[Federal Register Volume 81, Number 221 (Wednesday, November 16, 2016)]
[Rules and Regulations]
[Pages 80567-80587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27114]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 888, 982, 983, and 985

[Docket No. FR-5855-F-03]
RIN 2501-AD74


Establishing a More Effective Fair Market Rent System; Using 
Small Area Fair Market Rents in the Housing Choice Voucher Program 
Instead of the Current 50th Percentile FMRs

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule applies the use of Small Area Fair Market 
Rents (Small Area FMRs) in the administration of the Housing Choice 
Voucher (HCV) program for certain metropolitan areas. This final rule 
provides for the use of Small Area FMRs, in place of the 50th 
percentile rent, the currently codified regulations, to address high 
levels of voucher concentration in certain communities. The use of 
Small Area FMRs is expected to give HCV tenants access to areas of high 
opportunity and lower poverty areas by providing a subsidy that is 
adequate to cover rents in those areas, thereby reducing the number of 
voucher families that reside in areas of high poverty concentration.

DATES: Effective: January 17, 2017.

FOR FURTHER INFORMATION CONTACT: For information about this rule, 
contact Peter B. Kahn, Director, Economic and Market Analysis Division, 
Office of Economic Affairs, Office of Policy Development and Research, 
U.S. Department of Housing and Urban Development, 451 7th Street SW., 
Washington, DC 20410, telephone (202) 402-2409 or Becky L. Primeaux, 
Director, Housing Voucher Management and Operations Division, U.S. 
Department of Housing and Urban Development, 451 7th Street SW., 
Washington, DC 20410, telephone (202) 708-0477; email: 
[email protected]. The listed telephone numbers are not toll-free 
numbers. Persons with hearing or speech impairments may access this 
number through TTY by calling Federal Relay Service at (800) 877-8339 
(this is a toll-free number).

SUPPLEMENTARY INFORMATION: Under this final rule, public housing 
agencies (PHAs) operating in designated metropolitan areas are required 
to use Small Area FMRs, while PHAs not operating in the designated 
areas have the option to use Small Area FMRs in administering their HCV 
programs. Other programs that use FMRs would continue to use area-wide 
FMRs. This final rule also provides for regulatory implementation of 
certain provisions of the Housing Opportunity Through Modernization Act 
(HOTMA) related to FMRs, as well as conforming regulatory changes to 
part 982 concerning the reduction in payment standards during the term 
of the Housing Assistance Payment (HAP) contract in the HCV program. 
Specifically, the final rule provides for publication of FMRs by way of 
the World Wide Web, and provides that PHAs are no longer required to 
reduce the payment standard for a family under HAP contract when the 
PHA is required to reduce the payment standard for its program as the 
result of a reduction in the FMR.

I. Executive Summary

A. Purpose of the Regulatory Action

    This final rule establishes a more effective means for HCV tenants 
to move into areas of higher opportunity and lower poverty by providing 
the tenants with a subsidy adequate to make such areas accessible and, 
consequently, help reduce the number of voucher families that reside in 
areas of high poverty concentration. Prior to this rule, subsidy for 
HUD's HCV program is determined by a formula that considers rent prices 
across an entire metropolitan area. However, rents can vary widely 
within a metropolitan area depending upon the size of the metropolitan 
area and the neighborhood in the metropolitan area within which one 
resides. The result of determining rents on the basis of an entire 
metropolitan area is that a voucher subsidy may be too high or may be 
too low to cover market rent in a given neighborhood. To date, HUD's 
policy for addressing high concentrations of voucher holders raises the 
level of the FMR from the 40th percentile to the 50th percentile 
(roughly a 7--8 percent increase) in the whole FMR area. This level of 
added subsidy has not been targeted to areas of opportunity, and 
consequently, this formula has not proven effective in addressing the 
problem of concentrated poverty and economic and racial segregation in 
neighborhoods. Experience with the 50th percentile regime has shown 
that the majority of HCV tenants use their vouchers in neighborhoods 
where rents are low but

[[Page 80568]]

poverty is generally high. Small Area FMRs will complement HUD's other 
efforts to support households in making informed choices about units 
and neighborhoods with the goal of increasing the share of households 
that choose to use their vouchers in low poverty opportunity areas.
    This rule provides that in lieu of determining rents on the basis 
of an entire metropolitan area, rents will be determined on the basis 
of ZIP codes for those metropolitan areas with both significant voucher 
concentration challenges and market conditions where establishing FMRs 
by ZIP code areas has the potential to significantly increase 
opportunities for voucher families. ZIP codes are small enough to 
reflect neighborhood differences and provide an easier method of 
comparing rents within one ZIP code to another ZIP code area within a 
metropolitan area. Based on early evidence from PHAs using Small Area 
FMRs that are in place in certain metropolitan areas in the U.S., HUD 
believes that Small Area FMRs are more effective in helping families 
move to areas of higher opportunity and lower poverty.

B. Summary of the Major Provisions of the Regulatory Action

    The major provisions of this final rule are set out in two 
sections: (1) Those that were in the proposed rule and retained at the 
final rule; and (2) those that were revised at the final rule or are 
new provisions at the final rule stage, developed in response to public 
comment: The major provisions are as follows:
1. Major Provisions at the Proposed Rule Stage Retained by This Final 
Rule
     Defines Small Area FMR areas as the U.S. Postal Service 
ZIP code areas within a designated metropolitan area.
     Provides for criteria by which Small Area FMRs will be 
set. Small Area FMRs will be set for metropolitan areas where the area 
includes the following criteria: number of HCVs under lease (initially, 
2,500 or more); the standard quality rental stock, within the 
metropolitan area, that is in small areas (that is ZIP codes) where the 
Small Area FMR is more than 110 percent of the metropolitan FMR 
(initially 20 percent or more); and the percentage of voucher holders 
living in concentrated low-income areas relative to all renters within 
these areas over the entire metropolitan area exceeds a specified 
threshold (initially 1.55). (This final rule also adopts additional 
criteria for setting Small Area FMRs for a metropolitan area, see 
below.)
     Defines ``concentrated low-income areas'' to mean those 
census tracts in the metropolitan FMR area with a poverty rate of 25 
percent or more; or any tract in the metropolitan FMR area where 50 
percent or more of the households earn incomes at less than 60 percent 
of the area median income (AMI) and are designated as Qualified Census 
Tracts in accordance with section 42 of the Internal Revenue Code (26 
U.S.C. 42).
     Provides for designation of Small Area FMR areas at the 
beginning of a Federal fiscal year and makes additional area 
designations every 5 years thereafter as new data becomes available.
     Requires if a metropolitan area meets the criteria for 
application of Small Area FMRs, that all PHAs administering HCV 
programs in that area will be required to use Small Area FMRs.
     Provides that a PHA that is administering an HCV program 
in a metropolitan area that is not subject to application of Small Area 
FMRs may opt to use Small Area FMRs by seeking approval of HUD's Office 
of Public and Indian Housing through written request to such office.
     For all rent determinations of FMRs, 40th percentile or 
Small Area FMRs, replaces ``the most recent decennial census'' with the 
``most recent American Community Survey conducted by the U.S. Census 
Bureau.''
     Provides that metropolitan areas with FMRs set at the 50th 
percentile rent will transition to either (1) the 40th percentile rent 
at the expiration of the 3-year period for the 50th percentile rent, or 
(2) designation as a Small Area FMR area in accordance with the 
criteria for determining a Small Area FMR area.
     Provides that a PHA with jurisdiction in a 50th percentile 
FMR area that reverts to the standard 40th percentile FMR may request 
HUD approval of payment standard amounts based on the 50th percentile 
rent in accordance with the regulations in 24 CFR 982.503(f) that are 
changed by this final rule. PHAs, however, would be required to 
continue to meet the provisions of 24 CFR 982.503(f) annually in order 
to maintain payment standards based on 50th percentile rents.
     Removes the existing regulations at 24 CFR 888.113 that 
provide for FMRs to be set at the 50th percentile rent. However, for 
areas not selected for implementation of Small Area FMRs, the final 
rule does not revoke any FMR currently set at the 50th percentile rent, 
and for which the current 3-year term for retaining a 50th percentile 
rent has not expired.
2. Major Provisions--New Provisions or Changes Made at Final Rule Stage
     Conforms the regulations at Sec.  982.505(c)(3) with the 
portion of section 107 of the Housing Through Opportunity Modernization 
Act (HOTMA), Public Law 114-201, which provides PHAs with the option to 
hold families under a Housing Assistance Payments (HAP) contract 
harmless from payment standard reductions that are currently required 
at the family's second annual recertification if the family's payment 
standard falls outside of the basic range as the result of a decrease 
in FMRs (including a decrease in FMR attributable to the implementation 
of Small Area FMRs). As an additional protection, the final rule 
provides that should a PHA choose not to hold the payment standard at 
its current level for families under HAP contract in an area 
experiencing a payment standard reduction, the PHA may set the payment 
standard for families that remain under HAP contract at any amount 
between the current payment standard and new normally applicable 
payment standard amount, and may further reduce the payment standard 
for families under HAP contract over time to gradually bring the 
family's payment standard down to payment standard that is normally 
applicable to the area for the PHA's program or reduce the gap between 
the two payment standards. The rule further extends these same 
flexibilities to the PHA in cases where the payment standard decrease 
is not the result of a FMR decrease.
    The rule further provides that if the PHA chooses to apply a 
reduction in the payment standard to the family's subsidy calculation 
during the HAP contract term, the earliest the PHA may implement the 
initial reduction in the payment standard is the second regular 
reexamination following the effective date of the decrease in the 
payment standard amount. Section 107 of HOTMA also provides new 
requirements for publishing HUD's FMRs.
     Additional criteria by which Small Area FMRs will be set.
    [cir] Adds the vacancy rate of an area as a criterion to the 
selection parameters for Small Area FMRs. The vacancy rate will be 
calculated in the following manner: Using data from the 1-year American 
Community Survey (ACS) tabulations, the vacancy rate is the number of 
Vacant For Rent Units divided by the sum of the number of Vacant For 
Rent Units, the number of Renter Occupied Units, and the number

[[Page 80569]]

of Rented, not occupied units. The vacancy rate will be calculated from 
the 3 most current ACS 1 year datasets available and average the 3 
values. Initially, this threshold will be set at 4 percent, meaning 
areas designated for Small Area FMRs must have vacancy rates higher 
than 4 percent.
    [cir] Adds an additional requirement to the voucher concentration 
ratio included in the proposed rule. In addition to requiring the ratio 
of the proportion of voucher tenants in concentrated low-income areas 
(CLIAs) to the proportion of renter occupied units in CLIAs to exceed a 
minimum threshold (initially 155 percent), the final rule requires that 
the numerator of the ratio (the proportion of voucher tenants in CLIAs) 
meet or exceed a minimum threshold. Initially, this threshold will be 
set at 25 percent.
     Exempts all project-based vouchers from required 
application of Small Area FMRs but allows a PHA operating under the 
Small Area FMRs for its tenant-based program to apply Small Area FMRs 
to future PBV projects (and to current PBV projects provided the owner 
mutually agrees to the change).
     Provides that a PHA's selection to use Small Area FMRs for 
PBVs would not require HUD approval but should be undertaken in 
accordance with guidance issued by HUD and indicated in the PHA's 
administrative plan.
     Rather than codify both the selection criteria and the 
selection values in the regulatory text as in the proposed rule, the 
final rule codifies the selection criteria in the regulatory text, but 
does not codify the selection values in the regulatory text. The 
selection values for the first round of Small Area FMR areas is 
announced in a separate notice published in today's Federal Register. 
The selection values for future designations of Small Area FMR areas 
will be made available for public comment via Federal Register notice 
before HUD selects additional areas to be designated as Small Area FMR 
Areas.
     Makes two changes to the exception payment standard 
requirements in response to public comments:
    [cir] PHAs not operating in Small Area FMR designated areas may 
establish exception payment standards for a ZIP code area of up to 110 
percent of the relevant Small Area FMR by notifying HUD; and
    [cir] The 50 percent population cap (24 CFR 982.503(c)(5)) will not 
be applicable to Exception Payment Standards in Small Area FMR areas.
     Exempts manufactured home space rental from Small Area 
FMRs.
     Provides that PHAs have up to three months from the date 
when the new FMRs go into effect in which to update their payment 
standards if a change is necessary to fall within the basic range of 
new FMRs. For example, if the new FMR went into effect on October 1, 
2017, the PHA would need to update their payment standard if necessary 
to fall within the basic range of the new FMRs no later than January 1, 
2018.
     Provides HUD may suspend a Small Area FMR designation for 
a metropolitan area, including at the request of a PHA, where HUD 
determines such action is warranted based on a documented finding of 
adverse rental housing market conditions that will be set out by notice 
(for example, the metropolitan area experiences a significant loss of 
housing units as a result of a natural disaster).
     Provides that HUD may provide an exception payment 
standard for a PHA administering the HCV program under Small Area FMRs 
for an entire ZIP Code area in accordance with the conditions and 
procedures provided by notice in the Federal Register. The requirements 
at Sec.  982.503(c) do not apply to these exception payment standard 
requests.

C. Costs and Benefits

    The main benefit of the final rule is that, through setting rental 
subsidy amounts at a more local level, assisted households will be more 
able to afford homes in areas of high opportunity than under current 
policy. Such moves are expected to benefit both individual households, 
for example, through access to better schools or safer neighborhoods, 
and areas as a whole through reducing concentrated neighborhood 
poverty. Other benefits could arise through the reduction of 
overpayment of rent in areas where the neighborhood rent is below the 
metropolitan average. Early evidence from current Small Area FMR 
locations suggests that there could be per-voucher cost decreases 
relative to 50th percentile rents, depending on the choices made by 
tenants. Evidence also suggests that families moved to better 
neighborhoods with higher rents, although not greatly in excess of the 
metropolitan FMR, which resulted in no overall program cost 
increases.\1\ Finally, the final rule eliminates the year to year 
volatility of some areas changing to and from 50th percentile FMRs.
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    \1\ Please see Collinson and Ganong, ``The Incidence of Housing 
Voucher Generosity'', available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255799.
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    Potential costs of the final rule include the administrative 
expenses associated with implementation on the part of PHAs. 
Additionally, if there are barriers to households moving to areas of 
higher opportunity beyond housing costs, such as transportation 
expenses or social factors, assisted households might be worse off if 
they can no longer afford their current units in their neighborhoods. 
This may be particularly true for elderly families or families with a 
disabled member; however, HUD regulations allow PHAs wide latitude in 
setting payments standards for disabled tenants as ``reasonable 
accommodations'' of their disabilities. Finally, if the long-term 
impacts of the final rule cause per-voucher costs to rise, fewer 
households would receive assistance without an overall increase in 
program funds.

