[Federal Register Volume 81, Number 199 (Friday, October 14, 2016)]
[Rules and Regulations]
[Pages 71244-71275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24619]



[[Page 71243]]

Vol. 81

Friday,

No. 199

October 14, 2016

Part III





Department of Housing and Urban Development





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24 CFR Part 200





Retrospective Review--Improving the Previous Participation Reviews of 
Prospective Multifamily Housing and Healthcare Programs Participants; 
Final Rule

  Federal Register / Vol. 81 , No. 199 / Friday, October 14, 2016 / 
Rules and Regulations  

[[Page 71244]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 200

[Docket No. FR-5850-F-04]
RIN 2502-AJ28


Retrospective Review--Improving the Previous Participation 
Reviews of Prospective Multifamily Housing and Healthcare Programs 
Participants

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

ACTION: Final rule.

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SUMMARY: This final rule revises HUD's regulations for reviewing the 
previous participation in federal programs of certain participants 
seeking to take part in multifamily housing and healthcare programs 
administered by HUD's Office of Housing. The final rule clarifies and 
simplifies the process by which HUD reviews the previous participation 
of participants that have decision-making authority over their projects 
as one component of HUD's responsibility to assess financial and 
operational risk to the projects in these programs. The final rule, 
together with an accompanying Processing Guide, clarifies which 
individuals and entities will undergo review, HUD's purpose in 
conducting such review, and describe the review to be undertaken. By 
targeting more closely the individuals and actions that would be 
subject to prior participation review, HUD not only brings greater 
certainty and clarity to the process but provides HUD and program 
participants with flexibility as to the necessary previous 
participation review for entities and individuals that is not possible 
in a one-size fits all approach. Through this rule, HUD replaces the 
current previous participation regulations in their entirety.

DATES: Effective Date: November 14, 2016.

FOR FURTHER INFORMATION CONTACT: Danielle Garcia, Office of Housing, 
Department of Housing and Urban Development, 451 7th Street SW., Room 
6148, Washington, DC 20410; telephone number 202-402-2768 (this is not 
a toll-free number). Individuals with speech or hearing impairments may 
access this number through TTY by calling the toll-free Federal Relay 
Service at 800-877-8339 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

    HUD's Previous Participation Review regulations, codified at 24 CFR 
part 200, subpart H (Subpart H regulations), set forth the HUD process, 
which applicants seeking to participate in HUD's multifamily housing 
and healthcare programs must undergo to ensure, including providing a 
certification, that all principals of the applicant involved in a 
proposed HUD project have acted responsibly and have honored their 
legal, financial, and contractual obligations in their previous 
participation in HUD programs, as well as in certain programs 
administered by the U.S. Department of Agriculture, and in projects 
assisted or insured by state and local government housing finance 
agencies. HUD's regulations governing the assessment of previous 
participation require applicants to complete a very detailed and 
lengthy certification form (HUD Form 2530).\1\
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    \1\ See http://portal.hud.gov/hudportal/documents/huddoc?id=2530.pdf.
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    The 2530 form requires disclosure of all principals to be involved 
in the proposed project, a list of projects in which those principals 
have previously participated or currently participate in, a detailed 
account of the principals' involvement in the listed project(s), and 
assurances that the principals have upheld their responsibilities while 
participating in those programs. HUD's Subpart H regulations govern not 
only the content of the certification submitted by applicants, but the 
types of parties that must certify, the process for submitting the 
certification, the standards by which submissions are evaluated, and 
the delegations and duties of HUD officials involved in the evaluation 
of the certifications. The regulations also contain procedures by which 
applicants can appeal adverse determinations.
    The Subpart H regulations, first established in 1980, with some 
updates over the years, were overdue for significant updating to 
reflect the deal structures and transaction practices taking place 
today that were not in place over 20 years ago. For example, the 
currently codified regulations pre-date the development of limited 
liability companies as an organizational entity. HUD recognized that 
the currently codified regulations have not kept step with contemporary 
organizational structures or transactional practices, and were both 
over-inclusive and under-inclusive of applicants that should undergo 
the previous participation review process, creating unnecessary burdens 
for participants and HUD alike. Further, participants in HUD's 
multifamily housing and healthcare programs have long complained about 
the delays with the previous participation review process because of 
the overly detailed information required to be submitted. Complaints 
focused on the difficulties associated with obtaining information from 
all the limited partner investors in individual projects and in 
duplicating information for multiple levels of affiliates. Participants 
in HUD's multifamily housing and healthcare programs also stated that 
the previous participation process requires participants to complete 
the Form 2530 for each project, regardless of the number of Forms 2530 
each participant completed in the recent past, regardless of how many 
projects the participant is involved in each year, and regardless of 
whether the participant is a well-established, experienced 
institutional entity already familiar to HUD.

II. The Proposed Rule

    On August 10, 2015, at 80 FR 47874, HUD published a proposed rule 
that is designed to comprehensively overhaul the Subpart H 
regulations.\2\ As described in the August 10, 2015, proposed rule, HUD 
made several efforts over the years to improve the process and minimize 
the time and collection burden it takes to undergo the previous 
participation review process, but none of the efforts achieved the 
success that HUD desired.\3\ Therefore on August 10, 2015, HUD 
submitted a rule for public comment that proposed to revise the Subpart 
H regulations in their entirety, replacing the current prior 
participation review process. The August 10, 2015, proposed rule noted 
that while the current regulations mandate that Form HUD 2530 be used, 
the proposed rule would shift the emphasis of the regulations from this 
specific form to the substance of what is being asked from whom. One of 
the goals of the August 10, 2015, proposed rule is to provide HUD and 
its program participants with greater flexibility by avoiding a one-
size-fits-all approach, and allowing for HUD to seek information 
tailored to certain programs, expand electronic data practices for 
gathering information, and decrease the information collection imposed, 
generally across-the-board on all applicants regardless of the 
applicant entity and the program to which the applicant seeks to 
participate. The specific changes proposed by the August 10, 2015 rule 
can be found at 80 FR 47876 through 47877.
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    \2\ See https://www.gpo.gov/fdsys/pkg/FR-2015-08-10/pdf/2015-19529.pdf.
    \3\ See preamble to proposed rule at 47875 and 47876.
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    At the close of public comment period on October 9, 2015, HUD 
received 33

[[Page 71245]]

public comments. Overall the commenters were supportive and 
appreciative of HUD's efforts to reform the regulations. Commenters 
stated that, in addition to reforms to the regulations and reforms to 
the review process, additional guidance and training materials were 
also needed. Several commenters stated, however, that the regulations 
were broad and vague and lacked the specificity that participants 
desired to bring clarity and certainty to the previous participation 
review process. The public comments and HUD's responses to the public 
comments on the proposed rule are addressed in Section V of this 
preamble.

III. Supplemental Notice of Proposed Rulemaking

    On May 17, 2016, at 81 FR 30495, HUD supplemented its August 10, 
2015, proposed rule with a Supplemental Notice of Proposed Rulemaking 
(Supplemental Notice). To address commenters' concerns about the need 
for more specificity in the proposed rule, HUD proposed through this 
supplemental document to use an approach that HUD has taken in certain 
of its other regulations and that is to supplement codified regulations 
with a document specifically referenced in the codified regulations 
that addresses the specific procedures (processing requirements) to be 
followed.\4\ When HUD has taken this approach, HUD commits to provide 
notice and opportunity for comment for any significant changes made to 
the document.
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    \4\ See, for example, 24 CFR 207.254, pertaining to mortgage 
insurance premiums; 24 CFR 203.605, pertaining to tier ranking 
systems and methodology applicable to loss mitigation performance; 
24 CFR 290.9, pertaining to setting rental rates for certain 
multifamily housing projects; 24 CFR 570.712(b) pertaining to 
setting a fee for the Section 108 Loan Guarantee Program; and 24 CFR 
part 902, pertaining to scoring notices for HUD's Public Housing 
Assessment System.
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    In the May 17, 2016, document, HUD proposed to issue with its final 
regulations a ``Processing Guide for Previous Participation Reviews of 
Prospective Multifamily Housing and Healthcare Programs' Participants'' 
(Processing Guide). This Processing Guide, to be posted on HUD's Web 
site, will provide the details on procedures which commenters are 
seeking and which HUD proffered is more appropriate for a process guide 
than for regulatory text. As provided in the May 17, 2016, document, 
HUD advised that the Processing Guide will provide applicants for and 
participants in HUD's multifamily housing and healthcare programs the 
detailed information desired on the previous participation review 
process, information about how ``flags'' are assigned and addressed,\5\ 
and elaborates on terms and information in Form 2530. HUD provided that 
the codified regulations would reference the Processing Guide and 
provide a 30-day advance notice and comment period for significant 
changes proposed to the Processing Guide. HUD reiterated that the 
Processing Guide offered an appropriate procedural approach for 
addressing the previous participation review process because it would 
give HUD the ability to make changes as may be needed or desired by HUD 
as well as program participants to address specific procedural 
circumstances that may arise in the previous participation process and 
to keep up-to-date with changes that may arise in the housing market. 
HUD noted that one of the longstanding complaints about HUD's previous 
participation review process is that the process and the regulations 
that govern the process are very outdated and do not keep up with the 
times. HUD submitted that a lean set of regulations supplemented by a 
detailed processing guide that is subject to notice and comment for any 
significant changes is the best approach for this process and one that 
will endure successfully for some time.
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    \5\ Flags refer to an issue or issues in a prospective 
participant's application for which further review is necessary.
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    The public comment period on the May 17, 2016, notice closed on 
June 16, 2016, and HUD received 11 comments. The commenters strongly 
supported this approach but some commenters stated that greater 
specificity was still necessary. The public comments and HUD's 
responses to the public comments on the Supplemental Notice are 
addressed in Section V of this preamble.

IV. Changes Made at This Final Rule Stage

    This section highlights the changes made to the proposed rule at 
this final rule stage.
     The final rule references the Processing Guide as a 
supplement to HUD's regulations and provides for changes to the guide 
to be done through advance notice and opportunity for comment.
     The final rule reorganizes information relating to the 
evaluation of risk into a separate definition of risk.
     The final rule clarifies that Covered Projects include 
projects subject to continuing HUD requirements only if those 
requirements are made in connection with a program administered by 
HUD's Office of Housing.
     The final rule revises terminology to clarify that 
Controlling Participants include both Specified Capacities and the 
individuals and entities that control the Specified Capacities.
     The final rule includes construction managers as 
Controlling Participants in hospital projects insured under section 242 
of the National Housing Act.
     The final rule specifies that individuals or entities with 
the ability to direct the day-to-day operations of a Specified Capacity 
or a Covered Project are Controlling Participants.
     The final rule specifies that board members of a non-
profit that do not otherwise control the day-to-day operations of the 
non-profit are not Controlling Participants.
     The final rule clarifies that a change in Controlling 
Participants is a Triggering Event if HUD consent is required for such 
change.
     The final rule provides more detail on when a Controlling 
Participant may be disapproved from participation in a Triggering Event 
on the basis of being restricted from doing business with other 
government agencies.
     The final rule specifies that reconsideration decisions 
shall not be rendered by the same individual who rendered the initial 
review.
     The final rule specifies that Controlling Participants 
shall receive at least 7 business-days advance notice of a 
reconsideration.
     The final rule eliminates the bid to purchase a Covered 
Project or mortgage note held by the Commissioner from the list of 
Triggering Events.

V. The Public Comments on the Proposed Rule and Supplemental Notice and 
HUD's Responses

A. Comments on the Proposed Rule

1. General Comments on the Proposed Rule
    Many commenters expressed support for HUD's initiation of the 
proposed rule, which was designed to streamline and improve the 
previous participation process. One commenter stated: ``This proposed 
rule is a step in the right direction to streamline a tedious process 
in HUD multifamily and healthcare programs.'' Commenters also suggested 
changes that they thought would further improve this process. The 
following are the significant comments raised by the commenters.
    Comment: The proposed rule is overly broad. Several commenters 
stated that the proposed regulations are overly broad and open to 
various interpretations by HUD. The

[[Page 71246]]

commenters stated that the final rule should provide a comprehensive 
outline of the previous participation review requirements so that 
industry partners and HUD staff alike have a primary resource from 
which to identify the governing requirements and be detailed enough not 
to have to be dependent on additional guidance. Commenters stated that 
it is essential that the process be as transparent as possible. The 
commenters stated that because the proposed rule does not specify how 
HUD intends to determine whether Controlling Participants have control 
over the finances or operation of a Covered Project, this could 
actually increase the number of responses required by a program 
participant rather than reduce such processes. A commenter stated that 
the proposed rule is so vague that HUD may violate the Administrative 
Procedures Act (APA) if HUD neglects to provide the public a meaningful 
opportunity to review and comment on forthcoming revisions. The 
commenters stated that before proceeding to a final rule, HUD must 
solicit additional comment by re-issuing a revised proposed 2530 rule.
    HUD Response: HUD understood the concerns made by these commenters 
about the need for further elaboration on various aspects of the rule, 
and it was these concerns that prompted HUD to issue the Supplemental 
Notice of Proposed Rulemaking through which HUD proposed to supplement 
the previous participation regulations with a Processing Guide. The 
Processing Guide would serve as a primary resource and provide the 
specificity for the procedural requirements governing the previous 
participation review process. HUD solicited public comment on this 
Processing Guide. As noted in Section IV, HUD is adopting the 
Processing Guide as part of the final rule changes. With the Processing 
Guide, HUD believes it has achieved the appropriate balance between 
specificity and flexibility. Comments on the Processing Guide and HUD's 
responses to these comments are provided in Section V.B. of this 
preamble.
    Comment: Method of filing. Several commenters asked whether a 
participant's ability to file would be done electronically or would 
paper forms have to be used.
    HUD Response: The regulations do not require filing electronically 
or paper filing. Both formats remain available, but HUD encourages 
electronic filing.
    Comment: Clarify that existing regulations are replaced in 
entirety. A commenter asked that HUD clarify that the new regulations 
replace the existing regulations in their entirety. The commenter 
stated that while the proposed rule clearly stated this, it was not 
repeated in the regulatory text.
    HUD Response: The regulatory text does not need to specify that it 
is superseding previous regulations. The final regulations will replace 
the existing regulations in their entirety, and the existing 
regulations will then no longer be contained in the Code of Federal 
Regulations.
    Comment: Clarify whether a single purpose entity wholly owned by a 
public housing agency (PHA) is exempt from the previous participation 
process. A commenter stated that it was not clear from the proposed 
rule if any single purpose entity wholly owned by a public housing 
agency (PHA) is still excluded from previous participation. The 
commenter asked for HUD to clarify.
    HUD Response: Yes, entities that are wholly owned by a PHA are 
considered public housing agencies. For the commenter's reference, see 
HUD's regulation at 24 CFR 5.100, which defines ``Public Housing 
Agency'' to include ``or instrumentality of these entities.'' Further, 
HUD's Office of Public and Indian Housing (PIH) issued PIH Notice 2007-
15,\6\ which defines ``instrumentality'' as ``an entity related to the 
PHA whose assets, operations, and management are legally and 
effectively controlled by the PHA.'' The notice further states that 
``For the Department's purposes, an Instrumentality assumes the role of 
the PHA and is the PHA under the public housing requirements for 
purposes of implementing public housing development activities and 
programs.''
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    \6\ See PIH Notice 2007-15 on ``Applicability of Public Housing 
Development Requirements to Transactions between Public Housing 
Agencies and their Related Affiliates and Instrumentalities,'' 
issued on June 20, 2007, at https://portal.hud.gov/hudportal/documents/huddoc?id=DOC_9278.pdf.
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    Comment: Address ``flags'' in regulatory text. A commenter stated 
that HUD, in the preamble to the proposed rule, is absolutely correct 
in stating that use of flags under the current system has created 
serious obstacles to participation in HUD programs, even when such 
flags are not indicative of real risk. The commenter stated that if HUD 
is going to continue its practice of issuing ``2530 flags,'' this 
policy should be clearly explained in the regulations. Other commenters 
similarly stated that, in many instances, program participants do not 
receive prior notice of flags; they do not know why they've been 
``flagged;'' they do not know whether they can ``appeal'' the flags; 
and/or they don't know how to get flags removed or ``resolved.''
    HUD Response: HUD agrees that prior dealings with ``flags'' have 
been frustrating for all parties. HUD, however, does not agree that the 
level of detail asked by the commenters is appropriate for regulations. 
The role of flags in the previous participation process is one of the 
reasons that HUD has proposed the Processing Guide. The Processing 
Guide is the better vehicle to address flags and HUD did in fact 
address flags in the Processing Guide, published for comment on May 17, 
2016. HUD provides additional comments received on flags and HUD's 
responses to these comments on Section V.B. of this preamble.
    Comment: Have one 2530 form, not multiple forms. Commenters 
expressed opposition to HUD's intention, as they stated was presented 
in the preamble to the proposed rule, to allow the development of 
multiple previous participation forms specifically tailored to 
particular HUD programs. The commenters stated that multiple forms will 
only further complicate a process that HUD itself recognizes is overly 
burdensome and time-consuming. The commenters also stated that the 
existing 2530 form at least provides applicants the following: (i) 
Assurance that there is one consistent form for participation in all 
HUD programs, and (ii) guidance on what information must be provided 
and updated (in the Schedule A attached to the existing 2530 form) 
regarding prior participation in HUD projects (status of HUD loan, 
current Real Estate Assessment Center (REAC) score, etc.).
    HUD Response: HUD is not proposing new previous participation forms 
at this time. In the preamble to the proposed rule, HUD simply noted 
that through the revised previous participation review process that HUD 
proposed in the August 10, 2015, rule, HUD may determine that 2530 
forms more tailored to HUD-specific forms, rather than an across-the-
board form, may be more appropriate, helpful, and facilitate the 
processing of a specific HUD transaction. For example, the structure of 
a Multifamily Housing transaction is vastly different from that of a 
Healthcare transaction or a Hospital transaction. It is not intuitive 
to fit a healthcare transaction's operator into the 2530 form used for 
a Multifamily Housing transaction. HUD's Office of Residential Care 
Facilities (ORCF) has advised that many submissions of the Form 2530 in 
connection with Healthcare transactions are completed incorrectly and 
do not yield adequate information to promptly process the healthcare 
transaction. For this reason, in its 2013 PRA information collection, 
ORCF developed as part of its consolidated certification, more

[[Page 71247]]

targeted questions that are easier to understand and fit more easily 
with a Healthcare transaction.\7\ Since the existing regulations 
require the submission of the specific Form 2530, ORCF has been using 
both the current Form 2530, which does not reflect a healthcare 
transaction, and its improved Consolidated Certification. With these 
revised previous participation regulations, ORCF now has the ability, 
if it so chooses, to require only the more targeted and accurate 
disclosures and more complete certifications of the Consolidated 
Certification. Time will tell whether other programs, such as the 
Rental Assistance Demonstration program or the HUD Hospitals program, 
will consider submitting similarly tailored forms through the PRA 
process. The 242 program is currently in the process of document reform 
and is not proposing a change from the 2530 form at this time, but may 
do so in the future.
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    \7\ See ORCF's notice announcing final approval of HUD's 
Healthcare Facility documents published in the Federal Register on 
March 14, 2013, at 78 FR 16279. See especially page 16281, third 
column.
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    Whether HUD chooses to develop 2530 forms tailored for specific HUD 
transactions, the public should keep in mind that changes to the 
existing 2530 form or development of new previous participation forms 
must undergo the notice and comment process (a minimum of 90 days) 
required by the Paperwork Reduction Act (PRA).
    Comment: Exclude limited liability investors. Commenters stated 
that the final rule should clarify that limited liability corporate 
investor (``LLCI'') certification is no longer required of low-income 
housing tax credit (LIHTC) investors or any other passive investors. 
Another commenter stated that it supports expanding the exemption given 
to LIHTC investors to all passive investors in other tax credit 
programs, such as the New Markets Tax Credit.
    HUD Response: HUD believes 24 CFR 200.216(c)(1) is clear that 
passive investors are not Controlling Participants, and are not 
required to undergo previous participation review. However, HUD 
reserves the right to perform appropriate due diligence review of 
investors, including reviewing their financial capacity and 
understanding the organizational structure of proposed entities.
2. Comments on the Proposed Rule Regulatory Text
Definitions (Sec.  202.212)
    Comment: Define Key Principal. Commenters stated that the term 
``Key Principal'' is a widely used term in the Active Partners 
Performance System (APPS) but is not included in the regulations, and 
should be.
    HUD Response: The term ``key principal'' continues to be used for 
underwriting purposes. HUD believes that the term ``key principal'' has 
been confusing in past practice with respect to previous participation 
review and has determined that the new terms Specified Capacity and 
Controlling Participant are more appropriate for previous participation 
review purposes. The APPS system will be updated to ensure consistency 
between the APPS system and the previous participation regulations.
    Comment: Distinguish between applicant entities and those that 
control them. Commenters stated that HUD should use separate terms for 
the applicant entities requiring approval and those individuals and 
entities that control them.
    HUD Response: HUD has added the term ``Specified Capacity'' and 
revised the definition of ``Controlling Participant'' to include the 
listed ``Specified Capacities'' and those entities and individuals that 
control the Specified Capacities. In addition, the Processing Guide 
elaborates on specified capacity and provides a chart that shows the 
specified capacities for the listed programs. See the Processing Guide, 
published for comment on May 17, 2016, at 81 FR 30497.
    Comment: Define Risk. Commenters stated that the proposed rule does 
not adequately define ``risk'' or how HUD will evaluate risk.
    HUD Response: In response to these commenters, HUD proposed in the 
Supplemental Notice, published on May 17, 2016, to include a definition 
of ``risk'' in Sec.  200.212, that would clarify that in order to 
determine whether a Controlling Participant's participation in a 
project would constitute an unacceptable risk, the FHA Commissioner 
must determine whether the Controlling Participant could be expected to 
participate in the Covered Project (as defined in the August 10, 2015, 
proposed rule) in a manner consistent with furthering HUD's purposes. 
The proposed definition of ``risk'' and comments received on this 
definition and HUD's responses are addressed in Section V.B. below.
    Comment: Clarify programs covered by previous participation review. 
A commenter stated that there appears to be in the rule an 
inconsistency in the definition of previous participation. The 
commenter stated that specifically in Sec.  200.212 the term is 
described as participation in Federal programs only, but the first 
paragraph of the Background section in the preamble to the proposed 
rule suggests that participation in State and local government financed 
or assisted programs must also undergo the previous participation 
review process. Commenters stated that currently many participants 
disclose only their participation in HUD programs, which the commenters 
stated should be HUD's concern. The commenters further stated that the 
assessment of risk by HUD of State and local participation greatly 
delays the clearance process since it requires HUD staff to track down 
the appropriate State or local officials who may have absolutely no 
interest in the 2530 process and therefore may not be inclined to 
cooperate.
    HUD Response: The definition of risk, as proposed in the 
Supplemental Notice, clarifies this issue. The commenters are correct 
that HUD's primary concern is previous participation in HUD programs. 
Previous participation in HUD programs is most relevant to HUD and HUD 
regards the information received with regard to previous participation 
in HUD programs (as opposed to other Federal, State or local programs) 
to be the most complete and most reliable because the information 
should correspond with HUD's records. However, previous participation 
in other Federal, State or local programs may also be relevant to the 
evaluation of risk, and therefore HUD reserves the right to request 
this information when it is relevant and can be gathered reliably. It 
is possible that such information may prove valuable when evaluating 
the risk of a flag in the context of a Controlling Participant's 
performance relative to their overall portfolio, especially if 
participation in HUD programs is minor compared with participation in 
other programs.
    In this final rule, the regulations have been revised to clarify 
that previous participation must include HUD programs but that the FHA 
Commissioner may request and consider previous participation in any 
Federal, State or local government program if the Commissioner 
determines that such information is reliably available and necessary in 
evaluating financial or operational risk. Further, the Commissioner may 
exclude any previous participation from the previous participation 
review process if the Commissioner determines that such information is 
not relevant or cannot be reliably gathered. This regulatory structure 
allows greater specificity to be set forth in forthcoming guidance and 
to evolve as housing programs and risks evolve. HUD notes that in order 
to request any such previous participation information, HUD must follow 
the PRA

