOME program 
provides grants to States and local jurisdictions (collectively, 
participating jurisdictions), which are used, often in partnership with 
local nonprofit groups, to fund a wide range of activities that 
construct, acquire, and/or rehabilitate affordable housing for rent or 
homeownership, or to provide direct rental assistance to low-income 
people. HOME program funds are awarded annually as formula grants to 
participating jurisdictions. HUD establishes a HOME Investment Trust 
Fund for each participating jurisdiction, providing a line of credit 
that the jurisdiction may draw upon as needed. The participating 
jurisdictions are allowed to use their HOME funds as grants, direct 
loans, loan guarantees, or other forms of credit enhancement, or as 
rental assistance or security deposits.
    The HOME program is the largest federal block grant to States and 
local governments that is designed exclusively to create affordable 
housing for low-income households. Each year, the program allocates 
approximately $1.0 to $1.5 billion among the States and hundreds of 
localities nationwide. The program was designed to reinforce several 
important values and principles of community development. First, the 
HOME program's flexibility is intended to empower people and 
communities to design and implement strategies tailored to their own 
needs and priorities. Second, the HOME program's emphasis on 
consolidated planning is intended to expand and strengthen partnerships 
among all levels of government and the private sector in the 
development of affordable housing. Third, the HOME program's technical 
assistance activities and set-aside for qualified community-based 
nonprofit housing groups is intended to help build the capacity of 
these partners. Fourth, the HOME program's requirement that 
participating jurisdictions match 25 cents of every dollar in program 
funds is intended to help mobilize community resources in support of 
affordable housing.
    The regulations for the HOME program are codified in 24 CFR part 92 
and were last substantively revised by the final rule issued on 
September 16, 1996 (61 FR 48750). In the 16 years since the 
promulgation of the 1996 final rule, many HOME participating 
jurisdictions have adopted more complex program designs. They have 
encountered new challenges in administering their programs and in 
managing their growing portfolios of older HOME projects. These 
challenges include reduced availability of States or local funding 
sources, reduced private lending, changes in housing property standards 
and energy codes, and reductions in State and local government 
workforces throughout the Nation. These challenges have been magnified 
by current housing and credit market conditions.
    Since the establishment of the HOME program, HUD has monitored 
participating jurisdictions' use of HOME funds and measured 
participating jurisdictions' performance. Through monitoring and 
audits, including those by HUD's Office of Inspector General (OIG), HUD 
has identified and corrected compliance problems and used this 
information to strengthen and clarify regulatory provisions to help 
avoid noncompliance and maximize effectiveness.
    HUD has invested significant time and resources in helping 
participating jurisdictions correct financial and physical problems 
that threaten the viability of some HOME-assisted rental projects in 
their portfolios. HUD has determined that participating jurisdictions 
need additional tools and flexibility to effectively address troubled 
projects. Over the last several years, HUD has developed numerous 
publicly available reports that measure the performance and 
effectiveness of each participating jurisdiction.\1\ HUD's review of 
these reports has identified performance and reporting problems among 
participating jurisdictions that cannot be addressed effectively under 
the current regulations.
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    \1\ See http://www.hud.gov/offices/cpd/affordablehousing/reports/.
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    Accordingly, through this rule, HUD makes regulatory changes to 
address many of the operational challenges facing participating 
jurisdictions, improve understanding of HOME program requirements, 
update property standards to which housing funded by HOME funds must 
adhere, and strengthen participating jurisdictions' accountability for 
both compliance with program requirements and performance.

III. Overview of Key Changes Made to HOME Program Regulations at Final 
Rule Stage

    The final rule largely adopts the provisions in the proposed rule, 
but HUD did make certain changes to the proposed regulatory provisions 
in response to public comments and further consideration of issues. 
Additionally, HUD further clarified language in various regulatory 
provisions for which commenters continued to indicate misunderstanding 
about the intent or meaning of the provision. Key changes made at the 
final rule stage include the following:
     Amending the definition of ``commitment'' to reinforce 
that participating jurisdictions must not commit HOME funds to a 
project in the Integrated Disbursement and Information System (IDIS) or 
in a written agreement until all necessary financing has been secured, 
a budget and production schedule established, and underwriting and 
subsidy layering completed; and clarifying, within that definition, the 
meaning of commit to a specific local project;
     Adding missing regulatory text to the definition of 
community housing development organization, language discussed in the 
preamble to the proposed rule, but which was inadvertently omitted in 
the regulatory text;
     Adopting language that permits a private nonprofit 
organization to qualify as a community housing development organization 
if the organization is a wholly-owned entity that is regarded as an 
entity separate from its owner for tax purposes, the owner has a tax 
exemption ruling from the Internal Revenue under section 501(c)(3) or 
(4) of the Internal Revenue Code of 1986 and the organization meets the 
definition of ``community housing development organization.''
     Removing the prohibition imposed on community housing 
development organizations from occupying the office spaced owned by a 
government entity or a for-profit parent organization.
     Permitting community housing development organizations to 
use consultants to demonstrate their capacity, but only during the 
first year of the organization's participation as a community housing 
development organization;
     Allowing community housing development organizations to 
become owners of rental housing that they do not develop;
     Revising the definition of ``homeownership'' to include 
manufactured housing which is on land

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owned by a not-for-profit cooperative if the homeowner is a member of 
the cooperative, by a not-for-profit resident corporation, or by a 
similar type not-for-profit resident control organization;
     Revising the definition of ``homeownership'' to explicitly 
permit ground leases of 50 years or more for community land trusts;
     Adopting a 12-month timeframe for committing HOME funds 
for reconstruction of a unit that was destroyed;
     Providing that designation of a HOME project as a single 
room occupancy unit must be consistent with local zoning and building 
code classifications;
     Establishing the timeframe for income source documentation 
as 2 months;
     Making the cost of conducting unit inspections and 
determining the income of tenant-based rental assistance applicants or 
recipients an eligible project-related soft cost;
     Permitting participating jurisdictions to count as match 
the value of the contribution, if the contribution provides a direct 
financial benefit to the homebuyer, or the contribution, if the 
contribution to the development of the homebuyer unit reduces the sales 
price of the unit or enables the unit to be sold for less than the cost 
of development;
     Eliminating the requirement for separate written standards 
for methods and materials for new construction projects;
     Eliminating the requirement for a minimum 15-year useful 
life of major systems, and providing, in lieu of such requirement, that 
the participating jurisdiction must estimate the remaining useful life 
of major systems based on age and current condition of the systems and 
determine the necessary annual replacement reserve contributions to 
facilitate system replacement at the appropriate time;
     Providing that the requirement for a current inspection of 
a unit is no earlier than 90 days before the commitment of HOME 
assistance;
     Extending the timeframe for selling homebuyer units to 9 
months from the completion of construction; and
     Revising the description of the cumulative methodology 
that HUD uses to determine compliance with the commitment, CHDO 
reservation, and expenditure deadlines to better present the method of 
calculation in use.

IV. December 2011 Proposed Rule

    On December 16, 2011 (76 FR 78344), HUD published a proposed rule 
that would amend the HOME Investment Partnerships Program (HOME) 
program regulations to address many of the operational challenges 
confronting participating jurisdictions in relation to recent housing 
market conditions and the alignment of federal housing programs. The 
proposed rule also sought to clarify certain existing regulatory 
requirements, establish new requirements to enhance accountability, and 
update property standards. In addition to proposed changes to the HOME 
program regulations, the December 16, 2011, rule also proposed changes 
to HUD's Consolidated Plan regulations that pertained to the HOME 
program.
    In the proposed rule, HUD also sought public comment on the 
following issues or provisions proposed in the rule: (1) Timeframes 
that would help ensure that initial occupancy of a HOME-assisted rental 
unit occurs timely following project completion and that HOME funds 
invested in rental units that have not been initially occupied within 
18 months are repaid; and (2) use of the Bureau of the Census' median 
sales price for single family houses sold outside of Metropolitan 
Statistical Areas (MSAs) as the sale price limitation for newly 
constructed HOME units; (3) criteria used in and characteristics of an 
effective risk-based system for on-site monitoring by States; and (4) 
participating jurisdictions performing regular financial reviews, 
specifically, regarding the unit-threshold for trigging annual 
financial reviews and whether it would be appropriate to establish a 
regulatory requirement for less frequent financial reviews of smaller 
projects.
    The public comment period on the proposed rule closed on February 
14, 2012. HUD received 322 public comments in response to the December 
16, 2011, proposed rule. Comments were submitted by various State and 
local participating jurisdictions, public housing authorities, 
individuals, trade associations, community housing development 
organizations (CHDOs), housing finance agencies, county governments, 
community land trust organizations, council of governments, housing and 
community development organizations, and other stakeholders.
    The following section sets out the key issues raised by the public 
commenters on the December 16, 2011, HOME Program proposed rule, and 
HUD's responses to these issues.

V. Discussion of Public Comments and HUD Responses

A. General Comments on the Proposed Rule

Increased Administrative Burden, Costs, and Reduced Flexibility
    HUD received many comments on the general direction of the proposed 
rule. Overall, commenters acknowledged that the HOME regulations needed 
updating to reflect current market conditions and challenges in 
affordable housing production. However, several commenters stated that, 
taken as a whole, HUD's proposed changes were an overreaction to 
largely unfounded criticisms. These commenters stated that the proposed 
rule ran counter to the flexibility that has long been a hallmark of 
the HOME program as the nation's largest affordable housing block grant 
program. This flexibility, they submit, has led to States and local 
governments producing more than one million affordable housing units 
that meet their locally-determined needs and priorities over the 
program's 20-year history. The commenters stated that the proposed rule 
would add a very significant administrative burden and additional costs 
on States and local governments at a time when governments are facing 
layoffs, furloughs, and a significant diminution of other available 
affordable housing and administrative resources, as well as very 
significant cuts to their annual HOME allocations. In addition, some 
participating jurisdictions commented that adoption of the proposed 
rule provisions would raise both development costs and administrative 
costs, in addition to increasing the administrative burden associated 
with developing and managing each HOME-assisted project, with the 
result being a reduction in the number of affordable housing units that 
participating jurisdictions could produce. Commenters from rural areas 
stated that they were particularly concerned with the feasibility of 
complying with the proposed HOME requirements. Other commenters 
expressed concern about the effect that proposed CHDO-related changes 
would have on these organizations.
    HUD Response: Several provisions in the proposed rule that are 
being adopted by this final rule are best practices already in use by 
participating jurisdictions, and this final rule codifies those 
practices for purposes of uniformity and increasing accountability and 
performance under the HOME Program. HUD is aware that adoption of other 
provisions of the proposed rule at this final rule stage will

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result in some increase in the administrative burden and, in some 
cases, the cost of developing and monitoring HOME-assisted housing. 
However, HUD has determined that these changes are necessary to enhance 
accountability and oversight and help ensure that HOME program funds 
deliver their intended benefit as expeditiously and effectively as 
possible. As provided in the proposed rule and this final rule, some of 
the additional costs can be paid as project-related soft costs with 
HOME funds (e.g., underwriting, market analysis) or funded through the 
imposition of project monitoring fees.
Effective Date of Final Rule Changes
    Comments: Commenters expressed concern regarding the effective date 
that HUD would establish for many of the proposed changes. Commenters 
asked if the changes--particularly a new project-specific completion 
deadline, underwriting requirements, and changes applicable to CHDOs--
would apply retroactively to projects that already have received 
commitments of HOME funds. Commenters stated that it would be 
infeasible for projects that already have a legally binding written 
agreement or are already underway to comply with many of the 
requirements of the proposed rule.
    HUD Response: Most provisions of this rule are applicable only to 
projects to which HOME funds are committed on or after the effective 
date of this final rule. The effective date for certain provisions will 
be delayed to permit participating jurisdictions adequate time to 
comply. HUD has added a new Sec.  92.3 that establishes the effective 
dates for various provisions. Unless an alternate effective date is 
established in this section for a specific provision, the provisions of 
this final rule apply only to projects to which funds are committed on 
or after the effective date of this final rule. The property standard 
provisions established at Sec.  92.251 will apply to projects to which 
funds are committed 18 months after the publication date of this final 
rule. The new provision that participating jurisdictions develop 
written homebuyer program policies related to underwriting, responsible 
lending, and refinancing becomes effective 6 month after the 
publication date of this final rule. The new provision that 
participating jurisdictions develop and follow policies and procedures 
established at Sec.  92.504(a) will become effective 12 months after 
the publication date of this final rule in the Federal Register. The 
change in the definition of commitment at Sec.  92.2 eliminating non-
specific reservations to CHDOs as a commitment becomes effective 90 
days after the publication date of the final rule and will be 
implemented by HUD for CHDO deadlines that occur on or after January 1, 
2015. The separate 5-year deadline for expenditure of CHDO set-aside 
funds established at Sec.  92.500(d)(1)(C) will become effective on 
January 1, 2015, and will be implemented by HUD for all deadlines that 
occur on or after that date. The requirement for participating 
jurisdictions to conduct financial oversight of HOME-assisted rental 
projects, will be effective 12 months after the publication date of the 
final rule.

B. Changes to HUD's Consolidated Plan Regulations

Approval Process
    HUD proposed revising Sec. Sec.  91.220(l)(i) and (ii) and 
91.320(k)(i) and (ii) of the Consolidated Plan regulations, codified at 
24 CFR part 91. Sections 92.205(b) and 92.254(a)(5) of the HOME program 
regulations proposed to clarify that participating jurisdictions must 
receive approval in writing from HUD, separate from the consolidated 
plan approval letter, for forms of investment of HOME funds other than 
those described in Sec.  92.205(b) and resale and recapture guidelines.
    Comments: A commenter supported this clarification. Another 
commenter stated that the requirement to obtain HUD approval of resale 
and recapture guidelines would create an administrative burden.
    HUD Response: The proposed rule language attempted to clarify that 
the approval requirement for other forms of investment of HOME funds 
and resale and recapture guidelines already exist in 24 CFR 
91.225(d)XX. HUD has always required the approval of these program 
components and the clarification in this section does not constitute a 
policy change. HUD is therefore adopting the proposed rule language 
without change.
Maximum Purchase Price for Single Family Housing
    HUD proposed a revision to Sec. Sec.  91.220 (l)(2)(iv) and 
91.320(k)(2)(iv) to specifically require a participating jurisdiction 
that calculates its own 95 percent of median purchase price for HOME-
assisted homebuyer or owner-occupied rehabilitation projects to submit 
its calculated limit and supporting documentation as part of its 
Consolidated Plan Annual Action Plan. The regulations currently 
codified do not specify the timing of the submission.
    Comments: With respect to the timing of submission of the 
calculated limit and supporting documentation, a few commenters 
commenting on HUD's proposal supported the change.
    HUD Response: HUD is adopting the proposed rule language without 
change.
Proposed Funding and Project Selection Procedures
    HUD proposed amending Sec. Sec.  91.220 (l)(2)(v) and 
91.320(k)(2)(v) of the Consolidated Plan regulations to require 
participating jurisdictions to describe eligible applicants for HOME 
funds and describe their process for soliciting and funding 
applications or proposals as part of its Consolidated Plan annual 
action plan.
    Comments: No opposition was expressed on this proposal but a few 
commenters sought clarification regarding the meaning of ``eligible 
applicant'' for the purposes of this provision.
    HUD Response: The proposed provision would require participating 
jurisdictions to describe the types of individual or entities that are 
eligible to apply for and receive HOME funding (e.g., nonprofit or for-
profit developers). HUD is largely adopting the proposed rule change, 
but has made minor changes to the wording of Sec.  91.220(l)(2)(v) and 
Sec.  91.320(k)(2) (v) to provide greater clarity.
Targeting of HOME Assistance to Subpopulations
    HUD proposed adding a provision to Sec.  91.220(l)(2)(vi) and Sec.  
91.320(k)(2)(v) of the Consolidated Plan regulations expressly 
permitting participating jurisdictions to limit HOME projects to 
specific populations, including to persons in a specific occupation 
(e.g., artists, police officers, or teachers) and requiring that 
participating jurisdictions include these uses in their Consolidated 
Plan Annual Action Plans.
    Comments: While a few commenters expressed support for this 
provision, the majority of commenters commenting on this proposal 
opposed limiting program participation to beneficiaries in specific 
occupations (e.g., artists, police officers, or teachers), stating that 
program targeting should be based on populations with the greatest 
needs, as identified in the participating jurisdiction's consolidated 
plan.
    HUD Response: Participating jurisdictions have broad authority to 
target their HOME funds to specific populations or special needs 
groups, as long as such targeting does not have the intent or effect of 
violating civil rights

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laws. Many participating jurisdictions have already undertaken HOME 
projects targeted to specific occupational groups. The purpose of this 
proposed provision was to require that participating jurisdictions make 
public their intention to target certain categories of persons for 
housing assistance through the Consolidated Plan citizen participation 
process. HUD is adopting the proposed rule language without change.

C. Changes to the HOME Program Regulations

1. Definitions (Sec.  92.2)
    HUD received no comments on the proposed addition of the following 
definitions to the HOME regulations: 1937 Act, ALJ (Administrative Law 
Judge), Fair Housing Act, Indian Housing Authority (IHA), Public 
Housing, Public Housing Agency (PHA), Secretary, CDBG program, Observed 
Deficiency (OD), and Consolidated Plan. Several comments were received 
regarding Uniform Physical Property Condition Standards (UPCS). 
However, these comments did not address the definition, but rather the 
applicability of those standards to HOME projects. Consequently, those 
comments are addressed under Property Standards at Sec.  92.251.
    Commitment. HUD proposed several changes to the definition of 
``commitment'' at Sec.  92.2, including: (1) Specifically including an 
agreement with a state recipient, a subrecipient, or a contractor to 
use a specific amount of HOME funds to provide downpayment assistance; 
(2) eliminating the reservation of funds to community housing 
development organizations (CHDOs) so that agreements that are not 
project-specific would no longer be considered a commitment; (3) adding 
a requirement that the signature of each party to the agreement be 
dated; (4) cross-referencing the written agreement requirements at 
Sec.  92.504(c); and (5) excluding agreements between a participating 
jurisdiction and a subrecipient that the participating jurisdiction 
controls, and agreements between the representative unit (i.e., lead 
member) of a consortium and local government consortium member.
    Comments: HUD received numerous comments in response to these 
proposed changes. Although a few commenters supported the proposed 
changes, the majority of the commenters commenting on this provision 
expressed concern regarding HUD's proposal to remove references to CHDO 
reservations from the definition of commitment.
    Commenters stated that requiring participating jurisdictions and 
CHDOs to enter into a project-specific commitment within 24 months of 
the obligation of the HOME grant would be burdensome.
    Commenters requested that HUD include as a commitment conditional 
reservations of funds that would allow CHDOs to secure additional 
funding for HOME-assisted projects, including Low Income Housing Tax 
Credits (LIHTC).
    A commenter requested clarification on whether the revised 
commitment definition excluded agreements between a participating 
jurisdiction and a subrecipient that the participating jurisdiction 
controls. The commenter appeared to not understand that HUD was 
proposing to revise the definition of commitment to exclude exactly 
such cases. When a participating jurisdiction controls a subrecipient, 
only a legally binding written agreement between the two parties for a 
specific HOME project would meet the proposed definition.
    Other commenters expressed concern about the timing and 
implementation of the new commitment requirements and how adoption of 
the new definition would affect upcoming 24-month HOME commitment 
deadlines.
    HUD Response: HUD's intent in revising the definition of commitment 
was to increase participating jurisdictions' accountability for the use 
of HOME funds. Requiring participating jurisdictions to execute a 
written agreement for a specific HOME project with a CHDO, certain 
subrecipients, or consortia members within 24 months of HUD's 
obligation of the HOME allocation is designed to help ensure that HOME 
funds are used as expeditiously as possible to develop affordable 
housing. Consequently, HUD is adopting the proposed rule language 
without change.
    At this final rule stage, HUD is further amending the commitment 
definition to reinforce that participating jurisdictions must not 
commit HOME funds to a project until all necessary financing has been 
secured, a budget and schedule established, and underwriting and 
subsidy layering completed. Based upon many of the comments received in 
response to the 4-year deadline for project completion proposed in 
Sec.  92.205(e), participating jurisdictions appeared to not fully 
understand the point at which a commitment of HOME funds may take 
place.
    Community Housing Development Organization. HUD proposed several 
changes to or clarification of this definition and received many 
comments on the proposed changes.
New Provision Relating to 501(c)(4) Organizations
    The preamble of the proposed rule stated that HUD proposed revising 
the definition of ``community housing development organization'' (CHDO) 
in Sec.  92.2 to add a reference to the Internal Revenue Service (IRS) 
regulations that implement section 501(c)(4) of the Internal Revenue 
Code to permit wholly-owned subsidiaries of a private non-profit 
organization that meet the requirements for CHDO designation to also 
qualify as a CHDO. The regulatory language was inadvertently omitted 
from the definition of CHDO at Sec.  92.2 and this final rule corrects 
that error by including the regulatory text.
    Comments: A commenter opposed permitting organizations with a 
501(c)(4) designation from the IRS to be qualified as CHDOs. The 
commenter stated that those organizations are not subject to the same 
public disclosure requirements as 501(c)(3) organizations and may 
participate in advocacy, including political advocacy. Another 
commenter recommended that PHAs that have 501(c)(3) designations be 
permitted to be qualified as CHDOs. Other commenters recommended that 
HUD permit organizations that are subordinates of a central 
organization nonprofit under section 905 of the Internal Revenue Code 
to qualify as CHDOs.
    HUD Response: HUD does not agree that PHAs that have 501(c)(3) 
designations should qualify as CHDOs because PHAs are publicly-
established organizations and are not community-based organizations 
that are accountable to the low-income community. For many years, HUD's 
administrative guidance on CHDO qualifications permitted subordinates 
of a central organization under section 905 of the Internal Revenue 
Code to qualify as CHDOs. HUD agrees with commenters that codifying the 
eligibility of these organizations in the regulations is appropriate 
and this final rule explicitly permits such organizations to be 
designated as CHDOs.
    At this final rule stage, HUD is also adopting language in the 
proposed rule that permits a private nonprofit organization to qualify 
as a CHDO if it is a wholly-owned entity that is regarded as an entity 
separate from its owner for tax purposes (e.g., a single member limited 
liability company that is wholly-owned by an organization that 
qualifies as tax-exempt), the owner organization has a tax exemption 
ruling from the IRS under section 501(c)(3) or (4) of the Internal 
Revenue Code of 1986

[[Page 44633]]

and meets the definition of ``community housing development 
organization.''
CHDO Relationship With Parent Organizations
    HUD proposed revising the CHDO definition to clarify the 
relationship between the CHDO and its parent organization by adding a 
new paragraph (3)(iv) clarifying that, if a for-profit entity creates 
or sponsors a nonprofit entity that seeks designation as a CHDO, the 
officers and employees of the for-profit entity would be prohibited 
from serving as officers or employees of the CHDO, and the nonprofit 
entity would be prohibited from using the office space of the for-
profit entity.
    Comments: A few commenters supported this provision, citing the 
intent of the proposal to increase the separation between a CHDO and a 
for-profit parent organization. A commenter opposed the prohibition on 
CHDOs occupying the space of for-profit parent organizations because of 
the limited financial resources available to CHDOs, particularly rural 
CHDOs.
    HUD Response: HUD understands that prohibiting CHDOs from occupying 
the office space of its for-profit parent organization may be 
financially difficult for some organizations. The prohibition was 
proposed to help avoid situations where for-profit entities could exert 
undue influences on their subsidiary organizations. However, HUD 
believes that other changes in this final rule provide sufficient 
oversight to avoid these undue influences. The prohibition on CHDOs 
occupying office space of for-profit entities has been removed from the 
rule.
Governmental Control of CHDOs
    HUD proposed revising paragraph (5) of the definition to clarify 
that a governmental entity may create a CHDO, but is not permitted to 
control the CHDO by providing its employees to the CHDO as staff or 
officers. The revision to the rule would also prohibit CHDOs from 
occupying the office space of a governmental entity.
    Comments: Several commenters objected to this provision because 
they stated it would preclude PHAs from forming CHDOs that would be 
controlled by a PHA-appointed board and staffed by PHA employees. Other 
commenters objected to the provision prohibiting a CHDO from occupying 
the office space of a governmental entity, and other commenters 
expressed concern about the effect the prohibition would have on CHDOs 
in rural areas where office space is limited.
    HUD Response: HUD understands that many PHAs have created 
subsidiary organizations to serve as a development arm of the PHA. Both 
PHAs and their development subsidiaries serve an important function in 
the HOME program. However, if these organizations are to qualify as 
CHDOs, they must not be controlled and staffed by the PHA. If a PHA 
does not seek to alter the existing arrangements that it has with its 
subsidiary organizations, then this organization can continue to 
participate in the HOME program, but as a non-profit developer rather 
than a CHDO. HUD agrees that prohibiting a CHDO from occupying the 
office space owned by a governmental entity may constitute an undue 
obstacle to CHDO operations and is therefore removing that portion of 
the provision. HUD is adopting, without change, the proposed rule 
language that prohibits a governmental entity that creates a CHDO from 
providing its employees as CHDO staff.
Demonstrated CHDO Capacity and Staffing
    HUD proposed revising paragraph (9) of the existing definition of 
CHDO at Sec.  92.2 to strengthen the requirement that an organization 
must have paid employee staff with housing development experience in 
order to be designated as a CHDO. The proposed rule specified that the 
demonstrated capacity requirement could not be met through the use of 
volunteers or staff donated by another organization. The rule also 
proposed to eliminate the provision that permitted a CHDO to meet the 
capacity requirement based upon the use of a consultant to undertake 
activities and train CHDO staff.
    Comments: HUD received many comments on these proposed changes. 
Nearly all commenters opposed these provisions, stating that the 
proposed changes would eliminate some organizations from gaining or 
retaining CHDO status or make it more difficult for participating 
jurisdictions to meet their CHDO set-aside requirements. Some 
commenters stated that CHDOs often cannot afford to pay staff and must 
rely on donated staff from parent organizations, volunteers, board 
members, or consultants. Other commenters stated that the prohibition 
on relying on volunteers to demonstrate capacity would affect faith-
based and other small organizations. A commenter asked that HUD permit 
independent contractors, in addition to paid staff, to work full time. 
Several commenters stated that the requirement that CHDOs have 
demonstrated capacity is at odds with NAHA, which has, as one of its 
purposes, building nonprofit development capacity. Other commenters 
urged HUD to continue to permit the use of consultants to meet the 
demonstrated capacity test, stating that this arrangement is 
particularly important in rural areas. Several commenters further urged 
HUD to phase in these requirements over a period of 5 or 10 years, or 
to apply them only to new CHDOs.
    HUD Response: HUD acknowledges the concerns raised by commenters 
and understands that the adoption of these provisions will result in 
changes to the manner in which CHDOs have operated to date. HUD 
recognizes that, with these changes in place, some current CHDOs will 
be unable to meet the new requirements for CHDO designation, and 
therefore will not receive additional CHDO set-aside funds. 
Additionally, HUD understands that because of these changes, in some 
participating jurisdictions, CHDO set-aside funds may be deobligated 
due to a lack of qualified CHDOs.
    Notwithstanding the recognized difficulty that compliance with the 
new provisions applicable to CHDOs may present, HUD determined that 
these changes are necessary to ensure that the hundreds of millions of 
CHDO set-aside funds that are awarded each year are committed to 
organizations that have adequate capacity to carry out and complete the 
projects for which they are being funded, so that the funds benefit the 
low-income individuals and families the HOME program is designed to 
serve. Therefore, the final rule retains the requirement that CHDOs 
that receive CHDO set-aside funds to develop HOME-assisted housing must 
demonstrate development capacity through paid staff with development 
experience.
    It is important to note that the rule does not prohibit the CHDO 
from using volunteers, board members, and staff of parent organizations 
in its operations; however, these individuals cannot be the basis for 
the determination of development capacity. Further, in requiring paid 
employees, HUD is not prohibiting a CHDO from employing an individual 
who is an independent contractor and using that contractor's experience 
as the basis for the demonstrated capacity determination. Paid staff is 
not required to be full time, but their hours must be appropriate for 
the role they play in the organization.
    Additionally, HUD agrees that the use of consultants by new CHDOs 
is appropriate. Accordingly, HUD has revised at this final rule stage, 
the proposed rule language to permit the use of consultants to 
demonstrate capacity, but only during the first year

[[Page 44634]]

of an organization's operation as a CHDO. Because the provisions of the 
proposed rule were made applicable to FY 2012 HOME funds in HUD's FY 
2012 appropriation law, HUD sees no benefit to participating 
jurisdictions or CHDOs in delaying the implementation of these 
provisions.
    In response to the concerns raised about the effect of these 
provisions on organizations that are currently designated as CHDOs, HUD 
has made a substantial change in the definition of owner in revised 
Sec.  92.300(a)(2) that establishes a new role for CHDOs to become 
owners of rental housing that they do not develop. HUD expects that 
this change will allow CHDOs without demonstrated development capacity 
to continue to access HOME funds to address the affordable housing 
needs in their communities.
    Homeownership. HUD proposed rearranging existing provisions in the 
definition of ``homeownership'' in Sec.  92.2 to improve clarity, as 
well as clarifying that contracts for deed (also known as installment 
contracts or land sales contracts) and mutual or cooperative housing 
that receives LIHTC do not constitute homeownership.
    Comments: A few commenters stated that contracts for deed or 
installment contracts should constitute homeownership for purposes of 
the HOME program. Other commenters stated that the revised definition 
inappropriately excluded individuals who own manufactured homes that 
are located in manufactured housing communities. Other commenters 
requested clarification on the eligibility of 50-year community land 
trust ground leases as an eligible form of homeownership and requested 
that HUD explicitly address ground leases and the community land trust 
approach in the definition of homeownership.
    HUD Response: While HUD acknowledges that contracts for deed, 
installment contracts, and land sales contracts are common in certain 
areas of the country, these contracts fail to provide equitable title 
to the contracting party, who remains vulnerable to forfeiting the 
property until the final payment is made. Although some states provide 
some protections to the contracting party, the rights are not equal to 
those individuals who own their homes fee simple or in an equivalent 
form of homeownership. Assisting individuals and families who have 
entered into contracts for deeds to acquire their home fee simple is an 
appropriate use of HOME funds, but assisting low-income families 
through contract for deed situations is not. For these reasons HUD is 
adopting the restriction in the proposed rule in this final rule.
    HUD does not agree that the homeownership definition in the 
proposed rule excludes owner-occupied manufactured homes located in 
manufactured home communities. However, HUD has revised the 
homeownership definition to reflect the existing language in Sec.  
92.205(a)(4) to clarify that, in such situations, the ground lease must 
be at least equal to the applicable period of affordability.
    Several commenters interpreted the proposed rule as permitting 
community land trusts with 50-year ground leases as an eligible form of 
homeownership. The commenters, however, misread the language, which is 
applicable only to Indian trusts. The proposed rule retained the 99-
year leasehold requirement for projects, other than community land 
trusts, involving ground leases.
    Other commenters suggested that HUD add a section to the 
homeownership definition explicitly addressing community land trusts. 
While HUD does not agree that a separate paragraph is needed to address 
community land trusts in this definition, HUD does agree that it would 
be appropriate to recognize community land trusts with 50-year ground 
leases as homeownership. Consequently, at this final rule stage, HUD is 
amending the definition to explicitly permit ground leases of 50 or 
more years for community land trusts.
    Housing. HUD proposed to amend the definition of ``housing'' in 
Sec.  92.2 to exclude all student housing, not just student 
dormitories. The use of HOME funds for student housing, in any 
configuration, is inconsistent with the statutory purposes of the 
program. In addition, the proposed rule amended the definition to 
clarify that dormitories, including those for farmworkers, do not 
constitute housing.
    Comments: HUD received many comments on the proposed revisions to 
the definition of housing. Commenters expressed concern about the 
language limiting housing for students and asked whether the proposed 
definition excludes providing any type of housing to any student, 
regardless of need or situation. Other commenters expressed concern 
that the student housing exclusion will negatively affect persons with 
disabilities and the homeless who may be participating in classes as 
part of a broader supportive or transitional housing program. Other 
comments sought clarification and guidance on farmworker housing, 
including whether farmworker dormitories constitute housing, or are 
differentiated from student housing.
    HUD Response: The use of HOME funds is statutorily limited to 
permanent and transitional affordable housing for low-income 
households. Consequently, housing that does not provide a permanent or 
transitional residence for income-eligible households is ineligible for 
HOME assistance. Student housing and dormitories, including farmworker 
dormitories, provide short-term or transitory housing, not permanent or 
transitional housing, as required by statute. In reviewing the 
comments, HUD found that several commenters appeared to confuse what 
constitutes eligible housing with who is considered an eligible 
beneficiary of HOME-assisted housing. The proposed changes to the 
definition of housing addressed the housing structure and what 
constitutes eligible affordable housing.
    In revising the definition of housing, HUD's intent was to clarify 
the difference between ineligible student or farmworker housing and 
eligible permanent or transitional housing. Given the many commenters 
commenting on this provision, and who appeared to not understand this 
distinction, HUD has further clarified the definition of housing. 
Revisions were also made to the language in the definitions of low-
income and very low-income families that provide additional 
clarification on when a student household may be an eligible 
beneficiary.
    Low-Income Family and Very Low-Income Family. HUD proposed revising 
the definition of ``low-income families'' and ``very low-income 
families'' in Sec.  92.2 to conform with the definitions used in the 
Section 8 Housing Choice Voucher (HCV) program, which excludes certain 
students from qualifying as a low-income or very low-income family.
    Comments: Several commenters expressed concern about eliminating 
students who are dependents of their families from eligibility for HOME 
assistance. Some commenters recommended that HUD align the HOME 
requirements with the HCV provisions. Other commenters suggested that 
HUD align the HOME requirements with LIHTC policy. Yet, other 
commenters stated that HUD should remove the term ``married'' from the 
definition, as it might prohibit participation of students in other 
types of domestic partnerships. Several commenters questioned whether 
this policy would prohibit the use of HOME funds to assist homeless 
youth or youth aging out of foster care.

[[Page 44635]]

    HUD Response: The addition of this language to these definitions 
would have no effect on the eligibility of homeless youth, who would be 
considered either individually low-income or a member of a low-income 
family, or youth aging out of foster care, who would qualify as 
individually low-income. This provision is intended solely to help 
ensure that HOME funds benefit individuals and families who are low-
income or very low-income, and that scarce HOME resources are not 
targeted to students who are dependents of families who are not low-
income. HUD proposed adopting the Section 8 Housing Choice Voucher 
provisions, which were the result of recent legislative changes, 
because the voucher provisions reflect the intent of Congress that 
federal housing resources be targeted to low-income and very low-income 
families. Instead of including the entire HCV definition in Sec.  92.2, 
HUD is replacing the proposed rule language with a cross-reference to 
the HCV requirement at 24 CFR 5.612.
    Program income. HUD proposed amending the definition of ``program 
income'' in Sec.  92.2 to clarify that it does not include gross income 
from the use, rental, or sale of real property received by the project 
owner, developer, or sponsor, unless the funds are paid by the project 
owner, developer, or sponsor to the participating jurisdiction, 
subrecipient, or state recipient.
    Comments: A few commenters stated that rental income should not be 
considered program income unless otherwise owed and paid to the 
participating jurisdiction or subrecipient.
    HUD Response: The purpose of this change is to clarify that rent 
received by project owners is not program income unless it is required 
to be paid to the participating jurisdiction or subrecipient. The 
commenters appear to have misunderstood that HUD was intending only to 
clarify this requirement. HUD agrees that rent should not be considered 
program income unless it is received by a participating jurisdiction or 
subrecipient. HUD is adopting the proposed rule language without 
change.
    Project Completion. HUD proposed amending the definition of 
``project completion'' in Sec.  92.2 to clarify the conditions that 
must be met for projects to be considered completed, including the 
point at which a participating jurisdiction can complete a project in 
IDIS, the HOME data system.
    Comments: HUD received several comments expressing confusion 
regarding the difference between project completion in IDIS and the 
point at which the proposed 6-month period that homebuyer units must be 
sold or converted to rental units. A commenter stated that commencing 
the period of affordability for a homebuyer project on the date that a 
project is completed in IDIS rather than on the date that the sale 
takes place penalizes homebuyers by extending the period of 
affordability on their unit.
    HUD Response: HUD acknowledges that the proposed rule may have 
caused some confusion by using the term ``project completion'' in Sec.  
92.254(a)(3) when describing the point at which the proposed 6-month 
timeframe for sale or conversion of homebuyer units is triggered. 
Section 92.254(a)(3) should have stated that the completion of 
construction triggers the beginning of this 6-month period. HUD has 
corrected the error in that section of this rule. While HUD understands 
that there may be some lag between closing on a homebuyer unit and 
entry of project completion data in IDIS, the participating 
jurisdiction has the required information to complete the homebuyer 
project in IDIS on the day of the closing and must adopt procedures 
that minimize delays in entering completion data. HUD is adopting the 
proposed rule language without change.
    Reconstruction. HUD proposed amending the definition of 
``reconstruction'' in Sec.  92.2 to facilitate participating 
jurisdictions' rebuilding efforts after disasters by permitting 
reconstruction of units that were not standing on the site at the time 
of fund commitment.
    Comments: Commenters identified a discrepancy between the proposed 
rule text, which permitted HOME funds to be committed for 
reconstruction of a unit destroyed by disaster within 12 months, and 
the rule text that designated the period as 6 months. Other commenters 
supported the 12-month timeframe to commit HOME funds for 
reconstruction after a disaster. Several commenters stated that 12 
months would not be a sufficient period to address destroyed housing in 
the event of a major disaster and suggested that the timeframe be 
extended to 36 months. A commenter recommended that HUD establish a 
process for granting exceptions in the event of major disasters. 
Another commenter suggested that HUD establish a continuum of 
timeframes for committing funds for reconstruction, covering situations 
ranging from a single house fire to mass destruction of housing due to 
a natural disaster. Several commenters urged HUD to include replacement 
of a manufactured housing unit with stick-built housing in the 
definition of reconstruction.
    HUD Response: Because the situations covered by this proposed 
change in the definition will range from destruction of a single unit 
to destruction of hundreds of housing units, HUD does not support 
extending the regulatory timeframe beyond 12 months. As explained in 
the preamble to the proposed rule, waivers of the timeframe can be 
granted in the event of widespread destruction of housing due to 
natural disaster. Further, establishing appropriate timeframes for 
disasters of differing magnitudes would be difficult and would cause 
undue complexity for participating jurisdictions. HUD does not agree 
that replacement of a manufactured housing unit with stick-built 
housing should be defined as reconstruction. While it is possible to 
use HOME funds to replace manufactured housing with stick-built 
housing, these projects are considered new construction, not 
reconstruction. HUD is adopting the proposed 12-month timeframe for 
committing HOME funds for reconstruction of a unit.
    Single room occupancy. HUD proposed revising the definition of 
``single room occupancy (SRO)'' in Sec.  92.2 to require that a project 
could be designated as an SRO for HOME purposes only if its 
characteristics are consistent with the participating jurisdiction's 
applicable zoning and building code classifications for SRO housing.
    Comments: Several commenters expressed concern that some 
jurisdictions do not include a SRO designation in their zoning and 
building code classifications. Consequently, participating 
jurisdictions without such classifications might be prohibited from 
using HOME funds for SROs or might be required to designate such 
projects as group homes, resulting in lower HOME subsidy limits and 
rents.
    HUD Response: HUD agrees with the concerns raised by commenters and 
has revised the SRO definition to require that the designation of the 
HOME project as an SRO cannot be inconsistent with local zoning and 
building code classifications, resolving potential conflicts in 
jurisdictions that do not include SROs in their zoning and building 
code classifications.
    Subrecipient. HUD proposed making minor revisions to the definition 
of ``subrecipient'' in Sec.  92.2, for the purpose of clarifying that 
subrecipients receive funds to carry out programs (e.g., downpayment 
assistance programs, owner-occupied rehabilitation programs, etc.), not 
to undertake specific housing projects.