II. Background

The Housing Choice Voucher Program and Fair Market Rents
    HUD's HCV program helps low-income households obtain standard 
rental housing and reduces the share of their income that goes toward 
rent. Vouchers issued under the HCV program provide subsidies that 
allow individuals and families to rent eligible units in the private 
market. A key parameter in operating the HCV program is the FMR. In 
general, the FMR for an area is the amount that would be needed to pay 
the gross rent (shelter rent plus utilities) of privately owned, 
decent, and safe rental housing of a modest (non-luxury) nature with 
suitable amenities. In addition, all rents subsidized under the HCV 
program must meet rent reasonableness standards. Rent reasonableness is 
determined by PHAs with reference to rents for comparable unassisted 
units.
    In the HCV program, the FMR is the basis for determining the 
``payment standard amount'' used to calculate the maximum monthly 
subsidy for a voucher household (see Sec.  982.503). PHAs may establish 
payment standards between 90 and 110 percent of the FMR.\2\ HCV program 
households receive a housing assistance payment equal to the difference 
between the lower of the gross rent of the unit or the payment standard 
established by the PHAs and the family's Total Tenant Payment (TTP), 
which is generally 30 percent of the household's adjusted monthly 
income. Participants in the voucher program can choose to live in units 
with gross rents higher than the payment standard, but would be 
required to pay the full cost of the difference between the gross rent 
and the payment standard, in addition to their TTP.

[[Page 80570]]

Please note that at initial occupancy the family's share cannot exceed 
40 percent of adjusted monthly income.
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    \2\ Moving to Work (MTW) agencies have the authority to waive 
Sec.  982.503 and can propose, for HUD approval, alternate rent 
policies in their Annual MTW Plan.
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    HUD establishes FMRs for different geographic areas. Because 
payment standards are based on FMRs, housing assistance payments on 
behalf of the voucher household are limited by the geographic area in 
which the voucher household resides. HUD calculates FMRs for all 
nonmetropolitan counties and metropolitan areas. To date, the same FMR 
is applicable throughout a nonmetropolitan county or metropolitan area, 
which generally is comprised of several metropolitan counties. FMRs in 
a metropolitan area (Metropolitan FMR) represent the 40th percentile 
(or in special circumstances the 50th percentile) gross rent for 
typical non-luxury, non-substandard rental units occupied by recent 
movers in a local housing market.\3\
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    \3\ General information concerning FMRs including more detailed 
information about their calculation is available at https://www.huduser.gov/portal/datasets/fmr.html.
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    As noted earlier, HUD regulations have allowed a PHA to set a 
payment standard between 90 percent and 110 percent (inclusive) of the 
FMR. PHAs may determine that payment standards that are higher than 110 
percent, or lower than 90 percent, are appropriate for subareas of 
their market; in this instance, a PHA would request HUD approval for a 
payment standard below 90 percent or an exception payment standard 
above 110 percent. The total population of a HUD-approved exception 
payment area (i.e., an area covered by a payment standard that exceeds 
110 percent of the FMR) may not include more than 50 percent of the 
population of the FMR area (see Sec.  982.503).
    On October 2, 2000, at 65 FR 58870, HUD published a rule (2000 
rule) establishing policy, currently in HUD's codified regulations, to 
set FMRs at the 50th percentile for ``areas where higher FMRs are 
needed to help families, assisted under HUD's program as well as other 
HUD programs, find and lease decent and affordable housing.'' This 
policy was put in place to achieve two program objectives: (1) Increase 
the ability of low-income families to find and lease decent and 
affordable housing; and (2) provide low-income families with access to 
a broad range of housing opportunities throughout a metropolitan area. 
The policy further provides that PHAs that had been authorized to use 
FMRs set at the 50th percentile rent may later be required to use FMRs 
set at the 40th percentile rent. This would occur if the FMR were set 
at the 50th percentile rent to provide a broad range of housing 
opportunities throughout a metropolitan area for three years, but the 
concentration of voucher holders in the metropolitan area did not 
lessen.
    Since HUD established the 50th percentile FMRs 16 years ago, 
research has emerged \4\ that indicates that 50th percentile FMRs are 
not an effective tool in increasing HCV tenant moves from areas of low 
opportunity to higher opportunity areas. Specifically, it appears that 
much of the benefit of increased FMRs simply accrues to landlords in 
lower rent submarket areas in the form of higher rents rather than 
creating an incentive for tenants to move to units in communities with 
more and/or better opportunities. As provided in HUD's currently 
codified regulation, to determine the 50th percentile program's 
effectiveness, HUD must measure the reduction in concentration of HCV 
tenants (objective 2 above) presumably from high poverty areas, over a 
3-year period. If there is no measurable reduction in the concentration 
of HCV tenants, the FMR area loses the 50th percentile FMRs for a 3-
year period. A large number of areas have been disqualified from the 
50th percentile program for failure to show measurable reduction in 
voucher concentration of HCV tenants since 2001 when the program 
started, which strongly suggests that the deconcentration objective is 
not being met.\5\
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    \4\ From 2000 to 2010, however, voucher concentration rose in 
the largest metro areas, even though most of those areas used 50th 
percentile FMRs for at least part of that period. Kirk McClure, Alex 
F. Schwartz, and Lydia B. Taghavi, ``Housing Choice Voucher Location 
Patterns a Decade Later,'' November, 2012, p 7. In 2010, 24 percent 
of vouchers in the 50 largest areas were used in tracts where at 
least 10 percent of households used vouchers, compared to 16 percent 
in 2000, p 7.
    \5\ Areas may subsequently requalify for 50th percentile status 
after a 3-year period.
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History of Small Area FMRs
    Since the establishment of the 50th percentile program, HUD has 
developed Small Area FMRs to reflect rents in ZIP code based areas with 
a goal to improve HCV tenant outcomes. Small Area FMRs have been shown 
to be a more direct approach to encouraging tenant moves to housing in 
lower poverty areas by increasing the subsidy available in specific ZIP 
codes to support such moves.\6\ Since 2010, when the United States 
Census Bureau made available data collected over the first 5 years of 
the American Community Survey (ACS), HUD has considered various 
methodologies that would set FMRs at a more granular level. HUD's goal 
in pursuing the Small Area FMR methodology is to create more effective 
means for HCV tenants to move into higher opportunity, lower poverty 
areas by providing them with subsidy adequate to make such areas 
accessible and to thereby reduce the number of voucher families that 
reside in areas of high poverty concentration.
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    \6\ Please see Collinson and Ganong, ``The Incidence of Housing 
Voucher Generosity'', available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255799.
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    Toward this end, through a Federal Register notice published on May 
18, 2010, at 75 FR 27808, HUD announced that in Fiscal Year (FY) 2011 
it would seek to conduct a Small Area FMR demonstration project to 
determine the effectiveness of FMRs which are published using U.S. 
Postal Service ZIP codes as FMR areas within metropolitan areas. HUD 
also solicited public comment on the proposed demonstration. On 
November 20, 2012, at 77 FR 69651, HUD announced the commencement of 
the Small Area FMR Demonstration, for which advance notice was provided 
on May 18, 2010, and further announced the participation of the 
following PHAs: The Housing Authority of the County of Cook (IL), the 
City of Long Beach (CA) Housing Authority, the Chattanooga (TN) Housing 
Authority, the Town of Mamaroneck (NY) Housing Authority, and the 
Housing Authority of Laredo (TX).
    Through a second Federal Register notice published on August 4, 
2010, at 75 FR 46958, HUD mandated the use of Small Area FMRs in place 
of metropolitan-area-wide-FMRs to settle litigation in the Dallas, TX, 
HUD Metro FMR Area. Small Area FMRs have been in operation in Dallas, 
Texas, as part of a court settlement since 2010, and in a small number 
of PHAs since 2012.
HUD Proposals To Move to Small Area FMRs
    On June 2, 2015, at 80 FR 31332, HUD published an advance notice of 
proposed rulemaking (ANPR) entitled ``Establishing a More Effective 
Fair Market Rent (FMR) System; Using Small Area Fair Market Rents 
(Small Area FMRs) in Housing Choice Voucher Program Instead of the 
Current 50th Percentile FMRs.'' In this ANPR, HUD announced its 
intention to amend HUD's FMR regulations applicable to the HCV program 
to provide HCV tenants with subsidies that better reflect the localized 
rental market, including subsidies that would be relatively higher if 
they move into areas that potentially have better access to jobs, 
transportation, services, and educational opportunities. The ANPR 
sought public

[[Page 80571]]

comment on the use of Small Area FMRs for the HCV program within 
certain metropolitan areas. HUD received 78 public comments in response 
to the ANPR.
    On June 16, 2016, at 81 FR 39218, HUD published a proposed rule 
that require the use of Small Area FMRs in place of the 50th percentile 
rent to address high levels of voucher concentration. The proposed rule 
addressed the issues and suggestions raised by public commenters on the 
ANPR. (See 81 FR 39222 through 39224.) In addition to responding to 
public comments on the ANPR, HUD specifically requested comment on 
certain issues. (See 81 FR 39224 through 39226.) HUD received 113 
comments on its June 16, 2016, proposed rule. The public comments can 
be found at https://www.regulations.gov/docket?D=HUD-2016-0063.
    The significant issues raised by the public commenters and HUD's 
responses are provided in the following section of this preamble.

III. Discussion of Public Comments and HUD's Responses

General Comments
    Commenters were divided in their support for the rule. For those 
commenters that supported the rule they stated that this new 
methodology was long overdue because the current system was not 
working. Commenters stated that the current system was not working and 
HUD's proposal sounded like a good solution. Commenters stated that 
creating a system where cities, counties and municipalities could have 
a finer laser point on their rental markets could increase subsidy 
utilization rates and customer choice. The commenters stated that they 
highly recommended not only looking at the proposed methodologies but 
also collecting and refining more data from cities on their housing 
stock and availability. A commenter stated that setting FMRs for 
smaller areas is an ingenious solution because it will put an end to 
unnecessarily high subsidies in high poverty areas, and will gradually 
erode the legacy of segregation by giving HCV households more access to 
low-poverty neighborhoods. Another commenter stated that this FMR 
change is a welcome innovative step toward increasing housing choices 
for low-income individuals and families. Other commenters stated that 
the goal of the Small Area FMR rule will benefit people with 
disabilities by affording them better opportunities for integration 
into the community.
    For those commenters that opposed the rule they offered the 
following concerns. A commenter stated HUD's proposal would result in 
Section 8 recipients in designated ZIP codes experiencing decreases in 
their subsidies, and these recipients would be obliged to increase 
their out-of-pocket share. Other commenters stated that research 
indicates low poverty rates are not 100 percent indicative of high 
opportunity areas. The commenters stated that given this information, 
Small Area FMRs are not an indicator of areas of opportunity and cannot 
be substituted for more robust mobility efforts resulting in poverty 
deconcentration, racial/ethnic deconcentration, and other positive 
outcomes associated with areas of opportunity. Other commenters 
similarly stated that voucher holders access to opportunity/higher 
market neighborhoods is only partially impacted by adequate payment 
standards. The commenters stated that while higher payment standards 
are essential this is not a solution to moving low-income families with 
children into opportunity neighborhoods. Commenters stated that HUD 
should not implement Small Area FMRs unless HUD revises the HCV funding 
formula to ensure that implementation of the rule does not result in 
fewer households being subsidized under the voucher program.
    The following presents the specific issues that commenters raised 
on the proposed rule and HUD's responses.
Specific Comments
    In the proposed rule, HUD sought comment on 13 specific areas 
presented below.
    1. Should HUD provide for PBVs that are in the pipeline to continue 
using metropolitan FMRs even if the area is designated as a Small Area 
FMR area? Additionally, should HUD require newly proposed PBVs post 
Small Area FMR designation to use Small Area FMRs?
    Comment: In response to the question of whether PBVs in the 
pipeline in a designated area, and newly proposed PBVs post-
designation, should use Small Area FMRs, commenters expressed wide-
ranging views. Many stated that applying Small Area FMRs to existing 
PBV projects or those in the pipeline could destabilize deals (e.g., 
impact their value for LIHTC allocation, etc.). Some commenters 
indicated Small Area FMRs would assist in placing PBV units in high 
opportunity areas and reduce incentives to develop units in high-
poverty areas. Other commenters stated Small Area FMRs would not be 
high enough to achieve the goal of creating units in high opportunity 
areas. Some suggested Small Area FMRs should not apply to PBVs at all 
because PBVs are essential to revitalization and preservation 
strategies. In summary, commenters offered differing views: Some 
recommend PBVs be excluded entirely (with or without an opt-in 
provision); some recommend voluntary adoption for new or pipeline 
projects, and others advocate application to all new projects to 
encourage placement of PBVs in high opportunity areas. One commenter 
requested HUD remove the word ``jurisdiction'' in proposed Sec.  
888.113(h), to clarify that the new Small Area FMRs apply in any zip 
code where a PHA's voucher is placed in the metropolitan area.
    HUD Response: HUD appreciates that PBVs relationship to FMRs is 
different than tenant-based vouchers; for example, PBVs are often used 
for preservation in low-income neighborhoods where the Small Area FMR 
would be lower than current FMRs--however, Small Area FMRs that are 
higher than current FMRs could help PBVs reach high opportunity 
neighborhoods. In the context of HUD's Rental Assistance Demonstration 
(RAD), the use of Small Area FMRs for PBV may limit PHA options in 
terms of deciding whether PBV or PBRA is the appropriate choice for the 
RAD conversion.
    Given the range and variation among public comments, and the range 
of uses of PBV within HUD's rental assistance programs, HUD is choosing 
to exempt all current and future PBVs from Small Area FMRs at this 
time. However, if a PHA is operating its tenant-based program under the 
Small Area FMRs, the PHA may apply Small Area FMRs to all future PBV 
projects if it establishes such a policy in its PHA administrative 
plan. In such a case, the PHA may also choose to also establish a 
policy that allows the PHA to apply the Small Area FMRs to current PBV 
projects, provided the owner is willing to mutually agree to do so. The 
application of the Small Area FMR to the PBV project must be 
prospective. The PHA and the PBV project owner operating under the 
Small Area FMRs may not subsequently choose to revert back to the 
metropolitan-wide FMR, regardless of whether the PHA subsequently 
changes its administrative policy to no longer apply Small Area FMRs to 
PBV projects. HUD believes this approach offers maximum flexibility for 
varied circumstances and HUD will closely monitor the results of the 
policy including for any fair housing or civil rights concerns.

