[Federal Register Volume 80, Number 136 (Thursday, July 16, 2015)]
[Notices]
[Pages 42105-42108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-17464]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5728-N-02]


Federal Housing Administration (FHA): Small Building Risk Sharing 
Initiative Final Notice

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

ACTION: Notice.

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SUMMARY: This Final Notice announces HUD's implementation of an 
Initiative under the Risk Sharing Program (the ``Initiative''), 
authorized by Section 542(b) of the Housing and Community Development 
Act of 1992, to facilitate the financing of small multifamily 
properties. Through this Final Notice, HUD invites applications for the 
Initiative described in this Notice from high capacity Community 
Development Finance Institutions (CDFIs), other non-profit lenders, and 
public and quasi-public agencies (collectively referred to as Mission 
Based Lenders), and private, for-profit lenders approved as FHA 
Multifamily Accelerated Processing (MAP) lenders (referred to as 
Private Lenders), to participate in HUD's Risk Sharing Program as 
Qualified Participating Entities (QPEs).

DATES: Effective Date of Initiative: July 16, 2015.
    Application Date for Mission Based Lenders: Applications will be 
completed in a two-stage process: Pre-Qualification and Final 
Application. Pre-Qualification Applications from Mission Based Lenders 
will be accepted starting on the effective date of this Notice. If the 
Pre-Qualification Application is approved by HUD the applicant will 
have 90 days from receipt of HUD's approval to complete its FHA Lender 
application online and deliver a Final Application to HUD.
    Application Date for Private Lenders: Applications will be 
completed in a two-stage process: Pre-Qualification and Final 
Application. Pre-Qualification Applications from Private Lenders will 
be accepted starting six (6) months from the effective date of this 
Notice. If the Pre-Qualification Application is approved by HUD the 
applicant will have 90 days from receipt of HUD's approval to deliver a 
complete Final Application to HUD. (Note Private Lenders must be FHA 
MAP Lenders in good standing in order to apply; therefore separate FHA 
Lender applications are not required.)

ADDRESSES: Interested parties are invited to submit applications 
including information outlined below, within the time frames described 
above.

FOR FURTHER INFORMATION CONTACT: Diana Talios, Office of Multifamily 
Housing Programs, Office of Production, Department of Housing and Urban 
Development, 451 7th Street SW., Room 6148, Washington, DC 20410; email 
address [email protected] and telephone number (202) 402-7125 
(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. Introduction

A. Purpose

    Under the Initiative, applicants qualified as QPEs will rely on a 
50 percent risk sharing arrangement with HUD to underwrite, originate, 
and service loans that (1) are secured with properties of 5 or more 
rental dwelling units, and (2) do not exceed the amount of $3,000,000, 
or, in the case of projects located in ``High Cost Areas'' annually 
designated by HUD, (most recently in Mortgagee Letter 2014-14 \1\), the 
amount of $5,000,000.
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    \1\ See http://portal.hud.gov/hudportal/documents/huddoc?id=14-14ml.pdf.
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B. Proposed Statutory Changes

    HUD intends to pursue statutory changes to Section 542(b) of the 
Housing and Community Development Act of 1992 that would, through loans 
originated by lenders that have demonstrated experience in affordable 
housing lending, remove affordability restrictions currently required 
under Section 542(b). The change is intended to reduce the burden on 
owners who access this capital in order to provide affordable housing 
in their communities. The language would also authorize Ginnie Mae to 
securitize loans on small buildings made under Section 542(b), which 
could significantly enhance the impact and utility of the Initiative. 
If granted this authority by the Congress, HUD would invite applicants 
that participate under the authority of this Final Notice to modify 
their agreements to take advantage of such new authority. Until such 
statutory changes are made, lenders participating in this Initiative 
may have access to low-cost long-term financing through the Federal 
Financing Bank (FFB). The FFB Risk Sharing Initiative announced June 
26, 2014, now provides capital for multifamily loans insured under 
Section 542(c) of the Risk Sharing Program. HUD and the Treasury 
Department are currently formalizing an agreement to expand this 
capital source to lenders

[[Page 42106]]

participating in the Small Buildings Initiative. Additional application 
criteria and program standards may be required by HUD and the Treasury 
Department in order to qualify for FFB financing under this Initiative.