[[Page 44636]]

    Comments: A commenter supported the clarification provided by the 
revised definition. Some commenters recommended that HUD include 
specific language in the regulations stating that selection of entities 
acting as owners, developers, or sponsors of housing is not subject to 
federal procurement rules, nor are owners, developers or sponsors 
themselves required to comply with federal procurement rules.
    HUD Response: HUD did not find it necessary to specifically state 
in the HOME regulations that the selection of owners, developers and 
sponsors of housing is not subject to the procurement rules at 24 CFR 
part 84 and part 85, although a participating jurisdiction may choose 
to follow these requirements. The new provisions in 24 CFR part 91 
requiring participating jurisdictions to include a description of 
eligible applicants and the method of soliciting applications and 
awarding HOME funding should clarify the selection methods of each 
participating jurisdiction.
2. Program Requirements
a. Jointly Funded Projects of Contiguous Jurisdictions (Sec.  92.201)
    Section 218(a) of NAHA prohibits a participating jurisdiction from 
investing HOME funds in projects outside its boundaries, except for 
projects located in a contiguous jurisdiction that are joint projects 
that serve the residents of both jurisdictions. HUD found that there 
were participating jurisdictions unfamiliar with or not fully familiar 
with this provision. HUD proposed to revise Sec.  92.201 to clarify 
that, to qualify as a joint project, a project must be ``jointly 
funded'' by the two contiguous jurisdictions and both jurisdictions 
must make a substantial financial contribution (e.g., waiver of impact 
fees, property taxes or other taxes or fees customarily imposed on 
projects within the jurisdiction) to the project.
    Comments: Some commenters expressed their support for this 
clarification. A commenter suggested that HUD require one of the 
jurisdictions to take the lead role and permit only one jurisdiction to 
count the completed project toward their production goal.
    HUD Response: HUD believes it is essential that each participating 
jurisdiction that invests HOME funds in a joint project be permitted to 
count a portion of the units toward its production totals. HUD is 
adopting the proposed rule language without change but will provide 
guidance regarding appropriate reporting in IDIS for these jointly 
funded projects.
b. Site and Neighborhood Standards (Sec.  92.202)
    The proposed rule included a conforming change that would update 
the citation in Sec.  92.202 to the site and neighborhoods regulations, 
which were moved to 24 CFR 983.57(e)(2) and (3). The site and 
neighborhood standards have applied to new construction rental projects 
funded with HOME since the inception of the program.
    Comments: Several commenters appeared to misunderstand that this 
was a conforming change only, and opposed the imposition of new site 
and neighborhood requirements. These commenters recommended that 
participating jurisdictions be permitted to adopt their own standards. 
Commenters also suggested that HUD issue guidance on site and 
neighborhood standards for the HOME Program.
    HUD Response: HUD included guidance on site and neighborhood 
standards in its guide entitled Fair Housing for HOME Participants, 
which is posted on HUD's Web site.\2\ HUD is adopting the proposed rule 
language without change, with the exception of correcting the 
regulatory citation.
---------------------------------------------------------------------------

    \2\ See http://www.hud.gov/offices/cpd/affordablehousing/library/modelguides/2005/200510.cfm.
---------------------------------------------------------------------------

c. Income Determinations (Sec.  92.203)
    HUD proposed several changes to Sec.  92.203 related to calculation 
of annual income of a family or household for the purpose of 
determining the family's or household's eligibility for HOME 
assistance.
Required Source Documentation for Income Determinations
    HUD proposed revising Sec.  92.203(a)(1)(i) and (a)(2) to require 
participating jurisdictions to examine at least 3 months of source 
documentation (e.g., wage statements, interest statements, unemployment 
compensation) when performing income determinations for potential HOME 
beneficiaries.
    Comments: While a few commenters expressed their support for this 
change, the majority of commenters commenting on this provision 
expressed their opposition to the requirement that participating 
jurisdictions examine at least 3 months of source documentation when 
determining income. The commenters offered different timeframes for 
required source documentation, with one commenter stating that 2 months 
was a more reasonable timeframe. Some commenters expressed concern that 
the new requirement would be inconsistent with other housing programs. 
Other commenters expressed concern that the requirement for 3 months of 
documentation might be an obstacle to low-income households receiving 
HOME assistance, because they might not have saved sufficient wage 
statements or bank statements. Several commenters specifically 
suggested that HUD align the required source documentation for the HOME 
program with the requirements outlined in HUD Handbook 4350.3 \3\, 
which requires examination of 6 pay statements. Other commenters 
suggested that HUD accept Social Security disability insurance 
statements and certified copies of Form 1040 issued by the IRS as 
sources of documentation.
---------------------------------------------------------------------------

    \3\ See http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_35639.pdf.
---------------------------------------------------------------------------

    HUD Response: HUD's intent in proposing this requirement was to 
establish a standard period during which all participating 
jurisdictions must obtain income documentation. Because employers may 
pay employees weekly, biweekly or monthly, establishing a documentation 
standard based upon a number of pay stubs does not accomplish HUD's 
goal of a uniform standard. However, HUD agrees that it is appropriate 
to balance the need for accurate income determinations and eliminate 
inconsistent income documentation standards used by HOME participating 
jurisdictions, with the increased burden that will be placed on 
potential HOME beneficiaries if they are required to produce income 
documentation for an extended period of time. Consequently, HUD 
determined that it is appropriate to reduce the required timeframe for 
source documentation to 2 months.
    This change aligns with the requirements of many private mortgage 
lenders and should be less burdensome to potential applicants, 
particularly applicants for rental housing who may not have retained 
documentation for an extended period. HUD is adopting a provision that 
requires examination of 2 months of income documentation when 
determining a family's eligibility for HOME assistance. HUD is not 
adopting the suggestion that it accept a certified IRS 1040 as income 
documentation. Certified IRS 1040 forms are very frequently obtained by 
participating jurisdictions for the purpose of determining income 
eligibility. However, unlike source documentation, such as wage 
statements, stubs and bank

[[Page 44637]]

statements, these forms do not contain the level of detail necessary to 
enable income to be accurately projected over the next 12 months.
Elimination of Census Long Form
    HUD proposed revising Sec.  92.203(b)(2) to eliminate the option 
currently available to participating jurisdictions to use the 
definition of ``annual income'' that is based on income reported on the 
Census long form because it was rarely used by participating 
jurisdictions.
    Comments: Although few commenters commented on this provision, 
those who did expressed their support for eliminating this definition 
of income, stating that the elimination of the definition would 
eliminate confusion.
    HUD Response: HUD did not receive any comments in opposition to 
elimination of this income definition, confirming HUD's belief that the 
definition is not being employed by participating jurisdictions. This 
rule eliminates the Census long form definition from the HOME 
regulations. Participating jurisdictions continue to have the option of 
using either the income definition in HUD's regulations at 24 CFR part 
5 (often referred to as the Section 8 definition) or the definition of 
adjusted gross income of the IRS, both of which are broadly used in 
other housing and supportive service programs.
Federal and Military Cost of Living Allowance
    HUD proposed revising the IRS definition of ``adjusted gross 
income'' in Sec.  92.203(b) to require that cost-of-living allowances 
for federal employees and military personnel in certain areas that are 
currently excluded from annual gross income by the IRS be included in 
adjusted gross income calculations when determining eligibility of 
applicants for HOME assistance. No comments regarding this proposed 
requirement were received. Section 1914 of the Non-Foreign Area 
Retirement Equity Assurance Act (Title XIX of Pub. L. 111-84, approved 
October 28, 2009) is phasing out these cost of living allowances. 
Consequently, HUD has determined that this regulatory change is not 
necessary. The language is eliminated in the final rule.
Single Income Definition for Each HOME-funded Program
    HUD proposed revising Sec.  92.203(c) to clarify that a 
participating jurisdiction must designate and implement only one 
definition of income for each HOME-assisted program (e.g., downpayment 
assistance program, rental housing program) that it administers.
    Comments: A commenter expressed support for this change, but other 
commenters opposed the clarification and expressed concern that this 
proposed language would reduce the flexibility of participating 
jurisdictions, especially those investing in projects with other 
sources of funding that have different income requirements. A few 
commenters requested clarification regarding whether all subrecipients 
and state recipients funded by a participating jurisdiction would be 
required to adopt the same definition of income. A commenter 
recommended that HUD allow participating jurisdictions to select an 
income determination method on a project-by-project basis for rental 
housing.
    HUD Response: HUD agrees that participating jurisdictions should be 
permitted to determine an income definition on a project-by-project 
basis for rental housing programs. This approach will reduce 
administrative burden for participating jurisdictions and project 
owners by enabling them to better align HOME requirements applicable to 
individual projects with the requirements of other common funding 
sources, while still ensuring that all applicants for a specific rental 
project are treated equally. HUD is adopting the requirement that 
participating jurisdictions select a single definition of income for 
use in each program it administers (e.g., downpayment assistance), but 
has also revised the language at Sec.  92.203(c) to reflect the change 
related to rental projects. HUD is not adding language to address the 
question regarding the income definitions that may be used by 
subrecipients or state recipients receiving HOME funds from a single 
participating jurisdiction. HUD views each subrecipient's or state 
recipient's program as distinct. Consequently, a participating 
jurisdiction can permit the use of different income definitions in 
these programs. HUD does not find that a regulatory clarification is 
necessary, but will further address this issue in guidance.
Counting All Household Members' Income
    HUD proposed revising Sec.  92.203(d)(1) to clarify that, when 
determining the annual income of a household to determine eligibility 
for HOME assistance, the participating jurisdiction must count the 
income of all persons in the household, including nonrelated 
individuals.
    Comments: A few commenters expressed concern about the use of the 
terms ``family'' and ``household'' throughout Sec.  92.203, and 
specifically in the revisions to Sec.  92.203 (d)(1). These commenters 
requested that HUD define the two terms so that they are identical.
    HUD Response: While the terms ``family'' and ``household'' do not 
have the same meaning (a ``household'' can be comprised of more than 
one family or multiple, unrelated individuals), HUD acknowledges that 
the terms are sometimes used interchangeably in statute, regulation, 
and guidance (i.e., HOME uses the 24 CFR part 5 definition of family at 
24 CFR 5.403, but defines household as one or more persons residing in 
a unit). However, to help ensure that HOME units serve only those who 
are low-income or very low-income, HUD is clarifying that 
determinations of annual income include the income of all persons 
residing in a household. HUD is adopting the proposed rule language at 
Sec.  92.203 (d)(1) without change.
d. Eligible Activities: General (Sec.  92.205)
    HUD proposed to revise several provisions of Sec.  92.205.
Housing Must Meet Property Standard To Be Eligible
    The proposed rule would add language to paragraph (a)(1) to clarify 
that activities and costs are eligible for HOME funding only if the 
housing meets the property standards in Sec.  92.251 upon project 
completion. HUD did not receive specific comments on this clarification 
and the clarification is retained in the final rule.
Acquisition of Vacant Land or Demolition Are Not Eligible Stand-Alone 
Activities
    To improve the clarity of the regulation, HUD proposed revising 
Sec.  92.205(a)(2) to specify that the acquisition of vacant land or 
demolition with HOME funds may be undertaken only with respect to a 
particular affordable housing project for which construction will begin 
within 12 months, as established in paragraph (2) of the definition of 
``commitment'' in Sec.  92.2.
    Comments: Several commenters stated that the 12-month timeframe 
from commitment to the commencement of construction, which is 
incorporated in the existing definition of ``commitment'' at Sec.  
92.2, is too short.
    HUD Response: The provision at Sec.  92.205(a)(2) is intended only 
to reinforce the existing requirement in the definition of 
``commitment.'' The requirement that construction is expected to begin 
within 12 months is not new. The proposed rule language is adopted 
without change.

[[Page 44638]]

On-Site Manager's Unit
    HUD proposed revising Sec.  92.205(d) to address the effect of 
converting a residential unit to an on-site manager's unit after 
project completion on the cost allocation and designation of HOME 
units.
    Comments: One commenter stated that the proposed change was 
appropriate, but also suggested that HUD permit participating 
jurisdictions to repay HOME funds invested in a unit that must be 
converted to an on-site manager's unit after project completion. The 
commenter stated that this alternative would eliminate the need to 
revise cost allocation to reflect fewer units and avoid problems 
related to potentially exceeding the maximum per unit subsidy limit.
    HUD Response: HUD would consider permitting a participating 
jurisdiction to make a prorated repayment of HOME funds, in the event 
that a HOME-assisted unit must be converted to an on-site manager's 
unit. However, HUD finds that such cases are more appropriately handled 
administratively, rather than including language to address them in the 
regulation. HUD is therefore adopting the proposed rule language 
without change.
Four-Year Project Completion Deadline
    HUD proposed changes to Sec.  92.205(e)(2) that would establish a 
4-year time period from commitment of HOME funds and set-up of a 
project in IDIS to complete the project. Projects that are not 
completed within this timeframe would be deemed terminated before 
completion and, in accordance with Sec.  92.503, the participating 
jurisdiction would be required to repay HOME funds invested in the 
project to its HOME account. The proposed rule would permit 
participating jurisdictions to request a 12-month extension of the 
completion deadline by submitting information about the status of the 
project, steps being taken to overcome any obstacles to completion, 
proof of adequate funding to complete the project, and a schedule with 
milestones for completion of the project for HUD's review and approval.
    Comments: HUD received many comments on this provision. Commenters 
opposed the imposition of a project deadline, citing the many delays 
that can occur in affordable housing development. A few commenters 
suggested that the timeframe be lengthened to anywhere from 5 years to 
8 years. Other commenters suggested that HUD not implement a timeframe 
for completing projects but rather strengthen up-front project 
evaluation and feasibility measures to ensure better project selection. 
Some commenters did not object to the deadline, but opposed the 
requirement that participating jurisdictions repay HOME funds invested 
in projects that are not completed. Other commenters suggested that HUD 
not require repayment in cases where the failure to complete the 
project was beyond the control of the participating jurisdiction or 
where the participating jurisdiction is unable to recover the HOME 
funds expended on the project from the developer.
    HUD Response: While recognizing that a large number of HOME program 
participants do not support the proposed provision establishing a 4-
year timeframe for completing a HOME project, HUD continues to maintain 
that the adoption of this provision is necessary to help ensure that 
projects proceed timely and that participating jurisdictions do not set 
up HOME projects in IDIS before the project is ready to move forward. 
Congress indicated its agreement with HUD's position by legislatively 
imposing the 4-year timeframe for project completion on projects 
receiving Fiscal Year 2012 HOME funds.\4\ Consequently, HUD is adopting 
the proposed rule provisions, including the 4-year timeframe for 
project completion and the 1-year exception authority. The requirement 
that HOME funds expended on projects that are terminated before 
completion (and therefore never met HOME affordability requirements) 
must be repaid, as required by statute, is not new and is also being 
retained. However, in response to some apparent confusion among 
commenters, HUD makes minor revisions to paragraph (e) to clarify that 
the participating jurisdiction, not the project owner, is required to 
repay its HOME account.
---------------------------------------------------------------------------

    \4\ See Consolidated and Further Continuing Appropriations Act, 
2012, Public Law 112-55, 125 Stat. 552, approved November 18, 2011 
which imposed, for Fiscal Year 2012, project-related deadlines, 
underwriting, developer capacity, and neighborhood market adequacy 
determinations, and CHDO capacity. (See specifically 125 Stat. 684.)
---------------------------------------------------------------------------

    Many commenters opposed the provision because of the length of time 
that it takes to obtain zoning approval, secure necessary financing, or 
overcome neighborhood opposition to an affordable housing project. 
These comments made clear to HUD that many HOME program participants 
continue to misunderstand the point at which a participating 
jurisdiction may commit HOME funds to a project. The existing HOME 
regulations require that, when committing HOME funds to a project, a 
participating jurisdiction must have a reasonable expectation that 
construction will begin within 12 months. Further, existing regulations 
require that a subsidy layering review and cost allocation be performed 
before commitment of funds and that the written agreement committing 
funds to a project include a project budget and a detailed construction 
schedule. Consequently, it has never been permissible to commit HOME 
funds to a project if delays in zoning or permitting approvals are 
anticipated, or if other necessary financing has not been secured. The 
proposed rule attempted to clarify these requirements. HUD is further 
amending the definition of ``commitment'' at Sec.  92.2 to emphasize 
that HOME funds cannot be committed to a project (other than as a CHDO 
predevelopment loan) until financing necessary to complete the project 
has been secured and a construction schedule that ensures completion 
within 4 years has been developed. Corresponding changes are being made 
to the provisions applicable to written agreements with owners, 
developers, or sponsors of housing at Sec.  92.504(c)(3) to require 
that written agreements include a schedule that ensures that 
construction will begin within 12 months and be completed within 4 
years.
e. Eligible Project Costs and Eligible Administrative and Planning 
Costs (Sec.  92.206 and Sec.  92.207)
    HUD proposed revising Sec.  92.206(b)(1) to emphasize that it is 
rehabilitation, rather than refinancing, which is the primary activity 
that makes refinancing an eligible cost under the HOME program. The 
proposed rule added language to Sec.  92.206(b)(1) to condition 
refinancing as an eligible cost to projects in which the cost of the 
actual rehabilitation is greater than the amount of debt that is 
refinanced with HOME funds. HUD also proposed amending Sec.  
92.206(b)(2) to allow that the eligibility of costs of refinancing 
existing debt under paragraph (b)(2), as well as the requirement for 
participating jurisdictions to adopt accompanying refinancing 
guidelines, are intended to cover all rental housing--multifamily and 
single family.
    Comments: Several commenters recommended that HUD permit the use of 
HOME funds to refinance existing debt of projects in which minimal or 
no rehabilitation is taking place. This would permit HOME funds to be 
used for preservation of affordable housing with little or no need for 
physical improvements. A commenter recommended that HUD remove the 
existing prohibition on using HOME

[[Page 44639]]

funds to refinance existing federal or federally-insured debt (e.g., a 
loan made with CDBG funds or a FHA-insured loan). No comments were 
received on the provision that expanded the refinancing guidelines to 
include single family rental housing.
    HUD Response: HUD does not have the authority to permit refinancing 
of existing debt of properties that are not being rehabilitated. The 
HOME statute establishes four eligible activities: Acquisition, 
rehabilitation, new construction, and tenant-based rental assistance. 
HOME funds can be used to preserve affordable housing through 
acquisition or acquisition and rehabilitation. Refinancing is not an 
eligible HOME activity and HOME funds may not be used to refinance 
existing debt of projects unless rehabilitation is the primary activity 
taking place. Further, HUD believes that using HOME funds to replace or 
refinance federal or federally-insured debt that was previously 
obtained by the owner would be an inappropriate use of limited HOME 
program resources that could be used to provide additional affordable 
housing. The proposed rule changes to Sec.  92.206(b)(1) and (2) are 
adopted without change.
f. Eligible Community Housing Development Organization (CHDO) Operating 
Expense and Capacity Building Costs (Sec.  92.208)
    HUD proposed a revision to the CHDO operating expense provisions of 
Sec.  92.208 to clarify that CHDO operating funds are separate from and 
not intended to supplant CHDO set-aside funds provided under Sec.  
92.300(a). CHDO operating funds are to cover general operating costs 
such as office rents and utilities, staff salaries, and insurance, and 
are not to be awarded in conjunction with CHDO set-aside funds to pay 
for project-related soft costs, such as architectural or engineering 
costs or in lieu of developer's fees. Such costs are eligible to be 
paid with CHDO set-aside funds.
    Comments: Several commenters supported the clarification of the 
appropriate use of CHDO operating expense funds. A few commenters 
recommended that HUD mandate that every participating jurisdiction use 
the full 5 percent of each annual HOME allocation for CHDO operating 
expenses. Other commenters requested that HUD clarify that the 5 
percent of each allocation that may be used for CHDO operating expenses 
is not part of the 15 percent CHDO set-aside or the 10 percent planning 
and administration set-aside available to the participating 
jurisdiction.
    HUD Response: HUD finds that the regulation is clear that the 5 
percent CHDO operating expense authority is not a subset of either the 
15 percent CHDO set-aside or the 10 percent administrative and planning 
set-aside. HUD does not have the authority to require that each 
participating jurisdiction use the full 5 percent of each HOME 
allocation for CHDO operating expenses. NAHA makes clear that 
participating jurisdictions have the option to use 5 percent of the 
allocation in this way; however, there is no basis for mandating this 
use of funds. HUD is adopting the proposed rule language without 
change.
g. Tenant-based Rental Assistance: Eligible Costs and Requirements 
(Sec.  92.209)
Eligible Costs
    HUD proposed adding language to Sec.  92.209(a) to expressly permit 
the payment of utility deposits as an eligible HOME cost when provided 
in conjunction with HOME tenant-based rental assistance or security 
deposit assistance.
    Comments: A commenter supported the explicit inclusion of utility 
deposits as an eligible cost, in connection with ongoing tenant-based 
rental assistance or security deposit assistance. A few commenters 
suggested HUD further revise the regulation to permit project delivery 
costs related to tenant-based rental assistance costs to be eligible as 
project-related soft costs under Sec.  92.206(d), instead of being 
required to charge them as administrative costs under Sec.  92.207(a).
    HUD Response: The existing HOME regulations at Sec.  92.209(a) 
state that costs associated with administration of tenant-based rental 
assistance are eligible only as general management and oversight and 
coordination at Sec.  92.207(a). This language prohibited costs such as 
annual unit inspections from being charged to a tenant-based rental 
assistance project. Further, the fact that many participating 
jurisdictions find the 10 percent administrative set-aside inadequate 
to cover general program administration costs may constitute a 
disincentive to undertake a tenant-based rental assistance program, 
even if needs data and area market conditions indicate that such a 
program would be an appropriate use of HOME funds. HUD agrees with the 
commenters that the cost of performing inspections and income 
determinations should be permitted to be charged as either general 
management and oversight and coordination under Sec.  92.207(a) or 
project-related soft costs under Sec.  92.206(d). HUD is therefore 
adding language to Sec.  92.209(a) to make the cost of conducting unit 
inspections and determining the income of tenant-based rental 
assistance applicants or recipients specifically eligible as project-
related soft costs for tenant-based rental assistance. HUD is adopting 
the proposed rule language with respect to the eligibility of utility 
deposits without change.
Tenant Selection
    HUD proposed adding language to Sec.  92.209(c) to clarify that a 
participating jurisdiction's tenant selection policies and criteria 
must be based on local housing needs and priorities that are consistent 
with the participating jurisdiction's consolidated plan. There was 
support and no opposition to this proposed change, and HUD is adopting 
the proposed rule language without change.
Preferences for HOME Tenant-Based Rental Assistance
    HUD proposed revising Sec.  92.209(c)(2)(i) to clarify that a 
participating jurisdiction may establish a preference for individuals 
with special needs (e.g., homeless persons or elderly persons) or 
persons with disabilities if the specific category is identified in the 
participating jurisdiction's consolidated plan as having unmet need and 
the preference is needed to narrow the gap in benefits and services 
received by such persons. HUD also proposed adding a provision at Sec.  
92.209(c)(2)(ii) specifying that participation may be limited to 
persons with a specific disability, in accordance with the provisions 
in 24 CFR 8.4(b)(1)(iv), and clarified that participating jurisdictions 
may not require participation in medical or disability-related services 
as a condition of receiving HOME tenant-based rental assistance.
    Comments: Several commenters support the ability to target HOME 
tenant-based rental assistance to special needs populations and persons 
with disabilities. A few commenters provided suggested regulatory 
language that would establish a specific preference for providing 
tenant-based rental assistance to households participating in permanent 
supportive housing programs for disabled persons.
    HUD Response: HUD does not agree that a separate provision for 
establishing a preference for disabled households participating in 
permanent supportive housing programs is necessary. The proposed rule 
provisions related to preferences for individuals with disabilities 
adequately address such

[[Page 44640]]

situations. Further, HUD carefully drafted the proposed rule language 
to ensure compliance with all applicable civil rights provisions. HUD 
is adopting the proposed rule language without change.
Tenant-Based Rental Assistance in Self-Sufficiency Programs
    HUD proposed adding language to Sec.  92.209 (c)(2) to specifically 
address the use of HOME tenant-based rental assistance in self-
sufficiency and homeownership programs (including lease-purchase 
programs), expressly permitting a participating jurisdiction to 
condition selection for the program and renewal of the tenant-based 
rental assistance on the household's participation in the self-
sufficiency program.
    Comments: A few commenters supported the use of HOME tenant-based 
rental assistance in conjunction with self-sufficiency programs. 
However, several commenters opposed permitting HOME tenant-based rental 
assistance in connection with self-sufficiency programs without 
specifying the basis of their objection. A commenter objected to the 
use of HOME funds in connection with self-sufficiency programs because 
tenants who do not fulfill the responsibilities of the program would 
lose their rental assistance and potentially experience housing 
instability. Another commenter supported the proposed language, but 
encouraged HUD to further revise the regulations to permit the escrow 
of HOME tenant-based assistance funds for self-sufficiency program 
participants.
    HUD Response: HUD's administrative guidance on HOME-funded tenant-
based rental assistance has included self-sufficiency programs and 
lease-purchase programs since 1996. Consequently, the proposed rule 
provisions were intended as codification of existing policy rather than 
the authorization of previously prohibited uses. HUD understands 
commenters' concerns that self-sufficiency program participants may 
experience housing instability if tenant-based rental assistance is not 
renewed due to failure to participate in the self-sufficiency program. 
However, unlike other HOME-funded tenant-based rental assistance 
programs, a self-sufficiency program is not intended to be a source of 
permanent housing assistance. In this respect, tenant-based rental 
assistance provided in connection with a self-sufficiency program is 
similar to transitional housing, in which occupancy is time-limited and 
participation in supportive services to facilitate transition to 
independence is required. HOME funds cannot be deposited in escrow 
accounts for self-sufficiency participants because the only eligible 
costs associated with tenant-based rental assistance are rental 
payments, security deposits, and utility deposits. However, the HOME 
regulations do not prohibit other funding from being deposited in 
escrow accounts for recipients of HOME-funded tenant-based rental 
assistance. HUD is adopting the proposed rule language without change.
Other Proposed Changes
    HUD proposed: (1) Adding a provision to redesignated Sec.  
92.209(c)(2)(v) to specifically prohibit the exclusion of persons who 
are given preferences for HOME assistance from participating in any 
other program of the jurisdiction; (2) revising Sec.  92.209(g) to make 
explicit that all tenants must have a lease and that the lease must 
comply with the requirements that are already cross-referenced in the 
existing provision; (3) revising Sec.  92.209(h)(3)(ii) to replace the 
existing description of one alternative for establishing the amount of 
rent for a unit with a cross-reference to the regulations in 24 CFR 
part 982, which govern the HCV program; and (4) making a technical 
change to Sec.  92.209(l) to clarify that the provision applies 
whenever HCV assistance becomes available, rather than just when it 
becomes available ``to a participating jurisdiction.'' HUD did not 
receive comments on these proposed revisions and is adopting the 
proposed rule language without change.
h. Troubled HOME-Assisted Rental Housing Projects (Sec.  92.210)
    HUD proposed adding a new Sec.  92.210 to the HOME regulations, 
establishing provisions that facilitate participating jurisdictions' 
efforts to preserve HOME-assisted housing projects that have become 
financially unviable and, as a result, are at risk of failure or 
foreclosure.
    Comments: Many commenters supported the addition of these 
provisions. A commenter opposed the provisions, stating that the 
decision to reduce the number of HOME units in a troubled project 
belongs solely to the property owner and the participating jurisdiction 
and should not involve HUD. Another commenter asked that HUD provide 
guidance on the process for obtaining approval to reduce the number of 
HOME units in a project. Several commenters urged HUD to define what 
constitutes a troubled project more broadly to include projects 
suffering from physical deterioration. Other commenters urged HUD to 
vest approval authority relative to project workouts with HUD field 
offices rather than in Headquarters. Several commenters urged HUD to 
explicitly include refinancing of existing debt as an eligible use of 
HOME funds in a work-out situation. A commenter recommended that HUD 
make initial capitalization of replacement reserves eligible for all 
HOME rental projects. Another commenter urged HUD to specify that the 
maximum per unit subsidy limit that applies to HOME-assisted units 
receiving additional HOME funds during the period of affordability be 
the limit in effect at the time of the additional investment rather 
than the initial commitment of HOME funds. Other commenters urged HUD 
to require that the existing period of affordability be extended on all 
projects that receive additional HOME funds. Another commenter 
recommended that HUD not require an extension of the affordability 
period for any project receiving additional HOME funds during the 
period of affordability, irrespective of the amount of HOME funds being 
invested.
    HUD Response: Under the existing HOME regulations, a participating 
jurisdiction would be required to obtain a waiver of Sec.  92.504(a)(1) 
in order to reduce the number of HOME-assisted units that were 
originally designated. The purpose of the change offered by the 
proposed rule was to permit this reduction to occur without a waiver. 
However, HUD has an obligation to ascertain that a reduction involves 
only units that were designated in excess of the minimum, will not 
unduly burden low-income tenants, and is both necessary to preserve the 
unit and more effective than other potential options for preserving the 
project's viability. Consequently, it is necessary for HUD to approve 
any plan to reduce the number of HOME-assisted units in a project. 
Additionally, it remains HUD's position that the authority to approve 
workouts overall, as well as the authority to execute Memoranda of 
Agreement with participating jurisdictions on behalf of HUD, is 
appropriately placed in HUD Headquarters.
    The use of additional HOME funds to refinance existing debt would 
be permissible under the proposed rule language. However, HUD chose not 
to list this use because the use of HOME funds for this purpose is 
relatively rare. In instances where HOME funds were used to refinance 
existing debt, it would be necessary for the participating jurisdiction 
to designate all the units in the project as HOME-assisted, which may 
not be desirable or practicable in many circumstances. Consequently,

[[Page 44641]]

HUD is not adding refinancing of existing debt to the uses listed in 
Sec.  92.210(b). HUD agrees that the maximum per unit subsidy limit 
applicable to a project receiving additional HOME funds should be the 
limit in effect at the time that the funds are added. HUD has opted not 
to revise the regulation to clarify, but will include this provision in 
administrative guidance.
    HUD disagrees with commenters who urged that the period of 
affordability always be required to be extended if the project receives 
additional HOME assistance and those who stated that the period of 
affordability never be extended on such a project under any 
circumstance. HUD's experience related to troubled project workouts has 
been that flexibility is essential to success. Many participating 
jurisdictions already impose periods of affordability that greatly 
exceed the required minimum periods in Sec.  92.252. Alternately, some 
projects may face market or physical conditions that make an extended 
period of affordability unworkable or unrealistic. The minimum period 
of affordability required by HUD in a workout will never be less than 
the minimum period required under the regulations based upon the total 
of the initial and subsequent per unit HOME investment. Although HUD's 
preference is to extend affordability periods whenever practicable, it 
declines to make the requested change in order to preserve the 
flexibility necessary to achieve successful workouts.
i. HOME Funds and Public Housing (Sec.  92.213)
    HUD proposed adding a new Sec.  92.213 to the HOME regulations to 
address the use of HOME funds with public housing funds. The use of 
HOME funds in public housing projects, and, in particular, the use of 
HOME funds in HOPE VI projects is an area that would benefit from 
further regulatory elaboration, given that HOME funds and public 
housing funds are each governed by separate statutes and NAHA prohibits 
the use of HOME funds to provide assistance authorized under section 9 
of the United States Housing Act of 1937 (Public Housing Capital and 
Operating Funds). This prohibition is reflected in paragraph (a) of 
Sec.  92.213, which prohibits the use of HOME funds for public housing 
modernization or operating assistance. This provision also prohibits a 
HOME-assisted unit from receiving Operating Fund or Capital Fund 
assistance under Section 9 during the period of affordability. With 
respect to the development of new public housing, paragraph (a) also 
makes clear that HOME funds cannot be used for public housing units, 
whether funded under section 9 or another source. Paragraph (b) of 
Sec.  92.213 establishes an exception to this prohibition that permits 
the use of HOME funds to develop a unit that receives funds for 
development under section 24 (HOPE VI), so long as no Capital Funds are 
used to develop the unit. Paragraph (c) of Sec.  92.213 makes clear 
that HOME funds may be used to develop or rehabilitate affordable 
housing units that are not public housing units in projects that also 
contain public housing units funded by Section 9, HOPE VI, or other 
funds.
    Comments: While a few commenters supported the provision, the 
majority of commenters commenting on this provision opposed the 
provision stating that the primary activity of many HOPE VI projects 
has been to demolish public housing units and replace them largely with 
market-rate LIHTC units leaving only a small percentage of units as 
public housing. A commenter stated that the National Affordable Housing 
Act (NAHA) prohibits the use of HOME funds for any public housing 
purpose. The commenters that supported the inclusion of the provision 
requested further clarification on the interplay of HOME funds, HOPE VI 
funds and public housing funds. Another commenter welcomed the 
inclusion of the provision stating that this interpretation had 
previously only been available through guidance. Other commenters 
expressed uncertainty over how the statutory rent provisions applicable 
to HOME-assisted units could be met in a public housing unit and 
requested that HUD provide additional guidance .
    HUD Response: HUD included a new provision in the proposed rule to 
clarify the permissible and impermissible uses of HOME and HOPE VI 
funds in the development and management of public housing units. The 
provision offered by HUD is based upon a longstanding legal 
interpretation of the three statutes: The HOME authorizing statute, the 
HOPE VI authorizing statute and the 1937 Act. HUD was not presenting a 
policy option but rather clarifying the statutory parameters governing 
the eligible uses of these funds. The commenters who opposed this 
language appeared to oppose the language more on the basis of policy as 
opposed to disagreement with HUD's statutory interpretation. HOME funds 
are not statutorily prohibited from being for any public housing 
purpose, but are specifically prohibited from being used ``to provide 
assistance authorized under section 9'' and ``to carry out activities 
authorized under section 9(d)(1)'' of the 1937 Act (public housing 
capital fund and operating fund). There is no statutory prohibition on 
using public housing operating assistance or public housing capital 
fund assistance for units that were developed with HOME and HOPE VI 
funds, authorized under section 24 of the 1937 Act, and are operated as 
public housing.
    The HOME Program was established to stimulate public-private 
partnerships to develop affordable housing, but the HOME authorizing 
statute specifically excluded from such partnerships combining HOME 
funds with public housing operating or capital funds for the operation, 
modernization or development of public housing under sections 9 and 14. 
As explained in the Senate report accompanying S.566 (the bill that 
became NAHA and authorized the HOME program) ``These prohibitions are 
made necessary by the Committee's intent that [HOME] be a new 
initiative focused on expanding public and private investment for more 
affordable housing and not just a general fund for undifferentiated 
federal housing assistance'' (S. Rep. 101-316, June 8, 1990, at 51). 
This prohibition remained in place even after section 9 of the 1937 Act 
was significantly revised by the Quality Housing and Work 
Responsibility Act (QHWRA) (Pub. L. 105-276, approved October 21, 1998) 
to establish the public housing operating and capital funds. The 
general HOME prohibition on use for activities ``under section 9'' 
remained in place, and the provision prohibiting use under section 14 
was amended to reflect the new capital fund provision--section 
9(d)(1)--and expanded the explicit prohibition on using HOME funds for 
public housing capital investments. However, Section 535 of QHWRA added 
a new section 24 to the 1937 Act (42 U.S.C. 1437v) to establish the 
HOPE VI program that is in operation today, and QHWRA did not preclude 
combining HOME funds with HOPE VI funds in the development and 
management of affordable housing.
    The HOME rule is consistent with these provisions and does not 
allow HOME funds to be used for public housing units, except to develop 
units under section 24 of the 1937 Act. Units developed with both HOME 
and HOPE VI may receive operating assistance and may subsequently 
receive Capital Funds for rehabilitation or modernization under section 
9 of the 1937 Act. Once developed, public housing units may not receive 
HOME funds, and HOME-assisted housing units may not receive Operating 
Fund or Capital Fund assistance under section 9 of the 1937

[[Page 44642]]

Act during the HOME period of affordability.
    HUD agrees that clarification of how HOME rent requirements of 
Sec.  92.252(a) and (b) affect the tenant and operating payments of 
public housing units is appropriate. Therefore, a new paragraph (d) is 
added to provide the requested clarification.
j. Prohibited Activities and Fees (Sec.  92.214)
Prohibition of Certain Fees
    HUD proposed several revisions to Sec.  92.214(b) for the purpose 
of clarifying the prohibition against program participants charging 
fees to cover their administrative costs and that the amount of 
application fees charged must not create an undue impediment to a low-
income family, a jurisdiction, or other entity's participation in the 
participating jurisdiction's HOME program. HUD also proposed a new 
provision at Sec.  92.214(b)(2) prohibiting owners of HOME-assisted 
rental projects from charging fees to tenants that are not reasonable 
or customary.
    Comments: One commenter stated that the prohibition on the 
inclusion of the term ``other fees'' in the prohibition at Sec.  
92.214(b)(1) will have the effect of disallowing developer fees and 
fees paid to construction contractors and subcontractors for overhead 
and profit, as well as fees paid to other HOME-funded contractors such 
as property inspectors, cost estimators, architects, engineers, real 
estate brokers and others. The commenter stated that the rule should 
expressly allow these fees, as long as they are reasonable and the 
services are properly procured. Several commenters questioned the use 
of the term ``program participants,'' stating that it was unclear what 
entities were covered by the term. Other commenters stated that 
participating jurisdictions should be permitted to charge origination 
fees for HOME loans, as well as servicing fees. A few commenters 
identified an apparent contradiction between Sec.  92.214(b)(2) and the 
written agreement provisions at Sec.  92.504(c)(3)(xi), which require 
inclusion of a prohibition on parking fees in the written agreement 
between the participating jurisdiction and the owner or developer of 
HOME-assisted housing.
    HUD Response: HUD does not agree that the inclusion of the term 
``other fees'' would prohibit developer fees, contractor overhead and 
profit, and fees for professional services, such as architectural and 
engineering services, all of which are expressly eligible costs under 
Sec.  92.206(d). Paragraph Sec.  92.214(b) clearly states that it 
applies to fees charged to cover the cost of administering the program. 
However, HUD does agree that the use of the term ``program 
participant'' in this section is unclear and may have led to 
misinterpretation of the requirements. HUD is amending the rule to 
remove the term ``program participant'' and add CHDO to the list of 
entities covered by this prohibition. HUD has also revised Sec.  
92.214(b)(1) to further clarify the circumstances under which the 
participating jurisdictions, subrecipients, and state recipients may 
charge certain fees.
Fees for Ongoing Monitoring of HOME Rental Projects
    HUD also proposed revising Sec.  92.214(b)(1) to eliminate the 
prohibition against monitoring fees and expressly permitting 
participating jurisdictions to charge fees to owners of HOME rental 
housing to cover the cost of ongoing monitoring, financial oversight, 
and physical inspection during the period of affordability.
    Comments: HUD received many comments supporting this proposed 
change. Some commenters suggested that HUD ensure that monitoring fees 
are reasonable and do not jeopardize the affordability of the property 
to the residents, particularly extremely low-income tenants. A few 
commenters stated that it was unfair to charge fees to property owners, 
because the owners have no control over the amount of the fee. Other 
commenters objected to HUD's stated position in the preamble that 
monitoring fees could only be charged to projects that received a 
commitment of HOME funds on or after the effective date of a final 
rule. These commenters stated that participating jurisdictions should 
be permitted to charge monitoring fees on all rental projects under a 
period of affordability. Other commenters expressed concern about how 
to determine a monitoring fee that is reasonable and requested guidance 
from HUD. A commenter stated that HUD should allow participating 
jurisdictions to charge ongoing monitoring fees to homeowners who 
receive HOME homebuyer or rehabilitation assistance. Several commenters 
urged HUD to adopt elements of the Rental Alignment Demonstration and 
permit participating jurisdictions to rely on monitoring performed by 
other entities, as long as that monitoring met all HOME requirements.
    HUD Response: HUD recognizes that many participating jurisdictions 
would like to impose monitoring fees on existing HOME rental projects. 
However, HUD's position is that it is neither prudent nor practicable 
to permit fees to be imposed on projects where the written agreement 
does not include a required monitoring fee and the underwriting did not 
include payment of annual monitoring fees. HUD does not agree that it 
is appropriate to permit ongoing monitoring fees to be charged to low-
income homebuyers and homeowners, and notes that ongoing physical 
inspections, income determinations, and financial assessments are not 
required for homeownership projects. HUD shares commenters' concerns 
about ensuring that monitoring fees charged to rental projects are 
reasonable. Monitoring fees on LIHTC projects vary widely and, in some 
states, do not appear to be related to the actual cost of compliance 
activities performed. Consequently, adoption of a state's LIHTC 
monitoring fee in a state as a HOME monitoring fee would not be 
reasonable in some states. HUD is revising this section to require that 
participating jurisdictions base their monitoring fees on an estimate 
of the average per unit staff time and materials consumed by compliance 
monitoring to ensure that the fees charged are not excessive and are 
based upon the actual cost of performing the compliance monitoring 
function. Participating jurisdictions will be required to document the 
basis on which they calculated their fee and retain this documentation 
for monitoring by HUD. Participating jurisdictions will also be 
required to ensure that the amount of the annual fee is included in the 
underwriting of the project. HUD will issue additional guidance 
regarding developing fee schedules.
k. Match Credit (Sec.  92.221)
    HUD proposed adding a new paragraph (d) to Sec.  92.221 requiring 
that a contribution to HOME-assisted or HOME-eligible homeownership 
projects must be valued not at face value, but by the amount by which 
it reduced the sales price to the homebuyer. Contributions that are 
included in a homebuyer's mortgage (e.g., donated land or construction 
materials) would not count as a match contribution.
    Comments: Several commenters opposed the provision, stating that it 
would require them to lower sales prices on units in order to count 
these contributions as match. Some commenters raised concerns that 
lowering prices would have detrimental effects on neighborhood housing 
markets, particularly in distressed communities. Other commenters were 
concerned that they would not be able