[[Page 80572]]

    HUD is also removing the term ``jurisdiction'' in Sec.  888.113(h) 
for consistency since HUD provides approval to a ``PHA'' that requests 
to voluntarily use Small Area FMRs under 982.113(c) as opposed to a 
``PHA jurisdiction''.
    2. The proposed rule provides for Small Area FMR area selection 
parameters to be codified in regulatory text. HUD is seeking comment on 
whether these parameters should be codified or should be incorporated 
into each annual proposed FMR notice to provide HUD, PHAs, and other 
stakeholders with flexibility, in any given fiscal year, to offer 
changes to these selection parameters and have the opportunity to 
comment before any changes to the parameters are made.
    Comment: Some commenters proposed codifying area selection criteria 
with limited flexibility in the specific parameter values for reach 
(percentages, populations). They recommended HUD should codify the 
criteria for selecting Small Area FMR areas but the final regulations 
should allow HUD to revise the Small Area FMR criteria if necessary, 
through notice and opportunity for public comment, in the Federal 
Register. Commenters suggested this would be the way to ensure changes 
are guaranteed to fall under the informal administrative rulemaking 
process. However, other commenters preferred incorporating the 
parameters into the annual notice as a way to allow for comments and 
perhaps changes before final Small Area FMRs are issued for that year--
enabling potential flexibility for changes on an annual basis. 
Commenters indicate that HUD should make clear whether Small Area FMRs 
designations are permanent.
    HUD Response: In order to provide specificity to FMR users, and 
flexibility to HUD, the final rule codifies the definitions of 
selection parameters in regulatory text but will not include the 
specific values for these selection criteria in the regulatory text. 
The values of the selection parameters for the first round of Small 
Area FMR area selections are specified in a separate Federal Register 
notice published today. The values of selection parameters for 
subsequent Small Area FMR Area designations, which will be made every 5 
years, will be specified through Federal Register notice with 
opportunity for public comment as new Small Area FMR designations are 
made. Further, once an area is selected to use Small Area FMRs, the 
selection is permanent. In future years, HUD intends to make additional 
selections based on updated information and different selection 
parameter values.
    3. Several commenters to HUD's ANPR suggested that HUD provide for 
tenant rent protections in ZIP codes where the Small Area FMR is below 
the metropolitan area and tenants choose not to move. No additional 
tenant protections were instituted for tenants serviced by PHAs 
accepting HUD's invitation to participate in the Small Area FMR 
demonstration nor were additional tenant protections implemented for 
tenants living in the Dallas, TX HUD Metropolitan Area when Small Area 
FMRs were implemented there. However, as part of a transition strategy 
between Metropolitan FMRs and Small Area FMRs, HUD seeks comment on 
what additional policies or requirements the final rule should include 
that would mitigate the impact of significant and abrupt decreases in 
the FMRs for certain ZIP code areas on families currently under HAP 
contract in those impacted areas.
    Comment: Commenters suggested a range of additional policies or 
requirements that would mitigate the impact of significant or abrupt 
decreases in the FMR for families currently in those areas. Many 
requested that HUD hold all current tenants harmless permanently if 
they remain in their same unit (or, as some suggested, neighborhood); 
others suggested until tenants move or remain for more than 5 years; 
and others still suggested hold harmless should only apply to certain 
populations. Commenters urged HUD to fund support mechanisms for 
impacted households, such as mobility counseling, training and guidance 
on reasonable accommodation procedures, and others. Some commenters 
stated that no additional protections were necessary. In addition, 
commenters also raised concerns about specific populations, exception 
payment standards, phasing in of payment standard reductions, and 
incorporation of vacancy rates; those comments are handled elsewhere in 
the response to comments within this preamble as other questions more 
directly focus on that content.
    HUD Response: Based on the comments received, HUD agrees that it is 
important to protect tenants, and therefore, the following changes have 
been incorporated within this final rule. The final rule makes 
conforming regulatory changes in accordance with Section 107 of HOTMA, 
which provides PHAs with the option to establish an administrative 
policy that would hold harmless those families remaining in place from 
payment standard reductions that are currently required at the family's 
second annual recertification if the family's payment standard falls 
outside of the basic range as the result of a decrease in FMRs 
(including a decrease in FMR attributable to the implementation of 
Small Area FMRs). This will be done without requiring individual 
exception payment standard requests.
    In addition, the final rule provides PHAs with the option to 
establish a new payment standard for families under HAP contract 
between the full ``hold harmless'' option provided under HOTMA and the 
new payment standard based on the Small Area FMR. Under this option, 
the PHA would have greater flexibility than what is afforded under 
HOTMA (which essentially requires the PHA to either hold the in-place 
families completely harmless or transition them to the new payment 
standard). This policy would allow the PHA to still achieve some 
budgetary flexibility by reducing the payment standard for families 
under HAP at the second reexamination, while ensuring the reduction in 
subsidy is modest and does not place families at risk of displacement.
    The rule further extends these same flexibilities to the PHA if the 
payment standard decrease is not the result of a decrease in the FMR.
    Finally, in order to ensure that a suitable amount of units remain 
available during the transition to Small Area FMRs, this final rule 
limits the annual decrease in Small Area FMRs to no more than 10 
percent of the area's FMR in the prior fiscal year. That is, the 
current FMR may be no less than 90 percent of the area's FMR in the 
previous fiscal year. In addition, the final rule provides that HUD may 
approve exception payment standards for PHAs administering their HCV 
programs under Small Area FMRs for an individual ZIP code area in 
accordance with conditions and procedures set forth in a separate 
Federal Register notice as opposed to the normally applicable 
requirements at 982.503(c).
    4. Related to question 3, HUD seeks comment on whether the final 
rule should limit the potential decline in the FMR for a ZIP code area 
resulting from the implementation of Small Area FMRs in order to ensure 
that sufficient housing opportunities remain available to voucher 
holders? If so, HUD seeks recommendations on specific policies or 
requirements that should be included in the final rule to achieve the 
desired outcome.
    a. For example, an approach would be to allow the PHA to establish 
exception payment standards above the basic

[[Page 80573]]

range for impacted ZIP code areas meeting certain conditions through a 
streamlined HUD approval process. One example of this may be that PHAs 
could have the discretion of setting their payment standards at up to 
130 percent of the Small Area FMR in the 1st year of transition, at up 
to 120 percent of the Small Area FMR in the 2nd year of transition, and 
at up to 110 percent of the Small Area FMR in the 3rd and subsequent 
years following implementation.
    b. With respect to protections for tenants currently under HAP 
contract, one possibility may be to increase the amount of time that 
the family is held harmless from a decrease in the payment standard. 
For instance, instead of the lower payment standard going into effect 
on the second reexamination following the effective date of the 
decrease in the payment standard, the final rule could provide that the 
lower payment standard would not go into effect for a family under HAP 
contract until a later re-examination (e.g., third, fourth, or fifth 
reexamination).
    Comment: Many commenters urged HUD to provide flexibility for PHAs 
to set rent levels and to protect tenants served by PHAs that do not 
choose to hold tenants harmless as allowed under HOTMA. Commenters 
urged HUD to implement the provision in HOTMA that gives PHAs the 
discretion to hold harmless decreases in Small Area FMRs and FMRs for 
current tenants. Others suggested PHA-administered phase-ins and 
increased timeframes before decreases are required are not necessarily 
helpful, as such phase-ins and timeframes add to administrative 
tracking requirements and increase program audit risks for the 
administering agency, as well as cause confusion for residents and 
landlords.
    Regarding the proposal in which PHAs could have exception payment 
standards above the basic range, some commenters embraced the proposal; 
however, others felt it would not go far enough, and only delay the 
onset of rent burdens. Compared to a Small Area FMR phase-in, some 
commenters suggested it would protect fewer families since it is likely 
that only some PHAs would implement the higher payment standards. Other 
commenters suggested HUD could permit PHAs to set payment standards for 
eligible voucher holders that fall anywhere between the Small Area FMR 
and the metro-level FMR. Commenters also suggested that HUD limit the 
amount the FMR or payment standard could fall below metropolitan FMRs 
each year. Suggestions offered by the commenters ranged from suggesting 
Small Area FMRs be set no lower than 90-95 percent of the metropolitan 
FMR, no lower than 80-90 percent the second year, and so on in 5 
percent or 10 percent increments.
    Some commenters supported limiting annual FMR reductions by 3 
percent or 5 percent, while others suggested the decreases should occur 
over a 5-year instead of a 3-year period (for all areas, or for only 
those areas that decrease by more than 10 percent), or the total drop 
be no more than 5 percent. Other commenters suggested changes included 
removing or increasing the cap on Small Area FMR values.
    Regarding the proposal to increase the amount of time that the 
family is held harmless from a decrease in the payment standard, some 
commenters suggested HUD hold the rent harmless until at least the 
fifth reexamination following implementation of Small Area FMRs. Other 
commenters stated that if HUD implements the HOTMA payment standard 
provision, there would be no need to implement a hold harmless 
provision that holds payment standards harmless in the third, fourth, 
or fifth reexamination.
    HUD Response: As noted above, the final rule implements a number of 
tenant protection policies: First, the final rule conforms the 
regulation in accordance with Section 107 of HOTMA, which provides PHAs 
with the option to maintain an in-place family's current payment 
standard at a level above a payment standard at the top of the basic 
range of the a new, lower FMR. Second, the final rule further provides 
PHAs with the option to establish a new payment standard for families 
under the HAP contract between the full ``hold harmless'' option 
provided under HOTMA and a payment standard based on the basic range of 
the new lower Small Area FMR. It is noted that the rule also extends 
these same flexibilities to the PHA in cases where the payment standard 
decrease is not a result of a decrease in the FMR.
    The rule maintains that in cases where the PHA will apply a 
decrease in the payment standard to families during the term of the HAP 
contract, the earliest that the PHA may apply the initial reduction to 
the payment standard amount is the second regular reexamination 
following the effective date of the change in the payment standard 
amount. This provides at minimum a family with no less than the amount 
of time previously provided under the regulations before a reduction in 
the payment standard may take effect during the term of the family's 
HAP contract. The final rule also provides the PHA with the 
administrative flexibility to further reduce the payment standard for 
the families that remain under HAP contract if the PHA wishes to 
gradually reduce or eliminate the difference between the family's 
payment standard and the normally applicable payment standard on the 
PHA's payment standard schedule over time.
    HUD notes that section 78001 of the Fixing America's Surface 
Transportation Act (or FAST Act), amended the 1937 Act to allow PHAs to 
undertake full income reexaminations for families with 90 percent or 
more of their income from fixed-income sources every three years 
instead of annually. HUD recognizes that implementation of this change 
in the frequency of reexaminations may have significant ramifications 
in terms of when a decrease in a payment standard could take effect 
during the term of the HAP contract for some families given that under 
this rule the decrease may not take effect until the second regulation 
reexamination. Rather than try to incorporate changes to the tenant 
protection provisions of this rule in anticipation of those potential 
complications, HUD will instead consider if any changes are necessary 
as part of the forthcoming rule-making for implementation of those FAST 
Act provisions.
    The final rule further provides that the PHA may establish 
different policies regarding how decreases in payment standards will 
apply during the term of the HAP contract for designated areas within 
their jurisdiction (e.g., for different zip code areas). However, the 
PHA must apply the same policies to all families under HAP contract 
within that designated area.
    Fourth, controlling for extremely large decreases in FMRs, the 
final rule protects families, by limiting the maximum amount the FMR 
may decrease year over year to 10 percent of the prior year's FMR for 
the area. This protection applies to all tenants--families under HAP 
contract, current participants that either want or are required to move 
to new units, and families from the waiting list who are issued 
vouchers to begin their initial housing search, and to metropolitan and 
non-metropolitan county FMRs.
    Fifth, the final rule permits a PHA that is administering its HCV 
program under the Small Area FMRs to request and HUD to approve 
exception payment standards for a ZIP Code Area under the conditions 
and procedures set forth in a Federal Register Notice instead of the 
requirements under 982.503(c). This will allow HUD to establish a 
process by which a PHA may request and receive approval to establish an 
exception payment standard promptly for a ZIP

[[Page 80574]]

Code area if necessary to react to rapidly changing market conditions 
or to ensure sufficient rental units are available for voucher 
families.
    5. The proposed rule adds a new paragraph (i) to Sec.  888.113 to 
address the transition of metropolitan areas that were previously 
subject to 50th percentile FMRs. HUD believes that the Small Area FMR 
methodology will provide HCV tenants with greater access to areas of 
opportunity than metropolitan area wide 50th percentile FMRs. As a 
result, this rule proposes that a 50th percentile metropolitan area 
designated for Small Area FMRs would transition to Small Area FMRs on 
the effective date of the Small Area FMR designation. HUD is also 
proposing that a 50th percentile FMR area that is not designated for 
Small Area FMRs would remain under 50th percentile FMRs until the end 
of the existing 3-year period for the 50th percentile FMRs prior to 
reverting to the standard 40th percentile FMRs. The rule does not 
eliminate provisions that permit a PHA with jurisdiction in a 50th 
percentile FMR area that reverts to the standard 40th percentile FMR to 
request HUD approval of payment standard amounts based on the 50th 
percentile rent in accordance with the existing Sec.  982.503(f); 
however, HUD is specifically seeking comment on whether this provision 
should be eliminated in order to phase out the use of 50th percentile 
rents for deconcentration purposes. HUD would also appreciate comments 
as to whether or not the current SEMAP deconcentration standard is 
appropriate as the basis for PHAs requesting HUD to approve payment 
standards based on 50th percentile rents under existing Sec.  
982.503(f). HUD is specifically seeking comment on these proposed 
polices, as well as suggestions for alternative approaches or other 
recommendations on how best to phase-out 50th percentile rent FMRs for 
impacted metropolitan areas and transition the area to either the Small 
Area FMRs or the standard metropolitan-wide 40th percentile FMRs.
    Comment: Commenters responses to this issue varied. Some commenters 
requested continuation of the 50th percentile policy in its entirely 
(including expanding it so that all FMRs would be set at the 50th 
percentile). Other commenters recommended it be optional if areas 
proved successful deconcentration using it, and others recommended 
phasing out 50th percentile rents altogether. Some commenters responded 
that the SEMAP standard should be considered an appropriate basis for 
PHAs to request payment standards based on the 50th percentile until 
such time as the Section Eight Management Assessment Program (SEMAP) 
provision for deconcentration is modified. Others commented that if HUD 
allows agencies that earn the SEMAP deconcentration bonus to retain 
50th percentile FMRs, it should also require such agencies to 
demonstrate that retaining 50th percentile FMRs would be more effective 
in enabling voucher holders to live in high-opportunity areas than 
adopting Small Area FMRs. and others still indicated that before 
determining this, HUD should clarify proposed mobility factors of SEMAP 
reform.
    HUD Response: It is impractical to maintain both 50th percentile 
FMRs and Small Area FMRs as the FMR tools that HUD provides to help 
deconcentrate voucher tenants in metropolitan areas. However, HUD 
recognizes that some PHAs have attained deconcentration success using 
50th percentile FMRs. Therefore, as in the proposed rule, the final 
rule provides that current 50th percentile areas that are designated 
for Small Area FMR usage will transition to using Small Area FMRs when 
Small Area FMRs become effective and areas not designated for Small 
Area FMR usage will remain 50th percentile areas until the end of their 
3-year designated period and then will revert to 40th percentile areas. 
PHAs operating in 50th percentile areas that do not convert to Small 
Area FMR areas and do not choose to opt-in to using Small Area FMRs may 
follow the procedures available at 24 CFR 982.503(f) to apply to 
continue to use payment standards based on 50th percentile rents.
    6. HUD is specifically seeking comment on how to reduce the 
administrative burden on PHAs and simplify the transition to Small Area 
FMRs. For example, HUD is proposing to change the percentage decrease 
in FMRs that triggers rent reasonableness redeterminations from 5 
percent to 10 percent for Small Area FMR PHAs. HUD requests comments, 
however, regarding whether 10 percent is the right trigger for program-
wide rent reasonableness redetermination, whether HUD should limit this 
proposal to Small Area FMR decreases, or also change the percentage of 
decrease that triggers rent reasonableness for all FMRs, and whether it 
should revise the trigger for program-wide rent reasonableness 
redeterminations at all. In regards to potentially expanding the 10 
percent trigger for rent reasonableness redetermination to a program-
wide requirement, HUD seeks comments on the trade-offs between 
administrative relief and decreased program oversight on rent levels. 
HUD also requests comments on what other changes would reduce the 
potential administrative burden and complexity for PHAs impacted by the 
implementation of Small Area FMRs.
    Comment: Commenters emphasized that that Small Area FMRs and other 
recent programmatic changes represent increased administrative burden. 
Many commenters supported increasing the threshold at which an FMR 
decline triggers a rent reasonableness redetermination from 5 percent 
to 10 percent as a way to reduce that burden. However, others 
recommended changing the trigger from 5 percent to 35 percent and 
allowing the PHA to make that change through their annual plan process. 
Some commenters opposed changing the standard altogether. Other 
commenters stated that they do not believe a change from 5 percent to 
10 percent is enough to reduce administrative burden sufficiently given 
the number of rent redeterminations expected from the transition to 
Small Area FMRs.
    Aside from whether and at what level to change the trigger, some 
commenters recommended this be program-wide, and not just for Small 
Area FMRs. Commenters urged HUD to issue updated rent reasonableness 
guidance--including for high opportunity neighborhoods to avoid methods 
disallowing rents if the methods do not adequately consider location. 
Commenters also urged HUD to require PHAs to be transparent with the 
data used to perform the analysis and make it publicly available.
    Other commenters urged HUD to publish new FMRs and Small Area FMRs 
far in advance of their effective date to avoid requiring PHAs to redo 
redeterminations. Commenters asked HUD to provide at least six months 
after publication of Small Area FMR designations before they are 
required to have Small Area FMR-based payment standards in place.
    Some commenters raised concerns about increasing the trigger for 
PBV because it would trigger rent reasonable studies that result in a 
significant loss of income to owners of PBV contracts. The commenters 
stated that for properties in which this income was assumed as part of 
initial financing or refinancing, the property is likely to become 
financially unstable and unable to meet its obligations. Other 
commenters stated that aside from rent reasonableness, the increased 
administrative costs of administering Small Area FMRs come at a time 
when PHAs are not being paid fully to administer the HCV program.