C. Initiative Description

    Lenders approved to participate in the Initiative will be 
authorized to originate, underwrite, and service loans for HUD 
multifamily mortgage insurance for project acquisition, refinancing, 
rehabilitation (up to and including substantial rehabilitation) and/or 
equity take outs, but excluding new construction. The amount of the 
equity take-out, or ``cash out'', cannot exceed the scope of work that 
is paid for by the Risk Sharing loan proceeds. Further, the 
rehabilitation must address all of the capital needs in the Capital 
Needs Assessment (CNA) and satisfy the reserve requirements for the 
life of the loan. The cornerstone of the Risk Sharing Program is that 
the lender shares the insurance risk with FHA. Since lenders will cover 
50 percent of the risk of loss under this Initiative, FHA offers 
participants significantly more flexibility with respect to 
underwriting terms, and ongoing compliance than is found in Risk 
Sharing Program elements with higher risk allocations to FHA, and in 
other FHA Multifamily insurance programs.
    Upon presentation of appropriate project information and 
certifications, HUD will endorse such loans for full mortgage 
insurance. QPEs will be responsible for the full range of loan 
management, servicing, and property disposition activities.
    Through a Risk Sharing Agreement (RSA) QPEs will contract to assume 
50 percent of the risk on each loan they underwrite. In turn, upon a 
default, HUD will commit to pay an initial claim amount based on 100 
percent of the unpaid principal balance of an insured mortgage note 
plus interest at the mortgage note rate from the date of default to the 
date of an initial claim payment upon default of the loan and filing of 
a claim. The loss, if any, will be determined at a later date and HUD 
and the QPE will share such loss in accordance with the fifty-fifty 
share of risk assumed by each under the RSA.

D. Contents

    This document contains information on applicant eligibility, 
application requirements, application process, the timeframe for 
decisions on applications, and other program features and requirements.

II. Background

    HUD's 2012 Rental Housing Finance Survey (RHFS) data indicates 
there are approximately 495,574 small (5-49 units) multifamily rental 
properties in the United States, constituting more than a quarter of 
rental units across the nation (2012 Rental Housing Finance Survey). 
Small multifamily properties tend to be older, located in low-income 
neighborhoods, and to have lower median rents and higher shares of 
affordable units than larger multifamily rental properties. The 2012 
RHFS also suggests that 87 percent of the owners of this stock are 
individuals, households and estates, compared to 8 percent of larger 
properties with 50 or more units. Similarly, according to the RHFS, 
just 52 percent of small multifamily properties are mortgaged compared 
to 87 percent of the larger multifamily properties.
    Worst case housing needs are defined as renters with very low 
incomes (below half the median in their area) who do not receive 
government housing assistance and who either paid more than half their 
monthly income for rent, lived in severely substandard conditions, or 
both. Worst case housing needs were 7.7 million in 2013, down from a 
historic high of 8.5 million in 2011, ending a sustained period of 
large increases. This represents a 9 percent decline since 2011 yet 
remains 9 percent greater than in 2009 and 49 percent greater than 
2003. Worst case needs affect very low-income renters across racial and 
ethnic groups, and all types of households.\2\
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    \2\ See http://www.huduser.org/portal/Publications/pdf/WorstCase2015_summary.pdf.
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    Long-term fixed rate mortgages made through this Initiative will be 
especially valuable because smaller properties tend to command modest 
rents and owners are often unable to raise rents to cover upward 
interest rate adjustments without causing vacancies. Additionally, the 
``mom and pop'' ownership of this inventory faces more constraints in 
accessing financing in recent years due to increasingly high credit 
standards and diminished lending, following a significant loss of many 
community and regional banks in the wake of the 2008 recession.
    HUD has chosen to include both Mission Based Lenders (defined to 
include CDFIs, other nonprofits and quasi-public and public agency 
lenders) as well as for-profit, private lenders (Private Lenders). 
Mission Based Lenders will be eligible for the first application round, 
beginning on the effective date of this Final Notice, while Private 
Lenders may apply 6 months later. Although the Initial Notice allowed 
for the admission of consortia or joint ventures comprised of Private 
Lenders under the control of a Mission Based Lender, HUD determined 
this would complicate program operations and introduce unnecessary 
complexity into the program. However, a newly formed organization could 
be created. The new entity will have to meet all the requirements of 
this Final Notice including qualifying as an approved FHA non-
supervised mortgagee.
    The Initiative implemented by this Final Notice is intended to 
encourage eligible Mission Based and Private Lenders to move into this 
market or to serve it more fully with an additional source of capital. 
One common problem facing non-depository CDFIs and other Mission Based 
Lenders is access to long-term capital, which may limit their ability 
to provide housing finance to their communities. These organizations 
can qualify as QPEs by demonstrating that they meet minimum criteria 
including designation as non-profit entities or as public or quasi-
public benefit corporations under the laws of their States of 
formation, and exemption from Federal income taxation pursuant to the 
Internal Revenue Code of 1986. These Mission Based Lenders, as well as 
Private Lenders, must demonstrate that they meet various financial 
standards, and that a minimum amount of their recent loan activity has 
been dedicated to the financing of affordable housing.