[[Page 71248]]

process for information collection. The form 2530 already requires 
limited disclosure of State and local housing programs; the form 
requires Schedule A disclosures to list ``every project assisted . . . 
by . . . State and local government housing finance agencies . . .''
Covered Projects (Sec.  200.214(d), (e))
    Comment: Covered projects subject to use restrictions should be 
limited to those administered by HUD's Office of Housing. Commenters 
stated that the category established by Sec.  200.214(d), relating to 
projects with affordability restrictions, should be limited to projects 
whose use restrictions are administered by HUD's Office of Housing.
    HUD Response: These regulations govern only projects administered 
by HUD's Office of Housing. For clarity, HUD has accepted the 
commenters' suggestion to revise the language and add the phrase 
``administered by HUD's Office of Housing.''
    Comment: Exclude project-based vouchers (PBVs) administered by 
HUD's Office of Public and Indian Housing. Commenters asked that HUD 
exclude from previous participation review projects with project-based 
voucher contracts.
    HUD Response: The proposed regulations exclude PBVs, and this final 
rule retains that exclusion. See the exclusion in Sec.  200.214(e)(3) 
of projects authorized by ``section 8(o)(13) of the United States 
Housing Act of 1937 (42 U.S.C. 1437f(o)(13),'' which pertains to PBVs.
    Comment: Do not exclude PBVs. In contrast to the preceding comment, 
a commenter stated that projects participating in the Rental Assistance 
Demonstration (RAD) and receiving PBVs are not required to obtain 
previous participation clearance for a change in ownership or 
management agent but would be under the Project-Base Rental Assistance 
program administered by the HUD Office of Housing. Commenter suggested 
projects in the PBV program should be subject to previous participation 
review.
    HUD Response: These regulations do not govern programs administered 
by the Office of Public and Indian Housing. There are several 
differences between the PBV and PBRA programs, which accomplish 
different policy goals and allow for various effects.
Controlling Participant (Sec.  200.216)
    Many commenters stated that the definition of ``Controlling 
Participant'' in the proposed rule was too broad and needed further 
clarity and specificity. Commenters offered suggestions on how 
Controlling Participant should be defined. Their suggestions are as 
follows:
    Comment: Limit and list specifically the individuals required to 
undergo previous participation review. Commenters stated that if HUD 
intends to include officers and directors, and individuals with 
authority to bind the entity as Controlling Participants, HUD should 
specify the parties required to file.
    HUD Response: HUD submits that the more appropriate document for 
listing the entities and individuals that HUD determined are 
Controlling Participants is in the Processing Guide that HUD published 
on May 17, 2016. That list of entities that HUD determined are 
Controlling Participants and those that HUD determined are not 
Controlling Participants can be found in the Guide at 81 FR 30498. HUD 
reminds the public that the Processing Guide is subject to advance 
notice and opportunity for comment for any substantive changes.
    Comment: Replace ``authority to bind'' phrase (Sec.  200.216(b)). 
Commenters objected to proposed Sec.  200.216(b) inclusion of 
individuals with the ``ability to bind'' such entity with respect to 
Triggering Events. Other commenters suggested replacing this phrase 
with the phrase ``ability to direct the entity in entering into 
agreements.''
    HUD response: HUD has revised this provision with the commenters' 
suggested language.
    Comment: Define ``Influence.'' Commenters stated that Sec.  
200.216(c)(2) introduces the new concept of ``influence'' but HUD has 
not previously defined or given any direction on what this term means. 
The commenters requested that HUD define or remove this term. Another 
commenter suggested using the language ``the ability to direct day-to-
day operations or policy of a Covered Project.''
    HUD Response: HUD has revised Sec.  200.216(c)(2) to be consistent 
with the terminology used elsewhere in the rule. HUD has also revised 
Sec.  200.216(b) to focus on those with control over ``day-to-day 
operations.''
    Comment: How many ``tiers'' are included? Commenters asked how many 
``tiers'' within a given entity may be deemed to include ``Controlling 
Participants.''
    HUD Response: HUD is interested in reviewing the previous 
participation of the entities and individuals in control of a project, 
no matter how many ``tiers'' of entities are structured in between. HUD 
expects Controlling Participants to include at least one natural 
person. However, HUD is not interested in receiving superfluous filings 
of several tiers of shell entities in an entity's organizational 
structure. Shell entities that do not exercise control are excluded 
from filing requirements. This difference is reflected in the 
regulations and further clarified in the Processing Guide.
    Comment: Do not define control as a percentage of ownership. 
Commenters stated that the language in Sec.  2001.216(c)(2) meant to 
allow for exclusions limiting the scope of the review is undermined by 
the language defining ``control'' in Sec.  2001.216(b) as a certain 
percentage of ownership. Commenter suggested revisions to this section 
to separate the exclusion language and eliminate the reference to 
percentage ownership.
    HUD Response: HUD agrees in part and has revised this language. HUD 
has revised this language so that percentage ownership does not 
``define'' control. Because other commenters have asked for greater 
clarity, HUD has retained the 25 percent ownership as an indicator of 
control. Participants should expect to undergo previous participation 
review if they own 25 percent of a Specified Capacity or a Controlling 
Participant. However, HUD has further revised this section to limit 
this 25 percent threshold by inserting the phrase ``unless otherwise 
determined by HUD.'' In other words, although having a 25 percent 
interest creates a presumption that a person or entity exercises 
control, HUD may make a determination otherwise if given other evidence 
indicating that the person or entity that owns the 25 percent share 
does not actually exercise control. The Processing Guide provides 
further clarity on this matter. This is now consistent with the 
limitation in the revised Sec.  2001.216(c)(2), excluding entities and 
individuals not exercising control.
    Comment: Percentage of ownership is an outdated way to determine 
ownership. Similar to the immediately preceding comment, a commenter 
stated that the concept of 25 percent or more ownership is an outdated 
notion of how modern organizations are structured and controlled. The 
commenters stated that investor entities have no rights to current 
control of entities, despite owning a majority of the interests. The 
commenters stated that HUD's focus should be not on who owns how much, 
but ultimately on who controls what (financially or operationally).
    HUD Response: HUD agrees in part with the commenters. As HUD noted 
above, HUD has revised the regulations to separate percentage interest 
from the definition of control. However, except

[[Page 71249]]

in the case of tax credit and other passive investors, HUD notes that 
in the majority of organizational structures, ownership of 25 percent 
or more of the ownership interests is a good indicator of control. 
Therefore, in response to other comments seeking greater clarity, HUD 
has retained this indicator but revised the language to indicate that 
HUD may make a determination that the person or entity does not 
exercise control, if there is a basis for such determination. Further, 
HUD notes that tax credit and passive investors are specifically 
excluded from review.
    Comment: Exemption of PHA from definition of Controlling 
Participant is not appropriate. A commenter stated that the exclusion 
of PHAs in Sec.  200.216(c)(4) is overly broad.
    HUD Response: PHAs are public entities that are overseen by HUD. 
HUD has determined that HUD has other methods of monitoring PHAs and 
that previous participation review in unnecessary given HUD's other 
oversight over PHAs.
    Comment: Specify Controlling Participants for nonprofit entities, 
real estate investment trusts (REITs) and public companies. Commenters 
stated that the regulations should specifically identify who is subject 
to previous participation review for nonprofit corporations, REITs, and 
public companies. The commenters stated that there can be significant 
differences in how ``control'' is held in each of these types of 
corporations, and that these differences have been the subject of much 
confusion over the years, by HUD staff and industry members alike. 
Another commenter stated that Sec.  200.216(a)(7), which speaks to 
hospital Boards of Directors, leaves unclear how HUD intends to treat 
Boards of Directors in the non-hospital context, as the proposed rule 
is silent on this matter.
    HUD Response: With respect to hospitals under the Section 242 
program, it is reasonable for the regulations to specifically address 
members of the hospital's board of directors because it is the typical 
structure for projects in the hospital program to have a nonprofit 
board of directors in a way that is not true for the variable 
organizational possibilities in other programs. However, HUD agrees 
with the commenters that confusion has arisen in recent years with 
regard to nonprofit entities, REITs and public companies. HUD agrees 
that the reference to hospital nonprofit entities without clarifying 
the approach for other nonprofit organizations may increase this 
confusion.
    In response to these comments, HUD has revised the language to 
clarify that unless members of a nonprofit board of directors are 
exercising day-to-day control over a Specified Capacity or a Covered 
Project, they need not submit for previous participation review. HUD 
does not believe the same clarity can be achieved through regulation 
with respect to REITs or public companies, nor does HUD believe that 
any regulation can keep pace with the ever-changing corporate 
organizational conventions. Therefore, HUD clarifies in the Processing 
Guide the requirements for REITs and public companies. The Processing 
Guide allows HUD to adhere to the concept expressed in the regulations 
that those individuals and entities that exercise control over a 
Specified Capacity and Covered Project are subject to previous 
participation review.
    Comment: Explicitly exclude certain entities. Commenters stated 
that the following should be explicitly excluded from review:
     Any passive investor (e.g., limited partner), regardless 
of whether the funding involves tax credits, provided that the entity 
is not on the General Service Administration's (GSA) most recently 
published list of parties debarred, suspended or disqualified by 
federal agencies (the ``GSA List'');
     Any publicly-traded corporation, REIT, or other entity 
that is listed on any exchange regularly reported in the Wall Street 
Journal, provided that such entity is not on the GSA List; and
     Any entity subject to regulatory oversight by the 
Securities Exchange Commission (SEC), the Federal Trade Commission 
(FTC), the Office of the Comptroller of the Currency (OCC), the Federal 
Deposit Insurance Corporation (FDIC) and/or the Federal Reserve Board 
(FRB), provided that such entity is not on the GSA List.
     Directors of nonprofit boards, including PHA boards, who 
have no day-to-day responsibility or authority. Commenters stated that 
PHA and nonprofit boards typically consist of volunteers, and for PHAs, 
often at least one public housing resident.
    HUD Response: These concerns have already been largely addressed by 
HUD's exclusion of passive investors, publicly traded companies and 
nonprofit entities. Although HUD does not believe that its previous 
participation regulations should categorically exclude entities 
overseen by other Federal regulatory entities (whose oversight may not 
adequately account for HUD programs and whose standards for oversight 
may change), HUD is nevertheless open to further considering (on a 
case-by-case basis, or perhaps in future issuances on the previous 
participation review process) that the review sought by the regulations 
is achieved through the oversight conducted by these other entities.
    Comment: Require an entity's attorneys to certify as to who the 
controlling participants of the entity are. A commenter suggested that 
in order to increase the efficiency and accuracy of HUD's determination 
as to the individual who exercises operational or financial control 
over an entity, HUD should require the entity's attorneys to certify as 
to who such individuals are.
    HUD Response: Although HUD does not believe that this process is 
appropriate for regulation and HUD is not imposing this requirement at 
this time, an attorney certification may be a valuable tool for 
determining control and HUD is open to further discussions and 
consideration on this topic in the future.
    Comment: Suggestions for limited liability companies (LLCs), 
limited partnerships (LPs), nonprofit entities, REITs and management 
companies. Commenters made several suggestions regarding LLCs, LPs, 
nonprofit entities, REITs and management companies that to some extent 
overlap with and to some extent vary from the comments summarized 
above. A commenter asserted that variations from standard ownership 
structures rarely occur and that the following individuals be 
identified for review: Managing members of LLCs and the person with 
controlling stock in the LLC; the person with control of 51 percent or 
more general partner of a LP; the person who controls 51 percent or 
more of the parent entity of a REIT or the person who voted in public 
filings; and the individual or entity owning 51 percent or more of the 
management company. The commenter stated that nonprofit entities will 
likely ``follow the same rules as LLCs or general partnerships,'' but 
does not explain what this means or how to apply the rules for LLCs or 
general partnerships to a nonprofit corporation (that does not 
typically have owners, majority members or partners).
    HUD Response: HUD appreciates the suggestions and the Processing 
Guide addresses these concerns. This comment also illustrates the 
difficulty that HUD faces with leaving only to regulations to address a 
changing lending market, and changing structures of lending/financial 
institutions. Although most organizational structures may align along 
certain conventions, variations are not infrequent. HUD needs 
regulations that are sufficiently flexible to be used in all 
scenarios--or at least all but those very few worthy of a waiver. This 
is not

[[Page 71250]]

only impossible but, in fact, probable that if HUD sets up overly 
detailed regulations based on contemporary organizational structures, 
corporate practice will be able to easily side-step the rule. To 
illustrate, consider that no person owns 51 percent or more of a 
company and two business partners each owns 49 percent of a company and 
a third owns 2 percent. The question therefore arises as to whether no 
partner should be identified for previous participation review. HUD 
believes that the commenter does not mean to suggest that no one 
controls an entity if they do not own 51 percent of that entity. 
Indeed, the 25 percent ownership, long-established as a threshold for 
control for HUD's purposes, has been side-stepped on a number of 
occasions by complicated organizational structures that appear to limit 
any individual's control to 24 percent or less or obscure related 
interests. It is exactly for this reason that HUD believes the best 
place for this level of detail is in the Processing Guide, rather than 
in the regulations themselves, and again HUD reminds its prospective 
participants that the Guide will be subject to advance notice and 
public comment if substantive changes are made.
    Comment: Clarify how HUD will determine control of finances or 
operational decisions. Commenters stated that in Sec.  200.216(b), HUD 
did not clarify how it would determine whether an individual 
participating actually controls the financing or operational decisions 
of the participant. Another commenter stated that proposed Sec.  
200.216(a)(7) does not clarify how HUD proposes to determine whether 
the hospital Board of Directors and its executive management have 
control over the finances or operation of a Covered Project.
    HUD Response: The Processing Guide addresses the commenters' 
concerns. Again, HUD anticipates that as corporate conventions evolve, 
who controls an organization may change. HUD does not seek to lock onto 
the corporate structures of today but rather establish a framework 
under which those who control a Covered Project receive adequate 
review.
    Comment: Remove reference to general contractor. Commenters stated 
that, in Sec.  200.216(a)(6), reference to management agents and 
general contractors lacks clarity.
    HUD Response: The Processing Guide elaborates on these terms.
    Comment: Provide Controlling Participant opportunity to appeal any 
adverse decision against the Controlling Participant: Commenters stated 
that the final rule should allow the Controlling Participant an 
opportunity to appear in person before the committee/officer to present 
its documents/arguments. Another commenter stated that it is essential 
that Controlling Participants have a right to appeal, and that HUD 
should inform the applicant of how to appeal in its notice informing 
the participant of the disapproved, limited or conditional approval. 
The commenter stated that the notice should include procedures for the 
appeal, identify to whom the appeal should be directed, and specify the 
information to submit with the appeal. The commenter further stated 
that HUD should also be required to acknowledge the appeal and make a 
determination within 30 days of receipt, which is the same timeframe to 
file an appeal provided for the Controlling Participant.
    HUD Response: HUD does not believe an in-person appearance is 
necessary. Given the changing nature of the workplace and increasing 
technology, HUD submits that it is not necessary for everyone providing 
input on a reconsideration of a determination to be physically in the 
same room. In addition, just as the changing nature of corporate 
structures may affect who a Controlling Participant is under future 
corporate conventions, it is not clear that one structure for seeking 
reconsideration of a HUD determination will be appropriate in 
perpetuity. As HUD offices and positions change, the person/persons 
responsible for reconsideration requests may also change. HUD agrees 
with the commenters that an opportunity for reconsideration is 
essential and has structured the final rule accordingly. The final 
regulations make clear that applicants will be given advance written 
notice of the reconsideration and an opportunity to submit supporting 
materials. This means that the matter will not be reconsidered prior to 
the date provided so that any arguments and materials provided by the 
participant can be considered. In response to these and similar 
comments, the final rule specifies that notice of reconsideration shall 
provide at least 7-days advance notice, which is meant to provide a 
meaningful opportunity for the submitter to provide supporting 
materials. HUD has also included in the Processing Guide that HUD will 
send the required notice of reconsideration no later than 30 days after 
receipt of the request for reconsideration.
Triggering Events (Sec.  200.218)
    Comment: Avoid duplication of review. A commenter stated that in 
Sec.  200.218(f), HUD provides only one opportunity to avoid 
duplication of review, under ``sale of a HUD Held Mortgage'' but urged 
HUD to consider other circumstances under which HUD might avoid 
duplicative review. The commenter stated that the industry feels there 
is significant duplicative review for ``well-known established 
institutional entity already familiar to HUD.'' Identifying additional 
opportunities to avoid duplicative review would alleviate burden for 
industry partners and HUD staff alike.
    HUD Response: HUD believes that the exclusion of non-controlling 
members and the other exclusions set forth in the Processing Guide help 
to reduce duplication of review. HUD is interested in continuing 
conversations with the industry to identify additional ways to reduce 
duplication and welcomes additional suggestions.
    Comment: Do not make 2530 process applicable to note sale bidder. A 
commenter stated that Sec.  200.218(e) makes the 2530 process 
applicable to a mortgage note sale bidder. The commenter stated that 
such entities are looking to purchase the note/operate the project 
outside of the HUD system and HUD risk factors in that instance appear 
to be irrelevant where HUD will no longer have involvement with the 
note or the asset. The commenter stated that in the event there may 
occur something like a housing assistance payment (HAP) assignment down 
the road, the clearance for that purpose can be handled at that time.
    HUD Response: HUD agrees in part and has revised Sec.  200.218 in 
response to this comment. HUD notes that note sale bidders and bidders 
in foreclosure sales have been and will continue to be vetted by HUD. 
However, note sale bidders have not been required to complete a full-
previous participation submission as part of this vetting. In contrast, 
bidders at foreclosure sales or other forms of property disposition are 
often required to operate the projects with continued use restrictions 
administered by the Office of Housing and thus in many instances have 
been required to undergo previous participation review. Due in part to 
the variable circumstances surrounding such sales, and because the 
statutory and regulatory authorities governing note sales and property 
dispositions provide broad discretion for HUD to set the requirements 
for such sales, the requirements are set forth in instructions commonly 
referred to as the ``Bidder Qualification Statement'' or ``bid kit.'' 
HUD has revised the regulations to clarify that the requirements for 
note sales and property dispositions continue to remain governed by 
their program

[[Page 71251]]

requirements, including without limitation the requirements set forth 
in the Bidder Qualification Statement or other instructions. These 
documents may require some vetting of previous participation of 
applicants, but depending on the individual circumstances and the time 
pressures associated with such sales, the Bidder Qualification 
Statement or other instructions may dictate modifications to the 
process, including for example, a shortening of the period to request a 
reconsideration. The final regulations continue to allow HUD to require 
through the note sale and foreclosure sale bidder qualification 
requirements, appropriate vetting of bidders in accordance with the 
relevant statutory and regulatory authorities.
    Comment: Limit application of funds to those administered by the 
Office of Housing. A commenter suggested limiting the language in Sec.  
200.218(b) relating to ``[a]n application for funds provided by HUD, 
such as but not limited to supplemental loans or flexible subsidy 
loans'' to such funds providing pursuant to a program administered by 
HUD's Office of Housing. Another commenter similarly suggested limiting 
this triggering event to an application for funds in HUD multifamily 
programs.
    HUD Response: It is HUD's intention to limit these regulations to 
those programs administered by HUD's Office of Housing, and this final 
rule reflects this limitation.
Previous Participation Review (Sec.  200.220)
    Comment: Clarify scope of review. Commenters stated that HUD's 
proposed rule indicates that the FHA Commissioner's previous 
participation review ``shall include previous financial and operational 
performance in federal programs that may indicate a financial or 
operating risk . . .;'' and that the Commissioner ``shall consider 
financial stability; previous performance in accordance with [HUD 
requirements]; general business practices and other factors . . . .'' 
The commenters stated that if HUD is truly committed to ensuring that 
the 2530 process does not become even more burdensome and overly 
inclusive the 2530 review should be limited to evaluating the 
Controlling Participant's performance as it relates solely to the 
information required on the 2530 form for the Controlling Participant's 
Covered Projects.
    HUD Response: HUD agrees in part and the definition of risk that 
has been added at this final rule stage addresses these comments. 
However, regardless of the regulations, HUD is limited to collecting 
the information for which it has PRA approval. If HUD wishes to change 
the form 2530 or ask for additional information, it must complete the 
PRA process, including the requirement for public comment, for a new 
form.
    Comment: Provide standards for disapproval. A commenter stated that 
the scope of review needs some specific details/clarification and that 
HUD should consider addressing standards for disapproval.
    HUD Response: The standards for disapproval remain the same as they 
have always been: An unacceptable risk to HUD. In response to this 
comment and similar other comments, HUD has revised the language in 
Sec.  200.220 and separated out a more focused definition of risk to 
clarify the scope of review.
    Comment: Distinguish between prior ownership and current ownership. 
Commenters stated that organizations that purchase distressed HUD 
properties for the purpose of stabilizing and improving them have 
periodically gotten hung up by flags that relate to the actions and 
omissions of prior owners from whom the properties were purchased. 
Commenters stated that HUD needs to improve its systems for recognizing 
and distinguishing between issues related to prior ownership and issues 
of current owners.
    HUD Response: HUD appreciates this comment and the commenter's 
raising awareness on this issue. In response to these comments and 
comments received on the Processing Guide, the Processing Guide has 
been revised to elaborate on these issues. HUD continues to work on 
standardizing asset management practice and improving all aspects of 
the previous participation review. HUD acknowledges that there has been 
inconsistency and unintended consequences in the past. However, flags 
are issued to ownership entities, not to properties. Flags are not to 
be issued to new owners for violations of a prior owner. If this has 
happened, it is in error and the owner should contact the appropriate 
HUD office to resolve the flag.
    Comment: Define general business practices and other factors. A 
commenter stated that proposed Sec.  200.220(a)(1) states that the 
Commissioner's review shall consider undefined ``general business 
practices and other factors'' in determining whether a Controlling 
Participant is expected to operate a Covered Project in a manner 
consistent with HUD's purposes. The commenter stated that this term 
needs to be defined.
    HUD Response: As provided in response to similar comments, the 
final rule includes a more focused definition of risk and has 
eliminated this ``general business practices'' language. Further, HUD 
reiterates that any information HUD collects in connection with the 
previous participation review is subject to the PRA and the PRA 
process, giving the public an opportunity for comment.
    Comment: Identify risk factors and define impermissible risk. A 
commenter stated that current regulations include a section titled 
``Content of Certifications'' which indicates a portion of the risk 
elements that HUD will review, but that the proposed rule does not 
include this detail and is relatively silent on the exact nature of 
HUD's expectations regarding what constitutes Impermissible Risk.
    HUD Response: HUD's more focused definition of risk addresses the 
commenter's concern.
    Comment: Have the review include reviews of credit history. 
Commenters stated that the proposed rule would have authorized HUD to 
take into account ``mortgage defaults, assignments, or foreclosures'' 
[not limited to HUD direct loans or FHA-insured loans] and ``instances 
of noncompliance with the regulations, programmatic or contractual 
requirements of HUD.'' The commenters stated that recently some of its 
members have observed sales of HUD-assisted properties at prices that 
are above their own estimates of long-term economic viability, 
sometimes to investors with little experience in real estate or 
assisted property management, and that some of these same properties 
subsequently are found out of programmatic compliance due to 
insufficient funding for rehabilitation, maintenance, or deposits to 
replacement reserves. The commenters stated while they do not support 
deeper review of proposed transaction terms, they urge that HUD conduct 
consistent reviews on credit history and past programmatic compliance 
(when available) to better guard against purchasers with a record of 
default or failure to meet rehabilitation and maintenance requirements 
(if HUD is not otherwise conducting a Transfer of Physical Assets 
(TPA), assignment of the HAP contract, or other review).
    HUD Response: These previous performance regulations address the 
disclosure of deficiencies in past performance; they are not the 
vehicle for highlighting the absence of sufficient relevant experience. 
Disclosure of overall experience and capacity is addressed in other 
elements of applications related to a particular triggering event. HUD 
continues to make improvements in its various application