[[Page 44643]]

to meet the minimum match requirement if the new provisions are 
adopted. Several commenters stated that contributions to homebuyer 
housing that are included in the homebuyer's mortgage serve the 
important purpose of enabling the housing developer to roll the value 
of the contributions forward into the next affordable homebuyer unit it 
develops. Other commenters stated that limiting match to contributions 
that reduce the price of the housing to the homebuyer ignores the fact 
that these contributions often write-down the development cost of a 
unit so that it can be sold to a low-income household at fair market 
value.
    HUD Response: HUD has carefully considered the commenters' concerns 
and has revised the proposed rule to balance those concerns with the 
requirement that match consist of permanent contributions that 
facilitate development and enhance affordability of HOME-assisted and 
other match-eligible housing. In response to comments, HUD has revised 
the final rule to make a distinction between contributions to the 
development of affordable housing and contributions that directly 
benefit low-income homebuyers. Under this approach, there will be no 
change to the eligibility of contributions that directly benefit the 
homebuyer (e.g., downpayment or closing cost assistance from non-
federal sources, the yield foregone on below-market interest rate 
mortgage financing, the direct cost of donated homebuyer counseling). 
However, in order to count as a match contribution, this final rule 
requires that contributions to the development of homebuyer also 
benefit the homebuyer in one of two ways. Contributions to the 
development of housing could include: Cash or below-market interest 
rate construction financing, forbearance of fees, donated real 
property, housing bond financing provided to a project developer, 
donated site preparation and construction materials, and donated labor 
or professional services. The contribution must either reduce the sale 
price of the housing below fair market value, or if the development 
cost of a unit exceeds the market value, by enabling the unit to be 
sold for less than the cost of development. In either case, a 
contribution can be credited to the extent that it reduced the sale 
price below fair market value or the cost of development.
l. Match Reduction (Sec.  92.222)
    HUD proposed revising Sec.  92.222(b) so that HUD would take the 
extent of a disaster's fiscal impact on a participating jurisdiction 
into account when determining whether to grant the reduction, as well 
as the amount and duration of any match reduction.
    Comments: A commenter requested that HUD clarify how it will make 
this determination.
    HUD Response: As indicated in the preamble of the proposed rule, 
HUD plans to issue administrative guidance regarding the factors HUD 
will consider and the information that the participating jurisdiction 
should submit with its match reduction request.
m. Maximum Per-unit Subsidy Amount, Underwriting, and Subsidy Layering 
(Sec.  92.250)
Maximum per Unit Subsidy Limits
    HUD proposed revising Sec.  92.250(a) to clarify that the maximum 
HOME per-unit subsidy may not be increased above 240 percent of the 
base limits authorized by section 221(d)(3)(ii) of the National Housing 
Act (12 U.S.C. 17151(d)(3)(iii), despite the fact that section 221 of 
the General Provisions of Title II, Division K of the Consolidated 
Appropriations Act, 2008 (Pub. L. 110-161, approved December 26, 2007) 
increased the maximum exceptions that HUD may grant for the 221(d)(3) 
mortgage insurance program to up to 315 percent of the base limits. The 
clarification was determined necessary because section 212(e) of NAHA, 
which establishes the 221(d)(3) mortgage insurance limits as the per-
unit cost limits for HOME-assisted units, was not amended and continues 
to limit HOME subsidy to the lesser of a participating jurisdictions' 
actual high cost percentage or to 240 percent of the base limit. HUD 
did not receive any comments on this provision and is adopting the 
proposed rule language without change.
Subsidy Layering, Underwriting, and Market Analysis
    HUD proposed revising Sec.  92.250(b) to require participating 
jurisdictions to: (1) Evaluate subsidy layering and conduct or examine 
the underwriting of all projects to ensure that the HOME subsidy is not 
excessive and does not result in an undue or excessive return to the 
owner; and (2) adopt underwriting and subsidy layering guidelines that 
include an assessment of, at minimum, the market conditions of the 
neighborhood in which the project will be located, the experience of 
the developer, the financial capacity of the developer, and firm 
financial commitments for the project.
    Comments: Many commenters supported these proposed additions to the 
regulations, citing the importance of sound underwriting and adequate 
market need to making affordable housing viable. However, other 
commenters cited concerns about the added burden, cost, and complexity 
of the new requirements. A number of commenters urged the Department to 
permit participating jurisdictions to accept the underwriting and 
subsidy layering conducted by other funders. Several commenters stated 
that the proposed rule would require a full-scale market analysis for 
every project, even individual homebuyer units. A few commenters asked 
for clarification of what would constitute an acceptable assessment of 
neighborhood market conditions for projects of different sizes and 
types (e.g., homeownership, special needs). Other commenters requested 
clarification about whether subsidy layering and underwriting 
requirements applied to homebuyer projects.
    HUD Response: HUD recognizes that the proposed requirements will 
result in additional burden for those participating jurisdictions that 
are not already engaging in these practices. However, requiring these 
practices for all participating jurisdictions is intended to ensure 
successful and timely completion of HOME projects, reduce the 
possibility of undue enrichment of project owners, and ensure that HOME 
funds are used for projects for which there is adequate demand. HUD's 
interest in safeguarding and optimizing scarce taxpayer funds justifies 
any additional burden that may arise from these requirements. HUD is 
adopting the proposed provisions, but has added a new paragraph (3) 
that explicitly states that these provisions do not apply to owner-
occupied rehabilitation projects where assistance is provided as a 
grant or to homebuyer assistance projects that do not involve 
development or rehabilitation of housing (e.g., downpayment 
assistance). These requirements apply to homebuyer projects that 
involve development activities. To improve clarity of the provision, 
HUD is revising the language at Sec.  92.250(b)(2) to eliminate the 
phrase ``market conditions'' with ``current market demand in the 
neighborhood.'' For the same reason, this paragraph is being revised to 
specify that firm financial commitments must be made in writing.
    HUD will issue guidance on these requirements. However, it is 
important to clarify that not all HOME projects will require a full-
scale market analysis and that the market area for projects of various 
sizes or other characteristics varies. While such analyses are 
appropriate for large-scale developments, assessing market

[[Page 44644]]

conditions in the case of smaller projects will be considerably less 
burdensome. The purpose of the requirement is to ensure that there will 
be adequate market demand for a project before committing HOME funds.
    HUD has determined that additional guidance on the applicability of 
these requirements to specific types of projects is necessary. This 
final rule makes explicit that an underwriting analysis is only 
required for owner-occupied rehabilitation projects if the HOME-funded 
rehabilitation loan is amortizing; participating jurisdictions will not 
be required to perform underwriting analyses of HOME-funded grants or 
deferred, forgivable loans to owner-occupants seeking rehabilitation 
assistance. This rule also makes clear that participating jurisdictions 
will not be required to perform neighborhood market analyses or 
evaluate developer capacity for owner-occupied rehabilitation projects 
or projects involving the provision of HOME-funded downpayment 
assistance, but no HOME-funded development. New paragraphs Sec.  
92.250(b)(3) and (4) have been added to provide this clarification.
n. Property Standards (Sec.  92.2 and Sec.  92.251)
    HUD proposed substantial revisions to the property standards 
applicable to HOME-assisted properties. The proposed changes to Sec.  
92.251 reorganized the section and established new requirements for 
HOME-assisted projects involving new construction, rehabilitation, 
acquisition of standard housing, manufactured housing, as well as 
ongoing property condition standards for HOME-assisted rental housing. 
In the final rule, the standards for rehabilitation projects, in Sec.  
92.251(b), were reorganized and revised to reflect public comment and 
to clarify misunderstandings of the proposed requirements.
Definitions (Sec.  92.2)
    HUD proposed to add definitions for ``observed deficiency (OD)'' 
and ``Uniform Physical Condition Standards (UPCS)'' to Sec.  92.2.
    Comments: A few commenters were concerned with the context of the 
term ``observed deficiency'' in connection with UPCS. The commenters 
noted that the proposed definition only addresses technical standards 
(i.e., routes, widths of main entrances, interior halls, and outside 
common areas). The commenter suggested that participating jurisdictions 
should be required to inspect for compliance with the Fair Housing Act, 
Section 504 of the Rehabilitation Act of 1973, and Americans with 
Disabilities Act (ADA) standards for structural accessibility.
    HUD Response: With the revisions to the property standards in Sec.  
92.251, HUD is eliminating the definition of ``observed deficiency. 
That term is no longer used in Sec.  92.251 and as used in Sec.  
92.504(d) refers to the participating jurisdiction's property standard 
rather than to UPCS. Under the participating jurisdiction's property 
standards, pursuant to Sec.  92.251(a)(2)(ii) and (b)(2)(v), the 
housing must meet the accessibility requirements of 24 CFR part 8, 
which implements Section 504, and Titles II and III of the Americans 
with Disabilities Act (42 U.S.C. 12131-12189) implemented at 28 CFR 
parts 35 and 36, as applicable. Covered multifamily dwellings must also 
meet the design and construction requirements at 24 CFR 100.205, which 
implements the Fair Housing Act.
Written Standards for Methods and Materials for New Construction 
Projects (Sec.  92.251(a))
    Comments: A few commenters supported the proposed requirement in 
Sec.  92.251(a)(v) to establish written standards for methods and 
materials for new construction projects. Other commenters, however, 
opposed the requirement to establish written standards for new 
construction when using HOME funds. The commenters stated that this 
requirement is burdensome, especially for small participating 
jurisdictions; will require significant resources to develop; and is 
not feasible for participating jurisdictions with limited capacity, 
housing construction expertise, and administrative budgets. For new 
construction building activity, several commenters argued that the 
development of written standards for methods and materials is 
unnecessary because state and local codes for new construction, as well 
as the International Residential Code (IRC) and International Building 
Code (IBC), provide sufficient specificity such that scopes of work can 
be developed using these codes. Some commenters expressed concern that 
this requirement will do little to improve housing quality, and if 
participating jurisdictions do not do a good job in developing 
standards, this could generate sub-optimal development practices and 
potential liability issues for participating jurisdictions, or could 
void manufacturer's warranties. Some commenters suggested allowing 
participating jurisdictions to rely on standards imposed by other 
public agencies, such as agencies that administer LIHTC, as 
participating jurisdictions are already familiar with these standards. 
Several commenters requested more information about what HUD envisioned 
would be in written methods and materials and asked that HUD provide 
training, guidance, templates with recommended minimum standards, and 
other technical assistance from HUD to help participating jurisdictions 
implement this requirement.
    HUD Response: HUD acknowledges the concern expressed by many 
commenters about the requirements for written standards for methods and 
materials. With respect to HOME-funded new construction projects, HUD 
agrees with the commenters that its proposal would be duplicative to 
require participating jurisdictions to establish written standards for 
methods and materials solely for new construction of HOME-assisted 
projects that are separate from codes already established. The final 
rule requires new construction of HOME-assisted projects to meet all 
applicable state and local building codes, or in the absence of such 
codes, the IRC or IBC, as applicable. HUD has determined that these 
codes provide sufficient detail to establish the materials and methods 
for new construction. Therefore, at this final rule stage, separate 
written standards for methods and materials will not be required for 
new construction activity. This requirement in Sec.  92.251(a)(2)(v) is 
removed in the final rule.
Rehabilitation Projects (Sec.  92.251(b))
    The proposed regulation required the participating jurisdiction's 
property standards for rehabilitation projects to describe, in detail, 
the scope of the rehabilitation that may be performed and the 
participating jurisdiction's written requirements for the design, 
amenity, and materials, beyond that which is contained in the local 
code (i.e., written methods and materials). The rehabilitation 
standards must establish the requirements for the minimum acceptable 
product that the rehabilitation completes, and a basis for a uniform 
inspection of the rehabilitated housing.
    In the final rule, HUD reorganized and revised language in Sec.  
92.251(b) to clarify the requirements for rehabilitation standards for 
HOME-assisted projects. The final rule requires that a participating 
jurisdiction's rehabilitation standards must include requirements to: 
Address health and safety defects immediately; determine the useful 
life cycle of major systems in both rental and owner-occupied housing 
and appropriately fund replacement

[[Page 44645]]

reserves to address capital repair and replacement needs; meet existing 
lead-based paint and accessibility laws and regulations; rehabilitate 
HOME-assisted projects to mitigate the impact of potential disasters; 
ensure that the housing meets all applicable state and local codes, 
ordinances and zoning requirements upon completion of rehabilitation; 
correct all critical deficiencies from the list of Observable 
Deficiencies in UPCS that HUD requires to be included in a 
participating jurisdiction's standards: Review construction cost 
estimates, contracts and related documents; conduct construction 
progress and final inspections to ensure that the work performed is in 
compliance with all requirements and establish requirements for the 
frequency of these inspections. The requirements of Sec.  92.251(b) 
apply to the rehabilitation of HOME assisted rental housing projects 
and homebuyer acquisition and rehabilitation projects, as well as 
homeowner rehabilitation.
State and Local Codes, Ordinances, and Zoning Requirements
    Comments: Commenters requested that HUD clarify how participating 
jurisdictions could meet the proposed requirement in Sec.  92.251(b)(1) 
that rehabilitated HOME-assisted projects meet state and local codes 
and ordinances if the state or local jurisdiction has no such codes or 
ordinances that apply to rehabilitation work where the project is 
located.
    HUD Response: The final rule at Sec.  92.251(b)(1) requires that, 
upon completion, all rehabilitation work performed on HOME-assisted 
projects must meet all state and local codes, ordinances, and 
requirements. In the absence of state or local building codes that 
address rehabilitation, the work must meet the International Existing 
Building Code (IEBC). In general, the IEBC provides alternative 
approaches to the IBC and IRC with respect to remodeling, repair, or 
alteration of existing buildings, as many existing buildings cannot 
comply with building code requirements for new construction. However, 
the IEBC does contain basic health and safety requirements for the 
rehabilitated building, such as requirements for fire prevention, 
structural or other life safety features. HUD plans to provide training 
and technical assistance to address the need for training on these new 
requirements and coordinate across HUD to develop model rehabilitation 
standard checklists. In addition, HUD will issue a notice that 
identifies which of the observable deficiencies in UPCS that 
participating jurisdictions must be corrected as part of the 
rehabilitation standards they adopt.
Proposed Use of UPCS in the HOME Program
    Comments: Several commenters opposed the proposed use of UPCS in 
the HOME program, expressing concern about the administrative burden 
and expense of using UPCS and suggesting retention of Housing Quality 
Standards (HQS). Commenters requested training and guidance on the new 
standards before the requirements take effect. A few commenters were 
concerned that the additional standards and necessary repairs would 
cause delays and prevent real estate transactions from moving forward, 
and requested a reasonable period of transition to UPCS. A commenter 
recommended that the 2009 International Property Maintenance Code be 
used as a standard for rental activities in rural areas rather than 
UPCS. Several commenters requested that HUD clarify whether inspection 
procedures of HUD's Real Estate Assessment Center (REAC) would be 
required.
    Some commenters supported the use of UPCS for rental properties, 
but suggested that the UPCS standards should not apply to owner-
occupied homeowner rehabilitation. Some commenters requested that HUD 
clarify the difference between UPCS, standards in state and local 
codes, and the proposed required rehabilitation standard that 
prescribes the methods and materials to be used in rehabilitation 
activities.
    HUD Response: For HOME-assisted rental housing projects, HUD has 
determined that the use of UPCS will result in better housing quality 
and long-term viability of HOME-assisted units than HQS, because UPCS 
includes a more comprehensive list of inspectable items and areas than 
HQS. The existing regulations require that all HOME-assisted rental 
units meet applicable state and local codes, this is a statutory 
requirement and is not changed in this final rule. In addition, the 
existing regulations require that in the absence of such state or local 
codes, HQS must be used as the property condition inspection protocol 
to meet the requirement for inspections of HOME-assisted rental 
housing. In the final rule, instead of using HQS in the absence of 
applicable state or local codes, UPCS must be used as the property 
condition inspection protocol when there are no applicable state or 
local codes. The use of UPCS as an inspection protocol for ongoing 
property inspections could facilitate alignment inspections of HOME-
assisted units with other federal housing programs. For example, UPCS 
is used to conduct inspections in many of HUD's rental housing programs 
and is familiar to HUD housing providers participating in these 
programs. Further, UPCS is used to conduct inspections in the LIHTC 
program, which is frequently a funding source in HOME-assisted rental 
housing. HUD and other federal agencies are currently engaged in a 
pilot program to examine ways to align the property inspections 
required by different housing programs. If this alignment is achieved, 
it will promote coordination at the local level and may promote cost 
savings.
    HUD will issue guidance specifying which inspectable items and 
areas in UPCS must be included in these inspections. Where the 2009 
International Property Maintenance Code has been adopted as the state 
or local code, participating jurisdiction would incorporate those 
requirements in the standards they establish to meet the requirements 
of Sec.  92.251(f).
    In the final rule at Sec.  92.251(b)(1)(viii), HUD also clarifies 
how deficiencies listed in UPCS are incorporated into a participating 
jurisdiction's rehabilitation standards. HUD agrees that not every 
deficiency would be required to be addressed for all HOME-assisted 
rehabilitation. Based on the list of inspectable items and areas in the 
UPCS, HUD will establish which critical deficiencies must be corrected 
as a minimum requirement for each type of rehabilitation--rental, 
homebuyer, and homeowner housing--and, therefore, must be included in 
the participating jurisdiction's rehabilitation standards.
    HUD disagrees that the UPCS standards should not apply to owner-
occupied homeowner rehabilitation. Although the current regulation 
requires that HOME-funded homeowner rehabilitation correct all property 
code violations, HUD has found that in many instances, the completed 
housing units did not meet the existing property codes and that all 
health and safety defects were not removed. Along with existing state 
and local property condition and building codes, or the IEBC, the use 
of UPCS inspections on completed HOME-funded homeowner rehabilitation 
will help assure that these units are free of life-threatening 
conditions, as well as health and safety defects, and meet minimum 
quality standards. HUD will issue guidance that establishes which 
observed deficiencies in homeowner rehabilitation, from the list of 
inspectable items and areas in UPCS, must be included in a 
participating jurisdiction's rehabilitations standards

[[Page 44646]]

and corrected as part of HOME-funded homeowner rehabilitation.
    To clarify the difference between codes such as the IEBC or local 
building codes and UPCS, UPCS is an inspection protocol that is used to 
evaluate the condition of housing. In this final rule, HUD is requiring 
participating jurisdictions to use this inspection protocol to 
establish minimum property condition standards for rehabilitation 
standards, (e.g., if certain deficiencies are observed as part of the 
UPCS inspection, then the housing must be rehabilitated to correct 
them). HUD previously issued guidance regarding written rehabilitation 
standards and how they differ from property standards in HOMEfires Vol. 
3, No. 1, January 2001, which is posted on HUD's Web site.\5\
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    \5\ See http://www.hud.gov/offices/cpd/affordablehousing/library/homefires/volumes/vol3no1.cfm.
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    Many commenters misunderstood the proposed use of UPCS in 
inspecting HOME-assisted units and believed HUD proposed that 
participating jurisdictions adopt existing REAC inspection procedures 
and protocols (i.e., item weight, scoring, and level of criticality). 
As stated earlier, HUD proposed to use UPCS for property condition 
inspections and as part of rehabilitation standards in the HOME 
program. Use of certified REAC inspectors is not required. Further, 
participating jurisdictions, subrecipients, and state recipients are 
not required to use their own staff to conduct the inspections; they 
may contract with third parties to do so. HUD is aware that some 
participating jurisdictions are not familiar with UPCS, and agrees with 
commenters that a transition period and training would be helpful. The 
final rule delays the effective date of the provisions of Sec.  92.251 
by 18 months so that HUD may develop additional guidance to facilitate 
an efficient transition to the new requirements.
Written Standards for Methods and Materials for Rehabilitation 
Standards (Sec.  92.251(b)(2)(i))
    Comments: Some commenters expressed concern that the proposed rule 
was not sufficiently clear about what is required in Sec.  
92.251(b)(2)(i) with respect to written methods and materials for 
rehabilitation standards. Commenters asked that HUD provide training, 
guidance, templates with recommended minimum standards, and other 
technical assistance to help participating jurisdictions implement this 
requirement. A commenter stated that while HUD requires participating 
jurisdictions to meet all applicable state and local codes, not all 
jurisdictions have rehabilitation codes, and asked that HUD make clear 
that rehabilitation work is not required to meet the same standards as 
new construction. Other commenters recommended relying on other public 
entities or federal funders for these standards.
    HUD Response: This final rule requires participating jurisdictions 
to adopt written standards for methods and materials for rehabilitation 
of HOME-assisted projects, as part of the required rehabilitation 
standards found in Sec.  92.251(b)(1). Over the history of the program, 
HUD has found that numerous participating jurisdictions have not made 
determinations of whether rehabilitation performed with HOME funds was 
adequate. The adoption of written methods and materials, which are 
sometimes referred to as specifications and include details such as the 
grade of lumber to be used, the number of nails per square foot, the 
type of material that can or cannot be used for doors serving as fire 
exits, the distribution pattern and material of roofing tiles, will 
improve the quality of rehabilitation performed with HOME funds. This 
final rule clarifies that participating jurisdictions may adopt written 
standards for methods and materials for rehabilitation work that are 
part of applicable national, state or local codes, or may establish 
standards that exceed the minimum requirements of these codes.
Health and Safety Issues
    The proposed rule required that the participating jurisdiction's 
rehabilitation standards must address health and safety issues.
    Comments: A commenter suggested that the property standards 
language should reference the National Fire Protection Association 
(NFPA) 101, Life Safety Code or NFPA 5000, Building Construction and 
Safety Code, and include several specific requirements to address fire 
safety objectives. A few commenters requested that HUD provide specific 
standards to cover health and safety inspection items. Some commenters 
suggested that HUD expand its definition of property standards to 
incorporate the principles of healthy and safe housing, broaden the 
rule beyond life-threatening deficiencies, and include specific 
examples of eligible safety and healthy homes improvements in the rule, 
such as installation of handrails, grab bars in bathrooms, improved 
lighting, kitchen exhaust fans, ventilation systems, removal of mold, 
repair of deteriorated paint, and promotion of integrated pest 
management.
    HUD Response: HUD previously issued guidance that addresses 
implementation of the Fire Administration Authorization Act of 1992 in 
CPD Notice 94-05, which applies to HOME-assisted housing and is posted 
on HUD's Web site.\6\ This guidance prohibits the use of housing 
assistance in connection with certain assisted and insured properties, 
unless certain NFPA fire protection and safety standards are met. While 
HUD agrees with the importance of healthy and safe housing, the 
specific examples provided by commenters do not fall under the category 
of required property standards. However, they are already HOME-eligible 
costs covered under Sec.  92.206. In accordance with 24 CFR 5.703(f), 
UPCS also specifically addresses health and safety concerns. To clarify 
the health and safety requirements, HUD is revising the language in 
Sec.  92.251(b)(1)(i) to remove the first sentence, which is already 
covered in Sec.  92.251(f)(1)(ii), and state that a participating 
jurisdiction's rehabilitation standards must address, not just 
identify, life-threatening health and safety deficiencies immediately 
if the property is occupied.
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    \6\ See http://www.hud.gov/offices/cpd/lawsregs/notices/priorto95/cpd9405.pdf.
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Useful Life of Major Systems and Capital Needs Assessments
    The proposed rule required that the remaining useful life of each 
major system be 15 years, at a minimum, after project completion, or 
the major system must be rehabilitated or replaced to have a minimum 
useful life of 15 years. A capital needs assessment would be required 
for all multifamily rental projects with 26 or more total units and 
determine the useful life of major systems with a capital needs 
assessment. For owner-occupied housing undergoing rehabilitation with 
HOME funds, the participating jurisdiction would be required to ensure 
that each major system has a remaining useful life of at least 5 years 
at the time the project is completed; major systems with a useful life 
of less than 5 years after project completion would be required to be 
rehabilitated or replaced to meet this requirement.
    Comments: Some commenters supported the requirements for major 
systems as proposed. Other commenters questioned who would determine 
the life expectancy of major systems and by what method, what documents 
would be required to be maintained, whether a capital needs assessment 
serves as a reliable tool to determine when major

[[Page 44647]]

systems need to be replaced, and whether major systems with a 
significant remaining useful life (e.g., 10-15 years) must be replaced. 
Several commenters opposed these requirements and stated that repairing 
or replacing major systems with a remaining useful life shorter than 15 
years may be unnecessary, inefficient, wasteful, unsustainable, and 
cost prohibitive. Many commenters suggested that capitalized 
replacement reserves, achieved through adequate underwriting, could be 
used to fund repairs and replacements of major systems in rental 
housing in the future when necessary. Several commenters suggested that 
HUD permit HOME funds to be used to fund a replacement reserve in 
anticipation of future needs. A few commenters suggested that HUD 
should provide additional time beyond acquisition to reach the 15-year 
remaining useful life standard, as many large rehabilitation projects 
take place over several years. A few commenters questioned whether the 
participating jurisdiction would be responsible for the cost to repair 
or replace a new system that originally met the useful life 
requirements if it fails sooner than the estimated timeframe of 15 
years.
    One commenter stated that the 5-year life expectancy requirement 
for homeownership housing would make it difficult for homebuyers to 
qualify their selected resale homes as eligible for HOME assistance. 
Some commenters stated that it is unfair to require a single-family 
rental house to have a 15-year useful life when a single-family 
homebuyer house is only required to have a 5-year useful life, and 
requested more flexibility with these requirements. Other commenter 
suggested a shorter useful life requirement of 5, 7, or 10 years for 
rental housing. A commenter recommended that the provision should state 
that all major systems must be in good operational condition rather 
than specifying time limits. A commenter supported the proposed capital 
needs assessment requirement for projects with 26 or more units. 
Another commenter recommended that a capital needs assessment be 
required for all rental projects, regardless of size. A few commenters 
recommended that HUD not impose a specific capital needs assessment 
format or process, and instead allow participating jurisdictions to use 
their own process. Another commenter requested clarification that a PJ 
is not required to conduct a capital needs assessment and it can be 
conducted by a professional third party entity.
    HUD Response: HUD acknowledges the concerns that commenters 
expressed about the proposed language requiring that after 
rehabilitation all major systems must have a useful life of 15 years. 
HUD agrees with the commenters who stated that major systems with a 
significant remaining useful life should not be required to be replaced 
when the systems are in good condition and replacement is unnecessary. 
Consequently, for rental housing, the proposed requirement for a 
minimum 15-year useful life of major systems in Sec.  92.251(b)(1)(ii) 
is removed in the final rule. Instead, as suggested by many commenters, 
the final rule states that for rental housing, the participating 
jurisdiction must estimate the remaining useful life of systems (based 
on age and current condition) and, to the extent that it is less than 
the period of affordability, the participating jurisdiction must 
ensure, through underwriting, that a replacement reserve is established 
and annual payments to the replacement reserve are adequate to replace 
or repair major systems as needed. HOME funds cannot be used to fund 
replacement reserves; however, larger HOME subsidies can be initially 
provided to reduce debt payments and overall operating expenses, making 
more operating revenue available to fund replacement reserves.
    HUD is not imposing a specific format or process for the required 
capital needs assessment. Participating jurisdictions will have the 
flexibility to develop their own capital needs assessment format and 
process. However, the White House Domestic Policy Council's Rental 
Policy Working Group alignment initiative may recommend capital needs 
assessment requirements and/or guidance that may apply to all federally 
assisted and funded multifamily rental housing in the future. While the 
participating jurisdiction is ultimately responsible for the management 
and oversight of its HOME program to ensure compliance with the 
property standards requirements, a qualified third party can be 
procured to carry out these tasks. Therefore, the participating 
jurisdiction is not required to conduct the capital needs assessments, 
but it must review and approve any capital needs assessment conducted 
by a qualified third party. HUD has determined that the capital needs 
assessment requirement would be overly burdensome for multifamily 
projects with less than 26 units. HUD is adopting the proposed rule 
language without change.
    For HOME-assisted homeowner housing (homebuyer acquisition and/or 
rehabilitation projects and rehabilitation of owner-occupied housing), 
HUD disagrees with the comment that the requirement for a minimum 
useful life of major systems would negatively impact local 
homeownership programs. The final rule does not change the proposed 
rule, and therefore states that each of the major systems must have a 
minimum useful life of 5 years, or the system(s) must be rehabilitated.
Disaster Mitigation
    HUD proposed that, where applicable, housing would be required to 
be improved to mitigate the impact of disasters such as earthquakes, 
hurricanes, flooding, and fires.
    Comments: Some commenters supported the language that allows 
construction of housing to mitigate the impact of potential disasters. 
A commenter requested guidance regarding how participating 
jurisdictions can meet the disaster mitigation requirements.
    HUD Response: Where relevant, participating jurisdictions should 
consult applicable state and local codes, ordinances, and other 
requirements for guidance regarding how to construct housing to 
mitigate the impact of potential disasters. HUD is adopting the 
proposed rule language without change.
Discretionary Housing Improvements
    HUD proposed adding a new paragraph, Sec.  92.251(b)(2)(viii) to 
clarify that discretionary housing improvements beyond those required 
to meet property standards may include modest amenities and aesthetic 
features that are in keeping with housing of similar type in the 
community, and must avoid luxury improvements, as defined by the 
participating jurisdiction.
    Comments: A few commenters opposed the prohibition against luxury 
improvements and the specific examples of luxury items provided in the 
preamble. Several commenters stated that what constitutes ``modest'' 
versus ``luxury'' may be subjective, and requested clarification 
regarding what is allowed or prohibited in HOME-assisted units and the 
level of discretion afforded to the participating jurisdiction. Other 
commenters suggested that cost effectiveness be considered when 
determining which materials, appliances, and fixtures are appropriate.
    HUD Response: The commenters appeared not to understand that the 
proposed rule was not imposing new requirements. The requirement for 
non-luxury housing with suitable amenities, which applies to all HOME-
assisted housing, is established in the existing regulation under 
``eligible activities'' in

[[Page 44648]]

Sec.  92.205(a)(1). Because the non-luxury requirement is already 
established in Sec.  92.205(a)(1), HUD has decided to remove the 
paragraph ``other improvements'' in proposed Sec.  92.251(b)(2)(viii) 
at this final rule stage to avoid redundancy and clarify that new 
requirements are not being imposed.
Work Write-Ups, Construction Progress Inspections and Payment Schedules 
in New Construction and Rehabilitation Projects
    HUD proposed to add new paragraphs to Sec.  92.251(a)(2)(vi) and 
Sec.  92.251(b)(3) and (4) to provide additional detail on required 
inspections and work write-ups. The proposed regulatory language was 
intended to make clear that a participating jurisdiction must inspect 
the property, and review and approve work write-ups for the project 
that describe the work needed to bring the project up to the 
participating jurisdiction's rehabilitation standards. The proposed 
language also provided that the participating jurisdiction must have 
written construction progress inspection procedures (including a 
description of how and by whom the inspections will be carried out) and 
detailed inspection checklists reflecting all aspects of the property 
standards, and that progress and final payments be tied to inspections 
of the completed work.
    Comments: Some commenters expressed support for the requirement to 
establish progress payment schedules. Other commenters were concerned 
that the proposal would require additional expense and time (especially 
in rural areas); for example, requiring inspection before payments may 
delay disbursements until project completion and consequently increase 
interest costs for construction loans. The commenter stated that this, 
in turn, may prevent participating jurisdictions from investing in 
rural areas due to higher costs. They also expressed concern that the 
proposal would duplicate other inspections. Some commenters opposed 
these requirements and stated that construction progress inspections 
would significantly increase project costs and administrative burden, 
particularly for participating jurisdictions with limited staff. Other 
commenters said that participating jurisdiction staff may not be 
qualified or have the capacity to conduct the required inspections. 
Several commenters asked that HUD clarify that participating 
jurisdictions may enter into agreements that allow inspections to be 
done by a subrecipient or other qualified third party that is 
independent of the developer carrying out the activity. Some commenters 
suggested that the HOME regulations should allow independent architects 
under contract with developers to perform construction progress 
inspections and provide sign-off for payment disbursements to align 
with the LIHTC program and avoid redundancy. Other commenters suggested 
that participating jurisdictions should be permitted to rely on 
construction standards used and inspections performed by other 
governmental agencies (e.g., housing finance agencies) or private 
lenders, as long as they meet the HOME requirements. Another commenter 
requested that HUD provide a reasonable timeframe for completion of 
both the inspections and work write-ups to enable developers to include 
them in their construction schedules. Some commenters also requested 
training, technical assistance, and guidance materials to assist in 
implementing these provisions.
    HUD Response: HUD appreciates the commenter's requests for 
clarification of these requirements. One of the primary purposes of 
proposing additional detail on required inspections and work write-ups 
was to ensure that participating jurisdictions are aware of the 
requirement to assess the work performed through periodic monitoring. 
While the participating jurisdiction is responsible for determining 
compliance with property standards requirements, it may hire a 
qualified third party inspector to carry out the tasks. For progress 
inspections, a participating jurisdiction can either use qualified in-
house staff conduct inspections or hire or secure a qualified third 
party that is independent of the developer to conduct these 
inspections. For example, a participating jurisdiction may contract 
with an independent inspector, or in certain circumstances, use 
inspections conducted by other funders, such as investors or the bank, 
to satisfy these inspection requirements. Subrecipients can conduct the 
inspections, if specified in the written agreement with the 
participating jurisdiction, or it can hire an independent third party 
contractor to conduct the inspections. The participating jurisdiction 
cannot rely on or accept inspections and certifications performed by 
the developer or an agent or contractor of the developer. In response 
to the commenters' requests for clarification, the proposed regulatory 
language in Sec.  92.251(a)(2)(vi), (a)(vii), and (b)(4) is revised in 
the final rule in a new paragraphs Sec.  92.251(a)(2)(iv), (a)(2)(v) 
and (b)(2) and (b)(3) to clarify these requirements. HUD also plans to 
provide training and technical assistance to assist participating 
jurisdictions in implementing these provisions.
    Regarding progress payment schedules, HUD agrees with the 
commenters that expressed concern about requiring progress inspections 
before payment may delay construction and potentially increasing costs. 
In many projects, HOME funds are used to acquire the site and 
construction is financed by other sources. Therefore, the proposed 
language may not effectively accomplish this purpose. At this final 
rule stage, HUD is revising Sec.  92.251(a)(2)(vii) and (b)(4)(iii) to 
state that the participating jurisdiction must conduct periodic 
inspections during construction, see Sec.  92.251(a)(2)(iv), (a)(2)(v) 
and (b)(2) and (b)(3) . These inspections do not need to be tied to the 
progress payments. Progress payments and inspections should be tied to 
the normal construction schedule; a separate payment schedule is not 
required for HOME.
Acquisition of Standard Housing
    When HOME funds are used to purchase existing rental housing, such 
housing must be in good condition or it must be rehabilitated with HOME 
funds to ensure that the housing is in standard condition at the time 
of project completion. HUD proposed revising Sec.  92.251(c)(1) to set 
forth property standards for existing housing in standard condition 
that is acquired with HOME funds. If the housing was newly constructed 
or rehabilitated less than one year before HOME funds were committed to 
acquire the housing as rental housing, the housing would be required to 
meet the property standards in Sec.  92.251(a). The participating 
jurisdiction would be required to document this compliance based upon a 
review of approved building plans and Certificates of Occupancy, and a 
current inspection conducted no less than 30 days before the commitment 
of HOME assistance. Existing housing that did not meet these standards 
would be required to be rehabilitated.
    In Sec.  92.251(c)(2) HUD proposed that existing rental housing, 
which does not meet the definition of Sec.  92.251(c)(1), is acquired 
with HOME funds would be required to be rehabilitated and meet the 
requirements of Sec.  92.251(b). The participating jurisdiction would 
be required to document this compliance based upon a current inspection 
conducted no less than 30 days before the date of commitment of HOME 
assistance, in accordance with the inspection procedures that the

[[Page 44649]]

participating jurisdiction established pursuant to this section.
    Comments: A commenter stated that the requirements in Sec.  
92.251(c)(1) would impose an undue burden on properties that are in 
good condition. Some commenters asked HUD to reconsider the UPCS 
requirement for down payment assistance programs, stating that lenders 
already conduct inspections in accordance with local codes. A few 
commenters stated that the requirement to conduct a current inspection 
less than 30 days before the commitment of HOME assistance is not 
practical and does not allow sufficient time for financing issues and 
other required loan documentation. These commenters stated that by the 
time the participating jurisdiction obtains the inspection report, 
which is after the lender has approved the borrower's loan package, the 
proposed 30-day period may already have elapsed and another inspection 
may be required. A few commenters suggested that the requirement be 
changed to 120 days, as Federal Housing Administration (FHA) appraisals 
are valid within 120 days of the loan closing date. Another commenter 
recommended that the timeframe for inspections mirror the 90-day period 
for Uniform Residential Appraisal Report.
    Several commenters expressed concern and opposition to the proposed 
required inspections for homebuyer housing. Some commenters expressed 
opposition to inspecting the unit after it is sold to the homebuyer, 
stating concern over cost and accessibility to the unit once it is 
sold. For homebuyer acquisition projects, one commenter recommended 
that, in addition to ensuring that the housing must be free from all 
health and safety defects before occupancy, the participating 
jurisdiction be required to ensure that all property standards are met 
before transfer of ownership and occupancy (instead of not later than 6 
months after the transfer) to facilitate administration and ensure 
compliance.
    HUD Response: HUD does not agree with commenters that stated that 
UPCS should not be applied to direct homebuyer assistance (e.g. 
downpayment assistance) because lenders already conduct inspections in 
accordance with local codes. While inspections for appraisal purposes 
are sometimes performed by lenders (e.g., for FHA-insured mortgages), 
there is no guarantee that these inspections, when performed, are 
always shared with homebuyers, or that these inspections contain 
details about the condition of the housing. Further, in many real 
estate transactions, the appraisal performed by the lender does not 
constitute an inspection and homebuyers are not required to obtain 
housing inspections. Low-income homebuyers who receive HOME downpayment 
assistance should be provided information that enables them to make 
informed decisions. Further, HUD must put rules in place that prevent 
the use of HOME funds for the purchase of substandard housing. Current 
regulations require that when HOME downpayment assistance is provided, 
the unit must meet applicable state and local codes, or in the absence 
of these codes, HQS. The final rule does not establish requirements 
significantly different from either the current regulation or the 
proposed rule.
    The final rule states that existing housing that is acquired for 
homeownership (e.g., downpayment assistance) must be decent, safe, 
sanitary, and in good repair. The participating jurisdiction must 
establish standards to determine that the housing is decent, safe, 
sanitary, and in good repair. At minimum, the standards must provide 
that the housing meets all applicable State and local housing quality 
standards and code requirements and the housing does not contain the 
deficiencies proscribed by HUD based on the inspectable items and 
inspected areas in HUD-prescribed physical inspection procedures (UPCS) 
pursuant to 24 CFR 5.705.
    HUD agrees that the requirement to conduct an inspection no less 
than 30 days before the commitment of HOME assistance may not allow 
sufficient time, resulting in duplicative inspections and unnecessary 
costs. Consequently, in the final rule at Sec.  92.251(c)(1) and 
(c)(2), HUD is requiring that an inspection be conducted no less than 
90 days before the commitment of HOME assistance. HUD acknowledges the 
concerns expressed about the proposed inspection required by the 
participating jurisdiction after a homeowner acquires a unit with HOME 
funds. In the final rule, to address public comment, HUD has revised 
the language to remove the requirement for the participating 
jurisdiction to inspect the unit after it is sold.
    Informing homebuyers of any defects in the unit provides them with 
the opportunity to negotiate with the seller for repairs, or they can 
seek financial assistance for rehabilitation from the participating 
jurisdiction. If the housing does not meet these standards, the housing 
must be rehabilitated to meet the standards or it cannot be acquired 
with HOME funds.
Manufactured Housing
    HUD proposed adding a requirement to Sec.  92.251(e) that 
manufactured housing assisted with HOME funds must be attached to a 
permanent foundation.
    Comments: A few commenters requested clarification regarding which 
definition and type of permanent foundation would be required. The 
commenters inquired about the foundation requirements in HUD Handbook 
4930.3G \7\ and CPD Notice 03-05 \8\, as well as FHA Title II 
requirements for permanent foundations. Foundations for manufactured 
housing have major implications for the types of financing accessible 
to buyers and owners of manufactured homes. Some commenters expressed 
concern that this requirement may not be physically feasible for 
several existing manufactured housing sites or it would be very cost 
prohibitive if required as part of rehabilitation, and this could 
potentially exclude many units in need of rehabilitation from receiving 
HOME funds.
---------------------------------------------------------------------------

    \7\ See http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/guidebooks/4930.3G.
    \8\ See http://www.hud.gov/offices/cpd/lawsregs/notices/2003/03-05.pdf.
---------------------------------------------------------------------------

    HUD Response: In the final rule, HUD is requiring permanent 
foundations for the new construction and replacement of manufactured 
housing units under Sec.  92.251(e). HUD clarifies that the definition 
of ``permanent foundation'' means a foundation system of supports that 
is capable of transferring all design loads to the ground and meets the 
requirements of 24 CFR 203.43f(c)(i). This definition is consistent 
with the FHA mortgage insurance requirements for all manufactured 
homes, which must be constructed in conformance with the Federal 
Manufactured Home and Safety Standards, as evidenced by an affixed 
certification label in accordance with 24 CFR 3280.11. Accordingly, 
what determines whether a foundation is permanent is HUD's Permanent 
Foundation Guide for Manufactured Housing, (HUD Publication 7584). To 
address commenters' concerns that it may not be possible to secure some 
existing manufactured housing to a permanent foundation, HUD is 
clarifying that foundation systems for existing units must be inspected 
and meet the applicable state or local codes, subject to the approval 
of the participating jurisdiction's building officials. In the absence 
of local or state codes, the participating jurisdiction must use the 
Model Manufactured Home Installation Standards at 24 CFR part 3285.