[[Page 80575]]

    HUD Response: Based on public comment, HUD agrees that a reduction 
in administrative burden is necessary. Therefore, HUD is adopting the 
proposed rule provisions which change the required rent reasonableness 
review standard from a 5 percent to a 10 percent decrease in the FMR. 
This change would apply not just to voucher units in Small Area FMR 
areas but to units in all FMR areas. Moreover, the final rule 
implements a policy that limits the annual decrease in FMRs (including 
Small Area FMRs). This change is being implemented in response to 
comments on the need for additional tenant protections, but should also 
provide some administrative relief to PHAs by having more certainty 
around the path of Small Area FMRs within areas where the Small Area 
FMR is below the metropolitan FMR as well as FMR decreases more 
generally.
    7. HUD is currently proposing, through this rulemaking, to expand 
the use of Small Area FMRs within the HCV program. HUD seeks public 
comment as to whether or not other HUD rental assistance programs would 
benefit from using Small Area FMRs in their operations. For example, 
would the rental assistance component of the Housing Opportunities for 
Persons with AIDS (HOPWA) programs be a candidate for Small Area FMR 
treatment? Frequently, metropolitan FMRs are inadequate for HOPWA-
assisted tenants to find units near health care facilities, or in 
neighborhoods with better job opportunities. Should the HOPWA program 
regulations be amended to allow participating jurisdictions the 
flexibility to set tenant-based assistance rents according to Small 
Area FMRs either in areas that would be designated Small Area FMR areas 
or for the HOPWA program more generally? Would other HUD programs 
benefit as well?
    Comment: Commenters responses to this issue were varied. Some 
commenters were against expansion to any other program, and some urged 
HUD to wait until Small Area FMRs could be studied more fully. Other 
commenters stated that they believed new tenants in tenant-based rental 
assistance programs could benefit from Small Area FMRs (e.g., HOPWA, 
CoC Rental Assistance, Legacy Shelter Plus Care program, HOME tenant-
based rental assistance,). The commenters that recommended expansion to 
other programs stated that applying the same Small Area FMR scheme 
would be less burdensome on PHAs and landlords than multiple standards.
    HUD Response: HUD appreciates the suggestions, but at this time, 
due the myriad of programs and program rules, it is beyond the scope of 
this rulemaking to make changes to these programs; therefore, HUD is 
proceeding solely with implementation of Small Area FMRs for the HCV 
program, which includes traditional vouchers and special purpose 
vouchers. HUD will consider the comments received for future rulemaking 
or other program implementation strategies for the various programs as 
the opportunity arises.
    8. As currently proposed, the Small Area FMR policy would apply to 
all residents within a ZIP code who receive housing vouchers. HUD seeks 
comment on whether there are certain situations or any specific groups 
of voucher recipients within the general population, such as persons 
with disabilities or elderly voucher recipients, where an alternate 
policy should apply that should exempt them from having their voucher 
level change as a result of this policy due to specific hardships they 
may encounter by having to choose between staying in their current area 
and receiving a smaller voucher or moving to a new area for the sake of 
obtaining a larger voucher?
    Comment: Many commenters urged HUD to hold all existing tenants 
harmless, and if HUD declined to do this, to hold disabled and elderly 
tenants harmless.
    HUD Response: In response to the commenters request that HUD hold 
disabled and elderly tenants harmless under this policy, HUD is 
prohibited from treating one or more protected class differently under 
the Fair Housing Act and other civil rights requirements, absent 
statutory authority. HUD in this rule is implementing robust tenant 
protections for all tenants, including those enacted in HOTMA, as 
outlined earlier in this preamble. HUD will study the specific impact 
on elderly and disabled voucher recipients as a result of this rule 
change to determine if additional policy changes are necessary.
    9. Are there specific groups within the general population of 
voucher holders for whom this policy change would be particularly 
burdensome? What are the ways in which this policy change could create 
a disproportionate burden on certain groups like elderly and disabled 
voucher holders?
    Comment: Commenters stated that there are specific groups of 
voucher holders for whom this policy change would be particularly 
burdensome. The commenters stated that these specific groups include 
the elderly, people with disabilities, and families with children. 
Commenters raised the concern that each group could face increased 
housing cost burdens, displacement, prohibitively expensive moves, and 
homelessness. Other commenters raised the concern that all tenants may 
have chosen their current location based on community, religious, 
medical, service provider, and social networks.
    Specifically, certain commenters stated that tenants with 
disabilities may not be able to find accessible units in higher rent 
neighborhoods and may face limited public transportation options. They 
may also face discrimination in these areas. Commenters stated that it 
is insufficient to suggest that these tenants are not at risk because 
they can request reasonable accommodation. The commenters stated that 
many people do not know enough about their rights to request the 
accommodation and will not be informed of them by landlords seeking 
higher payments. The commenters further stated that responding to 
requests for accommodations from a significant portion of voucher 
holders may be administratively burdensome for HUD. Specific 
recommendations from commenters focused exception payment standards 
(EPS) in which HUD should (1) notify all tenants who will experience a 
reduced payment standard of their right to a reasonable accommodation 
based on disability, (2) identify tenants, based on their participant 
file, who might be entitled to an EPS based on disability and take 
affirmative steps to accommodate them, and (3) publish additional 
guidance with the final rule that directs PHAs to allow EPS as a 
reasonable accommodation in any instance when a voucher family will 
experience a disability-related hardship as a result of being forced to 
pay over 30 percent of their income in rent or move.
    Commenters stated that elderly tenants may also share similar 
challenges finding accessible units, and that stability in a 
neighborhood may be more of an opportunity than mobility. Commenters 
also suggested families with children may be adversely impacted, as 
having a large number of children can act as a barrier to being able to 
find suitable housing. Commenters stated that families report longer 
search times and far fewer options.
    HUD Response: HUD agrees that the concerns raised by the commenters 
pose serious challenges for the specific populations raised above. As 
such, the final rule implements robust tenant protections for all 
tenants and a lengthened transition to full Small Area

[[Page 80576]]

FMR implementation as outlined earlier in this preamble. In addition, 
the final rule clarifies that reasonable accommodation requests may 
include exception payment standards of more than 120 percent of the 
published FMR, consistent with HOTMA. Consistent with current practice, 
for such requests, the focus of HUD's review will be on the exception 
payment standard requested by the PHA.
    10. HUD is seeking comment on the criteria that HUD selected for 
determining which metropolitan areas should be impacted by the shift to 
a Small Area FMR instead of the current 50th percentile policy. Did HUD 
use the correct criteria in making these choices? What other criteria 
should HUD be using to select metropolitan areas that will be impacted 
by this rule change and why are those criteria important?
    Comment: Commenters provided a range of responses on many topics, 
outlined below:
     Vacancy: Many commenters urged HUD to factor in vacancy 
data into the formula. Their recommendations included:
    [cir] Excluding low vacancy markets (those with a 4 percent, 5 
percent or 6 percent vacancy rates).
    [cir] Allow PHAs with low vacancy rates to opt out of Small Area 
FMRs, even if they meet HUD's criteria, and require PHAs with low 
vacancy rates that choose to adopt Small Area FMRs to hold current 
tenants harmless.
    [cir] Exempt low vacancy areas from decreases in authorized Section 
8 rent levels for existing tenants; Small Area FMRs should be 
implemented only for new tenants (or existing tenants who move) in 
these areas.
     Revising the formula
    [cir] Considering relative voucher concentration by measuring the 
difference--rather than the ratio--between the voucher and renter 
concentration shares. HUD should use the criteria that there must be at 
least a 15 percent difference between renter and voucher holder 
concentration in low-income areas.
    [cir] Compare voucher concentration to the distribution of all 
housing units rather than just rental units.
    [cir] Reduce the required proportion of rental units in areas over 
110 percent of the regional FMR to 17 percent, to capture more of our 
most deeply segregated metro areas. An alternative approach would 
prioritize metropolitan areas with the highest proportion of families 
with young children living in concentrated poverty neighborhoods.
    [cir] Lower this threshold for the share of rental units in ZIP 
codes with Small Area FMRs above 110 percent of the metro FMR at least 
to 15 percent.
    [cir] Change criterion to better target metropolitan areas in which 
overall segregation is the highest, with less focus on concentration of 
voucher households in high poverty areas relative to other renters.
     Exclusions and other comments
    [cir] Commenters also suggested that, in order not to impede PHAs 
whose program management has already resulted in participants living in 
higher opportunity/lower poverty areas, HUD should require adoption of 
Small Area FMRs only by those PHAs in Metro areas meeting the Small 
Area FMR designation criteria whose percentage of voucher holders 
living in concentrated low-income areas relative to all renters in 
concentrated low-income areas over the entire Metro FMR area exceeds 
155 percent.
    [cir] The use of Qualified Census Tracts (QCTs) in the criteria for 
designating Small Area FMR areas is inappropriate. In the LIHTC 
program, the purpose of QCTs is to increase the supply of affordable 
housing in these areas. It is contradictory to incentivize the 
construction of affordable rental units in certain areas on the one 
hand, and use Small Area FMRs to move residents out of those areas on 
the other.
    [cir] In addition to modifying the criteria, HUD should also revise 
the proposed regulation to give itself flexibility to designate highly 
segregated areas as Small Area FMR areas if it concludes that this is 
needed to further fair housing.
    HUD Response: While SAFMRs may be a useful tool for expanding 
choice and providing voucher holders with access to more units in 
opportunity areas, public comments on the proposed rule raised concerns 
with HUD's knowledge of how well SAFMRs will work in areas experiencing 
low vacancy rates. HUD agrees that areas with extremely low vacancy 
rates are indicative of rental markets in disequilibrium and the final 
rule includes additional selection criterion to those provided in the 
proposed rule. In order for the rental housing market to function in an 
orderly manner, there needs to be an ample supply of available vacant 
units. Once the vacancy rate falls below a certain percentage, 
typically when the quantity of units demanded exceeds the quantity of 
units supplied, this places upward pressure on rental prices. The 
solution is typically the creation of additional supply; however, in 
the short run, a market clearing price is harder to achieve and the 
rental market ceases to function normally. Therefore, the final rule 
includes vacancy rate as an additional selection criterion to those 
provided in the proposed rule. Commenters provided varied feedback on 
the level of vacancy for which areas should be excluded from Small Area 
FMR designation. The American Community Survey (ACS) provides the most 
comprehensive data measuring rental vacancies across all metropolitan 
areas; however, due to the manner in which vacancies are assessed in 
the ACS, as detailed in the Regulatory Impact Analysis of this rule, 
HUD research indicates that ACS based vacancy rates tend to 
underrepresent the actual level of vacancies across most markets; 
consequently, the final rule excludes any metropolitan area with an ACS 
based vacancy rate of 4 percent or lower from designation as a Small 
Area FMR designated area as a 4 percent vacancy rate measured by the 
ACS is roughly equivalent to an actual vacancy rate of 5 percent under 
reasonable assumptions.
    While HUD believes the criterion should remain focused on voucher 
concentration rather than residential segregation, HUD also agrees with 
commenters that the voucher concentration criterion should be improved 
to better target communities where voucher concentration is most 
severe. Consequently, in addition to the voucher concentration ratio 
included in the proposed rule, the final rule also requires the 
numerator of this measure, the concentration of voucher holders within 
concentrated low income areas, to meet a minimum standard level (25 
percent).
    HUD notes the other suggestions made by commenters and will 
evaluate program effects including access to neighborhoods with better 
employment opportunities, better schools, lower crime rates and lower 
racial and ethnic isolation to inform any future expansion of the 
program.
    11. The proposed rule makes no changes to 24 CFR 888.113(g), the 
FMR for Manufactured home space rental for voucher tenants that own 
manufactured housing units. Under this proposed rule Small Area FMRs 
would apply to manufactured home space rentals in areas designated for 
Small Area FMRs (i.e., FMRs for space rentals would be set at 40 
percent of the 2-bedroom Small Area FMR). Given the costly nature of 
moving a manufactured home, HUD is seeking comment on whether or not 
current voucher holders using their voucher for a manufactured home 
space should be exempt from Small Area FMRs at their current address?
    Comment: Most commenters suggested HUD should exempt manufactured 
home space rental from

[[Page 80577]]