[[Page 71252]]

processes, and welcomes suggestions for further improvements in that 
respect.
    Comment: Clarify ``extent requested by HUD.'' A commenter stated 
that the language in Sec.  200.220(a)(3) ``to the extent requested by 
HUD'' is too broad and open-ended. HUD needs to clarify their 
requirements.
    HUD Response: ``To the extent requested by HUD'' refers to the 
information requested on PRA-authorized forms, such as the Form 2530.
    Comment: Clarify meaning of ``limit'' or ``otherwise condition'' 
approval. Commenters stated that in Sec.  200.220(b)(1) HUD must 
clarify what it means to ``limit'' or ``otherwise condition'' approval 
for the Controlling Participant to continue to participate in a Covered 
Project. The commenters stated that such limits and/or conditional 
approvals should specify the time limits associated with each 
alternative. The commenters stated that in Sec.  200.220(d)(1) HUD 
should define what it means to ``condition'' or ``limit'' approval and 
also specify the time period for such actions. The commenters stated 
that such time periods should be reasonably related to the rationale 
for such a determination, and clearly articulated by HUD.
    HUD Response: The concept of conditional or limited approval is an 
accommodation on HUD's part to provide a middle ground between 
disapproval and approval. Whereas current practice withholds approval 
until all ``flags'' are lifted, conditional approval is intended to 
clarify the path forward. HUD's intention is to provide the conditions 
necessary for approval in such circumstances. The regulations cannot 
contemplate all potential scenarios for limited or conditional 
approval. The revised Processing Guide elaborates on this concept.
    Comment: Provide timing for identification of a Controlling 
Participant when a Triggering Event occurs. Commenters stated that 
where proposed Sec.  200.220(a)(3) requires that an applicant in 
connection with a Triggering Event ``shall identify the Controlling 
Participants,'' HUD should provide greater clarity regarding the timing 
of HUD's determination and the basis for that determination. The 
commenters stated that it would be more efficient and provide greater 
predictability for applicants if HUD would clearly identify who, at a 
minimum, are the ``Controlling Participants'' of a project, such as the 
general partner of a limited partnership and the managing member and 
managers of a limited liability company.
    HUD Response: The Processing Guide addresses the commenters' 
concerns.
    Comment: Specify time for HUD to conclude previous participation 
review, and provide notification of conclusion of review. Commenters 
stated that at proposed Sec.  200.220(b)(2) HUD does not specify the 
timeframe in which HUD shall provide notice of a previous participation 
determination. The commenters stated that HUD should provide such 
notice within 14 calendar days of reaching such a determination. The 
commenters further stated that the proposed rule does not specify which 
other parties, aside from the FHA-approved lender in the transaction, 
may receive notice of a previous participation determination from HUD. 
The commenters stated that presumably only those parties actually 
involved in the transaction at issue should be notified, and, if this 
is correct, HUD should clarify this in its rule. The commenters further 
stated that HUD should be mindful of concerns about privacy and 
disclosure of trade secrets as well as releases of information that may 
be pre-decisional and prejudicial, particularly because HUD's 
determination may not necessarily be based on a complete record if the 
Controlling Participant has yet to appeal HUD's decision and present 
additional evidence and HUD has not adequately weighed such additional 
material.
    HUD Response: HUD is not aware of problems in providing 
notification to parties after a determination has been made and 
believes current practice is providing timely notice. However, it is 
difficult to determine how long it will take HUD to make a 
determination in any particular transaction because the facts of each 
transaction, and therefore the review necessary, vary so widely. HUD is 
mindful of privacy and other concerns and continues to be held bound by 
such limitations on its authority and practice. Except to the extent 
that HUD is an agency of the Federal government and individuals' 
expectations for privacy are limited among Federal government actors 
once information is disclosed to the federal government, HUD does not 
foresee sharing information on determinations with parties not involved 
with a transaction or their agents.
    Comment: Clarify what is meant by ``any federal program.'' 
Commenters stated that the reference to ``any federal program'' should 
be clarified because it is unclear which programs HUD intends to cover. 
Commenters stated that currently, there is much confusion regarding 
HOME Investment Partnerships (HOME) program, the Community Development 
Block Grant (CDBG) program, LIHTC and other programs that may be 
essentially a pass-thru of Federal funds via a State or local 
jurisdiction. The commenters asked whether it is HUD's intent to review 
these properties as part of previous participation review and, if not, 
a clarification needs to be included.
    A commenter stated that the reference to ``federal programs'' in 
the second sentence of Sec.  200.220(a)(1) should be limited to the 
programs administered by HUD's Multifamily Housing Office.
    Another commenter stated that while previous performance in Federal 
programs is relevant for determination of risk, the proposed language 
allows for too detailed a review for the purposes of the regulations. 
The commenter specifically stated the language includes financial and 
operational performance in non-federal environments and general 
business practices. The commenter stated that Sec.  200.220(a) should 
be changed as follows: ``The Commissioner's review of a Controlling 
Participant's previous participation shall include previous financial 
and operational performance in federal programs that may indicate a 
financial or operating risk in approving the Controlling Participant's 
participation in the subject Triggering Event. The Commissioner's 
review shall consider previous performance in accordance with HUD 
statutes, regulations and program requirements; and other factors that 
indicate that the Controlling Participant could not be expected to 
operate the project in a manner consistent with furthering the HUD's 
purposes.
    HUD Response: All HUD and other Federal funding come from a single 
source--the taxpayer. To the extent HUD has the capacity and capability 
of ascertaining and reviewing an applicant's previous stewardship of 
any Federal funds, HUD intends to do so. However, HUD is limited in two 
important ways: (1) Such capabilities are currently limited; and (2) 
any additional information that HUD wishes to collect from applicants 
or other filers must complete the PRA process.
    Comment: Clarify what it means to be ``restricted from doing 
business.'' Commenters stated that in Sec.  200.220(c)(2)(i) HUD should 
clarify what it means to be ``restricted'' from doing business with any 
other department or agency of the federal government, because this term 
is undefined and could conceivably capture relatively minor limitations 
on a Controlling Participant's activities. The commenter stated that 
this ambiguous basis for disapproval also fails to consider the nexus 
between the

[[Page 71253]]

restriction and the relevant HUD programs.
    HUD Response: HUD agrees and the final rule reflects this change.
    Comment: Clarify what is a ``record'' of ``significant risk.'' A 
commenter stated that in Sec.  200.220(c)(2)(ii) HUD should clarify 
what constitutes a ``record'' of ``significant risk'' that would form 
the basis for disapproval, and that otherwise the regulation would be 
at risk of being found void for vagueness.
    HUD Response: To address these and similar comments, HUD has 
included a more focused definition of risk in the final rule.
    Comment: Specify time for withholding previous participation 
determination. Commenters stated that in Sec.  200.220(d)(2) HUD should 
clarify how long it may temporarily withhold issuing a previous 
participation determination so as not to interfere with transactions or 
unnecessarily hinder the business decisions of prospective 
participants.
    HUD Response: It is difficult to put a time limit on determinations 
because the facts of each transaction, and therefore the review 
necessary may vary so widely from one transaction to the next. HUD 
commits to reach a final decision as promptly as possible given the 
nature of the transaction and the documentation that HUD has received.
    Comment: Clarify scope of expected remedial measures. A commenter 
stated that in Sec.  200.220(d)(3) HUD should clarify the scope of 
expected remediation or remedial measures that Controlling Principals 
may be required to undertake. The commenter stated that the language in 
this section of ``to the Commissioner's satisfaction'' is incredibly 
vague and open-ended and must be adequately defined. The commenter 
stated that if this phrase is not clarified Controlling Participants 
will not have adequate notice of the regulatory requirements they are 
expected to abide by.
    HUD Response: The concept of remedial measures is an accommodation 
on HUD's part to provide a middle ground between approval and 
disapproval. Any remedial measures must be targeted at reducing the 
risk posed by the subject Controlling Participant. The more focused 
definition of risk in the final rule and addresses the commenter's 
concern and the Processing Guide elaborates on this concept.
    Comment: Limit look back at prior performance to 10 years. 
Commenter stated that HUD should clarify that it is only reviewing 
Previous Participation for the past 10 years, which is the current 
requirement per the HUD 2530 Form. The commenters stated that HUD has 
not specified how far back it will look when evaluating the previous 
participation record of Controlling Participants, and they stated that 
they saw no reason for HUD to depart from the ten (10) year period 
specified in the existing regulations.
    HUD Response: The Processing Guide reflects that HUD is retaining 
the look-back period with respect to information gathering for 10 
years. However, the Processing Guide notes that HUD reserves the right 
to review and consider a participant's previous participation in a 
Federal project beyond the 10-year period when determining whether to 
approve participation in the project associated with an application. 
For example, as stated in the Processing Guide, Tier 1 flags reflect 
such a high degree of risk that HUD reserves the right to consider 
those violations, in the context of the Controlling Participant's other 
participation, even beyond a 10-year period.
    Comment: Clarify obligation of Controlling Participant to file HUD 
Form 2530. A commenter stated that HUD should clarify the obligation of 
a Controlling Participant to file the HUD form 2530 and reference the 
form in the regulations.
    HUD Response: HUD has determined that it is inappropriate to 
reference a specific form in the regulations. As discussed earlier in 
this preamble, HUD wants to retain the flexibility to develop and 
authorize other forms, through the PRA process, if HUD determines 
another form or more tailored 2530 form is appropriate.
    Comment: Rule expands not reduces scope of review. A commenter 
stated that Sec.  200.220 expands HUD's ability to increase the scope 
of the previous participation review by determining, on an ad hoc 
basis, what the HUD reviewer may deem a ``significant risk'' at any 
particular time. The commenter stated that the proposed rule does not 
clarify what ``financial and operational performance'' HUD would 
consider ``a financial or operating risk.'' The commenter stated that 
in order to avoid arbitrary or capricious determinations, HUD must 
provide more specific guidance on what is to be reviewed and how HUD 
will determine what is considered a ``financial or operating risk'' or 
a ``significant risk.'' The commenter stated that in the preamble to 
the proposed rule, HUD sets forth examples of unacceptable risks, which 
include those currently existing in Sec.  200.230, such as: (1) 
Mortgage defaults, assignments or foreclosures; (2) suspension or 
termination of payments under any HUD assistance contract; (3) 
significant work stoppages; and (4) instances of noncompliance with the 
regulations, programmatic or contractual requirements of HUD or a State 
or local government's Housing Finance Agency in connection with an 
insured or assisted project. The commenter asked that the examples be 
incorporated into the regulatory text to provide additional clarity on 
the types of ``significant risks'' for which HUD will be reviewing.
    HUD Response: HUD has addressed these concerns by including a more 
focused definition of risk in the final rule.
Request for Reconsideration (Sec.  200.222)
    Comment: Identify who serves on Review Committee. Commenter stated 
that the proposed rule indicates that requests for reconsideration 
shall come before ``. . . a review committee or reviewing officer . . . 
.'' Commenters stated that the final rule should identify the title(s) 
of the persons that may serve on the review committee or as a reviewing 
officer; require participation by the Deputy Assistant Secretary for 
Multifamily Housing (the ``DAS'') or the designee of the DAS, and 
expressly exclude from the committee/reviewing officer any HUD employee 
or official that was involved in rendering the initial disapproval or 
limited/conditioned approval.
    HUD Response: HUD does not agree that specific titles or positions 
should be identified in the regulations, nor does HUD believe that 
reconsiderations should necessarily rise to the level of involvement by 
the DAS. Further, HUD does not believe that the individuals reviewing 
the initial applications should be wholly excluded from the 
reconsideration process, as they are the individuals in HUD with the 
greatest knowledge of the submission. However, HUD does agree that the 
submission should be reviewed and reconsidered by one individual. As a 
result, HUD has provided in the final rule that reconsideration 
decisions shall not be rendered by the same individual who rendered the 
initial decision.
    Comment: Specify time frame for reconsideration review. Commenters 
stated that HUD should specify the timeframe in which the HUD review 
committee or reviewing officer shall schedule a review of any requests 
for reconsideration, because in the past there were no deadlines 
incumbent on HUD to resolve 2530 flags, which resulted in closing 
delays, delayed property improvements, and losses of tax credits and 
investment dollars in a number of cases. The commenters

[[Page 71254]]

recommended that HUD schedule such a review no later than 14 calendar 
days following receipt of a request for reconsideration.
    HUD Response: As HUD noted in response to a similar comment, 
formalizing one reconsideration structure in perpetuity in the 
regulations is not a beneficial approach. However, HUD has provided in 
the Processing Guide that HUD will send the required notice of 
reconsideration no later than 30 days after receipt of the request for 
reconsideration.
    Comment: Impose time limit on review. Commenters stated that in the 
interest of ensuring that decisions do not languish and resolution of 
open matters is achieved in a timely fashion, HUD should impose an 
upper time limit during which the review committee or reviewing officer 
may affirm, modify or reverse the initial decision. Commenters stated 
that a reasonable time frame would be 30 days following receipt of the 
Controlling Participant's submission of supplemental materials in 
support of reconsideration.
    HUD Response: As HUD noted in response to a similar comment, it is 
difficult to put a time limit on reviews because information from 
transaction to transaction varies so widely.

B. Comments on the Supplemental Notice of Proposed Rulemaking and 
Processing Guide

1. General Comments
    Similar to comments that commenters made on the proposed rule, 
commenters commended HUD for the additional changes proposed in the 
Supplemental Notice and Processing Guide, but recommended further 
changes. A few commenters sought more specificity and clarity. The 
signature issues raised by the commenters are as follows:
    The Processing Guide provides or does not provide the specificity 
requested. Several commenters supported HUD's approach to supplement 
the updated previous participation regulations with a guidance 
document. A commenter stated that the Processing Guide: (i) Includes 
details about the 2530 process; (ii) is referenced in the regulation; 
and (ii) is subject to public comment for significant changes. The 
commenter stated that as a precedent for this approach, HUD cites 
regulations that require publication in the Federal Register and a 30-
day comment period for proposed changes to multifamily mortgage 
insurance premiums (MIPs). The commenter stated that it is familiar 
with this process, as well as HUD's Multifamily Accelerated Processing 
(MAP) guide, which provides detailed instructions to lenders about the 
application, endorsement and closing processes for MAP loans. The 
commenter stated that, in its previous comment letter on the proposed 
rule, the commenter stated that it asserted that stakeholders must be 
able to find all 2530 policies in one place. The commenter stated that 
it previously commented that a reasonable person should be able to find 
everything they need to know about the previous participation review 
with minimal effort. The commenter stated that by referring to the 
Processing Guide in the actual regulation and including a mandatory 
notice and comment period for significant changes, HUD has satisfied 
the commenter's concerns.
    In contrast to this commenter, a few commenters stated that the 
proposed Processing Guide needed additional detail and specificity. The 
commenters stated that the Processing Guide provide HUD too much 
discretion to identify Controlling Participants. The commenters stated 
that this lack of clarity adds complexity and significant time for both 
HUD staff and industry applicants in reviewing organization documents, 
evaluating the role of executive management positions and debating the 
issue of ``control.'' The commenters asked that HUD re-issue the 
proposed rule and Processing Guide for additional public comment. 
Another commenter similarly stated that because the proposed 
regulations and Processing Guide are interdependent policy documents, 
and HUD should re-issue the proposed rule concurrently with the 
Processing Guide and provide the public with an additional 60-day 
opportunity to comment on the complete set of policies and procedures 
in order to provide greater transparency and commitment to the 
regulatory process.
    HUD Response: HUD agrees with the commenters that additional detail 
can be included in the Processing Guide and has revised the Processing 
Guide in response to the specific issues identified in the comments 
submitted. The remainder of this section details the specific issues 
raised and HUD's responses. HUD declines to reissue the rule and 
Processing Guide for further public comment. However, HUD does not need 
to issue a formal call for public comment. HUD program participants are 
welcome at any time to propose changes to the rule, 2530 Form, and 
Processing Guide that they believe will improve the previous 
participation process and HUD will always consider such suggestions.
    Convene a meeting with industry before issuance of the final rule 
and Processing Guide. A commenter stated that it appreciated HUD 
tackling the 2530 process, but the commenter expressed concern with the 
discretion granted to HUD to make determinations and sought uniformity 
and standardization in implementing changes, especially with respect to 
the determination of who constitutes ``controlling participants'' and 
the placement and permanence of flags. The commenter urged HUD to 
convene a meeting as soon as possible with all interested parties to 
discuss concerns and further encouraged HUD to consider making 
additional revisions to the proposed regulations to address new 
concerns raised by comments to the Processing Guide. The commenter also 
cautioned HUD to ensure appropriate delegations of authority and 
coordination with the MAP Guide, RAD Notices, the APPS Guide and 
Closing Guide. The commenter urged HUD to consider how the revised 
Previous Participation policies and requirements will interact with 
existing HUD program requirements.
    HUD Response: HUD agrees that uniformity and standardization are 
necessary in the implementation of these regulations and Processing 
Guide. To the extent such standardization can be assisted with greater 
clarity and specificity in the Processing Guide, HUD has attempted to 
revise the document accordingly. HUD has also coordinated revisions 
with policies in the MAP Guide and with HUD programs. HUD also agrees 
that implementation of the regulations and Processing Guide warrants 
meetings, discussions and trainings with both HUD staff and with 
interested outside parties. HUD notes that it has held numerous 
meetings over the past several years, as detailed in the Proposed Rule, 
seeking industry input. HUD has also participated in numerous 
conference panels and other discussions where industry concerns and 
opinions have been discussed. HUD does not believe that a meeting is 
necessary at this time to discuss additional comments to the 
regulations and Processing Guide. Interested parties have had numerous 
and sufficient opportunities, including through this regulatory 
process, to voice their concerns and explain their comments.
    Appropriate comment period for changes to Processing Guide. A few 
commenters stated that HUD should provide a minimum period of 60 days 
for public comment on significant changes to the Processing Guide. 
Another commenter stated that it supported HUD's Processing Guide 
approach but that in the absence of a

[[Page 71255]]

definition of what constitutes a ``significant'' change, HUD should err 
on the side of transparency and disclosure.
    HUD Response: HUD maintains the minimum comment period of 30 days 
as proposed in the May 17, 2016, Supplemental Notice of Proposed 
Rulemaking. A 30-day minimum comment period is the typical minimum 
comment period that HUD uses in other regulations, such as the change 
in premiums as provided in 24 CFR 207.254. HUD emphasizes that 30 days 
is the minimum period, and HUD has the discretion to increase the 
comment period if it determines a longer period would be beneficial.
    Establish a streamlining process for higher volume participants. A 
commenter encouraged HUD to adopt a process that would allow a 
participant with a higher volume of HUD transactions and who has a 
strong track record of compliance and performance to submit a single 
annual report.
    HUD Response: HUD finds this idea interesting but does not have the 
systems infrastructure to appropriately implement this idea at this 
time. Further, HUD believes the changes being made through these final 
regulations and Processing Guide provide a significant reduction in 
burden and create significant challenges in implementation independent 
of the additional changes the commenter requests.
    Provide specific guidance on HUD responsibility for review. A 
commenter stated that inconsistent application and interpretation of 
requirements between different HUD offices in the previous 
participation review process has long been a concern. The commenter 
stated that HUD should provide detailed and specific guidance on timing 
and locus of responsibility for review and approval of initial 
applications and appeals. Another commenter urged HUD to provide 
contact information for the HUD staff contacts who are involved in the 
previous participation approval and reconsideration processes.
    HUD Response: HUD agrees that standardization and uniformity are a 
goal in implementation. To the extent such standardization can be 
assisted with greater clarity and specificity in the Processing Guide, 
HUD has attempted to revise the document accordingly. HUD notes that 
the Processing Guide includes tables stating the specific roles within 
HUD that have the responsibility for approving participants with flags, 
disapproval of participants and reconsideration. The Processing Guide 
has also been revised to include a link to a Web site with more 
specific contact information. HUD also notes that the Previous 
Participation review is only one, limited aspect of HUD review of 
applicants and transactions. Previous Participation review cannot 
substitute for underwriting and other HUD application reviews.
    Update MAP Guide. A commenter requested that the MAP Guide be 
updated as soon as possible after the Previous Participation final rule 
is issued.
    HUD Response: HUD believes the MAP Guide is consistent with these 
final regulations and Processing Guide. If commenters know of 
inconsistencies, they are always welcome to bring them to HUD's 
attention.
    Importance of training for HUD staff. A commenter stated that it 
recognizes that training for HUD staff on how to interpret and apply 
the new regulation and Processing Guide is important, and the commenter 
offered assistance with providing the training. The commenter stated 
that it appreciated the extensive work HUD has undertaken to update 
this regulation and some of the appropriate flexibility that is to be 
incorporated in HUD's administration of the previous participation 
review.
    HUD Response: HUD fully agrees with the commenter and HUD staff 
will undergo training to ensure they properly implement the new 
regulations.