[[Page 44650]]

Ongoing Property Condition Standards During Period of Affordability
    HUD proposed to eliminate the requirement that HOME-assisted rental 
housing meet the housing quality standards (HQS) in 24 CFR 982.401 
applicable during the period of affordability and instead adopt UPCS as 
the minimum habitability standard, in concert with applicable state and 
local code requirements. HUD proposed that at a minimum, the 
participating jurisdiction's ongoing property standards would be 
required to include all inspectable items in the most recent notice 
setting forth the physical inspection procedures prescribed by HUD, 
pursuant to 24 CFR 5.705.
    Comments: A few commenters supported the requirement that the 
housing must meet all applicable state and local code requirements and 
ordinances, but suggested that HUD not require participating 
jurisdictions to inspect or enforce those local standards. These 
commenters also recommended that the Minimum Property Standards (MPS) 
in 24 CFR 200.925 or 200.926 remain as an alternative standard for 
compliance when viable. Other commenters suggested that participating 
jurisdictions should be allowed to rely on the findings of other 
agencies and organizations that conduct ongoing inspections to minimize 
administrative burden and improve efficiency. A commenter requested 
guidance to assist in implementing these standards.
    HUD Response: While the participating jurisdiction is responsible 
for ensuring compliance with the ongoing property standards 
requirements, it may contract with a qualified third party to perform 
these tasks. A participating jurisdiction can use qualified in-house 
staff conduct inspections or execute a contract with a qualified third 
party (as a contractor of the participating jurisdiction) that is 
independent of the project owner to conduct inspections.
    Subrecipients can conduct these inspections if it is specified in 
their written agreement with the participating jurisdiction or it can 
hire an independent, third-party contractor to do the inspections. 
Although the participating jurisdiction staff is not required to 
conduct the inspections, the participating jurisdiction cannot rely on 
or accept independent inspections performed by any party not under 
contract to the participating jurisdiction or its subrecipient, 
including inspections and certifications by the project owner or a 
contractor of the project owner. Participating jurisdictions or its 
subrecipients cannot rely on any inspections performed by any party 
that is not contractually obligated to perform the participating 
jurisdiction's obligations to determine compliance with HOME property 
standards requirements. If the participating jurisdiction uses a state 
recipient, subrecipient, or contractor to perform these inspections, it 
must assess the work performed through periodic monitoring.
    HUD finds that the UPCS is a more suitable inspection protocol for 
HOME-assisted housing than the MPS. As discussed above, the adoption of 
UPCS in the HOME program could facilitate alignment between HOME and 
other Federal affordable housing programs. When administrative 
alignment regarding the use of UPCS across federal affordable housing 
programs is completed, participating jurisdictions and their 
subrecipients may choose to cooperate with other federal funders in a 
jointly funded project to share inspection data, and may use 
inspections conducted by these funders if they willing to accept the 
data. This could result in decreased administrative burden and cost. 
HUD will issue guidance or modify these regulations at the appropriate 
time to facilitate alignment.
    In the final rule, the language has been revised to remove UPCS as 
a minimum requirement for the participating jurisdiction's ongoing 
property standards. HUD has determined that this requirement may result 
in duplicative inspections and could result in HOME-assisted rental 
units being inspected in accordance with both UPCS and state or local 
codes by different inspectors. The HOME statute requires that all HOME 
units must be inspected and meet applicable state and local codes. In 
many places it may be administratively burdensome or impracticable to 
try to combine or compare state or local codes with UPCS. Therefore, 
participating jurisdictions will use UPCS for property inspections of 
HOME-assisted rental housing only in the absence of applicable state or 
local codes. HUD plans to issue guidance to establish which inspectable 
items and areas must be included in the participating jurisdiction's 
ongoing property standards and which critical deficiencies must be 
corrected. The participating jurisdiction's property standards are not 
required to use any scoring, item weight, or level of criticality in 
the UPCS.
    HUD has added language to the final regulation at Sec.  
92.251(f)(2) clarifying that the ongoing property standards for 
existing HOME rental projects and for rental projects to which funds 
are committed before the effective date of the new ongoing property 
standards must continue to meet the standards in effect at the time 
HOME funds were committed.
o. Qualification as Affordable Housing: Rental Housing (Sec.  92.252)
Initial Occupancy of HOME-Assisted Units
    HUD proposed revising Sec.  92.252 to require that HOME-assisted 
rental units be occupied by an initial tenant within a specified period 
from the date of project completion. While the regulation itself did 
not include a timeframe, the preamble specifically solicited comments 
on the appropriate timeframe, which would not be less than 3 months or 
longer than 6 months. If units have not been leased to an eligible 
tenant within that time, HUD will require the participating 
jurisdiction to provide information about current marketing efforts 
and, if appropriate, a plan for marketing the unit so that it is leased 
as quickly as possible. If a unit is not occupied by an initial tenant 
after 18 months, HUD would require repayment of HOME funds invested in 
the units.
    Comments: Several commenters stated that 18 months was a reasonable 
timeframe to expect HOME-assisted units to achieve initial occupancy. 
Of these commenters, some suggested that extensions be permitted or a 
formal appeals process be established. Other commenters opposed the 
proposed provision in Sec.  92.252 that would require HOME funds 
invested in a unit that has not had an initial occupant within 18 
months to be repaid to by the participating jurisdiction to its HOME 
account. HUD received many comments regarding the point at which a 
vacant unit should trigger HUD review of the marketing plan or a 
requirement for enhanced marketing efforts. HUD received no comments 
supporting a 3-month period to achieve initial occupancy and few 
comments in support of a 6-month period. Several commenters recommended 
a 9- or 12-month timeframe for achieving initial occupancy. Some 
commenters cited weak market conditions in some areas, or the 
administrative burden of overseeing enhanced marketing on participating 
jurisdictions as justification for a longer period to achieve occupancy 
before enhanced marketing requirements are triggered. One national 
organization that works exclusively in rural areas commented that 
projects in rural areas routinely take longer than 6 months to rent up.

[[Page 44651]]

    HUD Response: HUD agrees with commenters that for many projects it 
will take longer than 3 months to achieve initial occupancy of all 
HOME-assisted units, even when acceptable marketing. However, HUD 
remains concerned that a unit that is still vacant at 6 months may be 
the result of inadequate marketing or market demand, and that 
intervention to improve the marketing of the unit is needed at that 
point.
    A unit that has not served a low- or very low-income household has 
never met the purposes of the HOME program and therefore, the costs 
associated with the unit are ineligible. HUD therefore maintains that 
18 months is a more than adequate amount of time for a HOME-funded unit 
to be rented to an initial occupant, if the market demand for the 
project was adequate at the time funds were committed to it. The 
requirement that HOME funds expended on a unit that is never rented to 
an income-eligible household would have to be repaid provides 
participating jurisdictions further incentive to select projects for 
which there is adequate market demand for the affordable units. HUD is 
adopting the proposed provision of Sec.  92.252 without change. 
Projects that encounter extraordinary circumstances can be dealt with 
administratively.
Requirement for Leases
    HUD proposed adding a sentence to the introductory paragraph of 
Sec.  92.252 to make explicit that leases are required for all HOME-
assisted rental units.
    Comments: Only a few commenters commented on this provision, but 
they were all supportive of the change. One of the commenters 
recommended that HUD explicitly make permissible ``master leases'' 
signed by organizations that rent individual units to clients.
    HUD Response: HUD is adopting the proposed rule language without 
change. NAHA requires that HOME rental units be rented to low- or very 
low-income families. Leasing of HOME units by organizations that rent 
to individuals is not permissible.
High HOME Rent and Low HOME Rent Terminology
    HUD proposed to incorporate the ``High HOME rent'' (i.e., ``maximum 
HOME rent'') and ``Low HOME rent'' (i.e., ``additional requirements'') 
terminology, which is commonly used by HUD, participating 
jurisdictions, and other HOME program participants, including owners, 
developers, and property managers, into paragraphs (a) and (b) for 
clarity. No comments were received on this change, and HUD is adopting 
the proposed language without change.
Inclusion of Utilities and Utility Allowances in HOME Rent Limits
    HUD proposed a revision to Sec.  92.252(a) to specifically state 
that HOME rent limits include both rent and utilities or utility 
allowance. No comments were received on this change, and the proposed 
rule language is adopted without change.
Low HOME Rent Units Receiving Project-Based Rental Assistance
    HUD proposed a change to paragraph (b)(2) to make clear that 
participating jurisdictions may designate more than the minimum 20 
percent of units in a project as Low HOME rent units, as is common 
practice in many HOME projects, particularly in projects that also 
receive project-based rental assistance. This practice facilitates the 
use of HOME funds for extremely low-income households, such as Section 
202 projects for the elderly or permanent supportive housing for the 
homeless.
    Comments: A few commenters expressed concern that, by limiting the 
applicability of the project-based assistance rents to Low HOME rent 
units (which must be occupied by households with incomes at or below 50 
percent of area median income), HUD is limiting the benefit of this 
provision.
    HUD Response: The HOME rent limitations, including required 
occupancy of Low HOME rent units by very low-income households, are 
statutory. HUD does not have the discretion to extend the Low HOME rent 
provisions to units occupied by households with incomes above 50 
percent of area median income. The proposed rule language is adopted 
without change.
Single Room Occupancy Unit Rents
    HUD proposed adding language to Sec.  92.252(c) to establish the 
applicable rent limits for Single Room Occupancy (SRO) units assisted 
with HOME. Recognizing that a zero-bedroom rent was not appropriate for 
all SROs, depending on the amenities located within the unit, HUD 
established these rent limitations in administrative guidance in 1994. 
HUD did not receive comments on this provision, and is adopting the 
proposed rule language except that a circular reference to fair market 
rents is corrected in both subparagraphs (c)(1) and (c)(2). The 
reference should be to maximum HOME rent.
Utility Allowances
    HUD proposed adding language to Sec.  92.252(d) to require 
participating jurisdictions to use the HUD Utility Schedule Model to 
determine a project's annual utility allowance or to otherwise 
determine a project's utility allowance based upon the utilities used 
at the project. The model was developed by HUD and enables the user to 
calculate utility schedules by housing type after inputting utility 
rate information. The IRS uses this model to determine utilities for 
its LIHTC program. The model can be found at: http://huduser.org/portal/resources/utilmodel.html.
    Comments: A few commenters opposed the adoption of the Utility 
Schedule Model, stating that it is more complicated to determine a 
utility allowance for each project as opposed to relying on the local 
Public Housing Agency's (PHA) utility allowance. One of the commenters 
asked whether participating jurisdictions would be able to continue 
using the PHA utility allowance under the proposed regulatory language.
    HUD Response: Under the proposed rule language, a participating 
jurisdiction would be required to determine an individual utility 
allowance for each HOME rental project, either by using the model or by 
otherwise determining the allowance based upon the specific utilities 
used at the project. Participating jurisdictions would no longer be 
permitted to use the utility allowance established by the local PHA for 
every HOME-assisted rental project. Application of these standardized 
utility allowances may result in undercharging or overcharging of rent, 
particularly in projects where tenants pay utilities directly. As more 
projects are constructed or rehabilitated to higher energy-efficiency 
standards, thus enhancing affordability of the units, the use of a 
standard utility allowance that may not represent actual utility costs 
is difficult to justify. The availability of the HUD Utility Schedule 
Model minimizes any burden associated with determining utility 
allowance for each project. HUD is adopting the proposed rule language 
without change.
Requirement To Repay When Affordability Restrictions Are Terminated 
During the Affordability Period
    HUD proposed adding a sentence to Sec.  92.252(e) to clarify 
existing regulatory requirements by specifically stating that the 
termination of affordability restrictions under paragraph (e) does not 
relieve a participating jurisdiction of its

[[Page 44652]]

repayment obligation for housing that did not remain affordable for the 
required period under Sec.  92.503(b). To increase local administrative 
flexibility, HUD also proposed specifically authorizing use agreements 
to impose affordability restrictions, in addition to those currently 
included in the regulations (i.e., deed restrictions and covenants 
running with the land). HUD also proposed adding language to clarify 
that HOME affordability restrictions must be recorded in accordance 
with state recordation laws.
    Comments: A few commenters stated that participating jurisdictions 
should only be required to repay the prorata share of the HOME 
investment in a foreclosed project attributable to the proportion of 
the affordability period that was not met. Another commenter suggested 
that participating jurisdictions should only be required to repay to 
its HOME account funds that the participating jurisdiction is able to 
recover through the foreclosure. Other commenters stated that they 
record enforcement mechanisms other than deed restrictions, land 
covenants or use restrictions to impose HOME requirements on project 
deeds.
    HUD Response: HUD does not agree that participating jurisdictions 
should only be required to repay a prorata share of the HOME investment 
in a project that does not meet affordability requirements for the 
required period or that they should only be required to repay what they 
can obtain at foreclosure. Adopting the former approach would provide 
an incentive for owners or participating jurisdictions to repay HOME 
funds to terminate restrictions and potentially convert housing to 
market rate. Under the latter approach, a participating jurisdiction 
with a troubled HOME project would lack a financial incentive to pursue 
a financial or physical workout of the project. In response to comments 
regarding the mechanisms that participating jurisdictions employ to 
impose HOME requirements, HUD is revising this paragraph to eliminate 
the term ``use agreements'' and instead state that there must an 
agreement restricting the use of the property that gives the 
participating jurisdiction the right to require specific performance.
Review and Approval of Rents Charged in HOME Units
    HUD proposed adding a sentence to Sec.  92.252(f)(2) to require 
that a participating jurisdiction must review and approve the rents for 
its HOME-assisted rental projects each year to ensure that they comply 
with the HOME limits and do not result in undue increases from the 
previous year. Participating jurisdictions are currently required to 
provide the published maximum HOME rents to project owners and then to 
examine reports submitted by owners outlining for each HOME unit the 
rent being charged and the income of the tenant. The additional step 
codifies existing practice of most participating jurisdictions, which 
do not permit HOME project owners to raise rents without approval or to 
charge the maximum permissible HOME rent.
    Comments: A few commenters, all members of the same HOME 
consortium, expressed concern about the administrative burden of 
reviewing and approving rents. A commenter requested that HUD provide 
guidance on how to implement an efficient rent approval process. 
Another commenter questioned the legal basis for participating 
jurisdictions to approve the amount of rent increases as long as rents 
remain at or below the HOME maximum rent limits.
    HUD Response: While upfront review and approval of rents may create 
a modest additional burden for participating jurisdictions that are not 
currently engaging in the practice, HUD maintains that adopting this 
practice, which is already widely in use among participating 
jurisdictions, will reduce the much greater burden associated with 
bringing rental projects with noncompliant rents into compliance with 
HOME affordability requirements. Further, participating jurisdictions 
that underwrite projects with long-term sustainability as a goal rarely 
permit a project to charge maximum HOME rents to ensure that future 
viability of the project is not endangered by minimal rent increases or 
even decreases in the applicable HOME rents. These participating 
jurisdictions generally include upfront approval of rent increases in 
their HOME written agreements. HUD is adopting the proposed rule 
language without change.
Fixed and Floating HOME Rental Units
    HUD proposed adding language to Sec.  92.252(j) to specify that the 
written agreement between the participating jurisdiction and a project 
owner must state whether HOME rental units will be fixed or floating 
during the period of affordability because participating jurisdictions 
are not always documenting the determination or including the specific 
designation in their written agreements.
    Comments: A commenter stated that HUD should permit a project's 
unit designation as fixed or floating to be changed during the period 
of affordability. Another commenter asked how a participating 
jurisdiction could designate units in a project with floating units as 
HOME units at the time of commitment, since units would not yet be 
occupied.
    HUD Response: The decision regarding whether HOME units will be 
fixed during the period of affordability or will be permitted to float 
is nearly always determined by whether or not the units in a project 
are comparable in terms of mix of bedroom sizes, square footage, and 
level of amenities. Consequently, there are few projects that can 
change from a fixed to a floating designation during the period of 
affordability. For this reason, HUD is not adopting this suggestion. To 
clarify, the participating jurisdiction must determine whether the 
units in a project will be fixed or floating at the time of commitment 
of the HOME funds because that decision affects the amount of HOME 
funding the project can receive. Depending on the mix of unit sizes in 
a project, HOME units may not be permitted to float. The fixed versus 
floating determination dictates the income targeting requirements 
applicable to each HOME unit, HUD is adopting the proposed rule 
language. However, it is revising the language slightly to clarify that 
the written agreement must require the project owner to provide the 
participating jurisdiction with the address and unit number of each 
HOME-assisted unit no later than initial occupancy rather at project 
completion.
Cross-References for User Convenience
    HUD proposed adding two new paragraphs to Sec.  92.252 to make the 
regulations more user-friendly for persons attempting to locate 
requirements related to rental housing. No comments were received on 
this change and HUD is adopting the proposed rule language without 
change. A new Sec.  92.252(k) that cross-references the tenant 
selection requirements located in Sec.  92.253(d) is added. A new 
paragraph (l) is added to Sec.  92.252 that cross-references 
participating jurisdictions' ongoing responsibilities for on-site 
inspections, and financial oversight located in Sec.  92.504(d).
p. Tenant Protections and Selection (Sec.  92.253)
Required Leases in HOME Rental and Tenant-Based Rental Assistance Units
    HUD proposed revising Sec.  92.253(a) to clarify that there must be 
a written lease for all HOME-assisted rental units and units rented by 
HOME tenant-based rental assistance recipients, and that the statutory 
tenant protections in this

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paragraph must be integrated into the lease. HUD received no comments 
on the proposed clarification, and the proposed rule language is 
adopted without change.
Mandatory Supportive Services
    HUD proposed adding a new paragraph Sec.  92.253(b)(9) prohibiting 
lease terms that make acceptance of supportive services mandatory, 
except that a tenant in transitional housing may be required to accept 
supportive services. This clarification is consistent with section 504 
of the Rehabilitation Act of 1973 (29 U.S.C. 794), which prohibits 
discrimination on the basis of disability in Federally-funded programs 
and activities and HUD's implementing regulations at 24 CFR part 8. HUD 
did not receive comments on the provision in this paragraph. HUD 
received comments on the related provision in Sec.  92.253(c), which 
are addressed below. HUD is adopting this proposed rule provision 
without change.
Termination of Tenancy Through Eviction or Refusal To Renew a Lease
    HUD proposed revising Sec.  92.253(c) to provide that a tenant's 
failure to follow a transitional housing services plan is a permissible 
basis for terminating a tenancy or refusing to renew a lease, to ensure 
the unit can be made available to individuals who use the transitional 
housing for its intended purpose. HUD also proposed revising Sec.  
92.253(c) to make explicit that an increase in a tenant's income does 
not constitute good cause for termination or refusal to renew.
    Comments: HUD received several comments supporting the addition of 
the provision making failure to follow a transitional housing services 
plan a basis for evicting or refusing to renew the lease of a tenant of 
a transitional housing project. A few commenters requested that HUD 
clarify whether supportive services are the same as a transitional 
housing services plan.
    Several commenters objected to the requirement that owners of HOME 
rental housing provide 30-day written notice before evicting a tenant 
or refusing to renew a lease. Commenters stated that it is necessary 
for project owners to have the ability to remove tenants who pose an 
imminent threat to residents or employees of the project or to the 
property.
    HUD Response: HUD agrees that the use of the term ``transitional 
housing services plan'' may lead to confusion, since not all 
transitional housing providers establish such plans. Consequently, at 
this final rule stage, HUD is revising the rule language to eliminate 
the term and to make clear that failure to participate in any required 
supportive services is a basis for terminating tenancy of a 
transitional housing resident.
    The 30-day written notice requirement for eviction or refusal to 
renew a lease is not new. It is a longstanding provision of the HOME 
regulations that implements a statutory requirement that 30-day written 
notice be provided in these cases. HUD is adopting the proposed rule 
language without change.
Nondiscrimination Against Rental Assistance Subsidy Holders
    HUD proposed moving the provisions on nondiscrimination against 
rental assistance subsidy holders in existing Sec.  92.252(d) to Sec.  
92.253(d)(4). No substantive change was proposed.
    Comments: A few commenters suggested that HUD expand the 
prohibition on discrimination against voucher holders to include 
policies and criteria that have the effect of excluding families with 
vouchers or HOME tenant-based rental assistance.
    HUD Response: The existing rule language reflects the provisions of 
section 215(a)(1)(D) of NAHA. HUD finds that this language adequately 
implements the statutory intent. The provision is being moved to Sec.  
92.253(d)(4) as proposed, without change.
Preferences for Persons With Disabilities
    HUD proposed adding language at new Sec.  92.253(d)(3)(i) that 
would provide that any limitation or preference for HOME-assisted 
housing must not violate nondiscrimination requirements listed in Sec.  
92.350, and clarify that a limitation or preference does not violate 
nondiscrimination requirements if the housing also receives funding 
from a Federal program that limits eligibility to a particular segment 
of the population (e.g., HUD's Section 202 supportive housing for the 
elderly, Section 811 housing for persons with disabilities, etc.). HUD 
also proposed a new Sec.  92.253(d)(3)(ii) that would provide that 
preferences may be given to disabled families who need services offered 
at a project, if certain conditions are met.
    Comments: A commenter supported the change as written in the 
proposed rule. Other commenters drafted and submitted substitute 
language addressing permanent supportive housing, manufactured housing, 
and housing receiving LIHTC. A commenter submitted revised regulatory 
language addressing what was believed to be technical and 
interpretative issues.
    HUD Response: HUD's proposed language is compliant with applicable 
civil rights laws and regulations, including Section 504 of the 
Rehabilitation Act of 1973 and implementing regulations at 24 CFR part 
8. Additionally, the proposed rule language does not present problems 
for the particular permanent supportive housing model favored by 
several commenters, which was their primary concern. In fact, adopting 
the suggested language would limit flexibility to use other models of 
permanent supportive housing. Consequently, HUD declines to adopt any 
of the alternative language offered by commenters and is adopting the 
proposed rule language without change.
q. Qualification as Affordable Housing: Homeownership (Sec.  92.254)
95 Percent of Area Median Purchase Price Limitation on Sales Price and 
After-Rehabilitation Value
    HUD proposed revising Sec.  92.254(a)(2)(iii) so that participating 
jurisdictions would no longer be permitted to use the FHA Single Family 
Mortgage Limit (known as the 203(b) limit) as a surrogate for 95 
percent of area median purchase price. Section 215(b) of NAHA requires 
that the initial purchase price of homeownership units assisted with 
HOME funds not exceed 95 percent of the area median purchase price for 
single family housing, as determined by HUD. The preamble to the 
proposed rule describes in detail why continuing to use the 203(b) 
limit as the sales price or after-rehabilitation value limit for HOME 
homeownership projects would violate NAHA. HUD proposed calculating 95 
percent of median purchase price for each MSA or county and providing 
the limits annually, as it has been doing for informational purposes 
since 2008. In response to participating jurisdictions' concerns 
regarding the very low median sales prices in some non-metropolitan 
areas, HUD proposed amending Sec.  92.254(a)(2)(iii) to permit 
participating jurisdictions to use the greater of the HUD-issued 95 
percent of area median purchase price limit or 95 percent of the Bureau 
of the Census' median sales price for single family houses sold outside 
of MSAs.
    Comments: Many commenters opposed elimination of the 203(b) limit, 
which currently has a floor of $200,170, as the sales price or after-
rehabilitation value limit for HOME-assisted homeownership units. 
Several of these commenters suggested that HUD adopt 95 percent of the 
national median sales price as the HOME homeownership

[[Page 44654]]

limit. A commenter recommended that HUD permit each State participating 
jurisdiction to use 95 percent of its statewide median sales price as 
its HOME limit. Another commenter suggested that HUD adopt a phased 
approach to implementing the new limits. Several commenters approved 
HUD's proposal to permit participating jurisdictions to use the greater 
of its HUD-calculated 95 percent of area median purchase price or the 
Census Bureau's median sales price for single family houses sold 
outside of MSAs as the HOME homeownership limit for new construction 
units. Other commenters expressed concern that the requirement that the 
after-rehabilitation value of homeownership units rehabilitated for 
sale or for existing low-income owner-occupants not exceed the HUD-
calculated 95 percent limits would all but eliminate many participating 
jurisdictions' ability to use HOME funds for such purposes. These 
commenters stated that eliminating or limiting the use of HOME funds 
for rehabilitation of existing housing would have a detrimental effect 
on low-income seniors and on neighborhood revitalization efforts. Some 
of these commenters recommended that HUD establish a minimum limit for 
existing housing acquired or rehabilitated with HOME funds, similar to 
the Census Bureau figure proposed for newly constructed homeownership 
units.
    HUD Response: HUD agrees that limiting the use of HOME funds for 
rehabilitation in areas with low median sales prices and/or dilapidated 
housing stock may be an unintended consequence of the NAHA provision, 
the purpose of which is to ensure that HOME funds are used only for 
modest housing. However, HUD is statutorily prohibited from retaining 
the 203(b) limit as the 95 percent of area median purchase price for an 
area. Consequently, HUD is eliminating the 203(b) limit as the sales 
price or after-rehabilitation value limit for HOME-assisted 
homeownership housing in this final rule.
    HUD has carefully considered how to address commenters' concern 
about the effect that low median sales prices in some areas will have 
on the HOME program while still complying with the NAHA provisions. HUD 
has determined that the use of an alternate data set that excludes 
housing that is not in standard physical condition is consistent with 
the statutory intent and yields 95 percent of area median sales figures 
that more accurately reflect the market value of newly constructed and 
standard existing housing. For newly constructed single family housing 
units being developed or acquired with HOME funds, HUD will provide 
limits for affordable newly constructed housing based on 95 percent of 
the median purchase price of newly constructed housing in the area 
using data from the Federal Housing Administration (FHA) and other 
appropriate data sources, with a minimum limit based on 95 percent of 
the U.S. median purchase price for new construction for nonmetropolitan 
areas. For existing single family housing units being acquired and/or 
rehabilitated with HOME funds, HUD will provide limits for affordable 
existing housing based on 95 percent of the median purchase price of 
existing housing in the area using data from the FHA and other 
appropriate data sources on sale prices of existing homes in standard 
condition, with a minimum limit based on 95 percent of the state-wide 
nonmetropolitan area median purchase price using this data. 
Participating jurisdictions also would continue to have the option to 
determine their own 95 percent of area median value limit using the 
methodology in the regulation, which remains unchanged. HUD is amending 
Sec.  92.254(a)(2)(iii) of the regulation to establish these affordable 
housing value limits.
Conversion of Unsold Homeownership Units to Rental Housing
    HUD proposed revising Sec.  92.254(a)(3) to require participating 
jurisdictions to convert homebuyer housing that has not been sold to an 
eligible homebuyer within 6 months of the completion of construction or 
rehabilitation to rental housing that complies with all provisions of 
Sec.  92.252. If an unsold homebuyer unit is not converted to rental 
housing, the participating jurisdiction would be required to repay the 
HOME funds expended on it.
    Comments: HUD received many comments opposing adoption of this 
proposed provision. The commenters stated that the provision would 
discourage the use of HOME funds for development of homebuyer housing, 
because both developers and construction lenders would be unwilling to 
risk participating in projects that might be required to change tenure 
type after construction. Commenters were also concerned about finding 
permanent financing to repay private construction loans, since there 
would be no sales proceeds to retire construction debt. Other 
commenters were concerned that homeowner association rules might 
prohibit a conversion to rental housing; one commenter asked that HUD 
specifically exclude HOME-funded condominium units for this reason. 
Many commenters stated that the 6-month deadline was arbitrary or 
unrealistic given current market conditions. Some commenters 
recommended that HUD extend the period for sale of homebuyer units to 
periods ranging from 9 to 24 months before requiring conversion. 
Several commenters requested that HUD permit unsold homebuyer units to 
be placed into service as lease-purchase units. Many commenters pointed 
out that the developers that build homeownership units often do not 
have the capacity to function as owners/property managers of rental 
units. Other commenters requested that units converted to rental be 
permitted to convert back to homeownership at any time.
    HUD Response: HUD recognizes that commenters raised valid concerns 
regarding this provision. HUD shares the commenters' concerns about the 
availability of permanent financing and the challenge of finding an 
alternate owner for a homebuyer unit being converted to a HOME rental 
unit. HUD is also aware that some participating jurisdictions continue 
to award HOME funds for additional homebuyer units, despite large 
inventories of foreclosed properties, a lack of current market demand 
for homebuyer units, and/or inability of the target population to 
access first mortgage financing necessary to purchased HOME-assisted 
units. Congress demonstrated that it shares HUD's concern by including 
a 6-month deadline for selling homebuyer units funded with FY 2012 and 
FY 2013 HOME funds. Clearly, participating jurisdictions that wish to 
use HOME funds for development of additional homebuyer units must 
carefully consider projected demand for the units and the availability 
of private mortgage financing for low-income homebuyers. They must 
create and maintain their own list of potential low-income homebuyers, 
rely less on developers to identify homebuyers, and pre-identify 
specific homebuyers for units to the extent possible.
    In response to the concerns raised, HUD has determined that it is 
appropriate to extend the timeframe for selling homebuyer units to 9 
months from the completion of construction. In addition, to alleviate 
potential noncompliance due to common delays in closings, HUD is 
specifying that a ratified contract for purchase of a HOME-assisted 
unit is sufficient to meet the deadline for sale of the unit. This 
extension balances, to some extent, the interest in ensuring that 
federal funds timely result in public benefit. Because this final rule 
applies to projects to which HOME funds are committed on or after the 
effective date, this provision

[[Page 44655]]

will not affect units that are already built or under construction. 
HOME homebuyer projects funded with FY 2012 and FY 2013 HOME funds will 
be subject to the provisions of Public Law 112-55, Consolidated and 
Further Continuing Appropriations Act, 2012, which established a 6-
month period for selling HOME homebuyer units or converting them to 
rental. Before committing HOME funds to a homebuyer project, 
participating jurisdictions must carefully consider how they would 
address issues of ownership, management, and financing should they be 
required to convert an unsold homebuyer unit to a rental unit. HUD is 
not adopting the recommendation to permit unsold homebuyer units to be 
converted to lease-purchase units. Lease-purchase arrangements can work 
very well when administered through a well-designed lease-purchase 
program that includes strong management and tenant supports and 
counseling. If a participating jurisdiction has such a program, it can 
identify a lease-purchase candidate and place an unsold unit into this 
program before 9 months has elapsed. If a tenant wishes to purchase a 
unit that has been converted from a homebuyer activity to a rental 
activity, this is allowable under 24 CFR 92.255 of the existing 
regulations.
Income of All Persons Residing in the Housing
    HUD proposed revising Sec. Sec.  92.254(a)(3) and 92.254(b)(2) to 
specify that the income of all adults residing in the housing must be 
included when determining the income of a family applying for homebuyer 
or homeowner rehabilitation assistance. No opposition was expressed for 
this proposal and a commenter voiced support for this proposed change. 
HUD is adopting the proposed rule provision in the final rule.
Housing Counseling
    HUD proposed revisions to Sec.  92.254(a)(3) to require that all 
homebuyers receiving HOME assistance or purchasing units developed with 
HOME funds receive housing counseling.
    Comments: HUD received several comments related to the proposed 
housing counseling requirement. A commenter opposed requiring that 
HOME-assisted homebuyers receive housing counseling. Several commenters 
expressed support for the requirement, citing the value of housing 
counseling in preparing families for homeownership. However, some 
commenters expressed concern about the cost of compliance, given that 
counseling provided to individuals who do not complete a HOME-assisted 
purchase can only be charged as HOME administrative costs. A few 
commenters presented alternative approaches to addressing the possible 
financial burden, including establishing housing counseling eligible as 
a stand alone activity under which participating jurisdictions could 
run HOME-funded housing counseling programs. Many commenters assumed 
that potential homebuyers could not be charged a fee for homebuyer 
counseling and objected to the perceived prohibition.
    HUD Response: Because the HOME statute clearly specifies that there 
are four eligible activities, HUD cannot administratively establish 
additional eligible activities. For this reason, it is not possible to 
establish freestanding housing counseling programs as eligible for HOME 
funds. Housing counseling provided to an individual or family can be 
charged as a project-related soft cost under Sec.  92.205(d) or as an 
administrative cost under Sec.  92.207(b). Contrary to the 
understanding of several commenters, HUD does not currently prohibit 
potential HOME homebuyers from paying a fee to cover the cost of 
housing counseling and did not contemplate creating such a prohibition 
in the proposed rule. HUD is adding language to Sec. Sec.  
92.206(d)(6), 92.207(b) and 92.214(b)(1)(iii) to make clear that 
homebuyers may be charged reasonable fees to cover the cost of housing 
counseling. HUD is adopting the provision requiring housing counseling 
for homebuyers as published in the proposed rule.
Approval of Resale and Recapture Provisions
    HUD proposed revising Sec.  92.254(a)(5) to require participating 
jurisdictions to obtain HUD's specific written approval of their resale 
and recapture provisions.
    Comments: Several commenters expressed concern that HUD does not 
have adequate staff to timely review and approve the number of resale 
and recapture provisions that would be submitted for review and 
approval. Specifically, commenters stated that limited HUD staffing and 
the potential for a short approval timeframe would delay approval of 
resale and recapture provisions. Several commenters stated that HUD 
could simplify the approval process by either providing standard resale 
and recapture language, thereby eliminating the need for HUD approval, 
or by maintaining the current process of approving the provisions in 
each participating jurisdiction's annual action plan.
    HUD Response: Currently participating jurisdictions are required to 
describe their resale and recapture provisions in their annual action 
plans they submit to HUD for review and approval. HUD's approval of an 
annual action plan provided implicit approval of the resale and 
recapture provisions contained in the plan. HUD did not propose a 
significant change to this process. Participating jurisdictions will 
still submit resale and recapture provisions in the consolidated or 
annual action plans, unless they have a need to submit new provisions 
at some other point in the year. The change is that HUD must 
specifically provide notification that the provisions have been 
approved or disapproved. HUD does not view this as a significant 
additional burden on HUD staff and is not concerned that this change 
would affect the timeliness of approvals. Consequently, HUD is adopting 
the proposed rule language without change.
Fair Return and Affordability to a Reasonable Range of Low-Income 
Homebuyers
    HUD proposed amending Sec.  92.254(a)(5)(i) to require 
participating jurisdictions, in their resale provisions, to 
specifically define ``fair return on investment'' and ``affordability 
to a reasonable range of low-income buyers,'' and to address how it 
will make the housing affordable if the resale price that is needed for 
a fair return on investment is too high to be within the affordable 
range.
    Comments: HUD received a few comments related to defining fair 
return on investment and affordable to a reasonable range of low-income 
homebuyers. The commenters stated that HUD should not adopt the 
language as proposed, instead requesting that HUD permit participating 
jurisdictions the flexibility to determine fair return and 
affordability based on market conditions at the time of sale. The 
commenters also stated that HUD should clearly define these terms for 
participating jurisdictions to ensure clarity and accuracy.
    HUD Response: HUD has found that many resale provisions are not 
clearly described and do not meet statutory and regulatory 
requirements. Requiring participating jurisdictions to clearly define 
these terms is expected to encourage participating jurisdictions to 
improve their ability to design resale requirements that are 
understandable to potential homebuyers and reflect the local housing 
market. Further, resale provisions are required to be imposed at the 
time that the HOME-assisted purchase takes place. Participating