Small Area FMRs wholesale. Others suggested an exemption for existing 
voucher holders so long as the voucher holder remains at the current 
address. Some suggested HUD exempt only when the Small Area FMR is 
lower than the metro FMR; some pointed out that voucher holders in ZIP 
codes where the payment standard will increase under Small Area FMR 
should be permitted to benefit from the increased payment standard. 
Others commented that Small Area FMRs should be voluntary altogether, 
including for those areas which may have vouchers for manufactured home 
space. Manufactured homes are often limited by local regulation to 
particular sites. Residents should not be penalized in subsidy 
available to support their housing choice based on the ZIP code 
location of allowable manufactured home sites.
    HUD Response: Based on public comment, the final rule exempts 
vouchers used to subsidize the rent of a manufactured home space from 
the use of Small Area FMRs.
    12. HUD has proposed to amend the Exception Payment Standard rules 
at 24 CFR 982.503 to account for the fact that FMR areas in Small Area 
FMR designated metropolitan areas will be ZIP codes. HUD is seeking 
public comment to determine if there are other amendments HUD should 
make to the Exception Payment Standard Regulations to better facilitate 
the approval process of Exception Payment Standards. For example, the 
current exception payment standard regulations require that an 
exception payment standard may not include more than 50 percent of the 
population of the FMR area. This may be an impractical requirement when 
determining exception payment standards within a ZIP code. Similarly, 
given that ZIP codes more narrowly define the FMR area, the provision 
within the regulation that program justification may include helping 
families find housing outside areas of high poverty may not be 
applicable even though an exception payment standard may be necessary. 
Therefore, HUD is soliciting feedback to ensure that the exception 
payment standard regulations are revised so that PHAs may use this 
component of the regulations to optimize the administration of their 
HCV programs.
    Comment: Some commenters offered that under Small Area FMRs, EPSs 
become much less necessary, other than to group neighborhoods into 
payment standard buckets to simplify program administration and limit 
significant volatility between years.
    Specific requests of commenters included eliminating the population 
cap that prevents more than 50 percent of an area to be covered by an 
EPS, and clarify that that exception rents may exceed 150 percent of 
Small Area FMR. Commenters also suggested HUD clarify how exceptions 
will work for Census tracts and other small geographic areas. Some 
commenters suggested EPS should be available up to 130 percent in the 
first two years of the program; others request up to 150 percent of the 
FMR. Another commenter stated that HUD should publish additional 
guidance with the final rule that directs PHAs to allow EPS as a 
reasonable accommodation in any instance when a voucher family will 
experience hardship or pay over 30 percent of their income in rent.
    Commenters recommended that PHAs be able to set a payment standard 
up to 120 percent of the FMR without requesting HUD approval. Other 
suggested eliminating the distinction between exceptions above and 
below 120 percent of FMR, as the differences and processes are complex. 
If they are kept separate, commenters suggested HUD should revise the 
regulation for 110-120 percent to eliminate the requirements that PHAs 
submit information other than data on market rents or inability to 
secure housing and, for standards below the basic range, rent burdens. 
If HUD retains the requirement that increases above 120 percent prevent 
financial hardship, it is crucial that HUD revise the regulation or 
provide guidance making clear that this includes potential hardship 
that deters families from moving to the exception area in the first 
place.
    As far as the process, overall, commenters requested streamlined 
processes, clear guidance and an expedited path for approvals that is 
standardized across local HUD offices and HUD headquarters. Some 
commenters suggested a system in which HUD's Office of Policy 
Development and Research obtains data from local housing authority rent 
reasonable databases to immediately grant exception payment standards 
that will support the utilization of vouchers and prevent families from 
falling into homelessness or remain homeless. Commenters suggested 
allowing exception payment standards to remain in place for a prolonged 
period without PHA action. HUD could review existing exception every so 
many years.
    HUD Response: This final rule addresses the operation of exception 
payment standards with respect to Small Area FMRs. Specifically, the 
rule allows PHAs to request exception payment standards within ZIP 
codes. Additionally, for the purposes of exception payment standards 
within the context of Small Area FMRs, the final rule removes the 50 
percent population cap for exception payment standards within ZIP 
codes. Furthermore, HUD is also simplifying the procedures for PHAs not 
using Small Area FMRs to run their HCV program. The final rule provides 
that PHAs in non-Small Area FMR areas may request an exception payment 
standard from the HUD Field Office of up to 110 percent of the relevant 
Small Area FMR with no additional supporting information. Finally, as 
noted earlier the final rule provides that HUD may approve a request by 
a PHA administering the HCV program under the Small Area FMRs for an 
exception payment standard for a ZIP Code area in accordance with the 
conditions and procedures set forth in a Federal Register Notice as 
opposed to the formerly applicable requirements under 982.503(c). This 
will allow HUD to establish a streamlined and responsive process for 
Small Area FMR ZIP Code area exception payment standard requests.
    HUD has decided against proposing comprehensive changes to its EPS 
regulations at this time due to the implementation of Small Area FMRs 
and the potential to learn from PHA experiences with their adoption and 
operation. The suggestions offered through the public comment process 
will however be taken into consideration whenever HUD does revisit its 
EPS regulations.
    13. HUD makes administrative data for research into HUD's programs 
available in a variety of ways (i.e., Public Use Microdata Sample--PUMS 
data, Research Partnerships, and Data License Agreements). HUD seeks 
comment on what additional data or dissemination strategies would be 
helpful to the public to assess the impact of the implementation of the 
Small Area FMR proposed rule.
    Comment: Commenters requested both data and dissemination at the 
federal and PHA levels. They include:
     PUMS data set should include geographic identifiers for 
the census tract and ZIP code tabulation area, and HUD Fair Market Rent 
Metro Areas (HMFAs), so researchers can incorporate neighborhood 
information from, for example, the American Community Survey. Because 
HMFAs often diverge from OMBs definitions of metropolitan areas, it 
would also be helpful to append key HMFA-level variables (poverty rate, 
median gross rent, income, etc.) to the microdata.

[[Page 80578]]

     Number of voucher landlords and units associated with 
those landlords by ZIP code to which PHAs provide access to new voucher 
holders. This data is public, but not easily available or centralized.
     Ensure assessments of fair housing provide data at the ZIP 
code level.
     Study the impact the rule has on households' ability to 
use their voucher within the allowable time.
     Data from the evaluation of the Small Area FMR 
demonstration.
     List of ZIP codes by jurisdiction and the associated FMR 
rather than a list at the level of metropolitan area.
     All data used in the formula to designate the areas 
required to implement Small Area FMRs
     Data on whether increases to FMR for higher rent 
neighborhoods effectuates an increase in leasing activity in these 
neighborhoods.
     External evaluation of the Small Area FMR implementation 
parallel to implementation.
     Data not only for designated Small Area FMR areas and PHAs 
that opt in, but also for other areas and PHAs in order to allow 
comparison:
    [cir] Number of voucher holders by ZIP code including relevant data 
on race, ethnicity, disability status and other factors relevant to 
fair housing concerns.;
    [cir] Voucher success rates by PHA (if available and reliable); 
PHAs should report the average time it takes to lease-up for new and 
continuing voucher participants (who continue in their current 
jurisdiction or attempt to port their voucher);
    [cir] Voucher turnover rates; to assess the impact of Small Area 
FMRs on program participants, it is essential that data is collected on 
the number of participants leaving and entering the program each year;
    [cir] Voucher program exit and new admission rates by PHA;
    [cir] Number of voucher holders with rent burdens at various levels 
(30 percent of income or less, 31-40 percent, 41-50 percent, and so 
forth) by PHA or by ZIP code;
    [cir] Number of units on lists provided to families issued 
vouchers, broken down by ZIP code and PHA.
     Technical Assistance opportunities for impacted landlords 
and beneficiaries to understand the policy revisions and rationales.
     Information on what strategies PHAs used in conjunction 
with the Small Area FMRs.
     HUD should determine and publicize what payment standards 
PHAs use, and make this information available to help HCV households 
with their housing search.
    [cir] Publicly Available ZIP-Code-Level Counts of Voucher Holders 
and Their Race: Currently, HUD makes the number of voucher holders in a 
particular area available in two ways: (1) On HUD's Open Data Web site 
and (2) as part of the underlying data used in the AFH Data and Mapping 
Tool. Both give voucher counts on the Census tract level, while the 
latter source includes a count of the number of non-white voucher 
holders in each tract. Although HUD releases a crosswalk file that 
matches Census tracts and ZIP Code Tabulation Areas (ZCTAs), the 
process of converting HUD's tract-level data to ZCTAs is complex and 
riddled with potential for errors. Since Small Area FMRs use ZCTAs, not 
Census tracts, as the primary unit of analysis, HUD should release 
voucher counts at the ZCTA level in order to evaluate the impact of 
Small Area FMRs. The data made available by race will also allow 
evaluation of how the Small Area FMR rule impacts jurisdictions' AFFH 
obligations.
     Whether increasing available asking rents impact local 
land use decisions.
     Data on total tenant payments by age group over the course 
of voucher lease-up and through Small Area FMR transitions, payment 
standard changes by housing agencies within Small Area FMR areas, and 
the use and value of PBVs.
     Availability of health services in new/old neighborhoods, 
the rate at which households retain their vouchers in new/old 
neighborhoods, and the financial costs of moving beyond rent payments 
(transportation, deposits, etc.).
    HUD Response: HUD thanks the public for these helpful comments, and 
will take these recommendations under advisement. HUD does not need to 
undertake rulemaking to release additional data or information but does 
need to carefully consider the ramifications and disclosure issues 
associated with many of the suggestions. As HUD determines what 
additional information is releasable, HUD will continue to post Small 
Area FMR-relevant data online at https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html.
    Comment: Commenters provided a vast array of requests through this 
question that support a variety of objectives:
     The ability to assess the efficacy of Small Area FMRs.
     The ability to do additional research into the Housing 
Choice Voucher program.
     The ability to better administer the Housing Choice 
Voucher program.
    HUD Response: Within the context of the final rule, HUD will 
release Small Area FMRs accompanied by both the minimum and maximum 
basic range amounts (90 percent and 110 percent) for each bedroom unit 
count Small Area FMR. HUD will further sort the ZIP code based Small 
Area FMRs for each metropolitan area from least to greatest to 
facilitate PHAs wishing to group multiple ZIP codes together into 
Payment Standard regions. HUD is taking the rest of these 
recommendations under advisement and will continue to post Small Area 
FMR-relevant data online at https://www.huduser.gov/portal/datasets/fmr/smallarea/index.html.
Other Comments
    Commenters provided a variety of other comments regarding the 
proposed rule. Two of these topic areas include Moving To Work (MTW) 
PHAs, and comments on the methods for calculating FMRs.
    Issue: Moving To Work (MTW) PHAs and the use of Small Area FMRs.
    Comment: Commenters asked HUD to clarify whether or not MTW PHAs 
operating in metropolitan areas designated for Small Area FMR usage 
will have to use Small Area FMRs.
    HUD Response: The proposed Rule pointed out that MTW PHAs have the 
ability to set alternative rent policies, outside of the standard 
regulations governing the use of FMRs in setting payment standards with 
approval from HUD. To clarify, MTW PHAs administering the HCV program 
can exercise flexibility in regards to establishing rent in accordance 
with the terms of their respective MTW Agreement and approved Annual 
MTW Plan. If an MTW PHA has not exercised flexibility through their 
Annual MTW Plan, the Small Area FMR requirements set forth in this 
Final Rule will apply to the MTW PHA, and the MTW PHA will be required 
to use Small Area FMRs in place of metropolitan-wide FMRs if the PHA 
jurisdiction is located within a designated Small Area FMR metropolitan 
area.
    Issue: Methodology for Calculations of Metropolitan Fair Market 
Rents and Small Area Fair Market Rents.
    Comment: Several commenters provided HUD with unsolicited feedback 
regarding the methods that HUD uses to calculate metropolitan-wide and 
Small Area FMRs. Several commenters suggested that HUD should modify 
the process HUD uses to calculate FMRs to be more reflective of market 
rents.
    Overall FMR concerns: Many commenters discussed concerns

[[Page 80579]]

regarding overall FMRs, including data lags and gap between local rents 
that will be embedded into Small Area FMRs.
     Specific suggestions included:
    [cir] Fine tuning current formula to include rent variations for 
different bedroom size units, and ensuring that the five-year American 
Community Survey is keeping pace with actual rents in each ZIP code, 
particularly in the targeted metro areas, and to make upward 
adjustments as needed.
    [cir] Alter the current FMR methodology to account for trends in 
local rental markets; cease using the ``Trend Factor'' to calculate 
FMRs, which measures the forecasted changes in national gross rents, 
and instead use the percentage change in metropolitan area-wide rents 
published as part of HUD PD&R's quarterly U.S. Housing Market 
Conditions Regional Reports.
     Revising the formula
    [cir] Some commenters urged HUD to adopt a methodology for 
calculating Small Area FMRs that would better ensure access to 40% of 
units in all ZCTAs.
    [cir] Urged consideration of methodology other than ZIP codes, such 
as independent analyses of local housing submarkets. ZIP codes may be 
too large to get desired impact.
    [cir] Calculate 40th-percentile rents with data specific to 
different unit sizes (rather than indexing the rents to the 2-bedroom 
units),
    [cir] Rely upon local rather than national CPI data in order to 
trend FMRs forward
    HUD Response: HUD appreciates the breadth of comments provided to 
HUD regarding the methods used to calculate FMRs (both metropolitan-
wide and Small Area FMRs). As stated earlier in the response to 
comments, in this final rule HUD is implementing a floor on the amount 
that FMRs can decrease from year to year. This is being done to provide 
in-place tenants with an additional element of subsidy protection 
during the transition from metropolitan FMRs to Small Area FMRs. 
Additionally, limiting the annual decrease in FMRs will help ensure a 
sufficient supply of affordable units during the transition to both 
existing tenants who wish to move and new voucher families entering the 
market. The final rule does not otherwise affect the data or methods 
HUD uses to estimate FMRs or Small Area FMRs. Due to provisions within 
HOTMA, HUD will be publishing Federal Register notices of proposed 
material changes in the methods for calculating FMRs for public comment 
before these changes are incorporated into the calculation of FMRs. HUD 
will respond to comments on FMR methodology provided in response to the 
proposed Small Area FMR rule as well as the notice announcing Fiscal 
Year 2017 FMRs in an upcoming Notice of Proposed Material Change in 
FMRs.
    Issue: Rulemaking is premature.
    Comment: A commenter stated that given that demonstrations of this 
idea in five locations are well underway, HUD's proposal is premature. 
The commenter stated that demonstrations have the admirable purpose of 
working out the problems that occur even with proposals that are highly 
meritorious in general terms before implementing them at large scale.
    HUD Response: While HUD acknowledges that more information on the 
overall effects of the Small Area FMR approach will be forthcoming when 
the results of the Small Area FMR demonstration are available to inform 
broad policy, HUD believes that it is not premature to implement Small 
Area FMRs on this limited basis in those areas where it has the 
potential to address significant voucher concentration concerns. 
Through this final rule, HUD seeks not only to employ a better tool 
than the 50th percentile policy to expand housing opportunities for 
families where voucher concentration is a particular challenge but to 
also provide PHAs with the administrative flexibility to implement 
appropriate tenant protections to families currently under HAP contract 
and to address changing market conditions.
    Issue: Continuation in Small Area FMRs in the Dallas, TX HUD Metro 
FMR Area.
    Comment: A commenter noted that the Dallas, TX HUD Metro FMR Area, 
which has been operating under Small Area FMRs since 2010 pursuant to a 
court settlement, was very close to the thresholds for inclusion as a 
Small Area FMR area, and raised concerns that it might be excluded from 
continuing as a Small Area FMR area in the final rule or in the future.
    HUD Response: While the final rule establishes a permanent Small 
Area FMR program, the final does not void the settlement agreement by 
which PHAs in the Dallas, TX HUD Metro FMR Area are required to operate 
with Small Area FMRs. PHAs in the Dallas TX, HUD Metro FMR Area will 
continue to be required to operate using Small Area FMRs in accordance 
with this final rule. The final rule contains no provisions for 
discontinuing Small Area FMRs once they have been implemented for a FMR 
Area.

IV. Findings and Certifications

Regulatory Planning and Review

    OMB reviewed this final rule under Executive Order 12866 (entitled 
``Regulatory Planning and Review''). This rulemaking was determined to 
be an ``economically significant regulatory action,'' as defined in 
section 3(f)(1) of the order. The accompanying Regulatory Impact 
Analysis (RIA) for this rulemaking addresses the costs and benefits 
that would result from implementation of this final rule and the RIA 
can be found at http://www.regulations.gov.

Unfunded Mandates Reform Act

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

Environmental Impact

    This final rule concerns the establishment of fair market rent 
schedules and related external administrative requirements or 
procedures that do not constitute a development decision that affects 
the physical condition of specific project areas or building sites. 
Accordingly, under 24 CFR 50.19(c)(6), this final rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321).