III. Authority

    Section 542(b) of the Housing and Community Development Act of 
1992, as amended by Section 307 of the Multifamily Housing Property 
Disposition Reform Act of 1994, authorizes HUD to enter into RSAs with 
QPEs. QPE is broadly defined in Section 542(b) to allow HUD to enter 
into agreements with a range of lenders. Following full consideration 
of the comments submitted in response to the Initial Notice, HUD is 
hereby issuing this Final Notice to provide details of the 
implementation of the Initiative along with descriptions of changes 
made to the Initiative in response to public comment and/or further 
consideration of HUD as to how the Initiative should be structured or 
implemented.

IV. Key Changes Made to Initial Notice

    HUD announced a request for comments through a notice published in 
the Federal Register on November 4, 2013, at 78 FR 66043, which 
solicited public comment for a period of 60 days. The November 4, 2013, 
notice is referred to as the ``Initial Notice.''

[[Page 42107]]

    The following highlights key changes made to the Initial Notice. 
HUD received 41 public comments from approximately 28 different sources 
of interest. Respondents included CDFIs and FHA/MAP lenders, but the 
most prominent respondent group was comprised of nonprofit 
organizations, mainly membership organizations engaged in affordable 
housing preservation activities. All public comments may be viewed in 
their entirety online under docket number FR-5728-N-01 at http://www.regulations.gov/#!docketDetail;D=HUD-2013-0102. Also posted on 
HUD's Multifamily Web site at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b is a summary of the 
public comments and HUD's responses to the comments received to the 
Initial Notice.

A. General Comments

    Virtually all commenters recognized a pervasive need for programs 
to deliver capital to small scale lenders, and to promote the 
preservation of unassisted, affordable, small rental buildings, and 
they were largely supportive of the Initiative concept and program 
purposes as described by HUD in the Initial Notice. Some specifically 
supported the use of HUD's Risk Sharing Program for this purpose as 
well. Comments made with respect to inclusion of coop housing were 
consistently positive. Virtually all of the commenters that mentioned 
HUD's parallel legislative efforts to enhance the program (described in 
Section I.B. of this Final Notice) were supportive of them.
    Although largely supportive of the Initiative, commenters 
recommended modifications to virtually all elements of the design of 
the proposed Initiative. Their recommendations addressed the types of 
lenders and consortia allowed to participate, the standards with which 
participating lenders should be selected, and the borrowers' ongoing 
financial and reporting requirements. Even the most fundamental 
parameters of the Risk Sharing Program drew comments. These included 
the affordability requirements, loan standards, loan application 
requirements, and various federal review requirements such as 
environmental reviews, etc. In some cases recommendations were 
contradictory, for example some recommended more restrictive 
affordability requirements while others recommended less restrictive 
requirements. This section summarizes the key changes made by HUD to 
the Initial Notice. Complete application requirements and program 
details can be found at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b.
    Specific Changes are highlighted below.
    1. Lender Eligibility: Expansion of lender eligibility to invite 
FHA MAP lenders to participate. Their participation will be deferred by 
6 months from the initiation of the program, so that CDFIs and other 
nonprofit, public, or quasi-public organizations can start first and 
provide HUD with an opportunity to fine tune the program before having 
to manage larger numbers of participants.
    2. Applicant/Lender Qualification Requirements
    a. Demonstrable experience in affordable housing finance: 
Applicants are required to provide recent experience in lending for the 
production and/or preservation of ``affordable housing'' which for this 
purpose meets the minimum requirements of the Risk Sharing Program. 
During the past 2 years, no less than 20 percent or 20 of the 
applicant's multifamily housing loans originated, must have been made 
for affordable housing as their primary purpose. The Initial Notice 
required 33 percent of the applicant's loans over the past 2 years or 
33 percent of dollars loaned to be dedicated to affordable housing 
purposes.
    b. Financial Capacity: Minimum financial capacity requirements were 
added since the Initial Notice. Applicants must either have a 20 
percent net asset ratio and a minimum net worth of $7.5 million, or a 
CAMELS composite rating of 1 or 2 under the Uniform Financial 
Institutions Rating System (UFIRS) \3\ or equivalent nationally 
recognized rating system, and a minimum net worth of $7.5 million. No 
additional reserves are required so long as this standard is 
maintained. If the QPE can no longer meet this standard, a dedicated 
reserve must be established in a financial institution acceptable to 
HUD.
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    \3\ See http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/bsp-2.PDF.
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    c. Lender Staff Experience: The Initial Notice required lender's 
staff to demonstrate 3 years of originating FHA insured loans. This 
requirement was changed to permit alternative multifamily housing 
finance experience so long as it is substantial and fully described in 
the application.
    d. Lender's Net Income: Applicants will demonstrate financial 
solvency by disclosing annual income, as well as expenses and net 
income for each of the past 5 calendar years, and provide a computation 
of positive net income from the best 3 of those 5 years.
    e. Lender Staff Capacity: Applicants must demonstrate experience 
with multifamily housing mortgage servicing, and asset management, 
provide written procedures for work-outs, and describe management 
responsibilities.
    f. Certification of Compliance with Fair Housing and Civil Rights 
Requirements: An applicant must certify that it is the not subject of a 
suit filed by the Department of Justice or has an outstanding finding 
of noncompliance with a civil rights statute.
    3. Eligible Projects and Loan Size Limits: Projects must consist of 
5 or more rental dwelling units (including cooperative dwelling units) 
on one site. Scattered sites can be considered so long as each site has 
a minimum of 5 units, and can demonstrate it is one marketable and 
manageable real estate asset. Loan amounts have been increased from $3 
million to $5 million in certain high cost areas. Areas will be 
designated in HUD's ``Annual Base City High Cost Areas'' Mortgagee 
Letter. In the Initial Notice, eligible projects consisted of either 5-
49 units, or if the project consisted of more than 49 units, the loan 
amount could not exceed $3,000,000.
    4. Building Owner Requirements: Audited financial statement 
requirements may be waived by the QPE when it can be justified by the 
nature of the project and that the borrower has sufficient capacity to 
successfully manage the property.
    5. Loan Terms: Loan terms are changed to allow for balloon payments 
at the end of year 15 or thereafter, with an amortization term of no 
more than 30 years. Alternatively, loans may fully amortize over a term 
of up to 40 years.