B. Specific Comments

2530 Form
    Retain the current 2530 Form. A commenter stated that it 
understands that HUD is proposing to eliminate existing 2530 Form. The 
commenter urged HUD to retain the clarity and predictability that was 
intrinsic to the prior 2530 Form and instructions.
    HUD Response: HUD did not propose and is not proposing to eliminate 
the 2530 Form. As HUD responded to a similar comment submitted on the 
proposed rule, HUD advised that, based on experience under the new 
regulations, HUD may propose alternative versions of the 2530 form more 
tailored to a specific HUD program. However, at this point in time, HUD 
is not proposing any alternative versions and HUD is not proposing 
elimination of the 2530 Form.
    Exclude defaults that are beyond the participant's control. A 
commenter stated that the Processing Guide directs participants to 
disclose on Schedule A defaults in housing projects participating in 
other Federal, State or local government program but should recognize 
that lenders and other parties are often required to ``declare'' 
technical defaults that are quickly corrected. The commenter also 
suggested that HUD should exclude defaults that were beyond the 
participant's reasonable control.
    HUD Response: HUD has revised the Processing Guide's instructions 
on Schedule A to indicate that only defaults declared and remaining 
after applicable cure periods should be disclosed. HUD has also revised 
the Processing Guide to include considerable guidance as to when 
participation should be approved despite the presence of flags and 
lists the default being outside the participant's control as a factor 
to be considered and documented.
Definitions
    Support for definition of ``Risk.'' A commenter expressed support 
for the definition of ``risk'' and stated that, in its previous comment 
on the proposed rule, it requested that, ``HUD should clearly explain 
in the rule what constitutes acceptable and unacceptable risks to a 
property's finances and operations.'' The commenter stated that HUD 
addressed its concerns by proposing a definition of risk in the 
regulatory text, and listing specific types of flags in the Processing 
Guide.
    HUD Response: HUD is gratified that it was able to address the 
commenter's concern.
    Clarify definition of Covered Projects. Two commenters recommended 
that HUD revise the Processing Guide to expressly indicate whether 
``Covered Projects'' include non ``Subsidized Projects'' with no HUD-
insured/HUD-held loan or HUD subsidy, but with a HUD Use Agreement or 
similar document (e.g., deed) imposing HUD use restrictions. The 
commenters asked, for example, whether a project subject to an Interest 
Reduction Payment (IRP) decoupling Use Agreement (236(e)(2) Use 
Agreement), but where the IRP has already been exhausted, a ``Covered 
Project'' subject to 2530 review. The commenters also asked whether a 
project subject to an Emergency Low-Income Housing Preservation Act 
(ELIHPA) or Low-Income Housing Preservation and Resident Homeownership 
Act (LIHPRHA) Use Agreement, but with no HUD insured/held loan and no 
remaining HUD subsidy, is a ``Covered Project.''
    HUD Response: HUD has revised the Processing Guide to state more 
clearly that projects with Use Agreements administered by HUD's Office 
of Housing are Covered Projects. As such, the examples the commenter 
lists would be Covered Projects.

[[Page 71256]]

    Repeat definitions in Processing Guide. A commenter stated that it 
would be beneficial and remove any room for uncertainty, if a 
definition section were added to the Processing Guide. The commenter 
pointed to use of the terms ``controlling stockholder'' and 
``controlling shareholder'' as undefined and ambiguous. The commenter 
further stated that it would benefit all interested parties if there 
were consistency between the MAP Guide and the previous participation 
regulations and the Processing Guide. The commenter stated that the MAP 
Guide draws the line at 10 percent ownership for corporations and 
stockholders, but the Processing Guide is silent on it and therefore 
creates ambiguity.
    HUD Response: HUD believes that a definition sections would be 
largely duplicative and might not catch all the terms the commenter is 
looking for. HUD agrees that use of the terms ``controlling 
stockholder'' and ``controlling stakeholder'' was ambiguous and that 
coordination with the MAP Guide would be beneficial. HUD has revised 
the Processing Guide accordingly.
    Define ``significant changes.'' A commenter stated that the 
Processing Guide contains numerous references to ``significant 
changes,'' a term which is not defined. The commenter stated that this 
term is ambiguous and should be clarified in a meaningful way.
    HUD Response: ``Significant changes'' is a concept often used and 
sufficiently clear. For example, if HUD were to change what violations 
result in flags, that is a significant change. If HUD were to clarify 
the language describing the flag, without a substantive difference in 
the violation that is triggering the flag, that is not a significant 
change. If HUD were to change a policy relating to who is considered to 
be a Controlling Participant, this would be a significant change. If 
HUD were to clarify the language describing who a Controlling 
Participant is, but not change whether or not such an individual or 
entity is considered to be a Controlling Participant, such change would 
not be significant. Individual determinations on specific transactions 
are not changes to the Processing Guide.
    Definition of ``risk.'' A commenter noted that HUD stated its 
intention to provide a definition of ``Risk'' in 24 CFR 200.212, but 
HUD did not include the actual proposed regulatory definition for 
review or comment. With respect to the definition of ``risk,'' the 
commenter stated that there are no time restrictions set forth in HUD's 
description of what constitutes risk and no consideration of whether 
such risks have been mitigated.
    HUD Response: With respect to the commenter's concern about the 
absence of proposed regulatory changes presented in a non-codified 
manner, it is important to note that an agency may propose regulatory 
text without setting out the regulatory text in the manner it would be 
codified provided the agency presents a sufficient description of the 
regulation to be issued.\8\ HUD provided a sufficient description of 
the proposed changes. With respect to the concerns regarding the 
substance of what constitutes ``risk,'' in response to this comment and 
others, HUD has revised the Processing Guide to specify what factors 
shall be considered in evaluating the risks posed by flags and 
clarifying when it is appropriate to approve or disapprove an 
applicant.
---------------------------------------------------------------------------

    \8\ ``[T]he agency usually publishes the regulatory text of the 
proposal in full. The regulatory text sets out amendments to the 
standing body of law in the Code of Federal Regulations. If the 
amendments are not set out in full text, the agency must describe 
the proposed action in a narrative form.'' See https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf.
---------------------------------------------------------------------------

Determining Who Is Subject to Previous Participation Review
    HUD retains broad discretion to determine who is subject to 
previous participation review. A commenter stated that the proposed 
regulations reserve to HUD the ability to unilaterally determine who is 
subject to review, which creates uncertainty in the review process. The 
commenter stated that it supports the effort to identify and restrict 
the participation of individuals with a record of poor performance, but 
is concerned about the broad discretion for HUD to add individuals 
subject to previous participation review. The commenter stated that 
since it is difficult for HUD to clarify how or when it might determine 
additional individuals to be subject to review, HUD should limit the 
identification of additional individuals (beyond those with specified 
roles) to individuals for whom there is some reason to believe 
represent a risk to HUD programs. Another commenter stated that HUD 
must specify in a meaningful way how it would unilaterally 
``determine'' that an individual or entity does or does not exercise 
financial or operational control, otherwise the lack of specificity 
regarding HUD's determinative process makes the regulation vulnerable 
to a void for vagueness claim and increases uncertainty.
    HUD Response: HUD agrees in part and disagrees in part. HUD notes 
that the Processing Guide provides examples of every kind of entity 
that we can currently think of and who would be considered a 
Controlling Participant in such circumstance. HUD has also provided a 
specific list of exclusions of who HUD does not consider to be 
Controlling Participant. However, due to the volume of transaction that 
HUD oversees, it is unavoidable that HUD will not be able to list 
definitively every possible scenario. In fact, this is one problem with 
the current regulations which contemplate a number of scenarios, but 
not every possible scenario. For these unanticipated scenarios, HUD 
must be able to use discretion. Further, HUD notes that there are 
sometimes errors in the disclosure, whether advertent or inadvertent. 
Where HUD has reason to believe that an entity or individual other than 
those disclosed is actually exercising control over the Covered 
Project, HUD's oversight responsibilities require HUD to inquire about 
such entities and individuals. This is the essence of the regulations. 
It is not sufficient to structure a project in technical compliance of 
the anticipated scenarios that HUD lists in its guidance and shield 
controlling parties from appropriate review of their previous 
participation. Parties are unequivocally on notice--whoever actually 
controls a project is subject to Previous Participation Review.
    However, HUD agrees great clarity where possible is beneficial. HUD 
has clarified in the Processing Guide that it is the lender's (in FHA-
insured transactions) and applicant's responsibility the first instance 
to make the determination in accordance with HUD guidance of who is a 
Controlling Participant. HUD has also clarified that once HUD provides 
final approval for a Triggering Event, HUD will not re-open the 
question of who is a Controlling Participant. Finally, HUD has revised 
the Processing Guide to clarify some of the provisions that other 
comments indicated were ambiguous.
Commencing the Previous Participation Review Process
    Incorporate guidance in the Processing Guide that instructs 
reviewing offices to commence previous participation with their review 
of the application for mortgage insurance. A commenter stated that 
requiring the reviewing office to initiate the previous participation 
review when the application is accepted will allow for any flags to be 
identified and mitigated simultaneously with the processing of the 
application for mortgage insurance.
    HUD Response: HUD has revised the Processing Guide to indicate that 
previous participation review occur concurrent with the review of the

[[Page 71257]]

application for mortgage insurance or other request for approval of a 
Triggering Event.
Defining Controlling Participant
    Clarify meaning of construction manager. Three commenters stated 
that HUD should provide additional clarification and a definition 
regarding the title of construction manager.
    HUD Response: As shown on the Processing Guide, ``construction 
manager'' is only a Controlling Participant for section 242 hospital 
transactions and it is a clearly known term in such transactions.
    Make clear the controlling participants that have operational or 
policy control. Three commenters stated HUD should clarify whether the 
enumerated List of Controlling Participants in the Processing Guide is 
meant to define the participants that HUD is identifying as those HUD 
determines to have operational or policy control.
    HUD Response: HUD has revised the text to clarify that the 
enumerated list are those entities and individuals considered to 
exercise financial or operational control in the stated circumstances.
    Identify separate standards for determining Controlling 
Participants for public companies. A commenter stated that titles and 
roles of participants with control over a Covered Project can vary 
greatly between a publicly held company and a private company, and HUD 
should identify separate standards for determining Controlling 
Participants for publicly held companies, REITs and private 
corporations.
    HUD Response: HUD notes that REITs are already separately listed. 
HUD has revised the language in the Processing Guide to be more 
specific and believes that for both public and private corporations, 
the officers and other equivalent executive management who are directly 
responsible to the board of directors and who have the ability to 
prevent or resolve violations or circumstances giving rise to flags 
related to the Covered Project are the appropriate submitters.
Lists of Controlling Participants
    Suggested changes to List of Controlling Participants. Commenters 
submitted the following suggested changes to the list of Controlling 
Participants:
    Item 2--``and other executive management'' is far too broad and 
supplies HUD with too much discretion. Commenters stated that Item 2 
needs to be refined to drill down to only the officers/individuals with 
decision-making and/or financial capacity.
    HUD Response: HUD has revised this item to focus on officers and 
other equivalent executive management who are directly responsible to 
the board of directors and who have the ability to prevent or resolve 
violations or circumstances giving rise to flags related to the Covered 
Project.
    Item 7--Executive Director of a nonprofit sponsor. HUD needs to 
specifically define when a Sponsor comes into play and when it does 
not.
    HUD Response: HUD has deleted the word ``Sponsor.'' The Controlling 
Participant of a non-profit is the Executive Director or equivalent 
position.
    Item 10--There is no definition supplied for Controlling 
Stockholder, and the industry should have the right to comment on such 
definition, as it relates directly to principals and reporting 
disclosure. One of the commenters stated that HUD needs to define or 
clarify that it adheres to the MAP Guide.
    HUD Response: HUD has clarified this item.
    Item 14--This language is way too broad. If an entity is an 
``excluded entity'', by definition it is not considered a Controlling 
Participant, so its officers, directors, or executive management team 
should be excluded as well (unless there is an indication of interest 
(IOI) with other identified Participants or the combined financial 
percent exceeds other stated requirements.)
    HUD Response: HUD has revised this section to provide greater 
clarity.
    Address inconsistency in Processing Guide on the applicable 
ownership percentage. A commenter stated that there appears to be some 
conflicting guidance between these two items, which span the ``List of 
Controlling Participants'' section (item 1) and the ``List of 
Exclusions'' section (item 7). The commenter stated that Item 1 appears 
to be implying that the applicable ownership percentage is to be 
calculated based upon that entity's or individual's effective ownership 
in the Specified Capacity whereas item 7 implies that the applicable 
ownership is based on the actual ownership on an entity by entity 
basis.
    HUD Response: HUD has revised the text to clarify this discrepancy.
    Provide notification when additions are made to list of controlling 
participants. Two commenters stated that portions of the Processing 
Guide indicate that any person or entity ``determined by HUD to 
exercise day-to-day control over a Specified Capacity'' is a 
Controlling Participant. The commenters stated that if HUD intends to 
reserve the right to expand the list, we recommend that HUD identify 
(a) how/when the proposed participant will receive notice of any 
additional parties that must be included as Controlling Participants, 
and (b) what standards HUD will apply for such purpose.
    HUD Response: HUD has added additional specificity to this 
provision.
    Supplement the list of controlling participants with examples. A 
commenter expressed support for HUD's efforts to streamline and clarify 
the previous participation process by limiting 2530 approval 
requirements to those who have day-to-day financial or operational 
control of properties. The commenter stated that it was especially 
pleased that tax credit investors and passive participants are excluded 
from requirements to seek approval. The commenter recommended that HUD 
provide additional guidance, and perhaps a few examples, to determine 
which for-profit and nonprofit board members must seek approval.
    HUD Response: HUD has clarified the language regarding for-profit 
board of directors. Members of a non-profit's board of directors do not 
need to file.
    Protect innocent fee managers from punitive measures. A commenter 
stated that it recognized HUD's interest in having management agents 
file for 2530 approval, but that it remained concerned that the 
Processing Guide offers no safe harbor to protect innocent, unrelated, 
third-party fee managers from being flagged or otherwise penalized for 
owners' decisions outside of their control. The commenter stated that 
provided such managers did not participate in health or safety 
violations or financial impropriety, these fee managers can only affect 
the property operations to the extent the owner permits funds to be 
released. The commenter urged HUD to shield innocent fee managers who 
acted in good faith from punitive measures, so that capable managers 
are not discouraged from taking over troubled properties.
    HUD Response: HUD notes that property managers do sometimes 
contribute to the violations relating to a covered project. However, 
HUD has revised the Processing Guide to indicate more clearly that HUD 
will not flag Controlling Participants who did not contribute to or 
fail to prevent, when in a position to do so, the violation giving rise 
to the flag.
    Clarify whether ``ability to bind'' will remain in the final rule. 
A commenter asked whether ``ability to bind'' will remain as a 
threshold in the final rule.

[[Page 71258]]

    HUD Response: A similar comment was submitted and HUD retains the 
concept but revises the language in the final rule to state the 
``ability to direct the entity in entering into agreements.''
List of Exclusions From Controlling Participants
    Suggested changes to List of Exclusions. Commenters submitted the 
following suggested changes to the list of exclusions:
    Item 5 -HUD should not require ``all of the officers of the entity 
to certify as to who have significant or insignificant involvement . . 
.''
    HUD Response: HUD agrees that it may not be practical to have all 
officers certify and has revised the Processing Guide to provide an 
alternate standard.
    Item 7--The language ``less than 25 percent interest in an entity 
should be excluded'' should be changed to read ``less than 25 percent 
interest in a Specified Capacity should be excluded'' to conform with 
Item 1 under List of Controlling Participants.
    HUD Response: HUD agrees that the two items should be consistent 
but has revised Item 1 under the List of Controlling Participants to 
conform with this item.
    Item 10--HUD has not clearly identified how they are determining 
who has financial or operational control. The commenters stated that 
this must be addressed under the List of Controlling Participants.
    HUD Response: HUD has clarified the language in the List of 
Controlling Participants to be more specific.
    Clarify why HUD used different definitions of Controlling 
Participant in the proposed rule and in the proposed Processing Guide. 
A commenter asked why HUD used different definitions of a ``Controlling 
Participant'' in the proposed regulations and the Processing Guide. The 
commenter asked whether these definitions could be made consistent. The 
commenter stated that alternatively, the definition and concept of a 
``Specified Capacity'' could be added to the proposed regulations.
    HUD Response: HUD has added the concept of ``Specified Capacity'' 
to the regulations and has made all definitions more consistent.
    Clarify distinction between shell-entity and wholly-owned entity. A 
commenter noted that the list of exclusions includes wholly-owned 
entities and shell entities, but noted that they are the same.
    HUD Response: HUD agrees that many wholly-owned entities are shell 
entities, but shell entities are not necessarily wholly-owned entities. 
HUD includes both listings for completeness and believes this listing 
will provide greater clarity.
    Describe how HUD determines whether an identity of interest or 
other conflict of interest exists. A commenter stated that HUD should 
define in a meaningful way how it would unilaterally determine whether 
an identity of interest or conflict of interest exists.
    HUD Response: HUD has corrected the typo in this section. HUD notes 
that this item clearly states that the program requirements, which have 
extensive identity of interest provisions, govern. It is only in the 
instances when the program in question fails to include identity of 
interest provisions would HUD need to make a determination on this 
issue.
    The 25 percent ownership presents a complicated method of inclusion 
or exclusion. A commenter stated that some of HUD's exclusions are very 
helpful (including tax credit investors, passive participants, minor 
officers, members of a board), but that others are complicated--such as 
the less than 25 percent ownership interest, particularly having to 
aggregate your percentage with others with whom you have an identity of 
interest or conflict of interest.
    HUD Response: HUD thanks the commenter for the support. If the 
commenter has a simpler suggestion to replace the 25 percent ownership 
interest concept that adequately protects HUD's interest, HUD 
encourages the commenter to make a suggestion.
Organizational Chart
    Suggested Changes to Organizational Chart. Commenters submitted the 
following suggested changes to the organizational chart:
    Item 2--The commenters stated that it takes great exception to the 
requirement for provision of an Organization Chart that requires the 
disclosure of ``all participants''. The commenters stated that 
shareholders, members and limited partners with no operational or 
policy control and/or those with minimum financial interest should not 
be required. The commenters stated that the required Organization Chart 
should be limited to Controlling Participants, and pass-through 
entities and shell entities that culminate in revealing a Controlling 
Participant. The commenters stated that Passive Participants and other 
excluded parties should not be required on the Organization Chart.
    HUD Response: HUD notes that organizational charts are already 
required with the applications for Triggering Events. Further, HUD 
notes that the purpose of the organizational chart is to help HUD 
confirm that the appropriate individuals and entities are identified as 
Controlling Participants and they cannot serve this purpose if they 
only disclose those individuals already disclosed. However, HUD agrees 
that in some instances the identification of each ownership interest 
may be overly burdensome and has revised this requirement accordingly.
    Item 6--Individuals and entities that are not Controlling 
Participants should not be reviewed for limited denial of participation 
(LDP). The commenters stated that if there is no ability to control, 
this is not relative to assessing risk.
    HUD Response: HUD agrees and has removed this requirement.
    Item 7--If a Director is not considered to be a Controlling 
Participant then the Director should not be required to be listed on 
the Organization Chart. The commenters stated that this is specifically 
onerous for REITs or publicly held companies or any organization with a 
large investment pool, but is also an unnecessary burden for private 
corporations and nonprofit entities.
    HUD Response: HUD has revised the requirements for entities in 
which the requirement may be overly burdensome.
    The requirement for an organizational chart for all parties in all 
roles regardless of ownership percentages and decision-making 
capacities is onerous and prohibitive to the intent and spirit of the 
original rule. A commenter made a similar comment to that made by other 
commenters about the organizational charts, and largely focused on 
burden. The commenter stated that lenders go through significant due 
diligence during underwriting to determine the true and correct 
ownership structure(s), and they do this through reviewing ownership 
agreements, partnership documents, organizational charts and 
discussions with the borrower and their attorney.
    HUD Response: If the applicant is already gathering the information 
needed for other portions of an application, it is difficult to 
understand why submitting this information into the APPS system for the 
purpose of previous participation review would be onerous. Further, as 
stated above, the purpose of the organizational chart is to make sure 
that the individuals and entities identified as Controlling 
Participants make sense. Finally, HUD has revised these provisions to 
clarify HUD's intent and reduce the burden where appropriate.
    Eliminate all references to ``all officers.'' A commenter suggested 
that HUD eliminate reference to ``all officers'' of a corporation 
throughout the

[[Page 71259]]