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 will not have a 
significant economic impact on a substantial number of small entities. 
At the proposed rule stage, HUD prepared an Initial Regulatory 
Flexibility Analysis (IRFA) and HUD follows the IRFA with a Final 
Regulatory Flexibility Analysis (FRFA). HUD finds in the FRFA that this 
final rule will not have a significant economic impact on a substantial 
number of small entities. The FRFA, which is found in Appendix A to 
this final rule and can also be found at www.regulations.gov 
elaborates, and provides details on how HUD made this finding.

[[Page 80580]]

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on state and local governments and 
is not required by statute or preempts state law, unless the relevant 
requirements of section 6 of the Executive order are met. This final 
rule does not have federalism implications and does not impose 
substantial direct compliance costs on state and local governments or 
preempt state law within the meaning of the Executive order.

Catalog of Federal Domestic Assistance Number

    The Catalog of Federal Domestic Assistance number for 24 CFR part 
982 is 14.871.

List of Subjects

24 CFR Part 888

    Grant programs-housing and community development, Rent subsidies.

24 CFR Part 982

    Grant programs-housing and community development, Grant programs-
Indians, Indians, Public housing, Rent subsidies, Reporting and 
recordkeeping requirements.

24 CFR Part 983

    Grant programs-housing and community development, Low and moderate 
income housing, Rent subsidies, Reporting and recordkeeping 
requirements.

24 CFR Part 985

    Grant programs-housing and community development, Public housing, 
Rent subsidies, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, HUD amends 24 
CFR parts 888, 982, 983, and 985 as follows:

PART 888--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM--FAIR 
MARKET RENTS AND CONTRACT RENT ANNUAL ADJUSTMENT FACTORS

0
1. The authority citation for part 888 continues to read as follows:

    Authority: 42 U.S.C. 1437f and 3535d.


0
2. In Sec.  888.111, revise paragraph (a) to read as follows:


Sec.  888.111  Fair market rents for existing housing: Applicability.

    (a) The fair market rents (FMRs) for existing housing are 
determined by HUD and are used in the Section 8 Housing Choice Voucher 
program (HCV program) (part 982 of this title), Section 8 project-based 
assistance programs and other programs requiring their use. In the HCV 
program, the FMRs are used to determine payment standard schedules. In 
the Section 8 project-based assistance programs, the FMRs are used to 
determine the maximum initial rent (at the beginning of the term of a 
housing assistance payments contract).
* * * * *

0
3. Revise Sec.  888.113 to read as follows:


Sec.  888.113  Fair market rents for existing housing: Methodology.

    (a) Basis for setting fair market rents. Fair Market Rents (FMRs) 
are estimates of rent plus the cost of utilities, except telephone. 
FMRs are housing market-wide estimates of rents that provide 
opportunities to rent standard quality housing throughout the 
geographic area in which rental housing units are in competition. The 
level at which FMRs are set is expressed as a percentile point within 
the rent distribution of standard quality rental housing units in the 
FMR area. FMRs are set at the 40th percentile rent, the dollar amount 
below which the rent for 40 percent of standard quality rental housing 
units fall within the FMR area. The 40th percentile rent is drawn from 
the distribution of rents of all units within the FMR area that are 
occupied by recent movers. Adjustments are made to exclude public 
housing units, newly built units and substandard units.
    (b) Setting FMRs at the 40th percentile rent. Generally, HUD will 
set the FMRs at the 40th percentile rent, but no lower than 90 percent 
of the previous year's FMR for the FMR area.
    (c) Setting Small Area FMRs. (1) HUD will set Small Area FMRs for 
certain metropolitan FMR areas for use in the administration of tenant-
based assistance under the HCV program. HUD will establish the 
selection values used to determine those metropolitan areas through a 
Federal Register notice on November 16, 2016 and may update the 
selection values through a Federal Register notice, subject to public 
comment. The selection criteria used to determine those metropolitan 
areas are:
    (i) The number of vouchers under lease in the metropolitan FMR 
area;
    (ii) The percentage of the standard quality rental stock, within 
the metropolitan FMR area is in small areas (ZIP codes) where the Small 
Area FMR is more than 110 percent of the metropolitan FMR area;
    (iii) The percentage of voucher families living in concentrated low 
income areas;
    (iv) The percentage of voucher families living in concentrated low 
income areas relative to the percentage of all renters within these 
areas over the entire metropolitan area; and
    (v) The vacancy rate for the metropolitan area.
    (2) For purposes of determining applicability of Small Area FMRs to 
a metropolitan area, the term ``concentrated low-income areas'' means:
    (i) Those census tracts in the metropolitan FMR area with a poverty 
rate of 25 percent or more; or
    (ii) Any tract in the metropolitan FMR area where at least 50 
percent of the households earn less than 60 percent of the area median 
income and are designated by HUD as Qualified Census Tracts in 
accordance with section 42 of the Internal Revenue Code (26 U.S.C. 42).
    (3) If a metropolitan area meets the criteria of paragraph (c)(1) 
of this section, Small Area FMRs will apply to the metropolitan area 
and all PHAs administering HCV programs in that area will be required 
to use Small Area FMRs. A PHA administering an HCV program in a 
metropolitan area not subject to the application of Small Area FMRs may 
opt to use Small Area FMRs by seeking approval from HUD's Office of 
Public and Indian Housing (PIH) through written request to PIH.
    (4) HUD will designate Small Area FMR areas at the beginning of a 
Federal fiscal year, such designations will be permanent, and will make 
new area designations every 5 years thereafter as new data becomes 
available. HUD may suspend a Small Area FMR designation from a 
metropolitan area, or may temporarily exempt a PHA in a Small Area FMR 
metropolitan area from use of the Small Area FMRs, when HUD by notice 
makes a documented determination that such action is warranted. Actions 
that may serve as the basis of a suspension of Small Area FMRs are:
    (i) A Presidentially declared disaster area that results in the 
loss of a substantial number of housing units;
    (ii) A sudden influx of displaced households needing permanent 
housing; or
    (iii) Other events as determined by the Secretary.
    (5) Small Area FMRs only apply to tenant-based assistance under the 
HCV program. However, a PHA may elect to apply Small Area FMRs to 
project-based voucher (PBV) units at 24 CFR part 983

[[Page 80581]]

as provided in paragraph (h) of this section.
    (d) FMR areas. FMR areas comprise metropolitan areas and 
nonmetropolitan counties and Small Area FMR areas as follows:
    (1) Generally, FMR areas are metropolitan areas and nonmetropolitan 
counties. With several exceptions, the most current Office of 
Management and Budget (OMB) metropolitan area definitions of 
Metropolitan Statistical Areas (MSAs) are used because of their 
generally close correspondence with housing market area definitions. 
HUD may make exceptions to OMB definitions if the MSAs encompass areas 
that are larger than housing market areas. The counties deleted from 
the HUD-defined FMR areas in those cases are established as separate 
metropolitan county FMR areas. FMRs are established for all areas in 
the United States, the District of Columbia, and the Insular Areas of 
the United States.
    (2) Small Area FMR areas are the U.S. Postal Service ZIP code areas 
within a designated metropolitan area.
    (e) Data sources. (1) HUD uses the most accurate and current data 
available to develop the FMR estimates and may add other data sources 
as they are discovered and determined to be statistically valid. The 
following sources of survey data are used to develop the base-year FMR 
estimates:
    (i) The most recent American Community Survey conducted by the U.S. 
Census Bureau, which provides statistically reliable rent data.
    (ii) Locally collected survey data acquired through Address-Based 
Mail surveys or Random Digit Dialing (RDD) telephone survey data, based 
on a sampling procedure that uses computers to select statistically 
random samples of rental housing.
    (iii) Statistically valid information, as determined by HUD, 
presented to HUD during the public comment and review period.
    (2) Base-year recent mover adjusted FMRs are updated and trended to 
the midpoint of the program year they are to be effective using 
Consumer Price Index (CPI) data for rents and for utilities.
    (f) Unit size adjustments. (1) For most areas the ratios developed 
incorporating the most recent American Community Survey data are 
applied to the two-bedroom FMR estimates to derive FMRs for other 
bedroom sizes. Exceptions to this procedure may be made for areas with 
local bedroom intervals below an acceptable range. To help the largest 
most difficult-to-house families find units, higher ratios than the 
actual market ratios may be used for three-bedroom and larger-size 
units.
    (2) The FMR for single room occupancy housing is 75 percent of the 
FMR for a zero bedroom unit.
    (g) Manufactured home space rental. The FMR for a manufactured home 
space rental (for the HCV program under 24 CFR part 982) is 40 percent 
of the FMR for a two-bedroom unit for the metropolitan area or non-
metropolitan county, as applicable. Small Area FMRs under paragraph (c) 
of this section do not apply to manufactured home space rentals.
    (h) Small Area FMRs and Project-based vouchers. Small Area FMRs do 
not apply to Project-based vouchers regardless of whether HUD 
designates the metropolitan area or approves the PHA for Small Area 
FMRs under paragraph (c)(3) of this section. The following exceptions 
apply:
    (1) Where the PHA notice of owner selection under 24 CFR 983.51(d) 
was made on or before the effective dates of both the Small Area FMR 
designation and the PHA administrative policy, the PHA and owner may 
mutually agree to apply the Small Area FMR. The application of the 
Small Area FMRs must be prospective and consistent with the PHA 
administrative plan. The owner and PHA may not subsequently choose to 
revert back to the use of the metropolitan-wide FMRs for the PBV 
project. If the rent to owner will increase as a result of the mutual 
agreement to apply the Small Area FMRs to the PBV project, the rent 
increase shall not be effective until the first annual anniversary of 
the HAP contract in accordance with 24 CFR 983.302(b).
    (2) Where the PHA notice of owner selection under 24 CFR 983.51(d) 
was made after the effective dates of both the Small Area FMR 
designation and the PHA administrative policy, the Small Area FMRs 
shall apply to the PBV project if the PHA administrative plan provides 
that Small Area FMRs are used for all future PBV projects. If the PHA 
chooses to implement this administrative policy, the policy must apply 
to all future PBV projects and the PHA's entire jurisdiction. An owner 
and the PHA may not subsequently choose to apply the metropolitan area 
FMR to the project, regardless of whether the PHA subsequently changes 
its administrative plan to revert to the use of metropolitan-wide FMR 
for future PBV projects.
    (3) For purposes of this section, the term ``effective date of the 
Small Area FMR designation'' means:
    (i) The date that HUD designated a metropolitan area as a Small 
Area FMR area; or
    (ii) The date that HUD approved a PHA request to voluntarily opt to 
use Small Area FMRs for its HCV program, as applicable.
    (4) For purposes of this section, the term ``effective date of the 
PHA administrative policy'' means the date the administrative policy 
was formally adopted as part of the PHA administrative plan by the PHA 
Board of Commissioners or other authorized PHA officials in accordance 
with Sec.  982.54(a).
    (i) Transition of metropolitan areas previously subject to 50th 
percentile FMRs. (1) A metropolitan area designated as 50th percentile 
FMR areas for which the 3-year period has not expired prior to January 
17, 2017 shall transition out of 50th percentile FMRs as follows:
    (i) A 50th percentile FMR area that is designated for Small Area 
FMRs in accordance with paragraph (c) of this section will transition 
to the Small Area FMRs upon the effective date of the Small Area FMR 
designation;
    (ii) A 50th percentile metropolitan FMR area not designated as a 
Small Area FMRs in accordance with paragraph (c) of this section, will 
remain a 50th percentile FMR until the expiration of the three-year 
period, at which time the metropolitan area will revert to the standard 
FMR based on the 40th percentile rent for the metropolitan area.
    (2) A PHA with jurisdiction in a 50th percentile FMR area that 
reverts to the standard 40th percentile FMR may request HUD approval of 
payment standard amounts based on the 50th percentile rent in 
accordance with 24 CFR 982.503(f).
    (3) HUD will calculate the 50th percentile rents for certain 
metropolitan areas for purposes of this transition and to approve 
success rate payment standard amounts in accordance with 24 CFR 
982.503(e). As is the case for determining 40th percentile rent, the 
50th percentile rent is drawn from the distribution of rents of all 
units that are occupied by recent movers and adjustments are made to 
exclude public housing units, newly built units and substandard units.

0
4. Revise Sec.  888.115 to read as follows:


Sec.  888.115  Fair market rents for existing housing: Manner of 
publication.

    (a) Publication of FMRs. FMRs will be published at least annually 
by HUD on the World Wide Web, or in any other manner specified by the 
Secretary. HUD will publish a notice announcing the

[[Page 80582]]

publication of the FMRs in the Federal Register, to be effective 
October 1 of each year, and provide for a minimum of 30 days of public 
comments and requested for reevaluation of the FMRs in a jurisdiction. 
The FMRs will become effective no earlier than 30 days after the date 
the notice publishes in the Federal Register (e.g., if HUD fails to 
publish FMRs 30 days before October 1, the effective date will be 30 
days after publication), except for areas where HUD receives comments 
during the minimum 30-day comment period requesting reevaluation of the 
FMRs in a jurisdiction. After HUD reviews a request for reevaluation, 
HUD will post on the World Wide Web the final FMRs for the areas that 
have been reevaluated and publish a notice in the Federal Register 
announcing the publication and the effective date.
    (b) Changes in methodology. HUD will publish for comment in the 
Federal Register a document proposing material changes in the method 
for estimating FMRs and shall respond to public comment on the proposed 
material changes in the subsequent Federal Register document announcing 
the availability of new FMRs based on the revised method for estimating 
FMRs.

PART 982--SECTION 8 TENANT-BASED ASSISTANCE: HOUSING CHOICE VOUCHER 
PROGRAM

0
5. The authority citation for part 982 continues to read as follows:

     Authority:  42 U.S.C. 1437f and 3535d.


0
6. In Sec.  982.54, revise paragraph (d)(14) and add paragraph (d)(23) 
to read as follows:


Sec.  982.54  Administrative plan.

* * * * *
    (d) * * *
    (14) The process for establishing and revising payment standards, 
including policies on administering decreases in the payment standard 
during the HAP contract term (see Sec.  982.505(d)(3)).
* * * * *
    (23) Policies concerning application of Small Area FMRs to project-
based voucher units (see Sec.  888.113(h)).