V. HUD's Decisions on Applications

    HUD will act on Pre-Qualification submissions based on the criteria 
provided in the Application Requirements posted on the Web at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/progdesc/progsec542b, within approximately 30 days of the date HUD deems the 
application to be complete, either by denying the request or by 
inviting the applicant to submit a Final Application. HUD will act on 
Final Applications within approximately 60 days from the date of 
receipt of the Final Application. This will include notifying 
applicants determined to be eligible as QPEs, and delivering a RSA. It 
is important to note that Mission Based Lenders must be approved as FHA 
Non-supervised Mortgagees in advance of their approval as a QPE. An FHA 
Lender

[[Page 42108]]

Approval Application, Form 92001-A, can be downloaded from HUD's Web 
site at: http://portal.hud.gov/hudportal/documents/huddoc?id=92001-a.pdf.

VI. Evaluation of the Initiative

    One of the principal purposes of the Initiative is to determine 
whether, by providing Federal credit enhancement for refinancing and 
rehabilitation of small multifamily housing, the Initiative is 
successful in increasing the flow of credit to small multifamily 
properties. HUD will, therefore, undertake an evaluation of the 
Initiative to determine the success of the Initiative and will expect 
participation by selected lenders.

VII. Findings and Certifications

A. Paperwork Reduction Act

    The information collection requirements contained in this document 
have been approved by 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 2502-0500 and 2502-0541. In accordance with the 
Paperwork Reduction Act, HUD 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.

B. Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment has been made for this notice in accordance with HUD 
regulations at 24 CFR part 50, which implement Section 102(2)(C) of the 
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The 
FONSI is available for public inspection between 8 a.m. and 5 p.m. 
weekdays in the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 4517th Street SW., Room 
10276, Washington, DC 20410-0500. Due to security measures at this HUD 
Headquarters Building, an advance appointment to review the FONSI must 
be scheduled by calling the Regulations Division at 202-708-3055 (not a 
toll free number).

    Dated: June 30, 2015.
Edward L. Golding,
Principal Deputy Assistant Secretary for Housing.
[FR Doc. 2015-17464 Filed 7-15-15; 8:45 am]
BILLING CODE 4210-67-P