Processing Guide and limit previous participation review and approval 
to only those officers who are in an executive managerial position and 
exercise financial or operational control over the borrower, owner, 
etc.
    HUD Response: HUD has revised this provision to exclude the 
officers of wholly owned entities, tax credit investors and other 
investors that are not exercising day-to-day control, which HUD 
believes addresses the majority of situations that the commenter is 
referring to. HUD has further revised this section to indicate that HUD 
may accept an organizational chart without a full listing of an 
entity's Board of Directors if HUD determines that such a listing would 
be unduly burdensome.
    Establish one clear criterion for determining when an officer must 
obtain previous participation approval. A commenter stated it would be 
more efficient and provide greater predictability for applicants if HUD 
establishes one clear objective criterion for determining whether an 
officer must obtain previous participation approval.
    HUD Response: HUD has clarified this requirement.
    The chart is helpful in demonstrating financial and operational 
control. A commenter stated that the chart is very helpful in 
demonstrating who has financial and/or operational control over the 
property.
    HUD Response: HUD agrees.
    It is unclear if HUD has authority to review any information 
requested by HUD regarding widely held interests without regard to the 
connection to the Covered Project. A commenter stated that it is 
unclear whether HUD possesses the authority to review ``all 
participants'' beyond those defined as principals or Controlling 
Participants. The commenter stated that it is unclear if HUD has the 
authority to review ``any information requested by HUD'' regarding 
widely held interests without regard to the connection to the Covered 
Project.
    HUD Response: HUD does not propose reviewing the previous 
participation of entities or individuals who are not Controlling 
Participants. HUD does not propose examining information that is 
unrelated to a Covered Project. The information provided through the 
organizational chart is meant to confirm the information presented to 
HUD identifying who the Controlling Participants are--how can HUD know 
if applicants are submitting the entities in control unless the full 
organizational structure is disclosed? That being said, HUD has revised 
this section to eliminate undue burden and clarify these requirements.
Filing the Previous Participation Certification
    Provide a separate section in the Processing Guide for Participant 
Disclosure. A commenter stated that it appreciated the detail and 
attention that HUD has put into this section of the proposed Processing 
Guide, as these elements will be most helpful for applicants, but that 
the commenter felt strongly that a separate section in the Processing 
Guide titled ``Participation Disclosure'' should be included, 
immediately following the section on Organization Charts and before the 
section on Filing of Previous Participation Certification. The 
commenter stated that traditionally, the detail on which projects must 
be included as previous participation has been cause for much confusion 
by applicants. The commenter stated that it greatly appreciated the new 
detail and clarity on previous participation found in the proposed 
Processing Guide, but this detail is buried in the instructions to the 
paper forms. The commenter stated that it assumes that HUD intends this 
to apply to all filing methods, not just the paper HUD 2530, and as 
such, this should receive separate treatment in the Processing Guide 
under a separate section header.
    HUD Response: This has been clarified in Section C in the 
Processing Guide.
    Clarify the required certifications. A commenter stated that the 
current previous participation regulations include a section titled 
Content of Certifications. The commenter stated that neither the 
proposed rule nor the proposed Processing Guide identify the specific 
nature of the certifications that will be part of a previous 
participation submission.
    HUD Response: The certifications are stated on the form 2530. As 
HUD has indicated, HUD is not changing the certifications to the 2530 
at this time. If HUD were to do so, it would put the form through the 
PRA process, including the necessary notice and comment period.
    Support for HUD's provisions. A commenter expressed its support for 
HUD's provisions that allow participants to utilize either the 
electronic APPS or a paper alternative (currently known as the Form 
HUD-2530). The commenter expresses support that HUD only requires 
participants to list all projects that they have participated in over 
the previous 10-year period. The commenter noted that HUD reserves the 
right to review and consider a Participant's previous participation in 
a Federal project beyond the 10-year period when determining whether to 
approve participation in the project associated with an application. 
The commenter stated that in its previous comments on the proposed 
rule, it recommended limiting the timeframe covered in the review to a 
10-year look-back period, consistent with instructions of the current 
Form HUD-2530.
    HUD Response: HUD appreciates the support.
    Explain why HUD may review a participant's previous participation 
beyond the 10-year period. A commenter stated that HUD should 
meaningfully clarify the reasoning behind its reservation of rights to 
review and consider participant's previous participation in a federal 
project beyond the 10-year certification period.
    HUD Response: Only Tier 1 flags, which are permanent flags, would 
survive beyond the 10-year period. HUD believes these violations are so 
severe that they warrant permanent documentation in the record. 
However, HUD has clarified how HUD will evaluate the risk presented by 
these flags and when it is appropriate to approve a participant with 
these flags.
Approval of Participants
    Clarify whether approval of participant is prohibited by any flag 
(i.e. historical flag) or only an active flag. A commenter stated that 
the opening paragraph of this section indicates that HUD intends to 
provide approval of a submission if applicants do not have flags and 
are able to make all the certifications. The commenter stated that HUD 
should clarify whether this applies to any historical flags or only to 
active flags.
    HUD Response: Only active flags require review. However, HUD notes 
that an underlying issue may be ``resolved'' but the flag may be 
``active'' until the time period indicated in the Processing Guide 
expires. Tier 1 flags remain active permanently. Tier 2 flags remain 
active until the time periods specified expire.
    Require HUD to provide a participant with written approval or 
denial. Two commenters stated that the Processing Guide identifies the 
circumstances under which a 2530 submission will be approved. The 
commenters recommended that the Processing Guide also require HUD to, 
within 30 days of its receipt of the submission, provide the proposed 
Participant with (a) written evidence of HUD's approval or denial of 
the submission (and the justification for any denial), or (b) a

[[Page 71260]]

written statement identifying what additional information, if any, is 
required for HUD to complete its consideration of the submission.
    HUD Response: HUD does not agree with the specific suggestions made 
by the commenter but agrees that greater detail regarding notice and 
documentation is needed and has revised the Processing Guide 
accordingly.
    Provide notification of the duration of 2530 clearance. Two 
commenters recommended revising the Processing Guide to indicate how 
long a Controlling Participant's 2530 clearance remains in effect--and 
what procedures, if any, a Participant can follow to extend the 
effective period of the clearance without making a whole new 
submission.
    HUD Response: HUD believes the charts indicating the duration of 
the flags address the commenters concerns.
    Clarify approval of participants as it relates to various HUD 
offices. A commenter stated that it would be beneficial for HUD to 
include guidance in this section on the processing responsibilities of 
the approval process as it relates to Satellite Offices, Hub Offices 
and Headquarters.
    HUD Response: HUD has provided a web address linking to the 
additional contact information requested.
    Clarify how quickly HUD will issue approval. A commenter stated HUD 
should clarify how quickly it will issue approvals. The commenter 
suggested that HUD should commit to approving such submissions within 
14 days of receipt. The commenter further stated that the fourth bullet 
point of this section should clarify how far back in time HUD will 
retain and judge participants' flag history. The commenter stated that 
as currently worded, it appears HUD may hold and consider such flag 
history indefinitely.
    HUD Response: HUD cannot commit to a response within 14 days. Only 
Tier 1 flags are permanent. The charts detailing the flags specifically 
list the duration of the flags.
    Clarify what it means to limit or otherwise condition approval of 
the Controlling Participant to continue to participate in the 
Triggering Event. A commenter stated that HUD must clarify what it 
means to ``limit'' or ``otherwise condition'' approval for the 
Controlling Participant to continue to participate in the Triggering 
Event.
    HUD Response: HUD has revised these provisions to provide greater 
clarity and specificity.
    Clarify how a participant presents a significant risk to HUD. A 
commenter stated that HUD should clarify in a meaningful way how it 
determines that a participant presents a ``significant risk'' to HUD 
and also define what remedies and/or mitigation of outstanding 
violations will satisfy the criteria ``to the FHA Commissioner's 
satisfaction''.
    HUD Response: HUD has added considerable detail to clarify what 
factors must be considered in evaluating the risks identified by flags.
Flags
    Comments on flags: A commenter provided the following comments on 
flags:
    Who to flag. Specifically stipulate that participants who are not 
Controlling Participants should not be flagged.
    HUD Response: HUD has added greater detail on who should and should 
not be flagged.
    Tier 1--The commenter stated that it takes exception with the 
notion of permanent flags outlined in the proposed Processing Guide. 
The commenter stated that HUD appears to advocate that individuals 
cannot rehabilitate and that one instance of past behavior is a 
permanent indicator of all future actions.
    HUD Response: HUD believes that the violations resulting in Tier 1 
flags are so serious that they warrant permanent consideration. 
However, HUD has added greater clarity regarding what factors to 
consider in evaluating this risk and has specified when it may be 
appropriate to approve a participant with a Tier 1 flag.
    Tier 2--The commenter stated that in all instances where the reason 
includes the qualifier ``repeated'', HUD should clearly identify if the 
intent is concurrent repeated acts or a certain number within a given 
time frame.
    HUD Response: HUD has clarified the definition of ``Repeated'' in 
the text immediately above that chart.
    Tier 3--Unacceptable Physical Condition--The commenter stated that 
this does not match the current policy in place at REAC. REAC should be 
prepared to issue a revised policy concurrent with the release of this 
proposed Processing Guide.
    HUD Response: The Processing Guide is the revised policy.
    Subject of flags must address HUD's failure to abide by its own 
contractual, statutory or regulatory requirements. A commenter stated 
that no allowances are made for events of non-compliance that may be 
due to HUD failure to abide by its own contractual, statutory or 
regulatory requirements. The commenter stated that, for example, late 
payments of funds owed by HUD that result in late payment of loans 
should not be penalized and no flags should be placed. The commenter 
stated that similarly, flags for unsatisfactory management reviews 
should be removed because of HUD's failure or inability to conduct or 
contract for management reviews within a 12-month period of the last 
unsatisfactory review due to conditions that are outside of the control 
of program participants.
    HUD Response: The Processing Guide was updated to address 
situations outside of the controlling participant's control. In 
addition, HUD has clarified situations where projects can be approved 
despite a Tier 3 flag.
    Define ``minor infractions'' and clarify that flags may not be used 
to induce certain action. A commenter stated that in addition to the 
prohibition that flags shall not be placed for ``minor infractions,'' 
which should be defined, HUD should clarify that likewise flags may not 
be used by HUD punitively to induce a participant to undertake a 
desired action or to punish a participant for action(s) HUD deems 
undesirable.
    HUD Response: The Processing Guide has been revised in accordance 
with this comment. The Processing Guide sets forth reasons that flags 
may be placed: Punishment or inducement to take action are not among 
them. One example of a ``minor infraction'' would be a situation where 
a new participant to HUD accidentally took unauthorized distributions, 
but immediately repaid them upon realizing the mistake.
    Define ``Repeated Offense.'' A commenter stated that HUD should 
define a ``Repeated Offense'' to be three or more occurrences within 
the most recent five (5) year period, otherwise participants' distant 
past would cloud perceptions of recent performance, and recent 
performance arguably should be the most relevant criteria and of most 
interest to HUD.
    HUD Response: HUD agrees that a time period should be specified 
here. The Processing Guide has been clarified to provide for a seven 
(7) year period.
    No flag should be permanent. A commenter stated that HUD should 
recognize that in many instances, a default occurs due to circumstances 
beyond the Participant's reasonable control. The commenter recommended 
that HUD expressly indicate that the imposition of any flag shall be 
based on the particular facts and circumstances relating to the subject 
project. The commenter stated, that for example, if a participant is 
able to demonstrate that a loan default occurred due to a downturn in 
the local market, and the participant undertook reasonable efforts to 
cure the default (e.g., seeking to increase occupancy and/or revenues, 
seeking to

[[Page 71261]]

reduce expenses), the participant should not have a ``permanent flag'' 
or, for that matter, any Tier 2 or Tier 3 flag on its record. This 
commenter and two other commenters recommended that no flag should be 
``permanent.''
    HUD Response: The Processing Guide has been updated to reflect 
situations outside of a participant's control. HUD does want to 
maintain permanent flags on the Tier 1 events due to their severity but 
has clarified when approval is appropriate, even if a Tier 1 flag 
exists.
    Expressly state that passive investors are not subject to 2530 
flags. Two commenters stated that HUD should revise the Processing 
Guide to expressly indicate that investors/syndicators/passive 
investors who do not exercise day-to-day control should not be subject 
to 2530 flags based on the actions/inactions of other persons/entities.
    HUD Response: The Processing Guide addresses this in exclusions 
three and four.
    Enter Tier 1, 2, or 3 flags for only Controlling Participants that 
participate during the violation. Three commenters stated that HUD 
should indicate that flags will only be entered against Controlling 
Participants that exercise day-to-day control over the operations of 
the Covered Project during the period the default actually occurred and 
a proposed incoming participant will not be flagged based on a 
violation occurring prior to the participant's participation in the 
Covered Project.
    HUD Response: The Processing Guide has been updated to reflect 
this.
    Eliminate automatic flag triggers. A commenter urged HUD to 
eliminate ``automatic'' flag triggers, such as those generated by a 
change in ownership that do not necessarily represent additional risk 
to HUD but inevitably create additional reporting burdens for owners.
    Another commenter urged HUD to refrain from placing automatic 
system flags. The commenter stated that APPS generates unnecessary 
automatic flags, which the participant must then go to the trouble of 
having them removed. The commenter stated, for example, one member 
reported multiple problems with automatic flags after properties are 
refinanced and sold to a newly created entity. The commenter stated 
that according to one of its members, the participant cannot file 
financial statements into HUD's Financial Assessment Subsystem--
Multifamily Housing (FASSUB) until an audit template is ready in the 
Integrated Real Estate Management System (iREMS).
    HUD Response: The only automatic flag is for Failure to File 
Financial Statements. HUD staff has readily available access to 
determine whether the financial statements have been filed and can 
easily remove flags once the financial statements are filed in HUD's 
system. Refinement of this process is outside the scope of the 
regulation. HUD will continue to review this system and determine 
whether additional changes would be feasible. HUD will explore 
alternative solutions to make sure AFS filings after ownership 
transfers happen in a timely manner, such as staff training and adding 
the item to the checklist of standard work on ownership transfers.
    Expressly indicate that the imposition of any flag shall be based 
on the particular facts and circumstances relating to the subject 
project. Two commenters stated that HUD should recognize that in many 
instances, a default occurs due to circumstances beyond the 
participant's reasonable control. The commenters recommended that HUD 
expressly indicate that the imposition of any flag shall be based on 
the particular facts and circumstances relating to the subject project, 
stating, for example, if a participant is able to demonstrate that a 
loan default occurred due to a downturn in the local market, or the 
occurrence of an uninsured or underinsured natural disaster (such as an 
earthquake) and the participant undertook reasonable efforts to cure 
the default (e.g., seeking to increase occupancy and/or revenues, 
seeking to reduce expenses), the Participant should not have a flag on 
its record.
    HUD Response: The Processing Guide has been updated to address 
this.
    Reconcile duration of Tier 1 flags with duration of 10-year look-
back. A commenter urged HUD to reconcile the duration of these flags 
with the 10-year look back period. In other words, Tier I flags should 
not remain on a participant's record longer than 10 years.
    HUD Response: While a participant is not required to report 
participation beyond the 10-year period, HUD believes that Tier 1 
violations are severe enough to warrant a permanent record. In response 
to concerns raised in the comments, HUD has clarified the factors that 
should be considered when evaluating Tier 1 flags and has explicitly 
provided for circumstances under which participants with Tier 1 flags 
may be approved.
    Reduce duration of Tier 2 flags from 5 years to 3 years. A 
commenter urged HUD to reduce the timeframe for retaining Tier 2 flags 
from 5 years to 3 years, provided the cause of the flag is corrected. 
The commenter stated that it believes 3 years provides sufficient time 
for HUD to determine whether the problem that led to the flag has been 
addressed.
    Two commenters similarly urged HUD to modify the inflexibility of 
the duration of Tier 2 Flags. The commenters stated that resolution of 
flags is an important tool for HUD when negotiating settlement of 
disputes between owners and HUD, which will be lost if HUD cannot 
settle a matter and lift a Tier 2 Flag. The commenters stated, for 
example, assertion of audit findings by the Office of Inspector 
General, or by FASS may be contested by the Owner, but will 
nevertheless result in a Tier 2 Flag. The commenters stated that in 
order to resolve the audit findings, without resorting to litigation by 
HUD or the Owner, HUD should be free to resolve the Flag issue and 
remove the flag, without waiting out the five-year period.
    HUD Response: HUD does not believe that three years is a sufficient 
amount of time to indicate a complete resolution of the risk. The 
Processing Guide has been revised to provide explicitly considerations 
to evaluate whether approval is warranted despite the presence of 
flags.
    Tier 3 flags should be removed when the underlying reason for the 
flag is cured or 3 years after placement, whichever is sooner. A 
commenter stated that a number of Tier 3 flags will be considered 
repeat violations and may occur over a period of years. The commenter 
strongly urged HUD to develop safeguards for innocent owners and third 
party management agents who take over troubled properties. The 
commenter stated that, as HUD is aware, it will take time to put the 
necessary resources, personnel and procedures in place to turn around 
such properties. The commenter stated that it serves the public 
interest to have the most capable owners and agents rise to meet these 
challenges, but in the absence of a safe harbor which protects the new 
owners and managers from being flagged as a result of their 
predecessors' decisions, high-performing ownership and management teams 
may be deterred from assuming responsibility associated with these 
projects. The commenter requested that HUD add written safe-harbor 
policies to protect innocent owners and managers from flags as they are 
turning around troubled properties. Another commenter similarly stated 
that Tier 3 flags should be removed when the unauthorized distribution 
is repaid ``or is otherwise resolved'', because not all alleged 
unauthorized distributions are indeed unauthorized payments and may be 
resolved via means other than repayment.

[[Page 71262]]

    HUD Response: The Processing Guide has been revised in accordance 
with this comment.
    An appropriate time frame for a Tier 3 flag is one year. A 
commenter stated that the maximum time frame that Tier 3 flags should 
remain active is one year.
    HUD Response: HUD disagrees. Flags are a reflection of non-
compliance with HUD obligations, which is considered serious. The 
Processing Guide has been updated to provide additional guidance for 
situations in which Controlling Participants can be approved despite a 
flag.
    Disconnect between REAC policy and unacceptable physical condition 
for Tier 3. Two commenters stated that the unacceptable physical 
condition for Tier 3 does not match the current policy in place at 
REAC. The commenters asked whether REAC would issue a revised policy 
concurrent with the release of this Processing Guide. Another commenter 
stated that placement of flags for unacceptable physical conditions 
departs from current policy guidance, which requires consecutive below-
60 scores before flags are placed. The commenter stated that a look 
back period of 5 years is unduly harsh for conditions posing a 
temporary risk to the department, and that a two- or three-year period 
would be more appropriate.
    HUD Response: HUD takes REAC scores very seriously. The Processing 
Guide is an update to HUD's policy and future notices; guidance issued 
by REAC will follow. The Processing Guide has been revised to clarify 
that participants will be approved despite having initially scored 
between 30-59 at a property, on the condition they perform a 100 
percent unit inspection and complete necessary repairs within 60 days. 
A subsequent score below 60 within the 5-year time period will merit a 
flag.
    Incorporate a routine process to release flags without the 
participant's request. A commenter stated that HUD has incorporated 
guidance on its protocol for placing flags on participants which is 
helpful, particularly with regard to the tiers and weighting of certain 
flags, but the commenter asked HUD to be cautious in adding many 
automatic flags on participants. The commenter also asked whether HUD 
could incorporate a routine process to release flags without the 
participant's request. The commenter stated that this would be 
particularly helpful at the Tier 3 level when events known to HUD occur 
and trigger a flag through no fault of the borrower. The commenter 
stated, for example, when Section 8 PBRA payments have not been 
distributed as scheduled, it could potentially cause a borrower to miss 
mortgage payments.
    HUD Response: While this is beyond the scope of the regulations or 
Processing Guide, HUD is working on a process to standardize the 
removal of flags, which process should not be predicated on a request 
from the Participant.
    Inability to see ``critical findings'' and the need for easier 
method for program participant to accept certain findings. A commenter 
stated that, in the APPS system, the owner/agent can see flags, but not 
``critical findings.'' The commenter recommended that HUD develop an 
easier method than program participants having to ``Accept'' every 
management and occupancy review (MOR) and REAC finding, specifically 
having to ``Accept'' them on each entity. It is repetitive and 
unnecessary to ``Accept'' each finding on the ownership entity, the 
management entity, and each corporate officer's entity. The commenter 
reiterated that it seems like there should be an easier method.
    HUD Response: The commenter is confused; ``critical findings'' in 
the APPS system mean that there are flags on the record. The system 
processing of ``accepting'' reviews is outside the scope of this final 
rule, but HUD will look into the feasibility of updating the system to 
simplify the submission process.
Chart on Approval of Participants With Flags
    Include in the chart links to relevant HUD staff. A commenter 
stated that while HUD's chart is helpful, further clarification is 
needed. The commenter stated that the chart uses HUD staff titles that 
correspond with the ongoing Multifamily for Tomorrow Transformation 
Initiative, but participants may or may not yet be familiar with this 
structure. The commenter recommended including links to contact 
information for each official noted, stating, for example, that HUD 
should include links and/or additional charts that list each branch 
chief, production division director and asset management division 
director within the new multifamily field office structure.
    HUD Response: HUD agrees that additional information would be 
helpful and will provide such information on its Web site. The 
Processing Guide has been revised to reflect this additional resource.
Rejection of Participants
    Support for notification requirement. A commenter stated that it 
strongly supported HUD's proposal that HUD staff will notify the 
participant, or lender, if applicable, in advance of the recommended 
decision. The commenter stated that this notification will allow an 
opportunity for the participant to provide additional arguments for 
HUD's consideration to preserve processing efficiency and cut down on 
requests for reconsideration. Two other commenters recommended that the 
Processing Guide also indicate that HUD will identify in writing to the 
proposed participant, in reasonable detail: (a) The anticipated basis 
for the denial, and (b) what information, if any, is needed to resolve 
HUD's concerns. Another commenter stated that HUD should specify how 
much advance notice participants and lenders shall receive before a 
recommendation for rejection is proposed. The commenter stated that 
meaningful notice periods must be provided for due process purposes.
    HUD Response: The Processing Guide has been revised in accordance 
with this comment. HUD believes that it is quite strongly in compliance 
with any due process considerations.
Reconsideration of a Rejection
    Stipulate that the HUD individual making the appeal decision is not 
the same HUD individual who initially rejected the Participant's 
appeal. A commenter expressed support that participants have the right 
to request reconsideration of HUD's decisions to reject participants. 
The commenter requested that the Processing Guide stipulate the 
individual (i.e., HUD staff) making the decision on the appeal must not 
be the same person who initially rejected the participant. The 
commenter stated that the contact information for the Director or 
Delegate should be provided.
    HUD Response: The Processing Guide has been revised in accordance 
with this comment.

VI. Findings and Certifications

Regulatory Review--Executive Orders 12866 and 13563

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

[[Page 71263]]

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 not to be a 
``significant regulatory action'' as defined in section 3(f) of 
Executive Order 12866, nor was it found to be an economically 
significant regulatory action, as provided under section 3(f)(1) of the 
Executive Order.
    This rule responds to the direction of Executive Order 13563 to 
reduce burden. As discussed in this preamble, HUD stakeholders have 
long complained about the previous participation process, and HUD has 
offered measures over the past to improve this process. However, these 
measures were not successful in providing a significant overhaul of the 
previous participation review process sufficient to remedy the common 
complaints. HUD believes that this final rule and accompanying 
Processing Guide strikes the appropriate balance between allowing HUD 
to effectively assess the suitability of applicants to participate in 
HUD's multifamily housing and healthcare programs, while interjecting 
sufficient flexibility into the process in order to remove a one-size-
fits-all review process. Such a balance best allows HUD to make 
determinations of suitability in order to accurately access risk.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule would not have 
a significant economic impact on a substantial number of small 
entities.
    As has been discussed in this preamble, this rule streamlines HUD's 
previous participation review process, responding to longstanding 
complaints by HUD participants that this is an overly burdensome 
process. The changes made by this final rule allow HUD to better 
consider the differences of any applicant and tailor requested 
information to that applicant, including whether the applicant is a 
small entity. For these reasons, HUD has determined that this rule 
would not have a significant economic impact on a substantial number of 
small entities.

Environmental Impact

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

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or 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 preempts state law within the meaning of the 
Order.

Unfunded Mandates Reform Act

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

Paperwork Reduction Act

    The information collection requirements contained in this rule have 
been submitted to and approved by the Office of Management and Budget 
(OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) 
and assigned the following OMB control numbers--2502-0118 and 2502-0605

List of Subjects in 24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Housing standards, Lead poisoning, Loan 
programs-housing and community development, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

    Accordingly, for the reasons stated in the preamble above, and in 
accordance with HUD's authority under 42 U.S.C. 3535(d), HUD amends 24 
CFR part 200 as follows

PART 200--INTRODUCTION TO FHA PROGRAMS

0
1. The authority citation for 24 CFR part 200 continues to read as 
follows:

    Authority:  12 U.S.C. 1702-1715z-21; 42 U.S.C. 3535(d).