0
7. Amend Sec.  982.503 as follows:
0
a. Add a sentence to the end of paragraph (b)(1)(i);
0
b. Revise paragraph (b)(1)(iii) and add paragraphs (b)(1)(iv) through 
(vi);
0
c. Revise paragraph (b)(2);
0
d. Revise paragraphs (c)(2) introductory text, (c)(2)(ii), and (c)(5);
0
e. In paragraphs (f) introductory text and (f)(2), remove ``Sec.  
888.113(c)'' and add in its place ``Sec.  888.113(i)(3)''.
    The addition and revisions read as follows:


Sec.  982.503  Payment standard amount and schedule.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * * The PHA must revise the payment standard amount no later 
than 3 months following the effective date of the published FMR if a 
change is necessary to stay within the basic range.
* * * * *
    (iii) A PHA that is not in a designated Small Area FMR area or has 
not opted to voluntarily implement Small Area FMRs under 24 CFR 
888.113(c)(3) may establish exception payment standards for a ZIP code 
area above the basic range for the metropolitan FMR based on the HUD 
published Small Area FMRs. The PHA may establish an exception payment 
standard up to 110 percent of the HUD published Small Area FMR for that 
ZIP code area. The PHA must notify HUD if it establishes an exception 
payment standard based on the Small Area FMR. The exception payment 
standard must apply to the entire ZIP code area.
    (iv) At the request of a PHA administering the HCV program under 
Small Area FMRs under Sec.  888.113(c)(3), HUD may approve an exception 
payment standard for a Small Area FMR area above the 110 percent of the 
published FMR in accordance with conditions set forth by Notice in the 
Federal Register. The requirements of paragraph (c) of this section do 
not apply to these exception payment standard requests and approvals.
    (v) The PHA may establish an exception payment standard of not more 
than 120 percent of the published FMR if required as a reasonable 
accommodation in accordance with 24 CFR part 8 for a family that 
includes a person with a disability. Any unit approved under an 
exception payment standard must still meet the reasonable rent 
requirements found at Sec.  982.507.
    (vi) The PHA may establish an exception payment standard of more 
than 120 percent of the published FMR if required as a reasonable 
accommodation in accordance with 24 CFR part 8 for a family that 
includes a person with a disability after approval from HUD. Any unit 
approved under an exception payment standard must still meet the 
reasonable rent requirements found at Sec.  982.507.
    (2) Except as described in paragraphs (b)(1)(iii) through (v) of 
this section, the PHA must request HUD approval to establish a payment 
standard amount that is higher or lower than the basic range. HUD has 
sole discretion to grant or deny approval of a higher or lower payment 
standard amount. Paragraphs (c) and (e) of this section describe the 
requirements for approval of a higher payment standard amount 
(``exception payment standard amount'').
    (c) * * *
    (2) Above 110 percent of FMR to 120 percent of published FMR. The 
HUD Field Office may approve an exception payment standard amount from 
above 110 percent of the published FMR to 120 percent of the published 
FMR (upper range) if the HUD Field Office determines that approval is 
justified by the median rent method or the 40th percentile rent or the 
Small Area FMR method as described in paragraph (c)(2)(ii) of this 
section (and that such approval is also supported by an appropriate 
program justification in accordance with paragraph (c)(4) of this 
section).
* * * * *
    (ii) 40th percentile rent or Small Area FMR method. In this method, 
HUD determines that the area exception payment standard amount equals 
application of the 40th percentile of rents for standard quality rental 
housing in the exception area or the Small Area FMR. HUD determines 
whether the 40th percentile rent or Small Area FMR applies in 
accordance with the methodology described in 24 CFR 888.113 for 
determining FMRs. A PHA must present statistically representative 
rental housing survey data to justify HUD approval.
* * * * *
    (5) Population. The total population of HUD-approved exception 
areas in an FMR area may not include more than 50 percent of the 
population of the FMR area, except when applying Small Area FMR 
exception areas under paragraph (b)(1)(iii) of this section.
* * * * *

0
8. In Sec.  982.505, revise paragraph (c)(3) and add a sentence at the 
end of paragraph (d) to read as follows:


Sec.  982.505  How to calculate housing assistance payment.

* * * * *
    (c) * * *
    (3) Decrease in the payment standard amount during the HAP contract 
term. If the amount on the payment standard schedule is decreased 
during the term of the HAP contract, the PHA is not required to reduce 
the payment standard amount used to calculate the subsidy for the 
families under HAP contract for as long as the HAP contract remains in 
effect.
    (i) If the PHA chooses to reduce the payment standard for the 
families currently under HAP contract during

[[Page 80583]]

the HAP contract term in accordance with their administrative plan, the 
initial reduction to the payment standard amount used to calculate the 
monthly housing assistance payment for the family may not be applied 
any earlier than the effective date of the family's second regular 
reexamination following the effective date of the decrease in the 
payment standard amount.
    (ii) The PHA may choose to reduce the payment standard amount for 
families that remain under HAP contract to the current payment standard 
amount in effect on the PHA voucher payment standard schedule, or may 
reduce the payment standard amount to an amount that is higher than the 
normally applicable payment standard amount on the PHA voucher payment 
standard schedule. The PHA may further reduce the payment standard 
amount for the families during the term of the HAP contract, provided 
the subsequent reductions continue to result in a payment standard 
amount that meets or exceeds the normally applicable payment standard 
amount on the PHA voucher payment standard schedule.
    (iii) The PHA must provide the family with at least 12 months' 
notice that the payment standard is being reduced during the term of 
the HAP contract before the effective date of the change.
    (iv) The PHA shall administer decreases in the payment standard 
amount during the term of the HAP contract in accordance with the PHA 
policy as described in the PHA administrative plan. The PHA may 
establish different policies for designated areas within their 
jurisdiction (e.g., for different zip code areas), but the PHA 
administrative policy on decreases to payment standards during the term 
of the HAP contract applies to all families under HAP contract at the 
time of the effective date of decrease in the payment standard within 
that designated area. The PHA may not limit or otherwise establish 
different protections or policies for certain families under HAP 
contract.
* * * * *
    (d) * * * A PHA may establish a payment standard greater than 120 
percent of the FMR by submitting a request to HUD.

0
9. In Sec.  982.507, revise paragraph (a)(2)(ii) to read as follows:


Sec.  982.507  Rent to owner: Reasonable rent.

    (a) * * *
    (2) * * *
    (ii) If there is a 10 percent decrease in the published FMR in 
effect 60 days before the contract anniversary (for the unit size 
rented by the family) as compared with the FMR in effect 1 year before 
the contract anniversary.
* * * * *

PART 983--PROJECT-BASED VOUCHER (PBV) PROGRAM

0
10. The authority citation for part 983 continues to read as follows:

    Authority: 42 U.S.C. 1437f and 3535d.


0
11. In Sec.  983.301, revise paragraph (a)(3) to read as follows:


Sec.  983.301  Determining the rent to owner.

    (a) * * *
    (3) The rent to owner is also redetermined in accordance with Sec.  
983.302.
* * * * *

0
12. In Sec.  983.302, revise paragraph (a)(2) to read as follows:


Sec.  983.302  Redetermination of rent to owner.

    (a) * * *
    (2) When there is a 10 percent decrease in the published FMR.
* * * * *

0
13. In Sec.  983.303, revise paragraph (b)(1) to read as follows:


Sec.  983.303  Reasonable rent.

* * * * *
    (b) * * *
    (1) Whenever there is a 10 percent decrease in the published FMR in 
effect 60 days before the contract anniversary (for the unit sizes 
specified in the HAP contract) as compared with the FMR in effect 1 
year before the contract anniversary.
* * * * *

PART 985--SECTION 8 MANAGEMENT ASSESSMENT PROGRAM (SEMAP)

0
14. The authority citation for part 985 continues to read as follows:

    Authority: 42 U.S.C. 1437a, 1437c, 1437f, and 3535(d).


0
15. In Sec.  985.3, revise paragraphs (b)(1), (b)(3)(i)(B), and 
(b)(3)(ii) and add a sentence to the end of paragraph (i)(1) to read as 
follows:


Sec.  985.3  Indicators, HUD verification methods and ratings.

* * * * *
    (b) * * *
    (1) This indicator shows whether the PHA has and implements a 
reasonable written method to determine and document for each unit 
leased that the rent to owner is reasonable based on current rents for 
comparable unassisted units: At the time of initial leasing; if there 
is any increase in the rent to owner; at the HAP contract anniversary 
if there is a 10 percent decrease in the published fair market rent 
(FMR) in effect 60 days before the HAP contract anniversary. The PHA's 
method must take into consideration the location, size, type, quality 
and age of the units, and the amenities, housing services, and 
maintenance and utilities provided by the owners in determining 
comparability and the reasonable rent. (24 CFR 982.4, 24 CFR 
982.54(d)(15), 982.158(f)(7) and 982.507)
* * * * *
    (3) * * *
    (i) * * *
    (B) Based on the PHA's quality control sample of tenant files, the 
PHA follows its written method to determine reasonable rent and has 
documented its determination that the rent to owner is reasonable in 
accordance with Sec.  982.507 of this chapter for at least 98 percent 
of units sampled at the time of initial leasing, if there is any 
increase in the rent to owner, and at the HAP contract anniversary if 
there is a 10 percent decrease in the published FMR in effect 60 days 
before the HAP contract anniversary. 20 points.
* * * * *
    (ii) The PHA's SEMAP certification includes the statements in 
paragraph (b)(3)(i) of this section, except that the PHA documents its 
determination of reasonable rent for only 80 to 97 percent of units 
sampled at initial leasing, if there is any increase in the rent to 
owner, and at the HAP contract anniversary if there is a 10 percent 
decrease in the published FMR in effect 60 days before the HAP contract 
anniversary. 15 points.
* * * * *
    (i) * * *
    (1) * * * For purposes of this paragraph, payment standards that do 
not exceed 110 percent of the current applicable published FMRs include 
exception payment standards established by the PHA in accordance with 
982.503(c)(iii).
* * * * *

    Dated: November 3, 2016.
Nani A. Coloretti,
Deputy Secretary.

[[Page 80584]]

Appendix A--Final Regulatory Flexibility Analysis

Final Regulatory Flexibility Analysis Establishing a More Effective 
Fair Market Rent System; Using Small Area Fair Market Rents in Housing 
Choice Voucher Program Instead of the Current 50th Percentile FMRs

1. Introduction

    The Regulatory Impact Analysis of the final Small Area Fair 
Market Rent (Small Area FMR) rule identifies two types of small 
entities that would be affected by the rule: Small Public Housing 
Agencies (PHAs) and small private landlords. The Final Regulatory 
Flexibility Analysis (FRFA) furthers the analysis of the impact of 
the rule on small entities by including more data on the relevant 
sectors as well as a more rigorous definition of what is a ``small'' 
PHA. The analysis of the final rule satisfies Section 604 of the 
Regulatory Flexibility Act. The requirements of the FRFA are listed 
below.\7\
---------------------------------------------------------------------------

    \7\ HUD is not a covered agency, as defined in section 
609(d)(2), and so is not required to comply with (6)1.
---------------------------------------------------------------------------

    (a) Each final regulatory flexibility analysis required under 
this section shall contain--
    (1) A statement of the need for, and objectives of, the rule: 
This requirement is met by Sections 2.2 and 2.3 of the FRFA. A 
lengthier discussion can be found in the Regulatory Impact Analysis 
and the Preamble of the Final Rule.
    (2) A statement of the significant issues raised by the public 
comments in response to the initial regulatory flexibility analysis, 
a statement of the assessment of the agency of such issues, and a 
statement of any changes made in the proposed rule as a result of 
such comments; This requirement is met by Sections 3 of the FRFA. A 
discussion concerning all public comments submitted on the proposed 
rule can be found in the Preamble of the Final Rule.
    (3) The response of the agency to any comments filed by the 
Chief Counsel for Advocacy of the Small Business Administration in 
response to the proposed rule, and a detailed statement of any 
change made to the proposed rule in the final rule as a result of 
the comments; This requirement is met by Section 3 of the FRFA.
    (4) A description of and an estimate of the number of small 
entities to which the rule will apply or an explanation of why no 
such estimate is available: This requirement is met Sections 4.2 and 
5.2 of the FRFA.
    (5) A description of the projected reporting, recordkeeping and 
other compliance requirements of the rule, including an estimate of 
the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record: This requirement is met by 
Section 4.2 of the FRFA.
    (6) A description of the steps the agency has taken to minimize 
the significant economic impact on small entities consistent with 
the stated objectives of applicable statutes, including a statement 
of the factual, policy, and legal reasons for selecting the 
alternative adopted in the final rule and why each one of the other 
significant alternatives to the rule considered by the agency which 
affect the impact on small entities was rejected: This requirement 
is met by Section 6 of the FRFA.
    (b) The agency shall make copies of the final regulatory 
flexibility analysis available to members of the public and shall 
publish in the Federal Register such analysis or a summary thereof. 
This requirement is satisfied by the present FRFA.
    HUD expects a variety of economic effects stemming from 
implementation of the final rule. Transfers involving vouchers would 
be the most sizable of those effects. PHAs will face both costs and 
benefits from the implementation of this rule. Social benefits and 
costs associated with the rule could be generated by a new 
settlement pattern among voucher holders. Quantified incremental 
impacts include an expected transfer of $151 million among 
participants and $2 million of implementation costs to PHAs. The 
Regulatory Impact Analysis accompanying the final rule includes a 
lengthy description of qualitative impacts as well details 
concerning the calculation of the quantitative impacts.

2. Statement of the Need for, and Objectives of, the Rule

    Section 2 documents the need for the final Small Area FMR rule 
as well as the objectives of the final rule.

2.1. Overview of Final Rule

    This final rule requires the use of Small Area Fair Market Rents 
(Small Area FMRs) in the administration of the Housing Choice 
Voucher (HCV) program for certain metropolitan areas. HUD is 
implementing the use of Small Area FMRs in place of the current 50th 
percentile rent to address high levels of voucher concentration. HUD 
believes that Small Area FMRs gives HCV tenants a more effective 
means to move into areas of higher opportunity and lower poverty 
areas by providing them with subsidy adequate to make such areas 
accessible and to thereby reduce the number of voucher families that 
reside in areas of high poverty concentration.
    HUD is using several criteria to determine which metropolitan 
areas would best be served by application of Small Area FMRs in the 
administration of the HCV program. These criteria include a 
threshold number of vouchers within a metropolitan area, the 
concentration of current HCV tenants in low-income areas, and the 
percentage of renter occupied units within the metropolitan area 
with Small Area FMRs above the payment standard basic range. Public 
housing agencies (PHAs) operating in designated metropolitan areas 
would be required to use Small Area FMRs. PHAs not operating in the 
designated areas would have the option to use Small Area FMRs in 
administering their HCV programs. Other programs that use FMRs would 
continue to use area-wide FMRs.
    Note to Reader: A more comprehensive summary of the rule can be 
found in the Regulatory Impact Analysis and the Rule itself.

2.2. Need for the Rule

    HUD's current rule for addressing high concentrations of voucher 
tenants in metropolitan areas, the 50th percentile Fair Market Rent 
rule, has not succeeded in providing voucher tenants access to high 
opportunity areas within a Fair Market Rent area. Therefore, the 
Small Area FMR rule is needed to replace the current regulatory 
provision with a new framework intended to provide voucher families 
with increased opportunities to find suitable units in higher 
opportunity areas.

2.3. Objectives of Rule

    This final rule, through establishment of Small Area FMRs as a 
means of setting rents in certain metropolitan areas, is intended to 
facilitate the Housing Choice Voucher (HCV) program in achieving two 
program objectives: (1) Increasing the ability of low-income 
families to find and lease decent and affordable housing; and (2) 
providing low-income families with access to a broad range of 
housing opportunities throughout a metropolitan area. HUD's goal in 
pursuing this rulemaking is to provide HCV tenants with a greater 
ability to move into areas where jobs, transportation, and 
educational opportunities exist.

3. Significant Issues Raised by the Public Comments in Response to 
the Initial Regulatory Flexibility Analysis and Comments filed by 
the Chief Counsel for Advocacy of the Small Business 
Administration, Agency Assessment of Such Issues, and Changes Made 
in the Proposed Rule as a Result of Such Comments

3.1. Public Comments Filed Regarding the Initial Regulatory 
Flexibility Analysis

    No public comments were filed that discussed or provided 
feedback on the Initial Regulatory Flexibility Analysis. 
Consequently, there is nothing for HUD to assess regarding these 
types of comments and no changes were made to the proposed rule 
based on IRFA comments.