[[Page 44656]]

jurisdictions are not permitted to decide what constitutes fair return 
or affordability to a reasonable range of low-income homebuyers at the 
time that the HOME-assisted unit is resold. HUD is adopting the 
proposed rule language without change.
Assumption of Recapture Obligations by Subsequent Homebuyer
    HUD proposed amending Sec.  92.254(a)(5)(ii) to permit a subsequent 
low-income purchaser of a HOME-assisted homeownership unit to assume 
the HOME loan and recapture obligation entered into by the original 
buyer.
    Comments: Several commenters supported the proposed provision 
permitting a subsequent income-eligible homebuyer to assume existing 
loan and affordability restrictions under a recapture provision, 
agreeing that it would promote administrative simplicity for 
participating jurisdictions and assisted homebuyers.
    HUD Response: HUD is adopting the provision, but has added a 
clarification that the subsequent, eligible homebuyer can only assume 
the existing loan and affordability obligations if no additional HOME 
assistance is provided to the subsequent homebuyer. In cases in which 
the subsequent homebuyer needs HOME assistance in excess of the balance 
of the original HOME loan, the HOME subsidy (the direct subsidy as 
described in Sec.  92.254) to the original homebuyer would be 
recaptured and separate HOME subsidy would be provided to the new 
homebuyer.
Exceptions to Qualification as Homeowner
    HUD proposed amending Sec.  92.254(c) to permit rehabilitation 
assistance to be provided in three types of situations--heir 
properties, life estates, and living trusts--under which the occupant 
of the housing would not meet the definition of ``homeownership'' in 
Sec.  92.2.
    Comments: Two commenters urged HUD to include beneficiary deeds, 
under which a property passes, subject to all conveyances, assignments, 
contracts, mortgages, deeds of trust, liens, security pledges and other 
encumbrances made by the owners during the owner's lifetime, directly 
to a grantee beneficiary upon the death of the owner, as an eligible 
form of homeownership.
    HUD Response: HUD agrees that beneficiary deeds, which are used in 
a number of states, should qualify as a form of homeownership for 
purposes of owner-occupied rehabilitation projects. HUD has revised 
this final rule to permit owners that have beneficiary deeds to qualify 
for HOME rehabilitation assistance, if the owner is low-income at the 
time assistance is provided.
Oversight of Certain Subrecipients and Contractors
    HUD proposed adding a new Sec.  92.254(e) that would put in place 
safeguards to prevent potential abuses in situations in which the same 
entity is under contract with the participating jurisdiction to provide 
HOME homeownership assistance (e.g., downpayment assistance) and is 
also providing first mortgage financing to the same families.
    Comments: A commenter opposed requiring participating jurisdictions 
to verify income eligibility and inspect units in situations in which 
subrecipients or contractors are providing both the first mortgage and 
HOME downpayment assistance because it was overly burdensome. A few 
commenters sought clarification of whether the provisions would apply 
this requirement to primary lenders that perform HOME administrative 
functions (e.g., income determinations) related to qualifying 
applicants for HOME assistance, but do not originate HOME loans to 
homebuyers.
    HUD Response: The proposed rule limits this provision to situations 
in which a contractor or subrecipient acts as a private mortgage lender 
and as the originator of HOME loans. However, at this final rule stage, 
HUD extends these provisions to situations in which a primary lender 
also acts as a subrecipient or contractor qualifying a household or 
housing unit for HOME assistance. It is in the public interest to 
provide this extension because these organizations earn fees for 
originating non-HOME mortgages to borrowers also receiving HOME funds. 
Participating jurisdictions that find this additional oversight 
burdensome should avoid entering into contractual agreements that may 
result in financial incentives to approve HOME assistance. HUD is 
adopting the proposed provision and extending it to cover the 
situations described above.
Underwriting, Responsible Lending, and Refinancing Policies
    HUD proposed adding a new paragraph (f) to Sec.  92.254 requiring 
participating jurisdictions that use HOME funds for homebuyer 
assistance to develop and follow written policies for underwriting 
homeownership assistance, preventing predatory lending (i.e., ensuring 
responsible lending), and resubordinating HOME debt in the event of 
refinancing of private debt.
    Comments: Several commenters recommended that HUD clarify the 
proposed language by adopting industry terms of art such as housing 
payment ratio and installment debt ratio. Commenters also emphasized 
that participating jurisdictions should be encouraged to fully and 
carefully evaluate borrower credit and develop strict anti-predatory 
lending guidelines.
    HUD Response: HUD agrees with the commenters about the importance 
of fully and carefully evaluating borrower credit. Accordingly, HUD 
maintains the requirement in the proposed rule that participating 
jurisdictions establish underwriting policies providing underwriting 
standards for homeownership assistance that evaluate housing debt and 
overall debt of the family, the amount of assistance request, monthly 
expenses of the family, assets available to acquire the housing, and 
financial resources to sustain homeownership. However, at this final 
rule stage, HUD has substituted the term ``responsible lending'' for 
``anti-predatory lending'' on the basis that such term better reflected 
the objective of having underwriting policies that strive to ensure 
that the HOME funds used for homeownership opportunities in which the 
other (non-HOME) mortgage debt is affordable to and sustainable by the 
borrower.
    With respect to sustainable homeownership, it is important to note 
that since issuance of the December 16, 2011, proposed rule, the 
Consumer Financial Protection Bureau (CFPB) completed its rulemaking 
under section 1411 of subtitle B of Title XIV of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Pub. L. 111-230, 124 Stat. 
1736, approved July 21, 2010) (Dodd-Frank Act). Section 1411 added a 
new section 129C to the Truth-in-Lending Act (TILA) to provide minimum 
standards for considering a consumer's ability to repay a residential 
mortgage. The CFPB published a final rule on January 30, 2013, at 78 FR 
6408, entitled, ``Ability-to-Repay and Qualified Mortgage Standards 
under the Truth in Lending Act (Regulation Z)'' (QM rule) to implement 
the provisions of new section 129C of TILA. Section 1412 of the Dodd-
Frank Act requires that HUD, with regard to mortgages insured under the 
National Housing Act; the Department of Veterans Affairs (VA), with 
regard to a loan made or guaranteed by the Secretary of Veterans 
Affairs; the Department of Agriculture (USDA), with regard to loans 
guaranteed by the Secretary of Agriculture pursuant to 42 U.S.C. 
1472(h); and the Rural Housing Service (RHS), with regard to loans 
insured by the RHS, prescribe

[[Page 44657]]

rules in consultation with the CFPB to define the types of loans they 
insure, guarantee, or administer, as the case may be, that are 
``qualified mortgages,'' and revise, add to, or subtract from the 
statutory criteria used to define a qualified mortgage. Although the 
CFPB final rule established certain minimum requirements for creditors 
making ability-to-repay determinations, those requirements are not 
designed to address the specific homeownership concerns of the HOME 
program, which pertain to the ability of low-income homebuyers to 
sustain homeownership. While the CFPB requirements are a good starting 
point for assessing the appropriateness of private first mortgages, a 
participating jurisdiction's lending policy will need to consider 
additional factors because HOME-assisted homebuyers are low-income.
    Therefore, as noted earlier, HUD is adopting the requirement in the 
proposed rule that participating jurisdictions establish underwriting 
and responsible lending policies that help to ensure that HOME-assisted 
homebuyers obtain mortgages that they have the ability to repay. HUD 
will issue guidance on responsible lending that explains the CFPB 
ability-to-pay principles and suggests additional considerations that 
would be appropriately included in a lending policy applicable to low-
income homebuyers. The final lending policies, however, rest with the 
judgment of the participating jurisdiction, which is in the best 
position to craft responsible lending policies based on the populations 
they serve.
r. Converting Rental Units to Homeownership Units for Existing Tenants 
(Sec.  92.255)
    HUD proposed a revision to Sec.  92.255 to clarify that the 
existing regulation does not permit conversion of an entire HOME-
assisted multifamily rental project to condominium ownership during the 
period of affordability and that tenants' refusal to purchase their 
rental housing unit does not constitute grounds for eviction or failure 
to renew the lease.
    Comments: A few commenters supported the clarification that tenants 
cannot be evicted or lose their lease because they cannot or will not 
purchase the HOME rental unit they occupy. A commenter stated that this 
provision conflicted with LIHTC rules.
    HUD Response: HUD is adopting the proposed rule language without 
change. HUD disagrees that this provision conflicts with LIHTC rules, 
which require a unit to remain a rental unit during the 15-year 
compliance period. LIHTC does permit long-term lease-purchase 
agreements to permit a tenant to purchase a unit after the 15-year 
rental period has elapsed. HUD does not see a parallel rationale, since 
the provision for HOME rental units applies during the HOME period of 
affordability.
s. Set-Aside for CHDOs (Sec.  92.300)
Housing Owned, Developed or Sponsored by a CHDO
    HUD proposed to codify longstanding definitions of housing that is 
owned, developed, or sponsored by a CHDO currently established in HUD's 
administrative guidance into the regulation in Sec.  92.300(a)(2) 
through (a)(6), with minimal revisions. The proposed definitions 
included the existing requirement that a CHDO must have demonstrated 
development capacity to undertake development of a project in order to 
receive CHDO funds, regardless of whether the CHDO would be the 
``owner,'' ``developer,'' or ``sponsor'' of the project. The proposed 
rule differentiated between the roles of CHDO ``sponsors'' and CHDO 
``developers'' of rental housing, making clear that a developer of 
HOME-assisted rental housing must also own the housing during the 
period of affordability, whereas a sponsor may sell the HOME-assisted 
rental housing to a non-profit organization or another CHDO.
    Comments: HUD received many comments on the proposed changes to the 
definitions of own, develop and sponsor that were included in the 
proposed rule. Several commenters expressed concerns about the 
modifications to the definition of ``developer'' and the specificity in 
the ``sponsor'' model. Other commenters expressed concern about the 
requirements of CHDOs to demonstrate development experience in order to 
access CHDO set-aside funds, stating that in many areas CHDOs lack 
capacity to develop housing, particularly in rural or non-metro areas.
    HUD Response: In response to public comment, HUD is establishing a 
set of definitions for the CHDO as ``owner, developer, or sponsor'' 
that facilitates participation of CHDOs that have the capacity to own 
affordable rental housing, but do not have the capacity to develop such 
housing. These modified definitions would allow non-profit 
organizations an increased ability to access the CHDO set-aside funds 
to assist their neighborhoods address their affordable housing needs. 
In this final rule, HUD establishes a definition of ``owner'' that 
allows for a CHDO to receive CHDO set-aside funds if it has the 
capacity to own and operate HOME-assisted housing, even if it does not 
have the capacity to develop it. The new definition of owner for CHDOs 
should aid large rural States, which consistently experience great 
difficulty in developing and retaining capable CHDOs. The majority of 
the changes in the definition of CHDO as the ``owner,'' ``developer,'' 
or ``sponsor'' pertain to HOME-assisted rental housing. A CHDO that is 
an ``owner'' would be required to own the HOME project during 
development and throughout the period of affordability, and would be 
required to hire a project manager or have a contract with a 
development contractor to oversee all aspects of the development. A 
CHDO that is a ``developer'' of rental housing must arrange for the 
construction financing and is in sole charge of the construction, and 
must own the HOME-assisted housing throughout the period of 
affordability. A CHDO that is a ``sponsor'' of HOME-assisted rental 
housing ``owns'' and ``develops'' the rental housing project that it 
agrees to convey to a private nonprofit organization at a predetermined 
time after completion of the development of the project.
    For HOME-assisted homebuyer projects, the housing is ``developed'' 
by the CHDO if it is the owner (in fee simple absolute) and developer 
of new housing that will be constructed or existing substandard housing 
that is owned or will be acquired by the CHDO and rehabilitated for 
sale to low-income families, in accordance with Sec.  92.254. To be the 
``developer,'' the CHDO must arrange financing of the project and be in 
sole charge of construction.
CHDO Must Be Sole General Partner in Limited Partnerships and Limited 
Liability Corporations
    HUD proposed language to clarify the allowable ownership structures 
and roles of CHDOs when they are participating in limited partnerships 
or limited liability corporations as developers or sponsors of HOME-
assisted projects.
    Comments: HUD received several comments opposing the requirement 
that the CHDO, or its subsidiary, must be the ``sole general partner'' 
in a limited partnership, or the sole managing member of a limited 
liability company (LLC), when acting as the ``developer'' or 
``sponsor'' of rental housing owned by a limited partnership or an LLC. 
Commenters expressed concern about this requirement, specifically as it 
relates to securing financing for projects that will receive

[[Page 44658]]

Low Income Housing Tax Credits (LIHTCs). Commenters described and 
supported ownership structures in which the CHDO is the ``co-general'' 
partner, with another entity that may or may not have control or 
authority in decision making on behalf of the ownership entity.
    HUD Response: The HOME regulations, at Sec.  92.300(a)(1) have 
always required that, if a CHDO owns a project in partnership, or owns 
the project through its wholly-owned for-profit or non-profit 
subsidiary, it must be the managing general partner. This requirement 
implements the statutory intent of the CHDO set-aside to provide 
funding for housing under the control of CHDOs, in order to help ensure 
that community needs are met. In the proposed rule, HUD is extending 
its existing requirement to LLCs, which are ownership entities very 
similar to limited partnerships. The other partnership arrangements 
raised by commenters, such as ``co-general partners,'' do not meet the 
statutory requirements for CHDOs. HUD is adopting the proposed rule 
language without change.
Ownership ``In Fee Simple Absolute''
    HUD proposed language that CHDOs must own the HOME-assisted housing 
in ``in fee simple absolute.''
    Comments: Several commenters opposed the requirement that the 
property be owned by the CHDO ``in fee simple absolute.'' Commenters 
requested that HUD consider housing ``owned'' by a CHDO if it is 
subject to a long-term ground lease.
    HUD Response: HUD agrees with the comments submitted and, at this 
final rule stage, has revised this requirement to include long-term 
ground leases in the definition of housing owned by a CHDO. The 
revision accommodates ownership structures where the ownership of the 
land is not permitted due to other restrictions (e.g., land trusts).
Replacement of CHDO for Cause
    The proposed rule required that rental housing that is developed or 
owned by a CHDO must be owned by a CHDO throughout the period of 
affordability. Should a CHDO be removed as owner, HUD proposed that the 
owner of the HOME-assisted housing be replaced by another CHDO.
    Comments: Several commenters opposed the requirement that if a CHDO 
is removed for cause, it must be replaced with another CHDO. Other 
commenters requested additional guidance on what constitutes ``for 
cause.'' Some commenters requested specific guidance and clarification 
about how the requirements of this section will be applied.
    HUD Response: CHDO funds are required to be used for projects that 
will be owned, developed or sponsored by a CHDO. HUD has determined 
that, if a CHDO is removed for cause, meaning it violated the written 
agreement or partnership agreement, it must be replaced by another CHDO 
in order for the project to remain an eligible CHDO set-aside project. 
HUD will issue additional guidance on all CHDO requirements established 
in this final rule.
t. Other Federal Requirements
1. Affirmative Marketing; Minority Outreach Program (Sec.  92.351)
    HUD proposed revising Sec.  92.351 to: (1) remove the provision 
that affirmative marketing requirements do not apply to tenants with 
tenant-based rental assistance because HOME-assisted rental housing 
must always be affirmatively marketed without regard to whether the 
potential tenant has rental assistance; and (2) expand the 
applicability of affirmative marketing provisions to HOME-funded 
programs in addition to projects with 5 or more HOME-assisted units.
    Comments: Several commenters supported the expanded affirmative 
marketing requirements. One commenter was concerned that a one-size-
fits-all approach to affirmative marketing would have limited 
effectiveness. Another commenter requested clarification on how 
affirmative marketing requirements would apply to a downpayment 
assistance program in which homebuyers choose their own homes.
    HUD Response: In accordance with 24 CFR 92.351, participating 
jurisdictions are required to adopt affirmative marketing procedures 
for their programs and projects. The specific procedures to be used 
will depend on the type and size of the project. A participating 
jurisdiction administering a downpayment assistance program would be 
required to affirmatively market the program (i.e., the availability of 
federal funds for downpayment assistance), rather than units available 
for purchase. HUD is adopting the proposed rule language without 
change.
2. Environmental Review (Sec.  92.352)
    HUD proposed revising Sec.  92.352 to clarify that the 
applicability of environmental review regulations is based on the type 
of HOME project (new construction, rehabilitation, acquisition) or 
activity (tenant-based rental assistance), not the particular cost paid 
with HOME funds.
    Comments: A few commenters suggested the HUD adopt a two-step 
environmental review process, whereby project owners could incur costs 
for project predevelopment activities that would be ``exempt'' under 24 
CFR part 58, and participating jurisdictions could reimburse those 
costs after completion of environmental review requirements for the 
physical activity.
    HUD Response: The HOME Program regulation is not the appropriate 
vehicle for proposing or effectuating changes to the implementing 
regulations for the National Environmental Policy Act and related 
statutes. This final rule enables participating jurisdictions to 
reimburse certain project-related soft costs (e.g., architectural and 
engineering costs) incurred up to 24 months before the commitment of 
HOME funds to a project, without the need for an environmental review 
to be performed for the soft costs. For soft costs incurred after 
commitment of HOME funds to a project site, a two-step process would 
inappropriately facilitate participating jurisdictions committing and 
expending HOME funds on projects before the completion of an 
environmental review on the project. It is not inappropriate for 
participating jurisdictions to expend HOME funds on projects (other 
than on the environmental review) before it is certain that they will 
proceed.'' HUD is adopting the proposed rule language without change.
3. Labor (Sec.  92.352)
    HUD proposed revising Sec.  92.352(a)(3) to remove the reference to 
HUD Handbook 1344.1 Federal Labor Standards Compliance in Housing and 
Community Development Programs and replace this reference with a 
regulatory citation. HUD did not receive any comments on the proposed 
change and is adopting the proposed rule language without change.
4. Conflict of Interest (Sec.  92.356)
Financial Interest or Benefit
    HUD proposed revising the conflict of interest provisions of Sec.  
92.356(b) to clarify that the covered conflict involves a financial 
benefit or interest, and that covered familial relationships are 
limited to immediate family members. The proposed change would align 
the HOME provisions with the CDBG regulations. HUD did not receive 
comments on this revision and is adopting the proposed rule language 
without change.

[[Page 44659]]

Occupancy of HOME-Assisted Units
    HUD proposed revising Sec.  92.356(f)(1) to prohibit immediate 
family members of an officer, employee, agent, elected or appointed 
official or consultant of an owner, developer, or sponsor from 
occupying a HOME-assisted affordable housing unit in a project.
    Comments: A commenter expressed concern that the proposed provision 
was vague, and could result in the immediate family members of project 
owners being prohibited from occupying a HOME-assisted unit in 
perpetuity, rather than during the applicable HOME period of 
affordability. Another commenter requested that HUD define immediate 
family member. A commenter recommended that HUD expand the prohibition 
to persons in an intimate relationship with an officer or employee of 
the owner, developer or sponsor of a HOME-assisted project. Another 
commenter asked that HUD clarify that the existing regulatory provision 
that applies to officers and employees of the owner, developer or 
sponsor of HOME-assisted housing does not prohibit a tenant of a HOME-
assisted property from joining the board of a CHDO.
    HUD Response: HUD agrees that the prohibition on occupying HOME-
assisted housing should apply only during the HOME affordability 
period, not to the entire period of ownership of the entity that 
received HOME assistance, and has revised the language in Sec.  
92.356(b) accordingly. In this final rule, HUD has revised the language 
in paragraph (b) to specify the familial relationships that are 
considered immediate family members. HUD declines to include persons in 
intimate relationships with officers or employees of the owner, 
developer or sponsor in the prohibition due to the difficulty of 
establishing the nature and existence of such relationships. HUD agrees 
with the commenter that existing tenants of HOME units should not be 
prohibited from joining a CHDO or non-profit board simply because they 
occupy a HOME-assisted unit. HUD will address this issue in guidance. 
HUD is adopting this provision with the two clarifications described 
above.
u. Program Administration
1. The HOME Investment Trust Fund (Sec.  92.500)
Interest-Bearing Accounts for Program Income
    HUD proposed amending Sec.  92.500(c) to require that participating 
jurisdictions' local HOME accounts be interest-bearing.
    Comments: A commenter indicated that its State law prohibited 
jurisdictions from maintaining interest-bearing accounts for Federal 
funds and asked how it could comply with the proposed requirement.
    HUD Response: If state law prohibits a jurisdiction from 
maintaining interest-bearing accounts, the participating jurisdiction 
would have to request a waiver of this provision. HUD is adopting the 
proposed rule language without change.
Separate Deadline for CHDO Set-Aside Funds
    To provide an incentive for participating jurisdictions to 
proactively manage CHDO set-aside funds by moving them from 
nonperforming CHDOs to performing CHDOs before they expire, HUD 
proposed adding a new paragraph at Sec.  92.500(d)(1)(C) to establish a 
separate 5-year expenditure deadline for community housing development 
organization set-aside funds.
    Comments: A few commenters expressed concern regarding the 
establishment of this deadline, stating that it might increase the 
amount of CHDO set-aside funds subject to recapture and negatively 
affect their CHDO programs.
    HUD Response: HUD is adopting the proposed rule language without 
change to ensure that CHDO funds are actively managed and CHDO set-
aside funds are initially awarded or reallocated by participating 
jurisdictions to the best performing organizations. The 5-year deadline 
for expending CHDO set-aside funds will parallel the existing 
regulatory 5-year deadline for expenditure of other HOME funds, with 
HUD deobligating shortfall amounts and reallocating them in accordance 
with the provisions of NAHA and implementing regulations.
2. Program Disbursement and Information System (Sec.  92.502)
Reporting of Program Income
    HUD proposed adding a provision to Sec.  92.502(a) clarifying that 
participating jurisdictions are required to report all program income 
earned on HOME funds in IDIS.
    Comments: Several commenters disagreed with the proposed 
requirement in paragraph (a) in Sec.  92.502, stating that it will 
require participating jurisdictions to report all program income earned 
on HOME funds in IDIS. A few commenters stated that the current system 
of reporting program income is working and should be maintained.
    A commenter requested implementation flexibility with respect to 
reporting program income in IDIS and stated that reporting program 
income in IDIS should only be required if it is received after the 
effective date of the new regulations. The same commenter stated that 
the regulations should not be required to ensure that program income 
received and held by one state recipient is used before it draws HOME 
funds from its HOME Treasury Account to pay costs incurred by another 
state recipient or CHDO.
    HUD Response: HUD has found that some participating jurisdictions 
are not consistently reporting program income in IDIS and are not 
expending program income before drawing down additional HOME funds from 
their HOME Treasury Accounts. HUD recently made changes to IDIS to 
assist participating jurisdictions to accurately report program income, 
including program income retained by state recipients and 
subrecipients. Program income that is retained by one state recipient 
does not have to be expended before a state participating jurisdiction 
draws funds for another state recipient. HUD is adopting the proposed 
rule language without change. As a result, participating jurisdictions 
will be required to record all program income received after the 
effective date of this rule in IDIS.
Access to HUD's Integrated Disbursement and Information System (IDIS)
    HUD proposed revising Sec.  92.502(e) to clarify that even though 
other participants may be permitted to access HUD's disbursement and 
information system, only participating jurisdictions and State 
recipients (if permitted by the State) may request disbursement.
    Comments: Several commenters objected to the new language in 
paragraph (e) in Sec.  92.502 clarifying that only participating 
jurisdictions and State recipients may request disbursements from IDIS. 
A few commenters stated that HUD should grant exceptions to the 
proposed rule to permit subrecipients designated under state statute to 
administer the HOME program. A commenter stated that requiring the 
State to request every HOME draw would add cost and reduce efficiency, 
adding an extra layer of administration.
    HUD Response: The proposed rule language was added to the 
regulations to codify HUD's longstanding administrative guidance with 
respect to the authority to request drawdown of funds from IDIS. 
Participating jurisdictions that have been permitting

[[Page 44660]]

entities other than State recipients to draw funds have done so in 
violation of that administrative guidance. It is imperative to the 
integrity of the program that the ability to request draws from IDIS be 
limited to the participating jurisdiction or State recipients. HUD is 
adopting the proposed rule language without change. State agencies or 
instrumentalities designated by the state to administer the HOME 
program (e.g., housing finance agencies) as the state participating 
jurisdiction will retain the ability to request disbursement in IDIS. 
Other organizations may be allowed to access the system and perform 
various administrative functions, but will not be able to request 
disbursement of funds.
3. Repayments (Sec.  92.503)
    HUD proposed revising Sec.  92.503 to provide that, when repayment 
of HOME funds is required, HUD will instruct a participating 
jurisdiction whether to repay funds to the HOME Investment Trust Fund 
Treasury account or the local account. HUD did not receive any comments 
on this proposed change and is adopting the rule language without 
change.
4. Participating Jurisdiction Responsibilities; Written Agreements; On-
Site Inspection (Sec.  92.504)
Required Policies and Procedures
    HUD proposed revising Sec.  92.504(a) to: Require participating 
jurisdictions to develop and follow written policies, procedures, and 
systems, including a system for assessing risk of activities and 
projects, and a system for monitoring entities, to ensure that HOME 
requirements are met; to make explicit that State recipients are 
included in the entities that must be evaluated annually; and clarify 
that the evaluation must include a review of each entity's compliance 
with HOME program requirements.
    Comments: Some commenters supported the requirement that 
participating jurisdictions develop and follow written policies and 
procedures to administer their HOME programs. Another commenter stated 
that HUD should provide training and technical assistance to assist 
participating jurisdictions in developing the required policies and 
procedures. Other commenters requested that HUD clarify what 
constitutes risk assessment or how risk assessment should be conducted.
    HUD Response: HUD has developed numerous training and technical 
assistance products relating to appropriate policies and procedures. 
These products include classroom training with an accompanying manual 
on how participating jurisdictions can determine risk elements in their 
HOME program and how to develop and implement a risk assessment 
process. HUD anticipates developing additional guidance and training on 
appropriate policies and procedures related to the HOME program. HUD is 
adopting the proposed rule language without change.
Written Agreements
    HUD proposed several revisions to Sec.  92.504(c), which sets forth 
the provisions that are required in participating jurisdictions' 
written agreements with participants in their HOME programs, including 
state recipients, subrecipients, owners, developers, sponsors, 
contractors, and CHDOs to reflect new or altered requirements that 
would be added to other sections of the HOME regulations and to improve 
the ability of participating jurisdictions to use written agreements to 
ensure compliance.
    Comments: HUD received numerous comments related to Sec.  
92.504(c). However, these comments addressed the underlying requirement 
established elsewhere in the proposed rule rather than the requirement 
to include the requirement in the written agreement. Several commenters 
stated that HUD should not require the inclusion of an address in the 
written agreement between the participating jurisdiction and the owner, 
developer or sponsor of the housing because an address may not have 
been assigned to a property at the time HOME funds are committed to the 
project.
    HUD Response: HUD has addressed comments on specific requirements 
in the sections of this preamble relating to those requirements. HUD 
agrees that the requirement that a project address be included in the 
written agreement between the participating jurisdiction and an owner, 
developer, or sponsor of housing may not be possible in all cases. At 
this final rule stage, HUD has revised the language at Sec.  
92.504(c)(3)(i) to permit the inclusion of the legal description of the 
property location if an address has not been assigned to the property 
to which HOME funds are being committed. The final rule is also revised 
to require that the project owner provide the property address and unit 
numbers to the participating jurisdiction no later than the date of 
initial occupancy of each unit, rather than at project completion. In 
response to questions directed to HUD regarding the fees that owners, 
developers or sponsors of housing can charge in HOME projects or for 
HOME assistance, HUD has revised Sec.  92.504(c)(3)(xi) to more 
explicitly describe the permissibility of fees for rental projects and 
homebuyer projects.
On-Site Inspections and Financial Oversight
    HUD proposed revising Sec.  92.504(d)(1) to require on-site 
completion inspections of all completed HOME-assisted units, and 
proposing different sampling and frequency schedules in the 
requirements for ongoing periodic inspections of rental property in 
Sec.  92.504(d)(1) to provide participating jurisdictions with 
flexibility to implement risk-based monitoring. HUD proposed that 
participating jurisdictions must conduct inspections at least every 3 
years, but more frequently if deficiencies are revealed during 
inspection. The proposed rule also required that inspections be 
performed on a larger number of HOME-assisted units.
    Comments: Several commenters expressed concern that the requirement 
to inspect 20 percent of the HOME units in a building would be too 
onerous for participating jurisdictions that have HOME projects with a 
large number of HOME units. Other commenters supported the proposed 
rule requirement for inspection at the time of project completion and 
during the period of affordability. A few commenters opposed reducing 
the frequency of periodic inspections from what is currently required 
in the existing regulation. Several commenters recommended that HUD 
allow participating jurisdictions to hire contractors for these 
inspections, or to accept the inspections of other funders of the 
project, if any. Some commenters suggested that the proposal to require 
a re-inspection within 12 months of when a deficiency that must be 
corrected is observed is too long a time to have lapse. A commenter 
expressed concern over how these requirements could be implemented for 
single-family and scattered site rental units. Some commenters 
suggested that the requirement to re-inspect HOME-assisted properties 
within 12 months if there are any observed deficiencies could result in 
a costly and disproportionate response, (e.g., a minor deficiency 
should not necessitate a second onsite inspection, which would be 
particularly costly in rural or remote areas). A few commenters stated 
that this requirement appeared to reduce flexibility and eliminate the 
opportunity for the participating jurisdiction to establish a risk-
based approach.
    HUD Response: HUD does not agree that the requiring inspection of 
20 percent of HOME units in each building would result in burdensome 
sample

[[Page 44661]]

sizes, particularly when the inspections may occur only once every 
three years. This percentile was chosen to facilitate alignment with 
the sampling requirements for inspections currently required for LIHTC 
projects. HOME funds are frequently combined with LIHTCs in affordable 
housing projects. However, HUD has removed this specific requirement 
from the final rule in favor of using statistically valid samples, 
noting that in some projects a different sample size may be 
appropriate. HUD plans to issue guidance about appropriate sampling for 
the purposes of ongoing physical inspections of HOME-assisted units. 
HUD proposed the 3 year time frame to facilitate alignment of 
inspections for HOME-assisted projects with other funding sources, such 
as LIHTC. Participating jurisdictions may contract with third parties 
to conduct these inspections and, in the future, inspections performed 
by other funders may be permitted once administrative alignment at the 
Federal level has been achieved. Participating jurisdictions also may 
establish inspection schedules that involve more frequent inspections 
or larger sample sizes. This final rule retains the requirement that a 
follow up on-site inspection must be performed within 12 months to 
ensure that health and safety violations or other serious and 
significant defects do not exist in the property, but permits 
participating jurisdictions to establish a list of minor deficiencies 
for which it may accept third-party verification.
Financial Oversight
    HUD proposed a new a requirement pertaining to annual financial 
oversight of HOME-assisted rental properties in Sec.  92.504(d)(2). The 
purpose of this requirement is to enable participating jurisdictions to 
identify HOME-assisted projects that may become financially troubled 
before problems become severe. HUD proposed that this requirement apply 
only to projects with 10 or more HOME-assisted unit and specifically 
requested public comment on whether a different applicability threshold 
was appropriate.
    Comments: Some commenters expressed concern that HOME 
administrative funds would not provide sufficient resources to pay for 
type of oversight. Some requested training and guidance from HUD about 
how to monitor the financial condition of projects, and other 
commenters requested that HUD provide software to participating 
jurisdictions to assist them. Two commenters suggested that HUD adopt a 
higher number of units (between 20 and 30 HOME units) as the unit 
threshold for applicability of this requirement.
    HUD Response: A threshold of 10 HOME-assisted units or more will 
result in just over one-third of all HOME rental projects being subject 
to this requirement (34 percent of HOME projects completed in the last 
10 years have 10 or more HOME-assisted units). Because many rental 
projects with 10 or more HOME-assisted units are quite large (41 
percent of projects with 10 or more HOME units contain 26 or more total 
units), HUD finds the requirement for an annual examination of 
financial condition appropriate. This final rule requires that 
participating jurisdictions examine the financial condition of HOME-
assisted rental projects with 10 or more HOME-assisted units annually. 
HUD will provide guidance and training on how to implement this 
requirement.
5. Applicability of Uniform Administrative Requirements (Sec.  92.505)
    HUD proposed revising Sec.  92.505(a) and (b) to add a reference to 
the regulations implementing OMB Circular No. A-87 (2 CFR part 225) and 
OMB Circular No. A-122 (2 CFR part 230). Circular A-87 is entitled 
``Cost Principles for States, Local, and Indian Tribal Governments.'' 
Circular A-122 is entitled ``Cost Principles for Non-Profit 
Organizations.'' The provisions of these cost principle circulars are 
codified in the government-wide regulations found at 2 CFR part 225 and 
2 CFR part 230, respectively. HUD received no comments on this proposed 
change and is adopting the proposed rule language without change.
6. Recordkeeping (Sec.  92.508)
    HUD proposed revising Sec.  92.508 to require participating 
jurisdictions to maintain records pertaining to new requirements that 
would be established under this rule.
    Comments: HUD received a few comments related to record keeping 
revisions in the proposed rule. Some commenters expressed concern that 
participating jurisdictions may find it difficult to ensure that all of 
the proposed recordkeeping changes are implemented should HUD adopt the 
proposed changes, and requested technical assistance, training or 
software to assist in the requirements. Other commenters stated that 
the proposed recordkeeping requirements pose an administrative and 
paperwork burden on participating jurisdictions.
    HUD Response: Whenever HUD establishes a requirement for a grant 
program, generally HUD creates corresponding recordkeeping requirements 
to enable HUD to monitor for compliance with the requirements governing 
the grant. The estimated burden associated with new recordkeeping 
requirements is included in the Paperwork Reduction Act submission for 
this rule. HUD is adopting the proposed rule language. HUD plans to 
implement comprehensive training and technical assistance initiatives 
to assist program participants in understanding and implementing all 
provisions of this rule.
7. Corrective and Remedial Actions (Sec.  92.551)
    HUD proposed amending Sec.  92.551(c) by revising and adding to the 
remedial actions available for imposition on a participating 
jurisdiction. The current provision for requiring matching 
contributions would be expanded to include establishment of a remedial 
plan to make up a matching contribution deficit.
    Two new remedial actions, which are establishing procedures to 
ensure compliance with HOME requirements and forming a consortium with 
the urban county, would also be added. The existing provision under 
which HUD may change the method of payment from advance to 
reimbursement would be expanded to require submission of supporting 
documentation before payment is made. Finally, the proposed change 
would provide that HUD may determine the participating jurisdiction to 
be high-risk and impose special conditions or restrictions in 
accordance with 24 CFR 85.12. HUD did not receive any comments on these 
changes and is adopting the proposed rule language without change.
8. Hearing Proceedings (Sec.  92.552)
    HUD proposed to revise Sec.  92.552(b) to remove the reference that 
subpart B of 24 CFR part 26 governs hearing proceedings. HUD did not 
receive any comments on this change and the final rule removes this 
reference.
9. Other Federal Requirements (Sec.  92.614)
    HUD proposed a minor technical change to Sec.  92.614. HUD proposed 
to move the reference to the affirmative marketing requirements in 
Sec.  92.351(a) from Sec.  92.614(b) to Sec.  92.614(a)(3). HUD did not 
receive any comments on this change and is adopting the proposed rule 
language without change.

III. Findings and Certifications

Regulatory Planning and Review- Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a

[[Page 44662]]

regulatory action is significant and therefore, subject to review by 
the Office of Management and Budget (OMB) in accordance with the 
requirements of the order. Executive Order 13563 (Improving Regulations 
and Regulatory Review) directs executive agencies to analyze 
regulations that are ``outmoded, ineffective, insufficient, or 
excessively burdensome, and to modify, streamline, expand, or repeal 
them in accordance with what has been learned. Executive Order 13563 
also directs that, where relevant, feasible, and consistent with 
regulatory objectives, and to the extent permitted by law, agencies are 
to identify and consider regulatory approaches that reduce burdens and 
maintain flexibility and freedom of choice for the public. 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). HUD submits that updating the HOME 
program regulations is consistent with the objectives of Executive 
Order 13563 to reduce burden, as well as the goal of modifying and 
streamlining regulations that are outmoded and ineffective.
    This rule makes several changes to the HOME Program regulations, 
which are over 16 years old, and without a significant update during 
that period. The changes in this rule, for which public comment was 
received and considered, are designed to improve the performance of the 
program. The rule updates definitions and adds new terminology relevant 
to the housing market and real estate market; modifies the eligibility 
requirements of community housing development organizations that seek 
to participate in the HOME program to ensure that they have the 
capacity to undertake their responsibilities under the HOME Program, 
establishes deadlines for project completion in an effort to ensure 
that housing units needed by low-income households are in fact 
constructed and made available; strengthens conflict of interest 
provisions; and clarifies language in several existing HOME regulatory 
provisions to remove any possible ambiguity as to what is expected of 
participating jurisdictions, community housing development 
organizations and other entities that participate in the HOME program.
    The rule is an administrative one and so the economic impacts are 
almost entirely within the program. The requirements that improve 
program oversight and avoid noncompliance will lead to a more efficient 
allocation of resources within the program and the provision of more 
affordable housing. Some elements of the rule have the potential to 
impose compliance costs on participants. However, these costs will 
either be subsidized by HUD or can be avoided through more efficient 
behavior on the part of the participating jurisdictions and developers. 
Although the rule is expected to create some efficiencies within the 
HOME program, the rule it is not expected to have a measurable impact 
beyond the grant program. The costs and benefits of the regulatory 
changes made by this rule are more fully discussed in the regulatory 
impact analysis (RIA) that accompanies this rule and can be found at 
http://www.hud.gov/offices/cpd/affordablehousing/programs/home/.
    The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500. Due to security measures at the HUD Headquarters building, 
please schedule an appointment to review the docket file by calling the 
Regulations Division at 202-708-3055 (this is not a toll-free number).

Paperwork Reduction Act

    The information collection requirements contained in this rule were 
submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), and assigned OMB 
control number 2506-0171. For the information collection and 
recordkeeping changes made by this final rule, HUD estimated that 
annually the number of respondents would be 180,487, responding only 
once annually but with varying hours per response, resulting in a total 
annual burden hours of 208,886. HUD estimated the total annual cost of 
$31 per hour, resulting in a total cost of $6,475,450.00. HUD's 
supporting statement that is submitted to OMB describes in more detail 
the changes made by this final rule to the existing HOME program 
information collection and recordkeeping requirements can be found on 
the HOME program Web site.\9\ This Web page also includes a chart that 
describes how this rule added or reduced the existing information 
collection requirements. 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.
---------------------------------------------------------------------------

    \9\ See http://www.hud.gov/offices/cpd/affordablehousing/programs/home/.
---------------------------------------------------------------------------

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. This rule addresses 
the allocation and use of formula grant funds by state and local 
jurisdictions (participating jurisdictions) under the HOME program. As 
discussed in the preamble, this rule updates the regulations governing 
the HOME program, which have not been updated in 16 years. The rule 
does not alter the allocation of funds under the HOME program, but is 
directed to revising the HOME program regulations to: Reflect changes 
in the housing market that have occurred over the past 16 years; 
clarify and enhance the roles and responsibilities and accountability 
of participating jurisdictions; and strengthen HUD's own oversight of 
the program.
    Section 601 of the Regulatory Flexibility Act defines the term 
``small entity'' to include small governmental jurisdictions as 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts with a population of less than 50,000. 
Currently, there are 644 jurisdictions participating in the HOME 
program, and 33 jurisdictions meet the definition of small governmental 
jurisdictions. HUD is cognizant of the greater difficulties that small 
entities may have in meeting regulatory requirements, but as noted in 
the preamble, the requirements governing this program are designed to 
ensure that the use of HOME program grant funds, are consistent with 
statutory requirements and the objectives of the HOME program. 
Additionally, as a grant program, the program provides that up to 10 
percent of a participating jurisdiction's annual allocation may be used 
for program planning and program administration.
    Nevertheless HUD has strived to meet the objective of responsible 
and accountable use of grant funds without imposing undue burden on 
small jurisdictions or any other size jurisdiction. As discussed 
earlier in this preamble, several provisions adopted by this final rule 
are best practices, not requirements. As also discussed earlier in this 
preamble, additional costs that may arise as result of enhanced 
accountability and monitoring may be paid with HOME grant funds as 
project-

[[Page 44663]]

related soft costs. Further the majority of the provisions in this rule 
are applicable only to projects to which HOME funds are committed after 
the effective date of this final rule, which allows participating 
jurisdictions to better plan the expenditure of their funds. For new 
property standards, this final rule allows an additional 18 months 
after the publication date of this final rule to meet new standards. 
Section III of this preamble, which provides an overview of key changes 
made to the HOME program regulations at the final rule stage highlights 
decisions that HUD made to further minimize burden as a result of the 
update of 16-year old regulations. Such changes include adopting a 12-
month timeframe for committing HOME funds for reconstruction of a unit 
that was destroyed; making the cost of conducting unit inspections and 
determining income of tenant-based rental assistance applicants or 
recipients as an eligible project-related cost; and eliminating the 
requirement for written standards for methods and materials for new 
construction projects, to name a few of the burden reduction changes.
    Accordingly, for these reasons and as further discussed in the 
preamble, HUD has determined that this rule would not have a 
significant economic 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 (1) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (2) preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Order. This rule does not have federalism 
implications and would not impose substantial direct compliance costs 
on state and local governments nor preempt state law within the meaning 
of the Order.

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(2)(C)). The 
Finding remains applicable to this final 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). Individuals with speech or hearing impairments may access this 
number via TTY by calling the Federal Relay Service at (800) 877-8339.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 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 the Unfunded Mandates Reform Act of 1995.

List of Subjects

24 CFR Part 91

    Aged, Grant programs-housing and community development, Homeless, 
Individuals with disabilities, Low and moderate income housing, and 
Reporting and recordkeeping requirements.