0
2. Revise subpart H to read as follows:
Subpart H--Participation and Compliance Requirements
Sec.
200.210 Policy.
200.212 Definitions.
200.214 Covered Projects.
200.216 Controlling Participants.
200.218 Triggering Events.
200.220 Previous Participation review.
200.222 Request for reconsideration.

Subpart H--Participation and Compliance Requirements


Sec.  200.210  Policy.

    (a) Regulations. It is HUD's policy that, in accordance with the 
intent of the National Housing Act (12 U.S.C. 1701 et seq.), and with 
other applicable federal statutes, participants in HUD's housing and 
healthcare programs be responsible individuals and organizations who 
will honor their legal, financial and contractual obligations. 
Accordingly, as provided in this subpart, HUD will review the prior 
participation of Controlling Participants, as defined in Sec.  200.212 
and Sec.  200.216, as a prerequisite to participation in HUD's 
multifamily housing and healthcare programs listed in Sec.  200.214.
    (b) Processing Guide. The regulations in this subpart are 
supplemented by the Processing Guide for Previous Participation Reviews 
of Prospective Multifamily Housing and Healthcare Programs' 
Participants (Guide), which is found on HUD's Web site at www.hud.gov. 
This Guide elaborates on the basic procedures involved in the previous 
participation review process. For any significant changes made to this 
Guide, HUD will provide advance notice and the opportunity to comment, 
providing a comment period of no less than 30 days.


Sec.  200. 212  Definitions.

    As used in this subpart:
    Commissioner means the Assistant Secretary for Housing-Federal 
Housing Commissioner, or the Commissioner's delegates and designees.
    Controlling Participant means an individual or entity serving in a 
capacity for a Covered Project that makes the individual or entity 
subject to Previous Participation review under this

[[Page 71264]]

subpart, as further described in Sec.  200.216.
    Covered Project means a project in which the participation of a 
Controlling Participant is conditioned on Previous Participation review 
under this subpart, as further described in Sec.  200.214.
    Previous Participation means a Controlling Participant's previous 
participation in Covered Projects, and, if applicable, other federal, 
state and local housing programs, in accordance with the definition of 
Risk.
    Risk. In order to determine whether a Controlling Participant's 
participation in a project would constitute an unacceptable risk, the 
Commissioner must determine whether the Controlling Participant could 
be expected to participate in the Covered Project in a manner 
consistent with furthering the Department's purposes. The 
Commissioner's review of Previous Participation shall consider 
compliance with applicable statutes, regulations and program 
requirements. The Commissioner must consider the Controlling 
Participant's previous financial and operational performance in Covered 
Projects that may indicate a financial or operating risk in approving 
the Controlling Participant's participation in the subject Triggering 
Event. At the Commissioner's discretion, as necessary to determine 
financial or operating risk and to the extent the Commissioner 
determines such information to be reliably available, the Commissioner 
may consider the Controlling Participant's participation and 
performance in any federal, state or local government program. The 
Commissioner may exclude any Previous Participation the Commissioner 
determines to be of limited value, unreliable or irrelevant in 
evaluating risk and/or any Previous Participation in which the 
Controlling Participant did not exercise, actually or constructively, 
control. Any information collection in connection with review of 
Previous Participation must follow all applicable requirements for 
information collection.
    Triggering Event means an occurrence in connection with a Covered 
Project that subjects a Controlling Participant to Previous 
Participation review under this subpart, as further described in Sec.  
200.218.


Sec.  200.214  Covered Projects.

    The following types of multifamily and healthcare projects are 
Covered Projects subject to the requirements of this subpart, provided 
however that single family projects are excluded from the definition of 
Covered Projects:
    (a) FHA insured projects. A project financed or which is proposed 
to be financed with a mortgage insured under the National Housing Act, 
a project subject to a mortgage held by the Secretary under the 
National Housing Act, or a project acquired by the Secretary under the 
National Housing Act.
    (b) Housing for the elderly or persons with disabilities. Housing 
for the elderly financed or to be financed with direct loans or capital 
advances under section 202 of the Housing Act of 1959, as amended; and 
housing for persons with disabilities under section 811 of the 
Cranston-Gonzalez National Affordable Housing Act.
    (c) Risk Share projects. A project that is insured under section 
542(b) or 542(c) of the Housing and Community Development Act of 
1992(12 U.S.C. 17107 note).
    (d) Projects subject to continuing HUD requirements. A project that 
is subject to a use agreement or any other affordability restrictions 
pursuant to a program administered by HUD's Office of Housing.
    (e) Subsidized Projects. Any project in which 20 percent or more of 
the units now receive or will receive a subsidy in the form of:
    (1) Interest reduction payments under section 236 of the National 
Housing Act (12 U.S.C. 1715z-1);
    (2) Rental Assistance Payments under section 236 of the National 
Housing Act (12 U.S.C. 1715z-1);
    (3) Rent Supplement payments under section 101 of the Housing and 
Urban Development Act of 1965 (12 U.S.C. 1701s); or
    (4) Project-based housing assistance payment contracts under 
section 8 of the United States Housing Act of 1937 (42 U.S.C. 1437f) 
administered by HUD's Office of Housing.


Sec.  200. 216  Controlling Participants.

    (a) Definition. Controlling Participants are those entities and 
individuals (i) serving as a Specified Capacity with respect to a 
Covered Project and (ii) the entities and individuals in control of the 
Specified Capacities. Each of the following capacities for a Covered 
Project is a ``Specified Capacity:''
    (1) An owner of a Covered Project;
    (2) A borrower of a loan financing a Covered Project;
    (3) A management agent;
    (4) An operator (in connection with healthcare projects insured 
under the following section of the National Housing Act: Section 232 
(12 U.S.C. 1715w) and section 242 (12 U.S.C. 1715z-7));
    (5) A master tenant (in connection with any multifamily housing 
project insured under the National Housing Act (12 U.S.C. 1701 et seq.) 
and in connection with certain healthcare projects insured under 
sections 232 or section 242 of the National Housing Act);
    (6) A general contractor; and
    (7) In connection with a hospital project insured under section 242 
of the National Housing Act (12 U.S.C. 1715z-7), a construction 
manager;
    (b) Control of entities. To the extent any Specified Capacity 
listed in paragraph (a) of this section is an entity, any individual(s) 
or entities determined by HUD to control the financial or operational 
decisions of such Specified Capacity shall also be considered 
Controlling Participants. Without limiting the foregoing and unless 
otherwise determined by HUD, the following individuals or entities 
shall be considered Controlling Participants:
    (1) Individuals or entities with the ability to direct the day-to-
day operations of a Specified Capacity or a Covered Project;
    (2) Individuals or entities that own at least 25 percent of an 
entity that is a Specified Capacity;
    (3) Individuals or entities with the ability to direct the entity 
to enter into agreements relating to the Triggering Event that 
necessitates review of Previous Participation, including without 
limitation individuals or entities that own at least 25 percent of 
entities determined to control an entity that is a Specified Capacity; 
and
    (4) In connection with a hospital project insured under section 242 
of the National Housing Act (12 U.S.C. 1715z-7), members of a hospital 
Board of Directors (or similar body) and executive management (such as 
the Chief Executive Officer and Chief Financial Officer) that HUD 
determines to have control over the finances or operation of a Covered 
Project.
    (c) Exclusions from definition. The following individuals or 
entities are not Controlling Participants for purposes of this subpart:
    (1) Passive investors and investor entities with limited liability 
in Covered Projects benefiting from tax credits, including but not 
limited to low-income housing tax credits pursuant to section 42 of 
title 26 of the United States Code, whether such investors are 
syndicators, direct investors or investors in such syndicators and/or 
investors;
    (2) Individuals or entities that do not exercise financial or 
operational control over the Covered Project, a Specified Capacity or 
another Controlling Participant;
    (3) Unless determined by HUD to exercise day-to-day control over 
the

[[Page 71265]]

operations or finances of a Specified Capacity or Covered Project, 
board members of a non-profit corporation who are not officers or 
otherwise part of the executive management teams of the non-profit;
    (4) Mortgagees acting in their capacity as such; and
    (5) Public housing agencies (PHAs).


Sec.  200.218  Triggering Events.

    (a) Each of the following is a Triggering Event that may subject a 
Controlling Participant to Previous Participation review under Sec.  
200.220:
    (1) An application for FHA mortgage insurance;
    (2) An application for funds provided by HUD pursuant to a program 
administered by HUD's Office of Housing, such as but not limited to 
supplemental loans;
    (3) A request to change any Controlling Participant for which HUD 
consent is required with respect to a Covered Project; or
    (4) A request for consent to an assignment of a housing assistance 
payment contract under section 8 of the United States Housing Act of 
1937 or of another contract pursuant to which a Controlling Participant 
will receive funds in connection with a Covered Project.
    (b) The Commissioner may also require a review of a potential 
owner's Previous Participation in connection with a loan sale or other 
form of property disposition, including foreclosure sale. 
Notwithstanding anything contained in the regulations in this subpart 
to the contrary, any such review shall be in accordance with the terms, 
conditions, provisions and other requirements set forth by the 
Commissioner in connection with such loan sale or property disposition 
which may differ, in whole or in part, from the regulations in this 
subpart.


Sec.  200.220  Previous Participation review.

    (a) Scope of review. (1) Upon the occurrence of a Triggering Event, 
as provided in Sec.  200.218, the Commissioner shall review the 
Previous Participation of the relevant Controlling Participants in 
considering whether to approve the participation of the Controlling 
Participants in connection with the Triggering Event in accordance with 
the definition of Risk in Sec.  200.212.
    (2) The Commissioner will not review Previous Participation for 
interests acquired by inheritance or by court decree.
    (3) In connection with the submittal of an application for any 
Triggering Event, applicants shall identify the Controlling 
Participants and, to the extent requested by HUD, make available to HUD 
the Controlling Participant's Previous Participation in Covered 
Projects.
    (b) Results of review. (1) Based upon the review under paragraph 
(a) of this section, the Commissioner will approve, disapprove, limit, 
or otherwise condition the continued participation of the Controlling 
Participant in the Triggering Event, in accordance with paragraphs (c) 
and (d) of this section.
    (2) The Commissioner shall provide notice of the determination to 
the Controlling Participant including the reasons for disapproval or 
limitation. The Commissioner may provide notice of the determination to 
other parties as well, such the FHA-approved lender in the transaction.
    (c) Basis for disapproval. (1) The Commissioner must disapprove a 
Controlling Participant if the Commissioner determines that the 
Controlling Participant is suspended, debarred or subject to other 
restriction pursuant to 2 CFR part 180 or 2 CFR part 2424;
    (2) The Commissioner may disapprove a Controlling Participant if 
the Commissioner determines:
    (i) The Controlling Participant is materially restricted, including 
voluntarily, from doing business with HUD (other than the restrictions 
listed in paragraph (c)(1) of this section) or any other governmental 
department or agency if the Commissioner determines that such 
restriction demonstrates a significant risk to proceeding with the 
Triggering Event; or
    (ii) The Controlling Participant's record of Previous Participation 
reveals significant risk to proceeding with the Triggering Event.
    (d) Alternatives to disapproval. In lieu of disapproval, the 
Commissioner may:
    (1) Condition or limit the Controlling Participant's participation;
    (2) Temporarily withhold issuing a determination in order to gather 
more necessary information; or
    (3) Require the Controlling Participant to remedy or mitigate 
outstanding violations of HUD requirements to the Commissioner's 
satisfaction in order to participate in the Triggering Event.


Sec.  200.222  Request for reconsideration.

    (a) Where participation in a Triggering Event has been disapproved, 
otherwise limited or conditioned because of Previous Participation 
review, the Controlling Participant may request reconsideration of such 
determination by a review committee or reviewing officer as established 
by the Commissioner. Reconsideration decisions shall not be rendered by 
the same individual who rendered the initial review.
    (b) The Controlling Participant shall submit requests for such 
reconsideration in writing within 30 days of receipt of the 
Commissioner's notice of the determination under Sec.  200.220.
    (c) The review committee or reviewing officer shall schedule a 
review of such requests for reconsideration. The Controlling 
Participant shall be provided written notification of such a review; 
such notice shall provide at least 7 business days advanced notice of 
the reconsideration. The Controlling Participant shall be provided the 
opportunity to submit such supporting materials as the Controlling 
Participant desires or as the review committee or reviewing officer 
requests.
    (d) Before making its decision, the review committee or reviewing 
officer will analyze the reasons for the decision(s) for which 
reconsideration is being requested, as well as the documents and 
arguments presented by the Controlling Participant. The review 
committee or reviewing officer may affirm, modify, or reverse the 
initial decision. Upon making its decision, the review committee or 
reviewing officer will provide written notice of its determination to 
the Controlling Participant setting forth the reasons for the 
determination(s).

    Dated: October 4, 2016.
Edward L. Golding,
Principal Deputy Assistant Secretary for Housing.
    Approved: October 5, 2016.
Nani A. Coloretti,
Deputy Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix--Processing Guide for Previous Participation Reviews of 
Prospective Multifamily Housing and Healthcare Programs' Participants

Purpose

    This Processing Guide (Guide) supplements HUD's Previous 
Participation Review regulations in 24 CFR part 200, subpart H. The 
Guide defines Controlling Participants for previous participation 
review, new flag approval, and rejection guidance and flag protocols 
in federal programs of certain participants seeking to take part in 
multifamily housing and healthcare programs administered by HUD's 
Office of Housing. The Guide aids in clarifying and simplifying the 
process by which HUD reviews previous participation of participants 
that have decision making authority over their projects as one 
component of HUD's responsibility to assess financial and 
operational risk to projects in these programs.

[[Page 71266]]

    Pursuant to 24 CFR part 200, subpart H, HUD will not make 
substantial changes to this Guide without providing a 30-day notice 
and an opportunity to comment to the public. However, HUD notes that 
many titles of HUD officials and other contact information are noted 
in this Guide for many purposes. By way of illustration and not 
limitation, HUD may update any reference to titles, email addresses, 
Web sites or other information regarding HUD officials in this Guide 
(whether such update is necessary because of changes to titles, 
responsibilities, personnel, reorganization or for any other reason) 
without providing notice and an opportunity for comment. HUD may 
make other non-substantial changes made to this Guide without notice 
and comment.
    This Guide updates and clarifies previous procedures and 
supersedes outstanding policy and guidance concerning previous 
participation review found in previous Housing notices and in the 
following: Multifamily Accelerated Processing (MAP) Guide Handbook 
4430.G, Multifamily Asset Management and Project Servicing Handbook 
4350.1, Healthcare Mortgage Insurance Program Handbook 4232.1, and 
Mortgage Insurance for Hospitals 4615.1. HUD will incorporate 
elements of this Guide into these handbooks. In addition, the Guide 
supersedes the Previous Participation (HUD-2530) Handbook 4065.1.

Applicability of the Previous Participation Review

    This Guide applies to Covered Projects administered by the 
Office of Multifamily Housing and the Office of Healthcare Programs, 
as listed in HUD's regulations in 24 CFR part 200 subpart H:
    a. FHA-Insured Projects. A project financed or proposed to be 
financed with a mortgage insured under the National Housing Act, a 
project subject to a mortgage held by the Secretary under the 
National Housing Act, or a project acquired by the Secretary under 
the National Housing Act; these may include projects that are 
insured under the following sections of the National Housing Act: 
Sections 213, 220, 221(d)(3), 221(d)(4), 223(a)(7), 223(d), 223(e), 
207/223(f), 232/223(f), 242/223(f), 231, 232, 232(i), 236, 241(a), 
241(f) or 242;
    b. Housing for the elderly or persons with disabilities. Non-
insured projects that include Section 202 Direct Loans or Section 
202 or Section 811 Capital Advances;
    c. Risk-share projects. Projects that are insured under sections 
542(b) or 542(c) of the Housing and Community Development Act of 
1992;
    d. Projects subject to continuing HUD requirements: Projects 
subject to a use agreement or any other affordability restrictions 
pursuant to a program administered by HUD's Office of Housing; and
    e. Subsidized Projects. Projects in which 20 percent or more of 
the units now receive or will receive a subsidy in the form of:
     Interest reduction payments under section 236 of the 
National Housing Act (12 U.S.C. 1715z-1);
     Rental Assistance Payments under section 236 of the 
National Housing Act (12 U.S.C. 1715z-1);
     Rent Supplement payments under section 101 of the 
Housing and Urban Development Act of 1965 (12 U.S.C. 1701s); or
     Project-based rental assistance pursuant to housing 
assistance payment contracts under Section 8 of the Housing Act of 
1937. This includes projects converting to PBRA assistance pursuant 
to the Rental Assistance Demonstration (RAD). This does not include 
project-based assistance provided under the Housing Choice Voucher 
program administered by HUD's Office of Public and Indian Housing or 
project-based assistance provided under the McKinney Act, 
administered by HUD's Office of Community Planning and Development.
    For the Sections 223(a)(7), 223(f), 241(a), 232(i) and 223(d) 
programs Controlling Participants are only subject to Previous 
Participation review if they were not previously approved to 
participate in that project (provided they have not changed roles in 
the project without prior approval).

Change in Controlling Participants

    To the extent the program requirements (including without 
limitation any contractual documents) governing a Covered Project 
require HUD consent for a change in a Specified Capacity or other 
Controlling Participant, consent to such change is subject to 
Previous Participation review.

Waiver Authority

    Program offices may waive any portion of this Guide that is not 
a regulatory requirement, subject to an appropriate justification, 
as required by HUD for all waivers. HUD expects waivers to be rare 
and in response to unique circumstances meeting the intent of HUD's 
Previous Participation review regulations.

Program Requirements

    The sections below outline who is subject to a Previous 
Participation review; the submission requirements and review 
procedures; considerations for approval and rejection; and the 
participant flagging process.

A. Controlling Participants for Previous Participation Review 
Purposes

    Submittal of Controlling Participants. Previous Participation 
review is required for Controlling Participants. In connection with 
each Triggering Event, Lenders in insured projects and entities 
serving in the Specified Capacities listed below in non-insured 
projects shall provide to HUD a list of all Controlling 
Participants. As stated throughout this Guide, HUD makes the 
ultimate determination of who is deemed to be a Controlling 
Participant. In reviewing the information submitted or if 
circumstances change prior to final HUD approval of a Triggering 
Event, HUD may determine that other individuals or entities are 
Controlling Participants necessary to review. However, HUD providing 
final approval of a Triggering Event confirms that all Controlling 
Participants with respect to that Triggering Event have been 
properly identified to HUD's satisfaction. Unless HUD discovers that 
individuals or entities have not been properly disclosed in 
accordance with the organizational chart requirements listed in this 
Processing Guide, HUD shall not change a determination of whether or 
not an individual or entity is a Controlling Participant after 
providing final approval for a Triggering Event.
    Controlling Participants are those entities and individuals (i) 
serving as a Specified Capacity with respect to a Covered Project 
and (ii) the entities and individuals in control of the Specified 
Capacities. At least one natural person must be identified as a 
Controlling Participant for each Specified Capacity. The chart below 
shows the Specified Capacities for the listed programs.

                                              Specified Capacities
----------------------------------------------------------------------------------------------------------------
                                                                                   Office of
                                                                 Multifamily      Residential       Office of
                                                                   Housing            Care           Hospital
                                                                                   Facilities       Facilities
----------------------------------------------------------------------------------------------------------------
Borrower or Owner............................................               X                X                X
Management Agent.............................................               X                X                X
Operator.....................................................  ...............               X                X
General Contractor...........................................               X                X                X
Construction Manager.........................................  ...............  ...............               X
Master Tenant/Landlord.......................................  ...............               X                X
----------------------------------------------------------------------------------------------------------------

    Controlling Participants. The entities serving as a Specified 
Capacity are Controlling Participants of the Covered Project for the 
programs listed. In addition, the individuals and entities 
determined by HUD to exercise financial or operational