3.2. Comments Filed by Chief Counsel for Advocacy of the Small 
Business Administration

    No public comments were filed from the Chief Counsel for 
Advocacy of the Small Business Administration. The Small Business 
Administration provided comments during the interagency clearance 
process preceding publication of the proposed rule that were 
incorporated in the published document; however, no further changes 
to the proposed rule were made.

4.0. Description and Estimate of the Number of Small Entities to 
Which the Rule Will Apply

4.1. Industry Data: Lessors of Residential Building and Dwellings

    The Small Business Administration defines a lessor of 
residential real estate to be a small business if it earns annual 
revenues (sales receipts) of less than $27.5 million. In the 2012 
Economic Census, the Census counted approximately 50,000 of which 
approximately 43,000 operated for the entire year of 2012. Our 
comparisons are made

[[Page 80585]]

using the full-year data to be more consistent with the definition 
of what is small (firms operating the entire year).
    Of the 42,911 firms operating all year, 42,618 can be considered 
small firms. Total annual revenue of the industry was $84 
billion,\8\ compared to $43 billion for small firms. Approximately 
300,000 individuals were employed by firms operating all year during 
the pay period observed in March 2012; 200,000 of them were employed 
by small firms. Small lessors account for 99 percent of all firms, 
51 percent of all revenue, 57 percent of all payroll, and 67 percent 
of employees hired during the first quarter. The industry is 
dominated by small firms in numbers of firms and employees, but is 
roughly equivalent to all large firms in terms of revenue and 
payroll.
---------------------------------------------------------------------------

    \8\ American Community Survey data indicate that the lessor 
industry revenue is approximately 20 percent of aggregate rents. The 
industry collects twice the average 10 percent commission for 
property managers. This difference could be explained by: Realtors' 
commissions, other activities, and lessors owning property and thus 
collecting the full rent.

Lessors of Residential Buildings and Dwellings (NAICS Industry 531110) Operated for the Entire Year 2012, United
                                                     States
----------------------------------------------------------------------------------------------------------------
                                                                                                   Employees for
                                                                      Revenue         Payroll         period
              Firm size by revenue                     Firms         ($1,000)        ($1,000)        including
                                                                                                     March 12
----------------------------------------------------------------------------------------------------------------
All firms *.....................................          42,911      83,593,387       9,838,805         303,135
Revenue less than $25,000,000...................          42,618      42,908,437       5,574,606         202,381
Proportion small firms **.......................             99%             51%             57%             67%
----------------------------------------------------------------------------------------------------------------
* Note that there were 50,664 firms altogether but that 42,911 operated all year. Using the larger base would
  reduce the proportion of small firms.
** The official size standard of the SBA is $27.5 million. Statistics are not available for this cut-off so we
  use the closest one leading to a slight underestimate of the proportion ``small.''

    HUD is able to provide information on the number of owners who 
participate in the housing choice voucher program. Note that 
counting real estate owners is not equivalent to lessors that 
operate the property. One would expect there to be many more owners 
than lessors. Nonetheless, the data provides insight as to the 
distribution of vouchers. It is evident that the overwhelming 
proportion of owners rent to very few voucher tenants. Approximately 
two-thirds of owners who rent to voucher tenants rent to only one 
voucher tenant household. Many of these are likely owners of single-
family homes for whom the rental income is not the primary source of 
income. Approximately 90 percent rent to no more than 4 voucher 
tenant households, which could be housed in a large two-story 
building. Very few owners rent to enough voucher tenants to occupy 
multiple buildings.

U.S. Residential Real Estate Owners Renting to Voucher Tenant Households
                                    *
------------------------------------------------------------------------
                                             Number of      Percent of
  Category of owner with voucher tenant     owners with     owners with
               households                 voucher tenant  voucher tenant
                                            households*     households
------------------------------------------------------------------------
1 Voucher...............................         435,653            67.2
2-4 Vouchers............................         142,925            22.1
5-19 Vouchers...........................          55,206             8.5
20-49 Vouchers..........................          10,773             1.7
50-99 Vouchers..........................           2,564             0.4
100-199 Vouchers........................             687             0.1
200 or more Vouchers....................             148             0.0
All.....................................         647,956           100.0
------------------------------------------------------------------------
* This table describes voucher tenants but NOT non-voucher tenants. It
  is likely that many owners rent to additional tenants, making the
  above table a slight overestimate of the small landlords affected by
  the rule.

    The data on the distribution of owners by number of vouchers 
implies that industry structure is not significantly different for 
vouchers than for other residential rental properties. The tables do 
not correspond perfectly because one describes property managers and 
the other property owners. In addition, the table for owners shows 
information for voucher tenants only and does not include any 
unassisted tenants.
    HUD estimates that 18 percent of all vouchers are likely to be 
affected by the rule. If the number of lessor firms is proportional 
to the number of vouchers, then approximately 7,700 firms operating 
all year round (or 9,000 firms operating at any time) would manage 
units in Small Area FMR areas. They do not necessarily provide 
housing for voucher tenants but would be affected by any market 
externalities engendered by the rule. The median share of voucher 
holders in a census tract is 3.1 percent. Again, assuming 
proportionality we expect 400-500 NAICS industry 531110 firms to 
manage units occupied by voucher tenants in the Small Area FMR areas 
created by the proposed rule. The number of voucher units managed by 
any one firm will vary.

4.2. Economic Impacts and Compliance Requirements on Small 
Landlords

    There are two types of possible effects of the rule on property 
owners and managers. The first is direct: An owner (and lessor) who 
receives income from a voucher tenant may experience a change in 
rental income without changing the contract or tenant. Consider a 
low-rent area in which the subsidy will decline. The owner (and 
lessor) would be held harmless if the tenant chose to make up the 
difference. However, suppose that the subsidy declined by a critical 
amount such that the tenant can no longer afford the unit. The owner 
has two choices: Search for a new tenant who will pay the market 
rent or lower the rent by enough to maintain the current tenant. The 
former strategy would be chosen if the housing submarket were 
characterized by adequate demand. The latter strategy would be 
chosen if the reduction in rents are offset by the costs of finding 
a new tenant. Thus, while the owner (and lessor) may lose a 
particular voucher tenant, they will not lose the rental income from 
that unit. The rule may generate revenue for lessors of residential 
building and dwellings if a significant number of moves result. 
Managing turnover is one of the primary services provided by a 
lessor to an owner. This would not be a major effect but could serve 
to

[[Page 80586]]

counterbalance any minor adverse effects on lessors.
    The second type of effect is indirect (a pecuniary externality). 
A reduction (increase) of the voucher subsidy would lower (raise) 
the demand for housing in that submarket. Even properties without 
any voucher tenants would be affected by such a market-wide effect. 
However, a decline in demand would only result if voucher households 
make up a sufficiently large portion of rental households in a given 
neighborhood. Market spillovers are expected to be minimal in many 
areas due to the limited size of the voucher program in relation 
with the entire housing market. Of the 10,800 Census tracts in the 
areas affected by the final rule, the median share of voucher 
households is 3.2 percent. Even in areas where the share is larger, 
the rule does not eliminate the subsidy but reduces it. Small 
lessors will be disproportionately impacted by market effects only 
if the units leased by small lessors are disproportionately 
concentrated in low-rent areas.
    The final rule does not impose any additional reporting, 
recordkeeping and other compliance requirements. Compliance and unit 
standards remain the same. An additional effect of the rule is that 
eight current 50th percentile areas will revert to 40th percentile 
FMRs, as the Small Area FMR rule uses different selection criteria 
than the 50th percentile rule. These areas currently cover 82,000 
vouchers. On average, the FY16 40th percentile FMR is $77 lower than 
the 50th percentile FMR, meaning a transfer of $6.3 million is 
expected through a combination of landlords accepting lower rent, 
tenants increasing out of pocket rent, or tenants moving to lower 
cost, less desired units.

5. Public Housing Agencies Affected

    PHAs operating in metropolitan areas that meet the established 
Small Area FMR criteria of the final rule will be required to use 
Small Area FMRs in their HCV programs. As of issuance of this final 
rule, there are 24 areas listed that meet these criteria. These 
areas contain approximately 368,000 (18 percent) of the HCV 
households nationwide.\9\ Of these 368,000 vouchers, 219,000 
vouchers are administered by PHAs that may not yet use multiple 
payment standards.
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    \9\ This number includes areas that have already implemented 
Small Area FMRs and Moving to Work Agencies, which may not be 
compelled to adjust their payment standards as a result of the rule. 
The analysis below considers these exceptions.
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5.1. Data: Small PHAs

    A small PHA is defined by HUD to be one of less than 250 
units.\10\ Using this definition, approximately half of the PHAs 
(1,100 out of 2,200) that administer HCVs are considered small. In 
the 24 metropolitan areas affected by the proposed rule, there are 
217 PHAs, of which 71 are small. The Regulatory Flexibility Analysis 
authorizes an agency to adopt and apply definitions of small, 
``which are appropriate to the activities of the agency'' for each 
category of small entity.\11\ The 250-unit limit is one 
traditionally used by HUD in data collection as well as by city 
governments. In addition, it has been shown that PHAs of this size 
class face greater average costs of administering housing choice 
vouchers.\12\ A greater average cost is an indicator for smaller 
entities is suggestive evidence of fixed costs of operation. Small 
PHAs make up 32 percent of the PHAs in affected areas and would 
manage no more than 2 percent of the vouchers.
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    \10\ For regulatory definitions of small PHAs, see: Deregulation 
of Small PHAs Final Rule, 24 CFR part 902, 903, and 985.
    \11\ The RFA standard definition of a ``small governmental 
jurisdiction'' is the government of a city, county, town, school 
district or special district with a population of less than 50,000.
    \12\ Abt Associates, 2015.
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5.2. Economic Impacts and Compliance Requirements for PHAs

    PHAs administering Small Area FMRs will likely face higher 
administrative costs. Initial costs would include training employees 
and setting up new systems. Periodic costs include costs related to 
payment standard and rent determinations as well any increase in 
moves and contract rent changes than those operating under one 
metropolitan FMR. PHAs change their payment standards as the FMR 
changes. Once the payment standard is established, and the PHA board 
approves, the PHA creates materials to inform their customers (and 
landlords) of the new payment standards. Making the transition from 
one to many payment standards is likely to impose some burden at 
initial implementation of the Small Area FMR rule.
    There are at least two ways that a PHA would respond to the 
increased complexity of multiple payment standards. First, it could 
pursue a more labor-intensive solution and ask staff to determine 
the payment standard manually. This would not be particularly 
difficult for a small PHA with few payment standards. Small PHAs 
typically have smaller service areas with fewer ZIP codes and 
therefore fewer Small Area FMR-based payments standards to determine 
and administer than do larger PHAs. Another solution is to make an 
upfront investment to automate the process of subsidy determination. 
A unit's address is already entered into a PHA's database. All that 
is needed is a tool that calculates the rental subsidy as a function 
of the address. HUD has the intention of developing such an 
application for PHAs and voucher holder tenants. For it to work, 
PHAs will have to provide data on their payment standard decisions 
to HUD. Thus, compliance costs of PHAs are expected to rise slightly 
but not significantly. Because the tool will be developed, tested, 
and provided by HUD, it is not expected that the cost of 
implementation will be disproportionate.
    A 2015 study \13\ reports that, according to a Dallas PHA 
official, implementation costs of multiple payment standards were 
minimal at roughly $10 a household. Though it is unclear what this 
estimate considers, and assuming it can be applied elsewhere, as a 
rough measure of magnitude this would mean $2.2 million to $3.7 
million in implementation costs over the 24 areas designated and 217 
PHAs affected by this final rule. The more accurate estimate is the 
lower because it is based on PHAs that do not already use multiple 
payment standards. Both were considered for completeness. The impact 
on small entities would be a fraction of this impact. Assuming that 
all PHAs are affected and that all small PHAs are at the maximum, 
then the total impact on all small PHAs would be $177,500 (71 x 250 
x $10). Such a conservative estimate would reduce any downwards bias 
in the estimate of the impact stemming from returns to scale.
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    \13\ Collinson and Ganong, (2015, May).
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    The Small Area FMR rule will be beneficial to PHAs in some 
important respects. First, the rule intends to eliminate the 
possibility that an area will cycle in and out of the 50th 
percentile FMR as it can currently occur under the 2000 rule. This 
change is expected to reduce the year-to-year administrative 
uncertainty and the costs of adjusting the program to changing FMR 
calculations over time. Second, the final rule is also expected to 
facilitate PHA and regional compliance with consolidated planning 
and Fair Housing requirements and allow counseling and similar 
efforts to be more effective.\14\ Finally, the use of Small Area 
FMRs is expected to decrease the costs of rent reasonableness 
determinations as the payment standards better reflect local rent 
levels.
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    \14\ Advancing mobility is one of the costliest activities of a 
PHA.
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6. Alternatives Which Minimize Impact on Small Entities

    Under the Final Regulatory Flexibility Analysis, HUD must 
discuss alternatives that minimize the economic impact on small 
entities. In order to lessen the burden on PHAs, and specifically 
small PHAs, HUD has taken, or is committed to taking, several 
measures in implementing Small Area FMRs designed to facilitate 
transition to this approach and minimize costs and burdens. 
Specifically, HUD is pursuing the following strategies to mitigate 
adverse impacts:
     Publish Small Area FMRs grouped by overlapping 
potential payment standards. Although the final rule does not 
specifically address the format of HUD's publication of Small Area 
FMRs, in on-line materials HUD will provide a version of Small Area 
FMRs formatted and organized so as to facilitate compliance by PHAs.
     Develop a mobile application to automate payment 
standard identification and significantly reduce administrative 
costs of implementing the Small Area FMR rule for all parties 
involved (tenant, landlord, PHA). As noted above, HUD will be 
developing such an application for PHAs, voucher holders, and 
landlords.
     Allow the rounding of Small Area FMRs to the nearest 
ten dollars to make it easier to arrange the small areas into 
payment standard groups. Although the final rule does not specify 
the calculation methods for Small Area FMR estimates, HUD's practice 
in the Dallas, TX HUD Metro FMR Area and in the Small Area FMR 
demonstration sites has been to round Small Area FMR estimates to 
the nearest $10.00 to make it easier to arrange small areas into 
payment standard groups. Doing so reduces the number of payment 
standards PHAs would be required to administer.

[[Page 80587]]

     Consider an exemption for PHAs administering very few 
vouchers in Small Area FMR areas. The final rule exempts HUD 
Metropolitan FMR Areas with less than 2,500 HCVs under lease from 
using Small Area FMRs.
    In addition to the above, the presentation of the information in 
HUD's proposed revision to its PHA administrative fee formula would 
also soften any adverse impact by providing additional resources to 
small PHAs generally.

7. Conclusion

    The majority of lessors of residential real estate and a 
substantial fraction of PHAs are characterized as small. If there 
were disproportionate effects on small entities, then a more 
detailed regulatory flexibility analysis would be merited. However, 
after an in-depth discussion of the industry structure and impact of 
the rule, HUD cannot conclude that there is a significant and 
disproportionate impact on small entities. It is true that many 
lessors may receive income from voucher tenants but it is not likely 
that they will be adversely affected once market forces are 
accounted for. Small PHAs could face an additional administrative 
burden but HUD has offered solutions to significantly reduce any 
burden.

[FR Doc. 2016-27114 Filed 11-15-16; 8:45 am]
 BILLING CODE 4210-67-P