24 CFR Part 92

    Administrative practice and procedure, Grant programs-housing and 
community development, Low and moderate income housing, Manufactured 
homes, Rent subsidies, and Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, HUD amends 24 CFR parts 
91and 92, as follows:

PART 91--CONSOLIDATED SUBMISSIONS FOR COMMUNITY PLANNING AND 
DEVELOPMENT PROGRAMS

0
1. The authority citation for part 30 continues to read as follows:

    Authority:  42 U.S.C. 3535(d), 3601-3619, 5301-5315, 11331-
11388, 12701-12711, 12741-12756, and 12901-12912.


0
2. In Sec.  91.220, revise paragraphs (l)(2)(i) and (ii), redesignate 
paragraph (l)(2)(iv) as paragraph (l)(2)(vii), and add new paragraphs 
(l)(2)(iv), (v), and (vi), to read as follows:


Sec.  91.220  Action plan.

* * * * *
    (l) * * *
    (2) HOME. (i) For HOME funds, a participating jurisdiction shall 
describe other forms of investment that are not described in 24 CFR 
92.205(b). HUD's specific written approval to the jurisdiction is 
required for other forms of investment, as provided in Sec.  92.205(b). 
Approval of the consolidated plan or action plan under Sec.  91.500 or 
the failure to disapprove the consolidated plan or action plan does not 
satisfy the requirement for specific HUD approval for other forms of 
investment.
    (ii) If the participating jurisdiction intends to use HOME funds 
for homebuyers, it must set forth the guidelines for resale or 
recapture, and obtain HUD's specific, written approval, as required in 
24 CFR 92.254. Approval of the consolidated plan or action plan under 
Sec.  91.500 or the failure to disapprove the consolidated plan or 
action does not satisfy the requirement for specific HUD approval for 
resale or recapture guidelines.
* * * * *
    (iv) If the participating jurisdiction intends to use HOME funds 
for homebuyer assistance or for rehabilitation of owner-occupied single 
family housing and does not use the HOME affordable homeownership 
limits for the area provided by HUD, it must determine 95 percent of 
the median area purchase price and set forth the information in 
accordance with 24 CFR 92.254(a)(2)(iii).
    (v) The jurisdiction must describe eligible applicants (e.g., 
categories of eligible applicants), describe its process for soliciting 
and funding applications or proposals (e.g., competition, first-come 
first-serve) and state where detailed information may be obtained 
(e.g., application packages are available at the office of the 
jurisdiction or on the jurisdiction's Web site).
    (vi) The participating jurisdiction may limit the beneficiaries or 
give preferences to a particular segment of the low-income population 
only if described in the action plan.
    (A) Any limitation or preference must not violate nondiscrimination 
requirements in 24 CFR 92.350, and the participating jurisdiction must 
not limit or give preferences to students.
    (B) A limitation or preference may include, in addition to 
targeting tenant- based rental assistance to persons with special 
needs, as provided in 24 CFR 92.209(c)(2), limiting beneficiaries or 
giving preferences to such professions as police officers, teachers, or 
artists.
    (C) The participating jurisdiction must not limit beneficiaries or 
give a preference to all employees of the jurisdiction.
    (D) The participating jurisdiction may permit rental housing owners 
to limit

[[Page 44664]]

tenants or give a preference in accordance with 24 CFR 92.253(d) only 
if such limitation or preference is described in the action plan.
* * * * *

0
3. In Sec.  91.320, revise paragraphs (k)(2)(i) and (ii), redesignate 
paragraph (k)(2)(iv) as paragraph (k)(2)(vii), and add new paragraphs 
(k)(2)(iv), (v), and (vi) to read as follows:


Sec.  91.320  Action plan.

* * * * *
    (k) * * *
    (2) HOME. (i) The State shall describe other forms of investment 
that are not described in 24 CFR 92.205(b). HUD's specific written 
approval is required for other forms of investment, as provided in 
Sec.  92.205(b). Approval of the consolidated plan or action plan under 
Sec.  91.500 or the failure to disapprove the consolidated plan or 
action plan does not satisfy the requirement for specific HUD approval 
for resale or recapture guidelines.
    (ii) If the State intends to use HOME funds for homebuyers, it must 
set forth the guidelines for resale or recapture, and obtain HUD's 
specific, written approval, as required in 24 CFR 92.254. Approval of 
the consolidated plan or action plan under Sec.  91.500 or the failure 
to disapprove the consolidated plan or action does not satisfy the 
requirement for specific HUD approval for other forms of investment.
* * * * *
    (iv) If the participating jurisdiction intends to use HOME funds 
for homebuyer assistance or for rehabilitation of owner-occupied single 
family housing and does not use the HOME affordable homeownership 
limits for the area provided by HUD, it must determine 95 percent of 
the median area purchase price and set forth the information in 
accordance with 24 CFR 92.254(a)(2)(iii).
    (v) The State must describe eligible applicants (e.g., categories 
of eligible applicants), describe its process for soliciting and 
funding applications or proposals (e.g., competition, first-come first-
serve; subgrants to local jurisdictions) and state where detailed 
information may be obtained (e.g., application packages are available 
at the office of the State or on the State's Web site).
    (vi) The participating jurisdiction may limit the beneficiaries or 
give preferences to a particular segment of the low-income population 
only if described in the action plan.
    (A) Any limitation or preference must not violate nondiscrimination 
requirements in 24 CFR 92.350, and the participating jurisdiction must 
not limit or give preferences to students.
    (B) A limitation or preference may include, in addition to 
targeting tenant-based rental assistance to persons with special needs 
as provided in 24 CFR 92.209(c)(2), limiting beneficiaries or giving 
preferences to persons in certain occupations, such as police officers, 
firefighters, or teachers.
    (C) The participating jurisdiction must not limit beneficiaries or 
give a preference to all employees of the jurisdiction.
    (D) The participating jurisdiction may permit rental housing owners 
to limit tenants or give a preference in accordance with 24 CFR 
92.253(d) only if such limitation or preference is described in the 
action plan.
* * * * *

PART 92--HOME INVESTMENT PARTNERSHIPS PROGRAM

0
4. The authority citation for part 92 continues to read as follows:

    Authority:  42 U.S.C. 3535(d) and 12701- 12839.


0
5. In Sec.  92.2:
0
a. Revise the introductory text;
0
b. Add, in alphabetical order, the definition of CDBG program;
0
c. Revise paragraphs (1) and (2)(i) of the definition of Commitment;
0
d. Revise paragraphs (3)(ii) and (3)(iii), add paragraph (3)(iv), and 
revise paragraphs (4), (5), and (9) of the definition of Community 
housing development organization;
0
e. Add, in alphabetical order, the definition of Consolidated plan;
0
f. Revise the definitions of Homeownership, Housing, and Low-income 
families;
0
g. Revise paragraph (2) of the definition of Program income;
0
h. Revise the definitions of Project completion, Reconstruction, Single 
room occupancy (SRO) housing, and Subrecipient;
0
i. Add, in alphabetical order, a definition of Uniform Physical 
Condition Standards (UPCS); and
0
j. Revise the definition of Very low-income families.


Sec.  92.2  Definitions.

    The terms 1937 Act, ALJ, Fair Housing Act, HUD, Indian Housing 
Authority (IHA), Public housing, Public Housing Agency (PHA), and 
Secretary are defined in 24 CFR 5.100.
* * * * *
    CDBG program means the Community Development Block Grant program 
under 24 CFR part 570.
* * * * *
    Commitment means:
    (1) The participating jurisdiction has executed a legally binding 
written agreement (that includes the date of the signature of each 
person signing the agreement) with a State recipient, a subrecipient, 
or a contractor to use a specific amount of HOME funds to produce 
affordable housing, provide downpayment assistance, or provide tenant-
based rental assistance; or has met the requirements to commit to a 
specific local project, as defined in paragraph (2) of this definition. 
(See Sec.  92.504(c) for minimum requirements for a written agreement.) 
An agreement between the participating jurisdiction and a subrecipient 
that is controlled by the participating jurisdiction (e.g., an agency 
whose officials or employees are official or employees of the 
participating jurisdiction) does not constitute a commitment. An 
agreement between the representative unit and a member unit of general 
local government of a consortium does not constitute a commitment.
    (2) Commit to a specific local project means:
    (i) If the project consists of rehabilitation or new construction 
(with or without acquisition) the participating jurisdiction (or State 
recipient or sub recipient) and project owner have executed a written 
legally binding agreement under which HOME assistance will be provided 
to the owner for an identifiable project for which all necessary 
financing has been secured, a budget and schedule have been 
established, and underwriting has been completed and under which 
construction is scheduled to start within twelve months of the 
agreement date. If the project is owned by the participating 
jurisdiction or State recipient, the project has been set up in the 
disbursement and information system established by HUD, and 
construction can reasonably be expected to start within twelve months 
of the project set-up date.
* * * * *
    Community housing development organization * * *
    (3) * * *
    (ii) The for-profit entity may not have the right to appoint more 
than one-third of the membership of the organization's governing body. 
Board members appointed by the for-profit entity may not appoint the 
remaining two-thirds of the board members;
    (iii) The community housing development organization must be free 
to contract for goods and services from vendors of its own choosing; 
and
    (iv) The officers and employees of the for-profit entity may not be 
officers or

[[Page 44665]]

employees of the community housing development organization.
    (4) Has a tax exemption ruling from the Internal Revenue Service 
under section 501(c)(3) or (4) of the Internal Revenue Code of 1986 (26 
CFR 1.501(c)(3)-1 or 1.501(c)(4)-1)), is classified as a subordinate of 
a central organization non-profit under section 905 of the Internal 
Revenue Code of 1986, or if the private nonprofit organization is an 
wholly owned entity that is disregarded as an entity separate from its 
owner for tax purposes (e.g., a single member limited liability company 
that is wholly owned by an organization that qualifies as tax-exempt), 
the owner organization has a tax exemption ruling from the Internal 
Revenue Service under section 501(c)(3) or (4) of the Internal Revenue 
Code of 1986 and meets the definition of ``community housing 
development organization;''
    (5) Is not a governmental entity (including the participating 
jurisdiction, other jurisdiction, Indian tribe, public housing 
authority, Indian housing authority, housing finance agency, or 
redevelopment authority) and is not controlled by a governmental 
entity. An organization that is created by a governmental entity may 
qualify as a community housing development organization; however, the 
governmental entity may not have the right to appoint more than one-
third of the membership of the organization's governing body and no 
more than one- third of the board members may be public officials or 
employees of governmental entity. Board members appointed by a 
governmental entity may not appoint the remaining two-thirds of the 
board members. The officers or employees of a governmental entity may 
not be officers or employees of a community housing development 
organization;
* * * * *
    (9) Has a demonstrated capacity for carrying out housing projects 
assisted with HOME funds. A designated organization undertaking 
development activities as a developer or sponsor must satisfy this 
requirement by having paid employees with housing development 
experience who will work on projects assisted with HOME funds. For its 
first year of funding as a community housing development organization, 
an organization may satisfy this requirement through a contract with a 
consultant who has housing development experience to train appropriate 
key staff of the organization. An organization that will own housing 
must demonstrate capacity to act as owner of a project and meet the 
requirements of Sec.  92.300(a)(2). A nonprofit organization does not 
meet the test of demonstrated capacity based on any person who is a 
volunteer or whose services are donated by another organization; and
* * * * *
    Consolidated plan means the plan submitted and approved in 
accordance with 24 CFR part 91.
* * * * *
    Homeownership means ownership in fee simple title in a 1- to 4-unit 
dwelling or in a condominium unit, or equivalent form of ownership 
approved by HUD.
    (1) The land may be owned in fee simple or the homeowner may have a 
99-year ground lease.
    (i) For housing located in the insular areas, the ground lease must 
be 40 years or more.
    (ii) For housing located on Indian trust or restricted Indian lands 
or a Community Land Trust, the ground lease must be 50 years or more.
    (iii) For manufactured housing, the ground lease must be for a 
period at least equal to the applicable period of affordability in 
Sec.  92.254.
    (2) Right to possession under a contract for deed, installment 
contract, or land contract (pursuant to which the deed is not given 
until the final payment is made) is not an equivalent form of 
ownership.
    (3) The ownership interest may be subject only to the restrictions 
on resale required under Sec.  92.254(a); mortgages, deeds of trust, or 
other liens or instruments securing debt on the property as approved by 
the participating jurisdiction; or any other restrictions or 
encumbrances that do not impair the good and marketable nature of title 
to the ownership interest.
    (4) The participating jurisdiction must determine whether or not 
ownership or membership in a cooperative or mutual housing project 
constitutes homeownership under State law; however, if the cooperative 
or mutual housing project receives Low Income Housing Tax Credits, the 
ownership or membership does not constitute homeownership.
* * * * *
    Housing includes manufactured housing and manufactured housing 
lots, permanent housing for disabled homeless persons, transitional 
housing, single-room occupancy housing, and group homes. Housing also 
includes elder cottage housing opportunity (ECHO) units that are small, 
free- standing, barrier-free, energy-efficient, removable, and designed 
to be installed adjacent to existing single-family dwellings. Housing 
does not include emergency shelters (including shelters for disaster 
victims) or facilities such as nursing homes, convalescent homes, 
hospitals, residential treatment facilities, correctional facilities, 
halfway houses, housing for students, or dormitories (including 
farmworker dormitories).
* * * * *
    Low-income families means families whose annual incomes do not 
exceed 80 percent of the median income for the area, as determined by 
HUD, with adjustments for smaller and larger families, except that HUD 
may establish income ceilings higher or lower than 80 percent of the 
median for the area on the basis of HUD findings that such variations 
are necessary because of prevailing levels of construction costs or 
fair market rents, or unusually high or low family incomes. An 
individual does not qualify as a low-income family if the individual is 
a student who is not eligible to receive Section 8 assistance under 24 
CFR 5.612.
* * * * *
    Program income * * *
    (2) Gross income from the use or rental of real property, owned by 
the participating jurisdiction, State recipient, or a subrecipient, 
that was acquired, rehabilitated, or constructed, with HOME funds or 
matching contributions, less costs incidental to generation of the 
income (Program income does not include gross income from the use, 
rental or sale of real property received by the project owner, 
developer, or sponsor, unless the funds are paid by the project owner, 
developer, or sponsor to the participating jurisdiction, subrecipient 
or State recipient);
* * * * *
    Project completion means that all necessary title transfer 
requirements and construction work have been performed; the project 
complies with the requirements of this part (including the property 
standards under Sec.  92.251); the final drawdown of HOME funds has 
been disbursed for the project; and the project completion information 
has been entered into the disbursement and information system 
established by HUD, except that with respect to rental housing project 
completion, for the purposes of Sec.  92.502(d) of this part, project 
completion occurs upon completion of construction and before occupancy. 
For tenant-based rental assistance, project completion means the final 
drawdown has been disbursed for the project.
    Reconstruction means the rebuilding, on the same lot, of housing 
standing on

[[Page 44666]]

a site at the time of project commitment, except that housing that was 
destroyed may be rebuilt on the same lot if HOME funds are committed 
within 12 months of the date of destruction. The number of housing 
units on the lot may not be decreased or increased as part of a 
reconstruction project, but the number of rooms per unit may be 
increased or decreased. Reconstruction also includes replacing an 
existing substandard unit of manufactured housing with a new or 
standard unit of manufactured housing. Reconstruction is rehabilitation 
for purposes of this part.
* * * * *
    Single room occupancy (SRO) housing means housing (consisting of 
single- room dwelling units) that is the primary residence of its 
occupant or occupants. The unit must contain either food preparation or 
sanitary facilities (and may contain both) if the project consists of 
new construction, conversion of nonresidential space, or 
reconstruction. For acquisition or rehabilitation of an existing 
residential structure or hotel, neither food preparation nor sanitary 
facilities are required to be in the unit. If the units do not contain 
sanitary facilities, the building must contain sanitary facilities that 
are shared by tenants. A project's designation as an SRO cannot be 
inconsistent with the building's zoning and building code 
classification.
* * * * *
    Subrecipient means a public agency or nonprofit organization 
selected by the participating jurisdiction to administer all or some of 
the participating jurisdiction's HOME programs to produce affordable 
housing, provide downpayment assistance, or provide tenant-based rental 
assistance. A public agency or nonprofit organization that receives 
HOME funds solely as a developer or owner of a housing project is not a 
subrecipient. The participating jurisdiction's selection of a 
subrecipient is not subject to the procurement procedures and 
requirements.
* * * * *
    Uniform Physical Condition Standards (UPCS) means uniform national 
standards established by HUD pursuant to 24 CFR 5.703 for housing that 
is decent, safe, sanitary, and in good repair. Standards are 
established for inspectable items for each of the following areas: 
site, building exterior, building systems, dwelling units, and common 
areas.
* * * * *
    Very low-income families means low- income families whose annual 
incomes do not exceed 50 percent of the median family income for the 
area, as determined by HUD with adjustments for smaller and larger 
families, except that HUD may establish income ceilings higher or lower 
than 50 percent of the median for the area on the basis of HUD findings 
that such variations are necessary because of prevailing levels of 
construction costs or fair market rents, or unusually high or low 
family incomes. An individual does not qualify as a very low-income 
family if the individual is a student who is not eligible to receive 
Section 8 assistance under 24 CFR 5.612.

0
6. Add Sec.  92.3 to read as follows:


Sec.  92.3  Applicability of 2013 regulatory changes.

    The regulations of this part, as revised by final rule published on 
July 24, 2013 are applicable to projects for which HOME funds are 
committed on or after August 23, 2013, with the exception of the 
following provisions;
    (a) Section 92.2, for the definition of commitment, the change 
which eliminates reservations of funds that are not project-specific to 
CHDOs as a commitment will be applicable on October 22, 2013 and will 
be implemented by HUD for deadlines that occur on or after January 1, 
2015;
    (b) Section 92.251, Property Standards, will apply to projects to 
which funds are committed on or after January 24, 2015;
    (c) Section 92.254(f). Homebuyer program policies, for written 
policies related to underwriting, responsible lending, and refinancing, 
will be applicable on January 24, 2014;
    (d) Section 92.500(d)(1)(C), establishing the separate 5-year 
deadline for expenditure of CHDO set-aside funds will be applicable on 
January 1, 2015 and will be implemented by HUD for all deadlines that 
occur on or after that date; and
    (e) Section 92.504(a), for written policies, procedures, and 
systems, will be applicable on July 24, 2014.
    (f) Section 92.504(d)(2), for financial oversight of projects 
assisted with HOME funds, will be applicable on July 24, 2014.

0
7. In Sec.  92.201, revise paragraph (a)(2) to read as follows:


Sec.  92.201  Distribution of assistance.

    (a) * * *
    (2) The participating jurisdiction may only invest its HOME funds 
in eligible projects within its boundaries, or in jointly funded 
projects within the boundaries of contiguous local jurisdictions which 
serve residents from both jurisdictions. For a project to be jointly 
funded, both jurisdictions must make a financial contribution to the 
project. A jurisdiction's financial contribution may take the form of a 
grant or loan (including a loan of funds that comes from other federal 
sources and that are in the jurisdiction's control, such as CDBG 
program funds) or relief of a significant tax or fee (such as waiver of 
impact fees, property taxes, or other taxes or fees customarily imposed 
on projects within the jurisdiction).
* * * * *

0
8. In Sec.  92.202, revise paragraph (b) to read as follows:


Sec.  92.202  Site and neighborhood standards.

* * * * *
    (b) New rental housing. In carrying out the site and neighborhood 
requirements with respect to new construction of rental housing, a 
participating jurisdiction is responsible for making the determination 
that proposed sites for new construction meet the requirements in 24 
CFR 983.57(e)(2) and (3).

0
9. In Sec.  92.203, revise paragraphs (a)(1)(i), (a)(2), (b), (c), and 
(d)(1) to read as follows:


Sec.  92.203  Income determinations.

    (a) * * *
    (1) * * *
    (i) Examine at least 2 months of source documents evidencing annual 
income (e.g., wage statement, interest statement, unemployment 
compensation statement) for the family.
* * * * *
    (2) For all other families (i.e., homeowners receiving 
rehabilitation assistance, homebuyers, and recipients of HOME tenant-
based rental assistance), the participating jurisdiction must determine 
annual income by examining at least 2 months of source documents 
evidencing annual income (e.g., wage statement, interest statement, 
unemployment compensation statement) for the family.
    (b) When determining whether a family is income eligible, the 
participating jurisdiction must use one of the following two 
definitions of ``annual income'':
    (1) Annual income as defined at 24 CFR 5.609 (except when 
determining the income of a homeowner for an owner-occupied 
rehabilitation project, the value of the homeowner's principal 
residence may be excluded from the calculation of Net Family Assets, as 
defined in 24 CFR 5.603); or
    (2) Adjusted gross income as defined for purposes of reporting 
under Internal Revenue Service Form 1040 series for individual Federal 
annual income tax purposes.
    (c) Although the participating jurisdiction may use either of the

[[Page 44667]]

definitions of ``annual income'' permitted in paragraph (b) of this 
section to calculate adjusted income, it must apply exclusions from 
income established at 24 CFR 5.611. The HOME rents for very low-income 
families established under Sec.  92.252(b)(2) are based on adjusted 
income. In addition, the participating jurisdiction may base the amount 
of tenant-based rental assistance on the adjusted income of the family. 
The participating jurisdiction may use only one definition for each 
HOME-assisted program (e.g., downpayment assistance program) that it 
administers and for each rental housing project.
    (d)(1) The participating jurisdiction must calculate the annual 
income of the family by projecting the prevailing rate of income of the 
family at the time the participating jurisdiction determines that the 
family is income eligible. Annual income shall include income from all 
persons in the household. Income or asset enhancement derived from the 
HOME-assisted project shall not be considered in calculating annual 
income.
* * * * *

0
10. In Sec.  92.205, revise paragraphs (a)(1), (a)(2), (b)(1), (d), and 
(e) to read as follows:


Sec.  92.205  Eligible activities: General.

    (a) * * *
    (1) HOME funds may be used by a participating jurisdiction to 
provide incentives to develop and support affordable rental housing and 
homeownership affordability through the acquisition (including 
assistance to homebuyers), new construction, reconstruction, or 
rehabilitation of nonluxury housing with suitable amenities, including 
real property acquisition, site improvements, conversion, demolition, 
and other expenses, including financing costs, relocation expenses of 
any displaced persons, families, businesses, or organizations; to 
provide tenant-based rental assistance, including security deposits; to 
provide payment of reasonable administrative and planning costs; and to 
provide for the payment of operating expenses of community housing 
development organizations. The housing must be permanent or 
transitional housing. The specific eligible costs for these activities 
are set forth in Sec. Sec.  92.206 through 92.209. The activities and 
costs are eligible only if the housing meets the property standards in 
Sec.  92.251 upon project completion.
    (2) Acquisition of vacant land or demolition must be undertaken 
only with respect to a particular housing project intended to provide 
affordable housing within the time frames established in paragraph (2) 
of the definition of ``commitment'' in Sec.  92.2.
* * * * *
    (b) * * *
    (1) A participating jurisdiction may invest HOME funds as equity 
investments, interest-bearing loans or advances, non-interest-bearing 
loans or advances, interest subsidies consistent with the purposes of 
this part, deferred payment loans, grants, or other forms of assistance 
that HUD determines to be consistent with the purposes of this part and 
specifically approves in writing. Each participating jurisdiction has 
the right to establish the terms of assistance, subject to the 
requirements of this part.
* * * * *
    (d) Multi-unit projects. HOME funds may be used to assist one or 
more housing units in a multi-unit project.
    (1) Only the actual HOME eligible development costs of the assisted 
units may be charged to the HOME program. If the assisted and 
nonassisted units are not comparable, the actual costs may be 
determined based on a method of cost allocation. If the assisted and 
non- assisted units are comparable in terms of size, features, and 
number of bedrooms, the actual cost of the HOME- assisted units can be 
determined by prorating the total HOME eligible development costs of 
the project so that the proportion of the total development costs 
charged to the HOME program does not exceed the proportion of the HOME-
assisted units in the project.
    (2) After project completion, the number of units designated as 
HOME- assisted may be reduced only in accordance with Sec.  92.210, 
except that in a project consisting of all HOME- assisted units, one 
unit may be subsequently converted to an on-site manager's unit if the 
participating jurisdiction determines that the conversion will 
contribute to the stability or effectiveness of the housing and that, 
notwithstanding the loss of one HOME-assisted unit, the costs charged 
to the HOME program do not exceed the actual costs of the HOME- 
assisted units and do not exceed the subsidy limit in Sec.  92.250(b).
    (e) Terminated projects. A HOME assisted project that is terminated 
before completion, either voluntarily or involuntarily, constitutes an 
ineligible activity, and the participating jurisdiction must repay any 
HOME funds invested in the project to the participating jurisdiction's 
HOME Investment Trust Fund in accordance with Sec.  92.503(b) (except 
for project- specific assistance to community housing development 
organizations as provided in Sec.  92.301(a)(3) and (b)(3)).
    (1) A project that does not meet the requirements for affordable 
housing must be terminated and the participating jurisdiction must 
repay all HOME funds invested in the project to the participating 
jurisdiction's HOME Investment Trust Fund in accordance with Sec.  
92.503(b).
    (2) If a participating jurisdiction does not complete a project 
within 4 years of the date of commitment of funds, the project is 
considered to be terminated and the participating jurisdiction must 
repay all funds invested in the project to the participating 
jurisdiction's HOME Investment Trust Fund in accordance with Sec.  
92.503(b). The participating jurisdiction may request a one-year 
extension of this deadline in writing, by submitting information about 
the status of the project, steps being taken to overcome any obstacles 
to completion, proof of adequate funding to complete the project, and a 
schedule with milestones for completion of the project for HUD's review 
and approval.

0
11. In Sec.  92.206, revise paragraphs (a)(1), (a)(2), (a)(3) 
introductory text, (a)(4), (b) introductory text, (b)(1), (b)(2) 
introductory text, (b)(2)(vi), (d)(1), (d)(3), and (d)(6) to read as 
follows:


Sec.  92.206  Eligible project costs.

* * * * *
    (a) * * *
    (1) For new construction projects, costs to meet the new 
construction standards in Sec.  92.251;
    (2) For rehabilitation, costs to meet the property standards for 
rehabilitation projects in Sec.  92.251;
    (3) For both new construction and rehabilitation projects, costs:
* * * * *
    (4) For both new construction and rehabilitation of multifamily 
rental housing projects, costs to construct or rehabilitate laundry and 
community facilities that are located within the same building as the 
housing and which are for the use of the project residents and their 
guests.
* * * * *
    (b) Refinancing costs. The cost to refinance existing debt secured 
by a housing project that is being rehabilitated with HOME funds. These 
costs include the following:
    (1) For single-family (one- to four- family) owner-occupied 
housing, when loaning HOME funds to rehabilitate the housing, if the 
refinancing is necessary to reduce the overall housing costs to the 
borrower and make the housing more affordable and if the rehabilitation

[[Page 44668]]

cost is greater than the amount of debt that is refinanced.
    (2) For single family or multifamily projects, when loaning HOME 
funds to rehabilitate the units if refinancing is necessary to permit 
or continue affordability under Sec.  92.252. The participating 
jurisdiction must establish refinancing guidelines and state them in 
its consolidated plan described in 24 CFR part 91. Regardless of the 
amount of HOME funds invested, the minimum affordability period shall 
be 15 years. The guidelines shall describe the conditions under which 
the participating jurisdictions will refinance existing debt. At 
minimum, the guidelines must:
* * * * *
    (vi) State that HOME funds cannot be used to refinance single 
family or multifamily housing loans made or insured by any Federal 
program, including CDBG.
* * * * *
    (d) * * *
    (1) Architectural, engineering, or related professional services 
required to prepare plans, drawings, specifications, or work write-ups. 
The costs may be paid if they were incurred not more than 24 months 
before the date that HOME funds are committed to the project and the 
participating jurisdiction expressly permits HOME funds to be used to 
pay the costs in the written agreement committing the funds.
* * * * *
    (3) Costs of a project audit, including certification of costs 
performed by a certified public accountant, that the participating 
jurisdiction may require with respect to the development of the 
project.
* * * * *
    (6) Staff and overhead costs of the participating jurisdiction 
directly related to carrying out the project, such as work 
specifications preparation, loan processing inspections, and other 
services related to assisting potential owners, tenants, and 
homebuyers, e.g., housing counseling, may be charged to project costs 
only if the project is funded and the individual becomes the owner or 
tenant of the HOME-assisted project. For multi-unit projects, such 
costs must be allocated among HOME- assisted units in a reasonable 
manner and documented. Although these costs may be charged as project 
costs, these costs (except housing counseling) cannot be charged to or 
paid by low-income families.
* * * * *

0
12. In Sec.  92.207, revise paragraph (b) to read as follows:


Sec.  92.207  Eligible administrative and planning costs.

* * * * *
    (b) Staff and overhead. Staff and overhead costs of the 
participating jurisdiction directly related to carrying out the 
project, such as work specifications preparation, loan processing, 
inspections, lead-based paint evaluations (visual assessments, 
inspections, and risk assessments) and other services related to 
assisting potential owners, tenants, and homebuyers (e.g., housing 
counseling); and staff and overhead costs directly related to providing 
advisory and other relocation services to persons displaced by the 
project, including timely written notices to occupants, referrals to 
comparable and suitable replacement property, property inspections, 
counseling, and other assistance necessary to minimize hardship. These 
costs may be charged as administrative costs or as project costs under 
Sec.  92.206(d)(6) and (f)(2), at the discretion of the participating 
jurisdiction; however, these costs (except housing counseling) cannot 
be charged to or paid by the low-income families.
* * * * *

0
13. In Sec.  92.208, revise paragraph (a) to read as follows:


Sec.  92.208  Eligible community housing development organization 
(CHDO) operating expense and capacity building costs.

    (a) Up to 5 percent of a participating jurisdiction's fiscal year 
HOME allocation may be used for the operating expenses of community 
housing development organizations (CHDOs). This amount is in addition 
to amounts set aside for housing projects that are owned, developed, or 
sponsored by CHDOs as described in Sec.  92.300(a). These funds may not 
be used to pay operating expenses incurred by a CHDO acting as a 
subrecipient or contractor under the HOME Program. Operating expenses 
means reasonable and necessary costs for the operation of the community 
housing development organization. Such costs include salaries, wages, 
and other employee compensation and benefits; employee education, 
training, and travel; rent; utilities; communication costs; taxes; 
insurance; equipment; materials; and supplies. The requirements and 
limitations on the receipt of these funds by CHDOs are set forth in 
Sec.  92.300(e) and (f).
* * * * *

0
14. In Sec.  92.209, revise paragraphs (a), (c) introductory text, 
(c)(2), (g), (h)(3)(ii), and (l) to read as follows:


Sec.  92.209  Tenant-based rental assistance: Eligible costs and 
requirements.

    (a) Eligible costs. Eligible costs are the rental assistance and 
security deposit payments made to provide tenant-based rental 
assistance for a family pursuant to this section. Eligible costs also 
include utility deposit assistance, but only if this assistance is 
provided with tenant-based rental assistance or security deposit 
payment. Administration of tenant-based rental assistance is eligible 
only under general management oversight and coordination at Sec.  
92.207(a), except that the costs of inspecting the housing and 
determining the income eligibility of the family are eligible as costs 
of the tenant-based rental assistance.
* * * * *
    (c) Tenant selection. The participating jurisdiction must select 
low-income families in accordance with written tenant selection 
policies and criteria that are based on local housing needs and 
priorities established in the participating jurisdiction's consolidated 
plan.
* * * * *
    (2) Targeted assistance. (i) The participating jurisdiction may 
establish a preference for individuals with special needs (e.g., 
homeless persons or elderly persons) or persons with disabilities. The 
participating jurisdiction may offer, in conjunction with a tenant-
based rental assistance program, particular types of nonmandatory 
services that may be most appropriate for persons with a special need 
or a particular disability. Generally, tenant-based rental assistance 
and the related services should be made available to all persons with 
special needs or disabilities who can benefit from such services. 
Participation may be limited to persons with a specific disability if 
necessary to provide as effective housing, aid, benefit, or services as 
those provided to others in accordance with 24 CFR 8.4(b)(1)(iv).
    (ii) The participating jurisdiction may also provide a preference 
for a specific category of individuals with disabilities (e.g., persons 
with HIV/AIDS or chronic mental illness) if the specific category is 
identified in the participating jurisdiction's consolidated plan as 
having unmet need and the preference is needed to narrow the gap in 
benefits and services received by such persons.
    (iii) Self-sufficiency program. The participating jurisdiction may 
require the family to participate in a self- sufficiency program as a 
condition of

[[Page 44669]]

selection for assistance. The family's failure to continue 
participation in the self-sufficiency program is not a basis for 
terminating the assistance; however, renewal of the assistance may be 
conditioned on participation in the program. Tenants living in a HOME- 
assisted rental project who receive tenant-based rental assistance as 
relocation assistance must not be required to participate in a self- 
sufficiency program as a condition of receiving assistance.
    (iv) Homebuyer program. HOME tenant-based rental assistance may 
assist a tenant who has been identified as a potential low-income 
homebuyer through a lease-purchase agreement, with monthly rental 
payments for a period up to 36 months (i.e., 24 months, with a 12-month 
renewal in accordance with paragraph (e) of this section). The HOME 
tenant-based rental assistance payment may not be used to accumulate a 
downpayment or closing costs for the purchase; however, all or a 
portion of the homebuyer-tenant's monthly contribution toward rent may 
be set aside for this purpose. If a participating jurisdiction 
determines that the tenant has met the lease-purchase criteria and is 
ready to assume ownership, HOME funds may be provided for downpayment 
assistance in accordance with the requirements of this part.
    (v) Preferences cannot be administered in a manner that limits the 
opportunities of persons on any basis prohibited by the laws listed 
under 24 CFR 5.105(a). For example, a participating jurisdiction may 
not determine that persons given a preference under the program are 
therefore prohibited from applying for or participating in other 
programs or forms of assistance. Persons who are eligible for a 
preference must have the opportunity to participate in all programs of 
the participating jurisdiction, including programs that are not 
separate or different.
* * * * *
    (g) Tenant protections. The tenant must have a lease that complies 
with the requirements in Sec.  92.253 (a) and (b).
    (h) * * *
    (3) * * *
    (ii) The Section 8 Housing Choice Voucher Program (24 CFR part 
982).
* * * * *
    (l) Use of Section 8 assistance. In any case where assistance under 
section 8 of the 1937 Act becomes available, recipients of tenant-based 
rental assistance under this part will qualify for tenant selection 
preferences to the same extent as when they received the HOME tenant-
based rental assistance under this part.

0
15. Add Sec.  92.210 to read as follows:


Sec.  92.210  Troubled HOME-assisted rental housing projects.

    (a) The provisions of this section apply only to an existing HOME- 
assisted rental project that, within the HOME period of affordability, 
is no longer financially viable. For purposes of this section, a HOME 
assisted rental project is no longer financially viable if its 
operating costs significantly exceed its operating revenue. HUD may 
approve one or both of the actions described in paragraphs (b) and (c) 
of this section to strategically preserve a rental project after 
consideration of market needs, available resources, and the likelihood 
of long-term viability of the project.
    (b) Notwithstanding Sec.  92.214, a participating jurisdiction may 
request and HUD may permit, pursuant to a written memorandum of 
agreement, a participating jurisdiction to invest additional HOME funds 
in the existing HOME-assisted rental project. The total HOME funding 
for the project (original investment plus additional investment) must 
not exceed the per-unit subsidy limit in Sec.  92.250(a). The use of 
HOME funds may include, but is not limited to, rehabilitation of the 
HOME units and recapitalization of project reserves for the HOME units 
(to fund capital costs). If additional HOME funds are invested, HUD may 
require the period of affordability to be extended, based on such 
considerations as the amount of additional HOME funds or additional 
units.
    (c) HUD Headquarters may, through written approval, permit the 
participating jurisdiction to reduce the number of HOME-assisted units, 
if the project contains more than the minimum number of units required 
to be designated as HOME-assisted under Sec.  92.205(d). In determining 
whether to permit a reduction in the number of HOME-assisted units, HUD 
will take into account the required period of affordability and the 
amount of HOME assistance provided to the project.

0
16. Add Sec.  92.213 to read as follows:


Sec.  92.213  HOME Funds and Public Housing.

    (a) General rule. HOME funds may not be used for public housing 
units. HOME-assisted housing units may not receive Operating Fund or 
Capital Fund assistance under section 9 of the 1937 Act during the HOME 
period of affordability.
    (b) Exception. HOME funds may be used for the development of public 
housing units, if the units are developed under section 24 of the 1937 
Act (HOPE VI) and no Capital Fund assistance under section 9(d) of the 
Act is used for the development of the unit. Units developed with both 
HOME and HOPE VI may receive operating assistance under section 9 of 
the 1937 Act. Units developed with HOME and HOPE VI funds under this 
paragraph may subsequently receive Capital Funds for rehabilitation or 
modernization.
    (c) Using HOME funds in public housing projects. Consistent with 
Sec.  92.205(d), HOME funds may be used for affordable housing units in 
a project that also contains public housing units, provided that the 
HOME funds are not used for the public housing units (except as 
provided in paragraph (b) of this section) and HOME funds are used only 
for eligible costs in accordance with this part.
    (d) The HOME funds must be used in accordance with the requirements 
of this part and the project must meet the requirements of this part, 
including rent requirements in Sec.  92.252.

0
17. In Sec.  92.214, revise the section heading and paragraphs (a)(4) 
and (b) to read as follows:


Sec.  92.214  Prohibited activities and fees.

    (a) * * *
    (4) Provide assistance for uses authorized under section 9 of the 
1937 Act (Public Housing Capital and Operating Funds);
* * * * *
    (b)(1) Participating jurisdictions may not charge (and must 
prohibit State recipients, subrecipients, and community housing 
development organizations from charging) servicing, origination, or 
other fees for the purpose of covering costs of administering the HOME 
program (e.g., fees on low-income families for construction management 
or for inspections for compliance with property standards) (see Sec.  
92.206(d)(6) and Sec.  92.207), except that:
    (i) Participating jurisdictions and State recipients may charge 
owners of rental projects reasonable annual fees for compliance 
monitoring during the period of affordability. The fees must be based 
upon the average actual cost of performing the monitoring of HOME-
assisted rental projects. The basis for determining the amount of for 
the fee amount must be documented and the fee must be included in the 
costs of the project as part of the project underwriting;
    (ii) Participating jurisdictions, subrecipients and State 
recipients may charge nominal application fees (although these fees are 
not an eligible

[[Page 44670]]

HOME cost) to project owners to discourage frivolous applications. The 
amount of application fees must be appropriate to the type of 
application and may not create an undue impediment to a low-income 
family's, subrecipient's, State recipient's, or other entity's 
participation in the participating jurisdiction's program; and
    (iii) Participating jurisdictions, subrecipients and State 
recipients may charge homebuyers a fee for housing counseling.
    (2) All fees charged under paragraph (b)(1) of this section are 
applicable credits under 2 CFR part 225 (OMB Circular A-87, entitled 
``Cost Principles for State, Local, and Indian Tribal Governments'').
    (3) The participating jurisdiction must prohibit project owners 
from charging fees that are not customarily charged in rental housing 
(e.g., laundry room access fees), except that rental project owners may 
charge:
    (i) Reasonable application fees to prospective tenants;
    (ii) Parking fees to tenants only if such fees are customary for 
rental housing projects in the neighborhood; and
    (iii) Fees for services such as bus transportation or meals, as 
long as the services are voluntary and fees are charged for services 
provided.

0
18. In Sec.  92.221, add paragraph (d) to read as follows:


Sec.  92.221  Match credit.

* * * * *
    (d) Match credit for the development of affordable homeownership 
housing for sale to homebuyers. Contributions to the development of 
homeownership housing may be credited as a match only to the extent 
that the sales price of the housing is reduced by the amount of the 
contribution or, if the development costs exceed the fair market value 
of the housing, the contribution may be credited to the extent that the 
contributions enable the housing to be sold for less than the cost of 
development.

0
19. In Sec.  92.222, revise paragraph (b) to read as follows:


Sec.  92.222  Reduction of matching contribution requirement.