[[Page 71267]]

control over these entities are also Controlling Participants. 
Controlling Participants require Previous Participation review and 
must complete Previous Participation review submissions. Any 
individual or entity who exercises financial or operational control 
of a Specified Capacity is considered to be a Controlling 
Participant and required to complete a Previous Participation review 
submission, unless excluded below. Controlling Participants include 
both entities and natural persons. If a Controlling Participant is 
an entity, the submission must include the people who exercise the 
day-to-day financial or operational control for that entity. 
Notwithstanding the foregoing or anything else in this Guide, if HUD 
determines that an individual or entity does not actually exercise 
financial or operational control of a Covered Project or Specified 
Capacity, such individual or entity shall not be considered a 
Controlling Participant.
    List of Controlling Participants: For purposes of Previous 
Participation review, unless excluded below or otherwise determined 
by HUD not to be a Controlling Participant, the following shall be 
considered to exercise financial or operational control over the 
listed entities and shall be considered Controlling Participants:
    1. Entities and individuals owning, directly or indirectly, 25% 
or more of a Specified Capacity.
    2. The controlling owners (entities and/or individuals) of the 
entity that controls the Specified Capacity, these include 
individuals or entities with the ability to direct the Specified 
Capacity to enter into agreements relating to the Triggering Event, 
including without limitation individuals or entities that own at 
least 25 percent of entities determined to control an entity that is 
a Specified Capacity.
    3. Any officers and other equivalent executive management 
(including Executive Director and other similar capacities) of the 
Specified Capacity or Controlling Participant who are directly 
responsible to the board of directors (or equivalent oversight body) 
and who have the ability to prevent or resolve violations or 
circumstances giving rise to flags related to the Covered Project.
    4. Managers or managing members of Limited Liability Companies 
(LLCs).
    5. General partners of limited partnerships, including 
``administrative'' general partners or other general partners if 
they exercise day-to-day control over the entity.
    6. Partners in a general partnership.
    7. Executive Director (or equivalent position) of a non-profit 
corporation.
    8. With respect to non-profit Borrowers under the Section 242 
program, the executive management (Chief Executive Officer, Chief 
Financial Officer, and Chief Operating Officer, or equivalents) of 
the Borrower and the members of the Board of Directors that HUD 
determines have control over the finances or operation of the 
hospital (typically the President, Vice President, Treasurer, and 
Chairman of the Finance Committee, or equivalents).
    9. Members of a for-profit corporation's Board of Directors who 
are also officers of the corporation.
    10. Controlling stockholders of a corporation. A controlling 
stockholder is the holder of sufficient voting stock or shares in a 
corporation to prevail in any stockholders' motion. In most cases 
the controlling stockholder will be subject to the previous 
participation filing requirements of those owning at least 25% of a 
Specified Capacity or Controlling Participant. However, this listing 
is meant to trigger filing requirements for shareholders who may 
technically evade the 25% ownership filing requirement but exercise 
financial or operational control over the Specified Capacity.
    11. Trustees of a trust.
    12. For real estate investment trusts (REITs), the REIT itself, 
the chief executive officer (or equivalent position) and all company 
officers (except those officers determined by HUD not to exercise 
day-to-day control over the REIT, the Specified Capacity or the 
Covered Project) must file.
    13. For insured projects, if applicable, the person (people) 
and/or entity (entities) to be listed on the Regulatory Agreement 
Non-Recourse Debt section.
    14. Any other person or entity determined by HUD to exercise 
day-to-day, financial or operational control over a Specified 
Capacity. While it is unlikely, this may include any officers, 
directors or members of an executive management team who would 
otherwise not be required to make a submission (even of shell 
entities or other entities that may fall into the exclusions below), 
if such person is exercising control over the Specified Capacity. 
This listing is meant to capture those rare individuals who 
structure their participation so as to technically circumvent HUD 
requirements but who de facto exercise control over the Specified 
Capacity. HUD believes that the individuals and entities described 
in the list above accurately account for the Controlling 
Participants in the vast majority of cases and that invoking an 
additional submission through this catch-all listing should be rare.
    If the applicant or Mortgagee has any reason to believe that any 
Controlling Participant is not of sound mind or body or is otherwise 
incapacitated, such information must be disclosed to HUD to review 
and determine whether another individual is acting as a Controlling 
Participant.
    List of Exclusions: Except that any Specified Capacity is a 
Controlling Participant, and unless otherwise determined in writing 
by HUD in a specific transaction to exercise day-to-day control of a 
Covered Project or Specified Capacity, Controlling Participants do 
not include the following:
    1. Wholly-owned entities. Any entity that is 100% owned or 
controlled by one individual or entity is excluded. Such entities 
are not exercising control; the individual or entity that wholly 
owns them is exercising control. An organizational chart may include 
one or more tiers of wholly-owned entities. All wholly-owned 
entities in all tiers are excluded.
    2. Shell entities. Entities that do not take actions themselves 
but only serve as legal vehicles through which the partners, members 
or owners of such entity take actions are excluded. These entities 
are not exercising control; the partners, members or owners of such 
entities are controlling. The ``middle tiers'' of an organizational 
chart are often shell entities.
    For example, if a Borrower (``Borrower LLC'') has a managing 
member (``Managing Member'') that is a joint venture partnership of 
two entities (``Partner 1'' and ``Partner 2'') and day-to-day 
control of Managing Member is exercised by Partner 1, then Partner 1 
is the Controlling Participant of the Borrower. In this example, 
neither Managing Member nor Partner 2 are actually exercising 
control and are excluded. If Partner 1 is itself a shell LLC, with 
three members, then the individual(s) or entity(ies) that exercise 
day-to-day control of Partner 1 would be the Controlling 
Participant(s). If day-to-day control of Partner 1 is exercised by 
Member A, then Partner 1 would be excluded and Member A would be the 
Controlling Participant. If the organizational chart reflects this 
arrangement and unless additional information or special 
circumstances warrant further inquiry, HUD will accept Member A's 
certification that it is the Controlling Participant and will not 
require an examination of the various entities' organizational 
documents to confirm that Managing Member and Partner 1 are excluded 
shell entities.
    3. Tax credit investors. Syndicator and direct investor entities 
in Low-Income Housing Tax Credits, Historic Tax Credits, New Markets 
Tax Credits or other tax credits (if HUD determines such credits are 
substantially similar to the listed tax credits) are excluded unless 
such entities exercise day-to-day control or seek other involvement 
that would trigger the need for previous participation review. HUD 
may still require a so-called ``LLCI certification,'' an 
``Identification and Certification of Limited Liability Investor 
Entities,'' ``Passive Investor Certification'' or any other such 
certification. Acceptable language for such certification is 
attached as an addendum to this Guide.
    4. Passive participants. If an entity's organizational documents 
specify which members, partners or owners are authorized to exercise 
day-to-day control of that entity, then any other members, partners 
or owners who are not authorized to exercise day-to-day control of 
an entity are excluded.
    5. Minor officers. If HUD determines that an officer of a 
corporation or other entity does not have significant involvement in 
a Covered Project, such officers are excluded. Typically, 
``significant involvement'' means an ability to prevent or resolve 
violations or circumstances giving rise to flags related to the 
Covered Project.
    In the event HUD requests an officer who has not provided a 
Previous Participation Review submission to provide a submission, 
HUD shall accept certification from the officer that (s)he has 
limited involvement in the Covered Project, does not exercise 
operational or financial control over the Covered Project and does 
not have the ability to prevent or resolve violations or 
circumstances giving rise to flags related to the Covered Project 
(as listed below in Section G, ``Flags'').
    6. Members of a Board of Directors. Members of a non-profit or 
for-profit corporation's board of directors who do not

[[Page 71268]]

exercise control over the corporation in another capacity (for 
example, as Executive Director or other manager or officer of the 
non-profit corporation) are excluded. This exclusion does not apply 
to the members of boards of directors of hospitals, the rule for 
which is specified in the Regulation and captured in #8 within the 
Listing of Controlling Participants above.
    7. Less than 25% ownership interest. Unless exercising control 
through another capacity, members, partners, stakeholders and owners 
of entities with less than a 25% interest in an entity are excluded. 
This exclusion does not apply to any such member, partner, 
stakeholder or other owner of an entity (``Proposed Excluded 
Member'') who would have an interest greater than 25% if the 
combined percentages of all other members, partners, stakeholders or 
other owners (including beneficial interests in trusts) with whom 
the Proposed Excluded Member has an ``Identity of Interest,'' or a 
conflict of interest because of familial relation or common 
financial interest, exceeds 25%. Whether an Identity of Interest or 
conflict of interest exists is determined by HUD. If the program 
requirements of the applicable program in which the Covered Project 
is participating speak to Identify of Interest or conflict of 
interest, those program requirements control.
    8. Nursing Homes and Assisted Living Facilities. With respect to 
projects under the Section 232 program, the nursing home 
administrator and equivalent positions in assisted living facilities 
are excluded.
    9. Publicly Held Companies. For publicly held companies, the 
chief executive officer (or equivalent position), the controlling 
shareholder (if any), and other individual(s), if any, identified as 
having day-to-day control over a Specified Capacity or Covered 
Project, including any relevant project manager(s), must file but 
the publicly held company shall otherwise be treated as an 
individual without need for other individual shareholders to file 
certifications in their individual capacity or identify their social 
security or tax identification numbers.
    10. Mortgagees. Mortgagees acting in their capacity as such are 
excluded.
    11. Public housing agencies. Public housing agencies, whether in 
their capacity as owning and operating public housing or otherwise, 
are excluded. Public housing agencies are subject to different 
oversight and review by HUD's Office of Public and Indian Housing.
    12. No Exercise of Financial or Operational Control. Any 
individual or entity determined by HUD not to exercise financial or 
operational control of a Covered Project or Specified Capacity shall 
not be considered a Controlling Participant.

B. Organization Charts

    An organization chart must be submitted for each Specified 
Capacity and for any entity within the organization chart if 
requested by HUD. Organization charts are visual representations of 
the ownership structure of an organization. Organizational charts 
are already required for the underwriting purposes as a part of the 
application or request for most Triggering Events. This Guide 
clarifies that such organizational charts shall also be submitted 
with the Previous Participation review submissions for the purposes 
of Previous Participation review. If the application or request for 
a Triggering Event does not otherwise require submission of 
organizational charts, this Guide clarifies that such organizational 
charts are required for purposes of Previous Participation review. 
All organization charts submitted in connection with a Triggering 
Event are considered part of the application for HUD review and 
subject to the certifications stating that the application is true 
and complete. The organization chart must be clear enough so that a 
person unfamiliar with the Covered Project and the entities involved 
can understand the ownership and control structure. The organization 
chart must comply with the following guidelines:
    1. Clearly show all tiers of the ownership structure, including 
the members or owners of the entities listed.
    2. Show all participants, not just those who the Lender or 
Applicant considers to be principals or Controlling Participants. 
HUD may accept an organizational chart without a full listing of all 
participants if HUD determines that such a listing would be unduly 
burdensome.
    3. Show percentages of ownership and role in the entity (e.g. 
Limited Partner, General Partner, Managing Member, Tax Credit 
Syndicator/Investor, etc.). The percentages must add to 100%. 
However, if there are more than 10 holders of an ownership interest 
in an entity, no one with less than a 10% interest must be 
individually disclosed. In that case, holders with less than a 10% 
ownership interest in the entity may be listed as a group by 
indicating the total percentage of ownership interests held by the 
group and the total number of members of the group (e.g., ``8 
members own portions of the remaining 12%''). For public companies, 
shareholders holding less than 10% interest can be grouped by 
indicating the aggregate percentage and identified as ``widely 
held'' (e.g., ``80% of shares are widely held''). To the extent 
ownership interests are aggregated, the Applicant must provide any 
information requested by HUD regarding such interests.
    4. List at least one natural person, not just entities; 
provided, however, tax credit investors and other investors that are 
not exercising day-to-day control are not required to list a natural 
person.
    5. Provided that nothing in this Guide is meant to alter any 
underwriting requirements, for purposes of Previous Participation 
review, with respect to tax credit investors and other investors 
that are not exercising day-to-day control over a Specified Capacity 
or Controlling Participant, only the investor entity and its 
percentage ownership in the Specified Capacity need be shown; it is 
not necessary to show the members, partners or owners of the 
investor entity. HUD notes that additional information relating to 
investors may be required separately through underwriting review.
    6. Each Specified Capacity must be shown on a separate 
organization chart (e.g. Borrower, Operator, Management Agent, 
Master Tenant, etc.).
    7. With respect to each entity on the organization chart except 
wholly owned entities, tax credit investors and other investors that 
are not exercising day-to-day control, the executive management 
teams (for example, all senior officers such as CEO, CFO, President, 
Executive Director, etc., but not department heads or lower level 
management) and any members of a Board of Directors must be 
disclosed to HUD even if such individuals are not considered to be 
Controlling Participants and do not need to file Previous 
Participation review submissions. Such information must be updated 
if it changes prior to the Triggering Event. HUD may accept an 
organizational chart without a full listing of an entity's Board of 
Directors if HUD determines that such a listing would be unduly 
burdensome.

C. Filing the Previous Participation Certification

    (1) To fulfill the Previous Participation review requirements, 
applicable controlling participants must file a Previous 
Participation Certification. The Previous Participation review shall 
occur concurrently with the review of the application for mortgage 
insurance or other request for approval of a Triggering Event. 
Participants may utilize either the electronic Active Partners 
Performance System (APPS) or a paper alternative. Participants 
should not file both an APPS submission and a paper form. HUD 
strongly encourages participants to utilize the APPS system.
    The following chart indicates which filing options are available 
for which programs.

----------------------------------------------------------------------------------------------------------------
                                                                 Multifamily
                                                                  Housing &        Office of        Office of
                        Filing method                               Grant         Residential        Hospital
                                                                Administration  Care Facilities     Facilities
                                                                   projects
----------------------------------------------------------------------------------------------------------------
Active Partners Performance System (APPS) Submission.........               X                X                X
----------------------------------------------------------------------------------------------------------------
                                                       OR
----------------------------------------------------------------------------------------------------------------
Form HUD-2530 (paper)........................................               X   ...............               X

[[Page 71269]]

 
Consolidated Certification \9\ Previous Participation Section  ...............               X   ...............
 (paper).....................................................
----------------------------------------------------------------------------------------------------------------

    (2) It is the participant's responsibility to ensure that the 
filing is correct, complete and accurate. The participant should 
ensure compliance with the certifications is met. In rare instances, 
if there is a certification that the Controlling Participant cannot 
certify to, the participant must strikethrough that certification 
and provide a signed letter of explanation.
---------------------------------------------------------------------------

    \9\ Consolidated Certifications are the following forms: HUD 
90013-ORCF, Consolidated Certification-Borrower, HUD 90014-ORCF, 
Consolidated Certification-Principal of the Borrower, HUD 90015-
ORCF, Consolidated Certification-Operator, HUD 90017-ORCF, 
Consolidated Certification-Management Agent, and HUD 90018-ORCF, 
Consolidated Certification-General Contractor.
---------------------------------------------------------------------------

    (3) As part of the Previous Participation Certification, 
participants are only required to list all projects which they have 
participated in over the previous 10-year period. However, to the 
extent HUD has information that precedes the previous 10 years, HUD 
reserves the right to review and consider a participant's Previous 
Participation in federal projects beyond the 10-year period when 
determining whether to approve participation in a Triggering Event. 
Controlling Participants must include all previous participation 
from the past 10 years in: (a) Covered Projects, (b) housing 
projects with current flags under the U.S. Department of 
Agriculture's previous participation review system and (c) any other 
housing project participating in a federal, state or local or 
government program if during the Controlling Participant's 
participation in the housing project (i) the housing project was 
foreclosed upon; (ii) the housing project was transferred by a deed 
in lieu of foreclosure; or (iii) an event of default, or similarly 
termed event, was declared and remained after any applicable notice 
and cure periods against the housing project or the Controlling 
Participant pursuant to the government program's project documents.

    Active Partners Performance System (APPS) Submission Instructions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
HUD has made several upgrades to the system to improve the applicant
 submission process. For example, HUD now allows for electronic
 signatures of APPS submissions, ability to upload submission packages,
 and has improved the baseline submission to allow for edits. HUD
 encourages participants to utilize the APPS system when filing the
 Previous Participation Certification as it saves a substantial amount
 of time and allows for faster review of submissions by HUD reviewers..
Here is a link to the APPS resources: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/apps/appsmfhm..
For questions about the APPS system contact the Multifamily Housing
 Systems Help Desk by phone at (800) 767-7588 or [email protected]..
------------------------------------------------------------------------
Step 1: System Registration.......  This step registers Controlling
                                     Participants in the APPS system.
                                     See the APPS Quick Tips for
                                     detailed instructions on the
                                     registration process: http://portal.hud.gov/hudportal/documents/huddoc?id=appsquicktips.pdf.
Step 2: Create a Baseline.........  This step establishes the
                                     organizational structure and
                                     previous participation of
                                     Controlling Participants. See
                                     Chapter 2 of the APPS Userguide for
                                     specific instructions and screen
                                     shots: http://portal.hud.gov/hudportal/documents/huddoc?id=chapter2.pdf.
Step 3: Create a Property           This step creates a submission for a
 Submission.                         Controlling Participant's role in a
                                     specific project. See Chapter 3 of
                                     the APPS Userguide for specific
                                     instructions and screen shots:
                                     http://portal.hud.gov/hudportal/documents/huddoc?id=chapter3.pdf.
Step 4: Complete the Certification  In this step Controlling
 and Submit to HUD.                  Participants electronically certify
                                     to previous participation
                                     certifications and send the
                                     submission to HUD for review. See
                                     the discussions above regarding
                                     what projects must be included and
                                     if there is a certification the
                                     Controlling Participant cannot
                                     certify to. See also Chapter 7 of
                                     the APPS Userguide for specific
                                     instructions and screen shots:
                                     http://portal.hud.gov/hudportal/documents/huddoc?id=CHAPTER7.PDF.
Step 5: Upload the Organization     The user uploads the Organization
 Chart with the Signature Pages.     Chart and Signature Pages into the
                                     APPS system. See Section B for a
                                     description of what the
                                     organization chart must include.
------------------------------------------------------------------------


               Form HUD-2530 Completion Instructions \10\
[It is the participant's responsibility to assure that the Form HUD-2530
                   is correct, complete and accurate]
------------------------------------------------------------------------
            Form section                         Instructions
------------------------------------------------------------------------
Review certification language.......  The participant should assure that
                                       compliance with the certification
                                       is met. See the discussion above
                                       if there is a certification the
                                       Controlling Participant cannot
                                       certify to.
Block 2.............................  List Project Name and Number.
Block 7.............................  Controlling Participants on the
                                       organization chart must match
                                       Block 7.
Blocks 8 and 9......................  Write ``See Organization Chart''.
Block 10............................  Insert Social Security Number or
                                       Tax ID Number for each
                                       Controlling Participant.
Bottom of Page 1....................  The Controlling Participants
                                       listed in Block 7 must also be
                                       listed in the signature block at
                                       the bottom of Page 1.
The Controlling Participants must     The Controlling Participants must
 sign and date the submission.         sign and date the submission.
                                       Authorized person(s) may sign on
                                       behalf of other person(s) or
                                       entities. It is the signer's
                                       responsibility to assure that
                                       they are authorized to sign on
                                       behalf of others. Each signature
                                       block must include a signature.
Schedule A..........................  All principals listed in Block 7
                                       must be listed in Column 1.
Column 2............................  Column 2 must include all previous
                                       participation from the past 10
                                       years. See discussion above
                                       regarding what projects must be
                                       included.

[[Page 71270]]

 
                                      Controlling Participants with No
                                       Previous Participation should
                                       write ``No Previous
                                       Participation, First
                                       Experience.''
Column 3 Principal Role.............  Principal roles must be included
                                       in Column 3.
Column 4 Loan Status................  The Status of the Loan must be
                                       listed in Column 4.
                                      Note: This section is not
                                       applicable for General
                                       Contractors that did not have
                                       ownership interest in the
                                       project.
Column 5............................  Identify (check box) whether the
                                       project was ever in default
                                       during the participant's
                                       participation in Column 5. If the
                                       ``yes'' box is checked a detailed
                                       explanation of the circumstances
                                       (including mitigating factors)
                                       must be provided.
                                      Note: This section is not
                                       applicable for General
                                       Contractors that did not have
                                       ownership interest in the
                                       project.
Column 6............................  List the latest Management Review
                                       and Physical Inspection dates and
                                       scores in Column 6. If there are
                                       no scores, write ``None.''
                                      Note: This section is not
                                       applicable for General
                                       Contractors that did not have
                                       ownership interest in the
                                       project.
Business Partner Registration System  Each Controlling Participant must
 (BPRS) Registration.                  be registered in the BPRS System.
                                       Here is a link: https://hudapps2.hud.gov/apps/part_reg/apps040.cfm.
Organization Chart..................  Attach an organization chart. See
                                       Section B for a description of
                                       what the organization chart must
                                       include.
------------------------------------------------------------------------

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

    \10\ Until further notice, if using the paper Form HUD-2530, use 
these instructions.

           Consolidated Certification Completion Instructions
 [It is the participant's responsibility to assure that the Consolidated
            Certification is correct, complete and accurate]
------------------------------------------------------------------------
            Form section                         Instructions
------------------------------------------------------------------------
Review certification language in the  The participant should assure that
 Consolidated Certification.           compliance with the certification
                                       is met.
Attachment 1........................  Participants with Previous
                                       Participation must complete
                                       Attachment 1 of the Consolidated
                                       Certification for projects
                                       participated in over the past 10
                                       years. See discussion above
                                       regarding what projects must be
                                       included.
Business Partner Registration System  Each Controlling Participant must
 (BPRS) Registration.                  be registered in the BPRS System.
                                       Here is a link: https://hudapps2.hud.gov/apps/part_reg/apps040.cfm.
Organization Chart..................  Attach an organization chart with
                                       Social Security Numbers or Tax ID
                                       numbers for Controlling
                                       Participants. See Section B for a
                                       description of additional items
                                       the organization chart must
                                       include.
------------------------------------------------------------------------

D. Approval of Participants

    If there are no flags in the system and the applicant is able to 
make all the certifications or HUD has approved any reason as to why 
a certification cannot be made, the Previous Participation review is 
considered complete and the submission will be approved.
    If there are current flags in the system, HUD staff will review:
     The comments in the system related to the flag.
     The lender or participant's explanation of the flag and 
any mitigation of risk associated with the flag.
     Whether flags need to be resolved.
     The flag history in the system to assess patterns of 
misconduct and risk to the Department.
    Based upon this review, including review of the certifications, 
HUD will determine whether or not the Controlling Participant poses 
an unacceptable Risk to the Covered Project, in accordance with the 
definition in 24 CFR 200.212, namely whether the Controlling 
Participant could be expected to participate in the Covered Project 
in a manner consistent with furthering the Department's purposes. 
Based on this determination, HUD may approve, disapprove, limit or 
otherwise condition the continued participation of the Controlling 
Participant in the Triggering Event.
    Disapproval is only appropriate in the relatively few cases 
where the risks present cannot be mitigated. HUD will disapprove a 
Controlling Participant if the Controlling Participant is suspended, 
debarred or subject to other restriction pursuant to 2 CFR part 180 
or 2 CFR part 2424. HUD may disapprove a Controlling Participant if 
HUD determines: (i) The Controlling Participant is materially 
restricted, including voluntarily, from doing business with HUD 
(other than the restrictions listed above) or any other department 
or agency of the federal government if the Commissioner determines 
that such restriction demonstrates a significant risk to proceeding 
with the Triggering Event; or (ii) HUD determines that the 
Controlling Participant's record of Previous Participation reveals 
significant risk to proceeding with the Triggering Event that cannot 
be adequately mitigated.
    In lieu of disapproval, HUD may (1) condition or limit the 
Controlling Participant's participation; (2) temporarily withhold 
issuing a determination in order to gather more necessary 
information; or (3) require the Controlling Participant to remedy or 
mitigate outstanding violations of HUD requirements to the 
Commissioner's satisfaction in order to participate in the 
Triggering Event. A remedy or mitigation may include resolving any 
underlying issues that caused the existing flags or other measures 
that demonstrate to HUD's satisfaction that that the Controlling 
Participant could be expected to participate in the Covered Project 
in a manner consistent with furthering the Department's purpose of 
supporting and providing decent, safe and affordable housing for the 
public.
    In accordance with these provisions, if a HUD official approves 
a participant's participation while a flag remains outstanding, the 
determining HUD official shall annotate the APPS system with a

[[Page 71271]]

comment to the outstanding flag keeping a record of why approval is 
warranted and what, if any, conditions were imposed. The participant 
shall receive written notification of such determination and such 
explanatory comments. The purpose of this record is to prevent a 
repetitive HUD review in the future. If the circumstances and risks 
related to a flag have been determined by HUD to be mitigated, such 
risks and circumstances shall also be deemed mitigated and approval 
shall be approved under similar conditions, if any, for future 
Triggering Events, unless additional violations are present, 
circumstances have changed or additional information has come to 
light.