* * * * *
    (b) Reduction of match for participating jurisdictions in disaster 
areas. If a participating jurisdiction is located in an area in which a 
declaration of major disaster is made pursuant to the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5121-
5206), the participating jurisdiction may request a reduction of its 
matching requirement.
    (1) In determining whether to grant the request and the amount and 
duration of the reduction, if any, HUD must consider the fiscal impact 
of the disaster on the participating jurisdiction.
    (i) For a local participating jurisdiction, the HUD Field office 
may reduce the matching requirement specified in Sec.  92.218 by up to 
100 percent for the fiscal year in which the declaration of major 
disaster is made and the following fiscal year.
    (ii) For a State participating jurisdiction, the HUD Field office 
may reduce the matching requirement specified in Sec.  92.218, by up to 
100 percent for the fiscal year in which the declaration of major 
disaster is made and the following fiscal year with respect to any HOME 
funds expended in an area to which the declaration of a major disaster 
applies.
    (2) At its discretion and upon request of the participating 
jurisdiction, the HUD Field Office may extend the reduction for an 
additional year.

0
20. Revise Sec.  92.250 to read as follows:


Sec.  92.250  Maximum per-unit subsidy amount, underwriting, and 
subsidy layering.

    (a) Maximum per-unit subsidy amount. The total amount of HOME funds 
and ADDI funds that a participating jurisdiction may invest on a per-
unit basis in affordable housing may not exceed the per-unit dollar 
limitations established under section 221(d)(3)(ii) of the National 
Housing Act (12 U.S.C.17151(d)(3)(ii)) for elevator- type projects that 
apply to the area in which the housing is located. HUD will allow the 
per-unit subsidy amount to be increased on a program-wide basis to an 
amount, up to 240 percent of the original per unit limits, to the 
extent that the costs of multifamily housing construction exceed the 
section 221(d)(3)(ii) limit.
    (b) Underwriting and subsidy layering. Before committing funds to a 
project, the participating jurisdiction must evaluate the project in 
accordance with guidelines that it has adopted for determining a 
reasonable level of profit or return on owner's or developer's 
investment in a project and must not invest any more HOME funds, alone 
or in combination with other governmental assistance, than is necessary 
to provide quality affordable housing that is financially viable for a 
reasonable period (at minimum, the period of affordability in Sec.  
92.252 or Sec.  92.254) and that will not provide a profit or return on 
the owner's or developer's investment that exceeds the participating 
jurisdiction's established standards for the size, type, and complexity 
of the project. The participating jurisdiction's guidelines must 
require the participating jurisdiction to undertake:
    (1) An examination of the sources and uses of funds for the project 
and a determination that the costs are reasonable; and
    (2) An assessment, at minimum, of the current market demand in the 
neighborhood in which the project will be located, the experience of 
the developer, the financial capacity of the developer, and firm 
written financial commitments for the project.
    (3) For projects involving rehabilitation of owner-occupied housing 
pursuant to Sec.  92.254(b):
    (i) An underwriting analysis is required only if the HOME-funded 
rehabilitation loan is an amortizing loan; and
    (ii) A market analysis or evaluation of developer capacity is not 
required.
    (4) For projects involving HOME-funded downpayment assistance 
pursuant to Sec.  92.254(a) and which do not include HOME-funded 
development activity, a market analysis or evaluation of developer 
capacity is not required.

0
21. Revise Sec.  92.251 to read as follows:


Sec.  92.251  Property standards.

    (a) New construction projects. (1) State and local codes, 
ordinances, and zoning requirements. Housing that is newly constructed 
with HOME funds must meet all applicable State and local codes, 
ordinances, and zoning requirements. HOME-assisted new construction 
projects must meet State or local residential and building codes, as 
applicable or, in the absence of a State or local building code, the 
International Residential Code or International Building Code (as 
applicable to the type of housing) of the International Code Council. 
The housing must meet the applicable requirements upon project 
completion.
    (2) HUD requirements. All new construction projects must also meet 
the requirements described in paragraphs (a)(2)(i) through (v) of this 
section:
    (i) Accessibility. The housing must meet the accessibility 
requirements of 24 CFR part 8, which implements Section 504 of the 
Rehabilitation Act of 1973 (29 U.S.C. 794), and Titles II and III of 
the Americans with Disabilities Act (42 U.S.C. 12131-12189) implemented 
at 28 CFR parts 35 and 36, as applicable. Covered multifamily 
dwellings, as defined at 24 CFR 100.201, must also meet the design and 
construction requirements at 24 CFR

[[Page 44671]]

100.205, which implements the Fair Housing Act (42 U.S.C. 3601-3619).
    (ii) [Reserved]
    (iii) Disaster mitigation. Where relevant, the housing must be 
constructed to mitigate the impact of potential disasters (e.g., 
earthquakes, hurricanes, flooding, and wildfires), in accordance with 
State and local codes, ordinances, or other State and local 
requirements, or such other requirements as HUD may establish.
    (iv) Written cost estimates, construction contracts and 
construction documents. The participating jurisdiction must ensure the 
construction contract(s) and construction documents describe the work 
to be undertaken in adequate detail so that inspections can be 
conducted. The participating jurisdiction must review and approve 
written cost estimates for construction and determining that costs are 
reasonable.
    (v) Construction progress inspections. The participating 
jurisdiction must conduct progress and final inspections of 
construction to ensure that work is done in accordance with the 
applicable codes, the construction contract, and construction 
documents.
    (b) Rehabilitation projects. All rehabilitation that is performed 
using HOME funds must meet the requirements of this paragraph (b).
    (1) Rehabilitation standards. The participating jurisdiction must 
establish rehabilitation standards for all HOME- assisted housing 
rehabilitation activities that set forth the requirements that the 
housing must meet upon project completion. The participating 
jurisdiction's description of its standards must be in sufficient 
detail to determine the required rehabilitation work including methods 
and materials. The standards may refer to applicable codes or they may 
establish requirements that exceed the minimum requirements of the 
codes. The rehabilitation standards must address each of the following:
    (i) Health and safety. The participating jurisdiction's standards 
must identify life-threatening deficiencies that must be addressed 
immediately if the housing is occupied.
    (ii) Major systems. Major systems are: structural support; roofing; 
cladding and weatherproofing (e.g., windows, doors, siding, gutters); 
plumbing; electrical; and heating, ventilation, and air conditioning. 
For rental housing, the participating jurisdiction's standards must 
require the participating jurisdiction to estimate (based on age and 
condition) the remaining useful life of these systems, upon project 
completion of each major systems. For multifamily housing projects of 
26 units or more, the participating jurisdiction's standards must 
require the participating jurisdiction to determine the useful life of 
major systems through a capital needs assessment of the project. For 
rental housing, if the remaining useful life of one or more major 
system is less than the applicable period of affordability, the 
participating jurisdiction's standards must require the participating 
jurisdiction to ensure that a replacement reserve is established and 
monthly payments are made to the reserve that are adequate to repair or 
replace the systems as needed. For homeownership housing, the 
participating jurisdiction's standards must require, upon project 
completion, each of the major systems to have a remaining useful life 
for a minimum of 5 years or for such longer period specified by the 
participating jurisdiction, or the major systems must be rehabilitated 
or replaced as part of the rehabilitation work.
    (iii) Lead-based paint. The participating jurisdiction's standards 
must require the housing to meet the lead-based paint requirements at 
24 CFR part 35.
    (iv) Accessibility. The participating jurisdiction's standards must 
require the housing to meet the accessibility requirements in 24 CFR 
part 8, which implements Section 504 of the Rehabilitation Act of 1973 
(29 U.S.C. 794), and Titles II and III of the Americans with 
Disabilities Act (42 U.S.C. 12131-12189) implemented at 28 CFR parts 35 
and 36, as applicable. Covered multifamily dwellings, as defined at 24 
CFR 100.201, must also meet the design and construction requirements at 
24 CFR 100.205, which implements the Fair Housing Act (42 U.S.C. 3601-
3619). Rehabilitation may include improvements that are not required by 
regulation or statute that permit use by a person with disabilities.
    (v) [Reserved]
    (vi) Disaster mitigation. Where relevant, the participating 
jurisdiction's standards must require the housing to be improved to 
mitigate the impact of potential disasters (e.g., earthquake, 
hurricanes, flooding, and wildfires) in accordance with State and local 
codes, ordinances, and requirements.
    (vii) State and local codes, ordinances, and zoning requirements. 
The participating jurisdiction's standards must require the housing to 
meet all applicable State and local codes, ordinances, and requirements 
or, in the absence of a State or local building code, the International 
Existing Building Code of the International Code Council.
    (viii) Uniform Physical Condition Standards. The standards of the 
participating jurisdiction must be such that, upon completion, the 
HOME-assisted project and units will be decent, safe, sanitary, and in 
good repair as described in 24 CFR 5.703. HUD will establish the 
minimum deficiencies that must be corrected under the participating 
jurisdiction's rehabilitation standards based on inspectable items and 
inspected areas from HUD-prescribed physical inspection procedures 
(Uniform Physical Conditions Standards) pursuant to 24 CFR 5.705.
    (ix) Capital Needs Assessments. For multifamily rental housing 
projects of 26 or more total units, the participating jurisdiction must 
determine all work that will be performed in the rehabilitation of the 
housing and the long-term physical needs of the project through a 
capital needs assessment of the project.
    (2) Construction documents and cost estimates. The participating 
jurisdiction must ensure that the work to be undertaken will meet the 
participating jurisdiction's rehabilitation standards. The construction 
documents (i.e., written scope of work to be performed) must be in 
sufficient detail to establish the basis for a uniform inspection of 
the housing to determine compliance with the participating 
jurisdiction's standards. The participating jurisdiction must review 
and approve a written cost estimate for rehabilitation after 
determining that costs are reasonable.
    (3) Frequency of inspections. The participating jurisdiction must 
conduct an initial property inspection to identify the deficiencies 
that must be addressed. The participating jurisdiction must conduct 
progress and final inspections to determine that work was done in 
accordance with work write-ups.
    (c) Acquisition of standard housing. (1) Existing housing that is 
acquired with HOME assistance for rental housing, and that was newly 
constructed or rehabilitated less than 12 months before the date of 
commitment of HOME funds, must meet the property standards of paragraph 
(a) or paragraph (b) of this section, as applicable, of this section 
for new construction and rehabilitation projects. The participating 
jurisdiction must document this compliance based upon a review of 
approved building plans and Certificates of Occupancy, and an 
inspection that is conducted no earlier than 90 days before the 
commitment of HOME assistance.
    (2) All other existing housing that is acquired with HOME 
assistance for rental housing must meet the

[[Page 44672]]

rehabilitation property standards requirements of paragraph (b) of this 
section. The participating jurisdiction must document this compliance 
based upon an inspection that is conducted no earlier than 90 days 
before the commitment of HOME assistance. If the property does not meet 
these standards, HOME funds cannot be used to acquire the property 
unless it is rehabilitated to meet the standards of paragraph (b) of 
this section.
    (3) Existing housing that is acquired for homeownership (e.g., 
downpayment assistance) must be decent, safe, sanitary, and in good 
repair. The participating jurisdiction must establish standards to 
determine that the housing is decent, safe, sanitary, and in good 
repair. At minimum, the standards must provide that the housing meets 
all applicable State and local housing quality standards and code 
requirements and the housing does not contain the specific deficiencies 
proscribed by HUD based on the applicable inspectable items and 
inspected areas in HUD-prescribed physical inspection procedures 
(Uniform Physical Condition Standards) issued pursuant to 24 CFR 5.705. 
The participating jurisdiction must inspect the housing and document 
this compliance based upon an inspection that is conducted no earlier 
than 90 days before the commitment of HOME assistance. If the housing 
does not meet these standards, the housing must be rehabilitated to 
meet the standards of this paragraph (c)(3) or it cannot be acquired 
with HOME funds.
    (d) Occupied housing by tenants receiving HOME tenant-based rental 
assistance. All housing occupied by tenants receiving HOME tenant-based 
rental assistance must meet the standards in 24 CFR 982.401, or the 
successor requirements as established by HUD.
    (e) Manufactured housing. Construction of all manufactured housing 
including manufactured housing that replaces an existing substandard 
unit under the definition of ``reconstruction'' must meet the 
Manufactured Home Construction and Safety Standards codified at 24 CFR 
part 3280. These standards preempt State and local codes which are not 
identical to the federal standards for the new construction of 
manufactured housing. Participating jurisdictions providing HOME funds 
to assist manufactured housing units must comply with applicable State 
and local laws or codes. In the absence of such laws or codes, the 
installation must comply with the manufacturer's written instructions 
for installation of manufactured housing units. All new manufactured 
housing and all manufactured housing that replaces an existing 
substandard unit under the definition of ``reconstruction'' must be on 
a permanent foundation that meets the requirements for foundation 
systems as set forth in 24 CFR 203.43f(c)(i). All new manufactured 
housing and all manufactured housing that replaces an existing 
substandard unit under the definition of ``reconstruction'' must, at 
the time of project completion, be connected to permanent utility hook-
ups and be located on land that is owned by the manufactured housing 
unit owner or land for which the manufactured housing owner has a lease 
for a period at least equal to the applicable period of affordability. 
In HOME-funded rehabilitation of existing manufactured housing the 
foundation and anchoring must meet all applicable State and local 
codes, ordinances, and requirements or in the absence of local or state 
codes, the Model Manufactured Home Installation Standards at 24 CFR 
part 3285. Manufactured housing that is rehabilitated using HOME funds 
must meet the property standards requirements in paragraph (b) of this 
section, as applicable. The participating jurisdiction must document 
this compliance in accordance with inspection procedures that the 
participating jurisdiction has established pursuant to Sec.  92.251, as 
applicable.
    (f) Ongoing property condition standards: Rental housing. (1) 
Ongoing property standards. The participating jurisdiction must 
establish property standards for rental housing (including manufactured 
housing) that apply throughout the affordability period. The standards 
must ensure that owners maintain the housing as decent, safe, and 
sanitary housing in good repair. The participating jurisdiction's 
description of its property standards must be in sufficient detail to 
establish the basis for a uniform inspection of HOME rental projects. 
The participating jurisdiction's ongoing property standards must 
address each of the following:
    (i) Compliance with State and local codes, ordinances, and 
requirements. The participating jurisdiction's standards must require 
the housing to meet all applicable State and local code requirements 
and ordinances. In the absence of existing applicable State or local 
code requirements and ordinances, at a minimum, the participating 
jurisdiction's ongoing property standards must include all inspectable 
items and inspectable areas specified by HUD based on the HUD physical 
inspection procedures (Uniform Physical Condition Standards (UPCS)) 
prescribed by HUD pursuant to 24 CFR 5.705. The participating 
jurisdiction's property standards are not required to use any scoring, 
item weight, or level of criticality used in UPCS.
    (ii) Health and safety. The participating jurisdiction's standards 
must require the housing to be free of all health and safety defects. 
The standards must identify life-threatening deficiencies that the 
owner must immediately correct and the time frames for addressing these 
deficiencies.
    (iii) Lead-based paint. The participating jurisdiction's standards 
must require the housing to meet the lead-based paint requirements in 
24 CFR part 35.
    (2) Projects to which HOME funds were committed before January 24, 
2015 must meet all applicable State or local housing quality standards 
or code requirements, and if there are no such standard or code 
requirements, the housing must meet the housing quality standards in 24 
CFR 982.401.
    (3) Inspections. The participating jurisdiction must undertake 
ongoing property inspections, in accordance with Sec.  92.504(d).
    (4) Corrective and remedial actions. The participating jurisdiction 
must have procedures for ensuring that timely corrective and remedial 
actions are taken by the project owner to address identified 
deficiencies.
    (5) Inspection procedures. The participating jurisdiction must 
establish written inspection procedures inspections. The procedures 
must include detailed inspection checklists, description of how and by 
whom inspections will be carried out, and procedures for training and 
certifying qualified inspectors. The procedures must also describe how 
frequently the property will be inspected, consistent with this 
section, Sec.  92.209, and Sec.  92.504(d).

0
22. In Sec.  92.252:
0
a. Revise the introductory text, paragraph (a) introductory text, 
paragraph (b) introductory text, paragraphs (c), (d), (e), (f)(2), 
paragraph (g) heading, and paragraph (j); and
0
b. Add paragraphs (k) and (l).
    The revisions and additions read as follows:


Sec.  92.252  Qualification as affordable housing: Rental housing.

    The HOME-assisted units in a rental housing project must be 
occupied by households that are eligible as low- income families and 
must meet the requirements of this section to qualify as affordable 
housing. If the housing is not occupied by eligible tenants within six

[[Page 44673]]

months following the date of project completion, HUD will require the 
participating jurisdiction to submit marketing information and, if 
appropriate, submit a marketing plan. HUD will require the 
participating jurisdiction to repay HOME funds invested in any housing 
unit that has not been rented to eligible tenants 18 months after the 
date of project completion. The affordability requirements also apply 
to the HOME- assisted non-owner-occupied units in single-family housing 
purchased with HOME funds in accordance with Sec.  92.254. The tenant 
must have a written lease that complies with Sec.  92.253.
    (a) Rent limitation. HUD provides the following maximum HOME rent 
limits. The rent limits apply to the rent plus the utilities or the 
utility allowance. The maximum HOME rents (High HOME Rents) are the 
lesser of:
* * * * *
    (b) Additional rent limitations (Low HOME Rents). The participating 
jurisdiction may designate (in its written agreement with the project 
owner) more than the minimum HOME units in a rental housing project, 
regardless of project size, to have Low HOME Rents that meet the 
requirements of this paragraph (b). In rental projects with five or 
more HOME-assisted rental units, at least 20 percent of the HOME-
assisted units must be occupied by very low-income families and meet 
one of the following rent requirements:
* * * * *
    (c) Additional rent limitations for SRO projects. (1) For SRO units 
that have both sanitary and food preparation facilities, the maximum 
HOME rent is based on the zero-bedroom fair market rent. The project 
must meet the requirements of paragraphs (a) and (b) of this section.
    (2) For SRO units that have no sanitary or food preparation 
facilities or only one of the two, the maximum HOME rent is based on 75 
percent of the zero-bedroom fair market rent. The project is not 
required to have low HOME rents in accordance with paragraph (b)(1) or 
(2) of this section, but must meet the occupancy requirements of 
paragraph (b) of this section.
    (d) Initial rent schedule and utility allowances. (1) The 
participating jurisdiction must establish maximum monthly allowances 
for utilities and services (excluding telephone) and update the 
allowances annually. The participating jurisdiction must use the HUD 
Utility Schedule Model or otherwise determine the utility allowance for 
the project based on the type of utilities used at the project.
    (2) The participating jurisdiction must review and approve rents 
proposed by the owner for units, subject to the maximum rent 
limitations in paragraphs (a) or (b) of this section. For all units 
subject to the maximum rent limitations in paragraphs (a) or (b) of 
this section for which the tenant is paying utilities and services, the 
participating jurisdiction must ensure that the rents do not exceed the 
maximum rent minus the monthly allowances for utilities and services.
    (e) Periods of affordability. The HOME-assisted units must meet the 
affordability requirements for not less than the applicable period 
specified in the following table, beginning after project completion.
    (1) The affordability requirements:
    (i) Apply without regard to the term of any loan or mortgage, 
repayment of the HOME investment, or the transfer of ownership;
    (ii) Must be imposed by a deed restriction, a covenant running with 
the land, an agreement restricting the use of the property, or other 
mechanisms approved by HUD and must give the participating jurisdiction 
the right to require specific performance (except that the 
participating jurisdiction may provide that the affordability 
restrictions may terminate upon foreclosure or transfer in lieu of 
foreclosure); and
    (iii) Must be recorded in accordance with State recordation laws.
    (2) The participating jurisdiction may use purchase options, rights 
of first refusal or other preemptive rights to purchase the housing 
before foreclosure or deed in lieu of foreclosure in order to preserve 
affordability.
    (3) The affordability restrictions shall be revived according to 
the original terms if, during the original affordability period, the 
owner of record before the foreclosure, or deed in lieu of foreclosure, 
or any entity that includes the former owner or those with whom the 
former owner has or had family or business ties, obtains an ownership 
interest in the project or property.
    (4) The termination of the restrictions on the project does not 
terminate the participating jurisdiction's repayment obligation under 
Sec.  92.503(b).

------------------------------------------------------------------------
                                                         Minimum period
                Rental housing activity                 of affordability
                                                            in years
------------------------------------------------------------------------
Rehabilitation or acquisition of existing housing per                  5
 unit amount of HOME funds: Under $15,000.............
$15,000 to $40,000....................................                10
Over $40,000 or rehabilitation involving refinancing..                15
New construction or acquisition of newly constructed                  20
 housing..............................................
------------------------------------------------------------------------

    (f) * * *
    (2) The participating jurisdiction must provide project owners with 
information on updated HOME rent limits so that rents may be adjusted 
(not to exceed the maximum HOME rent limits in paragraph (f)(1) of this 
section) in accordance with the written agreement between the 
participating jurisdiction and the owner. Owners must annually provide 
the participating jurisdiction with information on rents and occupancy 
of HOME-assisted units to demonstrate compliance with this section. The 
participating jurisdiction must review rents for compliance and approve 
or disapprove them every year.
* * * * *
    (g) Adjustment of HOME rent limits for an existing project. * * *
* * * * *
    (j) Fixed and floating HOME units. In a project containing HOME-
assisted and other units, the participating jurisdiction may designate 
fixed or floating HOME units. This designation must be made at the time 
of project commitment in the written agreement between the 
participating jurisdiction and the owner, and the HOME units must be 
identified not later than the time of initial unit occupancy. Fixed 
units remain the same throughout the period of affordability. Floating 
units are changed to maintain conformity with the requirements of this 
section during the period of affordability so that the total number of 
housing units meeting the requirements of this section remains the 
same, and each substituted unit is comparable in terms of size, 
features, and number of bedrooms to the originally designated HOME-
assisted unit.

[[Page 44674]]

    (k) Tenant selection. The tenants must be selected in accordance 
with Sec.  92.253(d).
    (l) Ongoing responsibilities. The participating jurisdiction's 
responsibilities for on-site inspections and financial oversight of 
rental projects are set forth in Sec.  92.504(d).

0
23. In Sec.  92.253:
0
a. Revise the section heading and paragraphs (a), (c), and (d);
0
b. Remove ``and'' from the end of paragraph (b)(7);
0
c. Remove the period from the end of paragraph (b)(8) and add ``; and'' 
in its place; and
0
d. Add paragraph (b)(9),
    The revisions and additions read as follows:


Sec.  92.253  Tenant protections and selection.

    (a) Lease. There must be a written lease between the tenant and the 
owner of rental housing assisted with HOME funds that is for a period 
of not less than one year, unless by mutual agreement between the 
tenant and the owner a shorter period is specified.
    (b) * * *
    (9) Mandatory supportive services. Agreement by the tenant (other 
than a tenant in transitional housing) to accept supportive services 
that are offered.
    (c) Termination of tenancy. An owner may not terminate the tenancy 
or refuse to renew the lease of a tenant of rental housing assisted 
with HOME funds, except for serious or repeated violation of the terms 
and conditions of the lease; for violation of applicable Federal, 
State, or local law; for completion of the tenancy period for 
transitional housing or failure to follow any required transitional 
housing supportive services plan; or for other good cause. Good cause 
does not include an increase in the tenant's income or refusal of the 
tenant to purchase the housing. To terminate or refuse to renew 
tenancy, the owner must serve written notice upon the tenant specifying 
the grounds for the action at least 30 days before the termination of 
tenancy.
    (d) Tenant selection. An owner of rental housing assisted with HOME 
funds must comply with the affirmative marketing requirements 
established by the participating jurisdiction pursuant to Sec.  
92.351(a). The owner must adopt and follow written tenant selection 
policies and criteria that:
    (1) Limit the housing to very low- income and low-income families;
    (2) Are reasonably related to the applicants' ability to perform 
the obligations of the lease (i.e., to pay the rent, not to damage the 
housing; not to interfere with the rights and quiet enjoyment of other 
tenants);
    (3) Limit eligibility or give a preference to a particular segment 
of the population if permitted in its written agreement with the 
participating jurisdiction (and only if the limitation or preference is 
described in the participating jurisdiction's consolidated plan).
    (i) Any limitation or preference must not violate nondiscrimination 
requirements in Sec.  92.350. A limitation or preference does not 
violate nondiscrimination requirements if the housing also receives 
funding from a Federal program that limits eligibility to a particular 
segment of the population (e.g., the Housing Opportunity for Persons 
with AIDS program under 24 CFR part 574, the Shelter Plus Care program 
under 24 CFR part 582, the Supportive Housing program under 24 CFR part 
583, supportive housing for the elderly or persons with disabilities 
under 24 CFR part 891), and the limit or preference is tailored to 
serve that segment of the population.
    (ii) If a project does not receive funding from a Federal program 
that limits eligibility to a particular segment of the population, the 
project may have a limitation or preference for persons with 
disabilities who need services offered at a project only if:
    (A) The limitation or preference is limited to the population of 
families (including individuals) with disabilities that significantly 
interfere with their ability to obtain and maintain housing;
    (B) Such families will not be able to obtain or maintain themselves 
in housing without appropriate supportive services; and
    (C) Such services cannot be provided in a nonsegregated setting. 
The families must not be required to accept the services offered at the 
project. In advertising the project, the owner may advertise the 
project as offering services for a particular type of disability; 
however, the project must be open to all otherwise eligible persons 
with disabilities who may benefit from the services provided in the 
project.
    (4) Do not exclude an applicant with a certificate or voucher under 
the Section 8 Tenant-Based Assistance: Housing Choice Voucher Program 
(24 CFR part 982) or an applicant participating in a HOME tenant-based 
rental assistance program because of the status of the prospective 
tenant as a holder of such certificate, voucher, or comparable HOME 
tenant-based assistance document.
    (5) Provide for the selection of tenants from a written waiting 
list in the chronological order of their application, insofar as is 
practicable; and
    (6) Give prompt written notification to any rejected applicant of 
the grounds for any rejection.

0
24. In Sec.  92.254, revise paragraph (a)(2)(iii), (a)(3), (a)(5) 
introductory text, (a)(5)(i) introductory text, (a)(5)(ii) introductory 
text, (b)(2), and (c), and add paragraphs (e) and (f) to read as 
follows:


Sec.  92.254  Qualification as affordable housing: Homeownership.

    (a) * * *
    (2) * * *
    (iii) If a participating jurisdiction intends to use HOME funds for 
homebuyer assistance or for the rehabilitation of owner-occupied 
single- family properties, the participating jurisdiction must use the 
HOME affordable homeownership limits provided by HUD for newly 
constructed housing and for existing housing. HUD will provide limits 
for affordable newly constructed housing based on 95 percent of the 
median purchase price for the area using Federal Housing Administration 
(FHA) single family mortgage program data for newly constructed 
housing, with a minimum limit based on 95 percent of the U.S. median 
purchase price for new construction for nonmetropolitan areas. HUD will 
provide limits for affordable existing housing based on 95 percent of 
the median purchase price for the area using Federal FHA single family 
mortgage program data for existing housing data and other appropriate 
data that are available nation-wide for sales of existing housing, with 
a minimum limit based on 95 percent of the state-wide nonmetropolitan 
area median purchase price using this data. In lieu of the limits 
provided by HUD, the participating jurisdiction may determine 95 
percent of the median area purchase price for single family housing in 
the jurisdiction annually, as follows. The participating jurisdiction 
must set forth the price for different types of single family housing 
for the jurisdiction. The participating jurisdiction may determine 
separate limits for existing housing and newly constructed housing. For 
housing located outside of metropolitan areas, a State may aggregate 
sales data from more than one county, if the counties are contiguous 
and similarly situated. The following information must be included in 
the annual action plan of the Consolidated Plan submitted to HUD for 
review and updated in each action plan.
    (A) The 95 percent of median area purchase price must be 
established in accordance with a market analysis that ensured that a 
sufficient number of

[[Page 44675]]

recent housing sales are included in the survey.
    (B) Sales must cover the requisite number of months based on 
volume: For 500 or more sales per month, a one- month reporting period; 
for 250 through 499 sales per month, a 2-month reporting period; for 
less than 250 sales per month, at least a 3-month reporting period. The 
data must be listed in ascending order of sales price.
    (C) The address of the listed properties must include the location 
within the participating jurisdiction. Lot, square, and subdivision 
data may be substituted for the street address.
    (D) The housing sales data must reflect all, or nearly all, of the 
one- family house sales in the entire participating jurisdiction.
    (E) To determine the median, take the middle sale on the list if an 
odd number of sales, and if an even number, take the higher of the 
middle numbers and consider it the median. After identifying the median 
sales price, the amount should be multiplied by 0.95 to determine the 
95 percent of the median area purchase price.
    (3) The housing must be acquired by a homebuyer whose family 
qualifies as a low-income family, and the housing must be the principal 
residence of the family throughout the period described in paragraph 
(a)(4) of this section. If there is no ratified sales contract with an 
eligible homebuyer for the housing within 9 months of the date of 
completion of construction or rehabilitation, the housing must be 
rented to an eligible tenant in accordance with Sec.  92.252. In 
determining the income eligibility of the family, the participating 
jurisdiction must include the income of all persons living in the 
housing. The homebuyer must receive housing counseling.
* * * * *
    (5) Resale and recapture. The participating jurisdiction must 
establish the resale or recapture requirements that comply with the 
standards of this section and set forth the requirements in its 
consolidated plan. HUD must determine that they are appropriate and 
must specifically approve them in writing.
    (i) Resale. Resale requirements must ensure, if the housing does 
not continue to be the principal residence of the family for the 
duration of the period of affordability that the housing is made 
available for subsequent purchase only to a buyer whose family 
qualifies as a low-income family and will use the property as the 
family's principal residence. The resale requirement must also ensure 
that the price at resale provides the original HOME-assisted owner a 
fair return on investment (including the homeowner's investment and any 
capital improvement) and ensure that the housing will remain affordable 
to a reasonable range of low- income homebuyers. The participating 
jurisdiction must specifically define ``fair return on investment'' and 
``affordability to a reasonable range of low-income homebuyers,'' and 
specifically address how it will make the housing affordable to a low-
income homebuyer in the event that the resale price necessary to 
provide fair return is not affordable to the subsequent buyer. The 
period of affordability is based on the total amount of HOME funds 
invested in the housing.
* * * * *
    (ii) Recapture. Recapture provisions must ensure that the 
participating jurisdiction recoups all or a portion of the HOME 
assistance to the homebuyers, if the housing does not continue to be 
the principal residence of the family for the duration of the period of 
affordability. The participating jurisdiction may structure its 
recapture provisions based on its program design and market conditions. 
The period of affordability is based upon the total amount of HOME 
funds subject to recapture described in paragraph (a)(5)(ii)(A)(5) of 
this section. Recapture provisions may permit the subsequent homebuyer 
to assume the HOME assistance (subject to the HOME requirements for the 
remainder of the period of affordability) if the subsequent homebuyer 
is low-income, and no additional HOME assistance is provided.
* * * * *
    (b) * * *
    (2) The housing is the principal residence of an owner whose family 
qualifies as a low-income family at the time HOME funds are committed 
to the housing. In determining the income eligibility of the family, 
the participating jurisdiction must include the income of all persons 
living in the housing.
    (c) Ownership interest. The ownership in the housing assisted under 
this section must meet the definition of ``homeownership'' in Sec.  
92.2, except that housing that is rehabilitated pursuant to paragraph 
(b) of this section may also include inherited property with multiple 
owners, life estates, living trusts and beneficiary deeds under the 
following conditions. The participating jurisdiction has the right to 
establish the terms of assistance.
    (1) Inherited property. Inherited property with multiple owners: 
Housing for which title has been passed to several individuals by 
inheritance, but not all heirs reside in the housing, sharing ownership 
with other nonresident heirs. (The occupant of the housing has a 
divided ownership interest.) The participating jurisdiction may assist 
the owner-occupant if the occupant is low-income, occupies the housing 
as his or her principal residence, and pays all the costs associated 
with ownership and maintenance of the housing (e.g., mortgage, taxes, 
insurance, utilities).
    (2) Life estate. The person who has the life estate has the right 
to live in the housing for the remainder of his or her life and does 
not pay rent. The participating jurisdiction may assist the person 
holding the life estate if the person is low-income and occupies the 
housing as his or her principal residence.
    (3) Inter vivos trust, also known as a living trust. A living trust 
is created during the lifetime of a person. A living trust is created 
when the owner of property conveys his or her property to a trust for 
his or her own benefit or for that of a third party (the 
beneficiaries). The trust holds legal title and the beneficiary holds 
equitable title. The person may name him or herself as the beneficiary. 
The trustee is under a fiduciary responsibility to hold and manage the 
trust assets for the beneficiary. The participating jurisdiction may 
assist if all beneficiaries of the trust qualify as a low-income family 
and occupy the property as their principal residence (except that 
contingent beneficiaries, who receive no benefit from the trust nor 
have any control over the trust assets until the beneficiary is 
deceased, need not be low-income). The trust must be valid and 
enforceable and ensure that each beneficiary has the legal right to 
occupy the property for the remainder of his or her life.
    (4) Beneficiary deed. A beneficiary deed conveys an interest in 
real property, including any debt secured by a lien on real property, 
to a grantee beneficiary designated by the owner and that expressly 
states that the deed is effective on the death of the owner. Upon the 
death of the owner, the grantee beneficiary receives ownership in the 
property, subject to all conveyances, assignments, contracts, 
mortgages, deeds of trust, liens, security pledges, and other 
encumbrances made by the owner or to which the owner was subject during 
the owner's lifetime. The participating jurisdiction may assist if the 
owner qualifies as low-income and

[[Page 44676]]

the owner occupies the property as his or her principal residence.
* * * * *
    (e) Providing homeownership assistance through lenders. Subject to 
the requirements of this paragraph (e), the participating jurisdiction 
may provide homeownership assistance through for-profit or nonprofit 
lending institutions that provide the first mortgage loan to a low-
income family.
    (1) The homeownership assistance may be provided only as specified 
in a written agreement between the participating jurisdiction and the 
lender. The written agreement must specify the forms and amounts of 
homeownership assistance that the participating jurisdiction authorizes 
the lender to provide to families and any conditions that apply to the 
provision of such homeownership assistance.
    (2) Before the lender provides any homeownership assistance to a 
family, the participating jurisdiction must verify that the family is 
low-income and must inspect the housing for compliance with the 
property standards in Sec.  92.251.
    (3) No fees (e.g., origination fees or points) may be charged to a 
family for the HOME homeownership assistance provided pursuant to this 
paragraph (e), and the participating jurisdiction must determine that 
the fees and other amounts charged to the family by the lender for the 
first mortgage financing are reasonable. Reasonable administrative 
costs may be charged to the HOME program as a project cost. If the 
participating jurisdiction requires lenders to pay a fee to participate 
in the HOME program, the fee is program income to the HOME program.
    (4) If the nonprofit lender is a subrecipient or contractor that is 
receiving HOME assistance to determine that the family is eligible for 
homeownership assistance, but the participating jurisdiction or another 
entity is making the assistance to the homebuyer (e.g., signing the 
documents for the loan or the grant), the requirements of paragraphs 
(e)(2) and (3) of this section are applicable.
    (f) Homebuyer program policies. The participating jurisdiction must 
have and follow written policies for:
    (1) Underwriting standards for homeownership assistance that 
evaluate housing debt and overall debt of the family, the 
appropriateness of the amount of assistance, monthly expenses of the 
family, assets available to acquire the housing, and financial 
resources to sustain homeownership;
    (2) Responsible lending, and
    (3) Refinancing loans to which HOME loans are subordinated to 
ensure that the terms of the new loan are reasonable.

0
25. Revise Sec.  92.255 to read as follows:


Sec.  92.255  Converting rental units to homeownership units for 
existing tenants.

    (a) The participating jurisdiction may permit the owner of HOME-
assisted rental units to convert the rental units to homeownership 
units by selling, donating, or otherwise conveying the units to the 
existing tenants to enable the tenants to become homeowners in 
accordance with the requirements of Sec.  92.254. However, refusal by 
the tenant to purchase the housing does not constitute grounds for 
eviction or for failure to renew the lease.
    (b) If no additional HOME funds are used to enable the tenants to 
become homeowners, the homeownership units are subject to a minimum 
period of affordability equal to the remaining affordable period if the 
units continued as rental units. If additional HOME funds are used to 
directly assist the tenants to become homeowners, the minimum period of 
affordability is the affordability period under Sec.  92.254(a)(4), 
based on the amount of direct homeownership assistance provided.

0
26. Revise Sec.  92.257 to read as follows:


Sec.  92.257  Faith-based activities.

    (a) Equal treatment of program participants and program 
beneficiaries. (1) Program participants. Organizations that are 
religious or faith-based are eligible, on the same basis as any other 
organization, to participate in HOME program. Neither the Federal 
Government nor a State or local government receiving funds under the 
HOME program shall discriminate against an organization on the basis of 
the organization's religious character or affiliation. Recipients and 
subrecipients of program funds shall not, in providing program 
assistance, discriminate against a program participant or prospective 
program participant on the basis of religion or religious belief.
    (2) Beneficiaries. In providing services supported in whole or in 
part with federal financial assistance, and in their outreach 
activities related to such services, program participants shall not 
discriminate against current or prospective program beneficiaries on 
the basis of religion, a religious belief, a refusal to hold a 
religious belief, or a refusal to attend or participate in a religious 
practice.
    (b) Separation of explicitly religious activities. Recipients and 
subrecipients of HOME program funds that engage in explicitly religious 
activities, including activities that involve overt religious content 
such as worship, religious instruction, or proselytization, must 
perform such activities and offer such services outside of programs 
that are supported with federal financial assistance separately, in 
time or location, from the programs or services funded under this part, 
and participation in any such explicitly religious activities must be 
voluntary for the program beneficiaries of the HUD-funded programs or 
services.
    (c) Religious identity. A faith-based organization that is a 
recipient or subrecipient of HOME program funds is eligible to use such 
funds as provided under the regulations of this part without impairing 
its independence, autonomy, expression of religious beliefs, or 
religious character. Such organization will retain its independence 
from federal, State, and local government, and may continue to carry 
out its mission, including the definition, development, practice, and 
expression of its religious beliefs, provided that it does not use 
direct program funds to support or engage in any explicitly religious 
activities, including activities that involve overt religious content, 
such as worship, religious instruction, or proselytization, or any 
manner prohibited by law. Among other things, faith-based organizations 
may use space in their facilities to provide program-funded services, 
without removing or altering religious art, icons, scriptures, or other 
religious symbols. In addition, a HOME program-funded religious 
organization retains its authority over its internal governance, and it 
may retain religious terms in its organization's name, select its board 
members on a religious basis, and include religious references in its 
organization's mission statements and other governing documents.
    (d) Alternative provider. If a program participant or prospective 
program participant of the HOME program supported by HUD objects to the 
religious character of an organization that provides services under the 
program, that organization shall, within a reasonably prompt time after 
the objection, undertake reasonable efforts to identify and refer the 
program participant to an alternative provider to which the prospective 
program participant has no objection. Except for services provided by 
telephone, the Internet, or similar means, the referral must be to an 
alternate provider in reasonable geographic proximity to the 
organization making the referral. In making the referral, the 
organization shall comply with applicable privacy laws and regulations. 
Recipients and subrecipients shall document any objections from program 
participants

[[Page 44677]]

and prospective program participants and any efforts to refer such 
participants to alternative providers in accordance with the 
requirements of Sec.  92.508(a)(2)(xiii). Recipients shall ensure that 
all subrecipient agreements make organizations receiving program funds 
aware of these requirements.
    (e) Structures. Program funds may not be used for the acquisition, 
construction, or rehabilitation of structures to the extent that those 
structures are used for explicitly religious activities. Program funds 
may be used for the acquisition, construction, or rehabilitation of 
structures only to the extent that those structures are used for 
conducting eligible activities under this part. When a structure is 
used for both eligible and explicitly religious activities, program 
funds may not exceed the cost of those portions of the acquisition, new 
construction, or rehabilitation that are attributable to eligible 
activities in accordance with the cost accounting requirements 
applicable to the HOME program. Sanctuaries, chapels, or other rooms 
that a HOME program-funded religious congregation uses as its principal 
place of worship, however, are ineligible for HOME program-funded 
improvements. Disposition of real property after the term of the grant, 
or any change in the use of the property during the term of the grant, 
is subject to governmentwide regulations governing real property 
disposition (see 24 CFR parts 84 and 85).
    (f) Supplemental funds. If a State or local government voluntarily 
contributes its own funds to supplement federally funded activities, 
the State or local government has the option to segregate the federal 
funds or commingle them. However, if the funds are commingled, this 
section applies to all of the commingled funds.