                   HUD Offices & Officials Responsible for Approval of Participants With Flags
----------------------------------------------------------------------------------------------------------------
                                      Office of Multifamily Housing &
                                   Assisted Housing  Oversight Division,       Office of
                                    220, 221(d)(4), 223(a)(7), 223(f),        Residential     Office of Hospital
                                           231, 241(a) programs               Healthcare          Facilities
                                 ----------------------------------------     Facilities
                                      Production       Asset management
----------------------------------------------------------------------------------------------------------------
Participants with Tier 1 Flags..  Director of         Director, Office    Director, Office    Director, Office
                                   Multifamily         of Asset            of Residential      of Hospital
                                   Housing             Management and      Care Facilities     Facilities.
                                   Production (HQ).    Portfolio           or Delegate.
                                                       Oversight (HQ).
Participants with Tier 2 Flags..  Production          Asset Management    Supervisory         Director, Office
                                   Division Director.  Division Director.  Account Executive.  of Hospital
                                                                                               Facilities.
                                 ----------------------------------------
Participants with Tier 3 Flags..               Branch Chief               Supervisory         Director, Office
                                                                           Account Executive.  of Hospital
                                                                                               Facilities.
----------------------------------------------------------------------------------------------------------------

E. Disapproval of Participants

    If a recommendation for disapproval is proposed, HUD staff will 
notify the participant, and, in the case of an FHA-insured loan, the 
Lender, in advance of the recommendation, which notification shall 
include the basis for the anticipated disapproval and, if known, 
what information is needed to resolve HUD's concerns. This 
notification will allow an opportunity for the participant to 
provide additional arguments for HUD's consideration to preserve 
processing efficiency and cut down on requests for reconsideration.

                  HUD Offices & Officials Responsible for Rejection of Participants With Flags
----------------------------------------------------------------------------------------------------------------
                                      Office of Multifamily Housing &
                                   Assisted Housing  Oversight Division,       Office of
                                    220, 221(d)(4), 223(a)(7), 223(f),        Residential     Office of Hospital
                                           231, 241(a) programs               Healthcare          Facilities
                                 ----------------------------------------     Facilities
                                      Production       Asset management
----------------------------------------------------------------------------------------------------------------
Participants with Tier 1, Tier 2  Regional Director   Division Director,  Division Director,
 or Tier 3 Flags.                  or Delegate.        Office of           Office of
                                                       Residential Care    Hospital
                                                       Facilities or       Facilities.
                                                       Delegate.
----------------------------------------------------------------------------------------------------------------

F. Reconsideration of a Disapproval

    Participants have the right to request a reconsideration of HUD 
decisions disapproving participants. The Controlling Participant 
shall submit requests for such reconsideration in writing within 30 
days of receipt of HUD's notice of disapproval. The review committee 
or reviewing officer shall schedule a review of such requests for 
reconsideration. The Controlling Participant shall be provided 
written notification of such a review at least 7 business days in 
advance of the reconsideration. The reconsideration shall not occur 
prior to the date provided to the Controlling Participant so that 
the Controlling Participant shall be provided the opportunity to 
submit such supporting materials as the Controlling Participant 
desires or as the review committee or reviewing officer requests. 
However, reconsideration need not be conducted through a formal 
meeting and the Controlling Participant may not necessarily have an 
opportunity to appear before the reviewing official in person.
    Before making its decision, the review committee or reviewing 
officer will analyze the reasons for the decision(s) for which 
reconsideration is being requested, as well as the documents and 
arguments presented by the Controlling Participant. The review 
committee or reviewing officer may affirm, modify, or reverse the 
initial decision. Upon making its decision, the review committee or 
reviewing officer will provide written notice of its determination 
to the Controlling Participant setting forth the reasons for the 
determination(s). Reconsideration decisions shall not be rendered by 
the same individual who rendered the initial review. Please see the 
below table for the officials responsible for rendering 
reconsideration decisions applicable to each program area. The 
decision rendered by the officials below is final agency action.

 HUD Offices & Officials Responsible for Reconsideration of a Rejection
------------------------------------------------------------------------
                                       Office of Healthcare Programs
                                 ---------------------------------------
 Office of Multifamily Housing &       Office of
   Assisted  Housing Oversight        Residential     Office of Hospital
            Division                  Healthcare          Facilities
                                      Facilities
------------------------------------------------------------------------
Director, Office of Asset         Director, Office    Director, Office
 Management and Portfolio          of Residential      of Hospital
 Oversight or Delegate.            Care Facilities     Facilities or
                                   or Delegate.        Delegate.
------------------------------------------------------------------------

G. Flags

    HUD utilizes flags in the APPS system as a way to assess risk 
associated with participants in Office of Multifamily Housing and 
Office of Healthcare Programs projects. A flag does not 
automatically exclude an applicant from participation in HUD's 
programs; however, flags are considered risk factors that require 
appropriate mitigation, where possible. Flags are to be a meaningful 
representation of risk, and therefore, they should not be placed for 
minor infractions that do not pose a risk to HUD. HUD will

[[Page 71272]]

notify participants in writing when flags are placed.
    1. Placement of Flags. When there is a violation or other 
circumstance warranting a flag in connection with a Covered Project, 
as listed in the charts below, HUD shall place a flag on all 
Controlling Participants who contributed to the violation or 
circumstance or failed to intervene appropriately but shall not 
place a flag on any Controlling Participant determined by HUD not to 
have contributed to the violation or circumstance (or if it is 
otherwise determined by HUD that placement of a flag on such 
Controlling Participant would be inappropriate). HUD shall not place 
any flags on Controlling Participants in connection with violations 
that occur prior to the Controlling Participant's involvement in the 
Covered Project. HUD shall not place flags relating to ongoing 
violations on Controlling Participants who become involved with a 
Covered Project with HUD's consent in order to mitigate or remedy 
the ongoing violation, provided that HUD may place flags on such a 
Controlling Participant related to new violations occurring after 
the Controlling Participant has become involved with the Covered 
Project.
    For the Office of Multifamily Housing & Assisted Housing 
Oversight Division, Tier 1 and 2 manual flags must be reviewed by 
the Branch Chief prior to placement. For the Office of Healthcare 
Programs, all manual flags must be reviewed by the Director of Asset 
Management prior to placement. The Branch Chief and Director of 
Asset Management, respectively, shall ensure that their office's 
Account Executive notifies the flagged participant of the flag 
placement and provides adequate comments in the APPS system 
detailing the reason for the flag.
    For any flag, if the Branch Chief or Director of Asset 
Management has reason to believe that placement of the flag is 
inappropriate, the Branch Chief and/or Director of Asset Management 
may approve removal of the flag or no placement of the flag in the 
first place. For example, HUD is aware that currently, when an owner 
purchases a portfolio, HUD's Financial Assessment of Multifamily 
Housing (FASS) system may have trouble accepting the financial 
statement submission of the new owner. In this circumstance, the 
system may perceive the new owner as having multiple failures to 
file financial statements because each property in the portfolio may 
be perceived as missing a financial statement. In this circumstance, 
the system may indicate that a Tier 2 flag would be appropriate, but 
obviously no flag is warranted. In this circumstance, the Account 
Executive shall not place a flag on the Controlling Participant's 
record or shall remove any such unwarranted flag relating to such 
circumstance. The Branch Chiefs and Directors of Asset Management 
have authority to make similar determinations in other 
circumstances.
    2. Tiers of Flags. HUD has developed three flag tiers, which 
reflect varying levels of risk to HUD. Tier 1 flags are elevated 
risk to HUD. HUD considers Tier 1 flags to be a significant long-
term risk to HUD and warrant significant mitigation in new 
transactions. Tier 2 flags are considered an ongoing risk to HUD. 
For Tier 2 flags that have a resolution date (as listed in the chart 
below), flags will not be removed until the time period has expired 
even if the action has been resolved earlier. This is considered a 
risk factor in production and asset management transactions. Tier 3 
flags are considered a single risk to HUD and will be removed when 
the reason for the flag is corrected.

Tier 1 Flags: Elevated Risk to the Department

    Tier 1 flags warrant permanent consideration when reviewing 
Controlling Participants for their participation in Triggering 
Events. Except that HUD will disapprove a Controlling Participant if 
the Controlling Participant is currently suspended, debarred or 
subject to other restriction pursuant to 2 CFR part 180 or 2 CFR 
part 2424, participants with Tier 1 flags may still participate in a 
Triggering Event if the risk posed by the flag has been 
appropriately mitigated.

Tier 1 Flags:

------------------------------------------------------------------------
                                                           Duration of
          Flag type                     Reason                 flag
------------------------------------------------------------------------
Mortgage Assignment/           Mortgagee assigned title  Permanent
 Conveyance of Title.           or conveyed property to   flag.*
                                HUD.
FHA Claim or Partial Payment   Claim payment by HUD....  Permanent
 of Claim.                                                flag.*
HUD Property Disposition.....  Foreclosure, loan sale,   Permanent
                                or other property         flag.*
                                disposition effort by
                                HUD.
Mortgagee in Possession (MIP)  HUD becomes the MIP.....  Permanent
                                                          flag.*
Deed in Lieu of Foreclosure..  HUD receives a deed in    Permanent
                                lieu of foreclosure.      flag.*
Limited Denial of              Participant is currently  Permanent flag.
 Participation (LDP)--Current   or has previously been
 or Past.                       placed on the LDP list.
Suspension or Debarment--      Participant is currently  Permanent flag.
 Current or Past.               or has previously been
                                placed on the Debarment
                                list or the participant
                                is or was temporarily
                                suspended from
                                participation in HUD
                                programs.
Voluntary Abstention or        Participant is currently  Permanent flag.
 Exclusion--Current or Past.    or has previously been
                                subject to a voluntary
                                abstention from
                                participation in HUD
                                programs.
Conviction for fraud or        Participant has been      Permanent flag.
 embezzlement of funds.         convicted of fraud or
                                embezzlement of funds.
------------------------------------------------------------------------
Participants with Tier 1 flags may be approved if:
------------------------------------------------------------------------
Participants with Tier 1 flags may be approved if:
    1. The participant is not currently suspended, debarred or subject
     to other restriction pursuant to 2 CFR part 180 or 2 CFR part 2424;.
    2. HUD determines that, because the participant has sufficiently
     improved operations and oversight to ensure that further violations
     will not occur or for other compelling reasons, the flag is not
     indicative of ongoing risk..
Questions that may be relevant to this analysis include:
     What has the participant done to mitigate the risk
     indicated by the flag?.
     Is the flagged condition indicative of a current pattern of
     behavior? What has the participant done to change the underlying
     causes of the flagged condition or otherwise prevent the flagged
     condition from occurring again?.
     Is the flagged condition limited in number and/or geography
     relative to the participant's whole portfolio? Was the flagged
     condition an isolated event?.
     Has significant time passed since the condition was
     flagged?.
     Was the flagged condition caused by market or other forces
     outside the participant's control?.
     How does the participant's role in the flagged condition
     compare to his/her role in the Triggering Event and Covered Project
     for which they are currently seeking approval?.
------------------------------------------------------------------------
* Unless otherwise determined by HUD due to mitigating circumstances.


[[Page 71273]]

Tier 2 Flags: Compliance Risk to the Department

    Tier 2 flags warrant consideration for an extended period of 
time when reviewing Controlling Participants for their participation 
in Triggering Events, even after the underlying reason for the flag 
is resolved. A ``Repeated'' Offense means that a Controlling 
Participant has had three or more instances of the violation in a 
seven-year period.

------------------------------------------------------------------------
            Flag type                 Explanation      Duration of flag
------------------------------------------------------------------------
Repeated Failure to File Annual   Repeated Failure    Retained until
 Financial Statements.             to File Annual      there have been
                                   Financial           five (5) years
                                   Statements (three   with no missed
                                   or more             filings of Annual
                                   occurrences in a    Financial
                                   seven-year          Statements.
                                   period).
Default-Financial...............  60 days or more     Retained for five
                                   behind on loan      (5) years after
                                   payments.           the placement
                                                       date of the flag.
Unacceptable Physical Condition   A property          May be removed
 of a property.                    received a Real     upon the
                                   Estate Assessment   completion of a
                                   Center (REAC)       five (5) year
                                   score below 30,     period in which
                                   two consecutive     the property
                                   REAC scores below   receives no REAC
                                   60, Repeated REAC   score below 60.
                                   scores below 60,
                                   or other Repeated
                                   failures to
                                   maintain decent,
                                   safe and sanitary
                                   conditions.
Unauthorized Distributions......  Repeated incidents  Retained for five
                                   of Unauthorized     (5) years after
                                   Distributions.      the placement
                                                       date of the flag.
Repeated Unresolved Audit         Repeated            Retained for five
 Findings.                         Unresolved Audit    (5) years after
                                   Findings.           the placement
                                                       date of the flag
                                                       provided that
                                                       audit findings
                                                       have been
                                                       resolved.
Conversion to Unapproved Use....  Project was         Retained for five
                                   converted to a      (5) years after
                                   use that is not     the placement
                                   permitted under     date of the flag.
                                   the program
                                   obligations.
Unauthorized Alteration to        Project or part of  Retained for five
 Facility.                         the project         (5) years after
                                   completed a         the placement
                                   significant         date of the flag.
                                   addition/
                                   alteration/
                                   construction/
                                   licensure status
                                   without prior
                                   approval.
Unauthorized Change in            When a Transfer of  Retained for five
 Participant.                      Physical Assets     (5) years after
                                   (TPA), Change of    the placement
                                   Management Agent,   date of the flag.
                                   Lessee or other
                                   change of
                                   Controlling
                                   Participant
                                   requiring HUD
                                   consent is
                                   completed without
                                   prior HUD
                                   approval.
Unauthorized Secondary Financing  When Secondary      Retained for five
                                   Financing is        (5) years after
                                   utilized without    the placement
                                   prior HUD           date of the flag.
                                   approval.
Miscellaneous Violation of        Repeated            Retained for five
 Business Agreements.              violations of       (5) years after
                                   business            the placement
                                   agreements (e.g.,   date of the flag.
                                   breaking use
                                   agreement or
                                   affordability
                                   restrictions,
                                   repeated
                                   unacceptable
                                   management
                                   reviews, repeated
                                   failure to comply
                                   with an action
                                   plan, non-
                                   compliance with
                                   program
                                   requirements, non-
                                   responsive to HUD
                                   requests).
Suspension/Termination of         When HUD suspends   Retained for five
 Payments.                         subsidy payments    (5) years after
                                   due to non-         the placement
                                   compliance with     date of the flag.
                                   Program
                                   Obligations.
General Contractor Performance--  Material failure    Retained for five
 Construction Compliance.          to build project    (5) years after
                                   in accordance       the placement
                                   with approved       date of the flag
                                   Plans and           provided that
                                   Specifications      noncompliance has
                                   (During             been cured to
                                   Construction        HUD's
                                   Period).            satisfaction.
General Contractor Performance--  Failure to correct  Retained for five
 One Year Warranty.                material warranty   (5) years after
                                   issues identified   the placement
                                   in HUD's Nine-      date of the flag
                                   Month and 12-       provided that
                                   Month Warranty      noncompliance has
                                   Inspections         been cured to
                                   (After              HUD's
                                   Construction        satisfaction.
                                   Period).
------------------------------------------------------------------------
Participants with Tier 2 flags may be approved if:
------------------------------------------------------------------------
Participants with Tier 2 flags may be approved if HUD determines that,
 because the participant has sufficiently improved operations and
 oversight to ensure that further violations will not occur or for other
 compelling reasons, the flag is not indicative of ongoing risk.
Questions that may be relevant to this analysis include:
     Are the underlying conditions causing the flag resolved?...
     What has the participant done to mitigate the risk
     indicated by the flag?.
     Is the flagged condition indicative of a current pattern of
     behavior? What has the participant done to change the underlying
     causes of the flagged condition or otherwise prevent the flagged
     condition from occurring again?.
     Is the flagged condition limited in number and/or geography
     relative to the participant's whole portfolio? Was the flagged
     condition an isolated event?.
     Has significant time passed since the condition was
     flagged?.
     Was the flagged condition caused by market forces outside
     the participant's control?.
     How does the participant's role in the flagged condition
     compare to his/her role in the Triggering Event and Covered Project
     for which they are currently seeking approval?.
------------------------------------------------------------------------

Tier 3 Flags: Temporary Risk to the Department

    Tier 3 flags relate to a single and/or less serious incident of 
non-compliance and can be resolved and removed. Participants with 
Tier 3 flags shall be approved, subject to satisfaction of the 
conditions listed below prior to or at the closing of the Triggering 
Event transaction. In the case of FHA Insurance, any conditions not 
met by the issuance of the Firm Commitment shall be special 
conditions to the Firm Commitment.

[[Page 71274]]



----------------------------------------------------------------------------------------------------------------
              Flag type                         Reason              Duration of flag      Approval condition(s):
----------------------------------------------------------------------------------------------------------------
Failure to File Financial Statements.  Automatically Flagged    Removed when the         The Annual Financial
                                        when the Annual          missing Annual           Statement must be
                                        Financial Statements     Financial Statements     filed.
                                        are overdue.             are filed or five (5)
                                                                 years after the
                                                                 placement date of the
                                                                 flag, whichever is
                                                                 sooner.
Delinquent payments three or more      Flagged when borrower    Removed when there is a   Delinquencies
 times in the last year.                fails to make mortgage   one-year period of       cured (no longer
                                        payment by the           time in which borrower   delinquent).
                                        fifteenth of the         has made all mortgage    Explain the
                                        month, three or more     payments by the          cause of the
                                        times in a given one-    fifteenth of each        delinquencies.
                                        year period.             respective month, or     Efforts and/or
                                                                 five (5) years after     a plan acceptable to
                                                                 the placement date of    HUD to avoid future
                                                                 the flag, whichever is   delinquencies must be
                                                                 sooner.                  put in place.
Unacceptable Physical Condition......  Most recent REAC score   Removed when the most    Certify that 100% of
                                        is below 60, and         recent REAC score is     the units in the
                                        additional (does not     above 59.                project with the low
                                        need to be                                        REAC score have been
                                        consecutive) REAC                                 inspected and all
                                        score(s) below 60 over                            physical deficiencies
                                        the past seven years.                             have been remedied.
Unsatisfactory Management Review.....  Flagged when there is    Removed when there is a  Provide evidence that a
                                        an Unsatisfactory        Satisfactory             satisfactory response
                                        Management Review.       Management Review, or    to the management
                                                                 five (5) years after     review was provided to
                                                                 the placement date of    HUD or the Contract
                                                                 the flag whichever is    Administrator.
                                                                 sooner.
Unauthorized Distributions...........  One incident of          Removed when the         Unauthorized
                                        Unauthorized             unauthorized             distributions must be
                                        Distributions.           distribution is repaid   repaid.
                                                                 or otherwise resolved
                                                                 or five (5) years
                                                                 after the placement
                                                                 date of the flag
                                                                 whichever is sooner.
Material Unresolved Audit Findings...  Material Unresolved      Removed when the         Provide evidence that
                                        Audit Findings.          finding is resolved or   the audit finding was
                                                                 five (5) years after     resolved in manner
                                                                 the placement date of    satisfactory to HUD.
                                                                 the flag whichever is
                                                                 sooner.
Failure to Provide or Comply with      Failure to provide or    Removed when the action  Provide evidence that
 Action Plan.                           comply with a HUD        plan is received and     the Action Plan was
                                        required action plan     in good standing or      approved by HUD and
                                        and/or certification     five (5) years after     implementation has
                                        in a timely manner.      the placement date of    begun.
                                                                 the flag whichever is
                                                                 sooner.
----------------------------------------------------------------------------------------------------------------

    3. Flag Resolution and Removal of Flags. Tier 1 flags are 
permanent and are not removed from the APPS system, except where 
indicated in the Tier 1 chart above that HUD determines removal is 
warranted due to mitigating circumstances. Tier 2 flags will be 
removed from the APPS system upon the completion of the conditions 
and time periods listed in the Tier 2 chart above. Tier 3 flags 
shall be removed from the APPS system upon the resolution of the 
violation giving rise to the flag. Participants shall be notified in 
writing when flags are resolved and/or removed and may request 
confirmation of flag resolution and/or removal if they do not 
receive such notification.
    Notwithstanding anything else in this Guide, for any flag, if 
the Branch Chief or Director of Asset Management determines in 
writing that retention of the flag for the time periods listed above 
is inappropriate and unduly burdensome on the Controlling 
Participant or HUD, the Branch Chief and/or Director of Asset 
Management may waive this Guide's requirements with respect to 
duration of the flag and approve the flag's removal. In providing 
this determination, the Branch Chief or Director of Asset Management 
must consider any comments in the APPS system, including any 
comments indicating why the flag is warranted. If comment in the 
APPS system clearly describe that the flag is warranted and set out 
a justification for approval in forthcoming transactions despite the 
presence of the flag (as discussed in this Guide above), the flag 
may not be unduly burdensome and retention of the flag may be 
warranted. If, however, the Branch Chief or Director of Asset 
Management determines that retention of the flag is unwarranted or 
otherwise inappropriate and unduly burdensome on the Controlling 
Participant, the Branch Chief or Director of Asset Management shall 
indicate the basis for such determination and direct that the flag 
be removed.

H. Significant Changes to the Guide

    HUD will not make any significant changes to the Guide without 
first offering advance notice and the opportunity for comment for a 
period of not less than 30 days.

I. Technical Assistance

    Technical Assistance can be found on the HUD Web site at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/prevparticipation.
    Questions can be directed to:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Office of Multifamily Housing &          [email protected]
 Assisted Housing Oversight Division.     v.
Office of Residential Healthcare         [email protected].
 Facilities.                             www.hud.gov/healthcare.
Office of Hospital Facilities..........  [email protected].
                                         1-877-HLTH-FHA.
                                         www.hud.gov/healthcare.
------------------------------------------------------------------------


[[Page 71275]]

Addendum: Identification and Certification of Limited Liability 
Investor Entities

    The following certification is to be submitted as part of the 
FHA loan application from each entity which claims to be a limited 
liability investor.

Project Name:

FHA Project #:

    I, [name of authorized signer], am authorized to certify on 
behalf of [name of investor entity] to each and every item stated 
below.
    I certify that [name of investor entity] is:
    a. Investing in [name of owner/mortgagor entity], which 
anticipates receiving [list applicable tax credits, e.g.: Low-Income 
Housing Tax Credits pursuant to Section 42 of the Internal Revenue 
Code];
    b. A limited liability company, an investor corporation, an 
investor limited partnership, an investor limited liability limited 
partnership or other similar entity with limited liability; and
    c. An investor with limited or no control over routine property 
operations or HUD regulatory and/or contract compliance, unless it 
should take control of the ownership entity or assume the operating 
responsibilities in the event of the default of the operating 
partner or upon specific events defined in the [name of owner/
mortgagor entity]'s [operating agreement/partnership agreement/
organizational documents].
    I further certify that should any of the facts or circumstances 
that support the certifications above change or the entity for which 
this certification is made withdraws from participation in the 
owner/mortgagor, I will notify HUD immediately in writing, providing 
full disclosure and explanation of the change(s).

Signed:----------------------------------------------------------------
[Name of authorized signer]
[Title]

Date:------------------------------------------------------------------

[FR Doc. 2016-24619 Filed 10-13-16; 8:45 am]
 BILLING CODE 4210-67-P