0
27. In Sec.  92.300, revise paragraphs (a), (e), and (f) to read as 
follows:


Sec.  92.300  Set-aside for community housing development organizations 
(CHDOs).

    (a) Within 24 months after the date that HUD notifies the 
participating jurisdiction of HUD's execution of the HOME Investment 
Partnerships Agreement, the participating jurisdiction must reserve not 
less than 15 percent of the HOME allocation for investment only in 
housing to be owned, developed or sponsored by community housing 
development organizations. For a State, the HOME allocation includes 
funds reallocated under Sec.  92.451(c)(2)(i) and, for a unit of 
general local government, includes funds transferred from a State under 
Sec.  92.102(b). The participating jurisdiction must certify the 
organization as meeting the definition of ``community housing 
development organization'' and must document that the organization has 
capacity to own, develop, or sponsor housing each time it commits funds 
to the organization. For purposes of this paragraph:
    (1) Funds are reserved when a participating jurisdiction enters 
into a written agreement with the community housing development 
organization (or project owner as described in paragraph (a)(4) of this 
section) committing the funds to a specific local project in accordance 
with paragraph (2) of the definition of ``commitment'' in Sec.  92.2.
    (2) Rental housing is ``owned'' by the community housing 
development organization if the community housing development 
organization is the owner in fee simple absolute of multifamily or 
single family housing (or has a long term ground lease) for rental to 
low-income families in accordance with Sec.  92.252. If the housing is 
to be rehabilitated or constructed, the community housing development 
organization hires and oversees the developer that rehabilitates or 
constructs the housing. At minimum, the community housing development 
organization must hire or contract with an experienced project manager 
to oversee all aspects of the development, including obtaining zoning, 
securing non-HOME financing, selecting a developer or general 
contractor, overseeing the progress of the work and determining the 
reasonableness of costs. The community housing development organization 
must own the rental housing during development and for a period at 
least equal to the period of affordability in Sec.  92.252. If the CHDO 
acquires housing that meets the property standards in Sec.  92.251, the 
CHDO must own the rental housing for a period at least equal to the 
period of affordability in Sec.  92.252.
    (3) Rental housing is ``developed'' by the community development 
housing organization if the community housing development organization 
is the owner of multifamily or single family housing in fee simple 
absolute (or has a long term ground lease) and the developer of new 
housing that will be constructed or existing substandard housing that 
will be rehabilitated for rent to low-income families in accordance 
with Sec.  92.252. To be the ``developer,'' the community development 
housing organization must be in sole charge of all aspects of the 
development process, including obtaining zoning, securing non-HOME 
financing, selecting architects, engineers and general contractors, 
overseeing the progress of the work and determining the reasonableness 
of costs. At a minimum, the community housing development organization 
must own the housing during development and for a period at least equal 
to the period of affordability in Sec.  92.252.
    (4) Rental housing is ``sponsored'' by the community development 
housing organization if it is rental housing ``owned'' or ``developed'' 
by a subsidiary of a community housing development organization, a 
limited partnership of which the community housing development 
organization or its subsidiary is the sole general partner, or a 
limited liability company of which the community housing development 
organization or its subsidiary is the sole managing member.
    (i) The subsidiary of the community housing development 
organization may be a for-profit or nonprofit organization and must be 
wholly owned by the community housing development organization. If the 
limited partnership or limited liability company agreement permits the 
community housing development organization to be removed as general 
partner or sole managing member, the agreement must provide that the 
removal must be for cause and that the community housing development 
organization must be replaced with another community housing 
development organization.
    (ii) The HOME funds must be provided to the entity that owns the 
project.
    (5) HOME-assisted rental housing is also ``sponsored'' by a 
community housing development organization if the community housing 
development organization ``developed'' the rental housing project that 
it agrees to convey to an identified private nonprofit organization at 
a predetermined time after completion of the development of the 
project. Sponsored rental housing, as provided in this paragraph 
(a)(5), is subject to the following requirements:
    (i) The private nonprofit organization may not be created by a 
governmental entity.
    (ii) The HOME funds must be invested in the project that is owned 
by the community housing development organization.
    (iii) Before commitment of HOME funds, the community housing 
development organization sponsor must select the nonprofit organization 
that will obtain ownership of the property.
    (A) The nonprofit organization assumes the community housing 
development organization's HOME obligations (including any repayment of 
loans) for the rental project at a specified time after completion of 
development.

[[Page 44678]]

    (B) If the housing is not transferred to the nonprofit 
organization, the community housing development organization sponsor 
remains responsible for the HOME assistance and the HOME project.
    (6) Housing for homeownership is ``developed'' by the community 
development housing organization if the community housing development 
organization is the owner (in fee simple absolute) and developer of new 
housing that will be constructed or existing substandard housing that 
will be rehabilitated for sale to low-income families in accordance 
with Sec.  92.254.
    (i) To be the ``developer'' the community development housing 
organization must arrange financing of the project and be in sole 
charge of construction. The community housing development organization 
may provide direct homeownership assistance (e.g., downpayment 
assistance) when it sells the housing to low-income families and the 
community housing development organization will not be considered a 
subrecipient. The HOME funds for downpayment assistance shall not be 
greater than 10 percent of the amount of HOME funds for development of 
the housing.
    (ii) The participating jurisdiction must determine and set forth in 
its written agreement with the community housing development 
organization the actual sales prices of the housing or the method by 
which the sales prices for the housing will be established and whether 
the proceeds must be returned to the participating jurisdiction or may 
be retained by the community housing development organization.
    (A) While proceeds that the participating jurisdiction permits the 
community housing development organization to retain are not subject to 
the requirements of this part, the participating jurisdiction must 
specify in the written agreement with the community housing development 
organization whether the proceeds are to be used for HOME-eligible 
activities or other housing activities to benefit low-income families.
    (B) Funds that are recaptured because the housing no longer meets 
the affordability requirements under Sec.  92.254(a)(5)(ii) are subject 
to the requirements of this part in accordance with Sec.  92.503.
    (7) The participating jurisdiction determines the form of 
assistance (e.g., grant or loan) that it will provide to the community 
housing development organization receives or, for rental housing 
projects under paragraph (a)(4) of this section, to the entity that 
owns the project.
* * * * *
    (e) If funds for operating expenses are provided under Sec.  92.208 
to a community housing development organization that is not also 
receiving funds under paragraph (a) of this section for housing to be 
owned, developed or sponsored by the community housing development 
organization, the participating jurisdiction's written agreement with 
the community housing development organization must provide that the 
community housing development organization is expected to receive funds 
under paragraph (a) of this section for a project within 24 months of 
the date of receiving the funds for operating expenses, and specifies 
the terms and conditions upon which this expectation is based.
    (f) The participating jurisdiction must ensure that a community 
housing development organization does not receive HOME funding for any 
fiscal year in an amount that provides more than 50 percent or $50,000, 
whichever is greater, of the community housing development 
organization's total operating expenses in that fiscal year. This also 
includes organizational support and housing education provided under 
section 233(b)(1), (2), and (6) of the Act, as well as funds for 
operating expenses provided under Sec.  92.208.

0
28. In Sec.  92.351, revise paragraphs (a)(1) and (a)(2)(ii) through 
(iv) to read as follows:


Sec.  92.351  Affirmative marketing; minority outreach program.

    (a) Affirmative marketing. (1) Each participating jurisdiction must 
adopt and follow affirmative marketing procedures and requirements for 
rental and homebuyer projects containing five or more HOME-assisted 
housing units. Affirmative marketing requirements and procedures also 
apply to all HOME- funded programs, including, but not limited to, 
tenant-based rental assistance and downpayment assistance programs. 
Affirmative marketing steps consist of actions to provide information 
and otherwise attract eligible persons in the housing market area to 
the available housing without regard to race, color, national origin, 
sex, religion, familial status, or disability. If participating 
jurisdiction's written agreement with the project owner permits the 
rental housing project to limit tenant eligibility or to have a tenant 
preference in accordance with Sec.  92.253(d)(3), the participating 
jurisdiction must have affirmative marketing procedures and 
requirements that apply in the context of the limited/preferred tenant 
eligibility for the project.
    (2) * * *
    (ii) Requirements and practices each subrecipient and owner must 
adhere to in order to carry out the participating jurisdiction's 
affirmative marketing procedures and requirements (e.g., use of 
commercial media, use of community contacts, use of the Equal Housing 
Opportunity logotype or slogan, and display of fair housing poster);
    (iii) Procedures to be used by subrecipients and owners to inform 
and solicit applications from persons in the housing market area who 
are not likely to apply for the housing program or the housing without 
special outreach (e.g., through the use of community organizations, 
places of worship, employment centers, fair housing groups, or housing 
counseling agencies);
    (iv) Records that will be kept describing actions taken by the 
participating jurisdiction and by subrecipients and owners to 
affirmatively market the program and units and records to assess the 
results of these actions; and
* * * * *

0
29. In Sec.  92.352, revise paragraph (a) to read as follows:


Sec.  92.352  Environmental review.

    (a) General. The environmental effects of each activity carried out 
with HOME funds must be assessed in accordance with the provisions of 
the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321) 
and the related authorities listed in HUD's implementing regulations at 
24 CFR parts 50 and 58. The applicability of the provisions of 24 CFR 
part 50 or part 58 is based on the HOME project (new construction, 
rehabilitation, acquisition) or activity (tenant-based rental 
assistance) as a whole, not on the type of the cost paid with HOME 
funds.
* * * * *

0
30. In Sec.  92.353 paragraph (c)(2)(C)(1)(ii) is revised to read as 
follows:


Sec.  92.353  Displacement, relocation, and acquisition.

* * * * *
    (c) * * *
    (2) * * *
    (C) * * *
    (1) * * *
    (ii) The total tenant payment, as determined under 24 CFR 5.628, if 
the tenant is low-income, or 30 percent of gross household income, if 
the tenant is not low-income;
* * * * *

0
31. In Sec.  92.354, paragraphs (a)(1) and (3) are revised to read as 
follows:

[[Page 44679]]

Sec.  92.354  Labor.

    (a) * * *
    (1) Every contract for the construction (rehabilitation or new 
construction) of housing that includes 12 or more units assisted with 
HOME funds must contain a provision requiring the payment of not less 
than the wages prevailing in the locality, as predetermined by the 
Secretary of Labor pursuant to the Davis-Bacon Act (40 U.S.C. 3141), to 
all laborers and mechanics employed in the development of any part of 
the housing. Such contracts must also be subject to the overtime 
provisions, as applicable, of the Contract Work Hours and Safety 
Standards Act (40 U.S.C. 3701).
* * * * *
    (3) Participating jurisdictions, contractors, subcontractors, and 
other participants must comply with regulations issued under these acts 
and with other Federal laws and regulations pertaining to labor 
standards, as applicable. Participating jurisdictions shall be 
responsible for ensuring compliance by contractors and subcontractors 
with labor standards described in this section. In accordance with 
procedures specified by HUD, participating jurisdictions shall:
    (i) Ensure that bid and contract documents contain required labor 
standards provisions and the appropriate Department of Labor wage 
determinations;
    (ii) Conduct on-site inspections and employee interviews;
    (iii) Collect and review certified weekly payroll reports;
    (iv) Correct all labor standards violations promptly;
    (v) Maintain documentation of administrative and enforcement 
activities; and
    (vi) Require certification as to compliance with the provisions of 
this section before making any payment under such contracts.
* * * * *

0
32. In Sec.  92.356, paragraphs (b) and (f)(1) are revised to read as 
follows:


Sec.  92.356  Conflict of interest.

* * * * *
    (b) Conflicts prohibited. No persons described in paragraph (c) of 
this section who exercise or have exercised any functions or 
responsibilities with respect to activities assisted with HOME funds or 
who are in a position to participate in a decision-making process or 
gain inside information with regard to these activities may obtain a 
financial interest or financial benefit from a HOME-assisted activity, 
or have a financial interest in any contract, subcontract, or agreement 
with respect to the HOME-assisted activity, or the proceeds from such 
activity, either for themselves or those with whom they have business 
or immediate family ties, during their tenure or for one year 
thereafter. Immediate family ties include (whether by blood, marriage 
or adoption) the spouse, parent (including a stepparent), child 
(including a stepchild), brother, sister (including a stepbrother or 
stepsister), grandparent, grandchild, and in-laws of a covered person.
* * * * *
    (f) Owners and Developers. (1) No owner, developer, or sponsor of a 
project assisted with HOME funds (or officer, employee, agent, elected 
or appointed official, or consultant of the owner, developer, or 
sponsor or immediate family member or immediate family member of an 
officer, employee, agent, elected or appointed official, or consultant 
of the owner, developer, or sponsor) whether private, for-profit or 
nonprofit (including a community housing development organization 
(CHDO) when acting as an owner, developer, or sponsor) may occupy a 
HOME-assisted affordable housing unit in a project during the required 
period of affordability specified in Sec.  92.252(e) or Sec.  
92.254(a)(4). This provision does not apply to an individual who 
receives HOME funds to acquire or rehabilitate his or her principal 
residence or to an employee or agent of the owner or developer of a 
rental housing project who occupies a housing unit as the project 
manager or maintenance worker.
* * * * *

0
33. In Sec.  92.500, paragraphs (c)(1), (d)(1)(A) and (C), and (d)(2) 
are revised to read as follows:


Sec.  92.500  The HOME Investment Trust Fund.

* * * * *
    (c) * * *
    (1) The local account of the HOME Investment Trust Fund includes 
deposits of HOME funds disbursed from the Treasury account; the deposit 
of any State funds (other than HOME funds transferred pursuant to Sec.  
92.102(b)(2)) or local funds that enable the jurisdiction to meet the 
participating threshold amount in Sec.  92.102, any program income 
(from both the allocated funds and matching contributions in accordance 
with the definition of program income), and any repayments or 
recaptured funds as required by Sec.  92.503. The local account must be 
interest-bearing.
* * * * *
    (d)(1) * * *
    (A) Any funds in the United States Treasury account that are 
required to be reserved (i.e., 15 percent of the funds) by a 
participating jurisdiction under Sec.  92.300 that are not committed to 
a community housing development organization project within 24 months 
after the last day of the month in which HUD notifies the participating 
jurisdiction of HUD's execution of the HOME Investment Partnership 
Agreement;
* * * * *
    (C) Any funds in the United States Treasury account that are not 
expended within 5 years after the last day of the month in which HUD 
notifies the participating jurisdiction of HUD's execution of the HOME 
Investment Partnership Agreement and any funds in the United States 
Treasury account that were committed to community housing development 
organization projects that are not expended within 5 years after the 
last day of the month in which HUD notifies the participating 
jurisdiction of HUD's execution of the HOME Investment Partnership 
Agreement; and
* * * * *
    (2) For purposes of determining the amount by which the HOME 
Investment Trust Fund will be reduced or recaptured under paragraphs 
(d)(1)(A), (B) and (C) of this section, HUD will consider the sum of 
commitments to CHDOs, commitments, or expenditures, as applicable, from 
all fiscal year allocations. This sum must be equal to or greater than 
the sum of all fiscal year allocations through the fiscal year 
allocation being examined (minus previous reductions to the HOME 
Investment Trust Fund), or in the case of commitments to CHDOs, 15 
percent of those fiscal year allocations.

0
34. In Sec.  92.502, paragraphs (a), (b)(2), and (e) are revised to 
read as follows:


Sec.  92.502  Program disbursement and information system.

    (a) General. The HOME Investment Trust Fund account established in 
the United States Treasury is managed through a computerized 
disbursement and information system established by HUD. The system 
disburses HOME funds that are allocated or reallocated, and collects 
and reports information on the use of HOME funds in the United States 
Treasury account. (For purposes of reporting in the Integrated 
Disbursement and Information System, a HOME project is an activity.) 
The participating jurisdiction must report all program income in HUD's 
computerized disbursement and information system.
    (b) * * *
    (2) If the project set-up information is not completed within 20 
days of the

[[Page 44680]]

project set-up, the project may be cancelled by the system. In 
addition, a project that has been committed in the system for 12 months 
without an initial disbursement of funds may be cancelled by the 
system.
* * * * *
    (e) Access by other participants. Access to the disbursement and 
information system by other entities participating in the HOME program 
(e.g., State recipients) will be governed by procedures established by 
HUD. Only participating jurisdictions and State recipients (if 
permitted by the State) may request disbursement.

0
35. In Sec.  92.503, paragraph (b)(3) is revised to read as follows:


Sec.  92.503  Program income, repayments, and recaptured funds.

* * * * *
    (b) * * *
    (3) HUD will instruct the participating jurisdiction to either 
repay the funds to the HOME Investment Trust Fund Treasury account or 
the local account. Generally, if the HOME funds were disbursed from the 
participating jurisdiction's HOME Investment Trust Fund Treasury 
account, they must be repaid to the Treasury account. If the HOME funds 
were disbursed from the participating jurisdiction's HOME Investment 
Trust Fund local account, they must be repaid to the local account. If 
the jurisdiction is not a participating jurisdiction at the time the 
repayment is made, the funds must be remitted to HUD, and reallocated 
in accordance with Sec.  92.454.
* * * * *

0
36. In Sec.  92.504:
0
a. Paragraph (a) is revised;
0
b. Paragraphs (c)(1) introductory text, (c)(1)(i), (ii), (vii), and 
(xi) are revised;
0
c. Paragraph (c)(1)(xiii) is added;
0
d. Paragraphs (c)(2) introductory text, (c)(2)(i), (iv), (v), and (x) 
are revised;
0
e. Paragraph (c)(2)(xi) is added;
0
f. Paragraph (c)(3) introductory text is added;
0
g. Paragraphs (c)(3)(i) through (iv), (c)(3)(v)(A), (vi), (vii), and 
(x) are revised;
0
h. Paragraph (c)(3)(xi) is added;
0
i. Paragraph (c)(4) introductory text is revised;
0
j. Paragraph (c)(6) is added; and
0
k. Paragraph (d) is revised.
    The revisions and additions read as follows:


Sec.  92.504  Participating jurisdiction responsibilities; written 
agreements; on-site inspection.

    (a) Responsibilities. The participating jurisdiction is responsible 
for managing the day-to-day operations of its HOME program, ensuring 
that HOME funds are used in accordance with all program requirements 
and written agreements, and taking appropriate action when performance 
problems arise. The use of State recipients, subrecipients, or 
contractors does not relieve the participating jurisdiction of this 
responsibility. The performance and compliance of each contractor, 
State recipient, and subrecipient must be reviewed at least annually. 
The participating jurisdiction must have and follow written policies, 
procedures, and systems, including a system for assessing risk of 
activities and projects and a system for monitoring entities consistent 
with this section, to ensure that the requirements of this part are 
met.
* * * * *
    (c) * * *
    (1) State recipient. The provisions in the written agreement 
between the State and a State recipient will depend on the program 
functions that the State specifies the State recipient will carry out 
in accordance with Sec.  92.201(b). In accordance with Sec.  92.201, 
the written agreement must either require the State recipient to comply 
with the requirements established by the State or require the State 
recipient to establish its own requirements to comply with this part, 
including requirements for income determinations and underwriting 
subsidy layering guidelines, rehabilitation standards, refinancing 
guidelines, homebuyer program policies, and affordability.
    (i) Use of the HOME funds. The agreement must describe the amount 
and use of the HOME funds to administer one or more programs to produce 
affordable housing, provide downpayment assistance, or provide tenant-
based rental assistance, including the type and number of housing 
projects to be funded (e.g. the number of single- family homeowner 
loans to be made or number of homebuyers to receive downpayment 
assistance), tasks to be performed, a schedule for completing the tasks 
(including a schedule for committing funds to projects that meet the 
deadlines established by this part), a budget for each program, and any 
requirement for matching contributions. These items must be in 
sufficient detail to provide a sound basis for the State to effectively 
monitor performance under the agreement.
    (ii) Affordability. The agreement must require housing assisted 
with HOME funds to meet the affordability requirements of Sec.  92.252 
or Sec.  92.254, as applicable, and must require repayment of the funds 
if the housing does not meet the affordability requirements for the 
specified time period. The agreement must state if repayment of HOME 
funds or recaptured HOME funds must be remitted to the State or 
retained by the State recipient for additional eligible activities.
* * * * *
    (vii) Affirmative marketing. The agreement must specify the State 
recipient's affirmative marketing responsibilities in accordance with 
Sec.  92.351.
* * * * *
    (xi) Written agreement. Before the State recipient provides funds 
to for-profit owners or developers, nonprofit owners or developers or 
sponsors, subrecipients, homeowners, homebuyers, tenants (or landlords) 
receiving tenant-based rental assistance, or contractors who are 
providing services to the State recipient, the State recipient must 
have a written agreement with such entities that meets the requirements 
of this section.
* * * * *
    (xiii) Fees. The agreement must prohibit the State recipient and 
its subrecipients and community housing development organizations from 
charging servicing, origination, processing, inspection, or other fees 
for the costs of administering a HOME program, except as permitted by 
Sec.  92.214(b)(1).
    (2) Subrecipient. A subrecipient is a public agency or nonprofit 
organization selected by the participating jurisdiction to administer 
all or some of the participating jurisdiction's HOME programs to 
produce affordable housing, provide downpayment assistance, or provide 
tenant-based rental assistance. The agreement must set forth and 
require the subrecipient to follow the participating jurisdiction's 
requirements, including requirements for income determinations, 
underwriting and subsidy layering guidelines, rehabilitation standards, 
refinancing guidelines, homebuyer program policies, and affordability 
requirements. The agreement between the participating jurisdiction and 
the subrecipient must include:
    (i) Use of the HOME funds. The agreement must describe the amount 
and use of the HOME funds for one or more programs, including the type 
and number of housing projects to be funded (e.g., the number of 
single-family homeowners loans to be made or the number of homebuyers 
to receive downpayment assistance), tasks to be performed, a schedule 
for completing the tasks (including a schedule for committing funds to 
projects in

[[Page 44681]]

accordance with deadlines established by this part), a budget, any 
requirement for matching contributions and the period of the agreement. 
These items must be in sufficient detail to provide a sound basis for 
the participating jurisdiction to effectively monitor performance under 
the agreement.
* * * * *
    (iv) Other program requirements. The agreement must require the 
subrecipient to carry out each activity in compliance with all Federal 
laws and regulations described in subpart H of this part, except that 
the subrecipient does not assume the participating jurisdiction's 
responsibilities for environmental review under Sec.  92.352 and the 
intergovernmental review process in Sec.  92.357 does not apply. The 
agreement must set forth the requirements the subrecipient must follow 
to enable the participating jurisdiction to carry environmental review 
responsibilities before HOME funds are committed to a project.
    (v) Affirmative marketing. The agreement must specify the 
subrecipient's affirmative marketing responsibilities in accordance 
with Sec.  92.351.
* * * * *
    (x) Written agreement. Before the subrecipient provides HOME funds 
to for-profit owners or developers, nonprofit owners or developers or 
sponsors, subrecipients, homeowners, homebuyers, tenants (or landlords) 
receiving tenant-based rental assistance, or contractors, the 
subrecipient must have a written agreement that meets the requirements 
of this section. The agreement must state if repayment of HOME funds or 
recaptured HOME funds must be remitted to the participating 
jurisdiction or retained by the subrecipient for additional eligible 
activities.
    (xi) Fees. The agreement must prohibit the subrecipient and any 
community housing development organizations from charging servicing, 
origination, or other fees for the costs of administering the HOME 
program, except as permitted by Sec.  92.214(b)(1).
    (3) For-profit or nonprofit housing owner, sponsor, or developer 
(other than single-family owner-occupant). The participating 
jurisdiction may preliminarily award HOME funds for a proposed project, 
contingent on conditions such as obtaining other financing for the 
project. This preliminary award is not a commitment to a project. The 
written agreement committing the HOME funds to the project must meet 
the requirements of ``commit to a specific local project'' in the 
definition of ``commitment'' in Sec.  92.2 and contain the following:
    (i) Use of the HOME funds. The agreement between the participating 
jurisdiction and a for-profit or nonprofit housing owner, sponsor, or 
developer must describe the address of the project or the legal 
description of the property if a street address has not been assigned 
to the property, the use of the HOME funds and other funds for the 
project, including the tasks to be performed for the project, a 
schedule for completing the tasks and the project, and a complete 
budget. These items must be in sufficient detail to provide a sound 
basis for the participating jurisdiction to effectively monitor 
performance under the agreement to achieve project completion and 
compliance with the HOME requirements.
    (ii) Affordability. The agreement must require housing assisted 
with HOME funds to meet the affordability requirements of Sec.  92.252 
or Sec.  92.254, as applicable, and must require repayment of the funds 
if the housing does not meet the affordability requirements for the 
specified time period. The affordability requirements in Sec.  92.252 
must be imposed by deed restrictions, covenants running with the land, 
use restrictions, or other mechanisms approved by HUD under which the 
participating jurisdiction has the right to require specific 
performance.
    (A) If the owner or developer is undertaking rental projects, the 
agreement must establish the initial rents, the procedures for rent 
increases pursuant to Sec.  92.252(f)(2), the number of HOME units, the 
size of the HOME units, and the designation of the HOME units as fixed 
or floating, and include the requirement that the owner or developer 
provide the address (e.g., street address and apartment number) of each 
HOME unit no later than the time of initial occupancy.
    (B) If the owner or developer is undertaking a homeownership 
project for sale to homebuyers in accordance with Sec.  92.254(a), the 
agreement must set forth the resale or recapture requirements that must 
be imposed on the housing, the sales price or the basis upon which the 
sales price will be determined, and the disposition of the sales 
proceeds. Recaptured funds must be returned to the participating 
jurisdiction.
    (iii) Project requirements. The agreement must require compliance 
with project requirements in subpart F of this part, as applicable in 
accordance with the type of project assisted. The agreement may permit 
the owner to limit eligibility or give a preference to a particular 
segment of the population in accordance with Sec.  92.253(d).
    (iv) Property standards. The agreement must require the housing to 
meet the property standards in Sec.  92.251, upon project completion. 
The agreement must also require owners of rental housing assisted with 
HOME funds to maintain the housing compliance with Sec.  92.251 for the 
duration of the affordability period.
    (v) * * *
    (A) The agreement must specify the owner or developer's affirmative 
marketing responsibilities as enumerated by the participating 
jurisdiction in accordance with Sec.  92.351.
* * * * *
    (vi) Records and reports. The agreement must specify the particular 
records that must be maintained and the information or reports that 
must be submitted in order to assist the participating jurisdiction in 
meeting its recordkeeping and reporting requirements. The owner of 
rental housing must annually provide the participating jurisdiction 
with information on rents and occupancy of HOME-assisted units to 
demonstrate compliance with Sec.  92.252. If the rental housing project 
has floating HOME units, the owner must provide the participating 
jurisdiction with information regarding unit substitution and filling 
vacancies so that the project remains in compliance with HOME rental 
occupancy requirements. The agreement must specify the reporting 
requirements (including copies of financial statements) to enable the 
participating jurisdiction to determine the financial condition (and 
continued financial viability) of the rental project.
    (vii) Enforcement of the agreement. The agreement must provide for 
a means of enforcement of the affordable housing requirements by the 
participating jurisdiction and the intended beneficiaries. This means 
of enforcement may include liens on real property, deed restrictions, 
or covenants running with the land. The affordability requirements in 
Sec.  92.252 must be imposed by deed restrictions, covenants running 
with the land, use restrictions, or other mechanisms approved by HUD 
under which the participating jurisdiction has the right to require 
specific performance. In addition, the agreement must specify remedies 
for breach of the provisions of the agreement.
* * * * *
    (x) Community housing development organization provisions. If the 
nonprofit owner or developer is a community

[[Page 44682]]

housing development organization and is using set-aside funds under 
Sec.  92.300, the agreement must include the appropriate provisions 
under Sec. Sec.  92.300, 92.301, and 92.303. If the community 
development organization is receiving HOME funds as a developer of 
homeownership housing, the agreement must specify if the organization 
may retain proceeds from the sale of the housing and whether the 
proceeds are to be used for HOME-eligible or other housing activities 
to benefit low-income families. Recaptured funds are subject to the 
requirements of Sec.  92.503. If the community housing development 
organization is receiving assistance for operating expenses, see 
paragraph (c)(6) of this section.
    (xi) Fees. The agreement must prohibit project owners from charging 
fees that are not customarily charged in rental housing such as laundry 
room access fees, and other fees. However, rental project owners may 
charge reasonable application fees to prospective tenants may charge 
parking fees to tenants only if such fees are customary for rental 
housing projects in the neighborhood; and may charge fees for services 
such as bus transportation or meals, as long as such services are 
voluntary. The agreement must also prohibit the developer that is 
undertaking a homeownership project from charging servicing, 
origination, processing, inspection, or other fees for the costs of 
providing homeownership assistance.
    (4) Contractor. The participating jurisdiction selects a contractor 
through applicable procurement procedures and requirements. The 
contractor provides goods or services in accordance with a written 
agreement (the contract). For contractors who are administering all or 
some of the participating jurisdiction's HOME programs or specific 
services for one or more programs, the contract must include at a 
minimum the following provisions:
* * * * *
    (6) Community housing development organization receiving assistance 
for operating expenses. The agreement must describe the use of HOME 
funds for operating expenses; e.g., salaries, wages, and other employee 
compensation and benefits; employee education, training, and travel; 
rent; utilities; communication costs; taxes; insurance; equipment; and 
materials and supplies. If the community housing development 
organization is not also receiving funds for a housing project to be 
developed, sponsored, or owned by the community housing development 
organization, the agreement must provide that the community housing 
development organization is expected to receive funds for a project 
within 24 months of the date of receiving the funds for operating 
expenses, and must specify the terms and conditions upon which this 
expectation is based and the consequences of failure to receive funding 
for a project.
    (d) On-site inspections and financial oversight. (1) Inspections. 
The participating jurisdiction must inspect each project at project 
completion and during the period of affordability to determine that the 
project meets the property standards of Sec.  92.251.
    (i) Completion inspections. Before completing the project in the 
disbursement and information system established by HUD, the 
participating jurisdiction must perform an on-site inspection of HOME-
assisted housing to determine that all contracted work has been 
completed and that the project complies with the property standards of 
Sec.  92.251.
    (ii) Ongoing periodic inspections of HOME-assisted rental housing. 
During the period of affordability, the participating jurisdiction must 
perform on-site inspections of HOME-assisted rental housing to 
determine compliance with the property standards of Sec.  92.251 and to 
verify the information submitted by the owners in accordance with the 
requirements of Sec.  92.252. The inspections must be in accordance 
with the inspection procedures that the participating jurisdiction 
establishes to meet the inspection requirements of Sec.  92.251.
    (A) The on-site inspections must occur within 12 months after 
project completion and at least once every 3 years thereafter during 
the period of affordability.
    (B) If there are observed deficiencies for any of the inspectable 
items in the property standards established by the participating 
jurisdiction, in accordance with the inspection requirements of Sec.  
92.251, a follow-up on-site inspection to verify that deficiencies are 
corrected must occur within 12 months. The participating jurisdiction 
may establish a list of non-hazardous deficiencies for which correction 
can be verified by third party documentation (e.g., paid invoice for 
work order) rather than re-inspection. Health and safety deficiencies 
must be corrected immediately, in accordance with Sec.  92.251. The 
participating jurisdiction must adopt a more frequent inspection 
schedule for properties that have been found to have health and safety 
deficiencies.
    (C) The property owner must annually certify to the participating 
jurisdiction that each building and all HOME- assisted units in the 
project are suitable for occupancy, taking into account State and local 
health, safety, and other applicable codes, ordinances, and 
requirements, and the ongoing property standards established by the 
participating jurisdiction to meet the requirements of Sec.  92.251.
    (D) Inspections must be based on a statistically valid sample of 
units appropriate for the size of the HOME-assisted project, as set 
forth by HUD through notice. For projects with one-to-four HOME-
assisted units, participating jurisdiction must inspect 100 percent of 
the HOME-assisted units and the inspectable items (site, building 
exterior, building systems, and common areas) for each building housing 
HOME-assisted units.
    (iii) Annual inspections. Tenant- based rental assistance (TBRA). 
All housing occupied by tenants receiving HOME tenant-based rental 
assistance must meet the standards in 24 CFR 982.401 or the successor 
requirements as established by HUD. The participating jurisdiction must 
perform annual on-site inspections of rental housing occupied by 
tenants receiving HOME-assisted TBRA to determine compliance with these 
standards.
    (2) Financial oversight. During the period of affordability, the 
participating jurisdiction must examine at least annually the financial 
condition of HOME-assisted rental projects with 10 units or more to 
determine the continued financial viability of the housing and must 
take actions to correct problems, to the extent feasible.
0
37. Revise Sec.  92.505 to read as follows:


Sec.  92.505  Applicability of uniform administrative requirements.

    (a) Governmental entities. The requirements of 2 CFR part 225 (OMB 
Circular No. A-87) and the following requirements of 24 CFR part 85 
apply to the participating jurisdictions, State recipients, and 
governmental subrecipients receiving HOME funds: Sec. Sec.  85.6, 
85.12, 85.20, 85.22, 85.26, 85.32 through 85.34, 85.36, 85.44, 85.51, 
and 85.52.
    (b) Nonprofit organizations. The requirements of 2 CFR part 230 
(OMB Circular No. A-122) and the following requirements of 24 CFR part 
84 apply to subrecipients receiving HOME funds that are nonprofit 
organizations that are not governmental subrecipients: Sec. Sec.  84.2, 
84.5, 84.13 through 84.16, 84.21, 84.22, 84.26 through 84.28, 84.30, 
84.31, 84.34 through 84.37, 84.40 through 84.48, 84.51, 84.60 through 
84.62, 84.72, and 84.73.

0
38. In Sec.  92.508:

[[Page 44683]]

0
a. Paragraphs (a)(2)(ii), (iii), and (viii) are revised, and a new 
paragraph (a)(2) (xiii) is added;
0
b. Paragraphs (a)(3)(i), (ii), (iii), (iv), (vi), and (xiii) are 
revised;
0
c. Paragraph (a)(3)(xiv) is added;
0
d. Paragraphs (a)(4)(i) and (iii) are revised; and
0
e. Paragraphs (a)(6)(i) through (a)(6)(iii) are redesignated as 
paragraphs (a)(6)(ii) through (a)(6)(iv) and new paragraph (a)(6)(i) is 
added.
    The revisions and addition read as follows:


Sec.  92.508  Recordkeeping.

    (a) * * *
    (2) * * *
    (ii) The forms of HOME assistance used in the program, including 
any forms of investment described in the Consolidated Plan under 24 CFR 
part 91 that are not identified in Sec.  92.205(b), and which are 
specifically approved by HUD.
    (iii) The underwriting and subsidy layering guidelines adopted in 
accordance with Sec.  92.250 that support the participating 
jurisdiction's Consolidated Plan certification.
* * * * *
    (viii) If HOME funds are used for acquisition of housing for 
homeownership, the resale or recapture guidelines established in 
accordance with Sec.  92.254(a)(5), as set forth in the Consolidated 
Plan.
* * * * *
    (xiii) Records documenting objections to the religious character of 
an organization that provides services under the HOME program, and the 
reasonable efforts undertaken to identify and refer the program 
participant to an alternative provider to which the prospective program 
participant has no objection, as provided in Sec.  92.257(d).
    (3) Project records. (i) A full description of each project 
assisted with HOME funds, including the location (address of each 
unit), form of HOME assistance, and the units or tenants assisted with 
HOME funds.
    (ii) The source and application of funds for each project, 
including supporting documentation in accordance with 24 CFR 85.20; and 
records to document the eligibility and permissibility of the project 
costs, including the documentation of the actual HOME-eligible 
development costs of each HOME-assisted unit (through allocation of 
costs, if permissible under Sec.  92.205(d)) where HOME funds are used 
to assist less than all of the units in a multi-unit project.
    (iii) Records demonstrating that each rental housing or 
homeownership project meets the minimum per-unit subsidy amount of 
Sec.  92.205(c), the maximum per-unit subsidy amount of Sec.  
92.250(a), and the subsidy layering and underwriting evaluation adopted 
in accordance with Sec.  92.250(b).
    (iv) Records (e.g., inspection reports) demonstrating that each 
project meets the property standards of Sec.  92.251 at project 
completion. In addition, during the period of affordability, records 
for rental projects demonstrating compliance with the property 
standards and financial reviews and actions pursuant to Sec.  
92.504(d).
* * * * *
    (vi) Records demonstrating that each tenant-based rental assistance 
project meets the written tenant selection policies and criteria of 
Sec.  92.209(c), including any targeting requirements, the rent 
reasonableness requirements of Sec.  92.209(f), the maximum subsidy 
provisions of Sec.  92.209(h), property inspection reports, and 
calculation of the HOME subsidy.
* * * * *
    (xiii) Records demonstrating that a site and neighborhood standards 
review was conducted for each project which includes new construction 
of rental housing assisted under this part to determine that the site 
meets the requirements of 24 CFR 983.57(e)(2) and (e)(3), in accordance 
with Sec.  92.202.
    (xiv) Records (written agreements) demonstrating compliance with 
the written agreements requirements in Sec.  92.504.
    (4) * * *
    (i) Written agreements committing HOME funds to CHDO projects in 
accordance with Sec.  92.300(a).
    * * *
    (iii) The name and qualifications of each CHDO and amount of HOME 
CHDO set-aside funds committed.
* * * * *
    (6) Program administration records. (i) Written policies, 
procedures, and systems, including a system for assessing risk of 
activities and projects and a system for monitoring entities consistent 
with this section, to ensure that the requirements of this part are 
met.
* * * * *

0
39. In Sec.  92.551, paragraph (c)(1)(vii) is redesignated as paragraph 
(c)(1)(viii) and revised, new paragraphs (c)(1)(vii) and (c)(1)(ix) are 
added, and paragraph (c)(2) is revised to read as follows:


Sec.  92.551  Corrective and remedial actions.

* * * * *
    (c) * * *
    (1) * * *
    (vii) Establishing procedures to ensure compliance with HOME 
requirements;
    (viii) Making matching contributions as draws are made from the 
participating jurisdiction's HOME Investment Trust Fund United States 
Treasury Account and establishing a remedial plan to make up the 
matching contributions deficit; and
    (ix) If the participating jurisdiction is a metropolitan city, 
forming a consortium with the urban county if the urban county is 
willing to carry out the HOME program in the metropolitan city.
    (2) HUD may also change the method of payment from an advance to 
reimbursement basis and may require supporting documentation to be 
submitted for HUD review for each payment request before payment is 
made; determine the participating jurisdiction to be high risk and 
impose special conditions or restrictions on the next year's allocation 
in accordance with 24 CFR 85.12; and take other remedies that may be 
legally available.


0
40. In Sec.  92.552, paragraph (b) is revised to read as follows:


Sec.  92.552  Notice and opportunity for hearing; sanctions.

* * * * *
    (b) Proceedings. When HUD proposes to take action pursuant to this 
section, the respondent in the proceedings will be the participating 
jurisdiction or, at HUD's option, the State recipient. Proceedings will 
be conducted in accordance with 24 CFR part 26.

0
41. In Sec.  92.614:
0
a. Paragraphs (a)(3) through (6) are redesignated as paragraphs (a)(4) 
through (7), respectively;
0
b. New paragraph (a)(3) is added;
0
c. Paragraph (b)(1) is removed; and
0
d. Paragraphs (b)(2) and (3) are redesignated as paragraphs (b)(1) and 
(2), respectively.
    The addition reads as follows:


Sec.  92.614  Other Federal requirements.

    (a) * * *
    (3) Affirmative marketing. The affirmative marketing requirements 
contained in Sec.  92.351(a).
* * * * *

    Dated: July 15, 2013.
Shaun Donovan,
Secretary.
[FR Doc. 2013-17348 Filed 7-23-13; 8:45 am]
BILLING CODE 4210-67-P